Chapter 11 – Reporting and Interpreting Owners’ Equity
11–34
P11–11.
Item
Comparative Effects Explained
Cash Dividend on Preferred
Stock Dividend on Common
a) Through December 31, 2011:
Assets
None—No cash yet disbursed.
None—No entry (no assets to
b) On February 15, 2012:
Assets
Decreased by the amount of
the dividend (credit cash
$40,000).
None—No assets are
disbursed.
Liabilities
Decreased by the amount of
the dividend (debit dividends
payable $40,000).
None—No liability was
created.
of the dividend.
Assets
Decreased $40,000.
No effect.
Liabilities
No effect.
No effect.
equity
Decreased $40,000.
No effect on total.
be disbursed).
Liabilities
Increased current liabilities by
the amount of the dividend
None—No entry made on
declaration date.
equity
Decreased by the amount of
the dividend.
None—No entry.
Chapter 11 – Reporting and Interpreting Owners’ Equity
P11–12.
Req. 1
March 9
No journal entry is required for the declaration of a stock dividend.
May 21
No journal entry is required.
June 18 (millions)
Retained earnings* (-SE) …………………………………………..
Common stock (+SE) ……………………………………………..
Capital in excess of par (+SE) …………………………………
Req. 2
This simple question can give the instructor an excellent opportunity to discuss the
Req. 3
The board must consider the impact of the stock dividend and the increase in cash
Chapter 11 – Reporting and Interpreting Owners’ Equity
11–36
P11–13.
Req. 1
Case A: Sole Proprietorship, closing entries:
A, Capital …………………………………………………………………
20,000
Case B: Partnership, closing entries:
A, Capital …………………………………………………………………
10,000
B, Capital …………………………………………………………………
10,000
Individual revenue and expense accounts …………………
20,000
A, Capital …………………………………………………………………
B, Capital …………………………………………………………………
A, Drawings …………………………………………………………..
B, Drawings …………………………………………………………..
Case C: Corporation, closing entry:
Retained earnings …………………………………………………….
20,000
Individual revenue and expense accounts …………………
20,000
Individual revenue and expense accounts …………………
20,000
A, Capital …………………………………………………………………
A, Drawings …………………………………………………………..
Chapter 11 – Reporting and Interpreting Owners’ Equity
11–37
P11–13. (continued)
Req. 2
Case A: Sole Proprietorship
Statement of Owner’s Equity
A, Capital, January 1 …………………………………………………….
$52,000
Less: Net loss ………………………………………………………………
20,000
Case B: Partnership
Partners’ Equity
A, Capital ……………………………………………………………………
$28,000
B, Capital ……………………………………………………………………
26,000
Total Partners’ Equity ………………………………………………..
$54,000
Statement of Partners’ Equity
A
B
Total
Partners’ equity, January 1 ………………………….
$43,000
$43,000
$86,000
Deduct: Net loss …………………………………………
Total ……………………………………………………..
Deduct: Withdrawals …………………………………..
5,000
7,000
Partners’ Equity, December 31 …………………….
$28,000
$26,000
$54,000
Case C: Corporation
Stockholders’ Equity
Contributed capital:
Common stock, par $10, authorized 30,000 shares,
outstanding 14,000 shares ……………………………………….
$140,000
Capital in excess of par ……………………………………………..
Total contributed capital ………………………………………….
Retained earnings …………………………..…………………………...
42,000
Total Stockholders’ Equity ……………………………………
Retained earnings, balance Jan. 1 …………………………………………………..
Less: Net loss ………………………………………………………………………………
Retained earnings, balance Dec. 31 ………………………………………………..
Total ……………………………………………………………………….
32,000
Less: Withdrawals ………………………………………………………..
9,000
A, Capital, December 31 ……………………………………………….
$23,000
Chapter 11 – Reporting and Interpreting Owners’ Equity
ALTERNATE PROBLEMS
AP11–1.
Req. 1
Common Stock $1,500,000 / $1
=
1,500,000 shares
Issued Shares
1,500,000
Treasury Stock
(100,000)
Shares Outstanding
1,400,000
Req. 2
The balance in the Capital in Excess of Par Account appears to be $118,500,000.
[($80-$1) x 1,500,000 shares]
Req. 3
EPS on net income is $3.43 (rounded)
$4,800,000 / 1,400,000 shares = $3.43
Chapter 11 – Reporting and Interpreting Owners’ Equity
11–39
AP11–2.
(a)
Cash (30,000 shares x $40) + (5,000 shares x $26) (+A) …..
1,330,000
Common stock, (30,000 shares x $40) (+SE) ……………….
1,200,000
(b)
Cash (2,000 shares x $32) (+A) ……………………………………..
64,000
Preferred stock (2,000 shares x $5) (+SE) ……………………
10,000
Contributed capital in excess of par, preferred
54,000
Sold preferred stock.
(c)
Treasury stock, common (3,000 shares x $38) (+XSE, –SE)
Cash (-A) …………………………………………………………………
Purchased treasury stock, common, at $38 per share.
AP11–3.
Stockholders’ Equity
Contributed capital:
Capital in excess of par, common ………………………………………………………
Total contributed capital ………………………………………………………………..
Retained earnings …………………………..………………………………………………….
Total …………………………………………………………………………………………..
Less: Treasury stock held (25,000 shares x $50) …………………………………
Common stock, par $5, authorized 1,000,000 shares; issued 700,000
Preferred stock (5,000 shares x $5) (+SE) ……………………
25,000
Capital in excess of par, preferred
Sold stock.
Chapter 11 – Reporting and Interpreting Owners’ Equity
AP11–4.
a.
Cash (+A) …………………………………………………………………..
272,900
Common stock (+SE) ……………………………………………….
272,900
b.
Treasury stock (+XSE, –SE) …………………………………………..
c.
Retained earnings (-SE) ……………………………………………….
340,867
Dividend payable (+L) ……………………………………………….
340,867
Dividend payable (-L) ……………………………………………………
340,867
Cash (- A) ……………………………………………………….……….
340,867
AP11–5.
Req. 1
Case A—Preferred is noncumulative (total amount to distribute, $25,000):
Preferred
(21,000
shares)
Common
(500,000
shares)
Total
Preferred ($210,000 x 8%) ……………………………………..
$16,800
$16,800
8,200
$16,800
$25,000
Per share …………………………………………………………….
$.016
Preferred:
Arrears ($210,000 x 8% x 2 years = $33,600) ………..
$25,000
$25,000
Current year ($210,000 x 8%) ……………………………..
$25,000
$25,000
Per share …………………………………………………………….
$1.19
$ –0–
Case C—Preferred is cumulative (total amount to distribute, $75,000):
Preferred:
Arrears ($210,000 x 8% x 2 years) ……………………….
$33,600
$33,600
Current year ($210,000 x 8%) ……………………………..
$24,600
$50,400
$24,600
$75,000
Per share …………………………………………………………….
$2.40
$.049
Chapter 11 – Reporting and Interpreting Owners’ Equity
11–41
AP11–5. (continued)
Req. 2
Schedule of Comparative Differences (with comments)
Item
Amount of Dollar Increase (Decrease)
Cash Dividend – Case C
Stock Dividend
Assets
$75,000 decrease
No assets were disbursed.
Liabilities
Current liabilities increased
$75,000 on declaration date and
No effect – no contractual liability
was created.
Summary comment:
(1) A cash dividend decreases assets and stockholders’ equity by the amount of the
dividend because resources were disbursed.
date. The net effect is zero.
Chapter 11 – Reporting and Interpreting Owners’ Equity
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Comprehensive Review Problem (Chapter 9, 10, 11)
Case A
Req. 1
Preferred stock dividend — $2,160 = 3,000 shares x $8 x 9%
Common stock dividend—$7,840 = $10,000 – $2,160
collected and the cost of the shares recorded as an increase in capital in excess of par.
Req. 4
A journal entry is not required to record a stock split. Instead, the par value of the stock
is adjusted. After a 2-for-1 stock split, the par value for Rogers stock would be $5 per
share.
Case B
Quick Ratio
Working Capital
Case C
Req. 1
$1,000,000 x 0.6139 ……………………………………………..
$50,000 x 7.7217 ………………………………………………….
Issue price …………………………………………………………..
(at par)*
Chapter 11 – Reporting and Interpreting Owners’ Equity
11–43
*$15 rounding error—issue price is par value, or $1,000,000
Comprehensive Review Problem (continued)
Req. 2
$1,000,000 x 0.6756 ……………………………………………..
$ 675,600
Case D
Req. 1
Computations:
Interest:
$1,000,000 x 5%
=
$ 50,000
$1,000,000 x 0.4564
=
$ 50,000 x 13.5903
=
=
Cash (+A) ……………………………………………………………………
Bonds Payable (+L) ………………………………………………….
Cash (+A) ……………………………………………………………………
Capital in excess of par, common stock (+SE) ………………
1,080,000
$1,081,145
Req. 3
Chapter 11 – Reporting and Interpreting Owners’ Equity
CASES AND PROJECTS
FINANCIAL REPORTING AND ANALYSIS CASES
CP11–1.
Req. 1 There are 43,248 (thousand) shares in treasury stock.
CP11–2.
Req. 1 200,000,000 shares authorized; 167,712,088 shares issued and
outstanding.
Chapter 11 – Reporting and Interpreting Owners’ Equity
11–45
CP11–3.
Req.1
The stock price of a company will immediately adjust downward. Each share is worth
less after a split because there are more shares outstanding. Some companies believe
that higher stock prices might make the stock less attractive to some investors. By
splitting the stock, the stock price is lowered making the stock potentially more attractive
to some investors.
Req. 2
Urban Outfitters
American Eagle
Dividends per share
0
0%
0.40
2.7%
Req. 3
Many investors are interested in the appreciation of stock rather than the amount of
Req. 4
Retail Apparel
Pharmaceuticals
Electric Utilities
Dividend
Yield
1.1%
2.6%
3.8%
Chapter 11 – Reporting and Interpreting Owners’ Equity
11–46
CP11–4.
Number of common shares outstanding.
106.52 million shares x $1 per share = $106.52 million
CRITICAL THINKING CASES
CP11–5.
The payment of a stock dividend is a cosmetic solution with no cash flow effects. If the
CP11–6.
We do not have an easy answer to this question. We use this case to discuss corporate
governance and responsibilities.
FINANCIAL REPORTING AND ANALYSIS PROJECTS