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corporation (which can be withdrawn from the corporation through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
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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
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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
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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
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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
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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
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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
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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
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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
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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,
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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
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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
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resulting from share-based payment arrangements)
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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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