Concept explainers
(a)
Cash dividends: The amount of cash provided by a corporation out of its distributable profits to its shareholders as a return for the amount invested by them is referred as cash dividends.
Stock Dividends: It refers to the payment of dividends by a company to its existing shareholders, in the form of additional shares rather than cash. Stock dividends are paid, when there is inadequate cash available in the company.
To Journalize: the payment of cash dividends and stock dividends for Corporation T.
(a)
Answer to Problem 11.8AP
Record the
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2017 | |||||
January | 15 | Cash Dividends (1) | 35,000 | ||
Dividends Payable | 35,000 | ||||
(To record cash dividends declared) | |||||
February | 15 | Dividends Payable | 35,000 | ||
Cash | 35,000 | ||||
(To record payment of cash dividends) | |||||
April | 15 | Stock Dividends (3) | 98,000 | ||
Common Stock Dividends Distributable (4) | 70,000 | ||||
Paid-in Capital in excess of Par Value-Common stock (5) | 28,000 | ||||
(To record declaration of stock dividends) | |||||
May | 15 | Common Stock Dividends Distributable | 70,000 | ||
Common Stock | 70,000 | ||||
(To record distribution of stock dividends) | |||||
December | 1 | Cash Dividends (6) | 46,200 | ||
Dividends Payable | 46,200 | ||||
(To record declaration of dividends) | |||||
December | 31 | Income Summary | 400,000 | ||
Retained Earnings | 400,000 | ||||
(To record closing of net income to income summary account) | |||||
December | 31 | Retained Earnings | 98,000 | ||
Stock Dividends | 98,000 | ||||
(To record closing of stock dividends to retained earnings account) | |||||
December | 31 | Retained Earnings | 81,200 | ||
Cash Dividends (7) | 81,200 | ||||
((To record closing of cash dividends to retained earnings account) |
Table (1)
Working Notes:
Compute the amount of cash dividends payable to common stockholders.
Compute the stock dividends shares.
Compute the stock dividends amount payable to common stockholders.
Compute common stock dividends distributable value.
Compute paid-in capital in excess of par value-common stock.
Compute the amount of cash dividends payable to common stockholders.
Compute the total amount of cash dividends.
Explanation of Solution
January 15: Declared cash dividends at $0.50 per share.
- Cash Dividends is a temporary stockholders’ equity account. The account is debited as the cash dividends are declared and eventually be transferred to Retained Earnings account. Therefore, debit Cash Dividends account with $35,000.
- Dividends Payable is a liability account and the amount owed is increased. Therefore, credit Dividends Payable account with $35,000.
February 15: Paid the cash dividends declared.
- Dividends Payable is a liability account and the amount is decreased because the dividends owed are paid off. Therefore, debit Dividends Payable with $35,000.
- Cash is an asset account and the amount is decreased because cash is paid. Therefore, credit Cash account with $35,000.
April 15: Declared 10% stock dividends.
- Stock Dividends is a contra-stockholders’ equity account which decreases the stockholders’ equity amount. Therefore, debit Stock Dividends account with $98,000.
- Common Stock Dividends Distributable is a stockholders’ equity account and the amount has increased due to the declaration of stock dividends. Therefore, credit Common Stock Dividends Distributable account with $70,000.
- Paid-in Capital in Excess of Par Value is a stockholders’ equity account and the amount has increased due to increase in capital excess of common stock value. Therefore, credit Paid-in Capital in Excess of Par Value account with $28,000.
May 15: Distribution of stock dividends declared.
- Common Stock Dividends Distributable is a stockholders’ equity account and the amount has decreased due to transfer of Common Stock Dividends Distributable amount to Common Stock account. Therefore, debit Common Stock Dividends Distributable account with $70,000.
- Common Stock is stockholders’ equity account and the amount has increased. Therefore, credit Common Stock account with $70,000.
December 1: Declared cash dividends at $0.60 per share.
- Cash Dividends is a temporary stockholders’ equity account. The account is debited as the cash dividends are declared and eventually be transferred to Retained Earnings account. Therefore, debit Cash Dividends account with $46,200.
- Dividends Payable is a liability account and the amount owed is increased. Therefore, credit Dividends Payable account with $46,200.
December 31: Transfer of net income to retained earnings
- Income Summary is a clearing account or temporary account used to close revenues and expenses to Retained Earnings account. Therefore, debit Income Summary account with $400,000.
- Since Retained Earnings account’s amount has increased due to closing of Income Summary account to Retained Earnings account, stockholders’ equity amount has increased. Therefore, credit Retained Earnings account with $400,000.
December 31: Transfer of cash dividends to retained earnings
- Retained Earnings is a stockholders’ equity account. The amount has decreased because Cash dividends account is closed to Retained Earnings account. Therefore, debit Retained Earnings account with $81,200.
- Cash Dividends is a temporary stockholders’ equity account. The account is credited as the cash dividends are transferred to Retained Earnings account to eventually close Cash Dividends account. Therefore, credit Cash Dividends account with $81,200.
December 31: Transfer of stock dividends to retained earnings
- Retained Earnings is a stockholders’ equity account. The amount has decreased because Stock dividends account is closed to Retained Earnings account. Therefore, debit Retained Earnings account with $98,000.
- Stock Dividends is a contra capital stockholders’ equity account. The account is credited as the stock dividends are transferred to Retained Earnings account to eventually close Stock Dividends account. Therefore, credit Stock Dividends account with $98,000.
(b)
To
(b)
Explanation of Solution
T Accounts: T- accounts are prepared for all the business transactions. First, journal entries are passed and then transferred to the respective ledger accounts where they are recorded, and summarized in either side of the ‘T’ format. It is divided into two parts by a vertical line, that is, the left side and the right side. The left side of the T-account is known as the debit side, and the right side of the T-account is known as the credit side. The account name appears on the top of the T-account.
Common stock account is a component of stockholders’ equity account with a normal credit balance.
Common Stock Account | ||||||
Date | Details | Debit ($) | Date | Details | Credit ($) | |
December 31, 2017 | Closing Balance | 770,000 | January 1 | Balance | 700,000 | |
May 15 | Common stock dividends distributable | 70,000 | ||||
Total | 770,000 | Total | 770,000 | |||
January 1, 2018 | Opening Balance | 770,000 |
Table (2)
Retained earnings account is a component of stockholders’ equity account with a normal credit balance.
Retained Earnings Account | ||||||
Date | Details | Debit ($) | Date | Details | Credit ($) | |
December 31 | Stock dividends | 98,000 | January 1 | Balance | 620,000 | |
December 31 | Cash dividends | 81,200 | December 31 | Income Summary | 400,000 | |
December 31,2017 | Closing Balance | 840,800 | ||||
Total | 1,020,000 | Total | 1,020,000 | |||
January 1, 2018 | Opening Balance | $840,000 |
Table (3)
Paid-in Capital in Excess of Par Value–Common Stock account is a component of stockholders’ equity account with a normal credit balance.
Paid-in Capital in Excess of Par Value–Common Stock Account | ||||||
Date | Details | Debit ($) | Date | Details | Credit ($) | |
December 31, 2017 | Closing Balance | 528,000 | January 1 | Balance | 500,000 | |
April 15 | Stock Dividends | 28,000 | ||||
Total | $528,000 | Total | $528,000 | |||
January 1, 2018 | Opening Balance | $528,000 |
Table (4)
Common Stock Dividends Distributable account is a contra-component of stockholders’ equity account with a normal credit balance.
Common Stock Dividends Distributable Account | ||||||
Date | Details | Debit ($) | Date | Details | Credit ($) | |
May 15 | Common Stock | 70,000 | April 15 | Stock Dividends | 70,000 | |
Total | $70,000 | Total | $70,000 |
Table (5)
Cash dividends account is a component of stockholders’ equity account that is closed to retained earnings.
Cash Dividends Account | ||||||
Date | Details | Debit ($) | Date | Details | Credit ($) | |
January 15 | Dividends payable | 35,000 | December 31 | Retained Earnings | $81,200 | |
December 1 | Dividends payable | 46,200 | ||||
Total | 81,200 | Total | 81,200 |
Table (6)
Stock dividends account is a component of stockholders’ equity account that is closed to retained earnings.
Stock Dividends Account | ||||||
Date | Details | Debit ($) | Date | Details | Credit ($) | |
April 15 | Common Stock Dividends Distributable | 70,000 | December 31 | Retained Earnings | $98,000 | |
April 15 | Paid-in Capital in excess of par value-common stock | 28,000 | ||||
Total | 98,000 | Total | 98,000 |
Table (7)
(c)
To Prepare: the stockholders’ equity section of balance sheet for Corporation T as of December 31, 2017.
(c)
Explanation of Solution
Prepare the stockholders’ equity section of balance sheet for Corporation T as of December 31, 2017.
Corporation T | ||
Balance Sheet (Partial) | ||
December 31, 2017 | ||
Particulars | Amount ($) | Amount ($) |
Stockholders’ equity | ||
Paid-in Capital | ||
Capital stock | ||
Common stock, $10 par value, 77,000 shares issued and outstanding | 770,000 | |
Total capital stock | $770,000 | |
Additional paid-in capital | ||
Paid-in capital in excess of stated value–Common stock | 528,000 | |
Total additional paid-in capital | 528,000 | |
Total paid-in capital | 1,298,000 | |
Retained earnings | 840,800 | |
Total paid-in capital and retained earnings | 2,647,500 | |
Less: | (0) | |
Total stockholders’ equity | $2,138,800 |
Table (8)
(d)
To Calculate: the payout ratio for Corporation T.
(d)
Answer to Problem 11.8AP
Calculate the payout ratio for Corporation T for 2017.
Explanation of Solution
Payout Ratio: It refers to a measure that evaluates the amount of dividends paid to the shareholders out of the net income earned by a corporation. It is generally expressed as a percentage. The formula to calculate the payout ratio is as follows:
Therefore, the Payout ratio for Corporation T for 2017 is 20.3%.
To Calculate: the return on common stockholders’ equity for Corporation T.
Answer to Problem 11.8AP
Calculate the return on common stockholders’ equity for Corporation T:
Working notes:
Compute beginning stockholders’ equity.
Compute average stockholders’ equity.
Explanation of Solution
Return on common stockholders’ equity ratio: It is a profitability ratio that measures the profit generating ability of the company from the invested money of the shareholders. The formula to calculate the return on common stockholders’ equity is as follows:
Therefore, the Return on Common Stockholders’ equity for Corporation T is 20.2%
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Chapter 11 Solutions
Financial Accounting: Tools for Business Decision Making, 8th Edition
- Selected transactions completed by Equinox Products Inc. during the fiscal year ended December 31, 2016, were as follows: a. Issued 15,000 shares of 0 par common stock at 0, receiving cash. b. Issued 4,000 shares of 80 par preferred 5% stock at 100, receiving cash. c. Issued 500,000 of 10-year, 5% bonds at 104, with interest payable semiannually. d. Declared a quarterly dividend of 0.50 per share on common stock and 1.00 per share on preferred stock. On the date of record, 100,000 shares of common stock were outstanding, no treasury shares were held, and 20,000 shares of preferred stock were outstanding. e. Paid the cash dividends declared in (d). f. Purchased 7,500 shares of Solstice Corp. at 40 per share, plus a 150 brokerage commission. The investment is classified as an available-for-sale investment. g. Purchased 8,000 shares of treasury common stock at 33 per share. h. Purchased 40,000 shares of Pinkberry Co. stock directly from the founders for 24 per share. Pinkberry has 125,000 shares issued and outstanding. Equinox Products Inc. treated the investment as an equity method investment. i. Declared a 1.00 quarterly cash dividend per share on preferred stock. On the date of record, 20,000 shares of preferred stock had been issued. j. Paid the cash dividends to the preferred stockholders. k. Received 27,500 dividend from Pinkberry Co. investment in (h). l. Purchased 90,000 of Dream Inc. 10-year, 5% bonds, directly from the issuing company, at their face amount plus accrued interest of 375. The bonds are classified as a held- to-maturitv long-term investment. m. Sold, at 38 per share, 2,600 shares of treasury common stock purchased in (g). n. Received a dividend of 0.60 per share from the Solstice Corp. investment in (f). o. Sold 1,000 shares of Solstice Corp. at 545, including commission. p. Recorded the payment of semiannual interest on the bonds issued in (c) and the amortization of the premium for six months. The amortization is determined using the straight-line method, q. Accrued interest for three months on the Dream Inc. bonds purchased in (1). r. Pinkberry Co. recorded total earnings of 240,000. Equinox Products recorded equity earnings for its share of Pinkberry Co. net income. s. The fair value for Solstice Corp. stock was 39.02 per share on December 31, 2016. The investment is adjusted to fair value, using a valuation allowance account. Assume Valuation Allowance for Available-for-Sale Investments had a beginning balance of zero. Instructions Journalize the selected transactions. After all of the transactions for the year ended December 31, 2016, had been posted [including the transactions recorded in part (1) and all adjusting entries], the data that follows were taken from the records of Equinox Products Inc. a. Prepare a multiple-step income statement for the year ended December 31, 2016, concluding with earnings per share. In computing earnings per share, assume that the average number of common shares outstanding was 100,000 and preferred dividends were 100,000. (Round earnings per share to the nearest cent.) b. Prepare a retained earnings statement for the year ended December 31, 2016. c. Prepare a balance sheet in report form as of December 31, 2016. Income statement data: Advertising expense 150,000 Cost of merchandise sold 3,700,000 Delivery expense 30,000 Depreciation expense -office buildings and equipment 30,000 Depreciation expensestore buildings and equipment 100,000 Dividend revenue 4,500 Gain on sale of investment 4,980 Income from Pinkberry Co. investment 76,800 Income tax expense 140,500 Interest expense 21,000 Interest revenue 2,720 Miscellaneous administrative expense 7.500 Miscellaneous selling expense 14,000 Office rent expense 50,000 Office salaries expense 170,000 Office supplies expense 10,000 Sales 5,254,000 Sales commissions 185,000 Sales salaries expense 385,000 Store supplies expense 21,000 Retained earnings and balance sheet data: Accounts payable 194,300 Accounts receivable 545,000 Accumulated depreciationoffice buildings and equipment 1,580,000 Accumulated depreciationstore buildings and equipment 4,126,000 Allowance for doubtful accounts 8,450 Available for sale investments (at cost) 260,130 Bonds payable. 5%. due 2024 500,000 Cash 246,000 Common stock, 20 par (400,000 shares authorized; 100,000 shares issued. 94,600 outstanding) 2,000,000 Dividends: Cash dividends for common stock 155,120 Cash dividends for preferred stock 100,000 Goodwill 500,000 Income tax payable 44,000 Interest receivable 1,125 Investment in Pinkberry Co. stock (equity method) 1,009,300 Investment in Dream Inc. bonds (long term) 90,000 Merchandise inventory [December 31, 2016). at lower of cost (FIFO) or market 778,000 Office buildings and equipment 4.320,000 Paid-in capital from sale of treasury stock 13,000 Excess of issue price over parcommon stock 886,800 Excess of issue price over parpreferred stock 150,000 Preferred 5% stock. 80 par (30,000 shares authorized; 20,000 shares issued] 1,600,000 Premium on bonds payable 19,000 Prepaid expenses 27,400 Retained earnings, January 1, 2016 9,319,725 Store buildings and equipment 12,560,000 Treasury stock (5,400 shares of common stock at cost of 33 per share) 178,200 Unrealized gain (loss) on available for sale investments (6,500) Valuation allowance for available for sale investments (6,500)arrow_forwardChen Corporation began 2012 with the following stockholders equity balances: The following selected transactions and events occurred during the year: a. Issued 10,000 shares of common stock for 60,000. b. Purchased 1,200 shares of treasury stock for 4,800. c. Sold 2,000 shares of treasury stock for 11,000. d. Generated net income of 94,000. e. Declared and paid the full years dividend on preferred stock and a dividend of 1.00 per share on common stock outstanding at the end of the year. Chen Corporation maintains several paid-in capital accounts (Paid-in Capital in Excess of Par, Paid-in Capital from Treasury Stock, etc.) in its ledger, but combines them all as Additional paid-in capital when preparing financial statements. Open the file STOCKEQ from the website for this book at cengagebrain.com. Enter the formulas in the appropriate cells on the worksheet. Then fill in the columns to show the effect of each of the selected transactions and events listed earlier. Enter your name in cell A1. Save the completed worksheet as STOCKEQ2. Print the worksheet. Also print your formulas. Check figure: Total stockholders equity balance at 12/31/12 (cell G21). 398,800.arrow_forwardChen Corporation began 2012 with the following stockholders equity balances: The following selected transactions and events occurred during the year: a. Issued 10,000 shares of common stock for 60,000. b. Purchased 1,200 shares of treasury stock for 4,800. c. Sold 2,000 shares of treasury stock for 11,000. d. Generated net income of 94,000. e. Declared and paid the full years dividend on preferred stock and a dividend of 1.00 per share on common stock outstanding at the end of the year. Chen Corporation maintains several paid-in capital accounts (Paid-in Capital in Excess of Par, Paid-in Capital from Treasury Stock, etc.) in its ledger, but combines them all as Additional paid-in capital when preparing financial statements. In the space provided below, prepare the stockholders equity section of Chen Corporations balance sheet as of December 31, 2012. Use proper headings and provide full disclosure of all appropriate information. Chens corporate charter authorizes the issuance of 1,000 shares of preferred stock and 100,000 shares of common stock.arrow_forward
- Anoka Company reported the following selected items in the shareholders equity section of its balance sheet on December 31, 2019, and 2020: In addition, it listed the following selected pretax items as a December 31, 2019 and 2020: The preferred shares were outstanding during all of 2019 and 2020; annual dividends were declared and paid in each year. During 2019, 2,000 common shares were sold for cash on October 4. During 2020, a 20% stock dividend was declared and issued in early May. At the end of 2019 and 2020, the common stock was selling for 25.75 and 32.20, respectively. The company is subject to a 30% income tax rate. Required: 1. Prepare the comparative 2019 and 2020 income statements (multiple-step), and the related note that would appear in Anokas 2020 annual report. 2. Next Level Compute the price/earnings ratio for 2020. How does this compare to 2019? Why is it different?arrow_forwardLyon Company shows the following condensed income statement information for the year ended December 31, 2019: Lyon declared dividends of 6,000 on preferred stock and 17,280 on common stock. At the beginning of 2019, 10,000 shares of common stock were outstanding. On May 1, 2019, the company issued 2,000 additional common shares, and on October 31, 2019, it issued a 20% stock dividend on its common stock. The preferred stock is not convertible. Required: 1. Compute the 2019 basic earnings per share. 2. Show the 2019 income statement disclosure of basic earnings per share. 3. Draft a related note to accompany the 2019 financial statements.arrow_forwardOn January 1, 2019, Kittson Company had a retained earnings balance of 218,600. It is subject to a 30% corporate income tax rate. During 2019, Kittson earned net income of 67,000, and the following events occurred: 1. Cash dividends of 3 per share on 4,000 shares of common stock were declared and paid. 2. A small stock dividend was declared and issued. The dividend consisted of 600 shares of 10 par common stock. On the date of declaration, the market price of the companys common stock was 36 per share. 3. The company recalled and retired 500 shares of 100 par preferred stock. The call price was 125 per share; the stock had originally been issued for 110 per share. 4. The company discovered that it had erroneously recorded depreciation expense of 45,000 in 2018 for both financial reporting and income tax reporting. The correct depreciation for 2018 should have been 20,000. This is considered a material error. Required: 1. Prepare journal entries to record Items 1 through 4. 2. Prepare Kittsons statement of retained earnings for the year ended December 31, 2019.arrow_forward
- Chen Corporation began 2012 with the following stockholders equity balances: The following selected transactions and events occurred during the year: a. Issued 10,000 shares of common stock for 60,000. b. Purchased 1,200 shares of treasury stock for 4,800. c. Sold 2,000 shares of treasury stock for 11,000. d. Generated net income of 94,000. e. Declared and paid the full years dividend on preferred stock and a dividend of 1.00 per share on common stock outstanding at the end of the year. Chen Corporation maintains several paid-in capital accounts (Paid-in Capital in Excess of Par, Paid-in Capital from Treasury Stock, etc.) in its ledger, but combines them all as Additional paid-in capital when preparing financial statements.arrow_forwardThe following selected transactions and events occurred during 2013: a. Issued 200 shares of preferred stock for 20,000. b. Sold 800 shares of treasury stock for 2,800. c. Declared and issued a 4% common stock dividend. The market value on the date of declaration was 5 per share. d. Generated a net loss for the year of 16,000. e. Declared and paid the full years dividend on all the preferred stock and a dividend of 15 per share on common stock outstanding at the end of the year. Enter beginning balances for 2013 on STOCKEQ2. Then erase all 2012 entries and enter the transactions for 2013. Save the results as STOCKEQ4. Print the results.arrow_forwardMonona Company reported net income of 29,975 for 2019. During all of 2019, Monona had 1,000 shares of 10%, 100 par, nonconvertible preferred stock outstanding, on which the years dividends had been paid. At the beginning of 2019, the company had 7,000 shares of common stock outstanding. On April 2, 2019, the company issued another 2,000 shares of common stock so that 9,000 common shares were outstanding at the end of 2019. Common dividends of 17,000 had been paid during 2019. At the end of 2019, the market price per share of common stock was 17.50. Required: 1. Compute Mononas basic earnings per share for 2019. 2. Compute the price/earnings ratio for 2019.arrow_forward
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