Solution manual financial accounting 4e by wild chapter11

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

Trang 1

Chapter 11

Reporting and Analyzing Equity

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

Trang 2

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 February

26, 2005, 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 Apple received $427,000,000 from the issue of common stock, but it did not repurchase any common stock for the year ended September 25, 2004

Trang 3

QUICK STUDIES

Quick Study 11-1 (10 minutes)

True statements: 3, 4, 5 and 7

a Cash 375,000

Common Stock, $5 Par Value 375,000

Issued par value stock for cash (75,000 x $5)

b Cash* 450,000

Common Stock, $5 Par Value 375,000 Paid-In Capital in Excess of Par Value,

Common Stock 75,000

Issued par value stock for cash *(75,000 x $6)

Trang 4

a Cash 1,827,000

Common Stock, No-Par Value 1,827,000

Issued no-par value stock for cash (63,000 x $29)

b Land 1,827,000

Common Stock, No-Par Value 1,827,000

Issued no-par value stock for land

(a) Mar 1 Cash 297,500

Common Stock, $4 Par Value 170,000 Paid-In Capital in Excess of Par Value,

Issued par value stock for cash

(b) Apr 1 Cash 70,000

Common Stock, No-Par Value 70,000

Issued no-par value stock for cash

Machinery 145,000

Note Payable 94,000 Common Stock, $25 Par Value 50,000 Paid-In Capital in Excess of Par Value,

Issued stock for inventory, machinery, and note

Trang 5

May 15 Retained Earnings 54,000

Common Dividend Payable 54,000

Declared cash dividend on common

June 31 Common Dividend Payable 54,000

Cash 54,000

Paid cash dividend to common

Jun Company Stockholders’ Equity April 2 (after stock dividend)

Common stock$5 par value, 375,000 shares

authorized, 220,000 shares issued and outstanding $1,100,000 Paid-in capital in excess of par value, common stock 900,000 Total paid-in capital 2,000,000 Retained earnings 433,000 Total stockholders' equity $2,433,000

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 ($20 market value – $5 par value) = $300,000

Total cash dividend $110,000

Trang 6

May 3 Treasury Stock (4,000 shares) 36,000

Cash 36,000

Purchased treasury stock

($36,000 / 4,000 shares = $9 per share cost)

Nov 4 Cash 8,500

Treasury Stock (850 x $9*) 7,650 Paid-In Capital, Treasury Stock 850

Reissued treasury stock at a price

greater than its cost

($9 per share x 850 shares = $7,650)

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

Basic earnings per share: =

= ($770,000 - $0) / 280,000 shares = $2.75 per share

Net income - Preferred dividends Weighted-average common shares outstanding

Trang 7

Basic earnings per share: =

= ($900,000 - $20,000) / 400,000 shares = $2.20 per share

Price-earnings ratio = = = 8.3

Analysis: Many analysts consider stocks with a PE less than 5 to 8 as potentially underpriced This stock with a PE of 8.3 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.)

Analysis: The company’s dividend yield of 7.1% 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 7.1% of the company’s market value

Total stockholders' equity $1,840,000 Less equity attributable to preferred shares

Call price (20,000 shares x $40) 800,000 Equity applicable to common shares $1,040,000

Net income - Preferred dividends Weighted-average common shares outstanding

Market value per share

Trang 8

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

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)

1

Feb 20 Cash 152,000

Issued common stock for cash

*19,000 shares x $2 per share = $38,000

Trang 9

1 Organization Expenses 40,000

Issued stock to promoters

Issued common stock for cash

Issued preferred stock for cash

Issued stock for land and building

**($45,000 + $85,000) – $49,000 = $81,000

Trang 10

b Total stockholders’ equity

authorized, 75,000 shares issued and outstanding $ 750,000 Paid-in capital in excess of par value 200,000 Retained earnings 410,000 Total stockholders’ equity $1,360,000

c Number of outstanding shares

Outstanding shares before the dividend 50,000 Dividend shares 25,000 Outstanding shares after the dividend 75,000

2

a Retained earnings (no change)

Before and after stock split $ 660,000

b Total stockholders’ equity

authorized, 75,000 shares issued and outstanding $ 500,000 Paid-in capital in excess of par value 200,000 Retained earnings 660,000 Total stockholders’ equity $1,360,000

c Number of outstanding shares

Outstanding shares before the split 50,000 Additional split shares (3-for-2) 25,000 Outstanding shares after the split 75,000

3 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

Trang 11

1

Feb 5 Retained Earnings* 480,000

Common Stock Dividend Distributable** 120,000 Paid-In Capital in Excess of Par Value,

Common Stock*** 360,000

Declared 20% common stock dividend

Shares to be issued: 60,000 shares x 20% = 12,000 shares

**12,000 shares x $10 per share = $120,000

***$480,000 - $120,000 = $360,000

Feb 28 Common Stock Dividend Distributable 120,000

Common Stock, $10 Par Value 120,000

Distributed common stock dividend

2

Before After Total stockholders’ equity $1,575,000 $1,575,000 Issued and distributable shares  60,000  72,000 Book value per share $ 26.250 $ 21.875 Shares owned x 800 x 960* Total book value of shares $ 21,000 $ 21,000

* 800 shares x 120% = 960 shares

3

February 5 February 28 Market value per share $ 40 $ 33.40 Shares owned x 800 x 960 Total market value of shares owned $ 32,000 $ 32,064

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.

Trang 12

Total for four years $108,000 $490,000

* The holders of the noncumulative preferred stock are entitled to no more than

$30,000 of dividends in any one year (7.5% x $5 x 80,000 shares)

Trang 13

Total for the year $ 20,000 $ 0

(Note: $10,000 in preferred stock dividends in arrears.)

2007 ($28,000 paid)

Preferredarrears from 2006 $ 10,000

Preferred * 18,000

Commonremainder _ $ 0

Total for the year $ 28,000 $ 0

(Note: $12,000 in preferred stock dividends in arrears.)

2008 ($200,000 paid)

Preferredarrears from 2007 $ 12,000

Preferred * 30,000

Commonremainder _ $158,000

Total for the year $ 42,000 $158,000

(Note: $0 in preferred stock dividends in arrears.)

2009 ($350,000 paid)

Preferred * $ 30,000

Commonremainder _ $320,000

Total for the year $ 30,000 $320,000

(Note: $0 in preferred stock dividends in arrears.)

2006-2009 ($598,000 paid) _ _

Total for four years $120,000 $478,000

* The holders of the cumulative preferred stock are entitled to no more than

$30,000 of dividends declared in any year (7.5% x $5 x 80,000 shares) plus any

dividends skipped in prior years

Trang 14

Reissued treasury stock at a price exceeding cost

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

authorized and issued; 5,000 shares in treasury $720,000 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 ($125,000 restricted for treasury stock) $864,000

(iv) A fter the purchase, a deduction for the cost of treasury stock is

Less cost of treasury stock $(125,000)

Trang 15

Exercise 11-10 (concluded)

Revised equity section appears as follows

Total 1,800,000 Less cost of treasury stock (125,000) Total stockholders’ equity $1,675,000

Amos Company Statement of Retained Earnings For Year Ended December 31, 2008 Retained earnings, December 31, 2007, as previously reported $1,375,000 Prior period adjustment

Depreciation expense not recorded in 2006 (net of $4,500 in

Income taxes) ($55,500) Retained Earnings, December 31, 2007, as adjusted 1,319,500 Plus net income 126,000 Less dividends (43,000) Retained earnings, December 31, 2008 $1,402,500

1 Net income $2,700,000 Less preferred dividends (390,000) Net income available to common stockholders $2,310,000

2 Net income available to common stockholders $2,310,000 Divided by weighted-average outstanding shares 678,000 Basic earnings per share $3.41

Trang 16

1 Net income $960,000 Less preferred dividends (130,000) Net income available to common stockholders $830,000

2 Net income available to common stockholders $830,000 Divided by weighted-average outstanding shares 379,000 Basic earnings per share $ 2.19

Stock

Market Value per Share

Divided

by

Earnings per Share

Price-Earnings Ratio

1 $176.00  $12.00 = 14.7

2 96.00  10.00 = 9.6

3 94.00  7.50 = 12.5

4 250.00  50.00 = 5.0

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 might investigate stock #4 as possibly undervalued with a PE ratio of 5.0

Trang 17

2

Total stockholders’ equity $1,585,000 Less equity applicable to preferred shares

Call price ($30 x 10,000) $300,000

Equity applicable to common shares $1,240,000 Book value of preferred stock ($345,000/10,000) $ 34.50 Book value of common stock ($1,240,000/80,000) $ 15.50

Trang 18

Total paid-in capital from common stockholders

From transaction (a) $300,000

Book value per common share

Total stockholders’ equity (given) $695,000

Trang 19

Problem 11-2A (60 minutes)

Part 1

Jan 1 Treasury Stock, Common 80,000

Cash 80,000

Purchased treasury stock (4,000 x $20)

Jan 5 Retained Earnings 72,000

Common Dividend Payable 72,000

Declared $2 dividend on 36,000 outstanding shares

Feb 28 Common Dividend Payable 72,000

Treasury Stock, Common** 50,000

Reissued treasury stock

*(2,500 x $17) **(2,500 x $20)

Sept 5 Retained Earnings 80,000

Common Dividend Payable 80,000

Declared $2 dividend on 40,000 outstanding shares

Oct 28 Common Dividend Payable 80,000

Cash 80,000

Paid cash dividend

Dec 31 Income Summary 388,000

Retained Earnings 388,000

Closed Income Summary account

Trang 20

Problem 11-2A (Concluded)

Part 2

KOHLER CORPORATION Statement of Retained Earnings For Year Ended December 31, 2009 Retained earnings, December 31, 2008 $270,000 Plus net income 388,000

658,000 Less: Cash dividends declared (152,000)

Treasury stock reissuances (1,500) Retained earnings, December 31, 2009 $504,500

Part 3

KOHLER CORPORATION Stockholders’ Equity Section of the Balance Sheet

December 31, 2009 Common stock$10 par value, 100,000 shares

authorized, 40,000 shares issued and outstanding $400,000

Paid-in capital in excess of par value, common stock 60,000

Retained earnings (from part 2) 504,500

Total stockholders’ equity $964,500

Định dạng
Số trang	41
Dung lượng	892,52 KB