chapter 13 - financial accounting

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CHAPTER 13 CORPORATIONS: ORGANIZATION, STOCK

TRANSACTIONS, AND DIVIDENDS

DISCUSSION QUESTIONS

1. No. Common stock with a higher par is not necessarily a better investment than com-mon stock with a lower par because par is an amount assigned to the shares.

2. The broker is not correct. Corporations are not legally liable to pay dividends until the dividends are declared. If the company that issued the preferred stock has operating losses, it could omit dividends, first, on its common stock and, later, on its preferred stock.

3. The company may not have had enough cash on hand to pay a dividend on the com-mon stock, or resources may be needed for plant expansion, replacement of facilities, payment of liabilities, etc.

4. a. No change. b. Total equity is the same.

5. a. Current liability b. Stockholders equity

6. a. It has no effect on revenue or expense. b. It reduces stockholders equity by

$1,000,000. 7. a. It has no effect on revenue. b. It increases stockholders equity by

$1,200,000. 8. The three classifications of restrictions on

retained earnings are legal, contractual, and discretionary. Appropriations are normally reported in the notes to the financial state-ments.

9. Such prior period adjustments should be reported as an adjustment to the beginning balance of retained earnings.

10. The primary purpose of a stock split is to bring about a reduction in the market price per share and thus to encourage more in-vestors to buy the companys shares.

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PRACTICE EXERCISES

PE 131A

Year 1 Year 2 Year 3

Amount distributed .............................. $72,000 $125,000 $160,000 Preferred dividend (18,000 shares)..... 72,000 108,000* 90,000* Common dividend (50,000 shares) ..... $ 0 $ 17,000 $ 70,000 *($18,000 + $90,000)

Dividends per share: Preferred stock............................. $4.00 $6.00 $5.00 Common stock ............................. None $0.34 $1.40

PE 131B

Year 1 Year 2 Year 3

Amount distributed .............................. $18,000 $7,500 $35,000 Preferred dividend (10,000 shares)..... 10,000 7,500 12,500* Common dividend (25,000 shares) ..... $ 8,000 $ 0 $22,500

*($2,500 + $10,000)

Dividends per share: Preferred stock............................. $1.00 $0.75 $1.25 Common stock ............................. $0.32 None $0.90

PE 132A

Feb. 23 Cash..................................................................... 9,375,000 Common Stock .............................................. 6,000,000 Paid-In Capital in Excess of Stated Value ... 3,375,000*

*[75,000 shares ($125 $80)]

Oct. 6 Cash..................................................................... 1,000,000 Preferred Stock.............................................. 1,000,000 (20,000 shares $50).

Nov. 4 Cash..................................................................... 708,000 Preferred Stock.............................................. 600,000 Paid-In Capital in Excess of Par................... 108,000*

*[12,000 shares ($59 $50)]

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PE 132B

Aug. 7 Cash..................................................................... 525,000 Common Stock .............................................. 525,000 (300,000 shares $1.75).

Sept. 1 Cash..................................................................... 1,000,000 Preferred Stock.............................................. 1,000,000 (25,000 shares $40).

Nov. 2 Cash..................................................................... 520,000 Preferred Stock.............................................. 400,000 Paid-In Capital in Excess of Par................... 120,000*

*(10,000 shares $12)

PE 133A

Oct. 15 Cash Dividends................................................... 115,000 Cash Dividends Payable ............................... 115,000

Nov. 14 No entry required.

Dec. 14 Cash Dividends Payable .................................... 115,000 Cash................................................................ 115,000

PE 133B

Mar. 3 Cash Dividends................................................... 275,000 Cash Dividends Payable ............................... 275,000

Apr. 2 No entry required.

May 2 Cash Dividends Payable .................................... 275,000 Cash................................................................ 275,000

PE 134A

Feb. 8 Stock Dividends (100,000 6% $94) .............. 564,000 Stock Dividends Distributable (6,000 $60) 360,000 Paid-In Capital in Excess of Par Common Stock ($564,000 $360,000) ......... 204,000

Mar. 10 No entry required.

Apr. 11 Stock Dividends Distributable ........................... 360,000 Common Stock .............................................. 360,000

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PE 134B

July 20 Stock Dividends (250,000 3% $54) .............. 405,000 Stock Dividends Distributable (7,500 $15) 112,500 Paid-In Capital in Excess of Par Common Stock ($405,000 $112,500) ......... 292,500

Aug. 19 No entry required.

Sept. 18 Stock Dividends Distributable ........................... 112,500 Common Stock .............................................. 112,500

PE 135A

Mar. 8 Treasury Stock (13,000 $42)............................ 546,000 Cash................................................................ 546,000

May 16 Cash (9,500 $50)............................................... 475,000 Treasury Stock (9,500 $42) ........................ 399,000 Paid-In Capital from Sale of Treasury Stock [9,500 ($50 $42)] ............ 76,000

Aug. 30 Cash (3,500 $40)............................................... 140,000 Paid-In Capital from Sale of Treasury Stock [3,500 ($42 $40)] ................. 7,000 Treasury Stock (3,500 $42) ........................ 147,000

PE 135B

Sept. 9 Treasury Stock (9,000 $24).............................. 216,000 Cash................................................................ 216,000

Oct. 7 Cash (4,800 $29)............................................... 139,200 Treasury Stock (4,800 $24) ........................ 115,200 Paid-In Capital from Sale of Treasury Stock [4,800 ($29 $24)] ............ 24,000

Dec. 20 Cash (4,200 $22)............................................... 92,400 Paid-In Capital from Sale of Treasury Stock [4,200 ($24 $22)] ................. 8,400 Treasury Stock (4,200 $24) ........................ 100,800

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PE 136A

Stockholders Equity Paid-in capital: Common stock, $120 par (50,000 shares

authorized, 40,000 shares issued) ................. $4,800,000 Excess of issue price over par ............................ 600,000 $ 5,400,000 From sale of treasury stock ................................. 59,000 Total paid-in capital......................................... $ 5,459,000 Retained earnings ...................................................... 7,138,500 Total ....................................................................... $ 12,597,500 Deduct treasury stock (2,500 shares at cost) .......... 287,500 Total stockholders equity......................................... $ 12,310,000

PE 136B

Stockholders Equity Paid-in capital: Common stock, $15 par (200,000 shares

authorized, 160,000 shares issued) ............... $2,400,000 Excess of issue price over par ............................ 480,000 $2,880,000 From sale of treasury stock ................................. 100,000 Total paid-in capital......................................... $2,980,000 Retained earnings ...................................................... 5,275,000 Total ....................................................................... $8,255,000 Deduct treasury stock (24,000 shares at cost) ........ 336,000 Total stockholders e