Chapter 12 Corporations: Organization, Stock Transactions, and Dividends Study Guide Do You Know?

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1 Chapter 12 Corporations: Organization, Transactions, and Dividends Study Guide Do You Know? Learning Objective 1: Describe the nature of the corporate form of organization. The distinguishing characteristics and structure of a corporation? (See exercises 1 3) How to record the expenses incurred to organize a corporation? (See exercises 4 6) Learning Objective 2: Describe and illustrate the characteristics of stock, classes of stock, and entries for issuing stock. The difference between shares being classified as authorized, issued, and outstanding? (See exercises 7 9) How to allocate dividends paid between common and preferred shareholders? (See exercises 10 12) The journal entry used to record the issuance of stock at par value? (See exercises 13, 15, 17) The journal entry used to record the issuance of stock at a premium? (See exercises 14, 16, 18) The journal entry used to record the issuance of no-par stock? (See exercises 19 21) Learning Objective 3: Describe and illustrate the accounting for cash dividends and stock dividends. The three dates of a dividend announcement and the journal entries associated with each? (See exercises 22 24) How to account for stock dividends? (See exercises 25 27) Learning Objective 4: Describe the effect of stock splits on stockholders equity. How stock splits affect the number of shares outstanding and the par value per share? (See exercises 28 30) Learning Objective 5: Describe and illustrate the accounting for treasury stock transactions. How to account for treasury stock using the cost method? (See exercises 31 33) 1

2 2 Chapter 12 Learning Objective 6: Describe and illustrate the reporting of stockholders equity. How stockholders equity is shown on the balance sheet? (See exercises 34 36) How to prepare the retained earnings statement? (See exercises 37 39) How to prepare the statement of stockholders equity? (See exercises 40 42) Learning Objective ADM: Describe and illustrate the use of earnings per share in evaluating a company s profitability. How to calculate and interpret earnings per share? (See exercises 43 45) Fill-in-the-Blank Equations 1. If stock is sold for a price that is more than its par value, the stock has been sold at a(n). 2. If stock is sold for a price that is less than its par value, the stock has been sold at a(n). 3. = (Net income Preferred dividends) Average number of common shares outstanding Exercises 1. Which of the following is true of a corporation? If a description is false, why? a. Owners of a corporation have full liability. b. The corporation is taxed separately from its owners. c. The corporation has a life limited to its owners. 2. Which of the following characteristics relates to a corporation? a. Pass-through taxation to its owners b. Must satisfy the Sarbanes-Oxley requirements c. Creditors limited to the assets of the corporation 3. A corporation has which of the following characteristics? a. Owners may easily buy or sell an interest in the corporation b. Earnings are double taxed c. Difficult to raise capital

3 Corporations: Organization, Transactions, and Dividends 3 4. Upon formation, Apple Tree Corp. incurred the following expenses: incorporation fees, $2,200; legal fees, $1,500; and state incorporation fees, $4,000. Prepare the journal entry to record the payment of these expenses on January Upon formation on August 15, Snacksters Corp. incurred the following expenses: promotional costs, $1,750; legal fees, $950; and state incorporation fees, $6,200. Prepare the journal entry to record the payment of these expenses. 6. Pen Supply Corp. began operations on March 1. On this date, the company paid for the following expenses: legal fees related to organization, $5,000; rent for the upcoming month, $1,500; license fees, $2,000; promotional costs, $1,200; and insurance for the fiscal year, $9,000. Prepare the journal entry to record the organizational expenses paid. 7. Shem Creek Corp. has $52,000 of common stock outstanding and $15,000 of treasury stock. If the corporation has $24,000 of common stock not issued, calculate the following: a. Dollar value of shares issued b. Dollar value of shares authorized to issue 8. Burns Alley has $16,700 of common stock issued to shareholders. The company holds $4,200 in treasury stock. What is the dollar value of the common stock outstanding? If the company also has $4,300 of stock not yet issued, what is the dollar value of the common stock the corporation has authorized? 9. Apple Tree Corp. has $2,400 of treasury stock currently and $25,000 of common stock outstanding. If the company has $37,000 authorized, how much is not issued to shareholders? 10. In 20Y5, Shem Creek Corp. paid $52,000 in dividends to its shareholders. At the time, the corporation had 4,000 shares of cumulative preferred $5 stock, $10 par and 3,000 shares of common stock, $5 par issued. If no dividends were paid in 20Y4, determine how much each preferred and common shareholder will receive. 11. Snacksters Corp. paid a total of $60,000 in dividends for the year. The corporation currently has 10,000 shares of $5 par common stock issued and 5,000 of $5 cumulative preferred stock with a $100 par. The corporation has paid dividends in all of the previous years. How much will each common and preferred shareholder receive? 12. Burns Alley paid a total of $75,000 in dividends during 20Y5. For the year, the corporation had 3,000 shares of cumulative preferred $6 stock, $15 par and 15,000 shares of common stock, $10 par issued. The corporation did not pay dividends in 20Y3 or 20Y4. Determine how much each common and preferred shareholder will receive.

4 4 Chapter On September 5, Olive Oils Corp. issued 4,000 shares of $20 par preferred stock and 25,000 shares of $5 par common stock at par for cash. Prepare the journal entry to record the stock issue. 14. Using the same information as Exercise 13, assume the corporation issued the preferred stock for $25 and the common stock for land with a current market value of $200,000. Prepare the journal entry to record the stock issue. 15. Tortoise Cleaning Corporation issued 15,000 shares of $3 par preferred stock, 20,000 of $2 par preferred stock, and 10,000 shares of $5 par common stock at par for cash on March 20. Prepare the journal entry to record the stock issue. 16. Use the same information as Exercise 15, except that Tortoise Cleaning Corporation issued the $3 par preferred stock for $10 a share and the $2 par preferred stock for $7 a share. The common stock also sold at a premium for $7 per share. Prepare the journal entry to record the stock issue. 17. Upon formation on May 12, Big Zero issued 3,000 shares each of $10 par preferred stock and $8 par common stock at par. Prepare the journal entry to record the stock issue. 18. Instead of issuing the stock at par as in Exercise 17, Big Zero issued the preferred and common stock for $12 per share. Prepare the journal entry to record the stock issue. 19. On March 16, a corporation issued 3,000 shares of no-par common stock for $3 per share and 4,000 shares of no-par preferred stock for $5 per share. Prepare the journal entry to record the transaction. 20. Ole Corp. issued 5,000 shares of no-par common stock for $10 per share on April 1. The common stock had a stated value of $5 per share. On June 1, the corporation issued 2,000 shares of the same common stock for $7 per share. Prepare the journal entries to record the stock issues. 21. Upon formation on July 10, Tortoise Cleaning Corporation issued 2,500 shares of no-par common stock for $6 per share and 6,100 shares of no-par preferred stock for $10 per share. On September 12, the corporation issued 1,000 more shares of the same common stock for $5 per share. Prepare the journal entries to record these transactions. 22. On May 16, the board of directors authorized a $3 dividend for all common stock outstanding and an $8 dividend for all preferred stock outstanding. The corporation had 5,000 shares of common stock and 3,500 shares of preferred stock. One month later, the corporation determines there are 1,000 shareholders to receive the cash dividends. The dividend is paid on April 30. Prepare the journal entry required on each of the dates.

5 Corporations: Organization, Transactions, and Dividends On June 1, RPC Corporation announced a cash dividend of $52,000 for the year. The company determined the shareholders to receive the dividends on July 5 and made the disbursement on July 18. Prepare the journal entry required as of each date. 24. Reeds Corp. decided to pay the dividends below on August 1. On September 20, the corporation determined the owners of the stock and made the cash payment on the first of the following month. Prepare the journal entries required. Dividends per Share 10,000 shares of preferred stock, $20 par $ ,000 shares of common stock, $5 par $ Silver Dollar Corp. had the balances below on January 15 in its stockholders equity accounts. On that same day, the company declared a 2% stock dividend, when the stock had a current market value of $20 per share. The stock dividends are distributed on February 20. Prepare the journal entries required on each date. Common, $2 par (100,000 shares issued) $ 200,000 Paid-In Capital in Excess of Par Common 470,000 Retained Earnings 1,060, Shem Creek Corp. declared a 10% stock dividend on March 2, when its stockholders equity accounts had the balances listed. On this date, the market value of common stock was $70 a share. The company distributed the dividends on April 15. Prepare the journal entries required on each date. Common, $10 par (250,000 shares issued) $ 2,500,000 Paid-In Capital in Excess of Par Common 18,750,000 Retained Earnings 54,350, RPC Corporation declared a 6% stock dividend on May 7. On this date, its stockholder equity accounts had the balances listed, and the current price of the common stock was $15. Prepare the journal entries required if the dividends were distributed on June 25. Common, $1.50 par (120,000 shares issued) $ 180,000 Paid-In Capital in Excess of Par Common 2,160,000 Retained Earnings 4,470,000

6 6 Chapter Snacksters Corp. had 40,000 shares of common stock outstanding with a $6 par value on August 24. The next day, the board of directors announced a 3-for-1 stock split. Determine how many stocks will be outstanding after the stock split and the par value of each share. 29. RPC Corporation had 25,000 shares of common stock outstanding with a $10 par value on March 5, before a 5-for-2 stock split. Determine how many stocks will be outstanding after the split and the par value of each share. 30. Tortoise Cleaning Corporation had 90,000 shares of common stock outstanding on June 1, with each share having a $20 par value. The corporation announced a 4-for-1 stock split on this date. Prior to the split, Jen Vester held 2,000 shares of the corporation s common stock. Determine the total number of shares outstanding and the par value of each share after the stock split. Will Jen have a change in ownership after the split? 31. Burns Alley has 35,000 shares of $5 common stock outstanding on April 20. The paid-in capital in excess of par account related to the common stock has a balance of $120,000. Use the cost method to prepare the following transactions: a. The corporation purchased 10,000 of its common stock for $10 a share on April 22. b. The corporation sells 6,500 of its treasury stock for $12 a share on May 5. c. The corporation sells 1,000 of its treasury stock for $7.50 a share on May Big Zero has the following paid-in capital on July 1: Common stock, $10 par (120,000 shares authorized and issued) $1,200,000 Excess of issue price over par 3,600,000 $4,800,000 Use the cost method to prepare the journal entries required for the transactions below. a. Purchase of 25,000 of common stock for $42 per share on July 5 b. Sale of 10,000 of treasury stock for $38 per share on July 15 c. Sale of 4,000 of treasury stock for $44 per share on August 5

7 Corporations: Organization, Transactions, and Dividends Pet Supply Corp. has the following account balances on August 1: Common stock, $2 par (75,000 shares authorized and issued) $ 150,000 Excess of issue price over par 1,590,000 Treasury (10,000 shares) 275,000 Retained Earnings 3,750,300 Using the cost method, prepare the journal entries required for the corporation: a. Sale of 3,500 shares of treasury stock for $30 on August 9 b. Purchase of 5,000 shares of common stock for $26 per share on September 15 c. Purchase of 1,500 shares of common stock for $25 per share on September With the account balances below, prepare the stockholders equity section of the balance sheet. The corporation has 20,000 shares authorized, and 4,000 shares have been reacquired. Common, $15 par $150,000 Retained Earnings 850,400 Treasury 84,000 Paid-In Capital in Excess of Par 195, Prepare the stockholders equity section of the balance sheet using the account balances below. The corporation has 100,000 shares authorized, and 15,000 shares have been reacquired. Common, $5 par $ 375,000 Retained Earnings 5,975,000 Treasury 112,500 Paid-In Capital in Excess of Par 1,290,000 Paid-In Capital from Sale of Treasury 47, Use the account balances below to prepare the stockholders equity section of the company s balance sheet. The corporation has 75,000 shares authorized, and 4,000 shares have been reacquired. Common, $20 par $1,200,000 Retained Earnings 3,470,000 Treasury 57,000 Paid-In Capital in Excess of Par 1,920,000 Paid-In Capital from Sale of Treasury 15,200

8 8 Chapter At the beginning of its fiscal year on January 1, 20Y5, Tortoise Cleaning Corporation had a balance in its retained earnings account of $6,200,000. During the year, it suffered a $1,200,000 net loss but was able to pay a $52,750 dividend to its common shareholders. Prepare the retained earnings statement for its 20Y5 fiscal year. 38. At the beginning of its fiscal year on April 1, 20Y5, Olive Oils Corp. had a balance of $4,740,000 in its retained earnings account. The company generated its highest net income ever of $4,150,750, so it paid large dividends of $975,000 and $750,000 to its preferred and common shareholders, respectively. Prepare the 20Y5 fiscal year retained earnings statement for the company. 39. RPC Corporation s retained earnings account had a balance of $2,150,000 as of the beginning of its fiscal year, July 1, 20Y5. It only generated $950,000 of net income for the year, but paid large dividends of $650,000 to its preferred shareholders and $500,000 to its common shareholders to maintain investor confidence. Prepare the 20Y5 retained earnings statement for the company. 40. Using the information from Exercise 37 and the account balances below, prepare Tortoise Cleaning Corporation s statement of stockholders equity. The company also issued 20,000 shares of $10 preferred stock for $25 per share. Common $175,000 Preferred 200,000 Additional Paid-In Capital 400,000 Treasury 10, During its 20Y5 fiscal year, Olive Oils Corp. issued 10,000 shares of $5 preferred stock for $12 per share. It also purchased 5,000 shares of treasury stock for $50,000. Use the information from Exercise 38 and the beginning balances below to prepare the statement of stockholders equity. Preferred Olive Oils Corp. Statement of holders' Equity For the Year Ended March 31, 20Y6 Common Additional Paid-In Capital Retained Earnings Treasury Total Balance, April 1, 20Y5 $125,000 $320,000 $1,520,000 $4,740,000 $(7,500) $6,697,500

9 Corporations: Organization, Transactions, and Dividends Prepare RPC Corporation s statement of stockholders equity using the information in Exercise 39 and the account balances below. During the year, the corporation issued an additional 4,000 shares of $4 common stock for $22 each and sold half of the treasury stock for $5,000. Preferred RPC Corporation Statement of holders' Equity For the Year Ended June 30, 20Y6 Common Additional Paid-In Capital Retained Earnings Treasury Total Balance, July 1, 20Y5 $100,500 $220,000 $3,250,000 $2,150,000 $(6,000) $5,714, Calculate Burns Alley s earnings per share for 20Y5 and 20Y6 using the information given. For both years, the company had no preferred stock outstanding. Round answers to the nearest cent, and determine if the change is favorable or unfavorable. 20Y6 20Y5 Net income $10,800,000 $9,250,750 Average number of common shares outstanding 123, , Calculate Apple Tree Corp. s earnings per share for 20Y5 and 20Y6, rounding to the nearest cent. Determine if the company became more profitable or less profitable in 20Y6. 20Y6 20Y5 Net income $11,750,000 $8,950,000 Preferred dividends $600,500 $220,100 Average number of common shares outstanding 240, , Use the information in the table below to calculate RPC Corporation s earnings per share for 20Y5 and 20Y6. Round answers to the nearest cent, and determine if the change is favorable or unfavorable. 20Y6 20Y5 Net income $1,090,250 $1,005,000 Preferred stock outstanding 100, ,000 Dividends paid per preferred stock $2.00 $1.75 Average number of common shares outstanding 115, ,325