A public company issues 10,000 shares on November 1 to purchase equipment with a value of $$72,000. Assume the company’s shares are actively traded with a value of $$ 7 per share. Which statement is true?

Equipment is debited for $72,000.

Contributed Surplus is credited for $2,000.

A gain on sale is credited for $2,000.

Common Shares is credited for $70,000.

Preferred shares are least likely to have which characteristic?

the right of the holder to vote at shareholders’ meetings

the right of the corporation to redeem or retire the shares

preference as to assets upon liquidation of the corporation

The Preferred Shares account has a balance of $$100,000. There are 500 convertible preferred shares, each convertible to 4 common shares. On a day that the preferred shares have an average cost of $$ 200 and a market value of $$230, one-half of the preferred shares are converted to common shares. Common shares are trading at $$ 60. Which statement is true?

The Common Shares account will be credited for $50,000.

Retained Earnings will be debited by $2,500.

An income statement account, Loss on Conversion, will be debited by $2,500.

The Common Shares account will be credited for $60,000.

Which of the following lists the three requirements that must exist for a corporation to pay a cash dividend?

Retained earnings, adequate cash, and declared dividends by the board of directors

High sales, low expenses, and board approval

Positive cash flow, high stock price, and shareholder approval

Retained earnings, high profits, and market demand

Which three dates are associated with the declaration of a cash dividend, and what is the implication of each date?

Date of declaration, date of record, and payment date; they determine when the dividend is announced, who is eligible, and when it is paid.

Date of issue, date of maturity, and payment date; they determine when the stock is issued, matures, and when the dividend is paid.

Date of purchase, date of sale, and payment date; they determine when the stock is bought, sold, and when the dividend is paid.

Date of record, date of sale, and payment date; they determine who is eligible, when the stock is sold, and when the dividend is paid.

Record the journal entry for the following transaction: On July 5, Adobe Corporation issued 500 of its common shares for a total of $10,000.

Debit Cash $10,000; Credit Common Shares $10,000

Debit Common Shares $10,000; Credit Cash $10,000

Debit Cash $5,000; Credit Common Shares $5,000

Debit Common Shares $500; Credit Cash $500

Record journal entries for the following unrelated transaction: On June 1, Baker Corporation issued 1,000 of its preferred shares in exchange for land valued at $50,000. Baker’s shares are not widely held or regularly traded. Four years ago, 500 preferred shares were issued for $35 a share. What is the correct journal entry for this transaction?

Land 50,000; Preferred Shares 50,000

Land 35,000; Preferred Shares 35,000

Land 17,500; Preferred Shares 17,500

Land 70,000; Preferred Shares 70,000

Which of the following is the correct journal entry on April 12 when Hobson Corporation declared a quarterly dividend of $0.05 per share on its 200,000 common shares?

Retained Earnings 10,000 Dividends Payable 10,000

Dividends Payable 10,000 Cash 10,000

Cash 10,000 Retained Earnings 10,000

Dividends Payable 10,000 Retained Earnings 10,000

List the three conditions that must be met before a cash dividend can be paid.

1. Enough retained earnings 2. Enough cash. 3. A declaration of dividends.

1. Board approval 2. Shareholder consent 3. Sufficient inventory.

1. Positive net income 2. High stock price 3. Market demand.

1. Sufficient assets 2. Low liabilities 3. High revenue.

Describe the three important dates in connection with dividends and their significance.

Date of declaration – the cash dividend obligation becomes binding Date of record – shareholders of record receive the dividend payment Payment date – shareholders as of the date of record are paid the dividend

Date of issue – the dividend is announced Date of approval – shareholders approve the dividend Payment date – all shareholders are paid regardless of record date

Date of announcement – the dividend is paid Date of record – only new shareholders receive the dividend Payment date – the dividend is cancelled

Date of declaration – the dividend is optional Date of record – only directors receive the dividend Payment date – the dividend is reinvested automatically

Prepare the journal entry for July 5 when 500 common shares are issued for cash.

Debit: Cash $10,000 Credit: Common Shares $10,000 (To record issuance of 500 shares for cash)

Debit: Common Shares $10,000 Credit: Cash $10,000 (To record issuance of 500 shares for cash)

Debit: Cash $5,000 Credit: Common Shares $5,000 (To record issuance of 500 shares for cash)

Debit: Common Shares $5,000 Credit: Cash $5,000 (To record issuance of 500 shares for cash)

Prepare the journal entry for June 1 when 1,000 preferred shares are issued for land valued at $50,000.

Debit: Land $50,000 Credit: Preferred Shares $50,000 (To record issuance of 1,000 preferred shares for land)

Debit: Preferred Shares $50,000 Credit: Land $50,000 (To record issuance of 1,000 preferred shares for land)

Debit: Cash $50,000 Credit: Preferred Shares $50,000 (To record issuance of 1,000 preferred shares for land)

Debit: Land $50,000 Credit: Common Shares $50,000 (To record issuance of 1,000 preferred shares for land)

Prepare the journal entries for the following dividend-related transactions: Apr. 12: Declaration of cash dividends on 200,000 common shares at $0.05 per share. Apr. 19: Date of record. Apr. 29: Payment of the dividend.

Apr. 12: Debit Cash Dividends – Common $10,000; Credit Dividends Payable $10,000 Apr. 19: No entry required Apr. 29: Debit Dividends Payable $10,000; Credit Cash $10,000 (Paid the dividend)

Apr. 12: Debit Dividends Payable $10,000; Credit Cash Dividends – Common $10,000 Apr. 19: Debit Cash $10,000; Credit Dividends Payable $10,000 Apr. 29: No entry required

Apr. 12: Debit Cash $10,000; Credit Dividends Payable $10,000 Apr. 19: No entry required Apr. 29: Debit Cash Dividends – Common $10,000; Credit Cash $10,000

Apr. 12: Debit Dividends Payable $10,000; Credit Cash $10,000 Apr. 19: No entry required Apr. 29: Debit Cash Dividends – Common $10,000; Credit Dividends Payable $10,000

CHAPTER 13: INTRODUCTION TO CORPORATIONS - 20-MINUTE QUIZ #1

Authored by Mohd Alnajjar

Social Studies

University

CHAPTER 13: INTRODUCTION TO CORPORATIONS - 20-MINUTE QUIZ #1

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MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Income tax expense is calculated based on Profit from Operations from the income statement.

True

False

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

The legal capital and retained earnings can be used for the distribution of dividends.

True

False

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Shareholders’ liability is generally limited; therefore, creditor recourse is limited to that of the corporate assets.

True

False

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Retained earnings are the cumulative profit less losses and amounts distributed to shareholders since incorporation.

True

False

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

Dividends paid on common shares are shown as Dividends Expense in the Other Expenses section of the Income Statement.

True

False

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

When convertible preferred shares are converted into common shares, the company uses the current fair value to record the journal entry.

True

False

MULTIPLE CHOICE QUESTION

30 sec • 1 pt

The redemption or call features apply to preferred shares.

True

False

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CHAPTER 13: INTRODUCTION TO CORPORATIONS - 20-MINUTE QUIZ #1

Income tax expense is calculated based on Profit from Operations from the income statement.

The legal capital and retained earnings can be used for the distribution of dividends.

Shareholders’ liability is generally limited; therefore, creditor recourse is limited to that of the corporate assets.

Retained earnings are the cumulative profit less losses and amounts distributed to shareholders since incorporation.

Dividends paid on common shares are shown as Dividends Expense in the Other Expenses section of the Income Statement.

When convertible preferred shares are converted into common shares, the company uses the current fair value to record the journal entry.

The redemption or call features apply to preferred shares.

Dividend payments become legally binding upon the date of declaration.

Return on equity is calculated by dividing average shareholders’ equity by profit.

When shares are issued for noncash assets, the cost of the assets acquired is always equal to the fair value of the shares issued.

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