Exam 2 Problems

Question 1

The stockholders’ equity section of Baxter Corporation’s balance sheet on December 31, 2025 is as follows:

• Preferred stock, 9%, $100 par value; 2,000 shares issued: 200,000
• Paid-in capital in excess of par - Preferred stock: 100,000
• Common stock, $1 par value; 1,000,000 shares authorized; 400,000 shares issued and outstanding: 400,000
• Paid-in capital in excess of par - Common stock: 1,000,000
• Retained earnings: 3,500,000
  = 5,200,000

Record the following events that occurred during 2026:

a) Issued 20,000 shares of common stock in exchange for equipment. The equipment has a list price of $115,000. The market price of the stock on the date of the exchange was $5.50 per share.

b) Issued for a lump-sum amount of $400,000: 50,000 shares of common stock with a current market value of $6.50 and 500 shares of preferred stock with a current market value $165 per share.

Answer 1

a)
D - Equipment (20,000 x 5.50): 110,000
C - Common Stock (20,000 x 1): 20,000
C - Paid-in Capital Excess of Par - Common Stock: 90,000

b)
D - Cash: 400,000
C - Preferred Stock (500 x 100): 50,000
C - Paid-in Capital - Preferred Stock: 30,982
C - Common Stock (50,000 x 1): 50,000
C - Paid-in Capital - Common Stock: 269,018

Question 2

Maggie Company’s balance sheet shows:
- Common stock,$3 par, 300,000 shares: 900,000
- Paid-in capital in excess of par - Common: 1,500,000
- Retained earnings: 750,000

Record the following transactions:
a) Purchased 15,000 shares of its common stock at $12 per share
b) Sold 6,000 treasury shares at $13 per share
c) Sold 4,000 shares of treasury stock at $10 per share

Answer 2

a)
D - Treasury Stock (15,000 x 12): 180,000
C - Cash: 180,000

b)
D - Cash (6,000 x 13): 78,000
C - Treasury Stock (6,000 x 12): 72,000
C - Paid-in Capital - Sale of Treasury Stock: 6,000

c)
D - Cash (4,000 x 10): 40,000
D - Paid-in Capital - Sale of Treasury Stock: 6,000
D - Retained Earnings: 2,000
C - Treasury Stock (4,000 x 12): 48,000

Question 3

The stockholders’ equity section of Melton Corporation’s balance sheet as of December 31, 2025 is as follows:

• Common stock, $2 par value; authorized, 2,000,000 shares; issued, 600,000 shares: 1,200,000
• Paid-in capital in excess of par: 4,900,000
• Retained earnings: 2,700,000
  = 8,800,000

Record the following events that occurred during 2026:

• 1/5: 15,000 shares of common stock were issued at $12 per share
• 1/10: Declared a cash dividend of $0.50 per share, payable 2/10 to stockholders of record on 2/1
• 3/1: 25,000 shares of common stock were issued for $12.50 per share
• 3/5: A 10% common stock dividend was declared. Market value per share is currently $14
• 3/30: The common stock dividend is distributed
• 8/1: A two-for-one common stock split was carried out. Fair value on 8/1 was $7 per share
• 11/1: A 40% common stock dividend was declared. Market value is currently $8 per share
• 11/30: The common stock dividend is distributed
• 12/1: A cash dividend of $0.25 per share was declared, payable 12/31 to stockholders of record on 12/15

1. Record the journal entries for each date given. If there is no entry on that date, write “No Entry”.
2. Answer the following questions:
   a) What is the number of common shares outstanding on December 31, 2026?
   b) What is the balance in Retained Earnings on December 31, 2026 if Net Income is $1,250,000?

Answer 3

1. 1/5:
   D - Cash (15,000 x 12): 180,000
   C - Common Stock (15,000 x 2): 30,000
   C - Paid-in Capital - Excess of Par: 150,000

1/10:
D - Retained Earnings: 307,500
C - Dividends Payable (615,000 x 0.50): 307,500

2/1: No Entry

2/10:
D - Dividends Payable: 307,500
C - Cash: 307,500

3/1:
D - Cash (25,000 x 12.50): 312,500
C - Common Stock (25,000 x 2): 50,000
C - Paid-in Capital - Excess of Par: 262,500

3/5:
D - Retained Earnings (64,000 x 14): 896,000
C - Common Stock Distributable: 128,000
C - Paid-in Capital Excess of Par: 768,000

3/30:
D - Common Stock Distributable: 128,000
C - Common Stock: 128,000

8/1: No Entry

11/1:
D - Retained Earnings (563,200 x 1): 563,200
C - Common Stock Distributable: 563,200

11/30:
D - Common Stock Distributable: 563,200
C - Common Stock: 563,200

12/1:
D - Retained Earnings: 492,800
C - Dividends Payable (1,971,200 x 0.25): 492,800

12/15: No Entry

12/31:
D - Dividends Payable: 492,800
C - Cash: 492,800

2a. Common Shares:
600,000 + 15,000 (1/5) = 615,000
615,000 + 25,000 (3/1) = 640,000
640,000 + 64,000 (3/5) = 704,000
704,000 x 2 (8/1): 1,408,000
1,408,000 + 563,200 = 1,971,200
Common shares outstanding: $1,971,200

2b. Retained Earnings:
2,700,000
307,500 - 896,000 - 563,200 - 492,800 = 1,250,000
2,700,000 - 1,250,000 = 1,690,500
Retained Earnings: $1,690,500

Question 4

On January 1, 2025, Reese Corporation had 250,000 shares of $1 par common stock outstanding. The market price of the stock was $5.50 per share. The following occurred during 2025:
- 2/1: Issued 15,000 shares of common stock at $6.50 per share
- 5/1: Declared and distributed a 10% stock dividend
- 6/1: Declared and issued a 2-for-1 stock split
- 7/1: Purchased on the market 5,000 of its own outstanding shares as treasury stock for $8.00 per share
- 9/1: Reissued the 5,000 treasury shares at $9.00 per share
- 12/1: Declared and distributed a 35% stock dividend

Compute the weighted average number of shares to be used in computing earnings per share for 2025.

Answer 4

250,000 + 15,000 (2/1) = 265,000

265,000 x 10% = 26,500
265,000 + 26,500 (5/1) = 291,500

291,500 x 2 (6/1) = 583,000
583,000 - 5,000 (9/1) = 578,000
578,000 + 5,000 (9/1) = 583,000

583,000 x 35% = 204,050
583,000 + 204,050 (12/1): 787,050

Question 5

Information for Elden Corporation for 2026:

• Net Income of $2,500,000
• Weighted average common shares outstanding of 900,000
• During all of 2026, there were 50,000 shares of 5%, $100 par, cumulative, convertible preferred stock
• During all of 2026, there were 50,000 shares of 5%, $100 par, cumulative, convertible
  preferred stock outstanding. No dividends had been declared or paid in 2026. Each share is convertible into four shares of common stock
• Elden has 100,000 options to buy common stock at $75 a share. The market price of the common stock averaged $100 during 2026.
• Elden issued $2,000,000 of 6%, 5-year, convertible bonds at 103 on January 1, 2026. Interest is paid annually on December 31. Elden uses straight-line amortization of bond discount or premium. Each $1,000 bond is convertible into 50 shares of common stock.
• Elden had a $1,500,000, 5%, 8-year, convertible bond outstanding during all of 2026. The bonds had been issued at their face amount. Interest is paid semiannually on June 30 and December 31. Each $1,000 bond is convertible into 17 shares of common stock.
• Tax rate is 25%.

Compute basic and diluted earnings per share for 2026.

Answer 5

Preferred dividends:
50,000 x (5% x 100) = 250,000

Basic EPS: 2.50
(2,500,000 - 250,000) / 900,000 = 2.50

1. Options:
   100,000 x 75 = 7,500,000
   7,500,000 / 100 = 75,000
   100,000 - 75,000 = 25,000 shares
   0 / 25,000 = 0 (1st)
2. Preferred stock
   50,000 x 4 = 200,000
   250,000 / 200,000 = 1.25 (3rd)
3. Bonds #1:
   2,000,000 x 3% = 60,000
   60,000 / 5 = 12,000
   (2,000,000 x 6%) - 12,000 = 108,000
   108,000 x (1 - 0.25) = 81,000
   (2,000,000 / 1,000) x 50 = 100,000
   81,000 / 100,000 = 0.81 (2nd)
4. Bonds #2:
   1,500,000 x 5% = 75,000
   75,000 x (1 - 0.25) = 56,250
   (1,500,000 / 1,000) x 17 = 25,500
   56,250 / 25,500 = 2.21 (4th)

Bonds #2 is anti-dilutive.

Add Options:
2,500,000 - 250,000 + 0 = 2,250,000
/
900,000 + 25,000 = 925,000
= 2.43

Add Bonds #1:
2,250,000 + 81,000 = 2,331,000
/
925,000 + 100,000 = 1,025,000
= 2.27

Add Preferred Stock:
2,331,000 + 250,000 = 2,581,000
/
1,025,000 + 200,000 = 1,225,000
= 2.11

Diluted EPS: 2.11

Question 6

Bond interest paid is equal to the…?

Answer 6

Face amount of the bonds multiplied by the stated interest rate.