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Problem 11-2B (Concluded)
Part 2
BALTHUS CORP.
Statement of Retained Earnings
For Year Ended December 31, 2014
Retained earnings, December 31, 2013 ............................
$2,160,000
Plus net income ..................................................................
1,072,000
3,232,000
Less: Cash dividends declared ........................................
(740,000)
Treasury stock reissuances ...................................
(16,000)
Retained earnings, December 31, 2014 ............................
$2,476,000
Part 3
BALTHUS CORP.
Stockholders’ Equity Section of the Balance Sheet
December 31, 2014
Common stock⎯$1 par value, 320,000 shares
authorized, 200,000 shares issued and outstanding ....
$ 200,000
Paid in capital in excess of par value, common stock ...
1,400,000
Retained earnings (from part 2) .............................................
2,476,000
Total stockholders’ equity .................................................
$4,076,000
Problem 11-3B (45 minutes)
Part 1
Explanations for each of the journal entries
Jan. 17
Declared a cash dividend of $1 per share of common stock.
($96,000 / 96,000 shares)
Feb. 5
Paid the cash dividend on common stock.
Feb. 28
Declared a 12.5% stock dividend when the market value is $21 per
share. ($120,000 / $10 par = 12,000 shares = 12.5% of 96,000
shares; $252,000 / 12,000 shares = $21 per share)
Mar. 14
Distributed the common stock dividend.
Mar. 25
Executed a 2-for-1 stock split. ($10 par / $5 par = 2-for-1 ratio)
Mar. 31
Closed the Income Summary account to Retained Earnings.
Part 2
Jan. 17
Feb. 5
Feb. 28
Mar. 14
Mar. 25
Mar. 31
Common stock .................
$ 960,000
$ 960,000
$ 960,000
$1,080,000
$1,080,000
$1,080,000
Common stock
dividend distributable ....
0
0
120,000
0
0
0
Paid-in capital in
excess of par....................
384,000
384,000
516,000
516,000
516,000
516,000
Retained earnings ............
1,504,000
1,504,000
1,252,000
1,252,000
1,252,000
1,972,000
Total equity .........................
$2,848,000
$2,848,000
$2,848,000
$2,848,000
$2,848,000
$3,568,000
Problem 11-4B (45 minutes)
Part 1
Outstanding common shares
Feb. 15
May 15
Aug. 15
Nov. 15
Beginning balance ...........................
17,000
17,000
17,000
17,000
Less treasury stock (Mar. 2) ............
(1,000)
(1,000)
(1,000)
Plus dividend shares (Oct. 4)* .........
______
______
______
2,000
Outstanding shares ..........................
17,000
16,000
16,000
18,000
*(12.5% x 16,000)
Part 2
Cash dividend amounts
Feb. 15
May 15
Aug. 15
Nov. 15
Outstanding shares ..........................
17,000
16,000
16,000
18,000
Dividend per share ...........................
$ 0.40
$ 0.40
$ 0.40
$ 0.40
Total dividend ................................
$6,800
$6,400
$6,400
$7,200
Part 3
Capitalization of retained earnings for small stock dividend
Number of shares ................................................................
2,000
Market value per share ................................................................
$ 42
Total capitalized ................................................................
$ 84,000
Part 4
Cost per share of treasury stock
Total amount paid ................................................................
$ 40,000
Shares purchased ................................................................
1,000
Cost per share ................................................................
$ 40
Part 5
Net income
Retained earnings, beginning balance ................................
$270,000
Less dividends: Feb. 15 ................................................................
(6,800)
May 15 ................................................................
(6,400)
Aug. 15 ................................................................
(6,400)
Oct. 4 ................................................................
(84,000)
Nov. 15 ................................................................
(7,200)
Total before net income ................................................................
$159,200
Plus net income ................................................................
?
Retained earnings, ending balance ................................
$295,200
Problem 11-5B (40 minutes)
1. Market price = $90 per share (current stock exchange price given)
2. Computation of stock par values
3. Book values with no dividends in arrears
Book value per preferred share = par value (when not callable)
= $ 250
Common stock
Total equity...............................................
$2,400,000
Less equity for preferred ........................
(375,000)
Common stock equity .............................
$2,025,000
Number of outstanding shares ..............
18,000
Book value per common share ..............
$ 112.50
($2,025,000 / 18,000)
4. Book values with two years’ dividends in arrears
Preferred stock
Preferred stock par value .......................
$ 375,000
Plus two years’ dividends in arrears* ....
60,000
Preferred equity .......................................
$ 435,000
*2 years’ dividends = 2 x ($375,000 x 8%) = $60,000
Number of outstanding shares ..............
1,500
Book value per preferred share .............
$ 290.00
($435,000 / 1,500)
Common stock
Total equity...............................................
$2,400,000
Less equity for preferred ........................
(435,000)
Common stock equity .............................
$1,965,000
Number of outstanding shares ..............
18,000
Book value per common share ..............
$ 109.17
($1,965,000 / 18,000) rounded
Problem 11-5B (Concluded)
5. Book values with call price and two years’ dividends in arrears
Preferred stock
Preferred stock call price (1,500 x $280)
$ 420,000
Plus two years’ dividends in arrears* ..........
60,000
Preferred equity .............................................
$ 480,000
*2 years’ dividends = 2 x ($375,000 x 8%) = $60,000
Number of outstanding shares ....................
1,500
Book value per preferred share ...................
$ 320.00
($480,000/1,500)
Common stock
Total equity.....................................................
$2,400,000
Less equity for preferred ..............................
(480,000)
Common stock equity ...................................
$1,920,000
Number of outstanding shares ....................
18,000
Book value per common share ....................
$ 106.67
($1,920,000/18,000) rounded
6. Dividend allocation in total
Preferred
Common
Total
2 years’ dividends in arrears ...
$ 60,000
$ 0
$ 60,000
Current year dividends .............
30,000
—
30,000
Remainder to common .............
—
10,000
10,000
Totals ..........................................
$ 90,000
$ 10,000
$100,000
Dividends per share for the common stock
$10,000 / 18,000 shares = $0.56 rounded
7. Equity represents the residual interest of owners in the assets of the
business after subtracting claims of creditors. With few exceptions, these
Financial & Managerial Accounting, 5th Edition
658
SERIAL PROBLEM — SP 11
Serial Problem — SP 11, Success Systems (25 minutes)
1a. Journal entry for issuance of common stock to Cicely
Cash .................................................................................
86,000
Common Stock .........................................................
86,000
Issuance of common stock.
1b. Journal entry for issuance of preferred stock to Marcello
Cash .................................................................................
86,000
Preferred Stock .........................................................
86,000
Issuance of $100 par 7% preferred stock.
1c. Journal entry to record $86,000 borrowed from the bank
Cash .................................................................................
86,000
Notes Payable ...........................................................
86,000
Borrowed $86,000 on a 10-year, 7% note payable
2. Evaluation of the three proposals
a. Cicely’s investment as a common shareholder would mean that
Adria would have a second person who would be an owner. Adria
has been working on her own business for about 15 months, and
may not wish to have a second person who may have authority to
Serial Problem (concluded)
b. Having a preferred shareholder means that Adria’s Uncle Marcello
will not have the same voting rights as Adria. Marcello may be
c. The loan requires regular monthly payments, so Adria will need to
budget the $1,000 each month as a cash outflow. The loan may be
3. There is no correct answer to the question of which proposal Adria
Reporting in Action — BTN 11-1
(All shares in thousands.)
1. As of December 31, 2011, the shares of common stock issued and
outstanding are 68,430(see balance sheet). As of December 31, 2010,
occurs for 2010. (Differences between the year-end and weighted-
average share amounts are likely the result of timing differences with
share repurchases, issuances, and retirements.)
2. Total stockholders’ equity as of December 31, 2011 ....... $500,056,000
3. As found on the Statement of Cash Flows, Polaris made $61,585,000 and
4. Polaris’s income statement reports the following
2011
2010
2009
5. Polaris’s consolidated balance sheet reports no shares of treasury stock
6. Answer depends on the financial statement information obtained.
Comparative Analysis — BTN 11-2
1. Book value per common share = Equity applicable to common shares
Common shares outstanding
2. Earnings per share = Net income
3. Dividend yield = Annual cash dividends per share
Market value per share
4. Price-earnings ratio = Market value per share
Earnings per share
Polaris’s price-earnings ratio: $ 72.10 / $3.31 = 21.78
Ethics Challenge — BTN 11-3
During the course of her duties, Harriet has learned information that others
might not know. If she uses this information to trade in New World
stock.
Communicating in Practice — BTN 11-4
There is no set solution to this activity. Solutions will vary based on the
industry and the companies selected.
Taking It to the Net — BTN 11-5
1. The balance sheet of McDonald’s shows that they have both preferred
and common stock authorized, but it has only issued common stock.
2. The preferred stock has no par value. There are 165.0 million preferred
3. In 2011, the financing section of the statement of cash flows shows that
McDonald’s paid $3,363.1 million to purchase treasury stock.
4. In 2011, the financing section of the statement of cash flows shows that
McDonald’s paid common stock cash dividends of $2,609.7 million.
Teamwork in Action — BTN 11-6
1. The team statement should include the following:
a. When a corporation “buys back” its stock (engages in a treasury
stock acquisition), the effect on financial position is a decrease in
2. The team should establish the acquisition entry as follows
Treasury Stock, Common .........................................
13,400
Cash ................................................................
13,400
Reacquired 100 shares of $100 par value
common stock at a cost of $134 per share.
Each member should prepare one of the following reissue entries:
a.
Cash ..........................................................................................
13,400
Treasury Stock, Common ................................
13,400
Financial & Managerial Accounting, 5th Edition
664
Teamwork in Action (Continued)
d.
Cash ..........................................................................................
12,000
Paid-In Capital, Treasury Stock ................................
1,000
Retained Earnings ................................................................
400
Treasury Stock, Common ................................
13,400
Received $120 per share for 100 treasury
shares costing $134 per share.
e.
Cash ..........................................................................................
12,000
Retained Earnings ................................................................
1,400
Treasury Stock, Common ................................
13,400
Received $120 per share for 100 treasury
shares costing $134 per share.
3. When presenting and explaining the above entries to the team, the
following points should be made by the team members:
The similarities in all reissue entries a through e are:
• The net affect of the transaction is to increase assets and equity by
The differences in reissue entries b through e are:
(b) Reissuing above cost creates additional Paid-In Capital.*
(c) Reissuing below cost reduces existing Paid-In Capital.*
*Refers to the Paid-In Capital, Treasury Stock account.
Entrepreneurial Decision — BTN 11-7
1.
Plan A
Plan B
Net income ..............................................................
$ 72,000
$ 72,000
Less preferred dividends ......................................
0
(10,000)
Net income for common stockholders ................
$ 72,000
$ 62,000
Andrew’s share of common equity ......................
80%
100%
Andrew’s share of income after any preferred
stock dividends .......................................................
$ 57,600
$ 62,000
Andrew’s initial equity ...........................................
$375,000
$375,000
Andrew’s return on equity ....................................
15.4%
16.5%
2.
Plan A
Plan B
Net income ..............................................................
$ 16,800
$ 16,800
Less preferred dividends ......................................
0
(10,000)
Net income for common stockholders ................
$ 16,800
$ 6,800
Andrew’s share of common equity ......................
80%
100%
Andrew’s share of income after any preferred
stock dividends .......................................................
$ 13,440
$ 6,800
Andrew’s initial equity ...........................................
$375,000
$375,000
Andrew’s return on equity ....................................
3.6%
1.8%
3. The difference between the answers for parts 1 and 2 arises from the
percent of return generated with the assets invested in the corporation.
In part 1, Andrew’s return on equity is 15.4% for Plan A, which is less
than the 16.5% for Plan B. However, the return on equity is only 3.6% in
Hitting the Road — BTN 11-8
There is no formal solution for this field activity. Students often find this
assignment interesting as it highlights the relevance of their accounting
studies. Instructors also sometimes assign a particular financial news
show to watch on a certain day for the entire class—this can help
encourage a general class discussion on the topics raised.
Global Decision — BTN 11-9
1. Book value per common share = Equity applicable to common shares
Common shares outstanding
2. Earnings per share = Net income
Weighted-average common shares outstanding
3. KTM’s EPS is €1.98, and its statement of changes in shareholders’
equity reports that KTM declared no cash dividends during 2011.
Consequently, for the current year, KTM is paying out dividends per
