Accounting Chapter 11 Capitalization of retained earnings for small stock

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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)

Mar. 14

Mar. 25

Mar. 31

Part 2

Dec. 31

Beg. Bal.

Jan. 17

Feb. 5

Feb. 28

Mar. 14

Mar. 25

Mar. 31

Common stock ……….

$960,000

$ 960,000

$1,080,000

Wild & Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 11

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Problem 11-4B (45 minutes)

Part 1

Outstanding common shares

Feb. 15

May 15

Aug. 15

Nov. 15

Beginning balance ………………….

17,000

Less treasury stock (Mar. 2) ……

Part 2

Cash dividend amounts

Feb. 15

May 15

Aug. 15

Nov. 15

$ 0.40

Total dividend …………………………

Part 3

Capitalization of retained earnings for small stock dividend

Number of shares …………………………………………..

Market value per share ……………………………………

x $42

Total capitalized ……………………………………………..

Part 4

Cost per share of treasury stock

Total amount paid …………………………………………..

$ 40,000

Shares purchased …………………………………………..

Part 5

Net income

Retained earnings, beginning balance ……………

$270,000

Less dividends: Feb. 15 ………………………………..

(6,800)

May 15 ………………………………..

(6,400)

Retained earnings, ending balance ………………..

$295,200

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Problem 11-5B (25 minutes)

1. Computation of stock par values

2. Dividend allocation to preferred and common shareholders

(a)

Preferred

(b)

Common

Total

2 years’ dividends in arrears ….

$ 60,000*

$ 0

$ 60,000

Wild & Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 11

SERIAL PROBLEM — SP 11

Serial Problem — Business Solutions (25 minutes)

1a. Journal entry for issuance of common stock to Cicely

Cash …………………………………………………………..

86,000

Common Stock………………………………………

86,000

Cash …………………………………………………………..

86,000

Preferred Stock ……………………………………..

86,000

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 may

not wish to have a second person who may have authority to make

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Serial Problem (concluded)

b. Having a preferred shareholder means that Santana’s Uncle Marcello

will not have the same voting rights as Santana. Marcello may be

expecting regular dividend, however, so Santana should be prepared

to pay $6,020 ($86,000 x 7%) in dividends each year. This is not a

3. There is no correct answer to the question of which proposal Santana

should adopt. Class discussion may indicate which proposal the class

prefers.

Wild & Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 11

Company Analysis — AA 11–1

(All shares in thousands.)

1. a. 4,443,236 common stock outstanding

2. a. $14,119 million in cash dividends to shareholders

3. a. $11.97 basic earnings per share

4. Unfavorable

5. Increase

Explanation: Buying back outstanding shares generally increases

Wild & Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 11

Comparative Analysis — AA 11-2

1. Earnings per share = Net income

Weighted-average common shares outstanding

2. Dividend yield = Annual cash dividends per share

Market value per share

3. Price-earnings ratio = Market value per share

Earnings per share

4. Google

Explanation: Based on the price-earnings ratio of both companies, the

Wild & Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 11

Extended Analysis — AA 11-3

1. Earnings per share:

2. Increase

Explanation: Buying back outstanding shares generally increases

Wild & Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 11

DISCUSSION QUESTIONS

1. Organization expenses (costs) are incurred in creating a corporation. Examples include:

2. Organization expenses (costs) are reported as expenses when incurred—as part of

3. The board of directors of a corporation is responsible for overseeing the corporation’s

activities. The directors are elected by the corporation’s stockholders.

4. Authorized shares represent the maximum number of shares that a corporation’s charter

5. The preemptive right of common stockholders is the right to maintain their relative

6. The general rights of common stockholders include: (1) the right to vote in stockholders’

meetings, (2) the right to sell or otherwise dispose of stock, (3) the preemptive right, (4)

7. The market value per share of stock is the price at which a share of stock is bought or

8. The three important dates governing dividends are:

a. date of declaration⎯the date the directors vote to pay a dividend.

9. Declaring a stock dividend has no effect on assets, liabilities, or total equity. Also, the

subsequent distribution of the stock dividend has no effect on these items. Instead, the

10. A stock dividend results in a distribution of additional shares to stockholders and the

capitalization of retained earnings. A stock split calls in the old shares and replaces them

Wild & Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 11

11. A treasury stock purchase reduces total assets and total equity by equal amounts.

12. With a simple capital structure, earnings per share is calculated by first subtracting any

declared and cumulative preferred dividends from net income, and then dividing the

Wild & Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 11

Ethics Challenge — BTN 11-1

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

Pharmaceuticals’ stock, Harriet may be violating securities laws, so she

Communicating in Practice — BTN 11-2

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 11-3

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

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Teamwork in Action — BTN 11-4

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 both

assets (cash) and equity (treasury stock). Also, treasury stock is a

2. The team should establish the acquisition entry as follows

Treasury Stock, Common …………………………...

Cash ……………………………………………………..

Each member should prepare one of the following reissue entries:

a.

Cash …………………………………………………………..

13,400

Treasury Stock, Common ………………………

13,400

Received $134 per share for 100 treasury

shares costing $134 per share.

b.

Cash …………………………………………………………..

15,000

Paid-In Capital, Treasury Stock ………………

1,600

Treasury Stock, Common ………………………

13,400

c.

Cash …………………………………………………………..

12,000

Treasury Stock, Common ………………………

13,400

Wild & Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 11

Teamwork in Action (Continued)

3. When presenting and explaining the above entries to the team, the

following points should be made by the team members:

The similarities in all reissue entries a through c are:

• The net effect of the transaction is to increase assets and equity by the

Wild & Shaw Financial and Managerial Accounting 9e Solutions Manual: Chapter 11

Entrepreneurial Decision — BTN 11-5

1.

Plan A

Plan B

Net income ……………………………………………………

$ 72,000

Less preferred dividends ……………………………….

0

(10,000)

Net income for common stockholders ……………

$ 72,000

$ 62,000

$375,000

2.

Plan A

Plan B

Net income ……………………………………………………

$ 16,800

Less preferred dividends ……………………………….

0

(10,000)

Net income for common stockholders ……………

$ 16,800

$ 6,800

$375,000

3. The difference between the answers for parts 1 and 2 arises from the

percent of return generated with the assets invested in the corporation.

In part 1, the founder’s return on equity is 15.4% for Plan A, which is less

than the 16.5% for Plan B. However, the return on equity is only 3.6% in

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