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C8.34.
f.
(continued)
Preferred stock ........... ........... ........... ........... ........... ........... ........... ........... $ 5,760,000
Common stock ........... ........... ........... ........... ........... ........... ........... ........... 16,400,000
Additional paid-in capital ...... ........... ........... ........... ........... ........... ........... 22,960,000
Retained earnings ....... ........... ........... ........... ........... ........... ........... ........... ?
C8.35.
a.
Solution approach: Record the journal entries for transactions 1-6 to determine the
effects of the transactions on stockholders’ equity accounts:
1. Dr. Cash (320,000 shares @ $14.25 per share) .. ........... ........... 4,560,000
2. Dr. Cash (80,000 shares @ $18 per share) ......... ........... ........... 1,440,000
Cr. Treasury Stock (80,000 @ $18 per share) ......... ........... 1,440,000
4. Dr. Retained Earnings (96,000 shares @ $4.50 per share) ......... 432,000
Cr. Cash ....... ........... ........... ........... ........... ........... ........... 432,000
C8.35.
a.
(continued)
6. No entry is required for a 2 for 1 stock split. The number of shares issued and
outstanding are each doubled (i.e., multiplied by two); the par value per share and the
annual dividend per share are each halved (i.e., divided by two). The market price per
share is likely to settle at approximately half of its pre-split value.
Note that the number of shares authorized will normally be increased to accommodate a
Retained Earnings ($19,920,000 + $1,280,000 - $432,000 - $680,000) ..... 20,088
Treasury Stock ($5,040,000 - $1,440,000) ... ........... ........... ........... ........... (3,600)
Total Stockholders’ Equity………………………………………………… $66,168
b.
Preferred stock, $2.25, $30 par value, cumulative, 200,000 shares authorized, 192,000
shares issued and outstanding.
C8.36.
a.
Assets acquired under capital leases are treated very much like other long-term
depreciable assets, and capital lease liabilities are treated very much like long-term notes
payable. The only difference is that in a capital lease transaction, the lessee company
(i.e., the company having use and enjoyment of the asset during the lease term) does not
C8.36.
(continued)
b.
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues - Expenses
Equipment Capital
+4,000,000 Lease
To record the initial capital lease agreement.
Dr. Depreciation Expense ..... ........... ........... ........... ........... ........... XXX
Cr. Accumulated Depreciation .. ........... ........... ........... ........... XXX
To record annual depreciation on the equipment.
Dr. Interest Expense .. ........... ........... ........... ........... ........... ........... XXX
C8.36.
(continued)
d.
Bonds payable represents a liability to the firm and is payable at pre-specified times.
Interest is a fixed claim to the company’s income and must be paid in accordance with the
terms of the bond agreement. Likewise, the maturity value of bonds is a fixed claim to the
company’s assets. If any interest or principal payments are missed, the company will face
stockholders. This “cumulative” feature makes preferred more bond-like than common
stock-like. Preferred stock has no maturity date but normally has a redemption value that
represents a fixed claim to the company’s assets after bondholders have been satisfied for
their claims. Preferred is usually callable and may be convertible. Dividends are not an
expense and are not deductible for income tax purposes.
leverage than Mr. Gerrard may be comfortable with at this time, given his concern about
not wanting to become “overextended” with debt. Since most of the company’s assets are
invested in property, plant, and equipment, liquidity could become a serious problem if
there were an economic downturn in the near future. By issuing preferred stock, Mr.
Gerrard could better control the timing of future cash flows in the event that the company
Chapter 8 Accounting for and Presentation of Stockholders’ Equity
TAKE-HOME QUIZ: CHAPTER 8 NAME______________________
1. The balance sheet caption for common stock is:
Common stock, $25 par value, 5,000,000 shares authorized,
3,500,000 shares issued, 3,410,000 shares outstanding………………. $ ? .
a. Calculate the dollar amount that will be presented opposite of this caption.
b. Calculate the total amount of a cash dividend of $2.90 per share.
c. What accounts for the difference between issued shares and outstanding shares?
2. As of March 11, 2016, Swanson Group, Ltd. had 300,000 shares of $10 par value common
stock authorized, and 185,000 shares issued. There were 6,000 shares of treasury stock that
had been purchased by the firm at an average cost of $12. The market value of the stock on
March 11, 2016 was $22.
a. How many shares of common stock are outstanding on March 11, 2016?
b. Assume that on March 11, 2016, the board of directors declared a cash dividend of $0.15
per share, payable on April 4, 2016, to stockholders of record on March 11, 2016. What
is the amount of the dividend payable that would appear on the March 31, 2016, balance
sheet?
Instructor’s Manual / Solutions Manual
TAKE-HOME QUIZ: CHAPTER 8 (continued)
c. Assume that instead of a cash dividend, the board of directors declared a 4% stock
dividend. Calculate the amount of retained earnings that would be capitalized as a result
of the stock dividend.
d. Assume that instead of either the cash dividend or the stock dividend, the board of
directors approve a 2-for-1 stock split. How many shares of stock will be outstanding
after the stock split?
e. If you were a stockholder of the Swanson Group, Ltd., which would you prefer—a cash
dividend, a stock dividend, or a stock split? Explain your answer.
Chapter 8 Accounting for and Presentation of Stockholders’ Equity
TAKE-HOME QUIZ: CHAPTER 8 (continued)
3. Barron, Inc. was incorporated on January 1, 2014, and issued the following stock, for cash:
3,000,000 shares of no-par common stock were authorized, and 1,200,000 shares were
issued on January 1, 2014 at $14 per share.
200,000 shares of $100 par value, 8.3 percent cumulative, non-participating preferred
stock were authorized, and 70,000 shares were issued on January 1, 2014, at $107 per
share.
b. Of the total amount of dividends declared during 2016, how much will be received by
preferred shareholders?
Instructor’s Manual / Solutions Manual
TAKE-HOME QUIZ KEY: CHAPTER 8
1. a. Balance sheet amount = 3,500,000 shares issued * $25 par value = $87,500,000
2. a. Shares outstanding = (185,000 shares issued - 6,000 treasury shares) = 179,000
b. 179,000 shares * $0.15 = $26,850
c. 185,000 shares issued * 4% dividend rate = 7,400 stock dividend shares issued
f.
Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity Net income = Revenues - Expenses
Cash Treasury Stock (Note: The sale of treasury stock
+96,000 +48,000 reduces the contra stockholders’
g.
Retained earnings, beginning balance ........... ........... ........... ........... $2,285,000
Add: Net .......... ........... ........... ........... ........... ........... ........... ?
3. a.
Dr. Cash ((1,200,000 @ $14) + (70,000 @ $107)) ........... 24,290,000
Cr. Common Stock (1,200,000 shares @ $14 per share) 16,800,000
Cr. Preferred Stock (70,000 shares @ $100 per share) 7,000,000
Cr. APIC—Preferred (70,000 shares @ $7 per share) 490,000
b.
Preferred shareholders are entitled to two years of dividends in arrears (for 2014 and
