Chapter 18 Shareholder equity
Fortune Enterprises has the following information at January 1, 2013: Common stock, $1 par $ 690,000 Paid-in capital—excess of par, common 2,009,500 Preferred stock, 8%, $25 par 445,000 Retained earnings 149,000 During 2013, Fortune Enterprises reacquired 34,500 shares of its common stock for $3.30 per share, and accounted for the shares as treasury stock. In June, Fortune sold 16,900 of these shares for $3.40 per share, and in September sold the remaining shares for $2.80 per share. On its December 31, 2013 balance sheet, what amount will Fortune Enterprises report for retained earnings?
$141,890 The company will make the following journal entries during 2013 to record the purchase and resale of its treasury stock: Treasury stock (34,500 × $3.30) 113,850 Cash 113,850 Cash (16,900 × $3.40) 57,460 Treasury stock (16,900 × $3.30) 55,770 Paid in capital - share repurchase 1,690 Cash (17,600 × $2.80) 49,280 Paid in capital - share repurchase 1,690 Retained earnings 7,110 Treasury stock (17,600 × $3.30) 58,080 Total retained earnings = $149,000 - 7,110 = $141,890
Fortune Enterprises has the following accounts at January 1, 2013: Common stock, $1 par $ 590,000 Paid-in capital—excess of par, common 99,500 Preferred stock, 8%, $25 par 395,000 Retained earnings 139,000 During 2013, Fortune Enterprises sold 29,500 shares of its common stock and 5,900 shares of its preferred stock for $625,000. At the time of the sale the common stock was trading on the NYSE for $18 per share and the preferred stock was selling for $30 per share. The total amount recorded for the preferred stock is
$156,250 When more than one security is issued for a single price, and when the total selling price is not equal to the sum of the two market prices (when both market values are known), the total selling price is allocated between the two securities, in proportion to their relative market values. In this case the value is determined as follows: Common stock, 29,500 × $18 $ 531,000 Preferred stock, 5,900 × $30 177,000 Total fair value $ 708,000 Fair value allocated to preferred stock = $177,000/$708,000 × $625,000 = $156,250
On January 1, 2013, Sugar Company has issued 200,000 shares of its $1 par value common stock for $720,000 and 51,000 of its $100 par value preferred stock for $580,000; the retained earnings at this date is $941,000. Sugar Company declares and distributes a 2-for-1 stock split effected in the form of a 100% stock dividend when the market value of the $1 par common stock is $10 per share. Sugar Company has chosen to record the dividend by reducing paid-in capital - excess of par. What amount is debited to paid-in capital - excess of par to record the stock dividend?
$200,000 The journal entry to record a stock split effected in the form of a 100% stock dividend increases the common stock account by the par value of the additional shares and decreases paid-in capital—excess of par to offset the credit to common stock. In this case, the debit to paid-in capital - excess of par is 200,000 × $1 = $200,000.
Fortune Enterprises has the following account balances at December 31, 2013 Common stock $ 620,000 Paid-in capital—excess of par, common 101,000 Preferred stock, 8%, mandatorily redeemable 430,000 Retained earnings 142,000 What total amount of shareholders' equity will Fortune Enterprises report at December 31, 2013?
$863,000 Mandatorily redeemable shares are classified as liabilities. All other account balances are reported as part of shareholders' equity. In this case shareholders' equity equals $620,000 + 101,000 + 142,000 = $863,000.
Fortune Enterprises purchased 100,000 shares of its own common stock during 2013. Which of the following statements is incorrect regarding this transaction? Many companies have formal share repurchase plans to buy back stock over a series of years. The acquisition will be recorded as an asset on Fortune's financial statements. Fortune can account for the buyback as either treasury stock or a formal retirement. Decreasing the supply of Fortune's shares in the marketplace supports the price of remaining shares.
The acquisition will be recorded as an asset on Fortune's financial statements. Unlike an investment in another firm's shares, the acquisition of a company's own shares does not create an asset.
On January 1, 2013, Sugar Company has issued 250,000 shares of its $1 par value common stock for $770,000 and 51,500 of its $100 par value preferred stock for $585,000; the retained earnings at this date is $355,000. Sugar Company declares and distributes a 10% common stock dividend when the market value of the $1 par common stock is $8 per share. What amount is debited to retained earnings to record the stock dividend?
$200,000 A small stock dividend is recorded at the fair value of the additional shares distributed. In this case, 250,000 × 10% = 25,000 shares × $8 = $200,000.
Retained earnings represents
A corporation's accumulated, undistributed net income (or net loss).
A reverse stock split
After a 1-for-4 reverse stock split, 100,000 shares, $1 par per share, would become 25,000 shares, $4 par per share. A reverse stock split occurs when a company decreases, rather than increases, its outstanding shares. A reverse stock split does not require a journal entry.
how is comprehensive income calculated
Comprehensive income is calculated by starting with net income and adding or subtracting certain gains/losses on investments, pensions, derivatives, and foreign currency translations.
Which of the following is considered a disadvantage of the corporate form of organization? A corporation is a separate legal entity. Corporations are the dominant form of business organization. Corporations create double taxation. Ownership interest in a corporation is easily transferred.
Corporations create double taxation.
A _____ results when the amount distributed as dividends to shareholders by a firm exceeds the dollar amount of assets previously earned
deficit
To be a registered owner of shares on the date of record, an investor must purchase the shares before the
ex dividend date
What is comprehensive income
it is the total non owner change in equity for a reporting period.
Retained earnings is sometimes called
reinvested earnings Reserves is a term used under IFRS and is one of the two shareholders' equity categories under IFRS (retained earnings is used under IFRS). A deficit occurs when the balance in retained earnings is a debit.
Net assets equals
shareholders equity
Accumulated comprehensive income is
the cumulative amount of comprehensive income reported in all prior years (comprehensive income is computed by starting with net income and adding or subtracting certain gains/losses on investments, pensions, derivatives, and foreign currency translations).
Shareholders' equity consists of all of the following except Additional paid-in capital. Treasury stock. Unearned revenue. Capital stock.
unearned revenue
The Financial Statement Project, which the FASB and the IASB are working on together, proposes a new format for the statement of comprehensive income. This new format includes all of the following classifications except Extraordinary items. Discontinued operations. Income taxes. Other comprehensive income.
Extraordinary items. Extraordinary items is not one of the proposed financial statement classifications. The classifications for the statement of comprehensive income include business, financing, income taxes, discontinued operations, and other comprehensive income.
Fortune Enterprises issued 220,000 shares of its common stock during 2013 and obtained $42,500 in legal and accounting services necessary to effect the sale. How should Fortune Enterprises account for these costs? $42,500 legal and accounting expense. $42,500 reduction of paid in capital - excess of par. $42,500 deferred asset that will be amortized to expense over the time period the stock will be outstanding. All of the choices are acceptable ways to record the costs.
$42,500 reduction of paid in capital - excess of par. When a company sells shares, and it obtains the legal, promotional, and accounting services necessary to effect the sale, the cost of these services reduces the net proceeds from selling the shares. Since paid-in capital—excess of par is credited for the excess of the proceeds over the par value of the shares sold, the effect of share issue costs is to reduce the amount credited to that account.
Under IFRS, which of the following reserve accounts is permitted to be reported in the shareholders' equity section? Investment revaluation reserve. Translation reserve. Revaluation reserve. All of the choices are permitted to be reported in the shareholders' equity section under IFRS.
All of the choices are permitted to be reported in the shareholders' equity section under IFRS.
how is accumulated comprehensive income reported
Is reported as a separate component of shareholders' equity following retained earnings in the balance sheet
Fortune Enterprises has the following accounts at January 1, 2013: Common stock, $1 par $ 550,000 Paid-in capital—excess of par, common 105,000 Preferred stock, 8%, $35 par 385,000 Retained earnings 143,000 During 2013, Fortune Enterprises exchanged 27,500 shares of its common stock for a tract of land valued at $58,500. Which journal entries would be made by Fortune Enterprises to record this transaction?
Land 58,500 Common stock 27,500 Paid in capital - excess of par 31,000 When stock is issued in exchange for noncash assets, the transaction should be recorded at fair value using the best evidence available. In this case, the value of the land is known and is used to value the common stock issued.
IFRS often uses different terms for equity items than the terms used under U.S. GAAP. Which of the following pairing of terms is not synonymous? Common stock and Ordinary shares. Preferred stock and Preference shares. Retained earnings and Reserves. Paid-in capital - excess of par, common and Share premium, ordinary shares.
Retained earnings and Reserves.
Which of the following is an ownership interest? Capital leases. Notes payable. Unearned revenue. Retained earnings.
Retained earnings. Capital leases, notes payable and unearned revenue are liability accounts; retained earnings is an ownership interest or part of shareholders' equity.
Which of the statements is correct regarding shareholders' equity? If preferred shares are cumulative, dividends not declared in any given year need never be paid. Mandatorily redeemable shares are classified as a contra account in the shareholders' equity section of the balance sheet. The Model Business Corporation Act serves as the model for the corporation statutes of most states. All of the choices are correct regarding shareholders' equity.
The Model Business Corporation Act serves as the model for the corporation statutes of most states. If preferred shares are not cumulative, dividends not declared in any given year need never be paid. Mandatorily redeemable shares are classified as liabilities.
The comprehensive income created during the period should be reported as part of
the statement of shareholder's equity.
On November 30, 2013, the board of directors of Fortune Enterprises declares a property dividend of 270,000 shares of Sugar Company's preferred stock that Fortune Enterprises had purchased in March as an investment for $1,250,000. The investment shares have a fair value of $8 per share, and are payable to shareholders of record December 15, to be distributed January 31, 2014. How much will Fortune Enterprises report as a debit to retained earnings during 2013 to record this dividend?
$2,160,000 A property dividend should be recorded at the fair value of the assets to be distributed, measured at the date of declaration. In this case, the shares are revalued to their fair value prior to recording the dividend, and the dividend is recorded by debiting retained earnings for the fair value of the shares $2,160,000 (270,000 × $8)
Fortune Enterprises has the following information at January 1, 2013: Common stock, $1 par $ 650,000 Paid-in capital—excess of par, common 2,007,500 Preferred stock, 8%, $25 par 425,000 Retained earnings 145,000 During 2013, Fortune Enterprises reacquired 32,500 shares of its common stock for $3.40 per share, and accounted for the shares as treasury stock. In June, Fortune sold 16,500 of these shares for $3.50 per share. On its December 31, 2013 balance sheet, what amount will Fortune Enterprises report for common stock and treasury stock, respectively?
$650,000 common stock; $54,400 treasury stock The company will make the following journal entries during 2013 to record the purchase and resale of its treasury stock: Treasury stock (32,500 × $3.40) 110,500 Cash 110,500 Cash (16,500 × $3.50) 57,750 Treasury stock (16,500 × $3.40) 56,100 Paid in capital - share repurchase 1,650 Total common stock at 12/31 = $650,000 (no change when purchasing or selling treasury stock) Total treasury stock at 12/31 = $54,400 ($110,500 - 56,100).
On January 1, 2013, Sugar Company has issued 280,000 shares of its $1 par value common stock for $800,000 and 51,800 of its $100 par value preferred stock for $588,000; the retained earnings at this date is $35,800. During the year Sugar Company had net income of $15,900 and declares dividends of $5,100 to be paid in January 2014. On its December 31, 2013 balance sheet, what amount will Sugar Company report for retained earnings?
46,600 Retained earnings is increased by net income and decreased by dividends declared, whether they are paid or not. In this case, retained earnings is computed as follows: 1/1 Retained earnings $ 35,800 + Net income 15,900 - Dividends declared 5,100 12/31 Retained earnings $ 46,600