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SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Jan. 16
Cash Dividends
32,943
Dividends Payable—Preferred (6% × $97 × 1,150
shares)
6,693
Dividends Payable—Common ($0.25 × 105,000
shares)
26,250
Declared cash dividend.
P13-44B, cont.
Requirement 2
SUMMERBORN MANUFACTURING CO.
Balance Sheet (Partial)
December 31, 2016
Stockholders’ Equity
Paid-In Capital:
Noncumulative Preferred Stock—6%, $97 Par Value; 1,500
P13-45B 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 $218,740
The balance sheet of Patrick Management Consulting, Inc. at December 31, 2015, reported the following
stockholders’ equity:
During 2016, Patrick 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 Patrick’s net
income for the year was $82,000.
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 ($20 per share × 22,000 × 0.05)
22,000
Common Stock Dividend Distributable ($12 per share × 22,000 ×
0.05)
13,200
Requirement 2
PATRICK MANAGEMENT CONSULTING, INC.
Statement of Retained Earnings
Year Ended December 31, 2016
P13-45B, cont.
Requirement 3
P13-46B Computing earnings per share, price/earnings ratio, and rate of return on common
stockholders’ equity
Learning Objective 6
Medina Company reported these figures for 2016 and 2015:
Requirements
1. Compute Medina Company’s earnings per share for 2016. Assume the company paid the minimum
preferred dividend during 2016.
2. Compute Medina Company’s price/earnings ratio for 2016. Assume the company’s market price per
share of common stock is $7.
3. Compute Medina Company’s rate of return on common stockholders’ equity for 2016. Assume the
company paid the minimum preferred dividend during 2016.
PATRICK MANAGEMENT CONSULTING, INC.
Balance Sheet (Partial)
December 31, 2016
Stockholders’ Equity
Paid-In Capital:
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
Requirement 3
Rate of return
on common
(Net income − Preferred
Average common stockholders’
Continuing Problem
P13-47 Sources of equity and journalizing stock issuance
This problem continues the Daniels Consulting situation from Problem P12-45 of Chapter 12. Daniels
decides to raise additional capital for a planned business expansion by issuing 8,000 additional $2 par
value common shares for $24,000 and by issuing 2,500, 4%, $50 par preferred shares at $55 per share.
Assuming total stockholders’ equity is $25,422 and includes 200 shares of common stock and 0 shares
of preferred stock issued and outstanding immediately before the previously described transactions,
journalize the entries related to the issuances of both common and preferred shares.
SOLUTION
Date
Accounts and Explanation
Debit
Credit
Cash
24,000
Common Stock—$2 Par Value ($2 per share × 8,000 shares)
16,000
Critical Thinking
Decision Case 13-1
Lena Kay and Kathy Lauder have a patent on a new line of cosmetics. They need additional capital to
market the products, and they plan to incorporate the business. They are considering the capital structure
for the corporation. Their primary goal is to raise as much capital as possible without giving up control
of the business. Kay and Lauder plan to invest the patent (an intangible asset, which will be transferred
to the company’s ownership in lieu of cash) in the company and receive 100,000 shares of the
corporation’s common stock. They have been offered $100,000 for the patent, which provides an
indication of the fair market value of the patent.
The corporation’s plans for a charter include an authorization to issue 5,000 shares of preferred stock
and 500,000 shares of $1 par common stock. Kay and Lauder are uncertain about the most desirable
features for the preferred stock. Prior to incorporating, they are discussing their plans with two
investment groups. The corporation can obtain capital from outside investors under either of the
following plans:
• Plan 1. Group 1 will invest $150,000 to acquire 1,500 shares of 6%, $100 par nonvoting,
noncumulative preferred stock.
• Plan 2. Group 2 will invest $100,000 to acquire 1,000 shares of $5, no-par preferred stock and
$70,000 to acquire 70,000 shares of common stock. Each preferred share receives 50 votes on
matters that come before the common stockholders.
Requirements
Assume that the corporation has been chartered (approved) by the state.
1. Journalize the issuance of common stock to Kay and Lauder. Explanations are not required.
2. Journalize the issuance of stock to the outsiders under both plans. Explanations are not required.
3. Net income for the first year is $180,000, and total dividends are $30,000. Prepare the stockholders’
equity section of the corporation’s balance sheet under both plans at the end of the first year.
4. Recommend one of the plans to Kay and Lauder. Give your reasons.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Plan 1
Cash
150,000
Preferred Stock—$100 Par Value ($100 per share ×
1,500 shares)
150,000
Decision Case 13-1, cont.
Requirement 3
Kay and Lauder
Balance Sheet (Partial)
Plan 1
Kay and Lauder
Balance Sheet (Partial)
Plan 2
Decision Case 13-1, cont.
Requirement 4
Although Plan 2 raises more capital than Plan 1, Plan 1 appears to fit the plans of Kay and Lauder better
than Plan 2. Recall that their primary goal is to raise as much capital as possible without giving up
control of the business.
Financial Statement Case 13-1
Use Starbucks Corporation’s financial statements to answer the following questions. Visit
Requirements
1. Review the stockholders’ equity section of the balance sheet. Did Starbucks have any preferred stock
at September 29, 2013?
2. Now review Note 11: Shareholders’ Equity. Is Starbucks authorized to issue preferred stock? If so,
how much?
3. How much of Starbucks Corporation’s common stock was outstanding at September 29, 2013? How
can you tell?
4. Examine Starbucks Corporation’s consolidated statements of cash flows. Did Starbucks pay any
cash dividends during the year ending September 29, 2013? If so, how much?
5. Show how Starbucks Corporation computed basic earnings per share of $0.01 for 2013. (Ignore
diluted earnings per share.)
SOLUTION
Requirement 1
Requirement 2
Requirement 3
Requirement 4
Yes, Starbucks paid $628.9 million in cash dividends in the year ending September 29, 2013.
Requirement 5
Team Project 13-1
Obtain the annual reports (or annual report data) of five well-known companies. You can get the reports
either from the companies’ Web sites, from your college library, or by mailing a request directly to the
Requirements
1. After selecting five companies, examine their income statements to search for the following items:
a. Net income or net loss
b. Earnings per share data
2. Study the companies’ balance sheets to answer the following questions:
3. Examine each company’s statement of stockholders’ equity for evidence of the following:
a. Cash dividends
b. Stock dividends
c. Treasury stock purchases and sales
4. As directed by your instructor, either write a report or present your findings to your class. You may
not be able to understand everything you find, but neither can the Wall Street analysts! You will be
amazed at how much you have learned.
SOLUTION
Communication Activity 13-1
In 75 words or fewer, explain the difference between stock dividends and stock splits. Include the effect
on stock values.
SOLUTION
A stock split is fundamentally different from a stock dividend. A stock split increases the number of
