Chapter 11 – Reporting and Interpreting Owners’ Equity
Chapter 11
Reporting and Interpreting Owners’ Equity
ANSWERS TO QUESTIONS
1. A corporation is a separate legal entity (authorized by law to operate as an individual).
It is owned by a number of persons and/or entities whose ownership is evidenced by
3. (a) Authorized capital stock—the maximum number of shares of stock that can be
sold and issued as specified in the charter of the corporation.
4. Common stock—the usual or normal stock of the corporation. It is the voting stock
and generally ranks after the preferred stock for dividends and assets distributed
upon dissolution. Often it is called the residual equity. Common stock may be either
Chapter 11 – Reporting and Interpreting Owners’ Equity
11. The two basic requirements to support a cash dividend are: (1) cash on hand or the
ability to obtain cash sufficient to pay the dividend and (2) a sufficient balance in
12. Cumulative preferred stock has a dividend preference such that, should the
dividends on the preferred stock for any year, or series of years, not be paid,
13. A stock dividend involves the issuance to the stockholders of a dividend in the
corporation’s own stock (rather than cash). A stock dividend is significantly different
14. The primary purposes for issuing a stock dividend are: (1) to maintain dividend
consistency; that is, to pay dividends each year either in cash or in capital stock,
15. When a dividend is declared and paid, the three important dates are:
Declaration date—the date on which the board of directors votes the dividend. In
the case of a cash dividend, a dividend liability comes into existence on this date
and must be recorded as a debit to Retained Earnings and as a credit to Dividends
Payable.
Chapter 11 – Reporting and Interpreting Owners’ Equity
Authors’ Recommended Solution Time
(Time in minutes)
Mini exercises
Exercises
Problems
Alternate
Problems
Cases and
Projects
No.
Time
Time
No.
No.
Time
Time
1
5
15
1
1
45
30
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5
15
2
2
30
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3
5
30
3
3
30
20
4
5
30
4
4
35
20
5
5
20
5
20
6
5
20
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30
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5
45
7
*
8
5
15
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9
5
30
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10
5
15
10
20
11
20
12
20
30
30
30
20
30
20
15
15
20
20
15
15
* Due to the nature of this project, it is very difficult to estimate the amount of time
students will need to complete the assignment. As with any open-ended project, it is
possible for students to devote a large amount of time to these assignments. While
students often benefit from the extra effort, we find that some become frustrated by the
perceived difficulty of the task. You can reduce student frustration and anxiety by
making your expectations clear. For example, when our goal is to sharpen research
skills, we devote class time to discussing research strategies. When we want the
students to focus on a real accounting issue, we offer suggestions about possible
companies or industries.
Chapter 11 – Reporting and Interpreting Owners’ Equity
MINI- EXERCISES
M11–1.
Stockholders may:
a) Vote in the stockholders’ meeting (or by proxy) on major issues concerning
management of the corporation.
M11–2.
Unissued shares = 90,000 (268,000 – 178,000)
M11–3.
Cash (170,000 $21) (+A) …………………………………………….
3,570,000
Common Stock (170,000 $1) (+SE) ………………………….
170,000
Capital in Excess of Par (+SE) …………………………..
3,400,000
The journal entry would be different if the par value were $2:
Cash (170,000 $21) (+A) …………………………………………….
3,570,000
Common Stock (170,000 $2) (+SE) ………………………….
340,000
Capital in Excess of Par (+SE) …………………………..
3,230,000
Chapter 11 – Reporting and Interpreting Owners’ Equity
M11–4.
Common stock is the basic voting stock issued by a corporation. It ranks after
preferred stock for dividends and assets distributed upon liquidation of the
corporation. The dividend rate for common stock is determined by the board of
M11–5.
Assets
Liabilities
Stockholders’
Equity
Net Income
Purchased
20,000 shares
of treasury
stock
Decrease by
$900,000
No change
Decrease by
$900,000
No change
Sold 5,000
shares
Increase by
$250,000
No change
Increase by
$250,000
No change
Sold 10,000
shares
Increase by
$370,000
No change
Increase by
$370,000
No change
M11–6.
200,000 X $0.65
=
$130,000
Chapter 11 – Reporting and Interpreting Owners’ Equity
EXERCISES
E11–1.
Computation of End of Year Balance for Treasury Stock:
Beginning balance 307,532,841
E11–2.
Req. 1 The number of authorized shares is specified in the corporate charter: 300,000.
Req. 2 Issued shares are the shares sold to the public: 160,000
Chapter 11 – Reporting and Interpreting Owners’ Equity
E11–5.
Req. 1
a.
Cash (5,600 shares x $20) (+A) ……………………………………..
112,000
Common stock (5,600 shares x $10) (+SE) ………………….
56,000
Capital in excess of par, common stock (+SE) ………………
56,000
Sold common stock at a premium.
b.
Cash (1,000 shares x $25) (+A) ……………………………………..
25,000
Common stock (1,000 shares x $10) (+SE) ………………….
10,000
Capital in excess of par, common stock (+SE) ………………
15,000
Sold common stock at a premium.
Contributed capital:
outstanding 6,600 shares …………………………………………………………..
Total contributed capital ………………………………………………………………..
Chapter 11 – Reporting and Interpreting Owners’ Equity
E11–7.
Req. 1
a.
Cash (50,000 shares x $50) (+A) ……………………………………
2,500,000
Common stock (50,000 shares x $2) (+SE) ………………….
100,000
Capital in excess of par, common stock (+SE) ………………
2,400,000
Sold common stock at a premium.
b.
Treasury stock (2,000 shares x $52) (+XSE, –SE) …………….
104,000
Cash (-A) …………………………………………………………………
104,000
Bought treasury stock.
Contributed capital:
issued 50,000 shares ………………………………………………………………..
2,400,000
)
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E11–9.
Stockholders’ Equity
Contributed capital:
Preferred stock, 8%, par $50, authorized 59,000 shares,
issued and outstanding, 20,000 shares ………………………………………..
$1,000,000
Common stock, par $10, authorized 98,000 shares,
issued, 78,000 shares ……………………………………………………………….
780,000
Capital in excess of par, preferred stock ………………………………………….
600,000
Capital in excess of par, common stock …………………………..………………
780,000
Treasury stock ………………………………………………………………………….
(80,000)
Retained earnings* ……………………………………………………………………………..
160,000
Total stockholders’ equity………………………………………………………………
$3,240,000
*($210,000 – $50,000 = $160,000.)
E11–10.
Req. 1
a.
Cash (20,000 shares x $20) (+A) …………………………..……….
400,000
Common stock, no-par (+SE) ……………………………………..
400,000
.
b.
Cash (6,000 shares x $40) (+A) ……………………………………..
240,000
Common stock, no-par (+SE) …………………………………….
240,000
c.
Cash (7,000 shares x $30) (+A) ……………………………………..
210,000
Preferred stock (7,000 shares x $10) (+SE) ………………….
70,000
Capital in excess of par, preferred (+SE) ……………………..
140,000
Req. 2
Yes, it is ethical as long as there is a full disclosure of relevant information. In any arm’s
length transaction, an informed buyer will pay the market value of the stock.
Chapter 11 – Reporting and Interpreting Owners’ Equity
E11–11.
Req. 1
Number of preferred shares issued: $100,000 $10 = 10,000
Req. 2
Number of preferred shares outstanding: 10,000 shares issued minus 500 shares held
as treasury stock = 9,500.
Req. 3
Chapter 11 – Reporting and Interpreting Owners’ Equity
E11–14.
Req. 1
Stockholders’ Equity
Contributed capital:
Common stock, authorized 100,000 shares, issued 34,000 shares, of
which 2,000 shares are held as treasury stock …………………………….
$680,000
Capital in excess of par ………………………………………………………………
163,000
Total contributed capital …………………………………………………………..
843,000
Retained earnings ……………………………………………………….……………….
89,000
Total ……………………………………………………………………………………..
932,000
Less: Cost of treasury stock …………………………..…………………………...
25,000
Total Stockholders’ Equity …………………………………………………….
$907,000
Req. 2
The dividend yield ratio is 2.24% ([$16,000 32,000 shares] $22.29). While this yield
seems small, it is a typical return on common stock. Investors receive a return from both
dividends and stock price appreciation.
Treasury stock does not receive dividends. As a result, dividends should be paid on
32,000 shares.
E11–15.
Req. 1
a.
Treasury stock (200 shares x $20) (+XSE, -SE) ……………….
4,000
Cash (-A) …………………………………………………………………
4,000
Bought treasury stock.
b.
Cash (40 shares x $25) (+A) ………………………………………….
1,000
Treasury stock (40 shares x $20) (-XSE, +SE) ……………..
800
Capital in excess of par (+SE) …………………………………….
200
Sold treasury stock.
c.
Cash (30 shares x $15) (+A) ………………………………………….
450
Capital in excess of par (-SE) ………………………………………..
150
Treasury stock (30 shares x $20) (-XSE, +SE) …………….
600
Sold treasury stock.
Chapter 11 – Reporting and Interpreting Owners’ Equity
E11–17.
Req. 1
Case 3: Stock dividends do not provide any economic value but they may have a
signal effect and are often associated with increases in cash dividends. As a result,
stock dividends do not appear to directly cause an increase in stock price but are