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Problem 11-2B (Concluded)
Part 2
BALTHUS CORP.
Statement of Retained Earnings
For Year Ended December 31, 2016
Retained earnings, December 31, 2015 ............................
$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, 2016 ............................
$2,476,000
Part 3
BALTHUS CORP.
Stockholders’ Equity Section of the Balance Sheet
December 31, 2016
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
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
Therefore, net income = $136,000
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
assets and liabilities are valued at historical cost, not market value.
SERIAL PROBLEM — SP 11
Serial Problem — SP 11, Business Solutions (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
Santana would have a second person who would be an owner.
Santana has been working on her own for about 15 months, and
Serial Problem (concluded)
b. Having a preferred shareholder means that Santana’s Uncle
Marcello will not have the same voting rights as Santana. Marcello
c. The loan requires regular monthly payments, so Santana will need
to budget the $1,000 each month as a cash outflow. The loan may
3. There is no correct answer to the question of which proposal Santana
should adopt. Class discussion may indicate which proposal the class
prefers.
Reporting in Action — BTN 11-1
(All shares in thousands.)
1. As of September 28, 2013, the shares of common stock issued and
outstanding are 899,213 (see balance sheet). As of September 29, 2012,
the number of shares of common stock issued and outstanding is
939,208.
The weighted-average common shares used in calculating earnings per
2. Total stockholders’ equity as of September 28, 2013 ......$123,549,000,000
3. As found on its statement of cash flows, Apple reported $10,564 million
4. Apple’s income statement reports the following
(Fiscal years) 2013
2012
2011
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
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
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
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.
Teamwork in Action (Continued)
d.
Cash ..........................................................................................
12,000
Paid-In Capital, Treasury Stock ................................
1,000
Retained Earnings ................................................................
400
Treasury Stock, Common ................................
13,400
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
Founder’s share of common equity .....................
80%
100%
Founder’s share of income after any preferred
stock dividends .......................................................
$ 57,600
$ 62,000
Founder’s initial equity .........................................
$375,000
$375,000
Founder’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
Founder’s share of common equity .....................
80%
100%
Founder’s share of income after any preferred
stock dividends .......................................................
$ 13,440
$ 6,800
Founder’s initial equity .........................................
$375,000
$375,000
Founder’s return on equity ...................................
3.6%
1.8%
3. The difference between the answers for parts 1 and 2 arises from the
3.6% in part 2 for Plan A, BUT this is more than the 1.8% for Plan B.
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 – Preferred dividends) / Weighted-average common shares outstanding
3. Samsung’s EPS is ₩197,841, and Samsung declared ₩14,300 in cash
dividends per share during fiscal year 2013. Consequently, for the
