Chapter 13 Corporations: Organization, Stock …

Chapter 13 Corporations: Organization, Stock Transactions, and Dividends Study Guide

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Learning Objective 1: Describe the nature of the corporate form of organization.

The distinguishing characteristics and structure of a corporation? (See exercises 1?3) How to record the expenses incurred to organize a corporation? (See exercises 4?6)

Learning Objective 2: Describe the two main sources of stockholders' equity.

How to show increases and decreases in retained earnings? (See exercises 7?9)

Learning Objective 3: Describe and illustrate the characteristics of stock, classes of stock, and entries for issuing stock.

The difference between shares being classified as authorized, issued, and outstanding?

(See exercises 10?12)

How to allocate dividends paid between common and preferred shareholders? (See

exercises 13?15)

The journal entry used to record the issuance of stock at par value? (See exercises 16,

18, and 20)

The journal entry used to record the issuance of stock at a premium? (See exercises 17,

19, and 21)

The journal entry used to record the issuance of no-par stock? (See exercises 22?24)

Learning Objective 4: Describe and illustrate the accounting for cash dividends and stock dividends.

The three dates of a dividend announcement and the journal entries associated with

each? (See exercises 25?27)

How to account for stock dividends? (See exercises 28?30)

Learning Objective 5: Describe the effect of stock splits on corporate financial statements.

How stock splits affect the number of shares outstanding and the par value per share?

(See exercises 31?33)

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Learning Objective 6: Describe and illustrate the accounting for treasury stock transactions.

How to account for treasury stock using the cost method? (See exercises 34?36)

Learning Objective 7: Describe and illustrate the reporting of stockholders' equity.

How stockholders' equity is shown on the balance sheet? (See exercises 37?39) How to prepare the retained earnings statement? (See exercises 40?42) How to prepare the statement of stockholders' equity? (See exercises 43?45)

Learning Objective 8: Describe and illustrate the use of earnings per share in evaluating a company's profitability.

How to calculate and interpret earnings per share? (See exercises 46?48)

Fill-in-the-Blank Equations

1. If price of stock > par value of stock, sold at a __________ 2. If price of stock < par value of stock, sold at a __________ 3. __________ = (Net income ? Preferred dividends)/Average number of common shares

outstanding

Exercises

1. Which of the following is true of a corporation? If a description is incorrect, why? a. Owners of a corporation have full liability. b. The corporation is taxed separately from its owners. c. The corporation has a life limited to its owners.

2. Which of the following characteristics relates to a corporation? a. Pass-through taxation to its owners b. Must satisfy the Sarbanes-Oxley requirements c. Creditors limited to the assets of the corporation

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Corporations: Organization, Stock Transactions, and Dividends 3

3. A corporation has which of the following characteristics? a. Owners may easily buy or sell an interest in the corporation b. Earnings are double taxed c. Difficult to raise capital

4. Upon formation, Apple Tree Corp. incurred the following expenses: incorporation fees, $2,200; legal fees, $1,500; and state incorporation fees, $4,000. Prepare the journal entry to record the payment of these expenses on January 1, 20Y5.

5. Upon formation on August 15, 20Y5, Snacksters Corp. incurred the following expenses: promotional costs, $1,750; legal fees, $950; and state incorporation fees, $6,200. Prepare the journal entry to record the payment of these expenses.

6. Pen Supply Corp. began operations on March 1, 20Y5. On this date, the company paid for the following expenses: legal fees related to organization, $5,000; rent for the upcoming month, $1,500; license fees, $2,000; promotional costs, $1,200; and insurance for the fiscal year, $9,000. Prepare the journal entry to record the organizational expenses paid.

7. For its 20Y5 fiscal year, Pet Supply Corp. had a net income of $32,400. It also paid $15,800 in dividends. If the balance of retained earnings was $41,100 at the beginning of the year, what will the balance be at year-end?

8. Reeds Corp.'s retained earnings had a balance of $25,600 as of the beginning of its fiscal year, January 1, 20Y5. The company had a net loss of $8,950 made up of $100,000 in revenues and $108,950 in expenses and paid $10,200 to its shareholders in dividends. What will the balance of retained earnings be at year-end? Prepare the journal entries to record the changes.

9. For its fiscal year ending September 30, 20Y5, Snacksters Corp. earned a net income of $52,100 made up of $152,100 in revenues and $100,000 in expenses. It paid $42,500 of this to its shareholders. If the corporation's retained earnings account had a beginning balance of $5,200, what is the ending balance? Also, prepare the journal entries to record the changes in retained earnings.

10. Shem Creek Corp. has $52,000 of common stock outstanding and $15,000 of treasury stock. If the corporation has $24,000 of common stock not issued, calculate the following: a. Dollar value of shares issued b. Dollar value of shares authorized to issue

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11. Burns' Alley has $16,700 of common stock issued to shareholders. The company holds $4,200 in treasury stock. What is the dollar value of the common stock outstanding? If the company also has $4,300 of stock not yet issued, what is the dollar value of the common stock the corporation has authorized?

12. Apple Tree Corp. has $2,400 of treasury stock currently and $25,000 of common stock outstanding. If the company has $37,000 authorized, how much is not issued to shareholders?

13. In 20Y5, Shem Creek Corp. paid $52,000 dividends to its shareholders. At the time, the corporation had 4,000 shares of cumulative preferred $5 stock, $10 par and 3,000 shares of common stock, $5 par issued. If no dividends were paid in 20Y4, determine how much each preferred and common shareholder will receive.

14. Snacksters Corp. paid a total of $60,000 in dividends for the year. The corporation currently had 10,000 shares of $5 par common stock issued and 5,000 of $5 cumulative preferred stock with a $100 par. The corporation has paid dividends in all of the previous years. How much will each common and preferred shareholder receive?

15. Burns' Alley paid a total of $75,000 in dividends during 20Y5. For the year, the corporation had 3,000 shares of cumulative preferred $6 stock, $15 par and 15,000 shares of common stock, $10 par issued. The corporation did not pay dividends in 20Y3 or 20Y4. Determine how much each common and preferred shareholder will receive.

16. On September 5, 20Y5, Olive Oils Corp. issued 4,000 shares of $20 par preferred stock and 25,000 shares of $5 par common stock at par for cash. Prepare the journal entry to record the stock issue.

17. Using the same information as Exercise 16, assume the corporation issued the preferred stock for $25 and the common stock for land with a current market value of $200,000. Prepare the journal entry to record the stock issue.

18. Tortoise Cleaning Corp. issued 15,000 shares of $3 par preferred stock, 20,000 of $2 par preferred stock, and 10,000 shares of $5 par common stock at par for cash on March 20, 20Y5. Prepare the journal entry to record the stock issue.

19. Use the same information as Exercise 18, except that Tortoise Cleaning Corp. issued the $3 par preferred stock for $10 a share and the $2 par preferred stock for $7 a share. The common stock also sold at a premium for $7 per share. Prepare the journal entry to record the stock issue.

20. Upon formation on May 12, 20Y5, Big Zero issued 3,000 shares each of $10 par preferred stock and $8 par common stock at par. Prepare the journal entry to record the stock issue.

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Corporations: Organization, Stock Transactions, and Dividends 5

21. Instead of issuing the stock at par as in Exercise 20, Big Zero issued the preferred and common stock for $12 per share. Prepare the journal entry to record the stock issue.

22. On March 16, 20Y5, a corporation issued 3,000 shares of no-par common stock for $3 per share and 4,000 shares of no-par preferred stock for $5 per share. Prepare the journal entry to record the transaction.

23. Ole Corp. issued 5,000 shares of no-par common stock for $10 per share on April 1, 20Y5. The common stock had a stated value of $5 per share. On June 1, 20Y5, the corporation issued 2,000 shares of the same common stock for $7 per share. Prepare the journal entries to record the stock issues.

24. Upon formation on July 10, 20Y5, Tortoise Cleaning Corp. issued 2,500 shares of no-par common stock for $6 per share and 6,100 shares of no-par preferred stock for $10 per share. On September 12, 20Y5, the corporation issued 1,000 more shares of the same common stock for $5 per share. Prepare the journal entries to record these transactions.

25. On May 16, 20Y5, the board of directors authorized a $3 dividend for all common stock outstanding and an $8 dividend for all preferred stock outstanding. The corporation had 5,000 shares of common stock and 3,500 shares of preferred stock. One month later, the corporation determines there are 1,000 shareholders to receive the cash dividends. The dividend is paid on April 30, 20Y5. Prepare the journal entry required on each of the dates.

26. On June 1, 20Y5, RPC Corporation announced a cash dividend of $52,000 for the year. The company determined that the shareholders would receive the dividends on July 5, 20Y5, and made the disbursement on July 18, 20Y5. Prepare the journal entry required as of each date.

27. Reeds Corp. decided to pay the dividends below on August 1, 20Y5. On September 20, 20Y5, the corporation determined the owners of the stock and made the cash payment on the first of the following month. Prepare the journal entries required.

Dividends per Share

10,000 shares of preferred stock, $20 par

$4.50

20,000 shares of common stock, $5 par

$2.10

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