Chapter 11 – Stockholders’ Equity
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Exercise 11-1
Computing Shares Outstanding
Exercise 11-1
Exercise 11-2
Reporting Stockholders’ Equity and Determining Dividend Policy
Exercise 11-2
Exercise 11-3
Preparing the Stockholders’ Equity Section of the Balance Sheet
Exercise 11-3
Exercise 11-4
Reporting the Stockholders’ Equity Section of the Balance Sheet
Exercise 11-4
Exercise 11-5
Determining the Effects of the Issuance of Common and Preferred
Stock
Exercise 11-5
Exercise 11-6
Recording and Reporting Stockholders’ Equity Transactions
Exercise 11-6
Exercise 11-7
Finding Amounts Missing from the Stockholders’ Equity Section
Exercise 11-7
Exercise 11-8
Recording Treasury Stock Transactions and Analyzing Their Impact
Exercise 11-8
Exercise 11-9
Recording and Reporting Stockholders’ Equity Transactions,
Including Closing Entry
Exercise 11-9
Copyright © 2022 McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
Chapter 11 – Stockholders’ Equity
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Exercise 11-10
Computing Dividends on Preferred Stock and Analyzing Differences
Exercise 11-10
Exercise 11-11
Recording Dividends and Preparing a Statement of Retained Earnings
Exercise 11-11
Exercise 11-12
Analyzing Stock Dividends
Exercise 11-12
Exercise 11-13
Accounting for Dividends
Exercise 11-13
Exercise 11-14
Comparing 100 percent Stock Dividend and 2-for-1 Split
Exercise 11-14
Exercise 11-15
Journalizing Cash Dividends
Exercise 11-15
Exercise 11-16
Preparing a Statement of Retained Earnings and Partial Balance Sheet
and Evaluating Dividend Policy
Exercise 11-16
Exercise 11-17
Determining the Effect of a Stock Repurchase on EPS and ROE
Exercise 11-17
Exercise 11-18
Comparing Stockholders’ Equity Sections for Alternative
Forms of Organization
Exercise 11-18
Exercise 11-19
Journalizing Small and Large Stock Dividends
Exercise 11-19
Copyright © 2022 McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
Exercise 11-1
The annual report for Trends Corporation disclosed that 1,000,000 shares of common stock were
authorized. At the beginning of Year 2, 200,000 shares were issued and the number of shares in
treasury stock was 110,000. During Year 2, the only common share transactions were that 2,500
common shares were reissued from treasury and 3,000 common shares were purchased and held
as treasury stock.
Required:
Determine the number of common shares (a) issued, (b) in treasury, and (c) outstanding at the
end of Year 2.
No. of Shares
Authorized
1,000,000
At the beginning of Year 2:
Issued
200,000
Treasury stock
110,000
During Year 2:
Common shares reissued from treasury
2,500
Common shares purchased and held as treasury
3,000
Computation of issued stock
Balance at beginning of Year 2
200,000
Changes during Year 2
Balance at end of Year 2
0
200,000
Computation of treasury stock
Balance at beginning of Year 2
Shares purchased in Year 2
Shares reissued in Year 2
Balance at end of Year 2
Computation of shares outstanding at end of Year 2
Issued stock
200,000
Treasury stock
Balance at end of Year 2
(110,500)
89,500
110,000
3,000
(2,500)
110,500
Exercise 11-2
Roger Corporation was authorized to issue 10,000 shares of common stock, each with a $5 par
value. During its first year, the following selected transactions were completed:
a. Issued 5,000 shares of common stock for cash at $22 per share.
b. Issued 3,000 shares of common stock for cash at $25 per share.
Required:
1. Show the effects of each transaction on the accounting equation.
2. Give the journal entry required for each of these transactions.
3. Prepare the stockholders’ equity section as it should be reported on the year-end balance
sheet. At year-end, the accounts reflected a profit of $150.
4.
Roger Corporation has $30,000 in the company’s bank account. What is the maximum
amount of cash dividends the company can declare and distribute?
a.
b.
Issued 3,000
5,000 shares of common stock for cash at $25
$22 per share.
5,000 shares × $25
3,000
$22
$5
Assets
a.
b.
Cash
=
Liabilities
+110,000
Cash
Stockholders’ Equity
+
+75,000
Common Stock
+25,000
Additional Paid-in Capital, Common Stock
+85,000
Common Stock
+15,000
Additional Paid-in Capital, Common Stock
+60,000
Debit
a.
b.
Cash
Credit
110,000
Common Stock
25,000
Additional Paid-in Capital, Common Stock
85,000
Cash
75,000
Common Stock
15,000
Additional Paid-in Capital, Common Stock
60,000
Roger Corporation
Prepare the has
stockholders’
$30,000 inequity
the company’s
section asbank
it should
account.
be reported
What is the
on the
maximum
year-end
amount
balance
of cash
sheet.
dividends
At year-end,
the company
the accounts
can declare
reflected
andadistribute?
profit of $150.
Assets
a.
b.
Cash
Cash
=
Liabilities
+110,000
+75,000
Stockholders’ Equity
+
Common Stock
+25,000
Additional Paid-in Capital, Common Stock
+85,000
Common Stock
+15,000
Additional Paid-in Capital, Common Stock
+60,000
ROGER CORP.
Partial Balance Sheet
STOCKHOLDERS’ EQUITY
Contributed Capital
Common Stock, par $5, authorized 10,000 shares,
outstanding 8,000 shares
Additional Paid-in Capital
Total Contributed Capital
Retained Earnings
Total Stockholders’ Equity
$ 40,000
$25,000 + $15,000
145,000
$85,000 + $60,000
185,000
150
$185,150
Exercise 11-3
Everest Corporation received its charter during January authorizing the following capital stock:
Preferred stock: 12 percent, par $10, authorized 30,000 shares
Common stock: par $5, authorized 70,000 shares
The following transactions occurred during the first year of operations in the order given:
a. Issued a total of 60,000 shares of the common stock for $20 per share.
b. Issued 15,000 shares of the preferred stock at $20 per share.
c. Issued 5,000 shares of the common stock at $25 per share and 3,000 shares of the preferred
stock at $20.
d. Net income for the first year was $64,000, but no dividends were declared.
Required:
Prepare the stockholders’ equity section of the balance sheet at December 31.
Preferred stock: 12 percent, par $10, authorized 30,000 shares
Common stock: par $5, authorized 70,000 shares
The following transactions occurred during the first year of operations in the order given:
a. Issued a total of 60,000 shares of the common stock for $20 per share.
b. Issued 15,000 shares of the preferred stock at $20 per share.
c. Issued 5,000 shares of the common stock at $25 per share and 3,000 shares of the preferred stock
at $20.
d. Net income for the first year was $64,000, but no dividends were declared.
Everest Corporation
Partial Balance Sheet
at December 31
STOCKHOLDERS’ EQUITY
Contributed Capital
Preferred Stock, 12%, par $10, authorized 30,000 shares;
issued and outstanding, 18,000 shares
Additional Paid-in Capital, Preferred
Common Stock, par $5, authorized 70,000 shares;
issued and outstanding, 65,000 shares
Additional Paid-in Capital, Common Stock
Total Contributed Capital
Retained Earnings
Total Stockholders’ Equity
18,000 × $20 =
$360,000
$ 180,000
180,000
$360,000 − $180,000
= $180,000
325,000
1,000,000
1,685,000
64,000
$1,749,000
($20 − $5) × 60,000 +
($25 − $5) × 5,000 =
$1,000,000
Exercise 11-4
Pine Corporation, a furniture company, was organized in January. The charter issued by the state
authorized the following capital stock:
Common stock, $2 par value, 200,000 shares.
Preferred stock, $12 par value, 8 percent, 70,000 shares.
During January, the following stock transactions were completed:
a. Collected $450,000 cash and issued 30,000 shares of common stock.
b. Issued 16,000 shares of preferred stock at $30 per share; collected in cash.
Net income for the year was $68,000; cash dividends declared and paid at year-end were $19,000.
Required:
Prepare the stockholders’ equity section of the balance sheet at December 31.
Common stock, $2 par value, 200,000 shares.
Preferred stock, $12 par value, 8 percent, 70,000 shares.
Net income for the year was $68,000; cash dividends declared and paid at yearCollected
and issued
of common
Issued
16,000$450,000
shares ofcash
preferred
stock30,000
at $30 shares
per share;
collectedstock.
in cash.
end were $19,000.
PINE CORPORATION
Balance Sheet (excerpt)
At December 31
Stockholders’ Equity
Contributed Capital
Preferred Stock, 8%, par $12, authorized 70,000 shares, issued
and outstanding, 16,000 shares
Additional Paid-in Capital, Preferred Stock
Common Stock, par $2, authorized 200,000 shares, issued and
outstanding, 30,000 shares
Additional Paid-in Capital, Common Stock
Total Contributed capital
Retained Earnings
Total Stockholders’ Equity
$192,000
288,000
60,000
390,000
16,000 × $12
16,000 × ($30 − $12)
30,000 × $2
$450,000 − $60,000
930,000
49,000
$979,000
$68,000 − $19,000
Exercise 11-5
Regal Incorporated was issued a charter on January 15 authorizing the following capital stock:
Common stock, $8 par, 80,000 shares, one vote per share.
Preferred stock, 10 percent, par value $12 per share, 7,000
shares, nonvoting.
The following selected transactions were completed during the first year of operations in the
order given:
a. Issued 10,000 shares of the $8 par common stock at $20 cash per share.
b. Issued 5,000 shares of preferred stock at $25 cash per share.
c. At the end of the year, the accounts showed net income of $42,000. No dividends were
declared.
Required:
1. Prepare the stockholders’ equity section of the balance sheet at December 31.
2. Assume that you are a common stockholder of Regal Incorporated. If the company needed
additional capital, would you prefer to have it issue additional common stock or additional
preferred stock? Explain.
Common stock, $8 par, 80,000 shares, one vote per share.
Preferred stock, 10 percent, par value $12 per share, 7,000 shares,
nonvoting.
The following selected transactions were completed during the first year of operations in the order given:
a. Issued 10,000 shares of the $8 par common stock at $20 cash per share.
b. Issued 5,000 shares of preferred stock at $25 cash per share.
c. At the end of the year, the accounts showed net income of $42,000.
Regal Incorporated
Partial Balance Sheet
at December 31
Stockholders’ Equity
Contributed Capital
Preferred Stock, 10% (par value $12; 7,000 authorized
shares, 5,000 issued and outstanding shares)
Additional Paid-In Capital, Preferred Stock
Common Stock (par value $8; authorized 80,000 shares,
10,000 issued and outstanding shares)
Additional Paid-In Capital, Common Stock
Total Contributed Capital
Retained Earnings
Total Stockholders’ Equity
$ 60,000
65,000
80,000
120,000
325,000
42,000
$367,000
($25 − $12) × 5,000
($20 − $8) × 10,000
Exercise 11-6
Berry Inc. obtained a charter at the start of the year that authorized 70,000 shares of
no-par common stock and 15,000 shares of preferred stock, par value $8. During the year, the
following selected transactions occurred:
a.
b.
c.
Collected $30 cash per share from four individuals and issued 10,000 shares of common stock
to each.
Issued 5,000 shares of common stock to an outside investor at $30 cash per share.
Issued 7,500 shares of preferred stock at $22 cash per share.
Required:
1. Give the journal entries indicated for each of these transactions.
2. Prepare the stockholders’ equity section of the balance sheet at December 31. At the
end of the year, the accounts reflected net income of $18,000. No dividends were declared.
Collected $30 cash per share from four individuals and issued 10,000 shares of common
Issued
7,500
shares
of preferred
stock
of outside
par value
$8, at $22
cash
perper
share.
Issued
5,000
shares
of common
stock
to an
investor
at $30
cash
share.
stock to each.
Debit
a.
Cash
1,200,000
1,200,000
Common Stock
b.
Cash
150,000
150,000
Common Stock
c.
Cash
Preferred Stock
Additional Paid-in Capital, Preferred
Credit
165,000
60,000
105,000
BERRY INC.
Balance Sheet (excerpt)
At December 31
Stockholders’ Equity
Contributed Capital
Preferred Stock, par $8, authorized 15,000 shares, issued
and outstanding, 7,500 shares
Additional Paid-in Capital, Preferred Stock
$ 60,000
105,000
Retained Earnings
Debit
c.
Cash
Preferred Stock
Additional Paid-in Capital, Preferred
Credit
165,000
60,000
105,000
BERRY INC.
Balance Sheet (excerpt)
At December 31
Stockholders’ Equity
Contributed Capital
Preferred Stock, par $8, authorized 15,000 shares, issued
and outstanding, 7,500 shares
Additional Paid-in Capital, Preferred Stock
Common Stock, no-par, authorized 70,000 shares, issued
and outstanding, 45,000 shares
Total Contributed Capital
Retained Earnings
$ 60,000
105,000
1,350,000
1,515,000
18,000
$1,533,000
Total Stockholders’ Equity
At the end of the year, the accounts reflected net income of $18,000.
Debit
Credit
No dividends were declared.
a.
Cash
1,200,000
1,200,000
Common Stock
b.
Cash
Common Stock
150,000
150,000
Exercise 11-7
The stockholders’ equity section on the December 31, balance sheet of Rockline Corporation
reported the following amounts:
Contributed Capital
Preferred Stock (par $25; authorized 5,000 shares, ? Issued,
of which 700 shares are held as treasury stock)
Additional Paid-in Capital , Preferred
$120,0 00
7,800
Common Stock (no-par; authorized 10,000 shares, issued and
outstanding 4,100 shares)
Retained Earnings
Treasury Stock, 700 Preferred shares at cost
100,000
30,000
(7,700)
Assume that no shares of treasury stock have been sold in the past.
Required:
Complete the following statements and show your computations.
1. The number of shares of preferred stock issued was
.
2. The number of shares of preferred stock outstanding was
.
3. The average issue price of the preferred stock was $
per share.
4. The average issue price of the common stock was $
.
5. The treasury stock transaction increased (decreased) stockholders’ equity by
6. The treasury stock cost $
per share.
7. Total stockholders’ equity is $
.
.
Contributed Capital
Preferred Stock (par $25 ; authorized 5,000 shares, ? Issued,
of which 700 shares are held as treasury stock)
Additional Paid-in Capital, Preferred
Common Stock (no-par; authorized 10,000 shares, issued and
outstanding 4,100 shares)
Retained Earnings
Treasury Stock, 700 Preferred shares at cost
1.
Number of shares of preferred stock issued:
issued was
$120,000
4,800. ÷ $25 = 4,800
2.
Number of shares of preferred stock outstanding :was4,800
4,100.− 700 = 4,100
$120,000
7,800
100,000
30,000
(7,700)
3. The average issue price of the preferred stock was:
was $26.63
($120,000
$127,800
per share.
+÷ $7,800)
4,800 = $26.63
4.
The average issue price of the common stock was
: $100,000
$24.39 per÷share.
4,100 = $24.39
5.
The treasury stock transaction decreases
increased (decreased)
stockholders’
stockholders’
equity by $7,700.
equity by:
6.
The treasury stock cost :$11$7,700
per share.
÷ 700 = $11
7.
Total stockholders’ equity :is ($227,800
$250,100. + $30,000 − $7,700) = $250,100
Exercise 11-8
The following selected transactions occurred for Burkel Corporation:
Mar. 1
Aug. 15
Oct. 1
Purchased 500 shares of the company’s own common stock at $30 cash per share; the
stock is now held in treasury.
Issued 150 of the shares purchased on March 1 for $40 cash per share.
Issued 100 more of the shares purchased on March 1 for $20 cash per share.
Required:
1. Show the effects of each transaction on the accounting equation.
2. Give the indicated journal entries for each of the transactions.
3. What impact does the purchase of treasury stock have on dividends paid?
4. What impact does the reissuance of treasury stock for an amount higher than the purchase
price have on net income?
Mar. 1
Purchased 500 shares of the company’s own common stock at $30 cash per share.
500 × $30 = $15,000
Date
Mar. 1
Assets
Cash
=
Liabilities
− 15,000 =
+
+
Stockholders’ Equity
Treasury Stock (+xSE)
− 15,000
General Journal
Date
Mar. 1
Account Titles
Treasury Stock (+xSE)
Cash
Debit
Credit
15,000
15,000
Aug. 15
Issued 150 of the shares purchased on March 1 for $40 cash per share.
$6,000
150 −× $30
$40
$4,500
= $4,500
$6,000
= $1,500
Date
Aug. 15
Assets
Cash
=
Liabilities
+ 6,000 =
+
Stockholders’ Equity
+ Treasury Stock (−xSE)
+ 4,500
Additional Paid-in Capital,
Treasury Stock
+ 1,500
General Journal
Date
Aug. 15
Account Titles
Cash
Debit
Credit
6,000
Treasury Stock (−xSE)
4,500
Additional Paid-in Capital, Treasury Stock
1,500
Oct. 1
Issued 100 more of the shares purchased on March 1 for $20 cash per share.
$3,000
100 −× $30
$20
$2,000
= $3,000
$2,000
= $1,000
Date
Oct. 1
Assets
Cash
=
Liabilities
+ 2,000 =
+
+
Stockholders’ Equity
Treasury Stock (−xSE)
+ 3,000
Additional Paid-in Capital,
Treasury Stock
− 1,000
General Journal
Date
Oct. 1
Account Titles
Debit
Cash
2,000
Additional Paid-in Capital, Treasury Stock
1,000
Treasury Stock (−xSE)
Credit
3,000
What impact does the purchase of treasury stock have on dividends paid?
The total amount of cash dividends paid is reduced.
What impact does the reissuance of treasury stock for an amount higher than the purchase price
have on net income?
This does not affect net income. The transaction affects only balance sheet accounts.
Exercise 11-9
The annual report for Macum Company reported the following transactions affecting
stockholders’ equity:
a. Purchased $400,000 of common stock now held in treasury.
b. Declared cash dividends in the amount of $300,000.
c. Paid the dividends in (b).
d. Issued 120,000 new shares of $0.50 par value common shares for $5 per share.
e. Closed the Dividends account.
Required:
1. Indicate the effect (increase, decrease, or no effect) of each of these transactions on total
assets, liabilities, and stockholders’ equity.
2. Prepare journal entries to record each of these events.
3. Prepare a statement of stockholders’ equity, assuming the following opening balances:
Common Stock, $15,000; Additional Paid-In Capital, $220,000; Retained Earnings, $175,000;
and Treasury Stock, $0. Net income for the current year was $310,000.
a.
a.
Purchased $400,000 of common stock now held in treasury.
Assets
=
Liabilities
+
Stockholders’ Equity
Cash −$400,000
=
NE
+
Treasury Stock −$400,000
Debit
a.
Treasury Stock
Cash
Credit
400,000
400,000
b.
Declared cash dividends in the amount of $300,000.
Assets
b.
NE
=
Liabilities
+
=
Dividends Payable
+$300,000
+
Stockholders’ Equity
Dividends − $300,000
Debit
b.
Dividends
Dividends Payable
Credit
300,000
300,000
b.
c.
c.
Declared cash dividends in the amount of $300,000.
Paid the dividends in ( b ).
Assets
=
Liabilities
+
Stockholders’ Equity
Cash –$300,000
=
Dividends Payable
–$300,000
+
NE
Debit
c.
Dividends Payable
Cash
Credit
300,000
300,000
d.
d.
Issued 120,000 new shares of $0.50 par value common shares for $5 per share.
Assets
=
Liabilities
+
Stockholders’ Equity
Cash +$600,000
=
NE
+
Common Stock +$60,000
Additional Paid-In
Capital, Common Stock
+$540,000
Debit
d.
Credit
600,000
Cash
Common Stock
Additional Paid-In Capital, Common Stock
60,000
540,000
Issue price = 120,000 shares × $5 per share = $600,000
Par value of the issue = 120,000 shares × $0.50 per share = $60,000
e.
Closed the Dividends account.
e.
Assets
=
Liabilities
+
NE
=
NE
+
Stockholders’ Equity
Retained Earnings –$300,000
Dividends +$300,000
Debit
e
.
Retained Earnings
Dividends
Credit
300,000
300,000
a.
b.
c.
d.
e.
Purchased $400,000 of common stock now held in treasury.
Declared cash dividends in the amount of $300,000.
Paid the dividends in ( b ).
Issued 120,000 new shares of $0.50 par value common shares for $5 per share.
Closed the Dividends account.
Opening balances: Common Stock, $15,000; Additional Paid-In Capital, $220,000; Retained
Earnings, $175,000; and Treasury Stock, $0. Net income for the current year was $310,000.
Issue price = 120,000 shares × $5 per share = $600,000
Par value of the issue = 120,000 shares × $0.50 per share = $60,000
Additional Paid-In Capital = $600,000 − $60,000 = $540,000
Common
Additional
Retained
Stock
Paid-In Capital Earnings
Beginning
Stock Issuances
Net Income
Dividends: Common
Ending
$15,000
$220,000
60,000
540,000
400,000
$760,000
310,000
(300,000)
$185,000 $400,000
$75,000
$175,000
Treasury
Stock
$
0
Exercise 11-10
The records of Sphere Company reflected the following balances in the stockholders’ equity
accounts at December 31, Year 2:
Common stock, par $15 per share, 50,000 shares outstanding.
Preferred stock, 6 percent, par $12 per share, 5,000 shares outstanding.
Retained earnings, $250,000.
On January 1, Year 3, the board of directors was considering the distribution of a $75,000 cash
dividend. No dividends were paid during Year 1 and Year 2.
Required:
1. Determine the total and per-share amounts that would be paid to the common stockholders
and to the preferred stockholders under two independent assumptions:
a. The preferred stock is noncumulative.
b. The preferred stock is cumulative.
2. Briefly explain why the dividends per share of common stock in requirements 1a and 1b could
be different.
3. What factors would cause a more favorable dividend for the common stockholders?
The records of Sphere Company reflected the following balances in the stockholders’ equity
accounts at December 31, Year 2:
Common stock, par $15 per share, 50,000 shares outstanding.
Preferred stock, 6 percent, par $12 per share, 5,000 shares outstanding.
Retained earnings, $250,000.
On January 1, Year 3, the board of directors was considering the distribution of a $75,000 cash
dividend. No dividends were paid during Year 1 and Year 2.
$71,400
$3,600
÷÷50,000
5,000
shares
shares
==$0.72
$1.428
5,000 shares
× $12
= $60,000
Preferred
5,000
Shares
Common
50,000
Shares
Total
1. a) Noncumulative:
Preferred ($60,000 × 6%)
$3,600
Balance to common ($75,000 – $3,600)
Per Share
$ 3,600
$71,400
71,400
$3,600
$71,400
$75,000
$0.72
$1.428
The records of Sphere Company reflected the following balances in the stockholders’ equity
accounts at December 31, Year 2:
Common stock, par $15 per share, 50,000 shares outstanding.
Preferred stock, 6 percent, par $12 per share, 5,000 shares outstanding.
Retained earnings, $250,000.
On January 1, Year 3, the board of directors was considering the distribution of a $75,000 cash
dividend. No dividends were paid during Year 1 and Year 2.
$64,200
$10,800
5,000 shares
÷÷50,000
5,000
× $12
shares
= $60,000
= $1.284
$2.16
Preferred
5,000
Shares
Common
50,000
Shares
Total
1. b) Cumulative:
Preferred, arrears ($60,000 × 6% × 2 years) $ 7,200
$ 7,200
3,600
3,600
Preferred, current year ($60,000 × 6%)
Balance to common ($75,000 − $7,200 − $3,600)
Per Share
$64,200
64,200
$10,800
$64,200
$75,000
$2.16
$1.284
Preferred
5,000
Shares
Common
50,000
Shares
Total
1. a) Noncumulative:
Preferred ($60,000 × 6%)
$3,600
Balance to common ($75,000 − $3,600)
Per Share
$ 3,600
$71,400
71,400
$3,600
$71,400
$75,000
$0.72
$1.428
Preferred
5,000
Shares
Common
50,000
Shares
Total
1. b) Cumulative:
Preferred, arrears ($60,000 × 6% × 2)
$ 7,200
$ 7,200
Preferred, current year ($60,000 × 6%)
3,600
3,600
Balance to common ($75,000 − $7,200 − $3,600)
Per Share
$64,200
64,200
$10,800
$64,200
$75,000
$2.16
$1.284
Dividends would be more favorable for the common stockholders if:
• the preferred dividends were not in arrears.
• the preferred dividends were not cumulative.
• the total dividend distribution was increased.
Exercise 11-11
The annual report for Derek Corporation disclosed that the company declared and paid preferred
dividends in the amount of $20,000 in the current year. It also declared and paid dividends on
common stock in the amount of $3 per share. During the current year, Derek had 100,000
common shares authorized; 40,000 shares had been issued; and 15,000 shares were in treasury
stock. The opening balance in Retained Earnings was $150,000 and Net Income for the current
year was $55,000.
Required:
1. Prepare journal entries to record the declaration, and payment, of dividends on (a) preferred
and (b) common stock.
2. Using the information given above, prepare a statement of retained earnings for the year
ended December 31.
3. Prepare a journal entry to close the Dividends account.
Derek Corporation declared and paid preferred dividends in the amount of $20,000 in
It also declared and paid dividends on common stock in the amount of $3 per share.
the current year.
No. of Shares
Authorized
Issued
Treasury Stock
100,000
40,000
15,000
25,000 (outstanding shares) =× 40,000
$3 = $75,000
(issued shares) − 15,000 (treasury stock)
Debit
(a)
(b)
Dividends
Dividends Payable
Declaration of preferred dividends.
20,000
Dividends Payable
Cash
Payment of preferred dividends.
20,000
Dividends
Dividends Payable
Declaration of common dividends.
75,000
Dividends Payable
Cash
Payment of common dividends.
75,000
Credit
20,000
20,000
75,000
75,000
Retained Earnings, December 31
$150,000
Net Income
55,000
Preferred Dividends
20,000
Common Share Dividends
75,000
DEREK CORPORATION
Statement of Retained Earnings
For the Year Ended December 31
Retained Earnings, January 1
Add: Net Income
Subtract: Dividends on preferred stock
Dividends on common stock
Retained Earnings, December 31
$150,000
55,000
(20,000)
(75,000)
$110,000
Exercise 11-12
On December 31, the stockholders’ equity section of the balance sheet of D & K Corporation
reflected the following:
Common stock (par $12; 50,000 shares authorized; 20,000 issued and outstanding)
$240,000
Additional paid-in capital
15,000
Retained earnings
80,000
On February 1 of the following year, a 15 percent stock dividend was issued. The market value of
the stock on February 1 was $20 per share.
Required:
1. For comparative purposes, prepare the stockholders’ equity section of the balance sheet
(a) immediately before the stock dividend and (b) immediately after the stock dividend.
2. How would your answer to requirement 1 change if the stock dividend were 100%?
Common stock (par $12; 50,000 shares authorized; 20,000 issued and outstanding)
$240,000
Additional paid-in capital
15,000
Retained earnings
80,000
On February 1 of the following year, a 15 percent stock dividend was issued. The market value of
the stock on February 1 was $20 per share.
Stockholders’ Equity
Before
Stock
Dividend
Common Stock
Common Stock (par $12, 50,000 shares authorized;
20,000 issued and outstanding )
Additional Paid-In Capital
Retained Earnings
Total Stockholders’ Equity
Stock
Dividend
After
Stock
Dividend
3,000
3,000
shares
shares
××$20
$12
$8===3,000
$24,000
$36,000
$60,000
20,000
shares
× 15%
shares
$240,000
$36,000
$276,000
15,000
255,000
80,000
$335,000
24,000
60,000
(60,000)
$
0
39,000
315,000
20,000
$335,000
On December 31, the stockholders’ equity section of the balance sheet of D & K Corporation
reflected the following:
Common stock (par $12; 50,000 shares authorized; 20,000 issued and outstanding)
$240,000
Additional paid-in capital
15,000
Retained earnings
80,000
On February 1 of the following year, a 15 percent stock dividend was issued. The market value of
the stock on February 1 was $20 per share.
Required:
2. How would your answer to requirement 1 change if the stock dividend were 100%?
If the stock dividend were 100% (a large stock dividend, rather than the small stock dividend analyzed
in requirement 1):
1. It would be recorded at the $12 par value per share.
2. Common stock would increase and retained earnings would decrease by $240,000 (20,000 shares
x 100% x $12 par).
3. The balance in Additional Paid-In Capital would not change.
Exercise 11-13
Impex is a leading global manufacturer and marketer of power tools, hardware, and home
improvement products. A press release contained the following announcement:
NEW BRITAIN, Conn.—(BUSINESS WIRE)—Jan. 28, Year 1— Impex (NYSE: SWK)
announced today that its Board of Directors approved a regular first-quarter
cash dividend of $0.40 per common share. This extends the company’s record
for the longest consecutive annual and quarterly dividend payments among
industrial companies listed on the New York Stock Exchange. The dividend is
payable on Tuesday, Feb 11, Year 1, to shareholders of record as of the close of
business on Wednesday, Feb 5, Year 1.
At the time of the press release, the company had 250 million shares authorized and 170 million
outstanding. The par value for the company’s stock is $3 per share.
Required:
1. Prepare journal entries as appropriate for each of the three dates mentioned above.
2. Assuming no other dividends were declared during the year, prepare the closing entry.
NEW BRITAIN, Conn.—(BUSINESS WIRE)—Jan. 28, Year 1— Impex (NYSE: SWK)
announced today that its Board of Directors approved a regular first-quarter
cash dividend of $0.40 per common share. This extends the company’s record
for the longest consecutive annual and quarterly dividend payments among
industrial companies listed on the New York Stock Exchange. The dividend is
payable on Tuesday, Feb 11, Year 1, to shareholders of record as of the close of
business on Wednesday, Feb 5, Year 1.
The company had 250 million shares authorized and 170 million outstanding. The
par value for the company’s stock is $3 per share.
General Journal
Date
Jan. 28
Account Titles
Debit
Credit
68,000,000
Dividends
Dividends Payable
170 million × $0.40 = $68,000,000
68,000,000
NEW BRITAIN, Conn.—(BUSINESS WIRE)—Jan. 28, Year 1— Impex (NYSE: SWK)
announced today that its Board of Directors approved a regular first-quarter
cash dividend of $0.40 per common share. This extends the company’s record
for the longest consecutive annual and quarterly dividend payments among
industrial companies listed on the New York Stock Exchange. The dividend is
payable on Tuesday, Feb 11, Year 1, to shareholders of record as of the close of
business on Wednesday, Feb 5, Year 1.
The company had 250 million shares authorized and 170 million outstanding. The
par value for the company’s stock is $3 per share.
General Journal
Date
Feb. 5
Account Titles
No journal entry required.
Debit
Credit
NEW BRITAIN, Conn.—(BUSINESS WIRE)—Jan. 28, Year 1— Impex (NYSE: SWK)
announced today that its Board of Directors approved a regular first-quarter
cash dividend of $0.40 per common share. This extends the company’s record
for the longest consecutive annual and quarterly dividend payments among
industrial companies listed on the New York Stock Exchange. The dividend is
payable on Tuesday, Feb 11, Year 1, to shareholders of record as of the close of
business on Wednesday, Feb 5, Year 1.
The company had 250 million shares authorized and 170 million outstanding. The
par value for the company’s stock is $3 per share.
General Journal
Date
Feb. 11
Account Titles
Dividends Payable
Cash
Debit
Credit
68,000,000
68,000,000
NEW BRITAIN, Conn.—(BUSINESS WIRE)—Jan. 28, Year 1— Impex (NYSE: SWK)
announced today that its Board of Directors approved a regular first-quarter
cash dividend of $0.40 per common share. This extends the company’s record
for the longest consecutive annual and quarterly dividend payments among
industrial companies listed on the New York Stock Exchange. The dividend is
payable on Tuesday, Feb 11, Year 1, to shareholders of record as of the close of
business on Wednesday, Feb 5, Year 1.
The company had 250 million shares authorized and 170 million outstanding. The
par value for the company’s stock is $3 per share.
General Journal
Date
Dec. 31
Account Titles
Retained Earnings
Dividends
Debit
Credit
68,000,000
68,000,000
Exercise 11-14
On July 1, Adams Corporation had the following capital structure:
Common Stock, par $2; 1,000,000 authorized shares, 120,000 issued and outstanding
Additional Paid-in Capital
Retained Earnings
Treasury Stock
$240,000
60,000
250,000
None
Required:
Show the effects of the following two independent cases on the stockholder’s equity section of
the balance sheet before and after the stock transactions.
Case 1: The board of directors declared and issued a 15 percent stock dividend when the stock
price was $8 per share.
Case 2: The board of directors voted a 2-for-1 stock split. The stock price prior to the split was $8
per share.
Case
Case2:1:The
Theboard
boardof
ofdirectors
directorsvoted
declared
a 2-for-1
and issued
stock asplit.
15 percent
The stock
stock
price
dividend
prior towhen
the split
the was
stock$8
price was
per $8
share.
per share.
Common Stock, par $2; 1,000,000 authorized shares, 120,000 issued and outstanding
Additional Paid-in Capital
Retained Earnings
Treasury Stock
Item
Number of shares outstanding
Par per share
Common stock account
Additional paid-in capital
Retained earnings
Total stockholders’ equity
$240,000
60,000
250,000
None
Case 1
After 15%
Stock
Dividend
Case 2
After
Stock
Split
138,000
240,000
$2
× $1
$240,000 +$$36,000
36,000
$276,000
$240,000
60,000 + 108,000
168,000
60,000
250,000 − 144,000
106,000
250,000
$550,000
$550,000
Before Stock
Transactions
120,000 ×+ 18,000
2
× $2 ÷ 2
$550,000
$144,000
120,000
18,000 −× $36,000
15%
$2 == $36,000
$8
$144,000
=18,000
$108,000
Exercise 11-15
Birdman Company has outstanding 90,000 shares of $12 par value common stock and 30,000
shares of $18 par value preferred stock (6 percent). On February 1, the board of directors voted in
favor of a 6 percent cash dividend on the preferred stock. The cash dividends were paid on March
15. The company closed its books at its fiscal year-end, June 30.
Required:
Prepare journal entries to record the events on ( a ) February 1, ( b ) March 15, and ( c ) June 30.
Birdman Company has outstanding 90,000 shares of $12 par value common stock and 30,000
shares of $18 par value preferred stock (6 percent). On February 1, the board of directors voted in
favor of a 6 percent cash dividend on the preferred stock. The cash dividends were paid on March
15. The company closed its books at its fiscal year-end, June 30.
Required:
Prepare journal entries to record the events on (a) February 1
General Journal
Date
Feb. 1
Account Titles
Debit
Credit
32,400
Dividends
Dividends Payable
30,000 shares × $18 × 6% = $32,400
32,400
Birdman Company has outstanding 90,000 shares of $12 par value common stock and 30,000
shares of $18 par value preferred stock (6 percent). On February 1, the board of directors voted in
favor of a 6 percent cash dividend on the preferred stock. The cash dividends were paid on March
15. The company closed its books at its fiscal year-end, June 30.
Required:
Prepare journal entries to record the events on (b) March 15
General Journal
Date
Mar. 15
Account Titles
Dividends Payable
Cash
Debit
Credit
32,400
32,400
Birdman Company has outstanding 90,000 shares of $12 par value common stock and 30,000
shares of $18 par value preferred stock (6 percent). On February 1, the board of directors voted in
favor of a 6 percent cash dividend on the preferred stock. The cash dividends were paid on March
15. The company closed its books at its fiscal year-end, June 30.
Required:
Prepare journal entries to record the events on (c) June 30.
General Journal
Date
June 30
Account Titles
Retained Earnings
Dividends
Debit
Credit
32,400
32,400
Exercise 11-16
The following account balances were selected from the records of Berger Corporation at
December 31 after all adjusting entries were completed:
Common stock (par $10; authorized 75,000 shares, issued 40,000
shares, of which 2,000 shares are held as treasury stock)
Additional paid-in capital—common stock
$ 400,000
175,000
Dividends
24,000
Retained earnings, beginning of year
72,000
Treasury stock at cost (2,000 shares)
30,000
Net income for the year was $45,000.
Required:
1. Prepare the statement of retained earnings for the year ended December 31 and the
stockholders’ equity section of the balance sheet at December 31.
2. Determine the number of shares of stock that received dividends.
3. Compute the ROE ratio for the current year assuming total stockholders’ equity was $545,000
on December 31 of the previous year.
Common stock (par $10; authorized 75,000 shares, issued 40,000
shares, of which 2,000 shares are held as treasury stock)
Additional paid-in capital—common stock
Dividends
Retained earnings, beginning of year
Treasury stock at cost (2,000 shares)
Net Income
BERGER CORPORATION
Statement of Retained Earnings
For the Year Ended December 31
Retained Earnings, January 1
$ 72,000
Add: Net Income
45,000
Subtract: Dividends
(24,000)
Retained Earnings, December 31
$ 93,000
$ 400,000
175,000
24,000
72,000
30,000
45,000
BERGER CORPORATION
Balance Sheet (Excerpt)
At December 31
Stockholders’ Equity
Contributed Capital
Common Stock, par $10, authorized 75,000
shares, issued 40,000 shares, of which 2,000
shares are held as treasury stock
Additional Paid-in Capital
Total Contributed Capital
Retained Earnings
Total
Less: Treasury Stock, at cost
$400,000
175,000
575,000
93,000
668,000
(30,000)
Total Stockholders’ Equity
$638,000
Common stock (par $10; authorized 75,000 shares, issued 40,000
shares, of which 2,000 shares are held as treasury stock)
Additional paid-in capital—common stock
Dividends
Retained earnings, beginning of year
Treasury stock at cost (2,000 shares)
Net Income
40,000 (issued) − 2,000 (treasury stock) = 38,000 shares
$ 400,000
175,000
24,000
72,000
30,000
45,000
Current Year
Return on Equity =
Net Income – Preferred Dividends
Average Common Stockholders’ Equity
=
$45,000
$45,000
– $0
($545,000
+ $638,000)/2
$591,500
= 7.6%
Exercise 11-17
Apex Corporation reported the following in its financial statements for the quarter ended March
31, Year 2.
December 31, Year 1 March 31, Year 2
Common Stock, $1 par, 100,000 shares issued and outstanding
$100,000
$100,000
Additional Paid-In Capital
35,000
35,000
Retained Earnings
45,000
45,000
Total Stockholders’ Equity
$180,000
$180,000
During the quarter ended March 31, Apex reported Net Income of $10,000 and declared and paid
cash dividends totaling $10,000.
Required:
1. Calculate earnings per share (EPS) and return on equity (ROE) for the quarter ended March
31.
2. Assume Apex repurchases 30,000 of its common stock at a price of $2 per share on April 1,
Year 2. Also assume that during the quarter ended June 30, Year 2, Apex reported Net Income
of $10,000, and declared and paid cash dividends totaling $10,000. Calculate earnings per
share (EPS) and return on equity (ROE) for the quarter ended June 30, Year 2.
3. Based on your calculations in requirements 1 and 2, what can you conclude about the impact
of a stock repurchase on EPS and ROE?
December 31, Year 1
Common Stock, $1 par 100,000 shares issued and outstanding
Additional Paid-In Capital
Retained Earnings
Total Stockholders’ Equity
March 31, Year 2
$100,000
35,000
45,000
$100,000
35,000
45,000
$180,000
$180,000
Net Income
Cash Dividends
$10,000
10,000
Quarter ended
March 31, Year 2
Net Income − Preferred Dividends
Earnings Per
=
Share (EPS)
Average Number of
Common Shares Outstanding
$10,000
100,000
= $0.10
Net Income − Preferred Dividends
Return on
=
Equity (ROE)
Average Common
Stockholders’ Equity
$10,000
$180,000
(180,000
+ 180,000)/2
= 0.056 or 5.6%
Assume Apex repurchases 30,000 of its common stock at a price of $2 per share on April 1, Year 2
March 31, Year 2
Common Stock, $1 par
Additional Paid-In Capital
Retained Earnings
Treasury Stock
Total Stockholders’ Equity
Net Income
Cash Dividends
$100,000
35,000
45,000
June 30, Year 2
$180,000
$100,000
35,000
45,000
(60,000)
30,000
× $2
$120,000
$10,000
10,000
$10,000
10,000
Quarter ended
Net Income − Preferred Dividends
Earnings Per
=
Share (EPS)
Average Number of
Common Shares Outstanding
March 31, Year 2
June 30, Year 2
$10,000
100,000
$10,000
70,000
100,000
− 30,000
= $0.10
Net Income − Preferred Dividends
Return on
=
Equity (ROE)
Average Common
Stockholders’ Equity
$10,000
$180,000
= 0.056 or 5.6%
= $0.14
$10,000
$150,000
(180,000
+120,000)/2
= 0.067 or 6.7%
Exercise 11-18
Assume for each of the following independent cases that the annual accounting period ends on
December 31 and that the total of all revenue accounts was $220,000 and the total of all expense
accounts was $190,000.
Case A: Assume that the business is a sole proprietorship owned by Proprietor A. Prior to the
closing entries, the Capital account reflected a credit balance of $60,000 and the
Drawings account showed a balance of $10,000.
Case B: Assume that the business is a partnership owned by Partner A and Partner B. Prior to the
closing entries, the owners’ equity accounts reflected the following balances: A, Capital,
$52,000; B, Capital, $45,000; A, Drawings, $6,000; and B, Drawings, $11,000. Profits and
losses are divided equally.
Case C: Assume that the business is a corporation. Prior to the closing entries, the stockholders’
equity accounts showed the following: Capital Stock, par $10, authorized 40,000 shares,
issued and outstanding 17,000 shares; Additional Paid-In Capital, $8,000; and Retained
Earnings, $70,000. No dividends were declared.
Required:
1. Give all the closing entries required at December 31 for each of the separate cases.
2. Show how the equity section of the balance sheet would appear at December 31 for each
case. Show computations.
Case A: Sole Proprietorship
Total Revenues
$ 220,000
Total Expenses
190,000
Capital Account balance, before closing entries
60,000
Drawings Account
10,000
Net Income = $220,000 − $190,000 = $30,000
Debit
Individual Revenue Accounts
220,000
190,000
Individual Expense Accounts
Proprietor A, Capital
Proprietor A, Capital
Proprietor A, Drawings
Credit
30,000
10,000
10,000
Case A: Sole Proprietorship
Total Revenues
$ 220,000
Total Expenses
190,000
Capital Account balance, before closing entries
60,000
Drawings Account
10,000
Statement of Owner’s Equity
For the Year Ended December 31
A, Capital, January 1
$60,000
Add: Net Income
30,000
Total
90,000
Less: Withdrawals
(10,000)
A, Capital, December 31
$80,000
Case B: Partnership
Total Revenues
$ 220,000
Total Expenses
190,000
Partner A, Capital
52,000
Partner B, Capital
45,000
Partner A, Drawings
6,000
Partner B, Drawings
11,000
Net Income = $220,000 − $190,000 = $30,000
Debit
Individual Revenue Accounts
Credit
220,000
Individual Expense Accounts
190,000
Partner A, Capital
15,000
Partner B, Capital
15,000
Partner A, Capital
6,000
Partner B, Capital
11,000
Partner A, Drawings
6,000
Partner B, Drawings
11,000
Case B: Partnership
Total Revenues
$ 220,000
Total Expenses
190,000
Partner A, Capital
52,000
Partner B, Capital
45,000
Partner A, Drawings
6,000
Partner B, Drawings
11,000
Statement of Partners’ Equity
For the Year Ended December 31
A
B
Total
$52,000
$45,000
$ 97,000
Add: Net Income for the year
15,000
15,000
30,000
Total
67,000
60,000
127,000
Less: Withdrawals during the year
(6,000)
(11,000)
(17,000)
Partners’ Equity, January 1
Partners’ Equity, December 31
$61,000
$49,000
$110,000
Case C: Corporation
Total Revenues
$ 220,000
Total Expenses
190,000
Capital Stock, par $10, authorized 40,000 shares,
issued and outstanding 17,000 shares
170,000
Additional Paid-In Capital
17,000 × $10
8,000
Retained Earnings
70,000
Net Income = $220,000 − $190,000 = $30,000
Debit
Individual Revenue Accounts
Individual Expense Accounts
Retained Earnings
Credit
220,000
190,000
30,000
Case C: Corporation
Total Revenues
Total Expenses
Capital Stock, par $10, authorized 40,000 shares,
issued and outstanding 17,000 shares
$ 220,000
190,000
170,000
8,000
70,000
Additional Paid-In Capital
Retained Earnings
Statement of Retained Earnings
For the Year Ended December 31
Retained Earnings, January 1
Add: Net Income
Retained Earnings, December 31
$ 70,000
30,000
$100,000
STOCKHOLDERS’ EQUITY
As of December 31
Contributed Capital
Capital Stock, par $10, authorized 40,000 shares,
issued and outstanding 17,000 shares
Additional Paid-In Capital
$170,000
8,000
Total Contributed Capital
Retained Earnings
178,000
100,000
Total Stockholders’ Equity
$278,000
Exercise 11-19
On December 31, the stockholders’ equity section of the balance sheet of S & D Corporation
reflected the following:
Common stock (par $10; authorized 50,000 shares, outstanding
30,000 shares)
Additional paid-in capital
Retained earnings
$ 300,000
15,000
80,000
On February 1 of the following year a 14 percent stock dividend was issued. The market value of
the stock on February 1 was $15 per share.
Required:
Prepare the journal entry to record (a) the small 14 percent stock dividend and, alternatively (b)
assuming the stock dividend was 100 percent.
Stock dividend
14 percent
Market value of the stock
$15 per share
Number of outstanding shares (par $10)
30,000 shares
30,000
$63,000
4,200
shares
shares
− ×$42,000
14%
×× $10
$15==$21,000
$42,000
$63,000
Debit
Year 2
Feb. 1
Retained Earnings (−SE)
Credit
63,000
Common Stock (+SE)
42,000
Additional Paid-in Capital (+SE)
21,000
Stock dividend
100 percent
Market value of the stock
$15 per share
Number of outstanding shares (par $10)
30,000 shares
30,000 shares × 100% × $10
Debit
Year 2
Feb. 1
Feb. 1
Retained Earnings (−SE)
Credit
63,000
Common Stock (+SE)
42,000
Additional Paid-in Capital (+SE)
21,000
Retained Earnings (+D, −SE)
Common Stock (+SE)
300,000
300,000