Professional Documents
Culture Documents
Shareholders’ Equity
Short Exercises
(5 min.) S 9-1
Corporation’s advantages:
Corporation’s disadvantages:
Corporate taxation
Government regulation
Separation of ownership and management
(5 min.) S 9-2
716 Financial Accounting 8/e Solutions Manual
1. The shareholders hold ultimate power in a corporation.
Delectable Doughnuts:
Cash……………………………………………. 292
Share capital……………………………….. 292
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Cash……………………………………….. 800,000
Share capital (12,000 × $20)……....... 240,000
Paid-in capital in excess of par……. 560,000
Issued shares.
Building…………………………………… 550,000
Equipment………………………………… 250,000
Cash…………………………………….. 800,000
Purchased PPE.
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Building…………………………………… 550,000
Equipment………………………………... 250,000
Share capital (12,000 × $20)………... 240,000
Paid-in capital in excess of par….... 560,000
Issued shares to acquire building and equipment.
Building…………………………………… $550,000
Equipment……………………………….… 250,000
Share capital (12,000 x $20)…………… 240,000
Paid-in capital in excess of par……….. 560,000
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Millions
Treasury shares……………………………. 29
Cash……………………………………….. 29
Cash………………………………………….. 8
Treasury shares…………………………. 2
Paid-in Capital from Treasury share
Transactions………………………….. 6
MEMORANDUM
Req. 2
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
2010
Dec. 15 Retained Earnings
($110,000 × .06) + (45,000 × $1.00)… 51,600
Dividends Payable………………… 51,600
Declared a cash dividend……………
2011
Jan. 4 Dividends Payable…………………… 51,600
Cash…………………………………. 51,600
Paid cash dividend.
2. Preference: $360,000
Ordinary: $ 40,000
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Req. 2
(b)
Rate of return Net income − Preference
on ordinary dividends
=
shareholders' Average ordinary
equity shareholders’ equity
¥151
= = 1.5%
¥10,070
¥120
= = 3.9%
¥3,045
5.
Book value per Total shareholders’ equity − Preference
share of equity
=
ordinary Number of shares of ordinary shares
shares outstanding
11 Inventory.............................................. 16,000
Equipment............................................ 9,500
Share capital (3,700 × $2.00)......... 7,400
Paid-in capital in excess of par..... 18,100
Req. 2
Shareholders’ equity:
Preference shares, $1.00, no par
10,000 shares authorized, 400 shares issued……. $54,000
Share capital, $2.00 par,
19,000 shares authorized, 15,700 shares issued… 31,400
Paid-in capital in excess of par-ordinary
($48,000 + $18,100)……………………………………. 66,100
Retained earnings (deficit)………………………….…… (43,000)
Total shareholders’ equity……………………….…… $108,500
12 Inventory.............................................. 19,000
Equipment............................................ 41,000
Share capital................................... 4,950
Paid-in capital in excess of par…. 55,050
Unused data:
Net income
Dividends declared
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Millions
b. Cash (8 million × $13.50)…………………… 108
Share capital (8 million × $2.00)……..... 16
Paid-in capital in excess of par….…….. 92
c. Treasury shares……………………………… 16
Cash…………………………………………. 16
d. Retained Earnings…………………………… 31
Dividends Payable………………………… 31
Dividends Payable…………………………… 31
Cash……………………………………….… 31
Req. 2
Req. 3
(Millions
of shares)
Dec. 31, 2011
Ordinary shares issued……………………………. 300
Less: Treasury shares, number of shares……. (52)
Ordinary shares outstanding……………………... 288
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Req. 2
Shareholders’ equity
Share capital, $0.80 par, 2,600,000 shares authorized,
345,000 issued ($240,000 + $36,000)……….. $ 276,000
Paid-in capital in excess of par - ordinary
($307,200 + $819,000)…………………………... 1,126,200
Retained earnings ($7,122,000 − $855,000)……. 6,267,000
Other………………………………………………….. (200,000)
Total shareholders’ equity…………………….. $7,469,200
Req. 4
b. No effect.
c. No effect.
d. No effect.
g. No effect.
Shareholders’ equity:
Millions
Share capital, $0.50 par, 2,250 million shares
(750 million × 3) authorized,
1,260 million shares (420 million × 3) issued… $ 630
Additional paid-in capital……………………………. 318
Retained earnings…………………………………….. 2,399
Other…………………………………………………….. (148)
Total shareholders’ equity………………………. $3,199
Ordinary:
Total shareholders’ equity………………………….. $96,000
Less: Preference equity — redemption value….. (45,000)
Total ordinary equity……………………………….... $51,000
Book value per share ($51,000 / 6,000 shares)…. $ 8.50
Req. 2
Ordinary:
Total shareholders’ equity…………………………... $ 96,000
Less: Preference equity [$45,000 +($30,000 ×.04 × 3)] (48,600)
Total ordinary equity…………………………………. $ 47,400
Book value per share ($47,400 /6,000 shares)……….. $ 7.90
Req. 3
Net income
$1,525 −
− Preference $1,525
Rate of return $0
dividends
on ordinary = = = 0.186
= Average ordinary ($8,556* + $8,196
shareholders' equity
shareholders’ $7,836**) /
equity 2
Net income −
Return Preference dividends $1,878− $0 $1,878
on equity = Average ordinary = ($23,475 + $14,033) / 2 = $18,754 = 0.100
equity
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
11 Inventory.............................................. 18,000
Equipment............................................ 10,500
Share capital (4,000 × $3.50).......... 14,000
Paid-in capital in excess of par 14,500
Req. 2
Shareholders’ equity:
Preference shares, $2.00, no par
4,000 shares authorized, 400 shares issued……… $55,000
Share capital, $3.50 par,
110,000 shares authorized, 15,000 shares issued… 52,500
Paid-in capital in excess of par - ordinary
($60,000 + $14,500)………………………………………. 74,500
Retained earnings (deficit)………………………….…… (47,000)
Total shareholders’ equity……………………….…… $135,000
12 Inventory.............................................. 15,000
Equipment............................................ 44,000
Share capital.................................... 7,400
Paid-in Capital in Excess of Par… 51,600
Unused data:
Net income
Dividends declared
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Millions
b. Cash (9 million × $12.50)……………………. 112.5
Share capital (9 million × $1.50)……..... 13.5
Paid-in capital in excess of par…….….. 99
c. Treasury shares……………………………… 15
Cash…………………………………………. 15
d. Retained earnings……………………………. 34
Dividends payable………………………… 34
Dividends payable…………………………… 34
Cash……………………………………….… 34
Req. 2
Req. 3
(Millions
of shares)
Dec. 31, 2011
Ordinary shares issued……………………………. 500
Less: Treasury shares, number of shares……. (54)
Ordinary shares outstanding……………………... 446
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Req. 2
Shareholders’ equity
Share capital, $0.30 par, 2,200,000 shares authorized,
480,000 issued ($120,000 + $24,000)……….. $ 144,000
Paid-in capital in excess of par - ordinary
($409,600 + $1,176,000)……………………….. 1,585,600
Retained earnings ($7,133,000 − $1,200,000)…. 5,933,000
Other………………………………………………….. (185,000)
Total shareholders’ equity…………………….. $7,477,600
Req. 4
b. No effect.
c. No effect.
d. No effect.
g. No effect.
Shareholders’ equity:
Millions
Share capital, $0.10 par, 1,500 million shares
(500 million × 3) authorized,
1,350 million shares (450 million × 3) issued… $ 135
Additional paid-in capital……………………………. 315
Retained earnings…………………………………….. 2,393
Other…………………………………………………….. (146)
Total shareholders’ equity………………………. $2,697
Ordinary:
Total shareholders’ equity…………………………. $121,000
Less: Preference equity — redemption value…. (25,000)
Total ordinary equity………………………………... $ 96,000
Book value per share ($96,000 / 10,000 shares) $ 9.60
Req. 2
Ordinary:
Total shareholders’ equity…………………………... $ 121,000
Less: Preference equity [$25,000 + ($21,000 ×.10 × 3) (31,300)
Total ordinary equity…………………………………. $ 89,700
Book value per share ($89,700 / 10,000 shares)……. $ 8.97
Req. 3
Net income
Rate of return − Preference $1,530 − $0
on ordinary $1,530
dividends 0.18
shareholders' = = = =
Average ordinary 7
equity ($8,604* + $8,203
shareholders’
equity $7,802**) / 2
Net income −
Return Preference dividends $1,872− $0 $1,872
on equity = Average ordinary = ($23,477 + $14,043) / 2 = $18,760 = 0.100
equity
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
_____
*$51,000 ÷ $1 par value per share = 51,000 shares issued.
Share capital
Issuance of
51,000
shares
Balance 51,000
Retained Earnings
Dividends 23,000 Net income 58,000
Balance 35,000
Treasury shares
Purchase 8,550 Sale 900
Balance 7,650
Treasury shares:
Apollo purchased treasury shares for $177 million ($2,777 −
$2,600).
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
10 Patent………………………………………. 20,000
Preference shares……..................... 20,000
Issued preference shares to acquire a patent.
_____
* 900 + 10,000 + 12,000 + 1,000 = 23,900 shares
**$18,000 + $440,000 + $20,000 = $478,000
_____
Computations:
Req. 2
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Cash…………………………………. 2,730,000
Class A Preference shares….. 2,730,000
Cash…………………………………. 3,115,000
Class B Preference shares….. 3,115,000
Req. 3
Req. 5
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
2011
Feb. 28 Retained Earnings……………………….. 860,000
Dividends Payable, Class A
Preference ($2,730,000 ×.065 × 2) 354,900
Dividends Payable, Class B
Preference ($3,115,000 ×.065 × 2) 404,950
Dividends Payable, Ordinary
($860,000 − $354,900 − $404,964). 100,150
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Shareholders’ equity:
$.70 cumulative preference shares, $5 par, 300
shares
issued…………………………………………………………. $ 1,500
Share capital, $4 par, 13,090 shares issued
($26,000 + $21,600 + $4,760)…………………………… 52,360
Paid-in capital in excess of par - ordinary
($17,800 + $5,400 + $2,380)……………………………. 25,580
Paid-in capital from treasury shares transactions…… 800
Retained earnings
($25,000 + $28,000 − $210 − $7,140)………………..... 45,650
Less: Treasury shares, 300 shares at cost
($3,500 − $1,400)……………………………………
(2,100)
Total shareholders’ equity…………………………….. $123,790
Net income
Rate of return
− Preference
on ordinary $32,000 − (11,000 × $.50) $26,500
= dividends = = = 0.105
shareholders'
Average ordinary ($281,300* + $222,000) / 2 $251,650
equity
shareholders' equity
Req. 3
Journal
ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Millions
Retained earnings……………………………….. 1,890
Dividends payable……………………………. 1,890
Cash………………………………………………… 1,234
Share capital………………………………..... 1,234
Cash………………………………………………… 58
Long-term notes payable…………………... 58
10 Patent………………………………………………. 12,000
Preference shares……………………….…… 12,000
Issued preference shares to acquire a patent.
26 Cash………………………………………………… 21,000
Share capital (1,400 × $5)…………………… 7,000
Paid-in Capital in Excess of
Par - Ordinary……………………………... 14,000
Issued share capital for cash.
(continued) P 9-84B
Req. 2
_____
*500 + 19,000 + 1,400 = 20,900 shares
**$5,000 + $190,000 + $14,000 = $209,000
_____
Computations:
Req. 2
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Cash………………………………. 1,520,000
Class A Preference shares.. 1,520,000
Cash………………………………. 1,940,000
Class B Preference shares.. 1,940,000
Req. 3
Req. 5
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
2011
Feb. 28 Retained Earnings……………………….. 840,000
Dividends Payable, Class A
Preference ($1,520,000 × .04 × 2) 121,600
Dividends Payable, Class B
Preference ($1,940,000 × .04 × 2) 155,200
Dividends Payable, Ordinary
($840,000 − $121,600 − $155,200) 563,200
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Shareholders’ equity:
$0.80 cumulative preference shares, $15 par,
400 shares issued………………………………………. $ 6,000
Share capital, $2 par, 13,800 shares issued
($12,600 + $10,400 + $4,600)……............................... 27,600
Paid-in capital in excess of par – ordinary
($17,400 + $20,800 + $11,500)…………………………. 49,700
Paid-in capital from treasury shares transactions….. 2,400
Retained earnings ($23,000 + $25,000 − $320 − $16,100) 31,580
Less: Treasury shares, ordinary, 300 shares
at cost ($7,200 − $4,800)…………………………. (2,400)
Total shareholders’ equity…………………………….. $114,880
Net income
Rate of return
− Preference
on ordinary $30,000 − (12,000 × .50) $24,000
= dividends = = = 0.100
shareholders'
Average ordinary ($254,600** + $225,000)/2 $239,800
equity
shareholders' equity
Req. 3
Journal
ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Cash……………………………………………. 1,234
Share capital……………………………… 1,234
Cash…………………………………………… 58
Long-term notes payable………………. 58
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Smith, Capital………………………………. 25,000
Jones, Capital……………………………… 25,000
Share capital…………………………… 50,000
To incorporate the business, close the capital accounts of
Smith and Jones, and issue share capital to them.
Req. 2
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Plan 1:
Cash…………………………………………. 80,000
Preference shares (800 × $100)…….. 80,000
To issue preference shares to outside investors.
Plan 2:
Cash…………………………………………. 55,000
Preference shares…………………….. 55,000
To issue preference shares to outside investors.
Cash…………………………………………. 35,000
Share capital…………………………… 35,000
To issue ordinary shares to outside investors.
Req. 3
Plan 1:
Shareholders’ Equity
Preference shares, 6%, $100 par, nonvoting,
10,000 shares authorized, 800 shares issued….. $ 80,000
Share capital, $1 par, 500,000 shares authorized,
50,000 shares issued……………………………….. 50,000
Retained earnings ($120,000 − $30,000)……………. 90,000
Total shareholders’ equity………………………… $220,000
Plan 2:
Shareholders’ Equity
Preference shares, $5, no-par, 5,000 shares authorized,
500 shares issued…………………………………… $ 55,000
Share capital, $1 par, 500,000 shares authorized,
85,000 shares issued……………………………….. 85,000
Retained earnings ($120,000 − $30,000)……………. 90,000
Total shareholders’ equity………………………… $230,000
Req. 4
Plan 1 appears to fit the plans of Smith and Jones better than
Plan 2 because:
Their primary goal is to raise as much capital as possible
without giving up control of the business. Under Plan 2,
the outside shareholders would have 60,000 votes [35,000
ordinary votes + 25,000 preference votes (500 shares × 50
votes per share)]. Smith and Jones would lose control of
the business because they would have only 50,000 votes.
Under Plan 1 preference shareholders have no votes.
Smith and Jones would have complete control since they
would hold all the voting shares.
Plan 2 would raise only $10,000 more than Plan 1 whilst
giving up more than 50% of the voting control in the
company.
Req. 1
Req. 3
Req. 4
Req. 1
Millions
Req. 3
As Reported As Adjusted
Dollars in millions
Total
Debt liabilities $54,033 $61,873
= =
ratio Total $65,503 $71,203
assets
= 0.82 = 0.87
Req. 4
Req. 1
Req. 4
The franchise should be valued at its true value, which is
$50,000. Campbell should focus his time and energy on ways
to make the business profitable in the long run in other ways,
rather than focusing on turning a quick buck and playing legal
games that could well get him into trouble with a lot of other
parties.
Note: One of the authors experienced this actual situation in
his first job after college.
800 Financial Accounting 8/e Solutions Manual
Ethical Issue 2
Req. 1
Req. 4
The correct way to handle this transaction is never to have
proposed it in the first place. However, if it did happen, the
disclosure principle is relevant to the situation. The
transaction should be disclosed in the footnotes to the
financial statements, and if potential liability to the SEC or
others is probable and can be estimated, a loss be disclosed in
the income statement and a liability should be accrued on the
balance sheet.
802 Financial Accounting 8/e Solutions Manual
Focus on Financials: Nokia Corporation
(20-30 min.)
Req. 1
Req. 2
Req. 3
Req. 5
Return on $3988
equity = ($16,510 + $17,338) / = 23.6%
2
Req. 1
Stakeholders in a corporation vary widely with the nature of the
corporation. In the case of the corporations included in this
case (GM, Chrysler, AIG, Citibank, Bank of America) because of
their size and the scope of their operations, stakeholders
include the shareholders, bondholders, other creditors,
employees, suppliers, customers, local, regional, national and
international economies, federal, state and local governments
—just about everyone in the broadest sense of the term.
Req. 2
Student opinions on this will vary. It might be interesting to
divide the class into two teams and conduct a debate, each
team taking a side.
Req. 4
Student opinions on this will vary.
Req. 5
Student opinions on this will vary and should be related to the
opinions they express in requirement 4. This question has
economic, political and social ramifications. Some would say
that government taking equity positions in private businesses
violates principles of free market economics and tends toward
socialism. If the equity positions were carefully crafted and
sufficiently restricted to appear to have more debt than equity
features, perhaps this could be justified in some people’s
minds.