15–16
The year-end balance in retained earnings is $99,027 so the maximum legal
dividend would be this amount plus dividends paid for the year, or $102,203,
P15-9. Repurchasing stock and calculating EPS
Requirement 1:
If the stock buyback had not occurred, an additional 1,237,000 shares would
have been outstanding for ten months during 2013 (January through October)
P15–10. Preferred stock and credit analysis
Requirement 1:
15–17
Year 1:
DR Dividends $240.00
CR Cash $240.00
($240.00 = $3,000 x 8%)
Year 2:
DR Dividends $611.52
company would also receive a tax deduction for interest.
Requirement 4:
The following schedule shows the computation of AT&T Wireless Services’
interest coverage and long-term debt to equity ratios for both years:
8% Debt
Year 2
Year 1
Year 2
Year 1
Interest expense on debt
$386
$85
$386
$85
Interest on 8% debt
$612
$240
Interest expense
$386
$85
$998
$325
Net income before interest and taxes
$972
$771
$972
$771
Interest coverage ratio
2.52
9.07
0.97
2.37
Long-term debt
$6,705
$2,547
$6705
$2,547
Long-term debt 8%
$7,644
$3,000
Total Iong-term debt
$6,705
$2,547
$14,349
$5,547
Common stockholders’ equity
$19,281
$21,887
$19,281
$21,887
Preferred stock
$7,644
$3,000
Total equity
$26,925
$24,887
$19,281
$21,887
Long-term debt to equity
0.25
0.10
0.74
0.25
As expected, issuing debt rather than preferred stock as equity results in a
substantially lower interest coverage ratio each year, and a substantially
15–18
feature. In both cases, the cash flows dedicated to preferred stock
payments would not be available for debt repayment, and this might
P15–11. Calculating earnings per share
Requirement 1:
The preferred stock pays a 10% dividend ($500,000), so there must be $5
million of preferred stock outstanding. Since each share has a $100 par
15–19
1. Common shares issued February 28: 60,000 shares X 10/12 months = 50,000 shares
2. Common shares issued May 15 as stock dividend: (1,800,000 + 60,000) shares outstanding
X .04 stock dividend percent X 15/24 of year remaining = 46,500 shares
3. Interest on convertible note: $1,000,000 face X .10 interest rate X (1- .40 tax rate) X 4/12 of
year = $20,000 interest after-tax.
4. Common shares issued upon conversion: 40 shares X 1,000 certificates x 4/12 of year.
Contingently issuable shares (not mentioned in the chapter) are considered to
P15–12. Calculating EPS when the capital structure is complex
Requirement 1:
The preferred stock pays a 10% dividend ($500,000), so there must be $5
million of preferred stock outstanding. Since each share has a $100 par
converts into 250,000 shares of common stock at 50 shares per certificate.
15–20
$1 million of cash is generated when the options are exercised (50,000
options x $20 per share). Since the options add 33,334 shares to the EPS
P15–13. Analyzing shareholders’ equity
(AICPA adapted)
Requirement 1:
The company’s statement of retained earnings appears below:
Stockholders’ Equity Section of Balance Sheet
December 31, 2014
15–21
Common stock, $2.50 par value; 4,000,000 shares
authorized; 3,400,000 shares issued 8,500,000 [3]
15–22
Requirement 3:
The computation of book value per share appears below:
Trask Corp.
Computation of Book Value per Share of Common Stock
December 31, 2014
Book value per share of common stock $12.75
Explanation of amounts:
[1] Preferred stock dividend
Par value of outstanding preferred shares $500,000
Multiplied by dividend rate x 0.60
Number of common shares issued, 12/31/13 1,575,000
Less: Common shares retired (25,000)
Number of common shares issued, 6/1/14 150,000
1,700,000
Two-for-one stock split, 10/27/14 x 2
Less: Common shares retired at par value (125,000)
Amount of common shares issued, 6/1/14 750,000
Total amount of common shares issued $8,500,000
[4] Amount of additional paid-in capital
Amount at 12/31/13 (1,575,000 @ $10) $15,750,000
15–23
15–24
P15–14. Stockholders’ equity
Part A:
Requirement 1:
There are 300,000 shares of preferred stock outstanding. The par value is
$1 per share and NIAC is the sole owner with $300,000 par value shares.
Requirement 2:
Requirement 3:
The journal entry to record the $0.10 annual dividend on the 10,000 shares
issued above is:
DR Dividends $1,000
CR Cash $1,000
sold (issued) and is set by the company’s board of directors. “Issued”
shares have been sold to the public at some time in the past. If these shares
are still in the hands of investors, they are “outstanding” shares; if they are
now owned by the company, they are “treasury” shares.
Requirement 6:
15–25
Part B:
The schedule below shows the calculations.
Common Common Additional Total
Shares Stock $0.01 Paid-In Retained Stockholders’
Common shares issued – 0 0
Balance at May 31, Year 6 32,000,000 $320,000 2,282,000 $115,714,500 $118,316,500
P15–15. Stock option accounting: Transitioning to current GAAP
Requirement 1:
Under the intrinsic value method allowed by pre-Codification SFAS No. 123,
but later disallowed by pre-Codification SFAS No. 123(R), firms that issued
$9.3 million and $8.7 million, respectively. Notice that the 2005 awards
have a fair value that exceeds their intrinsic value ($6.6 million) on the grant
date.
15–26
Requirement 3:
SFAS No. 123(R) required firms that had previously used the intrinsic value
method to change to the fair value method for recording stock option
($6.3 million) compared to the value awarded in 2005 ($8.7 million).
Requirement 5:
P15–16. Distinguishing liabilities from equities
Requirement 1:
The company’s Series B preferred stock has a mandatory redemption
feature that, under pre-Codification SFAS No. 150, required J. Crew Group
15–27
The company’s Series A preferred stock has a contingent redemption
clause, and because the contingency is not met at the balance sheet date,
redemption is not yet mandatory and the preferred stock is shown as part of
stockholders’ equity. The Series A dividends will be treated as GAAP (and