TRUE-FALSE STATEMENTS
1. Dividends may be declared and paid in cash or stock.
True
False
2. Cash dividends are not a liability of the corporation until they are declared by the board of directors.
True
False
3. The amount of a cash dividend liability is recorded on the date of record because it is on that date that the persons or entities who will receive the dividend are identified.
True
False
4. A 10% stock dividend will increase the number of shares outstanding but the book value per share will decrease.
True
False
5. A 3 for 1 common stock split will increase total stockholders’ equity but reduce the par or stated value per share of common stock.
True
False
6. Retained earnings represents the amount of cash available for dividends.
True
False
7. Net income of a corporation should be closed to retained earnings and net losses should be closed to paid-in capital accounts.
True
False
8. A debit balance in the Retained Earnings account is identified as a deficit.
True
False
9. A correction in income of a prior period involves either a debit or credit to the Retained Earnings account.
True
False
10. Prior period adjustments to income are reported in the current year’s income statement.
True
False
11. Retained earnings that are restricted are unavailable for dividends.
True
False
12. Restricted retained earnings are available for preferred stock dividends but unavailable for common stock dividends.
True
False
13. A retained earnings statement shows the same information as a corporation income statement.
True
False
14. A detailed stockholders’ equity section in the balance sheet will list the names of individuals who are eligible to receive dividends on the date of record.
True
False
15. Common Stock Dividends Distributable is shown within the Paid-in Capital subdivision of the stockholders’ equity section of the balance sheet.
True
False
16. Return on common stockholders equity is computed by dividing net income by ending stockholders equity.
True
False
17. Many companies prepare a stockholders equity statement instead of presenting a detailed stockholders equity section in the balance sheet.
True
False
18. A major difference among corporations proprietorships and partnerships is that a corporation’s income statement reports income tax expense.
True
False
19. A corporation incurs income tax expense only if it pays dividends to stockholders.
True
False
20. Income tax expense usually appears as a separate section on a corporation income statement.
True
False
21. Earnings per share is calculated by dividing net income by the weighted average number of shares of preferred stock and common stock outstanding.
True
False
22. Preferred dividends paid are added back to net income in calculating earnings per share for common stockholders.
True
False
23. Earnings per share indicates the net income earned by each share of outstanding common stock.
True
False
24. Earnings per share is reported for both preferred and common stock.
True
False
25. Most companies are required to report earnings per share on the face of the income statement.
True
False
Additional True-False Questions
26. A dividend based on paid-in capital is termed a liquidating dividend.
True
False
27. Common Stock Dividends Distributable is reported as additional paid-in capital in the stockholders’ equity section.
True
False
28. A prior period adjustment is reported as an adjustment of the beginning balance of Retained Earnings.
True
False
29. Income tax expense and the related liability for income taxes payable are recorded when taxes are paid.
True
False
30. Earnings per share is reported only for common stock.
True
False
MULTIPLECHOICE QUESTIONS
31. Each of the following decreases retained earnings except a
a. cash dividend.
b. liquidating dividend.
c. stock dividend.
d. All of these decrease retained earnings.
32. Each of the following decreases total stockholders’ equity except a
a. cash dividend.
b. liquidating dividend.
c. stock dividend.
d. All of these decrease total stockholders’ equity.
33. Which one of the following is not necessary in order for a corporation to pay a cash dividend?
a. Adequate cash
b. Approval of stockholders
c. Declaration of dividends by the board of directors
d. Retained earnings
34. If a corporation declares a dividend based upon paid-in capital it is known as a
a. scrip dividend.
b. property dividend. c. paid dividend.
d. liquidating dividend.
35. The date on which a cash dividend becomes a binding legal obligation is on the
a. declaration date.
b. date of record.
c. payment date.
d. last day of the fiscal year-end.
36. The effect of the declaration of a cash dividend by the board of directors is to
Increase Decrease
a. Stockholders’ equity Assets
b. Assets Liabilities
c. Liabilities Stockholders’ equity
d. Liabilities Assets
37. The cumulative effect of the declaration and payment of a cash dividend on a company’s financial statements is to
a. decrease total liabilities and stockholders’ equity.
b. increase total expenses and total liabilities.
c. increase total assets and stockholders’ equity.
d. decrease total assets and stockholders’ equity.
38. Common Stock Dividends Distributable is classified as a(n)
a. asset account.
b. stockholders’ equity account.
c. expense account.
d. liability account.
39. The effect of a stock dividend is to
a. decrease total assets and stockholders’ equity.
b. change the composition of stockholders’ equity.
c. decrease total assets and total liabilities.
d. increase the book value per share of common stock.
40. If a corporation declares a 10% stock dividend on its common stock the account to be debited on the date of declaration is
a. Common Stock Dividends Distributable.
b. Common Stock.
c. Paid-in Capital in Excess of Par.
d. Retained Earnings.
41. Which one of the following events would not require a formal journal entry on a corporation’s books?
a. 2 for 1 stock split
b. 100% stock dividend
c. 2% stock dividend
d. $1 per share cash dividend
42. Stock dividends and stock splits have the following effects on retained earnings:
Stock Splits Stock Dividends
a. Increase No change
b. No change Decrease
c. Decrease Decrease
d. No change No change
43. Dividends are predominantly paid in
a. scrip.
b. property.
c. cash.
d. stock.
44. If a stockholder receives a dividend consisting of a promissory note the stockholder has received a
a. stock dividend.
b. cash dividend.
c. contingent dividend.
d. scrip dividend.
45. Of the four dividends types the two most common types in practice are
a. cash and scrip.
b. cash and property.
c. cash and stock.
d. property and stock.
46. Regular dividends are declared out of
a. Paid-in Capital in Excess of Par Value.
b. Treasury Stock.
c. Common Stock.
d. Retained Earnings.
47. A corporation is committed to a legal obligation when it declares
a. a cash dividend.
b. either a cash dividend or a stock dividend.
c. a stock dividend.
d. a stock split.
48. Which of the following is not a significant date with respect to dividends?
a. The declaration date
b. The incorporation date
c. The record date
d. The payment date
49. On the dividend record date
a. a dividend becomes a current obligation.
b. no entry is required.
c. an entry may be required if it is a stock dividend.
d. Dividends Payable is debited.
50. Which of the following statements regarding the date of a cash dividend declaration is not accurate?
a. The dividend can be rescinded once it has been declared.
b. The corporation is committed to a legal binding obligation.
c. The board of directors formally authorizes the cash dividend.
d. A liability account must be increased.
51. Dividends Payable is classified as a
a. long-term liability.
b. contra stockholders’ equity account to Retained Earnings.
c. current liability.
d. stockholders’ equity account.
52. Indicate the respective effects of the declaration of a cash dividend on the following balance sheet sections:
Total Assets Total Liabilities Total Stockholders’ Equity
a. Increase Decrease No change
b. No change Increase Decrease
c. Decrease Increase Decrease
d. Decrease No change Increase
53. Which of the following statements about dividends is not accurate?
a. Many companies declare and pay cash quarterly dividends.
b. Low dividends may mean high stock returns.
c. The board of directors is obligated to declare dividends.
d. A legal dividend may not be a feasible one.
54. The cumulative effect of the declaration and payment of a cash dividend on a company’s balance sheet is to
a. decrease current liabilities and stockholders’ equity.
b. increase total assets and stockholders’ equity.
c. increase current liabilities and stockholders’ equity.
d. decrease stockholders’ equity and total assets.
55. The declaration and distribution of a stock dividend will
a. increase total stockholders’ equity.
b. increase total assets.
c. decrease total assets.
d. have no effect on total assets.
56. ABC Inc. has 1000 shares of 4% $100 par value cumulative preferred stock and 50000 shares of $1 par value common stock outstanding at December 31 2008. What is the annual dividend on the preferred stock?
a. $40 per share
b. $4000 in total
c. $400 in total
d. $.40 per share
57. Agler Inc. has 10000 shares of 6% $100 par value cumulative preferred stock and 100000 shares of $1 par value common stock outstanding at December 31 2008. If the board of directors declares a $50000 dividend the
a. preferred shareholders will receive 1/10th of what the common shareholders will receive.
b. preferred shareholders will receive the entire $50000.
c. $50000 will be held as restricted retained earnings and paid out at some future date.
d. preferred shareholders will receive $25000 and the common shareholders will receive $25000.
58. Manner Inc. has 5000 shares of 6% $100 par value noncumulative preferred stock and 20000 shares of $1 par value common stock outstanding at December 31 2008. There were no dividends declared in 2007. The board of directors declares and pays a $55000 dividend in 2008. What is the amount of dividends received by the common stockholders in 2008?
a. $0
b. $30000
c. $55000
d. $25000
59. Lopez Inc. has 2000 shares of 6% $50 par value cumulative preferred stock and 50000 shares of $1 par value common stock outstanding at December 31 2007 and December 31 2008. The board of directors declared and paid a $4000 dividend in 2007. In 2008 $20000 of dividends are declared and paid. What are the dividends received by the preferred and common shareholders in 2008?
Preferred Common
a. $12000 $8000
b. $10000 $10000
c. $8000 $12000
d. $6000 $14000
60. Norton Inc. has 10000 shares of 6% $100 par value noncumulative preferred stock and 100000 shares of $1 par value common stock outstanding at December 31 2008 and December 31 2009. The board of directors declared and paid a $50000 dividend in 2008. In 2009 $100000 of dividends are declared and paid. What are the dividends received by the preferred and common shareholders in 2009?
Preferred Common
a. $0 $100000
b. $60000 $40000
c. $50000 $50000
d. $100000 $0
61. The board of directors must assign a per share value to a stock dividend declared that is
a. greater than the par or stated value.
b. less than the par or stated value.
c. equal to the par or stated value.
d. at least equal to the par or stated value.
62. Corporations generally issue stock dividends in order to
a. increase the market price per share.
b. exceed stockholders’ dividend expectations.
c. increase the marketability of the stock.
d. decrease the amount of capital in the corporation.
63. A stockholder who receives a stock dividend would
a. expect the market price per share to increase.
b. own more shares of stock.
c. expect retained earnings to increase.
d. expect the par value of the stock to change.
64. When stock dividends are distributed
a. Common Stock Dividends Distributable is decreased.
b. Retained Earnings is decreased.
c. Paid-in Capital in Excess of Par Value is debited if it is a small stock dividend.
d. no entry is necessary if it is a large stock dividend.
65. A small stock dividend is defined as
a. less than 30% but greater than 25% of the corporation’s issued stock.
b. between 50% and 100% of the corporation’s issued stock.
c. more than 30% of the corporation’s issued stock.
d. less than 2025% of the corporation’s issued stock.
66. The per share amount normally assigned by the board of directors to a large stock dividend is
a. the market value of the stock on the date of declaration.
b. the average price paid by stockholders on outstanding shares.
c. the par or stated value of the stock.
d. zero.
67. The per share amount normally assigned by the board of directors to a small stock dividend is
a. the market value of the stock on the date of declaration.
b. the average price paid by stockholders on outstanding shares.
c. the par or stated value of the stock.
d. zero.
68. Identify the effect the declaration of a stock dividend has on the par value per share and book value per share.
Par Value per Share a. Increase
b. No effect
c. Decrease
d. No effect
69. The declaration of a stock dividend will
a. increase paid-in capital.
b. change the total of stockholders’ equity.
c. increase total liabilities.
d. increase total assets.
70. Which of the following show the proper effect of a stock split and a stock dividend?
Item Stock Split Stock Dividend
a. Total paid-in capital Increase Increase
b. Par value per share Decrease No change
c. Total retained earnings Decrease Decrease
d. Total par value (common) Decrease Increase
71. A stock split
a. may occur in the absence of retained earnings.
b. will increase total paid-in capital.
c. will increase the total par value of the stock.
d. will have no effect on the par value per share of stock.