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PROBLEM 15-12
PENN COMPANY
Stockholders’ Equity
June 30, 2013
Capital stock
8% preferred stock, $25 par value,
cumulative and nonparticipating,
100,000 shares authorized, 40,000
shares issued and outstanding—Note A …………….
$1,000,000
Additional paid-in capital
In excess of par-preferred stock …………………………..
$ 760,000
In excess of par-common stock …………………………...
2,821,800*
From treasury stock …………………………………………….
1,500
3,583,300
Total paid-in capital ……………………………………..
5,737,300
409,200
6,146,500
58,500
* Paid-In Capital in Excess of Par—Common Stock:
$1,785,000
170,000
shares authorized, 115,400 shares
issued with 1,500 shares held in the treasury ……..
1,154,000
Total capital stock ……………………………………….
2,154,000
PROBLEM 15-12 (Continued)
Account Balances
850,000
50,000
200,000
54,000
1,154,000
1,785,000
170,000
640,000
226,800
2,821,800
Preferred Stock
1,000,000
58,500
1,500
690,000
280,800
40,000
40,000
409,200
Paid-in Capital in
Excess of Par—Preferred Stock
760,000
Note that the Penn Company is authorized to issue 300,000 shares of
$10 par value common and 100,000 shares of $25 per value, cumulative and
nonparticipating preferred.
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PROBLEM 15-12 (Continued)
Entries supporting the balances.
Common Stock
Entries
1. Cash ……………………………………………………….. 2,635,000
Common Stock …………………………………. 850,000
Paid-in Capital in Excess of Par—
Common Stock ………………………………. 1,785,000
At the beginning of the year, Penn had 110,000 common shares out–
standing, of which 85,000 shares were issued at $31 per share, resulting
in $850,000 (85,000 shares at $10) of common stock and $1,785,000 of
additional paid-in capital on common stock (85,000 shares at $21). The
5,000 shares exchanged for a plot of land would be recorded at $50,000
of common stock and $170,000 of paid-in capital (use the current fair
value of the land on July 24 to value the stock issuance). The 20,000
shares issued in 2011 at $42 a share resulted in $200,000 of common
stock and $640,000 of paid-in capital.
PROBLEM 15-12 (Continued)
The issuance of 40,000 shares of preferred at $44 resulted in $1,000,000
(40,000 shares at $25) of preferred stock outstanding and $760,000
(40,000 shares at $19) of paid-in capital on preferred.
Treasury Stock
Nov. 30 Treasury Stock …………………………………. 78,000
Cash ……………………………………………. 78,000
The sale of the treasury shares above cost ($21,000 minus $19,500
cost) is recorded in a separate paid-in capital amount.
Stock Dividend
Dec. 15 Retained Earnings …………………………..… 280,800**
Common Stock …………………………….. 54,000*
Paid-in Capital in Excess of Par—
Common Stock. …………………………. 226,800
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PROBLEM 15-12 (Continued)
Retained Earnings
TIME AND PURPOSE OF CONCEPTS FOR ANALYSIS
CA 15-1 (Time 10–20 minutes)
Purpose—to provide the student with some familiarity with the applications of the capital stock share
system. This case requires the student to analyze the concept dealing with the dilution of ownership
interest and the establishment of any necessary corrective actions to compensate an existing
stockholder for this dilution effect.
CA 15-2 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to discuss the bases for recording the issuance of
stock in exchange for nonmonetary assets.
CA 15-3 (Time 25–30 minutes)
Purpose—to provide a five-part theory case on equity based on Statement of Financial Accounting
Concepts No. 6. It requires defining terms and analyzing the effects of equity transactions on financial
statement elements.
CA 15-4 (Time 25–30 minutes)
Purpose—to provide the student with an understanding of the conceptual framework which underlies
a stock dividend and a stock split. The student is required to explain what a stock dividend is, the
amount of retained earnings to be capitalized in connection with a stock dividend, and how it differs
from a stock split both from a legal standpoint and an accounting standpoint. This case also requires an
explanation of the various reasons why a corporation declares a stock dividend or a stock split.
CA 15-5 (Time 15–20 minutes)
Purpose—to provide the student with an understanding of the theoretical concepts and implications that
underlie the issuance of a stock dividend. The student is required to discuss the arguments against
either considering the stock dividend as income to the recipient or issuing stock dividends on treasury
shares.
CA 15-6 (Time 20–25 minutes)
Purpose—to provide the student with a situation containing a cash dividend declaration, a stock dividend,
and a reacquisition and reissuance of shares requiring the student to explain the accounting treatment.
CA 15-7 (Time 10–15 minutes)
Purpose—to provide an opportunity for the student to consider and discuss the ethical issues involved
when the control of a corporation is at stake. The student should recognize the potential conflict between
the CEO’s personal will and the responsibility and accountability the CEO has to the stockholders.
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SOLUTIONS TO CONCEPTS FOR ANALYSIS
CA 15-1
(a) To share proportionately in any new issues of stock of the same class (the preemptive right).
(b) Derek Wallace bought an additional $100,000 par value stock. His original ownership was
$200,000 ($250,000 X 80%). Thus he increased his ownership by 100/200 (50%). This imbalance
CA 15-2
(a) 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
issued, whichever is more clearly determinable.
CA 15-3
(a) Equity, or net assets, is the owners’ residual interest in the assets of an entity that remains after
deducting liabilities; in other words, equity equals assets less liabilities. Assets are probable future
economic benefits controlled by a particular entity as the result of past transactions or events,
and liabilities are probable future sacrifices of economic benefits arising from present obligations
of a particular entity which result from past transactions or events; therefore equity can be
defined as future economic benefits which will not be sacrificed to satisfy present obligations.
CA 15-3 (Continued)
CA 15-4
(a) A stock dividend is the issuance by a corporation of its own stock to its stockholders on a prorata
basis without receiving payment therefor. The stock dividend results in an increase in the amount
of the legal or stated capital of the enterprise. The dividend may be charged to retained earnings
or to any other capital account that is not a part of legal capital.
(b) The usual reason for issuing a stock dividend is to give the stockholders something on a dividend
date and yet conserve working capital.
A stock dividend that is charged to retained earnings reduces the total accumulated earnings,
and all stock dividends reduce the per share earnings. Issuing a stock dividend to achieve these
ends would be a public relations gesture in that the public would be less likely to criticize the
corporation for high profits or undue retention of earnings.
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CA 15-4 (Continued)
A stock dividend also may be issued for the purpose of obtaining a wider distribution of the stock.
Although this is the main consideration in a stock split, it may be a secondary consideration in the
issuance of a stock dividend. The issuance of a series of stock dividends will accomplish the
same objective as a stock split.
CA 15-5
(a) The case against treating an ordinary stock dividend as income is supported by a majority of
accounting authorities. It is based upon “entity” and “proprietary” interpretations.
If the corporation is considered an entity separate from stockholders, the income of the
corporation is corporate income and not income to stockholders, although the equity of the
stockholders in the corporation increases as income to the corporation increases. This position is
consistent with the interpretation that a dividend is not income to the recipient until it is realized
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CA 15-6
(a) Mask Company should account for the purchase of the treasury stock on August 15, 2012, by
debiting Treasury Stock and crediting Cash for the cost of the purchase (1,000 shares X $18 per
share). Mask should account for the sale of the treasury stock on September 14, 2012, by
debiting Cash for the selling price (500 shares X $20 per share), crediting Treasury Stock for cost
CA 15-7
(a) The stakeholders are the dissident stockholders, the other stockholders, potential investors,
creditors, and Kenseth.
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FINANCIAL REPORTING PROBLEM
(a) P&G’s preferred stock has a stated value of $1 per share.
(d) At June 30, 2009 and June 30, 2008, P&G had 4,007.3 million and
4,001.8 million shares of common stock outstanding, respectively.
(e) The cash dividends caused P&G’s Retained Earnings to decrease by
$5,044,000 (including both common and preferred dividends).
Low—$46.29
Note to instructor: Stock price information can be found in P&G’s full 10–K
at the KWW website.
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COMPARATIVE ANALYSIS CASE
(a) Par value:
Coca-Cola, $0.25 per share.
PepsiCo, $0.012/3 per share.
(d) Common or capital stock shares outstanding, year-end 2009:
Coca-Cola, 3,520,000,000 – 1,217,000,000 = 2,303,000,000.
PepsiCo, 1,782,000,000 – 217,000,000 = 1,565,000,000.
(f) Rate of return on common stock equity.
2009:
Coca-Cola,
$6,824
= 30.2%
$24,799 + $20,472
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COMPARATIVE ANALYSIS CASE (Continued)
2008:
During 2009 and 2008, PepsiCo earned a higher return on its stock-
holders’ equity.
(g) Payout ratios for 2009.
(h) Market price range of stock during the fourth quarter of 2009:
Coca-Cola, High $59.45
Low $52.71
PepsiCo, High $64.48
Low $57.33