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Chapter 11
Corporate Reporting and Analysis
Quick Check—Chapter 11
QC1
11-1. Which of the following is not a characteristic of the corporate form of business? (a) Ease
of capital accumulation, (b) stockholder responsibility for corporate debts, (c) ease in
transferability of ownership rights, or (d) double taxation.
11-2. Why is a corporation’s income said to be taxed twice?
11-3. Is it more common for a company to issue common stock with a par value of $10 or
$.001? Explain why.
QC2
11-4. A company issues 7,000 shares of its $10 par value common stock in exchange for
equipment valued at $105,000. The entry to record this transaction includes a credit to
(a) Paid-In Capital in Excess of Par Value, Common Stock, for $35,000, (b) Retained
Earnings for $35,000, (c) Common Stock, $10 Par Value, for $105,000.
11-5. What is a premium on stock issuance?
11-6. Who is protected by the minimum legal capital requirement?
QC3
11-7. What type of an account is the Common Dividend Payable account?
11-8. What three crucial dates are involved in the process of paying a cash dividend?
11-9. When does a dividend become a company’s legal obligation?
QC4
11-10. How does a stock dividend impact assets and retained earnings?
11-11. What distinguishes a large stock dividend from a small stock dividend?
11-12. What amount of retained earnings is capitalized for a small stock dividend?
QC5
11-13. In what ways does preferred stock often have priority over common stock?
11-14. Increasing the return to common stockholders by issuing preferred stock is an example of
(a) financial leverage, (b) cumulative earnings, (c) dividend in arrears.
11-15. A corporation has issued and outstanding (i) 9,000 shares of $50 par value, 10% cumulative,
nonparticipating preferred stock and (ii) 27,000 shares of $10 par value common stock.
No dividends have been declared for the two prior years. During the current year, the
corporation declares $288,000 in dividends. The amount paid to common shareholders is
(a) $243,000, (b) $153,000, (c) $135,000.
QC6
11-16. Purchase of treasury stock (a) has no effect on assets; (b) reduces total assets and total
equity by equal amounts; or (c) is recorded with a debit to Retained Earnings.
11-17. Southern Co. purchases shares of Northern Corp. Should either company classify these
shares as treasury stock?
11-18. How does treasury stock affect the authorized, issued, and outstanding shares?
11-19. When a company purchases treasury stock, (a) retained earnings are restricted by the
amount paid; (b) Retained Earnings is credited; or (c) it is retired.
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Chapter 11
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Corporate Reporting and Analysis
Guidance Answers to Quick Checks—Chapter 11
11-1. (b)
11-2. A corporation pays taxes on its income, and its stock-
11-11. A small stock dividend is 25% or less of the previous out-
holders normally pay personal income taxes (at the 15%
rate or lower) on any cash dividends received from the
corporation.
Companies desire to minimize the amount of legal capital. It is more likely that the par value of common stock
will be $0.001 per share than $10 per share.
(a)
A stock premium is an amount in excess of par (or
stated) value paid by purchasers of newly issued stock.
Minimum legal capital intends to protect creditors of a
corporation by obligating stockholders to some minimum level of equity financing and by constraining a
corporation from excessive payments to stockholders.
Common Dividend Payable is a current liability
account.
The date of declaration, date of record, and date of
payment.
A dividend is a legal liability at the date of declaration,
on which date it is recorded as a liability.
A stock dividend does not transfer assets to stockholders, but it does require an amount of retained earnings to
be transferred to a contributed capital account(s).
11-12. Retained earnings equal to the distributable shares’
11-3.
11-4.
11-5.
11-6.
11-7.
11-8.
11-9.
11-10.
standing shares. A large stock dividend is more than 25%.
market value should be capitalized for a small stock
dividend.
11-13. Typically, preferred stock has a preference in receipt of
dividends and in distribution of assets.
11-14. (a)
11-15. (b)
Total cash dividend . . . . . . . . . . . . . . . . . . . $288,000
To preferred shareholders . . . . . . . . . . . . . 135,000*
Remainder to common shareholders . . . . . $153,000
* 9,000 3 $50 3 10% 3 3 years 5 $135,000.
11-16. (b)
11-17. No. The shares are an investment for Southern Co. and
are issued and outstanding shares for Northern Corp.
11-18. Treasury stock does not affect the number of authorized
or issued shares, but it reduces the outstanding shares.
11-19. (a)