Stockholders’ Equity
Practice as You Learn
Intermediate Accounting 2
Practice as You Learn
Practice Problem 1 – Issue shares
A corporation was granted a charter at the beginning of the year that authorized 100,000 shares of $0.50 par value common stock and 10,000 shares of $100 par value 5% preferred stock. Record the transactions that occurred during the first year.
a. issued 56,000 common shares at $14 per share
b. issued 8,000 preferred shares at $100 per share
c. issued 20,000 common shares at $22 per share
Answer
Answers to Shareholder’s Equity – Practice Problem 1 – Issue shares
Follow these rules:
Always credit: Common Stock, Preferred Stock, Paid in Capital-CS & PS
Always record Common Stock and Preferred Stock at # shares x par value
Always record cash for # shares x fair market value
a.
Cash 784,000
Common Stock 28,000
PIC – CS 756,000
b.
Cash 800,000
Preferred Stock 800,000
Issued at par value; no paid in capital account is necessary
c.
Cash 440,000
Common Stock 10,000
PIC – CS 430,000
Practice Problem 2 – Treasury Stock
A corporation was authorized to issue 500,000 shares of $0.10 par value common stock and 100,000 shares of $50 par value 7% preferred stock. Prior to this year the corporation had issued 200,000 common shares for a total of $2,200,000. On March 1 of this year, the company purchased 10,000 of their common shares for $12 per share. On August 15th of this year, the corporation reissued 5,000 shares for $18 per share. On November 1st, the corporation reissued 2,000 shares when FMV is $8 per share.
Record the transactions related to treasury shares for the current year.
Answer
Answers to Shareholder’s Equity – Practice Problem 2 – Treasury Stock
Follow these rules:
Always record treasury stock for # shares x cost
Always record cash for # shares x FMV
The common stock account is NOT used when recording treasury stock
3/1 Purchase of TS:
Treasury Stock 120,000
Cash 120,000
8/15 Reissue TS – sell it back out to investors
Cash 90,000
Treasury Stock 60,000 *
PIC – TS 30,000
*Treasury stock goes on and off at original cost
5,000 shares x $12
11/1 Reissue TS – sell back out to investors
PIC – TS 8,000
Cash 16,000
Treasury Stock 24,000
Use the PIC- TS up to $30,000 before debiting R.E.
2,000 x original cost $12
Practice Problem 3 – Cash Dividends
A corporation was authorized to issue 1,000,000 shares of $0.01 par value common stock and 100,000 shares of $50 par value 7% preferred stock. Prior to this year the corporation had issued 200,000 common shares for cash of $3,000,000 and 20,000 preferred share for cash of $1,000,000. On February 1st the company declared the stated preferred dividend and a common dividend of $0.50 per share. The record date is March 1st and the payment date is March 18th.
Record all transactions related to the dividend declared.
Answer
Answers to Shareholder’s Equity – Practice Problem 3 – Cash Dividends
Always debit Retained Earnings for dividends
Record the declaration as a liability and then record the payment
2/1 Declared dividends:
Retained Earnings $100,000
Dividends Payable – CS $100,000
Issued shares of 200,000 x $0.50 per share = $100,000
Retained Earnings $70,000
Dividends Payable – PS $70,000
Issued shares of 20,000 x par value of $50 x .07 = $70,000
3/1 Record date: No journal entry
3/18 Payment date:
| Dividends Payable – CS | $100,000 |
| Dividends Payable – PS | $ 70,000 |
| Cash | $170,000 |
Note:
Cash dividends are paid to outstanding shares
Treasury shares do not receive a cash dividend, the Company does not pay itself
Practice Problem 4 – Stock Dividends
A corporation was authorized to issue 2,000,000 shares of $1 par value common stock and 100,000 shares of $10 par value 6% preferred stock. Prior to this year the corporation had issued 100,000 common shares for a total of $2,000,000 and 20,000 preferred share for a total of $200,000. The board of directors declared a common stock dividend on February 1st. The record date is March 1st and the payment date is March 18th. The FMV of the common stock was $10 on February 1st and $11.50 on March 18th.
a. Record the common stock dividend given the board declared a 10% dividend.
b. Record the common stock dividend given the board declared a 40% dividend.
c. Given that the board declared a 4:1 split on common stock, what parts of owner’s equity would change?
Answer
Answers to Owner’s Equity – Practice Problem 4 – Stock Dividends
Apply the rules:
| Large > 25% Debit R.E. for Par value of stock x # shares Small < 25 % Debit R.E. for Fair MV of stock x # shares |
Ignore the information on preferred stock, the stock dividend is only on the common stock
a. February 1 – declared
| Retained Earnings $100,000 Dividend Payable $100,000 |
Previous shares issued x dividend % declared = new shares to issue
100,000 x10% = 10,000
Small dividend:
10,000 shares x FMV of stock on declared date $10 = $100,000
March 15 – Payment
| Dividend Payable $100,000 Common Stock $10,000 PIC – CS $90,000 |
Common stock is always recorded at number of shares (10,000) x par value ($1)
Paid in Capital is recorded for the difference
b. February 1 – declared
| Retained Earnings $40,000 Dividend Payable $40,000 |
Previous shares issued x dividend % declared = new shares to issue
100,000 x 40% = 40,000
Large dividend:
40,000 shares x Par value ($1) of stock on declared date
March 15 – Payment
| Dividend Payable $40,000 Common Stock $40,000 |
Common stock is always recorded at number of shares (40,000) x par value ($1)
No difference to record to Paid in Capital
c. No entry for a stock split.
Nothing is exchanged.
The par value and the number of shares is adjusted.
Par value is less, number of shares is more.
Prior to the split, there were 100,000 shares issued with a par value of $1.
4:1 split means to divide the par by 4, so par will become $0.25
4:1 split means to multiply the shares by 4, so total shares issued becomes 400,000
The owner’s equity accounts will not change
The reported amount for common stock is equal to # shares issued x par
| Before split: 100,000 x $1 = $100,000 for common stock After split: 400,000 x $0.25 = $100,000 for common stock |
Note:
Stock dividends are paid to all issued shares less retired shares.
Treasury stock is also paid a stock dividend otherwise the company would lose fair market value.
A corporation was authorized to issue 500,000 shares of $0.10 par value common stock. Prior to this year the corporation had issued 200,000 common shares for a total of $2,000,000. On March 1 of this year, the company purchased and immediately retired 10,000 of their common shares for $12 per share.
A. Record the issuance of the 200,000 common shares in prior years
B. Record the retirement of common stock on March 1
Answer
Answers to Owner’s Equity – Practice Problem 5 – Retire common stock
A.
| Cash 2,000,000 Common Stock 20,000 Paid In Capital – CS 1,980,000 |
B.
| Retained Earnings 20,000 (plug) Common Stock 1,000 (par x # shares) Paid In Capital – CS 99,000 (ave. PIC-CS x # shares) Cash 120,000 (FMV x # shares) |
Average PIC – CS per share
| $1,980,000 = $9.90 average per share 200,000 shares |
Use Retained Earnings for a debit plug to balance
Use Paid In Capital – CS Retired for a credit plug to balance
Practice Problem 6 – Record equity transactions and prepare the balance sheet section for owner’s equity
A corporation had 200,000 shares of $1 par common stock issued and outstanding on January 1, of the current year. The common stock was issued at an average price of $7 per share. The corporation had 10,000 shares of preferred stock, $10 par, 5%, outstanding at a total issue price of $100,000. Beginning retained earnings was $645,000. Authorized common stock is 500,000 shares and authorized preferred stock is 25,000 shares. During this year, the following transactions occurred in the following order.
a. The company issued 10,000 common shares at a market price of $22 per share.
b. 12,000 shares were repurchased at a market price of $14 per share.
c. 4,000 shares of treasury stock were reissued at a market price of $20.
e. The company declared and paid a 40% common stock dividend when the market price was $22 per share.
f. Preferred dividends were declared and paid.
g. Income for the current year was $150,000.
Prepare the balance sheet section of owner’s equity at the end of the year.
Answer
+Practice Problem 6 – Record equity transactions and prepare the balance sheet section for owner’s equity
First – Establish the beginning balances in the equity accounts by recreating the prior stock issuance entries:
CS issued:
| Cash 1,400,000 Common Stock 200,000 Paid In Capital – CS 1,200,000 |
PS issued:
| Cash 100,000 Preferred Stock 100,000 |
Then record the current year transactions:
a.
| Cash 220,000 Common Stock 10,000 Paid In Capital – CS 210,000 |
b.
| Treasury Stock 168,000 Cash 168,000 |
c.
| Cash 80,000 Treasury Stock 56,000 PIC – TS 24,000 |
d.
|
Retained Earnings 84,000 Dividends Payable 84,000 |
Total shares 200,000 + 10,000 = 210,000 x 40% = 84,000 shares issued
Large stock dividends are recorded at par value x # shares issued
$1 x 84,000 = $84,000
FMV of shares is ignored for large stock dividends
e.
|
Retained Earnings $5,000 Dividends Payable – PS $5,000 |
Preferred dividend amount is # shares x par value x % stated
10,000 x $10 x .05 = $5,000
Then you must determine the cumulative balance for each account:
| Preferred Stock | $100,000 | prior year entry only |
| Common Stock | $294,000 | ($200,000 + $10,000 + 84,000) |
| PIC – CS | $1,410,000 | ($1,200,000 + $210,000) |
| Treasury Stock | $112,000 | ($168,000 – $56,000) |
| Retained Earnings | $706,000 | ($645,000 + $150,000 -$84,000 – $5,000) |
Using the account balances and the corporate information, prepare the balance sheet section for owner’s equity:
| Preferred Stock, $10 par, 5%, 25,000 shares authorized and 10,000 shares issued and outstanding | $ 100,000 |
| Common Stock, $1 par, 500,000 shares authorized, 210,000 shares issued, and 202,000 shares outstanding | $ 294,000 |
| Paid in Capital – Common Stock | $1,410,000 |
| Retained Earnings | $ 706,000 |
| Treasury Stock (11,200 shares) | ($ 112,000) |
| Total Owner’s Equity | $ 2,398,000 |