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Chapter18: Shareholders’ Equity

Problems

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An alternate exercise and problem set is available on the text website: www.mhhe.com/spiceland6e

P 18-1

 

Various stock transactions; correction of journal entries

 

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Part A

During its first year of operations, the McCollum Corporation entered into the following transactions relating to shareholders' equity. The corporation was authorized to issue 100 million common shares, $1 par per share.

Required:

Prepare the appropriate journal entries to record each transaction.

p. 1055

Jan. 9
Issued 40 million common shares for $20 per share.
Mar. 11
Issued 5,000 shares in exchange for custom-made equipment. McCollum's shares have traded recently on the stock exchange at $20 per share.

Part B

A new staff accountant for the McCollum Corporation recorded the following journal entries during the second year of operations. McCollum retires shares that it reacquires (restores their status to that of authorized but unissued shares).

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Required:

Prepare the journal entries that should have been recorded for each of the transactions.

P 18-2

 

Share buyback—comparison of retirement and treasury stock treatment

 

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The shareholders' equity section of the balance sheet of TNL Systems Inc. included the following accounts at December 31, 2010:

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Required:

1.

  

During 2011, TNL Systems reacquired shares of its common stock and later sold shares in two separate transactions. Prepare the entries for both the purchase and subsequent resale of the shares assuming the shares are (a) retired and (b) viewed as treasury stock.

a.

  

On February 5, 2011, TNL Systems purchased 6 million shares at $10 per share.

b.

  

On July 9, 2011, the corporation sold 2 million shares at $12 per share.

c.

  

On November 14, 2013, the corporation sold 2 million shares at $7 per share.

2.

  

Prepare the shareholders' equity section of TNL Systems' balance sheet at December 31, 2013, comparing the two approaches. Assume all net income earned in 2011-2013 was distributed to shareholders as cash dividends.

P 18-3

 

Reacquired shares—comparison of retired shares and treasury shares

 

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National Supply's shareholders' equity included the following accounts at December 31, 2010:

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Required:

1.

  

National Supply reacquired shares of its common stock in two separate transactions and later sold shares. Prepare the entries for each of the transactions under each of two separate assumptions: the shares are (a) retired and (b) accounted for as treasury stock.

February 15, 2011
Reacquired 300,000 shares at $8 per share.
February 17, 2012
Reacquired 300,000 shares at $5.50 per share.
November 9, 2013
Sold 200,000 shares at $7 per share (assume FIFO cost).

2.

  

Prepare the shareholders' equity section of National Supply's balance sheet at December 31, 2013, assuming the shares are (a) retired and (b) accounted for as treasury stock. Net income was $14 million in 2011, $15 million in 2012, and $16 million in 2013. No dividends were paid during the three-year period.

p. 1056

P 18-4

 

Statement of retained earnings

 

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Comparative statements of retained earnings for Renn-Dever Corporation were reported in its 2011 annual report as follows.

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At December 31, 2008, common shares consisted of the following:

Common stock, 1,855,000 shares at $1 par
$1,855,000
Paid-in capital—excess of par
7,420,000

Required:

Infer from the reports the events and transactions that affected Renn-Dever Corporation's retained earnings during 2009, 2010, and 2011. Prepare the journal entries that reflect those events and transactions.

P 18-5

 

Shareholders' equity transactions; statement of shareholders' equity

 

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Listed below are the transactions that affected the shareholders' equity of Branch-Rickie Corporation during the period 2011–2013. At December 31, 2010, the corporation's accounts included:

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a.

  

November 1, 2011, the board of directors declared a cash dividend of $.80 per share on its common shares, payable to shareholders of record November 15, to be paid December 1.

b.

  

On March 1, 2012, the board of directors declared a property dividend consisting of corporate bonds of Warner Corporation that Branch-Rickie was holding as an investment. The bonds had a fair value of $1.6 million, but were purchased two years previously for $1.3 million. Because they were intended to be held to maturity, the bonds had not been previously written up. The property dividend was payable to shareholders of record March 13, to be distributed April 5.

c.

  

On July 12, 2012, the corporation declared and distributed a 5% common stock dividend (when the market value of the common stock was $21 per share). Cash was paid in lieu of fractional shares representing 250,000 equivalent whole shares.

d.

  

On November 1, 2012, the board of directors declared a cash dividend of $.80 per share on its common shares, payable to shareholders of record November 15, to be paid December 1.

e.

  

On January 15, 2013, the board of directors declared and distributed a 3-for-2 stock split effected in the form of a 50% stock dividend when the market value of the common stock was $22 per share.

f.

  

On November 1, 2013, the board of directors declared a cash dividend of $.65 per share on its common shares, payable to shareholders of record November 15, to be paid December 1.

Required:

1.

  

Prepare the journal entries that Branch-Rickie recorded during the three-year period for these transactions.

2.

  

Prepare comparative statements of shareholders' equity for Branch-Rickie for the three-year period ($ in 000s). Net income was $330 million, $395 million, and $455 million for 2011, 2012, and 2013, respectively.

P 18-6

 

Statement of shareholders' equity

 

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Comparative statements of shareholders' equity for Anaconda International Corporation were reported as follows for the fiscal years ending December 31, 2011, 2012, and 2013.

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p. 1057

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Required:

1.

  

Infer from the statements the events and transactions that affected Anaconda International Corporation's shareholders' equity during 2011, 2012, and 2013. Prepare the journal entries that reflect those events and transactions.

2.

  

Prepare the shareholders' equity section of Anaconda's comparative balance sheets at December 31, 2013 and 2012.

P 18-7

 

Reporting shareholders' equity; comprehensive income; Cisco Systems

 

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The following is the 2009 Statement of Shareholders' Equity from Cisco Systems' 2009 annual report. Remember that for comparative purposes, three years are reported in these statements. The 2008 and 2007 portions of the statement are not shown here for brevity of presentation.

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Real World Financials

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p. 1058

Required:

1.

  

What is the purpose of the statement of shareholders' equity?

2.

  

How does Cisco account for its share buybacks?

3.

  

For its share buybacks in fiscal year 2009, was the price Cisco paid for the shares repurchased more or less than the average price at which Cisco had sold the shares previously? Reconstruct the journal entry Cisco used to record the buyback.

4.

  

What is comprehensive income? What is other comprehensive income?

5.

  

What caused the change in Cisco's comprehensive income in fiscal year 2009? What was the amount of Accumulated other comprehensive income (loss) that Cisco reported in its July 28, 2009 balance sheet? Be specific.

P 18-8

 

Share issue costs; issuance; dividends; early retirement

 

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During its first year of operations, Cupola Fan Corporation issued 30,000 of $1 par Class B shares for $385,000 on June 30, 2011. Share issue costs were $1,500. One year from the issue date (July 1, 2012), the corporation retired 10% of the shares for $39,500.

Required:

1.

  

Prepare the journal entry to record the issuance of the shares.

2.

  

Prepare the journal entry to record the declaration of a $2 per share dividend on December 1, 2011.

3.

  

Prepare the journal entry to record the payment of the dividend on December 31, 2011.

4.

  

Prepare the journal entry to record the retirement of the shares.

(Note: You may wish to compare your solution to this problem with that of Problem 14-16, which deals with parallel issues of debt issue costs and the retirement of debt.)

P 18-9

 

Effect of preferred stock characteristics on dividends

 

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The shareholders' equity of Kramer Industries includes the data shown below. During 2012, cash dividends of $150 million were declared. Dividends were not declared in 2010 or 2011.

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Required:

Determine the amount of dividends payable to preferred shareholders and to common shareholders under each of the following two assumptions regarding the characteristics of the preferred stock.

Assumption A—The preferred stock is noncumulative.
Assumption B—The preferred stock is cumulative.

P 18-10

 

Transactions affecting retained earnings

 

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Indicate by letter whether each of the transactions listed below increases (I), decreases (D), or has no effect (N) on retained earnings. Assume the shareholders' equity of the transacting company includes only common stock, paid-in capital—excess of par, and retained earnings at the time of each transaction.

Example

Transactions

    N    1.Sale of common stock
_____2.Purchase of treasury stock at a cost less than the original issue price
_____3.Purchase of treasury stock at a cost greater than the original issue price
_____4.Declaration of a property dividend
_____5.Sale of treasury stock for more than cost
_____6.Sale of treasury stock for less than cost
_____7.Net income for the year
_____8.Declaration of a cash dividend
_____9.Payment of a previously declared cash dividend
_____10.Issuance of convertible bonds for cash
_____11.Declaration and distribution of a 5% stock dividend
_____12.Retirement of common stock at a cost less than the original issue price
_____13.Retirement of common stock at a cost greater than the original issue price
_____14.A stock split effected in the form of a stock dividend
_____15.A stock split in which the par value per share is reduced (not effected in the form of a stock dividend)
_____16.A net loss for the year

p. 1059

P 18-11

 

Stock dividends received on investments; integrative problem

 

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Ellis Transport Company acquired 1.2 million shares of stock in L&K Corporation at $44 per share. They are classified by Ellis as “available for sale.” Ellis sold 200,000 shares at $46, received a 10% stock dividend, and then later in the year sold another 100,000 shares at $43.

   Hint: There is no entry for the stock dividend, but a new investment per share must be calculated for use later when the shares are sold.

Required:

Prepare journal entries to record these transactions.

P 18-12

 

Various shareholders' equity topics; comprehensive

 

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Part A

In late 2010, the Nicklaus Corporation was formed. The corporate charter authorizes the issuance of 5,000,000 shares of common stock carrying a $1 par value, and 1,000,000 shares of $5 par value, noncumulative, nonparticipating preferred stock. On January 2, 2011, 3,000,000 shares of the common stock are issued in exchange for cash at an average price of $10 per share. Also on January 2, all 1,000,000 shares of preferred stock are issued at $20 per share.

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Required:

1.

  

Prepare journal entries to record these transactions.

2.

  

Prepare the shareholders' equity section of the Nicklaus balance sheet as of March 31, 2011. (Assume net income for the first quarter 2011 was $1,000,000.)

Part B

During 2011, the Nicklaus Corporation participated in three treasury stock transactions:

   

a.

  

On June 30, 2011, the corporation reacquires 200,000 shares for the treasury at a price of $12 per share.

b.

  

On July 31, 2011, 50,000 treasury shares are reissued at $15 per share.

c.

  

On September 30, 2011, 50,000 treasury shares are reissued at $10 per share.

Required:

1.

  

Prepare journal entries to record these transactions.

2.

  

Prepare the Nicklaus Corporation shareholders' equity section as it would appear in a balance sheet prepared at September 30, 2011. (Assume net income for the second and third quarter was $3,000,000.)

Part C

On October 1, 2011, Nicklaus Corporation receives permission to replace its $1 par value common stock (5,000,000 shares authorized, 3,000,000 shares issued, and 2,900,000 shares outstanding) with a new common stock issue having a $.50 par value. Since the new par value is one-half the amount of the old, this represents a 2-for-1 stock split. That is, the shareholders will receive two shares of the $.50 par stock in exchange for each share of the $1 par stock they own. The $1 par stock will be collected and destroyed by the issuing corporation.

   On November 1, 2011, the Nicklaus Corporation declares a $.05 per share cash dividend on common stock and a $.25 per share cash dividend on preferred stock. Payment is scheduled for December 1, 2011, to shareholders of record on November 15, 2011.

   On December 2, 2011, the Nicklaus Corporation declares a 1% stock dividend payable on December 28, 2011, to shareholders of record on December 14. At the date of declaration, the common stock was selling in the open market at $10 per share. The dividend will result in 58,000 (.01 × 5,800,000) additional shares being issued to shareholders.

Required:

1.

  

Prepare journal entries to record the declaration and payment of these stock and cash dividends.

2.

  

Prepare the December 31, 2011, shareholders' equity section of the balance sheet for the Nicklaus Corporation. (Assume net income for the fourth quarter was $2,500,000.)

3.

  

Prepare a statement of shareholders' equity for Nicklaus Corporation for 2011.

p. 1060

P 18-13

 

Quasi reorganization (based on Appendix 18)

 

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A new CEO was hired to revive the floundering Champion Chemical Corporation. The company had endured operating losses for several years, but confidence was emerging that better times were ahead. The board of directors and shareholders approved a quasi reorganization for the corporation. The reorganization included devaluing inventory for obsolescence by $105 million and increasing land by $5 million. Immediately prior to the restatement, at December 31, 2011, Champion Chemical Corporation's balance sheet appeared as follows (in condensed form):

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Required:

1.

  

Prepare the journal entries appropriate to record the quasi reorganization on January 1, 2012.

2.

  

Prepare a balance sheet as it would appear immediately after the restatement.

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