Stockholders’ Equity

Match the accounting terminology to the definitions.

1. Factoring receivables a. A monetary claim against a business or an individual.

2. Debtor b. The party to a transaction who takes on an obligation/payable.

3. Accounts receivable c. Using receivables as security (collateral) for a loan.

4. Maturity date d. The right to receive cash in the future from customers for goods sold or for services provided.

5. Receivable e. The date when a note is due.

6. Pledging receivables f. Selling receivables to a finance company or bank.

London Corporation has two classes of stock: Common, \(1 par value; and Preferred, \)4 par value. Journalize the issuance of 10,000 shares of common stock for $8 per share.

On January 3, Halsall Corporation purchased 2,000 shares of the company’s \(2 par value common stock as treasury stock, paying cash of \)8 per share. On January 30, Halsall sold 1,200 shares of the treasury stock for cash of $10 per share. Journalize these transactions.

On August 1, Hagino Corporation declared a $1.50 per share cash dividend on its common stock (20,000 shares) for stockholders on record as of August 15. Hagino paid the dividend on August 31. Journalize the entries declaring the cash dividend and paying the dividend.

Rocky Corporation’s accounting records include the following items, listed in no particular order, at December 31, 2018:

Other Income and (Expenses) \( (6,000) Cost of Goods Sold \) 29,200

Net Sales Revenue 70,800 Operating Expenses 22,000

Gain on Discontinued Operations 4,800

The income tax rate for Rocky Corporation is 30%. Prepare Rocky’s income statement for the year ended December 31, 2018. 

Omit earnings per share. Use a multi-step format

Sjostrom, Inc. had beginning retained earnings of \(300,000 on January 1, 2018. During the year, Sjostrom declared and paid \)140,000 of cash dividends and earned $200,000 of net income. Prepare a statement of retained earnings for Sjostrom, Inc. for the year ended December 31, 2018.

Vollmer, Inc. had reported the following balances:

December 31, 2019 December 31, 2018

Net Income \( 80,000 \) 60,000

Preferred Dividends 2,000 5,000

Total Stockholders’ Equity 340,000 310,000

Stockholders’ Equity attributable to Preferred Stock 20,000 20,000

Number of Common Shares Outstanding 10,000 14,000

11. Compute Vollmer’s earnings per share for 2019.

12. Compute Vollmer’s price/earnings ratio for 2019, assuming the market price is $40 per share.

13. Compute Vollmer’s rate of return on common stockholders’ equity for 2019.

Question - Describing corporation characteristics

Due to recent beef recalls, Southwest Steakhouse is considering incorporating. Bob, the owner, wants to protect his personal assets in the event the restaurant is sued.

Requirements

2. What are some disadvantages of organizing as a corporation?

What is a corporation?

Question: Journalizing issuance of stock—at par and at a premium

Colorado Corporation has two classes of stock: common, \(3 par value; and preferred, \)30 par value.

Requirements

2. Journalize Colorado’s issuance of 4,500 shares of preferred stock for a total of $135,000

Question: Journalizing issuance of stock—at par and at a premium

Colorado Corporation has two classes of stock: common, \(3 par value; and preferred, \)30 par value.

Requirements

1. Journalize Colorado’s issuance of 4,500 shares of common stock for $6 per share.

List three characteristics of a corporation.

How does authorized stock differ from ouststanding stock?

What are the basic rights of stockholders?

How does preferred stock differ from common stock?

What is par value?

What are the two basic sources of stockholders’ equity? Describe each source.

What account is used to record the premium when issuing common stock? What type of account is this?

If stock is issued for assets other than cash describe the recording of this transaction

What is treasury stock? What type of account is Treasury Stock, and what is the account’s normal balance?

Where and how is treasury stock reported on the balance sheet?

What is the effect on the accounting equation when cash dividends are declared? 

What is the effect on the accounting equation when cash dividends are paid?

What are the three relevant dates involving cash dividends? Describe each.

How does cumulative preferred stock differ from non-cumulative preferred stock?

What is a stock dividend?

What is the effect on the accounting equation when a stock dividend is declared? 

What is the effect on the accounting equation when a stock dividend is distributed?

What are some reasons corporations issue stock dividends?

What is a stock split?

What is reported in the discontinued operations section of the income statement?

What does the statement of retained earnings report?

What is a prior-period adjustment?

What does the statement of stockholders’ equity report? How does the statement of stockholders’ equity differ from the statement of retained earnings?

What does earnings per share report, and how is it calculated?

What is the price/earnings ratio, and how is it calculated?

What does the rate of return on common stock show, and how is it calculated?

Question - Describing corporation characteristics

Due to recent beef recalls, Southwest Steakhouse is considering incorporating. Bob, the owner, wants to protect his personal assets in the event the restaurant is sued.

Requirements

1. Which advantage of incorporating is most applicable? What are other advantages of organizing as a corporate entity?

Journalizing issuance of stock—no-par

Wolcott Corporation issued 5,000 shares of no-par common stock for $2 per share on January 13. Record the stock issuance

Journalizing issuance of stock—stated value

Nelson Corporation issued 9,000 shares of \(3 stated value common stock for \)11 per share on July 7. Record the stock issuance.

Journalizing issuance of stock for assets other than cash

Cedar Corporation issued 36,000 shares of \(1 par value common stock in exchange for a building with a market value of \)160,000. Record the stock issuance.

Question: Accounting for the purchase and sale of treasury stock

Discount Furniture, Inc. completed the following treasury stock transactions in 2018:

Dec. 1 Purchased 1,900 shares of the company’s \(1 par value common stock as treasury stock, paying cash of \)5 per share.

15 Sold 200 shares of the treasury stock for cash of \(8 per share.

20 Sold 1,000 shares of the treasury stock for cash of \)1 per share. (Assume the balance in Paid-In Capital from Treasury Stock Transactions on December 20 is $2,400.)

Requirements

2. How will Discount Furniture, Inc. report treasury stock on its balance sheet as of December 31, 2018?

Accounting for the purchase and sale of treasury stock

Discount Furniture, Inc. completed the following treasury stock transactions in 2018:

Dec. 1 Purchased 1,900 shares of the company’s \(1 par value common stock as treasury stock, paying cash of \)5 per share.

15 Sold 200 shares of the treasury stock for cash of \(8 per share.

20 Sold 1,000 shares of the treasury stock for cash of \)1 per share. (Assume the balance in Paid-In Capital from Treasury Stock Transactions on December 20 is $2,400.)

Requirements

1. Journalize these transactions. Explanations are not required.

Question: Accounting for cash dividends

Java Company earned net income of \(85,000 during the year ended December 31, 2018. On December 15, Java declared the annual cash dividend on its 4% preferred stock (par value, \)120,000) and a $0.25 per share cash dividend on its common stock (50,000 shares). Java then paid the dividends on January 4, 2019.

Requirements

2. Journalize for Java the entry paying the cash dividends on January 4, 2019.

Question: Accounting for cash dividends

Java Company earned net income of \(85,000 during the year ended December 31, 2018. On December 15, Java declared the annual cash dividend on its 4% preferred stock (par value, \)120,000) and a $0.25 per share cash dividend on its common stock (50,000 shares). Java then paid the dividends on January 4, 2019.

Requirements

1. Journalize for Java the entry declaring the cash dividends on December 15, 2018.

Question: Copperhead Trust has the following classes of stock:

Preferred Stock—6%, \(12 par value; 8,500 shares authorized, 7,000 shares issued and outstanding

Common Stock—\)0.10 par value; 2,100,000 shares authorized, 1,400,000 shares issued and outstanding

Requirements

3. Assume the preferred stock is noncumulative and Copperhead passed the preferred dividend in 2016 and 2017. In 2018, the company declares cash dividends of $46,000. How much of the dividend goes to preferred stockholders? How much goes to common stockholders?

Question: Dividing cash dividends between preferred and common stock

Copperhead Trust has the following classes of stock:

Preferred Stock—6%, \(12 par value; 8,500 shares authorized, 7,000 shares issued and outstanding

Common Stock—\)0.10 par value; 2,100,000 shares authorized, 1,400,000 shares issued and outstanding

Requirements

1. Copperhead declares cash dividends of $44,000 for 2018. How much of the dividends goes to preferred stockholders? How much goes to common stockholders?

Question: Copperhead Trust has the following classes of stock:

Preferred Stock—6%, \(12 par value; 8,500 shares authorized, 7,000 shares issued and outstanding

Common Stock—\)0.10 par value; 2,100,000 shares authorized, 1,400,000 shares issued and outstanding

Requirements

2. Assume the preferred stock is cumulative and Copperhead passed the preferred dividend in 2016 and 2017. In 2018, the company declares cash dividends of $46,000. How much of the dividend goes to preferred stockholders? How much goes to common stockholders?

Question: Journalizing a small stock dividend

Element Water Sports has 13,000 shares of \(1 par value common stock outstanding. 

Element distributes a 5% stock dividend when the market value of its stock is \)15 per share.

Requirements

3. What is the overall effect on total stockholders’ equity?

Question: Journalizing a small stock dividend

Element Water Sports has 13,000 shares of \(1 par value common stock outstanding. 

Element distributes a 5% stock dividend when the market value of its stock is \)15 per share.

Requirements

2. What is the overall effect of the stock dividend on Element’s total assets?

Question: Journalizing a small stock dividend

Element Water Sports has 13,000 shares of \(1 par value common stock outstanding. 

Element distributes a 5% stock dividend when the market value of its stock is \)15 per share.

Requirements

1. Journalize Element’s declaration of the stock dividend on August 15 and distribution on August 31.

Question: Journalizing a large stock dividend

Nelly, Inc. had 320,000 shares of \(2 par value common stock issued and outstanding as of December 15, 2018. The company is authorized to issue 1,300,000 common shares. On December 15, 2018, Nelly declared a 40% stock dividend when the market value for Nelly’s common stock was \)7 per share. The stock was issued on Dec. 30.

Requirements

1. Journalize the declaration and distribution of the stock dividend.