BE12-2
When Tandy (RadioShack) Corporation announced a 2:1 stock split, the company had
97 million shares outstanding, trading at $100 per share.
(a) Estimate the number of shares outstanding and market price per share
immediately after the split.
The number of shares outstanding after the split would double to 194 million shares and
the market price per share would drop by half to about $50.
(b) Estimate the company’s overall market value, and explain whether you expect
the company’s overall market value to change due to the split.
The company’s overall market capitalization is $9.7 billion ($50 X 194 million shares).
The company’s overall market value should not change due to the split. The number of
shares outstanding will double but the price per share will be cut in half. Sometimes a
company that announces a stock split will see their stock price rise because many
investors see a stock split as a positive sign from management but this is inferring
positive news that has not been announced.
E12-1
The following are possible transactions that affect shareholders’ equity:
1. A company issues common stock above par value for cash.
2. A company declares a 3-for-1 stock split.
3. A company repurchases 10,000 shares of its own common stock in exchange for
cash.
4. A company declares and issues a stock dividend. Assume that the fair market value
of the stock is greater than the par value.
5. A company reissues 1,000 shares of treasury stock for $75 per share. The stock
was acquired for $60 per share.
6. A company pays a cash dividend that had been declared fifteen days earlier.
7. A company generates net income of $250,000.
For each transaction above, indicate the following:
(a) The accounts within the shareholders’ equity section that would be affected.
(b) Whether these accounts would be increased or decreased.
(c) The effect (increase, decrease, or no effect) of the transaction on total
stockholders’ equity.
1.
2.
3.
4.
5.
6.
7.
Account
Effect on
Account
Common stock
Additional PIC, C/S
None
Treasury stock
Retained earnings
Common stock
Additional PIC, C/S
Treasury stock
None*
Retained earnings
Increase
Increase
N/A
Increase
Decrease
Increase
Increase
Decrease
N/A
Increase
Effect on
Shareholders’
Equity
Increase
No effect
Decrease
No effect
Increase
None
Increase
* Stockholders’ equity decreases when the dividend was declared15 days ago.
E12-3
Deming Contractors was involved in the following events involving stock during 2012:
1. Authorized to issue: (a) 100,000 shares of $100 par value, 8% preferred stock; (b)
150,000 shares of no-par, $5 preferred stock; and (c) 250,000 shares of $5 par
value common stock.
2. Issued 10,000 shares of $5 par value common stock for $30 per share.
3. Issued 25,000 shares of the $100 par value preferred stock for $150 per share.
4. Issued 50,000 shares of no-par value preferred stock for $50 each.
Prepare entries, if appropriate, for each event, describe how each event affects
the basic accounting equation, and explain the economic significance of par
value.
Debit
Credit
1.
No entry is necessary
2.
3.
4.
Cash
Common stock
Addtl paid in capital, common stock
$300,000
Cash
Preferred stock
Addtl paid in capital, preferred stock
$3,750,000
Cash
Preferred stock
$2,500,000
$50,000
$250,000
$2,500,000
$1,250,000
$2,500,000
Effect of each transaction on the accounting equation:
1.
2.
3.
4.
Assets
NE
+
+
+
Liabilities
NE
NE
NE
NE
Stockholders’
Equity
NE
+
+
+
Since par value has no relationship to market value, it has little economic significance.
At one time, par value was construed to be the legal minimum capital to protect
creditors in times of dissolution or bankruptcy, but over time the concept has lost its
appeal as creditors have found better ways to protect themselves.
E12-5
Twin Lakes incorporated on April 1, 2012, and was authorized to issue 100,000 shares
of $5 par value common stock and 10,000 shares of $8, no-par value preferred stock.
During the remainder of 2012, the company entered into the following transactions.
1. Issued 25,000 shares of common stock in exchange for $500,000 in cash.
2. Issued 5,000 shares of preferred stock in exchange for $60,000 in cash.
3. Purchased 3,000 shares of common stock for $15 per share and held them in the
form of treasury stock.
4. Sold 1,000 treasury shares for $18 per share on the open market.
5. Issued 1,000 treasury shares to executives who exercised stock options for a
reduced price of $5 per share.
The company entered into no other transactions that affected stockholders’ equity
during 2012.
(a) Prepare entries for each of the transactions.
1.
2.
3.
4.
5.
Cash
Common stock
Addtl paid in capital, common stock
Debit
$500,000
$125,000
$375,000
Cash
Preferred stock
$60,000
Treasury stock
Cash
$45,000
Cash
Treasury stock
Addtl paid in capital, treasury stock
$18,000
Cash
Addtl paid in capital, treasury stock
Retained earnings
Treasury stock
Credit
$60,000
$45,000
$15,000
$3,000
$5,000
$3,000
$7,000
$15,000
E12-5 (continued)
(b) Assume that Twin Lakes generated $500,000 in net income in 2012 and did not
declare any dividends during 2012. Prepare the shareholders’ equity section of
the balance sheet as of December 31, 2012.
Preferred stock, $8, no-par value, authorized 10,000 shares
Issued and outstanding 5,000 shares
Common stock, $5 par value, authorized 100,000 shares
Issued 25,000 shares
Additional paid-in capital, common stock
Retained earnings
Treasury stock
Total shareholders’ equity
$
60,000
125,000
375,000
500,000
(15,000)
$1,045,000
E12-6
The stockholders’ equity section of Rodman Corporation as of December 31, 2011
follows:
Common stock
Additional paid-in capital (C/S)
Retained earnings
Total stockholders’ equity
$ 80,000
10,000
60,000
$ 150,000
During 2012, the company entered into the following transactions. Prepare the journal
entry for each transaction.
1. Purchased 1,000 shares of treasury stock for $60 per share.
2. Reissued half of the treasury shares to executives who exercised stock options for a
reduced price of $20 per share.
3. Reissued the remainder of the treasury stock on the open market for $66 per share.
(a) Provide journal entries for each transaction, and prepare the shareholders’ equity
section of the balance sheet as of December 31, 2012. Rodman Corporation
generated $20,000 in net income during 2012 and did not declare any dividends.
1.
Treasury stock
Cash
2.
3.
Debit
$60,000
Credit
$60,000
Cash
Retained earnings
Treasury stock
$10,000
$20,000
Cash
Addtl paid in capital, treasury stock
Treasury stock
$33,000
$30,000
$3,000
$30,000
Common stock
Additional paid-in capital, common stock
Additional paid in capital, treasury stock
Retained earnings
$ 80,000
10,000
3,000
60,000
Total stockholders’ equity
$ 153,000
(b) What portion of the additional paid-in capital account is attributed to treasury
stock transactions?
$3,000
E12-9
The information below is taken from the statement of stockholders’ equity of Chinook
Furs:
2012
2011
Preferred stock (no par)
$ 700
$ 400
Common stock ($1 par value)
1,000
900
Common stock
40
20
Treasury stock
10
-
130
150
Additional paid-in capital:
Less: Treasury stock
Provide the journal entries for the following:
(a) The issuance of preferred stock during 2012.
(b) The issuance of common stock during 2012.
(c) The sale of treasury stock during 2012.
a.
b.
c.
Cash
Preferred stock
Debit
$300
Credit
$300
Cash
Common stock
Addtl paid in capital, common stock
$120
Cash
Treasury stock
Addtl paid in capital, treasury stock
$30
$100
$20
$20
$10
E12-13
The stockholders’ equity section of Mayberry Corporation, as of the end of 2012,
follows. Mayberry began operations in 2008. The 5,000 shares of preferred stock have
been outstanding since 2008.
Preferred stock (10,000 shares authorized, 5,000 issued)
cumulative, nonparticipating, $5 dividend, $10 par value
Common stock (500,000 shares authorized, 200,000 shares
issued 50,000 held in treasury, no par value
Additional paid-in capital – preferred stock
Retained earnings
Less: Treasury stock
Total stockholders’ equity
$
50,000
1,600,000
140,000
110,000
(80,000)
$ 1,820,000
(a) and (b) Compute the amount of dividends paid to preferred and common
shareholders and the balance of dividends in arrears each year.
Year
2008
Total
Dividends
Paid
0
Dividends
Owed to
Preferred
25,000
Dividends
Paid to
Preferred
0
Dividends
in Arrears
25,000
Dividends
Paid to
Common
0
2009
30,000
50,000
30,000
20,000
0
2010
80,000
45,000
45,000
0
35,000
2011
15,000
25,000
15,000
10,000
0
2012
40,000
35,000
35,000
0
5,000
(c) Should dividends in arrears be considered a liability? Why or why not?
Dividends in arrears should not be considered a liability. A company may choose to
reinvest its profits back into the company, or the company may not be financially secure
enough to pay a dividend. Preferred shareholders are only entitled to receive a dividend
when the company declares a dividend. If the Board never declares a dividend, the
preferred shareholders are not entitled to receive one; thus, no liability exists until the
dividend is actually declared.
E12-14
The stockholders’ equity section of Pioneer Enterprises as of December 31, 2012 follows:
Common stock (10,000 shares issued @ $6 par)
Additional paid-in capital – common stock
Retained earnings
Less: Treasury stock (2,000 shares @ $12)
Total stockholders’ equity
$ 60,000
100,000
60,000
(24,000)
$ 196,000
Prepare journal entries for the following independent transactions:
(a) The company declares and distributes a 2% stock dividend on the outstanding
shares. The market price of the stock is $70.
(b) The company declares a 3:2 stock split on the outstanding shares.
(c) The company declares a 10% stock dividend on the outstanding shares. The
market price of the stock is $80.
(d) The company declares a 2:1 stock split on the outstanding shares.
a.
Retained earnings (160 shares @$70)
Common stock
Addtl paid-in capital, common stock
b.
No entry is necessary; however, a
memo entry would be made stating
that the par value has decreased from
$6 to $4 per share and that there are
now 15,000 shares issued and
$12,000 shares outstanding.
C.
Retained earnings (800 shares @$80)
Common stock
Addtl paid in capital, common stock
d.
No entry is necessary; however, a
memo entry would be made stating
that the par value has decreased from
$6 to $3 per share and that there are
now 20,000 shares issued and
$16,000 shares outstanding.
Debit
$11,200
Credit
$960
$10,240
$64,000
$4,800
$59,200
P12-10
The stockholders’ equity section of Buzytown Industries’ balance sheet reports the following:
Preferred stock (9%, $100 par value)
Common stock ($10 par value, 750,000 shares
authorized, 90,000 shares issued and 5,000
held in the treasury)
Additional paid-in capital:
Preferred stock
Common stock
Retained earnings
Less: Treasury stock
$
Total stockholders’ equity
2012
200,000
$
2011
110,000
900,000
750,000
150,000
465,000
575,000
(110,000)
35,000
298,000
495,000
-
$ 2,180,000
$ 1,688,000
(a) How many shares of preferred stock were issued during 2012? What was the
average issue price?
Increase in the Preferred Stock Account
Par Value per share
Number of shares issued
Total cash proceeds ($90,000 + $115,000)
Average issue price per share
$ 90,000
$100
900
$ 205,000
$ 227.78
(b) How many shares of common stock were issued during 2012? What was the
average issue price?
Increase in the Common Stock Account
Par Value per share
Number of shares issued
$150,000
$10
15,000
Total cash proceeds ($150,000 + $167,000)
Average issue price per share
$ 317,000
$ 21.13
P12-10 (continued)
(c) Prepare the entry to record the repurchase of the company’s own stock during
2012. What was the average repurchase price?
Treasury stock
Cash
Total cash paid
Number of shares repurchased
Average price per share
Debit
$110,000
Credit
$110,000
$ 110,000
5,000
$ 22.00