Chapter 11

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bCHAPTER 11 Corporations: Organization, Stock Transactions, Dividends, and Retained Earnings Accounting for Stock Transactions  When par value common stock is issued for cash, the par value of the shares is credited to Common Stock and the portion of the proceeds that is above or below par value is recorded in a separate paid-in capital account.  When no-par common stock has a stated value, the stated value is credited to Common Stock. When the selling price exceeds the stated value, the excess is credited to Paid-in Capital in Excess of Stated Value. When no-par stock does not have a stated value, the entire proceeds are credited to Common Stock. Example 1: Osage Corporation issued 2,000 shares of stock. Prepare the entry for the issuance under the following assumptions. (a) The stock had a par value of $5 per share and was issued for a total of $52,000. (b) The stock had a stated value of $5 per share and was issued for a total of $52,000. (c) The stock had no par or stated value and was issued for a total of $52,000. Par value Cash 52k Common stock 10k Paid capital excess of par 42k No par value,stated value Cash 52k Common stock 10k Paid in capital excess of stated value 42k No par, stated value Cash 52k Common stock 52k Issuing Common Stock for Services or Noncash Assets 1

Example 2: As an auditor for the CPA firm of Hinkson and Calvert, you encounter the following situations in auditing different clients. 1. LR Corporation is a closely held corporation whose stock is not publicly traded. On December 5, the corporation acquired land by issuing 5,000 shares of its $20 par value common stock. The owners’ asking price for the land was $120,000, and the fair value of the land was $110,000. 2. Vera Corporation is a publicly held corporation whose common stock is traded on the securities markets. On June 1, it acquired land by issuing 20,000 shares of its $10 par value stock. At the time of the exchange, the land was advertised for sale at $250,000. The stock was selling at $11 per share. Prepare the journal entries for each of the situations above. Land 110k Common stock 100k Pic in excess of par 10k 2. Land (11-20k) 220k Common stock 200k PIC in excess of PAR 20k Preferred Stock a) When preferred stock is cumulative, any dividends in arrears (preferred dividends not declared in a given period) must be paid to preferred stockholders before allocating any dividends to common stockholders. b) When preferred stock is not cumulative, only the current year’s dividend must be paid to preferred stockholders before paying any dividends to common stockholders. Example 3: Hodge Corporation issued 100,000 shares of $20 par value, cumulative, 6% preferred stock on January 1, 2021, for $2,300,000. In December 2023, Hodge declared its first dividend of $500,000. Instructions (a) Prepare Hodge's journal entry to record the issuance of the preferred stock. (b) If the preferred stock is not cumulative, how much of the $500,000 would be paid to common stockholders? (c) If the preferred stock is cumulative, how much of the $500,000 would be paid to common stockholders? 2

A) Cash 2.3M Preferred stock 2M Paid in excess par stock 300k B) Preferred Dividends(6%*20*100k=120k (2 nd year + 1 st year)*120k=360k Common Dividends 500k-120=380k 500k-360k=140k C) Treasury Stock Example 4: Rinehart Corporation purchased from its stockholders 5,000 shares of its own previously issued stock for $255,000. It later resold 2,000 shares for $54 per share, then 2,000 more shares for $49 per share, and finally 1,000 shares for $43 per share. Prepare journal entries for the purchase of the treasury stock and the three sales of treasury stock. 3

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Example 5: On January 1, 2022, the stockholders' equity section of Newlin Corporation shows common stock ($5 par value) $1,500,000; paid-in capital in excess of par $1,000,000; and retained earnings $1,200,000. During the year, the following treasury stock transactions occurred. Mar. 1 Purchased 50,000 shares for cash at $15 per share. July 1 Sold 10,000 treasury shares for cash at $17 per share. Sept. 1 Sold 8,000 treasury shares for cash at $14 per share. Instructions (a) Journalize the treasury stock transactions. (b) Restate the entry for September 1, assuming the treasury shares were sold at $12 per share. Cash Dividends Example 6: On January 1, Guillen Corporation had 95,000 shares of no-par common stock issued and outstanding. The stock has a stated value of $5 per share. During the year, the following occurred. Prepare the entries, if any, on each of the three dividend dates. Apr. 1 Issued 25,000 additional shares of common stock for $17 per share. June 15 Declared a cash dividend of $1 per share to stockholders of record on June 30. July 10 Paid the $1 cash dividend. Dec. 1 Issued 2,000 additional shares of common stock for $19 per share. 15 Declared a cash dividend on outstanding shares of $1.20 per share to stockholders of record on December 31. 5

Stock Dividends Example 7: Langley Corporation has 50,000 shares of $10 par value common stock outstanding. It declares a 15% stock dividend on December 1 when the market price per share is $16. The dividend shares are issued on December 31. Prepare the entries for the declaration and issuance of the stock dividend. Stock Dividends (16*50k*15%) 120k Common stock Dividends(10*50k*15) 75k Paid in capital par common stock 45K Common stock dividends distributable 75k Common stock 75k Stockholders’ Equity Presentation  Payout Ratio =Cash Dividends Declared on Common Stock÷Net Income  Return on common stockholders’ equity =Net Income minus Preferred Dividendes÷Average Common Stockholders’ Equity Example 8: The following accounts appear in the ledger of Horner Inc. after the books are closed at December 31. Common Stock, no par, $1 stated value, 400,000 shares authorized; 300,000 shares issued $ 300,000 Common Stock Dividends Distributable 30,000 Paid-in Capital in Excess of Stated Value—Common Stock 1,200,000 Preferred Stock, $5 par value, 8%, 40,000 shares authorized; 30,000 shares issued 150,000 Retained Earnings 800,000 Treasury Stock (10,000 common shares) 74,000 Paid-in Capital in Excess of Par—Preferred Stock 344,000 Prepare the stockholders' equity section at December 31, assuming retained earnings is restricted for plant expansion in the amount of $100,000. Capital Stock 9%preferred stock, $5 par value,8%,40k shares authorized; 30k shares issued 150k Common Stock, no par, $1 stated value, 400k shares authorized; 300k shares issued 300k Common stock dividends distribute 30k Total capital stock 480k Additional Paid in capital Paid-in Capital in Excess of Par—Preferred Stock 344k Paid-in Capital in Excess of Stated Value—Common Stock 1.2M Total additional paid in capital 1,544,000 6

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Retained Earnings 2024k Total paid in capital and retained earnings 800k 2824k Less: Treasery stock(10k common) 74k Total stockholders equity 2750k Payout ratio= cash div. Declared on common stock/ net income ROE= Net Income-Preferred div./ average common stock equity Example 9: In 2022, Pennington Corporation had net sales of $600,000 and cost of goods sold of $360,000. Operating expenses were $153,000, and interest expense was $7,500. The corporation's tax rate is 30%. The corporation declared common dividends of $25,000 and preferred dividends of $15,000 in 2022, and its average common stockholders' equity during the year was $200,000. Compute Pennington Corporation's payout ratio and return on common stockholders' equity for 2022. Payout Ratio= 25k/(600k-360k-153k-7,500)*(1-30%) =45% ROE= 55,650-15k/200k =20% 7