MODULE 6
Liabilities and Owners' Equity - Bonds
Demonstration Problem 1
Plymouth Corporation
Plymouth Corporation issued $200,000 of 9%, five-year bonds at 99 on January 1, 2000. Interest is paid
semi-annually on January 1 and July 1. Plymouth Corporation uses the straight-line method of
amortization. This assignment requires you to record transactions related to the issue of bonds and
subsequent interest payments in the general journal.
Transactions for 2000
Jan. 1
Issued $200,000 of 5-year, 9% bonds at 99. Interest is paid on January 1 and July 1.
Jul. 1
Recorded the interest payment.
Dec. 31
Recorded the accrued interest on the bonds.
Transactions for 2001
Jan. 1
Recorded the interest payment.
Jul. 1
Recorded the interest payment.
Dec. 31
Recorded the accrued interest on the bonds.
Journal Entries for 2000
Transaction
number
1
2
3
DATE
2000
Jan. 1
Jul. 1
Dec. 31
ACCOUNT
DEBIT
Cash
Discount on Bonds Payable
Bonds Payable
Interest Expense
Cash
Discount on Bonds Payable
Interest Expense
Interest Payable
Discount on Bonds Payable
198,000
2,000
CREDIT
200,000
9,200
9,000
200
9,200
9,000
200
Semi-annual interest payment = $200,000 x 0.09 x 0.5 = $9,000
The total discount of $2,000 is amortized over 5 years. Since interest is paid twice a year, the amount of
discount amortized at the time of each interest payment = $2,000 /10= $200
Journal Entries for 2001
Transaction
number
DATE
1
2001
Jan. 1
2
Jul. 1
ACCOUNT
DEBIT
Interest Payable
Cash
Interest Expense
CREDIT
9,000
9,000
9,200
188
3
Dec. 31
Cash
Discount on Bonds Payable
Interest Expense
Interest Payable
Discount on Bonds Payable
189
9,000
200
9,200
9,000
200
Practice Problem 1
Antine Corporation
Antine Corporation issued $240,000 of 9%, three-year bonds at 99 on January 1, 2000. Interest is paid
semi-annually on January 1 and July 1. This assignment requires you to calculate the interest expense
and interest payments over the life of the bonds. You are also required to calculate the amortization of
the bond discount and the carrying value of the bond at the end of the year for each year of the life of the
bond using straight-line amortization.
Date
Jan. 1, 2000
Jul. 1, 2000
Dec. 31, 2000
Jul. 1, 2001
Dec. 31, 2001
Jul. 1, 2002
Dec. 31, 2002
Interest
Expense
11,200
11,200
11,200
11,200
11,200
11,200
Amortization
of Discount
Discount
2,400
2,000
1,600
1,200
800
400
0
400
400
400
400
400
400
Carrying Value
of Bond
237,600
238,000
238,400
238,800
239,200
239,600
240,000
Semi-annual interest payment = $240,000 x 0.09 x 0.5 = $10,800
The total discount of $2,400 is amortized over 3 years. Since interest is paid twice a year, the amount of
discount amortized at the time of each interest payment = $2,400 /6= $400
Thus the discount decreases by $400 and the carrying value increases by $400 every six months.
Thus, interest expense for each period = $10,800 + $400 = $11,200.
190
Practice Problem 2
Amaral Corporation
Amaral Corporation issued $100,000 of 10-year, 10% bonds at 104 on January 1, 2000. Interest is
payable on January 1 and July 1. Amaral Corporation uses the straight-line method of amortization.
This assignment requires you to record transactions related to the issue of bonds and subsequent interest
payments in the general journal.
Transactions for 2000
Jan. 1
Issued $100,000 of 10%, 10-year bonds at 104. Interest is paid on January 1 and July 1.
Jul. 1
Recorded the interest payment.
Dec. 31
Recorded the accrued interest on the bonds.
Transactions for 2001
Jan. 1
Recorded the interest payment.
Jul. 1
Recorded the interest payment.
Dec. 31
Recorded the accrued interest on the bonds.
Journal Entries for 2000
DATE
2000
Jan. 1
ACCOUNT
DEBIT
CREDIT
Cash
104,000
Bonds Payable
100,000
Premium on Bonds Payable
4,000
Jul. 1
Interest Expense
4,800
Premium on Bonds Payable
200
Cash
5,000
Dec. 31
Interest Expense
4,800
Premium on Bonds Payable
200
Interest Payable
5,000
Semi-annual interest payment = $100,000 x 0.1 x 0.5 = $5,000
The total premium of $4,000 is amortized over 10 years. Since interest is paid twice a year, the amount
of premium amortized at the time of each interest payment = $4,000 /20 = $200
Journal Entries for 2001
DATE
2001
Jan. 1
Jul. 1
Dec. 31
ACCOUNT
DEBIT
Interest Payable
Cash
Interest Expense
Premium on Bonds Payable
Cash
Interest Expense
Premium on Bonds Payable
Interest Payable
CREDIT
5,000
5,000
4,800
200
5,000
4,800
200
5,000
191
Homework Problem 1
Pelletier Corporation
Pelletier Corporation issued $300,000 of 8%, three-year bonds at 95 on January 1, 2000. Interest is paid
semi-annually on January 1 and July 1. The fiscal year ends on December 31. Interest expense is
recorded on July 1 and December 31 of each year. This assignment requires you to calculate the interest
expense and interest payments over the life of the bonds. You are also required to calculate the
amortization of the bond discount and the carrying value of the bond at the end of the year for each year
of the life of the bond using straight-line amortization.
Date
Interest
Expense
Amortization
of Discount
Discount
Carrying
Value
285,000
287,500
290,000
292,500
295,000
297,500
300,000
Jan. 1, 2000
15,000
Jul. 1, 2000
14,500
2,500
12,500
Dec. 31, 2000
14,500
2,500
10,000
Jul. 1, 2001
14,500
2,500
7,500
Dec. 31, 2001
14,500
2,500
5,000
Jul. 1, 2002
14,500
2,500
2,500
Dec. 31, 2002
14,500
2,500
0
Semi-annual interest payment = $300,000 x 0.08 x 0.5 = $12,000
The total discount of $15,000 is amortized over 3 years. Since interest is paid twice a year, the amount of
discount amortized at the time of each interest payment = $15,000/6 = $2,500
Interest expense = $12,000 + $2,500 = $14,500
Homework Problem 2
Vincent Corporation
Vincent Corporation issued $150,000 of 9%, three-year bonds at 101 on January 1, 2000. Interest is paid
semi-annually on January 1 and July 1. The fiscal year ends on December 31. Interest expense is
recorded on July 1 and December 31 of each year. This assignment requires you to calculate the interest
expense and interest payments over the life of the bonds. You are also required to calculate the
amortization of the bond discount and the carrying value of the bond at the end of the year for each year
of the life of the bond using straight-line amortization.
Date
Interest
Expense
Amortization
of Premium
Premium
Carrying
Value
151,500
151,250
151,000
150,750
150,500
150,250
150,000
Jan. 1, 2000
1,500
Jul. 1, 2000
6,500
250
1,250
Dec. 31, 2000
6,500
250
1,000
Jul. 1, 2001
6,500
250
750
Dec. 31, 2001
6,500
250
500
Jul. 1, 2002
6,500
250
250
Dec. 31, 2002
6,500
250
0
Semi-annual interest payment = $150,000 x 0.09 x 0.5 = $6,750
The total premium of $1,500 is amortized over 3 years. Since interest is paid twice a year, the amount of
premium amortized at the time of each interest payment = $1,500/6 = $250.
Interest expense = $6,750 - $250 = $6,500.
192
Homework Problem 3
Jackson Corporation
Jackson Corporation issued $250,000 of 10-year, 8% bonds at 103 on January 1, 2000. Interest is
payable on January 1 and July 1. Jackson Corporation uses the straight-line method of amortization.
This assignment requires you to record the purchase of the bonds and the interest payments for 2000 and
2001.
Transactions for 2000
Jan. 1
Issued $250,000 of 10-year, 8% bonds at 103. Interest is paid on January 1 and July 1.
Jul. 31
Recorded the interest payment.
Dec. 31
Recorded the accrued interest on the bonds.
Transactions for 2001
Jan. 1
Recorded the interest payment.
Jul. 1
Recorded the interest payment.
Dec. 31
Recorded the accrued interest on the bonds.
Journal Entries for 2000
Transaction
number
1
DATE
ACCOUNT
DEBIT
CREDIT
2000
Jan. 1
Cash
257,500
Bonds Payable
250,000
Premium on Bonds Payable
7,500
2
Jul. 1
Interest Expense
9,625
Premium on Bonds Payable
375
Cash
10,000
3
Dec. 31
Interest Expense
9,625
Premium on Bonds Payable
375
Interest Payable
10,000
Semi-annual interest payment = $250,000 x 0.08 x 0.5 = $10,000
The total premium of $7,500 is amortized over 10 years. Since interest is paid twice a year, the amount
of premium amortized at the time of each interest payment = $7,500/20= $375
Journal Entries for 2001
Transaction
number
DATE
1
2001
Jan. 1
2
Jul. 1
3
Dec. 31
ACCOUNT
DEBIT
Interest Payable
Cash
Interest Expense
Premium on Bonds Payable
Cash
Interest Expense
Premium on Bonds Payable
Interest Payable
193
CREDIT
10,000
10,000
9,625
375
10,000
9,625
375
10,000
Homework Problem 4
Glaser Corporation
filename: M6T1G4.html
Glaser Corporation issued $500,000 of 10-year, 8% bonds at 98 on January 1, 2000. Interest is payable
on January 1 and July 1. Glaser Corporation uses the straight-line method of amortization. This
assignment requires you to record the purchase of the bonds and the interest payments for 2000 and 2001.
Transactions for 2000
Jan. 1
Issued $500,000 of 10-year, 8% bonds at 98. Interest is paid on January 1 and July 1.
Jul. 1
Recorded the interest payment.
Dec. 31
Recorded the accrued interest on the bonds
Transactions for 2001
Jan. 1
Recorded the interest payment.
Jul. 1
Recorded the interest payment.
Dec. 31
Recorded the accrued interest on the bonds.
Journal Entries for 2000
DATE
2000
Jan. 1
ACCOUNT
DEBIT
CREDIT
Cash
490,000
Discount on Bonds Payable
10,000
Bonds Payable
500,000
Jul. 1
Interest Expense
20,500
Cash
20,000
Discount on Bonds Payable
500
Dec. 31
Interest Expense
20,500
Interest Payable
20,000
Discount on Bonds Payable
500
Semi-annual interest payment = $500,000 x 0.08 x 0.5 = $20,000
The total discount of $10,000 is amortized over 10 years. Since interest is paid twice a year, the amount
of discount amortized at the time of each interest payment = $10,000/20 = $500
Journal Entries for 2001
DATE
2001
Jan. 1
Jul. 1
Dec. 31
ACCOUNT
DEBIT
Interest Payable
Cash
Interest Expense
Cash
Discount on Bonds Payable
Interest Expense
Interest Payable
Discount on Bonds Payable
20,000
CREDIT
20,000
20,500
20,000
500
20,500
20,000
500
194
Homework Quiz
Bonds
1.
When a bond's stated rate of interest is higher than the market rate of interest, the bond will sell
at:
a.
a premium
b.
its face value
c.
its maturity value
d.
a discount
2.
When a bond's stated rate of interest is lower than the market rate of interest, the bond will sell
at:
a.
a premium
b.
its face value
c.
its maturity value
d.
a discount
3.
When the market rate of interest for bonds is higher than a bond's stated rate of interest, the bond
will sell at:
a.
a premium
b.
its face value
c.
its maturity value
d.
a discount
4.
$1,000,000 of 10% bonds is issued at 102 1/2. What is the amount of cash received from the
sale?
a.
$25,000
b.
$975,000
c.
$1,025,000
d.
$1,000,000
5.
$4,000,000 of 12% bonds are issued at 101. What is the amount of cash received from the sale?
a.
$4,040,000
b.
$4,000,000
c.
$4,080,000
d.
$3,520,000
6.
$1,000,000 of 10% bonds is issued at 94. What is the amount of cash received from the sale?
a.
$60,000
b.
$940,000
c.
$960,000
d.
1,000,000
7.
$4,000,000 of 12% bonds are issued at 92 1/2. What is the amount of cash received from the
sale?
a.
$3,700,000
b.
$4,000,000
c.
$4,100,000
d.
$4,300,000
195
8.
Angelina Corporation just issued bonds. The stated rate of interest is greater than the market
rate. The proper entry to record this transaction is:
a.
Debit, Bonds Payable; Credit, Cash
b.
Debit, Cash and Discount on Bonds Payable; Credit, Bonds Payable
c.
Debit, Cash; Credit Premium on Bonds Payable and Bonds Payable
d.
Debit, Cash; Credit, Bonds Payable
9.
Angelina Corporation just issued bonds. The stated rate of interest is less than the market rate.
The proper entry to record this transaction is:
a.
Debit, Bonds Payable; Credit, Cash <br>
b.
Debit, Cash and Discount on Bonds Payable; Credit, Bonds Payable <br>
c.
Debit, Cash; Credit Premium on Bonds Payable and Bonds Payable <br>
d.
Debit, Cash; Credit, Bonds Payable <br>
10.
Angelina Corporation just issued bonds at a premium. The entry to record the semiannual
payment of interest is:
a.
Debit, Premium on Bonds Payable and Interest Expense; Credit, Cash
b.
Debit, Interest Expense; Credit, Premium on Bonds Payable and Cash
c.
Debit, Interest Expense; Credit, Cash
d.
Debit, Bonds Payable; Credit, Interest Expense
11.
Angelina Corporation just issued bonds at a discount. The entry to record the semiannual
payment of interest is:
a.
Debit, Discount on Bonds Payable and Interest Expense; Credit, Cash
b.
Debit, Interest Expense; Credit, Discount on Bonds Payable and Cash
c.
Debit, Interest Expense; Credit, Cash
d.
Debit, Bonds Payable; Credit, Interest Expense
12.
Angelina Corporation employs the straight-line method for amortization of bond
premium/discount. Which of the following statements is true?
a.
Annual interest expense will increase over the life of the bond with the amortization of
bond premium.
b.
Annual interest expense will remain the same over the life of the bond with the
amortization of bond discount.
c.
Annual interest expense will decrease over the life of the bond with the amortization of
bond discount.
d.
Annual interest expense will increase over the life of the bond with the amortization of
bond discount.
13.
Angelina Corporation employs the straight-line method for amortization of bond
premium/discount. Which of the following statements is true?
a.
The annual interest expense and the premium amortization will increase over the life of
the bonds for the amortization of bond premium.
b.
The annual interest expense and the discount amortization will decrease over the life of
the bonds for the amortization of bond discount.
c.
The annual interest expense and the premium amortization will be the same over
the life of the bonds for the amortization of bond premium.
d.
The annual interest expense will increase and the discount amortization will decrease
over the life of the bonds for the amortization of bond discount.
196
14.
Jolina Corporation recently issued $1,000,000 of 10%, 20-year bonds, interest payable annually,
at a time when the market rate of interest is 12%. Jolina utilizes the straight-line method for
amortizing bond discount/premium. Which of the following statements is true?
a.
The amount of the annual interest expense is computed at 10% of the bond-carrying
amount at the beginning of the year.
b.
The amount of the annual interest expense gradually decreases over the life of the bonds.
c.
The amount of unamortized discount decreases from its balance at issuance date to
a zero balance at maturity.
d.
The amount of unamortized premium decreases from its balance at issuance date to a
zero balance at maturity.
15.
Jolina Corporation recently issued $500,000 of 11%, 15-year bonds, interest payable annually, at
a time when the market rate of interest is 10%. Jolina utilizes the straight-line method for
amortizing bond discount/premium. Which of the following statements is true?
a.
The amount of the annual interest expense is computed at 11% of the bond-carrying
amount at the beginning of the year.
b.
The amount of the annual interest expense gradually increases over the life of the bonds.
c.
The amount of unamortized discount decreases from its balance at issuance date to a zero
balance at maturity.
d.
The amount of unamortized premium decreases from its balance at issuance date to
a zero balance at maturity.
16.
Weltech Corporation recently issued $200,000, 12%, 10-year bonds. Premium on the issue
amounted to $25,000. Interest is paid semiannually. Weltech uses the straight-line method. The
amount of premium to be amortized each interest period will be:
a.
$ 1,250
b.
$ 2,500
c.
$ 5,000
d.
Some other amount
17.
Weltech Corporation issued $100,000 of 20-year, 6 percent bonds on January 1, 2001. The issue
yielded $112,550.40 in cash. Interest payment dates on the bonds are January 1 and July 1. When
using the straight-line method, the amount of premium to be amortized on July 1, 2001 is:
a.
$ 627.60
b.
$ 313.76
c.
$1,553.00
d.
$ 186.22
18.
Weltech Corporation issued $100,000 of 20-year, 6 percent bonds on January 1, 2001. The issue
yielded $87,449.60 in cash. Interest payment dates on the bonds are January 1 and July 1. When
using the straight-line method, the amount of discount to be amortized on July 1, 2001 is:
a.
$ 627.60
b.
$ 313.76
c.
$1,553.00
d.
$ 186.22
197
19.
Utilizing the straight-line amortization method, the yearly interest expense on a $500,000, 11
percent, 20-year bond issued at 94 will be:
a.
$53,500
b.
$55,000
c.
$56,500
d.
$59,000
20.
Total interest expense on a $400,000, 10 percent, 10-year bond issued at 95 would be:
a.
$380,000
b.
$390,000
c.
$400,000
d.
$420,000
21.
Gardner Corporation issued $100,000 of 8-year, 9% bonds for 98 on January 1, 2000. Interest is
payable on January 1 and July 1. Gardner Corporation uses the straight-line method of
amortization. The amount of cash received on January 1, 2000, is:
a.
$100,000
b.
$99,000
c.
$98,000
d.
$102040
22.
Gardner Corporation issued $100,000 of 8-year, 9% bonds for 98 on January 1, 2000. Interest is
payable on January 1 and July 1. Gardner Corporation uses the straight-line method of
amortization. The balance in Discount on Bonds Payable on January 1, 2000, is:
a.
$0
b.
$1,000
c.
$2,000
d.
$1,500
23.
Gardner Corporation issued $100,000 of 8-year, 9% bonds for 98 on January 1, 2000. Interest is
payable on January 1 and July 1. Gardner Corporation uses the straight-line method of
amortization. The balance in Discount on Bonds Payable on December 31, 2007, is:
a.
$0
b.
$1,000
c.
$2,000
d.
$1,500
24.
Gardner Corporation issued $100,000 of 8-year, 9% bonds for 98 on January 1, 2000. Interest is
payable on January 1 and July 1. Gardner Corporation uses the straight-line method of
amortization. The carrying value of the bond on December 31, 2007, is:
a.
$100,000
b.
$99,000
c.
$98,000
d.
$102040
198
25.
Gardner Corporation issued $100,000 of 8-year, 9% bonds for 98 on January 1, 2000. Interest is
payable on January 1 and July 1. Gardner Corporation uses the straight-line method of
amortization. The amount of cash repaid to bondholders on January 1, 2008, is:
a.
$100,000
b.
$99,000
c.
$98,000
d.
$102040
26.
Moore Corporation issued $150,000 of 10-year, 8% bonds for 102 on January 1, 2000. Interest is
payable on January 1 and July 1. Moore Corporation uses the straight-line method of
amortization. The amount of cash received on January 1, 2000, is:
a.
$150,000
b.
$147,000
c.
$147,058
d.
$153,000
27.
Moore Corporation issued $150,000 of 10-year, 8% bonds for 102 on January 1, 2000. Interest is
payable on January 1 and July 1. Moore Corporation uses the straight-line method of
amortization. To record the issuance of the bond on January 1, 2000:
a.
Premium on Bonds Payable is credited
b.
Premium on Bonds Payable is debited
c.
Discount on Bonds Payable is credited
d.
Discount on Bonds Payable is debited
28.
Moore Corporation issued $150,000 of 10-year, 8% bonds for 102 on January 1, 2000. Interest is
payable on January 1 and July 1. Moore Corporation uses the straight-line method of
amortization. The amount of interest paid on July 1, 2000, is:
a.
$12,000
b.
$6,000
c.
$6,150
d.
$5,850
29.
Moore Corporation issued $150,000 of 10-year, 8% bonds for 102 on January 1, 2000. Interest is
payable on January 1 and July 1. Moore Corporation uses the straight-line method of
amortization. The amount of interest expense recorded on July 1, 2000, is:
a.
$12,000
b.
$6,000
c.
$6,150
d.
$5,850
30.
Moore Corporation issued $150,000 of 10-year, 8% bonds for 102 on January 1, 2000. Interest is
payable on January 1 and July 1. Moore Corporation uses the straight-line method of
amortization. The carrying value of the bond on December 31, 2000, is:
a.
$153,300
b.
$152,700
c.
$150,000
d.
$153,000
199
MODULE 6
Liabilities and Owners' Equity - Corporate Transactions
Demonstration Problem
Lang Corporation
Lang Corporation is authorized to issue 150,000 shares of $5 par value common stock and 5,000 shares
of 6%, $25 par value preferred stock. This assignment requires you to record the stock transactions for
Lang Corporation for 2000 and 2001 in the general journal.
Transactions for 2000
Jan. 1, 2000
Issued 30,000 shares of $5 par value common stock at $8 per share.
Jan. 1, 2000
Issued 1,000 shares of 6%, $25 par value preferred stock at $26 per share.
Dec. 31, 2000 The board of directors declared a dividend for one year on the $25, 6% preferred stock
(1,000 shares issued) and of $0.40 per share on the shares of common stock (30,000
shares issued).
Transactions for 2001
Mar. 1, 2001 Paid the dividends declared in the previous transaction. Recall that the company
declared a dividend for one year on the $25, 6% preferred stock (1,000 shares issued)
and of $0.40 per share on the shares of common stock (30,000 shares issued).
June 25, 2001 Purchased 4,000 shares of its own $5 par value common stock at $9 per share.
DATE
2000
Jan. 1
Jan. 1
Dec. 31
2001
Mar. 1
June 25
ACCOUNT
DEBIT
Cash
Common Stock
Contributed Capital in Excess of Par - Common
Cash
Preferred Stock
Contributed Capital in Excess of Par - Preferred
Dividends
Dividends Payable - Common
Dividends Payable - Preferred
Dividends Payable - Common
Dividends Payable - Preferred
Cash
Treasury Stock
Cash
CREDIT
240,000
150,000
90,000
26,000
25,000
1,000
13,500
12,000
1,500
12,000
1,500
13,500
36,000
36,000
200
Practice Problem 1
Milton Corporation
Milton Corporation was authorized to issue 10,000 shares of $50 par value, 4% preferred stock and
250,000 shares of $1 par value common stock. This assignment requires you to record the stock
transactions for Milton Corporation for 2000 in the general journal.
Transactions for 2000
Jan. 1, 2000
Issued 100,000 shares of $1 par value common stock at $5 per share.
Jan. 1, 2000
Issued 2,000 shares of 4%, $50 par value preferred stock at $52 per share.
Dec. 31, 2000 The board of directors declared a dividend for one year on the $50, 4% preferred stock
(2,000 shares issued) and of $0.20 per share on the shares of common stock (100,000
shares issued).
Transactions for 2001
Mar. 1, 2001 Paid the dividends declared in the previous transaction. Recall that the company
declared a dividend for one year on the $50, 4% preferred stock (2,000 shares issued)
and of $0.20 per share on the shares of common stock (100,000 shares issued).
June 25, 2001 Purchased 5,000 shares of its own $1 par value stock at $7 per share.
DATE
2000
Jan. 1
Jan. 1
Dec. 31
2001
Mar. 1
June 25
ACCOUNT
DEBIT
Cash
Common Stock
Contributed Capital in Excess of Par - Common
Cash
Preferred Stock
Contributed Capital in Excess of Par - Preferred
Dividends
Dividends Payable - Common
Dividends Payable - Preferred
Dividends Payable - Common
Dividends Payable - Preferred
Cash
Treasury Stock
Cash
CREDIT
500,000
100,000
400,000
104,000
100,000
4,000
24,000
20,000
4,000
20,000
4,000
24,000
35,000
35,000
201
Practice Problem 2
Brookfield Corporation
Brookfield Corporation is authorized to issue 80,000 shares of $8 par value common stock. 30,000
shares were issued at $10 on January 1, 2000. On March 1, the company declared a stock dividend of
5%. On June 1, the board of directors declared a dividend of $0.25 per share. On November 1, the
company announced a stock split of 2 to 1. The company purchased 6,000 shares of its own stock on
December 1 at $11 per share. This assignment requires you to calculate the amount of cash payment or
receipt from the transaction, the par value of the stock, and the number of shares authorized, issued and
outstanding.
Transaction
Cash
Receipt
Issue stock
Declare stock
Dividend
Declare cash
dividend
Declare stock
split
Purchase
treasury stock
$300,000
Cash
Payment
$66,000
Shares
Authorized
Shares
Issued
Shares
Outstanding
Par
Value
80,000
30,000
30,000
$8
80,000
31,500
31,500
$8
80,000
31,500
31,500
$8
80,000
63,000
63,000
$4
80,000
63,000
57,000
$4
After the stock is issued on January 1, 30,000 shares are issued and outstanding. On March 1, 1,500
(0.05 x 30,000) shares are issued. Thus total shares issued and outstanding after March 1 is 31,500. The
declaration of the cash dividend does not affect any of the above. Cash will only be affected when this
dividend is paid. The 2 for 1 split doubles the issued and outstanding shares to 63,000 (2 x 31,500) and
reduces the par value to 4. The purchase of treasury stock reduces the outstanding shares to 57,000
(67,000 - 6,000).
202
Homework Problem 1
Olson Corporation
Olson Corporation was authorized to issue 25,000 shares of $100 par value, 5% preferred stock and
100,000 shares of $10 par value common stock. This assignment requires you to record the stock
transactions for Olson Corporation for 2000 and 2001 in the general journal.
Transactions for 2000
Jan. 1
Issued 50,000 shares of $10 par value common stock at $15 per share.
Jan. 1
Issued 5,000 shares of $100 par value preferred stock at $105 per share.
Dec. 31
The board of directors declared a dividend for one year on the $100, 5% preferred stock
(5,000 shares issued) and of $0.80 per share on the shares of common stock (50,000
shares issued).
Transactions for 2001
Feb. 15
Paid the dividends declared in the previous transaction. Recall that the company
declared a dividend for one year on the $100, 5% preferred stock (5,000 shares issued)
and of $0.80 per share on the shares of common stock (50,000 shares issued).
Apr. 25
Purchased 2,000 shares of its own $10 par value stock at $17 per share.
DATE
2000
Jan. 1
Jan. 1
Dec. 31
2001
Feb. 15
Apr. 25
ACCOUNT
DEBIT
Cash
Common Stock
Contributed Capital in Excess of Par - Common
Cash
Preferred Stock
Contributed Capital in Excess of Par - Preferred
Dividends
Dividends Payable - Common
Dividends Payable - Preferred
Dividends Payable - Common
Dividends Payable - Preferred
Cash
Treasury Stock
Cash
CREDIT
750,000
500,000
250,000
525,000
500,000
25,000
65,000
40,000
25,000
40,000
25,000
65,000
34,000
34,000
203
Homework Problem 2
Atkins Corporation
Atkins Corporation was authorized to issue 20,000 shares of $25 par value, 6% preferred stock and
100,000 shares of $5 par value common stock. This assignment requires you to record the stock
transactions for Atkins Corporation for 2000 and 2001 in the general journal.
Transactions for 2000
Jan. 1
Issued 30,000 shares of $5 par value common stock at $8 per share.
Jan. 1
Issued 4,000 shares of $25 par value preferred stock at $30 per share.
Dec. 31
The board of directors declared a dividend for one year on the $25, 6% preferred stock
(4,000 shares issued) and of $0.30 per share on the shares of common stock (30,000
shares issued).
Transactions for 2001
Mar. 7
Paid the dividends declared in the previous transaction. Recall that the company
declared a dividend for one year on the $25, 6% preferred stock (4,000 shares issued)
and of $0.30 per share on the shares of common stock (30,000 shares issued).
Jun.. 25
Purchased 1,000 shares of its own $5 par value stock at $9 per share.
DATE
2000
Jan. 1
Jan. 1
Dec. 31
2001
Mar. 7
Jun. 25
ACCOUNT
DEBIT
Cash
Common Stock
Contributed Capital in Excess of Par - Common
Cash
Preferred Stock
Contributed Capital in Excess of Par - Preferred
Dividends
Dividends Payable - Common
Dividends Payable - Preferred
Dividends Payable - Common
Dividends Payable - Preferred
Cash
Treasury Stock
Cash
CREDIT
240,000
150,000
90,000
120,000
100,000
20,000
15,000
9,000
6,000
9,000
6,000
15,000
9,000
9,000
204
Homework Problem 3
Claxton Corporation
Claxton Corporation is authorized to issue 250,000 shares of $10 par value common stock. 100,000
shares were issued at $12 on January 1, 2000. On July 1, the board of directors declared a dividend of
$0.30 per share. The dividend was paid on August 16. The company issued a 2 for 1 stock split on
November 2. The company purchased 5,000 shares of its own stock on October 1 at $12 per share. This
assignment requires you to calculate the amount of cash payment or receipt from the transaction, the par
value of the stock, and the number of shares authorized, issued and outstanding.
Transaction
Cash Receipt
Issue stock
Declare cash
Dividend
Pay cash
dividends
Declare stock
split
Purchase
treasury stock
$1,200,000
Cash
Payment
$30,000
$60,000
Shares
Authorized
Shares
Issued
Shares
Outstanding
Par
Value
250,000
100,000
100,000
$10
250,000
100,000
100,000
$10
250,000
100,000
100,000
$10
250,000
200,000
200,000
$5
250,000
200,000
195,000
$5
205
Homework Problem 4
Cromwell Corporation
Cromwell Corporation is authorized to issue 50,000 shares of $10 par value. 20,000 shares were issued
at $14 on January 1, 2000. On March 1, the company declared a stock dividend of 5%. On June 1, the
board of directors declared a dividend of $0.25 per share. The dividend was paid on August 16. The
company purchased 4,000 shares of its own stock on October 1 at $15 per share. This assignment
requires you to calculate the amount of cash payment or receipt from the transaction, the par value of the
stock, and the number of shares authorized, issued and outstanding.
Transaction
Cash
Receipt
Issue stock
Declare stock
Dividend
Declare cash
dividend
Pay cash
dividends
Purchase
treasury stock
$280,000
Cash
Payment
Shares
Authorized
Shares
Issued
Shares
Outstanding
Par
Value
50,000
20,000
20,000
$10
50,000
21,000
21,000
$10
50,000
21,000
21,000
$10
$5,250
50,000
21,000
21,000
$10
60,000
50,000
21,000
17,000
$10
206
Homework Quiz
Corporate Transactions
1.
Peter Corporation issues a Common Stock dividend. The entry to record this transaction will:
a.
Decrease the Common Stock's par value.
b.
Increase total Common Stock shares issued and outstanding.
c.
Increase the Corporation's Retained Earnings account.
d.
Decrease the Corporation's Cash account.
2.
On what date is a Corporation's liability for a Dividend recognized?
a.
The date of record
b.
The date of payment
c.
The date of announcement
d.
The date of declaration
3.
The reduction of par or stated value of stock by issuance of a proportionate number of additional
shares is termed a:
a.
Liquidating dividend
b.
Stock split
c.
Stock option
d.
Preferred dividend
4.
A Corporation's primary rationale for a stock split is to:
a.
Increase Paid-In Capital.
b.
Reduce the per share market price of the Common Stock.
c.
Increase the par value of the Common Stock.
d.
Increase Retained Earnings.
5.
A 2-for-1 stock split:
a.
Doubles Retained Earnings.
b.
Increases the par value of all authorized stock by 50%.
c.
Doubles the number of Common Stock shares outstanding.
d.
Requires a transfer of retained earnings to contributed capital.
6.
Treasury Stock is reported in which section of the balance sheet?
a.
Fixed assets
b.
Long-term Liabilities
c.
Stockholders' Equity
d.
Plant Assets
7.
Treasury Stock represents stock that is:
a.
Authorized but not issued
b.
Issued and outstanding
c.
Issued but not outstanding
d.
Authorized and outstanding
207
8.
The entry to record the purchase of 5,000 shares of a corporation's own $20 par common stock at
$25, paid in cash, includes a debit to:
a.
Common Stock
b.
Paid-In Capital in Excess of Par
c.
Retained Earnings
d.
Treasury Stock
9.
Heather Corporation purchases 20,000 shares of its own $20 par common stock for $35 per
share. What will be the effect on Heather's Total Stockholders' equity?
a.
Increase by $400,000
b.
Increase by $700,000
c.
Decrease by $400,000
d.
Decrease by $700,000
10.
Which of the following statements about Treasury Stock is true?
a.
It is classified as an asset on the balance sheet.
b.
It allows management to vote for members of the board of directors.
c.
It is considered outstanding stock.
d.
It usually has a debit balance.
11.
Colby Corporation issues 20,000 shares of $10 par value Common Stock at $14 per share.
Contributed Capital in Excess of Par, is credited for:
a.
$280,000
b.
$ 80,000
c.
$200,000
d.
None of the above
12.
Colby Corporation issues 30,000 shares of $5 par value Common Stock at $20 per share.
Contributed Capital in Excess of Par, is credited for:
a.
$ 30,000
b.
$ 150,000
c.
$ 450,000
d.
$ 600,000
13.
Flight Incorporated presents the following information:
Common Stock
Paid-In Capital Excess of Par
Retained Earnings
Treasury Stock
$1,000,000
$80,000
$380,000
$40,000
What is the total stockholders' equity based on the following account balances?
a.
$ 1,040,000
b.
$ 1,060,000
c.
$ 1,420,000
d.
$ 1,500,000
208
14.
Antech Corporation has 50,000 shares of $100 par value stock outstanding. If Antech issues a 4for-1 stock split, the number of shares outstanding after the split will be:
a.
200,000 shares
b.
50,000 shares
c.
250,000 shares
d.
12,500 shares
15.
Lawretz Corporation has 4,000,000 authorized shares of $9 par-value common stock, with
600,000 shares issued and outstanding. After a 3-for-1 stock split, Lawretz Corporation would
have:
a.
1,800,000 shares of Common Stock issued and outstanding at $3 par
b.
200,000 shares of Common Stock issued and outstanding at $27 par
c.
12,000,000 shares of Common Stock outstanding at $3 par
d.
1,333,333 shares of Common Stock outstanding at $27 per share
16.
Serene Corporation has 100,000 shares of $15 par Common Stock outstanding. Serene declares a
7,000 share Stock Dividend when the market value of the stock is $24 per share. By what
amount will the Common Stock account increase after completing this transaction?</font>
a.
$ 105,000
b.
$ 150,000
c.
$1,500,000
d.
$2,400,000
17.
Serene Corporation has 100,000 shares of $15 par Common Stock outstanding. Serene declares a
7,000 share Stock Dividend when the market value of the stock is $24 per share. By what
amount will the Contributed Capital in Excess of Par account increase after completing this
transaction?
a.
$ 105,000
b.
$ 150,000
c.
$ 63,000
d.
$ 168,000
18.
Red River Corporation has 80,000 shares of $14 par-value common stock outstanding. If the
corporation declares a 15 percent stock dividend and the market value of the stock on the date of
declaration is $22 per share, what amount should be credited to the Contributed Capital in Excess
of Par account?
a.
$264,000
b.
$ 96,000
c.
$ -0d.
$168,000
19.
Carother Corporation's charter provides for the issuance of 200,000 shares of common stock.
Assume that 120,000 shares are originally issued and 10,000 are subsequently reacquired. What
is the amount of cash dividends to be paid if a $1 per share dividend is declared?
a.
$120,000
b.
$ 10,000
c.
$200,000
d.
$110,000
209
20.
AnchorTech Corporation has 100,000 authorized shares of $5 par common stock. AnchorTech
issued 40,000 shares at $7. Subsequently, the company declared a 2% stock dividend on a date
when the market price was $9 a share. The effect of the declaration and issuance of the stock
dividend is to:
a.
Retained Earnings: Decrease; Common Stock: Increase; Contributed Capital in
Excess of Par: Increase
b.
Retained Earnings: Increase; Common Stock: Decrease; Contributed Capital in Excess of
Par: Decrease
c.
Retained Earnings: Increase; Common Stock: Decrease; Contributed Capital in Excess of
Par: Increase
d.
Retained Earnings: Decrease; Common Stock: Increase; Contributed Capital in Excess of
Par: Decrease
21.
Quinn Company is authorized to issue 100,000 shares of $10 par value common stock. On
December 31, 2000, Quinn Company had 35,000 shares issued and outstanding. The company
bought back 5,000 shares of its own stock on April 3, 2001. The number of shares issued on
April 4, 2001, are:
a.
35,000
b.
30,000
c.
40,000
d.
95,000
22.
Quinn Company is authorized to issue 100,000 shares of $10 par value common stock. On
December 31, 2000, Quinn Company had 35,000 shares issued and outstanding. The company
bought back 5,000 shares of its own stock on April 3, 2001. The number of shares outstanding
on April 4, 2001, is:
a.
35,000
b.
30,000
c.
40,000
d.
95,000
23.
Snell Corporation has issued 20,000 shares of $10 par value common stock and 4,000 shares of
5%, $50 par value cumulative preferred stock. The total amount of dividends payable to
preferred stockholders each year is:
a.
$200
b.
$5,000
c.
$10,000
d.
$20,000
24.
Snell Corporation started operations on January 1, 2000. The company has issued 20,000 shares
of $10 par value common stock and 4,000 shares of 5%, $50 par value cumulative preferred
stock. The board of directors declared dividends of $5,000 and $21,000 in 2000 and 2001
respectively. The amount of dividends paid to common stockholders in 2001 is:
a.
$11,000
b.
$6,000
c.
$11,500
d.
$1,000
210
25.
Snell Corporation started operations on January 1, 2000. The company has issued 20,000 shares
of $10 par value common stock and 4,000 shares of 5%, $50 par value preferred stock. Assume
that the preferred stock is not cumulative. The board of directors declared dividends of $5,000
and $21,000 in 2000 and 2001 respectively. The amount of dividends paid to common
stockholders in 2001 is:
a.
$11,000
b.
$6,000
c.
$11,500
d.
$1,000
26.
Johansen Corporation is authorized to issue 150,000 shares of $1 par value common stock. On
December 31, 2000, Johansen Corporation had 80,000 shares issued and outstanding. The
company issued a 10% stock dividend on March 30, 2001. The par value of the stock on March
31, 2001, is:
a.
$0.50
b.
$1.10
c.
$0.90
d.
$1.00
27.
Johansen Corporation is authorized to issue 150,000 shares of $1 par value common stock. On
December 31, 2000, Johansen Corporation had 80,000 shares issued and outstanding. The
company issued a 10% stock dividend on March 30, 2001. The number of shares outstanding on
March 31, 2001, is:
a.
88,000
b.
80,000
c.
72,000
d.
8,000
28.
Ehrlich Corporation is authorized to issue 175,000 shares of $1 par value common stock. On
December 31, 2000, Ehrlich Corporation had 30,000 shares issued and outstanding. The
company issued a 3 for 1 stock split on June 29, 2001. The number of shares outstanding on
June 30, 2001, is:
a.
10,000
b.
90,000
c.
30,000
d.
85,000
29.
Ehrlich Corporation is authorized to issue 175,000 shares of $1 par value common stock. On
December 31, 2000, Ehrlich Corporation had 30,000 shares issued and outstanding. The
company issued a 3 for 1 stock split on June 29, 2001. The par value of the stock on June 30,
2001, is:
a.
$0.33
b.
$3.00
c.
$1.30
d.
$1.00
211
30.
Dividends payable is credited for the amount of cash dividends on:
a.
Date of record
b.
Date of declaration
c.
Date of payment
d.
Last date in the fiscal period
212