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CHAPTER 11 • STOCKHOLDERS’ EQUITY 11-33
LO 8 PROBLEM 11-7A COSTCO’S COMPREHENSIVE INCOME
1. Other comprehensive income includes items that are not in the traditional net in-
come amount but are included in the broader measure of comprehensive income.
These items include: foreign-currency translation adjustments, adjustments in the
market values of certain investments, and other items that are not specified by the
company. Costco has an amount as foreign-currency translation adjustment for
2014.
LO 10 PROBLEM 11-8A EFFECTS OF STOCKHOLDERS’ EQUITY TRANSACTIONS ON
THE STATEMENT OF CASH FLOWS
Cash flows from financing activities:
Issuance of preferred stock (1,000 × $120) ...................................... $120,000
Issuance of common stock (8,000 × $80) ......................................... 640,000
Purchase of treasury stock (1,000 × $60) ......................................... (60,000)
Reissuance of treasury stock (100 × $65)......................................... 6,500
Net cash flows from financing activities ............................................ $706,500
11-34 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 11 PROBLEM 11-9A INCOME DISTRIBUTION OF A PARTNERSHIP (APPENDIX)
1. Katz Kan
Salary to Katz $ 40,000
Interest to Kan: 10% × $600,000 $ 60,000
2. If income is $100,000, it should be distributed as follows:
Katz Kan
Salary to Katz $40,000
Interest to Kan: 10% × $600,000 $60,000
Total distributed $40,000 $60,000
3. If income is $160,000, it should be distributed as follows:
Katz Kan
LO 11 PROBLEM 11-10A SOLE PROPRIETORSHIPS (APPENDIX)
1. The balance of the owner’s capital account can be calculated as follows:
Beginning balance $ 0
Investments by owner 150,000
$150,000
Net income 30,000
Withdrawals (15,000)
Ending balance $165,000
CHAPTER 11 • STOCKHOLDERS’ EQUITY 11-35
LO 11 PROBLEM 11-11A PARTNERSHIPS (APPENDIX)
Allocation: Locke
Keyes Total
Amount to be allocated $19,600*
Salary $10,800
Locke
Keyes
Beginning balance $ 0 $ 0
Investments 35,000 140,000
Allocation of net income 11,000 8,600
11-36 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
ALTERNATE MULTI-CONCEPT PROBLEMS
LO 1,4 PROBLEM 11-12A ANALYSIS OF STOCKHOLDERS’ EQUITY
1. Preferred Stock Issued = $400,000/$50 par = 8,000 shares
2. Preferred Stock Outstanding = 8,000 – 200 (Treasury Stock) = 7,800 shares
LO 3,4,7 PROBLEM 11-13A EFFECTS OF STOCKHOLDERS’ EQUITY TRANSACTIONS ON
BALANCE SHEET
1. Assets = Liabilities + Stockholders’ Equity
a. +100,000 +10,000
+90,000
2. Contributed capital is the amount given in exchange for assets. In the first transac-
tion, the company gave stock for cash, an asset. In the second transaction, the
company gave stock for a patent, also an asset. Contributed capital may also be
CHAPTER 11 • STOCKHOLDERS’ EQUITY 11-37
PROBLEM 11-13A (Concluded)
3. The book value of the common stock at the end of the year is computed as follows:
Stockholders’ Equity:
Common stock .................................................................................. $ 20,000
LO 1,4 PROBLEM 11-14A STOCKHOLDERS’ EQUITY SECTION OF THE BALANCE SHEET
1. GRAINFIELD INC.
PARTIAL BALANCE SHEET
AS OF XXXX
Stockholders’ Equity
Preferred stock, 10,000 shares authorized, 5,000
shares issued and outstanding, $10 par, 5% ............................... $ 50,000
11-38 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
DECISION CASES
READING AND INTERPRETING FINANCIAL STATEMENTS
LO 1,8 DECISION CASE 11-1 COMPARING TWO COMPANIES IN THE SAME INDUSTRY:
PANERA BREAD AND CHIPOTLE
1. Panera Bread had the following number of shares:
Authorized: 112,500,000
2. Panera Bread’s Retained Earnings account increased during the period from
$1,049,884,000 to $1,229,177,000. Chipotle’s Retained Earnings account increased
3. Panera Bread had a total stockholders’ equity of $736,184,000, while Chipotle had
$2,012,369,000. The dollar amount of stockholders’ equity, by itself, does not
LO 10 DECISION CASE 11-2 READING PANERA BREAD’S STATEMENT OF CASH
FLOWS
1. The largest cash inflow was from the issuance of long-term debt. The largest cash
outflow was from the repurchase of common stock. Smaller amounts were reflected
on the statement of cash flows for items related to stock options and employee ben-
efit plans.
CHAPTER 11 • STOCKHOLDERS’ EQUITY 11-39
MAKING FINANCIAL DECISIONS
LO 1,2 DECISION CASE 11-3 DEBT VERSUS PREFERRED STOCK
1. The purpose of this problem is to allow students to see the similarities and differ-
ences between a liability and an equity. In the problem, the loan of First Company is
very similar to the preferred stock of Second Company. Both securities indicate an-
nual payments of 8% (interest or dividend). Further, the stock carries a mandatory
2. Whether the preferred stock should be considered a liability or an equity is a matter
of judgment. This is a good opportunity to stress form over substance. The proper
classification of the security should be based on the student’s belief about the sub-
stance of the transaction rather than on whether the company has chosen to call the
security a loan or stock.
LO 2 DECISION CASE 11-4 PREFERRED VERSUS COMMON STOCK
Preferred Stock—Preferred stock has no voting rights. The company is not obligated to
pay dividends until they are declared; however, the cumulative feature requires that the
company pay preferred shareholders all dividends in arrears before common share-
holders receive a dividend.
11-40 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
ETHICAL DECISION MAKING
LO 9 DECISION CASE 11-5 INSIDE INFORMATION
1. Recognize an ethical dilemma:
The ethical issue in this case is whether or not Jim Brock acted improperly when he
2. Analyze the key elements in the situation:
1. Was anyone harmed by Brock’s actions, e.g., the parties that sold the stock at a
low price?
2. Does it matter if Brock himself profited or if some other party purchased stock
based on his knowledge?
3. Do brokers and analysts receive information about the firm that is not available to
the public? Doesn’t everyone engage in insider information?
3. List alternatives and evaluate the impact of each on those affected:
If Brock decides he has acted ethically, then he has no further responsibility in the
4. Select the best alternative:
In this case, it appears that Jim has acted unethically. He has not upheld his respon-
sibilities to his employer. Further, it is quite possible that his actions are illegal. The
SEC and state authorities have very stringent rules against someone using “insider
information” in order to obtain an advantage.
LO 5 DECISION CASE 11-6 DIVIDEND POLICY
Retained earnings represents accumulated, undistributed earnings of the company, but
CHAPTER 11 • STOCKHOLDERS’ EQUITY 11-41
SOLUTION TO INTEGRATIVE PROBLEM
Alternative A. If Griffin had issued bonds to purchase the asset, the additional
transactions would have been as follows. (Note: This assumes that the transaction
to purchase the asset and to depreciate the asset were recorded under either alter-
native.)
Journal Jan. 1 Cash ................................................................... 8
Entry Bonds Payable .............................................. 8
Analysis To record issuance of bonds to be used
for equipment.
11-42 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
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Griffin’s balance sheet and income statement would appear as follows:
GRIFFIN INC.
BALANCE SHEET
DECEMBER 31, 2016
(IN MILLIONS)
Assets
Cash ................................................................................. $ 8.25*
Other current assets ......................................................... 6.40
Equipment (net of accumulated depreciation) ................... 7.00
Other long-term assets ..................................................... 45.00
Total assets ................................................................. $66.65
*Cash increase by $8.0 bond issuance – $1.5 loan payment + 0.15 tax saving (0.5 in-
terest × 30%).
GRIFFIN INC.
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2016
(IN MILLIONS)
Revenues .......................................................................... $50.00
CHAPTER 11 • STOCKHOLDERS’ EQUITY 11-43
Alternative B. If Griffin issued preferred stock and purchased the asset, the transac-
tions would be as follows. (Note: This assumes that the transaction to purchase the
asset and to depreciate the asset were recorded under either alternative.)
Journal Jan. 1 Cash ................................................................... 8
Entry Preferred Stock ............................................. 2
Analysis Additional Paid-In Capital—Preferred ........... 6
To record issuance of stock.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash 8
Preferred Stock 2
Additional Paid-In
Capital—Prefer-
red 6
11-44 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
GRIFFIN INC.
BALANCE SHEET
DECEMBER 31, 2016
(IN MILLIONS)
Assets
Cash ................................................................................. $ 7.6
Other current assets ......................................................... 6.4
Equipment (net of accumulated depreciation) ................... 7.0
Other long-term assets ..................................................... 45.0
Total assets ................................................................. $66.0
GRIFFIN INC.
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2016
(IN MILLIONS)
Revenues .......................................................................... $50.00
Expenses:
Depreciation ............................................................... $ 4.20
