Hhtfa8e Ch09 Sm (2)

8/13/2019 Hhtfa8e Ch09 Sm (2)

1/119

Chapter 9

Stockholders Equity

Short Exercises

(5 min.) S 9-1

Corporationsadvantages:

Continuouslife

Transferability of ownership(listed as two itemson page 536)

Limitedliability of the stockholders

Ease of raisingcapital (page 536)

Corporationsdisadvantages:

Corporatetaxation

Governmentregulation

Separationof ownershipand management(per text page 536)

Financial Accounting 8/e Solutions Manual 204

8/13/2019 Hhtfa8e Ch09 Sm (2)

2/119

(5 min.) S 9-2

1. Thestockholdershold ultimatepowerin a corporation.

2. The chairperson of the board of directors is usually the most

powerful personin a corporation. Title is CEO.

3. Thepresidentis in chargeof day-to-day operations. Title is COO.

4. The chief financial officer is in chargeof accountingand finance. Title is

CFO.

Financial Accounting 8/e Solutions Manual205

8/13/2019 Hhtfa8e Ch09 Sm (2)

3/119

(5-10 min.) S 9-3

1. Thecommon stockholdersare 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 commonstockholders take more risk so their potential for

gains throughan increasein the companysstock price is unlimited.

Chapter 9 Stockholders Equity 206

8/13/2019 Hhtfa8e Ch09 Sm (2)

4/119

(5-10 min.) S 9-4DATE: _____________

TO: KarenScanlonand Jennifer Shaw

FROM: Student Name

RE: Steps in forminga corporation

The first step in organizing a corporation is to obtain a charterfrom 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 page 536) Pay fees,

Sign the charter,

File documentswith the state, and

Agree to a set of bylawsto determine how the corporation is to be

governedinternally.

Later steps include the stockholders will electing a board of

directorswho in turn appoint officersto 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).


8/13/2019 Hhtfa8e Ch09 Sm (2)

5/119

(5-10 min.) S 9-5

The $72,927,000was paid-in capital. It was nota 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 issued plus any additional paid-

in capital.

(10 min.) S 9-6

Millions

Horris Printer:

Cash. 17,123

CommonStock. 23

Additional Paid-in Capital.. 17,100

DelectableDoughnuts:Cash. 292

CommonStock. 292


8/13/2019 Hhtfa8e Ch09 Sm (2)

6/119

(10 min.) S 9-7

Case A Issue stock and buy the assets in separate

transactions:

JournalDATE ACCOUNTTITLESANDEXPLANATION DEBIT CREDIT

Cash.. 800,000

CommonStock (12,000 $20)... 240,000

Paid-in Capital in Excessof Par 560,000

Issuedstock.

Building 550,000

Equipment 250,000

Cash.. 800,000

Purchasedplant assets.

Case B Issue stock to acquire the assets:


Building 550,000

Equipment... 250,000

CommonStock (12,000 $20) 240,000

Paid-in Capital in Excessof Par... 560,000

Issuedstock to acquire buildingand equipment.

The balancesin all accountsare the same:

Building $550,000

Equipment. 250,000


8/13/2019 Hhtfa8e Ch09 Sm (2)

7/119

CommonStock (12,000x $20 240,000



8/13/2019 Hhtfa8e Ch09 Sm (2)

8/119

(5-10 min.) S 9-8

Thousands

Stockholders equity:

Commonstock, $.01 par, 400 thousandsharesissued... $ 4

Paid-in capital in excessof par.. 196

Retainedearnings.. 647

Other stockholders equity.. (22)

Total stockholders equity... $825

(10 min.) S 9-9

Amounts In Thousands

a. Total revenues.. $1,340

Total expenses.. 806

Net income. $ 534

b. Accountspayable $ 440

Other current liabilities... 2,569

Long-term debt. 27

Total liabilities... $3,036

c. Total liabilities (fromReq. b). $3,036

Total stockholders equity (fromS 9-7).. 825Total assets $3,861


8/13/2019 Hhtfa8e Ch09 Sm (2)

9/119

(5 min.) S 9-10


MillionsTreasuryStock... 29

Cash.. 29

Cash.. 8

TreasuryStock.. 2

Paid-in Capital from TreasuryStock

Transactions.. 6

Overall, stockholders equity decreased by $21 million ($29 million paid out

minus$8 million received).


8/13/2019 Hhtfa8e Ch09 Sm (2)

10/119


8/13/2019 Hhtfa8e Ch09 Sm (2)

11/119

(15-20 min.) S 9-11Req. 1

MEMORANDUM

TO: SusanSmith Exports, Inc., Boardof Directors

FROM: Student Name

RE: Howthe purchaseof treasurystock will makeit more difficult 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 treasury stock at prices above the purchaseprice increasecompany

assets becauseof the greater amount of 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.Thesesales of treasurystock will not affect net incomebecausethe company

is dealing with its owners. Transactions between the corporation and its

owners cannotgenerate a profit or a loss that is reported on the income

statement.

Student responsesmay vary.


8/13/2019 Hhtfa8e Ch09 Sm (2)

12/119

(10 min.) S 9-12


2010Dec. 15 RetainedEarnings

($110,000 .06) + (45,000 $1.00) 51,600

DividendsPayable 51,600

Declareda cash dividend

2011

Jan. 4 DividendsPayable 51,600

Cash. 51,600Paid the cash dividend.

During 2010, RetainedEarningsincreasedby $43,400 (net incomeof $95,000

dividendsof $51,600).

(5-10 min.) S 9-13

1. $360,000(200,000shares $1.80 per 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)


8/13/2019 Hhtfa8e Ch09 Sm (2)

13/119

(5-10 min.) S 9-14

Req. 1


May 11 RetainedEarnings(13,000 .15 $25.00) 48,750

CommonStock (13,000 .15 $3)... 5,850

Paid-in Capital in Excessof Par-Common.. 42,900

Req. 2

No effect on total assets.

No effect on total liabilities.

No effect on total stockholders equity.


8/13/2019 Hhtfa8e Ch09 Sm (2)

14/119

(10 min.) S 9-15

Total stockholders equity.. $4,146,000

Less:Preferredstock. (195,000)

Preferreddividendsin arrears(33,000 .04 $5 x 3) (19,800)

Commonequity. $3,931,200

Numberof commonsharesoutstanding

(63,000 1,400).. 61,600

Bookvalue per share of commonstock. $ 63.82


8/13/2019 Hhtfa8e Ch09 Sm (2)

15/119

8/13/2019 Hhtfa8e Ch09 Sm (2)

16/119

(10-15 min.) S 9-17

Rate of return

on total

assets

Net Interest

= income+ expense

=120 + 31

Averagetotal assets (10,624+ 9,515) / 2

=151

= 1.5%10,070

Note: 10% is consideredgood in most industries. Therefore, Godhis 1.5%

return on assets is very weak.

Rate of return Net Preferred

on common=

income dividends=

120 0

stockholders Averagecommon (3,212+ 2,878) / 2

equity stockholdersequity

=

120

= 3.9%3,045

Note: 15% is consideredgood in most industries, so Godhis

return on equity is very weak.


8/13/2019 Hhtfa8e Ch09 Sm (2)

17/119

(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

stockholders equity by sourceto distinguishpaid-in capital, which cannotbe used for cash dividends,from retainedearnings.

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 how manysharesof our stock to issue for the land.

3. Investorsbuy commonstock in the hope of earninghigher returnson their

investmentthan are availableon an investmentin preferredstock.

4. The redemption value of our preferred stock requires us to pay the

preferredstockholdersthis amountwhenwe buy back the preferredstock.

5. Bookvalue

per share of=

Total stockholdersequity Preferredequity

commonstock Numberof sharesof commonstock outstanding

The stockholder can multiply book value per share by the number of

sharesshe owns. The result will be the book value of her stock.


8/13/2019 Hhtfa8e Ch09 Sm (2)

18/119

(5-10 min.) S 9-19

Billion

s

Cashflows from financingactivities:Paid off long-term notes payable. $(2.4)

Issuedcommonstock. 1.1

Purchasedtreasurystock.. (3.5)

Paid cash dividends (1 .6)

Cashflows from financingactivities $(6.4)


8/13/2019 Hhtfa8e Ch09 Sm (2)

19/119

ExercisesGroupA

(5-10 min.) E 9-20AReq. 1


Jan. 19 Cash (12,000 $6.00) 72,000

CommonStock (12,000 $2.00).............. 24,000

Paid-in Capital in Excessof

Par - Common.................................... 48,000

Apr. 3 Cash....................................................... 54,000

PreferredStock.................................... 54,000

11 Inventory................................................. 16,000

Equipment............................................... 9,500

CommonStock (3,700 $2.00)............... 7,400


Par - Common.................................... 18,100

Req. 2


Preferredstock, $1.00, no par

10,000 sharesauthorized, 400 sharesissued $54,000

Commonstock, $2.00 par,

19,000 sharesauthorized, 15,700 sharesissued 31,400

Paid-in capital in excessof par-common

($48,000+ $18,100). 66,100


8/13/2019 Hhtfa8e Ch09 Sm (2)

20/119

Retainedearnings(deficit). (43,000)

Total stockholders equity. $108,500


8/13/2019 Hhtfa8e Ch09 Sm (2)

21/119

(10-15 min.) E 9-21A

Stockholders Equity

Preferredstock, $4.50 no-par, 10,000 shares authorized, 600 sharesissued........................................... $ 22,000

Commonstock, $1.50 par, 19,000 sharesauthorized, 5,000

sharesissued

7,500

Paid-in capital in excessof par - common............................... 80,550*

Retainedearnings................................................................ 45,000

Total stockholders equity................................................ $155,050

_____*Computation:

April 23: 1,700 shares ($16.50 $1.50) = $25,500

May 12: $19,000+ $41,000 (3,300 shares $1.50) =. 55,050

$80,550

Journal entries (not required):

Apr. 23 Cash... 28,050

CommonStock................................... 2,550


May 2 Cash...................................................... 22,000

PreferredStock.................................. 22,000

12 Inventory............................................... 19,000

Equipment............................................. 41,000

CommonStock................................... 4,950


8/13/2019 Hhtfa8e Ch09 Sm (2)

22/119



8/13/2019 Hhtfa8e Ch09 Sm (2)

23/119

(10 min.) E 9-22A

Paid-in capital consistsof:

Preferredequity:

Issuedfor cash (2,000 shares $120) ........... $240,000 Commonequity:

Issuedfor cash (22,000shares $1.00) 22,000

Issuedfor organizingthe corporation 23,000

Issuedfor patent.. 82,000

Total paid-in capital $367,000

Unuseddata:

Net income

Dividendsdeclared

Short-cut solution(also okay):

1. $ 23,000

2. 82,0003. 240,000(2,000 $120)

4. 22,000 (22,000 $1.00)

$367,000= Total paid-in capital


8/13/2019 Hhtfa8e Ch09 Sm (2)

24/119

(10-15 min.) E 9-23A

Stockholders Equity (Thousands)

Commonstock, $0.75 par, 800 shares

authorized, 320 sharesissued $ 240

Paid-in capital in excessof par 899

Retainedearnings 2,220

Other stockholders equity (730)

Less: Treasurystock, common,100 sharesat cost.. (1,150)

Total stockholders equity... $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 plusPaid-in Capital in Excessof Par.


8/13/2019 Hhtfa8e Ch09 Sm (2)

25/119

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


Jan. 17 Cash(2,200 $10). 22,000

CommonStock (2,200 $2.50) 5,500

Paid-in Capital in Excessof Par. 16,500

To issue commonstock.

May 23 TreasuryStock- Common(300 $12)... 3,600 Cash... 3,600

To purchasetreasurystock.

Jul. 11 Cash(200 $20)... 4,000

TreasuryStock - Common(200 $12) 2,400

Paid-in Capital fromTreasury

Stock Transactions.. 1,600

To sell treasurystock.

Overall effect on stockholders equity

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


8/13/2019 Hhtfa8e Ch09 Sm (2)

26/119

(10 min.) E 9-25A


Millionsb. Cash(8 million $13.50). 108

CommonStock (8 million $2.00)... 16

Capital in Excessof Par Value. 92

c. TreasuryStock.. 16

Cash. 16

d. RetainedEarnings 31

DividendsPayable 31

DividendsPayable 31

Cash. 31

or one entry only:

RetainedEarnings ... 31Cash. 31


8/13/2019 Hhtfa8e Ch09 Sm (2)

27/119

(10 min.) E 9-26A

Dollars

in

MillionsStockholders Equity:

Commonstock, $2.00 par value,

10.1 million sharesissued($4.2 + $16.0) $ 20,200

Capital in excessof par value ($8,400+ $92,000) 100,400

Retainedearnings($250 + $446 $31) 665

Treasurystock, 2 million sharesat cost. (16,070)

Total stockholders equity $105,195


8/13/2019 Hhtfa8e Ch09 Sm (2)

28/119

(20-30 min.) E 9-27A

Req. 1

Conversionof preferredstock into commonstockRetirementof preferredstock

Req. 2

Issuanceof commonstock:

a. To preferredstockholderswho convertedtheir preferred

into common

b. For cash or other assets

c. Stock dividend

Req. 3

(Millions

of shares

of stock)

Dec. 31, 2011

Commonsharesissued. 300

Less:Treasurystock, numberof shares (52)

Commonsharesoutstanding... 288


8/13/2019 Hhtfa8e Ch09 Sm (2)

29/119

(continued)E 9-27A

Req. 4

RetainedEarnings(Millions)Dividends Dec. 31, 2010 Bal. 5,066

during 2011 176 Net income2011 1,380

Dec. 31, 2011 Bal. 6,270

Req. 5 (All amounts in millions)

December31, Purchases

2011 2010 During2011

Cost of treasurystock. $1,144 $228 = $ 916

Treasurystock, numberof shares 52 12 = 40

Averageprice per share paid for

treasurystock purchasedduring2011. $22.90


8/13/2019 Hhtfa8e Ch09 Sm (2)

30/119

(15 min.) E 9-28A

PREFERRED COMMON TOTAL

2010 Total dividend. $ 60,000Preferreddividends

in arrears:

2008: 40,000 sharesX

$0.50(par) per share X .09 =

$1,800

2009: 40,000 sharesX


1,800

Current year

2010: 40,000 sharesX


1,800

Total to preferred... $5,400

Remainderto common. $54,600

2011 Total dividend. $120,000

Preferreddividends:Current year

2011: 40,000 sharesX


$1,800



8/13/2019 Hhtfa8e Ch09 Sm (2)

31/119

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

Req. 1


May 11 RetainedEarnings(300,000 .15 $19) 855,000

CommonStock(300,000 .15 $0.80). 36,000


Par - Common 819,000

To distributea commonstockdividend.

Req. 2

Stockholders equity

Commonstock, $0.80 par, 2,600,000shares authorized,

345,000issued($240,000+ $36,000) $ 276,000 Paid-in capital in excessof par - common

($307,200+ $819,000)... 1,126,200

Retainedearnings($7,122,000 $855,000). 6,267,000

Other.. (200,000)



8/13/2019 Hhtfa8e Ch09 Sm (2)

32/119


8/13/2019 Hhtfa8e Ch09 Sm (2)

33/119

(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 companymerely transferred$855,000from Retained

Earnings to CommonStock ($36,000) and Paid-in Capital in Excess of Par

($819,000).

Req. 4

HDs maximumcash dividendis limited to $560,000, the balance of its cash

account.


8/13/2019 Hhtfa8e Ch09 Sm (2)

34/119

(15-20 min.) E 9-30A

a. Decreasestockholders equity by $78 million.

b. No effect.

c. No effect.

d. No effect.

e. Decreasestockholders equity by $997.50(1,900 $5.25).

f. Increasestockholders equity by $6,300(900 $7).

g. No effect.


8/13/2019 Hhtfa8e Ch09 Sm (2)

35/119

(10-15 min.) E 9-31A


Millions

Commonstock, $0.50 par, 2,250 million shares

(750 million 3) authorized,

1,260 million shares(420 million 3) issued $ 630

Additional paid-in capital. 318

Retainedearnings.. 2,399

Other.. (148) Total stockholders equity. $3,199


8/13/2019 Hhtfa8e Ch09 Sm (2)

36/119

(10-15 min.) E 9-32A

Req. 1

Common:Total stockholders equity.. $96,000

Less: Preferredequity redemptionvalue.. (45,000)

Total commonequity... $51,000

Bookvalue per share ($51,000/ 6,000 shares). $ 8.50

Req. 2

Common:

Total stockholders equity... $ 96,000

Less: Preferredequity[$45,000+ ($30,000 .04 3)]. (48,600)

Total commonequity. $ 47,400

Book value per share ($47,400/6,000 shares).. $ 7.90

Req. 3

Luxury Rugs stock is not necessarily a good buy. Investment decisions

shouldbe basedon more than one ratio.


8/13/2019 Hhtfa8e Ch09 Sm (2)

37/119

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

Rate of Net income+

return=

Interest expense=

$1,525+ $222=

1,747= 0 .118

on assets Averagetotal assets ($15,906+ $13,700)/ 2 $14,803

Net income

Rate of return Preferred

on common=

dividends=

$1,525 $0=

$1,525= 0.186

stockholders' Averagecommon ($8,556*+ $7,836**) / 2 $8,196

equity stockholders

equity

*$ 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.


8/13/2019 Hhtfa8e Ch09 Sm (2)

38/119

8/13/2019 Hhtfa8e Ch09 Sm (2)

39/119


8/13/2019 Hhtfa8e Ch09 Sm (2)

40/119

ExercisesGroupB

(5-10 min.) E 9-36B

Req. 1


Aug. 19 Cash (15,000 $7.50) 112,500

CommonStock (15,000 $3.50).............. 52,500 Paid-in Capital in Excessof

Par - Common.................................... 60,000

Apr. 3 Cash....................................................... 55,000

PreferredStock.................................... 55,000

11 Inventory................................................. 18,000

Equipment............................................... 10,500

CommonStock (4,000 $3.50)............... 14,000


Par - Common.................................... 14,500


8/13/2019 Hhtfa8e Ch09 Sm (2)

41/119

Req. 2


Preferredstock, $2.00, no par

4,000 sharesauthorized, 400 sharesissued $55,000Commonstock, $3.50 par,

110,000sharesauthorized, 15,000 sharesissued 52,500

Paid-in capital in excessof par-common

($60,000+ $14,500). 74,500

Retainedearnings(deficit). (47,000)



8/13/2019 Hhtfa8e Ch09 Sm (2)

42/119

(10-15 min.) E 9-37B

Stockholders Equity

Preferredstock, $5.50 no-par, 7,000 shares authorized, 400 sharesissued........................................... $ 30,000

Commonstock, $2.00 par, 16,000 sharesauthorized, 5,200

sharesissued

10,400

Paid-in capital in excessof par - common............................... 74,850*

Retainedearnings................................................................ 46,000

Total stockholders equity................................................ $161,250

_____*Computation:

JUNE23: 1,500 shares ($17.50 $2.00) = $23,250

JULY 12: $15,000+ $44,000 (3,700 shares $2.00) =. 51,600

$74,850

Journal entries (not required):

Jun. 23 Cash... 26,250

CommonStock................................... 3,000


July 2 Cash...................................................... 30,000

PreferredStock.................................. 30,000

12 Inventory............................................... 15,000

Equipment............................................. 44,000

CommonStock................................... 7,400


8/13/2019 Hhtfa8e Ch09 Sm (2)

43/119

8/13/2019 Hhtfa8e Ch09 Sm (2)

44/119

(10 min.) E 9-38B

Paid-in capital consistsof:

Preferredequity:

Issuedfor cash (3,000 shares $90) ........... $270,000 Commonequity:

Issuedfor cash (17,000shares $18.00) 306,000

Issuedfor organizingthe corporation 24,000

Issuedfor patent.. 85,000

Total paid-in capital $685,000

Unuseddata:

Net income

Dividendsdeclared

Short-cut solution(also okay):

1. $ 24,000

2. 85,0003. 270,000(3,000 $90)

4. 306,000 (17,000 $18.00)

$685,000= Total paid-in capital


8/13/2019 Hhtfa8e Ch09 Sm (2)

45/119

8/13/2019 Hhtfa8e Ch09 Sm (2)

46/119

(10-15 min.) E 9-39B

Stockholders Equity (Thousands)

Commonstock, $0.50 par, 900 shares

authorized, 300 sharesissued $ 150

Paid-in capital in excessof par 897


Other stockholders equity (726)

Less: Treasurystock, common,100 sharesat cost.. (1,610)

Total stockholders equity... $ 981

Bukala Softwarepaid a higher price to acquire treasury stock than the price

Bukala receivedwhen it issued its stock. This explains why Treasury Stock

has a greater balancethan the sum of CommonStock plus Paid-in Capital inExcessof Par.


8/13/2019 Hhtfa8e Ch09 Sm (2)

47/119

(10-15 min.) E 9-40B

Journal

DATE ACCOUNTTITLESANDEXPLANATION DEBIT CREDIT

Mar. 17 Cash(2,400 $7). 16,800

CommonStock (2,400 $1.50) 3,600

Paid-in Capital in Excessof Par. 13,200

To issue commonstock.

Apr. 20 TreasuryStock- Common(800 $16)... 12,800

Cash... 12,800

To purchasetreasurystock.

Aug. 8 Cash(600 $17)... 10,200 TreasuryStock - Common(600 $16) 9,600


Stock Transactions.. 600

To sell treasurystock.

Overall effect on stockholders equity

($16,800 $12,800+ $10,200) $14,200increase


8/13/2019 Hhtfa8e Ch09 Sm (2)

48/119

(10 min.) E 9-41B


Millionsb. Cash(9 million $12.50). 112.5

CommonStock (9 million $1.50)... 13.5

Capital in Excessof Par Value. 99

c. TreasuryStock.. 15

Cash. 15

d. RetainedEarnings 34

DividendsPayable 34

DividendsPayable 34

Cash. 34

or one entry only:

RetainedEarnings ... 34Cash. 34


8/13/2019 Hhtfa8e Ch09 Sm (2)

49/119

(10 min.) E 9-42B

Dollars

in

MillionsStockholders Equity:

Commonstock, $1.50 par value,

10.7 million sharesissued($2.550+ $13.500) $ 16,050

Capital in excessof par value ($7,650+ $99,000) 106,650

Retainedearnings($260 + $447 $34) 673

Treasurystock, 3 million sharesat cost. (15)



8/13/2019 Hhtfa8e Ch09 Sm (2)

50/119


8/13/2019 Hhtfa8e Ch09 Sm (2)

51/119

(20-30 min.) E 9-43B

Req. 1

Conversionof preferredstock into commonstockRetirementof preferredstock

Req. 2

Issuanceof commonstock:

a. To preferredstockholderswho convertedtheir preferred

into common

b. For cash or other assets

c. Stock dividend

Req. 3

(Millions

of shares

of stock)

Dec. 31, 2011

Commonsharesissued. 300

Less:Treasurystock, numberof shares (54)

Commonsharesoutstanding... 246


8/13/2019 Hhtfa8e Ch09 Sm (2)

52/119

(continued)E 9-43B

Req. 4

RetainedEarnings(Millions)Dividends Dec. 31, 2010 Bal. 5,025

during 2011 200 Net income2011 1,475

Dec. 31, 2011 Bal. 6,300

Req. 5 (All amounts in millions)

December31, Purchases

2011 2010 During2011

Cost of treasurystock. $1,242 $280 = $ 962

Treasurystock, numberof shares 54 14 = 40

Averageprice per share paid for

treasurystock purchasedduring2011. $24.05


8/13/2019 Hhtfa8e Ch09 Sm (2)

53/119

(15 min.) E 9-44B

PREFERRED COMMON TOTAL

2010 Total dividend. $ 100,000Preferreddividends

in arrears:

2008: 50,000 sharesX $1.50

(par) per share X .07 =

$5,250

2009: 50,000 sharesX $1.50

(par) per share X .07

5,250

Current year

2010: 50,000 sharesX $1.50


5,250

Total to preferred... $15,750


2011 Total dividend. $200,000

Preferreddividends:Current year

2011: 50,000 sharesX $1.50


$5,250



8/13/2019 Hhtfa8e Ch09 Sm (2)

54/119

(15-20 min.) E 9-45B

Req. 1


Aug. 11 RetainedEarnings(400,000 .20 $15) 1,200,000

CommonStock(400,000 .20 $0.30) 24,000

Paid-in Capital in Excessof Par -

Common 1,176,000

To distributea commonstockdividend.

Req. 2

Stockholders equity

Commonstock, $0.30 par, 2,200,000shares authorized,

480,000issued($120,000+ $24,000) $ 144,000 Paid-in capital in excessof par - common

($409,600+ $1,176,000) 1,585,600

Retainedearnings($7,133,000 $1,200,000) 5,933,000

Other.. (185,000)



8/13/2019 Hhtfa8e Ch09 Sm (2)

55/119


8/13/2019 Hhtfa8e Ch09 Sm (2)

56/119

(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 CommonStock ($24,000) and Paid-in

Capital in Excessof Par ($1,176,000).

Req. 4

HDs maximumcash dividendis limited to $590,000, the balance of its cash

account.


8/13/2019 Hhtfa8e Ch09 Sm (2)

57/119


8/13/2019 Hhtfa8e Ch09 Sm (2)

58/119

(15-20 min.) E 9-46B

a. Decreasestockholders equity by $85 million.

b. No effect.

c. No effect.

d. No effect.

e. Decreasestockholders equity by $11,250(1,800 $6.25).

f. Increasestockholders equity by $8,100(900 $9).

g. No effect.

(10-15 min.) E 9-47B


Millions

Commonstock, $0.30 par, 1,500 million shares

(500 million 3) authorized,

1,350 million shares(450 million 3) issued $ 135

Additional paid-in capital. 315 Retainedearnings.. 2,393

Other.. (146)



8/13/2019 Hhtfa8e Ch09 Sm (2)

59/119


8/13/2019 Hhtfa8e Ch09 Sm (2)

60/119

(10-15 min.) E 9-48B

Req. 1

Common:Total stockholders equity.. $121,000

Less: Preferredequity redemptionvalue.. (25,000)

Total commonequity... $ 96,000

Bookvalue per share ($96,000/ 10,000 shares) $ 9.60

Req. 2

Common:

Total stockholders equity... $ 121,000

Less: Preferredequity[$25,000+ ($21,000 .10 3). (31,300)

Total commonequity. $ 89,700

Book value per share ($89,700/ 10,000shares) $ 8.97

Req. 3

Eclectic Rugs stock is not necessarily a good buy. Investment decisions

shouldbe basedon more than one ratio.


8/13/2019 Hhtfa8e Ch09 Sm (2)

61/119

(10-15 min.) E 9-49B

Rate of Net income+

return=

Interest expense=

$1,530+ $219=

1,749= 0 .117


Net income

Rate of return Preferred

on common=

dividends=

$1,530 $0=

$1,530= 0.187

stockholders' Averagecommon ($8,604*+ $7,802**) / 2 $8,203

equity stockholders

equity

*$ 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

wide margin.


8/13/2019 Hhtfa8e Ch09 Sm (2)

62/119

(10-15 min.) E 9-50B

Net income+

Return=

Interest expense=

$1,872+ $1,443=

$3,315= 0.061

on assets Averagetotal assets ($55,792*+ $52,074**) / 2 $53,933

*$32,315+ $23,477=$55,792

**$38,031 + $14,043= $52,074

Net income

Return=

Preferreddividends=

$1,872 $0=

$1,872= 0.100

on equity Averagecommonequity ($23,477+ $14,043)/ 2 $18,760

These rates of return are low belowthe targets of most companies but

not terribly weak. The companyis profitable, and return on equity exceeds

return on assets. But both return measurescould standto be improved.

(10 min.) E 9-51B

Cashflows from financing activities:

Paymentof long-term debt.. $(17,100)

Proceedsfrom issuanceof commonstock. 8,495

Borrowings... 6,590

Dividendspaid. (215)


8/13/2019 Hhtfa8e Ch09 Sm (2)

63/119


8/13/2019 Hhtfa8e Ch09 Sm (2)

64/119

ChallengeExercises

(20-25 min.) E 9-52


(a) Cash(51,000* $3)....................................... 153,000

CommonStock........................................ 51,000

Additional Paid-in Capital.......................... 102,000

Issuedstock.

(b) TreasuryStock (950 $9)... 8,550

Cash. 8,550

Purchasedtreasurystock.

(c) Cash.. 900

TreasuryStock($8,550 $7,650). 900

Resoldtreasurystock.

(d) Revenues. 172,000

Expenses 114,000

RetainedEarnings... 58,000

Closednet incometo RetainedEarnings.

(d) RetainedEarnings($58,000 $35,000) 23,000

Cash. 23,000Declaredand paid dividends.

_____

*$51,000 $1 par value per share = 51,000 sharesissued.


8/13/2019 Hhtfa8e Ch09 Sm (2)

65/119

8/13/2019 Hhtfa8e Ch09 Sm (2)

66/119

(20-25 min.) E 9-53

Statementof cash flows:

CashFlowsfrom FinancingActivities:

Issuanceof commonstock. $153,000Purchaseof treasurystock. (8,550)

Sale of treasurystock.. 900

Paymentof dividends.. (23,000)

Journal entries are given in the solutionto Exercise9-52.

T-accountsof the stockholders equity accounts:

CommonStock

Issuance of stock 51,000

Balance 51,000

Additional Paid-in Capital

Issuance ofstock 102,000

Balance 102,000

RetainedEarningsDividends 23,000 Net income 58,000

Balance 35,000

TreasuryStock


8/13/2019 Hhtfa8e Ch09 Sm (2)

67/119

Purchase 8,550 Sale 900

Balance 7,650


8/13/2019 Hhtfa8e Ch09 Sm (2)

68/119

(15 min.) E 9-54

Preferredstock:

SpaceWalk retired preferredstock of $131 million ($740 $609).

Commonstock and Additional paid-in capital:

SpaceWalk issued16 million sharesof common

stock for $48 million, computedas follows: Millions

Commonstock ($905 $889). $ 16

Additional paid-in capital ($1,514 $1,482) 32

Total receivedfor issuanceof commonstock.. $48

Retainedearnings: Millions

Beginningbalance. $19,100

Add: Net income.. 2,980

Less:Dividends (1,455 *)

Endingbalance $20,625

*$19,100+ $2,980 $20,625= $1,455

Treasurystock:

Apollo purchasedtreasurystock for $177 million ($2,777 $2,600).


8/13/2019 Hhtfa8e Ch09 Sm (2)

69/119

(15 min.) E 9-55

Additional

Amounts in Millions

Common

Stock +

Paid-in

Capital +

Retained

Earnings

Treasury

Stock =

Total

Equity

Balance,Dec. 31, 2010 $ 71 $10 $35 $52Issuanceof stock. 52 102 15

Stockdividend.. 1.23 65 (7.2)4

Purchaseof treasury

stock.. $(10) (10)

Net income. 22 22

Cashdividends. (12) (12)

Balance,Dec. 31, 2011 $13.2 $26 $37.8 $(10) $67

Computations(not required):

17,000,000 $1 par = $7,000,000

25,000,000 $1 par = $5,000,000

5,000,000 ($3 $1) = $10,000,000

3(7,000,000+ 5,000,000) .10 $1 par = $1,200,0004(7,000,000+ 5,000,000) .10 $6 market value = $7,200,000

5$7,200,000market value $1,200,000par value = $6,000,000


8/13/2019 Hhtfa8e Ch09 Sm (2)

70/119

Quiz

Q9-56 c

Q9-57 b

Q9-58 eQ9-59 c

Q9-60 a

Q9-61 a

Q9-62 b ($317,000+ $220,000+ $85,000 = $622,000

Q9-63 a ($622,000+ $71,300 $5,200 = $688,100)

Q9-64 a {($119,100 $8,500) / [($681,500+ $603,100*) /

2] = .172}

*$688,100 $85,000= $603,100

Q9-65 a

Q9-66 b

Q9-67 a

Q9-68 a

Q9-69 c

Q9-70 b 40,000 $100 .10 = $400,000

Q9-71 c ($500,000 $400,000)/ 40,000= $2.50

Q9-72 e

Q9-73 b

Q9-74 b

Q9-75 a [($27,000+ $3,000) / $600,000= 5.0%]


8/13/2019 Hhtfa8e Ch09 Sm (2)

71/119

Problems

GroupA

( (30-45 min.) P 9-76AReq. 1


May 6 OrganizationExpense 22,500

CommonStock (900 $5) 4,500 Paid-in Capital in Excessof

Par - Common..................... 18,000

Issuedstock to promoterfor assisting

with issuanceof stock.

9 Cash(22,000 $25 per share) 550,000

CommonStock 22,000 $5) 110,000


Par - Common..................... 440,000

Issuedcommonstock for cash.

10 Patent. 20,000

PreferredStock........................... 20,000Issuedpreferredstock to acquire a patent.

26 Cash(1,000 $25)... 25,000

CommonStock (1,000 $5) 5,000



8/13/2019 Hhtfa8e Ch09 Sm (2)

72/119

Par - Common..................... 20,000



8/13/2019 Hhtfa8e Ch09 Sm (2)

73/119

(continued)P 9-76A

Req. 2

CohenCanoes, Inc.BalanceSheet (partial)

May 31, 2010


Preferredstock, $2, no-par, 9,000 sharesauthorized,

800 sharesissued $20,000

Commonstock, $5 par,100,000sharedauthorized, 23,900 sharesissued*. 119,500

Paid-in capital in excessof par - common**... 478,000

Retainedearnings.. 55,000


_____

* 900 + 10,000 + 12,000+ 1,000 = 23,900shares

**$18,000+ $440,000+ $20,000= $478,000


8/13/2019 Hhtfa8e Ch09 Sm (2)

74/119

(10-15 min.) P 9-77A

GarmanCorp.

BalanceSheet (partial)

December31, 2010Stockholders equity:

Preferredstock, 5%, $130 par, 8,000 shares

authorized, 1,600 sharesissued. $208,000

Commonstock, no-par, 600,000shares

authorized, 120,000sharesissued. 513,000

Retainedearnings. 123,200


_____

Computations:

Preferredstock: 1,600 $130 = $208,000

Commonstock: Balancegiven as $513,000

Retainedearnings:$74,000+ $94,000 ($208,000.05 2)

(120,000 $.20) = $123,200


8/13/2019 Hhtfa8e Ch09 Sm (2)

75/119

(20-30 min.) P 9-78A

Commonstock [(475,000+ 380,000) $5] + $358,650. $ 4,633,650

Additional paid-in capital475,000 ($7 $5.00)... 950,000

380,000 ($10.00 $5.00). 1,900,000

41,000 ($10 $7.25) 112,750

Fromstock dividend.. 286,920

Retainedearnings($1,010,000 $610,000 $645,570). (245,570)

Treasurystock [(58,000 41,000) $7.25] (123,250)

Total stockholders equity. $7,514,500

Total assets.. $14,600,000

Total liabilities.. 7,085,500)

= Total stockholders equity $7,514,500


8/13/2019 Hhtfa8e Ch09 Sm (2)

76/119

8/13/2019 Hhtfa8e Ch09 Sm (2)

77/119

Elegant Outdoor Furniture would have to pay all preferred dividends in

arrears and pay the current years dividends before paying dividends to

commonstockholdersbecausethe preferredstock is cumulative.


8/13/2019 Hhtfa8e Ch09 Sm (2)

78/119

(continued)P 9-79A

Req. 4

Elegant must pay preferred dividendsof $379,925 each year to avoid having

preferreddividendsin arrears.

_____

Computation:

Class A Preferred: 78,000sharesX $35 (par) per share 0.065 =

$177,450

Class B Preferred: 79,000 sharesX $35 (par) per share 0.065=

202,475

Total preferreddividends $379,925

Req. 5


2011

Feb. 28 RetainedEarnings.. 860,000

DividendsPayable, Class A

Preferred($2,730,000 .065 2).. 354,900

DividendsPayable, Class B

Preferred($3,115,000 .065 2).. 404,950 DividendsPayable, Common

($860,000 $354,900 $404,964). 100,150


8/13/2019 Hhtfa8e Ch09 Sm (2)

79/119

(15-20 min.) P 9-80A

Req. 1


Feb. 13 Cash (5,400 $5) 27,000

CommonStock(5,400 $4). 21,600


Common 5,400

Jun. 7 RetainedEarnings 210

DividendsPayable

(300 shares $0.70) 210

24 DividendsPayable... 210

Cash 210

Aug. 9 RetainedEarnings

(11,900shares 0.10 $6) 7,140

Common11,900 0.10 $4). 4,760


Common 2,380

Oct. 26 TreasuryStock (500 $7) 3,500

Cash 3,500

Nov. 20 Cash (200 $11)... 2,200

TreasuryStock, (200 7) 1,400


StockTransactions 800


8/13/2019 Hhtfa8e Ch09 Sm (2)

80/119

(continued)P 9-80A

Req. 2

Stockholders equity:$.70 cumulativepreferredstock, $5 par, 300 shares

issued............ $ 1,500

Commonstock, $4 par, 13,090sharesissued

($26,000+ $21,600+ $4,760) 52,360

Paid-in capital in excessof par - common

($17,800+ $5,400 + $2,380). 25,580

Paid-in capital fromtreasurystock transactions 800

Retainedearnings

($25,000+ $28,000 $210 $7,140)... 45,650

Less:Treasurystock, 300 shares at cost

($3,500 $1,400).. (2,100)



8/13/2019 Hhtfa8e Ch09 Sm (2)

81/119


8/13/2019 Hhtfa8e Ch09 Sm (2)

82/119

(20-30 min.) P 9-81A

ASSETS = LIABILITIES +

STOCKHOLDERS

EQUITY

Feb. 3 + 435,000 = 0 + 435,000

Mar. 19 62,400 = 0 62,400

Apr. 24 + 41,600 = 0 + + 41,600

Aug. 15 0 = + 7,200 7,200

Sept. 1 7,200 = 7,200 + 0

Nov. 18 0 = 0 + 0


8/13/2019 Hhtfa8e Ch09 Sm (2)

83/119


8/13/2019 Hhtfa8e Ch09 Sm (2)

84/119

(40-50 min.) P 9-82Req. 1

Seagull Designers, Inc.

BalanceSheet

December31, 2010

ASSETS LIABILITIES

Current: Current:

Cash... $ 55,000 Accountspayable... $136,000

Accountsrec., net.. 34,000 Dividendspayable.. 6,000

Inventory... 93,000 Accruedliabilities... 24,000

Prepaidexpenses... 13,000 Total current

Total current liabilities.. 166,000

assets.. 195,000 Long-term note payable 99,000

Total liabilities. 265,000

Property, plant, and

equipment,net 364,000 STOCKHOLDERS

EQUITY

Intangibleassets: Preferredstock, $.50,

Goodwill 13,000 no-par, 11,000shares

Trademark,net 4,000 authorizedand issued... $ 29,700Commonstock,

$2 par, 600,000shares

authorized, 116,000

sharesissued... 232,000

Paid-in capital in excess

of par common 20,000

Retainedearnings.. 53,300*Less: Treasurystock,

common,21,000shares

at cost. (24,000)

Total stockholdersequity... 311,000

Total liabilities and


8/13/2019 Hhtfa8e Ch09 Sm (2)

85/119

Total assets. $ 576,000 stockholders equity.. $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

Rate of Net income

return=

+ Interest expense=

$32,000+ $15,600=

$47,600= 0.089


Rate of return Net incomeon common

= Preferreddividends

=$32,000 (11,000 $.50)

=$26,500

= 0.105stockholders' Averagecommon ($281,300*+ $222,000)/ 2 $251,650

equity stockholders' equity

*Total stockholders equity... $311,000

Less: Preferredequity.. (29,700)

Commonstockholders equity... $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

return on equity. Howeverreturn on equity does exceedreturn on assets.


8/13/2019 Hhtfa8e Ch09 Sm (2)

86/119

(20-30 min.) P 9-83A

JournalACCOUNTTITLESANDEXPLANATION DEBIT CREDIT

Millions

RetainedEarnings.. 1,918

DividendsPayable. 1,918

DividendsPayable.. 1,918

Cash.. 1,918

ORRetainedEarnings.. 1,918

Cash.. 1,918

Cash 1,000

CommonStock... 1,000

Cash 54

Long-TermNotes Payable... 54

TreasuryStock. 3,030

Cash.. 3,030

Long-TermNotes Payable 163 Cash.. 163


8/13/2019 Hhtfa8e Ch09 Sm (2)

87/119

Problems

GroupB

(30-45 min.) P 9-84B

Req. 1


Jan. 6 OrganizationExpense 7,500 CommonStock (500 $5)... 2,500


Par - Common... 5,000

Issuedstock to promoterfor assistancein

Issuingcommonstock.

9 Cash(19,000 $15) 285,000

CommonStock (19,000 $5). 95,000


Par - Common... 190,000


10 Patent. 12,000

PreferredStock(600 $1 no-par) 12,000

Issuedpreferredstock to acquire a patent.

26 Cash 21,000 CommonStock (1,400 $5) 7,000


Par - Common... 14,000



8/13/2019 Hhtfa8e Ch09 Sm (2)

88/119

(continued)P 9-84B

Req. 2

Liard Canoes, Inc.BalanceSheet (partial)

January31, 2010


Preferredstock, $1 no-par, 5,000 sharesauthorized,

600 sharesissued.. $ 12,000

Commonstock, $5 par, 140,000shares

authorized, 20,900 sharesissued*............... 104,500

Paid-in capital in excessof par - common 209,000**


Total stockholders equity... $381,500

_____

*500 + 19,000+ 1,400 = 20,900 shares**$5,000+ $190,000+ $14,000= $209,000


8/13/2019 Hhtfa8e Ch09 Sm (2)

89/119

(10-15 min.) P 9-85B

HolmanCorp.

BalanceSheet (partial)

December31, 2010Stockholders equity:

Preferredstock, 8%, $110 par, 5,000 sharesauthorized,

1,000 sharesissued... $110,000

Commonstock, no-par, 400,000sharesauthorized,

80,000 sharesissued.. 512,000

Retainedearnings 97,400Total stockholders equity... $719,400

_____

Computations:

Preferredstock: 1,000 $110 = $110,000

Commonstock: Balancegiven as $512,000

Retainedearnings:$71,000+ $92,000 ($110,000 0.08 x 2) (80,000x

$0.60) = $97,400


8/13/2019 Hhtfa8e Ch09 Sm (2)

90/119


8/13/2019 Hhtfa8e Ch09 Sm (2)

91/119

(20-30 min.) P 9-86B

Commonstock [(500,000+ 395,000) $2] + $150,120. $ 1,940,120

Additional paid-in capital500,000 ($5.00 $2.00)... 1,500,000

395,000 ($9.00 $2.00). 2,765,000

38,000 ($8 $7.25) 28,500

Fromstock dividend.. 450,360

Retainedearnings($1,150,000 $700,000 $600,480). (150,480)

Treasurystock [(61,000 38,000) $7.25] (166,750)

Total stockholders equity. $6,366,750

Total assets.. $14,200,000

Total liabilities.. 7,833,250)

= Total stockholders equity $6,366,750


8/13/2019 Hhtfa8e Ch09 Sm (2)

92/119

(25-35 min.) P 9-87B

Req. 1

SeasonalOutdoorFurnitureCompanyhas Class A cumulativepreferredstock, Class B cumulativepreferredstock, and commonstock outstanding.

Req. 2


Cash 1,520,000

Class A PreferredStock 1,520,000

Cash 1,940,000

Class B PreferredStock 1,940,000

Cash ($1,000,000+ $5,520,000) 6,520,000

CommonStock 1,000,000

Additional Paid-in Capital -

Common 5,520,000

Req. 3


8/13/2019 Hhtfa8e Ch09 Sm (2)

93/119

Seasonal Outdoor Furniture would have to pay all preferred dividends in

arrears before paying dividends to common stockholders because the

preferredstock is cumulative.


8/13/2019 Hhtfa8e Ch09 Sm (2)

94/119

(continued)P 9-87B

Req. 4

Seasonal must pay preferreddividendsof $138,400each year to avoid having

preferreddividendsin arrears.

_____

Computation:

Class A Preferred: 76,000 sharesX $20 (par) per share 0.04 = $ 60,800

Class B Preferred: 97,000 sharesX $20 (par) per share 0.04 = 77,600

Total preferreddividends $138,400

Req. 5


2011Feb. 28 RetainedEarnings.. 840,000

DividendsPayable, Class A

Preferred($1,520,000 .04 2).. 121,600

DividendsPayable, Class B

Preferred($1,940,000 .04 2).. 155,200

DividendsPayable, Common

($840,000 $121,600 $155,200).

563,200


8/13/2019 Hhtfa8e Ch09 Sm (2)

95/119

(15-20 min.) P 9-88B

Req. 1


Feb. 13 Cash (5,200 $6). 31,200

CommonStock (5,200 $2). 10,400


Common... 20,800

June 7 RetainedEarnings.. 320

DividendsPayable

(400 shares $0.80)... 320

24 DividendsPayable.. 320

Cash... 320

Aug. 9 RetainedEarnings

(11,500shares 0.20 $7) 16,100

CommonStock (11,500 0.20 $2).. 4,600


Common... 11,500

Oct. 26 TreasuryStock, Common(900 $8)......... 7,200

Cash... 7,200

Nov. 20 Cash (600 $12) 7,200

TreasuryStock, Common(600 $8). 4,800

Paid-in Capital from Treasury

Stock Transactions... 2,400


8/13/2019 Hhtfa8e Ch09 Sm (2)

96/119

(continued)P 9-88B

Req. 2

Stockholders equity:$0.80 cumulativepreferredstock, $15 par,

400 sharesissued. $ 6,000

Commonstock, $2 par, 13,800sharesissued

($12,600+ $10,400+ $4,600)............................... 27,600

Paid-in capital in excessof par - common

($17,400+ $20,800+ $11,500). 49,700

Paid-in capital fromtreasurystock transactions.. 2,400

Retainedearnings($23,000+ $25,000 $320 $16,100) 31,580

Less:Treasurystock, common,300 shares

at cost ($7,200 $4,800). (2,400)

Total stockholders equity.. $114,880


8/13/2019 Hhtfa8e Ch09 Sm (2)

97/119

(20-30 min.) P 9-89B

ASSETS = LIABILITIES +

STOCKHOLDERS

EQUITY

Feb. 4 +350,000 = 0 + + 350,000

Mar. 20 -46,200 = 0 46,200

Apr. 25 +27,000 = 0 + +27,000

Aug. 17 0 = +11,200 11,200

Sept. 8 -11,200 = -11,200 + 0

Nov. 28 0 = 0 + 0


8/13/2019 Hhtfa8e Ch09 Sm (2)

98/119

8/13/2019 Hhtfa8e Ch09 Sm (2)

99/119

= $555,000 $268,000 $32,400 $234,000 ( $22,000)

= $42,600


8/13/2019 Hhtfa8e Ch09 Sm (2)

100/119

(continued)P 9-90B

Req. 2

Rate of Net incomereturn

=+ Interest expense

=$30,000+ $16,000

=$46,000

= 0.088on assets Averagetotal assets ($555,000+ $496,000)/ 2 $525,500

Rate of return Net income

on common=

Preferreddividends=

$30,000 (12,000 .50)=

$24,000= 0.100

stockholders' Averagecommon ($254,600**+ $225,000)/2 $239,800

equity stockholders'equity

**Total stockholders equity. $287,000

Less: Preferredequity (32,400)

Commonstockholders equity. $254,600

Req. 3

These rates of return suggest a mid range. Return on commonstockholders

equity is below 15%, mentionedin the text as a good rate of return, but its

higher than return on assets a goodsign.


8/13/2019 Hhtfa8e Ch09 Sm (2)

101/119

(20-30 min.) P 9-91B

JournalACCOUNTTITLESANDEXPLANATION DEBIT CREDIT

RetainedEarnings 1,890

DividendsPayable.. 1,890

DividendsPayable 1,890

Cash 1,890

ORRetainedEarnings 1,890

Cash 1,890

Cash. 1,234

CommonStock 1,234

Cash 58

Long-TermNotes Payable 58

TreasuryStock.. 3,080

Cash. 3,080

Long-TermNotes Payable.Cash..

162162


8/13/2019 Hhtfa8e Ch09 Sm (2)

102/119

DecisionCases

(30-45 min.) DecisionCase 1

Req. 1


Smith, Capital. 25,000

Jones, Capital 25,000

CommonStock 50,000

To incorporatethe business, close the capitalaccountsof Smith and Jones, and issue

commonstock to them.

Req. 2


Plan 1:

Cash. 80,000

PreferredStock(800 $100) 80,000

To issuepreferredstockto outsideinvestors.

Plan 2:

Cash. 55,000 PreferredStock 55,000

To issue preferredstock to outsideinvestors.

Cash. 35,000


8/13/2019 Hhtfa8e Ch09 Sm (2)

103/119

CommonStock 35,000

To issue commonstock to outsideinvestors.


8/13/2019 Hhtfa8e Ch09 Sm (2)

104/119

(continued) DecisionCase 1

Req. 3

Plan 1: Stockholders Equity

Preferredstock, 6%, $100 par, nonvoting,

10,000 sharesauthorized, 800 sharesissued.. $ 80,000

Commonstock, $1 par, 500,000sharesauthorized,


Retainedearnings($120,000 $30,000).

90,000Total stockholders equity $220,000

Plan 2:

Stockholders Equity

Preferredstock, $5, no-par, 5,000 sharesauthorized,

500 sharesissued $ 55,000

Commonstock, $1 par, 500,000sharesauthorized,


Retainedearnings($120,000 $30,000). 90,000



8/13/2019 Hhtfa8e Ch09 Sm (2)

105/119


Req. 4

Plan 1 appears to fit the plans of Smith and Jones better than Plan 2because:

Their primarygoal is to raise as muchcapital as possiblewithout giving

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 losecontrol of the businessbecausethey wouldhave only 50,000 votes.

UnderPlan 1preferredstockholdershave no votes. Smith and Jones

would have complete control since they would hold all the voting

shares.

Plan 2wouldraise only $10,000more than Plan 1.


8/13/2019 Hhtfa8e Ch09 Sm (2)

106/119


Req. 1

The stock dividend does not affect your proportionate ownership in thecompany because all the stockholders receive 10% new shares. All

stockholders are in the same relative position after the dividends as they

were before.

Req. 2

Cash dividends received last year were $7,150 (10,000 shares $0.715 per

share). Cash dividends after the dividendwill be $7,150 (11,000 shares

$0.65 per share). Thus, there is no changein cash dividends.

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

market price per share. Any differencehere is due to rounding.


8/13/2019 Hhtfa8e Ch09 Sm (2)

107/119


Req. 4

If the company continues paying the $0.715 cash dividend per share, afterissuing the 10% stock dividend, total cash dividends will increase. (Your

annual dividendswill rise to $7,865 [11,000 shares $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 keep the value higher than it would be without the increasein cash

dividends.


8/13/2019 Hhtfa8e Ch09 Sm (2)

108/119


Req. 1

Millions

a. Net income,as reportedfor 2000... $979

b. Net incomeafter new developments

[$979 $130 ($2,000 .12)]............. $609

c. The trend of net incomeis down. The reasons for the downwardtrend

are (a) inclusion of the money-losing companies and (b) the interestexpenseon the new debt.

Req. 2 (amounts in millions)

Assets = Liabilities + EquityAs reported.. $65,503 = $54,033 + $11,470

Adjustments

for 2001:

Inclusionof

companies.. 5,700 = 5,600 + 100

Exchangeof

notes payable

for stock 0 = 2,000 2,000

Interest expense

on new debt.. 0 = 240 240

As adjusted. $71,203 = $61,873 + $9,330


8/13/2019 Hhtfa8e Ch09 Sm (2)

109/119


Req. 3

As Reported As AdjustedDollars in millions

Total

Debt=

liabilities=

$54,033 $61,873

ratio Total $65,503 $71,203

assets

= 0.82 = 0.87

Req. 4

I wouldrecommenddowngradingEnronsdebt for two reasons:

1. Downturn in net income due to (a) inclusion of the money-losing

companies,and (b) the addedinterest expenseon the new debt.

2. Increasein the debt ratio due to the sametwo factors.


8/13/2019 Hhtfa8e Ch09 Sm (2)

110/119

Ethical Issue 1

Req. 1

The ethical issue is, What is the correct amount at which to record and

disclosethe value of the franchiseon Campbells balancesheet?

Req. 2 and Req.3

The stakeholdersin the transactioninclude Campbell, the potential buyers of

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: Campbell is better off temporarily, unless potential buyers sue

him for damages, in which case he could be worse off. Potential buyers of

the individual-languagefranchisescan be harmed. Campbells balance sheet

overstates his assets. If outsiders believe his balance sheet, they may be

induced to pay Campbell more than the individual-language franchises are

worth. Lenderscan also be harmedby loaningmoneyto Campbell on more

favorabletermsthan his financial positionwarrants.


8/13/2019 Hhtfa8e Ch09 Sm (2)

111/119

8/13/2019 Hhtfa8e Ch09 Sm (2)

112/119

8/13/2019 Hhtfa8e Ch09 Sm (2)

113/119

(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 insider trading, probablyfine them, and possibly send the

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 recover monetarydamagessufferedbecauseof the actionsof the

company.

(c) Ethical analysis: The managersclearly didnotbehaveethically, 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 handle this transactionis never to have proposedit in the

first place. However, if it did happen, thedisclosure principleis relevant

to the situation. The transaction should 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.


8/13/2019 Hhtfa8e Ch09 Sm (2)

114/119

(20-30 min.)

Req. 1

Amazon.com,Inc. has two classesof stock authorizedat 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 million sharesoutstanding.

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 2million shares of its commonstock during the year for a total of $100 million

in cash ($50 per share).

Req. 3

The companyearnedand reportednet incomeof $645 million. It appearsfirst

in the ConsolidatedStatementsof Operations. It also appearsas a reduction

of the accumulated deficit in the Consolidated Statements of Stockholders

Equity, and as the


8/13/2019 Hhtfa8e Ch09 Sm (2)

115/119

opening line of the Consolidated Statementsof Cash Flows. This is a good

thing.

Req. 4

Returnon=

$645= 33.3%

equity ($2,672+ $1,197) / 2

Returnon=

$645 + $71= 9.7%

assets ($8,314+ $6,485) / 2

Theserates of return indicate financial strengthfor two reasons:

1. Both returnsare high. Returnon equity is 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 businessthan they are payingcreditors for borrowedfunds.


8/13/2019 Hhtfa8e Ch09 Sm (2)

116/119

FocusonAnalysis: Foot Locker, Inc.

(20-30 min.)

Req. 1

Foot Locker, Inc. has only one class of 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. repurchased2.283 million sharesfor $50 million. The

averageprice (computationin millions) was:

Averageprice paid=

Cashpaid=

$50= $21.90

for treasurystock Numberof shares 2.283

Based on the information in Footnote 26 to the Consolidated Financial

Statements, the averageprice of the companysstock during the year (based

on the high ending quarterly price) was $20.41 [($24.78 + $24.15 + $17.60 +

$15.14) 4]. This indicates that the companypaid an averageprice that was

slightly more than the quoted market price of its stock. The company

probably did 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


8/13/2019 Hhtfa8e Ch09 Sm (2)

117/119

earningsper share. Third, the companyprobablythoughtthat the share price

wouldrecoverin subsequentperiods, thus makingthe stock a goodbuy.

Req. 3

Refer to the Consolidated Statementsof Shareholders Equity. Foot Locker,

Inc. issueda total of 1,187,000new shares of its commonstock in 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 directorand employeestock plans.

Req. 4

Refer to the ConsolidatedStatementsof Shareholders Equity.

RetainedEarnings( in millions)Bal., Feb. 3, 2007 1,785

Dividendsfor fiscal 2007 77 Cumulativeeffect of

adoptionof new

accountingstandard(FIN

48)

1

Net income 51

Bal., Feb. 2, 2008 1,760


8/13/2019 Hhtfa8e Ch09 Sm (2)

118/119

GroupProject in 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 andinternational economies, federal, state and local governmentsjust about

everyonein the broadestsenseof the term.

Req. 2

Student opinions on this will vary. It might be interesting to divide the classinto two teamsand conducta debate, each teamtaking a side.


8/13/2019 Hhtfa8e Ch09 Sm (2)

119/119

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 being violated, 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

Student opinionson 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

Hhtfa8e Ch09 Sm (2)

Documents

Transcript of Hhtfa8e Ch09 Sm (2)