Stockholders’ Equity
Common Stock, $10 par value,
10,000 shares issued and outstanding
$100,000
Paid-In Capital in Excess of Par
60,000
Total Paid-In Capital
160,000
Retained Earnings
19,500
Total Liabilities and Stockholders’ Equity
$179,500
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash Flows From Operating Activities:
Inflow from Revenues
$71,000
Outflow for Expenses
(46,500)
Net Cash Flow from Operating Activities
$ 24,500
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities:
Inflow from Issue of Stock
$160,000
Outflow for Dividends
(5,000)
Net Cash Flow from Financing Activities
155,000
Net Change in Cash
179,500
Plus: Beginning Cash Balance
-0-
Ending Cash Balance
$179,500
EXERCISE 8-4
a.
Balance Sheet
Income Statement
Stmt. of
Event
Assets
=
Liab
+
Stkholders’ Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
Cash
=
+
C. Stk.
+
PIC Exc.
3/1
240,000
=
NA
+
200,000
+
40,000
NA
−
NA
=
NA
240,000 FA
5/2
450,000
=
NA
+
300,000
+
150,000
NA
−
NA
=
NA
450,000 FA
b.
Common Stock:
20,000 shares x $10=
$200,000
30,000 shares x $10=
300,000
Total
$500,000
c.
Paid-In Capital in Excess of Par
20,000 shares x ($12 − $10)=
$ 40,000
30,000 shares x ($15 − $10)=
150,000
Total
$190,000
d. Total Paid-In Capital:
Common Stock $500,000
EXERCISE 8-5
Summary of Transactions
Event
Cash
Received
Common
Stock
PIC in Excess
CS
Preferred Stock
PIC in Excess
PS
1.
640,000
400,000
240,000
2.
1,040,000
1,000,000
40,000
3.
1,200,000
600,000
600,000
Totals
2,880,000
1,000,000
840,000
1,000,000
40,000
Stockholders’ Equity:
Preferred Stock, $50 stated value, 4% cumulative class A, 100,000
shares authorized, 20,000 shares issued and outstanding
$1,000,000
Common Stock, $10 par value, 500,000 shares authorized, 100,000
shares issued and outstanding
1,000,000
Paid-In Capital in Excess of SV, Preferred Stock
40,000
Paid-In Capital in Excess of Par, Common Stock
840,000
Retained Earnings
-0-
Total Stockholders’ Equity
$2,880,000
EXERCISE 8-6
Bailey Corporation
Statements Model
Balance Sheet
Income Statement
Stmt. of
Event
Assets
=
Stockholders’ Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
Cash
=
Pref.
Stock
+
No-Par
C. Stock
+
PIC in
Excess
1.
250,000
=
NA
+
250,000
+
NA
NA
−
NA
=
NA
250,000 FA
2.
126,000
=
120,000
+
NA
+
6,000
NA
−
NA
=
NA
126,000 FA
EXERCISE 8-7
a. 3,500 shares x $8 market value per share of stock = $28,000
b.
Balance Sheet
Income Statement
Stmt. of
Event
Assets
=
Stockholders’ Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flows
Cash
+
Van
=
Com. Stk.
+
PIC Exc.
1.
80,000
+
NA
=
50,0001
+
30,000
NA
−
NA
=
NA
80,000 FA
2.
NA
+
28,000
=
17,5002
+
10,500
NA
−
NA
=
NA
NA
110,000 x $5 = $50,000
2 3,500 x $5 = $17,500
EXERCISE 8-8
Transactions:
Purchase: 4,000 x $30 = $120,000
Treasury Stock
1. 120,000
2. (75,000)*
Bal. 45,000
*2,500 shares x $30 = $75,000
EXERCISE 8-9
a. & b.
Common Stock
Issued
Outstanding
Beginning Number of Shares
3,000
3,000
Issued This Period
2,000
2,000
Repurchased as Treasury Stock
(500)
Resold Treasury Stock
120
Ending Number of Shares
(b) 5,000
(a) 4,620
c.
Wise Corporation Accounting Equation
Event
Assets
=
Stockholders’ Equity
Cash
=
Comm
Stock
+
PIC in Excess
CS
+
PIC in
Excess TS
−
Treasury
Stock
Retained
Earnings
Beg.
Bal.
xxxxxx
30,000
12,000
46,000
1.
32,000
20,000
12,000
NA
NA
2.
(9,000)
NA
NA
NA
9,000
3.
2,400
NA
NA
240
(2,160)
Bal.
xxxxxx
50,000
24,000
240
6,840
46,000
d.
Stockholders’ Equity
Common Stock, $10 par value, 50,000 shares
authorized, 5,000 shares issued, and 4,620 shares
outstanding
$50,000
Paid-In Capital in Excess of Par, Common
24,000
Paid-In Capital in Excess of Cost, TS
240
Total Paid-In Capital
$74,240
Retained Earnings
46,000
Less: Treasury Stock
(6,840)
Total Stockholders’ Equity
$113,400
EXERCISE 8-10
Balance Sheet
Income Statement
Statement
Date
Assets
=
Liab.
+
Com.
Stk.
+
Ret. Ear.
Rev
−
Exp.
=
Net Inc.
of
Cash Flows
10/1
NA
=
50,000
+
NA
+
(50,000)
NA
−
NA
=
NA
NA
11/1
NA
=
NA
+
NA
+
NA
NA
−
NA
=
NA
NA
12/15
(50,000)
=
(50,000)
+
NA
+
NA
NA
−
NA
=
NA
(50,000) FA
EXERCISE 8-11
Computation of Preferred Dividends:
Par
x
Dividend %
=
Dividend per
Share
x
Number of Shares
Outstanding
=
Total Preferred
Dividends for Year
$50
x
5%
=
$2.50
x
10,000
=
$25,000
a. Dividend arrearage as of January 1, 2015: $25,000 (one year)
b.
Dist. to Shareholders
Amount
Preferred
Common
Total Dividend Declared
$65,000
2014 Arrearage
(25,000)
$25,000
2015 Preferred Dividends
(25,000)
25,000
Available for Common Shs.
15,000
Distributed to Common
(15,000)
$15,000
Total Distribution
$50,000
$15,000
EXERCISE 8-12
Computation of Dividends to Be Paid:
Preferred Stock
$100 par value x 4% x 8,000 shares=
$32,000
Common Stock
$.50 x 200,000 shares =
100,000
Total Dividend
$132,000
EXERCISE 8-13
Distribution of Dividend:
Distributed to Shareholders
Preferred
Common
Total Dividend Declared
$150,000
Preferred Arrearage*
(60,000)
$60,000
Current Preferred Dividend*
(60,000)
60,000
Available for Common
30,000
Distributed to Common
(30,000)
$30,000
Total
$120,000
$30,000
*$100 x 4% x 15,000 Shares = $60,000
EXERCISE 8-14
a. (20,000 shares x .04) = 800 shares; 800 shares x $30 = $24,000
b.
Balance Sheet
Income Statement
Stmt. of
Assets
=
Liab
+
Stockholders’ Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flows
Com. Stk.
+
PIC. Ex.
+
Ret. Ear.
NA
=
NA
+
8,000
+
16,000
+
(24,000)
NA
−
NA
=
NA
NA
EXERCISE 8-15
a. No formal entry would be made in the accounting records. A memo entry would
b. 200,000 shares x 3 = 600,000 total shares outstanding
c. Theoretically, the market value per share would be reduced to $80 ($240 3) after
EXERCISE 8-16
a. The price per share of Super Drugs should increase substantially. This increase is a
result of the expectation of future profits. The approval of the new drug signals that
profits should be substantially higher in the future.
c. The income statement will not be affected when the announcements are made. Only
when revenues increase will net income be affected.
PROBLEM 8-17
Note: The memo incorporates a schedule showing the after-tax cash flows under each form
of ownership and discusses LLCs.
Memo
As requested, this memo describes the advantages and disadvantages of the partnership
versus corporate forms of business ownership.
Advantages
Disadvantages
Partnership
• Ease of formation
• Less regulation
• Lower effective tax rate
• Limited life
• Mutual agency
• Unlimited liability
Corporation
• Unlimited life
• Limited liability
• Capital easier to acquire &
ownership easily
transferred
• More regulation
• Higher effective tax rate
The most important of these advantages and disadvantages relate to taxation and owner’s
liability.PROBLEM 8-17 (cont.)
The schedule below illustrates the after-tax cash flows under each form:
Partnership
Corporation
Income before taxes
$200,000
$200,000
Tax at entity level
-0-
(50,000)
Net income distributed to
owners
200,000
150,000
Less: Individual income tax
(35%)
(70,000)
(52,500)
After-tax cash flow
$130,000
$ 97,500
After-tax cash flow available
to each investor
$130,000 5 =
$26,000
$97,500 5 =
$19,500
Effective tax rate (total tax
paid to total earnings)
($70,000 $200,000)
=35%
($102,500 $200,000)
=51.25%
The corporate form limits the potential liability of owners. Creditors of partnerships may
Limited liability companies (LLCs) offer many of the benefits associated with corporate
PROBLEM 8-18
Transactions
Cash Acquired from Owners
$120,000
Revenues
80,000
Expenses
56,000
Withdrawals/Distributions
5,000
a. Sole Proprietorship
Auto Spa Company
Financial Statements
For the Year Ended December 31, 2014
Income Statement
Revenues
$ 80,000
Expenses
(56,000)
Net Income
$ 24,000
Capital Statement
Beginning Capital Balance
$ -0-
Plus: Capital Acquired from Owner
120,000
Plus: Net Income
24,000
Less: Withdrawal by Owner
(5,000)
Ending Capital Balance
$139,000
PROBLEM 8-18 a. (cont.)
Auto Spa Company
Financial Statements
Balance Sheet
As of December 31, 2014
Assets
Cash
$139,000
Total Assets
$139,000
Liabilities
$ -0-
Equity
Burns, Capital
139,000
Total Liabilities and Equity
$139,000
Statement of Cash Flows
For the Year Ended December 31, 2014
Cash Flows From Operating Activities:
Inflow from Revenues
$ 80,000
Outflow for Expenses
(56,000)
Net Cash Flow from Operating Activities
$ 24,000
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities:
Inflow from Owner
$120,000
Outflow for Owner Withdrawals
(5,000)
Net Cash Flow from Financing Activities
115,000
Net Change in Cash
139,000
Plus: Beginning Cash Balance
-0-
Ending Cash Balance
$139,000
PROBLEM 8-18 (cont.)
b. Partnership
Auto Spa Company
Financial Statements
For the Year Ended December 31, 2014
Income Statement
Revenues
$80,000
Expenses
(56,000)
Net Income
$24,000
Capital Statement
Beginning Capital Balance
$ -0-
Plus: Capital Acquired from Owners
120,000
Plus: Net Income
24,000
Less: Withdrawals by Owners
(5,000)
Ending Capital Balance
$139,000
Prepared for the instructor’s use:
Analysis of Capital Accounts:
Moore
Pounds
Total
Beginning Capital Balance
$ -0-
$ -0-
$ -0-