Solution manual intermediate accounting 15th kiesoch15

140,000 Paid-in Capital in Excess of Stated Value—Common Stock Paid-in Capital in Excess of Stated Value—Common Stock Paid-in Capital in Excess of Stated Value—Common Stock Paid-in Capit

CHAPTER 15

SOLUTIONS TO B EXERCISES

E15-1B (15–20 minutes)

Paid-in Capital in Excess of

Paid-in Capital in Excess of

Paid-in Capital in Excess of

Paid-in Capital in Excess of

June 15 Cash (165,000 X $5) 825,000

Paid-in Capital in Excess of Stated

Paid-in Capital in Excess of Par

Aug 15 Building 140,000

Paid-in Capital in Excess of Stated Value—Common Stock

Paid-in Capital in Excess of Stated Value—Common Stock

Paid-in Capital in Excess of Stated Value—Common Stock

Paid-in Capital in Excess of Stated Value—Common Stock

Paid-in Capital in Excess of Par Value—Preferred Stock

E15-3B (10–15 minutes)

(b) One might use the cost of treasury stock However, this is not a relevant measure of this economic event Rather, it is a measure of a prior, unrelated event The appraised value of the land is a reasonable alternative since the value of the asset acquired should preferably determine the issue price of the stock However, it is an appraisal as opposed to a cash price The trading price of the stock is probably the best measure of market value in this transaction.

E15-4B (20–25 minutes)

Cash ($1,150 X 9,500) 10,925,000

Assumes bonds properly priced and issued at par; residual attributed to common stock which has a less reliable measure of market value.

Investment banking costs 500 @ $1,150 = $575,000 allocate 1,000/1,150 to debentures and 150/1,150 to common stock Bond portion is bond issue cost; common stock portion is a reduction of paid-in capital in excess of par.

2 Cash 10,925,000

Bonds Payable

Paid-in capital in excess of par = $1,277,778 – $250,000 – $63,889

= $963,889

(b) One is not better than the other This question is presented to stimulate some thought and class discussion.

E15-5B (10–15 minutes)

FMV of preferred (1,000 X $60) 60,000

$297,500

Cash 275,000

Paid-in Capital in Excess of Par—

Paid-in Capital in Excess of Par—

E15-5B (Continued)

Cash 275,000

Paid-in Capital in Excess of Par—Common

(b) Land (10,000 X $78) 780,000

Paid-in Capital in Excess of Par

Note: The market value of the stock ($780,000) is used to value the exchange because it is a more objective measure than the appraised value of the land ($815,000).

# Assets Liabilities

Stockholders’

Equity

Paid-in Capital

Retained Earnings

Net Income

E15-8B (15–20 minutes)

(b) 4 years in arrears:

2,250,000 X 10% X 4 = $900,000

The cumulative dividend is disclosed in a note to the stockholders’ equity section; it is not reported as a liability.

E15-9B (15–20 minutes)

Oct 5 Cash 39,000

Paid-in Capital in Excess of Par—

12 Cash 330,000

Paid-in Capital in Excess of Par—

E15-9B (Continued)

26 Cash 22,500

Paid-in Capital from Treasury

E15-10B (20–25 minutes)

following: 2014—$1,538 ÷ 769, or 2013—$1,512 ÷ 756.

per share ($400 ÷ 63); the average cost at December 31, 2013, was

$7.00 per share ($595 ÷ 85).

(b) Stockholders’ equity (in millions of dollars)

Paid-in capital

Common stock, $2 par value, 1,500,000,000 shares authorized, 769,000,000 shares issued,

Additional paid-in capital 2,861 Total paid-in capital 4,399 Retained earnings 18,196

Item Assets Liabilities

Stockholders’

Equity

Paid-in Capital

Retained Earnings

Net Income

E15-12B (10–15 minutes)

(a) 8/31 Retained Earnings 30,000,000

Dividends Payable 30,000,000

9/30 Dividends Payable 30,000,000

Cash 30,000,000

declaration would be to Additional Paid-in Capital rather than Retained Earnings.

E15-13B (10–15 minutes)

increased to 60 million and par value has been reduced from $4 to $1 per share.

(b) Retained Earnings 180,000,000

Common Stock Dividend Distributable 180,000,000

Common Stock 180,000,000

securities markets Both techniques allow the board of directors to increase the quantity of shares and channel share prices into the

“popular trading range.”

For accounting purposes the 20%–25% rule reasonably views large stock dividends as substantive stock splits It is necessary to capitalize par value with a stock dividend because the number of shares is increased and the par value remains the same Earnings are capitalized for purely procedural reasons.

E15-14B (10–12 minutes)

(a) Retained Earnings (3,000,000 X $1) 3,000,000

Common Stock Dividend

Distributable 3,000,000

Common Stock Dividend Distributable 3,000,000

(b) Retained Earnings (150,000 X $17) 2,550,000

Common Stock Dividend

Distributable 150,000

outstanding increases to 4,500,000.

(a) No entry; company uses a memorandum note to indicate that par value is

reduced to $0.50 and shares outstanding are now 140,000.

(b) Retained Earnings 175,000

Common Stock Dividend

(70,000 shares X 10% X $25= $175,000 $175,000 – $7,000 = $168,000)

Common Stock Dividend Distributable 7,000

Investments (Equity) 155,000

Gain on Appreciation of Investments (Equity) 155,000

Retained Earnings 205,000

October 1, 2014 Property Dividends Payable 205,000

E15-16B (5–10 minutes)

Less: Total cash dividends paid $260,000

E15-17B (20–25 minutes)

CAPITAL NORTHEAST CORPORATION

Stockholders’ Equity December 31, 2014 Capital stock

Preferred stock, 6% cumulative, par value

$100 per share; authorized 1,000,000

shares, issued and outstanding 65,000

shares $6,500,000 Common stock, par value $1 per share;

authorized 2,500,000 shares, issued

500,000 shares, and outstanding 490,000

shares 500,000 Total capital stock 7,000,000 Additional paid-in capital—

Total paid-in capital 8,935,000 Retained earnings 982,000

(a) 1 Dividends Payable—Preferred

(25,000 X $100 X 12%) 300,000

Dividends Payable—Common

(300,000 X $0.50) 150,000

Cash 450,000

2 Treasury Stock 8,000

Cash (1,000 X $8) 8,000

3 Land (1,000 X $8.50) 8,500

4 Cash (50,000 X $9) 450,000

Paid-in Capital in Excess of Par—

Common 400,000

par value is reduced to $0.50 and shares

issued are now 700,000.

6 Retained Earnings 650,000

Dividends Payable—Preferred

Dividends Payable—Common (700,000 X $0.50) 350,000

E15-18B (Continued)

(b) FOCUS FOOT COMPANY

Stockholders’ Equity December 31, 2014 Capital stock

Preferred stock, 12%, $100 par, 100,000

shares authorized, 25,000 shares issued and

Common stock, $0.50 par, 2,000,000 shares

authorized, 700,000 shares issued and

outstanding 350,000

Computations:

(a) Honey Dew Inc is the more profitable in terms of rate of return on total

assets This may be shown as follows:

$1,000,000

$1,000,000

It should be noted that these returns are based on net income related to total assets, where the ending amount of total assets is considered representative If the rate of return on total assets uses net income before interest but after taxes in the numerator, the rates of return on total assets are those shown below:

$1,000,000

= 12.0%

equity This may be shown as follows:

$500,000

$900,000 (Note: The following schedule helps explain why the difference in rate of return on assets and rate of return on stockholders’ equity occurs.)

E15-19B (Continued)

ISTAR COMPANY

Fund Supplies

Funds Supplied

Rate of Return

on Funds at 12.0%*

Cost of Funds

Accruing to Common Stock

*Determined in part (a), 12.0%

**The cost of funds is the interest of $40,000 ($400,000 X 10%) This interest cost must be reduced by the tax savings (40%) related to the interest.

The schedule indicates that the income earned on the total assets (before interest cost) was $120,000 The interest cost (net of tax) of this income was $24,000, which indicates a net return to the common equity

of $96,000.

while Honey Dew Inc had an income per share of $2.00 ($120,000 ÷ 60,000) Istar Company has borrowed a substantial portion of its assets

at a cost of 10% and has used these assets to earn a return in excess of 10% The excess earned on the borrowed assets represents additional income for the stockholders and has resulted in the higher income per share Due to the debt financing, Istar has fewer shares of stock outstanding.

stockholders of the Istar Company to have long-term debt outstanding The assets obtained from incurrence of this debt are earning a higher return than their cost to Istar Company.

20,000

60,000

E15-20B (15 minutes)

Rate of return on common stock equity:

$327,000

$3,000,000 Yes, Todd Warner, Inc is trading on the equity successfully, since its return on common stock equity is greater than interest paid on bonds.

*E15-21B (10–15 minutes)

(a) Preferred stock is noncumulative,

(b) Preferred stock is cumulative,

(c) Preferred stock is cumulative,

Pro rata share to common

Balance dividend pro rata

**12.58% ($97,500/$775,000) of par value.

Preferred Common Total

$500,000 – $486,000 = 0.683%

2,050,000

$500,000 – $246,000 = 12.39%

2,050,000

*E15-23B (10–15 minutes)

Assumptions

Preferred, noncumulative, and nonparticipating

Preferred, cumulative, and fully participating

$235,000 –

$160,000*

250,000

*($160,000 = $8 X 20,000)

*E15-23B (Continued)

Preferred dividends in arrears

Available for common and

Ratable dividend to common

250,000

*($160,000 = $8 X 20,000)

Per Share

Available for common and

participation 475,000

Ratable dividend to common

$455,000

= 20.22%

$2,000,000 + $250,000

(a) Common Preferred Stockholders’ equity

Common stock $ 50,000

Retained earnings

Shares outstanding 50,000

Book value per share ($332,000 ÷ 50,000) $6.64

*Balance in retained earnings

Stockholders’ equity

Common stock $ 50,000

Retained earnings

Shares outstanding 50,000

Book value per share ($329,000 ÷ 50,000) $6.58

*Balance in retained earnings