CHAPTER 13

CORPORATIONS: ORGANIZATION, STOCK

TRANSACTIONS, AND DIVIDENDS
EYE OPENERS

1. Each stockholder’s liability for corporation 9. a. No change.

debts is limited to the amount invested in the b. Total equity is the same.
corporation. A corporation is responsible for 10. a. Current liability
its own obligations; therefore, its creditors
b. Stockholders’ equity
may not look beyond the assets of the
corporation for satisfaction of their claims. 11. a. Unissued stock has never been issued,
2. The large investments needed by large but treasury stock has been issued as
businesses are usually obtainable only fully paid and has subsequently been
through pooling of resources of many reacquired.
people. The corporation also has the b. As a deduction from the total of other
advantages over proprietorships and stockholders’ equity accounts.
partnerships of transferable shares of 12. a. It has no effect on revenue or expense.
ownership, and thus the continuity of b. It reduces stockholders’ equity by
existence, and limited liability of its owners $450,000.
(stockholders). 13. a. It has no effect on revenue.
3. No. Common stock with a higher par is not b. It increases stockholders’ equity by
necessarily a better investment than com- $615,000.
mon stock with a lower par because par is
an amount assigned to the shares. 14. The primary advantage of the combined
income and retained earnings statement is
4. The broker is not correct. Corporations are
not legally liable to pay dividends until the that it emphasizes net income as the
dividends are declared. If the company that connecting link between the income
issued the preferred stock has operating statement and the retained earnings portion
losses, it could omit dividends, first, on its of stockholders’ equity.
common stock and, later, on its preferred 15. The three classifications of restrictions on
stock. retained earnings are legal, contractual, and
5. Factors influencing the market price of a discretionary. Appropriations are normally
corporation’s stock include the following: reported in the notes to the financial
a. Financial condition, earnings record, and statements.
dividend record of the corporation. 16. Such prior period adjustments should be
b. Its potential earning power. reported as an adjustment to the beginning
c. General business and economic balance of retained earnings.
conditions and prospects. 17. The statement of stockholders’ equity is
6. No. Premium on stock is additional paid-in normally prepared when there are significant
capital. changes in stock and other paid-in capital
7. a. Sufficient retained earnings, sufficient accounts.
cash, and formal action by the board of 18. The primary purpose of a stock split is to
directors. bring about a reduction in the market price
b. February 16, declaration date; March per share and thus to encourage more in-
18, record date; and April 17, payment vestors to buy the company’s shares.
date.
8. The company may not have had enough
cash on hand to pay a dividend on the com-
mon stock, or resources may be needed for
plant expansion, replacement of facilities,
payment of liabilities, etc.

705
 PRACTICE EXERCISES

PE 13–1A
Year 1 Year 2 Year 3
Amount distributed............................... $ 15,000 $ 5,000 $ 62,000
Preferred dividend (5,000 shares)....... 8,000 5,000 11,000*
Common dividend (10,000 shares)...... $ 7,000 $ 0 $ 51,000
*(3,000 + 8,000)
Dividends per share:
Preferred stock.............................. $1.60 $1.00 $2.20
Common stock.............................. $0.70 None $5.10

PE 13–1B
Year 1 Year 2 Year 3
Amount distributed............................... $ 30,000 $6,000 $80,000
Preferred dividend (10,000 shares)..... 10,000 6,000 14,000*
Common dividend (25,000 shares)...... $ 20,000 $ 0 $66,000
*($4,000 + $10,000)
Dividends per share:
Preferred stock.............................. $1.00 $0.60 $1.40
Common stock.............................. $0.80 None $2.64

PE 13–2A

July 3 Cash....................................................................... 1,125,000

Common Stock................................................ 1,125,000
(450,000 shares × $2.50).
Sept. 1 Cash....................................................................... 250,000
Preferred Stock............................................... 250,000
(10,000 shares × $25).
Oct. 30 Cash....................................................................... 225,000
Preferred Stock............................................... 187,500
Paid-In Capital in Excess of Par.................... 37,500*
*(7,500 shares × $5)
PE 13–2B
Feb. 13 Cash....................................................................... 10,500,000
Common Stock................................................ 9,375,000
Paid-In Capital in Excess of Stated Value.... 1,125,000*
*(75,000 shares × $15)
Sept. 9 Cash....................................................................... 900,000
Preferred Stock............................................... 900,000
(15,000 shares × $60).
Nov. 23 Cash....................................................................... 560,000
Preferred Stock............................................... 480,000
Paid-In Capital in Excess of Par.................... 80,000*
*(8,000 shares × $10)

PE 13–3A
Oct. 6 Cash Dividends.................................................... 112,750
Cash Dividends Payable................................ 112,750
Nov. 5 No entry required.
Dec. 5 Cash Dividends Payable...................................... 112,750
Cash.................................................................. 112,750

PE 13–3B
July 1 Cash Dividends.................................................... 61,500
Cash Dividends Payable................................ 61,500
Aug. 1 No entry required.
Sept. 30 Cash Dividends Payable...................................... 61,500
Cash.................................................................. 61,500

PE 13–4A
May 10 Stock Dividends (100,000 × 2% × $48)............... 96,000
Stock Dividends Distributable (2,000 × $40) 80,000
Paid-In Capital in Excess of Par—
Common Stock ($96,000 – $80,000).............. 16,000
June 9 No entry required.
Aug. 1 Stock Dividends Distributable............................ 80,000
Common Stock................................................ 80,000
PE 13–4B

Feb. 13 Stock Dividends (600,000 × 4% × $90)............... 2,160,000

Stock Dividends Distributable (24,000 × $75) 1,800,000
Paid-In Capital in Excess of Par—
Common Stock ($2,160,000 – $1,800,000).... 360,000
Mar. 14 No entry required.
Apr. 30 Stock Dividends Distributable............................ 1,800,000
Common Stock................................................ 1,800,000

PE 13–5A

Oct. 3 Treasury Stock (10,000 × $9)............................... 90,000

Cash.................................................................. 90,000
Nov. 15 Cash (6,800 × $12)................................................ 81,600
Treasury Stock (6,800 × $9)........................... 61,200
Paid-In Capital from Sale of
Treasury Stock [6,800 × ($12 – $9)]............... 20,400
Dec. 22 Cash (3,200 × $7).................................................. 22,400
Paid-In Capital from Sale of
Treasury Stock [3,200 × ($9 – $7)]...................... 6,400
Treasury Stock (3,200 × $9)........................... 28,800

PE 13–5B

Feb. 1 Treasury Stock (7,500 × $30)............................... 225,000

Cash.................................................................. 225,000
Mar. 15 Cash (4,500 × $34)................................................ 153,000
Treasury Stock (4,500 × $30)......................... 135,000
Paid-In Capital from Sale of
Treasury Stock [4,500 × ($34 – $30)]............. 18,000
June 2 Cash (3,000 × $28)................................................ 84,000
Paid-In Capital from Sale of
Treasury Stock [3,000 × ($30 – $28)].................. 6,000
Treasury Stock (3,000 × $30)......................... 90,000
PE 13–6A

Stockholders’ Equity
Paid-in capital:
Common stock, $75 par (70,000 shares
authorized, 63,000 shares issued)................. $ 4,725,000
Excess of issue price over par............................. 679,000 $ 5,404,000
From sale of treasury stock.................................. 25,200
Total paid-in capital......................................... $ 5,429,200
Retained earnings....................................................... 2,032,800
Total......................................................................... $ 7,462,000
Deduct treasury stock (7,500 shares at cost).......... 588,000
Total stockholders’ equity......................................... $ 6,874,000

PE 13–6B

Stockholders’ Equity
Paid-in capital:
Common stock, $80 par (60,000 shares
authorized, 50,000 shares issued)................. $ 4,000,000
Excess of issue price over par............................. 630,000 $ 4,630,000
From sale of treasury stock.................................. 66,000
Total paid-in capital......................................... $ 4,696,000
Retained earnings....................................................... 2,220,000
Total......................................................................... $ 6,916,000
Deduct treasury stock (4,000 shares at cost).......... 360,000
Total stockholders’ equity......................................... $ 6,556,000

PE 13–7A

HORNBLOWER CRUISES INC.

Retained Earnings Statement
For the Year Ended October 31, 2010
Retained earnings, November 1, 2009.............................. $ 1,500,000
Net income........................................................................... $475,000
Less dividends declared.................................................... 350,000
Increase in retained earnings............................................ 125,000
Retained earnings, October 31, 2010................................ $ 1,625,000
PE 13–7B

FRONTIER LEADERS INC.

Retained Earnings Statement
For the Year Ended July 31, 2010
Retained earnings, August 1, 2009........................... $ 875,000
Net income................................................................... $260,000
Less dividends declared............................................ 120,000
Increase in retained earnings.................................... 140,000
Retained earnings, July 31, 2010.............................. $ 1,015,000
 EXERCISES

Ex. 13–1
1st Year 2nd Year 3rd Year 4th Year
a. Total dividend declared.................. $ 30,000 $ 42,000 $ 90,000 $ 120,000
Preferred dividend (current).......... $ 30,000 $ 27,000 $ 45,000 $ 45,000
Preferred dividend in arrears........ — 15,000 18,000 —
b. Total preferred dividends............... $ 30,000 $ 42,000 $ 63,000 $ 45,000
Preferred shares outstanding........ ÷ 15,000 ÷ 15,000 ÷ 15,000 ÷ 15,000
Preferred dividend per share......... $ 2.00 $ 2.80 $ 4.20 $ 3.00
Dividend for common share
(a. – b.)............................................. $ — $ — $ 27,000 $ 75,000
Common shares outstanding........ ÷ 50,000 ÷ 50,000
Common dividend per share......... $ 0.54 $ 1.50

Ex. 13–2
1st Year 2nd Year 3rd Year 4th Year
a. Total dividend declared.................. $ 3,000 $ 4,000 $ 30,000 $ 80,000
Preferred dividend (current).......... $ 3,000 $ 2,000 $ 5,000 $ 5,000
Preferred dividend in arrears........ — 2,000 3,000 —
b. Total preferred dividends............... $ 3,000 $ 4,000 $ 8,000 $ 5,000
Preferred shares outstanding........ ÷ 20,000 ÷ 20,000 ÷ 20,000 ÷ 20,000
Preferred dividend per share......... $ 0.15 $ 0.20 $ 0.40 $ 0.25
Dividend for common share
(a. – b.)............................................. $ — $ — $ 22,000 $ 75,000
Common shares outstanding........ ÷ 25,000 ÷ 25,000
Common dividend per share......... $ 0.88 $ 3.00
Ex. 13–3
a. Feb. 10 Cash................................................................ 1,360,000
Common Stock......................................... 400,000
Paid-In Capital in Excess of Par—
Common Stock......................................... 960,000
May 9 Cash................................................................ 700,000
Preferred Stock......................................... 500,000
Paid-In Capital in Excess of Par—
Preferred Stock......................................... 200,000

b. $2,060,000 ($1,360,000 + $700,000)

Ex. 13–4
a. June 4 Cash................................................................ 3,000,000
Common Stock......................................... 750,000
Paid-In Capital in Excess of
Stated Value.............................................. 2,250,000
Oct. 9 Cash................................................................ 2,000,000
Preferred Stock......................................... 1,875,000
Paid-In Capital in Excess of Par—
Preferred Stock......................................... 125,000
b. $5,000,000 ($3,000,000 + $2,000,000)

Ex. 13–5

Jan. 30 Land......................................................................... 270,000

Common Stock................................................. 180,000
Paid-In Capital in Excess of Par..................... 90,000
Ex. 13–6
a. Cash.................................................................................. 400,000
Common Stock (10,000 × $40).................................. 400,000

b. Organizational Expenses............................................... 30,000

Common Stock (750 × $40)....................................... 30,000
Cash.................................................................................. 800,000
Common Stock (20,000 × $40).................................. 800,000

c. Land.................................................................................. 125,000
Building............................................................................ 600,000
Interest Payable*........................................................ 7,000
Mortgage Note Payable............................................. 400,000
Common Stock........................................................... 318,000
*An acceptable alternative would be to credit Interest Expense.

Ex. 13–7

Buildings................................................................................. 200,000
Land......................................................................................... 125,000
Preferred Stock................................................................. 250,000
Paid-In Capital in Excess of Par—Preferred Stock....... 75,000
Cash......................................................................................... 475,000
Common Stock................................................................. 300,000
Paid-In Capital in Excess of Par—Common Stock....... 175,000
Ex. 13–8
Feb. 20 Cash........................................................................ 2,250,000
Common Stock (150,000 × $15)...................... 2,250,000
26 Organizational Expenses...................................... 7,500
Common Stock (500 × $15)............................. 7,500
Mar. 6 Land......................................................................... 50,000
Buildings................................................................. 275,000
Equipment.............................................................. 60,000
Common Stock (18,000 × $15)........................ 270,000
Paid-In Capital in Excess of Par—
Common Stock................................................. 115,000
Apr. 30 Cash........................................................................ 1,200,000
Preferred Stock (20,000 × $50)........................ 1,000,000
Paid-In Capital in Excess of Par—
Preferred Stock................................................. 200,000

Ex. 13–9
May 3 Cash Dividends...................................................... 69,500
Cash Dividends Payable.................................. 69,500
June 17 No entry required.
Aug. 1 Cash Dividends Payable....................................... 69,500
Cash................................................................... 69,500
Ex. 13–10
a. (1) Stock Dividends......................................................... 250,000*
Stock Dividends Distributable (2,000 × $100)... 200,000
Paid-In Capital in Excess of Par—
Common Stock..................................................... 50,000
*[($10,000,000/$100) × 2%] × $125
(2) Stock Dividends Distributable................................. 200,000
Common Stock..................................................... 200,000
b. (1) $12,000,000 ($10,000,000 + $2,000,000)
(2) $45,000,000
(3) $57,000,000 ($12,000,000 + $45,000,000)

c. (1) $12,250,000 ($12,000,000 + $250,000)

(2) $44,750,000 ($45,000,000 – $250,000)
(3) $57,000,000 ($12,250,000 + $44,750,000)

Ex. 13–11

a. Mar. 4 Treasury Stock............................................... 450,000

Cash........................................................... 450,000
Aug. 7 Cash................................................................ 350,000
Treasury Stock (3,500 × $90).................. 315,000
Paid-In Capital from Sale of
Treasury Stock......................................... 35,000
Nov. 29 Cash................................................................ 132,000
Paid-In Capital from Sale of
Treasury Stock............................................... 3,000
Treasury Stock (1,500 × $90).................. 135,000
b. $32,000 credit
c. Beaverhead Creek may have purchased the stock to support the market price
of the stock, to provide shares for resale to employees, or for reissuance to
employees as a bonus according to stock purchase agreements.
Ex. 13–12
a. Aug. 30 Treasury Stock (17,500 × $42)...................... 735,000
Cash........................................................... 735,000
Oct. 31 Cash (14,000 × $45)....................................... 630,000
Treasury Stock (14,000 × $42)................ 588,000
Paid-In Capital from Sale
of Treasury Stock..................................... 42,000
Nov. 10 Cash (2,000 × $48)......................................... 96,000
Treasury Stock (2,000 × $42).................. 84,000
Paid-In Capital from Sale
of Treasury Stock..................................... 12,000
b. $54,000 ($42,000 + $12,000) credit
c. $63,000 (1,500 × $42) debit
d. The balance in the treasury stock account is reported as a deduction from
the total of the paid-in capital and retained earnings.

Ex. 13–13
a. July 15 Treasury Stock (24,000 × $60)...................... 1,440,000
Cash........................................................... 1,440,000
Aug. 10 Cash (19,000 × $63)....................................... 1,197,000
Treasury Stock (19,000 × $60)................ 1,140,000
Paid-In Capital from Sale of
Treasury Stock......................................... 57,000
Dec. 18 Cash (5,000 × $56)......................................... 280,000
Paid-In Capital from Sale of
Treasury Stock............................................... 20,000
Treasury Stock (5,000 × $60).................. 300,000
b. $37,000 ($57,000 – $20,000) credit
c. Stockholders’ Equity section
d. Sweet Water Inc. may have purchased the stock to support the market price
of the stock, to provide shares for resale to employees, or for reissuance to
employees as a bonus according to stock purchase agreements.
Ex. 13–14

Stockholders’ Equity
Paid-in capital:
Preferred 2% stock, $100 par
(20,000 shares authorized,
7,500 shares issued).................. $750,000
Excess of issue price over par....... 90,000 $ 840,000
Common stock, no par, $5 stated
value (250,000 shares author-
ized, 80,000 shares issued)....... $400,000
Excess of issue price over par....... 960,000 1,360,000
From sale of treasury stock............ 25,000
Total paid-in capital.................... $2,225,000

Ex. 13–15

Stockholders’ Equity
Paid-in capital:
Common stock, $75 par
(40,000 shares authorized,
18,000 shares issued)................ $1,350,000
Excess of issue price over par....... 108,000 $1,458,000
From sale of treasury stock............ 12,000
Total paid-in capital.................... $1,470,000
Retained earnings................................. 2,950,000
Total................................................... $4,420,000
Deduct treasury stock
(875 shares at cost)......................... 70,000
Total stockholders’ equity................... $4,350,000
Ex. 13–16

Stockholders’ Equity
Paid-in capital:
Preferred 4% stock, $50 par
(50,000 shares authorized,
30,000 shares issued)................ $1,500,000
Excess of issue price over par....... 90,000 $1,590,000
Common stock, $10 par
(200,000 shares authorized
40,000 shares issued)................ $ 400,000
Excess of issue price over par....... 120,000 520,000
From sale of treasury stock............ 30,000
Total paid-in capital.................... $2,140,000
Retained earnings................................. 3,900,000
Total................................................... $6,040,000
Deduct treasury common stock
(5,000 shares at cost)...................... 55,000
Total stockholders’ equity................... $5,985,000

Ex. 13–17

BANCROFT CORPORATION
Retained Earnings Statement
For the Year Ended January 31, 2010
Retained earnings, February 1, 2009................................ $ 3,175,500
Net income........................................................................... $415,000
Less dividends declared.................................................... 215,500
Increase in retained earnings............................................ 199,500
Retained earnings, January 31, 2010................................ $ 3,375,000
Ex. 13–18

1. Retained earnings is not part of paid-in capital.

2. The cost of treasury stock should be deducted from the total stockholders’
equity.
3. Dividends payable should be included as part of current liabilities and not as
part of stockholders’ equity.
4. Common stock should be included as part of paid-in capital.
5. The amount of shares of common stock issued of 180,000 times the par value
per share of $75 should be extended as $13,500,000, not $14,040,000. The
difference, $540,000, probably represents paid-in capital in excess of par.
6. Organizing costs should be expensed when incurred and not included as a
part of stockholders’ equity.

One possible corrected Stockholders’ Equity section of the balance sheet is as

follows:
Stockholders’ Equity
Paid-in capital:
Preferred 2% stock, $150 par
(10,000 shares authorized and issued).................. $ 1,500,000
Excess of issue price over par..................................... 250,000 $ 1,750,000
Common stock, $75 par (250,000 shares authorized,
180,000 shares issued)............................................ $13,500,000
Excess of issue price over par..................................... 540,000 14,040,000
Total paid-in capital.................................................. $15,790,000
Retained earnings............................................................... 1,400,000*
$17,190,000
Deduct treasury stock (6,000 shares at cost).................. 432,000
Total stockholders’ equity................................................. $16,758,000
*$1,450,000 – $50,000. Since the organizing costs should have been expensed,
the retained earnings should be $50,000 less.
Ex. 13–19

FOR ALL OCCASIONS GREETING CARDS INC.

Statement of Stockholders’ Equity
For the Year Ended December 31, 2010
Paid-In
Common Capital in
Stock Excess Treasury Retained
$50 Par of Par Stock Earnings Total
Balance, Jan. 1, 2010...... $2,000,000 $320,000 — $3,480,000 $5,800,000
Issued 18,000 shares
of common stock........ 900,000 216,000 1,116,000
Purchased 3,000
shares as treasury
stock............................ $(144,000) (144,000)
Net income...................... 510,000 510,000
Dividends......................... (100,000) (100,000)
Balance, Dec. 31, 2010... $2,900,000 $536,000 $(144,000) $3,890,000 $7,182,000

Ex. 13–20

a. 160,000 shares (40,000 × 4)

b. $75 per share ($300/4)

Ex. 13–21

Stockholders’
Assets Liabilities Equity
(1) Declaring a cash dividend 0 + –
(2) Paying the cash dividend
declared in (1) – – 0
(3) Authorizing and issuing stock
certificates in a stock split 0 0 0
(4) Declaring a stock dividend 0 0 0
(5) Issuing stock certificates for
the stock dividend declared
in (4) 0 0 0
Ex. 13–22
Feb. 3 No entry required. The stockholders ledger would be revised to record
the increased number of shares held by each stockholder.
Apr. 10 Cash Dividends...................................................... 47,000*
Cash Dividends Payable.................................. 47,000
*[(18,000 shares × $1.50) + (250,000 shares
× $0.08)] = $27,000 + $20,000 = $47,000
June 9 Cash Dividends Payable....................................... 47,000
Cash................................................................... 47,000
Oct. 10 Cash Dividends...................................................... 37,000*
Cash Dividends Payable.................................. 37,000
*[(18,000 shares × $1.50) + (250,000 shares
× $0.04)] = $27,000 + $10,000 = $37,000
10 Stock Dividends..................................................... 180,000**
Stock Dividends Distributable (5,000 × $20). 100,000
Paid-In Capital in Excess of
Par—Common Stock........................................ 80,000
**(250,000 shares × 2% × $36) = $180,000
Dec. 9 Cash Dividends Payable....................................... 37,000
Cash................................................................... 37,000
9 Stock Dividends Distributable............................. 100,000
Common Stock................................................. 100,000

Ex. 13–23
Net Income  Preferred Dividends
Earnings per Share = Number of Common Shares Outstandin g

$160,000  ($7 per share  2,000 shares)

Earnings per Share =
20,000 common shares outstanding

Earnings per Share = $7.30 per share

Ex. 13–24

a.
Net Income  Preferred Dividends
Earnings per Share = Number of Common Shares Outstandin g

$10,340  $161
2007 Earnings per Share = 3,159 common shares outstandin g

= $3.22 per share

$8,684  $148
2006 Earnings per Share = 3,055 common shares outstandin g

= $2.79 per share

$6,923  $136
2005 Earnings per Share = 2,515 common shares outstandin g

= $2.70 per share

b.
2007 2006 2005
Earnings per share................................ $3.22 $2.79 $2.70
As a percent of 2005 (base year)......... 119% 103% 100%
Net income............................................. $10,340 $8,684 $6,923
As a percent of 2005 (base year)......... 149% 125% 100%

The earnings per share growth was much less than the net income growth.
Earnings per share increased 119% from 2005 to 2007, while net income grew
149% over the same period. The major reason for this difference is due to the
increase in common shares outstanding. During this period the common shares
increased by 126% (3,159/2,515), thus depressing the earnings per share growth.
This significant increase in the common shares outstanding was due to the
purchase of Gillette.
Ex. 13–25

a.
OfficeMax:

Net Income  Preferred Dividends

Earnings per Share = Number of Common Shares Outstandin g

$91,721,00 0  ($54,735,0 00  7.375%)

Earnings per Share =
73,142,000 common shares outstandin g

Earnings per Share = $1.20 per share

Staples:

Net Income  Preferred Dividends

Earnings per Share = Number of Common Shares Outstandin g

$973,577,0 00
Earnings per Share = 720,528,00 0 common shares outstanding

Earnings per Share = $1.35 per share

b. Staples’ net income is over 10 times greater than OfficeMax’s. This is because
Staples is a much larger business than OfficeMax. As a result, Staples also
has nearly 10 times greater shares outstanding as well. The earnings per
share for both firms can be used to compare their relative earnings. Staples
has a better earnings per share ($1.35) than does OfficeMax ($1.20).
 PROBLEMS

Prob. 13–1A

1.

Total Preferred Dividends

Year Dividends Total Per Share Total Per Share
2005........................ $ 5,000 $ 5,000 $ 0.50 $ 0 $ 0
2006........................ 18,000 18,000 1.80 0 0
2007........................ 45,000 37,000* 3.70 8,000 0.32
2008........................ 45,000 20,000 2.00 25,000 1.00
2009........................ 60,000 20,000 2.00 40,000 1.60
2010........................ 67,000 20,000 2.00 47,000 1.88
$12.00 $4.80

*$37,000 = (2005 dividends in arrears of $15,000) +

(2006 dividends in arrears of $2,000) +
(2007 current dividend of $20,000)

2. Average annual dividend for preferred: $2.00 per share ($12.00/6)

Average annual dividend for common: $0.80 per share ($4.80/6)

3. a. 1.6% ($2.00/$125)

b. 10.0% ($0.80/$8)
Prob. 13–2A
Jan. 10 Cash........................................................................ 2,000,000
Mortgage Note Payable................................... 2,000,000
21 Cash........................................................................ 1,267,500
Preferred Stock (15,000 × $80)........................ 1,200,000
Paid-In Capital in Excess of Par—
Preferred Stock................................................. 67,500
31 Building................................................................... 1,850,000
Land......................................................................... 162,500
Common Stock (17,500 × $100)...................... 1,750,000
Paid-In Capital in Excess of Par—
Common Stock................................................. 262,500
Prob. 13–3A
a. Treasury Stock................................................................. 540,000
Cash............................................................................ 540,000
($540,000/60,000 shares) = $9 per share.

b. Cash.................................................................................. 462,000
Treasury Stock (42,000 × $9).................................... 378,000
Paid-In Capital from Sale of Treasury Stock.......... 84,000

c. Cash (7,500 × $38)........................................................... 285,000

Preferred Stock (7,500 × $25)................................... 187,500
Paid-In Capital in Excess of Par—Preferred
Stock (7,500 × $13)..................................................... 97,500

d. Cash (120,000 × $15)....................................................... 1,800,000

Common Stock (120,000 × $5).................................. 600,000
Paid-In Capital in Excess of Par—Common
Stock........................................................................... 1,200,000

e. Cash.................................................................................. 110,500
Paid-In Capital from Sale of Treasury Stock................ 6,500
Treasury Stock (13,000 × $9).................................... 117,000

f. Cash Dividends............................................................... 387,050

Cash Dividends Payable........................................... 387,050
(47,500 × $0.50) + [(750,000 – 60,000 + 42,000
+ 120,000 + 13,000) × $0.42]

g. Cash Dividends Payable................................................. 387,050

Cash............................................................................ 387,050
Prob. 13–4A

1. and 2.
Common Stock
Jan. 1 Bal. 3,500,000
Apr. 3 1,000,000
Aug. 30 90,000
Dec. 31 Bal. 4,590,000

Paid-In Capital in Excess of Stated Value

Jan. 1 Bal. 1,750,000
Apr. 3 700,000
July 30 72,000
Dec. 31 Bal. 2,522,000

Retained Earnings
Dec. 31 254,025 Jan. 1 Bal. 4,600,000
Dec. 31 400,000
Dec. 31 Bal. 4,745,975

Treasury Stock
Jan. 1 Bal. 1,000,000 Mar. 9 1,000,000
Nov. 7 800,000
Dec. 31 Bal. 800,000

Paid-In Capital from Sale of Treasury Stock

Mar. 9 350,000

Stock Dividends Distributable

Aug. 30 90,000 July 30 90,000

Stock Dividends
July 30 162,000 Dec. 31 162,000

Cash Dividends
Dec. 30 92,025 Dec. 31 92,025
Prob. 13–4A Continued

2.
Jan. 6 Cash Dividends Payable....................................... 54,000*
Cash................................................................... 54,000
*[(175,000 – 40,000) × $0.40]
Mar. 9 Cash........................................................................ 1,350,000
Treasury Stock................................................. 1,000,000
Paid-In Capital from Sale of Treasury Stock. 350,000
Apr. 3 Cash........................................................................ 1,700,000
Common Stock (50,000 × $20)........................ 1,000,000
Paid-In Capital in Excess of Stated Value..... 700,000
July 30 Stock Dividends..................................................... 162,000*
Stock Dividends Distributable (4,500 × $20) 90,000
Paid-In Capital in Excess of Stated Value..... 72,000
*(175,000 + 50,000) × 2% × $36
Aug. 30 Stock Dividends Distributable............................. 90,000
Common Stock................................................. 90,000
Nov. 7 Treasury Stock....................................................... 800,000
Cash................................................................... 800,000
($800,000/25,000 shares) = $32 per share.
Dec. 30 Cash Dividends...................................................... 92,025*
Cash Dividends Payable.................................. 92,025
*(175,000 + 50,000 + 4,500 – 25,000) × $0.45
31 Income Summary................................................... 400,000
Retained Earnings............................................ 400,000
31 Retained Earnings................................................. 254,025
Stock Dividends............................................... 162,000
Cash Dividends................................................ 92,025
Prob. 13–4A Concluded

3.
KRISCH ENTERPRISES INC.
Retained Earnings Statement
For the Year Ended December 31, 2010
Retained earnings (January 1, 2010).............................. $4,600,000
Net income......................................................................... $400,000
Less: Cash dividends...................................................... (92,025)
Stock dividends..................................................... (162,000)
Increase in retained earnings.......................................... 145,975
Retained earnings (December 31, 2010)........................ $4,745,975

4.
Stockholders’ Equity
Paid-in capital:
Common stock, $20 stated value (250,000 shares
authorized, 229,500 shares issued)..................... $4,590,000
Excess of issue price over stated value................. 2,522,000
From sale of treasury stock..................................... 350,000
Total paid-in capital............................................... $ 7,462,000
Retained earnings............................................................ 4,745,975
Total............................................................................ $12,207,975
Deduct treasury stock (25,000 shares at cost)............. 800,000
Total stockholders’ equity............................................... $11,407,975
Prob. 13–5A
Jan. 10 No entry required. The stockholders ledger would be revised to record
the increased number of shares held by each stockholder.
Mar. 1 Cash Dividends...................................................... 216,000*
Cash Dividends Payable.................................. 216,000
*(80,000 × $1.20) + (500,000 × $0.24)
Apr. 30 Cash Dividends Payable....................................... 216,000
Cash................................................................... 216,000
July 9 Treasury Stock (75,000 × $26).............................. 1,950,000
Cash................................................................... 1,950,000
Aug. 29 Cash (40,000 × $32)............................................... 1,280,000
Treasury Stock (40,000 × $26)......................... 1,040,000
Paid-In Capital from Sale of Treasury
Stock (40,000 × $6)........................................... 240,000
Sept. 1 Cash Dividends...................................................... 165,750*
Cash Dividends Payable.................................. 165,750
*(80,000 × $1.20) + [(500,000 – 35,000) × $0.15]
1 Stock Dividends (4,650 × $30).............................. 139,500**
Stock Dividends Distributable (4,650 × $25). 116,250
Paid-In Capital in Excess of Par—Common
Stock (4,650 × $5)............................................. 23,250
**(500,000 – 35,000) × 1% × $30
Oct. 31 Cash Dividends Payable....................................... 165,750
Cash................................................................... 165,750
31 Stock Dividends Distributable............................. 116,250
Common Stock................................................. 116,250
Prob. 13–1B

1.

Total Preferred Dividends

Year Dividends Total Per Share Total Per Share
2005........................ $ 7,500 $ 7,500 $0.75 $ 0 $ 0
2006........................ 9,000 9,000 0.90 0 0
2007........................ 30,000 13,500* 1.35 16,500 0.33
2008........................ 30,000 10,000 1.00 20,000 0.40
2009........................ 40,000 10,000 1.00 30,000 0.60
2010........................ 48,500 10,000 1.00 38,500 0.77
$6.00 $2.10

*$13,500 = (2005 dividends in arrears of $2,500) +

(2006 dividends in arrears of $1,000) +
(2007 current dividend of $10,000)

2. Average annual dividend for preferred: $1.00 per share ($6.00/6)

Average annual dividend for common: $0.35 per share ($2.10/6)

3. a. 2.5% ($1.00/$40)
b. 7.0% ($0.35/$5)
Prob. 13–2B
June 9 Building................................................................... 1,680,000
Land......................................................................... 420,000
Common Stock (65,000 × $30)........................ 1,950,000
Paid-In Capital in Excess of Par—
Common Stock................................................. 150,000
13 Cash........................................................................ 840,000
Preferred Stock (21,000 × $25)........................ 525,000
Paid-In Capital in Excess of Par—
Preferred Stock................................................. 315,000
25 Cash........................................................................ 700,000
Mortgage Note Payable................................... 700,000
Prob. 13–3B
a. Cash (17,500 × $81)......................................................... 1,417,500
Common Stock (17,500 × $75).................................. 1,312,500
Paid-In Capital in Excess of Par—Common
Stock (17,500 × $6)..................................................... 105,000

b. Cash (8,000 × $63)........................................................... 504,000

Preferred Stock (8,000 × $50)................................... 400,000
Paid-In Capital in Excess of Par—Preferred
Stock (8,000 × $13)..................................................... 104,000

c. Treasury Stock................................................................. 390,000*

Cash............................................................................ 390,000
*($390,000/5,000 shares) = $78 per share

d. Cash.................................................................................. 240,000
Treasury Stock (3,000 × $78).................................... 234,000
Paid-In Capital from Sale of Treasury Stock.......... 6,000

e. Cash.................................................................................. 75,000
Paid-In Capital from Sale of Treasury Stock................ 3,000
Treasury Stock (1,000 × $78).................................... 78,000

f. Cash Dividends............................................................... 73,200*

Cash Dividends Payable........................................... 73,200
*(28,000 × $1) + [(40,000 + 17,500 – 5,000
+ 3,000 + 1,000) × $0.80

g. Cash Dividends Payable................................................. 73,200

Cash............................................................................ 73,200
Prob. 13–4B

1. and 2.
Common Stock
Jan. 1 Bal. 3,200,000
Feb. 9 400,000
Aug. 15 144,000
Dec. 31 Bal. 3,744,000

Paid-In Capital in Excess of Stated Value

Jan. 1 Bal. 600,000
Feb. 9 200,000
July 1 90,000
Dec. 31 Bal. 890,000

Retained Earnings
Dec. 31 325,600 Jan. 1 Bal. 7,100,000
Dec. 31 485,000
Dec. 31 Bal. 7,259,400

Treasury Stock
Jan. 1 Bal. 240,000 May 21 240,000
Sept. 30 100,000
Dec. 31 Bal. 100,000
395,000

Paid-In Capital from Sale of Treasury Stock

May 21 60,000

Stock Dividends Distributable

Aug. 15 144,000 July 1 144,000

Stock Dividends
July 1 234,000 Dec. 31 234,000

Cash Dividends
Dec. 27 91,600 Dec. 31 91,600
Prob. 13–4B Continued

2.
Jan. 7 Cash Dividends Payable....................................... 66,600*
Cash................................................................... 66,600
*[(400,000 – 30,000) × $0.18]
Feb. 9 Cash........................................................................ 600,000
Common Stock (50,000 × $8).......................... 400,000
Paid-In Capital in Excess of Stated Value..... 200,000
May 21 Cash........................................................................ 300,000
Treasury Stock (30,000 × $8)........................... 240,000
Paid-In Capital from Sale of Treasury Stock. 60,000
July 1 Stock Dividends..................................................... 234,000*
Stock Dividends Distributable (18,000 × $8). 144,000
Paid-In Capital in Excess of Stated Value..... 90,000
*(400,000 + 50,000) × 4% × $13
Aug. 15 Stock Dividends Distributable............................. 144,000
Common Stock................................................. 144,000
Sept. 30 Treasury Stock....................................................... 100,000
Cash................................................................... 100,000
Dec. 27 Cash Dividends...................................................... 91,600*
Cash Dividends Payable.................................. 91,600
*(400,000 + 50,000 + 18,000 – 10,000) × $0.20
31 Income Summary................................................... 485,000
Retained Earnings............................................ 485,000
31 Retained Earnings................................................. 325,600
Stock Dividends............................................... 234,000
Cash Dividends................................................ 91,600
Prob. 13–4B Concluded

3.
IVY ENTERPRISES INC.
Retained Earnings Statement
For the Year Ended December 31, 2010
Retained earnings (January 1, 2010)................................ $7,100,000
Net income........................................................................... $ 485,000
Less: Cash dividends........................................................ (91,600)
Stock dividends....................................................... (234,000)
Increase in retained earnings............................................ 159,400
Retained earnings (December 31, 2010)........................... $7,259,400

4.
Stockholders’ Equity
Paid-in capital:
Common stock, $8 stated value (600,000 shares
authorized, 468,000 shares issued).......................... $3,744,000
Excess of issue price over stated value...................... 890,000
From sale of treasury stock........................................... 60,000
Total paid-in capital.................................................... $ 4,694,000
Retained earnings.................................................................. 7,259,400
Total.................................................................................. $11,953,400
Deduct treasury stock (10,000 shares at cost)................... 100,000
Total stockholders’ equity.................................................... $11,853,400
Prob. 13–5B
Jan. 8 No entry required. The stockholders ledger would be revised to record
the increased number of shares held by each stockholder.
Feb. 13 Treasury Stock (30,000 × $27)................................. 810,000
Cash...................................................................... 810,000
May 1 Cash Dividends......................................................... 122,600*
Cash Dividends Payable.................................... 122,600
*(25,000 × $0.80) + [(600,000 – 30,000) × $0.18]
June 1 Cash Dividends Payable.......................................... 122,600
Cash...................................................................... 122,600
Aug. 5 Cash (22,000 × $34).................................................. 748,000
Treasury Stock (22,000 × $27)........................... 594,000
Paid-In Capital from Sale of Treasury
Stock (22,000 × $7).............................................. 154,000
Nov. 15 Cash Dividends......................................................... 138,400*
Cash Dividends Payable.................................... 138,400
*(25,000 × $0.80) + [(600,000 – 8,000) × $0.20]
15 Stock Dividends (11,840 × $40)............................... 473,600**
Stock Dividends Distributable (11,840 × $25).. 296,000
Paid-In Capital in Excess of Par—Common
Stock (11,840 × $15)............................................ 177,600
**(600,000 – 8,000) × 2% × $40
Dec. 31 Cash Dividends Payable.......................................... 138,400
Cash...................................................................... 138,400
31 Stock Dividends Distributable................................ 296,000
Common Stock.................................................... 296,000
 SPECIAL ACTIVITIES

Activity 13–1

At the time of this decision, the WorldCom board had come under intense
scrutiny. This was the largest loan by a company to its CEO in history. The SEC
began an investigation into this loan, and Bernie Ebbers was eventually
terminated as the CEO, with this loan being cited as part of the reason. The
board indicated that the decision to lend Ebbers this money was to keep him
from selling his stock and depressing the share price. Thus, it claimed that it was
actually helping shareholders by keeping these shares from being sold.
However, this argument wasn’t well received, given that the share price dropped
from around $15 per share at the time of the loan to about $2.50 per share when
Ebbers was terminated. In addition, critics were scornful of the low “sweetheart”
interest rate given to Ebbers for this loan. In addition, many critics viewed the
loan as risky, given that it was not supported by any personal assets. WorldCom
has since entered bankruptcy proceedings, Ebbers has gone to prison, and the
Ebbers loan went uncollected.
Some press comments:
1. When he borrowed money personally, he used his WorldCom stock as
collateral. As these loans came due, he was unwilling to sell at “depressed
prices” of $10 to $15 (it’s now around $2.50). So WorldCom lent him the
money to consolidate his loans, to the tune of $366 million. How a board of
directors, representing you and me at the table, allowed this to happen is
beyond comprehension. They should resign with Bernie. (Source: Andy
Kessler, “Bernie Bites the Dust,” The Wall Street Journal, May 1, 2002, p.
A18.)

2. It was astonishing to read the other day that the board of directors of the
United States’ second-largest telecommunications company claims to have
had its shareholders’ interests in mind when it agreed to grant more than
$430 million in low-interest loans to the company’s CEO, mainly to meet
margin calls on his stock.
Yet that’s the level to which fiduciary responsibility seems to have sunk on
the board of Clinton, Mississippi-based WorldCom, the deeply troubled
telecom giant, as it sought to bail Bernard Ebbers out of the folly of
speculating in shares of WorldCom itself. Sadly, WorldCom is hardly alone.
“The very essence of why Mr. Ebbers was granted a loan was to protect
shareholder value,” said a WorldCom spokesman in mid-March, just as the
U.S. Securities & Exchange Commission was unfurling a probe of the loan
and 23 other matters related to WorldCom’s finances.
Activity 13–1 Concluded

Yes, folks, you read that right. On March 14, 2002, a spokesman for a publicly
traded, $20 billion company actually stood up and declared that of all the
uses to which the company could have put almost half-a-billion dollars, the
best one by far—at least from the point of view of the shareholders—was to
spend it on some sort of stock-parking scheme in order to keep the CEO out
of bankruptcy court. (Source: Christopher Byron, “Bernie’s Bad Idea,” Red
Herring, April 16, 2002.)

Note to Instructors: Bernie Ebbers is currently serving a 25-year prison sentence

for conspiracy, securities fraud, and making false statements to securities
regulators.

Activity 13–2

Jas and Nadine are behaving in a professional manner as long as full and
complete information is provided to potential investors in accordance with
federal regulations for the sale of securities to the public. If such information is
provided, the marketplace will determine the fair value of the company’s stock.

Activity 13–3

1. This case involves a transaction in which a security has been issued that has
characteristics of both stock and debt. The primary argument for classifying
the issuance of the common stock as debt is that the investors have a legal
right to an amount equal to the purchase price (face value) of the security.
This is similar to a note payable or a bond payable. The additional $50
payment could be argued to be equivalent to an interest payment, whose
payment has been deferred until a later date.

Arguments against classifying the security as debt include the fact that the
investors will not receive fixed “annual” interest payments. In fact, if
Biosciences Unlimited Inc. does not generate any net sales, the investors do
not have a right to receive any payments. One could argue that the payments
of 2% of net sales are, in substance, a method of redeeming the stock. As
indicated in the case, the stockholders must surrender their stock for $100
after the $10 million payment has been made. Overall, the arguments would
seem to favor classifying the security as common stock.
Activity 13–3 Concluded

2. In practice, the $10 million stock issuance would probably be classified as

common stock. However, full disclosure should be made of the 2% of net
sales and $100 payment obligations in the notes to the financial statements.
In addition, as Biosciences Unlimited Inc. generates net sales, a current
liability should be recorded for the payment to stockholders. Such payments
would be classified as dividend payments rather than as interest payments.
Emma Cavins should also investigate whether such payments might violate
any loan agreements with the banks. Banks often restrict dividend payments
in loan agreements. If such an agreement has been violated, Biosciences
Unlimited Inc. should notify the bank immediately and request a waiver of the
violation.

Activity 13–4

a. 500 shares × ($1.24 ÷ 4) = $155

b. 1.75% = ($32.5815 – $32.02)/$32.02

c. 1.49% ($32.02 – $31.55)/$31.55

d. 500 shares × $32.5815 = $16,290.75 plus brokerage commission

The $16,290.75 paid for 500 shares of GE common stock goes to the seller of
the common stock (another shareholder). The brokerage commission goes to
the broker who facilitated the trade.
Note to Instructors: You may wish to leave the answer as given, or go into
greater detail about the NYSE specialist system. Namely, the specialist both
buys and sells the GE common stock and acts as an intermediary between
individual buyers and sellers. The specialist makes money on the bid/ask
price spreads between buyers and sellers. The specialist creates an orderly
market by matching supply and demand.
Activity 13–5

1. Before a cash dividend is declared, there must be sufficient retained

earnings and cash. On December 31, 2010, the retained earnings balance of
$1,798,800 is available for use in declaring a dividend. This balance is
sufficient for the payment of the normal quarterly cash dividend of $0.40 per
share, which would amount to $24,000 ($0.40 × 60,000).
Rainbow Designs Inc.’s cash balance at December 31, 2010, is $96,000, of
which $60,000 is committed as the compensating balance under the loan
agreement. This leaves only $36,000 to pay the dividend of $24,000 and to
finance normal operations in the future. Unless the cash balance can be
expected to increase significantly in early 2011, it is questionable whether
sufficient cash will be available to pay a cash dividend and to provide for
future cash needs.
Other factors that should be considered include the company’s working
capital (current assets – current liabilities) position and the loan provision
pertaining to the current ratio, resources needed for plant expansion or
replacement of facilities, future business prospects of the company, and
forecasts for the industry and the economy in general. The working capital is
$1,210,800 ($1,510,800 – $300,000) on December 31, 2010. The current ratio is
therefore 5:1 ($1,510,800/$300,000) on December 31, 2010. However, after
deducting the $900,000 committed to store modernization and product-line
expansion, the ratio drops to 2:1 ($610,800/$300,000). If the cash dividend
were declared and paid and the other current assets and current liabilities
remain unchanged, the current ratio would drop to 1.956:1
($586,800/$300,000), and this would violate the loan agreement. Further,
working capital commitments for 2011 and any additional funds that might be
required, such as funds for the replacement of fixed assets, would suggest
that the declaration of a cash dividend for the fourth quarter of 2010 might
not be wise.
Activity 13–5 Concluded

2. Given the cash and working capital position of Rainbow Designs Inc. on
December 31, 2010, a stock dividend might be an appropriate alternative to a
cash dividend.
a. From the point of view of a stockholder, the declaration of a stock
dividend would continue the dividend declaration trend of Rainbow
Designs Inc. In addition, although the amount of the stockholders’
equity and proportional interest in the corporation would remain
unchanged, the stockholders might benefit from an increase in the fair
market value of their total holdings of Rainbow Designs Inc. stock after
distribution of the dividend.
b. From the point of view of the board of directors, a stock dividend would
continue the dividend trend, while the cash and working capital position
of the company would not be jeopardized. Many corporations use stock
dividends as a way to “plow back” retained earnings for use in acquiring
new facilities or for expanding their operations. Rainbow Designs Inc.
has sufficient unissued common stock to declare a stock dividend
without changing the amount authorized.

Activity 13–6

Note to Instructors: The purpose of this activity is to familiarize students with

sources of information about corporations and how that information is useful in
evaluating the corporation’s activities.