Module 8 Solutions

M8-25
Balance Sheet
Transaction
RE

Cash
Asset

Noncash
Assets

Liabilities

Income Statement
+

Contrib.
Capital

Earned
Capital

Revenues

Expenses

Net
Income

87,000
Cash 87,000
Declare and pay
preferred and
common dividends

RE
87,000

87,000
Cash

87,000
Retained
Earnings

Cash
87,000

Preferred dividends = $21,000 ($3 7,000 shares); Common dividends = $66,000 ($2.20 30,000 shares).

M8-26
Balance Sheet
Transaction

Cash
Asset

Noncash
Assets

RE
55,200
CS
12,000
APIC
43,200

Declare and pay

stock dividend.

CS
12,000

Contrib.
Capital

+12,000
Common
Stock

RE
55,200

Liabilities

Income Statement

+43,200
Additional
Paid-in
Capital

Earned
Capital

55,200
Retained
Earnings

APIC
43,200
Stock dividend = $55,200: market price of the shares distributed (60,000 shares 4% $23).

Revenues

Expenses

Net
Income

M8-27
a. Immediately after the 3-for-2 stock split, the company has 300,000 shares of $10 par value
common stock [200,000 shares (3/2) = 300,000 shares] issued and outstanding.
b. The dollar balance in the Common Stock account is unchanged by the stock split; the
balance remains at $3,000,000 (300,000 shares at the new $10 par value per share).
c. The usual reason for a corporation to split its stock is to reduce the share price of the stock
thereby improving the stock's marketability. Weiss stock is trading at $159 which is pricey if
investors want to buy the stock in a round lot, which is 100 shares. To increase transactions
(and hence demand for the stock), Weiss has dropped its stock price to around $100 ($159
2/3 = $106).

E8-43

a.
Balance Sheet
Cash
Transaction

+
Asset

RE

Noncash
Assets

Liabil=

+
ities

Income Statement
Contrib.
Capital

Earned

Rev-

Expen

+
Capital

enues

Net
=

ses

Income

300,000

CS

300,000
Apr 1: Issue stock
dividend on
common stock1

RE
300,000
CS

-300,000

+300,000
=

Retained

Common
Stock

67,200

CS

24,000

APIC

43,200

Earnings

300,000

RE

+24,000
Common
Stock
-67,200

RE
67,200

Dec 7: Issue 4%
stock dividend on
common stock2

CS

Retained

+43,200
Earnings

24,000

Additional

APIC

Paid-in

43,200

Capital
RE

124,840

Dec 20: Pay cash -124,840

dividends on

-124,840

Cash

124,840 preferred and

common stock3

Cash

Retained
Earnings

RE
124,840
Cash
124,840

Large stock dividends are recorded at par value. The company reduces Retained Earnings and increases Common Stock by
$300,000 (60,000 shares 100% $5 par value). There is no effect on APIC.
Small stock dividends are recorded at market value. The company reduces Retained Earnings by the market value of the shares
to be distributed (4% 120,000 shares $14 per share = $67,200). Common Stock increases by the par value of the shares
distributed (4% 120,000 $5 = $24,000) and APIC increases by the balance ($43,200).
Total dividends are 5,000 $5 = $25,000 for the preferred shares and 124,800 $0.80 = $99,840 for the common shares.
Retained Earnings and Cash decrease to reflect the payment.

b.
KINNEY COMPANY
STATEMENT OF RETAINED EARNINGS
FOR YEAR ENDED DECEMBER 31, 2014

Retained Earnings, December 31, 2013

Add:Net Income
Less: Cash Dividends Declared
Stock Dividends Declared
Retained Earnings, December 31, 2014

$656,000
262,000
918,000
$124,840
367,200

492,040
$425,960

E8-44

a.

Immediately after the stock split, 1,000,000 shares (2 500,000 shares) of $10 par value
common stock are issued and outstanding.

b.

The stock split does not change the Common Stock account balance. The account balance is
$10,000,000 just before and immediately after the stock split.

c.

The stock split does not change the Paid-in Capital in Excess of Par Value account. The
account balance is $5,300,000 just before and immediately after the stock split.

P8-50
a.
Balance Sheet
Transaction

Cash
Asset

Noncash
Assets

Cash 120,000
CS
50,000
APIC
70,000

Liabilities

Income Statement
+

Contrib.
Capital

Earned
Capital

Revenues

Expenses

+50,000
Common
Stock

Cash
120,000

Jan. 5 1

+120,000
Cash

Jan. 18 2

60,000
Cash

CS
50,000

APIC

+70,000
Additional
Paid-in
Capital

70,000

TS

60,000
Cash 60,000
TS
60,000

60,000
Treasury
Stock

Cash
60,000

Cash 18,000
TS
15,000
APIC
3,000

+15,000
Treasury
Stock

Cash
18,000

Mar. 12 3
TS

+18,000
Cash

+6,500
Cash

15,000
APIC

+3,000
Additional
Paid-in
Capital

3,000

Cash
APIC
TS

6,500
1,000
Jul. 17 4
7,500

+7,500
Treasury
Stock

Net
Income

-1,000
Additional
Paid-in
Capital

Cash
6,500
APIC
1,000
TS
7,500

Cash 175,000
PS
125,000
APIC
50,000

+125,000
Preferred
Stock

Cash
175,000

Oct. 1 5
PS
125,000

+175,000
Cash

+50,000
Additional
Paid-in
Capital

APIC
50,000
1

Cash increases by the proceeds from the stock sale (10,000 shares $12 = $120,000). Common Stock increases by the par
value (10,000 shares $5) and Additional Paid-In Capital increases by the remainder ($70,000).

Cash decreases by the cost of the Treasury Stock (4,000 shares $15 = $60,000). The Treasury Stock account increases
by the same amount. Because Treasury Stock is a contra-equity account, the share repurchase reduces stockholders equity
(paid-in capital).

Cash increases by the proceeds from the sale of the Treasury Stock (1,000 shares $18 = $18,000). The Treasury Stock
account is reduced by the original cost of the shares (1,000 $15 = $15,000) and Additional Paid-In Capital increases by the
remainder ($3,000).

Cash is increased by the proceeds from the sale of the Treasury Stock (500 shares $13 = $6,500). Treasury Stock is

reduced by its original cost (500 shares $15 = $7,500) and Additional Paid-In Capital is reduced by the
difference.
5

Cash increases by the proceeds from the sale of the Preferred Stock (5,000 shares $35 per share = $175,000). Preferred
Stock increases by its par value (5,000 shares $25 = $125,000) and Additional Paid-in Capital increases by the remainder
($50,000).

b.
VERRECCHIA COMPANY
Stockholders' Equity
December 31, 2014
Paid-in capital
8% Preferred stock, $25 par value,
50,000 shares authorized, 5,000
shares issued and outstanding
Common stock, $5 par value, 350,000
shares authorized; 260,000 shares
issued
Additional paid-in capital
Paid-in capital in excess of par
valuepreferred stock
Paid-in capital in excess of par
valuecommon stock
Paid-in capital from treasury stock
Total paid-in capital
Retained earnings
Less: Treasury stock (2,500 shares) at cost
Total Stockholders' Equity

$125,000

1,300,000

$ 1,425,000

50,000
670,000
2,000

722,000
2,147,000
411,800
2,558,800
(37,500)
$2,521,300