Chapter 13 Corporations: Organization, Stock · PDF fileChapter 13 Corporations: Organization, Stock Transactions, and Dividends Study Guide Solutions. Fill-in-the-Blank Equations

Chapter 13

Corporations: Organization, Stock Transactions, and Dividends

Study Guide Solutions

Fill-in-the-Blank Equations

1. Premium

2. Discount

3. Earnings per share

Exercises

1. Which of the following is true of a corporation? If a description is false, why?

a. No; owners have limited liability

b. Yes

c. No; a corporation’s life is separate from its owners

2. Which of the following characteristics relate to a corporation?

a. No

b. Yes

c. Yes

3. A corporation has which of the following characteristics?

a. Yes

b. Yes

c. No

Strategy: Because a corporation provides limited liability and will be a separate legal entity, formation requires a large amount of paperwork and regulatory costs. Since the corporation is a separate legal entity, the life continues indefinitely. Issuing stock gives the corporation an easy way to raise a large amount of capital and shareholders an easy way to transfer ownership.

4. Upon formation, Apple Tree Corp. incurred the following expenses: incorporation fees, $2,200; legal fees, $1,500; and state incorporation fees, $4,000. Prepare the journal entry to record the payment of these expenses on January 1, 2015.

Jan. 1 Organizational Expenses 7,700 Cash 7,700

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5. Upon formation on August 15, 2015, Snacksters Corp. incurred the following expenses: promotional costs, $1,750; legal fees, $950; and state incorporation fees, $6,200. Prepare the journal entry to record the payment of these expenses.

Aug. 15 Organizational Expenses 8,900 Cash 8,900

6. Pen Supply Corp. began operations on March 1, 2015. On this date the company paid for the following expenses: legal fees related to organization, $5,000; rent for the upcoming month, $1,500; license fees, $2,000; promotional costs, $1,200; and insurance for the fiscal year, $9,000. Prepare the journal entry to record the organizational expenses paid.

Mar. 1 Organizational Expenses 8,200 Cash 8,200

Organizational expenses: $5,000 + $2,000 + $1,200

Strategy: Organizational expenses are one-time expenses related to the formation of the corporation and will not be paid again at a later date. To record the expenses, debit Organizational Expenses for the amount and credit Cash for the amount paid.

7. For its 2015 fiscal year, Pet Supply Corp. had a net income of $32,400. It also paid $15,800 in dividends. If the balance of retained earnings was $41,100 at the beginning of the year, what will the balance be at year-end?

Retained Earnings 41,100

15,800 32,400 57,700

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Corporations: Organization, Stock Transactions, and Dividends 3

8. Reeds Corp.’s retained earnings had a balance of $25,600 as of the beginning of its fiscal year, January 1, 2015. The company had a net loss of $8,950 and paid $10,200 to its shareholders in dividends. What will the balance of retained earnings be at the year-end? Prepare the journal entries to record the changes.

Retained Earnings 8,950 25,600

10,200 6,450

Dec. 31 Retained Earnings 8,950

Income Summary 8,950 31 Retained Earnings 10,200

Dividends 10,200

9. For its fiscal year ending September 30, 2015, Snacksters Corp. earned a net income of $52,100. It paid $42,500 of this to its shareholders. If the corporation’s retained earnings account had a beginning balance of $5,200, what is the ending balance? Also prepare the journal entries to record the changes in retained earnings.

Retained Earnings 5,200

42,500 52,100 14,800

Sept. 30 Income Summary 52,100 Retained Earnings 52,100

30 Retained Earnings 42,500 Dividends 42,500

Strategy: Retained earnings are earnings held by the company over time that hasn’t been distributed to shareholders. If the company has a positive income, retained earnings will increase because the company will have more income to distribute to shareholders. Dividends paid to shareholders and a net loss will decrease retained earnings. Since the retained earnings account has a normal credit balance, a credit will increase the account and a debit will decrease the account.


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10. Shem Creek Corp. has $52,000 of common stock outstanding and $15,000 of treasury stock. If the corporation has $24,000 of common stock not issued, calculate the following:

a. Dollar value of shares issued

$67,000; ($52,000 + $15,000)

b. Dollar value of shares authorized to issue

$91,000; ($52,000 + $15,000 + $24,000)

11. Burns’ Alley has $16,700 of common stock issued to shareholders. The company holds $4,200 in treasury stock. What is the dollar value of the common stock outstanding? If the company also has $4,300 of stock not yet issued, what is the dollar value of the common stock the corporation has authorized?

Outstanding: $12,500 = ($16,700 – $4,200)

Authorized: $21,000 = ($16,700 + $4,300)

12. Apple Tree Corp. has $2,400 of treasury stock currently and $25,000 of common stock outstanding. If the company has $37,000 authorized, how much is not issued to shareholders?

$9,600; [$37,000 – ($25,000 + $2,400)]

Strategy: Authorized shares are the total number of shares that a corporation may legally issue to shareholders. The number of shares issued is the amount that the company has released to shareholders for sale. The outstanding stock is the stock held in the hands of the stockholders. If there is a difference between the shares issued and the shares outstanding, the corporation probably repurchased some of the stock to hold as treasury stock.



13. In 2015, Shem Creek Corp. paid $42,000 dividends to its shareholders. At the time, the corporation had 4,000 shares of cumulative preferred $5 stock, $10 par and 3,000 shares of common stock, $5 par issued. If no dividends were paid in 2014, determine how much each preferred and common shareholder will receive.

Total dividends paid

$ 52,000 Preferred stockholders:

2014 dividends in arrears (4,000 shares × $5) $20,000 2015 dividend (4,000 shares × $5) 20,000 Total preferred dividends paid (40,000)

Dividends available to common shareholders $ 12,000

Preferred shareholders ($40,000/4,000 shares) $10.00 Common shareholders ($12,000/3,000 shares) $4.00

14. Snacksters Corp. paid a total of $60,000 in dividends for the year. The corporation currently had 10,000 shares of $5 par value common stock issued and 5,000 of $5 cumulative preferred stock with a $100 par value. The corporation has paid dividends in all of the previous years. How much will each common and preferred shareholder receive?

Total dividends paid $ 60,000 Preferred stockholders:

2015 dividend (5,000 shares × $5) (25,000) Dividends available to common shareholders $ 35,000



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15. Burns’ Alley paid a total of $75,000 in dividends during 2015. For the year, the corporation had 3,000 shares of cumulative preferred $6 stock, $15 par and 15,000 shares of common stock, $10 par issued. The corporation did not pay dividends in 2013 or 2014. Determine how much each common and preferred shareholder will receive.

Total dividends paid

$ 75,000 Preferred stockholders:

2013 dividends in arrears (3,000 shares × $6) $18,000 2014 dividends in arrears (3,000 shares × $6) 18,000 2015 dividend (3,000 shares × $6) 18,000 Total preferred dividends paid (54,000)

Dividends available to common shareholders $ 21,000


Strategy: Since preferred shareholders have higher rights than common shareholders, dividends should first be allocated to the preferred shareholders. If the corporation has cumulative preferred stock outstanding, the dividends must be allocated to any dividends in arrears to ensure the shareholders receive the amount promised annually and the current dividends for the preferred shareholders. Any remaining dividends should be allocated to the total number of common shareholders.

16. On September 5, 2015, Olive Oils Corp. issued 4,000 shares of $20 par preferred stock and 25,000 shares of $5 par common stock at par for cash. Prepare the journal entry to record the stock issue.

Sept. 5 Cash 205,000 Preferred Stock 80,000 Common Stock 125,000



17. Using the same information as Exercise 16, assume the corporation issued the preferred stock for $25 and the common stock for land with a current market value of $200,000. Prepare the journal entry to record the stock issue.

Sept. 5 Cash 100,000 Land 200,000 Preferred Stock 80,000 Common Stock 125,000 Paid-In Capital in Excess of Par—Preferred Stock 20,000 Paid-In Capital in Excess of Par—Common Stock 75,000

18. Tortoise Cleaning Corp. issued 15,000 shares of $3 par preferred stock, 20,000 of $2 par preferred stock, and 10,000 shares of $5 par common stock at par for cash on March 20, 2015. Prepare the journal entry to record the stock issue.

Mar. 20 Cash 135,000 Preferred Stock 85,000 Common Stock 50,000

Preferred stock: ($3 × 15,000 shares) + ($2 × 20,000 shares)

19. Use the same information as Exercise 18, except that Tortoise Cleaning Corp. issued the $3 par preferred stock for $10 a share and the $2 par preferred stock for $7 a share. The common stock also sold at a premium for $7 per share. Prepare the journal entry to record the stock issue.

Mar. 20 Cash 360,000 Preferred Stock 85,000 Common Stock 50,000 Paid-In Capital in Excess of Par—Preferred Stock 205,000 Paid-In Capital in Excess of Par—Common Stock 20,000

Paid-In capital in excess of par—preferred stock: ($7 premium × 15,000 shares) + ($5 premium × 20,000 shares)


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20. Upon formation on May 12, 2015, Big Zero issued 3,000 shares each of $10 par preferred stock and $8 par common stock at par. Prepare the journal entry to record the stock issue.

May 12 Cash 54,000 Preferred Stock 30,000 Common Stock 24,000

Strategy: If shares are issued at par, the shareholders did not pay any premium, or excess over the par value. The cash received is equal to the stock’s par value. To show an increase in the stock outstanding, credit the stock account for the par value and debit Cash for the amount received.

21. Instead of issuing the stock at par as in Exercise 20, Big Zero issued the preferred and common stock for $12 per share. Prepare the journal entry to record the stock issue.

May 12 Cash 72,000 Preferred Stock 30,000 Common Stock 24,000 Paid-In Capital in Excess of Par—Preferred Stock 6,000 Paid-In Capital in Excess of Par—Common Stock 12,000

Strategy: Even if a shareholder pays a premium for the stock, the stock account still must be credited for the par value. The premium, or amount paid over the par value, is shown in the Paid-In Capital in Excess of Par account, which is also increased with a credit.

22. On March 16, 2015, a corporation issued 3,000 shares of no-par common stock for $3 per share and 4,000 shares of no-par preferred stock for $5 per share. Prepare the journal entry to record the transaction.

Mar. 16 Cash 29,000 Preferred Stock 20,000 Common Stock 9,000



23. Ole Corp. issued 5,000 shares of no-par common stock for $10 per share on April 1, 2015. The common stock had a stated value of $5 per share. On June 1, 2015, the corporation issued 2,000 shares of the same common stock for $7 per share. Prepare the journal entries to record the stock issues.

April 1 Cash 50,000 Common Stock 25,000 Paid-In Capital in Excess of Stated Value 25,000

June 1 Cash 14,000 Common Stock 10,000

Paid-In Capital in Excess of Stated Value 4,000

24. Upon formation on July 10, 2015, Tortoise Cleaning Corp. issued 2,500 shares of no-par common stock for $6 per share and 6,100 shares of no-par preferred stock for $10 per share. On September 12, 2015, the corporation issued 1,000 more shares of the same common stock for $5 per share. Prepare the journal entries to record these transactions.

July 10 Cash 76,000 Common Stock 15,000 Preferred Stock 61,000

Sept. 12 Cash 5,000 Common Stock 5,000

Strategy: The journal entry to record the issuance of no-par stock is the same as if it was issued at par, because there is no premium to record. However, if the stock has a stated value and sold for higher than the stated value, the journal entry will be the same as if the stock had been sold over its par value.

25. On May 16, 2015, the board of directors authorized a $3 dividend for all common stock outstanding and an $8 dividend for all preferred stock outstanding. The corporation had 5,000 shares of common stock and 3,500 shares of preferred stock. One month later, the corporation determines there are 1,000 shareholders to receive the cash dividends. The dividend is paid on April 30, 2015. Prepare the journal entry required on each of the dates.

Declaration Date May 16 Cash Dividends 43,000 Cash Dividends Payable 43,000 Record Date April 16 No entry Date of Payment 30 Cash Dividends Payable 43,000 Cash 43,000


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26. On June 1, 2015, RPC Corporation announced a cash dividend of $52,000 for the year. The company determined the shareholders to receive the dividends on July 5, 2015, and made the disbursement on July 18, 2015. Prepare the journal entry required as of each date.

Declaration Date June 1 Cash Dividends 52,000 Cash Dividends Payable 52,000 Record Date July 5 No entry Date of Payment 18 Cash Dividends Payable 52,000 Cash 52,000

27. Reeds Corp. decided to pay the dividends below on August 1, 2015. On September 20, 2015, the corporation determined the owners of the stock and made the cash payment on the first of the following month. Prepare the journal entries required.

Dividends per share Total dividends

10,000 shares of preferred stock, $20 par $4.50 $45,000 20,000 shares of common stock, $5 par $2.10 42,000

$87,000

Declaration Date Aug. 1 Cash Dividends 87,000 Cash Dividends Payable 87,000 Record Date Sept. 20 No entry Date of Payment Oct. 1 Cash Dividends Payable 87,000 Cash 87,000

Strategy: On the date of declaration, the corporation must record the liability for the dividends to be paid by debiting Cash Dividends and crediting Cash Dividends Payable for the amount to be paid. The record date does not require a journal entry because a transaction does not occur. On the date of payment, the liability is paid, so the liability must be removed (debit Cash Dividends Payable) and Cash should be decreased.



28. Silver Dollar Corp. had the balances below on January 15, 2015, in its stockholders’ equity accounts. On that same day, the company declared a 2% stock dividend, when the stock had a current market value of $20 per share. The stock dividends are distributed on February 20, 2015. Prepare the journal entries required on each date.

Common Stock, $2 par (100,000 shares issued) $200,000 Paid-In Capital in Excess of Par—Common Stock 470,000 Retained Earnings 1,060,000

Jan. 15 Stock Dividends 40,000 Stock Dividends Distributable 4,000 Paid-In Capital in Excess of Par—Common Stock 36,000

Feb. 20 Stock Dividends Distributable 4,000 Common Stock 4,000

Shares Issued: 100,000 shares × 2% dividend

Stock Dividends: 2,000 shares issued × $20 per share

Stock Dividends Distributable: 2,000 shares issued × $2 par

Paid-In Capital in Excess of Par: 2,000 shares issued × $18 premium

29. Shem Creek declared a 10% stock dividend on March 2, 2015, when its stockholders’ equity accounts had the balances listed. On this date, the market value of common stock was $70 a share. The company distributed the dividends on April 15, 2015. Prepare the journal entries required on each date.

Common Stock, $10 par (250,000 shares issued) $2,500,000 Paid-In Capital in Excess of Par—Common Stock 18,750,000 Retained Earnings 54,350,000

Mar. 2 Stock Dividends 1,750,000

Stock Dividends Distributable 250,000 Paid-In Capital in Excess of Par—Common Stock 1,500,000

April 15 Stock Dividends Distributable 250,000 Common Stock 250,000

Shares Issued: 250,000 × 10%


Stock Dividends Distributable: 25,000 shares issued × $10 par

Paid-In Capital in Excess of Par: 25,000 shares issued × $60 premium


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30. RPC Corporation declared a 6% stock dividend on May 7, 2015. On this date, its stockholder equity accounts had the balances listed and the current price of the common stock was $15. Prepare the journal entries required to record if the dividends were distributed on June 25, 2015.

Common Stock, $1.50 par (120,000 shares issued) $180,000 Paid-In Capital in Excess of Par—Common Stock 2,160,000 Retained Earnings 4,470,000

May 7 Stock Dividends 108,000

Stock Dividends Distributable 10,800 Paid-In Capital in Excess of Par—Common Stock 97,200

June 25 Stock Dividends Distributable 10,800 Common Stock 10,800

Shares Issued: 120,000 × 6%


Stock Dividends Distributable: 7,200 shares issued × $1.50 par

Paid-In Capital in Excess of Par: 7,200 shares issued × $13.50 premium

Strategy: Before recording the liability for the stocks distributable, determine the number of stocks that will be issued to the shareholders and their total value. Increase the liability (Stock Dividends Distributable) by the par value of the stock on the date of declaration. If the value of the stock is greater than its par value, credit Paid-In Capital in Excess of Par for the difference, since the company is essentially “paying” for the stock. On the date of payment, debit the liability and credit the stock account to show an increase in the stock outstanding.



31. Burns’ Alley has 35,000 shares of $5 common stock outstanding on April 20, 2015. The paid-in capital in excess of par account related to the common stock has a balance of $120,000. Use the cost method to prepare the following transactions:

a. The corporation purchased 10,000 of its common stock for $10 a share on April 22, 2015.

April 22 Treasury Stock 100,000 Cash 100,000

b. The corporation sells 6,500 of its treasury stock for $12 a share on May 5, 2015.

May 5 Cash 78,000 Treasury Stock 65,000 Paid-In Capital from Sale of Treasury Stock 13,000

c. The corporation sells 1,000 of its treasury stock for $7.50 a share on May 25,

2015.

May 25 Cash 7,500 Paid-In Capital from Sale of Treasury Stock 2,500 Treasury Stock 10,000


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32. Big Zero has the following account balances on July 1, 2015:

Common Stock, $10 par (120,000 shares authorized & issued) $1,200,000 Excess of issue price over par 3,600,000 Retained Earnings 5,200,500

Use the cost method to prepare the journal entries required for the transactions:

a. Purchase of 25,000 of common stock for $42 per share on July 5, 2015

July 5 Treasury Stock 1,050,000 Cash 1,050,000

b. Sale of 10,000 of treasury stock for $38 per share on July 15, 2015

July 15 Cash 380,000 Retained Earnings 40,000 Treasury Stock 420,000

c. Sale of 4,000 of treasury stock for $44 per share on August 5, 2015

Aug. 5 Cash 176,000 Treasury Stock 168,000 Paid-In Capital from Sale of Treasury Stock 8,000



33. Pet Supply Corp. has the following account balances on August 1, 2015:

Common Stock, $2 par (75,000 shares authorized & issued) $150,000 Excess of issue price over par 1,590,000 Treasury Stock (10,000 shares) 275,000 Retained Earnings 3,750,300

Using the cost method, prepare the journal entries required for the corporation:

a. Sale of 3,500 shares of treasury stock for $30 on August 9, 2015

Aug. 9 Cash 105,000 Treasury Stock 96,250 Paid-In Capital from Sale of Treasury Stock 8,750

Treasury Stock: 3,500 shares × $27.50 per share ($275,000/10,000 shares)

b. Purchase of 5,000 common stock for $26 per share on September 15, 2015

Sept. 15 Treasury Stock 130,000 Cash 130,000

c. Purchase of 1,500 treasury stock for $25 per share on September 30, 2015

Sept. 30 Treasury Stock 37,500 Cash 37,500

Strategy: To record the purchase of treasury stock under the cost method, debit Treasury Stock for the amount paid by the corporation. Upon sale, credit Treasury Stock for the cost of the stock to the corporation. If the corporation receives more than the amount paid, credit Paid-In Capital from Sale of Treasury Stock for the difference. If the corporation receives less than the amount paid, debit Paid-In Capital from Sale of Treasury Stock for the difference, if there is enough of a credit balance to cover the difference. If the paid-in capital account does not have enough to cover the loss, debit Retained Earnings, which reduces the amount of accumulated earnings held by the company.


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34. With the account balances below, prepare the stockholders’ equity section of the balance sheet. The corporation has 20,000 shares authorized and 4,000 shares have been reacquired.

Common Stock, $15 par $150,000 Retained Earnings 850,400 Treasury Stock 84,000 Paid-In Capital in Excess of Par 195,750

Stockholders' Equity

Paid-in capital: Common stock, $15 par (20,000 shares authorized, 10,000 issued) $150,000

Excess of issue price over par 195,750 Total paid-in capital

$ 345,750

Retained earnings

850,400 Total

$1,196,150

Deduct treasury stock (4,000 shares at cost)

84,000 Total stockholders' equity

$1,112,150

35. Prepare the stockholders’ equity section of the balance sheet using the account

balances below. The corporation has 100,000 shares authorized and 15,000 shares have been reacquired.

Common Stock, $5 par $375,000 Retained Earnings 5,975,000 Treasury Stock 112,500 Paid-In Capital in Excess of Par 1,290,000 Paid-In Capital from Sale of Treasury Stock 47,500


Paid-in capital: Common stock, $5 par (100,000 shares authorized, 75,000 issued) $ 375,000

Excess of issue price over par 1,290,000 From sale of treasury stock 47,500 Total paid-in capital

$1,712,500

Retained earnings

5,975,000 Total

$7,687,500



$7,575,000



36. Use the account balances below to prepare the stockholders’ equity section of the company’s balance sheet. The corporation has 75,000 shares authorized and 4,000 shares have been reacquired.

Common Stock, $20 par $1,200,000 Retained Earnings 3,470,000 Treasury Stock 57,000 Paid-In Capital in Excess of Par 1,920,000 Paid-In Capital from Sale of Treasury Stock 15,200


Paid-in capital: Common stock, $20 par (75,000 shares authorized, 60,000 issued) $1,200,000

Excess of issue price over par 1,920,000 From sale of treasury stock 15,200 Total paid-in capital

$3,135,200

Retained earnings

3,470,000 Total

$6,605,200



$6,548,200

Strategy: First, list the paid-in capital, which will include common and preferred stock currently issued and any excess received over par (or cost for treasury stock). Add retained earnings and subtract any treasury stock to determine total stockholders’ equity. The treasury stock is subtracted because it is included in paid-in capital, since the balance includes all stock issued.

37. At the beginning of its fiscal year on January 1, 2015, Tortoise Cleaning Corporation had a balance in its retained earnings account of $6,200,000. During the year, it suffered a $1,200,000 net loss but was able to pay a $52,750 dividend to its common shareholders. Prepare the retained earnings statement for its 2015 fiscal year.

Tortoise Cleaning Corporation Retained Earnings Statement

For the Year Ended December 31, 2015 Retained earnings, Jan 1, 2015

$6,200,000

Less net loss $1,200,000 Common stock dividends 52,750 Decrease in retained earnings

1,252,750

Retained earnings, Dec. 31, 2015

$4,947,250


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38. At the beginning of its fiscal year on April 1, 2015, Olive Oils Corp. had a balance of $4,740,000 in its retained earnings account. The company generated its highest net income ever of $4,150,750, so it paid large dividends of $975,000 and $750,000 to its preferred and common shareholders, respectively. Prepare the 2015 fiscal year retained earnings statement for the company.

Olive Oils Corp. Retained Earnings Statement

For the Year Ended March 31, 2016 Retained earnings, April 1, 2015

$4,740,000

Net income

$4,150,750 Less dividends:

Preferred stock dividends $975,000 Common stock dividends 750,000 1,725,000

Increase in retained earnings

2,425,750 Retained earnings, March 31, 2016

$7,165,750

39. RPC Corporation’s retained earnings account had a balance of $2,150,000 as of the

beginning of its fiscal year, July 1, 2015. It only generated $950,000 of net income for the year, but paid large dividends of $650,000 to its preferred shareholders and $500,000 to its common shareholders to maintain investor confidence. Prepare the 2015 retained earnings statement for the company.

RPC Corporation Retained Earnings Statement

For the Year Ended June 30, 2015 Retained earnings, July 1, 2015

$2,150,000

Net income

$ 950,000 Less dividends:

Preferred stock dividends $650,000 Common stock dividends 500,000 1,150,000

Decrease in retained earnings

200,000 Retained earnings, June 30, 2016

$1,950,000

Strategy: The retained earnings statement shows the changes in retained earnings for the year. After the header, list the beginning retained earnings first. Next, show the changes in the account. Net income increases the account while a net loss will decrease the account. Any dividends paid will also decrease the account.



40. Using the information from Exercise 37 and the account balances below, prepare Tortoise Cleaning Corporation’s statement of stockholders’ equity. The company also issued 20,000 shares of $10 preferred stock for $25 per share.

Common Stock $175,000 Preferred Stock 200,000 Additional Paid-In Capital 400,000 Treasury Stock 10,000

Tortoise Cleaning Corporation

Statement of Stockholders' Equity For the Year Ended December 31, 2015

Preferred Stock

Common Stock

Additional Paid-In Capital

Retained Earnings

Treasury Stock Total

Balance, Jan. 1, 2015 $200,000 $175,000 $400,000 $6,200,000 $(10,000) $6,965,000 Net loss

(1,200,000)

(1,200,000)

Dividends on common stock

(52,750)

(52,750)

Issuance of additional preferred stock 200,000 300,000 500,000 Balance, Dec. 31, 2015 $400,000 $175,000 $700,000 $4,947,250 $(10,000) $6,212,250

41. During its 2015 fiscal year, Olive Oils Corp. issued 10,000 shares of $5 preferred stock for $12 per share. It also purchased 5,000 shares of treasury stock for $50,000. Use the information from Exercise 38 and the beginning balances below to prepare the statement of stockholders’ equity.

Olive Oils Corp. Statement of Stockholders' Equity For the Year Ended March 31, 2016

Preferred Stock

Common Stock


Retained Earnings


Balance, April 1, 2015

$125,000

$320,000

$1,520,000 $4,740,000 $ (7,500) $6,697,500 Net income

4,150,750

4,150,750

Dividends on preferred stock

(975,000)

(975,000) Dividends on common stock

(750,000)

(750,000)

Issuance of additional preferred stock

50,000

70,000

120,000

Purchase of treasury stock (50,000) (50,000)

Balance, March 31, 2016

$175,000

$320,000

$1,590,000

$7,165,750

$(57,500) $9,193,250


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42. Prepare RPC Corporation’s statement of stockholders’ equity using the information in Exercise 39 and the account balances below. During the year, the corporation issued an additional 4,000 shares of $4 common stock for $22 each and sold half of the treasury stock for $5,000.

RPC Corporation Statement of Stockholders' Equity For the Year Ended June 30, 2015

Preferred Stock

Common Stock


Retained Earnings


Balance, July 1, 2015

$100,500 $220,000 $3,250,000 $2,150,000 $(6,000) $5,714,500 Net income

950,000

950,000

Dividends on preferred stock

(650,000)

(650,000)

Dividends on common stock

(500,000)

(500,000)

Issuance of additional common stock

16,000

72,000

88,000

Sale of treasury stock 2,000 3,000 5,000 Balance, June 30, 2016 $100,500 $236,000 $3,324,000 $1,950,000 $(3,000) $5,607,500

Strategy: The statement of stockholders’ equity shows the changes in all stockholders’ equity accounts. After the heading, list all beginning balances of the stockholders’ equity accounts and a total column. Next, add net income (or subtract the net loss) and also subtract the dividends from retained earnings. If more shares are issued, the stock increase the stock balance account for the par value and increase additional paid-in capital for any excess amounts. The purchase of treasury stock will increase the account balance while the sale of treasury stock will decrease the account balances (with any excess received over cost to additional paid-in capital).

43. Snacksters Corp. had 40,000 shares of common stock outstanding with a $6 par on August 24, 2014. The next day, the board of directors announced a 3-for-1 stock split. Determine how many stocks will be outstanding after the stock split and the par value of each share.

Before Split After Split

Number of shares 40,000 120,000 (40,000 shares × 3) Par value per share $6 $2 ($240,000/120,000 shares)

$240,000 $240,000



44. RPC Corporation had 25,000 shares of common stock $10 par outstanding on March 5, 2015, before a 5-for-2 stock split. Determine how many stocks will be outstanding after the split and the par value of each share.


Number of shares 25,000 62,500 (25,000 shares × 5/2) Par value per share $10 $4 ($250,000/62,500 shares)

$250,000 $250,000

45. Tortoise Cleaning Corporation had 90,000 shares of common stock outstanding on June

1, 2015, with each share having a $20 par value. The corporation announced a 4-for-1 stock split on this date. Prior to the split, Jen Vester held 2,000 shares of the corporation’s common stock. Determine the total number of shares outstanding and the par value of each share after the stock split. Will Jen have a change in ownership after the split?


Number of shares 90,000 360,000 (90,000 shares × 4) Par value per share $20 $5 ($1,800,000/360,000 shares)

$1,800,000 $1,800,000

Jen’s percentage of ownership will not change due to the stock split:


Number of shares 2,000 8,000 Par value per share $20 $5

$40,000 $40,000

Ownership percentage 2.22% 2.22% Strategy: In a stock split, the number of shares increases by the amount determined by the corporation. A 3-for-2 stock split will give each shareholder three new shares for every two shares owned. To calculate the new par value per share, divide the total par value (which remains the same) by the number of shares outstanding after the split. Ownership percentages will not change as a result of the split because each shareholder will receive the same percentage of stocks as all other shareholders.


22 Chapter 13

46. Calculate Burns’ Alley’s earnings per share for 2015 and 2016 using the information given. For both years, the company had no preferred stock outstanding. Round answers to the nearest cent and determine if the change is favorable or unfavorable.

2016 2015

Net income $10,800,000 $9,250,750 Average number of common shares outstanding 123,500 120,800 Earnings per share $87.45 $76.58

The increase in earnings per share is a favorable trend.

47. Calculate Apple Tree Corp.’s earnings per share for 2015 and 2016, rounding to the nearest cent. Determine if the company became more profitable or less profitable in 2016.

2016 2015

Net income $11,750,000 $8,950,000 Preferred dividends $600,500 $220,100 Average number of common shares outstanding 240,600 225,300 Earnings per share $46.34 $38.75

EPS 2015: ($8,950,000 – $220,100)/225,300

EPS 2016: ($11,750,000 – $600,500)/240,600

The increase in earnings per share indicates that the company is more profitable in 2016.



48. Use the information in the table below to calculate RPC Corporation’s earnings per share for 2015 and 2016. Round answers to the nearest cent and determine if the change is favorable or unfavorable.

2016 2015

Net income $1,090,250 $1,005,000 Preferred stock outstanding 100,600 100,000 Dividends paid per preferred stock $2 $1.75 Total preferred dividends $201,200 $175,000 Average number of common shares outstanding 115,325 100,325 Earnings per share $7.71 $8.27

EPS 2015: ($1,005,000 – $175,000)/100,325

EPS 2016: ($1,090,250 – $201,200)/115,325

The decrease in earnings per share in 2016 is unfavorable.

Strategy: First, subtract the amount of dividends paid to the preferred shareholders from net income because this will result in less earnings allocable to the common shareholders. Next, divide the result by the average number of common shares outstanding to calculate the earnings per share. The earnings per share ratio indicates how much of net income is allocable to the common shareholders. Some investors base their decision on this number, so higher earnings per share is favorable because it seems more attractive to the investors. A low earnings per share indicates the company does not generate a high amount of income to distribute to shareholders.


Documents

Chapter 13 Corporations: Organization, Stock · PDF fileChapter 13 Corporations: Organization, Stock Transactions, and Dividends Study Guide Solutions. Fill-in-the-Blank Equations