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Stockholders Equity: Paid-In Capital
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Stockholders' Equity Section
Banner Publications was organized early in 2012 with authorization to issue 10,000 shares of $100 par value preferred stock and 1 million shares of $1 par value common stock. All of the preferred stock was issued at par, and 400,000 shares of common stock were sold for $15 per share. The preferred stock pays a 10 percent cumulative dividend.
During the first five years of operations (2010 through 2014) the corporation earned a total of $4,100,000 and paid dividends of $.80 per share each year on the common stock. In 2015, however, the corporation reported a net loss of $1,250,000 and paid no dividends.
Instructions
a. Prepare the stockholders' equity section of the balance sheet at December 31, 2015. Include a supporting schedule showing your computation of retained earnings at the balance sheet date. (Hint: Income increases retained earnings, whereas dividends and net losses decrease retained earnings.)
b. Draft a note to accompany the financial statements disclosing any dividends in arrears at the end of 2015.
c. Do the dividends in arrears appear as a liability of the corporation as of the end of 2015? Explain.
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a.
Prepare a statement showing computation of stockholders equity section of balance sheet:
Stockholders' equity is main portion of the balance sheet. It represents the amounts that are collected from investors by issuing stocks (Common and preferred) and retained earnings. Common stock, preferred stock, additional capital in excess of par, retained earnings, and treasury stock are some of the items included in this section.
Notes:
• Issued common stock for cash of 400,000 shares at $1
• Preferred stock 10,000 shares at $100 per shares.
• Additional paid-in stock for common stock is $5,600,000 (400,000 at the rate of $14 ($15-$1)
• Net loss during the year is $1,250,000
b.
Disclose dividends in arrears ate the end of 2015:
• Corporations paid in cash periodically called dividends
• Dividends cannot be more than the retained earnings of the corporations
• Preferred stock holder paid the dividends before the common stockholder each year.
• Due to loss in 2015 there is no dividends declared in 2015
• Dividend is declared only in case of profit earned by the corporation or otherwise.
• From year 2010 to 2014 total dividends will be $1,600,000 ($320,000 X 5 years)
• Corporation paid the dividends only when cash is available with the corporations.
• It is not a fixed charge.
• Here, $320,000 is the dividends in 2015 (400,000 X $0.80)
• Dividends in arrears are deducted from the stockholder equity to find the book value of shares.
c.
State the reason for dividends in arrears to be shown as a liability:
Dividend is not a fixed charge. It reduces the equity of common stockholder and fall in the book value per share. If there are any arrears for the past year, it will be considered as liability since company should be paid (met the obligation) in future.
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Distinguish between corporations and sole proprietorships in terms of the following characteristics:
a. Owners liability for debts of the business.
b. Transferability of ownership interest.
c. Continuity of existence.
d. Federal taxation on income.
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a. Owners' liability. Sole proprietors are personally liable for the debts of the business. A corporation, however, is responsible for its own debts; the stockholders of a corporation are not personally liable for the debts of the business entity. Thus, the amount of money that a stockholder might lose by investing in a corporation is limited to the amount of his or her investment.
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b. Transferability of ownership interest. A sole proprietor generally must sell his or her entire interest in the business. This creates a new business owned by a new sole proprietor. Shares of stock in a corporation are freely transferable.
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c. Continuity of existence. A sole proprietorship is terminated upon sale or abandonment by the owner and upon that person's death or incapacitation. Corporations continue in existence regardless of changes in ownership.
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d. Federal taxation on income. A corporation is subject to federal income tax on its income, and stockholders are also subject to a personal income tax on any amounts they receive as dividends. A sole proprietorship is not a taxable entity, but the owner must pay personal taxes on the income earned by the business, whether or not it is actually withdrawn by the owner.
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Why are large corporations often said to be publicly owned?
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The large corporations are often said to be publicly owned because the capital stock of most large corporations can be traded (bought and sold) through organized securities exchanges. As these shares are available for purchase by the general public, these large corporations are said to be publicly owned.
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Distinguish between paid-in capital and retained earnings of a corporation. Why is such a distinction useful?
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Factors Affecting the Market Prices of Common Stocks
Each of the following situations describes an event that affected the stock market price of a particular company.
a. The price of a common share of McDonnell Douglas, Inc., increased by over $5 per share in the several days after it was announced that Saudia Airlines would order $6 billion of commercial airliners from Boeing and McDonnell Douglas.
b. Citicorp' s common stock price fell by over $3.50 per share shortly after the Federal Reserve Board increased the discount rate by 1/4 percent. The discount rate is the rate charged to banks for short-term loans they need to meet their reserve requirements,
c. The price of a common share of Ventitex, Inc., a manufacturer of medical devices, fell over $10 (27.7 percent) after it was announced that representatives of the Federal Drug Administration paid a visit to the company.
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For each of the independent situations described, explain the likely underlying rationale for the change in market price of the stock.
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Stockholders' Equity in a Balance Sheet
Maria Martinez organized Manhattan Transport Company in January 2012. The corporation immediately issued at $8 per share one-half of its 200,000 authorized shares of $2 par value common stock. On January 2, 2013, the corporation sold at par value the entire 5,000 authorized shares of 8 percent, $100 par value cumulative preferred stock. On January 2, 2014, the company again needed capital and issued 5,000 shares of an authorized 10,000 shares of no-par cumulative preferred stock for a total of $512,000. The no-par shares have a stated dividend of $9 per share.
The company declared no dividends in 2012 and 2013. At the end of 2013, its retained earnings were $170,000. During 2014 and 2015 combined, the company earned a total of $890,000. Dividends of 50 cents per share in 2014 and $1.60 per share in 2015 were paid on the common stock.
Instructions
a. Prepare the stockholders' equity section of the balance sheet at December 31, 2015. Include a supporting schedule showing your computation of retained earnings at the balance sheet date. (Hint: Income increases retained earnings, whereas dividends decrease retained earnings.)
b. Assume that on January 2, 2013, the corporation could have borrowed $500,000 at 8 percent interest on a long-term basis instead of issuing the 5,000 shares of the $100 par value cumulative preferred stock. Identify two reasons a corporation may choose to issue cumulative preferred stock rather than finance operations with long-term debt.
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Stockholders' Equity
Beta Co. sold 10,000 shares of common stock, which has a par value of $25, for $28 per share. The company also sold 1,000 shares of $100 par value preferred stock for $110. Assume the balance in retained earnings is $80,000. Prepare the stockholders' equity section of Beta's balance sheet.
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Stockholders' Equity in a Balance Sheet
Joy Sun organized Ray Beam, Inc., in January 2012. The corporation immediately issued at $15 per share one-half of its 260,000 authorized shares of $1 par value common stock. On January 2, 2013, the corporation sold at par value the entire 10,000 authorized shares of 10 percent, $100 par value cumulative preferred stock. On January 2, 2014, the company again needed capital and issued 5,000 shares of an authorized 8,000 shares of no-par cumulative preferred stock for a total of $320,000. The no-par shares have a stated dividend of $6 per share.
The company declared no dividends in 2012 and 2013. At the end of 2013, its retained earnings were $530,000. During 2014 and 2015 combined, the company earned a total of $1,400,000. Dividends of 90 cents per share in 2014 and $2 per share in 2015 were paid on the common stock.
Instructions
a. Prepare the stockholders' equity section of the balance sheet at December 31, 2015. Include a supporting schedule showing your computation of retained earnings at the balance sheet date. (Hint: Income increases retained earnings, whereas dividends decrease retained earnings.)
b. Assume that on January 2, 2013, the corporation could have borrowed $1,000,000 at 10 percent interest on a long-term basis instead of issuing the 10,000 shares of the $100 par value cumulative preferred stock. Identify two reasons a corporation may choose to issue cumulative preferred stock rather than finance operations with long-term debt.
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Springdale Retail, Inc.
Springdale Retail, Inc., is a retailer that has engaged you to assist in the preparation of its financial statements at December 31, 2015. Following are the correct adjusted account balances, in alphabetical order, as of that date. Each balance is the "normal" balance for that account. (Hint: The "normal" balance is the same as the debit or credit side that increases the account.)
Instructions
a. Prepare an income statement for the year ended December 31, 2015, which includes amounts for gross profit, income before income taxes, and net income. List expenses (other than cost of goods sold and income tax expense) in order, from the largest to the smallest dollar balance. You may ignore earnings per share.
b. Prepare a statement of retained earnings for the year ending December 31, 2015.
c. Prepare a statement of financial position (balance sheet) as of December 31, 2015, following these guidelines:
• Include separate asset and liability categories for those assets which are "current."
• Include and label amounts for total assets, total liabilities, total stockholders' equity, and total liabilities and stockholders' equity.
• Present deferred income taxes as a noncurrent liability.
• To the extent information is available that should be disclosed, include that information in your statement.
Instructions
a. Prepare an income statement for the year ended December 31, 2015, which includes amounts for gross profit, income before income taxes, and net income. List expenses (other than cost of goods sold and income tax expense) in order, from the largest to the smallest dollar balance. You may ignore earnings per share.
b. Prepare a statement of retained earnings for the year ending December 31, 2015.
c. Prepare a statement of financial position (balance sheet) as of December 31, 2015, following these guidelines:
• Include separate asset and liability categories for those assets which are "current."
• Include and label amounts for total assets, total liabilities, total stockholders' equity, and total liabilities and stockholders' equity.
• Present deferred income taxes as a noncurrent liability.
• To the extent information is available that should be disclosed, include that information in your statement. Not Answered
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Dividends on Preferred Stock
Zeta Co. has outstanding 100,000 shares of $100 par value cumulative preferred stock which has a dividend rate of 7 percent. The company has not declared any cash dividends on the preferred stock for the last three years. Calculate the amount of dividends in arrears for the last three years on Zeta's preferred stock and briefly explain how this amount will be known to investors and creditors who may use the company's financial statements.
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Dividends on Common and Preferred Stock
Mega, Inc., has common and 6 percent preferred stock outstanding as follows:
The company declares a total dividend of $225,000. If the dividends on preferred stock are one year in arrears (in addition to the current year), how will the total dividend be divided between the common and preferred stock?
The company declares a total dividend of $225,000. If the dividends on preferred stock are one year in arrears (in addition to the current year), how will the total dividend be divided between the common and preferred stock? Essay
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Interview the owners of two local small businesses. One business should be organized as a corporation and the other as either a sole proprietorship or a partnership. Inquire as to:
• Why this form of entity was selected.
• Have there been any unforeseen complications with this form of entity?
• Is the form of entity likely to be changed in the foreseeable future? And if so, why?
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Listed below are 12 technical accounting terms discussed in this chapter:
Each of the following statements may (or may not ) describe one of these technical terms. For each statement, indicate the term described, or answer "None" if die statement does not correctly describe any of the terms.
a. A major disadvantage of the corporate form of organization.
b. From investors' point of view, the most important value associated with capital stock.
c. Cash available for distribution to the stockholders.
d. The class of capita! stock that normally has the most voting power.
e. A distribution of assets that may be made in future years to the holders of common stock.
f. A corporation whose shares are traded on an organized stock exchange.
g. Equity arising from investments by owners.
h. The element of stockholders' equity that is increased by net income.
i. Total assets divided by the number of common shares outstanding.
j. The class of stock for which market price normally rises as interest rales increase.
Each of the following statements may (or may not ) describe one of these technical terms. For each statement, indicate the term described, or answer "None" if die statement does not correctly describe any of the terms.
a. A major disadvantage of the corporate form of organization.
b. From investors' point of view, the most important value associated with capital stock.
c. Cash available for distribution to the stockholders.
d. The class of capita! stock that normally has the most voting power.
e. A distribution of assets that may be made in future years to the holders of common stock.
f. A corporation whose shares are traded on an organized stock exchange.
g. Equity arising from investments by owners.
h. The element of stockholders' equity that is increased by net income.
i. Total assets divided by the number of common shares outstanding.
j. The class of stock for which market price normally rises as interest rales increase. Essay
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Assume that you have recently obtained your scuba instructor's certification.and have decided to start a scuba diving school.
a. Describe the advantages and disadvantages of organizing your scuba diving school as a:
1. Sole proprietorship
2. Corporation
b. State your opinion about which form of organization would be best and explain the basis for your opinion.
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Stockholders' Equity
Omega Co. sold 10,000 shares of common stock, which has a par value of $8, for $13 per share. The company's balance in retained earnings is $75,000. Prepare the stockholders' equity section of the company's balance sheet.
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Stockholders' Equity Section of a Balance Sheet
When Resisto Systems, Inc., was formed, the company was authorized t o issue 5,000 shares of $100 par value, 8 percent cumulative preferred stock, and 100,000 shares of $2 stated value common stock.
Half of the preferred stock was issued at a price of $103 per share, and 70,000 shares of the common stock were sold for $13 per share. At the end of the current year, Resisto has retained earnings of $475,000.
a. Prepare the stockholders' equity section of the company's balance sheet at the end of the current year.
b. Assume Resisto Systems's common stock is trading at $24 per share and its preferred stock is trading at $107 per share at the end of the current year. Would the stockholders' equity section prepared in part a be affected by this additional information?
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Stockholders' Equity in a Balance Sheet
Early in 2012, Robbinsville Press was organized with authorization to issue 100,000 shares of $100 par value preferred stock and 500,000 shares of $1 par value common stock. Ten thousand shares of the preferred stock were issued at par, and 170,000 shares of common stock were sold for $15 per share. The preferred stock pays an 8 percent cumulative dividend.
During the first four years of operations (2012 through 2015), the corporation earned a total of $1,385,000 and paid dividends of 75 cents per share in each year on its outstanding common stock.
Instructions
a. Prepare the stockholders' equity section of the balance sheet at December 31, 2015. Include a supporting schedule showing your computation of the amount of retained earnings reported. (Hint: Income increases retained earnings, whereas dividends decrease retained earnings.)
b. Are there any dividends in arrears on the company's preferred stock at December 31, 2015? Explain your answer.
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Stockholders' Equity Section
McMinn Publications was organized early in 2010 with authorization to issue 20,000 shares of $100 par value preferred stock and 1 million shares of $1 par value common stock. All of the preferred stock was issued at par, and 300,000 shares of common stock were sold for $20 per share. The preferred stock pays a 10 percent cumulative dividend.
During the first five years of operations (2010 through 2014) the corporation earned a total of $4,560,000 and paid dividends of $1 per share each year on the common stock. In 2015, however, the corporation reported a net loss of $1,825,000 and paid no dividends.
Instructions
a. Prepae the stockholders' equity section of the balance sheet at December 31, 2015. Include a supporting schedule showing your computation of retained earnings at the balance sheet date. (Hint: Income increases retained earnings, whereas dividends and net losses decrease retained earnings.)
b. Draft a note to accompany the financial statements disclosing any dividends in arrears at the end of 2015.
c. Do the dividends in arrears appear as a liability of the corporation as of the end of 2015? Explain.
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Factors Affecting the Market Prices of Preferred and Common Stocks
SciFi Labs is a publicly owned company with several issues of capital stock outstanding. Over the past decade, the company has consistently earned modest profits and has increased its common stock dividend annually by 5 or 10 cents per share. Recently the company has had several important research successes and has introduced several new products that you believe will motivate future sales and profits to increase dramatically. You also expect a gradual increase in long-term interest rates from their present level of about 8 percent to, perhaps, 9 percent or 10 percent.
Instructions
On the basis of these forecasts, explain whether you would expect to see the market prices of the following issues of SciFi capital stock increase or decrease. Explain your reasoning in each answer.
a. 10 percent, $100 par value preferred stock (currently selling at $80 per share).
b. $5 par value common stock (currently paying an annual dividend of $2.50 and selling at $40 per share).
c. 7 percent, $100 par value convertible preferred stock (currently selling at $95 per share).
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Stockholders' Equity in a Balance Sheet
Early in 2012, Searfoss, Inc., was organized with authorization to issue 2,000 shares of $100 par value preferred stock and 300,000 shares of $1 par value common stock. Five hundred shares of the preferred stock were issued at par, and 80,000 shares of common stock were sold at $15 per share. The preferred stock pays a 10 percent cumulative dividend.
During the first four years of operations (2012 through 2015), the corporation earned a total of $1,950,000 and paid dividends of 40 cents per share in each year on its outstanding common stock.
Instructions
a. Prepare the stockholders' equity section of the balance sheet at December 31, 2015. Include a supporting schedule showing your computation of the amount of retained earnings reported. Assume the call price of preferred stock is $110 per share as of December 31, 2015. (Hint: Income increases retained earnings, whereas dividends decrease retained earnings.)
b. Are there any dividends in arrears on the company's preferred stock at December 31, 2015? Explain your answer.
c. Assume that interest rates increase steadily from 2012 through 2015. Would you expect the market price of the company's preferred stock to be higher or lower than its call price of $110 at December 21, 2015? (The call price is the amount the company must pay to repurchase the shares from the stockholders.)
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