Question 1

When treasury stock is acquired,what is the effect on assets and stockholders' equity?

Accepted Answer

When treasury stock is acquired, cash is used to buy back shares, which decreases assets (cash) and stockholders' equity (the amount of the company's earnings that are no longer distributed among as many outstanding shares).

Question 2

When treasury stock is resold at a price above cost:

Accepted Answer

When treasury stock is resold at a price above its cost, the excess is credited to Additional Paid-in Capital, not reported as a gain or revenue, as treasury stock transactions are equity transactions, not income statement activities.

Question 3

California Adventures issues 5,000 shares of 8%,$100 par value preferred stock at the beginning of 2017.All remaining shares are common stock.The company was not able to pay dividends in 2017,but plans to pay dividends of $100,000 in 2018.Assuming the preferred stock is cumulative,how much of the $100,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2018?

Accepted Answer

Since the preferred stock is cumulative and the company did not pay dividends in 2017, the preferred stockholders are owed dividends for both 2017 and 2018 before any dividends can be paid to common stockholders. The annual dividend per share for the preferred stock is 8% of the $100 par value, which is $8 per share. With 5,000 shares, the total annual dividend for preferred stockholders is $40,000. Since dividends were not paid in 2017, the preferred stockholders are owed $40,000 for 2017 and another $40,000 for 2018, totaling $80,000. This leaves $20,000 of the $100,000 dividend to be paid to common stockholders in 2018.

Question 4

The corporation's own stock that has been issued and then repurchased by the company is referred to as:

Accepted Answer

Treasury stock refers to a corporation's own stock that has been issued and then repurchased by the company. This stock can be held by the company or retired, and it does not carry voting rights or receive dividends.

Question 5

Which of the following statements about treasury stock transactions is true?

Accepted Answer

When a company acquires treasury stock, it is considered a reduction of stockholders' equity as the company is essentially buying back its own shares. Option A is incorrect, as treasury stock is recorded as a reduction of stockholders' equity, not an asset. Option B is incorrect, as both gains and losses on the sale of treasury stock are recorded on the income statement.

Question 6

When treasury stock is resold at a gain,the difference between its cost and the cash received when resold:

Accepted Answer

When treasury stock is resold at a gain, the difference between its cost and the cash received when resold increases stockholders' equity. It does not affect net income because this transaction is simply a reclassification of equity accounts and does not involve any revenue or expenses.

Question 7

On November 6,Coleman Corp.acquired 1,000 shares of its $2 par value common stock for $27 each.On November 20,Coleman Corp.reissued 400 shares for $30 each.Which of the following is correct regarding the effect of the journal entry for the reissued shares?

Accepted Answer

When a company reissues its own shares, it receives the proceeds from the sale as a part of its equity. Therefore, the journal entry for reissued shares would increase the stockholders' equity account. Neither assets nor liabilities are affected by this transaction, and expenses are not relevant in this context.

Question 8

When treasury stock is acquired,what is the effect on total stockholders' equity?

Accepted Answer

When treasury stock is acquired, it is considered a reduction of the company's issued and outstanding shares. As a result, total stockholders' equity is reduced, therefore the answer is A) Decrease.

Question 9

Crossroads Mall had 100,000 outstanding shares of common stock.On June 16,2018,Crossroads repurchased 20,000 shares of its own stock at $30 per share.On July 23,2018,Crossroads resold 10,000 shares at $28 per share.What net effect did the repurchase and the resell of common stock have on the accounting equation?

Accepted Answer

The repurchase of 20,000 shares decreased the amount of outstanding shares, and therefore decreased the stockholders' equity. The payment of $30 per share decreased the amount of cash in the assets. 
20,000 shares x $30/share = -$600,000 
On the other hand, the resell of 10,000 shares increased the amount of cash in the assets. 
10,000 shares x $28/share = +$280,000 
However, this resell did not affect the stockholders' equity since it was not a new issuance of shares. 
Overall, the accounting equation was affected as follows: 
- Repurchase: Assets decreased by $600,000, Stockholders' Equity decreased by $600,000 
- Resell: Assets increased by $280,000 
Therefore, the net effect on the accounting equation was a decrease in assets and a decrease in stockholders' equity, option D.

Question 10

On February 22,Brett Corporation acquired 200 shares of its $5 par value common stock for $25 each.On March 15,the company reissued 70 shares for $30 each.What is true of the entry for reissuing the shares?

Accepted Answer

When the company reissues the shares, the cash received exceeds the cost of the shares initially purchased, resulting in an increase in additional paid-in capital. Therefore, the entry should credit Additional Paid in Capital $350. There is no need to debit Treasury Stock because only a portion of the shares acquired were reissued. Cash is also not debited because the company received cash from the sale of shares.

Question 11

When shares of another corporation are purchased,what is the effect on total stockholders' equity?

Accepted Answer

Purchasing shares of another corporation is an investment activity that affects the asset side of the balance sheet by exchanging one asset (cash) for another (investment in another company). It does not directly affect the total stockholders' equity.

Question 12

California Adventures issues 5,000 shares of 8%,$100 par value preferred stock at the beginning of 2017.All remaining shares are common stock.The company was not able to pay dividends in 2017,but plans to pay dividends of $100,000 in 2018.Assuming the preferred stock is noncumulative,how much of the $100,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2018?

Accepted Answer

Since the preferred stock is noncumulative, it does not have the right to accumulate unpaid dividends. Therefore, the preferred stockholders will only receive their stated dividend of 8% on their $100 par value, which amounts to $8 per share. With 5,000 shares outstanding, the total dividend paid to preferred stockholders will be $40,000 (5,000 shares x $8 per share). The remaining $60,000 will be paid to common stockholders.

Question 13

Which of the following is TRUE regarding the accounting for treasury stock?

Accepted Answer

- A is true because treasury stock is reported as a deduction from total stockholders' equity on the balance sheet.
- B is true because the purchase and sale of treasury stock does not affect net income and therefore has no impact on the income statement.
- C is false because treasury stock is still considered part of the equity section, even though it represents shares of the company that have been repurchased.

Question 14

On December 2,Coley Corp.acquired 1,000 shares of its $2 par value common stock for $27 each.On December 20,Coley Corp.reissued 400 shares for $15 each.Which of the following is correct regarding the journal entry for the reissued shares?

Accepted Answer

When a company reissues its treasury stock, it reduces the treasury stock account and increases the amount of common stock outstanding. The journal entry for the reissued shares would be to debit Cash for the amount received ($15 x 400 = $6,000) and credit Treasury Stock for the cost of the shares being reissued ($27 x 400 = $10,800). Therefore, the correct answer is B. Choice A is incorrect because the cash received is only $6,000, not $15,000. Choice C is incorrect because there is no need to credit additional paid-in capital for reissued shares of common stock.

Question 15

Treasury Stock:

Accepted Answer

Treasury stock is a company's own stock that has been repurchased from the shareholders. This effectively reduces the amount of outstanding shares and decreases stockholders' equity as the company is holding its own stock. Treasury stock has a normal debit balance and is recorded as a contra equity account on the balance sheet.

Question 16

What would be the impact on the accounting equation when a company acquires treasury stock?

Accepted Answer

Acquiring treasury stock results in a decrease in assets (cash is used to buy back the stock) and a decrease in stockholders' equity (treasury stock is a contra equity account, reducing total equity).

Question 17

The Surf's Up issues 1,000 shares of 6%,$100 par value preferred stock at the beginning of 2017.All remaining shares are common stock.The company was not able to pay dividends in 2017,but plans to pay dividends of $18,000 in 2018.Assuming the preferred stock is noncumulative,how much of the $18,000 dividend will be paid to preferred stockholders and how much will be paid to common stockholders in 2018?

Accepted Answer

Since the preferred stock is noncumulative, any unpaid dividends from last year do not accrue. Therefore, the preferred stockholders are only entitled to the dividends for the current year. The total dividend payout for the company in 2018 is $18,000. Since the preferred stock has a fixed dividend rate of 6%, the total dividend payout to the preferred stockholders is 6% x 1,000 shares x $100 par value = $6,000. The remaining $12,000 would be paid to the common stockholders. Therefore, the answer is choice A.

Question 18

Treasury Stock is normally reported as:

Accepted Answer

Treasury stock represents shares of a company's own stock that have been repurchased from shareholders. When a company buys back its own stock, the shares are no longer outstanding, which reduces the total number of outstanding shares. Since stockholders' equity is calculated by subtracting liabilities from assets, reducing the number of outstanding shares reduces the total stockholders' equity. Therefore, treasury stock is reported as a reduction of total stockholders' equity.

Question 19

A company reissues 400 shares of its own common stock for $20 per share.The company had acquired these shares two months before for $15 per share.The reissuance of this stock would be recorded with a:

Accepted Answer

When a company reissues its own common stock, it records the transaction at the price it sells the shares for. In this case, the company reissued 400 shares for $20 each, so the total amount received was $8,000 (400 shares x $20 per share).

The initial cost of acquiring these shares is not relevant to the reissuance transaction. Therefore, the journal entry to record the reissuance would be:

Debit: Cash for $8,000
Credit: Common Stock for $6,000 (400 shares x $15 par value per share)
Credit: Additional Paid-In Capital for $2,000 ($8,000 cash received - $6,000 par value of shares issued)

Thus, the correct answer is D – Credit to Additional Paid-In Capital for $2,000.

Question 20

A company acquires 1,000 shares of its own $1 par common stock for $15 per share.This purchase would be recorded with a:

Accepted Answer

When a company acquires its own stock, it is recorded as a reduction in stockholders' equity, specifically as a debit to Treasury Stock. The cost of the shares, in this case $15,000 ($15 per share x 1,000 shares), is credited to the same account. There is no impact on the par value or additional paid-in capital accounts as the shares were already outstanding and previously issued. Therefore, the correct choice would be D, a Debit to Treasury Stock for $15,000.

Quiz 10: Stockholders Equity