Chapter 11

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University of the Pacific, Stockton *

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031

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Finance

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Jan 9, 2024

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docx

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bCHAPTER 11 Corporations: Organization, Stock Transactions, Dividends, and Retained Earnings Accounting for Stock Transactions  When par value common stock is issued for cash, the par value of the shares is credited to Common Stock and the portion of the proceeds that is above or below par value is recorded in a separate paid-in capital account.  When no-par common stock has a stated value, the stated value is credited to Common Stock. When the selling price exceeds the stated value, the excess is credited to Paid-in Capital in Excess of Stated Value. When no-par stock does not have a stated value, the entire proceeds are credited to Common Stock. Example 1: Osage Corporation issued 2,000 shares of stock. Prepare the entry for the issuance under the following assumptions. (a) The stock had a par value of $5 per share and was issued for a total of $52,000. (b) The stock had a stated value of $5 per share and was issued for a total of $52,000. (c) The stock had no par or stated value and was issued for a total of $52,000. Par value Cash 52k Common stock 10k Paid capital excess of par 42k No par value,stated value Cash 52k Common stock 10k Paid in capital excess of stated value 42k No par, stated value Cash 52k Common stock 52k Issuing Common Stock for Services or Noncash Assets 1

Example 2: As an auditor for the CPA firm of Hinkson and Calvert, you encounter the following situations in auditing different clients. 1. LR Corporation is a closely held corporation whose stock is not publicly traded. On December 5, the corporation acquired land by issuing 5,000 shares of its $20 par value common stock. The owners’ asking price for the land was $120,000, and the fair value of the land was $110,000. 2. Vera Corporation is a publicly held corporation whose common stock is traded on the securities markets. On June 1, it acquired land by issuing 20,000 shares of its $10 par value stock. At the time of the exchange, the land was advertised for sale at $250,000. The stock was selling at $11 per share. Prepare the journal entries for each of the situations above. Land 110k Common stock 100k Pic in excess of par 10k 2. Land (11-20k) 220k Common stock 200k PIC in excess of PAR 20k Preferred Stock a) When preferred stock is cumulative, any dividends in arrears (preferred dividends not declared in a given period) must be paid to preferred stockholders before allocating any dividends to common stockholders. b) When preferred stock is not cumulative, only the current year’s dividend must be paid to preferred stockholders before paying any dividends to common stockholders. Example 3: Hodge Corporation issued 100,000 shares of $20 par value, cumulative, 6% preferred stock on January 1, 2021, for $2,300,000. In December 2023, Hodge declared its first dividend of $500,000. Instructions (a) Prepare Hodge's journal entry to record the issuance of the preferred stock. (b) If the preferred stock is not cumulative, how much of the $500,000 would be paid to common stockholders? (c) If the preferred stock is cumulative, how much of the $500,000 would be paid to common stockholders? 2

A) Cash 2.3M Preferred stock 2M Paid in excess par stock 300k B) Preferred Dividends(6%*20*100k=120k (2 nd year + 1 st year)*120k=360k Common Dividends 500k-120=380k 500k-360k=140k C) Treasury Stock Example 4: Rinehart Corporation purchased from its stockholders 5,000 shares of its own previously issued stock for $255,000. It later resold 2,000 shares for $54 per share, then 2,000 more shares for $49 per share, and finally 1,000 shares for $43 per share. Prepare journal entries for the purchase of the treasury stock and the three sales of treasury stock. 3