Page 541 - Accounting Principles (A Business Perspective)

13. Corporations: Paid-in capital, retained earnings, dividends, and treasury stock

• The income or loss (net of tax effect) from the segment's operations for the portion of the current year
before it was discontinued is reported on the income statement below "Income from continuing operations".

• The gain or loss (net of tax effect) on disposal of the segment is also reported in that same section of the
income statement.
• Extraordinary items are both unusual in nature and infrequent in occurrence. Extraordinary items appear
on the income statement (net-of-tax effect) below "Income from continuing operations".
• In the period in which a change in principle is made, the nature of the change, its justification, and its effect
on net income must be disclosed in the financial statements. Also, the cumulative effect of the change on prior
years' income (net of tax effect) must be shown on the income statement for the year of the change below

"Income from continuing operations".
• Prior period adjustments consist of errors in previously published financial statements. Prior period
adjustments appear (net-of-tax effect) as a correction to the beginning retained earnings balance on the
statement of retained earnings.
• EPS equals the income available to common stockholders divided by the weighted-average number of
common shares outstanding. Income available to common stockholders is net income less any dividends on
preferred stock. EPS provides information on the return of an investment in common stock.
• The price-earnings ratio equals the current market price per share of common stock divided by EPS. The
price-earnings ratio indicates whether a stock has a future high income potential as compared to other stocks.

Demonstration problem
Demonstration problem A Wylie Corporation has outstanding 10,000 shares of USD 150 par value common
stock.
Prepare the entries to record:

a. The declaration of a cash dividend of USD 1.50 per share.
b. The declaration of a stock dividend of 10 per cent at a time when the market value per share is USD 185.
c. The declaration of a stock dividend of 40 per cent at a time when the market value per share is USD 195.
Demonstration problem B Following are selected transactions of Brackett Company:
• The company reacquired 200 shares of its own USD 100 par value common stock, previously issued at USD
105 per share, for USD 20,600.
• Fifty of the treasury shares were reissued at USD 110 per share, cash.
• Seventy of the treasury shares were reissued at USD 95 per share, cash.
• Stockholders of the corporation donated 100 shares of their common stock to the company.

• The 100 shares of treasury stock received by donation were reissued for USD 9,000.
Prepare the necessary journal entries to record these transactions.
Demonstration problem C Selected account balances of Nexis Corporation at 2010 December 31, are:
Common stock (nor par value; 100,000 shares authorized, issued, and
outstanding; stated value of USD 20 per share USD 2,000,000
Retained earnings 570,000
Dividends payable (in cash, declared December 15 on preferred stock) 16,000
Preferred stock (8 per cent, par value USD 200; 1,000 shares
authorized, issued, and outstanding) 200,000
Paid-In capital from donation of plant site 100,000
Paid-in capital in excess of par value – preferred 8,000
Present in good form the stockholders' equity section of the balance sheet.

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