17-57
DANA COMPANY
Statement of Changes in Stockholders’ Equity
For Year Ended December 31, 2010
Compre-
Preferred Stock
Common Stock
Additional Paid-In Capital
Accumulated
Other
Explanation hensive
Income
Shares
Issued
Par
Value
Shares
Issued
Par
Value
Preferred
Stock
Common
Stock
Treasury
Stock
Retained
Earnings
Comprehensive
Income
Treasury
Stock
Balances,
January 1, 2010
Comprehensive income:
Net income
Unrealized decrease in
value of available-for-sale
$83,000
1,000
$100,000
9,000
$90,000
$20,000
$99,000
$330,000
83,000
17-57
P17-20
1.
17-58
P17-20 (continued)
2. DANA COMPANY
Stockholders’ Equity
December 31, 2010
Contributed Capital
Preferred stock, 9%, $100 par (10,000 shares
authorized, 1,100 shares issued) $110,000
Common stock, $10 par (20,000 shares authorized,
8,800 shares issued of which 100 shares
are being held as treasury stock) 88,000
Notes to Financial Statements
Note 1: Retained earnings are restricted in the amount of $1,100, the cost of
the treasury stock.
Note 2: The aggregate market value of the company’s long-term investments in
P17-21
1. (1) Cash 40,000
Common Stock, $10 par 10,000
Premium on Common Stock
[1,000 x ($40 – $10)] 30,000
(4) Cash (200 x $41) 8,200
Treasury Stock (200 x $31) 6,200
Premium on Common Stock 2,000
(5) Land 50,000
17-60
GAINES INDUSTRIES
Statement of Changes in Stockholders’ Equity
For Year Ended December 31, 2010
Preferred Stock
Common Stock
Premium
Common
Stock
Explanation Shares
Issued
Par
Value
Shares
Issued
Par
Value
Preferred
Stock
Common
Stock
Option
Warrants
Retained
Earnings
Donated
Capital
Treasury
Stock
Balances,
January 1, 2010
Issued common stock
Compensation expense for
share options
3,000
$300,000
20,000
1,000
$200,000
10,000
$120,000
$280,000
30,000
$32,000
3,000
$260,000
$(15,500)
P17-21 (continued)
2.
17-60
61
16-61
P17-21 (continued)
3. GAINES INDUSTRIES
Stockholders’ Equity
December 31, 2010
Premium on common stock 323,500
Common stock option warrants (Note 1) 33,500
Total contributed capital $1,006,200
Note 2: Retained earnings are restricted in the amount of $9,300, the cost of
treasury stock.
P17-22 (AICPA adapted solution)
Note to Instructor: This problem appeared in the CPA Exam before GAAP was
modified to require additional disclosures about fair values not specified in the
problem.
RAUN COMPANY
Stockholders’ Equity Section of Balance Sheet
December 31, 2010
9% cumulative convertible preferred stock,
$100 par value, 2,000,000 shares authorized,
Note 1: Convertible preferred stock. On December 31, 2010, all 1,000,000
shares of preferred stock outstanding of the company were convertible into
Note 2: Employee share option plan and employee share purchase plan. The
company has granted options to officers and certain key employees to
Shares Option Price
Outstanding at January 1, 2010 70,000 $47.00 to $83.00
Granted during 2010 15,000 86.00
Exercised in 2010 20,000 47.00 to 79.00
P17-22 (continued)
Pursuant to the terms of the employee share purchase plan, employees have
subscribed to, paid for, and received 60,000 shares of common stock of the
P17-23 (AICPA adapted solution)
1. FAY, INC.
Long-Term Liabilities Section of Balance Sheet
December 31, 2010
9% unsecured note payable to bank,
2. FAY, INC.
Stockholders’ Equity Section of Balance Sheet
December 31, 2010
Common stock, $10 par; 2,000,000 shares
authorized; 840,000 shares issued;
P17-23 (continued)
3. FAY, INC.
Interest Expense
For the Year Ended December 31, 2010
Note payable to bank $ 60,000 [8]
Debenture bonds payable 535,240 [9]
Total interest expense $595,240
Explanations of Amounts
[1] 9% note payable to bank
[3] Common stock issued Date Shares Amount
Balance 12/31/09 800,000 $8,000,000
5% stock dividend issued 03/02/10 40,000 400,000
Balance 12/31/10 840,000 $8,400,000
[4] Additional paid-in capital
17-65
P17-23 (continued)
3. (continued)
[6] Unrealized decrease in value of
available-for-sale securities
Balance, 12/31/10 [($20 – $18) x 10,000 shares] $ 20,000
P17-24
1. $14,000[($320,000 ÷ 8 x 1/2) x (1-0.30)]
2. $12,000 ($200,000 x 0.06)
17-66
ANSWERS TO CASES
C17-1 (AICPA adapted solution)
1. Dividends on outstanding preferred stock must be subtracted from net income or added
to net loss for the period before computing EPS on the common shares. This generalization
will be modified by the various features and different requirements preferred stock may
have with respect to dividends. Thus, if preferred stock is cumulative, it is necessary to
2. When options and warrants to buy common stock are outstanding and their option price
(that is, proceeds the corporation would derive from issuance of common stock pursuant
to the warrants and options, including any unrecognized compensation cost) is less than
3. In the case of convertible bonds that are assumed to be converted and are dilutive, their
interest (less tax effect) is added back to net income as the numerator element of the
C17-2 (AICPA adapted solution)
A capital structure is regarded as complex when it includes potentially dilutive convertible
securities, options, warrants, or other rights that upon conversion or exercise could dilute
earnings per common share.
C17-2 (continued)
Additional disclosures when a complex structure exists include a schedule or note
identifying and reconciling the numerators and denominators on which basic and diluted
C17-3 (AICPA adapted solution)
The general categories of a corporation’s capital are contributed (invested) capital,
earned capital (retained earnings), and accumulated other comprehensive income.
Contributed capital represents the amounts paid in for all classes of shares of stock and the
amounts capitalized by order of the corporation’s board of directors. Included in
• Premiums over the par (stated) value of the stock issued (including stock dividends).
• Donations of assets to the corporation by governmental units.
• Assessments on stockholders.
C17-3 (continued)
Accumulated other comprehensive income includes amounts accumulated to date for
the following items:
1. Unrealized increases (gains) or decreases (losses) in the market (fair) value of
investments in available-for-sale securities.
C17-4 (AICPA adapted solution)
1. The date of declaration is the date when the liability for dividends payable is recorded by
a debit to retained earnings and a credit to dividends payable.
2. The effect of an ordinary 10 percent common stock dividend is that an amount equal to
C17-5 (AICPA adapted solution)
1. A stock split effected in the form of a dividend is a distribution of corporate stock to present
stockholders in proportion to each stockholder’s current holdings and can be expected to
cause a material decrease in the fair value per share of the stock. GAAP specifies that a
2. The stock split effected in the form of a dividend differs from an ordinary stock dividend in
the amount of other paid-in capital or retained earnings to be capitalized. An ordinary
17-69
C17-5 (continued)
2. (continued)
would be charged for the par (stated) value of the additional shares issued.
3. A declared but unissued stock dividend should be classified as part of corporate capital
rather than as a liability in a statement of financial position. A stock dividend affects only
C17-6 (AICPA adapted solution)
1. Convertible securities are included in the computation of the number of shares in the
2. Antidilutive convertible securities are excluded from diluted earnings per share. They are,
however, described in the notes to the financial statements.
C17-7 (AICPA adapted solution)
The diluted earnings per share computations are based on net earnings divided by the
C17-8 (AICPA adapted solution)
Note to Instructor: This case includes treasury stock, discussed in Chapter 16.
1. Brady should account for the cash dividend on December 21, 2010, the declaration date,
by debiting retained earnings and crediting cash dividends payable for $1 per share
17-70
C17-8 (continued)
2. Brady should account for the stock dividend by debiting retained earnings for $16 per
share (the market value of the stock in October 2010, the date of the stock dividend)
multiplied by the 2,000 shares distributed. Brady should then credit common stock for the
3. Brady should account for the purchase of the treasury stock on August 13, 2010 by debiting
treasury stock and crediting cash for the cost of the purchase (1,000 shares x $12 per
share). Brady should account for the sale of the treasury stock on September 14, 2010 by
C17-9
1. The company uses the term “reinvested earnings“; the amount at the end of 2007 was
$36,235 million (p. 67).
2. The balance of accumulated other comprehensive income on December 31, 2007 was
4. The dividends per share were $1.36 and the total dividends were $3,149 million for 2007 (p.
69).
5. The return on shareowners’ equity for 2007 was 30.9%, computed as follows:
Net Income $5,981
17-71
C17-10
Note to Instructor: This case does not have a definitive answer. From a financial reporting
perspective, GAAP is identified and summarized. From an ethical perspective, various
issues are raised for discussion purposes.
From a financial reporting perspective, in regard to bad debt expense, under the
allocation is known as systematic and rational allocation. For Ryan Company, a reduction
in credit sales by itself does not warrant a change in the estimated uncollectible percent.
On the other hand, if the decrease in credit sales occurred because customers must meet
stricter credit policies before being allowed to make credit sales, then an adjustment of
the uncollectible percent may be warranted. Ryan’s depreciation method is not activity
based. Hence, an increase in the estimated life because of decreased usage may not be
From an ethical perspective, the issue involves whether it is appropriate to adjust expenses
downward to offset decreased revenues and increase income, thereby increasing
earnings per share (EPS) to meet the company’s goal. The primary stakeholders are you,
the company’s officers, and current and potential stockholders. An increase in earnings
ANSWER TO RESEARCH SIMULATION
R17-1
Note to Instructor: Students are expected to cite references to GAAP in their research of
this issue. They might use the FARS electronic database, pronouncements listed on the
FASB web site, the FASB Original Pronouncements, the FASB Current text, or other primary
sources of GAAP to obtain these references. They may also use the FASB Accounting
Standards Codification which is cited in parentheses.
To: President of Tara Corporation
From: Student
I have researched the issue of how to report comparative earnings per share over a two-
year period when a company reports basic earnings per share in one year and is required