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Chapter 11: Stockholders' Equity
199. Lakeview Company reported the following amounts on its balance sheet at December 1, 2016:
Preferred stock, $2 par, 3,000 shares issued and outstanding
$ 6,000
Common stock, $10 par, 8%, 400 shares issued and outstanding
4,000
Additional paid-in capital—Common
22,000
Total contributed capital
$32,000
Retained earnings
48,000
Total stockholders' equity
$80,000
The following transactions occurred during December:
1.
Declared a 20% stock dividend on comnon stock on December 3, when the
stock was selling at $12 per share. The stock dividend will be distributed on
December 20, 2016.
2.
Distributed the common stock dividend on December 20.
3.
Approved a 2-for-1 stock split of the common stock on December 28, when the
stock was selling for $20 per share.
A)
Show the effect of the transactions on the accounting equation.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net
Income
B)
Answer the following questions:
1.
How many common shares are outstanding at December 31, 2016?
2.
What effect will the stock split have on the stock's market value?
ANSWER:
A)
1.
Balance Sheet
Income Statement
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
2.
Balance Sheet
Income Statement
Assets
=
Liabilities
+
Stockholders’
Equity
Revenues
–
Expenses
=
Net
Income
Common
Stock
Dividend
Distributable
(800)
Common
Stock 800
3. No effect.
B.
1. 400 × 2 = 800 shares
2. Stock splits generally cause market value to reduce in the same proportion as the split.
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-06 - LO: 11-06
FACC.PONO.13.11-07 - LO: 11-07
KEYWORDS:
Bloom's: Analyzing
200. Lemon Company reported the following amounts on its balance sheet at January 1, 2016:
Preferred stock, $10 par, 5%, 1,000 shares issued and outstanding
$10,000
Common stock, $1 par, 8,000 shares issued and outstanding
8,000
Additional paid-in capital—common
52,000
Total contributed capital
$70,000
Retained earnings
22,000
Total stockholders' equity
$92,000
The following transactions occurred during 2016:
1.
Declared a 20% stock dividend on preferred stock on May 21, when the stock
was selling at $15 per share. The stock dividend will be distributed on June 30,
2016.
2.
Distributed the preferred stock dividend on June 30.
Show the effects of the transactions on the accounting equation and prepare the stockholders' equity section of Lemon's
balance sheet at December 31, 2016.
ANSWER:
1.
Balance Sheet
Income Statement
202. Assume that Wei Company’s Stockholders’ Equity category of the balance sheet appears as follows as of January 1,
2016:
Common stock, $15 par, 7,000 shares issued and outstanding
$105,000
Additional paid-in capital—Common
70,000
Retained earnings
300,000
Total stockholders’ equity
$475,000
Assume that Wei’s common stock is selling at $35 per share on that date.
Required:
1. Assume that on January 2, 2016, Wei declares a 10% stock dividend to common stockholders to be distributed on April
1, 2016. Prepare the journal entry to be recorded by Wei.
2. Instead of (1) above, assume that on January 2, 2016, Wei declares a 100% stock dividend to be distributed on April 1,
2016. Prepare the journal entry to be recorded by Wei.
3. What entry would be made when the stock in (2) above, is actually distributed?
ANSWER:
1.
Jan. 2
Retained Earnings
24,500
Additional Paid-in Capital—
Common
14,000
Common Stock Dividend
203. Assume that Milo Company’s Stockholders’ Equity category of the balance sheet appears as follows as of January 1,
2016:
Common stock, $15 par, 7,000 shares issued and outstanding
$105,000
Additional paid-in capital—Common
70,000
Retained earnings
30,000
Total stockholders’ equity
$205,000
Assume that Milo’s common stock is selling at $35 per share on that date.
Required:
What is the effect on the Stockholders’ Equity section of Milo’s balance sheet if the company issues a 3-for-1 stock split
on January 2, 2016?
ANSWER:
Par value is reduced to $5 per share. Total stockholders’ equity is not affected. The number
of shares issued and outstanding increases to 21,000.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-07 - LO: 11-07
KEYWORDS:
Bloom's: Analyzing
204. Park Avenue Toys reported the following information at December 31, 2016:
Common stock, $3 par, 10,000 shares authorized
$ 30,000
Additional paid-in capital—common
80,000
Retained earnings
40,000
Total contributed capital and retained earnings
$150,000
Less: Treasury stock (5,000 common shares at cost)
(10,000)
Total stockholders' equity
$140,000
Answer the following questions for Park Avenue Toys.
1.
Would the book value per share increase, decrease, or remain the same, if the
company declared a 3-for-1 stock split on December 31, 2016? Explain.
2.
If cash dividends were declared on January 10, 2017, at $1 per share, by how much
would retained earnings decrease as a result? (Assume that the 3-for-1 stock split
occurred.)
ANSWER:
1.
The book value would be cut in third because the number of shares would triple.
2.
30,000 shares × $1 = $30,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-07 - LO: 11-07
FACC.PONO.13.11-09 - LO: 11-09
KEYWORDS:
Bloom's: Analyzing
205. Marvin’s Shrimp Restaurant incorporated as a new business on January 1, 2016. The company is authorized to issue
40,000 shares of $1 par value common stock, and 10,000 shares of 4%, $5 par value, cumulative, participating preferred
stock. On January 1, 2016, the company issued 15,000 shares of common stock for $8 per share. Net income for the year
ended December 31, 2016, was $115,000. Cash dividends in the amount of $30,000 were declared, but only $25,000 were
paid as of year-end. Prepare the stockholders' equity section of the balance sheet for Marvin’s Shrimp Restaurant at
December 31, 2016.
ANSWER:
Marvin’s Shrimp Restaurant
Stockholder’s Equity Section of the Balance Sheet
at December 31, 2016
Preferred stock, 4%, $5 par value, cumulative, participating,
10,000 shares authorized
$ 0
Common stock, $1 par value, 40,000 shares authorized,
15,000 shares issued and outstanding
15,000
Additional paid-in capital—common stock
105,000
Retained earnings
85,000
Total stockholders’ equity
$205,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-08 - LO: 11-08
KEYWORDS:
Bloom's: Analyzing
206. Use the comparative financial statements of Penny Company for the year ended December 31, 2016 to answer the
following question(s).
Penny Company
Statement of Stockholder’s Equity
for the Year Ended December 31, 2016
in thousands, except share data
Common Stock
Retained
Treasury Stock
Shares
Amount
Earnings
Shares
Amount
Total
Balance, Jan. 1, 2016
57,936,988
$ 89,861
$20,037
$109,898
Exercise of stock options
including tax benefit of
$4,754
945,780
7,911
7,911
Sale of common stock
12,050,000
163,873
163,873
Stock subscription notes
repayments
3,671
3,671
Conversion of convertible
debentures, net
6,798
100
100
Sale of common stock under
employee stock purchase
plan
17,424
263
263
Net earnings
26,102
26,102
Unrealized holding gains,
net
141
141
Translation adjustment
272
272
Balance Dec. 31, 2016
70,956,990
$265,679
$46,552
0
$ 0
$312,231
See notes to consolidated financial statements.
Required:
(1) What is the primary cause of the change in Penny’s stockholders' equity from January 1, 2016, to December 31, 2016?
(2) Did Penny declare dividends during 2016? How do you know? Which items would be included as part of
comprehensive income, if any?
ANSWER:
(1) Stockholders' equity increased from $109,898,000 to $312,231,000 from January 1, 2016,
to December 31, 2016. The primary cause of increase is due to issuance of common stock.
Net income accounted for a minor portion.
(2) The company did not declare dividends during the year. If Penny had declared dividends,
they would be reported as a deduction of retained earnings in the retained earnings column.
The items that would be included as a component of comprehensive income are unrealized
holding gains and the translation adjustment.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-08 - LO: 11-08
KEYWORDS:
Bloom's: Analyzing
207. On March 31, 2016, Outdoor Closets, Inc. had common stock of $230,000, retained earnings of $65,000, and
additional paid-in capital—common of $540,000. During the fiscal year ended March 31, 2017, 500 shares of stock were
sold for $60,000, of which $40,000 represented additional paid-in capital. The company reported net income of $140,000
and declared and paid dividends of $80,000. In good form, prepare the financial statement that shows all of the changes in
the stockholders' equity accounts.
ANSWER:
Outdoor Closets, Inc.
Statement of Stockholders' Equity
For the Year Ended March 31, 2017
Common
Stock
Additional
Paid-in Capital
—Common
Retained
Earnings
Total
Beginning balance
$230,000
$540,000
$ 65,000
$835,000
Sale of stock
20,000
40,000
60,000
Net income
140,000
140,000
Dividends
(80,000)
(80,000)
Ending balance
$250,000
$580,000
$125,000
$955,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-08 - LO: 11-08
KEYWORDS:
Bloom's: Analyzing
208. On December 31, 2016, Aire Dyne, Inc. reported common stock of $120,000, retained earnings of $60,000, and total
stockholders' equity equal to $500,000. No unusual accounts appeared in the stockholders' equity section of its balance
sheet. During the fiscal year ended December 31, 2017, 10,000 shares of stock were sold for $40,000, of which $10,000
represented additional paid-in capital. The company reported net income of $85,000 and declared and paid dividends of
$50,000.
A)
What is the par value of the stock?
B)
What is the amount of the retained earnings at December 31, 2017?
C)
Prepare a statement of retained earnings for Aire Dyne, Inc. for the year ended
December 31, 2017, in good form.
ANSWER:
A)
$40,000 – $10,000 = $30,000
$30,000/10,000 shares = $3.00 per share
B)
X = $60,000 + $85,000 – $50,000 = $60,000
X = $95,000
C)
Aire Dyne, Inc
Statement of Retained Earnings
For the Year Ended December 31, 2017
Beginning balance, January 1, 2017
$60,000
Add: Net income
85,000
Less: Dividends
(50,000)
Ending balance, December 31, 2017
$95,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-08 - LO: 11-08
KEYWORDS:
Bloom's: Analyzing
209. The following stockholders' equity section of Petal Pusher Company's balance sheet appeared at December 31, 2016.
Common stock, $1 par value, 200,000 shares issued
$ 200,000
Additional paid-in capital—common
800,000
Retained earnings
450,000
Total stockholders’ equity
$1,450,000
Answer the following:
A)
Has the company been profitable since its inception? How do you know?
B)
What does the balance in retained earnings represent?
ANSWER:
A)
Yes, the company has been profitable because the retained earnings account has
a positive balance.
210. Several transactions occurred for Shadow Dreams Corporation during 2016. Indicate the effect each item has directly
on retained earnings by writing the amount in the space provided. Place a + (plus sign) in front of the amount if the item
increases retained earnings, or ( ) parentheses around the amount if the item decreases retained earnings. Place an X in the
blank for items that have no direct effect on retained earnings. (Items that affect the income statement do not directly
affect retained earnings.)
A)
____
A tornado completely destroyed the company's warehouse on March 1. The original
cost was $300,000, and the book value was $160,000 on that date. The company had
no insurance on the warehouse.
B)
____
Shadow Dreams earned net income in the amount of $450,000 for the year ending
December 31, 2016.
C)
____
Shadow Dreams declared and paid $320,000 of cash dividends to common and
preferred stockholders during 2016.
ANSWER:
A) X
B) +$450,000
C) ($320,000)
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-08 - LO: 11-08
KEYWORDS:
Bloom's: Analyzing
211. Assume the following independent situations:
1. Company A has total stockholders’ equity at year-end of $600,000 and has 10,000 shares of stock.
2. Company B has total stockholders’ equity at year-end of $600,000 and has 10,000 shares of stock. The company also
has 60,000 shares of preferred stock, which has a $1 par value and a liquidation value of $3 per share.
Required:
Calculate the book value per share for Company A and Company B.
ANSWER:
1. Book value per share is $60, or $600,000/10,000.
2. Book value per share is $42, or ($600,000 – $180,000)/10,000.
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-09 - LO: 11-09
KEYWORDS:
Bloom's: Analyzing
212. Heather Valley Company has the following amounts in the Stockholders’ Equity category of the balance sheet at
December 31, 2016:
Preferred Stock, $100 par, 8%, noncumulative (liquidation value of
$120 per share)
$100,000
Paid-In Capital—Preferred
60,000
Common Stock, $5 par
450,000
Paid-In Capital—Common
50,000
Retained Earnings
225,000
Required:
Determine the book value per share of the Heather Valley Company stock.
ANSWER:
Book value per share
Total stockholders’ equity
$885,000*
Less: Preferred stock liquidation value
(120,000)
Rights of common stockholder
$765,000
Divided by number of shares of common
stock
90,000 shares
Book value per share ($765,000/90,000) =
$8.50
*$100,000 + $60,000 + $450,000 + $50,000 + $225,000 = $885,000
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-09 - LO: 11-09
KEYWORDS:
Bloom's: Analyzing
213. Information taken from the accounting records of Airways, Inc., for the year ended December 31, 2016, appears in
the table below. In the space provided, indicate in which section of the statement of cash flows (investing or financing)
each item would be reported, and whether the item is a cash inflow or outflow. If an item is neither an investing activity or
financing activity, place an X in the box.
Transaction
Cash Flow
Section
Inflow or
Outflow
a.
Proceeds from sale of investment, $65,000
b.
Proceeds from borrowing from the bank, $32,000
c.
Dividends declared, $68,000
d.
Repayments of long-term debt, $21,000
e.
Preferred shares issued, $140,000
f.
Preferred shares converted into common stock; the market
value at time of exchange, $35,000
g.
Dividends paid to shareholders, $43,000
h.
Treasury stock purchases, $15,000
ANSWER:
Transaction
Cash Flow
Section
Inflow or
Outflow
a.
Proceeds from sale of investment, $65,000
Investing
Inflow
b.
Proceeds from borrowing from the bank, $32,000
Financing
Inflow
c.
Dividends declared, $68,000
X
X
d.
Repayments of long-term debt, $21,000
Financing
Outflow
e.
Preferred shares issued, $140,000
Financing
Inflow
f.
Preferred shares converted into common stock; the
market value at time of exchange, $35,000
X
X
g.
Dividends paid to shareholders, $43,000
Financing
Outflow
h.
Treasury stock purchases, $15,000
Financing
Outflow
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-10 - LO: 11-10
KEYWORDS:
Bloom's: Analyzing
214. [APPENDIX] Tony Venato opened Tony’s Best Brand Shop as a sole proprietorship by investing $10,000 on
January 1, 2016. During the first year, the business earned revenues of $520,000 and incurred expenses of $360,000. Tony
withdrew $50,000 for personal use. Prepare Tony’s statement of owner’s equity for the year ended December 31, 2016.
ANSWER:
Tony’s Best Brand Shop
Statement of Owner’s Equity
Year Ended December 31, 2016
Beginning balance, January 1, 2016
$ -0-
Plus: Investments
10,000
Net Income
160,000
Less: Withdrawals
(50,000)
Ending balance, December 31, 2016
$120,000
DIFFICULTY:
Easy
LEARNING OBJECTIVES:
FACC.PONO.13.11-11 - LO: 11-11
KEYWORDS:
Bloom's: Analyzing
215. [APPENDIX] Chad Jones established Jones’ Cleaning Services, a sole proprietorship, by investing $1,000 on
January 1, 2016. During the first year of operations, the business generated net income of $42,000. The owner withdrew
cash for personal use. The ending balance of the capital account was $20,000. Prepare Jones’ statement of owner’s equity
for the year ended December 31, 2016.
ANSWER:
Jones’ Cleaning Services
Statement of Owner’s Equity
Year Ended December 31, 2016
Beginning balance, January 1, 2016
$ -0-
Plus:
Investments
1,000
Net income
42,000
Less:
Withdrawals
(23,000)
Ending balance, December 31, 2016
$20,000
DIFFICULTY:
Moderate
LEARNING OBJECTIVES:
FACC.PONO.13.11-11 - LO: 11-11
KEYWORDS:
Bloom's: Analyzing
216. [APPENDIX] Derek and Kent are partners. At the beginning of the current year, Derek’s capital account is $30,000,
while Kent’s is $50,000. The partners decided to allocate income with 10% interest on capital balances at the beginning of
the period and divide the balance equally. Net income for the current year, 2016, is $80,000. Each partner withdrew
$15,000 for personal use during the year. Determine the amount of income that each partner will be allocated.
ANSWER:
Interest on Capital Balances
Derek’s—$30,000 (Balance) × 10% = $3,000
Kent’s—$50,000 (Balance) × 10% = $5,000
$80,000 (Net income) – $8,000 (Interest on Capital Balances) = $72,000 (Balance available)
$72,000 / 2 = $36,000 Distribution to each partner
Allocation of Income
Derek—$3,000 + $36,000 = $39,000
