14.3 Flashcards
Bain Corp. owned 20,000 common shares of Tell Corp., purchased in Year 1 for $180,000. On December 15, Year 5, Bain declared a property dividend of all its Tell Corp. shares on the basis of one share of Tell for every 10 shares of Bain common stock held by its shareholders. The property dividend was distributed on January 15, Year 6. On the declaration date, the aggregate market price of the Tell shares held by Bain was $300,000. The entry to record the declaration of the dividend should include a debit to retained earnings (or property dividends declared) of
$300,000
When a corporation declares a dividend consisting of tangible property, the property must first be remeasured to fair value as of the date of declaration. The dividend should then be debited to retained earnings and credited to a dividend payable. Thus, the entry to record the declaration of the dividend should include a debit to retained earnings (or dividends declared) of $300,000, the fair value of the Tell Corp. shares.
The number of common stock shares outstanding will be decreased by the
Declaration of a Stock Dividend:
Purchase of Treasury Stock:
No
Yes
The number of shares outstanding is not changed by the declaration of a stock dividend (outstanding shares do increase on the date of distribution). A treasury stock purchase decreases the shares outstanding.
During the prior year, Brad Co. issued 5,000 shares of $100 par-value convertible preferred stock for $110 per share. One share of preferred stock can be converted into three shares of Brad’s $25 par-value common stock at the option of the preferred shareholder. On December 31 of the current year, when the market value of the common stock was $40 per share, all of the preferred stock was converted. What amount should Brad credit to common stock and to additional paid-in capital – common stock as a result of the conversion?
Common Stock:
Additional Paid-in Capital:
$375,000
$175,000
Brad recorded the issue of the convertible preferred stock with this entry:
Cash (5,000 shares × $110 market value) $550,000
Preferred stock (5,000 shares × $100 par value) $500,000
Additional paid-in capital – preferred (difference) 50,000
Brad recorded the conversion as follows:
Preferred stock (balance) $500,000
Additional paid-in capital – preferred (balance)
$50,000
Common stock (5,000 shares × 3 × $25 par value)
$375,000
Additional paid-in capital – common (difference)
175,000
An appropriation of retained earnings by the board of directors of a corporation for bonded indebtedness will result in
The disclosure that management does not intend to distribute assets, in the form of dividends, equal to the amount of the appropriation.
The appropriation of retained earnings is a transfer from one retained earnings account to another. The only practical effect is to decrease the amount of retained earnings available for dividends. An appropriation of retained earnings is purely for disclosure purposes.
Of the 125,000 shares of common stock issued by Vey Corp., 25,000 shares were held as treasury stock at December 31, Year 3. During Year 4, transactions involving Vey’s common stock were as follows:
January 1 through October 31: 13,000 treasury shares were distributed to officers as part of a stock compensation plan.
November 1: A 3-for-1 stock split took effect.
December 1: Vey purchased 5,000 of its own shares to discourage an unfriendly takeover. These shares were not retired.
At December 31, Year 4, how many shares of Vey’s common stock were issued and outstanding?
Shares issued:
Shares outstanding:
$375,000
$334,000
Given that 125,000 have been issued and that the stock has been split 3-for-1, the shares issued at year-end equal 375,000 (125,000 × 3). At the beginning of the year 100,000 shares were outstanding (125,000 issued – 25,000 treasury shares). After 13,000 treasury shares were distributed, 113,000 shares were outstanding, an amount that increased to 339,000 (113,000 × 3) after the stock split. The purchase on December 1 reduced the shares outstanding to 334,000 (339,000 – 5,000).
Which of the following financial instruments issued by a public company should be reported on the issuer’s books as a liability on the date of issuance?
Common stock that contains an unconditional redemption feature.
Mandatorily redeemable financial instruments (MRFIs) are redeemable shares that embody an unconditional obligation to transfer assets at a fixed or determinable time or upon an event certain to occur. MRFIs must be accounted for as liabilities.
On incorporation, Dee, Inc., issued common stock at a price in excess of its par value. No other stock transactions occurred except that treasury stock was acquired for an amount exceeding this issue price. If Dee uses the par value method of accounting for treasury stock appropriate for retired stock, what is the effect of the acquisition on the following?
Net Common Stock:
Additional Paid-in Capital:
Retained Earnings:
Decrease
Decrease
Decrease
Under the par value method, treasury stock is debited at par value, and the amount is reported as a reduction of common stock. The purchase also results in the removal of the additional paid-in capital associated with the original issue of the shares. Given that no other stock transactions occurred and that treasury stock was acquired for an amount exceeding the issue price, the balancing debit for the excess of the acquisition price over the issue price is to retained earnings. If paid-in capital from treasury stock had been previously recorded, the balancing debit would be to that account but only to the extent of its credit balance. Thus, retained earnings is also decreased.
Jensen performed legal services to assist Balm Co. in accomplishing its initial organization. Jensen accepted 1,000 shares of $5 par common stock in Balm as payment for his services. The Balm shares were not yet publicly traded, but they had a book value of $4 per share. Jensen provided 48 hours of service, which is normally billed at $125 per hour. By what amount should the common stock account increase?
$5,000
The common stock account is reported in the financial statements at the par value of common stock outstanding. Accordingly, the common stock account is increased by the par value of common stock issued of $5,000 (1,000 shares of common stock issued × $5 par value). Note that when the stock is issued for property received or services rendered, the transaction should be recorded at the more clearly determinable of the fair values of the stock issued or the property or services received. Because the fair value of the stock issued cannot be clearly determined (the shares are not publicly traded), the transaction is recorded at the fair value of services rendered of $6,000 (48 × $125).
An entity declared a cash dividend on its common stock in December Year 1, payable in January Year 2. Retained earnings will
Not be affected on the date of payment.
When cash dividends are declared, a liability to the shareholders is created because the dividends must be paid once they are declared. At the declaration date, retained earnings must be debited, resulting in a decrease in retained earnings. When the cash dividends are subsequently paid, the dividends payable account is debited and a cash account credited. Thus, at the payment date, the amount of retained earnings is not affected.
On December 31, Pack Corp.’s board of directors canceled 50,000 shares of $2.50 par value common stock held in treasury at an average cost of $13 per share. Before recording the cancelation of the treasury stock, Pack had the following balances in its equity accounts:
Common stock: $540,000
Additional paid-in capital: 750,000
Retained earnings: 900,000
Treasury stock, at cost: 650,000
In its balance sheet at December 31, Pack should report common stock outstanding of
$415,000
The treasury shares had an aggregate par value of $125,000 (50,000 shares × $2.50). Consequently, the common stock outstanding after their retirement is $415,000 ($540,000 par value of issued common stock – $125,000).
Instead of the usual cash dividend, Evie Corp. declared and distributed a property dividend from its overstocked merchandise. The excess of the merchandise’s carrying amount over its fair value should be
Reported as a reduction in operating income.
When a corporation declares a dividend consisting of tangible property, the property must first be remeasured to fair value. Thus, a loss should be recognized on the disposition of the asset. This loss on merchandise is an operating item.
Park Corp.’s equity accounts at December 31, Year 4, were as follows:
Common stock, $20 par: $8,000,000
Additional paid-in capital: 2,550,000
Retained earnings: 1,275,000
All shares of common stock outstanding at December 31, Year 4, were issued in Year 1 for $26 a share. On January 4, Year 5, Park reacquired 20,000 shares of its common stock at $24 a share and retired them. Immediately after the shares were retired, the balance in additional paid-in capital was
$2,470,000
The 20,000 shares of common stock that were reacquired and retired were originally issued for $520,000 (20,000 shares × $26). Of this amount, $400,000 (20,000 shares × $20 par) should have been credited to common stock, with the remaining $120,000 ($520,000 – $400,000) credited to additional paid-in capital. The 20,000 shares were reacquired for $480,000 (20,000 shares × $24). To record the purchase and retirement, $400,000 should be debited to the common stock account, with the remaining $80,000 ($480,000 – $400,000) debited to additional paid-in capital. Thus, the additional paid-in capital following the retirement of the shares should be $2,470,000 ($2,550,000 – $80,000).
A company whose stock is trading at $10 per share has 1,000 shares of $1 par common stock outstanding when the board of directors declares a 30% common stock dividend. Which of the following adjustments should be made when recording the stock dividend?
Retained earnings is debited for $300.
The board of directors declared a 30% common stock dividend. As this issuance is more than 25% of the previously outstanding common shares, it should be accounted for as a stock split in the form of a dividend. Generally (depending on the state of incorporation), the company will capitalize retained earnings in an amount based on the par value. Thus, the journal entry at the date of declaration will be:
Retained earnings (1,000 shares × 30%) $300
Common stock dividend distributable $300
In Year 3, Seda Corp. acquired 6,000 shares of its own $1 par value common stock at $18 per share. In Year 4, Seda reissued 3,000 of these shares at $25 per share. Seda uses the cost method to account for its treasury stock transactions. What accounts and amounts should Seda credit in Year 4 to record the reissuance of the 3,000 shares?
Treasury Stock:
Additional Paid-in Capital:
Retained earnings:
Common Stock:
$54,000
$21,000
$0
$0
Under the cost method, the treasury stock account should be debited for the purchase price. When this stock is subsequently reissued for an amount greater than its acquisition cost, the excess should be credited to additional paid-in capital. The 3,000 shares were purchased as treasury stock for $54,000 (3,000 shares × $18 per share). They were reissued for $75,000 (3,000 shares × $25 per share). Under the cost method, the carrying amount of the 3,000 shares was $54,000. When these shares are reissued, the treasury stock account should be credited for $54,000, with the remaining $21,000 ($75,000 – $54,000) credited to additional paid-in capital.
In Year 1, Rona Corp. issued 5,000 shares of $10 par value common stock for $100 per share. In Year 7, Rona reacquired 2,000 shares at $150 per share from the estate of one of its deceased officers and immediately canceled these 2,000 shares. Rona uses the cost method in accounting for its treasury stock transactions. In connection with the retirement of these 2,000 shares, Rona should debit
Additional Paid-in Capital:
Retained Earnings:
$180,000
$100,000
The 2,000 shares of stock were originally issued for $100 per share, a total of $200,000. Of this amount, $20,000 (2,000 shares × $10 par) should have been credited to common stock, with the remaining $180,000 [2,000 shares × ($100 – $10)] credited to additional paid-in capital. When these 2,000 shares are purchased at $150 per share and retired, common stock and additional paid-in capital should be debited for $20,000 and $180,000, respectively, which were the amounts related to the reacquired shares originally credited to those accounts. Moreover, $100,000 [2,000 shares × ($150 – $100)] should be debited to retained earnings (assuming no previous treasury stock transactions that resulted in additional paid-in capital). Because the stock was immediately retired, this journal entry would be made whether the treasury stock is accounted for under the cost method or the par value method.
