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Chapter 11
Reporting and Analyzing Equity
QUESTIONS
1.

Organization expenses (costs) are incurred in creating a corporation. Examples include:
legal fees, promoter fees, accountant fees, costs of printing stock certificates, and fees paid
to obtain a state charter.

2.

Organization expenses (costs) are reported as expenses when incurred—as part of operating
expenses—because the amount and timing of their future benefit is difficult to determine.
(Instructor note: Prior to SOP 98-5, organization costs were classified as part of intangible
assets and then allocated to amortization expense.)

3.

The board of directors of a corporation is responsible for directing the corporation's affairs.
The directors are elected by the corporation’s stockholders.

4.

The preemptive right of common stockholders is the right to maintain their relative
ownership interests in the corporation by having the first opportunity to purchase their
proportionate share of any additional common shares issued by the corporation.

5.

The general rights of common stockholders include: (1) the right to vote in stockholders’
meetings, (2) the right to sell or otherwise dispose of stock, (3) the preemptive right, (4) the
right to share proportionately in dividends, and (5) the right to share proportionately in
assets remaining after the creditors are paid when, and if, the corporation is liquidated. In
addition, stockholders have the general right to receive timely and useful financial reports
that describe the corporation’s financial position and the results of its activities.

6.

Authorized shares represent the maximum number of shares that a corporation’s charter
allows it to sell. Outstanding shares are the number of issued shares that are held by
stockholders. The number of authorized shares usually exceeds the number of issued
shares, often by a large amount.

7.

Convertible preferred stock is potentially attractive because it offers the safety of a regular
return as well as the opportunity to share in the increased value of the issuer’s common
stock through conversion (or potential conversion).

8.

The market value per share of stock is the price at which a share of stock is bought or sold.
Many factors—including expected future earnings, dividends, growth, and other company
and economic factors—affect market value. Par value per share is an arbitrary value
assigned by the corporation in its charter.

9.

The par value is an arbitrary value placed on a share of stock when it is authorized. The call

price is an amount that a corporation must pay if it exercises the option to buy back and
retire a share of callable preferred stock.

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10. The three important dates governing dividends are:
a. date of declarationthe date the directors vote to pay a dividend.
b. date of recorda future date specified by the directors to identify the particular
shareholders that are to receive the dividend.
c. date of paymentthe date when shareholders receive the dividend payment.
11. Cash dividends debited against paid-in capital accounts are called liquidating dividends
because they represent a return of amounts originally invested in the corporation by the
stockholders. (They are a return of, not a return on, capital contributions.)
12. Declaring a stock dividend has no effect on assets, liabilities, or total equity. Also, the
subsequent distribution of the stock dividend has no effect on these items. Instead, the stock
dividend simply increases the number of shares outstanding and results in a transfer of
equity from retained earnings to paid-in capital.
13. A stock dividend results in a distribution of additional shares to stockholders and the
capitalization of retained earnings. A stock split calls in the old shares and replaces them
with a different number of new shares with a new par value. Also, no entry is made to any of
the equity accounts with a stock split. In spite of these technical differences, there is no
practical difference in most cases between a stock split and a large stock dividend.
14. A stock dividend should not be considered income because it does not transfer any assets
from the corporation to the stockholders.

15. A treasury stock purchase reduces total assets and total equity by equal amounts.
16. Treasury stock purchases affect the corporate assets and stockholders’ equity just like a
cash dividend. To keep a company from dissipating its assets by paying an inordinate
amount of dividends to its stockholders, state laws protect the company’s creditors by
imposing limits on treasury stock purchases.
17. With a simple capital structure, earnings per share is calculated by first subtracting any
declared and cumulative preferred dividends from net income, and then dividing the
difference by the weighted-average number of shares of outstanding common stock. The
resulting figure is called the basic earnings per share.
18. A stock option is the right to purchase common stock at a fixed price over a specified period.
19. When a corporation has no preferred stock, book value per share is calculated by dividing
total stockholders’ equity by the number of common shares outstanding. The main limitation
of using book value per share to value a corporation is the potential difference between
recorded value and market value for assets and liabilities.
20. Best Buy has preferred stock and common stock listed on its balance sheet. As of February
26, 2005, however, Best Buy has not issued any of the preferred stock.
21. The par value for Circuit City’s common stock is $0.50 per share (as reported on its balance
sheet). The company has likely set the par value to minimize the amount of legal capital the
company must maintain (and that stockholders would be liable for).
22. Apple received $427,000,000 from the issue of common stock, but it did not repurchase any
common stock for the year ended September 25, 2004.

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QUICK STUDIES
Quick Study 11-1 (10 minutes)
True statements: 3, 4, 5 and 7

Quick Study 11-2 (5 minutes)
a. Cash .......................................................................... 375,000
Common Stock, $5 Par Value ............................

375,000

Issued par value stock for cash. (75,000 x $5)

b. Cash*......................................................................... 450,000
Common Stock, $5 Par Value ............................
Paid-In Capital in Excess of Par Value,
Common Stock ................................................

375,000
75,000

Issued par value stock for cash. *(75,000 x $6)

Quick Study 11-3 (5 minutes)
a. Cash*......................................................................... 648,000
Common Stock, $2 Par Value** .........................
Paid-In Capital in Excess of Par Value,
Common Stock*** ............................................

72,000
576,000


Issued par value stock for cash.
*36,000 x $18 = $648,000
**36,000 x $2 = $72,000
***$648,000 - $72,000 = $576,000

b. Cash*......................................................................... 648,000
Common Stock, $2 Stated Value** ....................
Paid-In Capital in Excess of Stated Value,
Common Stock*** ............................................

72,000
576,000

Issued stated value stock for cash.
*36,000 x $18 = $648,000
**36,000 x $2 = $72,000
***$648,000 - $72,000 = $576,000

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Quick Study 11-4 (5 minutes)
a. Cash ....................................................................................
1,827,000

Common Stock, No-Par Value .....................................
1,827,000
Issued no-par value stock for cash. (63,000 x $29)

b. Land ....................................................................................
1,827,000
Common Stock, No-Par Value .....................................
1,827,000
Issued no-par value stock for land.

Quick Study 11-5 (15 minutes)
(a) Mar. 1 Cash ..........................................................................
297,500

Common Stock, $4 Par Value ............................
Paid-In Capital in Excess of Par Value,
Common Stock ................................................

170,000
127,500

Issued par value stock for cash.

(b) Apr. 1 Cash .......................................................................... 70,000

Common Stock, No-Par Value ...........................

70,000

Issued no-par value stock for cash.


(c) Apr. 6 Inventory ................................................................... 45,000

Machinery .................................................................
145,000
Note Payable .......................................................
Common Stock, $25 Par Value ..........................
Paid-In Capital in Excess of Par Value,
Common Stock ................................................

94,000
50,000
46,000

Issued stock for inventory, machinery, and note.

Quick Study 11-6 (5 minutes)
1. Cash*...................................................................................
510,000
Preferred Stock, $100 Par Value**...............................
Paid-In Capital in Excess of Par Value,
Preferred Stock*** ......................................................

500,000
10,000

Issued par value stock for cash.
*5,000 x $102 = $510,000
**5,000 x $100 = $500,000
***$510,000 - $500,000 = $10,000


2. Preferred dividend =
$100 par value/share x 7% x 5,000 shares = $35,000

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Quick Study 11-7 (10 minutes)
May 15 Retained Earnings .........................................................
54,000
Common Dividend Payable ....................................

54,000

Declared cash dividend on common.

June 31 Common Dividend Payable ..........................................
54,000
Cash ..........................................................................

54,000

Paid cash dividend to common.

Quick Study 11-8 (10 minutes)

Jun Company
Stockholders’ Equity
April 2 (after stock dividend)
Common stock$5 par value, 375,000 shares
authorized, 220,000 shares issued and outstanding ................
Paid-in capital in excess of par value, common stock.................
Total paid-in capital ........................................................................
Retained earnings ...........................................................................
Total stockholders' equity .............................................................

$1,100,000
900,000
2,000,000
433,000
$2,433,000

Supporting work
Apr.

2

Retained Earnings .........................................................400,000
Common Stock* .......................................................
Paid-In Capital in Excess of Par Value,
Common Stock** ...................................................

100,000
300,000

To record declaration and distribution

of a 10% common stock dividend.
* 200,000 shares x 10% x $5 par value = $100,000
**200,000 shares x 10% x ($20 market value –
$5 par value) = $300,000

Quick Study 11-9 (10 minutes)
Total cash dividend ...........................................................................
To preferred shareholders ................................................................
Remainder to common shareholders ..............................................

$110,000
64,000*
$ 46,000

*80,000 shares x $5 par x .08 x 2 years = $64,000.

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Quick Study 11-10 (10 minutes)
May 3

Treasury Stock (4,000 shares) ......................................
36,000
Cash ..........................................................................


36,000

Purchased treasury stock
($36,000 / 4,000 shares = $9 per share cost).

Nov. 4

Cash ................................................................................
8,500
Treasury Stock (850 x $9*) ......................................
Paid-In Capital, Treasury Stock ..............................

7,650
850

Reissued treasury stock at a price
greater than its cost.
($9 per share x 850 shares = $7,650)

Quick Study 11-11 (10 minutes)
1. This material error should be reported on the statement of retained
earnings (and/or the statement of stockholders’ equity) as a prior
period adjustment to the beginning retained earnings balance. Also, if
prior year’s financial numbers are reported, they should be revised to
show the correct numbers.
2. This change in the expected useful life is a change in an accounting
estimate—affecting current and future accounting periods. Therefore,
the current year depreciation should be modified to reflect the change
and the revised depreciation expense reported on the income

statement as a regular part of income from continuing operations. The
remaining years’ depreciation also should reflect this new estimate of
useful life.

Quick Study 11-12 (10 minutes)
Basic earnings per share:

Net income - Preferred dividends
= Weighted-average common shares outstanding
= ($770,000 - $0) / 280,000 shares
= $2.75 per share

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Quick Study 11-13 (10 minutes)
Basic earnings per share:

Net income - Preferred dividends
= Weighted-average common shares outstanding
= ($900,000 - $20,000) / 400,000 shares
= $2.20 per share

Quick Study 11-14 (10 minutes)
Price-earnings ratio = Market value per share

Earnings per share

= $32.60
$3.95

= 8.3

Analysis: Many analysts consider stocks with a PE less than 5 to 8 as
potentially underpriced. This stock with a PE of 8.3 would exceed this
criterion. (Instructor note: This is a good point at which to emphasize that
PE is based on expectations—expectations can prove to be higher or lower
than actual results.)

Quick Study 11-15 (10 minutes)
Dividend yield =

Annual cash dividends per share
Market value per share

=

$2.30
$32.50

= 7.1%

Analysis: The company’s dividend yield of 7.1% indicates that it should be
classified as an income stock. That is, the company annually pays out
cash dividends to its shareholders in an amount that equals 7.1% of the
company’s market value.


Quick Study 11-16 (10 minutes)
Total stockholders' equity .................................................................$1,840,000
Less equity attributable to preferred shares
Call price (20,000 shares x $40)...................................................... 800,000
Equity applicable to common shares ...............................................$1,040,000
Book value of common shares ($1,040,000/150,000 shares) .........$

6.93

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EXERCISES
Exercise 11-1 (15 minutes)
Characteristic
Corporations
1. Owner authority and control ......................One vote per share
2. Ease of formation ........................................Requires government approval
3. Transferability of ownership ......................Readily transferred
4. Ability to raise large amounts of capital .....High ability
5. Duration of life .............................................Unlimited
6. Owner liability..............................................Limited
7. Legal status .................................................Separate legal entity
8. Tax status of income ..................................Corporate income is taxed and

its cash dividends are usually
taxed at the 15% rate (some
cases at a lower rate)
Exercise 11-2 (15 minutes)
1.
Feb. 20

Cash ..........................................................................152,000
Common Stock, No-Par Value ..........................
152,000
Issued common stock for cash.

2.
Feb. 20

Cash ..........................................................................152,000
Common Stock, $2 Par Value* .........................
38,000
Paid-In Capital in Excess of Par Value,
Common Stock** ............................................
114,000
Issued common stock for cash.
*19,000 shares x $2 per share = $38,000
**$152,000 - $38,000 = $114,000

3.
Feb. 20

Cash ..........................................................................152,000
Common Stock, $5 Stated Value* ....................

Paid-In Capital in Excess of Stated Value,
Common Stock** ............................................

95,000
57,000

Issued common stock for cash.
*19,000 shares x $5 per share = $95,000
**$152,000 - $95,000 = $57,000
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Exercise 11-3 (15 minutes)
1.

Organization Expenses ................................................... 40,000
Common Stock, No-Par Value ..................................

40,000

Issued stock to promoters.

2.

Organization Expenses ................................................... 40,000

Common Stock, $1 Stated Value ..............................
Paid-In Capital in Excess of Stated Value,
Common Stock ........................................................

2,000
38,000

Issued stock to promoters.

3.

Cash .................................................................................. 35,000
Common Stock, $5 Par Value* ..................................
Paid-In Capital in Excess of Par Value,
Common Stock** .....................................................

20,000
15,000

Issued common stock for cash.
*4,000 shares x $5 per share = $20,000
**$35,000 - $20,000 = $15,000

4.

Cash ................................................................................... 60,000
Preferred Stock, $50 Par Value* ................................
Paid-In Capital in Excess of Par Value,
Preferred Stock**......................................................


50,000
10,000

Issued preferred stock for cash.
*1,000 shares x $50 per share = $50,000
**$60,000 - $50,000 = $10,000

Exercise 11-4 (15 minutes)
Land ..................................................................................
Building ............................................................................
Common Stock, $7 Par Value* ..................................
Paid-In Capital in Excess of Par Value,
Common Stock ........................................................

45,000
85,000
49,000
81,000

Issued stock for land and building.
*7,000 shares x $7 per share = $49,000
**($45,000 + $85,000) – $49,000 = $81,000

Exercise 11-5 (10 minutes)
1.

C

2.


A

3.

F

4.

E

5.

B

6.

D

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Exercise 11-6 (20 minutes)
1.
a.


Retained earnings
Before dividend ........................................................................ $ 660,000
$10 par value of 25,000 dividend shares ...............................
(250,000)
After dividend ........................................................................... $ 410,000

b.

Total stockholders’ equity
Common stock$10 par value, 120,000 shares
authorized, 75,000 shares issued and outstanding ........... $ 750,000
Paid-in capital in excess of par value ....................................
200,000
Retained earnings ....................................................................
410,000
Total stockholders’ equity....................................................... $1,360,000

c.

Number of outstanding shares
Outstanding shares before the dividend .............................
Dividend shares .....................................................................
Outstanding shares after the dividend ................................

2.
a.

50,000
25,000
75,000


Retained earnings (no change)
Before and after stock split ..................................................... $ 660,000

b.

Total stockholders’ equity
Common stock$5 par value, 180,000 shares
authorized, 75,000 shares issued and outstanding ........... $ 500,000
Paid-in capital in excess of par value ....................................
200,000
Retained earnings ....................................................................
660,000
Total stockholders’ equity....................................................... $1,360,000

c.

Number of outstanding shares
Outstanding shares before the split.......................................
Additional split shares (3-for-2) ..............................................
Outstanding shares after the split ..........................................

3.

50,000
25,000
75,000

From a stockholder’s point of view, there is no practical difference
between the stock dividend and the stock split. The number of

shares will be increased equivalently under either approach, and the
market value change, if any, should be approximately the same.

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Exercise 11-7 (25 minutes)
1.
Feb. 5 Retained Earnings* ........................................................
480,000
Common Stock Dividend Distributable** ..............
120,000
Paid-In Capital in Excess of Par Value,
Common Stock*** .................................................
360,000
Declared 20% common stock dividend
Shares to be issued: 60,000 shares x 20% = 12,000 shares
*12,000 shares x $40 per share = $480,000
**12,000 shares x $10 per share = $120,000
***$480,000 - $120,000 = $360,000

Feb. 28

Common Stock Dividend Distributable .......................
120,000

Common Stock, $10 Par Value ...............................
120,000
Distributed common stock dividend.

2.
Before
Total stockholders’ equity ........................ $1,575,000
Issued and distributable shares ..............  60,000
Book value per share ................................ $ 26.250

After
$1,575,000
 72,000
$ 21.875

Shares owned ............................................ x
800
Total book value of shares ....................... $ 21,000

$

x

960*
21,000

* 800 shares x 120% = 960 shares.

3.
February 5

Market value per share ............................. $
40
Shares owned ............................................ x
800
Total market value of shares owned ....... $ 32,000

February 28
$
33.40
x
960
$ 32,064

Note: The total market value of the investor’s holdings is approximately the same
for February 5 and February 28. Assuming that the stock dividend is the only
value-relevant information/event between February 5th and February 28th, these
per share values highlight the lack of value distributed in a stock dividend.

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Exercise 11-8 (30 minutes)
Preferred

Common


2006 ($20,000 paid)
Preferred* ...................................................... $ 20,000
Commonremainder ................................... _______
Total for the year .......................................... $ 20,000

$
$

0
0

2007 ($28,000 paid)
Preferred* ...................................................... $ 28,000
Commonremainder ................................... _______
Total for the year .......................................... $ 28,000

$
$

0
0

2008 ($200,000 paid)
Preferred* ...................................................... $ 30,000
Commonremainder ................................... _______
Total for the year .......................................... $ 30,000

$170,000
$170,000


2009 ($350,000 paid)
Preferred* ...................................................... $ 30,000
Commonremainder ................................... _______
Total for the year .......................................... $ 30,000

$320,000
$320,000

2006-2009 ($598,000 paid)
_______
Total for four years ...................................... $108,000

_______
$490,000

* The holders of the noncumulative preferred stock are entitled to no more than
$30,000 of dividends in any one year (7.5% x $5 x 80,000 shares).

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Exercise 11-9 (25 minutes)
Preferred
2006 ($20,000 paid)

Preferred* ...................................................... $ 20,000
Commonremainder ................................... _______
Total for the year .......................................... $ 20,000

Common

$
$

0
0

$
$

0
0

(Note: $10,000 in preferred stock dividends in arrears.)

2007 ($28,000 paid)
Preferredarrears from 2006 ...................... $ 10,000
Preferred* ......................................................
18,000
Commonremainder ................................... _______
Total for the year .......................................... $ 28,000
(Note: $12,000 in preferred stock dividends in arrears.)

2008 ($200,000 paid)
Preferredarrears from 2007 ...................... $ 12,000

Preferred* ......................................................
30,000
Commonremainder ................................... _______
Total for the year .......................................... $ 42,000

$158,000
$158,000

(Note: $0 in preferred stock dividends in arrears.)

2009 ($350,000 paid)
Preferred* ...................................................... $ 30,000
Commonremainder ................................... _______
Total for the year .......................................... $ 30,000

$320,000
$320,000

(Note: $0 in preferred stock dividends in arrears.)

2006-2009 ($598,000 paid)
_______
Total for four years ...................................... $120,000

_______
$478,000

* The holders of the cumulative preferred stock are entitled to no more than
$30,000 of dividends declared in any year (7.5% x $5 x 80,000 shares) plus any
dividends skipped in prior years.


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Exercise 11-10 (25 minutes)
1. (a)
Oct. 11 Treasury Stock (5,000 x $25) ........................................
125,000
Cash ..........................................................................
125,000
Purchased treasury stock.

(b)
Nov. 1

Cash (1,000 x $31) .........................................................
31,000
Treasury Stock (1,000 x $25) ..................................
Paid-In Capital, Treasury Stock ..............................

25,000
6,000

Reissued treasury stock at a price exceeding cost.


(c)
Nov. 25 Cash (4,000 x $20) .........................................................
80,000
Paid-In Capital, Treasury Stock ....................................
6,000
Retained Earnings .........................................................
14,000
Treasury Stock (4,000 x $25) ..................................
100,000
Reissued treasury stock at a price less than cost.

2. Changes to the equity section include the following
(i) The common stock account description line will change. After the
treasury stock purchase, it should read:
Common stock$10 par value; 72,000 shares
$720,000
authorized and issued; 5,000 shares in treasury .................
The dollar balance of this account does not change with a treasury
stock purchase.
(ii) The descriptions and dollar amounts for Paid-In Capital in Excess of
Par Value, Common Stock will not change.
(iii) The retained earnings dollar balance will not change but its
description should change to read:
Retained earnings ($125,000 restricted for treasury stock) .............
$864,000
(iv) After the purchase, a deduction for the cost of treasury stock is
reported immediately before the total line for stockholders’ equity as:
Less cost of treasury stock .........................................................
$(125,000)
(v) Total stockholders’ equity will change from $1,800,000 to $1,675,000.


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Exercise 11-10 (concluded)
Revised equity section appears as follows
Common stock$10 par value; 72,000 shares authorized
$ 720,000
and issued; 5,000 shares in treasury .................................................
Paid-in capital in excess of par value, Common stock ........................ 216,000
Retained earnings, $125,000 restricted by treasury stock .................. 864,000
Total .........................................................................................................1,800,000
Less cost of treasury stock.................................................................... (125,000)
Total stockholders’ equity......................................................................
$1,675,000

Exercise 11-11 (15 minutes)
Amos Company
Statement of Retained Earnings
For Year Ended December 31, 2008
Retained earnings, December 31, 2007, as previously reported .... $1,375,000
Prior period adjustment
Depreciation expense not recorded in 2006 (net of $4,500 in
Income taxes) .............................................................................. ($55,500)
Retained Earnings, December 31, 2007, as adjusted ..................... 1,319,500

Plus net income ..................................................................................
126,000
Less dividends ...................................................................................
(43,000)
Retained earnings, December 31, 2008 ............................................ $1,402,500

Exercise 11-12 (25 minutes)
1.

Net income.....................................................................................
$2,700,000
Less preferred dividends ............................................................ (390,000)
Net income available to common stockholders .......................$2,310,000

2.

Net income available to common stockholders .......................$2,310,000
Divided by weighted-average outstanding shares ................... 678,000
Basic earnings per share ............................................................
$3.41

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Exercise 11-13 (30 minutes)

1.

Net income......................................................................................$960,000
Less preferred dividends ............................................................ (130,000)
Net income available to common stockholders ....................... $830,000

2.

Net income available to common stockholders .................... $830,000
Divided by weighted-average outstanding shares ................... 379,000
Basic earnings per share ............................................................ $
2.19

Exercise 11-14 (15 minutes)
Market Value
Stock
per Share
1.............. $176.00
2.............. 96.00
3.............. 94.00
4.............. 250.00

Divided
by





Earnings

per Share
$12.00
10.00
7.50
50.00

=
=
=
=

Price-Earnings
Ratio
14.7
9.6
12.5
5.0

Analysis: Stocks with PE ratios less than about 5 to 8 are likely viewed
as potentially undervalued by the market. Of the stocks above, an
analyst might investigate stock #4 as possibly undervalued with a PE
ratio of 5.0.

Exercise 11-15 (15 minutes)
1.
2.
3.
4.

Dividend yield

$16.00 / $220.00
$14.00 / $136.00
$ 4.00 / $ 72.00
$ 1.00 / $ 80.00

= 7.3%
= 10.3%
= 5.6%
= 1.3%

Analysis: The yield of 1.3% on stock #4 is sufficiently low that it
probably would be classified as a growth stock, and not an income
stock. Note that classification involves expectations (not necessarily
realizations).

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Exercise 11-16 (20 minutes)
1.
Total stockholders’ equity .............................................
$1,585,000
Less equity applicable to preferred shares
Call price ($30 x 10,000) ............................................... $300,000
Cumulative dividends in arrears (none) .....................

0
(300,000)
Equity applicable to common shares ...........................
$1,285,000
Book value of preferred stock ($300,000/10,000) ........

$

30.00

Book value of common stock ($1,285,000/80,000) ......

$

16.06

2.
Total stockholders’ equity .............................................
$1,585,000
Less equity applicable to preferred shares
Call price ($30 x 10,000) ............................................... $300,000
Cumulative dividends in arrears (3 x 6% x $250,000) ..
45,000
(345,000)
Equity applicable to common shares ...........................
$1,240,000
Book value of preferred stock ($345,000/10,000) ........

$


34.50

Book value of common stock ($1,240,000/80,000) ......

$

15.50

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PROBLEM SET A
Problem 11-1A (30 minutes)
Part 1
a.

To record sale of 10,000 ($250,000/$25 per share) shares of $25 par
value common stock for $30 ($300,000/10,000 shares) per share.

b.

To record issuance of 5,000 ($125,000/$25 per share) shares of $25
par value common stock to the company’s promoters for their efforts
in organizing the company when the market value is $30
($150,000/5,000 shares) per share.


c.

To record acquisition of assets and liabilities by issuing 2,000
($50,000/$25) shares of $25 par value common stock at $40 per share.

d.

To record sale of 3,000 ($75,000/$25 per share) shares of $25 par
value common stock for $40 ($120,000/3,000 shares) per share.

Part 2
Number of outstanding shares
Issued in (a) .......................................
Issued in (b) .......................................
Issued in (c) .......................................
Issued in (d) .......................................
Total ....................................................

10,000
5,000
2,000
3,000
20,000

Part 3
Minimum legal capital = Outstanding shares x Par value per share
= 20,000 x $25 = $500,000
Part 4
Total paid-in capital from common stockholders

From transaction (a) ........................ $300,000
From transaction (b) ........................
150,000
From transaction (c) ........................
80,000
From transaction (d) ........................
120,000
Total paid-in capital ......................... $650,000
Part 5
Book value per common share
Total stockholders’ equity (given) ...

$695,000

Outstanding shares (from Part 2) ....

20,000

Book value per common share ........

$

34.75 ($695,000 / 20,000 shares)

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Problem 11-2A (60 minutes)
Part 1
Jan. 1

Treasury Stock, Common .............................................
80,000
Cash ..........................................................................

80,000

Purchased treasury stock (4,000 x $20).

Jan. 5

Retained Earnings .........................................................
72,000
Common Dividend Payable ....................................

72,000

Declared $2 dividend on 36,000 outstanding shares.

Feb. 28

Common Dividend Payable ..........................................
72,000
Cash ..........................................................................


72,000

Paid cash dividend.

July 6

Cash*...............................................................................
36,000
Treasury Stock, Common** ....................................
Paid-In Capital, Treasury Stock*** .........................

30,000
6,000

Reissued treasury stock.
*(1,500 x $24) **(1,500 x $20) ***(1,500 x $4)

Aug. 22

Cash*...............................................................................
42,500
Paid-In Capital, Treasury Stock ....................................6,000
Retained Earnings .........................................................1,500
Treasury Stock, Common** ....................................

50,000

Reissued treasury stock.
*(2,500 x $17) **(2,500 x $20)


Sept. 5

Retained Earnings .........................................................
80,000
Common Dividend Payable ....................................

80,000

Declared $2 dividend on 40,000 outstanding shares.

Oct. 28

Common Dividend Payable ..........................................
80,000
Cash ..........................................................................

80,000

Paid cash dividend.

Dec. 31

Income Summary ...........................................................
388,000
Retained Earnings ...................................................
388,000
Closed Income Summary account.

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Problem 11-2A (Concluded)
Part 2
KOHLER CORPORATION
Statement of Retained Earnings
For Year Ended December 31, 2009
Retained earnings, December 31, 2008 ...........................
Plus net income .................................................................
Less: Cash dividends declared ........................................
Treasury stock reissuances ...................................
Retained earnings, December 31, 2009 ...........................

$270,000
388,000
658,000
(152,000)
(1,500)
$504,500

Part 3
KOHLER CORPORATION
Stockholders’ Equity Section of the Balance Sheet
December 31, 2009
Common stock$10 par value, 100,000 shares
authorized, 40,000 shares issued and outstanding ..... $400,000

60,000
Paid-in capital in excess of par value, common stock ..
Retained earnings (from part 2) ............................................ 504,500
Total stockholders’ equity ................................................ $964,500

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Problem 11-3A (45 minutes)
Part 1
Explanations for each of the journal entries
Oct.

2 Declared a cash dividend of $2 per share of common stock.
($60,000 / 30,000 shares)

Oct. 25 Paid the cash dividend on common stock.
Oct. 31 Declared a 10% stock dividend when the market value is $25 per
share. ($36,000/$12 par = 3,000 shares = 10% of 30,000 shares;
$75,000/3,000 shares = $25 per share)
Nov.

5 Distributed the common stock dividend.

Dec.


1 Executed a 3-for-1 stock split. ($12 par / $4 par = 3-for-1 ratio)

Dec. 31 Closed the Income Summary account to Retained Earnings.
Part 2
Oct. 2
Common stock ...................... $360,000

Oct. 25

Oct. 31

Nov. 5

Dec. 1

Dec. 31

$360,000

$360,000

$396,000

$396,000 $396,000

Common stock
dividend distributable........

0


0

36,000

0

Paid-in capital in
excess of par........................

90,000

90,000

129,000

129,000

129,000 129,000

Retained earnings .................

260,000

260,000

185,000

185,000


185,000

Total equity .............................. $710,000

$710,000

$710,000

$710,000

0

0

395,000

$710,000 $920,000

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Problem 11-4A (45 minutes)
Part 1
Outstanding common shares
Jan. 5

Beginning balance ......................... 40,000
Less treasury stock (Mar. 20) ........
Plus dividend shares (July 31)* ....... ______
Outstanding shares ........................ 40,000

Apr. 5
40,000
(3,000)

July 5
40,000
(3,000)

______

______

37,000

37,000

Oct. 5
40,000
(3,000)
7,400
44,400

*(20% x 37,000)

Part 2

Cash dividend amounts
Jan. 5
Outstanding shares ...................... 40,000
Dividend per share ....................... $ 0.50
Total dividend ............................... $20,000

Apr. 5
37,000
$ 0.50
$18,500

July 5
37,000
$ 0.50
$18,500

Oct. 5
44,400
$ 0.50
$22,200

Part 3
Capitalization of retained earnings for small stock dividend
Number of shares ........................................................................
Market value per share ................................................................
Total capitalized ...........................................................................

7,400
$12
$ 88,800


Part 4
Cost per share of treasury stock
Total amount paid ........................................................................ $ 30,000
Shares purchased .......................................................................
3,000
Cost per share .............................................................................$
10
Part 5
Net income
Retained earnings, beginning balance ......................................
Less dividends: Jan. 5 ..............................................................
Apr. 5 ..............................................................
July 5 ..............................................................
July 31 .............................................................
Oct. 5 ..............................................................
Total before net income ..............................................................
Plus net income ...........................................................................
Retained earnings, ending balance ...........................................

$320,000
(20,000)
(18,500)
(18,500)
(88,800)
(22,200)
$152,000
?
$400,000


Therefore, net income = $248,000
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Problem 11-5A (40 minutes)
1. Market price = $85 per share (current stock exchange price given)
2. Computation of par values of stock
Preferred: Paid-in amount / Number of shares = $50,000 / 1,000 = $50
Common: Paid-in amount / Number of shares = $80,000 / 4,000 = $20

3. Book values with no dividends in arrears
Book value per preferred share = par value (when not callable) = $50
Common stock
Total equity ................................................ $280,000
Less equity for preferred ..........................
(50,000)
Common stock equity............................... $230,000
Number of outstanding shares ................
Book value per common share ................

4,000
$

57.50 ($230,000 / 4,000 shares)


4. Book values with two years’ dividends in arrears
Preferred stock
Preferred stock par value ........................... $ 50,000
Plus two years’ dividends in arrears* .......
5,000
Preferred equity........................................... $ 55,000
*2 years’ dividends = 2 x ($50,000 x 5%) = $5,000

Number of outstanding shares ..................

1,000

Book value per preferred share ................. $

55.00 ($55,000 / 1,000 shares)

Common stock
Total equity .................................................. $280,000
Less equity for preferred ............................
(55,000)
Common stock equity................................. $225,000
Number of outstanding shares ..................

4,000

Book value per common share .................. $

56.25 ($225,000/4,000 shares)

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Problem 11-5A (Concluded)
5. Book values with call price and two years’ dividends in arrears
Preferred stock
Preferred stock call price (1,000 x $55) .......
Plus two years’ dividends in arrears* .........
Preferred equity.............................................

$ 55,000
5,000
$ 60,000

*2 years’ dividends = 2 x ($50,000 x 5%) = $5,000

1,000

Number of outstanding shares ....................

60.00 ($60,000 / 1,000 sh.)

Book value per preferred share ...................

$


Common stock
Total equity ....................................................
Less equity for preferred ..............................
Common stock equity...................................

$280,000
(60,000)
$220,000

Number of outstanding shares ....................
Book value per common share ....................

4,000
$

55.00 ($220,000 / 4,000 sh.)

6. Dividend allocation in total
Preferred
2 years’ dividends in arrears ........... $ 5,000
Current year dividends ..................... 2,500
Remainder to common .....................
.
Totals .................................................. $ 7,500

Common
$
0
4,000
$ 4,000


Total
$ 5,000
2,500
4,000
$11,500

Dividends per share for the common stock
$4,000 / 4,000 shares = $1.00

7. Equity represents the residual interest of owners in the assets of the
business after subtracting claims of creditors. With few exceptions,
these assets and liabilities are reported at historical cost, not market
value. Therefore, the book value of common stock does not normally
match its market value. Also, the book value of common stock is
based on past transactions and events, whereas the market value takes
into account expected future earnings, growth, dividends, and other
industry and economic factors.

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PROBLEM SET B
Problem 11-1B (30 minutes)
Part 1

a. To record sale of 3,000 ($3,000/$1 per share) shares of $1 par value
common stock for $40 ($120,000/3,000) per share.
b. To record issuance of 1,000 ($1,000/$1 per share) shares of $1 par value
common stock to the company’s promoters for their efforts in
organizing the company when the market value is $40 per share.
c. To record acquisition of assets and liabilities by issuing 800 ($800/$1
per share) shares of $1 par value common stock at $50 per share and
issuing a note for $18,300.
d. To record sale of 1,200 shares of $1 par value common stock for $50
per share.
Part 2
Number of outstanding shares
Issued in (a) ..........................................
Issued in (b)..........................................
Issued in (c) ..........................................
Issued in (d)..........................................
Total ......................................................

3,000
1,000
800
1,200
6,000

Part 3
Minimum legal capital = Outstanding shares x Par value per share
= 6,000 x $1 = $6,000
Part 4
Total paid-in capital from common stockholders
From transaction (a) ............................$120,000

From transaction (b) ............................ 40,000
From transaction (c) ............................ 40,000
From transaction (d) ............................ 60,000
Total paid-in capital .............................$260,000
Part 5
Book value per common share
Total stockholders’ equity (given) .....$283,000
Outstanding shares (from 2) ..............

6,000

Book value per common share ..........$

47.17 ($283,000 / 6,000 shares)
©McGraw-Hill Companies, 2008

Solutions Manual, Chapter 11

605