Final Exam Review Ch. 11

Question 1

What are the 6 advantages of the corporate form of organization?

Answer 1

1. Separate legal entity
2. Limited liability
3. Transferable ownership rights
4. Continuous life
5. No mutual agency for shareholders
6. Ease of accumulating capital

Question 2

What are the 2 disadvantages of the corporate form of organization?

Answer 2

1. Government regulation
2. Double Taxation

Question 3

What are organization expenses?

Answer 3

The costs to start a corporation.

Question 4

What is included in organization expenses?

Answer 4

1. Legal and promoter’s fees
2. Charter payments

Question 5

Define issuing stock.

Answer 5

The sale of stock

Question 6

What is the market value per share of stock?

Answer 6

The price stock is bought and sold for.

Question 7

What are the two classes of stock?

Answer 7

1. Common stock
2. Preferred stock

Question 8

What is Par Value stock?

Answer 8

Stock that has a par value; has a minimum capital

Question 9

What is No Par Value stock?

Answer 9

Stock that is not assigned value per share by corporate charter.

Question 10

What is Stated Value stock?

Answer 10

No-par value stock with an assigned value per share that is the minimum legal capital per share.

Question 11

What does stockholder’s equity consist of?

Answer 11

1. Paid in capital
2. Retained Earnings

Question 12

What does it mean if stock is sold at a premium?

Answer 12

The stock is sold for more than par.

Question 13

What does it mean if stock is sold at a discount?

Answer 13

The stock is sold for less than par.

Question 14

What account do we credit to when we sell stock at a premium?

Answer 14

Paid-in excess of par/stated value

Question 15

What account do we debit when we sell stock at a discount?

Answer 15

Paid-in excess of par/stated value

Question 16

What are Cash dividends?

Answer 16

Distributions of cash to stockholders

Question 17

What 2 important dates do we journalize to record cash dividends?

Answer 17

1. Date of declaration
2. Date of payment

Question 18

What is a stock dividend?

Answer 18

A distribution of additional shares of the corporation’s stock to shareholders without payment in return.

Question 19

Stock dividends transfers a portion of equity from ________ ________ to contributed capital.

Answer 19

retained earnings

Question 20

Why do companies declare stock dividends?

Answer 20

1. Keep market price more affordable
2. Show management’s confidence that the company is doing well and will continue to do well.

Question 21

What is a small stock dividend?

Answer 21

A distribution less than or equal to 25% of previously outstanding shares

Question 22

How are small stock dividends recorded?

Answer 22

By capitalizing Retained Earnings for the market value of the shares to be distributed.

Question 23

What are large stock dividends?

Answer 23

A distribution more than 25% of previously outstanding shares.

Question 24

How are large stock dividends recorded?

Answer 24

By capitalizing Retained Earnings to Par/Stated Value of the stock.

Question 25

What is a stock buy back?

Answer 25

When corporations buy back their own stock

Question 26

Why do corporations conduct stock buy backs?

Answer 26

1. To acquire another corporation 2. To avoid the takeover of a company 3. Give as compensation to employees 4. Maintain a strong market for stock

Question 27

What is treasury stock?

Answer 27

Reacquired stock that the company buys.

Question 28

What are the three ways treasury stock can be sold?

Answer 28

1. At cost 2. Above cost 3. Below cost

Question 29

How do we record selling treasury above cost?

Answer 29

As a credit to Paid-in Capital in excess of Treasury Stock Account.

Question 30

How do we record selling treasury below cost?

Answer 30

As a debit to Paid-in Capital in excess of Treasury Stock Account.

Question 31

Ernst Co. has 11,800 shares of common stock with a par value of $2 outstanding. On May 1, Ernst declares a 23% stock dividend when the market value of each share is $26 per share. 1. Record the declaration of the stock dividend 2. Record the distribution of the common stock dividend.

Answer 31

1. Retained Earnings 70,564 Common Dividend Distributable 5,428 PIC Excess Par, CS 65,136 2. Common Dividend Distributable 5,428 Common Stock, $2 Par Value 5,428