Comprehensive Problem, cont.
Requirement 6, cont.
THE TUSQUITTEE COMPANY
Balance Sheet
December 31, 2018
Liabilities
Current Liabilities:
Sales Tax Payable 12,600
Estimated Warranty Payable 29,300
Interest Payable 1,569
Notes Payable 10,000
Current Portion of Mortgage Payable 13,840
Total Paid-in Capital 251,500
Retained Earnings 59,249
Treasury Stock—Common, 200 shares at cost (3,000)
Total Stockholders’ Equity 307,749
Total Liabilities and Stockholders’ Equity $ 691,379
Comprehensive Problem, cont.
Requirement 7
Times-interest-earned ratio
Net Income $ 83,749
= 1.25
Earnings
per share =(Net income − Preferred dividends) / Average number of
common shares outstanding
Rate of
return on
common
stockholders’
equity
=(Net income − Preferred dividends) / Average common
stockholders’ equity
=($83,749 − 0) / ($0 + $307,749) / 2
=$83,749 / $153,874.5
=0.54 = 54%
Comprehensive Problem, cont.
Requirement 8
Critical Thinking
Tying It All Together Case 13-1
Facebook, Inc. is a mobile application and Web site that enables people to connect, share, discover,
and communicate with each other. The company also owns Instagram, messenger, WhatsApp, and
Oculus.
Requirements
1. Review Item 5 (Dividend Policy) of the 2015 annual report. Has Facebook ever paid a dividend?
Provide the company’s reasoning.
2. Review the balance sheet for Facebook. What is the par value of its Class A common shares.
3. Does Facebook have any treasury stock? How do you know?
SOLUTION
Decision Case 13-1
Lena Kay and Kathy Lauder have a patent on a new line of cosmetics. They need additional capital to
market the products, and they plan to incorporate the business. They are considering the capital structure
for the corporation. Their primary goal is to raise as much capital as possible without giving up control
of the business. Kay and Lauder plan to invest the patent (an intangible asset, which will be transferred
to the company’s ownership in lieu of cash) in the company and receive 100,000 shares of the
corporation’s common stock. They have been offered $100,000 for the patent, which provides an
indication of the fair market value of the patent.
The corporation’s plans for a charter include an authorization to issue 5,000 shares of preferred
stock and 500,000 shares of $1 par common stock. Kay and Lauder are uncertain about the most
desirable features for the preferred stock. Prior to incorporating, they are discussing their plans with two
investment groups. The corporation can obtain capital from outside investors under either of the
following plans:
• Plan 1. Group 1 will invest $150,000 to acquire 1,500 shares of 6%, $100 par nonvoting,
noncumulative preferred stock.
• Plan 2. Group 2 will invest $100,000 to acquire 1,000 shares of $5, no-par preferred stock and
$70,000 to acquire 70,000 shares of common stock. Each preferred share receives 50 votes on matters
that come before the common stockholders.
Requirements
Assume that the corporation has been chartered (approved) by the state.
1. Journalize the issuance of common stock to Kay and Lauder. Explanations are not required.
2. Journalize the issuance of stock to the outsiders under both plans. Explanations are not required.
3. Net income for the first year is $180,000, and total dividends are $30,000. Prepare the stockholders’
equity section of the corporation’s balance sheet under both plans at the end of the first year.
4. Recommend one of the plans to Kay and Lauder. Give your reasons.
SOLUTION
Requirement 1
Decision Case 13-1, cont.
Requirement 4
Financial Statement Case 13-1
Use Target Corporation’s financial statements to answer the following questions. Visit
Requirements
1. Review the stockholders’ equity section of the balance sheet. Did Target have any preferred stock
at January 30, 2016?
2. Now examine the notes at the bottom of the balance sheet. Is Target authorized to issue preferred
stock? If so, how much?
3. How much of Target Corporation’s common stock was outstanding at January 30, 2016? How
can you tell?
4. Examine Target Corporation’s consolidated statements of cash flows. Did Target pay any cash
dividends during the year ending January 30, 2016? If so, how much?
5. Show how Target Corporation computed basic earnings per share of $5.35 for fiscal year 2015.
(Ignore diluted earnings per share.)
SOLUTION
Team Project 13-1
Obtain the annual reports (or annual report data) of five well-known companies. You can get the reports
either from the companies’ Web sites, from your college library, or by mailing a request directly to the
Requirements
1. After selecting five companies, examine their income statements to search for the following items:
a. Net income or net loss
b. Earnings per share data
2. Study the companies’ balance sheets to answer the following questions:
a. What classes of stock has each company issued?
b. Which item carries a larger balance—the Common Stock account or Paid-In Capital in Excess of
Par (also labeled Additional Paid-In Capital)?
c. What percentage of each company’s total stockholders’ equity is made up of retained earnings?
d. Do any of the companies have treasury stock? If so, how many shares and how much is the cost?
3. Examine each company’s statement of stockholders’ equity for evidence of the following:
a. Cash dividends
b. Stock dividends
c. Treasury stock purchases and sales
4. As directed by your instructor, either write a report or present your findings to your class. You may
not be able to understand everything you find, but neither can the Wall Street analysts! You will be
amazed at how much you have learned.
SOLUTION
Communication Activity 13-1
In 75 words or fewer, explain the difference between stock dividends and stock splits. Include the effect
on stock values.
SOLUTION