Principles of Accounting: Chapter Fourteen

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Chapter 14 provides in-depth coverage of accounting issues that are unique to corporations. The chapter begins with a discussion of the nature of the corporate entity, and its advantages and disadvantages. There are various types of stock, and each type has unique features. The second section of the chapter highlights common and preferred stock, and identifies features that should be fully understood. The presence of multiple classes of stock requires deeper understanding of dividends and capital structure, as described in the chapter.

Companies may buy back shares of their own stock, which are known as treasury shares. The proper accounting for treasury stock involves certain unique principles and practices. Companies would generally not recognize gains and losses on such transactions.

As described in the chapter, the appropriate accounting for stock splits and stock dividends depends on the legal form of the transaction. The accounting methodology is further impacted for stock dividends, based upon whether a transaction is deemed to be a large or small stock dividend. The chapter concludes with an illustrative statement of stockholders' equity, which is more extensive and often substituted for a statement of retained earnings.

Exercises

To aid in your understanding of this chapter, exercises with solutions are available for free download at Bookboon.com. You will find these exercises very helpful in providing models and guidelines for solving all of the problems at principlesofaccounting.com.

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Problems
Goals Achievement
Fill in the Blanks
Multiple Choice
Objectives
Key Terms

Goals Achievement: Chapter Fourteen

The feature of limited liability means that stockholders can never lose more than the par value of the stock in which they have invested.

true Incorrect or falseCorrect

Which of the following features would be associated with common stock?

preemptive rights Correct or cumulativeIncorrect

Which of the following types of stock is accounted for similar to par-value stock?

no-par Incorrect or stated-valueCorrect

Total paid-in capital equals the par value of capital stock plus:

paid-in capital in excess of par value Correct or retained earningsIncorrect

For a cash dividend, stockholders' equity would be reduced on the:

date of declaration Correct or date of paymentIncorrect

In the event dividends are paid to only one class of stock, which class is ordinarily paid?

preferred stock Correct or common stockIncorrect

Dividends that have not been paid on cumulative preferred stock are said to be:

in arrears Correct or forgivenIncorrect

If a corporation has dividends in arrears on preferred stock for two years ($5,000 per year), and declares $20,000 of dividends during the current (third) year, how much will be paid to the common shareholders?

$5,000 Correct or $10,000Incorrect

Treasury stock is stock of one corporation that is owned by another corporation.

true Incorrect or falseCorrect

Treasury stock should be reported as:

a reduction of stockholders' equity Correct or an assetIncorrect

The reissuance of treasury stock would never result in a credit to:

Gain on Sale Correct or Paid-in CapitalIncorrect

The accounting for a stock split requires the recording of a journal entry.

true Incorrect or falseCorrect

A small stock dividend (one that is less than 20-25%) should be accounted for based on:

par value Incorrect or fair valueCorrect

Stock dividends are reported on the statement of retained earnings.

true Correct or falseIncorrect

In preparing the stockholders' equity section (and related footnotes), how much detail is required?

limited Incorrect or significantCorrect

In lieu of the Statement of Retained Earnings, many companies will prepare an expanded Statement of Stockholders' Equity.

true Correct or falseIncorrect Incorrect