Chapter 11
Reporting and Analyzing Equity
QUESTIONS
1. Organization expenses (costs) are incurred in creating a corporation. Examples include:
2. Organization expenses (costs) are reported as expenses when incurred—as part of
4. Authorized shares represent the maximum number of shares that a corporation’s charter
6. The general rights of common stockholders include: (1) the right to vote in
stockholders’ meetings, (2) the right to sell or otherwise dispose of stock, (3) the
7. The market value per share of stock is the price at which a share of stock is bought or
9. Convertible preferred stock is potentially attractive because it offers the safety of a
10. The three important dates governing dividends are:
a. date of declaration⎯the date the directors vote to pay a dividend.
12. Declaring a stock dividend has no effect on assets, liabilities, or total equity. Also, the
13. A stock dividend results in a distribution of additional shares to stockholders and the
capitalization of retained earnings. A stock split calls in the old shares and replaces
16. Treasury stock purchases affect the corporate assets and stockholders’ equity just like a
17. With a simple capital structure, earnings per share is calculated by first subtracting any
19. When a corporation has no preferred stock, book value per share is calculated by
20. Apple discloses on its fiscal 2014 balance sheet that it has 12,600,000 common shares
21. The par value for Google’s preferred stock is reported to be $0.001. A low par value can
22. From a review of its statement of cash flows, Samsung reported cash outlay of
QUICK STUDIES
Quick Study 11-2 (5 minutes)
Quick Study 11-3 (5 minutes)
Quick Study 11-4 (5 minutes)
a.
Cash …………………………………………………………………………
1,827,000
1,827,000
1,827,000
1,827,000
Quick Study 11-5 (15 minutes)
Cash ………………………………………………………………..
297,500
Cash ………………………………………………………………..
70,000
Inventory ……………………………………………………….
45,000
145,000
Quick Study 11-6 (10 minutes)
July 15
Retained Earnings …………………………………………………
165,000
Common Dividend Payable …………………………..
165,000
Declared cash dividend on common.
assemble a payee list for the dividend as of August 15.
Common Dividend Payable …………………………..
165,000
Cash ……………………………………………………….
165,000
Quick Study 11-7 (10 minutes)
Jun Company
Stockholders’ Equity
April 2 (after stock dividend)
Common stock⎯$5 par value, 375,000 shares
authorized, 220,000 shares issued and outstanding …………….
$1,100,000
Supporting work
Apr. 2
Retained Earnings …………………………………………………
400,000
Common Stock* ……………………………………………….
Common Stock** ……………………………………………
Paid-In Capital in Excess of Par Value,
Quick Study 11-8 (10 minutes)
True statements: 1, 2 and 4
Quick Study 11-9 (5 minutes)
1.
Cash* ………………………………………………………………………..
510,000
Preferred Stock, $100 Par Value** ………………………….
500,000
2. Preferred dividend =
Quick Study 11–10 (10 minutes)
Total cash dividend …………………………………………………………………
$110,000
Quick Study 11-11 (10 minutes)
May 3
Treasury Stock (4,000 shares) …………………………..
36,000
Nov. 4
Cash ……………………………………………………………………..
8,500
Quick Study 11–12 (10 minutes)
Quick Study 11-13 (10 minutes)
1. This material error should be reported on the statement of retained
earnings (and/or the statement of stockholders’ equity) as a prior
2. This change in the expected useful life is a change in an accounting
Quick Study 11-14 (10 minutes)
Basic earnings per share: =
Quick Study 11-15 (10 minutes)
Quick Study 11-16 (10 minutes)
Price-earnings ratio = = 5.2
Quick Study 11-17 (10 minutes)
Market value per share
Earnings per share
Net income – Preferred dividends
Weighted-average common shares outstanding
$20.54
$3.95
$2.34
Annual cash dividends per share
Quick Study 11-18 (10 minutes)
Total stockholders’ equity ……………………………………………………….
$1,850,000
Less equity attributable to preferred shares
$1,050,000
Quick Study 11-19 (10 minutes)
Cash ………………………………………………………………..
3,271
EXERCISES
Exercise 11-1 (15 minutes)
Characteristic
Corporations
1.
Owner authority and control ………………….
One vote per share
2.
Ease of formation ………………………………….
Requires government approval
3.
Transferability of ownership ………………….
4.
5.
Unlimited
6.
7.
Separate legal entity
Exercise 11-2 (15 minutes)
1.
Cash ………………………………………………………………..
152,000
2.
Cash ………………………………………………………………..
152,000
3.
Cash ………………………………………………………………..
152,000
Exercise 11-3 (15 minutes)
1.
Cash ……………………………………………………………………….
35,000
Common Stock, $5 Par Value* …………………………….
20,000
2.
Organization Expenses ……………………………………………
40,000
Common Stock, $1 Stated Value …………………………
3.
Organization Expenses ……………………………………………
40,000
Common Stock, No-Par Value …………………………….
40,000
4.
Cash ………………………………………………………………………..
60,000
Preferred Stock, $50 Par Value* …………………………..
50,000
Preferred Stock**………………………………………………
10,000
Exercise 11-4 (15 minutes)
Land ……………………………………………………………………….
45,000
85,000
Exercise 11-5 (20 minutes)
1.
a. Retained earnings
Before dividend ………………………………………………………………
$ 660,000
b. Total stockholders’ equity
Retained earnings ……………………………………………………….
c. Number of outstanding shares
Dividend shares ……………………………………………………………
2.
a. Retained earnings (no change)
Before and after stock split ……………………………………………..
$ 660,000
b. Total stockholders’ equity
Retained earnings ……………………………………………………….
3. From a stockholder’s point of view, there is no practical difference
Exercise 11-6 (25 minutes)
1.
Feb. 5
Retained Earnings* ………………………………………………..
480,000
Common Stock Dividend Distributable** …………..
120,000
Feb. 28
Common Stock Dividend Distributable …………………..
120,000
Common Stock, $10 Par Value ………………………….
120,000
2.
Before
After
Total stockholders’ equity ……………………
$1,575,000
$1,575,000
Total book value of shares …………………..
$ 21,000
$ 21,000
3.
February 5
February 28
Market value per share ………………………..
$ 40
$ 33.40
Shares owned ……………………………………..
Total market value of shares owned …….
$ 32,000
$ 32,064
Exercise 11-7 (10 minutes)
C
A
F
E
B
D
Exercise 11-8 (30 minutes)
Non-Cumulative
Preferred
Common
2015 ($20,000 paid)
Common⎯remainder ……………………………..
Common⎯remainder ……………………………..
2017 ($200,000 paid)
Common⎯remainder ……………………………..
2018 ($350,000 paid)
Common⎯remainder ……………………………..
2015-2018 ($598,000 paid)
Exercise 11-9 (25 minutes)
Cumulative
Preferred
Common
2015 ($20,000 paid)
Preferred* ………………………………………………
$ 20,000
Total for the year …………………………..……….
$ 20,000
Preferred⎯arrears from 2015 ………………….
$ 10,000
Preferred* ………………………………………………
Total for the year …………………………..……….
$ 28,000
2017 ($200,000 paid)
Preferred⎯arrears from 2016 ………………….
$ 12,000
Preferred* ………………………………………………
Total for the year …………………………..……….
$ 42,000
2018 ($350,000 paid)
Preferred* ………………………………………………
$ 30,000
Total for the year …………………………..……….
$ 30,000
2015-2018 ($598,000 paid)
Exercise 11-10 (25 minutes)
1. (a)
2. Changes to the equity section include the following
(i) The common stock account description line will change. After the
treasury stock purchase, it should read:
(ii) The descriptions and dollar amounts for Paid-In Capital in Excess of
(iii) The retained earnings dollar balance will not change but its
description should change to read:
(iv) After the purchase, a deduction for the cost of treasury stock is
reported immediately before the total line for stockholders’ equity as:
Exercise 11-10 (Concluded)
Revised equity section appears as follows
Common stock⎯$10 par value; 72,000 shares authorized
and issued; 5,000 shares in treasury ………………………………………….
$ 720,000
Exercise 11-11 (15 minutes)
Amos Company
Statement of Retained Earnings
For Year Ended December 31, 2016
Retained earnings, December 31, 2015, as previously reported ….
$1,375,000
Prior period adjustment
Retained Earnings, December 31, 2015, as adjusted …………………
Plus net income ……………………………………………………………………….
Less dividends ………………………………………………………………………..
Exercise 11-12 (25 minutes)
1. Net income ………………………………………………………………………….
$2,700,000
Less preferred dividends ……………………………………………………
2. Net income available to common stockholders …………………..
$2,311,980
Basic earnings per share ……………………………………………………
Exercise 11-13 (30 minutes)
1. Net income …………………………………………………………………………..
$960,000
2. Net income available to common stockholders ………………..
$840,000
Exercise 11-14 (15 minutes)
Stock
Market Value
per Share
Divided
by
Earnings
per Share
Price-Earnings
Ratio
1…………..
$176.40
$12.00
=
14.7
2…………..
96.00
=
4…………..
=
Exercise 11-15 (15 minutes)
Dividend yield
1. $16.06 / $220.00 = 7.3%
Exercise 11-16 (20 minutes)
1.
Total stockholders’ equity ………………………………………
$1,585,000
Less equity applicable to preferred shares
2.
Total stockholders’ equity ………………………………………
$1,585,000
Less equity applicable to preferred shares
Exercise 11-17 (20 minutes)
1. Share capital → Common stock
Cash ………………………………………………………………..
629
Exercise 11-18 (40 minutes)
Part 1
Jan. 2
Treasury Stock, Common ………………………………………
75,000
Cash ………………………………………………………………..
75,000
Purchased treasury stock (3,000 x $25).
Jan. 7
Retained Earnings …………………………………………………
40,500
Common Dividend Payable …………………………..
40,500
Common Dividend Payable ……………………………………
40,500
Cash ………………………………………………………………..
40,500
Paid cash dividend.
July 9
Cash* …………………………………………………………………….
36,000
Treasury Stock, Common** …………………………..
30,000
Paid-In Capital, Treasury Stock*** …………………….
*(1,200 x $30) **(1,200 x $25) ***(1,200 x $5)
Cash* …………………………………………………………………….
Retained Earnings …………………………………………………
Treasury Stock, Common** …………………………..
37,500
*(1,500 x $20) **(1,500 x $25)
Sept. 9
Retained Earnings …………………………………………………
59,400
Common Dividend Payable …………………………..
59,400
Oct. 22
Common Dividend Payable ……………………………………
59,400
Cash ………………………………………………………………..
59,400
Paid cash dividend.
Income Summary …………………………………………………..
52,000
Retained Earnings ……………………………………………
52,000