Page 511 - Accounting Principles (A Business Perspective)

12. Stockholders' equity: Classes of capital stock

➢ A corporation has 1,000 shares of 8 per cent, USD 200 par value, cumulative, preferred stock
outstanding. Dividends on this stock have not been declared for three years. Is the corporation

legally liable to its preferred stockholders for these dividends? How should this fact be shown in the
balance sheet, if at all?
➢ Explain why a corporation might issue a preferred stock that is both convertible into common stock
and callable.
➢ Explain the nature of the account entitled Paid-In Capital in Excess of Par Value. Under what
circumstances is this account credited?

➢ Blake Corporation issued 5,000 shares of USD 100 par value common stock at USD 120 per share.
What is the legal capital of Blake Corporation, and why is the amount of legal capital important?
➢ What is the general approach of the accountant in determining the dollar amount at which to record
the issuance of capital stock for services or property other than cash?
➢ What assumptions are made in determining book value?
➢ Assuming there is no preferred stock outstanding, how can the book value per share of common
stock be determined? Of what significance is the book value per share? What is the relationship of
book value per share to market value per share?

Exercises
Exercise A Winters Corporation has outstanding 1,000 shares of noncumulative preferred stock and 2,000
shares of common stock. The preferred stock is entitled to an annual dividend of USD 100 per share before
dividends are declared on common stock. What are the total dividends received by each class of stock if Winters
Corporation distributes USD 280,000 in dividends in 2010?
Exercise B Zeff Corporation has 2,000 shares outstanding of cumulative preferred stock and 6,000 shares of

common stock. The preferred stock is entitled to an annual dividend of USD 18 per share before dividends are
declared on common stock. No preferred dividends were paid for last year and the current year. What are the total
dividends received by each class of stock if Zeff Corporation distributes USD 108,000 in dividends?
Exercise C Gordon Company issued 10,000 shares of common stock for USD 1,120,000 cash. The common
stock has a par value of USD 100 per share. Give the journal entry for the stock issuance.
Exercise D Thore Company issued 30,000 shares of USD 20 par value common stock for USD 680,000. What
is the journal entry for this transaction? What would the journal entry be if the common stock had no-par or stated
value?
Exercise E Li & Tu, Inc., needed land for a plant site. It issued 100 shares of USD 480 par value common stock

to the incorporators of their corporation in exchange for land, which cost USD 56,000 one year ago. Experienced
appraisers recently valued the land at USD 72,000. What journal entry would be appropriate to record the
acquisition of the land?
Exercise F Smart Corporation owes a trade creditor USD 30,000 on open account which the corporation does
not have sufficient cash to pay. The trade creditor suggests that Smart Corporation issue to him 750 shares of the
USD 24 par value common stock, which is currently selling on the market at USD 40. Present the entry or entries
that should be made on Smart Corporation's books.

512