Stockholders’ Equity

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

2. How many shares of common stock are outstanding after the dividend?

Accounting for a stock split

Decor and More Imports recently reported the following stockholders’ equity:

Common Stock—\(1 Par Value; 490,000,000 shares

 authorized, 119,000,000 shares issued and outstanding

Paid-In Capital:

654,000,000

\) 119,000,000

267,000,000

Retained Earnings

Total Stockholders’ Equity \( 921,000,000

Stockholders’ Equity

Paid-In Capital in Excess of Par—Common 148,000,000

Total Paid-In Capital

Suppose Decor and More split its common stock 2-for-1 in order to decrease the market price per share of its stock. The company’s stock was trading at \)17 per share immediately before the split.

Requirements

1. Prepare the stockholders’ equity section of the Decor and More Imports balance sheet after the stock split.

Accounting for a stock split

Decor and More Imports recently reported the following stockholders’ equity:

Common Stock—\(1 Par Value; 490,000,000 shares

 authorized, 119,000,000 shares issued and outstanding

Paid-In Capital:

654,000,000

\) 119,000,000

267,000,000

Retained Earnings

Total Stockholders’ Equity \( 921,000,000

Stockholders’ Equity

Paid-In Capital in Excess of Par—Common 148,000,000

Total Paid-In Capital

Suppose Decor and More split its common stock 2-for-1 in order to decrease the market price per share of its stock. The company’s stock was trading at \)17 per share immediately before the split.

Requirements

2. Were the account balances changed or unchanged after the stock split?

Preparing a corporate income statement

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

Other Income and (Expenses) \( (7,200) Cost of Goods Sold \) 30,000

Net Sales 81,000 Operating Expenses 25,000

Gain on Discontinued Operations 3,600

The income tax rate for ABC Corporation is 39%.

Prepare ABC’s income statement for the year ended December 31, 2018. Omit earnings per share. Use the multi-step format.

Reporting earnings per share

Return to the ABC data in Short Exercise S13-12. ABC had 8,000 shares of common stock outstanding during 2018. ABC declared and paid preferred dividends of $4,000 during 2018.

Show how ABC reports EPS data on its 2018 income statement.

Preparing a statement of retained earnings

Kingston, Inc. had beginning retained earnings of \(135,000 on January 1, 2018. During the year, Kingston declared and paid \)85,000 of cash dividends and earned $75,000 of net income. Prepare a statement of retained earnings for Kingston, Inc. for the year ending December 31, 2018.

Analyzing the effect of prior-period adjustments

Taylor Corporation discovered in 2019 that it had incorrectly recorded in 2018 a cash payment of \(70,000 for utilities expense. The correct amount of the utilities expense was \)35,000.

Requirements

1. Determine the effect of the error on the accounting equation in 2018.

Analyzing the effect of prior-period adjustments

Taylor Corporation discovered in 2019 that it had incorrectly recorded in 2018 a cash payment of \(70,000 for utilities expense. The correct amount of the utilities expense was \)35,000.

Requirements

2. How should this error be reported in the 2019 financial statements?

Computing earnings per share

HEB Corporation had net income for 2018 of \(60,450. HEB had 15,500 shares of common stock outstanding at the beginning of the year and 20,100 shares of common stock outstanding as of December 31, 2018. During the year, HEB declared and paid preferred dividends of \)2,600. Compute HEB’s earnings per share.

Identifying advantages and disadvantages of a corporation

Following is a list of advantages and disadvantages of the corporate form of business. Identify each quality as either an advantage or a disadvantage.

f. Entity can raise more money than a partnership or sole proprietorship

Computing price/earnings ratio Refer to the HEB data in Short Exercise S13-17. Assume the market price of HEB’s common stock is $19.50 per share. Compute HEB’s price/earnings ratio.

Computing rate of return on common stockholders’ equity Wyler, Inc.’s 2018 balance sheet reported the following items—with 2017 figures given for comparison: 

Total Assets Total Liabilities and Stockholders’ Equity Total Liabilities Total Stockholders’ Equity (all common) WYLER, INC. Balance Sheet As of December 31, 2018, and December 31, 2017 \( 39,600 December 31, 2018 17,100 22,500 18,500 14,962 December 31, 2017 \) 39,600 \( 33,462 \) 33,462 Net income for 2018 was $3,690. 

Compute Wyler’s rate of return on common stockholders’ equity for 2018.

Identifying advantages and disadvantages of a corporation

Following is a list of advantages and disadvantages of the corporate form of business. Identify each quality as either an advantage or a disadvantage.

a. Ownership and management are separated.

Identifying advantages and disadvantages of a corporation

Following is a list of advantages and disadvantages of the corporate form of business. Identify each quality as either an advantage or a disadvantage.

b. Entity has continuous life.

Identifying advantages and disadvantages of a corporation

Following is a list of advantages and disadvantages of the corporate form of business. Identify each quality as either an advantage or a disadvantage.

c. Transfer of ownership is easy.

Identifying advantages and disadvantages of a corporation

Following is a list of advantages and disadvantages of the corporate form of business. Identify each quality as either an advantage or a disadvantage.

d. Stockholders’ liability is limited.

Identifying advantages and disadvantages of a corporation

Following is a list of advantages and disadvantages of the corporate form of business. Identify each quality as either an advantage or a disadvantage.

e. Exposure to double taxation is evident.

Identifying advantages and disadvantages of a corporation

Following is a list of advantages and disadvantages of the corporate form of business. Identify each quality as either an advantage or a disadvantage.

f. Entity can raise more money than a partnership or sole proprietorship.

Identifying advantages and disadvantages of a corporation

Following is a list of advantages and disadvantages of the corporate form of business. Identify each quality as either an advantage or a disadvantage.

g. Government regulation is expensive

Determining paid-in capital for a corporation

Aruba Corporation recently organized. The company issued common stock to an inventor in exchange for a patent with a market value of \(57,000. In addition, Aruba received cash for 6,000 shares of its \)10 par preferred stock at par value and 6,500 shares of its no-par common stock at $20 per share. Without making journal entries, determine the total paid-in capital created by these transactions.

Journalizing issuance of stock

Steller Systems completed the following stock issuance transactions:

May 19 Issued 1,700 shares of \(3 par value common stock for cash of \)10.50 per share.

Jun. 3 Issued 300 shares of \(9, no-par preferred stock for \)15,000 cash.

11 Received equipment with a market value of \(68,000 in exchange for 5,000 shares of the \)3 par value common stock.

Requirements

1. Journalize the transactions. Explanations are not required.

Journalizing issuance of stock

Steller Systems completed the following stock issuance transactions:

May 19 Issued 1,700 shares of \(3 par value common stock for cash of \)10.50 per share.

Jun. 3 Issued 300 shares of \(9, no-par preferred stock for \)15,000 cash.

11 Received equipment with a market value of \(68,000 in exchange for 5,000 shares of the \)3 par value common stock.

Requirements

2. How much paid-in capital did these transactions generate for Steller Systems?

Eates Corp. issued 8,000 shares of no-par common stock for \(13 per share.

Requirements

1. Record issuance of the stock if the stock:

a. is true no-par stock.

b. has stated value of \)3 per share.

Eates Corp. issued 8,000 shares of no-par common stock for $13 per share.

Requirements

2. Which type of stock results in more total paid-in capital?

Journalizing issuance of stock and preparing the stockholders’ equity section of the balance sheet

The charter for ASAP-TV, Inc. authorizes the company to issue 100,000 shares of \(5, no-par preferred stock and 500,000 shares of common stock with \)1 par value. During its start-up phase, ASAP-TV completed the following transactions:

Sep. 6 Issued 550 shares of common stock to the promoters who organized the corporation, receiving cash of \(16,500.

12 Issued 400 shares of preferred stock for cash of \)23,000.

14 Issued 1,500 shares of common stock in exchange for land with a market value of $17,000.

Requirements

1. Record the transactions in the general journal.

Journalizing issuance of stock and preparing the stockholders’ equity section of the balance sheet

The charter for ASAP-TV, Inc. authorizes the company to issue 100,000 shares of \(5, no-par preferred stock and 500,000 shares of common stock with \)1 par value. During its start-up phase, ASAP-TV completed the following transactions:

Sep. 6 Issued 550 shares of common stock to the promoters who organized the corporation, receiving cash of \(16,500.

12 Issued 400 shares of preferred stock for cash of \)23,000.

14 Issued 1,500 shares of common stock in exchange for land with a market value of \(17,000.

Requirements

1. Record the transactions in the general journal.

2. Prepare the stockholders’ equity section of the ASAP-TV balance sheet atSeptember 30, 2018, assuming ASAP-TV, Inc. had net income of \)38,000 for the month.

Journalizing issuance of stock and preparing the stockholders’ equity section of the balance sheet

The charter of Evergreen Corporation authorizes the issuance of 900 shares of preferred stock and 1,400 shares of common stock. During a two-month period, Evergreen completed these stock-issuance transactions:

Mar. 23 Issued 230 shares of \(3 par value common stock for cash of \)15 per share.

Apr. 12 Received inventory with a market value of \(27,000 and equipment with a market value of \)19,000 for 320 shares of the \(3 par value common stock.

17 Issued 900 shares of 5%, \)20 par value preferred stock for \(20 per share.

Requirements

2. Prepare the stockholders’ equity section of the Evergreen balance sheet as of April 30, 2018, for the transactions given in this exercise. Retained Earnings has a balance of \)73,000 at April 30, 2018

Journalizing issuance of stock and preparing the stockholders’ equity section of the balance sheet

The charter of Evergreen Corporation authorizes the issuance of 900 shares of preferred stock and 1,400 shares of common stock. During a two-month period, Evergreen completed these stock-issuance transactions:

Mar. 23 Issued 230 shares of \(3 par value common stock for cash of \)15 per share.

Apr. 12 Received inventory with a market value of \(27,000 and equipment with a market value of \)19,000 for 320 shares of the \(3 par value common stock.

17 Issued 900 shares of 5%, \)20 par value preferred stock for $20 per share.

Requirements

1. Record the transactions in the general journal.

Journalizing treasury stock transactions and reporting stockholders’ equity

Southern Amusements Corporation had the following stockholders’ equity on 

November 30:

Paid-In Capital:

Common Stock—\(5 Par Value; 1,300 sharesauthorized, 250 shares issued and outstanding1,250

Retained Earnings50,000

Total Stockholders’ Equity \) 55,000

Stockholders’ Equity

Paid-In Capital in Excess of Par—Common 3,750

Total Paid-In Capital

\(5,000

On December 30, Southern purchased 200 shares of treasury stock at \)15 per share.

Requirements

1. Journalize the purchase of the treasury stock.

Journalizing treasury stock transactions and reporting stockholders’ equity

Southern Amusements Corporation had the following stockholders’ equity on 

November 30:

Paid-In Capital:

Common Stock—\(5 Par Value; 1,300 sharesauthorized, 250 shares issued and outstanding1,250

Retained Earnings50,000

Total Stockholders’ Equity \) 55,000

Stockholders’ Equity

Paid-In Capital in Excess of Par—Common 3,750

Total Paid-In Capital

\(5,000

On December 30, Southern purchased 200 shares of treasury stock at \)15 per share.

Requirements

2. Prepare the stockholders’ equity section of the balance sheet at December 31, 2018. Assume the balance in retained earnings is unchanged from November 30.

Journalizing treasury stock transactions and reporting stockholders’ equity

Southern Amusements Corporation had the following stockholders’ equity on 

November 30:

Paid-In Capital:

Common Stock—\(5 Par Value; 1,300 sharesauthorized, 250 shares issued and outstanding1,250

Retained Earnings50,000

Total Stockholders’ Equity \) 55,000

Stockholders’ Equity

Paid-In Capital in Excess of Par—Common 3,750

Total Paid-In Capital

\(5,000

On December 30, Southern purchased 200 shares of treasury stock at \)15 per share.

Requirements

3. How many shares of common stock are outstanding after the purchase oftreasury stock?

Journalizing issuance of stock and treasury stock transactions

Stock transactions for Careful Driving School, Inc. follow:

Mar. 4 Issued 27,000 shares of \(1 par value common stock at \)10 per share.

May 22 Purchased 1,300 shares of treasury stock—common at \(13 per share.

Sep. 22 Sold 500 shares of treasury stock—common at \)23 per share.

Oct. 14 Sold 800 shares of treasury stock—common at $9 per share.

Computing dividends on preferred and common stock and journalizing

Northern Communications has the following stockholders’ equity on December 31, 

2018:

Preferred Stock—5%, \(11 Par Value; 150,000 shares authorized, 20,000 shares issued and outstanding

Paid-In Capital:

\) 220,000

760,000

Stockholders’ Equity

Paid-In Capital in Excess of Par—Common 680,0006

Total Paid-In Capital 1,660,000

Retained Earnings 200,000

Total Stockholders’ Equity \( 1,860,000

Common Stock—\)2 Par Value; 575,000 shares

 authorized, 380,000 shares issued and outstanding

Requirements

1. Assuming the preferred stock is cumulative, compute the amount of dividends to preferred stockholders and to common stockholders for 2018 and 2019 if total dividends are \(9,000 in 2018 and \)45,000 in 2019. Assume no changes in preferred stock and common stock in 2019.

Computing dividends on preferred and common stock and journalizing

Northern Communications has the following stockholders’ equity on December 31, 

2018:

Preferred Stock—5%, \(11 Par Value; 150,000 shares authorized, 20,000 shares issued and outstanding

Paid-In Capital:

\) 220,000

760,000

Stockholders’ Equity

Paid-In Capital in Excess of Par—Common 680,000

Total Paid-In Capital 1,660,000

Retained Earnings 200,000

Total Stockholders’ Equity \( 1,860,000

Common Stock—\)2 Par Value; 575,000 shares

 authorized, 380,000 shares issued and outstanding

Requirements

2. Record the journal entries for 2018, assuming that Northern Communications declared the dividend on December 1 for stockholders of record on December 10. Northern Communications paid the dividend on December 20.

Computing dividends on preferred and common stock and journalizing

The following elements of stockholders’ equity are from the balance sheet of Sneed Marketing Corp. at December 31, 2017:

800,000

Preferred Stock—4%, \(2 Par Value; 80,000 shares

 authorized, 55,000 shares issued and outstanding

Paid-In Capital:

\) 110,000

Stockholders’ Equity

Common Stock—\(0.10 Par Value; 8,750,000 shares

 authorized, 8,000,000 shares issued and outstanding

Sneed paid no preferred dividends in 2017.

Requirements

1. Compute the dividends to the preferred and common shareholders for 2018 if total dividends are \)185,000 and assuming the preferred stock is noncumulative. Assume no changes in preferred and common stock in 2018.

Computing dividends on preferred and common stock and journalizing

The following elements of stockholders’ equity are from the balance sheet of Sneed Marketing Corp. at December 31, 2017:

800,000

Preferred Stock—4%, \(2 Par Value; 80,000 shares

 authorized, 55,000 shares issued and outstanding

Paid-In Capital:

\) 110,000

Stockholders’ Equity

Common Stock—$0.10 Par Value; 8,750,000 shares

 authorized, 8,000,000 shares issued and outstanding

Sneed paid no preferred dividends in 2017.

Requirements

2. Record the journal entries for 2018 assuming that Sneed Marketing Corp. declared the dividends on July 1 for stockholders of record on July 15. Sneed paid the dividends on July 31

Journalizing a stock dividend and reporting stockholders’ equity

The stockholders’ equity of Lakeside Occupational Therapy, Inc. on December 31, 2017, follows:

Common Stock—\(1 Par Value; 1,200 shares

 authorized, 400 shares issued and outstanding

Paid-In Capital:

120,000

400

2,000

Retained Earnings

Total Stockholders’ Equity \) 122,000

Stockholders’ Equity

Paid-In Capital in Excess of Par—Common 1,600

Total Paid-In Capital

\(

On April 30, 2018, the market price of Lakeside’s common stock was \)16 per share and the company declared a 13% stock dividend. The stock was distributed on May 15.

Requirements

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

Journalizing a stock dividend and reporting stockholders’ equity

The stockholders’ equity of Lakeside Occupational Therapy, Inc. on December 31, 2017, follows:

Common Stock—\(1 Par Value; 1,200 shares

 authorized, 400 shares issued and outstanding

Paid-In Capital:

120,000

400

2,000

Retained Earnings

Total Stockholders’ Equity \) 122,000

Stockholders’ Equity

Paid-In Capital in Excess of Par—Common 1,600

Total Paid-In Capital

\(

On April 30, 2018, the market price of Lakeside’s common stock was \)16 per share and the company declared a 13% stock dividend. The stock was distributed on May 15.

Requirements

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

2. Prepare the stockholders’ equity section of the balance sheet as of May 31, 2018. Assume Retained Earnings are $120,000 on April 30, 2018, before the stock dividend, and the only change made to Retained Earnings before preparing the balance sheet was closing the Stock Dividends account.

Journalizing cash and stock dividends

Self-Defense Schools, Inc. is authorized to issue 200,000 shares of \(2 par common stock. The company issued 73,000 shares at \)5 per share. When the market price of common stock was \(7 per share, Self-Defense Schools declared and distributed a 14% stock dividend. Later, Self-Defense Schools declared and paid a \)0.70 per share cash dividend.

Requirements

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

Journalizing cash and stock dividends

Self-Defense Schools, Inc. is authorized to issue 200,000 shares of \(2 par common stock. The company issued 73,000 shares at \)5 per share. When the market price of common stock was \(7 per share, Self-Defense Schools declared and distributed a 14% stock dividend. Later, Self-Defense Schools declared and paid a \)0.70 per share cash dividend.

Requirements

2. Journalize the declaration and the payment of the cash dividend.

Reporting stockholders’ equity after a stock split

Wood Golf Club Corp. had the following stockholders’ equity at December 31, 2017:

Common Stock—\(1 Par Value; 650 sharesauthorized, 270 shares issued and outstanding

Paid-In Capital:

2,600

\) 270

810

Retained Earnings

Total Stockholders’ Equity $ 3,410

Stockholders’ Equity

Paid-In Capital in Excess of Par—Common 540

Total Paid-In Capital

On June 30, 2018, Wood Golf Club split its common stock 2-for-1. Prepare the stockholders’ equity section of the balance sheet immediately after the split. Assume the balance in retained earnings is unchanged from December 31, 2017.

Determining the effects of cash dividends, stock dividends, and stock splits

Complete the following chart by inserting a check mark for each statement that is true.

Cash dividend Stock dividend Stock split

Decreases retained earnings

Has no effect on a liability

Increases paid-in capital by thesame amount that it decreasesretained earnings

Decreases both total assets andtotal stockholders’ equity

Has no effect on totalstockholders’ equity

Determining the effect of stock dividends, stock splits, and treasury stock transactions

Many types of transactions may affect stockholders’ equity. Identify the effects of the following transactions on total stockholders’ equity. Each transaction is independent.

c. Purchase of 1,100 shares of \(0.50 par treasury stock at \)6 per share.

Determining the effect of stock dividends, stock splits, and treasury stock transactions

Many types of transactions may affect stockholders’ equity. Identify the effects of the following transactions on total stockholders’ equity. Each transaction is independent.

d. Sale of 600 shares of \(0.50 par treasury stock for \)9 per share. Cost of the treasury stock was $7 per share.

Determining the effect of stock dividends, stock splits, and treasury stock transactions

Many types of transactions may affect stockholders’ equity. Identify the effects of the following transactions on total stockholders’ equity. Each transaction is independent.

b. A 2-for-1 stock split. Prior to the split, 66,000 shares of $5 par value common stock were outstanding

Determining the effect of stock dividends, stock splits, and treasury stock transactions

Many types of transactions may affect stockholders’ equity. Identify the effects of the following transactions on total stockholders’ equity. Each transaction is independent.

a. A 10% stock dividend. Before the dividend, 540,000 shares of \(1 par value common stock were outstanding; market value was \)9 per share at the time of the dividend.

Preparing a multi-step income statement

Clix Photographic Supplies, Inc.’s accounting records include the following for 2018:

Income Tax Savings—Loss on 

Discontinued Operations

\( 12,000 Net Sales \) 525,000

Operating Expenses 

(Including Income Tax)

100,000

Loss on Discontinued Operations 30,000

Cost of Goods Sold 240,000

Prepare Clix’s multi-step income statement for the year ending December 31, 2018. Omit earnings per share.

Computing earnings per share

Faccone Academy Surplus had 60,000 shares of common stock and 9,000 shares of 20%, \(15 par value preferred stock outstanding through December 31, 2018. Income from continuing operations for 2018 was \)711,000, and loss on discontinued operations (net of income tax saving) was $36,000.Compute Faccone’s earnings per share for 2018, starting with income from continuing operations. Round to the nearest cent

Preparing a statement of retained earnings

Kelly May Bakery, Inc. reported a prior-period adjustment in 2018. An accounting error caused net income of prior years to be overstated by \(1,000. Retained Earnings at December 31, 2017, as previously reported, was \)48,000. Net income for 2018 was \(74,000, and dividends declared were \)28,000. Prepare the company’s statement of retained earnings for the year ended December 31, 2018.

Computing earnings per share and price/earnings ratio

Rocket Corp. earned net income of \(153,040 and paid the minimum dividend to preferred stockholders for 2018. Assume that there are no changes in common shares outstanding during 2018. Rocket’s books include the following figures:

Preferred Stock—6%, \)60 par value; 2,000 shares authorized, 1,000 

shares issued and outstanding \( 60,000

Common Stock—\)5 par value; 80,000 shares authorized, 48,000 shares 

issued, 46,700 shares outstanding 240,000

Paid-In Capital in Excess of Par—Common 470,000

Treasury Stock—Common; 1,300 shares at cost (26,000)

Requirements

1. Compute Rocket’s EPS for the year.