3. 6.
3. 6.
28,000 28,000
28,000 28,000
$40,000
24,000
$64,000
($64,000)
($24,000)
24,000
16,000
( 64,000)
Payment of dividends
6/1
6/15
Cash
Common Stock
Additional Paid-In Capital
Retained Earnings
Start-up and organization costs
Balance Sheet Effect:
Start-up and organization costs:
Legal services, 24,000 shares of $1 par value common stock
Incorporation fees
Total start-up and organization costs
Income Statement Effect:
Chapter 11, SE 4.
Dividends
Declaration of dividends: 140,000 shares
outstanding × $0.20 per share
b
Dividends Payable
5/15 Dividends Payable
No entry necessary on record date
Cash
CHAPTER 11—Solutions
STOCKHOLDERS’ EQUITY
Chapter 11, SE 1.
Chapter 11, SE 3.
a
518
Chapter 11, SE 5.
Fina Corporation
Balance Sheet
December 31, 2011
Stockholders’ Equity
Contributed capital
1. 30,000 12,500
2. 30,000 2,500
1. 112,000 16,000
96,000
2. 100,000 16,000
84,000
Common Stock
Additional Paid-In Capital
Common Stock
Common Stock
Chapter 11, SE 7.
Common Stock
Additional Paid-In Capital
Issued 16,000 shares of $1 par value common
stock for land; market value of land used to
value transaction
520
Oct. 1 40,000 40,000
(×
17 12,500 10,000
2,500
(×
( × $20
Oct. 28 3,000
4,500
Chapter 11, SE 9.
Cash
Treasury Stock, Common
$20
Cash
Paid-In Capital, Treasury Stock
per share); $25500$12,500
cost was
2,000 per share )
Sold 500 shares of treasury stock for
Treasury Stock, Common
Common Stock
Additional Paid-In Capital
Acquired 2,000 shares of company’s common
stock for $40,000
$10,000 500
per share)
Chapter 11, SE 10.
× 224,400 =
Common stock, $3 par value, 400,000 shares authorized,
375,000 shares issued and outstanding
Contributed capital
Chapter 11, SE 12.
August 10, 2011
$1,125,000
3,000,000
Additional paid-in capital
Stockholders’ Equity
Chapter 11, SE 11.
After Stock Split Pearl International
$0.50
shares
4. $48 per share (
4.
* ( × $100 ) =
×
=
Chapter 11, SE 15.
Chapter 11, SE 13.
per share
80,000
0.08
$8,000
shares1,000
=
$29.58
*
1.
2.
3.
4.
1.
2.
3.
4.
sense that an outside investor does. For instance, no dividends are paid on
treasury stock because the company would be paying itself. By buying and
holding its own stock, the company is in effect reducing its stockholders’
been issued and then reacquired. The company does not own the stock in the
record, the seller will not receive the dividend because the date of record is the
date at which ownership of the stock of a company and the right to receive a
Chapter 11, E 1.
$66.00
$4.40
6/5 17,500 17,500
6/15
6/25 17,500 17,500
10/15 90,000 90,000
11/1
11/15 90,000 90,000
Dividends
Payment of dividends
Cash
Declaration of dividends
Dividends Payable
Dividends Payable
Cash
Payment of dividends
Chapter 11, E 5.
180,000 shares outstanding × $0.50 per share
Record date: No entry necessary
Chapter 11, E 3.
Chapter 11, E 4.
Dividends
Dividends Payable
Declaration of dividends
70,000 shares outstanding × $0.25 per share
Record date: No entry necessary
Dividends Payable
525
3. 6. 9.
Chapter 11, E 6.
$400,000
450,000
$850,000
—
$850,000
authorized, 30,000 shares issued and
Total contributed capital
2. Stockholders’ equity section of the balance sheet prepared
300,000
Cash Preferred Stock
$150,000outstanding
Rich Supply Corporation
Stockholders’ Equity
Additional paid-in capital
Retained earnings
Preferred stock, $100 par value, 6 percent
Contributed capital
March 1, 2011
Balance Sheet
1.
Chapter 11, E 8.
Transactions recorded in T accounts
4,000 shares issued and outstanding
Common stock, $5 stated value, 100,000 shares
Total stockholders’ equity
noncumulative, 20,000 shares authorized,
527
Total
Per Per Dividends
Amount Share Amount Share Allocated
Dividends
Chapter 11, E 9.
Preferred Stock Common Stock
Dividends
1. $40,000 —$40,000
(× $35,000
(– $ 5,000 $40,000
$30,000 —$30,000
( $35,000 – $ 5,000
Chapter 11, E 10.
2011 dividends
$500,000
$40,000
)
$35,000
0.07
2010 dividends
2011
)
)
2010 dividends in arrears
$30,000
1 125,000 50,000
1 125,000 5,000
120,000
Chapter 11, E 11.
Common Stock
Aug.
2. Entry prepared—$10 par value
Cash
Additional Paid-In Capital
Issued 5,000 shares of $1 stated value
common stock for $25 per share
Aug. Cash
3.
4. Entry prepared—$1 stated value
530
1 1,200,000 160,000
1,040,000
2011
2011
with a fair market value of $1,200,000
Additional Paid-In Capital
Issued 40,000 shares of $4 stated
value common stock for a building
Common Stock
July
3.
2. Entry prepared—no par value
Building
Chapter 11, E 12.
531
May 17 2 May 5 1May 5 128,000 May 17 48,000 3
21 5 21 32,000
28 628 48,000 7
Bal. —
May 28 2,400 8 May 17 4,800 4
Bal. 2,400
1=
2=
3=
4=
5=
6=
7=
8=
$40
($38 – $40)
$40
$44
$40
($44 – $40)
1,200
3,200
$32,000
$45,600
800
shares ×
shares ×
$128,000
shares × $48,000
shares ×
1,200
$2,400
52,800
32,000
45,600
128,000
Chapter 11, E 13.
Cash Treasury Stock, Common
1,200
1,200 shares ×
1,200
1,200 $52,800
$48,000
$40
$38
shares ×
shares × $4,800
shares ×
Paid-In Capital, Treasury Stock
532
10 21
1 35,000 June 10 8,750 3
20 520 12,250 6
30 14,000 8
—
20 720 1,250 June 10 1,250 4
Bal. —
Chapter 11, E 14.
Treasury Stock, Common
Paid-In Capital, Treasury Stock
30 5,600 11
10,000
10,150
June
June Retained Earnings
850
35,000 June 1
Cash
Bal.
June
June
shares × = $33,000
$0.50
Chapter 11, E 15.
66,000
534
$100,000
10,000
$110,000
350,000
$460,000
$100,000
10,000
$110,000
350,000
$460,000
Contributed capital
Chapter 11, E 16.
May 15, 2011
Retained earnings
Additional paid-in capital
Total contributed capital
Retained earnings
No entry is required, but a memorandum entry for informational purposes should
be prepared.
Common stock, $1 par value, 250,000 shares authorized,
Contributed capital
Total stockholders’ equity
Common stock, $0.50 par value, 250,000 shares authorized,
100,000 shares issued and outstanding
200,000 shares issued and outstanding
Agat Company
Stockholders’ Equity
Total contributed capital
Before Stock Split
May 15, 2011
After Stock Split Agat Company
Additional paid-in capital
Stockholders’ Equity
Total stockholders’ equity
535
January 15, 2011
Mendoza International
Stockholders’ Equity
Chapter 11, E 17.
Contributed capital
Before Stock Split
Other
0.02 per share
( 400 × ) +
400 =
$44,400 per Share
Chapter 11, E 19.
$2,400
Preferred Stock
Book Value per Share =$105
$111=
400 Shares
*
Sept. 1 500,000 Sept. 1 32,000 Sept. 1 100,000
Oct. 2 960,000 Oct. 15 150,000 Oct. 2 320,000
1,460,000 182,000 Bal. 420,000
Bal. 1,278,000
Sept. 1 400,000 Nov. 30 48,000
1. T accounts set up and transactions recorded in the accounts
Additional Paid-In Capital
Common Stock
Cash
Dividends Payable
Chapter 11, P 1.
*
$1,040,000
Dewey Corporation
Contributed capital
Common stock, $8 par value, 300,000 shares
authorized, 130,000 shares issued and
120,000 shares outstanding
Balance Sheet
Stockholders’ Equity
November 30, 2011
Chapter 11, P 1. (Continued)
2. Stockholders’ equity section of the balance sheet prepared
The cash dividend declaration on November 30 will not affect net income and will
3. User Insight: Effects of cash dividend declaration discussed
$ 3.50 —$ 35,000
$17.00
=
Common Stock
Noncumulative
Chapter 11, P 2.
Preferred Stock Total
2012
Common Stock
Preferred Stock
1. Dividends calculated for cumulative preferred stock and common stock
2. Dividends calculated for noncumulative preferred stock and common stock
3. The 2012 and 2013 dividends yield for common stock calculated
Cumulative
2011
Chapter 11, P 2. (Continued)
4. User Insight: Preferred stock compared to long-term bonds
Both cumulative and noncumulative preferred stock have a fixed level of dividends
bonds in the sense that if dividends are declared in any given year, past dividends
not paid must be made up. Likewise, any past interest missed on long-term bonds
would have to be made up. The difference is that with noncumulative preferred
and are thus similar in this way to long-term bonds, which have a fixed level of in-
terest. However, cumulative preferred stock would be more similar to long-term
Jan. 19 310 $ 15,000
$ 31,500 312 16,500
21 310 5,000
11,000 312 6,000
Feb. 7 310 30,000
78,000 312 48,000
Mar. 22 30,000 110 30,000
July 15 310 5,000
15,000 312 10,000
Aug. 1 350 7,500
Credited
Account
Number
Debited
Dollar
Amount Dollar
Amount
Account
Account
Number
110
Chapter 11, P 3.
1. Account numbers and dollar amounts provided
110
350
510
121
2. User Insight: Stockholders’ equity section of balance sheet discussed
The stockholders’ equity section of the balance sheet is an important factor in ana-
lyzing a company’s performance because it represents the ownership interest of
Chapter 11, P 3. (Continued)
Aug. 3 110,000 Oct. 10 Aug. 3 100,000
22 250,000 31 15 40,000
Oct. 4 30,000 Oct. 4 25,000
390,000 Bal. 165,000
Bal. 381,975
Aug
.
3 Aug. 22 250,000
Bal. 250,000
Oct. 4
10,000 Preferred Stock
Cash 3,250
4,775
15
Additional Paid-In Capital
Common Stock
Chapter 11, P 4.
1. T accounts set up and transactions recorded in the accounts
5,000
8,000
8,025
$250,000
$ 23,000
2. Stockholders’ equity section of the balance sheet prepared
Balance Sheet
October 31, 2011
Stas Corporation
authorized, 2,500 shares issued and outstanding
authorized, 11,500 shares issued, and 10,250 shares
outstanding
Chapter 11, P 4. (Continued)
Stockholders’ Equity
Contributed capital
Preferred stock, $100 par value, 6 percent, 5,000 shares
Common stock, $2 stated value, 25,000 shares
Average Stockholders’ Equity
$1.97
$25.00
Chapter 11, P 4. (Continued)
3. User Insight: Performance ratios computed for the quarter
Return on Equity
Net Income
=
must also consider changes in the price of the company’s stock. A return on equity
Stas Corporation’s dividends yield is only 0.4 percent, which means that investors
4. User Insight: Investors’ return discussed
3/25 12,000
12/15 25,200
Bal. 25,200
2×× =
+=
240,000
$21
$9
80,000
80,000 $226,800
$84,000
0.05
Shares outstanding before split: 84,000
252,000 0.10
Common Stock
252,000
1. Transactions recorded in T accounts
Common Stock Distributable
Bal.
Bal.
5/1
12,000
Chapter 11, P 5.
Additional Paid-In Capital Retained Earnings
5/1 12,000
$ 252,000
2,000
3. User insight: Effect of stock transactions determined
shares
receive the same proportionate distributions.
Your proportionate share would be the same because other shareholders would
Mar. 1, 2012:
252,000 shares issued and outstanding
Chapter 11, P 5. (Continued)
If you owned 2,000 shares of Rigby Storage stock on March 1, 2012, you would own
6,930 shares on February 15, 2013 (calculation below).
2. Stockholders’ equity section of the balance sheet prepared
Rigby Storage, Inc.
Stockholders’ Equity
December 31, 2012
Contributed capital
Common stock, $1 par value, 1,000,000 shares authorized,
Original holding
1 Mar. 2 Mar. 1 60,000 1
10 Apr. 15 Apr. 10 26,000 2
Bal. 86,000
Mar. 1 Mar. 2 12,000
Bal. 12,000
Bal.
Dividends Payable
Apr.
128,000Bal.
Start-up and Organization Costs
40,000
79,000
25,000
165,000 37,000
Chapter 11, P 6.
Common Stock
1. Transactions recorded in T accounts
Cash
Additional Paid-In Capital
Mar. 12,000
100,000
65,000
Treasury Stock, Common
Apr. 10
39,000
$ 86,000
Contributed capital
Common stock, $4 par value, 50,000 shares authorized,
21,500 shares issued and 19,000 shares outstanding
Algae Corporation
Balance Sheet
May 31, 2011
2. Stockholders’ equity section of balance sheet prepared
Stockholders’ Equity
Chapter 11, P 6. (Continued)
3. User Insight: Effects of cash dividend declaration discussed
The cash dividend declaration on May 31 will not affect net income and will not
Per Per Dividends
Amount Share Amount Share Allocated
$ 30,000 $ 6.00 — — $ 30,000
Per Per Dividends
Amount Share Amount Share Allocated
1. Dividends calculated for cumulative preferred stock and common stock
2. Dividends calculated for noncumulative preferred stock and common stock
Total
Noncumulative
Common Stock
Dividends
Preferred Stock
Chapter 11, P 7.
Dividends Total
2010
2011
Dividends
Preferred Stock Common Stock
Cumulative
Dividends
Chapter 11, P 7. (Continued)
4.
3. The 2012 and 2013 dividends yield for common stock calculated
Both cumulative and noncumulative preferred stock have a fixed level of dividends
and are thus similar in this way to long-term bonds, which have a fixed level of in-
terest. However, cumulative preferred stock would be more similar to long-term
would have to be made up. The difference is that with noncumulative preferred
bonds in the sense that if dividends are declared in any given year, past dividends
not paid must be made up. Likewise, any past interest missed on long-term bonds
1 110,000 50,000
60,000
1 5,500 2,500
3,000
2 100,000 100,000
×=
12
No entry required
Common Stock
stated shares of
Cash
$11
July
1.
10,000
Start-up and Organization Costs
value common stock at
Issued
Total $980
$5
Chapter 11, P 8.
Journal entries prepared
$0.02
legal services to organize the corporation
value common stock at $11 per share for
Common Stock
stated $5500
Additional Paid-In Capital
Issued per share
Cash
Additional Paid-In Capital
shares of
$100,000
$65,000
outstanding
Chapter 11, P 8. (Continued)
Contributed capital
Common stock, no-par $5 stated value, 50,000 shares
Preferred stock, $100 par value, 9 percent, 5,000 shares
authorized, 13,000 shares issued, and 11,500 shares
Stockholders’ equity section of the balance sheet prepared
2.
Stockholders’ Equity
Java, Inc.
Balance Sheet
August 31, 2011
authorized, 1,000 shares issued and outstanding
4.8 percent is low and will not encourage a rise in the company’s stock or an ex-
=
$1.00
$20.00
3. User Insight: Performance ratios computed
Chapter 11, P 8. (Continued)
2012
Jan. 4
14 960,000 960,000
14 160,000 160,000
Mar. 8
Apr. 20 72,000 72,000
May 4 32,000 24,000
8,000
July 15 206,400 206,400
+ $94,400 =
25
Chapter 11, P 9.
No entry required
Preferred Stock
Issued 4,000 shares of preferred stock in
Preferred Stock
exchange for a building valued at $160,000
Paid-In Capital, Treasury Stock
value common stock issued and outstanding.
Memo: The 120,000 shares of $8 par value common stock that are issued
1. Journal entries prepared
the treasury at $12 per share
Cash
Sold 24,000 shares of $40 par value preferred
stock at $40
Building
Treasury Stock, Common
share
Cash
per share; originally purchased for $12 per
Purchased 6,000 shares of common stock for
and outstanding were split 2 for 1, resulting in 240,000 shares of $4 par
No entry required $206,400
Dividends
Dividends Payable
Declared a cash dividend of $4 per share on
28,000 shares of preferred stock and $0.40
per share on 236,000 shares of common stoc
k
$112,000
Treasury Stock, Common
Cash
Sold 2,000 shares of treasury stock for $16
557
2012
Aug. 15 206,400 206,400
Nov. 28 708,000 141,600
566,400
Additional Paid-In Capital
Paid cash dividends to preferred and
Dividends Payable
Stock Dividends
Cash
common stockholders
Common Stock Distributable
Declared a 15 percent stock dividend on
Chapter 11, P 9. (Continued)
Chapter 11, P 9. (Continued)
=÷ =
*
**
December 31, 2011
271,400 ) ÷ (
3.
per share
shares
Rounded.
Book value per share usually does not affect market price, which is affected by
28,000 shares of preferred stock × $42 per share
$16.32
$4,429,600
many other factors.
Common stock:
Chapter 11, P 9. (Continued)
$0.40
20
6 400,000 400,000
17 1,400,000 200,000
1,200,000
on August 17 at the market value of the
$0.20
Declaration of a stock dividend of 100,000
Common Stock Distributable
June Stock Dividends
Additional Paid-In Capital
Apr.
Dividends Payable
No entry required
Chapter 11, P 10.
Cash
par value common stock, to be distributed
Payment of cash dividend declared on
March 5
shares (1,000,000 shares × 0.10) on $2
$400,000
$2,200,000
=
pany declares stock dividends or stock splits. These actions often accompany
Jet Moving Company
Contributed capital Stockholders’ Equity
Chapter 11, P 10. (Continued)
Balance Sheet
If you owned shares in Jet, you would expect the total value of your shares to re-
main about the same, although the price per share would be less because there
positive views on the part of management about the future of the company.
are more shares outstanding. An intangible that might cause the total value to in-
crease is that it is usually considered a positive sign to the market when a com-
2. Stockholders’ equity section of the balance sheet prepared
3. User Insight: Effect of stock transactions on share price
Common stock, $1 par value, 6,000,000 shares authorized,
2,200,000 shares issued and outstanding
December 31, 2012
562
Chapter 11, C 2.
terest rates decline and a company wishes to refinance the stock, it can call the
mon stock rises above the conversion price, the price of the preferred stock will
PERCs are popular with companies because they provide great flexibility. If the in-
long-term debt. Another advantage is that issuing stock is less risky than issuing
reduces the company’s ability to use financial leverage to increase the return on
ible, whereas dividends paid on common stock are not.
equity over the return on assets. Also, the interest paid on bonds is tax-deduct-
to be repaid. These are effects that could improve DreamWorks’ bond rating and
dividend rate, they are classified on the balance sheet as equity. This is very im-
portant to companies that have suffered losses resulting in decreased stockhold-
stock and retire it. If a company does not have the cash to redeem the shares, it
assets. From the investor’s standpoint, the dividend is fixed, like bond interest.
The value of the preferred stock varies with changes in the market rate of interest,
also like bond prices. If the preferred stock is convertible and the price of the com-
then rise with the common price (in which case the investor has a capital gain).
An advantage of issuing common stock is that it improves the company’s debt to
Chapter 11, C 1.
equity ratio by increasing the amount of common stock outstanding in relation to
Even though preferred stocks have some characteristics of bonds, such as a fixed
ers’ equity and to banks, which must maintain minimum ratios of capital to total
bonds because dividends do not have to be paid on stock and there is no debt
lower the interest it might pay on future bond issues. A disadvantage of issuing
ers unless they buy more shares. In addition, when the company is profitable, it
stock is that it dilutes the share of the company owned by the current stockhold-
Chapter 11, C 3.
1,800,000,000 22,500
The total proceeds were $1,912,500,000 ($85 × 22,500,000 shares). Google received
$80 ($1,800,000,000 ÷ 22,500,000 shares) per share. The underwriters received a
4. Underwriters’ fee discussed
Contributed capital
Balance Sheet
After Stock Offering
Google, Inc.
Stockholders’ Equity
3. Google’s need to increase the authorized shares discussed
Common stock, $0.001 par value, 700,000,000 shares authorized,
1. Stock issue recorded as journal entry
2. Stockholders’ equity section of the balance sheet prepared
Cash
Chapter 11, C 5.
(in thousands)
(8)
2. Comprehensive income discussed
Chapter 11, C 6.
sources other than owners and includes net income, change in unrealized invest-
ment gains and losses, and other items affecting equity. Thus, Spencer’s compre-
Comprehensive income is the change in a company’s equity during a period from
1.
3.
4.
(called a stock incentive plan) described in Note 10. These options apply to
lates to the preference stock. In addition, the company has a stock option plan
Chapter 11, C 7.
$0.01 per share. There are 3.2 billion authorized shares, of which 1.612 billion
applies to full-time employees with at least one year of service. This plan re-
$32.83
This yield is less than 1 percent. As a result, the stockholders’ total return is
eral items appear on each of the three years of CVS’s statement of sharehold-
ers’ equity. These items include conversion of preference stock to common
stock, conversion of preference stock to treasury stock, common stock issued,
=
=
=
=
3.0%
1.9%
Southwest’s Return on Equity Ratio:
Net Income
Net Income
Chapter 11, C 8.
1. Return on equity computed (dollars in millions)
CVS’s Return on Equity Ratio:
10.5%
9.7%
$178
holders’ equity, it may be seen that both companies pay cash dividends, but the
Dividend policies discussed
From their income statements, statements of cash flows, and statements of stock-
4.
Neither company raised significant funds through stock issues. It may be seen in
According to the statement of cash flows, CVS purchased treasury stock of $2.477
billion in 2009, but about $7.87 billion over the past three years. In contrast, South-
3. Stock issues discussed
Chapter 11, C 8. (Continued)
2. Treasury stock purchases discussed
2009 2008
$35,768 $34,574
$34.90 + $23.19 ) ÷2=
2009 2008
6. Book values per share and their relationship to market prices discussed
Total stockholders’ equity
Chapter 11, C 8. (Continued)
5. Book values per share computed
of shares outstanding. CVS has roughly two times as many shares outstanding as
about 3.8 times that of Southwest. Book value per share is a function of the number
Southwest does.
CVS’s Book Value per Share (in millions except per share):
Southwest’s Book Value per Share (in millions except per share):
570
are harmed by this action in at least two ways. Buying treasury stock is not unethi-
Chapter 11, C 9.
Some may argue that if management were not prohibited from taking such action,
then its actions might be judged as acceptable. Others will clearly see that owners