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Introduction to Accounting 2 Chapter 13, Assignments of Accounting

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CHAPTER 13
CORPORATIONS: ORGANIZATION, STOCK
TRANSACTIONS, AND DIVIDENDS
EYE OPENERS
1. Each stockholder’s liability for corporation
debts is limited to the amount invested in
the corporation. A corporation is responsible
for its own obligations; therefore, its
creditors may not look beyond the assets of
the corporation for satisfaction of their
claims.
2. The large investments needed by large
businesses are usually obtainable only
through pooling of resources of many
people. The corporation also has the
advantages over proprietorships and
partnerships of transferable shares of
ownership, and thus the continuity of
existence, and limited liability of its owners
(stockholders).
3. No. Common stock with a higher par is not
necessarily a better investment than com-
mon stock with a lower par because par is
an amount assigned to the shares.
4. The broker is not correct. Corporations are
not legally liable to pay dividends until the
dividends are declared. If the company that
issued the preferred stock has operating
losses, it could omit dividends, first, on its
common stock and, later, on its preferred
stock.
5. Factors influencing the market price of a
corporation’s stock include the following:
a. Financial condition, earnings record,
and dividend record of the corporation.
b. Its potential earning power.
c. General business and economic
conditions and prospects.
6. No. Premium on stock is additional paid-in
capital.
7. a. Sufficient retained earnings, sufficient
cash, and formal action by the board of
directors.
b. February 16, declaration date; March
18, record date; and April 17, payment
date.
8. The company may not have had enough
cash on hand to pay a dividend on the com-
mon stock, or resources may be needed for
plant expansion, replacement of facilities,
payment of liabilities, etc.
9. a. No change.
b. Total equity is the same.
10. a. Current liability
b. Stockholders’ equity
11. a. Unissued stock has never been issued,
but treasury stock has been issued as
fully paid and has subsequently been
reacquired.
b. As a deduction from the total of other
stockholders’ equity accounts.
12. a. It has no effect on revenue or expense.
b. It reduces stockholders’ equity by
$450,000.
13. a. It has no effect on revenue.
b. It increases stockholders’ equity by
$615,000.
14. The primary advantage of the combined
income and retained earnings statement is
that it emphasizes net income as the
connecting link between the income
statement and the retained earnings portion
of stockholders’ equity.
15. The three classifications of restrictions on
retained earnings are legal, contractual, and
discretionary. Appropriations are normally
reported in the notes to the financial
statements.
16. Such prior period adjustments should be
reported as an adjustment to the beginning
balance of retained earnings.
17. The statement of stockholders’ equity is
normally prepared when there are
significant changes in stock and other paid-
in capital accounts.
18. The primary purpose of a stock split is to
bring about a reduction in the market price
per share and thus to encourage more in-
vestors to buy the company’s shares.
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CHAPTER 13

CORPORATIONS: ORGANIZATION, STOCK

TRANSACTIONS, AND DIVIDENDS

EYE OPENERS

  1. Each stockholder’s liability for corporation debts is limited to the amount invested in the corporation. A corporation is responsible for its own obligations; therefore, its creditors may not look beyond the assets of the corporation for satisfaction of their claims.
  2. The large investments needed by large businesses are usually obtainable only through pooling of resources of many people. The corporation also has the advantages over proprietorships and partnerships of transferable shares of ownership, and thus the continuity of existence, and limited liability of its owners (stockholders).
  3. No. Common stock with a higher par is not necessarily a better investment than com- mon stock with a lower par because par is an amount assigned to the shares.
  4. The broker is not correct. Corporations are not legally liable to pay dividends until the dividends are declared. If the company that issued the preferred stock has operating losses, it could omit dividends, first, on its common stock and, later, on its preferred stock.
  5. Factors influencing the market price of a corporation’s stock include the following: a. Financial condition, earnings record, and dividend record of the corporation. b. Its potential earning power. c. General business and economic conditions and prospects.
  6. No. Premium on stock is additional paid-in capital.
  7. a. Sufficient retained earnings, sufficient cash, and formal action by the board of directors. b. February 16, declaration date; March 18, record date; and April 17, payment date.
  8. The company may not have had enough cash on hand to pay a dividend on the com- mon stock, or resources may be needed for plant expansion, replacement of facilities, payment of liabilities, etc. 9. a. No change. b. Total equity is the same.
  9. a. Current liability b. Stockholders’ equity
  10. a. Unissued stock has never been issued, but treasury stock has been issued as fully paid and has subsequently been reacquired. b. As a deduction from the total of other stockholders’ equity accounts.
  11. a. It has no effect on revenue or expense. b. It reduces stockholders’ equity by $450,000.
  12. a. It has no effect on revenue. b. It increases stockholders’ equity by $615,000.
  13. The primary advantage of the combined income and retained earnings statement is that it emphasizes net income as the connecting link between the income statement and the retained earnings portion of stockholders’ equity.
  14. The three classifications of restrictions on retained earnings are legal, contractual, and discretionary. Appropriations are normally reported in the notes to the financial statements.
  15. Such prior period adjustments should be reported as an adjustment to the beginning balance of retained earnings.
  16. The statement of stockholders’ equity is normally prepared when there are significant changes in stock and other paid- in capital accounts.
  17. The primary purpose of a stock split is to bring about a reduction in the market price per share and thus to encourage more in- vestors to buy the company’s shares. 193193

PRACTICE EXERCISES

PE 13–1A

Year 1 Year 2 Year 3 Amount distributed............................... $ 15,000 $ 5,000 $ 62, Preferred dividend (5,000 shares)....... 8,000 5,000 11,000* Common dividend (10,000 shares)...... $ 7,000 $ 0 $ 51, *(3,000 + 8,000) Dividends per share: Preferred stock.............................. $1.60 $1.00 $2. Common stock.............................. $0.70 None $5.

PE 13–1B

Year 1 Year 2 Year 3 Amount distributed............................... $ 30,000 $6,000 $80, Preferred dividend (10,000 shares)..... 10,000 6,000 14,000* Common dividend (25,000 shares)...... $ 20,000 $$ 00 $66, *($4,000 + $10,000) Dividends per share: Preferred stock.............................. $1.00 $0.60 $1. Common stock.............................. $0.80 None $2.

PE 13–2A

July 3 Cash....................................................................... 1,125, Common Stock................................................ 1,125, (450,000 shares × $2.50). Sept. 1 Cash....................................................................... 250, Preferred Stock............................................... 250, (10,000 shares × $25). Oct. 30 Cash....................................................................... 225, Preferred Stock............................................... 187, Paid-In Capital in Excess of Par.................... 37,500* *(7,500 shares × $5)

PE 13–4B

Feb. 13 Stock Dividends (600,000 × 4% × $90)............... 2,160, Stock Dividends Distributable (24,000 × $75) 1,800, Paid-In Capital in Excess of Par— Common Stock ($2,160,000 – $1,800,000).... 360, Mar. 14 No entry required. Apr. 30 Stock Dividends Distributable............................ 1,800, Common Stock................................................ 1,800,

PE 13–5A

Oct. 3 Treasury Stock (10,000 × $9)............................... 90, Cash.................................................................. 90, Nov. 15 Cash (6,800 × $12)................................................ 81, Treasury Stock (6,800 × $9)........................... 61, Paid-In Capital from Sale of Treasury Stock [6,800 × ($12 – $9)]............... 20, Dec. 22 Cash (3,200 × $7).................................................. 22, Paid-In Capital from Sale of Treasury Stock [3,200 × ($9 – $7)]...................... 6, Treasury Stock (3,200 × $9)........................... 28,

PE 13–5B

Feb. 1 Treasury Stock (7,500 × $30)............................... 225, Cash.................................................................. 225, Mar. 15 Cash (4,500 × $34)................................................ 153, Treasury Stock (4,500 × $30)......................... 135, Paid-In Capital from Sale of Treasury Stock [4,500 × ($34 – $30)]............. 18, June 2 Cash (3,000 × $28)................................................ 84, Paid-In Capital from Sale of Treasury Stock [3,000 × ($30 – $28)].................. 6, Treasury Stock (3,000 × $30)......................... 90,

PE 13–6A

Stockholders’ Equity Paid-in capital: Common stock, $75 par (70,000 shares authorized, 63,000 shares issued).................. $ 4,725, Excess of issue price over par............................. 679,000 $ 5,404, From sale of treasury stock.................................. 25, Total paid-in capital......................................... $ 5,429, Retained earnings....................................................... 2,032, Total........................................................................ $ 7,462, Deduct treasury stock (7,500 shares at cost).......... 588, Total stockholders’ equity......................................... $ 6,874,

PE 13–6B

Stockholders’ Equity Paid-in capital: Common stock, $80 par (60,000 shares authorized, 50,000 shares issued).................. $ 4,000, Excess of issue price over par............................. 630,000 $ 4,630, From sale of treasury stock.................................. 66, Total paid-in capital......................................... $ 4,696, Retained earnings....................................................... 2,220, Total........................................................................ $ 6,916, Deduct treasury stock (4,000 shares at cost).......... 360, Total stockholders’ equity......................................... $ 6,556,

PE 13–7A

HORNBLOWER CRUISES INC.

Retained Earnings Statement For the Year Ended October 31, 2010 Retained earnings, November 1, 2009.............................. $ 1,500, Net income........................................................................... $475, Less dividends declared.................................................... 350, Increase in retained earnings............................................. 125, Retained earnings, October 31, 2010................................ $ 1,625,

EXERCISES

Ex. 13–

1st Year 2nd Year 3rd Year 4th Year a. Total dividend declared.................. $ 30,000 $ 42,000 $ 90,000 $ 120, Preferred dividend (current)........... $ 30,000 $ 27,000 $ 45,000 $ 45, Preferred dividend in arrears......... — 15,000 18,000 — b. Total preferred dividends............... $ 30,000 $ 42,000 $ 63,000 $ 45, Preferred shares outstanding........ ÷ 15,000 ÷ 15,000 ÷ 15,000 ÷ 15, Preferred dividend per share......... $ 2.00 $ 2.80 $ 4.20 $ 3. Dividend for common share (a. – b.)............................................. $ — $ — $ 27,000 $ 75, Common shares outstanding......... ÷ 50,000 ÷ 50, Common dividend per share.......... $ 0.54 $ 1.

Ex. 13–

1st Year 2nd Year 3rd Year 4th Year a. Total dividend declared.................. $ 3,000 $ 4,000 $ 30,000 $ 80, Preferred dividend (current)........... $ 3,000 $ 2,000 $ 5,000 $ 5, Preferred dividend in arrears......... — 2,000 3,000 — b. Total preferred dividends............... $ 3,000 $ 4,000 $ 8,000 $ 5, Preferred shares outstanding........ ÷ 20,000 ÷ 20,000 ÷ 20,000 ÷ 20, Preferred dividend per share......... $ 0.15 $ 0.20 $ 0.40 $ 0. Dividend for common share (a. – b.)............................................. $ — $ — $ 22,000 $ 75, Common shares outstanding......... ÷ 25,000 ÷ 25, Common dividend per share.......... $ 0.88 $ 3.

Ex. 13–

a. Feb. 10 Cash................................................................ 1,360, Common Stock......................................... 400, Paid-In Capital in Excess of Par— Common Stock......................................... 960, May 9 Cash................................................................ 700, Preferred Stock......................................... 500, Paid-In Capital in Excess of Par— Preferred Stock......................................... 200, b. $2,060,000 ($1,360,000 + $700,000)

Ex. 13–

a. June 4 Cash................................................................ 3,000, Common Stock......................................... 750, Paid-In Capital in Excess of Stated Value.............................................. 2,250, Oct. 9 Cash................................................................ 2,000, Preferred Stock......................................... 1,875, Paid-In Capital in Excess of Par— Preferred Stock......................................... 125, b. $5,000,000 ($3,000,000 + $2,000,000)

Ex. 13–

Jan. 30 Land......................................................................... 270, Common Stock................................................. 180, Paid-In Capital in Excess of Par..................... 90,

  • Ex. 13–
  • a. Cash.................................................................................. 400, - Common Stock (10,000 × $40).................................. 400,
  • b. Organizational Expenses................................................ 30, - Common Stock (750 × $40)....................................... 30, - Cash.................................................................................. 800, - Common Stock (20,000 × $40).................................. 800,
  • c. Land.................................................................................. 125, - Building............................................................................ 600, - Interest Payable*........................................................ 7, - Mortgage Note Payable............................................. 400, - Common Stock........................................................... 318,
  • Ex. 13–
  • Buildings................................................................................. 200,
  • Land......................................................................................... 125,
    • Preferred Stock................................................................. 250,
    • Paid-In Capital in Excess of Par—Preferred Stock....... 75,
  • Cash......................................................................................... 475,
    • Common Stock.................................................................. 300,
    • Paid-In Capital in Excess of Par—Common Stock....... 175,
  • Ex. 13–
  • Feb. 20 Cash........................................................................ 2,250, - Common Stock (150,000 × $15)...................... 2,250,
    • 26 Organizational Expenses...................................... 7, - Common Stock (500 × $15)............................. 7,
  • Mar. 6 Land......................................................................... 50, - Buildings................................................................. 275, - Equipment............................................................... 60, - Common Stock (18,000 × $15)........................ 270, - Common Stock................................................. 115, Paid-In Capital in Excess of Par—
  • Apr. 30 Cash........................................................................ 1,200, - Preferred Stock (20,000 × $50)........................ 1,000, - Preferred Stock................................................. 200, Paid-In Capital in Excess of Par—
  • Ex. 13–
  • May 3 Cash Dividends...................................................... 69, - Cash Dividends Payable.................................. 69,
  • Aug. 1 Cash Dividends Payable....................................... 69, June 17 No entry required. - Cash................................................................... 69,

Ex. 13–

a. (1) Stock Dividends......................................................... 250,000* Stock Dividends Distributable (2,000 × $100)... 200, Paid-In Capital in Excess of Par— Common Stock..................................................... 50, *[($10,000,000/$100) × 2%] × $ (2) Stock Dividends Distributable.................................. 200, Common Stock..................................................... 200, b. (1) $12,000,000 ($10,000,000 + $2,000,000) (2) $45,000, (3) $57,000,000 ($12,000,000 + $45,000,000) c. (1) $12,250,000 ($12,000,000 + $250,000) (2) $44,750,000 ($45,000,000 – $250,000) (3) $57,000,000 ($12,250,000 + $44,750,000)

Ex. 13–

a. Mar. 4 Treasury Stock............................................... 450, Cash........................................................... 450, Aug. 7 Cash................................................................ 350, Treasury Stock (3,500 × $90).................. 315, Paid-In Capital from Sale of Treasury Stock......................................... 35, Nov. 29 Cash................................................................ 132, Paid-In Capital from Sale of Treasury Stock............................................... 3, Treasury Stock (1,500 × $90).................. 135, b. $32,000 credit c. Beaverhead Creek may have purchased the stock to support the market price of the stock, to provide shares for resale to employees, or for reissuance to employees as a bonus according to stock purchase agreements.

Ex. 13–

Stockholders’ Equity Paid-in capital: Preferred 2% stock, $100 par (20,000 shares authorized, 7,500 shares issued).................. $750, Excess of issue price over par....... 90,000 $ 840, Common stock, no par, $5 stated value (250,000 shares author- ized, 80,000 shares issued)....... $400, Excess of issue price over par....... 960,000 1,360, From sale of treasury stock............ 25, Total paid-in capital.................... $2,225,

Ex. 13–

Stockholders’ Equity Paid-in capital: Common stock, $75 par (40,000 shares authorized, 18,000 shares issued)................ $1,350, Excess of issue price over par....... 108,000 $1,458, From sale of treasury stock............ 12, Total paid-in capital.................... $1,470, Retained earnings................................. 2,950, Total................................................... $4,420, Deduct treasury stock (875 shares at cost)......................... 70, Total stockholders’ equity.................... $4,350,

Ex. 13–

Stockholders’ Equity Paid-in capital: Preferred 4% stock, $50 par (50,000 shares authorized, 30,000 shares issued)................ $1,500, Excess of issue price over par....... 90,000 $1,590, Common stock, $10 par (200,000 shares authorized 40,000 shares issued)................ $ 400, Excess of issue price over par....... 120,000 520, From sale of treasury stock............ 30, Total paid-in capital.................... $2,140, Retained earnings................................. 3,900, Total................................................... $6,040, Deduct treasury common stock (5,000 shares at cost)...................... 55, Total stockholders’ equity.................... $5,985,

Ex. 13–

BANCROFT CORPORATION

Retained Earnings Statement For the Year Ended January 31, 2010 Retained earnings, February 1, 2009................................. $ 3,175, Net income........................................................................... $415, Less dividends declared.................................................... 215, Increase in retained earnings............................................. 199, Retained earnings, January 31, 2010................................ $ 3,375,

Ex. 13–

FOR ALL OCCASIONS GREETING CARDS INC.

Statement of Stockholders’ Equity For the Year Ended December 31, 2010 Paid-In Common Capital in Stock Excess Treasury Retained $50 Par of Par Stock Earnings Total Balance, Jan. 1, 2010...... $2,000,000 $320,000 — $3,480,000 $5,800, Issued 18,000 shares of common stock........ 900,000 216,000 1,116, Purchased 3, shares as treasury stock............................ $(144,000) (144,000) Net income...................... 510,000 510, Dividends......................... (100,000) (100,000) Balance, Dec. 31, 2010... $2,900,000 $536,000 $(144,000) $3,890,000 $7,182,

Ex. 13–

a. 160,000 shares (40,000 × 4) b. $75 per share ($300/4)

Ex. 13–

Stockholders’ Assets Liabilities Equity (1) Declaring a cash dividend 0 + – (2) Paying the cash dividend declared in (1) – – 0 (3) Authorizing and issuing stock certificates in a stock split 0 0 0 (4) Declaring a stock dividend 0 0 0 (5) Issuing stock certificates for the stock dividend declared in (4) 0 0 0

Ex. 13–

Feb. 3 No entry required. The stockholders ledger would be revised to record the increased number of shares held by each stockholder. Apr. 10 Cash Dividends...................................................... 47,000* Cash Dividends Payable.................................. 47, [(18,000 shares × $1.50) + (250,000 shares × $0.08)] = $27,000 + $20,000 = $47, June 9 Cash Dividends Payable....................................... 47, Cash................................................................... 47, Oct. 10 Cash Dividends...................................................... 37,000 Cash Dividends Payable.................................. 37, [(18,000 shares × $1.50) + (250,000 shares × $0.04)] = $27,000 + $10,000 = $37, 10 Stock Dividends..................................................... 180,000* Stock Dividends Distributable (5,000 × $20). 100, Paid-In Capital in Excess of Par—Common Stock........................................ 80, **(250,000 shares × 2% × $36) = $180, Dec. 9 Cash Dividends Payable....................................... 37, Cash................................................................... 37, 9 Stock Dividends Distributable.............................. 100, Common Stock................................................. 100,

Ex. 13–

Earnings per Share = NumberofCommonSharesOutstanding Net Income−Preferred Dividends Earnings per Share = 20,000commonsharesoutstanding $160,000 −($7pershare×2,000 shares) Earnings per Share = $7.30 per share

Ex. 13–

a. OfficeMax: Earnings per Share = NumberofCommonSharesOutstanding Net Income−Preferred Dividends Earnings per Share = 73,142,000commonsharesoutstanding $91,721,00 0 −($54,735,0 00 × 7.375%) Earnings per Share = $1.20 per share Staples: Earnings per Share = NumberofCommonSharesOutstanding Net Income−Preferred Dividends Earnings per Share = (^) 720,528,00 0 commonsharesoutstanding $973,577,0 00 Earnings per Share = $1.35 per share b. Staples’ net income is over 10 times greater than OfficeMax’s. This is because Staples is a much larger business than OfficeMax. As a result, Staples also has nearly 10 times greater shares outstanding as well. The earnings per share for both firms can be used to compare their relative earnings. Staples has a better earnings per share ($1.35) than does OfficeMax ($1.20).

PROBLEMS

Prob. 13–1A

Total Preferred Dividends Year Dividends Total Per Share Total Per Share 2005 ........................ $ 5,000 $ 5,000 $ 0.50 $ 0 $ 0 2006 ........................ 18,000 18,000 1.80 0 0 2007 ........................ 45,000 37,000* 3.70 8,000 0. 2008 ........................ 45,000 20,000 2.00 25,000 1. 2009 ........................ 60,000 20,000 2.00 40,000 1. 2010 ........................ 67,000 20,000 2.00 47,000 1. $12.00 $4. *$37,000 = (2005 dividends in arrears of $15,000) + (2006 dividends in arrears of $2,000) + (2007 current dividend of $20,000)

  1. Average annual dividend for preferred: $2.00 per share ($12.00/6) Average annual dividend for common: $0.80 per share ($4.80/6)
  2. a. 1.6% ($2.00/$125) b. 10.0% ($0.80/$8)