Introduction to Financial Accounting, 10e (Horngren)
Chapter 10 Stockholders’ Equity
Learning Objective 10.1 Questions
10.1-1) By using ________, shareholders may express (vote) their preference without traveling to the site
of the annual meeting.
A) a preemptive right
B) a corporate proxy
C) a stock option
D) a stock split
E) a stock dividend
10.1-2) A preemptive right is
A) the right of stockholders to acquire a proportional amount of any new issues of common stock.
B) the right of stockholders to fire and replace the board of directors.
C) the right of the corporation to enter into legally binding contracts without the direct approval of the
shareholders.
D) the right of stockholders to supersede the actions of top management.
E) the right of top management to act on behalf of the stockholders.
10.1-3) Limited liability means
A) that in the event of liquidation, owners need to contribute only enough additional money so as to fully
pay off the creditors of a corporation.
B) the creditors of a corporation can receive only up to and no more than the amount due to them.
C) that the company is required to pay only current liabilities in the current year and has no obligation to
pay long–term liabilities in the current year.
D) that corporations can have liabilities only up to a certain amount, due to limits on the company’s
borrowing capability.
E) the creditors of the corporation have claims on only the assets of the corporation and not the assets of
the owners of the corporation.
10.1-4) Which of the following statements is false?
A) New corporations often start with a few investors and then seek additional funding as their original
ideas are shown to be profitable.
B) Groups of investors called venture capitalists provide financial support for new corporations.
C) If the early life of the company is successful, the company may issue additional shares through an
initial public offering (IPO).
D) The IPO may be managed by an underwriting firm and shares will be sold to individual and
institutional investors.
E) The accounting procedures used by a company will vary significantly based upon the stage of the
company’s growth cycle.
10.1-5) The owners of a business have a residual interest in the assets of the company after both current
and long–term liabilities have been satisfied.
10.1-6) Corporations are perpetual entities created in accordance with federal laws.
10.1-7) A corporate proxy is a written authority granted by individual shareholders to others to cast the
shareholders’ votes.
10.1-8) The ultimate power to manage a corporation almost always resides with the corporation’s top
management.
10.1-9) Top management does not need to own a significant number of shares in order to have the
authority to exert great influence on the actions of a corporation.
10.1-10) In general, what are the principal rights of shareholders?
Learning Objective 10.2 Questions
10.2-1) The total number of shares that may be issued is known as
A) issued shares.
B) authorized shares.
C) outstanding shares.
D) treasury shares.
E) preferred shares.
10.2-2) Those shares which have been sold to outside investors at one time or another are known as
A) authorized shares.
B) issued shares.
C) outstanding shares.
D) treasury shares.
E) preferred shares.
10.2-3) Those shares which have been issued and that are still in the hands of shareholders are known as
A) authorized shares.
B) issued shares.
C) treasury shares.
D) outstanding shares.
E) preferred shares.
10.2-4) Additional paid–in capital is the difference between
A) cash received from stockholders and par value of the stock.
B) cash received from stockholders and dividends of the stock.
C) dividends paid to stockholders and treasury stock purchased.
D) dividends paid to stockholders and total number of shares authorized.
E) total number of shares authorized and total number of shares outstanding.
Table 10–1
Lewis & Clark, Inc., has 100,000 shares of common stock authorized, 25,000 shares issued and
outstanding. On September 1, 20X9, the company declared a $3.00 per share dividend for those of record
on October 1, 20X9, to be paid on November 1, 20X9.
10.2-5) Referring to Table 10–1, which of the following journal entries would Lewis & Clark, Inc., make on
September 1, 20X9?
A) Retained Earnings 75,000
Dividends Payable 75,000
B) Retained Earnings 75,000
Cash 75,000
C) Dividends Payable 75,000
Cash 75,000
D) Retained Earnings 300,000
Dividends Payable 300,000
E) Retained Earnings 300,000
Cash 300,000
10.2-6) Referring to Table 10–1, which of the following journal entries would Lewis & Clark, Inc., make on
October 1, 20X9?
A) No journal entry is necessary.
B) Retained Earnings 75,000
Dividends Payable 75,000
C) Retained Earnings 75,000
Cash 75,000
D) Dividends Payable 75,000
Cash 75,000
E) Retained Earnings 300,000
Dividends Payable 300,000
10.2-7) Referring to Table 10–1, which of the following journal entries would Lewis & Clark, Inc., make on
November 1, 20X9?
A) No journal entry is necessary.
B) Retained Earnings 75,000
Dividends Payable 75,000
C) Retained Earnings 75,000
Cash 75,000
D) Dividends Payable 75,000
Cash 75,000
E) Retained Earnings 300,000
Cash 300,000
10.2-8) The account Dividends Payable is ________.
A) debited on the date of declaration
B) credited on the date of payment
C) not a legal liability of the company
D) a liability on a balance sheet prepared between the date of declaration and the date of payment
E) a contra account found in the stockholders‘ equity section of the balance sheet
10.2-9) The aggregate number of shares of stock sold to the public is referred to as authorized shares of
stock.
10.2-10) Just because a certain number of shares are authorized does not mean that a company will ever
offer that many shares to potential investors.
10.2-11) The number of shares authorized are always greater than or equal to the number of shares
outstanding, which are always greater than or equal to the number of shares issued.
10.2-12) If 10,000 shares have been issued, and 500 are held as treasury stock, the number of shares
outstanding is 9,500.
10.2-13) If 100,000 shares are authorized, 95,000 are outstanding and 1,500 are held as treasury stock, the
number of shares issued is 93,500.
10.2-14) Additional Paid–in Capital is also known as Capital Surplus and Capital in Excess of Par Value.
10.2-15) In the United States, most corporations pay dividends every six months.
10.2-16) Retained earnings is debited on the date of payment for a cash dividend.
10.2-17) Dividends become a liability of the corporation on the date of payment.
10.2-18) With respect to dividends, the record date comes first and is always followed by the declaration
date, which is then always followed by the payment date.
10.2-19) Net income must be greater than zero in order to pay dividends.
10.2-20) Cording Company had 2,500,000 shares of common stock authorized. Shares issued were
1,050,000. There were 50,000 shares in treasury.
a. How many shares have been sold to shareholders?
b. How many shares are outstanding?
c. How many shares are unissued?
d. If the company declared a $2.00 per share cash dividend on January 1, 20X4, for those of record on
January 15, 20X4, payable on January 31, 20X4, prepare the journal entry for each of those dates assuming
there were no changes over that period in the number of shares authorized, issued, or outstanding.
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10.2-21) Dalia Catering’s Statement of Stockholders’ Equity at December 31, 2X09 follows.
Common stock, $2 par, 25,000 shares authorized $ 20,000
Additional paid–in capital 10,000
Retained earnings 80,000
Total contributed capital and retained earnings 110,000
Less: Treasury stock, 1,000 shares at cost 10,000
Total stockholders‘ equity $ ?
1. ________ How many shares of common stock are issued?
2. ________ How many shares of common stock are outstanding?
3. ________ How many shares of common stock will receive dividends if dividends are declared?
4. ________ What is the cost of the treasury stock per share?
5. ________ What is the value of total stockholders equity?
6. ________ Suppose Dalia Catering issues 10,000 additional shares of common stock and receives
$50,000. What is the journal entry to record the additional issuance of stock?
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10.2-22) Fallon Industries had the following transactions during 2X09, its first year of operations. For each
transaction, determine the effect each transaction had on the various stockholders’ equity accounts by
placing a plus sign (+), a minus sign (–), or an X in each column.
Additional
Common paid–in Retained Dividends
stock capital earnings payable Cash
1. Fallon issued 1,000
shares above par
for cash
2. Fallon declared dividends
3. The date of record
recorded stockholders
4. Fallon paid dividends
5. Fallon authorized 500
additional shares
10.2-23) Prepare the appropriate journal entry for the Griffin, Inc., for each of the events below. Each
event relies on some or all of the events preceding it.
a. On January 1, 20X9, Griffin, Inc., began operations. The company issued 25,000 shares of its $1.50 par
value common stock. The shares were sold for $14 per share.
b. On November 1, 20X9, Griffin, Inc., declared a $.60 per share common stock dividend.
c. The record date for the common stock cash dividend was November 15, 20X9.
d. On November 20, 20X9, Griffin, Inc., paid the $.60 per share common stock dividend.
Learning Objective 10.3 Questions
10.3-1) Which of the following statements is NOT true regarding common and preferred stock?
A) Common stock is the most basic and common type of stock.
B) All corporations issue common stock.
C) Preferred stock owners do not usually have voting rights.
D) Preferred stockholders have priority over common stockholders regarding dividends and the
distribution of assets upon liquidation.
E) With preferred shares, the amount of the dividend is generally specified and increases every year.
10.3-2) Attributes of cumulative preferred stock include all of the following except:
A) a company does not have to pay a preferred stock dividend every year.
B) no dividends can be paid to common stockholders until all current and prior year preferred stock
dividends are paid.
C) all dividends in arrears must be disclosed in a footnote to a company’s balance sheet.
D) any dividends in arrears are considered to be a liability since the company is obligated to pay these
dividends.
E) in the event of liquidation, cumulative unpaid dividends must be paid before common stockholders
receive any cash.
Table 10–2
Musso Company began operations on January 1, 20X9. The company has the following items included in
the stockholders’ equity section of its balance sheet.
8% Preferred Stock, $100 par, 100,000 shares authorized,
25,000 shares issued and outstanding $2,500,000
Common Stock, $3 par, 500,000 shares authorized;
150,000 shares issued and outstanding 450,000
Additional paid–in capital 2,250,000
Total dividends declared and paid were
during 20X9 $170,000
during 2X10 210,000
during 2X11 240,000
10.3-3) Referring to Table 10–2, if Musso Company’s preferred stock were noncumulative, how much of
the 2X10 dividends would have been distributed to
A) Preferred Stock Common Stock
$110,526 $ 99,474
B) Preferred Stock Common Stock
$100,962 $109,038
C) Preferred Stock Common Stock
$ 2,000 $208,000
D) Preferred Stock Common Stock
$200,000 $ 10,000
E) Preferred Stock Common Stock
$210,000 $ 0
10.3-4) Referring to Table 10–2, if Musso Company’s preferred stock were cumulative, how much of the
2X10 dividends would have been distributed to
A) Preferred Stock Common Stock
$210,000 $ 0
B) Preferred Stock Common Stock
$200,800 $ 9,200
C) Preferred Stock Common Stock
$201,429 $ 8,571
D) Preferred Stock Common Stock
$204,808 $ 5,192
E) Preferred Stock Common Stock
$200,000 $10,000
10.3-5) Referring to Table 10–2, if Musso Company’s preferred stock were cumulative, how much of the
2X11 dividends would have been distributed to
A) Preferred Stock Common Stock
$200,000 $40,000
B) Preferred Stock Common Stock
$205,714 $34,286
C) Preferred Stock Common Stock
$219,230 $20,770
D) Preferred Stock Common Stock
$220,000 $20,000
E) Preferred Stock Common Stock
$240,000 $ 0
10.3-6) Features of preferred stock could include all of the following except:
A) callable.
B) convertible.
C) cumulative.
D) interest–bearing.
E) participating.
10.3-7) A characteristic of preferred stock that provides increasing dividends when common dividends
increase is known as
A) participating.
B) callable.
C) convertible.
D) liquidating preference.
E) cumulative.
10.3-8) A characteristic of preferred stock that gives the issuer of the stock the right to redeem the stock at
a fixed price is known as
A) participating.
B) cumulative.
C) convertible.
D) liquidating preference.
E) callable.
10.3-9) Which of the following attributes of preferred stock is incorrectly defined?
A) Callable preferred stock gives the company the right to purchase the preferred stock back from the
shareholder.
B) Callable preferred stock is usually sold at a price below a similar non–callable preferred stock, since it
is less desirable than the non–callable preferred stock.
C) Convertible preferred stock gives the owners of the stock the right to exchange their preferred stock
for common stock.
D) Convertible preferred stock can be expected to have a lower dividend percentage than a similar
nonconvertible preferred stock.
E) Participating preferred stock can receive a larger than minimum dividend when a company has an
especially good year.
10.3-10) Oak Consulting is liquidating. The company owes $1,400 to creditors of which $900 is
unsubordinated debentures and $500 is subordinated debentures, preferred stockholders with a
liquidating value of $2,000, and common stockholders. If Oak Consulting has cash proceeds of $4,000,
how much of the proceeds do the common stockholders receive?
A) $1,500
B) $2,600
C) $ 600
D) $1,100
E) $ 0
10.3-11) When comparing preferred stock to common stock and bonds, which of the following is
incorrectly stated?
A) Because bonds pay interest and preferred stock pays dividends, bonds are usually considered a riskier
investment.
B) Both bonds and preferred stock pay a specific return to the investor.
C) Both preferred stock and common stock can pay dividends.
D) Both preferred stock dividends and common stock dividends become liabilities only when the board
of directors declares them.
E) Common stock, and typically preferred stock, have indefinite lives.
10.3-12) Which of the following statements regarding stock options is false?
A) Options are valuable because the executives can gain the benefits of stock price increases without
bearing the risks of price declines.
B) Options are generally given to corporate officers as a form of incentive compensation.
C) Stock options are rights granted to executives to purchase a specific number of shares of a
corporation’s capital stock at a specific price for a specific time period.
D) Measurement of the value of stock options is simply the market value of the options at the balance
sheet date.
E) Footnotes in the financial statements must reveal the number and type of options outstanding and an
assessment of their value.
10.3-13) Preferred stock is like common stock in that dividends are not a legal obligation until the board
of directors declares them.
10.3-14) Dividend arrearages occur only for noncumulative preferred stock.
10.3-15) If the board of directors declares a $210,000 dividend in 20X9, current year dividends on
cumulative preferred stock are $80,000, dividends in arrears on cumulative preferred stock are $60,000,
and the common shareholders are entitled to $70,000 of the 20X9 dividend amount.
10.3-16) A measure of the preference to receive assets in the event of corporate liquidation is referred to as
liquidating value.
10.3-17) Before a liquidating company can distribute any assets to common stockholders, it must pay the
full liquidating value of the preferred stock to all preferred stockholders.
10.3-18) Preferred stocks are quite similar to bonds.
10.3-19) Hancock Enterprises began operations on January 1, 20X9, and issued preferred and common
stock. The stockholders’ equity section of the Hancock Enterprise’s balance sheet immediately after the
issuance of the preferred and common stock was as follows:
Preferred stock, $100 par, 9%, 100,000 shares authorized,
55,000 shares issued and outstanding $ 5,500,000
Common stock, $2 par, 2,000,000 shares authorized,
1,200,000 shares issued and outstanding 2,400,000
Additional paid–in capital preferred 110,000
Additional paid–in capital common 19,200,000
Retained earnings 0
Total stockholders’ equity $ 27,210,000
Dividend payments were as follows:
20X9 $0
2X10 $0
2X11 $1,980,000
2X12 $2,200,000
No additional shares of preferred or common stock were issued after January 1, 20X9, nor did the
company ever have treasury stock.
How would the dividends be distributed for 20X9 through 2X12 between the preferred stock and the
common stock if
a. the preferred stock were cumulative?
b. the preferred stock were noncumulative?
10.3-20) State the appropriate accounting term for each of the definitions given below.
a. A written authority granted by individual shareholders to others to cast the shareholders‘ votes
b. The right to acquire a proportional amount of any new issues of common stock
c. The aggregate number of shares potentially in the hands of shareholders
d. A characteristic of preferred stock that requires that the undeclared dividends accumulate and must be
paid in the future before common dividends are paid
e. A measure of the preference to receive assets in the event of corporate liquidation
f. A characteristic of bonds or preferred stock that gives the issuer the right to redeem the security at a
fixed price
g. A characteristic of bonds or preferred stock that gives the holder the right to exchange the security for
common stock
10.3-21) For each of the following items, state whether its effect will be to increase, decrease, or have no
change in total stockholders’ equity.
a. Issue common stock at a price greater than par value
b. Issue common stock at par value
c. Issue preferred stock at a price greater than par value
d. Issue preferred stock at par value
e. Declare the current year preferred stock dividend
f. Pay the declared dividend in e. above
g. Not declaring any dividends on cumulative preferred stock, thus having dividends in arrears
h. Declaring dividends in arrears for cumulative preferred stock
i. Paying for the dividends in arrears declared in h. above
j. Having a company call all callable preferred stock
10.3-22) Brock Investing Group granted 25,000 stock options to its employees on December 1, 2X09 and
8,000 options to buy shares at $40 per share became vested with a fair value of $4 per share. The shares
had a par value of $1.
Required:
1. Journalize the entry on December 1, 2X09.
2. Journalize the entry on December 1, 2X15 exercising 8,000 stock options.
3. Suppose Brock Investing Group granted restricted stock as opposed to stock options. Journalize the
entry on December 1, 2X09 for the restricted stock.
4. What is the benefit to employees who receive restricted stock over stock options?
10.3-23) In what way is preferred stock similar to and different from common stock? In what way is
preferred stock similar to debt, such as bonds? From the investor’s viewpoint, is preferred stock riskier
than bonds? Why?
10.3-24) What are stock options? Why might stock options not be exercised? Why do companies reward
management with stock options as opposed to cash bonuses?
Learning Objective 10.4 Questions
Table 10–3
Herold Company has 700,000 shares authorized and 250,000 shares issued and outstanding of its $4 par
value common stock. The stock is currently selling for $60 per share.
10.4-1) Referring to Table 10–3, if Herold Company declared and issued a three–for–one stock split by
issuing 500,000 new shares and retains its par value, what journal entry would be made?
A) Retained Earnings 250,000
Common Stock 250,000
B) Retained Earnings 500,000
Common Stock 500,000
C) Retained Earnings 1,000,000
Common Stock 1,000,000
D) Additional Paid–in Capital 2,000,000
Common Stock 2,000,000
E) No journal entry is necessary.
10.4-2) Referring to Table 10–3, if Herold Company declared and issued a three–for–one stock split
adjusting its par value, what would be the effect on the following items after the stock split? Assume the
old shares were exchanged for 750,000 new shares.
A) # of Shares Issued Par Value Market Price per Share
500,000 $2.00 $30.00
B) # of Shares Issued Par Value Market Price per Share
750,000 $1.33 $20.00
C) # of Shares Issued Par Value Market Price per Share
750,000 $4.00 $20.00
D) # of Shares Issued Par Value Market Price per Share
1,000,000 $1.00 $15.00
E) # of Shares Issued Par Value Market Price per Share
1,000,000 $12.00 $20.00
10.4-3) Dilardo Manufacturing began operations on June 1, 2X09. The company authorized 10,000 shares
of $1 par value common stock. Dilardo Manufacturing sold 10,000 shares of common stock for $5 per
share on June 2, 2X09. On August 15, 2X09, Dilardo Manufacturing repurchased 1/2 of the outstanding
common stock for $6 per share. On August 31, 2X09, Dilardo Manufacturing sold 1,000 of the treasury
stock and declared a three–for–one stock split. After the split
A) total stockholders’ equity remained the same.
B) total stockholders’ equity increased.
C) total stockholders’ equity decreased.
D) assets and liabilities increased.
E) assets and liabilities decreased.
10.4-4) Libnitzer Company has 500,000 shares of common stock authorized and 100,000 shares of common
stock issued and outstanding. The common stock has a par value of $6 per share. On February 1, 20X9,
the company declared and issued a two–for–one stock split. Assuming that the company exchanges
200,000 new $3 par value shares for the old shares, what journal entry would be made by Libnitzer
Company on February 1, 20X9?
A) Cash 600,000
Common Stock 600,000
B) Cash 3,000,000
Common Stock 3,000,000
C) Common Stock 600,000
Additional Paid–in Capital 600,000
D) Retained Earnings 1,200,000
Common Stock 1,200,000
E) No journal entry is necessary.
10.4-5) Tundra, Inc., has 200,000 shares of common stock authorized and 50,000 shares of common stock
issued and outstanding. The common stock has a par value of $5 per share. On September 1, 20X9, the
company declared and issued a two–for–one stock split. Assuming that the company issues 50,000 new
shares and accounts for it as a stock dividend, what journal entry would be made by Tundra, Inc., on
September 1, 20X9?
A) Retained Earnings 250,000
Common Stock 250,000
B) Additional Paid–in Capital 250,000
Common Stock 250,000
C) Cash 250,000
Common Stock 250,000
D) Cash 250,000
Additional Paid–in Capital 250,000
E) No journal entry is necessary.
10.4-6) Stock splits generally cause stock prices to fall.