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Exam 13: Corporations: Effects on Retained Earnings and the Income Statement

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Question 61

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If a company's lenders wanted to ensure that the company maintained adequate levels of equity to pay back their loans, a good strategy would be to impose restrictions on dividend payments and purchases of treasury stock.

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Question 62

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A company originally issued 10,000 shares of $5 par value common stock at $7 per share. The board of directors declares a 10% stock dividend when the market price of the stock is $9 a share. Which of the following is included in the entry to record the stock dividend?

A) Retained earnings is debited for $9,000.
B) Retained earnings is credited for $9,000.
C) Retained earnings is debited for $5,000.
D) Common stock is credited for $9,000.

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Question 63

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Which of the following is NOT true of stock dividends?

At March 31, 2014, the Park Place Company shows the following data on their balance sheet: $\begin{array} { | l | r | } \hline \text { Stockholders' equity } & \\\hline \begin{array} { l } \text { Common stock, } \$ 1 \text { par, } 1,000,000 \text { shares } \\\text { authorized, }\end{array} & \$ 120,000 \\\hline \begin{array} { l } 120,000 \text { shares issued, } 110,000 \text { shares } \\\text { butstanding }\end{array} & \\\hline \text { Paid-in capital in excess of par } & 2,470,000 \\\hline \text { Retained earnings } & 5,440,000 \\\hline \text { Treasury stock, } 10,000 \text { shares at } \$ 25 & ( 250,000 )\\\hline \text { Total stockholder's equity } & \$ 7,780,000 \\\hline\end{array}$ - Assume that Park Place sells 900 shares of treasury stock at $32 per share. Please restate the equity section of the balance sheet to reflect that transaction. $\begin{array} { | l | l | l | } \hline \text { Stockholders' equity }\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad&\quad\quad\quad\quad &\quad\quad\quad \\\hline & & \\\hline & & \\\hline\\\hline & & \\\hline\\\hline\end{array}$

The purchase of treasury stock requires a credit to the Common stock account.

A corporation reported the following equity section on its current balance sheet. The common stock is currently selling for $12.00 per share. $\begin{array} {| l | r | } \hline \text { Common stock, } \$ 5 \text { par, } 100,000 \text { shares authorized, } & \\50,000 \text { shares issued } & \$ 250,000 \\\hline \text { Paid in capital in excess of par-common } & 150,000 \\\hline \text { Retained earnings } & 300,000 \\\hline \text { Total stockholders' equity } & \$ 700,000 \\\hline\end{array}$ Which of the following would be included in the entry to record a 10% stock dividend?

On July 31, 2013, the Archer Company reported the following information in the equity section of their balance sheet: $\begin{array} { | l | r | } \hline \text { Stockholders' equity } & \\\hline \begin{array} { l } \text { Common stock, } \$ 1.00 \text { par, } 500,000 \text { shares authorized, 20,000 shares } \\\text { issued }\end{array} & \$ 20,000 \\\hline \text { Paid-in capital in excess of par } & 1,180,000 \\\hline \text { Retained earnings } & 3,200,000 \\\hline \text { Total stockholder's equity } & \$ 4,400,000 \\\hline\end{array}$ - Assume that Archer carries out a 2-for-1 stock split. Please prepare a similar equity section showing the effects of the stock split. $\begin{array} { | l | l | l | } \hline \text { Stockholders' equity }\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad\quad&\quad\quad\quad\quad &\quad\quad\quad \\\hline & & \\\hline & & \\\hline\\\hline & & \\\hline\\\hline\end{array}$

On June 30, 2013, Stephans Company showed the following data on the equity section of their balance sheet: $\begin{array}{|l|r|r|}\hline \text { Stockholders' equity } & & \\\hline \text { Common stock, } \$ 1 \text { par } & 100,000 \text { shares authorized } &\$40,000 \\\hline & 40,000 \text { shares issued } & \\\hline \text { Paid-in capital in excess of par } & & 260,000 \\\hline \text { Retained earnings } & & 940,000 \\\hline \text { Total stockholder's equity } & & \$ 1,240,000 \\\hline\end{array}$ On July 1, 2013, Stephans distributed a 5% stock dividend. The market value of the stock at that time was $13 per share. - Following this transaction, what would be the new number of shares issued shown on the balance sheet?

On June 30, 2014, Stephans Company showed the following data on the equity section of their balance sheet: $\begin{array}{|l|r|r|}\hline \text { Stockholders' equity } & & \\\hline \text { Common stock, } \$ 1 \text { par } & 100,000 \text { shares authorized } &\$40,000 \\\hline & 40,000 \text { shares issued } & \\\hline \text { Paid-in capital in excess of par } & & 260,000 \\\hline \text { Retained earnings } & & 940,000 \\\hline \text { Total stockholder's equity } & & \$ 1,240,000 \\\hline\end{array}$ On July 1, 2014, Stephans distributed a 5% stock dividend. The market value of the stock at that time was $13 per share. - Following this transaction, the total shareholders' equity would go down by $26,000.

Please refer to the following information for Petra Sales Company: • Common stock, $1.00 par, 200,000 issued, 180,000 outstanding • Paid-in capital in excess of par: $1,600,000 • Retained earnings: $2,440,000 • Treasury stock: 20,000 shares purchased at $12 per share - If Petra Sales sells 10,000 shares of treasury stock at $14 per share, the company will record a gain on the sale of treasury stock of $20,000.

Please refer to the following information for Peartree Company: • Common stock, $1.00 par, 100,000 issued, 95,000 outstanding • Paid-in capital in excess of par: $2,150,000 • Retained earnings: $910,000 • Treasury stock: 5,000 shares purchased at $20 per share - If Peartree resold 1,000 shares of treasury stock for $24 per share, the total equity of the company would remain unchanged.

Certain types of transactions, other than dividend payments, that are NOT included in the income statement, but have an effect on retained earnings would be treated as part of comprehensive income.

Which of the following would be a reason for a company to appropriate a portion of retained earnings?

Please refer to the following information for Peartree Company: • Common stock, $1.00 par, 100,000 issued, 95,000 outstanding • Paid-in capital in excess of par: $2,150,000 • Retained earnings: $910,000 • Treasury stock: 5,000 shares purchased at $20 per share - If Peartree purchases an additional 1,000 shares of treasury stock at $18 per share, which of the following statements would be TRUE?

Alexander Company reported the ending balance of Retained earnings as $400,000 on December 31, 2013. During the first month of 2014, they discovered an error in the ledger which had the effect of overstating net income in 2013 by $45,000. At the end of 2014, they included this item as a prior period adjustment. Year 2014 results included $52,000 of net income and $15,000 of dividends paid. What amount would be shown as the ending balance of Retained earnings on the December 31, 2014 financial statements?

Which of the following best describes extraordinary items on the income statement?

The entry to record an appropriation of retained earnings requires a debit to Retained earnings and a credit to Cash.

Please refer to the following information for Peartree Company: • Common stock, $1.00 par, 100,000 issued, 95,000 outstanding • Paid-in capital in excess of par: $2,150,000 • Retained earnings: $910,000 • Treasury stock: 5,000 shares purchased at $20 per share - If Peartree resold 1,000 shares of treasury stock for $24 per share, what journal entry would be required?

Which of the following statements is TRUE?

On June 30, 2013, Stephans Company showed the following data on the equity section of their balance sheet: $\begin{array}{|l|r|r|}\hline \text { Stockholders' equity } & & \\\hline \text { Common stock, } \$ 1 \text { par } & 100,000 \text { shares authorized } &\$40,000 \\\hline & 40,000 \text { shares issued } & \\\hline \text { Paid-in capital in excess of par } & & 260,000 \\\hline \text { Retained earnings } & & 940,000 \\\hline \text { Total stockholder's equity } & & \$ 1,240,000 \\\hline\end{array}$ On July 1, 2013, Stephans distributed a 5% stock dividend. The market value of the stock at that time was $13 per share. - Following this transaction, how much would the total stockholders' equity be?