Assignment:
Chapter :Notes
This, the first of two chapters on stockholders' equity, treats topics concerned with the paid-in capital of a corporation. Consideration of issues relative to retained earnings is deferred to Chapter .
The advantages and disadvantages of the corporate form are reviewed in detail, and the distinctions between public and closely held corporations are explained. An extensive discussion of the formation of a corporation highlights the rights of stockholders and the roles of corporate directors and officers.
The treatment of accounting procedures regarding paid-in capital concentrates on the issuance of capital stock and the stockholders' equity section of the balance sheet. The concept of par value is explained in detail, as is additional paid-in capital. The introduction of preferred stock leads to more complex illustrations of the stockholders' equity section. Preferences with respect to dividends and assets are explained and illustrated as is the distinction between cumulative and noncumulative preferred stock.
The calculation of book value per common share is explained and illustrated before attention turns to factors concerning market values. The significance of market price to the issuing corporation is contrasted to its significance to the investor. We then explain the roles of interest rates and investor expectations in the determination of market prices.
Since stock splits and treasury stock transactions impact the presentation of paid-in capital on the balance sheet, they are also introduced in this chapter. Journal entries to record both the purchase and reissuance of treasury shares are provided. We explain and emphasize that gains and losses on treasury stock transactions are not recognized.
In some respects, preferred stock more closely resembles debt than equity. For example, preferred dividends are fixed in amount, rather than dependent upon the level of earnings. Also, preferred stockholders usually have no voting power. The key criterion distinguishing preferred stock from a liability is that liabilities mature that is, they ultimately must be paid off. The SEC has taken the position that the "redeemable" preferred stock issued by several corporations should be classified in the balance sheet as debt rather than equity. The redeemable shares could be redeemed at their par value for cash, at the option of the shareholder. In making the decision, the SEC felt that the redemption option made the shares equivalent to demand notes payable rather than equity securities.
Q. 1: Shown below is information relating to the stockholders'equity of Novake Corporation at December 31, 2018:
8% cumulative preferred stock, $100 par, 100,000 shares authorized, 7,000 shares issued $700,000
Common stock, $3 par, 1,000,000 shares authorized, 500,000 shares issued and outstanding 1,500,000
Additional paid-in capital: preferred stock 400,000
Additional paid-in capital: common stock 500,000
Retained earnings 800,000
From the above information, compute the following:
1. The total amount of legal capital
2. The total amount of paid-in capital
3. The average issue price per share ofpreferredstock
4. The book valueper share of common stock (assume current-year preferred dividends have been paid
5. The balance in Retained Earnings at the beginning of the year was $650,000, and there were no dividends in arrears. Net income for 2018 was $475,000. What was the amount of dividend declared on each share of common stock during 2018
Q. 2: Shown below is the stockholders' equity section of Powell's balance sheet at December 31, 2017:
Stockholders' equity:
Common stock, $2 par value, 500,000 shares authorized,....? shares issued $500,000
Additional paid in capital: common stock 1,750,000
Total paid-in capital $2,250,000
Retained earnings 2,400,000
Total stockholders' equity $4,650,000
In 2018, the following events occurred:
Powell issued 2,500 shares of $2 par common stock as payment for legal services.Although Powell's stock is not traded on any exchange, the agreed-upon value of the legal services is $80,000.
Powell issued 4,500 shares of 6% cumulative preferred stock, $100 par value, for $106 per share.
The board of directors declared a dividend of $1.25 per share on the common stock. Powell's net income for 2017 was $675,000.
Instructions
Complete in good form the stockholders' equity section of a balance sheet prepared for Powell at December 31, 2018.
Stockholders' equity:
6% cumulative preferred stock, $100 par value, 10,000 shares authorized, 4,500 shares issued $
Total paid in capital
Total stockholders' equity