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.
Prepare a tabular summary of the effects of the alternative actions on the components of stockholders’
equity and outstanding shares. Use the following column headings: Before Action,After
Stock Dividend, and After Stock Split.
Before Action After Stock Dividend After Stock ...view middle of the document...
No dividends were declared in 2011.
(a) 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.
(b) Prepare the stockholders’ equity section at December 31, 2011.
Debit Land 296,000
Credit Preferred Stock 240,000 (2,400 x $100)
Credit Paid-in Capital in Excess of Par Value--Preferred Stock 56,000
Debit Cash 7,700,000 ($2,000,000 + 5,700,000)
Credit Common Stock 2,000,000 (400,000 x $5)
Credit Paid-in Capital in Excess of Stated Value--Common Stock 5,700,000
Debit Treasury Stock--Common 33,000 (1,500 x $28)
Credit Cash 33,000
Debit Cash 14,000 (500 x $28)
Credit Treasury Shares--Common 11,000
Credit Paid in Capital from Treasury Stock 3,000 (500 x $6)
Complete the stockholders' equity section at December 31, 2011.
Paid-in capital $240,000 (2,400 x $100)
Common stock 2,000,000 (400,000 x $5)
Total capital stock 2,240,000
Additional paid-in capital
In excess of par value--preferred stock $56,000
In excess of stated value--common stock 5,700,000
From treasury stock--common 3,000
Total additional paid-in capital 5,759,000
Total paid-in capital 7,999,000
Retained earnings 560,000
Total paid-in capital and retained earnings 8,559,000
Less: Treasury stock (1,000 common shares) (22,000)
Total stockholders’ equity $8,537,000
E12-1 Max Weinberg is studying for an accounting test and has developed the following questions
What are three reasons why companies purchase investments in debt or stock securities?
To increase the earnings of the company, to reduce the risk through portfolio management and diversification, and to meet the future needs of cash flow for the business.
Why would a corporation have excess cash that it does not need for operations?
The company has...