Chapter 18 Shareholders’ Equity
TERM
PHRASE
NUMBER
1. Reverse stock split
Designed to increase the market value of
stock.
____
2. Retained earnings
Reduces the net proceeds from selling shares.
____
3. Cumulative
A feature of most preferred stock.
____
4. Price-earnings ratio
May be reduced when net income increases.
____
5. Share issue cost
May be reduced when shares are retired.
____
1. Reverse stock split
2. Retained earnings
3. Cumulative
4. Price-earnings ratio
5. Share issue cost
Chapter 18 Shareholders’ Equity
105. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Restriction of retained
earnings
Net income as a percentage of average book
value.
____
2. Treasury stock
Paid-in capital and/or retained earnings
affected when sold.
____
3. Limited liability company
Preferred practice is to disclose in the
footnotes.
____
4. Return on shareholders’
equity
Similar to an S corporation, but no limit on
number of owners.
____
5. Earnings-price ratio
Used in evaluating stock performance.
____
Answer:
TERM
PHRASE
NUMBER
1. Restriction of retained
earnings
Net income as a percentage of average book
value.
2. Treasury stock
Paid-in capital and/or retained earnings
affected when sold.
Preferred practice is to disclose in the
footnotes.
4. Return on shareholders’
equity
Similar to an S corporation, but no limit on
number of owners.
5. Earnings-price ratio
Used in evaluating stock performance.
106. Use I = Increase, D = Decrease, or N = No effect, to indicate the effect on total shareholders’
equity for each of the listed transactions.
____ Declaration of a property dividend.
____ Net income for the year.
____ Purchase of treasury stock at a cost greater than the original issue price.
____ Purchase of treasury stock at a cost less than the original issue price.
____ Issue common stock.
____ Resale of treasury stock.
Chapter 18 Shareholders’ Equity
Chapter 18 Shareholders’ Equity
107. Use I = Increase, D = Decrease, or N = No effect, to indicate the effect on total shareholders’
equity for each of the listed transactions.
____ A net loss for the year.
____ A stock split effected in the form of a stock dividend.
____ A stock split in which the par per share is reduced (but not effected in the form of a stock
dividend).
____ Declaration of a 5% stock dividend.
____ Declaration of a cash dividend.
____ Issue stock for noncash assets.
____ Payment of previously declared cash dividend.
____ Retirement of common stock at a cost greater than the original issue price.
____ Retirement of common stock at a cost less than the original issue price.
____ Resale of treasury stock for less than book value.
108. Indicate by letter whether each of the terms or phrases listed below is more associated with
financial statements prepared in accordance with U.S. GAAP (U) or International Financial
Reporting Standards (I).
Terms and phrases
Preferred stock
Investment revaluation reserve
Liabilities listed after Equity in the balance sheet (statement of financial position)
Accumulated other comprehensive income
Asset revaluation reserve
Share premium
Equity listed after Liabilities in the balance sheet (statement of financial position)
Share premium
Net gains (losses) on investments—AOCI
Paid-in capital—excess of par
Ordinary shares
Chapter 18 Shareholders’ Equity
Preference shares
Common stock
Chapter 18 Shareholders’ Equity
Problems
Use the following to answer questions 109–113:
The following information comes from the 2016 Annual Report to stockholders of Composition Inc.
(in thousands):
From the Statement of Changes in Stockholders’ Equity:
Capital in
Treasury
Excess of
Treasury
Stock
Retained
Par Value
Shares
Amount
Earnings
BALANCES AT December 31, 2014
$ –
(30,561)
$(524,321)
$1,673,382
Net earnings
–
–
–
242,941
Sales of common stock under option plans
(5,181)
377
10,738
–
Cash dividends declared on common stock:
$.5375 per share
–
–
–
(68,952)
Compensation under employee incentive plans
(1,802)
395
9,408
–
Treasury shares exchanged for Acquisitions
139,209
20,449
318,293
–
Purchase of shares for treasury
–
(6,668)
(122,906)
–
BALANCES AT December 31, 2015
132,226
(16,008)
(308,788)
1,847,371
Net earnings
–
–
–
81,965
Sales of common stock under option plans
(3,538)
279
7,095
–
Cash dividends declared on common stock:
$.5475 per share
–
–
–
(72,903)
Compensation under employee incentive plans
(196)
366
8,271
–
Purchase of shares for treasury
–
(2,933)
(48,678)
–
BALANCES AT December 31, 2016
$128,492
(18,296)
$(342,100)
$1,856,433
From the Statement of Cash Flows:
Cash flows from financing activities:
2016
2015
Dividends paid
72,244
66,932
109. What was the average exercise price per share of stock issued under option plans in 2016?
Chapter 18 Shareholders’ Equity
Chapter 18 Shareholders’ Equity
110. What was the average cost per share of the treasury stock purchased by Composition during
2015 and 2016, respectively?
111. How many shares of treasury stock were removed for use during 2015, and for what
purpose(s)?
112. What was the fair value of the treasury stock exchanged for asset acquisitions for 2015?
113. Assuming that Composition had Dividends Payable of $17,450 thousand at December 31,
2014, compute the balance in that account at December 31, 2016.
114. During its first year of operations, Cole’s Electronics Inc. completed the following transactions
relating to shareholders’ equity.
January 5: Issued 1,000,000 shares of common stock for $25 per share.
February 12: Issued 20,000 shares of common stock to accountants for $500,000 of
professional services.
The articles of incorporation authorize 5,000,000 shares of common stock with a par value of
$1 per share and 1,000,000 preferred shares with a par value of $100 per share.
Required:
Record the above transactions in general journal form.
115. During its first year of operations, Criswell Inc. completed the following transactions relating
to shareholders’ equity.
January 5: Issued 300,000 of its common shares for $8 per share and 3,000 preferred shares at
$110.
February 12: Issued 50,000 shares of common stock in exchange for equipment with a known
cash price of $310,000.
The articles of incorporation authorize 5,000,000 shares with a par value of $1 per share of
common and 1,000,000 preferred shares with a par value of $100 per share.
Required:
Record the above transactions in general journal form.
116. During the current year JET Industries issued 5 million of its $1 par common shares to its
underwriters for $25,000,000 less promotional and accounting services of $500,000 to effect
the issue.
Required:
Prepare the journal entry to record the issuance of the shares.
Chapter 18 Shareholders’ Equity
117. The shareholders’ equity of Tru Corporation includes $600,000 of $1 par common stock and
$1,200,000 par value of 6% cumulative preferred stock. The board of directors of Tru declared
cash dividends of $150,000 in 2016 after paying $60,000 cash dividends in each of 2015 and
2014.
Required:
What is the amount of dividends common shareholders will receive in 2016?
Answer:
118. The shareholders’ equity of HS Corporation includes $300,000 of $1 par common stock and
$600,000 par value of 6% cumulative preferred stock. The board of directors of HS declared
cash dividends of $70,000 in 2016 after paying $30,000 cash dividends in 2015 and $50,000
in 2014.
Required:
What is the amount of dividends common shareholders will receive in 2016?
Answer:
119. Cal Cookie Company (CCC) has 100 million shares of $1 par common stock authorized. The
transactions below caused changes in CCC’s outstanding shares.
January 4, 2016: Repurchased and retired 1 million shares at $8 per share.
June 25, 2016: Repurchased and retired 2 million shares at $2 per share.
Prior to the transactions, CCC’s shareholders’ equity included the following:
Common stock, 80 million shares at $1 par
$ 80,000,000
Paid-in capital—excess of par
160,000,000
Retained earnings
120,000,000
Required:
Record entries for the above transactions.
120. On December 31, 2015, Rebel Corporation’s balance sheet reported the following.
Common stock, $1 par
$1,000,000
Paid-in capital—excess of par
4,000,000
Retained earnings
5,280,000
Treasury stock (20,000 shares at cost)
(625,000
)
During 2016, Rebel decided to discontinue accounting for share buybacks as treasury shares.
Instead, the shares will be treated as having been retired.
Required:
Prepare the appropriate journal entry to effect this change.
121. In 2016, Poe’s Products completed the treasury stock transactions described below.
January 2: Reacquired 10 million shares at $16 per share.
February 15: Sold 3 million shares at $20 per share.
September 20: Sold 3 million treasury shares at $15 per share.
Poe had issued 50 million shares of its $1 par common stock for $18 several years ago.
Required:
Record the above transactions, assuming that Poe’s Products uses the cost method.
122. In 2016, Southwestern Corporation completed the treasury stock transactions listed below.
February 2: Reacquired 70,000 shares at $12.
March 17: Sold 20,000 shares at $14.
May 17: Sold 25,000 shares at $8.
Southwestern had issued 100,000 shares of its $1 par common stock for $10 several months
ago.
Required:
Prepare the journal entries to record the above transactions using the cost method.
123. The December 31, 2016, balance sheet of Springer Company included the following:
Common stock, 20 million shares outstanding at $1 par
$ 20,000,000
Paid-in capital—excess of par
100,000,000
Retained earnings
115,000,000
Springer completed the following transactions in 2016 relating to treasury stock:
March 17: Reacquired 5 million shares at $10.
May 17: Reacquired 3 million shares at $9.
August 10: Sold 6 million shares at $12.
Required:
Assuming Springer uses the cost method, prepare journal entries to record the foregoing
transactions on a FIFO basis.
*5 x $10 =
124. The December 31, 2016, balance sheet of MBI Company included the following:
Common stock, 20 million shares outstanding at $1 par
$ 20,000,000
Paid-in capital—excess of par
100,000,000
Retained earnings
115,000,000
MBI completed the following transactions in 2016 relating to treasury stock:
March 17: Reacquired 2 million shares at $10.
May 17: Reacquired 2 million shares at $9.
August 10: Issued 3 million shares at $12.
Required:
Assuming MBI uses the cost method, prepare journal entries to record the foregoing
transactions on a weighted average basis.
*2 x $10 =
125. The shareholders’ equity of Nick Co. includes the items shown below. The board of directors
of Nick declared cash dividends of $4 million, $8 million, and $50 million in each of its first 3
years of operation: 2014, 2015, and 2016, respectively.
Common stock, $1 par, 50,000,000 shares outstanding
Preferred stock, 6%, $100 par, 1,000,000 shares outstanding
Required:
Determine the amount of dividends per share on preferred and common stock for each of the
three years. The preferred stock is noncumulative and nonparticipating.
126. The shareholders’ equity of Crystal Company includes the items shown below. The board of
directors of Crystal declared cash dividends of $3 million, $6 million, and $50 million in each
of its first three years of operation: 2014, 2015, and 2016, respectively.
Common stock, $1 par, 50,000,000 shares outstanding
Preferred stock, 6%, $100 par, 1,000,000 shares outstanding
Required:
Determine the amount of dividends per share on preferred and common stock for each of the
three years. The preferred stock is cumulative and nonparticipating.
127. ZIP Company owns 40,000 shares of the common stock of PIK Company. ZIP decided to
divest itself of this investment by distributing the PIK shares in the form of a property
dividend. The dividend ratio is one share of PIK for every four shares of ZIP common held by
shareholders. ZIP has 160,000 common shares outstanding. On April 15, 2016, the date of
declaration, PIK stock had a par value of $5 per share, a book value of $12 per share, and a
market value of $17 per share.
Required:
Prepare any necessary journal entries. The shares were distributed on May 15, 2016, to
stockholders of record on May 1, 2016.