Chapter 15

Recording and Evaluating Capital Resource Process Activities:

Financing

Questions

  1. Which account would be used to reflect the difference between the net assets received and the par value of the stock issued?
  2. Which account decreases when a cash dividend has been declared but not paid?
  3. Which account is credited on the date of declaration of a stock dividend to show the par value of the shares the corporation will issue on the date of distribution?
  4. Which account is used to reflect a company’s purchase of its own shares of stock in the open market?
  5. Which account reflects the additional capital generated from the reissue of treasury stock?
  6. On which financial statement would treasury stock be reported?
  7. Which account represents the difference between the carrying value and the face value of a noninterest-bearing note?
  8. Which contra liability account represents the difference between the face value and the carrying value of bonds?
  9. Which account represents the difference between the face value and the carrying value of bonds that exists when the face value is less than the carrying value?
  10. On which financial statement would interest on debt be reported?

Exercises

E15.1Ver Pleg Corporation is authorized to issue 500,000 shares of $2 par value common stock, and 250,000 shares of $50 par value preferred stock. Prepare the journal entries to record the sale of 20,000 shares of common stock at $15.00 and 1,000 shares of preferred stock at $75.00 on January 15, 2003.

E15.2Wells, Inc. is authorized to issue 1,500,000 shares no-par common stock, and 750,000 shares of $100 par value, 7 percent preferred stock. During the first year of operation, the company issued 500,000 shares of common stock for a total amount of $5,000,000 and 50,000 shares of its preferred stock for a total of $5,200,000. Wells, Inc. has net income of $375,000 for the year, but it pays no dividends. Prepare the stockholders’ equity section of the balance sheet as it would appear after the first year’s operation.

E15.3On February 2, 2003, Guarino Corporation purchased 4,000 shares of its $0.50 par value common stock for $15 per share. Make the entries to record the acquisition of the treasury stock and the following transactions to reissue the stock.

  1. On February 25, 2003, it sold 2,000 of the treasury shares for $21 per share.
  2. On June 30, 2003 it sold 500 more shares for $14.00 per share.
  3. On December 15, 2003, Guarino sold the remaining 1,500 shares for $17 per share.

E15.4One September 30, 2003 the board of directors of Davies, Inc. declared a $36,000 dividend for its common stockholders. The date of payment for the dividend is November 30, 2003, to stockholders of record on October 30, 2003. Record all the appropriate journal entries.

E15.5The following payment schedule is for a $30,000 note the Wickel Corporation issued for cash on October 1, 2003. If Wickel Corporation has a December 31 fiscal year-end, make the entries for the issuance of the note through December 31, 2004.

Period / Payment / Interest / Principal / Carrying Value
10/1/2003 / $30,000.00
4/1/2004 / $5,910.52 / $1,500.00 / $4,410.52 / 25,589.48
10/1/2004 / 5,910.52 / 1,279.47 / 4,631.05 / 20,958.43
4/1/2005 / 5,910.52 / 1,047.92 / 4,862.60 / 16,095.84
10/1/2005 / 5,910.52 / 804.79 / 5,105.73 / 10,990.11
4/1/2006 / 5,910.52 / 549.51 / 5,361.01 / 5,629.09
10/1/2006 / 5,910.52 / 281.43 / 5,629.09 / 0.00

E15.6Using the information in E15.5, show how the installment note is reported on Wickel Corporation’s income statement, balance sheet, and statement of cash flows for the years ended December 31, 2003 and 2004.

E15.7On September 1, 2003, Chiono Corporation raised $391,335.34 by issuing a five-year, $575,000 noninterest-bearing note. The amortization table for the note follows. Make the entries for the note from September 1, 2003 to December 31, 2004.

Period / Payment / Interest / Discount Left / Carrying Value
$183,664.66 / $391,335.34
1 / $0.00 / $31,306.83 / 152,357.83 / 422,642.17
2 / 0.00 / 33,811.37 / 118,546.46 / 456,453.54
3 / 0.00 / 36,516.28 / 82,030.18 / 492,969.82
4 / 0.00 / 39,437.59 / 42,592.59 / 532,407.41
5 / 0.00 / 42,592.59 / 0.00 / 575,000.00

E15.8Using the information in E15.7, show how Chiono Corporation’s income statement, balance sheet, and cash flow statement report the impact of this note for the years ended December 31, 2003 and December 31, 2004.

E15.9Wintermote Industries issued $330,000 of 10-year, 7 percent bonds for cash on May 1, 2004. The bonds pay interest semiannually and the market rate of interest was 6 percent when the bonds were issued. Given this information, make the entries for the first year of the bond issue’s life if Wintermote Industries has a December 31 fiscal year-end. Show how Wintermote Industries reports the bond issue on its income statement, balance sheet, and cash flow statement for the year ended December 31, 2004.

E15.10Using the information from E15.9 and assuming the market rate of interest was 8 percent, make the entries for the first year of the bond’s life and show how Wintermore Industries would report its bond activities on its 2004 financial statements.

Problems

P15.1Temte Corporation is authorized to issue 1,000,000 shares of no-par common stock and 250,000 shares of 6 percent, $25 par value, cumulative preferred stock. These events affected stockholders’ equity during the first year of operations:

  1. 125,000 shares of common stock were sold for $20 per share.
  2. 25,000 shares of preferred stock were sold for $40 per share.
  3. A building with a fair market value of $280,000 was acquired for a cash payment of $112,000 and 7,000 shares of common stock.
  4. 15,000 shares of common stock were issued for $270,000 cash.
  5. A dividend of $.50 per share for common and $1.50 per share for preferred stock was declared.

Required:

  1. Record the transactions described above.
  2. Prepare the stockholders’ equity section of the balance sheet for December 31 assuming that Temte Corporation generated $615,000 of income.

P15.2Schoessier Corporation is authorized to issue 100,000 shares of $25 par value, 8 percent cumulative preferred stock and 1,000,000 shares of $1 par value common stock. The following transactions summarize the events affecting its capital stock accounts during its first year of operations:

  1. The company issued 500,000 shares of common stock for cash at $10 per share.
  2. 10,000 shares of preferred stock were sold for cash at $34 per share.
  3. Schoessier Corporation repurchased and held as treasury stock 5,000 shares of its own common stock at $8 per share.
  4. 2,500 shares of the treasury stock were reissued at $14 per share.

Required:

  1. Make the entries to record these events.
  2. Prepare the stockholders’ equity section of Schoessier Corporation’s balance sheet assuming Retained Earnings has a credit balance of $387,000.

P15.3The following transactions were made in 2003 by the Decker Company when the market rate of interest was 9 percent. The Decker Company has a December 31 fiscal year-end.

June 1Purchased a piece of equipment costing $64,000 by paying $10,000 down and signing a five-year annual installment note with a face interest rate of 9 percent.

Sept 1Purchased a piece of equipment by signing a three-year noninterest-bearing note (annual compounding ) for $26,000.00.

Required:

  1. Make the entries to record the issuance of the notes.
  2. Make the appropriate adjusting entries for the notes.
  3. Show how the notes are reported on the December 31, 2003 balance sheet.
  4. How much interest was reported on the 2003 income statement?
  5. Is the cash paid for interest different than the amount reported on the income statement? Explain.
  6. How much cash was paid to reduce the principal of the notes?

P15.4Williams Company’s board of directors authorized the issuance $20,000,000 in 10-year, 8 percent bonds. The bonds are dated February 1, 2003 and interest is paid semiannually on August 1 and February 1. Williams Company closes its books on December 31 each year. The bonds were issued on February 1, 2003 when the market rate of interest was 7 percent.

Required:

  1. How many individual bonds make up the bond issue?
  2. Prepare the journal entries for the issuance of the bonds and the first year of the bonds’ life.
  3. Describe how the bonds are reported on Williams Company’s income statement, balance sheet, and statement of cash flows for the year ended December 2003.

P15.5On March 1, 2003, Poppe Enterprises issued $10,000,000 in ten-year, 9 percent bonds that pay interest annually on March 1. The bonds were issued on March 1, 2003, when the market interest rate was 10 percent. The fiscal year end for Poppe Enterprises is December 31.

Required:

  1. Prepare the journal entries for the first two years of the bond issue’s life.
  2. Show how Poppe Enterprises reports the events involving the bond issue on its income statement, balance sheet, and statement of cash flows for the years ended December 31, 2003, and December 31, 2004.

Case

Select a company that is featured in this week’s issue of BusinessWeek. Using the company’s annual report, answer the following questions:

  1. Does it have preferred stock? If so, how many shares are authorized, issued, and outstanding, and what is the par value?
  2. Does it have common stock? If so, how many shares are authorized, issued, and outstanding, and what is the par (stated) value?
  3. Does it have treasury stock? If so, how many shares, and what is the total cost?
  4. What is the balance in retained earnings?
  5. Did it declare any dividends? If so, were they cash or stock dividends?
  6. What is the composition of its long-term debt?
  7. How much cash was received from financing activities during the most recent period?
  8. How much cash was used for financing activities during the most recent period?