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CHAPTER 13
CORPORATIONS: ORGANIZATION, STOCK
TRANSACTIONS, AND DIVIDENDS
QUESTION INFORMATION
Number Objective Description Difficulty Time AACSB AICPA SS GL
Q13-1 13-1 Easy 5 min Analytic FN-Measurement
Q13-2 13-1 Easy 5 min Analytic FN-Measurement
Q13-3 13-3 Easy 5 min Analytic FN-Measurement
Q13-4 13-3 Easy 5 min Analytic FN-Measurement
Q13-5 13-3 Easy 5 min Analytic FN-Measurement
Q13-6 13-3 Easy 5 min Analytic FN-Measurement
Q13-7 13-4 Easy 5 min Analytic FN-Measurement
Q13-8 13-4 Easy 5 min Analytic FN-Measurement
Q13-9 13-4 Easy 5 min Analytic FN-Measurement
Q13-10 13-4 Easy 5 min Analytic FN-Measurement
Q13-11 13-5 Easy 5 min Analytic FN-Measurement
Q13-12 13-5 Easy 5 min Analytic FN-Measurement
Q13-13 13-5 Easy 5 min Analytic FN-Measurement
Q13-14 13-6 Easy 5 min Analytic FN-Measurement
Q13-15 13-6 Easy 5 min Analytic FN-Measurement
Q13-16 13-6 Easy 5 min Analytic FN-Measurement
Q13-17 13-6 Easy 5 min Analytic FN-Measurement
Q13-18 13-7 Easy 5 min Analytic FN-Measurement
PE13-1A 13-3 Dividends per share Easy 10 min Analytic FN-Measurement
PE13-1B 13-3 Dividends per share Easy 10 min Analytic FN-Measurement
PE13-2A 13-3 Entries for issuing stock Easy 5 min Analytic FN-Measurement
PE13-2B 13-3 Entries for issuing stock Easy 5 min Analytic FN-Measurement
PE13-3A 13-4 Entries for cash dividends
Easy 5 min Analytic FN-Measurement
PE13-3B 13-4 Entries for cash dividends
Easy 5 min Analytic FN-Measurement
PE13-4A 13-4 Entries for stock dividends
Easy 10 min Analytic FN-Measurement
PE13-4B 13-4 Entries for stock dividends
Easy 10 min Analytic FN-Measurement
PE13-5A 13-5 Entries for treasury stock
Easy 10 min Analytic FN-Measurement
PE13-5B 13-5 Entries for treasury stock
Easy 10 min Analytic FN-Measurement
PE13-6A 13-6 Stockholders' equity section of balance sheet
Easy 5 min Analytic FN-Measurement
PE13-6B 13-6 Stockholders' equity section of balance sheet
Easy 5 min Analytic FN-Measurement
PE13-7A 13-6 Retained earnings statement
Easy 5 min Analytic FN-Measurement
PE13-7B 13-6 Retained earnings statement
Easy 5 min Analytic FN-Measurement
Ex13-1 13-3 Dividends per share Easy 10 min Analytic FN-Measurement
Ex13-2 13-3 Dividends per share Easy 10 min Analytic FN-Measurement
Ex13-3 13-3 Entries for issuing par stock
Easy 10 min Analytic FN-Measurement
Ex13-4 13-3 Entries for issuing no- par stock
Easy 10 min Analytic FN-Measurement
Ex13-5 13-3 Issuing stock for assets other than cash
Easy 5 min Analytic FN-Measurement
Ex13-6 13-3 Selected stock transactions
Easy 15 min Analytic FN-Measurement
Ex13-7 13-3 Issuing stock Moderate 10 min Analytic FN-Measurement
Ex13-8 13-3 Issuing stock Easy 10 min Analytic FN-Measurement
Ex13-9 13-4 Entries for cash dividends
Easy 10 min Analytic FN-Measurement
Ex13-10 13-4 Entries for stock dividends
Moderate 15 min Analytic FN-Measurement
Ex13-11 13-5 Treasury stock transactions
Moderate 15 min Analytic FN-Measurement
Ex13-12 13-5, 13-6 Treasury stock transactions
Moderate 15 min Analytic FN-Measurement
Ex13-13 13-5, 13-6 Treasury stock transactions
Moderate 15 min Analytic FN-Measurement
Ex13-14 13-6 Reporting paid-in- capital
Easy 10 min Analytic FN-Measurement
Ex13-15 13-6 Stockholders' equity section of balance sheet
Easy 10 min Analytic FN-Measurement
Ex13-16 13-6 Stockholders' equity section of balance sheet
Easy 10 min Analytic FN-Measurement
Ex13-18 13-6 Retained earnings statement
Easy 10 min Analytic FN-Measurement
Ex13-17 13-6 Stockholders' equity section of balance sheet
Moderate 15 min Analytic FN-Measurement
Ex13-19 13-6 Statement of stockholders' equity
Moderate 15 min Analytic FN-Measurement Exl
Ex13-20 13-7 Effect of stock split Easy 5 min Analytic FN-Measurement
Ex13-21 13-7 Effect of cash dividend and stock split
Easy 5 min Analytic FN-Measurement
Ex13-22 13-7 Selected dividend transactions, stock split
Moderate 15 min Analytic FN-Measurement
Ex13-23 FAI Dividend yield Easy 5 min Analytic FN-Measurement
Ex13-24 FAI Dividend yield Easy 10 min Analytic FN-Measurement
Ex13-25 FAI Dividend yield Moderate 10 min Analytic FN-Measurement
Pr13-1A 13-3 Dividends on preferred and common stock
Moderate 1 hr Analytic FN-Measurement Exl
Pr13-2A 13-3 Stock transactions for corporate expansion
Moderate 45 min Analytic FN-Measurement KA
Pr13-3A 13-3, 13-4, 13-
Selected stock transactions
Moderate 1 hr Analytic FN-Measurement KA
Pr13-4A 13-3, 13-4, 13-5, 13-
Entries for selected corporate transactions
Difficult 1 hr Analytic FN-Measurement Exl KA
Pr13-5A 13-3, 13-4, 13-5, 13-
Entries for selected corporate transactions
Moderate 1 hr Analytic FN-Measurement Exl KA
Pr13-1B 13-3 Dividends on preferred and common stock
Moderate 1 hr Analytic FN-Measurement Exl
EYE OPENERS
1. Each stockholder’s liability for corporation
debts is limited to the amount invested in the
corporation. A corporation is responsible for
its own obligations, and therefore, its
creditors may not look beyond the assets of
the corporation for satisfaction of their
claims.
2. The large investments needed by large
businesses are usually obtainable only
through the pooling of the resources of
many people. The corporation also has the
advantages over proprietorships and
partnerships of transferable shares of
ownership, and thus the continuity of
existence, and limited liability of its owners
(stockholders).
3. No. Common stock with a higher par is not
necessarily a better investment than com-
mon stock with a lower par because par is
an amount assigned to the shares.
4. The broker is not correct. Corporations are
not legally liable to pay dividends until the
dividends are declared. If the company that
issued the preferred stock has operating
losses, it could omit dividends, first, on its
common stock and, later, on its preferred
stock.
5. Factors influencing the market price of a
corporation’s stock include the following:
a. Financial condition, earnings record, and
dividend record of the corporation.
b. Its potential earning power.
c. General business and economic
conditions and prospects.
6. No. Premium on stock is additional paid-in
capital.
7. a. Sufficient retained earnings, sufficient
cash, and formal action by the board of
directors.
b. February 6, declaration date; March 9,
record date; and April 5, payment date.
8. The company may not have had enough
cash on hand to pay a dividend on the com-
mon stock, or resources may be needed for
plant expansion, replacement of facilities,
payment of liabilities, etc.
9. a. No change.
b. Total equity is the same.
10. a. Current liability
b. Stockholders’ equity
11. a. Unissued stock has never been issued,
but treasury stock has been issued as
fully paid and has subsequently been
reacquired.
b. As a deduction from the total of other
stockholders’ equity accounts.
12. a. It has no effect on revenue or expense.
b. It reduces stockholders’ equity by
13. a. It has no effect on revenue.
b. It increases stockholders’ equity by
14. The primary advantage of the combined
income and retained earnings statement is
that it emphasizes net income as the
connecting link between the income
statement and the retained earnings portion
of stockholders’ equity.
15. The three classifications of restrictions on
retained earnings are legal, contractual, and
discretionary. Appropriations are normally
reported in the notes to the financial
statements.
16. Such prior period adjustments should be
reported as an adjustment to the beginning
balance of retained earnings.
17. The statement of stockholders’ equity is
normally prepared when there are significant
changes in stock and other paid-in capital
accounts.
18. The primary purpose of a stock split is to
bring about a reduction in the market price
per share and thus to encourage more in-
vestors to buy the company’s shares.
2 PRACTICE EXERCISES
PE 13–1A
Year 1 Year 2 Year 3
Amount distributed $ 40,000 $ 10, 000 $120, Preferred dividend (10, shares) 15,000 10, 15, Common dividend (25, shares) $ 25,000 $^0 $105,
Dividends per share: Preferred stock $1.50 $1.00 $1. 50 Common stock $1.00 None $4. 20
PE 13–1B
Year 1 Year 2 Ye ar 3
Amount distributed $ 20,000 $ 4,000 $ 40, Preferred dividend (5, shares) 7,500 4,000 7, 00 Common dividend (10, shares) $ 12,500 $^0 $ 32,
Dividends per share: Preferred stock $1.50 $0.80 $1. 50 Common stock $1.25 None $3. 25
PE 13–2B
July 6Cash 960, Common Stock 960, (800,000 shares × $1.20).
Aug. 30 Cash 500, Preferred Stock 500, (10,000 shares × $50).
Oct. 14Cash 405, Preferred Stock 375, Paid-In Capital in Excess of Par 30, (7,500 shares × $54).
2. 2 PE 13–3A
July 16Cash Dividends 48, Cash Dividends Payable 48,
Aug. 15No entry required.
Sept. 30Cash Dividends Payable 48, Cash 48,
2. 3 PE 13–3B
Oct. 1Cash Dividends 90, Cash Dividends Payable 90,
Nov. 1No entry required.
Dec. 24Cash Dividends Payable 90, Cash 90,
PE 13–4A
Feb. 13Stock Dividends (300,000 × 3% × $63) 567, Stock Dividends Distributable (9,000 × $40) 360, Paid-In Capital in Excess of Par— Common Stock ($567,000 – $360,000) 207,
Mar. 14No entry required.
Apr. 30Stock Dividends Distributable 360, Common Stock 360,
PE 13–6A
Stockholders’ Equity Paid-in capital: Common stock, $80 par (30,000 shares authorized, 25,000 shares issued) $ 2,000, Excess of issue price over par 315,000 $ 2,315, From sale of treasury stock 33, Total paid-in capital $ 2,348, Retained earnings 1,112, Total $ 3,460, Deduct treasury stock (2,000 shares at cost) 180, Total stockholders’ equity $ 3,280,
PE 13–6B
Stockholders’ Equity Paid-in capital: Common stock, $75 par (50,000 shares authorized, 45,000 shares issued) $ 3,375, Excess of issue price over par 485,000 $ 3,860, From sale of treasury stock 18, Total paid-in capital $ 3,878, Retained earnings 1,452, Total $ 5,330, Deduct treasury stock (5,000 shares at cost) 420, Total stockholders’ equity $ 4,910,
PE 13–7A
DYNAMIC LEADERS INC. Retained Earnings Statement For the Year Ended July 31, 2008
Retained earnings, August 1, 2007 $ 988, Net income $325, Less dividends declared 125, Increase in retained earnings 200, Retained earnings, July 31, 2008 $ 1,188,
PE 13–7B
MAXIMA RETRACTORS INC. Retained Earnings Statement For the Year Ended October 31, 2008
Retained earnings, November 1,
2007 $
2,906,
Net income $553,
Less dividends declared 300,
Increase in retained
earnings
253,
Retained earnings, October 31, 2008 $ 3,159,
Ex. 13–
a. Feb. 4 Cash 1,920, Common Stock 600, Paid-In Capital in Excess of Par— Common Stock 1,320,
Mar. 31 Cash 1,620, Preferred Stock 1,350, Paid-In Capital in Excess of Par— Preferred Stock 270,
b. $3,540,000 ($1,920,000 + $1,620,000)
Ex. 13–
a. July 17 Cash 5,400, Common Stock 750, Paid-In Capital in Excess of Stated Value 4,650,
Sept. 20 Cash 800, Preferred Stock 500, Paid-In Capital in Excess of Par— Preferred Stock 300,
b. $6,200,000 ($5,400,000 + $800,000)
Ex. 13–
Nov. 10Land 480, Common Stock 120, Paid-In Capital in Excess of Par 360,
Paid-In Capital in Excess of Par—
- Ex. 13–
- Feb. 19Cash 1,500, - Common Stock 1,500,
- 27Organizational Expenses 7, - Common Stock 7,
- Mar. 13Land 80, - Buildings 350, - Equipment 45, - Common Stock 450, - Common Stock 25,
- May 6Cash 230, - Preferred Stock 200, - Preferred Stock 30, Paid-In Capital in Excess of Par—
- Ex. 13–
- July 2Cash Dividends 275, - Cash Dividends Payable 275,
- Sept. 1Cash Dividends Payable 275, Aug. 1No entry required. - Cash 275,
Ex. 13–
a. (1) Stock Dividends 720,000* Stock Dividends Distributable 600, Paid-In Capital in Excess of Par— Common Stock 120,
*[($30,000,000/$100) × $120] × 2%
(2) Stock Dividends Distributable 600, Common Stock 600,
b. (1) $34,500,000 ($30,000,000 + $4,500,000)
(2) $50,600,
(3) $85,100,000 ($34,500,000 + $50,600,000)
c. (1) $35,220,000 ($34,500,000 + $720,000)
(2) $49,880,000 ($50,600,000 – $720,000)
(3) $85,100,000 ($35,220,000 + $49,880,000)
Ex. 13–
a. May 2 Treasury Stock 216, Cash 216,
Aug. 14 Cash 190, Treasury Stock 180, Paid-In Capital from Sale of Treasury Stock 10,
Nov. 7 Cash 35, Paid-In Capital from Sale of Treasury Stock 1, Treasury Stock 36,
b. $9,000 credit
c. Mountain Springs may have purchased the stock to support the market price of the stock, to provide shares for resale to employees, or for reissuance to employees as a bonus according to stock purchase agreements.
Ex. 13–
Ex. 13–
a. Sept. 9 Treasury Stock 1,068, Cash 1,068,
Oct. 31 Cash 966, Treasury Stock 934, Paid-In Capital from Sale of Treasury Stock 31,
Dec. 4 Cash 85, Treasury Stock 80, Paid-In Capital from Sale of Treasury Stock 5,
b. $36,900 ($31,500 + $5,400) credit
c. $53,400 (600 × $89) debit
d. The balance in the treasury stock account is reported as a deduction from the total of the paid-in capital and retained earnings.
Ex. 13–
a. June 12 Treasury Stock 720, Cash 720,
Aug. 10 Cash 450, Treasury Stock 432, Paid-In Capital from Sale of Treasury Stock 18,
Dec. 20 Cash 282, Paid-In Capital from Sale of Treasury Stock 6, Treasury Stock 288,
b. $12,000 credit
c. Stockholders’ Equity section
d. Tacoma Inc. may have purchased the stock to support the market price of the
stock, to provide shares for resale to employees, or for reissuance to employees as a bonus according to stock purchase agreements.
