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11-1
Chapter 11
Proprietorships, Partnerships, and Corporations
General Comments for Chapter 11
Introductory accounting courses often consist of students who are trying to determine a major
or are majoring in something other than accounting. This chapter provides information that
is especially relevant to all students, regardless of their chosen majors. Chapter 11 discusses
the different forms of business organizations and explains accounting for equity transactions
for each form of organization. It describes the three primary forms of business organization
(sole proprietorship, partnership, and corporation) along with advantages and disadvantages
of each. The chapter illustrates aspects of financial statement reporting unique to each type
of business organization. Finally, it covers common corporate equity topics such as par and
stated value, issuing stock, common versus preferred stock, stock splits and dividends, and
treasury stock.
Detailed Outline of a Lesson Plan for Chapter 11
I. Use Demonstration Problem 11-1 to illustrate reporting differences among pro-
prietorships, partnerships, and corporations.
A. Scenario 1. The statements for a proprietorship include two features you should
emphasize. First, the capital account combines the owner’s investments with re-
tained earnings. Second, proprietorship distributions are called withdrawals. As
you discuss this scenario, include a discussion of advantages and disadvantages of
a proprietorship.
B. Scenario 2. Point out that financial statements for a partnership are similar to
those for a proprietorship. Both forms combine capital acquisitions and retained
earnings into single accounts referred to as owners’ capital accounts. The only
reporting difference is that partnership statements present multiple capital ac-
counts (one for each partner). The amounts in the capital accounts represent the
proportionate share of each partner’s claim on assets. As you discuss this scenar-
io, include a discussion of the advantages and disadvantages of a partnership.
C. Scenario 3. The financial statements for corporations reflect several differences
from those for proprietorships and partnerships. Distributions are called divi-
dends. Capital acquisitions and retained earnings are reported in separate ac-
counts. The owners’ interest is called common stock. You can easily explain the
idea of representing ownership interests with common stock certificates by refer-
ring to them as a type of receipt that recognizes the owners’ contribution of assets
to the business. Again, include a discussion of the advantages and disadvantages
of a corporation.
11-2
After creating the financial statements for the three scenarios, point out that the end
results (net income, assets, liabilities, total equity, etc.) are the same but the differ-
ences in organization form were reflected in the equity sections as well as the state-
ment of changes in stockholder equity or capital statement.
II. Use Demonstration Problem 11-2 to illustrate accounting for additional paid-in
capital in excess of par value. You should discuss par value, stated value, and no-
par stock before working the problem. This is the first time many students have been
introduced to these terms, so it’s important that they understand the terms before
working the problem. Use the problem to illustrate how contributed capital is divided
into par value and additional paid-in capital in the accounting records. The problem
also illustrates cash dividends, stock dividends, and stock splits. Discuss these issues
before you work the problem.
The problem illustrates seven events. Students should record each event in a horizon-
tal financial statements model. Proceed through the problem step by step. Distribute
a copy of the workpaper to your students and have them work along with you. Ex-
plain how each event affects the statements differently.
III. Use Demonstration Problem 11-3 to introduce preferred stock. First define the
difference between common and preferred stock and then define the terms cumulative
and noncumulative with respect to preferred stock dividends. The Demonstration
Problem illustrates dividend allocation between common and preferred shareholders.
IV. Use Demonstration Problem 11-4 to illustrate the effects of treasury stock trans-
actions on financial statements. This problem requires recording six events in a
horizontal financial statements model. We again suggest you distribute a copy of the
workpaper to students and have them work along with you as you demonstrate how
each event affects the financial statements.
V. Time considerations and homework assignments. Allow approximately two hours
of class time to cover the four demonstration problems. Use Problem 11-19A or B to
reinforce how financial statement presentation reflects business structure. Problem
11-23A or B requires students to record a variety of stock and dividend transactions.
Use Exercise 11-13A or B to reinforce computing cumulative preferred dividends.
Treasury stock is covered in Problem 11-21A or B.
11-3
Demonstration Problem 11-1 - Forms of Business Organization
Assume a business was started on January 1, 2016 when it acquired $60,000 cash from its
owner(s). During 2016 the company generated $29,000 of cash service revenue, incurred
$19,000 of cash expenses, and distributed $4,000 cash to the owner(s).
Required
Prepare an income statement, a statement of changes in equity, and a balance sheet for each
of the three alternative scenarios described below. The statement of changes in equity is
called a capital statement for proprietorships and partnerships. It is called a statement of
changes in stockholders’ equity for corporations.
1. Sally Russell formed the business as a sole proprietorship.
2. Carl Link and Bill Morgan established the business as a partnership. Link contributed
60% of the capital and Morgan contributed the remaining 40%. The partners agreed to
share profits and withdrawals in proportion to their capital investments.
3. The business was established as a corporation. It issued 1,000 shares of no-par common
stock for $60 per share.
Demonstration Problem 11- 2 - Equity Transactions
Reynolds, Inc. was incorporated on January 1, 2016. The following events apply to the com-
pany’s first year of operation.
1. Issued 2,000 shares of $10 par value common stock at a market price of $25 per share.
2. Earned $35,000 cash revenue.
3. Incurred $25,000 of cash expenses.
4. Declared a $3,000 cash dividend.
5. Paid the cash dividend declared in Event No. 4.
6. Distributed a 5% stock dividend when the market price of the stock was $28 per share.
7. Distributed a two-for-one stock split.
Required
Record the events using the horizontal financial statements model.
11-4
Demonstration Problem 11- 3 - Preferred and Common Dividends
Ferris Corporation had the following stock issued and outstanding on January 1, 2015.
1. 50,000 shares of $5 stated value common stock
2. 20,000 shares of $20 par value 10 percent preferred stock
Ferris paid the following dividends during the years indicated.
Year
Total Dividends Paid
2015
$ 10,000
2016
20,000
2017
60,000
2018
120,000
2019
100,000
Required
Determine the amount of the dividends distributed to common and preferred shareholders
assuming the following alternatives:
a. The preferred stock is cumulative.
b. The preferred stock is noncumulative.
Demonstration Problem 11- 4 - Treasury Stock Transactions
Griffin, Inc. was started on January 1, 2016. The following events apply to the company’s
first year of operation.
1. Issued 3,000 shares of no-par common stock at a market price of $12 per share.
2. Earned $12,000 cash revenue.
3. Incurred $8,000 of cash expenses.
4. Purchased 500 shares of Griffin stock (treasury stock) at a price of $10 per share.
5. Sold 200 (reissued) shares of the treasury stock at a price of $13 per share.
6. Sold (reissued) 200 shares of the treasury stock at a price of $9 per share.
Required
Record the events using the horizontal financial statements model.
11-5
Demonstration Problem 11-1 Solution, Scenario 1
Financial Statements for Russell Sole Proprietorship
For 2016
Income Statement
Capital Statement
Balance Sheet, 12/31
Service revenue
$29,000
Beginning capital balance
$ 0
Assets
Expenses
19,000
Plus: Owner investment
60,000
Cash
$ 66,000
Net income
$10,000
Plus: Net income
10,000
Equity
Less: Withdrawal
(4,000)
Russell, capital
$ 66,000
Ending capital balance
$ 66,000
Demonstration Problem 11-1 Solution, Scenario 2
Financial Statements for Link/Morgan Partnership
For 2016
Income Statement
Capital Statement
Balance Sheet, 12/31
Service revenue
$29,000
Beginning capital balance
$ 0
Assets
Expenses
19,000
Plus: Owner investments
60,000
Cash
$66,000
Net income
$10,000
Plus: Net income
10,000
Partners’ capital
Less: Withdrawals
(4,000)
Link, capital
$39,600
Ending capital balance
$66,000
Morgan, capital
26,400
Total capital
$66,000
Demonstration Problem 11-1 Solution, Scenario 3
Financial Statements for Corporation
For 2016
Income Statement
Statement of Changes in Stk. Equity
Balance Sheet, 12/31
Service revenue
$29,000
Beginning common stock
$ 0
Assets
Expenses
19,000
Plus: common stock issued
60,000
Cash
$66,000
Net income
$10,000
Ending common stock
60,000
Stockholders’ equity
Beginning retained earnings
0
Common stock
$60,000
Plus: Net income
10,000
Retained earnings
6,000
Less: Dividends
(4,000)
Total stk. equity
$66,000
Ending retained earnings
6,000
Total stockholders’ equity
$66,000
11-6
Demonstration Problem 11- 2 Solution
Assets
=
Liabilities
+
Stockholders’ Equity
Event
Cash
=
Dividends
Payable
+
Com. Stk.
Par
Value
+
Additional
Paid-in
Capital
+
Retained
Earnings
Revenue
‒
Expense
=
Net Income
Cash Flow
Beg. bal.
0
=
0
+
0
+
0
+
0
0
–
0
=
0
0
1
50,000
=
0
+
20,000
+
30,000
+
0
0
–
0
=
0
50,000 FA
2
35,000
=
0
+
0
+
0
+
35,000
35,000
–
0
=
35,000
35,000 OA
3
(25,000)
=
0
+
0
+
0
+
(25,000)
0
–
25,000
=
(25,000)
(25,000) OA
4
0
=
3,000
+
0
+
0
+
(3,000)
0
–
0
=
0
0
5
(3,000)
=
(3,000)
+
0
+
0
+
0
0
–
0
=
0
(3,000) FA
6
0
=
0
+
1,000
+
1,800
+
(2,800)
0
–
0
=
0
0
7
0
=
0
+
0
+
0
+
0
0
–
0
=
0
0
Totals
57,000
=
0
+
21,000
+
31,800
+
4,200
35,000
–
25,000
=
10,000
57,000 NC
Demonstration Problem 11- 3 Solution, part a. Cumulative Preferred
Year
Total Dividends
To Common
To Preferred
Dividends in Arrears
2015
$ 10,000
0
10,000
30,000
2016
$ 20,000
0
20,000
50,000
2017
$ 60,000
0
60,000
30,000
2018
$120,000
50,000
70,000
0
2019
$100,000
60,000
40,000
0
Demonstration Problem 11- 3 Solution, part b. Noncumulative Preferred
Year
Total Dividends
To Common
To Preferred
Dividends in Arrears
2015
$ 10,000
0
10,000
0
2016
$ 20,000
0
20,000
0
2017
$ 60,000
20,000
40,000
0
2018
$120,000
80,000
40,000
0
2019
$100,000
60,000
40,000
0
11-7
Demonstration Problem 11- 4 Solution
Assets
=
Stockholders’ Equity
Event
Cash
=
No-par
Com.
Stock
+
Retained
Earnings
−
Treasury
Stock
+
Add. Paid-
in Capital
T.S.T.*
Revenue
−
Expense
=
Net
Income
Cash
Flow
Beg.
bal.
0
=
0
+
0
−
0
+
0
0
–
0
=
0
0
1
36,000
=
36,000
+
0
−
0
+
0
0
–
0
=
0
36,000 FA
2
12,000
=
0
+
12,000
−
0
+
0
12,000
–
0
=
12,000
12,000 OA
3
(8,000)
=
0
+
(8,000)
−
0
+
0
0
–
8,000
=
(8,000)
(8,000) OA
4
(5,000)
=
0
+
0
−
5,000
+
0
0
–
0
=
0
(5,000) FA
5
2,600
=
0
+
0
−
(2,000)
+
600
0
–
0
=
0
2,600 FA
6
1,800
=
0
+
0
−
(2,000)
+
(200)
0
–
0
=
0
1,800 FA
Totals
39,400
=
36,000
+
4,000
−
1,000
+
400
12,000
–
8,000
=
4,000
39,400 NC
*Additional paid-in capital from treasury stock transactions
11-8
Demonstration Problem 11-1 Workpaper, Scenario 1
Financial Statements for Russell Sole Proprietorship
For 2016
Income Statement
Capital Statement
Balance Sheet, 12/31
Service revenue
$
Beginning capital balance
$ 0
Assets
Expenses
Plus: Owner investment
Cash
$
Net income
$10,000
Plus: Net income
Equity
Less: Withdrawal
Russell, capital
$
Ending capital balance
$ 66,000
Demonstration Problem 11-1 Workpaper, Scenario 2
Financial Statements for Link/Morgan Partnership
For 2016
Income Statement
Capital Statement
Balance Sheet, 12/31
Service revenue
$
Beginning capital balance
$ 0
Assets
Expenses
Plus: Owner investments
Cash
$
Net income
$10,000
Plus: Net income
Partners’ capital
Less: Withdrawals
Link, capital
$
Ending capital balance
$66,000
Morgan, capital
Total capital
$66,000
Demonstration Problem 11-1 Workpaper, Scenario 3
Financial Statements for Corporation
For 2016
Income Statement
Statement of Changes in Stk. Equity
Balance Sheet, 12/31
Service revenue
$
Beginning common stock
$ 0
Assets
Expenses
Plus: common stock issued
Cash
$
Net income
$10,000
Ending common stock
Stockholders’ equity
Beginning retained earnings
0
Common stock
$
Plus: Net income
Retained earnings
Less: Dividends
Total stk. equity
$66,000
Ending retained earnings
Total stockholders’ equity
$66,000
11-9
Demonstration Problem 11- 2 Workpaper
Assets
=
Liabilities
+
Stockholders’ Equity
Event
Cash
=
Dividends
Payable
+
Com. Stk.
Par
Value
+
Additional
Paid-in
Capital
+
Retained
Earnings
Revenue
‒
Expense
=
Net Income
Cash Flow
Beg. bal.
0
=
0
+
0
+
0
+
0
0
–
0
=
0
0
1
=
+
+
+
0
–
=
2
=
+
+
+
–
=
3
=
+
+
+
–
=
4
=
+
+
+
–
=
5
=
+
+
+
–
=
6
=
+
+
+
–
=
7
=
+
+
+
0
–
=
Totals
57,000
=
0
+
21,000
+
31,800
+
4,200
35,000
–
25,000
=
10,000
57,000 NC
Demonstration Problem 11- 3 Workpaper, part a. Cumulative Preferred
Year
Total Dividends
To Common
To Preferred
Dividends in Arrears
2015
$ 10,000
2016
$ 20,000
2017
$ 60,000
2018
$120,000
2019
$100,000
Demonstration Problem 11- 3 Workpaper, part b. Noncumulative Preferred
Year
Total Dividends
To Common
To Preferred
Dividends in Arrears
2015
$ 10,000
2016
$ 20,000
2017
$ 60,000
2018
$120,000
2019
$100,000
11-10
Demonstration Problem 11- 4 Workpaper
Assets
=
Stockholders’ Equity
Event
Cash
=
No-par
Com.
Stock
+
Retained
Earnings
−
Treasury
Stock
+
Add. Paid-
in Capital
T.S.T.*
Revenue
−
Expense
=
Net
Income
Cash
Flow
Beg.
bal.
0
=
0
+
0
−
0
+
0
0
–
0
=
0
0
1
=
+
−
+
–
=
2
=
+
−
+
–
=
3
=
+
−
+
–
=
4
=
+
−
+
–
=
5
=
+
−
+
–
=
6
=
+
−
+
–
=
Totals
39,400
=
36,000
+
4,000
−
1,000
+
400
12,000
–
8,000
=
4,000
39,400 NC
*Additional paid-in capital from treasury stock transactions
11-11
Quiz Questions for Chapter 11
1. The XP Corporation had the following shares of stock outstanding at December 31, 2016: Common
Stock, $50 par value, 40,000 shares outstanding; and Preferred Stock, 6 percent, $100 par value, cumula-
tive, 10,000 shares outstanding. Dividends for 2014 and 2015 were in arrears. On December 31, 2016,
XP declared total cash dividends of $250,000. The total amounts payable to preferred stockholders and
common stockholders, respectively, are:
a. $60,000 / $190,000.
b. $120,000 / $130,000.
c. $180,000 / $70,000.
d. $125,000 / $125,000.
Use the following information to answer the next four questions. The Kramer Company was started when it
issued 200 shares of $5 par value common stock at a market price of $20 per share. The company repurchased
10 shares at a market price of $15 per share. Later the company reissued 5 shares at a market price of $20 per
share. At the end of the first year of operations the company’s equity included $1,200 of retained earnings in
addition to its contributed capital.
2. The entry to record the original issue of 200 shares of stock would
a. increase cash by $4,000 / increase common stock and paid-in capital in excess of par value by
$1,000 and $3,000, respectively.
b. increase cash by $4,000 / increase common stock by $4,000.
c. decrease cash by $4,000 / increase common stock common stock by $4,000.
d. increase cash by $1,000 / increase common stock by $1,000.
3. The entry to record the purchase of the 10 shares of the company’s own stock would
a. decrease assets / decrease equity.
b. decrease assets / increase equity.
c. decrease assets / increase treasury stock.
d. both a and c.
4. What effect would reissuing the 5 shares have on the company’s paid-in capital from treasury stock
transactions account?
a. No effect.
b. Increase additional paid-in capital by $25.
c. Increase additional paid-in capital by $100.
d. Decrease additional paid-in capital by $75.
5. The total amount of stockholders’ equity at the end of the first year would be
a. $1,200.
b. $5,200.
c. $5,150.
d. none of the above.
6. Which of the following is an advantage of the corporate form of business organization?
a. double taxation.
b. amount of regulation.
c. entrenched management.
d. limited liability.
11-12
7. Jan Irving started a proprietorship on January 1, 2016 with a $1,000 cash contribution to the business.
During the first year of operations the company generated $5,000 of cash revenue and incurred $2,000 of
cash expenses. Also, Jan withdrew $500 from the business. At the end of 2016 the balance in the Jan Ir-
ving, Capital account was
a. $1,000.
b. $3,500.
c. $3,000.
d. $4,000.
8. ABC Company is authorized to issue 100,000 shares of common stock. The company issued 60,000
shares of common stock and later repurchased 15,000 shares of its own common stock. How many
shares are outstanding?
a. 45,000.
b. 60,000.
c. 100,000.
d. 40,000.
9. An 8% stock dividend on 12,000 shares of outstanding preferred stock with a par value of $20 per share
and a market value of $60 a share will have what effect on the accounting equation?
a. Increase preferred stock by $57,600.
b. Increase cash by $38,400.
c. Decrease retained earnings by $57,600.
d. Decrease retained earnings by $19,200.
10. Which of the following statements concerning a two-for-one stock split is true?
a. The number of shares outstanding will decrease.
b. The market price of the stock would be expected to increase.
c. The company’s equity will increase.
d. No journal entry would be necessary.
11. EFG Company paid cash to purchase treasury stock. Which of the following reflects how this event af-
fects the company’s financial statements?
Assets
=
Liab.
+
Equity
Rev.
‒
Exp.
=
Net Inc.
Cash Flow
a.
‒
NA
‒
NA
NA
NA
‒ FA
b.
+ ‒
NA
NA
NA
NA
NA
‒ OA
c.
‒
NA
‒
NA
+
‒
‒ FA
d.
+ ‒
NA
NA
NA
+
‒
‒ OA
12. ZGAR Company distributed a stock dividend. Which of the following reflects how this event affects the
company’s financial statements?
Assets
=
Liab.
+
Equity
Rev.
‒
Exp.
=
Net Inc.
Cash Flow
a.
‒
NA
‒
NA
NA
NA
NA
b.
NA
NA
+ ‒
NA
NA
NA
NA
c.
‒
NA
‒
NA
+
‒
‒ FA
d.
NA
NA
+ ‒
NA
NA
NA
‒ FA
11-13
Quiz Answers
Question
Answer
1
C
2
A
3
D
4
B
5
C
6
D
7
B
8
A
9
C
10
D
11
A
12
B
11-14
Summary Outline of a Lesson Plan for Chapter 11
I. Use Demonstration Problem 11-1 to illustrate reporting differences among pro-
prietorships, partnerships, and corporations.
II. Use Demonstration Problem 11-2 to illustrate accounting for additional paid-in
capital in excess of par value.
III. Use Demonstration Problem 11-3 to introduce preferred stock and illustrate al-
locating dividends between common and preferred shareholders.
IV. Use Demonstration Problem 11-4 to illustrate the effects of treasury stock trans-
actions on financial statements.
V. Time considerations and homework assignments. Allow approximately two hours
of class time to cover the four demonstration problems. Use Problem 11-19A or B to
reinforce how financial statement presentation reflects business structure. Problem
11-23A or B requires students to record a variety of stock and dividend transactions.
Use Exercise 11-13A or B to reinforce computing cumulative preferred dividends.
Treasury stock is covered in Problem 11-21A or B.
