Question 1 - Indicate whether each of the following statements is true or false.
1. The corporation is an entity separate and distinct from its owners.
2. The liability of stockholders is normally limited to their investment in the corporation.
3. The relative lack of government regulation is an advantage of the corporate form of business.
4. There is no journal entry to record the authorization of capital stock.
5. No-par value stock is quite rare today.
Question 2 - On October 31, the stockholders' equity section of Omar Company consists of common stock $600,000 and retained earnings $900,000. Omar is considering the following two courses of action: (1) declaring a 5% stock dividend on the 60,000, $10 par value shares outstanding, or (2) effecting a 2-for-1 stock split that will reduce par value to $5 per share. The current market price is $14 per share.
Complete the tabular summary of the effects of the alternative actions on the components of stockholders' equity and outstanding shares.
Question 3 - Before preparing financial statements for the current year, the chief accountant for Springer Company discovered the following errors in the accounts.
1. The declaration and payment of $50,000 cash dividend was recorded as a debit to Interest Expense $50,000 and a credit to Cash $50,000.
2. A 10% stock dividend (1,000 shares) was declared on the $10 par value stock when the market value per share was $16. The only entry made was: Retained Earnings (Dr.) $10,000 and Dividend Payable (Cr.) $10,000. The shares have not been issued.
3. A 4-for-1 stock split involving the issue of 400,000 shares of $5 par value common stock for 100,000 shares of $20 par value common stock was recorded as a debit to Retained Earnings $2,000,000 and a credit to Common Stock $2,000,000.
Prepare the correcting entries at December 31.
Question 4 - Arnold Corporation has been authorized to issue 40,000 shares of $100 par value, 8%, noncumulative preferred stock and 2,000,000 shares of no-par common stock. The corporation assigned a $5 stated value to the common stock. At December 31, 2011, the ledger contained the following balances pertaining to stockholders' equity.
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Preferred Stock
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$240,000
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Paid-in Capital in Excess of Par Value-Preferred
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56,000
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Common Stock
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2,000,000
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Paid-in Capital in Excess of Stated Value-Common
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5,700,000
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Treasury Stock-Common (1,000 shares)
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22,000
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Paid-in Capital from Treasury Stock
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3,000
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Retained Earnings
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560,000
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The preferred stock was issued for land having a fair market value of $296,000. All common stock issued was for cash. In November, 1,500 shares of common stock were purchased for the treasury at a per share cost of $22. In December, 500 shares of treasury stock were sold for $28 per share. No dividends were declared in 2011.
Prepare the journal entries for the:
1. Issuance of preferred stock for land.
2. Issuance of common stock for cash.
3. Purchase of common treasury stock for cash.
4. Sale of treasury stock for cash.
Complete the stockholders' equity section at December 31, 2011.
Question 5 - The following stockholders' equity accounts arranged alphabetically are in the ledger of McGrath Corporation at December 31, 2011.
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Common Stock ($10 stated value)
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$1,500,000
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Paid-in Capital from Treasury Stock
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6,000
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Paid-in Capital in Excess of Stated Value-Common Stock
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690,000
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Paid-in Capital in Excess of Par Value-Preferred Stock
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288,400
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Preferred Stock (8%, $100 par, noncumulative)
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400,000
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Retained Earnings
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776,000
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Treasury Stock-Common (8,000 shares)
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88,000
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Complete the stockholders' equity section at December 31, 2011.
Compute the book value per share of the common stock, assuming the preferred stock has a call price of $110 per share.