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CHAPTER 11 • STOCKHOLDERS’ EQUITY 11-21
PROBLEM 11-5 (Concluded)
2. The Stockholders’ Equity category as of December 31, 2016, would appear as
follows:
FREDERIKSEN INC.
PARTIAL BALANCE SHEET
DECEMBER 31, 2016
Stockholders’ Equity
Preferred stock, $80 par, 7%, 3,000 shares issued
and outstanding ........................................................................... $ 240,000
3. A stock dividend results in the capitalization of part of the Retained Earnings ac-
count. The value of the shares issued in the stock dividend is deducted from the Re-
tained Earnings account and added to the Capital Stock account (and the Additional
Paid-In Capital account for small stock dividends). The number of outstanding
11-22 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 8 PROBLEM 11-6 STATEMENT OF STOCKHOLDERS’ EQUITY
Preferred Common Paid-In Treasury Retained
Stock Stock Capital Stock Earnings
Balance, January 1 $ 0 $ 0 $ 0 $ 0 $ 0
Sale of preferred stock 50,000 10,000
Sale of common stock 20,000 300,000
Issuance of common
Explanations:
1/10 Preferred stock: 500 × $100 par = $50,000 increase
Additional paid-in capital: 500 × ($120 – $100) = $10,000 increase
1/10 Common stock: 4,000 × $5 = $20,000 increase
Additional paid-in capital: 4,000 × ($80 – $5) = $300,000 increase
1/20 Common stock: 1,000 × $5 par = $5,000 increase
Additional paid-in capital: 1,000 × ($70 – $5) = $65,000 increase
CHAPTER 11 • STOCKHOLDERS’ EQUITY 11-23
LO 8 PROBLEM 11-7 SOUTHWEST AIRLINES’ COMPREHENSIVE INCOME
1. Southwest Airlines has several items that were not included in the net income
amount but are included on the statement of comprehensive income. The effect of
2. While comprehensive income would show all sources of income for the period, these
numbers could lead readers to believe this is an ordinary result of operations. Some
items are considered to be “paper” gains or losses; these adjustments are not pre-
sented on the income statement because they are unrealized. These adjustments
LO 10 PROBLEM 11-8 EFFECTS OF STOCKHOLDERS’ EQUITY TRANSACTIONS ON
STATEMENT OF CASH FLOWS
Cash flows from financing activities:
Issuance of preferred stock (500 × $120) ......................................... $ 60,000
Issuance of common stock (4,000 × $80) ......................................... 320,000
Purchase of treasury stock (500 × $60) ............................................ (30,000)
Reissuance of treasury stock (100 × $65)......................................... 6,500
Net cash flow from financing activities .............................................. $356,500
The following transactions would not appear in the Financing Activities section of the
11-24 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 11 PROBLEM 11-9 INCOME DISTRIBUTION OF A PARTNERSHIP (APPENDIX)
1. If income is $15,000, it should be distributed as follows:
Abbott
Costello
Salary to Abbott ...................................................... $ 20,000
Interest to Costello: 10% × $300,000 ...................... $ 30,000
2. If income is $50,000, it should be distributed as follows:
Abbott
Costello
3. If income is $80,000, it should be distributed as follows:
Abbott
Costello
Salary to Abbott ...................................................... $20,000
Interest to Costello: 10% × $300,000 ...................... $30,000
LO 11 PROBLEM 11-10 SOLE PROPRIETORSHIPS (APPENDIX)
1. The balance of the owner’s capital account can be calculated as follows:
Beginning balance ............................................................................ $ 0
Investments by owner ....................................................................... 120,000
$ 120,000
CHAPTER 11 • STOCKHOLDERS’ EQUITY 11-25
LO 11 PROBLEM 11-11 PARTNERSHIPS (APPENDIX)
Allocation: Nerise
O’Brien Total
Amount to be allocated $21,200*
Salary $ 7,200
Interest ($100,000 × 6%) $ 6,000 13,200
Remainder to allocate $ 8,000
Balance of equity 4,000 4,000 8,000
$11,200 $10,000 $ 0
MULTI-CONCEPT PROBLEMS
LO 1,4 PROBLEM 11-12 ANALYSIS OF STOCKHOLDERS’ EQUITY
1. Preferred Stock Issued = $120,000/$30 par = 4,000 shares issued
2. Preferred Stock Outstanding = 4,000 – 100 (Treasury Stock) = 3,900* shares
11-26 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 3,4,7 PROBLEM 11-13 EFFECTS OF STOCKHOLDERS’ EQUITY TRANSACTIONS ON
THE BALANCE SHEET
1. Assets = Liabilities + Stockholders’ Equity
a. +500,000 +100,000
+400,000
2. HORTON INC.
PARTIAL BALANCE SHEET
DECEMBER 31, XXXX
Stockholders’ Equity
Common stock, 2,000,000 authorized, 220,000 issued,
3. Note: The company is authorized to issue 2,000,000 shares of common stock, $0.50
par value. At the end of the year, 220,000 shares are issued; however, only 218,000
CHAPTER 11 • STOCKHOLDERS’ EQUITY 11-27
LO 1,4 PROBLEM 11-14 STOCKHOLDERS’ EQUITY SECTION OF THE BALANCE SHEET
1. IVES INC.
BALANCE SHEET
AS OF XXXX
Assets
Cash ................................................................................................. $ 3,500
Account receivable ............................................................................ 5,000
Plant, property, and equipment ......................................................... 108,000
Total assets ................................................................................. $116,500
2. The Retained Earnings account has a debit balance because the accumulated earn-
ings of the company represent a net loss and/or dividends paid out have exceeded
the cumulative earnings.
11-28 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
ALTERNATE PROBLEMS
LO 1 PROBLEM 11-1A STOCKHOLDERS’ EQUITY CATEGORY
KEBLER COMPANY
PARTIAL BALANCE SHEET
DECEMBER 31, 2016
Stockholders’ Equity
Preferred stock, $100 par, 7%, 2,000 shares authorized,
1,000 shares issued .......................................................................... $100,000a
Common stock, $5 par, 20,000 shares authorized, 10,000
shares issued, 9,100 shares outstanding .......................................... 50,000b
1/10 Preferred stock: 1,000 × $100 par = $100,000a credit
Additional paid-in capital: 1,000 × ($120 – $100) = $20,000c credit
1/10 Common stock: 8,000 × $5 = $40,000 creditb
Additional paid-in capital: 8,000 × ($80 – $5) = $600,000d credit
1/20 Common stock: 2,000 × $5 par = $10,000 creditb
Additional paid-in capital: 2,000 × ($70 – $5) = $130,000d credit
CHAPTER 11 • STOCKHOLDERS’ EQUITY 11-29
LO 2 PROBLEM 11-2A EVALUATING ALTERNATIVE INVESTMENTS
1. Common stock—dividends become an obligation of the company after they are de-
clared. Prior to the declaration, the company is not obligated to pay dividends to
common shareholders.
2. Rob should invest in the common stock because the return is greatest. Rob must be
aware, however, that the risk is also the greatest. If the company fails to perform as
LO 5 PROBLEM 11-3A DIVIDENDS FOR PREFERRED AND COMMON STOCK
1. Preferred Stock Common Stock
$200,000 × 8% = $16,000 $118,000 – $16,000 = $102,000
Per share: $16,000/2,000 = $8.00 $102,000/40,000 = $2.55
LO 6 PROBLEM 11-4A EFFECT OF STOCK DIVIDEND
1. The statement should include the following points:
a. A stock dividend does not change the total stockholders’ equity amount.
11-30 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 11-4A (Concluded)
2. The statement to the stockholders should stress the following points:
a. Each stockholder has the same proportionate ownership of the company after
the dividend as before the dividend.
LO 7 PROBLEM 11-5A DIVIDENDS AND STOCK SPLITS
1. Mar. 1 Cash dividends increase (or Retained Earnings decreases) and total
stockholders’ equity decreases.
Apr. 1 Total stockholders’ equity remains unchanged.
Sept. 1 Retained Earnings and total stockholders’ equity decrease by $7,560
[(10,000 + 800) × $0.70].
Oct. 1 Total stockholders’ equity does not change.
CHAPTER 11 • STOCKHOLDERS’ EQUITY 11-31
PROBLEM 11-5A (Concluded)
2. SVENBERG INC.
PARTIAL BALANCE SHEET
DECEMBER 31, 2016
Stockholders’ Equity
Preferred stock, $80 par, 8%, 1,000 shares issued
and outstanding ........................................................................... $ 80,000
Common stock, $3.33 par, 32,400a shares issued
and outstanding ........................................................................... 108,000b
3. A stock dividend results in the capitalization of part of the Retained Earnings ac-
count. The value of the shares issued in the stock dividend is deducted from the Re-
tained Earnings account and added to the Capital Stock account (and the Additional
11-32 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 8 PROBLEM 11-6A STATEMENT OF STOCKHOLDERS’ EQUITY
Preferred Common Paid-In Treasury Retained
Stock Stock Capital Stock Earnings
Balance, January 1 $ 0 $ 0 $ 0 $ 0 $ 0
Sale of preferred stock 100,000 20,000
Sale of common stock 40,000 600,000
Issuance of common
Explanations:
1/10 Preferred stock: 1,000 × $100 par = $100,000 increase
Additional paid-in capital: 1,000 × ($120 – $100) = $20,000 increase
1/10 Common stock: 8,000 × $5 = $40,000 increase
Additional paid-in capital: 8,000 × ($80 – $5) = $600,000 increase
1/20 Common stock: 2,000 × $5 par = $10,000 increase
Additional paid-in capital: 2,000 × ($70 – $5) = $130,000 increase
