M5 - Stockholders' Equity: Part 1

Question 1

True or false: If a example says “the state of incorporation protects treasury stock from dilution”, a 2-for-1 stock split also increases treasury shares.

Answer 1

True

Question 2

What is the formula to calculate retained earnings?

Answer 2

Net income/loss
-Dividends (cash, property, and stock) declared
+/- Prior Period Adjustments
+/- Accounting changes reported retrospectively
—————————————————————–
Retained Earnings
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Question 3

True or False: There is no gain or loss on the purchase and/or sale of treasury stock. Any “difference” goes to “paid-in capital,” or if there is not enough paid-in capital to absorb a loss, the loss would be debited (subtracted) from “retained earnings.”

Answer 3

True

Question 4

Cumulative preferred stock dividends are paid on par value (not sales price) of preferred stock and have a “preference” over C/S dividends until all past preferred stock dividends are paid. (true or false)

Answer 4

True

Question 5

How to calculate book value per common share:

Answer 5

Common Shares Outstanding

Common Shares Outstanding is computed as total shares issued less treasury shares.

Question 6

Common stock that contains an unconditional redemption feature should be reported on the issuer’s books as a liability on the date of issuance because there is an obligation of a cash outflow in the future that the company has not ability to prevent. (true or false)

Answer 6

True

Question 7

There is no requirement to appropriate retained earnings for any purpose. Retained earnings may be set aside for future purposes by classifying a portion as “appropriated”. (true or false)

Answer 7

True

Question 8

Dividends in “arrears” (undeclared dividends on cumulative preferred stock) should be reported in the footnotes. If they are not declared, no journal entry is made. (true or false)

Answer 8

True

Neither liabilities nor equity are affected