Financial Reporting and Analysis (7th Ed.)
Chapter 15 Solutions
Financial Reporting for Owners’ Equity
Exercises
Exercises
E15-1.Understanding Shareholders’ Equity (LO 15-1, LO 15-3, LO 15-6, LO 15-7)
Requirement 1:
Preferred stock is a class of “capital stock” that pays dividends at a specified
rate and that has preference over common stock in the payment of dividends
declared (“set”) quarterly by the company’s directors.
Requirement 2:
Treasury stock is stock (usually common shares) reacquired by the issuing
nor accrue dividends.
Requirement 3:
Redeemable preferred stock is a less permanent form of ownership capital than
is traditional (non-redeemable) preferred stock. The SEC was concerned that
cash flow consequences.
Requirement 4:
The employer’s cost of stock-based compensation—employee stock options
Requirement 5:
The employer’s cost of stock-based compensation is expensed (usually on a
Requirement 6:
Firms that have complex capital structures have financed their business
activities either using (a) securities that are convertible into common stock, or
EPS does not.
E15-2. Issuing common stock (LO 15-5)
Common stock–par value (600,000 shares issued x $3 par) $1,800,000
E15-3.Retiring common stock (LO 15-1)
(AICPA adapted)
Because the shares are “retired” rather than “held in treasury,” they are
entry to record the repurchase is:
DR Common stock par (100,000 shares x $10) $1,000,000
*The original APIC is reduced for retired shares according to the original issue
The account balances after this entry are:
Common stock par (800,000 shares x $10) $8,000,000
E15-4.Analyzing debt and redeemable preferred stock (LO 15-3)
Requirement 1:
The bond will be recorded as a $10 million long-term liability with annual
(not dividends).
E15-5.Analyzing various stock transactions (LO 15-1, LO 15-5)
(AICPA adapted)
The capital transactions are described in the following schedule:
Common Stock Accounts
Cash Par APIC Treasur
y
1/05/17: issued 100,000 shares at $5 each $500,000 $500,00
0
each
Balance at 12/31/2017 $1,100,000 $825,00
0
$275,00
0
$0
E15-6.Determining how many shares? (LO 15-5)
(AICPA adapted)
The number of preferred shares issued can be found by dividing the balance in
$300,000/$5 = 60,000 shares
assuming the shares were issued at this stated value.
E15-7. Treasury Stock (LO 15-1)
Common stock—par $ 4,800,000 (1)
Additional paid-in capital 19,200,000 (2)
share issue price minus $2 per share assigned to par value)
$3,400,000 = 200,000 shares X $17 per share repurchase price.
E15-8. Determining stockholders’ equity after a stock repurchase (LO 15-1, LO
15-5)
(AICPA adapted)
Common Stock Accounts
Par APIC Treasury
Retaine
d
Earning
s
9:
Balance at 12/31/19 $2,000,00
0
$968,000 ($48,000) $370,00
0
E15-9.Stock dividends and retained earnings (LO 15-4, LO 15-5)
(AICPA adapted)
The entry to record the stock dividend (900 shares x $8 = $7,200) is:
The retained earnings balance on March 31, 2018, is:
Balance on 12/31/17 $73,000
E15-10. Weighted-average number of shares (LO 15-6)
Analysis of common shares: Weight Weighted
Number (months) Average
1/1/2017 Shares outstanding at beginning of
year
600,000 12/12 600,000
outstanding
E15-11. Retained earnings transactions (LO 15-1, LO 15-4)
The legality of corporate dividend distributions varies from state to state. In
excess of current-year net income.
Nathan Corporation’s retained earnings balance as of the end of 2017 is
actually pay dividends in such a large amount.
E15-12. Determining stockholders’ equity after a stock split (LO 15-5)
(AICPA adapted)
The stockholders’ equity accounts on June 30, 2017, after the split
Retained earnings 1,350,000
E15-13. Computing basic EPS (LO 15-6)
(AICPA adapted)
Basic EPS =
(Net income- Preferred dividends)
Weighted-average common shares outstanding
10,000 common shares were issued and outstanding the full year, and
another 2,000 shares were issued on July 1. So the weighted-average
common shares outstanding is 10,000 + 2,000 x 1/2 year = 11,000
shares.
This means:
Basic EPS =
$10,000 $1,000
11, 000 shares
= $0.82 per share
E15-14. Finding the number of shares for EPS (LO 15-6)
(AICPA adapted)
Number
of shares
Weight
% of year
EPS
Basic Diluted
Common shares outstanding 1/1/17 5,000,000 100% 5,000,000 5,000,000
Number of shares used in EPS computation 6,000,000 6,100,000
E15-15. Calculating earnings per share (LO 15-6)
(AICPA adapted)
Requirements 1 and 2:
EPS for 2017
Basic Diluted
Common shares outstanding 90,000 90,000
Net income as reported $285,000 $285,000
Earnings per share $2.90 $2.38
E15-16. Employee stock options (LO 15-7, LO 15-8)
(AICPA adapted)
Requirement 1 – Compensation expense in 2017 and 2018
Total compensation cost (15 x 20,000) $300,000
2018 $75,000
Requirement 2 – Tax benefit in 2023
Stock price at date of exercise $53
Tax benefit in 2023 $147,000
Financial Reporting and Analysis (7th Ed.)
Chapter 15 Solutions
Financial Reporting for Owners’ Equity
Problems
Problems
P15-1.Identifying incentives for stock repurchases (LO 15-2)
Requirement 1:
The answer to this question depends on when, during the year, shares
Target 2018 EPS = $5.25 = $10 million/shares
There must be 1,818,182 shares outstanding, so 86,580 shares must be
is borrowed.
Requirement 2:
If the buybacks occur mid-year, Keystone would need to double the number
Requirement 3:
There are several reasons Keystone’s management may want to maintain the
Management compensation and loan agreements may be tied to specific
Maintain credibility with analysts and investors by delivering earnings
P15-2. Understanding convertible debt (LO 15-9)
Requirement 1:
Investors who purchase Massey Coal’s convertible notes receive two distinct
promised interest rate (2%) for the debt component because the notes
include a valuable conversion option.
Requirement 2:
As described in Chapter 11, the financial statement notes for long-term debt
addition, this note typically discloses the average interest rate the firm is
paying on its long-term debt.
Requirement 3:
U.S. GAAP guidelines do not yet require firms to bifurcate the convertible note
component and conversion option, and use the 12% interest rate.
P15-3. Recording cash and stock dividends (LO 15-5)
Requirement 1:
Journal entries for the three dividend events are:
Preferred dividends: $10 per share x 50,000 shares.
DR Retained earnings $250,000
CR Cash
$250,000
Stock dividend: Since the dividend is less than 25%, it is recorded at the market
$12,900,000 or ($135 – $6) x 100,000.
DR Retained earnings $13,500,000
12,900,000
Requirement 2:
The market value of the company’s common stock at the time the stock
unchanged. As a result, the share price will fall from $135 to $122.73
($135,000,000/1,100,000).
P15-4. Determining the effects of splits, dividends, and retained earnings (LO
15-5)
Requirement 1:
Both options allow the company to avoid violating the limit on cash dividend
payments. With regard to option A, a stock split of 12 for 10 means investors
recording the dividend. Retained earnings would be reduced by the par-value
of stock issued, or $1,980,000 (30% x 1,100,000 shares x $6 per share) but
this will not violate the dividend constraint.
Requirement 2:
Stockholders prefer cash dividends and stock price appreciation to just more
dividend payments in the future. Otherwise, it is not clear that stockholders will
have a strong preference for any of these options.