Chapter 18 Shareholders' EquityTrue/False Questions 1. Paid-in capital must consist solely of amounts invested by shareholders. Answer: False Learning Objective: 6 Level of Learning: 1 2. Stock designated as preferred usually has preferential rights over other classes of stock relative to dividends and liquidating distributions. Answer: True Learning Objective: 7 Level of Learning: 1 3. Dividends in arrears on cumulative preferred stock are reported as current liabilities. Answer: False Learning Objective: 7 Level of Learning: 1 4. Receivables from share purchase contracts are reported as current and noncurrent assets depending upon the terms of the underlying note. Answer: False Learning Objective: 3 Level of Learning: 1 5. Noncash assets received as consideration for the issue of stock are always valued based on the fair market value of the stock. Answer: False Learning Objective: 3 Level of Learning: 2 6. Treasury stock transactions never increase retained earnings or net income. Answer: True Learning Objective: 5 Level of Learning: 1 7. Restrictions on retained earnings must be disclosed in the body of the balance sheet. Answer: False Learning Objective: 6 Level of Learning: 1 8. Cash dividends become a binding liability as of the record date. Answer: False Learning Objective: 7 Level of Learning: 1 9. Under GAAP, the declaration of a property dividend may require the recognition of a gain or loss if the fair value of the property is different from its carrying value on the declaration date. Answer: True Learning Objective: 7 Level of Learning: 2 10. Stock dividends may cause a reduction in retained earnings, but they never reduce total shareholders' equity. Answer: True Learning Objective: 8 Level of Learning: 1 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 249 Chapter 18 Shareholders' Equity Matching Pair Questions Use the following to answer questions 11-20: 11-20. Use I = Increase, D = Decrease, or N = No effect, to indicate the effect on retained earnings for each of the listed transactions. 11. ____ Declaration of a property dividend. 12. ____ Net income for the year. 13. ____ Purchase of treasury stock at a cost greater than the original issue price (cost method). 14. ____ Purchase of treasury stock at a cost greater than the original issue price (par value method). 15. ____ Purchase of treasury stock at a cost less than the original issue price (cost method). 16. ____ Purchase of treasury stock at a cost less than the original issue price (par value method). 17. ____ Issue common stock. 18. ____ Resale of treasury stock for less than cost (cost method), assuming no previous treasury stock sales. 19. ____ Resale of treasury stock for more than cost (cost method). 20. ____ Resale of treasury stock for more than par and cost (par value method). Answer: 11-D; 12-I; 13-N; 14-D; 15-N; 16-N; 17-N; 18-D; 19-N; 20-N Use the following to answer questions 21-30: 21-30. Use I = Increase, D = Decrease, or N = No effect, to indicate the effect on retained earnings for each of the listed transactions. 21. ____ A net loss for the year. 22. ____ A stock split effected in the form of a stock dividend. 23. ____ A stock split in which the per share is reduced (but not effected in the form of a stock dividend). 24. ____ Declaration of a 5% stock dividend. 25. ____ Declaration of a cash dividend. 26. ____ Issue stock by a share purchase contract. 27. ____ Payment of previously declared cash dividend. 28. ____ Retirement of common stock at a cost greater than the original issue price. 29. ____ Retirement of common stock at a cost less than the original issue price. 30. ____ Resale of treasury stock for less than carrying value (cost method) assuming no previous treasury stock sales. Answer: 21-D; 22-D; 23-N; 24-D; 25-D; 26-N; 27-N; 28-D; 29-N; 30-D 250 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition Chapter 18 Shareholders' Equity Use the following to answer questions 31-35: 31-35. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase. Terms: A. Cost method B. Cumulative C. Deficit D. Large stock dividend E. Liquidating dividend F. Paid-in capital-share repurchase G. Par value method H. Participating I. Receivable - share purchase contract J. Stock split Phrases: 31. ____ A debit balance for retained earnings. 32. ____ A feature that could increase the dividend yield on preferred stock. 33. ____ Essentially identical to formally retiring shares. 34. ____ A stock split in the form of a stock dividend. 35. ____ An account that may be used in a share buyback. Answer: 31-C; 32-H; 33-G; 34-D; 35-F Use the following to answer questions 36-40: 36-40. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase. Terms: A. Declaration date B. Large stock dividend C. Liquidating dividend D. Paid-in capital-share repurchase E. Par value method F. Participating G. Preferred stock is issued H. Property dividend I. Receivable from share purchase contract J. Stock split Phrases: 36. ____ Cash dividends become a legal liability. 37. ____ Classified as a contra account to paid-in capital. 38. ____ Considered a return of capital. 39. ____ Consists of noncash assets. 40. ____ Designed to decrease the market value of stock. Answer: 36-A; 37-I; 38-C; 39-H; 40-J Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 251 Chapter 18 Shareholders' Equity Use the following to answer questions 41-45: 41-45. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase. Terms: A. Appropriation of retained earnings B. Cost method C. Cumulative D. Earnings-price ratio E. Limited liability company F. Par value G. Retained earnings H. Return on shareholders' equity I. Reverse stock split J. Share issue cost Phrases: 41. ____ Designed to increase the market value of stock. 42. ____ Reduces the net proceeds from selling shares. 43. ____ Feature designed to favor preferred shareholders. 44. ____ Has no relationship to market value. 45. ____ May be reduced when shares are retired. Answer: 41-I; 42-J; 43-C; 44-F; 45-G Use the following to answer questions 46-50: 46-50. Listed below are ten terms followed by a list of phrases that describe or characterize five of the terms. Match each phrase with the correct term by placing the letter designating the best term in the space provided by the phrase. Terms: A. Cost method B. Cumulative C. Earnings-price ratio D. Limited liability company E. Par value F. Restriction of retained earnings G. Retained earnings H. Return on shareholders' equity I. Reverse stock split J. Share issue cost Phrases: 46. ____ Net income as a percentage of average book value. 47. ____ Paid-in capital and/or retained earnings affected at time of sale of treasury stock. 48. ____ Preferred practice is to disclose in the footnotes. 49. ____ Similar to an S corporation, but no limit on number of owners. 50. ____ Used in evaluating stock performance. Answer: 46-H; 47-A; 48-F; 49-D; 50-C 252 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition Chapter 18 Shareholders' Equity Multiple Choice Questions 51. The net assets of a corporation equal to: A) Contributed capital. B) Retained earnings. C) Shareholders' equity. D) None of the above. Answer: C Learning Objective: 1 Level of Learning: 1 52. Characteristics of the corporate form that have led to the growth of this form of business ownership include all of the following except: A) Ease of raising capital. B) Low government regulation. C) Limited liability. D) Ease of ownership transfer. Answer: B Learning Objective: 3 Level of Learning: 1 53. Retained earnings represent: A) Earned capital. B) Cash. C) Assets. D) Net assets. Answer: A Learning Objective: 6 Level of Learning: 1 54. The two primary components of shareholders' equity are: A) Preferred stock and retained earnings. B) The par value of common stock plus retained earnings. C) Paid-in capital and retained earnings. D) Preferred and common stock. Answer: C Learning Objective: 1 Level of Learning: 1 55. Unrealized pension cost is included among shareholders' equity as: A) Future earnings. B) An addition to paid-in capital. C) A restriction of retained earnings. D) A contra account. Answer: D Learning Objective: 2 Level of Learning: 1 56. Details of each class of stock must be reported: A) On the face of the balance sheet only. B) In disclosure notes only. C) On the face of the balance sheet or in disclosure notes. D) On the face of the balance sheet and in disclosure notes. Answer: C Learning Objective: 1 Level of Learning: 1 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 253 Chapter 18 Shareholders' Equity 57. In terms of business volume, the dominant form of business organization is the: A) Partnership. B) Corporation. C) Limited liability company. D) Proprietorship. Answer: B Learning Objective: 1 Level of Learning: 58. The corporate charter sometimes is known as (a): A) Articles of incorporation. B) Statement of organization. C) By-laws. D) Registration statement. Answer: A Learning Objective: 1 Level of Learning: 1 59. The preemptive right refers to the shareholder's right to: A) Maintain a proportional ownership interest in the corporation. B) Vote for members of the board of directors. C) Receive a share of dividends. D) Share in profits proportionally with all other stockholders. Answer: A Learning Objective: 3 Level of Learning: 1 60. Common shareholders usually have all of the following rights except: A) To share in the profits. B) To share in assets upon liquidation. C) To elect a board of directors. D) To participate in the day-to-day operations. Answer: D Learning Objective: 3 Level of Learning: 1 61. Corporations are formed in accordance with: A) The Model Business Corporation Act. B) Federal statutes. C) The laws of individual states. D) Federal trade commission regulations. Answer: C Learning Objective: 1 Level of Learning: 1 62. Preferred stock is called preferred because it usually has two preferences. These preferences relate to: A) Dividends and voting rights. B) Par value and dividends. C) The preemptive right and voting rights. D) Assets at liquidation and dividends. Answer: D Learning Objective: 7 Level of Learning: 1 254 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition Chapter 18 Shareholders' Equity 63. The par value of shares issued is normally recorded in the: A) Paid-in capital in excess of par account. B) Common stock account. C) Retained earnings account. D) Appropriated retained earnings account. Answer: B Learning Objective: 3 Level of Learning: 1 64. Authorized capital stock refers to the total number of shares: A) Outstanding. B) Issued. C) Issued and outstanding. D) That can be issued. Answer: D Learning Objective: 3 Level of Learning: 1 65. The par value of common stock represents: A) The arbitrary dollar amount assigned to a share of stock. B) The liquidation value of a share. C) The book value of a share of stock. D) The amount received when the stock was issued. Answer: A Learning Objective: 3 Level of Learning: 1 66. Which of the following statements is true when dividends are not declared or paid on cumulative preferred stock? A) The shareholders must be allowed to convert their shares to common stock. B) The unpaid dividends are accrued as a liability. C) The unpaid dividends are reported in a note to the financial statements. D) The unpaid dividends accrue interest until paid. Answer: C Learning Objective: 7 Level of Learning: 2 67. Outstanding common stock is: A) Stock that is performing well on the New York Stock Exchange. B) Stock that has been authorized by the state for issue. C) Stock held in the corporate treasury. D) Stock in the hands of shareholders. Answer: D Learning Objective: 1 Level of Learning: 1 68. Issued stock refers to the number of shares: A) Outstanding plus treasury shares. B) Shares issued for cash. C) In the hand of shareholders. D) That may be issued under state law. Answer: A Learning Objective: 1 Level of Learning: 1 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 255 Chapter 18 Shareholders' Equity 69. Preferred shares that are participating may: A) Vote for the board of directors. B) Be exchanged for common stock. C) Receive extra cash during corporate liquidation. D) Receive additional dividends beyond the stated amount. Answer: D Learning Objective: 7 Level of Learning: 2 70. The Model Business Corporation Act: A) Uses the word "common" and "preferred" in describing distinguishing characteristics of stock. B) Defines legal capital as the amount of net assets not available for distribution to shareholders. C) Provides guidance for choosing an appropriate par value for new issues of stock. D) Has affected the laws of most states. Answer: D Learning Objective: 1 Level of Learning: 1 71. When preferred stock carries a redemption privilege, the shareholders may: A) Purchase new shares as they become available. B) Exchange their preferred shares for common shares. C) Surrender the preferred shares for a specified amount of cash. D) Purchase treasury shares ahead of common shareholders. Answer: C Learning Objective: 1 Level of Learning: 2 72. Treasury shares are most often reported as: A) A reduction of total shareholders' equity. B) A reduction of total paid-in capital. C) A reduction to retained earnings. D) An expense on the income statement. Answer: A Learning Objective: 5 Level of Learning: 1 73. When treasury shares accounted for under the cost method are sold at a price above cost: A) A gain account is credited. B) A loss is reported. C) A revenue account is credited. D) Additional paid-in capital is increased. Answer: D Learning Objective: 5 Level of Learning: 2 74. When treasury shares accounted for under the cost method are resold at a price below cost: A) Additional paid-in capital and/or retained earnings is reduced. B) Additional paid-in capital and/or retained earnings is increased. C) Retained earnings is always reduced. D) A loss is taken on the income statement. Answer: A Learning Objective: 5 Level of Learning: 2 256 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition Chapter 18 Shareholders' Equity 75. When treasury stock is purchased for an amount greater than its par value, what is the effect on total shareholders' equity under the cost method? A) Increase B) Decrease C) No effect D) Cannot tell from the given information. Answer: B Learning Objective: 5 Level of Learning: 2 76. When stock is issued in exchange for property, the best evidence of market value might be any of the following except: A) The appraised value of the property received. B) The selling price of the stock in a recent transaction. C) The price of the stock quoted on the stock exchange. D) The average book value of outstanding stock. Answer: D Learning Objective: 3 Level of Learning: 2 77. When stock is issued under a stock subscription: A) No entry is recorded until the shares are fully paid for. B) An asset is recorded for the receivable from share purchase contract. C) A credit is made to common stock upon receipt of the subscription. D) A debit is made to paid-in capital - excess of par. Answer: C Learning Objective: 3 Level of Learning: 1 78. The SEC requires that a receivable from a share purchase contract be reported: A) As a reduction of paid-in capital. B) As a current asset. C) As a noncurrent asset. D) As an increase in shareholders' equity. Answer: A Learning Objective: 3 Level of Learning: 1 79. When preferred stock is purchased by the issuing corporation at a price below the original issue price and the stock is retired, the transaction: A) Increases net income for the year. B) Increases retained earnings. C) Increases revenue for the year. D) Increases paid-in capital share repurchase. Answer: D Learning Objective: 5 Level of Learning: 2 80. When more than one security is sold for a single price and the total selling price is not equal to the sum of the market prices, the cash received is allocated between the securities based on: A) Relative book values. B) Par values. C) Relative market values. D) The earnings per share. Answer: C Learning Objective: 3 Level of Learning: 2 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 257 Chapter 18 Shareholders' Equity 81. The retained earnings balance reported on the balance sheet typically is not affected by: A) Net income. B) A prior period adjustment. C) Dividends paid. D) Restrictions. Answer: D Learning Objective: 6 Level of Learning: 2 82. When dividends are declared in one fiscal year and paid in the next fiscal year, the liability for the dividend should be recorded as of the: A) Date the dividend is declared. B) Last day of the fiscal year. C) Date of record. D) Date of payment. Answer: A Learning Objective: 7 Level of Learning: 1 83. When a property dividend is declared, the reduction in retained earnings is for: A) The book value of the property on the date of declaration. B) The book value of the property on the date of distribution. C) The fair market value of the property on the date of distribution. D) The fair market value of the property on the date of declaration. Answer: D Learning Objective: 7 Level of Learning: 2 84. Any dividend that is considered to be a liquidating dividend will: A) Reduce retained earnings. B) Reduce additional paid-in capital. C) Increase additional paid-in capital. D) Reduce the common stock account. Answer: B Learning Objective: 7 Level of Learning: 1 85. Retained earnings represent a company's: A) Undistributed net income. B) Undistributed net assets. C) Extra paid-in capital. D) Undistributed cash. Answer: A Learning Objective: 6 Level of Learning: 1 86. When a property dividend is declared, the property to be distributed should be revalued to fair market value as of the: A) Record date. B) Date of distribution. C) Date of declaration. D) Announcement date. Answer: C Learning Objective: 7 Level of Learning: 2 258 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition Chapter 18 Shareholders' Equity 87. The declaration and issuance of a common stock dividend: A) Has no effect on assets, liabilities, or total shareholders' equity. B) Decreases total shareholders' equity and increases common stock. C) Decreases assets and decreases total shareholders' equity. D) Does not change retained earnings or paid-in capital. Answer: A Learning Objective: 8 Level of Learning: 1 88. Stock splits are issued primarily to: A) Increase the number of outstanding shares. B) Increase the number of authorized shares. C) Increase legal capital. D) Induce a decline in market value per share. Answer: D Learning Objective: 8 Level of Learning: 1 89. A small stock dividend is defined as one that is: A) Less than or equal to 25%. B) Less than 20%. C) Less than or equal to 20%. D) Less than 25%. Answer: D Learning Objective: 8 Level of Learning: 1 90. The common stock account on a company's balance sheet is measured as: A) The number of common shares outstanding x the stock's par value per share. B) The number of common shares outstanding x the stock's current market value per share. C) The number of common shares issued x the stock's par value per share. D) None of the above is correct. Answer: C Learning Objective: 1 Level of Learning: 1 Use the following to answer questions 91-94: The following partial information is taken from the comparative balance sheet of Levi Corporation: Shareholders’ equity 12/31/2006 12/31/2005 Common stock, $5 par value; 20 million shares authorized; 15 million shares issued and 9 million shares $75 million $45 million outstanding at 12/31/2006; and ____million shares issued and ____shares outstanding at 12/31/2005. Additional paid-in capital on 520 million 392 million common stock Retained earnings 197 million 157 million Treasury common stock, at cost, 6 million shares at 12/31/2006 and 4 (72 million) (50 million) million shares at 12/31/2005 Total shareholders’ equity $720 million $544 million Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 259 Chapter 18 Shareholders' Equity 91. How many of Levi's common shares were outstanding on 12/31/05? A) 14 million B) 9 million C) 5 million D) None of the above is correct. Answer: C Learning Objective: 1 Level of Learning: 2 Rationale: 5 million shares were outstanding at this date (9 million were issued, and 4 million shares were in the treasury). 92. What was the average price of the additional shares issued by Levi in 2006? A) $5 per share B) $26 per share C) $39 per share D) Cannot be determined from the given information. Answer: B Learning Objective: 1 Level of Learning: 2 Rationale: Proceeds = Increase in common stock + increase in additional paid-in capital = $30 million + $128 million = $158 million Average issue price = Proceeds/Number of shares issued = $158 million/6 million shares = $26/share 93. What was the average price (rounded) of the additional treasury shares purchased by Levi during 2006? A) $11 per share B) $12 per share C) $12.50 per share D) None of the above is correct. Answer: A Learning Objective: 1 Level of Learning: 2 Rationale: Cost of additional shares = $72 million – $50 million = $22 million Average price paid = Cost/number of additional treasury shares = $22 million/2 million shares = $11 per share 94. What was the amount of net income earned by Levi during 2006? A) $0 B) $40 million C) $62 million D) Cannot be determined from the given information. Answer: D Learning Objective: 1 Level of Learning: 2 Rationale: The increase in retained earnings is a composite of net income and changes due to dividends. You cannot determine the portion due to net income unless you have information about the dividends. 260 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition Chapter 18 Shareholders' Equity Use the following to answer questions 95-99: The 12/31/05 balance sheet of Despot Inc. included the following: Common stock, 25 million shares at $20 par $500 million Paid-in capital—excess of par 3,000 million Retained earnings 980 million 95. In January, 2006, Despot recorded a transaction with this journal entry: Cash $150 million Common stock $100 million Paid-in capital—excess of par 50 million The transaction was: A) Issue of 2 million shares of common stock at par value B) Issue of common stock for $150 million in cash C) Receipt of $20 per share for a new stock issue D) All of the above are correct. Answer: B Learning Objective: 3 Level of Learning: 2 96. In February, 2006, Despot declared cash dividends of $12 million to be paid in April of that year. What effect did the April transaction have on Despot's accounts? A) Decreased assets and liabilities B) Decreased assets and shareholders' equity C) Increased liabilities and decreased shareholders' equity D) None of the above is correct. Answer: A Learning Objective: 7 Level of Learning: 2 97. In October, 2006, Despot's Board of Directors declared and distributed a 1% common stock dividend when the market value of the common stock was $60 per share. In recording this transaction, Despot would: A) Debit retained earnings for $18 million B) Credit paid-in capital – excess of par for $18 million C) Credit common stock for $18 million D) None of the above is correct. Answer: A Learning Objective: 8 Level of Learning: 2 Rationale: Shares to be distributed = .01 x 30 million (including the January issue) = 300,000 Retained earnings: Market value of shares = 300,000 x $60 = $18 million 98. Which of the following Despot transactions decreases its retained earnings? A) A property dividend B) A stock dividend C) A cash dividend D) All of the above are correct. Answer: D Learning Objective: 8 Level of Learning: 2 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 261 Chapter 18 Shareholders' Equity 99. Despot declared a property dividend to give marketable securities to its common stockholders. The securities had cost Despot $7 million and currently had a fair value of $16 million. Which of the following would be included in recording the property dividend declaration? A) Increase in a liability for $16 million. B) Decrease in retained earnings for $7 million. C) Decrease in marketable securities by $16 million. D) All of the above are correct. Answer: A Learning Objective: 7 Level of Learning: 2 100. Pug Corporation has 10,000 shares of $10 par common stock outstanding and 20,000 shares of $100 par, 6% noncumulative, nonparticipating preferred stock outstanding. Dividends have not been paid for the past two years. This year, a $150,000 dividend will be paid. What are the dividends per share for preferred and common, respectively? A) $7.50; $0. B) $6; $3. C) $6; $1.50. D) None of the above is correct. Answer: C Learning Objective: 7 Level of Learning: 3 Rationale: Preferred: $6 per share x 20,000 = $120,000 Common: ($150,000 $120,000)/20,000 = $1.50 101. Beagle Corporation has 20,000 shares of $10 par common stock outstanding and 10,000 shares of $100 par, 6% cumulative, nonparticipating preferred stock outstanding. Dividends have not been paid for the past two years. This year, a $300,000 dividend will be paid. What are the dividends per share payable to preferred and common, respectively? A) $6; $12. B) $18; $6. C) $6; $6. D) None of the above is correct. Answer: B Learning Objective: 7 Level of Learning: 3 Rationale: Preferred: $6 x 3 x 10,000 = $180,000 Common: ($300,000 $180,000)/20,000 = $6 262 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition Chapter 18 Shareholders' Equity 102. The changes in account balances for Elder Company for 2006 are as follows: Assets $480,000 debit Common stock 250,000 credit Liabilities 160,000 credit Paid-in capital – excess of par 30,000 credit Assuming the only charges in retained earnings in 2006 were for net income and a $50,000 dividend, what was net income for 2006? A) $40,000. B) $60,000. C) $70,000. D) $90,000. Answer: D Learning Objective: 1 Level of Learning: 3 Rationale: Debits Credits Assets $480,000 Common stock $250,000 Liabilities 160,000 Paid-in capital – excess of par 30,000 Dividends 50,000 Net income _______ ______? Totals $530,000 $530,000 Net income = $90,000 103. The changes in account balances for Allen Inc. for 2006 are as follows: Assets $225,000 debit Common stock 125,000 credit Liabilities 80,000 credit Paid-in capital - excess of par 15,000 credit Assuming the only changes in retained earnings in 2006 were for net income and a $25,000 dividend, what was net income for 2006? A) $30,000 B) $20,000 C) $15,000 D) $ 5,000 Answer: A Learning Objective: 1 Level of Learning: 3 Rationale: Debits Credits Assets $225,000 Common stock $125,000 Liabilities 80,000 Paid-in capital – excess of par 15,000 Dividends 25,000 Net income _______ ______? Totals $250,000 $250,000 Net income = $30,000 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 263 Chapter 18 Shareholders' Equity 104. Poodle Corporation was organized on January 3, 2006. The firm was authorized to issue 100,000 shares of $5 par common stock. During 2006, Poodle had the following transactions relating to shareholders' equity: Issued 30,000 shares of common stock at $7 per share. Issued 20,000 shares of common stock at $8 per share. Reported a net income of $100,000. Paid dividends of $50,000. What is total contributed capital at the end of 2006? A) $420,000. B) $370,000. C) $470,000. D) $320,000. Answer: B Learning Objective: 3 Level of Learning: 3 Rationale: (30,000 x $7) + (20,000 x $8) = $370,000 105. Roberto Corporation was organized on January 1, 2006. The firm was authorized to issue 100,000 shares of $5 par common stock. During 2006, Roberto had the following transactions relating to shareholders' equity: Issued 10,000 shares of common stock at $7 per share. Issued 20,000 shares of common stock at $8 per share. Reported a net income of $100,000. Paid dividends of $50,000. Purchased 2,000 shares of treasury stock at $10 (part of the 20,000 shares issued at $8). What is total shareholders' equity at the end of 2006? A) $270,000. B) $300,000. C) $250,000. D) $200,000. Answer: C Learning Objective: 1 Level of Learning: 2 Rationale: Issue of stock (10,000 x $7) $70,000 Issue of stock (20,000 x $8) 160,000 Net income 100,000 Dividends (50,000 ) Treasury stock (3,000 x $10) (30,000 ) $250,000 264 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition Chapter 18 Shareholders' Equity 106. Boxer Company owned 20,000 shares of King Company that were purchased in 2004 for $500,000. On May 1, 2006, Boxer declared a property dividend of 1 share of King for every 10 shares of Boxer stock. On that date, there were 50,000 shares of Boxer stock outstanding. The market value of the King stock was $30 per share on the date of declaration and $32 per share on the date of distribution. By how much is retained earnings reduced by the property dividend? A) $0. B) $150,000. C) $160,000. D) $300,000. Answer: B Learning Objective: 6 Level of Learning: 3 Rationale: (500,000/10) x $30 = $150,000 107. On January 1, 2006, the board of directors of Goby Inc. declared a $540,000 dividend. The following data are from the balance sheet of Goby on that date: Capital stock $500,000 Additional paid-in capital $300,000 Retained earnings $400,000 Paid-in capital from sale of treasury stock $ 50,000 How much is the liquidating dividend? A) $140,000 B) $240,000 C) $290,000 D) None of the above is correct. Answer: A Learning Objective: 7 Level of Learning: 3 Rationale: Total dividend $540,000 Retained earnings 400,000 Liquidating dividends $140,000 108. ABC declared a property dividend. The dividend consisted of 10,000 common shares of its investment in XYZ Company. The shares had originally been purchased at $4 per share and had a $1 par value. The value of the shares on the declaration date is $7 per share. What is the first entry that should be recorded related to this dividend? A) Retained earnings 70,000 Property dividends payable 70,000 B) Retained earnings 70,000 Property dividends payable 40,000 Gain 30,000 C) Investment in XYZ 30,000 Retained earnings 30,000 D) Investment in XYZ 30,000 Gain 30,000 Answer: D Learning Objective: 7 Level of Learning: 3 Rationale: Investment in XYZ [10,000 x ($7 – $4)] 30,000 Gain on appreciation of investment 30,000 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 265 Chapter 18 Shareholders' Equity 109. The board of directors of Capstone Inc. declared a $0.60 per share cash dividend on its $1 par common stock. On the date of declaration, there were 50,000 shares authorized, 20,000 shares issued, and 5,000 shares held as treasury stock. What is the entry for the dividend declaration? A) Retained earnings 9,000 Dividends payable 9,000 B) Retained earnings 9,000 Cash 9,000 C) Retained earnings 10,000 Dividends payable 10,000 D) Retained earnings 10,000 Cash 10,000 Answer: A Learning Objective: 7 Level of Learning: 3 Rationale: Retained earnings [(20,000 – 5,000) x $.60] 9,000 Dividends payable 9,000 110. On October 1, 2006, Chief Corporation declared and issued a 20% stock dividend. Prior to this date, Chief had 40,000 shares of common stock outstanding with a $5 par value. The market value of Chief Corporation on the date of declaration was $10 per share. As a result of this dividend, Chief's retained earnings will: A) Decrease by $80,000. B) Not change. C) Decrease by $40,000. D) Increase by $80,000. Answer: A Learning Objective: 6 Level of Learning: 3 Rationale: Retained earnings (8,000 shares x $10/share) 80,000 Common stock (8,000 shares x $5/share) 40,000 Paid-in capital–excess of par 40,000 111. Lucid Company declared a property dividend of 20,000 shares of $1 par Polk Company common stock. The Polk stock was purchased for $5 per share. Market value was $10 per share on the declaration date and $11 per share on the distribution date. What is the amount of the dividend? A) $100,000. B) $200,000. C) $220,000. D) $300,000. Answer: B Learning Objective: 7 Level of Learning: 3 Rationale: 20,000 x $10 = $200,000 266 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition Chapter 18 Shareholders' Equity Use the following to answer questions 112-114: As of December 31, 2006, Warner Corporation reported the following: Dividends payable 20,000 Treasury stock 600,000 Paid-in capital-share repurchase 20,000 Other paid-in capital accounts 4,000,000 Retained earnings 3,000,000 During 2007, half of the treasury stock was resold for $240,000; net income was $600,000; cash dividends declared were $1,500,000; and stock dividends declared were $500,000. 112. What was shareholders' equity as of December 31, 2006? A) $7,020,000. B) $6,440,000. C) $6,420,000. D) $6,400,000. Answer: C Learning Objective: 1 Level of Learning: 3 Rationale: Paid-in capital–share repurchase $ 20,000 Other paid-in capital accounts 4,000,000 Retained earnings 3,000,000 Treasury stock (600,000 ) Total shareholders’ equity $6,420,000 113. The 2007 sale of half of the treasury stock would: A) Reduce income before tax by $60,000. B) Reduce retained earnings by $60,000. C) Increase total shareholders' equity by $300,000. D) Decrease retained earnings by $40,000. Answer: D Learning Objective: 5 Level of Learning: 3 Rationale: Cash 240,00 0 Paid-in capital–share repurchase 20,000 Retained earnings 40,000 Treasury stock ($600,000/2) 300,00 0 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 267 Chapter 18 Shareholders' Equity 114. What would shareholders' equity be as of December 31, 2007? A) Amount is not shown. B) $5,760,000. C) $5,820,000. D) $6,760,000. Answer: B Learning Objective: 1 Level of Learning: 3 Rationale: Paid-in- Other Paid-in Capital Share Capital Retained Treasury (Dr) Cr Repurchase Accounts Earnings Stock Total 12/31/2006 $20,000 $4,000,000 $3,000,000 $(600,000 ) $6,420,000 Sale of Treasury Stock (20,000 ) (40,000 ) 300,000 240,000 Net Income 600,000 600,000 Cash Dividends (1,500,000 ) (1,500,000 ) Stock Dividends _________ 500,000 (500,000 ) ________ ________ $0 $4,500,000 $1,560,000 $(300,000 ) $5,760,000 115. Olsson Corporation received a check from its underwriters for $72 million. This was for the issue of one million of its $5 par value stock that the underwriters expect to sell for $52 per share. Which is the correct entry to record the issue of the stock? A) Cash 72,000,00 0 Stock issue expense 20,000,00 0 Stock contract receivable 52,000,00 0 B) Cash 72,000,00 0 Deferred stock issue revenue 20,000,00 0 Common stock 5,000,000 Paid-in capital—excess of par 47,000,00 0 C) Cash 72,000,00 0 Common stock 72,000,00 0 D) Cash 72,000,00 0 Common stock 5,000,000 Paid-in capital—excess of par 67,000,00 0 Answer: D Learning Objective: 3 Level of Learning: 3 Rationale: Cash 72,000,000 Common stock (1,000,000 x $5 par) 5,000,000 Paid-in capital – excess of par 67,000,000 268 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition Chapter 18 Shareholders' Equity Use the following to answer questions 116-117: Black Enterprises reported the following (in thousands of dollars) as of December 31, 2006. All accounts have normal balances. Deficit 3,000 Common stock 2,000 Paid-in capital-stock options 1,000 Treasury stock at cost 400 Paid-in capital-excess of par 30,000 During 2007 (in thousands of dollars), net income was $9,000; 25% of the treasury stock was resold for $450; cash dividends declared were $600; cash dividends paid were $500; and all of the stock options expired. 116. What (in thousands of dollars) was shareholders' equity as of December 31, 2006? A) $29,600. B) $35,600. C) $30,400. D) $28,600. Answer: A Learning Objective: 1 Level of Learning: 3 Rationale: Common stock $2,000 Paid-in capital–excess of par 30,000 Paid-in capital–stock options 1,000 Retained earnings (3,000 ) Treasury stock (400 ) Total shareholders’ equity $29,600 117. What (in thousands of dollars) was shareholders' equity as of December 31, 2007? A) $38,100. B) $37,450. C) $38,450. D) $38,350. Answer: C Learning Objective: 1 Level of Learning: 3 Rationale: Shareholders’ equity 12/31/2006 $29,600 (determined above) Net income 9,000 Sale of treasury stock 450 Dividends declared (600 ) Shareholders’ equity 12/31/2007 $38,450 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 269 Chapter 18 Shareholders' Equity 118. Montgomery & Co., a well established law firm, provided 500 hours of its time to Fink Corporation in exchange for 1,000 shares of Fink's $5 par common stock. Mitchell's usual billing rate is $700 per hour, and Fink's stock has a book value of $250 per share. By what amount will Fink's additional paid-in capital increase for this transaction? A) $345,000. B) $295,000. C) $350,000. D) $300,000. Answer: A Learning Objective: 3 Level of Learning: 3 Rationale: Legal expense (500 x $700) 350,000 Common stock (1,000 x $5) 5,000 Paid-in capital 345,000 119. Three years ago, Emily Corporation issued 12,000 shares of $100 par, convertible, preferred stock for $105 per share. Each share of preferred can be converted into 4 shares of $1 par common stock. Half of the preferred shares were converted in the current year when the common stock was trading for $40 per share. How much will total paid-in capital increase as a result of the conversion? A) $630,000. B) $960,000. C) $330,000. D) $0. Answer: D Learning Objective: 3 Level of Learning: 3 Rationale: Total paid-in capital is unchanged by the conversion. 270 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition Chapter 18 Shareholders' Equity Problems 120. During its first year of operations, Denton Corporation issued 300,000 shares of its $1 par common stock. During the fiscal year ending December 31, 2005, net income was $2,000,000 and no dividends were paid. Required: (1.) Prepare the journal entry to record the issue of the shares for cash at a price of $10 per share. (2.) Prepare the journal entry to record the issue by subscription for $10 per share, with 50% received as a down payment. (3.) Prepare the journal entry to record the receipt of the remainder of the subscription during 2006. Answer: 1.) Cash (300,000 x $10) 3,000,000 Common stock (300,000 x $1) 300,000 Paid-in capital - excess of par 2,700,000 2.) Cash (50% x $3,000,000) 1,500,000 Receivable from share purchase contract 1,500,000 Common stock 300,000 Paid-in capital - excess of par 2,700,000 3.) Cash 1,500,000 Receivable from share purchase contract 1,500,000 Learning Objective: 3 Level of Learning: 3 121. During its first year of operations, Cole's Electronics Inc. completed the following transactions relating to shareholders' equity. Jan. 5: Issued 1,000,000 shares of common stock for $25 per share. Feb. 12: Issued 20,000 shares of common stock to accountants for professional services. The articles of incorporation authorize 5,000,000 shares of common stock with a par value of $1 per share and 1,000,000 preferred shares with a par value of $100 per share. Required: Record the above transactions in general journal form. Answer: 1.) January 5 Cash (1,000,000 x $25) 25,000,000 Common stock (1,000,000 x $1) 1,000,000 Paid-in capital - excess of par 24,000,000 2.) February 12 Professional services expense (20,000 x $25) 500,000 Common stock (20,000 x $1) 20,000 Paid-in-capital - excess of par 480,000 Learning Objective: 3 Level of Learning: 3 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 271 Chapter 18 Shareholders' Equity 122. During its first year of operations, Criswell Inc. completed the following transactions relating to shareholders' equity. Jan. 5: Issued 300,000 of its common shares for $8 per share and 3,000 preferred shares at $110. Feb. 12: Issued 50,000 shares of common stock in exchange for equipment with a known cash price of $310,000. The articles of incorporation authorize 5,000,000 shares with a par value of $1 per share of common and 1,000,000 preferred shares with a par value of $100 per share. Required: Record the above transactions in general journal form. Answer: 1.) January 5 Cash (300,000 x $8) 2,400,000 Common stock (300,000 x $1) 300,000 Paid-in capital - excess of par, common 2,100,000 Cash (3,000 x $110) 330,000 Preferred stock (3,000 x $100) 300,000 Paid-in capital - excess of par, preferred 30,000 2.) February 12 Equipment (cash price) 310,000 Common stock (50,000 x $1) 50,000 Paid-in capital - excess of par 260,000 Learning Objective: 3 Level of Learning: 3 123. During the current year JET Industries issued 5 million of its $1 par common shares to its underwriters for $25,000,000 less promotional and accounting services of $500,000 to effect the issue. Required: Prepare the journal entry to record the issuance of the shares. Answer: Cash ($25,000,000 - $500,000) 24,500,000 Common stock (5,000,000 x $1) 5,000,000 Paid-in capital – excess of par 19,500,000 Learning Objective: 3 Level of Learning: 3 272 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition Chapter 18 Shareholders' Equity 124. The shareholders' equity of Nick Co. includes the items shown below. The board of directors of Nick declared cash dividends of $4 million, $8 million, and $50 million in each of its first 3 years of operation: 2004, 2005, 2006, respectively. Common stock, $1 par, 50,000,000 shares outstanding Preferred stock, 6%, $100 par, 1,000,000 shares outstanding Required: Determine the amount of dividends per share on preferred and common stock for each of the three years. The preferred stock is noncumulative and nonparticipating. Answer: ($ in millions, except per share amounts) Preferred Common 2004 $4/1 = $4 0 2005 $6/1 = $6 ($8-$6)/50=$0.04 2006 $6/1 = $6 ($50 - $6)/50 = $.88 Preferred annual dividend = $100 par x 6% = $6 per share $6 per share x 1,000,000 shares = $6,000,000 Learning Objective: 7 Level of Learning: 3 125. The shareholders' equity of Crystal Company includes the items shown below. The board of directors of Crystal declared cash dividends of $3 million, $6 million, and $50 million in each of its first 3 years of operation: 2004, 2005, 2006, respectively. Common stock, $1 par, 50,000,000 shares outstanding Preferred stock, 6%, $100 par, 1,000,000 shares outstanding Required: Determine the amount of dividends per share on preferred and common stock for each of the three years. The preferred stock is cumulative and nonparticipating. Answer: ($ in millions, except per share amounts) Preferred Common 2004 $3/1 = $3 0 2005 $6/1 = $6 0 2006 $9/1 = $9 ($50 - $9)/50 = $.82 Preferred annual dividend = $100 par x 6% = $6 per share $6 per share x 1,000,000 shares = $6,000,000. In 2006, the preferred shareholders will receive their regular dividend ($6) plus the dividends in arrears from 2004 ($3). Learning Objective: 7 Level of Learning: 3 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 273 Chapter 18 Shareholders' Equity 126. Cal Cookie Company (CCC) has 100 million shares of $1 par common stock authorized. The transactions below caused changes in CCC's outstanding shares. January 4, 2006: Repurchased and retired 1 million shares at $8 per share. June 25, 2006: Repurchased and retired 2 million shares at $2 per share. Prior to the transactions, CCC's shareholders' equity included the following: Common stock, 80 million shares at $1 par $ 80,000,000 Paid-in capital excess of par 160,000,000 Retained earnings 120,000,000 Required: Record entries for the above transactions. Answer: January 4, 2006 Common stock (1 million x $1 par) 1,000,000 Paid-in capital – excess of par (1 million x $2*) 2,000,000 Retained earnings (difference) 5,000,000 Cash (1 million x $8) 8,000,000 June 25, 2006 Common stock (2 million x $1 par) 2,000,000 Paid-in capital – excess of par (2 million x $2) 4,000,000 Cash ( 2 million x $2) 4,000,000 Paid-in capital – share repurchase (difference) 2,000,000 *$160,000,000/80,000,000 = $2 Learning Objective: 4 Level of Learning: 3 127. In 2006, Poe's Products completed the treasury stock transactions described below. January 2: Reacquired 10 million shares at $16 per share. February 15: Sold 3 million shares at $20 per share. September 20: Sold 3 million treasury shares at $15 per share. Poe had issued 50 million shares of its $1 par common stock for $18 several years ago. Required: Record the above transactions, assuming that Poe's Products uses the cost method. 274 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition Chapter 18 Shareholders' Equity Answer: ($ in millions, except per share amounts) January 2, 2006 Treasury stock (10 x $16) 160 Cash (10 x $16) 160 February 15, 2006 Cash (3 x $20) 60 Treasury stock (3 x $16) 48 Paid-in capital – share repurchase 12 September 20, 2006 Cash (3 x $15) 45 Paid-in capital - share repurchase 3 Treasury stock (3 x $16) 48 Learning Objective: 5 Level of Learning: 3 128. In 2006, Southwestern Corporation completed the treasury stock transactions listed below. February 2: Reacquired 70,000 shares at $12. March 17: Sold 20,000 shares at $14. May 17: Sold 25,000 shares at $8. Southwestern had issued 100,000 shares of its $1 par common stock for $10 several months ago. Required: Prepare the journal entries to record the above transactions using the cost method. Answer: February 2, 2006 Treasury stock (70,000 x $12) 840,000 Cash (70,000 x $12) 840,000 March 17, 2006 Cash (20,000 x $14) 280,000 Treasury stock (20,000 x $12) 240,000 Paid-in capital - share repurchase 40,000 May 17, 2006 Cash (25,000 x $8) 200,000 Paid-in capital - share repurchase 40,000 Retained earnings (to balance) 60,000 Treasury stock (25,000 x $12) 300,000 Learning Objective: 5 Level of Learning: 3 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 275 Chapter 18 Shareholders' Equity 129. The December 31, 2006, balance sheet of Springer Company included the following: Common stock, 20 million shares outstanding at $1 par $ 20,000,000 Paid-in capital – excess of par 100,000,000 Retained earnings 115,000,000 Springer completed the following transactions in 2006 relating to treasury stock: March 17: Reacquired 5 million shares at $10. May 17: Reacquired 3 million shares at $9. August 10: Sold 6 million shares at $12. Required: Assuming Springer uses the cost method, prepare journal entries to record the foregoing transactions on a FIFO basis. Answer: (in millions, except per share amounts) March 17, 2006 Treasury stock (5 x $10) 50 Cash 50 May 17, 2006 Treasury stock (3 x $9) 27 Cash 27 August 10, 2006 Cash (6 x $12) 72 Treasury stock * 59 Paid-in capital – share repurchase 13 *5 x $10 = $ 50 1 x $9 = 9 $ 59 Learning Objective: 5 Level of Learning: 3 276 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition Chapter 18 Shareholders' Equity 130. The December 31, 2006 balance sheet of MBI Company included the following: Common stock, 20 million shares outstanding at $1 par $ 20,000,000 Paid-in capital - excess of par 100,000,000 Retained earnings 115,000,000 MBI completed the following transactions in 2006 relating to treasury stock: March 17: Reacquired 2 million shares at $10. May 17: Reacquired 2 million shares at $9. August 10: Issued 3 million shares at $12. Required: Assuming MBI uses the cost method, prepare journal entries to record the foregoing transactions on a weighted average basis. Answer: (in millions, except per share amounts) March 17, 2006 Treasury stock (2 x $10) 20 Cash May 17, 2006 Treasury stock (2 x $9) 18 Cash August 10, 2006 Cash (3 x $12) 36 Treasury stock * Paid-in capital – share repurchase *2 x $10 = $ 20,000,000 2 x $9 = $ 18,000,000 $ 38,000,000 $38/4 = $9.50 per share 3 x $9.50 = $28.5 Learning Objective: 5 Level of Learning: 3 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 277 Chapter 18 Shareholders' Equity 131. ZIP Company owns 40,000 shares of the common stock of PIK Company. ZIP decided to divest itself of this investment by distributing the PIK shares in the form of a property dividend. The dividend ratio is one share of PIK for every four shares of ZIP common held by shareholders. ZIP has 160,000 common shares outstanding. On April 15, 2006, the date of declaration, PIK stock had a par value of $5 per share, a cost of $12 per share, and a market value of $17 per share. Required: Prepare any necessary journal entries. The shares were distributed on May 15, 2006, to stockholders of record on May 1, 2006. Answer: April 15, 2006 Investment in PIK common stock 200,000 [(40,000 x ($17 - $12)] Gain on investment 200,000 Retained earnings (40,000 x $17) 680,000 Property dividends payable 680,000 May 1, 2006 NO ENTRY May 15, 2006 Property dividends payable 680,000 Investment in PIK common stock 680,000 Learning Objective: 7 Level of Learning: 3 278 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition Chapter 18 Shareholders' Equity 132. Fowler Co.'s balance sheet showed the following at December 31, 2006: Capital stock, $10 par $100,000 Paid-in capital - excess of par 50,000 Retained earnings 20,000 A cash dividend is declared on December 31, 2006, and is payable on January 20, 2007, to shareholders of record on January 10, 2007. Required: (1.) Prepare all appropriate journal entries, assuming a cash dividend in the amount of $1.00 per share. (2.) Prepare all appropriate journal entries, assuming a cash dividend in the amount of $5.00 per share. Answer: (1.) December 31, 2006 Retained earnings 10,000 [($1 x ($100,000/$10)] Cash dividends payable 10,000 January 10, 2007 NO ENTRY January 20, 2007 Cash dividends payable 10,000 Cash 10,000 (2.) December 31, 2006 Retained earnings 20,000 [($2 x ($100,000/$10)] Paid-in capital - excess of par* 30,000 Cash dividends payable 50,000 January 10, 2007 NO ENTRY January 20, 2007 Cash dividends payable 50,000 Cash 50,000 *Since the dividend exceeds the retained earnings balance, the excess is a liquidating dividend. Learning Objective: 7 Level of Learning: 3 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 279 Chapter 18 Shareholders' Equity 133. On September 15, 2006, the Scottie Company board of directors declared a 10% stock dividend on common shares. The shares are to be distributed on October 10, 2006, to shareholders of record on October 1, 2006. The market price per share on the date of declaration was $24 while the market price on the date of distribution was $26. The common stock has a par value of $5 per share and there were 1,000,000 shares outstanding prior to the declaration of the stock dividend. Required: Prepare any necessary journal entries to record the above transactions. Answer: September 15, 2006 Retained earnings 2,400,000 [(1,000,000 x 10%) x $24] Common stock dividends issuable 500,000 Paid-in capital - excess of par 1,900,000 October 1, 2006 NO ENTRY October 10, 2006 Common stock dividends issuable 500,000 Common stock 500,000 Learning Objective: 8 Level of Learning: 3 134. On October 15, 2006, a 5% stock dividend was declared and distributed. The market value of the common stock on this date was $32 per share. Fractional share rights represented 100,000 shares. Cash was paid in lieu of issuing fractional share rights. On the date of declaration and payment, the company had 10 million shares of common stock outstanding. The par value of the common shares was $5. Required: Prepare any necessary journal entries to record the above events. Answer: October 15, 2003 Retained earnings (500,000 x $32) 16,000,000 Common stock (500,000 - 100,000) x $5 2,000,000 Paid-in capital - excess of par 10,800,000 [(400,000 x ($32 - $5)] Cash (100,000 x $32) 3,200,000 10 million shares x 5% = 500,000 shares Learning Objective: 8 Level of Learning: 3 280 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition Chapter 18 Shareholders' Equity 135. On January 1, 2006, Gerlach Inc. had the following account balances in its shareholders' equity accounts. Common stock, $1 par, 250,000 shares issued 250,000 Paid-in capital excess of par, common 500,000 Paid-in capital excess of par, preferred 100,000 Preferred stock, $100 par, 10,000 shares outstanding 1,000,000 Retained earnings 2,000,000 Treasury stock, at cost, 5,000 shares 25,000 During 2006, Gerlach Inc. had several transactions relating to common stock. January 15: Declared a property dividend of 100,000 shares of Slowdown Company (book value, $10 per share, market value $9 per share). February 17: Distributed the property dividend. April 10: A 2 for 1 stock split was declared on outstanding common stock and affected in the form of a stock dividend. The market value of the stock was $4 on this date. July 18: Declared and distributed a 3% stock dividend on outstanding common stock; market value per share, $5. December 1: Declared a fifty cents per share cash dividend on the outstanding common shares. December 20: Paid the cash dividend. Required: Record the above transactions and events in journal entry format. Answer: January 15, 2006 Loss on investment [(100,000 - ($10 - $9)] 100,000 Investment in Slowdown Co. 100,000 Retained earnings (100,000 x $9) 900,000 Property dividend payable 900,000 February 17, 2006 Property dividend payable 900,000 Investment in Slowdown Co. 900,000 April 10, 2006 Retained earnings [(250,000 – 5,000) x $1] 245,000 Common stock 245,000 July 18, 2006 Retained earnings [(3% x 490,000) x $5] 73,500 Common stock [(3% x 490,000) x $1] 14,700 Paid-in capital - excess of par 58,800 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 281 Chapter 18 Shareholders' Equity December 1, 2006 Retained earnings (504,700 x $.50) 252,350 Cash dividends payable 252,350 December 20, 2006 Cash dividends payable 252,350 Cash 252,350 Learning Objective: 8 Level of Learning: 3 136. On January 1, 2006, Fascom had the following account balances in its shareholders' equity accounts. Common stock, $1 par, 250,000 shares issued 250,000 Paid-in capital excess of par, common 500,000 Paid-in capital excess of par, preferred 100,000 Preferred stock, $100 par, 10,000 shares outstanding 1,000,000 Retained earnings 2,000,000 Treasury stock, at cost, 5,000 shares 25,000 During 2006, Fascom Inc. had several transactions relating to common stock. January 15: Declared a property dividend of 100,000 shares of Slowdown Company (book value, $10 per share, market value $9 per share). February 17: Distributed the property dividend. April 10: A 2 for 1 stock split was declared on outstanding common stock and affected in the form of a stock dividend. The market value of the stock was $4 on this date. July 18: Declared and distributed a 3% stock dividend on outstanding common stock market value per share, $5. December 1: Declared a fifty cents per share cash dividend on the outstanding common shares. December 20: Paid the cash dividend. Required: Without preparing journal entries, prepare the shareholders' equity section of Fascom's balance sheet as of December 31, 2006. Assume net income is $500,000 for 2006. 282 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition Chapter 18 Shareholders' Equity Answer: Fascom Shareholders' Equity Preferred stock, 10,000 shares at $100 par $1,000,000 Common stock, 509,700 shares at $1 par1 509,700 Paid-in capital - excess of par, preferred 100,000 Paid-in capital - excess of par, common2 558,800 Retained earnings3 1,029,150 Treasury stock, at cost; 5,000 shares (25,000 ) Total shareholders' equity $3,172,650 1 (250,000 - 5,000) x 2 = 490,000 x 1.03 x $1 = $504,700 + (5,000 treasury shares at $1) 2 $500,000 + [(490,000 x 3%) x ($5 - $1)] = $558,800 3 $2,000,000 - (100,000 x $9) - [(250,000 - 5,000) x $1] - [(490,000 x 3%) x $5] - (504,700 x $.50) + $500,000 = $1,029,150 Learning Objective: 7 Level of Learning: 3 137. On December 31, 2005, Rebel Corporation's balance sheet reported the following. Common stock, $1 par $1,000,000 Paid-in capital - excess of par 4,000,000 Retained earnings 5,280,000 Treasury stock (20,000 shares at cost) (625,000 ) During 2006, Rebel decided to discontinue accounting for share buybacks as treasury shares. Instead, the shares will be treated as having been retired. Required: Prepare the appropriate journal entry to effect this change. Answer: Common stock (20,000 x $1) 20,000 Paid-in capital - excess of par 80,000* Retained earnings (difference) 525,000 Treasury stock 625,000 *($4M/1M=$4); thus, ($4 x 20,000) = $80,000 Learning Objective: 4 Level of Learning: 3 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 283 Chapter 18 Shareholders' Equity Use the following to answer questions 138-142: The following information comes from the 2004 Annual Report to stockholders of Stubblefield Inc. (In thousands): From the Statement of Changes in Stockholders' Equity: Capital in Treasury Excess of Treasury Stock Retained Par Value Shares Amount Earnings BALANCES AT December 31, 2002 - -30,561 -524,321 1,673,382 Net earnings - - - 242,941 Sales of common stock under option plans -5,181 377 10,738 - Cash dividends declared on common stock - $.5375 per share - - - -68,952 Compensation under employee incentive Plans -1,802 395 9,408 - Treasury shares exchanged for Acquisitions 139,209 20,449 318,293 - Purchase of shares for treasury - -6,668 -122,906 - BALANCES AT December 31, 2003 132,226 -16,008 -308,788 1,847,371 Net earnings - - - 81,965 Sales of common stock under option plans -3,538 279 7,095 - Cash dividends declared on common stock- $.5475 per share - - - -72,903 Compensation under employee incentive plans -196 366 8,271 - Purchase of shares for treasury - -2,933 -48,678 - BALANCES AT December 31, 2004 $128,492 -18,296 -342,100 $1,856,433 From the Statement of Cash Flows: In Cash flows from financing activities: 2004 2003 Dividends paid 72,244 66,932 138. What was the average cost per share of the treasury stock purchased by Stubblefield during 2003 and 2004, respectively? Answer: In 2003: $122,906/6,668 = $18.43/share In 2004: $48,678/2,933 = $16.60/share Learning Objective: 5 Level of Learning: 2 139. How many shares of treasury stock did Stubblefield use during 2003, and for what purpose(s)? Answer: 21,221 thousand shares were used. Of these, the main use was for acquisitions (20,449 thousand shares). The remaining shares were used for stock option and other employee incentive plans. Learning Objective: 5 Level of Learning: 2 284 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition Chapter 18 Shareholders' Equity 140. What was the fair value of the treasury stock exchanged for asset acquisitions for 2003? Answer: The total is $457,502 thousand. This is the sum of the $318,293 thousand cost of treasury stock used and the $139,209 thousand additional paid-in capital resulting from the acquisition. Learning Objective: 5 Level of Learning: 2 141. Assuming that Stubblefield had Dividends Payable of $17,450 thousand at December 31, 2002, compute the balance in that account at December 31, 2004. Answer: The balance would be $20,129 thousand, computed as follows: 12/31/2002 balance $17,450 Add: Dividends declared: In 2003 68,952 In 2004 72,903 Less: Dividends paid: In 2003 -66,932 In 2004 -72,244 12/31/2004 balance $20,129 Learning Objective: 7 Level of Learning: 2 142. What was the average exercise price per share of stock issued under option plans in 2004? Answer: The average price was $12.68/share, $3,538/279. Learning Objective: 3 Level of Learning: Essay Instructions: The following answers point out the key phrases that should appear in students' answers. They are not intended to be examples of complete student responses. It might be helpful to provide detailed instructions to students on how brief or in-depth you want their answers to be. 143. Some preferred stock is cumulative while other preferred stock is noncumulative. What does this mean? Answer: If preferred shares are noncumulative, dividends not declared in a given year are irrelevant to the calculation of dividends in any future year. However, if cumulative, when the specified dividend is not paid in a given year, the unpaid dividends accumulate as dividends in arrears and must be made up in a later dividend year before any dividends are paid on common shares. Learning Objective: 7 Level of Learning: 2 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition 285 Chapter 18 Shareholders' Equity 144. When stock is issued for consideration other than cash, what is the measurement objective? Answer: The measurement objective is that the transaction should be measured and recorded at fair market value. This might be the fair market value of the issued shares or of the noncash asset received in the exchange. The value that should be used is the one that is more clearly evident. This is consistent with the general practice of recording any noncash transaction at market value. When the stock is actively traded on an organized stock exchange, the market value of the stock might be the best evidence. Learning Objective: 3 Level of Learning: 2 145. What is the difference between a stock split and a stock split affected in the form of a stock dividend? Answer: A stock split is usually motivated by a desire to increase a stock's marketability. A stock split has the effect of by reducing the market price of the stock to attract a broader participation from investors. When a standard stock split occurs, there is no journal entry prepared by the issuing company. The number of outstanding shares increases while the par value per share decreases. However, in those rare instances when the par value of the stock is not changed, the stock distribution is accounted for as a stock split effected as stock dividend. In this case there is a transfer of capital from retained earnings to paid-in capital at the par value of the stock issued. Learning Objective: 8 Level of Learning: 1 286 Spiceland/Sepe/Tomassini, Intermediate Accounting, Fourth Edition