Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Chapter 13
Stockholders’ Equity
Review Questions
1. What is a corporation?
A corporation is a business organized under state law that is a separate legal entity.
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:
5. How does preferred stock differ from common stock?
Preferred stock gives its owners certain advantages over common stock. It receives dividend
13-2
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. Paid-
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?
Treasury stock is a corporation’s own stock that it has previously issued and later reacquired.
Its normal balance is a debit. Treasury stock is a contra-equity account.
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
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?
A stock dividend is a distribution of a corporation’s own stock to its stockholders.
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?
13-4
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?
The statement of stockholders’ equity is another option for reporting the changes in
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 common stock to the
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
Stockholders are not personally liable for the debts of the corporation. Other advantages of the
corporate entity form include the following. A corporation:
Requirement 2
Some disadvantages of organizing as a corporation are:
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
Date
Accounts and Explanation
Debit
Credit
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Cash
135,000
13-7
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
Date
Accounts and Explanation
Debit
Credit
Jan. 13
Cash
10,000
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
Date
Accounts and Explanation
Debit
Credit
July 7
Cash ($11 per share × 9,000 shares)
99,000
13-8
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
Date
Accounts and Explanation
Debit
Credit
Building
160,000
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
Date
Accounts and Explanation
Debit
Credit
2018
Requirement 2
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
Requirement 1
Date
Accounts and Explanation
Debit
Credit
2018
Requirement 2
Date
Accounts and Explanation
Debit
Credit
2019
13-11
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
Requirement 2
Total Dividend
$ 46,000
S13-8, cont.
Requirement 3
Total Dividend
$ 46,000
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
Date
Accounts and Explanation
Debit
Credit
Aug. 15
Stock Dividends ($15 per share × 13,000 × 0.05)
9,750
Requirement 2
Requirement 3
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
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Dec. 15
Stock Dividends ($2 per share × 320,000 shares × 0.40)
256,000
Common Stock Dividend Distributable
256,000
Requirement 2
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
Requirement 1
Stockholders’ Equity
Paid-In Capital:
Requirement 2
13-16
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
ABC CORPORATION
Income Statement
Year Ended December 31, 2018
Net Sales
$ 81,000
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
ABC CORPORATION
Income Statement
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
KINGSTON, INC.
Statement of Retained Earnings
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
Requirement 2
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.
SOLUTION
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
Rate of
13-21
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
13-22
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
Patent for Common Stock
$ 57,000
E13-21 Journalizing issuance of stock
Learning Objective 2
Steller Systems completed the following stock issuance transactions:
May 19
Issued 1,700 shares of $3 par value common stock for cash of $10.50 per share.
Jun. 3
Issued 300 shares of $9, no-par preferred stock for $15,000 cash.
11
Received equipment with a market value of $68,000 in exchange for 5,000 shares
of the $3 par value common stock.
Requirements
1. Journalize the transactions. Explanations are not required.
2. How much paid-in capital did these transactions generate for Steller Systems?
E13-21 , cont.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
May 19
Cash ($10.50 per share × 1,700 shares)
17,850
Requirement 2
E13-22 Journalizing issuance of no-par stock
Learning Objective 2
1. a. Cash $104,000
Eates Corp. issued 8,000 shares of no-par common stock for $13 per share.
Requirements
1. Record issuance of the stock if the stock:
a. is true no-par stock.
b. has stated value of $3 per share.
2. Which type of stock results in more total paid-in capital?
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
a.
Cash ($13 per share × 8,000 shares)
104,000
Requirement 2
E13-23 Journalizing issuance of stock and preparing the stockholders’ equity section of the
balance sheet
Learning Objective 2
2. Total Stockholders’ Equity $94,500
The charter for ASAP-TV, Inc. authorizes the company to issue 100,000 shares of $5, no-par
preferred stock and 500,000 shares of common stock with $1 par value. During its start-up phase,
ASAP-TV completed the following transactions:
Sep. 6
Issued 550 shares of common stock to the promoters who organized the
corporation, receiving cash of $16,500.
12
Issued 400 shares of preferred stock for cash of $23,000.
14
Issued 1,500 shares of common stock in exchange for land with a market
value of $17,000.
Requirements
1. Record the transactions in the general journal.
2. Prepare the stockholders’ equity section of the ASAP-TV balance sheet at September 30,
2018, assuming ASAP-TV, Inc. had net income of $38,000 for the month.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Sep. 6
Cash
16,500
Common Stock—$1 Par Value ($1 per share × 550 shares)
550
E13-23, cont.
Requirement 2
E13-24 Journalizing issuance of stock and preparing the stockholders’ equity section of the
balance sheet
Learning Objective 2
March 23 Common Stock $690
The charter of Evergreen Corporation authorizes the issuance of 900 shares of preferred stock
and 1,400 shares of common stock. During a two-month period, Evergreen completed these
stock-issuance transactions:
Mar. 23
Issued 230 shares of $3 par value common stock for cash of $15 per share.
Apr. 12
Received inventory with a market value of $27,000 and equipment with a market
value of $19,000 for 320 shares of the $3 par value common stock.
17
Issued 900 shares of 5%, $20 par value preferred stock for $20 per share.
Requirements
1. Record the transactions in the general journal.
2. Prepare the stockholders’ equity section of the Evergreen balance sheet as of April 30, 2018,
for the transactions given in this exercise. Retained Earnings has a balance of $73,000 at April
30, 2018.
ASAP-TV, Inc.
Balance Sheet (Partial)
13-27
E13-24. cont.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Mar. 23
Cash ($15 per share × 230 shares)
3,450
Requirement 2
EVERGREEN CORPORATION
Balance Sheet (Partial)
April 30, 2018
13-28
E13-25 Journalizing treasury stock transactions and reporting stockholders’ equity
Learning Objective 3
2. Total Stockholders’ Equity $52,000
Southern Amusements Corporation had the following stockholders’ equity on November 30:
On December 30, Southern purchased 200 shares of treasury stock at $15 per share.
Requirements
1. Journalize the purchase of the treasury stock.
2. Prepare the stockholders’ equity section of the balance sheet at December 31, 2018. Assume
the balance in retained earnings is unchanged from November 30.
3. How many shares of common stock are outstanding after the purchase of treasury stock?
SOLUTION
Requirement 1
E13-25, cont.
Requirement 2
SOUTHERN AMUSEMENTS CORPORATION
Balance Sheet (Partial)
December 31, 2018
Requirement 3
shares).
13-30
E13-26 Journalizing issuance of stock and treasury stock transactions
Learning Objectives 2, 3
May 22 Treasury Stock $16,900
Stock transactions for Careful Driving School, Inc. follow:
Mar. 4
Issued 27,000 shares of $1 par value common stock at $10 per share.
May 22
Purchased 1,300 shares of treasury stock—common at $13 per share.
Sep. 22
Sold 500 shares of treasury stock—common at $23 per share.
Oct. 14
Sold 800 shares of treasury stock—common at $9 per share.
Journalize the transactions.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
13-31
E13-27 Computing dividends on preferred and common stock and journalizing
Learning Objective 4
1. Preferred Dividend 2018 $9,000
Northern Communications has the following stockholders’ equity on December 31, 2018:
Requirements
1. Assuming the preferred stock is cumulative, compute the amount of dividends to preferred
stockholders and to common stockholders for 2018 and 2019 if total dividends are $9,000 in
2018 and $45,000 in 2019. Assume no changes in preferred stock and common stock in 2019.
2. Record the journal entries for 2018, assuming that Northern Communications declared the
dividend on December 1 for stockholders of record on December 10. Northern
Communications paid the dividend on December 20.
SOLUTION
Requirement 1
Total Dividend—2018
$ 9,000
13-32
E13-27, cont.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
2018
Dec. 1
Cash Dividends
9,000
E13-28 Computing dividends on preferred and common stock and journalizing
Learning Objective 4
2. July 1 Cash Dividends $185,000
The following elements of stockholders’ equity are from the balance sheet of Sneed Marketing
Corp. at December 31, 2017:
Sneed paid no preferred dividends in 2017.
Requirements
1. Compute the dividends to the preferred and common shareholders for 2018 if total dividends
are $185,000 and assuming the preferred stock is noncumulative. Assume no changes in
preferred and common stock in 2018.
2. Record the journal entries for 2018 assuming that Sneed Marketing Corp. declared the
dividends on July 1 for stockholders of record on July 15. Sneed paid the dividends on July
31.
E13-28, cont.
SOLUTION
Requirement 1
Total Dividend—2018
$ 185,000
Requirement 2
Date
Accounts and Explanation
Debit
Credit
2018
July 1
Cash Dividends
185,000
13-34
E13-29 Journalizing a stock dividend and reporting stockholders’ equity
Learning Objective 4
2. Total Stockholders’ Equity $122,000
The stockholders’ equity of Lakeside Occupational Therapy, Inc. on December 31, 2017,
follows:
On April 30, 2018, the market price of Lakeside’s common stock was $16 per share and the
company declared a 13% stock dividend. The stock was distributed on May 15.
Requirements
1. Journalize the declaration and distribution of the stock dividend.
2. Prepare the stockholders’ equity section of the balance sheet as of May 31, 2018. Assume
Retained Earnings are $120,000 on April 30, 2018, before the stock dividend, and the only
change made to Retained Earnings before preparing the balance sheet was closing the Stock
Dividends account.
E13-29, cont.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Apr. 30
Stock Dividends ($16 per share × 400 shares × 0.13)
832
Requirement 2
LAKESIDE OCCUPATIONAL THERAPY, INC.
Balance Sheet (Partial)
May 31, 2018
13-36
E13-30 Journalizing cash and stock dividends
Learning Objective 4
1. Common Stock $20,440
Self-Defense Schools, Inc. is authorized to issue 200,000 shares of $2 par common stock. The
company issued 73,000 shares at $5 per share. When the market price of common stock was $7
per share, Self-Defense Schools declared and distributed a 14% stock dividend. Later, Self-
Defense Schools declared and paid a $0.70 per share cash dividend.
Requirements
1. Journalize the declaration and the distribution of the stock dividend.
2. Journalize the declaration and the payment of the cash dividend.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Stock Dividends ($7 per share × 73,000 shares × 0.14)
71,540
Requirement 2
Date
Accounts and Explanation
Debit
Credit
E13-31 Reporting stockholders’ equity after a stock split
Learning Objective 4
Total Stockholders’ Equity $3,410
Wood Golf Club Corp. had the following stockholders’ equity at December 31, 2017:
On June 30, 2018, Wood Golf Club split its common stock 2-for-1. Prepare the stockholders’
equity section of the balance sheet immediately after the split. Assume the balance in retained
earnings is unchanged from December 31, 2017.
SOLUTION
WOOD GOLF CLUB CORP.
Balance Sheet (Partial)
June 30, 2018
13-38
E13-32 Determining the effects of cash dividends, stock dividends, and stock splits
Learning Objective 4
Complete the following chart by inserting a check mark
( )
for each statement that is true.
SOLUTION
Cash dividend
Stock dividend
Stock split
Decreases retained earnings
√
√
E13-33 Determining the effect of stock dividends, stock splits, and treasury stock
transactions
Learning Objectives 3, 4
Many types of transactions may affect stockholders’ equity. Identify the effects of the following
transactions on total stockholders’ equity. Each transaction is independent.
a. A 10% stock dividend. Before the dividend, 540,000 shares of $1 par value common stock
were outstanding; market value was $9 per share at the time of the dividend.
b. A 2-for-1 stock split. Prior to the split, 66,000 shares of $5 par value common stock were
outstanding.
c. Purchase of 1,100 shares of $0.50 par treasury stock at $6 per share.
d. Sale of 600 shares of $0.50 par treasury stock for $9 per share. Cost of the treasury stock was
$7 per share.
SOLUTION
Effect on Total
Stockholders’ Equity
Amount
Explanation
a.
No effect
$ 0
Increases Paid-In Capital, but decreases Retained
13-40
E13-34 Preparing a multi-step income statement
Learning Objective 5
Net Income $167,000
Clix Photographic Supplies, Inc.’s accounting records include the following for 2018:
Income Tax Savings—Loss on
Discontinued Operations
$ 12,000
Net Sales
$
525,000
Loss on Discontinued
Operations
30,000
Operating Expenses
(Including Income Tax)
100,000
Cost of Goods Sold
240,000
Prepare Clix’s multi-step income statement for the year ending December 31, 2018. Omit
earnings per share.
SOLUTION
CLIX PHOTOGRAPHIC SUPPLIES, INC.
Income Statement
E13-35 Computing earnings per share
Learning Objective 5
Net Income $10.80
Faccone Academy Surplus had 60,000 shares of common stock and 9,000 shares of 20%, $15 par
value preferred stock outstanding through December 31, 2018. Income from continuing
operations for 2018 was $711,000, and loss on discontinued operations (net of income tax
saving) was $36,000.
Compute Faccone’s earnings per share for 2018, starting with income from continuing
operations. Round to the nearest cent.
SOLUTION
Common
13-42
E13-36 Preparing a statement of retained earnings
Learning Objective 6
Retained Earnings Dec. 31, 2018 $93,000
Kelly May Bakery, Inc. reported a prior-period adjustment in 2018. An accounting error caused
net income of prior years to be overstated by $1,000. Retained Earnings at December 31, 2017,
as previously reported, was $48,000. Net income for 2018 was $74,000, and dividends declared
were $28,000. Prepare the company’s statement of retained earnings for the year ended
December 31, 2018.
SOLUTION
KELLY MAY BAKERY, INC.
Statement of Retained Earnings
Year Ended December 31, 2018
E13-37 Computing earnings per share and price/earnings ratio
Learning Objective 7
Rocket Corp. earned net income of $153,040 and paid the minimum dividend to preferred
stockholders for 2018. Assume that there are no changes in common shares outstanding during
2018. Rocket’s books include the following figures:
Preferred Stock—6%, $60 par value; 2,000 shares authorized, 1,000 shares issued and
outstanding
$ 60,000
Common Stock—$5 par value; 80,000 shares authorized, 48,000 shares issued, 46,700
shares outstanding
240,000
Paid-In Capital in Excess of Par—Common
470,000
Treasury Stock—Common; 1,300 shares at cost
(26,000)
Requirements
1. Compute Rocket’s EPS for the year.
2. Assume Rocket’s market price of a share of common stock is $12 per share. Compute
Rocket’s price/earnings ratio.
SOLUTION
Requirement 1
Earnings per
share
=
(Net income − Preferred
dividends)
/
Average number of common shares
outstanding
Requirement 2
Price/earnings
ratio
=
Market price per share of common stock
/
Earnings per share
E13-38 Computing rate of return on common stockholders’ equity
Learning Objective 7
LaSalle Exploration Company reported these figures for 2018 and 2017:
2018
2017
Income Statement—partial:
Net Income
$ 14,800
$ 19,200
Dec. 31, 2018
Dec. 31, 2017
Balance Sheet—partial:
Total Assets
$ 323,000
$ 314,000
Preferred Stock
$ 2,100
$ 2,100
Common Stock
178,000
168,000
Retained Earnings
11,000
7,000
Total Stockholders’ Equity
$ 191,100
$ 177,100
Compute rate of return on common stockholders’ equity for 2018 assuming no dividends were
declared or paid to preferred stockholders.
SOLUTION
Rate of
return on
common
stockholders’
equity
=
(Net income − Preferred
dividends)
/
Average common stockholders’
equity = Total equity ‒ preferred
equity
13-45
Problems – Group A
P13-39A Organizing a corporation and issuing stock
Learning Objectives 1, 2
Montel and Jeremy are opening a paint store. There are no competing paint stores in the area.
They must decide how to organize the business. They anticipate profits of $350,000 the first
year, with the ability to sell franchises in the future. Although they have enough to start the
business now as a partnership, cash flow will be an issue as they grow. They feel the corporate
form of operation will be best for the long term. They seek your advice.
Requirements
1. What is the main advantage they gain by selecting a corporate form of business now?
2. Would you recommend they initially issue preferred or common stock? Why?
3. If they decide to issue $5 par common stock and anticipate an initial market price of $20 per
share, how many shares will they need to issue to raise $2,750,000?
SOLUTION
Requirement 1
Students’ answers may vary. The following are advantages of the corporate form of business. A
corporation:
Requirement 2
Requirement 3
13-46
P13-40A Identifying sources of equity, stock issuance, and dividends
Learning Objectives 1, 2, 4
4. Common stock dividends $402,000
Voyage Comfort Specialists, Inc. reported the following stockholders’ equity on its balance sheet
at June 30, 2018:
Requirements
1. Identify the different classes of stock that Voyage Comfort Specialists has outstanding.
2. What is the par value per share of Voyage Comfort Specialists’ preferred stock?
3. Make two summary journal entries to record issuance of all the Voyage Comfort Specialists’
stock for cash. Explanations are not required.
4. No preferred dividends are in arrears. Journalize the declaration of a $500,000 dividend at
June 30, 2018, and the payment of the dividend on July 20, 2018. Use separate Dividends
Payable accounts for preferred and common stock. An explanation is not required.
SOLUTION
Requirement 1
Requirement 2
P13-40A, cont.
Requirement 3
Date
Accounts and Explanation
Debit
Credit
Requirement 4
Total Dividend—2018
$ 500,000
Date
Accounts and Explanation
Debit
Credit
2018
13-48
P13-41A Journalizing stock issuance and cash dividends and preparing the stockholders’
equity section of the balance sheet
Learning Objectives 2, 4
2. Total Stockholders’ Equity $454,000
D-Mobile Wireless needed additional capital to expand, so the business incorporated. The charter
from the state of Georgia authorizes D-Mobile to issue 50,000 shares of 8%, $50 par value
cumulative preferred stock and 160,000 shares of $4 par value common stock. During the first
month, D-Mobile completed the following transactions:
Oct. 2
Issued 19,000 shares of common stock for a building with a market value of $240,000.
6
Issued 600 shares of preferred stock for $140 per share.
9
Issued 11,000 shares of common stock for cash of $55,000.
10
Declared a $19,000 cash dividend for stockholders of record on Oct. 20. Use a separate
Dividends Payable account for preferred and common stock.
25
Paid the cash dividend.
Requirements
1. Record the transactions in the general journal.
2. Prepare the stockholders’ equity section of D-Mobile’s balance sheet at October 31, 2018.
Assume D-Mobile’s net income for the month was $94,000.
P13-41A, cont.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Oct. 2
Building
240,000
Common Stock—$4 Par Value ($4 per share × 19,000 shares)
76,000
Paid-In Capital in Excess of Par—Common ($240,000 –
13-50
P13-41A, cont.
Requirement 2
D-MOBILE WIRELESS
Balance Sheet (Partial)
October 31, 2018
*Retained Earnings = Beginning Balance + Net income – Dividends = $0 + $94,000 ‒ $19,000 =
$75,000
P13-42A Journalizing dividends and treasury stock transactions and preparing the
stockholders’ equity section of the balance sheet
Learning Objectives 3, 4
Nov. 8 Treasury Stock $4,000
Deerborn Manufacturing Co. completed the following transactions during 2018:
Jan. 16
Declared a cash dividend on the 6%, $103 par noncumulative preferred stock (1,050 shares
outstanding). Declared a $0.20 per share dividend on the 100,000 shares of $2 par value
common stock outstanding. The date of record is January 31, and the payment date is
February 15.
Feb. 15
Paid the cash dividends.
Jun. 10
Split common stock 2-for-1.
Jul. 30
Declared a 30% stock dividend on the common stock. The market value of the common
stock was $9 per share.
Aug. 15
Distributed the stock dividend.
Oct. 26
Purchased 1,000 shares of treasury stock at $8 per share.
Nov. 8
Sold 500 shares of treasury stock for $10 per share.
30
Sold 300 shares of treasury stock for $4 per share.
Requirements
1. Record the transactions in Deerborn’s general journal.
2. Prepare the Deerborn’s stockholders’ equity section of the balance sheet as of December 31,
2018. Assume that Deerborn was authorized to issue 2,600 shares of preferred stock and
400,000 shares of common stock. Both preferred stock and common stock were issued at par.
The ending balance of retained earnings as of December 31, 2018, is $2,060,000.
13-52
P13-42A, cont.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Jan. 16
Cash Dividends
26,489
Dividends Payable—Preferred (6% × $103 × 1,050 shares)
6,489
Dividends Payable—Common ($0.20 × 100,000 shares)
20,000
Declared cash dividend.
P13-42A, cont.
Requirement 2
DEERBORN MANUFACTURING CO.
Balance Sheet (Partial)
December 31, 2018
Stockholders’ Equity
13-54
P13-43A Preparing an income statement
Learning Objective 5
Net Income $65,500
The following information was taken from the records of Chua Motorsports, Inc. at November
30, 2018:
Selling Expenses
Administrative Expenses
Income from Discontinued Operations
Cost of Goods Sold
Treasury Stock—Common (5,000 shares)
Net Sales Revenue
$ 110,000
115,000
2,500
510,000
75,000
819,000
Common Stock, $12 Par Value, 10,000
shares authorized and issued
$ 120,000
Preferred Stock, $7 No-Par Value, 7,000
shares issued
490,000
Income Tax Expense: Continuing
Operations
20,000
Income Tax Expense: Income from
Discontinued Operations
1,000
Prepare a multi-step income statement for Chua Motorsports for the fiscal year ended November
30, 2018. Include earnings per share.
P13-43A, cont.
SOLUTION
CHUA MOTORSPORTS, INC.
Income Statement
Year Ended November 30, 2018
P13-44A Journalizing dividend and treasury stock transactions, preparing a statement of
retained earnings, and preparing stockholders’ equity
Learning Objectives 3, 4, 6
2. Retained Earnings Dec. 31, 2018 $126,550
The balance sheet of Goldstein Management Consulting, Inc. at December 31, 2017, reported the
following stockholders’ equity:
During 2018, Goldstein completed the following selected transactions:
Feb. 6
Declared a 15% stock dividend on common stock. The market value of
Goldstein’s stock was $25 per share.
15
Distributed the stock dividend.
Jul. 29
Purchased 2,300 shares of treasury stock at $25 per share.
Nov.
27
Declared a $0.10 per share cash dividend on the common stock outstanding.
Requirements
1. Record the transactions in the general journal.
2. Prepare a retained earnings statement for the year ended December 31, 2018. Assume
Goldstein’s net income for the year was $90,000.
3. Prepare the stockholders’ equity section of the balance sheet at December 31, 2018.
13-57
P13-44A, cont.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Feb. 6
Stock Dividends ($25 per share × 32,000 × 0.15)
120,000
Requirement 2
GOLDSTEIN MANAGEMENT CONSULTING, INC.
Statement of Retained Earnings
Year Ended December 31, 2018
P13-44A, cont.
Requirement 3
GOLDSTEIN MANAGEMENT CONSULTING, INC.
Balance Sheet (Partial)
December 31, 2018
Stockholders’ Equity
Paid-In Capital:
P13-45A Computing earnings per share, price/earnings ratio, and rate of return on
common stockholders’ equity
Learning Objective 7
Bianchi Company reported these figures for 2018 and 2017:
2018
2017
Income Statement—partial:
Net Income
$ 34,380
$ 18,000
Dec. 31, 2018
Dec. 31, 2017
Balance Sheet—partial:
Total Assets
$ 285,000
$ 280,000
Paid-In Capital:
Preferred Stock—11%, $9 Par Value; 60,000 shares
authorized, 12,000 shares issued and outstanding
$ 108,000
$ 108,000
Common Stock—$2 Par Value; 60,000 shares
authorized, 50,000 shares issued and outstanding
100,000
100,000
Paid-In Capital in Excess of Par—Common
14,000
14,000
Retained Earnings
60,500
38,000
Total Stockholders’ Equity
$ 282,500
$ 260,000
P13-45A, cont.
Requirements
1. Compute Bianchi Company’s earnings per share for 2018. Assume the company paid the
minimum preferred dividend during 2018. Round to the nearest cent.
2. Compute Bianchi Company’s price/earnings ratio for 2018. Assume the company’s market
price per share of common stock is $9. Round to two decimals.
3. Compute Bianchi Company’s rate of return on common stockholders’ equity for 2018.
Assume the company paid the minimum preferred dividend during 2018. Round to the nearest
whole percent.
SOLUTION
Requirement 1
Earnings per
=
(Net income − Preferred
/
Average number of common shares
Requirement 2
=
20.00
Requirement 3
Rate of
13-60
Problems – Group B
P13-46B Organizing a corporation and issuing stock
Learning Objectives 1, 2
Jimmy and Randy are opening a comic store. There are no competing comic stores in the area.
They must decide how to organize the business. They anticipate profits of $550,000 the first
year, with the ability to sell franchises in the future. Although they have enough to start the
business now as a partnership, cash flow will be an issue as they grow. They feel the corporate
form of operation will be best for the long term. They seek your advice.
Requirements
1. What is the main advantage they gain by selecting a corporate form of business now?
2. Would you recommend they initially issue preferred or common stock? Why?
3. If they decide to issue $3 par common stock and anticipate an initial market price of $75 per
share, how many shares will they need to issue to raise $3,000,000?
SOLUTION
Requirement 1
Students’ answers may vary. The following are advantages of the corporate form of business. A
corporation:
Requirement 2
Requirement 3
13-61
P13-47B Identifying sources of equity, stock issuance, and dividends
Learning Objectives 1, 2, 4
4. Common stock dividends $135,000
Tillman Comfort Specialists, Inc. reported the following stockholders’ equity on its balance sheet
at June 30, 2018:
Requirements
1. Identify the different classes of stock that Tillman Comfort Specialists has outstanding.
2. What is the par value per share of Tillman Comfort Specialists’ preferred stock?
3. Make two summary journal entries to record issuance of all the Tillman Comfort Specialists
stock for cash. Explanations are not required.
4. No preferred dividends are in arrears. Journalize the declaration of a $200,000 dividend at
June 30, 2018, and the payment of the dividend on July 20, 2018. Use separate Dividends
Payable accounts for preferred and common stock. An explanation is not required.
SOLUTION
Requirement 1
Requirement 2
P13-47B, cont.
Requirement 3
Date
Accounts and Explanation
Debit
Credit
Requirement 4
Total Dividend—2018
$ 200,000
Date
Accounts and Explanation
Debit
Credit
2018
13-63
P13-48B Journalizing stock issuance and cash dividends and preparing the stockholders’
equity section of the balance sheet
Learning Objectives 2, 4
2. Total Stockholders’ Equity $530,000
C-Mobile Wireless needed additional capital to expand, so the business incorporated. The charter
from the state of Georgia authorizes C-Mobile to issue 120,000 shares of 9%, $150 par value
cumulative preferred stock, and 140,000 shares of $3 par value common stock. During the first
month, C-Mobile completed the following transactions:
Oct. 2
Issued 18,000 shares of common stock for a building with a market value of $260,000.
6
Issued 650 shares of preferred stock for $160 per share.
9
Issued 14,000 shares of common stock for cash of $84,000.
10
Declared a $13,000 cash dividend for stockholders of record on Oct. 20. Use a separate
Dividends Payable account for preferred and common stock.
25
Paid the cash dividend.
Requirements
1. Record the transactions in the general journal.
2. Prepare the stockholders’ equity section of C-Mobile’s balance sheet at October 31, 2018.
Assume C-Mobile’s net income for the month was $95,000.
P13-48B, cont.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Oct. 2
Building
260,000
Common Stock—$3 Par Value ($3 per share × 18,000 shares)
54,000
*Total Dividend
$ 13,000
Dividend to Preferred Stockholders
9% × $150 × 650 shares
$ 8,775
13-65
P13-48B, cont.
Requirement 2
C-MOBILE WIRELESS
Balance Sheet (Partial)
October 31, 2018
Stockholders’ Equity
Paid-In Capital:
Cumulative Preferred Stock—9%, $150 Par Value; 120,000 shares
*Ending retained earnings = Beginning retained earnings + Net income – dividends = $0 +
$95,000 ‒ $13,000 = $82,000
P13-49B Journalizing dividends and treasury stock transactions and preparing the
stockholders’ equity section of the balance sheet
Learning Objectives 3, 4
1. Nov. 8 Treasury Stock $36,000
Halborn Manufacturing Co. completed the following transactions during 2018:
Jan. 16
Declared a cash dividend on the 6%, $97 par noncumulative preferred stock (1,150 shares
outstanding). Declared a $0.20 per share dividend on the 80,000 shares of $8 par value
common stock outstanding. The date of record is January 31, and the payment date is
February 15.
Feb. 15
Paid the cash dividends.
Jun. 10
Split common stock 2-for-1.
Jul. 30
Declared a 40% stock dividend on the common stock. The market value of the common
stock was $8 per share.
Aug. 15
Distributed the stock dividend.
Oct. 26
Purchased 8,000 shares of treasury stock at $9 per share.
Nov. 8
Sold 4,000 shares of treasury stock for $10 per share.
30
Sold 1,400 shares of treasury stock for $5 per share.
Requirements
1. Record the transactions in Halborn’s general journal.
2. Prepare the Halborn’s stockholders’ equity section of the balance sheet as of December 31,
2018. Assume that Halborn was authorized to issue 2,200 shares of preferred stock and
500,000 shares of common stock. Both preferred stock and common stock were issued at par.
The ending balance of retained earnings as of December 31, 2018, is $2,030,000.
P13-49B, cont.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Jan. 16
Cash Dividends
22,693
Dividends Payable—Preferred (6% × $97 × 1,150 shares)
6,693
Dividends Payable—Common ($0.20 × 80,000 shares)
16,000
Declared cash dividend.
P13-49B, cont.
Requirement 2
HALBORN MANUFACTURING CO.
Balance Sheet (Partial)
December 31, 2018
Stockholders’ Equity
Paid-In Capital:
Noncumulative Preferred Stock—6%, $97 Par Value; 2,200
shares authorized, 1,150 shares issued and outstanding
$ 111,550
13-69
P13-50B Preparing an income statement
Learning Objective 5
Net Income $37,840
The following information was taken from the records of Arizona Motorsports, Inc. at November
30, 2018:
Selling Expenses
Administrative Expenses
Income from Discontinued
Operations
Cost of Goods Sold
Treasury Stock—Common (1,500
shares)
Net Sales Revenue
$ 95,000
150,000
2,400
470,000
19,500
801,400
Common Stock, $11 Par Value,
13,500 shares authorized and
issued
$
148,500
Preferred Stock, $2 No-Par
Value, 2,000 shares issued
60,000
Income Tax Expense: Continuing
Operations
50,000
Income Tax Expense: Income
from Discontinued Operations
960
Prepare a multi-step income statement for Arizona Motorsports for the fiscal year ended
November 30, 2018. Include earnings per share.
P13-50B, cont.
SOLUTION
ARIZONA MOTORSPORTS, INC.
Income Statement
Year Ended November 30, 2018
Net Sales Revenue
$ 801,400
Cost of Goods Sold
470,000
P13-51B Journalizing dividend and treasury stock transactions, preparing a statement of
retained earnings, and preparing stockholders’ equity
Learning Objectives 3, 4, 6
2. Retained Earnings Dec. 31, 2018 $218,280
The balance sheet of Cullins Management Consulting, Inc. at December 31, 2017, reported the
following stockholders’ equity:
During 2018, Cullins completed the following selected transactions:
Feb. 6
Declared a 5% stock dividend on common stock. The market value of Cullins’s stock was
$25 per share.
15
Distributed the stock dividend.
Jul. 29
Purchased 2,000 shares of treasury stock at $25 per share.
Nov. 27
Declared a $0.20 per share cash dividend on the common stock outstanding.
Requirements
1. Record the transactions in the general journal.
2. Prepare a retained earnings statement for the year ended December 31, 2018. Assume
Cullins’s net income for the year was $87,000.
3. Prepare the stockholders’ equity section of the balance sheet at December 31, 2018.
13-72
P13-51B, cont.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Feb. 6
Stock Dividends ($25 per share × 22,000 × 0.05)
27,500
Common Stock Dividend Distributable ($10 per share × 22,000 ×
0.05)
11,000
Requirement 2
CULLINS MANAGEMENT CONSULTING, INC.
Statement of Retained Earnings
Year Ended December 31, 2018
Retained Earnings, January 1, 2018
$ 163,000
P13-51B, cont.
Requirement 3
CULLINS MANAGEMENT CONSULTING, INC.
Balance Sheet (Partial)
December 31, 2018
Stockholders’ Equity
Paid-In Capital:
Common Stock—$10 Par Value; 200,000 shares authorized,
P13-52B Computing earnings per share, price/earnings ratio, and rate of return on
common stockholders’ equity
Learning Objective 7
Gullo Company reported these figures for 2018 and 2017:
2018
2017
Income Statement—partial:
Net Income
$ 18,900
$ 24,000
P13-52B, cont.
Requirements
1. Compute Gullo Company’s earnings per share for 2018. Assume the company paid the
minimum preferred dividend during 2018. Round to the nearest cent.
2. Compute Gullo Company’s price/earnings ratio for 2018. Assume the company’s market
price per share of common stock is $9. Round to two decimals.
3. Compute Gullo Company’s rate of return on common stockholders’ equity for 2018. Assume
the company paid the minimum preferred dividend during 2018. Round to the nearest whole
percent.
SOLUTION
Requirement 1
Earnings per
=
(Net income − Preferred
/
Average number of common shares
Requirement 2
=
30.00
Requirement 3
Rate of return
on common
stockholders’
equity
=
(Net income − Preferred
dividends)
/
Average common stockholders’
equity – Total equity minus
preferred equity
13-75
P13-53 Using Excel for stockholders’ equity transactions and preparing financial
statements
Naxion Corporation began operations on January 2, 2018, and had the following transactions
during the year:
Jan. 2
Issued 250,000 shares of $1 par value common stock at $45 per share.
Total shares authorized: 1,000,000.
Feb. 5
Issued 10,000 shares of $50 par, 5% cumulative preferred stock at $65 per
share. Total shares authorized: 25,000.
Mar. 15
Issued 150,000 shares of $1 par value common stock at $35 per share.
Apr. 2
Declared a $2.50 per share cash dividend on its preferred stock to be paid
on April 25. Date of record is April 10.
3
Declared a $0.10 per share cash dividend on its common stock to be paid
on April 26. Date of record is April 10.
Jun. 1
Declared a 2% stock dividend on all common stock outstanding. Current
market price of the stock was $48 per share. Date of record is June 15.
30
Distributed common stock dividend to shareholders.
Oct. 10
Purchased 2,500 shares of treasury stock—common at $52 per share.
Nov. 15
Sold 2,000 shares of treasury stock—common at $54 per share.
P13-53, cont.
Requirements
1. Journalize Naxion’s transactions for 2018.
2. Prepare the stockholders’ equity section of the balance sheet as of December 31, 2018,
including the heading. Assume Naxion had net income of $15,000,000 during 2018. This is
the first year of operations.
3. Determine Naxion’s earnings per share for 2018, rounded to two decimal places. For the
average number of common shares outstanding, average the number of shares outstanding on
January 2 and December 31.
4. Assuming Naxion’s market value per common share as of December 31, 2018, was $55,
calculate Naxion’s price/earnings ratio for 2018, rounded to two decimal places.
SOLUTION
The student templates for Using Excel are available online in MyAccountingLab in the
Continuing Problem
P13-54 Journalizing stock issuances, cash dividends, and stock dividends; preparing
stockholders’ equity section of balance sheet
This problem continues the Canyon Canoe Company situation from Chapter 12. After looking
into debt financing through notes, mortgage, and bonds payable, Canyon Canoe Company
decides to raise additional capital for the planned business expansion. The company will be able
to acquire cash as well as land adjacent to its current business location. Before the following
transactions, the balance in Common Stock on January 1, 2021, was $136,000 and included
136,000 shares of common stock issued and outstanding. (There was no Paid-In Capital in
Excess of Par—Common.)
Canyon Canoe Company had the following transactions in 2021:
Jan. 1
Issued 50,000 shares of $1 par value common stock for a total of $200,000.
10
Issued 20,000 shares of 4%, $3 par value preferred stock in exchange for
land with a market value of $70,000.
Dec.
15
Declared total cash dividends of $15,000.
20
Declared an 8% common stock dividend when the market value of the stock
was $4.50 per share.
31
Paid the cash dividends.
31
Distributed the stock dividend.
Requirements
1. Journalize the transactions.
2. Calculate the balance in Retained Earnings on December 31, 2021. Assume the balance on
January 1, 2021 was $4,250 and net income for the year was $417,000.
3. Prepare the stockholders’ equity section of the balance sheet as of December 31, 2021. There
was no preferred stock issued prior to the 2021 transactions.
13-78
P13-54 , cont.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Jan. 1
Cash
200,000
Common Stock—$1 Par Value ($1 per share × 50,000 shares)
50,000
Paid-In Capital in Excess of Par—Common ($200,000 − $50,000)
150,000
Issued common stock for cash.
13-79
P13-54, cont.
Requirement 2
Retained Earnings, January 1, 2021
$ 4,250
Requirement 3
CANYON CANOE COMPANY
Balance Sheet (Partial)
December 31, 2021
Stockholders’ Equity
Paid-In Capital:
Preferred Stock, 4%, $3 par value; 20,000 shares issued and outstanding
$ 60,000
13-80
Comprehensive Problem for Chapters 11, 12, and 13
The Tusquittee Company is a retail company that began operations on October 1, 2018, when it incorporated in the state of North
Carolina. The Tusquittee Company is authorized to issue 100,000 shares of $1 par value common stock and 50,000 shares of 5%, $50
par value preferred stock. The company sells a product that includes a one-year warranty and records estimated warranty payable each
month. Customers are charged a 6% state sales tax. The company uses a perpetual inventory system. There are three employees that
are paid a monthly salary on the last day of the month.
Following is the chart of accounts for The Tusquittee Company. As a new business, all beginning balances are $0.
The Tusquittee Company
Chart of Accounts
Cash
Dividends Payable—Common
Merchandise Inventory
Notes Payable
Land
Mortgages Payable
Building
Common Stock—$1 Par Value
Store Fixtures
Paid-In Capital in Excess of Par—Common
Accumulated Depreciation
Paid-In Capital from Treasury Stock
Transactions
13-81
Income Tax Payable
Utilities Expense
Sales Tax Payable
Depreciation Expense
Estimated Warranty Payable
Warranty Expense
Interest Payable
Income Tax Expense
Interest Expense
The Tusquittee Company completed the following transactions during the last quarter of 2018, its first year of operations:
Oct. 1
Issued 25,000 shares of $1 par value common stock for cash of $10 per share.
1
Issued a $200,000, 10-year, 8% mortgage payable for land with an existing store
building. Mortgage payments of $2,425 are due on the first day of each month,
beginning November 1. The assets had the following market values: Land,
$40,000; Building, $160,000.
1
Issued a one-year, 10% note payable for $10,000 for store fixtures. The principal
and interest are due October 1, 2019.
3
Purchased merchandise inventory on account from Top Rate for $125,000, terms
n/30.
13-82
15
Paid all liabilities associated with the October 31 payroll.
15
Remitted (paid) sales tax from October sales to the state of North Carolina.
16
Paid $6,000 to satisfy warranty claims.
17
Declared cash dividends of $1 per outstanding share of common stock.
18
Paid $245 for utilities.
27
Paid the cash dividends.
30
Recorded cash sales for the month of $140,000 plus sales tax of 6%. The cost of
the goods sold was $84,000 and estimated warranty payable was 8%.
30
Recorded November payroll and paid employees.
30
Accrued employer payroll taxes for November.
Requirements
1. In preparation for recording the transactions, prepare:
a. An amortization schedule for the first 3 months of the mortgage payable issued on October 1. Round interest calculations to
the nearest dollar.
b. Payroll registers for October, November, and December. All employees worked October 1 through December 31 and are
subject to the following FICA taxes: OASDI: 6.2% on first $118,500 earned; Medicare: 1.45% up to $200,000, 2.35% on
earnings above $200,000. Additional payroll information includes:
Employee
Monthly
Salary
Federal
Income Tax
Health
Insurance
Kate Jones
$ 6,000
$ 1,800
$ 300
Mary Smith
5,000
1,000
300
13-84
7. Evaluate the company’s success for the first quarter of operations by calculating the following ratios. The market price of the
common stock is $25 on December 31, 2018. Round to two decimal places.
a. Times interest earned
b. Debt to equity
c. Earnings per share
d. Price/earnings ratio
e. Rate of return on common stock
8. The Tusquittee Company wants to expand and is considering options for raising additional cash. The company estimates net
income before the expansion of $250,000 in 2019 and that the expansion will provide additional operating income of $75,000
in 2019. The company intends to sell the shares of treasury stock, so use issued shares for the analysis rather than current
shares outstanding. Compare these options, assuming a 30% income tax rate:
Plan 1: Issue 10,000 additional shares of common stock for $20 per share
Plan 2: Issue $200,000 in 20-year, 12% bonds payable.
Which option will contribute more net income in 2019? Which option provides the highest EPS?
SOLUTION
Requirement 1
Beginning
Balance
Principal
Payment
Interest
Expense
Total
Payment
Ending
Balance
13-85
OCTOBER Payroll
Earnings
Withholdings
Employee
Beginning
Cumulative
Earnings
Current
Period
Earnings
Ending
Cumulative
Earnings
OASDI
Medicare
Income
Tax
Health
Insurance
Total
Withholdings
Net Pay
OCTOBER Employer Payroll Taxes
Tax
Earnings
Rate
Amount
13-86
Requirement 1, cont.
NOVEMBER Payroll
Earnings
Withholdings
Employee
Beginning
Cumulative
Earnings
Current
Period
Earnings
Ending
Cumulative
Earnings
OASDI
Medicare
Income
Tax
Health
Insurance
Total
Withholdings
Net Pay
Jones
$ 6,000.00
$ 6,000.00
$ 12,000.00
$ 372.00
$ 87.00
$ 1,800.00
$ 300.00
$ 2,559.00
$ 3,441.00
13-87
Comprehensive Problem, cont.
Requirement 1, cont.
DECEMBER Payroll
Earnings
Withholdings
Employee
Beginning
Cumulative
Earnings
Current
Period
Earnings
Ending
Cumulative
Earnings
OASDI
Medicare
Income
Tax
Health
Insurance
Total
Withholdings
Net Pay
DECEMBER Employer Payroll Taxes
Tax
Earnings
Rate
Amount
Comprehensive Problem, cont.
Requirement 2
Date
Accounts
Debit
Credit
Oct. 1
Cash (25,000 shares × $10 per share)
250,000
Common Stock—$1 Par Value (25,000 × $1 per share)
25,000
Paid-in Capital in Excess of Par—Common ($250,000 ‒ $25,000)
225,000
31
Cash
196,100
Sales Tax Payable ($185,000 × 0.06)
11,100
Sales Revenue
185,000
Cost of Goods Sold
110,000
Merchandise Inventory
110,000
Comprehensive Problem, cont.
Requirement 2, cont.
Date
Accounts
Debit
Credit
3
Accounts Payable
125,000
Cash
125,000
10
Merchandise Inventory
150,000
Accounts Payable
150,000
12
Treasury Stock—Common (500 shares × $15 per share)
7,500
Cash
7,500
Comprehensive Problem, cont.
Requirement 2, cont.
Date
Accounts
Debit
Credit
Nov. 18
Utilities Expense
245
Cash
245
27
Dividends Payable—Common
24,500
Cash
24,500
30
Salaries Expense
14,000
FICA—OASDI Taxes Payable
868
FICA—Medicare Taxes Payable
203
Employee Income Taxes Payable
3,250
Employee Health Insurance Payable
900
Cash
8,779
Comprehensive Problem, cont.
Requirement 2, cont.
Date
Accounts
Debit
Credit
Dec. 10
Accounts Payable
150,000
Cash
150,000
12
Estimated Warranty Payable
7,500
Cash
7,500
15
Cash (300 shares × $20 per share)
6,000
Treasury Stock—Common (300 shares × $15 per
share)
4,500
Paid-in Capital from Treasury Stock Transactions
1,500
18
Utilities Expense
220
Cash
220
19
Merchandise Inventory
90,000
Accounts Payable
90,000
Comprehensive Problem, cont.
Requirement 2, cont.
Date
Accounts
Debit
Credit
Dec. 31
Salaries Expense
14,000
FICA—OASDI Taxes Payable
868
FICA—Medicare Taxes Payable
203
Employee Income Taxes Payable
3,250
Employee Health Insurance Payable
900
Cash
8,779
Comprehensive Problem, cont.
Requirements 3 and 5
2,425
Dec. 1
150,000
Dec. 10
7,500
Dec. 12
6,652
Dec. 15
8,400
Dec. 15
220
Dec. 18
8,779
Dec. 31
Bal.
437,504
Merchandise Inventory
Oct. 3
125,000
110,000
Oct. 31
Nov. 10
150,000
84,000
Nov. 30
Dec. 19
90,000
126,000
Dec. 31
Bal.
45,000
Comprehensive Problem, cont.
Requirements 3 and 5
FICA—OASDI Taxes Payable
Nov. 15
1,736
868
Oct. 31
Dec. 15
1,736
868
Oct. 31
868
Nov. 30
868
Nov. 30
868
Dec. 31
868
Dec. 31
1,736
Bal.
FICA—Medicare Taxes Payable
Nov. 15
406
203
Oct. 31
Dec. 15
406
203
Oct. 31
203
Nov. 30
203
Nov. 30
Comprehensive Problem, cont.
Requirements 3 and 5
State Unemployment Taxes Payable
Nov. 15
756
756
Oct. 31
Dec. 15
324
324
Nov. 30
54
Dec. 31
54
Bal.
Dec. 15
8,400
8,400
Nov. 30
12,600
Dec. 31
12,600
Bal.
Estimated Warranty Payable
Nov. 16
6,000
14,800
Oct. 31
Notes Payable
10,000
Oct. 1
10,000
Bal.
Comprehensive Problem, cont.
Requirements 3 and 5
Treasury Stock—Common
Nov. 12
7,500
4,500
Dec. 15
Bal.
3,000
Paid-in Capital from Treasury Stock Trans.
1,500
Dec. 15
Cost of Goods Sold
Oct. 31
110,000
Nov. 30
84,000
Dec. 31
126,000
Bal.
320,000
Comprehensive Problem, cont.
Requirements 3 and 5
Utilities Expense
Oct. 15
160
Nov. 18
245
Dec. 18
220
Bal.
625
Depreciation Expense
Adj. a
1,000
Adj. b
125
Bal.
1,125
Comprehensive Problem, cont.
Requirement 4
Date
Accounts
Debit
Credit
Adjusting Entries
a.
Depreciation Expense(1)
1,000
Accumulated Depreciation
1,000
b.
Depreciation Expense(2)
125
Accumulated Depreciation
125
Comprehensive Problem, cont.
Requirement 5
THE TUSQUITTEE COMPANY
Adjusted Trial Balance
December 31, 2018
Balance
Account
Debit
Credit
Cash
$ 437,504
Merchandise Inventory
45,000
Land
40,000
Comprehensive Problem, cont.
Requirement 6
THE TUSQUITTEE COMPANY
Income Statement
For Quarter Ended December 31, 2018
Net Sales Revenue
$ 535,000
Cost of Goods Sold
320,000
Gross Profit
215,000
THE TUSQUITTEE COMPANY
Statement of Retained Earnings
For Quarter Ended December 31, 2018
Retained Earnings, October 1, 2018
$ 0
Net income for the year
83,749
Comprehensive Problem, cont.
Requirement 6, cont.
THE TUSQUITTEE COMPANY
Balance Sheet
December 31, 2018
Total Property, Plant and Equipment
208,875
Total Assets
$ 691,379
(continued on next page)
Comprehensive Problem, cont.
Requirement 6, cont.
State Unemployment Taxes Payable
54
Federal Unemployment Taxes Payable
6
Income Tax Payable
36,000
Sales Tax Payable
12,600
Estimated Warranty Payable
29,300
Common Stock—$1 Par Value, 100,000 shares authorized,
25,000 shares issued, 24,800 shares outstanding
25,000
Paid-in Capital in Excess of Par—Common
225,000
Paid-in Capital from Treasury Stock Transactions
1,500
Total Paid-in Capital
251,500
Comprehensive Problem, cont.
Requirement 7
Times-interest-earned ratio
Net Income
$ 83,749
+ Income Tax Expense
+ 36,000
+ Interest Expense
+ 4,228
Total
$ 123,977
÷ Interest Expense
÷ 4,228
Ratio for 2018
29.32
=
$6.75 per share
=
$25.00
/
$6.75
=
3.70
Rate of
=
0.54 = 54%
Comprehensive Problem, cont.
Requirement 8
Plan 1:
Issue $200,000 of
Common Stock
Plan 2:
Issue $200,000 of 12%
Bonds Payable
Net income before new project
$ 250,000
$ 250,000
Critical Thinking
Tying It All Together Case 13-1
Facebook, Inc. is a mobile application and Web site that enables people to connect, share, discover,
and communicate with each other. The company also owns Instagram, messenger, WhatsApp, and
Oculus.
Requirements
1. Review Item 5 (Dividend Policy) of the 2015 annual report. Has Facebook ever paid a dividend?
Provide the company’s reasoning.
2. Review the balance sheet for Facebook. What is the par value of its Class A common shares.
3. Does Facebook have any treasury stock? How do you know?
SOLUTION
Requirement 1
Facebook has never paid any cash dividends on its common stock. The company states that they intend
Requirement 3
Decision Case 13-1
Lena Kay and Kathy Lauder have a patent on a new line of cosmetics. They need additional capital to
market the products, and they plan to incorporate the business. They are considering the capital structure
for the corporation. Their primary goal is to raise as much capital as possible without giving up control
of the business. Kay and Lauder plan to invest the patent (an intangible asset, which will be transferred
to the company’s ownership in lieu of cash) in the company and receive 100,000 shares of the
corporation’s common stock. They have been offered $100,000 for the patent, which provides an
indication of the fair market value of the patent.
The corporation’s plans for a charter include an authorization to issue 5,000 shares of preferred
stock and 500,000 shares of $1 par common stock. Kay and Lauder are uncertain about the most
desirable features for the preferred stock. Prior to incorporating, they are discussing their plans with two
investment groups. The corporation can obtain capital from outside investors under either of the
following plans:
• Plan 1. Group 1 will invest $150,000 to acquire 1,500 shares of 6%, $100 par nonvoting,
noncumulative preferred stock.
• Plan 2. Group 2 will invest $100,000 to acquire 1,000 shares of $5, no-par preferred stock and $70,000
to acquire 70,000 shares of common stock. Each preferred share receives 50 votes on matters that come
before the common stockholders.
Requirements
Assume that the corporation has been chartered (approved) by the state.
1. Journalize the issuance of common stock to Kay and Lauder. Explanations are not required.
2. Journalize the issuance of stock to the outsiders under both plans. Explanations are not required.
3. Net income for the first year is $180,000, and total dividends are $30,000. Prepare the stockholders’
equity section of the corporation’s balance sheet under both plans at the end of the first year.
4. Recommend one of the plans to Kay and Lauder. Give your reasons.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Decision Case 13-1, cont.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Requirement 3
Kay and Lauder
Balance Sheet (Partial)
Plan 1
Decision Case 13-1, cont.
Requirement 4
Although Plan 2 raises more capital than Plan 1, Plan 1 appears to fit the plans of Kay and Lauder better
than Plan 2. Recall that their primary goal is to raise as much capital as possible without giving up
control of the business.
Financial Statement Case 13-1
Use Target Corporation’s financial statements to answer the following questions. Visit
Requirements
1. Review the stockholders’ equity section of the balance sheet. Did Target have any preferred
stock at January 30, 2016?
2. Now examine the notes at the bottom of the balance sheet. Is Target authorized to issue preferred
stock? If so, how much?
3. How much of Target Corporation’s common stock was outstanding at January 30, 2016? How
can you tell?
4. Examine Target Corporation’s consolidated statements of cash flows. Did Target pay any cash
dividends during the year ending January 30, 2016? If so, how much?
5. Show how Target Corporation computed basic earnings per share of $5.35 for fiscal year 2015.
(Ignore diluted earnings per share.)
SOLUTION
Requirement 1
Requirement 2
Requirement 3
Requirement 4
Requirement 5
Earnings per
share
=
(Net income − Preferred
dividends)
/
Weighted average shares
outstanding
Team Project 13-1
Obtain the annual reports (or annual report data) of five well-known companies. You can get the reports
Requirements
1. After selecting five companies, examine their income statements to search for the following items:
a. Net income or net loss
b. Earnings per share data
2. Study the companies’ balance sheets to answer the following questions:
a. What classes of stock has each company issued?
b. Which item carries a larger balance—the Common Stock account or Paid-In Capital in Excess of
Par (also labeled Additional Paid-In Capital)?
c. What percentage of each company’s total stockholders’ equity is made up of retained earnings?
d. Do any of the companies have treasury stock? If so, how many shares and how much is the cost?
3. Examine each company’s statement of stockholders’ equity for evidence of the following:
a. Cash dividends
b. Stock dividends
c. Treasury stock purchases and sales
4. As directed by your instructor, either write a report or present your findings to your class. You may
not be able to understand everything you find, but neither can the Wall Street analysts! You will be
amazed at how much you have learned.
SOLUTION
Communication Activity 13-1
In 75 words or fewer, explain the difference between stock dividends and stock splits. Include the effect
on stock values.
SOLUTION
A stock split is fundamentally different from a stock dividend. A stock split increases the number of
