Problem 13-3A
Part 1
Explanations for each of the journal entries
Oct.
2 Declared a cash dividend of $2 per share of common stock.
($60,000 / 30,000 shares)
Oct. 25 Paid the cash dividend on common stock.
Oct. 31 Declared a 10% stock dividend when the market value is $25 per
share. ($36,000/$12 par = 3,000 shares = 10% of 30,000 shares;
$75,000/3,000 shares = $25 per share)
Nov.
5 Distributed the common stock dividend.
Dec.
1 Executed a 3-for-1 stock split. ($12 par / $4 par = 3-for-1 ratio)
Dec. 31 Closed the Income Summary account to Retained Earnings.
Part 2
Oct. 2
Oct. 25
Common stock ................. $360,000 $360,000
Oct. 31
Nov. 5
Dec. 1
Dec. 31
$360,000 $396,000 $396,000 $396,000
Common stock
dividend distributable ..
0
0
36,000
0
0
0
Paid-in capital in
excess of par...................
90,000
90,000
129,000
129,000
129,000
129,000
Retained earnings............
260,000
260,000
185,000
185,000
185,000
395,000
Total equity ......................... $710,000 $710,000
$710,000 $710,000 $710,000 $920,000
Problem 13-5A
1. Market price = $85 per share (current stock exchange price given)
2. Computation of par values of stock
Preferred: Paid-in amount / Number of shares = $50,000 / 1,000 =
$50
Common: Paid-in amount / Number of shares = $80,000 / 4,000 =
$20
3. Book values with no dividends in arrears
Book value per preferred share = par value (when not callable) =
$50
Common stock
Total equity ...............................................
Less equity for preferred .........................
Common stock equity ..............................
$280,000
(50,000)
$230,000
Number of outstanding shares ................
Book value per common share ...............
4,000
$
57.50 ($230,000 / 4,000 shares)
4. Book values with two years’ dividends in arrears
Preferred stock
Preferred stock par value .......................... $ 50,000
Plus two years’ dividends in arrears* .......
5,000
Preferred equity .......................................... $ 55,000
*2 years’ dividends = 2 x ($50,000 x 5%) = $5,000
Number of outstanding shares ..................
1,000
Book value per preferred share ................ $
55.00 ($55,000 / 1,000 shares)
Common stock
Total equity ................................................. $280,000
Less equity for preferred ...........................
(55,000)
Common stock equity ................................ $225,000
Number of outstanding shares ..................
4,000
Book value per common share ................. $
56.25 ($225,000/4,000 shares)
Problem 13-5A (Concluded)
5. Book values with call price and two years’ dividends in arrears
Preferred stock
Preferred stock call price (1,000 x $55) .......
Plus two years’ dividends in arrears* ..........
Preferred equity .............................................
$ 55,000
5,000
$ 60,000
*2 years’ dividends = 2 x ($50,000 x 5%) = $5,000
1,000
Number of outstanding shares.....................
60.00 ($60,000 / 1,000 sh.)
Book value per preferred share ...................
$
Common stock
Total equity ....................................................
Less equity for preferred ..............................
Common stock equity ...................................
$280,000
(60,000)
$220,000
Number of outstanding shares .....................
Book value per common share ....................
4,000
$
55.00 ($220,000 / 4,000 sh.)
6. Dividend allocation in total
Preferred
2 years’ dividends in arrears ...........$ 5,000
Current year dividends .................... 2,500
Remainder to common .....................
.
Totals .................................................$ 7,500
Common
$
0
4,000
$ 4,000
Total
$ 5,000
2,500
4,000
$11,500
Dividends per share for the common stock
$4,000 / 4,000 shares = $1.00
7. Equity represents the residual interest of owners in the assets of
the business after subtracting claims of creditors. With few
exceptions, these assets and liabilities are reported at historical
cost, not market value. Therefore, the book value of common
stock does not normally match its market value. Also, the book
value of common stock is based on past transactions and events,
whereas the market value takes into account expected future
earnings, growth, dividends, and other industry and economic
factors.