Exercise 11-10 (25 minutes)
1. (a)
Oct. 11
Treasury Stock (5,000 x $25) …………………………..
125,000
Cash ………………………………………………………………..
125,000
Purchased treasury stock.
(b)
Nov. 1
Cash (1,000 x $31) ………………………………………….……..
31,000
Treasury Stock (1,000 x $25) ……………………..……
25,000
Paid-In Capital, Treasury Stock ………………….……..
6,000
Reissued treasury stock at a price exceeding cost.
(c)
Nov. 25
Cash (4,000 x $20) ………………………………………….……..
80,000
Paid-In Capital, Treasury Stock ……………………….….
6,000
Retained Earnings ………………………………………….……..
14,000
Treasury Stock (4,000 x $25) ……………………..……
100,000
Reissued treasury stock at a price less than cost.
2. Changes to the equity section include the following
(i) The common stock account description line will change. After the
treasury stock purchase, it should read:
Common stock⎯$10 par value; 72,000 shares
authorized and issued; 5,000 shares in treasury ……………..
The dollar balance of this account does not change with a treasury
stock purchase.
(ii) The descriptions and dollar amounts for Paid-In Capital in Excess of
Par Value, Common Stock will not change.
(iii) The retained earnings dollar balance will not change but its
description should change to read:
Retained earnings ($125,000 restricted for treasury stock) ………….
$864,000
(iv) After the purchase, a deduction for the cost of treasury stock is
reported immediately before the total line for stockholders’ equity as:
Less cost of treasury stock …………………………………………….…..
(v) Total stockholders’ equity will change from $1,800,000 to $1,675,000.
Exercise 11-10 (Concluded)
Revised equity section appears as follows
Common stock⎯$10 par value; 72,000 shares authorized
and issued; 5,000 shares in treasury …………………………………….……
$ 720,000
Paid-in capital in excess of par value, Common stock ……………………
216,000
Retained earnings, $125,000 restricted by treasury stock ………………
864,000
Total ……………………………………………………………………………………………
1,800,000
Less cost of treasury stock ……………………………………………………....
(125,000)
Total stockholders’ equity ……………………………………………………….
$1,675,000
Exercise 11-11 (15 minutes)
Amos Company
Statement of Retained Earnings
For Year Ended December 31, 2015
Retained earnings, December 31, 2014, as previously reported ….
$1,375,000
Prior period adjustment
Depreciation expense not recorded in 2013 (net of $4,500 in
tax benefits) ……………………………………………………………………...
($55,500)
Retained Earnings, December 31, 2014, as adjusted ………………...
1,319,500
Plus net income ……………………………………………………………………….
126,000
Less dividends ………………………………………………………………………..
(43,000)
Retained earnings, December 31, 2015 ……………………………………..
$1,402,500
Exercise 11-12 (25 minutes)
1. Net income ………………………………………………………………………….
$2,700,000
Less preferred dividends ……………………………………………………
(388,020)
Net income available to common stockholders ………………..…
$2,311,980
2. Net income available to common stockholders ………………..…
$2,311,980
Divided by weighted-average outstanding shares …………….…
678,000
Basic earnings per share ……………………………………………………
$3.41
Exercise 11-13 (30 minutes)
1. Net income …………………………………………………………………………..
$960,000
Less preferred dividends ……………………………………………………
(120,000)
Net income available to common stockholders ……………..……
$840,000
2. Net income available to common stockholders ……………..…
$840,000
Divided by weighted-average outstanding shares ………….……
400,000
Basic earnings per share ……………………………………………………
$ 2.10
Exercise 11-14 (15 minutes)
Stock
Market Value
per Share
Divided
by
Earnings
per Share
Price-Earnings
Ratio
1…………..
$176.40
=
14.7
2…………..
96.00
=
9.6
3…………..
93.75
=
12.5
4…………..
250.00
=
5.0
Analysis: Stocks with PE ratios less than about 5 to 8 are likely viewed as
potentially undervalued by the market. Of the stocks above, an analyst
might investigate stock #4 as possibly undervalued with a PE ratio of 5.0.
Exercise 11-15 (15 minutes)
Dividend yield
1. $16.06 / $220.00 = 7.3%
Exercise 11-16 (20 minutes)
1.
Total stockholders’ equity …………………………..………….
$1,585,000
Less equity applicable to preferred shares
Call price ($30 x 10,000) ………………………………………..
$300,000
Cumulative dividends in arrears (none) …………………
0
(300,000)
Equity applicable to common shares ………………………
$1,285,000
Book value of preferred stock ($300,000/10,000) ……..
$ 30.00
Book value of common stock ($1,285,000/80,000) ……
$ 16.06
2.
Total stockholders’ equity …………………………..………….
$1,585,000
Less equity applicable to preferred shares
Call price ($30 x 10,000) ………………………………………..
$300,000
Cumulative dividends in arrears (3 x 6% x $250,000) ..
45,000
(345,000)
Equity applicable to common shares ………………………
$1,240,000
Book value of preferred stock ($345,000/10,000) ……..
$ 34.50
Book value of common stock ($1,240,000/80,000) ……
$ 15.50
Exercise 11-17 (20 minutes)
1. Share capital → Common stock
2.
Cash ………………………………………………………………..
624
Share Capital (at Par Value) ………………………...
484
Share Premium …………………………………………..
140
Issued common stock at premium for cash.
3. 2013 Retained profit = 2012 Retained profit + 2013 Income – 2013 Dividends
Exercise 11-18 (40 minutes)
Part 1
Jan. 2
Treasury Stock, Common ……………………………….……..
75,000
Cash ………………………………………………………………..
75,000
Purchased treasury stock (3,000 x $25).
Jan. 7
Retained Earnings ………………………………………….……..
40,500
Common Dividend Payable ……………………….….
40,500
Declared $1.50 dividend per share on 27,000
outstanding shares.
Feb. 28
Common Dividend Payable …………………………….……..
40,500
Cash ………………………………………………………………..
40,500
Paid cash dividend.
July 9
Cash* ……………………………………………………………..……..
36,000
Treasury Stock, Common** ……………………….….
30,000
Paid-In Capital, Treasury Stock*** ……………..……..
6,000
Reissued treasury stock.
*(1,200 x $30) **(1,200 x $25) ***(1,200 x $5)
Aug. 27
Cash* ……………………………………………………………..……..
30,000
Paid-In Capital, Treasury Stock ……………………….….
6,000
Retained Earnings ………………………………………….……..
1,500
Treasury Stock, Common** ……………………….….
37,500
Reissued treasury stock.
*(1,500 x $20) **(1,500 x $25)
Sept. 9
Retained Earnings ………………………………………….……..
59,400
Common Dividend Payable ……………………….….
59,400
Declared $2 dividend on 29,700 outstanding shares.
Oct. 22
Common Dividend Payable …………………………….……..
59,400
Cash ………………………………………………………………..
59,400
Paid cash dividend.
Dec. 31
Income Summary …………………………………………………..
52,000
Retained Earnings …………………………………….……..
52,000
Closed Income Summary account.
Exercise 11–18 (Concluded)
Part 2
ALEXANDER CORPORATION
Statement of Retained Earnings
For Year Ended December 31, 2016
Retained earnings, December 31, 2015 ……………………...
$340,000
Plus net income ……………………………………………………….
52,000
392,000
Less: Cash dividends declared ………………………………….
(99,900)
Treasury stock reissuances* …………………………….
(1,500)*
Retained earnings, December 31, 2016 ……………………...
$290,600
*From August 27 transaction of reissuance of treasury shares.
Part 3
ALEXANDER CORPORATION
Stockholders’ Equity Section of the Balance Sheet
December 31, 2016
Common stock⎯$25 par value, 50,000 shares
authorized, 30,000 shares issued and outstanding;
300 shares in treasury …………………………………………….
$ 750,000
Paid-in capital in excess of par value, common stock ...
50,000
Retained earnings (from part 2) ……………………………………..
290,600
Less cost of treasury stock ……………………………………….
(7,500)
Total stockholders’ equity ………………………………………...
$1,083,100
PROBLEM SET A
Problem 11-1A (30 minutes)
Part 1
a. To record sale of 10,000 ($250,000/$25 per share) shares of $25 par
value common stock for $30 ($300,000/10,000 shares) per share.
Part 2
Number of outstanding shares
Issued in (a) …………………………………
10,000
Issued in (b) …………………………………
5,000
Issued in (c) …………………………………
2,000
Issued in (d) …………………………………
3,000
Total …………………………………………….
20,000
Part 3
Part 4
Total paid-in capital from common stockholders
From transaction (a) ……………………
$300,000
From transaction (b) ……………………
150,000
From transaction (c) ……………………
80,000
From transaction (d) ……………………
120,000
Total paid-in capital …………………….
$650,000
Part 5
Problem 11-2A (60 minutes)
Part 1
Jan. 1
Treasury Stock, Common ……………………………….……..
80,000
Cash ………………………………………………………………..
80,000
Purchased treasury stock (4,000 x $20).
Jan. 5
Retained Earnings ………………………………………….……..
72,000
Common Dividend Payable ……………………….….
72,000
Declared $2 dividend on 36,000 outstanding shares.
Feb. 28
Common Dividend Payable …………………………….……..
72,000
Cash ………………………………………………………………..
72,000
Paid cash dividend.
July 6
Cash* ……………………………………………………………..……..
36,000
Treasury Stock, Common** ……………………….….
30,000
Paid-In Capital, Treasury Stock*** ……………..……..
6,000
Reissued treasury stock.
*(1,500 x $24) **(1,500 x $20) ***(1,500 x $4)
Aug. 22
Cash* ……………………………………………………………..……..
42,500
Paid-In Capital, Treasury Stock ……………………….….
6,000
Retained Earnings ………………………………………….……..
1,500
Treasury Stock, Common** ……………………….….
50,000
Reissued treasury stock.
*(2,500 x $17) **(2,500 x $20)
Sept. 5
Retained Earnings ………………………………………….……..
80,000
Common Dividend Payable ……………………….….
80,000
Declared $2 dividend on 40,000 outstanding shares.
Oct. 28
Common Dividend Payable …………………………….……..
80,000
Cash ………………………………………………………………..
80,000
Paid cash dividend.
Dec. 31
Income Summary …………………………………………………..
388,000
Retained Earnings …………………………………….……..
388,000
Closed Income Summary account.
Problem 11-2A (Concluded)
Part 2
KOHLER CORPORATION
Statement of Retained Earnings
For Year Ended December 31, 2016
Retained earnings, December 31, 2015 ……………………...
$270,000
Plus net income ……………………………………………………….
388,000
658,000
Less: Cash dividends declared ………………………………….
(152,000)
Treasury stock reissuances ……………………………..
(1,500)
Retained earnings, December 31, 2016 ……………………...
$504,500
Part 3
KOHLER CORPORATION
Stockholders’ Equity Section of the Balance Sheet
December 31, 2016
Common stock⎯$10 par value, 100,000 shares
authorized, 40,000 shares issued and outstanding …..
$400,000
Paid-in capital in excess of par value, common stock ..
60,000
Retained earnings (from part 2) ……………………………………..
504,500
Total stockholders’ equity ………………………………………...
$964,500
Problem 11-3A (45 minutes)
Part 1
Explanations for each of the journal entries
Oct. 2
Declared a cash dividend of $2 per share of common stock.
($60,000 / 30,000 shares)
Oct. 25
Paid the cash dividend on common stock.
Oct. 31
Declared a 10% stock dividend when the market value is $25 per
share. ($36,000/$12 par = 3,000 shares = 10% of 30,000 shares;
$75,000/3,000 shares = $25 per share)
Nov. 5
Distributed the common stock dividend.
Dec. 1
Executed a 3-for-1 stock split. ($12 par / $4 par = 3-for-1 ratio)
Dec. 31
Closed the Income Summary account to Retained Earnings.
Part 2
Oct. 2
Oct. 25
Oct. 31
Nov. 5
Dec. 1
Dec. 31
Common stock ………....
$360,000
$360,000
$360,000
$396,000
$396,000
$396,000
Common stock
dividend distributable
0
0
36,000
0
0
0
Paid-in capital in
excess of par …………..
90,000
90,000
129,000
129,000
129,000
129,000
Retained earnings ……..
260,000
260,000
185,000
185,000
185,000
395,000
Total equity ……………....
$710,000
$710,000
$710,000
$710,000
$710,000
$920,000
Problem 11-4A (45 minutes)
Part 1
Outstanding common shares
Jan. 5
Apr. 5
July 5
Oct. 5
Beginning balance ………………….…
40,000
40,000
40,000
40,000
Less treasury stock (Mar. 20) …..…
(3,000)
(3,000)
(3,000)
Plus dividend shares (July 31)* ….…
______
______
______
7,400
Outstanding shares ……………………
40,000
37,000
37,000
44,400
*(20% x 37,000)
Part 2
Cash dividend amounts
Jan. 5
Apr. 5
July 5
Oct. 5
Outstanding shares ………………….
40,000
37,000
37,000
44,400
Dividend per share …………………..
$ 0.50
$ 0.50
$ 0.50
$ 0.50
Total dividend ………………………….
$20,000
$18,500
$18,500
$22,200
Part 3
Number of shares ……………………………………………………………...
7,400
Market value per share ……………………………………………………....
$12
Total capitalized ………………………………………………………………...
$ 88,800
Part 4
Cost per share of treasury stock
Total amount paid ……………………………………………………………...
$ 30,000
Shares purchased ……………………………………………………………..
3,000
Cost per share …………………………………………………………………..
$ 10
Part 5
Net income
Retained earnings, beginning balance ………………………………..
$320,000
Less dividends: Jan. 5 ……………………………………………………..
(20,000)
Apr. 5 ……………………………………………………..
(18,500)
July 5 ……………………………………………………..
(18,500)
July 31 …………………………………………………....
(88,800)
Oct. 5 ……………………………………………………..
(22,200)
Total before net income ……………………………………………………..
$152,000
Plus net income ………………………………………………………………...
?
Retained earnings, ending balance …………………………………....
$400,000
Therefore, net income = $248,000
Problem 11-5A (40 minutes)
1. Market price = $85 per share (current stock exchange price given)
2. Computation of par values of stock
3. Book values with no dividends in arrears
Book value per preferred share = par value (when not callable) = $50
Common stock
Total equity ………………………………………...
$280,000
Less equity for preferred ……………………..
(50,000)
Common stock equity ………………………….
$230,000
Number of outstanding shares …………….
4,000
Book value per common share …………….
$ 57.50
($230,000 / 4,000 shares)
4. Book values with two years’ dividends in arrears
Preferred stock
Preferred stock par value ………………………
$ 50,000
Plus two years’ dividends in arrears* ….…
5,000
Preferred equity ………………………………….…
$ 55,000
*2 years’ dividends = 2 x ($50,000 x 5%) = $5,000
Number of outstanding shares ………………
1,000
Book value per preferred share …………..…
$ 55.00
($55,000 / 1,000 shares)
Common stock
Total equity ………………………………………..…
$280,000
Less equity for preferred …………………….…
(55,000)
Common stock equity …………………………..
$225,000
Number of outstanding shares ………………
4,000
Book value per common share ………………
$ 56.25
($225,000/4,000 shares)
Problem 11-5A (Concluded)
5. Book values with call price and two years’ dividends in arrears
Preferred stock
Preferred stock call price (1,000 x $55) …….
$ 55,000
Plus two years’ dividends in arrears* ………
5,000
Preferred equity ………………………………………
$ 60,000
*2 years’ dividends = 2 x ($50,000 x 5%) = $5,000
Number of outstanding shares ………………..
1,000
Book value per preferred share ……………….
$ 60.00
($60,000 / 1,000 sh.)
Common stock
Total equity …………………………………………….
$280,000
Less equity for preferred …………………………
(60,000)
Common stock equity ……………………………..
$220,000
Number of outstanding shares ………………..
4,000
Book value per common share ………………..
$ 55.00
($220,000 / 4,000 sh.)
6. Dividend allocation in total
Preferred
Common
Total
2 years’ dividends in arrears ………..
$ 5,000
$ 0
$ 5,000
Current year dividends …………….…..
2,500
2,500
Remainder to common …………….…..
.
4,000
4,000
Totals …………………………………………..
$ 7,500
$ 4,000
$11,500
7. Equity represents the residual interest of owners in the assets of the
business after subtracting claims of creditors. With few exceptions,
these assets and liabilities are reported at historical cost, not market
PROBLEM SET B
Problem 11-1B (30 minutes)
Part 1
a. To record sale of 3,000 ($3,000/$1 per share) shares of $1 par value
common stock for $40 ($120,000/3,000) per share.
b. To record issuance of 1,000 ($1,000/$1 per share) shares of $1 par value
common stock to the company’s promoters for their efforts in
per share.
Part 2
Number of outstanding shares
Issued in (a) …………………………………...
3,000
Issued in (b)…………………………………...
1,000
Issued in (c) …………………………………...
800
Issued in (d)…………………………………...
1,200
Total ……………………………………………...
6,000
Part 3
Minimum legal capital = Outstanding shares x Par value per share
Part 4
Total paid-in capital from common stockholders
From transaction (a) ……………………....
$120,000
From transaction (b) ……………………....
40,000
From transaction (c) ……………………....
40,000
From transaction (d) ……………………....
60,000
Total paid-in capital ………………………..
$260,000
Part 5
Book value per common share
Total stockholders’ equity (given) …..
$283,000
Outstanding shares (from 2) …………..
6,000
Book value per common share ……....
$ 47.17
($283,000 / 6,000 shares)
Problem 11-2B (60 minutes)
Part 1
Jan. 10
Treasury Stock, Common ………………………………………
480,000
Cash ………………………………………………………..………
Purchased treasury stock (40,000 x $12).
Mar. 2
Retained Earnings …………………………………………………
240,000
Common Dividend Payable …………………………..
Declared $1.50 dividend on 160,000 outstanding shares.
Mar. 31
Common Dividend Payable ……………………………………
240,000
Cash ………………………………………………………..………
Paid cash dividend.
Nov. 11
Cash* …………………………………………………………….………
312,000
Treasury Stock, Common** …………………………..
Paid-In Capital, Treasury Stock*** ……………..………
Reissued treasury stock.
*(24,000 x $13) **(24,000 x $12) ***(24,000 x $1)
Nov. 25
Cash* …………………………………………………………….………
152,000
Paid-In Capital, Treasury Stock …………………………..
24,000
Retained Earnings …………………………………………………
16,000
Treasury Stock, Common** …………………………..
Reissued treasury stock.
*(16,000 x $9.50) **(16,000 x $12)
Dec. 1
Retained Earnings …………………………………………………
500,000
Common Dividend Payable …………………………..
Declared $2.50 dividend on 200,000 outstanding shares.
Dec. 31
Income Summary …………………………………………………..
1,072,000
Retained Earnings ………………………………….………..
Closed Income Summary account.