S13-8 Dividing cash dividends between preferred and common stock
Learning Objective 4
Copperhead Trust has the following classes of stock:
Preferred Stock—6%, $12 par value; 8,500 shares authorized, 7,000 shares issued and
outstanding
Common Stock—$0.10 par value; 2,100,000 shares authorized, 1,400,000 shares
issued and outstanding
Requirements
1. Copperhead declares cash dividends of $44,000 for 2018. How much of the dividends goes to
preferred stockholders? How much goes to common stockholders?
2. Assume the preferred stock is cumulative and Copperhead passed the preferred dividend in
2016 and 2017. In 2018, the company declares cash dividends of $46,000. How much of the
dividend goes to preferred stockholders? How much goes to common stockholders?
3. Assume the preferred stock is noncumulative and Copperhead passed the preferred dividend
in 2016 and 2017. In 2018, the company declares cash dividends of $46,000. How much of
the dividend goes to preferred stockholders? How much goes to common stockholders?
SOLUTION
Requirement 1
S13-8, cont.
Requirement 3
S13-9 Journalizing a small stock dividend
Learning Objective 4
Element Water Sports has 13,000 shares of $1 par value common stock outstanding. Element
distributes a 5% stock dividend when the market value of its stock is $15 per share.
Requirements
1. Journalize Element’s declaration of the stock dividend on August 15 and distribution on
August 31.
2. What is the overall effect of the stock dividend on Element’s total assets?
3. What is the overall effect on total stockholders’ equity?
SOLUTION
Requirement 1
S13-10 Journalizing a large stock dividend
Learning Objective 4
Nelly, Inc. had 320,000 shares of $2 par value common stock issued and outstanding as of
December 15, 2018. The company is authorized to issue 1,300,000 common shares. On
December 15, 2018, Nelly declared a 40% stock dividend when the market value for Nelly’s
common stock was $7 per share. The stock was issued on Dec. 30.
Requirements
1. Journalize the declaration and distribution of the stock dividend.
2. How many shares of common stock are outstanding after the dividend?
SOLUTION
S13-11 Accounting for a stock split
Learning Objective 4
Decor and More Imports recently reported the following stockholders’ equity:
Suppose Decor and More split its common stock 2-for-1 in order to decrease the market price per
share of its stock. The company’s stock was trading at $17 per share immediately before the split.
Requirements
1. Prepare the stockholders’ equity section of the Decor and More Imports balance sheet after
the stock split.
2. Were the account balances changed or unchanged after the stock split?
SOLUTION
S13-12 Preparing a corporate income statement
Learning Objective 5
ABC Corporation’s accounting records include the following items, listed in no particular order,
at December 31, 2018:
Other Income and (Expenses) $ (7,200) Cost of Goods Sold $
30,000
Net Sales 81,000 Operating Expenses 25,000
Gain on Discontinued Operations 3,600
The income tax rate for ABC Corporation is 39%.
Prepare ABC’s income statement for the year ended December 31, 2018. Omit earnings per
share. Use the multi-step format.
SOLUTION
S13-13 Reporting earnings per share
Learning Objective 5
Return to the ABC data in Short Exercise S13-12. ABC had 8,000 shares of common stock
outstanding during 2018. ABC declared and paid preferred dividends of $4,000 during 2018.
Show how ABC reports EPS data on its 2018 income statement.
SOLUTION
S13-14 Preparing a statement of retained earnings
Learning Objective 6
Kingston, Inc. had beginning retained earnings of $135,000 on January 1, 2018. During the year,
Kingston declared and paid $85,000 of cash dividends and earned $75,000 of net income.
Prepare a statement of retained earnings for Kingston, Inc. for the year ending December 31,
2018.
SOLUTION
S13-15 Analyzing the effect of prior-period adjustments
Learning Objective 6
Taylor Corporation discovered in 2019 that it had incorrectly recorded in 2018 a cash payment of
$70,000 for utilities expense. The correct amount of the utilities expense was $35,000.
Requirements
1. Determine the effect of the error on the accounting equation in 2018.
2. How should this error be reported in the 2019 financial statements?
SOLUTION
Requirement 1
S13-16 Computing earnings per share
Learning Objective 7
HEB Corporation had net income for 2018 of $60,450. HEB had 15,500 shares of common stock
outstanding at the beginning of the year and 20,100 shares of common stock outstanding as of
December 31, 2018. During the year, HEB declared and paid preferred dividends of $2,600.
Compute HEB’s earnings per share.
Note: Short Exercise S13-16 must be completed before attempting Short Exercise S13-17.
S13-17 Computing price/earnings ratio
Learning Objective 7
Refer to the HEB data in Short Exercise S13-17. Assume the market price of HEB’s common
stock is $19.50 per share. Compute HEB’s price/earnings ratio.
SOLUTION
S13-18 Computing rate of return on common stockholders’ equity
Learning Objective 7
Wyler, Inc.’s 2018 balance sheet reported the following items—with 2017 figures given for
comparison:
Net income for 2018 was $3,690. Compute Wyler’s rate of return on common stockholders’
equity for 2018.
SOLUTION
Exercises
E13-19 Identifying advantages and disadvantages of a corporation
Learning Objective 1
Following is a list of advantages and disadvantages of the corporate form of business. Identify
each quality as either an advantage or a disadvantage.
a. Ownership and management are separated.
b. Entity has continuous life.
c. Transfer of ownership is easy.
d. Stockholders’ liability is limited.
e. Exposure to double taxation is evident.
f. Entity can raise more money than a partnership or sole proprietorship.
g. Government regulation is expensive.
SOLUTION
E13-20 Determining paid-in capital for a corporation
Learning Objective 2
Aruba Corporation recently organized. The company issued common stock to an inventor in
exchange for a patent with a market value of $57,000. In addition, Aruba received cash for 6,000
shares of its $10 par preferred stock at par value and 6,500 shares of its no-par common stock at
$20 per share. Without making journal entries, determine the total paid-in capital created by
these transactions.
SOLUTION