Chapter 11

Question 1

if you deposit 100 on January 1, 2022 in your bank and how much money do you get with the interest on December 31, 2024. Assume that interest rate is 7%

Answer 1

You start with 100. 1 year later you get 100(1+0.07) so you get 107 1 yeat later. In the second year you get 100(1.07)*1.07) = 114.49. So this is the future value two years later

Question 2

Common shares rights?

Answer 2

Voting right
Dividend right
right to share in the distribution of assets upon liquidation
Premtive rights to purchase new stocks issued by the corporation (to avoid diluting your interest)

Question 3

Why do company’s go bakrupt?

Answer 3

If they have debt. If they only have equity fund then they do not go bankrupt

Question 4

When there is an increase in share price in the stock market, does it increase equity section of B/S?

Answer 4

No, because it comes down to if something is an accounting event or not. If there is an increase in equity there is increase in asset or decrease in liability. When stock prices increases nothing changes to assets of liabilities so no change in real economic resources (no cash coming in)`

Question 5

What are the two clases of facebook stock?

Answer 5

Class A: 1 vote per share

Class B: 10 votes per share (held by a small group of insiders)

Question 6

Why do firms issue dual or multiple classes of common shares?

Answer 6

Stock ownership dilution. Company insiders do not want to give up control of company (dilute their ownership interes) so that they can keep controlling the firm

Question 7

Is there any stock without voting power?

Answer 7

Yes, the prefer stock. If you buy prefer stocks you do not get voting power at all but if you buy common stock you generally have voting rights

Question 8

Is there any common stock without voting power?

Answer 8

Yes, for example Google class C common stock

Question 9

Shareholder Equity other names?

Answer 9

Stockholders equity, Owner’s equity, Residual interest, Ownership interest, Net asset, Assrts minus liabilites

Question 10

What are auhorized shares?

Answer 10

The total number of shares that can be issued by a company and are specified in the articles of incorporation. Unlimited allows more freedom to issue chares at management’s dicussion

Question 11

What are the two types of authorized shares?

Answer 11

Issued shares: outstanding shares traded in the market plus treasure shares from stock repurchases
Unissued shares

Question 12

Which of the following dollar amount is shown under the common share section of equity?

Answer 12

Outstanding shares

Question 13

What is the valid reason for a decrease in common shares?

Answer 13

Common shares were repurchased and cancelled. Stock repurchases result in treasury shares, a contra equity account.

Question 14

What is EPS?

Answer 14

Net Income in the absence of prefer stock/Weighted average number of outstanding shares

(if there is prefer stock we need to subtract prefer dividend)

Question 15

In general, repurchased shares are immediately cancelled in Canada. What is the impact on Balance sheet equation?

Answer 15

Asset goes down and shareholders equity goes down

Question 16

To record stock repurchase and retirement of 5,000 common shares on Sept 1 (stock price is 1.5 at this point)

Answer 16

(Dr) Common shares (5000*2.5) = 12,500
(Cr) Cash 5000*1.5 = 7500
Contributed suprlus (5000*1) = 5000

Question 17

To record stock repurchase and retirement of 4000 common shares on Oct 1 (stock price is 4 at this point)

Answer 17

(Dr) Common shares (4,000 * 2.5) = 10,000
(Cr) Cash (4000 * 4) = 16,000

(Dr) Contriuted surplus (5,000)
(Dr) Retained earnings 1,000

Question 18

Can the corporation recognize a gain from stock repurchases?

Answer 18

No, corporations cannot recognize a gain or a loss from share transactions with their own shareholders

Question 19

Difference between common and preferred stock?

Answer 19

If you buy common stock you will have voting power (most likely) but there is not fixed dividend rights. If you bought preferred stock you do not have voting power but at time of purchase you know exact amount of dividend you could potentially get at the time of dividend declaration.

Question 20

When are preferred shareholders paid before common shareholders?

Answer 20

If dividends are paid in a year.

Question 21

What happens if dividends are not declared in a year on cumulative dividends preferred shares?

Answer 21

The divdends owed to preferred shareholders with accumulate and be paid in the future.

Question 22

Dividends in arrears?

Answer 22

Dividiends that are owed to the preferred shareholders, but have not been declared or paid.

Question 23

Redeemable preferred shares?

Answer 23

The company can cancel your share at any time at a specified price.

Question 24

What is the impact of cancellation on B/S equation?

Answer 24

(1) Stock buyback has to happen
(2) Those shares are then called treasury stock which are put into inissued categories
Assets goes down and shareholder’s equity does down

Question 25

What is the impact of cancellation on B/S equation?

Answer 25

(1) Stock buyback has to happen
(2) Those shares are then called treasury stock which are put into inissued categories
Assets goes down and shareholder’s equity does down

Question 26

Retractable preferred stock?

Answer 26

Shareholder can cancel his share by selling it back to the company

Question 27

Convertible preferred shares?

Answer 27

Shareholders’ option to exchange your chares for a common share.

Question 28

When does a company issue shares?

Answer 28

(1) At inception
(2) When going public
(3) To raise additional funds

Question 29

Journal entry to record share issuance

Answer 29

(Dr) Cash (Cr) common stock

Question 30

What are dividends?

Answer 30

A corporation’s distribution of cash or stock to its shareholders on a proportional basis (stock stock property etc.)

Question 31

What are the important dates for cash dividends?

Answer 31

(1) Dividend delcaration
(2) Date of record
(3) Date of Payment

Question 32

Which of the important dates for cash dividends is a non accounting event?

Answer 32

Date of record

Question 33

Journal entry for dividend declaration?

Answer 33

(Dr) Retained earnings (Cr) Dividend payable

Question 34

journal entry for date of payment

Answer 34

(Dr) Dividend payable

(Cr) Cash

Question 35

Suppose that a stock price is 1 per share and there are 1,000 shares outstanding in the market. You own 100 shares of this company, leading to 10% ownership. When a company issues a 10% stock dividend, what happens to your ownership percentagr?

Answer 35

No impact. What changes is the number of outstanding shares in the stock market.

Question 36

What is a 2 for 1 stock split?

Answer 36

Divide stock price by 2, so stock price per share decreases by half but the number of shares doubles in the market.

Question 37

What is the reason for stock split?

Answer 37

Although there is no accounting entry for stock split, the number of outstanding shares increases and stock price per chare decreases which might attract more investors since it is more accessible.