Professional Documents
Culture Documents
11-1
expected life of the corporation, provisions for the capital
stock of the corporation, and the names and addresses of
the members of the Board of Directors.
Disadvantages:
(1) Regulation. Corporations are subject to considerably
more regulation, both state and federal, than are sole
proprietorships and partnerships. Corporations are
required to file separate income tax returns and public
corporations are required to comply with SEC regulations.
11-2
(2) Double taxation. The most important disadvantage
of the corporation is double taxation. Since a corporation
is a separate legal entity, it must file and pay tax on
corporate profits. When these profits are distributed to
the owners (shareholders), these distributions are not
deductible for the corporation and are taxable income to
the shareholders.
11-3
12. For both sole proprietorships and partnerships,
contributed capital and retained earnings are combined
in one account for financial statement reporting. Capital
acquisitions are additions to the capital account of the
owners or partners; earnings of the business are
additions (losses are reductions) to the capital accounts;
and distributions to owners (withdrawals) are reductions
to the capital account. Corporations maintain separate
accounts for contributed capital and retained earnings.
11-4
f. Authorized stock: The number of shares that a
corporation has been authorized by the state to
issue.
11-5
Noncumulative preferred stock: A class of preferred
stock whose unpaid dividend is not carried forward to
future years. If dividends are not declared in one year,
they are lost.
16. No-par stock is stock for which a par value has not been
established by the corporation. No-par stock may have a
stated value. If so, issuance of the stock is recorded
exactly the same as par value stock.
If the stock has neither a par or stated value, the entire
market value is assigned to the capital stock account.
17. Dividend per share: $100 par x 10% = $10 per share.
The total dividends per year are $10,000 (1,000 shares x
$10). Total dividends to be paid preferred shareholders
is $30,000, the current year's dividend plus two past
years.
19. Par value and stated value are similar in meaning in that
they are arbitrary values assigned to stock. Par value is
assigned in the charter at incorporation. Stated value is
determined by the board of directors after incorporation.
11-6
22. Even though the stock was purchased for $30 per share
and resold for $35 per share, there is no gain on the sale.
The difference in the purchase and sales price is
additional contributed capital because it is from capital
invested by stockholders. It is reported on the balance
sheet in the stockholders’ equity section as paid-in
capital. Treasury Stock is a contra asset account.
11-7
25. A stock dividend is declared either to compensate
shareholders when cash is not available or to lower the
market price of a share of stock.
11-8
in order to pay dividends in years when cash flows are
low. In addition, the board may restrict dividends in
order to finance future expansion of the business.
11-9
SOLUTIONS TO EXERCISES -SERIES A - CHAPTER 11
EXERCISE 11-1A
Transactions
Cash Acquired from $50,000
Owner
Revenues 25,000
Expenses 14,500
Withdrawals 1,500
11-10
EXERCISE 11-1A (cont.)
Liabilities $
-0-
Equity
Simms, Capital 59,000
11-11
11-12
EXERCISE 11-2A
Transactions:
Cash Contributions
B. Bailey $ 40,000 35%
R. Clark 75,000 65%
Total $115,000
Revenues $ 75,000
Expenses 36,000
Bailey Withdrawal 1,000
Clark Withdrawal 3,000
BC Partnership
Financial Statements
For the Year Ended December 31, 2004
Income Statement
Revenues $75,000
Expenses (36,000
)
Net Income $39,000
Capital Statement
Beginning Capital Balance $
-0-
Plus: Capital Acquired from 115,000
Owners
Plus: Net Income 39,000
Less: Withdrawal by Owners (4,000)
Ending Capital Balance $150,00
0
11-13
EXERCISE 11-2A (cont.)
Analysis of Capital
Accounts:
Bailey Clark Total
Beginning Capital $ $ $
Balance -0- -0- -0-
Investments 40,000 75,000 115,000
Net Income 39,000
B. Bailey 35% 13,650
R. Clark 65% 25,350
Withdrawals (1,000) (3,000) (4,000)
Ending Capital Balances $52,65 $97,35 $150,00
0 0 0
11-14
EXERCISE 11-2A (cont.)
BC Partnership
Financial Statements
For the Year Ended December 31, 2004
Balance Sheet
Assets
Cash $150,00
0
Total Assets $150,00
0
Liabilities $ -0-
Equity
B. Bailey, Capital 52,650
R. Clark, Capital 97,350
Total Equity 150,000
Total Liabilities and Equity $150,00
0
Statement of Cash Flows
Cash Flows From Operating
Activities:
Inflow from Revenues $75,000
Outflow for Expenses (36,000)
Net Cash Flow from Operating $39,000
Activities
Cash Flows From Investing -0-
Activities
11-15
Activities
Net Change in Cash 150,000
Plus: Beginning Cash Balance -0-
Ending Cash Balance $150,00
0
11-16
EXERCISE 11-3A
Transactions:
Issued 2,000 shares of $10 par stock $44,000
@ $22
Revenues 46,000
Expenses 34,000
Dividends Paid 2,500
Hill Corporation
Financial Statements
For the Year Ended December 31, 2005
Income Statement
Revenues $46,000
Expenses (34,000
)
Net Income $12,000
Statement of Changes in Stockholders’ Equity
Beginning Common Stock $ -0-
Plus: Issuance of Common 44,000
Stock
Ending Common Stock $44,000
Beginning Retained Earnings -0-
Plus: Net Income 12,000
Less: Dividend Distributions (2,500)
Ending Retained Earnings 9,500
Total Stockholders’ Equity $53,500
11-17
EXERCISE 11-3A (cont.)
Hill Corporation
Financial Statements
For the Year Ended December 31, 2005
Balance Sheet
Assets
Cash $53,500
Total Assets $53,50
0
Liabilities $
-0-
Stockholders’ Equity
Common Stock, $10 par value,
2,000 shares issued and $20,000
outstanding
Paid-In Capital in Excess of Par 24,000
Total Paid-In Capital 44,000
Retained Earnings 9,500
Total Liabilities and Stockholders’ $53,50
Equity 0
Statement of Cash Flows
Cash Flows From Operating
Activities:
Inflow from Revenues $46,000
Outflow for Expenses (34,000)
Net Cash Flow from Operating $12,00
Activities 0
Cash Flows From Investing -0-
Activities
Cash Flows From Financing
Activities:
Inflow from Sale of Stock 44,000
Outflow for Dividends (2,500)
11-18
Net Cash Flow from Financing 41,500
Activities
Net Change in Cash 53,500
Plus: Beginning Cash Balance -0-
Ending Cash Balance $53,50
0
11-19
EXERCISE 11-4A
a.
Balance Sheet Income Statement Stmt. of
E Assets = L + Stkholders’ R − E = Net Cash Flow
vent iab Equity ev. xp. Inc.
Cash = + C. + PIC
Stk. Exc.
3/1 = NA + 40,00 + 80,000 NA − NA = NA 120,000
120,00 0 FA
0
5/2 = NA + 75,00 + 255,00 NA − NA = NA 330,000 FA
330,00 0 0
0
b.
Common Stock:
8,000 shs. x $5= $ 40,000
15,000 shs. x $5= 75,000
Total $115,000
c.
Paid-In Capital in Excess
of Par
8,000 shs x ($15 − $5)= $
80,000
15,000 shs x ($22 − 255,000
$5)=
Total $335,00
0
f.
General Journal
D Account Titles Debit Credit
ate
11-20
3/1 Cash 120,000
Common Stock 40,000
Paid-In Capital in Excess of 80,000
Par
5/2 Cash 330,000
Common Stock 75,000
Paid-In Capital in Excess 255,000
of Par
11-21
EXERCISE 11-5A
a.
General Journal
Even Account Titles Debit Credit
t
1. Cash (20,000 x $9) 180,000
Common Stock, $5 par 100,000
Paid-In Capital in Excess of 80,000
Par, CS
2. Cash (5,000 x $22) 110,000
Preferred Stock, $20 stated 100,000
value
Paid-In Capital in Excess of 10,000
SV, PS
3. Cash (100,000 x $12) 1,200,00
0
Common Stock, $5 par 500,000
Paid-In Capital in Excess of 700,000
Par, CS
b.
Stockholders’ Equity:
Preferred Stock, $20 stated value, 5%
cumulative class A, 50,000 shares
authorized, 5,000 shares issued and $ 100,000
outstanding
Common Stock, $5 par value, 400,000
shares authorized, 120,000 shares issued 600,000
and outstanding
Paid-In Capital in Excess of SV, Preferred 10,000
Stock
Paid-In Capital in Excess of Par, Common 780,000
Stock
Retained Earnings -0-
Total Stockholders’ Equity $1,490,00
11-22
0
11-23
EXERCISE 11-6A
a.
Balance Sheet Income Statement Stmt. of
Even Assets = Stockholders’ Equity Rev − E = Net Cash Flow
t xp. Inc.
Pref. No-Par PIC in
Cash = Stock + C. + Exces
Stock s
b.
General Journal
Even Account Titles Debit Credit
t
1. Cash 50,000
Common Stock, No Par 50,000
2. Cash 70,000
Preferred Stock, $50 par 50,000
value
Paid-In Capital in Excess of 20,000
Par, PS
11-24
EXERCISE 11-7A
b.
Balance Sheet Income Statement Stmt. of
Even Assets = Stockholders’ R − E = Net Cash
t Equity ev. xp. Inc. Flows
Cash + Van = C. Stk. + PIC
Exc.
EXERCISE 11-8A
a.
Russ Corporation
General Journal
Date Account Titles Debit Credit
1. Treasury Stock (1,000 x $45) 45,000
Cash 45,000
2. Cash (700 x $55) 38,500
Treasury Stock (700 x $45) 31,500
Paid-In Capital in Excess of 7,000
Cost, TS
b.
11-25
Treasury Stock
1. 45,000 2. 31,500
Bal. 13,500
11-26
EXERCISE 11-9A
a. & b.
Common Stock Issued Outstandin
g
Beginning Number of 650 650
Shares
Issued This Period 1,000 1,000
Repurchased as Treasury (200)
Stock
Resold Treasury Stock 50
Ending Number of Shares (b) (a) 1,500
1,650
c.
Smoot Corporation
General Journal
Date Account Titles Debit Credit
1. Cash (1,000 X $50) 50,000
Common Stock, $10 par 10,000
Paid-in Capital in Excess of Par, 40,000
CS
2. Treasury Stock (200 x $40) 8,000
Cash 8,000
3. Cash (50 x $44) 2,200
Treasury Stock (50 x $40) 2,000
Paid-In Capital in Excess of Cost, 200
TS
d.
Stockholders’ Equity
Common Stock, $10 par value,
10,000 shares authorized, 1,650
shares issued, and 1,500 shares $16,500
outstanding
Paid-In Capital in Excess of Par, 65,350
Common
Paid-In Capital in Excess of Cost, 200
11-27
TS
Total Paid-In Capital $82,050
Retained Earnings 95,000
Less: Treasury Stock (6,000)
Total Stockholders’ Equity $171,05
0
EXERCISE 11-10A
a.
Balance Sheet Income Statement Stmt. of
Date Assets = Liab. + C. + Ret. Ear. Rev − Exp. = Net Cash Flows
Stk. Inc.
10/1 NA = 75,000 + NA + (75,000) NA − NA = NA NA
11/2 NA = NA + NA + NA NA − NA = NA NA
0
12/3 (75,000) = (75,000) + NA + NA NA − NA = NA (75,000) FA
0
b.
Med Corporation
General Journal
Date Account Titles Debit Credit
10/1/05 Dividends 75,000
Dividends Payable 75,000
11/20/0 No Entry
5
12/30/0 Dividends Payable 75,000
5
Cash 75,000
12/31/0 Retained Earnings 75,000
5
Dividends 75,000
11-28
EXERCISE 11-11A
b.
Dist. to
Shareholders
Amount Preferre Commo
d n
Total Dividend $20,000
Declared
2003 Arrearage (4,000) $ 4,000
2004 Preferred (4,000) 4,000
Dividends
Available for Common 12,000
Shs.
Distributed to (12,000) $12,000
Common
Total Distribution $8,000 $12,000
11-29
EXERCISE 11-12A
a.
Total $280,000
Dividend
b.
Date Account Titles Debit Credit
5/10/02 Dividends 280,000
Dividends Payable 280,000
5/30/02 No Entry
6/15/02 Dividends Payable 280,000
Cash 280,000
12/31/0 Retained Earnings 280,000
2
(Closing Dividends 280,000
Entry)
11-30
EXERCISE 11-13A
a. Distribution of Dividend:
Distributed to
Shareholders
Preferred Common
Total Dividend $120,00
Declared 0
Preferred Arrearage* (60,000) $ 60,000
Current Preferred (60,000) 60,000
Dividend
Available for Common -0-
Distributed to -0- $-0-
Common
Total $120,000 $-0-
11-31
11-32
EXERCISE 11-14A
b.
c.
General Journal
Account Title Debit Credit
Retained Earnings 28,000
Common Stock, $20 par 16,000
Paid-In Capital in Excess of 12,000
Par, CS
11-33
EXERCISE 11-15A
11-34
EXERCISE 11-16A
a.
Frontier Corporation:
Earnings per Share (EPS):
Net Income ÷ Common Shs. = EPS
Outst.
$60,000 ÷ 15,000 = $4.00
Price/Earnings Ratio:
Selling ÷ Earnings per = P/E
Price/Share Share Ratio
$70.00 ÷ $4 = 17.50
Upton Corporation:
Earnings Per Share (EPS):
Net Income ÷ Common Shs = EPS
Outst.
$112,000 ÷ 15,000 = $7.47
Price/Earnings Ratio:
Selling ÷ Earnings per = P/E
Price/Share Share Ratio
$90.00 ÷ $7.47 = 12.05
11-35
earnings because they believe that tomorrow’s earnings
will be higher.
11-36
EXERCISE 11-17A (Appendix)
11-37
SOLUTIONS TO PROBLEMS - SERIES A - CHAPTER 11
PROBLEM 11-18A
Transactions
Cash Acquired from $300,000
Owner
Revenues 80,000
Expenses 52,000
Withdrawals 10,000
a. Sole Proprietorship
MMX Company
Financial Statements
For the Year Ended December 31, 2007
Income Statement
Revenues $80,000
Expenses (52,000)
Net Income $ 28,000
Capital Statement
Beginning Capital Balance $
-0-
Plus: Capital Acquired from 300,000
Owner
Plus: Net Income 28,000
Less: Withdrawal by Owner (10,000)
Ending Capital Balance $318,000
11-38
PROBLEM 11-18A a. (cont.)
MMX Company
Financial Statements
For the Year Ended December 31, 2007
Balance Sheet
Assets
Cash $318,00
0
Total Assets $318,00
0
Liabilities $
-0-
Equity
Mayer, Capital 318,000
11-39
Net Change in Cash 318,000
Plus: Beginning Cash Balance -0-
Ending Cash Balance $318,00
0
11-40
PROBLEM 11-18A (cont.)
b. Partnership
MMX Company
Financial Statements
For the Year Ended December 31, 2007
Income Statement
Revenues $80,000
Expenses (52,000
)
Net Income $28,000
Capital Statement
Beginning Capital Balance $
-0-
Plus: Capital Acquired from 300,000
Owners
Plus: Net Income 28,000
Less: Withdrawals by Owners (10,000)
Ending Capital Balance $318,00
0
Analysis of Capital
Accounts:
Mayer Mitchell Total
Beginning Capital $ -0- $ -0- $ -0-
Balance
Investments 200,000 100,000 300,000
Net Income* 8,400 19,600 28,000
Withdrawals (6,000) (4,000) (10,000)
Ending Capital Balances $202,400 $115,600 $318,000
11-42
PROBLEM 11-18A b. (cont.)
MMX Company
Financial Statements
For the Year Ended December 31, 2007
Balance Sheet
Assets
Cash $318,00
0
Total Assets $318,00
0
Liabilities $ -0-
Equity
Martin Mayer, Capital 202,400
Kay Mitchell, Capital 115,600
11-43
Activities
11-44
PROBLEM 11-18A (cont.)
c. Corporation
MMX Inc.
Financial Statements
For the Year Ended December 31, 2007
Income Statement
Revenues $80,000
Expenses (52,000)
Net Income $28,000
Statement of Changes in Stockholders’ Equity
Beginning Common Stock $ -0-
Plus: Issuance of Common 300,000
Stock
Ending Common Stock $300,00
0
Beginning Retained Earnings -0-
Plus: Net Income 28,000
Less: Dividend Distributions (10,000)
Ending Retained Earnings 18,000
Total Stockholders’ Equity $318,00
0
11-45
PROBLEM 11-18A c. (cont.)
MMX, Inc.
Financial Statements
For the Year Ended December 31, 2007
Balance Sheet
Assets
Cash $318,00
0
Total Assets $318,00
0
Liabilities $ -0-
Stockholders’ Equity
Common Stock, $10 par value,
12,000 shares issued and $120,00
outstanding 0
Paid-In Capital in Excess of Par 180,000
Total Paid-In Capital 300,000
Retained Earnings 18,000
Total Liabilities and Stockholders’ $318,00
Equity 0
Statement of Cash Flows
Cash Flows From Operating
Activities:
Inflow from Revenues $80,000
Outflow for Expenses (52,000)
Net Cash Flow from Operating $ 28,000
Activities
Cash Flows From Investing -0-
Activities
Cash Flows From Financing
Activities:
Inflow from Sale of Stock 300,000
Outflow for Dividends (10,000)
11-46
Net Cash Flow from Financing 290,000
Activities
Net Change in Cash 318,000
Plus: Beginning Cash Balance -0-
Ending Cash Balance $318,00
0
11-47
PROBLEM 11-19A
a.
General Journal
Date Account Titles Debit Credit
2003
Jan. 2 Cash (20,000 x $8) 160,000
Common Stock (20,000 x 100,000
$5)
PIC in Excess of Par, CS 60,000
Jan. Cash (4,000 x $130) 520,000
15
Preferred Stock (4,000 x 400,000
$100)
PIC in Excess of Par, PS 120,000
Feb. Cash (10,000 x $9) 90,000
14
Common Stock (10,000 x 50,000
$5)
PIC in Excess of Par, CS 40,000
Dec. Cash 270,000
31
Service Revenue 270,000
Dec. Operating Expenses 160,000
31
Cash 160,000
Dec. Dividends [4,000 x ($100 x 32,000
31 8%)]
Dividends Payable 32,000
Closing Entries
Dec. Service Revenue 270,000
31
Retained Earnings 270,000
Dec. Retained Earnings 160,000
31
Operating Expenses 160,000
11-48
Dec. Retained Earnings 32,000
31
Dividends 32,000
2004
Jan. Dividends Payable 32,000
31
Cash 32,000
11-49
PROBLEM 11-19A a. (cont.)
General Journal
Date Account Titles Debit Credit
2004
Mar. 1 Cash (2,000 x $150) 300,000
Preferred Stock, $100 par 200,000
PIC in Excess of Par, PS 100,000
June 1 Treasury Stock (Common)(400 x 4,400
$11)
Cash 4,400
Dec. Cash 250,000
31
Service Revenue 250,000
Dec. Operating Expenses 175,000
31
Cash 175,000
Dec. Dividends 53,920*
31
Dividends Payable 53,920
Closing Entries
Dec. Service Revenue 250,000
31
Retained Earnings 250,000
Dec. Retained Earnings 175,000
31
Operating Expenses 175,000
Dec. Retained Earnings 53,920
31
Dividends 53,920
11-52
PROBLEM 11-19A (cont.)
c.
Oak Corporation
Balance Sheet
As of December 31, 2004
Assets
Cash $1,218,60
0
Total Assets $1,218,60
0
Liabilities
Dividends Payable $ 53,920
Total Liabilities $ 53,920
Stockholders’ Equity
Preferred Stock, $100 par value, 8%
cumulative, 10,000 shares
authorized, 600,000
6,000 shares issued and outstanding
Common Stock, $5 par value, 50,000
shares
authorized, 30,000 shares issued, 150,000
29,600
shares outstanding
Paid-In Capital in Excess of Par− 220,000
Preferred Stk.
Paid-In Capital in Excess of Par−Common 100,000
Stk.
Total Paid-In Capital 1,070,000
Retained Earnings 99,080
Less: Treasury Stock (4,400)
Total Stockholders’ Equity 1,164,680
Total Liabilities and Stockholders’ Equity $1,218,60
0
11-53
PROBLEM 11-19A c. (cont.)
Schedule of Number of
Shares of Common Stock
Shares Shares
Issued Outstandin
g
2003
Jan. 2 20,000 20,000
Feb. 14 10,000 10,000
Totals 30,000 30,000
2004
June 1 (400)
Totals 30,000 29,600
11-54
PROBLEM 11-20A
a.
General Journal
Date Account Titles Debit Credit
1. Cash (10,000 x $10) 100,000
Common Stock, $10 par 100,000
2. Cash (2,000 x $30) 60,000
Preferred Stock, $30 stated 60,000
value
3. Treasury Stock (Common 9,000
Stock)
(500 x $18)
Cash 9,000
4. Dividends ($30 x 6% x 2,000) 3,600
Dividends Payable 3,600
5. Cash (300 x $23) 6,900
Treasury Stock (300 x $18) 5,400
PIC in Excess of Cost−TS 1,500
6. Dividends Payable 3,600
Cash 3,600
7. Cash (assumed cash) 57,000
Service Revenue 57,000
Operating Expenses 36,000
Cash (assumed cash) 36,000
Closing Entries
8. Service Revenue 57,000
Retained Earnings 57,000
Retained Earnings 36,000
Operating Expenses 36,000
Retained Earnings 3,600
Dividends 3,600
9. Retained Earnings 6,000
Appropriated Retained 6,000
Earnings
11-55
PROBLEM 11-20A (cont.)
b.
Stockholders’ Equity
Preferred Stock, $30 stated value,
2,000 shares issued and outstanding $ 60,000
Common Stock, $10 par value,10,000
shares 100,000
issued, and 9,800 shares outstanding
Paid-In Capital in Excess of Cost, 1,500
Treasury Stk.
Total Paid-In Capital $161,50
0
Retained Earnings
Appropriated 6,000
Unappropriated 11,400
Total Retained Earnings 17,400
Less: Treasury Stock (200 shares) (3,600)
Total Stockholders’ Equity $175,30
0
11-56
PROBLEM 11-21A
a.
b.
Stockholders’ Equity
Common Stock, $10 par value, 50,000
shares authorized, 40,000 shares $400,00
issued, and 39,300 shares outstanding 0
Paid-In Capital in Excess of Par−Common 150,000
Stock
Paid-In Capital in Excess of Cost−Treasury 1,200
Stk.
Total Paid-In Capital $551,20
0
Retained Earnings 126,000
Less: Treasury Stock (700 shares) (11,200)
Total Stockholders’ Equity $666,00
0
11-57
PROBLEM 11-22A
a.
Granger Corp.
Statements Model For 2004
Totals 919,500 = 250,000 +315,000+ 337,50 + 17,000 210,00 − 128,00 = 82,000 919,500 NC
0 0 0
1
$50 x 5% = $2.50; $2.50 x 5,000 = $12,500
2
15,000 x 5%=750 shares; 750 shares x $70 = $52,500
3
Memo: 2:1 stock split reduces common’s par to $10 and increases number of shares outstanding
to 31,500
11-58
PROBLEM 11-22A (cont.)
b.
General Journal
Date Account Titles Debit Credit
1. Cash (15,000 x $40) 600,000
Common Stock $20 par 300,000
Paid in Capital in Excess of 300,000
Par, CS
2. Cash (5,000 x $50) 250,000
Preferred Stock 250,000
3. Dividends ($50 x 5% x 5,000) 12,500
Cash 12,500
4. Retained Earnings 37,500*
Common Stock, $20 Par 15,000
Paid-in Capital in Excess of 22,500
Par, CS
5. Granger’s declaration of a two-
for-one stock split will replace
the 15,750 shares of $20
common stock with 31,500
shares of $10 common stock.
6a. Cash 210,000
Service Revenue 210,000
6b. Operating Expenses 128,000
Cash 128,000
11-59
PROBLEM 11-22A (cont.)
c.
Stockholders’ Equity
Preferred Stock, $50 par value, 5%,
5,000 $250,00
shares issued and outstanding 0
Common Stock, $10, par, 31,500 shares
issued and outstanding 315,000
Paid-In Capital in Excess of Par, Common 337,500
Stock
Total Paid-In Capital $902,50
0
Retained Earnings 17,000
Total Stockholders’ Equity $919,50
0
11-60
PROBLEM 11-23A
11-61
PROBLEM 11-24A
Memo
To: Owners of Bates and Associates
From: John Q CPA
Date: X/X/20XX
Re: Forms of business ownership
Advantages Disadvantages
Partnership • Ease of formation • Limited life
• Less regulation • Mutual agency
• Lower effective • Unlimited liability
tax rate
Corporation • Unlimited life • More regulation
• Limited liability • Higher effective
• Capital easier to tax rate
acquire &
ownership easily
transferred
11-62
PROBLEM 11-24A (cont.)
Partnership Corporation
Income before $200,000 $200,000
taxes
Tax at entity level -0- (50,000)
Net Income
distributed to 200,000 150,000
owners
Less: Individual
income tax (36%) (72,000) (54,000)
After-tax cash $128,000 $ 96,000
flow
After-tax cash $128,000 ÷ 5 = $96,000 ÷ 5 =
flow available to $25,600 $19,200
each investor
($72,000 ÷ $200,000) ($104,000 ÷
Effective tax rate =36% $200,000)
=52%
11-63
PROBLEM 11-25A
Abbot Inc.
Statements Model
11-64
PROBLEM 11-26A
11-65
11-66
PROBLEM 11-26A (cont.)
11-67
PROBLEM 11-26A (cont.)
11-68
PROBLEM 11-26A (cont.)
11-69
SOLUTIONS TO EXERCISES - SERIES B - CHAPTER 11
EXERCISE 11-1B
Transactions
Cash Acquired from $20,000
Owner
Revenues 14,500
Expenses 9,300
Withdrawal 500
11-70
EXERCISE 11-1B (cont.)
Liabilities $
-0-
Equity
Jones, Capital 24,700
11-71
Ending Cash Balance $24,700
11-72
EXERCISE 11-2B
Transactions:
Cash Contributions
C. Mills $24,50 35%
0
P. Price 45,500 65%
Total $70,00
0
Revenues $15,00
0
Expenses 6,300
Mills Withdrawal 600
Price Withdrawal 1,400
M&P Partnership
Financial Statements
For the Year Ended December 31, 2009
Income Statement
Revenues $15,000
Expenses (6,300)
Net Income $ 8,700
Capital Statement
Beginning Capital Balance $
-0-
Plus: Capital Acquired from 70,000
Owners
Plus: Net Income 8,700
Less: Withdrawal by Owners (2,000)
Ending Capital Balance $76,700
11-73
EXERCISE 11-2B (cont.)
Analysis of Capital
Accounts:
Mills Price Total
Beginning Capital $ $ $
Balance -0- -0- -0-
Investments 24,500 45,500 70,000
Net Income 8,700
C. Mills 35% 3,045
P. Price 65% 5,655
Withdrawals (600) (1,400) (2,000)
Ending Capital Balances $26,94 $49,75 $76,70
5 5 0
11-74
EXERCISE 11-2B (cont.)
M&P Partnership
Financial Statements
For the Year Ended December 31, 2009
Balance Sheet
Assets
Cash $76,700
Total Assets $76,700
Liabilities $ -0-
Equity
C. Mills, Capital 26,945
P. Price, Capital 49,755
11-75
Ending Cash Balance $76,700
11-76
EXERCISE 11-3B
Transactions:
Issued 1,000 shares of $5 par stock $18,000
@ $18
Revenues 23,000
Expenses 17,000
Dividends Paid 1,200
Stone Corporation
Financial Statements
For the Year Ended December 31, 2009
Income Statement
Revenues $23,000
Expenses (17,000
)
Net Income $ 6,000
Statement of Changes in Stockholders’ Equity
Beginning Common Stock $ -0-
Plus: Issuance of Common 18,000
Stock
Ending Common Stock $18,000
Beginning Retained Earnings -0-
Plus: Net Income 6,000
Less: Dividend (1,200)
Ending Retained Earnings 4,800
Total Stockholders’ Equity $22,800
11-77
EXERCISE 11-3B (cont.)
Stone Corporation
Financial Statements
For the Year Ended December 31, 2009
Balance Sheet
Assets
Cash $22,800
Total Assets $22,80
0
Liabilities $
-0-
Stockholders’ Equity
Common Stock, $5 par value,
1,000 shares issued and $ 5,000
outstanding
Paid-In Capital in Excess of Par 13,000
Total Paid-In Capital 18,000
Retained Earnings 4,800
Total Liabilities and Stockholders’ $22,80
Equity 0
Statement of Cash Flows
Cash Flows From Operating
Activities:
Inflow from Revenues $23,000
Outflow for Expenses (17,000)
Net Cash Flow from Operating $
Activities 6,000
Cash Flows From Investing -0-
Activities
Cash Flows From Financing
Activities:
Inflow from Sale of Stock 18,000
Outflow for Dividends (1,200)
Net Cash Flow from Financing 16,800
Activities
11-78
Net Change in Cash 22,800
Plus: Beginning Cash Balance -0-
Ending Cash Balance $22,80
0
11-79
EXERCISE 11-4B
a.
Balance Sheet Income Statement Stmt. of
Even Assets = L + Stockholders’ Rev. − E = Net Cash Flow
t iab Equity xp. Inc.
Cash = + C. + PIC Exc.
Stk.
3/1 100,00 = NA + 50,00 + 50,000 NA − NA = NA 100,000 FA
0 0
5/2 144,00 = NA + 60,00 + 84,000 NA − NA = NA 144,000 FA
0 0
b.
Common Stock:
5,000 shs. x $10= $ 50,000
6,000 shs. x $10= 60,000
Total $110,000
c.
Paid-In Capital in Excess of
Par
5,000 shs x ($20 − $10)= $ 50,000
6,000 shs x ($24 − $10)= 84,000
Total $134,000
11-80
5/2 Cash 144,00
0
Common Stock 60,000
Paid-In Capital in Excess of 84,000
Par
11-81
EXERCISE 11-5B
a.
General Journal
Even Account Titles Debit Credit
t
1. Cash 80,000
Common Stock, $5 par 50,000
Paid-In Capital in Excess of 30,000
Par, CS
2. Cash 240,000
Preferred Stock, $50 stated 150,000
value
Paid-In Capital in Excess of 90,000
SV, PS
3. Cash 800,000
Common Stock, $5 par 400,000
Paid-In Capital in Excess of 400,000
Par, CS
b.
Stockholders’ Equity:
Preferred Stock, $50 stated value, 5%
cumulative class A, 20,000 shares
authorized, 3,000 shares issued and $
outstanding 150,000
Common Stock, $5 par value, 200,000
shares authorized, 90,000 shares issued 450,000
and outstanding
Paid-In Capital in Excess of SV, Preferred 90,000
Stock
Paid-In Capital in Excess of Par, Common 430,000
Stock
Retained Earnings -0-
Total Stockholders’ Equity $1,120,00
0
11-82
11-83
EXERCISE 11-6B
a.
Balance Sheet Income Statement Stmt. of
Even Assets = Stockholders’ Equity Rev − E = Net Cash Flow
t xp. Inc.
Pref. No-Par PIC in
Cash = Stock + C. + Exces
Stock s
1. = NA + + NA NA − NA = NA 120,000 FA
120,00 120,00
0 0
2. 80,000 = 50,000 + NA + 30,00 NA − NA = NA 80,000 FA
0
b.
General Journal
Even Account Titles Debit Credit
t
1. Cash 120,00
0
Common Stock, No Par 120,000
2. Cash 80,000
Preferred Stock, $50 par value 50,000
Paid-In Capital in Excess of 30,000
Par, PS
11-84
EXERCISE 11-7B
b.
Balance Sheet Income Statement Stmt. of
E Assets = Stockholders’ Rev. − E = Net Cash
vent Equity xp. Inc. Flows
Cash + Land = C. Stk. + PIC Exc.
EXERCISE 11-8B
a.
Hawk Corporation
General Journal
Date Account Titles Debit Credit
1. Treasury Stock (1,000 x $38) 38,000
Cash 38,000
2. Cash (500 x $55) 27,500
Treasury Stock (500 x $38) 19,000
Paid-In Capital in Excess of 8,500
Cost, TS
b.
Treasury Stock
1. 38,000 2. 19,000
Bal. 19,000
11-85
11-86
EXERCISE 11-9B
a. & b.
Common Stock Issued Outstandin
g
Beginning Number of 800 800
Shares
Issued This Period 2,000 2,000
Repurchased as Treasury (300)
Stock
Resold Treasury Stock 100
Ending Number of Shares (b) (a) 2,600
2,800
c.
Sneed Corporation
General Journal
Date Account Titles Debit Credit
1. Cash (2,000 X $43) 86,000
Common Stock, $10 par 20,000
Paid-in Capital in Excess of Par, 66,000
CS
2. Treasury Stock (300 x $38) 11,400
Cash 11,400
3. Cash (100 x $40) 4,000
Treasury Stock (100 x $38) 3,800
Paid-In Capital in Excess of Cost, 200
TS
d.
Stockholders’ Equity
Common Stock, $10 par value,
10,000 shares authorized, 2,800
shares issued, and 2,600 shares $28,000
outstanding
Paid-In Capital in Excess of Par, 78,000
Common
Paid-In Capital in Excess of Cost, TS 200
Total Paid-In Capital $106,20
0
11-87
Retained Earnings 75,000
Less: Treasury Stock (7,600)
Total Stockholders’ Equity $173,60
0
11-88
EXERCISE 11-10B
a.
Balance Sheet Income Statement Stmt. of
Date Assets = Liab. + C. + Ret. Ear. Rev − Exp. = Net Cash Flows
Stk. Inc.
5/1 NA = 120,000 + NA + (120,000 NA − NA = NA NA
)
5/15 NA = NA + NA + NA NA − NA = NA NA
5/31 (120,00 = (120,00 + NA + NA NA − NA = NA (120,000)F
0) 0) A
b.
Lott Corporation
General Journal
Date Account Titles Debit Credit
5/1/05 Dividends 120,000
Dividends Payable 120,000
5/15/05 No Entry
5/31/05 Dividends Payable 120,000
Cash 120,000
12/31/0 Retained Earnings 120,000
5
Dividends 120,000
11-89
EXERCISE 11-11B
b.
Dist. to
Shareholders
Amount Preferre Common
d
Total Dividend Declared $30,000
2007 Arrearage (7,000) $ 7,000
2008 Preferred (7,000) 7,000
Dividends
Available for Common 16,000
Shs.
Distributed to Common (16,000) $16,000
Total Distribution $14,000 $16,000
11-90
EXERCISE 11-12B
a.
Total $180,000
Dividend
b.
Date Account Titles Debit Credit
6/10/05 Dividends 180,000
Dividends Payable 180,000
6/20/05 No Entry
7/1/05 Dividends Payable 180,000
Cash 180,000
12/31/05 Retained Earnings 180,000
(Closing Dividends 180,000
Entry)
11-91
EXERCISE 11-13B
a. Distribution of Dividend:
Distributed to
Shareholders
Preferred Common
Total Dividend Declared $200,00
0
Preferred Arrearage* (80,000 $ 80,000
)
Current Preferred (80,000 80,000
Dividend )
Available for Common 40,000
Distributed to Common (40,000 $40,000
)
Total $160,000 $40,000
11-92
11-93
EXERCISE 11-14B
b.
c.
General Journal
Account Title Debit Credit
Retained Earnings 7,000
Common Stock, $10 par 5,000
Paid-In Capital in Excess of Par, 2,000
CS
11-94
EXERCISE 11-15B
11-95
EXERCISE 11-16B
a.
Cooper Corporation:
Earnings per Share (EPS):
Net Income ÷ Common Shs. = EPS
Outst.
$80,000 ÷ 15,000 = $5.33
Price/Earnings Ratio:
Selling ÷ Earnings per = P/E
Price/Share Share Ratio
$70.00 ÷ $5.33 = 13.13
Eastman Corporation:
Earnings Per Share (EPS):
Net Income ÷ Common Shs = EPS
Outst.
$55,000 ÷ 15,000 = $3.67
Price/Earnings Ratio:
Selling ÷ Earnings per = P/E
Price/Share Share Ratio
$90.00 ÷ $3.67 = 24.52
11-96
earnings because they believe that tomorrow’s earnings
will be higher.
11-97
EXERCISE 11-17B
11-98
SOLUTIONS TO PROBLEMS - SERIES B - CHAPTER 11
PROBLEM 11-18B
Transactions
Cash Acquired from $40,000
Owner
Revenues 18,000
Expenses 12,500
Distributions 3,000
a. Sole Proprietorship
Calloway Co.
Financial Statements
For the Year Ended December 31, 2009
Income Statement
Service Revenues $18,000
Operating Expenses (12,500
)
Net Income $ 5,500
Capital Statement
Beginning Capital Balance $
-0-
Plus: Capital Acquired from 40,000
Owner
Plus: Net Income 5,500
Less: Withdrawal by Owner (3,000)
Ending Capital Balance $42,500
11-99
PROBLEM 11-18B a. (cont.)
Calloway Co.
Financial Statements
For the Year Ended December 31, 2009
Balance Sheet
Assets
Cash $42,500
Total Assets $42,50
0
Liabilities $
-0-
Equity
Macy Calloway, Capital 42,500
11-100
Activities
11-101
PROBLEM 11-18B (cont.)
b. Partnership
Calloway Co.
Financial Statements
For the Year Ended December 31, 2009
Income Statement
Service Revenue $18,000
Operating Expenses (12,500
)
Net Income $ 5,500
Capital Statement
Beginning Capital Balance $ -0-
Plus: Capital Acquired from 40,000
Owners
Plus: Net Income 5,500
Less: Withdrawals by Owners (3,000)
Ending Capital Balance $42,500
11-102
PROBLEM 11-18B b. (cont.)
Calloway Co.
Financial Statements
For the Year Ended December 31, 2009
Balance Sheet
Assets
Cash $42,500
Total Assets $42,500
Liabilities $
-0-
Equity
Macy Calloway, Capital 25,400
Artie Calloway, Capital 17,100
11-103
Net Change in Cash 42,500
Plus: Beginning Cash Balance -0-
Ending Cash Balance $42,500
11-104
PROBLEM 11-18B (cont.)
c. Corporation
Calloway Inc.
Financial Statements
For the Year Ended December 31, 2009
Income Statement
Service Revenues $18,000
Operating Expenses (12,500)
Net Income $ 5,500
Statement of Changes in Stockholders’ Equity
Beginning Common Stock $ -0-
Plus: Issuance of Common 40,000
Stock
Ending Common Stock $40,000
Beginning Retained Earnings -0-
Plus: Net Income 5,500
Less: Dividend Distributions (3,000)
Ending Retained Earnings 2,500
Total Stockholders’ Equity $42,500
11-105
PROBLEM 11-18B c. (cont.)
Calloway Inc.
Financial Statements
For the Year Ended December 31, 2009
Balance Sheet
Assets
Cash $42,500
Total Assets $42,500
Liabilities $
-0-
Stockholders’ Equity
Common Stock, $5 par value,
5,000 shares issued and $25,000
outstanding
Paid-In Capital in Excess of Par 15,000
Total Paid-In Capital 40,000
Retained Earnings 2,500
Total Liabilities and Stockholders’ $42,500
Equity
Statement of Cash Flows
Cash Flows From Operating
Activities:
Inflow from Revenues $18,000
Outflow for Expenses (12,500)
Net Cash Flow from Operating $ 5,500
Activities
Cash Flows From Investing -0-
Activities
Cash Flows From Financing
Activities:
Inflow from Sale of Stock 40,000
Outflow for Dividends (3,000)
Net Cash Flow from Financing 37,000
Activities
11-106
Net Change in Cash 42,500
Plus: Beginning Cash Balance -0-
Ending Cash Balance $42,500
11-107
PROBLEM 11-19B
a.
General Journal
Date Account Titles Debit Credit
2008
Jan. 5 Cash (10,000 x $28) 280,000
Common Stock, $10 par 100,000
PIC in Excess of Par−CS 180,000
11-109
PROBLEM 11-19B a. (cont.)
General Journal
Date Account Titles Debit Credit
2009
Mar. 3 Cash (10,000 x $78) 780,000
Preferred Stock, $50 par 500,000
PIC in Excess of Par−PS 280,000
11-110
Total Dividend $62,700
11-111
PROBLEM 11-19B (cont.)
b.
Hamby Corporation
Balance Sheet
As of December 31, 2008
Assets
Cash $2,010,00
0
Total Assets $2,010,00
0
Liabilities
Dividends Payable $
3,000
Total Liabilities $
3,000
Stockholders’ Equity
Preferred Stock, $50 par value, 6%
cumulative, 50,000 shares authorized,
1,000 shares issued and outstanding 50,000
Common Stock, $10 par value, 100,000
shares
authorized, 50,000 shares issued and 500,000
outstanding
Paid-In Capital in Excess of Par− 20,000
Preferred Stock
Paid-In Capital in Excess of Par− 1,380,000
Common Stock
Total Paid-In Capital 1,950,000
Retained Earnings 57,000
Total Stockholders’ Equity 2,007,000
Total Liabilities and Stockholders’ $2,010,00
Equity 0
11-112
PROBLEM 11-19B b. (cont.)
Hamby Corporation
Balance Sheet
As of December 31, 2009
Assets
Cash $2,835,50
0
Total Assets $2,835,50
0
Liabilities
Dividends Payable $
62,700
Total Liabilities $
62,700
Stockholders’ Equity
Preferred Stock, $50 par value, 6%
cumulative, 50,000 shares
authorized, 11,000 shares issued and 550,000
outstanding
Common Stock, $10 par value, 100,000
shares
authorized, 50,000 shares issued, 500,000
49,500
shares outstanding
Paid-In Capital in Excess of Par− 300,000
Preferred Stk.
Paid-In Capital in Excess of Par− 1,380,000
Common Stk.
Total Paid-In Capital 2,730,000
Retained Earnings 64,300
Less: Treasury Stock (21,500)
Total Stockholders’ Equity 2,772,800
Total Liabilities and Stockholders’ $2,835,50
Equity 0
11-113
PROBLEM 11-19B (cont.)
c.
Schedule of Number of
Shares of Common Stock
Shares Shares
Issued Outstandin
g
2008
Jan. 5 10,000 10,000
Apr. 5 40,000 40,000
Totals 50,000 50,000
2009
May 5 (500)
Totals 50,000 49,500
11-114
PROBLEM 11-20B
a.
General Journal
D Account Titles Debit Credit
ate
1. Cash (20,000 x $5) 100,000
Common Stock, $5 par 100,000
2. Cash (1,000 x $20) 20,000
Preferred Stock, $20 stated value 20,000
3. Treasury Stock (Common Stock) (1,000 7,000
x $7)
Cash 7,000
4. Dividends 1,500
Dividends Payable 1,500
5. Cash 5,000
Treasury Stock (500 x $7) 3,500
PIC in Excess of Cost−TS 1,500
6. Dividends Payable 1,500
Cash 1,500
7. Cash 54,000
Service Revenue 54,000
Operating Expenses 32,000
Cash 32,000
Closing Entries
8. Service Revenue 54,000
Retained Earnings 54,000
Retained Earnings 32,000
Operating Expenses 32,000
Retained Earnings 1,500
Dividends 1,500
9. Retained Earnings 5,000
Appropriated Retained Earnings 5,000
11-115
PROBLEM 11-20B (cont.)
b.
One Co.
Balance Sheet
As of December 31, 2009
Assets
Cash $138,50
0
Total Assets $138,500
Liabilities $ -0-
Stockholders’ Equity
Preferred Stock, $20 stated value, 1,000
shares issued and outstanding $ 20,000
Common Stock, $5 par value, 20,000
shares 100,000
issued and 19,500 shares
outstanding
Paid-In Capital in Excess of Cost− 1,500
Treasury Stock
Total Paid-In Capital 121,500
Retained Earnings
Appropriated 5,000
Unappropriated 15,500
Total Retained Earnings 20,500
Less: Treasury Stock (500 shares) (3,500)
Total Stockholders’ Equity 138,500
Total Liabilities and Stockholders’ Equity $138,50
0
11-116
PROBLEM 11-21B
d.
Outstanding
Shares
Prior to Event 2 200,000
Less: Treasury Stock (1,500)
(Event 2)
Total After Event 2 198,500
Plus: Treasury Stock
Reissued 800
(Event 3)
Total After Event 3 199,300
11-117
PROBLEM 11-22B
a.
Deaton Co.
Statements Model For 2006
11-118
PROBLEM 11-22B (cont.)
b.
General Journal
Date Account Titles Debit Credit
1. Cash (20,000 x $10) 200,000
Common Stock, No Par 200,000
2. Cash (5,000 x $20) 100,000
Preferred Stock, $20 Par 100,000
3. Dividends 6,000
Cash 6,000
4. Retained Earnings 30,000*
Common Stock, No Par 30,000
5. Deaton’s declaration of a
two-for-one stock split will
replace the 22,000 of no-par
common stock with 44,000
shares of no-par common
stock.
6. Cash 145,000
Service Revenue 145,000
7. Operating Expenses 97,000
Cash 97,000
Closing Entries
8. Service Revenue 145,000
Retained Earnings 145,000
9. Retained Earnings 97,000
Operating Expenses 97,000
10. Retained Earnings 6,000
Dividends 6,000
*20,000 shares x 10% = 2,000 shares; 2,000 shares x $15
per share = $30,000
11-119
PROBLEM 11-22B (cont.)
c.
Stockholders’ Equity
Preferred Stock, $20 par value, 6%,
5,000 shares issued and outstanding $100,00
0
Common Stock, no par value, 44,000
shares issued and outstanding 230,000
Total Paid-In Capital $330,00
0
Retained Earnings 12,000
Total Stockholders’ Equity $342,00
0
11-120
PROBLEM 11-23B
11-121
PROBLEM 11-24B
11-122
PROBLEM 11-25B
Baskin Inc.
Statements Model
11-123
PROBLEM 11-26B
a.
MCPL
Financial Statements
For the Year Ended December 31, 2009
Income Statement
Revenue $120,000
Expenses (105,000)
Net Income $ 15,000
Balance Sheet
Assets
Cash $ 90,000
Facilities and Equipment $450,000
Less: Accumulated Depreciation (25,000) 425,000
Total Assets $515,000
Liabilities $ -0-
Stockholders’ Equity
Common Stock $500,000
Retained Earnings 15,000
Total Stockholders’ Equity 515,000
Total Liabilities and Stockholders’ $515,000
Equity
11-124
PROBLEM 11-26B a. (cont.)
MCPL
Statement of Cash Flows
For the Year Ended December 31, 2009
Cash Flows From Operating Activities:
Inflow from Revenue $120,000
Outflow for Expenses (80,000)
Net Cash Flow from Operating $ 40,000
Activities
Cash Flows From Investing Activities:
Outflow for Facilities Equipment (450,000
)
Net Cash Flow from Investing Activities (450,000
)
Cash Flows From Financing Activities:
Inflow from the Sale of Stock 500,000
Net Cash Flow from Financing 500,000
Activities
Net Change in Cash 90,000
Plus: Beginning Cash Balance -0-
Ending Cash Balance $ 90,000
b.
Worksheet provided for instructor’s use:
11-125
4. (80,000) (80,000) (80,000) OA
5. (25,00 (25,000) NA
0)
Tot. 90,000 425,00 = -0- -0- 515,000 90,000 NC
0
11-126
PROBLEM 11-26B b. (cont.)
MCPL
Financial Statements
For the Year Ended December 31, 2009
Statement of Activities
Changes in Unrestricted Net Assets
Donor Contributions $500,000
Revenues 120,000
Expenses (80,000)
Depreciation Expense (25,000)
Net Change in Unrestricted Net Assets $515,00
0
Changes in Temporarily Restricted -0-
Assets
Changes in Permanently Restricted -0-
Assets
Increase in Net Assets 515,000
Net Assets at the Beginning of the -0-
Year
Net Assets at the End of the Year $515,00
0
Statement of Financial Position
Assets
Cash $
90,000
Facilities and Equipment $450,000
Less, Accumulated Depreciation (25,000) 425,000
Total Assets $515,00
0
Net Assets
Permanently Restricted Assets $ 0-
Temporarily Restricted Assets -0-
11-127
Unrestricted Assets 515,000
Total Net Assets $515,00
0
11-128
PROBLEM 11-26B b. (cont.)
MCPL
Statement of Cash Flows
For the Year Ended December 31, 2009
Cash Flows From Operating Activities:
Unrestricted Donor Contributions $500,000
Inflow from Revenues 120,000
Outflow for Expenses (80,000)
Net Cash Flow from Operating $540,000
Activities
Cash Flows From Investing Activities:
Outflow for Facilities Equipment (450,000
)
Net Cash Flow from Investing Activities (450,000
)
Cash Flows From Financing Activities -0-
Net Change in Cash 90,000
Plus: Beginning Cash Balance -0-
Ending Cash Balance $ 90,000
11-129
ATC 11-1
a. Yes, $.01 per share. See the balance sheet, page 27.
e. The NASDAQ (See page 1 of the 10-K, in the last paragraph of the “General”
section).
11-130
ATC 11-2
11-131
ATC 11-2 (cont.)
11-132
ATC 11-2 h. (cont.)
Cola-Cola
(in millions)
Harley Davidson
(in thousands)
11-133
ATC 11-3
Thinking About the Numbers -- Computing the P/E Ratios for Four Companies
a.
Adjusted for
Company As Reported Stock Compensation
Sears
Stock price $42.89 $42.89
EPS $3.89 = 11.0 times $3.77 = 11.4 times
Target
Stock price $35.59 $35.59
EPS $1.40 = 25.4 times $1.39 = 25.6 times
Cisco
Stock price $19.22 $19.22
EPS $.39 = 49.3 times $.22 = 87.4 times
Oracle
Stock price $19.58 $19.58
EPS $2.22 = 8.8 times $2.02 = 9.7 times
11-134
ATC 11-4
11-135
ATC 11-5
a.
Geolock Corporation:
Earnings per Share (EPS):
Net Income ÷ Common Shs. = EPS
Outst.
$8,000 ÷ 2,000 = $4.00
Price/Earnings Ratio:
Selling ÷ Earnings per = P/E
Price/Share Share Ratio
$48.00 ÷ $4.00 = 12.00
Minerals Corporation:
Earnings Per Share (EPS):
Net Income ÷ Common Shs = EPS
Outst.
$9,400 ÷ 2,000 = 4.70
Price/Earnings Ratio:
Selling ÷ Earnings per = P/E
Price/Share Share Ratio
$94.00 ÷ $4.70 = 20.00
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earnings because they believe that tomorrow’s earnings
will be higher.
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ATC 11-6
MEMO
FROM:
Partnership:
Advantages: Easy to form;
Not subject to many of the federal and state
regulations imposed on corporations;
Partners may act on behalf of the business
without approval from stockholders.
Disadvantages: Limited life;
Mutual agency, each partner is an agent of
the partnership and can bind the
partnership to a contract;
Unlimited liability.
Corporation:
Advantages: Separate legal entity, thus owner’s liability
is limited to investment;
Continuity of life; i.e., the corporation does
not dissolve at the death, etc. of owners;
Ownership is easily transferred;
Easy access to capital funds.
Disadvantages: Government regulation;
Double taxation.
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ATC 11-7
a.
1. Converting to an accelerated method would increase expense on the income
statement thereby decreasing net income and the stockholders’ equity section
(i.e., retained earnings) of the balance sheet. It would also reduce assets since
the additional expense would increase accumulated depreciation thereby
reducing the book value of long-term operational assets.
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ATC
11-7 (cont)
c. The managers of a company are hired to make decisions that are in the best
interest of the stockholders (the owners of the company). They should make
decisions that increase the value of stockholders’ equity, not decisions that
increase their own personal worth. Increases in management’s compensation
should be the result of increasing the profitability of the company. Stinson is
considering manipulating accounting procedures to maximize management’s
wealth (increase management bonuses). Since corporate profits were down,
these bonuses are undeserved. Higher bonuses will decrease assets and
retained earnings. Financial reports are one means to evaluate management on
their ability to earn returns for the stockholders. Knowledgeable investors will
be aware of the cash effects of Stinson’s decisions and could devalue the price
of the company’s stock, resulting in future wealth declines. For these reasons,
Stinson’s strategies are unethical. She is not doing her job, which is to look
after the stockholders’ interest.
e. Since the company is expected to report a loss, the price earnings ratio cannot
be computed. Accordingly, Stinson’s strategy would not affect the price-
earnings ratio.
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ATC 11-8 Using the EDGAR Database
NOTE: This solution was accurate as of January 4, 2002. However, the EDGAR
database is subject to update at any time, so this solution will likely be
“dated” at the time you assign this case to your students.
These data are from the December 30, 2000 financial statements and dollar
amounts are in millions.
d. There are several reasons a company’s stock can have a higher market value than
its book value. These include:
1. The fair market value of its assets, such as land, are higher than the assets’
historical cost or book value.
2. The “market” believes the company has goodwill that is not recorded on the
company’s balance sheet due to the GAAP rules regarding when goodwill
may be recorded.
3. The “market” believes the company has potential future earnings power that
is not reflected on its balance sheet under GAAP rules. For example, this
might occur if the company has been granted a new patent that is expected
to have great revenue potential, yet most of the cost the company incurred to
develop the patent was “expensed” as R&D in prior years.
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