14-1 Solutions
CHAPTER 14
SHAREHOLDERS’ EQUITY: CAPITAL CONTRIBUTIONS,
DISTRIBUTIONS, AND EARNINGS
Questions, Exercises, and Problems: Answers and Solutions
14.2 The three provisions provide different benefits and risks to the issuing firm and
the investor and should sell at different prices. Callable preferred stock should
14.3 Redeemable preferred stock will appear as a liability if it is subject to
mandatory redemption on a particular date or upon occurrence of a specified
14.4 All three items permit their holder to acquire shares of common stock at a set
price. Their values depend on the difference between the market price and
the exercise price on the exercise date and the length of the exercise period.
Solutions 14-2
14-3 Solutions
14.5 The greater the volatility of the stock price, the larger is the potential excess of
the market price over the exercise price on the exercise date and the greater
14.6 The theoretical rationale is allocating the cost of employee compensation to
14.7 The accounting for each of these transactions potentially involves transfers
between contributed capital and retained earnings accounts and clouds the
distinction between capital transactions and income transactions. The
14.8 In the case of a cash dividend, the shareholder now holds the investment in
two parts—cash and stock certificates. The sum of the cash and the book
value of the stock after the dividend declaration equals the book value of the
stock before the firm declared the dividend. It is common to speak of a cash
Solutions 14-4
14-5 Solutions
14.9 The managers of a firm have knowledge of the plans and risks of the firm that
external investors may not possess. Although laws prevent firms from taking
advantage of this “inside information,” inclusion of gains from treasury stock
14.10 There are at least two issues here. First, the proposal gives management an
opportunity to decide which income items are and are not likely to recur.
14.11 The FASB suggests that the distinction between performance-related (subject
to significant influence by management) and non-performance-related
(subject to external influences not controllable by management) items drives
14.12 An error in previously-issued financial statements results from oversights or
errors which the firm should not have made given reasonable diligence in
accessing available information at the time. Accountants restate the
Solutions 14-6
14-7 Solutions
14.13 (The Washington Post Company; classification of redeemable preferred
stock.)
14.14 (Bank of America; classification of redeemable preferred stock.)
14.15 (Intel; accounting for stock options.)
14.16 (Morrissey Corporation; journal entries for employee stock options.)
December 31, 2008
December 31, 2009 and December 31, 2010
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–200,000
IncSt → RE
+200,000
ContriCap
June 30, 2011
Solutions 14-8
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+1,800,000
–240,000
ContriCap
+30,000
ContriCap
+2,010,000
ContriCap
14-9 Solutions
14.16 continued.
November 15, 2011
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+1,200,000
–160,000
ContriCap
+20,000
ContriCap
+1,340,000
ContriCap
14.17 (Watson Corporation; journal entries for employee stock options.)
December 31, 2009, 2010, and 2011
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–25,000
IncSt → RE
+25,000
ContriCap
April 30, 2012
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+375,000
–56,250
ContriCap
+150,000
ContriCap
+281,250
ContriCap
Solutions 14–10
14.17 continued.
September 15, 2013
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+125,000
–18,750
ContriCap
+50,000
ContriCap
+93,750
ContriCap
14.18 (Higgins Corporation; journal entries for convertible bonds.)
a. 1/02/2008
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+1,0000,000
+1,000,000
To record the issue of convertible bonds.
1/02/2012
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–1,000,000
+40,000
ContriCap
+960,000
ContriCap
To record conversion using carrying value of bonds.
14–11 Solutions
14.18 continued.
b. 1/02/2008
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+1,000,000
+685,140.50
+314,859.50
ContriCap
Issue of 10% semiannual coupon convertible bonds at
a time when the firm could issue ordinary 10% bonds
for $685,140.50 when the market interest rate is 15%
compounded semiannually.
Supporting Computations
14.19 (Symantec; accounting for conversion of bonds.)
Carrying Value Method
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–10,225,000
+1,000,000
ContriCap
+9,255,000
ContriCap
Fair Value Method
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–10,255,000
–245,000
IncSt → RE
Solutions 14–12
+1,000,000
ContriCap
+9,500,000
ContriCap
14–13 Solutions
14.20 (Kiersten Corporation; journal entries for stock warrants.)
February 26, 2008
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+240,000
+240,000
ContriCap
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+1,200,000
–160,000
ContriCap
+400,000
ContriCap
+960,000
ContriCap
February 26, 2012
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–80,000
ContriCap
+80,000
ContriCap
14.21 (Altus Pharmaceuticals; journal entries for stock warrants.)
December 7, 2002
Solutions 14–14
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+46,180,000
+43,450,000
ContriCap
+2,730,000
ContriCap
To record issuance of convertible preferred stock with
stock warrants.
14–15 Solutions
14.21 continued.
January 15, 2007
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–62,533,000
ContriCap
+52,697
ContriCap
+62,480,303
ContriCap
To record conversion of preferred stock with accumulated
14.22 (Journal entries for dividends.)
a. Retained Earnings (Dividends Declared) ……………… 19,500
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+19,500
–19,500
R E
b. Dividends Payable—Preferred Stock …………………… 19,500
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–19,500
–19,500
c. Retained Earnings (Dividends Declared) ……………… 300,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–300,000
R E
+300,000
ContriCap
Solutions 14–16
14–17 Solutions
14.23 (Watt Corporation; journal entries for dividends.)
a. March 31, 2008
Retained Earnings (Dividends Declared) ……………… 10,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+10,000
–10,000
R E
b. April 15, 2008
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–10,000
–10,000
c. June 30, 2008
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–40,000
R E
+30,000
ContriCap
+10,000
ContriCap
d. September 30, 2008
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+11,000
–11,000
R E
$11,000 = 22,000 X $.50.
Solutions 14–18
14.23 continued.
e. October 15, 2008
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–11,000
–11,000
f. December 31, 2008
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–165,000
ContriCap
+165,000
ContriCap
14.24 (Danos Corporation; journal entries for treasury stock transactions.)
a. Treasury Stock—Common …………………………………. 300,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–300,000
–300,000
ContriCap
b. Cash (= 6,000 X $32) …………………………………………. 192,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+192,000
–36,000
ContriCap
+180,000
ContriCap
+48,000
ContriCap
c. Treasury Stock—Common …………………………………. 266,000
14–19 Solutions
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–266,000
–266,000
ContriCap
Solutions 14–20
14.24 continued.
d. Land ……………………………………………………………….. 300,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+300,000
+272,000
ContriCap
+28,000
ContriCap
e. Cash (= 3,000 X $36) ………………………………………… 108,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
+108,000
–6,000
ContriCap
+114,000
ContriCap
14.25 (Melissa Corporation; journal entries for treasury stock transactions.)
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–120,000
–120,000
ContriCap
b. Bonds Payable …………………………………………………. 72,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–72,000
+72,000
ContriCap
c. Treasury Stock—Common …………………………………. 300,000
Assets
=
Liabilities
+
Shareholders’
Equity
(Class.)
–300,000
–300,000
ContriCap