14.7 Flashcards
Jones Co. had 50,000 shares of $5 par value common stock outstanding at January 1. On August 1, Jones declared a 5% stock dividend followed by a two-for-one stock split on September 1. What amount should Jones report as common shares outstanding at December 31?
$105,000
Stock dividends and stock splits are distributions of stock to current shareholders. The amount of stock outstanding at January 1 is 50,000. The 5% stock dividend provides an additional 2,500 shares (50,000 shares × 5%), increasing the amount of outstanding shares to 52,500. The two-for-one stock split doubles the amount of shares outstanding, resulting in a total of 105,000 outstanding shares (52,500 × 2).
Treasury stock was acquired for cash at a price in excess of its original issue price. The treasury stock was subsequently reissued for cash at a price in excess of its acquisition price. Assuming that the par value method of accounting for treasury stock transactions is used, what is the effect on total equity of each of the following
Acquisition of Treasury Stock:
Reissuance of Treasury Stock:
Decrease
Increase
The par value method treats the acquisition of treasury stock as a constructive retirement and its resale as a new issuance of stock. Thus, the acquisition of treasury stock will be reflected as a decrease in total equity. The reissuance will be accounted for as an increase in total equity.
Nest Co. issued 100,000 shares of common stock. Of these, 5,000 were held as treasury stock at December 31, Year 3. During Year 4, transactions involving Nest’s common stock were as follows:
May 3 - 1,000 shares of treasury stock were sold.
August 6 - 10,000 shares of previously unissued stock were sold.
November 18 - A 2-for-1 stock split took effect.
Laws in Nest’s state of incorporation protect treasury stock from dilution. At December 31, Year 4, how many shares of Nest’s common stock were issued and outstanding?
Shares Issued:
Shares Outstanding:
220,000
212,000
In Nest’s state, stock splits and dividends apply to treasury stock. Accordingly, the number of shares issued is 220,000 [(100,000 + 10,000) × 2]. The number of shares outstanding is 212,000 [(95,000 + 1,000 + 10,000) × 2].
East Corp., a company with a fiscal year-end on October 31, had sufficient retained earnings as a basis for dividends but was temporarily short of cash. East declared a dividend of $100,000 on February 1, Year 3, and issued promissory notes to its shareholders in lieu of cash. The notes, which were dated February 1, Year 3, had a maturity date of January 31, Year 4, and a 10% interest rate. How should East account for the scrip dividend and related interest?
Debit retained earnings for $100,000 on February 1, Year 3, and debit interest expense for $7,500 on October 31, Year 3.
When a scrip dividend is declared, retained earnings should be debited and scrip dividends (or notes) payable should be credited for the amount of the dividend ($100,000) excluding interest. Interest accrued on the scrip dividend is recorded as a debit to interest expense up to the balance sheet date with a corresponding credit for interest payable. Thus, interest expense will be debited and interest payable credited for $7,500 [$100,000 × 10% × (9 months ÷ 12 months)] on 10/31/Year 3.
At its date of incorporation, Glean, Inc., issued 100,000 shares of its $10 par common stock at $11 per share. During the current year, Glean acquired 30,000 shares of its common stock at a price of $16 per share and accounted for them by the cost method. Subsequently, these shares were reissued at a price of $12 per share. Glean had made no other issuances or acquisitions of its own common stock. What effect does the reissuance of the stock have on the following accounts?
Retained Earnings:
Additional Paid-in Capital:
Decrease
No effect
When shares are issued for an amount greater than their par value, the difference is credited to additional paid-in capital. Under the cost method, the treasury stock account should be debited for the price of reacquired shares. If the treasury stock is reissued for an amount less than its acquisition cost, the difference between the acquisition cost and the reissuance price should be debited to additional paid-in capital from treasury stock transactions to the extent it has a credit balance from previous transactions. However, Glean has not previously reissued treasury stock. Thus, it has a zero balance in this account. Thus, Glean must debit cash for $360,000 (30,000 shares × $12 reissuance price per share), debit retained earnings for $120,000 [30,000 shares × ($16 cost per share – $12)], and credit treasury stock for $480,000 (30,000 shares × $16 cost per share).
During the current year, Onal Co. purchased 10,000 shares of its own stock at $7 per share. The stock was originally issued at $6. The firm sold 5,000 of the treasury shares for $10 per share. The firm uses the cost method to account for treasury stock. What amount should Onal report in its income statement for these transactions?
$0
An entity’s transactions in its own stock do not affect net income or the results of operations.
Baker Co. issued 100,000 shares of common stock in the current year. On October 1, Baker repurchased 20,000 shares of its common stock on the open market for $50.00 per share. At that date, the stock’s par value was $1.00 and the average issue price was $40.00 per share. Baker uses the cost method for treasury stock transactions. On December 1, Baker reissued the stock for $60.00 per share. What amount should Baker report as treasury stock gain at December 31?
$0
An entity’s transactions in its own stock do not affect net income or the results of operations. Thus, no gain or loss is recognized on treasury stock transactions.
A corporation declared a dividend, a portion of which was liquidating. How does this declaration affect each of the following?
Additional Paid-in Capital:
Retained Earnings:
Decrease
Decrease
The portion of a dividend that is liquidating results in a distribution in excess of the corporation’s retained earnings. The effect of a liquidating dividend is to decrease contributed capital. Additional paid-in capital is debited first to the extent available before other contributed capital accounts are charged. Thus, declaration of a cash dividend, a portion of which is liquidating, decreases both additional paid-in capital and retained earnings.
Earl was engaged by Farm Corp. to perform consulting services. Earl’s compensation for these services consisted of 1,000 shares of Farm’s $10 par value common stock, to be issued to Earl on completion of Earl’s services. On the execution date of Earl’s employment contract, Farm’s stock had a market value of $40 per share. Six months later, when Earl’s services were completed and the stock issued, the stock’s market value was $50 per share. Farm’s management estimated that Earl’s services were worth $100,000 in cost savings to the company. As a result of this transaction, additional paid-in capital should increase by
$30,000
When stock is issued in exchange for property or services, the transaction should be recorded at the fair value of the stock or of the property or services received, whichever is more clearly determinable. In this case, the value of the stock should be used to measure this transaction because it is more clearly determinable given market prices than the value of the services. The market price used to measure the transaction is that in effect at the date of the agreement. Accordingly, Farm debits consulting expense for $40,000 (1,000 shares × $40 market price), credits common stock for $10,000 (1,000 shares × $10 par value), and credits additional paid-in capital for the difference ($40,000 – $10,000 = $30,000).
Long Co. had 100,000 shares of common stock issued and outstanding at January 1. During the year, Long took the following actions:
March 15 - declared a 2-for-1 stock split, when the fair value of the stock was $80 per share
December 15 - declared a $.50 per share cash dividend
In Long’s statement of changes in equity for the year, what amount should Long report as dividends?
$100,000
The 100,000 shares of common stock split 2-for-1, leaving 200,000 shares at year-end. The dividends declared equaled $100,000 (200,000 shares × $0.50).
Selected information from the accounts of Row Co. at December 31, Year 4, follows:
Total income since incorporation: $420,000
Total cash dividends paid: 130,000
Total value of property dividends distributed: 30,000
Excess of proceeds over cost of treasury stock sold, accounted for using the cost method: 110,000
In its December 31, Year 4, financial statements, what amount should Row report as retained earnings?
$260,000
Retained earnings is increased by net income and decreased by net losses, dividends, and certain treasury stock transactions. Thus, retained earnings is $260,000 ($420,000 – $130,000 – $30,000). Because Row uses the cost method to account for treasury stock, the $110,000 excess of proceeds over the cost of treasury stock sold does not affect retained earnings. Under the cost method, the excess should be credited to additional paid-in capital.
On December 1, Year 4, Nilo Corp. declared a property dividend to be distributed on December 31, Year 4, to shareholders of record on December 15, Year 4. On December 1, Year 4, the property to be transferred had a carrying amount of $60,000 and a fair value of $78,000. What is the effect of this property dividend on Nilo’s Year 4 retained earnings, after all nominal accounts are closed?
$60,000 decrease
When a corporation declares a dividend consisting of tangible property, the property is first 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. The distribution is recognized by a debit to property dividend payable and a credit to the property. The net effect of recognition of the gain and the declaration of the dividend is a $60,000 decrease in retained earnings ($78,000 fair value of the property dividend – $18,000 gain).
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.
When collectibility is reasonably assured, the excess of the subscription price over the stated value of no-par common stock subscribed should be recorded as
Additional paid-in capital when the subscription is recorded.
The accounting for subscriptions of no-par stock with a stated value is the same as for par value stock. 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 stated value of the shares subscribed, with the excess of the subscription price over the stated value recognized as additional paid-in capital.
Ole Corp. declared and paid a liquidating dividend of $100,000. This distribution resulted in a decrease in Ole’s
Additional Paid-in Capital:
Retained Earnings:
Yes
No
The portion of a dividend that is liquidating results in a distribution in excess of the corporation’s retained earnings. Thus, by definition, declaration and payment of a liquidating dividend does not affect retained earnings.
