Accounting Chapter 11 Price earnings Ratio Market Value Per Share Earnings

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 11

688

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

Common stock

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 11

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

Outstanding shares ……………………..

17,000

16,000

18,000

$ 0.40

Part 3

Capitalization of retained earnings for small stock dividend

Number of shares ……………………………………………………….

Market value per share ……………………………………………………….

Part 4

Cost per share of treasury stock

Total amount paid ……………………………………………………….

Shares purchased ……………………………………………………….

Part 5

Net income

Retained earnings, beginning balance …………………………..

$270,000

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 11

Problem 11-5B (40 minutes)

1. Computation of stock par values

2. Book value with no dividends in arrears

Common stock

3. Book value with two years’ dividends in arrears

Common stock

Total equity…………………………..……………

$2,400,000

Less preferred stock par value …………..

4. Dividend allocation in total

Preferred

Common

Total

2 years’ dividends in arrears …

$ 60,000

$ 0

$ 60,000

Current year dividends ………….

30,000

—

30,000

Remainder to common ………….

—

10,000

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 11

SERIAL PROBLEM — SP 11

Serial Problem — SP 11, Business Solutions (25 minutes)

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

Cash …………………………..………………………………………….

86,000

Common Stock …………………………………………………

86,000

Issuance of common stock.

Cash …………………………..………………………………………….

86,000

Preferred Stock …………………………………………………

86,000

Issuance of $100 par 7% preferred stock.

Cash …………………………..………………………………………….

86,000

Notes Payable …………………………………………………..

86,000

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

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 11

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

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

should adopt. Class discussion may indicate which proposal the class

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 11

Company Analysis — AA 11-1

(All shares in thousands.)

1. a. 5,126,201 common stock outstanding

2. a. $12,769 million in cash dividends to shareholders

3. a. $9.27 basic earnings per share

4. Favorable

5. Increase

Explanation: Buying back outstanding shares generally increases

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 11

Comparative Analysis — AA 11-2

1. Book value per common share = Equity applicable to common shares

Common shares outstanding

2. Earnings per share = Net income

Weighted-average common shares outstanding

Google’s earnings per share: $12,662 / 693.049 = $18.27

3. Dividend yield = Annual cash dividends per share

Market value per share

4. Price-earnings ratio = Market value per share

Earnings per share

5. Google

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

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 11

Global Analysis — AA 11-3

1. Book value per common share = Equity applicable to common shares

Common shares outstanding

2. Earnings per share:

3. Increase

Explanation: Buying back outstanding shares generally increases

earnings per share. This is because buying back shares reduces the

Wild and Shaw, Financial & Managerial Accounting, 8e 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

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

2. The preferred stock has no par value. There are 165.0 million preferred

3. In 2016, the financing section of the statement of cash flows shows that

McDonald’s paid $11,171.0 million to purchase treasury stock.

4. In 2016, the financing section of the statement of cash flows shows that

McDonald’s paid common stock cash dividends of $3,058.2 million.

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 11

697

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

2. The team should establish the acquisition entry as follows

Treasury Stock, Common …………………………….

13,400

Cash ……………………………………………………..

13,400

Reacquired 100 shares of $100 par value

common stock at a cost of $134 per share.

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.

Cash …………………………………………………………..

15,000

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

Treasury Stock, Common ………………………

13,400

c.

Cash …………………………………………………………..

12,000

Treasury Stock, Common ………………………

13,400

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 11

698

Teamwork in Action (Continued)

d.

Cash …………………………………………………………..

12,000

1,000

Retained Earnings ……………………………………….

e.

Cash …………………………………………………………..

12,000

Retained Earnings ……………………………………….

1,400

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 e are:

The differences in reissue entries b through e are:

(b) Reissuing above cost creates additional Paid-In Capital.*

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 11

699

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

Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 11

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Hitting the Road — BTN 11-6

There is no formal solution for this field activity. Students often find this