Chapter Eleven
Challenge Exercise 1
During its first year of operations, Roldan Corporation had the following transactions pertaining to its common
stock.
Jan. 10 Issued 60,000 shares for cash at $5 per share.
July 1 Issued 50,000 shares for cash at $8 per share.
Instructions:
(a) Journalize the transactions, assuming that the common stock has a par value of $5 per share.
(b) Journalize the transactions, assuming that the common stock is no-par with a stated value of $2 per share.
(c) Compare the effect the two Jan. 10 transactions would have on Roldan’s assets, liabilities, stockholders’
equity, and net income.
(d) Compare the effect the two July 1 transactions would have on Roldan’s assets, liabilities, stockholders’
equity, and net income.
Challenge Exercise 1 – Solution
(a) Jan. 10 Cash (60,000 X $5) ……………………………………………. 300,000
Common Stock …………………………………………. 300,000
(b) Jan. 10 Cash (60,000 X $5) ……………………………………………. 300,000
Common Stock (60,000 X $2) …………………….. 120,000
Paid-in Capital in Excess of
Challenge Exercise 2
The stockholders’ equity section of Lumley Corporation at December 31 is as follows:
LUMLEY CORPORATION
Balance Sheet (partial)
Paid-in capital
Preferred stock, cumulative, 10,000 shares authorized, 6,000 shares issued and outstanding $
600,000
Common stock, $2 par, 750,000 shares authorized, 500,000 shares issued
1,000,000
Paid-in capital in excess of par – common 200,000
Total paid-in capital 1,800,000
Retained earnings 1,858,000
Total paid-in capital and retained earnings 3,658,000
Less: Treasury stock (12,000 common shares)
64,000
Total stockholders’ equity $3,594,000
Instructions:
From a review of the stockholders’ equity section, as chief accountant, write a memo to the president of the
company answering the following questions.
(a) How many shares of common stock are outstanding?
(b) At what average price per share was the common stock issued?
(c) What is the par value of the preferred stock?
(d) If the annual dividend on preferred stock is $36,000, what is the dividend rate on preferred stock?
(e) Since the inception of the company, what has been the total excess of net income over dividends declared?
(f) If dividends of $72,000 were in arrears on preferred stock, what would be the balance in Retained Earnings?
Challenge Exercise 2 – Solution
MEMO
To: President
From: Your name, Chief Accountant
Re: Questions about Stockholders’ Equity Section
Your memorandum about the stockholders’ equity section was received this morning. I hope the following will
answer your questions.
(d) The dividend rate is 6%, or ($36,000 ÷ $600,000).
Challenge Exercise 3
On January 1, Amanda Corporation had 100,000 shares of no-par common stock issued. 5,000 shares are
held as treasury stock. The stock has a stated value of $5 per share. During the year, the following occurred.
Apr. 1 Issued 12,000 additional shares of common stock for $18 per share.
June 15 Declared a cash dividend of $1 per share to stockholders of record on June 30.
July 10 Paid the $1 cash dividend.
Dec. 1 Purchased 2,000 additional shares of common stock for $17 per share.
15 Declared a cash dividend on outstanding shares of $1.20 per share to stockholders of record
on
December 31.
Instructions:
(a) Prepare the entries, if any, on each of the three dividend dates.
(b) How are dividends and dividends payable reported in the financial statements prepared at December 31?
Challenge Exercise 3 – Solution
a) June 15 Cash Dividends (107,000 X $1) …………………………. 107,000
Dividends Payable …………………………………… 107,000
Challenge Exercise 4
Richard Tandy Company reported the following balances at December 31, 2013: common stock $500,000;
paid-in capital in excess of par-common stock $200,000; retained earnings $350,000. During 2014, the
following transactions affected stockholder’s equity.
1. Issued preferred stock with a par value of $200,000 for $230,000.
2. Purchased treasury stock (common) for $70,000.
3. Earned net income of $240,000.
4. Declared and paid cash dividends of $86,000 ($16,000 preferred).
Instructions:
(a) Prepare the stockholders’ equity section of Richard Tandy Company’s December 31, 2014, balance sheet.
(b) Compute Tandy’s 2014 return on common stockholders’ equity.
Challenge Exercise 4 – Solution
(a)
RICHARD TANDY COMPANY
Balance Sheet (Partial)
December 31, 2011
Paid-in capital
Capital stock
Preferred stock ……………………………………………………………… $200,000
Common stock ……………………………………………………………… 500,000
Challenge Exercise 4 – Solution (Continued)
(b) The return on common stockholders’ equity ratio shows how many dollars of net income were earned for
each dollar invested by the stockholders. It is computed by dividing net income available to common