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Reporting and Analyzing Stockholders’ Equity
11-61
Ex. 235
On January 1 Weiss Corporation had 60,000 shares of no-par common stock issued and
outstanding. The stock has a stated value of $5 per share. During the year, the following
transactions occurred:
Apr. 1 Issued 10,000 additional shares of common stock for $10 per share.
June 15 Declared a cash dividend of $1.00 per share to stockholders of record on June 30.
July 10 Paid the $1.00 cash dividend.
Dec. 1 Issued 4,000 additional shares of common stock for $12 per share.
15 Declared a cash dividend on outstanding shares of $1.00 per share to stockholders
of record on December 31.
Instructions
(a) Prepare the entries, if any, on each of the three dates that involved dividends.
(b) How are dividends and dividends payable reported in the financial statements prepared at
December 31?
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
11-62
Ex. 236
On October 31 the stockholders' equity section of Eaton Company's balance sheet consists of
common stock $600,000 and retained earnings $400,000. Eaton is considering the following two
courses of action: (1) declaring a 10% stock dividend on the 60,000 $10 par value shares
outstanding or (2) affecting a 2-for-1 stock split that will reduce par value to $5 per share. The
current market price is $15 per share.
Instructions
Prepare a tabular summary of the effects of the alternative actions on the company's
stockholders' equity and outstanding shares. Use these column headings: Before Action, After
Stock Dividend, and After Stock Split.
Ex. 237
Giraldi Corporation’s stockholders’ equity section at December 31, 2016, appears below:
Stockholders’ equity
Paid-in capital
Common stock, $10 par, 60,000 outstanding $600,000
Paid-in capital in excess of par 162,500
Total paid-in capital $762,500
Retained earnings 150,000
Total stockholders’ equity $912,500
On June 30, 2017, the board of directors of Giraldi Corporation declared a 15% stock dividend,
payable on July 31, 2017, to stockholders of record on July 15, 2017. The fair value of Giraldi
Corporation’s stock on June 30, 2017, was $16.
On December 1, 2017, the board of directors declared a 2 for 1 stock split effective December 15,
2017. Giraldi Corporation’s stock was selling for $18 on December 1, 2017, before the stock split
was declared. Par value of the stock was adjusted. Net income for 2017 was $230,000 and there
were no cash dividends declared.
Reporting and Analyzing Stockholders’ Equity
FOR INSTRUCTOR USE ONLY
11-63
Ex. 237 (Cont.)
Instructions
(a) Prepare the journal entries on the appropriate dates to record the stock dividend and the
stock split.
(b) Fill in the amount that would appear in the stockholders’ equity section for Giraldi
Corporation at December 31, 2017, for the following items:
1. Common stock $____________
2. Number of shares outstanding _____________
3. Par value per share $____________
4. Paid-in capital in excess of par $____________
5. Retained earnings $____________
6. Total stockholders’ equity $____________
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
11-64
Ex. 238
On January 1, 2017, Mather Corporation had Retained Earnings of $625,000. During the year,
Mather had the following selected transactions:
1. Declared stock dividends of $40,000
2. Declared cash dividends of $50,000
3. A 2 for 1 stock split involving the issue of 200,000 shares of $5 par value common stock for
100,000 shares of $10 par value common stock
4. Suffered a net loss of $80,000
Instructions
Prepare a Retained Earnings Statement for the year.
Ex. 239
The following accounts appear in the ledger of Bradley, Inc., after the books are closed at
December 31, 2017.
Common Stock, $1 par value, 800,000 shares authorized, 550,000 shares
issued $550,000
Common Stock Dividends Distributable 80,000
Paid-in Capital in Excess of Par Value—Common Stock 950,000
Preferred Stock, $100 par value, 8%, 10,000 shares authorized; 4,000 shares
issued 400,000
Retained Earnings 680,000
Treasury Stock (10,000 common shares) 40,000
Paid-in Capital in Excess of Par Value—Preferred Stock 75,000
Instructions
Prepare the stockholders’ equity section at December 31, 2017, assuming that part of retained
earnings is restricted for plant expansion in the amount of $200,000.
Reporting and Analyzing Stockholders’ Equity
FOR INSTRUCTOR USE ONLY
11-65
Ex. 240
The following are selected accounts and balances from the records of Doran Corporation on June
30, 2017.
Common Stock, $10 par value, 75,000 shares authorized, 54,000 shares
issued $540,000
Paid-in Capital in Excess of Par Value—Common Stock 150,000
Preferred Stock, $100 par value, 8%, 3,000 shares authorized and
issued 300,000
Retained Earnings 280,000
Treasury Stock (10,000 common shares) 150,000
Paid-in Capital in Excess of Par Value—Preferred Stock 30,000
Instructions
Prepare in proper form the stockholders’ equity section of the balance sheet.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
11-66
Ex. 241
The following stockholders' equity accounts, arranged alphabetically, are in the ledger of Marvel
Corporation at December 31, 2017.
Common Stock ($5 stated value) $2,800,000
Paid-in Capital in Excess of Par Value—Preferred Stock 45,000
Paid-in Capital in Excess of Stated Value—Common Stock 1,050,000
Preferred Stock (8%, $100 par, noncumulative) 1,000,000
Retained Earnings 1,684,000
Treasury Stock (10,000 shares) 98,000
Instructions
Prepare the stockholders’ equity section of the balance sheet at December 31, 2017.
Reporting and Analyzing Stockholders’ Equity
FOR INSTRUCTOR USE ONLY
11-67
Solution 241 (8 min.)
Ex. 242
Mann Corporation decided to issue common stock and used the $120,000 proceeds to retire all of
its outstanding bonds on January 1, 2017. The following information is available for the company
for 2016 and 2017.
2017
2016
Net income
$ 120,000
$ 100,000
Average stockholders' equity
1,000,000
800,000
Total assets
1,200,000
1,200,000
Current liabilities
100,000
100,000
Total liabilities
360,000
480,000
Instructions
(a) Compute the return on common stockholders' equity for both years.
(b) Explain how it is possible that net income increased, but the return on common
stockholders' equity decreased.
(c) Compute the debt to assets ratio for both years, and comment on the implications of this
change in the company's solvency.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
11-68
Ex. 243
In 2016 Manning Company has $1,000,000 in assets and $1,000,000 in stockholders' equity, with
50,000 shares outstanding the entire year. In the past year it had net income of $75,000. On
January 1, 2017, it issued $300,000 in debt at 5% and immediately repurchased 25,000 shares
for $300,000. Management expected that, had it not issued the debt, it would have again had net
income of $75,000.
Instructions
(a) Determine the Company's net income and earnings per share for 2016 and 2017. (Ignore
taxes in your computations.)
(b) Compute the Company's return on common stockholders' equity for 2016 and 2017.
(c) Compute the company's debt to assets ratio for 2016 and 2017.
Reporting and Analyzing Stockholders’ Equity
FOR INSTRUCTOR USE ONLY
11-69
Ex. 244
On January 1, 2017, Holt Corporation had $1,000,000 of common stock outstanding that was
issued at par and retained earnings of $750,000. The company issued 60,000 shares of common
stock at par on July 1 and earned net income of $400,000 for the year.
Instructions
Journalize the declaration of a 15% stock dividend on December 10, 2017, for the following two
independent assumptions.
(a) Par value is $10 and market value is $16.
(b) Par value is $5 and market value is $8.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
11-70
COMPLETION STATEMENTS
245. A corporation has a separate __________________________ distinct from its owners.
246. The major advantages of the corporate form of organization include (1) limited
_________________ of stockholders, (2) continuous ____________________ and (3)
ease of transferring ___________________.
247. The _______________ is the chief executive officer with direct responsibility for managing
the business.
248. Most publicly held corporations are required to make extensive disclosure of their financial
affairs to the _______________.
249. Stockholders generally have the right to share in corporate _______________ and in
______________ upon liquidation.
250. Par value of stock represents the __________________ per share that must be retained
in the business for the protection of corporate ___________________.
251. A corporation’s own stock that has been reacquired by the corporation and held for future
use is called __________________ and is deducted from total _____________________
on the balance sheet.
252. The _______________ feature of preferred stock gives the preferred stockholders the
right to receive current-year dividends and unpaid prior-year dividends before common
stockholders receive any dividends.
253. Three important dates associated with dividends are the: (1)___________________,
(2)__________________, and (3)__________________.
254. The entry to record the declaration of a stock dividend increases _________________,
and decreases ________________.
Reporting and Analyzing Stockholders’ Equity
FOR INSTRUCTOR USE ONLY
11-71
255. Both a stock split and a stock dividend will _________________ the number of shares
outstanding and have _________________ on total stockholders’ equity.
256. A debit balance in retained earnings is identified as a ________________.
257. The paid-in capital section of the balance sheet consists of two classifications:
______________________ and ______________________.
Answers to Completion Statements
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
11-72
MATCHING
258. Match the items below by entering the appropriate code letter in the space provided.
A. Controller F. Preemptive right
B. Deficit G. Par value
C. Payout ratio H. Legal capital
D. Stock dividend I. Treasury stock
E. Declaration date J. Cumulative feature
____ 1. The date the board of directors formally declares a dividend.
____ 2. The amount that must be retained in the business for the protection of creditors.
____ 3. Preferred stockholders have a right to receive current and unpaid prior-year dividends
before common stockholders receive any dividends.
____ 4. The chief accounting officer.
____ 5. Measures the percentage of earnings distributed in the form of dividends to common
stockholders.
____ 6. The amount assigned to each share of stock in the corporate charter.
____ 7. A debit balance in retained earnings.
____ 8. Enables stockholders to maintain their same percentage ownership when new shares
are issued.
____ 9. Corporation’s own stock that has been reacquired by the corporation but not retired.
____ 10. A pro rata distribution of the corporation’s own stock to stockholders.
Answers to Matching
SHORT-ANSWER ESSAY QUESTIONS
S-A E 259
Define par value, and discuss its significance in accounting.
Reporting and Analyzing Stockholders’ Equity
FOR INSTRUCTOR USE ONLY
11-73
S-A E 260
Companies frequently issue both preferred stock and common stock. What are the major
differences in the rights of stockholders between these two classes of stock?
S-A E 261
For what reasons might a company like IBM repurchase some of its stock (treasury stock)?
S-A E 262
(a) Preferred stock may be cumulative. Discuss this feature.
(b) How are dividends in arrears presented in the financial statements?
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
11-74
S-A E 263
A large stock dividend and stock split can frequently have the same effect on the market price of
a corporation’s stock. Explain how stock dividends and stock splits affect the market price of a
corporation’s stock.
S-A E 264
Why must a corporation have sufficient retained earnings before it may declare cash dividends?
S-A E 265
Linda Merton asks, "Since stock dividends don't change anything, why declare them?" What is
your answer to Linda?
cash dividends.
S-A E 266
What is the formula for the payout ratio? What does it indicate?
Reporting and Analyzing Stockholders’ Equity
FOR INSTRUCTOR USE ONLY
11-75
Solution 266
S-A E 267 (Ethics)
Mark Remington, the president and CEO of Earth Systems, Inc., a waste management firm, was
recently hospitalized, suffering from exhaustion and a heart ailment. Immediately prior to his
hospitalization, Earth Systems had experienced a sharp decline in its stock price, and trading
activity became almost nonexistent. The primary reason for this was concern expressed in the
media over a new untested waste management system implemented by the company.
Mr. Remington had been unwilling to submit the procedure to testing before implementation, but
he reluctantly agreed to limited tests after the system was operational. No problems have been
identified by the tests to date.
The other members of management called a meeting to determine what they should do. Terry
Jackson, the marketing manager, suggested that the company purchase a large number of
shares of treasury stock. In that way, investors might notice that activity had picked up, and might
decide to buy some more shares. This plan would use up most of the company’s available cash,
so that there will be no money available for a cash dividend. Earth Systems has paid cash
dividends every quarter for over ten years.
Required:
1. Is Mr. Jackson’s suggestion ethical? Explain.
2. Is it ethical to discontinue the cash dividend? Explain.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
11-76
S-A E 268 (Communication)
As part of a Careers in Accounting program sponsored by accounting organizations and
supported by your company, you will be taking a group of high-school students through the
accounting department in your company. You will also provide them with various materials to
explain the work of an accountant. One of the materials you will provide is the Stockholders’
Equity section of a recent balance sheet.
Required:
Prepare a short response explaining each major section: Common Stock, Additional Paid-in
Capital, and Retained Earnings. You should try to be brief but clear.
Reporting and Analyzing Stockholders’ Equity
11-77
IFRS QUESTIONS
1. Jahnke Corporation issued 8,000 shares of €2 par value ordinary shares for €11 per
share. The journal entry to record the sale will include
a. a debit to Cash for €16,000.
b. a credit to Share Premium–Ordinary for €72,000.
c. a credit to Share Capital–Ordinary for €88,000.
d. a debit to Retained Earnings for €72,000.
2. La Vida Corporation issued 24,000 shares of no-par value ordinary shares for €29.50 per
share. Which of the following statements is true?
a. Share Premium–Ordinary account will increase by €276,000.
b. The Cash account will increase by €24,000.
c. Retained Earnings account will increase by €684,000.
d. Share Capital–Ordinary account will increase by €708,000.
3. Freidrichs Company has issued and outstanding 11,000 shares of cumulative, 6%, €50
par value preference shares which it sold for €54 per share at the beginning of 2015. The
company has never paid preference dividends. As of December 31, 2017, dividends in
arrears are
a. €66,000.
b. €99,000.
c. €121,500.
d. €106,920.
4. Looper, Inc. has 30,000 shares of 6%, ₤100 par value, noncumulative preference shares
and 50,000 ordinary shares with a ₤1 par value outstanding at December 31, 2017. There
were no dividends declared in 2016. The board of directors declares and pays a ₤250,000
dividend in 2017. What is the amount of dividends received by the common shareholders
in 2017?
a. ₤0
b. ₤180,000
c. ₤250,000
d. ₤70,000
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
11-78
5. Manner, Inc. has 10,000 shares of 5%, ₤100 par value, noncumulative preference shares
and 20,000 ordinary shares with a ₤1 par value outstanding at December 31, 2017. There
were no dividends declared in 2016. The board of directors declares and pays a ₤90,000
dividend in 2017. What is the amount of dividends received by the ordinary shareholders
in 2017?
a. ₤0
b. ₤50,000
c. ₤90,000
d. ₤40,000
6. Anders, Inc has 10,000 shares of 5%, €100 par value, cumulative preference shares and
20,000 ordinary shares with a $1 par value outstanding at December 31, 2017. There
were no dividends declared in 2015. The board of directors declares and pays a €90,000
dividend in 2016 and in 2017. What is the amount of dividends received by the ordinary
shareholders in 2017?
a. €30,000
b. €50,000
c. €90,000
d. €0
7. On January 1, Swanson Corporation had 80,000 ordinary shares with a €10 par value
outstanding. On March 17, the company declared a 15% share dividend to shareholders
of record on March 20. Market value of the shares was €13 on March 17. The entry to
record the transaction of March 17 would include a
a. credit to Cash Dividends for €36,000.
b. credit to Cash for €156,000.
c. credit to Ordinary Share Dividends Distributable for €120,000.
d. debit to Ordinary Share Dividends Distributable for €120,000.
8. On January 1, Swanson Corporation had 80,000 ordinary shares with a €10 par value
outstanding. On March 17, the company declared a 15% share dividend to shareholders
of record on March 20. Market value of the shares was €13 on March 17. The shares
were distributed on March 30. The entry to record the transaction of March 30 would
include a
a. credit to Cash for €120,000.
b. debit to Ordinary Share Dividends Distributable for €120,000.
c. credit to Share Premium–Ordinary for €36,000.
d. debit to Cash Dividends for €36,000.
Reporting and Analyzing Stockholders’ Equity
11-79
9. Oxford Inc. was authorized to issue 100,000 £10 par value ordinary shares. As of
December 31, 2017, the company had issued 44,000 shares at an average price of £22
per share. During 2017, the company felt that the shares were undervalued so it
purchased 10,000 treasury shares at £18 per share. When the share price rebounded
later in the year, the company sold 4,000 of the treasury shares for £25 per share.
Retained earnings was £1,658,000 at December 31, 2017.
Total equity at December 31, 2017 is
a. £2,446,000.
b. £2,518,000.
c. £2,546,000.
d. £2,762,000.
