QUESTIONS
1. In the absence of restrictive provisions, what are the basic rights of stockholders of a corporation?
2. Why is a preemptive right important?
3. Distinguish between common and preferred stock.
4. Why is the distinction between paid-in capital and retained earnings important?
5. Explain each of the following terms: authorized capital stock, unissued capital stock, issued capital stock, outstanding capital stock, and treasury stock.
6. What is meant by par value, and what is its significance to stockholders?
7. Describe the accounting for the issuance for cash of nopar value common stock at a price in excess of the stated value of the common stock.
8. Explain the difference between the proportional method and the incremental method of allocating the proceeds of lump-sum sales of capital stock.
9. What are the different bases for stock valuation when assets other than cash are received for issued shares of stock?
10. Explain how underwriting costs and accounting and legal fees associated with the issuance of stock should be recorded.
11. What features or rights may alter the character of preferred stock?
12. Dagwood Inc. recently noted that its 4% preferred stock and 4% participating preferred stock, which are both cumulative, have priority as to dividends up to 4% of their par value. Its participating preferred stock participates equally with the common stock in any dividends in excess of 4%. What is meant by the term participating?
Cumulative?
13. Where in the financial statements is preferred stock normally reported?
14. For what reasons might a corporation purchase its own stock?
15. Discuss the propriety of showing:
(a) Treasury stock as an asset.
(b) “Gain” or “loss” on sale of treasury stock as additions to or deductions from income.
(c) Dividends received on treasury stock as income.
16. List possible sources of additional paid-in capital.
17. Satchel Inc. purchases 10,000 shares of its own previously issued $10 par common stock for $290,000. Assuming the shares are held in the treasury with intent to reissue, what effect does this transaction have on (a) net income,
(b) total assets, (c) total paid-in capital, and (d) total stockholders’ equity?
18. Indicate how each of the following accounts should be classified in the stockholders’ equity section.
(a) Common Stock.
(b) Retained Earnings.
(c) Paid-in Capital in Excess of Par—Common Stock.
(d) Treasury Stock.
(e) Paid-in Capital from Treasury Stock.
(f) Paid-in Capital in Excess of Stated Value—Common
Stock.
(g) Preferred Stock.
19. What factors influence the dividend policy of a company?
20. What are the principal considerations of a board of directors in making decisions involving dividend declarations?
Discuss briefly.
21. Dividends are sometimes said to have been paid “out of retained earnings.” What is the error, if any, in that statement?
22. Distinguish among: cash dividends, property dividends, liquidating dividends, and stock dividends.
23. Describe the accounting entry for a stock dividend, if any.
Describe the accounting entry for a stock split, if any.
24. Stock splits and stock dividends may be used by a corporation to change the number of shares of its stock outstanding.
(a) What is meant by a stock split effected in the form of a dividend?
(b) From an accounting viewpoint, explain how the stock split effected in the form of a dividend differs from an ordinary stock dividend.
(c) How should a stock dividend that has been declared but not yet issued be classified in a balance sheet?
Why?
25. The following comment appeared in the notes of Colorado
Corporation’s annual report: “Such distributions, representing proceeds from the sale of Sarazan, Inc., were paid in the form of partial liquidating dividends and were in lieu of a portion of the Company’s ordinary cash dividends.” How would a partial liquidating dividend be accounted for in the financial records?
26. This comment appeared in the annual report of Mac-
Cloud Inc.: “The Company could pay cash or property dividends on the Class A common stock without paying cash or property dividends on the Class B common stock.
But if the Company pays any cash or property dividends on the Class B common stock, it would be required to pay at least the same dividend on the Class A common stock.”
How is a property dividend accounted for in the financial records?
27. For what reasons might a company restrict a portion of its retained earnings?
28. How are restrictions of retained earnings reported?
*29. McNabb Corp. had $100,000 of 7%, $20 par value preferred stock and 12,000 shares of $25 par value common stock outstanding throughout 2017.
(a) Assuming that total dividends declared in 2017 were $64,000, and that the preferred stock is not cumulative but is fully participating, common stockholders should receive 2017 dividends of what amount?
(b) Assuming that total dividends declared in 2017 were $64,000, and that the preferred stock is fully participating and cumulative with preferred dividends in arrears for 2016, preferred stockholders should receive
2017 dividends totaling what amount?
(c) Assuming that total dividends declared in 2017 were $30,000, that the preferred stock is cumulative, nonparticipating, and was issued on January 1, 2016, and that $5,000 of preferred dividends were declared and paid in 2016, the common stockholders should receive 2017 dividends totaling what amount?
