CHAPTER 15
SOLUTIONS TO B EXERCISES
E15-1B (15–20 minutes)
(a) Apr. 26 Cash (15,000 X $4.50) ……………………… 67,500
Common Stock (15,000 X $1) …….. 15,000
Paid-in Capital in Excess of Par …. 52,500
(b) Apr. 26 Cash (15,000 X $4.50) ……………………… 67,500
Common Stock (15,000 X $3) …….. 45,000
Paid-in Capital in Excess of
Stated Value ………………………….. 22,500
E15-2B (15–20 minutes)
June 15 Cash (165,000 X $5) ………………………………. 825,000
Common Stock (165,000 X $1) ………….. 165,000
Paid-in Capital in Excess of Stated
Value—Common Stock ………………… 660,000
Sept. 1 Cash (200,000 X $7) ………………………………. 1,400,000
Common Stock (200,000 X $1) ………….. 200,000
Paid-in Capital in Excess of Stated
Value—Common Stock
(200,000 X $6) ………………………………. 1,200,000
E15-3B (10–15 minutes)
(a) Land ($176 X 20,000) …………………………………. 3,520,000
Treasury Stock ($153 X 20,000) …………… 3,060,000
Paid-in Capital from Treasury Stock ……. 460,000
(b) One might use the cost of treasury stock. However, this is not a relevant
measure of this economic event. Rather, it is a measure of a prior,
E15-4B (20–25 minutes)
(a) 1. Bond Issue Costs
($575,000 X $1,000/$1,150) …………………… 500,000
Cash ($1,150 X 9,500) ……………………………… 10,925,000
E15-4B (Continued)
2. Cash ……………………………………………………. 10,925,000
Bond Issue Costs …………………………………. 511,111
Bonds Payable
($5,000,000 – $4,888,889) ………………… 10,000,000
(b) One is not better than the other. This question is presented to stimulate
some thought and class discussion.
E15-5B (10–15 minutes)
(a) FMV of common (2,500 X $95) ………………………………………… $237,500
FMV of preferred (1,000 X $60) …………………………..……………. 60,000
$297,500
E15-5B (Continued)
(b) Lump-sum receipt ………………………………………….. $275,000
Allocated to common (2,500 X $90) …………………. 225,000
E15-6B (25–30 minutes)(a)Cash [(55,000 X $76) – $27,000] 4,153,000
Common Stock (55,000 X $1) ……………………. 55,000
Paid-in Capital in Excess of Par ……………….. 4,098,000
(b) Land (10,000 X $78) ………………………………………… 780,000
Common Stock (10,000 X $1) ……………………. 10,000
(c) Treasury Stock (6,000 X $74) ……………………………… 444,000
Cash ………………………………………………………….. 444,000
E15-7B (15–20 minutes)
#
Assets
Liabilities
Stockholders’
Equity
Paid-in
Capital
Retained
Earnings
Net
Income
1
D
NE
D
NE
NE
NE
3
NE
NE
NE
E15-8B (15–20 minutes)
(a) 10% Preferred stock (30,000 shares X $75) …………………… 2,450,000
Paid-in capital in excess of par (30,000 x [$83 – $75]) ……. 240,000
E15-9B (15–20 minutes)
Oct. 5 Cash ………………………………………………………. 39,000
Common Stock (1,000 X $1) ……………… 1,000
E15-9B (Continued)
13 Treasury Stock ………………………………………. 20,000
E15-10B (20–25 minutes)
2. The average cost of treasury shares at December 31, 2014, was $6.35
per share ($400 ÷ 63); the average cost at December 31, 2013, was
$7.00 per share ($595 ÷ 85).
(b) Stockholders’ equity (in millions of dollars)
Paid-in capital
E15-11B (15–20 minutes)
Item
Assets
Liabilities
Stockholders’
Equity
Paid-in
Capital
Retained
Earnings
Net
Income
1.
D
D
NE
NE
NE
NE
2.
NE
NE
NE
NE
NE
NE
3.
I
NE
I
NE
I
I
4.
D
NE
NE
NE
5.
NE
I
NE
6.
NE
I
NE
NE
7.
NE
NE
8.
I
NE
I
NE
NE
E15-12B (10–15 minutes)
(a)
8/31
Retained Earnings …………………………………………………..
30,000,000
Dividends Payable …………………………………………..
30,000,000
9/5
No entry on date of record.
9/30
Dividends Payable…………………………………………………..
Cash ………………………………………………………………
E15-13B (10–15 minutes)
(a) No entry—simply a memorandum indicating the number of shares has
increased to 60 million and par value has been reduced from $4 to $1 per
share.
(b)
180,000,000
(c) Stock dividends and splits serve the same function with regard to the
securities markets. Both techniques allow the board of directors to
increase the quantity of shares and channel share prices into the
“popular trading range.”
E15-14B (10–12 minutes)
(a)
Retained Earnings (3,000,000 X $1) …………………………..
3,000,000
Common Stock Dividend
Distributable …………………………………………………….
3,000,000
Common Stock Dividend Distributable ……………………..
Common Stock ……………………………………………………
3,000,000
(b)
Retained Earnings (150,000 X $17) …………………………...
Common Stock Dividend
Distributable …………………………………………………….
Paid-in Capital in Excess of Par …………………………...
2,400,000
Common Stock Dividend Distributable ……………………..
Common Stock ……………………………………………………
E15-15B (10–15 minutes)
(a) No entry; company uses a memorandum note to indicate that par value is
reduced to $0.50 and shares outstanding are now 140,000.
(b)
Retained Earnings …………………………………………………..
175,000
Common Stock Dividend
Distributable …………………………..……………………
Paid-in Capital in Excess of Par ……………………….
(70,000 shares X 10% X $25= $175,000
Common Stock Dividend Distributable …………………….
Common Stock ……………………………………………….
(c)
September 12, 2014
Investments (Equity) ……………………………………………….
155,000
Gain on Appreciation of Investments
(Equity) ……………………………………………………….
155,000
Retained Earnings …………………………………………………..
205,000
Property Dividends Payable …………………………….
205,000
Property Dividends Payable …………………………………….
205,000
Investments (Equity) …………………………..…………..
205,000
E15-16B (5–10 minutes)
Total income since incorporation …………………………….
$466,000
Less: Total cash dividends paid ……………………………..
Current balance of retained earnings ……………………….
$204,000
E15-17B (20–25 minutes)
CAPITAL NORTHEAST CORPORATION
Stockholders’ Equity
December 31, 2014
Capital stock
Preferred stock, 6% cumulative, par value
$100 per share; authorized 1,000,000
shares, issued and outstanding 65,000
shares …………………………………………………………….
$6,500,000
Common stock, par value $1 per share;
authorized 2,500,000 shares, issued
500,000 shares, and outstanding 490,000
shares …………………………………………………………….
500,000
Total capital stock ………………………………………………………
7,000,000
Additional paid-in capital—
In excess of par value—common ………………………..
1,900,000
From sale of treasury stock …………………………..……
35,000
Total paid-in capital …………………………………………………….
8,935,000
Retained earnings ……………………………………………………….
982,000
Total paid-in capital and retained earnings …………………..
9,917,000
Less: Treasury stock, 10,000 shares at cost ………………..
125,000
E15-18B (30–35 minutes)
(a)
1.
Dividends Payable—Preferred
(25,000 X $100 X 12%) …………………………………………..
300,000
Dividends Payable—Common
(300,000 X $0.50) …………………………………………………..
150,000
Cash ………………………………………………………………
2.
Treasury Stock ……………………………………………………….
8,000
Cash (1,000 X $8) …………………………………………….
8,000
3.
Land (1,000 X $8.50) ………………………………………………..
8,500
Treasury Stock (1,000 X $8) ……………………………..
8,000
Paid-in Capital From Treasury Stock ………………..
4.
Cash (50,000 X $9) …………………………………………………..
450,000
Common Stock (50,000 X $1) …………………………...
Paid-in Capital in Excess of Par—
Common ………………………………………………………
5.
No entry, memorandum note to indicate that
par value is reduced to $0.50 and shares
issued are now 700,000.
6.
Retained Earnings …………………………………………………..
650,000
Dividends Payable—Preferred
(25,000 X $100 X 12%) …………………………………..
Dividends Payable—Common
(700,000 X $0.50) …………………………………………..
E15-18B (Continued)
(b) FOCUS FOOT COMPANY
Stockholders’ Equity
December 31, 2014
Capital stock
Preferred stock, 12%, $100 par, 100,000
shares authorized, 25,000 shares issued and
outstanding ………………………………………………….
Common stock, $0.50 par, 2,000,000 shares
authorized, 700,000 shares issued and
outstanding ………………………………………………….
Total capital stock ……………………………………
2,850,000
Additional paid-in capital—Common ………………..
1,350,000
Additional paid-in capital—Treasury ………………..
Total additional paid-in capital ………………….
Total paid-in capital …………………………………………
Retained earnings …………………………………………………..
1,380,000
Total stockholders’ equity ……………………………………….
$5,580,500
Computations:
E15-19B (20–25 minutes)
(a) Honey Dew Inc. is the more profitable in terms of rate of return on total
assets. This may be shown as follows:
Istar Company
$96,000
= 9.6%
$1,000,000
Honey Dew Inc.
= 12.0%
$1,000,000
= 12.0%
$1,000,000
It should be noted that these returns are based on net income related to
total assets, where the ending amount of total assets is considered
representative. If the rate of return on total assets uses net income
before interest but after taxes in the numerator, the rates of return on
total assets are those shown below:
(b) Istar Company is the more profitable in terms of return on stockholders’
equity. This may be shown as follows:
E15-19B (Continued)
ISTAR COMPANY
Fund Supplies
Funds
Supplied
Rate of Return
on Funds at
12.0%*
Cost of
Funds
Accruing to
Common
Stock
Current liabilities
$ 100,000
$ 12,000
$ 0
$12,000
Long-term debt
400,000
48,000
24,000
**
24,000
Common stock
200,000
24,000
0
24,000
Retained earnings
300,000
36,000
0
(c) Istar Company earned a net income per share of $4.80 ($96,000 ÷ 20,000),
while Honey Dew Inc. had an income per share of $2.00 ($120,000 ÷
60,000). Istar Company has borrowed a substantial portion of its assets
(d) Yes, from the point of view of income it is advantageous for the
(e) Book value per share:
Istar Company
$200,000 + $300,000
= $25.00
20,000
$600,000 + $300,000
E15-20B (15 minutes)
Rate of return on common stock equity:
*E15-21B (10–15 minutes)
Preferred
Common
Total
(a)
Preferred stock is noncumulative,
participating
$241,935
$8,065
$250,000
(b)
Preferred stock is cumulative,
nonparticipating
(c)
Preferred stock is cumulative,
participating
$5,645
$250,000*
*Dividends in arrears
$ 75,000
$ 75,000
Current dividend
75,000
75,000
Pro rata share to common
($25,000 X 10%)
Balance dividend pro rata
750/775 X $97,500**
94,355
94,355
25/775 X $97,500**
3,145
$244,355
$5,645
*E15-22B (10–15 minutes)
Preferred
Common
Total
(a)
One year in arrears
$240,000
$240,000
Current year
Participating (0.683%)
13,658
14,000
$493,658
(b)
$240,000
$260,000
$500,000
(c)
Current year
$240,000
$246,000
Participating (12.39%)
$487,805
*E15-23B (10–15 minutes)
Assumptions
(a)
(b)
Preferred,
noncumulative, and
nonparticipating
Preferred, cumulative,
and fully participating
Year
Paid-out
Preferred
Common
Preferred
Common
2011
$100,000
$5.00
–0–
$5.00
–0–
$150,000
–0–
–0–
2014
$635,000
$8.00
*E15-23B (Continued)
b
Per Share
Total
Preferred
Common
Total amount to be distributed ……….
$235,000
Preferred dividends in arrears
2007 ($160,000 – $100,000 – $60,000) ….
–0–
Current dividend …………………………...
Available for common and
participation ……………………………….
Ratable dividend to common
(8% X $250,000 = $20,000) ……………
(5,000)
Available for participation ………………
$ –0–
Totals ……………………………………………
c$1.90 =
$635,000 – $160,000*
250,000
*($160,000 = $8 X 20,000)
Per Share
Total
Preferred
Common
Total amount to be distributed ………
$635,000
Preferred dividends in arrears ……….
–0–
Current dividend …………………………..
Available for common and
participation ………………………………
Ratable dividend to common
(8% X $250,000) …………………………
Available for participation ……………..
$455,000
Preferred (20.22% X $100) ……………..
$455,000
$2,000,000 + $250,000
Totals …………………………………………..
*E15-24B (10–15 minutes)
(a)
Common
Preferred
Stockholders’ equity
Preferred stock …………………………………….
$100,000
Common stock ……………………………………..
Retained earnings
Dividends in arrears (3 years at 16%) …….
Remainder to common* ……………………………..
$148,000
Shares outstanding ……………………………………
Book value per share ($332,000 ÷ 50,000) …….
*Balance in retained earnings
($200,000 – $640,000 + $950,000) …………….
$330,000
Less: Dividends to preferred …………………….
(48,000)
Available to common …………………………………
$282,000
(b)
Common
Preferred
Stockholders’ equity
Preferred stock …………………………………….
$100,000
Liquidating premium …………………………….
Common stock ………………………………………….
$ 50,000
Retained earnings ……………………………………..
Dividends in arrears (3 years at 16%) …….
Remainder to common* ……………………………..
Shares outstanding ……………………………………
50,000
Book value per share ($329,000 ÷ 50,000) ……
$6.58
*Balance in retained earnings
($200,000 – $640,000 + $950,000) …………..
$330,000
Less: Liquidating premium to preferred …….
Dividends to preferred …………………….
$279,000