Stockholders’ Equity

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

2. Assume Rocket’s market price of a share of common stock is $12 per share. Compute Rocket’s price/earnings ratio.

Computing rate of return on common stockholders’ equity

LaSalle Exploration Company reported these figures for 2018 and 2017:

2018 2017

Income Statement—partial:

Net Income \( 14,800 \) 19,200

Dec. 31, 2018 Dec. 31, 2017

Balance Sheet—partial:

Total Assets \( 323,000 \) 314,000

Preferred Stock \( 2,100 \) 2,100

Common Stock 178,000 168,000

Retained Earnings 11,000 7,000

Total Stockholders’ Equity \( 191,100 \) 177,100

Compute rate of return on common stockholders’ equity for 2018 assuming no dividends were declared or paid to preferred stockholders

Organizing a corporation and issuing stock

Montel and Jeremy are opening a paint store. There are no competing paint stores in the area. They must decide how to organize the business. They anticipate profits of $350,000 the first year, with the ability to sell franchises in the future. Although they have enough to start the business now as a partnership, cash flow will be an issue as they grow. They feel the corporate form of operation will be best for the long term. They seek your advice.

Requirements

1. What is the main advantage they gain by selecting a corporate form of business now?

Organizing a corporation and issuing stock

Montel and Jeremy are opening a paint store. There are no competing paint stores in the area. They must decide how to organize the business. They anticipate profits of $350,000 the first year, with the ability to sell franchises in the future. Although they have enough to start the business now as a partnership, cash flow will be an issue as they grow. They feel the corporate form of operation will be best for the long term. They seek your advice.

Requirements

2. Would you recommend they initially issue preferred or common stock?Why?

Organizing a corporation and issuing stock

Montel and Jeremy are opening a paint store. There are no competing paint stores in the area. They must decide how to organize the business. They anticipate profits of \(350,000 the first year, with the ability to sell franchises in the future. Although they have enough to start the business now as a partnership, cash flow will be an issue as they grow. They feel the corporate form of operation will be best for the long term. They seek your advice.

Requirements

3. If they decide to issue \)5 par common stock and anticipate an initial market price of \(20 per share, how many shares will they need to issue to raise \)2,750,000?

A Identifying sources of equity, stock issuance, and dividends

Voyage Comfort Specialists, Inc. reported the following stockholders’ equity on its balance sheet at June 30, 2018:

Preferred Stock—7%, ? Par Value; 625,000 shares

 authorized, 280,000 shares issued and outstanding

Paid-In Capital:

\( 1,400,000

1,340,000

Stockholders’ Equity

Paid-In Capital in Excess of Par—Common 2,900,000

Total Paid-In Capital 5,640,000

Retained Earnings 12,000,000

Total Stockholders’ Equity \) 17,640,000

Common Stock—$1 Par Value; 3,000,000 shares 

 authorized, 1,340,000 shares issued and outstanding

Requirements

1. Identify the different classes of stock that Voyage Comfort Specialists has outstanding.

A Identifying sources of equity, stock issuance, and dividends

Voyage Comfort Specialists, Inc. reported the following stockholders’ equity on its balance sheet at June 30, 2018:

Preferred Stock—7%, ? Par Value; 625,000 shares

 authorized, 280,000 shares issued and outstanding

Paid-In Capital:

\( 1,400,000

1,340,000

Stockholders’ Equity

Paid-In Capital in Excess of Par—Common 2,900,000

Total Paid-In Capital 5,640,000

Retained Earnings 12,000,000

Total Stockholders’ Equity \) 17,640,000

Common Stock—$1 Par Value; 3,000,000 shares 

 authorized, 1,340,000 shares issued and outstanding

Requirements

3. Make two summary journal entries to record issuance of all the Voyage Comfort Specialists’ stock for cash. Explanations are not required.

A Identifying sources of equity, stock issuance, and dividends

Voyage Comfort Specialists, Inc. reported the following stockholders’ equity on its balance sheet at June 30, 2018:

Preferred Stock—7%, ? Par Value; 625,000 shares

 authorized, 280,000 shares issued and outstanding

Paid-In Capital:

\( 1,400,000

1,340,000

Stockholders’ Equity

Paid-In Capital in Excess of Par—Common 2,900,000

Total Paid-In Capital 5,640,000

Retained Earnings 12,000,000

Total Stockholders’ Equity \) 17,640,000

Common Stock—\(1 Par Value; 3,000,000 shares 

 authorized, 1,340,000 shares issued and outstanding

Requirements

4. No preferred dividends are in arrears. Journalize the declaration of a \)500,000 dividend at June 30, 2018, and the payment of the dividend on July 20, 2018. Use separate Dividends Payable accounts for preferred and common stock. An explanation is not required.

A Identifying sources of equity, stock issuance, and dividends

Voyage Comfort Specialists, Inc. reported the following stockholders’ equity on its balance sheet at June 30, 2018:

Preferred Stock—7%, ? Par Value; 625,000 shares

 authorized, 280,000 shares issued and outstanding

Paid-In Capital:

\( 1,400,000

1,340,000

Stockholders’ Equity

Paid-In Capital in Excess of Par—Common 2,900,000

Total Paid-In Capital 5,640,000

Retained Earnings 12,000,000

Total Stockholders’ Equity \) 17,640,000

Common Stock—$1 Par Value; 3,000,000 shares 

 authorized, 1,340,000 shares issued and outstanding

Requirements

2. What is the par value per share of Voyage Comfort Specialists’ preferred stock?

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

D-Mobile Wireless needed additional capital to expand, so the business incorporated. The charter from the state of Georgia authorizes D-Mobile to issue 50,000 shares of 8%, \(50 par value cumulative preferred stock and 160,000 shares of \)4 par value common stock. During the first month, D-Mobile completed the following transactions:

Oct. 2 Issued 19,000 shares of common stock for a building with a market value of \(240,000.

6 Issued 600 shares of preferred stock for \)140 per share.

9 Issued 11,000 shares of common stock for cash of \(55,000.

10 Declared a \)19,000 cash dividend for stockholders of record on Oct. 20. Use a separate Dividends Payable account for preferred and common stock.

25 Paid the cash dividend.

Requirements

1. Record the transactions in the general journal.
2.  Prepare the stockholders’ equity section of D-Mobile’s balance sheet at October 31, 2018. Assume D-Mobile’s net income for the month was $94,000.

Journalizing dividends and treasury stock transactions and preparing the stockholders’ equity section of the balance sheet

Deerborn Manufacturing Co. completed the following transactions during 2018:

Jan. 16 Declared a cash dividend on the 6%, \(103 par noncumulative preferred stock (1,050 shares outstanding). Declared a \)0.20 per share dividend on the 100,000 shares of \(2 par value common stock outstanding. The date of record is January 31, and the payment date is February 15.

Feb. 15 Paid the cash dividends.

Jun. 10 Split common stock 2-for-1.

Jul. 30 Declared a 30% stock dividend on the common stock. The market value 

of the common stock was \)9 per share.

Aug. 15 Distributed the stock dividend.

Oct. 26 Purchased 1,000 shares of treasury stock at \(8 per share.

Nov. 8 Sold 500 shares of treasury stock for \)10 per share.

30 Sold 300 shares of treasury stock for \(4 per share.

Requirements

1. Record the transactions in Deerborn’s general journal.
2. Prepare the Deerborn’s stockholders’ equity section of the balance sheet as of December 31, 2018. Assume that Deerborn was authorized to issue 2,600 shares of preferred stock and 400,000 shares of common stock. Both preferred stock and common stock were issued at par. The ending balance of retained earnings as of December 31, 2018, is \)2,060,000.

Question: A Preparing an income statement

The following information was taken from the records of Chua Motorsports, Inc. at November 30, 2018:

Learning Objective 5

Net Income \(65,500

Selling Expenses

Administrative Expenses

Income from Discontinued Operations

Cost of Goods Sold

Treasury Stock—Common (5,000 shares)

Net Sales Revenue

\) 110,000

115,000

2,500

510,000

75,000

819,000

Common Stock, \(12 Par Value, 

10,000 shares authorized and issued \) 120,000

Preferred Stock, $7 No-Par Value, 

7,000 shares issued 490,000

Income Tax Expense: Continuing 

Operations 20,000

Income Tax Expense: Income from 

Discontinued Operations 1,000

Prepare a multi-step income statement for Chua Motorsports for the fiscal year ended November 30, 2018. Include earnings per share.

Journalizing dividend and treasury stock transactions, preparing a statement of retained earnings, and preparing stockholders’ equity

The balance sheet of Goldstein Management Consulting, Inc. at December 31, 2017, reported the following stockholders’ equity:

Common Stock—\(10 Par Value; 350,000 shares

 authorized, 32,000 shares issued and outstanding

Paid-In Capital:

160,000

\) 320,000

650,000

Retained Earnings

Total Stockholders’ Equity \( 810,000

Stockholders’ Equity

Paid-In Capital in Excess of Par—Common 330,000

Total Paid-In Capital

During 2018, Goldstein completed the following selected transactions:

Feb. 6 Declared a 15% stock dividend on common stock. The market value of 

Goldstein’s stock was \)25 per share.

15 Distributed the stock dividend.

Jul. 29 Purchased 2,300 shares of treasury stock at \(25 per share.

Nov. 27 Declared a \)0.10 per share cash dividend on the common stock outstanding.

Requirements

2. Prepare a retained earnings statement for the year ended December 31, 2018. Assume Goldstein’s net income for the year was $90,000.

Journalizing dividend and treasury stock transactions, preparing a statement of retained earnings, and preparing stockholders’ equity

The balance sheet of Goldstein Management Consulting, Inc. at December 31, 2017, reported the following stockholders’ equity:

Common Stock—\(10 Par Value; 350,000 shares

 authorized, 32,000 shares issued and outstanding

Paid-In Capital:

160,000

\) 320,000

650,000

Retained Earnings

Total Stockholders’ Equity \( 810,000

Stockholders’ Equity

Paid-In Capital in Excess of Par—Common 330,000

Total Paid-In Capital

During 2018, Goldstein completed the following selected transactions:

Feb. 6 Declared a 15% stock dividend on common stock. The market value of 

Goldstein’s stock was \)25 per share.

15 Distributed the stock dividend.

Jul. 29 Purchased 2,300 shares of treasury stock at \(25 per share.

Nov. 27 Declared a \)0.10 per share cash dividend on the common stock outstanding.

Requirements

3. Prepare the stockholders’ equity section of the balance sheet at December 31, 2018.

Journalizing dividend and treasury stock transactions, preparing a statement of retained earnings, and preparing stockholders’ equity

The balance sheet of Goldstein Management Consulting, Inc. at December 31, 2017, reported the following stockholders’ equity:

Common Stock—\(10 Par Value; 350,000 shares

authorized, 32,000 shares issued and outstanding

Paid-In Capital:

160,000

\) 320,000

650,000

Retained Earnings

Total Stockholders’ Equity \( 810,000

Stockholders’ Equity

Paid-In Capital in Excess of Par—Common 330,000

Total Paid-In Capital

During 2018, Goldstein completed the following selected transactions:

Feb. 6 Declared a 15% stock dividend on common stock. The market value of 

Goldstein’s stock was \)25 per share.

15 Distributed the stock dividend.

Jul. 29 Purchased 2,300 shares of treasury stock at \(25 per share.

Nov. 27 Declared a \)0.10 per share cash dividend on the common stock outstanding.

Requirements

1. Record the transactions in the general journal.

Computing earnings per share, price/earnings ratio, and rate of return on common stockholders’ equity

Bianchi Company reported these figures for 2018 and 2017:

2018 2017

Income Statement—partial:

Net Income \( 34,380 \) 18,000

Dec. 31, 2018 Dec. 31, 2017

Balance Sheet—partial:

Total Assets \( 285,000 \) 280,000

Paid-In Capital:

Preferred Stock—11%, \(9 Par Value; 60,000 shares 

authorized, 12,000 shares issued and outstanding

\) 108,000 \( 108,000

Common Stock—\)2 Par Value; 60,000 shares 

authorized, 50,000 shares issued and outstanding

100,000 100,000

Paid-In Capital in Excess of Par—Common 14,000 14,000

Retained Earnings 60,500 38,000

Total Stockholders’ Equity \( 282,500 \) 260,000

Requirements

1. Compute Bianchi Company’s earnings per share for 2018. Assume the company paid the minimum preferred dividend during 2018. Round to the nearest cent.

Computing earnings per share, price/earnings ratio, and rate of return on common stockholders’ equity

Bianchi Company reported these figures for 2018 and 2017:

2018 2017

Income Statement—partial:

Net Income \( 34,380 \) 18,000

Dec. 31, 2018 Dec. 31, 2017

Balance Sheet—partial:

Total Assets \( 285,000 \) 280,000

Paid-In Capital:

Preferred Stock—11%, \(9 Par Value; 60,000 shares 

authorized, 12,000 shares issued and outstanding

\) 108,000 \( 108,000

Common Stock—\)2 Par Value; 60,000 shares 

authorized, 50,000 shares issued and outstanding

100,000 100,000

Paid-In Capital in Excess of Par—Common 14,000 14,000

Retained Earnings 60,500 38,000

Total Stockholders’ Equity \( 282,500 \) 260,000

Requirements

2. Compute Bianchi Company’s price/earnings ratio for 2018. Assume the company’s market price per share of common stock is $9. Round to two decimals.

Computing earnings per share, price/earnings ratio, and rate of return on common stockholders’ equity

Bianchi Company reported these figures for 2018 and 2017:

2018 2017

Income Statement—partial:

Net Income \( 34,380 \) 18,000

Dec. 31, 2018 Dec. 31, 2017

Balance Sheet—partial:

Total Assets \( 285,000 \) 280,000

Paid-In Capital:

Preferred Stock—11%, \(9 Par Value; 60,000 shares 

authorized, 12,000 shares issued and outstanding

\) 108,000 \( 108,000

Common Stock—\)2 Par Value; 60,000 shares 

authorized, 50,000 shares issued and outstanding

100,000 100,000

Paid-In Capital in Excess of Par—Common 14,000 14,000

Retained Earnings 60,500 38,000

Total Stockholders’ Equity \( 282,500 \) 260,000

Requirements

3. Compute Bianchi Company’s rate of return on common stockholders’ equity for 2018. Assume the company paid the minimum preferred dividend during 2018. Round to the nearest whole percent.

Question: Organizing a corporation and issuing stock

Jimmy and Randy are opening a comic store. There are no competing comic stores in the area. They must decide how to organize the business. They anticipate profits of $550,000 the first year, with the ability to sell franchises in the future. Although they have enough to start the business now as a partnership, cash flow will be an issue as they grow. They feel the corporate form of operation will be best for the long term. They seek your advice.

Requirements

1. What is the main advantage they gain by selecting a corporate form of business now?

Question: Organizing a corporation and issuing stock

Jimmy and Randy are opening a comic store. There are no competing comic stores in the area. They must decide how to organize the business. They anticipate profits of $550,000 the first year, with the ability to sell franchises in the future. Although they have enough to start the business now as a partnership, cash flow will be an issue as they grow. They feel the corporate form of operation will be best for the long term. They seek your advice.

Requirements

2. Would you recommend they initially issue preferred or common stock? Why?

Question: Organizing a corporation and issuing stock

Jimmy and Randy are opening a comic store. There are no competing comic stores in the area. They must decide how to organize the business. They anticipate profits of \(550,000 the first year, with the ability to sell franchises in the future. Although they have enough to start the business now as a partnership, cash flow will be an issue as they grow. They feel the corporate form of operation will be best for the long term. They seek your advice.

Requirements

3. If they decide to issue \)3 par common stock and anticipate an initial market price of \(75 per share, how many shares will they need to issue to raise \)3,000,000?

Question: Identifying sources of equity, stock issuance, and dividends

Tillman Comfort Specialists, Inc. reported the following stockholders’ equity on its balance sheet at June 30, 2018:

Preferred Stock—5%, ? Par Value; 625,000 shares 

 authorized, 325,000 shares issued and outstanding

Paid-In Capital:

\( 1,300,000

1,350,000

Stockholders’ Equity

Paid-In Capital in Excess of Par—Common 2,600,000

Total Paid-In Capital 5,250,000

Retained Earnings 11,800,000

Total Stockholders’ Equity \) 17,050,000

Common Stock—$1 Par Value; 7,000,000 shares 

 authorized, 1,350,000 shares issued and outstanding

Requirements

3. Make two summary journal entries to record issuance of all the Tillman Comfort Specialists stock for cash. Explanations are not required.

Question: Identifying sources of equity, stock issuance, and dividends

Tillman Comfort Specialists, Inc. reported the following stockholders’ equity on its balance sheet at June 30, 2018:

Preferred Stock—5%, ? Par Value; 625,000 shares 

 authorized, 325,000 shares issued and outstanding

Paid-In Capital:

\( 1,300,000

1,350,000

Stockholders’ Equity

Paid-In Capital in Excess of Par—Common 2,600,000

Total Paid-In Capital 5,250,000

Retained Earnings 11,800,000

Total Stockholders’ Equity \) 17,050,000

Common Stock—$1 Par Value; 7,000,000 shares 

 authorized, 1,350,000 shares issued and outstanding

Requirements

2. What is the par value per share of Tillman Comfort Specialists’ preferred stock?

Question: Identifying sources of equity, stock issuance, and dividends

Tillman Comfort Specialists, Inc. reported the following stockholders’ equity on its balance sheet at June 30, 2018:

Preferred Stock—5%, ? Par Value; 625,000 shares 

 authorized, 325,000 shares issued and outstanding

Paid-In Capital:

\( 1,300,000

1,350,000

Stockholders’ Equity

Paid-In Capital in Excess of Par—Common 2,600,000

Total Paid-In Capital 5,250,000

Retained Earnings 11,800,000

Total Stockholders’ Equity \) 17,050,000

Common Stock—\(1 Par Value; 7,000,000 shares 

 authorized, 1,350,000 shares issued and outstanding

Requirements

4. No preferred dividends are in arrears. Journalize the declaration of a \)200,000 dividend at June 30, 2018, and the payment of the dividend on July 20, 2018. Use separate Dividends Payable accounts for preferred and common stock. An explanation is not required.

Question: Identifying sources of equity, stock issuance, and dividends

Tillman Comfort Specialists, Inc. reported the following stockholders’ equity on its balance sheet at June 30, 2018:

Preferred Stock—5%, ? Par Value; 625,000 shares 

 authorized, 325,000 shares issued and outstanding

Paid-In Capital:

\( 1,300,000

1,350,000

Stockholders’ Equity

Paid-In Capital in Excess of Par—Common 2,600,000

Total Paid-In Capital 5,250,000

Retained Earnings 11,800,000

Total Stockholders’ Equity \) 17,050,000

Common Stock—$1 Par Value; 7,000,000 shares 

 authorized, 1,350,000 shares issued and outstanding

Requirements

1. Identify the different classes of stock that Tillman Comfort Specialists has outstanding.

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

C-Mobile Wireless needed additional capital to expand, so the business incorporated. The charter from the state of Georgia authorizes C-Mobile to issue 120,000 shares of 9%, \(150 par value cumulative preferred stock, and 140,000 shares of \)3 par value common stock. During the first month, C-Mobile completed the following transactions:

Oct. 2 Issued 18,000 shares of common stock for a building with a market value of \(260,000.

6 Issued 650 shares of preferred stock for \)160 per share.

9 Issued 14,000 shares of common stock for cash of \(84,000.

10 Declared a \)13,000 cash dividend for stockholders of record on Oct. 20. Use a separate Dividends Payable account for preferred and common stock.

25 Paid the cash dividend.

Requirements

1. Record the transactions in the general journal.

2. Prepare the stockholders’ equity section of C-Mobile’s balance sheet at October 31, 2018. Assume C-Mobile’s net income for the month was $95,000.

Journalizing dividends and treasury stock transactions and preparing the stockholders’ equity section of the balance sheet

Halborn Manufacturing Co. completed the following transactions during 2018:

Jan. 16 Declared a cash dividend on the 6%, \(97 par noncumulative preferred stock (1,150 shares outstanding). Declared a \)0.20 per share dividend on the 80,000 shares of \(8 par value common stock outstanding. The date of record is January 31, and the payment date is February 15.

Feb. 15 Paid the cash dividends.

Jun. 10 Split common stock 2-for-1.

Jul. 30 Declared a 40% stock dividend on the common stock. The market value 

of the common stock was \)8 per share.

Aug. 15 Distributed the stock dividend.

Oct. 26 Purchased 8,000 shares of treasury stock at \(9 per share.

Nov. 8 Sold 4,000 shares of treasury stock for \)10 per share.

30 Sold 1,400 shares of treasury stock for \(5 per share.

Requirements

1. Record the transactions in Halborn’s general journal.

2. Prepare the Halborn’s stockholders’ equity section of the balance sheet as of December 31, 2018. Assume that Halborn was authorized to issue 2,200 shares of preferred stock and 500,000 shares of common stock. Both preferred stock and common stock were issued at par. The ending balance of retained earnings as of December 31, 2018, is \)2,030,000.

Preparing an income statement

The following information was taken from the records of Arizona Motorsports, Inc. at November 30, 2018:

Learning Objectives 3, 4

1. Nov. 8 Treasury Stock \(36,000

Learning Objective 5

Net Income \)37,840

Selling Expenses

Administrative Expenses

Income from Discontinued Operations

Cost of Goods Sold

Treasury Stock—Common (1,500 shares)

Net Sales Revenue

\( 95,000

150,000

2,400

470,000

19,500

801,400

Common Stock, \)11 Par Value, 13,500 

shares authorized and issued \( 148,500

Preferred Stock, \)2 No-Par Value, 2,000 

shares issued 60,000

Income Tax Expense: Continuing 

Operations 50,000

Income Tax Expense: Income from 

Discontinued Operations 960

Prepare a multi-step income statement for Arizona Motorsports for the fiscal year ended November 30, 2018. Include earnings per share

Journalizing dividend and treasury stock transactions, preparing a statement of retained earnings, and preparing stockholders’ equity

The balance sheet of Cullins Management Consulting, Inc. at December 31, 2017, reported the following stockholders’ equity:

Common Stock—\(10 Par Value; 200,000 shares authorized, 22,000 shares issued and outstanding Paid-In Capital:

163,000

\) 220,000

580,000

Retained Earnings

Total Stockholders’ Equity \( 743,000

Stockholders’ Equity

Paid-In Capital in Excess of Par—Common 360,000

Total Paid-In Capital

During 2018, Cullins completed the following selected transactions:

Feb. 6 Declared a 5% stock dividend on common stock. The market value of 

Cullins’s stock was \)25 per share.

15 Distributed the stock dividend.

Jul. 29 Purchased 2,000 shares of treasury stock at \(25 per share.

Nov. 27 Declared a \)0.20 per share cash dividend on the common stock  outstanding.

Requirements

1. Record the transactions in the general journal.

2. Prepare a retained earnings statement for the year ended December 31, 2018. Assume Cullins’s net income for the year was $87,000.

3. Prepare the stockholders’ equity section of the balance sheet at December 31, 2018.

Computing earnings per share, price/earnings ratio, and rate of return on common stockholders’ equity 

Gullo Company reported these figures for 2018 and 2017:

2018 2017

Income Statement—partial:

Net Income \( 18,900 \) 24,000

Dec. 31, 2018 Dec. 31, 2017

Balance Sheet—partial:

Total Assets \( 285,000 \) 200,000

Paid-In Capital:

Preferred Stock—11%, \(9 Par Value; 60,000 shares authorized, 10,000 shares issued and outstanding \) 90,000 \( 90,000

Common Stock—\)1 Par Value; 45,000 shares authorized, 30,000 shares issued and outstanding

30,000 30,000

Paid-In Capital in Excess of Par—Common 14,000 14,000

Retained Earnings 51,000 42,000

Total Stockholders’ Equity \( 185,000 \) 176,000

Learning Objectives 3, 4, 6

2. Retained Earnings Dec. 31, 

2018 \(218,280

Requirements

1. Compute Gullo Company’s earnings per share for 2018. Assume the company paid the minimum preferred dividend during 2018. Round to the nearest cent.

2. Compute Gullo Company’s price/earnings ratio for 2018. Assume the company’s market price per share of common stock is \)9. Round to two decimals.

3. Compute Gullo Company’s rate of return on common stockholders’ equity for 2018. Assume the company paid the minimum preferred dividend during 2018. Round to the nearest whole percent.

Using Excel for stockholders’ equity transactions and preparing financial statements

Download an Excel template for this problem online in MyAccountingLab or at http://www.pearsonhighered.com/Horngren.

Naxion Corporation began operations on January 2, 2018, and had the following transactions during the year:

Jan. 2 Issued 250,000 shares of \(1 par value common stock at \)45 per share. Total shares authorized: 1,000,000.

Feb. 5 Issued 10,000 shares of \(50 par, 5% cumulative preferred stock at \)65 per share. Total shares 

authorized: 25,000.

Mar. 15 Issued 150,000 shares of \(1 par value common stock at \)35 per share.

Apr. 2 Declared a \(2.50 per share cash dividend on its preferred stock to be paid on April 25. Date of 

record is April 10.

3 Declared a \)0.10 per share cash dividend on its common stock to be paid on April 26. Date of record 

is April 10.

Jun. 1 Declared a 2% stock dividend on all common stock outstanding. Current market price of the stock 

was \(48 per share. Date of record is June 15.

30 Distributed common stock dividend to shareholders.

Oct. 10 Purchased 2,500 shares of treasury stock—common at \)52 per share.

Nov. 15 Sold 2,000 shares of treasury stock—common at \(54 per share.

Requirements

1. Journalize Naxion’s transactions for 2018.

2. Prepare the stockholders’ equity section of the balance sheet as of December 31, 2018, including the heading. Assume Naxion had net income of \)15,000,000 during 2018. This is the first year of operations.

3. Determine Naxion’s earnings per share for 2018, rounded to two decimal places. For the average number of common shares outstanding, average the number of shares outstanding on January 2 and December 31.

4. Assuming Naxion’s market value per common share as of December 31, 2018, was $55, calculate Naxion’s price/earnings ratio for 2018, rounded to two decimal places.

Journalizing stock issuances, cash dividends, and stock dividends; preparing stockholders’ equity section of balance sheet

This problem continues the Canyon Canoe Company situation from Chapter 12. After looking into debt financing through notes, mortgage, and bonds payable, Canyon Canoe Company decides to raise additional capital for the planned business expansion. The company will be able to acquire cash as well as land adjacent to its current business location. Before the following transactions, the balance in Common Stock on January 1, 2021, was \(136,000 and included 136,000 shares of common stock issued and outstanding. (There was no Paid-In Capital in Excess of Par—Common.) Canyon Canoe Company had the following transactions in 2021:

Jan. 1 Issued 50,000 shares of \)1 par value common stock for a total of 

\(200,000.

10 Issued 20,000 shares of 4%, \)3 par value preferred stock in exchange for 

land with a market value of \(70,000.

Dec. 15 Declared total cash dividends of \)15,000.

20 Declared an 8% common stock dividend when the market value of the 

stock was \(4.50 per share.

31 Paid the cash dividends.

31 Distributed the stock dividend.

Requirements

1. Journalize the transactions.

2. Calculate the balance in Retained Earnings on December 31, 2021. Assume the balance on January 1, 2021 was \)4,250 and net income for the year was $417,000.

3. Prepare the stockholders’ equity section of the balance sheet as of December 31, 2021. There was no preferred stock issued prior to the 2021 

transactions

Lena Kay and Kathy Lauder have a patent on a new line of cosmetics. They need additional capital to market the products, and they plan to incorporate the business. They are considering the capital structure for the corporation. Their primary goal is to raise as much capital as possible without giving up control of the business. Kay and Lauder plan to invest the patent (an intangible asset, which will be transferred to the company’s ownership in lieu of cash) in the company and receive 100,000 shares of the corporation’s common stock. They have been offered \(100,000 for the patent, which provides an indication of the fair market value of the patent. The corporation’s plans for a charter include an authorization to issue 5,000 shares of preferred stock and 500,000 shares of \)1 par common stock. Kay and Lauder are uncertain about the most desirable features for the preferred stock. Prior to incorporating, they are discussing their plans with two investment groups. The corporation can obtain capital from outside investors under either of the following plans: 

• Plan 1. Group 1 will invest \(150,000 to acquire 1,500 shares of 6%, \)100 par nonvoting, noncumulative preferred stock. 

• Plan 2. Group 2 will invest \(100,000 to acquire 1,000 shares of \)5, no-par preferred stock and \(70,000 to acquire 70,000 shares of common stock. Each preferred share receives 50 votes on matters that come before the common stockholders. 

Requirements Assume that the corporation has been chartered (approved) by the state.

 1. Journalize the issuance of common stock to Kay and Lauder. Explanations are not required. 

2. Journalize the issuance of stock to the outsiders under both plans. Explanations are not required. 

3. Net income for the first year is \)180,000, and total dividends are $30,000. Prepare the stockholders’ equity section of the corporation’s balance sheet under both plans at the end of the first year. 

4. Recommend one of the plans to Kay and Lauder. Give your reasons