Chapter 11: Serial Problem

Problem 11-1: Stockholders’ Equity Transactions and Analysis 1. Prepare Journal Entries for Initial Investments: o Option A (Common Stock Investment by Cicely):  Debit Cash for $86,000.  Credit Common Stock and/or Additional Paid-In Capital (APIC) depending on the issuance price relative to par value. o Option B (Preferred Stock Investment by Marcello):  Debit Cash for $86,000.  Credit Preferred Stock for the par value amount (860 shares at $100 par value = $86,000). o Option C (Bank Loan):  Debit Cash for $86,000.  Credit Notes Payable for $86,000. 2. Evaluate the Three Proposals for Expansion: o Option A: Common Stock Investment  Pros: No required interest payments or repayment of principal; strengthens equity base; lower debt ratio.  Cons: Dilution of ownership; Santana's share drops to about 60%; future dividends expected by shareholders. o Option B: Preferred Stock Investment  Pros: No obligation to repay the principal; preferred dividends may be skipped in bad years if cumulative; less dilution of control compared to common stock.  Cons: Obligation to pay 7% dividends annually; increases fixed financial commitments; preferred shareholders have priority in earnings and liquidation. o Option C: Bank Loan  Pros: No dilution of ownership; Santana retains full control of the business; interest is tax-deductible.  Cons: Obligation to make regular monthly payments of $1,000; increases debt load and financial risk. 3. Recommendation for Santana: o The recommendation depends on Santana’s goals:  If maintaining control and ownership is important, Option C (Bank Loan) may be preferable, despite the fixed payments.  If Santana wants to minimize financial risk in terms of interest payments, Option A (common stock investment) could be better, especially if she can tolerate the dilution.  Option B (Preferred stock) is a balanced approach but introduces a fixed obligation of preferred dividends. Problem 11-2B: Cash Dividends, Treasury Stock, and Statement of Retained Earnings 1. Journal Entries for Each Transaction: o Purchase of Treasury Stock: Debit Treasury Stock for 40,000 shares at $12 each (total $480,000), and credit Cash. o Declaration of Cash Dividend: Debit Retained Earnings and credit Dividends Payable for the dividend amount. o Payment of Dividend: Debit Dividends Payable and credit Cash for the payment. o Sale of Treasury Stock at $13: Debit Cash for the proceeds (24,000 shares at $13), credit Treasury Stock for the cost basis (24,000 shares at $12), and credit APIC-Treasury Stock for any excess. o Sale of Treasury Stock at $10.50: Debit Cash for the proceeds (16,000 shares at $10.50), and adjust APIC-Treasury Stock if there is a deficit when compared to the cost basis. o Declaration of December Dividend: Record a debit to Retained Earnings and a credit to Dividends Payable. o Closing Income Summary: Debit Income Summary for $1,072,000 and credit Retained Earnings. 2. Statement of Retained Earnings for the Year Ended December 31: o Begin with the prior year-end balance, add net income ($1,072,000), and subtract all dividends declared during the year. 3. Stockholders’ Equity Section of the Balance Sheet: o Include Common Stock, Preferred Stock (if applicable), Additional Paid-In Capital, Treasury Stock (deduction), and Retained Earnings. Problem 11-3B: Equity Analysis—Journal Entries and Account Balances 1. Explaining the Transactions Underlying Journal Entries: o Each transaction should be explained, such as issuing stock, purchasing treasury stock, declaring dividends, and recording net income. 2. Equity Account Balances Table: o Track changes to each equity account over time, reflecting the impact of each transaction on total equity. o Check: Ensure total equity is $2,848,000 on January 17 and $3,568,000 on March 31. Problem 11-4B: Analyzing Changes in Stockholders’ Equity Accounts 1. Common Shares Outstanding on Each Cash Dividend Date: 2. 3. 4. 5. Calculate by adjusting for treasury stock and any stock dividends. Total Dollar Amount for Each Cash Dividend: o Multiply the per-share dividend by the number of shares eligible. Amount of Retained Earnings Transferred for Stock Dividend: o Calculate the transfer based on the stock dividend percentage and market price. o Check: Transfer amount is $84,000. Per Share Cost of Treasury Stock Purchased: o Divide the total purchase cost by the number of shares. o Check: Cost is $40 per share. Net Income for the Year: o Derive from changes in retained earnings after adjusting for dividends. o Check: Net income is $136,000. o Problem 11-5B: Computing Par Values and Dividend Allocations 1. Determine the Par Values: o Find the nominal par values listed for common and preferred stock. 2. Dividend Allocations with Arrears: o Cumulative preferred stockholders receive dividends in arrears before any are distributed to common shareholders. o Calculate the amount required to pay two years of arrears plus the current year's preferred dividend, then distribute remaining amounts to common shareholders. Analysis and Decision Points: These problems focus on evaluating the impacts of different financing options and stock transactions on equity. Each decision has its own set of benefits and risks, depending on control preferences, financial commitments, and business strategies. Let me know if you need more detail on any specific part!