12–1
CHAPTER 12
CORPORATIONS: ORGANIZATION, STOCK
TRANSACTIONS, AND DIVIDENDS
DISCUSSION QUESTIONS
2. The broker is not correct. Corporations are not legally liable to pay dividends until the dividends are
3. The company may not have had enough cash on hand to pay a dividend on the common stock, or resources
may be needed for plant expansion, replacement of facilities, payment of liabilities, etc.
b. Stockholders’ equity
7. a. It has no effect on revenue or expense.
b. It reduces stockholders’ equity by $3,000,000.
9. The three classifications of restrictions on retained earnings are legal, contractual, and discretionary.
Restrictions are normally reported in the notes to the financial statements.
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
12–2
BASIC EXERCISES
BE 12–1
20Y1
20Y2
20Y3
Amount distributed ………………………………….
$28,500
$ 6,000
$110,000
Preferred dividend (15,000 shares) ……………
(7,500)
(6,000)
(9,000)*
Common dividend (100,000 shares) …………..
$21,000
$ 0
$101,000
BE 12–2
Jan.
22
Cash
1,280,000
Common Stock (160,000 $8)
1,280,000
Feb.
14
Cash
2,250,000
Preferred Stock (45,000 $50)
2,250,000
Aug.
30
Cash (10,000 $56)
560,000
Preferred Stock (10,000 $50)
500,000
Paid-In Capital in Excess of Par—
Preferred Stock [10,000 ($56 – $50)]
60,000
BE 12–3
Oct.
1
Cash Dividends
375,000
Cash Dividends Payable
375,000
Nov.
7
No entry required.
Dec.
15
Cash Dividends Payable
375,000
Cash
375,000
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
BE 12–4
Aug.
2
Stock Dividends (1,500,000 5% $60)
4,500,000
Stock Dividends Distributable
(1,500,000 5% $10)
750,000
Paid-In Capital in Excess of Par—Common
Stock [(1,500,000 5%) ($60 – $10)]
3,750,000
Sept.
15
No entry required.
Oct.
8
Stock Dividends Distributable
750,000
Common Stock
750,000
BE 12–5
May
27
Treasury Stock (65,000 $6)
390,000
Cash
390,000
Aug.
3
Cash (48,000 $9)
432,000
Treasury Stock (48,000 $6)
288,000
Paid-In Capital from Sale of
Treasury Stock [48,000 ($9 – $6)]
144,000
Nov.
14
Cash (17,000 $5)
85,000
Paid-In Capital from Sale of
Treasury Stock [17,000 ($6 – $5)]
17,000
Treasury Stock (17,000 $6)
102,000
BE 12–6
Stockholders’ Equity
Paid-in capital:
Common stock, $120 par (500,000 shares
authorized, 400,000* shares issued)
$48,000,000
Excess of issue price over par
6,400,000
Paid-in capital, common stock
$ 54,400,000
From sale of treasury stock
4,500,000
Total paid-in capital
$ 58,900,000
Retained earnings
63,680,000
Total
$ 122,580,000
Treasury stock (40,000 shares at cost)
(5,200,000)
Total stockholders’ equity
$117,380,000
12–4
BE 12–7
Noric Cruises Inc.
Statement of Stockholders’ Equity
For the Month Ended October 31
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Total
Balances, October 1
$150,000
$3,225,000
$12,400,000
$15,775,000
Issued common stock
50,000
750,000
800,000
Net income
2,350,000
2,350,000
Dividends
(475,000)
(475,000)
Balances, October 31
$200,000
$3,975,000
$14,275,000
$18,450,000
BE 12–8
a.
gOutstandin Shares Common of Number Average
Dividends PreferredIncomeNet
Share per Earnings:20Y5 +
=
$18.60
shares 80,000
$1,488,000
shares 80,000
$50,000 – $1,538,000
==
=
gOutstandin Shares Common of Number Average
Dividends PreferredIncomeNet
Share Per Earnings:20Y6 −
=
$21.18
shares 115,000
$2,435,700
shares 115,000
$50,000$2,485,700
==
−
=
b. The increase in the earnings per share from $18.60 to $21.18 indicates a favorable change
in the company’s profitability.
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
12–5
EXERCISES
Ex. 12–1
1st Year
2nd Year
3rd Year
4th Year
Total dividend declared …………
$51,000
$105,000
$81,000
$120,000
Preferred dividend (current) …..
$51,000
$ 72,000
$72,000
$ 72,000
Preferred dividend in arrears …
—
21,000
—
—
Total preferred dividends ………
$51,000
$ 93,000
$72,000
$ 72,000
Preferred shares outstanding…
÷ 60,000
÷ 60,000
÷ 60,000
÷ 60,000
Preferred dividend per share ….
$ 0.85
$ 1.55
$ 1.20
$ 1.20
Dividend for common shares
(total dividend declared –
total preferred dividends) ……
$ —
$ 12,000
$ 9,000
$ 48,000
Common shares outstanding …
÷ 300,000
÷ 300,000
÷ 300,000
Common dividend per share ….
$ 0.04
$ 0.03
$ 0.160
Ex. 12–2
1st Year
2nd Year
3rd Year
4th Year
Total dividend declared …………
$ 36,000
$58,000
$75,000
$124,000
Preferred dividend (current) …..
$ 36,000
$44,000*
$50,000
$ 50,000
Preferred dividend in arrears …
—
14,000
6,000
—
Total preferred dividends ………
$ 36,000
$58,000
$56,000
$ 50,000
Preferred shares outstanding…
÷40,000
÷40,000
÷ 40,000
÷ 40,000
Preferred dividend per share ….
$ 0.90
$ 1.45
$ 1.40
$ 1.25
* Preferred dividend (current) for 2nd year = $44,000 = $58,000 – $14,000
Dividend for common shares
(total dividend declared –
total preferred dividends) ……
$ —
$ —
$ 19,000
$ 74,000
Common shares outstanding …
÷ 100,000
÷ 100,000
Common dividend per share ….
$ 0.19
$ 0.74
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
12–6
Ex. 12–3
a.
Jan.
22
Cash (210,000 $34)
7,140,000
Common Stock (210,000 $30)
6,300,000
Paid-In Capital in Excess of Par—Common
Stock [210,000 ($34 – $30)]
840,000
Feb.
27
Cash (15,000 $12)
180,000
Preferred Stock (15,000 $9)
135,000
Paid-In Capital in Excess of Par—Preferred
Stock [15,000 ($12 – $9)]
45,000
Ex. 12–4
a.
May
15
Cash (750,000 $4)
3,000,000
Common Stock (750,000 $1.50)
1,125,000
Paid-In Capital in Excess of Stated Value—
Common Stock [750,000 ($4 – $1.50)]
1,875,000
June
30
Cash (17,500 $60)
1,050,000
Preferred Stock (17,500 $50)
875,000
Paid-In Capital in Excess of Par—Preferred
Stock [17,500 ($60 – $50)]
175,000
b. $4,050,000 ($3,000,000 + $1,050,000)
Ex. 12–5
Nov.
23
Land (14,200 $34)
482,800
Common Stock (14,200 $25)
355,000
Paid-In Capital in Excess of Par—
Common Stock [14,200 ($34 – $25)]
127,800
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
12–7
Ex. 12–6
a.
Cash
100,000
Common Stock (100,000 $1)
100,000
b.
Organizational Expenses
3,000
Common Stock (3,000 $1)
3,000
Cash
45,000
Common Stock (45,000 $1)
45,000
c.
Land
60,000
Building
225,000
Interest Payable*
5,200
Mortgage Note Payable
180,000
Common Stock (99,800 $1)
99,800
* An acceptable alternative would be to credit Interest Expense.
Ex. 12–7
Oct.
1
Cash (120,000 $31.50)
3,780,000
Common Stock (120,000 $30.00)
3,600,000
Paid-In Capital in Excess of Par—
Common Stock [120,000 ($31.50 – $30.00)]
180,000
1
Buildings
2,380,000
Land
840,000
Preferred Stock (35,000 $80)
2,800,000
Paid-In Capital in Excess of Par—
Preferred Stock [35,000 ($92 – $80)]
420,000
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
12–8
Ex. 12–8
Feb.
5
Cash
5,600,000
Common Stock (700,000 $8)
5,600,000
5
Organizational Expenses
9,600
Common Stock (1,200 $8)
9,600
Apr.
9
Land
120,000
Buildings
280,000
Equipment
80,000
Common Stock (40,000 $8.00)
320,000
Paid-In Capital in Excess of Par—Common
Stock [40,000 ($12.00 – $8.00)]
160,000
June
14
Cash (25,000 $82)
2,050,000
Preferred Stock (25,000 $60)
1,500,000
Paid-In Capital in Excess of Par—Preferred
Stock [25,000 ($82 – $60)]
550,000
Ex. 12–9
July
9
Cash Dividends
1,425,000
Cash Dividends Payable
1,425,000
Aug.
31
No entry required.
Oct.
1
Cash Dividends Payable
1,425,000
Cash
1,425,000
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
12–9
Ex. 12–10
a.
(1)
Stock Dividends [(2,200,000 5%) $18]
1,980,000
Stock Dividends Distributable (110,000 $15)
1,650,000
Paid-In Capital in Excess of Par—
Common Stock [110,000 ($18 – $15)]
330,000
(2)
Stock Dividends Distributable
1,650,000
Common Stock
1,650,000
b. (1) $42,000,000 ($33,000,000 + $9,000,000)
Ex. 12–11
Ex. 12–12
Assets
Liabilities
Stockholders’
Equity
a. Authorizing and issuing stock
certificates in a stock split
0
0
0
b. Declaring a stock dividend
0
0
0
c. Issuing stock certificates for the
stock dividend declared in (b)
0
0
0
d. Declaring a cash dividend
0
+
–
e. Paying the cash dividend
declared in (d)
–
–
0
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
12–10
Ex. 12–13
Jan.
8
No entry required. The stockholders’ ledger would be revised to
record the increased number of shares held by each stockholder.
Apr.
30
Cash Dividends
75,600
Cash Dividends Payable
75,600
{[(16,000 $0.60) + (300,000 $0.22)] =
$9,600 + $66,000 = $75,600}
July
1
Cash Dividends Payable
75,600
Cash
75,600
Oct.
31
Cash Dividends
42,600
Cash Dividends Payable
42,600
{[(16,000 $0.60) + (300,000 $0.11)] =
$9,600 + $33,000 = $42,600}
31
Stock Dividends [(300,000 5% $56) = $840,000]
840,000
Stock Dividends Distributable (300,000 5% $50)
750,000
Paid-In Capital in Excess of Par—Common Stock
[(300,000 5%) ($56 – $50)]
90,000
Dec.
31
Cash Dividends Payable
42,600
Cash
42,600
31
Stock Dividends Distributable
750,000
Common Stock
750,000
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
12–11
Ex. 12–14
a.
July
9
Treasury Stock (60,000 $42)
2,520,000
Cash
2,520,000
Sept.
22
Cash (45,000 $51)
2,295,000
Treasury Stock (45,000 $42)
1,890,000
Paid-In Capital from Sale of Treasury
Stock [45,000 ($51 – $42)]
405,000
Nov.
23
Cash (15,000 $40)
600,000
Paid-In Capital from Sale of Treasury
Stock [15,000 ($42 – $40)]
30,000
Treasury Stock (15,000 $42)
630,000
c. Mystic Lake may have purchased the stock to support the market price of the stock, to
according to stock purchase agreements.
Ex. 12–15
a.
Mar.
9
Treasury Stock (62,000 $51)
3,162,000
Cash
3,162,000
June
9
Cash (48,000 $60)
2,880,000
Treasury Stock (48,000 $51)
2,448,000
Paid-In Capital from Sale of Treasury
Stock [48,000 ($60 – $51)]
432,000
Nov.
13
Cash (7,500 $54)
405,000
Treasury Stock (7,500 $51)
382,500
Paid-In Capital from Sale of Treasury
Stock [7,500 ($54 – $51)]
22,500
paid-in capital and retained earnings.
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
12–12
Ex. 12–16
a.
May
14
Treasury Stock (23,500 $75)
1,762,500
Cash
1,762,500
Sept.
6
Cash (14,000 $81)
1,134,000
Treasury Stock (14,000 $75)
1,050,000
Paid-In Capital from Sale of Treasury
Stock [14,000 ($81 – $75)]
84,000
Nov.
30
Cash (9,500 $72)
684,000
Paid-In Capital from Sale of Treasury
Stock [9,500 ($75 – $72)]
28,500
Treasury Stock (9,500 $75)
712,500
d. Biscayne Bay Water Inc. may have purchased the stock to support the market price of the
stock, to provide shares for resale to employees, or for reissuance to employees as a
bonus according to stock purchase agreements.
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
12–13
Ex. 12–17
Stockholders’ Equity
Paid-in capital:
Preferred 2% stock, $120 par
(85,000 shares authorized,
70,000 shares issued)
$8,400,000
Excess of issue price over par
210,000
Paid-in capital, preferred stock
$8,610,000
Common stock, no par, $14 stated
value (375,000 shares authorized,
320,000 shares issued)
$4,480,000
Excess of issue price over par
480,000
Paid-in capital, common stock
4,960,000
From sale of treasury stock
45,000
Total paid-in capital
$13,615,000
Ex. 12–18
Stockholders’ Equity
Paid-in capital:
Common stock, $45 par
(80,000 shares authorized,
68,000 shares issued)
$3,060,000
Excess of issue price over par
272,000
Paid-in capital, common stock
$3,332,000
From sale of treasury stock
115,000
Total paid-in capital
$ 3,447,000
Retained earnings
20,553,000
Total
$24,000,000
Treasury stock
(9,000 shares at cost)
(324,000)
Total stockholders’ equity
$23,676,000
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
12–14
Ex. 12–19
Stockholders’ Equity
Paid-in capital:
Preferred 1% stock, $150 par
(50,000 shares authorized,
48,000 shares issued)
$ 7,200,000
Excess of issue price over par
384,000
Paid-in capital, preferred stock
$ 7,584,000
Common stock, $36 par
(300,000 shares authorized,
280,000 shares issued)
$10,080,000
Excess of issue price over par
420,000
Paid-in capital, common stock
10,500,000
From sale of treasury stock
340,000
Total paid-in capital
$18,424,000
Retained earnings
71,684,000
Total
$90,108,000
Treasury common stock
(24,000 shares at cost)
(1,008,000)
Total stockholders’ equity
$89,100,000
Ex. 12–20
Sumter Pumps Corporation
Retained Earnings Statement
For the Year Ended December 31, 20Y3
Retained earnings, January 1, 20Y3
$59,650,000
Net income
$ 8,160,000
Dividends
(3,600,000)
Change in retained earnings
4,560,000
Retained earnings, December 31, 20Y3
$64,210,000
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
12–15
Ex. 12–21
1. Retained earnings is not part of paid-in capital.
3. Dividends payable should be included as part of current liabilities and not as part of
stockholders’ equity.
5. The amount of shares of common stock issued of 825,000 times the par value per share of
6. Organizing costs should be expensed as Organizational Expenses when incurred and not
included as a part of stockholders’ equity.
One possible corrected “Stockholders’ Equity” section of the balance sheet is as follows:
Stockholders’ Equity
Paid-in capital:
Preferred 2% stock, $80 par (125,000
shares authorized and issued)
$10,000,000
Excess of issue price over par
500,000
Paid-in capital, preferred stock
$ 10,500,000
Common stock, $20 par (1,000,000 shares
authorized, 825,000 shares issued)
$16,500,000
Excess of issue price over par
1,155,000
Paid-in capital, common stock
17,655,000
Total paid-in capital
$ 28,155,000
Retained earnings*
96,400,000
Total
$124,555,000
Treasury stock (75,000 shares at cost)
(1,755,000)
Total stockholders’ equity
$122,800,000
* $96,700,000 – $300,000. Since the organizing costs should have been expensed, the
retained earnings should be $300,000 less.
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
12–16
Ex. 12–22
I-Cards Inc.
Statement of Stockholders’ Equity
For the Year Ended December 31, 20Y9
Common
Stock,
$40 par
Paid-In
Capital in
Excess of
Par
Treasury
Stock
Retained
Earnings
Total
Balances, Jan. 1, 20Y9
$4,800,000
$ 960,000
—
$11,375,000
$17,135,000
Issued 30,000 shares
of common stock
1,200,000
300,000
1,500,000
Purchased 12,000 shares
as treasury stock
$(552,000)
(552,000)
Net income
3,780,000
3,780,000
Dividends
(276,000)
(276,000)
Balances, Dec. 31, 20Y9
$6,000,000
$1,260,000
$(552,000)
$14,879,000
$21,587,000
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
12–17
PROBLEMS
Prob. 12–1A
1.
Preferred Dividends
Common Dividends
Year
Total
Dividends
Total
Per
Share
Total
Per
Share
20Y1 ……..
$ 80,000
$ 80,000
$0.32
$ 0
$0.00
20Y2 ……..
90,000
90,000
0.36
0
0.00
20Y3 ……..
150,000
130,000*
0.52
20,000
0.04
20Y4 ……..
150,000
100,000
0.40
50,000
0.10
20Y5 ……..
160,000
100,000
0.40
60,000
0.12
20Y6 ……..
180,000
100,000
0.40
80,000
0.16
$2.40
$0.42
Prob. 12–2A
May
11
Building
3,375,000
Land
1,500,000
Common Stock (125,000 $35)
4,375,000
Paid-In Capital in Excess of Par—
Common Stock [125,000 ($39* – $35)]
500,000
20
Cash (40,000 $52)
2,080,000
Preferred Stock (40,000 $50)
2,000,000
Paid-In Capital in Excess of Par—
Preferred Stock [40,000 ($52** – $50)]
80,000
31
Cash
4,000,000
Mortgage Note Payable
4,000,000
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
12–18
Prob. 12–3A
a.
Cash (200,000 $12)
2,400,000
Common Stock (200,000 $5)
1,000,000
Paid-In Capital in Excess of Par—Common
Stock [200,000 ($12 – $5)]
1,400,000
b.
Cash (8,000 $115)
920,000
Preferred Stock (8,000 $100)
800,000
Paid-In Capital in Excess of Par—Preferred
Stock [8,000 ($115 – $100)]
120,000
c.
Treasury Stock (175,000 $10)
1,750,000
Cash
1,750,000
d.
Cash (110,000 $14)
1,540,000
Treasury Stock (110,000 $10)
1,100,000
Paid-In Capital from Sale of Treasury Stock
[110,000 ($14 – $10)]
440,000
e.
Cash (30,000 $8)
240,000
Paid-In Capital from Sale of Treasury Stock
[30,000 ($10 – $8)]
60,000
Treasury Stock (30,000 $10)
300,000
f.
Cash Dividends
443,200*
Cash Dividends Payable
443,200
g.
Cash Dividends Payable
443,200
Cash
443,200
* Calculation of cash dividends:
Outstanding Shares of Stock
Beginning of year
Preferred Stock
80,000 shares
Common Stock
4,000,000 shares
(a)
200,000
(b)
8,000
(c)
(175,000)
(d)
110,000
(e)
0 0
30,000
88,000 shares
4,165,000 shares
Cash dividends per share
$1.25
$0.08
Dividends paid in (f)
$110,000
$333,200
Total dividends paid $443,200 ($110,000 + $333,200)
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
12–19
Prob. 12–4A
1. and 2.
Common Stock
Jan.
1
Bal.
7,500,000
Apr.
10
1,500,000
Aug.
15
360,000
Dec.
31
Bal.
9,360,000
Paid-In Capital in Excess of Stated Value—Common Stock
Jan.
1
Bal.
825,000
Apr.
10
300,000
July
5
90,000
Dec.
31
Bal.
1,215,000
Retained Earnings
Dec.
31
493,800
Jan.
1
Bal.
33,600,000
Dec.
31
1,125,000
Dec.
31
Bal.
34,231,200
Treasury Stock
Jan.
1
Bal.
450,000
June 6
450,000
Nov.
23
570,000
Dec.
31
Bal.
570,000
Paid-In Capital from Sale of Treasury Stock
June 6
200,000
Stock Dividends Distributable
Aug.
15
360,000
July 5
360,000
Stock Dividends
July
5
450,000
Dec. 31
450,000
Cash Dividends
Dec.
28
43,800
Dec. 31
43,800
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
Prob. 12–4A (Continued)
2.
20Y6
Jan.
22
Cash Dividends Payable [(375,000 – 25,000) $0.08]
28,000
Cash
28,000
Apr.
10
Cash (75,000 shares $24)
1,800,000
Common Stock (75,000 $20)
1,500,000
Paid-In Capital in Excess of Stated Value—
Common Stock [75,000 ($24 – $20)]
300,000
June
6
Cash (25,000 $26)
650,000
Treasury Stock (25,000 $18)
450,000
Paid-In Capital from Sale of Treasury Stock
[25,000 ($26 – $18)]
200,000
July
5
Stock Dividends [(375,000 + 75,000) 4% $25]
450,000
Stock Dividends Distributable (18,000 $20)
360,000
Paid-In Capital in Excess of Stated Value—
Common Stock [18,000 ($25 – $20)]
90,000
Aug.
15
Stock Dividends Distributable
360,000
Common Stock
360,000
Nov.
23
Treasury Stock (30,000 $19)
570,000
Cash
570,000
Dec.
28
Cash Dividends
43,800
Cash Dividends Payable
43,800
[(375,000 + 75,000 + 18,000 – 30,000) $0.10].
31
Retained Earnings
493,800
Stock Dividends
450,000
Cash Dividends
43,800