Terms
__g___ 1. Limited liability company
__e___ 2. Limited liability
__d___ 3. Articles of Incorporation
__h___ 4. Organization chart
__a___ 5. S Corporation
__b___ 6. Publicly held corporation
__c___ 7. Initial public offering
__f___ 8. Double taxation
Definitions
a. Allows for legal treatment as a corporation, but tax treatment as a partnership.
b. Has stock traded on a stock exchange such as the New York Stock Exchange
c. The first time a corporation issues stock to the public.
d. Describe (a) the nature of the firm’s business activities, (b) the shares to be
e. Shareholders can lose no more than the amount they invested in the company.
f. Corporate earnings are taxed twice – at the corporate level and individual
g. Like an S corporation, but there are no limitations on the number of owners as
h. Traces the line of authority within the corporation.
Chapter 10
Stockholders’ Equity
Exercise 10-1
January 1, 2015
Cash (500 shares x $20) 10,000
April 1, 2015
Cash (200 shares x $24) 4,800
January 1, 2015
Cash (500 shares x $20) 10,000
Common Stock (500 shares x $1.00) 500
April 1, 2015
Cash (200 shares x $24) 4,800
Exercise 10-2
Authorized stock is the number of shares the company is authorized to sell, stated in
Issued stock is the number of shares that have been sold to investors.
Outstanding stock is the number of shares held by investors. Issued and outstanding
Preferred stock is “preferred” over common stock in two ways. Preferred stockholders
usually have first rights to a specified amount of dividend and receive preference over
Treasury stock is the corporation’s own stock that it reacquired.
Exercise 10-3
Requirement 1
Requirement 2
(Issue common stock above par or stated value)
February 1 Debit Credit
Cash (4,000 x $12) 48,000
May 15
Cash (1,000 x $11) 11,000
Preferred Stock (1,000 x $10) 10,000
October 1
Dividends (5,000 shares x $1.00) 5,000
October 15
No Entry
October 31
Exercise 10-4
Requirement 1
Preferred dividends in arrears for 2014 $12,000
Preferred dividends for 2015 (2,000 shares x 6% x $100 par value) 12,000
Requirement 2
Preferred dividends in arrears for 2014 $ 0
Preferred dividends for 2015 (2,000 shares x6% x $100 par value) 12,000
Exercise 10-5
Dividends Payable (5,000 shares x $1.00) 5,000
January 2, 2015 Debit Credit
Cash (100,000 x $15) 1,500,000
Common Stock (100,000 x $1) 100,000
February 6, 2015
Cash (200 x $120) 24,000
Preferred Stock (200 x $100) 20,000
September 10, 2015
Treasury Stock (10,000 shares x $18) 180,000
December 15, 2015
Cash (5,000 shares x $20) 100,000
Treasury Stock (5,000 shares x $18) 90,000
Exercise 10-6
Finishing Touches
Balance Sheet
(Stockholders’ Equity Section)
December 31, 2015
Stockholders’ equity:
Preferred stock, $100 par value $ 20,000
Common stock, $1.00 par value 100,000
Additional paid-in capital 1,414,000
Total paid-in capital 2,534,000
Retained earnings 13,800 *
Treasury stock, 5,000 shares (90,000)
March 15 Debit Credit
Dividends (250,000,000 shares x $0.10) 25,000,000
March 30 – No Entry
April 13
Dividends Payable (250,000,000 shares x $0.10) 25,000,000
March 1, 2015 Debit Credit
Cash (25,000 x $18) 450,000
Common Stock (25,000 x $1) 25,000
May 10, 2015
Exercise 10-7
Exercise 10-8
Exercise 10-9
Treasury Stock (6,000 shares x $20) 120,000
June 1, 2015
Dividends (219,000 shares x $1.00) 219,000
July 1, 2015
Dividends Payable (219,000 shares x $1.00) 219,000
October 21, 2015
Cash (4,000 shares x $25) 100,000
Treasury Stock (4,000 shares x $20) 80,000
September 1
Stock Dividends (20,000 x 5% x $40) 40,000
Common Stock (20,000 x 5% x $1) 1,000
September 1
Stock Dividends (20,000 shares x $1) 20,000
Exercise 10-10 (LO 10-6)
Requirement 1
Requirement 2
Power Drive Corporation
Balance Sheet
(Stockholders’ Equity Section)
December 31, 2015
Stockholders’ equity:
Common stock, $1.00 par value $ 225,000
Additional paid-in capital 4,245,000
Total paid-in capital 4,470,000
Retained earnings 2,081,000 *
Treasury stock, 2,000 shares (40,000)
Power Drive Corporation
Statement of Stockholders’ Equity
For the Year Ended December 31, 2015
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Treasury
Stock
Total
Stockholders’
Equity
Balance, January 1 $200,000 3,800,000 1,500,000 -0- $5,500,000
Issued common stock 25,000 425,000 450,000
Purchase treasury stock (120,000) (120,000)
Cash dividends (219,000) (219,000)
Total
Requirement 3
• No entry is recorded for a 2-for-1 stock split, because the balance in all of the
accounts remains the same before and after a stock split.
Exercise 10-11
Exercise 10-12
Exercise 10-13
Transaction
Total
Assets
Total
Liabilities
Stockholders’
Equity
Issue common stock +NE +
Purchase treasury stock − NE −
Sale of treasury stock + NE +
Issue preferred stock + NE +
Declare cash dividend NE + −
United Apparel
Balance Sheet
(Stockholders’ Equity Section)
December 31, 2015
Stockholders’ equity:
Preferred stock $ 1,500,000
Common stock 600,000
Additional paid-in capital 5,400,000
Total paid-in capital 7,500,000
($ in millions) Net Income ÷
Average
Stockholders’ Equity =
Return on
Equity
Exercise 10-14
Exercise 10-15
Requirement 1
($ in millions) Net Income ÷
Market Value
of Equity =
Return on the
Market Value
of Equity
($ in millions) Net Income ÷ Shares Outstanding =Earnings per Share
($ in millions) Stock Price ÷ Earnings Per Share =
Price-Earnings
Ratio
Friendly Fashions $29.24 ÷$2.72 = 10.8
($ in millions)
Net Income
(less preferred
stock dividends) ÷
Average
Shares
Outstanding =
Earnings per
Share
2014 $450 ÷340 = $1.32
Friendly Fashions has a higher return on equity than Deckers Outdoor or Wolverine.
Requirement 2
Friendly Fashions has a higher return on the market value of equity than Deckers
Outdoor or Wolverine.
Requirement 3
Friendly Fashions has earnings per share of $2.72. Earnings per share is not useful for
comparing earnings performance between companies because of wide differences in
Requirement 4
Friendly Fashions has a lower price-earnings ratio than Deckers Outdoor or Wolverine.
Exercise 10-16
Requirement 1
($ in millions) Stock Price ÷
Earnings Per
Share =
Price-Earnings
Ratio
2014 $18.60 ÷$1.32 = 14.1
Earnings per share increased from $1.32 per share to $1.53 per share.
Requirement 2
The stock is priced lower in relation to reported earnings in 2015.