Chapter 11 - Reporting and Interpreting Owners’ Equity
E11–14. Req. 1
Stockholders’ Equity
Contributed capital:
Common stock, authorized 100,000 shares, issued 34,000 shares, of
which 2,000 shares are held as treasury stock .................................. Capital in excess of par ........................................................................ Total contributed capital .................................................................... Retained earnings ................................................................................... Total .................................................................................................. Less: Cost of treasury stock ................................................................. Total Stockholders’ Equity ............................................................. Req. 2
The dividend yield ratio is 2.24% ([$16,000 ? 32,000 shares] ? $22.29). While this yield seems small, it is a typical return on common stock. Investors receive a return from both dividends and stock price appreciation.
Treasury stock does not receive dividends. As a result, dividends should be paid on 32,000 shares. E11–15.
Req. 1
a. Treasury stock (200 shares x $20) (+XSE, -SE) ................... Cash (-A) ........................................................................... Bought treasury stock. b.
Cash (40 shares x $25) (+A) ................................................. Treasury stock(40 shares x $20) (-XSE, +SE) .................. Capital in excess of par (+SE) ........................................... Sold treasury stock.
Capital in excess of par (-SE) ............................................... Treasury stock (30 shares x $20) (-XSE, +SE) ................ Sold treasury stock.
4,000
1,000
450 150
4,000
800 200
600
$680,000 163,000 843,000 89,000 932,000 25,000 $907,000 c. Cash (30 shares x $15) (+A) .................................................
Req. 2
It is not possible to make a ―profit‖ or ―loss‖ on treasury stock transactions. Therefore, these transactions do not affect the income statement.
Financial Accounting, 8/e 11-17 ? 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Reporting and Interpreting Owners’ Equity
E11–16.
Req. 1 Feb. 1:
Treasury stock, common (160 shares x $20) (+XSE, -SE) Cash (-A) ........................................................................
July 15:
Cash (80 shares x $21) (+A) ............................................. Treasury stock, common (-XSE, +SE) ........................... Capital in excess of par (+SE) .......................................
Sept. 1:
Cash (50 shares x $19) (+A) ............................................. Capital in excess of par (-SE) ............................................ Treasury stock, common (50 shares x $20) (-XSE, +SE) . Req. 2
Dividends are not paid on treasury stock. Therefore, the amount of total cash dividends paid is reduced when treasury stock is purchased. Req. 3
The sale of treasury stock for more or less than its original purchase price does not have an impact on net income. The transaction affects only balance sheet accounts. The cash received from the sale of treasury stock is a cash inflow which would affect the Statement of Cash Flows in the financing activities section.
11-18 Solutions Manual ? 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
3,200
1,680
950 50
3,200
1,600 80 1,000
Chapter 11 - Reporting and Interpreting Owners’ Equity
E11–17. Req. 1
Case 1: When companies unexpectedly announce increases in dividends, stock prices typically increase. Depending on course objective, the instructor may want to discuss research in finance concerning dividend policy.
Case 2: Stock price is based on expectations. If the increase in operating
performance was not expected, the stock price should increase. It is not necessary to increase dividends to have a favorable stock price reaction.
Case 3: Stock dividends do not provide any economic value but they may have a signal effect and are often associated with increases in cash dividends. As a result, stock dividends do not appear to directly cause an increase in stock price but are often associated with factors that do impact favorably on price.
Req.2
Stock prices react to underlying economic events and not changes in reporting methods, per se. Markets are relatively effective in recognizing the difference
between profits generated by operations and profits generated by the use of liberal accounting policies.
Financial Accounting, 8/e 11-19 ? 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Chapter 11 - Reporting and Interpreting Owners’ Equity
E11–18.
Preferred Common (5,000 (50,000 Shares) Shares) Req. 1 Total
a) Noncumulative: Preferred ($50,000 x 10%) ...................................... $ 5,000 $ 5,000 Balance to common ($85,000 – $5,000) ................. $80,000 80,000 $ 5,000 $80,000 $85,000 Per share ................................................................ $1.00 $1.60 b)
Cumulative: Preferred, arrears ($50,000 x 10% x 2 years) ......... $ 10,000 Preferred, current year ($50,000 x 10%) ................. 5,000 Balance to common ($85,000 – $10,000 – $5,000) $70,000 $15,000 $70,000 Per share ................................................................ $3.00 $1.40
$ 10,000 5,000 70,000 $85,000 Req. 2
The total dividend amount and dividends per share of common stock were less under
the second assumption because the preferred stock preferences increased while at the same time the total dividend amount remained stable. Req. 3
Larger total dividend distributionsare more favorable for the common stockholders.
E11–19.
Effect of Cash Dividend (Preferred) Effect of Stock Dividend (Common) Item Assets –No effect on declaration date. No effect because no assets are
–Decreased by the amount of the disbursed. dividend ($7,200) on payment date.
Liabilities –Increased on declaration date No effect—no entry on declaration
($7,200). date because no contractual liability –Decreased on payment date is created (no assets are ($7,200). disbursed).
Stockholders’ Decreased by the amount of the –Total stockholders’ equity not
equity dividend (retained earnings changed.
decreased by $7,200). –Retained earnings reduced and
contributed capital increased by same amount ($120,000).
11-20 Solutions Manual ? 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.