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227
CHAPTER 8
LIABILITIES AND STOCKHOLDERS’ EQUITY
CLASS DISCUSSION QUESTIONS
1. Accounts payable and accruals
2. Short-term notes payable may be issued to
purchase merchandise or other assets or to
satisfy an account payable which was cre-
ated earlier.
5. (1) To pay the face (maturity) amount of the
bonds at a specified date. (2) To pay peri-
odic interest at a specified percentage of
the face amount.
6. a. Less than $40,000,000
b. 1. $40,000,000
2. 8%
3. 6%
4. $40,000,000
7. a. Premium
b. Interest Expense
b. A contingent liability should be record-
ed when it is probable and can be rea-
sonably estimated. Each year, Delta Air
Lines estimates its contingent liability
based on frequent flyer miles flown and
13. a. Unissued stock has never been issued,
but treasury stock has been issued as
fully paid and has subsequently been
reacquired.
b. As a deduction from the total of other
stockholders’ equity accounts.
14. a. It has no effect on revenue or expense.
b. It reduces stockholders’ equity by
$2,250,000.
15. a. It has no effect on revenue.
b. It increases stockholders’ equity by
228
EXERCISES
E8–1
BSF Co.
a. Earnings before bond interest and income tax ........... $ 1,000,000
Bond interest ($7,500,000 × 8%) ................................... (600,000)
Balance ........................................................................... $ 400,000
Income tax (40%) ............................................................ (160,000)
b. Earnings before bond interest and income tax ........... $ 3,000,000
Bond interest ($7,500,000 × 8%) ................................... (600,000)
Balance ........................................................................... $ 2,400,000
Income tax (40%) ............................................................ (960,000)
Net income ...................................................................... $ 1,440,000
c. Earnings before bond interest and income tax ........... $ 4,500,000
Bond interest ($7,500,000 × 8%) ................................... (600,000)
Balance ........................................................................... $ 3,900,000
Income tax (40%) ............................................................ (1,560,000)
Net income ...................................................................... $ 2,340,000
Dividends on preferred stock ($7,500,000 × 2%) ......... (150,000)
Earnings available for dividends on common stock .. $ 2,190,000
E8–2
Factors other than earnings per share that should be considered in evaluating
financing plans include the following: Bonds represent a fixed annual interest
229
E8–3
Current liabilities:
Accounts payable ................................................. $ 43,000
Accrued wages payable ....................................... 12,200
Accrued interest payable ..................................... 1,600*
Notes payable ....................................................... 96,000
E8–4
a.
Balance Sheet
Assets = Liabilities + Stockholders’ Equity
Accounts Notes
b.
Balance Sheet
Statement of Assets = Liabilities + Stockholders’ Equit
y
Cash Flows Retained
Cash = Notes Pa
y
able + Earnin
g
s
(
60,750
)
(
60,000
)
(
750
)
Statement of Cash Flows Income Statement
Operatin
g
(
60,750
)
Interest expense
(
750
)
*
*$60,000 × 5% × 90/360 = $750
230
E8–5
a. Regular pay (40 hrs. × $24) ........................................ $ 960.00
Overtime pay (3 hrs. × $36) ........................................ 108.00
Gross pay .................................................................... $1,068.00
E8–6
Summary: (1) $720,000; (3) $840,000; (7) $15,000; (11) $290,000
Net amount paid ..................................................... $ 525,000
Total deductions .................................................... 315,000
(3) Total earnings ........................................................ $ 840,000
Less overtime ......................................................... (120,000)
(1) Regular earnings .................................................... $ 720,000
231
E8–7
a. FICA tax (7.5% × $90,000) ........................................................ $6,750
State unemployment (2.7% × $30,000) ................................... 810
Federal unemployment (0.8% × $30,000) ............................... 240
$7,800
b.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
FICA SUTA FUTA Retained
E8–8
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Vacation Pay Retained
Pa
y
able + Earnin
g
s
232
E8–9
The bonds sold at a premium. This is indicated by the selling price of 113.04,
which is stated as a percentage of face amount and is more than par (100%). The
E8–10
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Balance Sheet
Assets = Liabilities + Stockholders’ Equity
Retained
Cash = Earnings
Sept. 1. (1,500,000) (1,500,000)
Statement of Cash Flows Income Statement
Sept.1. Operatin
g
(
1,500,000
)
Sept. 1. Interest exp.
(
1,500,000
)
*
*$50,000,000 × 6% × 1/2 = $1,500,000
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Retained
233
E8–11
a. $6,250 = $625,000 × 1%
E8–12
a.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Product Warranty Retained
Pa
y
able + Earnin
g
s
3,956
(
3,956
)
Statement of Cash Flows Income Statement
No effect 0 Product
warranty
exp.
(
3,956
)
234
E8–13
a.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
EPA Fines Litigation Retained
Note to Instructors: The “damage awards and fines” would be disclosed on
the income statement under “other expenses.”
b. The company experienced a hazardous materials spill at one of its plants
during the previous period. This spill has resulted in a number of lawsuits to
which the company is a party. The Environmental Protection Agency (EPA)
235
E8–14
a. The adjustment to accrue litigation contingency:
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Contingent Product Retained
& Tort Claims Pa
y
. + Earnin
g
s
316,000,000
(
316,000,000
)
Statement of Cash Flows Income Statement
No effect 0 Litigation
exp. and
losses
(
316,000,000
)
Note to Instructors: The actual titles in the accounts may vary from those
illustrated in this answer and, in practice, will vary according to the nature of
the contingency.
236
E8–15
a.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Paid-In Capital in
Common
Excess of Par—
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Paid-In Capital in
Preferred
Excess of Par—
237
E8–16
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Common Paid-In Capital in
Stock + Excess of Par—
E8–17
a. $2,100,000 (35,000 shares × $60)
E8–18
a. $1,036,000 ($37 × 28,000 shares)
b. The balance in the treasury stock account is reported as a deduction in the
Stockholders’ Equity section of the balance sheet.
238
E8–19
a. $990,000 ($33 × 30,000 shares)
b. The balance in the treasury stock account is reported as a deduction in the
Stockholders’ Equity section of the balance sheet.
d.
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Treasur
y
Paid-In Capital
Cash = Stock + from Treasur
y
Stock
Jan. 25. 800,0001 660,0002 140,0003
Statement of Cash Flows Income Statement
Jan. 25. Financing 800,000 No effect 0
239
E8–20
Balance Sheet
Assets = Liabilities + Stockholders’ Equit
y
Cash Dividends Retained
Pa
y
able + Earnin
g
s
Januar
y
1. 600,000
(
600,000
)
Statement of Cash Flows Income Statement
No effect 0 No effect 0
March 15. No entry required.
Balance Sheet
Assets = Liabilities + Stockholders’ Equity
Cash Dividends
Cash = Payable
E8–21
Stockholders’
Assets Liabilities Equity
(1) Declaring a cash dividend 0 + –
(2) Paying the cash dividend
declared in (1) – – 0
E8–22
a. 300,000 shares (50,000 shares × 6)
b. $90 per share ($540 ÷ 6)
240
E8–23
Stockholders’ Equity
Paid-in capital:
Common stock, $40 par
(100,000 shares authorized,
75,000 shares issued*) ................. $3,000,000
Additional paid-in capital in
excess of par ................................... 450,000 $ 3,450,000
Paid-in capital from treasury stock... 125,000
E8–24
Stockholders’ Equity
Paid-in capital:
Preferred 2% stock, $80 par
(40,000 shares authorized,
26,000 shares issued*) ............... $ 2,080,000
Additional paid-in capital
in excess of par ............................. 182,000 $ 2,262,000
Common stock, $8 par
Retained earnings ................................. 17,250,000
Total ................................................... $ 23,562,000
Deduct treasury common stock
(62,000 shares at cost) ..................... (744,000)
Total stockholders’ equity ................... $ 22,818,000
