CHAPTER 12

STOCKHOLDERS' EQUITY
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EXERCISES
E121
a.,b.,c.
Effect on
Account

Accounts
(1)
(2)
(3)
(4)
(5)
(6)

Common Stock
Additional Paid-In Capital, C/S
None
Treasury Stock
Common Stock
Additional Paid-In Capital, C/S
Retained Earnings
Treasury Stock
Additional Paid-In Capital, T/S
None

(7)

Retained Earnings

Effect on Total
Stockholders' Equity

Increase
Increase
N/A
Increase
Increase
Increase
Decrease
Decrease
Increase
N/A

Increase

Increase

Increase

No effect
Decrease
No effect
Increase
No effect

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E123
(1)

No entry is necessary.

(2)

Cash (+A)........................................................................
Common Stock (+SE)................................................
Additional Paid-In Capital, Common Stock (+SE)......
Issued common stock.

(3)

Cash (+A)........................................................................ 3,750,000

Preferred Stock (+SE)................................................
2,500,000
Additional Paid-In Capital, Preferred Stock (+SE)......
1,250,000
Issued preferred stock.

(4)

Cash (+A)........................................................................ 2,500,000

Preferred Stock (+SE)................................................
2,500,000
Issued preferred stock.

300,000

50,000
250,000

Effect of each event on basic accounting equation:

Transaction

Assets

Liabilities
1

Owners Equity

1.
2.
3.
4.

NE
+
+
+

NE
NE
NE
NE

NE
+
+
+

Since par value of a share of stock has no relationship to market value, it has very
little economic significance. At one time, par value was construed to be legal
minimum capital to protect creditors in times of dissolution or bankruptcy, but over
time the concept has lost its appeal as creditors have found better ways to protect
themselves.

E125
a.
(1)

(2)

(3)

(4)

(5)

Cash (+A).........................................................................
Common Stock (+SE)..................................................
Additional Paid-In Capital, Common Stock (+SE).......
Issued common stock.

500,000

Cash (+A).........................................................................
Preferred Stock (+SE).................................................
Issued preferred stock.

60,000

Treasury Stock (SE).........................................................

Cash (A).....................................................................
Repurchased treasury stock.

45,000

Cash (+A).........................................................................
Treasury Stock (+SE)..................................................
Additional Paid-In Capital, Treasury Stock (+SE)........
Reissued treasury stock.

18,000

Cash (+A).........................................................................
Additional Paid-In Capital, Treasury Stock (SE)...............
Treasury Stock (+SE)..................................................
Reissued treasury stock.

5,000
10,000

125,000
375,000

60,000

45,000

15,000
3,000

15,000

E125 Concluded
b. Preferred stock ($8 par value, 5,000 shares outstanding)..
Common stock ($5 par value, 25,000 shares issued,
24,000 shares outstanding)..............................................
Additional paid-in capital.....................................................
Retained earnings...............................................................
Treasury stock.....................................................................
Total stockholders' equity....................................................

60,000

125,000
368,000
500,000
(15,000)
$1,038,000

--------------------------------------------------------------------------------E1210

a. Issue Price per Share =

*Total Par Value of

Common Stock
$10,000

Common Stock + Additional Paid - in Capital

Number of Shares Issued

$10,000 $25,000
2000
,
*

$17.50

Par Value
per Share

$5

b. Purchase Price of Treasury Stock=

Number of Shares
Issued
2,000

Treasury Stock Carrying Value on Balance Sheet

Number of Treasury Stock Purchased

$8,000
400

= $20/Share
c. To acquire Timeco Zielow issued 1,000* shares and the market price of Timeco at
the time of acquisition was $28,000.**
* $5,000 c/s $5 P/V
** $5,000 c/s + $23,000 AP/C
d. Since the common stock accounts is always credited with total par value of shares
issued to stock option holders, the company issued 200 shares (i.e., $1,000 c/s
$5 a share P/V).
The stock options were exercised at a price of $9* a share. Most certainly the
market price of Zielows shares would be more than $9 at that time.
($1,000 c/s + $800 AP/C) 200 shares.
E1210 Concluded
e. Per Share Dividend Rate =

=
=

Total Dividends Paid During 2006

Common Stock Outstanding

$3,520
2,600 *
$1.354 per share

* ($16,000 $5) [(8,000 + 4,000) $20]

In this problem it is assumed that during the year 2006, treasury-stock was
acquired at $20 a share.

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E1214
a. Stock Dividend (SE)...........................................................
Common Stock (+SE)....................................................
Additional Paid-In Capital, Common Stock (+SE)..........
Declared and issued 2% stock dividend.

11,200*

960
10,240

* $11,200 = (10,000 shares issued 2,000 shares in treasury) 2% $70 per

share
b. No journal entry is necessary. However, the company should prepare a
memorandum entry stating that the par value has decreased from $6 to $4 per
share and that there are now 15,000 shares issued and 12,000 shares outstanding.
c. Stock Dividend (SE)...........................................................
Common Stock (+SE)....................................................
Additional Paid-In Capital, Common Stock (+SE)..........
Declared and issued 10% stock dividend.

64,000*
4,800
59,200

* $64,000 = (10,000 shares issued 2,000 shares in treasury) 10% $80

d. No journal entry is necessary. However, the company should prepare a
memorandum entry stating that the par value has decreased from $6 to $3 per
share and that there are now 20,000 shares issued and 16,000 shares outstanding.

E1214

Concluded

e. Ratio = (Common Stk. + Additional Paid-In Capital Treasury Stock) Retained

Earnings
Prior to entries
($60,000 + $100,000 $24,000) $60,000 = 2.27
After (a)
[($60,000 + $960) + ($100,000 + $10,240) $24,000] ($60,000 $11,200) =
3.02
After (b)
($60,000 + $100,000 $24,000) $60,000 = 2.27
After (c)
[($60,000 + $4,800) + ($100,000 + $59,200) $24,000] ($60,000 $64,000)
= .00*
After (d)
($60,000 + $100,000 $24,000) $60,000 = 2.27
* Since retained earnings account is $4,000, no ratio can be computed.
In a stock split the number of outstanding shares is simply split into smaller
units, which require the corporation to distribute additional shares. However, in a
stock dividend additional shares, usually expressed as a percentage of the
outstanding shares, are issued to stockholders. Large stock dividends have
essentially the same effect as stock splits.

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PROBLEMS
P124
a. Dividends are paid only on the shares that are both issued and outstanding. In this
case, 55,000 shares have been issued, but 8,000 of these shares are held as
treasury stock. Thus, only 47,000 shares are eligible to receive a dividend.
b. Date of declaration
Cash Dividend (SE)............................................................
Dividend Payable (+L)...................................................
Declared divided.

705,000

705,000

Date of record
No journal entry is necessary.
Date of payment
Dividend Payable (L)..........................................................
Cash (A)........................................................................
Paid dividend.
c. Stock Dividend (SE)...........................................................
Common Stock (+SE)....................................................
Additional Paid-in Capital, Common Stock (+SE)..........
Declared and issued stock dividend.

705,000

235,000a

705,000

47,000b
188,000

a $235,000 is calculated as follows:

1. Number of Shares to Be Distributed = Number of Shares Outstanding 10%

= 47,000 10% = 4,700 Shares
2. Value of Dividend
= $50 Fair Market per Share 4,700 Shares to Be
Distributed
b $47,000 = 4,700 shares to be distributed par value of $10 per share
d. The overall impact of cash dividends is a decline in the Retained Earnings account.
Since retained earnings is a part of equity, the debt/equity ratio will increase.
Issuance of stock dividends results in no change in the overall stockholders equity
of the company. However, the balance in the retained earnings account goes down
and common stock and additional paid-in capital account balances go up. Thus,
the debt/equity ratio remains unchanged after the issuance of stock dividends.

P124 Concluded
e. Stockholders would generally prefer a cash dividend over a stock dividend. Assume
that you own 1,300 shares of Royal Company's common stock prior to any
dividend. Since there are 47,000 shares outstanding, you own 3% of the company.
In addition, since each share is worth $50, the total value of your investment is
$65,000. Since the company's financial position would not be expected to improve
or worsen simply from declaring a stock dividend, the total value of your
investment should still be worth $65,000. Thus, it appears that receiving a stock
dividend has not improved your wealth. To the extent that Royal Company cannot
declare and pay dividends in excess of its balance in Retained Earnings, a stock
dividend may even decrease your wealth. By declaring a stock dividend, Royal
Company has capitalized part of Retained Earnings, which means that it will never
be available for cash dividends. Alternatively, with a cash dividend you would
receive something of value, namely cash, while still maintaining a 3% ownership
interest in the company. The trade-off, however, is that the value of the company
would decrease by the value of the cash dividend.

-----------------------------------------------------------------------P125
a. Each preferred stockholder is entitled to 10% of the par value, or $5.00. Thus, the
15,000 preferred stockholders are entitled to a total of $75,000 in any particular
year.
Year

Total
Dividends

Preferred
Dividends

Common
Dividends

2000
2001
2002
2003
2004
2005
2006

$ 65,000
100,000
70,000
50,000
125,000
110,000
99,000

$65,000
75,000
70,000
50,000
75,000
75,000
75,000

b.
Common
Year
Share

Total
Dividends

2000
2001

$ 65,000
100,000

2002
2003

70,000
50,000

2004

125,000

2005
2006

110,000
99,000

0
25,000
0
0
50,000
35,000
24,000

Preferred
per Share
$4.33
5.00
4.67
3.33
5.00
5.00
5.00

Common
per Share
$0.00
0.50
0.00
0.00
1.00
0.70
0.48

Common Preferred
Preferred Dividends Dividends per Share
$65,000
10,000
75,000
70,000
5,000
30,000
75,000
75,000
75,000

(for 2000)
(for 2000)
(for 2001)
(for 2002)
(for 2002)
45,000
(for 2003)
(for 2004)
(for 2005)
(for 2006)

0
15,000

0
0
(for 2003)
20,000
35,000
24,000

per

$4.33
5.67

$0.00
0.30

4.67
3.33

0.00
0.00

7.00

0.40

5.00
5.00

0.70
0.48

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P129
a. (1)

(2)

(3)

(4)

Treasury Stock (SE)..................................................

Cash (A)..............................................................
Purchased treasury stock.

1,000
1,000

Cash (+A)...................................................................
3,800
Preferred Stock (10%) (+SE)................................
Additional Paid-In Capital, 10% Preferred Stock (+SE)
1,800
Issued preferred stock.
Cash (+A)...................................................................
Treasury Stock (+SE)............................................
Additional Paid-In Capital, Treasury Stock (+SE)..
Reissued treasury stock.

660

10% Preferred Cash Dividend (SE)...........................

12% Preferred Cash Dividend (SE)...........................
Common Cash Dividend (SE)...................................
Dividends Payable (+L)........................................
Declared cash and stock dividend.

400a
180b
170

a $400

=
=
b $180 =
=

2,000

360
300

750

Dividends in arrears + current dividend

($1,000 10%) + ($3,000 10%)
Par value 12%
$1,500 12%

(5)

Dividends Payable (L)...............................................

Cash (A)..............................................................
Paid and issued dividend.

750

(6)

No journal entry is needed. A memorandum entry should be made stating

that the company's common stock now has a par value of $.50 per share and
that 7,000 shares are now issued and 840 shares [after the events
underlying entries (1) and (3)] are held in treasury.

750

P129 Concluded
b. Preferred stock (10%, $10 par value, cumulative)..............
Preferred stock (12%, $10 par value, noncumulative)........
Common stock ($1 par value, 10,000 shares authorized,
7,000 shares issued, and 840 shares held in treasury).
Additional paid-in capital:
Preferred stock (10%)....................................................
Preferred stock (12%)....................................................
Common stock...............................................................
Treasury stock................................................................
Retained earnings...............................................................
Treasury stock ($5,750 + $1,000 - $360)...........................
Total stockholders' equity....................................................

$ 3,000
1,500
3,500
2,850
1,275
2,345
300
4,405*
(6,390)
$12,785

* $4,405 = $4,256 $750 (dividends declared) + $899 (net income)

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