Chapter 15 13e

7/25/2019 Chapter 15 13e

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7/25/2019 Chapter 15 13e


hen a corporation sells treasury stock below its cost! it usually debits the difference between

cost and selling price to "aid-in Capital from Treasury #tock.

"articipating preferred stock requires that if a company fails to pay a dividend in any year! it must

make it up in a later year before paying any common dividends.

Callable preferred stock permits the corporation at its option to redeem the outstanding preferred

shares at stipulated prices.

The laws of some states require that corporations restrict their legal capital from distribution to

stockholders.

The #EC requires companies to disclose their dividend policy in their annual report.

All dividends! e$cept for liquidating dividends! reduce the total stockholders’ equity of a

corporation.

%ividends payable in assets of the corporation other than cash are called property dividends or

dividends in kind.

hen a stock dividend is less than &'-&( percent of the common stock outstanding! a company

is required to transfer the fair value of the stock issued from retained earnings.

#tock splits and large stock dividends have the same effect on a company’s retained earnings

and total stockholders’ equity.

The rate of return on common stock equity is computed by dividing net income by the average

common stockholders’ equity.

The payout ratio is determined by dividing cash dividends paid to common stockholders by net

income available to common stockholders.

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The pre-emptive right of a common stockholder is the right to

share proportionately in corporate assets upon liquidation.

"(a!e p!opo!t*onate+ *n an+ ne# *""ue" o, "toc' o, t(e "a$e ca""%

receive cash dividends before they are distributed to preferred stockholders.

e$clude preferred stockholders from voting rights.

The pre-emptive right enables a stockholder to

"(a!e p!opo!t*onate+ *n an+ ne# *""ue" o, "toc' o, t(e "a$e ca""%

receive cash dividends before other classes of stock without the pre-emptive right.

sell capital stock back to the corporation at the option of the stockholder.

receive the same amount of dividends on a percentage basis as the preferred stockholders.

#&/. 1n a corporate form of business organi2ation! legal capital is best defined as

the amount of capital the state of incorporation allows the company to accumulate over its

e$istence.

t(e pa! aue o, a cap*ta "toc' *""ue)%

the amount of capital the federal government allows a corporation to generate.

the total capital raised by a corporation within the limits set by the #ecurities and E$change

Commission.

#&(. #tockholders of a business enterprise are said to be the residual owners. The term residual

owner means that shareholders

are entitled to a dividend every year in which the business earns a profit.

have the rights to specific assets of the business.

.ea! t(e ut*$ate !*"'" an) unce!ta*nt*e" an) !ece*e t(e .ene,*t" o, ente!p!*"e o#ne!"(*p%

can negotiate individual contracts on behalf of the enterprise.

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hen a corporation issues its capital stock in payment for services! the least appropriate basis

for recording the transaction is the

market value of the services received.

pa! aue o, t(e "(a!e" *""ue)%

market value of the shares issued.

Any of these provides an appropriate basis for recording the transaction.

%irect costs incurred to sell stock such as underwriting costs should be accounted for as

a reduction of additional paid-in capital.

an e$pense of the period in which the stock is issued.

an intangible asset.

a% 1

&

) or

A 6secret reserve6 will be created if

inadequate depreciation is charged to income.

a cap*ta e0pen)*tu!e *" c(a!/e) to e0pen"e%

liabilities are understated.

stockholders3 equity is overstated.

". hich of the following represents the total number of shares that a corporation may issue

under the terms of its charter7

aut(o!*e) "(a!e"

issued shares

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As ordinary earnings shown on the income statement.

A" pa*)-*n cap*ta ,!o$ t!ea"u!+ "toc' t!an"act*on"%

As an increase in the amount shown for common stock.

As an e$traordinary item shown on the income statement.

hich of the following best describes a possible result of treasury stock transactions by a

corporation7

@ay increase but not decrease retained earnings.

@ay increase net income if the cost method is used.

&a+ )ec!ea"e .ut not *nc!ea"e !eta*ne) ea!n*n/"%

@ay decrease but not increase net income.

hich of the following features of preferred stock makes the security more like debt than an

equity instrument7

"articipating

oting

Re)ee$a.e

Boncumulative

The cumulative feature of preferred stock

limits the amount of cumulative dividends to the par value of the preferred stock.

!e3u*!e" t(at )**)en)" not pa*) *n an+ +ea! $u"t .e $a)e up *n a ate! +ea! .e,o!e

)**)en)" a!e )*"t!*.ute) to co$$on "(a!e(o)e!"%

means that the shareholder can accumulate preferred stock until it is equal to the par value of

common stock at which time it can be converted into common stock.

enables a preferred stockholder to accumulate dividends until they equal the par value of the

stock and receive the stock in place of the cash dividends.

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&ULTIPLE CHOICE—Co$putat*ona

Jse the following information for questions ,) and ,&.

"resented below is information related to ?ale Corporation5

Common #tock! 9) par

9/!''!'''

"aid-in Capital in E$cess of "arKCommon #tock

(('!'''

"referred )L&F #tock! 9(' par

&!'''!'''

"aid-in Capital in E$cess of "arK"referred #tock

/''!'''

Detained Earnings

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)!(''!'''

Treasury Common #tock ;at cost<

)('!'''

The total stockholders3 equity of ?ale Corporation is

:;6<==6===%

9!,('!'''. :>6?==6=== @ :>==6=== @ :55=6=== @ :6===6=== @ :165==6=== B :15=6===

9,!)''!'''. :;6<==6===

9,!&('!'''.

The total paid-in capital ;cash collected< related to the common stock is

9/!''!'''.

:>6;5=6===% :>6?==6=== @ :55=6=== :>6;5=6===

9(!&('!'''.

9/!,''!'''.

@anning Company issued )'!''' shares of its 9( par value common stock having a market valueof 9&( per share and )(!''' shares of its 9)( par value preferred stock having a market value of

9&' per share for a lump sum of 9/'!'''. ?ow much of the proceeds would be allocated to the

common stock7

9('!'''

:1;61; 71=6=== :58 @ 7156=== :=8 :55=6===

9&('!''' 7:5=6=== :55=6===8 :>;=6=== :1;61;

9&((!'''

Borton Company issues /!''' shares of its 9( par value common stock having a market value of

9&( per share and *!''' shares of its 9)( par value preferred stock having a market value of 9&'

per share for a lump sum of 9)0&!'''. hat amount of the proceeds should be allocated to the

preferred stock7

9),&!'''

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Treasury #tock for 9)!'''. ?6=== := :<=6=== ?6=== : :16===

T!ea"u!+ Stoc' ,o! :<=6=== an) Pa*)-*n Cap*ta ,!o$ T!ea"u!+ Stoc' ,o! :16===%

Treasury #tock for 9*'!''' and Detained Earnings for 9&)!'''.

Treasury #tock for 9,&!''' and Detained Earnings for 90!'''.

ong Co. issued )''!''' shares of 9)' par common stock for 9)!&''!'''. ong acquired !'''

shares of its own common stock at 9)( per share. Three months later ong sold /!''' of these

shares at 9)0 per share. 1f the cost method is used to record treasury stock transactions! to

record the sale of the /!''' treasury shares! ong should credit

Treasury #tock for 9,*!'''. >6=== :15 :<=6=== >6=== :> :1<6===

Treasury #tock for 9/'!''' and "aid-in Capital from Treasury #tock for 9*!'''.

T!ea"u!+ Stoc' ,o! :<=6=== an) Pa*)-*n Cap*ta ,!o$ T!ea"u!+ Stoc' ,o! :1<6===%

Treasury #tock for 9*'!''' and "aid-in Capital in E$cess of "ar for 9)*!'''.

An analysis of stockholders3 equity of ?ahn Corporation as of 8anuary )! &')'! is as follows5

Common stock! par value 9&'M authori2ed )''!''' sharesM

issued and outstanding 0'!''' shares

9)!''!'''

"aid-in capital in e$cess of par

0''!'''

Detained earnings

,*'!'''

Total

9!/*'!'''

?ahn uses the cost method of accounting for treasury stock and during &')' entered into the

following transactions5

Acquired &!('' shares of its stock for 9,(!'''. #old &!''' treasury shares at 9( per share.

#old the remaining treasury shares at 9&' per share.

Assuming no other equity transactions occurred during &')'! what should ?ahn report at

%ecember )! &')'! as total additional paid-in capital7

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9/(!''' 7:>56=== 8 B 7:56=== ?8 :156===

9'

Colson 1nc. declared a 9)*'!''' cash dividend. 1t currently has *!''' shares of ,F! 9)'' parvalue cumulative preferred stock outstanding. 1t is one year in arrears on its preferred stock.

?ow much cash will Colson distribute to the common stockholders7

:<6===%

9/!'''. <6=== :1== %= :>6===

9))!'''. :1<=6=== B 7:>6=== 8 :<6===

Bone.

"ierson Corporation owned )'!''' shares of ?unter Corporation. These shares were

purchased in &'', for 90'!'''. :n Bovember )(! &'))! "ierson declared a property dividend of

one share of ?unter for every ten shares of "ierson held by a stockholder. :n that date! when

the market price of ?unter was 9)/ per share! there were 0'!''' shares of "ierson outstanding.

hat gain and net reduction in retained earnings would result from this property dividend7

>ain

Bet Deduction in

Detained Earnings

a.

9'

9

)&*!'''

b.

9'

9

)!'''

c%

:>56===

:

;16===

d.

9/(!'''

9

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,(!'''

9

)&(!'''

:n @arch )! &'))! the board of directors declared a )(F stock dividend! and accordingly )!(''

additional shares were issued. :n @arch )! &'))! the fair market value of the stock was 9* per

share. +or the two months ended +ebruary &! &'))! >unkel sustained a net loss of 9)'!'''.

hat amount should >unkel report as retained earnings as of @arch )! &'))7

:5<6===%

9*&!'''. :56=== B :1=6=== B 7165== :<8 :5<6===

9**!'''.

9,&!'''.

The stockholders3 equity of ?owell Company at 8uly )! &')' is presented below5

Common stock! par value 9&'! authori2ed /''!''' sharesM

issued and outstanding )*'!''' shares

9!&''!'''

"aid-in capital in e$cess of par

)*'!'''

Detained earnings

*('!'''

9/!')'!'''

:n August )! &')'! the board of directors of ?owell declared a )(F stock dividend on common

stock! to be distributed on #eptember )(th. The market price of ?owell3s common stock was

9( on August )! &')'! and 9 on #eptember )(! &')'. hat is the amount of the debit to

retained earnings as a result of the declaration and distribution of this stock dividend7

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9''!'''.

:;>=6===%

90)&!'''. 1<=6=== %15 :?5 :;>=6===

9*''!'''.

:n 8anuary )! &')'! %odd! 1nc.! declared a )'F stock dividend on its common stock when the

market value of the common stock was 9&' per share. #tockholders3 equity before the stock

dividend was declared consisted of5

Common stock! 9)' par value! authori2ed &''!''' sharesM

issued and outstanding )&'!''' shares

9)!&''!'''

Additional paid-in capital on common stock

)('!'''

Detained earnings

,''!'''

Total stockholders3 equity

9&!'('!'''

hat was the effect on %odd’s retained earnings as a result of the above transaction7

9)&'!''' decrease

:>=6=== )ec!ea"e

9/''!''' decrease 1=6=== %1= := :>=6===

9&''!''' decrease

:n 8anuary )! &')'! Culver Corporation had ))'!''' shares of its 9( par value common stock

outstanding. :n 8une )! the corporation acquired )'!''' shares of stock to be held in the

treasury. :n %ecember )! when the market price of the stock was 9! the corporation declared

a )'F stock dividend to be issued to stockholders of record on %ecember )*! &')'. hat was

the impact of the )'F stock dividend on the balance of the retained earnings account7

9('!''' decrease

:;=6=== )ec!ea"e

9!''' decrease 1==6=== %1= :; :;=6===

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Bo effect

At the beginning of &'))! +laherty Company had retained earnings of 9&''!'''. %uring the year

+laherty reported net income of 9)''!'''! sold treasury stock at a =gainO of 9*!'''! declared a

cash dividend of 9*'!'''! and declared and issued a small stock dividend of !''' shares ;9)'par value< when the market value of the stock was 9&' per share. The amount of retained

earnings available for dividends at the end of &')) was

:1;=6===.

9&)'!'''. ==6=== @ :1==6=== B :<=6=== B 7?6=== :=8 :1;=6===

9&)*!'''.

9&/*!'''.

@asterson Company has /&'!''' shares of 9)' par value common stock outstanding. %uring

the year @asterson declared a (F stock dividend when the market price of the stock was 9*

per share. Three months later @asterson declared a 9.*' per share cash dividend. As a result of

the dividends declared during the year! retained earnings decreased by

:16==6<==

9,(*!''' 7:>=6=== %=5 :?<8 @ 7:>=6=== 1%=5 :%<=8 :16==6<==

9&*/!*''

9&(&!'''

Guestions )' and )'/ are based on the following information.

ayne Corporation had the following information in its financial statements for the years ended

&')' and &'))5

Cash dividends for the year &'))

9

!'''

Bet income for the year ended &'))

0!'''

@arket price of stock! )&L)L)'

)'

@arket price of stock! )&L)L))

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)&

Common stockholders’ equity! )&L)L)'

)!*''!'''

Common stockholders’ equity! )&L)L))

)!''!'''

:utstanding shares! )&L)L))

)('!'''"referred dividends for the year ended &'))

)(!'''

hat is the payout ratio for ayne Corporation for the year ended &'))7

&/.,F

)*.)F

1=%?K :;6=== 7:G?6=== B :156===8 1=%?K

.*F

hat is the book value per share for ayne Corporation for the year ended &'))7

:1%==

9)).0'

9)). :16;==6=== 15=6=== :1%==

9)'.*,

At the beginning of &'))! ?amilton Company had retained earnings of 9)('!'''. %uring the

year ?amilton reported net income of 9,(!'''! sold treasury stock at a =gainO of 9&,!'''!

declared a cash dividend of 9/(!'''! and declared and issued a small stock dividend of )!(''

shares ;9)' par value< when the market value of the stock was 9' per share. The amount of

retained earnings available for dividends at the end of &')) was5

9)/!(''.

9)*&!'''. :15=6=== @ :56=== B :>56=== B 7165== :?=8 :1?56===

9)(,!(''.

:1?56===%

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@ingenback Company has (*'!''' shares of 9)' par value common stock outstanding. %uring

the year @ingenback declared a (F stock dividend when the market price of the stock was 9/

per share. Two months later @ingenback declared a 9.*' per share cash dividend. As a result of

the dividends declared during the year! retained earnings decreased by5

9*!'''.

9(&!''. 75<=6=== %=5 :>;8 @ 75<=6=== 1%=5 :%<=8 :16<G<6;==

9)!//!'''.

:16<G<6;==%

#ealy Corporation had the following information in its financial statements for the years ended

&')' and &'))5

Cash dividends for the year &'))

9

(!'''

Bet income for the year ended &'))

,&!'''

@arket price of stock! )&L)L)'

)'

@arket price of stock! )&L)L))

)&

Common stockholders’ equity! )&L)L)'

)!'''!'''

Common stockholders’ equity! )&L)L))

)!&''!'''

:utstanding shares! )&L)L))

)''!'''

"referred dividends for the year ended &'))

)'!'''

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hat is the rate of return on common stock equity for #ealy Corporation for the year ended

&'))7

*.(F

*.'F 7:6=== B :1=6===8 7:16===6=== @ :16==6===8 5%<K

5%<K

(.&F

hat is the price-earnings ratio for #ealy Corporation for the year ended &'))7

)*.)

)*., 6=== B :1=6===8 1==6=== :%<

1G%> :1 %< 1G%>

&).)

@ays! 1nc. had net income for &')' of 9&!)&'!''' and earnings per share on common stock of

9(. 1ncluded in the net income was 9''!''' of bond interest e$pense related to its long-term

debt. The income ta$ rate for &')' was 'F. %ividends on preferred stock were 9/''!'''. The

payout ratio on common stock was &(F. hat were the dividends on common stock in &')'7

:>?=6===%

9('!'''.

9/&!(''. ——————————— %56 :>?=6===

9*/(!'''. 7:61=6=== B :>==6===8

"resented below is information related to :render! 1nc.5

%ecember )!

Common stock

&'))

&')'

9 ,(!'''

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9/!'''.

:<?6===%

I)),. Assuming that 9)!''' will be distributed! and the preferred stock is also participating!how much will the common stockholders receive7

9)))!'''.

:G=6===%

90!'''.

9/!'''.

I)). Hoder! 1nc. has ('!''' shares of 9)' par value common stock and &(!''' shares of 9)'

par value! *F! cumulative! participating preferred stock outstanding. %ividends on the preferred

stock are one year in arrears. Assuming that Hoder wishes to distribute 9)(!''' as dividends!

the common stockholders will receive

9'!'''.

9((!'''.

:;=6===%

9)'(!'''.

I))0. @ann Co. has outstanding ('!''' shares of F preferred stock with a 9 )' par value

and )&(!''' shares of 9 par value common stock. %ividends have been paid every year

e$cept last year and the current year. 1f the preferred stock is cumulative and nonparticipating

and 9&('!''' is distributed! the common stockholders will receive

9'.

:1=6===%

9&)'!'''. :5=6=== B 7:5==6=== ;K 8 :1=6===

9&('!'''.

Ite$

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Ite$

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I))0.

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&ULTIPLE CHOICE—CPA A)apte)

A corporation was organi2ed in 8anuary &'', with authori2ed capital of 9)' par value common

stock. :n +ebruary )! &')'! shares were issued at par for cash. :n @arch )! &')'! the

corporation3s attorney accepted ,!''' shares of common stock in settlement for legal services

with a fair value of 90'!'''. Additional paid-in capital would increase on

+ebruary )! &')'

@arch )! &')'

a.

Hes

Bo

b.

Hes

Hes

c.

Bo

Bo

)%

9o

Ye"

:n 8uly )! &')'! Ball Co. issued &!('' shares of its 9)' par common stock and (!''' shares of

its 9)' par convertible preferred stock for a lump sum of 9)&(!'''. At this date Ball3s common

stock was selling for 9&/ per share and the convertible preferred stock for 9) per share. The

amount of the proceeds allocated to Ball3s preferred stock should be

9*&!(''.

:56===%

90'!'''.

9*!,('.

?orton Co. was organi2ed on 8anuary &! &')'! with (''!''' authori2ed shares of 9)' par value

common stock. %uring &')'! ?orton had the following capital transactions5

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8anuary (Kissued ,(!''' shares at 9)/ per share. 8uly &,Kpurchased &(!''' shares at 9)) per

share.

Bovember &(Ksold )(!''' shares of treasury stock at 9) per share.

?orton used the cost method to record the purchase of the treasury shares. hat would be the

balance in the "aid-in Capital from Treasury #tock account at %ecember )! &')'7

9'.

9)(!'''. 156=== : :?=6===

:?=6===%

9/(!'''.

1n &')'! ?obbs Corp. acquired 0!''' shares of its own 9) par value common stock at 9) per

share. 1n &'))! ?obbs issued /!''' of these shares at 9&( per share. ?obbs uses the cost

method to account for its treasury stock transactions. hat accounts and what amounts should

?obbs credit in &')) to record the issuance of the /!''' shares7

Treasury

Additional

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Detained

Common

#tock

"aid-in Capital

Earnings

#tock

a.

9,&!'''

9,'!'''

.%

:6===

:;6===

c.

90*!'''

9/!'''

d.

9*!'''

9&!'''

9/!'''

7>6=== :1;8 :6=== 7>6=== :8 :;6===

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At its date of incorporation! #auder! 1nc. issued )''!''' shares of its 9)' par common stock at

9)) per share. %uring the current year! #auder acquired &'!''' shares of its common stock at a

price of 9)* per share and accounted for them by the cost method. #ubsequently! these shares

were reissued at a price of 9)& per share. There have been no other issuances or acquisitions

of its own common stock. hat effect does the reissuance of the stock have on the following

accounts7

Detained Earnings

Additional "aid-in Capital

a.

%ecrease

%ecrease

b.

Bo effect

%ecrease

c%

Dec!ea"e

9o e,,ect

d.

Bo effect

Bo effect

+armer Corp. owned &'!''' shares of Eaton Corp. purchased in &'', for 9&/'!'''. :n

%ecember )(! &')'! +armer declared a property dividend of all of its Eaton Corp. shares on thebasis of one share of Eaton for every )' shares of +armer common stock held by its

stockholders. The property dividend was distributed on 8anuary )(! &')). :n the declaration

date! the aggregate market price of the Eaton shares held by +armer was 9/''!'''. The entry

to record the declaration of the dividend would include a debit to Detained Earnings of

9'.

9)*'!'''. :>==6=== 7$a!'et aue8

9&/'!'''.

:>==6===%

A corporation declared a dividend! a portion of which was liquidating. ?ow would this distribution

affect each of the following7

Additional

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"aid-in Capital

a.

Bo effect

Bo effect

b.

Bo effect

1ncrease

c.

1ncrease

Bo effect

)%

Inc!ea"e

Inc!ea"e

:n %ecember )! &')'! the stockholders3 equity section of Arndt! 1nc.! was as follows5

Common stock! par value 9)'M authori2ed '!''' sharesM

issued and outstanding 0!''' shares

9

0'!'''

Additional paid-in capital

))*!'''

Detained earnings

),/!'''

Total stockholders3 equity

9

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'!'''

:n @arch )! &'))! Arndt declared a )'F stock dividend! and accordingly 0'' additional

shares were issued! when the fair market value of the stock was 9) per share. +or the three

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7/25/2019 Chapter 15 13e


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Date post:	28-Feb-2018
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Chapter 15 13e

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