CHAPTER 11
Reporting and Analyzing Stockholders’ Equity
Learning Objectives
1. Discuss the major characteristics of a corporation.
2. Explain how to account for the issuance of common and preferred stock, and the purchase of
treasury stock.
3. Explain how to account for cash dividends and describe the effect of stock dividends and stock
splits.
4. Discuss how stockholders’ equity is reported and analyzed.
*5. Prepare entries for stock dividends.
Summary of Questions by Learning Objectives and Bloom’s Taxonomy
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Questions
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Brief Exercises
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Do It! Exercises
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Exercises
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Problems: Set A
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*Continuing Cookie Solutions for this chapter are available online.
ASSIGNMENT CHARACTERISTICS TABLE
Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
1A
Journalize stock transactions, post, and prepare paid-in
capital section.
Simple
30–40
2A
Journalize transactions, post, and prepare a stockholders’
equity section; calculate ratios.
Moderate
40–50
3A
Prepare a stockholders’ equity section.
Moderate
20–30
4A
Reproduce Retained Earnings account, and prepare
a stockholders’ equity section.
Moderate
30–40
5A
Prepare entries for stock transactions, and prepare
a stockholders’ equity section.
Moderate
20–30
6A
Prepare a stockholders’ equity section.
Simple
20–30
7A
Evaluate a company’s profitability and solvency.
Moderate
20–30
*8A
Prepare dividend entries, prepare a stockholders’ equity
section, and calculate ratios.
Moderate
40–50
ANSWERS TO QUESTIONS
1. (a) Separate legal existence. A corporation is separate and distinct from its owners and it acts
in its own name rather than in the name of its stockholders. In contrast to a partnership, the
acts of the owners (stockholders) do not bind the corporation unless the owners are agents
of the corporation.
2. (a) Corporate management is an advantage to a corporation because it can hire professional
managers to run the company. Corporate management is a disadvantage to a corporation
because it prevents owners from having an active role in directly managing the company.
3. Nona is incorrect. A corporation must be incorporated in only one state. It is to the company’s ad–
vantage to incorporate in a state whose laws are favorable to the corporate form of business
4. In the absence of restrictive provisions, the basic ownership rights of common stockholders are
the rights to:
(1) vote in the election of the board of directors and in corporate actions that require stock-
holders’ approval.
(3) maintain the same percentage ownership when additional shares of common stock are
issued (the preemptive right).
(4) share in assets upon liquidation.
5. Legally, a corporation is an entity, separate and distinct from its owners. As a legal entity, a corpo-
ration possesses most of the privileges and is subject to the same duties and responsibilities as a
6. The principal components of stockholders’ equity for a corporation are paid-in capital and retained
earnings.
7. The maximum number of shares that a corporation is legally allowed to issue is the number
authorized. Gage Corporation is authorized to sell 100,000 shares. Of these shares, 70,000
8. The relative par values should have no effect on the investment decision. The par value of
common stock has no effect on its market value. Par value used to be a legal amount per share
9. A corporation may acquire treasury stock (1) to reissue the shares to officers and employees
under bonus and stock compensation plans, (2) to increase trading of the company’s stock in the
10. When treasury stock is purchased, Treasury Stock is debited and Cash is credited at cost ($11,000
in this example). Treasury stock is a contra stockholders’ equity account and cash is an asset.
11. (a) Common stock and preferred stock both represent ownership of the corporation. Common
stock signifies the basic residual ownership; preferred stock is ownership with certain
(b) Some preferred stocks possess the additional feature of being cumulative. Cumulative pre–
ferred stock means that preferred stockholders must be paid both current year dividends
12. The debits and credits to retained earnings are:
Debits Credits
1. Net loss 1. Net income
13. The answers are summarized in the table below:
Account Classification
(a) Common Stock Paid-in capital—capital stock
14. For a cash dividend to be paid, a corporation must have retained earnings, adequate cash, and a
15. May 1 is the date on which the board of directors formally declares (authorizes) and announces
the cash dividend. May 15 is the record date which marks the time when ownership of outstanding
16. A cash dividend decreases assets, retained earnings, and total stockholders’ equity. A stock divi–
17. Doris is incorrect. A corporation generally issues stock dividends for one of the following reasons:
(1) To satisfy stockholders’ dividend expectations without spending cash.
(2) To increase the marketability of its stock by increasing the number of shares outstanding
(3) To emphasize that a portion of stockholders’ equity that had been reported as retained
18. In a stock split, the number of shares is increased in the same proportion that par value
is decreased. Thus, in Jayne Corporation the number of shares will increase to 30,000 (10,000 X
3) and the par value will decrease to $5 ($15 ÷ 3). The effect of a split on market value is
19. The different effects of a stock split versus a stock dividend are:
Item Stock Split Stock Dividend
Total paid-in capital No change Increase
20. The cost of Apple’s treasury stock at September 27,2014 was $45,000 million. It declared cash
21. (a) The purpose of a retained earnings restriction is to indicate that a portion of retained earnings
22. Par value is a legal amount per share, often set at an arbitrarily selected amount, which usually
indicates the minimum amount at which a share of stock can be issued. Market value is generally
23. The payout ratio is computed by dividing cash dividends declared on common stock by net
24. Debt financing will increase the return on common stockholders’ equity when the return on assets
25. The return on assets will equal the return on common stockholders’ equity when a company has
26. The issuance of bonds combined with a reduction in outstanding shares increases the company’s
reliance on debt financing which will be reflected in an increase of the debt to assets ratio. The
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 11-1
The advantages and disadvantages of a corporation are as follows:
Advantages Disadvantages
Separate legal existence Corporate management—
Limited liability of stockholders separation of ownership
LO 1 BT: K Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement
BRIEF EXERCISE 11-2
May 10 Cash (2,500 X $13) …………………………………. 32,500
Common Stock (2,500 X $5) ……………… 12,500
Paid-in Capital in Excess of Par
BRIEF EXERCISE 11-3
June 1 Cash (3,000 X $7) …………………………………… 21,000
BRIEF EXERCISE 11-4
Cash (8,000 X $106) …………………………………………….. 848,000
Preferred Stock (8,000 X $100) ………………………. 800,000
Paid-in Capital in Excess of Par Value—
BRIEF EXERCISE 11-5
Nov. 1 Cash Dividends (7,000 X $1) ………………… 7,000
Dividends Payable ……………………….. 7,000
BRIEF EXERCISE 11-6
Before After
Dividend Dividend
(a) Stockholders’ equity
Paid-in capital
Common stock, $8 par $1,000,000 $1,100,000
Paid in capital in excess of
(b) Outstanding shares 125,000 137,500
BRIEF EXERCISE 11-7
Transaction
Total
Assets
Total
Liabilities
Total
Stockholders’
Equity
(a) Declared cash dividend
N/A
+
–
(b) Paid cash dividend declared in (a)
–
–
N/A
(c) Declared stock dividend
N/A
N/A
(d) Distributed stock dividend declared in (c)
N/A
N/A
(e) Split stock three-for-one
N/A
N/A
BRIEF EXERCISE 11-8
Stockholders’ equity
Paid-in capital
Capital stock
Common stock, $10 par value, 5,000 shares
issued and 4,500 shares outstanding ……………….. $ 50,000
BRIEF EXERCISE 11-9
Payout ratio—last year =
$120,000
$600,000 = 20%
BRIEF EXERCISE 11-10
Return on stockholders’ equity =
Net income–Preferred dividends
Average common stockholders’ equity
BRIEF EXERCISE 11-11
Issue Stock Issue Bond
Income before interest and taxes $1,500,000 $1,500,000
Interest ($2,000,000 X 6%) 0 120,000
*BRIEF EXERCISE 11-12
Dec. 1 Stock Dividends (24,000 X $17) …………………. 408,000
Common Stock Dividends Distributable
(24,000 X $10) …………………………………… 240,000
SOLUTIONS TO DO IT! EXERCISES
DO IT! 11-1
2. True.
4. True.
LO 1 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement
DO IT! 11-2a
Apr. 1 Cash (55,000 × $13) ………………………………….. 715,000
Common Stock (55,000 × $5) ……………….. 275,000
Paid-in Capital in Excess of
Par Value—Common Stock ………………. 440,000
DO IT! 11-3a
(1) The company has not missed past dividends and the preferred stock is
noncumulative; thus, the preferred stockholders are paid only this year’s
(2) The preferred stock is noncumulative; thus, past unpaid dividends do
(3) The preferred stock is cumulative; thus, dividends that have been missed
in the past (dividends in arrears) must be paid. The dividend paid to
LO 3 BT: AP Difficulty: Medium TOT: 10 min. AACSB: Analytic AICPA FC: Reporting
DO IT! 11-3b
(a) 1. The stock dividend amount is $3,000,000 [(400,000 X 15%) X $50].
The new balance in retained earnings is $9,000,000 ($12,000,000 –
$3,000,000).
DO IT! 11-3b (Continued)
(b) (1) and (2) The effects on the stockholders’ equity accounts are as follows:
Original
Balance
After
Dividend
After
Split
Paid-in capital
$ 2,400,000
$ 5,400,000
$ 2,400,000
Retained earnings
Shares outstanding
(Paid in capital is increased by the total amount of the stock dividend)
(c) 1. The stock dividend will not affect the par value per share. It remains
DO IT! 11-4a
HOYLE CORPORATION
Balance Sheet (Partial)
Stockholders’ equity
Paid-in capital
Capital Stock
9% preferred stock, $100 par value,
500,000 shares authorized,
100,000 shares issued, and
93,000 shares outstanding …………… 500,000
Total capital stock …………………… $ 700,000
Additional paid-in capital
Paid-in capital in excess of par value—
preferred stock ……………………………. 23,000
DO IT! 11-4b
(a)
2016
2017
(b) Between 2016 and 2017, return on common stockholders’ equity
SOLUTIONS TO EXERCISES
EXERCISE 11-1
(a) Jan. 10 Cash (30,000 X $5) ………………………….. 150,000
Common Stock ………………………… 150,000
(b) Jan. 10 Cash (30,000 X $5) ………………………….. 150,000
Common Stock (30,000 X $1) …….. 30,000
Paid-in Capital in Excess of
Stated Value—Common Stock
(30,000 X $4) ………………………….. 120,000
EXERCISE 11-2
June 12 Cash ………………………………………………….. 300,000
Common Stock (80,000 X $1) ……….. 80,000
Paid-in Capital in Excess of Par
Value—Common Stock ……………… 220,000
EXERCISE 11-3
(a) Feb. 1 Cash (40,000 X $51) …………………………. 2,040,000
Preferred Stock (40,000 X $50) …… 2,000,000
Paid-in Capital in Excess of
(b)
Preferred Stock
Paid-in Capital in Excess of
Par Value—Preferred Stock
2/1 2,000,000
2/1 40,000
7/1 3,000,000
7/1 360,000
5,000,000
400,000
EXERCISE 11-3 (Continued)
(c) Preferred Stock—listed first in paid-in capital under capital stock. Paid
in Capital in Excess of Par Value—Preferred Stock—listed first under
EXERCISE 11-4
(a) Common stock outstanding is 574,000 shares. (Issued shares 580,000
less treasury shares 6,000.)
EXERCISE 11-5
May 2 Cash (8,000 X $13) ………………………………. 104,000
Common Stock (8,000 X $10) ………… 80,000
Paid-in Capital in Excess of Par