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Chapter 15: Question 8Q (page 810)

Explain the difference between the proportional method and the incremental method of allocating the proceeds of lump-sum sales of capital stock.

Short Answer

Expert verified

The proportional and incremental methods are both used according to the different approaches performed by the company.

Step by step solution

01

Meaning Proportional Method

A proportionate technique is a mechanism for allocating a lump-sum sale among one or more classes of securities. It is also known as the pro-rata basis of allocation.

02

Differences between proportional and incremental method

When the fair value or another good foundation for assessing relative value is available for each class of security, the proportionate technique is used to allocate the lump sum received on salesof two or more classes of securities.

The incremental method must be utilized when the fair valueof all classes of securities cannot be determined in a lump-sum transaction.

For the classes for which the value is known, the value of the securities is used. The balance is allocated to the class for which the value is unknown.

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Most popular questions from this chapter

Twenty-five thousand shares reacquired by Elixir Corporation for \(53 per share were exchanged for undeveloped land that has an appraised value of \)1,700,000. At the time of the exchange, the common stock was trading at $62 per share on an organized exchange.

Instructions

a) Prepare the journal entry to record the acquisition of land assuming that the purchase of the stock was originally recorded using the cost method.

b) Briefly identify the possible alternatives (including those that are totally unacceptable) for quantifying the cost of the land and briefly support your choice.

Kellogg Company is the world’s leading producer of ready-to-eat cereal products. In recent years, the company has taken numerous steps aimed at improving its profitability and earnings per share. Presented below are some basic facts for Kellogg.

(in millions)

2014

2013

Net sales

\(14,580

\)14,792

Net income

632

1,807

Total assets

15,153

15,474

Total liabilities

12,302

11,867

Common stock, $0.25 par value

105

105

Capital in excess of par value

678

626

Retained earnings

6,689

6,749

Treasury stock, at cost

3,470

2,999

Number of shares outstanding (in millions)

358

363

Instructions

  1. What are some of the reasons that management purchases its own stock?
  2. Explain how earnings per share might be affected by treasury stock transactions.
  3. Calculate the debt to assets ratio for 2013 and 2014, and discuss the implications of the change.

Joe Dumars Company has outstanding 40,000 shares of \(5 par common stock, which had been issued at \)30 per share. Joe Dumars then entered into the following transactions.

  1. Purchased 5,000 treasury shares at \(45 per share.
  2. Resold 2,000 of the treasury shares at \)49 per share.
  3. Resold 500 of the treasury shares at $40 per share.

Instructions

Use the following code to indicate the effect each of the three transactions has on the financial statement categories listed in the table below, assuming Joe Dumars Company uses the cost method (I = Increase; D = Decrease; NE = No effect).

#

Asset

Liabilities

Stockholders’ Equity

Paid-in Capital

Retained

Earnings

Net Income

1

2

3

Discuss the propriety of showing:

  1. Treasury stock as an asset.
  2. “Gain” or “loss” on sale of treasury stock as additions to or deductions from income.
  3. Dividends received on treasury stock as income.

McNabb Corp. had \(100,000 of 7%, \)20 par value preferred stock, and 12,000 shares of \(25 par value common stock outstanding throughout 2017.

  1. Assuming that total dividends declared in 2017 were \)64,000, and that the preferred stock is not cumulative but is fully participating, common stockholders should receive 2017 dividends of what amount?
  2. Assuming that total dividends declared in 2017 were \(64,000, and that the preferred stock is fully participating and cumulative with preferred dividends in arrears for 2016, preferred stockholders should receive 2017 dividends totaling what amount?
  3. Assuming that total dividends declared in 2017 were \)30,000, that the preferred stock is cumulative, nonparticipating, and was issued on January 1, 2016, and that $5,000 of preferred dividends were declared and paid in 2016, the common stockholders should receive 2017 dividends totaling what amount?
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