Chapter 11

Question 1

What are the two forms of instalment payments?

Answer 1

(1) Fixed principal payments plus interest

(2) Blended principal and interest payments

Question 2

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% (Interest is compounded annually).

Answer 2

100* (1.07)^2

Question 3

What is the present value on January 1, 2022 when you expect to have
$114.49 on December 31, 2024 in the bank account?
Assume that interest rate is 7%.

Answer 3

114.49/(1.07)^2

Question 4

Basic set of rights for common shares?

Answer 4

(1) Voting right
(2) Dividend right
(3) Right to share in the distribution of assets upon liquidation
(4) Pre-emptive rights to purchase new stock issued by the corporation

Question 5

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

Answer 5

No. We use historical cost principle, so there is no change in equity even when the shar eprice in the stock market changes because there is no change in the real economic resouorces, or assets, in the firm

Question 6

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

Answer 6

Company insiders do not want to dilute their ownership interests so that they can keep controlling the firm

Question 7

Is there any stock without voting power?

Answer 7

Yes

Question 8

Is there any common stock without voting power?

Answer 8

Yes

Question 9

What are authorized shares?

Answer 9

The total number of shares that can be issued by a company.

Question 10

What are authorized shares the sum of?

Answer 10

(1) Issued shares

(2) Unissued shares

Question 11

What makes up issued shares?

Answer 11

(1) Outstanding shares traded in the market

(2) Treasury shares from stock repurchases

Question 12

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

Answer 12

Outstanding shares

Question 13

What is a reason to reacquire shares?

Answer 13

Stock repurchase reduces the number of shares outstanding in the market so it increases earnings per share (EPS)

Question 14

In Canada, repurchased shares are immediately cancelled in Canada, what is the impack on Balance Sheet Equation?

Answer 14

Assets decrease and shareholders’ equity decreases

Question 15

Journla entry to record stock issuance

Answer 15

(Dr) Cash

Cr) Common shares (# shares * price per share

Question 16

Journal entry for stock repurchase and retirement when stock repurchase is below cost?

Answer 16

(Dr) Common shares

(Cr) Cash (using same equation for common shares but with the price at this point in time), Contributed surplus

Question 17

Journal entry for stock repurchase and retirement when stock repurchase is above cost

Answer 17

(Dr) Common shares, Contributed surplus, Retained earnings

(Cr) Cash

Question 18

Can the corporation recognize a gain from stock repurchases?

Answer 18

No

Question 19

Difference between common and preferred shares?

Answer 19

Common shares generally have voting power with no fixed dividend rights whilst preferred shares have non-voting power with fixed dividend rights

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 dividends owed to preferred shareholders will accumulate and be paid in the future.

Question 22

What are dividends in arrears?

Answer 22

dividends that are owed to the preferred shareholder, but have not been declared or paid

Question 23

Are dividend in arrears the liability account?

Answer 23

No

Question 24

What is the impact of redeemable preferred shares on B/S equation?

Answer 24

Decrease in assets and decrease in equity

Question 25

When can a company issue shares?

Answer 25

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

Question 26

What are dividends?

Answer 26

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

Question 27

Important dates for cash dividends?

Answer 27

(1) Dividend declaration
(2) Date of record
(3) Date of payment

Question 28

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

Answer 28

Dare of record

Question 29

Journal entry for date of declaration?

Answer 29

(Dr) Retained earnings

(Cr) Dividend payable

Question 30

Journal entry for date of payment?

Answer 30

(Dr) Dividend payable

(Cr) Cash

Question 31

What does issuance of additional shares of stock on a proportional basis to existing shareholders do?

Answer 31

Retained earnings decrease and common shares increase (just a reclassification within equity)

Question 32

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
percentage?

Answer 32

No impact

Question 33

Journal entry for declaration of stock dividend?

Answer 33

(Dr) Retained earnings

(Cr) Stock dividend issuable

Question 34

Journal entry for issuance date for stock dividend?

Answer 34

(Dr) Stock dividend issuable

(Cr) Common shares

Question 35

What is the impact of stock dividend on shareholder’s equity?

Answer 35

No impact

Question 36

Does the total shareholder’s equity of a company change with stock split?

Answer 36

No

Question 37

Is there an accounting entry for stock split?

Answer 37

No

Question 38

What is the reason for stock split?

Answer 38

The number of outstanding shares increases and stock price per share decreases, inducing more investors