Practice Problems: Corporations

Site: Saylor Academy
Course: BUS103: Introduction to Financial Accounting
Book: Practice Problems: Corporations
Printed by: Guest user
Date: Tuesday, February 20, 2024, 5:00 PM

Description

Complete the demo problems, and self test true/false and multiple choice questions. Check your answers at the end after you finish.

Demonstration problem

Demonstration problem A Wylie Corporation has outstanding 10,000 shares of USD 150 par value common stock.

Prepare the entries to record:

a. The declaration of a cash dividend of USD 1.50 per share.

b. The declaration of a stock dividend of 10 percent at a time when the market value per share is USD 185.

c. The declaration of a stock dividend of 40 percent at a time when the market value per share is USD 195.


Demonstration problem B Following are selected transactions of Brackett Company:

  • The company reacquired 200 shares of its own USD 100 par value common stock, previously issued at USD 105 per share, for USD 20,600.

  • Fifty of the treasury shares were reissued at USD 110 per share, cash.

  • Seventy of the treasury shares were reissued at USD 95 per share, cash.

  • Stockholders of the corporation donated 100 shares of their common stock to the company.

  • The 100 shares of treasury stock received by donation were reissued for USD 9,000.

  • Prepare the necessary journal entries to record these transactions.


Demonstration problem C Selected account balances of Nexis Corporation at 2010 December 31, are:

Common stock (nor par value; 100,000 shares authorized, issued, and outstanding; stated value of USD 20 per share USD 2,000,000
Retained earnings 570,000
Dividends payable (in cash, declared December 15 on preferred stock) 16,000
Preferred stock (8 percent, par value USD 200; 1,000 shares authorized, issued, and outstanding) 200,000
Paid-In capital from donation of plant site 100,000
Paid-in capital in excess of par value – preferred 8,000


Present in good form the stockholders' equity section of the balance sheet.


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

Solution

Solution to demonstration problem A

a.

Retained earnings (or dividends) (-SE) 15,000
Dividends payable (+L) 15,000
To record declaration of a cash dividend.


b.

Retained earnings (or stock dividends) (1,000 shares x $185) (-SE) 185,000
Stock dividend distributable – Common (1,000 shares x $150) (+L) 150,000
Paid-in capital – Stock dividends(+SE) 35,000
To record declaration of a small stock dividend (10%).


c.

Retained earnings (or stock dividends) (4,000 shares x $150) (-SE) 600,000
Stock dividend distributable – Common (+L) 600,000
To record declaration of a large stock dividend (40%).


Solution to demonstration problem B

1.

Treasury stock (-SE) 20,600
Cash (-A) 20,600
Acquired 200 shares at $20,600 ($103 per share).


2.

Cash (50 shares x $110) (+A) 5,500
Treasury stock – Common (50 shares x $103) (+SE) 5,150
Paid-in capital – common treasury stock transactions (+SE) 350
Reissued 50 shares at $110 per share; cost is $5,150 350


3.

Cash (70 shares x $95) (+A) 6,650
Paid-in capital – Common treasury stock transactions (50 shares x $7) (-SE) 350
Retained earnings (-SE) 210
Treasury stock – common (70 shares x $103) (+SE) 7,210
Reissued 70 shares at $95 per share; cost is $7,210.


4. Stockholders donated 100 shares of common stock to the company. (Only memo entry is made.)

5.

Cash (+A) 9,000
Paid-in capital – Donations (100 shares x $90) (+SE)
9,000
Reissued donated shares at $90 per share.


Solution to demonstration problem C

Nexis Corporation
Partial balance sheet
2010 December 31

Stockholders' equity:
Paid-in capital:
Preferred stock – 8%, par value $200; 1,000 shares authorized, issued, and outstanding $200,000
Common stock – no par value, stated value of $20 per share; 100,000 shares authorized, issued, and outstanding 2,000,000
Paid-in capital from donation of plant site 100,000
Paid-in capital in excess of par value – preferred 8,000
Total paid-in capital $2,308,000
Retained earnings 570,000
Total stockholders' equity $2,878,000

Self-test

True-false

Indicate whether each of the following statements is true or false

1. The retained earnings balance of a corporation is part of its paid-in capital.

2. The purchase of treasury stock does not affect stockholders' equity.

3. Dividends are expenses since they decrease stockholders' equity.

4. A stock dividend reduces the retained earnings balance and permanently capitalizes the reduced portion of the retained earnings.

5. A retained earnings appropriation reduces the total stockholders' equity shown on the balance sheet.

6. Heavy frost damage suffered by a Florida citrus grower's orange trees would probably be reported as an extraordinary item.


Multiple-choice

Select the best answer for each of the following questions.

1. Which of the following is not included in paid-in capital?

a. Common Stock.

b. Paid-In Capital – Donations.

c. Stock Dividend Distributable.

d. Appropriation per Loan Agreement.


2. Bevins Company issued 10,000 shares of USD 20 par value common stock at USD 24 per share. Bevins reacquired 1,000 shares of its own stock at a cost of USD 30 per share. The entry to record the reacquisition is:

a.

Premium on Treasury Stock (-SE) 10,000
Treasury stock (-SE) 20,000
Cash (-A) 30,000


b.

Premium on Treasury Stock (-SE) 6,000
Treasury stock (-SE) 24,000
Cash (-A) 30,000


c.

Treasury Stock (-SE) 30,000
Cash (-A)
30,000


d.

Treasury stock (-SE) 20,000
Paid-In Capital – Treasury Stock Transactions (-SE) 10,000
Cash (-A) 30,000


3. If the company reissues 500 shares of the treasury stock in (2) for USD 36 per share, the entry is:

a.

Cash (+A) 18,000
Treasury Stock (+SE)
15,000
Paid-In Capital – Treasury Stock Transactions (+SE) 3,000


b.

Cash (+A) 18,000
Treasury Stock (+SE)
18,000


c.

Cash (+A) 18,000
Treasury Stock (+SE)
15,000
Retained earnings (+SE) 3,000


d.

Cash (+A) 18,000
Treasury Stock (+SE)
10,000
Retained earnings (+SE) 8,000


4. Treasury stock should be shown on the balance sheet as a:

a. Reduction of the corporation's stockholders' equity.

b. Current asset.

c. Current liability.

d. Investment asset.


5. An individual stockholder is entitled to receive any dividends declared on stock owned, provided the stock is held on the:

a. Date of declaration.

b. Date of record.

c. Date of payment.

d. Last day of a fiscal year.


6. ABC Corporation declared the regular quarterly dividend of USD 2 per share. ABC had issued 12,000 shares and subsequently reacquired 2,000 shares as treasury stock. What would be the total amount of the dividend?

a. USD 24,000.

b. USD 28,000.

c. USD 20,000.

d. USD 4,000.


7. Which item is not reported as a separate line item below income from continuing operations, net of tax effects, in the income statement?

a. Extraordinary items.

b. Prior period adjustments.

c. Discontinued operations.

d. Changes in accounting principle.

Answers

True-false

1. False. The paid-in capital of a corporation only includes capital contributed by stockholders or others. Thus, it does not include retained earnings.

2. False. The purchase of treasury stock reduces total stockholders' equity.

3. False. Dividends are distributions of earnings in the past and are not expenses.

4. True. A stock dividend permanently capitalizes a portion of retained earnings by

decreasing retained earnings and increasing paid-in capital by an equal amount.

5. False. The purpose of a retained earnings appropriation is to disclose that a portion of retained earnings is not available for cash dividends. Thus, such an appropriation does not reduce total stockholders' equity.

6. False. Such damage occurs too frequently to be considered nonrecurring.


Multiple-choice

1. d. Appropriation per Loan Agreement is part of retained earnings.

2. c. When treasury stock is reacquired, the stock is recorded at cost in a debit-balance stockholders' equity account, Treasury Stock.

3. a. The excess of the reissue price over the cost of treasury stock is recorded in the Paid-In Capital – Treasury Stock Transactions account.

4. a. Treasury stock is customarily shown as a deduction from total stockholders' equity.

5. b. The date of record determines who is to receive the dividends.

6. c. The total amount of dividends is computed as follows: Total Outstanding shares at declaration:

(12,000 – 2,000) shares 10,0000
Dividend per share X USD 2
Total dividend amount USD 20,000


7. b. Prior period adjustments are shown as adjustments to the opening balance of retained earnings on the statement of retained earnings.