When Tandy (RadioShack) Corporation announced a 2:1 stock split, the company had 97 million shares outstanding, trading at $100 per share.

Transcription

1 BE12-2 When Tandy (RadioShack) Corporation announced a 2:1 stock split, the company had 97 million shares outstanding, trading at $1 per share. (a) Estimate the number of shares outstanding and market price per share immediately after the split. The number of shares outstanding after the split would double to 194 million shares and the market price per share would drop by half to about $5. (b) Estimate the company s overall market value, and explain whether you expect the company s overall market value to change due to the split. The company s overall market capitalization is $9.7 billion ($5 X 194 million shares). The company s overall market value should not change due to the split. The number of shares outstanding will double but the price per share will be cut in half. Sometimes a company that announces a stock split will see their stock price rise because many investors see a stock split as a positive sign from management but this is inferring positive news that has not been announced.

2 E12-1 The following are possible transactions that affect shareholders equity: 1. A company issues common stock above par value for cash. 2. A company declares a 3-for-1 stock split. 3. A company repurchases 1, shares of its own common stock in exchange for cash. 4. A company declares and issues a stock dividend. Assume that the fair market value of the stock is greater than the par value. 5. A company reissues 1, shares of treasury stock for $75 per share. The stock was acquired for $6 per share. 6. A company pays a cash dividend that had been declared fifteen days earlier. 7. A company generates net income of $25,. For each transaction above, indicate the following: (a) The accounts within the shareholders equity section that would be affected. (b) Whether these accounts would be increased or decreased. (c) The effect (increase, decrease, or no effect) of the transaction on total stockholders equity Account Additional PIC, C/S None Additional PIC, C/S None* Effect on Account N/A Decrease Decrease N/A Effect on Shareholders Equity No effect Decrease No effect None * Stockholders equity decreases when the dividend was declared15 days ago.

3 E12-3 Deming Contractors was involved in the following events involving stock during 212: 1. Authorized to issue: (a) 1, shares of $1 par value, 8% preferred stock; (b) 15, shares of no-par, $5 preferred stock; and (c) 25, shares of $5 par value common stock. 2. Issued 1, shares of $5 par value common stock for $3 per share. 3. Issued 25, shares of the $1 par value preferred stock for $15 per share. 4. Issued 5, shares of no-par value preferred stock for $5 each. Prepare entries, if appropriate, for each event, describe how each event affects the basic accounting equation, and explain the economic significance of par value. Debit Credit 1. No entry is necessary 2. Addtl paid in capital, common stock $3, $5, $25, 3. Preferred stock Addtl paid in capital, preferred stock $3,75, $2,5, $1,25, 4. Preferred stock $2,5, $2,5, Effect of each transaction on the accounting equation: Assets Liabilities Stockholders Equity Since par value has no relationship to market value, it has little economic significance. At one time, par value was construed to be the 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.

4 E12-5 Twin Lakes incorporated on April 1, 212, and was authorized to issue 1, shares of $5 par value common stock and 1, shares of $8, no-par value preferred stock. During the remainder of 212, the company entered into the following transactions. 1. Issued 25, shares of common stock in exchange for $5, in cash. 2. Issued 5, shares of preferred stock in exchange for $6, in cash. 3. Purchased 3, shares of common stock for $15 per share and held them in the form of treasury stock. 4. Sold 1, treasury shares for $18 per share on the open market. 5. Issued 1, treasury shares to executives who exercised stock options for a reduced price of $5 per share. The company entered into no other transactions that affected stockholders equity during 212. (a) Prepare entries for each of the transactions. 1. Addtl paid in capital, common stock Debit $5, Credit $125, $375, 2. Preferred stock $6, $6, 3. $45, $45, 4. Addtl paid in capital, treasury stock $18, $15, $3, 5. Addtl paid in capital, treasury stock $5, $3, $7, $15,

5 E12-5 (continued) (b) Assume that Twin Lakes generated $5, in net income in 212 and did not declare any dividends during 212. Prepare the shareholders equity section of the balance sheet as of December 31, 212. Preferred stock, $8, no-par value, authorized 1, shares Issued and outstanding 5, shares $ 6,, $5 par value, authorized 1, shares Issued 25, shares 125, Additional paid-in capital, common stock 375, 5, (15,) Total shareholders equity $1,45,

6 E12-6 The stockholders equity section of Rodman Corporation as of December 31, 211 follows: $ 8, Additional paid-in capital (C/S) 1, 6, Total stockholders equity $ 15, During 212, the company entered into the following transactions. Prepare the journal entry for each transaction. 1. Purchased 1, shares of treasury stock for $6 per share. 2. Reissued half of the treasury shares to executives who exercised stock options for a reduced price of $2 per share. 3. Reissued the remainder of the treasury stock on the open market for $66 per share. (a) Provide journal entries for each transaction, and prepare the shareholders equity section of the balance sheet as of December 31, 212. Rodman Corporation generated $2, in net income during 212 and did not declare any dividends. 1. Debit $6, Credit $6, 2. $1, $2, $3, 3. Addtl paid in capital, treasury stock $33, $3, $3, $ 8, Additional paid-in capital, common stock 1, Additional paid in capital, treasury stock 3, 6, Total stockholders equity $ 153, (b) What portion of the additional paid-in capital account is attributed to treasury stock transactions? $3,

7 E12-9 The information below is taken from the statement of stockholders equity of Chinook Furs: Preferred stock (no par) $ 7 $ 4 ($1 par value) Additional paid-in capital: Less: 1, Provide the journal entries for the following: (a) The issuance of preferred stock during 212. (b) The issuance of common stock during 212. (c) The sale of treasury stock during 212. a. Preferred stock Debit $3 Credit $3 b. Addtl paid in capital, common stock $12 $1 $2 c. Addtl paid in capital, treasury stock $3 $2 $1

8 E12-13 The stockholders equity section of Mayberry Corporation, as of the end of 212, follows. Mayberry began operations in 28. The 5, shares of preferred stock have been outstanding since 28. Preferred stock (1, shares authorized, 5, issued) cumulative, nonparticipating, $5 dividend, $1 par value (5, shares authorized, 2, shares issued 5, held in treasury, no par value Additional paid-in capital preferred stock Less: Total stockholders equity $ 5, 1,6, 14, 11, (8,) $ 1,82, (a) and (b) Compute the amount of dividends paid to preferred and common shareholders and the balance of dividends in arrears each year. Year 28 Total Dividends Paid Dividends Owed to Preferred 25, Dividends Paid to Preferred Dividends in Arrears 25, Dividends Paid to Common 29 3, 5, 3, 2, 21 8, 45, 45, 35, , 25, 15, 1, 212 4, 35, 35, 5, (c) Should dividends in arrears be considered a liability? Why or why not? Dividends in arrears should not be considered a liability. 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. Preferred shareholders are only entitled to receive a dividend when the company declares a dividend. If the Board never declares a dividend, the preferred shareholders are not entitled to receive one; thus, no liability exists until the dividend is actually declared.

9 E12-14 The stockholders equity section of Pioneer Enterprises as of December 31, 212 follows: (1, shares $6 par) $ 6, Additional paid-in capital common stock 1, 6, Less: (2, $12) (24,) Total stockholders equity $ 196, Prepare journal entries for the following independent transactions: (a) The company declares and distributes a 2% stock dividend on the outstanding shares. The market price of the stock is $7. (b) The company declares a 3:2 stock split on the outstanding shares. (c) The company declares a 1% stock dividend on the outstanding shares. The market price of the stock is $8. (d) The company declares a 2:1 stock split on the outstanding shares. a. (16 Addtl paid-in capital, common stock Debit $11,2 Credit $96 $1,24 b. No entry is necessary; however, a memo entry would be made stating that the par value has decreased from $6 to $4 per share and that there are now 15, shares issued and $12, shares outstanding. C. (8 Addtl paid in capital, common stock $64, $4,8 $59,2 d. No entry is necessary; however, a memo entry would be made stating that the par value has decreased from $6 to $3 per share and that there are now 2, shares issued and $16, shares outstanding.

10 P12-1 The stockholders equity section of Buzytown Industries balance sheet reports the following: Preferred stock (9%, $1 par value) ($1 par value, 75, shares authorized, 9, shares issued and 5, held in the treasury) Additional paid-in capital: Preferred stock Less: $ 2, $ 11, 9, 15, 465, 575, (11,) 75, 35, 298, 495, - Total stockholders equity $ 2,18, $ 1,688, (a) How many shares of preferred stock were issued during 212? What was the average issue price? in the Preferred Stock Account $ 9, Par Value per share $1 Number of shares issued 9 Total cash proceeds ($9, $115,) $ 25, Average issue price per share $ (b) How many shares of common stock were issued during 212? What was the average issue price? in the Common Stock Account $15, Par Value per share $1 Number of shares issued 15, Total cash proceeds ($15, $167,) $ 317, Average issue price per share $ 21.13

11 P12-1 (continued) (c) Prepare the entry to record the repurchase of the company s own stock during 212. What was the average repurchase price? Debit $11, Credit $11, Total cash paid $ 11, Number of shares repurchased 5, Average price per share $ 22.