ACCT-1001EL Study Guide - Final Guide: Retained Earnings, Authorised Capital, Share Capital

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Chapter 11 - Shareholders’ Equity

Signiﬁcance of Shareholders Equity

Shares are purchased as part of their investment portfolios, directly by purchasing

shares or indirectly by investing in mutual funds.

Share Capital and Retained Earnings

SC — represents the amount that investors paid for the shares when they were initially

issued by the company

RE — represents the assets generated from the accumulated earnings of the company

that have not been distributed as dividends to shareholders.

Comprehensive Income

Accounting standards specify that certain gains and losses incurred by a company must

be presented in other comprehensive income rather than net income.

•Significance of Shareholders Equity

•Components of Shareholders Equity

•Share Capital

•Returned earnings

•Accumulated Other Comprehensive Income

•Contributed Surplus

•Shares – Authorized, Issued,

•Treasury

•Major classes, Preferred, Common

•Paying dividends

•Must have the cash and retained earnings

•Key dates

•Date of declaration

•Date of record (date that the company uses

to determine ownership for dividend

payment)

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Shares are purchased as part of their investment portfolios, directly by purchasing shares or indirectly by investing in mutual funds. Sc represents the amount that investors paid for the shares when they were initially issued by the company. Re represents the assets generated from the accumulated earnings of the company that have not been distributed as dividends to shareholders. Analysts use nancial statements to help them evaluate corporate performance an the risks related to investment or lending decisions involving the company. Providing signals about nancial health, cash ows and operating ef ciency. An investment analyst or stockbroker may undertake an analysis in order to make a recommendation to clients to buy, sell, or continue to hold shares of a particular company. A commercial leader may undertake an analysis to assess the creditworthiness of a loan applicant or analyze the nancial statements of an existing borrower to determine whether they have complied with any loan covenants.

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Common Stock Issuance, Treasury Stock, Preferred Stock,Dividends, Comprehensive Income, Disclosure. Castleline,Inc. reported the following shareholdersâ equity section as of thebeginning of the current year:

Stockholder's Equity

Contributed Capital:
Common Stock, $1 Par Value, 3,850,000 shares authorized,905,000 shares issued, and 821,500 shares outstanding	$905,000
Additional Paid-in Capital in Excess of Par-Common	22,625,000
Total Contributed Capital:	$23,530,000
Retained Earnings:	$8,957,450
Accumulated Other Comprehensive Income	1,057,600
Less: Treasury Stock (83,500 common stock shares at cost)	(1,670,000)
Total Stockholders Equity:	$31,875,050

During the current year, Castleline engaged in the followingtransactions affecting the stockholdersâ equity section of itscurrent balance sheet.

Issued 400,000 shares of its $1 par value common stock at $31per share. The underwriter charged a 3% fee for issuing the shares.The stock issue costs are not capitalized.

Issued 500,000 shares of $10 par value 6% preferred stock(2,550,000 authorized) at $40 per share. These shares wereprivately placed and Castleline did not pay stock issue costs.

Purchased 220,000 shares of common stock at $32 per share.

Declared a $450,000 dividend for the first half of the year.(The declarations should be recorded separately for the common andthe preferred shares.)

Sold 105,000 of the treasury shares at $44 per share. (The83,500 treasury shares on hand at the beginning of the year areconsidered sold first. The company paid $20 per share for theseshares of treasury stock).

Paid the cash dividends.

Reported net income of $3,180,500 for the current year.

In addition to the net income, Castleline incurred an $801,000unrealized loss on an available-for-sale investment.

Declared a $450,000 cash dividend for the second half of theyear. (The declarations should be recorded separately for thecommon and the preferred shares.)

Closed out all dividends and other comprehensive incomeaccounts.

Required Â»

Prepare all journal entries required to record the transactionslisted above.

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Problem 18-12 Various shareholders' equity topics; comprehensive[LO18-1, 18-4, 18-5, 18-6, 18-7, 18-8]

Part A

In late 2015, the Nicklaus Corporation was formed. The corporatecharter authorizes the issuance of 5,000,000 shares of common stockcarrying a $1 par value, and 1,000,000 shares of $5 par value,noncumulative, nonparticipating preferred stock. On January 2,2016, 3,000,000 shares of the common stock are issued in exchangefor cash at an average price of $15 per share. Also on January 2,all 1,000,000 shares of preferred stock are issued at $30 pershare.

Required:

1.	Prepare journal entries to record these transactions.(If no entry is required for a particular transaction,select "No journal entry required" in the first accountfield.)

2.	Prepare the shareholders' equity section of the Nicklaus balancesheet as of March 31, 2016. (Assume net income for the firstquarter 2016 was $1,500,000.)

Part B
During 2016, the Nicklaus Corporation participatedin three treasury stock transactions:

a.	On June 30, 2016, the corporation reacquires 190,000 shares forthe treasury at a price of $17 per share.
b.	On July 31, 2016, 45,000 treasury shares are reissued at $20per share.
c.	On September 30, 2016, 45,000 treasury shares are reissued at$15 per share.

Required:

1.	Prepare journal entries to record these transactions.(If no entry is required for a transaction/event, select"No journal entry required" in the first accountfield.)

2.	Prepare the Nicklaus Corporation shareholders' equity section asit would appear in a balance sheet prepared at September 30, 2016.(Assume net income for the second and third quarter was$2,950,000.)

Part C

On October 1, 2016, Nicklaus Corporation receives permission toreplace its $1 par value common stock (5,000,000 shares authorized,3,000,000 shares issued, and 2,900,000 shares outstanding) with anew common stock issue having a $.50 par value. Since the new parvalue is one-half the amount of the old, this represents a 2-for-1stock split. That is, the shareholders will receive two shares ofthe $.50 par stock in exchange for each share of the $1 par stockthey own. The $1 par stock will be collected and destroyed by theissuing corporation.

On November 1, 2016, the NicklausCorporation declares a $0.13 per share cash dividend on commonstock and a $0.30 per share cash dividend on preferred stock.Payment is scheduled for December 1, 2016, to shareholders ofrecord on November 15, 2016.

On December 2, 2016, the NicklausCorporation declares a 1% stock dividend payable on December 28,2016, to shareholders of record on December 14. At the date ofdeclaration, the common stock was selling in the open market at $15per share. The dividend will result in 58,000 (0.01 Ã 5,800,000)additional shares being issued to shareholders.

Required:

Prepare journal entries to record the declaration and payment ofthese stock and cash dividends. (If no entry is requiredfor a transaction/event, select "No journal entry required" in thefirst account field.)

1.Record the entry for a 2-for-1 stock split.

2.Record declaration of cash dividend for common shares andpreferred shares.

3.Record the entry on date of record.

4.Record payment of cash dividend for common shares andpreferred shares.

5.Record declaration of common stock dividend.

6.Record distribution of common stock dividend.

2.	Prepare the December 31, 2016, shareholders' equity section ofthe balance sheet for the Nicklaus Corporation. (Assume net incomefor the fourth quarter was $2,450,000.)

3.	Prepare a statement of shareholders' equity for NicklausCorporation for 2016. (Amounts to be deducted should beindicated with a minus sign. Enter your answers inthousands.)

Complex Balance Sheet

Presented below is the unaudited balance sheet as of December31, 2016, prepared by Zeus Manufacturing Corporationâsbookkeeper.

Zeus Manufacturing Corporation Balance Sheet for the Year Ended December 31, 2016
Assets		Liabilities and Shareholders' Equity
Cash	$225,000	Accounts payable	$133,800
Accounts receivable (net)	345,700	Mortgage payable	900,000
Inventories	560,000	Notes payable	500,000
Prepaid income taxes	40,000	Lawsuit liability	80,000
Investments	57,700	Income taxes payable	61,200
Land	450,000	Deferred tax liability	28,000
Building	1,750,000	Accumulated depreciation	420,000
Machinery and equipment	1,964,000	Total Liabilities	$2,123,000
Goodwill	37,000	Common stock, $50 par; 40,000 shares issued	$2,231,000
Total Assets	$5,429,400	Retained earnings	1,075,400
		Total Shareholders' Equity	$3,306,400
		Total Liabilities and Shareholders' Equity	$5,429,400

Your company has been engaged to perform an audit, during whichyou discover the following information:

Checks totaling $14,000 in payment of accounts payable weremailed on December 31, 2016, but were not recorded until 2017. Latein December 2016, the bank returned a customerâs $2,000 checkmarked "NSF," but no entry was made. Cash includes $100,000restricted for building purposes.

Included in accounts receivable is a $30,000 note due onDecember 31, 2019, from Zeusâs president.

During 2016, Zeus purchased 500 shares of common stock of amajor corporation that supplies Zeus with raw materials. Total costof this stock was $51,300, and fair value on December 31, 2016, was$47,000. The decline in fair value is considered temporary. Zeusplans to hold these shares indefinitely.

Treasury stock was recorded at cost when Zeus purchased 200 ofits own shares for $32 per share in May 2016. This amount isincluded in investments.

On December 31, 2016, Zeus borrowed $500,000 from a bank inexchange for a 10% note payable, maturing December 31, 2021. Equalprincipal payments are due December 31 of each year beginning in2017. This note is collateralized by a $250,000 tract of landacquired as a potential future building site, which is included inland.

The mortgage payable requires $50,000 principal payments, plusinterest, at the end of each month. Payments were made on January31 and February 28, 2017. The balance of this mortgage was due June30, 2017. On March 1, 2017, prior to issuance of the auditedfinancial statements, Zeus consummated a noncancelable agreementwith the lender to refinance this mortgage. The new terms require$100,000 annual principal payments, plus interest, on February 28of each year, beginning in 2018. The final payment is due February28, 2025.

The lawsuit liability will be paid in 2017.

Of the total deferred tax liability, $5,000 is considered acurrent liability.

The current income tax expense reported in Zeusâs 2016 incomestatement was $61,200.

The company was authorized to issue 100,000 shares of $50 parvalue common stock.

Required:

Prepare a corrected classified balance sheet as of December 31,2016.

Zeus Manufacturing Corporation Balance Sheet December 31, 2016
Assets
Current Assets:
Cash		$
Accounts receivable (net)
Inventories
Total current assets			$
Long-Term investment, at fair value
Property, Plant, and Equipment (at cost):
Land		$
Building	$
Machinery and equipment
Total
Less: Accumulated depreciation
Total property, plant, and equipment
Intangible Asset:
Goodwill
Other Assets:
Cash restricted for building purposes		$
Officer's note receivable
Land held for future building site
Total Assets			$
Liabilities
Current Liabilities:
Accounts payable		$
Current installments of long-term debt
Lawsuit liability
Income taxes payable
Deferred tax liability
Total current liabilities			$
Long-Term Debt:
Mortgage payable		$
Notes payable
Deferred tax liability
Total long-term debt
Total Liabilities			$
Shareholders' Equity
Contributed Capital:
Common stock, $50 par value		$
Additional paid-in capital
Total paid-in capital		$
Retained earnings
Accumulated Other Comprehensive Loss:
Unrealized decrease in value of long-term investment
Total		$
Less: Cost of treasury stock
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity			$

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ACCT-1001EL Study Guide - Final Guide: Retained Earnings, Authorised Capital, Share Capital

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