Problem 13-64

Reporting Stockholders’ Equity

Stockholders’ EquityDecember 31, 2010

Common stock ($5 par, 500,000 sharesauthorized, 275,000 issued and outstanding)... $1,375,000

Paid-in capital in excess of par…………………… 550,000Total paid-in capital…………………………… $1,925,000

Unappropriated retained earnings ………………. $1,335,000Appropriated retained earnings…………………… 500,000

Total retained earnings………………………. 1,835,000

Total stockholders’ equity…………………………. $3,760,000

Part 1: Nilsson Corporation

The Nilsson Corporation recorded several stockholders’ equity transactions during 2011.

For Part 1, we need to record all necessary journal entries for these 2011 transactions that affect stockholders’ equity.

Stockholders’ Equity Transactions

Nilsson Corporation’s Books

Jan. 15 Appropriated Retained Earnings……… 500,000Retained Earnings………………….. 500,000

Stockholders’ Equity Transactions

Nilsson Corporation’s Books

Jan. 15 Appropriated Retained Earnings……… 500,000Retained Earnings………………….. 500,000

Cash received = 100,000 shares x $8 per share = $800,000Common Stock (par value) = 100,000 shares x $5 par = $500,000Excess of Par = 100,000 shares x ($8 - $5) = $300,000

Stockholders’ Equity Transactions

Mar. 3 Cash……………………………………… 800,000Common Stock……………………… 500,000Paid-In Capital in Excess of Par…… 300,000

Stockholders’ Equity Transactions

Nilsson Corporation’s Books

Cash received = 100,000 shares x $8 per share = $800,000Common Stock (par value) = 100,000 shares x $5 par = $500,000Excess of Par = 100,000 shares x ($8 - $5) = $300,000

Remember: The day dividends are declared, they become a legal liability that the company must pay at a future date.

375,000 shares outstanding x $1.50 per share = $562,500

Stockholders’ Equity Transactions

May 18 Dividends (Retained Earnings)……….. 562,500Dividends Payable………………….. 562,500

Stockholders’ Equity Transactions

Nilsson Corporation’s Books

Remember: The day dividends are declared, they become a legal liability that the company must pay at a future date.

375,000 shares outstanding x $1.50 per share = $562,500

Stockholders’ Equity Transactions

Restricted Retained Earnings are not eligible for distribution as dividends.

June 19 Retained Earnings……………………… 400,000Appropriated Retained Earnings….. 400,000

Stockholders’ Equity Transactions

Nilsson Corporation’s Books

Restricted Retained Earnings are not eligible for distribution as dividends.

Stockholders’ Equity Transactions

On July 31, Nilsson Corporation paid the liability established on May 18.

July 31 Dividends Payable……………………… 562,500Cash………………………………….. 562,500

Stockholders’ Equity Transactions

Nilsson Corporation’s Books

On July 31, Nilsson Corporation paid the liability established on May 18.

This transaction will cause Nilsson to record a gain for the difference between the fair market value of the Hampton stock on the day the dividends are declared and the price Nilsson Corporation originally paid to acquire the Hampton stock. The gain to Nilsson is the same as if they had sold the Hampton stock for cash and then distributed this cash to their stockholders.

Stockholders’ Equity Transactions

This transaction will cause Nilsson to record a gain for the difference between the fair market value of the Hampton stock on the day the dividends are declared and the price Nilsson Corporation originally paid to acquire the Hampton stock. The gain to Nilsson is the same as if they had sold the Hampton stock for cash and then distributed this cash to their stockholders.

Property Dividend: 35,000 shares of Hampton x $13 per share = $455,000Gain on Distribution: 35,000 shares of Hampton x ($13-$9) = $140,000

Stockholders’ Equity Transactions

Nov. 12 Property Dividends (Retained Earnings) ……. 455,000Property Dividend Payable ………………. 315,000Gain on Distribution of Property Dividend.. 140,000

This transaction will cause Nilsson to record a gain for the difference between the fair market value of the Hampton stock on the day the dividends are declared and the price Nilsson Corporation originally paid to acquire the Hampton stock. The gain to Nilsson is the same as if they had sold the Hampton stock for cash and then distributed this cash to their stockholders.

Stockholders’ Equity Transactions

Nilsson Corporation’s Books

Property Dividend: 35,000 shares of Hampton x $13 per share = $455,000Gain on Distribution: 35,000 shares of Hampton x ($13-$9) = $140,000

Revenues exceeded expenses by $885,000. Assume Nilsson used an Income Summary Account.

Stockholders’ Equity Transactions

Dec. 31 Income Summary……………………….. 885,000Retained Earnings………………….. 885,000

Stockholders’ Equity Transactions

Nilsson Corporation’s Books

Revenues exceeded expenses by $885,000. Assume Nilsson used an Income Summary Account.

Hampton Stock is distributed to its shareholders. Nilsson is not entitled to the gain in the share price that has occurred between the declaration date (November 12) and the distribution date (December 31).

Stockholders’ Equity Transactions

Dec. 31 Property Dividend Payable……………. 315,000Investment in Hampton Inc. Stock… 315,000

Stockholders’ Equity Transactions

Nilsson Corporation’s Books

Hampton Stock is distributed to its shareholders. Nilsson is not entitled to the gain in the share price that has occurred between the declaration date (November 12) and the distribution date (December 31).

Part 2: Nilsson CorporationStockholders’ Equity

Common stock ($5 par, 500,000 sharesauthorized, 375,000 issued and outstanding)…. $1,875,000

Computations

$1,375,000 + $500,000 = $1,875,000

Stockholders’ Equity

Common stock ($5 par, 500,000 sharesauthorized, 375,000 issued and outstanding)…. $1,875,000

Paid-in capital in excess of par…………………… 850,000

Computations

$550,000 + $300,000 = $850,000

Part 2: Nilsson Corporation

ComputationsBeginning retained earnings……………………………………. $1,335,000Add: Reversal of appropriated retained earnings……………. 500,000Deduct: Appropriation of retained earnings…………………… (400,000)

$1,435,000Add: Net income…………………………………………………. 885,000

$2,320,000Deduct: Dividends………………………………………………. (1,017,500)Retained earnings balance, December 31, 2011..…………. $1,302,500

Stockholders’ Equity

Common stock ($5 par, 500,000 sharesauthorized, 375,000 issued and outstanding)... $1,875,000

Paid-in capital in excess of par…………………… 850,000Total paid-in capital…………………………… $2,725,000

Unappropriated retained earnings ………………. $1,302,500

Part 2: Nilsson Corporation

Stockholders’ EquityDecember 31, 2011

Common stock ($5 par, 500,000 sharesauthorized, 375,000 issued and outstanding)... $1,875,000

Paid-in capital in excess of par…………………… 850,000Total paid-in capital…………………………… $2,725,000

Unappropriated retained earnings ………………. $1,302,500Appropriated retained earnings…………………… 400,000

Total retained earnings………………………. 1,702,500

Total stockholders’ equity…………………………. $4,427,500

Part 2: Nilsson Corporation

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