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Chapter 13
Stockholders’ Equity
Review Questions
1. What is a corporation?
2. List three characteristics of a corporation.
Characteristics of a corporation are the following (students are required to list three):
a. Is a separate legal entity
3. How does authorized stock differ from outstanding stock?
4. What are the four basic rights of stockholders?
The four basic rights of a stockholder are to do the following:
a. Participate in management by voting on corporate matters.
5. How does preferred stock differ from common stock?
6. What is par value?
7. What are the two basic sources of stockholders’ equity? Describe each source.
The two basic sources of stockholders’ equity are paid-in capital and retained earnings.
8. What account is used to record the premium when issuing common stock? What type of
account is this?
9. If stock is issued for assets other than cash, describe the recording of this transaction.
10. What is treasury stock? What type of account is Treasury Stock, and what is the account’s
normal balance?
11. Where and how is treasury stock reported on the balance sheet?
12. What is the effect on the accounting equation when cash dividends are declared? What is the
effect on the accounting equation when cash dividends are paid?
When cash dividends are declared, a current liability increases (Dividends Payable is
13. What are the three relevant dates involving cash dividends? Describe each.
The three relevant dates involving cash dividends are the declaration date, date of record, and
payment date.
14. How does cumulative preferred stock differ from noncumulative preferred stock?
With cumulative preferred stock, the owners must receive all dividends in arrears before the
15. What is a stock dividend?
16. What is the effect on the accounting equation when a stock dividend is declared? What is the
effect on the accounting equation when a stock dividend is distributed?
When a stock dividend is declared, there is no change to the accounting equation because it
17. What are some reasons corporations issue stock dividends?
A company issues stock dividends for several reasons:
18. What is a stock split?
A stock split is an increase in the number of issued and outstanding shares of stock coupled
with a proportionate reduction in the par value of the stock.
19. What is reported in the discontinued operations section of the income statement?
20. What does the statement of retained earnings report?
21. What is a prior-period adjustment?
A prior-period adjustment is a correction to retained earnings for an error in an earlier period.
22. What does the statement of stockholders’ equity report? How does the statement of
stockholders’ equity differ from the statement of retained earnings?
23. What does earnings per share report, and how is it calculated?
Earnings per share reports the amount of net income (loss) for each share of the company’s
24. What is the price/earnings ratio, and how is it calculated?
The price/earnings ratio is the ratio of the market price of a share of
25. What does the rate of return on common stock show, and how is it calculated?
The rate of return on common stock shows the relationship between net income available to
Short Exercises
S13-1 Describing corporation characteristics
Learning Objective 1
Due to recent beef recalls, Southwest Steakhouse is considering incorporating. Bob, the owner,
wants to protect his personal assets in the event the restaurant is sued.
Requirements
1. Which advantage of incorporating is most applicable? What are other advantages of
organizing as a corporate entity?
2. What are some disadvantages of organizing as a corporation?
SOLUTION
Requirement 1
S13-2 Journalizing issuance of stock—at par and at a premium
Learning Objective 2
Colorado Corporation has two classes of stock: common, $3 par value; and preferred, $30 par
value.
Requirements
1. Journalize Colorado’s issuance of 4,500 shares of common stock for $6 per share.
2. Journalize Colorado’s issuance of 4,500 shares of preferred stock for a total of $135,000.
SOLUTION
Requirement 1
S13-3 Journalizing issuance of stock—no-par
Learning Objective 2
Wolcott Corporation issued 5,000 shares of no-par common stock for $2 per share on January 13.
Record the stock issuance.
SOLUTION
S13-4 Journalizing issuance of stock—stated value
Learning Objective 2
Nelson Corporation issued 9,000 shares of $3 stated value common stock for $11 per share on
July 7. Record the stock issuance.
SOLUTION
S13-5 Journalizing issuance of stock for assets other than cash
Learning Objective 2
Cedar Corporation issued 36,000 shares of $1 par value common stock in exchange for a
building with a market value of $160,000. Record the stock issuance.
SOLUTION
S13-6 Accounting for the purchase and sale of treasury stock
Learning Objective 3
Discount Furniture, Inc. completed the following treasury stock transactions in 2018:
Dec. 1 Purchased 1,900 shares of the company’s $1 par value common stock as
treasury stock, paying cash of $5 per share.
15 Sold 200 shares of the treasury stock for cash of $8 per share.
20 Sold 1,000 shares of the treasury stock for cash of $1 per share. (Assume
the balance in Paid-In Capital from Treasury Stock Transactions on
December 20 is $2,400.)
Requirements
1. Journalize these transactions. Explanations are not required.
2. How will Discount Furniture, Inc. report treasury stock on its balance sheet as of December
31, 2018?
S13-6, cont.
SOLUTION
Requirement 1
S13-7 Accounting for cash dividends
Learning Objective 4
Java Company earned net income of $85,000 during the year ended December 31, 2018. On
December 15, Java declared the annual cash dividend on its 4% preferred stock (par value,
$120,000) and a $0.25 per share cash dividend on its common stock (50,000 shares). Java then
paid the dividends on January 4, 2019.
Requirements
1. Journalize for Java the entry declaring the cash dividends on December 15, 2018.
2. Journalize for Java the entry paying the cash dividends on January 4, 2019.
SOLUTION
