Ex. 15-159—Computation of selected financial ratios.

The following information pertains to Parsons Co.:

Preference shares, cumulative:
Par per share $100
Dividend rate 8%
Shares outstanding 5,000
Dividends in arrears none
Ordinary shares:
Par per share $10
Shares issued 60,000
Dividends paid per share $2.70
Market price per share $48.00
Share premium—ordinary $200,000
Unappropriated retained earnings (after closing) $135,000
Retained earnings appropriated for contingencies $150,000
Ordinary treasury shares:
Number of shares 5,000
Total cost $125,000
Net income $370,000

Instructions
Compute (assume no changes in balances during the past year):
(a) Total amount of equity in the statement of financial position
(b) Earnings per share
(c) Book value per ordinary share
(d) Payout ratio
(e) Return on ordinary share equity

*Ex. 15-160—Dividends on preference shares.

The equity section of Lemay Corporation shows the following on December 31, 2011:
Share capital—preference—6%, $100 par, 4,000 shares outstanding $ 400,000
Share capital—ordinary—$10 par, 60,000 shares outstanding 600,000
Share premium—ordinary 200,000
Retained earnings 114,000
Total equity $1,314,000

Instructions
Assuming that all of the company's retained earnings are to be paid out in dividends on 12/31/11 and that preference
dividends were last paid on 12/31/09, show how much the preference and ordinary shareholders should receive if the
preference share are cumulative and fully participating.

*Ex. 15-161—Dividends on preference shares.

In each of the following independent cases, it is assumed that the corporation has $400,000 of 6% preference shares
and $1,600,000 of ordinary shares outstanding, each having a par value of $10. No dividends have been declared for
2009 and 2010.

(a) As of 12/31/11, it is desired to distribute $250,000 in dividends. How much will the preference shareholders receive
if their shares are cumulative and nonparticipating?

(b) As of 12/31/11, it is desired to distribute $400,000 in dividends. How much will the preference shareholders receive
if their shares are cumulative and participating up to 11% in total?

(c) On 12/31/11, the preference shareholders received a $120,000 dividend on their shares which are cumulative and
fully participating. How much money was distributed in total for dividends during 2011?

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 PROBLEMS

Pr. 15-162—Equity transactions.

Presented below is information related to Wyrick Company:
1. The company is granted a charter that authorizes issuance of 15,000 shares of $100 par value preference
shares and 40,000 shares of no-par ordinary shares.
2. 8,000 ordinary shares are issued to the founders of the corporation for land valued by the board of directors at
$300,000. The board establishes a stated value of $5 a share for the ordinary shares.
3. 5,000 preference shares are sold for cash at $120 per share.
4. The company issues 100 ordinary shares to its attorneys for costs associated with starting the company. At that
time, the ordinary shares were selling at $60 per share.

Instructions
Prepare the general journal entries necessary to record these transactions.

Pr. 15-163—Treasury share transactions.

The original sale of the $50 par value ordinary shares of Gray Company was recorded as follows:
Cash ................................................................................................................ 290,000
Share Capital—Ordinary ................................................................... 250,000
Share Premium—Ordinary ................................................................ 40,000

Instructions
Record the treasury share transactions (given below) under the cost method:

Transactions:
(a) Bought 300 ordinary shares as treasury shares at $62.
(b) Sold 80 shares of treasury shares at $60.
(c) Sold 40 treasury shares at $68.

Pr. 15-164—Share dividends.

The equity section of Benton Corporation's statement of financial position as of December 31, 2010 is as follows:
Equity
Share capital—ordinary, $5 par value; authorized, 2,000,000 shares;
issued, 400,000 shares $2,000,000
Share premium—ordinary 850,000
Retained earnings 3,000,000
$5,850,000
The following events occurred during 2011:

1. Jan. 5 10,000 shares of authorized and unissued ordinary shares were sold for $8 per share.

2. Jan. 16 Declared a cash dividend of 20 cents per share, payable February 15 to share-holders of record on
February 5.

3. Feb. 10 20,000 shares of authorized and unissued ordinary shares were sold for $12 per share.

4. March 1 A 30% share dividend was declared and issued. Fair value per share is currently $15.

5. April 1 A two-for-one split was carried out. The par value of the shares was to be reduced to $2.50 per share.
Fair value on March 31 was $18 per share.

6. July 1 A 15% share dividend was declared and issued. Fair value is currently $10 per share.

7. Aug. 1 A cash dividend of 20 cents per share was declared, payable September 1 to stockholders of record
on August 21.

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Instructions
Enter the above events into the following work sheet showing how each event affects the column. Event No. 1 will serve
as an example.
Share Capital—Ordinary
No. of Total Share Premium—
Item Shares Issued Par Value Ordinary Retained Earnings
Beginning Balance—1/1/11 400,000 $2,000,000 $850,000 $3,000,000
Event #1—Jan. 5 10,000 50,000 30,000 -0-
Balance 410,000 $2,050,000 $880,000 $3,000,000

Event # 2—Jan. 16 (and events 3 through 7)

Pr. 15-165—Equity transactions.

Foley Corporation has the following capital structure at the beginning of the year:

Share capital—preference 6%, $50 par value, 20,000 shares authorized,

6,000 shares issued and outstanding $ 300,000
Share capital—ordinary, $10 par value, 60,000 shares authorized,
40,000 shares issued and outstanding 400,000
Share premium—ordinary 110,000
Retained earnings 440,000
Total equity $1,250,000

Instructions
(a) Record the following transactions which occurred consecutively (show all calculations).
1. A total cash dividend of $90,000 was declared and payable to shareholders of record. Record dividends
payable on ordinary and preference shares in separate accounts.
2. A 10% ordinary share dividend was declared. The average fair value of the ordinary shares is $18 a share.
3. Assume that net income for the year was $150,000 (record the closing entry) and the board of directors
appropriated $70,000 of retained earnings for plant expansion.

(b) Construct the equity section incorporating all the above information.

*Pr. 15-166—Dividends on preference and ordinary shares.

Rensing, Inc., has $800,000 of 8% preference shares and $1,200,000 of ordinary shares outstanding, each having a
par value of $10 per share. No dividends have been paid or declared during 2009 and 2010. As of December 31, 2011,
it is desired to distribute $488,000 in dividends.

Instructions
How much will the preference and ordinary shareholders receive under each of the following assumptions:
(a) The preference is noncumulative and nonparticipating.
(b) The preference is cumulative and nonparticipating.
(c) The preference is cumulative and fully participating.
(d) The preference is cumulative and participating to 12% total.

1. Barker Corp. received a charter authorizing 120,000 shares of common stock at $15 par value per share.
During the first year of operations, 40,000 shares were sold at $28 per share. 600 shares were issued in payment of
a current operating debt of $18,600. In the first year, the net income was $142,000.

During the year, dividends of $36,000 were paid to stockholders. At the end of the year, total liabilities were $82,000.
Use the given data to compute the following items at the end of the first year (show all computations):

(1) Total liabilities and stockholders' equity

(2) Stockholders' equity

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 (3) Contributed capital
(4) Issued capital stock (par)
(5) Outstanding capital stock (par)
(6) Unissued capital stock (number of shares)
(7) Paid-In capital in excess of par value

2. The following transactions relate to the stockholders' equity transactions of Lindsay Corporation for its initial year of
existence.

(a) Jan. 7 Articles of incorporation are filed with the state. The state authorized the issuance of
10,000 shares of $50 par value preferred stock and 200,000 shares of $10 par value
common stock.
(b) Jan. 28 40,000 shares of common stock are issued for $14 per share.
(c) Feb. 3 80,000 shares of common stock are issued in exchange for land and buildings that
have an appraised value of $250,000 and $1,000,000, respectively. The stock traded
at $15 per share on that date on the over-the-counter market.
(d) Feb. 24 2,000 shares of common stock are issued to Shane and Winston, Attorneys-at-Law,
in payment for legal services rendered in connection with incorporation. The
company charged the amount to organization costs. The market value of the stock
was $16 per share.
(e) Sep. 12 Received subscriptions for 10,000 shares of preferred stock at $53 per share. A 40
percent down payment accompanied the subscriptions. The balance is due on
October 1.
(f) Oct. 1 Received the final payment for 10,000 shares.

Prepare journal entries to record the foregoing transactions. Identify the entries by letter (a - f).

3. On August 10, Jameson Corporation reacquired 8,000 shares of its $100 par value common stock at $134. The stock
was originally issued at $110. The shares were resold on November 21 at $145.

Provide the entries required to record the reacquisition and the subsequent resale of the stock using the:

(1) Par value method of accounting for treasury stock.

(2) Cost method of accounting for treasury stock.

4. The data below are from the December 31, 2005, balance sheet of the Handi Corner Corporation:

Common stock, $50 par, 3,000 shares issued and

outstanding ......................................... $150,000
Paid-in capital in excess of par ...................... 45,000
Retained earnings ..................................... 75,000

During 2006, the following transactions affecting corporate capital were recorded:

Aug. 16 Purchased 400 shares of treasury stock at $78 per share.

Oct. 23 Purchased 225 shares of stock at $71 per share and
immediately retired the stock.
Nov. 3 Sold 150 shares of the treasury stock purchased on Aug. 16
at $81 per share.

Assuming the cost method is used for treasury stock and that retained earnings are to be reduced minimally in stock
reacquisition transactions, provide the entries required to record the above transactions.

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5. The Perry Company wants to raise additional equity capital. The company decides to issue 5,000 shares of $25 par
preferred stock with detachable warrants. The package of the stock and warrants sells for $105. Each warrant
enables the holder to purchase two shares of $10 par common stock at $30 per share. Immediately following the
issuance of the stock, the stock warrants are selling at $14 each. The market value of the preferred stock without the
warrants is $96.

(1) Prepare a journal entry for Perry Company to record the issuance of the preferred stock and
the detachable warrants.
(2) Assuming that all the warrants are exercised, prepare a journal entry for Perry to record the
exercise of the warrants.
(3) Assuming that only 70 percent of the warrants are exercised, prepare a journal entry for
Perry to record the exercise and expiration of the warrants.

6. Bennett Company paid cash dividends totaling $150,000 in 2003 and $75,000 in 2004. In 2005, Bennett intends to
pay cash dividends of $800,000. Compute the amount of cash dividends per share to be received by common
stockholders in 2005 under each of the following assumptions. Treat each case independently. There were no
dividends in arrears as of January 1, 2003.

(1) 25,000 shares of common; 100,000 shares of 6 percent, $50 par cumulative preferred.
(2) 25,000 shares of common; 50,000 shares of 6 percent, $50 par noncumulative preferred.
(3) 25,000 shares of common; 70,000 shares of 6 percent, $100 par cumulative preferred.

7. On January 1, 2005, the records of the Gerrard Corporation showed these balances:

Common stock--authorized 78,000 shares at $100 par;

issued 30,800 shares ................................ $3,080,000
Paid-In capital in excess of par ...................... 264,800
Retained earnings ..................................... 2,960,000

During 2005 and 2006, these transactions occurred:

July 1, 2005 Declared stock dividend (from unissued stock) of 1 share for each 2 shares
outstanding, issued September 1. (Prior to the declaration, the market value of the
unissued stock was $115 per share.)
June 1, 2006 Declared stock dividend (from unissued stock) of 1 share for each 10 shares
outstanding, issued August 1. (Prior to the declaration, the market value of the
unissued stock was $120 per share.)

Provide the entries to record the declaration and payment of the stock dividends during 2005 and 2006.

8. Upon organization on January 1, 2005, Okra Inc. was authorized to issue 200,000 shares of $10 par common stock
in multiples of 100 shares. During 2005, 110,000 shares were sold at $65 per share; 6,000 shares were later
reacquired as treasury stock at $72 per share. A stock split of 2-for-1 on all issued shares was approved on
December 31, 2005.

During 2006, these dividend and treasury stock transactions occurred:

April 12 Declared and paid a 10 percent stock dividend on all outstanding
shares.

Oct. 17 All treasury stock was sold at $81 per share.

Dec. 4 Declared and paid these dividends:

• $1 cash dividend per share for common stock outstanding
• Property dividend of 1 share of Hall Co. common stock for each 10 shares of
Okra stock held. The cost to the company for 1 share of Hall Co. common stock
was $25 with a current market value
of $30.
Provide the entries to record the declaration and payment of the dividends on December 4, 2006.

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 9. During 2005, the following transactions related to the capital stock of the Buffet-Line Corp. occurred:

Jan. 7 Declared a $.75 cash dividend on 150,000 shares of preferred stock.

Feb. 7 Paid dividends on preferred stock.
March 4 Declared a $.50 cash dividend on 200,000 shares of common stock with a $20 par value.
March 18 Paid dividends on common stock.
June 30 Split common stock 4-for-1.
July 9 Purchased 12,000 shares of Buffet-Line's own common stock at $32 per share; acquisition
recorded at cost.
Sept. 10 Declared a cash dividend of $.40 per share on common stock outstanding.
Sept. 18 Paid dividends on common stock.

Provide the entries to record the above transactions.

10. The stockholders' equity section of Jessie Corp. is presented below.

Common stock, $20 par value, authorized 1,000,000 $ 8,000,000

shares, issued and outstanding 400,000 shares .......
Additional paid-in capital ............................ 2,400,000
Retained earnings ..................................... 10,800,000
Total stockholders' equity ............................ $21,200,000

Complete the following table to depict the number of shares of stock and balances in the stockholders' equity
accounts after each of the following transactions. Each situation is to be considered independently of the others.

(a) 15 percent stock dividend, market value $25 per share

(b) 2-for-1 stock split
(c) 100 percent stock dividend, market value $25 per share

Additional Total Total

Outstanding Common Paid-In Retained Stockholders'
Shares Stock Capital Earnings Equity
(a)
(b)
(c)

11. The following information pertains to log Corp. for the year ended September 30, 2005:

Net income ............................................. $ 75,000

Retained earnings, Oct. 1, 2004 ........................ 860,000
Cash dividends declared ................................ 16,400
Stock dividends declared ............................... 41,000
Overstatement of depreciation expense of 2001 and 2002— 62,000
pretax ...............................................
Tax rate ............................................... 30%

Prepare a statement of retained earnings for Rondo Corp. for the year ended September 30, 2005.

12. On July 23, Tinbabe Company declared a cash dividend totaling $80,000. Stockholders were notified that $15,000 of
this dividend represented a liquidating dividend. At the time, the balance in Paid-In Capital in Excess of Par was
$113,000.

Make the journal entries to record (1) the declaration and (2) the payment of this dividend.

13. Indicate how each of the following transactions would be reflected in a statement of cash flows:

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 (1) Cash dividends declared and paid during the year.
(2) A 10 percent stock dividend declared and distributed during the year.
(3) A 50 percent stock dividend declared and distributed during the year.
(4) A property dividend declared and distributed during the year.
(5) A retained earnings appropriation made during the year.

14. On January 1, 2005, Thomas Company granted its 20 top executives stock options to acquire 6,000 shares of $10
par value common stock for $15 per share in the year commencing January 1, 2008. The market price of Thomas
stock is $20 on the date of the grant. The executives must remain in the employ of the company only until December
31, 2006, to retain their options.

The market price of the stock is $20, $25, and $26 on December 31, 2005, 2006, and 2008, respectively. On January
1, 2008, options equivalent to 5,200 shares are exercised, with no other exercises of options during the year.

Prepare the journal entries necessary on January 1, 2005, December 31, 2005, December 31, 2006, and during the
year beginning January 1, 2008.

15. The accounts from the stockholders' equity section of the balance sheet of Western Company showed the following
at December 31, 2004:

Common Stock .......................................... $ 475,000

Paid-in Capital in Excess of Par ...................... 6,650,000
Retained Earnings ..................................... 787,500

Western issued 475,000 shares of the $1 par value common stock on January 1, 2004.

The company also is authorized to issue 500,000 shares of $5 par value, 6% preferred stock.

During 2005, Western had the following transactions:

Jan. 10 Issued an additional 90,000 shares of common stock at $17 per share.
Apr. 1 Issued 100,000 shares of preferred stock at $8 per share.
July 19 The board of directors authorized the appropriation of $295,000 of retained earnings for the
purchase of equipment.
Oct. 23 Sold an additional 60,000 shares of preferred stock at $9 per share.
Dec. 31 Net income for the year was $1,200,000. The board of directors declared a dividend of
$623,000 to stockholders of record on January 15, 2006, to be paid on February 1, 2006.

Prepare a statement of changes in stockholders' equity for 2005 using the information given above.

17. The following amounts were taken from the income statement of LFM Company for the year ending December 31,
2005:

Revenues $1,800,000
Expenses 1,000,000
Income before taxes $ 800,000
Income tax expense 200,000
Net income $ 600,000
Income from discontinued operations:
Income from operations $ 50,000
Loss on disposal (200,000)
Loss from discontinued operations (150,000)
Net income $ 450,000
In addition, LFM reported the following items (all items are before taxes):

Unrealized gain (loss) on available-for-sale securities $100,000

(Increase) Decrease in minimum pension liability (60,000)
Unrealized gain (loss) on derivative instruments (20,000)

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 Foreign currency translation adjustment, increase (decrease)
in stockholders' equity 300,000

The tax rate on all items is 40%.

Prepare a statement of comprehensive income in a one-statement format.

18. The following amounts were taken from the income statement of LFM Company for the year ending December 31,
2005:

Revenues $1,800,000
Expenses 1,000,000
Income before taxes $ 800,000
Income tax expense 200,000
Net income $ 600,000
Income from discontinued operations:
Income from operations $ 50,000
Loss on disposal (200,000)
Loss from discontinued operations (150,000)
Net income $ 450,000
In addition, LFM reported the following items (all items are before taxes):

Unrealized gain (loss) on available-for-sale securities $100,000

(Increase) Decrease in minimum pension liability (60,000)
Unrealized gain (loss) on derivative instruments (20,000)
Foreign currency translation adjustment, increase (decrease)
in stockholders' equity 300,000

The tax rate on all items is 40%.

Prepare a statement of comprehensive income in a two-statement format.

Problem 18
The Carver Company began a performance-based employee stock option plan on
January1, 2001. The performance base for the plan is net sales in the year 2003.The
plan provides for stock options to be awarded to employees as a group on the
following basis:

Level Net Sales Range Options Granted

1 < $200,000 5,000
2 $200,000--$399,000 10,000
3 $400,000--$900,000 15,000
4 >$900,000 20,000

The options are exercisable on January 1, 2004. The option exercise price is $20
per share. On January 1, 2001, each option had a fair value of $12. The market
prices of Carver stock on selected dates in 2001 through 2003 were:
January 1, 2001 $30
December 31, 2001 $35
December 31, 2002 $40
December 31, 2003 $36

Estimates of sales for the year 2003 were:

January 1, 2001 $450,000
December 31, 2001 $475,000
December 31, 2002 $500,000

Actual sales for 2003 were $600,000.

Calculate the compensation expense Carver should report for the years 2001, 2002,
and 2003 related to the option plan under the:

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(1) Fair value method
(2) Intrinsic value method.

Problem 13
The balance sheet below was prepared for the Cardenas Corporation just prior to a quasi-reorganization:
Cardenas Corporation
Balance Sheet
July 31, 2002
Assets
Current assets ................................................................................................................. $ 400,000
Land ..... … ...................................................................................................................... 200,000
Buildings and equipment ................................................................................................. 1,700,000
Less accumulated depreciation--buildings and equipment .............................................. (600,000)
Total assets....................................................................................................... $ 1,700,000

Liabilities and Stockholders’ Equity

Current liabilities .............................................................................................................. $ 200,000
Capital stock (par $50) .................................................................................................... 1,600,000
Paid-In capital in excess of par ....................................................................................... 320,000
Retained earnings (deficit) .............................................................................................. (420,000)
Total liabilities and stockholders’ equity ............................................................ $ 1,700,000

On August 15, 2002, the stockholders approved a reorganization plan with these provisions:

 Gross buildings and equipment are to be adjusted to their current value of $1,100,000; the accumulated
depreciation is to reflect 40 percent depreciation on the revised value.
 The capital stock is to be reduced to a par value of $20 per share.
 The deficit is to be applied to the paid-in capital in excess of par on capital stock; any excess is to be
charged to the paid-in capital from the reduction in value assigned to the capital stock created by the
restatement of capital stock.

Provide the entries required to give effect to the reorganization plan.

Problem 12
The board of directors of Logan Piano Co. decided that the company should undergo a quasi-reorganization
effective on December 31, 2002. On that date, the company determined the following asset values.

Book Value Market Value

Machinery................................................................. $ 40,000 $ 40,000
Building ...................................................... 300,000 175,000
Equipment ................................................................ 95,000 80,000
$435,000 $295,000

The stockholders’ equity section at December 31, 2002, is presented below.

Common stock, $25 par, 25,000 shares issued and outstanding ...................................... $625,000
Additional paid-in capital ................................................................................................... 250,000
Retained earnings (deficit) ................................................................................................ (225,000)
Total……………………………………………………………… $650,000

The quasi-reorganization is to be accomplished by reducing the par value of the stock to $20 per share.
(1) Prepare the journal entry required to adjust the assets.
(2) Prepare the journal entry to record the recapitalization.
(3) Prepare the journal entry to record the elimination of the deficit.