CHAPTER 12
STOCKHOLDERS' EQUITY
BRIEF EXERCISES
BE12–2
a. The number of shares outstanding after the split would be 194 million shares (97 million x 2) and
the price per share would be approximately $50 ($100/2).
b. The company’s overall value or market capitalization is $9.7 billion ($50 x 194 million shares).
The company’s overall market should not change simply because of the share split. The
number of shares will double but the price per share will be cut in half. Sometimes company’s
that announce a share split see their stock price rise because many investors see a share split
as a positive sign from management but this shareholder action is inferring positive news that
has not been announced.
EXERCISES
E12–1
a.,b.,c.
Effect on
Accounts
(1)
Account
Effect on Total
Stockholders' Equity
Common Stock
Increase
Additional Paid-In Capital, C/S
Increase
(2)
None
N/A
No effect
(3)
Treasury Stock
Increase
Decrease
(4)
Common Stock
Increase
No effect
Additional Paid-In Capital, C/S
Increase
Retained Earnings
Decrease
Treasury Stock
Decrease
Additional Paid-In Capital, T/S
Increase
(6)
None
N/A
(7)
Retained Earnings
(5)
Increase
Increase
Increase
No effect
Increase
E12–3
(1)
No entry is necessary.
(2)
Cash (+A) ....................................................................................
Common Stock (+SE) ...........................................................
Additional Paid-In Capital, Common Stock (+SE) ................
Issued common stock.
300,000
Cash (+A) ....................................................................................
Preferred Stock (+SE) ...........................................................
Additional Paid-In Capital, Preferred Stock (+SE) ................
Issued preferred stock.
3,750,000
Cash (+A) ....................................................................................
Preferred Stock (+SE) ...........................................................
Issued preferred stock.
2,500,000
(3)
(4)
50,000
250,000
2,500,000
1,250,000
2,500,000
Effect of each event on basic accounting equation:
Transaction
Assets
Liabilities
Owner’s Equity
1.
2.
3.
4.
NE
+
+
+
NE
NE
NE
NE
NE
+
+
+
Since par value of a share of stock has no relationship to market value, it has very little economic
significance. At one time, par value was construed to be legal minimum capital to protect
creditors in times of dissolution or bankruptcy, but over time the concept has lost its appeal as
creditors have found better ways to protect themselves.
E12–5
a.
(1)
(2)
(3)
(4)
Cash (+A)......................................................................................
Common Stock (+SE).............................................................
Additional Paid-In Capital, Common Stock (+SE)..................
Issued common stock.
500,000
Cash (+A)......................................................................................
Preferred Stock (+SE) ............................................................
Issued preferred stock.
60,000
Treasury Stock (–SE) ...................................................................
Cash (–A) ...............................................................................
Repurchased treasury stock.
45,000
Cash (+A)......................................................................................
Treasury Stock (+SE) .............................................................
Additional Paid-In Capital, Treasury Stock (+SE) ..................
Reissued treasury stock.
18,000
125,000
375,000
60,000
45,000
15,000
3,000
(5)
Cash (+A)......................................................................................
Additional Paid-In Capital, Treasury Stock (–SE) ........................
Retained Earnings (–SE) ..............................................................
Treasury Stock (+SE) .............................................................
Reissued treasury stock.
b. Preferred stock ($8 par value, 5,000 shares outstanding) ..............
Common stock ($5 par value, 25,000 shares issued,
24,000 shares outstanding) ...........................................................
Additional paid-in capital ..................................................................
Retained earnings ............................................................................
Treasury stock .................................................................................
Total stockholders' equity ................................................................
5,000
3,000
7,000
15,000
$
60,000
125,000
375,000
493,000
(15,000)
$1,038,000
E12–6
a. (1)
(2)
Treasury Stock (–SE) ............................................................
Cash (–A) ........................................................................
Purchased treasury stock.
60,000
Cash (+A) ..............................................................................
Retained Earnings (–SE) ......................................................
Treasury Stock (+SE) .....................................................
Reissued treasury stock as compensation.
10,000
20,000
60,000
30,000
Note: Depending upon the terms of the employees' compensation package, it may be more
appropriate to debit Compensation Expense for $20,000 rather than debiting Additional
Paid-In Capital for $20,000.
(3)
Cash (+A) ..............................................................................
Treasury Stock (+SE) .....................................................
Additional Paid-In Capital, Treasury Stock (+SE) ..........
Reissued treasury stock.
33,000
30,000
3,000
Common stock ......................................................................................
$ 80,000
Additional paid-in capital (common and treasury stock) .....................
13,000
Retained earnings ($60,000 - $20,000 +$20,000) ................................
60,000
Total stockholders' equity ....................................................................
$153,000
b. A total of $3,000 of additional paid-in capital is attributable to treasury stock. This amount would
be recorded in the account Additional Paid-In Capital, Treasury Stock. Under the cost method,
this amount represents the amount of proceeds received in excess of the acquisition cost of the
treasury stock reissued.
E12–9
a. Cash (+A) .........................................................................................
Preferred Stock (+SE) ...............................................................
Issued preferred stock.
300
b. Cash (+A) .........................................................................................
Common Stock (+SE) ................................................................
Additional Paid-In Capital, Common Stock (+SE) .....................
Issued common stock.
120
c. Cash (+A) .........................................................................................
Treasury Stock (+SE) ................................................................
Additional Paid-In Capital, Treasury Stock (+SE) .....................
Reissued treasury stock.
30
300
100
20
20
10
E12–13
a. Each year the preferred stockholders are entitled to $5 for each share of preferred stock
outstanding. Since 5,000 shares are outstanding, total dividends to preferred stockholders
should be $25,000 per year.
Year
2008
2009
Dividends Declared
$
0
30,000
Dividends to Preferred
$
0
Dividends to Common
$
25,000 (for 2008)
0
0
5,000 (for 2009)
2010
80,000
20,000 (for 2009)
35,000
25,000 (for 2010)
2011
15,000
15,000 (for 2011)
0
2012
40,000
10,000 (for 2011)
5,000
25,000 (for 2012)
b. Dividends in arrears are the dividends preferred stockholders are entitled to if and when the
company's board of directors declares a dividend. The amount of dividends in arrears equals the
cumulative total of dividends not declared and not paid to preferred stockholders in the current
and past years. The amount of dividends in arrears at the end of each year would be as follows.
December 31, 2008
December 31, 2009
December 31, 2010
December 31, 2011
December 31, 2012
$25,000
$20,000
$0
$10,000
$0
c. Dividends in arrears should not be considered a liability. A liability represents the probable future
sacrifice of assets. A company may choose to reinvest its profits back into the company, or the
company may not be financially secure enough to pay a dividend. This uncertainty is only
resolved when the company's board of directors actually declares a dividend. Preferred
stockholders are only entitled to receive their dividend when the company declares a dividend. If
the board of directors never declares a dividend, then the preferred stockholders are not entitled
to receive one; thus, no liability exists until the dividend is actually declared.
E12–14
a. Stock Dividend (–SE).......................................................................
Common Stock (+SE) ................................................................
Additional Paid-In Capital, Common Stock (+SE) .....................
Declared and issued 2% stock dividend.
11,200*
960
10,240
* $11,200 = (10,000 shares issued – 2,000 shares in treasury)  2%  $70 per share
b. No journal entry is necessary. However, the company should prepare a memorandum entry
stating that the par value has decreased from $6 to $4 per share and that there are now 15,000
shares issued and 12,000 shares outstanding.
c. Stock Dividend (–SE).......................................................................
Common Stock (+SE) ................................................................
Additional Paid-In Capital, Common Stock (+SE) .....................
Declared and issued 10% stock dividend.
* $64,000
64,000*
4,800
59,200
= (10,000 shares issued – 2,000 shares in treasury)  10%  $80
d. No journal entry is necessary. However, the company should prepare a memorandum entry
stating that the par value has decreased from $6 to $3 per share and that there are now 20,000
shares issued and 16,000 shares outstanding.
P12–10
a. Number of Shares Issued = Increase in Par Value ÷ Par Value per Share
= ($200,000 – $110,000) ÷ $100 per Share
= 900 Shares
Average Issue Price = Increase in Contributed Capital ÷ Number of Shares
= (Increase in Par Value + Increase in Additional Paid-in Capital) ÷
900 Shares
= [($200,000 – $110,000) + ($150,000 – $35,000)] ÷ 900
Shares
= $227.78 per Share
b. Number of Shares Issued = ($900,000 – $750,000) ÷ $10 per Share
= 15,000 Shares
Average Issue Price = [($900,000 – $750,000) + ($465,000 – $298,000)] ÷
15,000 Shares
= $21.13 per Share
c. Treasury Stock (–SE) ......................................................................
Cash (–A)...................................................................................
Purchased treasury stock.
110,000
110,000
Average Repurchase Price
= Total Repurchase Price ÷ Number of Shares Held in Treasury
= $110,000 ÷ 5,000 Shares Held in Treasury
= $22.00 per Share