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Chapter 9
Stockholders Equity
Short Exercises
(5 min.) S 9-1
Corporationsadvantages:
Continuouslife
Transferability of ownership(listed as two itemson page 536)
Limitedliability of the stockholders
Ease of raisingcapital (page 536)
Corporationsdisadvantages:
Corporatetaxation
Governmentregulation
Separationof ownershipand management(per text page 536)
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(5 min.) S 9-2
1. Thestockholdershold ultimatepowerin a corporation.
2. The chairperson of the board of directors is usually the most
powerful personin a corporation. Title is CEO.
3. Thepresidentis in chargeof day-to-day operations. Title is COO.
4. The chief financial officer is in chargeof accountingand finance. Title is
CFO.
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(5-10 min.) S 9-3
1. Thecommon stockholdersare the real ownersof a corporation
2. Preferred stockholders have priority over common stockholders in (1)receipt of dividends and (2) receipt of assets if the corporation
liquidates.
3. Common stockholders benefit more from a successful corporation
because the preferred stockholders dividends are limited to a specified
amount. The commonstockholders take more risk so their potential for
gains throughan increasein the companysstock price is unlimited.
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(5-10 min.) S 9-4DATE: _____________
TO: KarenScanlonand Jennifer Shaw
FROM: Student Name
RE: Steps in forminga corporation
The first step in organizing a corporation is to obtain a charterfrom the
state. The charter authorizes the corporation to issue a certain number of
shares of stock to the owners of the business, who are called
stockholders. The corporationwill exist whenthe incorporators
(Per page 536) Pay fees,
Sign the charter,
File documentswith the state, and
Agree to a set of bylawsto determine how the corporation is to be
governedinternally.
Later steps include the stockholders will electing a board of
directorswho in turn appoint officersto managethe corporationon
a day-to-day basis. These officers consist of the chairperson of the
board (the chief executive officer) and the president (the chief
operating officer) who lead the chief financial officer who manage the
day to day operations of the controller (accounting officer) and
treasurer (financeofficer).
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(5-10 min.) S 9-5
The $72,927,000was paid-in capital. It was nota profit and therefore had no
effect on net income.
The par value of stock has no effect on total paid-in capital. Total paid-in
capital is the total amount that stockholders have invested in (paid into) a
corporation, includingthe par value of stock issued plus any additional paid-
in capital.
(10 min.) S 9-6
Millions
Horris Printer:
Cash. 17,123
CommonStock. 23
Additional Paid-in Capital.. 17,100
DelectableDoughnuts:Cash. 292
CommonStock. 292
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(10 min.) S 9-7
Case A Issue stock and buy the assets in separate
transactions:
JournalDATE ACCOUNTTITLESANDEXPLANATION DEBIT CREDIT
Cash.. 800,000
CommonStock (12,000 $20)... 240,000
Paid-in Capital in Excessof Par 560,000
Issuedstock.
Building 550,000
Equipment 250,000
Cash.. 800,000
Purchasedplant assets.
Case B Issue stock to acquire the assets:
JournalDATE ACCOUNTTITLESANDEXPLANATION DEBIT CREDIT
Building 550,000
Equipment... 250,000
CommonStock (12,000 $20) 240,000
Paid-in Capital in Excessof Par... 560,000
Issuedstock to acquire buildingand equipment.
The balancesin all accountsare the same:
Building $550,000
Equipment. 250,000
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CommonStock (12,000x $20 240,000
Paid-in Capital in Excessof Par 560,000
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(5-10 min.) S 9-8
Thousands
Stockholders equity:
Commonstock, $.01 par, 400 thousandsharesissued... $ 4
Paid-in capital in excessof par.. 196
Retainedearnings.. 647
Other stockholders equity.. (22)
Total stockholders equity... $825
(10 min.) S 9-9
Amounts In Thousands
a. Total revenues.. $1,340
Total expenses.. 806
Net income. $ 534
b. Accountspayable $ 440
Other current liabilities... 2,569
Long-term debt. 27
Total liabilities... $3,036
c. Total liabilities (fromReq. b). $3,036
Total stockholders equity (fromS 9-7).. 825Total assets $3,861
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(5 min.) S 9-10
JournalDATE ACCOUNTTITLESANDEXPLANATION DEBIT CREDIT
MillionsTreasuryStock... 29
Cash.. 29
Cash.. 8
TreasuryStock.. 2
Paid-in Capital from TreasuryStock
Transactions.. 6
Overall, stockholders equity decreased by $21 million ($29 million paid out
minus$8 million received).
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(15-20 min.) S 9-11Req. 1
MEMORANDUM
TO: SusanSmith Exports, Inc., Boardof Directors
FROM: Student Name
RE: Howthe purchaseof treasurystock will makeit more difficult for
outsidersto take over the company
Purchasing treasury stock decreases the amount of stock outstanding. If
Susan Smith Exports holds a sufficient quantity of company stock in the
treasury, outsiders, such as the Mobile investor group, may not be able to
acquire a controlling interest (50+ percent) of the outstandingstock from the
remaining stockholders. Because it takes cash to buy treasury stock, the
purchase decreases the size of the corporation. Reducing the companys
cash position may make the company sufficiently unattractive to cause the
outsideinvestorsto abandontheir takeoverplan.
Req. 2
Sales of treasury stock at prices above the purchaseprice increasecompany
assets becauseof the greater amount of assets comingin from the sale than
went out to buy the stock. Treasury stock transactions do not affect
liabilities, so the sale of treasury stock also increases stockholders equity.Thesesales of treasurystock will not affect net incomebecausethe company
is dealing with its owners. Transactions between the corporation and its
owners cannotgenerate a profit or a loss that is reported on the income
statement.
Student responsesmay vary.
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(10 min.) S 9-12
JournalDATE ACCOUNTTITLESANDEXPLANATION DEBIT CREDIT
2010Dec. 15 RetainedEarnings
($110,000 .06) + (45,000 $1.00) 51,600
DividendsPayable 51,600
Declareda cash dividend
2011
Jan. 4 DividendsPayable 51,600
Cash. 51,600Paid the cash dividend.
During 2010, RetainedEarningsincreasedby $43,400 (net incomeof $95,000
dividendsof $51,600).
(5-10 min.) S 9-13
1. $360,000(200,000shares $1.80 per share)
2. Preferred: $360,000
Common: $ 40,000
3. Cumulative, becauseit is not labelednoncumulative
4. Preferred: $1,080,000($360,000 3)
Common: $ 420,000($1,500,000 $1,080,000)
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(5-10 min.) S 9-14
Req. 1
JournalDATE ACCOUNTTITLESANDEXPLANATION DEBIT CREDIT
May 11 RetainedEarnings(13,000 .15 $25.00) 48,750
CommonStock (13,000 .15 $3)... 5,850
Paid-in Capital in Excessof Par-Common.. 42,900
Req. 2
No effect on total assets.
No effect on total liabilities.
No effect on total stockholders equity.
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(10 min.) S 9-15
Total stockholders equity.. $4,146,000
Less:Preferredstock. (195,000)
Preferreddividendsin arrears(33,000 .04 $5 x 3) (19,800)
Commonequity. $3,931,200
Numberof commonsharesoutstanding
(63,000 1,400).. 61,600
Bookvalue per share of commonstock. $ 63.82
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(10-15 min.) S 9-17
Rate of return
on total
assets
Net Interest
= income+ expense
=120 + 31
Averagetotal assets (10,624+ 9,515) / 2
=151
= 1.5%10,070
Note: 10% is consideredgood in most industries. Therefore, Godhis 1.5%
return on assets is very weak.
Rate of return Net Preferred
on common=
income dividends=
120 0
stockholders Averagecommon (3,212+ 2,878) / 2
equity stockholdersequity
=
120
= 3.9%3,045
Note: 15% is consideredgood in most industries, so Godhis
return on equity is very weak.
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(20-30 min.) S 9-18
1. Corporations report common stock and retained earnings separately to
comply with state laws. The laws require corporations to report
stockholders equity by sourceto distinguishpaid-in capital, which cannotbe used for cash dividends,from retainedearnings.
2. We should first determine the market value of the land. Then divide the
lands value by the market value of each share of stock. The result will tell
us how manysharesof our stock to issue for the land.
3. Investorsbuy commonstock in the hope of earninghigher returnson their
investmentthan are availableon an investmentin preferredstock.
4. The redemption value of our preferred stock requires us to pay the
preferredstockholdersthis amountwhenwe buy back the preferredstock.
5. Bookvalue
per share of=
Total stockholdersequity Preferredequity
commonstock Numberof sharesof commonstock outstanding
The stockholder can multiply book value per share by the number of
sharesshe owns. The result will be the book value of her stock.
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(5-10 min.) S 9-19
Billion
s
Cashflows from financingactivities:Paid off long-term notes payable. $(2.4)
Issuedcommonstock. 1.1
Purchasedtreasurystock.. (3.5)
Paid cash dividends (1 .6)
Cashflows from financingactivities $(6.4)
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ExercisesGroupA
(5-10 min.) E 9-20AReq. 1
JournalDATE ACCOUNTTITLESANDEXPLANATION DEBIT CREDIT
Jan. 19 Cash (12,000 $6.00) 72,000
CommonStock (12,000 $2.00).............. 24,000
Paid-in Capital in Excessof
Par - Common.................................... 48,000
Apr. 3 Cash....................................................... 54,000
PreferredStock.................................... 54,000
11 Inventory................................................. 16,000
Equipment............................................... 9,500
CommonStock (3,700 $2.00)............... 7,400
Paid-in Capital in Excessof
Par - Common.................................... 18,100
Req. 2
Stockholders equity:
Preferredstock, $1.00, no par
10,000 sharesauthorized, 400 sharesissued $54,000
Commonstock, $2.00 par,
19,000 sharesauthorized, 15,700 sharesissued 31,400
Paid-in capital in excessof par-common
($48,000+ $18,100). 66,100
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Retainedearnings(deficit). (43,000)
Total stockholders equity. $108,500
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(10-15 min.) E 9-21A
Stockholders Equity
Preferredstock, $4.50 no-par, 10,000 shares authorized, 600 sharesissued........................................... $ 22,000
Commonstock, $1.50 par, 19,000 sharesauthorized, 5,000
sharesissued
7,500
Paid-in capital in excessof par - common............................... 80,550*
Retainedearnings................................................................ 45,000
Total stockholders equity................................................ $155,050
_____*Computation:
April 23: 1,700 shares ($16.50 $1.50) = $25,500
May 12: $19,000+ $41,000 (3,300 shares $1.50) =. 55,050
$80,550
Journal entries (not required):
Apr. 23 Cash... 28,050
CommonStock................................... 2,550
Paid-in Capital in Excessof Par 25,500
May 2 Cash...................................................... 22,000
PreferredStock.................................. 22,000
12 Inventory............................................... 19,000
Equipment............................................. 41,000
CommonStock................................... 4,950
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Paid-in Capital in Excessof Par 55,050
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(10 min.) E 9-22A
Paid-in capital consistsof:
Preferredequity:
Issuedfor cash (2,000 shares $120) ........... $240,000 Commonequity:
Issuedfor cash (22,000shares $1.00) 22,000
Issuedfor organizingthe corporation 23,000
Issuedfor patent.. 82,000
Total paid-in capital $367,000
Unuseddata:
Net income
Dividendsdeclared
Short-cut solution(also okay):
1. $ 23,000
2. 82,0003. 240,000(2,000 $120)
4. 22,000 (22,000 $1.00)
$367,000= Total paid-in capital
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(10-15 min.) E 9-23A
Stockholders Equity (Thousands)
Commonstock, $0.75 par, 800 shares
authorized, 320 sharesissued $ 240
Paid-in capital in excessof par 899
Retainedearnings 2,220
Other stockholders equity (730)
Less: Treasurystock, common,100 sharesat cost.. (1,150)
Total stockholders equity... $1,479
Patterson Software paid a higher price to acquire treasury stock than the
price Patterson received when it issued its stock. This explains why
Treasury Stock has a greater balance than the sum of CommonStock plusPaid-in Capital in Excessof Par.
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(10-15 min.) E 9-24A
JournalDATE ACCOUNTTITLESANDEXPLANATION DEBIT CREDIT
Jan. 17 Cash(2,200 $10). 22,000
CommonStock (2,200 $2.50) 5,500
Paid-in Capital in Excessof Par. 16,500
To issue commonstock.
May 23 TreasuryStock- Common(300 $12)... 3,600 Cash... 3,600
To purchasetreasurystock.
Jul. 11 Cash(200 $20)... 4,000
TreasuryStock - Common(200 $12) 2,400
Paid-in Capital fromTreasury
Stock Transactions.. 1,600
To sell treasurystock.
Overall effect on stockholders equity
($22,000 $3,600 + $4,000) $22,400increase
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(10 min.) E 9-25A
JournalDATE ACCOUNTTITLESANDEXPLANATION DEBIT CREDIT
Millionsb. Cash(8 million $13.50). 108
CommonStock (8 million $2.00)... 16
Capital in Excessof Par Value. 92
c. TreasuryStock.. 16
Cash. 16
d. RetainedEarnings 31
DividendsPayable 31
DividendsPayable 31
Cash. 31
or one entry only:
RetainedEarnings ... 31Cash. 31
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(10 min.) E 9-26A
Dollars
in
MillionsStockholders Equity:
Commonstock, $2.00 par value,
10.1 million sharesissued($4.2 + $16.0) $ 20,200
Capital in excessof par value ($8,400+ $92,000) 100,400
Retainedearnings($250 + $446 $31) 665
Treasurystock, 2 million sharesat cost. (16,070)
Total stockholders equity $105,195
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(20-30 min.) E 9-27A
Req. 1
Conversionof preferredstock into commonstockRetirementof preferredstock
Req. 2
Issuanceof commonstock:
a. To preferredstockholderswho convertedtheir preferred
into common
b. For cash or other assets
c. Stock dividend
Req. 3
(Millions
of shares
of stock)
Dec. 31, 2011
Commonsharesissued. 300
Less:Treasurystock, numberof shares (52)
Commonsharesoutstanding... 288
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(continued)E 9-27A
Req. 4
RetainedEarnings(Millions)Dividends Dec. 31, 2010 Bal. 5,066
during 2011 176 Net income2011 1,380
Dec. 31, 2011 Bal. 6,270
Req. 5 (All amounts in millions)
December31, Purchases
2011 2010 During2011
Cost of treasurystock. $1,144 $228 = $ 916
Treasurystock, numberof shares 52 12 = 40
Averageprice per share paid for
treasurystock purchasedduring2011. $22.90
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(15 min.) E 9-28A
PREFERRED COMMON TOTAL
2010 Total dividend. $ 60,000Preferreddividends
in arrears:
2008: 40,000 sharesX
$0.50(par) per share X .09 =
$1,800
2009: 40,000 sharesX
$0.50(par) per share X .09 =
1,800
Current year
2010: 40,000 sharesX
$0.50(par) per share X .09 =
1,800
Total to preferred... $5,400
Remainderto common. $54,600
2011 Total dividend. $120,000
Preferreddividends:Current year
2011: 40,000 sharesX
$0.50(par) per share X .09 =
$1,800
Remainderto common. $118,200
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(15-20 min.) E 9-29A
Req. 1
JournalDATE ACCOUNTTITLESANDEXPLANATION DEBIT CREDIT
May 11 RetainedEarnings(300,000 .15 $19) 855,000
CommonStock(300,000 .15 $0.80). 36,000
Paid-in Capital in Excessof
Par - Common 819,000
To distributea commonstockdividend.
Req. 2
Stockholders equity
Commonstock, $0.80 par, 2,600,000shares authorized,
345,000issued($240,000+ $36,000) $ 276,000 Paid-in capital in excessof par - common
($307,200+ $819,000)... 1,126,200
Retainedearnings($7,122,000 $855,000). 6,267,000
Other.. (200,000)
Total stockholders equity.. $7,469,200
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(continued)E 9-29A
Req. 3
The stock dividend did not change total stockholders equity because the
company didnt distribute assets to the shareholders as it would in a
traditional dividend. The companymerely transferred$855,000from Retained
Earnings to CommonStock ($36,000) and Paid-in Capital in Excess of Par
($819,000).
Req. 4
HDs maximumcash dividendis limited to $560,000, the balance of its cash
account.
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(15-20 min.) E 9-30A
a. Decreasestockholders equity by $78 million.
b. No effect.
c. No effect.
d. No effect.
e. Decreasestockholders equity by $997.50(1,900 $5.25).
f. Increasestockholders equity by $6,300(900 $7).
g. No effect.
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(10-15 min.) E 9-31A
Stockholders equity:
Millions
Commonstock, $0.50 par, 2,250 million shares
(750 million 3) authorized,
1,260 million shares(420 million 3) issued $ 630
Additional paid-in capital. 318
Retainedearnings.. 2,399
Other.. (148) Total stockholders equity. $3,199
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(10-15 min.) E 9-32A
Req. 1
Common:Total stockholders equity.. $96,000
Less: Preferredequity redemptionvalue.. (45,000)
Total commonequity... $51,000
Bookvalue per share ($51,000/ 6,000 shares). $ 8.50
Req. 2
Common:
Total stockholders equity... $ 96,000
Less: Preferredequity[$45,000+ ($30,000 .04 3)]. (48,600)
Total commonequity. $ 47,400
Book value per share ($47,400/6,000 shares).. $ 7.90
Req. 3
Luxury Rugs stock is not necessarily a good buy. Investment decisions
shouldbe basedon more than one ratio.
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(10-15 min.) E 9-33A
Rate of Net income+
return=
Interest expense=
$1,525+ $222=
1,747= 0 .118
on assets Averagetotal assets ($15,906+ $13,700)/ 2 $14,803
Net income
Rate of return Preferred
on common=
dividends=
$1,525 $0=
$1,525= 0.186
stockholders' Averagecommon ($8,556*+ $7,836**) / 2 $8,196
equity stockholders
equity
*$ 44 + $11,522 $3,010= $8,556
**$390+ $16,490 $9,044= $7,836
These profitability measures suggest strength because (1) Lunas 18.6%
return on equity is very good and (2) it exceeds return on assets by a wide
margin.
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ExercisesGroupB
(5-10 min.) E 9-36B
Req. 1
JournalDATE ACCOUNTTITLESANDEXPLANATION DEBIT CREDIT
Aug. 19 Cash (15,000 $7.50) 112,500
CommonStock (15,000 $3.50).............. 52,500 Paid-in Capital in Excessof
Par - Common.................................... 60,000
Apr. 3 Cash....................................................... 55,000
PreferredStock.................................... 55,000
11 Inventory................................................. 18,000
Equipment............................................... 10,500
CommonStock (4,000 $3.50)............... 14,000
Paid-in Capital in Excessof
Par - Common.................................... 14,500
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Req. 2
Stockholders equity:
Preferredstock, $2.00, no par
4,000 sharesauthorized, 400 sharesissued $55,000Commonstock, $3.50 par,
110,000sharesauthorized, 15,000 sharesissued 52,500
Paid-in capital in excessof par-common
($60,000+ $14,500). 74,500
Retainedearnings(deficit). (47,000)
Total stockholders equity. $135,000
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(10-15 min.) E 9-37B
Stockholders Equity
Preferredstock, $5.50 no-par, 7,000 shares authorized, 400 sharesissued........................................... $ 30,000
Commonstock, $2.00 par, 16,000 sharesauthorized, 5,200
sharesissued
10,400
Paid-in capital in excessof par - common............................... 74,850*
Retainedearnings................................................................ 46,000
Total stockholders equity................................................ $161,250
_____*Computation:
JUNE23: 1,500 shares ($17.50 $2.00) = $23,250
JULY 12: $15,000+ $44,000 (3,700 shares $2.00) =. 51,600
$74,850
Journal entries (not required):
Jun. 23 Cash... 26,250
CommonStock................................... 3,000
Paid-in Capital in Excessof Par 23,250
July 2 Cash...................................................... 30,000
PreferredStock.................................. 30,000
12 Inventory............................................... 15,000
Equipment............................................. 44,000
CommonStock................................... 7,400
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(10 min.) E 9-38B
Paid-in capital consistsof:
Preferredequity:
Issuedfor cash (3,000 shares $90) ........... $270,000 Commonequity:
Issuedfor cash (17,000shares $18.00) 306,000
Issuedfor organizingthe corporation 24,000
Issuedfor patent.. 85,000
Total paid-in capital $685,000
Unuseddata:
Net income
Dividendsdeclared
Short-cut solution(also okay):
1. $ 24,000
2. 85,0003. 270,000(3,000 $90)
4. 306,000 (17,000 $18.00)
$685,000= Total paid-in capital
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(10-15 min.) E 9-39B
Stockholders Equity (Thousands)
Commonstock, $0.50 par, 900 shares
authorized, 300 sharesissued $ 150
Paid-in capital in excessof par 897
Retainedearnings 2,270
Other stockholders equity (726)
Less: Treasurystock, common,100 sharesat cost.. (1,610)
Total stockholders equity... $ 981
Bukala Softwarepaid a higher price to acquire treasury stock than the price
Bukala receivedwhen it issued its stock. This explains why Treasury Stock
has a greater balancethan the sum of CommonStock plus Paid-in Capital inExcessof Par.
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(10-15 min.) E 9-40B
Journal
DATE ACCOUNTTITLESANDEXPLANATION DEBIT CREDIT
Mar. 17 Cash(2,400 $7). 16,800
CommonStock (2,400 $1.50) 3,600
Paid-in Capital in Excessof Par. 13,200
To issue commonstock.
Apr. 20 TreasuryStock- Common(800 $16)... 12,800
Cash... 12,800
To purchasetreasurystock.
Aug. 8 Cash(600 $17)... 10,200 TreasuryStock - Common(600 $16) 9,600
Paid-in Capital fromTreasury
Stock Transactions.. 600
To sell treasurystock.
Overall effect on stockholders equity
($16,800 $12,800+ $10,200) $14,200increase
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(10 min.) E 9-41B
JournalDATE ACCOUNTTITLESANDEXPLANATION DEBIT CREDIT
Millionsb. Cash(9 million $12.50). 112.5
CommonStock (9 million $1.50)... 13.5
Capital in Excessof Par Value. 99
c. TreasuryStock.. 15
Cash. 15
d. RetainedEarnings 34
DividendsPayable 34
DividendsPayable 34
Cash. 34
or one entry only:
RetainedEarnings ... 34Cash. 34
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(10 min.) E 9-42B
Dollars
in
MillionsStockholders Equity:
Commonstock, $1.50 par value,
10.7 million sharesissued($2.550+ $13.500) $ 16,050
Capital in excessof par value ($7,650+ $99,000) 106,650
Retainedearnings($260 + $447 $34) 673
Treasurystock, 3 million sharesat cost. (15)
Total stockholders equity $123,358
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(20-30 min.) E 9-43B
Req. 1
Conversionof preferredstock into commonstockRetirementof preferredstock
Req. 2
Issuanceof commonstock:
a. To preferredstockholderswho convertedtheir preferred
into common
b. For cash or other assets
c. Stock dividend
Req. 3
(Millions
of shares
of stock)
Dec. 31, 2011
Commonsharesissued. 300
Less:Treasurystock, numberof shares (54)
Commonsharesoutstanding... 246
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(continued)E 9-43B
Req. 4
RetainedEarnings(Millions)Dividends Dec. 31, 2010 Bal. 5,025
during 2011 200 Net income2011 1,475
Dec. 31, 2011 Bal. 6,300
Req. 5 (All amounts in millions)
December31, Purchases
2011 2010 During2011
Cost of treasurystock. $1,242 $280 = $ 962
Treasurystock, numberof shares 54 14 = 40
Averageprice per share paid for
treasurystock purchasedduring2011. $24.05
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(15 min.) E 9-44B
PREFERRED COMMON TOTAL
2010 Total dividend. $ 100,000Preferreddividends
in arrears:
2008: 50,000 sharesX $1.50
(par) per share X .07 =
$5,250
2009: 50,000 sharesX $1.50
(par) per share X .07
5,250
Current year
2010: 50,000 sharesX $1.50
(par) per share X .07 =
5,250
Total to preferred... $15,750
Remainderto common. $84,250
2011 Total dividend. $200,000
Preferreddividends:Current year
2011: 50,000 sharesX $1.50
(par) per share X .07 =
$5,250
Remainderto common. $194,750
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(15-20 min.) E 9-45B
Req. 1
JournalDATE ACCOUNTTITLESANDEXPLANATION DEBIT CREDIT
Aug. 11 RetainedEarnings(400,000 .20 $15) 1,200,000
CommonStock(400,000 .20 $0.30) 24,000
Paid-in Capital in Excessof Par -
Common 1,176,000
To distributea commonstockdividend.
Req. 2
Stockholders equity
Commonstock, $0.30 par, 2,200,000shares authorized,
480,000issued($120,000+ $24,000) $ 144,000 Paid-in capital in excessof par - common
($409,600+ $1,176,000) 1,585,600
Retainedearnings($7,133,000 $1,200,000) 5,933,000
Other.. (185,000)
Total stockholders equity.. $7,477,600
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(continued)E 9-45B
Req. 3
The stock dividend did not change total stockholders equity because the
company gave its stockholders no assets. The company merely transferred
$1,200,000 from Retained Earnings to CommonStock ($24,000) and Paid-in
Capital in Excessof Par ($1,176,000).
Req. 4
HDs maximumcash dividendis limited to $590,000, the balance of its cash
account.
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(15-20 min.) E 9-46B
a. Decreasestockholders equity by $85 million.
b. No effect.
c. No effect.
d. No effect.
e. Decreasestockholders equity by $11,250(1,800 $6.25).
f. Increasestockholders equity by $8,100(900 $9).
g. No effect.
(10-15 min.) E 9-47B
Stockholders equity:
Millions
Commonstock, $0.30 par, 1,500 million shares
(500 million 3) authorized,
1,350 million shares(450 million 3) issued $ 135
Additional paid-in capital. 315 Retainedearnings.. 2,393
Other.. (146)
Total stockholders equity. $2,697
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(10-15 min.) E 9-48B
Req. 1
Common:Total stockholders equity.. $121,000
Less: Preferredequity redemptionvalue.. (25,000)
Total commonequity... $ 96,000
Bookvalue per share ($96,000/ 10,000 shares) $ 9.60
Req. 2
Common:
Total stockholders equity... $ 121,000
Less: Preferredequity[$25,000+ ($21,000 .10 3). (31,300)
Total commonequity. $ 89,700
Book value per share ($89,700/ 10,000shares) $ 8.97
Req. 3
Eclectic Rugs stock is not necessarily a good buy. Investment decisions
shouldbe basedon more than one ratio.
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(10-15 min.) E 9-49B
Rate of Net income+
return=
Interest expense=
$1,530+ $219=
1,749= 0 .117
on assets Averagetotal assets ($16,000+ $13,790)/ 2 $14,895
Net income
Rate of return Preferred
on common=
dividends=
$1,530 $0=
$1,530= 0.187
stockholders' Averagecommon ($8,604*+ $7,802**) / 2 $8,203
equity stockholders
equity
*$ 38 + $11,528 $2,962= $8,604
**$384+ $16,530 $9,112= $7,802
These profitability measures suggest strength because (1) LaSalle Inns
18.7% return on equity is very good and (2) it exceedsreturn on assets by a
wide margin.
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(10-15 min.) E 9-50B
Net income+
Return=
Interest expense=
$1,872+ $1,443=
$3,315= 0.061
on assets Averagetotal assets ($55,792*+ $52,074**) / 2 $53,933
*$32,315+ $23,477=$55,792
**$38,031 + $14,043= $52,074
Net income
Return=
Preferreddividends=
$1,872 $0=
$1,872= 0.100
on equity Averagecommonequity ($23,477+ $14,043)/ 2 $18,760
These rates of return are low belowthe targets of most companies but
not terribly weak. The companyis profitable, and return on equity exceeds
return on assets. But both return measurescould standto be improved.
(10 min.) E 9-51B
Cashflows from financing activities:
Paymentof long-term debt.. $(17,100)
Proceedsfrom issuanceof commonstock. 8,495
Borrowings... 6,590
Dividendspaid. (215)
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ChallengeExercises
(20-25 min.) E 9-52
JournalDATE ACCOUNTTITLESANDEXPLANATION DEBIT CREDIT
(a) Cash(51,000* $3)....................................... 153,000
CommonStock........................................ 51,000
Additional Paid-in Capital.......................... 102,000
Issuedstock.
(b) TreasuryStock (950 $9)... 8,550
Cash. 8,550
Purchasedtreasurystock.
(c) Cash.. 900
TreasuryStock($8,550 $7,650). 900
Resoldtreasurystock.
(d) Revenues. 172,000
Expenses 114,000
RetainedEarnings... 58,000
Closednet incometo RetainedEarnings.
(d) RetainedEarnings($58,000 $35,000) 23,000
Cash. 23,000Declaredand paid dividends.
_____
*$51,000 $1 par value per share = 51,000 sharesissued.
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(20-25 min.) E 9-53
Statementof cash flows:
CashFlowsfrom FinancingActivities:
Issuanceof commonstock. $153,000Purchaseof treasurystock. (8,550)
Sale of treasurystock.. 900
Paymentof dividends.. (23,000)
Journal entries are given in the solutionto Exercise9-52.
T-accountsof the stockholders equity accounts:
CommonStock
Issuance of stock 51,000
Balance 51,000
Additional Paid-in Capital
Issuance ofstock 102,000
Balance 102,000
RetainedEarningsDividends 23,000 Net income 58,000
Balance 35,000
TreasuryStock
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Purchase 8,550 Sale 900
Balance 7,650
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(15 min.) E 9-54
Preferredstock:
SpaceWalk retired preferredstock of $131 million ($740 $609).
Commonstock and Additional paid-in capital:
SpaceWalk issued16 million sharesof common
stock for $48 million, computedas follows: Millions
Commonstock ($905 $889). $ 16
Additional paid-in capital ($1,514 $1,482) 32
Total receivedfor issuanceof commonstock.. $48
Retainedearnings: Millions
Beginningbalance. $19,100
Add: Net income.. 2,980
Less:Dividends (1,455 *)
Endingbalance $20,625
*$19,100+ $2,980 $20,625= $1,455
Treasurystock:
Apollo purchasedtreasurystock for $177 million ($2,777 $2,600).
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(15 min.) E 9-55
Additional
Amounts in Millions
Common
Stock +
Paid-in
Capital +
Retained
Earnings
Treasury
Stock =
Total
Equity
Balance,Dec. 31, 2010 $ 71 $10 $35 $52Issuanceof stock. 52 102 15
Stockdividend.. 1.23 65 (7.2)4
Purchaseof treasury
stock.. $(10) (10)
Net income. 22 22
Cashdividends. (12) (12)
Balance,Dec. 31, 2011 $13.2 $26 $37.8 $(10) $67
Computations(not required):
17,000,000 $1 par = $7,000,000
25,000,000 $1 par = $5,000,000
5,000,000 ($3 $1) = $10,000,000
3(7,000,000+ 5,000,000) .10 $1 par = $1,200,0004(7,000,000+ 5,000,000) .10 $6 market value = $7,200,000
5$7,200,000market value $1,200,000par value = $6,000,000
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Quiz
Q9-56 c
Q9-57 b
Q9-58 eQ9-59 c
Q9-60 a
Q9-61 a
Q9-62 b ($317,000+ $220,000+ $85,000 = $622,000
Q9-63 a ($622,000+ $71,300 $5,200 = $688,100)
Q9-64 a {($119,100 $8,500) / [($681,500+ $603,100*) /
2] = .172}
*$688,100 $85,000= $603,100
Q9-65 a
Q9-66 b
Q9-67 a
Q9-68 a
Q9-69 c
Q9-70 b 40,000 $100 .10 = $400,000
Q9-71 c ($500,000 $400,000)/ 40,000= $2.50
Q9-72 e
Q9-73 b
Q9-74 b
Q9-75 a [($27,000+ $3,000) / $600,000= 5.0%]
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Problems
GroupA
( (30-45 min.) P 9-76AReq. 1
JournalDATE ACCOUNTTITLESANDEXPLANATION DEBIT CREDIT
May 6 OrganizationExpense 22,500
CommonStock (900 $5) 4,500 Paid-in Capital in Excessof
Par - Common..................... 18,000
Issuedstock to promoterfor assisting
with issuanceof stock.
9 Cash(22,000 $25 per share) 550,000
CommonStock 22,000 $5) 110,000
Paid-in Capital in Excessof
Par - Common..................... 440,000
Issuedcommonstock for cash.
10 Patent. 20,000
PreferredStock........................... 20,000Issuedpreferredstock to acquire a patent.
26 Cash(1,000 $25)... 25,000
CommonStock (1,000 $5) 5,000
Paid-in Capital in Excessof
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Par - Common..................... 20,000
Issuedcommonstock for cash.
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(continued)P 9-76A
Req. 2
CohenCanoes, Inc.BalanceSheet (partial)
May 31, 2010
Stockholders equity:
Preferredstock, $2, no-par, 9,000 sharesauthorized,
800 sharesissued $20,000
Commonstock, $5 par,100,000sharedauthorized, 23,900 sharesissued*. 119,500
Paid-in capital in excessof par - common**... 478,000
Retainedearnings.. 55,000
Total stockholders equity. $672,500
_____
* 900 + 10,000 + 12,000+ 1,000 = 23,900shares
**$18,000+ $440,000+ $20,000= $478,000
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(10-15 min.) P 9-77A
GarmanCorp.
BalanceSheet (partial)
December31, 2010Stockholders equity:
Preferredstock, 5%, $130 par, 8,000 shares
authorized, 1,600 sharesissued. $208,000
Commonstock, no-par, 600,000shares
authorized, 120,000sharesissued. 513,000
Retainedearnings. 123,200
Total stockholders equity $844,200
_____
Computations:
Preferredstock: 1,600 $130 = $208,000
Commonstock: Balancegiven as $513,000
Retainedearnings:$74,000+ $94,000 ($208,000.05 2)
(120,000 $.20) = $123,200
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(20-30 min.) P 9-78A
Commonstock [(475,000+ 380,000) $5] + $358,650. $ 4,633,650
Additional paid-in capital475,000 ($7 $5.00)... 950,000
380,000 ($10.00 $5.00). 1,900,000
41,000 ($10 $7.25) 112,750
Fromstock dividend.. 286,920
Retainedearnings($1,010,000 $610,000 $645,570). (245,570)
Treasurystock [(58,000 41,000) $7.25] (123,250)
Total stockholders equity. $7,514,500
Total assets.. $14,600,000
Total liabilities.. 7,085,500)
= Total stockholders equity $7,514,500
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Elegant Outdoor Furniture would have to pay all preferred dividends in
arrears and pay the current years dividends before paying dividends to
commonstockholdersbecausethe preferredstock is cumulative.
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(continued)P 9-79A
Req. 4
Elegant must pay preferred dividendsof $379,925 each year to avoid having
preferreddividendsin arrears.
_____
Computation:
Class A Preferred: 78,000sharesX $35 (par) per share 0.065 =
$177,450
Class B Preferred: 79,000 sharesX $35 (par) per share 0.065=
202,475
Total preferreddividends $379,925
Req. 5
JournalDATE ACCOUNTTITLESANDEXPLANATION DEBIT CREDIT
2011
Feb. 28 RetainedEarnings.. 860,000
DividendsPayable, Class A
Preferred($2,730,000 .065 2).. 354,900
DividendsPayable, Class B
Preferred($3,115,000 .065 2).. 404,950 DividendsPayable, Common
($860,000 $354,900 $404,964). 100,150
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(15-20 min.) P 9-80A
Req. 1
JournalDATE ACCOUNTTITLESANDEXPLANATION DEBIT CREDIT
Feb. 13 Cash (5,400 $5) 27,000
CommonStock(5,400 $4). 21,600
Paid-in Capital in Excessof Par -
Common 5,400
Jun. 7 RetainedEarnings 210
DividendsPayable
(300 shares $0.70) 210
24 DividendsPayable... 210
Cash 210
Aug. 9 RetainedEarnings
(11,900shares 0.10 $6) 7,140
Common11,900 0.10 $4). 4,760
Paid-in Capital in Excessof Par -
Common 2,380
Oct. 26 TreasuryStock (500 $7) 3,500
Cash 3,500
Nov. 20 Cash (200 $11)... 2,200
TreasuryStock, (200 7) 1,400
Paid-in Capital fromTreasury
StockTransactions 800
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(continued)P 9-80A
Req. 2
Stockholders equity:$.70 cumulativepreferredstock, $5 par, 300 shares
issued............ $ 1,500
Commonstock, $4 par, 13,090sharesissued
($26,000+ $21,600+ $4,760) 52,360
Paid-in capital in excessof par - common
($17,800+ $5,400 + $2,380). 25,580
Paid-in capital fromtreasurystock transactions 800
Retainedearnings
($25,000+ $28,000 $210 $7,140)... 45,650
Less:Treasurystock, 300 shares at cost
($3,500 $1,400).. (2,100)
Total stockholders equity $123,790
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(20-30 min.) P 9-81A
ASSETS = LIABILITIES +
STOCKHOLDERS
EQUITY
Feb. 3 + 435,000 = 0 + 435,000
Mar. 19 62,400 = 0 62,400
Apr. 24 + 41,600 = 0 + + 41,600
Aug. 15 0 = + 7,200 7,200
Sept. 1 7,200 = 7,200 + 0
Nov. 18 0 = 0 + 0
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(40-50 min.) P 9-82Req. 1
Seagull Designers, Inc.
BalanceSheet
December31, 2010
ASSETS LIABILITIES
Current: Current:
Cash... $ 55,000 Accountspayable... $136,000
Accountsrec., net.. 34,000 Dividendspayable.. 6,000
Inventory... 93,000 Accruedliabilities... 24,000
Prepaidexpenses... 13,000 Total current
Total current liabilities.. 166,000
assets.. 195,000 Long-term note payable 99,000
Total liabilities. 265,000
Property, plant, and
equipment,net 364,000 STOCKHOLDERS
EQUITY
Intangibleassets: Preferredstock, $.50,
Goodwill 13,000 no-par, 11,000shares
Trademark,net 4,000 authorizedand issued... $ 29,700Commonstock,
$2 par, 600,000shares
authorized, 116,000
sharesissued... 232,000
Paid-in capital in excess
of par common 20,000
Retainedearnings.. 53,300*Less: Treasurystock,
common,21,000shares
at cost. (24,000)
Total stockholdersequity... 311,000
Total liabilities and
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Total assets. $ 576,000 stockholders equity.. $576,000
*Retainedearnings= Total assets Total liabilities Total paid-in capital =
$576,000 $265,000 $29,700 $232,000 $20,000 ( $24,000)= $53,300
(continued)P 9-82A
Req. 2
Rate of Net income
return=
+ Interest expense=
$32,000+ $15,600=
$47,600= 0.089
on assets Averagetotal assets ($576,000+ $493,000)/ 2 $534,500
Rate of return Net incomeon common
= Preferreddividends
=$32,000 (11,000 $.50)
=$26,500
= 0.105stockholders' Averagecommon ($281,300*+ $222,000)/ 2 $251,650
equity stockholders' equity
*Total stockholders equity... $311,000
Less: Preferredequity.. (29,700)
Commonstockholders equity... $281,300
Req. 3
These rates of return suggest some weakness. Return on common
stockholders equity is well below 15%, mentioned in the text as a good
return on equity. Howeverreturn on equity does exceedreturn on assets.
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(20-30 min.) P 9-83A
JournalACCOUNTTITLESANDEXPLANATION DEBIT CREDIT
Millions
RetainedEarnings.. 1,918
DividendsPayable. 1,918
DividendsPayable.. 1,918
Cash.. 1,918
ORRetainedEarnings.. 1,918
Cash.. 1,918
Cash 1,000
CommonStock... 1,000
Cash 54
Long-TermNotes Payable... 54
TreasuryStock. 3,030
Cash.. 3,030
Long-TermNotes Payable 163 Cash.. 163
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Problems
GroupB
(30-45 min.) P 9-84B
Req. 1
JournalDATE ACCOUNTTITLESANDEXPLANATION DEBIT CREDIT
Jan. 6 OrganizationExpense 7,500 CommonStock (500 $5)... 2,500
Paid-in Capital in Excessof
Par - Common... 5,000
Issuedstock to promoterfor assistancein
Issuingcommonstock.
9 Cash(19,000 $15) 285,000
CommonStock (19,000 $5). 95,000
Paid-in Capital in Excessof
Par - Common... 190,000
Issuedcommonstock for cash.
10 Patent. 12,000
PreferredStock(600 $1 no-par) 12,000
Issuedpreferredstock to acquire a patent.
26 Cash 21,000 CommonStock (1,400 $5) 7,000
Paid-in Capital in Excessof
Par - Common... 14,000
Issuedcommonstock for cash.
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(continued)P 9-84B
Req. 2
Liard Canoes, Inc.BalanceSheet (partial)
January31, 2010
Stockholders equity:
Preferredstock, $1 no-par, 5,000 sharesauthorized,
600 sharesissued.. $ 12,000
Commonstock, $5 par, 140,000shares
authorized, 20,900 sharesissued*............... 104,500
Paid-in capital in excessof par - common 209,000**
Retainedearnings 56,000
Total stockholders equity... $381,500
_____
*500 + 19,000+ 1,400 = 20,900 shares**$5,000+ $190,000+ $14,000= $209,000
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(10-15 min.) P 9-85B
HolmanCorp.
BalanceSheet (partial)
December31, 2010Stockholders equity:
Preferredstock, 8%, $110 par, 5,000 sharesauthorized,
1,000 sharesissued... $110,000
Commonstock, no-par, 400,000sharesauthorized,
80,000 sharesissued.. 512,000
Retainedearnings 97,400Total stockholders equity... $719,400
_____
Computations:
Preferredstock: 1,000 $110 = $110,000
Commonstock: Balancegiven as $512,000
Retainedearnings:$71,000+ $92,000 ($110,000 0.08 x 2) (80,000x
$0.60) = $97,400
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(20-30 min.) P 9-86B
Commonstock [(500,000+ 395,000) $2] + $150,120. $ 1,940,120
Additional paid-in capital500,000 ($5.00 $2.00)... 1,500,000
395,000 ($9.00 $2.00). 2,765,000
38,000 ($8 $7.25) 28,500
Fromstock dividend.. 450,360
Retainedearnings($1,150,000 $700,000 $600,480). (150,480)
Treasurystock [(61,000 38,000) $7.25] (166,750)
Total stockholders equity. $6,366,750
Total assets.. $14,200,000
Total liabilities.. 7,833,250)
= Total stockholders equity $6,366,750
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(25-35 min.) P 9-87B
Req. 1
SeasonalOutdoorFurnitureCompanyhas Class A cumulativepreferredstock, Class B cumulativepreferredstock, and commonstock outstanding.
Req. 2
JournalDATE ACCOUNTTITLESANDEXPLANATION DEBIT CREDIT
Cash 1,520,000
Class A PreferredStock 1,520,000
Cash 1,940,000
Class B PreferredStock 1,940,000
Cash ($1,000,000+ $5,520,000) 6,520,000
CommonStock 1,000,000
Additional Paid-in Capital -
Common 5,520,000
Req. 3
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Seasonal Outdoor Furniture would have to pay all preferred dividends in
arrears before paying dividends to common stockholders because the
preferredstock is cumulative.
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(continued)P 9-87B
Req. 4
Seasonal must pay preferreddividendsof $138,400each year to avoid having
preferreddividendsin arrears.
_____
Computation:
Class A Preferred: 76,000 sharesX $20 (par) per share 0.04 = $ 60,800
Class B Preferred: 97,000 sharesX $20 (par) per share 0.04 = 77,600
Total preferreddividends $138,400
Req. 5
JournalDATE ACCOUNTTITLESANDEXPLANATION DEBIT CREDIT
2011Feb. 28 RetainedEarnings.. 840,000
DividendsPayable, Class A
Preferred($1,520,000 .04 2).. 121,600
DividendsPayable, Class B
Preferred($1,940,000 .04 2).. 155,200
DividendsPayable, Common
($840,000 $121,600 $155,200).
563,200
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(15-20 min.) P 9-88B
Req. 1
JournalDATE ACCOUNTTITLESANDEXPLANATION DEBIT CREDIT
Feb. 13 Cash (5,200 $6). 31,200
CommonStock (5,200 $2). 10,400
Paid-in Capital in Excessof Par -
Common... 20,800
June 7 RetainedEarnings.. 320
DividendsPayable
(400 shares $0.80)... 320
24 DividendsPayable.. 320
Cash... 320
Aug. 9 RetainedEarnings
(11,500shares 0.20 $7) 16,100
CommonStock (11,500 0.20 $2).. 4,600
Paid-in Capital in Excessof Par -
Common... 11,500
Oct. 26 TreasuryStock, Common(900 $8)......... 7,200
Cash... 7,200
Nov. 20 Cash (600 $12) 7,200
TreasuryStock, Common(600 $8). 4,800
Paid-in Capital from Treasury
Stock Transactions... 2,400
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(continued)P 9-88B
Req. 2
Stockholders equity:$0.80 cumulativepreferredstock, $15 par,
400 sharesissued. $ 6,000
Commonstock, $2 par, 13,800sharesissued
($12,600+ $10,400+ $4,600)............................... 27,600
Paid-in capital in excessof par - common
($17,400+ $20,800+ $11,500). 49,700
Paid-in capital fromtreasurystock transactions.. 2,400
Retainedearnings($23,000+ $25,000 $320 $16,100) 31,580
Less:Treasurystock, common,300 shares
at cost ($7,200 $4,800). (2,400)
Total stockholders equity.. $114,880
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(20-30 min.) P 9-89B
ASSETS = LIABILITIES +
STOCKHOLDERS
EQUITY
Feb. 4 +350,000 = 0 + + 350,000
Mar. 20 -46,200 = 0 46,200
Apr. 25 +27,000 = 0 + +27,000
Aug. 17 0 = +11,200 11,200
Sept. 8 -11,200 = -11,200 + 0
Nov. 28 0 = 0 + 0
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= $555,000 $268,000 $32,400 $234,000 ( $22,000)
= $42,600
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(continued)P 9-90B
Req. 2
Rate of Net incomereturn
=+ Interest expense
=$30,000+ $16,000
=$46,000
= 0.088on assets Averagetotal assets ($555,000+ $496,000)/ 2 $525,500
Rate of return Net income
on common=
Preferreddividends=
$30,000 (12,000 .50)=
$24,000= 0.100
stockholders' Averagecommon ($254,600**+ $225,000)/2 $239,800
equity stockholders'equity
**Total stockholders equity. $287,000
Less: Preferredequity (32,400)
Commonstockholders equity. $254,600
Req. 3
These rates of return suggest a mid range. Return on commonstockholders
equity is below 15%, mentionedin the text as a good rate of return, but its
higher than return on assets a goodsign.
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(20-30 min.) P 9-91B
JournalACCOUNTTITLESANDEXPLANATION DEBIT CREDIT
RetainedEarnings 1,890
DividendsPayable.. 1,890
DividendsPayable 1,890
Cash 1,890
ORRetainedEarnings 1,890
Cash 1,890
Cash. 1,234
CommonStock 1,234
Cash 58
Long-TermNotes Payable 58
TreasuryStock.. 3,080
Cash. 3,080
Long-TermNotes Payable.Cash..
162162
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DecisionCases
(30-45 min.) DecisionCase 1
Req. 1
JournalDATE ACCOUNTTITLESANDEXPLANATION DEBIT CREDIT
Smith, Capital. 25,000
Jones, Capital 25,000
CommonStock 50,000
To incorporatethe business, close the capitalaccountsof Smith and Jones, and issue
commonstock to them.
Req. 2
JournalDATE ACCOUNTTITLESANDEXPLANATION DEBIT CREDIT
Plan 1:
Cash. 80,000
PreferredStock(800 $100) 80,000
To issuepreferredstockto outsideinvestors.
Plan 2:
Cash. 55,000 PreferredStock 55,000
To issue preferredstock to outsideinvestors.
Cash. 35,000
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CommonStock 35,000
To issue commonstock to outsideinvestors.
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(continued) DecisionCase 1
Req. 3
Plan 1: Stockholders Equity
Preferredstock, 6%, $100 par, nonvoting,
10,000 sharesauthorized, 800 sharesissued.. $ 80,000
Commonstock, $1 par, 500,000sharesauthorized,
50,000 sharesissued.. 50,000
Retainedearnings($120,000 $30,000).
90,000Total stockholders equity $220,000
Plan 2:
Stockholders Equity
Preferredstock, $5, no-par, 5,000 sharesauthorized,
500 sharesissued $ 55,000
Commonstock, $1 par, 500,000sharesauthorized,
85,000 sharesissued.. 85,000
Retainedearnings($120,000 $30,000). 90,000
Total stockholders equity $230,000
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(continued) DecisionCase 1
Req. 4
Plan 1 appears to fit the plans of Smith and Jones better than Plan 2because:
Their primarygoal is to raise as muchcapital as possiblewithout giving
up control of the business. Under Plan 2, the outside stockholders
would have 60,000 votes [35,000 common votes + 25,000 preferred
votes (500 shares 50 votes per share)]. Smith and Jones would losecontrol of the businessbecausethey wouldhave only 50,000 votes.
UnderPlan 1preferredstockholdershave no votes. Smith and Jones
would have complete control since they would hold all the voting
shares.
Plan 2wouldraise only $10,000more than Plan 1.
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(15-20 min.) DecisionCase 2
Req. 1
The stock dividend does not affect your proportionate ownership in thecompany because all the stockholders receive 10% new shares. All
stockholders are in the same relative position after the dividends as they
were before.
Req. 2
Cash dividends received last year were $7,150 (10,000 shares $0.715 per
share). Cash dividends after the dividendwill be $7,150 (11,000 shares
$0.65 per share). Thus, there is no changein cash dividends.
Req. 3
You incur no loss in value becausethe market value of your investmentafter
the stock dividend $610,203 (11,000 shares $55.473) is the same as it
was before the dividend 10,000 shares $61.02. The increase in the
number of shares you own at $55.473 per share offsets the decrease in the
market price per share. Any differencehere is due to rounding.
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(continued) DecisionCase 2
Req. 4
If the company continues paying the $0.715 cash dividend per share, afterissuing the 10% stock dividend, total cash dividends will increase. (Your
annual dividendswill rise to $7,865 [11,000 shares $0.715].) The increasein
dividends might attract new investors, who view the increased cash
dividends as an indication that the business is operating quite well. This
investor interest may result in an increase in the market value of UPS stock,or at least keep the value higher than it would be without the increasein cash
dividends.
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(20-30 min.) DecisionCase 3
Req. 1
Millions
a. Net income,as reportedfor 2000... $979
b. Net incomeafter new developments
[$979 $130 ($2,000 .12)]............. $609
c. The trend of net incomeis down. The reasons for the downwardtrend
are (a) inclusion of the money-losing companies and (b) the interestexpenseon the new debt.
Req. 2 (amounts in millions)
Assets = Liabilities + EquityAs reported.. $65,503 = $54,033 + $11,470
Adjustments
for 2001:
Inclusionof
companies.. 5,700 = 5,600 + 100
Exchangeof
notes payable
for stock 0 = 2,000 2,000
Interest expense
on new debt.. 0 = 240 240
As adjusted. $71,203 = $61,873 + $9,330
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(continued) DecisionCase 3
Req. 3
As Reported As AdjustedDollars in millions
Total
Debt=
liabilities=
$54,033 $61,873
ratio Total $65,503 $71,203
assets
= 0.82 = 0.87
Req. 4
I wouldrecommenddowngradingEnronsdebt for two reasons:
1. Downturn in net income due to (a) inclusion of the money-losing
companies,and (b) the addedinterest expenseon the new debt.
2. Increasein the debt ratio due to the sametwo factors.
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Ethical Issue 1
Req. 1
The ethical issue is, What is the correct amount at which to record and
disclosethe value of the franchiseon Campbells balancesheet?
Req. 2 and Req.3
The stakeholdersin the transactioninclude Campbell, the potential buyers of
the franchises, and potential lenders who loan them the money to buy the
franchises in the future. Campbell and the corporation are effectively the
same entity. The third party serves no purposeother than as an accomplice
to overvaluethe franchise.
Analysisof the decisionto overvaluethe franchise:
(a) Economic: Campbell is better off temporarily, unless potential buyers sue
him for damages, in which case he could be worse off. Potential buyers of
the individual-languagefranchisescan be harmed. Campbells balance sheet
overstates his assets. If outsiders believe his balance sheet, they may be
induced to pay Campbell more than the individual-language franchises are
worth. Lenderscan also be harmedby loaningmoneyto Campbell on more
favorabletermsthan his financial positionwarrants.
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(b) Legal analysis: If St. Genevieve is a public company, their actions are
illegal. The Securities Exchange Act of 1934 prohibits insider trading. It
imposes stiff penalties for unethical conduct of this type. The SEC will
prosecutethemfor insider trading, probablyfine them, and possibly send the
officers and directors responsible for the decision to prison. In addition,
actions such as these have been the basis for numerous civil stockholder
lawsuits, to recover monetarydamagessufferedbecauseof the actionsof the
company.
(c) Ethical analysis: The managersclearly didnotbehaveethically, violating
the rights of existing shareholders as well as the good faith of the investing
public. Managers defrauded the stockholders by withholding important
informationprior to buyingcompanystock.
Req. 4
The correct way to handle this transactionis never to have proposedit in the
first place. However, if it did happen, thedisclosure principleis relevant
to the situation. The transaction should be disclosedin the footnotes to the
financial statements, and if potential liability to the SEC or others is probable
and can be estimated, a loss be disclosed in the income statement and a
liability shouldbe accruedon the balancesheet.
Focuson Financials: Amazon.com,Inc.
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(20-30 min.)
Req. 1
Amazon.com,Inc. has two classesof stock authorizedat December31, 2008:
1. Preferred stock, $.01 par value, 500 million shares authorized, no
sharesissuedand outstanding.
2. Commonstock, $.01 par value, 5 billion shares authorized, 445 million
sharesissued, 428 million sharesoutstanding.
Req. 2
Based on the comparative Consolidated Balance Sheets, as well as the
information in the Consolidated Statements of Stockholders Equity and the
Consolidated Statements of Cash Flows, Amazon.com, Inc. repurchased 2million shares of its commonstock during the year for a total of $100 million
in cash ($50 per share).
Req. 3
The companyearnedand reportednet incomeof $645 million. It appearsfirst
in the ConsolidatedStatementsof Operations. It also appearsas a reduction
of the accumulated deficit in the Consolidated Statements of Stockholders
Equity, and as the
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opening line of the Consolidated Statementsof Cash Flows. This is a good
thing.
Req. 4
Returnon=
$645= 33.3%
equity ($2,672+ $1,197) / 2
Returnon=
$645 + $71= 9.7%
assets ($8,314+ $6,485) / 2
Theserates of return indicate financial strengthfor two reasons:
1. Both returnsare high. Returnon equity is outstanding!
2. Return on equity is much higher than return on assets, meaning that the
commonshareholders are earning a much higher return on their investment
in the businessthan they are payingcreditors for borrowedfunds.
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FocusonAnalysis: Foot Locker, Inc.
(20-30 min.)
Req. 1
Foot Locker, Inc. has only one class of stock: Commonstock, $.01 par value,
500,000,000 shares authorized; 158,997,000 shares issued and 154,474,000
sharesoutstandingas of the end of fiscal 2007.
Req. 2
Foot Locker, Inc. repurchased2.283 million sharesfor $50 million. The
averageprice (computationin millions) was:
Averageprice paid=
Cashpaid=
$50= $21.90
for treasurystock Numberof shares 2.283
Based on the information in Footnote 26 to the Consolidated Financial
Statements, the averageprice of the companysstock during the year (based
on the high ending quarterly price) was $20.41 [($24.78 + $24.15 + $17.60 +
$15.14) 4]. This indicates that the companypaid an averageprice that was
slightly more than the quoted market price of its stock. The company
probably did this for several reasons. First, they may have neededthe stock
to distribute to employees in the form of compensation. Second, share
repurchases reduce the number of shares outstanding, thus boosting the
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earningsper share. Third, the companyprobablythoughtthat the share price
wouldrecoverin subsequentperiods, thus makingthe stock a goodbuy.
Req. 3
Refer to the Consolidated Statementsof Shareholders Equity. Foot Locker,
Inc. issueda total of 1,187,000new shares of its commonstock in fiscal 2007:
513,000 shares were restricted stock issued under new stock option and
awards plans to employees, and 674,000 shares were issued under directorand employeestock plans.
Req. 4
Refer to the ConsolidatedStatementsof Shareholders Equity.
RetainedEarnings( in millions)Bal., Feb. 3, 2007 1,785
Dividendsfor fiscal 2007 77 Cumulativeeffect of
adoptionof new
accountingstandard(FIN
48)
1
Net income 51
Bal., Feb. 2, 2008 1,760
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GroupProject in Ethics
(1-3 hours, includingdiscussion)
Req. 1
Stakeholdersin a corporationvary widely with the nature of the corporation.
In the case of the corporations included in this case (GM, Chrysler, AIG,
Citibank, Bank of America) because of their size and the scope of their
operations, stakeholders include the shareholders, bondholders, other
creditors, employees, suppliers, customers, local, regional, national andinternational economies, federal, state and local governmentsjust about
everyonein the broadestsenseof the term.
Req. 2
Student opinions on this will vary. It might be interesting to divide the classinto two teamsand conducta debate, each teamtaking a side.
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Req. 3
The measures of deficiency can vary, but usually are: excessively high
debt ratios, continuing and increasing deficits in retained earnings, debt
covenantsthat are being violated, labor troubles, litigation. If the companyis
not too far gone, in some cases, downsizing helps by cutting costs to be
more in line with revenues. Students teams might brainstormthis question
as well.
Req. 4
Student opinionson this will vary.
Req. 5
Student opinionson this will vary and should be related to the opinionsthey
express in requirement 4. This question has economic, political and social
ramifications. Some would say that government taking equity positions in