Solution manual intermediate accounting 15e by stice ch11

Chapter 11

253

CHAPTER 11
QUESTIONS
1. The basic rights of common stockholders,
unless otherwise restricted in the articles
of incorporation or bylaws, are as follows:
(a) The right to vote in the election of
directors and in the determination of
certain corporate policies.
(b) The
right
to
maintain
one’s
proportional interest in the corporation
through purchase of additional stock
issued by the company. (In recent
years, some states have eliminated
this preemptive right.)
2. Historically, par value was equal to the
market value of the shares at issuance.
Par value was also sometimes viewed by
the courts as the minimum contribution by
investors. These days, par values for
common stocks are usually set at very low
values (less than $1), so the importance of
par value has decreased substantially.
3. Preferred stock is stock that carries certain

preferences over common stock, such as
prior claims to dividends and liquidation
preferences. Often preferred stock has no
voting rights or only limited voting rights,
and dividends are usually limited to a
stated percentage or amount. The special
rights of a particular issue of preferred
stock are set forth in the articles of
incorporation and in the preferred stock
certificates issued by the corporation.
4. When stock is issued for noncash assets
or for services, the fair market value of the
stock or the fair market value of the
property or services, whichever is more
objectively determinable, is used to record
the transaction.
5. A company may repurchase its own stock
for any of the following reasons:
•
To provide shares for incentive
compensation plans
•
To obtain shares for convertible
securities holders
•
To reduce the amount of equity
•
To invest excess cash temporarily
•
To protect against a hostile takeover

•
To improve per-share earnings
•
To display confidence that the stock is
currently undervalued

6. a. The cost method of accounting for
treasury stock records the treasury
stock at cost, pending final disposition
of the stock; the par value method
treats the acquisition of treasury stock
as
effective
or
“constructive”
retirement of outstanding stock.
b. Total stockholders’ equity will be the
same regardless of whether the cost
method or the par value method is
used to account for treasury stock.
The respective amounts of retained
earnings and paid-in capital may
differ, however.
7. The difference between the purchase price
and the selling price of treasury stock is
properly excluded from the income
statement
because
treasury
stock

transactions cannot be considered to give
rise to a gain or a loss. Gain or loss arises
from the utilization of assets or resources
by the corporation in operating and
investing
activities.
Because
the
recognition of treasury stock as an asset is
discouraged, transactions in treasury
stock are considered capital transactions
between the company and its stockholders
and thus do not give rise to a gain or a
loss.
8. If warrants are detachable, the issuance
proceeds are allocated between the
security and the warrant, based on the
relative fair market values of each. If
warrants are nondetachable, no allocation
is made to recognize the value of the
warrant. The entire proceeds are assigned
to the security to which the warrant is
attached.
9. With the fair value method, total
compensation expense is measured using
the estimated fair value of the options as
of the grant date. With the intrinsic value
method, total compensation expense is
measured using the difference between
the exercise price and the market price at

the grant date. For most plans,
compensation expense using the intrinsic
value method is zero. The FASB
recommends the fair value method.


254

10. Companies must disclose the number of
options outstanding, granted, and forfeited
during the year, along with their weightedaverage exercise prices. In addition, the
weighted-average fair value of options
granted during the year must be disclosed.
If the intrinsic value method is used, a
company is also required to disclose (in
each year) what net income would have
been if the fair value method had been
used.
11. If an error is discovered in the current
year, it is corrected with a correcting entry.
If a material error is discovered in a year
subsequent to the error, the error is
corrected by a prior-period adjustment
whereby the beginning balance in
Retained Earnings is adjusted. Some
errors
are
counterbalancing
(e.g.,
inventory errors) and may need no

correction.
12. State incorporation laws are written to
prevent corporations from wrongfully
borrowing money and then funneling that
money to shareholders. One device to
prevent this is to restrict the payment of
cash dividends to the amount of retained
earnings. Retained earnings can also be
restricted by private debt agreements in
which lenders constrain the ability of a
borrowing
company
to
pay
cash
dividends.
13. a. June 15, 2005, is the date on which
dividend action was formally taken.
July 10, 2005, is the date dividend
checks will be mailed to stockholders.
June 30, 2005, is the date for
determining
the
names
of
stockholders for purposes of the
dividend; dividend checks will be
mailed only to those stockholders
whose
names

appear
in
the
stockholders’ ledger at the close of
business on this date. The period
between the date of declaration and
the date of record gives stockholders a
chance to adjust their holdings in light
of the dividend action taken by the
company. The period between the
date of record and the date of
payment gives the corporation time to
prepare dividend checks for mailing.
b. The stock would normally be traded
“ex-dividend” 3 or 4 days prior to June

Chapter 11

30, 2005. A stockholder selling shares
on or after that date would still receive
the dividend on stock and, conversely,
any person acquiring the stock
between that date and July 10 would
receive no dividend payment from the
current declaration.
14. With a stock split, the par value of each
share is reduced, and the number of
shares outstanding is increased. The total
par value of shares is unchanged. With a
stock dividend, the par value of each

share is unchanged, and because the
number
of
shares outstanding
is
increased, total par value is increased.
This par value increase is effected through
a transfer to par value from Retained
Earnings and/or Additional Paid-In Capital.
With a small stock dividend, the market
value of the newly issued shares is
transferred. With a large stock dividend,
the par value of the new shares is
transferred.
15. a. A liquidating dividend is a distribution
of contributed capital to stockholders.
b. A liquidating dividend is paid when a
corporation is undertaking a partial or
complete liquidation.
16. The four types of unrealized gains and
losses shown as direct equity adjustments
are
•
Foreign
currency
translation
adjustment. This adjustment arises
from the change in the equity of
foreign subsidiaries (as measured in
terms of U.S. dollars) that occurs as a

result of changes in foreign currency
exchange rates.
•

Minimum pension liability adjustment.
This adjustment is created when
additional pension liability must be
recognized.

•

Unrealized gains and losses on
available-for-sale securities. Availablefor-sale securities are those that were
not purchased with the immediate
intention to resell but will be held for
an indefinite time. Unrealized gains
and losses arise because these
securities must be reported on the
balance sheet at their fair market
value.


Chapter 11

•

Unrealized gains and losses on
derivatives. Unrealized gains and
losses from market value fluctuations
of derivative instruments that are

intended to manage risks associated
with future sales or purchases are
deferred to allow for proper matching.

17. Each equity reserve account is associated
with legal restrictions dictating whether it
can be distributed to shareholders.
Therefore, the accounting for equity
reserves

255

directly influences a firm's ability to pay
dividends. The most important distinction
is whether the equity reserve is part of
distributable or nondistributable equity.


PRACTICE EXERCISES
PRACTICE 11−1

COMPUTATION OF DIVIDENDS, COMMON AND PREFERRED

(1)
Noncumulative
2004:
Preferred shareholders
(10,000 shares × 0.06 × $100 = $60,000)

Amount

$45,000

Comments
No dividends in arrears; noncumulative

Common shareholders

0
$45,000

No remainder

2005:
Preferred shareholders

Amount
$ 60,000

Common shareholders

40,000
$100,000

(2)
Cumulative
2004:
Preferred shareholders
(10,000 shares × 0.06 × $100 = $60,000)

Comments

No dividends in arrears; noncumulative

Amount
$45,000

Comments
$15,000 dividends in arrears

Common shareholders

0
$45,000

No remainder

2005:
Preferred shareholders

Amount
$ 75,000

Common shareholders

25,000
$100,000

PRACTICE 11−2

Comments
$60,000 + $15,000 in arrears

ISSUANCE OF COMMON STOCK

Cash (10,000 shares × $40)
400,000
Common Stock, $1 par (10,000 shares × $1)
10,000
Paid-In Capital in Excess of Par
390,000


PRACTICE 11−3

ACCOUNTING FOR STOCK SUBSCRIPTIONS

Subscription:
Common Stock Subscriptions Receivable
Common Stock Subscribed
Paid-In Capital in Excess of Par

300,000

10,000
290,000

Subscription amount = 10,000 shares × $30 = $300,000
Collection of initial 30 percent of the cash:
Cash ($300,000 × 0.30)
Common Stock Subscriptions Receivable

90,000

Collection of remaining cash and issuance of shares:
Cash ($300,000 − $90,000)
Common Stock Subscriptions Receivable

210,000

90,000

210,000

Common Stock Subscribed
10,000
Common Stock, $1 par (10,000 shares × $1)
10,000
PRACTICE 11−4

ISSUING STOCK IN EXCHANGE FOR SERVICES

Salaries Expense
700,000
Common Stock, $0.50 par (25,000 shares × $0.50)
Paid-In Capital in Excess of Par
687,500

12,500

Paid-in Capital in Excess of Par = $700,000 − $12,500 = $687,500
PRACTICE 11−5

ACCOUNTING FOR TREASURY STOCK: COST METHOD

Treasury Stock
Cash

300,000

300,000

$300,000/10,000 shares = $30 per share
Cash

144,000
Treasury Stock (4,000 shares × $30)
Paid-In Capital from Treasury Stock

PRACTICE 11−6

120,000
24,000

ACCOUNTING FOR TREASURY STOCK: PAR VALUE METHOD

Treasury Stock (10,000 shares × $1 par)
Paid-In Capital in Excess of Par
Retained Earnings ($300,000 − $200,000)
Cash

10,000

190,000
100,000
300,000

Paid-In Capital in Excess of Par = 10,000 shares × ($20 − $1 par) = $190,000
Cash

Treasury Stock
Paid-In Capital in Excess of Par

144,000

4,000
140,000


PRACTICE 11−7

ACCOUNTING FOR STOCK WARRANTS

Cash (20,000 units × $55)
1,100,000
Preferred Stock, $50 par (20,000 shares × $50)
1,000,000
Paid-In Capital in Excess of ParPreferred
40,000
Common Stock Warrants (20,000 warrants × $3)
60,000
Paid-In Capital in Excess of Par—Preferred = 20,000 shares × [($55 − $3) − $50 par] = $40,000
Cash (20,000 warrants × $20)

Common Stock Warrants (20,000 warrants × $3)
Common Stock, $1 par
Paid-In Capital in Excess of ParCommon
PRACTICE 11−8
1.

400,000
60,000
20,000
440,000

ACCOUNTING FOR STOCK-BASED COMPENSATION

Intrinsic value method

Grant Date:
No entry.
End of First Year:
No entry because the exercise price is equal to (or greater than) the market price on the
grant date. Accordingly, no compensation expense is associated with these options, and an
adjusting entry at the end of the first year is not needed.
Option Exercise Date:
Cash (100,000 options × $30)
3,000,000
Common Stock, $1 par (100,000 shares × $1) 100,000
Paid-In Capital in Excess of Par
2,900,000
2.

Fair value method

Grant Date:
No entry.
End of First Year:
Compensation Expense ($300,000/3 years)
100,000
Paid-In Capital from Stock Options
100,000
Total compensation over the 3-year life of the options: 100,000 options × $3 = $300,000
The same adjusting entry would be made at the end of the second and the third years.
Option Exercise Date:
Cash (100,000 options × $30)
3,000,000
Paid-In Capital from Stock Options
300,000
Common Stock, $1 par (100,000 shares × $1)
100,000
Paid-In Capital in Excess of Par
3,200,000


PRACTICE 11−9

DISCLOSURE FOR STOCK-BASED COMPENSATION

Net income reported using the intrinsic value method
$75,000
Less: Additional compensation expense using the fair value method
Net income that would be reported using the fair value method$(25,000)

100,000

PRACTICE 11−10 ACCOUNTING FOR STOCK CONVERSION
Preferred Stock, $50 par (10,000 shares × $50)
500,000
Paid-In Capital in Excess of ParPreferred
30,000
Common Stock, $1 par (50,000 shares × $1)
50,000
Paid-In Capital in Excess of ParCommon
480,000
PRACTICE 11−11 PRIOR-PERIOD ADJUSTMENTS
Retained earnings, unadjusted beginning balance$50,000
Add prior-period adjustment
4,000
Retained earnings, adjusted beginning balance $54,000
Add: Net income
12,000
$66,000
Deduct: Dividends
4,500
Retained earnings, ending balance
$61,500
PRACTICE 11−12 ACCOUNTING FOR DECLARATION AND PAYMENT OF DIVIDENDS
Dividends (or Retained Earnings)
Dividends Payable

35,000

Dividends Payable

Cash

35,000

35,000
35,000

PRACTICE 11−13 ACCOUNTING FOR PROPERTY DIVIDENDS
Dividends (or Retained Earnings)
270,000
Property Dividends Payable (10,000 shares × $20) 200,000
Gain on Distribution of Property Dividend
70,000
Gain on distribution of property dividend: 10,000 shares × ($27 − $20) = $70,000
Property Dividends Payable
Investment SecuritiesWilsonville

200,000
200,000


PRACTICE 11−14 ACCOUNTING FOR SMALL STOCK DIVIDENDS
Retained Earnings
30,000
Stock Dividends Distributable (1,000 shares × $1)
1,000
Paid-In Capital in Excess of Par
29,000
Reduction in retained earnings: 10,000 shares × 0.10 × $30 = $30,000
Stock Dividends Distributable

Common Stock, $1 par

1,000
1,000

PRACTICE 11−15 LARGE STOCK DIVIDENDS AND STOCK SPLITS
(1) 100% Large Stock Dividend:
Retained Earnings*
10,000
Stock Dividends Distributable (10,000 shares × $1) 10,000
Reduction in retained earnings: 10,000 new shares × $1 = $10,000
*Alternatively, the debit can be to Paid-In Capital in Excess of Par.
Stock Dividends Distributable
Common Stock, $1 par

1,000
1,000

(2) 2-for-1 Stock Split:
There are no journal entries necessary with a stock split. In this case, only a memorandum entry would be made
to note the fact that the par value per share had been reduced to $0.50 and the number of shares outstanding had
been increased to 20,000.
PRACTICE 11−16 ACCOUNTING FOR LIQUIDATING DIVIDENDS
Dividends (or Retained Earnings)
Paid-In Capital in Excess of Par
Dividends Payable

30,000
470,000

Dividends Payable
Cash

500,000

500,000
500,000

PRACTICE 11−17 COMPREHENSIVE INCOME
Net income (loss)
Increase (decrease) from foreign currency
Increase (decrease) in portfolio value
Comprehensive income

2003
$(1,000)
350
(1,100)
$(1,750)

2004
400
(800)
(600)
$(1,000)

$

2005
$1,700

(170)
420
$1,950


PRACTICE 11−18 ACCUMULATED OTHER COMPREHENSIVE INCOME
(1)

Retained earnings
Retained earnings, January 1, 2003
Net loss
Dividends
Retained earnings (deficit), December 31, 2003
Net income
Dividends
Retained earnings (deficit), December 31, 2004
Net income
Dividends
Retained earnings (deficit), December 31, 2005

(2)

$
0
(1,000)
0
$(1,000)
400
(100)
$ (700)

1,700
(300)
$ 700

Accumulated other comprehensive income
Accumulated other comprehensive income, January 1, 2003
$
0
Increase (decrease) from foreign currency
350
Increase (decrease) in portfolio value
(1,100)
Accumulated other comprehensive income (deficit), December 31, 2003
$
(750)
Increase (decrease) from foreign currency
(800)
Increase (decrease) in portfolio value
(600)
Accumulated other comprehensive income (deficit), December 31, 2004
$(2,150)
Increase (decrease) from foreign currency
(170)
Increase (decrease) in portfolio value
420
Accumulated other comprehensive income (deficit), December 31, 2005
$
(1,900)

PRACTICE 11−19 INTERNATIONAL EQUITY RESERVES

(1)

Nondistributable

Par value of shares
Share premium
Asset revaluation reserve
Total nondistributable equity
(2)

$ 100
1,700
3,200
$5,000

Distributable

Retained earnings
Special reserve
Total distributable equity

$1,000
400
$1,400


PRACTICE 11−20 STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
Common
Stock
at Par

Equity
Begin $1,500

Paid-In
Accumulated
Capital
Other
in Excess Comprehensive
of Par
Income
$10,000

$(2,200)

Treasury
Stock
$(5,000)

(a)

Retained

Total
Stockholders’
Earnings

$15,000

$19,300

4,500

(b)

300

300

Comprehensive income

$4,800

(c)

(1,000)

(d)
(e)
End

(1,200)
40

460

$1,540

$10,460

$4,500

$(1,000)
(1,200)
500

$(1,900)

$(6,200)

$18,500

$22,400


EXERCISES
11–21.

(a)

(b)

(c)

(d)

(e)

(f)

Cash..............................................................................

Common Stock........................................................
Paid-In Capital in Excess of Par.............................
Issued 20,000 shares of $2 par common
stock at $30.

600,000

Organization Expense.................................................
Common Stock........................................................
Paid-ln Capital in Excess of Par.............................
Issued 250 shares of $2 par common stock in
return for legal services in organizing
corporation.

9,000

Compensation Expense..............................................
Common Stock........................................................
Paid-ln Capital in Excess of Par.............................
Issued 300 shares of $2 par common stock
to employees; objective market value
of stock = $10,000.

10,000

Buildings......................................................................
Land..............................................................................
Common Stock........................................................
Paid-In Capital in Excess of Par.............................
Issued 12,500 shares of $2 par common stock

in exchange for a building and land valued
at $295,000 and $80,000, respectively.

295,000
80,000

Cash..............................................................................
Common Stock........................................................
Paid-ln Capital in Excess of Par.............................
Issued 6,500 shares of $2 par common stock
at $38.

247,000

Cash..............................................................................
Common Stock........................................................
Paid-ln Capital in Excess of Par.............................
Issued 4,000 shares of $2 par common stock
at $45.

180,000

40,000
560,000

500
8,500

600
9,400

25,000
350,000

13,000
234,000

8,000
172,000


11–22.

December 31, 2003, Dividend:
Because no preferred stock had been issued at this time, the entire
$25,600 dividend was paid to the common stockholders.
December 31, 2005, Dividend:
Because cumulative preferred stock had been issued, the preferred
stockholders have the right to receive $17,280 in dividends before
common stockholders receive payment. (24,000 shares × $12 par =
$288,000; $288,000 × 0.06 = $17,280.) Thus, the entire $15,500 was paid
to preferred stockholders.
December 31, 2006, Dividend:
Because preferred stockholders had not received all dividends they
were entitled to on December 31, 2005, the remaining portion of the
2005 dividend plus the preference for 2006 must be paid to preferred
stockholders before any payment to common stockholders. Thus,
preferred stockholders will receive $19,060 in 2006, and common
stockholders will receive $13,600 ($17,280 – $15,500 = $1,780; $1,780 +
$17,280 = $19,060; $32,660 – $19,060 = $13,600).

11–23.

2003

2004

2005

Preferred
Stock

$90,000
= $9.00
10,000

$90,000
= $9.00
10,000

$90,000
= $9.00
10,000

Common
Stock

$60,000
= $0.20
300,000

$150,000
= $0.50
300,000

$470,000
= $1.57
300,000

Preferred
Stock

$150,000
= $7.50
20,000

$180,000
= $9.00
20,000

$180,000
= $9.00
20,000

Common
Stock

None

$60,000

= $0.24
250,000

$380,000
= $1.52
250,000

Preferred
Stock

$150,000
= $7.50
20,000

$210,000
= $10.50
20,000

$180,000
= $9.00
20,000

Common
Stock

None

$30,000
= $0.12
250,000

$380,000
= $1.52
250,000

Preferred
Stock

$150,000
= $5.00
30,000

$240,000
= $8.00
30,000

$420,000
= $14.00
30,000

Common
Stock

None

None

$140,000
= $0.56
250,000

(a)

(b)

(c)

(d)


11–24.

(a) Cash..............................................................................
Common Stock........................................................
60,000
Paid-ln Capital in Excess of Stated
Value—Common...................................................

672,000

612,000

Issued 12,000 shares of common stock, stated
value $5, at $56.

11–25.

Cash..............................................................................
Preferred Stock........................................................
Paid-ln Capital in Excess of Par—Preferred..........

Issued 3,000 shares of preferred stock, par
value $15, at $20.

60,000

(b) Cash..............................................................................
Common Stock Subscriptions Receivable...............
Common Stock Subscribed...................................
Paid-ln Capital in Excess of Stated
Value—Common...................................................
Received subscriptions for 2,500 shares of
common stock, stated value $5, at $52.

39,000
91,000

(c) Cash..............................................................................
Common Stock Subscriptions Receivable...........
Collected remaining amount owed on stock
subscriptions.

91,000

Common Stock Subscribed........................................
Common Stock........................................................
Issued 2,500 shares of subscribed stock.

12,500

(d) Cash..............................................................................

Common Stock........................................................
Paid-ln Capital in Excess of Stated
Value—Common...................................................
Issued 5,500 shares of common stock at $61.

335,500

2005
Aug. 1

Dec. 31

Common Stock.................................................
Paid-ln Capital in Excess of Par......................
Retained Earnings............................................
Cash..............................................................
*Alternatively, the entire $120,000 could be
debited to Retained Earnings.
Common Stock.................................................
Paid-ln Capital in Excess of Par......................
Cash..............................................................
Paid-ln Capital from Stock Reacquisition ....

45,000
15,000

12,500
117,500

91,000

12,500

27,500
308,000

10,000
95,000*
25,000*
130,000

24,000
228,000
216,000
36,000


11–26.

1. (a) 2005
June 1 Treasury Stock............................................ 240,000
Cash.........................................................
240,000
Reacquired 15,000 shares of
common at $16.
July 1 Cash............................................................. 100,000
Treasury Stock........................................
80,000
Paid-ln Capital from Treasury Stock.....
20,000

Sold 5,000 shares of treasury
stock at $20; cost $16.
Aug. 1 Cash.............................................................
98,000
Paid-ln Capital from Treasury Stock.........
14,000*
Treasury Stock........................................
112,000
Sold 7,000 shares of treasury
stock at $14; cost $16.
*Alternatively, Retained Earnings could be
debited for $14,000.
Sept. 1 Common Stock...........................................
1,000
Paid-ln Capital in Excess of Par................
16,000*
Treasury Stock........................................
16,000
Paid-ln Capital from Treasury Stock.....
1,000
Retired 1,000 shares of treasury
stock, cost $16; pro rata issuance
cost, $17.
[($240,000 + $3,840,000) ÷ 240,000 shares].
*Alternatively, Retained Earnings could be debited for
$15,000, with no entries to paid-in capital accounts.
(b)

11–26.

Stockholders’ Equity
Contributed capital:
Common stock, $1 par, 275,000 shares authorized;
239,000 shares issued; 2,000 shares held as
treasury stock........................................................
Paid-in capital in excess of par................................
Paid-in capital from treasury stock.........................
Retained earnings.........................................................
Total contributed capital and retained earnings.........
Less: Treasury stock at cost.......................................
Total stockholders’ equity............................................

$ 239,000
3,824,000
7,000
1,005,000
$5,075,000
32,000
$5,043,000

2. (a) 2005
June 1 Treasury Stock............................................
15,000
Paid-ln Capital in Excess of Par................ 240,000
Paid-ln Capital from Treasury Stock.....
15,000
Cash.........................................................
240,000
Reacquired 15,000 shares at $16; par value, $1;
pro rata cost, $17.

(Concluded)
July

1 Cash.............................................................

100,000


Treasury Stock........................................
Paid-ln Capital in Excess of Par............
Sold 5,000 shares at $20; par
value, $1.

(b)

11–27.

5,000
95,000

Aug. 1 Cash.............................................................
Treasury Stock........................................
Paid-In Capital in Excess of Par............
Sold 7,000 shares at $14; par
value, $1.

98,000

Sept. 1 Common Stock...........................................
Treasury Stock........................................

Retired 1,000 shares; par value, $1.

1,000

Stockholders’ Equity
Contributed capital:
Common stock, $1 par, 275,000 shares authorized;
239,000 shares issued; 2,000 shares held as
treasury stock....................................................
Less: Treasury stock at par.................................
Common stock outstanding................................
Paid-in capital in excess of par ..........................
Paid-in capital from treasury stock.....................
Total contributed capital......................................
Retained earnings.................................................
Total stockholders’ equity...................................

7,000
91,000

1,000

$ 239,000
2,000
$ 237,000
3,786,000
15,000
$4,038,000
1,005,000
$5,043,000

When the rights are issued, only a memorandum entry is required to state
the number of shares that may be claimed. This is to ensure that enough
shares are held to cover the rights.
When the rights are exercised, another memorandum entry is needed to
record the reduction in the outstanding rights.
When the rights lapse, a memorandum entry should be made to note the
decrease in outstanding claims to common stock.

11–28.

11–28.

1. Cash ................................................................................
90,000
Common Stock Warrants..........................................
8,617*
Preferred Stock..........................................................
20,000†
Paid-ln Capital in Excess of Par—Preferred............
61,383 †
*Value assigned to warrants:
($9/$94) × $90 × 1,000 = $8,617 (rounded)
†
Value assigned to preferred stock:
($85/$94) × $90 × 1,000 = $81,383 ($20,000 par, $61,383 paid-in capital)
(Concluded)
2. Common Stock Warrants...................................................
Cash ....................................................................................
Common Stock...............................................................

8,617
30,000
2,000


Paid-ln Capital in Excess of Par—Common.................

11–29.

36,617

3. Common Stock Warrants...................................................
Cash ....................................................................................
Common Stock...............................................................
Paid-ln Capital in Excess of Par—Common.................
*0.70 × $8,617 = $6,032 (rounded)

6,032*
21,000

Common Stock Warrants...................................................
Paid-ln Capital from Expired Common Stock
Warrants.......................................................................
*0.30 × $8,617 = $2,585 (rounded)

2,585*

1,400
25,632

2,585

1. Fair Value Method
Total compensation expense over the 3-year service period (2004–2006)
is $630,000 ($7 fair value × 90,000 options). The journal entry required in
each year of the service period is as follows:
Compensation Expense ($630,000/3 years)..............
Paid-In Capital from Stock Options.......................

210,000
210,000

The journal entry to record the exercise of all 90,000 of the options on
December 31, 2007, is as follows:
Cash (90,000 × $48)..................................................... 4,320,000
Paid-In Capital from Stock Options...........................
630,000
Common Stock......................................................
180,000
Additional Paid-In Capital in Excess of Par.........
4,770,000
2. Intrinsic Value Method
Total compensation expense over the 3-year service period (2004–2006)
is $180,000 [($50 – $48) × 90,000 options]. The journal entry required in
each year of the service period is as follows:
Compensation Expense ($180,000/3 years)..............
Paid-In Capital from Stock Options.......................

60,000

60,000

The journal entry to record the exercise of all 90,000 of the options on
December 31, 2007, is as follows:
Cash (90,000 × $48)..................................................... 4,320,000
Paid-In Capital from Stock Options...........................
180,000
Common Stock........................................................
180,000
Paid-In Capital in Excess of Par.............................
4,320,000


11–30.

1. Fair Value Method
Employee Stock Options:
Outstanding at January 1, 2004..................
Granted during 2004....................................
Exercised during 2004.................................
Forfeited during 2004...................................
Outstanding at December 31, 2004..........

Shares
0
90,000
0
0
90,000

Options exercisable at December 31, 2004

0

Weighted-average fair value of
options granted during 2004....................

$7

Weighted-Average
Exercise Price
—
$48
—
—
$48

2. Intrinsic Value Method
The information provided in (1) would also be disclosed under the
intrinsic value method. Also, reported net income would be $440,000
($500,000 – $60,000). Layton would be required to disclose that net
income would have been $290,000 ($500,000 – $210,000) if the fair value
method had been used.
11–31.

11–32.

1. Preferred Stock (4,000 shares × $15)................................ 60,000
Paid-ln Capital in Excess of Par—Preferred..................... 12,000
Common Stock (4,000 shares, $10 par).......................

Paid-ln Capital in Excess of Par—Common.................

40,000
32,000

2. Preferred Stock................................................................... 60,000
Paid-ln Capital in Excess of Par—Preferred..................... 12,000
Retained Earnings.............................................................. 88,000
Common Stock (16,000 shares, $10 par).....................

160,000

3. Preferred Stock................................................................... 60,000
Paid-ln Capital in Excess of Par—Preferred..................... 12,000
Common Stock (6,000 shares, $10 par).......................
Paid-ln Capital in Excess of Par—Common.................

60,000
12,000

1. The error would be reported as an adjustment to the beginning Retained
Earnings balance in the 2005 statement of retained earnings or
statement of changes in stockholders’ equity.
2. Retained earnings, January 1, 2005.................................
Adjustment for depreciation error in 2004......................
Retained earnings, adjusted, January 1, 2005................
Net income.........................................................................
106,000
Dividends...........................................................................
Retained earnings, December 31, 2005.......................

$ 86,500
(36,000
$ 50,500
(30,000
$ 126,500


11–33. (1) Calculation of number of shares outstanding:
Jan.
Feb.
May

1
1
12

June

15

800,000 shares
550,000 shares
100,000 shares (1,000 × 100)
950,000 shares
104,500 shares (950,000 × 0.11)
1,054,500 shares outstanding

Amount to be paid in dividends for the third quarter,
1,054,500 × $1.50 = $1,581,750

(2) Total dividends for 2005:
Mar.
=
June, Sept., and Dec.
=

$1.50 × 850,000 = $1,275,000
3 × $1,581,750 = 4,745,250
$6,020,250

11–34. (a) Dividends (Retained Earnings)................................
Property Dividends Payable................................
Gain on Distribution of Property Dividends.......

2,700,000

Property Dividends Payable....................................
Investment in Shell Corporation Stock..............

1,500,000

(b) Dividends (Retained Earnings) ($5.60 × 230,000
shares).........................................................................
Property Dividends Payable...................................

11–35. 1.

2.

1,500,000

1,200,000
1,500,000
1,288,000
1,288,000

Property Dividends Payable ......................................
Investment in Evans Company Stock...................

1,288,000

Retained Earnings ......................................................
Stock Dividends Distributable................................
Declaration of 25% stock dividend; transfer
at stated value.

20,000

Stock Dividends Distributable....................................
Common Stock, $1 stated value............................
Issuance of stock dividend.

20,000

1,288,000
20,000

20,000

The issuance of the stock dividend had no effect on the ownership equity
of each stockholder in the corporation. For each share previously held

representing an equity of $19.375 ($1,550,000 ÷ 80,000 shares), the
stockholder now holds 1¼ shares, representing an equity of 1¼ × $15.50
($1,550,000 ÷ 100,000 shares), or $19.375.


11–35.

(Concluded)
3.

11–36.

Retained Earnings..................................................
Stock Dividends Distributable..........................
Paid-In Capital in Excess of Stated Value........
Declaration of 15% stock dividend; transfer at
market value.

120,000

Stock Dividends Distributable..............................
Common Stock, $1 stated value......................
Issuance of stock dividend.

12,000

12,000
108,000

12,000

(a) Entries assuming that the 10% stock dividend is recorded at market
value:
Retained Earnings..................................................
Stock Dividends Distributable..........................
Paid-In Capital in Excess of Par.......................
Declared a 10% stock dividend recorded at
new market value of $20 ($22 ÷ 1.1).

80,000*
20,000
60,000

*40,000 shares outstanding × 0.10 = 4,000 additional shares;
4,000 shares × $20 = $80,000
Stock Dividends Distributable..............................
Common Stock, $5 par......................................

20,000
20,000

(b) Entries assuming that the 50% stock dividend is recorded at par
value:
Retained Earnings (or Paid-In Capital in
Excess of Par).....................................................
100,000*
Stock Dividends Distributable..........................
100,000
Declared 50% stock dividend recorded at
par value.

*40,000 shares outstanding × 0.50 = 20,000 additional shares;
20,000 shares × $5 = $100,000
Stock Dividends Distributable..............................
Common Stock, $5 par......................................

100,000
100,000

(c) No journal entry is needed. A memorandum entry would disclose the
decrease in par value (from $5 to $2.50) and the increase in shares
outstanding (from 40,000 to 80,000).


11–37.

Retained Earnings...................................................... 1,250,000
Stock Dividends Distributable..............................
Paid-In Capital in Excess of Par............................
Declared 10% stock dividend, recorded at $25
new market value.
Stock Dividends Distributable..................................
Common Stock, $1 par value................................
Partial distribution of stock dividend.

46,000

Retained Earnings......................................................
Paid-ln Capital in Excess of Par................................
Dividends Payable.................................................

50,000
275,000

Dividends Payable......................................................
Cash........................................................................

325,000

(a) Fire Loss................................................................
Retained Earnings............................................
To report loss from fire on the income
statement.

2,625

(b) Goodwill Impairment Loss...................................
Retained Earnings............................................
To report goodwill impairment loss on the
income statement.

26,250

50,000
1,200,000

46,000

11–38.

11–39.

325,000
325,000

2,625

26,250

(d) Loss on Sale of Equipment.................................
24,150
Retained Earnings............................................
To report loss from sale of equipment on the
income statement.
(g) Retained Earnings................................................
Paid-ln Capital in Excess of Par......................
To report paid-in capital from sale of stock
as a separate stockholders’ equity item.

64,750

(h) Retained Earnings................................................
Paid-ln Capital from Forfeited Stock
Subscriptions..................................................
To report capital from stock subscription
defaults as part of paid-in capital.

4,235

24,150

64,750

4,235


11–39. (Concluded)
(i)

(j)

(k)

Retained Earnings..................................................
Paid-ln Capital from Retirement of Preferred
Stock................................................................
To report retirement of preferred stock at
less than issuance price as part of paid-in
capital.

12,950
12,950

Retained Earnings..................................................
Gain on Bond Retirement.................................
To report gain on retirement of bonds at less
than book value on the income statement.

7,525

Retained Earnings..................................................

Gain on Settlement of Life Insurance..............
To report gain on life insurance policy
settlement on the income statement.

9,500

7,525

9,500

The following items are correctly recorded in the retained earnings
account:
c. Stock dividend, $70,000. This amount is transferred to paid-in capital
accounts.
e. Officers’ compensation related to income of prior periods, $162,750.
This is an accounting error, and the amount is properly recorded as a
prior-period adjustment.
f. Retirement of preferred shares at more than the issue price, $35,000.
This amount is properly debited to Retained Earnings.
I. Correction of prior-period error, $25,025. This is properly recorded as a
prior-period adjustment.
The corrected amount of Retained Earnings is as follows: $66,410 + $2,625
+ $26,250 + $24,150 – $64,750 – $4,235 – $12,950 – $7,525 – $9,500 =
$20,475. Of course, the items included in the computation of net income
will eventually be closed to Retained Earnings.
11–40.

11–41.

Minimum pension liability adjustment: This item is always a reduction in

equity.
Unrealized loss on available-for-sale securities: An unrealized loss reduces
equity.
Accumulated foreign currency translation adjustment: Because the
currencies in the countries where Bypass has foreign subsidiaries have
strengthened relative to the U.S. dollar, this equity adjustment will increase
equity.
Contributed capital and retained earnings........................
$700,000
Plus: Foreign currency translation adjustment................
50,000
Less: Minimum pension liability adjustment.....................
(95,000)
Less: Unrealized loss on available-for-sale securities.....
(68,000)
Total stockholders’ equity................................................
$587,000
Common Stock................................................................... 62,500*


Paid-ln Capital in Excess of Par........................................ 15,000†
Retained Earnings.............................................................. 12,500‡
Cash.................................................................................
Retirement of 2,500 shares of common stock.

90,000

*Common Stock: $150,000 ÷ 6,000 shares = $25 par value
2,500 shares × $25 = $62,500
†

Paid-ln Capital in Excess of Par: $36,000 ÷ 6,000 shares = $6
2,500 shares × $6 = $15,000
‡
Debit to Retained Earnings: $49,000 + $40,000 (net income) – $76,500 =
$12,500 amount paid over original issuance
price to retire stock.
Cash................................................................................. 120,750
Paid-ln Capital in Excess of Par ($54,250 + $15,000 –
$36,000)....................................................................
33,250
Common Stock (3,500 shares × $25)........................
87,500
Additional issuance of common stock.
Treasury Stock................................................................
25,000
Cash.............................................................................
Purchase of common stock held as treasury stock.
*300 shares on hand × $50 = $15,000
200 shares later sold × $50 = $10,000
Original purchase: $25,000 ($15,000 + $10,000)
Cash (200 shares × $55).................................................
Treasury Stock...........................................................
Paid-ln Capital from Treasury Stock.........................
Sale of 200 shares of treasury stock.
Income Summary............................................................
Retained Earnings......................................................
Income for period closed to Retained Earnings.

25,000*

11,000
10,000
1,000
40,000
40,000


11–42.

1.

Kenny Co.
Stockholders’ Equity
December 31, 2004

Common stock ($1 par, 950,000 shares
authorized, 475,000 shares issued and
outstanding)........................................................ $ 475,000*
Paid-in capital in excess of par............................. 6,650,000†
Total paid-in capital..........................................
$7,125,000
Retained earnings..................................................
787,500‡
.................................................................................
Total stockholders’
equity............................................................................
$7,912,500
Total stockholders’ equity ..............................
$7,912,500
COMPUTATIONS:

*950,000 ÷ 2 = 475,000 × $1 = $475,000
†
475,000 × $15 = $7,125,000 – $475,000 = $6,650,000
‡
$1,025,000 – $237,500 = $787,500
2.
Kenny Co.
Statement of Changes in Stockholders’ Equity
For the Year Ended December 31, 2005

Preferred
Stock
Balances,
Dec. 31, 2004......... $
0
Jan. 10:
Issued 100,000
shares of common stock
at $17..................
Apr. 1:
Issued 150,000
shares of
preferred stock
at $8..................... 750,000
Oct. 23:
Issued 50,000
shares of
preferred stock
at $9..................... 250,000
Net income

for 2005................
Cash dividends:
Preferred stock,
$0.30 on 200,000
shares.................
Common stock,
$1.00 on 575,000
shares.................
Balances,
Dec. 31, 2005.....$1,000,000

Paid-In
Capital
in Excess
of Par

Common
Stock

$

$475,000

0

100,000

Paid-In
Capital
in Excess

of Par

Retained
Earnings

Total

$6,650,000 $ 787,500 $ 7,912,500

1,600,000

1,700,000

450,000

1,200,000

200,000

450,000
1,215,000

$650,000

$575,000

1,215,000

(60,000)

(60,000)

(575,000)

(575,000)

$8,250,000 $1,367,500 $11,842,500


11–42.

(Concluded)
3.

Kenny Co.
Stockholders’ Equity
December 31, 2005

Preferred stock, 6% ($5 par, 500,000 shares
authorized, 200,000 issued and outstanding).... $1,000,000
Paid-in capital in excess of par—preferred
stock......................................................................
650,000
Common stock ($1 par, 950,000 shares
authorized, 575,000 issued and outstanding)....
575,000
Paid-in capital in excess of par—common
stock......................................................................
8,250,000
Total paid-in capital............................................

$10,475,000
Retained earnings...................................................
Total stockholders’ equity.................................
$11,842,500

1,367,500

(Note: Disclosure of the $295,000 retained earnings restriction would be
made. Alternatively, retained earnings of $295,000 could be shown as
appropriated in the Stockholders' Equity section.)


PROBLEMS
11–43.
1.

Jan.

1 Property...............................................................................
Organization Expense........................................................
Common Stock...............................................................
Paid-ln Capital in Excess of Par—Common.................
Issued 500 shares of $1 par common stock in
exchange for property and services rendered.

17,000
7,000
500
23,500

Feb. 23 Cash..................................................................................... 142,500
Preferred Stock...............................................................
100,000
Paid-ln Capital in Excess of Par—Preferred.................
42,500
Sold 1,000 shares of $100 par preferred stock
at $150 per share less $7,500 commission.
Mar. 10 Cash..................................................................................... 114,500
Common Stock...............................................................
3,000
Paid-ln Capital in Excess of Par—Common.................
111,500
Sold 3,000 shares of $1 par common stock
at $39 per share less issue costs of $2,500.
Apr. 10 Common Stock Subscriptions Receivable...................... 180,000
Common Stock Subscribed..........................................
4,000
Paid-ln Capital in Excess of Par—Common.................
176,000
Received subscriptions for 4,000 shares of
$1 par common stock at $45 per share.
July 14 Cash.....................................................................................
Building................................................................................
Common Stock...............................................................
Paid-ln Capital in Excess of Par—Common.................
Preferred Stock...............................................................
Paid-ln Capital in Excess of Par—Preferred.................
Sold 600 shares of $1 par common stock at
$40 per share and exchanged 700 shares of
$1 par common stock and 140 shares of

$100 par preferred stock for a building.

24,000
51,000
1,300
50,700
14,000
9,000

Aug. 3 Cash..................................................................................... 140,000
Common Stock Subscriptions Receivable..................
140,000
Common Stock Subscribed...............................................
Common Stock...............................................................
Collected cash on subscriptions and issued
2,000 shares of $1 par common stock.

2,000
2,000