Chapter 18 Shareholders Equity

(1)

AACSB assurance of learning standards in accounting and business education require documentation of outcomes assessment. Although schools, departments, and faculty may approach assessment and its documentation differently, one approach is to provide specific questions on exams that become the basis for assessment. To aid faculty in this endeavor, we have labeled each question, exercise, and problem in Intermediate Accounting, 7e, with the following AACSB learning skills:

Questions AACSB Tags Exercises AACSB Tags

18–1 Reflective thinking 18–1 Reflective thinking 18–2 Reflective thinking, Communications 18–2 Communications 18–3 Reflective thinking, Communications 18–3 Reflective thinking 18–4 Reflective thinking 18–4 Analytic 18–5 Reflective thinking 18–5 Analytic 18–6 Reflective thinking 18–6 Reflective thinking 18–7 Reflective thinking 18–7 Analytic, Communications 18–8 Reflective thinking 18–8 Analytic

18–9 Reflective thinking 18–9 Analytic 18–10 Reflective thinking 18–10 Analytic 18–11 Reflective thinking 18–11 Analytic 18–12 Reflective thinking 18–12 Analytic 18–13 Reflective thinking 18–13 Analytic 18–14 Reflective thinking 18–14 Analytic

18–15 Reflective thinking 18–15 Analytic, Communications 18–16 Reflective thinking 18–16 Analytic

18–17 Reflective thinking, Communications 18–17 Analytic, Communications 18–18 Reflective thinking 18–18 Analytic

18–19 Reflective thinking 18–19 Analytic 18–20 Reflective thinking 18–20 Analytic

18–21 Reflective thinking 18–21 Reflective thinking, Analytic 18–22 Analytic 18–22 Communications 18–23 Analytic 18–23 Analytic, Communications 18–24 Reflective thinking, Communications 18–24 Reflective thinking, Analytic

Brief Exercises 18–25 Diversity, Reflective thinking

18–1 Analytic _CPA/CMA

18–2 Reflective thinking 1 Analytic

(2)

Problems 18–1 Analytic 18–2 Analytic 18–3 Analytic 18–4 Analytic 18–5 Analytic 18–6 Analytic

(3)

Question 18–1

The two primary sources of shareholders’ equity are amounts invested by shareholders in the corporation and amounts earned by the corporation on behalf of its shareholders. Invested capital is reported as paid-in capital and earned capital is reported as retained earnings.

Question 18–2

The three primary ways a company can be organized are (1) a sole proprietorship, (2) a partnership, or (3) a corporation. Transactions are accounted for the same regardless of the form of business organization with the exception of the method of accounting for capital—the ownership interest in the company. Several capital accounts (as discussed in this chapter) are used to record changes in ownership interests for a corporation, rather than recording all changes in ownership interests in a single capital account for each owner, as we do for sole proprietorships and partnerships.

Question 18–3

In the eyes of the law, a corporation is a separate legal entity—separate and distinct from its owners. The owners are not personally liable for debts of the corporation. So, shareholders generally may not lose more than the amounts they invest when they purchase shares. This is perhaps the single most important advantage of corporate organization over a proprietorship or a partnership.

Question 18–4

“Not-for-profit” corporations such as churches, hospitals, universities, and charities, are not organized for profit and do not sell stock. Some not-for-profit corporations, such as the Federal Deposit Insurance Corporation (FDIC), are government owned.

Question 18–5

(4)

Answers to Questions (continued) Question 18–7

The ownership rights held by common shareholders, unless specifically withheld by agreement with the shareholders, are:

a. The right to vote on policy issues.

b. The right to share in profits when dividends are declared (in proportion to the percentage of shares owned by the shareholder).

c. The right to share in the distribution ofany assets remaining at liquidation after other claims are satisfied.

Question 18–8

The “preemptive right” is the right to maintain one’s percentage share of ownership when new shares are issued. When granted, each shareholder is offered the opportunity to buy the same percentage of any new shares issued as the percentage of shares he/she owns at the time. For reasons of practicality, the preemptive right usually is excluded.

Question 18–9

The typical rights of preferred shares usually include one or both of the following:

a. A preference to a predesignated amount of dividends, that is, a stated dollar amount per share or percent of par value per share. This means that when the board of directors of a corporation declares dividends, preferred shareholders will receive the specified dividend prior to any dividends being paid to common shareholders.

b. A preference over common shareholders in the distribution of assets in the event the corporation is dissolved.

Question 18–10

If preferred shares are noncumulative, dividends not declared in any given year need never be paid. However, if cumulative, when the specified dividend is not paid in a given year, the unpaid dividends accumulate and must be made up in a later dividend year before any dividends are paid on common shares. These unpaid dividends are called “dividends in arrears.”

(5)

Comprehensive income is a broader view of the change in shareholders’ equity than traditional net income. It is the total nonowner change in equity for a reporting period. It encompasses all changes in equity except those caused by transactions with owners. Transactions between the corporation and its owners (shareholders) primarily include dividends and the sale or purchase of shares of the company’s stock. Most nonowner changes (e. g., revenues and expenses) are reported in the income statement. So, the changes other than the ones that are part of net income are those reported as “other comprehensive income.”

Two attributes of other comprehensive income are reported: (1) components of comprehensive income created during the reporting period and (2) the comprehensive income accumulated over the current and prior periods.

The components of comprehensive income created during the reporting period can be reported in either (a) an expanded version of the income statement or (b) a separate statement immediately following the income statement. Regardless of the choice a company makes, the presentation will report net income, other components of comprehensive income, and total comprehensive income. The second attribute—the comprehensive income accumulated over the current and prior periods— is reported as a separate component of shareholders’ equity. This amount represents the cumulative sum of the changes in each component created during each reporting period throughout all prior years.

Components of comprehensive income created during the reporting period can be reported in either (a) an expanded version of the income statement or (b) a separate statement immediately following the income statement. Regardless of the placement a company chooses, the presentation is similar. It will report net income, other components of comprehensive income, and total comprehensive income.

(6)

Answers to Questions (continued) Question 18–16

The cash received usually is the sum of the separate market values of the separate securities. However, when the total selling price is not equal to the sum of the separate market prices, the total selling price is allocated in proportion to their relative market values.

Share issue costs reduce the net cash proceeds from selling the shares and thus paid-in capital— excess of par. On the other hand, debt issue costs are recorded in a separate “debt issue costs” account and amortized to expense over the life of the debt. The difference often is justified by the presumption that share issue costs and debt issue costs are fundamentally different because a debt issue has a fixed maturity, but that selling shares represents a perpetual equity interest. Concept Statement 6 disagrees, stating that debt issue costs should be treated the same way as share issue costs. But, Concept Statements do not constitute GAAP, and the currently prescribed practice is to record debt issue costs as assets and expense the asset over the maturity of the debt.

The same accounts that previously were increased when the shares were sold are decreased when the shares are retired. Specifically, common (or preferred) stock and paid-in capital—excess of par are reduced by the same amounts they were increased by when the shares were originally sold.

If the cash paid to repurchase the shares differs from the amount originally paid in, accounting for the difference depends on whether the cash paid to repurchase the shares is less than or more than the price previously received when the shares were sold. When less cash is distributed to shareholders to retire shares than originally paid in, some of the original investment remains and is labeled paid-in capital—share repurchase. When more cash is distributed to shareholders to retire shares than originally was paid in for those shares, the additional amount is viewed as a dividend on the original investment, and thus a reduction of retained earnings (unless previous share repurchases have created a balance in paid-in capital—share repurchase, which would be reduced first).

(7)

For a stock dividend of less than 25%, a "small" stock dividend, the fair value of the additional shares distributed is transferred from retained earnings to paid-in capital. The reduction in retained earnings is the same amount as if cash dividends were paid equal to the market value of the shares issued. The treatment is consistent with the belief that per share prices remain unchanged by stock dividends.

This is not logical. If the value of each share were to remain the same when additional shares are distributed without compensation, the total value of the company would grow simply because additional stock certificates are distributed. Instead, the market price per share will decline in proportion to the increase in the number of shares distributed in a stock dividend.

The effect and maybe the motivation for the 2-for-1 stock split is to reduce the per share market price (by half). This will likely increase the stock’s marketability by making it attractive to a larger number of potential investors. The appropriate accounting treatment of a stock split is to make no journal entry, which avoids the reclassification of “earned” capital as “invested” capital. However, if the stock distribution is referred to as a "stock split effected in the form of a stock dividend," and the per share par value of the shares is not changed, a journal entry is recorded that increases the common stock account by the par value of the additional shares. To avoid reducing retained earnings Brandon can reduce (debit) paid-in capital—excess of par to offset the credit to common stock, although it’s permissible to debit retained earnings.

When a company decreases, rather than increases, its outstanding shares, a reverse stock split occurs. A 1-for-2 reverse stock split would cause one million $1 par shares to become one-half million $2 par shares. No journal entry would be recorded, so no account balances will change. But the market price per share would double, and the par amount per share would double.

(8)

BRIEF EXERCISES

Brief Exercise 18–1

Two attributes of other comprehensive income are reported: (1) the components of comprehensive income created during the reporting period ($15 million in this instance) and (2) the comprehensive income accumulated over the current and prior periods ($50 million at the end of this year).

The $50 million represents the cumulative sum of the changes in each component created during each reporting period throughout all prior years. Since this amount increased by $15 million, the balance must have been $35 million last year.

Brief Exercise 18–2

($ in millions) Cash (8 million shares x $12 per share) ... 96

Common stock (8 million shares x $1 par per share) ... 8

(9)

Lewelling’s paid-in capital—excess of par will increase by $860,000: 4,000 hours x $240 less $100,000 par.

Journal entry (not required):

Legal expense (4,000 hours x $240) ... 960,000

Common stock (100,000 shares x $1 par per share) ... 100,000

Paid-in capital—excess of par (remainder) ... 860,000

Brief Exercise 18–4

Hamilton’s shareholders’ equity will increase by $3,500,000 as a result of this transaction.

Inventory of motors (1,000 x $3,500) ... 3,500,000

(10)

Brief Exercise 18–5

MLS’s common shareholders’ will receive dividends of $18 million as a result of the 2013 distribution.

Preferred Common

2011 $20 million* 0

2012 20 million** 0

2013 32 million*** $18 million (remainder)

* $24 million current preference (6% x $400 million), thus $4 million dividends in arrears.

** $24 million current preference (6% x $400 million), thus another $4 million

dividends in arrears.

*** $8 million dividends in arrears plus the $24 million current preference.

Brief Exercise 18–6

Horton’s total paid-in capital will decline by $17 million, the price paid to buy back the shares.

($ in millions)

Common stock (2 million shares x $1 par) ... 2

Paid-in capital—excess of par (2 million shares x $9*) ... 18

Paid-in capital—share repurchase (difference) ... 3

(11)

Agee’s total paid-in capital will decline by $18 million because recording the transaction involves a $1 million reduction of retained earnings and an $18 million reduction in paid-in capital accounts.

Journal entries (not required):

First buyback ($ in millions)

Common stock (1 million shares x $1 par) ... 1

Paid-in capital—share repurchase (difference) ... 2

Cash (1 million shares x $14) ... 14

* $16 – $1 par Second buyback Common stock (1 million shares x $1 par) ... 1

Paid-in capital—share repurchase (balance from first buyback) .. 2

Retained earnings (difference) ... 1

(12)

Brief Exercise 18–8

Jennings’s retained earnings will decline by $2 million because the $67 million sale price is less than the sum of the cost of the treasury stock ($70 million) and paid-in capital from the previous treasury stock sale ($1 million).

Journal entries (not required):

Purchase of treasury stock ($ in millions)

Treasury stock (2 million shares x $70) ... 140

Cash ... 140

First sale of treasury stock Cash (1 million shares x $71) ... 71

Paid-in capital—share repurchase (remainder) ... 1

Second sale of treasury stock Cash (1 million shares x $67) ... 67

Paid-in capital—share repurchase (balance from first sale)... 1

Retained earnings (remainder) ... 2

(13)

Cox’s paid-in capital—share repurchase will increase by $7 million as determined in the following journal entry:

($ in millions) Cash (1 million shares x $29) ... 29 Paid-in capital—share repurchase (difference) ... 7 Treasury stock (1 million shares x $22*)... 22

* 2 million shares x $20 = $40 million

1 million shares x $26 = 26 million

3 million shares $66 million

$66 million ÷ 3 million shares = $22 average cost per share

Brief Exercise 18–10

Cox’s paid-in capital—share repurchase will increase by $9 million as determined in the following journal entry:

($ in millions) Cash (1 million shares x $29) ... 29 Paid-in capital—share repurchase (difference) ... 9 Treasury stock (1 million shares x $20*)... 20

* 2 million shares x $20 = $40 million (first million at $20)

(14)

Brief Exercise 18–11

Declaration date ($ in millions)

Retained earnings ... 1,387

Cash dividends payable (8,668 million shares x $.16) ... 1,387 Date of record

no entry Payment date

Cash dividends payable ... 1,387

Cash ... 1,387

Brief Exercise 18–12

Declaration date Loss on investment ($37,000 – 35,000) ... 2,000 Investment in GE stock ... 2,000

Retained earnings (1,000 shares at $35 per share) ... 35,000

Property dividends payable ... 35,000 Payment date

Property dividends payable ... 35,000

Investment in GE stock ... 35,000

Brief Exercise 18–13

($ in millions)

Retained earnings (3 million* shares at $25 per share) ... 75

Common stock (3 million* shares at $1 par per share) ... 3 Paid-in capital—excess of par (remainder) ... 72

(15)

If a stock split is not to be effected in the form of a stock dividend, no entry is recorded. Since the shares double, but the balance in the common stock account is not changed, the par per share is reduced, to $.50 in this instance.

Brief Exercise 18–15

($ in millions)

Paid-in capital—excess of par** 60

Common stock (60 million shares* x $1 par per share) 60 **_{alternatively, retained earnings may be debited}

* 100% x 60 million shares = 60 millionshares

If the per share par value of the shares is not to be changed, the stock distribution is referred to as a "stock split effected in the form of a stock dividend." In that case, the journal entry increases the common stock account by the par value of the additional shares. This prevents the increase in shares from reducing (by half in this case) the par per share. The par is $1 before and after the split.

(16)

EXERCISES

Exercise 18–1

Requirement 1

Comprehensive income is a more expansive view of the change in shareholders’ equity than traditional net income. It is the total nonowner change in equity for a reporting period. In fact, it encompasses all changes in equity other than from transactions with owners. Transactions between the corporation and its shareholders primarily include dividends and the sale or purchase of shares of the company’s stock. Most nonowner changes are reported in the income statement. So, the changes other than those that are part of net income are the ones reported as “other comprehensive income.”

Requirement 2

Two attributes of other comprehensive income are reported: (1) the components of comprehensive income created during the reporting period and (2) the comprehensive income accumulated over the current and prior periods.

(17)

Requirement 3

Kaufman's 2013 balance sheet amount ($107 million) differs from the 2013 amount reported in the disclosure note. On the other hand, the comprehensive income created during the reporting period can be reported in either (a) an expanded version

of the income statement or (b) a separate statement immediately following the income statement. Regardless of the placement a company chooses, the presentation is similar. It will report net income, other components of comprehensive income, and total comprehensive income, similar to the following:

($ in millions)

Net income $xxx

Other comprehensive income:

Net unrealized holding gains (losses) on investments (net of tax)† _{$ x}

Gains (losses) from and amendments to postretirement plans (net of tax)‡ _(x)

Deferred gains (losses) from derivatives (net of tax)§ _x

Gains (losses) from foreign currency translation (net of tax)* _{x xx}

Comprehensive income $xxx

† Changes in the fair value of some securities (described in Chapter 12)..

‡ Gains and losses due to revising assumptions or market returns differing from expectations and prior service cost from amending the plan (described in Chapter 17).

§ _{When a derivative designated as a cash flow hedge is adjusted to fair value, the gain or loss is} deferred as a component of comprehensive income and included in earnings later, at the same time as earnings are affected by the hedged transaction (described in the Derivatives

Appendix to the text).

(18)

Exercise 18–1 (concluded) Requirement 4

From the information Kaufman's financial statements provide, we can determine how the company calculated the $107 million accumulated other comprehensive income in 2013:

($ in millions)

Accumulated other comprehensive income, 2012 $75

Change in net unrealized gains on investments 34

Change in “other” (2)

(19)

Requirement 1

The specific citation that describes the guidelines for presenting accumulated other comprehensive income on the statement of shareholders’ equity is FASB ACS 220– 10–45–14: “Comprehensive Income–Overall–Other Presentation Matters– Reporting Other Comprehensive Income in the Equity Section of a Statement of Financial Position.”

Requirement 2

45-14 The total of other comprehensive income for a period shall be transferred to a

(20)

Exercise 18–3

Indicate by letter whether each of the items listed below most likely is reported in the income statement as Net Income (NI) or in the statement of comprehensive income as Other Comprehensive Income (OCI).

Items

OCI 1. Increase in the fair value of securities available-for-sale NI 2. Gain on sale of land

OCI 3. Loss on pension plan assets (actual return less than expected) OCI 4. Gain from foreign currency translation

NI 5. Increase in the fair value of trading securities

OCI 6. Loss from revising an assumption related to a pension plan NI 7. Loss on sale of patent

OCI 8. Prior service cost

NI 9. Increase in the fair value of bonds outstanding; fair value option OCI 10. Gain on postretirement plan assets (actual return more than expected)

Exercise 18–4

Cash (3 million shares x $17.15 per share) ... 51,450,000

(21)

February 12

Cash (2 million shares x $9 per share) ... 18,000,000

Common stock (2 million shares x $1 par) ... 2,000,000 Paid-in capital—excess of par (difference) ... 16,000,000 February 13

Legal expenses (40,000 shares x $9 per share) ... 360,000

Common stock (40,000 shares x $1 par) ... 40,000 Paid-in capital—excess of par (difference) ... 320,000 Note: Because 2 million shares sold the previous day for $9 per share, it’s reasonable to assume

a $9 per share fair value. February 13

Cash ... 945,000

Common stock (80,000 shares x $1 par) ... 80,000 Paid-in capital—excess of par, common* ... 640,000 Preferred stock (4,000 shares x $50 par) ... 200,000 Paid-in capital—excess of par, preferred** ... 25,000

* 80,000 shares x [$9 market value – $1 par]

** Since the value of the common shares is known ($720,000), the market value of the preferred ($225,000) is assumed from the total selling price ($945,000).

November 15

Property, plant, and equipment (cash value) ... 3,688,000

(22)

Exercise 18–6

Williams Industries must report the 20 million Class B shares among its long-term liabilities in its balance sheet, not as part of shareholders’ equity. The “triggering event,” the death of J.P Williams, is certain to occur even though its timing may not be. A share or other financial instrument is considered to be mandatorily redeemable if it embodies an unconditional obligation that requires the issuer to redeem the instrument with cash or other assets at a specified or determinable date or upon an

event certain to occur. Events certain to occur include the death or termination of

employment of an individual, since both events, like taxes, are inevitable.

(23)

Requirement 1 ($ in millions) Cash ($424 million – 2 million) ... 422

Common stock (15 million shares at $1 par per share) ... 15 Paid-in capital—excess of par (difference) ... 407

Requirement 2

In recording the sale of shares above, the cost of services related to the sale reduced the net proceeds from selling the shares. Since paid-in capital—excess of par is credited for the excess of the proceeds over the par amount of the shares sold, the effect of share issue costs is to reduce the amount credited to that account. On the other hand, the costs associated with a debt issue are recorded in a separate “debt issue costs” account and amortized to expense over the life of the debt (Chapter 14).

Some argue that share issue costs and debt issue costs are fundamentally different. This view is that a debt issue has a fixed maturity so, like interest expense, debt issue costs are part of the expense of borrowing funds for that period of time (recorded in a separate expense account—“debt issue expense”). On the other hand, selling shares represents a perpetual equity interest. Just as dividends paid on that capital investment are not an expense, neither are the share issue costs of obtaining that capital investment.

(24)

Exercise 18–8

Requirement 1

The base amount of the preferred shares is $2,500,000 ÷ 100,000 shares = $25. The dividend preference is 6.785%. So, the dividends paid annually to a preferred shareholder owning 100 shares are: $25 x 100 shares x 6.785% = $169.625.

Requirement 2

If dividends are not paid in 2014 and 2015, but are paid in 2016, the shareholder will receive $169.625 x 3 = $508.875. The prior years’ unpaid dividends are paid because the shares are cumulative. Otherwise, only the $169.625 current year dividend would be paid. When preferred shares are cumulative, this means that if the specified dividend is not paid in a given year, the unpaid dividends (called “dividends in arrears”) accumulate and must be made up in a later dividend year before any dividends are paid on common shares.

Requirement 3

If the investor chooses to convert the shares in 2014, the investor will receive $25 ÷ $30.31 x 100 shares = 82.48 shares of common stock for his/her 100 shares. This can be calculated also as 82,481 ÷ 100,000, or $0.8248 per share times 100 shares. The .48 fractional share likely would be paid in cash equal to the current market price per share times .48.

Requirement 4

If Ozark chooses to redeem the shares on June 18, 2014, the investor will be paid $2,744 for his/her 100 shares:

(25)

AMTC

Cash (7.5 million shares x $13.546) ... 101,595,000

Common stock (7.5 million shares x $.001 par) 7,500

Paid-in capital—excess of par (difference) ... 101,587,500 PSI

Cash (9 million shares x $15.20) ... 136,800,000

Common stock (9 million shares x $.01 par) .. 90,000

(26)

Exercise 18–10

Preferred Common

2013 $ 8 million $ 0

2014 20 million* 0

2015 20 million** 130 million (remainder)

* $8 million dividends in arrears plus $12 million of the $16 million current

preference.

(27)

1. January 7, 2013

($ in millions) Common stock (2 million shares x $1 par) ... 2

Paid-in capital—excess of par (2 million shares x $3*) ... 6 Retained earnings (difference) ... 2

Cash (2 million shares x $5 per share) ... 10 * Paid-in capital—excess of par: $300 ÷ 100 million shares

2. August 23, 2013

Common stock (4 million shares x $1 par) ... 4 Paid-in capital—excess of par (4 million shares x $3) ... 12

Paid-in capital—share repurchase (difference) ... 2 Cash (4 million shares x $3.50 per share) ... 14 3. July 25, 2014

Cash (3 million shares x $6 per share) ... 18

(28)

Exercise 18–12

1. January 2, 2013 ($ in millions)

Common stock (10 million shares x $1 par) ... 10 Paid-in capital—excess of par (10 million shares x $33*) ... 330

Paid-in capital—share repurchase (difference) ... 15 Cash (10 million shares x $32.50) ... 325

* $34 – $1 par 2. March 3, 2013

Common stock (10 million shares x $1) ... 10 Paid-in capital—excess of par (10 million shares x $33*) ... 330 Paid-in capital—share repurchase (available balance) ... 15 Retained earnings (remainder) ... 5

Cash (10 million shares x $36) ... 360 * $34 – $1 par

3. August 13, 2013

Common stock (1 million shares x $1) ... 1 Paid-in capital—excess of par (remainder) ... 41 4. December 15, 2013

(29)

1. January 23, 2013 ($ in millions) Treasury stock (10 million shares x $20) ... 200

Cash ... 200 2. September 3, 2013

Treasury stock (1 million shares x $20) ... 20 Paid-in capital—share repurchase (remainder) ... 1 3. November 4, 2013

Cash (1 million shares x $18) ... 18 Paid-in capital—share repurchase (available balance from req. 2.) 1 Retained earnings (remainder) ... 1

(30)

Exercise 18–14

1. February 12, 2013

($ in millions) Treasury stock (1 million shares x $13) ... 13

Cash ... 13 2. June 9, 2014

Cash ... 20 3. May 25, 2015

Paid-in capital—share repurchase (difference) ... 8 Treasury stock (2 million shares x $11*) ... 22

* 1 million shares x $13 = $13 million 2 million shares x $10 = 20 million

3 million shares $33 million

$33 million ÷ 3 million shares = $11 average cost per share 4. May 25, 2015

Paid-in capital—share repurchase (difference) ... 7 Treasury stock (FIFO cost*) ... 23

* 1 million shares x $13 = $13 million

(31)

Requirement 1

Method A – Reacquired shares are treated as treasury stock.

Method B – Reacquired shares are retired with their status restored to that of

authorized but unissued shares. Requirement 2

Reacquired shares that are retired have their status restored to that of authorized

but unissued shares. Although theoretically identical to retired shares, treasury

shares are treated as issued, but not outstanding shares—at the same time both (a) issued and (b) not outstanding. This artificial status has provided companies an effective device to evade the superficial constraints imposed on par value shares.

Treasury stock is reported as a reduction in total shareholders' equity, not associated with any specific shareholders’ equity account. By either method, total

shareholders’ equity is the same. Retiring shares clearly is conceptually superior because it effectively restores the shares to the status of being authorized, but unissued, shares.

(32)

Exercise 18–16

This is a change in accounting principle.

($ in millions)

Common stock ($1 par x 4 million shares retired) ... 4 Paid-in capital—excess of par (average amount above par

at which the retired shares originally sold: $800 million ...

÷ 200 million shares = $4; $4 x 4 million shares retired) ... 16 Retained earnings (difference) ... 5

Treasury stock (cost of the shares retired) ... 25

UMC applies the new way of reporting reacquired shares retrospectively; that is, to all prior periods as if it always had used that method. In other words, all financial statement amounts for individual periods affected by the change and that are included for comparison with the current financial statements are revised.

In each prior period reported, then, UMC would reduce Common stock by $4 million, Paid-in capital—excess of par by $16 million, Retained earnings by $5 million, and Treasury stock by $25 million.

(33)

Requirement 1

($ in millions)

Treasury stock 1,980

Cash (36 million shares x $55) 1,980

Requirement 2

($ in millions)

Common stock (36 million shares x $.30) 10.80

Paid-in capital—excess of par (36 million shares x $9.19) 330.84

Retained earnings (difference) 1,638.36

Cash (36 million shares x $55) 1,980.00

Requirement 3

(34)

Exercise 18–18

Requirement 1

Retirement of common shares ($ in millions)

Common stock (5 million shares x $1 par per share) ... 5 Paid-in capital—excess of par ($22 – 5 – 2) ... 15 Retained earnings (given) ... 2

Cash (given) ... 22 Net income closed to retained earnings

Income summary ... 88

Retained earnings (given) ... 88 Declaration of a cash dividend

Retained earnings (given) ... 33

Cash ... 33 Declaration of a stock dividend

Retained earnings (given) ... 20

Common stock ([105 – 5] x 4%) million shares at $1 par per share) 4 Paid-in capital—excess of par (difference) ... 16 Requirement 2

BRENNER-JUDE CORPORATION Statement of Retained Earnings FOR THE YEAR ENDED DECEMBER 31,2013

($ in millions)

Balance at January 1 $ 90

Net income for the year 88

Deductions:

Retirement of common stock (2)

Cash dividends of $.33 per share (33)

4% stock dividend (20)

(35)

April 1, 2013

Retained earnings (300,000* shares at $30 per share) ... 9,000,000

Common stock (300,000* shares at $1 par per share) ... 300,000 Paid-in capital—excess of par (remainder) ... 8,700,000

* 10% x 3 million shares issued and outstanding or, alternatively:

April 1, 2013

Retained earnings ... 9,000,000

Common stock dividends distributable ... 300,000 Paid-in capital—excess of par ... 8,700,000 June 1, 2013

Common stock dividends distributable ... 300,000

(36)

Exercise 18–20

Requirement 1

Paid-in capital—excess of par** 24,500

Common stock (24.5 million shares* x $.001 par per share) 24,500 **_{alternatively, retained earnings may be debited}

* 100% x 24.5 million shares = 24.5 millionshares Requirement 2

If the per share par value of the shares is not to be changed, the stock distribution is referred to as a "stock split effected in the form of a stock dividend." In that case, the journal entry in requirement 1 increases the common stock account by the par value of the additional shares. This prevents the increase in shares from reducing (by half in this case) the par per share.

Requirement 3

(37)

Requirement 1

A stock dividend or stock split usually results in some shareholders being entitled to fractions of whole shares. For instance, if a company declares a 25% stock dividend, or equivalently a 5-for-4 stock split, a shareholder owning 10 shares would be entitled to 2 1/2 shares. Another shareholder with 15 shares would be entitled to 3 3/4 shares. Paying shareholders the cash equivalent of the fractional shares simplifies matters for both the corporation and shareholders.

Requirement 2

($ in millions)

Retained earnings (36 million* x $21 per share) ... 756

Common stock ([36 million* – 2 million] x $1 par) ... 34 Paid-in capital—excess of par

([36 million* – 2 million] x [$21 – 1 = $20 per share]) ... 680 Cash (2 million shares at $21 market price per share) ... 42

(38)

Exercise 18–22

The FASB Accounting Standards Codification represents the single source of authoritative U.S. generally accepted accounting principles. The specific citation for each of the following items is:

1. Disclosure for the pertinent rights and privileges of the various securities outstanding:

FASB ACS 505–10–50–3: “Equity–Overall–Disclosure.”

2. Requirement to record a “small” stock dividend at the fair value of the shares issued:

FASB ASC 505–20–30–3: “Equity–Stock Dividends and Stock Splits–Initial Measurement–Stock Dividend.”

Another citation that describes what qualifies as a small stock dividend is FASB ASC 505–20–25–3. Notice, though, that this paragraph does not say fair value, so it can’t be considered the “best” answer.

3. Requirement to exclude from the determination of net income gains and losses on transactions in a company’s own stock:

(39)

Requirement 1

a. March 3—declaration date

Investment in Leasco International stock ... 20,000

Gain on appreciation of investment ($720,000 – 700,000) 20,000

Retained earnings (240,000 shares at $3 per share) ... 720,000

Property dividends payable ... 720,000 March 15—date of record

no entry

March 31—payment date

Property dividends payable ... 720,000

Investment in Leasco International stock ... 720,000 b. May 3

Paid-in capital—excess of par, common* ... 90,000

Common stock (25% x [364,000 – 4,000] shares at $1 par) .. 90,000 *alternatively, retained earnings may be debited.

c. July 5

Retained earnings (9,000* x $11 per share) ... 99,000

Common stock (9,000* x $1 par) ... 9,000

(40)

Exercise 18–23 (concluded)

d. December 1—declaration date

Cash dividends payable ($90,000 par x 8.8%) ... 7,920 December 20—date of record

no entry

December 28—payment date

Cash ... 7,920 e. December 1—declaration date

Cash dividends payable (459,000* x $.50) ... 229,500

* 360,000 + 90,000 + 9,000 = 459,000 shares December 20—date of record

no entry

Cash ... 229,500 Requirement 2

CONSOLIDATED PAPER, INC. [Shareholders’ Equity section] December 31, 2013Paid-in capital:

Preferred stock, 8.8%, 90,000 shares at $1 par $ 90,000

Common stock, 463,0001shares at $1 par 463,000

Paid-in capital—excess of par, preferred 1,437,000

Paid-in capital—excess of par, common 2,574,000 2

Retained earnings 9,488,580 3

Treasury stock, at cost; 4,000 common shares (44,000)

Total shareholders’ equity $14,008,580

(41)

The return on shareholders' equity is computed by dividing net income by average shareholders' equity.

[$200 – 120]* ÷ ([$600 + 520] ÷ 2) = 14.29%

* Increase in retained earnings, which equals net income since no dividends were paid.

The ratio is a summary measure of profitability often used by investors and potential investors, particularly common shareholders. It measures the ability of company management to generate net income from the resources that owners provide.

(42)

Exercise 18–25

Indicate by letter whether each of the terms or phrases listed below is more associated with financial statements prepared in accordance with U.S. GAAP (U) or International Financial Reporting Standards (I).

Terms and phrases

U 1. Common stock I 2. Preference shares

U 3. Liabilities often listed before Equity in the balance sheet (statement of financial position)

I 4. Asset revaluation reserve

U 5. Accumulated other comprehensive income I 6. Share premium

I 7. Equity often listed before Liabilities in the balance sheet (statement of financial position)

I 8. Translation reserve I 9. Ordinary shares

U 10. Paid-in capital—excess of par

U 11. Net gains (losses) on investments—AOCI I 12. Investment revaluation reserve

(43)

CPA Exam Questions

1. b. The entries to record the stock issuance and subsequent acquisition and retirement (per share) are as follows:

Issuance

Cash ... 25

Common stock ... 10 Paid-in capital—excess of par ... 15 Retirement

Common stock ... 10 Paid-in capital—excess of par ... 15

Paid-in capital—share repurchase ... 5 Cash ... 20

The net result is a decrease in Paid-in capital—excess of par (additional paid-in capital) of $10 per share retired.

2. c. A treasury stock account is created when a company reacquires its own stock

(44)

CPA Exam Questions (concluded)

3. b. Property dividends are recorded at the fair value of the property distributed as of the date of declaration, with any gain or loss being recognized in the current period.

Fair market value of property dividend

$2.50 x 100,000 shares $250,000

Carrying value

$2.00 x 100,000 shares 200,000

Gain on disposal of investment $ 50,000

4. c. The number of shares issued is less than 20—25%. Therefore, the transaction is considered a small stock dividend and retained earnings should be debited for the FV at date of declaration.

600,000 shares x 1/6 = 100,000 shares x $8 = $800,000

5. a. When a company issues a stock dividend, earnings per share decreases as the number of shares outstanding increases. There is no effect on total assets, total liabilities, or total stockholders’ equity.

6. b.

$100,000

Jan. 1 Shares issued and outstanding 100,000

Mar. 15 2-for-1 stock split x 2

Mar. 15 Shares issued and outstanding 200,000

Dec. 15 Cash dividend declared (per share) x $ .50

(45)

reported in the income statement as interest expense.

8. c. Both U.S. GAAP and IFRS require that companies report a statement of comprehensive income either as a separate statement immediately following the income statement or as a continuation of the income statement.

CMA Exam Questions

1. b. Par value represents a stock’s legal capital. It is an arbitrary value assigned to stock before it is issued. Par value represents a shareholder’s liability ceiling because, as long as the par value has been paid in to the corporation, the shareholders obtain the benefits of limited liability.

2. c. Common shareholders usually have preemptive rights, which means they have the right to purchase any new issues of stock in proportion to their current ownership percentages. The purpose of a preemptive right is to allow shareholders to maintain their current percentages of ownership. Given that Smith had 2,000,000 shares outstanding ($10,000,000 ÷ $5), an investor with 20,000 shares has a 1% ownership. Hence, this investor must be allowed to purchase 4,000 (1% x 400,000 shares) of the additional shares. 3. b. A stock dividend is a transfer of equity from retained earnings to paid-in

(46)

PROBLEMS

Problem 18–1

PART A

Jan. 9

($ in millions) Cash (40 million shares x $20 per share) ... 800

Common stock (40 million shares x $1 par) ... 40 Paid-in capital—excess of par (difference) ... 760 Mar. 11

Equipment (5,000 shares x $20 per share) ... 100,000

Common stock (5,000 shares x $1 par) ... 5,000 Paid-in capital—excess of par (difference) ... 95,000 PART B

Jan. 12

($ in millions) Land ... 2

Revenue—donation of land ... 2

Note: Donated assets are recorded as revenue at the fair value of the assets received, not paid-in capital. This is discussed paid-in Chapter 10.

Sept. 1

($ in millions) Common stock (2 million shares x $1 par) ... 2

Paid-in capital—excess of par

(2 million shares x $19) ... 38 Retained earnings (difference) ... 10

Cash ... 50

Dec. 1

($ in millions) Cash ... 26

(47)

Requirement 1 a. February 5, 2013

($ in millions)

Retirement Treasury Stock

Common stock (6 million sh. x $1) 6 Treasury stock (6 million sh. x $10) 60

Paid-in capital—excess of par Cash 60

(6 million shares x $7*₎ ₄₂

Paid-in capital—share repurchase 1

Retained earnings (plug) 11

Cash 60

* _{Paid-in capital—excess of par:} _{$1,680 ÷ 240} b. July 9, 2013

Cash (2 million sh. x $12) 24 Cash (2 million sh. x $12) 24

Common stock (2 million sh. x $1) 2 Treasury stock (2 million sh. x $10) 20 Paid-in capital—excess of par 22 Paid-in capital—sh. repurchase 4 c. November 14, 2015

Cash (2 million sh. x $7) 14 Cash (2 million sh. x $7) 14

Common stock (2 million sh. x $1) 2 Paid-in cap.—sh. repurchase ($1+4 ) 5

Paid-in capital—excess of par 12 Retained earnings (plug) 1

(48)

Problem 18–2 (concluded) Requirement 2

Shareholders’ Equity $ in millions

Treasury Retirement Stock Paid-in capital:

Common stock, $1 par, ... $ 238 $ 240 Paid-in capital—excess of par ... 1,672 * 1,680 Paid-in capital—share repurchase ... 0 0 Retained earnings ... 1,089 ** 1,099 *** Less: Treasury stock, 2 million shares (at cost) ... (20) Total shareholders’ equity ... $2,999 $2,999 * $1,680 – 42 + 22 + 12

** $1,100 – 11 *** $1,100 – 1

or, alternatively: Paid-in capital:

Common stock, $1 par, ... $ 238 $ 240 Additional paid-in capital ... 1,672 * 1,680 Retained earnings ... 1,089 ** 1,099 *** Less: Treasury stock, 2 million shares (at cost) ... (20) Total shareholders’ equity ... $2,999 $2,999 * $1,680 – 42 + 22 + 12

(49)

Requirement 1

February 15, 2013 (a) Retired

Common stock (300,000 shares x $1 par) ... 300,000 Paid-in capital—excess of par

(300,000 shares x $5) ... 1,500,000 Retained earnings (difference) ... 600,000

Cash (300,000 shares x $8) ... 2,400,000 (b) Accounted for as treasury stock

Treasury stock (300,000 shares x $8) ... 2,400,000

Cash (300,000 shares x $8) ... 2,400,000 February 17, 2014

(a) Retired

Common stock (300,000 shares x $1 par) ... 300,000 Paid-in capital—excess of par

(300,000 shares x $5) ... 1,500,000

Paid-in capital—share repurchase (difference) ... 150,000 Cash (300,000 shares x $5.50) ... 1,650,000 (b) Accounted for as treasury stock

Treasury stock (300,000 shares x $5.50) ... 1,650,000

(50)

Problem 18–3 (concluded) November 9, 2015 (a) Retired

Cash (200,000 shares x $7) ... 1,400,000

Common stock (200,000 shares x $1 par) ... 200,000 Paid-in capital—excess of par (difference) ... 1,200,000 (b) Accounted for as treasury stock

Cash (200,000 shares x $7) ... 1,400,000 Retained earnings ... 200,000

Treasury stock (200,000 shares x $8 FIFO cost) ... 1,600,000 Requirement 2

Shareholders’ Equity

SHARES RETIRED TREASURY STOCK

Paid-in capital:

Common stock, $1 par, ... $ 5,600,000 $ 6,000,000 Paid-in capital—excess of par ... 28,200,000 30,000,000 Paid-in capital—share repurchase ... 150,000 0 Retained earnings ... 130,900,000* 131,300,000** Less: treasury stock, 400,000 shares (at cost) ... (2,450,000) Total shareholders’ equity ... $164,850,000 $164,850,000 * $86,500,000 – 600,000 + 14,000,000 + 15,000,000 + 16,000,000

**$86,500,000 + 14,000,000 + 15,000,000 + 16,000,000 – 200,000

or, alternatively: Paid-in capital:

(51)

2011 Retained earnings ... 160,500 Income summary ... 160,500 2012 Income summary ... 2,240,900 Retained earnings ... 2,240,900 Common stock (110,000 shares at $1 par per share) ... 110,000

Paid-in capital—excess of par (110,000 shares x $4) ... 440,000 Retained earnings (given) ... 212,660

Cash (total) ... 762,660 * _{Paid-in capital—excess of par:}_{$7,420 ÷ 1,855 = $4}

Retained earnings (given) ... 698,000

Cash dividends payable ... 698,000 Cash dividends payable ... 698,000

Cash ... 698,000 2013

Income summary ... 3,308,700

Retained earnings ... 3,308,700 Retained earnings (given) ... 242,000

(52)

Problem 18–5

Requirement 1

2013

a. November 1—declaration date

Cash dividends payable (105 million shares at $.80/share) 84,000,000 November 15—date of record

no entry

Cash dividends payable ... 84,000,000

Cash ... 84,000,000

2014

b. March 1—declaration date

Investment in Warner bonds ... 300,000 Gain on appreciation of investment

($1.6 million – 1.3 million) ... 300,000 Retained earnings ... 1,600,000

Property dividends payable ... 1,600,000 March 13– date of record

no entry April 5– payment date

Property dividends payable ... 1,600,000

Investment in Warner bonds ... 1,600,000 c. July 12

Retained earnings (5,250,000* x $21 per share) ... 110,250,000

Common stock ([5,250,000* – 250,000] x $1 par) .... 5,000,000 Paid-in capital—excess of par

(53)

d. November 1—declaration date

Cash dividends payable (110,000,000* x $.80) ... 88,000,000

* 105,000,000 + 5,000,000 = 110,000,000 shares November 15—date of record

no entry

Cash dividends payable ... 88,000,000

Cash ... 88,000,000 2015

e. January 15

Paid-in capital—excess of par** ... 55,000,000

Common stock (55,000,000* shares at $1 par) ... 55,000,000 **_{alternatively, retained earnings may be debited}

* 110,000,000 shares x 50% = 55,000,000 shares f. November 1—declaration date

Cash dividends payable (165,000,000 * x $.65) ... 107,250,000

* 105,000,000 + 5,000,000 + 55,000,000 = 165,000,000 shares November 15—date of record

no entry

(54)

Problem 18–5 (concluded) Requirement 2

BRANCH-RICKIE CORPORATION

Statement of Shareholders’ Equity

For the Years Ended Dec. 31, 2013, 2014, and 2015 ($ in 000s)

(55)

Requirement 1

2013 ($ in millions)

Cash ... 480

Preferred stock (1 million shares x $10 par per share) ... 10 Paid-in capital—excess of par, preferred ... 470 Cash ... 70

Common stock (7 million shares x $1 par per share) ... 7 Paid-in capital—excess of par, common ... 63 Retained earnings ... 1

Cash dividends payable, preferred ... 1 Cash dividends payable, preferred ... 1

Cash ... 1 Retained earnings ... 16

Cash dividends payable, common ... 16 Cash dividends payable, common ... 16

Cash ... 16 Income summary ... 290

Retained earnings ... 290

2014 ($ in millions)

(56)

Problem 18–6 (continued)

($ in millions)

Retained earnings ... 1

Cash ... 20 Paid-in capital—excess of par, preferred ... 5

Preferred stock ... 5 Income summary ... 380 Retained earnings ... 380 2015 ($ in millions) Retained earnings ... 65 Common stock ... 6 Paid-in capital—excess of par, common ... 59 Retained earnings ... 1

Cash ... 22 Income summary ... 412

(57)

Requirement 2

ANACONDA INTERNATIONAL CORPORATION

Balance Sheets at December 31 2015 2014 Shareholders’ Equity: Preferred stock $ 15 $ 15 Common stock 65 59

Additional paid-in capital 1,055 996

Retained earnings 2,814 2,490

(58)

Problem 18–7

Requirement 1

The statement of shareholders’ equity explains why and how the various shareholders’ equity items in the balance sheet change from year to year. The statement shows the beginning and ending balances in primary shareholders’ equity accounts and any changes that occur during the years reported (usually three years). Typical reasons for changes are the sale of additional shares of stock, the buyback of stock, net income, and the declaration of dividends.

Requirement 2

Cisco accounts for its share repurchases by formally retiring them. The Statement of Shareholders’ Equity reports the repurchase of common stock and yet has no column in the Statement of Shareholders’ Equity for treasury stock. If the buybacks were viewed as the purchase of treasury shares, a Treasury Stock account would have been employed.

Requirement 3

The price Cisco paid for the shares repurchased in fiscal year 2011 was more than the average price at which Cisco had sold the shares previously. We know this because the Statement of Shareholders’ Equity reports a reduction in retained earnings resulting from that transaction. This occurs only when the cash paid exceeds the reduction in Common stock and Additional Paid-in capital:

($ in millions)

Common stock (361,000,000 shares x $.001 par per share) . 0 Additional paid-in capital*(given) ... 2,575 Retained earnings (given) ... 4,399

Cash (given: change in total shareholders’ equity) ... 6,974

(59)

Requirement 4

Comprehensive income is the total nonowner change in equity for a reporting period. It encompasses all changes in equity other than from transactions with owners. Transactions between the corporation and its owners primarily include dividends and the sale or purchase of shares of the company’s stock. Most nonowner changes are reported in the income statement ($6,490 million earnings for Cisco). The changes other than those that are part of traditional net income are reported as “Other comprehensive income”: $154 + (21) + 538 million for Cisco.

Requirement 5

The change in Comprehensive income in fiscal year 2011 was due to (1) net income ($6.490 million), (2) a net unrealized loss on investment securities ($154 million), (3) change in derivative instruments ($21 million), and (4) change in cumulative translation adjustment and other ($538 million). Each of the last two items is considered other comprehensive income and not discussed in detail in this chapter. Here’s a summary:

For reporting purposes, investments in most equity securities are reported at their fair values. The holding gains and losses from writing securities available for sale up or down to fair value are not reported in the income statement, but instead are reported as a component of Other comprehensive income in the balance sheet (described in Chapter 12).

(60)

Problem 18–7 (concluded)

As we noted in Chapter 17, gains and losses, and prior service cost for pensions and other postretirement benefit plans are not recognized currently in earnings. Instead, we report them as part of other comprehensive

income.

Gains and losses from changes in foreign currency exchange rates when translating financial statements of foreign subsidiaries are discussed elsewhere in the accounting curriculum, and also are included in other

comprehensive income rather than net income.

As of 2012, the components of comprehensive income created during the

reporting period can be reported either (a) as a continuation of the income statement,

or (b) in a separate statement. In 2011, when this annual report was produced, companies were permitted to report it as part of the statement of shareholders’ equity as Cisco did. Regardless of the placement a company chooses, the presentation is similar. It will report net income, other components of comprehensive income, and total comprehensive income. This is the measure of comprehensive income Cisco reported in the statement of shareholders’ equity.

(61)

Requirement 1

Cash ($385,000 – 1,500) ... 383,500

Common stock (30,000 shares at $1 par per share) ... 30,000 Paid-in capital—excess of par (remainder) ... 353,500

Requirement 2

Cash dividends payable (30,000shares x $2) ... 60,000

Requirement 3

Cash ... 60,000

Requirement 4

Common stock (10% x $30,000) ... 3,000 Paid-in capital—excess of par (10% x $353,500) ... 35,350 Retained earnings (difference) ... 1,150

(62)

(63)

Transactions

N 1. Sale of common stock

N 2. Purchase of treasury stock at a cost less than the original issue price

N 3. Purchase of treasury stock at a cost greater than the original issue price

D 4. Declaration of a property dividend

N 5. Sale of treasury stock for more than cost

N(orD) 6. Sale of treasury stock for less than cost

I 7. Net income for the year

D 8. Declaration of a cash dividend

N 9. Payment of a previously declared cash dividend

N 10. Issuance of convertible bonds for cash

D 11. Declaration and distribution of a 5% stock dividend

N 12. Retirement of common stock at a cost less than the original issue

price

N(orD) 13. Retirement of common stock at a cost greater than the original issue

price

N(orD) 14. A stock split effected in the form of a stock dividend

N 15. A stock split in which the par value per share is reduced (not

effected in the form of a stock dividend)

(64)

Problem 18–11

A stock dividend is the distribution of additional shares of stock to current

shareholders of the corporation. The investor receives no assets, only additional shares. Because each shareholder receives the same percentage increase in shares, an investor’s proportional interest in (percentage ownership of) the investee corporation remains unchanged. So, when additional shares are received from a stock dividend, no journal entry is needed. The same investment is simply represented by a larger number of shares. Of course, the investment per share is now less, an effect that must be considered if a portion of the investment is sold.

To record the investment ($ in millions)

Investment in L&K Corporation shares ... 52.8

Cash (1.2 million shares x $44) ... 52.8

To record the sale of shares ...

Cash (200,000 shares x $46) ... 9.2

Investment in L&K shares (200,000 shares x $44) ... 8.8

Gain on sale of investments (difference) ... .4

10% stock dividend

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:

$44 million* . = $40 per share 1,000,000 shares x 1.10

* $52.8 – 8.8 = $44

To record the sale of shares

Cash (100,000 shares x $43) ... 4.3

Investment in L&K shares (100,000 shares x $40) ... 4.0 Gain on sale of investments (difference) ... .3

(65)

Part A

Requirement 1 January 2

Cash (amount received) ... 30,000,000

Common stock ($1 par x 3,000,000 shares) ... 3,000,000 Paid-in capital—excess of par, common (difference) ... 27,000,000 January 2

Cash (amount received) ... 20,000,000

Preferred stock ($5 par x 1,000,000 shares) ... 5,000,000 Paid-in capital—excess of par, preferred (difference) .. 15,000,000

Requirement 2

NICKLAUS CORPORATION

Balance Sheet-Shareholders' Equity Section March 31, 2013

Shareholders' equity

Preferred stock, $5 par, authorized 1,000,000 shares,

issued and outstanding 1,000,000 shares $ 5,000,000

Common stock, $1 par, authorized 5,000,000 shares,

issued and outstanding 3,000,000 shares 3,000,000

Paid-in capital—excess of par 42,000,000

Retained earnings 1,000,000

(66)

Problem 18–12 (continued) Part B

Requirement 1 June 30

Treasury stock ($12 x 200,000 shares) ... 2,400,000

Cash ... 2,400,000 July 31

Cash ($15 x 50,000 shares) ... 750,000

Treasury stock ($12 x 50,000 shares) ... 600,000 Paid-in capital—share repurchase

[($15 – 12) x 50,000 shares] ... 150,000 September 30

Cash ($10 x 50,000 shares) ... 500,000 Paid-in capital—share repurchase

[($12 – 10) x 50,000 shares] ... 100,000

Treasury stock ($12 x 50,000 shares) ... 600,000

Requirement 2

Balance Sheet - Shareholders' Equity Section September 30, 2013

Common stock, $1 par, authorized 5,000,000 shares

issued 3,000,000 shares, 2,900,0001 shares outstanding 3,000,000

Paid-in capital—excess of par 42,000,000

Paid-in capital—share repurchase2 50,000

Retained earnings3 4,000,000

$54,050,000

Less: Treasury stock (100,000 shares at cost) (1,200,000)

Total shareholders' equity $52,850,000

1

3,000,000 – 200,000 + 50,000 + 50,000 2

(67)

Part C Requirement 1 October 1 No entry November 1 Retained earnings ... 540,000 Dividends payable—common ($.05 x 5,800,0001) ... 290,000 Dividends payable—preferred ($.25 x 1,000,000) ... 250,000 November 15 No entry December 1 Dividends payable—common ... 290,000 Dividends payable—preferred ... 250,000 Cash ... 540,000 Note: Dividends are not paid on treasury shares. Cash dividends are paid only on

the 5,800,000 common shares outstanding. December 2

Retained earnings ($10 fair value x 58,000 shares2) 580,000 Common stock dividends

(68)

Problem 18–12 (continued) Requirement 2

Balance Sheet-Shareholders' Equity Section December 31, 2013

Common stock, $.50 par, authorized 10,000,000 shares,

issued 6,058,000 shares, and 5,858,0001 shares outstanding 3,029,000

Paid-in capital—excess of par2 42,551,000

Paid-in capital—share repurchase 50,000

Retained earnings3 5,380,000

$56,010,000

Less: Treasury stock (100,000 shares at cost) (1,200,000)

Total shareholders' equity $54,810,000

(69)

Requirement 3

NICKLAUS CORPORATION

Statement of Shareholders’ Equity

for the Year Ended Dec. 31, 2013 ($ in 000s)

Preferred

Stock Common Stock

Additional Paid-in

Capital EarningsRetained Treasury Stock

(70)

Problem 18–13

Requirement 1 To revalue assets: Retained earnings ... 105 Inventory ... 105 Land ... 5 Retained earnings ... 5 To eliminate a portion of the deficit against available additional paid-in capital:

Additional paid-in capital ... 60

Retained earnings ... 60 To eliminate the remainder of the deficit against common stock: Common stock ... 240