PROBLEM SETS

PROBLEM 1

The following information was taken from the balance sheet of Laribee Company (amounts
are in thousands of dollars):
Current Liabilities* 24, 480
Long-term Debt 73,440
Common stock, par value 61,200
Paid in Capital 15,300
Retained earning 70,380
244,800
*includes 6,120 current portion of long-term debt
Required
Calculate debt/equity and debt capitalization ratios
What do these ratios measure?
 Debt/Equity Ratio Debt/Capitalization
Ratio
1. Including current Rarely calculated
liabilities
2. Excluding current
liabilities except
current portion of
long-term debt
3. Excluding all
current liabilities
These two ratios measure the proportion of funds
the company has raised from creditors as opposed
to owners. They indicate how much leverage the
firm has in its capital structure. The basic trade-off
a company makes in determining the right ratio
(i.e., capital structure) is between the risks
inherent in taking on fixed debt obligations versus
the opportunity to increase the shareholders
profitability by having some debt in the capital
PROBLEM 9-2

During its fiscal year, Morey Corporation had outstanding

600,000 shares of $6.50 preferred stock and 2,000,000
shares of common stock. Moreys net income for the year
was $19,550,000. The company also had granted stock
options to employees for 200,000 shares of common stock
at $10 per share (exercise price). The average price of the
companys common stock during the fiscal year was $20
per share.
Required:
Calculate the companys basic earnings per share.
A. BASIC EARNINGS PER SHARE

Review: basic earnings per share is a measurement

of the corporations per share performance over a
period of time
Computation: Dividing net income applicable to the

common stock by the number of shares of common

stock outstanding
B. DILUTED EARNINGS PER SHARE

REVIEW:
amount of earnings for the period applicable to each share of common stock
outstanding (basic earnings per share) adjusted to reflect dilution (lower
earnings per share) assuming all potentially dilutive common shares were
outstanding during the period. q

 PROBLEM 9-5

The Owners Equity section of the balance The Board of Directors took the following
sheet of Ovlov Corporation on December Actions:
31, 2009 was as follows: December 31, 2010
$8.00 preferred stock (40,000 $4,000,000
A 2 for 1 stock split of common stock was declared
shares, par value $100)
12,000 shares of it outstanding preferred stock
Common stock (no par value 21,000,000 were purchased by Ovlov at $114 per share
5,000,000 shares issued and January 1, 2011
outstanding)
The preferred dividend of $8.00 was declared
Retained Earnings 7,000,000 A cash dividend of $0.15 of a share on common
Total Owners Equity $32,000,000 stock outstanding on January 1 was declared
A stock dividend of 1/10 of a share was declared
on common stock, effective Febraury 1.
February 1, 2011
The dividends declared in January were paid
 JOURNAL ENTRIES

DECEMBER 31, 2010

(A)
10,000,000 shares issued and outstanding
(B)
Dr. Treasury Stock 1,368,000
Cr. Cash 1,368,000
 JOURNAL ENTRIES
JANUARY 1, 2011
(A)
dr. Dividends on Preferred 224,000
Stock
cr. Dividends Payable 224,000
(B)
dr. Dividends on Common 1,500,000
Stock
dr. Dividends on Common 1,500,000
Stock
(C)
No entry. (When this stock dividend is effective, retained earnings is diluted for the fair value
of the additional shares issued, paid-in-capital is credited for a like amount, and 1,000,000
additional shares are listed as issued and outstanding.)
JOURNAL ENTRIES

FEBRUARY 1, 2011
dr. Dividends 1,724,000
Payable
cr. Cash 1,724,000
PROBLEM 9-6
PROBLEM 9-6
Required
How many shares of common stock were issued during 2010?
What was their average issue price?
How many shares of preferred stock were issued during 2010?
What was their average issue price?
Give the entry for the companys purchase of treasury stock. What
was the average repurchase price?
What was the companys book value at the end of 2009? 2010?
How many shares of common stock were issued during 2010? What
was their average issue price?

15,000 ( 80,000 - 65,000) common shares issued in 2010.

Average price: $25

How many shares of preferred stock were issued during 2010? What
was their average issue price?

= 3,000 shares

Change in preferred 150,000

stock
Change in paid 25,000
capital

Total 175,000

Give the entry for the companys purchase of treasury stock. What
was the average repurchase price?

Dr Treasury Stock 150,000

Cr Cash 150,000

Average Price
What was the companys book value at the end of 2009? 2010?

2009: $1, 780,000

2010: $ 2,354,000
 PROBLEM 9-7
Eastman, Inc., incorporated in New Hampshire on April 15, 2007. Since the date of its
inception, the following transactions occurred: On December 15, 2008, Eastman issued
On April 15, 2007, Eastman was
5,000 shares of treasury stock at $46 per
authorized to issue 2,000,000 shares of $6 share.
par value common stock.
On February 1, 2009, the stock split 2 for
On April 15, 2007, the company issued
1.
100,000 shares of common stock for $15
per share. On September 15, 2009, the remaining
treasury stock was sold for $35 per share.
The company issued and paid a 25
percent stock dividend on December 21, On December 24, 2009, Eastman declared
2007. The market value on that date was a cash dividend of $150,000.
$16 per share. On January 24, 2010, the cash dividend
On July 1, 2008, Eastman sold 30,000 was paid.
shares of common for $30.
On November 15, 2008, the company Required: Prepare the necessary
repurchased 10,000 shares of stock for journal entries
$42 per share.
JOURNAL ENTRIES

April 15, 2007

Dr cash
Cr common
stock