Chapter 11
Reporting and Interpreting Stockholders’
Equity
ANSWERS TO QUESTIONS
1. A corporation is a legal entity separate and distinct from its owners. Owners are those
who own shares of stock in the corporation. The primary advantages of the corporate
2. The charter of a corporation, sometimes called the articles of incorporation, is a legal
3. (a) Authorized shares: The maximum number of shares of stock that a corporation
can issue as specified in the charter of the corporation.
4. Common stock—the usual or normal stock of a corporation. It is the voting stock and
generally ranks after the preferred stock for dividends and assets distributed upon
dissolution. Common stock may have a par value or be no-par value common stock.
5. Par value is a nominal value per share established in the corporate charter. The
original purpose of establishing a par value was to protect creditors by specifying a
6. When stock with a par value is issued, the par value times the number of shares is
7. The stockholders’ equity section of the balance sheet reflects two kinds of capital:
contributed capital and earned capital.
Contributed capital—the amount invested by stockholders. Contributed capital is
8. Treasury stock is a corporation’s own stock that was sold (issued) and subsequently
reacquired by the corporation. Corporations frequently repurchase shares of their
9. Treasury stock is reported in the stockholders’ equity section of the balance sheet as
a negative amount. If a corporation resells treasury shares at a price above what it
10. The two basic requirements to support a cash dividend are: (1) cash on hand or the
11. A stock dividend involves the issuance of additional shares of stock to stockholders.
12. A stock split distributes additional shares of stock to stockholders by “splitting” their
existing shares into some multiple of additional shares. Though a stock split and a
stock dividend both distribute additional shares of stock to stockholders, they are
13. With respect to dividends, the three important dates are:
Declaration date—the date on which the board of directors votes to declare a
dividend. The declaration of a cash dividend creates a liability.
14. Several characteristics typically associated with preferred stock are: (1) lack of voting
rights, (2) less risky than common stock since in the event of bankruptcy, preferred
15. Cumulative preferred stock has a dividend preference such that, should the dividends
on the preferred stock for any year or series of years not be paid, dividends cannot
ANSWERS TO MULTIPLE CHOICE
Financial Accounting, 10/e 11-5
Authors’ Recommended Solution Time
(Time in minutes)
Mini-exercises
Exercises
Problems
Alternate
Problems
Cases and
Projects
No.
No.
Time
No.
1
1
45
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45
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45
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4
60
4
5
5
30
5
6
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30
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7
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30
7
8
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45
9
9
20
10
10
20
11
30
12
45
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18
Continuing
* Due to the nature of this project, it is very difficult to estimate the amount of time students
will need to complete the assignment. As with any open-ended project, it is possible for
students to devote a large amount of time to these assignments. While students often
MINI- EXERCISES
M11–1.
At the end of each accounting period, retained earnings is computed by the following
M11–2.
178,000 shares issued (168,000 outstanding + 10,000 in treasury)
M11–3.
M11–4.
Cash (+A) (170,000 $21) …………………………………………….
3,570,000
Common stock (+SE) (170,000 $1) …………………………..
170,000
Cash (+A) (170,000 $21) …………………………………………….
Common stock (+SE) (170,000 $2) …………………………..
Financial Accounting, 10/e 11-7
M11–5.
Common stock is the basic voting stock issued by a corporation. Common stock
M11–6.
Assets
Liabilities
Stockholders’
Equity
Net Income
Resold 5,000
$250,000
Purchased
20,000 shares
Decrease by
$900,000
No change
Decrease by
$900,000
No change
M11–7.
M11–8.
April 15:
Retained earnings (-SE) (100,000 x $0.65) ………………………
65,000
Dividends payable (+L) ……………………………………………..
65,000
Dividends payable (-L) ………………………………………………….
65,000
Cash (-A) …………………………………………………………………
65,000
M11–9.
Dividend Yield = Dividends per share / Market price per share
M11–10.
Stock Dividend
Stock Split
No change in assets
No change in assets
No change in liabilities
No change in liabilities
Increase in common stock
No change in common stock
amount.
Decrease in market value
Decrease in market value
M11–11.
EVENT
EFFECT ON STATEMENT OF CASH FLOWS
Issued stock
Financing cash flow increase
Repurchased stock
Financing cash flow decrease
Declared a stock split
No effect
EXERCISES
E11–1.
Computation of end of year balance for treasury stock:
Beginning balance 7,171,269
Computation of shares outstanding at the end of the year:
Issued shares 36,915,122 (36,356,357 beginning + 558,765 new)
E11–2.
Req. 1 The number of authorized shares is specified in the corporate charter: 300,000.
E11–3.
Req. 1
Stockholders’ Equity
Common stock, authorized 103,000 shares;
issued and outstanding, 20,000 shares …………………………………………….
$200,000
Preferred stock, authorized 4,000 shares;
issued and outstanding, 3,000 shares ………………………………………………
Req. 2
The answer would depend on the profitability of the company and the stability of its
E11–4.
Req. 1 ($30 x 90,000 shares issued) – $1,600,000 in common stock = $1,100,000
Req. 2 Beginning balance + net income – dividends = ending balance
Financial Accounting, 10/e 11–11
E11–5.
Req. 1
a.
Cash (+A) (5,600 shares x $20) ……………………………………..
112,000
Common stock (+SE) (5,600 shares x $10) ………………….
56,000
Additional paid-in capital, common stock (+SE) …………….
56,000
Sold common stock for $20 per share.
b.
Cash (+A) (1,000 shares x $25) ……………………………………..
25,000
Common stock (+SE) (1,000 shares x $10) ………………….
10,000
Additional paid-in capital, common stock (+SE) …………….
15,000
Sold common stock for $25 per share.
Req. 2
Stockholders’ Equity
6,600 shares issued & outstanding ……………………………………………..
Common stock, $10 par value; 11,500 shares authorized;
Total stockholders’ equity ……………………………………………………….
$149,000
E11–6.
Req. 1
Req. 2
Req. 3
Retained earnings last year: $3,107,344,000 minus net income for the current year
E11–6. (continued)
Req. 4
Treasury stock is purchased with cash. The journal entry is a debit to treasury stock and
Req. 5
Req. 6
E11–7.
Req. 1
a.
Cash (+A) (50,000 shares x $50) ……………………………………
2,500,000
Common stock (+SE) (50,000 shares x $2 par value) …….
100,000
Additional paid-in capital, common stock (+SE) …………….
Sold common stock for $50 per share.
b.
Treasury stock (+XSE, –SE) (2,000 shares x $52) …………….
Cash (-A) …………………………………………………………………
Bought treasury stock for $52 per share.
Req. 2
Stockholders’ Equity
50,000 shares issued, 48,000 shares outstanding …………………………
)
Common stock, $2 par value; 80,000 shares authorized;
Financial Accounting, 10/e 11–13
E11–8.
Stockholders’ equity:
Current
Year
Last
Year
Additional paid-in capital
Retained earnings
Common stock, $.01 par
value; 100,000,000
E11–9.
Stockholders’ Equity
Common stock, $10 par value; 98,000 shares authorized;
78,000 shares issued, 74,000 shares outstanding …………………………
$ 780,000
20,000 shares issued and outstanding …………………………………………
Additional paid-in capital, common stock …………………………………………
Additional paid-in capital, preferred stock ………………………………………..
Retained earnings* ……………………………………………………………………
)
Preferred stock, 8%, $50 par value; 59,000 shares authorized;
E11–10.
DC United’s EPS is positive, which is good, but one cannot say much else about the
E11–11.
Req. 1
a.
Cash (+A) (20,000 shares x $20) ……………………………………
400,000
Common stock, no-par (+SE) ……………………………………..
400,000
b.
Cash (+A) (6,000 shares x $40) ……………………………………..
Common stock, no-par (+SE) ……………………………………..
c.
Cash (+A) (7,000 shares x $30) ……………………………………..
210,000
Preferred stock (+SE) (7,000 shares x $10) ………………….
Req. 2
Yes, it is ethical as long as there is full disclosure of relevant information. It is common
E11–12.
Req. 1
The number of shares that have been issued is computed by dividing the common stock
account ($4,009 million) by the par value of the shares ($1 per share) or approximately
4,009,000,000 shares.
Req. 2
Retained earnings end of last year ……
$80,197,000,000
Net income for current year ……………..
Dividends for current year ………………..
)
Retained earnings end of current year .
Financial Accounting, 10/e 11–17
E11–13.
Req. 1
Assets decreased by $329,000,000 ($47 x 7 million shares) and stockholders’ equity
decreased by $329,000,000. Liabilities were not affected.
Req. 2
E11–14.
Req. 1
Stockholders’ Equity
Common stock, $20 par value, 100,000 shares authorized,
Req. 2
The dividend yield ratio is 2.24% ([$16,000 32,000 shares] $22.29). This is the
E11–15.
Req. 1
(a.)
Apr. 1:
Treasury stock (+XSE, –SE) (200 shares x $20) ……………….
4,000
Cash (-A) …………………………………………………………………
4,000
Bought treasury stock for $20 per share.
June 14:
Cash (+A) (40 shares x $25) ………………………………………….
Treasury stock (-XSE, +SE) (40 shares x $20) ……………..
800
Sold treasury stock for $25 per share.
(c.)
Sept. 1:
Cash (+A) (30 shares x $15) ………………………………………….
450
Additional paid-in capital (-SE) ……………………………………….
150
Treasury stock (-XSE, +SE) (30 shares x $20) …………….
600
Sold treasury stock for $15 per share.
Req. 2
E11–16.
Req. 1
(a) Feb. 1:
Treasury stock (+XSE, –SE) (160 shares x $20) …………….
3,200
Cash (-A) ………………………………………………………………
3,200
(b) July 15:
Cash (+A) (80 shares x $21) ……………………………………..
1,680
Treasury stock (-XSE, +SE) (80 shares x $20) …………..
1,600
Additional paid-in capital (+SE) ………………………………..
(c) Sept. 1:
Cash (+A) (50 shares x $19) ………………………………………
Additional paid-in capital (-SE) …………………………………..
Financial Accounting, 10/e 11–19
.
E11-16. (continued)
Req. 2
Dividends are not paid on treasury stock. Dividends are computed on shares
Req. 3
The sale of treasury stock for more or less than its original purchase price does not
E11–17.
Req. 1
Case 1: When the company pays the dividend, it will be recorded on the statement
of cash flows as a financing activity cash outflow.
Req. 2
Case 1: Since there is no effect on net income or the weighted number of common
shares outstanding, EPS is not affected.
E11–18.
Req. 1
Preferred
(5,000
Shares)
Common
(50,000
Shares)
Total
a)
Noncumulative:
Preferred ($50,000 x 10%) ………………………………..
$ 5,000
$ 5,000
$80,000
$ 5,000
$80,000
$85,000
Per share ……………………………………………………….
b)
Cumulative:
Preferred, arrears ($50,000 x 10% x 2 years) ………
$70,000
$15,000
$70,000
$85,000
Per share ……………………………………………………….
Req. 2
Since the total dividend ($85,000) does not change under the two assumptions, the
statement of cash flows is impacted in the same manner across the two independent
E11–19.
Item
Effect of Cash Dividend (Preferred)
Effect of Stock Dividend (Common)
Assets
Liabilities
–Increased on declaration date
date because no contractual liability
is created (no assets are disbursed;
equity reclassification only).
equity
dividend on declaration date
(retained earnings decreased by
$7,200).
–Retained earnings reduced and
–No effect on declaration date.
–Decreased by the amount of the
No effect because no assets are
disbursed.
*Because this is a large stock dividend (> 20-25%), the amount transferred from
retained earnings to contributed capital is based on the par value of the stock
($120,000 = 30,000 shares x $8 par value x 50%).