Question

1.Which of the following would not be included in a company’s total stockholders’ equity?

Investments in equity securities

Additional paid-in capital

Retained earnings

Treasury stock

2.How do “dividends in arrears” on cumulative preferred stock appear in the financial statements?

as a liability on the balance sheet

as a contra equity item

as an expense on the income statement

dividends in arrears will not appear as a line item within the financial statements, but must be disclosed in the notes to the financial statements

3.“Treasury stock” acquired during the period and held at the end of the period is presented in the financial statements as:

A contra revenue item in the income statement

An asset in the balance sheet

A contra stockholders’ equity item in the balance sheet

An expense in the income statement

Answer 1

1- Correct answer is Option-A. Investment in equity securities.

Explanation:

Investment in equity securities means the investment in other entities by acquiring their stocks. It is an asset item and not a part of stockholders' equity.

Investment in equity securities should be presented under short term or long term investment under asset side of the Balance sheet.

Additional paid in capital, Retained earnings and Treasury stocks are part of total stockholders' equity.

Additional paid in capital means the excess value over the par value of stock (Common stock or Preferred stock).

Retained earnings is cumulative profit which is not distributed as dividend.

Treasury stocks are repurchase of own stock by paying cash.

2- Correct answer is Option-D. Dividends in arrears will not appear as a line item within the financial statements, but must be disclosed in the notes to financial statements.

Explanation:

Dividend in arrears normally on cumulative preferred stock. if the dividend is not paid for any previous year on cumulative preference stock, they are entitled to get previous year dividend before making any payment of dividend to common stockholders.

Dividend in arrears is normally disclose in the notes to the financial statements.

3- Correct answer is Option-C. a contra stockholders' equity item in the balance sheet.

Explanation:

A treasury stock means purchase of own common stock or preferred stock. Treasury stock is presented in financial statement under the Stockholders' equity as a negative balance (Deducting from the contributed capital). Purchase of treasury stock is never affect income statement.

Treasury stock is a contra stockholders' equity item, hence the amount has to be deducted from the total stockholders' equity.

eg:

Common stock $ xxxx

Preferred stock $ xxxx

Additional paid in capital $ xxxx

Retained earnings $ xxxx

less: Treasury stock ($ xxxx)

Total stockholders equity $ xxxx