PROBLEM 15–12
PENN COMPANY
Stockholders’ Equity
June 30, 2015
Capital stock
8% preferred stock, $25 par value,
cumulative and nonparticipating,
100,000 shares authorized, 40,000
$1,000,000
shares authorized, 115,400 shares
issued with 1,500 shares held in the treasury ……..
1,154,000
Total capital stock ……………………………………….
2,154,000
Additional paid-in capital
In excess of par-preferred …………………………………….
$ 760,000
In excess of par-common …………………………………….
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
PROBLEM 15-12 (Continued)
Account Balances
Common Stock
850,000
50,000
54,000
640,000
226,800
Preferred Stock
1,000,000
1,500
280,800
40,000
409,200
Paid-in Capital in
Excess of Par—Common Stock
1,785,000
2,821,800
Paid-in Capital in
Excess of Par—Preferred Stock
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.
PROBLEM 15-12 (Continued)
Entries supporting the balances.
Common Stock
Entries
1. Cash ……………………………………………………….. 2,635,000
2. Land ……………………………………………………….. 220,000
3. Cash ……………………………………………………….. 840,000
Common Stock …………………………………. 200,000
Paid-in Capital in Excess of Par—
Common Stock ………………………………. 640,000
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
Preferred Stock
Cash ……………………………………………………….. 1,760,000
Preferred Stock ………………………………… 1,000,000
Paid-in Capital in Excess of Par—
Preferred Stock ………………………………. 760,000
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
Stock Dividend
Dec. 15 Retained Earnings …………………………….. 280,800**
Common Stock …………………………….. 54,000*
Paid-in Capital in Excess of Par—
Common Stock. …………………………. 226,800
PROBLEM 15-12 (Continued)
Retained Earnings
The cash dividends only affect the retained earnings. Note that the
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
CA 15-2 (Time 15–20 minutes)
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
CA 15-5 (Time 15–20 minutes)
Purpose—to provide the student with an understanding of the theoretical concepts and implications that
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)
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
(c) No information is given with respect to the fair value of the stock. In this situation, an estimate for
fair value could be developed based on market transactions involving comparable assets. Otherwise,
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
CA 15-3 (Continued)
(b) Transactions or events that change owners’ equity include revenues and expenses, gains and
losses, investments by owners, distributions to owners, and changes within owners’ equity.
(c) Investments by owners are increases in net assets resulting from transfers by other entities of
something of value to obtain ownership. Examples of investments by owners are issuance of
CA 15-4
(a) A stock dividend is the issuance by a corporation of its own stock to its stockholders on a prorata
(1) From the legal standpoint a stock split is distinguished from a stock dividend in that a split
results in an increase in the number of shares outstanding and a corresponding decrease in
(2) The major distinction is that a stock dividend requires a journal entry to decrease retained
earnings and increase paid-in capital, while there is no entry for a stock split. Also, from the
accounting standpoint the distinction between a stock dividend and a stock split is
(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,
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
(c) The amount of retained earnings to be capitalized in connection with a stock dividend (in the
accounting sense) might be (1) the legal minimum (usually par or stated value), (2) the average
paid-in capital per outstanding share, or (3) the fair value of the shares.
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
equity since there is no increase in total proprietorship.
(b) The case against issuing stock dividends on treasury stock rests principally upon the argument
that stock reacquired by the corporation is a “reduction of capital” through the payment of cash to
reduce the number of outstanding shares. According to this view, the corporation cannot obtain a
CA 15-6
(a) Mask Company should account for the purchase of the treasury stock on August 15, 2014, 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, 2014, by
(b) Mask should account for the stock dividend by debiting Retained Earnings for $21 per share (the
market price of the stock in October 2014, the date of the stock dividend) multiplied by the
1,950 shares distributed. Mask should then credit Common Stock for the par value of the common
(c) Mask should account for the cash dividend on December 20, 2014, the declaration date, by
debiting Retained Earnings and crediting Dividends Payable for $1 per share multiplied by the
CA 15-7
(a) The stakeholders are the dissident stockholders, the other stockholders, potential investors,
creditors, and Kenseth.
(b) The ethical issues are honesty, job security, and personal responsibility to others. That is, by
FINANCIAL REPORTING PROBLEM
(a) P&G’s preferred stock has a stated value of $1 per share.
(d) At June 30, 2011 and June 30, 2010, P&G had 2,766 (4,008 – 1,242)
million and 2,844 (4,008 – 1,164) million shares of common stock
outstanding, respectively.
(f) Rate of return on common stock equity:
2011: ($11,797 – $233)/[$66,406 + $59,838)/2] = 18.3%
2010: ($12,736 – $219)/[$59,838 + $61,775)/2] = 20.6%
(g) Payout ratio:
(h) Price range for the quarter ended June 30, 2011:
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 2011:
Coca-Cola, 3,520,000,000 – 1,257,000,000 = 2,263,000,000.
PepsiCo, 1,865,000,000 – 301,000,000 = 1,564,000,000.
(f) Rate of return on common stock equity.
2011:
COMPARATIVE ANALYSIS CASE (Continued)
2010:
PepsiCo,
= 33.1%
(g) Payout ratios for 2011.
Coca-Cola,
$4,300
= 50.2%
$8,572
(h) Market price range of stock during the fourth quarter of 2011: