Chapter 13 - Accounting for Corporations

Chapter 13
Accounting for Corporations
EXERCISES
Exercise 13-1 (15 minutes)

Characteristic Corporations
1. Owner authority and control One vote per share
2. Ease of formation Requires government approval
3. Transferability of ownership Readily transferred
4. Ability to raise large amounts of capital High ability
5. Duration of life Unlimited
6. Owner liability Limited
7. Legal status Separate legal entity
8. Tax status of income Corporate income is taxed and
its cash dividends are usually
taxed at the 15% rate (some
cases at a lower rate)

Exercise 13-2 (15 minutes)

1.
Feb. 20 Cash 152,000
Common Stock, $2 Par Value* 38,000
Paid-In Capital in Excess of Par Value,
Common Stock** 114,000
Issued common stock for cash.
*19,000 shares x $2 per share = $38,000
**$152,000 - $38,000 = $114,000
2.
Feb. 20 Cash 152,000
Common Stock, No-Par Value 152,000
Issued common stock for cash.
3.
Feb. 20 Cash 152,000
Common Stock, $5 Stated Value* 95,000
Paid-In Capital in Excess of Stated Value,
Common Stock** 57,000
Issued common stock for cash.
Chapter 13 - Accounting for Corporations

Exercise 13-3 (15 minutes)

1. Cash 35,000
Common Stock, $5 Par Value* 20,000
Paid-In Capital in Excess of Par Value,
Common Stock** 15,000
Issued common stock for cash.
*4,000 shares x $5 per share = $20,000
**$35,000 - $20,000 = $15,000

2. Organization Expenses 40,000

Common Stock, $1 Stated Value 2,000
Paid-In Capital in Excess of Stated Value,
Common Stock 38,000
Issued stock to promoters.

3. Organization Expenses 40,000

Common Stock, No-Par Value 40,000
Issued stock to promoters.

4. Cash 60,000
Preferred Stock, $50 Par Value* 50,000
Paid-In Capital in Excess of Par Value,
Preferred Stock** 10,000
Issued preferred stock for cash.
*1,000 shares x $50 per share = $50,000
**$60,000 - $50,000 = $10,000

Exercise 13-4 (15 minutes)

Land 45,000
Building 85,000
Common Stock, $7 Par Value* 49,000
Paid-In Capital in Excess of Par Value,
Common Stock 81,000
Issued stock for land and building.
*7,000 shares x $7 per share = $49,000
**($45,000 + $85,000) – $49,000 = $81,000
Chapter 13 - Accounting for Corporations

Exercise 13-5 (20 minutes)

1.
a. Retained earnings
Before dividend $ 660,000
$10 par value of 25,000 dividend shares (250,000)
After dividend $ 410,000

b. Total stockholders’ equity

Common stock$10 par value, 120,000 shares
authorized, 75,000 shares issued and outstanding $ 750,000
Paid-in capital in excess of par value 200,000
Retained earnings 410,000
Total stockholders’ equity $1,360,000

c. Number of outstanding shares

Outstanding shares before the dividend 50,000
Dividend shares 25,000
Outstanding shares after the dividend 75,000
2.
a. Retained earnings (no change)
Before and after stock split $ 660,000

b. Total stockholders’ equity

Common stock$6.67 (rounded) par value, 180,000 shares
authorized, 75,000 shares issued and outstanding $ 500,000
Paid-in capital in excess of par value 200,000
Retained earnings 660,000
Total stockholders’ equity $1,360,000

c. Number of outstanding shares

Outstanding shares before the split 50,000
Additional split shares (3-for-2) 25,000
Outstanding shares after the split 75,000

3. From a stockholder’s point of view, there is no practical difference

between the stock dividend and the stock split. The number of
shares will be increased equivalently under either approach, and the
market value change, if any, should be approximately the same.
Chapter 13 - Accounting for Corporations

Exercise 13-6 (25 minutes)

1.
Feb. 5 Retained Earnings* 480,000
Common Stock Dividend Distributable** 120,000
Paid-In Capital in Excess of Par Value,
Common Stock*** 360,000
Declared 20% common stock dividend
Shares to be issued: 60,000 shares x 20% = 12,000 shares
*12,000 shares x $40 per share = $480,000
**12,000 shares x $10 per share = $120,000
***$480,000 - $120,000 = $360,000

Feb.28 Common Stock Dividend Distributable 120,000

Common Stock, $10 Par Value 120,000
Distributed common stock dividend.
2.
Before After
Total stockholders’ equity $1,575,000 $1,575,000
Issued and distributable shares  60,000  72,000
Book value per share $ 26.250 $ 21.875
Shares owned x 800 x 960*
Total book value of shares $ 21,000 $ 21,000
* 800 shares x 120% = 960 shares.

3.
February 5 February 28
Market value per share $ 40 $ 33.40
Shares owned x 800 x 960
Total market value of shares owned $ 32,000 $ 32,064

Note: The total market value of investor’s holdings is approximately the same
for February 5 and February 28. Assuming that the stock dividend is the only
value-relevant information/event between February 5th and February 28th, these
per share values highlight the lack of value distributed in a stock dividend.

Exercise 13-7 (10 minutes)

1. C 2. A 3. F 4. E 5. B 6. D
Chapter 13 - Accounting for Corporations

Exercise 13-8 (30 minutes)

Non-Cumulative
Preferred Common

2015 ($20,000 paid)

Preferred* $ 20,000
Commonremainder _______ $ 0
Total for the year $ 20,000 $ 0

2016 ($28,000 paid)

Preferred* $ 28,000
Commonremainder _______ $ 0
Total for the year $ 28,000 $ 0

2017 ($200,000 paid)

Preferred* $ 30,000
Commonremainder _______ $170,000
Total for the year $ 30,000 $170,000

2018 ($350,000 paid)

Preferred* $ 30,000
Commonremainder _______ $320,000
Total for the year $ 30,000 $320,000

2015-2018 ($598,000 paid) _______ _______

Total for four years $108,000 $490,000

* The holders of the noncumulative preferred stock are entitled to no more than
$30,000 of dividends in any one year (7.5% x $5 x 80,000 shares).
Chapter 13 - Accounting for Corporations

Exercise 13-9 (25 minutes)

Cumulative
Preferred Common

2015 ($20,000 paid)

Preferred* $ 20,000
Commonremainder _______ $ 0
Total for the year $ 20,000 $ 0
(Note: $10,000 in preferred stock dividends in arrears.)

2016 ($28,000 paid)

Preferredarrears from 2015 $ 10,000
Preferred* 18,000
Commonremainder _______ $ 0
Total for the year $ 28,000 $ 0
(Note: $12,000 in preferred stock dividends in arrears.)

2017 ($200,000 paid)

Preferredarrears from 2016 $ 12,000
Preferred* 30,000
Commonremainder _______ $158,000
Total for the year $ 42,000 $158,000
(Note: $0 in preferred stock dividends in arrears.)

2018 ($350,000 paid)

Preferred* $ 30,000
Commonremainder _______ $320,000
Total for the year $ 30,000 $320,000
(Note: $0 in preferred stock dividends in arrears.)

_______ _______
2015-2018 ($598,000 paid)
Total for four years $120,000 $478,000

* The holders of the cumulative preferred stock are entitled to no more than
$30,000 of dividends declared in any year (7.5% x $5 x 80,000 shares) plus any
dividends skipped in prior years.
Chapter 13 - Accounting for Corporations

Exercise 13-10 (25 minutes)

1. (a)
Oct. 11 Treasury Stock (5,000 x $25) 125,000
Cash 125,000
Purchased treasury stock.
(b)
Nov. 1 Cash (1,000 x $31) 31,000
Treasury Stock (1,000 x $25) 25,000
Paid-In Capital, Treasury Stock 6,000
Reissued treasury stock at a price exceeding cost.
(c)
Nov. 25 Cash (4,000 x $20) 80,000
Paid-In Capital, Treasury Stock 6,000
Retained Earnings 14,000
Treasury Stock (4,000 x $25) 100,000
Reissued treasury stock at a price less than cost.

2. Changes to the equity section include the following

(i) The common stock account description line will change. After the
treasury stock purchase, it should read:
Common stock$10 par value; 72,000 shares
authorized and issued; 5,000 shares in treasury $720,000
The dollar balance of this account does not change with a treasury
stock purchase.

(ii) The descriptions and dollar amounts for Paid-In Capital in Excess of
Par Value, Common Stock will not change.

(iii) The retained earnings dollar balance will not change but its
description should change to read:
Retained earnings ($125,000 restricted for treasury stock) $864,000

(iv) After the purchase, a deduction for the cost of treasury stock is
reported immediately before the total line for stockholders’ equity as :
Less cost of treasury stock $(125,000)

(v) Total stockholders’ equity will change from $1,800,000 to $1,675,000.

Chapter 13 - Accounting for Corporations

Exercise 13-10 (Concluded)

Revised equity section appears as follows

Common stock$10 par value; 72,000 shares authorized

and issued; 5,000 shares in treasury $ 720,000
Paid-in capital in excess of par value, Common stock 216,000
Retained earnings, $125,000 restricted by treasury stock 864,000
Total 1,800,000
Less cost of treasury stock (125,000)
Total stockholders’ equity $1,675,000

Exercise 13-11 (15 minutes)

Amos Company
Statement of Retained Earnings
For Year Ended December 31, 2015
Retained earnings, December 31, 2014, as previously reported $1,375,000
Prior period adjustment
Depreciation expense not recorded in 2013 (net of $4,500 in
tax benefits) ($55,500)
Retained Earnings, December 31, 2014, as adjusted 1,319,500
Plus net income 126,000
Less dividends (43,000)
Retained earnings, December 31, 2015 $1,402,500

Exercise 13-12 (25 minutes)

1. Net income $2,700,000

Less preferred dividends (388,020)
Net income available to common stockholders $2,311,980

2. Net income available to common stockholders $2,311,980

Divided by weighted-average outstanding shares 678,000
Basic earnings per share $3.41
Chapter 13 - Accounting for Corporations

Exercise 13-13 (30 minutes)

1. Net income $960,000

Less preferred dividends (120,000)
Net income available to common stockholders $840,000

2. Net income available to common stockholders $840,000

Divided by weighted-average outstanding shares 400,000
Basic earnings per share $ 2.10

Exercise 13-14 (15 minutes)

Market Value Divided Earnings Price-Earnings

Stock per Share by per Share Ratio
1 $176.40  $12.00 = 14.7
2 96.00  10.00 = 9.6
3 93.75  7.50 = 12.5
4 250.00  50.00 = 5.0

Analysis: Stocks with PE ratios less than about 5 to 8 are likely viewed as
potentially undervalued by the market. Of the stocks above, an analyst
might investigate stock #4 as possibly undervalued with a PE ratio of 5.0.

Exercise 13-15 (15 minutes)

Dividend yield
1. $16.06 / $220.00 = 7.3%
2. $13.86 / $132.00 = 10.5%
3. $ 3.96 / $ 72.00 = 5.5%
4. $ 0.96 / $ 80.00 = 1.2%

Analysis: The yield of 1.2% on stock #4 is sufficiently low that it

probably would be classified as a growth stock, and not an income
stock. Note that classification involves expectations (not necessarily
realizations).
Chapter 13 - Accounting for Corporations

Exercise 13-16 (20 minutes)

1.
Total stockholders’ equity $1,585,000
Less equity applicable to preferred shares
Call price ($30 x 10,000) $300,000
Cumulative dividends in arrears (none) 0 (300,000)
Equity applicable to common shares $1,285,000

Book value of preferred stock ($300,000/10,000) $ 30.00

Book value of common stock ($1,285,000/80,000) $ 16.06

2.
Total stockholders’ equity $1,585,000
Less equity applicable to preferred shares
Call price ($30 x 10,000) $300,000
Cumulative dividends in arrears (3 x 6% x $250,000) 45,000 (345,000)
Equity applicable to common shares $1,240,000

Book value of preferred stock ($345,000/10,000) $ 34.50

Book value of common stock ($1,240,000/80,000) $ 15.50

Exercise 13-17 (20 minutes)

1. Share capital  Common stock

Share premium  Paid-in capital in excess of par value
Retained profit  Retained earnings

2. Cash 624
Share Capital (at Par Value) 484
Share Premium 140
Issued common stock at premium for cash.

3. 2013 Retained profit = 2012 Retained profit + 2013 Income – 2013 Dividends
€ 20,468 € 20,964 € 5,263 € 5,759
Chapter 13 - Accounting for Corporations

Exercise 13-18 (40 minutes)

Part 1
Jan. 2 Treasury Stock, Common 75,000
Cash 75,000
Purchased treasury stock (3,000 x $25).

Jan. 7 Retained Earnings 40,500

Common Dividend Payable 40,500
Declared $1.50 dividend per share on 27,000
outstanding shares.

Feb. 28 Common Dividend Payable 40,500

Cash 40,500
Paid cash dividend.

July 9 Cash* 36,000

Treasury Stock, Common** 30,000
Paid-In Capital, Treasury Stock*** 6,000
Reissued treasury stock.
*(1,200 x $30) **(1,200 x $25) ***(1,200 x $5)

Aug. 27 Cash* 30,000

Paid-In Capital, Treasury Stock 6,000
Retained Earnings 1,500
Treasury Stock, Common** 37,500
Reissued treasury stock.
*(1,500 x $20) **(1,500 x $25)

Sept. 9 Retained Earnings 59,400

Common Dividend Payable 59,400
Declared $2 dividend on 29,700 outstanding shares.

Oct. 22 Common Dividend Payable 59,400

Cash 59,400
Paid cash dividend.

Dec. 31 Income Summary 52,000

Retained Earnings 52,000
Closed Income Summary account.
Chapter 13 - Accounting for Corporations

Exercise 13-18 (Concluded)

Part 2

ALEXANDER CORPORATION
Statement of Retained Earnings
For Year Ended December 31, 2016

Retained earnings, December 31, 2015 $340,000

Plus net income 52,000
392,000
Less:Cash dividends declared (99,900)
Treasury stock reissuances* (1,500)*
Retained earnings, December 31, 2016 $290,600
*From August 27 transaction of reissuance of treasury shares.

Part 3

ALEXANDER CORPORATION
Stockholders’ Equity Section of the Balance Sheet
December 31, 2016
Common stock$25 par value, 50,000 shares
authorized, 30,000 shares issued and outstanding;
300 shares in treasury $ 750,000

Paid-in capital in excess of par value, common stock 50,000

Retained earnings (from part 2) 290,600

Less cost of treasury stock (7,500)

Total stockholders’ equity $1,083,100

Chapter 13 - Accounting for Corporations

PROBLEM SET A
Problem 13-1A (30 minutes)
Part 1
a. To record sale of 10,000 ($250,000/$25 per share) shares of $25 par
value common stock for $30 ($300,000/10,000 shares) per share.
b. To record issuance of 5,000 ($125,000/$25 per share) shares of $25
par value common stock to the company’s promoters for their efforts
in organizing the company when the market value is $30
($150,000/5,000 shares) per share.
c. To record acquisition of assets and liabilities by issuing 2,000
($50,000/$25) shares of $25 par value common stock at $40 per share.
d. To record sale of 3,000 ($75,000/$25 per share) shares of $25 par
value common stock for $40 ($120,000/3,000 shares) per share.

Part 2
Number of outstanding shares
Issued in (a) 10,000
Issued in (b) 5,000
Issued in (c) 2,000
Issued in (d) 3,000
Total 20,000

Part 3
Minimum legal capital = Outstanding shares x Par value per share
= 20,000 x $25 = $500,000
Part 4
Total paid-in capital from common stockholders
From transaction (a) $300,000
From transaction (b) 150,000
From transaction (c) 80,000
From transaction (d) 120,000
Total paid-in capital $650,000

Part 5
Book value per common share
Total stockholders’ equity (given) $695,000
Outstanding shares (from Part 2) 20,000
Book value per common share $ 34.75 ($695,000 / 20,000 shares)
Chapter 13 - Accounting for Corporations

Problem 13-2A (60 minutes)

Part 1
Jan. 1 Treasury Stock, Common 80,000
Cash 80,000
Purchased treasury stock (4,000 x $20).

Jan. 5 Retained Earnings 72,000

Common Dividend Payable 72,000
Declared $2 dividend on 36,000 outstanding shares.

Feb. 28 Common Dividend Payable 72,000

Cash 72,000
Paid cash dividend.

July 6 Cash* 36,000

Treasury Stock, Common** 30,000
Paid-In Capital, Treasury Stock*** 6,000
Reissued treasury stock.
*(1,500 x $24) **(1,500 x $20) ***(1,500 x $4)

Aug. 22 Cash* 42,500

Paid-In Capital, Treasury Stock 6,000
Retained Earnings 1,500
Treasury Stock, Common** 50,000
Reissued treasury stock.
*(2,500 x $17) **(2,500 x $20)

Sept. 5 Retained Earnings 80,000

Common Dividend Payable 80,000
Declared $2 dividend on 40,000 outstanding shares.

Oct. 28 Common Dividend Payable 80,000

Cash 80,000
Paid cash dividend.

Dec. 31 Income Summary 388,000

Retained Earnings 388,000
Closed Income Summary account.
Chapter 13 - Accounting for Corporations

Problem 13-2A (Concluded)

Part 2

KOHLER CORPORATION
Statement of Retained Earnings
For Year Ended December 31, 2016

Retained earnings, December 31, 2015 $270,000

Plus net income 388,000
658,000
Less:Cash dividends declared (152,000)
Treasury stock reissuances (1,500)
Retained earnings, December 31, 2016 $504,500

Part 3

KOHLER CORPORATION
Stockholders’ Equity Section of the Balance Sheet
December 31, 2016
Common stock$10 par value, 100,000 shares
authorized, 40,000 shares issued and outstanding $400,000

Paid-in capital in excess of par value, common stock 60,000

Retained earnings (from part 2) 504,500

Total stockholders’ equity $964,500

 Chapter 13 - Accounting for Corporations

Problem 13-3A (45 minutes)

Part 1
Explanations for each of the journal entries

Oct. 2 Declared a cash dividend of $2 per share of common stock.

($60,000 / 30,000 shares)

Oct. 25 Paid the cash dividend on common stock.

Oct. 31 Declared a 10% stock dividend when the market value is $25 per
share. ($36,000/$12 par = 3,000 shares = 10% of 30,000 shares;
$75,000/3,000 shares = $25 per share)

Nov. 5 Distributed the common stock dividend.

Dec. 1 Executed a 3-for-1 stock split. ($12 par / $4 par = 3-for-1 ratio)

Dec. 31 Closed the Income Summary account to Retained Earnings.

Part 2

Oct. 2 Oct. 25 Oct. 31 Nov. 5 Dec. 1 Dec. 31

Common stock $360,000 $360,000 $360,000 $396,000 $396,000 $396,000

Common stock
dividend distributable 0 0 36,000 0 0 0

Paid-in capital in
excess of par 90,000 90,000 129,000 129,000 129,000 129,000

Retained earnings 260,000 260,000 185,000 185,00 185,000 395,000

0

Total equity $710,000 $710,000 $710,000 $710,000 $710,000 $920,000

Chapter 13 - Accounting for Corporations

Problem 13-4A (45 minutes)

Part 1
Outstanding common shares
Jan. 5 Apr. 5 July 5 Oct. 5
Beginning balance 40,000 40,000 40,000 40,000
Less treasury stock (Mar. 20) (3,000) (3,000) (3,000)
Plus dividend shares (July 31)* ______ ______ ______ 7,400
Outstanding shares 40,000 37,000 37,000 44,400
*(20% x 37,000)

Part 2
Cash dividend amounts
Jan. 5 Apr. 5 July 5 Oct. 5
Outstanding shares 40,000 37,000 37,000 44,400
Dividend per share $ 0.50 $ 0.50 $ 0.50 $ 0.50
Total dividend $20,000 $18,500 $18,500 $22,200

Part 3
Capitalization of retained earnings for small stock dividend
Number of shares 7,400
Market value per share $12
Total capitalized $ 88,800

Part 4
Cost per share of treasury stock
Total amount paid $ 30,000
Shares purchased 3,000
Cost per share $ 10

Part 5
Net income
Retained earnings, beginning balance $320,000
Less dividends: Jan. 5 (20,000)
Apr. 5 (18,500)
July 5 (18,500)
July 31 (88,800)
Oct. 5 (22,200)
Total before net income $152,000
Plus net income ?
Retained earnings, ending balance $400,000

Therefore, net income = $248,000

Chapter 13 - Accounting for Corporations

Problem 13-5A (40 minutes)

1. Market price = $85 per share (current stock exchange price given)

2. Computation of par values of stock

Preferred: Paid-in amount / Number of shares = $50,000 / 1,000 = $50
Common: Paid-in amount / Number of shares = $80,000 / 4,000 = $20

3. Book values with no dividends in arrears

Book value per preferred share = par value (when not callable) = $50

Common stock
Total equity $280,000
Less equity for preferred (50,000)
Common stock equity $230,000
Number of outstanding shares 4,000
Book value per common share $ 57.50 ($230,000 / 4,000 shares)

4. Book values with two years’ dividends in arrears

Preferred stock
Preferred stock par value $ 50,000
Plus two years’ dividends in arrears* 5,000
Preferred equity $ 55,000
*2 years’ dividends = 2 x ($50,000 x 5%) = $5,000
Number of outstanding shares 1,000
Book value per preferred share $ 55.00 ($55,000 / 1,000 shares)

Common stock
Total equity $280,000
Less equity for preferred (55,000)
Common stock equity $225,000
Number of outstanding shares 4,000
Book value per common share $ 56.25 ($225,000/4,000 shares)
Chapter 13 - Accounting for Corporations

Problem 13-5A (Concluded)

5. Book values with call price and two years’ dividends in arrears

Preferred stock
Preferred stock call price (1,000 x $55) $ 55,000
Plus two years’ dividends in arrears* 5,000
Preferred equity $ 60,000
*2 years’ dividends = 2 x ($50,000 x 5%) = $5,000
Number of outstanding shares 1,000

Book value per preferred share $ 60.00 ($60,000 / 1,000 sh.)

Common stock
Total equity $280,000
Less equity for preferred (60,000)
Common stock equity $220,000
Number of outstanding shares 4,000
Book value per common share $ 55.00 ($220,000 / 4,000 sh.)

6. Dividend allocation in total

Preferred Common Total
2 years’ dividends in arrears $ 5,000 $ 0 $ 5,000
Current year dividends 2,500 2,500
Remainder to common . 4,000 4,000
Totals $ 7,500 $ 4,000 $11,500

Dividends per share for the common stock

$4,000 / 4,000 shares = $1.00

7. Equity represents the residual interest of owners in the assets of the

business after subtracting claims of creditors. With few exceptions,
these assets and liabilities are reported at historical cost, not market
value. Therefore, the book value of common stock does not normally
match its market value. Also, the book value of common stock is
based on past transactions and events, whereas the market value takes
into account expected future earnings, growth, dividends, and other
industry and economic factors.