Question & Answer

Briefly discuss the implications of the financial statement presentation project for the reporting of stockholders’ equity.

Briefly describe some of the similarities and differences between GAAP and IFRS with respect to the accounting for stockholders’ equity.

Question:

Where can authoritative IFRS guidance related to stockholders’ equity be found?

Recall from Chapter 13 that Hincapie Co. (a specialty bike-accessory manufacturer) is expecting growth in sales of some products targeted to the low-price market. Hincapie is contemplating a preferred stock issue to help finance this expansion in operations. The company is leaning toward participating preferred stock because ownership will not be diluted, but the investors will get an extra dividend if the company does well. The company management wants to be certain that its reporting of this transaction is transparent to its current shareholders and wants you to research the disclosure requirements related to its capital structure.

Instructions

If your school has a subscription to the FASB Codification, go to http://aaahq.org/ascLogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses.

(a) Identify the authoritative literature that addresses disclosure of information about capital structure.

(b) Find definitions of the following:

(1) Securities.

(2) Participation rights.

(3) Preferred stock.

(c) What information about securities must companies disclose? Discuss how Hincapie should report the proposed preferred stock issue.

The financial statements of P&G are presented in Appendix 5B. The company’s complete annual report, including the notes to the financial statements, can be accessed at the book’s companion website, www.

wiley.com/college/kieso.

Instructions

Refer to P&G’s financial statements and the accompanying notes to answer the following questions.

(a) What is the par or stated value of P&G’s preferred stock?

(b) What is the par or stated value of P&G’s common stock?

(c) What percentage of P&G’s authorized common stock was issued at June 30, 2011?

(d) How many shares of common stock were outstanding at June 30, 2011, and June 30, 2010?

(e) What was the dollar amount effect of the cash dividends on P&G’s stockholders’ equity?

(f) What is P&G’s return on common stock equity for 2011 and 2010?

(g) What is P&G’s payout ratio for 2011 and 2010?

(h) What was the market price range (high/low) of P&G’s common stock during the quarter ended

June 30, 2011?

Lois Kenseth, president of Sycamore Corporation, is concerned about several large stockholders who have been very vocal lately in their criticisms of her leadership. She thinks they might mount a campaign to have her removed as the corporation’s CEO. She decides that buying them out by purchasing their shares could eliminate them as opponents, and she is confident they would accept a “good” offer. Kenseth knows the corporation’s cash position is decent, so it has the cash to complete the transaction. She also knows the purchase of these shares will increase earnings per share, which should make other investors quite happy. (Earnings per share is calculated by dividing net income available for the common shareholders by the weighted-average number of shares outstanding. Therefore, if the number of shares outstanding is decreased by purchasing treasury shares, earnings per share increases.)

Instructions

Answer the following questions.

(a) Who are the stakeholders in this situation?

(b) What are the ethical issues involved?

(c) Should Kenseth authorize the transaction?

Mask Company has 30,000 shares of $10 par value common stock authorized and 20,000 shares issued and outstanding. On August 15, 2014, Mask purchased 1,000 shares of treasury stock for $18 per share. Mask uses the cost method to account for treasury stock. On September 14, 2014, Mask sold 500 shares of the treasury stock for $20 per share. In October 2014, Mask declared and distributed 1,950 shares as a stock dividend from unissued shares when the market price of the common stock was $21 per share.

On December 20, 2014, Mask declared a $1 per share cash dividend, payable on January 10, 2015, to shareholders of record on December 31, 2014.

Instructions

(a) How should Mask account for the purchase and sale of the treasury stock, and how should the treasury stock be presented in the balance sheet at December 31, 2014?

(b) How should Mask account for the stock dividend, and how would it affect the stockholders’ equity at December 31, 2014? Why?

(c) How should Mask account for the cash dividend, and how would it affect the balance sheet at

December 31, 2014? Why?

Kulikowski Inc., a client, is considering the authorization of a 10% common stock dividend to common stockholders. The financial vice president of Kulikowski wishes to discuss the accounting implications of such an authorization with you before the next meeting of the board of directors.

Instructions

(a) The first topic the vice president wishes to discuss is the nature of the stock dividend to the recipient.

Discuss the case against considering the stock dividend as income to the recipient.

(b) The other topic for discussion is the propriety of issuing the stock dividend to all “stockholders of

record” or to “stockholders of record exclusive of shares held in the name of the corporation as treasury stock.” Discuss the case against issuing stock dividends on treasury shares.

The directors of Merchant Corporation are considering the issuance of a stock dividend. They have asked you to discuss the proposed action by answering the following questions.

Instructions

(a) What is a stock dividend? How is a stock dividend distinguished from a stock split (1) from a legal standpoint, and (2) from an accounting standpoint?

(b) For what reasons does a corporation usually declare a stock dividend? A stock split?

(c) Discuss the amount, if any, of retained earnings to be capitalized in connection with a stock dividend.

Statements of Financial Accounting Concepts set forth financial accounting and reporting objectives and fundamentals that will be used by the Financial Accounting Standards Board in developing standards. Concepts Statement No. 6 defines various elements of financial statements.

Instructions

Answer the following questions based on SFAC No. 6.

(a) Define and discuss the term “equity.”

(b) What transactions or events change owners’ equity?

(c) Define “investments by owners” and provide examples of this type of transaction. What financial statement element other than equity is typically affected by owner investments?

(d) Define “distributions to owners” and provide examples of this type of transaction. What financial statement element other than equity is typically affected by distributions?

(e) What are examples of changes within owners’ equity that do not change the total amount of owners’ equity?

Martin Corporation is planning to issue 3,000 shares of its own $10 par value common stock for two acres of land to be used as a building site.

Instructions

(a) What general rule should be applied to determine the amount at which the land should be recorded?

(b) Under what circumstances should this transaction be recorded at the fair value of the land?

(c) Under what circumstances should this transaction be recorded at the fair value of the stock issued?

(d) Assume Martin intentionally records this transaction at an amount greater than the fair value of the land and the stock. Discuss this situation.

Wallace Computer Company is a small, closely held corporation. Eighty percent of the stock is held by Derek Wallace, president. Of the remainder, 10% is held by members of his family and 10% by Kathy Baker, a former officer who is now retired. The balance sheet of the company at June 30, 2014, was substantially as shown below.CONCEPTS FOR ANALYSIS

Assets Liabilities and Stockholders’ Equity

Cash $ 22,000 Current liabilities $ 50,000

Other 450,000 Common stock 250,000

$472,000 Retained earnings 172,000

$472,000

Additional authorized common stock of $300,000 par value had never been issued. To strengthen the cash position of the company, Wallace issued common stock with a par value of $100,000 to himself at par for cash. At the next stockholders’ meeting, Baker objected and claimed that her interests had been injured.

Instructions

(a) Which stockholder’s right was ignored in the issue of shares to Derek Wallace?

(b) How may the damage to Baker’s interests be repaired most simply?

(c) If Derek Wallace offered Baker a personal cash settlement and they agreed to employ you as an impartial arbitrator to determine the amount, what settlement would you propose? Present your calculations with sufficient explanation to satisfy both parties.

Penn Company was formed on July 1, 2012. It was authorized to issue 300,000 shares of $10 par value common stock and 100,000 shares of 8% $25 par value, cumulative and nonparticipating preferred stock. Penn Company has a July 1–June 30 fiscal year.

The following information relates to the stockholders’ equity accounts of Penn Company.

Common Stock

Prior to the 2014–2015 fiscal year, Penn Company had 110,000 shares of outstanding common stock issued as follows.

1. 85,000 shares were issued for cash on July 1, 2012, at $31 per share.

2. On July 24, 2012, 5,000 shares were exchanged for a plot of land which cost the seller $70,000 in 2006 and had an estimated fair value of $220,000 on July 24, 2012.

3. 20,000 shares were issued on March 1, 2013, for $42 per share.

During the 2014–2015 fiscal year, the following transactions regarding common stock took place.

November 30, 2014 Penn purchased 2,000 shares of its own stock on the open market at $39 per share.

Penn uses the cost method for treasury stock.

December 15, 2014 Penn declared a 5% stock dividend for stockholders of record on January 15, 2015, to be issued on January 31, 2015. Penn was having a liquidity problem and could not afford a cash dividend at the time. Penn’s common stock was selling at $52 per share on December 15, 2014.

June 20, 2015 Penn sold 500 shares of its own common stock that it had purchased on November 30, 2014, for $21,000.

Preferred Stock

Penn issued 40,000 shares of preferred stock at $44 per share on July 1, 2013.

Cash Dividends

Penn has followed a schedule of declaring cash dividends in December and June, with payment being made to stockholders of record in the following month. The cash dividends which have been declared since inception of the company through June 30, 2015, are shown below.

Declaration Common Preferred

Date Stock Stock

12/15/13 $0.30 per share $1.00 per share

6/15/14 $0.30 per share $1.00 per share

12/15/14 — $1.00 per share

No cash dividends were declared during June 2015 due to the company’s liquidity problems.

Retained Earnings

As of June 30, 2014, Penn’s retained earnings account had a balance of $690,000. For the fiscal year ending

June 30, 2015, Penn reported net income of $40,000.

Instructions

Prepare the stockholders’ equity section of the balance sheet, including appropriate notes, for Penn

Company as of June 30, 2015, as it should appear in its annual report to the shareholders

Earnhart Corporation has outstanding 3,000,000 shares of common stock of a par value of $10 each. The balance in its Retained Earnings account at January 1, 2014, was $24,000,000, and it then had Paid-in Capital in Excess of Par—Common Stock of $5,000,000. During 2014, the company’s net income was $4,700,000. A cash dividend of $0.60 a share was declared on May 5, 2014, and was paid June 30, 2014, and a 6% stock dividend was declared on November 30, 2014, and distributed to stockholders of record at the close of business on December 31, 2014. You have been asked to advise on the proper accounting treatment of the stock dividend.

The existing stock of the company is quoted on a national stock exchange. The market price of the stock has been as follows.

October 31, 2014 $31

November 30, 2014 $34

December 31, 2014 $38

Instructions

(a) Prepare the journal entry to record the declaration and payment of the cash dividend.

(b) Prepare the journal entry to record the declaration and distribution of the stock dividend.

(c) Prepare the stockholders’ equity section (including schedules of retained earnings and additionalpaid-in capital) of the balance sheet of Earnhart Corporation for the year 2014 on the basis of the foregoing information. Draft a note to the financial statements setting forth the basis of the accounting for the stock dividend, and add separately appropriate comments or explanations regarding the basis chosen.

Oregon Inc. $10 par common stock is selling for $110 per share.

Four million shares are currently issued and outstanding. The board of directors wishes to stimulate interest in Oregon common stock before a forthcoming stock issue but does not wish to distribute capital at this time. The board also believes that too many adjustments to the stockholders’ equity section, especially retained earnings, might discourage potential investors.

The board has considered three options for stimulating interest in the stock:

1. A 20% stock dividend.

2. A 100% stock dividend.

3. A 2-for-1 stock split.

Instructions

Acting as financial advisor to the board, you have been asked to report briefly on each option and, considering the board’s wishes, make a recommendation. Discuss the effects of each of the foregoing options.

The following is a summary of all relevant transactions of Vicario Corporation since it was organized in 2014. In 2014, 15,000 shares were authorized and 7,000 shares of common stock ($50 par value) were issued at a price of $57. In 2015, 1,000 shares were issued as a stock dividend when the stock was selling for $60. Three hundred shares of common stock were bought in 2016 at a cost of $64 per share. These 300 shares are still in the company treasury.

In 2015, 10,000 preferred shares were authorized and the company issued 5,000 of them ($100 par value) at $113. Some of the preferred stock was reacquired by the company and later reissued for $4,700 more than it cost the company.

The corporation has earned a total of $610,000 in net income after income taxes and paid out a total of $312,600 in cash dividends since incorporation.

Instructions

Prepare the stockholders’ equity section of the balance sheet in proper form for Vicario Corporation as of

December 31, 2016. Account for treasury stock using the cost method.

Myers Company provides you with the following condensed balance sheet information.

Assets Liabilities and Stockholders’ Equity

Current assets $ 40,000 Current and long-term liabilities $100,000

Equity investments (trading) 60,000 Stockholders’ equity

Equipment (net) 250,000 Common stock ($5 par) $ 20,000

Intangibles 60,000 Paid-in capital in excess of par 110,000

Total assets $410,000 Retained earnings 180,000 310,000

Total liabilities and stockholders’ equity $410,000

Instructions

For each transaction below, indicate the dollar impact (if any) on the following five items: (1) total assets,

(2) common stock, (3) paid-in capital in excess of par, (4) retained earnings, and (5) stockholders’ equity.

(Each situation is independent.)

(a) Myers declares and pays a $0.50 per share cash dividend.

(b) Myers declares and issues a 10% stock dividend when the market price of the stock is $14 per share.

(c) Myers declares and issues a 30% stock dividend when the market price of the stock is $15 per share.

(d) Myers declares and distributes a property dividend. Myers gives one share of its equity investment

(ABC stock) for every two shares of Myers Company stock held. Myers owns 10,000 shares of ABC.

ABC is selling for $10 per share on the date the property dividend is declared.

(e) Myers declares a 2-for-1 stock split and issues new shares.

The books of Conchita Corporation carried the following account balances as of December 31, 2014.

Cash $ 195,000

Preferred Stock (6% cumulative, nonparticipating, $50 par) 300,000

Common Stock (no-par value, 300,000 shares issued) 1,500,000

Paid-in Capital in Excess of Par—Preferred Stock 150,000

Treasury Stock (common 2,800 shares at cost) 33,600

Retained Earnings 105,000

The company decided not to pay any dividends in 2014.

The board of directors, at their annual meeting on December 21, 2015, declared the following: “The current year dividends shall be 6% on the preferred and $.30 per share on the common. The dividends in arrears shall be paid by issuing 1,500 shares of treasury stock.” At the date of declaration, the preferred is selling at $80 per share, and the common at $12 per share. Net income for 2015 is estimated at $77,000.

Instructions

(a) Prepare the journal entries required for the dividend declaration and payment, assuming that they occur simultaneously.

(b) Could Conchita Corporation give the preferred stockholders 2 years’ dividends and common stockholders a 30 cents per share dividend, all in cash?

Washington Company has the following stockholders’ equity accounts at December 31, 2014.

Common Stock ($100 par value, authorized 8,000 shares) $480,000 Retained Earnings 294,000

Instructions

(a) Prepare entries in journal form to record the following transactions, which took place during 2015.

(1) 280 shares of outstanding stock were purchased at $97 per share. (These are to be accounted for using the cost method.)

(2) A $20 per share cash dividend was declared.

(3) The dividend declared in (2) above was paid.

(4) The treasury shares purchased in (1) above were resold at $102 per share.

(5) 500 shares of outstanding stock were purchased at $105 per share.

(6) 350 of the shares purchased in (5) above were resold at $96 per share.

(b) Prepare the stockholders’ equity section of Washington Company’s balance sheet after giving effect to these transactions, assuming that the net income for 2015 was $94,000. State law requires restriction of retained earnings for the amount of treasury stock.

Before Gordon Corporation engages in the treasury stock transactions listed below, its general ledger reflects, among others, the following account balances (par value of its stock is $30 per share).

Paid-in Capital in Excess of Par—Common Stock Common Stock Retained Earnings

$99,000 $270,000 $80,000

Instructions

Record the treasury stock transactions (given below) under the cost method of handling treasury stock; use the FIFO method for purchase-sale purposes.

(a) Bought 380 shares of treasury stock at $40 per share.

(b) Bought 300 shares of treasury stock at $45 per share.

(c) Sold 350 shares of treasury stock at $42 per share.

(d) Sold 110 shares of treasury stock at $38 per share.

Seles Corporation’s charter authorized issuance of 100,000 shares of $10 par value common stock and 50,000 shares of $50 preferred stock. The following transactions involving the issuance of shares of stock were completed. Each transaction is independent of the others.

1. Issued a $10,000, 9% bond payable at par and gave as a bonus one share of preferred stock, which at that time was selling for $106 a share.

2. Issued 500 shares of common stock for equipment. The equipment had been appraised at $7,100; the seller’s book value was $6,200. The most recent market price of the common stock is $16 a share.

3. Issued 375 shares of common and 100 shares of preferred for a lump sum amounting to $10,800. The common had been selling at $14 and the preferred at $65.

4. Issued 200 shares of common and 50 shares of preferred for equipment. The common had a fair value of $16 per share; the equipment has a fair value of $6,500.

Instructions

Record the transactions listed above in journal entry form.

Hatch Company has two classes of capital stock outstanding: 8%, $20 par preferred and $5 par common. At December 31, 2014, the following accounts were included in stockholders’ equity.

Preferred Stock, 150,000 shares $ 3,000,000

Common Stock, 2,000,000 shares 10,000,000

Paid-in Capital in Excess of Par—Preferred Stock 200,000

Paid-in Capital in Excess of Par—Common Stock 27,000,000

Retained Earnings 4,500,000

The following transactions affected stockholders’ equity during 2015. Jan. 1 30,000 shares of preferredstock issued at $22 per share. Feb. 1 50,000 shares of common stock issued at $20 per share.

June 1 2-for-1 stock split (par value reduced to $2.50).July 1 30,000 shares of common treasury stock purchased at $10 per share. Hatch uses the cost method.Sept. 15 10,000 shares of treasury stock reissuedat $11 per share.

Dec. 31 The preferred dividend is declared, and a common dividend of 50¢ per share is declared.

Dec. 31 Net income is $2,100,000.

Instructions

Prepare the stockholders’ equity section for Hatch Company at December 31, 2015. Show all supporting computations.

Clemson Company had the following stockholders’ equity as of January 1, 2014.

Common stock, $5 par value, 20,000 shares issued $100,000

Paid-in capital in excess of par—common stock 300,000

Retained earnings 320,000

Total stockholders’ equity $720,000

During 2014, the following transactions occurred.

Feb. 1 Clemson repurchased 2,000 shares of treasury stock at a price of $19 per share.

Mar. 1 800 shares of treasury stock repurchased above were reissued at $17 per share.

Mar. 18 500 shares of treasury stock repurchased above were reissued at $14 per share.

Apr. 22 600 shares of treasury stock repurchased above were reissued at $20 per share.

Instructions

(a) Prepare the journal entries to record the treasury stock transactions in 2014, assuming Clemson uses the cost method.

(b) Prepare the stockholders’ equity section as of April 30, 2014. Net income for the first 4 months of

2014 was $130,000.

On January 5, 2014, Phelps Corporation received a charter granting the right to issue 5,000 shares of $100 par value, 8% cumulative and nonparticipating preferred stock, and 50,000 shares of $10 par value common stock. It then completed these transactions.

Jan. 11 Issued 20,000 shares of common stock at $16 per share.

Feb. 1 Issued to Sanchez Corp. 4,000 shares of preferred stock for the following assets: equipment with a fair value of $50,000; a factory building with a fair value of $160,000; and land with an appraised value of $270,000.

July 29 Purchased 1,800 shares of common stock at $17 per share. (Use cost method.) Aug. 10 Sold the 1,800 treasury shares at $14 per share. Dec. 31 Declared a $0.25 per share cash dividend on the common stock and declared the preferred dividend.

Dec. 31 Closed the Income Summary account. There was a $175,700 net income.

Instructions

(a) Record the journal entries for the transactions listed above.

(b) Prepare the stockholders’ equity section of Phelps Corporation’s balance sheet as of December 31,

2014.

Morgan Sondgeroth Inc. began operations in January 2012 and reported the following results for each of its 3 years of operations. 2012 $260,000 net loss 2013 $40,000 net loss 2014 $800,000 net income At December 31, 2014, Morgan Sondgeroth Inc. capital accounts were as follows. 8% cumulative preferred stock, par value $100; authorized, issued, and outstanding 5,000 shares $500,000 Common stock, par value $1.00; authorized 1,000,000 shares; issued and outstanding 750,000 shares $750,000 Morgan Sondgeroth Inc. has never paid a cash or stock dividend. There has been no change in the capital accounts since Sondgeroth began operations. The state law permits dividends only from retained earnings.

Instructions

(a) Compute the book value of the common stock at December 31, 2014.

(b) Compute the book value of the common stock at December 31, 2014, assuming that the preferred stock has a liquidating value of $106 per share.