CHAPTER 5

5. ACCOUNTING FOR CORPORATIONS

A corporation is created by law, and its continued existence depends upon thestatutes of the state
in which it is incorporated. As a legal entity, a corporation hasmost of the rights and privileges of
a person. The major exceptions relate to privileges that only a living person can exercise, such as
the right to vote or to hold public office. A corporation is subject to the same duties and
responsibilities as a [Link] example, it must abide by the laws, and it must pay taxes.

5.1. Classifications of Corporations

Two common ways to classify corporations are by purpose and by ownership.

By purpose

A corporation may be organized for the purpose of making a profit, or it may benot-for-profit.
For-profit corporations include such well-known companies asMcDonald’s, Ford Motor
Company, PepsiCo, and Google. Not-for-profit corporations are organized for charitable,
medical, or educational purposes. Examplesare the Salvation Army, the American Cancer
Society, and the Bill & MelindaGates Foundation.

By ownership

Classification by ownership distinguishes between publicly held and privatelyheldcorporations.

A publicly held corporationmay have thousands of stockholders. Its stock is regularly traded on
a national securities exchange of a country or other types of markets. Examples of publicly held
corporations are Intel, IBM, Caterpillar Inc., andGeneral [Link] contrast, a privately held
corporationusually has only a few stockholders,and does not offer its stock for sale to the
general public. Privately held companiesare generally much smaller than publicly held
companies, although some notableexceptions exist. Cargill Inc., a privatecorporation that trades
in grain and othercommodities, is one of the largest companies in the United States.

5.2. Basic characteristics of Corporations/Share Companies and PLCs/

A number of characteristics distinguish corporations from proprietorshipsand partnerships.

a. Separate Legal Existence

As an entity separate and distinct from its owners, the corporation acts under itsown name rather
than in the name of its stockholders. Ford Motor Companymaybuy, own, and sell property. It
may borrow money, and may enter into legallybinding contracts in its own name. It may also sue
or be sued, and it pays its owntaxes.

1
Remember that in a partnership the acts of the owners (partners) bind thepartnership. In contrast,
the acts of its owners (stockholders) do not bind the corporation unless such owners are agents of
the corporation. For example, if youowned shares of Ford Motor Company stock, you would not
have the right to purchase automobile parts for the company unless you were appointed as an
agent ofthe company, such as a purchasing manager.

b. Limited Liability of Stockholders

Since a corporation is a separate legal entity, creditors have recourse only to corporate assets
tosatisfy their claims. The liability of stockholders is normally limitedto their investment in the
corporation. Creditors have no legal claim on the personal assets of the owners unless fraud has
occurred. Even in the event of bankruptcy, stockholders’ losses are generally limited to their
capital investment in thecorporation.

c. Transferable Ownership Rights

Shares of capital stock give ownership in a corporation. These shares are transferable
[Link] may dispose of part or all of their interest in a corporationsimply by selling
their stock. Remember that the transfer of an ownership interestin a partnership requires the
consent of each owner. In contrast, the transfer ofstock is entirely at the discretion of the
stockholder. It does not require the approval of either the corporation or other stockholders.

The transfer of ownership rights between stockholders normally has no effecton the daily
operating activities of the corporation. Nor does it affect the corporation’s assets, liabilities, and
total ownership equity. The transfer of these ownershiprights is a transaction between individual
owners. After it first issues the capitalstock, the company does not participate in such transfers.

d. Ability to Acquire Capital

It is relatively easy for a corporation to obtain capital through the issuance ofstock. Investors buy
stock in a corporation to earn money over time as the shareprice grows, and because a
stockholder has limited liability and shares of stock arereadily transferable. Also, individuals can
become stockholders by investing relatively small amounts of money. In sum, the ability of a
successful corporation to obtain capital is virtually unlimited.

e. Continuous Life

The life of a corporation is stated in its charter. The life may be perpetual, or it maybe limited to
a specific number of years. If it is limited, the company can extend thelife through renewal of the
charter. Since a corporation is a separate legal entity, itscontinuance as a going concern isnot
affected by the withdrawal, death, or incapacity of a stockholder, employee, or officer. As
aresult, a successful enterprise canhave a continuous and perpetual life.

f. Corporation Management

2
As in Ford Motor Company, stockholders legally own the corporation. But theymanage the
corporation indirectly through a board of directors they elect. Theboard, in turn, formulates the
operating policies for the company. The boardalso selects officers, such as a president and one or
more vice presidents, to execute policy and to perform daily management functions.

Illustration below presents a typical organization chart showing the delegation of responsibility.
The chief executive officer (CEO) has overall responsibility formanaging the business. As the
organization chart shows, the CEO delegatesresponsibility to other officers.

Stockholders

Chairman and
Board of
Directors

President and
Chief Executive
Officer

GeneralVice President Vice President Vice President Vice President

Counsel and Marketing Finance/Chief Operations Human
Secretary Financial OfficerResources

Treasurer Controller

The chief accounting officer is the controller. The controller’s responsibilitiesinclude (1)
maintaining the accounting records, (2) maintaining an adequate system of internal control, and
(3) preparing financial statements, tax returns,and internal reports. The treasurer has custody of
the corporation’s fundsand is responsible for maintaining the company’s cash position.

The organizational structure of a corporation enables a company tohire professional managers to

run the business. On the other hand, theseparation of ownership and management prevents
owners from havingan active role in managing the company, which some owners like tohave.

g. Government Regulations
A corporation is subject to numerous state and federal regulations. State lawsusually prescribe
the requirements for issuing stock, the distributions of earningspermitted to stockholders, and the
effects of retiring stock. Federal securities lawsgovern the sale of capital stock to the general
public. Also, most publicly held corporations are required to make extensive disclosure of their
financial affairs to theSecurities and Exchange Commission (SEC) through quarterly and annual
[Link] addition, when a corporation lists its stock on organized securities exchanges, itmust
comply with the reporting requirements of these exchanges. Governmentregulations are designed
to protect the owners of the corporation.

3
 h. Additional Taxes
Neither proprietorships nor partnerships pay income taxes separate from theowner’s share of
earnings. Sole proprietors and partners report earnings on theirpersonal income tax returns and
pay taxes on this amount. Corporations, on theother hand, must pay federal and state income
taxes as a separate legal [Link] taxes are [Link] addition, stockholders must pay
taxes on cash dividends (pro rata distributionsof net income). Thus, many argue that the
government taxes corporate income twice(double taxation)—once at the corporate level, and
again at the individual level.

In summary, we can identify the following advantages and disadvantages of acorporation

compared to a proprietorship and a partnership.

Advantages Disadvantages
_____________________________________ __________________________________
Separate legal existence Corporation management—separation of
Limited liability of stockholdersownership and management
Transferable ownership rights Government regulations
Ability to acquire capital Additional taxes
Continuous life
Corporation management—professional
managers

5.3. Classes of shares

a. Common stock

When a corporation has only one class of stock, it is common [Link] share of common
stock gives the stockholder the following ownership rights.

1. Vote in election of boardof directors at annualmeeting and vote on actionsthat require

stockholderapproval.
2. Share the corporateearnings through receiptof dividends.
3. Keep the samepercentage ownershipwhen new shares ofstock are issued.
4. Share in assets uponliquidation in proportionto their holdings. This iscalled a residual
claim:owners are paidwith assets that remainafter all creditors’ claimshave been paid.

b. Treasury stock

Treasury stock is a corporation’s own stock that it has issued and subsequently reacquired
fromshareholders, but not retired. A corporation mayacquire treasury stock for various reasons:

4
 1. To reissue the shares to officers and employees under bonus and stock compensation
plans.
2. To signal to the stock market that management believes the stock is underpriced, in the
hope of enhancing its market value.
3. To have additional shares available for use in the acquisition of other companies.
4. To reduce the number of shares outstanding and thereby increase earnings per share.
5. To rid the company of disgruntled investors, perhaps to avoid a takeover.

Note:Treasury shares do nothave dividend rights orvoting rights.

c. Preferred stock

To appeal to more investors, a corporation may issue an additional class ofstock, called preferred
stock. Preferred stockhas provisions that give itsome preference or priority over common stock.
Typically, preferredstockholders have a priority as to (1) distributions of earnings (dividends)and
(2) assets in the event of liquidation. However, they generally do not havevoting [Link]
common stock, corporations may issue preferred stock for cash or fornoncash assets. The entries
for these transactions are similar to the entries for common stock.

When a corporation has more than one class of stock, each paid-in capital account title
shouldidentify the stock to which it relates. A company mighthave the following accounts:
Preferred Stock, Common Stock, Paid-in Capital inExcess of Par Value—Preferred Stock, and
Paid-in Capital in Excess of ParValue—Common Stock. For example, if Stine Corporation
issues 10,000 shares of$10 par value preferred stock for $12 cash per share, the entry to record
theissuance is:

Cash 120,000
Preferred Stock 100,000
Paid-in Capital in Excess of Par Value–Preferred Stock 20,000
(To record the issuance of 10,000 shares of $10 par value preferred stock)

Preferred stock may have either a par value or no-par value. In the stockholders’equity section of
the balance sheet, companies list preferred stock first because ofits dividend and liquidation
preferences over common stock.

Corporate Capital

5
Owners’ equity is identified by various names: stockholders’ equity, shareholders’ equity, or
corporate capital. The stockholders’ equity section of acorporation’s balance sheet consists of
two parts: (1) paid-in (contributed)capital and (2) retained earnings (earned capital).

The distinction between paid-in capital and retained earnings is importantfrom both a legal and a
financial point of view. Legally, corporations can make distributions of earnings (declare
dividends) out of retained earnings. Management, stockholders, and others often look to retained
earnings for the continued existence and growth of the corporation.

a. Paid-In Capital

Paid-in capitalis the total amount of cash and other assets paid in to the corporationby
stockholders in exchange for capital stock. As noted earlier, when a corporationhas only one
class of stock, it is common stock.

b. Retained Earnings

Retained earnings are net income that a corporation retains for future use. Net income is
recorded in Retained Earnings by a closing entry that debits IncomeSummary and credits
Retained Earnings. For example, assuming that net incomefor Delta Robotics in its first year of
operations is $130,000, the closing entry is:

Income Summary 130,000

Retained Earnings 130,000
(To close Income Summary and transfer net income to retained earnings)

If Delta Robotics has a balance of $800,000 in common stock at the end of itsfirst year, its
stockholders’ equity section is as follows.

DELTA ROBOTICS
Balance Sheet (partial)
_________________________________________________________
Stockholders’ equity
Paid-in capital
Common stock $800,000
Retained earnings130,000
Total stockholders’ equity $930,000

Exercise 1

6
At the end of its first year of operation, Doral Corporation has $750,000 of common stock and
net income of $122,000.

Required:Prepare (a) the closing entry for netincome and (b) the stockholders’ equity section at
year-end.

5.4. Issuing shares /Stock Transactions

5.4.1. Issues of common stock

The primary objectives in accounting for the issuance of common stock are: (1)to identify the
specific sources of paid-in capital, and (2) to maintain thedistinction between paid-in capital and
retained earnings. The issuance ofcommon stock affects only paid-in capital accounts.

[Link]. Issuing Par Value Common Stock for Cash

Par value does not indicate a stock’s market value. Therefore,the cash proceeds from issuing par
value stock may be equal to, greater than, or lessthan par value. When the company records
issuance of common stock for cash, itcredits to Common Stock the par value of the shares. It
records in a separate paidin capital account the portion of the proceeds that is above or below par
[Link] illustrate, assume that Hydro-Slide, Inc. issues 1,000 shares of $1 par valuecommon
stock at par for cash. The entry to record this transaction is:

Cash 1,000
Common Stock 1,000
(To record issuance of 1,000 shares of $1 par common stock at par)

If Hydro-Slide issues an additional 1,000 shares of the $1 par value common stock for cash at $5
per share, the entry is:

Cash 5,000
Common Stock 1,000
Paid-in Capital in Excess of Par Value 4,000
(To record issuance of 1,000 shares of $1 par common stock)

The total paid-in capital from these two transactions is $6,000, and the legalcapital is $2,000.
Assuming Hydro-Slide, Inc. has retained earnings of $27,000. Illustration below shows the
company’s stockholders’ equity section.

HYDRO-

7
SLIDE, INC.
Balance Sheet (partial)
___________________________________________________
Stockholders’ equity
Paid-in capital
Common stock $ 2,000
Paid-in capital in excess of par value 4,000
Total paid-in capital 6,000
Retained earnings 27,000
Total stockholders’ equity$33,000

When a corporation issues stock for less than par value, it debits the accountPaid-in Capital in
Excess of Par Value, if a credit balance exists in this account. If acredit balance does not exist,
then the corporation debits to Retained Earnings theamount less than par.

[Link]. Issuing No-Par Common Stock for Cash

When no-par common stock has a stated value, the entries are similar to those illustrated for
parvalue stock. The corporation credits the stated value to CommonStock. Also, when the selling
price of no-par stock exceeds stated value, the corporation credits the excess to Paid-in Capital in
Excess of Stated [Link] example, assume that instead of $1 par value stock, Hydro-Slide, Inc.
has $5stated value no-par stock and the company issues 5,000 shares at $8 per share forcash. The
entry is:

Cash 40,000
Common Stock 25,000
Paid-in Capital in Excess of Stated Value 15,000
(To record issue of 5,000 shares of $5 stated value no-par stock)

Hydro-Slide, Inc. reports Paid-in Capital in Excess of Stated Value as part of paidin capital in
thestockholders’ equity [Link] happens when no-par stock does not have a stated value? In
that case,the corporation credits the entire proceeds to Common Stock. Thus, if Hydro-Slidedoes
not assign a stated value to its no-par stock, it would record the issuance of the5,000 shares at $8
per share for cash as follows.

Cash 40,000
Common Stock 40,000
(To record issue of 5,000 shares of no-par stock)

8
 [Link]. Issuing Common Stock for Servicesor Noncash
Assets
Corporations also may issue stock for services (compensation to attorneys or consultants) or
fornoncash assets (land, buildings, and equipment). In such cases, whatcost should be recognized
in the exchange transaction? To comply with the cost principle, in a noncash transaction cost is
thecash equivalent price. Thus, cost iseither the fair market value of the consideration given up,
or the fair market valueof the consideration received, whichever is more clearly determinable.

To illustrate, assume that attorneys have helped Jordan Company [Link] have billed
the company $5,000 for their services. They agree to accept 4,000shares of $1 par value common
stock in payment of their bill. At the time of theexchange, there is no established market price for
the stock. In this case, the marketvalue of the consideration received, $5,000, is more clearly
evident. Accordingly,Jordan Company makes the following entry:

Organization Expense 5,000

Common Stock 4,000
Paid-in Capital in Excess of Par Value 1,000
(To record issuance of 4,000 shares of $1 par valuestock to attorneys)

As explained previously, organization costs are expensed as [Link] contrast, assume that
Athletic Research Inc. is an existing publicly heldcorporation. Its $5 par value stock is actively
traded at $8 per share. The companyissues 10,000 shares of stock to acquire land recently
advertised for sale at$90,000. The most clearly evident value in this noncash transaction is the
marketprice of the consideration given, $80,000. The company records the transaction as
follows.

Land80,000
Common Stock 50,000
Paid-in Capital in Excess of Par Value 30,000
(To record issuance of 10,000 shares of $5 par valuestock for land)

As illustrated in these examples, the par value of the stock is never a factor indetermining the
cost of the assets received. This is also true of the stated value ofno-par stock.

Exercise 2

Cayman Corporation begins operations on March 1 by issuing 100,000 shares of$10 par value
common stock for cash at $12 per share. On March 15 it issues 5,000shares of common stock to
attorneys in settlement of their bill of $50,000 fororganization costs.
Required:Journalize the issuance of the shares, assuming the stock is notpublicly traded.

9
 5.4.2. Issuance of Treasury stock
[Link]. Purchase of Treasury Stock
Companies generally account for treasury stock by the cost method. This methoduses the cost of
the shares purchased to value the treasury stock. Under the costmethod, the company debits
Treasury Stock for the price paid to reacquire [Link] the company disposes of the
shares, it credits to Treasury Stock the sameamount it paid to reacquire the shares. To illustrate,
assume that on January 1, 2010,the stockholders’ equity section of Mead, Inc. has 100,000 shares
of $5 par valuecommon stock outstanding (all issued at par value) and Retained Earnings
of$200,000. The stockholders’ equity section before purchase of treasury stock is asfollows.

MEAD, INC.
Balance Sheet (partial)
Stockholders’ equity
Paid-in capital
Common stock, $5 par value, 100,000 shares issued and outstanding $500,000
Retained earnings 200,000
Total stockholders’ equity $700,000
On February 1, 2010, Mead acquires 4,000 shares of its stock at $8 per share. Theentry is:

Feb. 1 Treasury Stock 32,000

Cash 32,000
(To record purchase of 4,000 sharesof treasury stock at $8 per share)

Note that Mead debits Treasury Stock for the cost of the shares purchased. Is theoriginal paid-in
capital account, Common Stock, affected? No, because the numberof issued shares does not
change. In the stockholders’ equity section of the balancesheet, Mead deducts treasury stock
from total paid-in capital and retained earnings. Treasury Stock is a contra stockholders’ equity
account. Thus, the acquisitionof treasury stock reduces stockholders’ equity.

The stockholders’ equity section of Mead, Inc. after purchase of treasury stockis as follows.

MEAD, INC.
Balance Sheet (partial)
___________________________________________________________
Stockholders’ equity
Paid-in capital
Common stock, $5 par value, 100,000 shares issued
and 96,000 sharesoutstanding $500,000
Retained earnings 200,000
Total paid-in capital and retained earnings 700,000
Less: Treasury stock (4,000 shares) 32,000
Total stockholders’ equity$668,000

10
In the balance sheet, Mead discloses both the number of shares issued(100,000) and the number
in the treasury (4,000). The difference betweenthese two amounts is the number of shares of
stock outstanding (96,000).The term outstanding stockmeans the number of shares of issued
stockthat are being held by stockholders.

[Link]. Disposal of Treasury Stock

Treasury stock is usually sold or retired. The accounting for its sale differs whentreasury stock is
sold above cost than when it is sold below cost.

a. Sale of treasury stock above cost

If the selling price of the treasury shares is equal to their cost, the company recordsthe sale of the
shares by a debit to Cash and a credit to Treasury Stock. When theselling price of the shares is
greater than their cost, the company credits the difference to Paid-in Capital from Treasury
[Link] illustrate, assume that on July 1, Mead sells for $10 per share the 1,000shares of its
treasury stock, previously acquired at $8 per share. The entry is asfollows.

July 1Cash 10,000

Treasury Stock 8,000
Paid-in Capital from Treasury Stock 2,000
(To record sale of 1,000 shares of treasury stock above cost)

Mead does not record a $2,000 gain on sale of treasury stock for two reasons:(1) Gains on sales
occur when assets are sold, and treasury stock is not an asset.(2) A corporation does not realize a
gain or suffer a loss from stock transactionswith its own stockholders. Thus, companies should
not include in net income anypaid-in capital arising from the sale of treasury stock. Instead, they
report Paidin Capital from Treasury Stock separately on the balance sheet, as a part of paidin
capital.
a. Sale of treasury stock below cost
When a company sells treasury stock below its cost, it usually debits to Paid-inCapital from
Treasury Stock the excess of cost over selling price. Thus, if Mead, [Link] an additional 800
shares of treasury stock on October 1 at $7 per share, itmakes the following entry.

Oct. 1Cash 5,600

Paid-in Capital from Treasury Stock 800
Treasury Stock 6,400
(To record sale of 800 shares of treasury stock below cost)

Observe the following from the two sales entries: (1) Mead credits TreasuryStock at cost in each
entry. (2) Mead uses Paid-in Capital from Treasury Stock forthe difference between cost and the
11
resale price of the shares. (3) The original paidin capital account, Common Stock, is not affected.
The sale of treasury stock increases both total assets and total stockholders’ equity.

After posting the foregoing entries, the treasury stock accounts will show thefollowing balances
on October 1.

Treasury Stock Paid-in Capital from Treasury Stock

_________________________________ ______________________________________
Feb. 1 32,000 July 1 8,000 Oct. 1 800 July 1 2,000
Oct. 1 6,400 ______________________________________
_________________________________ Oct. 1 Bal. 1,200
Oct. 1Bal. 17,600

When a company fully depletes the credit balance in Paid-in Capital fromTreasury Stock, it
debits to Retained Earnings any additional excess of cost overselling price. To illustrate, assume
that Mead, Inc. sells its remaining 2,200 sharesat $7 per share on December 1. The excess of cost
over selling price is $2,200[2,200 ($8 $7)]. In this case, Mead debits $1,200 of the excess to
Paid-inCapital from Treasury Stock. It debits the remainder to Retained Earnings. Theentry is:

Dec. 1Cash 15,400

Paid-in Capital from Treasury Stock 1,200
Retained Earnings 1,000
Treasury Stock 17,600
(To record sale of 2,200 shares of treasury stock at $7 per share)
Exercise 3
Santa Anita Inc. purchases 3,000 shares of its $50 par value common stock for$180,000 cash on
July 1. It will hold the shares in the treasury until resold. OnNovember 1, the corporation sells
1,000 shares of treasury stock for cash at $70per share. Required: Journalize the treasury stock
transactions.

5.4.3. Issuance of Preferred Stock

[Link]. Dividend Preferences
As noted earlier, preferred stockholders have the right to receive dividends beforecommon
stockholders. For example, if the dividend rate on preferred stock is $5per share, common
shareholders will not receive any dividends in the current yearuntil preferred stockholders have
received $5 per share. The first claim to dividendsdoes not, however, guarantee the payment of
dividends. Dividends depend onmany factors, such as adequate retained earnings and availability
of cash. If a company does not pay dividends to preferred stockholders, it cannot of course pay
dividends to common stockholders.

The per share dividend amount is stated as a percentage of the preferredstock’s par value or as a

12
specified amount. For example, at one time Crane Companyspecified a 33⁄4% dividend on its
$100 par value preferred ($100 × 33⁄4% =$3.75 per share). PepsiCohas a $5.46 series of no-par
preferred stock.

[Link]. Cumulative Dividend

Preferred stock often contains a cumulative dividendfeature. This means that
preferredstockholders must be paid both current-year dividends and any unpaidprior-year
dividends before common stockholders receive dividends. When preferred stock is cumulative,
preferred dividends not declared in a given period arecalled dividends in arrears.

To illustrate, assume that Scientific Leasing has 5,000 shares of 7%, $100 parvalue, cumulative
preferred stock outstanding. The annual dividend is $35,000(5,000 × $7 per share), but dividends
are two years in arrears. In this case, preferredstockholders are entitled to receive the following
dividends in the current year.

Dividends in arrears ($35,000 × 2) $ 70,000

Current-year dividends 35,000
Total preferred dividends $105,000

The company cannot pay dividends to common stockholders until it pays the entirepreferred
dividend. In other words, companies cannot pay dividends to commonstockholders while any
preferred stock is in [Link] dividends in arrears considered a liability? No—no payment
obligationexists until the board of directors declares a dividend. However, companies
shoulddisclose in the notes to the financial statements the amount of dividends in arrears.

Doing so enables investors to assess the potential impact of this commitment onthe corporation’s
financial [Link] that are unable to meet their dividend obligations are not
lookedupon favorably by the investment community.
[Link]. Liquidation Preference
Most preferred stocks also have a preference on corporate assets if the corporationfails. This
feature provides security for the preferred stockholder. The preference toassets may be for the
par value of the shares or for a specified liquidating value. Forexample, EarthLink’s preferred
stock entitles its holders to receive $20.83 pershare, plus accrued and unpaid dividends. The
liquidation preference establishesthe respective claims of creditors and preferred stockholders.

5.5. Reporting shareholders’ equity on the balance sheet

13
Companies report paid-in capital and retained earnings in the stockholders’ equity section of
thebalance sheet. They identify the specific sourcesof paid-in capital, using the following
classifications.

1. Capital stock. This category consists of preferred and common [Link] stock
appears before common stock because of its preferentialrights. Companies report par
value, shares authorized, shares issued, and sharesoutstanding for each class of stock.
2. Additional paid-in capital. This category includes the excess of amounts paid inover par
or stated value and paid-in capital from treasury stock.

The stockholders’ equity section of Connally Inc. in Illustration below includes most of the
accounts discussed in this chapter. The disclosures pertaining toConnally’s common
stockindicate that: the company issued 400,000 shares of $5 par value common stock;
100,000shares are unissued (500,000 authorized less 400,000 issued); and 390,000 shares
areoutstanding (400,000 issued less 10,000 shares in treasury). The paid-in capital in excess of
par value on the common stock is $860,000. The co. has reacquired 10,000 shares at a cost of $
80,000 and is currently holding those shares. Treasury stock was reissued in prior years for
$140,000 more than its cost. The c. also has 6,000 shares issued and outstanding of 9%, $100 par
value preferred stock. It authorized 10,000 shares. The paid-in capital in excess of par value on
preferred stock is $30,000. The retained earnings are $ 1,058,000.

CONNALLY INC.
Balance Sheet (partial)
_____________________________________________________________________________
Stockholders’ equity
Paid-in capital
Capital stock
9% preferred stock, $100 par value cumulative, 10,000 shares
authorized, 6,000 shares issued and outstanding $ 600,000
Common stock, no par, $5 stated value, 500,000 shares
authorized, 400,000 shares issued, and 390,000 outstanding2,000,000
Total capital stock 2,600,000
Additional paid-in capital
In excess of par value—preferred stock $ 30,000
In excess of stated value—common stock 860,000
From treasury stock 140,000
Total additional paid-in capital 1,030,000
Total paid-in capital 3,630,000
Retained earnings 1,058,000
Total paid-in capital and retained earnings 4,688,000
Less: Treasury stock—common (10,000 shares) (at cost) (80,000)
Total stockholders’ equity $4,608,000

14
 Exercise 4

Jennifer Corporation has issued 300,000 shares of $3 par value common stock.
It authorized 600,000 shares. The paid-in capital in excess of par value on thecommon stock
is $380,000. The corporation has reacquired 15,000 shares at a costof $50,000 and is
currently holding those shares. Treasury stock was reissued inprior years for $72,000 more
than its [Link] corporation also has 4,000 shares issued and outstanding of 8%, $100
parvalue preferredstock. It authorized 10,000 shares. The paid-in capital in excess ofpar
value on the preferred stock is $25,000. The retained earnings are $610,000.

Required:Prepare the stockholders’ equity section of the balance sheet.

Solutions for exercises

Exercise 1
Solution
(a) Income Summary 122,000
Retained Earnings 122,000
(To close Income Summary and transfer net income to retained earnings)
(b) Stockholders’ equity
Paid-in capital
Common stock $750,000
Retained earnings 122,000
Total stockholders’ equity $872,000
Exercise 2
Solution
Mar. 1 Cash 1,200,000
Common Stock 1,000,000
Paid-in Capital in Excess of Par Value 200,000
(To record issuance of 100,000 shares at $12 per share)
Mar. 15 Organization Expense 50,000
Common Stock 50,000
(To record issuance of 5,000 shares for attorneys’ fees)
Exercise 3
Solution
July 1 Treasury Stock 180,000
Cash 180,000
(To record the purchase of 3,000 shares at $60 per share)
Exercise 4
Solution
JENNIFER CORPORATION
Balance Sheet (partial)
Stockholders’ equity

15
Paid-in capital
Capital stock
8% preferred stock, $100 par value, 10,000 shares
authorized, 4,000 shares issued and outstanding $ 400,000
Common stock, $3 par value, 600,000 shares authorized,
300,000 shares issued, and 285,000 shares outstanding 900,000
Total capital stock 1,300,000
Additional paid-in capital
In excess of par value—preferred stock $ 25,000
In excess of par value—common stock 380,000
From treasury stock 72,000
Total additional paid-in capital 477,000
Total paid-in capital 1,777,000
Retained earnings 610,000
Total paid-in capital and retained earnings 2,387,000
Less: Treasury stock—common (15,000 shares) (at cost) (50,000)
Total stockholders’ equity$2,337,000

16