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P13-37A, cont.
Requirement 2
C-CELL WIRELESS
Balance Sheet (Partial)
October 31, 2016
P13-38A Journalizing dividends and treasury stock transactions and preparing the stockholders’
equity section of the balance sheet
Learning Objectives 3, 4
Nov. 8 Treasury Stock $6,300 CR
Winterborn Manufacturing Co. completed the following transactions during 2016:
Requirements
1. Record the transactions in Winterborn’s general journal.
2. Prepare the Winterborn’s stockholders’ equity section of the balance sheet as of December 31, 2016.
Assume that Winterborn was authorized to issue 2,400 shares of preferred stock and 500,000 shares
of common stock. Both preferred stock and common stock were issued at par. The ending balance of
retained earnings as of December 31, 2016, is $2,080,000.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Jan. 16
Cash Dividends
41,800
Dividends Payable—Preferred (4% × $100 × 950
shares)
3,800
Aug. 15
Common Stock Dividend Distributable
190,000
Common Stock—$2 Par Value
190,000
Issued 50% stock dividend.
Oct. 26
Treasury Stock—Common ($9 per share × 1,400
shares)
12,600
Cash
12,600
Purchased treasury stock.
P13-38A, cont.
Requirement 2
WINTERBORN MANUFACTURING CO.
Balance Sheet (Partial)
December 31, 2016
Stockholders’ Equity
Paid-In Capital:
P13-39A Journalizing dividend and treasury stock transactions, preparing a statement of retained
earnings, and preparing stockholders’ equity
Learning Objectives 3, 4, 5
2. Retained Earnings Dec. 31, 2016 $152,240
The balance sheet of Morrisey Management Consulting, Inc. at December 31, 2015, reported the
following stockholders’ equity:
During 2016, Morrisey completed the following selected transactions:
Requirements
1. Record the transactions in the general journal.
2. Prepare a retained earnings statement for the year ended December 31, 2016. Assume Morrisey’s net
income for the year was $86,000.
3. Prepare the stockholders’ equity section of the balance sheet at December 31, 2016.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Feb. 6
Stock Dividends ($23 per share × 25,000 × 0.15)
86,250
Common Stock Dividend Distributable ($10 per share ×
Requirement 2
MORRISEY MANAGEMENT CONSULTING, INC.
Statement of Retained Earnings
P13-39A, cont.
Requirement 3
P13-40A Computing earnings per share, price/earnings ratio, and rate of return on common
stockholders’ equity
Learning Objective 6
Fowler Company reported these figures for 2016 and 2015:
Requirements
1. Compute Fowler Company’s earnings per share for 2016. Assume the company paid the minimum
preferred dividend during 2016.
2. Compute Fowler Company’s price/earnings ratio for 2016. Assume the company’s market price per
share of common stock is $5.
3. Compute Fowler Company’s rate of return on common stockholders’ equity for 2016. Assume the
company paid the minimum preferred dividend during 2016.
MORRISEY MANAGEMENT CONSULTING, INC.
Balance Sheet (Partial)
December 31, 2016
SOLUTION
Requirement 1
Earnings per
share
=
(Net income − Preferred
dividends)
/
Average number of common shares
outstanding
Requirement 2
Price/earnings
ratio
=
Market price per share of common stock
/
Earnings per share
$25.00 per share
=
$5
/
$0.20
Requirement 3
Rate of
return on
common
stockholders’
equity
=
(Net income − Preferred
dividends)
/
Average common stockholders’
equity = Total equity minus
preferred equity
Problems (Group B)
P13-41B Organizing a corporation and issuing stock
Learning Objectives 1, 2
Phil and Stephen are opening a comic store. There are no competing comic stores in the area. They must
decide how to organize the business. They anticipate profits of $200,000 the first year, with the ability to
sell franchises in the future. Although they have enough to start the business now as a partnership, cash
flow will be an issue as they grow. They feel the corporate form of operation will be best for the long
term. They seek your advice.
Requirements
1. What is the main advantage they gain by selecting a corporate form of business now?
2. Would you recommend they initially issue preferred or common stock? Why?
3. If they decide to issue $3 par common stock and anticipate an initial market price of $45 per share,
how many shares will they need to issue to raise $2,025,000?
SOLUTION
Requirement 1
Students’ answers may vary. The following are advantages of the corporate form of business. A
corporation:
Requirement 2
Requirement 3
P13-42B Identifying sources of equity, stock issuance, and dividends
Learning Objectives 1, 2, 4
4. Common stock dividends $112,000
Terrific Comfort Specialists, Inc. reported the following stockholders’ equity on its balance sheet at June
30, 2016:
Requirements
1. Identify the different classes of stock that Terrific has outstanding.
2. What is the par value per share of Terrific’s preferred stock?
3. Make two summary journal entries to record issuance of all the Terrific stock for cash. Explanations
are not required.
4. No preferred dividends are in arrears. Journalize the declaration of a $200,000 dividend at June 30,
2016, and the payment of the dividend on July 20, 2016. Use separate Dividends Payable accounts
for preferred and common stock. An explanation is not required.
SOLUTION
Requirement 1
Requirement 2
Requirement 3
Date
Accounts and Explanation
Debit
Credit
Requirement 4
Total Dividend—2016
$ 200,000
Dividend to Preferred Stockholders
8% × $4 × 275,000 shares
$ 88,000
P13-43B Journalizing stock issuance and cash dividends and preparing the stockholders’ equity
section of the balance sheet
Learning Objectives 2, 4
2. Total Stockholders’ Equity $371,000
Waco Wireless needed additional capital to expand, so the business incorporated. The charter from the
state of Georgia authorizes Waco to issue 80,000 shares of 10%, $100 par value cumulative preferred
stock, and 120,000 shares of $3 par value common stock. During the first month, Waco completed the
following transactions:
Requirements
1. Record the transactions in the general journal.
2. Prepare the stockholders’ equity section of Waco’s balance sheet at October 31, 2016. Assume
Waco’s net income for the month was $91,000.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Oct. 2
Building
150,000
Common Stock—$3 Par Value ($3 per share × 20,000 shares)
60,000
Paid-In Capital in Excess of Par—Common ($150,000 −
$60,000)
90,000
Issued common stock for building.
*Total Dividend
$ 20,000
Dividend to Preferred Stockholders
10% × $100 × 750 shares
$ 7,500
Current Year Dividend
(7,500)
Dividend to Common Stockholders
$ 12,500
P13-43B, cont.
Requirement 2
*Net income $91,000 – dividends $20,000 = $71,000
P13-44B Journalizing dividends and treasury stock transactions and preparing the stockholders’
equity section of the balance sheet
Learning Objectives 3, 4
1. Nov. 8 Treasury Stock $6,300 CR
Summerborn Manufacturing Co. completed the following transactions during 2016:
Requirements
1. Record the transactions in Summerborn’s general journal.
2. Prepare the Summerborn’s stockholders’ equity section of the balance sheet as of December 31,
2016. Assume that Summerborn was authorized to issue 1,500 shares of preferred stock and 500,000
shares of common stock. Both preferred stock and common stock were issued at par. The ending
balance of retained earnings as of December 31, 2016, is $2,080,000.
WACO WIRELESS
Balance Sheet (Partial)
October 31, 2016
Stockholders’ Equity
Paid-In Capital:
Cumulative Preferred Stock—10%, $100 Par Value; 80,000 shares
