Chapter 18 Shareholders’ Equity
128. Fowler Co.’s balance sheet showed the following at December 31, 2016:
Common stock, $10 par
$100,000
Paid-in capital—excess of par
50,000
Retained earnings
20,000
A cash dividend is declared on December 31, 2016, and is payable on January 20, 2017, to
shareholders of record on January 10, 2017.
Required:
(1.) Prepare all appropriate journal entries, assuming a cash dividend in the amount of $1.00
per share.
(2.) Prepare all appropriate journal entries, assuming a cash dividend in the amount of $5.00
per share.
Chapter 18 Shareholders’ Equity
129. On January 1, 2016, Fascom had the following account balances in its shareholders’ equity
accounts.
Common stock, $1 par, 250,000 shares issued
250,000
Paid-in capital—excess of par, common
500,000
Paid-in capital—excess of par, preferred
100,000
Preferred stock, $100 par, 10,000 shares outstanding
1,000,000
Retained earnings
2,000,000
Treasury stock, at cost, 5,000 shares
25,000
During 2016, Fascom Inc. had several transactions relating to common stock.
January 15:
February 17:
April 10:
July 18:
December 1:
December 20:
Required:
Without preparing journal entries, prepare the shareholders’ equity section of Fascom’s balance
sheet as of December 31, 2016. Assume net income is $500,000 for 2016.
130. On September 15, 2016, the Scottie Company board of directors declared a 10% stock
dividend on common shares. The shares are to be distributed on October 10, 2016, to
shareholders of record on October 1, 2016. The market price per share on the date of
declaration was $24 while the market price on the date of distribution was $26. The common
stock has a par value of $5 per share and there were 1,000,000 shares outstanding prior to the
declaration of the stock dividend.
Required:
Prepare any necessary journal entries to record the above transactions.
131. On October 15, 2016, a 5% stock dividend was declared and distributed. The market value of
the common stock on this date was $32 per share. Fractional share rights represented 100,000
shares. Cash was paid in lieu of issuing fractional share rights. On the date of declaration and
payment, the company had 10 million shares of common stock outstanding. The par value of
the common shares was $5.
Required:
Prepare any necessary journal entries to record the above events.
Chapter 18 Shareholders’ Equity
132. On January 1, 2016, Gerlach Inc. had the following account balances in its shareholders’
equity accounts.
Common stock, $1 par, 250,000 shares issued
250,000
Paid-in capital—excess of par, common
500,000
Paid-in capital—excess of par, preferred
100,000
Preferred stock, $100 par, 10,000 shares outstanding
1,000,000
Retained earnings
2,000,000
Treasury stock, at cost, 5,000 shares
25,000
During 2016, Gerlach Inc. had several transactions relating to common stock.
January 15:
February 17:
April 10:
July 18:
December 1:
December 20:
Required:
Record the above transactions and events in journal entry format.
January 15, 2016
Loss on investment [($100,000 – ($10 – 9)]
Retained earnings (100,000 x $9)
Chapter 18 Shareholders’ Equity
133. A new CEO was hired to revive the floundering Heirloom Watch Corporation. The company
had endured operating losses for several years, but confidence was emerging that better times
were ahead. The board of directors and shareholders approved a quasi-reorganization for the
corporation. The reorganization included devaluing inventory for obsolescence by $210
million and increasing land by $10 million. Immediately before the restatement, at December
31, 2016, Heirloom Watch Corporation’s balance sheet appeared as follows (in condensed
form):
Chapter 18 Shareholders’ Equity
Heirloom Watch Corporation
BALANCE SHEET
At December 31, 2016 ($ in millions)
Cash $ 40
Receivables 80
Inventory 460
Land 80
Buildings and equipment (net) 180
$840
Liabilities $480
Common stock (640 million shares at $1 par) 640
Additional paid-in capital 120
Retained earnings (deficit) (400)
$840
Required:
1. Prepare the journal entries appropriate to record the quasi-reorganization on January 1, 2017.
2. Prepare a balance sheet as it would appear immediately after the restatement.
Answer:
Chapter 18 Shareholders’ Equity
Chapter 18 Shareholders’ Equity
Essay
Instructions:
The following answers point out the key phrases that should appear in students’ answers. They are not
intended to be examples of complete student responses. It might be helpful to provide detailed
instructions to students on how brief or in-depth you want their answers to be.
134. The balance sheet reports the balances of shareholders’ equity accounts. What additional
information is provided by the statement of shareholders’ equity?
135. What is comprehensive income and how does it differ from net income? Where is it reported
in the balance sheet?
136. Identify the three common forms of business organization and the primary difference in the
way we account for them.
137. When stock is issued for consideration other than cash, what is the measurement objective?
138. The costs of legal, promotional, and accounting services necessary to effect the sale of shares
are referred to as share issue costs. How are these costs recorded? Compare this approach to
the way debt issue costs are recorded.
Answer:
139. When a corporation acquires its own shares, those shares assume the same status as authorized
but unissued shares, as if they never had been issued. Explain how this is reflected in the
accounting records if the shares are formally retired.
140. Some preferred stock is cumulative while other preferred stock is noncumulative. What does
this mean?
141. What is the difference between a stock split and a stock split effected in the form of a stock
dividend?
154. The prescribed accounting treatment for stock dividends implicitly assumes that shareholders
are fooled by “small” stock dividends and benefit by the market value of their additional
shares. Explain this statement. Is it logical?
155. How do U.S. GAAP and International Financial Reporting Standards (IFRS) differ with
respect to debt and equity for preferred stock?
156. What is the effect of the declaration and subsequent issuance of a 10% stock
dividend on each of the following?
Retained Paid-in
earnings capital
a. decrease increase
b. no effect increase
c. increase decrease
d. no effect no effect
157. What is the effect of a stock split (not effected in the form of a stock dividend) on
each of the following?
Total
Retained Paid-in
earnings capital
a. no effect increase
b. no effect no effect
Chapter 18 Shareholders’ Equity
c. increase decrease
d. decrease increase
158. What is the usual effect of a stock split (effected in the form of a stock dividend)
on each of the following?
Total
Retained paid-in
earnings capital
a. no effect no effect
b. increase decrease
c. no effect increase
d. increase increase
.
159. Renaldo Cross Company views share buybacks as treasury stock. Renaldo
repurchased shares and then later sold the shares at more than their acquisition
price. What is the effect of the sale of the treasury stock on each of the following?
Total
Retained paid-in
earnings capital
a. no effect increase
b. no effect no effect
c. increase no effect
d. increase increase
Chapter 18 Shareholders’ Equity
160. Dempsey Company retires shares that it buys back. In its first share repurchase
transaction, Dempsey purchased stock for more than the price at which the stock
was originally issued. What is the effect of the purchase of the stock on each of
the following?
Total paid-in Retained
capital earnings
a. no effect no effect
b. decrease no effect
c. decrease decrease
d. no effect decrease
.
161. Gabriel Company views share buybacks as treasury stock. In its first treasury
stock transaction, Gabriel purchased treasury stock for more than the price at
which the stock was originally issued. What is the effect of the purchase of the
treasury stock on each of the following?
Total paid-in Retained
capital earnings
a. decrease decrease
b. decrease no effect
c. no effect decrease
d. no effect no effect
Chapter 18 Shareholders’ Equity
162. The balance sheet of FIFA Cup Company included the following shareholders’
equity section at December 31, 2016:
($ in millions)
Common stock ($1 par value,
authorized 200 million shares,
issued and outstanding 180 million shares) $ 180
Paid-in capital – excess of par 1,080
Retained earnings 560
Total shareholders’ equity $1,820
On January 5, 2017, FIFA purchased and retired 2 million shares for $9 million.
Immediately after retirement of the shares, the balances in the paid-in capital –
excess of par and retained earnings accounts are:
Paid-in capital Retained
– excess of par earnings
a. $1,068 $556
b. $1,064 $560
c. $1,080 $560
d. $1,080 $544
163. The balance sheet of Messi Services included the following shareholders’ equity
section at December 31, 2016:
($ in millions)
Common stock ($1 par value,
authorized 200 million shares,
issued and outstanding 180 million shares) $ 180
Paid-in capital – excess of par 1,080
Retained earnings 560
Total shareholders’ equity $1,820
On January 5, 2017, Holmes purchased 2 million treasury shares for $9 million.
Immediately after the purchase of the shares, the balances in the paid-in capital–
excess of par and retained earnings accounts are:
Paid-in capital Retained
– excess of par earnings
a. $1,068 $556
b. $1,064 $560
Chapter 18 Shareholders’ Equity
c. $1,080 $560
d. $1,080 $544
164. Tim Howard Gloves issued 4.75% bonds with a face amount of $24 million,
together with 4 million shares of its $1 par value common stock, for a combined
cash amount of $44 million. The market value of Howard’s stock cannot be
determined. The bonds would have sold for $18 million if issued separately. For
this transaction, Howard should record paid-in capital—excess of par in the
amount of:
a. $26 million
b. $22 million
c. $18 million
d. $16 million
165. Treasury stock transactions might cause:
a. A decrease in the balance of retained earnings.
b. An increase in the balance of retained earnings.
c. An increase or a decrease in the par amount per share.
d. An increase or a decrease in the amount of net income.
Chapter 18 Shareholders’ Equity
166. Mike Bradley & Company, a family-owned corporation, declared and distributed a
property dividend from its overstocked inventory instead of declaring its usual
cash dividend. The inventory’s book value exceeded its fair value. The excess is:
a. Reported as a direct reduction of shareholders’ equity.
b. Reported as other comprehensive income.
c. Reported as a loss.
d. Not reported.
167. The shareholders’ equity section of Time Company’s comparative balance sheets
for the years ended December 31, 2016 and 2015, reported the following data:
($ in millions)
2016 2015
Common stock, $1 par per share $612 $600
Paid-in capital – excess of par 348 300
Retained earnings 628 600
During 2016, Time declared and paid cash dividends of $90 million. The
company also declared and issued a stock dividend. No other changes occurred in
shares outstanding during 2016. What was Time’s net income for 2016?
a. $ 28 million
b. $118 million
c. $130 million
d. $178 million
168. The corporate charter of Alpaca Co. authorized the issuance of 10 million, $1 par
common shares. During 2016, its first year of operations, Alpaca had the
following transactions:
Chapter 18 Shareholders’ Equity
January 1 sold 8 million shares at $15 per share
June 3 retired 2 million shares at $18 per share
December 28 sold the 2 million shares at $20 per share
What amount should Alpaca report as additional paid-in capital ‒ excess of par, in
its December 31, 2016, balance sheet?
a. $122 million
b. $116 million
c. $112 million
d. $ 74 million
169. The corporate charter of Llama Co. authorized the issuance of 10 million, $1 par
common shares. During 2016, its first year of operations, Llama had the following
transactions:
January 1 sold 8 million shares at $15 per share
June 3 purchased 2 million shares of treasury stock at $18 per share
December 28 sold the 2 million shares of treasury stock at $20 per share
What amount should Llama report as additional paid-in capital in its December 31,
2016, balance sheet?
a. $122 million
b. $116 million
c. $112 million
d. $ 74 million
170. Which of the following terms or phrases is more associated with financial
statements prepared in accordance with U.S. GAAP than those prepared in
accordance with International Financial Reporting Standards?
a. Ordinary shares.
b. Asset revaluation reserve.
c. Share premium.
d. Accumulated other comprehensive income.
171. Beasley Crossing prepares its financial statements in accordance with International
Financial Reporting Standards (IFRS). The company issued shares of the
company’s Class B stock. Beasley Crossing should report the stock in the
company’s statement of financial position
a. among liabilities unless the shares are mandatorily redeemable.
b. among liabilities if the shares are mandatorily redeemable or redeemable at the
option of the shareholder.
c. as equity unless the shares are mandatorily redeemable.
d. as equity unless the shares are redeemable at the option of the issuer.