Solution manual intermediate accounting 7th by nelson spiceland ch18

So, the changes other than the ones that are part of net income are those reported as “other comprehensive income.” Two attributes of other comprehensive income are reported: 1 componen

Chapter 18 Shareholders’ Equity

AACSB assurance of learning standards in accounting and business education require documentation of outcomes assessment Although schools, departments, and faculty may approach assessment and its documentation differently, one approach is to provide specific questions on exams that become the basis for assessment To aid faculty in this endeavor, we have labeled each

question, exercise, and problem in Intermediate Accounting, 7e, with the following AACSB learning

skills:

18–17 Reflective thinking, Communications 18–17 Analytic, Communications

18–24 Reflective thinking, Communications 18–24 Reflective thinking, Analytic

Brief Exercises 18–25 Diversity, Reflective thinking

QUESTIONS FOR REVIEW OF KEY TOPICS

Question 18–1

The two primary sources of shareholders’ equity are amounts invested by shareholders in the corporation and amounts earned by the corporation on behalf of its shareholders Invested capital is reported as paid-in capital and earned capital is reported as retained earnings

Question 18–3

In the eyes of the law, a corporation is a separate legal entity—separate and distinct from its owners The owners are not personally liable for debts of the corporation So, shareholders generally may not lose more than the amounts they invest when they purchase shares This is perhaps the single most important advantage of corporate organization over a proprietorship or a partnership

Question 18–4

“Not-for-profit” corporations such as churches, hospitals, universities, and charities, are not organized for profit and do not sell stock Some not-for-profit corporations, such as the Federal Deposit Insurance Corporation (FDIC), are government owned

Answers to Questions (continued)

Question 18–7

The ownership rights held by common shareholders, unless specifically withheld by agreement with the shareholders, are:

a The right to vote on policy issues

b The right to share in profits when dividends are declared (in proportion to the percentage of shares owned by the shareholder)

c The right to share in the distribution of any assets remaining at liquidation after other claims are satisfied

Question 18–8

The “preemptive right” is the right to maintain one’s percentage share of ownership when new shares are issued When granted, each shareholder is offered the opportunity to buy the same percentage of any new shares issued as the percentage of shares he/she owns at the time For reasons of practicality, the preemptive right usually is excluded

Question 18–9

The typical rights of preferred shares usually include one or both of the following:

a A preference to a predesignated amount of dividends, that is, a stated dollar amount per share

or percent of par value per share This means that when the board of directors of a corporation declares dividends, preferred shareholders will receive the specified dividend prior to any dividends being paid to common shareholders

b A preference over common shareholders in the distribution of assets in the event the

corporation is dissolved

Question 18–10

If preferred shares are noncumulative, dividends not declared in any given year need never be paid However, if cumulative, when the specified dividend is not paid in a given year, the unpaid dividends accumulate and must be made up in a later dividend year before any dividends are paid on common shares These unpaid dividends are called “dividends in arrears.”

Question 18–11

Par value was defined by early corporation laws as the amount of net assets not available for distribution to shareholders (as dividends or otherwise) However, now the concepts of “par value” and “legal capital” have been eliminated entirely from the Model Business Corporation Act Most shares continue to bear arbitrarily designated par values, typically nominal amounts Although many states already have adopted these provisions, most established corporations issued shares prior

to changes in the state statutes So, most companies still have par value shares outstanding and continue to issue previously authorized par value shares

Answers to Questions (continued)

Question 18–12

Comprehensive income is a broader view of the change in shareholders’ equity than traditional

net income It is the total nonowner change in equity for a reporting period It encompasses all

changes in equity except those caused by transactions with owners Transactions between the corporation and its owners (shareholders) primarily include dividends and the sale or purchase of shares of the company’s stock Most nonowner changes (e g., revenues and expenses) are reported

in the income statement So, the changes other than the ones that are part of net income are those reported as “other comprehensive income.”

Two attributes of other comprehensive income are reported: (1) components of comprehensive

income created during the reporting period and (2) the comprehensive income accumulated over the

current and prior periods

The components of comprehensive income created during the reporting period can be reported

in either (a) an expanded version of the income statement or (b) a separate statement immediately following the income statement Regardless of the choice a company makes, the presentation will report net income, other components of comprehensive income, and total comprehensive income

The second attribute—the comprehensive income accumulated over the current and prior periods—

is reported as a separate component of shareholders’ equity This amount represents the cumulative

sum of the changes in each component created during each reporting period throughout all prior years

Question 18–13

Components of comprehensive income created during the reporting period can be reported in

either (a) an expanded version of the income statement or (b) a separate statement immediately following the income statement Regardless of the placement a company chooses, the presentation

is similar It will report net income, other components of comprehensive income, and total comprehensive income

Question 18–14

The statement of shareholders’ equity reports the transactions that cause changes in its

shareholders’ equity account balances It shows the beginning and ending balances in primary shareholders’ equity accounts and any changes that occur during the years reported Typical reasons for changes are the sale of additional shares of stock, the acquisition of treasury stock, net income, and the declaration of dividends

Answers to Questions (continued)

Question 18–16

The cash received usually is the sum of the separate market values of the separate securities However, when the total selling price is not equal to the sum of the separate market prices, the total selling price is allocated in proportion to their relative market values

Question 18–17

Share issue costs reduce the net cash proceeds from selling the shares and thus paid-in capital— excess of par On the other hand, debt issue costs are recorded in a separate “debt issue costs” account and amortized to expense over the life of the debt The difference often is justified by the presumption that share issue costs and debt issue costs are fundamentally different because a debt issue has a fixed maturity, but that selling shares represents a perpetual equity interest Concept Statement 6 disagrees, stating that debt issue costs should be treated the same way as share issue costs But, Concept Statements do not constitute GAAP, and the currently prescribed practice is to record debt issue costs as assets and expense the asset over the maturity of the debt

Question 18–18

The same accounts that previously were increased when the shares were sold are decreased when the shares are retired Specifically, common (or preferred) stock and paid-in capital—excess of par are reduced by the same amounts they were increased by when the shares were originally sold

If the cash paid to repurchase the shares differs from the amount originally paid in, accounting for the difference depends on whether the cash paid to repurchase the shares is less than or more than the price previously received when the shares were sold When less cash is distributed to shareholders to retire shares than originally paid in, some of the original investment remains and is labeled paid-in capital—share repurchase When more cash is distributed to shareholders to retire shares than originally was paid in for those shares, the additional amount is viewed as a dividend on the original investment, and thus a reduction of retained earnings (unless previous share repurchases have created a balance in paid-in capital—share repurchase, which would be reduced first)

Question 18–19

The purchase of treasury stock and its subsequent resale are considered to be a “single transaction.” The purchase of treasury stock is perceived as a temporary reduction of shareholders' equity, to be reversed later when the treasury stock is resold, so the cost of acquiring the shares is

“temporarily” debited to the treasury stock account Allocating the effects to specific shareholders’ equity accounts is deferred until the shares are subsequently reissued

Answers to Questions (concluded)

Question 18–20

For a stock dividend of less than 25%, a "small" stock dividend, the fair value of the additional shares distributed is transferred from retained earnings to paid-in capital The reduction in retained earnings is the same amount as if cash dividends were paid equal to the market value of the shares issued The treatment is consistent with the belief that per share prices remain unchanged by stock dividends

This is not logical If the value of each share were to remain the same when additional shares are distributed without compensation, the total value of the company would grow simply because additional stock certificates are distributed Instead, the market price per share will decline in proportion to the increase in the number of shares distributed in a stock dividend

Question 18–21

The effect and maybe the motivation for the 2-for-1 stock split is to reduce the per share market price (by half) This will likely increase the stock’s marketability by making it attractive to a larger number of potential investors The appropriate accounting treatment of a stock split is to make no journal entry, which avoids the reclassification of “earned” capital as “invested” capital However,

if the stock distribution is referred to as a "stock split effected in the form of a stock dividend," and

the per share par value of the shares is not changed, a journal entry is recorded that increases the

common stock account by the par value of the additional shares To avoid reducing retained earnings Brandon can reduce (debit) paid-in capital—excess of par to offset the credit to common stock, although it’s permissible to debit retained earnings

Question 18–22

When a company decreases, rather than increases, its outstanding shares, a reverse stock split

occurs A 1-for-2 reverse stock split would cause one million $1 par shares to become one-half million $2 par shares No journal entry would be recorded, so no account balances will change But the market price per share would double, and the par amount per share would double

Question 18–23

You would be entitled to 3.2 shares (4% x 80 shares) Since cash in lieu of payments usually are made when shareholders are entitled to fractions of whole shares, you probably would receive 3 shares and cash equal to the market value of 1/5 of one share Sometimes fractional share rights are

BRIEF EXERCISES

Brief Exercise 18–1

Two attributes of other comprehensive income are reported: (1) the components

of comprehensive income created during the reporting period ($15 million in this instance) and (2) the comprehensive income accumulated over the current and prior

periods ($50 million at the end of this year)

The $50 million represents the cumulative sum of the changes in each component

created during each reporting period throughout all prior years Since this amount increased by $15 million, the balance must have been $35 million last year

Brief Exercise 18–2

($ in millions) Cash (8 million shares x $12 per share) 96

Common stock ( 8 million shares x $ 1 par per share) 8 Paid-in capital—excess of par (remainder) 88

Brief Exercise 18–3

Lewelling’s paid-in capital—excess of par will increase by $860,000: 4,000 hours

x $240 less $100,000 par

Journal entry (not required):

Legal expense (4,000 hours x $240) 960,000

Common stock ( 100,000 shares x $ 1 par per share) 100,000 Paid-in capital—excess of par (remainder) 860,000

Brief Exercise 18–5

MLS’s common shareholders’ will receive dividends of $18 million as a result of the 2013 distribution

Preferred Common

* $24 million current preference (6% x $400 million), thus $4 million

dividends in arrears

** $24 million current preference (6% x $400 million), thus another $4 million

dividends in arrears

*** $8 million dividends in arrears plus the $24 million current preference

Brief Exercise 18–6

Horton’s total paid-in capital will decline by $17 million, the price paid to buy back the shares

Journal entry (not required):

($ in millions)

Common stock (2 million shares x $1 par) 2

Paid-in capital—excess of par (2 million shares x $9*) 18

Paid-in capital—share repurchase (difference) 3

Cash (2 million shares x $8.50 per share) 17

* Paid-in capital—excess of par: $900 ÷ 100 million shares

Brief Exercise 18–7

Agee’s total paid-in capital will decline by $18 million because recording the transaction involves a $1 million reduction of retained earnings and an $18 million reduction in paid-in capital accounts

Journal entries (not required):

Common stock (1 million shares x $1 par) 1

Paid-in capital—excess of par (1 million shares x $15*) 15

Paid-in capital—share repurchase (difference) 2

Cash (1 million shares x $14) 14

* $16 – $1 par Second buyback Common stock (1 million shares x $1 par) 1

Paid-in capital—excess of par (1 million shares x $15*) 15

Paid-in capital—share repurchase (balance from first buyback) 2

Retained earnings (difference) 1

Cash (1 million shares x $19) 19

* $16 – $1 par

Brief Exercise 18–8

Jennings’s retained earnings will decline by $2 million because the $67 million sale price is less than the sum of the cost of the treasury stock ($70 million) and paid-in capital from the previous treasury stock sale ($1 million)

Journal entries (not required):

Treasury stock (2 million shares x $70) 140

Cash 140

First sale of treasury stock Cash (1 million shares x $71) 71

Treasury stock (1 million shares x $70) 70

Paid-in capital—share repurchase (remainder) 1

Second sale of treasury stock Cash (1 million shares x $67) 67

Paid-in capital—share repurchase (balance from first sale) 1

Retained earnings (remainder) 2

Treasury stock (1 million shares x $70) 70

Brief Exercise 18–9

Cox’s paid-in capital—share repurchase will increase by $7 million as

determined in the following journal entry:

($ in millions)Cash (1 million shares x $29) 29

Paid-in capital—share repurchase (difference) 7

Treasury stock (1 million shares x $22*) 22

* 2 million shares x $20 = $40 million

1 million shares x $26 = 26 million

3 million shares $66 million

$66 million ÷ 3 million shares = $22 average cost per share

Brief Exercise 18–10

Cox’s paid-in capital—share repurchase will increase by $9 million as

determined in the following journal entry:

($ in millions)Cash (1 million shares x $29) 29

Paid-in capital—share repurchase (difference) 9

Treasury stock (1 million shares x $20*) 20

* 2 million shares x $20 = $40 million (first million at $20)

1 million shares x $26 = 26 million

Retained earnings (1,000 shares at $35 per share) 35,000

Property dividends payable 35,000

Retained earnings (3 million* shares at $25 per share) 75

Common stock (3 million* shares at $1 par per share) 3 Paid-in capital—excess of par (remainder) 72

* 5% x 60 million shares = 3 million shares

Common stock (60 million shares* x $1 par per share) 60

**alternatively, retained earnings may be debited

* 100% x 60 million shares = 60 million shares

If the per share par value of the shares is not to be changed, the stock distribution

is referred to as a "stock split effected in the form of a stock dividend." In that case, the journal entry increases the common stock account by the par value of the additional shares This prevents the increase in shares from reducing (by half

in this case) the par per share The par is $1 before and after the split

Brief Exercise 18–16

EXERCISES

Exercise 18–1

Requirement 1

Comprehensive income is a more expansive view of the change in shareholders’

equity than traditional net income It is the total nonowner change in equity for a

reporting period In fact, it encompasses all changes in equity other than from transactions with owners Transactions between the corporation and its shareholders primarily include dividends and the sale or purchase of shares of the company’s stock Most nonowner changes are reported in the income statement So, the changes other than those that are part of net income are the ones reported as “other comprehensive income.”

Requirement 2

Two attributes of other comprehensive income are reported: (1) the components

of comprehensive income created during the reporting period and (2) the comprehensive income accumulated over the current and prior periods

The second measure—the comprehensive income accumulated over the current

and prior periods—is reported in the balance sheet as a separate component of shareholders’ equity This is what Kaufman reported in its balance sheet ($107

million in 2013) Be sure to realize this amount represents the cumulative sum of the

changes in each component created during each reporting period (the disclosure note) throughout all prior years

Exercise 18–1 (continued)

Requirement 3

Kaufman's 2013 balance sheet amount ($107 million) differs from the 2013 amount reported in the disclosure note. On the other hand, the comprehensive income

created during the reporting period can be reported in either (a) an expanded version

of the income statement or (b) a separate statement immediately following the income statement Regardless of the placement a company chooses, the presentation is similar

It will report net income, other components of comprehensive income, and total comprehensive income, similar to the following:

Other comprehensive income:

Net unrealized holding gains (losses) on investments (net of tax)† $ x

Gains (losses) from and amendments to postretirement plans (net of tax)‡ (x)

Deferred gains (losses) from derivatives (net of tax)§ x

Gains (losses) from foreign currency translation (net of tax)* x xx

† Changes in the fair value of some securities (described in Chapter 12)

‡ Gains and losses due to revising assumptions or market returns differing from expectations and prior service cost from amending the plan (described in Chapter 17)

§ When a derivative designated as a cash flow hedge is adjusted to fair value, the gain or loss is deferred as a component of comprehensive income and included in earnings later, at the same time as earnings are affected by the hedged transaction (described in the Derivatives

Appendix to the text)

* Gains or losses from changes in foreign currency exchange rates from the translation of

foreign subsidiary financial statements The amount could be an addition to or reduction in

Exercise 18–1 (concluded)

Requirement 4

From the information Kaufman's financial statements provide, we can determine how the company calculated the $107 million accumulated other comprehensive income in 2013:

Exercise 18–2

Requirement 1

The specific citation that describes the guidelines for presenting accumulated other comprehensive income on the statement of shareholders’ equity is FASB ACS 220–10–45–14: “Comprehensive Income–Overall–Other Presentation Matters– Reporting Other Comprehensive Income in the Equity Section of a Statement of Financial

Position.”

Requirement 2

45-14 The total of other comprehensive income for a period shall be transferred to a

component of equity that is displayed separately from retained earnings and additional paid-in capital in a statement of financial position at the end of an accounting period

A descriptive title such as accumulated other comprehensive income shall be used for that component of equity An entity shall disclose accumulated balances for each classification in that separate component of equity on the face of a statement of

financial position, in a statement of changes in equity, or in notes to the financial statements The classifications shall correspond to classifications used elsewhere in the same set of financial statements for components of other comprehensive income

Exercise 18–3

Indicate by letter whether each of the items listed below most likely is reported in the

income statement as Net Income (NI) or in the statement of comprehensive income as Other Comprehensive Income (OCI)

Items

OCI 1 Increase in the fair value of securities available-for-sale

NI 2 Gain on sale of land

OCI 3 Loss on pension plan assets (actual return less than expected)

OCI 4 Gain from foreign currency translation

NI 5 Increase in the fair value of trading securities

OCI 6 Loss from revising an assumption related to a pension plan

NI 7 Loss on sale of patent

OCI 8 Prior service cost

NI 9 Increase in the fair value of bonds outstanding; fair value option

OCI 10 Gain on postretirement plan assets (actual return more than expected)

Exercise 18–4

Cash (3 million shares x $17.15 per share) 51,450,000

Common stock (3 million shares x $.01 par per share) 30,000 Paid-in capital—excess of par (remainder) 51,420,000

Exercise 18–5

February 12

Cash (2 million shares x $9 per share) 18,000,000

Common stock (2 million shares x $1 par) 2,000,000 Paid-in capital—excess of par (difference) 16,000,000

February 13

Legal expenses (40,000 shares x $9 per share) 360,000

Common stock (40,000 shares x $1 par) 40,000 Paid-in capital—excess of par (difference) 320,000 Note: Because 2 million shares sold the previous day for $9 per share, it’s reasonable to assume

a $9 per share fair value

February 13

Cash 945,000

Common stock (80,000 shares x $1 par) 80,000

Paid-in capital—excess of par, common* 640,000 Preferred stock (4,000 shares x $50 par) 200,000

Paid-in capital—excess of par, preferred** 25,000

* 80,000 shares x [$9 market value – $1 par]

** Since the value of the common shares is known ($720,000), the market value of the

preferred ($225,000) is assumed from the total selling price ($945,000)

November 15

Property, plant, and equipment (cash value) 3,688,000

Common stock (380,000 shares at $1 par per share) 380,000 Paid-in capital—excess of par (difference) 3,308,000

Exercise 18–6

Williams Industries must report the 20 million Class B shares among its term liabilities in its balance sheet, not as part of shareholders’ equity The “triggering event,” the death of J.P Williams, is certain to occur even though its timing may not

long-be A share or other financial instrument is considered to be mandatorily redeemable

if it embodies an unconditional obligation that requires the issuer to redeem the instrument with cash or other assets at a specified or determinable date or upon an

employment of an individual, since both events, like taxes, are inevitable

Because Williams has the right but not the obligation to repurchase the Class A shares if a change in ownership of the voting common shares changes, there is no unconditional obligation to repurchase the Class B shares They are classified as equity

Exercise 18–7

Cash ($424 million – 2 million) 422

Common stock (15 million shares at $1 par per share) 15

Paid-in capital—excess of par (difference) 407

Some argue that share issue costs and debt issue costs are fundamentally different This view is that a debt issue has a fixed maturity so, like interest expense, debt issue costs are part of the expense of borrowing funds for that period of time (recorded in a separate expense account—“debt issue expense”) On the other hand, selling shares represents a perpetual equity interest Just as dividends paid on that capital investment are not an expense, neither are the share issue costs of obtaining that capital investment

Expensing debt issue costs presently is required by GAAP However, the FASB has suggested in Concept Statement 6 that those costs should be treated the same way

as share issue costs, meaning that the debt issue costs would reduce the recorded amount of the debt instead of being recorded separately as an asset

Exercise 18–8

Requirement 1

The base amount of the preferred shares is $2,500,000 ÷ 100,000 shares = $25 The dividend preference is 6.785% So, the dividends paid annually to a preferred shareholder owning 100 shares are: $25 x 100 shares x 6.785% = $169.625

Requirement 2

If dividends are not paid in 2014 and 2015, but are paid in 2016, the shareholder will receive $169.625 x 3 = $508.875 The prior years’ unpaid dividends are paid because the shares are cumulative Otherwise, only the $169.625 current year dividend would

be paid When preferred shares are cumulative, this means that if the specified dividend is not paid in a given year, the unpaid dividends (called “dividends in arrears”) accumulate and must be made up in a later dividend year before any dividends are paid on common shares

Requirement 3

If the investor chooses to convert the shares in 2014, the investor will receive $25 ÷

$30.31 x 100 shares = 82.48 shares of common stock for his/her 100 shares This can

be calculated also as 82,481 ÷ 100,000, or $0.8248 per share times 100 shares The 48 fractional share likely would be paid in cash equal to the current market price per share times 48

Requirement 4

If Ozark chooses to redeem the shares on June 18, 2014, the investor will be paid

$2,744 for his/her 100 shares:

The redemption price is $28 ($25 x 112%), reduced by 2% because redemption would

be two years after the initial redemption date Hence, the price would be $28 x 98% =

$27.44 The total payment would be $27.44 x 100 shares, or $2,744

Exercise 18–9

AMTC

Cash (7.5 million shares x $13.546) 101,595,000

Paid-in capital—excess of par (difference) 101,587,500

PSI

Cash (9 million shares x $15.20) 136,800,000

Paid-in capital—excess of par (difference) 136,710,000

Exercise 18–10

Preferred Common

* $8 million dividends in arrears plus $12 million of the $16 million current

preference

** $4 million dividends in arrears plus the $16 million current preference

Exercise 18–11

1 January 7, 2013

($ in millions) Common stock (2 million shares x $1 par) 2

Paid-in capital—excess of par (2 million shares x $3*) 6

Retained earnings (difference) 2

Cash (2 million shares x $5 per share) 10

* Paid-in capital—excess of par: $300 ÷ 100 million shares

2 August 23, 2013

Common stock (4 million shares x $1 par) 4

Paid-in capital—excess of par (4 million shares x $3) 12

Paid-in capital—share repurchase (difference) 2

Cash (4 million shares x $3.50 per share) 14

3 July 25, 2014

Cash (3 million shares x $6 per share) 18

Common stock (3 million shares x $1 par) 3

Paid-in capital—excess of par (difference) 15

Exercise 18–12

Common stock (10 million shares x $1 par) 10

Paid-in capital—excess of par (10 million shares x $33*) 330

Paid-in capital—share repurchase (difference) 15

Cash (10 million shares x $32.50) 325

* $34 – $1 par

2 March 3, 2013

Common stock (10 million shares x $1) 10

Paid-in capital—excess of par (10 million shares x $33*) 330

Paid-in capital—share repurchase (available balance) 15

Retained earnings (remainder) 5

Cash (10 million shares x $36) 360

* $34 – $1 par

3 August 13, 2013

Cash (1 million shares x $42) 42

Common stock (1 million shares x $1) 1

Paid-in capital—excess of par (remainder) 41

4 December 15, 2013

Cash (2 million shares x $36) 72

Common stock (2 million shares x $1) 2

Paid-in capital—excess of par (remainder) 70

Cash (1 million shares x $21) 21

Treasury stock (1 million shares x $20) 20

Paid-in capital—share repurchase (remainder) 1

3 November 4, 2013

Cash (1 million shares x $18) 18

Paid-in capital—share repurchase (available balance from req 2.) 1

Retained earnings (remainder) 1

Treasury stock (1 million shares x $20) 20

Exercise 18–14

1 February 12, 2013

($ in millions)Treasury stock (1 million shares x $13) 13

Cash (2 million shares x $15) 30

Paid-in capital—share repurchase (difference) 8

Treasury stock (2 million shares x $11*) 22

* 1 million shares x $13 = $13 million

2 million shares x $10 = 20 million

3 million shares $33 million

$33 million ÷ 3 million shares = $11 average cost per share

4 May 25, 2015

Cash (2 million shares x $15) 30

Paid-in capital—share repurchase (difference) 7

Treasury stock (FIFO cost*) 23

* 1 million shares x $13 = $13 million

1 million shares x $10 = 10 million

$23 million

Exercise 18–15

Requirement 1

authorized but unissued shares

Requirement 2

Reacquired shares that are retired have their status restored to that of authorized

shares are treated as issued, but not outstanding shares—at the same time both (a) issued and (b) not outstanding This artificial status has provided companies an effective device to evade the superficial constraints imposed on par value shares Treasury stock is reported as a reduction in total shareholders' equity, not associated with any specific shareholders’ equity account By either method, total

shareholders’ equity is the same Retiring shares clearly is conceptually superior because it effectively restores the shares to the status of being authorized, but unissued, shares

Treated as treasury stock, the cost of acquiring the shares is debited to the treasury stock account Recording the effects on specific shareholders’ equity accounts is delayed until later when the shares are reissued In the meantime, the shares assume the artificial status of being neither unissued nor outstanding

Exercise 18–16

This is a change in accounting principle

Common stock ($1 par x 4 million shares retired) 4

Paid-in capital—excess of par (average amount above par

at which the retired shares originally sold: $800 million

÷ 200 million shares = $4; $4 x 4 million shares retired) 16

Retained earnings (difference) 5

Treasury stock (cost of the shares retired) 25

UMC applies the new way of reporting reacquired shares retrospectively; that is,

to all prior periods as if it always had used that method In other words, all financial statement amounts for individual periods affected by the change and that are included for comparison with the current financial statements are revised

In each prior period reported, then, UMC would reduce Common stock by $4 million, Paid-in capital—excess of par by $16 million, Retained earnings by $5 million, and Treasury stock by $25 million

The effect of the change on each line item affected should be disclosed for each period reported as well as any adjustment for periods prior to those reported Also, the nature of and justification for the change should be described in the disclosure notes

Paid-in capital—excess of par (36 million shares x $9.19) 330.84

Requirement 3

DuPont is referring to the fact that stock options and stock awards increase the number of shares and thus decrease earnings per share, other things being equal This effect would partially be offset by decreasing the number of shares through share repurchase

Exercise 18–18

Requirement 1

Common stock (5 million shares x $1 par per share) 5

Paid-in capital—excess of par ($22 – 5 – 2) 15

Retained earnings (given) 2

Cash (given) 22

Net income closed to retained earnings

Income summary 88

Retained earnings (given) 88

Declaration of a cash dividend

Retained earnings (given) 33

Cash 33

Declaration of a stock dividend

Retained earnings (given) 20

Common stock ([105 – 5] x 4%) million shares at $1 par per share) 4

Paid-in capital—excess of par (difference) 16

Requirement 2

BRENNER-JUDE CORPORATION

Statement of Retained Earnings

F OR THE YEAR ENDED D ECEMBER 31, 2013

Cash dividends of $.33 per share (33)

Balance at December 31 $123

Exercise 18–19

April 1, 2013

Retained earnings (300,000* shares at $30 per share) 9,000,000

Common stock (300,000* shares at $1 par per share) 300,000 Paid-in capital—excess of par (remainder) 8,700,000

* 10% x 3 million shares issued and outstanding

Exercise 18–20

Requirement 1

Common stock (24.5 million shares* x $.001 par per share) 24,500

**alternatively, retained earnings may be debited

* 100% x 24.5 million shares = 24.5 million shares

Requirement 2

If the per share par value of the shares is not to be changed, the stock distribution

is referred to as a "stock split effected in the form of a stock dividend." In that case, the journal entry in requirement 1 increases the common stock account by the par value of the additional shares This prevents the increase in shares from reducing (by half in this case) the par per share

Requirement 3

If Hanmi’s stock price had been $36 at the time of the split, its approximate value after the split (other things equal) would be $18 The same pie is sliced into twice as many pieces, so each piece is worth half as much

Exercise 18–21

Requirement 1

A stock dividend or stock split usually results in some shareholders being entitled

to fractions of whole shares For instance, if a company declares a 25% stock dividend, or equivalently a 5-for-4 stock split, a shareholder owning 10 shares would be entitled to 2 1/2 shares Another shareholder with 15 shares would be entitled to 3 3/4 shares Paying shareholders the cash equivalent of the fractional shares simplifies matters for both the corporation and shareholders

Requirement 2

Retained earnings (36 million* x $21 per share) 756

Common stock ([36 million* – 2 million] x $1 par) 34

Paid-in capital—excess of par

([36 million* – 2 million] x [$21 – 1 = $20 per share]) 680

Cash (2 million shares at $21 market price per share) 42

* 4% x 900 million shares = 36 million additional shares

Exercise 18–22

The FASB Accounting Standards Codification represents the single source of

authoritative U.S generally accepted accounting principles The specific citation for each of the following items is:

1 Disclosure for the pertinent rights and privileges of the various securities outstanding:

FASB ACS 505–10–50–3: “Equity–Overall–Disclosure.”

2 Requirement to record a “small” stock dividend at the fair value of the shares issued:

FASB ASC 505–20–30–3: “Equity–Stock Dividends and Stock Splits–Initial Measurement–Stock Dividend.”

Another citation that describes what qualifies as a small stock dividend is FASB ASC 505–20–25–3 Notice, though, that this paragraph does not say fair value,

so it can’t be considered the “best” answer

3 Requirement to exclude from the determination of net income gains and

losses on transactions in a company’s own stock:

FASB ACS 505–10–25–2: “Equity–Overall–Recognition”

Exercise 18–23

Requirement 1

a March 3—declaration date

Investment in Leasco International stock 20,000

Gain on appreciation of investment ($720,000 – 700,000) 20,000

Retained earnings (240,000 shares at $3 per share) 720,000

Property dividends payable 720,000

March 15—date of record

no entry

March 31—payment date

Property dividends payable 720,000

Investment in Leasco International stock 720,000

b May 3

Paid-in capital—excess of par, common* 90,000

Common stock (25% x [364,000 – 4,000] shares at $1 par) 90,000

*alternatively, retained earnings may be debited.

c July 5

Retained earnings (9,000* x $11 per share) 99,000

Common stock (9,000* x $1 par) 9,000

Exercise 18–23 (concluded)

d December 1—declaration date

Retained earnings 7,920

Cash dividends payable ($90,000 par x 8.8%) 7,920

December 20—date of record

no entry

December 28—payment date

Cash dividends payable 7,920

December 28—payment date

Cash dividends payable 229,500

Cash 229,500

Requirement 2

CONSOLIDATED PAPER, INC

[Shareholders’ Equity section]

December 31, 2013Paid-in capital:

Preferred stock, 8.8%, 90,000 shares at $1 par $ 90,000

Treasury stock, at cost; 4,000 common shares (44,000)

1 364,000 + 90,000 + 9,000 = 463,000 shares

2 $2,574,000 – 90,000 + 90,000 = $2,574,000