Question 1

Investors commonly use two share values to assist with investment decisions-fair value and book value.

Accepted Answer

Investors commonly use fair value and book value to make investment decisions.

Question 2

Preferred shares are a hybrid between common shares and long-term debt.

Accepted Answer

Preferred shares have some characteristics of both common shares and long-term debt. Similar to debt, preferred shares generally have a fixed dividend that must be paid out before any dividends can be paid to common shareholders. However, like common shares, preferred shares do not have a maturity date and do not involve a contractual obligation to repay the capital.

Question 3

The fair value (or market price) of a share of a company's stock is the price that a willing buyer would pay a willing seller to acquire the share.

Accepted Answer

This is the definition of fair value/market price.

Question 4

The fair values of the shares of companies that are traded on public stock exchanges are easily determined.

Accepted Answer

The fair values of the shares of public companies are determined by the market forces of supply and demand, which are reflected in the stock prices on public stock exchanges. Therefore, the fair value of a company's shares can be easily determined by looking at its current stock price on a public exchange.

Question 5

When shares are issued, their are assigned a stated value.

Accepted Answer

When shares are issued, they are assigned a stated or par value, which is the minimum price for which the shares can be sold.

Question 6

Contributed capital as shown on a corporate balance sheet includes the share accounts and any contributed surplus as well as retained earnings.

Accepted Answer

Contributed capital typically includes the share accounts and any contributed surplus, but not retained earnings. Retained earnings are part of shareholders' equity but are considered earned capital, not contributed capital.

Question 7

Common shareholders, due to their increased risk, have first rights upon the organization's liquidation.

Accepted Answer

In the event of an organization's liquidation, common shareholders are last in line to receive any remaining assets, after creditors, bondholders, and preferred shareholders have been paid.

Question 8

One reason a company will repurchase its own shares is to help avoid a takeover of the company by an outside party.

Accepted Answer

Repurchasing its own shares reduces the number of outstanding shares, which makes it more difficult and expensive for an outside party to acquire a controlling interest in the company. This is known as a "poison pill" defense against takeovers.

Question 9

Once a share is sold, it is consider issued.

Accepted Answer

Once a share is sold, it is considered issued because it has been allocated to the investor, officially transferring ownership from the entity to the shareholder.

Question 10

In a corporation, the two basic sources of shareholders' equity are:

Accepted Answer

The two basic sources of shareholders' equity in a corporation are share capital and retained earnings. Share capital represents the amount of money that shareholders have invested in the company by purchasing shares, while retained earnings are the profits that the company has earned and kept (i.e. not distributed as dividends). Donated capital refers to contributions made to the company without the expectation of receiving shares or other ownership rights, and operating capital refers to funds used to finance the company's day-to-day operations. Therefore, options A, B, and D are incorrect.

Question 11

The entry to record the declaration of a cash dividend includes a credit to retained earnings.

Accepted Answer

The entry to record the declaration of a cash dividend includes a debit to retained earnings, not a credit.

Question 12

The president of the corporation can declare dividends.

Accepted Answer

The board of directors of a corporation is typically responsible for declaring dividends, not the president. The president may recommend or advise on dividends, but the final decision rests with the board.

Question 13

Under the Canada Business Corporation Act corporations can issue an unlimited number of shares.

Accepted Answer

Under the Canada Business Corporation Act, corporations are generally allowed to issue an unlimited number of shares unless otherwise specified in the articles of incorporation.

Question 14

Blu Corporation issued 1,000 common shares in exchange for a new commercial band saw. At the time of this transaction the shares were trading at $10 and the fair value of the saw was at $12,000. This transaction would be recorded at $10,000.

Accepted Answer

The transaction should be recorded at the fair value of the saw, which is $12,000, not the market value of the shares. Therefore, the correct recording would be an increase in equipment (or fixed assets) and an increase in common stock both for $12,000.

Question 15

The board of directors elects the chairperson of a corporation.

Accepted Answer

The board of directors is responsible for electing the chairperson of a corporation.

Question 16

A retirement of common shares:

Accepted Answer

Retiring common shares means that the company is buying back its own shares from the market, decreasing the number of outstanding shares. This results in a reduction in share capital and total shareholders' equity since the money used for the buyback is effectively reducing the assets of the company.

Question 17

The rate of return on total assets is calculated by dividing net income plus interest expense by average total assets.

Accepted Answer

The rate of return on total assets formula is (Net Income + Interest Expense) / Average Total Assets.

Question 18

Assets other than cash should be recorded at their current fair values when received from the issuance of shares.

Accepted Answer

According to accounting standards, assets received from the issuance of shares should be recorded at their current fair values, not at their historical cost. This ensures that the financial statements reflect the true value of the assets held by the company.

Question 19

The term outstanding shares refers to the maximum number of shares a corporation is allowed to distribute to shareholders.

Accepted Answer

The term outstanding shares refers to the actual number of shares that have been issued and are owned by shareholders, not the maximum number that the corporation is allowed to distribute.

Question 20

Following is the shareholders' equity section of the balance sheet of the Everslim Corporation:

Accepted Answer

The correct entry is a credit to Dividends Payable, Preferred for $6,000, which reflects the declaration of dividends on preferred shares.

Quiz 8: Shareholders Equity