Intermediate Accounting Kieso 16e Test Bank 15.3
MULTIPLE CHOICE—CPA Adapted
120. A corporation was organized in January 2018 with authorized capital of $10 par value common stock. On February 1, 2018, shares were issued at par for cash. On March 1, 2018, the corporation's attorney accepted 7,000 shares of common stock in settlement for legal services with a fair value of $90,000. Additional paid-in capital would increase on
February 1, 2018 March 1, 2018
a. Yes No
b. Yes Yes
c. No No
d. No Yes
121. On July 1, 2018, Nall Co. issued 2,500 shares of its $10 par common stock and 5,000 shares of its $10 par convertible preferred stock for a lump sum of $140,000. At this date Nall's common stock was selling for $24 per share and the convertible preferred stock for $18 per share. The amount of the proceeds allocated to Nall's preferred stock should be
a. $70,000.
b. $84,000.
c. $90,000.
d. $77,000.
122. Horton Co. was organized on January 2, 2018, with 500,000 authorized shares of $10 par value common stock. During 2018, Horton had the following capital transactions:
January 5—issued 375,000 shares at $14 per share.
July 27—purchased 25,000 shares at $11 per share.
November 25—sold 15,000 shares of treasury stock at $13 per share.
Horton used the cost method to record the purchase of the treasury shares. What would be the balance in the Paid-in Capital from Treasury Stock account at December 31, 2018?
a. $0.
b. $15,000.
c. $30,000.
d. $45,000.
123. In 2017, Hobbs Corp. acquired 15,000 shares of its own $1 par value common stock at $18 per share. In 2018, Hobbs issued 10,000 of these shares at $25 per share. Hobbs uses the cost method to account for its treasury stock transactions. What accounts and what amounts should Hobbs credit in 2018 to record the issuance of the 10,000 shares?
Treasury Additional Retained Common
Stock Paid-in Capital Earnings Stock
a. $180,000 $175,000
b. $180,000 $70,000
c. $240,000 $10,000
d. $170,000 $70,000 $10,000
124. At its date of incorporation, Sauder, Inc. issued 100,000 shares of its $10 par common stock at $11 per share. During the current year, Sauder acquired 20,000 shares of its common stock at a price of $16 per share and accounted for them by the cost method. Subsequently, these shares were reissued at a price of $12 per share. There have been no other issuances or acquisitions of its own common stock. What effect does the reissuance of the stock have on the following accounts?
Retained Earnings Additional Paid-in Capital
a. Decrease Decrease
b. No effect Decrease
c. Decrease No effect
d. No effect No effect
125. Farmer Corp. owned 20,000 shares of Eaton Corp. purchased in 2014 for $550,000. On December 15, 2017, Farmer declared a property dividend of all of its Eaton Corp. shares on the basis of one share of Eaton for every 10 shares of Farmer common stock held by its stockholders. The property dividend was distributed on January 15, 2018. On the declaration date, the aggregate market price of the Eaton shares held by Farmer was $900,000. The entry to record the declaration of the dividend would include a debit to Retained Earnings of
a. $0.
b. $350,000.
c. $550,000.
d. $900,000.
126. A corporation declared a dividend, a portion of which was liquidating. How would this distribution affect each of the following?
Additional
Paid-in Capital Retained Earnings
a. Decrease No effect
b. Decrease Decrease
c. No effect Decrease
d. No effect No effect
127. On May 1, 2018, Ziek Corp. declared and issued a 10% common stock dividend. Prior to this dividend, Ziek had 200,000 shares of $1 par value common stock issued and outstanding. The fair value of Ziek 's common stock was $25 per share on May 1, 2018. As a result of this stock dividend, Ziek's total stockholders' equity
a. increased by $500,000.
b. decreased by $500,000.
c. decreased by $25,000.
d. did not change.
128. How would the declaration and subsequent issuance of a 10% stock dividend by the issuer affect each of the following when the fair value of the shares exceeds the par value of the stock?
Additional
Common Stock Paid-in Capital
a. No effect No effect
b. No effect Increase
c. Increase No effect
d. Increase Increase
129. On December 31, 2017, the stockholders' equity section of Arndt, Inc., was as follows:
Common stock, par value $10; authorized 30,000 shares;
issued and outstanding 9,000 shares $ 90,000
Additional paid-in capital 116,000
Retained earnings 184,000
Total stockholders' equity $390,000
On March 31, 2018, Arndt declared a 10% stock dividend, and accordingly 900 additional shares were issued, when the fair value of the stock was $18 per share. For the three months ended March 31, 2018, Arndt sustained a net loss of $40,000. The balance of Arndt’s retained earnings as of March 31, 2018, should be
a. $127,800.
b. $135,000.
c. $136,800.
d. $144,000.
*130. At December 31, 2017 and 2018, Plank Corp. had outstanding 4,000 shares of $100 par value 6% cumulative preferred stock and 20,000 shares of $10 par value common stock. At December 31, 2017, dividends in arrears on the preferred stock were $12,000. Cash dividends declared in 2018 totaled $45,000. What amounts were payable on each class of stock?
Preferred Stock Common Stock
a. $24,000 $21,000
b. $33,000 $12,000
c. $36,000 $9,000
d. $45,000 $0
EXERCISES
Ex. 15-131—Lump sum issuance of stock.
Parker Corporation has issued 2,000 shares of common stock and 400 shares of preferred stock for a lump sum of $72,000 cash.
Instructions
(a) Give the entry for the issuance assuming the par value of the common stock was $5 and the fair value $30, and the par value of the preferred stock was $40 and the fair value $50. (Each valuation is on a per share basis and there are ready markets for each stock.)
(b) Give the entry for the issuance assuming the same facts as (a) above except the preferred stock has no ready market and the common stock has a fair value of $23 per share.
Ex. 15-132—Treasury stock.
For numerous reasons, a corporation may reacquire shares of its own capital stock. When a company purchases treasury stock, it usually accounts for the stock using the cost method.
Instructions
Explain how a company would account for each of the following:
1. Purchase of treasury shares at a price less than par value.
2. Subsequent resale of treasury shares at a price less than purchase price, but more than par value.
3. Subsequent resale of treasury shares at a price greater than both purchase price and par value.
4. Effect on net income.
Ex. 15-133—Treasury stock.
Agler Corporation's balance sheet reported the following:
Capital stock outstanding, 5,000 shares, par $30 per share $150,000
Paid-in capital in excess of par 80,000
Retained earnings 100,000
The following transactions occurred this year:
(a) Purchased 400 shares of capital stock to be held as treasury stock, paying $60 per share.
(b) Sold 300 of the shares of treasury stock at $65 per share.
(c) Sold the remaining shares of treasury stock at $50 per share.
Instructions
Prepare the journal entry for these transactions under the cost method of accounting for treasury stock.
Ex. 15-134—Treasury stock.
Ellison Company's balance sheet shows:
Common stock, $20 par $3,000,000
Paid-in capital in excess of par 1,050,000
Retained earnings 750,000
Instructions
Record the following transactions by the cost method.
(a) Bought 12,000 shares of its common stock at $29 a share.
(b) Sold 6,000 treasury shares at $30 a share.
(c) Sold 3,000 shares of treasury stock at $26 a share.
Ex. 15-135—Treasury stock.
In 2017, Mordica Co. issued 300,000 of its 500,000 authorized shares of $10 par value common stock at $35 per share. In January, 2018, Mordica repurchased 30,000 shares at $30 per share. Assume these are the only stock transactions the company has ever had.
Instructions
(a) What are the two methods of accounting for treasury stock?
(b) Prepare the journal entry to record the purchase of treasury stock by the cost method.
(c) 11,000 shares of treasury stock are reissued at $33 per share. Prepare the journal entry to record the reissuance by the cost method.
Ex. 15-136—Stockholders’ Equity.
Indicate the effect of each of the following transactions on total stockholders' equity by placing an "X" in the appropriate column.
Increase Decrease No Effect
1. Treasury stock is resold at more than cost.
2. Operating loss for the period.
3. Retirement of bonds payable at more than
book value.
4. Declaration of a stock dividend.
5. Acquisition of machinery for common stock.
6. Conversion of bonds payable into common
stock.
7. Not declaring a dividend on cumulative
preferred stock.
8. Declaration of cash dividend.
9. Payment of cash dividend.
Ex. 15-137—Stock dividends.
Describe the journal entry for a stock dividend on common stock (which has a par value).
Ex. 15-138—Stock dividends and stock splits.
Indicate the principal effects of a stock dividend versus a stock split on the issuing corporation. Respond in the spaces as follows: "C" for change; "NC" for no change.
Stock Dividend Stock Split
Number of Shares Outstanding
Par Value per Share
Total Par Outstanding
Retained Earnings
Total Stockholders' Equity
Composition of Stockholders' Equity
Ex. 15-139—Computation of selected financial ratios.
The following information pertains to Parsons Co.:
Preferred stock, cumulative:
Par value per share $100
Dividend rate 6%
Shares outstanding 10,000
Dividends in arrears none
Common stock:
Par value per share $10
Shares issued 120,000
Dividends paid per share $1.80
Market price per share $48.00
Additional paid-in capital $400,000
Unappropriated retained earnings (after closing) $270,000
Retained earnings appropriated for contingencies $300,000
Common treasury stock:
Number of shares 10,000
Total cost $250,000
Net income $500,000
Instructions
Compute (assume no changes in balances during the past year):
(a) Total amount of stockholders’ equity in the balance sheet
(b) Earnings per share of common stock
(c) Book value per share of common stock
(d) Payout ratio of common stock
(e) Return on common stock equity
*Ex. 15-140—Dividends on preferred stock.
The stockholders' equity section of Lemay Corporation shows the following on December 31, 2018:
Preferred stock—4%, $100 par, 5,000 shares outstanding $ 500,000
Common stock—$10 par, 60,000 shares outstanding 600,000
Paid-in capital in excess of par 200,000
Retained earnings 119,000
Total stockholders' equity $1,419,000
Instructions
Assuming that all of the company's retained earnings are to be paid out in dividends on 12/31/18 and that preferred dividends were last paid on 12/31/16, show how much the preferred and common stockholders should receive if the preferred stock is cumulative and fully participating.
*Ex. 15-141—Dividends on preferred stock.
In each of the following independent cases, it is assumed that the corporation has $800,000 of 5% preferred stock and $3,200,000 of common stock outstanding, each having a par value of $10. No dividends have been declared for 2016 and 2017.
(a) As of 12/31/18, it is desired to distribute $250,000 in dividends. How much will the preferred stockholders receive if their stock is cumulative and nonparticipating?
(b) As of 12/31/18, it is desired to distribute $800,000 in dividends. How much will the preferred stockholders receive if their stock is cumulative and participating up to 9% in total?
(c) On 12/31/18, the preferred stockholders received a $200,000 dividend on their stock which is cumulative and fully participating. How much money was distributed in total for dividends during 2018?
PROBLEMS
Pr. 15-142—Equity transactions.
Presented below is information related to Wyrick Company:
1. The company is granted a charter that authorizes issuance of 15,000 shares of $100 par value preferred stock and 40,000 shares of no-par common stock.
2. 12,000 shares of common stock are issued to the founders of the corporation for land valued by the board of directors at $400,000. The board establishes a stated value of $10 a share for the common stock.
3. 6,000 shares of preferred stock are sold for cash at $110 per share.
4. The company issues 200 shares of common stock to its attorneys for costs associated with starting the company. At that time, the common stock was selling at $60 per share.
Instructions
Prepare the general journal entries necessary to record these transactions.
Pr. 15-143—Treasury stock transactions.
The original sale of the $50 par value common shares of Gray Company was recorded as follows:
Cash 290,000
Common Stock 250,000
Paid-in Capital in Excess of Par 40,000
Instructions
Record the treasury stock transactions (given below) under the cost method:
Transactions:
(a) Bought 600 shares of common stock as treasury shares at $62.
(b) Sold 180 shares of treasury stock at $60.
(c) Sold 90 treasury shares at $68.
Pr. 15-144—Stock dividends.
The stockholders' equity section of Benton Corporation's balance sheet as of December 31, 2017 is as follows:
Stockholders' Equity
Common stock, $5 par value; authorized, 2,000,000 shares;
issued, 600,000 shares $3,000,000
Paid-in capital in excess of par 850,000
Retained earnings 4,500,000
$8,350,000
The following events occurred during 2018:
1. Jan. 5 45,000 shares of authorized and unissued common stock were sold for $8 per share.
2. Jan. 16 Declared a cash dividend of 20 cents per share, payable February 15 to stock-holders of record on February 5.
3. Feb. 10 60,000 shares of authorized and unissued common stock were sold for $12 per share.
Pr. 15-144 (Cont.)
4. March 1 A 30% stock dividend was declared and issued. Fair value per share is currently $15.
5. April 1 A two-for-one split was carried out. The par value of the stock was to be reduced to $2.50 per share. Fair value on March 31 was $18 per share.
6. July 1 A 15% stock dividend was declared and issued. Fair value is currently $10 per share.
7. Aug. 1 A cash dividend of 20 cents per share was declared, payable September 1 to stockholders of record on August 21.
Instructions
Enter the above events into the following work sheet showing how each event affects the column. Event No. 1 will serve as an example.
Common Stock
No. of Total Paid-in Capital In
Item Shares Issued Par Value Excess of Par Retained Earnings
Beginning Balance—1/1/18 600,000 $3,000,000 $850,000 $4,500,000
Event #1—Jan. 5 45,000 225,000 135,000 -0-
Balance 645,000 $3,225,000 $985,000 $4,500,000
Event # 2—Jan. 16 (and events 3 through 7)
Pr. 15-145—Equity transactions.
Foley Corporation has the following capital structure at the beginning of the year:
5% Preferred stock, $50 par value, 20,000 shares authorized,
6,000 shares issued and outstanding $ 300,000
Common stock, $10 par value, 60,000 shares authorized,
40,000 shares issued and outstanding 400,000
Paid-in capital in excess of par 110,000
Total paid-in capital 810,000
Retained earnings 440,000
Total stockholders' equity $1,250,000
Instructions
(a) Record the following transactions which occurred consecutively (show all calculations).
1. A total cash dividend of $90,000 was declared and payable to stockholders of record. Record dividends payable on common and preferred stock in separate accounts.
2. A 15% common stock dividend was declared. The average fair value of the common stock is $25 a share.
3. Assume that net income for the year was $160,000 (record the closing entry) and the board of directors appropriated $70,000 of retained earnings for plant expansion.
(b) Construct the stockholders' equity section incorporating all the above information.
*Pr. 15-146—Dividends on preferred and common stock.
Rensing, Inc., has $800,000 of 4% preferred stock and $1,200,000 of common stock outstanding, each having a par value of $10 per share. No dividends have been paid or declared during 2016 and 2017. As of December 31, 2018, it is desired to distribute $270,000 in dividends.
Instructions
How much will the preferred and common stockholders receive under each of the following assumptions:
(a) The preferred is noncumulative and nonparticipating.
(b) The preferred is cumulative and nonparticipating.
(c) The preferred is cumulative and fully participating.
(d) The preferred is cumulative and participating to 7% total.
IFRS QUESTIONS
True/False
1. In the United States, like many other countries, banks are major creditors as well as the largest investors.
2. The accounting for declaration and payment of dividends is different under IFRS and GAAP.
3. Under IFRS companies report preference shares at par value as the last item in the equity section.
4. Under IFRS true no-par shares should be carried in the accounts at issue price without any share premium reported.
5. Under IFRS compliance requirements the revaluation surplus is not considered contributed capital.
Multiple Choice
6. The accounting for treasury stock retirements under IFRS requires
a. a charge for the entire amount to paid-in capital.
b. a charge for the excess to paid-in capital, depending on the original transaction related to the issuance of the stock.
c. a charge for the excess of the cost of treasury stock over par value to retained earnings.
d. an allocation for the difference between paid-in capital and retained earnings.
7. The Revaluation Surplus of IFRS is
a. similar to GAAP in that it allows both increases and decreases in valuation.
b. similar to GAAP in that it only allows for the decrease in valuation.
c. similar to GAAP in that it only allows for the increase in valuation.
d. different than GAAP in that it allows the increase in valuation.
8. Under IFRS compliance requirements the Revaluation Surplus is
a. only utilized to record the changes in depreciable items – plant and equipment.
b. considered as revenue when utilizing the GAAP formatted income statement.
c. utilized to record the changes in property, plant, and equipment and intangible assets.
d. reported as contributed capital.
