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					                                      Module 17
                                 Stockholders’ Equity


Common Stock

A corporation is an entity that is legally separate from its owners. When a corporation is
formed, it issues capital stock to the owners. Stockholders have limited liability, and
ownership in a corporation is readily transferable.

Corporations can have two basic types of stockholders. Common stockholders have the
right to do the following:
 Vote in the election of directors and establish some company policies,
 Maintain a proportionate interest in the corporation by purchasing additional stock
    (called the preemptive right),
 Share in profits when dividends are declared,
 Share in distribution of assets when the company is liquidated.
Thus, of stockholders, common stockholders have the greater risk associated with a
company but also enjoy the greater benefits if the company is successful.

Preferred stockholders have some other privileges (discussed later) but in exchange are
usually granted only some of the rights that common stockholders have.

Some terms used in the balance sheet related to common stock include the following:
 Number of authorized shares refers to the total number of shares that a corporation
   may issue as stated in its corporate charter.
 Number of shares issued refers to the total number of shares that a corporation has
   actually issued. This cannot be more than the number of authorized shares.
 Number of shares outstanding refers to the number of shares issued that
   stockholders still hold. This number is obtained by subtracting the number of shares
   repurchased by the corporation that it still holds (called treasury stock) from the
   number of shares issued.
Thus, the number of shares authorized is the highest, and the number of shares
outstanding is the lowest of the three numbers listed.


Issuance of Common Stock

Par value is the dollar amount per share established by a corporation’s articles of
incorporation. Par value has some legal significance and is also referred to as legal
capital. Par value has no relation to the market value of common stock. Some
companies have no par value. In such instances, stated value (established by the board
of directors) is used for accounting purposes. Stated value is treated similarly to par
value.

When companies issue stock, the cash (or other assets and/or benefits) received is
usually more than the par value. That is, the market value per share sold is higher than
par value. The difference between the value of assets or benefits received by the
company and the par value is recorded in the account Additional Paid-in Capital, also
called Paid-in Capital in Excess of Par.
Example
Adams Company issued 100 shares of $2 par common stock for $10 each. Prepare the
journal entry for the transaction.
Account                                           Debit        Credit
Cash (step 1)                                    1,000
   Common Stock (step 2)                                         200
   Additional Paid-in Capital (step 3)                           800
Note the following:
1. Since the company issued 100 shares for $10 each, the cash received is $1,000.
2. Since the par value per share is $2 and 100 shares have been issued, the Common
Stock account is credited for $200.
3. The “plug” number to make debits equal credits is $800, the amount of the credit to
Additional Paid-in Capital.

Capital stock also can be issued for consideration other than cash. For example, a
company might receive property (such as land or a building) and in return offer common
stock. Companies also can offer to pay for services obtained from others (such as a
lawyer or business consultant) in the form of common stock. In such transactions, the
fair market value of the stock or the fair market value of the property or services
received, whichever can be more objectively determined, is used as the amount of the
transaction.

Example
Ball Company obtained land with a market value of $50,000 and in return issued 2,000
shares of $10 par common stock.
The journal entry for the transaction follows:
Account                                            Debit         Credit
Land (step 1)                                     50,000
   Common Stock (step 2)                                        20,000
   Additional Paid-in Capital (step 3)                          30,000
Note the following:
1. The Land account is debited for the market value of the acquired property.
2. The Common Stock account is credited for the shares issued, at par value.
3. The difference (plug number) is credited to the Additional Paid-in Capital account.

Example
Charles Company obtained a building and in return issued 1,000 shares of $10 par value
common stock. The market price of the common stock was $40 per share.
The journal entry for the transaction follows:
Account                                            Debit         Credit
Building (step 1)                                 40,000
   Common Stock (step 2)                                        10,000
   Additional Paid-in Capital (step 3)                          30,000
Note the following:
1. The building’s market value is not known, but the market value of the stock is known.
Since the market value of the asset acquired must equal the market value of stock given,
the market value for the building must be $40,000 ($40 per share times 1,000 shares).
2. The Common Stock account is credited for the shares issued at par value.
3. The difference (plug number) is credited to the Additional Paid-in Capital account.
Treasury Stock

Corporations can decide to buy back their stock for a variety of reasons. For example, a
corporation might believe that its stock is undervalued and decide to increase demand
by buying back some of it. If supply is relatively unchanged and demand increases, the
market price of the stock will increase. Alternatively, a corporation might have a
significant amount of cash and decide that the best use of cash (that is, the best return
on investment) is to buy back its own stock. Other reasons for buying treasury stock
include (1) having enough stock to issue for stock option plans and (2) making hostile
takeover attempts more difficult.

Treasury stock is not considered an asset but a contra-equity. Thus, if Corporation X
buys stock of Corporation Y, the investment will be shown on the balance sheet of
Corporation X. However, if Corporation X were to buy back its own stock, it is shown as
a reduction from stockholders’ equity, not as an asset on the balance sheet.

Two methods are used to account for treasury stock transactions: the cost method and
the par value method. The cost method is widely used, and the par value method is
used in practice only rarely. Hence, we focus only on the cost method.

Note that the cost method recognizes no gains or losses from treasury stock
transactions because treasury stock is not considered an asset. Any differences
between the price paid and price received for treasury stock is recorded in Additional
Paid-in Capital accounts.


Example
On March 1, 2002, Rose Corporation purchased 1,000 shares of treasury stock for $12
per share. It then sold 600 of the treasury shares for $14 per share on June 1, 2002, and
the remaining 400 shares for $8 per share on November 1, 2002. The journal entries for
the transactions follow:

March 1: Purchase 1,000 shares of treasury stock at $12 per share. This is recorded
with a credit to Cash and a debit to Treasury Stock.
Account                                                          Debit         Credit
Treasury Stock                                                 12,000
   Cash                                                                       12,000

June 1: Sold 600 shares of treasury stock for $14 per share.
Account                                                           Debit         Credit
Cash (step 1)                                                     8,400
   Treasury Stock (600 @ $12) (step 2)                                           7,200
   Additional Paid-in Capital from Treasury Stock (step 3)                       1,200
Note the following:
1. Cash is debited for the total amount received ($8,400).
2. Since the treasury shares were purchased for $12 per share and are carried at cost,
the Treasury Stock account is credited based on the cost of the shares sold, or only
$7,200 (600 shares at $12 each).
3. The difference (plug number) is a credit to Paid-in Capital from Treasury Stock.

November 1: Sold 400 shares of treasury stock for $8 per share.
                         Account                                     Debit          Credit
Cash (step 1)                                                       3,200
Additional Paid-in Capital from Treasury Stock (step 3)             1,200
Additional Paid-in Capital from Common Stock (step 4)                 400
    Treasury stock (400 @ $12) (step 2)                                             4,800
Note the following:
1. Cash is debited for the total amount received ($3,200).
2. Since the treasury shares were purchased for $12 per share and are carried at cost,
the Treasury Stock account is credited based on the cost of the shares sold, or only
$4,800 (400 shares at $12 each).
3. When treasury stock is sold for less than cost, first reduce any existing credit balance
in the Additional Paid-in Capital account related to treasury stock.
4. If further reductions are needed (to make debits equal credits), record the additional
debits in the Additional Paid-in Capital from Common Stock account.


Preferred Stock

Preferred stockholders give up some of the rights of common stockholders but acquire
one or more of benefits (preferences). Usually, they have a preference with respect to
dividends. That is, a company must pay the applicable dividend to the preferred
stockholders first before paying a dividend to common stockholders. In addition,
preferred stockholders have priority over common stockholders if the company is
liquidated and the stockholders must be repaid their investment.

Corporations need not pay dividends each year. For reasons such as inadequate cash,
a company might decide not to pay a dividend in a particular year. When a corporation
fails to declare a dividend in any year, dividends continue to accrue to the holders of
cumulative preferred stock. That is, the dividends on cumulative preferred stock
accumulate even if the corporation declares no dividends. Any dividends not declared
(passed) are referred to as dividends in arrears. In contrast, dividends do not
accumulate for noncumulative preferred stock.

Preferred stockholders are usually paid a fixed amount. Thus, if a company issues
2,000 shares of 5%, $100 par value preferred stock, the preferred dividend per share
each year is $5 (5% of $100). The total preferred dividends paid will be $10,000 ($5
times 2,000 shares).

Sometimes preferred stockholders obtain additional dividends. Participating preferred
stock enables the holders to receive, in addition to the normal preferred dividend, any
extra dividend available after normal dividends have been paid to preferred and common
stockholders.

Convertible preferred stock provides the owner with the option to exchange (that is,
convert) the preferred stock into common stock (or some other security) issued by the
corporation. The exchange ratio (the number of common shares issued when the
preferred stock is converted) is specified in the conversion provisions when the
convertible preferred stock is issued. Convertibles are attractive because if the company
does well and the common stock price goes up, the holders of the convertible preferred
stock can convert the stock and enjoy the benefits of a common stock. However, if the
company is not doing well (and the common stock price is not high), increasing in value
the holders of the convertible preferred need not convert; they will continue to receive
the preferred dividends.

Callable preferred stock provides the company the right to call (that is, buy back) and
cancel the preferred stock in the future. The call provision usually includes a premium
(thus, the call price is an amount higher than the issue price).

Redeemable preferred stock provides the stockholder the right to redeem (that is, sell
back to the company) the preferred stock in the future. The redemption can be either
mandatory (at a specified time) or at the option of the preferred stockholder. The
redemption option (especially when it is mandatory) makes redeemable preferred stock
somewhat similar to a loan because the company can be forced to repay the proceeds
from the stock in the future. The Security and Exchange Commission prohibits
mandatory redeemable preferred stock from being included as a part of stockholders’
equity in the balance sheet. (As a result, it is usually shown between the liabilities and
stockholders’ equity sections in the “mezzanine” section.


The journal entries when preferred stock is issued are straightforward and are similar to
the issuance of common stock. The journal entries for preferred stock dividends are
similar to the journal entries required when dividends are declared and paid on common
stock and are discussed in detail later.


Conversion of Preferred Stock

When convertible preferred stock is converted, the book value method is used. That is,
the market value of the common stock is ignored because gain or loss cannot be
recognized on a transaction involving only equity accounts. The journal entries focus
only on the book value of the preferred and common stock.

Since the convertible preferred stock no longer exists after conversion, the Preferred
Stock account and the associated Additional Paid-in Capital on Preferred Stock account
are debited (when equity accounts are reduced, they are debited). Since new common
stock is issued upon conversion, the Common Stock account and the associated
Additional Paid-in Capital on Common Stock are credited (when equity accounts are
increased, they are credited).

Example
On January 1, 2001, Kent Company issued 200 shares of $100 par convertible preferred
stock at $150 per share. Each share of preferred stock is convertible into four shares of
$10 par common stock. On December 31, 2002, all shares of preferred stock were
converted. Prepare the journal entry for the conversion.

Account                                                             Debit            Credit
Preferred Stock (step 1)                                           20,000
Additional Paid-in Capital on Preferred Stock (step 2)              10,000
   Common Stock (step 3)                                                               8,000
   Additional Paid-in Capital on Common Stock (step 4)                               22,000
Note the following:
1. Since each $100 par preferred stock was issued for $150, the additional paid-in
capital per preferred share is $50. Thus, the total additional paid-in capital associated
with the preferred stock is $10,000 ($50 x 200 shares).
2. Each preferred share is convertible into four shares of common stock. Thus, a total of
800 shares of common stock must have been issued upon conversion (200 preferred
shares x four common shares per preferred share).
3. Par value of common stock is $10. Hence, the credit to the Common Stock account is
$8,000 ($10 per share x 800 shares).
4. The plug number to make debits equal credits is a credit of $22,000 to the Additional
Paid-in Capital on Common Stock account.


What if the plug number in this journal entry is a debit? That is, what if each preferred
stock is convertible into 16 shares of common stock? In this case, steps 1 and 2 are the
same. However, the total number of common stock issued upon conversion is 3,200
(200 shares of preferred stock x 16 shares of common stock per preferred stock). Thus,
step 3 now involves a credit of $32,000 ($10 par value x 3,200 shares of common stock).
Hence, to make debits equal credits, $2,000 is debited to the Retained Earnings
account.


Calling of Preferred Stock

As with conversion of preferred stock, when a company calls a callable preferred stock,
no gain or loss is recognized. As noted previously, the call price is usually higher than
the issue price. The difference between the issue price and the call price is recorded as
a debit to the Retained Earnings account.

On January 1, 2001, Lomas Company issued 200 shares of $100 par callable preferred
stock at $120 per share. On December 31, 2002, it calls all shares of preferred stock for
$125 per share. Prepare the journal entry for calling of preferred shares.

Account                                                               Debit           Credit
Preferred Stock (step 1)                                            20,000
Additional Paid-in Capital on Preferred Stock (step 2)               4,000
Retained Earnings (step 4)                                           1,000
   Cash (step 3)                                                                     25,000
Note the following:
1. Since 200 shares of preferred stock have been called, the debit to the Preferred Stock
account is $20,000 ($100 x 200 shares).
2. Since each $100 par preferred stock was issued for $120, the additional paid-in
capital per preferred share is $20. Thus, the total additional paid-in capital associated
with the preferred stock is $4,000 ($20 x 200 shares).
3. Each preferred share is called at $125. Thus, the corporation pays total cash of
$25,000 ($125 x 200 preferred shares).
4. The plug number to make debits equal credits is a $1,000 debit to the Retained
Earnings account.

Sometimes the call price is lower than the issue price. In such cases, the plug number is
a credit to the Additional Paid-in Capital account.



Dividends

Dividends may be viewed as a return of equity to a corporation’s owners. Dividends
may be paid in cash or property. The board of directors is responsible for issues related
to the amount, timing, and types of dividend paid to shareholders.

Three dates are relevant in the context of dividends. The date of declaration is the date
the board of directors formally declares that a dividend will be paid to shareholders. The
date of record is the future date that the board specifies for identifying those
stockholders in the corporation’s records to receive dividends. The date of payment is
the date the dividends are actually paid to the shareholders.

The journal entry on the date of declaration of a dividend is as follows:
        Debit Retained Earnings
                Credit Dividend Payable
Note that dividends may be declared on both common stock and preferred stock. In
such situations, separate credit entries are made for the two types of stock. Thus, the
credit entries are to Common Stock Dividend Payable and Preferred Stock Dividend
Payable.

No journal entry is required on the date of record.

The journal entry on the date of payment is as follows:
        Debit Dividend Payable
                Credit Cash
Note that if some property other than cash is given to shareholders, the credit entry is for
the appropriate asset. For example, a corporation might have investments in the
securities (stocks or bonds) of other entities that it wishes to dispose of through a
dividend paid to the shareholders.


Stock Dividends

A stock dividend is the distribution of additional shares to the existing shareholders.
Such additional shares are made on a proportional basis. For example, if a company
declares a 10% stock dividend, a shareholder currently owning 2,000 shares receives an
additional 200 shares (0.10 x 2000).

Because each shareholder still has the same proportional ownership of the company
and the shareholder has received no other assets, this is an economic non-event for the
shareholder. That is, because a pizza has been cut into 11 slices as opposed to 10
slices does not mean that there is more pizza. Similarly, because a shareholder now
has 2,200 shares after the stock dividend as opposed to 2,000 shares before the stock
dividend, the shareholder does not have any more (or less) wealth.

The market price per share changes after a stock dividend in the opposite direction.
Thus, if a company had 10,000 shares outstanding and the market price was $22 per
share, the market value of the company is $220,000. After a 10% stock dividend,
11,000 are shares outstanding. Because nothing else has changed, the overall market
value of the company is still $220,000. Hence, the price per share after the stock
dividend is $20 ($220,000/11,000 shares).

Accounting for a stock dividend varies depending on its size. If the stock dividend is less
than 25%, it is considered a small stock dividend. In such instances, an amount equal to
the market value of the new shares issued is transferred from the Retained Earnings
account to the Common Stock and the Additional Paid-in Capital (if any) accounts.

If the stock dividend is more than 25%, it is considered a large stock dividend. In such
instances, the market value is ignored and the transfer from the Retained Earnings
account is at the book value of the shares.

Example
Greig Company has 10,000 shares of $1 par common stock outstanding. The stock’s
market value was $12 per share when the company declared a 10% stock dividend.
Prepare the necessary journal entries.

This is considered a small stock dividend because the dividend is less than 25%. The
number of new shares issued is 1,000 (10% of 10,000 shares). The market value of the
new shares is $12,000 ($12 per share x 1,000 shares). Thus, the journal entries are as
follows:
(a) When the stock dividend is declared, this journal entry is made:
Account                                                          Debit            Credit
Retained Earnings                                               12,000
    Stock Dividends Distributable                                                 1,000
    Additional Paid-in Capital on Common Stock                                   11,000

(b) When the stock dividend is paid, this entry is made:
Account                                                         Debit                Credit
Stock Dividends Distributable                                   1,000
    Common Stock                                                                      1,000

As noted previously, if the stock dividend is more than 25%, it is a large stock dividend,
and the Retained Earnings account is debited only by the amount of par value of the
new shares issued.

Example
Lewis Company has 10,000 shares of $1 par common stock outstanding. The market
value of the stock was $15 per share when the company declared a 30% stock dividend.
Prepare the necessary journal entries.

This is considered a large stock dividend because the dividend is more than 25%. The
number of new shares issued is 3,000 (10,000 shares x 0.30). The market value is
ignored, and only par value is considered. The total debit to Retained Earnings is
$3,000 ($1 x 3,000 shares). The journal entries are as follows:
(a) When the stock dividend is declared:
Account                                                Debit           Credit
Retained Earnings                                     3,000
    Stock Dividends Distributable                                      3,000

(b) When the stock dividend is paid:
Account                                                  Debit            Credit
Stock Dividends Distributable                            3,000
    Common Stock                                                          3,000

Note that after a stock dividend (large or small), the total amount of stockholders’ equity
does not change. Only the component amounts within stockholders’ equity have
changed. Specifically, the Retained Earnings account is reduced but the Common Stock
account (and, in the case of small stock dividends, the Additional Paid-in Capital
account, if needed) is increased.

Also note that the total number of shares issued and outstanding have increased, but the
par value of the stock remains the same as before the dividend.


Stock Splits

If the directors of a corporation believe that the market price per share of its stock is too
high, they can order a stock split. A stock split involves increasing the number of shares
outstanding with a corresponding decrease in the par value. However, just like a stock
dividend, this is a non-event as far as the total value of the company is concerned.

Although the number of shares increases by the split factor (the ratio of new shares to
the old shares), the market price per share decreases by exactly the same factor. If a
corporation has 1,000 shares of $10 par common stock outstanding and decides to
order a two-for-one split when previously there was one share, now there are two
shares. However, because nothing else has changed, the price per share decreases
exactly by one-half after the split. (Just because a pizza is cut into eight slices as
opposed to four slices does not mean that the total amount of pizza available has
increased. It means only that the number of pizza slices has doubled.)

Thus, stock splits are quite similar to stock dividends. However, there are some
differences. First, unlike a stock dividend, a stock split changes the par value of the
stock. The new par value equals the old par value divided by the split factor. For
example, if a corporation has 1,000 shares of $10 par common stock and decides to
order a two-for-one split, it will have 2,000 shares of $5 par common stock after the split.
Second, unlike a stock dividend, a stock split does not involve a journal entry. Only a
memorandum entry (changing the number of shares and the par value) is required.


Stock Option Plans
A stock option gives the holder the right, but not the obligation, to purchase stock at
some time in the future for a set price. The predetermined price is known as the option
price or exercise price. An option is valuable if the stock price is expected to increase.

The date when the options are granted is known as the grant date. The date when the
option holder becomes eligible to exercise the option (that is, buy the stock at the
exercise price) is known as the vesting date. The date when the option holder actually
exercises the option (that is, buys the stock) is known as the exercise date.

Example
The current market price of the stock of TechNerd Company is $20 per share. You have
the option to buy 100 shares of the company at $20 per share, and the vesting period is
three years. You expect the company’s stock price to be $45 three years from now.
The option is valuable because three years from now, you can buy 100 shares at $20
each and immediately sell them in the market for $45 each if your expectation is correct.

Options have become important in employee compensation, especially in high-tech
industries. Some employees make many times more from their stock options than from
their regular salaries.

Stock option plans have two broad categories: noncompensatory and compensatory.
The main objective of a noncompensatory stock option plan is to enable widespread
employee stock ownership of the company rather than to provide additional benefits for
only some employees. Such a plan has the following features:
 Almost all full-time employees (subject to some requirements) are eligible to
    participate in the plan.
 Employees can purchase the company stock at a discount (usually, between 5 to
    15%) from the market price.
 Employees decide within a certain time period if they want to participate in the plan.

The objective of a compensatory stock option plan is to provide additional compensation
to a select group of employees. Accounting for such plans has been the subject of great
controversy in recent years and is discussed in detail later.

Two methods are used to measure the value of stock option plans. The intrinsic value
method calculates the value of a stock option based on the exercise price and the
current market price. Thus, if the current market price is $25 per share and the option
exercise price is $20, the intrinsic value per option is $5.

Most companies set the exercise price of the options at the current market price. For
example, in the preceding example, TechNerd Company set the exercise price at $20,
which was the market price at that time. This means that the intrinsic value of an option
is zero.

However, the option is still considered valuable because the company’s stock price is
expected to increase in the future. This fact is recognized by the fair value method,
which assigns a value to the option based on various factors, such as the expected
increase in stock price, the volatility of the stock price, and the amount of dividends
expected to be received before the option is exercised. The fair value of options is
determined through complex formulas, and the most widely used method uses the
Black-Scholes option pricing formula (details of which are usually covered in finance
courses).


Fixed Stock Option Plans

The two types of compensatory stock option plans are (1) fixed stock and (2)
performance-based stock. For a fixed stock option plan, details such as the number of
options given and the exercise price are set at the date the options are granted. In
contrast, for a performance-based stock option plan, the exercise price or the number of
shares varies depending on the future performance (of the company, or a division, or the
individual).

Example of Fixed Stock Option Plan
TechZ company has 300 employees, and on January 1, 2002 it adopted a compensatory
stock option plan granting each employee the right to purchase 100 shares of $1 par
common stock at $20 per share. The vesting period is three years, and the market price
on the day the options were granted also was $20. The fair value of each option has
been determined using the Black-Scholes method to be $15. Calculate the
compensation expense each period.

The total number of options is 30,000 (100 shares x 300 employees).
The total value of the options is $450,000 ($15 per option x 30,000 options).
Since the vesting period is three years, this total amount is spread over three years,
giving $150,000 per year.
This is recorded as follows:
Account                                                          Debit               Credit
Compensation Expense                                          150,000
    Additional Paid-in Capital, Stock Options                                      150,000

Assume that after three years all employees exercise their options. This means that the
corporation will receive $600,000 from the employees and will issue 30,000 shares of $1
par common stock. Note that the Additional Paid-in Capital, Stock Options account must
be eliminated because the options no longer exist, having been converted into stock.
However, the Additional Paid-in Capital on Common Stock account must now be
credited for the plug number to make debits equal credits. The journal entry follows:
Account                                                       Debit                 Credit
Cash                                                       600,000
Additional Paid-in Capital, Stock Options                  150,000
   Common stock                                                                    30,000
   Additional Paid-in Capital on Common Stock                                     720,000

In this example, we assumed that all the employees would remain with the corporation
until the options are vested. However, almost all companies experience employee
turnover. Hence, companies estimate the number of employees who will stay until the
options are vested, and only this estimate is used to calculate compensation expense
(and the corresponding journal entry). Furthermore, estimates can change over time, so
that the compensation expense can change from period to period even if the number of
options or the exercise price remain unchanged. Issues associated with turnover
estimates are illustrated later, in Demonstration Problem 3.
Performance-Based Stock Option Plan

For a performance-based stock option plan, the exercise price or the number of shares
varies depending on the corporation’s future performance. For example, a company
might estimate that the number of options per employee will vary depending on future
performance as follows.
 If the company achieves sales of at least $50 million (but less than $75 million) for
    the year ending December 31, 2004, each employee will receive 100 options.
 If the company achieves sales between $75 million and $100 million for the year
    ended December 31, 2004, each employee will receive 125 options.
 If the company achieves sales more than $100 million for the year ended December
    31, 2004, each employee will receive 150 options.

In such instances, the company estimates at the end of the first and second years the
expected performance for the third year. (Note that by the end of the third year, the
actual performance and the actual number of options granted are also known.) Based
on such expectations, the company calculates the number of options to be granted and
the related compensation cost. The important thing to remember is that as expectations
are updated, there must be a “catch-up” for compensation expense.

Example of Performance-Based Option Plan
For example, assume that at the end of the first year, the company estimated the total
expected value of options to be granted to be $240,000. However, at the end of the
second year, the company estimates the total expected value of the options to be
granted to be $300,000.

At the end of the first year, the relevant value of options to be recognized is one-third of
the estimated total value at that time, or $80,000 (one-third of $240,000). Thus, the
Compensation Expense account is debited for $80,000 at the end of the first year.

As of the end of the second year, since two-thirds of the plan period has elapsed, the
relevant value of options to be recognized is $200,000 (two-thirds of the revised estimate
of the total amount of $300,000). Since the company recognized the option value of only
$80,000 in the first year, the amount recognized as compensation expense in the
second year is $120,000 ($200,000 – $80,000)


Glossary

   Authorized Share refers to the total number of shares that a corporation can issue
    as stated in the corporate charter.

   Book value method
    Callable preferred stock provides the company the right to call (that is, buy back)
    and cancel the preferred stock in the future.

   Common stockholders
    Compensatory stock option plan seeks to provide additional compensation to a
    select group of employees.

   Convertible preferred stock provides the owner the option to exchange (that is,
    convert) the preferred stock into common stock (or some other security) issued by
    the corporation.

   Corporation is an entity that is legally separate from its owners.

   Cost method
    Cumulative preferred stock accumulates dividends in years when dividends are
    not declared and will be paid later.

   Date of declaration is the date the board of directors formally declares that a
    dividend will be paid to shareholders.

   Date of payment is the date the dividends are actually paid to the shareholders.

   Date of record is date on which those listed in the company’s records as
    stockholders are identified to receive the dividends.

   Dividends in arrears are any dividends on cumulative preferred stock not declared
    (passed).

   Exercise date is the date the option holder actually exercises an option to buy stock.

   Exercise price is the predetermined price at which an option holder can purchase
    stock (or any other security or item on which there is an option).

   Fair value method
    Fixed stock option plan is a compensatory stock option plan that specifies details
    such as the number of options and the exercise price on the date the options are
    granted.

   Grant date is the date when the options are granted.

   Intrinsic value method
    Noncompensatory stock option plan seeks to have widespread employee stock
    ownership of the company. Providing additional benefits for only some employees is
    not the main objective of such a plan.

   Noncumulative preferred stock does not accumulate dividends in a period when
    dividends are not declared.

   Participating preferred stock enables the holders to obtain, in addition to the
    normal preferred dividend, any extra dividend available after the normal dividends
    have been paid to preferred and common stockholders.

   Par value is the dollar amount per share established by the articles of incorporation.
    Par value has some legal significance and is also referred to as the legal capital.
   Performance-based stock option plan is a compensatory stock option plan that
    has some elements (such as the exercise price or the number of shares) that vary
    depending on some specified future performance.

   Preferred stockholders have some privileges (such as priority with respect to
    dividends and at liquidation) but in exchange usually do not have the right to vote for
    the directors.

   Redeemable preferred stock provides the stockholder the right to redeem (that is,
    sell it back to the company) the preferred stock in the future.

   Shares issued refers to the total number of shares that a corporation has actually
    issued.

   Shares outstanding refers to the number of shares issued still held by
    shareholders. This is obtained by subtracting the number of treasury shares from
    the number of shares issued.

   Stated value is established by the board of directors and is used for accounting
    purposes when there is no par value; treated similarly to par value.

   Stock dividend distributes additional shares to the existing shareholders on a
    proportional basis.

   Stock options provide the right, but not the obligation, to purchase stock at some
    time in the future at a set price.

   Stock splits increase the number of shares outstanding with a decrease in the par
    value.

   Treasury stock refers to shares bought back by the company (and not yet reissued
    or canceled).

   Vesting date is the date the option holder becomes eligible to exercise the option
    (that is, buy the stock at the exercise price).
                             Demonstration Problem 1
                                Cone Company

Cone Company had the following transactions related to its common stock ($10 par
value) during the year ended December 31, 2002. Prepare the journal entries using the
cost method.

Date
March 1       Issued 3,000 shares for $12 per share.
May 1         Purchased 1,000 shares for $14 per share.
June 1        Sold 500 shares of treasury stock at $16 per share.
July 1        Sold an additional 300 shares of treasury stock at $11 per share.
August 1      Sold an additional 200 shares of treasury stock at $8 per share.
Solution to Demonstration Problem 1, Cone Company

March 1: Issued 3,000 shares for $12 per share:
Account                                                          Debit   Credit
Cash                                                            36,000
  Common Stock                                                           30,000
  Additional Paid-in Capital on Common Stock                              6,000


May 1: Purchased 1,000 shares for $14 per share:
Account                                                          Debit   Credit
Treasury Stock                                                  14,000
   Cash                                                                  14,000


June 1: Sold 500 shares of treasury stock for $16 per share:
Account                                                          Debit   Credit
Cash                                                             8,000
   Treasury Stock (500 @ $14)                                             7,000
   Additional Paid-in Capital from Treasury Stock                         1,000


July 1: Sold 300 shares of treasury stock for $11 per share:
Account                                                          Debit   Credit
Cash                                                             3,300
Additional Paid-in Capital from Treasury Stock                     900
   Treasury Stock (300 @ $14)                                             4,200


August 1: Sold 200 shares of treasury stock for $8 per share:
Account                                                          Debit   Credit
Cash (step 1)                                                    1,600
Additional Paid-in Capital from Treasury Stock (step 3)            100
Additional Paid-in Capital on Common Stock (step 4)              1,100
  Treasury Stock (200 @ $14) (step 2)                                     2,800
                              Demonstration Problem 2
                                 Travis Company


The stockholders’ equity section of the balance sheet of Travis Company had the
following information as of January 1, 2002:

       Common stock, $1 par, 200,000 shares issued and outstanding $ 200,000
       Paid-in capital in excess of par                               800,000
       Retained earnings                                            3,000,000

During the year, the following transactions took place:
March 1           Declared and distributed a 10% stock dividend.
June 1            Effected a two-for-one stock split.
October 1         Declared and distributed a 30% stock dividend.
December 31       Declared cash dividend of $1 per share, payable February 1, 2003.
The market price of Travis Company’s stock was $20 on March 1, $30 on June 1, $22
on October 1, and $24 on December 31 (effective before that day’s transaction noted).
Prepare the required journal entries.
Solution to Demonstration Problem 2, Travis Company

March 1: Declared and distributed 10% stock dividend.
The number of shares outstanding as of March 1 is 200,000.
The number of new shares issued for stock dividend is 20,000 (200,000 x 0.10).
This is a small stock dividend, so the Retained Earnings account is debited by market
price ($20 per share) times the number of new shares issued.
Since the shares were issued the same day, Common Stock is credited (for par value).
The entry Additional Paid-in Capital is for the plug number to make debits equal credits.
The total number of shares of common stock ($1 par) after the stock dividend is
220,000.

Account                                                            Debit            Credit
Retained Earnings (step 1)                                       400,000
  Common Stock (step 2)                                                            20,000
  Additional Paid-in Capital on Common Stock (step 3)                             380,000


June 1: Effected a two-for-one stock split.
No journal entry is made, but a memorandum is recorded.
The number of shares issued and outstanding doubles to 440,000, and the new par
value is $0.50 per share.


October 1: Declared and distributed 30% stock dividend.
Number of shares outstanding as of October 1 is 440,000.
Number of new shares issued for stock dividend is 132,000 (440,000 x 0.30)
This is a large stock dividend, so Retained Earnings is debited by par value times the
number of new shares issued, $66,000 ($0.50 x 132,000).
The total number of shares of common stock ($1 par) after the stock dividend is
572,000.

Account                                                          Debit              Credit
Retained Earnings                                               66,000
  Common Stock                                                                     66,000


December 31: Declared cash dividend of $1 per share, payable February 1, 2003.
Account                                                       Debit            Credit
Retained Earnings                                          572,000
  Dividend Payable                                                           572,000
                              Demonstration Problem 3
                                 ZZNET Company

ZZNET company has 200 employees, and on January 1, 2002, adopted a performance-
based stock option plan. The company will grant each employee the right to purchase its
$1 par common stock at $15 per share. The fair value of each option has been
determined to be $12, but the number of options per employee will vary depending on
the company’s future performance as follows:
          If Fiscal Year 2004 Sales Is           Then Number of Options per Employee
             Less than $200 million                               100
   Between $200 million and $250 million                          150
             More than $250 million                               200
The company’s estimates (and actual results) related to fiscal 2004 sales were as
follows:
 On December 31, 2002, the company estimated that fiscal year 2004 sales would be
      $180 million.
 The company revised its estimate on December 31, 2003, to $220 million.
 Actual sales for fiscal year 2004 were $260 million.
The company initially estimated that as of December 31, 2004, 190 employees would
still be with the company but revised its estimate on December 31, 2003, to only 180 of
the eligible employees. On December 31, 2004, only 175 of the eligible employees were
still working with the company.
Calculate the compensation expense each period.
Solution to Demonstration Problem 3, ZZNET Company

1. As of December 31, 2002, the estimated number of options to be granted is 100 per
employee because the estimated fiscal 2004 sales revenue is $180 million. Only 190
employees are expected to be with the company, so total options expected to be granted
equal 19,000 (100 options x 190 employees).
2. The fair value of each option is $12.
3. The total cost of options expected to be granted is $228,000 ($12 x 19,000 options).
4. As of December 31, 2002, only one-third of the vesting period had expired.
5. Total estimated compensation cost to date is $76,000 ($228,000 x 0.33).
6. No compensation expense had been recognized in prior periods (because 2002 is the
first year).
7. Hence, current period compensation expense is $76,000.
Repeat these calculations for the other two years as shown here:
                                                            2002        2003        2004
Estimated number of eligible employees                       190         180         175
Estimated number of options per employee                     100         150         200
Estimated total number of options to be granted           19,000      27,000      35,000
Fair value of each option                                    $12         $12         $12
Estimated total compensation cost                       $228,000    $324,000 $420,000
Fraction of period                                            1/3         2/3         3/3
Estimated compensation cost to date                      $76,000    $216,000 $420,000
Compensation expense recognized in prior periods              $0     $76,000 $216,000
Current period compensation expense                      $75,000    $140,000 $204,000

Calculations for year ending December 31, 2003:
1. As of December 31, 2003, the estimated number of options to be granted is 150 per
employee because estimated sales for fiscal 2004 total $220 million. Only 180
employees are expected to be with the company, so total options expected to be granted
are 27,000 (150 x 180 employees).
2. The fair value of each option x $12.
3. The total cost of options expected to be granted is $324,000 ($12 x 27,000 options).
4. As of December 31, 2002, two-thirds of the vesting period have expired.
5. Total estimated compensation cost to date is $216,000 ($324,000 x 0.66).
6. Total compensation expense recognized in prior periods is $76,000.
7. Current period compensation expense totals $140,000 ($216,000 – $76,000).

Complete the table for 2004. Note that 200 options will be issued per employee for the
175 eligible employees because the actual sales for 2004 were $260 million. Also note
that the total compensation expense recognized in prior periods is $216,000 ($76,000 in
2002 and $140,000 in 2003), so current compensation expense in 2004 is $204,000.
                                  Practice Problem 1
                                    Hill Company

Hill Company had the following transactions related to its common stock ($1 par value)
during the year ended December 31, 2002. Prepare the journal entries using the cost
method.

Date
February 1      Issued 5,000 shares for $9 per share.
April 1         Purchased 2,000 shares for $10 per share.
June 1          Sold 1,000 shares of treasury stock at $11 per share.
August 1        Sold an additional 400 shares of treasury stock at $9 per share.
December 1      Sold an additional 500 shares of treasury stock at $8 per share.
Solution to Practice Problem 1, Hill Company

February 1: Issued 5,000 shares for $9 per share:
Account                                                           Debit   Credit
Cash                                                             45,000
  Common Stock                                                             5,000
  Additional Paid-in Capital on Common Stock                              40,000


April 1: Purchased 2,000 shares for $10 per share:
Account                                                           Debit   Credit
Treasury Stock                                                   20,000
   Cash                                                                   20,000


June 1: Sold 1,000 shares of treasury stock for $11 per share:
Account                                                           Debit   Credit
Cash                                                             11,000
   Treasury Stock (1,000 @ $10)                                           10,000
   Additional Paid-in Capital from Treasury Stock                          1,000


August 1: Sold 400 shares of treasury stock for $9 per share:
Account                                                           Debit   Credit
Cash                                                              3,600
Additional Paid-in Capital from Treasury Stock                      400
  Treasury stock (400 @ $10)                                               4,000


December 31: Sold 500 shares of treasury stock for $8 per share:
Account                                                          Debit    Credit
Cash (step 1)                                                    4,000
Additional Paid-in Capital from Treasury Stock (step3)             600
Additional Paid-in Capital on Common Stock (step 4)                400
  Treasury stock (500 @ $10) (step 2)                                      5,000
                                 Practice Problem 2
                                 Conway Company


The stockholders’ equity section of the balance sheet of Conway Company had the
following information as of January 1, 2002:

       Common stock, $1 par, 100,000 shares issued and outstanding      $ 100,000
       Paid-in capital in excess of par                                   900,000
       Retained earnings                                                7,000,000

During the year, the following transactions took place:
April 1            Declared and distributed a 5% stock dividend.
July 1             Effected a two-for-one stock split.
December 31        Declared cash dividend of $1.50 per share, payable February 15, 2003.
The market price of Conway Company’s stock was $16 on April 1, $24 on July 1, and
$14 on December 31 (effective before that day’s transaction noted).
Prepare the following:
a. The required journal entries.
b. The stockholders’ equity section of the balance sheet as of December 31, 2002,
    if the net income for the year ended December 31, 2002, was $2,000,000.
Solution to Practice Problem 2, Conway Company

April 1: Journal entries
Declared and distributed 5% stock dividend.
The number of shares outstanding as of March 1 is 100,000.
The number of new shares issued for stock dividend is 5,000 (100,000 x 0.05).
This is a small stock dividend, so Retained Earnings is debited for the market price ($16
per share) times the number of new shares issued.
The total number of shares of common stock ($1 par) after the stock dividend is
105,000.

Account                                                          Debit             Credit
Retained Earnings                                               80,000
  Common Stock                                                                      5,000
  Additional Paid-in Capital on Common Stock                                       75,000

July 1: Effected a two-for-one stock split.
No journal entry is made, but a memorandum is recorded.
The number of shares issued and outstanding doubles to 210,000, and the new par
value is be $0.50 per share.


December 31: Declared cash dividend of $1.50 per share, payable February 15, 2003.
Account                                                      Debit             Credit
Retained Earnings                                          315,000
  Dividend Payable                                                           315,000


Stockholders’ equity section of balance sheet

Common stock, $0.50 par, 210,000
shares issued and outstanding                                                $   105,000
Additional paid-in capital on common stock                                       975,000
Retained earnings                                                              8,605,000
Total stockholders’ equity                                                   $ 9,685,000

Note:
Ending retained earnings      = $7,000,000 – $80,000 – $315,000 + $2,000,000
                              = $8,605,000
                                 Practice Problem 3
                                  XTEK Company

XTEK company has 150 employees, and on January 1, 2002, adopted a performance-
based stock option plan. The company will grant each employee the right to purchase its
$1 par common stock at $20 per share. The number of options per employee will vary
depending on the company’s future performance as follows:

         If Fiscal Year 2004 Sales Is             Number of Options per Employee
             Less than $25 million                                100
     Between $25 million and $30 million                          120
             More than $30 million                                140
The company’s estimates (and actual results) related to fiscal 2004 sales were as
follows:
 On December 31, 2002, the company estimated that fiscal year 2004 sales would be
     $23 million.
 The company revised its estimate on December 31, 2003, to $27 million.
 Actual sales for fiscal year 2004 were $31 million.
The fair value of each option has been determined to be $15 using the Black-Scholes
method. Calculate the compensation expense each period.
Solution to Practice Problem 3, XTEK Company

1. As of December 31, 2002, the estimated number of options to be granted is 100 per
employee because estimated sales for fiscal 2004 is only $23 million, so total options
expected to be granted equal 15,000 (100 options for 150 employees).
2. The fair value of each option is $15.
3. The total cost of options expected to be granted is $225,000 ($15 x 15,000 options).
4. As of December 31, 2002, only one-third of the vesting period had expired.
5. Total estimated compensation cost to date is $75,000 ($225,000 x 0.33).
6. No compensation expense has been recognized in prior periods (because 2002 is the
first year).
7. Hence, current period compensation expense is $75,000.
Repeat these calculations, for the other two years, as shown here.
                                                            2002        2003         2004
Estimated total number of options to be granted           15,000      18,000       21,000
Fair value of each option                                    $15         $15           15
Estimated total compensation cost                       $225,000    $270,000 $315,000
Fraction of period                                            1/3         2/3          3/3
Estimated compensation cost to date                      $75,000    $180,000 $315,000
Compensation expense recognized in prior periods              $0     $75,000 $180,000
Current period compensation expense                      $75,000    $105,000 $135,000

Calculations for year ending December 31, 2003:
1. As of December 31, 2003, the estimated number of options to be granted is 120 per
employee because estimated sales for fiscal 2004 is $27 million.
Thus, total options expected to be granted are 18,000 (120 options x 150 employees).
2. The fair value of each option is $15.
3. The total cost of options expected to be granted is $270,000 ($15 x 18,000 options).
4. As of December 31, 2002, two-thirds of the vesting period have expired.
5. Total estimated compensation cost to date is $180,000 ($270,000 x 0.66).
6. Total compensation expense recognized in prior periods is $75,000.
7. Current period compensation expense totals $105,000 ($180,000 – $75,000).

Complete the table for 2004. Note that 140 options will be issued per employee
because the actual sales for 2004 were $31 million. Also note that the total
compensation expense recognized in prior periods is $180,000 ($75,000 in 2002 and
$105,000 in 2003).
                                   Practice Problem 4


1. Dividends in arrears arises only with respect to
a. cumulative preferred stock.
b. noncumulative preferred stock.
c. callable preferred stock.
d. convertible preferred stock.


2. Stock for which the issuer has the right to buy back and cancel the preferred stock at
any time is called
a. cumulative preferred stock.
b. noncumulative preferred stock.
c. callable preferred stock.
d. convertible preferred stock.


3. Requirements of the Securities and Exchange Commission prohibit the following from
being included in the stockholders’ equity section of the balance sheet:
a. cumulative preferred stock.
b. mandatory redeemable preferred stock.
c. callable preferred stock.
d. convertible preferred stock.



4. When a small stock dividend is declared, the procedure is to
a. debit Retained Earnings based on the stock’s par value.
b. credit Retained Earnings based on the stock’s market value.
c. debit Retained Earnings based on the stock’s market value.
d. make no journal entry.


5. When a stock split is declared, the procedure is to
a. debit Retained Earnings based on the stock’s par value.
b. credit Retained Earnings based on the stock’s market value.
c. debit Retained Earnings based on the stock’s market value.
d. make no journal entry.


6. George Company declared and paid cash dividends of $3 per share on its common
stock. No journal entry is recorded on the
a. date of declaration.
b. date of record.
c. date of payment.
d. date of declaration and date of record.


7. Which of the following leads to a decrease in the par value of common stock?
a. both stock dividend and stock split.
b. stock dividend but not stock split.
c. stock split but not stock dividend.
d. neither stock split nor stock dividend.


8. When treasury stock is reissued for cash,
a. both gains and losses related to the resale can be recorded.
b. only losses related to the resale can be recorded,
c. only gains related to the resale can be recorded.
d. neither gains nor losses related to the resale can be recorded.
                                Homework Problem 1
                                  Webb Company

Webb Company had the following transactions related to its common stock ($1 par
value) during the year ended December 31, 2002. Prepare the journal entries using the
cost method.

Date
March 1         Issued 6,000 shares for $12 per share.
June 1          Purchased 2,000 shares for $14 per share.
July 1          Sold 1,000 shares of treasury stock at $15 per share.
September 1     Sold an additional 600 shares of treasury stock at $10 per share.
December 1      Sold an additional 200 shares of treasury stock at $8 per share.
Solution to Homework Problem 1, Webb Company

February 1: Issued 6,000 shares for $12 per share:
Account                                                           Debit   Credit
Cash                                                             72,000
  Common Stock                                                             6,000
  Additional Paid-in Capital on Common Stock                              66,000


April 1: Purchased 2,000 shares for $14 per share:
Account                                                           Debit   Credit
Treasury Stock                                                   28,000
   Cash                                                                   28,000


June 1: Sold 1,000 shares of treasury stock for $15 per share:
Account                                                         Debit     Credit
Cash                                                           15,000
   Treasury Stock (1,000 @ $14)                                           14,000
   Additional Paid-in Capital from Treasury Stock                          1,000


August 1: Sold 600 shares of treasury stock for $10 per share:
Account                                                           Debit   Credit
Cash                                                              6,000
Additional Paid-in Capital from Treasury Stock                    1,000
Additional Paid-in Capital on Common Stock                        1,400
  Treasury Stock (600 @ $14)                                               8,400


December 1: Sold 200 shares of treasury stock for $8 per share:
Account                                                         Debit     Credit
Cash                                                            1,600
Additional Paid-in Capital on Common Stock                      1,200
  Treasury Stock (200 @ $14)                                               2,800
                               Homework Problem 2
                                Weston Company


The stockholders’ equity section of the balance sheet of Weston Company had the
following information as of January 1, 2002:

       Common stock, $10 par, 50,000 shares issued and outstanding    $ 500,000
       Paid-in capital in excess of par                                2,500,000
       Retained earnings                                               9,000,000

During the year, the following transactions took place:
February 1        Effected a two-for-one stock split.
July 1            Declared and distributed a 15% stock dividend.
December 31       Declared cash dividend of $2 per share, payable February 1, 2003.
The market price of Travis Company’s stock was $30 on February 1, $18 on July 1, and
$21 on December 31 (effective before that day’s transaction noted).
Prepare the required journal entries.
Solution to Homework Problem 2, Weston Company

February 1: Effected a two-for-one stock split.
No journal entry is made, but a memorandum is recorded.
After the split, there are 100,000 shares of $5 par common stock.

July 1: Declared and distributed 15% stock dividend.
The number of shares outstanding before the stock dividend is 100,000.
The number of new shares issued for stock dividend is 15,000 (15% of 100,000).
This is a small stock dividend, so Retained Earnings is debited for the market price ($18
per share) times the number of new shares issued.
Total number of shares of common stock ($5 par) after the stock dividend is 115,000.

Account                                                         Debit              Credit
Retained Earnings                                             270,000
  Common Stock                                                                    75,000
  Additional Paid-in Capital on Common Stock                                     195,000


December 31: Declared cash dividend of $2 per share, payable February 1, 2003.
Account                                                       Debit            Credit
Retained Earnings                                          230,000
  Dividend Payable                                                           230,000
                                Homework Problem 3
                                 DOTDOT Company

DOTDOT company has 60 employees, and on January 1, 2002, adopted a performance-
based stock option plan. The company will grant each employee the right to purchase its
$1 par common stock at $5 per share. The fair value of each option has been
determined to be $10. The number of options per employee will vary depending on the
company’s future performance as follows:
         If Fiscal Year 2004 Sales Is             Number of Options per Employee
            Less than $100 million                                150
   Between $100 million and $125 million                          180
            More than $125 million                                200
The company’s estimates (and actual results) related to fiscal 2004 sales were as
follows:
 On December 31, 2002, the company estimated that fiscal year 2004 sales would be
     $80 million.
 The company revised its estimate on December 31, 2003, to $110 million.
 Actual sales for fiscal year 2004 were $145 million.
Calculate the compensation expense each period.
Solution to Homework Problem 3, DOTDOT Company

                                                     2002        2003        2004
Estimated number of options per employee               150         180         200
Estimated total number of options to be granted      9,000      10,800      12,000
Fair value of each option                              $10         $10         $10
Estimated total compensation cost                  $90,000    $108,000    $120,000
Fraction of period                                      1/3         2/3         3/3
Estimated compensation cost to date                $30,000     $72,000    $120,000
Compensation expense recognized in prior periods        $0     $30,000     $72,000
Current period compensation expense                $30,000     $42,000     $48,000
                                 Homework Problem 4

1. Preferred stockholders do not have preferences with respect to
a. dividends.
b. liquidation distributions.
c. voting for directors.
d. all of the above.


2. When preferred stock is converted into common stock,
a. both gains and losses related to conversion can be recorded.
b. only losses related to conversion can be recorded.
c. only gains related to conversion can be recorded.
d. neither gains nor losses related to conversion can be recorded.


3. The date when the option holder becomes eligible to buy the stock at the exercise
price is known as the
a. grant date.
b. vesting date.
c. exercise date.
d. measurement date.


4. When a large stock dividend is declared, the procedure is to
a. debit Retained Earnings based on par value of the stock.
b. credit Retained Earnings based on the stock’s market value.
c. debit Retained Earnings based on the stock’s market value.
d. make no journal entry.


5. Dividends are paid to stockholders as of the
a. date of declaration.
b. date of journal entry.
c. date of record.
d. date of payment.


6. Thomas Company declared and paid cash dividends of $2 per share on its common
stock. The Retained Earnings account must be reduced on the
a. date of declaration
b. date of journal entry
c. date of record
d. date of payment


7. Which of the following leads to an increase in stockholders’ equity?
a. both stock dividend and stock split.
b. stock dividend but not stock split.
c. stock split but not stock dividend.
d. neither stock split nor stock dividend.
8. Adams Company issued 1,000 shares of its $5 par common stock and in return
obtained land with a market value of $20,000 from Quincy Company. Adams Company
records this transaction with a
a. debit to Additional Paid-in Capital of $15,000.
b. debit to Additional Paid-in Capital of $5,000..
c. credit to Additional Paid-in Capital of $ 5,000.
d. credit to Additional Paid-in Capital of $15,000.

				
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