Solutions Manual and Test Bank Intermediate Accounting Kieso Weygandt Warfield 14th edition
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Chapter 15 Stockholders' Equity
Chapter 15 Stockholders' Equity
1. In the absence of restrictive provisions, what are the basic rights of stockholders of a corporation?
2. Why is a preemptive right important?
3. Distinguish between common and preferred stock.
4. Why is the distinction between paid-in capital and retained earnings important?
5. Explain each of the following terms: authorized capital stock, unissued capital stock, issued capital stock, outstanding capital stock, and treasury stock.
6. What is meant by par value, and what is its significance to stockholders?
7. Describe the accounting for the issuance for cash of no-par value common stock at a price in excess of the stated value of the common stock.
8. Explain the difference between the proportional method and the incremental method of allocating the proceeds of lump-sum sales of capital stock.
9. What are the different bases for stock valuation when assets other than cash are received for issued shares of stock?
10. Explain how underwriting costs and accounting and legal fees associated with the issuance of stock should be recorded.
11. For what reasons might a corporation purchase its own stock?
12. Discuss the propriety of showing: (a) Treasury stock as an asset. (b) “Gain” or “loss” on sale of treasury stock as additions to or deductions from income. (c) Dividends received on treasury stock as income.
13. What features or rights may alter the character of preferred stock?
14. Dagwood Inc. recently noted that its 4% preferred stock and 4% participating preferred stock, which are both cumulative, have priority as to dividends up to 4% of their par value. Its participating preferred stock participates equally with the common stock in any dividends in excess of 4%. What is meant by the term participating? Cumulative?
15. Where in the financial statements is preferred stock normally reported?
16. List possible sources of additional paid-in capital.
17. Satchel Inc. purchases 10,000 shares of its own previously issued $10 par common stock for $290,000. Assuming the shares are held in the treasury with intent to reissue, what effect does this transaction have on (a) net income, (b) total assets, (c) total paid-in capital, and (d) total stockholders’ equity?
18. Indicate how each of the following accounts should be classified in the stockholders’ equity section. (a) Common Stock (b) Retained Earnings (c) Paid-in Capital in Excess of Par—Common Stock (d) Treasury Stock (e) Paid-in Capital from Treasury Stock (f) Paid-in Capital in Excess of Stated Value—Common Stock (g) Preferred Stock
19. What factors influence the dividend policy of a company?
20. What are the principal considerations of a board of directors in making decisions involving dividend declarations? Discuss briefly.
21. Dividends are sometimes said to have been paid “out of retained earnings.” What is the error, if any, in that statement?
22. Distinguish among: cash dividends, property dividends, liquidating dividends, and stock dividends.
23. Describe the accounting entry for a stock dividend, if any. Describe the accounting entry for a stock split, if any.
24. Stock splits and stock dividends may be used by a corporation to change the number of shares of its stock outstanding. (a) What is meant by a stock split effected in the form of a dividend? (b) From an accounting viewpoint, explain how the stock split effected in the form of a dividend differs from an ordinary stock dividend. (c) How should a stock dividend that has been declared but not yet issued be classified in a balance sheet? Why?
25. The following comment appeared in the notes of Colorado Corporation’s annual report: “Such distributions, representing proceeds from the sale of Sarazan, Inc., were paid in the form of partial liquidating dividends and were in lieu of a portion of the Company’s ordinary cash dividends.” How would a partial liquidating dividend be accounted for in the financial records?
26. This comment appeared in the annual report of MacCloud Inc.: “The Company could pay cash or property dividends on the Class A common stock without paying cash or property dividends on the Class B common stock. But if the Company pays any cash or property dividends on the Class B common stock, it would be required to pay at least the same dividend on the Class A common stock.” How is a property dividend accounted for in the financial records?
27. For what reasons might a company restrict a portion of its retained earnings?
28. How are restrictions of retained earnings reported?
* 29. McNabb Corp. had $100,000 of 7%, $20 par value preferred stock and 12,000 shares of $25 par value common stock outstanding throughout 2012. (a) Assuming that total dividends declared in 2012 were $64,000, and that the preferred stock is not cumulative but is fully participating, common stockholders should receive 2012 dividends of what amount? (b) Assuming that total dividends declared in 2012 were $64,000, and that the preferred stock is fully participating and cumulative with preferred dividends in arrears for 2011, preferred stockholders should receive 2012 dividends totaling what amount? (c) Assuming that total dividends declared in 2012 were $30,000, that the preferred stock is cumulative, nonparticipating, and was issued on January 1, 2011, and that $5,000 of preferred dividends were declared and paid in 2011, the common stockholders should receive 2012 dividends totaling what amount?
BE15-1 Buttercup Corporation issued 300 shares of $10 par value common stock for $4,500. Prepare Buttercup’s journal entry.
BE15-2 Swarten Corporation issued 600 shares of no-par common stock for $8,200. Prepare Swarten’s journal entry if (a) the stock has no stated value, and (b) the stock has a stated value of $2 per share.
BE15-3 Wilco Corporation has the following account balances at December 31, 2012. Common stock, $5 par value $ 510,000 Treasury stock 90,000 Retained earnings 2,340,000 Paid-in capital in excess of par—common stock 1,320,000 Prepare Wilco’s December 31, 2012, stockholders’ equity section.
BE15-4 Ravonette Corporation issued 300 shares of $10 par value common stock and 100 shares of $50 par value preferred stock for a lump sum of $13,500. The common stock has a market price of $20 per share, and the preferred stock has a market price of $90 per share. Prepare the journal entry to record the issuance.
BE15-5 On February 1, 2012, Buffalo Corporation issued 3,000 shares of its $5 par value common stock for land worth $31,000. Prepare the February 1, 2012, journal entry.
BE15-6 Moonwalker Corporation issued 2,000 shares of its $10 par value common stock for $60,000. Moonwalker also incurred $1,500 of costs associated with issuing the stock. Prepare Moonwalker’s journal entry to record the issuance of the company’s stock.
BE15-7 Sprinkle Inc. has outstanding 10,000 shares of $10 par value common stock. On July 1, 2012, Sprinkle reacquired 100 shares at $87 per share. On September 1, Sprinkle reissued 60 shares at $90 per share. On November 1, Sprinkle reissued 40 shares at $83 per share. Prepare Sprinkle’s journal entries to record these transactions using the cost method.
BE15-8 Arantxa Corporation has outstanding 20,000 shares of $5 par value common stock. On August 1, 2012, Arantxa reacquired 200 shares at $80 per share. On November 1, Arantxa reissued the 200 shares at $70 per share. Arantxa had no previous treasury stock transactions. Prepare Arantxa’s journal entries to record these transactions using the cost method.
BE15-9 Hinges Corporation issued 500 shares of $100 par value preferred stock for $61,500. Prepare Hinges’s journal entry.
BE15-10 Woolford Inc. declared a cash dividend of $1.00 per share on its 2 million outstanding shares. The dividend was declared on August 1, payable on September 9 to all stockholders of record on August 15. Prepare all journal entries necessary on those three dates.
BE15-11 Cole Inc. owns shares of Marlin Corporation stock classified as available-for-sale securities. At December 31, 2012, the available-for-sale securities were carried in Cole’s accounting records at their cost of $875,000, which equals their fair value. On September 21, 2013, when the fair value of the securities was 3 3 4 9 3 3 3 4 4 5 6 6 7 BRI E F EXERCI S E S $1,200,000, Cole declared a property dividend whereby the Marlin securities are to be distributed on October 23, 2013, to stockholders of record on October 8, 2013. Prepare all journal entries necessary on those three dates.
BE15-12 Graves Mining Company declared, on April 20, a dividend of $500,000 payable on June 1. Of this amount, $125,000 is a return of capital. Prepare the April 20 and June 1 entries for Graves.
BE15-13 Green Day Corporation has outstanding 400,000 shares of $10 par value common stock. The corporation declares a 5% stock dividend when the fair value of the stock is $65 per share. Prepare the journal entries for Green Day Corporation for both the date of declaration and the date of distribution.
BE15-14 Use the information from
BE15-13, but assume Green Day Corporation declared a 100% stock dividend rather than a 5% stock dividend. Prepare the journal entries for both the date of declaration and the date of distribution. *B E15-15 Nottebart Corporation has outstanding 10,000 shares of $100 par value, 6% preferred stock and 60,000 shares of $10 par value common stock. The preferred stock was issued in January 2012, and no dividends were declared in 2012 or 2013. In 2014, Nottebart declares a cash dividend of $300,000. How will the dividend be shared by common and preferred stockholders if the preferred is (a) noncumulative and (b) cumulative? EXERCI S E S
E15-1 (Recording the Issuances of Common Stock) During its first year of operations, Sitwell Corporation had the following transactions pertaining to its common stock. Jan. 10 Issued 80,000 shares for cash at $6 per share. Mar. 1 Issued 5,000 shares to attorneys in payment of a bill for $35,000 for services rendered in helping the company to incorporate. July 1 Issued 30,000 shares for cash at $8 per share. Sept. 1 Issued 60,000 shares for cash at $10 per share.
Instructions (a) Prepare the journal entries for these transactions, assuming that the common stock has a par value of $3 per share. (b) Prepare the journal entries for these transactions, assuming that the common stock is no-par with a stated value of $2 per share.
E15-2 (Recording the Issuance of Common and Preferred Stock) Abernathy Corporation was organized on January 1, 2012. It is authorized to issue 10,000 shares of 8%, $50 par value preferred stock, and 500,000 shares of no-par common stock with a stated value of $2 per share. The following stock transactions were completed during the first year. Jan. 10 Issued 80,000 shares of common stock for cash at $5 per share. Mar. 1 Issued 5,000 shares of preferred stock for cash at $108 per share. Apr. 1 Issued 24,000 shares of common stock for land. The asking price of the land was $90,000; the fair value of the land was $80,000. May 1 Issued 80,000 shares of common stock for cash at $7 per share. Aug. 1 Issued 10,000 shares of common stock to attorneys in payment of their bill of $50,000 for services rendered in helping the company organize. Sept. 1 Issued 10,000 shares of common stock for cash at $9 per share. Nov. 1 Issued 1,000 shares of preferred stock for cash at $112 per share.
Instructions Prepare the journal entries to record the above transactions.
E15-3 (Stock Issued for Land) Twenty-five thousand shares reacquired by Pierce Corporation for $48 per share were exchanged for undeveloped land that has an appraised value of $1,700,000. At the time of the exchange, the common stock was trading at $60 per share on an organized exchange.
Instructions (a) Prepare the journal entry to record the acquisition of land assuming that the purchase of the stock was originally recorded using the cost method. (b) Briefly identify the possible alternatives (including those that are totally unacceptable) for quantifying the cost of the land and briefly support your choice.
E15-4 (Lump-Sum Sale of Stock with Bonds) Fogelberg Corporation is a regional company which is an SEC registrant. The corporation’s securities are thinly traded on NASDAQ (National Association of Securities Dealers Quotes). Fogelberg has issued 10,000 units. Each unit consists of a $500 par, 12% subordinated debenture and 10 shares of $5 par common stock. The investment banker has retained 400 units as the underwriting fee. The other 9,600 units were sold to outside investors for cash at $850 per unit. Prior to this sale the 2-week ask price of common stock was $40 per share. Twelve percent is a reasonable market yield for the debentures, and therefore the par value of the bonds is equal to the fair value.
Instructions (a) Prepare the journal entry to record Fogelberg’s transaction, under the following conditions. (1) Employing the incremental method. (2) Employing the proportional method, assuming the recent price quote on the common stock reflects fair value. (b) Briefly explain which method is, in your opinion, the better method.
E15-5 (Lump-Sum Sales of Stock with Preferred Stock) Hartman Inc. issues 500 shares of $10 par value common stock and 100 shares of $100 par value preferred stock for a lump sum of $100,000.
Instructions (a) Prepare the journal entry for the issuance when the market price of the common shares is $168 each and market price of the preferred is $210 each. (Round to nearest dollar.) (b) Prepare the journal entry for the issuance when only the market price of the common stock is known and it is $170 per share.
E15-6 (Stock Issuances and Repurchase) Loxley Corporation is authorized to issue 50,000 shares of $10 par value common stock. During 2012, Loxley took part in the following selected transactions. 1. Issued 5,000 shares of stock at $45 per share, less costs related to the issuance of the stock totaling $7,000. 2. Issued 1,000 shares of stock for land appraised at $50,000. The stock was actively traded on a national stock exchange at approximately $46 per share on the date of issuance. 3. Purchased 500 shares of treasury stock at $44 per share. The treasury shares purchased were issued in 2008 at $40 per share.
Instructions (a) Prepare the journal entry to record item 1. (b) Prepare the journal entry to record item 2. (c) Prepare the journal entry to record item 3 using the cost method.
E15-7 (Effect of Treasury Stock Transactions on Financials) Sanborn Company has outstanding 40,000 shares of $5 par common stock which had been issued at $30 per share. Sanborn then entered into the following transactions. 1. Purchased 5,000 treasury shares at $45 per share. 2. Resold 500 of the treasury shares at $40 per share. 3. Resold 2,000 of the treasury shares at $49 per share.
Instructions Use the following code to indicate the effect each of the three transactions has on the financial statement categories listed in the table below, assuming Sanborn Company uses the cost method: I 5 Increase; D 5 Decrease; NE 5 No effect. Stockholders’ Paid-in Retained Net # Assets Liabilities Equity Capital Earnings Income 1 2 3
E15-8 (Preferred Stock Entries and Dividends) Weisberg Corporation has 10,000 shares of $100 par value, 6% preferred stock and 50,000 shares of $10 par value common stock outstanding at December 31, 2012.
Instructions Answer the questions in each of the following independent situations. (a) If the preferred stock is cumulative and dividends were last paid on the preferred stock on December 31, 2009, what are the dividends in arrears that should be reported on the December 31, 2012, balance sheet? How should these dividends be reported? 3 3 5 3 4 4 3 5 10 (b) If the preferred stock is convertible into seven shares of $10 par value common stock and 3,000 shares are converted, what entry is required for the conversion assuming the preferred stock was issued at par value? (c) If the preferred stock was issued at $107 per share, how should the preferred stock be reported in the stockholders’ equity section?
E15-9 (Correcting Entries for Equity Transactions) Davison Inc. recently hired a new accountant with extensive experience in accounting for partnerships. Because of the pressure of the new job, the accountant was unable to review what he had learned earlier about corporation accounting. During the first month, he made the following entries for the corporation’s capital stock. May 2 Cash 192,000 Common Stock 192,000 (Issued 12,000 shares of $10 par value common stock at $16 per share) 10 Cash 600,000 Common Stock 600,000 (Issued 10,000 shares of $30 par value preferred stock at $60 per share) 15 Common Stock 14,000 Cash 14,000 (Purchased 1,000 shares of common stock for the treasury at $14 per share) 31 Cash 8,500 Common Stock 5,000 Gain on Sale of Stock 3,500 (Sold 500 shares of treasury stock at $17 per share)
Instructions On the basis of the explanation for each entry, prepare the entries that should have been made for the transactions.
E15-10 (Analysis of Equity Data and Equity Section Preparation) For a recent 2-year period, the balance sheet of Franklin Company showed the following stockholders’ equity data at December 31 in millions. 2013 2012 Paid-in capital in excess of par—common stock $ 891 $ 817 Common stock 545 540 Retained earnings 7,167 5,226 Treasury stock 1,428 918 Total stockholders’ equity $7,175 $5,665 Common stock shares issued 218 216 Common stock shares authorized 500 500 Treasury stock shares 34 27
Instructions (a) Answer the following questions. (1) What is the par value of the common stock? (2) What is the cost per share of treasury stock at December 31, 2013, and at December 31, 2012? (b) Prepare the stockholders’ equity section at December 31, 2013.
E15-11 (Equity Items on the Balance Sheet) The following are selected transactions that may affect stockholders’ equity. 1. Recorded accrued interest earned on a note receivable. 2. Declared and distributed a stock split. 3. Declared a cash dividend. 4. Recorded a retained earnings restriction. 5. Recorded the expiration of insurance coverage that was previously recorded as prepaid insurance. 6. Paid the cash dividend declared in item 3 above. 7. Recorded accrued interest expense on a note payable. 8. Declared a stock dividend. 9. Distributed the stock dividend declared in item 8. Instructions In the following table, indicate the effect each of the nine transactions has on the financial statement elements listed. Use the following code: Stockholders’ Paid-in Retained Net Item Assets Liabilities Equity Capital Earnings Income I 5 Increase D 5 Decrease NE 5 No effect
E15-12 (Cash Dividend and Liquidating Dividend) Addison Corporation has 10 million shares of common stock issued and outstanding. On June 1, the board of directors voted a 60 cents per share cash dividend to stockholders of record as of June 14, payable June 30.
Instructions (a) Prepare the journal entry for each of the dates above assuming the dividend represents a distribution of earnings. (b) How would the entry differ if the dividend were a liquidating dividend?
E15-13 (Stock Split and Stock Dividend) The common stock of Warner Inc. is currently selling at $110 per share. The directors wish to reduce the share price and increase share volume prior to a new issue. The per share par value is $10; book value is $70 per share. Five million shares are issued and outstanding.
Instructions Prepare the necessary journal entries assuming the following. (a) The board votes a 2-for-1 stock split. (b) The board votes a 100% stock dividend. (c) Briefly discuss the accounting and securities market differences between these two methods of increasing the number of shares outstanding.
E15-14 (Entries for Stock Dividends and Stock Splits) The stockholders’ equity accounts of Lawrence Company have the following balances on December 31, 2012. Common stock, $10 par, 200,000 shares issued and outstanding $2,000,000 Paid-in capital in excess of par—common stock 1,200,000 Retained earnings 5,600,000 Shares of Lawrence Company stock are currently selling on the Midwest Stock Exchange at $37.
Instructions Prepare the appropriate journal entries for each of the following cases. (a) A stock dividend of 5% is declared and issued. (b) A stock dividend of 100% is declared and issued. (c) A 2-for-1 stock split is declared and issued.
E15-15 (Dividend Entries) The following data were taken from the balance sheet accounts of Wickham Corporation on December 31, 2012. Current assets $540,000 Debt investments 624,000 Common stock (par value $10) 600,000 Paid-in capital in excess of par—common stock 150,000 Retained earnings 840,000 7 8 8 7 8
Instructions Prepare the required journal entries for the following unrelated items. (a) A 5% stock dividend is declared and distributed at a time when the market price is $39 per share. (b) The par value of the capital stock is reduced to $2 with a 5-for-1 stock split. (c) A dividend is declared January 5, 2013, and paid January 25, 2013, in bonds held as an investment. The bonds have a book value of $90,000 and a fair value of $125,000.
E15-16 (Computation of Retained Earnings) The following information has been taken from the ledger accounts of Sampras Corporation. Total income since incorporation $287,000 Total cash dividends paid 60,000 Total value of stock dividends distributed 40,000 Gains on treasury stock transactions 18,000 Unamortized discount on bonds payable 32,000
Instructions Determine the current balance of retained earnings.
E15-17 (Stockholders’ Equity Section) Teller Corporation’s post-closing trial balance at December 31, 2012, was as follows. TELLER CORPORATION POST-CLOSING TRIAL BALANCE DECEMBER 31, 2012 Dr. Cr. Accounts Payable $ 310,000 Accounts Receivable $ 480,000 Accumulated Depreciation—Buildings 185,000 Paid-in Capital in Excess of Par—Common Stock 1,000,000 Paid-in Capital from Treasury Stock 160,000 Allowance for Doubtful Accounts 30,000 Bonds Payable 700,000 Buildings 1,450,000 Cash 190,000 Common Stock ($1 par value) 200,000 Dividends Payable (preferred stock) 4,000 Inventory 560,000 Land 400,000 Preferred Stock ($50 par value) 500,000 Prepaid Expenses 40,000 Retained Earnings 201,000 Treasury Stock (common) 170,000 Totals $3,290,000 $3,290,000 At December 31, 2012, Teller had the following number of common and preferred shares. Common Preferred Authorized 600,000 60,000 Issued 200,000 10,000 Outstanding 190,000 10,000 The dividends on preferred stock are $4 cumulative. In addition, the preferred stock has a preference in liquidation of $50 per share.
Instructions Prepare the stockholders’ equity section of Teller’s balance sheet at December 31, 2012. (AICPA adapted)
E15-18 (Dividends and Stockholders’ Equity Section) Elizabeth Company reported the following amounts in the stockholders’ equity section of its December 31, 2012, balance sheet. Preferred stock, 8%, $100 par (10,000 shares authorized, 2,000 shares issued) $200,000 Common stock, $5 par (100,000 shares authorized, 20,000 shares issued) 100,000 Additional paid-in capital 125,000 Retained earnings 450,000 Total $875,000 During 2013, Elizabeth took part in the following transactions concerning stockholders’ equity. 1. Paid the annual 2012 $8 per share dividend on preferred stock and a $2 per share dividend on common stock. These dividends had been declared on December 31, 2012. 2. Purchased 2,700 shares of its own outstanding common stock for $40 per share. Elizabeth uses the cost method. 3. Reissued 700 treasury shares for land valued at $30,000. 4. Issued 500 shares of preferred stock at $105 per share. 5. Declared a 10% stock dividend on the outstanding common stock when the stock is selling for $45 per share. 6. Issued the stock dividend. 7. Declared the annual 2013 $8 per share dividend on preferred stock and the $2 per share dividend on common stock. These dividends are payable in 2014.
Instructions (a) Prepare journal entries to record the transactions described above. (b) Prepare the December 31, 2013, stockholders’ equity section. Assume 2013 net income was $330,000.
E15-19 (Comparison of Alternative Forms of Financing) Shown below is the liabilities and stockholders’ equity section of the balance sheet for Ingalls Company and Wilder Company. Each has assets totaling $4,200,000. Ingalls Co. Wilder Co. Current liabilities $ 300,000 Current liabilities $ 600,000 Long-term debt, 10% 1,200,000 Common stock ($20 par) 2,900,000 Common stock ($20 par) 2,000,000 Retained earnings (Cash Retained earnings (Cash dividends, $328,000) 700,000 dividends, $220,000) 700,000 $4,200,000 $4,200,000 For the year, each company has earned the same income before interest and taxes. Ingalls Co. Wilder Co. Income before interest and taxes $1,200,000 $1,200,000 Interest expense 120,000 –0– 1,080,000 1,200,000 Income taxes (40%) 432,000 480,000 Net income $ 648,000 $ 720,000 At year-end, the market price of Ingalls’s stock was $101 per share, and Wilder’s was $63.50. Assume balance sheet amounts are representative for the entire year.
Instructions (a) Which company is more profitable in terms of return on total assets? (b) Which company is more profitable in terms of return on stockholders’ equity? (c) Which company has the greater net income per share of stock? Neither company issued or reacquired shares during the year. (d) From the point of view of net income, is it advantageous to the stockholders of Ingalls Co. to have the long-term debt outstanding? Why? (e) What is the book value per share for each company? 4 7 8 9
E15-20 (Trading on the Equity Analysis) Presented below is information from the annual report of Potter Plastics, Inc. Operating income $ 532,150 Bond interest expense 135,000 397,150 Income taxes 183,432 Net income $ 213,718 Bonds payable $1,500,000 Common stock 875,000 Retained earnings 575,000
Instructions (a) Compute the return on common stock equity and the rate of interest paid on bonds. (Assume balances for debt and equity accounts approximate averages for the year.) (b) Is Potter Plastics, Inc. trading on the equity successfully? Explain. *E 15-21 (Preferred Dividends) The outstanding capital stock of Pennington Corporation consists of 2,000 shares of $100 par value, 6% preferred, and 5,000 shares of $50 par value common.
Instructions Assuming that the company has retained earnings of $70,000, all of which is to be paid out in dividends, and that preferred dividends were not paid during the 2 years preceding the current year, determine how much each class of stock should receive under each of the following conditions. (a) The preferred stock is noncumulative and nonparticipating. (b) The preferred stock is cumulative and nonparticipating. (c) The preferred stock is cumulative and participating. (Round dividend rate percentages to four decimal places.) *
E15-22 (Preferred Dividends) Martinez Company’s ledger shows the following balances on December 31, 2012. Preferred Stock (5%; $10 par value, outstanding 20,000 shares) $ 200,000 Common Stock ($100 par value, outstanding 30,000 shares) 3,000,000 Retained Earnings 630,000
Instructions Assuming that the directors decide to declare total dividends in the amount of $266,000, determine how much each class of stock should receive under each of the conditions stated below. One year‘s dividends are in arrears on the preferred stock. (a) The preferred stock is cumulative and fully participating. (b) The preferred stock is noncumulative and nonparticipating. (c) The preferred stock is noncumulative and is participating in distributions in excess of a 7% dividend rate on the common stock. *
E15-23 (Preferred Stock Dividends) Hagar Company has outstanding 2,500 shares of $100 par, 6% preferred stock and 15,000 shares of $10 par value common. The schedule below shows the amount of dividends paid out over the last 4 years.
Instructions Allocate the dividends to each type of stock under assumptions (a) and (b). Express your answers in per share amounts using the format shown below. Assumptions (a) (b) Preferred, noncumulative, Preferred, cumulative, and nonparticipating and fully participating Year Paid-out Preferred Common Preferred Common 2011 $12,000 2012 $26,000 2013 $52,000 2014 $76,000 *
E15-24 (Computation of Book Value per Share) Johnstone Inc. began operations in January 2011 and reported the following results for each of its 3 years of operations. 2011 $260,000 net loss 2012 $40,000 net loss 2013 $700,000 net income At December 31, 2013, Johnstone Inc. capital accounts were as follows. 6% cumulative preferred stock, par value $100; authorized, issued, and outstanding 5,000 shares $500,000 Common stock, par value $1.00; authorized 1,000,000 shares; issued and outstanding 750,000 shares $750,000 Johnstone Inc. has never paid a cash or stock dividend. There has been no change in the capital accounts since Johnstone began operations. The state law permits dividends only from retained earnings.
Instructions (a) Compute the book value of the common stock at December 31, 2013. (b) Compute the book value of the common stock at December 31, 2013, assuming that the preferred stock has a liquidating value of $106 per share. See the book’s companion website, www.wiley.com/college/kieso, for a set of B Exercises.
P15-1 (Equity Transactions and Statement Preparation) On January 5, 2012, Phelps Corporation received a charter granting the right to issue 5,000 shares of $100 par value, 8% cumulative and nonparticipating preferred stock, and 50,000 shares of $10 par value common stock. It then completed these transactions. Jan. 11 Issued 20,000 shares of common stock at $16 per share. Feb. 1 Issued to Sanchez Corp. 4,000 shares of preferred stock for the following assets: equipment with a fair value of $50,000; a factory building with a fair value of $160,000; and land with an appraised value of $270,000. July 29 Purchased 1,800 shares of common stock at $17 per share. (Use cost method.) Aug. 10 Sold the 1,800 treasury shares at $14 per share. Dec. 31 Declared a $0.25 per share cash dividend on the common stock and declared the preferred dividend. Dec. 31 Closed the Income Summary account. There was a $175,700 net income.
Instructions (a) Record the journal entries for the transactions listed above. (b) Prepare the stockholders’ equity section of Phelps Corporation’s balance sheet as of December 31, 2012.
P15-2 (Treasury Stock Transactions and Presentation) Clemson Company had the following stockholders’ equity as of January 1, 2012. Common stock, $5 par value, 20,000 shares issued $100,000 Paid-in capital in excess of par—common stock 300,000 Retained earnings 320,000 Total stockholders’ equity $720,000 During 2012, the following transactions occurred. Feb. 1 Clemson repurchased 2,000 shares of treasury stock at a price of $19 per share. Mar. 1 800 shares of treasury stock repurchased above were reissued at $17 per share. Mar. 18 500 shares of treasury stock repurchased above were reissued at $14 per share. Apr. 22 600 shares of treasury stock repurchased above were reissued at $20 per share. 3 4 9 10 4 9 PROBLEMS
Instructions (a) Prepare the journal entries to record the treasury stock transactions in 2012, assuming Clemson uses the cost method. (b) Prepare the stockholders’ equity section as of April 30, 2012. Net income for the first 4 months of 2012 was $130,000.
P15-3 (Equity Transactions and Statement Preparation) Hatch Company has two classes of capital stock outstanding: 8%, $20 par preferred and $5 par common. At December 31, 2012, the following accounts were included in stockholders’ equity. Preferred Stock, 150,000 shares $ 3,000,000 Common Stock, 2,000,000 shares 10,000,000 Paid-in Capital in Excess of Par—Preferred Stock 200,000 Paid-in Capital in Excess of Par—Common Stock 27,000,000 Retained Earnings 4,500,000 The following transactions affected stockholders’ equity during 2013. Jan. 1 30,000 shares of preferred stock issued at $22 per share. Feb. 1 50,000 shares of common stock issued at $20 per share. June 1 2-for-1 stock split (par value reduced to $2.50). July 1 30,000 shares of common treasury stock purchased at $10 per share. Hatch uses the cost method. Sept. 15 10,000 shares of treasury stock reissued at $11 per share. Dec. 31 The preferred dividend is declared, and a common dividend of 50￠ per share is declared. Dec. 31 Net income is $2,100,000.
Instructions Prepare the stockholders’ equity section for Hatch Company at December 31, 2013. Show all supporting computations.
P15-4 (Stock Transactions—Lump Sum) Seles Corporation’s charter authorized issuance of 100,000 shares of $10 par value common stock and 50,000 shares of $50 preferred stock. The following transactions involving the issuance of shares of stock were completed. Each transaction is independent of the others. 1. Issued a $10,000, 9% bond payable at par and gave as a bonus one share of preferred stock, which at that time was selling for $106 a share. 2. Issued 500 shares of common stock for equipment. The equipment had been appraised at $7,100; the seller’s book value was $6,200. The most recent market price of the common stock is $16 a share. 3. Issued 375 shares of common and 100 shares of preferred for a lump sum amounting to $10,800. The common had been selling at $14 and the preferred at $65. 4. Issued 200 shares of common and 50 shares of preferred for equipment. The common had a fair value of $16 per share; the equipment has a fair value of $6,500.
Instructions Record the transactions listed above in journal entry form.
P15-5 (Treasury Stock—Cost Method) Before Gordon Corporation engages in the treasury stock transactions listed below, its general ledger reflects, among others, the following account balances (par value of its stock is $30 per share). Paid-in Capital in Excess of Par—Common Stock Common Stock Retained Earnings $99,000 $270,000 $80,000
Instructions Record the treasury stock transactions (given below) under the cost method of handling treasury stock; use the FIFO method for purchase-sale purposes. (a) Bought 380 shares of treasury stock at $40 per share. (b) Bought 300 shares of treasury stock at $45 per share. (c) Sold 350 shares of treasury stock at $42 per share. (d) Sold 110 shares of treasury stock at $38 per share.
P15-6 (Treasury Stock—Cost Method—Equity Section Preparation) Washington Company has the following stockholders’ equity accounts at December 31, 2012. Common Stock ($100 par value, authorized 8,000 shares) $480,000 Retained Earnings 294,000
Instructions (a) Prepare entries in journal form to record the following transactions, which took place during 2013. (1) 280 shares of outstanding stock were purchased at $97 per share. (These are to be accounted for using the cost method.) (2) A $20 per share cash dividend was declared. (3) The dividend declared in (2) above was paid. (4) The treasury shares purchased in (1) above were resold at $102 per share. (5) 500 shares of outstanding stock were purchased at $105 per share. (6) 350 of the shares purchased in (5) above were resold at $96 per share. (b) Prepare the stockholders’ equity section of Washington Company’s balance sheet after giving effect to these transactions, assuming that the net income for 2013 was $94,000. State law requires restriction of retained earnings for the amount of treasury stock.
P15-7 (Cash Dividend Entries) The books of Conchita Corporation carried the following account balances as of December 31, 2012. Cash $ 195,000 Preferred Stock (6% cumulative, nonparticipating, $50 par) 300,000 Common Stock (no-par value, 300,000 shares issued) 1,500,000 Paid-in Capital in Excess of Par—Preferred Stock 150,000 Treasury Stock (common 2,800 shares at cost) 33,600 Retained Earnings 105,000 The company decided not to pay any dividends in 2012. The board of directors, at their annual meeting on December 21, 2013, declared the following: “The current year dividends shall be 6% on the preferred and $.30 per share on the common. The dividends in arrears shall be paid by issuing 1,500 shares of treasury stock.” At the date of declaration, the preferred is selling at $80 per share, and the common at $12 per share. Net income for 2013 is estimated at $77,000.
Instructions (a) Prepare the journal entries required for the dividend declaration and payment, assuming that they occur simultaneously. (b) Could Conchita Corporation give the preferred stockholders 2 years’ dividends and common stockholders a 30 cents per share dividend, all in cash?
P15-8 (Dividends and Splits) Myers Company provides you with the following condensed balance sheet information. Assets Liabilities and Stockholders’ Equity Current assets $ 40,000 Current and long-term liabilities $100,000 Equity investments (ABC stock; Stockholders’ equity 10,000 shares at cost) 60,000 Common stock ($5 par) $ 20,000 Equipment (net) 250,000 Paid-in capital in excess of par 110,000 Intangibles 60,000 Retained earnings 180,000 310,000 Total assets $410,000 Total liabilities and stockholders’ equity $410,000
Instructions For each transaction below, indicate the dollar impact (if any) on the following five items: (1) total assets, (2) common stock, (3) paid-in capital in excess of par, (4) retained earnings, and (5) stockholders’ equity. (Each situation is independent.) (a) Myers declares and pays a $0.50 per share cash dividend. (b) Myers declares and issues a 10% stock dividend when the market price of the stock is $14 per share. 4 7 9 4 7 7 8 (c) Myers declares and issues a 30% stock dividend when the market price of the stock is $15 per share. (d) Myers declares and distributes a property dividend. Myers gives one share of ABC stock for every two shares of Myers Company stock held. ABC is selling for $10 per share on the date the property dividend is declared. (e) Myers declares a 2-for-1 stock split and issues new shares.
P15-9 (Stockholders’ Equity Section of Balance Sheet) The following is a summary of all relevant transactions of Vicario Corporation since it was organized in 2012. In 2012, 15,000 shares were authorized and 7,000 shares of common stock ($50 par value) were issued at a price of $57. In 2013, 1,000 shares were issued as a stock dividend when the stock was selling for $60. Three hundred shares of common stock were bought in 2014 at a cost of $64 per share. These 300 shares are still in the company treasury. In 2013, 10,000 preferred shares were authorized and the company issued 5,000 of them ($100 par value) at $113. Some of the preferred stock was reacquired by the company and later reissued for $4,700 more than it cost the company. The corporation has earned a total of $610,000 in net income after income taxes and paid out a total of $312,600 in cash dividends since incorporation.
Instructions Prepare the stockholders’ equity section of the balance sheet in proper form for Vicario Corporation as of December 31, 2014. Account for treasury stock using the cost method.
P15-10 (Stock Dividends and Stock Split) Oregon Inc. $10 par common stock is selling for $110 per share. Four million shares are currently issued and outstanding. The board of directors wishes to stimulate interest in Oregon common stock before a forthcoming stock issue but does not wish to distribute capital at this time. The board also believes that too many adjustments to the stockholders’ equity section, especially retained earnings, might discourage potential investors. The board has considered three options for stimulating interest in the stock: 1. A 20% stock dividend. 2. A 100% stock dividend. 3. A 2-for-1 stock split.
Instructions Acting as financial advisor to the board, you have been asked to report briefly on each option and, considering the board’s wishes, make a recommendation. Discuss the effects of each of the foregoing options.
P15-11 (Stock and Cash Dividends) Earnhart Corporation has outstanding 3,000,000 shares of common stock of a par value of $10 each. The balance in its Retained Earnings account at January 1, 2012, was $24,000,000, and it then had Paid-in Capital in Excess of Par—Common Stock of $5,000,000. During 2012, the company’s net income was $4,700,000. A cash dividend of $0.60 a share was declared on May 5, 2012, and was paid June 30, 2012, and a 6% stock dividend was declared on November 30, 2012, and distributed to stockholders of record at the close of business on December 31, 2012. You have been asked to advise on the proper accounting treatment of the stock dividend. The existing stock of the company is quoted on a national stock exchange. The market price of the stock has been as follows. October 31, 2012 $31 November 30, 2012 $34 December 31, 2012 $38
Instructions (a) Prepare the journal entry to record the declaration and payment of the cash dividend. (b) Prepare the journal entry to record the declaration and distribution of the stock dividend. (c) Prepare the stockholders’ equity section (including schedules of retained earnings and additional paid-in capital) of the balance sheet of Earnhart Corporation for the year 2012 on the basis of the foregoing information. Draft a note to the financial statements setting forth the basis of the accounting for the stock dividend, and add separately appropriate comments or explanations regarding the basis chosen.
P15-12 (Analysis and Classification of Equity Transactions) Penn Company was formed on July 1, 2010. It was authorized to issue 300,000 shares of $10 par value common stock and 100,000 shares of 8% $25 par value, cumulative and nonparticipating preferred stock. Penn Company has a July 1–June 30 fiscal year. The following information relates to the stockholders’ equity accounts of Penn Company. Common Stock Prior to the 2012–13 fiscal year, Penn Company had 110,000 shares of outstanding common stock issued as follows. 1. 85,000 shares were issued for cash on July 1, 2010, at $31 per share. 2. On July 24, 2010, 5,000 shares were exchanged for a plot of land which cost the seller $70,000 in 2004 and had an estimated fair value of $220,000 on July 24, 2010. 3. 20,000 shares were issued on March 1, 2011, for $42 per share. During the 2012–13 fiscal year, the following transactions regarding common stock took place. November 30, 2012 Penn purchased 2,000 shares of its own stock on the open market at $39 per share. Penn uses the cost method for treasury stock. December 15, 2012 Penn declared a 5% stock dividend for stockholders of record on January 15, 2013, to be issued on January 31, 2013. Penn was having a liquidity problem and could not afford a cash dividend at the time. Penn’s common stock was selling at $52 per share on December 15, 2012. June 20, 2013 Penn sold 500 shares of its own common stock that it had purchased on November 30, 2012, for $21,000. Preferred Stock Penn issued 40,000 shares of preferred stock at $44 per share on July 1, 2011. Cash Dividends Penn has followed a schedule of declaring cash dividends in December and June, with payment being made to stockholders of record in the following month. The cash dividends which have been declared since inception of the company through June 30, 2013, are shown below. Declaration Common Preferred Date Stock Stock 12/15/11 $0.30 per share $1.00 per share 6/15/12 $0.30 per share $1.00 per share 12/15/12 — $1.00 per share No cash dividends were declared during June 2013 due to the company’s liquidity problems. Retained Earnings As of June 30, 2012, Penn’s retained earnings account had a balance of $690,000. For the fiscal year ending June 30, 2013, Penn reported net income of $40,000.
Instructions Prepare the stockholders’ equity section of the balance sheet, including appropriate notes, for Penn Company as of June 30, 2013, as it should appear in its annual report to the shareholders. (CMA adapted)
CA15-1 (Preemptive Rights and Dilution of Ownership) Wallace Computer Company is a small, closely held corporation. Eighty percent of the stock is held by Derek Wallace, president. Of the remainder, 10% is held by members of his family and 10% by Kathy Baker, a former officer who is now retired. The balance sheet of the company at June 30, 2012, was substantially as shown below. Assets Liabilities and Stockholders’ Equity Cash $ 22,000 Current liabilities $ 50,000 Other 450,000 Capital stock 250,000 $472,000 Retained earnings 172,000 $472,000 Additional authorized capital stock of $300,000 par value had never been issued. To strengthen the cash position of the company, Wallace issued capital stock with a par value of $100,000 to himself at par for cash. At the next stockholders’ meeting, Baker objected and claimed that her interests had been injured. CONCEPTS FOR ANALYS I S
Instructions (a) Which stockholder’s right was ignored in the issue of shares to Derek Wallace? (b) How may the damage to Baker’s interests be repaired most simply? (c) If Derek Wallace offered Baker a personal cash settlement and they agreed to employ you as an impartial arbitrator to determine the amount, what settlement would you propose? Present your calculations with sufficient explanation to satisfy both parties.
CA15-2 (Issuance of Stock for Land) Martin Corporation is planning to issue 3,000 shares of its own $10 par value common stock for two acres of land to be used as a building site.
Instructions (a) What general rule should be applied to determine the amount at which the land should be recorded? (b) Under what circumstances should this transaction be recorded at the fair value of the land? (c) Under what circumstances should this transaction be recorded at the fair value of the stock issued? (d) Assume Martin intentionally records this transaction at an amount greater than the fair value of the land and the stock. Discuss this situation.
CA15-3 (Conceptual Issues—Equity) Statements of Financial Accounting Concepts set forth financial accounting and reporting objectives and fundamentals that will be used by the Financial Accounting Standards Board in developing standards. Concepts Statement No. 6 defines various elements of financial statements.
Instructions Answer the following questions based on SFAC No. 6. (a) Define and discuss the term “equity.” (b) What transactions or events change owners’ equity? (c) Define “investments by owners” and provide examples of this type of transaction. What financial statement element other than equity is typically affected by owner investments? (d) Define “distributions to owners” and provide examples of this type of transaction. What financial statement element other than equity is typically affected by distributions? (e) What are examples of changes within owners’ equity that do not change the total amount of owners’ equity?
CA15-4 (Stock Dividends and Splits) The directors of Merchant Corporation are considering the issuance of a stock dividend. They have asked you to discuss the proposed action by answering the following questions.
Instructions (a) What is a stock dividend? How is a stock dividend distinguished from a stock split (1) from a legal standpoint, and (2) from an accounting standpoint? (b) For what reasons does a corporation usually declare a stock dividend? A stock split? (c) Discuss the amount, if any, of retained earnings to be capitalized in connection with a stock dividend. (AICPA adapted)
CA15-5 (Stock Dividends) Kulikowski Inc., a client, is considering the authorization of a 10% common stock dividend to common stockholders. The financial vice president of Kulikowski wishes to discuss the accounting implications of such an authorization with you before the next meeting of the board of directors.
Instructions (a) The first topic the vice president wishes to discuss is the nature of the stock dividend to the recipient. Discuss the case against considering the stock dividend as income to the recipient. (b) The other topic for discussion is the propriety of issuing the stock dividend to all “stockholders of record” or to “stockholders of record exclusive of shares held in the name of the corporation as treasury stock.” Discuss the case against issuing stock dividends on treasury shares. (AICPA adapted)
CA15-6 (Stock Dividend, Cash Dividend, and Treasury Stock) Mask Company has 30,000 shares of $10 par value common stock authorized and 20,000 shares issued and outstanding. On August 15, 2012, Mask purchased 1,000 shares of treasury stock for $18 per share. Mask uses the cost method to account for treasury stock. On September 14, 2012, Mask sold 500 shares of the treasury stock for $20 per share. In October 2012, Mask declared and distributed 1,950 shares as a stock dividend from unissued shares when the market price of the common stock was $21 per share. On December 20, 2012, Mask declared a $1 per share cash dividend, payable on January 10, 2013, to shareholders of record on December 31, 2012.
Instructions (a) How should Mask account for the purchase and sale of the treasury stock, and how should the treasury stock be presented in the balance sheet at December 31, 2012? (b) How should Mask account for the stock dividend, and how would it affect the stockholders’ equity at December 31, 2012? Why? (c) How should Mask account for the cash dividend, and how would it affect the balance sheet at December 31, 2012? Why? (AICPA adapted)
CA15-7 (Treasury Stock—Ethics) Lois Kenseth, president of Sycamore Corporation, is concerned about several large stockholders who have been very vocal lately in their criticisms of her leadership. She thinks they might mount a campaign to have her removed as the corporation’s CEO. She decides that buying them out by purchasing their shares could eliminate them as opponents, and she is confident they would accept a “good” offer. Kenseth knows the corporation’s cash position is decent, so it has the cash to complete the transaction. She also knows the purchase of these shares will increase earnings per share, which should make other investors quite happy. (Earnings per share is calculated by dividing net income available for the common shareholders by the weighted-average number of shares outstanding. Therefore, if the number of shares outstanding is decreased by purchasing treasury shares, earnings per share increases.)
Instructions Answer the following questions. (a) Who are the stakeholders in this situation? (b) What are the ethical issues involved? (c) Should Kenseth authorize the transaction? USING YOUR JUDGMENT FINANCIAL REPORTING Financial Reporting Problem The Procter & Gamble Company (P&G) The financial statements of P&G are presented in Appendix 5B or can be accessed at the book’s companion website, www.wiley.com/college/kieso.
Instructions Refer to these financial statements and the accompanying notes to answer the following questions. (a) What is the par or stated value of P&G’s preferred stock? (b) What is the par or stated value of P&G’s common stock? (c) What percentage of P&G’s authorized common stock was issued at June 30, 2009? (d) How many shares of common stock were outstanding at June 30, 2009, and June 30, 2008? (e) What was the dollar amount effect of the cash dividends on P&G’s stockholders’ equity? (f) What is P&G’s rate of return on common stock equity for 2009 and 2008? (g) What is P&G’s payout ratio for 2009 and 2008? (h) What was the market price range (high/low) of P&G’s common stock during the quarter ended June 30, 2009? Using Your Judgment 893
Comparative Analysis Case
The Coca-Cola Company and PepsiCo, Inc.
Instructions Go to the book’s companion website and use information found there to answer the following questions related to The Coca-Cola Company and PepsiCo, Inc. (a) What is the par or stated value of Coca-Cola’s and PepsiCo’s common or capital stock? (b) What percentage of authorized shares was issued by Coca-Cola at December 31, 2009, and by PepsiCo at December 26, 2009? (c) How many shares are held as treasury stock by Coca-Cola at December 31, 2009, and by PepsiCo at December 26, 2009? (d) How many Coca-Cola common shares are outstanding at December 31, 2009? How many PepsiCo shares of capital stock are outstanding at December 26, 2009? (e) What amounts of cash dividends per share were declared by Coca-Cola and PepsiCo in 2009? What were the dollar amount effects of the cash dividends on each company’s stockholders’ equity? (f) What are Coca-Cola’s and PepsiCo’s rate of return on common/capital stock equity for 2009 and 2008? Which company gets the higher return on the equity of its shareholders? (g) What are Coca-Cola’s and PepsiCo’s payout ratios for 2009? (h) What was the market price range (high/low) for Coca-Cola’s common stock and PepsiCo’s capital stock during the fourth quarter of 2009? Which company’s (Coca-Cola’s or PepsiCo’s) stock price increased more (%) during 2009?
Financial Statement Analysis Cases
Case 1 Kellogg Company Kellogg Company is the world’s leading producer of ready-to-eat cereal products. In recent years, the company has taken numerous steps aimed at improving its profitability and earnings per share. Presented below are some basic facts for Kellogg. 2009 2008 Net sales $12,575 $12,822 Net earnings 1,212 1,148 Total assets 11,200 10,946 Total liabilities 8,925 9,491 Common stock, $0.25 par value 105 105 Capital in excess of par value 472 438 Retained earnings 5,481 4,836 Treasury stock, at cost 1,820 1,790 Number of shares outstanding (in millions) 419 419
Instructions (a) What are some of the reasons that management purchases its own stock? (b) Explain how earnings per share might be affected by treasury stock transactions. (c) Calculate the ratio of debt to total assets for 2008 and 2009, and discuss the implications of the change.
Case 2 Wiebold, Incorporated The following note related to stockholders’ equity was reported in Wiebold, Inc.’s annual report. On February 1, the Board of Directors declared a 3-for-2 stock split, distributed on February 22 to shareholders of record on February 10. Accordingly, all numbers of common shares, except unissued shares and treasury shares, and all per share data have been restated to reflect this stock split. On the basis of amounts declared and paid, the annualized quarterly dividends per share were $0.80 in the current year and $0.75 in the prior year.
Instructions (a) What is the significance of the date of record and the date of distribution? (b) Why might Weibold have declared a 3-for-2 for stock split? (c) What impact does Wiebold’s stock split have on (1) total stockholders’ equity, (2) total par value, (3) outstanding shares, and (4) book value per share?
Accounting, Analysis, and Principles On January 1, 2012, Agassi Corporation had the following stockholders’ equity accounts. Common Stock ($10 par value, 60,000 shares issued and outstanding) $600,000 Paid-in Capital in Excess of Par 500,000 Retained Earnings 620,000 During 2012, the following transactions occurred. Jan. 15 Declared and paid a $1.05 cash dividend per share to stockholders. Apr. 15 Declared and paid a 10% stock dividend. The market price of the stock was $14 per share. May 15 Reacquired 2,000 common shares at a market price of $15 per share. Nov. 15 Reissued 1,000 shares held in treasury at a price of $18 per share. Dec. 31 Determined that net income for the year was $370,000.
Accounting Journalize the above transactions. (Include entries to close net income to Retained Earnings.) Determine the ending balances for Paid-in Capital, Retained Earnings, and Stockholders’ Equity.
Analysis Calculate the payout ratio and the return on common stock equity ratio.
Principles R. Federer is examining Agassi’s financial statements and wonders whether the “gains” or “losses” on Agassi’s treasury stock transactions should be included in income for the year. Briefly explain whether, and the conceptual reasons why, gains or losses on treasury stock transactions should be recorded in income.
BRIDGE TO THE PROFESSION
Professional Research: FASB Codifi cation Recall from Chapter 13 that Hincapie Co. (a specialty bike-accessory manufacturer) is expecting growth in sales of some products targeted to the low-price market. Hincapie is contemplating a preferred stock issue to help finance this expansion in operations. The company is leaning toward participating preferred stock because ownership will not be diluted, but the investors will get an extra dividend if the company does well. The company management wants to be certain that its reporting of this transaction is transparent to its current shareholders and wants you to research the disclosure requirements related to its capital structure.
Instructions If your school has a subscription to the FASB Codification, go to http://aaahq.org/ascLogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses. (a) Identify the authoritative literature that addresses disclosure of information about capital structure. (b) Find definitions of the following: (1) Securities. (2) Participation rights. (3) Preferred stock. (c) What information about securities must companies disclose? Discuss how Hincapie should report the proposed preferred stock issue. The primary IFRS related to stockholders’ equity are IAS 1 (“Presentation of Financial Statements”), IAS 32 (“Financial Instruments: Presentation”), and IAS 39 (“Financial Instruments: Recognition and Measurement”). The accounting for transactions related to stockholders’ equity, such as issuance of shares, purchase of treasury stock, and declaration and payment of dividends, are similar under both IFRS and GAAP. Major differences relate to terminology used, introduction of terms such as revaluation surplus, and presentation of stockholders’ equity information.
RELEVANT FACTS • Many countries have different investor groups than the United States. For example, in Germany, fi nancial institutions like banks are not only the major creditors but often are the largest shareholders as well. In the United States and the United Kingdom, many companies rely on substantial investment from private investors. • The accounting for treasury share retirements differs between IFRS and GAAP. Under GAAP, a company has three options: (1) charge the excess of the cost of treasury shares over par value to retained earnings, (2) allocate the difference between paid-in capital IFRS
Professional Simulation In this simulation, you are asked to address questions related to the accounting for stockholders, equity. Prepare responses to all parts.
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