Question

ACC161 Unit 2 Review Assignment

1. Define the term liabilities.

2. What are the three crucial factors/characteristics of liabilities?

3. What are known liabilities? Give four examples of known liabilities.

4. What is capital stock?

5. Which financial statement will you find the stocks listed for a corporation?

6. What is the difference between common stock and preferred stock?

7. What is the difference between "authorized stock" and "issued and outstanding stock"?

8. What is the difference between par value stock and nonpar value stock?

9. What is meant when stock is issued at par?

10. What is meant when stock is issued for a premium?

11. What is meant when stock is issued at a discount?

12. What is the difference between a stock dividend and a stock split?

13. What is the difference between cumulative preferred stocks and noncumulative preferred stocks?

14. What is a cash dividend?

15. When a company declares a dividend, what accounts are affected when recording cash dividends? What accounts are affected when a cash dividend is paid? How would record each of these types of activities in a journal entry? Specifically, which account is debited and which account is credited?

Please answer all of the questions, if you can not answer all of the questions do not reply.

Answer 1

1. Define the term liabilities?

Ans: A liability is a probable future payment of assets or services that a company is presently obligated to make as a result of past transactions or events.

2. What are the three crucial factors/characteristics of liabilities?

Ans: A past transaction or event.
A present obligation.
A future payment of assets or services.
No liability is reported when one or more of those characteristics is absent.

3. What are known liabilities? Give four examples of known liabilities?

Ans: Known liabilities are debts that a company has little uncertainty about. The company knows who to pay, how much to pay them, and when the payment is due. Most of the time, known liabilities come from contracts, agreements, or laws.

1. Accounts Payable
2. Sales Tax Payable
3. Payroll Liabilities
4. Contract Notes Payable

All of these debts arise from contracts, agreements, or laws that state how much the company owes, whom it owes the money, and how much it owes.

4. What is capital stock?

Ans: Capital stock is the common and preferred stock a company is authorized to issue according to the corporate charter. Accountants define capital stock as one component of the equity section in a company's balance sheet. Firms can issue more capital stock over time or buy back shares that are currently owned by shareholders.

5. Which financial statement will you find the stocks listed for a corporation?

Ans: Corporation Balance Sheet is the One where we see the Stocks of the Corporation in the Equity Section or Shareholder’s Funds.

6. What is the difference between common stock and preferred stock?

Ans:

Common stock is the most common type of stock that is issued by companies. It entitles shareholders to share in the company’s profits through dividends and/or capital appreciation. Common stockholders are usually given voting rights, with the number of votes directly related to the number of shares owned. Of course, the company’s board of directors can decide whether or not to pay dividends, as well as how much is paid.

Preferred stock is generally considered less volatile than common stock but typically has less potential for profit. Preferred stockholders generally do not have voting rights, as common stockholders do, but they have a greater claim to the company’s assets. Preferred stock may also be “callable,” which means that the company can purchase shares back from the shareholders at any time for any reason, although usually at a favorable price.

Owners of common stock have “preemptive rights” to maintain the same proportion of ownership in the company over time. If the company circulates another offering of stock, shareholders can purchase as much stock as it takes to keep their ownership comparable.

Preferred stock shareholders receive their dividends before common stockholders receive theirs, and these payments tend to be higher. Shareholders of preferred stock receive fixed, regular dividend payments for a specified period of time, unlike the variable dividend payments sometimes offered to common stockholders. Of course, it’s important to remember that fixed dividends depend on the company’s ability to pay as promised. In the event that a company declares bankruptcy, preferred stockholders are paid before common stockholders. Unlike preferred stock, though, common stock has the potential to return higher yields over time through capital growth. Remember that investments seeking to achieve higher rates of return also involve a higher degree of risk.

7. What is the difference between "authorized stock" and "issued and outstanding stock"?

Ans: Authorized Stock is the total Stock that a company can go issue to the public in the lifetime of the company. Where as issue & outstanding stock means the issued stocks to the public and the amount outstanding from them.

8. What is the difference between par value stock and nonpar value stock?

Ans: The par value of a stock is the stated value per share as outlined in the issuing company's charter. Also called "face value" (because it's the value printed on the face of a bond or stock certificate), the par value of a stock represents the minimum amount that must be paid per share. The difference between par and no par value stocks, therefore, is the presence or absence of this baseline valuation.

For example, if company ABC issues 1,000 shares of stock with a par value of $50, then the minimum amount of equity that should be generated by the sale of those shares is $50,000. Since the market value of stock has virtually nothing to do with par value, it is possible for investors to purchase this stock on the open market for considerably less than $50. Assume all 1,000 shares are purchased below par, say $30, generating only $30,000 in equity. If the business goes under and cannot meet its financial obligations, shareholders can be held liable for the $20-per-share difference between par and the purchase price.

9. What is meant when stock is issued at par?

Ans: When the Stock is Issued at the face value it is called stock issued at par.

10. What is meant when stock is issued for a premium?

Ans: When the stock is issued at a greater amount than the face value it is called stock issued at premium and the amount greater than the face value is called premium.

11. What is meant when stock is issued at a discount?

Ans: When the stock is issued at the value which is less than the face value of stock is called stock issued at discount.

12. What is the difference between a stock dividend and a stock split?

Ans: Stock Dividend is the one the dividend declared at the end of the financial year which accrues to the stockholders whereas stock split means the stock of the corporation with a particular value (say $10) is divided into stock of multiple number of stocks (say $2).

13. What is the difference between cumulative preferred stocks and noncumulative preferred stocks?

Ans: Cumulative Preferred stock mainly means there dividend will be cumulated to the previous dividend which is not paid in the previous financial year as there are no funds or otherwise and paid at once including the current year dividend. Where as noncumulative preferred stock does not entitled to that right, once the corporation does not pay the dividend in that year it will be lost.

14. What is a cash dividend?

Ans: A cash dividend is money paid to stockholders, normally out of the corporation's current earnings or accumulated profits. All dividends must be declared by the board of directors, and they are taxable as income to the recipients.

15. When a company declares a dividend, what accounts are affected when recording cash dividends? What accounts are affected when a cash dividend is paid? How would record each of these types of activities in a journal entry? Specifically, which account is debited and which account is credited?

Ans: When a corporation declares a cash dividend on its stock, its retained earnings are decreased and its current liabilities (Dividends Payable) are increased.

When the cash dividend is paid, the Dividends Payable account is decreased and the corporation's Cash account is decreased.

A dividend to stockholders or shareholders involves two entries. The first entry occurs on the date that the board of directors declares the dividend. In this entry the account Retained Earnings is debited and Dividends Payable is credited for the amount of the dividend that will be paid.

When the dividend declared is being paid the dividend payable account is debited and the bank account is credited with the amount of dividend that is being paid.