Ch 18

Question 1

Shareholders’ Equity =

Answer 1

(Assets - Liabilities) - Residual Interest in Asset

Question 2

Advantages of a Corp

Answer 2

1. Continuous Existence
2. Easy ownership transfer
3. Easy to raise capital
4. limited liability

Question 3

Disadvantage of a Corp

Answer 3

1. Double Taxation

2. Government regulation

Question 4

Authorized Shares

Answer 4

Max # of shares of capital stock sold to public

Question 5

Treasury Shares

Answer 5

Issued shares reacquired by the Corp

Question 6

Retired Shares

Answer 6

same status as authorized(Max # of shares of capital stock sold to public) but unissued shares

Question 7

Types of issued shares?

Answer 7

Outstanding shares

Treasury shares

Question 8

Common Stock Right?

Answer 8

Right to vote on matters, share in profits wen dividends, share in asset distribution

Question 9

Par Value Stock

Answer 9

Dollar amt per share as stated in the corporate charter

Question 10

No-par stock

Answer 10

Dollar amt per share is not stated in the corporate charter

“Company can assign a stated value per share

Question 11

How to deal with shares issued for noncash consideration?

Answer 11

use general valuation principle by using fair value of stock given up or fair value of asset received.

“Whichever is more clearly evident.”

Question 12

If market values cannot be determined?

Answer 12

Use appraised values

Question 13

Why do companies buy back their own stock?

Answer 13

1. Market price of stock is undervalued
2. Distribute profits without paying dividends
3. offset increase in shares issued under employee stock plans
4. Distribute a stock dividend

Question 14

Shares formally retired

Answer 14

Reduce (Common, preferred stock, addl paid-in capital)

Question 15

Shared treated as treasury stock

Answer 15

Record at cost when acquired

Credit treasury stock at cost when resold

Difference between buyback & resale price is recorded as “paid-in capital – share repurchase

Treasury shares have no voting, dividend rights

Question 16

Stock Splits(SS)

Answer 16

Stock splits change the par value per share & the number of shares outstanding, but the total par value is unchanged, & no journal entry is required.

Question 17

Preferred Stock

Answer 17

Generally don’t have voting rights.

Right to specified dividend amt before common share dividends are paid

Preference in asset distribution during liquidation

May be convertible, callable, and/or redeemable

Question 18

Schaeffer Corporation reports $50 million accumulated other comprehensive income in its balance sheet as a component of shareholders’ equity. In a related statement reporting comprehensive income for the year, the company reveals net income of $400 million and other comprehensive income of $15 million. What was the balance in accumulated other comprehensive income in last year’s balance sheet?

Answer 18

Two attributes of other comprehensive income are reported:

(1) the components of comprehensive income created during the reporting period = $15 million
(2) the comprehensive income accumulated over the current and prior periods = $50 million

Comprehensive Income = $50 - $15 = $35 last year

Question 19

Penne Pharmaceuticals sold 8 million shares of its $1 par common stock to provide funds for research and development. If the issue price is $12 per share, what is the journal entry to record the sale of the shares?

Answer 19

Cash (8 * 12 per share) - Dr. 96
CS(8*1 par per share) - Cr. 8
Paid-in capital–excess of par(diff) - Cr. 88

Question 20

Lewelling Company issued 100,000 shares of its $1 par common stock to the Michael Morgan law firm as compensation for 4,000 hours of legal services performed. Morgan’s usual rate is $240 per hour. By what amount should Lewelling’s paid-in capital—excess of par increase as a result of this transaction?

Answer 20

Lewelling’s paid-in capital—excess of par will increase by “$860,000”: 4,000 hours x $240 less $100,000 par.

Legal expense (4,000 hours x $240)		960,000
	Common stock (100,000 shares x $1 par per share)			100,000
	Paid-in capital—excess of par (remainder)			860,000

Question 21

Hamilton Boats issued 175,000 shares of its no par common stock to Sudoku Motors in exchange for 1,000 fourstroke outboard motors that normally sell in quantity for $3,500 each. By what amount should Hamilton’s shareholders’ equity increase as a result of this transaction?

Answer 21

Hamilton’s shareholders’ equity will increase by $3,500,000 as a result of this transaction.

Inventory of motors (1,000 x $3,500) 3,500,000
Common stock 3,500,000

Question 22

Horton Industries’ shareholders’ equity included 100 million shares of $1 par common stock and a balance in paid-in capital—excess of par of $900 million. Assuming that Horton retires shares it reacquires (restores their status to that of authorized but unissued shares), by what amount will Horton’s total paid-in capital decline if it reacquires 2 million shares at $8.50 per share?

Answer 22

Horton’s total paid-in capital will decline by $17 million, the price paid to buy back the shares.

Common stock (2 million shares x $1 par) 2
Paid-in capital—excess of par (2 million shares x $9*)18
Paid-in capital—share repurchase (difference) 3

Cash (2 million shares x $8.50 per share)		17 * Paid-in capital—excess of par: $900 ÷ 100 million shares

Question 23

Agee Storage issued 35 million shares of its $1 par common stock at $16 per share several years ago. Last year, for the first time, Agee reacquired 1 million shares at $14 per share. Assuming that Agee retires shares it reacquires (restores their status to that of authorized but unissued shares), by what amount will Agee’s total paid-in capital decline if it now reacquires 1 million shares at $19 per share?

Answer 23

Agee’s total paid-in capital will decline by $18 million because recording the transaction involves a $1 million reduction of retained earnings and an $18 million reduction in paid-in capital accounts.

First buyback ($ in millions)

Common stock (1 million shares x $1 par) 1
Paid-in capital—excess of par (1 million shares x $15*)15
Paid-in capital—share repurchase (difference) 2
Cash (1 million shares x $14) 14
* $16 – $1 par

Second buyback

Common stock (1 million shares x $1 par) 1
Paid-in capital—excess of par (1 million shares x $15*)15
Paid-in capital—share repurchase (balance from first buyback) 2
Retained earnings (difference) 1
Cash (1 million shares x $19) 19
* $16 – $1 par

Question 24

The Jennings Group reacquired 2 million of its shares at $70 per share as treasury stock. Last year, for the first time, Jennings sold 1 million treasury shares at $71 per share. By what amount will Jennings’ retained earnings decline if it now sells the remaining 1 million treasury shares at $67 per share?

Answer 24

Jennings’s retained earnings will decline by $2 million because the $67 million sale price is less than the sum of the cost of the treasury stock ($70 million) and paid-in capital from the previous treasury stock sale ($1 million).

Purchase of treasury stock ($ in millions)

Treasury stock (2 million shares x $70)		140
	Cash			140

First sale of treasury stock

Cash (1 million shares x $71) 71
Treasury stock (1 million shares x $70) 70
Paid-in capital—share repurchase (remainder) 1

Second sale of treasury stock
Cash (1 million shares x $67) 67
Paid-in capital—share repurchase (balance from first sale) 1
Retained earnings (remainder) 2
Treasury stock (1 million shares x $70) 70

Question 25

In previous years, Cox Transport reacquired 2 million treasury shares at $20 per share and, later, 1 million treasury shares at $26 per share. By what amount will Cox’s paid-in capital—share repurchase increase if it now sells 1 million treasury shares at $29 per share and determines cost as the weighted-average cost of treasury shares?

Answer 25

Cox’s paid-in capital—share repurchase will increase by $7 million as determined in the following journal entry: Cash (1 million shares x $29) 29 Paid-in capital—share repurchase (difference) 7 Treasury stock (1 million shares x $22*) 22 * 2 million shares x $20 = $40 million 1 million shares x $26 = 26 million 3 million shares $66 million

Question 26

Following is a recent Microsoft press release: REDMOND, Wash.—March 16, 2016 —Microsoft today announced that its board of directors have declared a quarterly dividend of $0.36 per share. The dividend will be payable on June 9, 2016, to shareholders of record on May 19, 2016. The ex-dividend date will be May 17, 2016. Prepare the journal entries Microsoft used to record the declaration and payment of the cash dividend for its 7,870 million shares.

Answer 26

Declaration date ($ in millions) Retained earnings 2,833 Cash dividends payable (7,870 million shares x $.36) 2,833 Date of record no entry Payment date Cash dividends payable 2,833 Cash 2,833

Question 27

The shareholders’ equity of MLS Enterprises includes $200 million of no par common stock and $400 million of 6% cumulative preferred stock. The board of directors of MLS declared cash dividends of $50 million in 2018 after paying $20 million cash dividends in both 2017 and 2016. What is the amount of dividends common shareholders will receive in 2018?

Answer 27

MLS’s common shareholders’ will receive dividends of $18 million as a result of the 2018 distribution. Preferred Common 2016 $20 million* 0 2017 20 million** 0 2018 32 million*** $18 million (remainder) * $24 million current preference (6% x $400 million), thus $4 million dividends in arrears. * * $24 million current preference (6% x $400 million), thus another $4 million dividends in arrears. * ** $8 million dividends in arrears plus the $24 million current preference.

Question 28

On June 13, the board of directors of Siewert Inc. declared a 5% stock dividend on its 60 million, $1 par, common shares, to be distributed on July 1. The market price of Siewert common stock was $25 on June 13. Prepare the journal entry to record the stock dividend.

Answer 28

``` Retained earnings (3 million* shares at $25 per share) 75 Common stock (3 million* shares at $1 par per share) 3 Paid-in capital—excess of par (remainder) 72 * 5% x 60 million shares = 3 million shares ```

Question 29

Refer to the situation described in BE 18–13, but assume a 2-for-1 stock split instead of the 5% stock dividend. Prepare the journal entry to record the stock split if it is not to be effected in the form of a stock dividend. What is the par per share after the split? 13. On June 13, the board of directors of Siewert Inc. declared a 5% stock dividend on its 60 million, $1 par, common shares, to be distributed on July 1. The market price of Siewert common stock was $25 on June 13. Prepare the journal entry to record the stock dividend.

Answer 29

If a stock split is not to be effected in the form of a stock dividend, no entry is recorded. Since the shares double, but the balance in the common stock account is not changed, the par per share is reduced, to $.50 in this instance.

Question 30

Refer to the situation described in BE 18–13, but assume a 2-for-1 stock split instead of the 5% stock dividend. Prepare the journal entry to record the stock split if it is to be effected in the form of a 100% stock dividend. What is the par per share after the split? 13. On June 13, the board of directors of Siewert Inc. declared a 5% stock dividend on its 60 million, $1 par, common shares, to be distributed on July 1. The market price of Siewert common stock was $25 on June 13. Prepare the journal entry to record the stock dividend.

Answer 30

``` Paid-in capital—excess of par** 60 Common stock (60 million shares* x $1 par per share) 60 ``` **alternatively, retained earnings may be debited * 100% x 60 million shares = 60 million shares If the per share par value of the shares is not to be changed, the stock distribution is referred to as a "stock split effected in the form of a stock dividend." In that case, the journal entry increases the common stock account by the par value of the additional shares. This prevents the increase in shares from reducing (by half in this case) the par per share. The par is $1 before and after the split.

Question 31

Indicate by letter whether each of the items listed below most likely is reported in the income statement as Net Income (NI) or in the statement of comprehensive income as Other Comprehensive Income (OCI). Items _____ 1� Increase in the fair value of available-for-sale debt securities _____ 2� Gain on sale of land _____ 3� Loss on pension plan assets (actual return less than expected) _____ 4� Adjustment for foreign currency translation _____ 5� Increase in the fair value of investments in common stock securities _____ 6� Loss from revising an assumption related to a pension plan _____ 7� Loss on sale of patent _____ 8� Prior service cost in defined benefit pension plan _____ 9� Increase in the fair value of bonds outstanding due to change in general interest rates; fair value option _____ 10� Gain on postretirement plan assets (actual return more than expected) The following is a news item reported by Reuters:

Answer 31

Indicate by letter whether each of the items listed below most likely is reported in the income statement as Net Income (NI) or in the statement of comprehensive income as Other Comprehensive Income (OCI). Items OCI 1. Increase in the fair value of available-for-sale debt securities NI 2. Gain on sale of land OCI 3. Loss on pension plan assets (actual return less than expected) OCI 4. Adjustment for foreign currency translation NI 5. Increase in the fair value of investments in common stock securities OCI 6. Loss from revising an assumption related to a pension plan NI 7. Loss on sale of patent OCI 8. Prior service cost in defined benefit pension plan NI 9. Increase in the fair value of bonds outstanding; fair value option OCI 10. Gain on postretirement plan assets (actual return more than expected)

Question 32

WASHINGTON, Jan 29 (Reuters)—Wright Medical Group, a maker of reconstructive implants for knees and hips, on Tuesday filed to sell 3 million shares of common stock. In a filing with the U.S. Securities and Exchange Commission, it said it plans to use the proceeds from the offering for general corporate purposes, working capital, research and development, and acquisitions. After the sale there will be about 31.5 million shares outstanding in the Arlington, Tennessee-based company, according to the SEC filing. Wright shares closed at $17.15 on Nasdaq. The common stock of Wright Medical Group has a par of $0.01 per share. Required: Prepare the journal entry to record the sale of the shares assuming the price existing when the announcement was made and ignoring share issue costs.

Answer 32

Cash (3 million shares x $17.15 per share) 51,450,000 Common stock (3 million shares x $.01 par per share) 30,000 Paid-in capital—excess of par (remainder) 51,420,000

Question 33

During its first year of operations, Eastern Data Links Corporation entered into the following transactions relating to shareholders’ equity. The articles of incorporation authorized the issue of 8 million common shares, $1 par per share, and 1 million preferred shares, $50 par per share. Required: Prepare the appropriate journal entries to record each transaction. Feb� 12 Sold 2 million common shares, for $9 per share� 13 Issued 40,000 common shares to attorneys in exchange for legal services� 13 Sold 80,000 of its common shares and 4,000 preferred shares for a total of $945,000� Nov� 15 Issued 380,000 of its common shares in exchange for equipment for which the cash price was known to be $3,688,000�

Answer 33

February 12 Cash (2 million shares x $9 per share) 18,000,000 Common stock (2 million shares x $1 par) 2,000,000 Paid-in capital—excess of par (difference) 16,000,000 February 13 Legal expenses (40,000 shares x $9 per share) 360,000 Common stock (40,000 shares x $1 par) 40,000 Paid-in capital—excess of par (difference) 320,000 Note: Because 2 million shares sold the previous day for $9 per share, it’s reasonable to assume a $9 per share fair value. February 13 Cash 945,000 Common stock (80,000 shares x $1 par) 80,000 Paid-in capital—excess of par, common* 640,000 Preferred stock (4,000 shares x $50 par) 200,000 Paid-in capital—excess of par, preferred** 25,000 * 80,000 shares x [$9 market value – $1 par] ** Since the value of the common shares is known ($720,000), the market value of the preferred ($225,000) is assumed from the total selling price ($945,000). November 15 Property, plant, and equipment (cash value) 3,688,000 Common stock (380,000 shares at $1 par per share) 380,000 Paid-in capital—excess of par (difference) 3,308,000

Question 34

Williams Industries has outstanding 30 million common shares, 20 million Class A shares, and 20 million Class B shares. Williams has the right but not the obligation to repurchase the Class A shares if a change in ownership of the voting common shares causes J. P. Williams, founder and CEO, to have less than 50% ownership. Williams has the unconditional obligation to repurchase the Class B shares upon the death of J. P. Williams. Required: Which, if any, of the shares should be reported in Williams’s balance sheet as liabilities? Explain.

Answer 34

Williams Industries must report the 20 million Class B shares among its long-term liabilities in its balance sheet, not as part of shareholders’ equity. The “triggering event,” the death of J.P Williams, is certain to occur even though its timing may not be. A share or other financial instrument is considered to be mandatorily redeemable if it embodies an unconditional obligation that requires the issuer to redeem the instrument with cash or other assets at a specified or determinable date or upon an event certain to occur. Events certain to occur include the death or termination of employment of an individual, since both events, like taxes, are inevitable. Because Williams has the right but not the obligation to repurchase the Class A shares if a change in ownership of the voting common shares changes, there is no unconditional obligation to repurchase the Class B shares. They are classified as equity.

Question 35

ICOT Industries issued 15 million of its $1 par common shares for $424 million on April 11. Legal, promotional, and accounting services necessary to effect the sale cost $2 million. Required: 1. Prepare the journal entry to record the issuance of the shares. 2. Explain how recording the share issue costs differs from the way debt issue costs are recorded.

Answer 35

Requirement 1 ($ in millions) Cash ($424 million – 2 million) 422 Common stock (15 million shares at $1 par per share) 15 Paid-in capital—excess of par (difference) 407 Requirement 2 In recording the sale of shares above, the cost of services related to the sale reduced the net proceeds from selling the shares. Paid-in capital—excess of par is credited for the excess of the proceeds over the par amount of the shares sold, and the issue costs are debited to that same account, thus reducing the account balance. Share issue costs are not subsequently amortized. While debt issue costs are similarly treated in that they reduce the proceeds from issuing debt, they differ in that debt issue costs are amortized to expense over the life of the debt. By doing so, debt issue costs change the effective rate of interest at which the debt is originally issued. The difference in accounting treatment often is justified by the presumption that share issue costs and debt issue costs are fundamentally different because a debt issue has a fixed maturity, but that selling shares represents a perpetual equity interest. Furthering that view is the notion that debt issue costs are part of the expense of borrowing funds for a definite period of time. On the other hand, selling shares represents an equity interest that may be held for as long as the entity is in existence. Just as dividends paid on that capital investment are not an expense, neither are the share issue costs of obtaining that capital investment.