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firms will decrease, in dollar terms. Before 1981, these changes were recognized as losses or
gains on the income statement. Multinational firms disliked this treatment because it added
volatility to reported earnings. The FASB changed the accounting rule, and now these
changes are reported as direct adjustments to equity on the balance sheet, insulating the in-
come statement from this aspect of foreign currency fluctuations.
Unrealized gains and losses on available-for-sale securities. As will be explained in Chapter 12,
available-for-sale securities are securities that a company purchased without intending to re-
sell them immediately but also not necessarily planning to hold them forever. When the FASB
was considering requiring securities to be reported at their market values on the balance sheet,
companies complained about the income volatility that would be caused by recognizing these
changes as gains or losses on the income statement. The FASB made the standard more ac-
ceptable to businesses by allowing unrealized gains and losses on available-for-sale securities
to bypass the income statement and go straight to the equity section of the balance sheet.
The hodgepodge of direct equity adjustments described above is conceptually unsatisfying.
These adjustments have arisen on a case-by-case basis as part of the FASB s effort to establish ac-
accumulated other compre- counting standards that are accepted by the business community. As mentioned, many business-
hensive income Certain people are opposed to including these categories on the income statement because, they say, the
market-related gains and
income statement would become cluttered with gains and losses from market value changes, dis-
losses that are not included
tracting from the purpose of the income statement, which is to focus on reporting profits from
in the computation of net
the activities of the business. The compromise that allows market values in the balance sheet while
income; for example, for-
eign currency translation keeping the income statement uncluttered is the creation of a separate category of equity called
adjustments and unrealized accumulated other comprehensive income. Accumulated other comprehensive income is com-
gains or losses on invest-
posed of certain market-related gains and losses that are not included in the computation of net
ments.
income. It is important to remember that accumulated other comprehensive income is not in-
statement of comprehen- come at all, but an equity category that summarizes the changes in equity that result during the
sive income A statement period from market-related increases and decreases in the reported values of assets and liabilities.
outlining the changes in ac-
The reporting of accumulated other comprehensive income equity is illustrated in the 1999 eq-
cumulated comprehensive
uity section of DOW JONES & COMPANY, shown in Exhibit 11-7.
income that arose during
A statement of comprehensive income provides a place, outside the regular income state-
the period.
ment, for reporting all the unrealized gains and losses that are reported as equity adjustments.
The appeal of comprehensive income is that this approach preserves the traditional income state-
ment (calming the fears of the business community) but allows unrealized gains and losses to
Which will have a greater be reported. In essence, comprehensive income makes it possible to recognize
unrealized gains and losses so that current market values can be reported on the
impact on a company s stock price: net in-
balance sheet without having those unrealized gains and losses affect the in-
come of $100 million or a $100 million unre- come statement.
alized gain from a change in exchange rates The statement of comprehensive income is very new; U.S. companies
have been required to present it starting December 31, 1998. Dow Jones &
or securities prices? Explain your answer.
529
f530 Part 3 Equity Financing
Investing and Financing Activities



Equity Section for Dow Jones & Company
exhibit 11-7


Dow Jones & Company s Equity Section
(amounts in millions of dollars)

1999 1998

Common stocks
Common stock, par value $1 per share . . . . . . . . . . . . . . . . . . $ 81,004 $ 80,899
Class B common stock, convertible, par value $1 per share . . . 21,177 21,282
$ 102,181 $102,181
Additional paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137,487 137,479
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 809,517 624,239
Accumulated other comprehensive income:
Unrealized (loss) gain on investments . . . . . . . . . . . . . . . . . . . (941) 35,775
Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . (1,257) 38
$1,046,987 $899,712
Less treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 493,497 390,372
Total stockholders equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 553,490 $509,340




Company s comprehensive income presentation for 1999 is shown in Exhibit 11-8. Note that
net income is one component in the computation of comprehensive income. For Dow Jones,
1997 was a particularly bad year, with each of the three reported elements of comprehensive in-
come being negative. By the way, the large loss reported by Dow Jones in 1997 resulted from
a $1 billion restructuring charge.

Statement of Stockholders Equity
Companies that have numerous changes in their stockholders equity accounts during the year
usually include a statement of stockholders equity (also called a statement of changes in stock-
statement of stockholders
equity A financial statement holders equity) with their financial statements. This statement reconciles the beginning and end-
that reports all changes in ing balances for all stockholders equity accounts reported on the balance sheet.
stockholders equity.
An illustrative statement of stockholders equity from the 1999 annual report of Dow Jones
& Company is presented in Exhibit 11-9. Note the following items in the statement:
As mentioned earlier in the chapter, Dow Jones has two classes of common stock. Class B
common shares with a par value of $105,000 were converted into ordinary common shares
during the year.
Dow Jones both bought and sold treasury shares during the year. The $4,539,000 decrease
in Additional Paid-In Capital from treasury stock sales indicates that these treasury shares
were resold for less than the $43,604,000 Dow Jones spent to repurchase them.


Statement of Comprehensive Income for Dow Jones & Company
exhibit 11-8


(in thousands) 1999 1998 1997

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $272,429 $ 8,362 $(802,132)
Unrealized gain (loss) on investments. . . . . . . . . . 2,124 32,379 (8,957)
Foreign currency translation adjustments . . . . . . . (1,295) 555 (3,644)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (38,840) 9,023
Comprehensive income . . . . . . . . . . . . . . . . . . . . $234,418 $50,319 $(814,733)
530 f531
Equity Financing EM Chapter 11
Equity Financing



Statement of Stockholders Equity for Dow Jones & Company
exhibit 11-9


CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
Dow Jones & Company, Inc.
For the Year Ended December 31, 1999
(amounts in thousands of U.S. dollars)

Accumulated
Class B Additional Other
Common Common Paid-In Retained Comprehensive Treasury
Stock Stock Capital Earnings Income Stock Total

Balance, December 31, 1998 . . . . $80,899 $21,282 $137,479 $624,239 $35,813 $(390,372) $509,340
Net income 1999. . . . . . . . . . . . 272,429 $272,429
Unrealized gain on investments . 2,124 2,124
Translation adjustment . . . . . . . . (1,295) (1,295)
Other . . . . . . . . . . . . . . . . . . . . . (38,840) (38,840)
Comprehensive income . . . . . . $234,418
Dividends, $0.96 per share . . . . . (87,151) (87,151)
Conversion of class B common
stock into common stock . . . . . 105 (105)
Other equity changes . . . . . . . . . 4,547 4,547
Sales under stock
compensation plans. . . . . . . . . (4,539) 43,604 39,065
Purchase of treasury stock . . . . . (146,729) (146,729)
Balance, December 31, 1999 . . . . $81,004 $21,177 $137,487 $809,517 $(2,198) $(493,497) $553,490




The last column in the statement reflects the total beginning and ending stockholders eq-
uity account balances and all increases and decreases. Both the individual account balances and
total Stockholders Equity at December 31, 1999, are reported on the balance sheet of Dow
Jones & Company.



to summarize
Accumulated other comprehensive income is not income at all, but an equity cat-
egory that summarizes the effect on equity of certain market-related gains and
losses. Two examples of items giving rise to accumulated other comprehensive
income are market fluctuations in the value of some investment securities and
changes in the value of assets and liabilities held by foreign subsidiaries that are
caused by exchange rate changes. A statement of stockholders equity summa-
rizes the changes affecting all the different categories of equity during the year.




Three topics related to equity financing need additional explanation. These

topics are stock dividends and stock splits, prior-period adjustments, and ac-
counting for equity financing in proprietorships and partnerships.
531
f532 Equity Financing
Part 3 EM Investing and Financing Activities



6 ACCOUNTING FOR STOCK DIVIDENDS
Account for stock dividends
Corporations sometimes distribute additional shares of their own stock to stockholders instead
and distinguish them from
stock splits. of paying a cash dividend. These stock dividends must be distributed to each stockholder in
proportion to the number of shares held. For example, if a company issues a 10% stock divi-
stock dividend A pro rata
dend, each stockholder will receive one additional share for every 10 shares owned.
distribution of additional
There is considerable disagreement as to whether stockholders receive anything of value from
shares of stock to stock-
a stock dividend. Certainly, they do not receive corporate assets, as with a cash dividend. Nor
holders.
does any stockholder own a larger percentage of the corporation after the stock dividend than be-
fore, because each stockholder receives a pro rata share of the stock issued. In fact, one way to
view a stock dividend is that the company has just cut the total ownership up into smaller pieces,
with each stockholder owning proportionately more pieces, and nothing has really changed.
Those who argue that stock dividends have value to stockholders point out that companies
frequently maintain the same level of cash dividends per share after the stock dividend as be-
fore. Accordingly, a stock dividend is an indirect method of increasing the amount of total cash
dividends to be received in the future by each stockholder.
Stock dividends are also sometimes used to mollify investors and lull them into thinking
that a company is maintaining its record of paying dividends when, in fact, it is not. Corpora-
tions that issue dividends each year do not want to miss a year, so for them a stock dividend
can be a useful substitute for cash when poor financial circumstances make payment of cash div-
idends difficult. It isn t clear whether investors are actually fooled by this tactic.
To illustrate the accounting for a stock dividend and to keep the example simple, we will
assume that the stockholders equity of the Boston Lakers Basketball Team is:
Common stock ($1 par value, 10,000 shares issued and outstanding). . . . . . . . . . . . . . $ 10,000
Paid-in capital in excess of par. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000
Total stockholders equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $130,000

If a 10% stock dividend is declared and issued when the stock s current market price is $70,
the entry to record the stock dividend is:

Retained Earnings (1,000 shares $70) . . . . . . . . . . . . . . . . . . . . . . . 70,000
Common Stock (1,000 shares $1 par) . . . . . . . . . . . . . . . . . . . . . . 1,000
Paid-In Capital in Excess of Par, Common Stock . . . . . . . . . . . . . . . 69,000
Declared and issued a 10% common stock dividend.




business environment essay


Do You Want a Stock Tip? The conven- money. By the time we learn about the split an-
tional wisdom is that the announcement nouncement and buy the shares, the share price will
of a stock split is good news. Academic have already increased.
research has confirmed this a com- All is not lost, however. Additional academic re-
pany s share value goes up an average search suggests that the share values of splitting firms
of 3% in the one or two days after a 2- continue to go up for at least a year after the split an-
for-1 split announcement appears in nouncement. In fact, if you buy the shares of a com-
The Wall Street Journal. But for most of pany one week after that company announces a stock
us, this market reaction to the split news split, you will earn, on average, an extra 7.9% on your
is too fast to allow us to make any investment during the following year. This extra 7.9%
532 f533
Equity Financing EM Chapter 11
Equity Financing


Because the dividend was 10% and there were previously 10,000 common shares outstanding,
1,000 additional shares were issued for the dividend. The accounting rules dic-
Look at the Boston Lakers tate that when a small stock dividend is issued, the market value of the newly
issued shares is transferred out of Retained Earnings, just as if that same amount
example and explain how the accounting
had been paid out in cash. If a stock dividend is relatively large, the accounting
rules discourage companies from declaring
rules state that only the par value of the newly issued shares is to be transferred
small stock dividends on a regular basis. out of Retained Earnings. A small stock dividend is one that is less than 25%.
To illustrate the accounting for a large stock dividend, we assume the same
stockholders equity for the Boston Lakers Basketball Team, except that the stock dividend is
now 30%. The entry is:

Retained Earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Common Stock (3,000 shares $1 par) . . . . . . . . . . . . . . . . . . . . . . 3,000
Declared and issued a 30% common stock dividend
(10,000 shares 0.30 3,000 shares).


The impact of the 10 and 30% stock dividends on the Boston Lakers stockholders equity
is detailed below:

Before With 10% With 30%
Stock Stock Stock
Dividend Dividend Dividend

Common stock, $1 par value . . . . . . . . . . . . . $ 10,000 $ 11,000 $ 13,000
Paid-in capital in excess of par . . . . . . . . . . . . 40,000 109,000 40,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . 80,000 10,000 77,000
Total stockholders equity . . . . . . . . . . . . $130,000 $130,000 $130,000



Note that a stock dividend does not change the total amount of stockholders equity, re-
gardless of the size of the dividend. The only effect is to reallocate some of the stockholders eq-
uity into different categories.

Stock Splits
Many investors, particularly individuals with limited amounts to invest, will not purchase stocks
with high market prices per share. For example, consider the case of BERKSHIRE HATH-




is over and above what you would have earned if you always remember that academic research is a good
had invested in a similar company that had not an- thing to keep professors occupied during their spare
nounced a stock split. time but is a notoriously unreliable (and unprofitable)
Before you run off to buy The Wall Street Journal basis for investment strategy.
or subscribe to an online service that will alert you to
stock split announcements, here are two more pieces
Source: David L. Ikenberry, Graeme Rankine, and Earl K. Stice, What
of advice. First, always be suspicious of unsolicited Do Stock Splits Really Signal? Journal of Financial and Quantitative
stock tips (such as the one just given). You should ask Analysis, September 1996, pp. 357 375.
yourself: If this is such a good idea, why hasn t the
person who told me about it become rich? Second,
533
f534 Equity Financing
Part 3 EM Investing and Financing Activities


AWAY, which will be spotlighted in Chapter 12 and is the holding company controlled by War-
ren Buffett (one of the richest people in the United States). In October 2000, the shares of Berk-
shire Hathaway were selling for over $58,000 per share! At that price, not many of us can own
even one share. To encourage more investors to buy their stocks, companies sometimes enact a
stock split, replacing the outstanding shares with a larger number of new shares that sell at a
stock split The replacement
of outstanding shares of lower price per share. MICROSOFT, for example, has split its stock eight times in order to
stock with a greater num- bring down the price per share. Because of these splits, a single original share of Microsoft stock
ber of new shares.
is now the equivalent (as of October 2000) of 144 shares.
In essence, the difference between a stock dividend and a stock split is that a stock split is
usually bigger. Whereas a stock dividend might increase the number of shares outstanding by
10 or 25%, a stock split is likely to increase the number of shares outstanding by 50% (3-for-
2 stock split), by 100% (2-for-1 stock split), or more. Actually, there is no clear distinction be-
tween a stock split and a stock dividend. For example, there are 50% stock dividends and there
are also 5-for-4 stock splits.
From an accounting standpoint, stock splits are accounted for in one of two ways. The most
common way is to simply account for the stock split as if it were a large stock dividend. Thus,
a 2-for-1 stock split would be accounted for as a 100% stock dividend with the par value of the
newly created shares transferred from Retained Earnings. Alternatively, a stock split can be ac-
counted for by reducing the par value of all outstanding shares. For a 2-for-1 stock split ac-
counted for in this way, the par value is halved and the number of shares is doubled. Thus, the
total par value of stock outstanding is unchanged. For example, a firm with 20,000 shares of
$10 par-value common stock outstanding may reduce the par value to $5 and increase the num-
ber of shares outstanding to 40,000. No journal entry is needed to account for a stock split in
this way; the company merely makes note of the fact that the par value and number of shares
outstanding have changed.



to summarize
Stock dividends are distributions of additional stock to stockholders. Although
a stock dividend does not increase a stockholder s percentage of ownership in
a corporation, the additional stock may provide the expectation of increased
future cash dividends. With small stock dividends, Retained Earnings is deb-
ited at the stock s market value; with large stock dividends (25% or more), Re-
tained Earnings is debited at the stock s par value. A stock split is also an in-
crease in the number of shares outstanding. Generally, stock splits are
authorized so that companies can attract more investors with a lower market
price per share. A stock split can be accounted for as a large stock dividend or
by lowering the par value of each share.




7 PRIOR-PERIOD ADJUSTMENTS
Explain prior-period
In the first part of this chapter, it was shown that profits and losses, dividends, and certain trea-
adjustments and prepare a
statement of retained sury stock transactions affect retained earnings. In addition to these three events, there is one other
earnings.
type of event that affects retained earnings directly. This category includes adjustments to restate
the net income of prior periods; these are called, appropriately, prior-period adjustments. Prior-
prior-period adjustments
Adjustments made directly period adjustments are relatively infrequent. In addition to some technical adjustments involving
to Retained Earnings in or-
taxes and bonds, which are beyond the scope of this book, the main event that qualifies as a prior-
der to correct errors in the
period adjustment is the correction of an error in previous financial statements, such as an error
financial statements of prior
in accounting for revenues or expenses of a previous period. In accounting for prior-period ad-
periods.
justments, Retained Earnings is increased or decreased directly because the net income for the years
affected by the adjustments has already been closed to the retained earnings account.
534 f535
Equity Financing EM Chapter 11
Equity Financing



Statement of Retained Earnings for Boston Lakers
exhibit 11-10


Boston Lakers Basketball Team
Statement of Retained Earnings
For the Year Ended December 31, 2003

Retained earnings, January 1, 2003 . . . . . . . . . . . . . . . . . . . . . $300,000
Prior-period adjustment:
Deduct adjustment for 2002 inventory correction . . . . . . . . . . . (25,000)
Balance as restated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $275,000
Net income for 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Less dividends declared in 2003:
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,000
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000 (22,000)
Retained earnings, December 31, 2003 . . . . . . . . . . . . . . . . . . . $303,000




Prior-period adjustments (if there are any) and dividends are usually disclosed in a state-
statement of retained earn-
ings A report that shows ment of retained earnings. Exhibit 11-10 shows how the Boston Lakers Basketball Team might
the changes in the retained
present a statement of retained earnings, using arbitrary numbers.
earnings account during a
period of time.



to summarize
In addition to net income, dividends, and certain treasury stock transactions,
retained earnings can also be either increased or decreased by prior-period ad-
justments, which do not occur often. Prior-period adjustments usually involve
corrections of errors in previous financial statements. Prior-period adjustments
are disclosed in a statement of retained earnings.




8 PROPRIETORSHIP AND PARTNERSHIP
ACCOUNTING
Understand basic
proprietorship and
partnership accounting.
Because the majority of businesses organized in the United States are proprietorships and part-
nerships, it is important to understand the accounting for equity financing in these types of busi-
nesses.
capital account An account
The difference between accounting for proprietorships and partnerships and accounting for
in which a proprietor s or
a corporation is the owners equity accounts. In a corporation, owners equity is divided into
partner s interest in a firm
is recorded; it is increased contributed capital and retained earnings (and some other equity items, as explained earlier in
by owner investments and
the chapter), with each of these categories possibly having several different accounts. In propri-
net income and decreased
etorships and partnerships, all owners equity transactions are recorded in only two accounts,
by withdrawals and net
Capital and Drawings.
losses.

drawings account The ac-
Accounting for Equity Financing in a Proprietorship
count used to reflect peri-
odic withdrawals of earn-
To illustrate the accounting for the owner s equity of a proprietorship, we will assume that Megan
ings by the owner
Wilkes decides to start a small, independent real estate brokerage business. On January 1, 2003,
(proprietor) or owners
she deposits $40,000 into a bank account to finance the business. The entry to record the $40,000
(partners) of a proprietor-
deposit is:
ship or partnership.
535
f536 Equity Financing
Part 3 EM Investing and Financing Activities



Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Megan Wilkes, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Invested $40,000 to start a real estate business.


Once the business is established, the entries to account for the purchase of assets, the pay-
ment of business expenses, and the receipt of revenues are similar to those for corporations.
There is one exception, however. Whereas in a corporation salaries paid to management are ac-
counted for as expenses, in a proprietorship the salary paid to the owner is a distribution of earn-
ings. The managers of a corporation are considered to be employees, even if they are also stock-
holders in the company. The owners of a corporation receive dividends, which are deducted
directly from Retained Earnings. In a proprietorship, the owner receives no dividends, so any
drawing out of funds is considered to be a distribution to the owner. Hence, the name draw-
ings account. If Megan Wilkes decides to withdraw $650 cash for personal use or as salary, the
entry is:


Megan Wilkes, Drawings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 650
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 650
Withdrew $650 for personal use.


The account Megan Wilkes, Drawings is similar to a dividends account in a corporation: at year-
end, it is closed to the owner s equity account, Megan Wilkes, Capital.
Assuming that Megan Wilkes withdrew only $650 during the year, the closing entry to
eliminate the balance in the drawings account is:


Megan Wilkes, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 650
Megan Wilkes, Drawings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 650
To close the drawings account for the year.


If we also assume revenues of $100,000 and expenses of $86,000, Megan Wilkes s closing
entry for net income is:


Revenues (individual revenue accounts) . . . . . . . . . . . . . . . . . . . . . . 100,000
Expenses (individual expense accounts). . . . . . . . . . . . . . . . . . . . . 86,000
Megan Wilkes, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000
To close net income for the year to the owner s capital account.


From the preceding two entries, we see that Megan Wilkes s capital account has increased
by $13,350 since January 1. Adding this amount to her original contribution results in a $53,350
balance at year-end, as the following statement of owner s capital shows:


Megan Wilkes
Statement of Owner s Capital
For the Year Ending December 31, 2003

Megan Wilkes, capital, January 1, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $40,000
Add net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $54,000
Less withdrawals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (650)
Megan Wilkes, capital, December 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $53,350
536 f537
Equity Financing EM Chapter 11
Equity Financing


The owner s equity section of Megan Wilkes s balance sheet would have only one item:
Megan Wilkes, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $53,350


Accounting for Equity Financing in a Partnership
Like a proprietorship, a partnership differs from a corporation primarily in accounting for own-
ers equity. That is, a partnership has only two types of owners equity accounts, Capital and
Drawings. Whereas a proprietorship has only one of each type of account, a partnership main-
tains separate capital and drawings accounts for each partner.

To illustrate the accounting for the formation of a partner-
FORMING A PARTNERSHIP
ship, assume that Dr. Mary Adams and Dr. Jim Bell decide to form a partnership on January
1, 2003. Their partnership agreement specifies that Dr. Adams will contribute land valued at
$30,000, a building valued at $50,000, and $10,000 cash to the business and that Dr. Bell will
contribute medical equipment valued at $40,000 plus $50,000 cash. The entry to record the
capital contributions of the two partners is:

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Adams, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000
Bell, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000
To record the investments of Adams and Bell in a partnership.


The valuation of noncash assets invested in a business is one of the most difficult tasks
in accounting for the formation of a partnership. Generally, the fair market values on the date
of transfer should be used, but these values must be agreed upon by all partners. For exam-
ple, if the assets contributed by either Bell or Adams had been used in another business prior
to the partnership, the values assigned to them for the partnership might be quite different
from the amounts that were being carried on the previous business s books. Although the
equipment invested by Bell may have had a book value of only $30,000, or the land and
building invested by Adams may have cost only $15,000 several years ago, it is only fair to
give each partner credit for the current market values of the assets at the time they are trans-
ferred to the partnership.

As mentioned previously, in a corporation the man-
PARTNERS DRAWINGS ACCOUNTS
agers are employees, so their salaries are accounted for as expenses; the stockholders are the own-
ers, and distributions to them are in the form of dividends. In a partnership the managers are
usually the owners, and any amounts they withdraw, either as salary or as a distribution of prof-
its, are debited to their drawings accounts, which eventually reduces the capital accounts. Each
partner has a drawings account in which his or her withdrawals are recorded for the year. For
example, assume that sufficient income was earned during the year and that Adams withdrew
$70,000 and Bell withdrew $55,000 as salary for the year. The entry is:


Adams, Drawings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000
Bell, Drawings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,000
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,000
To record cash taken from the partnership as salary.


Note that any salaries paid to employees who are not partners are expenses of the business.
If Adams or Bell had withdrawn funds, for example, for living expenses, that amount would
also be debited to the drawings account. At year-end, the debits in the drawings accounts are
537
f538 Equity Financing
Part 3 EM Investing and Financing Activities


totaled, and the accounts are closed to the partners capital accounts. Assuming that the total in
each drawings account was the salary, the entry to close the drawings accounts for the year is:

Adams, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000
Bell, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,000
Adams, Drawings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000
Bell, Drawings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,000
To close the drawings accounts for the year.




Because most partners want an explanation
THE STATEMENT OF PARTNERS CAPITAL
of how their capital accounts change from year to year, a statement of partners capital is usu-
statement of partners capi-
tal A partnership report ally prepared. This statement, which is similar to a retained earnings statement for a corpora-
showing the changes in the
tion, lists the beginning Capital balances, additional investments, profits or losses from opera-
capital balances; similar to
tions, withdrawals, and each partner s ending Capital balance. For example, given the preceding
a statement of retained
information and assuming that the Adams and Bell partnership had a 2003 profit of $140,000,
earnings for a corporation.
the statement of partners capital for the year ended December 31, 2003, would be as shown in
Exhibit 11-11. Note that the partnership agreement specifies that Adams is to receive 60% of
the profits and Bell is to receive 40%.


Statement of Partners Capital
exhibit 11-11


Adams and Bell Partnership
Statement of Partners Capital
For the Year Ended December 31, 2003

Dr. Adams Dr. Bell Total

Investments, January 1, 2003. . . . . . . . . . . . . . $ 90,000 $ 90,000 $180,000
Add net income for 2003 . . . . . . . . . . . . . . . . . 84,000 56,000 140,000
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $174,000 $146,000 $320,000
Less withdrawals during 2003 . . . . . . . . . . . . . (70,000) (55,000) (125,000)
Capital balances, December 31, 2003 . . . . . . . . $104,000 $ 91,000 $195,000




to summarize
The assets and liabilities of a proprietorship are accounted for in the same way
as they are in a corporation, but equity is handled differently. Whereas the ac-
counting for corporate equity may involve several accounts, the accounting for
proprietorship equity requires only two accounts, Drawings and Capital. The
drawings account is used for recording withdrawals of funds by the owner. It
is closed to the capital account at year-end. The capital account is increased
when capital is invested in the business and when profits are earned; it is de-
creased when cash or other assets are withdrawn from the business or when
losses occur. The basic elements in accounting for the owners equity of a part-
nership are (1) accounting for investments by the partners, (2) recording with-
drawals of assets by the partners, (3) closing the drawings accounts, and (4)
preparing a statement of partners capital. Investments by owners are usually
recorded at the fair market value and are credited to the owners capital bal-
ances. Owners withdrawals of cash, inventory, and other business assets are
recorded in drawings accounts, which are closed to the capital accounts at year-
538 f539
Equity Financing EOC Chapter 11
Equity Financing



end. There is one capital and one drawings account for each partner. A state-
ment of partners capital reconciles the beginning and ending capital balances
by adding any profits and additional investments to the beginning capital bal-
ances and subtracting any losses and withdrawals.




review of learning objectives

Distinguish between debt and equity financing, and is decreased by a net loss, by dividends, and by some treasury
1 describe the advantages and disadvantages of orga- stock transactions. Corporations usually distribute cash divi-
nizing a business as a proprietorship or a partnership. Bor- dends to their owners. The three important dates in account-
rowing money imposes a legal obligation to repay the amount ing for cash dividends are the declaration date, the date of
borrowed, plus interest. Receiving investment funds does not record, and the payment date. Dividends are not a liability un-
obligate the company to repay investors. Investors stand to lose til they are declared. If a company has common and preferred
their investments if the company does poorly, but they also stock, the allocation of dividends between the two types of
stand to share in the wealth if the company does well. Pro- stock depends on the dividend preferences of the preferred
prietorships are owned by one person; partnerships are owned stock. According to the incorporation laws in some states, the
by two or more persons or entities. Partnerships and propri- ability of a company to pay cash dividends can be restricted
etorships share three characteristics: (1) ease of formation, (2) by the balance in Retained Earnings. In addition, private lend-
limited life, and (3) unlimited liability. ing agreements sometimes constrain a company s ability to pay
cash dividends. The dividend payout ratio, which is cash div-
Describe the basic characteristics of a corporation and idends divided by net income, reveals what percentage of a
2 the nature of common and preferred stock. A corpo- company s income it is paying out in dividends.
ration is a business entity that is legally separate from its own-
Describe the purpose of reporting comprehensive in-
ers and is chartered by a state. It is independently taxed, and
5 come in the equity section of the balance sheet, and
it can incur debts, conduct business, own property, and enter
prepare a statement of stockholders equity. The accumu-
into contracts. Among the benefits of the corporate form of
lated amount of comprehensive income is reported in the eq-
business are that ownership interests are easily transferred and
uity section of the balance sheet. Comprehensive income items
that the liability of the owners is limited to the amount of their
result from changes in market values of certain assets and lia-
investment. Common stockholders are the true owners of a cor-
bilities. Comprehensive income is not income in the tradi-
poration. They have the right to vote in corporate matters and
tional sense but instead represents unrealized gains and losses
own all corporate assets that are left after the claims of others
that are excluded from the income statement. The statement
have been satisfied. Preferred stockholders are entitled to re-
of stockholders equity summarizes the changes in each equity
ceive their full cash dividend payments before any dividends
category during a year.
can be paid to common stockholders. Preferred stockholders
are entitled to a fixed amount of the corporate assets, and that
amount does not increase when the company is successful.

Account for the issuance and repurchase of common Account for stock dividends and distinguish them
3 6
and preferred stock. Stock that is issued often has a par from stock splits. Stock dividends and stock splits in-
value associated with each share. This par value is a legal tech- volve dividing the ownership of the corporation into smaller
nicality and represents the minimum amount that must be in- pieces but giving shareholders proportionately more of these
vested. When stock is issued in exchange for a noncash item, the smaller pieces. Generally speaking, stock dividends are smaller
transaction is recorded at the market value of the noncash item. than stock splits. A small stock dividend is one that is less than
Repurchased stock is called treasury stock. When treasury stock 25% and is accounted for by transferring the market value of
is purchased by a corporation, it is accounted for at cost and de- the newly created shares out of Retained Earnings. With a large
ducted from total stockholders equity as a contra-equity account. stock dividend, only the par value of the new shares is trans-
ferred. A stock split can be accounted for as a large stock div-
Understand the factors that affect retained earnings, idend or by decreasing the par value of the shares.
4 describe the factors determining whether a company
can and should pay cash dividends, and account for cash Explain prior-period adjustments and prepare a state-
7
dividends. Retained earnings is increased by net income and ment of retained earnings. Prior-period adjustments are
539
f540 Equity Financing
Part 3 EOC Investing and Financing Activities


adjustments to restate net income of prior periods. The most The capital account is increased by owner contributions and
common prior-period adjustments stem from past accounting profits and decreased by owner withdrawals and losses.
errors that have been discovered in the current period. Because Events commonly accounted for in a partnership are invest-
past periods net income has already been closed to Retained ments by owners, withdrawals by partners, and allocation of
Earnings, the corrections are made directly to the retained partnership profits and losses. Investments and withdrawals
earnings account. Companies often include a statement of re- by partners are treated in the same way as they are in a pro-
tained earnings with their financial statements. A statement of prietorship. That is, investments increase the partners Cap-
retained earnings reconciles the ending retained earnings bal- ital balances, and withdrawals decrease the partners Capital
ance with beginning retained earnings. balances. A statement of partners capital is usually prepared
at year end. This statement reconciles the ending Capital bal-
Understand basic proprietorship and partnership ances with the beginning Capital balances by adding profits
8 accounting. There are two owner s equity accounts in and additional investments and deducting losses and partner
a proprietorship: a capital account and a drawings account. withdrawals.



key terms and concepts

accumulated other comprehensive dividends 524 stockholders 517
income 529 dividends in arrears 527 treasury stock 521
board of directors 517 limited liability 515
cash dividend 524 par value 520
common stock 518 partnership 514
contributed capital 520 preferred stock 518 capital account 535
convertible preferred stock 519 proprietorship 514 drawings account 535
corporation 515 prospectus 517 prior-period adjustments 534
cumulative-dividend preference 527 retained earnings 524 statement of partners capital 538
current-dividend preference 526 statement of comprehensive statement of retained earnings 535
date of record 525 income 529
stock dividend 532
declaration date 525 statement of stockholders equity
stock split 534
530
dividend payment date 525
dividend payout ratio 528




review problem

Stockholders Equity Clarke Corporation was organized during 1973. At the end of 2003, the equity section of the
balance sheet was:
Contributed capital:
Preferred stock (8%, $30 par, 6,000 shares authorized,
5,000 shares issued and outstanding) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000
Common stock ($5 par, 50,000 shares authorized,
20,000 shares issued, 17,000 shares outstanding) . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Paid-in capital in excess of par, common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,000
Total contributed capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $330,000
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,000
Total contributed capital plus retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . $470,000
Less treasury stock (3,000 shares of common stock
at cost, $10 per share) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30,000)
Total stockholders equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $440,000
540 f541
Equity Financing EOC Chapter 11
Equity Financing


During 2003, the following stockholders equity transactions occurred in chronological sequence:
a. Issued 800 shares of common stock at $11 per share.
b. Reissued 1,200 shares of treasury stock at $12 per share.
c. Issued 300 shares of preferred stock at $33 per share.
d. Reissued 400 shares of treasury stock at $9 per share.
e. Declared and paid a dividend large enough to meet the current-dividend preference on the
preferred stock and to pay the common stockholders $1.50 per share.
f. Net income for 2003 was $70,000, which included $400,000 of revenues and $330,000 of
expenses.
g. Closed the dividends accounts for 2003.

1. Journalize the transactions.
Required:
2. Set up T-accounts with beginning balances and post the journal entries to the T-accounts,
adding any necessary new accounts. (Assume a beginning balance of $20,000 for the cash
account.)
3. Prepare the stockholders equity section of the balance sheet as of December 31, 2003.


1. Journalize the Transactions
Solution
a. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,800
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Paid-In Capital in Excess of Par, Common Stock. . . . . . . . . . . . . . . . . . . 4,800
Issued 800 shares of common stock at $11 per share.

Cash received is $11 800 shares; common stock is par value times the number of shares
($5 800); paid-in capital is the excess.

b. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................ 14,400
Treasury Stock . . . . . . . . . . . . . . . . . . . . . . . . . . ................ 12,000
Paid-In Capital, Treasury Stock. . . . . . . . . . . . . . ................ 2,400
Reissued 1,200 shares of treasury stock at $12 per share.

Cash is $12 1,200 shares; treasury stock is the cost times the number of shares sold ($10
1,200 shares); paid-in capital is the excess.

c. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,900
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000
Paid-In Capital in Excess of Par, Preferred Stock. . . . . . . . . . . . . . . . . . . 900
Issued 300 shares of preferred stock at $33 per share.

Cash is $33 300 shares; preferred stock is par value times the number of shares issued
($30 300); paid-in capital is the excess.

d. Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600
Paid-In Capital, Treasury Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400
Treasury Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Reissued 400 shares of treasury stock at $9 per share.

Cash is $9 400 shares; treasury stock is the cost times the number of shares sold ($10
400); paid-in capital is decreased for the difference. If no Paid-In Capital, Treasury Stock
balance had existed, Retained Earnings would have been debited.

e. Dividends, Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,720
Dividends, Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,100
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,820
Declared and paid cash dividend.
541
f542 Equity Financing
Part 3 EOC Investing and Financing Activities


Calculations:

Preferred Stock Number of Shares Par-Value Amount

Original balance . . . . . . . . . . . . . . . . . . . . . . . . . 5,000 $150,000
Entry (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 9,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,300 $159,000
0.08
$ 12,720




Common Stock Number of Shares

Original balance (excludes treasury stock). . . . . . . . . . . . . . . . . . . . . . . . . 17,000
Entry (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800
Entry (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200
Entry (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,400 shares
$1.50
$29,100
Total preferred stock dividend. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,720
Total common stock dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,100
Total dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $41,820



f. Revenues (individual revenue accounts). . . . . . . . . . . . . . . . . . . . . . . 400,000
Expenses (individual expense accounts) . . . . . . . . . . . . . . . . . . . . . 330,000
Retained Earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000
To close net income to Retained Earnings.
g. Retained Earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,820
Dividends, Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,720
Dividends, Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,100
To close the dividends accounts for 2003.


2. Set Up T-Accounts and Post to the Accounts


Paid-In Capital in Excess
Cash Preferred Stock of Par, Preferred Stock

Beg. Beg. (c) 900
Bal. 20,000 (e) 41,820 Bal. 150,000
(a) 8,800 (c) 9,000 Bal. 900
(b) 14,400 Bal. 159,000
(c) 9,900
(d) 3,600
Bal. 14,880



Paid-In Capital in Excess
Common Stock of Par, Common Stock Treasury Stock

Beg. Beg. Beg. (b) 12,000
Bal. 100,000 Bal. 80,000 Bal. 30,000 (d) 4,000
(a) 4,000 (a) 4,800 Bal. 14,000
Bal. 104,000 Bal. 84,800
542 f543
Equity Financing EOC Chapter 11
Equity Financing


Paid-In Capital, Dividends, Preferred
Treasury Stock Retained Earnings Stock

(d) 400 (b) 2,400 Beg. (e) 12,720 (g) 12,720
(g) 41,820 Bal. 140,000 Bal. 0
(f) 70,000
Bal. 2,000
Bal. 168,180

Dividends, Common
Stock Revenues Expenses

(e) 29,100 (g) 29,100 Beg. Beg.
(f) 400,000 Bal. 400,000 Bal. 330,000 (f) 330,000
Bal. 0
Bal. 0 Bal. 0


3. Prepare Stockholders Equity Section of the Balance Sheet

Clarke Corporation
Partial Balance Sheet
December 31, 2003
Stockholders Equity
Contributed Capital:
Preferred stock (8%, $30 par, 6,000 shares authorized,
5,300 shares issued and outstanding) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $159,000
Common stock ($5 par, 50,000 shares authorized,
20,800 shares issued, 19,400 outstanding) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104,000
Paid-in capital in excess of par, preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900
Paid-in capital in excess of par, common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84,800
Paid-in capital, treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Total contributed capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $350,700
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168,180
Total contributed capital plus retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . $518,880
Less treasury stock (1,400 shares of common stock at cost, $10 per share) . . . . . . . . . (14,000)
Total stockholders equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $504,880



Common Common
Stock Stock Treasury
Transaction Issued Authorized Stock

Number of shares originally issued. . . . . . . . . . 20,000 50,000 3,000
Entry (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800
Entry (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,200)
Entry (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (400)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,800 50,000 1,400




discussion questions

1. What are the primary differences between debt financ- 3. How is a proprietorship or partnership established?
ing and equity financing? 4. Does the death of a partner legally terminate a partner-
2. What are the major differences between a partnership ship? If so, does it mean that the partnership must cease
and a corporation? operating?
543
f544 Equity Financing
Part 3 EOC Investing and Financing Activities


5. Are partners legally liable for the actions of other part- 19. What is accumulated other comprehensive income?
ners? Explain. Why was this concept adopted by accounting standard-
6. In which type of business entity do all owners have lim- setters?
ited liability? 20. Give two examples of other equity items (items that by-
7. In what way are corporate profits subject to double tax- pass the income statement and go directly to the equity
ation? section of the balance sheet).
8. How do common and preferred stock differ?
9. What is the purpose of having a par value for stock?
10. Why would a company repurchase its own shares of
stock that it had previously issued?
11. Is treasury stock an asset? If not, why not? 21. Does a stock dividend have value to stockholders? Ex-
12. How is treasury stock usually accounted for? plain.
13. In what way does the stockholders equity section of a 22. What is the difference between large and small stock
balance sheet identify the sources of the assets? dividends?
14. What factors affect the retained earnings balance of a 23. Why are prior-period adjustments entered directly into
corporation? Retained Earnings instead of being reflected on the in-
15. Is it possible for a firm to have a large Retained Earn- come statement?
ings balance and no cash? Explain. 24. Is the payment of salary to a proprietor an expense that
16. When is a company legally barred from paying cash would be deducted on a proprietorship s income state-
dividends? ment? Explain.
17. Why should a potential common stockholder carefully 25. In a corporation, contributions by owners and accumu-
examine the dividend preferences of a company s pre- lated earnings of the business are separated into con-
ferred stock? tributed capital and retained earnings accounts. Are
18. The dividend payout ratio for Deedle Company is earnings and contributions separated into different ac-
40%. What does this mean? counts in a partnership? Explain.




discussion cases


CASE 11-1 DOES STOCKHOLDERS EQUITY TELL THE REAL STORY?
Last year, Shades International (a hypothetical company) invented the famous Shades Sunglasses
that are widely popular around the world and especially in Japan and the Far East. Citizens of
these countries love the new-age sunglasses and are buying them as fast as they can. Shades In-
ternational owns the patent but contracts out to other companies to manufacture the glasses.
Shades International also leases its research and development facility, the only building it occu-
pies. Royalties from the glasses exceeded $10 million last year and are expected to increase dra-
matically this year. Selected data (in millions of dollars) from Shades International s financial
statements are as follows:
Patent $0.3
Other assets 0.9
Total liabilities 4.5
Total stockholders equity (3.3)

In the next two months, Shades International will be offering stock for sale to the public.
Your friend is encouraging you to buy some of the stock. You are leery about the negative stock-
holders equity balance. Is Shades International worth even considering as a possible investment?

CASE 11-2 TO PAY OR NOT TO PAY DIVIDENDS
Assume Lenny Company manufactures specialized computer peripheral parts such as speakers
and modems. It is a new company that has been in operation for just two years. During those
two years, Lenny Company s stock price has increased over 400%. Lenny Company does not
544 f545
Equity Financing EOC Chapter 11
Equity Financing


pay dividends nor does the company plan to do so in the future. However, the company s stock
seems to be heavily traded. Why do you think there is so much interest in buying Lenny Com-
pany s stock if stockholders do not receive dividends?




exercises


EXERCISE 11-1 ISSUANCE OF STOCK
Brockbank Corporation was organized on July 15, 2003. Record the journal entries for
Brockbank to account for the following:
a. The state authorized 30,000 shares of 7% preferred stock ($20 par) and 100,000 shares
of no-par common stock.
b. The company gave 6,000 shares of common stock to its attorney in return for her help
in incorporating the business. Fees for this work are normally about $18,000. (Note: The
debit is to Legal Expense.)
c. Brockbank Corporation gave 15,000 shares of common stock to an individual who con-
tributed a building worth $50,000.
d. Brockbank Corporation issued 5,000 shares of preferred stock at $25 per share.
e. Peter Brockbank paid $70,000 cash for 30,000 shares of common stock.
f. Another individual donated a $15,000 machine and received 4,000 shares of common stock.
g. The attorney sold all her shares to her brother-in-law for $18,000.

EXERCISE 11-2 NO-PAR STOCK TRANSACTIONS
Parker Maintenance Corporation was organized in early 2003 with 40,000 shares of no-par
common stock authorized. During 2003, the following transactions occurred:
a. Issued 17,000 shares of stock at $36 per share.
b. Issued another 2,400 shares of stock at $38 per share.
c. Issued 2,000 shares for a building appraised at $40,000.
d. Declared dividends of $1 per share.
e. Earned net income of $99,000 for the year, including $200,000 of revenues and
$101,000 of expenses.
f. Closed the dividends accounts.
Given this information:
1. Journalize the transactions.
2. Present the stockholders equity section of the balance sheet as it would appear on De-
cember 31, 2003.

EXERCISE 11-3 TREASURY STOCK TRANSACTIONS
Provide the necessary journal entries to record the following:
a. Fayette Corporation was granted a charter authorizing the issuance of 100,000 shares of
$16 par-value common stock.
b. The company issued 40,000 shares of common stock at $20 per share.
c. The company reacquired 2,000 shares of its own stock at $22 per share, to be held in
treasury.
d. Another 2,000 shares of stock were reacquired at $24 per share.
e. Of the shares reacquired in (c), 800 were reissued for $26 per share.
f. Of the shares reacquired in (d), 1,400 were reissued for $18 per share.
g. Given the preceding transactions, what is the balance in the treasury stock account?
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EXERCISE 11-4 STOCK ISSUANCE AND CASH DIVIDENDS
Stillwater Corporation was organized in January 2003. The state authorized 100,000 shares of
no-par common stock and 50,000 shares of 10%, $20 par, preferred stock. Record the fol-
lowing transactions that occurred in 2003:
a. Issued 10,000 shares of common stock at $30 per share.
b. Issued 2,000 shares of preferred stock for a building appraised at $60,000.
c. Declared a cash dividend sufficient to meet the current-dividend preference on preferred
stock and pay common shareholders $2 per share.

EXERCISE 11-5 STOCK ISSUANCE, TREASURY STOCK, AND DIVIDENDS
On January 1, 2003, Abbott Corporation was granted a charter authorizing the following capital
stock: common stock, $20 par, 100,000 shares; preferred stock, $10 par, 6%, 30,000 shares.
Record the following 2003 transactions:
a. Issued 80,000 shares of common stock at $30 per share.
b. Issued 14,000 shares of preferred stock at $12 per share.
c. Bought back 5,000 shares of common stock at $40 per share.
d. Reissued 500 shares of treasury stock at $25 per share.
e. Declared cash dividends of $38,600 to be allocated between common and preferred stock-
holders. (The preferred stock, which has a current-dividend preference, is noncumulative.)
f. Paid dividends of $38,600.

EXERCISE 11-6 STOCK ISSUANCE, TREASURY STOCK, AND DIVIDENDS
On January 1, 2003, Snow Company was authorized to issue 100,000 shares of common
stock, par value $10 per share and 10,000 shares of 8% preferred stock, par value $20 per
share. Record the following transactions for 2003:
a. Issued 70,000 shares of common stock at $25 per share.
b. Issued 8,000 shares of preferred stock at $30 per share.
c. Reacquired 5,000 shares of common stock at $20 per share.
d. Reissued 2,000 shares of treasury stock for $46,000.
e. Declared a cash dividend sufficient to meet the current-dividend preference on preferred
stock and pay common shareholders $1 per share.

EXERCISE 11-7 STOCK TRANSACTIONS AND DIVIDENDS
Marion Corporation was organized in January 2003. The state authorized 200,000 shares of
no-par common stock and 100,000 shares of 10%, $10 par, preferred stock. Record the fol-
lowing transactions that occurred in 2003:
a. Issued 20,000 shares of common stock at $20 per share.
b. Issued 8,000 shares of preferred stock for a piece of land appraised at $90,000.
c. Declared a cash dividend sufficient to meet the current-dividend preference on preferred
stock and paid common shareholders $1 per share.
d. How would your answer to (c) change if the dividend declared were not sufficient to
meet the current-dividend preference on preferred stock?

EXERCISE 11-8 DIVIDEND CALCULATIONS
On January 1, 2003, Oldroyd Corporation had 130,000 shares of common stock issued and
outstanding. During 2003, the following transactions occurred (in chronological order):
a. Oldroyd issued 10,000 new shares of common stock.
b. The company reacquired 2,000 shares of stock for use in its employee stock option plan.
c. At the end of the option period, 1,200 shares of treasury stock had been purchased by
corporate officials.
Given this information, compute the following:
1. After the foregoing three transactions have occurred, what amount of dividends must
Oldroyd Corporation declare in order to pay 50 cents per share? To pay $1 per share?
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2. What is the dividend per share if $236,640 is paid?
3. If all 2,000 treasury shares had been purchased by corporate officials through the stock
option plan, what would the dividends per share have been, again assuming $236,640 in
dividends were paid? (Round to the nearest cent.)


EXERCISE 11-9 DIVIDEND CALCULATIONS
Stewart Corporation has the following stock outstanding:
Preferred stock (5%, $20 par value, 20,000 shares) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $400,000
Common stock ($5 par value, 80,000 shares) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000

For the two independent cases that follow, compute the amount of dividends that would be
paid to preferred and common shareholders. Assume that total dividends paid are $86,000.
No dividends have been paid for the past two years.
Case A, Preferred is noncumulative.
Case B, Preferred is cumulative.


EXERCISE 11-10 STOCK ISSUANCE, TREASURY STOCK, AND DIVIDENDS
During 2003, Doxey Corporation had the following transactions and related events:
Jan. 15 Issued 6,500 shares of common stock at par ($16 per share), bringing the total
number of shares outstanding to 121,300.
Feb. 6 Declared a 50-cent-per-share dividend on common stock for stockholders of record
on March 6.
Mar. 6 Date of record.
8 Pedro Garcia, a prominent banker, purchased 20,000 shares of Doxey Corporation
common stock from the company for $346,000.
Apr. 6 Paid dividends declared on February 6.
June 19 Reacquired 800 shares of common stock as treasury stock at a total cost of $9,350.
Sept. 6 Declared dividends of 55 cents per share to be paid to common stockholders of
record on October 15, 2003.
Oct. 6 The Dow Jones Industrial Average plummeted 300 points, and Doxey s stock price
fell $3 per share.
15 Date of record.
Nov. 16 Paid dividends declared on September 6.
Dec. 15 Declared and paid a 6% cash dividend on 18,000 outstanding shares of preferred
stock (par value $32).
Given this information:
1. Prepare the journal entries for these transactions.
2. What is the total amount of dividends paid to common and preferred stockholders dur-
ing 2003?


EXERCISE 11-11 DIVIDEND PAYOUT RATIO
The following numbers are for three different companies:


A B C

Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,000 $2,500 $2,000
Cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 200 400
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600 800 1,400
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 500 500


For each company, compute the dividend payout ratio.
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EXERCISE 11-12 ANALYSIS OF STOCKHOLDERS EQUITY
The stockholders equity section of Kay Corporation at the end of the current year showed:
Preferred stock (6%, $40 par, 10,000 shares authorized,
6,000 shares issued and outstanding) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ ?
Common stock ($6 par, 80,000 shares authorized, 53,000 issued,
52,650 shares outstanding) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 318,000
Paid-in capital in excess of par, preferred stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ?
Paid-in capital in excess of par, common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,000
Less treasury stock (350 shares at cost) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,000)
Total stockholders equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ ?

1. What is the dollar amount to be reported for preferred stock?
2. What is the average price for which common stock was issued? (Round to the nearest
cent.)
3. If preferred stock was issued at an average price of $43 per share, what amount should
appear in the paid-in capital in excess of par, preferred stock account?
4. What is the average cost per share of treasury stock? (Round to the nearest cent.)
5. Assuming that the preferred stock was issued for an average price of $43 per share, what
is total stockholders equity?
6. If net income for the year were $67,000 and if only dividends on preferred stock were
paid, by how much would retained earnings increase?

EXERCISE 11-13 PREPARING THE STOCKHOLDERS EQUITY SECTION
The following account balances, before any closing entries, appear on the books of Spring
Company as of December 31, 2003:
Retained Earnings (balance at Jan. 1, 2003) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $240,000
Dividends, Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
Dividends, Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000
Common Stock ($5 par, 100,000 shares authorized,
70,000 issued and outstanding) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350,000
Paid-In Capital in Excess of Par, Common Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350,000
Preferred Stock (6%, $50 par, 50,000 shares authorized,
5,000 issued and outstanding). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250,000
Paid-In Capital in Excess of Par, Preferred Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000

Based on these account balances, and assuming net income for 2003 of $80,000, prepare the
stockholders equity section of the December 31, 2003, balance sheet for Spring Company.

EXERCISE 11-14 COMPREHENSIVE INCOME
The following information relates to Lily Company:
a. Lily Company s net income for the year was $10,000.
b. Lily Company has an investment portfolio for long-term investment purposes. That port-
folio increased in value by $2,000 during the year.
c. Lily Company has several foreign subsidiaries. The currencies in the countries where
those subsidiaries are located declined in value (relative to the U.S. dollar) during the
year. Accordingly, the computed value of the equity of those subsidiaries, in U.S. dollars,
decreased by $3,000.
Compute Lily s comprehensive income for the year.

EXERCISE 11-15 OTHER EQUITY ITEMS
Red Rider Company has the following stockholders equity section on its balance sheet as of
December 31, 2003 and 2002.
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Red Rider Company
(in millions)
2003 2002

Stockholders Equity
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.0 $ 2.0
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32.0 32.0
Paid-in capital various . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.4 11.2
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.5 24.6
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 70.9 $69.8
Accumulated foreign currency translation adjustments . . . . . . . . . . . . . . . . . . 5.2 4.5
Net unrealized gains on investments in certain debt
and equity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.6 20.0
Total stockholders equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $101.7 $94.3



Based on this stockholders equity section, answer the following questions:
1. At the end of 2003, what was the total amount of equity financing provided by Red
Rider s investors?
2. At the end of 2003, how much of Red Rider s earnings had not been distributed to in-
vestors?
3. What is the total amount of other equity items contained in the 2003 stockholders eq-
uity section?
4. What contributed most to the increased equity from 2002 to 2003?




EXERCISE 11-16 STOCK DIVIDENDS AND STOCK SPLITS
The stockholders equity section of Ardvark Corporation s December 31, 2002, balance sheet
included the following items:
Common stock ($20 par, 250,000 shares authorized,
50,000 shares issued and outstanding). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,000,000
Paid-in capital in excess of par, common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000

Record the following transactions for 2003:
a. On March 1, Ardvark declared and issued a 25% stock dividend on common stock. The
market price of the stock was $40 per share on that date.
b. On June 30, a 4-for-1 stock split was declared.
c. On September 15, a 10% stock dividend on common stock was declared and distributed.
The market price of the stock was $30 per share on the dividend date.


EXERCISE 11-17 STOCK DIVIDENDS
Allred Company has issued 90,000 shares of common stock with a par value of $5. Of the
shares issued, 80,000 shares are outstanding. Allred s board of directors has decided to issue
a stock dividend. The current market price of the stock is $30 per share. Provide journal en-
tries to record the issuance of the dividend under each of the following independent circum-
stances:
1. The dividend is a 20% stock dividend.
2. The dividend is a 30% stock dividend.
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EXERCISE 11-18 STOCK DIVIDENDS
On July 1, 2003, Sanford Corporation s balance sheet reported the following account balances
in the stockholders equity section:
Common stock, $5 par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000
Paid-in capital in excess of par, common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180,000
Total stockholders equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $350,000

On August 31, 2003, Sanford s board of directors declared and issued a 10% stock dividend.
The market value on August 31 is $12 per share.
1. Compare the book value per share before and after the issuance of the stock dividend.
2. Compute the new balance for all stockholders equity accounts after the stock dividend.

EXERCISE 11-19 STOCKHOLDERS EQUITY TRANSACTIONS
On December 31, 2002, White Lighting Corporation s stockholders equity section of the
balance sheet showed the following:
Common stock ($10 par, 50,000 shares authorized,
25,000 issued and 17,000 outstanding). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $250,000
Paid-in capital in excess of par, common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450,000
Treasury stock (8,000 shares, at cost) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (90,000)
Total stockholders equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $985,000

During 2003, the following transactions occurred:
a. On March 1, 2003, White Lighting purchased 5,000 shares of its stock at $20 per share.
b. On April 15, 2003, White Lighting reissued the 5,000 shares of its stock purchased in
(a); the market price on that day was $30 per share.
c. On June 10, 2003, White Lighting declared and paid a 10% stock dividend. Market
price of the stock was $32 per share.
d. On June 30, 2003, White Lighting declared a cash dividend of 50 cents per share. The
dividend was paid on July 30. The record date was July 15.
e. On October 1, 2003, White Lighting issued 5,000 shares of new stock for $40 per share.
Prepare journal entries to record each of the above transactions.

EXERCISE 11-20 STATEMENT OF RETAINED EARNINGS
The stockholders equity section of Summer Corporation s balance sheet shows the following
as of the end of 2003:
Preferred stock (5%, $30 par, 10,000 shares authorized,
5,000 shares issued and outstanding) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ ?
Common stock ($12 par, 50,000 shares authorized,
28,000 issued, 27,500 outstanding) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 336,000
Paid-in capital in excess of par, preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ?
Paid-in capital in excess of par, common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 424,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,000
Treasury stock (purchased at $14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ?
Total stockholders equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $?

Prepare a statement of retained earnings for the year ended December 31, 2003. Assume the
following additional facts:
a. Retained earnings as of December 31, 2002, was $25,500.
b. Net income as of 2003 was $72,000.
c. Dividends equal to the current-dividend preference on preferred stock were declared and
issued.
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d. A prior-period adjustment was made to retained earnings to correct an overstatement of
2002 net income in the amount of $12,000.
e. Common stock was sold for $12.

EXERCISE 11-21 ACCOUNTING FOR A PROPRIETORSHIP
At the beginning of 2003, Marena Sanchez decided to go into business making and selling
decorative artificial plants. During the year ended December 31, 2003, Sanchez had the fol-
lowing transactions:
a. Withdrew $20,000 from a personal savings account and deposited that amount in a new
checking account to be used solely for the business.
b. Paid cash to purchase $12,000 of materials needed to make plants.
c. Invested another $24,000 in the business.
d. Sold 450 plants during the year at $60 each for cash.
e. Incurred and paid operating expenses for the year of $10,500.
f. At the end of the year, $4,000 of materials remained on hand. The cost of materials used
was transferred to a cost of goods sold account.
g. Withdrew $5,000 for personal use.
Prepare journal entries to record the transactions, and prepare a statement of owner s capital
for the year.

EXERCISE 11-22 PARTNERSHIP ACCOUNTING
Jill Emerson owned a pet shop. On August 1, 2003, Emerson accepted Allan Jacobs as a part-
ner. At that time, Emerson s capital account showed a balance of $135,000. Jacobs con-
tributed $90,000 cash for a 40% share in both capital and earnings. During the rest of 2003,
the following transactions took place:
a. Emerson withdrew $12,000 and Jacobs withdrew $4,000.
b. Emerson invested another $4,500 cash, and Jacobs contributed a truck valued at $6,000.
c. Net income from August 1, 2003, through December 31, 2003, was $26,700, which in-
cluded $66,700 of revenues and $40,000 of expenses.
Given this information:
1. Prepare the journal entries (including closing entries) for the transactions.
2. Prepare a statement of partners capital for the 5 months ending December 31, 2003, for
the Emerson and Jacobs partnership.

EXERCISE 11-23 STARTING A PARTNERSHIP
On July 1, 2003, Dr. Wright and Dr. O Flaherty decided to form a partnership by combin-
ing all the assets and liabilities of their respective dental practices. The partnership will have a
new and separate set of books. Dr. Wright s balance sheet at June 30, 2003, was as follows:
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,000
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $116,000
Less allowance for uncollectible accounts . . . . . . . . . . . . . . . . . . . . . . . . 6,600 109,400
Dental equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 52,900
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,200 28,700
Building. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $169,400
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,500 155,900
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $321,000

Liabilities and Owner s Equity
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,700
Mortgage payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000
Dr. Wright, capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148,300
Total liabilities and owner s equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . $321,000
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The partners agreed that $5,600 of the accounts receivable were uncollectible and that $2,400
was a reasonable allowance for the uncollectibility of the remaining receivables. They also
agreed that the dental equipment and the building should be recorded at their respective fair
market values of $46,000 and $182,000.
Prepare the journal entry to record Dr. Wright s investment in the partnership.




problems

PROBLEM 11-1 STOCK TRANSACTIONS AND ANALYSIS
The following selected items and amounts were taken from the balance sheet of Quale Com-
pany as of December 31, 2003:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 93,000
Property, plant, and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 850,000
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Preferred stock (7%, $100 par, noncumulative, 10,000 shares authorized,
5,000 shares issued and outstanding) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000
Common stock ($10 par, 100,000 shares authorized,
80,000 shares issued and outstanding) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800,000
Paid-in capital in excess of par, preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Paid-in capital in excess of par, common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125,000
Paid-in capital, treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310,000

Required: For each of parts (1) to (5), (a) prepare the necessary journal entry (or entries) to record each
transaction, and (b) calculate the amount that would appear on the December 31, 2003, balance
sheet as a consequence of this transaction only for the account given. (Note: In your answer to
each part of this problem, consider this to be the only transaction that took place during 2003.)
1. Quale Company issued 200 shares of common stock in exchange for cash of $4,000.
a. Entry
b. Paid-In Capital in Excess of Par, Common Stock
2. The company issued 200 shares of preferred stock at a price of $102 per share.
a. Entry
b. Paid-In Capital in Excess of Par, Preferred Stock
3. The company issued 500 shares of common stock in exchange for a building. The com-
mon stock is not actively traded, but the building was recently appraised at $11,000.
a. Entry
b. Property, Plant, and Equipment
4. The company reacquired 1,000 shares of common stock from a stockholder for $23,000 and
subsequently reissued the shares to a different investor for $21,500. (Note: Make two entries.)
a. Entries
b. Paid-In Capital, Treasury Stock
5. The board of directors declared dividends of $75,000. This amount includes the current-
year dividend preference on preferred stock, with the remainder to be paid to common
shareholders.
a. Entry
b. Retained Earnings

PROBLEM 11-2 STOCK TRANSACTIONS AND THE STOCKHOLDERS EQUITY
SECTION
The following is West Valley Company s stockholders equity section of the balance sheet on
December 31, 2002:

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