EXERCISE 15-2
(15-20 minutes)
Jan. 10 Cash (80,000 X $5)......................................................................... 400,000
Common
Stock (80,000 X $1).............................................................. 80,000
Paid-in
Capital in Excess of Stated
Value—Common Stock.................................................................... 320,000
(80,000 X $4)
Mar. 1 Cash (5,000 X $108)....................................................................... 540,000
Preferred
Stock (5,000 X $100)............................................................ 500,000
Paid-in
Capital in Excess of Par
Value—Preferred Stock.................................................................... 40,000
(5,000 X $8)
April 1 Land 80,000
Common
Stock (24,000 X $1).............................................................. 24,000
Paid-in
Capital in Excess of Stated
Value—Common Stock.................................................................... 56,000
($80,000 – $24,000)
May 1 Cash (80,000 X $7)......................................................................... 560,000
Common
Stock (80,000 X $1).............................................................. 80,000
Paid-in
Capital in Excess of Stated
Value—Common Stock.................................................................... 480,000
(80,000 X $6)
Aug. 1 Organization Expense*................................................................... 50,000
Common
Stock (10,000 X $1).............................................................. 10,000
Paid-in
Capital in Excess of Stated
Value—Common Stock.................................................................... 40,000
($50,000 – $10,000)
*(In
the past, these costs would have been charged to Organization Costs)
Sept. 1 Cash (10,000 X $9)........................................................................... 90,000
Common
Stock (10,000 X $1).............................................................. 10,000
Paid-in
Capital in Excess of Stated
Value—Common Stock.................................................................... 80,000
(10,000 X $8)
Nov. 1 Cash (1,000 X $112)....................................................................... 112,000
Preferred
Stock (1,000 X $100)............................................................ 100,000
Paid-in
Capital in Excess of Par
Value—Preferred Stock.................................................................... 12,000
(1,000 X $12)
EXERCISE 15-7
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# |
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Assets |
|
Liabilities |
|
Stockholders’ Equity |
|
Paid-in Capital |
|
Retained Earnings |
|
Net Income |
|
|
|
1 |
|
D |
|
NE |
|
D |
|
NE |
|
NE |
|
NE |
|
|
|
2 |
|
I |
|
NE |
|
I |
|
I |
|
NE |
|
NE |
|
|
|
3 |
|
I |
|
NE |
|
I |
|
D |
|
NE |
|
NE |
|
EXERCISE 15-14
|
(a) |
Retained
Earnings (15,000 X $37)................................. |
555,000 |
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|
|
Common Stock Dividend |
|
|
|
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Distributable........................................................... |
|
150,000 |
|
|
Paid-in Capital in Excess of Par............................... |
|
405,000 |
|
|
|
|
|
|
|
Common
Stock Dividend Distributable.......................... |
150,000 |
|
|
|
Common Stock......................................................... |
|
150,000 |
|
|
|
|
|
|
(b) |
Retained
Earnings (300,000 X $10)............................... |
3,000,000 |
|
|
|
Common Stock Dividend |
|
|
|
|
Distributable........................................................... |
|
3,000,000 |
|
|
|
|
|
|
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Common
Stock Dividend Distributable.......................... |
3,000,000 |
|
|
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Common Stock......................................................... |
|
3,000,000 |
(c) No entry, the par value becomes $5.00 and the number of
shares outstanding increases to 600,000.
EXERCISE 15-17
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Bruno
Corporation |
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Stockholders’
Equity |
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December
31, 2003 |
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Capital
stock |
|
|
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Preferred stock, $4 cumulative,
par value $50 |
|
|
|
per share; authorized 60,000 shares, issued |
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|
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and outstanding 10,000 shares |
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$ 500,000 |
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Common stock, par value $1 per
share; |
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|
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authorized 600,000 shares, issued 200,000 |
|
|
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shares, and outstanding 190,000 shares |
|
200,000 |
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Total
capital stock |
|
700,000 |
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Additional
paid-in capital— |
|
|
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In excess of par value |
|
1,300,000 |
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From sale of treasury stock |
|
160,000 |
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Total
paid-in capital |
|
2,160,000 |
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Retained
earnings |
|
301,000 |
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Total
paid-in capital and retained earnings |
|
2,461,000 |
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Less
treasury stock, 10,000 shares at cost |
|
170,000 |
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Total stockholders’ equity |
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$2,291,000 |
|
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PROBLEM 15-10 |
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To: Jenny Durdil Board of
Directors
From: Good Student, Financial Advisor
Date: Today
Subject: Report on the effects of a stock
dividend and a stock split
INTRODUCTION
As financial advisor to the Board of Directors for Jenny
Durdil, I have been asked to report on the effects of the following options for
creating interest in Jenny Durdil stock: a 20% stock dividend, a 100% stock
dividend, and a 2-for-1 stock split. The board wishes to maintain stockholders’
equity as it presently appears on the most recent balance sheet. The Board also
wishes to generate interest in stock purchases, and the current market value of
the stock ($120 per share) may be discouraging potential investors. Finally,
the Board thinks that a cash dividend at this point would be unwise.
RECOMMENDATION
In order to meet the needs of
Jenny Durdil Inc., the board should choose a 2-for-1 stock split. The stock
split is the only option which would not change the stockholders’ equity
section of the company’s balance sheet.
DISCUSSION OF
OPTIONS
The
three above-mentioned options would all result in an increased number of common
shares outstanding. Because the shares would be distributed on a pro rata basis
to current stockholders, each stockholder of record would maintain his/her
proportion of ownership after the declaration. All three options would probably
generate significant interest in the stock.
A 20% STOCK DIVIDEND
This option would increase the shares outstanding by 20
percent, which translates into 1,000,000 additional shares of $10 par value
common stock.
The problem with this type of stock dividend is that GAAP
requires these shares to be accounted for at their current market value if it
significantly exceeds par.
The following journal entry must be made to record this
dividend.
|
Retained
Earnings ($120 X 1,000,000)............................ |
120,000,000 |
|
|
Common Stock Dividend Distributable.................. |
|
10,000,000 |
|
Paid in Capital in Excess of Par............................. |
|
110,000,000 |
Although the Common Stock Dividend Distributable and the
Paid in Capital accounts increase, Retained Earnings decreases dramatically.
This reduction in Retained Earnings may hinder Jenny Durdil’s success with
the subsequent stock offer.
A 100% STOCK DIVIDEND
This option would double the number of $10 par value common
stock currently issued and outstanding. Because this type of dividend is
considered, in substance, a stock split, the shares do not have to be accounted
for at market value. Instead, Retained Earnings is reduced only by the par
value of the additional shares, while Common Stock Dividend Distributable and,
later, Common Stock are increased for that same amount. However, when 5,000,000
shares are already issued and outstanding, the reduction in Retained Earnings
reflecting the stock dividend is still great: $50,000,000. In addition, no
increase in any Paid in Capital account occurs.
The following journal entry would be made to record the
declaration of this dividend:
|
Retained
Earnings ($10 X 5,000,000)............................... |
50,000,000 |
|
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Common Stock Dividend Distributable................... |
|
50,000,000 |
A 2-FOR-1 STOCK SPLIT
This
option doubles the number of shares issued and outstanding; however, it also
cuts the par value per share in half. No accounting treatment beyond a
memorandum entry is required for the split because the effect of splitting the
par value cancels out the effect of doubling the number of shares. Therefore,
Retained Earnings remains unchanged as does the Common Stock and Paid in
Capital Accounts. In addition, the lower par value along with the decreased
market value will encourage investors who might otherwise consider the stock
too expensive.
CONCLUSION
To generate the greatest interest in Jenny Durdil stock
while maintaining the present Stockholders’ Equity section of the balance
sheet, you should opt for the 2-for-1 stock split.
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PROBLEM 15-12 |
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The requirement is to prepare the stockholders’ equity
section of Ohio Company’s June 30, 2003, balance sheet.
Note that the Ohio Company is authorized to issue 300,000
shares of $10 par value common and 100,000 shares of $25 par value, cumulative
and nonparticipating preferred.
At the beginning of the year, Ohio had 110,000 common shares
outstanding, of which 95,000 shares were issued at $31 per share, resulting in
$950,000 (95,000 shares at $10) of common stock and $1,995,000 of additional
paid-in capital on common stock (95,000 shares at $21). The 5,000 shares
exchanged for a plot of land would be recorded at $50,000 of common stock and
$170,000 of paid-in capital (use the current market value of the land on July
24 to value the stock issuance). The 10,000 shares issued in 2000 at $42 a
share resulted in $100,000 of common stock and $320,000 of paid-in capital.
|
The 2,000 shares of
treasury stock purchased resulted in a debit balance of treasury stock of
$78,000. Later, 500 shares were sold at $21,000, which brings the balance
down to $58,500 (1,500 shares at $39 per share). The gain on treasury shares ($21,000 minus $19,500 cost) is
recorded in a separate paid-in capital amount. The 5% stock dividend on
January 15 resulted in an increase of 5,400 shares. Recall that there were
110,000 shares outstanding at the beginning of the year. The purchase of
2,000 treasury shares occurred before the stock dividend, bringing the number
of shares outstanding at the time of the dividend (December 2002) to 108,000
shares. The resale of 500 treasury shares occurred after the stock dividend. The issuance of
50,000 shares of preferred at $44 resulted in $1,250,000 (50,000 shares at
$25) of preferred stock outstanding and $950,000 (50,000 shares at $19) of
paid-in capital on preferred. The cash dividends only affect the retained earnings. Note that the
preferred stock is in arrears for the dividends that should have been
declared in June, 2003. Ending retained earnings is the beginning balance of
$690,000 plus net income of $40,000, less the preferred dividend of $50,000
and the common stock dividend of $280,800 (5,400 shares at $52), resulting in
an ending balance of $399,200. Ohio
Company |
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Stockholders’
Equity |
|
||
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June 30, 2003 |
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Capital
stock |
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|
|
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8% preferred stock, $25 par value, |
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|
|
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cumulative and nonparticipating, |
|
|
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100,000 shares authorized, 50,000 |
|
|
|
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shares issued and outstanding—Note A |
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$1,250,000 |
|
|
|
|
|
|
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Common stock, $10 par value, 200,000 |
|
|
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shares authorized, 115,400 shares |
|
|
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issued with 1,500 shares held in the |
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treasury |
$1,154,000 |
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|
|
|
|
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Additional
paid-in capital |
|
|
|
|
On preferred stock |
950,000 |
|
|
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On common stock |
2,711,800* |
|
|
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On treasury stock |
1,500 |
3,663,300 |
|
|
|
|
|
|
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Total paid-in capital |
|
6,067,300 |
|
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Retained earnings |
|
399,200 |
|
|
|
|
|
|
|
Total paid-in capital and
retained earnings |
|
6,466,500 |
|
|
|
|
|
|
|
Less: Treasury stock, 1,500 shares at cost |
|
58,500 |
|
|
|
|
|
|
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Total stockholders’ equity |
|
$6,408,000 |
|
Note A: Ohio Company is in arrears on the
preferred stock in the amount of $50,000.
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*Additional Paid-In Capital on Common
Stock: |
|
|
|
Issue of 95,000 shares X ($31 – $10) |
$1,995,000 |
|
|
Plot of land |
170,000 |
|
|
Issue of 10,000 shares (3/1/00) |
320,000 |
|
|
[10,000 X ($42 – $10)] |
|
|
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5,400 shares as dividend |
226,800 |
|
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[5,400 X ($52 – $10)] |
|
|
|
|
$2,711,800 |
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