Chapter 18 shareholders generally may not lose more than the

Chapter 18 Shareholders’ Equity

QUESTIONS FOR REVIEW OF KEY TOPICS

Question 18–1

The two primary sources of shareholders’ equity are amounts invested by shareholders in the

Question 18–2

The three primary ways a company can be organized are (1) a sole proprietorship, (2) a

partnership, or (3) a corporation. Transactions are accounted for the same regardless of the form of

Question 18–3

In the eyes of the law, a corporation is a separate legal entity—separate and distinct from its

Question 18–4

“Not-for-profit” corporations such as churches, hospitals, universities, and charities, are not

Question 18–5

Corporations that are organized for profit may be publicly held or privately (or closely) held.

Question 18–6

Corporations are formed in accordance with the corporation laws of individual states. The

18–2 Intermediate Accounting, 8/e

Answers to Questions (continued)

Question 18–7

The ownership rights held by common shareholders, unless specifically withheld by agreement

Question 18–8

The “preemptive right” is the right to maintain one’s percentage share of ownership when new

Question 18–9

The typical rights of preferred shares usually include one or both of the following:

Question 18–10

If preferred shares are noncumulative, dividends not declared in any given year need never be

Question 18–11

Par value was defined by early corporation laws as the amount of net assets not available for

Answers to Questions (continued)

Question 18–12

Comprehensive income is a broader view of the change in shareholders’ equity than traditional

net income. It is the total nonowner change in equity for a reporting period. It encompasses all

changes in equity except those caused by transactions with owners. Transactions between the

Question 18–13

Components of comprehensive income created during the reporting period can be reported in

Question 18–14

The statement of shareholders’ equity reports the transactions that cause changes in its

Question 18–15

The measurement objective is that the transaction should be recorded at fair value. This might

Answers to Questions (continued)

Question 18–16

The cash received usually is the sum of the separate market values of the separate securities.

Question 18–17

Share issue costs reduce the net cash proceeds from selling the shares and thus paid-in capital—

excess of par. On the other hand, debt issue costs are recorded in a separate “debt issue costs”

Question 18–18

The same accounts that previously were increased when the shares were sold are decreased when

the shares are retired. Specifically, common (or preferred) stock and paid-in capital—excess of par

Question 18–19

The purchase of treasury stock and its subsequent resale are considered to be a “single

Answers to Questions (concluded)

Question 18–20

For a stock dividend of less than 25%, a “small” stock dividend, the fair value of the additional

shares distributed is transferred from retained earnings to paid-in capital. The reduction in retained

Question 18–21

The effect and maybe the motivation for the 2-for-1 stock split is to reduce the per share market

price (by half). This will likely increase the stock’s marketability by making it attractive to a larger

Question 18–22

When a company decreases, rather than increases, its outstanding shares, a reverse stock split

Question 18–23

You would be entitled to 3.2 shares (4% x 80 shares). Since cash in lieu of payments usually are

Question 18–24

A quasi reorganization allows a company to (1) write down inflated asset values and (2)

eliminate an accumulated deficit in retained earnings. The following steps are taken:

1. Assets and liabilities are revalued to reflect their fair values, with corresponding credits or

18–6 Intermediate Accounting, 8/e

BRIEF EXERCISES

Brief Exercise 18–1

Two attributes of other comprehensive income are reported: (1) the components

of comprehensive income created during the reporting period ($15 million in this

Brief Exercise 18–2

($ in millions)

Cash (8 million shares x $12 per share) ……………………………. 96

Brief Exercise 18–3

Lewelling’s paid-in capital—excess of par will increase by $860,000: 4,000 hours

x $240 less $100,000 par.

Journal entry (not required):

Brief Exercise 18–4

Hamilton’s shareholders’ equity will increase by $3,500,000 as a result of this

transaction.

18–8 Intermediate Accounting, 8/e

Brief Exercise 18–5

MLS’s common shareholders’ will receive dividends of $18 million as a result of

the 2016 distribution.

Preferred Common

2014 $20 million* 0

Brief Exercise 18–6

Horton’s total paid-in capital will decline by $17 million, the price paid to buy

back the shares.

Journal entry (not required):

($ in millions)

Common stock (2 million shares x $1 par) ……………………………. 2

Brief Exercise 18–7

Agee’s total paid-in capital will decline by $18 million because recording the

transaction involves a $1 million reduction of retained earnings and an $18 million

reduction in paid-in capital accounts.

Journal entries (not required):

First buyback ($ in millions)

Common stock (1 million shares x $1 par) ……………………………. 1

Second buyback

Common stock (1 million shares x $1 par) ……………………………. 1

18–10 Intermediate Accounting, 8/e

Brief Exercise 18–8

Jennings’s retained earnings will decline by $2 million because the $67 million

sale price is less than the sum of the cost of the treasury stock ($70 million) and

paid-in capital from the previous treasury stock sale ($1 million).

Journal entries (not required):

Purchase of treasury stock ($ in millions)

Treasury stock (2 million shares x $70) ……………………………….. 140

Cash ………………………………………………………………………… 140

First sale of treasury stock

Cash (1 million shares x $71) ……………………………………………… 71

Brief Exercise 18–9

Cox’s paid-in capital—share repurchase will increase by $7 million as

determined in the following journal entry:

($ in millions)

Cash (1 million shares x $29) ……………………………………………… 29

Brief Exercise 18–10

Cox’s paid-in capital—share repurchase will increase by $9 million as

determined in the following journal entry:

($ in millions)

18–12 Intermediate Accounting, 8/e

Brief Exercise 18–11

Declaration date ($ in millions)

Retained earnings …………………………………………………….. 2,313

Brief Exercise 18–12

Declaration date

Loss on investment ($37,000 – 35,000) …………………………. 2,000

Investment in GE stock ………………………………………… 2,000

Brief Exercise 18–13

($ in millions)

Retained earnings (3 million* shares at $25 per share) ………….. 75

Brief Exercise 18–14

If a stock split is not to be effected in the form of a stock dividend, no entry is

Brief Exercise 18–15

($ in millions)

Paid-in capital—excess of par** 60

Common stock (60 million shares* x $1 par per share) 60

Brief Exercise 18–16

If Nestle used U.S. GAAP:

• Ordinary share capital would be common stock,

18–14 Intermediate Accounting, 8/e

EXERCISES

Exercise 18–1

Requirement 1

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

Requirement 2

Two attributes of other comprehensive income are reported: (1) the components

of comprehensive income created during the reporting period and (2) the

Exercise 18–1 (continued)

Requirement 3

Kaufman’s 2016 balance sheet amount ($107 million) differs from the 2016

amount reported in the disclosure note. On the other hand, the comprehensive income

($ 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 securities (described in Chapter 12).

‡ 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).

§ When a derivative designated as a cash flow hedge is adjusted to fair value, the gain or loss is

Notice that each component is reported net of its related income tax expense or

income tax benefit.

Exercise 18–1 (concluded)

Requirement 4

From the information Kaufman’s financial statements provide, we can determine how

the company calculated the $107 million accumulated other comprehensive income in

2016:

Exercise 18–2

Requirement 1

The specific citation that describes the guidelines for presenting accumulated other

Position.”

Requirement 2

45-14 The total of other comprehensive income for a period shall be transferred to a

component of equity that is displayed separately from retained earnings and additional

paid-in capital in a statement of financial position at the end of an accounting period.

18–18 Intermediate Accounting, 8/e

Exercise 18–3

Indicate by letter whether each of the items listed below most likely is reported in the

income statement as Net Income (NI) or in the statement of comprehensive income as

Other Comprehensive Income (OCI).

Items

OCI 1. Increase in the fair value of securities available-for-sale

NI 2. Gain on sale of land

Exercise 18–4

Cash (3 million shares x $17.15 per share) ………………………… 51,450,000

Exercise 18–5

February 12

Cash (2 million shares x $9 per share) ………………………….. 18,000,000

February 13

Legal expenses (40,000 shares x $9 per share) ……………… 360,000

February 13

Cash ………………………………………………………………….. 945,000

Common stock (80,000 shares x $1 par) ………………… 80,000

November 15

Property, plant, and equipment (cash value) ……………… 3,688,000

Exercise 18–6

Williams Industries must report the 20 million Class B shares among its long–

term liabilities in its balance sheet, not as part of shareholders’ equity. The “triggering

event,” the death of J.P Williams, is certain to occur even though its timing may not