Chapter 11
Corporate Reporting and Analysis
QUESTIONS
1. Organization expenses (costs) are incurred in creating a corporation. Examples include:
to obtain a state charter.
2. Organization expenses (costs) are reported as expenses when incurred—as part of operating
3. The board of directors of a corporation is responsible for directing the corporation’s affairs.
4. Authorized shares represent the maximum number of shares that a corporation’s charter
5. The preemptive right of common stockholders is the right to maintain their relative
6. The general rights of common stockholders include: (1) the right to vote in stockholders’
meetings, (2) the right to sell or otherwise dispose of stock, (3) the preemptive right, (4) the
7. The market value per share of stock is the price at which a share of stock is bought or sold.
8. The par value is an arbitrary value placed on a share of stock when it is authorized. The call
9. Convertible preferred stock is potentially attractive because it offers the safety of a regular
10. The three important dates governing dividends are:
a. date of declaration⎯the date the directors vote to pay a dividend.
11. Cash dividends debited against paid-in capital accounts are called liquidating dividends
12. Declaring a stock dividend has no effect on assets, liabilities, or total equity. Also, the
13. A stock dividend results in a distribution of additional shares to stockholders and the
capitalization of retained earnings. A stock split calls in the old shares and replaces them
14. A stock dividend should not be considered income because it does not transfer any assets
16. Treasury stock purchases affect the corporate assets and stockholders’ equity just like a
17. With a simple capital structure, earnings per share is calculated by first subtracting any
19. When a corporation has no preferred stock, book value per share is calculated by dividing
20. Polaris discloses on its 2011 balance sheet that it has 160,000 common shares authorized; it
also reports that it has issued 68,430 voting common shares.
21. The par value for Arctic Cat’s common stock is reported to be $0.01. A low par value can be
QUICK STUDIES
Quick Study 11-1 (10 minutes)
True statements: 3, 4, 5 and 7
Quick Study 11-2 (5 minutes)
a.
Cash …………………………………………………………………………
1,827,000
Common Stock, No-Par Value …………………………..
1,827,000
Issued no-par value stock for cash. (63,000 x $29)
b.
Land …………………………………………………………………………
1,827,000
Common Stock, No-Par Value …………………………..
1,827,000
Issued no-par value stock for land.
Quick Study 11-3 (5 minutes)
a.
Cash ………………………………………………………………..
375,000
Common Stock, $5 Par Value ……………………….
375,000
Issued par value stock for cash. (75,000 x $5)
b.
Cash* ……………………………………………………………….
450,000
Common Stock, $5 Par Value ……………………….
375,000
Common Stock ………………………………………...
Issued par value stock for cash. *(75,000 x $6)
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Quick Study 11-4 (5 minutes)
a.
Cash* ……………………………………………………………….
648,000
Common Stock, $2 Par Value** …………………….
72,000
Paid-In Capital in Excess of Par Value,
Common Stock*** ……………………………………..
576,000
Issued par value stock for cash.
*36,000 x $18 = $648,000
**36,000 x $2 = $72,000
***$648,000 – $72,000 = $576,000
b.
Cash* ……………………………………………………………….
648,000
Common Stock, $2 Stated Value** ………………..
72,000
Paid-In Capital in Excess of Stated Value,
Common Stock*** ……………………………………..
576,000
Issued stated value stock for cash.
*36,000 x $18 = $648,000
**36,000 x $2 = $72,000
***$648,000 – $72,000 = $576,000
Quick Study 11-5 (15 minutes)
(a) Mar. 1
297,500
170,000
127,500
(b) Apr. 1
70,000
70,000
(c) Apr. 6
45,000
145,000
94,000
50,000
46,000
Quick Study 11-6 (5 minutes)
1.
Cash* …………………………………………………………………..……
510,000
Preferred Stock, $100 Par Value** …………………….……
500,000
Paid-In Capital in Excess of Par Value,
Preferred Stock*** ………………………………………………
10,000
Issued par value stock for cash.
*5,000 x $102 = $510,000
**5,000 x $100 = $500,000
***$510,000 – $500,000 = $10,000
2. Preferred dividend =
Quick Study 11-7 (10 minutes)
July 15
165,000
165,000
Aug. 15
No formal journal entry required; company would
assemble a payee list for the dividend as of August 15.
Aug. 31
165,000
165,000
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Quick Study 11-8 (10 minutes)
Jun Company
Stockholders’ Equity
April 2 (after stock dividend)
Common stock⎯$5 par value, 375,000 shares
authorized, 220,000 shares issued and outstanding …………….
$1,100,000
Paid-in capital in excess of par value, common stock……………..
900,000
Total paid-in capital ………………………………………………………………
2,000,000
Retained earnings …………………………………………………………………
433,000
Total stockholders’ equity …………………………………………………….
$2,433,000
Supporting work
Apr. 2
Retained Earnings ………………………………………………...
400,000
Common Stock* ……………………………………………....
100,000
Paid-In Capital in Excess of Par Value,
Common Stock** …………………………………………...
300,000
To record declaration and distribution
of a 10% common stock dividend.
* 200,000 shares x 10% x $5 par value = $100,000
**200,000 shares x 10% x ($20 market value –
$5 par value) = $300,000
Quick Study 11-9 (10 minutes)
Total cash dividend ………………………………………………………………...
$110,000
To preferred shareholders ……………………………………………………....
64,000*
Remainder to common shareholders ……………………………………....
$ 46,000
*80,000 shares x $5 par x .08 x 2 years = $64,000.
Quick Study 11-10 (10 minutes)
May 3
Treasury Stock (4,000 shares) …………………………..
36,000
Cash ………………………………………………………….…….
36,000
Purchased treasury stock
($36,000 / 4,000 shares = $9 per share cost).
Nov. 4
Cash ……………………………………………………………….…….
8,500
Treasury Stock (850 x $9*) …………………………..
7,650
Paid-In Capital, Treasury Stock …………………..…….
850
Reissued treasury stock at a price
greater than its cost.
($9 per share x 850 shares = $7,650)
*Cost of treasury share: $36,000/4,000 shares = $9 per share
Cost of 850 treasury shares: $9 per share x 850 shares = $7,650
Quick Study 11-11 (10 minutes)
1. This material error should be reported on the statement of retained
earnings (and/or the statement of stockholders’ equity) as a prior
2. This change in the expected useful life is a change in an accounting
estimate—affecting current and future accounting periods. Therefore,
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Quick Study 11-12 (10 minutes)
Basic earnings per share: =
Quick Study 11-13 (10 minutes)
Basic earnings per share: =
Quick Study 11-14 (10 minutes)
Analysis: Many analysts consider stocks with a PE less than 5 to 8 as
potentially underpriced. This stock with a PE of 5.2 would potentially fall
within the underpriced category. (Instructor note: This is a good point at
which to emphasize that PE is based on expectations—expectations can
prove to be higher or lower than actual results.)
Quick Study 11-15 (10 minutes)
company’s market value.
Earnings per share
Net income – Preferred dividends
Weighted-average common shares outstanding
Net income – Preferred dividends
Weighted-average common shares outstanding
$3.95
Quick Study 11-16 (10 minutes)
Total stockholders’ equity ……………………………………………………….
$1,850,000
Less equity attributable to preferred shares
Call price (20,000 shares x $40) ……………………………………………...
800,000
Equity applicable to common shares ………………………………………..
$1,050,000
Book value of common shares ($1,050,000/150,000 shares) ……...
$ 7.00
Quick Study 11-17 (10 minutes)
Mar. 31
Cash ………………………………………………………………..
3,271
Issued Capital, at Par Value ………………………...
300
Additional Paid–In Capital …………………………..
2,971
Issued stock at premium for cash.
*Entry uses Air France-KLM’s account titles.
EXERCISES
Exercise 11-1 (15 minutes)
Characteristic
Corporations
1.
Owner authority and control ………………….
One vote per share
2.
Ease of formation ………………………………….
Requires government approval
3.
Transferability of ownership ………………….
Readily transferred
4.
Ability to raise large amounts of capital …..
High ability
5.
Duration of life ………………………………………
Unlimited
6.
Owner liability ……………………………………….
Limited
7.
Legal status ………………………………………….
Separate legal entity
8.
Tax status of income …………………………….
Corporate income is taxed and
its cash dividends are usually
taxed at the 15% rate (some
cases at a lower rate)
Exercise 11-2 (15 minutes)
1.
Feb. 20
Cash ………………………………………………………………..
152,000
Common Stock, $2 Par Value* …………………....
38,000
Paid-In Capital in Excess of Par Value,
Common Stock** ……………………………………..
114,000
Issued common stock for cash.
*19,000 shares x $2 per share = $38,000
**$152,000 – $38,000 = $114,000
2.
Feb. 20
Cash ………………………………………………………………..
152,000
Common Stock, No-Par Value ……………………..
152,000
Issued common stock for cash.
3.
Feb. 20
Cash ………………………………………………………………..
152,000
Common Stock, $5 Stated Value* ………………..
95,000
Paid-In Capital in Excess of Stated Value,
Common Stock** ……………………………………..
57,000
Issued common stock for cash.
*19,000 shares x $5 per share = $95,000
**$152,000 – $95,000 = $57,000
Exercise 11-3 (15 minutes)
1.
Cash ……………………………………………………………………….
35,000
Common Stock, $5 Par Value* …………………………….
20,000
Paid-In Capital in Excess of Par Value,
Common Stock** ……………………………………………..
15,000
Issued common stock for cash.
*4,000 shares x $5 per share = $20,000
**$35,000 – $20,000 = $15,000
2.
Organization Expenses ……………………………………………
40,000
Common Stock, $1 Stated Value …………………………
2,000
Paid-In Capital in Excess of Stated Value,
Common Stock ………………………………………………..
38,000
Issued stock to promoters.
3.
Organization Expenses ……………………………………………
40,000
Common Stock, No-Par Value …………………………….
40,000
Issued stock to promoters.
4.
Cash ………………………………………………………………………..
60,000
Preferred Stock, $50 Par Value* …………………………..
50,000
Paid-In Capital in Excess of Par Value,
Preferred Stock**……………………………………………...
10,000
Issued preferred stock for cash.
*1,000 shares x $50 per share = $50,000
**$60,000 – $50,000 = $10,000
Exercise 11-4 (15 minutes)
Land ……………………………………………………………………….
45,000
Building ………………………………………………………………….
85,000
Common Stock, $7 Par Value* …………………………….
49,000
Paid-In Capital in Excess of Par Value,
Common Stock ………………………………………………..
81,000
Issued stock for land and building.
*7,000 shares x $7 per share = $49,000
**($45,000 + $85,000) – $49,000 = $81,000
Exercise 11-5 (10 minutes)
C
A
F
E
B
6.
D
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Exercise 11-6 (20 minutes)
1.
a. Retained earnings
Before dividend ………………………………………………………………
$ 660,000
$10 par value of 25,000 dividend shares ……………………….…
(250,000)
After dividend …………………………………………………………………
$ 410,000
b. Total stockholders’ equity
Common stock⎯$10 par value, 120,000 shares
authorized, 75,000 shares issued and outstanding ……..…
$ 750,000
Paid-in capital in excess of par value …………………………..
200,000
Retained earnings ……………………………………………………….
410,000
Total stockholders’ equity …………………………………………….…
$1,360,000
c. Number of outstanding shares
Outstanding shares before the dividend ………………………..
50,000
Dividend shares …………………………………………………………...
25,000
Outstanding shares after the dividend …………………………..
75,000
2.
a. Retained earnings (no change)
Before and after stock split …………………………………………..…
$ 660,000
b. Total stockholders’ equity
Common stock⎯$6.67 (rounded) par value, 180,000 shares
authorized, 75,000 shares issued and outstanding ………..…
$ 500,000
Paid-in capital in excess of par value …………………………..
200,000
Retained earnings ……………………………………………………….
660,000
Total stockholders’ equity …………………………………………….…
$1,360,000
c. Number of outstanding shares
Outstanding shares before the split…………………………………
50,000
Additional split shares (3-for-2) …………………………………….…
25,000
Outstanding shares after the split ……………………………………
75,000
3. From a stockholder’s point of view, there is no practical difference
Exercise 11-7 (25 minutes)
1.
Feb. 5
Retained Earnings* ………………………………………………..
480,000
Common Stock Dividend Distributable** …………..
120,000
Paid-In Capital in Excess of Par Value,
Common Stock*** …………………………………..……..
360,000
Declared 20% common stock dividend
Shares to be issued: 60,000 shares x 20% = 12,000 shares
*12,000 shares x $40 per share = $480,000
**12,000 shares x $10 per share = $120,000
***$480,000 – $120,000 = $360,000
Feb. 28
Common Stock Dividend Distributable …………………..
120,000
Common Stock, $10 Par Value …………………..……..
120,000
Distributed common stock dividend.
2.
Before
After
Total stockholders’ equity ……………………
$1,575,000
$1,575,000
Issued and distributable shares ………..…
60,000
72,000
Book value per share ………………………..…
$ 26.250
$ 21.875
Shares owned …………………………………..…
x 800
x 960*
Total book value of shares ………………..…
$ 21,000
$ 21,000
3.
February 5
February 28
Market value per share ……………………..…
$ 40
$ 33.40
Shares owned …………………………………..…
x 800
x 960
Total market value of shares owned ….…
$ 32,000
$ 32,064
Exercise 11-8 (30 minutes)
Non-Cumulative
Preferred
Common
2013 ($20,000 paid)
Preferred* ……………………………………………...
$ 20,000
Common⎯remainder ……………………………..
_______
$ 0
Total for the year …………………………………...
$ 20,000
$ 0
2014 ($28,000 paid)
Preferred* ……………………………………………...
$ 28,000
Common⎯remainder ……………………………..
_______
$ 0
Total for the year …………………………………...
$ 28,000
$ 0
2015 ($200,000 paid)
Preferred* ……………………………………………...
$ 30,000
Common⎯remainder ……………………………..
_______
$170,000
Total for the year …………………………………...
$ 30,000
$170,000
2016 ($350,000 paid)
Preferred* ……………………………………………...
$ 30,000
Common⎯remainder ……………………………..
_______
$320,000
Total for the year …………………………………...
$ 30,000
$320,000
2013-2016 ($598,000 paid)
_______
_______
Total for four years ………………………………..
$108,000
$490,000
Exercise 11-9 (25 minutes)
Cumulative
Preferred
Common
2013 ($20,000 paid)
Preferred* ……………………………………………...
$ 20,000
Common⎯remainder ……………………………..
_______
$ 0
Total for the year …………………………………...
$ 20,000
$ 0
(Note: $10,000 in preferred stock dividends in arrears.)
2014 ($28,000 paid)
Preferred⎯arrears from 2013 ………………….
$ 10,000
Preferred* ……………………………………………...
18,000
Common⎯remainder ……………………………..
_______
$ 0
Total for the year …………………………………...
$ 28,000
$ 0
(Note: $12,000 in preferred stock dividends in arrears.)
2015 ($200,000 paid)
Preferred⎯arrears from 2014 ………………….
$ 12,000
Preferred* ……………………………………………...
30,000
Common⎯remainder ……………………………..
_______
$158,000
Total for the year …………………………………...
$ 42,000
$158,000
(Note: $0 in preferred stock dividends in arrears.)
2016 ($350,000 paid)
Preferred* ……………………………………………...
$ 30,000
Common⎯remainder ……………………………..
_______
$320,000
Total for the year …………………………………...
$ 30,000
$320,000
(Note: $0 in preferred stock dividends in arrears.)
2013-2016 ($598,000 paid)
_______
_______
Total for four years ………………………………..
$120,000
$478,000
* The holders of the cumulative preferred stock are entitled to no more than
$30,000 of dividends declared in any year (7.5% x $5 x 80,000 shares) plus any
dividends skipped in prior years.