15 Stockholders’ Equity PROBLEMS 15
PROBLEMS
P15-1 (L01,2,3,4) EXCEL GROUPWORK (Equity Transactions and Statement Preparation) On January 5, 2017, Phelps
Corporation received a charter granting the right to issue 5,000 shares of $100 par value, 8% cumulative and nonparticipating preferred stock, and 50,000 shares of $10 par value common stock. It then completed these transactions.
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Instructions
(a) Record the journal entries for the transactions listed above.
(b) Prepare the stockholders’ equity section of Phelps Corporation’s balance sheet as of December 31, 2017.
P15-2 (LO2,4) (Treasury Stock Transactions and Presentation) Clemson Company had the following stockholders’ equity as of January 1, 2017.
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Instructions
(a) Prepare the journal entries to record the treasury stock transactions in 2017, assuming Clemson uses the cost method.
(b) Prepare the stockholders’ equity section as of April 30, 2017. Net income for the first 4 months of 2017 was $130,000.
P15-3 (LO1,2,3,4) (Equity Transactions and Statement Preparation) Hatch Company has two classes of capital stock outstanding: 8%, $20 par preferred and $5 par common. At December 31, 2017, the following accounts were included in stockholders’ equity.
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Instructions
Prepare the stockholders’ equity section for Hatch Company at December 31, 2018. Show all supporting computations.
P15-4 (LO1) (Stock Transactions—Lump Sum) Seles Corporation’s charter authorized issuance of 100,000 shares of $10 par value common stock and 50,000 shares of $50 preferred stock. The following transactions involving the issuance of shares of stock were completed. Each transaction is independent of the others.
1. Issued a $10,000, 9% bond payable at par and gave as a bonus one share of preferred stock, which at that time was selling for $106 a share.
2. Issued 500 shares of common stock for equipment. The equipment had been appraised at $7,100; the seller’s book value was $6,200. The most recent market price of the common stock is $16 a share.
3. Issued 375 shares of common and 100 shares of preferred for a lump sum amounting to $10,800. The common had been selling at $14 and the preferred at $65.
4. Issued 200 shares of common and 50 shares of preferred for equipment. The common had a fair value of $16 per share; the equipment has a fair value of $6,500.
Instructions
Record the transactions listed above in journal entry form.
P15-5 (LO2) EXCEL (Treasury Stock—Cost Method) Before Gordon Corporation engages in the treasury stock transactions listed on the next page, its general ledger reflects, among others, the following account balances (par value of its stock is $30 per share).
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Instructions
Record the treasury stock transactions (given below) under the cost method of handling treasury stock; use the FIFO method for purchase-sale purposes.
(a) Bought 380 shares of treasury stock at $40 per share.
(b) Bought 300 shares of treasury stock at $45 per share.
(c) Sold 350 shares of treasury stock at $42 per share.
(d) Sold 110 shares of treasury stock at $38 per share.
P15-6 (LO2,3,4) GROUPWORK (Treasury Stock—Cost Method—Equity Section Preparation) Washington Company has the following stockholders’ equity accounts at December 31, 2017.
Common Stock ($100 par value, authorized 8,000 shares) $480,000
Retained Earnings 294,000
Instructions
(a) Prepare entries in journal form to record the following transactions, which took place during 2018.
(1) 280 shares of outstanding stock were purchased at $97 per share. (These are to be accounted for using the cost method.)
(2) A $20 per share cash dividend was declared.
(3) The dividend declared in (2) above was paid.
(4) The treasury shares purchased in (1) above were resold at $102 per share.
(5) 500 shares of outstanding stock were purchased at $105 per share.
(6) 350 of the shares purchased in (5) above were resold at $96 per share.
(b) Prepare the stockholders’ equity section of Washington Company’s balance sheet after giving effect to these transactions, assuming that the net income for 2018 was $94,000. State law requires restriction of retained earnings for the amount of treasury stock.
P15-7 (LO3) (Cash Dividend Entries) The books of Conchita Corporation carried the following account balances as of December 31, 2017…
The company decided not to pay any dividends in 2017.
The board of directors, at their annual meeting on December 21, 2018, declared the following: “The current year dividends shall be 6% on the preferred and $.30 per share on the common. The dividends in arrears shall be paid by issuing 1,500 shares of treasury stock.” At the date of declaration, the preferred is selling at $80 per share, and the common at $12 per share. Net income for 2018 is estimated at $77,000.
Instructions
(a) Prepare the journal entries required for the dividend declaration and payment, assuming that they occur simultaneously.
(b) Could Conchita Corporation give the preferred stockholders 2 years’ dividends and common stockholders a 30 cents per share dividend, all in cash?
P15-8 (LO3) GROUPWORK (Dividends and Splits) Myers Company provides you with the following condensed balance sheet information…
Instructions
For each of the following transactions, indicate the dollar impact (if any) on the following five items: (1) total assets, (2) common stock, (3) paid-in capital in excess of par, (4) retained earnings, and (5) stockholders’ equity. (Each situation is independent.)
(a) Myers declares and pays a $0.50 per share cash dividend.
(b) Myers declares and issues a 10% stock dividend when the market price of the stock is $14 per share.
(c) Myers declares and issues a 30% stock dividend when the market price of the stock is $15 per share.
(d) Myers declares and distributes a property dividend. Myers gives one share of its equity investment (ABC stock) for every two shares of Myers Company stock held. Myers owns 10,000 shares of ABC. ABC is selling for $10 per share on the date the property dividend is declared.
(e) Myers declares a 2-for-1 stock split and issues new shares.
P15-9 (LO1,2,3,4) (Stockholders’ Equity Section of Balance Sheet) The following is a summary of all relevant transactions of Vicario Corporation since it was organized in 2017.
In 2017, 15,000 shares were authorized and 7,000 shares of common stock ($50 par value) were issued at a price of $57. In 2018, 1,000 shares were issued as a stock dividend when the stock was selling for $60. Three hundred shares of common stock were bought in 2019 at a cost of $64 per share. These 300 shares are still in the company treasury.
In 2018, 10,000 preferred shares were authorized and the company issued 5,000 of them ($100 par value) at $113. Some of the preferred stock was reacquired by the company and later reissued for $4,700 more than it cost the company.
The corporation has earned a total of $610,000 in net income after income taxes and paid out a total of $312,600 in cash dividends since incorporation.
Instructions
Prepare the stockholders’ equity section of the balance sheet in proper form for Vicario Corporation as of December 31, 2019. Account for treasury stock using the cost method.
P15-10 (LO3) WRITING (Stock Dividends and Stock Split) Oregon Inc. $10 par common stock is selling for $110 per share.
Four million shares are currently issued and outstanding. The board of directors wishes to stimulate interest in Oregon common stock before a forthcoming stock issue but does not wish to distribute capital at this time. The board also believes that too many adjustments to the stockholders’ equity section, especially retained earnings, might discourage potential investors.
The board has considered three options for stimulating interest in the stock:
1. A 20% stock dividend.
2. A 100% stock dividend.
3. A 2-for-1 stock split.
Instructions
Acting as financial advisor to the board, you have been asked to report briefly on each option and, considering the board’s wishes, make a recommendation. Discuss the effects of each of the foregoing options.
P15-11 (LO3,4) (Stock and Cash Dividends) Earnhart Corporation has outstanding 3,000,000 shares of common stock with a par value of $10 each. The balance in its Retained Earnings account at January 1, 2017, was $24,000,000, and it then had Paid-in Capital in Excess of Par—Common Stock of $5,000,000. During 2017, the company’s net income was $4,700,000. A cash dividend of $0.60 a share was declared on May 5, 2017, and was paid June 30, 2017, and a 6% stock dividend was declared on November 30, 2017, and distributed to stockholders of record at the close of business on December 31, 2017. You have been asked to advise on the proper accounting treatment of the stock dividend.
The existing stock of the company is quoted on a national stock exchange. The market price of the stock has been as follows.
October 31, 2017 $31
November 30, 2017 $34
December 31, 2017 $38
Instructions
(a) Prepare the journal entry to record the declaration and payment of the cash dividend.
(b) Prepare the journal entry to record the declaration and distribution of the stock dividend.
(c) Prepare the stockholders’ equity section (including schedules of retained earnings and additional paid-in capital) of the balance sheet of Earnhart Corporation for the year 2017 on the basis of the foregoing information. Draft a note to the financial statements setting forth the basis of the accounting for the stock dividend, and add separately appropriate comments or explanations regarding the basis chosen.
P15-12 (LO1,2,3,4) (Analysis and Classification of Equity Transactions) Penn Company was formed on July 1, 2015. It was authorized to issue 300,000 shares of $10 par value common stock and 100,000 shares of 8% $25 par value, cumulative and nonparticipating preferred stock. Penn Company has a July 1–June 30 fiscal year.
The following information relates to the stockholders’ equity accounts of Penn Company…
Instructions
Prepare the stockholders’ equity section of the balance sheet, including appropriate notes, for Penn Company as of June 30, 2018, as it should appear in its annual report to the shareholders.
(CMA adapted)
