(1) The LMI Companys stockholders equity section of the balance…

(1) The LMI Company’s stockholders’ equity section of the balance sheet as of December 31, 2008 follows:
Preferred stock, 12%, $60 par, (25,000 shares authorized, 5,000 shares issued and outstanding) $300,000
Common stock, $8 par (140,000 shares authorized, 40,000 shares issued and outstanding) 320,000
Total capital stock $620,000
Additional paid-in capital 200,000
Total paid-in capital $820,000
Retained earnings 1,160,000
Total stockholder’s equity $1,980,000

The LMI Company took the following actions during 2009:
1. On February 1, issued dividend payments in the amount of $2.00 per common share and $7.20 per preferred share. The dividends were declared by the Company’s board of directors on December 31, 2008.

2. On March 1, on the open stock market, purchased 6,000 shares of its own common stock at $33.

3. On April 1, acquired equipment valued at $83,200 in exchange for 2,400 of the shares of its own common stock purchased on March 1.

4. On May 1, issued 1,250 shares of preferred stock at $63 per share.

5. On June 1, the board of directors declared a 14% stock dividend on its outstanding common stock. On the date of the dividend, the stock was trading in the stock market at $37 per share.

6. On August 1, the company issued the stock dividend that was declared on June 1.

7. On December 31, the board of directors declared a dividend in the amount of $2.00 per common share and $7.20 per preferred share. The dividends will be paid on February 1 of the next year.

Instructions:

A. Assuming that the LMI Company uses the cost method to account for treasury stock, prepare the journal entries necessary to record the above transactions for 2009.

B. Assuming that net income for 2009 was $600,000, prepare the stockholder’s equity section of the Company’s balance sheet as of December 31, 2009.

(2) The HNR Company’s common stock information includes:

Current market price per share: $154
Current book value per share: $117
Current par value per share: $40
Shares issued and outstanding: 9,620,000

Instructions:

A. Prepare the journal entries necessary to record a 90% stock dividend.

B. Without regard to A., prepare the journal entries necessary to record a 5-for-1 stock split.

C. Discuss the differences between these methods of decreasing a stock’s price from the standpoint of both the securities market and the company’s accounting.