Question 1

A company has outstanding 9 million shares of $2 par value common stock and 1 million shares of $4 par value preferred stock.The preferred stock has an 8% dividend rate.The company declares $600,000 in total dividends for the year.Which of the following is correct if dividends in arrears are $30,000?
A) Preferred stockholders will receive $350,000; common stockholders will receive $250,000.
B) Preferred stockholders will receive $60,000; common stockholders will receive $540,000.
C) Preferred stockholders will receive $320,000; common stockholders will receive $280,000.
D) Preferred stockholders will receive $90,000; common stockholders will receive $510,000.

Accepted Answer

Preferred stockholders are entitled to $320,000 ($30,000 in arrears + $320,000 current year: 1,000,000 shares * $4 par value * 8%). Common stockholders receive the remaining $250,000.

Question 2

A company issues 100,000 shares of preferred stock for $40 a share.The stock has fixed annual dividend rate of 5% and a par value of $3 per share.If sufficient dividends are declared,preferred stockholders can anticipate receiving dividends of:
A) $5,000 each year.
B) $15,000 each year.
C) 5% of net income each year.
D) $3 per share.

Accepted Answer

The company has issued 100,000 shares of preferred stock at $40 per share, which amounts to a total of $4,000,000. 
Since the preferred stock has a fixed annual dividend rate of 5%, the annual dividend per share would be 5% of the par value of $3, which is $0.15 per share.
The total annual dividend payable to preferred stockholders would be:
$0.15 x 100,000 shares = $15,000 per year. 
Therefore, choice B is the correct answer.

Question 3

Double Vision,Inc.had 10,000 shares issued and outstanding of its $1 par value common stock.At December 31,Common Stock equaled $10,000,Retained Earnings equaled $20,000 and Total stockholders' equity equaled $50,000 prior to a 2-for-1 stock split.As a result of a 2-for-1 stock split:
A) par value equals $0.50.
B) the number of shares outstanding equals 5,000.
C) the common stock equals $20,000
D) Retained Earnings equals $40,000.

Accepted Answer

In a 2-for-1 stock split, the par value of the stock is halved, so the new par value is $0.50. The number of shares doubles to 20,000, but the common stock value remains the same at $10,000, and retained earnings are unaffected by the stock split.

Question 4

Which of the following statements about dividends in arrears is correct?
A) Dividends in arrears do not appear on the balance sheet or require a journal entry.
B) Dividends in arrears are not disclosed to stockholders.
C) Dividends in arrears applies to common stock.
D) Dividends in arrears are legal liabilities.

Accepted Answer

Dividends in arrears relate to preferred stock only.They are not reported as liabilities because dividends are not actual liabilities unless they are declared.Instead,they are disclosed in the notes to the financial statements.

Question 5

A company has outstanding 10 million shares of $2 par common stock and 1 million shares of $4 par preferred stock.The preferred stock has an 8% dividend rate.The board of directors declares $300,000 in total dividends for the year.Which of the following is correct if the preferred stockholders have a cumulative dividend preference?
A) Preferred stockholders will receive the entire $300,000 and they must also be paid $20,000 before the end of the current accounting period; common stockholders will receive nothing.
B) Preferred stockholders will receive $24,000 (or 8% of the total dividends); common stockholders will receive the remaining $276,000 (or $300,000 - $24,000).
C) Preferred stockholders will receive the entire $300,000 and they must also be paid the remaining $20,000 sometime in the future before common stockholders will receive any dividends.
D) Preferred stockholders will receive the entire $300,000, but will receive nothing more in the future relating to this dividend declaration; common stockholders will receive nothing.

Accepted Answer

Preferred dividend = Number of shares outstanding × Par value × Annual dividend rate
= 1,000,000 shares × $4 per share × 0.08 = $320,000 (if fully declared)
Current preferred dividend − Dividends paid to preferred stockholders = Dividends in arrears
= $320,000 − $300,000 = $20,000

Question 6

A company issues 100,000 shares of preferred stock for $40 per share.The stock has a fixed dividend rate of 5% and a par value of $3 per share.The company records the issuance with a debit to Cash for:
A) $4 million and a credit to Preferred Stock for $4 million.
B) $300,000 and a credit to Preferred Stock for $300,000.
C) $4 million, a credit to Preferred Stock for $300,000, and a credit to Additional Paid-in Capital for $3.7 million.
D) $300,000, a debit for $3.7 million to Long-term Investments , a credit to Preferred Stock for $300,000, and a credit to Additional Paid-in Capital for $3.7 million.

Accepted Answer

The company receives $4 million in cash (100,000 shares x $40 per share). The Preferred Stock account is credited for the par value of $300,000 (100,000 shares x $3 par value), and the excess amount of $3.7 million is credited to Additional Paid-in Capital.

Question 7

Fronthouse Corp.issues 10,000 shares of no-par value preferred stock for cash at $60 per share.The journal entry to record the transaction will consist of a debit to Cash for $600,000 and a credit (or credits)to:
A) Preferred Stock for $600,000.
B) Preferred Stock for $20,000 and Additional Paid-in Capital for $580,000.
C) Preferred Stock for $20,000 and Retained Earnings for $580,000.
D) Retained Earnings for $600,000.

Accepted Answer

The entire amount received from issuing no-par value stock is credited to the Preferred Stock account.

Question 8

A company issues 1 million shares of preferred stock with a par value of $2 at its market price of $26 per share.The issuance should be recorded with a debit to Cash for:
A) $26 million and a credit to Preferred Stock for $26 million.
B) $2 million and a credit to Preferred Stock for $2 million.
C) $26 million, a credit to Additional Paid-in Capital for $2 million, and a credit to Preferred Stock for $24 million.
D) $26 million, a credit to Preferred Stock for $2 million, and a credit to Additional Paid-in Capital for $24 million.

Accepted Answer

The issuance should be recorded with a debit to Cash for $26 million, a credit to Preferred Stock for the par value of $2 million, and a credit to Additional Paid-in Capital for the excess amount of $24 million.

Question 9

Preferred stock has some distinctly different characteristics from common stock.Which of the characteristics below is not related to preferred stock?
A) Its dividends may be paid at a fixed rate.
B) It has a higher priority for the distribution of assets than common stock.
C) It has a higher priority for the payment of dividends than common stock.
D) It generally has voting rights.

Accepted Answer

Preferred stock generally does not have voting rights, while common stock does.

Question 10

A cumulative dividend preference means that:
A) preferred stockholders are paid dividends before common stockholders are paid dividends for the current year only.
B) unpaid dividends to preferred stockholders accumulate and must be paid before common stockholders receive dividends.
C) preferred stockholders are paid their full fixed dividend rate each period as long as the company is in operation.
D) unpaid cash dividends to preferred stockholders must be replaced with stock dividends during the current period.

Accepted Answer

A cumulative dividend preference means that unpaid dividends to preferred stockholders accumulate and must be paid before common stockholders receive dividends. This ensures that preferred stockholders receive their preferred dividends before the common stockholders receive theirs.

Question 11

A company issues 500,000 shares of preferred stock for $30 a share.The stock has a fixed annual dividend rate of 5% and a par value of $9 per share.The current price of the preferred stock is $32 a share.If sufficient dividends are declared,preferred stockholders can anticipate receiving annual dividends of:
A) $0.45 per share.
B) $1.50 per share.
C) $1.60 per share.
D) $1.05 per share.

Accepted Answer

The answer of A company issues 500,000 shares of preferred...

Question 12

A company issued 8% preferred stock with a $100 par value.This means:
A) Preferred stockholders are entitled to 8% of the annual net income.
B) Only 8% of total contributed capital can be preferred stock.
C) Preferred stockholders are guaranteed a dividend.
D) The potential dividend to preferred stockholders is $8 per share per year.

Accepted Answer

The preferred stock pays a dividend of 8% of the par value, which is $8 per share per year.

Question 13

Hopkins,Inc.has 1,000 shares of common stock and 1,000 shares of preferred stock outstanding.The preferred stock has a cumulative dividend preference.Both classes of stock have a par value of $10.The preferred stock has a dividend rate of 6 percent.Hopkins failed to pay a dividend during the prior year.During the current year,the board of directors declares dividends totaling $2,000.Accordingly,the company will distribute dividends in the amount of:
A) $2,000 to the preferred shareholders.
B) $1,000 to each class of shareholders.
C) $1,200 to the preferred shareholders and $800 to the common shareholders.
D) $1,600 to the preferred shareholders and $400 to the common shareholders.

Accepted Answer

The preferred shareholders have a cumulative dividend preference, which means that Hopkins must first pay any unpaid dividends from prior years before paying any dividends to common shareholders. Since Hopkins failed to pay a dividend during the prior year, the $2,000 dividend declared must first satisfy the preferred shareholders' cumulative dividend owed from the prior year. The cumulative dividend owed to the preferred shareholders is $10 * 6% * 1,000 shares = $600. Therefore, $600 of the declared dividend will be paid to the preferred shareholders (1,200 shares * $0.50 per share), leaving $1,400 in remaining dividends to be distributed to both classes of shareholders. The remaining $1,400 will be split among the common shareholders and the remaining preferred shareholders, giving $800 to the common shareholders and $600 to the remaining preferred shareholders (800 shares * $0.50 per share).

Question 14

At the end of its first year of operations,Mendes Inc.had 75,000 shares of preferred stock,5% cumulative,$100 par value.It also has 500,000 shares of common stock $0.01 par value.(The share information represents the numbers of shares issued and outstanding for both types of stock.)If sufficient dividends are declared,what is the per share dividend that will be paid on the preferred stock?
A) $3,750
B) $380,000
C) $375,000
D) $5,000

Accepted Answer

The preferred stock is 5% cumulative, which means that the company must pay all dividends in arrears before paying any dividends on the common stock. The preferred stock has a par value of $100, so the total par value of the preferred stock is $7,500,000. The preferred stock has 75,000 shares outstanding, so the per share dividend is $7,500,000 / 75,000 = $100.

Question 15

Oxford Corporation has 120,000 shares of preferred stock,8% cumulative,$100 par value
It also has 1,400,000 shares of common stock,$0.01 par value.(The share information represents the numbers of shares issued and outstanding for both types of stock.)Dividends in arrears at the beginning of the year totaled $480,000.If Oxford's board of directors declares a total dividend of $1,650,000 to be distributed to preferred and common stockholders,how much will be paid to the common stockholders?
A) $1,440,000
B) $210,000
C) $1,170,000
D) $690,000

Accepted Answer

The preferred stock dividend is 8% of $100 par value, which is $8 per share. With 120,000 shares, the annual preferred dividend is $960,000. Adding the $480,000 in arrears, the total preferred dividend is $1,440,000. Subtracting this from the total declared dividend of $1,650,000 leaves $210,000 for common stockholders.

Question 16

A current dividend preference means that:
A) preferred stockholders are paid current dividends before common stockholders are paid dividends.
B) unpaid dividends to preferred stockholders accumulate and must be paid before common stockholders receive dividends.
C) preferred stockholders are paid their full fixed dividend rate each period as long as the company is in operation.
D) unpaid cash dividends to preferred stockholders must be replaced with stock dividends during the current period.

Accepted Answer

A current dividend preference means that preferred stockholders are paid current dividends before common stockholders are paid dividends. Therefore, choice A is correct. Choice B is referring to cumulative dividend preference. Choice C is true for all types of preferred stock, not just current dividend preference. Choice D is not a valid statement.

Question 17

A corporation's board of directors could prefer a stock split to a stock dividend because a stock split:
A) increases the market price of the stock.
B) reduces Retained Earnings, so the company pays less taxes.
C) does not reduce Retained Earnings, so it does not reduce the ability to declare a cash dividend in the future.
D) increases total stockholders' equity and allows the corporation more flexibility.

Accepted Answer

A company's board of directors may declare a stock dividend rather than a stock split to signal to financial statement users that the company expects significant future earnings (which will replenish the reduction in Retained Earnings caused by the stock dividend).

Question 18

Preferred stock differs from common stock in that:
A) preferred stock has more voting power and, as such, greater control over the management of the company.
B) preferred stockholders are paid dividends before common stockholders.
C) preferred stock pays tax-free dividends.
D) preferred stock has no preemptive rights or residual claims.

Accepted Answer

Preferred stockholders receive fixed dividends before common stockholders, and have priority over common stockholders in the event of a company's liquidation or bankruptcy. However, preferred stockholders typically have no voting rights and do not have the same level of control over the management of the company as common stockholders. The other answer choices are incorrect.

Question 19

A company has outstanding 10 million shares of $2 par common stock and 1 million shares of $4 par preferred stock.The preferred stock has an 8% dividend rate.The company declares $300,000 in total dividends for the year.Which of the following is correct if the preferred stockholders only have a current dividend preference?
A) Preferred stockholders will receive the entire $300,000, and they must also be paid $20,000 before the end of the current accounting period. Common stockholders will receive nothing.
B) Preferred stockholders will receive $24,000 or 8% of the total dividends. Common stockholders will receive the remaining $276,000.
C) Preferred stockholders will receive the entire $300,000, and they must also be paid $20,000 sometime in the future before common stockholders will receive anything.
D) Preferred stockholders will receive the entire $300,000, but will receive nothing more relating to this dividend declaration. Common stockholders will receive nothing.

Accepted Answer

Preferred dividend = Number of shares outstanding × Par value × Annual dividend rate
= 1,000,000 shares × $4 per share × 0.08 = $320,000 (but only if fully declared)
Preferred stockholders receive the entire $300,000 and nothing more relative to this declaration.

Question 20

A stock dividend is considered a large stock dividend if it is ____ than 25% of the outstanding shares,and it is recorded at the ______ value of the additional shares.
A) more; par
B) less; par
C) more; market
D) less; market

Accepted Answer

A stock dividend is considered a large stock dividend if it is more than 25% of the outstanding shares, and it is recorded at the par value of the additional shares. Therefore, the correct choice is A (more; par).

Quiz 11: Reporting and Interpreting Stockholders Equity

A company issues 100,000 shares of preferred stock for $40 a share.The stock has fixed annual dividend rate of 5% and a par value of $3 per share.If sufficient dividends are declared,preferred stockholders can anticipate receiving dividends of:

Double Vision,Inc.had 10,000 shares issued and outstanding of its $1 par value common stock.At December 31,Common Stock equaled $10,000,Retained Earnings equaled $20,000 and Total stockholders' equity equaled $50,000 prior to a 2-for-1 stock split.As a result of a 2-for-1 stock split:

Which of the following statements about dividends in arrears is correct?

A company issues 100,000 shares of preferred stock for $40 per share.The stock has a fixed dividend rate of 5% and a par value of $3 per share.The company records the issuance with a debit to Cash for:

Fronthouse Corp.issues 10,000 shares of no-par value preferred stock for cash at $60 per share.The journal entry to record the transaction will consist of a debit to Cash for $600,000 and a credit (or credits) to:

A company issues 1 million shares of preferred stock with a par value of $2 at its market price of $26 per share.The issuance should be recorded with a debit to Cash for:

Preferred stock has some distinctly different characteristics from common stock.Which of the characteristics below is not related to preferred stock?

A cumulative dividend preference means that:

A company issued 8% preferred stock with a $100 par value.This means:

A current dividend preference means that:

A corporation's board of directors could prefer a stock split to a stock dividend because a stock split:

Preferred stock differs from common stock in that:

A stock dividend is considered a large stock dividend if it is than 25% of the outstanding shares,and it is recorded at the __ value of the additional shares.