c15BExercises.

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B EXERCISES

3 E15-1B (Recording the Issuances of Common Stock) During its first year of operations, Endevor Cor-
poration had the following transactions pertaining to its common stock.
Apr. 26 Issued 15,000 shares for cash at $4.50 per share.
May 11 Issued 10,000 shares to attorneys in payment of a bill for $48,000 for services rendered in helping
the company to incorporate.
Aug. 1 Issued 20,000 shares for cash at $5 per share.
Nov. 1 Issued 10,000 shares for cash at $7 per share.

Instructions
(a) Prepare the journal entries for these transactions, assuming that the common stock has a par value
of $1 per share.
(b) Prepare the journal entries for these transactions, assuming that the common stock is no par with
a stated value of $3 per share.

3 E15-2B (Recording the Issuance of Common and Preferred Stock) National Gas Corporation was
organized on June 1, 2014. It is authorized to issue 100,000 shares of 5%, $100 par value preferred stock,
and 1,750,000 shares of no par common stock with a stated value of $1 per share. The following stock
transactions were completed during the first year.
June 15 Issued 165,000 shares of common stock for cash at $5 per share.
June 30 Issued 25,000 shares of preferred stock for cash at $102 per share.
Aug. 15 Issued 20,000 shares of common stock for a factory building. The asking price of the factory building
was $150,000; the appraised value of the factory building was $140,000.
Sept. 1 Issued 200,000 shares of common stock for cash at $7 per share.
Oct. 1 Issued 5,000 shares of common stock to attorneys in payment of their bill of $40,000 for services
rendered in helping the company organize.
Oct. 15 Issued 25,000 shares of common stock for cash at $8.50 per share.
Nov. 1 Issued 6,000 shares of preferred stock for cash at $104 per share.

Instructions
Prepare the journal entries to record the above transactions.

3 E15-3B (Stock Issued for Land) Twenty thousand shares reacquired by Sierra Land Inc. for $153 per
share were exchanged for land that has an appraised value of $3,600,000. At the time of the exchange the
common stock was trading at $176 per share on an organized exchange.

Instructions
(a) Prepare the journal entry to record the acquisition of land assuming that the purchase of the stock
was originally recorded using the cost method.
(b) Briefly identify the possible alternatives (including those that are totally unacceptable) for quan-
tifying the cost of the land, and briefly support your choice.

3 E15-4B (Lump-Sum Sale of Stock with Bonds) Zurg, Inc. is an SEC registrant, and its securities are thinly
traded on NASDAQ (National Association of Securities Dealers Quotes). Zurg, Inc. issued 10,000 units.
Each unit consists of a $1,000 par, 16% subordinated debenture and 5 shares of $5 par common stock. The
investment banker has retained 500 units as the underwriting fee. The other 9,500 units were sold to out-
side investors for cash at $1,150 per unit. Prior to this sale the 2-week ask price of common stock was $25
per share. Sixteen percent is a reasonable market yield for the debentures, and therefore the par value of
the bonds is equal to the fair value.

Instructions
(a) Prepare the journal entry to record the previous transaction, under the following conditions.
(1) Employing the incremental method.
(2) Employing the proportional method, assuming the recent price quotes on the common stock
reflect fair value.
(b) Briefly explain which method is, in your opinion, the better method.

3 5 E15-5B (Lump-Sum Sales of Stock with Preferred Stock) Black Diamond Inc. issues 2,500 shares of
$1 par value common stock and 1,000 shares of $50 par value preferred stock for a lump sum of
$275,000.

1
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2 • Chapter 15 Stockholders’ Equity

Instructions
(a) Prepare the journal entry for the issuance when the market value of the common shares is $95 each
and market value of the preferred is $60 each.
(b) Prepare the journal entry for the issuance when only the market value of the common stock is
known and it is $90 per share.
3 4 E15-6B (Stock Issuances and Repurchase) Overland Corporation is authorized to issue 250,000 shares
of $1 par value common stock. During 2014, Overland Corporation took part in the following selected
transactions.
1. Issued 55,000 shares of stock at $76 per share, less costs related to the issuance of the stock total-
ing $27,000.
2. Issued 10,000 shares of stock for land appraised at $815,000. The stock was actively traded on a
national stock exchange at approximately $78 per share on the date of issuance.
3. Purchased 6,000 shares of treasury stock at $74 per share. The treasury shares purchased were
issued in 2003 at $46 per share.
Instructions
(a) Prepare the journal entry to record item 1.
(b) Prepare the journal entry to record item 2.
(c) Prepare the journal entry to record item 3 using the cost method.
4 E15-7B (Effect of Treasury Stock Transactions on Financials) Regis One Company has outstanding
10,000 shares of $10 par common stock which had been issued at $42 per share. Regis One then entered
into the following transactions.
1. Purchased 1,000 treasury shares at $45 per share.
2. Resold 100 of the treasury shares at $42 per share.
3. Resold 200 of the treasury shares at $47 per share.

Instructions
Use the following code to indicate the effect each of the three transactions has on the financial statement
categories listed in the table below, assuming Regis One Company uses the cost method: I ⫽ Increase;
D ⫽ Decrease; NE ⫽ No effect.

Stockholders’ Paid-in Retained Net

# Assets Liabilities Equity Capital Earnings Income
1
2
3

3 5 E15-8B (Preferred Stock Entries and Dividends) Jedren Corporation has 30,000 shares of $75 par value,
10%, preferred stock and 150,000 shares of $1 par value common stock outstanding at December 31, 2014.
10
Instructions
Answer the questions in each of the following independent situations.
(a) If the preferred stock was issued at $83 per share, how should the preferred stock be reported in
the stockholders’ equity section?
(b) If the preferred stock is cumulative and dividends were last paid on the preferred stock on
December 31, 2010, what are the dividends in arrears that should be reported on the December 31,
2014, balance sheet? How should these dividends be reported?
(c) If the preferred stock is convertible into seven shares of $1 par value common stock and 2,000
shares are converted, what entry is required for the conversion assuming the preferred stock was
issued at par value?
3 4 E15-9B (Correcting Entries for Equity Transactions) Global Air Inc. recently hired a new accountant with
limited real-world experience in corporate accounting. Prior to starting the new job, the accountant was
very busy and was unable to review any texts on corporation accounting. During the first month, he made
the following entries for the corporation’s capital stock.

Oct. 5 Cash 39,000

Capital Stock 1,000
Gain on Sale of Stock 38,000
(Issued 1,000 shares of $1 par value common
stock at $39 per share)
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B Exercises • 3

12 Cash 330,000
Capital Stock 330,000
(Issued 3,000 shares of $100 par value preferred
stock at $110 per share)
13 Capital Stock 20,000
Cash 20,000
(Purchased 500 shares of common stock for the
treasury at $40 per share)
26 Cash 22,500
Capital Stock 500
Gain on Sale of Stock 22,000
(Sold 500 shares of treasury stock at $45 per share)

Instructions
On the basis of the explanation for each entry, prepare the entries that should have been made for the
capital stock transactions.

3 4 E15-10B (Analysis of Equity Data and Equity Section Preparation) For a recent 2-year period, the balance
sheet of Metal Pro Company showed the following stockholders’ equity data at December 31, in millions.

2014 2013
Additional paid-in capital $ 2,861 $ 2,685
Common stock—par 1,538 1,512
Retained earnings 18,196 15,015
Treasury stock 400 595
Total stockholders’ equity $22,195 $18,617
Common stock shares issued 769 756
Common stock shares authorized 1,500 1,500
Treasury stock shares 63 85

Instructions
(a) Answer the following questions.
(1) What is the par value of the common stock?
(2) What is the cost per share of treasury stock at December 31, 2014, and at December 31, 2013?
(b) Prepare the stockholders’ equity section at December 31, 2014.

7 8 E15-11B (Equity Items on the Balance Sheet) The following are selected transactions that may affect
stockholders’ equity.
1. Paid the cash dividend declared in a prior year.
2. Recorded a retained earnings appropriation.
3. Recorded accrued interest earned on a note receivable from a major shareholder.
4. Purchased treasury stock. (The company uses the cost method.)
5. Recorded salary expense accrual.
6. Declared a cash dividend on preferred stock.
7. Declared and distributed a 5% stock dividend.
8. Issued $1 par value common stock (current market price of $75 per share) in exchange for land.

Instructions
In the table below, indicate the effect each of the eight transactions has on the financial statement elements
listed. Use the following code:

I ⫽ Increase D ⫽ Decrease NE ⫽ No effect

Stockholders’ Paid-in Retained Net

Item Assets Liabilities Equity Capital Earnings Income
1
2
3
4
5
6
7
8
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4 • Chapter 15 Stockholders’ Equity

7 E15-12B (Cash Dividend and Liquidating Dividend) Alpha Corporation has 25 million shares of
common stock issued and outstanding. On August 31 the board of directors voted a $1.20 per share cash
dividend to stockholders of record as of September 5, payable September 30.

Instructions
(a) Prepare the journal entry for each of the dates above assuming the dividend represents a distri-
bution of earnings.
(b) How would the entry differ if the dividend were a liquidating dividend?

8 E15-13B (Stock Split and Stock Dividend) The common stock of Liberty Homes Inc. is currently selling
at $88 per share. The directors wish to reduce the share price and increase share volume prior to a new
issue. The per share par value is $4; book value is $36 per share. Fifteen million shares are issued and
outstanding.

Instructions
Prepare the necessary journal entries assuming the following.
(a) The board votes a 4-for-1 stock split.
(b) The board votes a 300% stock dividend.
(c) Briefly discuss the accounting and securities market differences between these two methods of in-
creasing the number of shares outstanding.

8 E15-14B (Entries for Stock Dividends and Stock Splits) The stockholders’ equity accounts of Palmetto
Company have the following balances on December 31, 2014.
Common stock, $1 par, 1,500,000 shares issued and outstanding $ 1,500,000
Paid-in capital in excess of par 6,900,000
Retained earnings 25,750,000
Shares of Palmetto Company stock are currently selling on the Philadelphia Stock Exchange at $17.

Instructions
Prepare the appropriate journal entries for each of the following cases.
(a) A stock dividend of 200% is declared and issued.
(b) A stock dividend of 10% is declared and issued.
(c) A 3-for-1 stock split is declared and issued.

7 8 E15-15B (Dividend Entries) The following data were taken from the balance sheet accounts of
Symbol Two Corporation on June 30, 2014.
Current assets $125,000
Investments 365,000
Common stock (par value $1) 70,000
Paid-in capital in excess of par 680,000
Retained earnings 963,000

Instructions
Prepare the required journal entries for the following unrelated items.
(a) The par value of the capital stock is reduced to $0.50 with a 2-for-1 stock split.
(b) A 10% stock dividend is declared and distributed at a time when the market value of the shares
is $25 per share.
(c) A property dividend is declared September 12, 2014, and paid October 1, 2014, in common shares
in another company held as an equity investment. The equity investment has a book value of
$50,000 and a fair market value of $205,000.

6 7 E15-16B (Computation of Retained Earnings) The following information has been taken from the
accounting records Vista Free Corporation.
8
Total net income since incorporation $466,000
Total cash dividends paid 260,000
Proceeds from sale of treasury stock 40,000
Total value of stock dividends distributed 2,000
Total purchases of treasury stock 35,000
Unamortized premium on bonds payable 32,000

Instructions
Determine the current balance of retained earnings.

9 E15-17B (Stockholders’ Equity Section) Capital Northeast Corporation’s post-closing trial balance at
December 31, 2014, was as follows.
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B Exercises • 5

CAPITAL NORTHEAST CORPORATION

POST-CLOSING TRIAL BALANCE
DECEMBER 31, 2014
Dr. Cr.
Accounts payable $ 668,000
Accounts receivable $ 605,000
Accumulated depreciation—equipment 450,000
Additional paid-in capital—common
In excess of par value 1,900,000
From sale of treasury stock 35,000
Allowance for doubtful accounts 20,000
Equipment 6,800,000
Cash 260,000
Common stock ($1 par value) 500,000
Dividends payable on common stock—cash 50,000
Inventories 750,000
Investments 2,500,000
Preferred stock ($100 par value) 6,500,000
Prepaid insurance 65,000
Retained earnings 982,000
Treasury stock—common at cost 125,000
Totals $11,105,000 $11,105,000

At December 31, 2014, Capital Northeast had the following number of common and preferred shares.
Common Preferred
Authorized 2,500,000 1,000,000
Issued 500,000 65,000
Outstanding 490,000 65,000

The dividends on preferred stock are 6% cumulative. In addition, the preferred stock has a preference in
liquidation of $102 per share.
Instructions
Prepare the stockholders’ equity section of Capital Northeast’s balance sheet at December 31, 2014.
(AICPA adapted)
4 7 E15-18B (Dividends and Stockholders’ Equity Section) Focus Foot Company reported the following
amounts in the stockholders’ equity section of its December 31, 2013, balance sheet.
8
Preferred stock, 12%, $100 par (100,000 shares
authorized, 25,000 shares issued) $2,500,000
Common stock, $1 par (1,000,000 shares authorized,
300,000 shares issued) 300,000
Additional paid-in capital 950,000
Retained earnings 1,365,000
Total $5,115,000

During 2014, Focus Foot took part in the following transactions concerning stockholders’ equity.
1. Paid the annual 2013 dividend on preferred stock and a $0.50 per share dividend on common stock.
These dividends had been declared on December 31, 2013.
2. Purchased 1,000 shares of its own outstanding common stock for $8 per share. Focus Foot uses the
cost method.
3. Reissued 1,000 treasury shares for land with an appraised value of $9,500. Focus Foot’s common
shares were trading for $8.50 per share.
4. Issued 50,000 shares of common stock at $9 per share.
5. Declared and recorded a 2:1 stock split on the outstanding common stock when the stock is sell-
ing for $10 per share.
6. Declared the annual 2014 dividend on preferred stock and the $0.50 per share dividend on com-
mon stock. These dividends are payable in 2015.
Instructions
(a) Prepare journal entries to record the transactions described above.
(b) Prepare the December 31, 2014, stockholders’ equity section. Assume 2014 net income was $665,000.
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6 • Chapter 15 Stockholders’ Equity

9 E15-19B (Comparison of Alternative Forms of Financing) Shown below is the liabilities and stock-
holders’ equity section of the balance sheet for Istar Company and Honey Dew Inc. Each has assets to-
taling $1,000,000.

Istar Co. Honey Dew, Inc.

Current liabilities $ 100,000 Current liabilities $ 100,000
Long-term debt, 10% 400,000
Common stock ($10 par) 200,000 Common stock ($10 par) 600,000
Retained earnings (Cash Retained earnings (Cash
dividends, $48,000) 300,000 dividends, $60,000) 300,000
$1,000,000 $1,000,000

For the year, each company has earned the same income before interest and taxes.

Istar Co. Honey Dew, Inc.

Income before interest and taxes $200,000 $200,000
Interest expense 40,000 –0–
160,000 200,000
Income taxes (40%) 64,000 80,000
Net income $ 96,000 $120,000

At year end, the market price of Istar‘s stock was $15 per share, and Honey Dew’s was $11 per share.
Instructions
(a) Which company is more profitable in terms of return on total assets?
(b) Which company is more profitable in terms of return on stockholders’ equity?
(c) Which company has the greater net income per share of stock? Neither company issued or reac-
quired shares during the year.
(d) From the point of view of net income, is it advantageous to the stockholders of Istar Co. to have
the long-term debt outstanding? Why?
(e) What is the book value per share for each company?
9 E15-20B (Trading on the Equity Analysis) Presented below is information from the annual report of
Todd Warner, Inc.

Operating income $850,000

Bond interest expense 305,000
545,000
Income taxes 218,000
Net income $327,000
Bonds payable $3,000,000
Common stock $1,655,000
Retained earnings $856,000

Instructions
Is Todd Warner, Inc. trading on the equity successfully? Explain.
10 *E15-21B (Preferred Dividends) The outstanding capital stock of York Brands Corporation consists of
10,000 shares of $75 par value, 10% preferred, and 25,000 shares of $1 par value common.
Instructions
Assuming that the company has net income of $250,000, all of which is to be paid out in dividends, and
that preferred dividends were not paid during the current year or the past year, state how much each
class of stock should receive under each of the following conditions.
(a) The preferred stock is noncumulative and fully participating.
(b) The preferred stock is cumulative and nonparticipating.
(c) The preferred stock is cumulative and fully participating.
10 *E15-22B (Preferred Dividends) DHR Holding’s accounting records show the following balances on
December 31, 2014.

12% Preferred stock—$100 par value, outstanding 20,000 shares $2,000,000

Common stock—$1 par value, outstanding 50,000 shares 50,000
Retained earnings 1,650,000
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B Exercises • 7

Instructions
Assuming that the directors decide to declare total dividends in the amount of $500,000, determine how
much each class of stock should receive under each of the conditions stated below. One year‘s dividends
are in arrears on the preferred stock.
(a) The preferred stock is cumulative and fully participating.
(b) The preferrred stock is noncumulative and nonparticipating.
(c) The preferred stock is noncumulative and is participating in distributions in excess of a 12% div-
idend rate on the common stock.
10 *E15-23B (Preferred Stock Dividends) United Mobile Company has outstanding 20,000 shares of $100
par, 8% preferred stock and 250,000 shares of $1 par value common. The following schedule shows the
amount of dividends paid out over the last 4 years.

Assumptions
(a) (b)
Preferred, noncumulative, Preferred, cumulative,
and nonparticipating and fully participating
Year Paid-out Preferred Common Preferred
Common
2011 $100,000
2012 150,000
2013 235,000
2014 635,000

Instructions
Allocate the dividends to each type of stock under assumptions (a) and (b). Express your answers in per
share amounts using the format shown.
10 *E15-24B (Computation of Book Value per Share) Kirk and Kirk, Ltd. began operations in July 2013 and
reported the following results for each of its first 3 years of operations.
2013 $20,000 net income 2014 $640,000 net loss 2015 $950,000 net income
At December 31, 2015, Kirk and Kirk, Ltd.’s capital accounts were as follows.
16% cumulative preferred stock, par value $100; authorized, issued,
and outstanding 1,000 shares $100,000
Common stock, par value $1; authorized 10,000,000 shares;
issued and outstanding 50,000 shares 50,000
Kirk and Kirk, Ltd. has never paid a cash or stock dividend. There has been no change in the capital
accounts since Kirk and Kirk, Ltd. began operations. The state law permits dividends only from retained
earnings.
Instructions
(a) Compute the book value of the common stock at December 31, 2015.
(b) Compute the book value of the common stock at December 31, 2015, assuming that the preferred
stock has a liquidating value of $103 per share.
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