Concept explainers
(a)
Cash dividends: The amount of cash provided by a corporation out of its distributable profits to its shareholders as a return for the amount invested by them is referred as cash dividends.
Stock Dividends: It refers to the payment of dividends by a company to its existing shareholders, in the form of additional shares rather than cash. Stock dividends are paid, when there is inadequate cash available in the company.
To Journalize: the payment of cash dividends and stock dividends for Corporation T.
(a)
Answer to Problem 11.8AP
Record the
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2017 | |||||
January | 15 | Cash Dividends (1) | 35,000 | ||
Dividends Payable | 35,000 | ||||
(To record cash dividends declared) | |||||
February | 15 | Dividends Payable | 35,000 | ||
Cash | 35,000 | ||||
(To record payment of cash dividends) | |||||
April | 15 | Stock Dividends (3) | 98,000 | ||
Common Stock Dividends Distributable (4) | 70,000 | ||||
Paid-in Capital in excess of Par Value-Common stock (5) | 28,000 | ||||
(To record declaration of stock dividends) | |||||
May | 15 | Common Stock Dividends Distributable | 70,000 | ||
Common Stock | 70,000 | ||||
(To record distribution of stock dividends) | |||||
December | 1 | Cash Dividends (6) | 46,200 | ||
Dividends Payable | 46,200 | ||||
(To record declaration of dividends) | |||||
December | 31 | Income Summary | 400,000 | ||
| 400,000 | ||||
(To record closing of net income to income summary account) | |||||
December | 31 | Retained Earnings | 98,000 | ||
Stock Dividends | 98,000 | ||||
(To record closing of stock dividends to retained earnings account) | |||||
December | 31 | Retained Earnings | 81,200 | ||
Cash Dividends (7) | 81,200 | ||||
((To record closing of cash dividends to retained earnings account) |
Table (1)
Working Notes:
Compute the amount of cash dividends payable to common stockholders.
Compute the stock dividends shares.
Compute the stock dividends amount payable to common stockholders.
Compute common stock dividends distributable value.
Compute paid-in capital in excess of par value-common stock.
Compute the amount of cash dividends payable to common stockholders.
Compute the total amount of cash dividends.
Explanation of Solution
January 15: Declared cash dividends at $0.50 per share.
- Cash Dividends is a temporary stockholders’ equity account. The account is debited as the cash dividends are declared and eventually be transferred to Retained Earnings account. Therefore, debit Cash Dividends account with $35,000.
- Dividends Payable is a liability account and the amount owed is increased. Therefore, credit Dividends Payable account with $35,000.
February 15: Paid the cash dividends declared.
- Dividends Payable is a liability account and the amount is decreased because the dividends owed are paid off. Therefore, debit Dividends Payable with $35,000.
- Cash is an asset account and the amount is decreased because cash is paid. Therefore, credit Cash account with $35,000.
April 15: Declared 10% stock dividends.
- Stock Dividends is a contra-stockholders’ equity account which decreases the stockholders’ equity amount. Therefore, debit Stock Dividends account with $98,000.
- Common Stock Dividends Distributable is a stockholders’ equity account and the amount has increased due to the declaration of stock dividends. Therefore, credit Common Stock Dividends Distributable account with $70,000.
- Paid-in Capital in Excess of Par Value is a stockholders’ equity account and the amount has increased due to increase in capital excess of common stock value. Therefore, credit Paid-in Capital in Excess of Par Value account with $28,000.
May 15: Distribution of stock dividends declared.
- Common Stock Dividends Distributable is a stockholders’ equity account and the amount has decreased due to transfer of Common Stock Dividends Distributable amount to Common Stock account. Therefore, debit Common Stock Dividends Distributable account with $70,000.
- Common Stock is stockholders’ equity account and the amount has increased. Therefore, credit Common Stock account with $70,000.
December 1: Declared cash dividends at $0.60 per share.
- Cash Dividends is a temporary stockholders’ equity account. The account is debited as the cash dividends are declared and eventually be transferred to Retained Earnings account. Therefore, debit Cash Dividends account with $46,200.
- Dividends Payable is a liability account and the amount owed is increased. Therefore, credit Dividends Payable account with $46,200.
December 31: Transfer of net income to retained earnings
- Income Summary is a clearing account or temporary account used to close revenues and expenses to Retained Earnings account. Therefore, debit Income Summary account with $400,000.
- Since Retained Earnings account’s amount has increased due to closing of Income Summary account to Retained Earnings account, stockholders’ equity amount has increased. Therefore, credit Retained Earnings account with $400,000.
December 31: Transfer of cash dividends to retained earnings
- Retained Earnings is a stockholders’ equity account. The amount has decreased because Cash dividends account is closed to Retained Earnings account. Therefore, debit Retained Earnings account with $81,200.
- Cash Dividends is a temporary stockholders’ equity account. The account is credited as the cash dividends are transferred to Retained Earnings account to eventually close Cash Dividends account. Therefore, credit Cash Dividends account with $81,200.
December 31: Transfer of stock dividends to retained earnings
- Retained Earnings is a stockholders’ equity account. The amount has decreased because Stock dividends account is closed to Retained Earnings account. Therefore, debit Retained Earnings account with $98,000.
- Stock Dividends is a contra capital stockholders’ equity account. The account is credited as the stock dividends are transferred to Retained Earnings account to eventually close Stock Dividends account. Therefore, credit Stock Dividends account with $98,000.
(b)
To
(b)
Explanation of Solution
T Accounts: T- accounts are prepared for all the business transactions. First, journal entries are passed and then transferred to the respective ledger accounts where they are recorded, and summarized in either side of the ‘T’ format. It is divided into two parts by a vertical line, that is, the left side and the right side. The left side of the T-account is known as the debit side, and the right side of the T-account is known as the credit side. The account name appears on the top of the T-account.
Common stock account is a component of stockholders’ equity account with a normal credit balance.
Common Stock Account | ||||||
Date | Details | Debit ($) | Date | Details | Credit ($) | |
December 31, 2017 | Closing Balance | 770,000 | January 1 | Balance | 700,000 | |
May 15 | Common stock dividends distributable | 70,000 | ||||
Total | 770,000 | Total | 770,000 | |||
January 1, 2018 | Opening Balance | 770,000 |
Table (2)
Retained earnings account is a component of stockholders’ equity account with a normal credit balance.
Retained Earnings Account | ||||||
Date | Details | Debit ($) | Date | Details | Credit ($) | |
December 31 | Stock dividends | 98,000 | January 1 | Balance | 620,000 | |
December 31 | Cash dividends | 81,200 | December 31 | Income Summary | 400,000 | |
December 31,2017 | Closing Balance | 840,800 | ||||
Total | 1,020,000 | Total | 1,020,000 | |||
January 1, 2018 | Opening Balance | $840,000 |
Table (3)
Paid-in Capital in Excess of Par Value–Common Stock account is a component of stockholders’ equity account with a normal credit balance.
Paid-in Capital in Excess of Par Value–Common Stock Account | ||||||
Date | Details | Debit ($) | Date | Details | Credit ($) | |
December 31, 2017 | Closing Balance | 528,000 | January 1 | Balance | 500,000 | |
April 15 | Stock Dividends | 28,000 | ||||
Total | $528,000 | Total | $528,000 | |||
January 1, 2018 | Opening Balance | $528,000 |
Table (4)
Common Stock Dividends Distributable account is a contra-component of stockholders’ equity account with a normal credit balance.
Common Stock Dividends Distributable Account | ||||||
Date | Details | Debit ($) | Date | Details | Credit ($) | |
May 15 | Common Stock | 70,000 | April 15 | Stock Dividends | 70,000 | |
Total | $70,000 | Total | $70,000 |
Table (5)
Cash dividends account is a component of stockholders’ equity account that is closed to retained earnings.
Cash Dividends Account | ||||||
Date | Details | Debit ($) | Date | Details | Credit ($) | |
January 15 | Dividends payable | 35,000 | December 31 | Retained Earnings | $81,200 | |
December 1 | Dividends payable | 46,200 | ||||
Total | 81,200 | Total | 81,200 |
Table (6)
Stock dividends account is a component of stockholders’ equity account that is closed to retained earnings.
Stock Dividends Account | ||||||
Date | Details | Debit ($) | Date | Details | Credit ($) | |
April 15 | Common Stock Dividends Distributable | 70,000 | December 31 | Retained Earnings | $98,000 | |
April 15 | Paid-in Capital in excess of par value-common stock | 28,000 | ||||
Total | 98,000 | Total | 98,000 |
Table (7)
(c)
To Prepare: the stockholders’ equity section of balance sheet for Corporation T as of December 31, 2017.
(c)
Explanation of Solution
Prepare the stockholders’ equity section of balance sheet for Corporation T as of December 31, 2017.
Corporation T | ||
Balance Sheet (Partial) | ||
December 31, 2017 | ||
Particulars | Amount ($) | Amount ($) |
Stockholders’ equity | ||
Paid-in Capital | ||
Capital stock | ||
Common stock, $10 par value, 77,000 shares issued and outstanding | 770,000 | |
Total capital stock | $770,000 | |
Additional paid-in capital | ||
Paid-in capital in excess of stated value–Common stock | 528,000 | |
Total additional paid-in capital | 528,000 | |
Total paid-in capital | 1,298,000 | |
Retained earnings | 840,800 | |
Total paid-in capital and retained earnings | 2,647,500 | |
Less: | (0) | |
Total stockholders’ equity | $2,138,800 |
Table (8)
(d)
To Calculate: the payout ratio for Corporation T.
(d)
Answer to Problem 11.8AP
Calculate the payout ratio for Corporation T for 2017.
Explanation of Solution
Payout Ratio: It refers to a measure that evaluates the amount of dividends paid to the shareholders out of the net income earned by a corporation. It is generally expressed as a percentage. The formula to calculate the payout ratio is as follows:
Therefore, the Payout ratio for Corporation T for 2017 is 20.3%.
To Calculate: the return on common stockholders’ equity for Corporation T.
Answer to Problem 11.8AP
Calculate the return on common stockholders’ equity for Corporation T:
Working notes:
Compute beginning stockholders’ equity.
Compute average stockholders’ equity.
Explanation of Solution
Return on common stockholders’ equity ratio: It is a profitability ratio that measures the profit generating ability of the company from the invested money of the shareholders. The formula to calculate the return on common stockholders’ equity is as follows:
Therefore, the Return on Common Stockholders’ equity for Corporation T is 20.2%
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Chapter 11 Solutions
FINANCIAL ACCT.:TOOLS...(LL)-W/ACCESS
- Selected transactions completed by Equinox Products Inc. during the fiscal year ended December 31, 2016, were as follows: a. Issued 15,000 shares of 20 par common stock at 30, receiving cash. b. Issued 4,000 shares of 80 par preferred 5% stock at 100, receiving cash. c. Issued 500,000 of 10-year, 5% bonds at 104, with interest payable semiannually. d. Declared a quarterly dividend of 0.50 per share on common stock and 1.00 per share on preferred stock. On the date of record, 100,000 shares of common stock were outstanding, no treasury shares were held, and 20,000 shares of preferred stock were outstanding. e. Paid the cash dividends declared in (d). f. Purchased 7,500 shares of Solstice Corp. at 40 per share, plus a 150 brokerage commission. The investment is classified as an available-for-sale investment. g. Purchased 8,000 shares of treasury common stock at 33 per share. h. Purchased 40,000 shares of Pinkberry Co. stock directly from the founders for 24 per share. Pinkberry has 125,000 shares issued and outstanding. Equinox Products Inc. treated the investment as an equity method investment. i. Declared a 1.00 quarterly cash dividend per share on preferred stock. On the date of record, 20,000 shares of preferred stock had been issued. j. Paid the cash dividends to the preferred stockholders. k. Received 27,500 dividend from Pinkberry Co. investment in (h). l. Purchased 90,000 of Dream Inc. 10-year, 5% bonds, directly from the issuing company, at their face amount plus accrued interest of 375. The bonds are classified as a heldtomaturity long-term investment. m. Sold, at 38 per share, 2,600 shares of treasury common stock purchased in (g). n. Received a dividend of 0.60 per share from the Solstice Corp. investment in (f). o. Sold 1,000 shares of Solstice Corp. at 45, including commission. p. Recorded the payment of semiannual interest on the bonds issued in (c) and the amortization of the premium for six months. The amortization is determined using the straight-line method. q. Accrued interest for three months on the Dream Inc. bonds purchased in (l). r. Pinkberry Co. recorded total earnings of 240,000. Equinox Products recorded equity earnings for its share of Pinkberry Co. net income. s. The fair value for Solstice Corp. stock was 39.02 per share on December 31, 2016. The investment is adjusted to fair value, using a valuation allowance account. Assume Valuation Allowance for Available-for-Sale Investments had a beginning balance of zero. Instructions 1. Journalize the selected transactions. 2. After all of the transactions for the year ended December 31, 2016, had been posted [including the transactions recorded in part (1) and all adjusting entries], the data that follows were taken from the records of Equinox Products Inc. a. Prepare a multiple-step income statement for the year ended December 31, 2016, concluding with earnings per share. In computing earnings per share, assume that the average number of common shares outstanding was 100,000 and preferred dividends were 100,000. (Round earnings per share to the nearest cent.) b. Prepare a retained earnings statement for the year ended December 31, 2016. c. Prepare a balance sheet in report form as of December 31, 2016.arrow_forwardChen Corporation began 2012 with the following stockholders equity balances: The following selected transactions and events occurred during the year: a. Issued 10,000 shares of common stock for 60,000. b. Purchased 1,200 shares of treasury stock for 4,800. c. Sold 2,000 shares of treasury stock for 11,000. d. Generated net income of 94,000. e. Declared and paid the full years dividend on preferred stock and a dividend of 1.00 per share on common stock outstanding at the end of the year. Chen Corporation maintains several paid-in capital accounts (Paid-in Capital in Excess of Par, Paid-in Capital from Treasury Stock, etc.) in its ledger, but combines them all as Additional paid-in capital when preparing financial statements. Open the file STOCKEQ from the website for this book at cengagebrain.com. Enter the formulas in the appropriate cells on the worksheet. Then fill in the columns to show the effect of each of the selected transactions and events listed earlier. Enter your name in cell A1. Save the completed worksheet as STOCKEQ2. Print the worksheet. Also print your formulas. Check figure: Total stockholders equity balance at 12/31/12 (cell G21). 398,800.arrow_forwardChen Corporation began 2012 with the following stockholders equity balances: The following selected transactions and events occurred during the year: a. Issued 10,000 shares of common stock for 60,000. b. Purchased 1,200 shares of treasury stock for 4,800. c. Sold 2,000 shares of treasury stock for 11,000. d. Generated net income of 94,000. e. Declared and paid the full years dividend on preferred stock and a dividend of 1.00 per share on common stock outstanding at the end of the year. Chen Corporation maintains several paid-in capital accounts (Paid-in Capital in Excess of Par, Paid-in Capital from Treasury Stock, etc.) in its ledger, but combines them all as Additional paid-in capital when preparing financial statements. In the space provided below, prepare the stockholders equity section of Chen Corporations balance sheet as of December 31, 2012. Use proper headings and provide full disclosure of all appropriate information. Chens corporate charter authorizes the issuance of 1,000 shares of preferred stock and 100,000 shares of common stock.arrow_forward
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- Anoka Company reported the following selected items in the shareholders equity section of its balance sheet on December 31, 2019, and 2020: In addition, it listed the following selected pretax items as a December 31, 2019 and 2020: The preferred shares were outstanding during all of 2019 and 2020; annual dividends were declared and paid in each year. During 2019, 2,000 common shares were sold for cash on October 4. During 2020, a 20% stock dividend was declared and issued in early May. At the end of 2019 and 2020, the common stock was selling for 25.75 and 32.20, respectively. The company is subject to a 30% income tax rate. Required: 1. Prepare the comparative 2019 and 2020 income statements (multiple-step), and the related note that would appear in Anokas 2020 annual report. 2. Next Level Compute the price/earnings ratio for 2020. How does this compare to 2019? Why is it different?arrow_forwardOn January 1, 2019, Kittson Company had a retained earnings balance of 218,600. It is subject to a 30% corporate income tax rate. During 2019, Kittson earned net income of 67,000, and the following events occurred: 1. Cash dividends of 3 per share on 4,000 shares of common stock were declared and paid. 2. A small stock dividend was declared and issued. The dividend consisted of 600 shares of 10 par common stock. On the date of declaration, the market price of the companys common stock was 36 per share. 3. The company recalled and retired 500 shares of 100 par preferred stock. The call price was 125 per share; the stock had originally been issued for 110 per share. 4. The company discovered that it had erroneously recorded depreciation expense of 45,000 in 2018 for both financial reporting and income tax reporting. The correct depreciation for 2018 should have been 20,000. This is considered a material error. Required: 1. Prepare journal entries to record Items 1 through 4. 2. Prepare Kittsons statement of retained earnings for the year ended December 31, 2019.arrow_forwardRaun Company had the following equity items as of December 31, 2019: Preferred stock, 9% cumulative, 100 par, convertible Paid-in capital in excess of par value on preferred stock Common stock, 1 stated value Paid-in capital in excess of stated value on common stock| Retained earnings The following additional information about Raun was available for the year ended December 31, 2019: 1. There were 2 million shares of preferred stock authorized, of which 1 million were outstanding. All 1 million shares outstanding were issued on January 2, 2016, for 120 a share. The preferred stock is convertible into common stock on a 1-for-1 basis until December 31, 2025; thereafter, the preferred stock ceases to be convertible and is callable at par value by the company. No preferred stock has been converted into common stock, and there were no dividends in arrears at December 31, 2019. 2. The common stock has been issued at amounts above stated value per share since incorporation in 2002. Of the 5 million shares authorized, 3,580,000 were outstanding at January 1, 2019. The market price of the outstanding common stock has increased slowly but consistently for the last 5 years. 3. Raun has an employee share option plan where certain key employees and officers may purchase shares of common stock at 100% of the marker price at the date of the option grant. All options are exercisable in installments of one-third each year, commencing 1 year after the date of the grant, and expire if not exercised within 4 years of the grant date. On January 1, 2019, options for 70,000 shares were outstanding at prices ranging from 47 to 83 a share. Options for 20,000 shares were exercised at 47 to 79 a share during 2019. During 2019, no options expired and additional options for 15,000 shares were granted at 86 a share. The 65,000 options outstanding at December 31, 2019, were exercisable at 54 to 86 a share; of these, 30,000 were exercisable at that date at prices ranging from 54 to 79 a share. 4. Raun also has an employee share purchase plan whereby the company pays one-half and the employee pays one-half of the market price of the stock at the date of the subscription. During 2019, employees subscribed to 60,000 shares at an average price of 87 a share. All 60,000 shares were paid for and issued late in September 2019. 5. On December 31, 2019, there was a total of 355,000 shares of common stock set aside for the granting of future share options and for future purchases under the employee share purchase plan. The only changes in the shareholders equity for 2019 were those described previously, the 2019 net income, and the cash dividends paid. Required: Prepare the shareholders equity section of Rauns balance sheet at December 31, 2019. Substitute, where appropriate, Xs for unknown dollar amounts. Use good form and provide full disclosure. Write appropriate notes as they should appear in the publisher financial statements.arrow_forward
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