CHAPTER 13
CORPORATIONS: OR-
GANIZATION, STOCK
TRANSACTIONS, AND
DIVIDENDS
4. The broker is not correct. Corporations are not legally liable to pay dividends until the dividends are declared. If the company that issued the preferred stock has operating losses, it could omit dividends, first, on its common stock and, later, on its preferred stock.
18.
The primary purpose of a stock split is to bring about a reduction in the market price per share and thus to encourage more investors to buy the company ’s shares.
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PRACTICE EXERCISES
PE 13 –1A
Amount distributed ..............................
Preferred dividend (5,000 shares) .......
Common dividend (10,000 shares) .....
*(3,000 + 8,000)
Year 1
$
$
15,000 $
8,000
7,000 $
Dividends per share:
Preferred stock ............................. $1.60
Common stock ............................. $0.70
Year 2
$1.00
None
5,000 $ 62,000
5,000 11,000*
0 $ 51,000
Year 3
$2.20
$5.10
PE 13 –2A
July 3 Cash .....................................................................
Common Stock ..............................................
(450,000 shares × $2.50).
Sept. 1 Cash .....................................................................
Preferred Stock ..............................................
(10,000 shares
× $25).
Oct. 30 Cash .....................................................................
Preferred Stock ..............................................
Paid-In Capital in Excess of Par ...................
*(7,500 shares
× $5)
1,125,000
1,125,000
250,000
250,000
225,000
187,500
37,500*
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PE 13 –3A
Oct. 6 Cash Dividends ...................................................
Cash Dividends Payable ...............................
Nov. 5 No entry required.
Dec. 5 Cash Dividends Payable ....................................
Cash ................................................................
PE 13 –4A
May 10 Stock Dividends (100,000
× 2% × $48) ..............
Stock Dividends Distributable (2,000 × $40)
Paid-In Capital in Excess of Par —
Common Stock ($96,000 – $80,000) .............
June 9 No entry required.
Aug. 1 Stock Dividends Distributable ...........................
Common Stock ..............................................
PE 13 –5A
Oct. 3 Treasury Stock (10,000 × $9) .............................
Cash ................................................................
Nov. 15 Cash (6,800 × $12) ..............................................
Treasury Stock (6,800 × $9) ..........................
Paid-In Capital from Sale of
Treasury Stock [6,800
× ($12 – $9)] ..............
Dec. 22 Cash (3,200
× $7) ................................................
Paid-In Capital from Sale of
Treasury Stock [3,200 × ($9 – $7)] .....................
Treasury Stock (3,200 × $9) ..........................
112,750
112,750
112,750
112,750
96,000
80,000
16,000
80,000
80,000
90,000
81,600
90,000
61,200
22,400
20,400
6,400
28,800
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PE 13 –6A
Stockholders ’ Equity
Paid-in capital:
Common stock, $75 par (70,000 shares authorized, 63,000 shares issued) .................
Excess of issue price over par ............................
5,404,000
From sale of treasury stock .................................
Total paid-in capital .........................................
Retained earnings ......................................................
Total .......................................................................
Deduct treasury stock (7,500 shares at cost) ..........
Total stockholders ’ equity .........................................
$ 4,725,000
679,000 $
25,200
$ 5,429,200
2,032,800
$ 7,462,000
588,000
$ 6,874,000
PE 13 –7A
HORNBLOWER CRUISES INC.
Retained Earnings Statement
For the Year Ended October 31, 2010
Retained earnings, November 1, 2009 ..............................
Net income ..........................................................................
Less dividends declared....................................................
Increase in retained earnings ...........................................
Retained earnings, October 31, 2010 ...............................
$ 1,500,000
$475,000
350,000
125,000
$ 1,625,000
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