Revised September 2007

ACC101 CHAPTER 11
Accounting for Equity

Revised September 2007

Key Terms and Concepts to Know

Authorized Shares number of shares a corporation is legally entitled to issue
Issued Shares number of shares sold to stockholders
Outstanding Shares shares issued minus any shares reacquired by the corporation;
i.e., the number of shares still owned by shareholders
Common Stock basic class of stock ownership with right to vote
Preferred Stock stock with a preferential right to dividends (preferred shareholders
receive their stated dividend before common shareholders may receive a dividend)
Cumulative Preferred Stock stockholders have the right to receive dividends in
arrears (their regular dividends passed or not paid in previous years) before common
shareholders may receive a dividend

Revised September 2007

Dividends
Cash Dividends Most cash dividends are declared on a per share basis; therefore it is
important to keep track of the number of outstanding shares of stock. The number of shares
outstanding changes with each stock issuance and each purchase or sale of treasury stock.
Cash Dividends a temporary account closed to Retained Earnings at the end of the
period
Stock Dividends Stock dividends distribute common stock rather than cash to the
shareholders. Small stock dividends, up to 25% of the outstanding shares, are recorded by
capitalizing an amount equal to the number of shares times the current market price. Large
stock dividends are recorded by capitalizing an amount equal to the number of shares times
the par value.
Stock dividends do not affect total assets, total liabilities or total stockholders equity. All of
the accounts used to record stock dividends are equity accounts. Stock dividends capitalize a
portion of retained earnings transferring it to paid-in capital. Therefore retained earnings
decreases by the same amount as the total increase in common stock and paid-in capital in
excess of par.
Stock Dividends a temporary account closed to Retained Earnings at the end of
the period
Stock Dividend Distributable a temporary owners equity account used until the
shares are issued
There are three important dates for both types of dividends:

Date of Declaration Journalize the entry to record cash dividends payable or shares
distributable
Date of Record All stockholders on this date will receive the dividend (no entry)
Date of Payment Journalize the entry to pay cash dividends to shareholders or
distribute the shares of stock

Journal entries for cash dividends:

Cash to be distributed: outstanding shares X dividend $ per share
Date of Declaration:
Cash Dividends
Cash Dividends Payable

XXX

Date of Payment:
Cash Dividends Payable
Cash

XXX
XXX
XXX

Revised September 2007

Journal entries for stock dividends:
Shares to be distributed: outstanding shares * dividend %
Date of Declaration:
Stock Dividends (Shares * Market Price)
XXX
Stock Dividend Distributable (Shares * Par Value)
PIC-excess of par-CS (excess of market price over par)
Date of Payment:
Stock Dividend Distributable
Common Stock

XXX
XXX

XXX
XXX

Example #2 Accounting for Dividends

Olsen Company has completed the following transactions. Journalize the entries to record
the transactions.
March 4
June 3
July 15
Oct. 14
Nov. 5

Dec. 10

Purchased 5,000 shares of it own common stock at $32, recording the

stock at cost. (Prior to the purchase, there were 50,000 shares of $20
par common stock outstanding.)
Declared a semiannual dividend of $1 on the 8,000 shares of preferred
stock and a $.40 dividend on the common stock to stockholders of
record on June 30, payable July 15.
Paid the cash dividends.
Sold 2,000 shares of treasury stock at $35, receiving cash.
Declared semiannual dividends of $1 on the preferred stock and $.40 on
the common stock (before the stock dividend). In addition, a 5%
common stock dividend was declared on the common stock outstanding,
to be capitalized at the fair market value of the common stock, which is
estimated at $30.
Paid the cash dividends and issued the certificates for the common stock
dividend.

Solution
March 4 Treasury Stock
Cash

160,000

160,000

(Outstanding Shares: 50,000 5,000 = 45,000)

June 3

Cash Dividends
26,000
Cash Dividends Pay.

26,000

Cash Dividends Payable

Cash

26,000

(PS: 8,000 * 1 = $8,000; CS: 45,000 * .40 = $18,000)

July 15

26,000
4

Revised September 2007

Oct. 14

Cash

70,000
Treasury Stock
PIC-Sale of T.S.

64,000
6,000

(Outstanding Shares: 45,000 + 2,000 = 47,000)

Nov. 5

Cash Dividends
26,800
Cash Dividends Payable

26,800

(PF: 8,000 * 1 = $8,000; CS: 47,000 * .40 = 18,800)

(2,350 shares * 30 market price)
47,000
(2,350 shares * 20 par)
23,500
(70,500 47,000)
**Stock Dividend: Shares issued = 47,000 * 5% = 2,350 **

Stock Dividends
70,500
Stock Dividends Distr.
PIC-excess of par-CS
Dec. 10

Cash Dividends Payable

Cash
Stock Dividends Distr.
Common Stock

26,800
47,000

26,800
47,000

There are four basic steps to distribute dividends and calculate dividends per
share:
1. If there is outstanding cumulative preferred stock, distribute dividends in arrears
followed by the current years dividend to preferred shareholders.
2. If there is outstanding non-cumulative preferred stock, distribute the current years
dividend to preferred shareholders.
3. Distribute the remaining dividends, if any, to common stockholders.
4. Divide by the respective number of shares to obtain dividends per share
Example #1 Dividend Distribution
Myers Inc. has stock outstanding as follows: 20,000 shares of $4.00 cumulative,
nonparticipating preferred stock of $100 par, and 60,000 shares of $20 par common stock.
During its first five years of operations, the following amounts were distributed as dividends:
first year, none; second year, $30,000; third year, $160,000; fourth year, $250,000; fifth
year, $140,000. Calculate the annual dividends per share on each class of stock.
Preferred shareholders are entitled to receive $80,000 (20,000 shares * 4.00/share) per year
in dividends.

Revised September 2007

Year 1
No dividends were declared therefore dividends per share are 0 for both preferred and
common stock. Preferred Stock has $80,000 dividends in arrears.
Year 2
Dividends Distributed
Dividends Paid
Dividends per Share
Dividends in Arrears:
From year 1
From year 2
Total
Year 3
Dividends Distributed
Dividends Paid
Dividends per Share
Dividends in Arrears:
From year 1
From year 2
From year 3
Total
Year 4
Dividends Distributed
Dividends Paid
Dividends per Share
Dividends in Arrears:
From year 3
From year 4
Total
Year 5
Dividends Distributed
Dividends Paid
Dividends per Share

Preferred

Common

30,000
$1.50

50,000
80,000
130,000

Total
30,000
30,000

(80,000 owed 30,000 paid)

Preferred

Common

160,000
$8.00

0
0
50,000
50,000

(50,000 in arrears 50,000 paid)

(80,000 in arrears 80,000 paid)
(80,000 owed 30,000 paid)

Preferred

Common

130,000
$6.50

120,000
$2.00

0
0
0

Total
250,000
250,000

(50,000 in arrears 50,000 paid)

(80,000 owed 80,000 paid)

Preferred

Common

80,000
$4.00

60,000
$1.00

Total
160,000
160,000

Total
140,000
140,000

Revised September 2007

Practice Problem #1
Canton, Inc. has stock outstanding as follows: 25,000 shares of $2.00 cumulative,
nonparticipating preferred stock of $50 par, and 100,000 shares of $25 par common. During
its first five years of operations, the following amounts were distributed as dividends: first
year, none; second year, $20,000; third year, $90,000; fourth year, $180,000; fifth year,
$250,000.
1) Calculate the dividends per share on each class of stock for each of the five years.
2) Redo #1, assuming the preferred stock is noncumulative

Transactions to Issue Stock

Issuance of Stock at Par
Issued 5,000 shares of $100 par common stock at par for cash.
Cash
Common Stock

500,000

500,000

Issuance of Stock at a Premium

Issued 2,000 shares of $100 par preferred stock for $110 per share.
Cash
220,000
Preferred Stock
PIC-excess of par-PF

200,000
20,000

Issuance of No-par Stock

Issued 4,000 shares of no-par common stock in exchange for equipment with a fair market
value of $80,000.
Equipment
Common Stock

80,000

80,000

Issued 1,000 shares of no-par preferred stock with a state value of $50 per share for $55 per
share.
Cash
55,000
Preferred Stock
PIC-excess of stated value-PF

50,000
5,000

Revised September 2007

Treasury Stock Transactions

Entries for the purchase of Treasury Stock
Purchased 2,000 shares of treasury common stock for $80,000.
Treasury Stock
Cash

80,000

80,000

Entries for the sale of treasury stock at a price greater than we paid
Sold 500 shares of the treasury stock purchased above for $43 per share.
Cash
21,500
Treasury Stock
PIC-from Sale of TS

20,000
1,500

Entries for the sale of treasury stock at a price less than we paid
Sold 1,000 shares of the treasury stock purchased above for $38 per share.
Cash
38,000
PIC-from Sale of TS 2,000
Treasury Stock

40,000
Stockholders Equity

Paid-In Capital
Preferred Stock
PIC-excess of par-PF
Common Stock
PIC-excess of par-CS
PIC from sale of treasury stock
Donated Capital
Total Paid-in Capital
Retained Earnings
Total
Deduct Treasury Stock
Total Stockholders Equity

$200,000
100,000
500,000
300,000

300,000
800,000
25,000
50,000
$1,175,000
550,000
1,725,000
(120,000)
$1,605,000

Revised September 2007

Practice Problem #2
The following selected accounts appear in the ledger of Cyma Environmental Corporation on
January 1, 2003.
Preferred 4% Stock, $100 par (10,000 shares authorized,
8,000 shares issued) ................................................... $800,000
PIC-excess of par-PF ..........................................................80,000
Common Stock, $20 par (60,000 shares authorized,
30,000 shares issued) ................................................... 600,000
PIC-excess of par-CS ........................................................ 900,000
Retained Earnings ......................................................... 1,277,000
Journalize the entries to record the following transactions.
a.
b.
c.
d.
e.
f.

Issued 20,000 shares of common stock at $32 receiving cash.

Sold 1,000 shares of preferred 4% stock at $120.
Purchased 5,000 shares of treasury common for $220,000
Sold 2,000 shares of treasury common for $84,000
Sold 1,500 shares of treasury common for $68,500
Issued 10,000 shares of common stock in exchange for Land costing $385,000

Practice Problem #3
Selected transactions completed by Zebra Company appear below. Journalize the
transactions.
Jan. 5
Feb. 20
Mar. 12
April 12
June 5
Sept. 2

Oct. 5

Split the common stock 4 for 1 and reduced the par from $100 to $25 per share.
After the split, there were 100,000 common shares outstanding.
Purchased 10,000 shares of treasury stock for $300,000.
Declared the semiannual dividends of $4 on 20,000 shares of preferred stock and
$.50 on the outstanding common stock.
Paid the cash dividends.
Sold 5,000 shares of treasury stock at $33, receiving cash.
Declared semiannual dividends of $4 on preferred stock, and $.50 on common
stock (before the stock dividend). In addition, a 4% common stock dividend was
declared on the common stock outstanding, to be capitalized at fair market value
of the common stock, which is estimated at $40.
Paid the cash dividends and issued the certificates for the common stock dividend.

Revised September 2007

SAMPLE MULTIPLE CHOICE QUESTIONS

1. Investors who are most interested in the dividend yield are those who invest for
a. Current income flow
b. Market price appreciation
c. Both market price appreciation and current income flow
d. Neither market price appreciation or current income flow
2. Organization Costs is included on the balance sheet as a(n):
a. Plant asset
b. Investment
c. Current asset
d. Intangible asset
3. Retained earnings:
a. is the same as contributed capital
b. changes are summarized in the Retained Earnings Statement
c. cannot have a debit balance
d. over time will have a direct relationship with the amount of cash on hand if the
corporation is profitable.
4. The charter of a corporation provides for the issuance of 100,000 shares of common
stock. Assume that 20,000 shares were originally issued and 2,500 were subsequently
reacquired. What is the number of shares outstanding?
a. 22,500
b. 17,500
c. 20,000
d. 82,500
5. A Company acquired land in exchange for 5,000 shares of its $10 par common stock. The
fair market value of the land is $63,000, it is appraised at $60,000 and the stock is widely
traded and was selling for $12.50 per share when exchanged for the land. At what
amount should the land be recorded by A Company?
a. $50,000
b. $62,500
c. $63,000
d. $60,000
6. The excess of sales price of treasury stock over its cost should be credited to:
a. Treasury Stock Receivable
b. Premium on Capital Stock
c. Income fro Sale of Treasury Stock
d. Paid-In Capital from Sale of Treasury Stock

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Revised September 2007

7. A corporation purchases 10,000 shares of its own $10 par common stock for $17.50 per
share, recording it at cost. What will be the effect on total stockholders equity?
a. Decrease, $175,000
b. Decrease, $100,000
c. Increase, $175,000
d. Increase, $100,000
8. A corporation has 25,000 shares of $100 par value stock outstanding. If the corporation
issues a 2-for-1 split or a 100% stock dividend, the number of shares outstanding after
the split or dividend will be:
a. 25,000 shares
b. 50,000 shares
c. 75,000 shares
d. 100,000 shares
9. The charter of a corporation provides for the issuance of 100,000 shares of common
stock. Assume that 60,000 shares were originally issued and 10,000 were subsequently
reacquired. What is the amount of cash dividends to be paid if a $1 per share dividend is
declared?
a. $50,000
b. $100,000
c. $70,000
d. $60,000
10. A company with 100,000 authorized shares of $5 par common stock issued 80,000
shares at $7. Subsequently, the company declared a 2% stock dividend on a date when
the market price was $10 a share. The effect of the declaration and issuance of the stock
dividend is to:
a. Decrease retained earnings, increase common stock, and decrease paid-in capital
b. Increase retained earnings, decrease common stock, and decrease paid-in capital
c. Increase retained earnings, decrease commons tock, and increase paid-in capital
d. Decrease retained earnings, increase common stock, and increase paid-in capital
11. Easy transfer of ownership is a characteristic of which form of business organization?
a. Sole proprietorship
b. Partnership
c. Corporation
d. All of the above
12. In which forms of business organization are the owners personally liable for all the debts
of the business?
a. Sole proprietorship and corporation
b. Sole proprietorship and partnerships
c. Partnership and corporation
d. All of them

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Revised September 2007

13. Issuing stock to investors for cash at a price above par would result in
a. a debit to Common Stock and a credit to Cash
b. a debit to Cash and a credit to Common Stock
c. a debit to Cash and PIC-excess of par-CS and a credit to Common Stock
d. a debit to Cash and a credit to Common Stock and PIC-excess of par-CS
14. The par value of the shares issued represents a corporations legal capital.
a. True
b. False
15. When treasury stock is purchased, the number of outstanding shares decreases.
a. True
b. False
16. Dividends in arrears are reported as a current liability on the balance sheet.
a. True
b. False
17. No journal entry is required on the date of record.
a. True
b. False
18. Which of the following is not a characteristic of a corporation?
a. Separate legal existence
b. Unlimited liability for stockholders
c. Easy transferability of ownership interests
d. Ability to acquire capital easily
19. Which of the following is not a disadvantage of the corporate business form?
a. Organization Costs
b. Government regulation
c. Continuous life
d. Additional taxes
20. Which of the following is not a stockholder right?
a. The preemptive right
b. The right to share in dividends
c. The right to vote on the board of directors
d. The right to participate in management decisions
21. Which of the following represents the maximum number of shares that a corporation can
issue?
a. Outstanding shares
b. Issued shares
c. Authorized shares
d. Treasury shares
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Revised September 2007

22. Which of the following decreases when a corporation purchases treasury stock?
a. Authorized shares
b. Issued shares
c. Treasury shares
d. Outstanding shares
23. Sting, Inc. issued 1,000 shares of common stock at $10 per share. If the stock has a
par value of $4 a share, the journal entry to record the issuance would include a
a. Credit to Common Stock for $4,000.
b. Debit to Cash for $4,000.
c. Credit to Paid-in-Capital in Excess of Par for $10,000
d. Debit to Retained Earnings for $6,000
24. Sting, Inc. issued 1,000 shares of common stock at $10 per share. If the stock was nopar stock, the journal entry to record the issuance would include a
a. debit to Cash for $6,000
b. credit to Paid-in-Capital in Excess of Par for 6,000
c. credit to Common Stock for $10,000
d. debit to Paid-in-Capital in Excess of Par for $10,000
25. If 1,000 shares of $5 par common stock are reacquired by a corporation for $12 a share,
total stockholders equity will be reduced by
a. $5,000
b. $12,000
c. $0
d. $7,000
26. Which of the following will increase the Paid-in-Capital section of the balance sheet?
a. Stock split
b. Stock dividend
c. Cash dividend
d. Property dividend
27. Buzz, Inc. has 8,000 shares of 5%, $50 par, cumulative preferred stock and 50,000
shares of $3 par common stock outstanding. No dividends were declared last year,
however, a dividend of $50,000 was declared and paid this year. What amount of the
total dividend was paid to common stockholders?
a. $10,000
b. $30,000
c. $15,000
d. $50,000

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Revised September 2007

28. Scratch, Inc. has 2,000 shares of 5%, $100 par, cumulative preferred stock and 80,000
shares of $4 par common stock outstanding. Last year the board of directors declared
and paid an $8,000 dividend. This year the dividend declared and paid was $15,000.
What amount of this years total dividend was paid to preferred stockholders?
a. $15,000
b. $10,000
c. $0
d. $12,000
29. Visor, Inc. had 300,000 shares of $20 par common stock outstanding when a 3% stock
dividend was declared and paid. How many shares were outstanding after the stock
dividend?
a. 390,000
b. 330,000
c. 300,000
d. 309,000
30. Visor, Inc. had 300,000 shares of $20 par common stock outstanding when a 3% stock
dividend was declared. The market price of the stock at the time of the declaration was
$22 per share. The journal entry to record the dividend declaration would include a
credit to
a. Common Stock for $180,000
b. PIC-excess of par-CS for $198,000
c. Stock Dividends for $198,000
d. Stock Dividends Distributable for $180,000

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Revised September 2007

SOLUTIONS TO PRACTICE PROBLEMS

Practice Problem #1 Part 1
Year 1
No dividends were declared therefore Dividends per Share is 0 for both preferred and
common stock. Preferred Stock has $50,000 dividends in arrears.
Year 2
Dividends Distributed
Dividends Paid
Dividends per share

Preferred

Common

20,000
$ .80

Total
20,000
20,000

Dividends in Arrears:
From year 1 30,000
From year 2 50,000
Total
80,000
Year 3
Dividends Distributed
Dividends Paid
Dividends per share
Dividends in Arrears:

Year 4
Dividends Distributed
Dividends Paid
Dividends per share
Dividends in Arrears:

Year 5
Dividends Distributed
Dividends Paid
Dividends per share

Preferred

(50,000 owed 20,000 paid)

Common

90,000
$ 3.60
From year 1
0
From year 2
0
From year 3 40,000
Total
40,000

(30,000 owed 30,000 paid)

(50,000 owed 50,000 paid)
(50,000 owed 10,000 paid)

Preferred

Common

90,000
$ 3.60

90,000
$.90

From year 3
Total

0
0

Total
180,000
180,000

(40,000 owed 40,000 paid)

Preferred

Common

50,000
$ 1.00

200,000
$2.00

15

Total
90,000
90,000

Total
250,000
250,000

Revised September 2007

Practice Problem #1 Part 2
Year 1
No dividends were declared therefore Dividends per Share is 0 for both preferred and
common stock.
Year 2
Dividends Distributed
Dividends Paid
Dividends per share

Preferred

Common

Total
20,000
20,000

Year 3
Dividends Distributed
Dividends Paid
Dividends per share

Preferred

Common

50,000
$ 1.00

40,000
$.40

Total
90,000
90,000

Year 4
Dividends Distributed
Dividends Paid
Dividends per share

Preferred

Common

50,000
$ 1.00

130,000
$1.30

Year 5
Dividends Distributed
Dividends Paid
Dividends per share

Preferred

Common

50,000
$ 1.00

200,000
$2.00

20,000
$ .80

Practice Problem #2
A. Cash
Common Stock
PIC-excess of par-CS
B. Cash

640,000

400,000
240,000

120,000
Preferred stock
PIC-excess of par-PF

C. Treasury Stock
Cash
D. Cash
PIC-Sale of Treasury Stock
Treasury Stock

100,000
20,000
220,000

220,000

84,000
4,000
88,000

(2,000 * 44 cost per share)

16

Total
180,000
180,000

Total
250,000
250,000

Revised September 2007

E. Cash
Treasury Stock

(1,500 * 44 cost per share)

68,500
66,000

PIC-Treasury Stock

F. Land

2,500
385,000

Common Stock
PIC-excess of par-CS

200,000
185,000

Practice Problem #3
Jan. 5
No entry required $25 par 100,000 share outstanding
Feb. 20

Treasury Stock
Cash

300,000

(90,000 shares outstanding)

Mar. 12

300,000

Cash Dividends
125,000
Cash Dividends Payable

125,000

Apr. 12

Cash Dividends Payable 125,000

Cash

125,000

June 5

Cash

Sept. 2

Cash Dividends
127,500
Cash Dividends Payable

127,500

Stock Dividends
152,000
Stock Div. Distr.
PIC-excess of par-CS

95,000
57,000

(20,000 * $4 = 80,000 PF + 90,000 * $ .50 = 45,000 CS)

165,000
Treasury Stock
150,000
PIC-from sale of treasury stock 15,000

(20,000 * $4 = 80,000 PF + 5,000 * $ .50 = 47,500)

Stock Dividend: 4% * 95,000 shares = 3,800

Oct. 5

Cash Dividends Payable 127,500

Cash
Stock Dividends Distr.
95,000
Common Stock

17

127,500
95,000

Revised September 2007

SOLUTIONS TO MULTIPLE CHOICE QUESTIONS

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.

A
D
B
B
C
D
A: 10,000 shares * 17.50/share = 175,000
B: 25,000 * 2 = 50,000 shares
A: 60,000 issued shares 10,000 reacquired = 50,000 * 1 = $50,000
D: Stock Dividends
16,000 (decreases retained earnings)
Stock Div. Distr.
8,000 (will increase common stock when issued)
PIC-excess of par-CS
8,000 (increases paid-in capital)
C
B
D: Cash
Common Stock
PIC-excess of par-CS
A
A
B
A
B
C
D
C
D
A: Cash
10,000
Common Stock
4,000
PIC-excess of par-CS
6,000
C
B: 1,000 * 12 = 12,000
B
A: 5% of $50 par = $2.50 dividend
8,000 * 2.50 = 20,000/ year * 2 years = 40,000 to Preferred
then 10,000 to Common
D: PF Dividend = 5% of 100 = $5/share * 2,000 shares = 10,000/year
Year 1: 8,000 to preferred, 2,000 in arrears
Year 2: 2,000 in arrears + 10,000 regualr = $12,000 to preferred
D: 300,000 * 3% = 9,000; 300,000 + 9,000 = 309,000
D: Stock Dividends
198,000
(9,000 * 22)
Stock Dividend Distr.
180,000
(9,000 * 20)
PIC-excess of par-CS
18,000

18