Financing Activities 251
D. As each payment is made, the amount owed decreases. As the unpaid
E.
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Date
Accounts
Cash
Contributed
Capital
Retained
Earnings
Bulldozer
Capital Lease Obligation
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Date
Accounts
Cash
Contributed
Capital
Retained
P9-9 A. $15,259 Three tractors with a total cost of $123,000 ($41,000 × 3)
are being financed with the lease. $123,000 is the pre-
C.
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Date
Accounts
Cash
Contributed
Capital
Retained
Earnings
Tractors
Capital Lease Obligation
252 Chapter 9
E.
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Date
Accounts
Cash
Other
Assets
Contributed
Capital
Retained
Earnings
B.
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Date
Accounts
Cash
Other
Assets
Contributed
Capital
Retained
Earnings
C.
A
B
C
D
E
F
Period
Present
Value at
Beginning of
Period
Interest
Incurred
(Column B
× 0.8125%)
Amount
Paid
Amortization
of Principal
(Column C −
Column D)
Value At
End of
Period
(B + E)
D.
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Date
Accounts
Cash
Other
Assets
Contributed
Capital
Retained
Earnings
Interest Expense
Capital Lease Obligation
Cash
E. At inception of the lease, the required monthly payments have a pre-
Interest Expense
Capital Lease Obligation
Cash
Financing Activities 253
the purchaser is exactly equal to 0.8125% of the amount owed (9¾%
interest ÷ 12 months = 0.8125%). For example, in period one, the pur-
chaser owes a balance of $153,852 for the entire month. At 9¾% an-
B.
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Date
Accounts
Cash
Contributed
Capital
Retained
Earnings
C.
A
B
C
D
E
F
Period
Present
Value at
Beginning
of Period
Interest
Incurred
(Column B ×
11.35%)
Amount
Paid
Amortization
of Principal
(Column C −
Column D)
Value At
End of
Period
(B + E)
1
350,000
39,725
95,535
(55,810)
294,190
2
294,190
33,391
95,535
(62,144)
232,046
3
232,046
26,337
95,535
(69,198)
162,848
4
162,848
18,483
95,535
(77,052)
5
85,796
95,535
(85,797)
D. The interest expense (column C above) decreases each year because
E.
ASSETS
=
LIABILITIES
+
OWNERS’ EQUITY
Date
Accounts
Cash
Contributed
Capital
Retained
Earnings
Interest Expense
Capital Lease Obligation
Cash
254 Chapter 9
interest expense incurred by the purchaser is exactly 11.35%. For ex-
P9–12 A. The Stockholders’ Equity section at December 31, 2008, would re-
port:
1The number of shares outstanding after the preceding transactions
would be:
Number at beginning of year 2,200,000
2The value of Retained Earnings after these transactions is:
Beginning balance $46,000,000
B. The financing section of the Statement of Cash Flows would report
the following:
Financing Activities 255
P9–13 A. The Stockholders’ Equity section of the Balance Sheet after the stock
split would be:
B. The Stockholders’ Equity section of the Balance Sheet after the 100%
stock dividend would be:
C. The total of stockholders’ equity is the same whether the company
carries out a split or a dividend. For the split, par is decreased from
P9–14 A. Net income = $26,182. Net income is reported on the bottom of the
256 Chapter 9
B. Dividends = $14,300. The dividends reported here must be cash divi-
C. Treasury stock increase = $1,263. The acquisition of treasury stock is
E. Common stock = $14,000. The cumulative par value of all common
P9–15 A. Stockholders’ Equity Before Conversion
Preferred stock, $5 par, 4,000 shares outstanding $ 20,000
Total $4,598,000
B. Stockholders’ Equity After Conversion
Common stock, $1 par, 57,000 shares outstanding $ 57,000
C. There is no effect on the financing section of the Statement of Cash
Flows.
Financing Activities 257
D. Shareholders are often attracted by convertible preferred stock. So,
they may be willing to accept a lower dividend rate than other, simi-
P9–16 The complete stockholders’ equity section is as follows:
December 31
2008
2007
Stockholders’ Equity
Paid-in capital in excess of par value
Retained earnings
Total Stockholders’ Equity
$1,411,750
8.5% Preferred stock, $10 par value, 10,000
The individual items can be determined as follows:
a. 10,000 preferred shares × $10 par value
b. 10,000 preferred shares × $10 par value
h. Equal to the sum of both years’ net income ($75,000 + $125,000 =
$200,000) minus the dividend paid on April 1, 2008 ($75,000 × 10% =
258 Chapter 9
P9–17 A. 3,000 $300,000 ÷ $100 par value = 3,000 preferred
shares issued; same answer for both years
D. 57,550 (2007) 60,000 shares issued − 2,450 treasury
shares = 57,550
73,600 (2008) 75,000 shares issued − 1,400 treasury
shares = 73,600
$16.00
G. $157,500 (2007) The company was started during 2007. Div-
idends are declared 30 days after the end of
the year. Therefore, no dividends have yet
been declared at December 31, 2007. The
Financing Activities 259
H. $5.25 The preferred stock earns a dividend of
($15,750 ÷ 3,000 shares).
I. zero All dividends due to preferred stock must
be paid before any dividends may be paid
to common. No dividends could be paid to
common stockholders in 2008.
J. zero The preferred stock is cumulative. No divi-
to preferred shareholders.
P9–18 A. 2008: 18,000 preferred shares $450,000 ÷ $25 par value
2007: 15,000 preferred shares $375,000 ÷ $25 par value
B. 2008: 136,000 common shares $680,000 ÷ $5 par value
2007: 115,000 common shares $575,000 ÷ $5 par value
260 Chapter 9
G. $2,599,500 Net income is the change in Retained Earnings
I. $8.46 Total dividends in 2008 $500,000
Less: preferred dividends
P9–19 A. Yes; generally companies will record an estimate of the liability to
repair potential defective products.
E. Yes; as long as the bonds have not been redeemed, they should be
shown as a liability. This would be a current liability, so the company
would be required to transfer the amount from the long-term section
Financing Activities 261
G. No; stock dividends do not require the use of a company’s assets, so
no liability should be recorded.
sheet.
P9–20
Maturity
$2,000,000
Total interest expense in 2008 = $135,612.47
Interest Payments
$15,000.00
Total interest paid in 2008 = $135,000.00
Month
Present Value
at Beginning
of Month
Interest
Incurred
Amount
Paid
Amortization
of Principal
Value at End
of Month
1
1,954,505.76
15,065.98
15,000.00
65.98
1,954,571.74
2
1,954,571.74
15,066.49
15,000.00
66.49
1,954,638.23
3
1,954,638.23
15,067.00
15,000.00
67.00
1,954,705.23
5
1,954,772.75
15,068.04
15,000.00
68.04
1,954,840.79
6
15,068.56
15,000.00
68.56
1,954,909.35
8
15,069.63
15,000.00
69.63
1,955,048.07
9
15,000.00
1,955,118.23
262 Chapter 9
Maturity
$2,000,000
If the effective interest rate were 8.75%:
Interest Payments
$15,000.00
Total interest expense for 2008 = $134,324.74
Month
Present Value
at Beginning
of Month
Interest
Incurred
Amount
Paid
Amortization
of Principal
Value at End
of Month
1
2,047,149.67
14,927.13
15,000.00
(72.87)
2,047,076.80
2
2,047,076.80
14,926.60
15,000.00
(73.40)
2,047,003.40
2,047,003.40
14,926.07
(73.93)
2,046,929.47
14,925.53
(74.47)
2,046,779.98
14,924.44
(75.56)
2,046,704.42
14,923.89
(76.11)
2,046,551.64
Maturity
$2,000,000
If the effective interest rate were 9%:
Interest Payments
$15,000.00
Total interest expense for 2008 = $135,000.00
Month
Present Value
at Beginning
of Month
Interest
Incurred
Amount Paid
Amortization
of Principal
Value at End
of Month
1
2,000,000.00
15,000.00
15,000.00
—
2,000,000.00
2
2,000,000.00
15,000.00
15,000.00
—
2,000,000.00
3
2,000,000.00
15,000.00
—
2,000,000.00
5
2,000,000.00
15,000.00
15,000.00
—
2,000,000.00
6
2,000,000.00
15,000.00
15,000.00
—
2,000,000.00
8
2,000,000.00
15,000.00
15,000.00
—
2,000,000.00
9
2,000,000.00
2,000,000.00
P9–21
1
2
3
4
5
6
7
8
9
10
Financing Activities 263
CASES
C9-1 Information that might be helpful in making a loan decision would include
the following:
A description of the company: A borrower should describe the busi-
Financial statements for the business for the past several years: A
creditor is interested in whether a borrower is likely to pay interest and
principal at the agreed times. The ability of a borrower to make these
date.
A plan describing future activities and use of borrowed funds: In addi-
tion to historical statements, information about expected future activities
C9-2 A. The par value of a company’s stock represents the portion of con-
tributed capital that may be legally restricted. In some states, corpo-
264 Chapter 9
B. Preferred stock typically has a fixed dividend rate. If the stock is cu-
mulative, dividends in arrears must be paid before dividends can be
C. Suspension of preferred dividends has no effect on the financial
statements. No account balances are affected directly by the deci-
December 31 (Millions) 2007 2006
Total assets $3,759.7 $3,774.4
D. The common stockholders have only a small claim to the company’s
future cash flows and earnings. This claim increased in 2007, how-
Financing Activities 265
C9-3 A. At year-end 2004, liabilities are a primary source of financing for as-
sets. At that date, 70% of the company’s assets were financed with
liabilities.