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Chapter 11
Corporate Reporting and Analysis
QUESTIONS
1.
Organization expenses (costs) are incurred in creating a corporation. Examples include:
legal fees, promoter fees, accountant fees, costs of printing stock certificates, and fees paid
to obtain a state charter.
2.
Organization expenses (costs) are reported as expenses when incurred—as part of operating
expenses—because the amount and timing of their future benefit is difficult to determine.
(Instructor note: Prior to SOP 98-5, organization costs were classified as part of intangible
assets and then allocated to amortization expense.)
3.
The board of directors of a corporation is responsible for directing the corporation's affairs.
The directors are elected by the corporation’s stockholders.
4.
The preemptive right of common stockholders is the right to maintain their relative
ownership interests in the corporation by having the first opportunity to purchase their
proportionate share of any additional common shares issued by the corporation.
5.
The general rights of common stockholders include: (1) the right to vote in stockholders’
meetings, (2) the right to sell or otherwise dispose of stock, (3) the preemptive right, (4) the
right to share proportionately in dividends, and (5) the right to share proportionately in
assets remaining after the creditors are paid when, and if, the corporation is liquidated. In
addition, stockholders have the general right to receive timely and useful financial reports
that describe the corporation’s financial position and the results of its activities.
6.
Authorized shares represent the maximum number of shares that a corporation’s charter
allows it to sell. Outstanding shares are the number of issued shares that are held by
stockholders. The number of authorized shares usually exceeds the number of issued
shares, often by a large amount.
7.
Convertible preferred stock is potentially attractive because it offers the safety of a regular
return as well as the opportunity to share in the increased value of the issuer’s common
stock through conversion (or potential conversion).
8.
The market value per share of stock is the price at which a share of stock is bought or sold.
Many factors—including expected future earnings, dividends, growth, and other company
and economic factors—affect market value. Par value per share is an arbitrary value
assigned by the corporation in its charter.
9.
The par value is an arbitrary value placed on a share of stock when it is authorized. The call
price is an amount that a corporation must pay if it exercises the option to buy back and
retire a share of callable preferred stock.
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 11
589
10. The three important dates governing dividends are:
a. date of declarationthe date the directors vote to pay a dividend.
b. date of recorda future date specified by the directors to identify the particular
shareholders that are to receive the dividend.
c. date of paymentthe date when shareholders receive the dividend payment.
11. Cash dividends debited against paid-in capital accounts are called liquidating dividends
because they represent a return of amounts originally invested in the corporation by the
stockholders. (They are a return of, not a return on, capital contributions.)
12. Declaring a stock dividend has no effect on assets, liabilities, or total equity. Also, the
subsequent distribution of the stock dividend has no effect on these items. Instead, the stock
dividend simply increases the number of shares outstanding and results in a transfer of
equity from retained earnings to paid-in capital.
13. A stock dividend results in a distribution of additional shares to stockholders and the
capitalization of retained earnings. A stock split calls in the old shares and replaces them
with a different number of new shares with a new par value. Also, no entry is made to any of
the equity accounts with a stock split. In spite of these technical differences, there is no
practical difference in most cases between a stock split and a large stock dividend.
14. A stock dividend should not be considered income because it does not transfer any assets
from the corporation to the stockholders.
15. A treasury stock purchase reduces total assets and total equity by equal amounts.
16. Treasury stock purchases affect the corporate assets and stockholders’ equity just like a
cash dividend. To keep a company from dissipating its assets by paying an inordinate
amount of dividends to its stockholders, state laws protect the company’s creditors by
imposing limits on treasury stock purchases.
17. With a simple capital structure, earnings per share is calculated by first subtracting any
declared and cumulative preferred dividends from net income, and then dividing the
difference by the weighted-average number of shares of outstanding common stock. The
resulting figure is called the basic earnings per share.
18. A stock option is the right to purchase common stock at a fixed price over a specified period.
19. When a corporation has no preferred stock, book value per share is calculated by dividing
total stockholders’ equity by the number of common shares outstanding. The main limitation
of using book value per share to value a corporation is the potential difference between
recorded value and market value for assets and liabilities.
20. Best Buy has preferred stock and common stock listed on its balance sheet. As of March 3,
2007, however, Best Buy has not issued any of the preferred stock.
21. The par value for Circuit City’s common stock is $0.50 per share (as reported on its balance
sheet). The company has likely set the par value to minimize the amount of legal capital the
company must maintain (and that stockholders would be liable for).
22. At December 31, 2006, RadioShack had 650,000,000 shares of common stock authorized and
191,033,000 shares of common stock issued.
23. Apple received $318,000,000 from the issue of common stock, and paid $355,000,000 to
repurchase common stock for the year ended September 30, 2006.
©McGraw-Hill Companies, 2009
590
Financial and Managerial Accounting, 3rd Edition
QUICK STUDIES
Quick Study 11-1 (10 minutes)
True statements: 1, 2, 5 and 6
Quick Study 11-2 (5 minutes)
a. Cash ..........................................................................
Common Stock, $1 Par Value ............................
50,000
50,000
Issued par value stock for cash. (50,000 x $1)
b. Cash*......................................................................... 150,000
Common Stock, $1 Par Value ............................
Paid-In Capital in Excess of Par Value,
Common Stock ................................................
50,000
100,000
Issued par value stock for cash. *(50,000 x $3)
Quick Study 11-3 (5 minutes)
a. Cash*......................................................................... 900,000
Common Stock, $5 Par Value** .........................
Paid-In Capital in Excess of Par Value,
Common Stock*** ............................................
375,000
525,000
Issued par value stock for cash.
*75,000 x $12 = $900,000
**75,000 x $5 = $375,000
***$900,000 - $375,000 = $525,000
b. Cash*......................................................................... 900,000
Common Stock, $5 Stated Value** ....................
Paid-In Capital in Excess of Stated Value,
Common Stock*** ............................................
375,000
525,000
Issued stated value stock for cash.
*75,000 x $12 = $900,000
**75,000 x $5 = $375,000
***$900,000 - $375,000 = $525,000
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 11
591
Quick Study 11-4 (5 minutes)
a. Cash ....................................................................................
1,560,000
Common Stock, No-Par Value .....................................
1,560,000
Issued no-par value stock for cash. (52,000 x $30)
b. Land ....................................................................................
1,560,000
Common Stock, No-Par Value .....................................
1,560,000
Issued no-par value stock for land.
Quick Study 11-5 (15 minutes)
(a) Mar. 1 Cash ..........................................................................
300,000
Common Stock, $5 Par Value ............................
Paid-In Capital in Excess of Par Value,
Common Stock ................................................
187,500
112,500
Issued par value stock for cash.
(b) Apr. 1 Cash .......................................................................... 90,000
Common Stock, No-Par Value ...........................
90,000
Issued no-par value stock for cash.
(c) Apr. 6 Inventory ................................................................... 20,000
Machinery .................................................................
130,000
Note Payable .......................................................
Common Stock, $10 Par Value ..........................
Paid-In Capital in Excess of Par Value,
Common Stock ................................................
75,000
35,000
40,000
Issued stock for inventory, machinery, and note.
Quick Study 11-6 (5 minutes)
1. Cash*...................................................................................
612,000
Preferred Stock, $100 Par Value**...............................
Paid-In Capital in Excess of Par Value,
Preferred Stock*** ......................................................
600,000
12,000
Issued par value stock for cash.
*6,000 x $102 = $612,000
**6,000 x $100 = $600,000
***$612,000 - $600,000 = $12,000
2. Preferred dividend =
$100 par value/share x 6% x 6,000 shares = $36,000
©McGraw-Hill Companies, 2009
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Financial and Managerial Accounting, 3rd Edition
Quick Study 11-7 (10 minutes)
May 15 Retained Earnings .........................................................
32,000
Common Dividend Payable ....................................
32,000
Declared cash dividend on common.
June 30 Common Dividend Payable ..........................................
32,000
Cash ..........................................................................
32,000
Paid cash dividend to common.
Quick Study 11-8 (10 minutes)
Atari Company
Stockholders’ Equity
April 2 (after stock dividend)
Common stock$5 par value, 375,000 shares
authorized, 220,000 shares issued and outstanding ................
Paid-in capital in excess of par value, common stock.................
Total paid-in capital ........................................................................
Retained earnings ...........................................................................
Total stockholders' equity .............................................................
$1,100,000
860,000
1,960,000
473,000
$2,433,000
Supporting work
Apr.
2
Retained Earnings .........................................................360,000
Common Stock* .......................................................
Paid-In Capital in Excess of Par Value,
Common Stock** ...................................................
100,000
260,000
To record declaration and distribution
of a 10% common stock dividend.
* 200,000 shares x 10% x $5 par value = $100,000
**200,000 shares x 10% x ($18 market value –
$5 par value) = $260,000
Quick Study 11-9 (10 minutes)
Total cash dividend ...........................................................................
To preferred shareholders ................................................................
Remainder to common shareholders ..............................................
$ 92,000
32,000*
$ 60,000
*10,000 shares x $20 par x .08 x 2 years = $32,000.
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 11
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Quick Study 11-10 (10 minutes)
May 3
Treasury Stock (3,000 shares) ......................................
45,000
Cash ..........................................................................
45,000
Purchased treasury stock
($45,000 / 3,000 shares = $15 per share cost).
Nov. 4
Cash ................................................................................
14,450
Treasury Stock .........................................................
Paid-In Capital, Treasury Stock ..............................
12,750
1,700
Reissued treasury stock at a price
greater than its cost.
($15 per share x 850 shares = $12,750)
Quick Study 11-11 (10 minutes)
1. This material error should be reported on the statement of retained
earnings (and/or the statement of stockholders’ equity) as a prior
period adjustment to the beginning retained earnings balance. Also, if
prior year’s financial numbers are reported, they should be revised to
show the correct numbers.
2. This change in the expected useful life is a change in an accounting
estimate—affecting current and future accounting periods. Therefore,
the current year depreciation should be modified to reflect the change
and the revised depreciation expense reported on the income
statement as a regular part of income from continuing operations. The
remaining years’ depreciation also should reflect this new estimate of
useful life.
Quick Study 11-12 (10 minutes)
Basic earnings per share:
Net income - Preferred dividends
= Weighted-average common shares outstanding
= ($840,000 - $0) / 300,000 shares
= $2.80 per share
©McGraw-Hill Companies, 2009
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Financial and Managerial Accounting, 3rd Edition
Quick Study 11-13 (10 minutes)
Basic earnings per share:
Net income - Preferred dividends
= Weighted-average common shares outstanding
= ($950,000 - $40,000) / 400,000 shares
= $2.275 per share
Quick Study 11-14 (10 minutes)
Price-earnings ratio = Market value per share
Earnings per share
= $31.50
$3.75
= 8.4
Analysis: Many analysts consider stocks with a PE less than 5 to 8 as
potentially underpriced. This stock with a PE of 8.4 would exceed this
criterion. (Instructor note: This is a good point at which to emphasize that
PE is based on expectations—expectations can prove to be higher or lower
than actual results.)
Quick Study 11-15 (10 minutes)
Dividend yield =
Annual cash dividends per share
Market value per share
=
$1.62
$22.50
= 7.2%
Analysis: The company’s dividend yield of 7.2% indicates that it should be
classified as an income stock. That is, the company annually pays out
cash dividends to its shareholders in an amount that equals 7.2% of the
company’s market value.
Quick Study 11-16 (10 minutes)
Total stockholders' equity .................................................................$1,839,500
Less equity attributable to preferred shares
Call price (20,000 shares x $25)...................................................... 500,000
Equity applicable to common shares ...............................................$1,339,500
Book value of common shares ($1,339,500/150,000 shares) .........$
8.93
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 11
595
EXERCISES
Exercise 11-1 (15 minutes)
Characteristic
Corporations
1. Owner authority and control ......................One vote per share
2. Ease of formation ........................................Requires government approval
3. Transferability of ownership ......................Readily transferred
4. Ability to raise large amounts of capital .....High ability
5. Duration of life .............................................Unlimited
6. Owner liability..............................................Limited
7. Legal status .................................................Separate legal entity
8. Tax status of income ..................................Corporate income is taxed and
its cash dividends are usually
taxed at the 15% rate (some
cases at a lower rate)
Exercise 11-2 (15 minutes)
1.
Feb. 20
Cash ..........................................................................182,700
Common Stock, No-Par Value ..........................
182,700
Issued common stock for cash.
2.
Feb. 20
Cash ..........................................................................182,700
Common Stock, $12 Par Value* .......................
144,000
Paid-In Capital in Excess of Par Value,
Common Stock** ............................................
38,700
Issued common stock for cash.
*12,000 shares x $12 per share = $144,000
**$182,700 - $144,000 = $38,700
3.
Feb. 20
Cash ..........................................................................182,700
Common Stock, $6 Stated Value* ....................
72,000
Paid-In Capital in Excess of Stated Value,
Common Stock** ............................................
110,700
Issued common stock for cash.
*12,000 shares x $6 per share = $72,000
**$182,700 - $72,000 = $110,700
©McGraw-Hill Companies, 2009
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Financial and Managerial Accounting, 3rd Edition
Exercise 11-3 (15 minutes)
1.
Organization Expenses ................................................... 43,500
Common Stock, No-Par Value ..................................
43,500
Issued stock to promoters.
2.
Organization Expenses ................................................... 43,500
Common Stock, $2 Stated Value ..............................
Paid-In Capital in Excess of Stated Value,
Common Stock ........................................................
5,000
38,500
Issued stock to promoters.
3.
Cash .................................................................................. 180,000
Common Stock, $30 Par Value* ................................
150,000
Paid-In Capital in Excess of Par Value,
Common Stock** .....................................................
30,000
Issued common stock for cash.
*5,000 shares x $30 per share = $150,000
**$180,000 - $150,000 = $30,000
4.
Cash ...................................................................................168,500
Preferred Stock, $100 Par Value* ..............................
125,000
Paid-In Capital in Excess of Par Value,
Preferred Stock**......................................................
43,500
Issued preferred stock for cash.
*1,250 shares x $100 per share = $125,000
**$168,500 - $125,000 = $43,500
Exercise 11-4 (15 minutes)
Land ..................................................................................
Building ............................................................................
Common Stock, $9 Par Value* ..................................
Paid-In Capital in Excess of Par Value,
Common Stock ........................................................
75,000
120,000
108,000
87,000
Issued stock for land and building.
*12,000 shares x $9 per share = $108,000
**($75,000 + $120,000) – $108,000 = $87,000
Exercise 11-5 (10 minutes)
1.
B
2.
F
3.
E
4.
D
5.
A
6.
C
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 11
597
Exercise 11-6 (20 minutes)
1.
a.
b.
c.
2.
a.
b.
c.
3.
Retained earnings
Before dividend ........................................................................
$8 par value of 32,000 dividend shares .................................
After dividend ...........................................................................
$ 356,000
(256,000)
$ 100,000
Total stockholders’ equity
Common stock$8 par value, 80,000 shares
authorized, 64,000 shares issued and outstanding ...........
Paid-in capital in excess of par value ....................................
Retained earnings ....................................................................
Total stockholders’ equity.......................................................
$ 512,000
100,000
100,000
$ 712,000
Number of outstanding shares
Outstanding shares before the dividend .............................
Dividend shares .....................................................................
Outstanding shares after the dividend ................................
32,000
32,000
64,000
Retained earnings (no change)
Before and after stock split .....................................................
$ 356,000
Total stockholders’ equity
Common stock$4 par value, 160,000 shares
authorized, 64,000 shares issued and outstanding ...........
Paid-in capital in excess of par value ....................................
Retained earnings ....................................................................
Total stockholders’ equity.......................................................
$ 256,000
100,000
356,000
$ 712,000
Number of outstanding shares
Outstanding shares before the split.......................................
Additional split shares (2-for-1) ..............................................
Outstanding shares after the split ..........................................
32,000
32,000
64,000
From a stockholder’s point of view, there is no practical difference
between the stock dividend and the stock split. The number of
shares will be increased equivalently under either approach, and the
market value change, if any, should be approximately the same.
©McGraw-Hill Companies, 2009
598
Financial and Managerial Accounting, 3rd Edition
Exercise 11-7 (25 minutes)
1.
Feb. 5 Retained Earnings* ........................................................
480,000
Common Stock Dividend Distributable** ..............
240,000
Paid-In Capital in Excess of Par Value,
Common Stock*** .................................................
240,000
Declared 15% common stock dividend
Shares to be issued: 64,000 shares x 15% = 9,600 shares
*9,600 shares x $50 per share = $480,000
**9,600 shares x $25 per share = $240,000
***$480,000 - $240,000 = $240,000
Feb. 28
Common Stock Dividend Distributable .......................
240,000
Common Stock, $25 Par Value ...............................
240,000
Distributed common stock dividend.
2.
Before
After
Total stockholders’ equity ........................ $2,796,800
$2,796,800
 64,000
 73,600
Issued and distributable shares ..............
Book value per share ................................ $
43.70
Shares owned ............................................ x
900
Total book value of shares ....................... $ 39,330
$
38.00
x 1,035*
$ 39,330
* 900 shares x 115% = 1,035 shares.
3.
February 5
Market value per share ............................. $
February 28
50.00
$
43.60
x
900
x
1,035
Total market value of shares owned ....... $
45,000
$
45,126
Shares owned ............................................
Note: The total market value of the investor’s holdings is approximately the same
for February 5 and February 28. Assuming that the stock dividend is the only
value-relevant information/event between February 5th and February 28th, these
per share values highlight the lack of value distributed in a stock dividend.
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 11
599
Exercise 11-8 (30 minutes)
Preferred
Common
2009 ($8,000 paid)
Preferred* ...................................................... $ 8,000
Commonremainder ................................... _______
Total for the year .......................................... $ 8,000
$
$
2010 ($24,000 paid)
Preferred* ...................................................... $ 10,400
Commonremainder ................................... _______
Total for the year .......................................... $ 10,400
$ 13,600
$ 13,600
2011 ($120,000 paid)
Preferred* ...................................................... $ 10,400
Commonremainder ................................... _______
Total for the year .......................................... $ 10,400
$109,600
$109,600
2012 ($197,000 paid)
Preferred* ...................................................... $ 10,400
Commonremainder ................................... _______
Total for the year .......................................... $ 10,400
$186,600
$186,600
2009-2012 ($349,000 paid)
_______
Total for four years ...................................... $ 39,200
_______
$309,800
0
0
* The holders of the noncumulative preferred stock are entitled to no more than
$10,400 of dividends in any one year (8% x $10 x 13,000 shares).
©McGraw-Hill Companies, 2009
600
Financial and Managerial Accounting, 3rd Edition
Exercise 11-9 (25 minutes)
Preferred
2009 ($8,000 paid)
Preferred* ...................................................... $ 8,000
Commonremainder ................................... _______
Total for the year .......................................... $ 8,000
Common
$
$
0
0
(Note: $2,400 in preferred stock dividends in arrears.)
2010 ($24,000 paid)
Preferredarrears from 2009 ...................... $ 2,400
Preferred* ......................................................
10,400
Commonremainder ................................... _______
Total for the year .......................................... $ 12,800
$ 11,200
$ 11,200
(Note: $0 in preferred stock dividends in arrears.)
2011 ($120,000 paid)
Preferred* ...................................................... $ 10,400
Commonremainder ................................... _______
Total for the year .......................................... $ 10,400
$109,600
$109,600
(Note: $0 in preferred stock dividends in arrears.)
2012 ($197,000 paid)
Preferred* ...................................................... $ 10,400
Commonremainder ................................... _______
Total for the year .......................................... $ 10,400
$186,600
$186,600
(Note: $0 in preferred stock dividends in arrears.)
2009-2012 ($349,000 paid)
_______
Total for four years ...................................... $ 41,600
_______
$307,400
* The holders of the cumulative preferred stock are entitled to no more than
$10,400 of dividends declared in any year (8% x $10 x 13,000 shares) plus any
dividends skipped in prior years.
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 11
601
Exercise 11-10 (25 minutes)
1. (a)
Oct. 11 Treasury Stock (5,000 x $22) ........................................
110,000
Cash ..........................................................................
110,000
Purchased treasury stock.
(b)
Nov. 1
Cash (1,000 x $28) .........................................................
28,000
Treasury Stock (1,000 x $22) ..................................
Paid-In Capital, Treasury Stock ..............................
22,000
6,000
Reissued treasury stock at a price exceeding cost.
(c)
Nov. 25 Cash (4,000 x $17) .........................................................
68,000
Paid-In Capital, Treasury Stock ....................................
6,000
Retained Earnings .........................................................
14,000
Treasury Stock (4,000 x $22) ..................................
88,000
Reissued treasury stock at a price less than cost.
2. Changes to the equity section include the following
(i) The common stock account description line will change. After the
treasury stock purchase, it should read:
Common stock$10 par value; 72,000 shares
$720,000
authorized and issued; 5,000 shares in treasury .................
The dollar balance of this account does not change with a treasury
stock purchase.
(ii) The descriptions and dollar amounts for Paid-In Capital in Excess of
Par Value, Common Stock will not change.
(iii) The retained earnings dollar balance will not change but its
description should change to read:
Retained earnings ($110,000 restricted for treasury stock) .............
$864,000
(iv) After the purchase, a deduction for the cost of treasury stock is
reported immediately before the total line for stockholders’ equity as :
Less cost of treasury stock .........................................................
$(110,000)
(v) Total stockholders’ equity will change from $1,800,000 to $1,690,000.
©McGraw-Hill Companies, 2009
602
Financial and Managerial Accounting, 3rd Edition
Exercise 11-10 (concluded)
Revised equity section appears as follows
Common stock$10 par value; 72,000 shares authorized
$ 720,000
and issued; 5,000 shares in treasury..........................................
Paid-in capital in excess of par value, common stock ................ 216,000
Retained earnings, $110,000 restricted by treasury stock .......... 864,000
Total ..................................................................................................
1,800,000
Less cost of treasury stock ............................................................(110,000)
Total stockholders’ equity ..............................................................
$1,690,000
Exercise 11-11 (15 minutes)
Arturo Company
Statement of Retained Earnings
For Year Ended December 31, 2009
Retained earnings, December 31, 2008, as previously reported .... $1,375,000
Prior period adjustment
Depreciation expense not recorded in 2007 (net of $4,500
in income taxes) ..........................................................................
(55,500)
Retained Earnings, December 31, 2008, as adjusted ..................... 1,319,500
Plus net income ..................................................................................
126,000
Less dividends ...................................................................................
(43,000)
Retained earnings, December 31, 2009 ............................................ $1,402,500
Exercise 11-12 (25 minutes)
1.
Net income.....................................................................................
$1,375,500
Less preferred dividends ............................................................ (192,500)
Net income available to common stockholders .......................$1,183,000
2.
Net income available to common stockholders .......................$1,183,000
Divided by weighted-average outstanding shares ................... 350,000
Basic earnings per share ............................................................$
3.38
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 11
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Exercise 11-13 (30 minutes)
1.
Net income......................................................................................
$1,875,000
Less preferred dividends ............................................................ (262,500)
Net income available to common stockholders .......................$1,612,500
2.
Net income available to common stockholders .................... $1,612,500
Divided by weighted-average outstanding shares ................... 250,000
Basic earnings per share ............................................................$
6.45
Exercise 11-14 (15 minutes)
Market Value
per Share
Divided
by
Earnings
per Share
1..............
$145.20

$12.00
=
12.1
2..............
116.60

11.00
=
10.6
3..............
74.10

7.80
=
9.5
4..............
60.48

43.20
=
1.4
Stock
Price-Earnings
Ratio
Analysis: Stocks with PE ratios less than about 5 to 8 are likely viewed
as potentially undervalued by the market. Of the stocks above, an
analyst would likely investigate stock #4 as possibly undervalued with
a PE ratio of 1.4.
Exercise 11-15 (15 minutes)
Dividend yield
1. $14.00 / $229.51 =
6.1%
2. $11.00 / $110.00 = 10.0%
3. $ 5.52 / $ 60.00 =
9.2%
4. $ 1.90 / $118.75 =
1.6%
Analysis: The yield of 1.6% on stock #4 is sufficiently low that it probably
would be classified as a growth stock, and not an income stock. Note that
classification involves expectations (not necessarily realizations).
©McGraw-Hill Companies, 2009
604
Financial and Managerial Accounting, 3rd Edition
Exercise 11-16 (20 minutes)
1.
Total stockholders’ equity .............................................
$ 917,500
Less equity applicable to preferred shares
Call price ($35 x 10,000) ............................................... $350,000
Cumulative dividends in arrears (none).....................
0
(350,000)
Equity applicable to common shares ...........................
$ 567,500
Book value of preferred stock ($350,000/10,000) ........
$
35.00
Book value of common stock ($567,500/35,000) .........
$
16.21
Total stockholders’ equity .............................................
$ 917,500
2.
Less equity applicable to preferred shares
Call price ($35 x 10,000) ............................................... $350,000
Cumulative dividends in arrears (3 x 6% x $300,000) ..
54,000
(404,000)
Equity applicable to common shares ...........................
$ 513,500
Book value of preferred stock ($404,000/10,000) ........
$
40.40
Book value of common stock ($513,500/35,000) .........
$
14.67
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 11
605
PROBLEM SET A
Problem 11-1A (30 minutes)
Part 1
a.
To record sale of 10,000 ($250,000/$25 per share) shares of $25 par
value common stock for $32 ($320,000/10,000 shares) per share.
b.
To record issuance of 5,000 ($125,000/$25 per share) shares of $25
par value common stock to the company’s promoters for their efforts
in organizing the company when the market value is $32
($160,000/5,000 shares) per share.
c.
To record acquisition of assets and liabilities by issuing 2,000
($50,000/$25) shares of $25 par value common stock at $42 per share.
d.
To record sale of 3,000 ($75,000/$25 per share) shares of $25 par
value common stock for $41 ($123,000/3,000 shares) per share.
Part 2
Number of outstanding shares
Issued in (a) .......................................
Issued in (b) .......................................
Issued in (c) .......................................
Issued in (d) .......................................
Total ....................................................
10,000
5,000
2,000
3,000
20,000
Part 3
Minimum legal capital = Outstanding shares x Par value per share
= 20,000 x $25 = $500,000
Part 4
Total paid-in capital from common stockholders
From transaction (a) ........................ $320,000
From transaction (b) ........................
160,000
From transaction (c) ........................
84,000
From transaction (d) ........................
123,000
Total paid-in capital ......................... $687,000
Part 5
Book value per common share
Total stockholders’ equity (given) ...
$785,000
Outstanding shares (from Part 2) ....
20,000
Book value per common share ........
$
39.25 ($785,000 / 20,000 shares)
©McGraw-Hill Companies, 2009
606
Financial and Managerial Accounting, 3rd Edition
Problem 11-2A (60 minutes)
Part 1
Jan. 1
Treasury Stock, Common .............................................
112,500
Cash ..........................................................................
112,500
Purchased treasury stock (4,500 x $25).
Jan. 5
Retained Earnings .........................................................
121,500
Common Dividend Payable ....................................
121,500
Declared $3 dividend on 40,500 outstanding shares.
Feb. 28
Common Dividend Payable ..........................................
121,500
Cash ..........................................................................
121,500
Paid cash dividend.
July 6
Cash*...............................................................................
48,952
Treasury Stock, Common** ....................................
Paid-In Capital, Treasury Stock*** .........................
42,200
6,752
Reissued treasury stock.
*(1,688 x $29) **(1,688 x $25) ***(1,688 x $4)
Aug. 22
Cash*...............................................................................
61,864
Paid-In Capital, Treasury Stock ....................................6,752
Retained Earnings .........................................................1,684
Treasury Stock, Common** ....................................
70,300
Reissued treasury stock.
*(2,812 x $22) **(2,812 x $25)
Sept. 5
Retained Earnings .........................................................
135,000
Common Dividend Payable ....................................
135,000
Declared $3 dividend on 45,000 outstanding shares.
Oct. 28
Common Dividend Payable ..........................................
135,000
Cash ..........................................................................
135,000
Paid cash dividend.
Dec. 31
Income Summary ...........................................................
388,000
Retained Earnings ...................................................
388,000
Closed Income Summary account.
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 11
607
Problem 11-2A (Concluded)
Part 2
ROCKLIN CORPORATION
Statement of Retained Earnings
For Year Ended December 31, 2010
Retained earnings, December 31, 2009 ........................... $ 460,000
Plus net income .................................................................
388,000
848,000
Less: Cash dividends declared ........................................ (256,500)
Treasury stock reissuances ...................................
(1,684)
Retained earnings, December 31, 2010 ........................... $ 589,816
Part 3
ROCKLIN CORPORATION
Stockholders’ Equity Section of the Balance Sheet
December 31, 2010
Common stock$25 par value, 100,000 shares
authorized, 45,000 shares issued and outstanding ..... $1,125,000
Paid-in capital in excess of par value, common stock ...
60,000
Retained earnings (from part 2) ............................................
589,816
Total stockholders’ equity ................................................ $1,774,816
©McGraw-Hill Companies, 2009
608
Financial and Managerial Accounting, 3rd Edition
Problem 11-3A (45 minutes)
Part 1
Explanations for each of the journal entries
Oct.
2 Declared a cash dividend of $1.50 per share of common stock.
($63,000 / 42,000 shares)
Oct. 25 Paid the cash dividend on common stock.
Oct. 31 Declared a 10% stock dividend when the market value is $22 per
share. ($42,000/$10 par = 4,200 shares = 10% of 42,000 shares;
$92,400/4,200 shares = $22 per share)
Nov.
5 Distributed the common stock dividend.
Dec.
1 Executed a 2-for-1 stock split. ($10 par / $5 par = 2-for-1 ratio)
Dec. 31 Closed the Income Summary account to Retained Earnings.
Part 2
Oct. 2
Oct. 25
Oct. 31
Nov. 5
Dec. 1
Dec. 31
Common stock.................... $420,000 $420,000 $420,000 $462,000 $462,000 $ 462,000
Common stock
dividend distributable .....
0
0
42,000
0
0
0
Paid-in capital in
excess of par ..................... 100,000
100,000
150,400
150,400
150,400
150,400
Retained earnings............... 337,000
337,000
244,600
244,600
244,600
474,600
Total equity............................ $857,000 $857,000 $857,000 $857,000 $857,000 $1,087,000
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 11
609
Problem 11-4A (45 minutes)
Part 1
Outstanding common shares
Jan. 5
Beginning balance ......................... 45,000
Less treasury stock (Mar. 20) ........
Plus dividend shares (July 31)* ....... ______
Outstanding shares ........................ 45,000
Apr. 5
45,000
(4,000)
July 5
45,000
(4,000)
______
______
41,000
41,000
Oct. 5
45,000
(4,000)
8,200
49,200
Apr. 5
41,000
$ 0.50
$20,500
July 5
41,000
$ 0.50
$20,500
Oct. 5
49,200
$ 0.50
$24,600
*(20% x 41,000)
Part 2
Cash dividend amounts
Jan. 5
Outstanding shares ...................... 45,000
Dividend per share ....................... $ 0.50
Total dividend ............................... $22,500
Part 3
Capitalization of retained earnings for small stock dividend
Number of shares ........................................................................
8,200
Market value per share ................................................................
x $10
Total capitalized ........................................................................... $ 82,000
Part 4
Cost per share of treasury stock
Total amount paid ........................................................................ $ 60,000
Shares purchased .......................................................................
4,000
Cost per share ............................................................................. $
15
Part 5
Net income
Retained earnings, beginning balance ......................................$340,000
Less dividends: Jan. 5 .............................................................. (22,500)
Apr. 5 .............................................................. (20,500)
July 5 .............................................................. (20,500)
July 31 ............................................................. (82,000)
Oct. 5 .............................................................. (24,600)
Total before net income ..............................................................$169,900
Plus net income ...........................................................................
?
Retained earnings, ending balance ...........................................$400,000
Therefore, net income = $230,100
©McGraw-Hill Companies, 2009
610
Financial and Managerial Accounting, 3rd Edition
Problem 11-5A (40 minutes)
1. Market price = $183 per share (current stock exchange price given)
2. Computation of par values of stock
Preferred: Paid-in amount / Number of shares = $ 85,000 / 1,000 = $85
Common: Paid-in amount / Number of shares = $200,000 / 4,000 = $50
3. Book values with no dividends in arrears
Book value per preferred share = par value (when not callable) = $85
Common stock
Total equity ................................................ $635,000
Less equity for preferred ..........................
(85,000)
Common stock equity............................... $550,000
Number of outstanding shares ................
Book value per common share ................
4,000
$ 137.50 ($550,000 / 4,000 shares)
4. Book values with two years’ dividends in arrears
Preferred stock
Preferred stock par value ........................... $ 85,000
Plus two years’ dividends in arrears* .......
8,500
Preferred equity........................................... $ 93,500
*2 years’ dividends = 2 x ($85,000 x 5%) = $8,500
Number of outstanding shares ..................
1,000
Book value per preferred share ................. $
93.50 ($93,500 / 1,000 shares)
Common stock
Total equity .................................................. $635,000
Less equity for preferred ............................
(93,500)
Common stock equity................................. $541,500
Number of outstanding shares ..................
4,000
Book value per common share .................. $ 135.38 ($541,500/4,000 shares)
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 11
611
Problem 11-5A (Concluded)
5. Book values with call price and two years’ dividends in arrears
Preferred stock
Preferred stock call price (1,000 x $95) .......
Plus two years’ dividends in arrears* .........
Preferred equity.............................................
$ 95,000
8,500
$103,500
*2 years’ dividends = 2 x ($85,000 x 5%) = $8,500
Number of outstanding shares ....................
1,000
Book value per preferred share ...................
$ 103.50 ($103,500 / 1,000 sh.)
Common stock
Total equity ....................................................
Less equity for preferred ..............................
Common stock equity...................................
$635,000
(103,500)
$531,500
Number of outstanding shares ....................
Book value per common share ....................
4,000
$ 132.88 ($531,500 / 4,000 sh.)
6. Dividend allocation in total
Preferred
2 years’ dividends in arrears ...........
$ 8,500
Current year dividends ..................... 4,250
Remainder to common .....................
.
Totals ..................................................
$12,750
Common
$
0
12,000
$12,000
Total
$ 8,500
4,250
12,000
$24,750
Dividends per share for the common stock
$12,000 / 4,000 shares = $3.00
7. Equity represents the residual interest of owners in the assets of the
business after subtracting claims of creditors. With few exceptions,
these assets and liabilities are reported at historical cost, not market
value. Therefore, the book value of common stock does not normally
match its market value. Also, the book value of common stock is
based on past transactions and events, whereas the market value takes
into account expected future earnings, growth, dividends, and other
industry and economic factors.
©McGraw-Hill Companies, 2009
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Financial and Managerial Accounting, 3rd Edition
PROBLEM SET B
Problem 11-1B (30 minutes)
Part 1
a. To record sale of 1,500 ($1,500/$1 per share) shares of $1 par value
common stock for $40 ($60,000/1,500) per share.
b. To record issuance of 500 ($500/$1 per share) shares of $1 par value
common stock to the company’s promoters for their efforts in
organizing the company when the market value is $40 per share.
c. To record acquisition of assets and liabilities by issuing 400 ($400/$1
per share) shares of $1 par value common stock at $50 per share and
issuing a note for $9,150.
d. To record sale of 600 shares of $1 par value common stock for $50 per
share.
Part 2
Number of outstanding shares
Issued in (a) ..........................................
Issued in (b)..........................................
Issued in (c) ..........................................
Issued in (d)..........................................
Total ......................................................
1,500
500
400
600
3,000
Part 3
Minimum legal capital = Outstanding shares x Par value per share
= 3,000 x $1 = $3,000
Part 4
Total paid-in capital from common stockholders
From transaction (a) ............................$ 60,000
From transaction (b) ............................ 20,000
From transaction (c) ............................ 20,000
From transaction (d) ............................ 30,000
Total paid-in capital .............................$130,000
Part 5
Book value per common share
Total stockholders’ equity (given) .....$141,500
Outstanding shares (from 2) ..............
3,000
Book value per common share ..........$
47.17 ($141,500 / 3,000 shares)
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 11
613
Problem 11-2B (60 minutes)
Part 1
Jan. 10 Treasury Stock, Common .............................................
240,000
Cash ..........................................................................
240,000
Purchased treasury stock (20,000 x $12).
Mar. 2
Retained Earnings .........................................................
120,000
Common Dividend Payable ....................................
120,000
Declared $1.50 dividend on 80,000 outstanding shares.
Mar. 31
Common Dividend Payable ..........................................
120,000
Cash ..........................................................................
120,000
Paid cash dividend.
Nov. 11
Cash* ...............................................................................
156,000
Treasury Stock, Common** ....................................
Paid-In Capital, Treasury Stock*** ..........................
144,000
12,000
Reissued treasury stock.
*(12,000 x $13) **(12,000 x $12) ***(12,000 x $1)
Nov. 25
Cash* ...............................................................................
76,000
Paid-In Capital, Treasury Stock ....................................
12,000
Retained Earnings .........................................................
8,000
Treasury Stock, Common** ....................................
96,000
Reissued treasury stock.
*(8,000 x $9.50) **(8,000 x $12)
Dec. 1
Retained Earnings .........................................................
250,000
Common Dividend Payable ....................................
250,000
Declared $2.50 dividend on 100,000 outstanding shares.
Dec. 31
Income Summary ...........................................................
536,000
Retained Earnings ...................................................
536,000
Closed Income Summary account.
©McGraw-Hill Companies, 2009
614
Financial and Managerial Accounting, 3rd Edition
Problem 11-2B (Concluded)
Part 2
SAN MARCO CORP.
Statement of Retained Earnings
For Year Ended December 31, 2010
Retained earnings, December 31, 2009 ............................ $1,080,000
Plus: Net income ...............................................................
536,000
1,616,000
Less: Cash dividends declared ........................................
(370,000)
Treasury stock reissuances ...................................
(8,000)
Retained earnings, December 31, 2010 ............................ $1,238,000
Part 3
SAN MARCO CORP.
Stockholders’ Equity Section of the Balance Sheet
December 31, 2010
Common stock$1 par value, 160,000 shares
authorized, 100,000 shares issued and outstanding .... $ 100,000
Paid in capital in excess of par value, common stock ...
700,000
Retained earnings (from part 2) .............................................
1,238,000
Total stockholders’ equity ................................................. $2,038,000
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 11
615
Problem 11-3B (45 minutes)
Part 1
Explanations for each of the journal entries
Jan. 17 Declared a cash dividend of $1 per share of common stock.
($48,000 / 48,000 shares)
Feb.
5 Paid the cash dividend on common stock.
Feb. 28
Declared a 12.5% stock dividend when the market value is $21 per
share. ($60,000 / $10 par = 6,000 shares = 12.5% of 48,000 shares;
$126,000 / 6,000 shares = $21 per share)
Mar. 14 Distributed the common stock dividend.
Mar. 25 Executed a 2-for-1 stock split. ($10 par / $5 par = 2-for-1 ratio)
Mar. 31 Closed the Income Summary account to Retained Earnings.
Part 2
Jan. 17
Feb. 5
Feb. 28
Mar. 14
Mar. 25
Mar. 31
Common stock ............ $ 480,000 $ 480,000 $ 480,000 $ 540,000 $ 540,000 $ 540,000
Common stock
dividend distributable..
0
0
60,000
0
0
0
Paid-in capital in
excess of par...............
192,000
192,000
258,000
258,000
258,000
258,000
Retained earnings.......
752,000
752,000
626,000
626,000
626,000
986,000
Total equity.................... $1,424,000 $1,424,000 $1,424,000 $1,424,000 $1,424,000 $1,784,000
©McGraw-Hill Companies, 2009
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Financial and Managerial Accounting, 3rd Edition
Problem 11-4B (45 minutes)
Part 1
Outstanding common shares
Feb. 15
Beginning balance ........................... 8,500
Less treasury stock (Mar. 2) ............
Plus dividend shares (Oct. 4)*......... _____
Outstanding shares .......................... 8,500
May 15
8,500
(500)
Aug. 15
8,500
(500)
_____
_____
8,000
8,000
Nov. 15
8,500
(500)
1,000
9,000
Aug. 15
8,000
$ 0.40
$3,200
Nov. 15
9,000
$ 0.40
$3,600
*(12.5% x 8,000)
Part 2
Cash dividend amounts
Feb. 15
Outstanding shares .......................... 8,500
Dividend per share ...........................$ 0.40
Total dividend ...................................$3,400
May 15
8,000
$ 0.40
$3,200
Part 3
Capitalization of retained earnings for small stock dividend
Number of shares ...............................................................................
1,000
Market value per share ......................................................................
$
42
Total capitalized .................................................................................
$ 42,000
Part 4
Cost per share of treasury stock
Total amount paid ..............................................................................
$ 20,000
Shares purchased ..............................................................................
500
Cost per share ....................................................................................
$
40
Part 5
Net income
Retained earnings, beginning balance ............................................
$135,000
Less dividends: Feb. 15 ...................................................................
(3,400)
May 15 ...................................................................
(3,200)
Aug. 15 ..................................................................
(3,200)
Oct. 4 .....................................................................
(42,000)
Nov. 15 ...................................................................
(3,600)
Total before net income.....................................................................
$ 79,600
Plus net income ..................................................................................
?
Retained earnings, ending balance ..................................................
$147,600
159,00,60
Therefore, net income = $68,000
0
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 11
617
Problem 11-5B (40 minutes)
1. Market price = $90 per share (current stock exchange price given)
2. Computation of stock par values
Preferred: Paid-in amount / Number of shares = $187,500 / 1,500 = $125
Common: Paid-in amount / Number of shares = $450,000 /18,000 = $ 25
3. Book values with no dividends in arrears
Book value per preferred share = par value (when not callable)
= $125
Common stock
Total equity............................................... $1,200,000
Less equity for preferred ........................
(187,500)
Common stock equity ............................. $1,012,500
Number of outstanding shares ..............
Book value per common share .............. $
4.
18,000
56.25 ($1,012,500 / 18,000)
Book values with two years’ dividends in arrears
Preferred stock
Preferred stock par value ....................... $ 187,500
Plus two years’ dividends in arrears* ....
30,000
Preferred equity ....................................... $ 217,500
*2 years’ dividends = 2 x ($187,500 x 8%) = $30,000
Number of outstanding shares ..............
Book value per preferred share ............. $
1,500
145.00 ($217,500 / 1,500)
Common stock
Total equity............................................... $1,200,000
Less equity for preferred ........................
(217,500)
Common stock equity ............................. $ 982,500
Number of outstanding shares ..............
Book value per common share .............. $
18,000
54.58 ($982,500 / 18,000)
©McGraw-Hill Companies, 2009
618
Financial and Managerial Accounting, 3rd Edition
Problem 11-5B (Concluded)
5. Book values with call price and two years’ dividends in arrears
Preferred stock
Preferred stock call price (1,500 x $140)
Plus two years’ dividends in arrears* ..........
Preferred equity .............................................
$ 210,000
30,000
$ 240,000
*2 years’ dividends = 2 x ($187,500 x 8%) = $30,000
Number of outstanding shares ....................
Book value per preferred share ...................
Common stock
Total equity.....................................................
Less equity for preferred ..............................
Common stock equity ...................................
1,500
$
$1,200,000
(240,000)
$ 960,000
Number of outstanding shares ....................
Book value per common share ....................
160.00 ($240,000 / 1,500)
18,000
$
53.33 ($960,000 / 18,000)
6. Dividend allocation in total
2 years’ dividends in arrears ...
Current year dividends .............
Remainder to common .............
Totals ..........................................
Preferred
$ 30,000
15,000
—
$ 45,000
Common
$
0
—
5,000
$ 5,000
Total
$ 30,000
15,000
5,000
$ 50,000
Dividends per share for the common stock
$5,000 / 18,000 shares = $0.28
7.
Equity represents the residual interest of owners in the assets of the
business after subtracting claims of creditors. With few exceptions,
these assets and liabilities are valued at historical cost, not market
value. Therefore, the book value of common stock does not normally
match its market value. Also, the book value of common stock is
based on past transactions and events, whereas the market value takes
into account expected future earnings, growth, dividends, and other
industry and economic factors.
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 11
619
SERIAL PROBLEM — SP 11
Serial Problem — SP 11, Success Systems (25 minutes)
1a. Journal entry for issuance of common stock to Cicely
Cash .................................................................................
86,000
Common Stock .........................................................
86,000
Issuance of common stock.
1b. Journal entry for issuance of preferred stock to Uncle Marcello
Cash .................................................................................
86,000
Preferred Stock .........................................................
86,000
Issuance of $100 par 7% preferred stock.
1c. Journal entry to record $86,000 borrowed from the bank
Cash .................................................................................
86,000
Notes Payable ...........................................................
86,000
Borrowed $86,000 on a 10-year, 7% note payable
2.
Evaluation of the three proposals
a. Cicely’s investment as a common shareholder would mean that
Adriana would have a second person who would be an owner.
Adriana has been working on her own for about 15 months, and
may not wish to have a second person who may have authority to
make decisions. If Cicely and Adriana do not agree completely on
policies and procedures, this may create some difficulties for
Adriana. On the other hand, Cicely may have skills that could
complement Adriana’s skills, and the two may make a great
success.
As Cicely is an owner there is no need to repay the $86,000, nor is
there any requirement that dividends be paid. If Success Systems
gets into cash flow difficulties, any dividends can be postponed
until a later time.
©McGraw-Hill Companies, 2009
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Financial and Managerial Accounting, 3rd Edition
Serial Problem (concluded)
b. Having a preferred shareholder means that Adriana’s Uncle
Marcello will not have the same voting rights as Adriana. Uncle
Marcello may be expecting regular dividend, however, so Adriana
should be prepared to pay $6,020 ($86,000 x 7%) in dividends each
year. This is not a requirement, however, even if the preferred stock
is cumulative.
The preferred stock does not require repayment, and technically,
Adriana would have the use of the $86,000 for as long as Uncle
Marcello wishes to be a preferred shareholder.
c. The loan requires regular monthly payments, so Adriana will need
to budget the $1,000 each month as a cash outflow. The loan may
be riskier because it does require regular payments. Interest on the
loan balance is a tax-deductible expense to Success Systems, while
any dividends (whether to the common or preferred shareholders)
are not a tax-deductible expense to Success Systems.
In addition, Adriana does not have an additional owner that could
exert some control over her business.
3.
There is no correct answer to the question of which proposal Adriana
should adopt. Class discussion may indicate which proposal the class
prefers.
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 11
621
Reporting in Action
— BTN 11-1
1. As of March 3, 2007, the shares of common stock issued and
outstanding are 480,655,000 (see balance sheet). As of February 25,
2006, the number of shares of common stock issued and outstanding is
485,098,000.
The weighted-average common shares used in calculating earnings per
share are disclosed within Best Buy’s income statement. At March 3,
2007, the basic weighted-average shares were 482,100,000. At February
25, 2006, the basic weighted-average shares were 490,300,000.
Therefore, for both years, the shares outstanding at year-end were
slightly lower than the basic weighted-average shares outstanding
during the year. (Differences between the year-end and weightedaverage share amounts are likely the result of timing differences with
share repurchases, issuances, and retirements.)
2. Total stockholders’ equity as of March 3, 2007 ................ $6,201,000,000
Book value of equity applicable to common stock* ........ $6,201,000,000
* Given that there is only one class of stock, all the equity items listed can be considered to
represent the book value of the common stock.
3. Best Buy paid cash dividends of $174,000,000 for the year ended March
3, 2007, and $151,000,000 for the year ended February 25, 2006.
4. Best Buy’s income statement reports the following
2007
Basic earnings per common share ................. $2.86
2006
$2.33
2005
$2.01
Its basic earnings per common share figure has consistently grown over
this 3-year period.
5. Best Buy’s consolidated balance sheet does not list any shares of
treasury stock in 2007 or 2006.
6. Answer depends on the financial statement information obtained.
©McGraw-Hill Companies, 2009
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Financial and Managerial Accounting, 3rd Edition
Comparative Analysis
— BTN 11-2
Equity applicable to common shares
Common shares outstanding
Best Buy’s book value per common share
= $6,201 / 481
= $12.89
1. Book value per common share =
Circuit City’s book value per common share
= $1,791 / 171
= $10.47
RadioShack’s book value per common share
= $654 / 136
= $ 4.81
2. Earnings per share =
Net income
Weighted-average common shares outstanding
Best Buy’s earnings per share:
$1,377/ 482
= $ 2.86
Circuit City’s earnings per share: $ (8) / 170
= $(0.05)
RadioShack’s earnings per share: $73 / 136
= $ 0.54
3. Dividend Yield =
Annual cash dividends per share
Market value per share
Best Buy dividend yield
Circuit City dividend yield
RadioShack dividend yield
= $0.36 / $46.35= 0.78%
= $0.12 / $19.00= 0.63%
= $0.25 / $16.78= 1.49%
Analysis: The low dividend yield for all three companies suggests that
they are “growth stocks.”
Market value per share
Earnings per share
Best Buy price-earnings ratio:
$46.35 / $2.86 = 16
Circuit City price-earnings ratio:
$19.00 / $(0.05) = (380)
RadioShack price-earnings ratio:
$16.78 / $0.54 = 31
4. Price-earnings ratio =
Interpretation:
The price-earnings ratios of the companies are
considerably different. In Best Buy’s case, the market appears willing
to pay a multiple of 16 times its earnings. For RadioShack, that multiple
is considerably greater at 31 times its earnings. Circuit City’s priceearnings ratio is difficult to interpret because Circuit City had a net
loss. In the case of net losses, users commonly adjust earnings per
share to the “usual, expected earnings,” often times using an average
from recent periods.
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 11
623
Ethics Challenge
— BTN 11-3
During the course of her duties, Brianna has learned information that
others might not know. If she uses this information to trade in New World
Pharmaceuticals’ stock, Brianna may be violating securities laws, so she
should be careful if she buys or sells any New World stock.
It is possible that the new drug will not be as profitable as expected, and
the stock might not increase as much as Brianna expects. Nevertheless,
Brianna might be accused of insider trading in the future if she buys the
stock.
Communicating in Practice
— BTN 11-4
There is no set solution to this activity. Solutions will vary based on the
industry and the companies selected.
Taking It to the Net
— BTN 11-5
1. The balance sheet of McDonald’s shows that they have both preferred
and common stock authorized, but it has only issued common stock.
2. The preferred stock has no par value. There are 165.0 million preferred
shares authorized, and none issued. The common stock has a $0.01 par
value. There are 3.5 billion shares authorized and 1,660.6 million shares
issued.
3. In 2006, the financing section of the statement of cash flows shows that
McDonald’s paid $2,959.4 million to purchase treasury stock.
4. In 2006, the financing section of the statement of cash flows shows that
McDonald’s paid common stock cash dividends of $1,216.5 million.
©McGraw-Hill Companies, 2009
624
Financial and Managerial Accounting, 3rd Edition
Teamwork in Action
— BTN 11-6
1. The team statement should include the following:
a. When a corporation “buys back” its stock (engages in a treasury
stock acquisition), the effect on financial position is a decrease in
both assets (cash) and equity (treasury stock). Also, treasury stock
is a contra equity account that decreases equity.
b. Reasons for “buybacks”:
 to use shares to acquire another corporation.
 to avoid a hostile takeover by an investor seeking to take control
of the company.
 to reissue shares to employees as compensation.
 to maintain a strong or stable market for the stock.
2. The team should establish the acquisition entry as follows
Treasury Stock, Common......................................... 13,400
Cash .....................................................................
13,400
Reacquired 100 shares of $100 par value
common stock at a cost of $134 per share.
Each member should prepare one of the following reissue entries:
a. Cash ..........................................................................................
13,400
Treasury Stock, Common .................................................
13,400
Received $134 per share for 100 treasury
shares costing $134 per share.
b. Cash ..........................................................................................
15,000
Paid-In Capital, Treasury Stock ........................................
Treasury Stock, Common .................................................
1,600
13,400
Received $150 per share for 100 treasury
shares costing $134 per share.
c. Cash ..........................................................................................
12,000
Paid-In Capital, Treasury Stock ..............................................
1,400
Treasury Stock, Common .................................................
13,400
Received $120 per share for 100 treasury
shares costing $134 per share.
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 11
625
Teamwork in Action (Continued)
d. Cash ..........................................................................................
12,000
Paid-In Capital, Treasury Stock ..............................................
1,000
Retained Earnings ....................................................................
400
Treasury Stock, Common .................................................
13,400
Received $120 per share for 100 treasury
shares costing $134 per share.
e. Cash ..........................................................................................
12,000
Retained Earnings ....................................................................
1,400
Treasury Stock, Common .................................................
13,400
Received $120 per share for 100 treasury
shares costing $134 per share.
3. When presenting and explaining the above entries to the team, the
following points should be made by the team members:
The similarities in all reissue entries a through e are:
 The net affect of the transaction is to increase assets and equity by
the amount received on reissue.
 Cash (assets) is always increased by the amount received.
 Treasury Stock is always decreased by the full cost regardless of
whether the reissue is at cost, above cost, or below cost.
The differences in reissue entries b through e are:
(b) Reissuing above cost creates additional Paid-In Capital.*
(c) Reissuing below cost reduces existing Paid-In Capital.*
(d) Reissuing below cost reduces existing Paid-In Capital,*
but after this account’s balance has been eliminated, then Retained
Earnings must be reduced by the additional amount below cost.
(e) Reissuing below cost reduces Retained Earnings when Paid-In
Capital* does not exist.
*Refers to the Paid-In Capital, Treasury Stock account.
©McGraw-Hill Companies, 2009
626
Financial and Managerial Accounting, 3rd Edition
Entrepreneurial Decision
— BTN 11-7
1.
Net income..............................................................
Less preferred dividends ......................................
Net income for common stockholders ................
Plan A
$ 72,000
0
$ 72,000
Plan B
$ 72,000
(10,000)
$ 62,000
Chris’ share of common equity ............................
Chris’ share of income after any preferred stock
dividends .................................................................
80%
100%
$ 57,600
$ 62,000
Chris’ initial equity .................................................
$375,000
$375,000
Chris’ return on equity ..........................................
15.4%
16.5%
Net income..............................................................
Less preferred dividends ......................................
Net income for common stockholders ................
Plan A
$ 16,800
0
$ 16,800
2.
Plan B
$ 16,800
(10,000)
$ 6,800
Chris’ share of common equity ............................
Chris’ share of income after any preferred stock
dividends .................................................................
80%
100%
$ 13,440
$
Chris’ initial equity .................................................
$375,000
$375,000
Chris’ return on equity ..........................................
3.6%
1.8%
6,800
3. The difference between the answers for parts 1 and 2 arises from the
percent of return generated with the assets invested in the corporation.
In part 1, Chris’ return on equity is 15.4% for Plan A, which is less than
the 16.5% for Plan B. However, the return on equity is only 3.6% in part
2 for Plan A, BUT this is more than the 1.8% for Plan B.
These results indicate that the 8% dividend rate on the preferred stock
is advantageous to Chris as long as the rate of return on the assets is
greater than 8% (this is the same as saying net income is over $40,000).
This means Plan B is preferred. Net income over $40,000 yields a return
on assets greater than 8% (that is, 8% equals $40,000/$500,000). If net
income falls below $40,000 (or less than 8% return on assets), then Plan
A is preferred.
©McGraw-Hill Companies, 2009
Solutions Manual, Chapter 11
627
Hitting the Road
— BTN 11-8
There is no formal solution for this field activity. Students often find this
assignment interesting as it highlights the relevance of their accounting
studies. Instructors also sometimes assign a particular financial news
show to watch on a certain day for the entire class—this can help
encourage a general class discussion on the topics raised.
Global Decision
1. Book value per common share =
— BTN 11-9
Equity applicable to common shares
Common shares outstanding
DSG’s book value per common share
= ₤1,304 / 1,843
2. Earnings per share =
= ₤0.71
Net income
Weighted-average common shares outstanding
DSG’s earnings per share
= ₤ 207 / 1,843
= ₤0.11
(Instructor’s note: At the date this problem was written, ₤1 was equal to about
$2.05. This means that DSG’s BVPS is about $1.46, and its EPS is about $0.23)
3. DSG’s EPS is ₤0.11, and its paid dividends of ₤0.07 It appears that DSG
is paying out about 64% of its income as dividends. In comparison with
most companies, this is a large proportion of income in the form of
cash dividends.
©McGraw-Hill Companies, 2009
628
Financial and Managerial Accounting, 3rd Edition
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