Professional Documents
Culture Documents
2.
Organization expenses (costs) are reported as expenses when incurredas part of operating
expenses. (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 corporations stockholders.
4.
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.
5.
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,
stockholders have the general right to receive timely and useful financial reports that
describe the corporations financial position and the results of its activities.
6.
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 issuers common
stock through conversion (or potential conversion).
7.
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.
8.
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
9.
Cash dividends debited against contributed 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.)
10. 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 contributed capital.
11. 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.
12. A stock dividend should not be considered income because it does not transfer any assets
from the corporation to the stockholders.
13. A treasury stock purchase reduces total assets and total equity by the same amount.
14. 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 companys creditors by
imposing limits on treasury stock purchases.
15. This gain is considered to be unusual but not infrequent. It would be included in the
calculation of income from continuing operations, with other unusual or infrequent gains and
lossesin a category often labeled Other Gains and Losses.
16. This decision (revision in asset life) is a change in an accounting estimate, not a change in
accounting principle. The change would be reflected in the financial statements with
decreased depreciation over the remaining six years of the assets revised useful life.
17. With a simple capital structure, earnings per share results are calculated by first subtracting
any declared 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. Krispy Kreme has issued only one class of stock no par, common stock. Preferred stock
has been authorized but none is outstanding.
19. The par value for Tastykakes common stock is $0.50 per share (as reported on its balance
sheet). The company has likely set the par value this low to minimize the amount of legal
capital that the company must maintain (and that stockholders would be liable for).
20. As of December 28, 2002, Tastykakes balance sheet reports 1,012,798 treasury shares as
repurchased. The average cost to Tastykake for these treasury shares is computed as:
$12,538,632/ 1,012,798 = $12.38 per treasury share.
21. Harley-Davidson was a net purchaser of treasury stock for the fiscal year ended December 31,
2002. Its statement of cash flows (under financing) shows a net purchase of treasury stock
of $56,814,000.
QUICK STUDIES
Quick Study 13-1 (10 minutes)
True statements: 1, 3, 4, and 7
Quick Study 13-2 (15 minutes)
(a) Mar. 1 Cash
255,000
Common Stock, $4 Par Value.............................
Contributed Capital in Excess of Par
Value, Common Stock......................................
178,000
77,000
50,000
(c) Apr. 6
Inventory...................................................................35,000
Machinery..................................................................
135,000
Note Payable........................................................
Common Stock, $20 Par Value...........................
Contributed Capital in Excess of Par
Value, Common Stock......................................
84,000
40,000
46,000
48,000
Cash...........................................................................
48,000
Retained Earnings...........................................................375,000
Common Stock*.........................................................
Contributed Capital in Excess of
Par Value, Common Stock**..................................
75,000
300,000
27,000
Nov. 4
Cash.................................................................................
7,080
Treasury Stock (750 x $9*).......................................
Contributed Capital, Treasury Stock......................
6,750
330
Outstanding
Shares
Weighted
Average
January..........................
100,000
1/12
February-May................
120,000
4/12
40,000
June-December............
160,000
7/12
93,333*
Fraction of
Year
8,333*
141,666
Time Period
Effect of
Dividend
Fraction of
Year
Weighted
Average
January-March..............
150,000
1.1
3/12
= 41,250
April-May.......................
138,000
1.1
2/12
= 25,300
June-December............
151,800*
1.0
7/12
= 88,550
155,100
8.27
$2.10
$28.50
= 7.4%
= $30.75
$4.10
= 7.5
EXERCISES
Exercise 13-1 (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)
Cash...........................................................................144,000
Common Stock, No-Par Value...........................
144,000
Issued common stock for cash.
2.
Feb. 20
Cash...........................................................................144,000
Common Stock, $20 Par Value..........................
120,000
Contributed Capital in Excess of Par
Value, Common Stock.....................................
24,000
Issued common stock for cash.
3.
Feb. 20
Cash...........................................................................144,000
Common Stock, $8 Stated Value......................
Contributed Capital in Excess of
Stated Value, Common Stock.........................
48,000
96,000
30,000
2.
2,000
28,000
3.
Cash
70,000
Common Stock, $10 Par Value..................................
Contributed Capital in Excess of Par
Value, Common Stock.............................................
40,000
30,000
4.
Cash
120,000
Preferred Stock, $100 Par Value.................................
100,000
Contributed Capital in Excess of Par
Value, Preferred Stock..............................................
20,000
Issued preferred stock for cash.
2.
3.
4.
5.
6.
Common
$
$
0
0
$
$
0
0
$ 70,000
$ 70,000
$166,000
$166,000
_______
$236,000
* The holders of the noncumulative preferred stock are entitled to no more than
$30,000 of dividends in any one year (7.5% x $10 x 40,000 shares).
Common
$
$
0
0
$
$
0
0
$ 44,000
$ 44,000
$166,000
$166,000
_______
$210,000
* The holders of the cumulative preferred stock are entitled to no more than
$30,000 of dividends declared in any year (7.5% x $10 x 40,000 shares) plus
any dividends skipped in prior years.
b.
c.
Retained earnings
Before dividend........................................................................
$10 par value of 25,000 dividend shares...............................
After dividend...........................................................................
$ 330,000
(250,000)
$ 80,000
$ 500,000
100,000
600,000
80,000
$ 680,000
25,000
25,000
50,000
2.
a.
b.
c.
3.
$ 330,000
$ 250,000
100,000
350,000
330,000
$ 680,000
25,000
25,000
50,000
Feb.28
2.
Before
Total stockholders equity......................... $2,700,000
Issued and distributable shares............... 60,000
Book value per share................................. $
45.00
After
$2,700,000
72,000
$
37.50
Shares owned............................................. x
750
Total book value of shares........................ $ 33,750
X
900*
$ 33,750
3.
February 5
Market value per share..............................
$
40
Shares owned.............................................
x 750
Total market value of shares owned........
$30,000
February 28
$ 34.00
x 900
$30,600
Note: The total market value of the investors 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 5 th and February 28th,
these per share values highlight the lack of value distributed in a stock
dividend.
Nov. 1
36,000
7,200
99,000
A
C
A
D
A
A
B
B
A
$2,700,000
2,182,500
517,500
207,000
310,500
120,000
430,500
330,000
135,000
Net income......................................................................
$ 895,500
Net income.....................................................................................
$1,350,000
Less preferred dividends............................................................. (195,000)
Net income available to common stockholders........................
$1,155,000
2.
Outstanding
Time Period
Shares
January-April....................
270,000
May-October.....................
450,000
November-December.......
342,000
Weighted-average shares outstanding
3.
Fraction
of Year
x
4/12
x
6/12
x
2/12
=
=
=
Weighted
Average
90,000
225,000
57,000
372,000
Net income......................................................................................$480,000
Less preferred dividends............................................................. (65,000)
Net income available to common stockholders........................ $415,000
2.
Original
Effect
Time Period
Shares
of Split
January-May..................... 50,000
3
June-August..................... 80,000
3
September......................... 67,000
3
October-December........... 201,000
1
Weighted-average shares outstanding
3.
Fraction
of Year
5/12
3/12
1/12
3/12
Weighted
Average
62,500
60,000
16,750
50,250
189,500
$2.19
$ 792,500
30.00
16.06
$ 792,500
34.50
15.50
(150,000)
$ 642,500
2.
(172,500)
$ 620,000
Dividend yield
$15.00 / $216.00
$12.00 / $128.00
$ 6.00 / $ 61.00
$ 1.20 / $ 86.00
=
=
=
=
6.9%
9.4%
9.8%
1.4%
Divided
by
Earnings
per Share
$10.00
9.00
6.50
=
=
=
Price-Earnings
Ratio
16.6
9.6
13.8
4.............
240.00
36.00
6.7
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 6.7.
PROBLEM SET A
Problem 13-1A (30 minutes)
Part 1
a.
To record sale of 5,000 shares of $25 par value common stock for $30
per share.
b.
c.
d.
To record sale of 1,500 shares of $25 par value common stock for $40
per share.
Part 2
Number of outstanding shares
Issued in (a)........................................
Issued in (b)........................................
Issued in (c)........................................
Issued in (d)........................................
Total.....................................................
5,000
2,500
1,000
1,500
10,000
Part 3
Minimum legal capital = Outstanding shares x Par value per share
= 10,000 x $25 = $250,000
Part 4
Total contributed capital from common stockholders
From transaction (a)......................... $150,000
From transaction (b)........................
75,000
From transaction (c).........................
40,000
From transaction (d)........................
60,000
Total contributed capital.................. $325,000
Part 5
Book value per common share
Total stockholders equity (given)....
$347,500
10,000
40,000
Jan. 5
Retained Earnings..........................................................
36,000
Common Dividend Payable.....................................
36,000
Feb. 28
36,000
July 6
Cash*...............................................................................
18,000
Treasury Stock, Common**.....................................
Contributed Capital, Treasury Stock***..................
15,000
3,000
Aug. 22
Cash*...............................................................................
21,250
Contributed Capital, Treasury Stock............................
3,000
Retained Earnings.......................................................... 750
Treasury Stock, Common**.....................................
25,000
Sept. 5
Retained Earnings..........................................................
40,000
Common Dividend Payable.....................................
40,000
Oct. 28
40,000
Dec. 31
Income Summary...........................................................
194,000
Retained Earnings....................................................
194,000
Closed Income Summary account.
Part 3
CONTEXT CORPORATION
Stockholders Equity Section of the Balance Sheet
December 31, 2006
Common stock $10 par value, 50,000 shares
authorized, 20,000 shares issued and outstanding...... $200,000
Contributed capital in excess of par value,
30,000
common stock..................................................................
Total contributed capital.................................................... 230,000
Retained earnings (from part 2)............................................. 252,250
Total stockholders equity................................................. $482,250
Dec.
Oct. 25
Oct. 31
Nov. 5
Dec. 1
Dec. 31
$ 792,000 $ 792,000
Common stock
dividend distributable. .
72,000
Contributed capital in
excess of par..........
180,000
180,000
258,000
258,000
258,000
258,000
Retained earnings......
520,000
520,000
370,000
370,000
370,000
790,000
$1,420,000 $1,840,000
Apr. 5
20,000
(1,500)
July 5
20,000
(1,500)
______
______
18,500
18,500
Oct. 5
20,000
(1,500)
3,700
22,200
Apr. 5
18,500
$ 0.50
$ 9,250
July 5
18,500
$ 0.50
$ 9,250
Oct. 5
22,200
$ 0.50
$11,100
*(20% x 18,500)
Part 2
Cash dividend amounts
Jan. 5
Outstanding shares...................... 20,000
Dividend per share....................... $ 0.50
Total dividend................................ $10,000
Part 3
Capitalization of retained earnings for small stock dividend
Number of shares.........................................................................
3,700
Market value per share................................................................$
12
Total capitalized............................................................................$ 44,400
Part 4
Cost per share of treasury stock
Total amount paid.........................................................................$ 15,000
Shares purchased........................................................................
1,500
Cost per share..............................................................................$
10
Part 5
Net income
Retained earnings, beginning balance......................................$160,000
Less dividends: Jan. 5............................................................... (10,000)
Apr. 5............................................................... (9,250)
July 5............................................................... (9,250)
July 31.............................................................. (44,400)
Oct. 5............................................................... (11,100)
Total before net income...............................................................$ 76,000
Plus net income............................................................................
?
Retained earnings, ending balance............................................$200,000
Therefore, net income = $124,000
30% Tax
Effect
After-Tax
(5,850)
(13,650)
8,550
19,950
(4,500)
(10,500)
9,900
23,100
q.
Net sales..................................................................
Interest revenue......................................................
Gain from settling lawsuit......................................
Total revenues and gains.......................................
Cost of goods sold.................................................$487,500
Depreciation expenseEquipment...................... 36,000
Depreciation expenseBuildings........................ 54,000
Other operating expenses..................................... 97,500
Loss on sale of equipment.................................... 24,750
Loss from settling lawsuit..................................... 24,000
Total expenses........................................................
$ 970,500
12,000
42,000
1,024,500
300,750
(90,225)
$ 210,525
(723,750)
k.
h.
Depreciation
Expense
$240,000
144,000
86,400
$470,400
Year-End
Book Value
$360,000
216,000
129,600
Depreciation
Expense*
$114,000
114,000
114,000
$342,000
Year-End
Book Value
$486,000
372,000
258,000
Part 4
Pretax cumulative effect of the accounting change
(see book, part 4)..........................................................................$128,400
After-tax cumulative effect of the accounting change
($128,400 x [1-0.30])......................................................................$ 89,880
Part 6
The 2006 income statement will report depreciation expense of $114,000. This
amount is the depreciation expense using the straight-line method.
Part 7
Effect of error on financial statements
On the 2006 income statement, the pre-tax cumulative effect of the change
from double-declining balance to straight-line depreciation of $128,400 (from
part (4)) less the 2006 straight-line depreciation of $114,000 yields an increase
to income before taxes of $14,400. Therefore, treating it as a change in an
accounting estimate (accounted for in current and future periods) would result
in an understatement of income before taxes by $64,200 ($49,800 * + $14,400).
This means net income (after-tax) would be understated by $44,940 [computed
as $64,200 x (1 - .30)].
On the 2006 balance sheet, retained earnings would be understated by
$44,940, income taxes payable would be understated by $19,260 ($64,200 x .
30), and assets would be understated by $64,200.
* Supporting computation Depreciation expense for 2006:
If switching depreciation methods is treated as a change in an
accounting estimate, then the straight-line depreciation amount
is computed and reported in 2006 as follows:
Book value, January 1, 2006.....................................................................
$ 129,600
Less salvage value....................................................................................
30,000
Depreciation expense...............................................................................
$ 99,600 / 2 years = $49,800
Time Period
Outstanding
Shares
Effect
of Dividend
January-March..................40,000 x
April-June..........................36,000 x
July-September................48,000 x
October-December...........52,800 x
Weighted-average shares outstanding
1.1
1.1
1.1
1.0
Fraction
of Year
x
x
x
x
3/12
3/12
3/12
3/12
Weighted
Average
=
=
=
=
11,000
9,900
13,200
13,200
47,300
Part 3
Earnings
per Share
$2.91
(1.11)
$1.80
Outstanding Fraction of
Weighted
Time Period
Shares
Year
Average
January-June.......................... 52,800
x
6/12
=
26,400
July-October........................... 68,800
x
4/12
=
22,933*
November-December............. 64,000
x
2/12
=
10,667*
Weighted-average shares outstanding
60,000
*Rounded to nearest whole share.
Part 4
Reported
Divided
Total
by Shares
Income from continuing operations......... $165,000
60,000
Extraordinary gain......................................
33,000
60,000
Net income.................................................. $198,000
60,000
Earnings
per Share
$2.75
0.55
$3.30
Part 6
Reported Divided by
Total
Shares
Income from continuing operations......... $167,000
213,000
Extraordinary loss...................................... (70,000)
213,000
Net income.................................................. $ 97,000
213,000
Earnings
per Share
$ 0.78
(0.33)
$ 0.45**
Part 7
Of the three earnings per share figures in part 6, income from continuing
operations is most likely the best predictor of 2006 results. We might also
want to factor in any trend in earnings per share (adjusted for the stock split).
By definition, the 2005 extraordinary loss is both unusual and infrequent and
therefore extremely unlikely to occur again in 2006. However, the nature of the
extraordinary loss needs to be considered, and its impact on future operations
needs to be evaluated. For example, if the extraordinary loss was due to a
flood that occurred in December that damaged the plant, then production
would most likely be impaired in 2006, resulting in a decrease in income from
continuing operations.
4,000
1,000
110 ($110,000 / 1,000 shares)
Common stock
Total equity................................................... $ 560,000
Less equity for preferred............................ (110,000)
Common stock equity................................. $ 450,000
Number of outstanding shares..................
4,000
1,000
Common stock
Total equity..................................................... $ 560,000
Less equity for preferred.............................. (120,000)
Common stock equity................................... $ 440,000
Number of outstanding shares.....................
4,000
Common
$
0
5,000
$5,000
Total
$10,000
5,000
5,000
$20,000
PROBLEM SET B
Problem 13-1B (30 minutes)
Part 1
a. To record sale of 1,500 shares of $1 par value common stock for $40
per share.
b. To record issuance of 500 shares of $1 par value common stock to the
companys 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 400 shares of
$1 par value common stock at $50 per share and issuing a note for
$3,150.
d. To record sale of 600 shares of $1 par value common stock for $50 per
share.
Part 2
Number of outstanding shares
Issued in (a)..........................................
Issued in (b)..........................................
Issued in (c)..........................................
Issued in (d)..........................................
Total.......................................................
1,500
500
400
600
3,000
Part 3
Minimum legal capital = Outstanding shares x Par value per share
= 3,000 x $1 = $3,000
Part 4
Total contributed capital from common stockholders
From transaction (a)............................ $60,000
From transaction (b)............................ 20,000
From transaction (c)............................ 20,000
From transaction (d)............................ 30,000
Total contributed capital.....................$130,000
Part 5
Book value per common share
Total stockholders equity (given)......$141,500
Outstanding shares (from 2)...............
3,000
240,000
Mar. 2
Retained Earnings..........................................................
120,000
Common Dividend Payable.....................................
120,000
Mar. 31
120,000
Nov. 11
Cash*
156,000
Treasury Stock, Common**.....................................
Contributed Capital, Treasury Stock***..................
144,000
12,000
Nov. 25
Cash*...............................................................................
76,000
Contributed Capital, Treasury Stock............................
12,000
Retained Earnings..........................................................
8,000
Treasury Stock, Common**.....................................
96,000
Dec. 1
Retained Earnings..........................................................
250,000
Common Dividend Payable.....................................
250,000
Dec. 31
Income Summary...........................................................
536,000
Retained Earnings....................................................
536,000
Feb. 28
Declared a 12.5% stock dividend when the market value is $21 per
share. ($60,000 / $10 par = 6,000 shares = 12.5% of 48,000 shares;
$126,000 / 6,000 shares = $21 per share)
Part 2
Jan. 17
Feb. 5
Feb. 28
Mar. 14
Mar. 25
Mar. 31
$ 540,000 $ 540,000
dividend distributable. .
60,000
Contributed capital in
excess of par...........
192,000
192,000
258,000
258,000
258,000
258,000
Retained earnings......
752,000
752,000
626,000
626,000
626,000
986,000
$1,424,000 $1,784,000
May 15
8,500
(500)
Aug. 15
8,500
(500)
_____
_____
8,000
8,000
Nov. 15
8,500
(500)
1,000
9,000
*(12.5% x 8,000)
Part 2
Cash dividend amounts
Feb. 15
Outstanding shares.......................... 8,500
Dividend per share...........................$ 0.40
Total dividend...................................$3,400
May 15
8,000
$ 0.40
$3,200
Aug. 15
8,000
$ 0.40
$3,200
Nov. 15
9,000
$ 0.40
$3,600
Part 3
Capitalization of retained earnings for small stock dividend
Number of shares...............................................................................
1,000
Market value per share......................................................................
$
42
Total capitalized..................................................................................
$42,000
Part 4
Cost per share of treasury stock
Total amount paid...............................................................................
$20,000
Shares purchased..............................................................................
500
Cost per share....................................................................................
$
40
Part 5
Net income
Retained earnings, beginning balance............................................
$135,000
Less dividends: Feb. 15...................................................................
(3,400)
May 15....................................................................
(3,200)
Aug. 15...................................................................
(3,200)
Oct. 4
(42,000)
Nov. 15...................................................................
(3,600)
Total before net income.....................................................................
$ 79,600
Plus net income..................................................................................
?
Retained earnings, ending balance..................................................
$147,600
Therefore, net income = $68,000
25% Tax
Effect
After-Tax
$ 11,500
$ 34,500
(24,000)
(8,000)
(45,000)
(15,000)
6,000
18,000
(67,500)
(22,500)
Part 2
d.
b.
k.
p.
i.
n.
h.
l.
j.
e.
Net sales
$1,320,000
Interest revenue..............................................................
10,000
Gain from settling lawsuit.............................................
34,000
Total revenues and gains..............................................
1,364,000
Cost of goods sold.........................................................
$520,000
Depreciation expenseEquipment..............................
50,000
Depreciation expenseBuildings................................
78,000
Other operating expenses.............................................
164,000
Loss on sale of equipment............................................
12,000
Loss from settling lawsuit.............................................
18,000
Total expenses and losses............................................
842,000
Income from continuing operations before taxes.............
522,000
Income taxes expense (25%).........................................
(130,500)
Income from continuing operations after taxes................
$ 391,500
Part 4
Extraordinary item:
Loss on hurricane damage (after-tax)......................................... (24,000)
c.
Beginning-Year
Book Value
2003................................... $200,000
2004................................... 120,000
2005...................................
72,000
Total.................................
Part 3
Depreciation
Expense
$ 80,000
48,000
28,800
$156,800
Year-End
Book Value
$120,000
72,000
43,200
Depreciation
Expense*
$ 40,000
40,000
40,000
$120,000
Year-End
Book Value
$160,000
120,000
80,000
Straight-line depreciation
Beginning-Year
Book Value
2003................................... $200,000
2004................................... 160,000
2005................................... 120,000
Total...................................
Part 4
Pretax cumulative effect of the accounting change
(see book, part 4)...........................................................................$36,800
After-tax cumulative effect of the accounting change
($36,800 x [1-0.25]).........................................................................$27,600
Part 6
The 2006 income statement will report depreciation expense of $40,000.
This amount is the depreciation expense using the straight-line method.
Part 7
Effect of error on financial statements
On the 2006 income statement, the pre-tax cumulative effect of the change
from double-declining-balance to straight-line depreciation of $36,800 (from
part (4)) less the 2006 straight-line depreciation of $40,000 yields a decrease to
income before taxes of $3,200. Therefore, treating it as a change in an
accounting estimate (accounted for in current and future periods) would result
in an understatement of income before taxes by $18,400 ($21,600 * - $3,200).
This means net income (after-tax) would be understated by $13,800 [computed
as $18,400 x (1 - .25)].
On the 2006 balance sheet, retained earnings would be understated by
$13,800, income taxes payable would be understated by $4,600 ($18,400 x .25),
and assets would be understated by $18,400.
* Supporting computation Depreciation expense for 2006:
If switching depreciation methods is treated as a change in an
accounting estimate, then the straight-line depreciation amount is
computed and reported in 2006 as follows:
Book value, January 1, 2006.........................................................................
$43,200
Less salvage value........................................................................................
0
Depreciation expense....................................................................................
$43,200 / 2 years = $21,600
Outstanding Effect of
Time Period
Shares
Dividend
January-June....................10,000
x
1.2
July-September................ 9,000
x
1.2
October-November...........12,500
x
1.2
December..........................15,000
x
1.0
Weighted-average shares outstanding
Part 2
x
x
x
x
Fraction
of Year
6/12
3/12
2/12
1/12
=
=
=
=
Reported
Divided
Total
by Shares
Income from continuing operations......... $ 90,000
12,450
Loss on discontinued segment................ (26,145)
12,450
Net income.................................................. $ 63,855
12,450
Part 3
Earnings
per Share
$7.23
(2.10)
$5.13
Outstanding
Time Period
Shares
January-March..................
15,000
April-September...............
19,000
October-December...........
17,500
Weighted-average shares outstanding
Part 4
Weighted
Average
6,000
2,700
2,500
1,250
12,450
Fraction of
Weighted
Year
Average
x
3/12
=
3,750
x
6/12
=
9,500
x
3/12
=
4,375
17,625
Reported
Divided
Total
by Shares
Income from continuing operations......... $85,000
17,625
Extraordinary gain...................................... 14,100
17,625
Net income.................................................. $99,100
17,625
Earnings
per Share
$4.82
0.80
$5.62
Outstanding
Effect
Time Period
Shares
of Split
January-June.................... 17,500
x
2
July-September................ 20,500
x
2
October.............................. 18,750
x
2
November-December....... 37,500
x
1
Weighted-average shares outstanding
Part 6
x
x
x
x
Fraction
of Year
6/12
3/12
1/12
2/12
Weighted
Average
= 17,500
= 10,250
= 3,125
= 6,250
37,125
Reported
Divided
Total
by Shares
Income from continuing operations......... $130,000
37,125
Extraordinary loss...................................... (37,125)37,125
Net income.................................................. $ 92,875
37,125
Earnings
per Share
$3.50
(1.00)
$2.50
Part 7
Of the three earnings per share figures in part 6, income from continuing
operations is most likely the best predictor of 2006 results. We might also
want to factor in any trend in earnings per share (adjusted for the stock split).
By definition, the 2005 extraordinary loss is both unusual and infrequent and
therefore extremely unlikely to occur again in 2006. However, the nature of the
extraordinary loss needs to be considered, and its impact on future operations
needs to be evaluated. For example, if the extraordinary loss was due to a fire
that occurred in December that damaged the plant, then production would
most likely be impaired in 2006, resulting in a decrease in income from
continuing operations.
4.
18,000
1,500
145.00 ($217,500 / 1,500)
Common stock
Total equity................................................ $1,200,000
Less equity for preferred......................... (217,500)
Common stock equity.............................. $ 982,500
Number of outstanding shares...............
Book value per common share............... $
18,000
54.58 ($982,500 / 18,000)
$ 210,000
30,000
$ 240,000
1,500
$
$1,200,000
(240,000)
$ 960,000
18,000
$
Preferred
$30,000
15,000
$45,000
Common
$
0
5,000
$5,000
Total
$30,000
15,000
5,000
$50,000
SERIAL PROBLEM
Serial Problem, Success Systems (30 minutes)
Part 1
Apr. 1
10,000
Apr. 1
119,034
Part 2
Equity
Common stock$1 par value, 25,000 shares authorized,
10,000 shares issued and outstanding........................................ $ 10,000
Contributed capital in excess of par value, common stock......... 119,034
Total equity........................................................................................ $129,034
Reporting in Action
BTN 13-1
1. No. The balance sheet shows that 10,000 shares of no par value,
preferred stock has been authorized, however, none have been issued.
2. As of February 2, 2003, the number of shares of common stock issued
and outstanding are 56,295 (in thousands, see balance sheet). As of
February 3, 2002, the number of shares of common stock issued is
54,271.
The weighted average common shares used in calculating earnings per
share can be found under Krispy Kremes Selected Financial Data.
For 2003, the weighted average common shares used were 55,093 and
for 2002 were 53,703. Therefore, for both years, the shares outstanding
at year-end were slightly higher than the average shares outstanding
during the year.
3. Total stockholders equity as of February 2, 2003...........
$273,352,000
$273,352,000
* Given that there is only one class of stock, all the equity items listed can be considered to
represent the book value of the common stock.
4. Krispy Kreme has not paid cash dividends on its common shares since
2001; see its statement of cash flows.
5. Krispy Kremes income statement reports the following:
2003
2002
Basic earnings per common share.............. $0.61
$0.49
2001
$0.30
Its basic earnings per common share figure is has consistently grown
over this 3-year period. Moreover, the 2003 amount is considerably
larger than the prior two years.
6. Krispy Kremes consolidated balance sheet does not list any shares of
treasury stock in 2003 or 2002.
7. No extraordinary gains or losses, nor changes in accounting principle,
are reported for either 2003 or 2002 (see its income statement). Also, no
gains or losses on the disposal of a business segment are reported for
either year.
8. Answer depends on the financial statement information obtained.
Comparative Analysis
BTN 13-2
= $ 5.89
$2,000*/ 8,075
= $0.25
* Excluding restructuring charge. If the net loss shown on the income statement is used
then earnings per share is $(0.54).
3. Dividend Yield =
Krispy Kreme dividend yield
Tastykake dividend yield
= $0 / 30.41
= 0.00%
= $0.48 / $9.20 = 5.22%
Analysis: The low dividend yield for Krispy Kreme suggests that it is a
growth stock.
4. Price-earnings ratio =
Krispy Kreme price-earnings ratio: $30.41 / $0.61 = 50
Tastykake price-earnings ratio:
$9.20 / $ 0.25 = 37
Ethics Challenge
BTN 13-3
Communicating in Practice
BTN 13-4
There is no set solution to this activity. Solutions will vary based on the
industry and the companies selected.
BTN 13-5
1. The balance sheet of HCA, Inc., shows that the company has only
issued common stock. However, the common stock is divided into
voting and nonvoting shares. In 2002 there were 493,176,000 voting
shares and 21,000,000 nonvoting shares outstanding.
2. Both the voting and nonvoting common shares have a par value of
$0.01.
3. The statement of cash flows (financing) shows that in 2002 HCA issued
common stock for proceeds of $267 million.
4. In 2002, the statement of cash flows (financing) shows that HCA
repurchased common stock shares for $282 million.
5. In 2002, the statement of cash flows (financing) shows that HCA paid
cash dividends of $40 million.
Teamwork in Action
BTN 13-6
13,400
13,400
Cash...........................................................................................
13,400
Treasury Stock, Common..................................................
13,400
b.
Cash...........................................................................................
15,000
Contributed Capital, Treasury Stock................................
Treasury Stock, Common..................................................
1,600
13,400
c.
Cash...........................................................................................
12,000
Contributed Capital, Treasury Stock......................................
1,400
Treasury Stock, Common..................................................
13,400
d.
Cash...........................................................................................
12,000
Contributed Capital, Treasury Stock......................................
1,000
Retained Earnings....................................................................
400
Treasury Stock, Common..................................................
13,400
e.
Cash...........................................................................................
12,000
Retained Earnings....................................................................
1,400
Treasury Stock, Common..................................................
13,400
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.
BTN 13-7
1. Start-up tech companies usually have limited cash. Most small tech
companies argue that they are better off pouring their cash into
research and development or other investments while also retaining a
cushion for any sharp downturns the industry might encounter.
2. The most prominent large tech companies do not pay cash dividends.
3. A recent poll of 500 institutional investors showed that investors were
clearly in favor of receiving dividends if the tax law changes so that
distributed dividends will not be taxed as part of the shareholder
personal income.
4. In the past, tech companies have often purchased treasury shares
(stock buybacks) with their excess cash. The share buybacks have
been popular with tech companies in the past because treasury stock
reduces shares outstanding. Stock options, which are highly utilized by
tech companies, will ultimately result in shares being issued. The tech
companies can manage the total number of shares outstanding by
balancing stock issued due to stock options with share repurchases.
5. CEOs of tech companies tend to hold considerable amounts of their
companys stocks. Therefore, the personal (cash) wealth of CEOs may
grow substantially if tech companies start to issue more dividends.
Entrepreneurial Decision
BTN 13-8
1.
Net income..............................................................
Less preferred dividends.......................................
Net income for common stockholders.................
Plan A
$ 45,000
0
$ 45,000
Plan B
$ 45,000
(5,000)
$ 40,000
80%
100%
$ 36,000
$ 40,000
$250,000
$250,000
14.4%
16.0%
Net income..............................................................
Less preferred dividends.......................................
Net income for common stockholders.................
Plan A
$ 10,500
0
$ 10,500
2.
Plan B
$ 10,500
(5,000)
$ 5,500
80%
$
$250,000
$250,000
3.4%
2.2%
8,400
100%
$
5,500
3. The difference between the answers for parts 1 and 2 arises from the
percent return generated with the assets invested in the corporation.
In part 1, Get Real Girl Inc.s return on equity is 14.4% ($36,000/$250,000)
for Plan A, which is less than the 16.0% for Plan B. However, the return on
equity is only 3.4% ($8,400/$250,000) in part 2 for Plan A, BUT this is more
than the 2.2% for Plan B.
These results indicate that the 8% dividend rate on the preferred stock is
advantageous to Chavez as long as the rate of return on the assets is
greater than 8% (this is the same as saying net income is over $25,000).
This means Plan B is preferred. Net income over $25,000 yields a return on
assets greater than 8% (i.e., 8% equals $25,000/$312,500). If net income
falls below $25,000 (or less than 8% return on assets), then Plan A is
preferred.
McGraw-Hill Companies, Inc., 2005
54
BTN 13-9
There is no formal solution for this field activity. Students often find this
assignment interesting as it highlights the relevance of their accounting
studies.
Global Decision
1.
BTN 13-10
2001
2000
$0.83
$1.25
$1.39
2001
1,175,821,000
1,321,642,000
2001
$303,804
$286,184