Quiz 11: Stockholders Equity: Paid-In Capital
Business
Q 1Q 1
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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Prepare the stockholder's section of the balance sheet of O Co.:
The stockholder's section of the balance sheet included the common capital (par value of outstanding shares), share premium (value paid in excess of par value of outstanding shares) and the balance of retained earnings.
In the present case, the par value of share is $8 and the value per share is $13. Hence, $5 ($13 - $8) is the excess amount paid over par value. It is given that the outstanding shares are 10,000 and have a retained earnings balance of $75,000.
Based on the above information, prepare the stockholder's section of the balance sheet of O Co. as below:
Hence, the shareholder's equity is $205,000.
Q 2Q 2
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.
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Q 3Q 3
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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a. Different issues of market price On the basis of the data market price decline as per share value decline from $100 to reduced to $80 per share. Dividends per shares increases from 5% to 10% Market value is up and down from the book value. Variability in the market value directly affects the financial positions of the stockholder not the corporations. b. Common stock Under this situation market price of the shares will be more, as selling at $40 per shares and the dividends will be 50% of the par value and the 6.25% of selling value. Market value • Once the shares issued than it will be sold from one investor to the investor. • It is price which is prevailing in the market. • Market value is different from one aspect to another. • Market value is different from the par value and the book value per shares. • As the market price is high it help to the investor • So, market value plays an important role in taking various decisions. c. Convertible preferred stock As per the situation market price decline as 7% is lower than expected although selling price is at $95 per shares compared to $100 per shares of convertible preferred stock. • As the market value increases, it will help to the corporations also. • As the creditors are fully satisfied with the working of the corporations and they continue with the corporations. • Suppliers also satisfied with the operations of the corporations. • Investors and the creditors are fully satisfied and continue with the corporations.
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Q 5Q 5
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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Q 6Q 6
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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Q 7Q 7
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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Q 8Q 8
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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Q 9Q 9
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.
Instructions
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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Q 10Q 10
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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Q 11Q 11
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.
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Q 12Q 12
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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Q 13Q 13
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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Q 14Q 14
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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Q 15Q 15
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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Q 16Q 16
Distinguish between paid-in capital and retained earnings of a corporation. Why is such a distinction useful?
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Q 17Q 17
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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Q 18Q 18
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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Q 19Q 19
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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Q 20Q 20
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?
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Q 21Q 21
SEC Enforcement Division
The Enforcement Division of the Securities and Exchange Commission (SEC) is an important aspect of the corporate governance structure in the United States that is intended to protect investors. Locate the home page of the SEC by doing a general search on the title "Securities and Exchange Commission," and answer the following.
Instructions
a. Identify the divisions of the SEC.
b. Access the category "Enforcement Division," and write a one-sentence description of the purpose of this division.
c. Explore the website and locate the SEC information that deals with pump-and-dump schemes on the Internet.
d. Write a concise description of a pump-and-dump scheme, and list the suggestions of the SEC to investors to avoid these schemes.
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Q 22Q 22
Explain the significance of par value. Does par value indicate the reasonable market price for a share of stock? Explain.
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Q 23Q 23
A portion of the stockholder's equity section from the balance sheet of Wall and Corporation appears as follows:
Assume that all the stock was issued on January l and that no dividends were paid during the first two years of operation. During the third year, Walland Corporation paid total cash dividends of $736,000.
a. Compute the amount of cash dividends paid during the third year to each of the three classes of stock.
b. Compute the dividends paid per share during the third year for each of the three classes of stock,
c. What was the average issue price.of each type of preferred stock?
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Q 24Q 24
Stockholders' Equity: A Short Comprehensive Problem
Early in the year Bill Sharnes and several friends organized a corporation called Sharnes Communications, Inc. The corporation was authorized to issue 50,000 shares of $100 par value, 10 percent cumulative preferred stock and 400,000 shares of $2 par value common stock. The following transactions (among others) occurred during the year:
Instructions
a. Prepare journal entries in general journal form to record the above transactions. Include entries at December 31 to close the Income Summary account and the Dividends account.
b. Prepare the stockholders' equity section of the Sharnes Communications, Inc., balance sheet at December 31.
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Q 25Q 25
Stockholders' Equity: A Short Comprehensive Problem
Early in the year Debra Deal and several friends organized a corporation called Markup, Inc. The corporation was authorized to issue 100,000 shares of $100 par value, 5 percent cumulative preferred stock and 100,000 shares of $1 par value common stock. The following transactions (among others) occurred during the year:
Instructions
a. Prepare journal entries in general journal form to record the above transactions. Include entries at December 31 to close the Income Summary account and the Dividends account.
b. Prepare the stockholders' equity section of the Markup, Inc., balance sheet at December 31.
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Q 26Q 26
Dividends on Common and Preferred Stock
Baker Company has common and preferred stock outstanding as follows:
Dividends on preferred stock have not been paid for the last three years (in addition to the current year). If the company pays a total of $120,000 in dividends, how much will the common stockholders receive per share if the preferred stock is not cumulative? How will your answer differ if the preferred stock is cumulative?
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Q 27Q 27
Stockholders' Equity Items
Visit the home page of Staples, Inc. , at the following Internet address:
www.staples.com
Locate the company's most current balance sheet by selecting "Investor Information."
Instructions
Answer the following questions:
a. Does the company report preferred stock in its balance sheet? If so, how many shares are currently outstanding?
b. How much common stock does the company report in its most recent balance sheet? What is the par value of each share?
c. Does the company report any treasury stock? Has this amount changed since the previous year?
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Q 28Q 28
Describe the usual nature of the following features as they apply to a share of preferred stock: (a) cumulative, and (b) convertible.
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Q 29Q 29
The year end balance sheet of Jackson Products, Inc., includes the following stockholders' equity section (with certain details omitted):
From this information, compute answers to the following questions:
a. How many shares of preferred stock have been issued?
b. What is the total amount of the annual dividends to which preferred stockholders are entitled? e. What was the average issuance price per share of common stock?
d. What is the amount of legal capital and the amount of total paid-in capital?
e. What is the book value per share of common stock?
f. Is it possible to determine the fair market value per share of common stock from the stockholder's equity section above? Explain.
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Q 30Q 30
Analysis of an Equity Section of a Balance Sheet
The year-end balance sheet of Ft. Smith Products includes the following stockholders' equity section (with certain details omitted):
Instructions
From this information, compute answers to the following questions:
a. How many shares of preferred stock have been issued?
b. What is the total amount of the annual dividends paid to preferred stockholders?
c. How many shares of common stock are outstanding?
d. What was the average issuance price per share of common stock?
e. What is the amount of legal capital?
f. What is the total amount of paid-in capital?
g. What is the book value per share of common stock? (There are no dividends in arrears.)
h. Assume that retained earnings at the beginning of the year amounted to $717,500 and that net income for the year was $3,970,000. What was the dividend declared during the year on each share of common stock? (Hint: Net income increases retained earnings, whereas dividends decrease retained earnings.)
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Q 31Q 31
Analysis of an Equity Section of a Balance Sheet
The year-end balance sheet of Mirror, Inc., includes the following stockholders' equity section (with certain details omitted):
Instructions
From this information, compute answers to the following questions:
a. How many shares of preferred stock have been issued?
b. What is the total amount of the annual dividends paid to preferred stockholders?
c. How many shares of common stock are outstanding?
d. What was the average issuance price per share of common stock?
e. What is the amount of legal capital?
f. What is the total amount of paid-in capital?
g. What is the book value per share of common stock? (There are no dividends in arrears.)
h. Assume that retained earnings at the beginning of the year amounted to $1,200,000 and the net income for the year was $4,800,000. What was the dividend declared during the year on each share of common stock? (Hint: Net income increases retained earnings, whereas dividends decrease retained earnings.)
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Q 32Q 32
Book Value
Menza Company has stockholders' equity accounts as follows:
Calculate the amount of book value per share for common stock and summarize briefly what that figure means in relation to the current market value of the stock.
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Q 34Q 34
Preferred Stock Alternatives
Easy Moncy, Inc., has the following capital structure:
The number of issued and outstanding shares of both preferred and common stock have been the same for the last two years. Dividends on preferred stock are 8 percent of par value and have been paid each year the stock was outstanding except for the immediate past year. In the current year, management declares a total dividend of $60,000. Indicate the amount that will be paid to both preferred and common stockholders assuming ( a ) the preferred stock is not cumulative and ( b ) the preferred stock is cumulative.
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Q 35Q 35
Quanex Corporatio n is a publicly owned company. The following information is excerpted from a recent balance sheet. Dollar amounts (except for per share amounts) are stated in thousands.
Instructions
From this information, answer the following questions:
a. How many shares of common stock have been issued?
b. What is the total amount of the annual dividends paid to preferred stockholders?
c. What is the total amount of paid-in capital?
d. What is the book value per share of common stock?
e. Briefly explain the advantages and disadvantages to Quanex of being publicly owned rather than operating as a closely held corporation.
f. What is meant by the term convertible used in the caption of the preferred stock? Is there any more information that investors need to know to evaluate this conversion feature?
g. Assume that the preferred stock currently is selling at $248 per share. Does this provide a higher or lower dividend yield than an 8 percent, $50 par value preferred with a market price of $57 per share? Show computations (round to the nearest tenth of 1 percent). Explain why one preferred stock might yield less than another.
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Q 36Q 36
Analysis of an Equity Section-More Comprehensive
Timberlake Corporation is a publicly owned company. The following information is taken from a recent balance sheet. Dollar amounts (except for per-share amounts) are stated in thousands.
Instructions
From this information, compute answers to the following questions:
a. How many shares of common stock have been issued?
b. What is the total amount of the annual dividends paid to preferred stockholders?
c. What is the total amount of paid-in capital?
d. What is the book value per share of common stock, assuming no dividends and arrears?
e. Briefly explain the advantages and disadvantages to Toasty of being publicly owned rather than operating as a closely held corporation.
f. What is meant by the term convertible used in the caption of the preferred stock? Is there any more information that investors need to know to evaluate this conversion feature?
g. Assume that the preferred stock currently is selling at $190 per share. Does this provide a higher or lower dividend yield than a 6 percent, $50 par value preferred with a market price of $52 per share? Show computations. Explain why one preferred stock might yield less than another.
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Q 37Q 37
Book Value
Franks, Inc., has preferred and common stock outstanding as follows:
Calculate the book value on common stock, assuming preferred dividends are cumulative and are currently one year in arrears.
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Q 38Q 38
State the balance sheet or income statement classification (asset, liability,stockholders equity, revenue, or expense) of each of the following accounts:
a. Cash (received from the issuance of capital stock).
b. Organization Costs.
c. Preferred Stock.
d. Retained Earnings.
e. Additional Paid-in Capital.
f. Income Taxes Payable.
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Q 39Q 39
Reporting the Effects of Transactions
Three events pertaining to Lean Machine Co. are described below.
a. Issued common stock for cash.
b. The market value of the corporation's stock increased.
c. Declared and paid a cash dividend to stockholders.
Indicate the immediate effects of the events on the financial measurements in the four columnar
headings listed below. Use the code letters I for increase, D for decrease, and NE for no effect.
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Q 40Q 40
Techno Corporation is the producer of popular business software. Recently, an investment service published the following per-share amounts relating to the company's only class of stock:
Instructions
a. Without reference to dollar amounts, explain the nature and significance of par value, book value, and market value.
b. Comment on the relationships, if any, among the per-share amounts shown for the company. What do these amounts imply about Techno Corporation and its operations? Comment on what these amounts imply about the security of creditors' claims against the company.
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Q 41Q 41
Par, Book, and Market Values
Whitaker Video is the producer of popular video games. Recently, an investment service published the following per-share amounts relating to the company's only class of stock:
Instructions
a. Without reference to dollar amounts, explain the nature and significance of par value, book value, and market value.
b. Comment on the relationships, if any, among the per-share accounts shown for the company. What do these amounts imply about Brain and its operations? Comment on what these amounts imply about the security of creditors' claims against the company.
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Q 42Q 42
Smelling Company declared a 2-for-l stock split on its common stock in order to intentionally reduce the market value of its stock so that it would be an attractive investment for a larger set of investors. The company's common stock is described as follows:
Common stock: 100,000 shares outstanding, $ 10 par value, originally sold at $ 12.50. current market price $50.
Describe the likely impact, if any. that the 2-for-l stock split will have on (a) the number of shares outstanding, (b) the market price of the stock, and (c) the total stockholder's equity attributable to common stock.
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Q 43Q 43
What does book value per share of common stock represent? Does it represent the amount common stockholders would receive in the event of liquidation of the corporation? Explain briefly.
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Q 44Q 44
The following information is necessary to compute the net assets (stockholder's equity) and book value per share of common stock for Rothchild Corporation:
a. compute the amount of net assets (stockholder's equity).
b. Compute the book value per share of common stock.
c. Is book value per share (answer to part b) the amount common stockholders should expect to receive if Rothchild Corporation were to cease operations and liquidate? Explain.
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Q 45Q 45
Reporting Stockholders' Equity with Treasury Stock
Early in 2013, Feller Corporation was formed with authorization to issue 50,000 shares of $1 par value common stock. All shares were issued at a price of $8 per share. The corporation reported net income of $95,000 in 2013, $27,500 in 2014, and $75,700 in 2015. No dividends were declared in any of these three years.
In 2014, the company purchased its own shares for $35,000 in the open market. In 2015, it reissued all of its treasury stock for $40,000.
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.)
b. As of December 31, compute the company's book value per share of common stock.
c. Explain how the treasury stock transactions in 2014 and 2015 were reported in the company's statement of cash flows.
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Q 46Q 46
Reporting Stockholders' Equity with Treasury Stock
Early in 2013, Teek Corporation was formed with authorization to issue 50,000 shares of $3 par value common stock. All shares were issued at a price of $10 per share. The corporation reported net income of $160,000 in 2013, $89,200 in 2014, and $97,000 in 2015. No dividends were declared in any of these three years.
In 2014, the company purchased its own shares for $30,000 in the open market. In 2015, it reissued all of its treasury stock for $40,000.
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.)
b. As of December 31, compute the company's book value per share of common stock.
c. Explain how the treasury stock transactions in 2014 and 2015 were reported in the company's statement of cash flows.
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Q 47Q 47
Treasury Stock
Melcher, Inc., originally sold 100,000 shares of its $10 par value common stock at $25 per share. Several years later the company repurchased 10,000 of these shares at $57 per share. Melcher currently holds those shares in treasury. Prepare the company's stockholders' equity section of the balance sheet to reflect this information.
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Q 48Q 48
What would be the effect, if any. on book value per share of common stock as a result of each of the following independent events:
( a ) a corporation obtains a bank loan; ( b )a dividend is declared (to be paid in the next accounting period)?
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Q 49Q 49
Johnston. Inc.. engaged in the following transactions involving treasury stock:
a. Prepare general journal entries to record these transactions.
b. Compute the amount of retained earnings that should be restricted because of the treasury stock still owned at December 31.
c. Does a restriction on retained earnings affect the dollar amount of retained earnings reported in the balance sheet Explain briefly.
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Essay
Q 50Q 50
Reporting Stockholders' Equity with Treasury Stock and Stock Splits
Early in 2011, Herndon Industries was formed with authorization to issue 250,000 shares of $10 par value common stock and 30,000 shares of $100 par value cumulative preferred stock. During 2011, all the preferred stock was issued at par, and 120,000 shares of common stock were sold for $16 per share. The preferred stock is entitled to a dividend equal to 10 percent of its par value before any dividends are paid on the common stock.
During its first five years of business (2011 through 2015), the company earned income totaling $3,700,000 and paid dividends of 50 cents per share each year on the common stock outstanding.
On January 2, 2013, the company purchased 20,000 shares of its own common stock in the open market for $400,000. On January 2, 2015, it reissued 10,000 shares of this treasury stock for $250,000. The remaining 10,000 were still held in treasury at December 31, 2015.
Instructions
a. Prepare the stockholders' equity section of the balance sheet for Herndon Industries at December 31, 2015. Include supporting schedules showing (1) your computation of any paidin capital on treasury stock and (2) retained earnings at the balance sheet date. (Hint: Income increases retained earnings, whereas dividends reduce retained earnings. Dividends are not paid on shares of stock held in treasury.)
b. As of December 31, compute Herndon's book value per share of common stock. (Hint: Book value per share is computed only on the shares of stock outstanding.)
c. At December 31, 2015, shares of the company's common stock were trading at $30. Explain what would have happened to the market price per share had the company split its stock 3-for-1 at this date. Also explain what would have happened to the par value of the common stock and to the number of common shares outstanding.
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Essay
Q 51Q 51
Reporting Stockholders' Equity with Treasury Stock and Stock Splits
Early in 2011, Laird Industries was formed with authorization to issue 150,000 shares of $20 par value common stock and 10,000 shares of $100 par value cumulative preferred stock. During 2011, all the preferred stock was issued at par, and 80,000 shares of common stock were sold for $35 per share. The preferred stock is entitled to a dividend equal to 6 percent of its par value before any dividends are paid on the common stock.
During its first five years of business (2011 through 2015), the company earned income totaling $3,800,000 and paid dividends of 60 cents per share each year on the common stock outstanding.
On January 2, 2013, the company purchased 1,000 shares of its own common stock in the open market for $40,000. On January 2, 2015, it reissued 600 shares of this treasury stock for $30,000. The remaining 400 shares were still held in treasury at December 31, 2015.
Instructions
a. Prepare the stockholders' equity section of the balance sheet at December 31, 2015. Include a supporting schedule showing (1) your computation of any paid-in capital on treasury stock and (2) retained earnings at the balance sheet date. (Hint: Income increases retained earnings, whereas dividends reduce retained earnings. Dividends are not paid on shares of stock held in treasury.)
b. As of December 31, 2015, compute the company's book value per share of common stock. (Hint: Book value per share is computed only on the shares of stock outstanding.)
c. At December 31, 2015, shares of the company's common stock were trading at $56. Explain what would have happened to the market price per share had the company split its stock 2-for-1 at this date. Also explain what would have happened to the par value of the common stock and to the number of common shares outstanding.
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Essay
Q 52Q 52
Treasury Stock
Weller, Inc., sold 1,000,000 shares of $25 par value common stock at $32. It subsequently repurchased 100,000 of those shares at $50 per share and then sold 70,000 of those shares at $55. Calculate the total amount of stockholders' equity given the above transactions.
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Essay
Q 53Q 53
In the stock market crash of October 19. 1987. the market price of IBM 's capital stock fell by over $31 per share, Explain the effects, if any, of this decline in share price on IBM 's balance sheet.
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Essay
Q 54Q 54
Effects of a Stock Split
The common stock of Fido Corporation was trading at $45 per share on October 15, 2014. A year later, on October 15, 2015, it was trading at $80 per share. On this date, Fido's board of directors decided to split the company's common stock.
a. If the company decides on a 2-for-1 split, at what price would you expect the stock to trade immediately after the split goes into effect?
b. If the company decides on a 4-for-1 split, at what price would you expect the stock to trade immediately after the split goes into effect?
c. Why do you think Fido's board of directors decided to split the company's stock?
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Essay
Q 56Q 56
Treasury Stock Presentation
Ashton Company was experiencing financial difficulty late in the current year. The company's income was sluggish, and the market price of its common stock was tumbling. On December 21, the company began to buy back shares of its own stock in an attempt to boost its market price per share and to improve its earnings per share.
a. Is it unethical for a company to purchase shares of its own stock to improve measures of financial performance? Defend your answer.
b. Assume that the company classified the shares of treasury stock as short-term investments in the current asset section of its balance sheet. Is this appropriate? Explain.
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Essay
Q 57Q 57
What is treasury stock ? Why do corporations purchase their own shares? Is treasury stock an asset? How should it be reported in the balance sheet?
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Essay
Q 58Q 58
Authorized Stock
The 2012 balance sheet for Kimberly-Clark Corporation indicates that the company has 1.2 billion shares of common stock authorized, of which approximately 428.6 million have been issued. In addition, the company holds 39.3 million shares in treasury.
a. How many additional shares of common stock could Kimberly-Clark sell?
b. How are the shares that have not yet been issued included in the company's balance sheet? Do they represent an asset of the company?
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Essay
Q 59Q 59
In many states, corporation law requires that retained earnings be restricted for dividend purposes to the extent of the cost of treasury shares. What is the reason for this legal rule?
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Essay
Q 60Q 60
Accounting Terminology
Minor Company, is authorized to sell 1,200,000 shares of $10 par value common stock and 60,000 shares of $100 par value 6 percent preferred stock. As of the end of the current year, the company has actually sold 550,000 shares of common stock at $12 per share and 40,000 shares of preferred stock at $110 per share. In addition, of the 550,000 shares of common that have been sold, 25,000 shares have been repurchased at $23 per share and are currently being held in treasury to be used to meet the future requirements of a stock option plan that the company intends to implement.
a. Prepare the general journal entries required to record all of the above transactions.
b. Prepare the stockholders' equity section of Minor's balance sheet to reflect the transactions you have recorded.
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Essay
Q 61Q 61
The basic accounting equation for a corporation is Assets = Liabilities + Stockholder's Equity. Stockholder's equity is further divided into two categories: paid in capital and retained earnings. What are the major transactions and other financial activities that impact the amount of paid in capital of a corporation? Identify for each major type of transaction or activity whether it increases or decreases the amount of paid in capital.
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Essay
Q 62Q 62
Treasury Stock and Stock Split
Twin Towns, Inc., was authorized to issue 300,000 shares of common stock and originally issued 100,000 shares of $10 par value stock at $18 per share. Subsequently, 25,000 shares were repurchased at $20, of which 10,000 were subsequently resold at $23.
Assume the company's retained earnings balance is $120,000.
a. Prepare the stockholders' equity section of Twin Towns's balance sheet, including all appropriate disclosures.
b. Briefly explain how the declaration and distribution of a 2-for-1 stock split subsequent to the above transactions would affect the stockholders' equity section you have prepared.
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Essay
Q 63Q 63
If you were going to start a corporation and expected to need to raise capital from several investors, would you include preferred stock in your capital structure? Why or why not? If your answer is that you would include preferred stock, what features would you incorporate into this class of stock?
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Essay
Q 64Q 64
Using the Home Depot, lnc., Financial Statements
The financial statements of Home Depot, Inc., appear in Appendix A of this text. These statements contain information describing the details of the companys stockholders equity.
a. What is the par value of the companys common stock? Did the common stock originally sell at, above, or below par value? How do you know this?
b. For the most current year shown, how many shares of common stock are authorized? What is the meaning of "authorized shares"?
c. What is the total stockholders equity amount for Home Depot for the most recent year reported? Does this figure mean that the total outstanding stock is actually worth this amount? Explain your answer
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