Brief Learning
Exercises Objectives Skills
B. Ex. 12.1 Unusual or infrequent item 12-1 Analysis
B. Ex. 12.2 Unusual or infrequent item 12-1 Analysis
B. Ex. 12.3 Discontinued operations 12-1 Analysis
B. Ex. 12.4 Cash and stock dividends 12-4 Analysis
B. Ex. 12.5 Statement of retained earnings 12-5 Analysis
B. Ex. 12.6 Statement of retained earnings 12-5, 12-6 Analysis
B. Ex. 12.7 Cash dividend journal entries 12-4 Analysis
B. Ex. 12.8 Stock dividend journal entries 12-4 Analysis
B. Ex. 12.9
12-4, 12-8
Analysis
B. Ex. 12.10 Comprehensive income 12-7
Analysis
Skills
12.1 Stock dividends and stock splits 12-4 Analysis, communication
12.2 Terminology
12-1–12–4,
12-6, 12-7
Analysis
12.3 Discontinued operations 12-1, 12-2 Analysis
12.4 Discontinued operations 12-1, 12-2 Analysis
12.5 12-2 Analysis
12.6 12-2, 12-4 Analysis
12.7 Stock dividends and splits 12-4 Analysis
12.8 12-4 Communication
12.9 12-8 Analysis
12.10 12-2, 12-4 Communication
12.11
Identifying source of desired
financial information
12-1, 12-5,
12-8
Analysis
12.12 Comprehensive income 12-7 Analysis
12.13 Cash and stock dividends 12-4 Analysis, communication,
judgment
12.14 Real World: Home Depot 12-3, 12-5 Analysis, communication
EPS and dividends
12.15 Real World: Home Depot 12-1, 12-8 Analysis, communication
Analysis of stock information
Topic
Exercises
Effects of transactions upon
earnings per share
CHAPTER 12
INCOME AND CHANGES
Learning
Objectives
OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL
THINKING CASES
Topic
Stockholders’ equity section of
balance sheet
Earnings per share: effect of
preferred stock
Restating earnings per share after a
stock split
Effect of stock dividends on stock
price
Effects of transactions upon
financial measurements
Problems
Sets A, B Skills
12.1 A, B Reporting unusual events 12-1, 12-2 Analysis
12.2 A, B
Format of statements of income
and retained earnings
12-1, 12-2,
12-5, 12-6
Analysis, communication
12.3 A, B
Reporting unusual events: a
comprehensive problem
12-1, 12-2,
12-5, 12-6
Analysis, communication
12.4 A, B 12-4 Analysis, communication
12.5 A, B Statement of stockholders’ equity 12-4, 12-8 Analysis, communication
12.6 A, B 12-4, 12-8 Analysis
12.7 A, B 12-8 Analysis, communication
12.8 A, B
Stockholders’ equity:
comprehensive
12-4, 12-8 Analysis
12.9 A, B
Format of an income statement in
a net loss situation
12-1, 12-2 Analysis
12.1 12-1 Analysis
Reporting special events
12.2 12-1 Analysis, communication
12.3 Interpreting earnings per share 12-1–12-3 Analysis, communication
12.4 12-8 Analysis, communication
12.5 Classifying unusual items
12-1, 12-2,
12-8
Analysis, communication
12.6 Managing profitability 12-9 Analysis, communication
12.7 12-2
Technology
Learning
Objectives
Effects of transactions upon
financial measurements
Stock splits, stock dividends,
treasury stock, and book value
Dividends and treasury stock
transactions
Topic
(Ethics, fraud & corporate
governance)
Real World: Martin Marietta
Critical Thinking Cases
Real World: Atlantic Richfield
Company, American Airlines,
Georgia Pacific Corporation
Analyzing statement of stockholders’
equity
Forecasting continuing
operations
Analyzing stockholders’ equity and EPS
Communication, research,
DESCRIPTIONS OF PROBLEMS AND
CRITICAL THINKING CASES
Problems (Sets A and B)
12.1 A,B
12.2 A,B
12.3 A,B
12.4 A,B
12.5 A,B
12.6 A,B
12.7 A,B
35 Strong
40 Strong
Eastern Aviation/Pacific Airlines
Slick Software, Inc./Beach, Inc.
A comprehensive problem on reporting the results of
operations. Stresses the format of an income statement and
statement of retained earnings, with disclosure of unusual
items. EPS computation involves common and preferred stock
outstanding.
30 Strong
Preparation of a condensed income statement and earnings per
share figures for a company with a discontinued segment.
Emphasizes format of the income statement rather than
computation of amounts. Students also are asked to forecast
future operating results.
20 Medium
A comprehensive problem on cash dividends, stock dividends,
and treasury stock transactions. Requires journal entries and
preparation of stockholders’ equity section of the balance sheet.
Students are asked to compute maximum amount available for
dividends.
Tech Process, Inc./Hot Water, Inc.
Explanation of the effects of equity transactions on various
financial measures.
Riverton Corporation/ Dry Wall, Inc.
Preparation of a statement of stockholders’ equity. Stresses an
understanding of the effects of various transactions upon the
elements of stockholders’ equity.
Thompson Service/Greene, Inc.
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.
30 Easy
30 Medium
20 Easy
Phoenix, Inc./Dexter, Inc.
Given an incorrectly prepared income statement, students are
asked to draft a revised income statement and a statement of
retained earnings. Includes discontinued operations, an
accounting change, and a prior period adjustment.
Albers, Inc./Sunstone, Inc.
Demonstrates the effect of various transactions upon total
stockholders’ equity, number of shares outstanding, and book
value per share. Includes stock splits, stock dividends, and
treasury stock transactions.
Problems (cont’d)
12.8 A,B
12.9 A,B
Critical Thinking Cases
12.1
12.2
12.3
12.4
12.5
Mandella Corporation/Adams Corporation
Preparation of the stockholders’ equity section of a balance sheet in two
successive years. Transactions affecting stockholders’ equity include
issuance of common stock, a stock dividend, purchase and sale of
treasury stock, cash dividends, and a stock split.
Esper Corporation/Cardinal Manufacturing Corp.
What’s This?
Preparation of a partial income statement, including discontinued
operations and an accounting change. Emphasizes format of the income
statement rather than computation of amounts. Students also are asked
to compute earnings per share.
60 Strong
50 Strong
25 Strong
20 Easy
20 Medium
30 Strong
35 Strong
Four “unusual events” taken from the published financial statements of
well-known corporations. Students are asked to indicate whether each
event qualifies as a discontinued operation or an accounting change.
Interpreting a Statement of Stockholders’ Equity
Student is asked to answer specific questions requiring analysis and
understanding of items reported in the statement of stockholders’ equity.
Students discuss the classification of unusual items from several
perspectives—accounting principles, pressures on management, cash
flows, and probable effects on stock price. Adapted from an actual case;
illustrates the “real world” aspects of financial reporting. Good group
assignment.
Classification of Unusual Items – and the Potential Financial
Impact
Is There Life Without Baseball?
Student is presented with an income statement containing discontinued
operations and is asked to forecast future earnings. Requires an
understanding of recurring versus nonrecurring events. Good practice
for interpreting annual reports.
Student is given six earnings per share figures, including earnings from
continuing operations and net earnings, computed on both a basic and
diluted basis. From this information, student is asked to use a p/e ratio
to estimate stock price, and to forecast future performance.
Using Earnings Per Share Statistics
Critical Thinking Cases (cont’d).
12.6 30 Medium
12.7
Managing Profitability
Ethics, Fraud & Corporate Governance
Comparing Price-Earnings Ratios
Internet
Students are to obtain information on the Internet about a Fortune
500 company and an emerging company. They are to compare p/e
ratios and speculate on the reasons for the differences.
30 Easy
Students must consider how certain financial statement items
should move in relation to other numbers and whether the specific
changes indicated in the case statement imply inappropriate
actions by management.
SUGGESTED ANSWERS TO DISCUSSION QUESTIONS
1.
2.
3.
4.
5.
6.
7. a.
A prior period adjustment represents a correction of an error in the amount of income
Irregular income items, such as discontinued operations, and prior period adjustments, are
The price-earnings ratio is computed by dividing the market price of a share of
common stock by the annual earnings per share.
The purpose of separately disclosing the amounts for unusual and/or infrequent items and
The restructuring charges should be combined and presented as a separate line item in the
company’s income statement in determining income before income tax.
The discontinued operations classification is used in the income statement only when a
Examples of unusual and/or infrequent items are results of lawsuits, sales of plant assets,
8. a.
9.
10.
11.
Restructuring charges result when the company incurs costs in the process of reorganization,
often downsizing. The purpose of reorganization is to benefit future operations in terms of more
The analyst should recognize the risk that the outstanding convertible securities may be
converted into additional shares of common stock, thereby diluting (reducing) basic earnings per
A stock split occurs when there is a relatively large increase in the number of shares issued
without any change in the total amount of stated capital. The par value per share is reduced
proportionately to the increase in the number of shares.
Shares used in computing basic earnings per share:
Shares used in computing diluted earnings per share:
Additional common shares that would exist if preferred stock had
12.
13.
14.
15.
The student is right in one sense—both stock splits and stock dividends are distributions of a
company’s shares to existing stockholders with the company receiving no payment in return.
If the price of the stock declines in proportion to the distribution of shares in a stock dividend,
at the time of that distribution the stockholder does not benefit. He/she holds exactly the same
The statement of retained earnings shows for the Retained Earnings account the beginning
A liquidating dividend is a return of the investment made in the company to the investor, in
$175,000
$750,000
115,000
$265,000
$172,250
Net income
B.Ex. 12.3
$480,000
Expenses
430,000
$50,000
$32,000
Discontinued operations:
Net income
B.Ex. 12.4
Revenues
SOLUTIONS TO BRIEF EXERCISES
B.Ex. 12.2
HUDSON COMPANY
Income Statement
For year ended _______________
B.Ex. 12.1
FELLUPS, INC.
Partial Income Statement
For year ended _______________
Income before income taxes*
100,000 shares x 110% = 110,000
Revenues
For year ended _______________
WABASH, INC.
Income Statement
Number of shares outstanding after stock dividend:
$105,000
$590,000
$460,000
$395,000
$645,000
$525,000
**200,000 shares x $0.50 = $100,000
Deduct: Preferred dividends
Common dividends
Retained earnings, end of year
*10,000 shares $1 x 2 years = $20,000
Add: Net income
$600,000
100,000 shares x $100 par x 6%
Cash dividend on common stock:
750,000 shares x $0.75
Total dividends
To record dividends declared on preferred and
Cash dividend on preferred stock:
B.Ex. 12.6
SALT & PEPPER, INC.
Statement of Retained Earnings
B.Ex. 12.5
MESSER COMPANY
Statement of Retained Earnings
For year ended _______________
Retained earnings, beginning of year
Retained earnings, beginning of year
For year ended _______________
B.Ex. 12.7
Journal entries to record declaration and payment of cash
dividends:
88,000
$678,000
$618,000
Add: Net income
Retained earnings, end of year
Deduct: Cash dividend on common stock*
$3,850,000 *
Additional paid-in capital on common stock
2,590,000 **
$6,440,000
$6,595,000
***$995,000 – (70,000 shares x $12) = $155,000
Total stockholders’ equity
*700,000 shares x 1.10 x $5 = $3,850,000
Retained earnings
$500,000
$520,000
Comprehensive income
B.Ex. 12.9
ALEXANDER, INC.
Net income
B.Ex. 12.10
CRASHER COMPANY
Statement of Comprehensive Income
For year ended _______________
Stockholders’ Equity Section of Balance Sheet
(Date)
Common stock, 770,000 shares, $5 par value
510,000*
300,000
*750,000 shares x 4% x $17 = $510,000
**750,000 shares x 4% x $10 = $300,000
***750,000 shares x 4% x ($17 – $10) = $210,000
c.
Ex. 12.2 a.
c.
e.
Stock dividend
Additional paid-in capital
Prior period adjustment
P/e ratio (Market price divided by earnings per share.)
Discontinued operations (Showing the discontinued operations in a separate
Diluted earnings per share
Comprehensive income
$12,500,000
8,600,000
$3,900,000
$3,360,000
Loss from discontinued operations ($540,000 ÷ 182,000) ….
Net earnings ($3,360,000 ÷ 182,000 shares) ………………..
Earnings per share:
Income from continuing operations
Discontinued operations:
SOLUTIONS TO EXERCISES
You are probably better off because of the board’s decision not to declare cash
Unusual or infrequent item
SPORTS +, INC.
Income Statement
For the Year Ended December 31, 20xx
Net sales ………………………………………………………………..
Costs and expenses (including applicable income tax)
Ex. 12.3
a.
Ex. 12.1 a.
1,440 shares = [(200 x 2) x 120%] x 3
$17,280 = 1,440 x $12
b.
$3,875,000
b.
Ex. 12.5 a. 1. Net income (all applicable to common stock) ……………… $1,920,000
$1,920,000
800,000
$1,120,000
b.
The $1.25 earnings per share from continuing operations is the preferred figure
The earnings per share figure computed in part a (2) is a basic EPS figure.
Although the company has outstanding both common and preferred stock, the
Net sales …………………………………………………………………………………………….
The $21.43 earnings per share figure from continuing operations (part a) is
Ex. 12.4
a.
SOUTHERN SUPPLY
Income Statement
For the Year Ended December 31, Current Year
Less: Costs and expenses (including income tax) ……………………………….
Income before continuing operations …………………………………………………….
Discontinued operations, net of income tax ………………………………………………
Net income ………………………………………………………………………………..
Ex. 12.6 a. 2018 2017 2016
b.
Ex. 12.7 a. 30
Aug.
Sept.
Common Stock …………………………………….
Dividends Payable …………………………………………….
Cash ………………………………………………..
Retained Earnings ……………………………………………
Stock Dividend to Be Distributed ……………………………
July
June
Dividends ………………………………………………………….
Dividends Payable …………………………………….
b.
d.
Declaration/payment of cash dividend—Decrease retained earnings
Stock split—No effect
Memorandum: Issued an additional 1,000,000 shares of capital stock in
a 2-for-1 stock split. Par value reduced from $1 per share to $0.50 per
share.
Apr.
Following the stock split, the earnings per share figure from earlier periods are
Earnings per share …………………………………………….
Ex. 12.8
Net Cash Flow
Net (from Any
Income Source)
D D NE D
Ex. 12.10 a.
b.
d.
After a stock split, earnings per share are expressed in terms of the new shares.
The market value of the total Inland Co.’s shares outstanding is $1,320,000 (40,000
Earnings per share are restated to reflect the increased number of shares
resulting from a stock dividend. Therefore, a stock dividend causes a
Ex. 12.9
Event
Realization of a gain from most sources, including discontinued operations,
a
Stockholders’
Equity
Current
Assets
D D NE D
d
b
Ex. 12.11 a.
Ex. 12.12 a. $572,000
Income before income tax ………………………………
Income tax* …………………………………………………………….
Net income ……………………………………………………………..
*$290,000 x 35%
Expenses ……………………………………………………………….
b. $188,500
Comprehensive income ……………………………………………….
Other comprehensive income:
Net income ………………………………………………………………
Revenues ……………………………………………………………….
Statement of financial position (balance sheet).
h.
Statement of comprehensive income, and statement of stockholders’ equity.
c.
188,500$
Ex. 12.13 a.
b.
10% stock dividend: 500,000 shares x 1.10 = 550,000 shares
2:1 stock split: 550,000 x 2 = 1,100,000 shares
$1 cash dividend: 550,000 shares x $1 = $550,000
$0.60 cash dividend: 1,100,000 shares x $0.60 = $660,000
Total cash paid: $550,000 + $660,000 = $1,210,000
220 shares x $40 = $8,800
Ex. 12.14 a.
b.
Based on information in the Case-in-Point in this chapter, unless you have an
extreme need for cash, you should probably be pleased that Home Depot retains its
Home Depot is a very aggressive company. It is constantly opening new
stores, requiring large amounts of capital. The company retains a significant portion
Net income is unchanged.
Net income …………………………………………………………………………….
Comprehensive income …………………………………………………………
Other comprehensive income:
b.
c.
Home Depot, Inc. has one class of common stock in its capital structure. Ten
million).
During the three years presented, Home Depot purchased treasury stock each
year–111 million shares in 2013, 80 million shares in 2014, and 59 million
30 Minutes, Easy
a.
Net sales 27,560,000$
Costs and expenses (including income taxes on continuing
operations) 21,660,000
Loss from warehouse damage 1,200,000
Earnings per share of common stock:
b. Estimated net earnings per share next year:
Earnings per share from continuing operations 2.82$
Estimated decrease ($2.82 x 5%) (0.14)
Estimated net earnings per share next year 2.68$
The profitability of the restaurants is not relevant, as these
SOLUTIONS TO PROBLEMS SET A
PROBLEM 12.1A
EASTERN AVIATION
For the Year Ended December 31, Current Year
Income Statement
EASTERN AVIATION
Income before income tax 4,700,000$
Income from continuing operations 2,820,000$
Discontinued operations:
30 Minutes, Medium
a.
Net sales 19,850,000$
Costs and expenses (including applicable income taxes) 16,900,000
Income from continuing operations 2,950,000$
Discontinued operations:
PROBLEM 12.2A
SLICK SOFTWARE, INC.
For the Year Ended December 31, 2018
Condensed Income Statement
SLICK SOFTWARE, INC.
Net income 2,540,000$
Earnings per share:
*Preferred dividends: 80,000 shares x $6.25 = $500,000