Chapter 11 Questions
- Entity that is legally treated as a separate person. The main advantage to this is limited liability.
3. Authorized stock is how many total shares of stock that have been authorized for payment. Issued shares are how many shares of stock that are in the public’s hands. Outstanding shares refers to the total of shares issued plus the number of shares that are held as treasury stock.
- Common stock has voting rights. Preferred stock does not, however it usually pays dividends and has first right to the company’s assets.
- One form is through the issue of contributed capital. The other is through retained earnings.
Chapter 11 Exercises
- Case 1: The stock price would drop somewhat. Some investors would be attracted to the higher dividends. However others will view increased dividends as draining the company of profit that would otherwise be reinvested into the company as retained earnings
Case 2: This event will most likely cause the stock to rise as the company has found ways to make more income while simultaneously holding on to more of its cash.
Case 3: This is likely to have no effect.
6. a. Cash 3.5 million
Treasury Stock 3.5 million.
b. Retained Earnings 254.2 million
Dividend Payable 254.2 million
Dividends Payable 254.2 million
Cash 254.2 million
7. 1. Stock dividends involve the issuing of more shares as a form of compensation. Issuing them decreases retained earnings, but not cash. Cash dividends decrease cash AND retained earnings.
2. Large stock dividends occur when more than 20 – 25 percent of the company’s current outstanding stock is issued at one time. The difference is in how the issuance is accounted for. Large stock dividends are accounted for using the par value. Small dividends are accounted for using the market value of the issuance.
- Companies are not allowed to make profit on treasury stock.
- Treasury stock could be used for employee incentive programs. It can also be used to buy back stock if the company believes that there is too much of its stock pending on the open market. This would result in fewer shares available, and hopefully this would increase the stock price.