Chapter 11: Problem Set A

Problem 11-1A: Stockholders’ Equity Transactions and Analysis 1. Explaining the Transactions Underlying Journal Entries: o (a) Issuing Common Stock: This transaction typically involves the company issuing shares to investors in exchange for cash. For example, if a company issues 20,000 shares of common stock at $32.50 per share, the entry would debit Cash and credit Common Stock and Additional Paid-In Capital. o (b) Treasury Stock Purchase: This involves the company buying back its own shares, reducing the number of outstanding shares. The transaction debits Treasury Stock and credits Cash. o (c) Declaration of Dividends: When dividends are declared, the company records a liability. This is debited as Dividends Payable and credited to Retained Earnings. o (d) Payment of Dividends: This transaction involves debiting Dividends Payable and crediting Cash, reflecting the payment to shareholders. 2. Number of Outstanding Shares at Year-End: o To find the outstanding shares, start with the total shares issued and subtract any shares that the company repurchased as treasury stock. 3. Total Paid-In Capital at Year-End: o Total paid-in capital is the sum of the Common Stock account and Additional Paid-In Capital (APIC). It does not include retained earnings or treasury stock effects. Problem 11-2A: Cash Dividends, Treasury Stock, and Retained Earnings Statement 1. Journal Entries for Each Transaction: o Purchase of Treasury Stock: Debit Treasury Stock and credit Cash for the purchase amount. o Declaration of Cash Dividend: Debit Retained Earnings (or Dividends Declared) and credit Dividends Payable. o Payment of Cash Dividend: Debit Dividends Payable and credit Cash. o Sale of Treasury Stock at $24: Debit Cash for the proceeds, credit Treasury Stock for the original cost, and credit APIC-Treasury Stock for the excess. o Sale of Treasury Stock at $16: Debit Cash, debit APIC-Treasury Stock if needed, and credit Treasury Stock for the original cost. o Declaration and Payment of October Dividend: Record the declaration with a debit to Retained Earnings and a credit to Dividends Payable; record the payment with a debit to Dividends Payable and a credit to Cash. o Closing Income Summary to Retained Earnings: Debit Income Summary and credit Retained Earnings. 2. Statement of Retained Earnings for the Year Ended December 31: o Start with the beginning balance, add net income, subtract dividends declared during the year, and arrive at the ending retained earnings balance. 3. Stockholders’ Equity Section of the Balance Sheet: o This includes Common Stock, Additional Paid-In Capital, Treasury Stock (deduction), and Retained Earnings. Problem 11-3A: Equity Analysis—Journal Entries and Account Balances 1. Explaining the Transactions Underlying Journal Entries: o This will involve breaking down each transaction, such as issuing shares, declaring and paying dividends, and recording net income. o Each journal entry impacts specific equity accounts, affecting the overall balance sheet and stockholders’ equity. 2. Table of Equity Account Balances: o Record the changes in equity accounts after each transaction to track the balances on specific dates like October 2 and December 31. Problem 11-4A: Analyzing Changes in Stockholders’ Equity 1. Common Shares Outstanding on Each Dividend Date: o Calculate based on the shares issued and adjusted for any treasury stock purchases or stock dividends issued. 2. Total Dollar Amount for Each Cash Dividend: o Multiply the per-share dividend amount by the number of shares eligible for dividends (outstanding shares). 3. Retained Earnings Transferred for Stock Dividend: o The amount transferred is calculated as the stock dividend percentage multiplied by the outstanding shares at the market value per share. 4. Per Share Cost of Treasury Stock Purchased: o This is the total cash paid divided by the number of shares purchased. 5. Net Income Earned This Year: o Determine net income by analyzing the change in retained earnings after adjusting for dividends. Problem 11-5A: Computing Par Values and Dividend Allocations 1. Determining Par Values: o Par value is usually stated on the balance sheet next to each class of stock. It represents the nominal or face value of the stock. 2. Calculating Dividend Allocations with Arrears: o Since preferred stock is cumulative, any unpaid dividends from prior years (in arrears) must be paid before dividends are distributed to common shareholders. o Calculate the amount to preferred shareholders first (including arrears), then allocate any remaining dividends to common shareholders. By analyzing each part step-by-step, we address the stock transactions, equity effects, and how these transactions reflect in financial statements. Each calculation focuses on maintaining clarity and accuracy.