Chapter 11: Problem Set B

Problem 11-1B: Stockholders’ Equity Transactions and Analysis 1. Explaining the Transactions Underlying Journal Entries: o (a) Jan. 10: Issuing common stock for cash. This entry records the issuance of stock by debiting Cash (for the amount received) and crediting Common Stock and Additional Paid-In Capital (if issued at a price above par). o (b) Mar. 2: Purchase of treasury stock. This represents the company buying back its shares, reducing the number of outstanding shares. The entry would debit Treasury Stock and credit Cash for the amount paid. o (c) Mar. 31: Declaration of dividends. When dividends are declared, Retained Earnings is debited, and Dividends Payable is credited, creating a liability for the company. o (d) Nov. 11: Payment of dividends. This entry reflects the actual payout of the previously declared dividends, debiting Dividends Payable and crediting Cash. 2. Number of Shares of Common Stock Outstanding at Year-End: o To calculate this, subtract the number of shares repurchased as treasury stock from the total shares originally issued. o Check: The problem specifies that 6,000 shares are outstanding. 3. Total Paid-In Capital at Year-End: o This is calculated as the sum of the Common Stock account and the Additional Paid-In Capital (APIC). o Check: The problem specifies that the total paid-in capital is $260,000. 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, and credit Cash for the total payment. o Declaration of Cash Dividend: Debit Retained Earnings and credit Dividends Payable for the amount of the dividend. o Payment of Dividend: Debit Dividends Payable and credit Cash for the payout. o Sale of Treasury Stock at $13: Debit Cash for the proceeds, credit Treasury Stock for the cost basis, and record any excess in APICTreasury Stock. o Sale of Treasury Stock at $10.50: Debit Cash for the proceeds, and if there's a deficit, debit APIC-Treasury Stock to balance the entry. Declaration of December Dividend: Record the liability with 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 to close out net income for the year. 2. Statement of Retained Earnings for the Year Ended December 31: o Begin with the balance at the start of the year, add net income, and subtract all dividends declared during the year to arrive at the ending balance. 3. Stockholders’ Equity Section of the Balance Sheet: o Include Common Stock, Additional Paid-In Capital, Treasury Stock (deducted from equity), and Retained Earnings. o Problem 11-3B: Equity Analysis—Journal Entries and Account Balances 1. Explaining the Transactions Underlying Journal Entries: o Each transaction should be identified, such as stock issuance, treasury stock transactions, dividends, or closing of net income, and their impacts on stockholders' equity accounts should be explained. 2. Equity Account Balances Table: o Track the changes to the stockholders’ equity accounts over time, ensuring to adjust for each transaction's effect on total equity. o Check: Ensure that the balances match $2,848,000 on January 17 and $3,568,000 on March 31. Problem 11-4B: Analyzing Changes in Stockholders’ Equity 1. Common Shares Outstanding on Each Cash Dividend Date: o Calculate based on total shares issued, minus any treasury stock, plus any additional shares from stock dividends. 2. Total Dollar Amount for Each Cash Dividend: o Multiply the per-share dividend by the number of shares eligible for dividends. 3. Amount of Retained Earnings Transferred to Paid-In Capital for Stock Dividend: o For a 12.5% stock dividend, multiply 12.5% by the outstanding shares and the market price to determine the total transfer amount. o Check: This amount should equal $84,000. 4. Per Share Cost of Treasury Stock Purchased: o Divide the total cash paid for treasury stock by the number of shares repurchased. o Check: The problem specifies a per-share cost of $40. 5. Net Income for the Year: o o Calculate this by analyzing changes in retained earnings after adjusting for declared dividends. Check: The net income is stated as $136,000. Problem 11-5B: Computing Par Values and Dividend Allocations 1. Determine the Par Values: o Par value is usually stated on the balance sheet or in the notes to the financial statements next to the stock classes. Look for the face value of each class of stock. 2. Dividend Allocations with Arrears: o Preferred dividends are cumulative, so two years of unpaid dividends must be paid before common shareholders receive any dividends. o Calculate the total amount paid to preferred shareholders, including the arrears, and allocate any remaining amount to common shareholders. o Check: Adjust calculations to ensure proper allocation.