Hhtfa8e Ch09 SM

Chapter 9
Stockholders Equity
ShortExercises
(5 min.) S 9-1 Corporationsadvantages: Continuouslife Transferabilityof ownership(listedas two itemson page536) Limitedliability of the stockholders Easeof raisingcapital (page536)
Corporationsdisadvantages: Corporatetaxation Governmentregulation Separationof ownershipand management(per text page536)
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(5 min.) S 9-2 1. The stockholders holdultimatepowerin a corporation. 2. The chairperson of the board of directors is usually the most powerfulpersonin a corporation.Title is CEO. 3. The president is in chargeof day-to-day operations.Title is COO. 4. The chief financialofficeris in chargeof accountingand finance. Title is CFO.
205
(5-10 min.) S 9-3 1. The common stockholders are the real ownersof a corporation 2. Preferred stockholders have priority over common stockholders in (1) receipt of dividends and (2) receipt of assets if the corporation liquidates. 3. Common stockholders benefit more from a successful corporation because the preferred stockholders dividends are limited to a specified amount. The common stockholders take more risk so their potential for gainsthroughan increasein the companysstockpriceis unlimited.
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(5-10 min.) S 9-4 DATE: TO: FROM: RE: _____________ KarenScanlonand JenniferShaw StudentName Stepsin forminga corporation
The first step in organizing a corporation is to obtain a charter from the state. The charter authorizes the corporation to issue a certain number of shares of stock to the owners of the business, who are called stockholders. The corporationwill exist whenthe incorporators (Per page536) Pay fees, Signthe charter, File documentswith the state, and Agree to a set of bylaws to determine how the corporation is to be governedinternally. Later steps include the stockholders will electing a board of directors whoin turn appointofficers to managethe corporationon a day-to-day basis. These officers consist of the chairperson of the board (the chief executive officer) and the president (the chief operating officer) who lead the chief financial officer who manage the day to day operations of the controller (accounting officer) and treasurer(financeofficer).
207 Financial Accounting 8/e Solutions Manual
(5-10 min.) S 9-5 The $72,927,000was paid-in capital. It was not a profit and therefore had no effect on net income. The par value of stock has no effect on total paid-in capital. Total paid-in capital is the total amount that stockholders have invested in (paid into) a corporation, includingthe par value of stock issuedplus any additional paidin capital.
(10 min.) S 9-6 Millions HorrisPrinter: Cash. CommonStock. AdditionalPaid-in Capital.. DelectableDoughnuts: Cash. CommonStock. 17,123 23 17,100
292 292
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(10 min.) S 9-7 Case A Issue stock and buy the assets in separate transactions:
Journal
DATE ACCOUNTTITLESANDEXPLANATION DEBIT CREDIT
Cash.. CommonStock(12,000 $20)... Paid-in Capitalin Excessof Par Issuedstock. Building Equipment Cash.. Purchasedplantassets. Case B Issue stock to acquire the assets:
800,000 240,000 560,000
550,000 250,000 800,000
Journal
Building 550,000 Equipment... 250,000 CommonStock(12,000 $20) Paid-in Capitalin Excessof Par... Issuedstockto acquirebuildingand equipment. The balancesin all accountsare the same: Building Equipment.
240,000 560,000
$550,000 250,000
CommonStock(12,000x $20 Paid-in Capitalin Excessof Par
240,000 560,000
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(5-10 min.) S 9-8 Thousands Stockholdersequity: Commonstock,$.01 par, 400 thousandshares issued... Paid-in capital in excessof par.. Retainedearnings.. Otherstockholdersequity.. Total stockholdersequity...
$ 4 196 647 (22) $825
(10 min.) S 9-9 Amounts In Thousands a. Total revenues.. $1,340 Total expenses.. 806 Net income. $ 534 b. Accountspayable Othercurrentliabilities... Longtermdebt. Total liabilities... c. Total liabilities(fromReq. b). Total stockholdersequity(fromS 9-7).. Total assets $ 440 2,569 27 $3,036 $3,036 825 $3,861
211
(5 min.) S 9-10
Journal
TreasuryStock... Cash.. Cash.. TreasuryStock.. Paid-in CapitalfromTreasuryStock Transactions..
Millions 29 29 8 2 6
Overall, stockholders equity decreased by $21 million ($29 million paid out minus$8 millionreceived).
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213
(15-20 min.) S 9-11 Req. 1 MEMORANDUM TO: FROM: RE: SusanSmithExports,Inc., Boardof Directors StudentName Howthe purchaseof treasurystockwill makeit moredifficult for outsidersto take over the company
Purchasing treasury stock decreases the amount of stock outstanding. If Susan Smith Exports holds a sufficient quantity of company stock in the treasury, outsiders, such as the Mobile investor group, may not be able to acquire a controlling interest (50+ percent) of the outstandingstock from the remaining stockholders. Because it takes cash to buy treasury stock, the purchase decreases the size of the corporation. Reducing the companys cash position may make the company sufficiently unattractive to cause the outsideinvestorsto abandontheir takeoverplan. Req. 2 Sales of treasurystock at pricesabovethe purchaseprice increasecompany assets becauseof the greater amountof assets comingin from the sale than went out to buy the stock. Treasury stock transactions do not affect liabilities, so the sale of treasury stock also increases stockholders equity. Thesesalesof treasurystockwill not affectnet incomebecausethe company is dealing with its owners. Transactions between the corporation and its owners cannot generate a profit or a loss that is reported on the income statement. Studentresponsesmayvary.
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(10 min.) S 9-12
Journal
2010 Dec. 15 RetainedEarnings ($110,000 .06) + (45,000 $1.00) DividendsPayable Declareda cashdividend 2011 Jan. 4 DividendsPayable Cash. Paidthe cashdividend.
51,600 51,600
51,600 51,600
During 2010, RetainedEarningsincreasedby $43,400 (net incomeof $95,000 dividendsof $51,600).
(5-10 min.) S 9-13 1. $360,000(200,000shares $1.80per share) 2. Preferred: $360,000 Common: $ 40,000 3. Cumulative, becauseit is not labelednoncumulative 4. Preferred: $1,080,000($360,000 3) Common: $ 420,000($1,500,000 $1,080,000)
(5-10 min.) S 9-14 Req. 1
Journal
May
11 RetainedEarnings(13,000 .15 $25.00) CommonStock (13,000 .15 $3)... Paid-in Capital in Excessof Par-Common..
48,750 5,850 42,900
Req. 2 No effecton total assets. No effecton total liabilities. No effecton total stockholdersequity.
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(10 min.) S 9-15 Total stockholdersequity.. Less:Preferredstock. Preferreddividendsin arrears (33,000 .04 $5 x 3) Commonequity. Numberof commonsharesoutstanding (63,000 1,400).. Bookvalueper shareof commonstock. $4,146,000 (195,000 ) (19,800 ) $3,931,200 61,600 63.82
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(5-10 min.) S 9-16 (a) Rateof return on total assets Rateof return on common stockholders' equity
Net income+ Interestexpense Averagetotal assets
(b)
Net income Preferreddividends Averagecommonstockholdersequity
1. Creditors have loaned money to the company and earn interest. Stockholders have invested in the corporations stock and thus own the companysnet income.The sumof interestexpenseplusnet incomeis the returnto the two groupsthat havefinancedthe companysassets. 2. Preferred stockholders have the first claim to the companys net income throughpreferreddividends.Therefore,preferreddividendsare subtracted fromnet incometo computeROE.
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(10-15 min.) S 9-17

Rateof return on total assets Net Interest income+ expense = Averagetotal assets
120+ 31 (10,624+ 9,515)/ 2 151 10,070 = 1.5%
Note: 10% is consideredgood in most industries. Therefore, Godhis 1.5% returnon assetsis very weak.
Rate of return on common stockholders equity
Net Preferred income dividends Averagecommon stockholdersequity
120 0 (3,212+ 2,878)/ 2
120 3,045
3.9%
Note: 15%is consideredgoodin mostindustries,so Godhis returnon equityis very weak.
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(20-30 min.) S 9-18 1. Corporations report common stock and retained earnings separately to comply with state laws. The laws require corporations to report stockholdersequityby sourceto distinguishpaid-in capital, whichcannot be usedfor cashdividends,fromretainedearnings. 2. We should first determine the market value of the land. Then divide the lands value by the market value of each share of stock. The result will tell us howmanysharesof our stockto issuefor the land. 3. Investorsbuy commonstockin the hopeof earninghigherreturnson their investmentthanare availableon an investmentin preferredstock. 4. The redemption value of our preferred stock requires us to pay the preferredstockholdersthis amountwhenwe buy backthe preferredstock. 5. Bookvalue
per shareof commonstock = Total stockholdersequity Preferredequity Numberof sharesof commonstockoutstanding
The stockholder can multiply book value per share by the number of sharesshe owns.The result will be the bookvalueof her stock.
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(5-10 min.) S 9-19 Billion s Cashflowsfromfinancingactivities: Paidoff long-termnotespayable. Issuedcommonstock. Purchasedtreasurystock.. Paidcashdividends Cashflowsfromfinancingactivities $(2.4) 1.1 (3.5) (1.6) $(6.4)
221
Exercises
GroupA (5-10 min.) Req. 1
E 9-20A
Journal
Jan. 19 Cash(12,000 $6.00) CommonStock(12,000 $2.00) .............. Paid-in Capitalin Excessof Par - Common .................................... Apr. 3 Cash ....................................................... PreferredStock .................................... 11 Inventory ................................................. Equipment ............................................... CommonStock(3,700 $2.00) ............... Paid-in Capitalin Excessof Par - Common .................................... Req. 2 Stockholdersequity: Preferredstock,$1.00,no par 10,000sharesauthorized,400 sharesissued Commonstock,$2.00par, 19,000sharesauthorized,15,700sharesissued Paid-in capital in excessof par-common ($48,000+ $18,100).
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72,000 24,000 48,000 54,000 54,000 16,000 9,500 7,400 18,100
$54,000 31,400 66,100

222
Stockholders Equity
Retainedearnings(deficit). Total stockholdersequity.
(43,000 ) $108,500
223
(10-15 min.) E 9-21A StockholdersEquity Preferredstock,$4.50no-par, 10,000shares authorized,600 sharesissued ........................................... $ 22,000 Commonstock,$1.50par, 19,000sharesauthorized,5,000 sharesissued 7,500 Paid-in capital in excessof par - common ............................... 80,550* Retainedearnings ................................................................ 45,000 Total stockholdersequity ................................................ $155,050 _____
*Computation: April 23: 1,700shares ($16.50 $1.50)= May 12: $19,000+ $41,000 (3,300shares $1.50)=. $25,500 55,050 $80,550
Journalentries(not required): Apr. 23 Cash... CommonStock ................................... Paid-in Capitalin Excessof Par May 2 Cash ...................................................... PreferredStock .................................. 12 Inventory ............................................... Equipment ............................................. CommonStock ...................................
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28,050 2,550 25,500 22,000 22,000 19,000 41,000 4,950

Stockholders Equity 224
Paid-in Capitalin Excessof Par
55,050
225
(10 min.) E 9-22A Paid-in capital consistsof: Preferredequity: Issuedfor cash(2,000shares $120) ........... Commonequity: Issuedfor cash(22,000shares $1.00) Issuedfor organizingthe corporation Issuedfor patent.. Total paid-in capital
$240,000 22,000 23,000 82,000 $367,000
Unuseddata: Net income Dividendsdeclared
Short-cut solution(alsookay): 1. $ 23,000 2. 82,000 3. 240,000(2,000 $120) 4. 22,000 (22,000 $1.00) $367,000= Total paid-in capital
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(10-15 min.) E 9-23A StockholdersEquity(Thousands) Commonstock,$0.75par, 800 shares authorized,320 sharesissued Paid-in capital in excessof par Retainedearnings Otherstockholdersequity Less:Treasurystock,common,100 sharesat cost.. Total stockholdersequity... $ 240 899 2,220 (730) (1,150 ) $1,479
Patterson Software paid a higher price to acquire treasury stock than the price Patterson received when it issued its stock. This explains why Treasury Stock has a greater balance than the sum of CommonStock plus Paid-in Capitalin Excessof Par.
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(10-15 min.) E 9-24A
Journal
Jan. 17 Cash(2,200 $10). CommonStock(2,200 $2.50) Paid-in Capital in Excessof Par. To issuecommonstock. May 23 TreasuryStock- Common(300 $12)... Cash... To purchasetreasurystock. Jul. 11 Cash(200 $20)... TreasuryStock- Common(200 $12) Paid-in Capital fromTreasury StockTransactions.. To sell treasurystock.
22,000 5,500 16,500
3,600 3,600
4,000 2,400 1,600
Overall effecton stockholdersequity ($22,000 $3,600+ $4,000) $22,400increase
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(10 min.) E 9-25A
Journal
b.
Cash(8 million $13.50). CommonStock(8 million $2.00)... Capitalin Excessof Par Value. TreasuryStock.. Cash. RetainedEarnings DividendsPayable DividendsPayable Cash. or one entry only: RetainedEarnings ... Cash.
Millions 108 16 92 16 16 31 31 31 31
c.
d.
31 31
229
(10 min.) E 9-26A Dollars in Millions StockholdersEquity: Commonstock,$2.00par value, 10.1 millionsharesissued($4.2 + $16.0) Capitalin excessof par value($8,400+ $92,000) Retainedearnings($250+ $446 $31) Treasurystock,2 millionsharesat cost. Total stockholdersequity
$ 20,200 100,400 665 (16,070 ) $105,195
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(20-30 min.) E 9-27A Req. 1 Conversionof preferredstockinto commonstock Retirementof preferredstock
Req. 2 Issuanceof commonstock: a. To preferredstockholderswhoconvertedtheir preferred into common b. For cashor otherassets c. Stockdividend
Req. 3 (Millions of shares of stock) Dec. 31, 2011 300 (52) 288
Commonsharesissued. Less:Treasurystock,numberof shares Commonsharesoutstanding...
231
(continued) E 9-27A Req. 4 RetainedEarnings(Millions) Dec. 31, 2010 176 Net income2011 Dec. 31, 2011
Dividends during 2011
Bal. Bal.
5,066 1,380 6,270
Req. 5 (All amounts in millions) December31, Purchases 2011 2010 During2011 $1,144 $228 = $ 916 52 12 = 40 $22.90
Costof treasurystock. Treasurystock,numberof shares Averagepriceper sharepaid for treasurystockpurchasedduring2011.
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(15 min.) E 9-28A

PREFERRED COMMON TOTAL
2010
Total dividend. Preferreddividends in arrears: 2008:40,000sharesX $0.50(par)per shareX .09 = 2009:40,000sharesX $0.50(par)per shareX .09 = Currentyear 2010:40,000sharesX $0.50(par)per shareX .09 = Total to preferred... Remainderto common.
$ 60,000
$1,800 1,800
1,800 $5,400 $54,600
2011
Total dividend. Preferreddividends: Currentyear 2011:40,000sharesX $0.50(par)per shareX .09 = Remainderto common.
$120,000
$1,800 $118,200
233
(15-20 min.) E 9-29A Req. 1
Journal
May 11 RetainedEarnings(300,000 .15 $19) CommonStock(300,000 .15 $0.80). Paid-in Capitalin Excessof Par - Common Todistributea commonstockdividend.
855,000 36,000 819,000
Req. 2 Stockholdersequity Commonstock,$0.80par, 2,600,000sharesauthorized, 345,000issued($240,000+ $36,000) Paid-in capital in excessof par - common ($307,200+ $819,000)... Retainedearnings($7,122,000 $855,000). Other.. Total stockholdersequity..
$ 276,000 1,126,200 6,267,000 (200,000 ) $7,469,200
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235
(continued) E 9-29A Req. 3 The stock dividend did not change total stockholders equity because the company didnt distribute assets to the shareholders as it would in a traditional dividend.The companymerelytransferred$855,000fromRetained Earnings to Common Stock ($36,000) and Paid-in Capital in Excess of Par ($819,000).
Req. 4 HDs maximumcash dividendis limited to $560,000, the balanceof its cash account.
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(15-20 min.) E 9-30A a. Decrease stockholdersequityby $78 million. b. No effect. c. No effect. d. No effect. e. Decrease stockholdersequityby $997.50(1,900 $5.25). f. Increase stockholdersequityby $6,300(900 $7).
g. No effect.
237
(10-15 min.) E 9-31A Stockholdersequity: Millions Commonstock,$0.50 par, 2,250millionshares (750 million 3) authorized, 1,260millionshares(420 million 3) issued Additionalpaid-in capital. Retainedearnings.. Other.. Total stockholdersequity. $ 630 318 2,399 (148) $3,199
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(10-15 min.) E 9-32A Req. 1 Common: Total stockholdersequity.. Less:Preferredequity redemptionvalue.. Total commonequity... Bookvalueper share($51,000/ 6,000shares).
$96,000 (45,000 ) $51,000 $ 8.50
Req. 2 Common: Total stockholdersequity... Less:Preferredequity[$45,000+ ($30,000 .04 3)]. Total commonequity. Bookvalueper share($47,400/6,000shares)..
$ 96,000 (48,600 ) $ 47,400 $ 7.90
Req. 3 Luxury Rugs stock is not necessarily a good buy. Investment decisions shouldbe basedon morethanone ratio.
239
(10-15 min.) E 9-33A

Rateof return on assets Net income+ Interestexpense Averagetotal assets
$1,525+ $222 ($15,906+ $13,700)/ 2
1,747 = 0 .118 $14,803
Rateof return on common = stockholders' equity
Net income Preferred dividends Averagecommon stockholders equity
$1,525 $0 ($8,556*+ $7,836**)/ 2
$1,525 = 0.186 $8,196
*$ 44 + $11,522 $3,010= $8,556 **$390+ $16,490 $9,044= $7,836
These profitability measures suggest strength because (1) Lunas 18.6% return on equity is very good and (2) it exceeds return on assets by a wide margin.
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(10-15 min.) E 9-34A

Return on assets
$1,878+ $1,439 ($55,790*+ $52,058**)/ 2
$3,317 = 0.062 $53,924
*$32,315+ $23,475=$55,790 **$38,025+ $14,033= $52,058
Return on equity
Net income Preferreddividends = = Averagecommonequity
$1,878 $0 ($23,475+ $14,033)/ 2
$1,878 = 0.100 $18,754
Theserates of returnare low belowthe targetsof most companies but not terribly weak. The companyis profitable, and return on equity exceeds returnon assets.But bothreturnmeasurescouldstandto be improved.
(10 min.) E 9-35A Cashflowsfromfinancing activities: Paymentof longtermdebt.. Proceedsfromissuanceof commonstock. Borrowings... Dividendspaid.
$(17,060) 8,500 6,580 (230)
241
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Exercises
GroupB (5-10 min.) Req. 1
E 9-36B
Journal
Aug. 19 Cash(15,000 $7.50) CommonStock(15,000 $3.50) .............. Paid-in Capitalin Excessof Par - Common .................................... Apr. 3 Cash ....................................................... PreferredStock .................................... 11 Inventory ................................................. Equipment ............................................... CommonStock(4,000 $3.50) ............... Paid-in Capitalin Excessof Par - Common ....................................
112,500 52,500 60,000 55,000 55,000 18,000 10,500 14,000 14,500
243
Req. 2 Stockholdersequity: Preferredstock,$2.00,no par 4,000sharesauthorized,400 sharesissued Commonstock,$3.50par, 110,000sharesauthorized,15,000sharesissued Paid-in capital in excessof par-common ($60,000+ $14,500). Retainedearnings(deficit). Total stockholdersequity.
$55,000 52,500 74,500 (47,000 ) $135,000
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(10-15 min.) E 9-37B StockholdersEquity Preferredstock,$5.50no-par, 7,000shares authorized,400 sharesissued ........................................... $ 30,000 Commonstock,$2.00par, 16,000sharesauthorized,5,200 sharesissued 10,400 Paid-in capital in excessof par - common ............................... 74,850* Retainedearnings ................................................................ 46,000 Total stockholdersequity ................................................ $161,250 _____
*Computation: JUNE23: 1,500shares ($17.50 $2.00)= JULY 12: $15,000+ $44,000 (3,700shares $2.00)=. $23,250 51,600 $74,850
Journalentries(not required): Jun. 23 Cash... CommonStock ................................... Paid-in Capitalin Excessof Par July 2 Cash ...................................................... PreferredStock .................................. 12 Inventory ............................................... Equipment ............................................. CommonStock ...................................
26,250 3,000 23,250 30,000 30,000 15,000 44,000 7,400
Paid-in Capitalin Excessof Par
51,600
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(10 min.) E 9-38B Paid-in capital consistsof: Preferredequity: Issuedfor cash(3,000shares $90) ........... Commonequity: Issuedfor cash(17,000shares $18.00) Issuedfor organizingthe corporation Issuedfor patent.. Total paid-in capital
$270,000 306,000 24,000 85,000 $685,000
Unuseddata: Net income Dividendsdeclared
Short-cut solution(alsookay): 1. $ 24,000 2. 85,000 3. 270,000(3,000 $90) 4. 306,000 (17,000 $18.00) $685,000= Total paid-in capital
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(10-15 min.) E 9-39B StockholdersEquity(Thousands) Commonstock,$0.50par, 900 shares authorized,300 sharesissued Paid-in capital in excessof par Retainedearnings Otherstockholdersequity Less:Treasurystock,common,100 sharesat cost.. Total stockholdersequity... $ 150 897 2,270 (726) (1,610 ) $ 981
BukalaSoftwarepaid a higherprice to acquiretreasurystock than the price Bukala receivedwhenit issuedits stock. This explains why TreasuryStock has a greaterbalancethanthe sumof CommonStockplusPaid-in Capital in Excessof Par.
249
(10-15 min.) E 9-40B
Journal
Mar. 17 Cash(2,400 $7). CommonStock(2,400 $1.50) Paid-in Capital in Excessof Par. To issuecommonstock. Apr. 20 TreasuryStock- Common(800 $16)... Cash... To purchasetreasurystock. Aug. 8 Cash(600 $17)... TreasuryStock- Common(600 $16) Paid-in Capital fromTreasury StockTransactions.. To sell treasurystock.
16,800 3,600 13,200
12,800 12,800
10,200 9,600 600
Overall effecton stockholdersequity ($16,800 $12,800+ $10,200) $14,200increase
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(10 min.) E 9-41B
Journal
b.
Cash(9 million $12.50). CommonStock(9 million $1.50)... Capitalin Excessof Par Value. TreasuryStock.. Cash. RetainedEarnings DividendsPayable DividendsPayable Cash. or one entry only: RetainedEarnings ... Cash.
Millions 112.5 13.5 99 15 15 34 34 34 34
c.
d.
34 34
251
(10 min.) E 9-42B Dollars in Millions StockholdersEquity: Commonstock,$1.50par value, 10.7 millionsharesissued($2.550+ $13.500) Capitalin excessof par value($7,650+ $99,000) Retainedearnings($260+ $447 $34) Treasurystock,3 millionsharesat cost. Total stockholdersequity
$ 16,050 106,650 673 (15) $123,358
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253
(20-30 min.) E 9-43B Req. 1 Conversionof preferredstockinto commonstock Retirementof preferredstock
Req. 2 Issuanceof commonstock: a. To preferredstockholderswhoconvertedtheir preferred into common b. For cashor otherassets c. Stockdividend
Req. 3 (Millions of shares of stock) Dec. 31, 2011 300 (54) 246
Commonsharesissued. Less:Treasurystock,numberof shares Commonsharesoutstanding...
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(continued) E 9-43B Req. 4 RetainedEarnings(Millions) Dec. 31, 2010 200 Net income2011 Dec. 31, 2011
Dividends during 2011
Bal. Bal.
5,025 1,475 6,300
Req. 5 (All amounts in millions) December31, Purchases 2011 2010 During2011 $1,242 $280 = $ 962 54 14 = 40 $24.05
Costof treasurystock. Treasurystock,numberof shares Averagepriceper sharepaid for treasurystockpurchasedduring2011.
255
(15 min.) E 9-44B

PREFERRED COMMON TOTAL
2010
Total dividend. Preferreddividends in arrears: 2008:50,000sharesX $1.50 (par) per shareX .07 = 2009:50,000sharesX $1.50 (par) per shareX .07 Currentyear 2010:50,000sharesX $1.50 (par) per shareX .07 = Total to preferred... Remainderto common.
$ 100,000
$5,250 5,250
5,250 $15,750 $84,250
2011
Total dividend. Preferreddividends: Currentyear 2011:50,000sharesX $1.50 (par) per shareX .07 = Remainderto common.
$200,000
$5,250 $194,750
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(15-20 min.) E 9-45B Req. 1
Journal
Aug. 11 RetainedEarnings(400,000 .20 $15) CommonStock(400,000 .20 $0.30) Paid-in Capitalin Excessof Par Common Todistributea commonstockdividend.
1,200,000 24,000 1,176,000
Req. 2 Stockholdersequity Commonstock,$0.30par, 2,200,000sharesauthorized, 480,000issued($120,000+ $24,000) Paid-in capital in excessof par - common ($409,600+ $1,176,000) Retainedearnings($7,133,000 $1,200,000) Other.. Total stockholdersequity..
$ 144,000 1,585,600 5,933,000 (185,000 ) $7,477,600
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(continued) E 9-45B Req. 3 The stock dividend did not change total stockholders equity because the company gave its stockholders no assets. The company merely transferred $1,200,000 from Retained Earnings to Common Stock ($24,000) and Paid-in Capitalin Excessof Par ($1,176,000).
Req. 4 HDs maximumcash dividendis limited to $590,000, the balanceof its cash account.
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(15-20 min.) E 9-46B a. Decrease stockholdersequityby $85 million. b. No effect. c. No effect. d. No effect. e. Decrease stockholdersequityby $11,250(1,800 $6.25). f. Increase stockholdersequityby $8,100(900 $9).
g. No effect.
(10-15 min.) E 9-47B Stockholdersequity: Millions Commonstock,$0.30 par, 1,500millionshares (500 million 3) authorized, 1,350millionshares(450 million 3) issued Additionalpaid-in capital. Retainedearnings.. Other.. Total stockholdersequity. $ 135 315 2,393 (146) $2,697
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(10-15 min.) E 9-48B Req. 1 Common: Total stockholdersequity.. Less:Preferredequity redemptionvalue.. Total commonequity... Bookvalueper share($96,000/ 10,000shares)
$121,000 (25,000 ) $ 96,000 $ 9.60
Req. 2 Common: Total stockholdersequity... Less:Preferredequity[$25,000+ ($21,000 .10 3). Total commonequity. Bookvalueper share($89,700/ 10,000shares)
$ 121,000 (31,300 ) $ 89,700 $ 8.97
Req. 3 Eclectic Rugs stock is not necessarily a good buy. Investment decisions shouldbe basedon morethanone ratio.
263
(10-15 min.) E 9-49B

Rateof return on assets Net income+ Interestexpense Averagetotal assets
$1,530+ $219 ($16,000+ $13,790)/ 2
1,749 = 0 .117 $14,895
Net income Preferred dividends Averagecommon stockholders equity
$1,530 $0 ($8,604*+ $7,802**)/ 2
$1,530 = 0.187 $8,203
*$ 38 + $11,528 $2,962= $8,604 **$384+ $16,530 $9,112= $7,802
These profitability measures suggest strength because (1) LaSalle Inns 18.7%return on equity is very good and (2) it exceedsreturn on assets by a widemargin.
Chapter 9
Stockholders Equity
264
(10-15 min.) E 9-50B

Return on assets
$1,872+ $1,443 ($55,792*+ $52,074**)/ 2
$3,315 = 0.061 $53,933
*$32,315+ $23,477=$55,792 **$38,031 + $14,043= $52,074
Return on equity
Net income Preferreddividends = = Averagecommonequity
$1,872 $0 ($23,477+ $14,043)/ 2
$1,872 = 0.100 $18,760
Theserates of returnare low belowthe targetsof most companies but not terribly weak. The companyis profitable, and return on equity exceeds returnon assets.But bothreturnmeasurescouldstandto be improved.
(10 min.) E 9-51B Cashflowsfromfinancing activities: Paymentof longtermdebt.. Proceedsfromissuanceof commonstock. Borrowings... Dividendspaid.
$(17,100) 8,495 6,590 (215)
Chapter 9
Stockholders Equity
266
ChallengeExercises
(20-25 min.) E 9-52
Journal
(a) Cash(51,000* $3)....................................... CommonStock ........................................ AdditionalPaidin Capital.......................... Issuedstock. (b) TreasuryStock(950 $9)... Cash. Purchasedtreasurystock. (c) Cash.. TreasuryStock($8,550 $7,650). Resoldtreasurystock. (d) Revenues. Expenses RetainedEarnings... Closednet incometo RetainedEarnings. (d) RetainedEarnings($58,000 $35,000) Cash. Declaredand paid dividends.
153,000 51,000 102,000
8,550 8,550
900 900
172,000 114,000 58,000
23,000 23,000
_____ *$51,000 $1 par valueper share= 51,000sharesissued.

Chapter 9
Stockholders Equity
268
(20-25 min.) E 9-53 Statementof cashflows: CashFlowsfromFinancingActivities: Issuanceof commonstock. Purchaseof treasurystock. Sale of treasurystock.. Paymentof dividends.. Journalentriesare givenin the solutionto Exercise9-52. T-accountsof the stockholdersequityaccounts: CommonStock Issuance of stock Balance
$153,000 (8,550 ) 900 (23,000 )
51,000 51,000
AdditionalPaid-in Capital Issuance of stock
102,000
Balance
102,000
Dividends
RetainedEarnings 23,000 Net income Balance
58,000 35,000
TreasuryStock
Purchase Balance
8,550 Sale 7,650
900
Chapter 9
Stockholders Equity
270
(15 min.) E 9-54 Preferredstock: SpaceWalkretiredpreferredstockof $131million($740 $609). Commonstockand Additionalpaid-in capital: SpaceWalkissued16 millionsharesof common stockfor $48 million,computedas follows: Commonstock($905 $889). Additionalpaid-in capital ($1,514 $1,482) Total receivedfor issuanceof commonstock.. Retainedearnings: Beginningbalance. Add: Net income.. Less:Dividends Endingbalance *$19,100+ $2,980 $20,625= $1,455 Treasurystock: Apollopurchasedtreasurystockfor $177million($2,777
Millions $ 16 32 $48 Millions $19,100 2,980 (1,455 *) $20,625
$2,600).
271
(15 min.) E 9-55

Additional Common Paid-in Stock + Capital 1 $7 $10 2 5 102 1.23 65
Amounts in Millions Balance,Dec. 31, 2010 Issuanceof stock. Stockdividend.. Purchaseof treasury stock.. Net income. Cashdividends. Balance,Dec. 31, 2011
Retained + Earnings $35 (7.2)4
Treasury Stock =
Total Equity $52 15 (10) 22 (12) $67
$(10) 22 (12) $37.8
$13.2
$26
$(10)
Computations(not required):
1 2
7,000,000 $1 par 5,000,000 $1 par
= $7,000,000 = $5,000,000
5,000,000 ($3 $1) = $10,000,000

3 4 5
(7,000,000+ 5,000,000) .10 $1 par
= $1,200,000
(7,000,000+ 5,000,000) .10 $6 marketvalue = $7,200,000 $7,200,000marketvalue $1,200,000par value= $6,000,000
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Stockholders Equity
272
Quiz
Q9-56 Q9-57 Q9-58 Q9-59 Q9-60 Q9-61 Q9-62 Q9-63 Q9-64 c b e c a a b a a
($317,000+ $220,000+ $85,000 = $622,000 ($622,000+ $71,300 $5,200= $688,100) {($119,100 $8,500)/ [($681,500+ $603,100*)/ 2] = .172} *$688,100 $85,000= $603,100
Q9-65 Q9-66 Q9-67 Q9-68 Q9-69 Q9-70 Q9-71 Q9-72 Q9-73 Q9-74 Q9-75
a b a a c b c e b b a
40,000 $100 .10 = $400,000 ($500,000 $400,000)/ 40,000= $2.50
[($27,000+ $3,000)/ $600,000= 5.0%]
273
Problems
GroupA ( (30-45 min.) P 9-76A Req. 1
Journal
May 6 OrganizationExpense CommonStock(900 $5) Paid-in Capital in Excessof Par - Common..................... Issuedstockto promoterfor assisting with issuanceof stock. 9 Cash(22,000 $25 per share) CommonStock22,000 $5) Paid-in Capital in Excessof Par - Common..................... Issuedcommonstockfor cash . 10 Patent. PreferredStock........................... Issuedpreferredstockto acquirea patent. 26 Cash(1,000 $25)... CommonStock(1,000 $5) Paid-in Capital in Excessof
Chapter 9
22,500 4,500 18,000
550,000 110,000 440,000
20,000 20,000
25,000 5,000
274
Stockholders Equity
Par - Common..................... Issuedcommonstockfor cash.
20,000
275
(continued) P 9-76A Req. 2 CohenCanoes,Inc. BalanceSheet(partial) May31, 2010 Stockholdersequity: Preferredstock,$2, no-par, 9,000sharesauthorized, 800 sharesissued Commonstock,$5 par, 100,000sharedauthorized,23,900sharesissued*. Paid-in capital in excessof par - common**... Retainedearnings.. Total stockholdersequity. _____ * 900 + 10,000+ 12,000+ 1,000= 23,900shares **$18,000+ $440,000+ $20,000= $478,000 119,500 478,000 55,000 $672,500 $20,000
Chapter 9
Stockholders Equity
276
(10-15 min.) P 9-77A GarmanCorp. BalanceSheet(partial) December31, 2010 Stockholdersequity: Preferredstock,5%, $130par, 8,000shares authorized,1,600sharesissued. Commonstock,no-par, 600,000shares authorized,120,000sharesissued. Retainedearnings. Total stockholdersequity _____ Computations: Preferredstock:1,600 $130= $208,000 Commonstock:Balancegivenas $513,000 Retainedearnings:$74,000+ $94,000 ($208,000.05 2) (120,000 $.20) = $123,200 513,000 123,200 $844,200 $208,000
277
(20-30 min.) P 9-78A Commonstock[(475,000+ 380,000) $5] + $358,650. Additionalpaid-in capital 475,000 ($7 $5.00)... 380,000 ($10.00 $5.00). 41,000 ($10 $7.25) Fromstockdividend.. Retainedearnings($1,010,000 $610,000 $645,570). Treasurystock[(58,000 41,000) $7.25] Total stockholdersequity. $ 4,633,650
950,000 1,900,000 112,750 286,920 (245,570 ) (123,250 ) $7,514,500
Total assets.. Total liabilities.. = Total stockholdersequity
$14,600,000 7,085,500 ) $7,514,500
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Stockholders Equity
278
(25-35 min.) P 9-79A Req. 1 ElegantOutdoorFurnitureCompanyhas ClassA cumulativepreferredstock, ClassB cumulativepreferredstock,and commonstockoutstanding.
Req. 2
Journal
Cash. ClassA PreferredStock Cash. ClassB PreferredStock Cash($1,400,000+ $5,540,000) CommonStock AdditionalPaid-in CapitalCommon..
2,730,000 2,730,000 3,115,000 3,115,000 6,400,000 870,000 5,530,000
Req. 3
279
Elegant Outdoor Furniture would have to pay all preferred dividends in arrears and pay the current years dividends before paying dividends to commonstockholdersbecausethe preferredstockis cumulative.
Chapter 9
Stockholders Equity
280
(continued) P 9-79A Req. 4 Elegant must pay preferred dividendsof $379,925 each year to avoid having preferreddividendsin arrears. _____ Computation: ClassA Preferred: 78,000sharesX $35 (par) per share 0.065 = $177,450 ClassB Preferred: 79,000sharesX $35 (par) per share 0.065= 202,475 Total preferreddividends $379,925
Req. 5
Journal
2011 Feb. 28 RetainedEarnings.. DividendsPayable,ClassA Preferred($2,730,000 .065 2).. DividendsPayable,ClassB Preferred($3,115,000 .065 2).. DividendsPayable,Common ($860,000 $354,900 $404,964).
860,000 354,900 404,950 100,150
281
(15-20 min.) P 9-80A Req. 1
Journal
Feb.
13
Cash(5,400 $5) CommonStock(5,400 $4). Paid-in Capitalin Excessof Par Common RetainedEarnings DividendsPayable (300 shares $0.70) DividendsPayable... Cash RetainedEarnings (11,900shares 0.10 $6) Common11,900 0.10 $4). Paid-in Capitalin Excessof Par Common TreasuryStock(500 $7) Cash Cash(200 $11)... TreasuryStock,(200 7) Paid-in CapitalfromTreasury StockTransactions
27,000 21,600 5,400 210 210 210 210
Jun.
24
Aug.
7,140 4,760 2,380 3,500 3,500 2,200 1,400 800
Oct.
26
Nov.
20
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Stockholders Equity
282
(continued) P 9-80A Req. 2 Stockholdersequity: $.70 cumulativepreferredstock,$5 par, 300 shares issued............ Commonstock,$4 par, 13,090sharesissued ($26,000+ $21,600+ $4,760) Paid-in capital in excessof par - common ($17,800+ $5,400+ $2,380). Paid-in capital fromtreasurystocktransactions Retainedearnings ($25,000+ $28,000 $210 $7,140)... Less:Treasurystock,300 sharesat cost ($3,500 $1,400).. Total stockholdersequity
$ 1,500 52,360 25,580 800 45,650 (2,100 ) $123,790
283
Chapter 9
Stockholders Equity
284
(20-30 min.) P 9-81A STOCKHOLDERS EQUITY 435,000 62,400 + + + + 41,600 7,200 0 0
ASSETS Feb. 3 + 435,000 62,400 + 41,600 0 7,200 0 Mar. 19 Apr. 24 Aug. 15 Sept. 1 Nov. 18
= = = = = = =
LIABILITIES 0 0 0 + 7,200 7,200 0
+ +
285
Chapter 9
Stockholders Equity
286
(40-50 min.) P 9-82 Req. 1

SeagullDesigners,Inc. BalanceSheet December31, 2010 ASSETS Current: Cash... Accountsrec., net.. Inventory... Prepaidexpenses... Total current assets.. Property,plant, and equipment,net Intangibleassets: Goodwill Trademark,net LIABILITIES Current: $ 55,000 Accountspayable... 34,000 Dividendspayable.. 93,000 Accruedliabilities... 13,000 Total current liabilities.. 195,000 Longtermnote payable Total liabilities. 364,000 STOCKHOLDERS EQUITY Preferredstock,$.50, 13,000 no-par, 11,000shares 4,000 authorizedand issued... Commonstock, $2 par, 600,000shares authorized,116,000 sharesissued... Paid-in capital in excess of par common Retainedearnings.. Less:Treasurystock, common,21,000shares at cost. Total stockholdersequity... Total liabilitiesand $136,000 6,000 24,000 166,000 99,000 265,000
$ 29,700
232,000 20,000 53,300*
(24,000) 311,000
287
Total assets.
$576,000 stockholdersequity..
$576,000
*Retainedearnings= Total assets Total liabilities Total paid-in capital = $576,000 $265,000 $29,700 $232,000 $20,000 ( $24,000)= $53,300
(continued) P 9-82A Req. 2

Rateof return = on assets Net income + Interestexpense Averagetotal assets
$32,000+ $15,600 ($576,000+ $493,000)/ 2
$47,600 = 0.089 $534,500
Net income Preferreddividends = Averagecommon stockholders'equity
$32,000 (11,000 $.50) ($281,300*+ $222,000)/ 2
$26,500 = 0.105 $251,650
*Total stockholdersequity... Less:Preferredequity.. Commonstockholdersequity...
$311,000 (29,700 ) $281,300
Req. 3 These rates of return suggest some weakness. Return on common stockholders equity is well below 15%, mentioned in the text as a good returnon equity. Howeverreturnon equitydoesexceedreturnon assets.
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Stockholders Equity
288
(20-30 min.) P 9-83A
Journal
ACCOUNTTITLESANDEXPLANATION DEBIT CREDIT
RetainedEarnings.. DividendsPayable. DividendsPayable.. Cash.. OR RetainedEarnings.. Cash.. Cash CommonStock... Cash LongTermNotesPayable... TreasuryStock. Cash.. LongTermNotesPayable Cash..
Millions 1,918 1,918 1,918 1,918 1,918 1,918 1,000 1,000 54 54 3,030 3,030 163 163
289
Problems
GroupB (30-45 min.) P 9-84B Req. 1
Journal
Jan. 6 OrganizationExpense CommonStock(500 $5)... Paid-in Capitalin Excessof Par - Common... Issuedstockto promoterfor assistancein Issuingcommonstock. 9 Cash(19,000 $15) CommonStock(19,000 $5). Paid-in Capitalin Excessof Par - Common... Issuedcommonstockfor cash. 10 Patent. PreferredStock(600 $1 no-par) Issuedpreferredstockto acquirea patent. 26 Cash CommonStock(1,400 $5) Paid-in Capitalin Excessof Par - Common... Issuedcommonstockfor cash.
7,500 2,500 5,000
285,000 95,000 190,000
12,000 12,000
21,000 7,000 14,000
Chapter 9
Stockholders Equity
290
(continued) P 9-84B Req. 2 LiardCanoes,Inc. BalanceSheet(partial) January31, 2010

Stockholdersequity: Preferredstock,$1 no-par, 5,000sharesauthorized, 600 sharesissued.. Commonstock,$5 par, 140,000shares authorized,20,900sharesissued*............... Paid-in capitalin excessof par - common Retainedearnings Total stockholdersequity... 104,500 209,000 ** 56,000 $381,500 $ 12,000
_____ *500 + 19,000+ 1,400= 20,900shares **$5,000+ $190,000+ $14,000= $209,000
291
(10-15 min.) P 9-85B HolmanCorp. BalanceSheet(partial) December31, 2010

Stockholdersequity: Preferredstock,8%, $110par, 5,000sharesauthorized, 1,000sharesissued... Commonstock,no-par, 400,000sharesauthorized, 80,000sharesissued.. Retainedearnings Total stockholdersequity... 512,000 97,400 $719,400 $110,000
_____ Computations: Preferredstock:1,000 $110= $110,000 Commonstock:Balancegivenas $512,000 Retainedearnings:$71,000+ $92,000 ($110,000 0.08 x 2) (80,000x $0.60)= $97,400
Chapter 9
Stockholders Equity
292
293
(20-30 min.) P 9-86B Commonstock[(500,000+ 395,000) $2] + $150,120. Additionalpaid-in capital 500,000 ($5.00 $2.00)... 395,000 ($9.00 $2.00). 38,000 ($8 $7.25) Fromstockdividend.. Retainedearnings($1,150,000 $700,000 $600,480). Treasurystock[(61,000 38,000) $7.25] Total stockholdersequity. $ 1,940,120
1,500,000 2,765,000 28,500 450,360 (150,480 ) (166,750 ) $6,366,750
Total assets.. Total liabilities.. = Total stockholdersequity
$14,200,000 7,833,250 ) $6,366,750
Chapter 9
Stockholders Equity
294
(25-35 min.) P 9-87B Req. 1 SeasonalOutdoorFurnitureCompanyhas ClassA cumulativepreferred stock,ClassB cumulativepreferredstock,andcommonstockoutstanding.
Req. 2
Journal
Cash ClassA PreferredStock Cash ClassB PreferredStock Cash($1,000,000+ $5,520,000) CommonStock AdditionalPaid-in CapitalCommon
1,520,000 1,520,000 1,940,000 1,940,000 6,520,000 1,000,000 5,520,000
Req. 3
295
Seasonal Outdoor Furniture would have to pay all preferred dividends in arrears before paying dividends to common stockholders because the preferredstockis cumulative.
Chapter 9
Stockholders Equity
296
(continued) P 9-87B Req. 4 Seasonalmustpay preferreddividendsof $138,400eachyear to avoidhaving preferreddividendsin arrears. _____ Computation: ClassA Preferred: 76,000sharesX $20 (par) per share 0.04 = $ 60,800 ClassB Preferred: 97,000sharesX $20 (par) per share 0.04 = 77,600 Total preferreddividends $138,400
Req. 5
Journal
2011 Feb. 28 RetainedEarnings.. DividendsPayable,ClassA Preferred($1,520,000 .04 2).. DividendsPayable,ClassB Preferred($1,940,000 .04 2).. DividendsPayable,Common ($840,000 $121,600 $155,200).
840,000 121,600 155,200 563,200
297
(15-20 min.) P 9-88B Req. 1
Journal
Feb.
13
Cash(5,200 $6). CommonStock(5,200 $2). Paid-in Capitalin Excessof Par Common... RetainedEarnings.. DividendsPayable (400 shares $0.80)... DividendsPayable.. Cash... RetainedEarnings (11,500shares 0.20 $7) CommonStock(11,500 0.20 $2).. Paid-in Capitalin Excessof Par Common... TreasuryStock,Common(900 $8)......... Cash... Cash(600 $12) TreasuryStock,Common(600 $8). Paid-in CapitalfromTreasury StockTransactions...
31,200 10,400 20,800 320 320 320 320
June
24
Aug.
16,100 4,600 11,500 7,200 7,200 7,200 4,800 2,400
Oct.
26
Nov.
20
Chapter 9
Stockholders Equity
298
(continued) P 9-88B Req. 2 Stockholdersequity: $0.80cumulativepreferredstock,$15 par, 400 sharesissued. Commonstock,$2 par, 13,800sharesissued ($12,600+ $10,400+ $4,600)............................... Paid-in capital in excessof par - common ($17,400+ $20,800+ $11,500). Paid-in capital fromtreasurystocktransactions.. Retainedearnings($23,000+ $25,000 $320 $16,100) Less:Treasurystock,common,300 shares at cost ($7,200 $4,800). Total stockholdersequity..
$ 6,000 27,600 49,700 2,400 31,580 (2,400 ) $114,880
299
(20-30 min.) P 9-89B STOCKHOLDERS EQUITY + 350,000 46,200 + + + +27,000 11,200 0 0
ASSETS Feb. Mar. Apr. Aug. Sept. Nov. 4 20 25 17 8 28 +350,000 -46,200 +27,000 0 -11,200 0
= = = = = = =
LIABILITIES 0 0 0 +11,200 -11,200 0
+ +
Chapter 9
Stockholders Equity
300
(40-50 min.) P 9-90B Req. 1 HawkDesigners,Inc. BalanceSheet December31, 2010

ASSETS Current: Cash. Accountsreceivable, net. Inventory. Prepaidexpenses. Total currentassets. Property,plant, and equipment,net.. Intangibleassets: Trademarks,net Goodwill.. 10,000 11,000 359,000 22,000 94,000 16,000 175,000 $ 43,000 Current: Accountspayable.............. Dividendspayable............. Accruedliabilities.............. Total currentliabilities... Longtermnotepayable....... Total liabilities....................... STOCKHOLDERS EQUITY Preferredstock,$.50 no- par, 12,000 sharesauthorized, 12,000sharesissued......... Commonstock,$2 par, 300,000shares authorized,117,000 sharesissued..................... Additionalpaid-in capital common............. Retainedearnings................. Less:Treasurystock,common 19,000sharesat cost.......... Total stockholdersequity....... Total liabilitiesand Total assets.. $555,000 stockholdersequity.......... $555,000 ( 22,000 ) 287,000 0 42,600 * 234,000 $ 32,400 $ 133,000 12,000 27,000 172,000 96,000 268,000 LIABILITIES
_____
*Retainedearnings
301
= Total assets Total liabilities Total paid-in capital
= $555,000$268,000 $32,400 $234,000 ( $22,000) = $42,600
Chapter 9
Stockholders Equity
302
(continued) P 9-90B Req. 2

Rateof return = on assets Net income + Interestexpense = Averagetotal assets
$30,000+ $16,000 ($555,000+ $496,000)/ 2
$46,000 = 0.088 $525,500
Net income Preferreddividends = Averagecommon stockholders'equity
$30,000 (12,000 .50) ($254,600**+ $225,000)/2
$24,000 = 0.100 $239,800
**Totalstockholdersequity. Less:Preferredequity Commonstockholdersequity.
$287,000 (32,400 ) $254,600
Req. 3 These rates of return suggesta mid range. Return on commonstockholders equity is below 15%, mentioned in the text as a good rate of return, but its higherthanreturnon assets a goodsign.
303
(20-30 min.) P 9-91B
Journal
ACCOUNTTITLESANDEXPLANATION DEBIT CREDIT
RetainedEarnings DividendsPayable.. DividendsPayable Cash OR RetainedEarnings Cash Cash. CommonStock Cash LongTermNotesPayable TreasuryStock.. Cash. LongTermNotesPayable. Cash..
1,890 1,890 1,890 1,890 1,890 1,890 1,234 1,234 58 58 3,080 3,080 162 162
Chapter 9
Stockholders Equity
304
DecisionCases
(30-45 min.) DecisionCase1 Req. 1
Journal
Smith,Capital. Jones,Capital CommonStock To incorporatethe business,closethe capital accountsof Smithand Jones,and issue commonstockto them. Req. 2
25,000 25,000 50,000
Journal
Plan1: Cash. PreferredStock(800 $100) To issuepreferredstockto outsideinvestors. Plan2: Cash. PreferredStock To issuepreferredstockto outsideinvestors. Cash.
80,000 80,000
55,000 55,000
35,000
CommonStock To issuecommonstockto outsideinvestors.
35,000
Chapter 9
Stockholders Equity
306
(continued) DecisionCase1 Req. 3 Plan 1: StockholdersEquity Preferredstock,6%,$100par, nonvoting, 10,000sharesauthorized,800 sharesissued.. Commonstock,$1 par, 500,000sharesauthorized, 50,000sharesissued.. Retainedearnings($120,000 $30,000). Total stockholdersequity 50,000 90,000 $220,000 $ 80,000
Plan 2: StockholdersEquity Preferredstock,$5, no-par, 5,000sharesauthorized, 500 sharesissued Commonstock,$1 par, 500,000sharesauthorized, 85,000sharesissued.. Retainedearnings($120,000 $30,000). Total stockholdersequity 85,000 90,000 $230,000 $ 55,000
307
(continued) DecisionCase1 Req. 4 Plan 1 appears to fit the plans of Smith and Jones better than Plan 2 because: Their primarygoal is to raiseas muchcapital as possiblewithoutgiving up control of the business. Under Plan 2, the outside stockholders would have 60,000 votes [35,000 common votes + 25,000 preferred votes (500 shares 50 votes per share)]. Smith and Jones would lose controlof the businessbecausethey wouldhaveonly 50,000votes. Under Plan 1 preferredstockholdershave no votes. Smith and Jones would have complete control since they would hold all the voting shares. Plan 2 wouldraiseonly $10,000morethanPlan 1.
Chapter 9
Stockholders Equity
308
(15-20 min.) DecisionCase2 Req. 1 The stock dividend does not affect your proportionate ownership in the company because all the stockholders receive 10% new shares. All stockholders are in the same relative position after the dividends as they werebefore.
Req. 2 Cash dividends received last year were $7,150 (10,000 shares $0.715 per share). Cash dividendsafter the dividend will be $7,150 (11,000 shares $0.65per share). Thus,thereis no changein cashdividends.
Req. 3 You incur no loss in value becausethe market value of your investmentafter the stock dividend $610,203 (11,000 shares $55.473) is the same as it was before the dividend 10,000 shares $61.02. The increase in the number of shares you own at $55.473 per share offsets the decrease in the marketpriceper share.Anydifferencehere is due to rounding.
309
(continued) DecisionCase2 Req. 4 If the company continues paying the $0.715 cash dividend per share, after issuing the 10% stock dividend, total cash dividends will increase. (Your annual dividendswill rise to $7,865[11,000shares $0.715].) The increasein dividends might attract new investors, who view the increased cash dividends as an indication that the business is operating quite well. This investor interest may result in an increase in the market value of UPS stock, or at least keepthe valuehigherthan it wouldbe withoutthe increasein cash dividends.
Chapter 9
Stockholders Equity
310
(20-30 min.) DecisionCase3 Req. 1 Millions a. Net income,as reportedfor 2000... b. Net incomeafter newdevelopments [$979 $130 ($2,000 .12)]............. $979
$609
c. The trend of net income is down. The reasons for the downwardtrend are (a) inclusion of the moneylosing companies and (b) the interest expenseon the newdebt.
Req. 2 (amounts in millions) Assets $65,503 = = Liabilities $54,033 + + Equity $11,470
As reported.. Adjustments for 2001: Inclusionof companies.. Exchangeof notespayable for stock Interestexpense on newdebt.. As adjusted.
5,700
5,600
100
0 0 $71,203
= = =
2,000 240 $61,873
2,000 240 $9,330
311
(continued) DecisionCase3 Req. 3 As Reported As Adjusted Dollars in millions Debt ratio = Total liabilities Total assets = $54,033 $65,503 $61,873 $71,203
= 0.82
= 0.87
Req. 4 I wouldrecommenddowngrading Enronsdebt for two reasons:
1. Downturn in net income due to (a) inclusion of the moneylosing companies,and (b) the addedinterestexpenseon the newdebt.
2. Increasein the debt ratio due to the sametwo factors.
Chapter 9
Stockholders Equity
312
EthicalIssue1
Req. 1 The ethical issue is, What is the correct amount at which to record and disclosethe valueof the franchiseon Campbellsbalancesheet? Req. 2 and Req.3 The stakeholdersin the transactionincludeCampbell, the potential buyersof the franchises, and potential lenders who loan them the money to buy the franchises in the future. Campbell and the corporation are effectively the same entity. The third party serves no purposeother than as an accomplice to overvaluethe franchise.
Analysisof the decisionto overvaluethe franchise: (a) Economic: Campbellis better off temporarily, unlesspotential buyerssue him for damages, in which case he could be worse off. Potential buyers of the individuallanguagefranchisescan be harmed. Campbells balancesheet overstates his assets. If outsiders believe his balance sheet, they may be induced to pay Campbell more than the individuallanguage franchises are worth. Lenderscan also be harmedby loaningmoneyto Campbell on more favorabletermsthanhis financialpositionwarrants.
313
(b) Legal: If potential buyersare damagedby Campbells actions, they might sue him for recovery of those damages. In this situation, the public is also defrauded if Campbell amortizes the cost of the franchise for income tax purposes. Basing amortization on $500,000 overstates tax deductions and understatesCampbells income.As a result, his tax paymentsare lower than they shouldbe. This couldexposeCampbellto futureinvestigationsfromthe IRS.
(c) Ethical: This type of scheme is harmful to everyone involved. It is not truthful, and it violates the rights of individuals and business entities to full and complete disclosure of the proper valuation of a business. It is an example of the type of transaction that meets the letter of the law without meetingthe spirit of the law.
Req. 4 The franchiseshould be valuedat its true value, which is $50,000. Campbell shouldfocushis time and energyon waysto makethe businessprofitablein the long run in other ways, rather than focusingon turninga quick buck and playing legal games that could well get him into trouble with a lot of other parties. Note: Oneof the authorsexperiencedthis actualsituationin his first job after college.
EthicalIssue2
Req. 1 The ethical issue is whether the companyacted properly in purchasingtheir shareson the openmarketbasedon insideinformationknownonly to them.
Req. 2 and Req. 3 Stakeholders include the company, its officers and directors, the shareholdersfromwhomthe stockwaspurchased,andthe generalpublic.
(a) Economicanalysis: The company, and likely its officers and directors, benefitted temporarily at the other shareholders expense . The managers purchased the stock at $6 and could sell it for $27. Thus, the managers enriched themselves at the expense of the stockholders who sold company stockat $6. Had the stockholders known of the oil discovery, those stockholders who sold shares probably would have held their St. Genevieve stock. Stockholders wanting to sell company stock would have demanded a price based on all relevant information about the company, including news of the discovery.
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(b) Legal analysis: If St. Genevieve is a public company, their actions are illegal. The Securities Exchange Act of 1934 prohibits insider trading. It imposes stiff penalties for unethical conduct of this type. The SEC will prosecutethemfor insidertrading,probablyfine them,and possiblysendthe officers and directors responsible for the decision to prison. In addition, actions such as these have been the basis for numerous civil stockholder lawsuits,to recovermonetarydamagessufferedbecauseof the actionsof the company.
(c) Ethical analysis: The managersclearly did not behaveethically, violating the rights of existing shareholders as well as the good faith of the investing public. Managers defrauded the stockholders by withholding important informationprior to buyingcompanystock.
Req. 4 The correct way to handlethis transactionis never to have proposedit in the first place. However, if it did happen,the disclosure principle is relevant to the situation. The transactionshould be disclosedin 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 shouldbe accruedon the balancesheet.
Focuson Financials: Amazon.com,Inc.

(20-30 min.) Req. 1 Amazon.com,Inc. has two classesof stockauthorizedat December31, 2008: 1. Preferred stock, $.01 par value, 500 million shares authorized, no sharesissuedand outstanding. 2. Commonstock, $.01 par value, 5 billion shares authorized, 445 million sharesissued,428 millionsharesoutstanding. Req. 2 Based on the comparative Consolidated Balance Sheets, as well as the information in the Consolidated Statements of Stockholders Equity and the Consolidated Statements of Cash Flows, Amazon.com, Inc. repurchased 2 million shares of its commonstock during the year for a total of $100 million in cash($50 per share).
Req. 3 The companyearnedand reportednet incomeof $645million. It appearsfirst in the ConsolidatedStatementsof Operations. It also appearsas a reduction of the accumulated deficit in the Consolidated Statements of Stockholders Equity,andas the
opening line of the Consolidated Statements of Cash Flows. This is a good thing.
Req. 4 Returnon equity Returnon assets = $645 ($2,672+ $1,197)/ 2 $645+ $71 ($8,314+ $6,485)/ 2 = 33.3%
9.7%
Theseratesof returnindicatefinancialstrengthfor two reasons: 1. Bothreturnsare high. Returnon equityis outstanding!
2. Return on equity is much higher than return on assets, meaning that the commonshareholders are earning a much higher return on their investment in the businessthantheyare payingcreditorsfor borrowedfunds.
Chapter 9
Stockholders Equity
318
FocusonAnalysis: Foot Locker,Inc.

(20-30 min.) Req. 1 Foot Locker,Inc. has only one classof stock: Commonstock, $.01 par value, 500,000,000 shares authorized; 158,997,000 shares issued and 154,474,000 sharesoutstandingas of the end of fiscal 2007. Req. 2 Foot Locker,Inc. repurchased2.283millionsharesfor $50 million. The averageprice(computationin millions)was: Averagepricepaid for treasurystock Cashpaid = Numberof shares $50 = 2.283
$21.90
Based on the information in Footnote 26 to the Consolidated Financial Statements,the averageprice of the companysstock duringthe year (based on the high ending quarterly price) was $20.41 [($24.78 + $24.15 + $17.60 + $15.14) 4]. This indicatesthat the companypaid an averageprice that was slightly more than the quoted market price of its stock. The company probablydid this for several reasons. First, they may have neededthe stock to distribute to employees in the form of compensation. Second, share repurchases reduce the number of shares outstanding, thus boosting the
earningsper share. Third, the companyprobablythoughtthat the shareprice wouldrecoverin subsequentperiods,thusmakingthe stocka goodbuy.
Req. 3 Refer to the Consolidated Statementsof Shareholders Equity. Foot Locker, Inc. issueda total of 1,187,000newsharesof its commonstockin fiscal 2007: 513,000 shares were restricted stock issued under new stock option and awards plans to employees, and 674,000 shares were issued under director andemployeestockplans. Req. 4 Referto the ConsolidatedStatementsof ShareholdersEquity. RetainedEarnings( in millions) Bal., Feb. 3, 2007 Dividendsfor fiscal 2007 77 Cumulativeeffect of adoptionof new accountingstandard(FIN 48) Net income Bal., Feb. 2, 2008
1,785 1
51 1,760
Chapter 9
Stockholders Equity
320
GroupProjectin Ethics
(1-3 hours,includingdiscussion) Req. 1 Stakeholdersin a corporationvary 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 governmentsjust about everyonein the broadestsenseof the term.
Req. 2 Student opinionson this will vary. It might be interestingto divide the class into two teamsandconducta debate,eachteamtakinga side.
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Req. 3 The measures of deficiency can vary, but usually are: excessively high debt ratios, continuing and increasing deficits in retained earnings, debt covenantsthat are beingviolated,labor troubles,litigation. If the companyis not too far gone, in some cases, downsizing helps by cutting costs to be more in line with revenues. Students teams might brainstormthis question as well.
Req. 4 Studentopinionson this will vary.
Req. 5 Student opinionson this will vary and should be related to the opinionsthey 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, perhapsthis couldbe justifiedin somepeoplesminds.
Chapter 9
Stockholders Equity
322

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Chapter 9

Corporationsdisadvantages: Corporatetaxation Governmentregulation Separationof ownershipand management(per text page536)

Financial Accounting 8/e Solutions Manual

Financial Accounting 8/e Solutions Manual

800,000 240,000 560,000

550,000 250,000 800,000

CommonStock(12,000x $20 Paid-in Capitalin Excessof Par

$ 4 196 647 (22) $825

Financial Accounting 8/e Solutions Manual

TreasuryStock... Cash.. Cash.. TreasuryStock.. Paid-in CapitalfromTreasuryStock Transactions..

Financial Accounting 8/e Solutions Manual

(10 min.) S 9-12

During 2010, RetainedEarningsincreasedby $43,400 (net incomeof $95,000 dividendsof $51,600).

(5-10 min.) S 9-14 Req. 1

48,750 5,850 42,900

Financial Accounting 8/e Solutions Manual

Net income+ Interestexpense Averagetotal assets

Net income Preferreddividends Averagecommonstockholdersequity

(10-15 min.) S 9-17

120+ 31 (10,624+ 9,515)/ 2 151 10,070 = 1.5%

Rate of return on common stockholders equity

Net Preferred income dividends Averagecommon stockholdersequity

120 0 (3,212+ 2,878)/ 2

Note: 15%is consideredgoodin mostindustries,so Godhis returnon equityis very weak.

Financial Accounting 8/e Solutions Manual

Financial Accounting 8/e Solutions Manual

72,000 24,000 48,000 54,000 54,000 16,000 9,500 7,400 18,100

$54,000 31,400 66,100

Retainedearnings(deficit). Total stockholdersequity.

Financial Accounting 8/e Solutions Manual

28,050 2,550 25,500 22,000 22,000 19,000 41,000 4,950

Paid-in Capitalin Excessof Par

Financial Accounting 8/e Solutions Manual

$240,000 22,000 23,000 82,000 $367,000

Unuseddata: Net income Dividendsdeclared

Financial Accounting 8/e Solutions Manual

(10-15 min.) E 9-24A

22,000 5,500 16,500

4,000 2,400 1,600

Overall effecton stockholdersequity ($22,000 $3,600+ $4,000) $22,400increase

(10 min.) E 9-25A

Financial Accounting 8/e Solutions Manual

$ 20,200 100,400 665 (16,070 ) $105,195

(20-30 min.) E 9-27A Req. 1 Conversionof preferredstockinto commonstock Retirementof preferredstock

Commonsharesissued. Less:Treasurystock,numberof shares Commonsharesoutstanding...

Financial Accounting 8/e Solutions Manual

Dividends during 2011

5,066 1,380 6,270

Costof treasurystock. Treasurystock,numberof shares Averagepriceper sharepaid for treasurystockpurchasedduring2011.

(15 min.) E 9-28A

1,800 $5,400 $54,600

Financial Accounting 8/e Solutions Manual

(15-20 min.) E 9-29A Req. 1

855,000 36,000 819,000

$ 276,000 1,126,200 6,267,000 (200,000 ) $7,469,200

Financial Accounting 8/e Solutions Manual

Financial Accounting 8/e Solutions Manual

$96,000 (45,000 ) $51,000 $ 8.50

$ 96,000 (48,600 ) $ 47,400 $ 7.90

Financial Accounting 8/e Solutions Manual

(10-15 min.) E 9-33A

$1,525+ $222 ($15,906+ $13,700)/ 2

1,747 = 0 .118 $14,803