Practice Problems: Stockholders' Equity

Demonstration problem

Demonstration problem A Violet Company has paid all required preferred dividends through 2004 December 31. Its outstanding stock consists of 10,000 shares of USD 125 par value common stock and 4,000 shares of 6 percent, USD 125 par value preferred stock. During five successive years, the company's dividend declarations were as follows:

2005	$85,000
2006	52,500
2007	7,500
2008	15,000
2009	67,500

Compute the amount of dividends that would have been paid to each class of stock in each of the last five years assuming the preferred stock is:

Demonstration problem B Terrier Company has been authorized to issue 100,000 shares of USD 6 par value common stock and 1,000 shares of 14 percent, cumulative, preferred stock with a par value of USD 12.

---

Source: Textbook Equity, https://learn.saylor.org/pluginfile.php/41429/mod_resource/content/15/AccountingPrinciples2.pdf
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 License.

Solution

Solution to demonstration problem A

VIOLET COMPANY
		Assumptions
Year	Dividends to	a	b
2005	Preferred	$30,000*	$30,000
	Common	55,000	55,000
2006	Preferred	30,000	30,000
	Common	22,500	22,500
2007	Preferred	7,500	7,500
	Common	-0-	-0-
2008	Preferred	15,000	15,000
	Common	-0-	-0-
2009	Preferred	67,500†	30,000‡
	Common	-0-	37,500

* 4,000 shares X $125 X 0.06 = $30,000
† $30,000 + $22,500 preferred dividend missed in 2007 + $15,000 preferred dividend missed in 2008.
‡ Only the basic $30,000 dividend is paid because the stock is noncumulative.

Solution to demonstration problem B

a. (1)

Cash (+A)	1,200,000
Common Stock (+SE)		300,000
Paid-In Capital in Excess of Par Value – Common Stock (+SE)		900,000
To record issuance of 50,000 shares at $24 per share.

(2)

Cash (+A)	13,500
Preferred Stock (+SE)		9,000
Paid-In Capital in Excess of Par Value  – Preferred (+SE)		4,500
To record the issuance of 750 shares for cash, at $18 per share.

(3)

Organization Costs (+A)	9,000
Common Stock (+SE)		6,000
Paid-In Capital in Excess of Par Value – Common (+SE)		3,000
To record the issuance of 1,000 shares in exchange for legal services.

b.

TERRIER COMPANY
Partial Balance Sheet
2009 June 30

Paid-in Capital:
Preferred stock – $12 par value, 14% cumulative; 1,000shares authorized; issued and outstanding, 750 shares	$ 9,000
Common stock – $6 par value per share; 100,000 shares authorized; issued and outstanding, 51,000 shares	306,000	$ 315,000
Paid-in capital in excess of par value:
From preferred stock issuances	$ 4,500
From common stock issuances	903,000	907,500
Total paid-in capital		$1,222,500

Self-test

True-false

Indicate whether each of the following statements is true or false.

1. A person may favor the corporate form of organization for a risky business enterprise primarily because a corporation's shares can be easily transferred.

2. In the event of corporate liquidation, stockholders whose stock is preferred as to assets are entitled to receive the par value of their shares before any amounts are distributed to creditors or common stockholders.

3. The par value of a share of capital stock is no indication of the market value or book value of the share of stock.

4. When 10,000 shares of USD 20 par value common stock are issued in payment for a parcel of land with a fair market value of USD 300,000, the Common Stock account is credited for USD 200,000, and the Paid-In Capital in Excess of Par Value – Common account is credited for USD 100,000.

Multiple-choice

Select the best answer for each of the following questions.

1. Which of the following is not an advantage of the corporate form of organization?

2. An arbitrary amount assigned by the board of directors to each share of a given class of no-par stock is:

3. Preferred stock that has dividends in arrears is:

4. Quinn Corporation issued 10,000 shares of USD 20 par value common stock at USD 50 per share. The amount that would be credited to Paid-In Capital in Excess of Par Value – Common is:

5. You are given the following information: Capital Stock, USD 80,000 (USD 80 par); Paid-In Capital in Excess of Par Value – Common, USD 200,000; and Retained Earnings, USD 400,000. Assuming only one class of stock, the book value per share is:

Answers

True-false

1. False. This is not the primary reason a person may prefer the corporate form of business organization in a situation involving considerable risk. The primary reason is that stockholders can lose only the amount of capital they have invested in a corporation.

2. False. The claims of the creditors rank ahead of the claims of the stockholders, even those stockholders whose stock is preferred as to assets.

3. True. Par value is simply the amount per share that is credited to the Capital Stock account for each share issued and is no indication of the market value or the book value of the stock.

4. True. When capital stock is issued for property or services, the transaction is recorded at the fair market value of (1) the property or services received or (2) the stock issued, whichever is more clearly evident.

Multiple-choice

1. c. This feature of corporations is one of the disadvantages of the corporate form of organization.

2. b. Stated value is an arbitrary amount assigned by the board of directors to each share of capital stock without a par value.

3. d. Dividends in arrears are cumulative unpaid dividends. Only cumulative preferred stock has dividends in arrears.

4. b. The amount credited to the Paid-In Capital in Excess of Par Value – Common is computed as follows:

5. a. The book value of common stock is computed as follows:

Total book value of stockholders' equity ($80,000 + $200,000 + $400,000)	$680,000
Total shares	÷1,000
Book value per share	$ 680