Stockholders Equity- problems

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Nyvoeb

Business Finance

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I have attached a copy of the lecture notes and the homework problems

the answer for the problem should be in word documents with details

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Stockholders’ Equity A. Corporation--a corporation is an artificial entity created by obtaining approval under the laws of the state in which it is incorporated B. Characteristics of a Corporation 1. Separate Legal Entity--a corporation engages in business activities under its own name instead of the names of the owners a. Government Regulation--a corporation is subject to a greater amount of regulation from federal and state governments than sole proprietorships and partnerships 2. Unlimited Life--the life of the corporation is not terminated when there is a change in ownership of the corporation a. Transferability of Ownership--ownership of a corporation is exhibited by shares of stock and can be transferred to another stockholder entirely at the discretion of the stockholder b. Ownership Rights of Stockholders--each share of stock represents a proportional ownership right in the corporation 1) Voting--stockholders have the right to vote in the election of a board of directors and to vote on actions that require stockholder approval a) Preferred Stock--stockholders who own preferred stock, instead of common stock, give up their right to vote in return for preferential treatment in regards to dividends and liquidation 2) Dividends--stockholders have the right to share in the earnings of the corporation through the receipt of dividends 3) Preemptive Right--the stock holders have the right to maintain the same percentage ownership when new shares of stock are issued 4) Liquidation--the stockholders have the right to share in the assets of the corporation upon liquidation 3. Limited Liability--each stockholders’ liability is usually limited to their investment in the corporation a. Ability to Raise Capital--because of the limited liability of the corporate form of organization and the ease of transferability of ownership, the ability of corporations to raise large amounts of capital is increased b. Owners’ Equity Accounts--separate owners’ accounts are maintained to account for the original investment of the owners (which usually has to be kept in the corporation) and for the net income of the corporation (which can be withdrawn from the corporation through the payment of dividends) 1) Contributed Capital--contributed capital accounts are used to account for the original investment of the owners 2) Retained Earnings--a retained earnings account is used to account for the net income of the corporation 1 4. C. Taxation--the net income of the corporation is taxed at the corporate level when it is earned and again at the stockholder level when it is paid as a dividend Contributed Capital--contributed capital represents the amount provided by stockholders to the corporation for use in the corporation 1. Issuance a. Cash Issuance 1) Par Value Stock--par value stock is capital stock with an arbitrary value assigned to the capital stock that represents the minimum amount at risk from investment in the corporation a) Accounting I) Capital Stock--the capital stock account is credited for the par value of the capital stock II) Paid-in Capital--the paid-in capital in excess of par account is credited for the difference between the issue price of the capital stock and its par value A) Discount--if capital stock is issued for less than its par value, a discount account is debited for the difference between the issue price of the capital stock and its par value and represents the amount the original purchaser or the current holder of the capital stock may be forced to pay to prevent creditors from sustaining a loss upon the liquidation of the corporation B) Cost of Issuing Stock--any direct costs incurred to issue capital stock (underwriting costs, accounting and legal fees, printing costs, taxes, etc.) are treated as a reduction in the issue price of the capital stock b) Illustration--a corporation issued 10,000 shares of common stock with a par value of $5 for $15 per share 2) b. No-par Stock--no-par stock is capital stock with no per-share value assigned to the capital stock a) Accounting--the capital stock account is credited for the issue price of the capital stock I) Stated Value--if no-par stock is either required or allowed to have a stated value, the issuance of the capital stock is recorded in the same way as par value stock b) Illustration--a corporation issued 10,000 shares of no-par common stock for $15 per share Noncash Issuance--capital stock is issued for services or property other than cash 1) Accounting--the issue price of the capital stock is equal to 2 2) equal to either the fair market value of the securities issued or the fair market value of the services or property received if the fair market value of the securities is not determinable Illustrations a) A corporation issued 10,000 shares of common stock with a par value of $5 and a fair market value of $15 for land with a fair market value of $152,000 b) c. Lump-sum Issuances--a lump-sum issuance is the issuance of two or more classes of capital stock for a single payment 1) Proportional Method--the proportional method is used if the fair market value of each class of capital stock is known a) Accounting--the lump-sum payment is allocated to each class of capital stock using the relative fair market value of each class of capital stock b) Illustration--a corporation issued 10,000 shares of common stock with a par value of $5 and a fair market value of $15 per share and 800 shares of preferred stock with a par value of $100 and a fair market value of $125 per share for $245,000 2) 2. A corporation issued 10,000 shares of common stock with a par value of $5 for land with a fair market value of $152,000; the fair market value of the common stock is unknown Incremental Method--the incremental method is used if the fair market value of only one class of capital stock is known a) Accounting--the lump-sum payment is allocated first to the class of capital stock with the known fair market value and then the remainder is allocated to the class of capital stock with the unknown fair market value b) Illustration--a corporation issued 10,000 shares of common stock with a par value of $5 and a fair market value of $15 per share and 800 shares of preferred stock with a par value of $100 for $245,000; the fair market value of the preferred stock is unknown Reacquisition--the reacquisition of capital stock is the repurchase of previously issued capital stock from stockholders to provide preferential tax distributions to stockholders, to increase earnings per share, to provide stock for employee stock compensation plans, to provide stock for business acquisitions, to prevent takeover attempts, etc. a. Retirement--the retirement of capital stock is the repurchase and cancellation of previously issued capital stock 1) Accounting 3 a) 2) Capital Stock--the capital stock account is debited for the par value of the capital stock b) Paid-in Capital--the paid-in capital in excess of par account is debited for the difference between the original issue price of the capital stock and its par value c) Gain/Loss--the difference between the repurchase price of the capital stock and its original issue price is credited to the paid-in capital from retirement if the repurchase price is less than the original issue price or debited to the retained earnings account if the repurchase price is greater than the original issue price Illustrations a) A corporation repurchased 1,000 shares of preferred stock at $105 per share; the preferred stock had a par value of $100 and was originally issued at $106 per share b) b. A corporation repurchased 1,000 shares of preferred stock at $108 per share; the preferred stock had a par value of $100 and was originally issued at $106 per share Treasury Stock--treasury stock is capital stock that is repurchased and held in the treasury for reissue 1) Cost Method--under the cost method the repurchase and the subsequent reissue of the capital stock are treated as one transaction a) Accounting I) Date of Repurchase--no gain or loss on the treasury stock is recognized at the date of repurchase A) Treasury Stock--the treasury stock account is debited for the repurchase price of the capital stock 1) Presentation--the treasury stock account is reported as a deduction from the total paid-in capital and retained earnings II) Date of Reissue--gain or loss on the treasury stock is recognized at the date of reissue A) Treasury Stock--the treasury stock account is credited for the repurchase price of the capital stock B) Gain/Loss--the difference between the repurchase price of the capital stock and its reissue price is credited to the paid-in capital from treasury stock account if the repurchase price is less than the reissue price or debited first to the paid-in capital from treasury stock account to the extent of any credit balance in the paid-in capital from treasury stock account and then to the retained 4 b) earnings account if the repurchase price is greater than the reissue price Illustrations I) A corporation purchased 1,000 shares of common stock at $14 per share; the common stock has a par value of $5 and was originally issued at $15 per share; the corporation reissued 100 shares of common stock at $16 per share and 300 shares of common stock at $13 per share II) 2) A corporation purchased 1,000 shares of common stock at $14 per share; the common stock has a par value of $5 and was originally issued at $12 per share; the corporation reissued 100 shares of common stock at $16 per share and 300 shares of common stock at $13 per share Par Value Method--under the par value method, the repurchase and the subsequent reissue of the capital stock are treated as independent transactions a) Accounting I) Date of Repurchase--gain or loss on the treasury stock is recognized at the date of repurchase as if the capital stock were retired A) Treasury Stock--the treasury stock account is debited for the par value of the capital stock 1) Presentation--the treasury stock account is reported as a deduction from capital stock B) Paid-in Capital--the paid-in capital in excess of par account is debited for the difference between the original issue price of the capital stock and its par value C) Gain/Loss--the difference between the repurchase price of the capital stock and its original issue price is credited to the paid-in capital from treasury stock if the repurchase price is less than the original issue price or debited to the retained earnings account if the repurchase price is greater than the original issue price II) Date of Reissue--the reissue of the treasury stock is treated in the same manner as the original issue of capital stock A) Treasury Stock--the treasury stock account is credited for the par value of the capital stock B) Paid-in Capital--the paid-in capital in excess of par account is credited for the difference between the reissue price of the capital stock and its par 5 b) value Illustrations I) A corporation purchased 1,000 shares of common stock at $14 per share; the common stock has a par value of $5 and was originally issued at $15 per share; the corporation reissued 100 shares of common stock at $16 per share and 300 shares of common stock at $13 per share II) 3. A corporation purchased 1,000 shares of common stock at $14 per share; the common stock has a par value of $5 and was originally issued at $12 per share; the corporation reissued 100 shares of common stock at $16 per share and 300 shares of common stock at $13 per share Dilutive Securities--dilutive securities are equity securities that enable the stockholder to acquire shares of common stock in the future a. Convertible Preferred Stock--convertible preferred stock is preferred stock that may be converted into common stock 1) Accounting a) Date of Issue--the conversion value of the preferred stock is not separately recorded since the conversion feature cannot be separated from the preferred stock b) Date of Conversion--the original issue price of the preferred stock is treated as the issue price of the common stock with the difference between the original issue price of the preferred stock and the par value of the common stock issued credited to the paid-in capital in excess of par account if the original issue price of the preferred stock is greater than the par value of the common stock issued or debited to the retained earnings account if the original issue price of the preferred stock is less than the par value of the common stock issued 2) Illustrations a) Stockholders exercised the conversion feature on 1,000 shares of preferred stock; each share of preferred stock is convertible into 6 shares of common stock with a par value of $5; the preferred stock has a par value of $100 and was originally issued at $103 per share b) Stockholders exercised the conversion feature on 1,000 shares of preferred stock; each share of preferred stock is convertible into 6 shares of common stock with a par value of $20; the preferred stock has a par value of $100 and was originally issued at $103 per share 6 b. Preferred Stock With Detachable Stock Warrants--detachable stock warrants are certificates, which are issued along with preferred stock, enabling the stockholder to acquire shares of common stock at a certain price within a stated period 1) Accounting a) Date of Issue--the issue price of the preferred stock is allocated to the preferred stock and the stock warrants using either the proportional method or the incremental method I) Preferred Stock--the preferred stock account is credited for the par value of the preferred stock II) Paid-in Capital--the paid-in capital in excess of par account is credited for the difference between the portion of the issue price allocated to the preferred stock and its par value III) Warrants--the paid-in capital from stock warrants account is credited for the portion of the issue price allocated to the warrants b) Date of Exercise--the issue price of the common stock is equal to the cash paid plus the carrying value of the stock warrants exercised c) Date of Lapse--when stock warrants lapse, the carrying value of the lapsed stock warrants is transferred to the paid-in capital from lapsed stock warrants account 2) Illustrations a) A corporation issued 1,000 shares of preferred stock with detachable stock warrants at $108 per share; each share of preferred stock has a par value of $100; each share of preferred stock contained 2 warrants; each warrant enables the holder to buy 1 share of common stock with a par value of $5 for $13; shortly after the issue of the preferred stock, the market value of the preferred stock was $104.50 per share and the market value of the warrants was $2.75 per warrant; 1,500 stock warrants were exercised; 500 stock warrants lapsed b) c. A corporation issued 1,000 shares of preferred stock with detachable stock warrants at $108 per share; each share of preferred stock has a par value of $100; each share of preferred stock contained 2 warrants; each warrant enables the holder to buy 1 share of common stock with a par value of $5 for $13; shortly after the issue of the preferred stock, the market value of the preferred stock was $105 per share; the market value of the warrants was unknown; 1,500 stock warrants were exercised; 500 stock warrants lapsed Stock Option Plans--a stock option is an option to purchase common 7 stock at a given price over an extended period of time given to selected employees to motivate their performance and provide additional compensation 1) Accounting a) Date of Measurement--total compensation expense is equal to the fair value of the stock options, expected to vest, on the date the options are granted using an options-pricing model b) Allocation of Compensation--compensation expense is recorded each period by debiting the compensation expense account and crediting the paid-in capital from stock options account for an amount equal to the total compensation expense divided by the length of time from the date of grant to the date of vesting I) Change in Estimate--if a stock option is forfeited because an employee leaves employment, compensation expense recorded in the current period should be adjusted for the change in estimate c) Date of Exercise--the issue price of the common stock is equal to the cash paid plus the carrying value of the stock options exercised d) Date of Lapse--when stock options lapse, the carrying value of the lapsed stock options is transferred to the paid-in capital from lapsed stock options account 2) Illustration--on January 1 of year 1 a corporation granted to its employees stock options to purchase 1,000 shares of common stock with a par value of $5 when the market value of the common stock was $15; the option price was $15 per share; the fair market value of the stock options was $6,000; the stock options are exercisable on December 31 of year 3; the stock options expire on December 31 of year 4; during year 4 900 stock options were exercised and 100 stock options lapsed d. Restricted Stock--restricted stock is stock transferred to an employee subject to an agreement that the stock cannot be sold, transferred, or pledged until vesting occurs 1) Accounting a) Date of Measurement--total compensation expense, equal to the fair value of the restricted stock on the date the restricted stock is granted, is recorded by debiting the unearned compensation expense account and crediting the appropriate contributed capital accounts I) Presentation-since unearned compensation expense is not considered an asset, it is reported as a deduction from total paid-in capital and retained earnings b) Allocation of Compensation--compensation expense is recorded each period by debiting the compensation expense 8 2) e. D. account and crediting the unearned compensation expense account for an amount equal the total compensation expense divided by the length of time from the date of grant to the date of vesting c) Date of Vesting--no entry is required d) Date of Forfeiture--when employees do not fulfill vesting requirements, the initial recording of the restricted stock is reversed with the appropriate adjustment to unearned compensation expense and compensation expense Illustration--on January 1 of year 1 a corporation issued to its employees 1,000 shares of restricted common stock with a par value of $5 when the market value of the common stock was $15; the restricted common stock vested on December 31 of year 3; during year 3 100 shares of restricted common stock were forfeited Employee Stock-Purchase Plans--employee stock-purchase plans permit to purchase stock at a discounted price for a short period of time 1) Accounting--as long as substantially all full-time employees may participate on an equitable basis and the discount is small, no compensation expense is recorded Retained Earnings--retained earnings represents the net income of the corporation that has not been paid to the stockholders in the form of a dividend 1. Distributions a. Cash Dividends--cash dividends are the proportionate distribution of cash to the stockholders 1) Dividend Dates a) Accounting Treatment I) Date of Declaration--the date of declaration is the date on which the board of directors formally declares the dividend and requires the recording of the decrease in retained earnings and the recognition of the liability to pay the dividend II) Date of Record--the date of record is date on which ownership of the stock is determined and requires no entry III) Date of Payment--the date of payment is the date on which the dividend is paid and requires the elimination of the liability to pay the dividend b) Illustration--on September 1 a corporation declared a cash dividend of $10,000 payable on September 15 to stockholders who own the stock on September 10 2) Dividend Preferences--preferred stockholders have the right to share in the net income of the corporation before common 9 stockholders a) Accounting Treatment I) Cumulative Preferred Stock--any preferred stock dividends that were not paid in prior years must be paid before the current year dividends are paid A) Dividends in Arrears--dividends in arrears are the preferred stock dividends that were not paid in prior years and are not considered a liability II) Noncumulative Preferred Stock--any preferred stock dividends that were not paid in prior years do not carryover to the current year III) Participating Preferred Stock--preferred stock dividends can exceed the face dividend rate once the common stock receives an equal percentage dividend A) Fully Participating--there is no limit on the size of the preferred stock dividends B) Partially Participating--there is a limit on the size of the preferred stock dividends IV) Nonparticipating Preferred Stock--preferred stock dividends cannot exceed the face dividend rate no matter the size of the common stock dividend b) Illustrations I) A corporation had 1,000 shares of 5% noncumulative, nonparticipating preferred stock with a par value of $100 and 16,000 shares of common stock with a $25 par outstanding; on December 31 of year 2 the corporation declared a dividend sufficient enough to give the common stock holders a dividend of $2 per share; no dividends were declared during year 1 II) III) IV) A corporation had 1,000 shares of 5% cumulative, nonparticipating preferred stock with a par value of $100 and 16,000 shares of common stock with a $25 par outstanding; on December 31 of year 2 the corporation declared a dividend sufficient enough to give the common stock holders a dividend of $2 per share; no dividends were declared during year 1 A corporation had 1,000 shares of 5% noncumulative, fully participating preferred stock with a par value of $100 and 16,000 shares of common stock with a $25 par outstanding; on December 31 of year 2 the corporation declared a dividend sufficient enough to give the common stock holders a dividend of $2 per share; no dividends were declared during year 1 A corporation had 1,000 shares of 5% cumulative, 10 fully participating preferred stock with a par value of $100 and 16,000 shares of common stock with a $25 par outstanding; on December 31 of year 2 the corporation declared a dividend sufficient enough to give the common stock holders a dividend of $2 per share; no dividends were declared during year 1 b. A corporation had 1,000 shares of 5% noncumulative, partially participating preferred stock (7% maximum) with a par value of $100 and 16,000 shares of common stock with a $25 par outstanding; on December 31 of year 2 the corporation declared a dividend sufficient enough to give the common stock holders a dividend of $2 per share; no dividends were declared during year 1 VI) A corporation had 1,000 shares of 5% noncumulative, partially participating preferred stock (9% maximum) with a par value of $100 and 16,000 shares of common stock with a $25 par outstanding; on December 31 of year 2 the corporation declared a dividend sufficient enough to give the common stock holders a dividend of $2 per share; no dividends were declared during year 1 Stock Dividends--stock dividends are the proportionate distribution of additional shares of stock in the corporation to the stockholders 1) Small Stock Dividends--small stock dividends are stock dividends less than 25% of the outstanding stock a) Accounting Treatment--retained earning is decreased and contributed capital is increased by the market value of the stock distributed as a stock dividend b) Illustration--a corporation declared a 5% stock dividend when the corporation had 10,000 shares of common stock with a $15 par outstanding; the market value of the common stock was $42 per share 2) c. V) Large Stock Dividends--large stock dividends are stock dividends 25% or more of the outstanding stock a) Accounting Treatment--retained earnings is decreased and contributed capital is increased by the par value of the stock distributed as a stock dividend b) Illustration--a corporation declared a 40% stock dividend when the corporation had 10,000 shares of common stock with a $15 par outstanding; the market value of the common stock was $42 per share Stock Splits--stock splits are the proportionate distribution of 11 shares of stock in the corporation to the stockholders together with a proportionate decrease in the par value of the stock 1) Accounting Treatment--no entry is necessary to record a stock split since the total par value of stock has remained unchanged 2) Illustration--a corporation issued a 2-for-1 stock split when the corporation had 10,000 shares of common stock with a $15 par outstanding; the market value of the common stock was $42 per share 2. E. Retained Earnings Restrictions--the amount of retained earnings that are available for dividend may be restricted by legal restrictions (the cost of the treasury stock is a restriction on retained earnings available for dividend payments in most states), contractual restrictions (debt agreements may restrict the amount of dividends that can be paid), and voluntary restrictions (the board of directors may voluntarily restrict the amount of dividends that can be paid in order to earmark the resources for such company needs as expansion) a. Accounting Treatment--restrictions on retained earnings are generally disclosed in the notes to the financial statements b. Illustration--the owners’ equity of a corporation consisted of common stock of $100,000, retained earnings of $50,000, and treasury stock of ($20,000) Disclosure 1. The pertinent rights and privileges of the various outstanding securities should be disclosed (such as dividend and liquidation preferences, participation rights, call prices and dates, conversion or exercise prices and pertinent dates, sinking fund requirements, unusual voting rights, etc.) 2. The status of stock-based compensation plans should be disclosed (such as the nature and terms of such arrangements that existed during the period and the potential effects of those arrangements on shareholder, the effect on the income statement of compensation cost arising from share-based payment arrangements, the method of estimating the fair value of the goods or services received or the fair value of the equity instruments granted during the period, and the cash flow effects resulting from share-based payment arrangements) 3. Sources of restrictions on retained earnings should be disclosed along with pertinent provisions and the amount of retained earnings subject to restriction. 4. The status of share-based payment arrangements should be disclosed (such as the nature and terms of such arrangements that existed during the period and the potential effect of these arrangement on stockholders, the effect on the income statement of compensation cost arising from share-based payment arrangements, the method of estimating the fair value of the goods or services received or the fair value of the equity instruments granted during the period, the cash flow effects 12 resulting from share-based payment arrangements) 13 Problem 1 On January 1 of year 1 the Black Company issued 10,000 shares of common stock and 2,000 shares of preferred stock for a building with a fair market value of $510,000. The par value of the common stock was $20 per share. The par value of the preferred stock was $50 per share. The market value of the common stock was $39 per share. Required: 1. Assuming that the market value of the share, prepare the necessary entry to stock and the preferred stock. 2. Assuming that the market value of the prepare the necessary entry to record and the preferred stock. preferred stock was $65 per record the issuance of the common preferred stock was unknown, the issuance of the common stock Problem 2 On January 1 of year 1 the White Company issued 100,000 shares of common stock at $34 per share. The par value of the common stock was $25 per share. On July 12 of year 3, 1,000 shares of the White Company's common stock were repurchased at a cost of $39 per share. On November 21 of year 3, 300 shares of common stock were sold from the treasury at $42 per share. On February 9 of year 4, 500 shares of common stock were sold from the treasury at $37 per share. Required: 1. Assuming that the cost method is used to account for treasury stock, prepare the necessary entries to record the repurchase of the common stock on July 12 of year 3 and the reissue of the common stock on November 21 of year 3 and February 9 of year 4. 2. Assuming that the par value method is used to account for treasury stock, prepare the necessary entries to record the repurchase of the common stock on July 12 of year 3 and the reissue of the common stock on November 21 of year 3 and February 9 of year 4. Problem 3 On January 1 of year 1 the Brown Company issued 20,000 shares of preferred stock at $90 per share. The par value of the preferred stock was $75 per share. On January 1 of year 5, 6,000 shares of preferred stock were repurchased and retired. Required: 1. Assuming that the preferred stock was repurchased at prepare the necessary entry to record the retirement shares of preferred stock on January 1 of year 5. 2. Assuming that the preferred stock was repurchased at prepare the necessary entry to record the retirement shares of preferred stock on January 1 of year 5. $89 per share, of the 6,000 $93 per share, of the 6,000 Problem 4 On January 1 of year 1 the Green Company issued 10,000 shares of convertible preferred stock at $130 per share. The par value of the preferred stock was $120 per share. Each share of preferred stock is convertible into 3 shares of common stock. On January 1 of year 6, 4,000 shares of preferred stock were converted into 12,000 shares of common stock. Required: 1. Prepare the necessary entry to stock on January 1 of year 1. 2. Assuming that the par value of prepare the necessary entry to shares of the preferred stock. 3. Assuming that the par value of prepare the necessary entry to shares of the preferred stock. record the issuance of the preferred the common stock was $25 per share, record the conversion of the 4,000 the common stock was $45 per share, record the conversion of the 4,000 Problem 5 On January 1 of year 1, 2,000 shares of preferred stock were issued for $477,600. The par value of the preferred stock was $225 per share. Each share of preferred stock carried three detachable stock warrant. One share of common stock can be purchased by surrendering one stock warrant and $35. The par value of the common stock was $20 per share. The stock warrants expire on December 31 of year 4. Shortly after the issuance of the preferred stock, the preferred stock without the stock warrants was trading at $228 per share, and the stock warrants were trading at $4 per stock warrant. On September 17 of year 4, 5,000 stock warrants were exercised. On December 31 of year 4 the outstanding stock warrants lapsed. Required: 1. Prepare the stock. 2. Prepare the warrants on 3. Prepare the warrants on necessary entry to record the issuance of the preferred necessary entry to record the exercise of the stock September 17 of year 4. necessary entry to record the expiration of the stock December 31 of year 4. Problem 6 On January 1 of year 1 a stock option plan for the president of the White Company was adopted. The stock option plan enables the president to purchase 12,000 shares of common stock at $65 per share. On January 1 of year 1 the market value of the common stock was $65 per share. The par value of the common stock was $35 per share. The stock options are exercisable beginning on December 31 of year 3. The stock options expire on December 31 of year 4. The fair value of the stock options is estimated to be $120,000. Any compensation expense that is recognized is to be allocated over the period of time from the date of grant to the date of exercise. On March 3 of year 4 the president exercised stock options on 11,000 shares of common stock. On December 31 of year 4 the president's remaining stock options expired. Required: 1. Prepare the necessary entry to record the adoption of the stock option plan on January 1 of year 1. 2. Prepare the necessary entries to record compensation expense on December 31 of year 1, year 2, and year 3. 3. Prepare the necessary entry to record the exercise of the stock options on March 3 of year 4. 4. Prepare the necessary entry to record the expiration of the stock options on December 31 of year 4. Problem 7 On January 1 of year 1 the Brown Company had 60,000 shares of common stock and 10,000 shares of 4% preferred stock outstanding. The par value of the common stock was $50 per share. The par value of the preferred stock was $75 per share. No dividends were declared during year 1. On December 31 of year 2 the Brown Company declared a cash dividend sufficient to give the common stockholders a $3.50 per share dividend. Required: 1. Assuming that the preferred stock is noncumulative and nonparticipating, determine the amount of the dividend declaration. 2. Assuming that the preferred stock is cumulative and nonparticipating, determine the amount of the dividend declaration. 3. Assuming that the preferred stock is cumulative and fully participating, determine the amount of the dividend declaration. 4. Assuming that the preferred stock is cumulative and partially participating up to a 9% maximum, determine the amount of the dividend declaration. 5. Assuming that the preferred stock is cumulative and partially participating up to a 6% maximum, determine the amount of the dividend declaration.
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Surname 1
Name
Supervisor
Course
Date
Stockholders Equity-Problems

Problem 1

Solution
Debit
510,000

Cash

Credit

Common stock

200,000

Paid-in Capital in Excess of Par—Common

182,500

Preferred stock

100,000

Paid-in Capital in Excess of Par—Preferred

27,500

(Common $39 × 10,000
Preferred $65 × 2,000

=$390,000
= 130,000
$520,000 market value
390/520 × $510,000 = $382,500
common
130/520 × $510,000 = 127,500
preferred
$510,000)

Surname 2

Solution
Debit
Cash

Credit

510,000
Common stock

200,000

Paid-in Capital in Excess of Par—Common

182,500

Preferred stock

100,000

Paid-in Capital in Excess of Par—Preferred

20,000

(Common $39 × 10,000
=$390,000
$510,000-$390,000 = $120,000

market value of common stock
preferred stock)

Surname 3
Problem 2

Solution
1.
Debit
July 7 Treasury stock

Credit
39,000

Cash

39,000

Nov 21 Cash (300*$42)
Treasury stock (300*$39)
Paid-in Capital for treasury stock

12,600

Feb 9 Cash (500*$37)
Paid-in Capital for treasury stock
Treasury stock (500*$39)

18,500
1,000

11,700
900

19,500

Solution
Debit
Jul 7 Treasury stock ($25*1000)

Credit
25,000

Surname 4
Paid-in Capital for common stock
(($34-25)*1000)
Retained earnings
($39000-25000-9000)
Cash
Nov 21
Cash

9,000
5,000
39,000

($42*300...


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