Page 505 - Accounting Principles (A Business Perspective)

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Value—Common (+SE)
• Issuance of no-par, stated value stock for cash—10,000 shares (no-par value) with USD 20 per share stated
value issued for USD 22 per share.
Cash (+A) 220,000
Common Stock (+SE) 200,000
Paid-In Capital in Excess of Stated 20,000
Value—Common (+SE)
• Issuance of no-par stock without a stated value for cash—10,000 shares (no-par value) issued at USD 22

per share.
Cash (+A) 220,000
Common Stock 220,000
(+SE)
• Example: A corporation has 200,000 shares of common stock and 5,000 shares of preferred stock
outstanding. Preferred stock is 6 per cent and cumulative. It is preferred as to dividends and as to assets in
liquidation to the extent of the liquidation value of USD 100 per share, plus any cumulative dividends on the
preferred stock. Dividends for three years are unpaid. Total stockholders' equity is USD 4,100,000.
Calculations are as follows:
Total Per
Share
Total stockholders' equity $4,100,000
Book value of preferred stock (5,000 shares)
Liquidation value (5,000 shares X $100) $ 500,000
Dividends (3 years at $30,000) 90,000 590,000 $ 118.00
Book value of common stock (200,000 shares) $3,510,000 17.55
• The return on average common stockholders' equity equals net income available to common stockholders

divided by average common stockholders' equity.
• The return on average common stockholders' equity is an important measure of the income-producing
ability of the company.
Demonstration problem
Demonstration problem A Violet Company has paid all required preferred dividends through 2004
December 31. Its outstanding stock consists of 10,000 shares of USD 125 par value common stock and 4,000 shares

of 6 per cent, USD 125 par value preferred stock. During five successive years, the company's dividend declarations
were as follows:
2005 $85,000
2006 52,500
2007 7,500
2008 15,000
2009 67,500
Compute the amount of dividends that would have been paid to each class of stock in each of the last five years
assuming the preferred stock is:
a. Cumulative.
b. Noncumulative.
Demonstration problem B Terrier Company has been authorized to issue 100,000 shares of USD 6 par
value common stock and 1,000 shares of 14 per cent, cumulative, preferred stock with a par value of USD 12.
a. Prepare the entries for the following transactions that all took place in June 2009:
• 50,000 shares of common stock are issued for cash at USD 24 per share.

Accounting Principles: A Business Perspective 506 A Global Text