Summary Business Accounting

CHAPTER 13
CORPORATIONS: ORGANIZATION, STOCK
TRANSACTIONS, AND DIVIDENDS

DISCUSSION QUESTIONS

1. No. Common stock with a higher par is not necessarily a better investment than common
stock with a lower par because par is an amount assigned to the shares.
2. The broker is not correct. Corporations are not legally liable to pay dividends until the
dividends are declared. If the company that issued the preferred stock has operating losses,
it could omit dividends, first, on its common stock and, later, on its preferred stock.
3. The company may not have had enough cash on hand to pay a dividend on the common
stock, or resources may be needed for plant expansion, replacement of facilities, payment of
liabilities, etc.
4. a. No change.
b. Total equity is the same.
5. a. Current liability
b. Stockholders’ equity
6. a. It has no effect on revenue or expense.
b. It reduces stockholders’ equity by $3,000,000.
7. a. It has no effect on revenue.
b. It increases stockholders’ equity by $3,750,000.
8. The three classifications of restrictions on retained earnings are legal, contractual, and
discretionary. Restrictions are normally reported in the notes to the financial statements.
9. Such prior period adjustments should be reported as an adjustment to the beginning balance
of retained earnings.
10. The primary purpose of a stock split is to bring about a reduction in the market price per
share and thus to encourage more investors to buy the company’s shares.




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, CHAPTER Corporations: Organization, Stock Transactions, and

PRACTICE EXERCISES
PE 13–1A
Year 1 Year 2 Year 3
Amount distributed.................................................$30,000 $90,000 $125,000
Preferred dividend (40,000 shares)........................ 30,000 66,000* 48,000
Common dividend (50,000 shares)……………… $ 0 $24,000 $ 77,000

* $18,000 + $48,000

Dividends per share:
Preferred stock………………………………… $0.75 $1.65 $1.20
Common stock………………………………… None $0.48 $1.54


PE 13–1B
Year 1 Year 2 Year 3
Amount distributed……………………………… $21,600 $4,000 $100,800
Preferred dividend (16,000 shares)…………… 6,400 4,000 8,800*
Common dividend (80,000 shares)…………… $15,200 $ 0 $ 92,000

* $2,400 + $6,400

Dividends per share:
Preferred stock………………………………… $0.40 $0.25 $0.55
Common stock………………………………… $0.19 None $1.15


PE 13–2A
May 10 Cash (90,000 shares × $42) 3,780,000
Common Stock (90,000 shares × $30) 2,700,000
Paid-In Capital in Excess of Stated Value—
Common Stock [90,000 shares × ($42 – $30)] 1,080,000
Sept. 3 Cash 900,000
Preferred Stock (36,000 shares × $25) 900,000
Dec. 1 Cash (14,000 shares × $33) 462,000
Preferred Stock (14,000 shares × $25) 350,000
Paid-In Capital in Excess of Par—
Preferred Stock [14,000 shares × ($33 – $25)] 112,000




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, CHAPTER Corporations: Organization, Stock Transactions, and

PE 13–2B
Jan. 22 Cash 720,000
Common Stock (180,000 shares × $4) 720,000

Feb. 14 Cash 2,420,000
Preferred Stock (44,000 shares × $55) 2,420,000

Aug. 30 Cash (9,000 shares × $60) 540,000
Preferred Stock (9,000 shares × $55) 495,000
Paid-In Capital in Excess of Par—
Preferred Stock [9,000 shares × ($60 – $55)] 45,000


PE 13–3A
Aug. 1 Cash Dividends 1,250,000
Cash Dividends Payable 1,250,000

Oct. 15 No entry required.

Nov. 14 Cash Dividends Payable 1,250,000
Cash 1,250,000


PE 13–3B
Feb. 1 Cash Dividends 480,000
Cash Dividends Payable 480,000

Mar. 18 No entry required.

May 1 Cash Dividends Payable 480,000
Cash 480,000




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, CHAPTER Corporations: Organization, Stock Transactions, and

PE 13–4A
Feb. 15 Stock Dividends (250,000 shares × 2% × $52) 260,000
Stock Dividends Distributable (5,000 shares × $40) 200,000
Paid-In Capital in Excess of Par—
Common Stock [$5,000 shares × ($52 – $40)] 60,000

Mar. 27 No entry required.

May 2 Stock Dividends Distributable 200,000
Common Stock 200,000


PE 13–4B
June 8 Stock Dividends (820,000 shares × 5% × $63) 2,583,000
Stock Dividends Distributable (41,000 shares × $35) 1,435,000
Paid-In Capital in Excess of Par—
Common Stock [41,000 shares × ($63 – $35)] 1,148,000

July 13 No entry required.

Aug. 12 Stock Dividends Distributable 1,435,000
Common Stock 1,435,000


PE 13–5A
Jan. 31 Treasury Stock (22,500 shares × $31) 697,500
Cash 697,500

Apr. 20 Cash (12,800 shares × $40) 512,000
Treasury Stock (12,800 shares × $31) 396,800
Paid-In Capital from Sale of
Treasury Stock [12,800 shares × ($40 – $31)] 115,200

Oct. 4 Cash (9,700 shares × $28) 271,600
Paid-In Capital from Sale of
Treasury Stock [9,700 shares × ($31 – $28)] 29,100
Treasury Stock (9,700 shares × $31) 300,700




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