DOC

Questions1Stockholders'

By Roberto Campbell,2014-12-19 23:58
8 views 0
Questions1Stockholders'

    Chapter 10

    STOCKHOLDERS EQUITY

     DISCUSSION QUESTIONS

    1. Stockholders equity, which also is called 6. Corporations can buy back their own stock. equity, represents the owners claims When a corporation purchases its own pre-against the assets of a corporation after all viously issued stock, it is called treasury liabilities have been deducted. There are stock. Thus, the number of shares issued is various elements of equity, and the stock-further distinguished from the number of holders equity section of the balance sheet shares outstandingwhich is the number of clearly classifies these elements according issued shares actually in the hands of to their source: (1) capital stocksplit be-stockholders. When firms reacquire their tween preferred and common stock and the own stock, the reacquired shares are not associated paid-in capital in excess of par; considered to be outstanding.

    (2) retained earnings or deficit; (3) accumu-7. Preferred dividends are conceptually similar lated other comprehensive income; and (4) to interest payments. Specifically, preferred treasury stock. dividends are a contractually defined

    2. A share of stock represents part ownership amount (e.g., some percentage of par) and of the company. are typically paid each year. Further, both

    debt and preferred stock are paid off in full 3. Corporations issue stock to raise cash (or before common stockholders receive any-capital) in a way that eases the transfer of thing in liquidation. Additionally, neither pre-ownership and limits the liability of owners. ferred stock nor debt provides voting rights.

    Finally, the value of preferred stock, like the 4. Common stockholders have four main bene-

    value of debt, is most closely tied to interest fits. Common stockholders have the right to:

    rate levels and the companys overall credit (1) vote in the election of the board of direc-worthiness. tors.

    8. While dividends on common stock are set by (2) share in the profits and dividends of the the corporations board of directors and are company. subject to change each year, dividends on

    preferred stock are usually established as (3) keep the same percentage of ownership one of the terms of the issue. Most preferred if new stock is issued (preemptive right). stock issues fix their dividend rate as a per-(4) share in the assets in liquidation in pro-centage of the par value. For example, an portion to their holdings. This is referred 8% preferred share with a $100 par value to as the residual claim, because has an annual dividend of $8 ($100 par × common stockholders are only paid af-8%). Of course, both preferred and common ter all creditors and preferred stockhold-dividends are subject to various restrictions ers are paid in full (which is very rare in imposed by statute, by corporate charter, by liquidation). the terms of preferred stock issues, and by

    contracts with bondholders and others. 5. Preferred stock grants certain privileges,

    usually involving dividends, to its holders 9. Each form of equity offers a different advan-that are not granted to holders of common tage to the issuing corporation. For example, stock. Common stock confers voting rights. the conversion privilege normally allows the Dividends on common stock are usually issuer to sell the convertible preferred stock more closely correlated with the success of with a lower dividend rate than would have the corporation than are preferred dividends. been required for comparable stock without Other differences include dividend prefe-a conversion feature. Convertible preferred rences, conversion privileges, liquidation stock is frequently issued with a call option preferences, call provisions, and denial of that entitles the issuing corporation to repur-voting rights. The first three are usually ad-chase the shares should conditions in the vantages of preferred stockholders, while marketplace change. Effective management the last two are disadvantages. of common and preferred stock requires

    10-1 ? 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible ? 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. website, in whole or in part.

    careful attention to the interplay of conver-charged against capital stock accounts and

    does not occur when the company is in dis-sion and call provisions, stock market val-

    ues, and stockholder incentives. Conse-solution.

    quently, virtually all corporations have 15. Retained earnings (or deficit) is the accumu-authorized different forms of equity. lated earnings (or losses) over the entire life 10. In a stock issuance, the contributions of of the corporation that have not been distri-

    stockholders are usually divided between buted to stockholders.

    two equity accounts on the basis of the par 16. Under most corporate charters, the balance value of the stock. The par value multiplied of a corporations retained earnings by the number of shares sold is recorded in represents an upper limit on the entitys an account that describes the type of ability to pay dividends. (Dividends cannot stockfor example, Common Stock or Pre-reduce retained earnings below zero.) A ferred Stock. When a corporation receives corporations capacity to pay dividends may more than par value for newly issued stock, be further restricted by agreements with as it usually does (stock rarely sells for ex-lenders, by the corporations board of direc-actly its par value), the excess over par is tors, and by various provisions of state law, recorded in an account called Paid-In Capi-as follows: tal in Excess of Par.

    (1) An agreement between the corporation 11. When a corporation purchases its own pre-and bondholders may require that re-viously issued stock, the stock that it buys is tained earnings never fall below a speci-called treasury stock. fied level so long as the bonds are out-12. The purchase of treasury stock is a tempo-standing.

    rary reduction of equity rather than the ac-(2) The firms board of directors may set quisition of an investment. Instead of requir-aside a portion of retained earnings and ing a debit to an investment account, the declare it unavailable for the payment reacquisition of treasury stock requires a of dividends. Such an action may be debit to a contra-equity account, treasury used to communicate to stockholders stock. changes in dividend policy made neces-13. A stock dividend transfers shares of stock sary by expansion programs or other

    from the corporation to its stockholders; they decisions of the board.

    receive additional shares of the corpora-(3) State law may require that dividends not tions stock. A stock split, like a stock divi-reduce retained earnings below the cost dend, increases the number of outstanding of treasury stock. shares without altering the proportionate

    ownership of a corporation. Unlike a stock 17. Other comprehensive income is related to dividend, however, a stock split involves a nonowner transactions, whereas retained

    decrease in the per-share par value (or earnings is what is left of the earnings after

    stated value), with no capitalization of re-payment to the owners.

    tained earnings. In other words, a stock split 18. Stockholders want to understand (1) how is a stock issue that increases the number of the value of their shares of stock will change outstanding shares of a corporation without and (2) how the company will distribute any changing the balances of its equity ac-excess cash to stockholders. The results of counts. these ratios are usually used in two ways. 14. When retained earnings have been reduced First, they are compared over time to eva-

    to zero, any additional dividends must come luate trends. Second, the ratios can be

    from paid-in capital. Such dividends are compared to results for other companies in called liquidating dividends, and must be the industry. charged against capital stock accountsfirst 19. Par value and stated value are measures of paid-in capital in excess of par, then par val-legal capital. Par value is the established ue. The payment of liquidating dividends minimum price for which each share must usually accompanies the dissolution of the be issued but does not determine the eco-corporation and is regulated by various laws nomic value of the stock. If stock is issued designed to protect the interests of creditors without a par value, it may have a stated and other holders of nonresidual equity. A value per share to establish the legal capital. cash dividend transfers cash from the corpo-

    ration to its stockholders. It does not get

    10-2 ? 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible ? 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. website, in whole or in part.

    20. A privately-held corporation is one whose 24. A stock split changes the number of autho-

    rized, issued, and outstanding shares of stock is held by a small group of private in-

    dividuals, whereas a publicly-held corpora-stock. It involves a decrease in the per-tion is one whose stock is owned and pur-share par or stated value and an increase in chasable by the general public. the number of shares issued. However,

    stock splits do not change any equity ac-21. A stock warrant is the right granted by a count balance. corporation to purchase a specified number

    of shares of its capital stock at a stated price 25. The statement of changes in stockholders

    and within a stated time period. Warrants equity shows changes in the capital stock are used when debt securities or preferred accounts, the number of shares outstanding, stock are sold to make those instruments and retained earnings.

    more attractive to investors. When additional 26. Prior period adjustments are corrections of shares of stock are sold to the public, war-errors in financial statements of prior periods rants are often issued to existing sharehold-and are presented as adjustments to begin-ers to provide them the opportunity to main-ning retained earnings. Adjustments arising tain their existing percentage level of from estimation errors or changes from one ownership. Warrants are also issued in the accounting principle to another are excluded form of stock options to employees and ex-from prior period adjustments. ecutives as compensation.

    27. Two common forms of dividend payouts are 22. Corporations purchase treasury stock for cash and additional shares of stock. Also, many reasons. Answers should include four when the corporation is liquidating, share-of the following: holders get to share in proportion to their (1) to buy out the ownership of one or more holdings or have a residual claim.

    stockholders. 28. A current dividend preference provides that (2) to reduce the size of corporate opera-current dividends must be paid to preferred

    tions. stockholders before any dividends are paid

    to common stockholders. A cumulative divi-(3) to reduce the number of outstanding dend preference requires the eventual pay-shares of stock in an attempt to increase ment of all preferred dividendsboth divi-earnings per share and market value dends in arrears and current dividendsper share. before any dividends are paid to common

    stockholders. A participating dividend prefe-(4) to acquire shares to be transferred to

    rence provides that preferred stockholders employees under stock bonus, stock op-

    receive, in addition to the stated dividend, a tion, or stock purchase plans. share of amounts available for distribution (5) to satisfy the terms of a business com-as dividends to other classes of stock. bination in which the corporation must

    29. Dividends do not become a liability of a cor-give a quantity of shares of its stock as

    poration until they have been declared by part of the acquisition of another busi-

    the board of directors. Since preferred divi-ness.

    dends in arrears have not been declared, (6) to reduce vulnerability to an unfriendly they are not recorded as liabilities but are takeover. disclosed in a footnote to the financial

    statements. 23. On the declaration date, the company

    records the dividend by a debit to Dividends

    and a credit to Dividends Payable. There is

    no journal entry on the date of record. On

    the date of payment, the company records a

    debit to Dividends Payable and a credit to

    Cash.

    10-3 ? 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible ? 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. website, in whole or in part.

     MULTIPLE-CHOICE EXERCISES

    101 a

    102 d

    103 a

    104 d Total stock issued ($37,500 ? $0.50) ................ 75,000 shares

     Less: Treasury stock ......................................... 5,000 shares

     Total stock outstanding .................................... 70,000 shares

    105 c

    106 d 2,400 shares × $20/share = $48,000 increase to stockholders equity

     Cash ............................................................................ $ 48,000

     Common stock (2,400 × $2 par) ................................ 4,800

     Paid-in excess of parcommon stock

     (2,400 × $18) ............................................................ $ 43,200

    107 c Prepaid rent ($2,400 × 24 months) ........................... $ 57,600*

     Common stock (1,000 shares × $1 par) ................... 1,000

     Paid-in excess of parcommon stock .................... $ 56,600

     *For newly organized or closely held corporations, the fair market

    value of the asset/service is usually more readily determinable

    than the fair market value of the stock. 108 b

    109 b

    1010 d

    1011 a

    1012 d

    1013 b

    1014 d

    1015 c

    1016 d $30 market price ? 3 = $10 per new share

    10-4 ? 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible ? 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. website, in whole or in part.

1017 a

    1018 a Preferred dividends:

     2008 (in arrears):

     (20,000 × $40) × 5% = $40,000

     2009:

     (20,000 × $40) × 5% = $40,000

     $150,000 $80,000 = $70,000 left over for dividends to common

    shareholders.

    1019 d

    1020 a

    1021 a $100,000 ? $200,000 = 0.5

    10-5 ? 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible ? 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. website, in whole or in part.

     CORNERSTONE EXERCISES

    Cornerstone Exercise 1022

    $150,000/$2 = 75,000 shares; 75,000 8,000 treasury stock = 67,000 shares

    outstanding

     Cornerstone Exercise 1023

    Common stock (8,000 $5) ............................................................ $ 40,000 Paid-in capital in excess of parcommon stock

     [8,000 ($15 ; $5)]........................................................................ 80,000 Preferred stock (2,000 $10) ......................................................... 20,000 Paid-in capital in excess of parpreferred stock

     [2,000 ($30 ; $10)]...................................................................... 40,000

     Total capital................................................................................ $ 180,000

     Cornerstone Exercise 1024

    Stahl Company

    Balance Sheet (Partial)

    December 31, 2007

    Capital stock:

     Preferred stock, 6%, $10 par, 10,000 shares

     authorized, 2,000 shares issued and outstanding .. $ 20,000

     Common stock, $5 par, 20,000 shares authorized,

     8,000 shares issued and outstanding ...................... 40,000 Paid-in capital in excess of par:

     Preferred stock ............................................................. $ 40,000

     Common stock .............................................................. 80,000 120,000

     Total capital stock ................................................... $ 180,000

     Retained earnings ........................................................ 375,000

     Total stockholders equity ...................................... $ 555,000

    10-6 ? 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible ? 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. website, in whole or in part.

Cornerstone Exercise 1025

    Preferred stock grants certain privileges, usually involving dividends, to its holders that are not granted to holders of common stock. Common stock con-fers voting rights. Dividends on common stock are usually more closely corre-lated with the success of the corporation than are preferred dividends. Other differences include dividend preferences, conversion privileges, liquidation preferences, call provisions, and denial of voting rights. The first three are usually advantages of preferred stockholders, while the last two are usually advantages of common stockholders.

     Cornerstone Exercise 1026

    Cash ............................................................................ 169,750

     Preferred Stock (250 $50).................................. 12,500

     Paid-In Capital in Excess of ParPreferred

     Stock [250 ($55 ; $50)] ................................... 1,250

     Common Stock (12,000 $0.01) .......................... 120

     Paid-In Capital in Excess of ParCommon

     Stock [12,000 ($13 ; $0.01)] ........................... 155,880

     Cornerstone Exercise 1027

    Cash (450 $32) ......................................................... 14,400.00

     Common Stock (450 $0.01) ............................... 4.50

     Paid-In Capital in Excess of ParCommon

     Stock [450 ($32 ; $0.01)] ................................ 14,395.50

     Cornerstone Exercise 1028

    Corporations distribute assets to stockholders through (1) dividends and (2) stock repurchases (i.e., purchasing treasury stock). Stock repurchases have tax advantages over dividends. First, dividends are paid to all stockholders, thus creating tax consequences for everyone. Stock repurchases, on the other hand, only trigger tax consequences for those stockholders who elect to sell their stock back to the company. Thus, if a stockholder does not want to incur tax consequences in the current year, (s)he can elect not to sell shares back to the company. Second, stock repurchases are taxed at capital gain rates, which, historically, are lower than dividend tax rates. However, in 2009 and 2010, the capital gain and dividend rates were the same. Dividends have the advantage of allowing the shareholder to receive assets from the corporation without reducing their ownership share.

    10-7 ? 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible ? 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. website, in whole or in part.

Cornerstone Exercise 1029

    2009

    Feb. 1 Treasury Stock (650 $9) .......................... 5,850

     Cash ....................................................... 5,850

    Mar. 1 Cash (150 $12) ......................................... 1,800

     Treasury Stock (150 $9) .................... 1,350

    Paid-In Capital from Treasury Stock

    Transactions [150 ($12 ; $9)] ......... 450

    May 10 Cash (500 $6) ........................................... 3,000

    Paid-In Capital from Treasury Stock

    Transactions ............................................ 1,350*

     Retained Earnings ..................................... 150

     Treasury Stock (500 $9) .................... 4,500

    Paid-In Capital from Treasury Stock Transactions

     1,350 March 1

    May 10 1,350*

     0 Ending Balance

*This account may be debited, but it cannot have a debit balance. As such, the

     maximum debit is the credit balance prior to the entry.

     Cornerstone Exercise 1030

    2009

    Jan. 1 Treasury Stock (12,000 $26) ................... 312,000

     Cash ....................................................... 312,000

    May 1 Cash (9,500 $17) ...................................... 161,500

     Retained Earnings [9,500 ($26 ; $17)] ... 85,500

     Treasury Stock (9,500 $26) ............... 247,000

    Oct. 1 Cash (1,500 $44) ...................................... 66,000

     Treasury Stock (1,500 $26) ............... 39,000

    Paid-In Capital from Treasury Stock

    Transactions [1,500 ($44 ; $26)] .... 27,000

     Cornerstone Exercise 1031

    Decrease total stockholders equity by $10,000 (2,000 $5).

    10-8 ? 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible ? 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. website, in whole or in part.

Cornerstone Exercise 1032

    Treasury Stock (2,000 $5) ....................................... 10,000

     Cash ....................................................................... 10,000

     Cornerstone Exercise 1033

    Date of DeclarationDecember 1, 2009:

     Dividends (3,800 $1.75) ..................................... 6,650

     Dividends Payable .......................................... 6,650

Date of RecordDecember 10, 2009:

     No entry is required.

Date of PaymentDecember 15, 2009:

     Dividends Payable ................................................ 6,650

     Cash ................................................................. 6,650

     Cornerstone Exercise 1034

    Dividends .................................................................... 50,000

     Dividends Payable ................................................ 50,000

     Cornerstone Exercise 1035

    Authorized shares = 200,000 2 = 400,000*

    Issued shares = 100,000 2 = 200,000

    Market value per share = $20/2 = $10

    Par value = $1/2 = $0.50

     *Although shareholders must amend the charter and the SEC must approve the amendment to increase the number of authorized shares, the number of au-thorized shares is typically adjusted for the split.

     Cornerstone Exercise 1036

    Retained Earnings [(5,000 10%) $30] .................. 15,000

     Common Stock [(5,000 10%) $3].................... 1,500

     Paid-In Capital in Excess of ParCommon

     Stock ................................................................... 13,500

    10-9 ? 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible ? 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. website, in whole or in part.

Cornerstone Exercise 1037

    2009: Preferred stock = $5,000 paid and $2,500 in arrears

     Common stock = $0

    2010: Preferred stock = $6,250 paid and $0 in arrears

     Common stock = $750

    2011: Preferred stock = $3,750 paid and $0 in arrears

     Common stock = $9,250

     Cornerstone Exercise 1038

    Preferred stock = 10% $20 10,000 shares 3 = $60,000

    Common stock = $200,000 ; $60,000 = $140,000

     Cornerstone Exercise 1039

    Beginning retained earnings, 1/1/07 .............................................. $1,250,000

    Add: Net income ............................................................................. 235,000

     $1,485,000

    Deduct: Dividends (22,000 $0.50) ............................................... 11,000 Ending retained earnings, 12/31/07 ............................................... $1,474,000

    Retained Earnings

     1,250,000 Beginning Balance

     235,000 Net Income

    Dividends

     (22,000 shares $0.50) 11,000

     1,474,000 Ending Balance

    10-10 ? 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible ? 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. website, in whole or in part.

Report this document

For any questions or suggestions please email
cust-service@docsford.com