Ex. 11.

Ex. 11.4

a.

Stockholders equity:
8% cumulative preferred stock, $100 par value,
5,000 shares authorized, 2,500 shares issued and outst
Common stock, $2 stated value, 100,000 shares authorized,
70,000 shares issued and outstanding
Additional paid-in capital:
Preferred stock
Common stock
Total paid-in capital
Retained earnings
Total stockholders equity

250,000
140,000

7,500
770,000
$ 1,167,500
475,000
$ 1,642,500

b.

No. The market value of a corporations stock has no direct effect on the amount in
the financial statements. Capital stock is recorded at the amount for which it was
originally issued.

a.

Total dividends paid in third year

Dividends on 9% cumulative preferred stock:
Dividends ($50 x .09 x 40,000 x 2 years) . $360,000
Current years dividend ($50 x .09 x 40,000)
180,000
Total paid on 9% cumulative preferred s
$540,000
Dividends on 12% noncumulative preferred stock:
Current years dividend ($100 x .12 x 8,000)
96,000
Dividends on common stock in third year

b.

636,000
$100,000

Dividends per share:

Preferred stock, 9% cum. ($540,000 40,000 share
Preferred stock, 12% noncum. ($96,000 8,000 shares) ..

Common stock ($100,000 400,000 shares)

c.

$736,000

$ 13.50 per share

$ 12.00 per share
$ 0.25 per share

The stockholders equity section of the balance sheet reports no additional paid-in
capital. Thus, the preferred shares must have been issued at their respective par
values ($50 per share for the 9% cumulative preferred stock, and $100 per share
for the noncumulative preferred stock).

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Ex. 11.9

a. Feb. 10

June

Dec. 22

Treasury Stock
Cash ...
Purchased 17,000 shares of treasury
stock at $25 per share.

425,000

Cash
Treasury Stock
Additional Paid-in Capital:
Treasury Stock
Sold 6,000 shares of treasury stock, cost
$150,000, for $33 per share.

198,000

Cash
Additional Paid-in Capital: Treasury
Stock
Treasury Stock
Sold 4,000 shares of treasury stock, cost
$100,000, for $22 per share.

88,000

425,000

150,000
48,000

12,000
100,000

b. Restriction of retained earnings for treasury stock owned at year-end:

$175,000 (7,000 shares still owned x $25 per share cost).
c. No, a restriction on retained earnings does not affect the total amount of retained
earnings reported in the balance sheet. A restriction of retained earnings is
disclosed, but does not reduce the total amount of retained earnings of a company.
The restriction on retained earnings simply limits the amount of dividends the
corporation can pay as long as it holds treasury stock.

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Ex. 11.10

a. Had the stock been split 2-for-1, it would begin trading at approximately $40 per
share immediately after the split ($80 2 = $40).
b. Had the stock been split 4-for-1, it would begin trading at approximately $20 per
share immediately after the split ($80 4 = $20).
c. When the market price of a corporations common stock appreciates in value
significantly, as it had in the case of Fido Corporation, it may become too
expensive for many investors. Thus, the decision to split the companys stock
was probably made with the intent of making it more affordable to investors.

Ex. 11.11

a. Companies sometimes purchase shares of their own common stock to help boost
the market price per share. This practice is not generally considered unethical,
given that information pertaining to the purchase is fully disclosed in the
companys financial statements. Furthermore, if the company acquires a
significantly large amount of its outstanding stock, the event would be reported
in the financial press.

b. For a company to classify its treasury stock as a short-term investment is not

appropriate. When treasury stock is purchased, the corporation is actually
reducing its assets (cash), and eliminating part of its stockholders equity. For
this reason, treasury stock should not appear in the balance sheet as a current
asset.

Ex. 11.12

a. Kimberly-Clark could sell approximately 810.7 million additional shares. This

figure is determined by subtracting the number of issued shares from the
number of authorized shares (1.2 billion - 428.6 million = 771.4 million) and
adding to that the number of treasury shares: 1.2 billion - 428.6 million + 39.3
million = 810.7 million.

b. Authorized, but unissued, shares do not represent an asset of the company. At

some time in the future they may result in an increase in assets if they are issued
for cash or other assets, but until that time they simply represent the potential
for future increases in assets. They are not included in the companys balance
sheet, other than through disclosure of the numbers of authorized and issued
shares. This permits the reader of the financial statements to calculate the
number of authorized, but unissued shares, as was done above.

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Ex. 11.13

a. Cash (550,000 x $12)

Common Stock (550,000 x $10)
Additional Paid-in Capital on Common
Stock.

6,600,000

Cash (40,000 x $110)

Preferred Stock (40,000 x $100)
Additional Paid-in Capital on Preferred
Stock..

4,400,000

Treasury Stock/Common 25,000 x $23).

Cash

575,000

5,500,000
1,100,000
4,000,000
400,000
575,000

Note: No entry is required to record the

authorization to issue preferred and common stock.

b. Stockholders' Equity:
Preferred stock, 6%, $100 par value, 60,000 shares authorized,
40,000 shares issued and outstanding

$4,000,000

Common stock, $10 par value, 1,200,000 shares authorized, 550,000

shares issued
$ 5,500,000
Additional paid-in capital:
Preferred stock
Common stock
Total paid-in capital
Less: Treasury (common) stock at cost, 25,000 shares
Total stockholders' equity

400,000
1,100,000
$11,000,000
(575000)
$10,425,000

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20 Minutes, Easy

SOLUTIONS TO PROBLEMS SET A

PROBLEM 11.1A
ROBBINSVILLE PRESS
Partial Balance Sheet
December 31, 2013

Stockholders' equity
8% cumulative preferred stock, $100 par value,
authorized 100,000 shares, issued and outstanding
10,000 shares
Common stock, $1 par value, authorized 500,000 shares
issued and outstanding 170,000 shares
Additional paid-in capital: Common stock
Total paid-in capital
Retained earnings*
Total stockholders' equity
*Computation of retained earnings at December 31, 2013:
Net income for the four-year period 2010-2013
Less: Preferred dividends ($80,000 per year for four years) $
Common dividends ($0.75 x 170,000 shares x 4 years)
Retained earnings, December 31, 2013

b.

1,000,000

$
$

170,000
2,380,000
3,550,000
555,000
4,105,000

1,385,000

830,000
555,000

320,000
510,000

There are no dividends in arrears at December 31, 2013. We know this because common
dividends were paid in each of the four years that the company was in existence. Common
shareholders could not have received dividends in each year of the companys existence had
any dividends been in arrears on the preferred stock.

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PROBLEM 11.2A

20 Minutes, Easy
MCMINN PUBLICATIONS
Partial Balance Sheet
December 31, 2013
Stockholders' equity
10% cumulative preferred stock, $100 par value,
authorized, issued, and outstanding 20,000 shares
Common stock, $1 par value, authorized 1 million shares,
issued and outstanding 300,000 shares
Additional paid-in capital: common stock
Total paid-in capital
Retained earnings*
Total stockholders' equity
*Computation of retained earnings at December 31, 2013:
Net income for the five-year period 2008-2012
Less: Preferred dividends ($200,000 x 5 years)
Common dividends ($1 x 300,000 shares x 5 years)
Retained earnings, December 2012
Less: Net loss of 2013
Retained earnings, December 31, 2013

2,000,000

$
$

300,000
5,700,000
8,000,000
235,000
8,235,000

4,560,000

$ 1,000,000
1,500,000
$
$

2,500,000
2,060,000
1,825,000
235,000

b.

Note to financial statements:

As of December 31, 2013, dividends on the 10%, $100 par value, cumulative preferred stock were
in arrears to the extent of $10 per share, amounting in total to $200,000.

c.

No. Dividends do not represent a liability of the corporation until they are declared by the board
of directors.

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35 Minutes, Medium

PROBLEM 11.4A
SHARNES COMMUNICATIONS, INC.

a.
General Journal
2013
Jan
6

Cash

280,000

Common Stock
Additional Paid-in Capital: Common Stock
Issued 20,000 shares of $2 par value common
stock
at $14 per share.
7 Organization Costs Expense
Common Stock
Additional Paid-in Capital: Common Stock
Issued 500 shares of common stock to Barnes in
exchange for services relating to formation of the
corporation. Implied issuance price ($7,000 500
shares) = $14 per share.
12 Cash

40,000
240,000

7,000
1,000
6,000

250,000

10% Cumulative Preferred Stock

Issued 2,500 shares of $100 par value, 10%,
cumulative preferred stock at par value.
June

4 Land

250,000

225,000

Common Stock
Additional Paid-in Capital: Common Stock
Issued 15,000 shares of common stock in
exchange
for land valued at $225,000 (15,000 shares x $15).
Nov

Dec

30,000
195,000

15 Dividends (Preferred Stock)

Dividends Payable
To record declaration of annual dividends of $10
per share on 2,500 preferred shares outstanding.
Payable Dec. 20.

25,000

20 Dividends Payable
Cash
To record payment of dividend declared Nov. 15.

25,000

31 Income Summary
Retained Earnings
To close the Income Summary account for the
year.
31 Retained Earnings
Dividends (preferred stock)
To close the Dividends account.

25,000

25,000

147,200
147,200

25,000
25,000

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b.

PROBLEM 11.4A
SHARNES COMMUNICATIONS, INC. (concluded)
SHARNES COMMUNICATIONS, INC.
Partial Balance Sheet
December 31, 20xx___

Stockholders' equity
10% cumulative preferred stock, $100 par, authorized
50,000 shares, issued and outstanding 2,500 shares
Common stock, $2 par, authorized 400,000 shares,
issued and outstanding 35,500 shares
Additional paid-in capital: Common stock
Total paid-in capital
Retained earnings*
Total stockholders' equity
*Computation of retained earnings at December 31, 20xx:
Retained earnings at January 1, 20xx
Add: Net income in 20xx
Less: Preferred dividends in 20xx
Retained earnings at December 31, 20xx.

250,000

71,000
441,000
762,000
122,200
884,200

$
$

147,200
(25,000)
122,200

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McGraw-Hill Education.

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McGraw-Hill Education.