16-1. Which is the order in which the dates related to cash dividends occur?

a. declaration, record, payment

b. payment, declaration, record
c. payment, record, declaration
d. record, declaration, payment

The correct answer is "a". Your choice of "b" was incorrect. The dates
are: (1) date of declaration, (2), date of record, and (3) date of payment.
Journal entries are required on the dates of declaration and payment.

16-2. The Common Stock Dividend Distributable account is classified as a/an:

a. current liability account

b. shareholders' equity account
c. long-term liability account
d. intangible asset account

The correct answer is "b". Your choice of "d" was incorrect. The account
is a shareholders' equity account and is found on the shareholders' equity
section of the balance sheet. It represents the value of the shares of stock that
have been declared as a stock dividend and that will be issued to
shareholders.

16-3. Which of the following is true about the effects of a stock dividend?

a. Shareholders' Equity: Decreases, Retained Earnings: No Change

b. Shareholders' Equity: Decreases, Retained Earnings: Decreases
c. Shareholders' Equity: No Change, Retained Earnings: Decreases
d. Shareholders' Equity: No Change, Retained Earnings: No Change

The correct answer is "c". Your choice of "d" was incorrect. The

declaration of a stock dividend decreases retained earnings, but increases
contributed capital by the same dollar amount; therefore total shareholders'
equity remains unchanged.

16-4. A stock split will

a. increase the number of shares outstanding

b. decrease the amount of contributed capital
c. increase the amount of contributed capital
d. decrease retained earnings
The correct answer is "a". Your choice of "b" was incorrect. A stock split
involves the calling in of outstanding shares and the distribution of more than
one share for each share called in, with each new share having a
proportionate reduction in the market or the book value of each share called
in.

16-5. Which of the following is not a reason for a corporation to acquire its
own shares of stock?

a. To use them as compensation to employees.

b. To avoid a hostile takeover by investors seeking control.
c. To help shareholders get a better price for outstanding shares.
d. To increase the assets of the corporation.

The correct answer is "d". Your choice of "a" was incorrect. When a

corporation acquires its own shares of stock, known as treasury shares, there
is no increase in assets. There is a decrease in assets (cash) and a decrease
in shareholders' equity through the increase in a contra-equity account titled
Treasury Shares.

16-6. Which of the following accounts would not be classified as a contributed

capital account?

a. Contributed Capital, Common Shares

b. Treasury Shares, Common
c. Stock Dividends Distributable
d. Contributed Capital, Preferred Shares

The correct answer is "b". Your choice of "d" was incorrect. The

Treasury Shares, Common account is the only account in the group that is not
reported as Contributed Capital on the balance sheet. The Treasury Shares
are subtracted from the total for Contributed Capital and Retained Earnings to
arrive at total shareholders' equity.

16-7. Which of the following is true?

a. Treasury shares receive cash dividends.

b. Treasury shares must be sold for more than its cost.
c. Treasury shares are unissued shares of the corporation.
d. The purchase of treasury shares reduces shareholders' equity.
The correct answer is "d". Your choice of "b" was incorrect. The
purchase of treasury shares reduces cash and shareholders' equity. Treasury
Shares (a contra contributed capital account) is debited and Cash is credited.

16-8. Jute Enterprises issues 10,000 shares of common stock on January 1,

2002 at $12 per share. On June 30, 2002, a 10% stock dividend is declared.
The market value of the stock on this date is $15. The journal entry to record
the stock dividend declared would include a:

a. debit to retained earnings for $120,000

b. debit to retained earnings for $12,000
c. debit to retained earnings for $150,000
d. debit to retained earnings for $15,000

The correct answer is "d". Your choice of "b" was incorrect. The stock
dividend amount is determined by multiplying the common stock outstanding
by the stock dividend rate and the fair market value of the stock. Therefore, on
June 30, 10,000 shares x 10% x $15 = $15,000.

16-9. Which of the following events might be considered as extraordinary?

a. Gains and losses from retiring debt.

b. Gains or losses from exchanging foreign currencies.
c. Gains or losses from disposing of a business segment.
d. Effects of a labour action against a major supplier of materials.

You answered correctly! To be an extraordinary event, the event must be

both unusual and infrequent. While gains and losses from retiring debt may
not be both unusual and infrequent, they are treated as extraordinary gains or
losses.

16-10. Company A has a simple capital structure of 100,000 shares of $10 par
common shares, no preferred shares, and retained earnings of $750,000. The
company made no sales or purchases of its common shares. The earnings
per share was $.75. What was the amount of net income?

a. $750,000
b. $75,000
c. $100,000
d. $50,000
The correct answer is "b". Your choice of "d" was incorrect. Earnings per
share is determined by dividing net income by the number of shares
outstanding throughout the entire year. Inversely, the net income can be
calculated by multiplying the earnings per share by the number of shares
outstanding throughout the entire year.

16-11. Net income for the period totaled $55,000, preferred dividends paid
totaled $10,000, and common dividends paid totaled $30,000. If there were
100,000 common shares outstanding throughout the year, what was the
earnings per common share?

a. $4.50
b. $44.50
c. $.45
d. $.30

The correct answer is "c". Your choice of "b" was incorrect. Earnings per
share is determined by dividing the net income less the preferred dividends by
the total weighted-average common shares outstanding. $45,000 / 100,000
shares = $.45 earnings per common share.

16-12. From January 1 to May 31, Company A had 7,000 shares outstanding.
From June 1 to October 31, the company had 8,000 shares outstanding. From
November 1 to December 31, the company had 7,500 shares outstanding.
What is the denominator for determining the earnings per share for this simple
capital structure company?

a. 7,500 shares
b. 7,000 shares
c. 7,459 shares
d. 8,042 shares

The correct answer is "a". Your choice of "d" was incorrect. The

weighted average number of shares outstanding must be used: 7,000 shares
x 5/12 = 2,917, plus 8,000 shares x 5/12 = 3,333, plus 7,500 shares x 2/12 =
1,250. Total weighted average shares: 2,917 + 3,333+ 1,250 = 7,500.

16-13. From January 1 to May 31, Company A had 4,800 shares outstanding.
From June 1 to October 31, the company had 5,220 shares outstanding. From
November 1 to December 31, the company had 6,000 shares outstanding. If
the company had declared a two-for-one stock split on December 1, how
many shares are outstanding after the stock split?
a. 3,000
b. 6,000
c. 12,000
d. 32,040

The correct answer is "c". Your choice of "a" was incorrect. The stock
splits two-for-one, therefore, there are twice as many shares outstanding after
the split as there were before the split. 6,000 x 2 = 12,000.

16-14. Which of the following is NOT true with regard to appropriations of

retained earnings?

a. They will restrict the amount of possible cash dividends.

b. They may be required because of contractual obligations.
c. They may be made at the discretion of the board of directors.
d. They require setting aside a reserve of cash for the appropriations.

You answered correctly! While appropriations of retained earnings restricts

dividends, the appropriations do not represent cash. Their purpose is merely
to disclose restrictions to dividends.