Ex. 12.5 a. 1.

Net income (all applicable to common stock) ……………… $1,920,000

Shares of common stock outstanding throughout the year .. 400,000
Earnings per share ($1,920,000 ÷ 400,000 shares) ……….. $4.80

2. Net income …………………………………………………………………$1,920,000

Less: Preferred stock dividend (100,000 x 8% x $100) ………… 800,000
Earnings available for common stock ……………………………… $1,120,000
Shares of common stock outstanding throughout the year ……… 300,000
Earnings per share ($1,120,000 ÷ 300,000 shares) ………………… $3.73

b. The earnings per share figure computed in part a (2) is a basic EPS figure. Although the
company has outstanding both common and preferred stock, the preferred stock must be
convertible into common stock in order to result in a diluted computation of earnings per
share. The potential conversion of preferred stock into common stock is what necessitates
disclosure of diluted EPS. Because the preferred stock in this exercise is not convertible,
the EPS computation is basic.
Ex. 12.7 a. Apr. 30 Memorandum: Issued an additional 1,000,000 shares of capital stock in a 2-for-1 stock
split. Par value reduced from $1 per share to $0.50 per share.

June 1 Dividends ……………………………………………………… 1,200,000

Dividends Payable ……………………………
To record the declaration of a dividend of $0.60 per share
on 2 million shares of stock outstanding.

July 1 Dividends Payable ……………………………………………. 1,200,000

Cash ……………………………………………….
To record payment of the dividend declared on June 1.

Aug. 1 Retained Earnings …………………………………………… 1,900,000

Stock Dividend to Be Distributed …….
Additional Paid-in Capital: Stock Dividends
To record declaration of a 5% stock dividend consisting of
100,000 shares (2,000,000 shares x 5%) of $0.50 par value
common stock. Amount of retained earnings transferred
to paid-in capital is based on market price of $19 a share.

Sept. 10 Stock Dividend to Be Distributed …………………………… 50,000

Common Stock …………………………………
To record distribution of a stock dividend of 100,000
shares.

b. 2,100,000 shares
1,000,000 + 1,000,000 + 100,000

c. $0.50 par value per share ($1 par reduced to $0.50 par due to 2-for-1 stock split on April 30.)

d. Stock split—No effect

Declaration/payment of cash dividend—Decrease retained earnings
Declaration/distribution of stock dividend—No effect (No effect on total stockholders' equity, but
retained earnings is reduced and paid-in capital increased by the market value of the stock
al stock in a 2-for-1 stock

1,200,000

1,200,000

50,000
1,850,000

50,000

split on April 30.)

stockholders' equity, but

rket value of the stock
 PROBLEM 12.2A
SLICK SOFTWARE, INC.
a.
SLICK SOFTWARE, INC.
Condensed Income Statement
For the Year Ended December 31, 2018
Net sales $ 19,850,000
Costs and expenses (including applicable income taxes) 16,900,000
Income from continuing operations $ 2,950,000
Discontinued operations:
Operating income (net of income tax) $ 140,000
Loss on disposal (net of income tax benefit) (550,000) (410,000)
Net income $ 2,540,000

Earnings per share:

Earnings from continuing operations
[($2,950,000 - $500,000*) ÷ 200,000 shares] $ 12.25
Loss from discontinued operations ($410,000 ÷ 200,000 shares) (2.05)
Net earnings
[($2,540,000 - $500,000 preferred dividends) ÷ $ 10.20
200,000 shares]

*Preferred dividends: 80,000 shares x $6.25 = $500,000

b.
SLICK SOFTWARE, INC.
Statement of Retained Earnings
For the Year Ended December 31, 2018
Retained earnings, December 31, 2017
As originally reported $ 7,285,000
Less: prior period adjustment 350,000
As restated $ 6,935,000
Net income 2,540,000
Subtotal $ 9,475,000
Cash dividends (950,000)
Retained earnings, December 31, 2018 $ 8,525,000

c.
Total cash dividends declared during 2018 (data given) $ 950,000
Less: Cash dividend on preferred stock (80,000 shares x $6.25 per
share) 500,000
Cash dividends to common stockholders $ 450,000
Number of common shares outstanding through 2018 200,000
Cash dividend per common share ($450,000 ÷ 200,000 shares) $ 2.25

d. The single 2019 $8.00 figure for EPS is unfavorable in comparison with 2018
performance. Since 2019 has only one EPS figure, it should be compared to the
earnings per share from continuing operations in 2018, which amounted to $12.25
per share. Slick Software, Inc.’s earnings per share from continuing operations fell
$4.25 per share (approximately 35%) from 2018 to 2019.
 PROBLEM 12.6A
THOMPSON SERVICE
a.
General Journal

2018
Jan 3 Dividends 382,000
Dividends 382,000
Payable of $1 per share
To record declaration
cash
dividend payable on Feb. 15 to
stockholders
record on Jan.of31.

Feb 15 Dividends Payable 382,000

Cash 382,000
To record payment of dividend declared
Jan. 3.
Apr 12 Treasury Stock 240,000
Cash 240,000
Purchased 6,000 shares of treasury
stock at $40
per share.

May 9 Cash 176,000

Treasury 160,000
Stock
Additional Paid-in Capital: 16,000
Treasury
Sold 4,000 shares Stock stock,
of treasury
which costat a price of $44 per share.
$160,000,

June 1 Retained Earnings 798,000

Stock Dividend to Be 19,000
Distributed
Additional Paid-in Capital: 779,000
Declared a 5%Stock
stockDividends
dividend (19,000
shares) on
380,000 outstanding shares. Market
price $42,
value parbe distributed on June 30
$1. To
to
stockholders of record.

30 Stock Dividend to Be Distributed 19,000

Capital 19,000
Issued 19,000Stock
shares of capital stock as
5% stock
dividend.

Aug 4 Cash 22,200

Additional Paid-in Capital: Treasury 1,800
Stock Treasury 24,000
Sold 600 sharesStock
of treasury stock, which
cost $24,000,
at a price of $37 per share.

Dec 31 Income Summary 1,928,000

Retained Earnings 1,928,000
To close Income Summary account for
the year.
Dec 31 Retained Earnings 382,000
Dividends 382,000
 To close Dividends account.

b.
THOMPSON SERVICE
Partial Balance Sheet
December 31, 2018
Stockholders’ equity:
Capital stock, $1 par value, 500,000 shares authorized,
401,000 shares issued, of which 1,400 are held in the treasury $ 401,000
Additional paid-in capital:
From issuance of capital stock $ 4,202,000
From stock dividend 779,000
From treasury stock 14,200 4,995,200
Total paid-in capital 5,396,200
Retained earnings* 3,452,600
$ 8,848,800
Less: Treasury stock, 1,400 shares at cost 56,000
Total stockholders’ equity $ 8,792,800

*Computation of retained earnings at Dec. 31, 2018:

Retained earnings at beginning of year $ 2,704,600
Add: Net income for year 1,928,000
Subtotal $ 4,632,600
Less: Cash dividend $ 382,000
Stock dividen 798,000 1,180,000
Retained earnings, Dec. 31, 2018 $ 3,452,600

c. Computation of maximum legal cash dividend

per share at Dec. 31, 2018:
Retained earn $ 3,452,600
Less: Restriction of retained earnings for
treasury stock owned 56,000
Unrestricted $ 3,396,600
Number of shares of capital
(401,000 shares issued, m
held in treasury) 399,600
Maximum legal cash dividend per share ($3,396,600
divided by 399,600 shares) $ 8.50
 CASE 12.1
WHAT'S THIS?

a. ATLANTIC RICHFIELD: Both the operating loss from the noncoal minerals
activities and the loss on disposal should be classified in the income statement as
discontinued operations and should be shown separately from the results of
ongoing business operations. These losses qualify for this separate treatment
because the discontinued activities represented an entire identifiable segment of
business operations.

b. UNION CARBIDE: The explosion of a chemical plant for a company like Union
Carbide appears to meet the criteria for presentation as an unusual or infrequent
item and should be separately disclosed in Income from Continuing Operations.
These criteria are that the gain or loss is (1) material in amount, (2) unusual in
nature, and (3) not expected to recur in the foreseeable future.

c. GEORGIA PACIFIC: This item appears to meet the criteria for being presented
as an unusual or infrequent item and should be separately disclosed in income
from continued operations or net income if there are no discontinued operations.
This disclosure is appropriate because this item is not expected to recur in the
foreseeable future.