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ACC1002X Financial Accounting

Semester 2 of Academic Year 2015-2016
SOLUTIONS to Optional Questions
CHAPTER 10: 10-43, 10-55, 10-58, 10-63

10-43 Dollar amounts (except per share amount) are in thousands.
Rate of return on common equity
=

(Net income – Preferred dividends)
Average of (Total stockholders’ equity – Liquidating value of preferred stock)

= ($2,400 – $400) ÷ ½ × [($18,400 – $4,400) + ($20,000 – $4,400)]
= $2,000 ÷ ½ × ($14,000 + $15,600) = $2,000 ÷ $14,800 = 13.5%
Earnings per share of common stock
= (Net income – Preferred dividends) ÷ Average number of shares outstanding
= $2,000 ÷ 4,000 = $.50
Price-earnings ratio
= Market price per share of common stock ÷ Earnings per share of common stock
= $11.00 ÷ $.50 = 22
Dividend-payout ratio
= Common dividends per share ÷ Common earnings per share
= $.20 ÷ $.50 = 40%
Dividend-yield ratio
= Common dividends per share ÷ Market price per share of common stock
= $.20 ÷ $11.00 = 1.8%

Book value per share of common stock
= (Stockholders’ equity – Liquidating value of preferred stock)
Number of common shares outstanding
= ($20,000 – $4,400) ÷ 4,000 = $3.90

Note that the book value is lower than the market value. This is typical. The shareholders are
paying for earning power rather than for assets.

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000 $7.800 Changes – 200 @ $1 par + 400 @ $. the underlying stockholder records will be changed to indicate the number of shares held by each shareholder.10-55 Dollar amounts are in millions. Cash Cr.800 $7. Common stock 200 Cr.800 5. necessitating a transfer from Retained Earnings to Common stock of the par value of the additional shares issued.600 2. Retained earnings 200 Cr.800 Cr.800 5. Cash 2. 2.800 5. 200 million shares @ $1 par Additional paid-in capital Total paid-in capital Retained earnings $ 200 Stockholders’ equity $7. Dr.800 There is no effect on the reported amount of the total stockholders’ equity.600 3. Common stock 200 To record stock split in the form of a 100% stock dividend.600 To record the issuance of 200 million shares of $1 par value common stock for an average price of $14 per share. Page 2 of 5 . Paid-in capital. Before 100% Stock Dividend Common stock.800 2. An alternate journal entry follows: Dr. 200 million × $1 = $200 million.000 4.000 $7. 1. common stock 2. 200 million shares @ $1 par Additional paid-in capital Total paid-in capital Retained earnings Stockholders’ equity $ 200 2.600 2.600 2. Additional paid-in capital 2.800 The journal entry would be: Dr.800 2. Although no formal journal entry is required.000 Changes + (200 @ $1) = 200 – 200 par value of “dividend” After 100% Stock Dividend $ 400 2.50 par After 2-for-1 Split $ 200 2.800 Before 2-for-1 Split Common stock. 3.

The financial crisis in 2008–2009 lead to a break in the prior pattern of consistent dividend increases.488 to shareholders by purchasing its own shares and returned $4.697 *X = $36. Because GE had been making large share repurchases.000 shares at a cost of $14 each. Investment in common stock of AT&T 14.00 each instead of 1.3 27.000 shares of an original issue of AT&T common stock at $14 per share. paying dividends and buying back shares of stock.4. Number of treasury shares purchased.1 3. Cash 14. A memorandum would be made to show that 2.508 X = $3. 10-58 Dollar amounts (except per share amounts) and numbers of shares are in millions. In 2008 these numbers were $1.707 ÷ $25 Total increase in number of treasure shares 175.508 ÷ $20 Number of treasury shares disposed of. treasury shares Purchases of treasury shares Dispositions of treasury shares Ending balance. General Electric returned $7. The use of share repurchases increased flexibility in dividend distributions as conditions worsened. There are two main ways to return money to shareholders. In 1999.697 = $3.508 respectively.707 2.000 Cr.896 + $3. 1.4 148. $3. for example. when the recession began.000 shares are now held at a cost of $7.508 – $36. Changes in dividends are important signals to the financial markets and reductions are interpreted by the financial markets as statements about the long term ability to generate steady or increasing cash flow. $3.649 and $3. The stock split at 2 for 1 (or if received as a 100% “dividend”) would call for no journal entry.000 To record investment in 1. Page 3 of 5 . they did not have to slash dividend payments as much as they would have if all distributions to shareholders had been via dividends.707* $36. Beginning balance. treasury shares $36. Note that GE has shifted cash distributions to shareholders to be more dividend based and less repurchase based. General Electric has historically used both.896 3. (Amounts not in millions) Dr.786 by paying cash dividends.

000.000.000. Dr. Cost was R40 per share. Additional Paid-in Capital is sometimes divided into several separate accounts that identify different sources of capital.000. 100.000 To record sale of treasury stock.000. Cost was R40 per share. 2.000.000 R54.000 Outstanding Shares R 6. Dr.000 Because of Outstanding Treasury Shares Stock Common stock.000 Total paid-in capital R40.000 shares @ R30. Treasury stock 4.000 shares of common stock @ R40 (to be held as treasury stock).000.000 The journal entry would be: Dr.000 4.000 34.000 Total R58.000.000. Treasury stock 4. Cash 4.000 To record sale of treasury stock.000 shares @ R50. for example: Additional paid-in capital–preferred stock Additional paid-in capital–common stock Additional paid-in capital–treasury stock transactions A consistent accounting treatment would call for debiting only Additional Paid-in Capital– Treasury Stock Transaction (and no other paid-in capital account) for the excess of the cost over Page 4 of 5 .000 Cr. Treasury stock 4.000.000 R40. After Repurchase of 100.000 Stockholders’ equity R58.000 18.000 Retained earnings 18.000.000.000 Cr.000 1. If the treasury shares are resold below their cost. accountants tend to debit Additional Paid-in Capital for the difference. Paid-in capital in excess of par 1.000.000.000 Deduct: Cost of treasury stock – – 4.000 To record acquisition of 100.000.000 Dr. Cash 5.000.000.000 Cr. Cash 3. 2.000.10-63 The stockholders’ equity section would be affected as follows: Before Repurchase Changes of 100. Paid-in capital in excess of par 1. Note that the treasury stock account does not represent an asset but a negative element of stockholders’ equity.000. $10 per share in this case.000. 3.000 shares @ R3 par R 6.000 R58. 100.000.000.000.000 Cr.000 Paid-in capital in excess of par 34.

000 shares = R29. As illustrated in the text.50 Page 5 of 5 . The accounting illustrated here assumes ongoing transactions in treasury stock. Book value is calculated based on outstanding shares.000 shares = R28.000.the resale price of treasury shares.42 R59. 4.000.000.000. paid-in capital accounts are reduced proportionately and retained earnings is also typically reduced. The original book value per share was R29.000/2.50 R57.000 shares = R28. If there is no balance in such a Paid-in Capital account.000/1. the debit should be made to Retained Earnings.000. when shares are purchased in the open market and retired. The new book values will be: (1) (2) (3) R54.000/2.900.