STOCKHOLDERS’ EQUITY Question The board of directors for the Blank Corporation declares a $1 per share cash dividend on April 1, Year One, to be paid to owners of record on April 17, Year One, with the checks being distributed on April 29, Year One Prior to April 1, the company had issued 100,000 shares of common stock but held 10,000 treasury shares Another 10,000 shares were repurchased on April 25, Year One On what date should the company decrease its working capital as a result of this dividend? A April 1, Year One B April 17, Year One C April 25, Year One D April 29, Year One The correct answer was A A company records its liability for a dividend on the date that the dividend is declared by the board of directors Increasing a current liability creates a decrease in working capital (current assets less current liabilities) The subsequent repurchase of additional treasury shares does not impact the dividend because it took place well after the date of record Question The board of directors for the Carson Corporation declares a $1 per share cash dividend on April 1, Year One, to be paid to owners of record on April 17, Year One, with the checks being distributed on April 29, Year One Prior to April 1, the company had issued 100,000 shares of common stock but held 10,000 treasury shares Another 10,000 shares were repurchased on April 4, Year One What is the decrease in retained earnings created by this dividend? A -0B $80,000 C $90,000 D $100,000 The correct answer was B Dividends are paid on the number of outstanding shares of a company's stock as of the date of record Although the company had originally issued 100,000 shares, 20,000 have been reacquired as treasury stock by the date of record The dividend payment will be recorded as a reduction in retained earnings is 80,000 shares times $1 per share Question The board of directors for the Denton Corporation declares a $1 per share cash dividend on April 1, Year One, to be paid to owners of record on April 17, Year One, with the checks being distributed on April 29, Year One, and received by the owners on May 3, Year One Ms Jones owns 1,000 shares of this stock On what date will she record dividend revenue of $1,000? A April 1, Year One B April 17, Year One C April 29, Year One D May 3, Year One The correct answer was B Owners who hold shares of stock on the date of record are entitled to receive any distributed dividends Until that date, there is uncertainty as to whether they will retain the shares until receipt is assured Thus, on the date of record (April 17 in this example), a receivable and the associated revenue are recorded for the dividend amount Question The Braxton Company has 100,000 common shares issued and outstanding This stock was issued several years ago at a price above the $10 per share par value During the current year, the board of directors declared a percent stock dividend so that 5,000 new shares were issued to the stockholders when the price of the stock was $26 per share As a result of this dividend, what reduction was recorded in the reported amount of retained earnings? A -0B $50,000 C $80,000 D $130,000 The correct answer was D A stock dividend is classified as small if it is below 20 to 25 percent of the previously outstanding shares of stock This percent dividend is, therefore, viewed as small Small stock dividends are recorded at the fair value of the shares issued which, in this problem, is $130,000 (5,000 shares at $26 per share) Question The Monroe Corporation has 100,000 common shares issued and outstanding This stock was issued several years ago at a price above the $10 per share par value During the current year, the board of directors declared a 30 percent stock dividend so that 30,000 new shares were issued to the stockholders when the price of the stock was $30 per share As a result of this dividend, what reduction was recorded in the reported amount of retained earnings? A -0B $300,000 C $600,000 D $900,000 The correct answer was B A stock dividend is classified as large if it is above 20 to 25 percent of the previously outstanding shares of stock This 30 percent dividend is, therefore, viewed as large Large stock dividends are recorded at the par value of the shares issued which, in this question, is $300,000 (30,000 shares at the $10 per share par value) Question The Parson Company has 100,000 common shares issued and outstanding This stock was issued several years ago at a price above the $10 per share par value During the current year, the board of directors declared a 10 percent stock dividend so that 10,000 new shares were issued to the stockholders when the price of the stock was $24 per share As a result of this dividend, what reduction was recorded reduction in total stockholders' equity? A -0B $100,000 C $140,000 D $240,000 The correct answer was A A small stock dividend (one where shares are issued that are below 20 to 25 percent of the outstanding shares) is recorded at the fair value of the shares issued A large stock dividend (one where shares are issued that are above 20 to 25 percent of the outstanding shares) is recorded at the par value of the shares issued In either case, retained earnings is decreased and contributed capital is increased by that same amount Thus, there can be no overall change in the total for stockholders' equity No assets or liabilities are received or disbursed; no change occurs in stockholders' equity The total balance stays the same Question The Larson Company has 100,000 shares of $10 par value common stock outstanding that was originally issued for $18 per share In the current year, when the price of this stock increased to $60 per share, the company's board of directors issued a two-for-one stock split The price of the stock immediately fell to $30 per share By what amount should the company reduce its Retained Earnings balance as a result of this split? A -0B $1,000,000 C $3,000,000 D $6,000,000 The correct answer was A A stock split is not viewed as a reward to the owners or a distribution from the company It is merely a mechanical method of reducing the market price of the shares A two-for-one stock split should cause the price to fall to half of its previous amount Because it is not a transaction but merely a method to change the stock price, no recording at all is made for a stock split Question The Anna Company has 100,000 shares of common stock outstanding with a $10 per share par value In addition, the company has 20,000 shares of preferred stock outstanding with a $100 par value On this preferred stock, there is a percent annual dividend that is cumulative What does the term "cumulative" mean in this situation? A The current and any missed dividends must be paid on the preferred stock shares before any dividends can be paid to the owners of the common stock B The preferred stock dividend must be paid each year C If the preferred stock dividend is not paid in one year, it must be paid the following year D If the preferred stock dividend is not paid in one year, an additional (or penalty) dividend must be paid in the subsequent period The correct answer was A A cumulative dividend is no guarantee that the owners of the preferred stock will ever receive a penny The term means that dividends cannot be paid to the owners of the common stock until all dividends (past and current) have been paid on the preferred stock Question The Lara Company has 100,000 shares of common stock outstanding with a $10 per share par value In addition, the company has 30,000 shares of preferred stock outstanding with a $100 par value On this preferred stock, there is a percent annual dividend that is cumulative No dividend is paid on the preferred stock during Year One Which of the following statements is true? A The company has to report a current liability of $150,000 B The company has to report a noncurrent liability of $150,000 C The company has to report an amount within stockholders’ equity for this $150,000 D The company must disclose information about the nature of this missed dividend The correct answer was D The presence of a cumulative dividend simply means that all current dividends as well as any dividends in arrears must be paid on this preferred stock before any dividend amount can be paid to the owners of the company's common stock This information should be reported within the notes to the financial statements but no liability or equity balance has been created as a result of missing this dividend, even if the amount was cumulative Question 10 The Mills Corporation was started several years ago and incorporated in the state of Delaware The company was granted the authorization to issue 250,000 shares of $10 per share par value common stock At that time, 30,000 shares were issued for cash of $12 per share Last year, another 10,000 shares were issued for cash of $19 per share Early in the current year, the company issued 12,000 shares of this common stock as a stock dividend when the fair value was $30 per share For the 52,000 shares that are now outstanding, what amount should be reported in stockholders’ equity as additional paid-in capital? A $150,000 B $220,000 C $310,000 D $390,000 The correct answer was A The company received $2 per share in excess of par value when the first 30,000 shares were issued (additional paid-in capital of $60,000) The next 10,000 shares were issued for $9 in excess of par value (additional paid-in capital of $90,000) The stock dividend was equal to 30 percent of the outstanding shares (12,000 shares divided by 40,000 shares) Stock dividends of 20-25 percent or less are recorded at fair value However, stock dividends of 20-25 percent and above are recorded at par value Because the stock dividend was recorded at par value, no additional paid-in capital is recognized The balance remains at $150,000 ($60,000 plus $90,000) Question 11 A company declares a cash dividend on its common stock on December 24, Year One, payable to owners of record on January 2, Year Two, with checks to be mailed on January 9, Year Two Which of the following statements is true? A The owners will record the revenue from this transaction in Year Two but the company will record the effect of the dividend in Year One B This dividend is recorded by the company as an operating expense on its income statement C The Company will have a liability on its December 31, Year One balance sheet and the owners will record a receivable on their December 31, Year One balance sheet D Both the revenue and the dividend paid will be recorded by the two companies on January 9, Year Two when payment is made The correct answer was A A company paying a dividend will record the financial impact (a reduction in retained earnings) on the date of declaration which is in Year One here The owners getting the dividend will not record any revenue until the date of record which is in Year Two Question 12 The Mulieri Company was authorized to issue 100,000 shares of common stock with a $10 par value The company issued 30,000 shares for cash of $15 per share Later, when the shares were selling for $20 per share on a stock exchange, the company issued another 9,000 shares as a stock dividend Which of the following statements is true about the recording of the stock dividend? A The total amount of stockholders’ equity is not affected but retained earnings is reduced by $90,000 B Stockholders’ equity is reduced by $180,000 and retained earnings is also reduced by $180,000 C Stockholders’ equity is reduced by $90,000 and retained earnings is reduced by $135,000 D The total amount of stockholders’ equity is not effected but retained earnings is reduced by $180,000 The correct answer was A When a stock dividend is above 20-25 percent, it is recorded at the par value of the shares issued Here, that is 9,000 shares times $10 per share are $90,000 Retained earnings are reduced by that amount and common stock is increased by that same amount The increase in common stock and the decrease in retained earnings offset each other so that total stockholders’ equity is not affected Question 13 A company issues 100,000 shares of common stock and 10,000 shares of preferred stock with a $2 cumulative dividend In the first year, no dividends are paid or declared Which of the following statements are true? A The company should report a $20,000 liability on its year-end balance sheet B All dividends in arrears on the preferred stock must be paid before any dividends can be paid on common stock C The preferred stockholders are guaranteed to receive this $20,000 at some point in the future D By not paying the cumulative dividend, the company will be forced into bankruptcy within 90 days of the beginning of the New Year The correct answer was B A cumulative preferred stock simply means that all dividends on the preferred stock must be paid as required before any dividends can be distributed to the owners of the common stock The company is not obligated in any other way There is no guarantee nor will liability and failure to pay not automatically lead to bankruptcy However, if the board of directors ever formally declares these dividends, the liability must be reported ... about the nature of this missed dividend The correct answer was D The presence of a cumulative dividend simply means that all current dividends as well as any dividends in arrears must be paid... stock dividend is classified as large if it is above 20 to 25 percent of the previously outstanding shares of stock This 30 percent dividend is, therefore, viewed as large Large stock dividends... annual dividend that is cumulative What does the term "cumulative" mean in this situation? A The current and any missed dividends must be paid on the preferred stock shares before any dividends