Study Unit 15: Corporate Equity

Treasury stock transactions may result in

Decreases in the balance of retained earnings.

At December 31, Year 3 and Year 4, Apex Co. had 3,000 shares of $100 par, 5% cumulative preferred stock outstanding. No dividends were in arrears as of December 31, Year 2. Apex did not declare a dividend during Year 3. During Year 4, Apex paid a cash dividend of $10,000 on its preferred stock. Apex should report dividends in arrears in its Year 4 financial statements as a(n)

Disclosure of $20,000.

Unlike a stock split, a stock dividend requires a formal journal entry in the financial accounting records because stock

Dividends represent a transfer from retained earnings to capital stock.

A property dividend should be recorded in retained earnings at the property's

Fair value at date of declaration.

Orr Corporation owned 1,000 shares of Vee Corporation. These shares were purchased for $9,000. On September 15, Orr declared a property dividend of one share of Vee for every 10 shares of Orr held by a shareholder. On that date, when the market price of Vee was $14 per share, 9,000 shares of Orr were outstanding. This transaction did not constitute a spin-off or other form of reorganization or liquidation and was not part of a plan that was in substance a rescission of a prior business combination. What gain and net reduction in retained earnings would result from this property dividend?

Gain: $4,500 Net Reduction in Retained Earnings: $8,100

The issuance of shares of preferred stock to shareholders

Increases preferred stock outstanding.

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?

January 15, Year 5.

In Year 1, Veras Corp. reported $3,500,000 of appropriated retained earnings for the construction of a new office building, which was completed in Year 2 at a total cost of $3,000,000. In Year 2, Veras appropriated $2,400,000 of retained earnings for the construction of a new plant. Also, $4,000,000 of cash was restricted for the retirement of bonds due in Year 3. In its Year 2 balance sheet, Veras should report what amount of appropriated retained earnings?

$2,400,000

On December 1, Year 4, Line Corp. received a contribution of 2,000 shares of its $5 par value common stock from a shareholder. On that date, the stock's fair value was $35 per share. The stock was originally issued for $25 per share. By what amount will this contribution cause total equity to decrease if Line accounts for treasury stock using the cost method?

$0

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

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?

$0

Clay Company's adjusted trial balance at December 31, Year 3, includes the following account balances: Common stock, $3 par $300,000 Additional paid-in capital 700,000 Treasury stock, at cost 50,000 Net unrealized holding loss on available-for-sale debt securities 30,000 Retained earnings: Appropriated 200,000 Retained earnings: Unappropriated 100,000 What amount should Clay Company report as total equity in its December 31, Year 3, balance sheet?

$1,220,000

Zinc Co.'s adjusted trial balance at December 31, Year 6, includes the following account balances: Common stock, $3 par $600,000 Additional paid-in capital 800,000 Treasury stock, at cost 50,000 Net unrealized holding loss on available-for-sale securities 20,000 Retained earnings: Appropriated for uninsured earthquake losses 150,000 Retained earnings: Unappropriated 200,000 What amount should Zinc report as total equity in its December 31, Year 6, balance sheet?

$1,680,000

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

Smythe Co. invested $200 in a call option for 100 shares of Gin Co. $.50 par common stock when the market price was $10 per share. The option expired in 3 months and had an exercise price of $9 per share. What was the intrinsic value of the call option at the time of initial investment?

$100

Porter Co. began its business last year and issued 10,000 shares of common stock at $3 per share. The par value of the stock is $1 per share. During January of the current year, Porter bought back 500 shares at $6 per share, which were reported by Porter as treasury stock. The treasury stock shares were reissued later in the current year at $10 per share. Porter used the cost method to account for its equity transactions. What amount should Porter report as paid-in capital related to its treasury stock transactions on its balance sheet for the current year?

$2,000

In September Year 1, Cal Corp. made a dividend distribution of one right for each of its 240,000 shares of outstanding common stock. Each right was exercisable for the purchase of 1/100 of a share of Cal's $50 variable rate preferred stock at an exercise price of $80 per share. On March 20, Year 8, none of the rights had been exercised, and Cal redeemed them by paying each shareholder $0.10 per right. As a result of this redemption, Cal's equity was reduced by

$24,000

On February 1, Lopez Corporation issued 1,000 shares of its $10 par common and 2,000 shares of its $10 par convertible preferred stock for a lump sum of $40,000. At this date, Lopez's common stock was selling for $18 per share and the convertible preferred stock for $13.50 per share. The amount of proceeds allocated to Lopez's preferred stock should be

$24,000

The following data are extracted from the equity section of the balance sheet of Ebbs Corporation: Common stock ($2 par value) 12/31/Yr 6 $100,000 12/31/Yr 7 $102,000 Paid-in capital in excess of par 12/31/Yr 6 50,000 12/31/Yr 7 58,000 Retained earnings 12/31/Yr 6 100,000 12/31/Yr 7 104,600 During Year 7, the corporation declared and paid cash dividends of $15,000 and also declared and issued a stock dividend. There were no other changes in stock issued and outstanding during Year 7. Net income for Year 7 was

$29,600

East Co. issued 2,000 shares of its $5 par common stock to Krannik as compensation for 1,000 hours of legal services performed. Krannik usually bills $200 per hour for legal services. On the date of issuance, the stock was trading on a public exchange at $160 per share. By what amount should the additional paid-in capital account increase?

$310,000

On March 4, Year 4, Evan Co. purchased 1,000 shares of LVC common stock at $80 per share. On September 26, Year 4, Evan received 1,000 stock rights to purchase an additional 1,000 shares at $90 per share. The stock rights had an expiration date of February 1, Year 5. On September 26, Year 4, LVC's common stock had a fair value, ex-rights, of $95 per share, and the stock rights had a fair value of $5 each. What amount should Evan record on September 26, Year 4, for investment in stock rights?

$4,000

Arp Corp.'s outstanding capital stock at December 15, Year 4, consisted of the following: 30,000 shares of 5% cumulative preferred stock, par value $10 per share, fully participating as to dividends. No dividends were in arrears. 200,000 shares of common stock, par value $1 per share On December 15, Year 4, Arp declared dividends of $100,000. What was the amount of dividends payable to Arp's common shareholders?

$40,000

On December 31, Pack Corp.'s board of directors canceled 50,000 shares of $2.50 par value common stock held in treasury at an average cost of $13 per share. Before recording the cancelation of the treasury stock, Pack had the following balances in its equity accounts: Common stock: $540,000 Additional paid-in capital: 750,000 Retained earnings: 900,000 Treasury stock, at cost: 650,000 In its balance sheet at December 31, Pack should report common stock outstanding of

$415,000

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?

$5,000

On June 27, Year 1, Marquis Co. distributed to its common shareholders 100,000 outstanding common shares of its investment in Chen Co., an unrelated party. The carrying amount on the books of Chen's $1 par common stock was $2 per share. Immediately after the distribution, the market price of Chen's stock was $2.50 per share. In its income statement for the year ended June 30, Year 1, what amount should Marquis report as gain before income taxes on disposal of the stock?

$50,000

The December 31, Year 7, condensed balance sheet of Moore and Daughter, a partnership, follows: Current assets $280,000 Equipment (net) 260,000 $540,000 Liabilities $140,000 M&D capital 400,000 $540,000 Fair values at December 31, Year 7, are as follows: Current assets $320,000 Equipment 420,000 Liabilities 140,000 On January 2, Year 8, Moore and Daughter was incorporated, with 10,000 shares of $10 par value common stock issued. How much should be credited to additional contributed capital?

$500,000

The following information was abstracted from the accounts of the Moore Corp. at year end: Total income since incorporation $840,000 Total cash dividends paid 260,000 Proceeds from sale of donated Travis Co. stock 90,000 Total value of stock dividends distributed 60,000 Excess of proceeds over cost of treasury stock sold 140,000 What should be the current balance of retained earnings?

$520,000

Fact Pattern: Anand Co. reported the following in its statement of equity on January 1: The following events occurred during the year: May 1 - 1,000 shares of treasury stock were sold for $10,000. July 9 - 10,000 shares of previously unissued common stock sold for $12 per share. October 1 - The distribution of a 2-for-1 stock split resulted in the common stock's per-share par value being halved. Anand accounts for treasury stock under the cost method. Laws in the state of Anand's incorporation protect shares held in treasury from dilution when stock dividends or stock splits are declared. Common stock, $5 par value, authorized 200,000 shares, issued 100,000 shares $ 500,000 Additional paid-in capital 1,500,000 Retained earnings 516,000 $2,516,000 Minus: Treasury stock, at cost, 5,000 shares (40,000) Total equity $2,476,000 In Anand's December 31 statement of equity, the par value of the issued common stock should be

$550,000

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

10% stock dividend.

On December 31, Year 4, the equity section of Spitz Co. was as follows: Common stock, par value $10; authorized 30,000 shares; issued and outstanding 9,000 shares $ 90,000 Additional paid-in capital 116,000 Retained earnings 146,000 Total equity $352,000 On March 31, Year 5, Spitz declared a 10% stock dividend. Accordingly, 900 shares were issued when the fair value was $16 per share. For the 3 months ended March 31, Year 5, Spitz sustained a net loss of $32,000. The balance of Spitz's retained earnings as of March 31, Year 5, should be

$99,600

Jones Co. had 50,000 shares of $5 par value common stock outstanding at January 1. On August 1, Jones declared a 5% stock dividend followed by a two-for-one stock split on September 1. What amount should Jones report as common shares outstanding at December 31?

105,000

Fact Pattern: Anand Co. reported the following in its statement of equity on January 1: The following events occurred during the year: May 1 - 1,000 shares of treasury stock were sold for $10,000. July 9 - 10,000 shares of previously unissued common stock sold for $12 per share. October 1 - The distribution of a 2-for-1 stock split resulted in the common stock's per-share par value being halved. Anand accounts for treasury stock under the cost method. Laws in the state of Anand's incorporation protect shares held in treasury from dilution when stock dividends or stock splits are declared. Common stock, $5 par value, authorized 200,000 shares, issued 100,000 shares $ 500,000 Additional paid-in capital 1,500,000 Retained earnings 516,000 $2,516,000 Minus: Treasury stock, at cost, 5,000 shares (40,000) Total equity $2,476,000 The number of outstanding common shares at December 31 should be:

212,000

An entity authorized 500,000 shares of common stock. At January 1, Year 2, the entity had 110,000 shares of common stock issued and 100,000 shares of common stock outstanding. The entity had the following transactions in Year 2: March 1 - Issued 15,000 shares of common stock June 1 - Resold 2,500 shares of treasury stock September 1 - Completed a 2-for-1 common stock split What is the total number of shares of common stock that the entity has outstanding at the end of Year 2?

235,000

Bier Corp. issued 400,000 shares of common stock when it began operations in Year 1 and issued an additional 200,000 shares in Year 2. Bier also issued preferred stock convertible to 200,000 shares of common stock. In Year 3, Bier purchased 150,000 shares of its common stock and held it in treasury. At the end of Year 3, how many shares of Bier's common stock were outstanding?

450,000

Rudd Corp. had 700,000 shares of common stock authorized and 300,000 shares outstanding at December 31, Year 3. The following events occurred during Year 4: January 31 Declared 10% stock dividend June 30 Purchased 100,000 shares August 1 Reissued 50,000 shares November 30 Declared 2-for-1 stock split At December 31, Year 4, how many shares of common stock did Rudd have outstanding?

560,000

Galarraga Co. completed a number of capital transactions during the fiscal year ended September 30 as follows: -An issue of 8% debentures was converted into common stock. -An issue of $2.50 preferred stock was called and retired. -A 10% common stock dividend was distributed on November 30. -Warrants for 200,000 shares of common stock were exercised on September 20. For the year-end financial statements to be sufficiently informative, Galarraga's most satisfactory method of presenting the effects of these events is

A formal statement of changes in equity that discloses changes in the various equity accounts.

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

Acceptable provided that fire losses are not charged against the appropriation.

Treasury stock was acquired for cash at a price in excess of its original issue price. The treasury stock was subsequently reissued for cash at a price in excess of its acquisition price. Assuming that the par value method of accounting for treasury stock transactions is used, what is the effect on total equity of each of the following events?

Acquisition of treasury Stock: Decrease reissuance of treasury Stock: Increase

Effective April 27, the shareholders of Dorr Corp. approved a 2-for-1 split of its common stock and an increase in authorized common shares from 100,000 shares (par value $20 per share) to 200,000 shares (par value $10 per share). Dorr's equity accounts immediately before issuance of the stock-split shares were as follows: Common stock, par value $20; 100,000 shares authorized; 50,000 shares outstanding $1,000,000 Additional paid-in capital ($3 per share on issuance of common stock) 150,000 Retained earnings 1,350,000 The stock-split shares were issued on June 30. In Dorr's June 30 statement of equity, the balances of additional paid-in capital and retained earnings are

Additional Paid-In Capital: $150,000 Retained Earnings: $1,350,000

On November 2, Year 3, Finsbury, Inc., issued warrants to its shareholders giving them the right to purchase additional $20 par value common shares at a price of $30. The shareholders exercised all rights on March 1, Year 4. The shares had market prices of $33, $35, and $40 on November 2, Year 3, December 31, Year 3, and March 1, Year 4, respectively. What were the effects of the warrants on Finsbury's additional paid-in capital and net income?

Additional Paid-In Capital: Increased in Year 4 Net Income: No Effect

Posy Corp. acquired treasury shares at an amount greater than their par value but less than their original issue price. Compared with the cost method of accounting for treasury stock, does the par-value method report a greater amount for additional paid-in capital and a greater amount for retained earnings?

Additional Paid-In Capital: No Retained Earnings: No

Knight Corp. holds 20,000 shares of its $10 par value common stock as treasury stock reacquired in Year 1 for $240,000. On December 12, Year 3, Knight reissued all 20,000 shares for $380,000. Under the cost method of accounting for treasury stock, the reissuance resulted in a credit to

Additional paid-in capital of $140,000.

When collectibility is reasonably assured, the excess of the subscription price over the stated value of no-par common stock subscribed should be recorded as

Additional paid-in capital when the subscription is recorded.

On February 1, Hyde Corp., a newly formed company, had the following stock issued and outstanding: Common stock, no par, $1 stated value, 10,000 shares originally issued for $15 per share Preferred stock, $10 par value, 3,000 shares originally issued for $25 per share Hyde's February 1 statement of equity should report

Common Stock: $10,000 Preferred Stock: $30,000 Additional Paid-In Capital: $185,000

During the prior year, Brad Co. issued 5,000 shares of $100 par-value convertible preferred stock for $110 per share. One share of preferred stock can be converted into three shares of Brad's $25 par-value common stock at the option of the preferred shareholder. On December 31 of the current year, when the market value of the common stock was $40 per share, all of the preferred stock was converted. What amount should Brad credit to common stock and to additional paid-in capital -- common stock as a result of the conversion?

Common Stock: $375,000 Additional Paid-In Capital: $175,000

On December 1, Year 4, shares of authorized common stock were issued on a subscription basis at a price in excess of par value. A total of 20% of the subscription price of each share was collected as a down payment on December 1, Year 4, with the remaining 80% of the subscription price of each share due in Year 5. Collectibility was reasonably assured. At December 31, Year 4, the equity section of the balance sheet should report additional paid-in capital for the excess of the subscription price over the par value of the shares of common stock subscribed and

Common stock subscribed for the par value of the shares of common stock subscribed.

Which of the following financial instruments issued by a public company should be reported on the issuer's books as a liability on the date of issuance?

Common stock that contains an unconditional redemption feature.

The acquisition of treasury stock will cause the number of shares outstanding to decrease if the treasury stock is accounted for by the

Cost Method: Yes Par-Value Method: Yes

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.

On June 1, Ligtenberg Company's board of directors declared a cash dividend of $1.00 per share on the 50,000 shares of common stock outstanding. The company also has 5,000 shares of treasury stock. Shareholders of record on June 15 are eligible for the dividend, which is to be paid on July 1. On June 1, the company should

Debit retained earnings for $50,000.

An entity declared a cash dividend on its common stock on December 15, Year 1, payable on January 12, Year 2. How would this dividend affect equity on the following dates?

December 15 Year 1: Decrease December 31 Year 1: No Effect January 12, Year 2: No Effect

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?

March 9

On incorporation, Dee, Inc., issued common stock at a price in excess of its par value. No other stock transactions occurred except that treasury stock was acquired for an amount exceeding this issue price. If Dee uses the par value method of accounting for treasury stock appropriate for retired stock, what is the effect of the acquisition on the following?

Net Common Stock: Decrease Additional Paid-In Capital: Decrease Retained Earnings: Decrease

Cross Corp. had 2,000 outstanding shares of 11% preferred stock, $50 par. These shares were not mandatorily redeemable. On August 8, Cross redeemed and retired 25% of these shares for $22,500. On that date, Cross's additional paid-in capital from preferred stock totaled $30,000. To record this transaction, Cross should debit (credit) its capital accounts as follows:

Preferred Stock: $25,000 Additional Paid-In Capital: $(2,500) Retained Earnings: --

At December 31, Year 5, Chipper Corporation has the following account balances: Common stock ($10 par, 50,000 shares issued): $500,000 8% preferred stock ($50 par, 10,000 shares issued): 500,000 Paid-in capital in excess of par on common stock: 640,000 Paid-in capital in excess of par on preferred stock: 20,000 Retained earnings: 600,000 The preferred stock is cumulative, nonparticipating, and has a call price of $55 per share. Chipper's journal entry to record the redemption of all preferred stock on January 2, Year 6, pursuant to the call provision is

Preferred stock $500,000 Paid-in capital in excess of par: preferred 20,000 Retained earnings 30,000 Cash $550,000

The preemptive right of shareholders is the right to

Purchase shares of stock on a pro rata basis when new issues are offered for sale.

The statement of shareholders' equity shows a

Reconciliation of the beginning and ending balances in shareholders' equity accounts.

Instead of the usual cash dividend, Evie Corp. declared and distributed a property dividend from its overstocked merchandise. The excess of the merchandise's carrying amount over its fair value should be

Reported as a reduction in operating income.

At its date of incorporation, Glean, Inc., issued 100,000 shares of its $10 par common stock at $11 per share. During the current year, Glean acquired 30,000 shares of its common stock at a price of $16 per share and accounted for them by the cost method. Subsequently, these shares were reissued at a price of $12 per share. Glean had made no other issuances or acquisitions of its own common stock. What effect does the reissuance of the stock have on the following accounts?

Retained Earnings: Decrease Additional Paid-In Capital: No Effect

An amount representing the difference between the carrying amount and the proceeds from the purchase and resale of treasury stock may be reflected only in

Retained earnings and paid-in capital accounts.

A company whose stock is trading at $10 per share has 1,000 shares of $1 par common stock outstanding when the board of directors declares a 30% common stock dividend. Which of the following adjustments should be made when recording the stock dividend?

Retained earnings is debited for $300.

Tem Co. issued rights to its existing shareholders without consideration. A shareholder received a right to buy one share for each 20 shares held. The exercise price was in excess of par value, but less than the current market price. Retained earnings decreases when

Rights are Issued: No Rights are Exercised: No

Of the 125,000 shares of common stock issued by Vey Corp., 25,000 shares were held as treasury stock at December 31, Year 3. During Year 4, transactions involving Vey's common stock were as follows: January 1 through October 31: 13,000 treasury shares were distributed to officers as part of a stock compensation plan. November 1: A 3-for-1 stock split took effect. December 1: Vey purchased 5,000 of its own shares to discourage an unfriendly takeover. These shares were not retired. At December 31, Year 4, how many shares of Vey's common stock were issued and outstanding?

Shares Issued: 375,000 Shares Outstanding: 334,000

Which of the following is the primary element that distinguishes accounting for corporations from accounting for other legal forms of business entity (such as partnerships)?

The corporation draws a sharper distinction in accounting for sources of capital.

Quoit, Inc., issued preferred stock with detachable common stock warrants. The issue price exceeded the sum of the warrants' fair value and the preferred stocks' par value. The preferred stocks' fair value was not determinable. What amount should be assigned to the warrants outstanding?

The fair value of the warrants.

McGlinchy Company had 100,000 shares of $4 par value common stock outstanding on June 12 of the current year. On this date, McGlinchy acquired 1,000 of its own shares as treasury stock at a cost of $12 per share. The acquisition was accounted for by the cost method. As a result of this treasury stock purchase,

Total assets and total equity decreased.

In Year 3, Seda Corp. acquired 6,000 shares of its own $1 par value common stock at $18 per share. In Year 4, Seda reissued 3,000 of these shares at $25 per share. Seda uses the cost method to account for its treasury stock transactions. What accounts and amounts should Seda credit in Year 4 to record the reissuance of the 3,000 shares?

Treasury Stock: $54,000 Additional Paid-In Capital: $21,000 Retained Earnings: -- Common Stock: --

In Year 2, Fogg, Inc., issued $10 par value common stock for $25 per share. No other common stock transactions occurred until March 31, Year 4, when Fogg acquired some of the issued shares for $20 per share and retired them. Which of the following statements accurately states an effect of this acquisition and retirement?

additional paid-in capital is decreased.