Download - Chapter 13 - Financial Accounting

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CHAPTER 13 CORPORATIONS: ORGANIZATION, STOCK

TRANSACTIONS, AND DIVIDENDS

DISCUSSION QUESTIONS

1. No. Common stock with a higher par is not necessarily a better investment than com-mon stock with a lower par because par is an amount assigned to the shares.

2. The broker is not correct. Corporations are not legally liable to pay dividends until the dividends are declared. If the company that issued the preferred stock has operating losses, it could omit dividends, first, on its common stock and, later, on its preferred stock.

3. The company may not have had enough cash on hand to pay a dividend on the com-mon stock, or resources may be needed for plant expansion, replacement of facilities, payment of liabilities, etc.

4. a. No change. b. Total equity is the same.

5. a. Current liability b. Stockholders equity

6. a. It has no effect on revenue or expense. b. It reduces stockholders equity by

$1,000,000. 7. a. It has no effect on revenue. b. It increases stockholders equity by

$1,200,000. 8. The three classifications of restrictions on

retained earnings are legal, contractual, and discretionary. Appropriations are normally reported in the notes to the financial state-ments.

9. Such prior period adjustments should be reported as an adjustment to the beginning balance of retained earnings.

10. The primary purpose of a stock split is to bring about a reduction in the market price per share and thus to encourage more in-vestors to buy the companys shares.



PRACTICE EXERCISES

PE 131A

Year 1 Year 2 Year 3

Amount distributed .............................. $72,000 $125,000 $160,000 Preferred dividend (18,000 shares)..... 72,000 108,000* 90,000* Common dividend (50,000 shares) ..... $ 0 $ 17,000 $ 70,000 *($18,000 + $90,000)

Dividends per share: Preferred stock............................. $4.00 $6.00 $5.00 Common stock ............................. None $0.34 $1.40

PE 131B

Year 1 Year 2 Year 3

Amount distributed .............................. $18,000 $7,500 $35,000 Preferred dividend (10,000 shares)..... 10,000 7,500 12,500* Common dividend (25,000 shares) ..... $ 8,000 $ 0 $22,500

*($2,500 + $10,000)

Dividends per share: Preferred stock............................. $1.00 $0.75 $1.25 Common stock ............................. $0.32 None $0.90

PE 132A

Feb. 23 Cash..................................................................... 9,375,000 Common Stock .............................................. 6,000,000 Paid-In Capital in Excess of Stated Value ... 3,375,000*

*[75,000 shares ($125 $80)]

Oct. 6 Cash..................................................................... 1,000,000 Preferred Stock.............................................. 1,000,000 (20,000 shares $50).

Nov. 4 Cash..................................................................... 708,000 Preferred Stock.............................................. 600,000 Paid-In Capital in Excess of Par................... 108,000*

*[12,000 shares ($59 $50)]



PE 132B

Aug. 7 Cash..................................................................... 525,000 Common Stock .............................................. 525,000 (300,000 shares $1.75).

Sept. 1 Cash..................................................................... 1,000,000 Preferred Stock.............................................. 1,000,000 (25,000 shares $40).

Nov. 2 Cash..................................................................... 520,000 Preferred Stock.............................................. 400,000 Paid-In Capital in Excess of Par................... 120,000*

*(10,000 shares $12)

PE 133A

Oct. 15 Cash Dividends................................................... 115,000 Cash Dividends Payable ............................... 115,000

Nov. 14 No entry required.

Dec. 14 Cash Dividends Payable .................................... 115,000 Cash................................................................ 115,000

PE 133B

Mar. 3 Cash Dividends................................................... 275,000 Cash Dividends Payable ............................... 275,000

Apr. 2 No entry required.

May 2 Cash Dividends Payable .................................... 275,000 Cash................................................................ 275,000

PE 134A

Feb. 8 Stock Dividends (100,000 6% $94) .............. 564,000 Stock Dividends Distributable (6,000 $60) 360,000 Paid-In Capital in Excess of Par Common Stock ($564,000 $360,000) ......... 204,000

Mar. 10 No entry required.

Apr. 11 Stock Dividends Distributable ........................... 360,000 Common Stock .............................................. 360,000



PE 134B

July 20 Stock Dividends (250,000 3% $54) .............. 405,000 Stock Dividends Distributable (7,500 $15) 112,500 Paid-In Capital in Excess of Par Common Stock ($405,000 $112,500) ......... 292,500

Aug. 19 No entry required.

Sept. 18 Stock Dividends Distributable ........................... 112,500 Common Stock .............................................. 112,500

PE 135A

Mar. 8 Treasury Stock (13,000 $42)............................ 546,000 Cash................................................................ 546,000

May 16 Cash (9,500 $50)............................................... 475,000 Treasury Stock (9,500 $42) ........................ 399,000 Paid-In Capital from Sale of Treasury Stock [9,500 ($50 $42)] ............ 76,000

Aug. 30 Cash (3,500 $40)............................................... 140,000 Paid-In Capital from Sale of Treasury Stock [3,500 ($42 $40)] ................. 7,000 Treasury Stock (3,500 $42) ........................ 147,000

PE 135B

Sept. 9 Treasury Stock (9,000 $24).............................. 216,000 Cash................................................................ 216,000

Oct. 7 Cash (4,800 $29)............................................... 139,200 Treasury Stock (4,800 $24) ........................ 115,200 Paid-In Capital from Sale of Treasury Stock [4,800 ($29 $24)] ............ 24,000

Dec. 20 Cash (4,200 $22)............................................... 92,400 Paid-In Capital from Sale of Treasury Stock [4,200 ($24 $22)] ................. 8,400 Treasury Stock (4,200 $24) ........................ 100,800



PE 136A

Stockholders Equity Paid-in capital: Common stock, $120 par (50,000 shares

authorized, 40,000 shares issued) ................. $4,800,000 Excess of issue price over par ............................ 600,000 $ 5,400,000 From sale of treasury stock ................................. 59,000 Total paid-in capital......................................... $ 5,459,000 Retained earnings ...................................................... 7,138,500 Total ....................................................................... $ 12,597,500 Deduct treasury stock (2,500 shares at cost) .......... 287,500 Total stockholders equity......................................... $ 12,310,000

PE 136B

Stockholders Equity Paid-in capital: Common stock, $15 par (200,000 shares

authorized, 160,000 shares issued) ............... $2,400,000 Excess of issue price over par ............................ 480,000 $2,880,000 From sale of treasury stock ................................. 100,000 Total paid-in capital......................................... $2,980,000 Retained earnings ...................................................... 5,275,000 Total ....................................................................... $8,255,000 Deduct treasury stock (24,000 shares at cost) ........ 336,000 Total stockholders equity......................................... $7,919,000

PE 137A

EMMY LEADERS INC. Retained Earnings Statement

For the Year Ended August 31, 2012 Retained earnings, September 1, 2011..................... $740,000 Net income.................................................................. $145,000 Less: dividends declared .......................................... 35,000 Increase in retained earnings.................................... 110,000 Retained earnings, August 31, 2012 ......................... $850,000



PE 137B

AUCKLAND CRUISES INC. Retained Earnings Statement

For the Year Ended April 30, 2012 Retained earnings, May 1, 2011 ........................................ $3,180,000 Net income.......................................................................... $515,000 Less dividends declared.................................................... 225,000 Increase in retained earnings............................................ 290,000 Retained earnings, April 30, 2012 ..................................... $3,470,000

PE 138A

a. 2012: Earning per Share = gOutstandin Shares Common of Number Avg.

Dividends Preferred IncomeNet

= shares 50,000

$18,000$117,000

= shares 50,000000,99$ = $1.98

2011: Earning per Share = gOutstandin Shares Common of Number Avg.


= shares 40,000

$18,000$104,000

= shares 40,000000,86$ = $2.15

b. The decrease in the earnings per share from $2.15 to $1.98 indicates an unfa-

vorable trend in the companys profitability.



PE 138B

a. 2012: Earning per Share = gOutstandin Shares Common of Number Avg.


= shares 120,000$35,000$971,000

= shares 120,000000,936$ = $7.80

2011: Earning per Share = gOutstandin Shares Common of Number Avg.


= shares 90,000

$35,000$692,000

= shares 90,000000,657$ = $7.30

b. The increase in the earnings per share from $7.30 to $7.80 indicates a favor-

able trend in the companys profitability.



EXERCISES

Ex. 131

1st Year 2nd Year 3rd Year 4th Year

a. Total dividend declared.................. $ 22,500 $ 28,800 $ 40,100 $ 77,000

Preferred dividend (current)........... $ 22,500 $ 27,000* $ 27,000 $ 27,000 Preferred dividend in arrears ......... 1,800 2,700

b. Total preferred dividends............... $ 22,500 $ 28,800 $ 29,700 $ 27,000 Preferred shares outstanding ........ 18,000 18,000 18,000 18,000 Preferred dividend per share ......... $ 1.25 $ 1.60 $ 1.65 $ 1.50 *$27,000 = 18,000 shares $75 2%

Dividend for common shares (a. b.).............................................. $ $ $ 10,400 $ 50,000 Common shares outstanding ........ 40,000 40,000 Common dividend per share.......... $ 0.26 $ 1.25

Ex. 132

1st Year 2nd Year 3rd Year 4th Year

a. Total dividend declared.................. $ 7,500 $ 10,500 $ 25,000 $ 60,000

Preferred dividend (current)........... $ 7,500 $ 8,000 $ 10,000* $ 10,000 Preferred dividend in arrears ......... 2,500 2,000

b. Total preferred dividends............... $ 7,500 $ 10,500 $ 12,000 $ 10,000 Preferred shares outstanding ........ 25,000 25,000 25,000 25,000 Preferred dividend per share ......... $ 0.30 $ 0.42 $ 0.48 $ 0.40 *$10,000 = 25,000 shares $40 1%

Dividend for common shares (a. b.).............................................. $ $ $ 13,000 $ 50,000 Common shares outstanding ........ 50,000 50,000 Common dividend per share.......... $ 0.26 $ 1.00



Ex. 133

a. Jan. 14 Cash .............................................................. 768,000 Common Stock ....................................... 600,000 Paid-In Capital in Excess of Par Common Stock .................................. 168,000

Mar. 17 Cash .............................................................. 660,000 Preferred Stock ....................................... 600,000 Paid-In Capital in Excess of Par Preferred Stock.................................. 60,000 b. $1,428,000 ($768,000 + $660,000)

Ex. 134

a. July 12 Cash .............................................................. 2,700,000 Common Stock ....................................... 1,200,000 Paid-In Capital in Excess of Stated Value....................................... 1,500,000

Nov. 18 Cash .............................................................. 4,000,000 Preferred Stock ....................................... 3,600,000 Paid-In Capital in Excess of Par Preferred Stock.................................. 400,000

b. $6,700,000 ($2,700,000 + $4,000,000)

Ex. 135

Apr. 15 Land ...................................................................... 525,000 Common Stock ............................................... 350,000 Paid-In Capital in Excess of Par .................... 175,000



Ex. 136

a. Cash................................................................................ 1,000,000 Common Stock (20,000 $50)................................. 1,000,000

b. Organizational Expenses.............................................. 50,000 Common Stock (1,000 $50) .................................. 50,000

Cash................................................................................ 750,000 Common Stock (15,000 $50)................................. 750,000

c. Land................................................................................ 200,000 Building .......................................................................... 500,000 Interest Payable* ...................................................... 2,500 Mortgage Note Payable............................................ 300,000 Common Stock......................................................... 397,500

*An acceptable alternative would be to credit Interest Expense.

Ex. 137

Buildings............................................................................... 910,000 Land....................................................................................... 350,000 Preferred Stock ............................................................... 1,200,000 Paid-In Capital in Excess of ParPreferred Stock ...... 60,000

Cash ...................................................................................... 1,584,000 Common Stock................................................................ 1,500,000 Paid-In Capital in Excess of ParCommon Stock....... 84,000

Ex. 138

Jan. 30 Cash ...................................................................... 6,000,000 Common Stock (300,000 $20) ..................... 6,000,000

31 Organizational Expenses..................................... 15,000 Common Stock (750 $20) ............................ 15,000

Feb. 21 Land ...................................................................... 150,000 Buildings............................................................... 460,000 Equipment............................................................. 90,000 Common Stock (32,000 $20) ....................... 640,000 Paid-In Capital in Excess of Par Common Stock .......................................... 60,000

Mar. 2 Cash ...................................................................... 1,162,500 Preferred Stock (15,000 $75)....................... 1,125,000 Paid-In Capital in Excess of Par Preferred Stock.......................................... 37,500



Ex. 139

Apr. 1 Cash Dividends .................................................... 365,850 Cash Dividends Payable ................................ 365,850

May 1 No entry required.

June 3 Cash Dividends Payable...................................... 365,850 Cash................................................................. 365,850

Ex. 1310

a. (1) Stock Dividends ....................................................... 554,400* Stock Dividends Distributable (4,200 $125)... 525,000 Paid-In Capital in Excess of Par Common Stock .............................................. 29,400

*[($17,500,000/$125) 3%] $132

(2) Stock Dividends Distributable ................................ 525,000 Common Stock ................................................... 525,000

b. (1) $18,060,000 ($17,500,000 + $560,000) (2) $75,496,000 (3) $93,556,000 ($18,060,000 + $75,496,000)

c. (1) $18,614,400 ($17,500,000 + $560,000 + $525,000 + $29,400) (2) $74,941,600 ($75,496,000 $554,400) (3) $93,556,000 ($18,614,400 + $74,941,600)

Ex. 1311

a. Apr. 27 Treasury Stock ............................................. 900,000 Cash......................................................... 900,000

July 13 Cash .............................................................. 648,000 Treasury Stock (9,000 $60).................. 540,000 Paid-In Capital from Sale of Treasury Stock................................... 108,000

Oct. 8 Cash .............................................................. 354,000 Paid-In Capital from Sale of Treasury Stock........................................ 6,000 Treasury Stock (6,000 $60).................. 360,000

b. $102,000 ($108,000 $6,000) credit



Ex. 1311 (Concluded)

c. Deer Creek may have purchased the stock to support the market price of the stock, to provide shares for resale to employees, or for reissuance to em-ployees as a bonus according to stock purchase agreements.

Ex. 1312

a. June 19 Treasury Stock (24,000 $64) ..................... 1,536,000 Cash......................................................... 1,536,000

Aug. 30 Cash (19,000 $68) ...................................... 1,292,000 Treasury Stock (19,000 $64)................ 1,216,000 Paid-In Capital from Sale of Treasury Stock .............................. 76,000

Sept. 6 Cash (3,000 $70) ........................................ 210,000 Treasury Stock (3,000 $64).................. 192,000 Paid-In Capital from Sale of Treasury Stock .............................. 18,000

b. $94,000 ($76,000 + $18,000) credit c. $128,000 (2,000 $64) debit d. The balance in the treasury stock account is reported as a deduction from the

total of the paid-in capital and retained earnings.

Ex. 1313

a. July 5 Treasury Stock (12,500 $80) ..................... 1,000,000 Cash......................................................... 1,000,000

Nov. 3 Cash (7,000 $85) ........................................ 595,000 Treasury Stock (7,000 $80).................. 560,000 Paid-In Capital from Sale of Treasury Stock................................... 35,000

Dec. 10 Cash (5,500 $78) ........................................ 429,000 Paid-In Capital from Sale of Treasury Stock........................................ 11,000 Treasury Stock (5,500 $80).................. 440,000

b. $24,000 ($35,000 $11,000) credit c. Stockholders Equity section



Ex. 1313 (Concluded)

d. Conyers Water Inc. may have purchased the stock to support the market price of the stock, to provide shares for resale to employees, or for reissuance to employees as a bonus according to stock purchase agreements.

Ex. 1314

Stockholders Equity Paid-in capital: Preferred 1% stock, $75 par

(100,000 shares authorized, 60,000 shares issued) ............... $4,500,000

Excess of issue price over par ...... 180,000 $4,680,000 Common stock, no par, $8 stated

value (500,000 shares authorized, 300,000 shares issued)..... $2,400,000

Excess of issue price over par ...... 450,000 2,850,000 From sale of treasury stock ........... 190,000 Total paid-in capital................... $7,720,000

Ex. 1315

Stockholders Equity Paid-in capital: Common stock, $90 par


Excess of issue price over par ...... 120,000 $ 2,820,000 From sale of treasury stock ........... 36,000 Total paid-in capital................... $ 2,856,000 Retained earnings ................................ 9,173,000 Total ................................................. $ 12,029,000 Deduct treasury stock (4,000 shares at cost) ..................... 352,000 Total stockholders equity................... $11,677,000



Ex. 1316

Stockholders Equity Paid-in capital: Preferred 2% stock, $125 par


Excess of issue price over par ...... 280,000 $ 5,280,000 Common stock, $8 par

(500,000 shares authorized, 375,000 shares issued) ............. $3,000,000

Excess of issue price over par ...... 525,000 3,525,000 From sale of treasury stock ........... 175,000 Total paid-in capital................... $ 8,980,000 Retained earnings ................................ 23,120,000 Total ................................................. $ 32,100,000 Deduct treasury common stock

(88,000 shares at cost) ................... 792,000 Total stockholders equity................... $31,308,000

Ex. 1317

SANDUSKY CORPORATION Retained Earnings Statement

For the Year Ended October 31, 2012

Retained earnings, November 1, 2011.............................. $796,750 Net income.......................................................................... $215,000 Less dividends declared.................................................... 45,000 Increase in retained earnings............................................ 170,000 Retained earnings, October 31, 2012................................ $966,750



Ex. 1318

1. Retained earnings is not part of paid-in capital. 2. The cost of treasury stock should be deducted from the total stockholders

equity. 3. Dividends payable should be included as part of current liabilities and not as

part of stockholders equity. 4. Common stock should be included as part of paid-in capital. 5. The amount of shares of common stock issued of 500,000 times the par value

per share of $14 should be extended as $7,000,000, not $7,600,000. The differ-ence, $600,000, probably represents paid-in capital in excess of par.

6. Organizing costs should be expensed when incurred and not included as a part of stockholders equity.

One possible corrected Stockholders Equity section of the balance sheet is as follows:

Stockholders Equity Paid-in capital: Preferred 1% stock, $200 par (25,000 shares authorized and issued).................. $5,000,000 Excess of issue price over par .................................... 75,000 $ 5,075,000 Common stock, $14 par (800,000 shares authorized, 500,000 shares issued) ........................................... $7,000,000 Excess of issue price over par .................................... 600,000 7,600,000 Total paid-in capital................................................. $ 12,675,000 Retained earnings .............................................................. 41,500,000* $ 54,175,000 Deduct treasury stock (45,000 shares at cost) ................ 648,000 Total stockholders equity................................................. $ 53,527,000

*$41,750,000 $250,000. Since the organizing costs should have been expensed, the retained earnings should be $250,000 less.



Ex. 1319

LIFES GREETING CARDS INC. Statement of Stockholders Equity

For the Year Ended December 31, 2012 Paid-In Common Capital in Stock Excess Treasury Retained $50 Par of Par Stock Earnings Total

Balance, Jan. 1, 2012...... $3,000,000 $480,000 $5,220,000 $ 8,700,000 Issued 27,000 shares of common stock........ 1,350,000 324,000 1,674,000 Purchased 4,500 shares as treasury stock ............................ $(216,000) (216,000) Net income ...................... 765,000 765,000 Dividends......................... (150,000) (150,000) Balance, Dec. 31, 2012 ... $4,350,000 $804,000 $(216,000) $5,835,000 $10,773,000

Ex. 1320

a. 500,000 shares (100,000 5) b. $40 per share ($200/5)

Ex. 1321

Stockholders Assets Liabilities Equity

(1) Authorizing and issuing stock certificates in a stock split 0 0 0 (2) Declaring a stock dividend 0 0 0 (3) Issuing stock certificates for the stock dividend declared in (2) 0 0 0 (4) Declaring a cash dividend 0 + (5) Paying the cash dividend declared in (4) 0



Ex. 1322 Feb. 10 No entry required. The stockholders ledger would be revised to record

the increased number of shares held by each stockholder.

May 1 Cash Dividends .................................................... 116,000* Cash Dividends Payable ................................ 116,000

*[(40,000 shares $2) + (300,000 shares $0.12)] = $80,000 + $36,000 = $116,000

June 15 Cash Dividends Payable...................................... 116,000 Cash................................................................. 116,000

Nov. 1 Cash Dividends .................................................... 104,000* Cash Dividends Payable ................................ 104,000

*[(40,000 shares $2) + (300,000 shares $0.08)] = $80,000 + $24,000 = $104,000

1 Stock Dividends ................................................... 168,000** Stock Dividends Distributable (6,000 $20) 120,000 Paid-In Capital in Excess of ParCommon Stock ...................................... 48,000

**(300,000 shares 2% $28) = $168,000

Dec. 15 Cash Dividends Payable...................................... 104,000 Cash................................................................. 104,000

15 Stock Dividends Distributable ............................ 120,000 Common Stock ............................................... 120,000

Ex. 1323

Earnings per Share = gOutstandin Shares Common of Number Avg.


Earnings per Share = ( )shares000,25

shares 10,000 share per 4$750,133$

Earnings per Share = $3.75 per share



Ex. 1324

a. Earnings per Share = gOutstandin Shares Common of Number Avg.


2009 Earnings per Share = shares 2,952

$192$11,293

= $3.76 per share


$176 $11,798

= $3.77 per share


$161 $10,063

= $3.13 per share b. 2009 2008 2007

Earnings per share .......................... $3.76 $3.77 $3.13 As a percent of 2007 (base year).... 120% 120% 100%

Net income ....................................... $11,293 $11,798 $10,063 As a percent of 2005 (base year).... 112% 117% 100%

The earnings per share growth for 2008 was slightly higher (120%) than the net income (117%) growth. While net income declined from 117% to 112% of the 2007 base year, earnings per share remained the same as 2008 (120%) of the base year. The number of common shares outstanding remained relatively the same during the three-year period.



Ex. 1325

a. OfficeMax:

Earnings per Share = gOutstandin Shares Common of Number Average


Earnings per Share = shares000,483,77

000,818,2 $ 000,667$

Earnings per Share = $(0.03) per share Staples:

Earnings per Share = gOutstandin Shares Common of Number Average


Earnings per Share = shares 0721,838,00

00$738,671,0

Earnings per Share = $1.02 per share b. Staples net income of $738,671,000 is much greater than OfficeMaxs net

income of $667,000. This is because Staples is a much larger business than OfficeMax. Staples also has over 9 times more shares of common stock out-standing than does OfficeMax. Regardless of these size differences, however, earnings per share can be used to compare their relative earnings. As shown above, Staples has a better earnings per share of $1.02 than does OfficeMax, which has negative earnings per share of $0.03.



PROBLEMS

Prob. 131A

1. Total Preferred Dividends Common Dividends

Year Dividends Total Per Share Total Per Share

2007 ................ $ 16,000 $16,000 $0.64 $ 0 $ 0 2008 ................ 48,000 48,000 1.92 0 0 2009 ................ 65,000 56,000* 2.24 9,000 0.09 2010 ................ 90,000 40,000 1.60 50,000 0.50 2011 ................ 115,000 40,000 1.60 75,000 0.75 2012 ................ 140,000 40,000 1.60 100,000 1.00

$9.60 $2.34

*$56,000 = (2008 dividends in arrears of $16,000) + (2009 current dividend of $40,000)

2. Average annual dividend for preferred: $1.60 per share ($9.60/6) Average annual dividend for common: $0.39 per share ($2.34/6) 3. a. 1.25% ($1.60/$128)

b. 5.0% ($0.39/$7.80)



Prob. 132A

June 5 Building................................................................. 3,500,000 Land ...................................................................... 5,000,000 Common Stock (80,000 $100) ..................... 8,000,000 Paid-In Capital in Excess of Par Common Stock .......................................... 500,000

16 Cash ...................................................................... 2,550,000 Preferred Stock (85,000 $25)....................... 2,125,000 Paid-In Capital in Excess of Par Preferred Stock.......................................... 425,000

29 Cash ...................................................................... 3,000,000 Mortgage Note Payable .................................. 3,000,000



Prob. 133A

a. Cash (50,000 $20) ....................................................... 1,000,000 Common Stock (50,000 $15)................................. 750,000 Paid-In Capital in Excess of ParCommon Stock (50,000 $5).............................................. 250,000 b. Cash (10,000 $92) ....................................................... 920,000 Preferred Stock (10,000 $75) ................................ 750,000 Paid-In Capital in Excess of ParPreferred Stock (10,000 $17)............................................ 170,000 c. Treasury Stock............................................................... 480,000* Cash .......................................................................... 480,000

*($480,000/30,000 shares) = $16 per share d. Cash................................................................................ 322,500 Treasury Stock (15,000 $16) ................................. 240,000 Paid-In Capital from Sale of Treasury Stock.......... 82,500 e. Cash................................................................................ 155,000 Paid-In Capital from Sale of Treasury Stock ............... 5,000 Treasury Stock (10,000 $16) ................................. 160,000 f. Cash Dividends.............................................................. 57,200* Cash Dividends Payable.......................................... 57,200

*(30,000 $1.50) + [(260,000 + 50,000 30,000 + 15,000 + 10,000) $0.04]

g. Cash Dividends Payable ............................................... 57,200 Cash .......................................................................... 57,200



Prob. 134A

1. and 2. Common Stock

Jan. 1 Bal. 4,000,000 Apr. 3 750,000 Aug. 15 190,000 Dec. 31 Bal. 4,940,000

Paid-In Capital in Excess of Stated Value Jan. 1 Bal. 750,000 Apr. 3 450,000 July 1 152,000 Dec. 31 Bal. 1,352,000

Retained Earnings

Dec. 31 417,040 Jan. 1 Bal. 9,150,000 Dec. 31 950,000 Dec. 31 Bal. 9,682,960

Treasury Stock Jan. 1 Bal. 600,000 June 6 600,000 Nov. 10 500,000 Dec. 31 Bal. 500,000

Paid-In Capital from Sale of Treasury Stock June 6 125,000

Stock Dividends Distributable Aug. 15 190,000 July 1 190,000

Stock Dividends July 1 342,000 Dec. 31 342,000

Cash Dividends Dec. 27 75,040 Dec. 31 75,040



Prob. 134A (Continued)

2. Jan. 4 Cash Dividends Payable...................................... 46,800* Cash................................................................. 46,800 *[(400,000 40,000) $0.13]

Apr. 3 Cash ...................................................................... 1,200,000 Common Stock (75,000 $10) ....................... 750,000 Paid-In Capital in Excess of Stated Value..... 450,000

June 6 Cash ...................................................................... 725,000 Treasury Stock (40,000 $15)........................ 600,000 Paid-In Capital from Sale of Treasury Stock 125,000

July 1 Stock Dividends ................................................... 342,000* Stock Dividends Distributable (19,000 $10) 190,000 Paid-In Capital in Excess of Stated Value..... 152,000

*(400,000 + 75,000) 4% $18

Aug. 15 Stock Dividends Distributable ............................ 190,000 Common Stock ............................................... 190,000

Nov. 10 Treasury Stock ..................................................... 500,000 Cash................................................................. 500,000

Dec. 27 Cash Dividends .................................................... 75,040* Cash Dividends Payable ................................ 75,040

*(400,000 + 75,000 + 19,000 25,000) $0.16

31 Income Summary ................................................. 950,000 Retained Earnings .......................................... 950,000

31 Retained Earnings................................................ 417,040 Stock Dividends.............................................. 342,000 Cash Dividends............................................... 75,040



Prob. 134A (Concluded)

3. TOLBERT ENTERPRISES INC. Retained Earnings Statement

For the Year Ended December 31, 2012

Retained earnings (January 1, 2012) ......................... $9,150,000 Net income ................................................................... $ 950,000 Less: Cash dividends................................................ (75,040 Stock dividends............................................... (342,000) Increase in retained earnings..................................... 532,960 Retained earnings (December 31, 2012) .................... $9,682,960

4.

Stockholders Equity Paid-in capital:

Common stock, $10 stated value (600,000 shares authorized, 494,000 shares issued) ..................... $4,940,000

Excess of issue price over stated value.................. 1,352,000 From sale of treasury stock...................................... 125,000 Total paid-in capital............................................... $ 6,417,000

Retained earnings ......................................................... 9,682,960 Total............................................................................ $ 16,099,960

Deduct treasury stock (25,000 shares at cost)............ 500,000 Total stockholders equity ............................................ $ 15,599,960



Prob. 135A

Jan. 3 No entry required. The stockholders ledger would be revised to record the increased number of shares held by each stockholder.

Apr. 7 Treasury Stock (50,000 $33) ................................ 1,650,000 Cash.................................................................... 1,650,000

May 1 Cash Dividends ....................................................... 112,000* Cash Dividends Payable ................................... 112,000

*(35,000 $1.40) + [(750,000 50,000) $0.09]

June 1 Cash Dividends Payable......................................... 112,000 Cash.................................................................... 112,000

July 29 Cash (36,000 $40) ................................................. 1,440,000 Treasury Stock (36,000 $33)........................... 1,188,000 Paid-In Capital from Sale of Treasury Stock (36,000 $7) ....................................... 252,000

Nov. 15 Cash Dividends ....................................................... 159,400* Cash Dividends Payable ................................... 159,400

*(35,000 $1.40) + [(750,000 14,000) $0.15]

15 Stock Dividends (14,720 $41) .............................. 603,520** Stock Dividends Distributable (14,720 $30) 441,600 Paid-In Capital in Excess of ParCommon Stock (14,720 $11) ..................................... 161,920

**(750,000 14,000) 2% $41

Dec. 31 Cash Dividends Payable......................................... 159,400 Cash.................................................................... 159,400

31 Stock Dividends Distributable ............................... 441,600 Common Stock .................................................. 441,600



Prob. 131B

1. Total Preferred Dividends Common Dividends

Year Dividends Total Per Share Total Per Share

2007 ................ $ 8,000 $ 8,000 $0.40 $ 0 $ 0 2008 ................ 24,000 24,000 1.20 0 0 2009 ................ 60,000 58,000* 2.90 2,000 0.04 2010 ................ 75,000 30,000 1.50 45,000 0.90 2011 ................ 80,000 30,000 1.50 50,000 1.00 2012 ................ 98,000 30,000 1.50 68,000 1.36

$9.00 $3.30

*$58,000 = (2007 dividends in arrears of $22,000) + (2008 dividends in arrears of $6,000) + (2009 current dividend of $30,000)

2. Average annual dividend for preferred: $1.50 per share ($9.00/6) Average annual dividend for common: $0.55 per share ($3.30/6) 3. a. 1.2% ($1.50/$125)

b. 4.0% ($0.55/$13.75)



Prob. 132B

Jan. 12 Cash ...................................................................... 6,000,000 Mortgage Note Payable .................................. 6,000,000

18 Cash ...................................................................... 3,825,000 Preferred Stock (45,000 $80)....................... 3,600,000 Paid-In Capital in Excess of Par Preferred Stock.......................................... 225,000

25 Building................................................................. 5,000,000 Land ...................................................................... 487,500 Common Stock (52,500 $100) ..................... 5,250,000 Paid-In Capital in Excess of Par Common Stock .......................................... 237,500



Prob. 133B

a. Treasury Stock............................................................... 1,500,000 Cash .......................................................................... 1,500,000 ($1,500,000/100,000 shares) = $15 per share. b. Cash................................................................................ 1,080,000 Treasury Stock (60,000 $15) ................................. 900,000 Paid-In Capital from Sale of Treasury Stock.......... 180,000 c. Cash (8,000 $50) ......................................................... 400,000 Preferred Stock (8,000 $40) .................................. 320,000 Paid-In Capital in Excess of ParPreferred Stock (8,000 $10).............................................. 80,000 d. Cash (150,000 $21) ..................................................... 3,150,000 Common Stock (150,000 $8)................................. 1,200,000 Paid-In Capital in Excess of ParCommon Stock .................................................................... 1,950,000 e. Cash................................................................................ 362,500 Paid-In Capital from Sale of Treasury Stock ............... 12,500 Treasury Stock (25,000 $15) ................................. 375,000 f. Cash Dividends.............................................................. 135,750 Cash Dividends Payable.......................................... 135,750 (48,000 $0.80) + [(750,000 100,000 + 60,000

+ 150,000 + 25,000) $0.11] g. Cash Dividends Payable ............................................... 135,750 Cash .......................................................................... 135,750



Prob. 134B

1. and 2. Common Stock

Jan. 1 Bal. 1,400,000 May 13 400,000 July 16 36,000 Dec. 31 Bal. 1,836,000

Paid-In Capital in Excess of Stated Value Jan. 1 Bal. 700,000 May 13 280,000 June 14 31,500 Dec. 31 Bal. 1,011,500

Retained Earnings Dec. 31 92,040 Jan. 1 Bal. 1,840,000 Dec. 31 775,000 Dec. 31 Bal. 2,522,960

Treasury Stock Jan. 1 Bal. 400,000 Mar. 15 400,000 Oct. 30 320,000 Dec. 31 Bal. 320,000

Paid-In Capital from Sale of Treasury Stock Mar. 15 140,000

Stock Dividends Distributable July 16 36,000 June 14 36,000

Stock Dividends June 14 67,500 Dec. 31 67,500

Cash Dividends Dec. 30 24,540 Dec. 31 24,540



Prob. 134B (Continued)

2. Jan. 9 Cash Dividends Payable...................................... 13,500* Cash................................................................. 13,500

*[(175,000 40,000) $0.10]

Mar. 15 Cash ...................................................................... 540,000 Treasury Stock................................................ 400,000 Paid-In Capital from Sale of Treasury Stock 140,000

May 13 Cash ...................................................................... 680,000 Common Stock (50,000 $8) ......................... 400,000 Paid-In Capital in Excess of Stated Value..... 280,000

June 14 Stock Dividends ................................................... 67,500* Stock Dividends Distributable (4,500 $8)... 36,000 Paid-In Capital in Excess of Stated Value..... 31,500

*(175,000 + 50,000) 2% $15

July 16 Stock Dividends Distributable ............................ 36,000 Common Stock ............................................... 36,000

Oct. 30 Treasury Stock ..................................................... 320,000 Cash................................................................. 320,000 ($320,000/25,000 shares) = $12.80 per share.

Dec. 30 Cash Dividends .................................................... 24,540* Cash Dividends Payable ................................ 24,540

*(175,000 + 50,000 + 4,500 25,000) $0.12

31 Income Summary ................................................. 775,000 Retained Earnings .......................................... 775,000

31 Retained Earnings................................................ 92,040 Stock Dividends.............................................. 67,500 Cash Dividends............................................... 24,540



Prob. 134B (Concluded)

3. RUFFALO ENTERPRISES INC. Retained Earnings Statement

For the Year Ended December 31, 2012

Retained earnings (January 1, 2012) ...................... $1,840,000 Net income ................................................................ $775,000 Less: Cash dividends .............................................. (24,540) Stock dividends ............................................. (67,500) Increase in retained earnings.................................. 682,960 Retained earnings (December 31, 2012) ................. $2,522,960

4.

Stockholders Equity Paid-in capital:

Common stock, $8 stated value (250,000 shares authorized, 229,500 shares issued)... $1,836,000

Excess of issue price over stated value............. 1,011,500 From sale of treasury stock................................. 140,000 Total paid-in capital ........................................ $2,987,500

Retained earnings .................................................... 2,522,960 Total....................................................................... $5,510,460

Deduct treasury stock (25,000 shares at cost)....... 320,000 Total stockholders equity ....................................... $5,190,460



Prob. 135B

Feb. 19 No entry required. The stockholders ledger would be revised to record the increased number of shares held by each stockholder.

Mar. 1 Cash Dividends .................................................... 138,000* Cash Dividends Payable ................................ 138,000

*(75,000 $1.20) + (600,000 $0.08)

Apr. 30 Cash Dividends Payable...................................... 138,000 Cash................................................................. 138,000

June 27 Treasury Stock (90,000 $24) ............................. 2,160,000 Cash................................................................. 2,160,000

Aug. 17 Cash (40,000 $30) .............................................. 1,200,000 Treasury Stock (40,000 $24)........................ 960,000 Paid-In Capital from Sale of Treasury Stock (40,000 $6) .................................... 240,000

Sept. 1 Cash Dividends .................................................... 156,000* Cash Dividends Payable ................................ 156,000

*(75,000 $1.20) + [(600,000 50,000) $0.12]

1 Stock Dividends (5,500 $28) ............................. 154,000** Stock Dividends Distributable (5,500 $20) 110,000 Paid-In Capital in Excess of ParCommon Stock (5,500 $8) ...................................... 44,000

**(600,000 50,000) 1% $28

Oct. 31 Cash Dividends Payable...................................... 156,000 Cash................................................................. 156,000

31 Stock Dividends Distributable ............................ 110,000 Common Stock ............................................... 110,000



CASES & PROJECTS

CP 131

At the time of this decision, the WorldCom board had come under intense scru-tiny. This was the largest loan by a company to its CEO in history. The SEC began an investigation into this loan, and Bernie Ebbers was eventually terminated as the CEO, with this loan being cited as part of the reason. The board indicated that the decision to lend Ebbers this money was to keep him from selling his stock and depressing the share price. Thus, it claimed that it was actually helping shareholders by keeping these shares from being sold. However, this argument wasnt well received, given that the share price dropped from around $15 per share at the time of the loan to about $2.50 per share when Ebbers was termi-nated. In addition, critics were scornful of the low sweetheart interest rate given to Ebbers for this loan. In addition, many critics viewed the loan as risky, given that it was not supported by any personal assets. WorldCom has since entered bankruptcy proceedings, Ebbers has gone to prison, and the Ebbers loan went uncollected.

Some press comments:

1. When he borrowed money personally, he used his WorldCom stock as collat-eral. As these loans came due, he was unwilling to sell at depressed prices of $10 to $15 (its now around $2.50). So WorldCom lent him the money to consolidate his loans, to the tune of $366 million. How a board of directors, representing you and me at the table, allowed this to happen is beyond com-prehension. They should resign with Bernie. (Source: Andy Kessler, Bernie Bites the Dust, The Wall Street Journal, May 1, 2002, p. A18.)

2. It was astonishing to read the other day that the board of directors of the United States second-largest telecommunications company claims to have had its shareholders interests in mind when it agreed to grant more than $430 million in low-interest loans to the companys CEO, mainly to meet mar-gin calls on his stock.

Yet thats the level to which fiduciary responsibility seems to have sunk on the board of Clinton, Mississippi-based WorldCom, the deeply troubled tele-com giant, as it sought to bail Bernard Ebbers out of the folly of speculating in shares of WorldCom itself. Sadly, WorldCom is hardly alone.

The very essence of why Mr. Ebbers was granted a loan was to protect shareholder value, said a WorldCom spokesman in mid-March, just as the U.S. Securities & Exchange Commission was unfurling a probe of the loan and 23 other matters related to WorldComs finances.



CP 131 (Concluded)

Yes, folks, you read that right. On March 14, 2002, a spokesman for a publicly traded, $20 billion company actually stood up and declared that of all the uses to which the company could have put almost half-a-billion dollars, the best one by farat least from the point of view of the shareholderswas to spend it on some sort of stock-parking scheme in order to keep the CEO out of bankruptcy court. (Source: Christopher Byron, Bernies Bad Idea, Red Herring, April 16, 2002.)

Note to Instructors: Bernie Ebbers is currently serving a 25-year prison sen-

tence for conspiracy, securities fraud, and making false statements to securi-ties regulators.

CP 132

Hazel and Cedric are behaving in a professional manner as long as full and com-plete information is provided to potential investors in accordance with federal regulations for the sale of securities to the public. If such information is provided, the marketplace will determine the fair value of the companys stock.

CP 133

1. This case involves a transaction in which a security has been issued that has characteristics of both stock and debt. The primary argument for classifying the issuance of the common stock as debt is that the investors have a legal right to an amount equal to the purchase price (face value) of the security. This is similar to a note payable or a bond payable. The additional $120 pay-ment could be argued to be equivalent to an interest payment, whose pay-ment has been deferred until a later date.

Arguments against classifying the security as debt include the fact that the investors will not receive fixed annual interest payments. In fact, if Bio En-gineering Inc. does not generate any net sales, the investors do not have a right to receive any payments. One could argue that the payments of 5% of net sales are, in substance, a method of redeeming the stock. As indicated in the case, the stockholders must surrender their stock for $120 after the $40 million payment has been made. Overall, the arguments would seem to favor classifying the security as common stock.



CP 133 (Concluded)

2. In practice, the $40 million stock issuance would probably be classified as common stock. However, full disclosure should be made of the 5% of net sales and $120 per share payment obligations in the notes to the financial statements. In addition, as Bio Engineering Inc. generates net sales, a current liability should be recorded for the payment to stockholders. Such payments would be classified as dividend payments rather than as interest payments. Todd Nash should also investigate whether such payments might violate any loan agreements with the banks. Banks often restrict dividend payments in loan agreements. If such an agreement has been violated, Bio Engineering Inc. should notify the bank immediately and request a waiver of the violation.

CP 134

a. 500 shares ($0.40) = $200 b. 2.85% = ($19.49 $18.95)/$18.95 c. 80.5% ($18.95 $10.50)/$10.50 d. 500 shares $19.49 = $9,745 plus brokerage commission The $9,745 paid for 500 shares of GE common stock goes to the seller of the

common stock (another shareholder). The brokerage commission goes to the broker who facilitated the trade.

Note to Instructors: You may wish to leave the answer as given, or go into greater detail about the NYSE specialist system. Namely, the specialist both buys and sells the GE common stock and acts as an intermediary between individual buyers and sellers. The specialist makes money on the bid/ask price spreads between buyers and sellers. The specialist creates an orderly market by matching supply and demand.



CP 135

1. Before a cash dividend is declared, there must be sufficient retained earnings and cash. On December 31, 2012, the retained earnings balance of $2,190,000 is available for use in declaring a dividend. This balance is sufficient for the payment of the normal quarterly cash dividend of $0.40 per share, which would amount to $72,000 ($0.40 180,000).

Cikan Designs Inc.s cash balance at December 31, 2012, is $250,000, of which $100,000 is committed as the compensating balance under the loan agreement. This leaves only $150,000 to pay the dividend of $72,000 and to fi-nance normal operations in the future. Unless the cash balance can be ex-pected to increase significantly in early 2013, it is questionable whether suffi-cient cash will be available to pay a cash dividend and to provide for future cash needs.

Other factors that should be considered include the companys working capi-tal (current assets current liabilities) position and the loan provision pertaining to the current ratio, resources needed for plant expansion or replacement of facilities, future business prospects of the company, and forecasts for the industry and the economy in general. The working capital is $4,500,000 ($6,300,000 $1,800,000) on December 31, 2012. The current ratio is therefore 3.5:1 ($6,300,000/$1,800,000) on December 31, 2012. However, after deducting the $2,700,000 committed to store modernization and product-line expansion, the ratio drops to 2:1 ($3,600,000/$1,800,000). If the cash dividend were declared and paid and the other current assets and current liabilities remain unchanged, the current ratio would drop to 1.96:1 ($3,528,000/$1,800,000), and this would violate the loan agreement. Further, working capital commitments for 2013 and any additional funds that might be required, such as funds for the replacement of fixed assets, would suggest that the declaration of a cash dividend for the fourth quarter of 2012 might not be wise.



CP 135 (Concluded)

2. Given the cash and working capital position of Cikan Designs Inc. on Decem-ber 31, 2012, a stock dividend might be an appropriate alternative to a cash dividend.

a. From the point of view of a stockholder, the declaration of a stock divi-dend would continue the dividend declaration trend of Cikan Designs Inc. In addition, although the amount of the stockholders equity and proportional interest in the corporation would remain unchanged, the stockholders might benefit from an increase in the fair market value of their total holdings of Cikan Designs Inc. stock after distribution of the dividend.

b. From the point of view of the board of directors, a stock dividend would continue the dividend trend, while the cash and working capital position of the company would not be jeopardized. Many corporations use stock dividends as a way to plow back retained earnings for use in acquiring new facilities or for expanding their operations. Cikan Designs Inc. has sufficient unissued common stock to declare a stock dividend without changing the amount authorized.

CP 136

Note to Instructors: The purpose of this activity is to familiarize students with sources of information about corporations and how that information is useful in evaluating the corporations activities.

The following information was prepared for Google Inc. based upon the SEC 10-K filing for the year ending December 31, 2009.

1. Google Inc.

2. Delaware

3. The following is taken from Googles 10-K:

Google is a global technology leader focused on improving the ways people connect with information. Our innovations in web search and advertising have made our web site a top internet property and our brand one of the most recognized in the world. We maintain a large index of web sites and other online content, which we make freely available via our search engine to any-one with an internet connection. Our automated search technology helps people obtain nearly instant access to relevant information from our vast online index.



CP 136 (Continued)

We generate revenue primarily by delivering relevant, cost-effective online advertising. Businesses use our AdWords program to promote their products and services with targeted advertising. In addition, the third-party web sites that comprise the Google Network use our AdSense program to deliver rele-vant ads that generate revenue and enhance the user experience.

4. $40,496,778,000

5. $23,650,563,000

6. $6,520,448,000

7. Convertible preferred stock, $0.001 par value, 100,000 shares authorized; no shares issued and outstanding.

Class A and Class B common stock, $0.001 par value per share: 9,000,000 shares authorized; 315,114 (Class A 240,073, Class B 75,041) and par value of $315 (Class A $240, Class B $75) and 317,772 (Class A 243,611, Class B 74,161) and par value of $318 (Class A $244, Class B $74) shares issued and outstanding, excluding 26 and zero Class A shares subject to repurchase at December 31, 2008 and 2009.

Note to Instructors: The rights of Class A and Class B common stock are identical except for voting rights. Specifically, each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to 10 votes per share. Shares of Class B common stock may be converted at any time at the option of the stockholder and automatically con-vert upon sale or transfer to Class A common stock. The Class A common stock is the stock that is actively traded on the New York Stock Exchange. The Class B common stock allows the founders of Google (Sergery Brin and Larry Page) and CEO (Eric Schmidt) to maintain control of the corporation. Specifically, the following stated in Googles 10-K:

as of December 31, 2009, our two founders and our CEO, Larry, Sergey, and Eric, owned approximately 90% of our outstanding Class B common stock, representing approximately 68% of the voting power of our out-standing capital stock. Larry, Sergey, and Eric therefore have significant in-fluence over management and affairs and over all matters requiring stock-holder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or its assets, for the foreseeable future.

8. $532 as of close on April 29, 2010

9. $384.69 $629.51



CP 136 (Concluded)

10. Google Inc. does not pay dividends as of April 29, 2010. In its 10-K Google states:

We have never declared or paid any cash dividend on our capital stock. We currently intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future.

Note to Instructors: The preceding information, which may be updated as needed, can be used as a basis for class discussion. Some issues that you may want to raise in class are (1) the high price of Googles Class A stock; (2) control of the corporation by the founders using the voting rights of their Class B stock; (3) the no dividend policy; and (4) future prospects for Google, including appreciation in value of the Class A stock.

Download - Chapter 13 - Financial Accounting

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