11-1
CHAPTER 11
Stockholders’ Equity
OVERVIEW OF EXERCISES, PROBLEMS, AND CASES
Estimated
Time in
Learning Objectives Exercises Minutes Level
Module 1
1. Understand the concept of stockholders’ equity and identify the 1 10 Easy
components of the Stockholders’ Equity category. 2 10 Mod
3 10 Mod
4 10 Mod
2. Show that you understand the characteristics of common
and preferred stock and the differences between the classes
of stock.
Module 2
5. Compute the amount of cash dividends when a firm has 9 10 Mod
issued both preferred and common stock. 10 15 Mod
Module 3
8. Show that you understand the statement of stockholders’ 14 10 Easy
equity and comprehensive income. 15 15 Diff
20 5 Easy
Module 4
11. Describe the important differences between the sole 21 15 Mod
proprietorship and partnership forms of organization 22 10 Mod
versus the corporate form (Appendix).
11-2 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
Problems Estimated
and Time in
Learning Objectives Alternates Minutes Level
Module 1
1. Understand the concept of stockholders’ equity and identify the 1 20 Mod
components of the Stockholders’ Equity category. 12* 15 Mod
14* 15 Diff
Module 2
5. Compute the amount of cash dividends when a firm has 3 20 Mod
issued both preferred and common stock.
Module 3
8. Show that you understand the statement of stockholders’ 6 20 Mod
equity and comprehensive income. 7 10 Mod
9. Understand how investors use ratios to evaluate stockholders’
equity.
Module 4
11. Describe the important differences between the sole 9 15 Mod
proprietorship and partnership forms of organization 10 20 Mod
versus the corporate form (Appendix). 11 10 Mod
CHAPTER 11 • STOCKHOLDERS’ EQUITY 11-3
Estimated
Time in
Learning Objectives Cases Minutes Level
Module 1
1. Understand the concept of stockholders’ equity and identify the 1* 15 Mod
components of the Stockholders’ Equity category. 3* 10 Mod
Module 2
5. Compute the amount of cash dividends when a firm has 6 15 Mod
issued both preferred and common stock.
Module 3
8. Show that you understand the statement of stockholders’ 1* 15 Mod
equity and comprehensive income.
Module 4
11. Describe the important differences between the sole
proprietorship and partnership forms of organization
versus the corporate form (Appendix).
*Exercise, problem, or case covers two or more learning objectives
Level = Difficulty levels: Easy; Moderate (Mod); Difficult (Diff)
11-4 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
EXERCISES
LO 1 EXERCISE 11-1 STOCKHOLDERS’ EQUITY ACCOUNTS
1. Yes, Preferred Stock, Increase
LO 1 EXERCISE 11-2 SOLVE FOR UNKNOWNS
1. Common Stock Total Par Value = $10 × 10,000 = $100,000
Cost per Share = $10,000/800 shares = $12.50
LO 1 EXERCISE 11-3 SOLVING FOR STOCKHOLDERS’ EQUITY AMOUNTS
1. To solve for the amount of net income for the year, the following equation can be used:
Beg. bal. of Ret. Earn. $420,000 + x – cash dividends declared $100,000 – stock
2. To solve for the amount of cash dividends paid during the year, the following equa-
tion can be used:
CHAPTER 11 • STOCKHOLDERS’ EQUITY 11-5
LO 1 EXERCISE 11-4 SOLVING FOR STOCKHOLDERS’ EQUITY AMOUNTS
1. To solve for the amount of cash dividends declared for the year, the following equa-
tion can be used:
Beg. bal. of Ret. Earn. $210,000 + net income $115,000 – x – stock dividend
$25,000 = End. bal. of Ret. Earn. $250,000
LO 3 EXERCISE 11-5 STOCK ISSUANCE
1. a.
Journal Cash …………………………………………………………. 75,000*
Entry Common Stock ……………………………………… 25,000**
Analysis Additional Paid-In Capital—Common ……….. 50,000***
To record issuance of common stock.
11-6 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
EXERCISE 11-5 (Concluded)
b.
Journal Building ……………………………………………………… 175,000
Entry Common Stock ……………………………………… 35,000*
Analysis Additional Paid-In Capital—Common ……….. 140,000
To record issuance of common stock.
c.
Journal Patent ……………………………………………………….. 50,000*
Entry Common Stock ……………………………………… 10,000**
Analysis Additional Paid-In Capital—Common ……….. 40,000***
To record issuance of common stock.
2. Common stock, $5 par value, 14,000 shares issued and outstanding …. $ 70,000
Additional paid-in capital ($50,000 + $140,000 + $40,000) ………………… 230,000
Total contributed capital ………………………………………………………….. $300,000
CHAPTER 11 • STOCKHOLDERS’ EQUITY 11-7
LO 3 EXERCISE 11-6 STOCK ISSUANCE
1. a. There is no entry.
b.
Journal 2016
Entry Mar. 10 Cash ………………………………………………. 175,000*
Analysis Common Stock …………………………… 50,000**
Additional Paid-In Capital—Common 125,000***
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash 175,000
Common
Stock 50,000
Additional Paid-In
Capital—Com-
mon 125,000
c.
Journal Mar. 18 Cash ………………………………………………. 12,000*
Entry Preferred Stock …………………………… 10,000**
Analysis Additional Paid-In Capital—Preferred 2,000***
To record issuance of preferred stock.
11-8 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
EXERCISE 11-6 (Concluded)
d.
Journal Apr. 12 Cash ………………………………………………. 450,000*
Entry Common Stock …………………………… 100,000**
Analysis Additional Paid-In Capital—Common 350,000***
To record issuance of common stock.
2. 8% Preferred stock, $100 par value, 5,000 shares authorized,
100 shares issued and outstanding …………………………………………… $ 10,000
Common stock, $10 par value, 2,000,000 shares authorized,
15,000 shares issued and outstanding ………………………………………. 150,000
LO 4 EXERCISE 11-7 TREASURY STOCK
1. a.
Journal July 1 Treasury Stock ………………………………… 40,000*
Entry Cash …………………………………………. 40,000
CHAPTER 11 • STOCKHOLDERS’ EQUITY 11-9
EXERCISE 11-7 (Concluded)
b.
Journal Aug. 1 Treasury Stock ………………………………… 7,200*
Entry Cash …………………………………………. 7,200
Analysis To record purchase of treasury stock.
2. Resale price of treasury stock (2,400 × $28) …………………………………… $67,200
Cost of treasury stock ($40,000 + $7,200) ………………………………………. 47,200
Excess of selling price over cost ……………………………………………….. $20,000
LO 4 EXERCISE 11-8 TREASURY STOCK TRANSACTIONS
1. a.
Journal 2016
Entry Feb. 1 Treasury Stock ………………………………… 100,000*
Analysis Cash …………………………………………. 100,000
To record purchase of treasury stock.
11-10 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
EXERCISE 11-8 (Concluded)
b.
Journal Mar. 1 Treasury Stock ………………………………… 15,600*
Entry Cash …………………………………………. 15,600
Analysis To record purchase of treasury stock.
*$13 × 1,200 = $15,600
3. Beginning balance ………………………………………………………………………. $ 390,000
Reacquisition of treasury stock—February 1 …………………………………… (100,000)
$ 290,000
Reacquisition of treasury stock—March 1 ……………………………………….. (15,600)
$ 274,400
Reissue of all treasury stock …………………………………………………………. 115,600
LO 5 EXERCISE 11-9 CASH DIVIDENDS
1. Preferred Dividends per Year = 1,000 × $100 × 9% = $9,000
Year Preferred Dividends Common Dividends
2013 $ 0 $ 0
CHAPTER 11 • STOCKHOLDERS’ EQUITY 11-11
EXERCISE 11-9 (Concluded)
2. Year Preferred Dividends Common Dividends
2013 $ 0 $ 0
LO 5 EXERCISE 11-10 CASH DIVIDENDS
1. Preferred: $200,000 × 8% = $16,000* for preferred
Common: $100,000 – $16,000* = $84,000 for common stockholders
2.
Journal July 1 Retained Earnings ……………………………. 100,000
Entry Dividends Payable ………………………. 100,000
Analysis To record dividend declared.
Balance Sheet Income Statement
3. Preferred: $16,000 × 3 years = $48,000* for cumulative preferred
Common: $100,000 – $48,000* = $52,000
11-12 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 6 EXERCISE 11-11 STOCK DIVIDENDS
1. a.
Journal Jan. 15 Retained Earnings …………………………………. 120,000**
Entry Common Stock Dividend Distributable … 40,000*
Analysis Additional Paid-In Capital—Common ….. 80,000
To record stock dividend declared.
mon 80,000
Retained
Earnings (120,000)
b.
Journal Jan. 30 Common Stock Dividend Distributable ……… 40,000
Entry Common Stock ………………………………… 40,000
Analysis To record issuance of stock dividend.
CHAPTER 11 • STOCKHOLDERS’ EQUITY 11-13
EXERCISE 11-11 (Concluded)
2. WORTHY COMPANY
PARTIAL BALANCE SHEET
JANUARY 31, 2016
Stockholders’ Equity
Common stock, $10 par, 44,000 shares issued and outstanding ….. $440,000*
Additional paid-in capital—Common stock …………………………………. 180,000**
LO 7 EXERCISE 11-12 STOCK DIVIDENDS VERSUS STOCK SPLITS
1. Assets = Liabilities + Stockholders’ Equity
Stock Dividend: (Retained Earnings)
– 500,000
11-14 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
EXERCISE 11-12 (Concluded)
2. Stockholders’ Equity Category:
a. Stock Dividend
Common stock, $10 par, 100,000 shares issued
and outstanding ……………………………………………………………. $1,000,000*
Additional paid-in capital—Common stock ……………………………. 750,000
LO 7 EXERCISE 11-13 STOCK DIVIDENDS AND STOCK SPLITS
1. Jan. 1 Balance …………………………………… 60,000 shares
May 1 60,000 × 15% …………………………… 9,000
69,000
Nov. 1 ………………………………………………. × 2
Total shares outstanding ………………………… 138,000 shares
CHAPTER 11 • STOCKHOLDERS’ EQUITY 11-15
LO 8 EXERCISE 11-14 REPORTING CHANGES IN STOCKHOLDERS’ EQUITY ITEMS
RYDE INC.
STATEMENT OF STOCKHOLDERS’ EQUITY
FOR THE YEAR ENDED APRIL 30, 2016
Additional Total
Common Paid-In Retained Stockholders’
Stock Capital Earnings Equity
LO 8 EXERCISE 11-15 COMPREHENSIVE INCOME
The Unrealized Gain/Loss—Available-for-Sale Securities account occurred when the
company adjusted its investments for the changes in the market value of the securities.
When a company buys stock in another company and the value of the stock changes, it
is necessary to write up or down the stock. In the case of available-for-sale securities,
LO 9 EXERCISE 11-16 PAYOUT RATIO AND BOOK VALUE PER SHARE
1. Dividend payout ratio: $45,000/$80,000 = 56.25%
Note: The solution assumes that the common stockholders have a right to the total
EXERCISE 11-16 (Concluded)
2. Book value per share:
Total stockholders’ equity
Preferred stock …………………………………………………………………. $110,000
Paid-in capital—Preferred ………………………………………………….. 55,000
Common stock ………………………………………………………………….. 500,000
LO 10 EXERCISE 11-17 IMPACT OF TRANSACTIONS INVOLVING ISSUANCE OF STOCK
ON STATEMENT OF CASH FLOWS
F—Issuance of common stock for cash
F—Issuance of preferred stock for cash
LO 10 EXERCISE 11-18 IMPACT OF TRANSACTIONS INVOLVING TREASURY STOCK ON
STATEMENT OF CASH FLOWS
F—Repurchase of common stock as treasury stock
F—Reissuance of common stock (held as treasury stock)
N—Retirement of treasury stock*
CHAPTER 11 • STOCKHOLDERS’ EQUITY 11-17
LO 10 EXERCISE 11-19 IMPACT OF TRANSACTIONS INVOLVING DIVIDENDS ON
STATEMENT OF CASH FLOWS
F—Payment of cash dividend on common stock
F—Payment of cash dividend on preferred stock
LO 10 EXERCISE 11-20 DETERMINING DIVIDENDS PAID ON STATEMENT OF CASH
FLOWS
1. Dividends payable, December 31, 2015 ……………………………………. $ 80,000
Dividends declared during 2016 ………………………………………………. 400,000
2. Clifford would report the cash dividend payments of $380,000 as a cash outflow in
the Financing Activities category of its 2016 statement of cash flows.
LO 11 EXERCISE 11-21 SOLE PROPRIETORSHIPS (APPENDIX)
The Owner’s Equity section of Par Golf’s balance sheet consists of the owner’s capital
account as follows:
LO 11 EXERCISE 11-22 PARTNERSHIPS (APPENDIX)
11-18 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEMS
LO 1 PROBLEM 11-1 STOCKHOLDERS’ EQUITY CATEGORY
PEELER COMPANY
PARTIAL BALANCE SHEET
DECEMBER 31, 2016
Stockholders’ Equity
Preferred stock, $100 par, 7%, 1,000 shares authorized, 500
shares issued and outstanding ………………………………………………… $ 50,000a
Common stock, $5 par, 10,000 shares authorized, 5,000 shares
1/10 Preferred stock: 500 × $100 par = $50,000 credita
Additional paid-in capital: 500 × ($120 – $100) = $10,000 creditb
1/10 Common stock: 4,000 × $5 par = $20,000 creditc
Additional paid-in capital: 4,000 × ($80 – $5) = $300,000 creditd
1/20 Common stock: 1,000 × $5 par = $5,000 creditc
Additional paid-in capital: 1,000 × ($70 – $5) = $65,000 creditd
CHAPTER 11 • STOCKHOLDERS’ EQUITY 11-19
LO 2 PROBLEM 11-2 EVALUATING ALTERNATIVE INVESTMENTS
1. Common stock has ownership privileges. The residual of the company belongs to
2. The return on the preferred stock depends upon its issue price. If it is assumed that
the stock is issued at par value, then the return is 8%. Since all three instruments
LO 5 PROBLEM 11-3 DIVIDENDS FOR PREFERRED AND COMMON STOCK
1. Preferred Stock Common Stock
$100,000 × 8% = $8,000 $59,000 – $8,000 = $51,000
Per share: $8,000/1,000 shares = $8.00 $51,000/20,000 shares = $2.55
LO 6 PROBLEM 11-4 EFFECT OF STOCK DIVIDEND
1. The memo to the board of directors should include the following points:
a. A stock dividend does not change the total stockholders’ equity amount.
11-20 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 11-4 (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 11-5 DIVIDENDS AND STOCK SPLITS
1. Mar. 1 Retained Earnings and total stockholders’ equity decrease.
Apr. 1 Total stockholders’ equity remains unchanged.
June 1 Common Stock Distributable increases by $7,500 (15,000 × 5% ×
$10). Additional Paid-In Capital—Common Stock increases by
$6,000 [(15,000 × 5%) × ($18 – $10)]. Retained Earnings decreas-
es by $13,500. Total stockholders’ equity does not change.