P16-11 (continued)
2. Contributed Capital
Preferred stock (6%, $50 par, 8,000 shares
authorized, 4,950 shares issued and
outstanding) $247,500
P16-12
JORDAN CORPORATION
Stockholders’ Equity
December 31, 2010
Contributed Capital
Preferred stock, $50 par (7%, cumulative,
convertible into 5 shares of common
16-42
P16-13
CLETT CORPORATION
Stockholders’ Equity
December 31, 2010
Contributed Capital
Preferred stock, $100 par (7.5%, cumulative,
P16-14
a. Cash (1,000 x $11) 11,000
Common Stock, $5 stated value 5,000
Additional Paid-in Capital on Common Stock 6,000
b. Equipment 69,000
*Originally subscribed
Issued 9,000 common shares
P16-14 (continued)
d. (continued)
*Subscriptions receivable: common stock
Original balance $70,000
f. Subscriptions Receivable: Preferred Stock
*Originally subscribed
g. Cash* 190,400
Subscriptions Receivable: Preferred Stock 190,400
*Subscriptions receivable: preferred stock
16-44
P16-14 (continued)
k. Retained Earnings* 9,000
Cash 9,000
*Common dividends: (8,000 + 1,000) x $1 = $9,000
Note to Instructor: Although the following T-Accounts are not required, they may be
helpful to tie the journal entries to the ending account balances.
Subscriptions Receivable:
Preferred Stock
Additional Paid-in Capital
on Preferred Stock
f 224,000
g 190,400
b 9,000
Bal 33,600
f 24,000
Bal 33,000
16-45
P16-15
1. (1) Treasury Stock: Preferred 11,400
Cash (200 x $57) 11,400
(4) Cash (200 x $17) 3,400
Treasury Stock: Common (200 x $16) 3,200
Additional Paid-in Capital from
Treasury Stock: Common 200
(6) Common Stock, $10 par 2,000
Additional Paid-in Capital on
P16-15 (continued)
2. Stockholders’ Equity
Contributed capital
Preferred stock, $50 par (1,000 shares
issued of which 100 are being held
as treasury stock) $ 50,000
P16-16
1. Treasury stock is not an asset. A corporation cannot own itself. A corporation may not
recognize a gain or loss from trading (that is, reacquiring and subsequently reissuing) in
its own securities. The reacquisition and reissuance are treated as a contraction and
expansion of stockholders’ equity. This primarily affects accounts other than Retained
Earnings, although the latter may occasionally be reduced (but never increased).
2. (1) Treasury Stock: Common 2,000
Cash (100 x $20) 2,000
(4) Cash (250 x $25) 6,250
16-47
P16-16 (continued)
2. (continued)
(6) Preferred Stock, $100 par (200 shares) 20,000
Additional Paid-in Capital on
3. Any “gain” on the reissuance of treasury stock is treated as an increase in additional
paid-in capital (as is shown in transaction #4). Treasury stock is reported as a reduction
P16-17 (AICPA adapted solution)
Note to Instructor: Although the coverage of stockholders’ equity is not completed until
Chapter 16, this problem does not contain any items not previously discussed. It does
include a net unrealized loss (decline) on long-term equity securities, which was covered
in Chapter 14.
1. UDALL CORPORATION
Stockholders’ Equity
December 31, 2010
Capital stock
Preferred stock, $4 cumulative, par value
$50 per share; authorized 50,000 shares,
P16-17 (continued)
2. Under IFRS, Udall would report a revaluation surplus of $70,000 in its stockholders’
equity. It would also refer to retained earnings as accumulated profits and
losses. Its stockholders’ equity under IFRS would be as follows:
Stockholders’ Equity
Capital stock
Preferred stock, $4 cumulative, par value
$50 per share; authorized 50,000 shares,
ANSWERS TO CASES
C16-1
1. A common stockholder has several rights as an owner of a corporation. These include:
a. Voting right; each share of common stock carries with it the right to one vote at the
stockholders’ meeting. This vote may be made by proxy. This right is rarely important
unless a large percentage of shares is held.
C16-1 (continued)
2. Preferred stockholder rights are sometimes modified upon the issuance of preferred stock.
The various characteristics that might be attached to preferred stock include:
a. Preference as to dividends; the right to a dividend of a predetermined amount
before dividends may be paid on common stock.
e. Warrants; rights that allow the holder to purchase additional shares of common stock
at a specified price over some future period.
Any combination of the preceding characteristics may be attached to preferred stock.
When a preferred stock must be paid a fixed dividend prior to any common dividends, is
redeemable at a set price on a fixed future maturity date or is callable at the corporation’s
option, and does not carry the right to vote, its characteristics are more similar to a long-
term bond than to a common stock.
C16-2
When a corporation acquires an asset through the payment of cash, it values the asset at
the cash exchanged, which represents the fair value of the asset at the time of exchange.
C16-2 (continued)
This general rule is an attempt to minimize the possibility of developing watered stock or
secret reserves. Watered stock arises when a corporation’s assets and stockholders’ equity
are overstated in the valuation of the exchange. Secret reserves occur when assets and
C16-3
1. Occasionally, a corporation will combine shares of common stock and preferred stock
and issue these securities as a package, rather than individually. The intent is to increase
the attractiveness of the securities.
2. In the case of the exchange of common stock and preferred stock for an asset other than
cash (equipment for example), the value assigned to the transaction should be based
C16-4
A subscription contract is a legally-binding contract whereby a subscriber (investor) agrees
C16-4 (continued)
The arguments for reporting the Subscriptions Receivable account as a contra-
stockholders’ equity item is that (1) collection is uncertain and the corporation is not
assured of obtaining a future benefit (so it has no asset), and (2) the receivables from
subscriptions are different from normal trade receivables because no goods or services
C16-5 (AICPA adapted solution)
1. For the noncompensatory share purchase plan, the entry at the date the stock is issued is
as follows:
(a) Debit to cash (or appropriate liability account if amounts were previously withheld
through payroll deductions) for the cash price.
2. No formal journal entry is made on the date of grant. However, a memorandum entry
may be made describing the terms of the plan and estimated fair value of options
expected to be exercised.