2

• Which of these is not a major advantage of a corporation?

  Government regulations.
• A major disadvantage of a corporation is:

  additional taxes.
• Which of these statements is false?

  Legal capital is intended to protect stockholders.
• ABC Corp. issues 1,000 shares of $10 par value common stock at $12 per share. When the transaction is recorded, credits are made to:


  Common Stock $10,000 and Paid-in Capital in Excess of Par Value $2,000.
• Treasury stock may be repurchased:


  More than one of the above
• Preferred stock may have priority over common stock except in:

  voting.
• U-Bet Corporation has 10,000 shares of 8%, $100 par value, cumulative preferred stock outstanding at December 31, 2017. No dividends were declared in 2015 or 2016. If U-Bet wants to pay $375,000 of dividends in 2017, common stockholders will receive:

  135,000
• Entries for cash dividends are required on the:

  declaration date and the payment date.
• Which of these statements about stock dividends is true?

  A stock dividend has no effect on total stockholders' equity.
• Zealot Inc. has retained earnings of $500,000 and total stockholders' equity of $2,000,000. It has 100,000 shares of $8 par value common stock outstanding, which is currently selling for $30 per share. If Zealot declares a 10% stock dividend on its common stock:

  retained earnings will decrease by $300,000 and total paid-in capital will increase by $300,000.
• In the stockholders' equity section of the balance sheet, common stock:


  is part of paid-in capital.
• In the stockholders' equity section, the cost of treasury stock is deducted from

  total paid-in capital and retained earnings.
• The return on common stockholders' equity is usually increased by all of the following, except


  an increase in the company's stock price.
• Thomas is nearing retirement and would like to invest in a stock that will provide a good steady income. Thomas should choose a stock with a:

  high dividend payout.
• Jackson Inc. reported net income of $186,000 during 2017 and paid dividends of $26,000 on common stock. It also paid dividends on its 10,000 shares of 6%, $100 par value, noncumulative preferred stock. Common stockholders' equity was $1,200,000 on January 1, 2017, and $1,600,000 on December 31, 2017. The company's return on common stockholders' equity for 2017 is:

  9.0%
• If everything else is held constant, earnings per share is increased by:

  the purchase of treasury stock.
• Maci Co. had the following transactions during the current period.

  June 12

  Issued 60,000 shares of $5 par value common stock for cash of $370,000.

  July 11

  Issued 1,000 shares of $100 par value preferred stock for cash at $112 per share.

  Nov. 28

  Purchased 2,000 shares of treasury stock for $70,000.

  Mar. 2

  Organization Expense

  35,000

  
  

  
  

  Common Stock (5,000 × $5)

  
  

  25,000

  
  

  Paid-in Capital in Excess of Par Value—Common Stock

  
  

  10,000

  June 12

  Cash

  370,000

  
  

  
  

  Common Stock (60,000 × $5)

  
  

  300,000

  
  

  Paid-in Capital in Excess of Par Value—Common Stock

  
  

  70,000

  July 11

  Cash (1,000 × $112)

  112,000

  
  

  
  

  Preferred Stock (1,000 × $100)

  
  

  100,000

  
  

  Paid-in Capital in Excess of Par Value—Preferred Stock (1,000 × $12)

  
  

  12,000

  Nov. 28

  Treasury Stock

  70,000

  
  

  
  

  Cash

  
  

  70,000
• On January 1, Chong Corporation had 95,000 shares of no-par common stock issued and outstanding. The stock has a stated value of $5 per share. During the year, the following occurred.

  Apr. 1

  Issued 25,000 additional shares of common stock for $17 per share.

  June 15

  Declared a cash dividend of $1 per share to stockholders of record on June 30.

  July 10

  Paid the $1 cash dividend.

  Dec. 1

  Issued 2,000 additional shares of common stock for $19 per share.

  15

  Declared a cash dividend on outstanding shares of $1.20 per share to stockholders of record on December 31.


  June 15

  Cash Dividends (120,000 × $1)

  120,000

  
  

  
  

  Dividends Payable

  
  

  120,000

  July 10

  Dividends Payable

  120,000

  
  

  
  

  Cash

  
  

  120,000

  Dec. 15

  Cash Dividends (122,000 × $1.20)

  146,400

  
  

  
  

  Dividends Payable

  
  

  146,400

  (b)In the retained earnings statement, dividends of $266,400 will be deducted. In the balance sheet, Dividends Payable of $146,400 will be reported as a current liability.
• dividend


  is a corporation's distribution of cash or stock to its stockholders on a pro rata (proportional to ownership)
• pro rata


  if you own 10% of the common shares, you will receive 10% of the dividend
• cash, property, scrip (a promissory note to pay cash), or stock.


  4 forms of dividends
• in the financial press

  dividends are generally reported quarterly as a dollar amount per share.
• cash dividend


  A pro rata distribution of cash to stockholders.
• 1. Retained earnings. The legality of a cash dividend depends on the laws of the state in which the company is incorporated.

  
  

  2. Adequate cash. The legality of a dividend and the ability to pay a dividend are two different things.

  
  

  3. Declared dividends. Companies do not pay dividends unless its board of directors decides to do so, at which point the board "declares" the dividend


  For a corporation to pay a cash dividend, it must have the following.
• (1) the declaration date, (2) the record date, and (3) the payment date.


  what are the three dates that are important in connection with dividends:
• declaration date


  The date the board of directors formally declares (authorizes) a dividend and announces it to stockholders.
• it commits the corporation to a legal obligation


  What's the purpose of a cash dividend?
• To illustrate, assume that on December 1, 2017, the directors of Media General declare a 50 cents per share cash dividend on 100,000 shares of $10 par value common stock. The dividend is $50,000 (100,000 x $0.50) . The entry to record the declaration is as follows.

  
• Record Date


  The date when ownership of outstanding shares is determined for dividend purposes.
• payment date


  The date dividends are transferred to stockholders.
• yes.

  
  

  For example, if the dividend rate on preferred stock is $5 per share, common shareholders cannot receive any dividends in the current year until preferred stockholders have received $5 per share.


  Do preferred stockholders have the right to receive dividends before common stockholders?
• If a company does not pay dividends to preferred stockholders, it cannot pay dividends to common stockholders.

  
• Yes

  
  

  it provides security for the stockholder


  Does most preferred stocks have a preference on corporate assets if the corporation fails? If so, why?
• Cumulative dividend


  A feature of preferred stock entitling the stockholder to receive current-year and any unpaid prior-year dividends before common stockholders are paid dividends.
• True

  
  

  Dividends in arrears are not considered a liability.

  True or False?

  
  

  No obligations exists until the board of directors formally declares that the corporation will pay a dividend.
• False,

  
  

  "Not meeting your obligations on something like that is a major black mark on your record."

  True or False

  
  

  The investment community looks favorably on companies that are unable to meet their dividend obligations.
• To illustrate, assume that at December 31, 2017, IBR Inc. has 1,000 shares of 8%, $100 par value cumulative preferred stock. It also has 50,000 shares of $10 par value common stock outstanding. The dividend per share for preferred stock is $8($100 par value x 8%) . The required annual dividend for preferred stock is therefore $8000 (1,000 shares x $8) . At December 31, 2017, the directors declare a $6,000 cash dividend. In this case, the entire dividend amount goes to preferred stockholders because of their dividend preference. The entry to record the declaration of the dividend is as follows.

  
• MasterMind Corporation has 2,000 shares of 6%, $100 par value preferred stock outstanding at December 31, 2017. At December 31, 2017, the company declared a $60,000 cash dividend. Determine the dividend paid to preferred stockholders and common stockholders under each of the following scenarios.

  1.The preferred stock is noncumulative, and the company has not missed any dividends in previous years.

  2.The preferred stock is noncumulative, and the company did not pay a dividend in each of the two previous years.

  3.The preferred stock is cumulative, and the company did not pay a dividend in each of the two previous years.

  Action Plan

  ✓Determine dividends on preferred shares by multiplying the dividend rate times the par value of the stock times the number of preferred shares.

  ✓Understand the cumulative feature. If preferred stock is cumulative, then any missed dividends (dividends in arrears) and the current year's dividend must be paid to preferred stockholders before dividends are paid to common stockholders.

  
• stock dividend


  A pro rata distribution to stockholders of the corporation's own stock.
• decrease in retained earnings and an increase in paid-in capital.

  A stock dividend results in a_____