Sheet (4)
Corporations :
Chapter
Dividends, Retained
Earnings, and
Income reporting
15
Solution of Exams
Groub: faculty of commerce english
section second year 2018/2019
Edited by Dr/ Magdy Kamel
Tel/ 01273949660
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Dr/ Magdy kamel
Circle the (T) or the (F) to indicate whether the statement is true or false
(T) 1. Dividends may be declared and paid in cash or stock.
(T) 2. Cash dividends are not a liability of the corporation until they are declared by the
board of directors.
(F) 3. The amount of a cash dividend liability is recorded on the date of record because it
is on that date that the persons or entities who will receive the dividend are
identified.
(T) 4. A 10% stock dividend will increase the number of shares outstanding but the book
value per share will decrease.
(F) 5. A 3 for 1 common stock split will increase total stockholders' equity but reduce the
par or stated value per share of common stock.
(F) 6. Retained earnings represents the amount of cash available for dividends.
(F) 7. Net income of a corporation should be closed to retained earnings and net losses
should be closed to paid-in capital accounts.
(T) 8. A debit balance in the Retained Earnings account is identified as a deficit.
(T) 9. A correction in income of a prior period involves either a debit or credit to the
Retained Earnings account.
(F) 10. Prior period adjustments to income are reported in the current year's income
statement.
(T) 11. Retained earnings that are restricted are unavailable for dividends.
(F) 12. Restricted retained earnings are available for preferred stock dividends but
unavailable for common stock dividends.
(F) 13. A retained earnings statement shows the same information as a corporation
income statement.
(F) 14. A detailed stockholders' equity section in the balance sheet will list the names of
individuals who are eligible to receive dividends on the date of record.
(T) 15. Common Stock Dividends Distributable is shown within the Paid-in Capital
subdivision Of the stockholders' equity section of the balance sheet.
(T) 16. Many companies prepare a stockholders’ equity statement instead of presenting a
detailed stockholders’ equity section in the balance sheet.
(T) 17. A major difference among corporations, proprietorships, and partnerships is that a
corporation's income statement reports income tax expense.
(F) 18. A corporation incurs income tax expense only if it pays dividends to stockholders.
Corporations: Dividends, Retained Earnings, and Income Reporting
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(T) 19. Income tax expense usually appears as a separate section on a corporation income
statement.
(F) 20. Preferred dividends paid are added back to net income in calculating earnings per
share for common stockholders.
(T) 21. Most companies are required to report earnings per share on the face of the
income statement.
(T) 22. A dividend based on paid-in capital is termed a liquidating dividend.
(F) 23. Common Stock Dividends Distributable is reported as additional paid-in capital in
the stockholders' equity section.
(T) 24. A prior period adjustment is reported as an adjustment of the beginning balance
Of Retained Earnings.
(F) 25. Income tax expense and the related liability for income taxes payable are recorded
when taxes are paid.
(F) 26. Earnings per share is reported for both preferred and common stock.
(T) 27. Earnings per share is reported only for common stock.
(F) 28. Earnings per share is calculated by dividing net income by the weighted average
number of shares of preferred stock and common stock outstanding.
(T) 29. Earnings per share indicates the net income earned by each share of outstanding
common stock.
(F) 30. Return on common stockholders’ equity is computed by dividing net income by
ending stockholders’ equity.
(T) 31. a corporation’s stockholders’ equity accounts will be the same whether it declares
a 100% stock dividend or split its stock 2 for 1
(F) 32. The purpose of treasury stock for cash causes no change in total assets
(T) 33. Small stock dividends are recorded by transferring the market value of the
additional shares to be issued from retained earnings to the appropriate paid in
capital accounts.
(T) 34. Dividends in arrears refer to by passed preferred dividends which must be made
up before any dividends may be paid on common stock.
(T) 35. Common stock dividends distributable is classified as stockholders’ equity account
(f) 36. Retained earnings is a fund of cash accumulated from profitable operation of the
business.
(T) 37.the purpose of a stock split is the decrease the market price per share
(T) 38. The cumulative effect of change in an accounting principle is shown in the retained
earnings statement as a prior period adjustment.
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1) Exam (2009) Q2
Nile Corporation was organized on January 1, 2001. During its first year, the corporation issued
20,000 shares with a $5 par value preferred stock and 200,000 shares with a $1 par value
common stock . At December 31, the company declared the following cash dividends:
2001
$ 4,000
2002
$13,000
2003
$28,000
Instructions
(a) Show the allocation of dividends to each class of shares, assuming the preferred stock
dividend is 5% and not cumulative.
(b) Show the allocation of dividends to each class of shares, assuming the preferred stock
dividend is 7% and cumulative.
(c) Journalize the declaration of the cash dividend at December 31, 2003 using the
assumption of part (b).
Solution
a) Preferred Stock dividend = 5% × 20,000 share × $5 par = 5,000 per year noncumulative
2001
2002
2003
Total dividend declared
4,000
13,000
28,000
Allocated to preferred stock
4,000
5,000
5,000
Remaining to common stock
-08,000
23,000
b) preferred stock dividend = 7% × 20, 000 share × $5 par = 7,000 per year  cumulative
2001
2002
2003
Total dividend declared
4,000
13,000
28,000
Allocated to preferred stock
4,000
10,000
7,000
Remaining to common stock
-03,000
21,000
c)
Retained earnings
Dividends Payable
28,000
28,000
2) Exam (2008) Q3
Olson company has a simple capital structure. At December 31, 2007, it has $500,000 of $100 par
value 6% preferred stock outstanding, and $1,000,000 of $5 par value common stock
outstanding. Net income for year was $680,000.
Required :
Compute the earnings per share of common stock assuming the dividend on preferred stock was
not declared and the preferred stock is cumulative.
The common shares remained unchanged during the year.
Solution
Preferred dividend = 6% × $500,000 = 30,000
Number of Common Share Outstanding = Ошибка! = 200,000 shares.
Earning per share = Ошибка! = Ошибка! = $3.25
3) Exam (2012) Q3
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At December 31, 2011, Bush Corporation has 2,000 shares of $100 par value, 8% preferred stock
outstanding and 100,000 shares of $10 par value common stock issued,
Bush’s Net Income for the year is $ 421,000.
Required :
Compute the earnings per share of common stock under the following independent situations
(round to two decimals).
a) The dividend to Preferred stockholders was declared. There has been no change in the
number of shares of common stock outstanding during the year .
b) The dividend to Preferred stockholders was not declared. The preferred stock is
cumulative. Bush held 10,000 shares of common treasury stock throughout the year.
Solution
a) preferred stock dividends = 8% × 2,000 shares × $100 par = $ 16,000
Earning per share = Ошибка! = Ошибка! = $ 4.05
b) Earning per share = Ошибка! = Ошибка! = $ 4.5
4) The following information is available for Wenger Corporation:
Beginning Stockholders' equity
$ 700,000
Dividends paid to Common Stockholders
50,000
Dividends paid to Preferred Stockholders
30,000
Ending stockholders' equity
800,000
Net income
$ 165,000
Instructions
Based on the preceding information, calculate return on common stockholders' equity.
Solution
Return on common stockholders' equity = Ошибка! × 100 = 18%
Weighted average of stockholder’ equity = Ошибка! = Ошибка!
= 750,000*
5) The following information is available for Sanders Inc. :
Beginning Retained Earnings ……………………………….
$600,000
Cash dividends declared ……………………………………..
50,000
Net Income for 2008 …………………………………………
120,000
Stock dividend declared …………………………………….
10,000
Understatement of last year's depreciation expense
40,000
Instructions
Based on the preceding information, prepare a retained earnings statement for 2008.
Solution
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SANDERS INC.
Retained Earnings Statement
For the Year Ended December 31, 2008
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Balance, January 1, as reported
(-) Correction for overstatement of 2007 net income
balance, January 1, as adjusted
Add: Net income
Less: Cash dividends
Stock dividends
Balance, December 31
$50,000
10,000
$600,000
(40,000)
560,000
120,000
680,000
60,000
$620,000
6) On January 1, 2008, Windom Corporation had Retained Earnings of $378,000. During the
year, Windom had the following selected transactions:
1. Declared stock dividends of $40,000.
2. Declared cash dividends of $90,000.
3. A 2 for 1 stock split involving the issuance of 200,000 shares of $5 par value common
stock for 100,000 shares of $10 par value common stock.
4. Suffered a net loss of $70,000.
5. Corrected understatement of net income because of an inventory error of $68,000
Instructions
Prepare a retained earnings statement for the year.
Solution
WINDOM CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2008
Balance, January 1, as reported ................................... $378,000
Correction for understatement of 2007 net income
(inventory error) ...........................................
68,000
Balance, January 1, as adjusted ...................................
446,000
Less: Net loss ..............................................................
Less: Cash dividends .................................. $90,000
Stock dividends ........................................... 40,000
Balance, December 31 ...............................................
(70,000)
376,000
(130,000)
$246,000
7) The following information is available for Patel Corporation for the year ended December 31,
2010: Sales $800,000; Other revenues and gains $92,000; Operating expenses $110,000; Cost of
goods sold $465,000; Other expenses and losses $32,000; Preferred stock dividends $30,000.The
company’s tax rate was 20%, and it had 50,000 shares outstanding during the entire year.
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Instructions
(a) Prepare a corporate income statement.
(b) Calculate earnings per share.
Solution
(a)
PATEL CORPORATION
Income Statement
For the Year Ended December 31, 2010
Sales ...............................................................
(-) Cost of goods sold ...........................................
Gross profit ....................................................
(-) Operating expenses ........................................
Income from operations .................................
(+) Other revenues and gains ...............................
(-) Other expenses and losses ..............................
Income before income taxes ...........................
Income tax expense ($285,000 X 20%) ...........
Net income .....................................................
$800,000
(465,000)
335,000
(110,000)
225,000
92,000
(32,000)
285,000
(57,000)
$228,000
(b) Earnings per share = Ошибка! = $3.96
8) Exam (2015) Q4
The stockholders' equity section of Ellis Corporation at December 31, 2007, included the
following:
6% preferred stock, $100 par value, cumulative,
10,000 shares authorized, 8,000 shares issued and outstanding....... $ 800,000
Common stock, $10 par value, 250,000 shares authorized,
200,000 shares issued and outstanding .......................................... $2,000,000
Dividends were not declared on the preferred stock in 2007 and are in arrears.
On September 15, 2008, the board of directors of Ellis Corporation declared dividends on
the preferred stock for 2007 and 2008, to stockholders of record on October 1, 2008,
payable on October 15, 2008.
On November 1, 2008, the board of directors declared a $.90 per share dividend on the common
stock, payable November 30, 2008, to stockholders of record on November 15, 2008.
Instructions
Prepare the journal entries that should be made by Ellis Corporation on the dates indicated
below:
September 15, 2008
November 1, 2008
October 1, 2008
November 15, 2008
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October 15, 2008
Solution
Sept 15,
2008
Oct . 1
Oct . 15
Nov .1
November 30, 2008
Retained Earnings ($800,000 × .06) × 2
Dividends Payable – Preferred
96,000
96,000
(No entry required.)
Preferred Dividends Payable
Cash
96,000
Retained Earnings ($.9 × 200,000)
Dividends Payable – Common
180,000
Nov .15
(No entry required.)
Nov . 30
Common Dividends Payable
Cash
96,000
180,000
180,000
180,000
9) Exam (2018)
Irving Corporation's stockholders' equity section at December 31, 2007 appears below:
Stockholders' equity
Paid-in capital
Common stock, $10 par, 60,000 outstanding
$600,000
Paid-in capital in excess of par ………………….
150,000
Total paid-in capital ………………………………….
$750,000
Retained earnings …………………………………….
150,000
Total stockholders' equity …………………………
$900,000
On June 30, 2008, the board of directors of Irving Corporation declared a 15% stock dividend,
payable on July 31, 2008, to stockholders of record on July 15, 2008. The fair
market value of Irving Corporation's stock on June 30, 2008, was $15.
On December 1, 2008, the board of directors declared a 2 for 1 stock split effective December 15,
2008. Irving Corporation's stock was selling for $20 on December 1, 2008, before the stock split
was declared. Par value of the stock was adjusted. Net income for 2008 was $190,000 and there
were no cash dividends declared.
Instructions
(a) Prepare the journal entries on the appropriate dates to record the stock dividend and
the stock split.
(b) Fill in the amount that would appear in the stockholders' equity section for Irving
Corporation at December 31, 2008, for the following items:
1. Common stock
$____________
2. Number of shares outstanding
_____________
3. Par value per share
$____________
4. Paid-in capital in excess of par
$____________
5. Retained earnings
$____________
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6. Total stockholders' equity
Solution
$____________
(a)
Date
June 30, 2017
Account title & explanation
Stock dividend = 60,000 × 15% = 9,000
Retained Earnings (9,000 × 15)
Common Stock Dividends Distributable
(9,000 × 10)
Paid-in Capital in Excess of Par
July 15, 2017
No entry required
July. 31, 2017
Common Stock Dividends Distributable
Common Stock
Dec 1, 2017
No entry required
Dec 15, 2017
Memo 2 for 1 stock split makes increase the
number of shares issued = (60,000 +9,000) × 2 =
138,000 shares with $5 par value
Closing entry
Income summary
Retained earnings
Debit
Credit
135,000
90,000
45,000
90,000
90,000
190,000
190,000
(b)
1. Common stock = 138,000 shares × 5 par = $ 690,000
2. Number of shares outstanding = 138,000 shares
3. Par value per share = $ 5 par
4. Paid-in capital in excess of par = 150,000 + 45,000 = $195,000
5. Retained earnings = 150,000 – 135,000 + 190,000 = $ 205,000
6. Total stockholders' equity = 690,000 + 195,000 + 205,000 = $1,090,000
10) Devons Company has 24,000 shares of $1 par common stock issued and outstanding.
The company also has 2,000 shares of $100 par 3% cumulative preferred stock outstanding.
The company did not pay the preferred dividends in 2007 or 2008. What amount of
dividends must the company pay the preferred shareholders in 2009 if they wish to pay the
common stockholders a dividend?
Solution
Annual preferred dividend = 3% × 2,000 share × $100 par = $6,000
Dividends for 2007, 2008 and 2009 = $6,000 × 3 = $18,000
11) Exam (2002) , 2003
Nouvel corporation has 300,000 shares of 10 per value capital stock outstanding.
Prepare journal entries to record the following transactions during the current year.
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Mar. 1: declared a 40% stock dividend. Market price per share was $70.
Apr. 10: issued the shares for the stock dividend declared on march 1.
July. 1: distributed additional shares of capital stock in a 2 for 1 stock split market price
per share was $60 immediately before the stock split.
Dec 15: declared a 10% stock dividend. Market price per share was $32.
Solution
Journal entry
Mar. 1 Stock dividend (40% × 300,000)= 120,000 share
Retained earnings (120,000 × 10 par)
Common stock dividends distributable
Apr.
10
Common stock dividends distributable
Common stock
1,200,000
1,200,000
1,200,000
1,200,000
July . 1
No entry
(2 for 1 stock split, increase the no. of shares
issued (300,000 + 120,000 ) × 2 =840,000 shares
and decrease par value = 10 ÷ 2 = 5 par)
Dec 15 Stock dividend = 10% × 840,000 = 84,000 shares.
Retained earnings (84,000 × $32)
2,688,000
Common stock dividends distributable
(84,000 × $5)
Paid in capital in excess of par value
420,000
2,268,000
12) On January 1, 2008, Dolan Corporation had 60,000 shares of $1 par value common
stock issued and outstanding. During the year, the following transactions occurred:
Mar. 1 Issued 20,000 shares of common stock for $400,000.
June 1 Declared a cash dividend of $2.00 per share to stockholders of record on June 15.
June 30 Paid the $2.00 cash dividend.
Dec. 1 Purchased 4,000 shares of common stock for the treasury for $22 per share.
Dec. 15 Declared a cash dividend on outstanding shares of $2.25 per share to
Stockholders of record on December 31.
Instructions
Prepare journal entries to record the above transactions.
Solution
Mar. 1 Cash
400,000
Common Stock (20,000 × $1)
20,000
Paid-in Capital in Excess of Par Value
380,000
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June 1
Retained Earnings
Dividends Payable (80,000 × $2 )
160,000
160,000
June 30 Dividends Payable
Cash
Dec. 1 Treasury Stock
Cash
160,000
Dec. 15 Retained Earnings (76,000 × $2.25)
Dividends Payable
171,000
160,000
88,000
88,000
171,000
13) The following information is available for Ellis Corporation:
Common Stock ($5 par)
$1,500,000
Retained Earnings
600,000
A 10% stock dividend is declared and paid when the market value was $15 per share.
Instructions
Compute each of the following after the stock dividend.
(a) Total stockholders' equity.
(b) Number of shares outstanding.
(c) Book value per share.
Solution
Shares issued = (1,500,000 ÷ 5) = 300,000
Stock dividends = 10% × 300,000 = 30,000
Retained earnings (30,000 × $15)
Common stock dividends distributable
Paid in capital in excess of par value
Common stock dividends distributable
Common stock
450,000
150,000
300,000
150,000
150,000
(a) common stock = 1,500,000 +150,000
= 1,650,000
paid in capital in excess of par value
= 300,000
total paid in capital
1,950,000
+ retained earnings (600,000 – 450,000) =
150,000
Total stock holders’ equity
$ 2,100,000
b) number of shares outstanding = Ошибка! = $ 330,000
c) book value per share = Ошибка! = Ошибка! = $6.36
14) Exam (2008) Q2
Catt corporation stockholders’ equity consisted of the following on January 1, 2007.
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Stockholders’ equity
Paid in capital
Capital stock
o 5% preferred stock, $ 100 par value, cumulative
50,000 shares authorized, 30,000 shares issued and outstanding
o Common stock, no par, $ 25 stated value, 1,000,000 shares
authorized, 400,000 shares issued and outstanding.
Total capital stock
Additional paid in capital
In excess of par value – preferred
$ 300,000
In excess of stated value – common 600,000
Total paid in capital
+ Retained earnings (note A)
Total stockholders’ equity
$ 3,000,000
$ 10,000,000
13,000,000
900,000
13,900,000
4,100,000
18,000,000
Note A: preferred dividends are in arrears for 2006.
Required :
Prepare the appropriate journal entries, if any, for the following transaction in 2007.
25/1/2007:
18/2/2007:
28/2/2007 :
15/3/2007 :
25/5/2007 :
15/6/2007 :
10/7/2007 :
13/8/2007 :
30/9/2007 :
12/11/2007:
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issued 60,000 shares of common stock for 42 per share.
the board of directors declared a cash dividend on preferred and common
totaling 700,000, payable on march 15, to stockholder of record on
February 28 (record dividends payable on preferred and common stock in
separate accounts.
date of record for cash dividends on preferred and common stock.
paid in cash dividend tp preferred and common stockholders.
declared a 10% stock dividends on the common stock, payable on june 15,
To stockholders of record on may 1. The market value of catt corporation’s
Common stock was $ 45 per share.
distributed stock dividend to common stockholders.
purchased 50,000 shares of catt corporation’s common stock for $ 49 per
share to be held in the company’s treasury.
sold 12,000 shares of treasury stock for $52 per share.
the board of directors declared and issued immediately a 2: 1 stock split on
all the common stock including shares held in the treasury. The stated value
on the common stock was reduced to 12.50 per share
sold 20,000 shares of treasury stock for 25 per share.
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25/1
18/2
28/2
15/3
25/5
15/6
10/7
13/8
30/9
12/11
Cash (60,000 × $42)
Common stock (60,000 × $25)
Paid in capital in excess of stated value
Retained earnings
Dividends payable – preferred
(3,000,000 × 5%) × 2
Dividends payable – common
(700,000 – 300,000)
No entry
Dividends payable – preferred
Dividends payable – common
Cash
Stock dividends = 10% × 460,000 = 46,000*
Retained earnings (46,000 × $45)
Common stock dividend distributable
(46,000 × $25)
Paid in capital in excess of stated value
Common stock dividend distributable
Common stock
Treasury stock (50,000 × $49)
Cash
Cash (12,000 × $52)
Treasury stock (12,000 × $49)
Paid in capital from treasury stock
No entry
2 for 1 stock split makes the number of shares
issued 1,012,000 (400,000 + 60,000 + 46,000)
× 2 with stated value 12.5 per shares
Cash (20,000 × $25)
Treasury stock (20,000 × $24.5)
Paid in capital from treasury stock
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2,520,000
1,500,000
1,020,000
700,000
300,000
400,000
300,000
400,000
700,000
2,070,000
1,150,000
920,000
1,150,000
1,150,000
2,450,000
2,450,000
624,000
588,000
36,000
500,000
490,000
10,000
15) Exam (2016)
At the beginning of 2012, Overnight letter showed the following amounts in the stockholders
equity section of its balance sheet:
Stockholders equity
Capital stock, $ 1 par value,
500,000 shares authorized, 382,000 issued
382,000
Additional paid in capital : capital stock
4,202,000
Total paid in capital
4,584,000
Retained earnings
2,704,600
Total stockholders’ equity
7,288,600
The transaction relating to stockholders equity during the year are as follows:
Jan 3: declared a dividend of $1 per share to stockholders of record on January 31,
payable on February 15.
Feb 15: paid in cash dividend declared on January 3.
Apr. 12: the corporation purchased 6,000 shares of its own capital stock at price of $ 40
per share.
May 9: reissued 4,000 shares of the treasury stock at a price of $ 44 per share.
June 1 : declared 5% stock dividend to stockholders of record at june 15, to be
distributed on june 30. The market price of the stock at june 1 was $ 42 per share.
(the 2,000 shares remaining in the treasury don’t participate in the stock dividend).
June 30: distributed the stock dividend declared on june 1.
Aug 4: reissued 600 of the 2,000 remaining shares of the treasury stock at a price of $37
per share.
Dec 31: the income summary account, showing net income for the year of $1,928,000 was
closed into the retained earnings accounts
Dec31: the $382,000 balance in the dividends account was closed into the retained
earnings account.
Required :
a) prepare in general journal form the entries to record the above transactions.
b) prepare the stockholders equity section of the balance sheet at dec 31, 2012.
Solution
Jan. 3
Feb. 15
Apr. 12
Dividends (382,000 × $1)
Dividends Payable
382,000
Dividends payable
Cash
382,000
Treasury stock (6,000 × $40)
Cash
240,000
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382,000
382,000
240,000
May 9
June 1
June 30
Aug. 4
Dec. 31
Dec. 31
Cash (4,000 × $44)
Treasury stock (4,000 × $40)
Paid in capital from treasury stock
176,000
160,000
16,000
( stock dividend = 5% × 380,000 = 19,000 )
Retained earnings (19,000 × $42)
Common stock dividend distributable
(19,000 × $1)
Paid in capital in excess of par value
798,000
Common stock dividend distributable
Common stock
19,000
Cash (600 × $37)
Paid in capital from treasury stock
Treasury stock (600 × $40)
22,200
1,800
Income summary
Retained earnings
Retained earnings
Dividends
b)
19,000
779,000
19,000
24,000
1,928,000
1,928,000
382,000
382,000
Overnight Letter
Balance Sheet (partial)
Dec 31, 2015
stockholders’ equity
paid in capital
capital stock, $1 par, 500,000 shares authorized,
401,000 issued shares …………………………………………………………
401,000*
additional paid in capital
capital stock(in excess of par value) (4,202,000 + 779,000) 4,981,000
from treasury stock (16,000 – 1,800) ………………………………
14,200
total additional paid in capital ………………………………………………
4,995,200
total paid in capital …………………………………………………………………..
5,396,200
(+) retained earnings (2,704,600 – 798,000 + 1,928,000 – 382,000)
3,452,600
total paid in capital and retained earnings ………………………………
8,848,800
less: treasury stock (1,400 shares)** …………………………………….
(56,000)***
total stockholders’ equity …………………………………………………….
8,792,800
draft
issued = 382,000 +19,000 = 401,000*
treasury stock = 240,000 – 160,000 – 24,000 = 56,000 ***
number of T.S = 6,000 – 4,000 – 600 = 1,400 or (56,000 ÷ 40) = 1,400 shares**
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16) Exam (2000) q2
Ekram has been working in the child care field for many years as both a child care provider
and as a consultant. she and several associates rececently formed a corporation. Wee car
Inc, to provide organization and administration of on site child care programs for large
employers. The corporation is authorized to issue 100,000 shares of $100 par value, $8
cumulative preferred stock and 200,000 shares of $2 par value common stock. The
following transaction (among others) occurred during the first year of operations:
Jan. 5: issued cash 20,000 shares of common stock at $14 per share. The shares were
issued to ekram and 10 other investors.
Jan. 8: issued 4,500 shares of preferred stock for cash of $450,000 .
Feb. 10: issued an additional 500 shares of common stock to ekram in exchange for her
services in organizing the corporation. The stockholders agreed that these
services were worth $7,000.
Nov. 15 the board of directors declares the first annual dividend on the preferred stock,
to be paid on December 15.
Nov. 27 acquired land as a future building site in exchange for 15,000 shares of common
stock wee care’s stock is not widely traded on any organized exchange, but the
parcel of land has been appraised at approximately $225,000 by two different
independent appraisers.
Dec 15: paid the cash dividend declared on November 15.
Dec 30: after the revenue and expenses were closed into the income summary account.
That account showed a profit of $216,000.
Required
a) prepare journal entries in general form to record the above transactions, and close the
income summary accounts.
b) prepare the stockholders’ equity section of Wee care, inc, balance sheet at December 31
Solution
Jan. 1
Jan. 8
Cash (20,000 × $14)
Common stock (20,000 × $2)
Paid in capital in excess of par value
280,000
Cash
450,000
40,000
240,000
Preferred stock (4,500 × $100)
Feb .10
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Organization expense
Common stock (500 × $2)
Paid in capital in excess of par value
Dr/ Magdy kamel
450,000
7,000
1,000
6,000
Nov. 15
Nov. 27
Dec. 15
Dec. 31
Preferred dividend = $8 × 4,500 = 36,000
Retained earnings
Dividend payable – preferred
Land
Common stock (15,000 × $2)
Paid in capital in excess of par value
36,000
36,000
225,000
30,000
195,000
Dividends payable – preferred
Cash
36,000
Income summary
Retained earnings
216,000
b)
36,000
216,000
Wee Care Corporation
Balance Sheet (Partial )
December 31
Stockholders’ Equity
Paid In Capital
Capital stock
 Preferred stock, 100,000 authorized, $8 cumulative,
$100 par vale, 4,500 shares issued.
 Common stock, $2 par value, 200,000 shares authorized,
30,500 issued shares and outstandings.
Total capital stock
Additional paid in capital
in excess of par value
Total paid in capital
Retained earnings
Total stockholders’ equity
450,000
71,000
521,000
441,000
962,000
180,000
1,142,000
17) Exam (2000)
During the current year. Suns sports, inc. operating two business segments a chain of surf
and dive shops and a small chain of tennis shops. The tennis shops were not profitable and
were sold near year end to another corporation. Cunsports, operations for the current year
are summarized below. The first two captains, net sales and costs and expenses, relate
only to the company’s continuing operations.
Net sales
Costs and expenses
Operating loss from tennis shops
Loss on sale of tennis shops
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Dr/ Magdy kamel
9,800,000
8,600,000
192,000
348,000
The company has 150,000 shares of a single class of capital stock outstanding throughout
the year
Required
Prepare a condensed income statement for the year. At the bottom on the statement,
show any appropriate earnings per shares figure.
Solution
Sunsports inc.
Condensed income statement
December 31.
Net sales
9,800,000
Costs and expenses
8,600,000
Income from continuing operations
1,200,000
Discontinued operations:
Operating loss from tennis shop
(192,000 )
Loss on sale of tennis shops
(348,000) (540,000)
Net income
660,000
Earnings per share =
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=
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= $ 4.4
18) Exam (2004)
The stockholders’ equity section of the balance sheet of P &P CO. at Dec31, 1996 as follows
Stockholders’ equity
o 7%, preferred stock, $100 par, callable at $105 each,
50,000 shares authorized, 40,000 shares issued
4,000,000
o Common stock, $2 par, 500,000 shares authorized,
300,000 shares issued of which 30,000 shares are held in treasury
600,000
Additional paid in capital
o From issuance of preferred stock
480,000
o From issuance of common stock
1,410,000
o From treasury stock transaction
25,000
o From common stock dividends
250,000
2,165,000
Total paid in capital
6,765,000
(+) Retained earnings (240,000 equal to cost of
treasury stock is not available for dividends)
1,700,000
Less: treasury stock (at cost 30,000 common shares)
Total stockholders’ equity
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Dr/ Magdy kamel
(240,000)
8,255,000
Answer the following questions based on the information given above:
1. what was the average issue price per share of preferred stock ?
2- how many shares of common stock are outstanding ?
3- a small stock dividend of 20,000 shares was declared and distributed during 1996.
What was the market price per share on the date of declaration ?
4- if P&P had reaquired 35,000 shares of treasury stock early in 1996, compute the price
per share for which the reissued treasury stock was sold.
Assume all remaining treasury stock is reissued at a price of $15 per share in January of
1997. Give one entry to record this transaction.
Solution
1) average issue price Per share of preferred stock
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=
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= $112
2) number of shares common stock outstanding = Common stock issued – no.of T.S
= 300,000 – 30,000 = 270,000
3)
Retained earnings
Common stock dividend distributable
(20,000 × $2 par)
Paid in capital in excess of par value
290,000
40,000
250,000
Retained earnings = stock dividend × market value per share
290,000
= 20,000 × market value per share
market value per share =
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= $14.5
4) treasury stock issued = 35,000 - 30,000 = 5,000
Cost per share of treasury stock = 240,000 ÷ 30,000 = 8
Cash
65,000
Treasury stock (5,000 × $8)
Paid in capital from treasury stock
Cash = treasury stock + paid in capital from treasury stock
= (5,000 × 8) + 25,000 = 65,000
Cash = treasury stock × market price per share
Market price per share = 65,000 ÷ 5,000 = 13
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Dr/ Magdy kamel
40,000
25,000
After all remaining treasury stock sold
Cash (30,000 × $15)
Treasury stock (30,000 × $8)
Paid in capital from treasury stock
450,000
240,000
210,000
19) The following information is available for Orson Corporation:
Retained Earnings, December 31, 2008
$ 1,500,000
Net Income for the year ended December 31, 2009
$ 250,000
The company accountant, in preparing financial statements for the year ending December
31,2009, has discovered the following information:
The company's previous bookkeeper, who has been fired, had recorded depreciation
expense on a machine in 2007 and 2008 using the double-declining-balance method of
depreciation. The bookkeeper neglected to use the straight-line method of depreciation
which is the company's policy. The cumulative effects of the error on prior years was
$15,000, ignoring income taxes. Depreciation was computed by the straight-line method in
2009.
Instructions
(a) Prepare the entry for the prior period adjustment.
(b) Prepare the retained earnings statement for 2009.
Solution
(a)
Accumulated Depreciation
Retained Earnings
(b)
15,000
15,000
ORSON CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2009
———————————————————————————————————
Balance January 1, as reported ...........................................
$1,500,000
Correction for overstatement of depreciation in prior period
15,000
Balance, January 1, as adjusted ...........................................
1,515,000
Add: Net income .................................................................
250,000
Balance, December 31 .........................................................
$1,765,000
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