CHAPTER 15
Stockholders’ Equity
ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)
Topics
Questions
Brief
Exercises
Exercises
Problems
Concepts
for Analysis
1. Stockholders’ rights;
corporate form.
1, 2, 3
1
2. Stockholders’ equity.
4, 5, 6, 16
3
7, 9, 10,
16, 17, 18
1, 2, 3, 6,
9, 12
7, 10
1, 2, 6
1, 2, 4, 5,
1, 3, 4, 9,
actions; lump sum sales.
8, 9
4, 5
3, 4, 5, 6,
1, 4
2
3, 11,
12, 13
7
9, 18
1, 3, 9, 12
12
7. Stockholders’ equity
accounts; classifications;
terminology.
18
10, 11, 17,
18
6, 9, 11,
12
3
19, 20, 21
12, 15, 16
7, 10
dividends; liquidating
dividends.
13, 14
15, 18
19, 20
and book value.
21, 22,
23, 24
ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE)
Learning Objectives
Questions
Brief
Exercises
Exercises
Problems
Concepts
for
Analysis
1. Describe the corporate
form and the issuance
of shares of stock
1, 2, 3, 4, 5,
6, 7, 8, 9, 10,
11, 12, 13, 16,
18
1, 2, 3, 4, 5,
6, 7
1, 2, 3, 4, 5,
6, 8, 9, 10,
18
1, 3, 4, 9,
12
CA15-1
CA15-2
CA15-3
2. Describe the accounting
and reporting for
reacquisition of shares.
14, 15, 17
3, 8, 9
3, 6, 7, 8,
10, 18
1, 2, 3, 5,
6, 9, 12
CA15-7
4. Indicate how to present
and analyze
27 ,28
10, 11, 16,
17, 18, 19,
20
1, 2, 3, 6,
dividends and their
effect on book value
per share.
23, 24
ASSIGNMENT CHARACTERISTICS TABLE
Item
Description
Level of
Difficulty
Time
(minutes)
E15.1
Recording the issuances of common stock.
Simple
15–20
E15.2
Recording the issuance of common and preferred stock.
Simple
15–20
E15.3
Stock issued for land.
Simple
10–15
E15.4
Lump-sum sale of stock with bonds.
Moderate
20–25
E15.5
Lump-sum sales of stock with preferred stock.
Simple
10–15
E15.6
Stock issuances and repurchase.
Moderate
25–30
E15.7
Effect of treasury stock transactions on financials.
Moderate
15–20
E15.8
Correcting entries for equity transactions.
Moderate
15–20
E15.9
Preferred stock entries and dividends.
Moderate
15–20
E15.10
Analysis of equity data and equity section preparation.
Moderate
20–25
Equity items on the balance sheet.
Simple
15–20
E15.12
Cash dividend and liquidating dividend.
Simple
10–15
E15.13
Stock split and stock dividend.
Simple
10–15
E15.14
Entries for stock dividends and stock splits.
Simple
10–12
E15.15
Dividend entries.
Simple
10–15
E15.16
Computation of retained earnings.
Simple
05–10
E15.17
Stockholders’ equity section.
Moderate
20–25
E15.18
Dividends and stockholders’ equity section.
Moderate
30–35
E15.19
Comparison of alternative forms of financing.
Moderate
20–25
E15.20
Trading on the equity analysis.
Moderate
Preferred dividends.
Simple
10–15
Preferred dividends.
Moderate
10–15
Preferred stock dividends.
10–15
Computation of book value per share.
Moderate
P15.1
Equity transactions and statement preparation.
Moderate
50–60
P15.2
Treasury stock transactions and presentation.
Simple
25–35
P15.3
Equity transactions and statement preparation.
Moderate
25–30
P15.4
Moderate
20–30
P15.5
Moderate
30–40
P15.6
Moderate
30–40
P15.7
Cash dividend entries.
Moderate
15–20
P15.8
Dividends and splits.
Moderate
20–25
P15.9
Stockholders’ equity section of balance sheet.
Simple
20–25
P15.10
Stock dividends and stock split.
Moderate
35–45
P15.11
Stock and cash dividends.
Simple
25–35
CA15.1
Preemptive rights and dilution of ownership.
Moderate
10–20
CA15.2
Issuance of stock for land.
Moderate
15–20
CA15.3
Conceptual issues—equity.
Moderate
25–30
CA15.4
Stock dividends and splits.
Simple
25–30
CA15.5
Stock dividends.
Simple
15–20
CA15.6
Stock dividend, cash dividend, and treasury stock.
Moderate
20–25
CA15.7
Treasury stock, ethics.
Moderate
10–15
ANSWERS TO QUESTIONS
2. The preemptive right protects existing shareholders from dilution of their ownership share in the
3. Preferred stock commonly has preference to dividends in the form of a fixed dividend rate and
a preference over common stock to remaining corporate assets in the event of liquidation.
4. The distinction between paid-in capital and retained earnings is important for both legal and
economic points of view. Legally, dividends can be declared out of retained earnings in all states,
5. Authorized capital stock—the total number of shares authorized by the state of incorporation for
issuance
6. Par value is an arbitrary, fixed per share amount assigned to a stock by the incorporators. It is
recognized by the state of incorporation as the amount that must be paid in for each share if the
7. The issuance for cash of no-par value common stock at a price in excess of the stated value of
the common stock is accounted for as follows:
(1) Cash is debited for the proceeds from the issuance of the common stock.
Questions Chapter 15 (Continued)
8. The proportional method is used to allocate the lump sum received on sales of two or more
classes of securities when the fair value or other sound basis for determining relative value is
9. The general rule to be applied when stock is issued for services or property other than cash is
that the property or services be recorded at either their fair value or the fair value of the stock
10. The direct costs of issuing stock, such as underwriting costs, accounting and legal fees, printing
11. The character of preferred stock can be altered by being cumulative or noncumulative, partici–
12. Nonparticipating means the security holder is entitled to no more than the specified fixed dividend.
If the security is partially participating, it means that in addition to the specified fixed dividend the
security may participate with the common stock in dividends up to a certain stated rate or
13. Preferred stock is generally reported at par value as the first item in the stockholders’ equity
14. The major reasons for purchasing its own shares are: (1) to provide tax-efficient distributions of
excess cash to shareholders, (2) to increase earnings per share and return on equity, (3) to provide
Questions Chapter 15 (Continued)
15. (a) Treasury stock should not be classified as an asset since a corporation cannot own itself.
(b) The “gain” or “loss” on sale of treasury stock should not be treated as additions to or
deductions from income. If treasury stock is carried in the accounts at cost, these so-called
gains or losses arise when the treasury stock is sold. These “gains” or “losses” should be
16. Additional paid-in capital results from: (1) issuance of common stock or preferred stock in excess
of par on stock issued, (2) sale of treasury stock above cost, (3) recapitalizations or revisions in
17. When treasury stock is purchased, the Treasury Stock account is debited and Cash is credited at
cost ($290,000 in this case). Treasury Stock is a contra stockholders’ equity account and Cash
*18. The answers are summarized in the table below:
Account Classification
(a) Common Stock Paid-in capital—capital stock
(b) Retained Earnings Retained earnings
19. The dividend policy of a company is influenced by (1) the availability of cash, (2) the stability of
Questions Chapter 15 (Continued)
20. In declaring a dividend, the board of directors must consider the condition of the corporation such
that a dividend is (1) legally permissible and (2) economically sound.
In general, directors should consider the following factors in determining the legality of a dividend
declaration:
(1) Retained earnings, unless legally encumbered in some manner, is usually the correct basis
21. Cash dividends are paid out of cash. A balance must exist in retained earnings to permit a legal
22. A cash dividend is a distribution of cash while a property dividend is a distribution of assets
other than cash. Any dividend not based on retained earnings is a liquidating dividend. A stock
23. A stock dividend results in the transfer from retained earnings to paid-in capital of an amount
equal to the fair value of each share (if the dividend is less than 20–25%) or the par value of
24. (a) A stock split effected in the form of a dividend is a distribution of corporate stock to present
stockholders in proportion to each stockholder’s current holdings and can be expected to cause a
material decrease in the market price per share of the stock. GAAP specifies that a distribution in
Questions Chapter 15 (Continued)
(b) The stock split effected in the form of a dividend differs from an ordinary stock dividend in
the amount of other paid-in capital or retained earnings to be capitalized. An ordinary stock
(c) A declared but unissued stock dividend should be classified as part of paid-in capital (stock
dividend distributable) rather than as a liability in the balance sheet. A stock dividend affects
25. A partially liquidating dividend will be debited to both Retained Earnings and Paid-in Capital in
26. A property dividend is a nonreciprocal transfer of nonmonetary assets between company and its
owners. A transfer of a nonmonetary asset to a stockholder or to another entity in a non-
27. Retained earnings are restricted because of legal or contractual restrictions, or the necessity to
28. Restrictions of retained earnings are best disclosed in a note to the financial statements. This
Questions Chapter 15 (Continued)
*29.
Preferred
Common
Total
(a)
Current year’s dividend, 7%*
$ 7,000
$21,000
$28,000
Participating dividend of 9%
9,000
27,000
36,000
Totals
$16,000
$48,000
$64,000
* The participating dividend was determined as follows:
(b)
Preferred
Common
Total
Dividends in arrears, 7% of $100,000
$ 7,000
$ 7,000
Current year’s dividend, 7%
7,000
$21,000
28,000
Participating dividend 7.25%*
7,250
$21,250
$64,000
(c)
Preferred
Common
Total
Dividends in arrears ($100,000 X .07) – $5,000
$2,000
$ 2,000
7,000
Remainder to common
$21,000
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 15.1
Cash ………………………………………………………………………. 4,500
BRIEF EXERCISE 15.2
(a) Cash ………………………………………………………………… 8,200
Common Stock ………………………………………….. 8,200
BRIEF EXERCISE 15.3
WILCO CORPORATION
Stockholders’ Equity
December 31, 2020
Common stock, $5 par value ……………………………………. $ 510,000
BRIEF EXERCISE 15.4
Cash ………………………………………………………………………. 13,500
Preferred Stock (100 X $50) ………………………………. 5,000
Paid-in Capital in Excess of Par—
Preferred Stock ……………………………………………… 3,100
BRIEF EXERCISE 15.5
Land ………………………………………………………………………. 31,000
Common Stock (3,000 X $5) ………………………………. 15,000
BRIEF EXERCISE 15.6
Cash ($60,000 – $1,500) ……………………………………………. 58,500
BRIEF EXERCISE 15.7
Cash …………………………………………………………………… 61,500
Preferred Stock (500 X $100) …………………………. 50,000
BRIEF EXERCISE 15.8
7/1/20
Treasury Stock (100 X $87) ……………………. 8,700
Cash ……………………………………………… 8,700
BRIEF EXERCISE 15.9
8/1/20
Treasury Stock (200 X $80) ……………………. 16,000
Cash ……………………………………………… 16,000
BRIEF EXERCISE 15.10
August 1
Retained Earnings (2,000,000 X $1.00) ……………………..
2,000,000
Dividends Payable …………………………..
2,000,000
No entry.
Dividends Payable ………………………………………………….
2,000,000
Cash ……………………………………………………….
2,000,000
BRIEF EXERCISE 15.11
September 21
Equity Investments …………………………………………………
325,000
Unrealized Holding Gain or Loss—
Income ($1,200,000 – $875,000) ……………………….
325,000
Retained Earnings ………………………………………………….
Property Dividends Payable …………………………..
No entry.
Property Dividends Payable…………………………..
Equity Investments …………………………..
BRIEF EXERCISE 15.12
April 20
Retained Earnings
($500,000 – $125,000) …………………………..
375,000
500,000
500,000
BRIEF EXERCISE 15.13
Declaration Date.
Retained Earnings …………………………………………………..
1,300,000
Common Stock Dividend Distributable …………….
200,000
Distribution Date.
Common Stock Dividend Distributable……………………..
200,000
Common Stock ……………………………………………….
200,000
BRIEF EXERCISE 15.14
Declaration Date.
Retained Earnings …………………………………………………..
4,000,000
Common Stock Dividend Distributable
(400,000 X $10) ……………………………………………..
Distribution Date.
Common Stock Dividend Distributable……………………..
4,000,000
Common Stock ……………………………………………….
*BRIEF EXERCISE 15.15
(a) Preferred stockholders would receive $60,000 (.06 X $1,000,000) and
the remainder of $240,000 ($300,000 – $60,000) would be distributed to
SOLUTIONS TO EXERCISES
EXERCISE 15.1 (15–20 minutes)
January 10
(a) Cash (80,000 X $6) …………………………. 480,000
Common Stock (80,000 X $5) …….. 400,000
Paid-in Capital in Excess of Par—
Common Stock………………………. 80,000
July 1
Cash (30,000 X $8) …………………………. 240,000
Common Stock (30,000 X $5) …….. 150,000
Paid-in Capital in Excess of Par—
Common Stock (30,000 X $3) ….. 90,000
January 10
(b) Cash (80,000 X $6) …………………………. 480,000
EXERCISE 15.1 (Continued)
March 1
Organization Expense …………………….. 35,000
Common Stock (5,000 X $3) ……….. 15,000
Paid-in Capital in Excess of
Stated Value—Common Stock
(5,000 X $4) ……………………………… 20,000
EXERCISE 15.2 (15–20 minutes)
January 10
Cash (80,000 X $5) …………………………………. 400,000
EXERCISE 15.2 (Continued)
March 1
Cash (5,000 X $108) …………………………..….. 540,000
Preferred Stock (5,000 X $100) ………….. 500,000
Paid-in Capital in Excess of Par—
Preferred Stock ……………………………. 40,000
(5,000 X $8)
May 1
Cash (80,000 X $7) ………………………………… 560,000
Common Stock (80,000 X $1) ……………. 80,000
Paid-in Capital in Excess of Stated
Value—Common Stock ………………… 480,000
(80,000 X $6)
(10,000 X $8)
EXERCISE 15.2 (Continued)
November 1
Cash (1,000 X $112) ……………………………….. 112,000
Preferred Stock (1,000 X $100) ………….. 100,000
EXERCISE 15.3 (10–15 minutes)
(a) Land ($62 X 25,000) ………………………………………… 1,550,000
Treasury Stock ($53 X 25,000) …………………… 1,325,000
Paid-in Capital from Treasury Stock ………….. 225,000
(b) One might use the cost of treasury stock. However, this is not a
EXERCISE 15.4 (20–25 minutes)
Incremental method
Lump sum receipt (10,000 X $880) $8,800,000
Allocated to subordinated debenture (10,000 X $500) (5,000,000)
EXERCISE 15.4 (Continued)
Assumes bonds properly priced; residual attributed to common
stock has a questionable measure of fair value.
*Computation of common stock and paid-in capital in excess of par.
Balance allocated to common stock $3,800,000
2. Cash ………………………………………………………… 8,800,000
Bond Discount ($5,000,000 – $4,888,889) ……. 111,111
Bonds Payable …………………………………… 5,000,000
(b) One method is not better than the other. The choice of method
depends on the relative reliability of the valuations for the stocks and