Chapter Twelve Questions
1. Define the term contributed capital.
Contributed capital is the source of resources invested
by owners. It represents the dollar amount of
resources invested in the corporation by its owners.
2. Identify three basic forms of business.
Proprietorships, partnerships, and
corporations.
3. Define the term corporation.
A corporation is a company whose legal existence is
separate from its owners' existence. It has its own
rights, which are separate from those of its owners and operators. For example, corporations may buy, own, and sell resources
and enter into contracts, such as borrowing resources and hiring employees.
4. Why is limited liability important to owners of corporations?
With limited liability, owners are at risk for only
the dollar amounts they invest in corporations. This means the maximum amounts owners can lose are the amounts
they invest. Without limited liability, owners are at risk for all their
resources, not just the amounts they invest.
5. List two responsibilities that increase when companies incorporate.
Corporations must pay income taxes and face
increased regulations, such as those of the Securities and Exchange Commission.
6. Identify three major rights of stockholders.
Elect the board of directors.
Receive dividends when declared.
Receive assets when the corporation is liquidated.
7. Identify two important responsibilities of corporate boards of directors.
Determining the corporation's long-term goals and
objectives.
Selecting top management, such as, the president,
vice-president, and treasurer.
Declaring dividends.
Determining terms for bonds and stock
issues.
8. Identify the major responsibility of managers.
Managers are responsible for the day-to-day
operation of corporations. Their major responsibility is to use the
corporations' resources to generate additional resources (net income).
9. Define the term authorized shares.
Authorized shares are those shares a corporation's
charter allows to be sold to owners. As such, the authorized shares
represent the maximum number of shares that can be issued to obtain resources
from owners.
10. Define the term issued shares.
Issued shares are those shares sold to owners and
not retired by the corporation. Most issued shares are in the hands of
owners, but some issued shares may have been purchased by the corporation and
are still being held by the corporation (treasury stock).
11. How is par value used to record the issuance of stock?
The dollar amounts reported in preferred stock
accounts and common stock accounts are determined by multiplying the par value
of the stock shares by the number of shares issued to owners. Any amounts
received in excess of par value are reported in additional paid-in capital
accounts.
12. List two preferences preferred stockholders have over common stockholders.
First right to dividends.
First right to assets upon
liquidation.
13. What effects do cash dividends have on resources and sources of resources?
Cash dividends decrease both resources and sources
of resources. The resource cash is reduced and the
source of resources retained earnings is reduced.
14. What right does the cumulative feature give preferred stockholders?
The cumulative feature gives preferred stockholders
the right to receive dividends not declared in prior years (in arrears) before
current dividends can be distributed to common stockholders.
15. What two primary options does a corporation have when it reacquires its stock.
When corporations reacquire their own stock they may
retire it or hold it to use in the future (treasury stock).
16. What effects does the retirement of stock have on resources and sources of resources?
When stock is retired, a corporation's resources
(assets) and sources of resources (stockholders' equity) both decrease by the
same dollar amount.
17. What is treasury stock and where is it reported in the financial statements?
Treasury stock is a corporation's own shares issued
to owners, then reacquired from them, and being held by the corporation.
Treasury stock is often used to provide additional compensation to managers. Treasury stock is reported on the balance sheet as a
contra stockholders' equity account.
18. What is the purpose of a preferred stock call price.
A preferred stock call price is the price at which a
corporation can purchase a share of its own preferred stock from preferred
stockholders. The call price provides the corporation
with a guaranteed way to acquire its own shares, while it also protects the
preferred stockholders by assuring them of a certain dollar amount if the
corporation acquires (calls) the preferred stock from them.
19. Identify three major components of contributed capital.
Preferred stock, common stock, paid-in capital in
excess of par.
Chapter Twelve Exercises
Exercise 12.1: Common Stock Cash Receipts
The creators of the Lamirande Corporation are considering various alternatives as they prepare the corporation’s charter. For each of the three alternatives below, calculate the total cash the Lamirande Corporation would receive if it issues all the authorized common stock.
1. 5,000,000 shares authorized, $1 par value per share, $4 expected market price per share.
5,000,000 shares x $4 per share = $20,000,000.
2. 8,000,000 shares authorized, $.50 par value per share, $2.50 expected market
price per share.
8,000,000 shares x $2.50 per share = $20,000,000.
3. 10,000,000 shares authorized, $.10 par value per share, $2 expected market
price per share.
10,000,000 shares x $2 per share = $20,000,000.
Exercise 12.2: Authorized and Issued Common Stock
The founders of the Capozzi Corporation estimate the corporation will need $25,000,000 in order for it to have a reasonable chance to succeed once it begins operations. The founders intend to contribute a total of $5,000,000 and hope to raise the other $20,000,000 by having the corporation issue $1 par common stock. The corporation is authorized to issue a total of 4,000,000 common shares. For their $5,000,000 investment, the founders will receive 2,100,000 common shares.
1. Calculate the price per share the corporation must receive in order to raise $20,000,000 by issuing 800,000 common shares to the public.
$20,000,000 / 800,000 shares = $25 per share.
2. Calculate the price per share the corporation must receive in order to raise
$20,000,000 by issuing 1,000,000 common shares to the public.
$20,000,000 / 1,000,000 shares = $20 per share.
3. Calculate the price per share the corporation must receive in order to raise
$20,000,000 by issuing 1,250,000 common shares to the public.
$20,000,000 / 1,250,000 shares = $16 per share.
Exercise 12.3: Par value and Legal Capital
The Bailey Corporation's December 31 balance sheet included the following
information.
|
Total assets |
$100,000,000 |
|
Total liabilities |
$60,000,000 |
|
Stockholders' equity |
|
|
Contributed capital |
|
|
Common stock, $1 par, 30,000,000 shares issued |
$30,000,000 |
|
Retained earnings |
$10,000,000 |
|
Total stockholders' equity |
$40,000,000 |
1. Calculate the percentage of the Bailey Corporation's assets obtained from creditors (borrowed).
(Total liabilities / total assets) x 100 = % of assets obtained from creditors
($60,000,000 / $100,000,000) x 100 = 60%
2. Calculate the percentage of the Bailey
Corporation's assets obtained from owners.
(Total contributed capital / total assets) x 100 = % of assets obtained from owners
($30,000,000 / $100,000,000) x 100 = 30%
3. Calculate the percentage of the Bailey
Corporation's assets generated by management and kept in the company.
(Retained earnings / total assets) x 100 = % of assets generated by management and kept in the company
($10,000,000 / $100,000,000) x 100 = 10%
Assume that on January 2 the Bailey Corporation used $25,000,000 cash to buy
back and retire (eliminate) 25,000,000 shares of its common stock.
4. Calculate the percentage of the Bailey Corporation's $75,000,000 assets obtained from creditors (borrowed).
(Total liabilities / total assets) x 100 = % of assets obtained from creditors
($60,000,000 / $75,000,000) x 100 = 80%
5. Calculate the percentage of the Bailey
Corporation's $75,000,000 assets obtained from owners.
(Total contributed capital / total assets) x 100 = % of assets obtained from owners
($5,000,000 / $75,000,000) x 100 = 6.67%
6. Calculate the percentage of the Bailey
Corporation's assets generated by management and kept in the company.
(Retained earnings / total assets) x 100 = % of assets generated by management and kept in the company
($10,000,000 / $75,000,000) x 100 = 13.3%
7. As a result of its January 2 stock purchase, has
the risk to creditors changed?
Yes. While the dollar
amount of creditors’ risk remained at $60,000,000, they are now, in effect,
financing 80% of the company’s resources. In turn, owners’ risk has been reduced from 30% to 6.7%. This process of reducing owners’ risk and increasing
creditors’ risk was the reason the concept of legal capital arose.
Exercise 12.4: Ownership Interests: Common Stock
The Anderson Investment Corporation manages financial investments for over 4,000 different investors. As part of its operations, the Anderson Investment Corporation acquired 300,000 shares of Gehring Corporation common stock, 500,000 shares of Philbin Corporation common stock, and 800,000 shares of Wyman Corporation common stock. The Gehring Corporation has a total of 15,000,000 common shares outstanding, Philbin Corporation has 12,500,000 common shares outstanding, and Wyman Corporation has 10,000,000 common shares outstanding.
1. Calculate the percentage of the Gehring Corporation owned by the Anderson Investment Corporation.
(# of shares owned by
(300,000 / 15,000,000) x 100 = 2%
2. Calculate the percentage of the Philbin
Corporation owned by the Anderson Investment Corporation.
(# of shares owned by
(500,000 / 12,500,000) x 100 = 4%
3. Calculate the percentage of the Wyman Corporation
owned by the Anderson Investment Corporation.
(# of shares owned by
(800,000 / 10,000,000) x 100 = 8%
4. Calculate the dollar amount of dividends the
Anderson Investment Corporation will receive if the Gehring
Corporation pays total cash dividends of $20,000,000 to common stockholders,
the Philbin Corporation pays total cash dividends of
$30,000,000 to common stockholders, and the Wyman Corporation pays total cash
dividends of $25,000,000 to common stockholders.
|
Company |
Total Dividends |
|
|
|
Gehring Corp. |
$20,000,000 |
2% |
$400,000 |
|
Philbin Corp. |
$30,000,000 |
4% |
$1,200,000 |
|
Wyman Corp. |
$25,000,000 |
8% |
$2,000,000 |
|
Totals |
$75,000,000 |
|
$3,600,000 |
Exercise 12.5: Common Stock: Cash Payments for Dividends
Over the last several years, the Hathaway Corporation maintained a policy of paying annual cash dividends of $.50 per share. For each of the last three years, calculate the Hathaway Corporation’s cash payments for dividends on common stock.
Year one: 20,000,000 shares authorized, $.01 par value per share, 6,000,000 shares outstanding.
Number of shares outstanding x $.50 per share = cash dividends
6,000,000 x $.50 = $3,000,000
Year two: 20,000,000 shares authorized, $.01 par value per share, 6,500,000
shares outstanding.
6,500,000 x $.50 = $3,250,000
Year three: 20,000,000 shares authorized, $.01 par value per share, 7,000,000
shares outstanding.
7,000,000 x $.50 = $3,500,000
Exercise 12.6: Common Stock: Cash Payments at Liquidation
As a result of experiencing extreme financial difficulty for the past six
years, the Grundy Corporation decided to cease operating on September 30. The company's September 30 balance sheet included the
following information.
|
Total assets |
$150,000,000 |
|
Total liabilities |
$100,000,000 |
|
Stockholders' equity |
|
|
Contributed capital |
|
|
Common stock, $1 par, 20,000,000 shares issued |
$20,000,000 |
|
Additional paid-in capital, common stock |
$40,000,000 |
|
Total contributed capital |
$60,000,000 |
|
Retained earnings (deficit) |
($10,000,000) |
|
Total stockholders’ equity |
$50,000,000 |
The company estimates it can sell all its assets for $135,000,000 cash. The company intends to pay its creditors in full.
1. Calculate the total dollar amount of cash the company will have available
to distribute to owners.
|
Total cash available |
$135,000,000 |
|
Less: cash to be paid to creditors |
$100,000,000 |
|
Cash available to stockholders |
$35,000,000 |
2. Calculate the cash per share the company will have available to distribute
to owners.
Cash available to stockholders / # of common shares outstanding = cash available per share
$35,000,000 / 20,000,000 = $1.75
3. Calculate the amount of cash you would receive if
you own 100,000 shares of Grundy Corporation common stock.
100,000 shares x $1.75 per share = $175,000
4. Using the results of part 3, calculate the change
in your resources if you had originally purchased the shares for $2 each.
Your resources would decrease by $25,000. You paid $200,000 for the shares (100,000 shares x $2 per
share = $200,000) but only received $175,000 cash when the company was
liquidated. $200,000 - $175,000 = $25,000.
Exercise 12.7: Common Stock and Cash Dividends Journal Entries
The LeBlanc Corporation's April 30 balance sheet included the following
information.
|
Total assets |
$2,000,000,000 |
|
Total liabilities |
$1,200,000,000 |
|
Stockholders' equity |
|
|
Contributed capital |
|
|
Common stock, $.50 par, 40,000,000 shares issued |
$20,000,000 |
|
Additional paid-in capital, common stock |
$630,000,000 |
|
Total contributed capital |
$650,000,000 |
|
Retained earnings |
$150,000,000 |
|
Total stockholders’ equity |
$800,000,000 |
Prepare journal entries to record the corporation’s following transactions. Before you prepare each journal entry, determine the transaction's effects on the company's resources and sources of resources.
May 1: 750,000 shares of common stock issued at an average price of $22 per
share.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
+ $16,500,000 |
= |
|
|
+ $375,000 |
|
|
|
Date |
Description |
Post. |
Debits |
Credits |
|
May 1 |
Cash |
|
16,500,000 |
|
|
|
Common Stock |
|
|
375,000 |
|
|
Additional Paid-in Capital, Common Stock |
|
|
16,125,000 |
|
|
Common stock issue |
|
|
|
June 30: Cash dividends of $.10 per share declared. Dividends
will be paid on July 15.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
|
|
+ $4,075,000 |
|
|
+ |
- $4,075,000 |
|
Date |
Description |
Post. |
Debits |
Credits |
|
June 30 |
Dividends |
|
4,075,000 |
|
|
|
Dividends Payable |
|
|
4,075,000 |
|
|
Cash dividends declared |
|
|
|
July 15: Cash dividends paid.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
- $4,075,000 |
= |
- $4,075,000 |
|
|
|
|
|
Date |
Description |
Post. |
Debits |
Credits |
|
July 15 |
Dividends Payable |
|
4,075,000 |
|
|
|
Cash |
|
|
4,075,000 |
|
|
Cash dividends paid |
|
|
|
Exercise 12.8: Preferred Stock: Cash Receipts and Dividends Requirements
The Parson's Corporation's June 30 balance sheet included the following
information.
|
Total assets |
$500,000,000 |
|
Total liabilities |
$300,000,000 |
|
Stockholders' equity |
|
|
Contributed capital |
|
|
Common stock, $.05 par, 200,000,000 shares issued |
$10,000,000 |
|
Additional paid-in capital, common stock |
$140,000,000 |
|
Total contributed capital |
$150,000,000 |
|
Retained earnings |
$50,000,000 |
|
Total stockholders' equity |
$200,000,000 |
The company intends to raise $100,000,000 by issuing $100 par value, 8% preferred stock. The company predicts the preferred stock will sell at par value.
1. Calculate the number of preferred shares the company must issue in order to raise $100,000,000.
$100,000,000 / $100 price per share = 1,000,000
shares
2. Calculate the total dollar amount of cash the
company must have available if it intends to pay preferred stockholders the
full amount of their cash dividends.
$100,000,000 x .08 = $8,000,000
3. Calculate the total amount of cash dividends you
would receive if you owned 30 shares of the Parsons Corporation’s
preferred stock.
30 shares x $100 par value per share = $3,000
$3,000 x .08 = $240
Exercise 12.9: Preferred Stock and Cash Dividends Journal Entries
The Thomas Corporation's February 28 balance sheet included the following
information.
|
Total assets |
$4,000,000,000 |
|
Total liabilities |
$2,900,000,000 |
|
Stockholders' equity |
|
|
Contributed capital |
|
|
8% preferred stock, $100 par, 6,000,000 shares issued |
$600,000,000 |
|
Common stock, $1 par, 50,000,000 shares issued |
$50,000,000 |
|
Additional paid-in capital, common stock |
$200,000,000 |
|
Total contributed capital |
$850,000,000 |
|
Retained earnings |
$250,000,000 |
|
Total stockholders' equity |
$1,100,000,000 |
Prepare journal entries to record the corporation’s following transactions. Before you prepare each journal entry, determine the transaction's effects on the company's resources and sources of resources.
June 1: 100,000 additional shares of 8%, $100 par preferred stock issued at
a price of $105 per share.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
+ $10,500,000 |
= |
|
|
+ $10,000,000 |
|
|
|
Date |
Description |
Post. |
Debits |
Credits |
|
June 1 |
Cash |
|
10,500,000 |
|
|
|
Preferred Stock |
|
|
10,000,000 |
|
|
Additional Paid-in Capital, Preferred Stock |
|
|
500,000 |
|
|
8% preferred stock issued |
|
|
|
February 15: Cash dividends were declared and will be paid on March 1. Dividends per common share were $.20.
|
Stock |
# of shares |
Dividends per share |
Dividends |
|
Preferred stock |
6,100,000 |
$8 |
$48,800,000 |
|
Common stock |
50,000,000 |
$.20 |
$10,000,000 |
|
Total |
|
|
$58,800,000 |
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
|
|
+ $58,800,000 |
|
|
+ |
- $58,800,000 |
|
Date |
Description |
Post. |
Debits |
Credits |
|
Feb. 15 |
Dividends |
|
58,800,000 |
|
|
|
Dividends Payable |
|
|
58,800,000 |
|
|
Cash dividends declared |
|
|
|
March 1: Cash dividends paid.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
- $58,800,000 |
= |
- $58,800,000 |
|
|
|
|
|
Date |
Description |
Post. |
Debits |
Credits |
|
Mar. 1 |
Dividends Payable |
|
58,800,000 |
|
|
|
Cash |
|
|
58,800,000 |
|
|
Cash dividends paid |
|
|
|
Exercise 12.10: Common Stock and Preferred Stock: Cash Payments at Liquidation
The Simpson Corporation decided to cease operating on January 31. The company's January 31 balance sheet included the
following information.
|
Total assets |
$180,000,000 |
|
Total liabilities |
$110,000,000 |
|
Stockholders' equity |
|
|
Contributed capital |
|
|
7% preferred stock, $100 par, 200,000 shares issued |
$20,000,000 |
|
Common stock, $1 par, 12,000,000 shares issued |
$12,000,000 |
|
Additional paid-in capital, common stock |
$46,000,000 |
|
Total contributed capital |
$78,000,000 |
|
Retained earnings (deficit) |
($8,000,000) |
|
Total stockholders' equity |
$70,000,000 |
One of the features of the preferred stock requires each share receive $110 if the firm is liquidated. The company estimates it can sell all its assets for $162,000,000 cash. The company intends to pay its creditors in full.
1. Calculate the total dollar amount of cash the company will have available
to distribute to owners (preferred stockholders and common stockholders) after
its creditors are paid.
|
Total cash available |
$162,000,000 |
|
Less: cash to be paid to creditors |
$110,000,000 |
|
Cash available to stockholders |
$52,000,000 |
2. Calculate the total dollar amount of cash the company will pay to preferred
stockholders.
200,000 shares x $110 per share = $22,000,000
3. Calculate the total dollar amount of cash the
company will have available to distribute to common stockholders.
|
Cash available to stockholders |
$52,000,000 |
|
Less: cash to be paid to preferred
stockholders |
$22,000,000 |
|
ash available to common stockholders |
$30,000,000 |
4. Calculate the cash per share the company will have available to distribute
to common stockholders.
$30,000,000 / 12,000,000 shares = $2.50 per share
5. Calculate the amount of cash you would receive if
you own 50,000 shares of Simpson Corporation common stock.
50,000 shares x $2.50 per share = $125,000
6. Using the results of part 5, calculate the change
in your resources if you had originally purchased the common shares for $7 each.
|
Cash originally paid (50,000 x $7) |
$350,000 |
|
Cash received on liquidation |
$125,000 |
|
Decrease in resources |
$225,000 |
Exercise 12.11: Common Stock and Cumulative Preferred Stock: Cash Dividends
The Bosch Corporation’s March 31 balance sheet
included the following information.
|
Total assets |
$325,000,000 |
|
Total liabilities |
$200,000,000 |
|
Stockholders' equity |
|
|
Contributed capital |
|
|
9%, cumulative preferred stock, $100 par, 300,000 shares issued |
$30,000,000 |
|
Common stock, $1 par, 20,000,000 shares issued |
$20,000,000 |
|
Additional paid-in capital, common stock |
$46,000,000 |
|
Total contributed capital |
$96,000,000 |
|
Retained earnings |
$29,000,000 |
|
Total stockholders' equity |
$125,000,000 |
All preferred stock was issued five years ago. All dividends on preferred stock for prior years have been paid. Total dividends declared and paid in the year ended March 31 were $6,000,000.
1. Calculate the total dollar amount of dividends paid to preferred stockholders in the year ended March 31.
300,000 shares x $100 par value per share x .09 =
$2,700,000
2. Calculate the total dollar amount of dividends paid
to common stockholders in the year ended March 31.
|
Total cash dividends |
$6,000,000 |
|
Less: cash dividends on preferred stock |
$2,700,000 |
|
Cash dividends on common stock |
$3,300,000 |
3. Calculate the common stock cash dividends per share paid in the year ended
March 31.
Total cash dividends on common stock / # of common shares outstanding = cash dividends per share
$3,300,000 / 20,000,000 shares = $.165 per share
4. Calculate the total amount of cash dividends you
would have received if you owned 500 shares of Bosch Corporation preferred
stock.
500 shares x $100 par value per share x .09 = $4,500
5. Calculate the total amount of cash dividends you
would have received if you owned 2,500 shares of Bosch Corporation common
stock.
2,500 shares x $.165 = $412.50
6. Assume the company neither declared nor paid any
cash dividends in the previous year. Calculate the
total dollar amount of cash dividends paid to preferred stockholders in the
current year ended March 31.
|
Cash dividends for prior year ($30,000,000 x .09) |
$2,700,000 |
|
Cash dividends for current year ($30,000,000 x .09) |
$2,700,000 |
|
Total cash dividends on preferred stock |
$5,400,000 |
7. Assume the company neither declared nor paid any cash dividends in the
previous year. Calculate the total dollar amount of cash
dividends paid to common stockholders in the current year ended March 31.
|
Total cash dividends |
$6,000,000 |
|
Less: cash dividends on preferred stock |
$5,400,000 |
|
Cash dividends on common stock |
$600,000 |
8. Assume the company neither declared nor paid any cash dividends in the
previous year. Calculate the common stock cash
dividends per share paid in the current year ended March 31.
Total cash dividends on common stock / # of common shares outstanding = cash dividends per share
$600,000 / 20,000,000 shares = $.03 per share
9. Assume the company neither declared nor paid any
cash dividends in the previous year. Calculate the
total amount of cash dividends you would have received in the current year if
you owned 500 shares of Bosch Corporation preferred stock.
500 shares x $100 par value per share x .09 = $4,500
$4,500 per year for two years = $9,000
10. Assume the company neither declared nor paid any
cash dividends in the previous year. Calculate the
total amount of cash dividends you would have received in the current year if
you owned 2,500 shares of Bosch Corporation common stock.
2,500 shares x $.03 = $75
Exercise 12.12: Preferred Stock Preferences
The Cuellar Corporation is attempting to raise approximately $50,000,000 by issuing preferred stock. With the aid of an underwriter, the company is exploring the three different options listed below. Assuming that it is the company’s intention to declare and pay all preferred stock dividends each year, calculate the total cash dividends the company will pay each year under each of the three options.
Option 1: 9%, noncumulative preferred stock, $100 par. 500,000 shares will be issued at a price of $100 per share.
500,000 shares x $100 par x .09 = $4,500,000
Option 2: 10% noncumulative preferred stock, $100
par. 450,000 shares will be issued at a price of $111.11 per share.
450,000 shares x $100 par x .10 = $4,500,000
Option 3: 10% cumulative preferred stock, $100 par. 440,000 shares will be
issued at a price of $113.64 per share.
440,000 shares x $100 par x .10 = $4,400,000
Exercise 12.13: Common Stock Retirement
Over the past few years, the Luciano Corporation’s cash balance increased significantly.
As a result, the company decided to purchase and retire 5,000,000 shares of its
common stock. The company's December 31 balance sheet included the
following information.
|
Total assets |
$1,180,000,000 |
|
Total liabilities |
$610,000,000 |
|
Stockholders' equity |
|
|
Contributed capital |
|
|
Common stock, $2 par, 50,000,000
shares authorized, |
$64,000,000 |
|
Additional paid-in capital, common stock |
$96,000,000 |
|
Total contributed capital |
$160,000,000 |
|
Retained earnings |
$410,000,000 |
|
Total stockholders' equity |
$570,000,000 |
1. Calculate the average price per share the Luciano Corporation received when it issued its 32,000,000 shares of common stock.
When stock is issued for cash, the cash account
increases by the dollar amount of cash received. The common stock account
increases by the par value of the shares issued. The additional paid-in
capital account increases by the excess of the cash received over the par value
of the shares issued. Thus, the total cash received equals the total of
the dollar amounts recorded in the common stock account and the paid-in capital
account. For the Luciano Corporation, this
total is $160,000,000 ($64,000,000 common stock + $96,000,000 additional
paid-in capital, common stock). On a per share basis, the average price
per share is $5 ($160,000,000 / 32,000,000 shares issued).
2. Calculate the total amount of cash the Luciano corporation must pay if it can reacquire the 5,000,000
shares of its common stock at the same price per share it received when they
were issued.
5,000,000 common shares x $5 = $25,000,000
3. Calculate the total number of
common shares issued and outstanding after the 5,000,000 shares are
retired.
32,000,000 common shares issued and outstanding
before retirement - 5,000,000 shares retired = 27,000,000 shares issued and
outstanding after retirement.
4. Prepare the Luciano Corporation's balance sheet
stockholders' equity section after the 5,000,000 shares are retired.
|
Stockholders' equity |
|
|
Contributed capital |
|
|
Common
stock, $2 par, 50,000,000 shares authorized, |
$54,000,000 |
|
Additional paid-in capital, common stock |
$81,000,000 |
|
Total contributed capital |
$135,000,000 |
|
Retained earnings |
$410,000,000 |
|
Total stockholders' equity |
$545,000,000 |
5. Assume the Luciano Corporation had to pay $9 per
share to retire the 5,000,000 common shares. Prepare the Luciano Corporation's balance sheet stockholders' equity
section after the 5,000,000 shares are retired.
To retire 5,000,000 shares at a price of $9 per
share, the Luciano Corporation would have to pay
$45,000,000. This $45,000,000 is $20,000,000 more than the Luciano Corporation received when it originally issued the
shares. The 5,000,000 shares were issued at a price of $5 per share for a
total of $25,000,000. The extra $20,000,000 paid to retire the shares
would be recorded as a reduction of retained earnings, and the following
balances would result.
|
Stockholders' equity |
|
|
Contributed capital |
|
|
Common
stock, $2 par, 50,000,000 shares authorized, |
$54,000,000 |
|
Additional paid-in capital, common stock |
$81,000,000 |
|
Total contributed capital |
$135,000,000 |
|
Retained earnings |
$390,000,000 |
|
Total stockholders' equity |
$525,000,000 |
Exercise 12.14: Treasury Stock Effects on Stockholders' Equity
The stockholders' equity section of the Callahan Corporation's June 30
balance sheet is as follows.
|
Stockholders' equity |
|
|
Contributed capital |
|
|
8% preferred stock, $100 par,
200,000 shares authorized, |
$7,500,000 |
|
Common stock, $1 par, 3,000,000
shares authorized, |
$1,200,000 |
|
Additional paid-in capital, common stock |
$6,000,000 |
|
Total contributed capital |
$14,700,000 |
|
Retained earnings |
$9,300,000 |
|
Total stockholders' equity |
$24,000,000 |
1. The Callahan Corporation intends to purchase 50,000 shares of its
own common stock on July 15 and hold the shares for future use. Calculate
the total amount of cash the company will need to purchase the stock if the
market price is $14 per share.
50,000 shares x $14 per share = $700,000.
2. Prepare the journal entry required to record the company's July 15
purchase of its own stock. Before you prepare the journal entry,
determine the transaction's effects on the company's resources and sources of
resources.
|
Total |
= |
Sources of |
+ |
Sources of |
+ |
Sources of |
|
Assets |
= |
Liabilities |
+ |
Stockholders' Equity |
||
|
- $700,000 |
= |
|
|
|
- $700,000 |
|
|
Date |
Description |
Post. |
Debits |
Credits |
|
July 15 |
Treasury Stock |
|
700,000 |
|
|
|
Cash |
|
|
700,000 |
|
|
50,000 common shares reacquired |
|
|
|
3. Determine the company's number of authorized shares of common stock
after the July 15 stock purchase.
The company's number of authorized common shares
remained at 3,000,000.
4. Determine the company's number of issued shares of common stock after the
July 15 stock purchase.
The company number of issued common shares remained
at 1,200,000 because the 50,000 shares were not retired, but are being held as
treasury stock.
5. Determine the company's number of outstanding shares of common stock
after the July 15 stock purchase.
The company number of outstanding common shares was
reduced to 1,150,000 (1,200,000 - 50,000 treasury shares). The 50,000
treasury shares are not considered to outstanding because they are not being
held by stockholders, but are being held by the company.
6. Prepare the stockholders' equity section of the Callahan Corporation's
balance sheet after the July 15 stock purchase.
|
Stockholders' equity |
|
|
Contributed capital |
|
|
8%
preferred stock, $100 par, 200,000 shares authorized, |
$7,500,000 |
|
Common
stock, $1 par, 3,000,000 shares authorized, |
$1,200,000 |
|
Additional paid-in capital, common stock |
$6,000,000 |
|
Total contributed capital |
$14,700,000 |
|
Retained earnings |
$9,300,000 |
|
Less: treasury stock |
700,000 |
|
Total stockholders' equity |
$23,300,000 |
Exercise 12.15: Treasury Stock Effects on Dividends
The stockholders' equity section of the Desrosiers
Corporation's September 30 balance sheet is as follows.
|
Stockholders' equity |
|
|
Contributed capital |
|
|
11% noncumulative
preferred stock, $100 par, 500,000 shares |
$30,000,000 |
|
Common stock, $.50 par,
10,000,000 shares authorized, |
$3,100,000 |
|
Additional paid-in capital, common stock |
$43,400,000 |
|
Total contributed capital |
$76,500,000 |
|
Retained earnings |
$15,900,000 |
|
Less: treasury stock, 200,000 shares |
$1,800,000 |
|
Total stockholders' equity |
$90,600,000 |
1. Determine the company's number of outstanding shares of common stock on September 30.
6,200,000 shares issued - 200,000 shares of treasury
stock = 6,000,000 common shares outstanding.
2. Calculate the average price at which the treasury stock was acquired.
$1,800,000 in the treasury stock account / 200,000
shares of treasury stock = $9 per share.
3. Calculate the dividends per share to be paid to common stockholders if
the company declares total cash dividends of $5,700,000.
|
Total cash dividends |
$5,700,000 |
|
Less: Dividends on preferred stock: $30,000,000 x .11 |
3,300,000 |
|
Dividends on common stock |
$2,400,000 |
|
|
|
|
Common shares outstanding |
6,000,000 |
|
Dividends per common stock share: $2,400,000 / 6,000,000 |
$.40 |
4. Calculate the total cash dividends you would receive if you owned
1,000 shares of the Desrosiers Corporation's
preferred stock and 3,000 shares of its common stock.
|
Stock |
Shares Owned |
Dividends |
Dividends |
|
Preferred |
1,000 |
$11 |
$11,000 |
|
Common |
3,000 |
$.40 |
$1,200 |
|
Total dividends |
|
|
$12,200 |
Exercise 12.16: Preferred Stock Retirement
On February 4, the Peatfield Corporation called
and retired 10,000 shares of its $100 par, 7% preferred stock. The
preferred stock call price was $106. Prior to the recall, the
stockholders' equity section of the company's balance sheet was as follows.
|
Stockholders' equity |
|
|
Contributed capital |
|
|
7% preferred stock, $100 par,
100,000 shares authorized, |
$8,000,000 |
|
Common stock, $1 par, 5,000,000
shares authorized, |
$4,000,000 |
|
Additional paid-in capital, common stock |
$10,000,000 |
|
Total contributed capital |
$22,000,000 |
|
Retained earnings |
$64,000,000 |
|
Total stockholders' equity |
$86,000,000 |
1. Calculate the total dollar amount of cash paid by the Peatfield Corporation to retire the 10,000 shares of its preferred stock.
10,000 shares retired x $106 per share price =
$1,060,000.
2. Prepare the stockholders' equity section of the Peatfield
Corporation's balance sheet after the 10,000 shares of preferred stock are
retired.
|
Stockholders' equity |
|
|
Contributed capital |
|
|
7%
preferred stock, $100 par, 100,000 shares authorized, |
$7,000,000 |
|
Common
stock, $1 par, 5,000,000 shares authorized, |
$4,000,000 |
|
Additional paid-in capital, common stock |
$10,000,000 |
|
Total contributed capital |
$21,000,000 |
|
Retained earnings |
$63,940,000 |
|
Total stockholders' equity |
$84,940,000 |
Exercise 12.17: Contributed Capital Section of Balance Sheet
The following information was obtained from the Robinton
Corporation's December 31 accounting records.
|
Additional paid-in capital, common stock |
$3,600,000 |
|
Additional paid-in capital, preferred stock |
300,000 |
|
Common stock, $.01 par, 100,000,000 shares
authorized, |
600,000 |
|
9% preferred stock, $100 par, 100,000 shares authorized,
|
7,500,000 |
|
Retained earnings |
35,000,000 |
|
Treasury stock, 5,000 common shares |
50,000 |
Prepare the December 31 stockholders' equity section of the Robinton Corporation's balance sheet.
|
Stockholders' equity |
|
|
Contributed capital |
|
|
9%
preferred stock, $100 par, 100,000 shares authorized, |
$7,500,000 |
|
Common
stock, $.01 par, 100,000,000 shares authorized, |
600,000 |
|
Additional paid-in capital, preferred stock |
300,000 |
|
Additional paid-in capital, common stock |
3,600,000 |
|
Total contributed capital |
$12,000,000 |
|
Retained earnings |
35,000,000 |
|
Less: treasury stock, 5,000 common shares |
50,000 |
|
Total stockholders' equity |
$46,950,000 |