Chapter 11 - Solutions to Exercises - Series A

SOLUTIONS TO EXERCISES - SERIES A - CHAPTER 11

EXERCISE 11-1A

Transactions
Cash Acquired from $60,000
Owner
Revenues 40,000
Expenses 19,300
Withdrawals 5,000

Mark Pruitt Sole Proprietorship

Financial Statements
For the Year Ended December 31, 2011
Income Statement
Revenues $40,000
Expenses (19,300)
Net Income $20,700
Capital Statement
Beginning Capital Balance $ -0-
Plus: Capital Acquired from 60,000
Owner
Plus: Net Income 20,700
Less: Withdrawal by Owner (5,000)
Ending Capital Balance $75,700

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Chapter 11 - Solutions to Exercises - Series A

EXERCISE 11-1A (cont.)

Mark Pruitt Sole Proprietorship

Financial Statements
Balance Sheet
As of December 31, 2011
Assets
Cash $75,700
Total Assets $75,700

Liabilities $
-0-

Equity
Pruitt, Capital 75,700

Total Liabilities and Equity $75,700

Statement of Cash Flows
For the Year Ended December 31, 2011
Cash Flows From Operating
Activities:
Inflow from Revenues $40,000
Outflow for Expenses (19,300)
Net Cash Flow from Operating $20,700
Activities

Cash Flows From Investing -0-

Activities

Cash Flows From Financing

Activities:
Inflow from Owner $60,000
Outflow for Owner Withdrawals (5,000)
Net Cash Flow from Financing 55,000
Activities
Net Change in Cash 75,700
Plus: Beginning Cash Balance -0-
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Chapter 11 - Solutions to Exercises - Series A

Ending Cash Balance $75,700

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Chapter 11 - Solutions to Exercises - Series A

EXERCISE 11-2A

Transactions:
Cash Contributions
J. Harris $ 40%
56,000
P. Berryhill 84,000 60%
Total $140,00 100%
0
Revenues $
65,000
Expenses 32,000
Harris Withdrawal 2,000
Berryhill Withdrawal 3,000

HB Partnership
Financial Statements
For the Year Ended December 31, 2011
Income Statement
Revenues $65,000
Expenses (32,000)
Net Income $33,000
Capital Statement
Beginning Capital Balance $ -0-
Plus: Capital Acquired from 140,000
Owners
Plus: Net Income 33,000
Less: Withdrawals by Owners (5,000)
Ending Capital Balance $168,000

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Chapter 11 - Solutions to Exercises - Series A

EXERCISE 11-2A (cont.)

Prepared for the instructor’s use:

Analysis of Capital
Accounts:
Harris Berryhill Total
Beginning Capital $ $ -0- $
Balance -0- -0-
Investments 56,000 84,000 140,000
Net Income 33,000
J. Harris 40% 13,200
P. Berryhill 60% 19,800
Withdrawals (2,000) (3,000) (5,000)
Ending Capital Balances $67,20 $100,80 $168,00
0 0 0

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Chapter 11 - Solutions to Exercises - Series A

EXERCISE 11-2A (cont.)

HB Partnership
Financial Statements
Balance Sheet
As of December 31, 2011
Assets
Cash $168,00
0
Total Assets $168,00
0

Liabilities $ -0-

Equity
J. Harris, Capital $ 67,200
P. Berryhill, Capital 100,800
Total Equity 168,000
Total Liabilities and Equity $168,00
0
Statement of Cash Flows
For the Year Ended December 31, 2011
Cash Flows From Operating
Activities:
Inflow from Revenues $
65,000
Outflow for Expenses (32,000)
Net Cash Flow from Operating $33,000
Activities
Cash Flows From Investing -0-
Activities

Cash Flows From Financing

Activities:
Inflow from Partners $140,00
0

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Chapter 11 - Solutions to Exercises - Series A

Outflow for Partners’ (5,000)

Withdrawals
Net Cash Flow from Financing 135,000
Activities
Net Change in Cash 168,000
Plus: Beginning Cash Balance -0-
Ending Cash Balance $168,00
0

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Chapter 11 - Solutions to Exercises - Series A

EXERCISE 11-3A

Transactions:
Issued 5,000 shares of $10 par stock $90,000
@ $18
Revenues 63,000
Expenses 41,000
Dividends Paid 4,000

Morris Corporation
Financial Statements
For the Year Ended December 31, 2011
Income Statement
Revenues $63,000
Expenses (41,000)
Net Income $22,000
Statement of Changes in Stockholders’ Equity
Beginning Common Stock $ -0-
Plus: Issuance of Common 90,000
Stock
Ending Common Stock $ 90,000
Beginning Retained Earnings $ -0-
Plus: Net Income 22,000
Less: Dividends (4,000)
Ending Retained Earnings 18,000
Total Stockholders’ Equity $108,000

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Chapter 11 - Solutions to Exercises - Series A

EXERCISE 11-3A (cont.)

Morris Corporation
Financial Statements
Balance Sheet
As of December 31, 2011
Assets
Cash $108,000
Total Assets $108,000
Liabilities $ -0-
Stockholders’ Equity
Common Stock, $10 par value,
5,000 shares issued and $ 50,000
outstanding
Paid-In Capital in Excess of Par 40,000
Total Paid-In Capital 90,000
Retained Earnings 18,000
Total Liabilities and Stockholders’ $108,000
Equity
Statement of Cash Flows
For the Year Ended December 31, 2011
Cash Flows From Operating
Activities:
Inflow from Revenues $63,000
Outflow for Expenses (41,000)
Net Cash Flow from Operating $ 22,000
Activities
Cash Flows From Investing -0-
Activities
Cash Flows From Financing
Activities:
Inflow from Issue of Stock $90,000
Outflow for Dividends (4,000)
Net Cash Flow from Financing 86,000
Activities

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Chapter 11 - Solutions to Exercises - Series A

Net Change in Cash 108,000

Plus: Beginning Cash Balance -0-
Ending Cash Balance $108,000

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Chapter 11 - Solutions to Exercises - Series A

EXERCISE 11-4A
a.
Balance Sheet Income Statement Stmt. of
Eve Assets = Lia + Stkholders’ Rev − Ex = Net Cash Flow
nt b Equity . p. Inc.
Cash = + C. Stk. + PIC
Exc.
3/1 = NA + 50,000 + 70,000 NA − NA = NA 120,000
120,00 FA
0
5/2 = NA + 100,00 + 300,00 NA − NA = NA 400,000
400,00 0 0 FA
0

b.
Common Stock:
10,000 shares x $5= $ 50,000
20,000 shares x $5= 100,000
Total $150,000

c.
Paid-In Capital in Excess of
Par
10,000 shares x ($12 − $ 70,000
$5)=
20,000 shares x ($20 − 300,000
$5)=
Total $370,000

d. Total Paid-In Capital:

Common Stock $150,000
Paid-In Capital in Excess of Par 370,000
Total $520,000

e. Total Assets: Cash $520,000

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Chapter 11 - Solutions to Exercises - Series A

f.
General Journal
Dat Account Titles Debit Credit
e
3/1 Cash 120,000
Common Stock 50,000
Paid-In Capital in Excess of 70,000
Par
5/2 Cash 400,000
Common Stock 100,000
Paid-In Capital in Excess of 300,000
Par

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Chapter 11 - Solutions to Exercises - Series A

EXERCISE 11-5A
a.
General Journal
Even Account Titles Debit Credit
t
1. Cash (20,000 x $15) 300,000
Common Stock, $10 par 200,000
Paid-In Capital in Excess of 100,000
Par, CS
2. Cash (10,000 x $30) 300,000
Preferred Stock, $25 stated 250,000
value
Paid-In Capital in Excess of 50,000
SV, PS
3. Cash (50,000 x $18) 900,000
Common Stock, $10 par 500,000
Paid-In Capital in Excess of 400,000
Par, CS

b.
Stockholders’ Equity:
Preferred Stock, $25 stated value, 4%
cumulative class A, 50,000 shares
authorized, 10,000 shares issued and $ 250,000
outstanding
Common Stock, $10 par value, 400,000
shares authorized, 70,000 shares issued 700,000
and outstanding
Paid-In Capital in Excess of SV, Preferred 50,000
Stock
Paid-In Capital in Excess of Par, Common 500,000
Stock
Retained Earnings -0-
Total Stockholders’ Equity $1,500,00
0

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EXERCISE 11-6A

a.
Balance Sheet Income Statement Stmt. of
Even Assets = Stockholders’ Equity Rev − Exp = Net Cash Flow
t . . Inc.
Pref. No-Par PIC in
Cash = Stock + C. + Excess
Stock

1. = NA + 100,00 + NA NA − NA = NA 100,000 FA
100,00 0
0
2. = + NA + 20,00 NA − NA = NA 120,000 FA
120,00 100,00 0
0 0

b.
General Journal
Even Account Titles Debit Credit
t
1. Cash 100,000
Common Stock, No Par 100,000
2. Cash 120,000
Preferred Stock, $50 par 100,000
value
Paid-In Capital in Excess of 20,000
Par, PS

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Chapter 11 - Solutions to Exercises - Series A

EXERCISE 11-7A

a. 2,500 shares x $12 market value per share of stock =

$30,000

b.
Balance Sheet Income Statement Stmt. of
Even Assets = Stockholders’ Rev − Exp = Net Cash
t Equity . . Inc. Flows
Com.
Cash + Van = Stk. + PIC
Exc.

1. + NA = + 10,00 NA − NA = NA 60,000
60,00 50,000 0 FA
0 1

2. NA + 30,00 = + 5,000 NA − NA = NA NA
0 25,000
2

1
5,000 x $10 = $50,000
2
2,500 x $10 = $25,000

c.
Even Account Titles Debit Credit
t
1. Cash 60,000
Common Stock 50,000
Paid In Capital in Excess of 10,000
Par, CS
2. Van (2,500 shs. x $12) 30,000
Common Stock 25,000
Paid in Capital in Excess of 5,000
Par, CS

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Chapter 11 - Solutions to Exercises - Series A

EXERCISE 11-8A
a.
Graves Corporation
General Journal
Date Account Titles Debit Credit
1. Treasury Stock (2,000 x $40) 80,000
Cash 80,000
2. Cash (1,200 x $48) 57,600
Treasury Stock (1,200 x $40) 48,000
Paid-In Capital in Excess of 9,600
Cost, TS

b.
Treasury Stock
1. 80,000 2. 48,000
Bal. 32,000

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Chapter 11 - Solutions to Exercises - Series A

EXERCISE 11-9A

a. & b.
Common Stock Issued Outstandin
g
Beginning Number of Shares 2,000 2,000
Issued This Period 1,000 1,000
Repurchased as Treasury (200)
Stock
Resold Treasury Stock 50
Ending Number of Shares (b) (a) 2,850
3,000

c.
Smoot Corporation
General Journal
Date Account Titles Debit Credit
1. Cash (1,000 x $28) 28,000
Common Stock, $10 par 10,000
Paid-in Capital in Excess of Par, 18,000
CS
2. Treasury Stock (200 x $25) 5,000
Cash 5,000
3. Cash (50 x $26) 1,300
Treasury Stock (50 x $25) 1,250
Paid-In Capital in Excess of Cost, 50
TS

Cash Common Stock PIC in Exc. of Par,

CS
Bal. not Bal. Bal. 15,000
given 20,000
1. 28,000 2. 5,000 1. 10,000 1. 18,000
3. 1,300 Bal. Bal. 33,000
30,000
Bal.
unknown

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Chapter 11 - Solutions to Exercises - Series A

PIC in Excess of
Treasury Stock Cost, TS
2. 5,000 3. 1,250 3. 50
Bal. 3,750 Bal. 50

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Chapter 11 - Solutions to Exercises - Series A

EXERCISE 11-9A (cont.)

d.
Stockholders’ Equity
Common Stock, $10 par value,
10,000 shares authorized, 3,000
shares issued, and 2,850 shares $30,000
outstanding
Paid-In Capital in Excess of Par, 33,000
Common
Paid-In Capital in Excess of Cost, 50
TS
Total Paid-In Capital $63,050
Retained Earnings 65,000
Less: Treasury Stock (3,750)
Total Stockholders’ Equity $124,30
0

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Chapter 11 - Solutions to Exercises - Series A

EXERCISE 11-10A
a.
Balance Sheet Income Statement Statement
Com. of
Dat Assets = Liab. + Stk. + Ret. Rev − Exp = Net Cash
e Ear. . Inc. Flows
10/1 NA = 60,000 + NA + (60,000 NA − NA = NA NA
)
11/2 NA = NA + NA + NA NA − NA = NA NA
0
12/3 (60,00 = (60,00 + NA + NA NA − NA = NA (60,000)
0 0) 0) FA

b.
Smart Corporation
General Journal
Date Account Titles Debit Credit
10/1/11 Dividends 60,000
Dividends Payable 60,000
11/20/1 No Entry
1
12/30/1 Dividends Payable 60,000
1
Cash 60,000
12/31/1 Retained Earnings (closing 60,000
1 entry)
Dividends 60,000
Note: Closing entry is not required in the problem.

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Chapter 11 - Solutions to Exercises - Series A

EXERCISE 11-11A

Computation of Preferred Dividends:

Number of Total
Dividen Shares Preferred
Par x Dividend = d per x Outstandin = Dividends for
% Share g Year

$50 x 5% = $2.50 x 5,000 = $12,500

a. Dividend arrearage as of January 1, 2012: $12,500 (one

year)

b.
Dist. to
Shareholders
Amount Preferre Commo
d n
Total Dividend $40,000
Declared
2011 Arrearage (12,500) $12,500
2012 Preferred (12,500) 12,500
Dividends
Available for Common 15,000
Shs.
Distributed to (15,000) $15,000
Common
Total Distribution $25,000 $15,000

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Chapter 11 - Solutions to Exercises - Series A

EXERCISE 11-12A

a.

Computation of Dividends to Be Paid:

Preferred $100 par value x 5% x 5,000 $25,000
Stock shares=
Common $1 x 100,000 shares = 100,000
Stock

Total $125,000
Dividend

b.
Date Account Titles Debit Credit
5/10/11 Dividends 125,000
Dividends Payable 125,000
5/30/11 No Entry
6/15/11 Dividends Payable 125,000
Cash 125,000
12/31/1 Retained Earnings 125,000
1
(Closing Dividends 125,000
Entry)
Note: Closing entry is not required in the problem.

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Chapter 11 - Solutions to Exercises - Series A

EXERCISE 11-13A

a. Distribution of Dividend:

Distributed to
Shareholders
Preferred Common
Total Dividend $100,00
Declared 0
Preferred Arrearage* (40,000) $40,000
Current Preferred (40,000) 40,000
Dividend*
Available for Common 20,000
Distributed to (20,000) $20,000
Common
Total $80,000 $20,000

*$100 x 4% x 10,000 Shares = $40,000

b.
Wu Corp.
General Journal for 2011
Date Account Titles Debit Credit
Feb. 1 Dividends 100,000
Dividends Payable 100,000
Mar. No Entry
10
Mar. Dividends Payable 100,000
31
Cash 100,000
Closing Entry
Dec. Retained Earnings 100,000
31
Dividends 100,000
Note: Closing entry is not required in the problem.

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EXERCISE 11-14A

a. (30,000 shares x .04) = 1,200 shares; 1,200 shares x $25 =

$30,000

b.

Balance Sheet Income Statement Stmt. of

Assets =Liab + Stockholders’ Equity Rev. − Exp. = Net Inc. Cash
Flows
Com. + PIC. + Ret.
Stk. Ex. Ear.

NA = NA + 12,000 +18,000 + (30,000 NA − NA = NA NA

)

c.
General Journal
Account Titles Debit Credit
Retained Earnings 30,000
Common Stock, $10 par 12,000
Paid-In Capital in Excess of 18,000
Par, CS

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Chapter 11 - Solutions to Exercises - Series A

EXERCISE 11-15A

a. No formal entry would be made in the accounting records.

A memo entry would indicate the number of shares had
doubled and the par value had been reduced by one-half.

b. 300,000 shares x 2 = 600,000 total shares outstanding

$10 par value ÷ 2 = $5 new par value

c. Theoretically, the market value per share would be

reduced to $90 ($180 ÷ 2) after the split. However, if this
is perceived as a good move by the company, the price
per share may not fall that far, ending at something over
$90.

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Chapter 11 - Solutions to Exercises - Series A

EXERCISE 11-16A

a. The price per share of Mighty Drugs should increase

substantially. This increase is a result of the expectation of
future profits. The approval of the new drug signals that
profits should be substantially higher in the future.

b. The balance sheet will not be affected by the

announcements.

c. The income statement will not be affected when the

announcements are made. Only when revenues increase
will net income be affected.

d. The statement of cash flows will not be affected by the

announcements.

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Chapter 11 - Solutions to Exercises - Series A

EXERCISE 11-17A

Computation of Price Earnings Ratio:

1. Compute Earnings per Share:

Net Income ÷ Number of Common Shares Outstanding

2. Compute Price Earnings Ratio:

Selling Price per Share ÷ Earnings per Share

a. Carabella, Inc.:

Earnings per Share (EPS):

Net Income ÷ Common Shs. Outst. = EPS
$120,000 ÷ 50,000 = $2.40

Price/Earnings Ratio:
Selling Price/Share ÷ Earnings per Share = P/E Ratio
$36.00 ÷ $2.40 = 15

Yamhill, Inc.:

Earnings Per Share (EPS):

Net Income ÷ Common Shs. Outst. = EPS
$140,000 ÷ 50,000 = 2.80

Price/Earnings Ratio:
Selling Price/Share ÷ Earnings per Share = P/E Ratio
$31.00 ÷ $2.80 = 11

b. Carabella appears to have greater potential for growth. Investors are

willing to pay more for today’s earnings because they believe that
tomorrow’s earnings will be higher.

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Chapter 11 - Solutions to Exercises - Series A

EXERCISE 11-18A

The memo should contain a defination of the price-earnings ratio. It is one

of the most commonly reported measures of a company’s value. It is
computed by dividing the market price per share by the earnings per share.
A high P/E ratio may mean that investors believe that a company’s
earnings are going to grow rapidly. A high-growth company will generaly
have a higher P/E ratio than a low growth company.

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Chapter 11 - Solutions to Exercises - Series A

SOLUTIONS TO PROBLEMS - SERIES A - CHAPTER 11

PROBLEM 11-19A

Transactions
Cash Acquired from $160,000
Owners
Revenues 90,000
Expenses 65,000
Withdrawals/Distributio 10,000
ns

a. Sole Proprietorship
Ja-San Company
Financial Statements
For the Year Ended December 31, 2011
Income Statement
Revenues $ 90,000
Expenses (65,000)
Net Income $ 25,000
Capital Statement
Beginning Capital Balance $
-0-
Plus: Capital Acquired from 160,000
Owner
Plus: Net Income 25,000
Less: Withdrawal by Owner (10,000)
Ending Capital Balance $175,000

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Chapter 11 - Solutions to Exercises - Series A

PROBLEM 11-19A a. (cont.)

Ja-San Company
Financial Statements
Balance Sheet
As of December 31, 2011
Assets
Cash $175,000
Total Assets $175,00
0

Liabilities $
-0-

Equity
Sanford, Capital 175,000

Total Liabilities and Equity $175,00

0
Statement of Cash Flows
For the Year Ended December 31, 2011
Cash Flows From Operating
Activities:
Inflow from Revenues $ 90,000
Outflow for Expenses (65,000)
Net Cash Flow from Operating $
Activities 25,000

Cash Flows From Investing -0-

Activities

Cash Flows From Financing

Activities:
Inflow from Owner $160,000
Outflow for Owner Withdrawals (10,000)
Net Cash Flow from Financing 150,000
Activities

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Chapter 11 - Solutions to Exercises - Series A

Net Change in Cash 175,000

Plus: Beginning Cash Balance -0-
Ending Cash Balance $175,00
0

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PROBLEM 11-19A (cont.)

b. Partnership
Ja-San Company
Financial Statements
For the Year Ended December 31, 2011
Income Statement
Revenues $90,000
Expenses (65,000)
Net Income $25,000
Capital Statement
Beginning Capital Balance $ -0-
Plus: Capital Acquired from 160,000
Owners
Plus: Net Income 25,000
Less: Withdrawals by Owners (10,000)
Ending Capital Balance $175,000

Prepared for the instructor’s use:

Analysis of Capital
Accounts:
James Sanders Total
Beginning Capital $ -0- $ -0- $ -0-
Balance
Investments 100,000 60,000 160,000
Net Income* 10,000 15,000 25,000
Withdrawals (7,000) (3,000) (10,000)
Ending Capital Balances $103,000 $72,000 $175,000

*James: $25,000 x 40% = $10,000

Sanders: $25,000 x 60% = $15,000

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Chapter 11 - Solutions to Exercises - Series A

PROBLEM 11-19A b. (cont.)

Ja-San Company
Financial Statements
Balance Sheet
As of December 31, 2011
Assets
Cash $175,00
0
Total Assets $175,000

Liabilities $ -0-

Equity
Kim James, Capital 103,000
Mary Sanders, Capital 72,000

Total Liabilities and Equity $175,000

Statement of Cash Flows
For the Year Ended December 31, 2011
Cash Flows From Operating
Activities:
Inflow from Revenues $
90,000
Outflow for Expenses (65,000)
Net Cash Flow from Operating $ 25,000
Activities

Cash Flows From Investing -0-

Activities

Cash Flows From Financing

Activities:
Inflow from Partners $160,00
0
Outflow for Partners’ (10,000)
Withdrawals

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Chapter 11 - Solutions to Exercises - Series A

Net Cash Flow from Financing 150,000

Activities

Net Change in Cash 175,000

Plus: Beginning Cash Balance -0-
Ending Cash Balance $175,000

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Chapter 11 - Solutions to Exercises - Series A

PROBLEM 11-19A (cont.)

c. Corporation
Ja-San Inc.
Financial Statements
For the Year Ended December 31, 2011
Income Statement
Revenues $90,000
Expenses (65,000)
Net Income $25,000
Statement of Changes in Stockholders’ Equity
Beginning Common Stock $ -0-
Plus: Issuance of Common 160,000
Stock
Ending Common Stock $160,00
0
Beginning Retained Earnings -0-
Plus: Net Income 25,000
Less: Dividends (10,000)
Ending Retained Earnings 15,000
Total Stockholders’ Equity $175,00
0

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Chapter 11 - Solutions to Exercises - Series A

PROBLEM 11-19A c. (cont.)

Ja-San Inc.
Financial Statements
Balance Sheet
As of December 31, 2011
Assets
Cash $175,000
Total Assets $175,000
Liabilities $ -0-
Stockholders’ Equity
Common Stock, $10 par value,
10,000 shares issued and $100,000
outstanding
Paid-In Capital in Excess of Par 60,000
Total Paid-In Capital 160,000
Retained Earnings 15,000
Total Liabilities and Stockholders’ $175,000
Equity
Statement of Cash Flows
For the Year Ended December 31, 2011
Cash Flows From Operating
Activities:
Inflow from Revenues $90,000
Outflow for Expenses (65,000)
Net Cash Flow from Operating $ 25,000
Activities
Cash Flows From Investing -0-
Activities
Cash Flows From Financing
Activities:
Inflow from Issue of Stock 160,000
Outflow for Dividends (10,000)
Net Cash Flow from Financing 150,000

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Activities
Net Change in Cash 175,000
Plus: Beginning Cash Balance -0-
Ending Cash Balance $175,000

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PROBLEM 11-20A

Note: The memo incorporates a schedule showing the after-

tax cash flows under each form of ownership and discusses
LLCs.

Memo
To: Owners of Bates and Associates
From: John Q CPA
Date: X/X/20XX
Re: Forms of business ownership

As requested, this memo describes the advantages and

disadvantages of the partnership versus corporate 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

The most important of these advantages and disadvantages

relate to taxation and owner’s liability.

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PROBLEM 11-20A (cont.)

The schedule below illustrates the after-tax cash flows under

each form:

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 (35%) (70,000) (52,500)
After-tax cash flow $130,000 $ 97,500
After-tax cash flow $130,000 ÷ 5 = $97,500 ÷ 5 =
available to each $26,000 $19,500
investor
($70,000 ÷ $200,000) ($102,500 ÷
Effective tax rate =35% $200,000)
=51.25%

The corporate form limits the potential liability of owners.

Creditors of partnerships may lay claim to the personal assets
of the owners as payment of company debts. The corporation,
as a separate legal entity, is responsible for its own debts.
Owners risk only the amount of their investment.

Limited liability companies (LLCs) offer many of the benefits

associated with corporate ownership, yet income is taxed like
partnerships. Thus, the burden of both double taxation and
personal liability for partnership debts are avoided.

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Chapter 11 - Solutions to Exercises - Series A

PROBLEM 11-21A

a.

Date Account Titles Debit Credit

1. Treasury Stock (1,000 x $18) 18,000
Cash 18,000
2. Cash (600 x $20) 12,000
Treasury Stock (600 x $18) 10,800
PIC in Excess of Cost, TS 1,200
3. Cash 64,000
Service Revenue 64,000
4. Operating Expenses 38,000
Cash 38,000

b.

Stockholders’ Equity
Common Stock, $10 par value, 50,000
shares authorized, 30,000 shares
issued, and 29,600 shares outstanding $300,000
Paid-In Capital in Excess of Par−Common 150,000
Stock
Paid-In Capital in Excess of 1,200
Cost−Treasury Stock
Total Paid-In Capital $451,200
Retained Earnings1 126,000
Less: Treasury Stock (400 shares) (7,200)
Total Stockholders’ Equity $570,000
1
Beginning Retained Earnings$100,000
2011 Revenues 64,000
2011 Expenses (38,000)
Ending Retained Earnings $126,000

11-49
 Chapter 11 - Solutions to Exercises - Series A

PROBLEM 11-22A

a.
Chen Corp.
Statements Model For 2011

Balance Sheet Income Statement Statement

of
Event Assets = Stockholders’ Equity Rev. − Exp. = Net Inc. Cash Flows
Com. PIC in PIC in
Pfd. + Stk. + Exc. PS + Exc. CS +Ret.
Stk. Earn
1. 600,000 NA 400,000 NA 200,00 NA NA NA NA 600,000 FA
0
2. 255,000 250,00 NA 5,000 NA NA NA NA NA 255,000 FA
0
3. (12,500) NA NA NA NA (12,500) NA NA NA (12,500) FA
1

4. NA NA 20,000 NA 20,000 (40,000) NA NA NA NA

2

5. no NA NA NA NA NA NA NA NA NA
memo entry3
6a. 210,000 NA NA NA NA 210,000 210,00 NA 210,000 210,000 OA
0
6b. (140,00 NA NA NA NA (140,00 NA 140,00 (140,00 (140,000)
0) 0) 0 0) OA

Totals 912,500 = 250,00 +420,000 + 5,000 + 220,00 + 17,500 210,00 − 140,00 = 70,000 912,500 NC
0 0 0 0

1
$50 x 5% = $2.50; $2.50 x 5,000 = $12,500
2
20,000 x 5%=1,000 shares; 1,000 shares x $40 = $40,000
3
Memo: 2:1 stock split reduces common’s par to $10 and increases number of shares outstanding
to 42,000

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Chapter 11 - Solutions to Exercises - Series A

Note: Entry 7, the closing entry does not affect the horizontal statements model.

11-51
Chapter 11 - Solutions to Exercises - Series A

PROBLEM 11-22A (cont.)

b.
General Journal
Date Account Titles Debit Credit
1. Cash (20,000 x $30) 600,000
Common Stock, $20 par 400,000
Paid-in Capital in Excess of 200,000
Par, CS
2. Cash (5,000 x $51) 255,000
Preferred Stock, $50 par 250,000
Paid-in Capital in Excess of 5,000
Par, PS
3. Dividends ($50 x 5% x 5,000) 12,500
Cash 12,500
4. Retained Earnings 40,000*
Common Stock, $20 Par 20,000
Paid-in Capital in Excess of 20,000
Par, CS
5. Chen’s declaration of a 2-for-1
stock split will replace the
21,000 shares of $20 par
common stock with 42,000
shares of $10 par common stock.
6a. Cash 210,000
Service Revenue 210,000
6b. Operating Expenses 140,000
Cash 140,000
7. Service Revenue 210,000
Operating Expenses 140,000
Dividends 12,500
Retained Earnings 57,500

*20,000 shares x 5% = 1,000 shares; 1,000 shares x $40 per

share = $40,000

11-52
Chapter 11 - Solutions to Exercises - Series A

11-53
 Chapter 11 - Solutions to Exercises - Series A

PROBLEM 11-22A b. (cont.)

Chen Corp. T-Accounts

Cash Retained Earnings Dividends
1. 600,000 3. 12,500 4. 40,000 7. 57,500 3. 12,500 7. 12,500
2. 255,000 6b. 140,000 Bal. 17,500 Bal. -0-
6a. 210,000
Bal. 912,500 Service Revenue
Preferred Stock 7. 210,000 6a.
210,000
2. 250,000 Bal. -0-
Bal. 250,000
Operating Expenses
Common Stock 6b. 7. 140,000
140,000
1. 400,000 Bal. -0-
4. 20,000
Bal. 420,000

PIC in Exc. of Par

Pref. Stk
2. 5,000
Bal. 5,000

PIC in Exc. of Par

Com. Stk.
1. 200,000
4. 20,000
Bal. 220,000

11-54
Chapter 11 - Solutions to Exercises - Series A

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, 42,000 shares
issued and outstanding 420,000
Paid-In Capital in Excess of Par, 5,000
Preferred Stock
Paid-In Capital in Excess of Par, Common 220,000
Stock
Total Paid-In Capital $895,00
0
Retained Earnings 17,500
Total Stockholders’ Equity $912,50
0

11-55
Chapter 11 - Solutions to Exercises - Series A

PROBEM 11-23A

a.
General Journal
Date Account Titles Debit Credit
2011
Jan. 2 Cash (15,000 x $7) 105,000
Common Stock (15,000 x 75,000
$5)
PIC in Excess of Par, CS 30,000
Jan. Cash (2,000 x $110) 220,000
15
Preferred Stock (2,000 x 200,000
$100)
PIC in Excess of Par, PS 20,000
Feb. Cash (20,000 x $9) 180,000
14
Common Stock (20,000 x 100,000
$5)
PIC in Excess of Par, CS 80,000
Dec. Cash 310,000
31
Service Revenue 310,000
Dec. Operating Expenses 240,000
31
Cash 240,000
Dec. Dividends [2,000 x ($100 x 12,000
31 6%)]
Dividends Payable 12,000
Closing Entries
Dec. Service Revenue 310,000
31
Retained Earnings 310,000
Dec. Retained Earnings 240,000
31
11-56
Chapter 11 - Solutions to Exercises - Series A

Operating Expenses 240,000

Dec. Retained Earnings 12,000
31
Dividends 12,000

11-57
Chapter 11 - Solutions to Exercises - Series A

PROBLEM 11-23A a. (cont.)

General Journal
Date Account Titles Debit Credit
2012
Jan. Dividends Payable 12,000
31
Cash 12,000
Mar. 1 Cash (3,000 x $120) 360,000
Preferred Stock, $100 par 300,000
PIC in Excess of Par, PS 60,000
June 1 Treasury Stock (Common) (500 x 5,000
$10)
Cash 5,000
Dec. Cash 250,000
31
Service Revenue 250,000
Dec. Operating Expenses 175,000
31
Cash 175,000
Dec. Dividends 47,250*
31
Dividends Payable 47,250
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 47,250
31
Dividends 47,250

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Chapter 11 - Solutions to Exercises - Series A

*Preferred Stock: $100 x 6% x 5,000 shares =

$30,000
Common Stock: $.50 x 34,500 shares = 17,250
Total Dividend $47,250

11-59
 Chapter 11 - Solutions to Exercises - Series A

PROBLEM 11-23A a. (cont.)

Lane Corporation T-Accounts for 2011

Cash Dividends Payable Retained Earnings
2011 2011 2011
1/2 105,000 12/31 12/31 cl 240,000 cl 310,000
240,000 12,000
1/15 220,000 Bal. 12,000 cl 12,000
2/14 180,000 Bal. 58,000
12/31
310,000
Bal. 575,000 Preferred Stock
1/15
200,000
Bal. 200,000

Common Stock
1/2 75,000
2/14
100,000
Bal. 175,000

PIC in Exc. of Par Pref.

Stk.
1/15 20,000
Bal. 20,000

PIC in Exc. of Par Com.

Stk.
1/2 30,000
2/14 80,000
Bal. 110,000

Dividends
12/31 cl 12,000
12,000
Bal. -0-

Service Revenue
cl 310,000 12/31
310,000
Bal. -0-

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Chapter 11 - Solutions to Exercises - Series A

Operating Expenses
12/31 cl 240,000
240,000
Bal. -0-

11-61
 Chapter 11 - Solutions to Exercises - Series A

PROBLEM 11-23A a. (cont.)

Lane Corporation T-Accounts for 2012
Cash Dividends Payable Retained Earnings
Bal. 575,000 1/31 12,000 Bal. 12,000 Bal. 58,000
3/1 360,000 6/1 5,000 1/31 12/31 cl 175,000 cl 250,000
12,000 47,250
12/31 12/31 Bal. 47,250 cl 47,250
250,000 175,000
Bal. 993,000 Bal. 85,750

Preferred Stock
Bal. 200,000
3/1 300,000
Bal. 500,000

Common Stock
Bal. 175,000

PIC in Exc. of Par Pref.

Stk.
Bal. 20,000
3/1 60,000
Bal. 80,000

PIC in Exc. of Par Com.

Stk.
Bal. 110,000

Treasury Stock
6/1 5,000
Bal. 5,000

Dividends
12/31 cl 47,250
47,250
Bal. -0-

Service Revenue
cl 250,000 12/31
250,000
Bal. -0-

Operating Expenses
12/31 cl 175,000
175,000

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Chapter 11 - Solutions to Exercises - Series A

Bal. -0-

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Chapter 11 - Solutions to Exercises - Series A

PROBLEM 11-23A (cont.)

b.
2011
Stockholders’ Equity
Preferred Stock, $100 par value, 6%
cumulative, 20,000 shares authorized,
2,000 shares issued and outstanding $200,000
Common Stock, $5 par value, 100,000
shares authorized, 35,000 shares
issued and outstanding 175,000
Paid-In Capital in Excess of 20,000
Par−Preferred Stock
Paid-In Capital in Excess of 110,000
Par−Common Stock
Total Paid-In Capital 505,000
Retained Earnings 58,000
Total Stockholders’ Equity $563,00
0

11-64
Chapter 11 - Solutions to Exercises - Series A

PROBLEM 11-23A (cont.)

c.
Schedule provided for use of instructor.

Schedule of Number of
Shares of Common Stock
Shares Shares
Issued Outstandin
g
2011
Jan. 2 15,000 15,000
Feb. 14 20,000 20,000
Totals 35,000 35,000
2012
June 1 (500)
Totals 35,000 34,500

Shares issued and outstanding are the same for 2011.

However, for 2012, the 500 shares of treasury stock reduce
the number of outstanding shares. In 2012, there are 35,000
shares issued but only 34,500 outstanding.

11-65
Chapter 11 - Solutions to Exercises - Series A

PROBLEM 11-23A (cont.)

c.
Lane Corporation
Balance Sheet
As of December 31, 2012
Assets
Cash $993,000
Total Assets $993,000
Liabilities
Dividends Payable $ 47,250
Total Liabilities $ 47,250
Stockholders’ Equity
Preferred Stock, $100 par value, 6%
cumulative, 20,000 shares authorized,
5,000 shares issued and outstanding $500,000
Common Stock, $5 par value, 100,000
shares
authorized, 35,000 shares issued, 175,000
34,500
shares outstanding
Paid-In Capital in Excess of 80,000
Par−Preferred Stock
Paid-In Capital in Excess of 110,000
Par−Common Stock
Total Paid-In Capital 865,000
Retained Earnings 85,750
Less: Treasury Stock (5,000)
Total Stockholders’ Equity 945,750
Total Liabilities and Stockholders’ Equity $993,000

11-66
Chapter 11 - Solutions to Exercises - Series A

PROBLEM 11-24A a.
General Journal
Date Account Titles Debit Credit
1. Cash (20,000 x $10) 200,000
Common Stock, $10 par 200,000
2. Cash (2,000 x $32) 64,000
Preferred Stock, $30 stated 60,000
value
Paid-In Capital in Excess of 4,000
SV-PS
3. Treasury Stock (Common 7,500
Stock)
(500 x $15)
Cash 7,500
4. Dividends ($30 x 5% x 2,000) 3,000
Dividends Payable 3,000
5. Cash (300 x $18) 5,400
Treasury Stock (300 x $15) 4,500
PIC in Excess of Cost−TS 900
6. Dividends Payable 3,000
Cash 3,000
7. Cash (assumed cash) 75,000
Service Revenue 75,000
Operating Expenses 42,000
Cash (assumed cash) 42,000
Closing Entries
8. Service Revenue 75,000
Retained Earnings 75,000
Retained Earnings 42,000
Operating Expenses 42,000
Retained Earnings 3,000
Dividends 3,000
9. Retained Earnings 6,000
Appropriated Retained 6,000
11-67
Chapter 11 - Solutions to Exercises - Series A

Earnings

11-68
 Chapter 11 - Solutions to Exercises - Series A

PROBLEM 11-24A a. (cont.)

Midwest Corp. T-Accounts for 2012
Cash Dividends Payable Retained Earnings
1. 200,000 3. 7,500 6. 3,000 4. 3,000 cl 8. cl 8 75,000
45,000
2. 64,000 6. 3,000 Bal. -0- cl 9. 6,000
5. 5,400 7. 42,000 Bal. 24,000
7. 75,000
Bal. 291,900 Appropriated Retained
Earn.
cl 9. 6,000
Bal. 6,000
Preferred Stock
2. 60,000
Bal. 60,000

Common Stock
1. 200,000
Bal. 200,000

PIC in Exc. of SV Pref.

Stk.
2. 4,000
Bal. 4,000
PIC in Exc. of Cost TS
5. 900
Bal. 900
Treasury Stock
3. 7,500 5. 4,500
Bal. 3,000

Dividends
4. 3,000 cl 8. 3,000
Bal. -0-
Service Revenue
cl 8. 7. 75,000
75,000
Bal. -0-
Operating Expenses
7. 42,000 cl 8. 42,000
Bal. -0-

11-69
Chapter 11 - Solutions to Exercises - Series A

PROBLEM 11-24A (cont.)

b.

Stockholders’ Equity
Preferred Stock, $30 stated value, 2,000
shares issued and outstanding $ 60,000
Common Stock, $10 par value, 20,000
shares 200,000
issued, and 19,800 shares outstanding
Paid-In Capital in Excess of Stated Value 4,000
Pref. Stk.
Paid-In Capital in Excess of Cost, 900
Treasury Stk.
Total Paid-In Capital $264,90
0
Retained Earnings
Appropriated $ 6,000
Unappropriated1 24,000
Total Retained Earnings 30,000
Less: Treasury Stock (200 shares) (3,000)
Total Stockholders’ Equity $291,90
0
1
Service Revenue $75,000
Operating Expenses(42,000)
Dividends (3,000)
Appropriated (6,000)
Total $24,000

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Chapter 11 - Solutions to Exercises - Series A

PROBLEM 11-25A

a. $300,000 ÷ 30,000 shares = $10 per share

b. $10 par value per share x 6% = $.60 per share

c. Number of common shares outstanding = 49,000 (50,000

shares issued − 1,000 treasury stock)

d. $500,000 + $200,000 = $700,000;

$700,000 ÷ 50,000 shares = $14 per share

e. The market price of the common stock is $11 more than

the average issue price. There may be several reasons
why this increase in share price has occurred. One reason
is that investors anticipate above-average performance in
the future. Also, improvement in general economic
conditions can make the share price rise.

f. 1. 49,000 x 2 = 98,000 shares outstanding after the split.

2. No amount will be transferred from retained earnings.
3. Theoretically, the market price will be $12.50 ($25 ÷ 2).

11-71
Chapter 11 - Solutions to Exercises - Series A

PROBLEM 11-26A
Abbot, Inc.
Statements Model

Balance Sheet Income Statement Statement

of
Eve Asset = Liab. + S. Rev. − Exp. = Net Cash
nt s Equity Inc. Flows
1. + NA + NA NA NA + FA
2. + NA + NA NA NA + FA
3. *NA NA NA NA NA NA NA
4. + NA + NA NA NA + FA
5. NA NA +− NA NA NA NA
6. + NA + NA NA NA + FA
7. NA NA +− NA NA NA NA
8. − NA − NA NA NA − FA
9. NA + − NA NA NA NA
10. − − NA NA NA NA − FA

*No entry: memo record of change in par value and # of

shares

11-72