CHAPTER 11 ALTERNATE PROBLEMS

Problem 11.1A
Stockholders Equt! " # B#l#"ce Sheet
Early in 1999, Delstar, Inc. was organized with authorization to issue 10,000 shares of $50 par
value preferred stoc and 100,000 shares of $1 par value co!!on stoc. "ive thousand shares of
the preferred stoc were issued at par, and #0,000 shares of co!!on stoc were sold of $1$ per
share. %he preferred stoc pays a 10& cu!ulative dividend and is calla'le at $55.
During the first four years of operations (1999 through $00$), the corporation earned a
total of $1,*00,000 and paid dividends of $5 cents per share in each year on its outstanding
co!!on stoc.
Instructions
a. +repare the stocholders, e-uity section of the 'alance sheet at Dece!'er *1, $00$.
Include a supporting schedule showing your co!putation of the a!ount of retained
earnings reported. (.int/ Inco!e increases retained earnings, whereas dividends decrease
retained earnings.)
b. 0re there any dividends in arrears on the co!pany,s preferred stoc at Dece!'er *1,
$00$1 E2plain your answer.
c. 0ssu!e that interest rates increase steadily fro! 1999 through $00$. 3ould you e2pect
the !aret price of the co!pany,s preferred stoc to 'e higher or lower than its call price
of $55 at Dece!'er $1, $00$1
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Problem 11.$A
Stockholders Equt! Secto"
"lag +u'lications was organized early in 1999 with authorization to issue 5,000 shares of $100
par value preferred stoc and 1 !illion shares of $$ par value co!!on stoc. 0ll of the
preferred stoc was issued at par, and $00,000 shares of co!!on stoc were sold for $1# per
share. %he preferred stoc pays a 10& cu!ulative dividend as is calla'le at $110.
During the first five years of operations (1999 through $001) the corporation earned a
total of $*,$00,000 and paid dividends of $1 per share each year on the co!!on stoc. In $00$,
however, the corporation reported a net loss of $1,*00,000 and paid no dividends.
Instructions
a. +repare the stocholder,s e-uity section of the 'alance sheet at Dece!'er *1, $00$.
Include a supporting schedule showing your co!putation of retained earrings at the
'alance sheet date. (.int/ Inco!e increases retained earnings, whereas dividends and net
losses decrease retained earnings.)
b. Draft a note to acco!pany the financial state!ents disclosing any dividends in arrears at
the end of $00$.
c. Do the dividends in arrears appear as a lia'ility of the corporation as of the end of $00$1
E2plain.
114$ Alternate Problems for use with Financial and Managerial Accounting, 1$e
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Problem 11.%A
Stockholders Equt! " # B#l#"ce Sheet
:ophia Dueno organized ;ewtown %ype, Inc. in <anuary 1999. %he corporation i!!ediately
issued at $1$ per share one4half of its 150,000 authorized shares of $1 par value co!!on stoc.
=n <anuary $, 2000, the corporation sold at par value the entire 10,000 authorized shares of 10&,
$100 par value, cu!ulative preferred stoc. =n <anuary $, 2001, the co!pany again needed
!oney and issued 5,000 shares of an authorized 10,000 shares of no4par, cu!ulative preferred
stoc for a total of $5>0,000. %he no4par shares have a stated dividend of $? per share.
%he co!pany declared no dividends in 1999 and $000. 0t the end of $000, its retained
earnings were $$$0,000. During $001 and $00$ co!'ined, the co!pany earned a total of
$9*0,000. Dividends of #0 cents per share in $001 and $1.50 per share in $00$ were paid on the
co!!on stoc.
Instructions
a. +repare the stocholder,s e-uity section of the 'alance sheet at Dece!'er *1, $00$.
Include a supporting schedule showing your co!putation of retained earrings at the
'alance sheet date. (.int/ Inco!e increases retained earnings, whereas dividends and net
losses decrease retained earnings.)
b. 0ssu!e that on <anuary $, $00$, the corporation could have 'orrowed $1,000,000 at 10&
interest on a long4ter! 'asis instead of issuing the 10,000 shares of the $100 par value
cu!ulative preferred stoc. Identify two reasons a corporation !ay choose to issue
cu!ulative preferred stoc rather than finance operations with long4ter! de't.
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Problem 11.&A
Stockholders Equt!' A Short Com(rehe"s)e Problem
Early in the year :usan 0nthony and several trends organized a corporation called E-ual %i!e,
Inc. %he corporation was authorized to issue 100,000 shares of $100 par value, ?& cu!ulative
preferred stoc and 500,000 shares of $1 par value co!!on stoc. %he following transactions
(a!ong others) occurred during the year/
Jan. 4 Issued for cash >0,000 shares of co!!on stoc at $? per share. %he shares were
issued to 0nthony and * other investors.
Jan. 10 Issued an additional 1,$50 shares of co!!on stoc to 0nthony in e2change for
his services in organizing the corporation. %he stocholders agreed that these
services were worth $10,000.
Jan. 15 Issued *,000 shares of preferred stoc for cash of $*00,000.
Aug. 12 0c-uired land as a 'uilding site in e2change for $0,000 shares of co!!on stoc.
In view of the appraised value of the land and the progress of the co!pany, the
directors agreed that the co!!on stoc was to 'e valued for purposes of this
transaction at $10 per share.
Nov. 25 %he first annual divided of $? per share was declared on the preferred stoc to 'e
paid Dece!'er 11.
Dec. 11 +aid the cash dividend declared on ;ove!'er $5.
Dec. 31 0fter the revenue and e2penses were closed into the Inco!e :u!!ary account,
that a!ount indicated a net inco!e of $$19,500.
Instructions
a. +repare @ournal entries in general @ournal for! to record the a'ove transactions. Include
entries at Dece!'er *1 to close the Inco!e :u!!ary account and the Dividends account.
b. +repare the stocholders, e-uity section of the E-ual %i!e, Inc., 'alance sheet at
Dece!'er *1.
114> Alternate Problems for use with Financial and Managerial Accounting, 1$e
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Problem 11.*A
A"#l!ss o+ #" Equt! Secto" o+ # B#l#"ce Sheet
%he year4end 'alance sheet of :ocial :yste!s, Inc. includes the following stocholders, e-uity
section (with certain details o!itted)/
Stockholders e!uit"#
?& cu!ulative preferred stoc, $100 par value,
calla'le at $10>, 100,000 shares authorized............................................$*,$00,000
8o!!on stoc, $* par value, 1,000,000 shares
authorized................................................................................................. 1,$00,000
0dditional paid4in capital/ 8o!!on stoc.................................................... $,?00,000
Donated capital.............................................................................................. #10,000
Aetained earnings........................................................................................... *,>90,000
%otal stocholders, e-uity..................................................................... $11,$?0,000
Instructions
"ro! this infor!ation, co!pute answers to the following -uestions/
a. .ow !any shares of preferred stoc have 'een issued1
b. 3hat is the total a!ount of the annual dividends paid to preferred stocholders1
c. .ow !any shares of co!!on stoc are outstanding1
d. 3hat was the average issuance price per share of co!!on stoc1
e. 3hat is the a!ount of legal capital1
$. 3hat is the total a!ount of paid4in capital1
g. 3hat is the 'oo value per share of co!!on stoc1 (%here are no dividends in arrears.)
h. 0ssu!e that retained earnings at the 'eginning of the year a!ounted to $?15,000 and the
net inco!e for the year was $>,$00,000. 3hat was the dividend declared during the year
on each share of co!!on stoc1 (.int/ ;et inco!e increases retained earnings, whereas
dividends decrease retained earnings.)
Alternate Problems for use with Financial and Managerial Accounting, 1$e 1145
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Problem 11.,A
A"#l!ss o+ #" Equt! Secto" - More Com(rehe"s)e
6el'a 8orporation is a pu'licly owned co!pany. %he following infor!ation is e2cerpted fro! a
recent 'alance sheet. Dollar a!ounts (e2cept for per share a!ounts) are stated in thousands.
Stockholders e!uit"#
8onverti'le $1$ preferred stoc, no par
value, 1,000,000 shares authorizedB $>0,000 shares
issued and outstandingB $$00 per share li-uidation
preference (call price).............................................................................. $ >?,000
8o!!on stoc, par value $$B 50,000,000 shares
authorized................................................................................................. 5,$#0
0dditional paid4in capital.............................................................................. 9$,*>0
Aetained earnings........................................................................................... >9,$>0
%otal stocholders, e-uity........................................................................ $19$,?>0
Instructions
"ro! this infor!ation, co!pute answers to the following -uestions/
a. .ow !any shares of preferred stoc have 'een issued1
b. 3hat is the total a!ount of the annual dividends paid to preferred stocholders1
c. 3hat is the total a!ount of paid4in capital1
d. 3hat is the 'oo value per share of co!!on stoc1
e. Criefly e2plain the advantages and disadvantages to 6el'a of 'eing pu'licly owned
rather than operating as a closely held corporation.
$. 3hat is !eant 'y the ter! convertible used in the caption of the preferred stoc1 Is there
any !ore infor!ation that investors need to now to evaluate this conversion feature1
g. 0ssu!e that the preferred stoc currently is selling at $195 per share. Does this provide
a higher or lower dividend yield than a 9&, $50 par value preferred with a !aret price
of $5$ per share1 :how co!putations. E2plain why one preferred stoc !ight yield less
than another.
114# Alternate Problems for use with Financial and Managerial Accounting, 1$e
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Problem 11..A
P#r/ Book/ #"d M#rket 0#lues
6indless 8orporation is the producer of popular video ga!es. Aecently, an invest!ent service
pu'lished the following per4share a!ounts relating to the co!pany,s only class of stoc/
+ar value......................................................................................................... $ 0.01
Coo value (esti!ated).................................................................................. ?.00
6aret value.................................................................................................. ?$.00
Instructions
a. 3ithout reference to dollar a!ounts, e2plain the nature and significance of par value,
book value, and arket value.
b. 8o!!ent on the relationships, if any, a!ong the per4share accounts shown for the
co!pany. 3hat do these a!ounts i!ply a'out 6indless and its operations1 8o!!ent
on what these a!ounts i!ply a'out the security of creditors! clai!s against the co!pany.
Alternate Problems for use with Financial and Managerial Accounting, 1$e 1149
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Problem 11.1A
Re(ort"2 Stockholders Equt! 3th Tre#sur! Stock
Early in $000, :teel 8orporation was for!ed with authorization to issue 100,000 shares of $$ par
value co!!on stoc. 0ll shares were issued at a price of $1$ per share. %he corporation
reported net inco!e of $1>0,000 in $000, $#0,000 in $001, and $90,000 in $00$. ;o dividends
were declared in any of these three years.
In $001, the co!pany purchased $50,000 of its own shares in the open !aret. In $00$,
it reissued all of its treasury stoc for $#$,000.
Instructions
a. +repare the stocholder,s e-uity section of the 'alance sheet at Dece!'er *1, $00$.
Include a supporting schedule showing your co!putation of retained earrings at the
'alance sheet date. (.int/ Inco!e increases retained earnings.)
b. 0s of Dece!'er *1, co!pute the co!pany,s 'oo value per share of co!!on stoc.
c. E2plain how the treasury stoc transactions in $001 and $00$ were reported in the
co!pany,s state!ent of cash flows.
114? Alternate Problems for use with Financial and Managerial Accounting, 1$e
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Problem 11.4A
Re(ort"2 Stockholders Equt! 3th Tre#sur! Stock #"d Stock S(lts
Early in 199?, "ess Industries was for!ed with authorization to issue 100,000 shares of $$5 par
value co!!on stoc and $0,000 shares of $100 par value cu!ulative preferred stoc. During
199?, all the preferred stoc was issued at par, and #0,000 shares of co!!on stoc were sold for
$>0 per share. %he preferred stoc is entitled to a dividend e-ual to ?& of its par value 'efore
any dividends are paid on the co!!on stoc.
During its first five years of 'usiness (199? through $00$), the co!pany earned inco!e
totaling $>,500,000 and paid dividends of 95 cents per share each year on the co!!on stoc
outstanding.
=n <anuary $, $000, the co!pany purchased 1,000 shares of its own co!!on stoc in the
open !aret for $>5,000. =n <anuary $, $00$, it reissued 500 shares of this treasury stoc for
$$#,000. %he re!aining 500 were still held in treasury at Dece!'er *1, $00$.
Instructions
a. +repare the stocholder,s e-uity section of the 'alance sheet at Dece!'er *1, $00$.
Include a supporting schedule showing (1) your co!putation of any paid4in capital on
treasury stoc and ($) retained earrings at the 'alance sheet date. (.int/ Inco!e increases
retained earnings, whereas dividends reduce retained earnings. Dividends are not paid on
shares of stoc held in treasury.)
b. 0s of Dece!'er *1, co!pute the co!pany,s 'oo value per share of co!!on stoc.
(.int/ Coo value per share is co!puted only on the shares of stoc outstanding.)
c. 0t Dece!'er *1, $00$, shares of the co!pany,s co!!on stoc were trading at $5>.
E2plain what would have happened to the !aret price per share had the co!pany split
its stoc $4for41 at this date. 0lso e2plain what would have happened to the par value of
the co!!on stoc and to the nu!'er of co!!on shares outstanding.
Alternate Problems for use with Financial and Managerial Accounting, 1$e 1149
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11410 Alternate Problems for use with Financial and Managerial Accounting, 1$e
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