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STOCKHOLDERS' EQUITY
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EXERCISES
E121
a.,b.,c.
Effect on
Account
Accounts
(1)
(2)
(3)
(4)
(5)
(6)
Common Stock
Additional Paid-In Capital, C/S
None
Treasury Stock
Common Stock
Additional Paid-In Capital, C/S
Retained Earnings
Treasury Stock
Additional Paid-In Capital, T/S
None
(7)
Retained Earnings
Effect on Total
Stockholders' Equity
Increase
Increase
N/A
Increase
Increase
Increase
Decrease
Decrease
Increase
N/A
Increase
Increase
Increase
No effect
Decrease
No effect
Increase
No effect
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E123
(1)
No entry is necessary.
(2)
Cash (+A)........................................................................
Common Stock (+SE)................................................
Additional Paid-In Capital, Common Stock (+SE)......
Issued common stock.
(3)
(4)
300,000
50,000
250,000
Assets
Liabilities
1
Owners Equity
1.
2.
3.
4.
NE
+
+
+
NE
NE
NE
NE
NE
+
+
+
Since par value of a share of stock has no relationship to market value, it has very
little economic significance. At one time, par value was construed to be legal
minimum capital to protect creditors in times of dissolution or bankruptcy, but over
time the concept has lost its appeal as creditors have found better ways to protect
themselves.
E125
a.
(1)
(2)
(3)
(4)
(5)
Cash (+A).........................................................................
Common Stock (+SE)..................................................
Additional Paid-In Capital, Common Stock (+SE).......
Issued common stock.
500,000
Cash (+A).........................................................................
Preferred Stock (+SE).................................................
Issued preferred stock.
60,000
45,000
Cash (+A).........................................................................
Treasury Stock (+SE)..................................................
Additional Paid-In Capital, Treasury Stock (+SE)........
Reissued treasury stock.
18,000
Cash (+A).........................................................................
Additional Paid-In Capital, Treasury Stock (SE)...............
Treasury Stock (+SE)..................................................
Reissued treasury stock.
5,000
10,000
125,000
375,000
60,000
45,000
15,000
3,000
15,000
E125 Concluded
b. Preferred stock ($8 par value, 5,000 shares outstanding)..
Common stock ($5 par value, 25,000 shares issued,
24,000 shares outstanding)..............................................
Additional paid-in capital.....................................................
Retained earnings...............................................................
Treasury stock.....................................................................
Total stockholders' equity....................................................
60,000
125,000
368,000
500,000
(15,000)
$1,038,000
--------------------------------------------------------------------------------E1210
$10,000 $25,000
2000
,
*
$17.50
Par Value
per Share
$5
Number of Shares
Issued
2,000
$8,000
400
= $20/Share
c. To acquire Timeco Zielow issued 1,000* shares and the market price of Timeco at
the time of acquisition was $28,000.**
* $5,000 c/s $5 P/V
** $5,000 c/s + $23,000 AP/C
d. Since the common stock accounts is always credited with total par value of shares
issued to stock option holders, the company issued 200 shares (i.e., $1,000 c/s
$5 a share P/V).
The stock options were exercised at a price of $9* a share. Most certainly the
market price of Zielows shares would be more than $9 at that time.
($1,000 c/s + $800 AP/C) 200 shares.
E1210 Concluded
e. Per Share Dividend Rate =
=
=
$3,520
2,600 *
$1.354 per share
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E1214
a. Stock Dividend (SE)...........................................................
Common Stock (+SE)....................................................
Additional Paid-In Capital, Common Stock (+SE)..........
Declared and issued 2% stock dividend.
11,200*
960
10,240
64,000*
4,800
59,200
E1214
Concluded
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PROBLEMS
P124
a. Dividends are paid only on the shares that are both issued and outstanding. In this
case, 55,000 shares have been issued, but 8,000 of these shares are held as
treasury stock. Thus, only 47,000 shares are eligible to receive a dividend.
b. Date of declaration
Cash Dividend (SE)............................................................
Dividend Payable (+L)...................................................
Declared divided.
705,000
705,000
Date of record
No journal entry is necessary.
Date of payment
Dividend Payable (L)..........................................................
Cash (A)........................................................................
Paid dividend.
c. Stock Dividend (SE)...........................................................
Common Stock (+SE)....................................................
Additional Paid-in Capital, Common Stock (+SE)..........
Declared and issued stock dividend.
705,000
235,000a
705,000
47,000b
188,000
P124 Concluded
e. Stockholders would generally prefer a cash dividend over a stock dividend. Assume
that you own 1,300 shares of Royal Company's common stock prior to any
dividend. Since there are 47,000 shares outstanding, you own 3% of the company.
In addition, since each share is worth $50, the total value of your investment is
$65,000. Since the company's financial position would not be expected to improve
or worsen simply from declaring a stock dividend, the total value of your
investment should still be worth $65,000. Thus, it appears that receiving a stock
dividend has not improved your wealth. To the extent that Royal Company cannot
declare and pay dividends in excess of its balance in Retained Earnings, a stock
dividend may even decrease your wealth. By declaring a stock dividend, Royal
Company has capitalized part of Retained Earnings, which means that it will never
be available for cash dividends. Alternatively, with a cash dividend you would
receive something of value, namely cash, while still maintaining a 3% ownership
interest in the company. The trade-off, however, is that the value of the company
would decrease by the value of the cash dividend.
-----------------------------------------------------------------------P125
a. Each preferred stockholder is entitled to 10% of the par value, or $5.00. Thus, the
15,000 preferred stockholders are entitled to a total of $75,000 in any particular
year.
Year
Total
Dividends
Preferred
Dividends
Common
Dividends
2000
2001
2002
2003
2004
2005
2006
$ 65,000
100,000
70,000
50,000
125,000
110,000
99,000
$65,000
75,000
70,000
50,000
75,000
75,000
75,000
b.
Common
Year
Share
Total
Dividends
2000
2001
$ 65,000
100,000
2002
2003
70,000
50,000
2004
125,000
2005
2006
110,000
99,000
0
25,000
0
0
50,000
35,000
24,000
Preferred
per Share
$4.33
5.00
4.67
3.33
5.00
5.00
5.00
Common
per Share
$0.00
0.50
0.00
0.00
1.00
0.70
0.48
Common Preferred
Preferred Dividends Dividends per Share
$65,000
10,000
75,000
70,000
5,000
30,000
75,000
75,000
75,000
(for 2000)
(for 2000)
(for 2001)
(for 2002)
(for 2002)
45,000
(for 2003)
(for 2004)
(for 2005)
(for 2006)
0
15,000
0
0
(for 2003)
20,000
35,000
24,000
per
$4.33
5.67
$0.00
0.30
4.67
3.33
0.00
0.00
7.00
0.40
5.00
5.00
0.70
0.48
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P129
a. (1)
(2)
(3)
(4)
1,000
1,000
Cash (+A)...................................................................
3,800
Preferred Stock (10%) (+SE)................................
Additional Paid-In Capital, 10% Preferred Stock (+SE)
1,800
Issued preferred stock.
Cash (+A)...................................................................
Treasury Stock (+SE)............................................
Additional Paid-In Capital, Treasury Stock (+SE)..
Reissued treasury stock.
660
400a
180b
170
a $400
=
=
b $180 =
=
2,000
360
300
750
(5)
750
(6)
750
P129 Concluded
b. Preferred stock (10%, $10 par value, cumulative)..............
Preferred stock (12%, $10 par value, noncumulative)........
Common stock ($1 par value, 10,000 shares authorized,
7,000 shares issued, and 840 shares held in treasury).
Additional paid-in capital:
Preferred stock (10%)....................................................
Preferred stock (12%)....................................................
Common stock...............................................................
Treasury stock................................................................
Retained earnings...............................................................
Treasury stock ($5,750 + $1,000 - $360)...........................
Total stockholders' equity....................................................
$ 3,000
1,500
3,500
2,850
1,275
2,345
300
4,405*
(6,390)
$12,785
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