22. Draw two distinctions between accounting for a stock split and accounting for a stock dividend.
23. a. Indicate on the blanks below the effect (I = increase, D = decrease, NE = no effect) of the entry to
record the declaration of a common stock dividend on each of the items listed.
b. Indicate on the blanks below the effect (I = increase, D = decrease, NE = no effect) of the entry to
record the distribution of a (previously declared and recorded) common stock dividend on each of the
items listed.
a.
b.
1. Assets
2. Balance of Common Stock account
3. Total contributed capital
4. Total retained earnings
5. Total stockholders’ equity
6. Par value per share
7. Total number of shares outstanding
24. In recent years, Welty Products Corporation, a small manufacturer of industrial products for the waste
management industry, has followed the practice of issuing a 10 percent stock dividend annually.
Although the company’s net income has been almost $4 million in each of the past three years, retained
earnings have declined from about $10 million to about $6 million. What is the probable motivation
for management’s decision to issue an annual 10 percent stock dividend? What is the most likely
explanation for the decrease in retained earnings? Given your explanation, would stockholders’ equity
also decrease by a like amount?
25. Compute the book values per share for (a) preferred and (b) common stock for Klemperer Corporation,
whose stockholders’ equity as of December 31, 20xx, was as follows.
Stockholders’ Equity
Contributed capital
Preferred stock—6 percent cumulative, $100 par value,
in arrears), callable at 110
$ 4,000,000
Common stock—$5 par value, 4,000,000 shares authorized,
3,200,000 shares issued and outstanding
16,000,000
Additional paid-in capital, common
8,400,000
Total contributed capital
$28,400,000
Retained earnings
3,600,000
Total stockholders’ equity
$32,000,000
26. At December 31, 2010, the book value per share of common stock of Big Time Corporation amounted
to $21 per share. Determine the effect of each of the following items on the book value per share of
common stock computation assuming each item occurs after December 31, 2010. Consider each item
independently of the other items listed. Indicate your answer for each (I = increase, D = decrease, or
NE = no effect) in the appropriate blank.
_____ 1. Sale of newly issued shares of common stock at $23 per share
_____ 2. Purchase of treasury stock for $16 per share
_____ 3. Declaration of current cash dividends on preferred stock
_____ 4. Declaration and distribution of stock dividends on common stock
_____ 5. Sale of treasury stock (purchased at $16 per share) for $19 per share
_____ 6. Entry to close net income for the period to the Retained Earnings account
_____ 7. Dividends in arrears on preferred stock
_____ 8. Purchase of a truck with cash
_____ 9. Payment of a previously declared and recorded cash dividend on common stock
ANS:
27. Heywood Enterprises is a famous entertainment company that produces films and operates theme
parks, among other things. The company is also well known as a profitable and well-managed
business. On November 15, 2010, the following article appeared in the financial section of the local
newspaper:
“Heywood Reports Fiscal 4th-Period Loss after Taking $166 Million Write-Down.”
Heywood Enterprises reported a $64 million net loss for its fiscal fourth quarter ended Sept. 30, after
writing down a record $166 million in movies and other properties.
In the year-earlier quarter, Heywood had net income of $24.5 million, or 70 cents a share.
Fourth-quarter revenue this year rose 28% to $463.2 million from $363 million.
In the fiscal year, the entertainment company’s earnings rose 5% to $97.8 million, or $2.73 a share,
from $93.2 million, or $2.70 a share, a year earlier. Revenue rose 27% to $1.66 billion from $1.31
billion.
The company said it wrote down $112 million in motion picture and television properties.
The write-down involves productions that already have been released as well as ones still under
development, but Heywood declined to identify the productions or projects involved.
“This just reflects the judgment of new management about the ultimate value of projects we had under
way,” said Marcia Fennel, Heywood’s executive vice president for finance.
The company also said it charged off $40 million to reflect the “abandonment” of a number of planned
projects at its various theme parks. An additional $14 million was charged off as a reserve to cover
possible legal obligations resulting from the company’s fight to ward off a pair of successive takeover
attempts last summer, Ms. Fennel said.
Heywood said its full-year net income included a $76 million extraordinary gain. The change will
boost that quarter’s reported net income to $85 million, from $9 million.
a. What two categories of issues does the user of financial statements want to consider when
evaluating the quality of a company’s reported earnings? Did Heywood have one or both types of items
in fiscal 2010?
b. Compare the fourth-period earnings or losses for 2009 and 2010 and full fiscal 2009 and 2010
earnings or losses before and after adjusting for the item or items described in a. Which comparisons
do you believe give the best picture of Heywood’s performance?
28. Below are the account balances for Eccles Corporation as of its fiscal year ended April 30, 20xx.
Prepare a corporate income statement in good form, assuming 5,000 shares of common stock were
outstanding during the year.
Administrative Expenses
$16,000
Cost of Goods Sold
80,000
Discontinued Operations
(1) Income from the Operations of Discontinued Segment (net of taxes, $5,000)
20,000
(2) Loss on Disposal of Segment (net of tax savings, $6,000)
14,000
Extraordinary Loss from Fire (net of tax savings, $4,000)
6,000
Income Taxes Applicable to Continuing Operations
8,000
Sales
160,000
Selling Expenses
50,000
Fourth Quarter
Reported earnings (loss)
Earnings before write-down
Full Year
Reported earnings
Add back write-down
Less extraordinary gain
29. Prepare a corporate income statement in good form from the following year-end balances as of
December 31, 20xx, from the general ledger of Hammond Corporation. Assume 10,000 shares of
common stock are outstanding for the year.
Administrative Expenses
$ 24,000
Cost of Goods Sold
120,000
Discontinued Operations
(1) Income from the Operations of Discontinued Segment
30,000
(net of taxes, $10,000)
(2) Loss on Disposal of Segment (net of taxes savings, $5,000)
15,000
Extraordinary Loss from Fire (net of tax savings, $1,250)
5,000
Income Taxes Applicable to Continuing Operations
12,000
Sales
240,000
Selling Expenses
72,000
30. At the beginning of 2008, Kurt Franz retired as president and principal stockholder in KRF
Corporation, a successful producer of personal computer equipment. As an incentive to the new
management, Franz supported the board of directors’ new executive compensation plan, which
provides cash bonuses to key executives for years in which the company’s earnings per share equal or
exceed the current dividends per share of $2.00, plus a $.20 per share increase in dividends for each
future year. Thus, for management to receive the bonuses, the company must earn per-share income of
$2.00 the first year, $2.20 the second, $2.40 the third, and so forth. Since Franz owns 500,000 of the
1,000,000 common shares outstanding, the dividend income will provide for his retirement years. He
is also protected against inflation by the regular increase in dividends. Earnings and dividends per
share for the first three years of operation under the new management were as follows:
2010
2009
2008
Earnings per share
$2.50
$2.50
$2.50
Dividends per share
2.50
2.20
2.00
During this time, management earned bonuses totaling more than $1 million under the compensation
plan. Franz, who had taken no active part on the board of directors, began to worry about the
unchanging level of earnings and decided to study the company’s annual report more carefully. The
notes to the annual report revealed the following information:
1. Management changed from the LIFO inventory method to the FIFO method in 2008. The effect of
the change was to decrease cost of goods sold by $200,000 in 2008, $300,000 in 2009, and $400,000
in 2010.
2. Management changed from the double-declining-balance accelerated depreciation method to the
straight-line method in 2009. The effect of this change was to decrease depreciation by $400,000 in
2009 and by $500,000 in 2010.
3. In 2010, management increased the estimated useful life of intangible assets from five to ten years.
The effect of this change was to decrease amortization expense by $100,000 in 2010.
a. Compute earnings per share for each year according to the accounting methods in use at the
beginning of 2008. (Use common shares outstanding.)
b. Have the executives earned their bonuses? What serious effect has the compensation package
apparently had on the net assets of KRF Corporation? How could Franz have protected himself from
what happened?
ANS:
31. The following facts pertain to Rojas Corporation:
Retained Earnings balance, December 31, 2009
$550,000
Cash dividends declared and paid in 2010
60,000
Cash dividends declared but not paid in 2010
20,000
Retained Earnings balance reported on December 31, 2010, balance sheet
675,000
On the basis of these facts, compute the amount of net income (loss) for Rojas Corporation for 2010.
32. On August 26, 2010, Booth Corporation’s board of directors declared a 2 percent stock dividend
applicable to the outstanding shares of its $5 par value common stock, of which 150,000 shares are
authorized, 130,000 are issued, and 10,000 are held in the treasury. The stock dividend was
distributable on September 25 to stockholders of record on September 10. On August 26, the market
value of the common stock was $12 per share. On November 26, the board of directors declared a
$0.20 per share cash dividend. No other stock transactions have occurred. Record the transactions on
August 26, September 10, September 25, and November 26. Make the December 31 entry to close
Dividends and Stock Dividends to Retained Earnings.
General Journal
Page 1
Date
Description
Post.
Ref.
Debit
Credit
33. a. Elton Corporation has 6,000 shares of $100 par value, 8 percent cumulative preferred stock and
10,000 shares of $50 par value common stock outstanding. All shares were issued at par value. In
addition, retained earnings total $198,000. If the preferred stock is callable at $105 per share and one
year’s dividends are in arrears, compute book value per share of preferred stock.
b. Assume the same facts as in a above. Calculate book value per share of common stock.
c. Assume the same facts as in a above and that Elton Corporation declares a 15 percent stock dividend
on its common stock. If the market value on the declaration date was $60 per share, for what amount
will Additional Paid-in Capital, Common be credited?
d. Assume the same facts as in a above and that Elton Corporation declares a 4-for-1 stock split on its
preferred stock. After the split, total par value of preferred stock equals what amount?
34. a. Shoup Corporation has 9,000 shares of $10 par value common stock and 5,000 shares of $50 par
value, 10 percent cumulative preferred stock outstanding. All shares were issued at par value. In
addition, retained earnings total $90,000. If the preferred stock is callable at $54 per share, and one
year’s dividends are in arrears, compute book value per share of preferred stock.
b. Assume the same facts as in a above. Calculate book value per share of common stock.
c. Assume the same facts as in a above and that Shoup Corporation declares a 5-for-1 stock split on its
common stock. After the split, total par value of common stock equals what amount?
d. Assume the same facts as in a above and that Shoup Corporation declares a 12 percent stock
dividend on its preferred stock. If the market value on the declaration date was $70 per share, for what
amount will Preferred Stock Distributable be credited?
35. The stockholders’ equity of Westester Corporation as of December 31, 20xx, is as follows:
Stockholders’ Equity
Contributed capital
Preferred stock—7 percent cumulative, $100 par value,
$103 call value, 30,000 shares authorized, issued,
and outstanding
$3,000,000
Common stock—$10 par value, 1,500,000 shares authorized,
1,200,000 shares issued and outstanding
12,000,000
Additional paid-in capital, common
5,175,000
Total contributed capital
$20,175,000
Retained earnings
2,750,000
Total stockholders’ equity
$22,925,000
The preferred stock has one year’s dividends in arrears.
a. Compute the book value per share of preferred stock and the book value per share of common stock.
(Round to the nearest cent.)
b. Assume the preferred stock has two years’ dividends in arrears. Compute the book value per share of
preferred stock and the book value per share of common stock. (Round to the nearest cent.)