Chapter 3 (Unit 3 Pt 1) Stockholders' Equity and Earnings Per Share

Question 1

What are the rights of a Common Shareholder?

Answer 1

Voting for the board of directors

Participate in the earnings of the firm through dividends (after preferred shareholders)

Liquidation Rights - share in assets upon liquidation of the firm (after preferred shareholders)

Question 2

What are the rights of a Preferred Shareholder?

Answer 2

Participate in the earnings of the firm through dividends (before common shareholders)

Liquidation Rights - share in assets upon liquidation of the firm (before common shareholders)

CanNOT vote for the board of directors

Question 3

Define stock that is “authorized and unissued.”

Answer 3

Authorized is the maximum number of shares a corporation can issue. Unissued means that it is not yet in the hands of shareholders.

Question 4

Define stock that is “issued and outstanding.”

Answer 4

After being authorized, the amount of stock (common and preferred) that have been sold to shareholders and fully paid for by those shareholders.

Outstanding does NOT include Treasury stock held.

Question 5

Define stock that is “issued and in the treasury.”

Answer 5

Stock that is not outstanding (in the hands of the shareholders).

Question 6

Define stock that is “retired.”

Answer 6

Stock that has been taken off the market (put in the treasury) with no intent to reissue.

Question 7

How do you determine the number of shares outstanding?

Answer 7

Number of shares issued - number of shares in the treasury.

Question 8

What does it mean when treasury stock is “reissued?”

Answer 8

That amount of treasury stock moves to the stock currently outstanding (not stock issued).

Question 9

XEY Corp. authorized 2,000,000 shares of common stock. On January 1, 2022, XEY had 420,00 shares of common stock issued and 385,000 shares of common stock outstanding. The entity had the following transactions during 2022:

March 1 - Issued 100,000 shares of common stock
June 1 - Reissued 15,000 shares of treasury stock
Sept 1 - Completed a 2-for-1 common stock split
Dec 1 - Purchased 2,000 shares of treasury stock

What is the total number os shares of common stock that the entity has issued and outstanding at the end of 2022?

Answer 9

Issued:
(420,000 + 100,000) x 2 = 1,040,000 shares

Outstanding:
([385,000 + 100,000 + 15,000] x 2) - 2,000 = 998,000

Question 10

What entries are made when Preferred Stock is called or redeemed? (2)

Answer 10

1. Record Dividends in Arrears (if any)

DR: Dividends Face x Dividend Rate
CR: Cash

2. Record the call or redemption

DR: Preferred Stock (remove)
DR: APIC - Preferred Stock (remove)
DR: Retained Earnings (DR Plug)
CR: APIC - Retirement of Preferred Stock (CR Plug)
CR: Cash Price Paid

Question 11

An issue of preferred stock at $100 par, with a preferred dividend of 7%, and $1,000 shares outstanding is called for 101. The dividend for this year has not yet been paid. All prior dividends have been paid.

What are the journal entries to record this transaction? (2)

Answer 11

1. Record Dividends in Arrears (if any)

Dr: Dividneds 7,000
CR: Cash 7,000

2. Record the call

DR: Preferred Stock 100,000
DR: Retained Earnings 1,000
CR: Cash 101,000

Question 12

What entries are made when Preferred Stock is converted? (2)

Answer 12

1. Record Dividends in Arrears (if any)

DR: Dividends Face x Dividend Rate
CR: Cash

2. Record the conversion into common stock

DR: Preferred Stock (remove)
DR: APIC - Preferred Stock (remove)
DR: Retained Earnings (DR Plug)
CR: APIC - Common Stock (CR Plug)
CR: Common Stock Par

Question 13

An issue of preferred stock at $100 par, with a preferred dividend of 7%, and 1,000 shares outstanding is converted into $1 par common stock at a rate of four shares of common per share of preferred.

The preferred stock was issued for $102.

The dividends for this year have not yet been paid. All prior dividends have been paid.

What are the journal entries to record this transaction? (2)

Answer 13

1. Record Dividends in Arrears (if any)

DR: Dividends 7,000
CR: Cash 7,000

2. Record the conversion into common stock

DR: Preferred Stock 100,000
DR: APIC - Preferred Stock 2,000
CR: APIC - Common Stock 98,000
CR: Common Stock 4,000

Question 14

How is Mandatorily Redeemable Preferred Stock classified and reported?

Answer 14

Classified as a debt.
It is initially reported at fair value.
Dividends are reported as interest expense.

Question 15

Assume 2,000 shares of $3 par common stock are issued for $12 per share.

What is the journal entry to record this transaction?

Answer 15

DR: Cash 24,000
CR: Common Stock 6,000
CR: APIC Common Stock 18,000

Question 16

How does it affect the journal entry if stock is considered No Par?

Answer 16

There is no APIC account.

If the stock is no-par value but a stated value per share is given, use the stated value as if it were par value.

Question 17

Assume 2,000 shares of $3 par common stock are issued for $12 per share and incurs $1,000 of stock issue costs

What is the journal entry to record this transaction?

Answer 17

DR: Cash 23,000
DR: Common Stock 6,000
DR: APIC Common Stock 17,000

Annual costs of maintaining the stockholder records are expensed as incurred.

Question 18

A firm issues 2,000 shares of $2 par common stock in exchange for land appraised at $32,000. The market price per share on the date of issue is $15.

a) What information is used to assign value to the asset and stock issued?

b) What is the journal entry to record this transaction?

Answer 18

a) Use the value with the more reliable fair value to record the transaction.

The market value is considered more reliable than the appraisal of the land.

If the stock is not actively traded, us the far value of the asset received.

b)
DR: Land 30,000
CR: Common Stock 4,000
CR: APIC Common Stock 26,000

Question 19

Define Stock Issued on Subscription

Answer 19

Corporations may issue stock in exchange for a promissory note.

Enticement for investors to purchase stock over a long period of time. This retains shareholders longer.

No commissions - cheaper for the shareholder.

Usually shares are not issued until fully paid.

Question 20

On January 1, an investor contracts for the purchase of 1,000 shares of $1 par common stock at a subscription price of $10.

a) What is the journal entry to record this transaction?

Assume on June 30 the investor pays $10,000 and 1,000 shares are issued.

b) What is the journal entry to record this transaction?

Now assume that no payment was made in June and on Dec 30, the investor pays $6,000 and defaults on the remainder.

c) What are the journal entries to record this transaction(3)?

Answer 20

a)
DR: Stock Subscription Receivable 10,000
CR: Common Stock Subscribed 1,000
CR: APIC - Common Stock 9,000

Common Stock Subscribed account is a holding account until the stock is actually issued (once fully paid).

The Stock Subscription Receivable account is a contra OE account so the net impact on Owners’ Equity zeros out.

b)
DR: Cash 10,000
CR: Stock Subscriptions Receivable 10,000

DR: Common Stock Subscribed 1,000
CR: Common Stock 1,000

c)
Record Receipt of Cash
DR: Cash 6,000
CR: Stock Subscriptions Receivable 6,000

Record Issuance of Stock
DR: Common Stock Subscribed 600
CR: Common Stock 600

Record the Default on $4,000 and 400 Shares
DR: Common Stock Subscribed 400
DR: APIC - Common Stock 3,600
CR: Stock Subscriptions Receivable 4,000

Question 21

On July 1, Cove Corp., a closely-held corporation, issued 6% bonds with a maturity value of $60,000, together with 1,000 shares of its $5 par value common stock, for a combined cash amount of $110,000. The market value of Cove’s stock cannot be ascertained. If the bonds were issued separately, they would have sold for $40,000 on an 8% yield to maturity basis. What amount should Cove report for additional paid-in capital on the issuance of the stock?

Answer 21

Lump sum receipt $110,000
Less: FMV of the Bonds (40,000) = 70,000

Balance allocated to common 70,000
Less: Par of common (5,000) = $65,000

APIC of Common = $65,000

Question 22

What journal entry is made when cash dividends are declared?

Answer 22

DR: Dividends Declared (or RE) xxx
CR: Dividends Payable xxx

Question 23

What journal entry is made when cash dividends are paid out to shareholders?

Answer 23

DR: Dividends Payable xxx
CR: Cash xxx

Question 24

What is the most common example of Property Dividends?

Answer 24

Most common is a transfer of securities in other entities.

Question 25

How is a Property Dividend valued?

Answer 25

The dividend is measured at fair value at the date of declaration.

A gain or loss is recorded on the asset distributed.

Ex. company transferring securities of another entity; Pam Corp. transferring stock in Apple; Pam Corp. marks their Apple securities to its fair value, recognize a gain or loss, and then use that as a transfer.

Question 26

A firm declares a property dividend in the form of shares of stock held as an investment and accounted for by the fair value method.

The shares were purchased earlier in the year for $400,000.

At the date of declaration, the shares are worth $430,000.

a) What are the journal entries at declaration (2)?

b) What is the journal entry at payment?

Answer 26

a) At Declaration:
DR: Investment in Stock 30,000
CR: Gain on Investment 30,000

DR: Dividends Declared (or RE) 430,000
CR: Property Dividends Payable 430,000

b) At Payment:
DR: Property Dividends Payable 430,000
CR: Investment in Stock 430,000

Question 27

Define Scrip Dividend

Answer 27

Company declares a dividend but doesn’t have the cash to pay the dividend

Scrip - coming from scrap of paper; IOU

Question 28

URGR8 Company declares a dividend of $0.40 per share (10,000 shares outstanding). URG8 does not have the cash to pay the dividend, so it promises to pay shareholders the dividend in 6 months, plus 10% interest.

What are the journal entries at declaration and at payment?

Answer 28

At Declaration:
DR: Dividends Declared (or RE) 4,000
CR: Scrip Dividends Payable 4,000

At Payment:
DR: Scrip Dividends Payable 4,000
DR: Interest Expense 200 (4,000 x 0.10 x 6/12)
CR: Cash 4,200

Question 29

What is the difference between Small and Large stock dividends?

Answer 29

Small stock dividends:
are < 20-25% of outstanding shares on the date of declaration.

Capitalized at fair value on the declaration date. (So small they are not going to affect the market price)

Large stock dividends:
are >= 20-25% of outstanding shares on the date of declaration.

Capitalized at par value. (So many new stocks, the market price may be affected)

Question 30

100,000 shares of $3 par common are issued and 10,000 treasury shares are held. A 10% stock dividend is distributed. Market price of the stock was $9.

What is the journal entry at declaration?

Answer 30

10% stock dividend = small = use market price, not par

At declaration:
DR: Retained Earnings 81,000 (90,000 x .10 x $9)
CR: Common Stock 27,000 (90,000 x .10 x $3)
CR: APIC - CS 54,000

Question 31

100,000 shares of $3 par common are issued and 10,000 shares are held. A 50% stock dividend is distributed. Market price of the stock was $9.

What is the journal entry at declaration?

Answer 31

50% stock dividend = large = use par, not market price

At declaration:
DR: Retaining Earnings 135,000 (90,000 x 0.50 x $3)
CR: Common Stock 135,000

Question 32

How is a Stock Split handled on the books and how does it affect:

of shares outstanding

par value

equity accounts

market price

Answer 32

A stock split is not a dividend.

No journal entry is required.

A stock split increases the number of shares outstanding and decreases the par or stated value.

Equity accounts are not affected.

Reduces the market price

Question 33

What happens if a stock split is effected in the form of a stock dividend?

Answer 33

The split cuts the par value in half

APIC - Common is debited rather than retained earnings

Question 34

Assume 100,000 shares of $3 par common are issued and 10,000 in treasury shares are held. A 50% stock split effected in the form of a stock dividend is distributed; market price of stock was $9.

What is the journal entry at declaration?

Answer 34

At declaration:
DR: APIC - Common Stock 135,000 (90,000 x 0.50 x $3)
CR: Common Stock 135,000

Question 35

What are the two methods of accounting for Treasury Stock and how do they differ?

Answer 35

1. Cost method - debits the treasury stock account at cost
2. Par method - debits the treasury stock account at par

At reissuance, the treasury stock account is credited for cost or par.

Question 36

When treasury stock is acquired, how is total stockholders’ equity affected?

Answer 36

When treasury stock is acquired, total stockholders’ equity decreases by the amount of cash paid.

Question 37

When treasury stock is reissued, how is total stockholders’ equity affected?

Answer 37

When treasury stock is reissued, total stockholders’ equity increases by the amount of cash received.

Question 38

The common stock of Jones Corporation is currently selling at $100 per share. The directors wish to reduce the share price and increase share volume prior to a new issue. The per share pare value is $10; book value is $60 per share. 400,000 are issued and outstanding.

Prepare the journal entries and or memorandums assuming the following:

The board votes a 2-for-1 stock split.

Answer 38

There is no entry.

The company will make a memorandum note to indicate:
-the increase in issued and outstanding shares to 800,000.
-the par value per share is now $5

Question 39

The common stock of Jones Corporation is currently selling at $100 per share. The directors wish to reduce the share price and increase share volume prior to a new issue. The per share pare value is $10; book value is $60 per share. 400,000 are issued and outstanding.

Prepare the journal entries and or memorandums assuming the following:

The board votes a 50% stock dividend.

Answer 39

At date of declaration:

DR: Retained Earnings 2,000,000 (400,000 x 0.50 x 10)
CR: Common Stock Dividend Distributable 2,000,000

At date of distribution:

DR: Common Stock Dividend Distributable 2,000,000
CR: Common Stock 2,000,000

Question 40

During its first quarter of operations, Walker Corporation had the following transactions pertaining to its common stock.

Jan 5 - Issued 50,000 shares for cash at $8 per share.
Mar 8 - Issued 8,000 shares to attorneys in payment of a bill for $40,000 for services rendered in helping the company to incorporate.
Mar 23 - Issued 10,000 shares for cash at $10 per share.

Prepare the journal entries for these transactions, assuming that the common stock has a par value of $4 per share.

Answer 40

Jan 5
DR: Cash 400,000
CR: Common Stock 200,000
CR: APIC - CS 200,000

Mar 8
DR: Organization Expense 40,000
CR: Common Stock 32,000
CR: APIC - CS 8,000

Mar 23
DR: Cash 100,000
CR: Common Stock 40,000
CR: APIC - CS 60,000

Question 41

During its first quarter of operations, Walker Corporation had the following transactions pertaining to its common stock.

Jan 5 - Issued 50,000 shares for cash at $8 per share.
Mar 8 - Issued 8,000 shares to attorneys in payment of a bill for $40,000 for services rendered in helping the company to incorporate.
Mar 23 - Issued 10,000 shares for cash at $10 per share.

Prepare the journal entries for these transactions, assuming that the common stock is no-par with a stated value of $3 per share.

Answer 41

When no-par stock has a stated value, the stated value serves the same purpose as par value.

Jan 5
DR: Cash 400,000
CR: Common Stock 150,000
CR: APIC - CS 250,000

Mar 8
DR: Organization Expense 40,000
CR: Common Stock 24,000
CR: APIC - CS 16,000

Mar 23
DR: Cash 100,000
CR: Common Stock 30,000
CR: APIC - CS 70,000

Question 42

Proportional Method
Dave Matthew Inc. issues 500 shares of $9 par value common stock and 100 shares of $106 par value preferred stock for a lump sum of $105,000.

Prepare the journal entry for the issuance when the market price of the common shares is $166 each and market price of the preferred is $213 each.

Answer 42

DR: Cash 105,000
CR: Common Stock 4,500
CR: APIC - CS 79,057
CR: Preferred Stock 10,600
CR: APIC - PS 10,843

Question 43

Incremental Method
Dave Matthew Inc. issues 500 shares of $9 par value common stock and 100 shares of $106 par value preferred stock for a lump sum of $105,000.

Prepare the journal entry for the issuance when only the market price of the common stock is known and it is $179.80 per share.

Answer 43

DR: Cash 105,000
CR: Common Stock 4,500
CR: APIC - CS 85,400
CR: Preferred Stock 10,600
CR: APIC - PS 4,500