EXERCISE 15.5 (10–15 minutes)
(a) Fair Value of Common (500 X $165) $ 82,500
Fair Value of Preferred (100 X $230) 23,000
$105,500
Allocated to Common: $82,500/$105,500 X $100,000 $ 78,199
(b) Lump-sum receipt $100,000
Allocated to common (500 X $170) (85,000)
Balance allocated to preferred $ 15,000
EXERCISE 15.6 (25–30 minutes)
(a) Cash [(5,000 X $45) – $7,000] ……………………………… 218,000
Common Stock (5,000 X $5) ………………………… 25,000
Paid-in Capital in Excess of Par—
EXERCISE 15.6 (Continued)
Note: The market value of the stock ($46,000) is used to value the
EXERCISE 15.7 (15–20 minutes)
#
Assets
Liabilities
Stockholders’
Equity
Paid-in
Capital
Retained
Earnings
Net
Income
1
D
NE
D
NE
NE
NE
EXERCISE 15.8 (15–20 minutes)
May 2 Cash ……………………………………………………… 192,000
Common Stock (12,000 X $5) …………… 60,000
Paid-in Capital in Excess of Par—
Common Stock (12,000 X $11) ……… 132,000
EXERCISE 15.9 (15–20 minutes)
(a) (1) $1,000,000 X .08 = $80,000; $80,000 X 3 = $240,000. (2) The
cumulative dividend is disclosed in a note to the stockholders’ equity
section; it is not reported as a liability.
EXERCISE 15.10 (20–25 minutes)
(2) The cost of treasury shares was higher in 2020. The cost at
December 31, 2020 was $46 per share ($1,564 ÷ 34) compared to
the cost at December 31, 2019 of $34 per share ($918 ÷ 27).
(b) Stockholders’ equity (in millions of dollars)
Paid-in capital
Common stock, $2.50 par value, 500,000,000
EXERCISE 15.11 (15–20 minutes)
Item
Assets
Liabilities
Stockholders’
Equity
Paid-in
Capital
Retained
Earnings
Net
Income
1.
I
NE
I
NE
I
I
2.
NE
I
D
NE
D
NE
3.
NE
NE
NE
NE
NE
NE
4.
NE
NE
NE
NE
NE
NE
5.
D
NE
D
NE
D
D
6.
D
D
NE
NE
NE
NE
7.
NE
I
D
NE
D
D
8.
NE
NE
NE
I
D
NE
9.
NE
NE
NE
NE
NE
NE
LO: 3, Bloom: AP, Difficulty: Simple, Time: 15-20, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None
EXERCISE 15.12 (10–15 minutes)
June 1
(a)
Retained Earnings …………………………..
8,000,000
Dividends Payable …………………………..
8,000,000
No entry on date of record.
Dividends Payable …………………………..
8,000,000
Cash ……………………………………………………….
8,000,000
EXERCISE 15.13 (10–15 minutes)
(a) No entry—simply a memorandum note indicating the number of shares
has increased to 18 million and par value has been reduced from
$10 to $5 per share.
Common Stock Dividend Distributable ………………..
(c) Stock dividends and splits serve the same function with regard to the
securities markets. Both techniques allow the board of directors to
increase the quantity of shares and reduce share prices into a desired
“trading range.”
EXERCISE 15.14 (10–12 minutes)
(a)
Retained Earnings (15,000 X $37) …………………………..
555,000
Common Stock Dividend Distributable …………………
150,000
Paid-in Capital in Excess of Par—
Common Stock ………………………………………………..
405,000
Common Stock …………………………………………………..
150,000
Common Stock Dividend Distributable …………………
Common Stock …………………………………………………..
EXERCISE 15.15 (10–15 minutes)
(a)
Retained Earnings ………………………………………………….
97,500
Common Stock Dividend Distributable …………….
Common Stock …………………………………………….
(50,000 shares X .05 X $39 = $97,500)
Common Stock Dividend Distributable …………………….
25,000
Common Stock ……………………………………………….
(b) No entry, memorandum note to indicate that par value is reduced to
$2 and the number of shares outstanding is now 250,000 (50,000 X 5).
(c)
January 5, 2020
Debt Investments (trading) …………………………..
35,000
Income …………………………..…………………………..
Retained Earnings ………………………………………………….
Property Dividends Payable …………………………..
Property Dividends Payable…………………………..
135,000
Debt Investments …………………………..……………….
EXERCISE 15.16 (5–10 minutes)
Total income since incorporation …………………………..
$317,000
Less: Total cash dividends paid …………………………..
$60,000
90,000
Current balance of retained earnings ……………………….
$227,000
EXERCISE 15.16 (Continued)
EXERCISE 15.17 (20–25 minutes)
BRUNO CORPORATION
Stockholders’ Equity
December 31, 2020
Capital stock
Preferred stock, $4 cumulative, par value
$50 per share; authorized 60,000 shares,
issued and outstanding 10,000 shares ………………….
$ 500,000
Common stock, par value $1 per share;
authorized 600,000 shares, issued
200,000 shares, and outstanding
190,000 shares …………………………..……………………….
200,000
Additional paid-in capital—
In excess of par—common …………………………..
$1,300,000
From sale of treasury stock …………………………..
160,000
Total paid-in capital ……………………………………….
Retained earnings ……………………………………………………….
301,000
Total paid-in capital and retained earnings ……………………….
Less: Treasury stock, 10,000 shares at cost ……………………..
170,000
EXERCISE 15.18 (30–35 minutes)
(a)
1.
Dividends Payable—Preferred (2,000 X $10) ………………….
20,000
Dividends Payable—Common (20,000 X $2) ………………….
40,000
Cash …………………………..…………………………..
60,000
EXERCISE 15.18 (Continued)
2.
Treasury Stock ……………………………………………………….
68,000
Cash (1,700 X $40) …………………………………………..
68,000
3.
Land ………………………………………………………………………
30,000
Treasury Stock (700 X $40) …………………………..
28,000
Paid-in Capital From Treasury Stock ………………..
4.
Cash (500 X $105)……………………………………………………
Preferred Stock (500 X $100) …………………………..
Preferred Stock …………………………………………….
5.
Retained Earnings (1,900* X $45) …………………………..
85,500
Common Stock Dividend Distributable
(1,900 X $5) ………………………………………………….
9,500
Paid-in Capital in Excess of Par—
Common Stock …………………………………………….
76,000
*(20,000 – 1,700 + 700 = 19,000; 19,000 X .10)
Common Stock ……………………………………………….
7.
Retained Earnings …………………………………………………..
66,800
Dividends Payable—Preferred
(2,500 X $10)…………………………………………………
Dividends Payable—Common
(20,900* X $2) ……………………………………………….
41,800
*(19,000 + 1,900)
EXERCISE 15.18 (Continued)
(b) ANNE CLEVES COMPANY
Stockholders’ Equity
December 31, 2020
Stockholders’ equity
Paid-in-capital
Capital stock
Preferred stock, 10%, $100 par, 10,000 shares
Common stock, $5 par, 100,000 shares
Total capital stock …………………………………………………
Retained earnings ……………………………………………………….
627,700
Total paid-in capital and retained earnings ……………………..
1,192,700
Less: Cost of treasury stock (1,000 shares common) ……….
40,000
Total stockholders’ equity ………………………………………………
$1,152,700
Computations:
Preferred stock $200,000 + $50,000 = $250,000
EXERCISE 15.19 (20–25 minutes)
(a) Mary Ann Benson Company is the more profitable in terms of return
on total assets. This may be shown as follows:
Benson Company
$960,000
= 22.86%
$4,200,000
EXERCISE 15.19 (Continued)
$4,200,000
$4,200,000
=
22.86%
(b) Kingston Company is the more profitable in terms of return on
common stockholders’ equity. This may be shown as follows:
Kingston Company
Funds Supplied
Funds
Supplied
Rate of Return
on Funds at
22.86%*
Cost of
Funds
Accruing to
Common
Stock
Current liabilities
$ 300,000
$ 68,580
$ 0
$ 68,580
Common stock
EXERCISE 15.19 (Continued)
**The cost of funds is the interest of $120,000 ($1,200,000 X .10). This
interest cost must be reduced by the tax savings (20%) related to the
interest.
The schedule indicates that the income earned on the total assets (before
(c) The Kingston Company earned a net income per share of $8.64
($864,000 ÷ 100,000) while Benson Company had an income per share
of $6.62 ($960,000 ÷ 145,000). Kingston Company has borrowed a
(e) Book value per share.
Kingston Company
$2,000,000 + $700,000
= $27.00
100,000
$2,900,000 + $700,000
EXERCISE 15.20 (15–20 minutes)
(a) Return on common stockholders’ equity:
Rate of interest paid on bonds payable:
= 13.5%
EXERCISE 15.20 (Continued)
Note: Some analysts use after-tax interest expense to compute the bond rate.
*EXERCISE 15.21 (10–15 minutes)
Preferred
Common
Total
(a)
Preferred stock is noncumulative,
nonparticipating (2,000 X $100 X .08)
$16,000
Remainder ($90,000 – $16,000)
$74,000
$90,000
(b)
Preferred stock is cumulative,
nonparticipating ($16,000 X 3)
$48,000
Remainder ($90,000 – $48,000)
Preferred
Total
(c)
Preferred stock is cumulative,
participating
The computation for these amounts is as follows:
Preferred
Common
Total
Dividends in arrears (2 X $16,000)
$32,000
$32,000
Current dividend
(5,000 X $50 X .08)
Balance dividend pro-rata
9,778
$32,222
*Additional amount available for participation
($90,000 – $32,000 – $16,000 – $20,000)
Par value of stock that is to participate
Preferred (2,000 X $100)
Common (5,000 X $50)
EXERCISE 15.21 (Continued)
Rate of participation
$22,000 ÷ $450,000
4.8889%
Participating dividend
Preferred, .048889 X $200,000
$ 9,778
Common, .048889 X $250,000
$22,000
Note to instructor: Another way to compute the participating amount is as
follows:
Preferred
$200,000
X $22,000
$ 9,778
$450,000
$250,000
$22,000
*EXERCISE 15.22 (15–20 minutes)
Preferred
Common
Total
(a)
Preferred stock is cumulative,
fully participating
$36,000
$330,000
$366,000
The computation for these amounts is as follows:
Preferred
Common
Total
Current dividend
Preferred
Common (.07 X $100 X 30,000)
Balance dividend pro-rata
$36,000
$330,000
$366,000
*EXERCISE 15.22 (Continued)
Par value of stock that is to participate
($200,000 + $3,000,000)
$3,200,000
Rate of participation
Participating dividend
Preferred, .04 X $200,000
$ 8,000
Common, .04 X $3,000,000
$128,000
Note to instructor: Another way to compute the participating amount is as
follows:
Preferred
$200,000
X $128,000
$ 8,000
$3,200,000
$3,000,000
$128,000
Preferred
Common
Total
(b)
Preferred stock is cumulative
Remainder to common
(c)
Preferred stock is noncumulative
*EXERCISE 15.22 (Continued)
The computation for these amounts is as follows:
Preferred
Common
Total
Current year
Preferred (.07 X $10 X 20,000)
Common (.07 X $3,000,000)
Balance dividend pro-rata
52,000*
$17,250
$348,750
$366,000
*Additional amount available for participation
($366,000 – $14,000 – $210,000 – $90,000)
Par value of stock that is to participate
($200,000 + $3,000,000)
Rate of participation
$52,000 ÷ $3,200,000
1.625%
Participating dividend
Preferred .01625 X $200,000
$ 3,250
Common .01625 X $3,000,000
$52,000
*EXERCISE 15.23 (15.20 minutes)
Assumptions
(a)
(b)
Preferred, noncumulative
and nonparticipating
Preferred, cumulative
and fully participating
Year
Paid-
out
Preferred
Common
Preferred
Common
2018
$13,000
$5.20
-0-
$ 5.20
-0-
$ 6.80
$14.25
2021
$76,000
$6.00
$19.00
*EXERCISE 15.23 (Continued)
The computations for part (a) are as follows:
2018
Dividends paid
$13,000
Amount due preferred (2,500 X $100 X .06)
$15,000
Preferred per share ($13,000 ÷ 2,500)
Common per share
2019
Dividends paid
$26,000
Amount due preferred
(15,000)
Amount due common
$11,000
Preferred per share ($15,000 ÷ 2,500)
Common per share ($11,000 ÷ 15,000)
2020
Dividends paid
$57,000
Amount due preferred
(15,000)
Amount due common
$42,000
Preferred per share ($15,000 ÷ 2,500)
Common per share ($42,000 ÷ 15,000)
2021
Dividends paid
$76,000
Amount due preferred
(15,000)
Amount due common
$61,000
Preferred per share ($15,000 ÷ 2,500)
Common per share ($61,000 ÷ 15,000)
The computations for part (b) are as follows:
2018
Dividends paid
$13,000
Amount due preferred (2,500 X $100 X .06)
$15,000
Common per share
*EXERCISE 15.23 (Continued)
2019
Dividends paid
$26,000
Amount due preferred
In arrears ($15,000 – $13,000)
2,000
Current
15,000
$17,000
Amount due common ($26,000 – $17,000)
$ 9,000
Preferred per share ($17,000 ÷ 2,500)
Common per share ($9,000 ÷ 15,000)
$57,000
Amount due preferred
Current (2,500 X $100 X .06)
$15,000
Amount due common
Current (15,000 X $10 X .06)
$ 9,000
Amount available for participation
($57,000 – $15,000 – $9,000)
$33,000
Par value of stock that is to participate
($250,000 + $150,000)
$400,000
Rate of participation
$33,000 ÷ $400,000
Participating dividend
Preferred (.0825 X $250,000)
Common (.0825 X $150,000)
Total amount per share—Preferred
Current $15,000
Participation 20,625
$35,625 ÷ 2,500
$14.25
Total amount per share—Common
Current $ 9,000
Participation 12,375
*EXERCISE 15.23 (Continued)
2021
Dividends paid
$76,000
Amount due preferred
Current (2,500 X $100 X .06)
$15,000
Amount due common
Current (15,000 X $10 X .06)
$ 9,000
Amount available for participation
($76,000 – $15,000 – $9,000)
($250,000 + $150,000)
Rate of participation
$52,000 ÷ $400,000
Participating dividend
Preferred (.13 X $250,000)
Common (.13 X $150,000)
Total amount per share—Preferred
Current $15,000
Participation 32,500
$47,500 ÷ 2,500
Total amount per share—Common
Current $ 9,000
Participation 19,500
$28,500 ÷ 15,000
*EXERCISE 15.24 (10–15 minutes)
(a)
Common
stock
Preferred
stock
Stockholders’ equity
Preferred stock
$500,000
Common stock
$ 750,000
Retained earnings
Dividends in arrears (3 years at 8%)
Remainder to common*
380,000
Shares outstanding
750,000
*Balance in retained earnings
($800,000 – $40,000 – $260,000)
Less: Dividends to preferred
(b)
Stockholders’ equity
Preferred stock
$500,000
Liquidating premium
30,000
Common stock
$ 750,000
Retained earnings
Dividends in arrears (3 years at 8%)
Remainder to common*
350,000
Shares outstanding
750,000
*Balance in retained earnings
($800,000 – $40,000 – $260,000)
$500,000
Less: Liquidating premium to preferred
30,000
Dividends to preferred
TIME AND PURPOSE OF PROBLEMS
Problem 15.1 (Time 50–60 minutes)
Purpose—to provide the student with an understanding of the necessary entries to account for a
Problem 15.2 (Time 25–35 minutes)
Problem 15.3 (Time 25–30 minutes)
Purpose—to provide the student with an opportunity to record seven different transactions involving
Problem 15.4 (Time 20–30 minutes)
Purpose—to provide the student with an understanding of the necessary entries to account for a
Problem 15.5 (Time 30–40 minutes)
Purpose—to provide the student with an understanding of the proper entries to reflect the reacquisition,
Problem 15.6 (Time 30–40 minutes)
Purpose—to provide the student with an understanding of the necessary entries to account for a
Problem 15.7 (Time 15–20 minutes)
Purpose—to provide the student with an understanding of the proper accounting for the declaration and
Problem 15.8 (Time 20–25 minutes)
Purpose—to provide the student with an understanding of the accounting effects related to stock divi-
Problem 15.9 (Time 20–25 minutes)
Purpose—to provide the student with an understanding of the effect which a series of transactions