Far unsures 22

Jensen performed legal services to assist Balm Co. in accomplishing its initial organization. Jensen accepted 1,000 shares of $5 par common stock in Balm as payment for his services. The Balm shares were not yet publicly traded, but they had a book value of $4 per share. Jensen provided 48 hours of service, which is normally billed at $125 per hour. By what amount should the common stock account increase?

The common stock account is reported in the financial statements at the par value of common stock outstanding. Accordingly, the common stock account is increased by the par value of common stock issued of $5,000 (1,000 shares of common stock issued × $5 par value). Note that when the stock is issued for property received or services rendered, the transaction should be recorded at the more clearly determinable of the fair values of the stock issued or the property or services received. Because the fair value of the stock issued cannot be clearly determined (the shares are not publicly traded), the transaction is recorded at the fair value of services rendered of $6,000 (48 × $125).

Blue Co. issued preferred stock with detachable common stock warrants at a price that exceeded both the par value and the fair value of the preferred stock. At the time the warrants are exercised, Blue's total equity is increased by the

When shares of preferred stock with detachable common stock warrants are issued at a price that exceeds both the par value and the fair value of the preferred stock, the consideration received must be allocated between the preferred stock and the detachable warrants. The amount allocated to the stock warrants outstanding should be recorded in the equity section as contributed capital. At the time the warrants are exercised, contributed capital will reflect both the cash received upon the exercise of the warrants and the carrying amount of the warrants. Total equity, however, will be increased only by the amount of cash received because the carrying amount of the warrants is already included in total equity.

Sanders Company effects self-insurance against loss from fire by appropriating an amount of retained earnings each year equal to the amount that would otherwise be paid out as fire insurance premiums. According to current accounting literature, the procedure used by Sanders is

An expense is not accrued prior to the occurrence of the event for which an entity self-insures. The fair value of the property diminishes only if the event actually occurs. But an appropriation of retained earnings is acceptable to disclose the self-insurance policy if, when a fire loss occurs, the entry appropriating retained earnings is reversed, and the loss is debited to income of the period of loss and not to retained earnings.

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?

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.

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?

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.

Ray Corp. declared a 5% stock dividend on its 10,000 issued and outstanding shares of $2 par value common stock, which had a fair value of $5 per share before the stock dividend was declared. This stock dividend was distributed 60 days after the declaration date. By what amount did Ray's current liabilities increase as a result of the stock dividend declaration?

Declaration of a stock dividend is not accounted for as a liability but as a reclassification of equity. For a stock dividend that is smaller than 20 to 25% of the shares outstanding, the entry is to debit retained earnings for the fair value of the stock (10,000 shares × $5 fair value × 5% = $2,500), credit stock dividend distributable at par (10,000 shares × $2 × 5% = $1,000), and credit additional paid-in capital for the excess of fair over par value ($2,500 - $1,000 = $1,500).

On January 15, Year 5, Rico Co. declared its annual cash dividend on common stock for the year ended January 31, Year 5. The dividend was paid on February 9, Year 5, to shareholders of record as of January 28, Year 5. On what date should Rico decrease retained earnings by the amount of the dividend?

On the date of declaration, a cash dividend becomes a legal liability of the corporation (unlike stock dividends, cash dividends cannot be rescinded). Thus, on January 15, a portion of retained earnings was reclassified as dividends payable.

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

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.

On May 1, Rhud Corp. declared and issued a 10% common stock dividend. Prior to this dividend, Rhud had 100,000 shares of $1 par value common stock issued and outstanding. The fair value of Rhud's common stock was $30 per share on May 1. As a result of the stock dividend, Rhud's total equity

When a stock dividend is declared, a portion of retained earnings is reclassified as contributed capital. The net effect on total equity is thus $0.

Aldrich Co. distributes cash dividends to its shareholders during the current year. The dividends are declared on March 9 and are payable to shareholders as of the date of record, which is April 15. The dividends are actually paid on May 19. At which of the following dates would the dividends become a liability to Aldrich?

On the date of declaration, the board of directors formally approves a dividend. A cash dividend becomes a legal liability to a corporation on the date of declaration. At this date, a corporation must reclassify a portion of its retained earnings as a liability. The journal entry is to debit retained earnings and credit dividends payable for the amount of dividends declared.