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CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
12-21
Prob. 12–4A (Concluded)
3.
Morrow Enterprises Inc.
Statement of Stockholders’ Equity
For the Year Ended December 31, 20Y6
Common
Stock
Paid-In
Capital in
Excess of
Stated
Value
Paid-In
Capital from
Sale of
Treasury
Stock
Retained
Earnings
Treasury
Stock
Total
Balances, January 1
$7,500,000
$ 825,000
$ 0
$33,600,000
$(450,000)
$41,475,000
Issued common stock
1,500,000
300,000
1,800,000
Net income
1,125,000
1,125,000
Cash dividends
(43,800)
(43,800)
Stock dividend
360,000
90,000
(450,000)
0
Sale of treasury stock
200,000
450,000
650,000
Purchase of treasury
stock
(570,000)
(570,000)
Balances, December 31
$9,360,000
$1,215,000
$200,000
$34,231,200
$(570,000)
$44,436,200
4.
Stockholders’ Equity
Paid-in capital:
Common stock, $20 stated value (500,000 shares
authorized, 468,000 shares issued)
$9,360,000
Excess of issue price over stated value
1,215,000
From sale of treasury stock
200,000
Total paid-in capital
$10,775,000
Retained earnings
34,231,200
Total
$45,006,200
Treasury stock (30,000 shares at cost)
(570,000)
Total stockholders’ equity
$44,436,200
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
12-22
Prob. 12–5A
Jan.
9
No entry required. The stockholders’ ledger would be revised to
record the increased number of shares held by each stockholder
and new par value.
Feb.
28
Treasury Stock (40,000 $28)
1,120,000
Cash
1,120,000
May
1
Cash Dividends {(75,000 $0.80) +
[(1,200,000 – 40,000) $0.12]}
199,200
Cash Dividends Payable
199,200
July
10
Cash Dividends Payable
199,200
Cash
199,200
Sept.
7
Cash (30,000 $34)
1,020,000
Treasury Stock (30,000 $28)
840,000
Paid-In Capital from Sale of Treasury
Stock [30,000 ($34 – $28)]
180,000
Oct.
1
Cash Dividends
202,800
Cash Dividends Payable
202,800
{(75,000 $0.80) – [(1,200,000 – 10,000) $0.12]}.
1
Stock Dividends [(1,200,000 – 10,000) 2% $36]
856,800
Stock Dividends Distributable (23,800 $25)
595,000
Paid-In Capital in Excess of Par—
Common Stock [23,800 ($36 – $25)]
261,800
Dec.
1
Cash Dividends Payable
202,800
Cash
202,800
1
Stock Dividends Distributable
595,000
Common Stock
595,000
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
12-23
Prob. 12–1B
1.
Preferred Dividends
Common Dividends
Total
Per
Per
Year
Dividends
Total
Share
Total
Share
20Y1........
$ 24,000
$ 24,000
$ 0.96
$ 0
$0.00
20Y2........
10,000
10,000
0.40
0
0.00
20Y3........
126,000
101,000*
4.04
25,000
0.25
20Y4........
100,000
45,000
1.80
55,000
0.55
20Y5........
125,000
45,000
1.80
80,000
0.80
20Y6........
125,000
45,000
1.80
80,000
0.80
$10.80
$2.40
* $101,000 = (20Y1 dividends in arrears of $21,000) +
(20Y2 dividends in arrears of $35,000) +
(20Y3 current dividend of $45,000)
3. a. 1.8% ($1.80 ÷ $100)
b. 8.0% ($0.40 ÷ $5)
Prob. 12–2B
Oct.
9
Cash
1,500,000
Mortgage Note Payable
1,500,000
17
Cash (20,000 $126)
2,520,000
Preferred Stock (20,000 $120)
2,400,000
Paid-In Capital in Excess of Par—
Preferred Stock [20,000 ($126 – $120)]
120,000
28
Building
4,150,000
Land
800,000
Common Stock (300,000 $15)
4,500,000
Paid-In Capital in Excess of Par—
Common Stock [300,000 ($16.50* – $15.00)]
450,000
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
12-24
Prob. 12–3B
a.
Treasury Stock (87,500 $8)
700,000
Cash
700,000
b.
Cash (55,000 $11)
605,000
Treasury Stock (55,000 $8)
440,000
Paid-In Capital from Sale of Treasury Stock
[55,000 ($11 – $8)]
165,000
c.
Cash (20,000 $84)
1,680,000
Preferred Stock (20,000 $80)
1,600,000
Paid-In Capital in Excess of Par—Preferred
Stock [20,000 ($84 – $80)]
80,000
d.
Cash (400,000 $13)
5,200,000
Common Stock (400,000 $9)
3,600,000
Paid-In Capital in Excess of Par—Common
Stock [400,000 ($13 – $9)]
1,600,000
e.
Cash (18,000 $7.50)
135,000
Paid-In Capital from Sale of Treasury Stock
[18,000 ($8.00 – $7.50)]
9,000
Treasury Stock (18,000 $8)
144,000
f.
Cash Dividends
234,775*
Cash Dividends Payable
234,775
g.
Cash Dividends Payable
234,775
Cash
234,775
* Calculation of cash dividends:
Outstanding Shares of Stock
Preferred Stock
Common Stock
Beginning of year
60,000 shares
1,750,000 shares
(a)
(87,500)
(b)
55,000
(c)
20,000
(d)
400,000
(e)
18,000
80,000 shares
2,135,500 shares
Cash dividends per share
$1.60
$0.05
Dividends paid in (f)
$128,000
$106,775
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
Prob. 12–4B
1. and 2.
Common Stock
Jan.
1
Bal.
3,100,000
Apr.
13
1,000,000
July
16
123,000
Dec.
31
Bal.
4,223,000
Paid-In Capital in Excess of Stated Value
—Common Stock
Jan.
1
Bal.
1,240,000
Apr.
13
600,000
June
14
61,500
Dec.
31
Bal.
1,901,500
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
12-26
Prob. 12–4B (Continued)
2.
20Y1
Jan.
15
Cash Dividends Payable
34,320
Cash [(620,000 – 48,000 $0.06]
34,320
Mar.
15
Cash (48,000 $6.75)
324,000
Treasury Stock (48,000 $6.00)
288,000
Paid-In Capital from Sale of Treasury Stock
[48,000 ($6.75 – $6.00)]
36,000
Apr.
13
Cash (200,000 $8)
1,600,000
Common Stock (200,000 $5)
1,000,000
Paid-In Capital in Excess of Stated Value—
Common Stock [200,000 ($8 – $5)]
600,000
June
14
Stock Dividends [(620,000 + 200,000) 3% $7.50]
184,500
Stock Dividends Distributable (24,600 $5)
123,000
Paid-In Capital in Excess of Stated Value—
Common Stock [24,600 ($7.50 – $5.00)]
61,500
July
16
Stock Dividends Distributable
123,000
Common Stock
123,000
Oct.
30
Treasury Stock (50,000 $6)
300,000
Cash
300,000
Dec.
30
Cash Dividends
63,568
Cash Dividends Payable
63,568
[(620,000 + 200,000 + 24,600 – 50,000) $0.08].
31
Retained Earnings
248,068
Stock Dividends
184,500
Cash Dividends
63,568
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
12-27
Prob. 12–4B (Concluded)
3.
Nav-Go Enterprises Inc.
Statement of Stockholders’ Equity
For the Year Ended December 31, 20Y1
Common
Stock
Paid-In
Capital in
Excess of
Stated Value
Paid-In
Capital from
Sale of
Treasury
Stock
Retained
Earnings
Treasury
Stock
Total
Balances, January 1
$3,100,000
$1,240,000
$ 0
$4,875,000
$(288,000)
$ 8,927,000
Issued common stock
1,000,000
600,000
1,600,000
Net income
775,000
775,000
Cash dividends
(63,568)
(63,568)
Stock dividend
123,000
61,500
(184,500)
0
Sale of treasury stock
36,000
288,000
324,000
Purchase of treasury
stock
(300,000)
(300,000)
Balances, December 31
$4,223,000
$1,901,500
$36,000
$5,401,932
$(300,000)
$11,262,432
4.
Stockholders’ Equity
Paid-in capital:
Common stock, $5 stated value (900,000 shares
authorized, 844,600 shares issued)
$4,223,000
Excess of issue price over stated value
1,901,500
From sale of treasury stock
36,000
Total paid-in capital
$ 6,160,500
Retained earnings
5,401,932
Total
$11,562,432
Treasury stock (50,000 shares at cost)
(300,000)
Total stockholders’ equity
$11,262,432
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
Prob. 12–5B
Jan.
15
No entry required. The stockholders’ ledger would be revised to record the
increased number of shares held by each stockholder and new par value.
Mar.
1
Cash Dividends
81,000
Cash Dividends Payable
81,000
[(100,000 $0.25) + (800,000 $0.07)].
Apr.
30
Cash Dividends Payable
81,000
Cash
81,000
May
31
Treasury Stock (60,000 $32)
1,920,000
Cash
1,920,000
Aug.
17
Cash (40,000 $38)
1,520,000
Treasury Stock (40,000 $32)
1,280,000
Paid-In Capital from Sale of Treasury
Stock [40,000 ($38 – $32)]
240,000
Sept.
1
Cash Dividends
95,200
Cash Dividends Payable
95,200
{(100,000 $0.25) + [(800,000 – 60,000 +
40,000) $0.09]}.
1
Stock Dividends [(800,000 – 60,000 + 40,000)
1% $40]
312,000
Stock Dividends Distributable (7,800 $30)
234,000
Paid-In Capital in Excess of Par—
Common Stock [7,800 ($40 – $30)]
78,000
Oct.
31
Cash Dividends Payable
95,200
Cash
95,200
31
Stock Dividends Distributable
234,000
Common Stock
234,000
12-29
COMPREHENSIVE PROBLEM 4
1.
a.
Cash (15,000 $30)
450,000
Common Stock (15,000 $20)
300,000
Paid-In Capital in Excess of Par—
Common Stock [15,000 ($30 – $20)]
150,000
b.
Cash (4,000 shares $100)
400,000
Preferred Stock (4,000 shares $80)
320,000
Paid-In Capital in Excess of Par—
Preferred Stock [4,000 shares ($100 – $80)]
80,000
c.
Cash ($500,000 1.04)
520,000
Bonds Payable
500,000
Premium on Bonds Payable
20,000
d.
Cash Dividends (100,000 shares $0.50 per share)
50,000
Cash Dividends Payable
50,000
Cash Dividends (20,000 shares $1.00 per share)
20,000
Cash Dividends Payable
20,000
e.
Cash Dividends Payable
70,000
Cash
70,000
f.
Treasury Stock (8,000 shares $33 per share)
264,000
Cash
264,000
g.
Cash Dividends
20,000
Cash Dividends Payable
20,000
h.
Cash Dividends Payable
20,000
Cash
20,000
i.
Cash (2,600 shares $38 per share)
98,800
Treasury Stock (2,600 shares $33 per share)
85,800
Paid-In Capital from Sale of Treasury Stock
13,000
j.
Interest Expense
11,500
Premium on Bonds Payable
1,000
Cash
12,500
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
12-30
Comp. Prob. 4 (Continued)
2. a.
Equinox Products Inc.
Income Statement
For the Year Ended December 31, 20Y8
Sales
$ 5,313,000
Cost of goods sold
(3,700,000)
Gross profit
$ 1,613,000
Operating expenses:
Selling expenses:
Sales salaries expense
$385,000
Sales commissions
185,000
Advertising expense
150,000
Depreciation expense—store
buildings and equipment
100,000
Delivery expense
30,000
Store supplies expense
21,000
Miscellaneous selling expense
14,000
$885,000
Administrative expenses:
Office salaries expense
$170,000
Office rent expense
50,000
Depreciation expense—office
buildings and equipment
30,000
Office supplies expense
10,000
Miscellaneous administrative
expense
7,500
267,500
Total operating expenses
(1,152,500)
Operating income
$ 460,500
Other revenue and expense:
Interest revenue
$ 30,000
Interest expense
(21,000)
9,000
Income before income tax
$ 469,500
Income tax
(140,500)
Net income
$ 329,000
12-31
© 2019 Cengage Learning. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Comp. Prob. 4 (Continued)
2. b.
Equinox Products Inc.
Statement of Stockholders’ Equity
For the Year Ended December 31, 20Y8
Preferred
Stock
Paid-in Capital in
Excess of
Par—Preferred
Stock
Common
Stock
Paid-In Capital in
Excess of Par—
Common Stock
Paid-In Capital
From Sale of
Treasury Stock
Retained
Earnings
Treasury
Stock
Total
Balances, January 1
$1,280,000
$ 70,000
$1,700,000
$736,800
$ 0
$8,197,220
$ 0
$11,984,020
Issued common stock
300,000
150,000
450,000
Issued preferred stock
320,000
80,000
400,000
Net income
329,000
329,000
Cash dividends
(255,120)
(255,120)
Sale of treasury stock
13,000
85,800
98,800
Purchase of treasury
(264,000)
(264,000)
stock
Balances, December 31
$1,600,000
$ 150,000
$2,000,000
$886,800
$ 13,000
$8,271,100
$(178,200)
$12,742,700
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
12-32
Comp. Prob. 4 (Continued)
2. c.
Equinox Products Inc.
Balance Sheet
December 31, 20Y8
Assets
Current assets:
Cash
$ 282,850
Accounts receivable
$ 545,000
Allowance for doubtful accounts
(8,450)
Accounts receivable, net
536,550
Inventory, at lower of cost
(FIFO) or market
778,000
Interest receivable
1,200
Prepaid expenses
27,400
Total current assets
$ 1,626,000
Property, plant, and equipment:
Store buildings and equipment
$12,560,000
Accumulated depreciation
(4,126,000)
Store buildings and equipment,
net value
$8,434,000
Office buildings and equipment
$ 4,320,000
Accumulated depreciation
(1,580,000)
Office buildings and equipment,
net value
2,740,000
Total property, plant, and
equipment
11,174,000
Intangible assets:
Goodwill
700,000
Total assets
$13,500,000
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
12-33
Comp. Prob. 4 (Concluded)
Liabilities
Current liabilities:
Accounts payable
$ 194,300
Income tax payable
44,000
Total current liabilities
$ 238,300
Long-term liabilities:
Bonds payable, 5%, due in 10 years
$ 500,000
Premium on bonds payable
19,000
519,000
Total liabilities
$ 757,300
Stockholders’ Equity
Paid-in capital:
Preferred 5% stock, $80 par
(30,000 shares authorized;
20,000 shares issued)
$1,600,000
Excess of issue price over par
150,000
Paid-in capital, preferred stock
$1,750,000
Common stock, $20 par (400,000
shares authorized; 100,000
shares issued, 94,600 shares
oustanding)
$2,000,000
Excess of issue price over par
886,800
Paid-in capital, common stock
2,886,800
From sale of treasury stock
13,000
Total paid-in capital
$4,649,800
Retained earnings
8,271,100
Treasury common stock
(5,400 shares at cost)
(178,200)
Total stockholders’ equity
12,742,700
Total liabilities and stockholders’
equity
$13,500,000
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
12-34
MAKE A DECISION
MAD 12–1
a.
gOutstandin Shares Common of Number Average
Dividends PreferredIncomeNet
Share per Earnings −
=
$0
–
$2,371 =
3,207
b. Amazon’s earnings per share is $5.00, while Wal-Mart has an earnings per share of $4.58.
While both companies are profitable, Amazon is more profitable than Wal-Mart from an
earnings-per-share perspective.
c. Amazon’s market price was $750, while Wal-Mart’s was $69; Amazon’s market price is
almost eleven times as large as Wal-Mart’s ($750 $69). This may seem unusual, given
MAD 12–2
a.
gOutstandin Shares Common of Number Average
Dividends PreferredIncomeNet
Share per Earnings −
=
$1,662$17,906 =
−
5,052.8
b. Wells Fargo’s earnings per share is $4.03, compared to Bank of America’s earnings per
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
MAD 12–2 (Concluded)
c. We would expect the market price of Wells Fargo to be higher than the market price of
MAD 12–3
a.
Year 3
Year 2
Year 1
Net income
$1,407
$ 888
$1,450
Preferred dividends
(14)
(14)
(14)
Numerator
$1,393
$ 874
$1,436
Denominator: Average
number of common shares
outstanding
÷ 499
÷ 484
÷ 468
Earnings per share
$ 2.79
$ 1.81
$ 3.07
b. The earnings per share declined from $3.07 to $1.81 between Year 1 and Year 2. In Year 3,
the earnings per share increased from $1.81 to $2.79, or 54% [($2.79 – $1.81) ÷ $1.81].
A horizontal analysis of the net income and the average number of common shares
outstanding with Year 1 as the base year is as follows:
Year 3
Year 2
Year 1
Net income
Average number of common
97%
($1,407 ÷ $1,450)
61%
($888 ÷ $1,450)
100%
shares outstanding
107%
(499 ÷ 468)
103%
(484 ÷ 468)
100%
The decrease in earnings per share in Year 2 and the subsequent increase in Year 3
is mostly explained by the change in net income growth over the three years. The
average number of common shares outstanding grew modestly, which has the effect
of reducing the growth in earnings per share. Thus, for example, the earnings per
share between Year 2 and Year 3 grew 54% [($2.79 – $1.81) ÷ $1.81], while the net
income grew 58% [($1,407 – $888) ÷ $888].
12-37
MAD 12–5 (Concluded)
d. From a stockholder’s perspective, the earnings per share is a better relative measure
of earnings between the two banks. BB&T has stronger earnings and is able to divide
CHAPTER 12 Corporations: Organization, Stock Transactions, and Dividends
TAKE IT FURTHER
TIF 12–1
Tommy is clearly acting unethically for several reasons. First, he is violating the
company’s policy on stock purchases. This policy was established to ensure the fair and
timely dissemination of information that gives all potential investors the same chance to
TIF 12–2
Lou and Shirley are behaving in a professional manner as long as full and complete
TIF 12–3
A sample solution based on Alphabet’s Form 10-K for the fiscal year ended December 31,
2016, follows:
1. Alphabet Inc.
3. Alphabet is a collection of businesses, the largest of which is Google. At its core, Google
4. $167,497 million
6. $139,036 million ($167,497 million total assets – $28,461 million total liabilities)
8. $19,478 million
9. Common stock: Class A authorized, 9 million; Class B authorized, 3 million; Class C
11. $771.82 at December 30, 2016
13. Alphabet has never declared or paid a cash dividend.
12-39
TIF 12–4
Memo
To: Chairman of the Board
From: A+ Student
Re: Fourth Quarter 20Y8 Cash Dividend
In order to prudently declare a dividend for the fourth quarter, the company must have a
sufficient retained earnings balance from which to declare the dividend. On December
31, 20Y8, Motion Designs has a $4,630,000 balance in retained earnings. This balance is
more than enough to cover the $90,000 declaration of the normal quarterly cash dividend
Before declaring a dividend, the company should also consider its working capital and
the effect of plant expansion on the current ratio requirement of the loan. On December
31, 20Y8, the company has working capital of $5,000,000 ($7,000,000 – $2,000,000),
