Financial and Managerial Accounting Information For Decisions 5th Edition Wild Solutions Manual Download

Solution Manual for Financial and Managerial
Accounting Information for Decisions 5th Edition

by Wild Shaw and Chiappetta ISBN 0078025605
9780078025600
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Chapter 11
Corporate Reporting and Analysis
QUESTIONS
1. Organization expenses (costs) are incurred in creating a corporation. Examples include: legal
fees, promoter fees, accountant fees, costs of printing stock certificates, and fees paid to
obtain a state charter.
2. Organization expenses (costs) are reported as expenses when incurred—as part of operating
expenses—because the amount and timing of their future benefit is difficult to determine.
(Instructor note: Prior to SOP 98-5, organization costs were classified as part of intangible
assets and then allocated to amortization expense.)
3. The board of directors of a corporation is responsible for directing the corporation's affairs.
The directors are elected by the corporation’s stockholders.
4. Authorized shares represent the maximum number of shares that a corporation’s charter
allows it to sell. Outstanding shares are the number of issued shares that are held by
stockholders. The number of authorized shares usually exceeds the number of issued shares,
often by a large amount.
5. The preemptive right of common stockholders is the right to maintain their relative ownership
interests in the corporation by having the first opportunity to purchase their proportionate
share of any additional common shares issued by the corporation.
6. The general rights of common stockholders include: (1) the right to vote in stockholders’
meetings, (2) the right to sell or otherwise dispose of stock, (3) the preemptive right, (4) the
right to share proportionately in dividends, and (5) the right to share proportionately in assets
remaining after the creditors are paid when, and if, the corporation is liquidated. In addition,
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Solutions Manual, Chapter 11 623
stockholders have the general right to receive timely and useful financial reports that describe
the corporation’s financial position and the results of its activities.
7. The market value per share of stock is the price at which a share of stock is bought or sold.
Many factors—including expected future earnings, dividends, growth, and other company and
economic factors—affect market value. Par value per share is an arbitrary value assigned by
the corporation in its charter.
8. The par value is an arbitrary value placed on a share of stock when it is authorized. The call
price is an amount that a corporation must pay if it exercises the option to buy back and retire
a share of callable preferred stock.
9. Convertible preferred stock is potentially attractive because it offers the safety of a regular
return as well as the opportunity to share in the increased value of the issuer’s common stock
through conversion (or potential conversion).
624 Financial & Managerial Accounting, 5th Edition
10. The three important dates governing dividends are:
a. date of declarationthe date the directors vote to pay a dividend.
b. date of recorda future date specified by the directors to identify the particular
shareholders that are to receive the dividend.
c. date of paymentthe date when shareholders receive the dividend payment.
11. Cash dividends debited against paid-in capital accounts are called liquidating dividends
because they represent a return of amounts originally invested in the corporation by the
stockholders. (They are a return of, not a return on, capital contributions.)
12. Declaring a stock dividend has no effect on assets, liabilities, or total equity. Also, the
subsequent distribution of the stock dividend has no effect on these items. Instead, the stock
dividend simply increases the number of shares outstanding and results in a transfer of equity
from retained earnings to paid-in capital.
13. A stock dividend results in a distribution of additional shares to stockholders and the
capitalization of retained earnings. A stock split calls in the old shares and replaces them with
a different number of new shares with a new par value. Also, no entry is made to any of the
equity accounts with a stock split. In spite of these technical differences, there is no practical
difference in most cases between a stock split and a large stock dividend.
14. A stock dividend should not be considered income because it does not transfer any assets
from the corporation to the stockholders.
15. A treasury stock purchase reduces total assets and total equity by equal amounts.
16. Treasury stock purchases affect the corporate assets and stockholders’ equity just like a cash
dividend. To keep a company from dissipating its assets by paying an inordinate amount of
dividends to its stockholders, state laws protect the company’s creditors by imposing limits
on treasury stock purchases.
17. With a simple capital structure, earnings per share is calculated by first subtracting any
declared and cumulative preferred dividends from net income, and then dividing the difference
by the weighted-average number of shares of outstanding common stock. The resulting figure
is called the basic earnings per share.
18. A stock option is the right to purchase common stock at a fixed price over a specified period.
19. When a corporation has no preferred stock, book value per share is calculated by dividing total
stockholders’ equity by the number of common shares outstanding. The main limitation of
using book value per share to value a corporation is the potential difference between recorded
value and market value for assets and liabilities.
20. Polaris discloses on its 2011 balance sheet that it has 160,000 common shares authorized; it
also reports that it has issued 68,430 voting common shares.
21. The par value for Arctic Cat’s common stock is reported to be $0.01. A low par value can be
the result of stock splits and/or a management attempt to limit any potential liability to
shareholders.
22. From a review of its statement of cash flows, Piaggio spent 9,080 thousand Euros in 2011 to
repurchase treasury stock.
QUICK STUDIES
Quick Study 11-1 (10 minutes)
True statements: 3, 4, 5 and 7
a. Cash ........................................................................... 1,827,000

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

Common Stock, No-Par Value ............................ 1,827,000
Issued no-par value stock for land.
a. Cash ...................................................................... 375,000

Common Stock, $5 Par Value ........................ 375,000
Issued par value stock for cash. (75,000 x $5)
b. Cash* ..................................................................... 450,000

Common Stock, $5 Par Value ........................ 375,000
Paid-In Capital in Excess of Par Value,
Common Stock ............................................. 75,000
Issued par value stock for cash. *(75,000 x $6)
a. Cash* ..................................................................... 648,000

Common Stock, $2 Par Value** ..................... 72,000
Common Stock***......................................... 576,000
Issued par value stock for cash.
*36,000 x $18 = $648,000
**36,000 x $2 = $72,000
***$648,000 - $72,000 = $576,000
b. Cash* ..................................................................... 648,000

Common Stock, $2 Stated Value** ................ 72,000
Paid-In Capital in Excess of Stated Value,
Common Stock***......................................... 576,000
Issued stated value stock for cash.
*36,000 x $18 = $648,000
**36,000 x $2 = $72,000
***$648,000 - $72,000 = $576,000
(a) Mar. 1 Cash ................................................................. 297,500

Common Stock, $4 Par Value ................... 170,000
Common Stock ........................................ 127,500
(b) Apr. 1 Cash .................................................................. 70,000

Common Stock, No-Par Value .................. 70,000
Issued no-par value stock for cash.
(c) Apr. 6 Inventory .......................................................... 45,000

Machinery ........................................................ 145,000
Note Payable ............................................... 94,000
Common Stock, $25 Par Value ................. 50,000
Common Stock ........................................ 46,000
Issued stock for inventory, machinery, and note.
1. Cash* .......................................................................... 510,000

Preferred Stock, $100 Par Value** ...................... 500,000
Preferred Stock*** ............................................. 10,000
*5,000 x $102 = $510,000
**5,000 x $100 = $500,000
***$510,000 - $500,000 = $10,000
2. Preferred dividend =
$100 par value/share x 7% x 5,000 shares = $35,000
July 15 Retained Earnings ........................................... 165,000

Common Dividend Payable ...................... 165,000
Declared cash dividend on common.
Aug. 15 No formal journal entry required; company would

assemble a payee list for the dividend as of August 15.
Aug. 31 Common Dividend Payable ............................ 165,000

Cash ........................................................... 165,000
Paid cash dividend to common.
Jun Company
Stockholders’ Equity
April 2 (after stock dividend)
Common stock$5 par value, 375,000 shares
authorized, 220,000 shares issued and outstanding .............. $1,100,000
Paid-in capital in excess of par value, common stock ............... 900,000
Total paid-in capital ....................................................................... 2,000,000
Retained earnings ......................................................................... 433,000
Total stockholders' equity ............................................................ $2,433,000
Supporting work
Apr. 2 Retained Earnings ..................................................... 400,000

Common Stock*................................................... 100,000
Common Stock** .............................................. 300,000
To record declaration and distribution
of a 10% common stock dividend.
* 200,000 shares x 10% x $5 par value = $100,000
**200,000 shares x 10% x ($20 market value –
$5 par value) = $300,000
Total cash dividend ....................................................................... $110,000

To preferred shareholders ............................................................ 64,000*
Remainder to common shareholders .......................................... $ 46,000
*80,000 shares x $5 par x .08 x 2 years = $64,000.
May 3 Treasury Stock (4,000 shares) ............................ 36,000

Cash ................................................................. 36,000
Purchased treasury stock
($36,000 / 4,000 shares = $9 per share cost).
Nov. 4 Cash ....................................................................... 8,500

Treasury Stock (850 x $9*)............................. 7,650
Paid-In Capital, Treasury Stock .................... 850
Reissued treasury stock at a price
greater than its cost.
($9 per share x 850 shares = $7,650)
*Cost of treasury share: $36,000/4,000 shares = $9 per share
Cost of 850 treasury shares: $9 per share x 850 shares = $7,650
1. This material error should be reported on the statement of retained

earnings (and/or the statement of stockholders’ equity) as a prior period
adjustment to the beginning retained earnings balance. Also, if prior
year’s financial numbers are reported, they should be revised to show
the correct numbers.
2. This change in the expected useful life is a change in an accounting

estimate—affecting current and future accounting periods. Therefore,
the current year depreciation should be modified to reflect the change
and the revised depreciation expense reported on the income statement
as a regular part of income from continuing operations. The remaining
years’ depreciation also should reflect this new estimate of useful life.
Net income - Preferred dividends

Basic earnings per share: =
Weighted-average common shares outstanding
= ($770,000 - $0) / 280,000 shares
= $2.75 per share

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

= $2.20 per share
Market value per share $20.54

Price-earnings ratio = = 5.2
Earnings per share $3.95
Analysis: Many analysts consider stocks with a PE less than 5 to 8 as

potentially underpriced. This stock with a PE of 5.2 would potentially fall
within the underpriced category. (Instructor note: This is a good point at
which to emphasize that PE is based on expectations—expectations can
prove to be higher or lower than actual results.)
Annual cash dividends per share $2.34

Dividend yield = Market value per share = = 7.2%
$32.50
Analysis: The company’s dividend yield of 7.2% indicates that it should be

classified as an income stock. That is, the company annually pays out cash
dividends to its shareholders in an amount that equals 7.2% of the
company’s market value.
Total stockholders' equity .............................................................. $1,850,000

Less equity attributable to preferred shares
Call price (20,000 shares x $40) .................................................. 800,000
Equity applicable to common shares ............................................ $1,050,000
Book value of common shares ($1,050,000/150,000 shares) ...... $ 7.00
Mar. 31 Cash ..................................................................... 3,271

Issued Capital, at Par Value ......................... 300
Additional Paid-In Capital............................. 2,971
Issued stock at premium for cash.
*Entry uses Air France-KLM’s account titles.
EXERCISES
Exercise 11-1 (15 minutes)
Characteristic Corporations
1. Owner authority and control..................... One vote per share
2. Ease of formation ...................................... Requires government approval
3. Transferability of ownership .................... Readily transferred
4. Ability to raise large amounts of capital .... High ability
5. Duration of life ........................................... Unlimited
6. Owner liability ............................................ Limited
7. Legal status ................................................ Separate legal entity
8. Tax status of income ................................. Corporate income is taxed and
its cash dividends are usually
taxed at the 15% rate (some
cases at a lower rate)

1.
Feb. 20 Cash ..................................................................... 152,000
Common Stock, $2 Par Value* ..................... 38,000
Common Stock** ........................................ 114,000
Issued common stock for cash.
*19,000 shares x $2 per share = $38,000
**$152,000 - $38,000 = $114,000
2.
Feb. 20 Cash ..................................................................... 152,000
Common Stock, No-Par Value ..................... 152,000
3.
Feb. 20 Cash ..................................................................... 152,000
Common Stock, $5 Stated Value* ................ 95,000
Common Stock** ........................................ 57,000
**$152,000 - $95,000 = $57,000
1. Cash ................................................................................ 35,000
Common Stock, $5 Par Value* ............................... 20,000
Common Stock** .................................................. 15,000
**$35,000 - $20,000 = $15,000
2. Organization Expenses ................................................. 40,000

Common Stock, $1 Stated Value ............................ 2,000
Common Stock ..................................................... 38,000
Issued stock to promoters.
3. Organization Expenses ................................................. 40,000

Common Stock, No-Par Value ................................ 40,000
Issued stock to promoters.
4. Cash ................................................................................ 60,000

Preferred Stock, $50 Par Value* ............................. 50,000
Preferred Stock** .................................................. 10,000
Issued preferred stock for cash.
**$60,000 - $50,000 = $10,000

Land ................................................................................ 45,000
Building .......................................................................... 85,000
Common Stock, $7 Par Value* ................................ 49,000
Common Stock ...................................................... 81,000
Issued stock for land and building.
**($45,000 + $85,000) – $49,000 = $81,000
1. C 2. A 3. F 4. E 5. B 6. D
1.
a. Retained earnings
Before dividend................................................................... $ 660,000
$10 par value of 25,000 dividend shares .......................... (250,000)
After dividend...................................................................... $ 410,000
b. Total stockholders’ equity

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

Outstanding shares before the dividend .......................... 50,000
Dividend shares .................................................................. 25,000
Outstanding shares after the dividend ............................. 75,000
2.
a. Retained earnings (no change)
Before and after stock split ............................................... $ 660,000
b. Total stockholders’ equity

Common stock$6.67 (rounded) par value, 180,000 shares
authorized, 75,000 shares issued and outstanding ......... $ 500,000
Paid-in capital in excess of par value ............................... 200,000
Retained earnings............................................................... 660,000
Total stockholders’ equity ................................................. $1,360,000
c. Number of outstanding shares

Outstanding shares before the split ................................. 50,000
Additional split shares (3-for-2) ........................................ 25,000
Outstanding shares after the split .................................... 75,000
3. From a stockholder’s point of view, there is no practical difference

between the stock dividend and the stock split. The number of shares
will be increased equivalently under either approach, and the market
value change, if any, should be approximately the same.
1.
Feb. 5 Retained Earnings* ............................................. 480,000
Common Stock Dividend Distributable** .... 120,000
Common Stock***....................................... 360,000
Declared 20% common stock dividend
Shares to be issued: 60,000 shares x 20% = 12,000 shares
**12,000 shares x $10 per share = $120,000
***$480,000 - $120,000 = $360,000
Feb. 28 Common Stock Dividend Distributable ............ 120,000

Common Stock, $10 Par Value .................... 120,000
Distributed common stock dividend.
2.
Before After
Total stockholders’ equity ................... $1,575,000 $1,575,000
Issued and distributable shares ..........  60,000  72,000
Book value per share............................ $ 26.250 $ 21.875
Shares owned........................................ x 800 x 960*

Total book value of shares .................. $ 21,000 $ 21,000
* 800 shares x 120% = 960 shares.
3.
February 5 February 28
Market value per share ......................... $ 40 $ 33.40
Shares owned........................................ x 800 x 960
Total market value of shares owned ... $ 32,000 $ 32,064
Note: The total market value of the investor’s holdings is approximately the same
for February 5 and February 28. Assuming that the stock dividend is the only value-
relevant information/event between February 5th and February 28th, these per
share values highlight the lack of value distributed in a stock dividend.
Non-Cumulative
Preferred Common
2013 ($20,000 paid)

Preferred* .................................................. $ 20,000
Commonremainder ................................ _______ $ 0
Total for the year ...................................... $ 20,000 $ 0
2014 ($28,000 paid)

Preferred* .................................................. $ 28,000
2015 ($200,000 paid)

Preferred* .................................................. $ 30,000
Commonremainder ................................ _______ $170,000
Total for the year ...................................... $ 30,000 $170,000
2016 ($350,000 paid)

Preferred* .................................................. $ 30,000
2013-2016 ($598,000 paid) _______ _______

Total for four years ................................... $108,000 $490,000
* The holders of the noncumulative preferred stock are entitled to no more than
$30,000 of dividends in any one year (7.5% x $5 x 80,000 shares).
Cumulative
Preferred Common
2013 ($20,000 paid)

Preferred* .................................................. $ 20,000
(Note: $10,000 in preferred stock dividends in arrears.)
2014 ($28,000 paid)

Preferredarrears from 2013 .................. $ 10,000
Preferred* .................................................. 18,000
(Note: $12,000 in preferred stock dividends in arrears.)
2015 ($200,000 paid)

Preferredarrears from 2014 .................. $ 12,000
Preferred* .................................................. 30,000
(Note: $0 in preferred stock dividends in arrears.)
2016 ($350,000 paid)

Preferred* .................................................. $ 30,000
(Note: $0 in preferred stock dividends in arrears.)
_______ _______
2013-2016 ($598,000 paid)
Total for four years ................................... $120,000 $478,000
* The holders of the cumulative preferred stock are entitled to no more than
$30,000 of dividends declared in any year (7.5% x $5 x 80,000 shares) plus any
dividends skipped in prior years.
1. (a)
Oct. 11 Treasury Stock (5,000 x $25) .............................. 125,000
Cash ............................................................... 125,000
Purchased treasury stock.
(b)
Nov. 1 Cash (1,000 x $31) ............................................... 31,000
Treasury Stock (1,000 x $25) ........................ 25,000
Paid-In Capital, Treasury Stock ................... 6,000
Reissued treasury stock at a price exceeding cost.
(c)
Nov. 25 Cash (4,000 x $20) ............................................... 80,000
Paid-In Capital, Treasury Stock ......................... 6,000
Retained Earnings ............................................... 14,000
Treasury Stock (4,000 x $25) ........................ 100,000
Reissued treasury stock at a price less than cost.
2. Changes to the equity section include the following

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

Exercise 11-10 (Concluded)
Revised equity section appears as follows

Common stock$10 par value; 72,000 shares authorized
and issued; 5,000 shares in $ 720,000
treasury
.........................................................................................................
Paid-in capital in excess of par value, Common 216,000
stock
.........................................................................................................
Retained earnings, $125,000 restricted by treasury 864,000
stock
.........................................................................................................
Total 1,800,000
.........................................................................................................
Less cost of treasury (125,000)
stock
.........................................................................................................
Total stockholders’ $1,675,000
equity
.........................................................................................................
Amos Company
Statement of Retained Earnings
For Year Ended December 31, 2013
Retained earnings, December 31, 2012, as previously $1,375,000
reported
.....................................................................................................................................................
Prior period adjustment

Depreciation expense not recorded in 2011 (net of $4,500
in
Income ($55,500)
taxes)
........................................................................................................
Retained Earnings, December 31, 2012, as 1,319,500
adjusted
........................................................................................................
Plus net 126,000
income
........................................................................................................
Less
dividends (43,000)
........................................................................................................
Retained earnings, December 31, $1,402,500
2013
........................................................................................................

1. Net income .............................................................................. $2,700,000
Less preferred dividends ...................................................... (388,020)
Net income available to common stockholders .................. $2,311,980
2. Net income available to common stockholders .................. $2,311,980

Divided by weighted-average outstanding shares ............. 678,000
Basic earnings per share ...................................................... $3.41
1. Net income ........................................................................... $960,000

Less preferred dividends ................................................... (120,000)
Net income available to common stockholders ............... $840,000
2. Net income available to common stockholders ............... $840,000

Divided by weighted-average outstanding shares .......... 400,000
Basic earnings per share ................................................... $ 2.10
Market Value Divided Earnings Price-Earnings

Stock per Share by per Share Ratio
1 ........... $176.40  $12.00 = 14.7
2 ........... 96.00  10.00 = 9.6
3 ........... 93.75  7.50 = 12.5
4 ........... 250.00  50.00 = 5.0
Analysis: Stocks with PE ratios less than about 5 to 8 are likely viewed as
potentially undervalued by the market. Of the stocks above, an analyst
might investigate stock #4 as possibly undervalued with a PE ratio of 5.0.

Dividend yield
1. $16.06 / $220.00 = 7.3%
2. $13.86 / $132.00 = 10.5%
3. $ 3.96 / $ 72.00 = 5.5%
4. $ 0.96 / $ 80.00 = 1.2%
Analysis: The yield of 1.2% on stock #4 is sufficiently low that it probably

would be classified as a growth stock, and not an income stock. Note
that classification involves expectations (not necessarily realizations).
1.
Total stockholders’ equity ........................................... $1,585,000
Less equity applicable to preferred shares
Call price ($30 x 10,000) ............................................. $300,000
Cumulative dividends in arrears (none) ................... 0 (300,000)
Equity applicable to common shares ......................... $1,285,000
Book value of preferred stock ($300,000/10,000) ...... $ 30.00
Book value of common stock ($1,285,000/80,000) .... $ 16.06
2.
Total stockholders’ equity ........................................... $1,585,000
Less equity applicable to preferred shares
Call price ($30 x 10,000) ............................................. $300,000
Cumulative dividends in arrears (3 x 6% x $250,000) . 45,000 (345,000)
Equity applicable to common shares ......................... $1,240,000
Book value of preferred stock ($345,000/10,000) ...... $ 34.50
Book value of common stock ($1,240,000/80,000) .... $ 15.50
1. Share capital  Common stock

Share premium  Paid-in capital in excess of par value
Retained profit  Retained earnings
2. Cash ..................................................................... 615

Share Capital (at Par Value) ......................... 484
Share Premium .............................................. 131
Issued common stock at premium for cash.
3. 2010 Retained profit = 2009 Retained profit + 2010 Income – 2010 Dividends
€ 19,273 € 17,350 € 4,232 € 2,309
Part 1
Jan. 2 Treasury Stock, Common................................... 75,000
Cash ............................................................... 75,000
Purchased treasury stock (3,000 x $25).
Jan. 7 Retained Earnings ............................................... 40,500

Common Dividend Payable .......................... 40,500
Declared $1.50
dividend per share on 27,000 outstanding shares.
Feb. 28 Common Dividend Payable ................................ 40,500

Cash ............................................................... 40,500
Paid cash dividend.
July 9 Cash* .................................................................... 36,000

Treasury Stock, Common** .......................... 30,000
Paid-In Capital, Treasury Stock*** ............... 6,000
Reissued treasury stock.
*(1,200 x $30) **(1,200 x $25) ***(1,200 x $5)
Aug. 27 Cash* .................................................................... 30,000

*(1,500 x $20) **(1,500 x $25)
Sept. 9 Retained Earnings ............................................... 59,400

Declared $2 dividend on 29,700 outstanding shares.
Oct. 22 Common Dividend Payable ................................ 59,400

Cash ............................................................... 59,400
Paid cash dividend.
Dec. 31 Income Summary ................................................ 52,000

Retained Earnings......................................... 52,000
Closed Income Summary account.
Exercise 11-18 (Concluded)
Part 2
ALEXANDER CORPORATION
Retained earnings, December 31, 2013 ....................... $ 340,000

Plus net income .............................................................. 52,000
392,000
Less: Cash dividends declared ..................................... (99,900)
Treasury stock (1,500)*
reissuances*
................................................................................
Retained earnings, December 31, 2014 ....................... $ 290,600
*From August 27 transaction of reissuance of treasury shares.
Part 3
ALEXANDER CORPORATION
Stockholders’ Equity Section of the Balance Sheet
December 31, 2014
authorized, 30,000 shares issued and outstanding;
300 shares in treasury ................................................. $ 750,000
Paid-in capital in excess of par value, common stock 50,000
Retained earnings (from part 2) ......................................... 290,600
Less cost of treasury stock........................................... (7,500)
Total stockholders’ equity............................................. $1,083,100
PROBLEM SET A
Problem 11-1A (30 minutes)
Part 1
a. To record sale of 10,000 ($250,000/$25 per share) shares of $25 par
value common stock for $30 ($300,000/10,000 shares) per share.
b. To record issuance of 5,000 ($125,000/$25 per share) shares of $25 par
value common stock to the company’s promoters for their efforts in
organizing the company when the market value is $30 ($150,000/5,000
shares) per share.
c. To record acquisition of assets and liabilities by issuing 2,000
($50,000/$25) shares of $25 par value common stock at $40 per share.
d. To record sale of 3,000 ($75,000/$25 per share) shares of $25 par value
common stock for $40 ($120,000/3,000 shares) per share.
Part 2
Number of outstanding shares
Issued in (a) ...................................... 10,000
Issued in (b) ...................................... 5,000
Issued in (c) ...................................... 2,000
Issued in (d) ...................................... 3,000
Total .................................................. 20,000
Part 3
Minimum legal capital = Outstanding shares x Par value per share
= 20,000 x $25 = $500,000
Part 4
Total paid-in capital from common stockholders
From transaction (a) ....................... $300,000
From transaction (b) ...................... 150,000
From transaction (c) ....................... 80,000
From transaction (d) ...................... 120,000
Total paid-in capital ........................ $650,000
Part 5
Book value per common share
Total stockholders’ equity (given) . $695,000
Outstanding shares (from Part 2) ... 20,000
Book value per common share ...... $ 34.75 ($695,000 / 20,000 shares)
Part 1
Jan. 1 Treasury Stock, Common................................... 80,000
Cash ............................................................... 80,000
Jan. 5 Retained Earnings ............................................... 72,000

Feb. 28 Common Dividend Payable ................................ 72,000

Cash ............................................................... 72,000
Paid cash dividend.
July 6 Cash* .................................................................... 36,000

Paid-In Capital, Treasury Stock*** ............... 6,000
*(1,500 x $24) **(1,500 x $20) ***(1,500 x $4)
Aug. 22 Cash* .................................................................... 42,500

*(2,500 x $17) **(2,500 x $20)
Sept. 5 Retained Earnings ............................................... 80,000

Oct. 28 Common Dividend Payable ................................ 80,000

Cash ............................................................... 80,000
Paid cash dividend.
Dec. 31 Income Summary ................................................ 388,000

Retained Earnings......................................... 388,000
Problem 11-2A (Concluded)
Part 2
KOHLER CORPORATION
Retained earnings, December 31, 2013 ....................... $270,000

Plus net income .............................................................. 388,000
658,000
Less: Cash dividends declared ..................................... (152,000)
Treasury stock (1,500)
reissuances
................................................................................
Retained earnings, December 31, 2014 ....................... $504,500
Part 3
KOHLER CORPORATION
December 31, 2014
authorized, 40,000 shares issued and outstanding .. $400,000
Paid-in capital in excess of par value, common stock 60,000
Retained earnings (from part 2) ......................................... 504,500
Total stockholders’ equity............................................. $964,500
Part 1
Explanations for each of the journal entries
Oct. 2 Declared a cash dividend of $2 per share of common stock.

($60,000 / 30,000 shares)
Oct. 25 Paid the cash dividend on common stock.
Oct. 31 Declared a 10% stock dividend when the market value is $25 per
share. ($36,000/$12 par = 3,000 shares = 10% of 30,000 shares;
$75,000/3,000 shares = $25 per share)
Nov. 5 Distributed the common stock dividend.
Dec. 1 Executed a 3-for-1 stock split. ($12 par / $4 par = 3-for-1 ratio)
Dec. 31 Closed the Income Summary account to Retained Earnings.
Part 2
Oct. 2 Oct. 25 Oct. 31 Nov. 5 Dec. 1 Dec. 31
Common stock ............... $360,000 $360,000 $360,000 $396,000 $396,000 $396,000
Common stock
dividend distributable 0 0 36,000 0 0 0
Paid-in capital in
excess of par................. 90,000 90,000 129,000 129,000 129,000 129,000
Retained earnings.......... 260,000 260,000 185,000 185,000 185,000 395,000
Total equity....................... $710,000 $710,000 $710,000 $710,000 $710,000 $920,000
Part 1
Outstanding common shares
Jan. 5 Apr. 5 July 5 Oct. 5
Beginning balance ..................... 40,000 40,000 40,000 40,000
Less treasury stock (Mar. 20) ... (3,000) (3,000) (3,000)
Plus dividend shares (July 31)* . ______ ______ ______ 7,400
Outstanding shares ................... 40,000 37,000 37,000 44,400
*(20% x 37,000)
Part 2
Cash dividend amounts
Jan. 5 Apr. 5 July 5 Oct. 5
Outstanding shares ................... 40,000 37,000 37,000 44,400
Dividend per share..................... $ 0.50 $ 0.50 $ 0.50 $ 0.50
Total dividend............................. $20,000 $18,500 $18,500 $22,200
Part 3
Capitalization of retained earnings for small stock dividend
Number of shares .................................................................... 7,400
Market value per share ........................................................... $12
Total capitalized ...................................................................... $ 88,800
Part 4
Cost per share of treasury stock
Total amount paid ................................................................... $ 30,000
Shares purchased ................................................................... 3,000
Cost per share ......................................................................... $ 10
Part 5
Net income
Retained earnings, beginning balance ................................. $320,000
Less dividends: Jan. 5 ......................................................... (20,000)
Apr. 5 ......................................................... (18,500)
July 5 ......................................................... (18,500)
July 31 ........................................................ (88,800)
Oct. 5.......................................................... (22,200)
Total before net income.......................................................... $152,000
Plus net income ....................................................................... ?
Retained earnings, ending balance ....................................... $400,000
Therefore, net income = $248,000
1. Market price = $85 per share (current stock exchange price given)
2. Computation of par values of stock

Preferred: Paid-in amount / Number of shares = $50,000 / 1,000 = $50
Common: Paid-in amount / Number of shares = $80,000 / 4,000 = $20
3. Book values with no dividends in arrears

Book value per preferred share = par value (when not callable) = $50
Common stock
Total equity............................................. $280,000
Less equity for preferred ...................... (50,000)
Common stock equity ........................... $230,000
Number of outstanding shares............. 4,000
Book value per common share ............ $ 57.50 ($230,000 / 4,000 shares)
4. Book values with two years’ dividends in arrears
Preferred stock
Preferred stock par value ..................... $ 50,000
Plus two years’ dividends in arrears* .. 5,000
Preferred equity ..................................... $ 55,000
*2 years’ dividends = 2 x ($50,000 x 5%) = $5,000
Book value per preferred share ........... $ 55.00 ($55,000 / 1,000 shares)
Common stock
Total equity............................................. $280,000
Less equity for preferred ...................... (55,000)
Common stock equity ........................... $225,000
Book value per common share ............ $ 56.25 ($225,000/4,000 shares)
Problem 11-5A (Concluded)
5. Book values with call price and two years’ dividends in arrears
Preferred stock
Preferred stock call price (1,000 x $55) .... $ 55,000
Plus two years’ dividends in arrears* ....... 5,000
Preferred equity .......................................... $ 60,000
Number of outstanding shares.................. 1,000
Book value per preferred share ................ $ 60.00 ($60,000 / 1,000 sh.)
Common stock
Total equity.................................................. $280,000
Less equity for preferred ........................... (60,000)
Common stock equity ................................ $220,000
Number of outstanding shares.................. 4,000
Book value per common share ................. $ 55.00 ($220,000 / 4,000 sh.)
6. Dividend allocation in total

Preferred Common Total
2 years’ dividends in arrears .... $ 5,000 $ 0 $ 5,000
Current year dividends ............. 2,500 2,500
Remainder to common .............. . 4,000 4,000
Totals .......................................... $ 7,500 $ 4,000 $11,500
Dividends per share for the common stock

$4,000 / 4,000 shares = $1.00
7. Equity represents the residual interest of owners in the assets of the

business after subtracting claims of creditors. With few exceptions,
these assets and liabilities are reported at historical cost, not market
value. Therefore, the book value of common stock does not normally
match its market value. Also, the book value of common stock is based
on past transactions and events, whereas the market value takes into
account expected future earnings, growth, dividends, and other industry
and economic factors.
PROBLEM SET B
Problem 11-1B (30 minutes)
Part 1
a. To record sale of 3,000 ($3,000/$1 per share) shares of $1 par value
common stock for $40 ($120,000/3,000) per share.
b. To record issuance of 1,000 ($1,000/$1 per share) shares of $1 par value
common stock to the company’s promoters for their efforts in organizing
the company when the market value is $40 per share.
c. To record acquisition of assets and liabilities by issuing 800 ($800/$1 per
share) shares of $1 par value common stock at $50 per share and issuing
a note for $18,300.
d. To record sale of 1,200 shares of $1 par value common stock for $50 per
share.
Part 2
Number of outstanding shares
Issued in (a) ..................................... 3,000
Issued in (b) ..................................... 1,000
Issued in (c) ..................................... 800
Issued in (d) ..................................... 1,200
Total .................................................. 6,000
Part 3
Minimum legal capital = Outstanding shares x Par value per share
= 6,000 x $1 = $6,000
Part 4
Total paid-in capital from common stockholders
From transaction (a) ....................... $120,000
From transaction (b) ....................... 40,000
From transaction (c) ....................... 40,000
From transaction (d) ....................... 60,000
Total paid-in capital ........................ $260,000
Part 5
Book value per common share
Total stockholders’ equity (given) . $283,000
Outstanding shares (from 2) .......... 6,000
Book value per common share ...... $ 47.17 ($283,000 / 6,000 shares)
Part 1
Jan. 10 Treasury Stock, Common .................................. 480,000
Cash ............................................................... 480,000
Mar. 2 Retained Earnings .............................................. 240,000

Common Dividend Payable ......................... 240,000
Declared $1.50 dividend on 160,000 outstanding shares.
Mar. 31 Common Dividend Payable ............................... 240,000

Cash ............................................................... 240,000
Paid cash dividend.
Nov. 11 Cash* ................................................................... 312,000

Treasury Stock, Common** ......................... 288,000
Paid-In Capital, Treasury Stock*** .............. 24,000
*(24,000 x $13) **(24,000 x $12) ***(24,000 x $1)
Nov. 25 Cash* ................................................................... 152,000

Paid-In Capital, Treasury Stock ........................ 24,000
Retained Earnings .............................................. 16,000
Treasury Stock, Common** ......................... 192,000
*(16,000 x $9.50) **(16,000 x $12)
Dec. 1 Retained Earnings .............................................. 500,000

Common Dividend Payable ......................... 500,000
Declared $2.50 dividend on 200,000 outstanding shares.
Dec. 31 Income Summary .............................................. 1,072,000

Retained Earnings ....................................... 1,072,000
Problem 11-2B (Concluded)
Part 2
BALTHUS CORP.
Retained earnings, December 31, 2013 ........................ $2,160,000
Plus net income .............................................................. 1,072,000

3,232,000
Less: Cash dividends declared .................................... (740,000)

Treasury stock (16,000)
reissuances
...............................................................................
Retained earnings, December 31, 2014 ........................ $2,476,000
Part 3
BALTHUS CORP.
December 31, 2014

authorized, 200,000 shares issued and outstanding . $ 200,000
Paid in capital in excess of par value, common stock . 1,400,000
Retained earnings (from part 2) .......................................... 2,476,000
Total stockholders’ equity .............................................. $4,076,000
Part 1
Explanations for each of the journal entries
Jan. 17 Declared a cash dividend of $1 per share of common stock.

($96,000 / 96,000 shares)
Feb. 5 Paid the cash dividend on common stock.
Feb. 28 Declared a 12.5% stock dividend when the market value is $21 per
share. ($120,000 / $10 par = 12,000 shares = 12.5% of 96,000
shares; $252,000 / 12,000 shares = $21 per share)
Mar. 14 Distributed the common stock dividend.
Mar. 25 Executed a 2-for-1 stock split. ($10 par / $5 par = 2-for-1 ratio)
Mar. 31 Closed the Income Summary account to Retained Earnings.
Part 2
Jan. 17 Feb. 5 Feb. 28 Mar. 14 Mar. 25 Mar. 31
Common stock............... $ 960,000 $ 960,000 $ 960,000 $1,080,000 $1,080,000 $1,080,000
Common stock
dividend distributable .. 0 0 120,000 0 0 0
Paid-in capital in
excess of par ................. 384,000 384,000 516,000 516,000 516,000 516,000
Retained earnings.......... 1,504,000 1,504,000 1,252,000 1,252,000 1,252,000 1,972,000
Total equity....................... $2,848,000 $2,848,000 $2,848,000 $2,848,000 $2,848,000 $3,568,000
Part 1
Outstanding common shares
Feb. 15 May 15 Aug. 15 Nov. 15
Beginning balance ...................... 17,000 17,000 17,000 17,000
Less treasury stock (Mar. 2) ...... (1,000) (1,000) (1,000)
Plus dividend shares (Oct. 4)* ... ______ ______ ______ 2,000
Outstanding shares .................... 17,000 16,000 16,000 18,000
*(12.5% x 16,000)
Part 2
Cash dividend amounts
Feb. 15 May 15 Aug. 15 Nov. 15
Outstanding shares .................... 17,000 16,000 16,000 18,000
Dividend per share...................... $ 0.40 $ 0.40 $ 0.40 $ 0.40
Total dividend.............................. $6,800 $6,400 $6,400 $7,200
Part 3
Capitalization of retained earnings for small stock dividend
Number of shares .................................................. 2,000
Market value per share .......................................... $ 42
Total capitalized ..................................................... $ 84,000
Part 4
Cost per share of treasury stock
Total amount paid .................................................. $ 40,000
Shares purchased .................................................. 1,000
Cost per share ........................................................ $ 40
Part 5
Net income
Retained earnings, beginning balance ............... $270,000
Less dividends: Feb. 15...................................... (6,800)
May 15 ...................................... (6,400)
Aug. 15 ..................................... (6,400)
Oct. 4 ........................................ (84,000)
Nov. 15 ..................................... (7,200)
Total before net income ....................................... $159,200
Plus net income .................................................... ?
Retained earnings, ending balance .................... $295,200
159,00,60
Therefore, net income = $136,000 0
1. Market price = $90 per share (current stock exchange price given)
2. Computation of stock par values

Preferred: Paid-in amount / Number of shares = $375,000 / 1,500 = $250
Common: Paid-in amount / Number of shares = $900,000 /18,000 = $ 50
3. Book values with no dividends in arrears
Book value per preferred share = par value (when not callable)
=$ 250
Common stock
Total equity ......................................... $2,400,000
Less equity for preferred ................... (375,000)
Common stock equity........................ $2,025,000
Number of outstanding shares ......... 18,000
Book value per common share ......... $ 112.50 ($2,025,000 / 18,000)
4. Book values with two years’ dividends in arrears
Preferred stock
Preferred stock par value ................... $ 375,000
Plus two years’ dividends in arrears* 60,000
Preferred equity................................... $ 435,000
Number of outstanding shares .......... 1,500
Book value per preferred share ......... $ 290.00 ($435,000 / 1,500)
Common stock
Total equity .......................................... $2,400,000
Less equity for preferred .................... (435,000)
Common stock equity......................... $1,965,000
Number of outstanding shares .......... 18,000
Book value per common share .......... $ 109.17 ($1,965,000 / 18,000) rounded
Problem 11-5B (Concluded)
5. Book values with call price and two years’ dividends in arrears
Preferred stock
Preferred stock call price (1,500 x $280) $ 420,000
Plus two years’ dividends in arrears* ........ 60,000
Preferred equity............................................ $ 480,000
Number of outstanding shares ................... 1,500
Book value per preferred share .................. $ 320.00 ($480,000/1,500)
Common stock
Total equity ................................................... $2,400,000
Less equity for preferred ............................. (480,000)
Common stock equity.................................. $1,920,000
Number of outstanding shares ................... 18,000
Book value per common share ................... $ 106.67 ($1,920,000/18,000) rounded
6. Dividend allocation in total

Preferred Common Total
2 years’ dividends in arrears .... $ 60,000 $ 0 $ 60,000
Current year dividends ............. 30,000 — 30,000
Remainder to common .............. — 10,000 10,000
Totals .......................................... $ 90,000 $ 10,000 $100,000
Dividends per share for the common stock

$10,000 / 18,000 shares = $0.56 rounded
7. Equity represents the residual interest of owners in the assets of the

business after subtracting claims of creditors. With few exceptions, these
assets and liabilities are valued at historical cost, not market value.
Therefore, the book value of common stock does not normally match its
market value. Also, the book value of common stock is based on past
transactions and events, whereas the market value takes into account
expected future earnings, growth, dividends, and other industry and
economic factors.
SERIAL PROBLEM — SP 11
Serial Problem — SP 11, Success Systems (25 minutes)
1a. Journal entry for issuance of common stock to Cicely

Cash .................................................................... 86,000
Common Stock............................................. 86,000
Issuance of common stock.
1b. Journal entry for issuance of preferred stock to Marcello

Cash .................................................................... 86,000
Preferred Stock ............................................ 86,000
Issuance of $100 par 7% preferred stock.
1c. Journal entry to record $86,000 borrowed from the bank

Cash .................................................................... 86,000
Notes Payable .............................................. 86,000
Borrowed $86,000 on a 10-year, 7% note payable
2. Evaluation of the three proposals
a. Cicely’s investment as a common shareholder would mean that Adria

would have a second person who would be an owner. Adria has been
working on her own business for about 15 months, and may not wish
to have a second person who may have authority to make decisions.
If Cicely and Adria do not agree completely on policies and
procedures, this may create some difficulties for Adria. On the other
hand, Cicely may have skills that could complement Adria’s skills,
and the two might make a great team and experience success.
As Cicely is an owner there is no need to repay the $86,000, nor is
there any requirement that dividends be paid. If the company
experiences cash flow difficulties, any dividends can be postponed
until a later time.
Serial Problem (concluded)
b. Having a preferred shareholder means that Adria’s Uncle Marcello

will not have the same voting rights as Adria. Marcello may be
expecting regular dividends, however, so Adria should be prepared
to pay $6,020 ($86,000 x 7%) in dividends each year. This is not a
requirement, however, even if the preferred stock is cumulative.
The preferred stock does not require repayment, and technically,
Adria would have the use of the $86,000 for as long as Marcello
wishes to be a preferred shareholder.
c. The loan requires regular monthly payments, so Adria will need to

budget the $1,000 each month as a cash outflow. The loan may be
riskier because it does require regular payments. Interest on the loan
balance is a tax-deductible expense to the company, while any
dividends (whether to the common or preferred shareholders) are not
a tax-deductible expense to the company.
In addition, Adria does not have an additional owner that could exert
some control over her business.
3. There is no correct answer to the question of which proposal Adria

should adopt. Class discussion might indicate which proposal the class
prefers.
Reporting in Action — BTN 11-1
(All shares in thousands.)

1. As of December 31, 2011, the shares of common stock issued and
outstanding are 68,430(see balance sheet). As of December 31, 2010, the
number of shares of common stock issued and outstanding is 68,468.
The weighted-average common shares used in calculating earnings per
share are disclosed on the Statement of Income. At December 31, 2011,
the basic weighted-average shares were 68,792. At December 31, 2010,
the basic weighted-average shares were 66,900. Therefore, for 2011, the
shares outstanding at year-end were slightly lower than the basic
weighted-average shares outstanding during the year; the reverse occurs
for 2010. (Differences between the year-end and weighted-average share
amounts are likely the result of timing differences with share
repurchases, issuances, and retirements.)
2. Total stockholders’ equity as of December 31, 2011 ....... $500,056,000
Book value of equity applicable to common stock* ........ $500,056,000

* Given that there is only one class of stock issued and oustanding, all the equity items listed
can be considered to represent the book value of the common stock.
3. As found on the Statement of Cash Flows, Polaris made $61,585,000 and

$53,043,000 in cash dividends to shareholders.
4. Polaris’s income statement reports the following

2011 2010 2009
Basic earnings per common share ................. $3.31 $2.20 $1.56
Its basic earnings per common share figure has consistently grown over
this 3-year period.
5. Polaris’s consolidated balance sheet reports no shares of treasury stock

in 2011 and 2010.
6. Answer depends on the financial statement information obtained.
Comparative Analysis — BTN 11-2
Equity applicable to common shares

1. Book value per common share =
Common shares outstanding
Polaris’s book value per common share
= $ 500,056 / 68,430 = $7.31
Arctic Cat’s book value per common share
= $183,036 / 18,301 = $10.00
Net income
2. Earnings per share =
Polaris’s earnings per share: $227,575 / $68,792 = $ 3.31
Arctic Cat’s earnings per share: $13,007 / $18,232 = $ 0.71
Annual cash dividends per share

3. Dividend yield =
Market value per share
Polaris’s dividend yield: $0.90 / $ 72.10 = 1.25%
Arctic Cat’s dividend yield: $0.00 / $ 33.70 = 0.00%
Analysis: The low (zero) dividend yield for both companies suggests
that they are “growth stocks.”
Market value per share

4. Price-earnings ratio =
Earnings per share
Polaris’s price-earnings ratio: $ 72.10 / $3.31 = 21.78

Arctic Cat’s price-earnings ratio: $33.70/ $0.71 = 47.46
Interpretation: The price-earnings ratio of Arctic Cat is over twice that of

Polaris. For Polaris, the market appears willing to pay a multiple of ~22
times its earnings. For Arctic Cat, that multiple is considerably greater
at ~47 times its earnings.
Ethics Challenge — BTN 11-3
During the course of her duties, Harriet has learned information that others
might not know. If she uses this information to trade in New World
Pharmaceuticals’ stock, Harriet may be violating securities laws, so she
should be careful if she buys or sells any New World stock.
It is possible that the new drug will not be as profitable as expected, and the
stock might not increase as much as Harriet expects. Nevertheless, Harriet
might be accused of insider trading in the future if she buys the stock.
Communicating in Practice — BTN 11-4
There is no set solution to this activity. Solutions will vary based on the
industry and the companies selected.
Taking It to the Net — BTN 11-5
1. The balance sheet of McDonald’s shows that they have both preferred and
common stock authorized, but it has only issued common stock.
2. The preferred stock has no par value. There are 165.0 million preferred
shares authorized, and none issued. The common stock has a $0.01 par
value. There are 3.5 billion shares authorized and 1,660.6 million shares
issued.
3. In 2011, the financing section of the statement of cash flows shows that
McDonald’s paid $3,363.1 million to purchase treasury stock.
4. In 2011, the financing section of the statement of cash flows shows that
McDonald’s paid common stock cash dividends of $2,609.7 million.
Teamwork in Action — BTN 11-6
1. The team statement should include the following:

a. When a corporation “buys back” its stock (engages in a treasury stock
acquisition), the effect on financial position is a decrease in both
assets (cash) and equity (treasury stock). Also, treasury stock is a
contra equity account that decreases equity.
b. Reasons for “buybacks”:
 to use shares to acquire another corporation.
 to avoid a hostile takeover by an investor seeking to take control
of the company.
 to reissue shares to employees as compensation.
 to maintain a strong or stable market for the stock.
2. The team should establish the acquisition entry as follows
Treasury Stock, Common ................................ 13,400

Cash ............................................................. 13,400
Reacquired 100 shares of $100 par value
common stock at a cost of $134 per share.
Each member should prepare one of the following reissue entries:
a. Cash 13,400
............................................................................
............................................................................
Treasury Stock, 13,400
Common
............................................................................
............................................................................
Received $134 per share for 100 treasury
shares costing $134 per share.
b. Cash 15,000
............................................................................
............................................................................
Paid-In Capital, Treasury Stock ................. 1,600
Common
............................................................................
............................................................................
c. Cash 12,000
............................................................................
............................................................................
Paid-In Capital, Treasury Stock ....................... 1,400
Common
............................................................................
............................................................................
Teamwork in Action (Continued)
d. Cash ................................................................... 12,000

Paid-In Capital, Treasury Stock ....................... 1,000
Retained 400
Earnings
............................................................................
............................................................................
Treasury Stock, Common .......................... 13,400
e. Cash 12,000
............................................................................
............................................................................
Retained 1,400
Earnings
............................................................................
............................................................................
Common
............................................................................
............................................................................
3. When presenting and explaining the above entries to the team, the
following points should be made by the team members:
The similarities in all reissue entries a through e are:

 The net affect of the transaction is to increase assets and equity by the
amount received on reissue.
 Cash (assets) is always increased by the amount received.
 Treasury Stock is always decreased by the full cost regardless of
whether the reissue is at cost, above cost, or below cost.
The differences in reissue entries b through e are:
(b) Reissuing above cost creates additional Paid-In Capital.*
(c) Reissuing below cost reduces existing Paid-In Capital.*

(d) Reissuing below cost reduces existing Paid-In Capital,*
but after this account’s balance has been eliminated, then Retained
Earnings must be reduced by the additional amount below cost.
(e) Reissuing below cost reduces Retained Earnings when Paid-In

Capital* does not exist.
*Refers to the Paid-In Capital, Treasury Stock account.
Entrepreneurial Decision — BTN 11-7
1.
Plan A Plan B
Net income ............................................................ $ 72,000 $ 72,000
Less preferred dividends ..................................... 0 (10,000)
Net income for common stockholders ............... $ 72,000 $ 62,000
Andrew’s share of common equity..................... 80% 100%

Andrew’s share of income after any preferred
stock dividends ..................................................... $ 57,600 $ 62,000
Andrew’s initial equity ......................................... $375,000 $375,000
Andrew’s return on equity ................................... 15.4% 16.5%
2.
Plan A Plan B
Net income ............................................................ $ 16,800 $ 16,800
Less preferred dividends ..................................... 0 (10,000)
Net income for common stockholders ............... $ 16,800 $ 6,800
Andrew’s share of common equity..................... 80% 100%

Andrew’s share of income after any preferred
stock dividends ..................................................... $ 13,440 $ 6,800
Andrew’s initial equity ......................................... $375,000 $375,000
Andrew’s return on equity ................................... 3.6% 1.8%
3. The difference between the answers for parts 1 and 2 arises from the
percent of return generated with the assets invested in the corporation.
In part 1, Andrew’s return on equity is 15.4% for Plan A, which is less
than the 16.5% for Plan B. However, the return on equity is only 3.6% in
part 2 for Plan A, BUT this is more than the 1.8% for Plan B.
These results indicate that the 8% dividend rate on the preferred stock is
advantageous to Andrew as long as the rate of return on the assets is
greater than 8% (this is the same as saying net income is over $40,000).
This means Plan B is preferred. Net income over $40,000 yields a return
on assets greater than 8% (i.e., 8% equals $40,000/$500,000). If net
income falls below $40,000 (or less than 8% return on assets), then Plan
A is preferred.
Hitting the Road — BTN 11-8
There is no formal solution for this field activity. Students often find this
assignment interesting as it highlights the relevance of their accounting
studies. Instructors also sometimes assign a particular financial news show
to watch on a certain day for the entire class—this can help encourage a
general class discussion on the topics raised.
Global Decision — BTN 11-9
Equity applicable to common shares

1. Book value per common share =
Common shares outstanding
KTM’s book value per common share

= €219,775 / 10,509 = €20.91
Net income
2. Earnings per share =
KTM’s earnings per share = € 20,818 / 10,509 = €1.98
(Instructor’s note: At the date this problem was written, €1 was equal to about
$1.24. This means that KTM’s BVPS is about $25.93, and its EPS is about $2.46)
3. KTM’s EPS is €1.98, and its statement of changes in shareholders’ equity

reports that KTM declared no cash dividends during 2011.
Consequently, for the current year, KTM is paying out dividends per
share of zero while it has experienced earnings per share of €1.98. Since
KTM is not paying any dividends, it is likely considered a growth stock.

Financial and Managerial Accounting Information For Decisions 5th Edition Wild Solutions Manual Download

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Solution Manual for Financial and Managerial

Accounting Information for Decisions 5th Edition

Quick Study 11-1 (10 minutes)

True statements: 3, 4, 5 and 7

Quick Study 11-2 (5 minutes)

a. Cash ........................................................................... 1,827,000

b. Land ............................................................................ 1,827,000

Quick Study 11-3 (5 minutes)

a. Cash ...................................................................... 375,000

b. Cash* ..................................................................... 450,000

a. Cash* ..................................................................... 648,000

b. Cash* ..................................................................... 648,000

Quick Study 11-5 (15 minutes)

(a) Mar. 1 Cash ................................................................. 297,500

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

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

1. Cash* .......................................................................... 510,000

Quick Study 11-7 (10 minutes)

July 15 Retained Earnings ........................................... 165,000

Aug. 15 No formal journal entry required; company would

Aug. 31 Common Dividend Payable ............................ 165,000

Paid-in capital in excess of par value, common stock ............... 900,000

Total paid-in capital ....................................................................... 2,000,000

Retained earnings ......................................................................... 433,000

Total stockholders' equity ............................................................ $2,433,000

Apr. 2 Retained Earnings ..................................................... 400,000

Quick Study 11-9 (10 minutes)

Total cash dividend ....................................................................... $110,000

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

May 3 Treasury Stock (4,000 shares) ............................ 36,000

Nov. 4 Cash ....................................................................... 8,500

Quick Study 11-11 (10 minutes)

1. This material error should be reported on the statement of retained

2. This change in the expected useful life is a change in an accounting

Net income - Preferred dividends

Quick Study 11-13 (10 minutes)

= ($900,000 - $20,000) / 400,000 shares

Quick Study 11-14 (10 minutes)

Market value per share $20.54

Analysis: Many analysts consider stocks with a PE less than 5 to 8 as

Quick Study 11-15 (10 minutes)

Annual cash dividends per share $2.34

Analysis: The company’s dividend yield of 7.2% indicates that it should be

Total stockholders' equity .............................................................. $1,850,000

Equity applicable to common shares ............................................ $1,050,000

Book value of common shares ($1,050,000/150,000 shares) ...... $ 7.00

Quick Study 11-17 (10 minutes)

Mar. 31 Cash ..................................................................... 3,271

Exercise 11-2 (15 minutes)

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

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

4. Cash ................................................................................ 60,000

Exercise 11-4 (15 minutes)

Exercise 11-5 (10 minutes)

b. Total stockholders’ equity

c. Number of outstanding shares

b. Total stockholders’ equity

c. Number of outstanding shares

3. From a stockholder’s point of view, there is no practical difference

Feb. 28 Common Stock Dividend Distributable ............ 120,000

Shares owned........................................ x 800 x 960*

2013 ($20,000 paid)

2014 ($28,000 paid)

2013-2016 ($598,000 paid) _ _