1) (Stock Split and Stock Dividend)
The common stock of Warner Inc. is currently selling at $110 per share. The directors wish to reduce the share price and increase share volume prior to a new issue. The per share par value is $10; book value is $70 per share. Five million shares are issued and outstanding.
(a) How much is the debit to retained earnings if the board votes a 2-for-1 stock split?
(b) Prepare the necessary journal entries if the board votes a 100% stock dividend.
2) (Equity Transactions and Statement Preparation)
On January 5, 2010, Phelps Corporation received a charter granting the right to issue 5,000 shares of $100 par value, 8% cumulative and nonparticipating preferred stock, and 50,000 shares of $10 par value common stock. It then completed these transactions.
Jan. 11 Issued 20,000 shares of common stock at $16 per share.
Feb. 1 Issued to Sanchez Corp. 4,000 shares of preferred stock for the following assets: machinery with a fair market value of $50,000; a factory building with a fair market value of $160,000; and land with an appraised value of $270,000.
July 29 Purchased 1,800 shares of common stock at $17 per share. (Use cost method.)
Aug. 10 Sold the 1,800 treasury shares at $14 per share.
Dec. 31 Declared a $0.25 per share cash dividend on the common stock and declared the preferred dividend.
Dec. 31 Closed the Income Summary account. There was a $175,700 net income.
Record the journal entries for the transactions listed above. (List multiple debit/credit entries from largest to smallest amount, e.g. 10, 5, 2.)
Date Description/Account Debit Credit
Dec. 31 Income Summary
Prepare the stockholders’ equity section of Phelps Corporation’s balance sheet as of December 31, 2010.
3) (Computation of Basic and Diluted EPS)
Charles Austin of the controller’s office of Thompson Corporation was given the assignment of determining the basic and diluted earnings per share values for the year ending December 31, 2011. Austin has compiled the information listed below.
The company is authorized to issue 8,000,000 shares of $10 par value common stock. As of December 31, 2010, 2,000,000 shares had been issued and were outstanding.
The per share market prices of the common stock on selected dates were as follows.
Price per Share
July 1, 2010 $20.00
January 1, 2011 21.00
April 1, 2011 25.00
July 1, 2011 11.00
August 1, 2011 10.50
November 1, 2011 9.00
December 31, 2011 10.00
A total of 700,000 shares of an authorized 1,200,000 shares of convertible preferred stock had been issued on July 1, 2010. The stock was issued at its par value of $25, and it has a cumulative dividend of $3 per share. The stock is convertible into common stock at the rate of one share of convertible preferred for one share of common. The rate of conversion is to be automatically adjusted for stock splits and stock dividends. Dividends are paid quarterly on September 30, December 31, March 31, and June 30.
Thompson Corporation is subject to a 40% income tax rate.
The after-tax net income for the year ended December 31, 2011 was $11,550,000.
The following specific activities took place during 2011.
January 1–A 5% common stock dividend was issued. The dividend had been declared on December 1, 2010, to all stockholders of record on December 29, 2010.
April 1–A total of 400,000 shares of the $3 convertible preferred stock was converted into common stock. The company issued new common stock and retired the preferred stock. This was the only conversion of the preferred stock during 2011.
July 1–A 2-for-1 split of the common stock became effective on this date. The board of directors had authorized the split on June 1.
August 1–A total of 300,000 shares of common stock were issued to acquire a factory building.
November 1–A total of 24,000 shares of common stock were purchased on the open market at $9 per share. These shares were to be held as treasury stock and were still in the treasury as of December 31, 2011.
Common stock cash dividends–Cash dividends to common stockholders were declared and paid as follows.
April 15–$0.30 per share
October 15–$0.20 per share
Preferred stock cash dividends–Cash dividends to preferred stockholders were declared and paid as scheduled.
Determine the number of shares used to compute basic earnings per share for the year ended December 31, 2011.
Determine the number of shares used to compute diluted earnings per share for the year ended December 31, 2011.
Compute the adjusted net income to be used as the numerator in the basic earnings per share calculation for the year ended December 31, 2011.