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ANSWERS TO QUESTIONS - CHAPTER 11

1. The three major forms of business organizations are the


sole proprietorship, the partnership, and the corporation.

The sole proprietorship is a business owned by one


individual.

The partnership is a business that is owned by two or


more persons with the intent to make a profit.

The corporation is a legal entity that is organized


according to the laws of the state in which it is formed.
The business organization is separate from its owners.

2. The sole proprietorship is formed when an individual


decides to engage in some activity that provides goods or
services, with the intent of making a profit.

3. The partnership agreement is a legal agreement that


defines the responsibilities of each partner and specifies
the division of profits and losses. In order to form a
partnership, there must be some type of agreement. It
can simply be the agreement between parties to perform
certain duties or make certain contributions of resources
or services. While a written agreement is not required
for legal purposes, a written document reduces the
chance for a misunderstanding.

4. The phrase separate legal entity simply means that the


business organization operates separately from its
owners. The corporation is referred to as a "separate
legal entity" and conducts business with the same rights
and responsibilities as a person.

5. The articles of incorporation constitute a legal document


that is filed with the appropriate state agency requesting
the official formation of a corporation. The articles of
incorporation generally set forth the name of the
corporation, the proposed date of incorporation, the
purpose for which the corporation is formed, the

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expected life of the corporation, provisions for the capital
stock of the corporation, and the names and addresses of
the members of the Board of Directors.

6. The stock certificate is issued as evidence of ownership


in a corporation and represents a certain proportionate
share of the business ownership.

7. The stock market crash of 1929 and the subsequent


economic depression led to the passage of the Securities
and Exchange Acts of 1933 and 1934. The acts were
passed to regulate the issuance of stock and govern
exchanges of publicly traded stock. A part of this
regulation extends to the establishment of certain
accounting policies for companies listed on the stock
exchanges (publicly traded stock).

8. The corporate form of business has both advantages and


disadvantages.
Advantages:
(1) Limited liability. Owners are not held personally
responsible for the actions of the corporation. Generally,
the maximum amount an owner can lose is limited to the
amount of the investment.
(2) Continuity of existence. Corporations do not cease to
exist when an owner dies, disposes of his interest,
retires, etc.
(3) Free transferability of ownership interest. An owner
can readily sell or transfer an interest to another party
without interfering with the corporation's business.
(4) Ease of raising capital. It is generally easier to
attract many small investors rather than one or two
investors willing to invest large sums of money or assets
in one business.

Disadvantages:
(1) Regulation. Corporations are subject to considerably
more regulation, both state and federal, than are sole
proprietorships and partnerships. Corporations are
required to file separate income tax returns and public
corporations are required to comply with SEC regulations.

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(2) Double taxation. The most important disadvantage
of the corporation is double taxation. Since a corporation
is a separate legal entity, it must file and pay tax on
corporate profits. When these profits are distributed to
the owners (shareholders), these distributions are not
deductible for the corporation and are taxable income to
the shareholders.

9. The limited liability company is a relatively new


organizational form in the United States and operates
similar to a partnership in that income is taxed at the
owner level. That is, the limited liability company does
not pay tax, but the owners must pay tax on company
profits. It is similar to a corporation in that the owners
have limited personal liability similar to a corporation.
The personal assets of the owners are protected from
business creditors.

10. The term double taxation as it refers to a corporation


means that earnings are taxed at both the corporate
level and the shareholder level when earnings are
distributed in the form of dividends. For example,
assume JCL, Inc. had taxable income of $100,000 and
distributed $50,000 of the earnings to the shareholders
as dividends. The corporation would pay tax on the
$100,000 at corporate income tax rates, and the
shareholders would pay tax on the $50,000 at each
individual shareholder's income tax rate. Consequently,
$50,000 of the income from the corporation would be
taxed twice.

11. Contributed capital is the capital that is acquired by the


corporation from owners of the corporation. For
example, the sale of stock to an investor is a type of
contributed capital.
Retained earnings is the capital of a corporation that has
been generated through the earnings process of a
corporation and kept in the corporation (i.e., not
distributed to owners).

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12. For both sole proprietorships and partnerships,
contributed capital and retained earnings are combined
in one account for financial statement reporting. Capital
acquisitions are additions to the capital account of the
owners or partners; earnings of the business are
additions (losses are reductions) to the capital accounts;
and distributions to owners (withdrawals) are reductions
to the capital account. Corporations maintain separate
accounts for contributed capital and retained earnings.

13. Because corporations can be owned by millions of


individuals, they are able to pool the resources of many
individuals which permits access to billions of dollars of
capital. Proprietorships and partnerships are bound by
the financial condition of a few, private investors.

14. a. Legal capital: Par value multiplied by the


number of shares issued. This represents the
minimum amount of assets that should be
maintained as a protection for creditors.

b. Par value of stock: An arbitrary value that is


assigned to a share of stock usually at the time
of incorporation. Par value, historically, has
represented the maximum liability of the
investor.

c. Stated value of stock: An arbitrary value that is


assigned to a share of stock by the board of
directors. It has little relevance to investors or
creditors.

d. Market value of stock: The price that must be paid


to purchase a share of stock.

e. Book value of stock: The amount of equity of one


share of stock, i.e., (assets − liabilities) divided by
the number of shares of stock outstanding.

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f. Authorized stock: The number of shares that a
corporation has been authorized by the state to
issue.

g. Issued stock: Stock that has been sold to


shareholders.

h. Outstanding stock: Issued stock that is owned by


outside parties, i.e., stock that has been issued and
not repurchased by the corporation.

i. Treasury stock: Previously issued stock that has


been repurchased by the corporation.

j. Common stock: A class of stock that possesses


certain rights usually not given to other classes of
stock. These rights include the right to share in the
distribution of profits, the right to share in the
distribution of corporate assets upon liquidation, the
right to vote on certain matters that affect the
corporate charter, and the right to participate in the
selection of directors for the corporation.

k. Preferred stock: A class of stock that is given


preferential treatment over common shareholders in
some matters, usually in the distribution of earnings.
However, certain other shareholder rights may not
be present; for instance, voting rights.

l. Dividends: Distributions of corporate profits to


shareholders.

15. Cumulative preferred stock: A class of preferred stock


for which the stipulated dividend, if not paid,
accumulates from one year to the next. If a corporation
does not pay a dividend one year, the unpaid dividend
amount is carried forward and when dividends are paid,
any unpaid portion of a past dividend (called dividends
in arrears) is paid first, before any dividends may be paid
on common stock.

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Noncumulative preferred stock: A class of preferred
stock whose unpaid dividend is not carried forward to
future years. If dividends are not declared in one year,
they are lost.

16. No-par stock is stock for which a par value has not been
established by the corporation. No-par stock may have a
stated value. If so, issuance of the stock is recorded
exactly the same as par value stock.
If the stock has neither a par or stated value, the entire
market value is assigned to the capital stock account.

17. Dividend per share: $100 par x 10% = $10 per share.
The total dividends per year are $10,000 (1,000 shares x
$10). Total dividends to be paid preferred shareholders
is $30,000, the current year's dividend plus two past
years.

18. The amount credited to the common stock account is


equal to par value times the number of shares issued or
$200,000 (10,000 x $20). The amount of cash received is
$300,000 (10,000 x $30).

19. Par value and stated value are similar in meaning in that
they are arbitrary values assigned to stock. Par value is
assigned in the charter at incorporation. Stated value is
determined by the board of directors after incorporation.

20. A company will repurchase its own stock for a number of


reasons. Some of the most common reasons include: (1)
to reduce the number of shares outstanding and thus
increase the earnings per share, (2) to accumulate stock
to use for employee bonus plans, (3) to accumulate stock
to be used in a merger or acquisition, (4) to avoid a
hostile takeover, and (5) to keep the stock price high with
active trading.

21. The purchase of treasury stock decreases total equity by


debiting the cost of the treasury stock to a contra-equity
account.

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22. Even though the stock was purchased for $30 per share
and resold for $35 per share, there is no gain on the sale.
The difference in the purchase and sales price is
additional contributed capital because it is from capital
invested by stockholders. It is reported on the balance
sheet in the stockholders’ equity section as paid-in
capital. Treasury Stock is a contra asset account.

23. The declaration date is the date the dividend is officially


declared by the corporation's board of directors. The
declaration of the dividend creates a legal liability to pay
the dividend. The record date is the date that
establishes the ownership of the stock by specific
shareholders to whom the dividends will be paid.
Payment date is the date the dividend checks are actually
written and mailed to the shareholders.

24. A stock dividend may be declared to give the


shareholders some reward when the corporation does not
have other assets to distribute. The stock dividend will
give each shareholder additional shares in proportion to
their stock ownership. After the stock dividend, each
shareholder owns exactly the same proportion of the
corporation as he owned before the dividend. The effect
on the accounting equation is to transfer the amount of
the stock dividend from retained earnings to contributed
capital.

A stock split is a method used to lower the market price


of a share of stock. A stock split replaces old shares with
a proportionate number of new shares. For instance, in a
three-for-one stock split, a shareholder that owns one
share of stock would now own three shares; in addition,
the par value is proportionately reduced.

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25. A stock dividend is declared either to compensate
shareholders when cash is not available or to lower the
market price of a share of stock.

26. The primary reason for declaring a stock split is to reduce


the market value of stock by increasing the number of
shares on the market. This makes the stock more
affordable and may, therefore, increase demand for the
stock.

27. In a stock split, the number of shares are increased


according to the amount of the split and the par is
reduced proportionately. In a five-for-one split, the new
number of shares would be five times the old: 10,000 x 5
= 50,000. The par amount would be reduced to one fifth
of the original amount: $20 ÷ 5 = $4.

28. When retained earnings are appropriated, cash in the


same amount is not necessarily set aside. However,
retained earnings that are appropriated are not available
to be paid out in dividends.

29. Equity financing (i.e., capital acquired from owners) is


the largest source of financing for most U.S. businesses.

30. Equity financing refers to capital acquired from owners;


usually the term refers to issuance of stock.

Debt financing refers to borrowing in the form of notes


and bonds payable.

31. A widely held corporation is one in which the stock is held


by a large number of investors.

A closely held corporation is one in which ownership is


concentrated in the hands of a few people.

32. In deciding whether to declare dividends, the board of


directors must consider whether the corporation has
sufficient cash to cover operating requirements and meet
emergencies. The board may also wish to retain earnings

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in order to pay dividends in years when cash flows are
low. In addition, the board may restrict dividends in
order to finance future expansion of the business.

33. The price-earnings ratio is defined as:

Selling Price per Share ÷ Earnings per Share

This ratio provides insight into how analysts and


investors view the future prospects of the company. A
high price-earnings ratio indicates that investors are
optimistic about the firm’s future.

11-9
SOLUTIONS TO EXERCISES -SERIES A - CHAPTER 11

EXERCISE 11-1A

Transactions
Cash Acquired from $50,000
Owner
Revenues 25,000
Expenses 14,500
Withdrawals 1,500

Edd Simms Sole Proprietorship


Financial Statements
For the Year Ended December 31, 2005
Income Statement
Revenues $25,00
0
Expenses (14,50
0)
Net Income $10,50
0
Capital Statement
Beginning Capital Balance $
-0-
Plus: Capital Acquired from 50,000
Owner
Plus: Net Income 10,500
Less: Withdrawal by Owner (1,500)
Ending Capital Balance $59,00
0

11-10
EXERCISE 11-1A (cont.)

Edd Simms Sole Proprietorship


Financial Statements
For the Year Ended December 31, 2005
Balance Sheet
Assets
Cash $59,000
Total Assets $59,000

Liabilities $
-0-

Equity
Simms, Capital 59,000

Total Liabilities and Equity $59,000


Statement of Cash Flows
Cash Flows From Operating
Activities:
Inflow from Revenues $25,000
Outflow for Expenses (14,500)
Net Cash Flow from Operating $10,500
Activities

Cash Flows From Investing -0-


Activities

Cash Flows From Financing


Activities:
Inflow from Owner 50,000
Outflow for Owner Withdrawals (1,500)
Net Cash Flow from Financing 48,500
Activities
Net Change in Cash 59,000
Plus: Beginning Cash Balance -0-
Ending Cash Balance $59,000

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11-12
EXERCISE 11-2A

Transactions:
Cash Contributions
B. Bailey $ 40,000 35%
R. Clark 75,000 65%
Total $115,000
Revenues $ 75,000
Expenses 36,000
Bailey Withdrawal 1,000
Clark Withdrawal 3,000

BC Partnership
Financial Statements
For the Year Ended December 31, 2004
Income Statement
Revenues $75,000
Expenses (36,000
)
Net Income $39,000
Capital Statement
Beginning Capital Balance $
-0-
Plus: Capital Acquired from 115,000
Owners
Plus: Net Income 39,000
Less: Withdrawal by Owners (4,000)
Ending Capital Balance $150,00
0

11-13
EXERCISE 11-2A (cont.)

Prepared for the instructor’s use:

Analysis of Capital
Accounts:
Bailey Clark Total
Beginning Capital $ $ $
Balance -0- -0- -0-
Investments 40,000 75,000 115,000
Net Income 39,000
B. Bailey 35% 13,650
R. Clark 65% 25,350
Withdrawals (1,000) (3,000) (4,000)
Ending Capital Balances $52,65 $97,35 $150,00
0 0 0

11-14
EXERCISE 11-2A (cont.)

BC Partnership
Financial Statements
For the Year Ended December 31, 2004
Balance Sheet
Assets
Cash $150,00
0
Total Assets $150,00
0

Liabilities $ -0-

Equity
B. Bailey, Capital 52,650
R. Clark, Capital 97,350
Total Equity 150,000
Total Liabilities and Equity $150,00
0
Statement of Cash Flows
Cash Flows From Operating
Activities:
Inflow from Revenues $75,000
Outflow for Expenses (36,000)
Net Cash Flow from Operating $39,000
Activities
Cash Flows From Investing -0-
Activities

Cash Flows From Financing


Activities:
Inflow from Partners 115,000
Outflow for Partners’ (4,000)
Withdrawals
Net Cash Flow from Financing 111,000

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Activities
Net Change in Cash 150,000
Plus: Beginning Cash Balance -0-
Ending Cash Balance $150,00
0

11-16
EXERCISE 11-3A

Transactions:
Issued 2,000 shares of $10 par stock $44,000
@ $22
Revenues 46,000
Expenses 34,000
Dividends Paid 2,500

Hill Corporation
Financial Statements
For the Year Ended December 31, 2005
Income Statement
Revenues $46,000
Expenses (34,000
)
Net Income $12,000
Statement of Changes in Stockholders’ Equity
Beginning Common Stock $ -0-
Plus: Issuance of Common 44,000
Stock
Ending Common Stock $44,000
Beginning Retained Earnings -0-
Plus: Net Income 12,000
Less: Dividend Distributions (2,500)
Ending Retained Earnings 9,500
Total Stockholders’ Equity $53,500

11-17
EXERCISE 11-3A (cont.)

Hill Corporation
Financial Statements
For the Year Ended December 31, 2005
Balance Sheet
Assets
Cash $53,500
Total Assets $53,50
0
Liabilities $
-0-
Stockholders’ Equity
Common Stock, $10 par value,
2,000 shares issued and $20,000
outstanding
Paid-In Capital in Excess of Par 24,000
Total Paid-In Capital 44,000
Retained Earnings 9,500
Total Liabilities and Stockholders’ $53,50
Equity 0
Statement of Cash Flows
Cash Flows From Operating
Activities:
Inflow from Revenues $46,000
Outflow for Expenses (34,000)
Net Cash Flow from Operating $12,00
Activities 0
Cash Flows From Investing -0-
Activities
Cash Flows From Financing
Activities:
Inflow from Sale of Stock 44,000
Outflow for Dividends (2,500)

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Net Cash Flow from Financing 41,500
Activities
Net Change in Cash 53,500
Plus: Beginning Cash Balance -0-
Ending Cash Balance $53,50
0

11-19
EXERCISE 11-4A
a.
Balance Sheet Income Statement Stmt. of
E Assets = L + Stkholders’ R − E = Net Cash Flow
vent iab Equity ev. xp. Inc.
Cash = + C. + PIC
Stk. Exc.
3/1 = NA + 40,00 + 80,000 NA − NA = NA 120,000
120,00 0 FA
0
5/2 = NA + 75,00 + 255,00 NA − NA = NA 330,000 FA
330,00 0 0
0

b.
Common Stock:
8,000 shs. x $5= $ 40,000
15,000 shs. x $5= 75,000
Total $115,000

c.
Paid-In Capital in Excess
of Par
8,000 shs x ($15 − $5)= $
80,000
15,000 shs x ($22 − 255,000
$5)=
Total $335,00
0

d. Total Paid-In Capital:


Common Stock $115,000
Paid-In Capital in Excess of Par 335,000
Total $450,000

e. Total Assets: Cash $450,000

f.
General Journal
D Account Titles Debit Credit
ate

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3/1 Cash 120,000
Common Stock 40,000
Paid-In Capital in Excess of 80,000
Par
5/2 Cash 330,000
Common Stock 75,000
Paid-In Capital in Excess 255,000
of Par

11-21
EXERCISE 11-5A
a.
General Journal
Even Account Titles Debit Credit
t
1. Cash (20,000 x $9) 180,000
Common Stock, $5 par 100,000
Paid-In Capital in Excess of 80,000
Par, CS
2. Cash (5,000 x $22) 110,000
Preferred Stock, $20 stated 100,000
value
Paid-In Capital in Excess of 10,000
SV, PS
3. Cash (100,000 x $12) 1,200,00
0
Common Stock, $5 par 500,000
Paid-In Capital in Excess of 700,000
Par, CS

b.
Stockholders’ Equity:
Preferred Stock, $20 stated value, 5%
cumulative class A, 50,000 shares
authorized, 5,000 shares issued and $ 100,000
outstanding
Common Stock, $5 par value, 400,000
shares authorized, 120,000 shares issued 600,000
and outstanding
Paid-In Capital in Excess of SV, Preferred 10,000
Stock
Paid-In Capital in Excess of Par, Common 780,000
Stock
Retained Earnings -0-
Total Stockholders’ Equity $1,490,00

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0

11-23
EXERCISE 11-6A

a.
Balance Sheet Income Statement Stmt. of
Even Assets = Stockholders’ Equity Rev − E = Net Cash Flow
t xp. Inc.
Pref. No-Par PIC in
Cash = Stock + C. + Exces
Stock s

1. 50,000 = NA + 50,000 + NA NA − NA = NA 50,000 FA


2. 70,000 = 50,000 + NA + 20,00 NA − NA = NA 70,000 FA
0

b.
General Journal
Even Account Titles Debit Credit
t
1. Cash 50,000
Common Stock, No Par 50,000
2. Cash 70,000
Preferred Stock, $50 par 50,000
value
Paid-In Capital in Excess of 20,000
Par, PS

11-24
EXERCISE 11-7A

a. $36,000 ÷ 3,000 = $12 market value per share


2,000 shares x $12 market value per share of stock =
$24,000

b.
Balance Sheet Income Statement Stmt. of
Even Assets = Stockholders’ R − E = Net Cash
t Equity ev. xp. Inc. Flows
Cash + Van = C. Stk. + PIC
Exc.

1. + NA = 15,000 + 21,000 NA − NA = NA 36,000 FA


36,00
0
2. NA + = 10,000 + 14,000 NA − NA = NA NA
24,00
0

EXERCISE 11-8A
a.
Russ Corporation
General Journal
Date Account Titles Debit Credit
1. Treasury Stock (1,000 x $45) 45,000
Cash 45,000
2. Cash (700 x $55) 38,500
Treasury Stock (700 x $45) 31,500
Paid-In Capital in Excess of 7,000
Cost, TS

b.

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Treasury Stock
1. 45,000 2. 31,500
Bal. 13,500

11-26
EXERCISE 11-9A

a. & b.
Common Stock Issued Outstandin
g
Beginning Number of 650 650
Shares
Issued This Period 1,000 1,000
Repurchased as Treasury (200)
Stock
Resold Treasury Stock 50
Ending Number of Shares (b) (a) 1,500
1,650

c.
Smoot Corporation
General Journal
Date Account Titles Debit Credit
1. Cash (1,000 X $50) 50,000
Common Stock, $10 par 10,000
Paid-in Capital in Excess of Par, 40,000
CS
2. Treasury Stock (200 x $40) 8,000
Cash 8,000
3. Cash (50 x $44) 2,200
Treasury Stock (50 x $40) 2,000
Paid-In Capital in Excess of Cost, 200
TS

d.
Stockholders’ Equity
Common Stock, $10 par value,
10,000 shares authorized, 1,650
shares issued, and 1,500 shares $16,500
outstanding
Paid-In Capital in Excess of Par, 65,350
Common
Paid-In Capital in Excess of Cost, 200

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TS
Total Paid-In Capital $82,050
Retained Earnings 95,000
Less: Treasury Stock (6,000)
Total Stockholders’ Equity $171,05
0
EXERCISE 11-10A
a.
Balance Sheet Income Statement Stmt. of
Date Assets = Liab. + C. + Ret. Ear. Rev − Exp. = Net Cash Flows
Stk. Inc.
10/1 NA = 75,000 + NA + (75,000) NA − NA = NA NA
11/2 NA = NA + NA + NA NA − NA = NA NA
0
12/3 (75,000) = (75,000) + NA + NA NA − NA = NA (75,000) FA
0

b.
Med Corporation
General Journal
Date Account Titles Debit Credit
10/1/05 Dividends 75,000
Dividends Payable 75,000
11/20/0 No Entry
5
12/30/0 Dividends Payable 75,000
5
Cash 75,000
12/31/0 Retained Earnings 75,000
5
Dividends 75,000

11-28
EXERCISE 11-11A

Computation of Preferred Dividends:


Number of Total
Dividen shares Preferred
Par x Dividend = d Per x outstanding = Dividends for
% Share Year

$50 x 8% = $4 x 1,000 = $4,000

a. Dividend arrearage as of January 1, 2004: $4,000 (one


year)

b.
Dist. to
Shareholders
Amount Preferre Commo
d n
Total Dividend $20,000
Declared
2003 Arrearage (4,000) $ 4,000
2004 Preferred (4,000) 4,000
Dividends
Available for Common 12,000
Shs.
Distributed to (12,000) $12,000
Common
Total Distribution $8,000 $12,000

11-29
EXERCISE 11-12A

a.

Computation of Dividends to Be Paid:


Preferred $50 par value x 8% x 20,000 $80,000
Stock shs=
Common $1 x 200,000 shs = 200,000
Stock

Total $280,000
Dividend

b.
Date Account Titles Debit Credit
5/10/02 Dividends 280,000
Dividends Payable 280,000
5/30/02 No Entry
6/15/02 Dividends Payable 280,000
Cash 280,000
12/31/0 Retained Earnings 280,000
2
(Closing Dividends 280,000
Entry)

11-30
EXERCISE 11-13A

a. Distribution of Dividend:

Distributed to
Shareholders
Preferred Common
Total Dividend $120,00
Declared 0
Preferred Arrearage* (60,000) $ 60,000
Current Preferred (60,000) 60,000
Dividend
Available for Common -0-
Distributed to -0- $-0-
Common
Total $120,000 $-0-

*$50 x 6% x 20,000 Shares = $60,000


b.
Ming, Inc.
General Journal for 2006
Date Account Titles Debit Credit
Feb. 1 Dividends 120,000
Dividends Payable 120,000
Mar. No Entry
10
Mar. Dividends Payable 120,000
31
Cash 120,000
Closing Entry
Dec. Retained Earnings 120,000
31
Dividends 120,000

11-31
11-32
EXERCISE 11-14A

a. (20,000 shares x .04) x $35 = $28,000

b.

Balance Sheet Income Statement Stmt. of


Assets = Liab + Stockholders’ Equity Rev. − Exp. = Net Inc. Cash
Flows
C. Stock+ PIC. + Ret.
Ex. Ear.

NA = NA + 16,000 +12,000 +(28,000 NA − NA = NA NA


)

c.
General Journal
Account Title Debit Credit
Retained Earnings 28,000
Common Stock, $20 par 16,000
Paid-In Capital in Excess of 12,000
Par, CS

11-33
EXERCISE 11-15A

a. No formal entry would be made in the accounting


records. A memo entry would indicate the number of
shares had doubled and the par value had been reduced
by one-half.

b. 200,000 shares x 2 = 400,000 new shares outstanding

$10 par value ÷ 2 = $5 new par value

c. Theoretically, the market value per share would be


reduced to $80 ($160 ÷ 2) after the split. However, if this
is perceived as a good move by the company, the price
per share may increase to something over $80.

11-34
EXERCISE 11-16A

Computation of Price-Earnings Ratio:

1. Compute Earnings per Share:


Net Income ÷ Number of Common Shares Outstanding

2. Compute Price-Earnings Ratio:


Selling Price per Share ÷ Earnings per Share

a.
Frontier Corporation:
Earnings per Share (EPS):
Net Income ÷ Common Shs. = EPS
Outst.
$60,000 ÷ 15,000 = $4.00

Price/Earnings Ratio:
Selling ÷ Earnings per = P/E
Price/Share Share Ratio
$70.00 ÷ $4 = 17.50

Upton Corporation:
Earnings Per Share (EPS):
Net Income ÷ Common Shs = EPS
Outst.
$112,000 ÷ 15,000 = $7.47

Price/Earnings Ratio:
Selling ÷ Earnings per = P/E
Price/Share Share Ratio
$90.00 ÷ $7.47 = 12.05

b. Frontier Corporation appears to have greater potential


for growth. Investors are willing to pay more for today’s

11-35
earnings because they believe that tomorrow’s earnings
will be higher.

11-36
EXERCISE 11-17A (Appendix)

Not-for-profit organizations have three general purpose


external financial statements:
(1) Statement of Financial Position - reports on the
organization’s assets, liabilities, and net assets.
(2) Statement of Activities for the Period - reports on
revenues, expenses, gains and losses that increase or
decrease net assets.
(3) Statement of Cash Flows for the Period - reports the cash
inflows and outflows from operating, investing and
financing activities.

11-37
SOLUTIONS TO PROBLEMS - SERIES A - CHAPTER 11

PROBLEM 11-18A

Transactions
Cash Acquired from $300,000
Owner
Revenues 80,000
Expenses 52,000
Withdrawals 10,000

a. Sole Proprietorship
MMX Company
Financial Statements
For the Year Ended December 31, 2007
Income Statement
Revenues $80,000
Expenses (52,000)
Net Income $ 28,000
Capital Statement
Beginning Capital Balance $
-0-
Plus: Capital Acquired from 300,000
Owner
Plus: Net Income 28,000
Less: Withdrawal by Owner (10,000)
Ending Capital Balance $318,000

11-38
PROBLEM 11-18A a. (cont.)

MMX Company
Financial Statements
For the Year Ended December 31, 2007
Balance Sheet
Assets
Cash $318,00
0
Total Assets $318,00
0

Liabilities $
-0-

Equity
Mayer, Capital 318,000

Total Liabilities and Equity $318,00


0
Statement of Cash Flows
Cash Flows From Operating
Activities:
Inflow from Revenues $ 80,000
Outflow for Expenses (52,000)
Net Cash Flow from Operating $
Activities 28,000

Cash Flows From Investing -0-


Activities

Cash Flows From Financing


Activities:
Inflow from Owner 300,000
Outflow for Owner Withdrawals (10,000)
Net Cash Flow from Financing 290,000
Activities

11-39
Net Change in Cash 318,000
Plus: Beginning Cash Balance -0-
Ending Cash Balance $318,00
0

11-40
PROBLEM 11-18A (cont.)
b. Partnership
MMX Company
Financial Statements
For the Year Ended December 31, 2007
Income Statement
Revenues $80,000
Expenses (52,000
)
Net Income $28,000
Capital Statement
Beginning Capital Balance $
-0-
Plus: Capital Acquired from 300,000
Owners
Plus: Net Income 28,000
Less: Withdrawals by Owners (10,000)
Ending Capital Balance $318,00
0

Prepared for the instructor’s use:

Analysis of Capital
Accounts:
Mayer Mitchell Total
Beginning Capital $ -0- $ -0- $ -0-
Balance
Investments 200,000 100,000 300,000
Net Income* 8,400 19,600 28,000
Withdrawals (6,000) (4,000) (10,000)
Ending Capital Balances $202,400 $115,600 $318,000

*Mayer: $28,000 x 30% = $8,400


11-41
Mitchell: $28,000 x 70% = $19,600

11-42
PROBLEM 11-18A b. (cont.)

MMX Company
Financial Statements
For the Year Ended December 31, 2007
Balance Sheet
Assets
Cash $318,00
0
Total Assets $318,00
0

Liabilities $ -0-

Equity
Martin Mayer, Capital 202,400
Kay Mitchell, Capital 115,600

Total Liabilities and Equity $318,00


0
Statement of Cash Flows
Cash Flows From Operating
Activities:
Inflow from Revenues $ 80,000
Outflow for Expenses (52,000)
Net Cash Flow from Operating $
Activities 28,000

Cash Flows From Investing -0-


Activities

Cash Flows From Financing


Activities:
Inflow from Partner 300,000
Outflow for Partners’ (10,000)
Withdrawals
Net Cash Flow from Financing 290,000

11-43
Activities

Net Change in Cash 318,000


Plus: Beginning Cash Balance -0-
Ending Cash Balance $318,00
0

11-44
PROBLEM 11-18A (cont.)
c. Corporation
MMX Inc.
Financial Statements
For the Year Ended December 31, 2007
Income Statement
Revenues $80,000
Expenses (52,000)
Net Income $28,000
Statement of Changes in Stockholders’ Equity
Beginning Common Stock $ -0-
Plus: Issuance of Common 300,000
Stock
Ending Common Stock $300,00
0
Beginning Retained Earnings -0-
Plus: Net Income 28,000
Less: Dividend Distributions (10,000)
Ending Retained Earnings 18,000
Total Stockholders’ Equity $318,00
0

11-45
PROBLEM 11-18A c. (cont.)

MMX, Inc.
Financial Statements
For the Year Ended December 31, 2007
Balance Sheet
Assets
Cash $318,00
0
Total Assets $318,00
0
Liabilities $ -0-
Stockholders’ Equity
Common Stock, $10 par value,
12,000 shares issued and $120,00
outstanding 0
Paid-In Capital in Excess of Par 180,000
Total Paid-In Capital 300,000
Retained Earnings 18,000
Total Liabilities and Stockholders’ $318,00
Equity 0
Statement of Cash Flows
Cash Flows From Operating
Activities:
Inflow from Revenues $80,000
Outflow for Expenses (52,000)
Net Cash Flow from Operating $ 28,000
Activities
Cash Flows From Investing -0-
Activities
Cash Flows From Financing
Activities:
Inflow from Sale of Stock 300,000
Outflow for Dividends (10,000)

11-46
Net Cash Flow from Financing 290,000
Activities
Net Change in Cash 318,000
Plus: Beginning Cash Balance -0-
Ending Cash Balance $318,00
0

11-47
PROBLEM 11-19A
a.
General Journal
Date Account Titles Debit Credit
2003
Jan. 2 Cash (20,000 x $8) 160,000
Common Stock (20,000 x 100,000
$5)
PIC in Excess of Par, CS 60,000
Jan. Cash (4,000 x $130) 520,000
15
Preferred Stock (4,000 x 400,000
$100)
PIC in Excess of Par, PS 120,000
Feb. Cash (10,000 x $9) 90,000
14
Common Stock (10,000 x 50,000
$5)
PIC in Excess of Par, CS 40,000
Dec. Cash 270,000
31
Service Revenue 270,000
Dec. Operating Expenses 160,000
31
Cash 160,000
Dec. Dividends [4,000 x ($100 x 32,000
31 8%)]
Dividends Payable 32,000
Closing Entries
Dec. Service Revenue 270,000
31
Retained Earnings 270,000
Dec. Retained Earnings 160,000
31
Operating Expenses 160,000

11-48
Dec. Retained Earnings 32,000
31
Dividends 32,000
2004
Jan. Dividends Payable 32,000
31
Cash 32,000

11-49
PROBLEM 11-19A a. (cont.)

General Journal
Date Account Titles Debit Credit
2004
Mar. 1 Cash (2,000 x $150) 300,000
Preferred Stock, $100 par 200,000
PIC in Excess of Par, PS 100,000
June 1 Treasury Stock (Common)(400 x 4,400
$11)
Cash 4,400
Dec. Cash 250,000
31
Service Revenue 250,000
Dec. Operating Expenses 175,000
31
Cash 175,000
Dec. Dividends 53,920*
31
Dividends Payable 53,920
Closing Entries
Dec. Service Revenue 250,000
31
Retained Earnings 250,000
Dec. Retained Earnings 175,000
31
Operating Expenses 175,000
Dec. Retained Earnings 53,920
31
Dividends 53,920

*Preferred Stock: $8 x 6,000 shares = $48,000


Common Stock: $.20 x 29,600 shares = 5,920
Total Dividend $53,920
11-50
11-51
PROBLEM 11-19A (cont.)
b.
2003
Stockholders’ Equity
Preferred Stock, $100 par value, 8%
cumulative, 10,000 shares
authorized, 4,000 shares issued and $400,000
outstanding
Common Stock, $5 par value, 50,000
shares authorized, 30,000 shares
issued, and outstanding 150,000
Paid-In Capital in Excess of Par− 120,000
Preferred Stock
Paid-In Capital in Excess of Par− 100,000
Common Stock
Total Paid-In Capital 770,000
Retained Earnings 78,000
Total Stockholders’ Equity $848,00
0

11-52
PROBLEM 11-19A (cont.)
c.
Oak Corporation
Balance Sheet
As of December 31, 2004
Assets
Cash $1,218,60
0
Total Assets $1,218,60
0
Liabilities
Dividends Payable $ 53,920
Total Liabilities $ 53,920
Stockholders’ Equity
Preferred Stock, $100 par value, 8%
cumulative, 10,000 shares
authorized, 600,000
6,000 shares issued and outstanding
Common Stock, $5 par value, 50,000
shares
authorized, 30,000 shares issued, 150,000
29,600
shares outstanding
Paid-In Capital in Excess of Par− 220,000
Preferred Stk.
Paid-In Capital in Excess of Par−Common 100,000
Stk.
Total Paid-In Capital 1,070,000
Retained Earnings 99,080
Less: Treasury Stock (4,400)
Total Stockholders’ Equity 1,164,680
Total Liabilities and Stockholders’ Equity $1,218,60
0

11-53
PROBLEM 11-19A c. (cont.)

Schedule provided for use of instructor.

Schedule of Number of
Shares of Common Stock
Shares Shares
Issued Outstandin
g
2003
Jan. 2 20,000 20,000
Feb. 14 10,000 10,000
Totals 30,000 30,000
2004
June 1 (400)
Totals 30,000 29,600

Shares issued and outstanding are the same for 2003.


However, for 2004, the 400 shares of treasury stock reduce
the number of outstanding shares. In 2004, there are 30,000
shares issued but only 29,600 outstanding.

11-54
PROBLEM 11-20A
a.
General Journal
Date Account Titles Debit Credit
1. Cash (10,000 x $10) 100,000
Common Stock, $10 par 100,000
2. Cash (2,000 x $30) 60,000
Preferred Stock, $30 stated 60,000
value
3. Treasury Stock (Common 9,000
Stock)
(500 x $18)
Cash 9,000
4. Dividends ($30 x 6% x 2,000) 3,600
Dividends Payable 3,600
5. Cash (300 x $23) 6,900
Treasury Stock (300 x $18) 5,400
PIC in Excess of Cost−TS 1,500
6. Dividends Payable 3,600
Cash 3,600
7. Cash (assumed cash) 57,000
Service Revenue 57,000
Operating Expenses 36,000
Cash (assumed cash) 36,000
Closing Entries
8. Service Revenue 57,000
Retained Earnings 57,000
Retained Earnings 36,000
Operating Expenses 36,000
Retained Earnings 3,600
Dividends 3,600
9. Retained Earnings 6,000
Appropriated Retained 6,000
Earnings

11-55
PROBLEM 11-20A (cont.)
b.

Stockholders’ Equity
Preferred Stock, $30 stated value,
2,000 shares issued and outstanding $ 60,000
Common Stock, $10 par value,10,000
shares 100,000
issued, and 9,800 shares outstanding
Paid-In Capital in Excess of Cost, 1,500
Treasury Stk.
Total Paid-In Capital $161,50
0
Retained Earnings
Appropriated 6,000
Unappropriated 11,400
Total Retained Earnings 17,400
Less: Treasury Stock (200 shares) (3,600)
Total Stockholders’ Equity $175,30
0

11-56
PROBLEM 11-21A

a.

Date Account Titles Debit Credit


1. Treasury Stock (1,000 x $16) 16,000
Cash 16,000
2. Cash (300 x $20) 6,000
Treasury Stock (300 x $16) 4,800
PIC in Excess of Cost, TS 1,200
3. Cash 64,000
Service Revenue 64,000
4. Operating Expenses 38,000
Cash 38,000

b.

Stockholders’ Equity
Common Stock, $10 par value, 50,000
shares authorized, 40,000 shares $400,00
issued, and 39,300 shares outstanding 0
Paid-In Capital in Excess of Par−Common 150,000
Stock
Paid-In Capital in Excess of Cost−Treasury 1,200
Stk.
Total Paid-In Capital $551,20
0
Retained Earnings 126,000
Less: Treasury Stock (700 shares) (11,200)
Total Stockholders’ Equity $666,00
0

11-57
PROBLEM 11-22A
a.
Granger Corp.
Statements Model For 2004

Balance Sheet Income Statement Statement


of
Event Assets = Stockholders’ Equity Rev. - Exp. = Net Inc. Cash Flows
P. Stock+ C. + PIC CS +Ret. Ear.
Stock
1. 600,000 = NA +300,000+ 300,00 + NA NA − NA = NA 600,000 FA
0
2. 250,000 = 250,000 + NA + NA + NA NA − NA = NA 250,000 FA
3. (12,500) =1
NA + NA + NA + (12,500) NA − NA = NA (12,500) FA
4. NA = NA + 15,000 + 37,500 + (52,500)2 NA − NA = NA NA
5. no = NA + NA + NA + NA NA − NA = NA NA
memo entry 3

6a. 210,000 = NA + NA + NA + 210,000 210,00 − NA = 210,000 210,000 OA


0
6b. (128,000 = NA + NA + NA + (128,000 NA − 128,00 = (128,000 (128,000)
) ) 0 ) OA

Totals 919,500 = 250,000 +315,000+ 337,50 + 17,000 210,00 − 128,00 = 82,000 919,500 NC
0 0 0

1
$50 x 5% = $2.50; $2.50 x 5,000 = $12,500
2
15,000 x 5%=750 shares; 750 shares x $70 = $52,500
3
Memo: 2:1 stock split reduces common’s par to $10 and increases number of shares outstanding
to 31,500

11-58
PROBLEM 11-22A (cont.)
b.
General Journal
Date Account Titles Debit Credit
1. Cash (15,000 x $40) 600,000
Common Stock $20 par 300,000
Paid in Capital in Excess of 300,000
Par, CS
2. Cash (5,000 x $50) 250,000
Preferred Stock 250,000
3. Dividends ($50 x 5% x 5,000) 12,500
Cash 12,500
4. Retained Earnings 37,500*
Common Stock, $20 Par 15,000
Paid-in Capital in Excess of 22,500
Par, CS
5. Granger’s declaration of a two-
for-one stock split will replace
the 15,750 shares of $20
common stock with 31,500
shares of $10 common stock.
6a. Cash 210,000
Service Revenue 210,000
6b. Operating Expenses 128,000
Cash 128,000

*15,000 shares x 5% = 750 shares; 750 shares x $50 per share


= $37,500

11-59
PROBLEM 11-22A (cont.)
c.

Stockholders’ Equity
Preferred Stock, $50 par value, 5%,
5,000 $250,00
shares issued and outstanding 0
Common Stock, $10, par, 31,500 shares
issued and outstanding 315,000
Paid-In Capital in Excess of Par, Common 337,500
Stock
Total Paid-In Capital $902,50
0
Retained Earnings 17,000
Total Stockholders’ Equity $919,50
0

11-60
PROBLEM 11-23A

a. $600,000 ÷ 30,000 shares = $20 per share

b. $20 par value per share x 6% = $1.20 per share

c. $500,000 + $200,000 = $700,000;


$700,000 ÷ 50,000 shares = $14 per share

d. The market price of the common stock is $11 more than


the average issue price. There may be several reasons
why this increase in share price has occurred. One
reason is that investors anticipate above-average
performance in the future. Also, improvement in general
economic conditions can make the share price rise.

e. 1. 50,000 x 2 = 100,000 shares outstanding after the


split.
2. No amount will be transferred from retained earnings.
3. Theoretically, the market price will be $12.50 ($25 ÷ 2).

11-61
PROBLEM 11-24A

Note: The memo incorporates a schedule showing the after-


tax cash flows under each form of ownership and discusses
LLCs.

Memo
To: Owners of Bates and Associates
From: John Q CPA
Date: X/X/20XX
Re: Forms of business ownership

As requested, this memo describes the advantages and


disadvantages of the partnership versus corporate forms of
business ownership.

Advantages Disadvantages
Partnership • Ease of formation • Limited life
• Less regulation • Mutual agency
• Lower effective • Unlimited liability
tax rate
Corporation • Unlimited life • More regulation
• Limited liability • Higher effective
• Capital easier to tax rate
acquire &
ownership easily
transferred

The most important of these advantages and disadvantages


relate to taxation and owner’s liability.

11-62
PROBLEM 11-24A (cont.)

The schedule below illustrates the after-tax cash flows under


each form:

Partnership Corporation
Income before $200,000 $200,000
taxes
Tax at entity level -0- (50,000)
Net Income
distributed to 200,000 150,000
owners
Less: Individual
income tax (36%) (72,000) (54,000)
After-tax cash $128,000 $ 96,000
flow
After-tax cash $128,000 ÷ 5 = $96,000 ÷ 5 =
flow available to $25,600 $19,200
each investor
($72,000 ÷ $200,000) ($104,000 ÷
Effective tax rate =36% $200,000)
=52%

The corporate form limits the potential liability of owners.


Creditors of partnerships may lay claim to the personal assets
of the owners as payment of company debts. The
corporation, as a separate legal entity, is responsible for its
own debts. Owners risk only the amount of their investment.

Limited liability companies (LLCs) offer many of the benefits


associated with corporate ownership, yet income is taxed like
partnerships. Thus, the burden of both double taxation and
personal liability for partnership debts are avoided.

11-63
PROBLEM 11-25A
Abbot Inc.
Statements Model

Balance Sheet Income Statement Statement


of
E Asset = Liab. + S. Rev. − Exp. = Net Cash Flows
vent s Equity Inc.
1. + NA + NA NA NA + FA
2. + NA + NA NA NA + FA
3. NA NA +− NA NA NA NA
4. + NA + NA NA NA + FA
5. NA NA +− NA NA NA NA
6. − NA − NA NA NA − FA
7. NA + − NA NA NA NA
8. − − NA NA NA NA − FA
9. + NA + NA NA NA + FA
10. *NA NA NA NA NA NA NA

*No entry: memo record of change in par value and # of


shares

11-64
PROBLEM 11-26A

Note: The worksheet is provided for the use of the instructor.

Assets = Net Assets


Endowe Theatric Perm. Temp.
Event Cash d Fund Theater al = Rest. Rest. Unrest. Cash Flows
Equip.
1a. 300,000 200,000 100,000 300,000 OA
1b. 600,000 600,00 600,000 FA
0
2. (600,00 600,000 (600,000)
0) IA
3. 55,000 55,000 55,000 OA
4. (200,00 200,000 (200,00 200,000 (200,000)
0) 0) IA
5. (50,000) 50,000 (50,000) IA
6. 120,000 120,000 120,000 OA
7. (110,00 (110,00 (110,000)
0) 0) OA
8. (4,500)* (10,000) (14,500) NA
*
Bal. 115,000 600,000 195,500 40,000 = 600,00 -0- 350,500 115,000 NC
0

*Computation of Depreciation Expense:


Theater: ($200,000 − $20,000) ÷ 40 = $4,500
Equipment: ($50,000 − $-0-) ÷ 5 = $10,000

11-65
11-66
PROBLEM 11-26A (cont.)

The Little Theatre


Statement of Activities
For the Year Ended December 31, 2006
Changes in Unrestricted Net Assets
Donor Contributions $100,000
Investment Revenue 55,000
Released from Temporarily 200,000
Restricted
Ticket Revenue 120,000
Operating Expenses (110,000
)
Depreciation Expense (14,500)
Net Change in Unrestricted Net Assets $350,50
0
Changes in Temporarily Restricted -0-
Assets
Donor Contributions 200,000
Released to Purchase Theater (200,000
)
Net Change in Temporarily Restricted -0-
Assets
Changes in Permanently Restricted
Assets
Donor Contributions 600,000
Net Change in Permanently Restricted 600,000
Assets
Increase in Net Assets 950,500
Net Assets at the Beginning of the -0-
Period
Net Assets at the End of the Period $950,50
0

11-67
PROBLEM 11-26A (cont.)

The Little Theatre


Statement of Financial Position
As of the December 31, 2006
Assets
Cash $115,00
0
Endowed Investments Fund 600,000
Theater $200,000
Less: Accumulated Depreciation (4,500) 195,500
Theatrical Equipment 50,000
Less: Accumulated Depreciation (10,000) 40,000
Total Assets $950,50
0
Net Assets
Permanently Restricted Assets $600,000
Temporarily Restricted Assets -0-
Unrestricted Assets 350,500
Total Net Assets $950,50
0

11-68
PROBLEM 11-26A (cont.)

The Little Theatre


Statement of Cash Flows
For the Year Ended December 31, 2006
Cash Flows From Operating Activities:
Temporarily Restricted Donor Cont. $200,000
Unrestricted Donor Contributions 100,000
Inflow from Investment Revenue 55,000
Inflow from Ticket Revenue 120,000
Outflow for Expenses (110,000
)
Net Cash Flow from Operating $365,000
Activities
Cash Flows From Investing Activities:
Outflow to Endowed Investment (600,000
Fund )
Outflow for Purchase of Theater (200,000
)
Outflow to Purchase Theatrical (50,000)
Equip.
Net Cash Flow from Investing Activities (850,000
)
Cash Flows From Financing Activities:
Inflow from Permanently Rest. 600,000
Contribution
Net Cash Flow from Financing 600,000
Activities
Net Change in Cash 115,000
Plus: Beginning Cash Balance -0-
Ending Cash Balance $115,000

11-69
SOLUTIONS TO EXERCISES - SERIES B - CHAPTER 11

EXERCISE 11-1B

Transactions
Cash Acquired from $20,000
Owner
Revenues 14,500
Expenses 9,300
Withdrawal 500

Dan Jones Sole Proprietorship


Financial Statements
For the Year Ended December 31, 2009
Income Statement
Revenues $14,50
0
Expenses (9,300)
Net Income $
5,200
Capital Statement
Beginning Capital Balance $
-0-
Plus: Capital Acquired from 20,000
Owner
Plus: Net Income 5,200
Less: Withdrawal by Owner (500)
Ending Capital Balance $24,70
0

11-70
EXERCISE 11-1B (cont.)

Dan Jones Sole Proprietorship


Financial Statements
For the Year Ended December 31, 2009
Balance Sheet
Assets
Cash $24,700
Total Assets $24,700

Liabilities $
-0-

Equity
Jones, Capital 24,700

Total Liabilities and Equity $24,700


Statement of Cash Flows
Cash Flows From Operating
Activities:
Inflow from Revenues $14,500
Outflow for Expenses (9,300)
Net Cash Flow from Operating $ 5,200
Activities

Cash Flows From Investing -0-


Activities

Cash Flows From Financing


Activities:
Inflow from Owner 20,000
Outflow for Owner Withdrawals (500)
Net Cash Flow from Financing 19,500
Activities

Net Change in Cash 24,700


Plus: Beginning Cash Balance -0-

11-71
Ending Cash Balance $24,700

11-72
EXERCISE 11-2B

Transactions:
Cash Contributions
C. Mills $24,50 35%
0
P. Price 45,500 65%
Total $70,00
0
Revenues $15,00
0
Expenses 6,300
Mills Withdrawal 600
Price Withdrawal 1,400

M&P Partnership
Financial Statements
For the Year Ended December 31, 2009
Income Statement
Revenues $15,000
Expenses (6,300)
Net Income $ 8,700
Capital Statement
Beginning Capital Balance $
-0-
Plus: Capital Acquired from 70,000
Owners
Plus: Net Income 8,700
Less: Withdrawal by Owners (2,000)
Ending Capital Balance $76,700

11-73
EXERCISE 11-2B (cont.)

Prepared for the instructor’s use:

Analysis of Capital
Accounts:
Mills Price Total
Beginning Capital $ $ $
Balance -0- -0- -0-
Investments 24,500 45,500 70,000
Net Income 8,700
C. Mills 35% 3,045
P. Price 65% 5,655
Withdrawals (600) (1,400) (2,000)
Ending Capital Balances $26,94 $49,75 $76,70
5 5 0

11-74
EXERCISE 11-2B (cont.)

M&P Partnership
Financial Statements
For the Year Ended December 31, 2009
Balance Sheet
Assets
Cash $76,700
Total Assets $76,700

Liabilities $ -0-

Equity
C. Mills, Capital 26,945
P. Price, Capital 49,755

Total Liabilities and Equity $76,700


Statement of Cash Flows
Cash Flows From Operating
Activities:
Inflow from Revenues $15,000
Outflow for Expenses (6,300)
Net Cash Flow from Operating $ 8,700
Activities

Cash Flows From Investing -0-


Activities

Cash Flows From Financing


Activities
Inflow from Partners 70,000
Outflow for Partners’ (2,000)
Withdrawals
Net Cash Flow from Financing 68,000
Activities
Net Change in Cash 76,700
Plus: Beginning Cash Balance -0-

11-75
Ending Cash Balance $76,700

11-76
EXERCISE 11-3B

Transactions:
Issued 1,000 shares of $5 par stock $18,000
@ $18
Revenues 23,000
Expenses 17,000
Dividends Paid 1,200

Stone Corporation
Financial Statements
For the Year Ended December 31, 2009
Income Statement
Revenues $23,000
Expenses (17,000
)
Net Income $ 6,000
Statement of Changes in Stockholders’ Equity
Beginning Common Stock $ -0-
Plus: Issuance of Common 18,000
Stock
Ending Common Stock $18,000
Beginning Retained Earnings -0-
Plus: Net Income 6,000
Less: Dividend (1,200)
Ending Retained Earnings 4,800
Total Stockholders’ Equity $22,800

11-77
EXERCISE 11-3B (cont.)
Stone Corporation
Financial Statements
For the Year Ended December 31, 2009
Balance Sheet
Assets
Cash $22,800
Total Assets $22,80
0
Liabilities $
-0-
Stockholders’ Equity
Common Stock, $5 par value,
1,000 shares issued and $ 5,000
outstanding
Paid-In Capital in Excess of Par 13,000
Total Paid-In Capital 18,000
Retained Earnings 4,800
Total Liabilities and Stockholders’ $22,80
Equity 0
Statement of Cash Flows
Cash Flows From Operating
Activities:
Inflow from Revenues $23,000
Outflow for Expenses (17,000)
Net Cash Flow from Operating $
Activities 6,000
Cash Flows From Investing -0-
Activities
Cash Flows From Financing
Activities:
Inflow from Sale of Stock 18,000
Outflow for Dividends (1,200)
Net Cash Flow from Financing 16,800
Activities

11-78
Net Change in Cash 22,800
Plus: Beginning Cash Balance -0-
Ending Cash Balance $22,80
0

11-79
EXERCISE 11-4B
a.
Balance Sheet Income Statement Stmt. of
Even Assets = L + Stockholders’ Rev. − E = Net Cash Flow
t iab Equity xp. Inc.
Cash = + C. + PIC Exc.
Stk.
3/1 100,00 = NA + 50,00 + 50,000 NA − NA = NA 100,000 FA
0 0
5/2 144,00 = NA + 60,00 + 84,000 NA − NA = NA 144,000 FA
0 0

b.
Common Stock:
5,000 shs. x $10= $ 50,000
6,000 shs. x $10= 60,000
Total $110,000
c.
Paid-In Capital in Excess of
Par
5,000 shs x ($20 − $10)= $ 50,000
6,000 shs x ($24 − $10)= 84,000
Total $134,000

d. Total Contributed Capital:


Common Stock $110,000
Paid-In Capital 134,000
Total $244,000

e. Total Assets: Cash $244,000


f.
General Journal
D Account Titles Debit Credit
ate
3/1 Cash 100,00
0
Common Stock 50,000
Paid-In Capital in Excess of 50,000
Par

11-80
5/2 Cash 144,00
0
Common Stock 60,000
Paid-In Capital in Excess of 84,000
Par

11-81
EXERCISE 11-5B
a.
General Journal
Even Account Titles Debit Credit
t
1. Cash 80,000
Common Stock, $5 par 50,000
Paid-In Capital in Excess of 30,000
Par, CS
2. Cash 240,000
Preferred Stock, $50 stated 150,000
value
Paid-In Capital in Excess of 90,000
SV, PS
3. Cash 800,000
Common Stock, $5 par 400,000
Paid-In Capital in Excess of 400,000
Par, CS

b.
Stockholders’ Equity:
Preferred Stock, $50 stated value, 5%
cumulative class A, 20,000 shares
authorized, 3,000 shares issued and $
outstanding 150,000
Common Stock, $5 par value, 200,000
shares authorized, 90,000 shares issued 450,000
and outstanding
Paid-In Capital in Excess of SV, Preferred 90,000
Stock
Paid-In Capital in Excess of Par, Common 430,000
Stock
Retained Earnings -0-
Total Stockholders’ Equity $1,120,00
0

11-82
11-83
EXERCISE 11-6B

a.
Balance Sheet Income Statement Stmt. of
Even Assets = Stockholders’ Equity Rev − E = Net Cash Flow
t xp. Inc.
Pref. No-Par PIC in
Cash = Stock + C. + Exces
Stock s

1. = NA + + NA NA − NA = NA 120,000 FA
120,00 120,00
0 0
2. 80,000 = 50,000 + NA + 30,00 NA − NA = NA 80,000 FA
0

b.
General Journal
Even Account Titles Debit Credit
t
1. Cash 120,00
0
Common Stock, No Par 120,000
2. Cash 80,000
Preferred Stock, $50 par value 50,000
Paid-In Capital in Excess of 30,000
Par, PS

11-84
EXERCISE 11-7B

a. 1,000 shares x $31 market value per share of stock =


$31,000

b.
Balance Sheet Income Statement Stmt. of
E Assets = Stockholders’ Rev. − E = Net Cash
vent Equity xp. Inc. Flows
Cash + Land = C. Stk. + PIC Exc.

1. NA + 31,00 = 10,000 + 21,000 NA − NA = NA NA


0
2. 12,40 + NA = 4,000 + 8,400 NA − NA = NA 12,400 FA
0

EXERCISE 11-8B
a.
Hawk Corporation
General Journal
Date Account Titles Debit Credit
1. Treasury Stock (1,000 x $38) 38,000
Cash 38,000
2. Cash (500 x $55) 27,500
Treasury Stock (500 x $38) 19,000
Paid-In Capital in Excess of 8,500
Cost, TS

b.
Treasury Stock
1. 38,000 2. 19,000
Bal. 19,000

11-85
11-86
EXERCISE 11-9B
a. & b.
Common Stock Issued Outstandin
g
Beginning Number of 800 800
Shares
Issued This Period 2,000 2,000
Repurchased as Treasury (300)
Stock
Resold Treasury Stock 100
Ending Number of Shares (b) (a) 2,600
2,800
c.
Sneed Corporation
General Journal
Date Account Titles Debit Credit
1. Cash (2,000 X $43) 86,000
Common Stock, $10 par 20,000
Paid-in Capital in Excess of Par, 66,000
CS
2. Treasury Stock (300 x $38) 11,400
Cash 11,400
3. Cash (100 x $40) 4,000
Treasury Stock (100 x $38) 3,800
Paid-In Capital in Excess of Cost, 200
TS

d.
Stockholders’ Equity
Common Stock, $10 par value,
10,000 shares authorized, 2,800
shares issued, and 2,600 shares $28,000
outstanding
Paid-In Capital in Excess of Par, 78,000
Common
Paid-In Capital in Excess of Cost, TS 200
Total Paid-In Capital $106,20
0
11-87
Retained Earnings 75,000
Less: Treasury Stock (7,600)
Total Stockholders’ Equity $173,60
0

11-88
EXERCISE 11-10B
a.
Balance Sheet Income Statement Stmt. of
Date Assets = Liab. + C. + Ret. Ear. Rev − Exp. = Net Cash Flows
Stk. Inc.
5/1 NA = 120,000 + NA + (120,000 NA − NA = NA NA
)
5/15 NA = NA + NA + NA NA − NA = NA NA
5/31 (120,00 = (120,00 + NA + NA NA − NA = NA (120,000)F
0) 0) A

b.
Lott Corporation
General Journal
Date Account Titles Debit Credit
5/1/05 Dividends 120,000
Dividends Payable 120,000
5/15/05 No Entry
5/31/05 Dividends Payable 120,000
Cash 120,000
12/31/0 Retained Earnings 120,000
5
Dividends 120,000

11-89
EXERCISE 11-11B

Computation of Preferred Dividends


Total
Par Dividend Preferred Dividend
Value x Dividend = per Share x shares = s per
of % outstanding Year
Stock
$50 x 7% = $3.50 x 2,000 = $7,000

a. Dividend arrearage as of January 1, 2008: $7,000

b.
Dist. to
Shareholders
Amount Preferre Common
d
Total Dividend Declared $30,000
2007 Arrearage (7,000) $ 7,000
2008 Preferred (7,000) 7,000
Dividends
Available for Common 16,000
Shs.
Distributed to Common (16,000) $16,000
Total Distribution $14,000 $16,000

11-90
EXERCISE 11-12B

a.

Computation of Dividends to Be Paid:


Preferred $100 par value x 8% x 10,000 $ 80,000
Stock shs=
Common $1 x 100,000 shs = 100,000
Stock

Total $180,000
Dividend

b.
Date Account Titles Debit Credit
6/10/05 Dividends 180,000
Dividends Payable 180,000
6/20/05 No Entry
7/1/05 Dividends Payable 180,000
Cash 180,000
12/31/05 Retained Earnings 180,000
(Closing Dividends 180,000
Entry)

11-91
EXERCISE 11-13B

a. Distribution of Dividend:

Distributed to
Shareholders
Preferred Common
Total Dividend Declared $200,00
0
Preferred Arrearage* (80,000 $ 80,000
)
Current Preferred (80,000 80,000
Dividend )
Available for Common 40,000
Distributed to Common (40,000 $40,000
)
Total $160,000 $40,000

*$100 X 8% X 10,000 Shares = $80,000


b.
Varsity, Inc.
General Journal for 2004
Date Account Titles Debit Credit
Mar. 8 Dividends 200,000
Dividends Payable 200,000
Mar. No Entry
20
Mar. Dividends Payable 200,000
31
Cash 200,000
Dec. Retained Earnings 200,000
31
Dividends 200,000

11-92
11-93
EXERCISE 11-14B

a. (10,000 shares x .05) x $14 = $7,000

b.

Balance Sheet Income Statement Stmt. of


Assets = Liab + Stockholders’ Equity Rev. − Exp. = Net Inc. Cash
Flows
+ C. Stock+ PIC. + Ret.
Ex. Ear.

NA = NA + 5,000 + 2,000 + (7,000) NA − NA = NA NA

c.
General Journal
Account Title Debit Credit
Retained Earnings 7,000
Common Stock, $10 par 5,000
Paid-In Capital in Excess of Par, 2,000
CS

11-94
EXERCISE 11-15B

a. No formal entry would be made in the accounting


records. A memo entry would indicate the number of
shares had quadrupled and the par value had been
reduced by three-fourths.

b. 100,000 shares x 4 = 400,000 new shares outstanding

$20 par value ÷ 4 = $5 new par value

c. Theoretically, the market value per share would be


reduced to $60 ($240 ÷ 4) after the split. However, if this
is perceived as a good move by the company, the price
per share may decrease to something over $60.

11-95
EXERCISE 11-16B

Computation of Price-Earnings Ratio:

1. Compute Earnings per Share:


Net Income ÷ Number of Common Shares Outstanding

2. Compute Price-Earnings Ratio:


Selling Price per Share ÷ Earnings per Share

a.
Cooper Corporation:
Earnings per Share (EPS):
Net Income ÷ Common Shs. = EPS
Outst.
$80,000 ÷ 15,000 = $5.33

Price/Earnings Ratio:
Selling ÷ Earnings per = P/E
Price/Share Share Ratio
$70.00 ÷ $5.33 = 13.13

Eastman Corporation:
Earnings Per Share (EPS):
Net Income ÷ Common Shs = EPS
Outst.
$55,000 ÷ 15,000 = $3.67

Price/Earnings Ratio:
Selling ÷ Earnings per = P/E
Price/Share Share Ratio
$90.00 ÷ $3.67 = 24.52

b. Eastman Corporation appears to have greater potential


for growth. Investors are willing to pay more for today’s

11-96
earnings because they believe that tomorrow’s earnings
will be higher.

11-97
EXERCISE 11-17B

Sewon Ow is correct if the organization in question is a not-


for-profit. Donor contributions to a NFP are classified as
revenues on the statement of activities. If the contributions
are unrestricted or temporarily restricted, the amount is
included in the operating activities section of the statement
of cash flows. Permanently restricted contributions are
considered financing activities.

Mark Hayes is correct if the organization is a for-profit


business. In this case, capital acquisitions appear on the
capital statement and as a financing activity on the statement
of cash flows.

11-98
SOLUTIONS TO PROBLEMS - SERIES B - CHAPTER 11

PROBLEM 11-18B

Transactions
Cash Acquired from $40,000
Owner
Revenues 18,000
Expenses 12,500
Distributions 3,000

a. Sole Proprietorship
Calloway Co.
Financial Statements
For the Year Ended December 31, 2009
Income Statement
Service Revenues $18,000
Operating Expenses (12,500
)
Net Income $ 5,500
Capital Statement
Beginning Capital Balance $
-0-
Plus: Capital Acquired from 40,000
Owner
Plus: Net Income 5,500
Less: Withdrawal by Owner (3,000)
Ending Capital Balance $42,500

11-99
PROBLEM 11-18B a. (cont.)

Calloway Co.
Financial Statements
For the Year Ended December 31, 2009
Balance Sheet
Assets
Cash $42,500
Total Assets $42,50
0

Liabilities $
-0-

Equity
Macy Calloway, Capital 42,500

Total Liabilities and Equity $42,50


0
Statement of Cash Flows
Cash Flows From Operating
Activities:
Inflow from Revenues $18,000
Outflow for Expenses (12,500
)
Net Cash Flow from Operating $
Activities 5,500

Cash Flows From Investing -0-


Activities

Cash Flows From Financing


Activities:
Inflow from Partners 40,000
Outflow for Partners’ (3,000)
Withdrawals
Net Cash Flow from Financing 37,000

11-100
Activities

Net Change in Cash 42,500


Plus: Beginning Cash Balance -0-
Ending Cash Balance $42,50
0

11-101
PROBLEM 11-18B (cont.)
b. Partnership
Calloway Co.
Financial Statements
For the Year Ended December 31, 2009
Income Statement
Service Revenue $18,000
Operating Expenses (12,500
)
Net Income $ 5,500
Capital Statement
Beginning Capital Balance $ -0-
Plus: Capital Acquired from 40,000
Owners
Plus: Net Income 5,500
Less: Withdrawals by Owners (3,000)
Ending Capital Balance $42,500

Prepared for the instructor’s use:


Analysis of Capital
Accounts:
M. A. Total
Calloway Calloway
Beginning Capital $ -0- $ -0- $ -0-
Balance
Investments 25,000 15,000 40,000
Net Income* 2,200 3,300 5,500
Withdrawals (1,800) (1,200) (3,000)
Ending Capital Balances $25,400 $17,100 $42,500

*M. Calloway: $5,500 x 40% = $2,200


A. Calloway: $5,500 x 60% = $3,300

11-102
PROBLEM 11-18B b. (cont.)

Calloway Co.
Financial Statements
For the Year Ended December 31, 2009
Balance Sheet
Assets
Cash $42,500
Total Assets $42,500

Liabilities $
-0-

Equity
Macy Calloway, Capital 25,400
Artie Calloway, Capital 17,100

Total Liabilities and Equity $42,500


Statement of Cash Flows
Cash Flows From Operating
Activities:
Inflow from Revenues $18,000
Outflow for Expenses (12,500)
Net Cash Flow from Operating $ 5,500
Activities

Cash Flows From Investing -0-


Activities

Cash Flows From Financing


Activities:
Inflow from Partners 40,000
Outflow for Partners’ (3,000)
Withdrawals
Net Cash Flow from Financing 37,000
Activities

11-103
Net Change in Cash 42,500
Plus: Beginning Cash Balance -0-
Ending Cash Balance $42,500

11-104
PROBLEM 11-18B (cont.)
c. Corporation
Calloway Inc.
Financial Statements
For the Year Ended December 31, 2009
Income Statement
Service Revenues $18,000
Operating Expenses (12,500)
Net Income $ 5,500
Statement of Changes in Stockholders’ Equity
Beginning Common Stock $ -0-
Plus: Issuance of Common 40,000
Stock
Ending Common Stock $40,000
Beginning Retained Earnings -0-
Plus: Net Income 5,500
Less: Dividend Distributions (3,000)
Ending Retained Earnings 2,500
Total Stockholders’ Equity $42,500

11-105
PROBLEM 11-18B c. (cont.)
Calloway Inc.
Financial Statements
For the Year Ended December 31, 2009
Balance Sheet
Assets
Cash $42,500
Total Assets $42,500
Liabilities $
-0-
Stockholders’ Equity
Common Stock, $5 par value,
5,000 shares issued and $25,000
outstanding
Paid-In Capital in Excess of Par 15,000
Total Paid-In Capital 40,000
Retained Earnings 2,500
Total Liabilities and Stockholders’ $42,500
Equity
Statement of Cash Flows
Cash Flows From Operating
Activities:
Inflow from Revenues $18,000
Outflow for Expenses (12,500)
Net Cash Flow from Operating $ 5,500
Activities
Cash Flows From Investing -0-
Activities
Cash Flows From Financing
Activities:
Inflow from Sale of Stock 40,000
Outflow for Dividends (3,000)
Net Cash Flow from Financing 37,000
Activities
11-106
Net Change in Cash 42,500
Plus: Beginning Cash Balance -0-
Ending Cash Balance $42,500

11-107
PROBLEM 11-19B
a.
General Journal
Date Account Titles Debit Credit
2008
Jan. 5 Cash (10,000 x $28) 280,000
Common Stock, $10 par 100,000
PIC in Excess of Par−CS 180,000

Jan. Cash (1,000 x $70) 70,000


12
Preferred Stock, $50 par 50,000
PIC in Excess of Par−PS 20,000

Apr. 5 Cash (40,000 x $40) 1,600,000


Common Stock, $10 Par 400,000
PIC in Excess of Par−CS 1,200,000

Dec. Cash 170,000


31
Service Revenue 170,000
Dec. Operating Expenses 110,000
31
Cash 110,000
Dec. Dividends ($50 x 6% x 1,000 3,000
31 shs.)
Dividends Payable 3,000
Closing Entries
Dec. Service Revenue 170,000
31
Retained Earnings 170,000
Dec. Retained Earnings 110,000
31
Operating Expenses 110,000
Dec. Retained Earnings 3,000
31
Dividends 3,000
11-108
2009
Feb. Dividends Payable 3,000
15
Cash 3,000

11-109
PROBLEM 11-19B a. (cont.)

General Journal
Date Account Titles Debit Credit
2009
Mar. 3 Cash (10,000 x $78) 780,000
Preferred Stock, $50 par 500,000
PIC in Excess of Par−PS 280,000

May 5 Treasury Stock (Common) (500 x 21,500


$43)
Cash 21,500
Dec. Cash 210,000
31
Service Revenue 210,000
Dec. Operating Expenses 140,000
31
Cash 140,000
Dec. Dividends 62,700*
31
Dividends Payable 62,700
Closing Entries
Dec. Service Revenue 210,000
31
Retained Earnings 210,000
Dec. Retained Earnings 140,000
31
Operating Expenses 140,000
Dec. Retained Earnings 62,700
31
Dividends 62,700

*Preferred Stock: $3 x 11,000 shares = $33,000


Common Stock: $.60 x 49,500 shares = 29,700

11-110
Total Dividend $62,700

11-111
PROBLEM 11-19B (cont.)
b.
Hamby Corporation
Balance Sheet
As of December 31, 2008
Assets
Cash $2,010,00
0
Total Assets $2,010,00
0
Liabilities
Dividends Payable $
3,000
Total Liabilities $
3,000
Stockholders’ Equity
Preferred Stock, $50 par value, 6%
cumulative, 50,000 shares authorized,
1,000 shares issued and outstanding 50,000
Common Stock, $10 par value, 100,000
shares
authorized, 50,000 shares issued and 500,000
outstanding
Paid-In Capital in Excess of Par− 20,000
Preferred Stock
Paid-In Capital in Excess of Par− 1,380,000
Common Stock
Total Paid-In Capital 1,950,000
Retained Earnings 57,000
Total Stockholders’ Equity 2,007,000
Total Liabilities and Stockholders’ $2,010,00
Equity 0

11-112
PROBLEM 11-19B b. (cont.)

Hamby Corporation
Balance Sheet
As of December 31, 2009
Assets
Cash $2,835,50
0
Total Assets $2,835,50
0
Liabilities
Dividends Payable $
62,700
Total Liabilities $
62,700
Stockholders’ Equity
Preferred Stock, $50 par value, 6%
cumulative, 50,000 shares
authorized, 11,000 shares issued and 550,000
outstanding
Common Stock, $10 par value, 100,000
shares
authorized, 50,000 shares issued, 500,000
49,500
shares outstanding
Paid-In Capital in Excess of Par− 300,000
Preferred Stk.
Paid-In Capital in Excess of Par− 1,380,000
Common Stk.
Total Paid-In Capital 2,730,000
Retained Earnings 64,300
Less: Treasury Stock (21,500)
Total Stockholders’ Equity 2,772,800
Total Liabilities and Stockholders’ $2,835,50
Equity 0

11-113
PROBLEM 11-19B (cont.)
c.
Schedule of Number of
Shares of Common Stock
Shares Shares
Issued Outstandin
g
2008
Jan. 5 10,000 10,000
Apr. 5 40,000 40,000
Totals 50,000 50,000
2009
May 5 (500)
Totals 50,000 49,500

Shares issued and outstanding are the same for 2008.


However, for 2009, the 500 shares of treasury stock reduce
the number of outstanding shares. In 2009, there are 50,000
shares issued but only 49,500 outstanding.

11-114
PROBLEM 11-20B
a.
General Journal
D Account Titles Debit Credit
ate
1. Cash (20,000 x $5) 100,000
Common Stock, $5 par 100,000
2. Cash (1,000 x $20) 20,000
Preferred Stock, $20 stated value 20,000
3. Treasury Stock (Common Stock) (1,000 7,000
x $7)
Cash 7,000
4. Dividends 1,500
Dividends Payable 1,500
5. Cash 5,000
Treasury Stock (500 x $7) 3,500
PIC in Excess of Cost−TS 1,500
6. Dividends Payable 1,500
Cash 1,500
7. Cash 54,000
Service Revenue 54,000
Operating Expenses 32,000
Cash 32,000
Closing Entries
8. Service Revenue 54,000
Retained Earnings 54,000
Retained Earnings 32,000
Operating Expenses 32,000
Retained Earnings 1,500
Dividends 1,500
9. Retained Earnings 5,000
Appropriated Retained Earnings 5,000

11-115
PROBLEM 11-20B (cont.)
b.

One Co.
Balance Sheet
As of December 31, 2009
Assets
Cash $138,50
0
Total Assets $138,500
Liabilities $ -0-
Stockholders’ Equity
Preferred Stock, $20 stated value, 1,000
shares issued and outstanding $ 20,000
Common Stock, $5 par value, 20,000
shares 100,000
issued and 19,500 shares
outstanding
Paid-In Capital in Excess of Cost− 1,500
Treasury Stock
Total Paid-In Capital 121,500
Retained Earnings
Appropriated 5,000
Unappropriated 15,500
Total Retained Earnings 20,500
Less: Treasury Stock (500 shares) (3,500)
Total Stockholders’ Equity 138,500
Total Liabilities and Stockholders’ Equity $138,50
0

11-116
PROBLEM 11-21B

a. $2,100,000 ÷ 200,000 shares =$10.50 per share

b. $22,500 ÷ $15 per share = 1,500 shares

c. $12,000 ÷ $15 per share = 800 shares

d.
Outstanding
Shares
Prior to Event 2 200,000
Less: Treasury Stock (1,500)
(Event 2)
Total After Event 2 198,500
Plus: Treasury Stock
Reissued 800
(Event 3)
Total After Event 3 199,300

11-117
PROBLEM 11-22B
a.
Deaton Co.
Statements Model For 2006

Balance Sheet Income Statement Stmt. of


Event Assets = Liab + Stockholders’ Equity Rev. − Exp. = Net Inc. Cash Flows
.
P. + C. + Ret. Ear.
Stock Stock
1. 200,000 = NA + NA + 200,00 + NA NA − NA = NA 200,000 FA
0
2. 100,000 = NA + 100,00 + NA + NA NA − NA = NA 100,000 FA
0
3. (6,000) = NA + NA + NA + (6,000) NA − NA = NA (6,000) FA
4.* NA = NA + NA + 30,000 + (30,000) NA − NA = NA NA
5. NA = NA + NA + NA + NA NA − NA = NA NA
memo
6a. 145,000 = NA + NA + NA + 145,000 145,00 − NA = 145,000 145,000 OA
0
6b. (97,000) = NA + NA + NA + (97,000) NA − 97,000 = (97,000) (97,000) OA
Totals 342,000 = NA + 100,00 + 230,00 + 12,000 145,00 − 97,000 = 48,000 342,000 NC
0 0 0

*20,000 shares x 10% = 2,000 shares; 2,000 shares x $15 = $30,000

11-118
PROBLEM 11-22B (cont.)
b.
General Journal
Date Account Titles Debit Credit
1. Cash (20,000 x $10) 200,000
Common Stock, No Par 200,000
2. Cash (5,000 x $20) 100,000
Preferred Stock, $20 Par 100,000
3. Dividends 6,000
Cash 6,000
4. Retained Earnings 30,000*
Common Stock, No Par 30,000
5. Deaton’s declaration of a
two-for-one stock split will
replace the 22,000 of no-par
common stock with 44,000
shares of no-par common
stock.
6. Cash 145,000
Service Revenue 145,000
7. Operating Expenses 97,000
Cash 97,000
Closing Entries
8. Service Revenue 145,000
Retained Earnings 145,000
9. Retained Earnings 97,000
Operating Expenses 97,000
10. Retained Earnings 6,000
Dividends 6,000
*20,000 shares x 10% = 2,000 shares; 2,000 shares x $15
per share = $30,000

11-119
PROBLEM 11-22B (cont.)
c.

Stockholders’ Equity
Preferred Stock, $20 par value, 6%,
5,000 shares issued and outstanding $100,00
0
Common Stock, no par value, 44,000
shares issued and outstanding 230,000
Total Paid-In Capital $330,00
0
Retained Earnings 12,000
Total Stockholders’ Equity $342,00
0

d. Theoretically, the market value after the split will be


reduced to $17.50 per share, one-half the value of the
shares before the 2-for-1 split. In reality, this may not
be the exact result because of other market factors.

11-120
PROBLEM 11-23B

a. $250,000 ÷ 5,000 shares = $50 per share

b. $50 par value per share x 8% = $4 per share

c. $2,000,000 + $500,000 = $2,500,000;


$2,500,000 ÷ 100,000 shares = $25 per share

d. The par value of the preferred sock is $50 per share.


This is a value that is assigned to the stock when the
corporation was formed or in a later request for an
addition stock issue. This value is usually unrelated
to the market value. However, with preferred stock
the market value and the par value are more closely
aligned. The difference between market value and
par value of preferred stock is usually driven by the
difference between current interest rates and the
amount of dividend the stock is paying.

e. 1. 100,000 x 3 = 300,000 shares outstanding after the


split.
2. No amount will be transferred from retained
earnings.
3. Theoretically, the market price will be $12 ($36 ÷
3).

11-121
PROBLEM 11-24B

Note: This exercise can be used to assess writing skills. If


a more comprehensive answer is desired, this exercise can
be assigned as a short research project.

Under common law, partners in a partnership have joint


liability. This means that any and all partners are
responsible for the debts of a partnership. This puts the
personal assets of all of the partners at risk. Any partner
can bind a partnership to a business agreement. In this
case, all of the personal assets of Salvy are at risk. Even
though he did not personally order the shipment, as a
partner in the partnership, he is liable for partnership
debts.

One of the primary advantages of the corporate form of


organization is limited liability. Since a corporation is a
separate legal entity, the assets of the owners are
separate from that of the business. If this had been a
corporation, only the investment that Salvy had made in
the business would be lost. He would not be held
personally liable for debts and claims of the business.

11-122
PROBLEM 11-25B

Baskin Inc.
Statements Model

Balance Sheet Income Statement Stmt. of


Even Asset = Liab + S. Rev. − Exp. = Net Cash
t s . Equity Inc. Flows
1. + NA + NA NA NA + FA
2. − NA − NA NA NA − FA
3. NA + − NA NA NA NA
4. + NA + NA NA NA + FA
5. + NA + NA NA NA + FA
6. NA NA +− NA NA NA NA
7. + NA + NA NA NA + FA
8. NA NA +− NA NA NA NA
9. NA NA NA NA NA NA NA
10. − − NA NA NA NA − FA

11-123
PROBLEM 11-26B
a.

MCPL
Financial Statements
For the Year Ended December 31, 2009
Income Statement
Revenue $120,000
Expenses (105,000)
Net Income $ 15,000
Balance Sheet
Assets
Cash $ 90,000
Facilities and Equipment $450,000
Less: Accumulated Depreciation (25,000) 425,000
Total Assets $515,000
Liabilities $ -0-
Stockholders’ Equity
Common Stock $500,000
Retained Earnings 15,000
Total Stockholders’ Equity 515,000
Total Liabilities and Stockholders’ $515,000
Equity

11-124
PROBLEM 11-26B a. (cont.)

MCPL
Statement of Cash Flows
For the Year Ended December 31, 2009
Cash Flows From Operating Activities:
Inflow from Revenue $120,000
Outflow for Expenses (80,000)
Net Cash Flow from Operating $ 40,000
Activities
Cash Flows From Investing Activities:
Outflow for Facilities Equipment (450,000
)
Net Cash Flow from Investing Activities (450,000
)
Cash Flows From Financing Activities:
Inflow from the Sale of Stock 500,000
Net Cash Flow from Financing 500,000
Activities
Net Change in Cash 90,000
Plus: Beginning Cash Balance -0-
Ending Cash Balance $ 90,000

b.
Worksheet provided for instructor’s use:

Assets = Net Assets


Fac. & Perm Temp
Even Cash Equip. = . . Unrest. Cash Flows
t Rest. Rest.
1, 500,000 500,000 500,000 OA
2. (450,00 450,00 (450,000)IA
0) 0
3. 120,000 120,000 120,000 OA

11-125
4. (80,000) (80,000) (80,000) OA
5. (25,00 (25,000) NA
0)
Tot. 90,000 425,00 = -0- -0- 515,000 90,000 NC
0

11-126
PROBLEM 11-26B b. (cont.)

MCPL
Financial Statements
For the Year Ended December 31, 2009
Statement of Activities
Changes in Unrestricted Net Assets
Donor Contributions $500,000
Revenues 120,000
Expenses (80,000)
Depreciation Expense (25,000)
Net Change in Unrestricted Net Assets $515,00
0
Changes in Temporarily Restricted -0-
Assets
Changes in Permanently Restricted -0-
Assets
Increase in Net Assets 515,000
Net Assets at the Beginning of the -0-
Year
Net Assets at the End of the Year $515,00
0
Statement of Financial Position
Assets
Cash $
90,000
Facilities and Equipment $450,000
Less, Accumulated Depreciation (25,000) 425,000
Total Assets $515,00
0
Net Assets
Permanently Restricted Assets $ 0-
Temporarily Restricted Assets -0-

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Unrestricted Assets 515,000
Total Net Assets $515,00
0

11-128
PROBLEM 11-26B b. (cont.)

MCPL
Statement of Cash Flows
For the Year Ended December 31, 2009
Cash Flows From Operating Activities:
Unrestricted Donor Contributions $500,000
Inflow from Revenues 120,000
Outflow for Expenses (80,000)
Net Cash Flow from Operating $540,000
Activities
Cash Flows From Investing Activities:
Outflow for Facilities Equipment (450,000
)
Net Cash Flow from Investing Activities (450,000
)
Cash Flows From Financing Activities -0-
Net Change in Cash 90,000
Plus: Beginning Cash Balance -0-
Ending Cash Balance $ 90,000

11-129
ATC 11-1

Financial Statement Analysis

a. Yes, $.01 per share. See the balance sheet, page 27.

b. 2,601 million shares (See the balance sheet).

c. No. (See the Statement of Cash Flows)

d. The number of shares outstanding increased because of employee stock


options that were exercised.

e. The NASDAQ (See page 1 of the 10-K, in the last paragraph of the “General”
section).

11-130
ATC 11-2

b. Wendy’s stated value per share:


$12,074 ÷ 136,188 = .089 per share

Coca-Cola par value per share:


$870,000,000 ÷ 3,481,882,834= .25 per share

Harley Davidson par value per share:


$3,210,000 ÷ 321,185,567 = .010 per share

c. Wendy’s average issue price of common stock:


2000: $435,218 ÷ 136,188 = $3.20
1999: $410,521 ÷ 134,856 = $3.04

Coca-Cola’s average issue price of common stock:


2000: $4,066 ÷ 3,482 = $1.17
1999: $3,445 ÷ 3,466 = $.99

Harley Davidson’s average issue price of common stock:


2000 : $288,600 ÷ 321,186 = $.90
1999: $238,132 ÷ 318,586 = $.75

d. Wendy’s stock outstanding at end of year:


2000: 136,188,000 − 21,978,000 = 114,210,000
1999: 134,856,000 − 16,626,000 = 118,230,000

Coca-Cola’s stock outstanding at end of year:


2000: 3,481,882,834 − 997,121,427 = 2,484,761,407
1999: 3,466,371,904 − 994,796,786 = 2,471,575,118

Harley Davidson’s stock outstanding at end of year:


2000: 321,185,567 − 19,114,822 = 302,070,745
1999: 318,586,144 − 15,863,518 = 302,722,626

11-131
ATC 11-2 (cont.)

e. Wendy’s average cost per share of treasury stock:


2000: $492,957,000 ÷ 21,978,000 = $22.43
1999: $399,522,000 ÷ 16,626,000 = 24.03

Coca-Cola’s average cost per share of treasury stock:


2000: $13,293,000,000 ÷ 997,121,427 = $13.33
1999: $13,160,000,000 ÷ 994,796,786 = $13.23

Harley Davidson’s average cost per share of treasury stock:


2000: $313,994,000 ÷ 19,114,822 = $16.43
1999: $187,992,000 ÷ 15,863,518 = $11.85

f. All three of the companies appeared to be profitable because retained


earnings increased from 1999 to 2000.

g. You can determine the amount of increase in retained earnings, which


would be caused by profit, but net income cannot be determined because
the dividends paid are not given and the payment of dividends will
decrease retained earnings.
h.
Wendy’s
(in thousands)

Stockholders’ Equity 2000 1999


Common Stock $ 12,074 $ 11,941
Capital in Excess of Stated Value 423,144 398,580
Total Paid-in Capital 435,218 410,521

Retained Earnings 1,211,015 1,068,883

Other Adjustments (27,133) (14,443)


Treasury Stock (492,957) (399,522)
Total Stockholders’ Equity $1,126,143 $1,065,439

11-132
ATC 11-2 h. (cont.)

Cola-Cola
(in millions)

Stockholders’ Equity 2000 1999


Common Stock $ 870 $ 861
Capital Surplus 3,196 2,584
Total Paid-in Capital 4,066 3,445

Retained Earnings 21,265 20,773

Other Adjustments (2,722) (1,551)


Treasury Stock (13,293) (13,160)
Total Stockholders’ Equity $ 9,316 $ 9,507

Harley Davidson
(in thousands)

Stockholders’ Equity 2000 1999


Common Stock $ 3,210 $ 3,184
Additional Paid-in Capital 285,390 234,948
Total Paid-in Capital 288,600 238,132

Retained Earnings 1,431,017 1,113,376

Other Adjustments 308 (2,067)


Treasury Stock (313,994) (187,992)
Unearned Compensation (276) (369)
Total Stockholders’ Equity $1,405,655 $1,161,080

11-133
ATC 11-3
Thinking About the Numbers -- Computing the P/E Ratios for Four Companies
a.
Adjusted for
Company As Reported Stock Compensation
Sears
Stock price $42.89 $42.89
EPS $3.89 = 11.0 times $3.77 = 11.4 times

Target
Stock price $35.59 $35.59
EPS $1.40 = 25.4 times $1.39 = 25.6 times

Cisco
Stock price $19.22 $19.22
EPS $.39 = 49.3 times $.22 = 87.4 times

Oracle
Stock price $19.58 $19.58
EPS $2.22 = 8.8 times $2.02 = 9.7 times

b. Two general conclusions may be reached based on the analysis of these


four companies. First, investors are very optimistic about the growth
potential of Cisco.
The second conclusion is that technology companies pay their executives
a lot more in stock options than do retail companies. Stock compensation
costs caused the EPS of the two retail companies to decline an average of
2%, while the EPS of the technology companies decreased an average of
14% as a result of stock options.

11-134
ATC 11-4

Only the stock market on which each company is listed is


provided below. The closing price and P/E ratio will
obviously change depending on the date this problem is
assigned.

The NASDAQ is technically not a stock exchange, but an


electronic over-the-counter system. However, many
business persons think of it as a stock exchange
nonetheless, so it is referred to as such here.

Stock Closin P/E


Company Symb Exchang g Ratio
ol e Price
Berkshire BRKA NYSE
Hathaway
Intel INTC NASDAQ
Iomega IOM NYSE
Yahoo YHOO NASDAQ
Xerox XRX NYSE

11-135
ATC 11-5

Computation of Price Earnings Ratio:

1. Compute Earnings per Share:


Net Income ÷ Number of Common Shares Outstanding

2. Compute Price Earnings Ratio:


Selling Price per Share ÷ Earnings per Share

a.
Geolock Corporation:
Earnings per Share (EPS):
Net Income ÷ Common Shs. = EPS
Outst.
$8,000 ÷ 2,000 = $4.00

Price/Earnings Ratio:
Selling ÷ Earnings per = P/E
Price/Share Share Ratio
$48.00 ÷ $4.00 = 12.00

Minerals Corporation:
Earnings Per Share (EPS):
Net Income ÷ Common Shs = EPS
Outst.
$9,400 ÷ 2,000 = 4.70

Price/Earnings Ratio:
Selling ÷ Earnings per = P/E
Price/Share Share Ratio
$94.00 ÷ $4.70 = 20.00

b. Minerals Corporation appears to have greater potential


for growth. Investors are willing to pay more for today’s

11-136
earnings because they believe that tomorrow’s earnings
will be higher.

11-137
ATC 11-6

Note to Instructor: The factors given below are only selected


factors and not meant to be all inclusive.

MEMO

TO: Jim and Scott

FROM:

The advantages and disadvantages of the partnership and the


corporate forms of business organizations are shown below.

Partnership:
Advantages: Easy to form;
Not subject to many of the federal and state
regulations imposed on corporations;
Partners may act on behalf of the business
without approval from stockholders.
Disadvantages: Limited life;
Mutual agency, each partner is an agent of
the partnership and can bind the
partnership to a contract;
Unlimited liability.

Corporation:
Advantages: Separate legal entity, thus owner’s liability
is limited to investment;
Continuity of life; i.e., the corporation does
not dissolve at the death, etc. of owners;
Ownership is easily transferred;
Easy access to capital funds.
Disadvantages: Government regulation;
Double taxation.

Based on above information, I would recommend that the


business be formed as a _____________________.

11-138
ATC 11-7

a.
1. Converting to an accelerated method would increase expense on the income
statement thereby decreasing net income and the stockholders’ equity section
(i.e., retained earnings) of the balance sheet. It would also reduce assets since
the additional expense would increase accumulated depreciation thereby
reducing the book value of long-term operational assets.

2. Increasing the receivables expected to be uncollectible would increase the


amount of bad debt expense on the income statement with the resultant effect of
reducing net income, and thereby stockholders’ equity (i.e., retained earnings),
on the balance sheet. Further, it would reduce assets by reducing the value of
receivables (increase the ending balance in the contra asset allowance for
doubtful accounts).

3. Increasing the percentage of estimated warranty claims would increase warranty


expense in the current period. This action would reduce net income and
stockholders’ equity (i.e., retained earnings) on the balance sheet. Other
balance sheet accounts affected would be warranties payable, which would
increase liabilities for the period.

b. Stinson’s actions would cause an increase in stockholders’ equity in


subsequent accounting periods. If inventory were written down in the current
period, future periods would show less product costs (costs of goods sold in
the future period when the inventory is sold would be less). The other three
strategies would result in lower expenses and higher profits in subsequent
periods with the resultant effect of increasing stockholders’ equity. However,
the overall value of the firm would not be as high as it would have been because
10% of the second period’s earnings would be transferred to management
through the bonus system.

11-139
ATC
11-7 (cont)

c. The managers of a company are hired to make decisions that are in the best
interest of the stockholders (the owners of the company). They should make
decisions that increase the value of stockholders’ equity, not decisions that
increase their own personal worth. Increases in management’s compensation
should be the result of increasing the profitability of the company. Stinson is
considering manipulating accounting procedures to maximize management’s
wealth (increase management bonuses). Since corporate profits were down,
these bonuses are undeserved. Higher bonuses will decrease assets and
retained earnings. Financial reports are one means to evaluate management on
their ability to earn returns for the stockholders. Knowledgeable investors will
be aware of the cash effects of Stinson’s decisions and could devalue the price
of the company’s stock, resulting in future wealth declines. For these reasons,
Stinson’s strategies are unethical. She is not doing her job, which is to look
after the stockholders’ interest.

d. If bonuses were tied to stock prices, management would be motivated to make


decisions that maximize the company’s value. Actions that increase the value of
the firm would be reflected in the price of the stock. Accordingly, there would be
goal congruence (i.e., maximization of the value of the firm) between the interest
of the owners (i.e., investors) and the managers’ personal interest.

e. Since the company is expected to report a loss, the price earnings ratio cannot
be computed. Accordingly, Stinson’s strategy would not affect the price-
earnings ratio.

11-140
ATC 11-8 Using the EDGAR Database

NOTE: This solution was accurate as of January 4, 2002. However, the EDGAR
database is subject to update at any time, so this solution will likely be
“dated” at the time you assign this case to your students.

These data are from the December 30, 2000 financial statements and dollar
amounts are in millions.

a. As of December 30, 2000, PepsiCo’s total shareholders’ equity was $7,249.

b. The par value of common stock is 1.67 cents per share.

c. As of December 30, 2000 PepsiCo held approximately 280 million shares of


treasury stock.

d. There are several reasons a company’s stock can have a higher market value than
its book value. These include:
1. The fair market value of its assets, such as land, are higher than the assets’
historical cost or book value.
2. The “market” believes the company has goodwill that is not recorded on the
company’s balance sheet due to the GAAP rules regarding when goodwill
may be recorded.
3. The “market” believes the company has potential future earnings power that
is not reflected on its balance sheet under GAAP rules. For example, this
might occur if the company has been granted a new patent that is expected
to have great revenue potential, yet most of the cost the company incurred to
develop the patent was “expensed” as R&D in prior years.

11-141