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Problem 18–10
Transactions
N 1. Sale of common stock
N 2. Purchase of treasury stock at a cost less than the original issue price
N 3. Purchase of treasury stock at a cost greater than the original issue
price
Problem 18–11
A stock dividend is the distribution of additional shares of stock to current
shareholders of the corporation. The investor receives no assets, only additional
To record the investment ($ in millions)
Investment in L&K Corporation shares ................................ 52.8
Cash (1.2 million shares x $44) ............................................... 52.8
To record the sale of shares ..........................
10% stock dividend
There is no entry for the stock dividend, but a new investment per share must be
calculated for use later when the shares are sold:
To record the sale of shares
Cash (100,000 shares x $43) ....................................................... 4.3
Investment in L&K shares (100,000 shares x $40) ................. 4.0
Gain on sale of investments (difference) .............................. .3
Problem 18–12
Part A
Requirement 1
January 2
Cash (amount received) ...................................................... 30,000,000
Requirement 2
NICKLAUS CORPORATION
Balance Sheet-Shareholders' Equity Section
March 31, 2016
Shareholders' equity
Preferred stock, $5 par, authorized 1,000,000 shares,
18–64 Intermediate Accounting, 8/e
Problem 18–12 (continued)
Part B
Requirement 1
June 30
Treasury stock ($12 x 200,000 shares) ................................ 2,400,000
Cash ............................................................................. 2,400,000
July 31
Cash ($15 x 50,000 shares) .................................................. 750,000
Requirement 2
NICKLAUS CORPORATION
Balance Sheet - Shareholders' Equity Section
September 30, 2016
Shareholders' equity
Preferred stock, $5 par, authorized 1,000,000 shares,
issued and outstanding 1,000,000 shares $ 5,000,000
Common stock, $1 par, authorized 5,000,000 shares
Problem 18–12 (continued)
Part C
Requirement 1
October 1
No entry
November 1
Retained earnings ........................................................... 540,000
December 2
Retained earnings ($10 fair value x 58,000 shares2) 580,000
Common stock dividends
Problem 18–12 (continued)
Requirement 2
NICKLAUS CORPORATION
Balance Sheet-Shareholders' Equity Section
December 31, 2016
Shareholders' equity
Preferred stock, $5 par, authorized 1,000,000 shares,
issued and outstanding 1,000,000 shares $ 5,000,000
Problem 18–12 (concluded)
Requirement 3
NICKLAUS CORPORATION
Statement of Shareholders’ Equity
for the Year Ended Dec. 31, 2016
($ in 000s)
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Treasury
Stock
Total
Share-
holders’ Equity
Jan. 2, 2016
––
––
––
––
––
––
Issuance of
preferred stock
5,000
15,000
20,000
Issuance of
18–68 Intermediate Accounting, 8/e
Problem 18–13
Requirement 1
To revalue assets:
To eliminate a portion of the deficit against available additional paid-in
capital:
Additional paid-in capital ....................................................... 60
Problem 18–13 (concluded)
Requirement 2
CHAMPION CHEMICAL CORPORATION
Balance Sheet
January 1, 2017
ASSETS
Current Assets:
Cash $ 20
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities $240
Stockholders’ Equity:
18–70 Intermediate Accounting, 8/e
CASES
Real World Case 18–1
Requirement 1
Assuming the shares are issued at the midpoint of the price range indicated, $14.50
Requirement 2
$ in millions
Cash (determined above) ........................................................... 398.750
Analysis Case 18–2
SESSEL’S DEPARTMENT STORES, INC.
Statement of Shareholders’ Equity
For the Years Ended December 31, 2017, 2016, and 2015
($ in 000s)
Preferred
Series A
Stock
Series B
Common
Stock
Additional Paid-
in
Capital
Retained
Earnings
Total
Share-
holders’
Equity
Dec. 31, 2014
$ –
$ –
$1,288
$ 88,468
$19,178
$108,934
Net income
13,494
13,494
Dec. 31, 2015
1,300
89,282
32,672
123,254
Net income
12,126
12,126
Issuance of
common stock
558
112,148
112,706
Dec. 31, 2016
1,858
201,430
44,798
248,086
Net income
32,2561
32,256
Issuance of
1 [$73,666,000 – 44,798,000] + 3,388,000 = $32,256,000
2 320,000 shares x $.10 par = $32,000
Communication Case 18–3
This case encourages students to consider the larger question of the factors that
differentiate whether financial instruments qualify for recognition as liabilities or part
of equity. It also requires them to carefully consider the profession’s definitions of
those elements. You may wish to suggest to your students that they consult FASB
ASC 480: “Distinguishing Liabilities from Equity” (previously SFAS No. 150,
Accounting for Certain Financial Instruments with Characteristics of both Liabilities
and Equity), and the FASB’s Preliminary Views on phase two of that project, which
Arguments brought out in IAS 32 cited above include the following:
Classification as Liability or Equity
The fundamental principle of IAS 32 is that a financial instrument should be classified
as either a financial liability or an equity instrument according to the substance of the
Case 18–3 (continued)
A financial instrument is an equity instrument only if (a) the instrument includes no
contractual obligation to deliver cash or another financial asset to another entity and
(b) if the instrument will or may be settled in the issuer's own equity instruments, it is
either:
Illustration – preference shares
If an enterprise issues preference (preferred) shares that pay a fixed rate of dividend
and that have a mandatory redemption feature at a future date, the substance is that
Arguments brought out in FASB documents cited above include the following:
Basic Ownership Approach—The Board’s Preliminary View
The underlying principle of the basic ownership approach is that claims against the
entity’s assets are liabilities (or assets) if they reduce (or enhance) the net assets
available to the owners of the entity. Under the approach, an instrument would be
classified as equity if it is a basic ownership instrument. A basic ownership instrument
18–74 Intermediate Accounting, 8/e
Case 18–3 (concluded)
Ownership-Settlement Approach
Under the ownership-settlement approach, an entity would classify instruments based
on the nature of their return and their settlement requirements (or lack thereof). The
following three types of instruments would be classified as equity:
1. Basic ownership instruments
An indirect ownership instrument has the following characteristics:
1. It is not perpetual
2. Its terms link its value to the price of a basic ownership instrument and cause its
If an instrument has one or more equity outcomes and one or more nonequity
outcomes, it would be separated into an equity component and a nonequity
component. Examples of instruments that would be separated are convertible debt and
puttable stock. The nonequity component of a separated instrument would be initially
Research Case 18–4
Requirement 1
Cisco reports accumulated other comprehensive income in its balance sheet as a
component of shareholders’ equity as follows:
($ in millions)
Shareholders' equity: 2013 2012
Preferred stock
Requirement 2
Cisco relies on FASB ASC 220–10–45–8: “Comprehensive Income–Overall–Other
Presentation Matters” when reporting comprehensive income. Cisco reports a separate
statement of comprehensive income.
45–8 An entity shall display comprehensive income and its components in a financial
statement that is displayed with the same prominence as other financial statements that
constitute a full set of financial statements. This Subtopic does not require a specific
Case 18–4 (continued)
Requirement 3
Comprehensive income is a more expansive view of the change in shareholders’
equity than traditional net income. It is the total nonowner change in equity for a
reporting period. In fact, it encompasses all changes in equity other than from
The first of these—components of comprehensive income created during the
reporting period—can be reported either (a) as an extension of the income statement
or (b) in a separate statement, immediately following the income statement.
($ in millions)
Net income $xxx
Other comprehensive income:
Net unrealized holding gains (losses) on investments (net of tax)† $ x
† Changes in the fair value of some equity securities.
‡ Gains and losses due to revising assumptions or market returns differing from expectations,
and prior service cost from amending the plan (described in Chapter 17).
