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Stock Dividend, Stock Split, Preferred, Retained Earnings

1. The declaration and issuance of a stock dividend larger than 25% of the shares previously outstanding
a. increases common stock outstanding and increases total stockholders' equity.
b. decreases retained earnings but does not change total stockholders' equity.
c. may increase or decrease paid-in capital in excess of par but does not change total stockholders' equity.
d. increases retained earnings and increases total stockholders' equity.

2. A feature common to both stock splits and stock dividends is
a. a transfer to earned capital of a corporation.
b. that there is no effect on total stockholders' equity.
c. an increase in total liabilities of a corporation.
d. a reduction in the contributed capital of a corporation.

3. How should cumulative preferred dividends in arrears be shown in a corporation's statement of financial position?
a.Note disclosure
b.Increase in stockholders' equity
c.Increase in current liabilities
d.Increase in current liabilities for the amount expected to be declared within the year or operating cycle, and increase in long-term liabilities for the balance.

4. Gonzalez Company has 350,000 shares of $10 par value common stock outstanding. During the year, Gonzalez declared a 10% stock dividend when the market price of the stock was $30 per share. Four months later Gonzalez declared a $.50 per share cash dividend. As a result of the dividends declared during the year, retained earnings decreased by
a. $1,242,500.
b. $525,000.
c. $192,500.
d. $175,000.

5. The stockholders' equity section of Lawton Corporation as of December 31, 2006, was as follows:

Common stock, par value $2; authorized 20,000 shares;

issued and outstanding 10,000 shares $ 20,000

Paid-in capital in excess of par 30,000

Retained earnings 75,000

$125,000

On March 1, 2007, the board of directors declared a 15% stock dividend, and accordingly 1,500 additional shares were issued. On March 1, 2007, the fair market value of the stock was $6 per share. For the two months ended February 28, 2007, Lawton sustained a net loss of $10,000.

What amount should Lawton report as retained earnings as of March 1, 2007?
a. $56,000.
b. $62,000.
c. $66,000.
d. $72,000.

Solution Preview

1. If a stock dividend larger than 25% of the shares previously outstanding is declared, Retained Earnings is decreased and a dividend liability account is increased. When the dividend is paid, the common stock account is increased by the entire amount of the dividend. Thus, the retained earnings account declines by the same amount that the common stock account increases if the stock dividend is declared and issued, having no effect on total stockholder's equity (answer b). (See http://www.investopedia.com/exam-guide/cfa-level-1/financial-statements/accounting-dividends.asp.)

2. The answer to Question ...

Solution Summary

This solution discusses various aspects of accounting for stock dividends (both greater than and less than 25 percent of the amount number of shares), stock splits and dividends on cumulative preferred shares. It ends with a comprehensive example.

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