Reporting Stockholders’ Equity

1. Chapter 11 Illustrated Solution: Problem 11-51 Reporting Stockholders’ Equity

2. Part 2: Nilsson Corporation Stockholders’ Equity December 31, 2001 Common stock ($5 par, 500,000 shares authorized, 275,000 issued and outstanding …. $1,375,000 Paid-in capital in excess of par …………………… 550,000 Total paid-in capital…………………………… $1,925,000 Unappropriated retained earnings ………………. $1,335,000 Appropriated retained earnings …………………… 500,000 Total retained earnings ………………………. 1,835,000 Total stockholders’ equity …………………………. $3,760,000 • The Nilsson Corporation recorded several stockholders’ equity transactions during 2002. • For Part 1, we need to record all necessary journal entries for these 2002 transactions that affect stockholders’ equity.

3. Entries Affecting Stockholders’ Equity Nilsson Corporation’s Books Jan. 15 Appropriated Retained Earnings ……… 500,000 Retained Earnings ………………….. 500,000

4. Entries Affecting Stockholders’ Equity Nilsson Corporation’s Books Jan. 15 Appropriated Retained Earnings ……… 500,000 Retained Earnings ………………….. 500,000 Jan. 15 Building Improvements …………………. 485,000 Cash ………………………………….. 485,000

5. Entries Affecting Stockholders’ Equity Cash received = 100,000 shares x $8 per share = $800,000 Common Stock (par value) = 100,000 shares x $5 par = $500,000 Excess of Par = 100,000 shares x ($8 - $5) = $300,000

6. Entries Affecting Stockholders’ Equity Cash received = 100,000 shares x $8 per share = $800,000 Common Stock (par value) = 100,000 shares x $5 par = $500,000 Excess of Par = 100,000 shares x ($8 - $5) = $300,000 Nilsson Corporation’s Books Mar. 3 Cash ……………………………………… 800,000 Common Stock ……………………… 500,000 Paid-In Capital in Excess of Par …… 300,000

7. Entries Affecting Stockholders’ Equity Remember: The day dividends are declared, they become a legal liability that the company must pay at a future date. 375,000 shares outstanding x $1.50 per share = $562,500

8. Entries Affecting Stockholders’ Equity Remember: The day dividends are declared, they become a legal liability that the company must pay at a future date. 375,000 shares outstanding x $1.50 per share = $562,500 Nilsson Corporation’s Books May 18 Dividends (Retained Earnings) ……….. 562,500 Dividends Payable ………………….. 562,500

9. Entries Affecting Stockholders’ Equity Restricted Retained Earnings are not eligible for distribution as dividends.

10. Entries Affecting Stockholders’ Equity Restricted Retained Earnings are not eligible for distribution as dividends. Nilsson Corporation’s Books June 19 Retained Earnings ……………………… 400,000 Appropriated Retained Earnings ….. 400,000

11. Entries Affecting Stockholders’ Equity On July 31, Nilsson Corporation paid the liability established on May 18.

12. Entries Affecting Stockholders’ Equity On July 31, Nilsson Corporation paid the liability established on May 18. Nilsson Corporation’s Books July 31 Dividends Payable ……………………… 562,500 Cash ………………………………….. 562,500

13. Entries Affecting Stockholders’ Equity This transaction will cause Nilsson to record a gain for the difference between the fair market value of the Hampton stock on the day the dividends are declared and the price Nilsson Corporation originally paid to acquire the Hampton stock. The gain to Nilsson is the same as if they had sold the Hampton stock for cash and then distributed this cash to their stockholders.

14. Entries Affecting Stockholders’ Equity This transaction will cause Nilsson to record a gain for the difference between the fair market value of the Hampton stock on the day the dividends are declared and the price Nilsson Corporation originally paid to acquire the Hampton stock. The gain to Nilsson is the same as if they had sold the Hampton stock for cash and then distributed this cash to their stockholders. Property Dividend: 35,000 shares of Hampton x $13 per share = $455,000 Gain on Distribution: 35,000 shares of Hampton x ($13-$9) = $140,000

15. Entries Affecting Stockholders’ Equity This transaction will cause Nilsson to record a gain for the difference between the fair market value of the Hampton stock on the day the dividends are declared and the price Nilsson Corporation originally paid to acquire the Hampton stock. The gain to Nilsson is the same as if they had sold the Hampton stock for cash and then distributed this cash to their stockholders. Property Dividend: 35,000 shares of Hampton x $13 per share = $455,000 Gain on Distribution: 35,000 shares of Hampton x ($13-$9) = $140,000 Nilsson Corporation’s Books Nov. 12 Property Dividends (Retained Earnings) ……. 455,000 Property Dividend Payable ………………. 315,000 Gain on Distribution of Property Dividend.. 140,000

16. Entries Affecting Stockholders’ Equity Revenues exceeded expenses by $885,000. Assume Nilsson used an Income Summary Account.

17. Entries Affecting Stockholders’ Equity Revenues exceeded expenses by $885,000. Assume Nilsson used an Income Summary Account. Nilsson Corporation’s Books Dec. 31 Income Summary ……………………….. 885,000 Retained Earnings ………………….. 885,000

18. Entries Affecting Stockholders’ Equity Hampton Stock is distributed to its shareholders. Nilsson is not entitled to the gain in the share price that has occurred between the declaration date (November 12) and the distribution date (December 31).

19. Entries Affecting Stockholders’ Equity Hampton Stock is distributed to its shareholders. Nilsson is not entitled to the gain in the share price that has occurred between the declaration date (November 12) and the distribution date (December 31). Nilsson Corporation’s Books Dec. 31 Property Dividend Payable ……………. 315,000 Investment in Hampton Inc. Stock … 315,000

20. Part 2: Nilsson Corporation Stockholders’ Equity Common stock ($5 par, 500,000 shares authorized, 375,000 issued and outstanding …. $1,875,000 Computations $1,375,000 + $500,000 = $1,875,000

21. Part 2: Nilsson Corporation Stockholders’ Equity Common stock ($5 par, 500,000 shares authorized, 375,000 issued and outstanding …. $1,875,000 Paid-in capital in excess of par …………………… 850,000 Computations $550,000 + $300,000 = $850,000

22. Part 2: Nilsson Corporation Stockholders’ Equity Common stock ($5 par, 500,000 shares authorized, 375,000 issued and outstanding …. $1,875,000 Paid-in capital in excess of par …………………… 850,000 Total paid-in capital…………………………… $2,725,000 Unappropriated retained earnings ………………. $1,302,500 Computations Beginning retained earnings ……………………………………. $1,335,000 Add: Reversal of appropriated retained earnings ……………. 500,000 Deduct: Appropriation of retained earnings …………………… (400,000) $1,435,000 Add: Net income …………………………………………………. 885,000 $2,320,000 Deduct: Dividends ………………………………………………. (1,017,500) Retained earnings balance, December 31, 2002 ……………. $1,302,500

23. Part 2: Nilsson Corporation Stockholders’ Equity December 31, 2002 Common stock ($5 par, 500,000 shares authorized, 375,000 issued and outstanding …. $1,875,000 Paid-in capital in excess of par …………………… 850,000 Total paid-in capital…………………………… $2,725,000 Unappropriated retained earnings ………………. $1,302,500 Appropriated retained earnings …………………… 400,000 Total retained earnings ………………………. 1,702,500 Total stockholders’ equity …………………………. $4,427,500

24. End of Problem