A statement of stockholders' equity is normally prepared when

Eye Openers

1. Describe the stockholders’ liability to creditors of a corporation.

2. Why are most large businesses organized as corporations?

3. Of two corporations organized at approximately the same time and engaged in competing businesses, one issued $100 par common stock, and the other issued $0.01 par common stock. Do the par designations provide any indication as to which stock is preferable as an investment? Explain.

4. A stockbroker advises a client to “buy preferred stock. . . . With that type of stock, . . . [you] will never have to worry about losing the dividends.” Is the broker right?

5. What are some of the factors that influence the market price of a corporation’s stock?

6. When a corporation issues stock at a premium, is the premium income? Explain.

7. (a) What are the three conditions for the declaration and payment of a cash dividend? (b) The dates in connection with the declaration of a cash dividend are February 16, March 18, and April 17. Identify each date.

8. A corporation with both preferred stock and common stock outstanding has a substantial credit balance in its retained earnings account at the beginning of the current fiscal year. Although net income for the current year is sufficient to pay the preferred dividend of $125,000 each quarter and a common dividend of $300,000 each quarter, the board of directors declares dividends only on the preferred stock.

Suggest possible reasons for passing the dividends on the common stock.

9. An owner of 500shares of Micro shop Company common stock receives a stock dividend of 5 shares. (a) What is the effect of the stock dividend on the stockholder’s proportionate interest (equity) in the corporation? (b) How does the total equity of 505 shares compare with the total equity of 500 shares before the stock dividend?

10. a. Where should a declared but unpaid cash dividend be reported on the balance sheet?

b. Where should a declared but unissued stock dividend be reported on the balance sheet?

11. a. In what respect does treasury stock differ from unissued stock?

b. How should treasury stock be presented on the balance sheet?

12. A corporation reacquires 10,000 shares of its own $25 par common stock for $450,000, recording it at cost. (a) What effect does this transaction have on revenue or expense of the period? (b) What effect does it have on stockholders’ equity?

13. The treasury stock in Eye Opener 12 is resold for $615,000. (a) What is the effect on the corporation’s revenue of the period? (b) What is the effect on stockholders’equity?

14. What is the primary advantage of combining the retained earnings statement with the income statement?

15. What are the three classifications of restrictions of retained earnings, and how are such restrictions normally reported in the financial statements?

16. Indicate how prior period adjustments would be reported on the financial statements presented only for the current period.

17. When is a statement of stockholders’ equity normally prepared?

18. What is the primary purpose of a stock split?

PE 11-6A

Reporting stockholders’ equity

Using the following accounts and balances, prepare the Stockholders’ Equity section of the balance sheet. Seventy thousand shares of common stock are authorized, and 7,500 shares have been reacquired.

Common Stock, $75 par $4,725,000

Paid-In Capital in Excess of Par 679,000

Paid-In Capital from Sale of Treasury Stock 25,200

Retained Earnings 2,032,800

Treasury Stock 588,000