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Morris Corporation uses the cost method to account for treasury stock transactions. As of June 30, the corporation had the following account balances. Treasury stock (100 shares at a cost of $20 per share) $2,000 Paid-in capital from previous treasury stock transactions 400 On July 15, Morris sold the 100 shares of treasury stock for $18 per share. As a result of this transaction, what amount would Morris charge to retained earnings, if any, under the cost method of accounting for treasury stock transactions?

$0 The difference between the cash received for the shares (100 × $18 = $1,800) and the credit to treasury stock (100 × $20 = $2,000) is debited to paid-in capital from previous treasury stock transactions ($2,000 - $1,800 = $200). Otherwise, the debit is to retained earnings. Thus, this transaction has no effect on the retained earnings account. The journal entry is as follows: Cash $1,800 PIC from treasury stock transactions 200 Treasury stock $2,000

On July 1, Vail Corp. issued rights to shareholders to subscribe to additional shares of its common stock. One right was issued for each share owned. A shareholder could purchase one additional share for 10 rights plus $15 cash. The rights expired on September 30. On July 1, the market price of a share with the right attached was $40, while the market price of one right alone was $2. Vail's equity on June 30 included the following: Common stock, $25 par value, 4,000 shares issued and outstanding $100,000 Additional paid-in capital 60,000 Retained earnings 80,000 By what amount should Vail's retained earnings decrease as a result of issuance of the stock rights on July 1?

$0 When stock rights are issued for no consideration, only a memorandum entry is made. When stock rights are exercised and stock is issued, the issuing company will reflect the proceeds as an increase in common stock and additional paid-in capital. Thus, retained earnings will not be affected when rights are either issued or exercised.

At December 31, Year 3, Eagle Corp. reported $1,750,000 of appropriated retained earnings for the construction of a new office building, which was completed in Year 4 at a total cost of $1.5 million. In Year 4, Eagle appropriated $1.2 million of retained earnings for the construction of a new plant. Also, $2 million of cash was restricted for the retirement of bonds due in Year 5. In its Year 4 balance sheet, Eagle should report what amount of appropriated retained earnings?

$1,200,000 Appropriating retained earnings is a formal way of marking a portion of retained earnings for other uses. A journal entry is used to move the amount from one account to the other. When the appropriation is no longer necessary, the entry is reversed, even if the full appropriation is not needed. Eagle appropriated only $1.2 million. The cash restriction is not included in appropriated retained earnings. If the amount is material, the restriction will require separate reporting of the cash item in the balance sheet, disclosure in the notes, and, possibly, reclassification as noncurrent.

Lem Co., which accounts for treasury stock under the par-value method, acquired 100 shares of its $6 par value common stock for $10 per share. The shares had originally been issued by Lem for $7 per share. By what amount would Lem's additional paid-in capital from common stock decrease as a result of the acquisition?

$100 The entry for issuance of the stock was Cash $700 Common stock ($6 per share) $600 Additional paid-in capital 100 The par-value method treats a treasury stock purchase as a constructive retirement. Assuming no balance in paid-in capital from treasury stock transactions, the entry for the treasury stock purchase using the par-value method is Treasury stock $600 Additional paid-in capital 100 Retained earnings 300 Cash $1,000

Bertram Company had a balance of $100,000 in retained earnings at the beginning of the year and of $125,000 at the end of the year. Net income for this time period was $40,000. Bertram's statement of financial position indicated that the dividends payable account had decreased by $5,000 throughout the year, despite the fact that both cash dividends and a stock dividend were declared. The amount of the stock dividend was $8,000. When preparing its statement of cash flows for the year, Bertram should show cash paid for dividends as

$12,000 The amount of total dividends declared during the year can be calculated as follows: Beginning retained earnings $100,000 Net income for the year 40,000 Ending retained earnings (125,000) Dividends declared during the year $ 15,000 Since $8,000 is the amount of stock dividends declared, the amount of cash dividends declared this year is $7,000 ($15,000 - $8,000). The amount of cash dividends paid during the year can be calculated as follows: Decrease in the cash dividends payable account during the period $ 5,000 Cash dividends declared during the year 7,000 Cash paid for dividends during the year $12,000 NOTE: Stock dividends declared does not affect the dividends payable account.

On December 1, Noble Inc.'s Board of Directors declared a property dividend, payable in stock held in the Multon Company. The dividend was payable on January 5. The investment in Multon stock had an original cost of $100,000 when acquired 2 years ago. The market value of this investment was $150,000 on December 1, $175,000 on December 31, and $160,000 on January 5. The amount to be shown on Noble's statement of financial position at December 31 as property dividends payable would be

$150,000 When a property dividend is declared, the property is remeasured at its fair value as of the declaration date. This amount is then reclassified from retained earnings to property dividend payable.

Park Corp.'s equity accounts at December 31, Year 4, were as follows: Common stock, $20 par $8,000,000 Additional paid-in capital 2,550,000 Retained earnings 1,275,000 All shares of common stock outstanding at December 31, Year 4, were issued in Year 1 for $26 a share. On January 4, Year 5, Park reacquired 20,000 shares of its common stock at $24 a share and retired them. Immediately after the shares were retired, the balance in additional paid-in capital was

$2,470,000 The 20,000 shares of common stock that were reacquired and retired were originally issued for $520,000 (20,000 shares × $26). Of this amount, $400,000 (20,000 shares × $20 par) should have been credited to common stock, with the remaining $120,000 ($520,000 - $400,000) credited to additional paid-in capital. The 20,000 shares were reacquired for $480,000 (20,000 shares × $24). To record the purchase and retirement, $400,000 should be debited to the common stock account, with the remaining $80,000 ($480,000 - $400,000) debited to additional paid-in capital. Thus, the additional paid-in capital following the retirement of the shares should be $2,470,000 ($2,550,000 - $80,000).

Wood Co. owns 2,000 shares of Arlo, Inc.'s 20,000 shares of $100 par, 6% cumulative, nonparticipating preferred stock and 1,000 shares (2%) of Arlo's common stock. During Year 2, Arlo declared and paid dividends of $240,000 on preferred stock. No dividends had been declared or paid during Year 1. In addition, Wood received a 5% common stock dividend from Arlo when the quoted market price of Arlo's common stock was $10 per share. What amount should Wood report as dividend income in its Year 2 income statement?

$24,000 Dividends, including those in arrears on preferred stock, are not liabilities of the investee or assets of the investor until the date of declaration. Thus, Wood should not recognize income from the dividends in arrears until Year 2. Stock dividends are not recognized as income. Because Wood owns 10% of the outstanding preferred stock (2,000 ÷ 20,000), it receives 10% of the dividends or $24,000 ($240,000 × .10).

On July 1, Rya Corporation issued 1,000 shares of its $20 par common and 2,000 shares of its $20 par convertible preferred stock for a lump sum of $80,000. At this date, Rya's common stock was selling for $36 per share and the convertible preferred stock for $27 per share. The amount of proceeds allocated to Rya's preferred stock should be

$48,000 Given that the 1,000 shares of common stock and 2,000 shares of preferred stock were issued for a lump sum of $80,000, the proceeds should be allocated based on the relative fair values of the securities issued. The fair value of the common stock is $36,000 (1,000 shares × $36). The fair value of the preferred stock is $54,000 (2,000 shares × $27). Because 60% [$54,000 ÷ ($54,000 + $36,000)] of the total fair value is attributable to the preferred stock, it should be allocated $48,000 ($80,000 × 60%) of the proceeds.

A corporation issuing stock should charge retained earnings for the fair value of the shares issued in a(n)

10% stock dividend. A stock dividend in which the number of shares issued is fewer than 20 to 25% of those outstanding should be accounted for by debiting retained earnings for the fair value of the stock and crediting a capital stock account for the par value. Any excess of fair value over the par value is credited to an additional paid-in capital account. Hence, retained earnings decreases, but total equity does not change.

Beck Corp. issued 200,000 shares of common stock when it began operations in Year 1 and issued an additional 100,000 shares in Year 2. Beck also issued preferred stock convertible to 100,000 shares of common stock. In Year 3, Beck purchased 75,000 shares of its common stock and held it in treasury. At the end of Year 3, how many shares of Beck's common stock were outstanding?

225,000 Beck issued 200,000 shares of common stock in Year 1 and 100,000 shares in Year 2. The purchase of 75,000 shares of treasury stock decreased the number of shares of common stock outstanding in Year 3 to 225,000 (200,000 + 100,000 - 75,000). The convertible preferred stock is not considered common stock.

Tyler Corporation purchased 10,000 shares of its own $5 par-value common stock for $25 per share. This stock originally sold for $28 per share. Tyler used the cost method to record this transaction. If the par-value method had been used rather than the cost method, which of the following accounts would show a different dollar amount?

Additional paid-in capital and treasury stock. Under the cost method, the treasury stock account was debited for the full market price of the shares; had the par-value method been used, treasury stock would only have been debited for the par value of the shares. Under the cost method, the additional paid-in capital account was not affected; had the par-value method been used, additional paid-in capital would have been debited for the excess of the market price of the shares over par.

In Year 1, Rona Corp. issued 5,000 shares of $10 par value common stock for $100 per share. In Year 7, Rona reacquired 2,000 shares at $150 per share from the estate of one of its deceased officers and immediately canceled these 2,000 shares. Rona uses the cost method in accounting for its treasury stock transactions. In connection with the retirement of these 2,000 shares, Rona should debit

Additionial Paid-In Capital $180,000 Retained Earnings $100,000 The 2,000 shares of stock were originally issued for $100 per share, a total of $200,000. Of this amount, $20,000 (2,000 shares × $10 par) should have been credited to common stock, with the remaining $180,000 [2,000 shares × ($100 - $10)] credited to additional paid-in capital. When these 2,000 shares are purchased at $150 per share and retired, common stock and additional paid-in capital should be debited for $20,000 and $180,000, respectively, which were the amounts related to the reacquired shares originally credited to those accounts. Moreover, $100,000 [2,000 shares × ($150 - $100)] should be debited to retained earnings (assuming no previous treasury stock transactions that resulted in additional paid-in capital). Because the stock was immediately retired, this journal entry would be made whether the treasury stock is accounted for under the cost method or the par value method.

If a corporation sells some of its treasury stock at a price that exceeds its cost, this excess should be

Credited to additional paid-in capital. Under the par value method, when treasury stock is reissued, cash is debited and treasury stock is credited for par value. Any excess of cash received is credited to additional paid-in capital. If the price is less than the par value, the debit is to an additional paid-in capital account or retained earnings. Under the cost method, treasury stock is credited at cost, and an additional paid-in capital account is credited for the excess of the proceeds over the cost.

East Corp., a company with a fiscal year-end on October 31, had sufficient retained earnings as a basis for dividends but was temporarily short of cash. East declared a dividend of $100,000 on February 1, Year 3, and issued promissory notes to its shareholders in lieu of cash. The notes, which were dated February 1, Year 3, had a maturity date of January 31, Year 4, and a 10% interest rate. How should East account for the scrip dividend and related interest?

Debit retained earnings for $100,000 on February 1, Year 3, and debit interest expense for $7,500 on October 31, Year 3. When a scrip dividend is declared, retained earnings should be debited and scrip dividends (or notes) payable should be credited for the amount of the dividend ($100,000) excluding interest. Interest accrued on the scrip dividend is recorded as a debit to interest expense up to the balance sheet date with a corresponding credit for interest payable. Thus, interest expense will be debited and interest payable credited for $7,500 [$100,000 × 10% × (9 months ÷ 12 months)] on 10/31/Year 3.

Underhall, Inc.'s common stock is currently selling for $108 per share. Underhall is planning a new stock issue in the near future and would like to stimulate interest in the company. The Board, however, does not want to distribute capital at this time. Therefore, Underhall is considering whether to offer a 2-for-1 common stock split or a 100% stock dividend on its common stock. The best reason for opting for the stock split is that

It will not impair the company's ability to pay dividends in the future. A 2-for-1 stock split doubles the number of shares outstanding; retained earnings is not affected. Under a stock dividend, however, a portion of retained earnings is reclassified as common stock. Since dividends are restricted by the amount of available retained earnings, a stock dividend, but not a stock split, will impair the firm's ability to pay dividends in the future.

An undistributed stock dividend declared by the Board of Directors should be reported as a(n)

Item in the shareholders' equity section. In accounting for a stock dividend, the fair value of the additional shares issued is reclassified from retained earnings to capital stock and the difference to additional paid in capital. Stock dividend distributable is an item of shareholders' equity and not a liability.

At December 31, Year 3 and Year 4, Carr Corp. had outstanding 4,000 shares of $100 par value, 6% cumulative preferred stock and 20,000 shares of $10 par value common stock. At December 31, Year 3, dividends in arrears on the preferred stock were $12,000. Cash dividends declared in Year 4 totaled $44,000. What amounts were payable on each class of stock?

Preferred Stock $36,000 Common Stock $8,000 Given that the preferred stock is cumulative, preferred dividends in arrears and the dividends for the current period must be paid before common shareholders may receive any dividends. The preferred dividends for the year ending December 31, Year 4, are $24,000 (4,000 shares × $100 par value × 6%). Consequently, the preferred shareholders should receive $36,000 ($12,000 Year 3 dividends in arrears + $24,000 Year 4 dividends). The common shareholders will receive the remaining $8,000 ($44,000 - $36,000).

A company issued rights to its existing shareholders. The rights were issued without consideration. The rights allowed the recipients to purchase unissued common stock for an amount in excess of par value. Common stock will be increased when the

Rights are Issued : No Rights Lapse : No When rights are issued for no consideration, only a memorandum entry is made. If the rights are exercised and stock is issued, the issuer will reflect the proceeds received as an increase in common stock at par value, with any remainder credited to additional paid-in capital. However, if the rights previously issued without consideration are allowed to lapse, contributed capital is unaffected. Thus, common stock will be increased only if the rights are exercised.

An appropriation of retained earnings by the board of directors of a corporation for bonded indebtedness will result in

The disclosure that management does not intend to distribute assets, in the form of dividends, equal to the amount of the appropriation. The appropriation of retained earnings is a transfer from one retained earnings account to another. The only practical effect is to decrease the amount of retained earnings available for dividends. An appropriation of retained earnings is purely for disclosure purposes.


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