tutorial ch11

7/28/2019 Tutorial Ch11

1/7

Ex. 11.1 a. (1)

(a)(b)

(a)

(b)

(2)

(a)

(b)

(c)

(a)

(b)

b.

Ex. 11.2 a.

b.

c.

d.

e.

f.

g.

h.

i.

j. None (The price of preferred stock varies inversely with interest rates.)

Publicly owned corporation

Paid-in capital

Retained earnings

None (Book value iscommon stockholders equity divided by the number ofcommon shares outstanding.)

None (Retained earnings is not an amount of cash; it is an element of owners

equity.)

Double taxation on distributed earnings

Greater regulation

A corporation would probably be the better form of organization because of the

characteristic of limited liability of the owners. Potentially, a scuba diving student

could be seriously injured in the class. With the sole proprietorship form of

organization, your personal assets would be at risk to pay for the persons injuries,

after you exhausted any insurance coverage and assets that the business might

have.

Common stock

None (Dividends in arrears are prior years dividends owed to holders of

cumulative preferred stock.)

Personal liability of owner for debts of the business

Business ceases with death of owner

Advantages:

Organizing the scuba diving school as a corporation.

Double taxation

Market value

No personal liability of owners for debts of the business

Readily transferable ownership shares

Continuous existence

Disadvantages:

SOLUTIONS TO EXERCISES

Advantages:

Organizing the scuba diving school as a sole proprietorship.

Easy to formNo double taxation on distributed earnings

Disadvantages:

The McGraw-Hill Companies, Inc., 2010

E11.1,2


2/7

Ex. 11.3 a.

$ 250,000

140,000

7,500

770,000

$ 1,167,500

382,000

$ 1,549,500

b.

$736,000

$360,000

180,000

$540,000

96,000 636,000

$100,000

b.

c.

Ex. 11.5 a.

b.

c.

d. $35,000,000 legal capital ($15,000,000 preferred, plus $20,000,000 common)

$79,000,000 total paid-in capital ($35,000,000 legal capital, plus $44,000,000

additional paid-in capital)

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).

150,000 shares ($15,000,000 total par value, divided by $100 par value per share)

$1,050,000 ($15,000,000 total par value x 7% or 150,000 x $100 x 7%)

$16 [($20 million par value +$44 million additional paid-in capital) 4,000,000shares issued]

Preferred stock, 12% noncum. ($96,000 8,000 shares)

Total stockholders equity

Dividends ($50 x .09 x 40,000 x 2 years) .

Current years dividend ($50 x .09 x 40,000)

No. The market value of a corporations stock has no effect on the amount in the

financial statements. Capital stock is recorded at the amount for which it was

originally issued.

$ 12.00 per share

Preferred stock, 9% cum. ($540,000 40,000 shares)

Stockholders equity:

8% cumulative preferred stock, $100 par value,

5,000 shares authorized, 2,500 shares issued and outstanding

Common stock, $2 stated value, 100,000 shares authorized,

70,000 shares issued and outstanding

Common stock

Dividends per share:

Current years dividend ($100 x .12 x 8,000)

Total paid on 9% cumulative preferred stock

Dividends on 12% noncumulative preferred stock:

Total paid-in capital

Retained earnings

Additional paid-in capital:

Preferred stock

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

Ex. 11.4 a.

Dividends on 9% cumulative preferred stock:

Total dividends paid in third year

Dividends on common stock in third year

$ 0.25 per share

$ 13.50 per share


E11.3,4,5


3/7

Ex. 11.8

a.

200,000$

300,000

452,800952,800$

146,800

806,000$

b.

806,000$

216,000

590,000$

60,000

9.83$

c.

a.

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).

Ex. 11.10

Book value per share of common stock:

Equity of common stockholders

Book value per share ($590,000 60,000 shares)

Total stockholders equity (from part a)

Claims of preferred stockholders ($200,000 plus

Net assets (stockholders equity):

8% cumulative preferred stock

Common stock, $5 par, 60,000 shares issued

Additional paid-in capital Total paid-in capital

Less: Deficit

Total net assets (stockholders equity) .

No. The book value per share represents the stockholders share of the net book value of

the corporations assets, not the assets liquidation values. The stockholders may receive

more or less than the book value per share if the corporation is liquidated, depending

primarily on the amounts at which the corporations assets are sold.

Less:

dividends in arrears, $16,000)

Number of shares of common stock outstanding

Had the stock been split 2-for-1, it would begin trading at approximately

$40 per share immediately after the split ($80 2 =$40).


E11.8,10

.

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.


E11.8,10


4/7

PROBLEM 11.4A

Jan 6 Cash 280,000

Common Stock 40,000240,000

7 7,000Common Stock 1,000

6,000

## 250,000250,000

June 4 Land 225,000Common Stock 30,000

195,000

Issued 15,000 shares of common stock in exchangefor land valued at $225,000 (15,000 shares x $15).

at $14 per share.

Issued 500 shares of common stock to Barnes in

Addi tional Paid-in Capital: Common Stock

20__

Issued 20,000 shares of $2 par value common stockAddi tional Paid-in Capital: Common Stock

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

corporation . Implied issuance price ($7,000 500shares) = $14 per share.

10% Cumulative Preferred Stock

Organization Costs Expense

a.General Journal

BARNES COMMUNICATIONS, INC.

exchange for services relating to formation of the

Cash

Addi tional Paid-in Capital: Common Stock


P11.4A

,25,000

Dec ## 25,000Cash 25,000

##Retained Earnings 147,200

147,200year.

## 25,000

25,000

Dividends PayableTo record declaration of annual dividends of $10

To close the Income Summary account for the

Income Summary

Payable Dec. 20.

To record payment of dividend declared Nov. 15.

DividendsTo close the Dividends account .

Retained Earnings

per share on 2,500 preferred shares outs tanding.

Dividends Payable


P11.4A


5/7

PROBLEM 11.4A

.

Stockholders' equity

50,000 shares, issued and outstanding 2,500 shares 250,000$

issued and outstanding 35,500 shares 71,000441,000

Total paid-in capital 762,000$122,200

Total stockholders' equity 884,200

-$147,200(25,000)122,200Retained earnings at December 31, 20__.

Retained earnings at January 1, 20__Add: Net income in 20__Less: Preferred dividends in 20__

10% cumulative preferred stock, $100 par, authorized

BARNES COMMUNICATIONS, INC.

December 31, 20___Partial Balance Sheet

BARNES COMMUNICATIONS, INC. (concluded)

*Computation of retained earnings at December 31, 20__:

Common stock, $2 par, authorized 400,000 shares,

Addi tional paid-in capital: Common stock

Retained earnings*


P11.4A (p.2)


P11.4A (p.2)


6/7

PROBLEM 11.5A

a. Par value of all preferred stock outstanding 2,400,000$100$

24,000

b. Dividend requirement per share of preferred stock (7 1/2% x $100) 7.50$24,000

Annual preferred stock dividend requirement ( 7.50 x 24,000 shares) 180,000

c. 900,000$2$

um er o s ares o common s oc ou s an ng , per s are 450,000

d. 900,000$Paid-in capital in excess of par: Common 8,325,000Total issuance price of all common stock 9,225,000$Number of shares of common stock issued (c) 450,000

20.50

e. 2,400,000$900,000

3,300,000$

f. 3,300,000$8,325,000

11,625,000

g. Total stockholders equity 14,220,000$Less: Par value of preferred stock [24,000 shares (a ) x $100 per share] 2,400,000

SMITHFIELD PRODUCTS

Par value of all common stock issued

Par value per share of preferred stock

Number of shares of preferred stock outstanding ($2,400,000 $100)

Number of shares of preferred stock outstanding (a)

Par value per share of common stockPar value of all common s tock outs tanding

Total legal capital (e)Add: Addi tional paid-in capital: Common stock

Total paid-in capital

Average issuance pr ice per share of common ($9,225,000 450,000 shares)

Par value of p referred stockPar value of common stock

Total legal capital


P11.5A

Equity of common stockholders 11,820,000

Number of shares of common stock outstanding (c ) 450,000

Book value er share $11 820 000 450 000 shares 26.27

h. Retained earnings, beginning of the year 717,500$Add: Net income for the year 3,970,000

Subtotal 4,687,500$Less: Retained earnings, end of the year 2,595,000

Total dividends paid during the year 2,092,500$Less: Dividends on preferred stock (part b ) 180,000

Total dividends on common stock 1,912,500$

Number of common shares outstanding 450,000Dividends er share of common stock $1 912 500 450 000 4.25


P11.5A


7/7

PROBLEM 11.7A

a.

b.

TECHNO CORPORATION

Par value is the legal capital per sharethe amount by which stockholders equity cannotbe reduced except by losses. Thus, par value may be viewed as a minimum cushion of

equity capital existing for the protection of creditors.

Book value per share is equal to thenet assets represented by each share of common

stock. Book value is a historical cost concept, representing the amounts invested by

the stockholders, plus the amounts earned and retained by the corporation. By

comparing book value with current market value, stockholders may gain insight into

whether management has increased or diminished the value of the resources

entrusted to their care.

Themarket value of a share of stock is established in the marketplace. It represents the

per-share price at which willing sellers can and will sell shares of the stock to willingbuyers. Market value is related primarily to investors future expectations of the

companys performance, rather than to historical amounts.

The companys par valueone-tenth of a cent per shareis quite low. However, the

corporation can set par value at any level that it chooses; the amount of par value has

no direct effect upon either book value or market value. It does mean, however, that

the amount of the companys legal capitalserving as a cushion for creditorsis quite

low. Another reason for the small par value is the possibility of stock splits in the past.

The fact that book value per share ($6.50) is far above par value indicates either that (1)

the stock initially was issued at a price far above par value, or (2) that the company hasretained substantial amounts of earnings. Even if there had been stock splits in prior

years, the total dollar amount of book value would not have been affected.


P11.7A

The market value of $65 is 10 times book value. This implies that investors believe that

management and product lines make the company worth far more than the amounts of

capital historically invested.

The very low par value offers little protection to the companys creditors. On the other

hand, a market value of many times book value implies that little cushion is required for

creditors claims to be secure. I f the company performs as its market price implies that it

will, its earnings and cash flows should make the creditors positions quite secure.

Earnings and cash flows are far more relevant to a companys debt-paying ability than is

the cushion provided by par value.


P11.7A

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