Chapter 10
Stockholders’ Equity
Ethics Check
(5-10 min.) EC 10-1
a. Integrity
b. Objectivity and independence
c. Due care
d. Objectivity and independence
Short Exercises
(5-10 min.) S 10-1
Corporation’s advantages:
• Continuous life
(5-10 min.) S 10-2
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 higher dividends and an increase in the
value of the company’s stock is unlimited.
(5-10 min.) S 10-3
The $11,488,500 was paid-in capital in excess of par – common. It was
not a profit and therefore had no effect on net income.
The par value per share 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.
(5 min.) S 10-4
Millions
Martin Legal Services:
Cash ....................................................................
17,721
Common Stock ..............................................
21
Additional Paid-in Capital .............................
17,700
Kramer Doughnuts:
Cash ....................................................................
294
Common Stock ..............................................
294
(5-10 min.) S 10-5
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Jan
14
Cash ........................................................
1,350,000
Common Stock (100,000 × $0.01) .....
1,000
Paid-in Capital in Excess of Par –
Common ............................................
1,349,000
Issued stock.
Jan
29
Legal Expense (2,000 × $13.70) .............
27,400
Common Stock (2,000 × $0.01) .........
20
Paid-in Capital in Excess of Par –
Common ............................................
27,380
Issued stock for services.
(5-10 min.) S 10-6
Case A — Issue stock and buy the assets in separate transactions:
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Cash ........................................................
750,000
(10-15 min.) S 10-8
Leverage
ratio
Total assets
Total stockholders’ equity
$3,915
$821
=
4.77
g.
Return on
equity
Net income
Total stockholders’ equity
$411
$821
=
.50
Prior year returns from the company and comparative data for competitors
would also be helpful to make decisions.
(5 min.) S 10-9
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Millions
Jan.
10
Treasury Stock..........................................
21
Cash .....................................................
21
July
3
Cash .........................................................
12
Treasury Stock ....................................
4
Paid-in Capital from Treasury Stock
Transactions ...................................
8
Overall, stockholders’ equity decreased by $9 million ($21 million paid
out minus $12 million received).
(15-20 min.) S 10-10
Req. 1
MEMORANDUM
TO: Lucinda Lowery 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
Lucinda Lowery 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
(10 min.) S 10-11
(5-10 min.) S 10-13
4. Preferred: $101,250 ($33,750 × 3)
Common: $1,198,750 ($1,300,000 − $101,250)
(5-10 min.) S 10-14
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
May
11
Retained Earnings (40,000 × .16 × $20) ...........
128,000
Common Stock (40,000 × .16 × $8) ..............
51,200
Paid-in Capital in Excess of Par-Common ...
76,800
Req. 2
(10 min.) S 10-15
Book value per share of common stock ............................
$ 64.26
(5-10 min.) S 10-16
(a)
Rate of return on
total assets (ROA)
=
Net profit margin ratio x Asset turnover
(b)
Rate of return on
common
=
ROA x Leverage ratio
stockholders'
equity (ROE)
Req. 1
The components of ROA are net profit margin ratio and asset turnover.
Net profit margin ratio [(net income minus preferred dividends)/net sales]
is a measure of operational effectiveness. It measures the percentage net
profit generated for each dollar of sales. Generally, companies that can
differentiate a highly desirable product can sell the product for more,
generating a higher profit. Asset turnover (net sales/average total assets)
is a measure of efficiency in the use of assets. Generally, companies that
can cut costs by reducing the amount invested in fixed assets and
(3.6%)
The company’s rate of return on total assets for 2016 is weak. The
company’s rate of return on common stockholders’ equity for 2016 is
(20-30 min.) S 10-18
1. Redemption value of preferred stock is the price the corporation
agrees to pay to retire its redeemable preferred stock; that price was
5.
Book value
per share of
=
Total stockholders’ equity − Preferred equity
common stock
Number of shares of common stock outstanding
(5-10 min.) S 10-19
(10 min.) S 10-20
3. The dividend:
(10 min.) S 10-21
2. The stock dividend:
4. Comprehensive income is $96,500 ($84,500 + $9,000 + $3,000).
Addition to Accumulated Other Comprehensive Income is $12,000.
Accumulated Other Comprehensive Income is reported as a part of
Stockholders’ Equity, and is not included in net income.
Exercises
(10-15 min.) E 10-22A
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Mar.
23
Cash .............................................................
46,500
Common Stock .......................................
18,000
Paid-in Capital in Excess of Par –
Common ...............................................
28,500*
Apr.
12
Inventory ......................................................
20,000
Equipment ...................................................
39,000
Common Stock .......................................
18,600
Paid-in Capital in Excess of Par --
Common ................................................
40,400*
Req. 2
(10 min.) E 10-23A
4.
36,000 (18,000 × $2)
$1,119,000 = Total paid-in capital
Other stockholders’ equity ...................................................
(22)
Total stockholders’ equity ...............................................
$821
(10-15 min.) E 10-25A
Accumulated other comprehensive income (loss) .............
(730)
Total stockholders’ equity ...............................................
$1,127
Req. 2
Alistair Software paid a higher price to acquire treasury stock than the
price Alistair 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.
(5-10 min) E 10-26A
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Millions
Treasury Stock ......................................................
28
Cash ...................................................................
28
Cash .......................................................................
9
Treasury Stock ..................................................
3
Paid-in Capital from Treasury Stock
Transactions ..................................................
6
Overall, stockholders’ equity decreased by $19 million (decrease of
$28 million and increase of $9 million).
(10 min.) E 10-27A
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Millions
(10 min.) E 10-28A
Treasury stock, at cost ($40 + $121 − $55) ........................
(106)
Total stockholders’ equity .............................................
$ 771
(20-30 min.) E 10-29A
Req. 1
Possible causes for preferred stock decrease:
• Conversion of preferred stock into common stock
Less: Treasury stock, number of shares......................
(38)
Common shares outstanding ........................................
162
Req. 4
Retained Earnings (Millions)
Dec. 31, 2016
Bal.
5,025
treasury stock purchased during 2017 .........
$24.07
(15 min.) E 10-30A
Req. 1
Preferred
Common
Total
2016
Total dividend
$120,000
Preferred dividends in arrears:
2014: 65,000 shares × $4.00 (par)
per share × .07 =
$18,200
2015: 65,000 shares × $4.00 (par)
per share × .07 =
18,200
Preferred dividends, current year :
2016: 65,000 shares × $4.00 (par)
per share × .07 =
18,200
Total to preferred
$54,600
Remainder to common
$65,400
2017
Total dividend
$204,000
Preferred dividends, current year:
2017: 65,000 shares × $4.00 (par)
per share × .07 =
$18,200
Remainder to common
$185,800
(15-20 min.) E 10-31A
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
June
16
Retained Earnings (400,000 × .12 × $18) .........
864,000
Common Stock (400,000 × .12 × $0.40) ......
19,200
Paid-in Capital in Excess of
Par – Common ..........................................
844,800
To declare and distribute a common stock dividend.
(15-20 min.) E 10-32A
(10-15 min.) E 10-33A
Book value per share ($65,000 / 4,000 shares) ..............
$ 16.25
Req. 2
Book value per share ($60,200 / 4,000 shares) ................
$ 15.05
Req. 3
Eclectic Rug’s stock is not necessarily a good buy. Investment
(10-15 min.) E 10-34A
(12.6%)
_____
Total assets = Total liabilities + Stockholders’ equity
*Beginning of year = $52,074 ($38,029 + $14,045)
**End of year = $55,786 ($32,311 + $23,475)
(continued) E 10-34A
Req. 2
These rates of return suggest relative weakness. The company is
generating a 2.97% net profit margin ratio (moderate effectiveness). The
Dividends paid .................................................................
(205)
Net cash used for financing activities $ (2,275)
(20-25 min.) E 10-36A
$1.00 Par
Common
Stock
Additional
Paid In
Capital
Retained
Earnings
Accum. Other
Comprehensive
Income
Total
Shareholders’
Equity
Balance, Dec. 31, 2015 ..
$395
$1,630
$4,500
$7
$6,532
(75)
(75)
Debt ratio
=
=
=
49.5%
Total assets
$7,800 + $7,958
Issue price
=
=
=
$3.90 per
share
Number of shares issued
100*
*$100/$1.00 par = 100 shares issued
(10-15 min.) E 10-37B
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Feb.
23
Cash .............................................................
25,500
Common Stock .......................................
3,400
Paid-in Capital in Excess of Par –
Common .................................................
22,100*
Mar.
12
Inventory ......................................................
19,000
Equipment ...................................................
46,000
Common Stock .......................................
6,400
Paid-in Capital in Excess of Par –
Common ..................................................
58,600*
Req. 2
(10 min.) E 10-38B
4.
136,000 (17,000 × $8)
$946,000 = Total paid-in capital
Other stockholders’ equity ...................................................
(27)
Total stockholders’ equity ...............................................
$832
(10-15 min.) E 10-40B
Accumulated other comprehensive income (loss) ............
(730)
Total stockholders’ equity ...............................................
$1,369
Req. 2
Treasury Stock has a larger balance than the sum of Common Stock
and Paid-in Capital in Excess of Par because Patterson Software paid a
higher price to acquire treasury stock than the price Patterson received
when it issued its stock.
(5-10 min.) E 10-41B
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Millions
Treasury Stock ......................................................
34
Cash ...................................................................
34
Cash .......................................................................
15
Treasury Stock ..................................................
6
Paid-in Capital from Treasury Stock
Transactions ..................................................
9
Overall, stockholders’ equity decreased by $19 million (decrease of
$34 million and increase of $15 million).
(10 min.) E 10-42B
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Millions
(10 min.) E 10-43B
Treasury stock, at cost ($100 + $65 − $52) ......................
(113)
Total stockholders’ equity ...........................................
$794
(20-30 min.) E 10-44B
Req. 1
Possible causes for preferred stock decrease:
• Conversion of preferred stock into common stock
• Retirement of preferred stock
Req. 2
Less: Treasury stock, number of shares………
(57)
Common shares outstanding……………………....
243
(continued) E 10-44B
Req. 4
Retained Earnings (Millions)
treasury stock purchased during 2017 ..........
$22.80
(15 min.) E 10-45B
Req. 1
Preferred
Common
Total
2016
Total dividend
$90,000
Preferred dividends in arrears:
2014: 55,000 shares × $2.50 (par)
per share × .04 =
$ 5,500
2015: 55,000 shares × $2.50 (par)
per share × .04 =
5,500
Preferred dividends, current year :
2016: 55,000 shares × $2.50 (par)
per share × .04 =
5,500
Total to preferred
$16,500
Remainder to common
$73,500
2017
Total dividend
$225,000
Preferred dividends, current year:
2017: 55,000 shares × $2.50 (par)
per share × .04 =
$ 5,500
Remainder to common
$219,500
(15-20 min.) E 10-46B
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Aug.
13
Retained Earnings (700,000 × .25 × $20) .....
3,500,000
Common Stock (700,000 × .25 × $0.60) ...
105,000
Paid-in Capital in Excess of Par -
Common ..............................................
3,395,000
To declare and distribute a common stock dividend.
(15-20 min.) E 10-47B
(10-15 min.) E 10-48B
Book value per share ($53,000 / 4,000 shares) .............
$13.25
Req. 2
Book value per share ($49,760 / 4,000 shares) ..............
$12.44
Req. 3
Walton Wallcoverings’ stock is not necessarily a good buy. Investment
(10-15 min.) E 10-49B
11.99%
x
2.87
=
34.41%
_____
Total assets = Total liabilities + Stockholders’ equity
*Beginning of year = $52,064 ($38,025 + $14,039)
**End of year = $55,794 ($32,311 + $23,483)
(continued) E 10-49B
Req. 2
These rates of return suggest relative strength. The company is
generating a 10.8% net profit margin ratio. The company is generating
an asset turnover of 1.11 meaning $1.11 in sales for each dollar of assets
Dividends paid ................................................................
Net cash used for financing activities ................................
(195)
$ (2,325)
(20-25 min.) E 10-51B
$2.00 Par
Common
Stock
Additional
Paid In
Capital
Retained
Earnings
Accum. Other
Comprehensive
Income
Total
Shareholders’
Equity
Balance, Dec. 31, 2015 ..
$370
$1,730
$4,500
$9
$6,609
(85)
(85)
Debt ratio
=
=
=
46.0%
Total assets
$7,000 + $8,225
Quiz
Q10-71
a ($25,000 / $120,000 = 20.8%)
Problems
(30-45 min.) P 10-72A
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Mar.
6
Organization Expense ...................................
27,000
Common Stock (1,000 × $6) ....................
6,000
Paid-in Capital in Excess of
Par – Common .....................................
21,000
Issued stock to promoter for assisting
with issuance of stock.
9
Cash (30,000 × $10 per share) ......................
300,000
Common Stock (30,000 × $6) ..................
180,000
Paid-in Capital in Excess of
Par – Common .....................................
120,000
Issued common stock for cash.
26
Cash (1,500 × $22) .........................................
33,000
Common Stock (1,500 × $6) ....................
9,000
Paid-in Capital in Excess of
Par – Common .....................................
24,000
Issued common stock for cash.
(continued) P 10-72A
Req. 2
Lane Rafts, Inc.
Balance Sheet (partial)
March 31, 2017
Stockholders’ equity:
Common stock, $6 par, 160,000 shares authorized,
32,500* shares issued and outstanding ....................
$195,000
Paid-in capital in excess of par – common** ...................
165,000
Retained earnings ..............................................................
90,000
Total stockholders’ equity............................................
$450,000
_____
*1,000 + 30,000 + 1,500 = 32,500 shares
**$21,000 + $120,000 + $24,000 = $165,000
(10-15 min.) P 10-73A
Rollo Corp.
Balance Sheet (partial)
December 31, 2016
Stockholders’ equity:
Preferred stock, 7%, $110 par, 5,000 shares authorized,
2,500 shares issued and outstanding ................................
$275,000
Common stock, no-par, 650,000 shares authorized,
65,000 shares issued and outstanding ..............................
511,000
Total paid-in capital ...............................................................
786,000
Retained earnings ....................................................................
96,500
Total stockholders’ equity ..................................................
$882,500
_____
Computations:
Preferred stock: 2,500 × $110 = $275,000
Retained earnings: $79,000 + $95,000 − ($275,000 ×.07 × 2) −
(65,000 × $.60) = $96,500
(25-35 min.) P 10-74A
Req. 1
Yoder Outdoor Furniture Company has Class A cumulative preferred
stock, Class B cumulative preferred stock, and common stock
outstanding.
Req. 2
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Cash ...................................................
2,520,000
Class A Preferred Stock ................
2,520,000
Cash ...................................................
3,115,000
Class B Preferred Stock ................
3,115,000
Cash ($1,860,000 + $5,570,000) .........
7,430,000
Common Stock ..............................
1,860,000
Additional Paid-in Capital –
(continued) P 10-74A
(15-20 min.) P 10-75A
(continued) P 10-75A
(20-30 min.) P 10-76A
Nov. 22
0
=
0
+
0
-0-
(40-50 min.) P 10-77A
Req. 1
Seagull Designers, Inc.
Balance Sheet
December 31, 2016
ASSETS
LIABILITIES
Current:
Current:
Cash ...........................
$ 42,000
Accounts payable ...............
$145,000
Accounts rec.,
Accrued liabilities ..............
25,000
net ...........................
20,000
Dividends payable ..............
11,000
Inventory ....................
89,000
Total current liabilities ..........
181,000
Prepaid
expenses ................
22,000
Long-term note payable .........
98,000
Total current assets ....
173,000
Total liabilities ........................
279,000
Property, plant,
STOCKHOLDERS’
EQUITY
(continued) P 10-77A
17.2%
x
2.092
=
36.0%
(continued) P 10-77A
9.47% (9.5%) net profit margin ratio indicating great effectiveness in
achieving profit goals and most likely some product differentiation. The
company is generating an asset turnover of 1.813, meaning $1.81 in
sales for each dollar of assets invested, indicating excellent efficiency.
Finally, the company has relatively moderate leverage, meaning they are
utilizing debt effectively. This magnifies ROA to a 36% ROE, which is
(15-20 min.) P 10-78A
Price per share of stock issuance:
=
$4.00 per share
100 million shares
issued
Req. 3
Cost of treasury stock sold: $ 5 million
Selling price of treasury stock sold: $ 22 million
Increase in total stockholders’ equity: $ 22 million
Req. 4
Stock dividend percentage:
$112 million
=
20%
$460 million + $100 million
(30-45 min.) P 10-79B
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Jan.
6
Organization Expense .....................................
1,800
Common Stock (100 × $15) ........................
1,500
Paid-in Capital in Excess of
Par – Common ........................................
300
Issued stock to promoter for assistance in
Issuing common stock.
9
Cash (26,000 × $22) .........................................
572,000
Common Stock (26,000 × $15) ...................
390,000
Paid-in Capital in Excess of
Par – Common ........................................
182,000
Issued common stock for cash.
26
Cash (1,400 × $22) ...........................................
30,800
Common Stock (1,400 × $15) .....................
21,000
Paid-in Capital in Excess of
Par – Common ........................................
9,800
Issued common stock for cash.
Req. 2
Canal Kayaks, Inc.
Balance Sheet (partial)
January 31, 2017
Stockholders’ equity:
Common stock, $15 par, 125,000 shares
authorized, 27,500* shares issued and outstanding .....
$412,500
Paid-in capital in excess of par – common ........................
192,100**
Retained earnings ................................................................
65,000
Total stockholders’ equity ...............................................
$669,600
_____
*100 + 26,000 + 1,400 = 27,500 shares
**$300 + $182,000 + $9,800 = $192,100
(10-15 min.) P 10-80B
Req. 1
Jackson Corp.
Balance Sheet (partial)
December 31, 2016
Stockholders’ equity:
Preferred stock, 6%, $110 par, 9,000 shares authorized,
2,250 shares issued and outstanding ............................
$247,500
Common stock, no-par, 450,000 shares authorized,
112,500 shares issued and outstanding ........................
515,000
Total paid-in capital .............................................................
762,500
Retained earnings ................................................................
94,300
Total stockholders’ equity ..............................................
$856,800
_____
Computations:
Preferred stock: 2,250 × $110 = $247,500
Retained earnings: $73,000 + $96,000 − ($247,500 × 0.06 x 2) –
(112,500 x $0.40) = $94,300
(25-35 min.) P 10-81B
Req. 1
(continued) P 10-81B
(15-20 min.) P 10-82B
(continued) P 10-82B
$0.90 cumulative preferred stock, $20 par, 200 shares
issued and outstanding ...........................................................
$ 4,000
Common stock, $5 par, 12,650 shares issued ($30,500 +
$24,500 + $8,250) and 12,450 shares outstanding .................
63,250
Paid-in capital in excess of par – common
($17,300 + $14,700 + $6,600) ....................................................
38,600
Paid-in capital from treasury stock transactions .......................
Total paid-in capital ......................................................................
4,000
109,850
(20-30 min.) P 10-83B
Nov.
22
0
=
0
+
0
-0-
(40-50 min.) P 10-84B
Req. 1
Ginger Designers, Inc.
Balance Sheet
December 31, 2016
ASSETS
LIABILITIES
Current:
Current:
Cash .............................
$ 50,000
Accounts payable ....................
$130,000
Accounts receivable,
Accrued liabilities ....................
26,000
net .............................
23,000
Dividends payable ...................
5,000
Inventory .....................
89,000
Total current liabilities ................
161,000
Prepaid
expenses ..................
16,000
Long-term note payable .............
95,000
Total current assets .......
178,000
Total liabilities .............................
256,000
Property, plant,
STOCKHOLDERS’
and equipment,
EQUITY
net ................................
363,000
Common stock,
(continued) P 10-84B
Leverage
assets
=
$527,500
1.904
6.1%
1.904
=
11.6%
(continued) P 10-84B
6.1% net profit margin ratio indicating some effectiveness in achieving
profit goals and perhaps some product differentiation. The company is
generating an asset turnover of 1.23, meaning $1.23 in sales for each
dollar of assets invested, indicating some efficiency. Finally, the
company has relatively moderate leverage, meaning they are utilizing
debt somewhat effectively. This magnifies ROA to only an 11.6% ROE,
(15-20 min.) P 10-85B
Price per share of stock issuance:
=
$1.10 per share
200 million shares
issued
Req. 3
Cost of treasury stock sold: $7 million
Selling price of treasury stock sold: $18 million
Increase in total stockholders’ equity: $18 million
Req. 4
Stock dividend percentage:
$106 million
=
20%
$430 million + $100 million
Challenge Exercises and Problem
(20-25 min.) E 10-86
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
(a)
Cash (52,000* × $6) .......................................
312,000
Common Stock ........................................
52,000
Additional Paid-in Capital .......................
260,000
Issued stock.
(b)
Treasury Stock (1,300 × $11) ......................
14,300
Cash ........................................................
14,300
Purchased treasury stock.
(c)
Cash .............................................................
1,400
Treasury Stock ($14,300 − $13,200) ......
1,100
Additional Paid-in Capital .......................
300
Resold treasury stock.
(d)
Revenues .....................................................
171,000
Expenses ................................................
119,000
Retained Earnings ..................................
52,000
Closed net income to Retained Earnings.
(20-25 min.) E 10-87
(15 min.) E 10-89
Balance, Dec. 31, 2017 ....
$14.3
$24.7
$39.0
$(4.0)
$74.0
Computations:
1$9,000,000 ÷ $1 par = 9,000,000 shares
24,000,000 × $1 par = $4,000,000
4,000,000 × ($2 − $1) = $4,000,000
3(9,000,000 + 4,000,000) × .10 × $1 par = $1,300,000
4(9,000,000 + 4,000,000) × .10 × $10 market value = $13,000,000
5$13,000,000 market value − $1,300,000 par value = $11,700,000
(20-25 min.) P 10-90
Req. 1
$350,000 / 1,000,000 shares = $.35 per share
Req.2
960,000 (1,000,000 shares issued – 40,000 shares in treasury)
Req. 3
Common stock $ 350,000
Paid-in capital in excess of par 34,850,000
$35,200,000
÷ Number of shares ÷ 1,000,000
= Average price $35.20
Req. 4
Journal
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Cash ................................................................ 4,770,000
Common Stock ($350,000 – $315,000) ... 35,000
Paid-in Capital in Excess of Par
($34,850,000 – $30,115,000) ................ 4,735,000
Req. 5
Proceeds from issuance of stock $4,770,000
÷ Number of shares ÷ 100,000
= Average price $47.70
(continued) P 10-90
Req. 6
Cost of treasury stock $1,528,000
÷ Number of shares ÷ 40,000
= Average price $38.20
Req. 7
Journal
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Cash ($191,000 + $3,000)……………………….. 194,000
Treasury Stock ($1,719,000 – $1,528,000)…… 191,000
Paid-in Capital from Treasury Stock
Transactions ($53,000 – $50,000)………… 3,000
Req. 8
Journal
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Retained Earnings………………………….. 1,500,000
Dividends Payable ................................ 1,500,000
($55,000,000 + $11,000,000 – X = $64,500,000)
X = $1,500,000
Decision Cases
(30-45 min.) Decision Case 1
Req. 1
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Smith, Capital ...................................................
25,000
Jones, Capital ..................................................
25,000
Common Stock ............................................
50,000
To incorporate the business, close the capital
accounts of Smith and Jones, and issue
common stock to them.
Req. 2
Journal
DATE
ACCOUNT TITLES AND EXPLANATION
DEBIT
CREDIT
Plan 1:
Cash..................................................................
80,000
Preferred Stock (800 × $100).......................
80,000
To issue preferred stock to outside investors.
Plan 2:
Cash..................................................................
55,000
Preferred Stock ............................................
55,000
To issue preferred stock to outside investors.
Cash..................................................................
35,000
Common Stock ............................................
35,000
To issue common stock to outside investors.
(continued) Decision Case 1
Req. 3
Plan 1:
Stockholders’ Equity
Preferred stock, 6%, $100 par, nonvoting,
10,000 shares authorized, 800 shares issued and
outstanding ....................................................................
$ 80,000
Common stock, $1 par, 500,000 shares authorized,
50,000 shares issued and outstanding .........................
50,000
Retained earnings ($120,000 − $30,000) ............................
90,000
Total stockholders’ equity .............................................
$220,000
Plan 2:
Stockholders’ Equity
Preferred stock, $5, no-par, 10,000 shares authorized,
500 shares issued and outstanding ..............................
$ 55,000
Common stock, $1 par, 500,000 shares authorized,
85,000 shares issued and outstanding .........................
85,000
Retained earnings ($120,000 − $30,000) ............................
90,000
Total stockholders’ equity .............................................
$230,000
(continued) Decision Case 1
Req. 4
Plan 1 appears to fit the plans of Smith and Jones better than Plan 2
because:
• Their primary goal is to raise as much capital as possible without
giving up control of the business. Under Plan 2, the outside
stockholders would have 60,000 votes [35,000 common votes +
25,000 preferred votes (500 shares × 50 votes per share)]. Smith
and Jones would lose control of the business because they would
have only 50,000 votes.
• Under Plan 1 preferred stockholders have no votes. Smith and
Jones would have complete control since they would hold all the
voting shares.
• Plan 2 would raise only $10,000 more than Plan 1.
(15-20 min.) Decision Case 2
Req. 1
The stock dividend does not affect your proportionate ownership in the
company because all the stockholders receive 10% new shares. All
stockholders are in the same relative position after the dividends as they
were before.
Req. 2
Cash dividends received last year were $7,150 (10,000 shares × $0.715
per share). Cash dividends after the dividend will be $7,150 (11,000
shares × $0.65 per share). Thus, there is no change in cash dividends.
Req. 3
You incur no loss in value because the market value of your investment
Ethical Issue 1
(continued) Ethical Issue 1
Ethical Issue 2
(continued) Ethical Issue 2
Focus on Financials: Apple Inc.
(continued) Apple Inc.
ROE
= 33.6%
= 26.2%
(123,549+111,547)/2
(78,944+89,784)/2
Apple has positive ROA and ROE ratios in 2014. While both companies
have a similar leverage ratio, Microsoft has a higher net profit margin
ratio. Apple has a higher asset turnover than Microsoft. Apple is
obviously more profitable based on ROA and ROE than Microsoft, but
Microsoft does a better job at managing its costs relative to its revenues
(higher net profit margin ratio).
Student answers may vary if another company is chosen for
comparison.
Focus on Analysis: Under Armour, Inc.
(20-30 min.)
Req. 1
2014. If you multiply 5,667,280 by the par value of $0.00033, this equals
$1,870.20, which approximates $2,000 (increase in Common Stock
account in balance sheet).
(continued) Under Armour, Inc.
Req. 4
Retained Earnings
653,842 Beg. Balance
208,042 Net Income
Shares withheld 5,197
856,687 End. Balance
Group Project in Ethics
(1-3 hours, including discussion)
Req. 1
Stakeholders in a corporation vary widely with the nature of the
corporation. In the case of the corporations included in this case (GM,
Chrysler, AIG, Citibank, Bank of America) because of their size and the
scope of their operations, stakeholders include the shareholders,
bondholders, other creditors, employees, suppliers, customers, local,
regional, national and international economies, federal, state and local
governments—just about everyone in the broadest sense of the term.
(continued) Group Project in Ethics