Chapter 15: Question 21Q (page 774)
Dividends are sometimes said to have been paid “out of retained earnings.” What is the error, if any, in that statement?
Here the statement contains an error as the retained earning does not give surety for a dividend payment.
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Satchel Inc. purchases 10,000 shares of its own previously issued \(10 par common stock for \)290,000. Assuming the shares are held in the treasury with intent to reissue, what effect does this transaction have on (a) net income, (b) total assets, (c) total paid-in capital, and (d) total stockholders’ equity?
The following comment appeared in the notes of Colorado Corporation’s annual report: “Such distributions, representing proceeds from the sale of Sarazan, Inc., were paid in the form of partial liquidating dividends and were in lieu of a portion of the Company’s ordinary cash dividends.” How would a partial liquidating dividend be accounted for in the financial records?
(Preemptive Rights and Dilution of Ownership) Wallace Computer Company is a small, closely-held corporation. Eighty percent of the stock is held by Derek Wallace, president. Of the remainder, 10% is held by members of his family and 10% by Kathy Baker, a former officer who is now retired. The balance sheet of the company at June 30, 2017, was substantially as shown below.
Asset
Current assets \(22,000
Equipment (net) 450,000
\)472,000
Liabilities and Stockholders’ Equity
Current liabilities \(50,000
Common stock 250,000
Retained earnings 172,000
\)472,000
Additional authorized common stock of \(300,000 par value had never been issued. To strengthen the cash position of the company, Wallace issued common stock with a par value of \)100,000 to himself at par for cash. At the next stockholders’ meeting, Baker objected and claimed that her interests had been injured.
Instructions
Sprinkle Inc. has outstanding 10,000 shares of \(10 par value common stock. On July 1, 2017, Sprinkle reacquired 100 shares at \)87 per share. On September 1, Sprinkle reissued 60 shares at \(90 per share. On November 1, Sprinkle reissued 40 shares at \)83 per share. Prepare Sprinkle’s journal entries to record these transactions using the cost method.
Kaymer Corporation issued 300 shares of \(10 par value ordinary shares for \)4,500. Prepare Kaymer’s journal entry.
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