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99
215) Match (by letter) the following terms with their definitions. Each letter is used only once.
Terms
_____ 1. 100% stock dividend
_____ 2. Statement of stockholders' equity
_____ 3. Treasury stock
_____ 4. Value stocks
_____ 5. PE ratio
_____ 6. Stockholders' equity section of the balance sheet
_____ 7. Return on equity
_____ 8. Retained earnings
_____ 9. Accumulated deficit
_____ 10. Growth stocks
Definitions
a. Summarizes the changes in the balance in each stockholders' equity account
over a period of time.
b. Priced low in relation to current earnings.
c. Measures the ability of company management to generate earnings from
the resources that owners provide.
d. Shows the balance in each equity account at a point in time.
e. The corporation's own stock that it has purchased.
f. A debit balance in retained earnings.
g. Priced high in relation to current earnings as investors expect future earnings
to be higher.
h. Effectively the same as a 2-for-1 stock split.
i. The earnings not paid out in dividends.
j. The stock price divided by earnings per share.
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216) Sweet Sixteen has two classes of stock authorized: $100 par value preferred and $1 par
value common. As of the beginning of 2021, 1,000 shares of preferred stock have been issued
and 20,000 shares of common stock have been issued. The following transactions affected
stockholders' equity during 2021:
March 1 Issues 3,000 additional shares of common stock for $22 per share.
April 1 Issues 5,000 additional shares of preferred stock for $110 per share.
June 1 Declares a cash dividend on common stock of $1 per share and
a cash dividend on preferred stock of $5 per share to all stockholders
of record on June 15.
June 30 Pays the cash dividends declared on June 1.
August 1 Purchases 2,000 shares of common treasury stock for $18 per share.
October 1 Resells 1,000 shares of treasury stock purchased on August 1 for $20 per share.
Required:
1. Record each of these transactions.
2. Indicate whether each of these transactions would increase (+), decrease (-), or have no effect
(NE) on total assets, total liabilities, and total stockholders' equity by completing the following
chart.
Transaction
Total Assets
Total
Liabilities
Total
Stockholders'
Equity
Issue common stock
Issue preferred stock
Declare cash dividends
Pay cash dividends
Purchase treasury stock
Resell treasury stock
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217) Hoop It Up has two classes of stock authorized: 7%, $20 par value preferred and $1 par
value common. The following transactions affected stockholders' equity during 2021, its first
year of operations:
February 2 Issues 1 million shares of common stock for $20 per share.
February 4 Issues 50,000 shares of preferred stock for $21 per share.
June 15 Purchases 100,000 shares of its own common stock for $18 per share.
August 15 Resells 75,000 shares of treasury stock for $23 per share.
November 1 Declares a cash dividend on its common stock of $1 per share and
a $70,000 (7% of par value) cash dividend on its preferred stock payable
to all stockholders on record on November 15.
Hint: Dividends are not paid on treasury stock.
November 30 Pays the dividends declared on November 1.
Required:
1. Record each of these transactions.
2. Prepare the stockholders' equity section of the balance sheet as of December 31, 2021. Net
income for the year was $3,200,000.
218) Brooks Brothers has done very well the past year and its stock price is now trading over
$100 per share. Management is considering either a 100% stock dividend or a 2-for-1 stock split.
Required:
1. Complete the following chart comparing the effects of a 100% stock dividend versus a 2-for-1
stock split on the stockholders' equity accounts, shares outstanding, par value, and share price.
Before
After 100%
Stock Dividend
After 2-for-1
Stock Split
Common stock, $1 par value
$10,000
Additional paid-in capital
250,000
Total paid-in capital
260,000
Retained earnings
150,000
Total stockholders' equity
$410,000
Shares outstanding
10,000
Par value per share
$1
Share price
$102
2. What is the primary reason companies declare a large stock dividend or a stock split?
108
219) The stockholders' equity section of University Fashions is presented here.
University Fashions
Balance Sheet
(Stockholders' Equity Section)
($ in thousands)
Stockholders' equity:
Preferred stock, $50 par value
$50,000
Common stock, $5 par value
$25,000
Additional paid-in capital
120,000
Total paid-in capital
195,000
Retained earnings
140,000
Treasury stock
(20,900)
Total stockholders' equity
$314,100
Required:
Based on the stockholders' equity section of University Fashions, answer the following
questions. Remember that all amounts are presented in thousands.
1. How many shares of preferred stock have been issued?
2. How many shares of common stock have been issued?
3. Assuming the preferred shares were issued at par value, at what average price per share were
the common shares issued?
4. If retained earnings at the beginning of the period was $120 million and net income during the
year was $30 million, how much was paid in dividends for the year?
5. If the treasury stock was purchased at $20 per share, how many shares were purchased?
220) Sweet Sixteen has the following beginning balances in its stockholders' equity accounts on
January 1, 2021: preferred stock, $100,000, common stock, $20,000; additional paid-in capital,
$380,000; and retained earnings, $450,000. Net income for the year ended December 31, 2021, is
$65,000. The following transactions affected stockholders' equity during 2021:
March 1 Issues 3,000 additional shares of $1 par value common stock for $22 per share.
April 1 Issues 5,000 additional shares of $100 par value preferred stock
for $110 per share.
June 1 Declares a cash dividend on common stock of $1 per share and a
cash dividend on preferred stock of $5 per share to all stockholders
of record on June 15.
June 30 Pays the cash dividends declared on June 1.
August 1 Purchases 2,000 shares of common treasury stock for $18 per share.
October 1 Resells 1,000 shares of treasury stock purchased on August 1 for $20 per share.
Required:
Taking into consideration the beginning balances and all the transactions during 2021, respond to
the following for Sweet Sixteen:
1. Prepare the statement of stockholders' equity for the year ended December 31, 2021.
2. Prepare the stockholders' equity section of the balance sheet as of December 31, 2021.
3. Explain how requirements 1 and 2 are similar and how they are different.
112
221) Selected financial data is provided as follows:
($ in millions, except stock price)
2021
2020
2019
Sales
$14,526
$15,763
$15,943
Net income
967
833
778
Dividends
512
468
435
Total assets
$7,564
$7,838
$8,544
Total liabilities
3,177
3,564
3,370
Stockholders' equity
4,387
4,274
5,174
Total liabilities and stockholders' equity
$7,564
$7,838
$8,544
Average shares outstanding
791
694
816
Average stock price
$19
$18
$18
Required:
1. Calculate the return on equity for 2021. How does it compare with the return on equity for
2020?
2. Calculate the dividend yield for 2021. How does it compare with the dividend yield for 2020?
3. Calculate earnings per share for 2021. How does it compare with earnings per share for 2020?
What is the trend in the company's performance?
4. Calculate the price-earnings ratio for 2021. How does it compare with the price-earnings ratio
for 2020? 2021
113
Answer:
114
222) Corporations typically do not start raising capital by issuing stock to the general public.
What are the common stages of equity financing leading to an initial public offering (IPO)?
223) Describe the primary advantages and disadvantages of a corporation in comparison to a
sole-proprietorship or partnership.
115
224) Explain the difference between authorized, issued, and outstanding shares.
225) Explain why preferred stock often is said to have a mixture of attributes somewhere
between common stock and bonds.
226) Contrast the effects of a cash dividend and a stock dividend on total assets, total liabilities,
and total stockholders' equity.
