15 Stockholders’ Equity EXERCISES 15
EXERCISES
E15-1 (L01) EXCEL (Recording the Issuances of Common Stock) During its first year of operations, Collin Raye Corporation had the following transactions pertaining to its common stock.
Jan. 10 Issued 80,000 shares for cash at $6 per share.
Mar. 1 Issued 5,000 shares to attorneys in payment of a bill for $35,000 for services rendered in helping the company to incorporate.
July 1 Issued 30,000 shares for cash at $8 per share.
Sept. 1 Issued 60,000 shares for cash at $10 per share.
Instructions
(a) Prepare the journal entries for these transactions, assuming that the common stock has a par value of $5 per share.
(b) Prepare the journal entries for these transactions, assuming that the common stock is no-par with a stated value of $3 per share.
E15-2 (L01) (Recording the Issuance of Common and Preferred Stock) Kathleen Battle Corporation was organized on January 1, 2017. It is authorized to issue 10,000 shares of 8%, $100 par value preferred stock, and 500,000 shares of no-par common stock with a stated value of $1 per share. The following stock transactions were completed during the first year.
Jan. 10 Issued 80,000 shares of common stock for cash at $5 per share.
Mar. 1 Issued 5,000 shares of preferred stock for cash at $108 per share.
Apr. 1 Issued 24,000 shares of common stock for land. The asking price of the land was $90,000; the fair value of the land was $80,000.
May 1 Issued 80,000 shares of common stock for cash at $7 per share.
Aug. 1 Issued 10,000 shares of common stock to attorneys in payment of their bill of $50,000 for services rendered in helping the company organize.
Sept. 1 Issued 10,000 shares of common stock for cash at $9 per share.
Nov. 1 Issued 1,000 shares of preferred stock for cash at $112 per share.
Instructions
Prepare the journal entries to record the above transactions.
E15-3 (L01,2) (Stock Issued for Land) Twenty-five thousand shares reacquired by Elixir Corporation for $53 per share were exchanged for undeveloped land that has an appraised value of $1,700,000. At the time of the exchange, the common stock was trading at $62 per share on an organized exchange.
Instructions
(a) Prepare the journal entry to record the acquisition of land assuming that the purchase of the stock was originally recorded using the cost method.
(b) Briefly identify the possible alternatives (including those that are totally unacceptable) for quantifying the cost of the land and briefly support your choice.
E15-4 (L01) (Lump-Sum Sale of Stock with Bonds) Faith Evans Corporation is a regional company which is an SEC registrant. The corporation’s securities are thinly traded on NASDAQ. Faith Evans Corp. has issued 10,000 units. Each unit consists of a $500 par, 12% subordinated debenture and 10 shares of $5 par common stock. The units were sold to outside investors for cash at $880 per unit. Prior to this sale, the 2-week ask price of common stock was $40 per share. Twelve percent is a reasonable market yield for the debentures, and therefore the par value of the bonds is equal to the fair value.
Instructions
(a) Prepare the journal entry to record Evans’ transaction, under the following conditions.
(1) Employing the incremental method.
(2) Employing the proportional method, assuming the recent price quote on the common stock reflects fair value.
(b) Briefly explain which method is, in your opinion, the better method.
E15-5 (L01) (Lump-Sum Sales of Stock with Preferred Stock) Dave Matthew Inc. issues 500 shares of $10 par value common stock and 100 shares of $100 par value preferred stock for a lump sum of $100,000.
Instructions
(a) Prepare the journal entry for the issuance when the market price of the common shares is $165 each and market price of the preferred is $230 each. (Round to nearest dollar.)
(b) Prepare the journal entry for the issuance when only the market price of the common stock is known and it is $170 per share.
E15-6 (L01,2) (Stock Issuances and Repurchase) Lindsey Hunter Corporation is authorized to issue 50,000 shares of $5 par value common stock. During 2017, Lindsey Hunter took part in the following selected transactions.
1. Issued 5,000 shares of stock at $45 per share, less costs related to the issuance of the stock totaling $7,000.
2. Issued 1,000 shares of stock for land appraised at $50,000. The stock was actively traded on a national stock exchange at approximately $46 per share on the date of issuance.
3. Purchased 500 shares of treasury stock at $43 per share. The treasury shares purchased were issued in 2013 at $40 per share.
Instructions
(a) Prepare the journal entry to record item 1.
(b) Prepare the journal entry to record item 2.
(c) Prepare the journal entry to record item 3 using the cost method.
E15-7 (L02) (Effect of Treasury Stock Transactions on Financials) Joe Dumars Company has outstanding 40,000 shares of $5 par common stock which had been issued at $30 per share. Joe Dumars then entered into the following transactions.
1. Purchased 5,000 treasury shares at $45 per share.
2. Resold 2,000 of the treasury shares at $49 per share.
3. Resold 500 of the treasury shares at $40 per share.
Instructions
Use the following code to indicate the effect each of the three transactions has on the financial statement categories listed in the table below, assuming Joe Dumars Company uses the cost method (I = Increase; D = Decrease; NE = No effect).
E15-8 (L01,2) (Correcting Entries for Equity Transactions) Pistons Inc. recently hired a new accountant with extensive experience in accounting for partnerships. Because of the pressure of the new job, the accountant was unable to review what he had learned earlier about corporation accounting. During the first month, he made the following entries for the corporation’s capital stock.
…
Instructions
On the basis of the explanation for each entry, prepare the entries that should have been made for the capital stock transactions.
E15-9 (L01,3) (Preferred Stock Entries and Dividends) Otis Thorpe Corporation has 10,000 shares of $100 par value, 8%, preferred stock and 50,000 shares of $10 par value common stock outstanding at December 31, 2017.
Instructions
Answer the questions in each of the following independent situations.
(a) If the preferred stock is cumulative and dividends were last paid on the preferred stock on December 31, 2014, what are the dividends in arrears that should be reported on the December 31, 2017, balance sheet? How should these dividends be reported?
(b) If the preferred stock is convertible into seven shares of $10 par value common stock and 4,000 shares are converted, what entry is required for the conversion assuming the preferred stock was issued at par value?
(c) If the preferred stock was issued at $107 per share, how should the preferred stock be reported in the stockholders’ equity section?
E15-10 (L02,4) (Analysis of Equity Data and Equity Section Preparation) For a recent 2-year period, the balance sheet of Santana Dotson Company showed the following stockholders’ equity data at December 31 (in millions).
…
Instructions
(a) Answer the following questions.
(1) What is the par value of the common stock?
(2) What is the cost per share of treasury stock at December 31, 2017, and at December 31, 2016?
(b) Prepare the stockholders’ equity section at December 31, 2017.
E15-11 (L03,4) (Equity Items on the Balance Sheet) The following are selected transactions that may affect stockholders’ equity.
1. Recorded accrued interest earned on a note receivable.
2. Declared a cash dividend.
3. Declared and distributed a stock split.
4. Approved a retained earnings restriction.
5. Recorded the expiration of insurance coverage that was previously recorded as prepaid insurance.
6. Paid the cash dividend declared in item 2 above.
7. Recorded accrued interest expense on a note payable.
8. Declared a stock dividend.
9. Distributed the stock dividend declared in item 8.
Instructions
In the following table, indicate the effect each of the nine transactions has on the financial statement elements listed. Use the following code: I = Increase, D = Decrease, NE = No effect.
…
E15-12 (L03) (Cash Dividend and Liquidating Dividend) Lotoya Davis Corporation has 10 million shares of common stock issued and outstanding. On June 1, the board of directors voted an 80 cents per share cash dividend to stockholders of record as of June 14, payable June 30.
Instructions
(a) Prepare the journal entry for each of the dates above assuming the dividend represents a distribution of earnings.
(b) How would the entry differ if the dividend were a liquidating dividend?
E15-13 (L03) (Stock Split and Stock Dividend) The common stock of Alexander Hamilton Inc. is currently selling at $120 per share. The directors wish to reduce the share price and increase share volume prior to a new issue. The per share par value is $10; book value is $70 per share. Nine million shares are issued and outstanding.
Instructions
Prepare the necessary journal entries assuming the following.
(a) The board votes a 2-for-1 stock split.
(b) The board votes a 100% stock dividend.
(c) Briefly discuss the accounting and securities market differences between these two methods of increasing the number of shares outstanding.
E15-14 (L03) (Entries for Stock Dividends and Stock Splits) The stockholders’ equity accounts of G.K. Chesterton Company have the following balances on December 31, 2017.
Common stock, $10 par, 300,000 shares issued and outstanding $3,000,000
Paid-in capital in excess of par—common stock 1,200,000
Retained earnings 5,600,000
Shares of G.K. Chesterton Company stock are currently selling on the Midwest Stock Exchange at $37.
Instructions
Prepare the appropriate journal entries for each of the following cases.
(a) A stock dividend of 5% is declared and issued.
(b) A stock dividend of 100% is declared and issued.
(c) A 2-for-1 stock split is declared and issued.
E15-15 (L03) EXCEL (Dividend Entries) The following data were taken from the balance sheet accounts of Masefield Corporation on December 31, 2016.
…
Instructions
Prepare the required journal entries for the following unrelated items.
(a) A 5% stock dividend is declared and distributed at a time when the market price per share is $39.
(b) The par value of the common stock is reduced to $2 with a 5-for-1 stock split.
(c) A dividend is declared January 5, 2017, and paid January 25, 2017, in bonds held as an investment. The bonds have a book value of $100,000 and a fair value of $135,000.
E15-16 (L04) (Computation of Retained Earnings) The following information has been taken from the ledger accounts of Isaac Stern Corporation.
…
Instructions
Determine the current balance of retained earnings.
E15-17 (L04) (Stockholders’ Equity Section) Bruno Corporation’s post-closing trial balance at December 31, 2017, is shown as follows.
…
Instructions
Prepare the stockholders’ equity section of Bruno’s balance sheet at December 31, 2017.
(AICPA adapted)
E15-18 (L01,2,3,4) GROUPWORK (Dividends and Stockholders’ Equity Section) Anne Cleves Company reported the following amounts in the stockholders’ equity section of its December 31, 2016, balance sheet.
…
During 2017, Cleves took part in the following transactions concerning stockholders’ equity.
1. Paid the annual 2016 $10 per share dividend on preferred stock and a $2 per share dividend on common stock. These dividends had been declared on December 31, 2016.
2. Purchased 1,700 shares of its own outstanding common stock for $40 per share. Cleves uses the cost method.
3. Reissued 700 treasury shares for land valued at $30,000.
4. Issued 500 shares of preferred stock at $105 per share.
5. Declared a 10% stock dividend on the outstanding common stock when the stock is selling for $45 per share.
6. Issued the stock dividend.
7. Declared the annual 2017 $10 per share dividend on preferred stock and the $2 per share dividend on common stock.
These dividends are payable in 2018.
Instructions
(a) Prepare journal entries to record the transactions described above.
(b) Prepare the December 31, 2017, stockholders’ equity section. Assume 2017 net income was $330,000.
E15-19 (L04) (Comparison of Alternative Forms of Financing) Shown below is the liabilities and stockholders’ equity section of the balance sheet for Jana Kingston Company and Mary Ann Benson Company. Each has assets totaling $4,200,000…
At year end, the market price of Kingston’s stock was $101 per share, and Benson’s was $63.50.
Instructions
(a) Which company is more profitable in terms of return on total assets?
(b) Which company is more profitable in terms of return on common stockholders’ equity?
(c) Which company has the greater net income per share of stock? Neither company issued or reacquired shares during the year.
(d) From the point of view of net income, is it advantageous to the stockholders of Jana Kingston Co. to have the long-term debt outstanding? Why?
(e) What is the book value per share for each company?
E15-20 (LO4) (Trading on the Equity Analysis) Presented below is information from the annual report of Emporia Plastics,Inc.
…
Instructions
(a) Compute the return on common stockholders’ equity and the rate of interest paid on bonds. (Assume balances for debt and equity accounts approximate averages for the year.)
(b) Is Emporia Plastics, Inc. trading on the equity successfully? Explain.
*E15-21 (LO5) (Preferred Dividends) The outstanding capital stock of Edna Millay Corporation consists of 2,000 shares of $100 par value, 8% preferred, and 5,000 shares of $50 par value common.
Instructions
Assuming that the company has retained earnings of $90,000, all of which is to be paid out in dividends, and that preferred dividends were not paid during the 2 years preceding the current year, state how much each class of stock should receive under each of the following conditions.
(a) The preferred stock is noncumulative and nonparticipating.
(b) The preferred stock is cumulative and nonparticipating.
(c) The preferred stock is cumulative and participating. (Round dividend rate percentages to four decimal places.)
*E15-22 (LO5) (Preferred Dividends) Matt Schmidt Company’s ledger shows the following balances on December 31, 2017…
Instructions
Assuming that the directors decide to declare total dividends in the amount of $366,000, determine how much each class of stock should receive under each of the conditions stated below. One year’s dividends are in arrears on the preferred stock.
(a) The preferred stock is cumulative and fully participating.
(b) The preferred stock is noncumulative and nonparticipating.
(c) The preferred stock is noncumulative and is participating in distributions in excess of a 10% dividend rate on the common stock.
*E15-23 (LO5) (Preferred Stock Dividends) Cajun Company has outstanding 2,500 shares of $100 par, 6% preferred stock and 15,000 shares of $10 par value common. The following schedule shows the amount of dividends paid out over the last 4 years.
Instructions
Allocate the dividends to each type of stock under assumptions (a) and (b). Express your answers in per share amounts using the format shown below.
…
* E15-24 (LO5) (Computation of Book Value per Share) Morgan Sondgeroth Inc. began operations in January 2015 and reported the following results for each of its 3 years of operations.
…
Instructions
(a) Compute the book value of the common stock at December 31, 2017.
(b) Compute the book value of the common stock at December 31, 2017, assuming that the preferred stock has a liquidating value of $106 per share.
