Section
PRACTICE MULTIPLE-CHOICE QUESTIONS
1. Entries for cash dividends are required on the:
(a) declaration date and the payment date.
(b) record date and the payment date.
(c) declaration date, record date, and payment date.
(d) declaration date and the record date.
2. Preferred stock may have priority over common stock
except in:
(a) dividends.
(b) assets in the event of liquidation.
(c) cumulative dividend features.
(d) voting.
3. Encore Inc. declared an $80,000 cash dividend. It currently
has 3,000 shares of 7%, $100 par value cumulative
preferred stock outstanding. It is one year in
arrears on its preferred stock. How much cash will
Encore distribute to the common stockholders?
(a) $38,000. (c) $59,000.
(b) $42,000. (d) None.
4. Which of the following statements about small stock
dividends is true?
(a) A debit to Retained Earnings for the par value of the shares issued should be made.
(b) A small stock dividend decreases total stockholders 'equity.
(c) Market price per share should be assigned to the dividend shares.
(d) A small stock dividend ordinarily will have an effect on par value per share of stock
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5. Which of the following statements about a 3-for-1
stock split is true?
(a) It will triple the market price of the stock.
(b) It will triple the amount of total stockholders’equity.
(c) It will have no effect on total stockholders’ equity.
(d) It requires the company to distribute cash.
6. Raptor Inc. has retained earnings of $500,000 and total stockholders’ equity of
$2,000,000. It has 100,000 shares of $8 par value common stock outstanding, which is
currently selling for $30 per share. If Raptor declares a 10% stock dividend on its common
stock:
(a) net income will decrease by $80,000.
(b) retained earnings will decrease by $80,000 and total stockholders’ equity will increase by
$80,000.
(c) retained earnings will decrease by $300,000 and total stockholders’ equity will increase
by $300,000.
(d) retained earnings will decrease by $300,000 and total paid-in capital will increase by
$300,000.
7. Which of the following can cause a restriction in retained earnings?
(a) State laws regarding treasury stock.
(b) Long-term debt contract terms.
(c) Authorizations by the board of directors in light of planned expansion of corporate
facilities.
(d) All of these answer choices are correct.
8. All but one of the following is reported in a retained earnings statement. The exception is:
(a) cash and stock dividends.
(b) net income and net loss.
(c) sales revenue.
(d) prior period adjustments.
9. A prior period adjustment is:
(a) reported in the income statement as a no typical item.
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(b) a correction of an error that is recorded directly to retained earnings.
(c) reported directly in the stockholders’ equity section.
(d) reported in the retained earnings statement as an adjustment of the ending balance of
retained earnings.
10. In the stockholders’ equity section, Common Stock Dividends Distributable is reported as
a(n):
(a) deduction from total paid-in capital and retained earnings.
(b) addition to additional paid-in capital.
(c) deduction from retained earnings.
(d) addition to capital stock.
11. The return on common stockholders’ equity is defined as:
(a) net income divided by total assets.
(b) cash dividends divided by average common stockholders’ equity.
(c) income available to common stockholders divided by average common stockholders’
equity.
(d) None of these is correct.
12. Katie Inc. reported net income of $186,000 during 2017 and paid dividends of $26,000
on common stock. It also has 10,000 shares of 6%, $100 par value, noncumulative preferred
stock outstanding and paid dividends of $60,000 on preferred stock. Common stockholders’
equity was $1,200,000 on January 1, 2017, and $1,600,000 on December 31, 2017. The
company’s return on common stockholders’ equity for 2017 is:
(a) 10.0%. (c) 7.1%.
(b) 9.0%. (d) 13.3%.
13. During 2017, Talon Inc. had sales revenue $376,000, gross profi t $176,000, operating
expenses $66,000, cash dividends $30,000, other expenses and losses $20,000. Its corporate
tax rate is 30%. What was Talon’s income tax expense for the year?
(a) $18,000. (c) $112,800.
(b) $52,800. (d) $27,000.
14. Corporation income statements may be the same as the income statements for
unincorporated companies except for:
(a) gross profit. (c) operating income.
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(b) income tax expense. (d) net sales.
15. If everything else is held constant, earnings per share is increased by:
(a) the payment of a cash dividend to common shareholders.
(b) the payment of a cash dividend to preferred shareholders.
(c) the issuance of new shares of common stock.
(d) the purchase of treasury stock.
16. The income statement for Nadeen, Inc. shows income before income taxes $700,000,
income tax expense $210,000, and net income $490,000. If Nadeen has 100,000 shares of
common stock outstanding throughout the year, earnings per share is:
(a) $7.00. (c) $2.10.
(b) $4.90. (d) No correct answer is given.
PRACTICE EXERCISES
1. At December 31, 2017, Lebron Company distributes $50,000 of cash dividends. Its
outstanding
common stock has a par value of $400,000, and its 6% preferred stock has a par
value of $100,000 at December 31, 2017.
Instructions
(a) Show the allocation of dividends to each class of stock, assuming that the preferred
stock dividend is 6% and not cumulative.
(b) Show the allocation of the dividends to each class of stock, assuming the preferred
stock dividend of 6% is cumulative and Lebron Company did not pay any dividends on
the preferred stock in the preceding 2 years.
(c) Journalize the declaration of the cash dividend at December 31, 2017, assuming the
requirements in part (b).
2. On January 1, Michelle Corporation had 95,000 shares of no-par common stock issued
and outstanding. The stock has a stated value of $5 per share. During the year, the following
occurred.
Apr. 1 Issued 55,000 additional shares of common stock for $17 per share.
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June 15 Declared a cash dividend of $1 per share to stockholders of record on June 30.
July 10 Paid the $1 cash dividend.
Dec. 1 Issued 2,000 additional shares of common stock for $19 per share.
15 Declared a cash dividend on outstanding shares of $1.20 per share to
stockholders of record on December 31.
Instructions
(a) Prepare the entries, if any, on each of the three dividend dates.
(b) How are dividends and dividends payable reported in the fi nancial statements prepared
at December 31?
3. Oswald Company reported retained earnings at December 31, 2016, of $400,000.
Oswald had 200,000 shares of common stock outstanding throughout 2017.
The following transactions occurred during 2017.
1. An error was discovered; in 2015, insurance expense was recorded at $90,000, but the
correct amount was $60,000.
2. A cash dividend of $0.50 per share was declared and paid.
3. A 5% stock dividend was declared and distributed when the market price per share was
$18 per share.
4. Net income was $310,000.
Instruction
Prepare a retained earnings statement for 2017.
PRACTICE PROBLEM
On January 1, 2017, Hayslett Corporation had the following stockholders’ equity accounts.
Common Stock ($10 par value, 260,000 shares issued
and outstanding) $2,600,000
Paid-in Capital in Excess of Par—Common Stock 1,500,000
Retained Earnings 3,200,000
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During the year, the following transactions occurred.
April 1 Declared a $1.50 cash dividend per share to stockholders of record on April 15,
payable May 1.
May 1 Paid the dividend declared in April.
June 1 Announced a 2-for-1 stock split. Prior to the split, the market price per share
was $24.
Aug. 1 Declared a 10% stock dividend to stockholders of record on August 15, distributable
August 31. On August 1, the market price of the stock was $10 per share.
31 Issued the shares for the stock dividend.
Dec. 1 Declared a $1.50 per share dividend to stockholders of record on December 15,
payable January 5, 2018.
31 Determined that net income for the year was $600,000.
Instructions
(a) Journalize the transactions and the closing entries for net income, stock dividends, and
cash dividends.
(b) Prepare a stockholders’ equity section at December 31.
