Accounting for Capital Stock and Stock Issuance

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Questions and Answers

What does authorized stock refer to?

The number of shares that a corporation has sold to investors

The shares currently held by shareholders in the market

The maximum number of shares a corporation can sell as per its charter (correct)

The total value of shares issued by a corporation

How does a corporation typically issue stock directly?

By issuing shares at a discount to attract investors

By charging investors a commission on the sale

By hiring a brokerage house to manage the process

Through advertising its stock issuance to potential buyers (correct)

What is paid-in capital?

The total amount received from stockholders for shares (correct)

The cumulative amount of dividends paid

The total earnings retained by the company

Cash generated from operations

What is a common feature of authorized stock in comparison to outstanding stock?

Authorized stock represents the total shares available for sale Signup and view all the answers

How is retained earnings primarily generated?

From the cumulative net income and loss Signup and view all the answers

What must a corporation do to increase its number of authorized shares?

Change its charter with state approval Signup and view all the answers

What happens when common stock is issued?

It impacts paid-in capital accounts only Signup and view all the answers

What is the purpose of a brokerage house in stock issuance?

To underwrite the stock and absorb any resale gains or losses Signup and view all the answers

Which of the following describes an accumulated deficit?

Cumulative losses exceeding cumulative profits Signup and view all the answers

Which of the following is true regarding outstanding stock?

It includes all shares that have been sold and are held by investors Signup and view all the answers

When common stock with par value is issued at a premium, what does this indicate?

The stock is sold above its par value Signup and view all the answers

Which variable is specifically included in a stock quote's PE ratio?

Price per share divided by earnings per share Signup and view all the answers

What financial aspects may management consider before selling stock?

Revenue, profits, cash flows, and risks involved Signup and view all the answers

What do the terms 'Hi' and 'Lo' in a stock quote represent?

Highest and lowest price in the past 52 weeks Signup and view all the answers

Which scenario would likely prompt current owners to sell their shares?

A decrease in the company’s market share Signup and view all the answers

What impact does issuing stock have on retained earnings?

It has no direct impact on retained earnings Signup and view all the answers

What happens when a corporation issues stock at a discount?

Buyers become contingent creditors for the discount. Signup and view all the answers

Where is the discount on common stock recorded?

In a Discount on Common Stock account. Signup and view all the answers

What is the accounting treatment for no-par stock issued without a stated value?

The proceeds are credited to a common stock account. Signup and view all the answers

If a corporation issues 1,000 shares of no-par stock for $40 each, what is the total cash received?

$40,000 Signup and view all the answers

What does a negative retained earnings balance indicate?

The company has accumulated losses. Signup and view all the answers

Which of the following is true about the Discount on Common Stock account?

It is subtracted from the par value of stock. Signup and view all the answers

What does a corporation record when it issues stock at par value?

Only the par value is recorded as common stock. Signup and view all the answers

What is the impact of issuing stock below par value in most states?

Most states prohibit the issuance of stock at a discount. Signup and view all the answers

What happens to the par value of shares in a 2-for-1 stock split?

It decreases by half. Signup and view all the answers

Which of the following statements regarding stock splits is correct?

No journal entry is needed for a stock split. Signup and view all the answers

How does a 2-for-1 stock split affect the total value of stockholders' equity?

It does not affect the total value. Signup and view all the answers

What is a common effect of stock splits on market value per share?

It halves the market value. Signup and view all the answers

What change is made to the stock account title after a 2-for-1 stock split for CompTec?

Common Stock, $10 Par Value. Signup and view all the answers

Which statement correctly describes the relationship between stock splits and large stock dividends?

The effects on a company's capital are similar. Signup and view all the answers

Why might a company like Berkshire Hathaway resist a stock split?

To maintain a higher market price per share. Signup and view all the answers

What is typically unchanged when a stock split occurs?

The total equity reported on the balance sheet. Signup and view all the answers

What is the total cash dividend declared for 200 outstanding shares at $0.10 per share?

$20 Signup and view all the answers

How many new shares are created when declaring a small stock dividend of 20% on 200 outstanding shares?

40 shares Signup and view all the answers

What is the total market value attributed to the small stock dividend declared on March 31?

$720 Signup and view all the answers

What amount is moved from Retained Earnings when declaring a large stock dividend of 40%?

$960 Signup and view all the answers

What is the par value of the new shares distributed from the large stock dividend declared on December 1?

$960 Signup and view all the answers

In which account is the amount for the cash dividend paid recorded?

Common Dividend Payable Signup and view all the answers

What accounts are affected when the cash dividend is paid out?

Common Dividend Payable and Cash Signup and view all the answers

How many shares are outstanding after the large stock dividend is distributed?

240 shares Signup and view all the answers

Study Notes

Capital Stock

Capital stock refers to shares issued by a corporation to raise capital.
Authorized stock is the maximum number of shares a corporation can sell, as stated in its charter.
Authorized stock often exceeds issued stock, meaning the corporation can issue additional shares in the future.

Stock Issuance

A corporation can sell stock directly to investors or indirectly via a brokerage house that underwrites the issuance.
Paid-in capital is the total amount of cash and other assets received by the corporation from its stockholders (shareholders) in exchange for stock.
Retained earnings represent the cumulative net income not distributed as dividends.

Stock Quotes

A stock quote shows the stock's high and low prices over the past 52 weeks.
It includes the company's exchange symbol, dividends paid, dividend yield, price-to-earnings ratio, trading volume, daily high, low, closing price, and price change from the previous day.

Accounting for Common Stock

Issuing common stock affects only paid-in capital accounts, not retained earnings.
Par value stock can be issued at par, at a premium (above par), or at a discount (below par).

Issuing Stock at a Discount

Issuing stock at a discount means selling it for less than par value.
Most states prohibit stock issuance at a discount.
If allowed, buyers of discounted stock may be liable to creditors for the discount.
The discount is recorded as a contra to the common stock account, reducing its par value on the balance sheet.

Issuing No-Par Stock

No-par stock does not have a stated value.
Proceeds from issuing no-par stock are recorded directly to the common stock account.

Stock Splits

A stock split increases the number of shares outstanding while reducing the par value per share.
It does not affect total equity, just the number of shares and par value.
The split does not change a shareholder's ownership percentage or the market value of their total holdings.

Cash Dividends

Cash dividends represent a distribution of earnings to shareholders.
They reduce retained earnings and are accounted for through common dividend payable.

Stock Dividends

Stock dividends distribute additional shares of stock to existing shareholders.
They can be small or large based on the percentage of new shares distributed.
Small stock dividends (<20-25% of outstanding shares) use the market value of the additional shares to reduce retained earnings.
Large stock dividends (>20-25%) use the par value of the additional shares to reduce retained earnings.

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Description

This quiz covers key concepts related to capital stock, including authorized stock, stock issuance methods, and stock quotes. Test your understanding of paid-in capital and retained earnings in the context of corporate finance. Ideal for students in finance or accounting courses.