Compute and interpret earnings per share.

1. Of two corporations organized at approximately the same time and engaged in competing businesses, one issued $80 par common stock, and the other issued $1 par common stock. Do the par designations provide any indication as to which stock is preferable as an investment? Explain.
2. A stockbroker advises a client to “buy preferred stock.
... With that type of stock, ... [you] will never have to worry about losing the dividends.” Is the broker right?
3. A corporation with both preferred stock and common stock outstanding has a substantial credit balance in its retained earnings account at the beginning of the current fiscal year. Although net income for the current year is sufficient to pay the preferred dividend of $150,000 each quarter and a common dividend of $90,000 each quarter, the board of directors declares dividends only on the preferred stock. Suggest possible reasons for passing the dividends on the common stock.
4. An owner of 2,500 shares of Simmons Company common stock receives a stock dividend of 50 shares.

a. What is the effect of the stock dividend on the stockholder’s proportionate interest (equity) in the corporation?

b. How does the total equity of 2,550 shares compare with the total equity of 2,500 shares before the stock dividend?
5.

a. Where should a declared but unpaid cash dividend be reported on the balance sheet?

b. Where should a declared but unissued stock dividend be reported on the balance sheet?
6. A corporation reacquires 60,000 shares of its own $10 par common stock for $3,000,000, recording it at cost.

a. What effect does this transaction have on revenue or expense of the period?

b. What effect does it have on stockholders’ equity?
7. The treasury stock in Discussion Question 6 is resold for $3,750,000.

a. What is the effect on the corporation’s revenue of the period?

b. What is the effect on stockholders’ equity?
8. What are the three classifications of restrictions of retained earnings, and how are such restrictions normally reported on the financial statements?
9. Indicate how prior period adjustments would be reported on the financial statements presented only for the current period.
10. What is the primary purpose of a stock split?