14.4 Flashcards
A corporation issuing stock should charge retained earnings for the fair value of the shares issued in a(n)
10% stock dividend.
An undistributed stock dividend declared by the Board of Directors should be reported as a(n)
Item in the shareholders’ equity section.
In accounting for a stock dividend, the fair value of the additional shares issued is reclassified from retained earnings to capital stock and the difference to additional paid in capital. Stock dividend distributable is an item of shareholders’ equity and not a liability.
In Year 2, Fogg, Inc., issued $10 par value common stock for $25 per share. No other common stock transactions occurred until March 31, Year 4, when Fogg acquired some of the issued shares for $20 per share and retired them. Which of the following statements accurately states an effect of this acquisition and retirement?
Additional paid-in capital is decreased.
When shares of common stock are reacquired and retired, contributed capital should be debited for the amount that was credited upon the issuance of the securities. In addition, because the acquisition of a company’s own shares is an equity transaction, no gain or loss should be reflected in the determination of income. The entry is to debit common stock at par (number of shares × $10) and additional paid-in capital [number of shares × ($25 – $10)], and to credit additional paid-in capital from retirement of common stock [number of shares × ($25 – $20)] and cash (number of shares × $20). The net effect is to decrease total additional paid-in capital.
Posy Corp. acquired treasury shares at an amount greater than their par value but less than their original issue price. Compared with the cost method of accounting for treasury stock, does the par-value method report a greater amount for additional paid-in capital and a greater amount for retained earnings?
Additional Paid-in Capital:
Retained earnings:
No
No
Under the cost method, the purchase of treasury stock (debit treasury stock, credit cash) has no effect on additional paid-in capital and retained earnings. Under the par-value method, given that the acquisition cost is greater than par but less than the original issue price, treasury stock is debited at par, and the additional paid-in capital associated with the original issue is also debited. Cash and paid-in capital from treasury stock transactions are credited. Hence, the par-value method does not report a greater amount for additional paid-in capital or retained earnings.
On December 1, Year 4, shares of authorized common stock were issued on a subscription basis at a price in excess of par value. A total of 20% of the subscription price of each share was collected as a down payment on December 1, Year 4, with the remaining 80% of the subscription price of each share due in Year 5. Collectibility was reasonably assured. At December 31, Year 4, the equity section of the balance sheet should report additional paid-in capital for the excess of the subscription price over the par value of the shares of common stock subscribed and
Common stock subscribed for the par value of the shares of common stock subscribed.
When stock is subscribed, the corporation recognizes an obligation to issue stock and the subscriber undertakes the legal obligation to pay for the shares subscribed. If collectibility of the subscription price is reasonably assured on the date the subscription is received, the issuing corporation should recognize the cash collected and a subscription receivable for the remainder. In addition, the common stock subscribed account should be credited for the par value of the shares subscribed, with the excess of the subscription price over the par value recognized as additional paid-in capital.
On December 1, Noble Inc.’s Board of Directors declared a property dividend, payable in stock held in the Multon Company. The dividend was payable on January 5. The investment in Multon stock had an original cost of $100,000 when acquired 2 years ago. The market value of this investment was $150,000 on December 1, $175,000 on December 31, and $160,000 on January 5. The amount to be shown on Noble’s statement of financial position at December 31 as property dividends payable would be
$150,000
When a property dividend is declared, the property is remeasured at its fair value as of the declaration date. This amount is then reclassified from retained earnings to property dividend payable.
Morris Corporation uses the cost method to account for treasury stock transactions. As of June 30, the corporation had the following account balances.
Treasury stock (100 shares at a cost of $20 per share): $2,000 Paid-in capital from previous treasury stock transactions: 400
On July 15, Morris sold the 100 shares of treasury stock for $18 per share. As a result of this transaction, what amount would Morris charge to retained earnings, if any, under the cost method of accounting for treasury stock transactions?
$0
The difference between the cash received for the shares (100 × $18 = $1,800) and the credit to treasury stock (100 × $20 = $2,000) is debited to paid-in capital from previous treasury stock transactions ($2,000 – $1,800 = $200). Otherwise, the debit is to retained earnings. Thus, this transaction has no effect on the retained earnings account. The journal entry is as follows:
The following stock dividends were declared and distributed by Sol Corp.:
Percentage of Common Shares Outstanding at Declaration Date: 10
Fair Value: $15,000
Par Value: $10,000
Percentage of Common Shares Outstanding at Declaration Date: 28
Fair Value: $40,000
Par Value: $30,800
What aggregate amount should be debited to retained earnings for these stock dividends?
$45,800
A stock dividend in which the number of shares issued is fewer than 20 to 25% of those outstanding is recorded as a debit to retained earnings for the fair value of the stock issued and a credit to the capital stock accounts. A split-up effected in the form of a stock dividend, that is, a share distribution that is greater than 20 to 25% of the outstanding shares, requires a debit to retained earnings at least equal to the legal requirement in the state of incorporation (usually the par value of the shares). Thus, the aggregate amount debited to retained earnings is $45,800 ($15,000 fair value of the 10% dividend + $30,800 par value of the 28% dividend).
On January 5, Year 2, Sardi Minerals Corp. declared a cash dividend of $600,000 to shareholders of record on January 21, Year 2. It was payable on February 11, Year 2. The dividend is permissible under the laws of Sardi’s state of incorporation. The following data pertain to Year 1:
Net income for year ended 12/31/Yr 1: $190,000
Additional paid-in capital, 12/31/Yr 1: 675,000
Retained earnings, 1/1/Yr 2: 425,000
The $600,000 dividend includes a liquidating dividend of
$175,000
A common practice of companies whose major activity is the exploitation of depletable resources is to pay dividends in amounts up to the sum of retained earnings and accumulated depletion. However, any distribution by a corporation to its shareholders in excess of the dollar balance in the retained earnings account is considered a liquidating dividend and return of capital to the shareholders. Given retained earnings of $425,000, a distribution of $600,000 results in a $175,000 liquidating dividend.
Cross Corp. had 2,000 outstanding shares of 11% preferred stock, $50 par. These shares were not mandatorily redeemable. On August 8, Cross redeemed and retired 25% of these shares for $22,500. On that date, Cross’s additional paid-in capital from preferred stock totaled $30,000. To record this transaction, Cross should debit (credit) its capital accounts as follows:
Preferred stock:
Additional Paid-in Capital:
Retained Earnings:
$25,000
$(2,500)
$0
$0
Under the cost method, the entry to record a treasury stock purchase is to debit treasury stock at cost ($22,500) and credit cash. The entry to retire this stock is to debit preferred stock at par [(2,000 shares × 25%) × $50 = $25,000], debit additional paid-in capital from the original issuance ($30,000 × 25% = $7,500), credit treasury stock at cost ($22,500), and credit additional paid-in capital from stock retirement ($10,000). Thus, the net effect on additional paid-in capital is a $2,500 credit ($10,000 credit – $7,500 debit). No entry to retained earnings is necessary.
At December 31, Year 3 and Year 4, Apex Co. had 3,000 shares of $100 par, 5% cumulative preferred stock outstanding. No dividends were in arrears as of December 31, Year 2. Apex did not declare a dividend during Year 3. During Year 4, Apex paid a cash dividend of $10,000 on its preferred stock. Apex should report dividends in arrears in its Year 4 financial statements as a(n)
Disclosure of $20,000.
Dividends in arrears on preferred stock are not obligations of the company and are not recognized in the financial statements. However, the aggregate and per-share amounts of arrearages in cumulative preferred dividends should be disclosed on the face of the balance sheet or in the notes. The aggregate amount in arrears is $20,000 [(3,000 shares × $100 par × 5% × 2 years) – $10,000 paid in Year 4].
On July 1, Rya Corporation issued 1,000 shares of its $20 par common and 2,000 shares of its $20 par convertible preferred stock for a lump sum of $80,000. At this date, Rya’s common stock was selling for $36 per share and the convertible preferred stock for $27 per share. The amount of proceeds allocated to Rya’s preferred stock should be
$48,000
Given that the 1,000 shares of common stock and 2,000 shares of preferred stock were issued for a lump sum of $80,000, the proceeds should be allocated based on the relative fair values of the securities issued. The fair value of the common stock is $36,000 (1,000 shares × $36). The fair value of the preferred stock is $54,000 (2,000 shares × $27). Because 60% [$54,000 ÷ ($54,000 + $36,000)] of the total fair value is attributable to the preferred stock, it should be allocated $48,000 ($80,000 × 60%) of the proceeds.
The format displayed is used by Gee, Inc., for its Year 4 statement of changes in equity. When both the 100% and the 5% stock dividends were declared and distributed, Gee’s common stock was selling for more than its $1 par value.
Balance at 1/1/Year 4
Common Stock $1 par: $90,000
Additional paid-in capital: $800,000
Retained earnings: $175,000
How would the 100% stock dividend affect the additional paid-in capital and retained earnings amounts reported in Gee’s Year 4 statement of changes in equity?
Additional paid-in Capital:
Retained Earnings:
No change
Decrease
An issuance of common shares that exceeds 20% to 25% of the outstanding shares more closely resembles a split than a stock dividend and should be treated accordingly. A debit is made to retained earnings at least equal to the legal requirement in the state of incorporation (usually the par value of the shares). Thus, if retained earnings is debited for the par value of the shares, additional paid-in capital will be unaffected although retained earnings will decrease.
On February 1, Hyde Corp., a newly formed company, had the following stock issued and outstanding:
- Common stock, no par, $1 stated value, 10,000 shares originally issued for $15 per share
- Preferred stock, $10 par value, 3,000 shares originally issued for $25 per share
Hyde’s February 1 statement of equity should report
Common Stock:
Preferred Stock:
Additional Paid-in Capital:
$10,000
$30,000
$185,000
The common stock was issued for a total of $150,000 (10,000 shares × $15). Of this amount, $10,000 (10,000 shares × $1 stated value) should be allocated to the common stock, with the remaining $140,000 ($150,000 – $10,000) credited to additional paid-in capital. The preferred stock was issued for $75,000 (3,000 shares × $25), of which $30,000 (3,000 shares × $10 par value) should be allocated to the preferred stock and $45,000 ($75,000 – $30,000) should be allocated to additional paid-in capital. In the statement of equity, Hyde therefore should report $10,000 in the common stock account, $30,000 in the preferred stock account, and $185,000 ($140,000 + $45,000) as additional paid-in capital.
Pugh Co. reported the following in its statement of equity on January 1:
Common stock, $5 par value, authorized 200,000 shares, issued 100,000 shares: $500,000
Additional paid-in capital: 1,500,000
Retained earnings: 516,000
Contributed capital and retained earnings: $2,516,000
Minus treasury stock at cost (5,000 shares): 40,000
Total equity: $2,476,000
The following events occurred during the year:
May 1 - 1,000 shares of treasury stock were sold for $10,000.
July 9 - 10,000 shares of previously unissued common stock sold for $12 per share.
October 1 - The distribution of a 2-for-1 stock split resulted in the common stock’s per-share par value being halved.
Pugh accounts for treasury stock under the cost method. Laws in the state of Pugh’s incorporation protect shares held in treasury from dilution when stock dividends or stock splits are declared.
In Pugh’s December 31 statement of equity, the par value of the issued common stock should be
$550,000
At the beginning of the year, 100,000 shares with a par value of $500,000 had been issued. These shares included the treasury stock (issued but not outstanding) accounted for at cost. Under the cost method, the par value recorded in the common stock account is unaffected by purchases and sales of treasury stock. On July 9, 10,000 shares of previously unissued common stock were sold. This transaction increased the aggregate par value to $550,000 (110,000 shares issued × $5). The 2-for-1 stock split reduced the par value per share by 50% but did not affect the aggregate par value of the issued stock.
