Brief Learning
Exercises Objectives Skills
B. Ex. 11.1 Stockholders’ equity 11-4
B. Ex. 11.2 Stockholders’ equity 11-4
B. Ex. 11.3 Dividends on preferred stock 11-5
B. Ex. 11.4
Dividends on common and
preferred stock
11-5 Analysis
B. Ex. 11.5 11-5
B. Ex. 11.6 Book value 11-7 Analysis, communication
B. Ex. 11.7 Book value 11-7
B. Ex. 11.8 Stock split 11-8
B. Ex. 11.9 Treasury stock 11-4, 11-9
B. Ex. 11.10 Treasury stock 11-4, 11-9
Skills
11.1 Form of organization 11-1–11-3 Analysis, communication
11.2 Accounting terminology 11-1–11-9 Analysis
11.3 Prepare equity section 11-4, 11-5 Analysis, communication
11.4 11-4, 11-5 Analysis, communication
11.5 Analyzing equity 11-4–11-7 Analysis
11.6 Preferred stock alternatives 11-5, 11-6 Analysis
11.7 Reporting effects of transactions 11-4, 11-7 Analysis
11.8 Computing book value 11-4–11-7 Analysis, communication
11.9 Treasury stock transactions 11-9 Analysis, communication
11.10 Effects of stock splits 11-8 Communication, judgment
11.11 Treasury stock presentation 11-9 Communication, judgment
11.12
Real World: Kimberly-Clark
11-4 Analysis, communication
Authorized stock
11.13 11-4, 11-9 Analysis, communication
11.14 Treasury stock and stock split 11-8, 11-9 Analysis
11.15 Real World: Home Depot 11-4, 11-7
CHAPTER 11
STOCKHOLDERS’ EQUITY:
Learning
Objectives
PAID-IN CAPITAL
Topic
Analysis
Dividends on common and preferred
stock
OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL
THINKING CASES
Analysis
Analysis
Analysis
Analysis, communication
Analysis, communication
Analysis
Analysis, communication
Topic
Exercises
Analysis, communication,
research
Problems Learning
Sets A, B Objectives Skills
11.1 A,B Reporting stockholders’ equity
11-4, 11-5,
11-6
Analysis, communication
11.2 A,B Reporting stockholders’ equity
11-4, 11-5,
11-6
Analysis, communication
11.3 A,B Reporting stockholders’ equity
11-4, 11-5,
11-6
Analysis, communication
11.4 A,B Comprehensive equity problem 11-4, 11-5 Analysis
11.5 A,B Analysis of equity 4, 5 Analysis
11.6 A,B Comprehensive equity analysis 11-1–11-7 Analytical, communication,
11.7 A,B Par, book, and market values 4, 7 Communication, judgment
11.8 A,B
Comprehensive equity with
treasury stock transactions
11-4, 11-5,
11-7, 11-9
Analysis, communication
11.9 A,B
Comprehensive equity with
treasury stock transactions and
stock splits
11-4, 11-5,
11-7, 11-8,
11-9
Analytical, communication,
judgment
11.1 11-5, 11-7 Communication, judgment
11.2 11-7 Communication
11.3 Communication, judgment
11.4
11.5 Real World: Staples, Inc. Communication, technology
Stockholders’ equity items
(Internet)
Communication, judgment,
technology
11-1, 11-2,
11-3
Topic
Critical Thinking Cases
Factors affecting market prices of
common stocks
Real World: McDonnell Douglas,
Inc., Boeing, Citicorp, Ventitex,
Inc.
11-1, 11-2,
11-3
11-4, 11-5,
11-7, 11-9
DESCRIPTIONS OF PROBLEMS AND
CRITICAL THINKING CASES
Problems (Sets A and B)
11.1 A,B
11.2 A,B
11.3 A,B
11.4 A,B
11.5 A,B
11.6 A,B
11.7 A,B
A short problem requiring the completion of the stockholders’
equity section of a corporate balance sheet. Includes preferred
stock dividends and conceptual issues pertaining to the market
price of preferred stock.
Below are brief descriptions of each problem and case. These descriptions are accompanied by the
estimated time (in minutes) required for completion and by a difficulty rating. The time estimates assume
use of the partially filled-in working papers.
20 Easy
20 Easy
25 Medium
35 Medium
15 Easy
Robbinsville Press/Searfoss, Inc.
Techno Corporation/Whitaker Video
A straightforward discussion of the relationships (if any) among
par value, book value, and market value per share. A company has
a book value 6,500 times greater than its par value, and a market
value 65,000 times as high. Fun problem that makes a point.
A more difficult problem requiring the completion of the
stockholders’ equity section of a corporate balance sheet. Includes
preferred stock dividends and conceptual issues pertaining to
equity versus debt financing.
Sharnes Communications, Inc./Markup, Inc.
A short but comprehensive problem on corporations. Includes
journal entries for issuance of common stock and preferred stock.
Also includes dividends on preferred stock, closing entries, and the
preparation of the stockholders’ equity section of a corporate
balance sheet.
Ft. Smith Products/Mirror, Inc.
Analysis of the stockholders’ equity of a publicly owned
corporation. Includes a discussion of why a business may opt to
become publicly owned and the reasons why the dividend yields
on preferred stocks vary.
35 Strong
35 Medium
McMinn Publications/Banner Publications
A second short problem requiring the completion of the
stockholders’ equity section of a corporate balance sheet. Includes
preferred stock dividends and conceptual issues pertaining to
dividends in arrears.
A more difficult problem involving distinction among par values,
book values, and market values.
Parsons, Inc./Timberlake Corporation
Manhattan Transport Company/Ray Beam, Inc.
Problems (continued)
Feller Corporation/Teek Corporation
Herndon Industries/Laird Industries
Critical Thinking Cases
Factors Affecting the Market Prices of Preferred and Common
Factors Affecting the Market Prices of Common Stocks
Selecting a Form of Organization
S.E.C. Enforcement Division
Ethics, Fraud & Corporate Governance
Examining Stockholders’ Equity
Internet
*Supplemental Topic, “Special Types of Liabilities.”
11.8 A,B
Interview; No
time estimate
Students are to interview the owners of two small businesses with
different forms of organization and find out why the particular form
was selected—and if they have any misgivings.
15 Medium
A stockholders’ equity problem involving paid-in capital from treasury
stock transactions. Requires the computation of book value per share
and reporting for the statement of cash flows.
A comprehensive equity problem involving treasury stock transactions
in two different years, preferred and common stock transactions, book
value calculations, and an understanding of stock splits.
11.1
30 Strong
Students are asked to explain whether the prices of preferred stock,
common stock, and convertible preferred stock are likely to rise or fall
if profitability increases dramatically and interest rates rise slightly. A
problem that stimulates lively classroom discussion.
Students are to explain the reason for changes in the market prices of
stocks of various real companies. A difficult problem that is very
thought-provoking.
11.9 A,B
15 Medium
11.2
25 Strong
11.3
30 Easy
11.4
11.5
Students are asked to identify and discuss elements of stockholders’
equity appearing in the balance sheet of Staples, Inc.
20 Easy
Students do an internet search to locate the website of the Securities &
Exchange Commission and respond to questions about the S.E.C.
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
1.
2. a.
b.
c.
d.
3
4.
5. a.
Paid-in capital of a corporation represents the amount invested by stockholders and is generally
Federal taxation on income. A corporation is subject to federal income tax on its income, and
Large corporations are often said to be publicly owned because they are literally owned by the
Owners’ liability for debts of the business. Sole proprietors are personally liable for the debts
Transferability of ownership interest. A sole proprietor generally must sell his or her entire
Continuity of existence. A sole proprietorship is terminated upon sale or abandonment by the
Par value represents the legal capital per share, that is, the amount below which stockholders’
equity cannot be reduced except by losses. The primary significance of par value is that a
Cumulative means that unpaid dividends on preferred stock are carried forward and must be
6.
7.
8
9. a.
10.
11.
A change in the market price of IBM’s outstanding shares of capital stock had no immediate
The purpose of a stock split is to reduce the per-share market price of the company’s stock down
Book value per share represents the amount of net assets (or stockholders’ equity) associated
Noncumulative preferred stock is entitled to dividends only if and when they are declared. If
(a) Cash is classified as an asset; (b) Organization Costs typically are classified as an expense;
When a corporation obtains a bank loan there is no effect upon book value per share of
12.
13.
Treasury stock is corporate stock that has been issued and then reacquired by the issuing company.
One reason for acquiring treasury stock is to have stock available to issue to officers and employees
The purpose of this rule is to protect corporate creditors, for whom stockholders’ equity represents the
Direction of change
15.
14.
The major types of transactions and activities that change the amount of paid-in capital and the
direction of that change are as follows:
Transaction/activity
No definitive answer can be given to this question because a case can be made for having preferred
stock and for not having preferred stock. Similarly, if preferred stock is included in the capital
Sale of capital stock
Stock split
Sale of treasury stock
B.Ex. 11.2 $100,000
Total stockholders’ equity
Additional paid-in capital:
Preferred stock (1,000 shares @ $10)
Common stock (10,000 shares @ $25)
Common stock (10,000 shares @ $3)
Retained earnings
B.Ex. 11.3
100,000 shares x $100 par value x 7% dividend rate x 3 years =
B.Ex. 11.4 $225,000
10,000 shares x $100 par x 6% x 2 years
Dividends available for common stock
B.Ex. 11.5 $120,000
10,000 x $100 par x 8% x 1 year
10,000 x $100 par x 8% x 4 years = $320,000
Dividends available for common stock
Dividends per share on common stock:
$40,000/100,000 shares
Total dividend declared
Dividend requirements for preferred stock:
Dividend requirements for noncumulative preferred stock:
Total dividend declared
Dividends on arrears on preferred stock for three years are calculated as follows:
Preferred stock (1,000 shares @ $100)
B.Ex. 11.1
Common stock (10,000 shares @ $8)
Additional paid-in capital (10,000 shares @ $5)
Retained earnings
Total stockholders’ equity
B.Ex. 11.6
B.Ex. 11.7
Amount attributable to common stock
Less: Preferred stock at par value
Dividends in arrears (40,000 shares x $6)
$7,310,000/500,000 shares
$14.62
B.Ex. 11.8
B.Ex. 11.9 $1,000,000
Total stockholders’ equity
Less: Treasury stock (10,000 shares x $45)
Additional paid-in capital
(100,000 shares @ $15)
B.Ex. 11.10 $25,000,000
[70,000 shares x ($55 – $50)]
Total stockholders’ equity
Additional paid-in capital on treasury stock
(1,000,000 shares @ $7)
Common stock (1,000,000 shares @ $25)
Additional paid-in capital on common stock
The book value on common stock is calculated by adding all stockholders’ equity
accounts together and dividing by the number of shares of common stock
outstanding:
Total stockholders’ equity ($4,000,000 + $5,000,000 + $800,000 +
The stock split will double the number of shares outstanding from 100,000 to
Common stock (100,000 shares @ $10)
($1,500,000 + $750,000 + $800,000)/100,000 shares =
Ex. 11.1 a. (1)
(2)
Greater regulation
No personal liability of owners for debts of the business
Readily transferable ownership shares
Continuous existence
Double taxation on distributed earnings
b.
Ex. 11.2 a.
b.
d.
h.
Common stock
None (The price of preferred stock varies inversely with interest rates.)
Publicly owned corporation
Paid-in capital
Retained earnings
Market value
A corporation would probably be the better form of organization because of the
Double taxation
SOLUTIONS TO EXERCISES
Advantages:
Organizing the scuba diving school as a sole proprietorship.
Advantages:
Organizing the scuba diving school as a corporation.
Easy to form
No double taxation on distributed earnings
Disadvantages:
Personal liability of owner for debts of the business
Business ceases with death of owner
Ex. 11.3 a.
b.
$736,000
$160,000
Dividends ($50 x .08 x 40,000 x 2 years) ………….
Dividends on 8% cumulative preferred stock:
Current year’s dividend ($100 x .12 x 8,000) …………………………….
Total paid on 8% cumulative preferred stock ……………………
b.
$ 12.00 per share
Common stock ($160,000 ÷ 400,000 shares) ……
Ex. 11.5 a.
$16 [($20 million par value + $44 million additional paid-in capital) ÷ 4,000,000
Preferred stock, 8% cum. ($480,000 ÷ 40,000 shares) ……………..
Stockholders’ equity:
8% cumulative preferred stock, $100 par value,
Ex. 11.4
a.
Total dividends paid in third year ……………………………………………………..
$ 12.00 per share
Dividends per share:
Total stockholders’ equity …………………………………………………….
Total paid-in capital ……………………………………………………………………
Retained earnings ……………………………………………………………….
5,000 shares authorized, 2,500 shares issued and outstanding ……………………………………
Common stock, $2 stated value, 100,000 shares authorized,
70,000 shares issued and outstanding…………………………………………………………………………
Additional paid-in capital:
Preferred stock ……………………………………………………………………
Common stock ………………………………………………………………
e. $ 143,450,000
Ex. 11.6
a. $60,000
Amount to preferred stock ……………………………………………………………
Amount to common stock ……………………………………………………………..
b. $60,000
Amount to preferred stock:
Current year …………………………………………………………
In arrears …………………………………………………………….
Amount to common stock ………………………………………………………….
Current Stockholders’ Net
Assets Equity Income
a. I I NE
Ex. 11.7
Event
Annual dividends on the preferred stock are $14,000 (7,000 × $25 × 8%)
Total dividend ………………………………………………………………………………
Source)
Total stockholders’ equity ……………………………………………………………………
Total dividend …………………………………………………………………………….
I
Net Cash Flow
(from Any
Book value per share ($128.45 million ÷ 4 million shares) …………………………..
No. Changes in the market value of capital stock do not directly affect a
Less: Par value of preferred stock (150,000 shares x $100) ………………………………
Equity of common stockholders …………………………………………………..
Common shares outstanding …………………………………………………………..
Ex. 11.8 a.
200,000$
b.
dividends in arrears, $16,000) …………………………………………………
Equity of common stockholders ………………………………………………………………
813,200$
Ex. 11.9 a. Feb. 10 425,000
Cash ………………………………………
425,000
48,000
Cash ………………………………………
Restriction of retained earnings for treasury stock owned at year-end:
Stock ……………………………………………
Additional Paid-in Capital: Treasury
Cash …………………………………………………………….
Net assets (stockholders’ equity):
8% cumulative preferred stock ………………………………………………………..
No. The book value per share represents the stockholders’ share of the net book
Treasury Stock ……………………………………………….
Total stockholders’ equity (from part a) …………………………………………………..
Book value per share of common stock:
disclosed, but does not reduce the total amount of retained earnings of a company.
The restriction on retained earnings simply limits the amount of dividends the
corporation can pay as long as it holds treasury stock.
Common stock, $5 par, 60,000 shares issued ……………………………………..
Additional paid-in capital …………………………………………………………………
Total paid-in capital ……………………………………………………………..
Less: Deficit ………………………………………………………………………………
Total net assets (stockholders’ equity) …………………………………………..
c.
Ex. 11.11 a.
b.
Ex. 11.12 a.
b.
Authorized, but unissued, shares do not represent an asset of the company. At
some time in the future they may result in an increase in assets if they are issued
When the market price of a corporation’s common stock appreciates in value
Companies sometimes purchase shares of their own common stock to help boost
For a company to classify its treasury stock as a short-term investment is not
Kimberly-Clark could sell approximately 839.1 million additional shares. This
Ex. 11.10 a.
b.
Ex. 11.13 a. 6,600,000
b.
Common stock, $10 par value, 1,200,000 shares authorized,
Cash (550,000 x $12)………………………………
Preferred stock, 6%, $100 par value, 60,000 shares authorized,
Stockholders’ Equity:
Common Stock (550,000 x $10)……………
Cash (40,000 x $110)………………………………
Preferred Stock (40,000 x $100)……………
Additional Paid-in Capital on Preferred
Treasury Stock/Common 25,000 x $23)………….
Ex. 11.14 a. $1,000,000
800,000
b.
After a 2:1 stock split is distributed, the par value of the common stock will be
reduced to half ($10 x 1/2 = $5) and all of the share numbers will double. The
Common Stock, $10 par value, 300,000 shares authorized,
100,000 shares issued
Additional paid-in capital on common stock
Total paid-in capital and retained earnings
Additional paid-in capital on treasury stock
b.
c.
The number of authorized shares of common stock is 10 billion. Authorized
$6,316 million. This amount is not how much the outstanding stock is actually
20 Minutes, Easy
a.
Stockholders’ equity
authorized 100,000 shares, issued and outstanding 1,000,000$
10,000 shares
b.
There are no dividends in arrears at December 31, 2018. We know this because common
SOLUTIONS TO PROBLEMS SET A
8% cumulative preferred stock, $100 par value,
PROBLEM 11.1A
ROBBINSVILLE PRESS
December 31, 2018
Partial Balance Sheet
ROBBINSVILLE PRESS
issued and outstanding 170,000 shares 170,000
Net income for the four-year period 2015-2018
Less: Preferred dividends ($80,000 per year for four years)
Common stock, $1 par value, authorized 500,000 shares
*Computation of retained earnings at December 31, 2018:
20 Minutes, Easy
a.
Stockholders’ equity
PROBLEM 11.2A
MCMINN PUBLICATIONS
December 31, 2018
Partial Balance Sheet
MCMINN PUBLICATIONS
b.
Note to financial statements:
10% cumulative preferred stock, $100 par value,
*Computation of retained earnings at December 31, 2018:
Common stock, $1 par value, authorized 1 million shares,
Retained earnings, December 2017
Net income for the five-year period 2013-2017
Less: Preferred dividends ($200,000 x 5 years)