Solution manual financial accounting 9th harrison ch10

The charter authorizes the corporation to issue a certain number of shares of stock to the owners of the business, who are called stockholders.. The par value of stock has no effect on

 Limited liability of the stockholders

 Ease of raising capital

1 The stockholders hold ultimate power in a corporation

2 The chairperson of the board of directors is usually the most

powerful person in a corporation The title is also often CEO

3 The president is in charge of day-to-day operations The title is COO

4 The chief financial officer is in charge of accounting and finance The title is CFO

(5-10 min.) S 10-3

1 The common stockholders are the real owners of a corporation

2 Preferred stockholders have priority over common stockholders in (1)

receipt of dividends and (2) receipt of assets if the corporation

liquidates

3 Common stockholders benefit more from a successful corporation

because the preferred stockholders’ dividends are limited to a specified amount The common stockholders take more risk so their potential for gains through an increase in the value of the company’s stock is unlimited

(5-10 min.) S 10-4 TO: Jessica Johnson and Claudia Stein

FROM: Student Name

RE: Steps in forming a corporation

The first step in organizing a corporation is to obtain a charter from the

state The charter authorizes the corporation to issue a certain number

of shares of stock to the owners of the business, who are called

stockholders The corporation will exist when the incorporators pay

fees, sign the charter, file documents with the state, and agree to a set of

bylaws to determine how the corporation is to be governed internally Later steps include the stockholders electing a board of directors who in turn appoint officers to manage the corporation on a day-to-day basis

These officers consist of the chairperson of the board (the chief executive officer) and the president (the chief operating officer), who lead the chief financial officer, who manages the day to day operations

of the controller (accounting officer) and treasurer (finance officer)

(5-10 min.) S 10-5

The $47,952,000 was paid-in capital It was not a profit and therefore had

no effect on net income

The par value of stock has no effect on total paid-in capital Total paid-in capital is the total amount that stockholders have invested in (paid into)

a corporation, including the par value of stock issued plus any additional paid-in capital

Building 590,000 Equipment 260,000 Cash 850,000 Purchased plant assets

(5-10 min.) S 10-8

Thousands

Stockholders’ equity:

Common stock, $.01 par, 800 thousand shares

issued……… $ 8

Paid-in capital in excess of par……… 193

Retained earnings……… 643

Other stockholders’ equity……… (27)

Total stockholders’ equity……… $817

(10 min.) S 10-9 Amounts In Thousands a Total revenues……… $1,370 Total expenses……… 812

Net income……….………… $ 558

b Accounts payable……… $ 460

Other current liabilities……… 2,562 Long-term debt……….…… 23

Total liabilities……… $3,045 c Total liabilities (from Req b)……… $3,045 Total stockholders’ equity (from S 10-8)………… 817

Total assets……… $3,862 d Net profit ratio Net income

Total revenues

$558

$1,370 = 407

(15-20 min.) S 10-11

Req 1

MEMORANDUM

TO: Karen Knox Exports, Inc., Board of Directors

FROM: Student Name

RE: How the purchase of treasury stock will make it more difficult

for outsiders to take over the company

Purchasing treasury stock decreases the amount of stock outstanding If Karen Knox Exports holds a sufficient quantity of company stock in the treasury, outsiders, such as the Alberton investor group, may not be able to acquire a controlling interest (50+ percent) of the outstanding stock from the remaining stockholders Because it takes cash to buy treasury stock, the purchase decreases the size of the corporation Reducing the company’s cash position may make the company sufficiently unattractive to cause the outside investors to abandon their takeover plan

Req 2

Sales of treasury stock at prices above the purchase price increase company assets because of the greater amount of assets coming in from the sale than went out to buy the stock Treasury stock transactions do not affect liabilities, so the sale of treasury stock also increases stockholders’ equity These sales of treasury stock will not affect net income because the company is dealing with its owners

Transactions between the corporation and its owners cannot generate a

profit or a loss that is reported on the income statement

Student responses may vary

(10 min.) S 10-12

Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Paid the cash dividend

During 2012, Retained Earnings increased by $63,000 (net income of

(5-10 min.) S 10-14

Req 1

Journal

DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

May 11 Retained Earnings (18,000 × 08 × $20)……… 28,800

Common Stock (18,000 × 08 × $4)……… 5,760 Paid-in Capital in Excess of Par-Common 23,040

Req 2

No effect on total assets

No effect on total liabilities

No effect on total stockholders’ equity

(10 min.) S 10-15

Total stockholders’ equity……… $4,877,000

Preferred dividends in arrears (35,000 × 01 × $12 x 3)……… (12,600)

Number of common shares outstanding

(67,000 − 1,400)……… ÷ 65,600 Book value per share of common stock……… $ 67.29

(5-10 min.) S 10-16 (a) Rate of return on

total assets (ROA)

= Profit margin x Asset turnover

(b) Rate of return on

profit

Asset turnover (net sales/average total assets) is a measure of efficiency

in use the use of assets Generally, companies that can cut costs by reducing the amount invested in fixed assets and inventory without sacrificing sales revenue are more efficient Asset turnover measure sales generated for each dollar of assets invested

Req 2

The leverage ratio (average total assets/average common stockholders’ equity) measures the impact of the use of borrowed capital on return on equity It magnifies the ROA to make ROE larger

Req 3

If ROA is positive, leverage makes ROE more positive If ROA is negative, leverage makes ROE more negative

(20-30 min.) S 10-18

1 Corporations report common stock and retained earnings separately

to comply with state laws The laws require corporations to report stockholders’ equity by source to distinguish paid-in capital, which cannot be used for cash dividends, from retained earnings

2 We should first determine the market value of the land Then divide the land’s value by the market value of each share of stock The result will tell us how many shares of our stock to issue for the land

3 Investors buy common stock in the hope of earning higher returns on their investment than are available on an investment in preferred stock

4 The redemption value of our preferred stock requires us to pay the preferred stockholders this amount when we buy back the preferred stock

(5-10 min.) S 10-19

Billions

Cash flows from financing activities:

Paid off long-term notes payable……… $(2.9)

Purchased treasury stock……… (3.9)

Net cash flows used by financing activities………… $(7.1)

Par - Common 5,500

Req 2

Stockholders’ equity:

Preferred stock, $4.00, no par, 5,000 shares

authorized, 1,000 shares issued $49,000 Common stock, $5.00 par, 170,000 shares authorized,

13,900 shares issued 69,500 Paid-in capital in excess of par-common

($70,000 + $5,500)……… 75,500 Retained earnings (deficit) ……….…… (42,000) Total stockholders’ equity ……….…… $152,000

(10-15 min.) E 10-21A

Stockholders’ Equity Common stock, $1.00 par, 18,000 shares authorized,

_

*Computation:

April 23: 3,000 shares × ($14.50 − $1.00) = ……… $40,500 May 12: $14,000 + $44,000 − (3,200 shares × $1.00) =……… 54,800

$95,300

Journal entries (not required):

Apr 23 Cash……… 43,500

Common Stock 3,000 Paid-in Capital in Excess of Par……… 40,500

May 12 Inventory 14,000

Equipment 44,000 Common Stock 3,200

(10 min.) E 10-22A

Paid-in capital consists of:

Issued common stock for legal services.……… $ 20,000 Issued common stock for patent……… 81,000 Issued preferred stock (8,000 shares × $70) ………

Issued common stock for cash (16,000 shares × $6)…

560,000 96,000 Total paid-in capital……… $757,000

(10-15 min.) E 10-23A

Stockholders’ Equity (Thousands)

Common stock, $0.25 par, 900 shares

authorized, 400 shares issued……… $ 100 Paid-in capital in excess of par……… 903 Retained earnings……… 2,200 Treasury stock, common, 90 shares at cost……… (1,035) Accumulated other comprehensive income (loss)………… (732) Total stockholders’ equity……… $1,436

Casey Software paid a higher price to acquire treasury stock than the price Casey received when it issued its stock This explains why Treasury Stock has a greater balance than the sum of Common Stock plus Paid-in Capital in Excess of Par

To issue common stock

June 23 Treasury Stock - Common (500 × $15) 7,500

To sell treasury stock

Overall effect on stockholders’ equity

($23,400 − $7,500 + $8,800)……… $24,700 increase

(10 min.) E 10-25A

Journal

DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Millions

b Cash (22 million × $14.00)……… 308

Common Stock (22 million × $3.00)…… 66

Capital in Excess of Par Value……… 242

c Treasury Stock……… 18

Cash……… 18

d Retained Earnings……… 32

Dividends Payable……… 32

Dividends Payable……… 32

Cash……….… 32

or one entry only: Retained Earnings ……… 32

Cash……….… 32

(10 min.) E 10-26A

Millions

Stockholders’ Equity:

Common stock, $3.00 par value,

2,422 million shares issued ($7,200 + $66)……… $ 7,266 Capital in excess of par value ($7,200 + $242) 7,442 Retained earnings ($290 + $450 − $32)……… 708 Treasury stock, at cost ($80 + $18)……… (98) Total stockholders’ equity……… $15,318

(20-30 min.) E 10-27A

Req 1

Possible causes for preferred stock decrease:

 Conversion of preferred stock into common stock

 Retirement of preferred stock

Req 2

Possible causes for common stock increase:

 Preferred stockholders who converted their preferred

Less: Treasury stock, number of shares……… (19)

Common shares outstanding……… 381

Treasury stock, number of shares… 19 − 4 = ÷ 15

Average price per share paid for

treasury stock purchased during 2013…… $18.80

(15-20 min.) E 10-29A

Req 1

Journal

DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Apr 16 Retained Earnings (600,000 × 18 × $20)…… 2,160,000

Accumulated other comprehensive income (loss) (200,000)

Total stockholders’ equity $7,771,400

Req 3

The stock dividend did not change total stockholders’ equity because

the company didn’t distribute assets to the shareholders as it would in a

traditional dividend The company merely transferred $2,160,000 from

Retained Earnings to Common Stock ($32,400) and Paid-in Capital in

Excess of Par ($2,127,600)

Req 4

DP’s maximum cash dividend is limited to $580,000, the balance of its

cash account

e Decrease stockholders’ equity by $5,525 (1,700 × $3.25)

f Increase stockholders’ equity by $4,800 (800 × $6)

Book value per share ($73,000 / 5,000 shares)… $ 14.60

Req 2

Common:

Total stockholders’ equity……… $ 108,000 Less: Preferred equity [$35,000 + ($28,000 × 05 × 3)] (39,200) Total common equity……… $ 68,800 Book value per share ($68,800 / 5,000 shares)… $ 13.76

Req 3

Basket Rug’s stock is not necessarily a good buy Investment decisions should be based on more than one ratio

stkholders’ equity

($7,612* + $8,560**) / 2 = $8,086

Profit

(continued) E 10-34A

Req 2

These rates of return suggest relative weakness The company is generating a 3.14% profit margin (moderate effectiveness) The company is generating an asset turnover of 1.12 meaning $1.12 in sales for each dollar of assets invested (relative inefficiency) Finally, the company has relatively high leverage, meaning they are utilizing debt effectively This magnifies the relatively low ROA to a 10.1% ROE, which

is considered relatively weak

Req 3

Comparative data from prior years as well as industry competitors’ ROA and ROE measures would also be helpful when making this decision

(10 min.) E 10-35A

Cash flows from financing activities:

Payment of long-term debt……… $(17,045) Proceeds from issuance of common stock…… 8,420 Borrowings……… 6,580

Par - Common 10,100

Req 2

Stockholders’ equity:

Preferred stock, $3.00, no-par,

10,000 shares authorized, 600 shares issued………… $62,000 Common stock, $4.00 par,

190,000 shares authorized, 15,600 shares issued…… 62,400 Paid-in capital in excess of par-common

($96,000 + $10,100)……… 106,100 Retained earnings (deficit)……….……… (40,000) Total stockholders’ equity……….……… $190,500

_

*Computation:

July 23: 3,200 shares × ($13.00 − $1.00) =……… $38,400 Aug 12: $13,000 + $48,000 − (3,000 shares × $1.00) =……… 58,000

$96,400

Journal entries (not required):

July 23 Cash 41,600

Common Stock 3,200 Paid-in Capital in Excess of Par 38,400

Aug 12 Inventory 13,000

Equipment 48,000 Common Stock 3,000 Paid-in Capital in Excess of Par 58,000

(10 min.) E 10-38B

Paid-in capital consists of:

Issued common stock for legal services $ 25,000 Issued common stock for patent……… 76,000 Issued preferred stock (1,000 shares × $120)…………

Issued common stock for cash (16,000 shares × $8)…

120,000 128,000 Total paid-in capital……… $349,000

(10-15 min.) E 10-39B

Stockholders’ Equity (Thousands)

Common stock, $2.25 par, 1,000 shares

authorized, 280 shares issued……… $ 630 Paid-in capital in excess of par……… 900

Treasury stock, common, 140 shares at cost……… (1,540) Accumulated other comprehensive income (loss).… (727) Total stockholders’ equity……… $1,523

Treasury Stock has a larger balance than the sum of Common Stock and Paid-in Capital in Excess of Par because Sagebrush Software paid

a higher price to acquire treasury stock than the price Sagebrush received when it issued its stock

To issue common stock

June 25 Treasury Stock - Common (400 × $14)…… 5,600

To sell treasury stock

Overall effect on stockholders’ equity

($9,000 − $5,600 + $6,600)……… $10,000 increase

Dividends Payable 28

Cash 28

or one entry only:

Stockholders’ Equity:

Common stock, $4.00 par value,

(20-30 min.) E 10-43B

Req 1

Possible causes for preferred stock decrease:

 Conversion of preferred stock into common stock

 Retirement of preferred stock

Req 2

Possible causes for common stock increase:

Common stock issued

 To preferred stockholders who converted their preferred

Less: Treasury stock, number of shares……… (20)

Common shares outstanding……… 180

treasury stock purchased during 2013…… $24.00

(15-20 min.) E 10-45B

Req 1

Journal

DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

July 13 Retained Earnings (500,000 × 25 × $17)…… 2,125,000

Common Stock (500,000 × 25 × $0.75)… 93,750 Paid-in Capital in Excess of Par -

Accumulated other comprehensive income (loss) (195,000)

Total stockholders’ equity $7,792,000

Req 3

The stock dividend did not change total stockholders’ equity because