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15.15. EXERCISES

E15-1 (Recording the Issuances of Common Stock) During its first year of operations, Sitwell Corporation had the following transactions pertaining to its common stock.



Instructions

  1. Prepare the journal entries for these transactions, assuming that the common stock has a par value of $3 per share.

  2. Prepare the journal entries for these transactions, assuming that the common stock is no par with a stated value of $2 per share.

E15-2 (Recording the Issuance of Common and Preferred Stock) Abernathy Corporation was organized on January 1, 2010. It is authorized to issue 10,000 shares of 8%, $50 par value preferred stock, and 500,000 shares of no par common stock with a stated value of $2 per share. The following stock transactions were completed during the first year.



Instructions

Prepare the journal entries to record the above transactions.

E15-3 (Stock Issued for Land) Twenty-five thousand shares reacquired by Pierce Corporation for $48 per share were exchanged for undeveloped land that has an appraised value of $1,700,000. At the time of the exchange the common stock was trading at $60 per share on an organized exchange.

Instructions

  1. Prepare the journal entry to record the acquisition of land assuming that the purchase of the stock was originally recorded using the cost method.

  2. Briefly identify the possible alternatives (including those that are totally unacceptable) for quantifying the cost of the land and briefly support your choice.

E15-4 (Lump-Sum Sale of Stock with Bonds) Fogelberg Corporation is a regional company which is an SEC registrant. The corporation's securities are thinly traded on NASDAQ (National Association of Securities Dealers Quotes). Fogelberg has issued 10,000 units. Each unit consists of a $500 par, 12% subordinated debenture and 10 shares of $5 par common stock. The investment banker has retained 400 units as the underwriting fee. The other 9,600 units were sold to outside investors for cash at $850 per unit. Prior to this sale the 2-week ask price of common stock was $40 per share. Twelve percent is a reasonable market yield for the debentures, and therefore the par value of the bonds is equal to the fair value.

Instructions

  1. Prepare the journal entry to record Fogelberg's transaction, under the following conditions.

    1. Employing the incremental method.

    2. Employing the proportional method, assuming the recent price quote on the common stock reflects fair value.

  2. Briefly explain which method is, in your opinion, the better method.

E15-5 (Lump-Sum Sales of Stock with Preferred Stock) Hartman Inc. issues 500 shares of $10 par value common stock and 100 shares of $100 par value preferred stock for a lump sum of $100,000.

Instructions

  1. Prepare the journal entry for the issuance when the market value of the common shares is $168 each and market value of the preferred is $210 each. (Round to nearest dollar.)

  2. Prepare the journal entry for the issuance when only the market value of the common stock is known and it is $170 per share.

E15-6 (Stock Issuances and Repurchase) Loxley Corporation is authorized to issue 50,000 shares of $10 par value common stock. During 2010, Loxley took part in the following selected transactions.

  1. Issued 5,000 shares of stock at $45 per share, less costs related to the issuance of the stock totaling $7,000.

  2. Issued 1,000 shares of stock for land appraised at $50,000. The stock was actively traded on a national stock exchange at approximately $46 per share on the date of issuance.

  3. Purchased 500 shares of treasury stock at $44 per share. The treasury shares purchased were issued in 2006 at $40 per share.

Instructions

  1. Prepare the journal entry to record item 1.

  2. Prepare the journal entry to record item 2.

  3. Prepare the journal entry to record item 3 using the cost method.

E15-7 (Effect of Treasury Stock Transactions on Financials) Sanborn Company has outstanding 40,000 shares of $5 par common stock which had been issued at $30 per share. Sanborn then entered into the following transactions.

  1. Purchased 5,000 treasury shares at $45 per share.

  2. Resold 500 of the treasury shares at $40 per share.

  3. Resold 2,000 of the treasury shares at $49 per share.

Instructions

Use the following code to indicate the effect each of the three transactions has on the financial statement categories listed in the table below, assuming Sanborn Company uses the cost method: I = Increase; D = Decrease; NE = No effect.



E15-8 (Preferred Stock Entries and Dividends) Weisberg Corporation has 10,000 shares of $100 par value, 6%, preferred stock and 50,000 shares of $10 par value common stock outstanding at December 31, 2010.

Instructions

Answer the questions in each of the following independent situations.

  1. If the preferred stock is cumulative and dividends were last paid on the preferred stock on December 31, 2007, what are the dividends in arrears that should be reported on the December 31, 2010, balance sheet? How should these dividends be reported?

  2. If the preferred stock is convertible into seven shares of $10 par value common stock and 3,000 shares are converted, what entry is required for the conversion assuming the preferred stock was issued at par value?

  3. If the preferred stock was issued at $107 per share, how should the preferred stock be reported in the stockholders' equity section?

E15-9 (Correcting Entries for Equity Transactions) Davison Inc. recently hired a new accountant with extensive experience in accounting for partnerships. Because of the pressure of the new job, the accountant was unable to review what he had learned earlier about corporation accounting. During the first month, he made the following entries for the corporation's capital stock.



Instructions

On the basis of the explanation for each entry, prepare the entries that should have been made for the capital stock transactions.

E15-10 (Analysis of Equity Data and Equity Section Preparation) For a recent 2-year period, the balance sheet of Franklin Company showed the following stockholders' equity data at December 31 in millions.



Instructions

  1. Answer the following questions.

    1. What is the par value of the common stock?

    2. What is the cost per share of treasury stock at December 31, 2011, and at December 31, 2010?

  2. Prepare the stockholders' equity section at December 31, 2011.

E15-11 (Equity Items on the Balance Sheet) The following are selected transactions that may affect stockholders' equity.

  1. Recorded accrued interest earned on a note receivable.

  2. Declared and distributed a stock split.

  3. Declared a cash dividend.

  4. Recorded a retained earnings restriction.

  5. Recorded the expiration of insurance coverage that was previously recorded as prepaid insurance.

  6. Paid the cash dividend declared in item 3 above.

  7. Recorded accrued interest expense on a note payable.

  8. Declared a stock dividend.

  9. Distributed the stock dividend declared in item 8.

Instructions

In the following table, indicate the effect each of the nine transactions has on the financial statement elements listed. Use the following code:



E15-12 (Cash Dividend and Liquidating Dividend) Addison Corporation has ten million shares of common stock issued and outstanding. On June 1 the board of directors voted a 60 cents per share cash dividend to stockholders of record as of June 14, payable June 30.

Instructions

  1. Prepare the journal entry for each of the dates above assuming the dividend represents a distribution of earnings.

  2. How would the entry differ if the dividend were a liquidating dividend?

E15-13 (Stock Split and Stock Dividend) The common stock of Warner Inc. is currently selling at $110 per share. The directors wish to reduce the share price and increase share volume prior to a new issue. The per share par value is $10; book value is $70 per share. Five million shares are issued and outstanding.

Instructions

Prepare the necessary journal entries assuming the following.

  1. The board votes a 2-for-1 stock split.

  2. The board votes a 100% stock dividend.

  3. Briefly discuss the accounting and securities market differences between these two methods of increasing the number of shares outstanding.

E15-14 (Entries for Stock Dividends and Stock Splits) The stockholders' equity accounts of Lawrence Company have the following balances on December 31, 2010.



Shares of Lawrence Company stock are currently selling on the Midwest Stock Exchange at $37.

Instructions

Prepare the appropriate journal entries for each of the following cases.

  1. A stock dividend of 5% is declared and issued.

  2. A stock dividend of 100% is declared and issued.

  3. A 2-for-1 stock split is declared and issued.

E15-15 (Dividend Entries) The following data were taken from the balance sheet accounts of Wickham Corporation on December 31, 2010.

Current assets$540,000
Investments624,000
Common stock (par value $10)600,000
Paid-in capital in excess of par150,000
Retained earnings840,000


Instructions

Prepare the required journal entries for the following unrelated items.

  1. A 5% stock dividend is declared and distributed at a time when the market value of the shares is $39 per share.

  2. The par value of the capital stock is reduced to $2 with a 5-for-1 stock split.

  3. A dividend is declared January 5, 2011, and paid January 25, 2011, in bonds held as an investment. The bonds have a book value of $90,000 and a fair value of $125,000.

E15-16 (Computation of Retained Earnings) The following information has been taken from the ledger accounts of Sampras Corporation.

Total income since incorporation$287,000
Total cash dividends paid60,000
Total value of stock dividends distributed40,000
Gains on treasury stock transactions18,000
Unamortized discount on bonds payable32,000


Instructions

Determine the current balance of retained earnings.

E15-17 (Stockholders' Equity Section) Teller Corporation's post-closing trial balance at December 31, 2010, was as follows.



At December 31, 2010, Teller had the following number of common and preferred shares.



The dividends on preferred stock are $4 cumulative. In addition, the preferred stock has a preference in liquidation of $50 per share.

Instructions

Prepare the stockholders' equity section of Teller's balance sheet at December 31, 2010.

(AICPA adapted)

E15-18 (Dividends and Stockholders' Equity Section) Elizabeth Company reported the following amounts in the stockholders' equity section of its December 31, 2010, balance sheet.



During 2011, Elizabeth took part in the following transactions concerning stockholders' equity.

  1. Paid the annual 2010 $8 per share dividend on preferred stock and a $2 per share dividend on common stock. These dividends had been declared on December 31, 2010.

  2. Purchased 2,700 shares of its own outstanding common stock for $40 per share. Elizabeth uses the cost method.

  3. Reissued 700 treasury shares for land valued at $30,000.

  4. Issued 500 shares of preferred stock at $105 per share.

  5. Declared a 10% stock dividend on the outstanding common stock when the stock is selling for $45 per share.

  6. Issued the stock dividend.

  7. Declared the annual 2011 $8 per share dividend on preferred stock and the $2 per share dividend on common stock. These dividends are payable in 2012.

Instructions

  1. Prepare journal entries to record the transactions described above.

  2. Prepare the December 31, 2011, stockholders' equity section. Assume 2011 net income was $330,000.

E15-19 (Comparison of Alternative Forms of Financing) Shown below is the liabilities and stockholders' equity section of the balance sheet for Ingalls Company and Wilder Company. Each has assets totaling $4,200,000.



For the year each company has earned the same income before interest and taxes.



At year-end, the market price of Ingalls's stock was $101 per share, and Wilder's was $63.50. Assume balance sheet amounts are representative for the entire year.

Instructions

  1. Which company is more profitable in terms of return on total assets?

  2. Which company is more profitable in terms of return on stockholders' equity?

  3. Which company has the greater net income per share of stock? Neither company issued or reacquired shares during the year.

  4. From the point of view of net income, is it advantageous to the stockholders of Ingalls Co. to have the long-term debt outstanding? Why?

  5. What is the book value per share for each company?

E15-20 (Trading on the Equity Analysis) Presented below is information from the annual report of Potter Plastics, Inc.



Instructions

  1. Compute the return on common stock equity and the rate of interest paid on bonds. (Assume balances for debt and equity accounts approximate averages for the year.)

  2. Is Potter Plastics, Inc. trading on the equity successfully? Explain.

*E15-21 (Preferred Dividends) The outstanding capital stock of Pennington Corporation consists of 2,000 shares of $100 par value, 6% preferred, and 5,000 shares of $50 par value common.

Instructions

Assuming that the company has retained earnings of $70,000, all of which is to be paid out in dividends, and that preferred dividends were not paid during the 2 years preceding the current year, determine how much each class of stock should receive under each of the following conditions.

  1. The preferred stock is noncumulative and nonparticipating.

  2. The preferred stock is cumulative and nonparticipating.

  3. The preferred stock is cumulative and participating. (Round dividend rate percentages to four decimal places.)

*E15-22 (Preferred Dividends) Martinez Company's ledger shows the following balances on December 31, 2010.

5% Preferred stock—$10 par value, outstanding 20,000 shares$ 200,000
Common stock—$100 par value, outstanding 30,000 shares3,000,000
Retained earnings630,000


Instructions

Assuming that the directors decide to declare total dividends in the amount of $266,000, determine how much each class of stock should receive under each of the conditions stated below. One year's dividends are in arrears on the preferred stock.

  1. The preferred stock is cumulative and fully participating.

  2. The preferred stock is noncumulative and nonparticipating.

  3. The preferred stock is noncumulative and is participating in distributions in excess of a 7% dividend rate on the common stock.

*E15-23 (Preferred Stock Dividends) Hagar Company has outstanding 2,500 shares of $100 par, 6% preferred stock and 15,000 shares of $10 par value common. The schedule below shows the amount of dividends paid out over the last 4 years.

Instructions

Allocate the dividends to each type of stock under assumptions (a) and (b). Express your answers in per-share amounts using the format shown below.



*E15-24 (Computation of Book Value per Share) Johnstone Inc. began operations in January 2009 and reported the following results for each of its 3 years of operations.

2009$260,000 net loss2010$40,000 net loss2011$700,000 net income


At December 31, 2011, Johnstone Inc. capital accounts were as follows.

6% cumulative preferred stock, par value $100; authorized, issued, and outstanding 5,000 shares$500,000
Common stock, par value $1.00; authorized 1,000,000 shares; issued and outstanding 750,000 shares$750,000


Johnstone Inc. has never paid a cash or stock dividend. There has been no change in the capital accounts since Johnstone began operations. The state law permits dividends only from retained earnings.

Instructions

  1. Compute the book value of the common stock at December 31, 2011.

  2. Compute the book value of the common stock at December 31, 2011, assuming that the preferred stock has a liquidating value of $106 per share.

See the book's companion website, www.wiley.com/college/kieso, for a set of B Exercises.


  

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