FinAcctg7SMCh09.docx
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FinAcctg7SMCh09.docx
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FinAcctg7SMCh09
Chapter9
Stockholders’Equity
ShortExercises
(5min.)S9-1
Corporation’sadvantages:
∙Continuouslifeandtransferabilityofownership
∙Limitedliabilityofthestockholders
Corporation’sdisadvantages:
∙Corporatetaxation
∙Governmentregulation
(5min.)S9-2
1.Thestockholdersholdultimatepowerinacorporation.
2.Thechairpersonoftheboardofdirectorsisusuallythemostpowerfulpersoninacorporation.TitleisCEO.
3.Thepresidentisinchargeofday-to-dayoperations.TitleisCOO.
4.Thechieffinancialofficerisinchargeofaccountingandfinance.TitleisCFO.
(5-10min.)S9-3
1.Thecommonstockholdersaretherealownersofacorporation
2.Preferredstockholdershavepriorityovercommonstockholdersin
(1)receiptofdividendsand
(2)receiptofassetsifthecorporationliquidates.
3.Commonstockholdersbenefitmorefromasuccessfulcorporationbecausethepreferredstockholders’dividendsarelimitedtoaspecifiedamount.Thecommonstockholderstakemorerisksotheirpotentialforgainsthroughanincreaseinthecompany’sstockpriceisunlimited.
(5-10min.)S9-4
The$61,938,000waspaid-incapital.Itwasnotaprofitandthereforehadnoeffectonnetincome.
Theparvalueofstockhasnoeffectontotalpaid-incapital.Totalpaid-incapitalisthetotalamountthatstockholdershaveinvestedin(paidinto)acorporation,includingtheparvalueofstockissuedplusanyadditionalpaid-incapital.
(10min.)S9-5
Millions
Hewlett-Packard:
Cash…………………………………………….
17,993
CommonStock…………………………….
27
AdditionalPaid-inCapital………………..
17,966
KrispyKremeDoughnuts:
Cash…………………………………………….
298
CommonStock…………………………….
298
(10min.)S9-6
CaseA—Issuestockandbuytheassetsinseparatetransactions:
Journal
DATE
ACCOUNTTITLESANDEXPLANATION
DEBIT
CREDIT
Cash………………………………………..
200,000
CommonStock(10,000×$5)…….....
50,000
Paid-inCapitalinExcessofPar……
150,000
Issuedstock.
Building……………………………………
160,000
Equipment…………………………………
40,000
Cash……………………………………..
200,000
Purchasedplantassets.
CaseB—Issuestocktoacquiretheassets:
Journal
DATE
ACCOUNTTITLESANDEXPLANATION
DEBIT
CREDIT
Building……………………………………
160,000
Equipment………………………………...
40,000
CommonStock(10,000×$5)……….
50,000
Paid-inCapitalinExcessofPar…...
150,000
Issuedstocktoacquirebuildingandequipment.
Thebalancesinallaccountsarethesame:
Building……………………………………
$160,000
Equipment……………………………….…
40,000
CommonStock…………………………...
50,000
Paid-inCapitalinExcessofPar………
150,000
(5-10min.)S9-7
Thousands
Stockholders’equity:
Commonstock,$.01par,600millionshares
issued……………………………………………...
$6
Paid-incapitalinexcessofpar…………………..
198
Retainedearnings…………………………………..
646
Otherstockholders’equity………………………..
(29)
Totalstockholders’equity………………………...
$821
(10min.)S9-8
Thousands
a.
Totalrevenues………………………………………..
$1,390
Totalexpenses………………………………………..
805
Netincome………………………………….…………
$585
b.
Accountspayable……………………………………
$420
Othercurrentliabilities……………………………...
2,566
Long-termliabilities………………………………….
25
Totalliabilities………………………………………...
$3,011
c.
Totalliabilities(fromReq.b)……………………….
$3,011
Totalstockholders’equity(fromS9-7)…………..
821
Totalassets……………………………………………
$3,832
(5min.)S9-9
Journal
DATE
ACCOUNTTITLESANDEXPLANATION
DEBIT
CREDIT
Millions
TreasuryStock……………………………...
28
Cash………………………………………..
28
Cash…………………………………………..
7
TreasuryStock…………………………..
3
Paid-inCapitalfromTreasuryStock
Transactions…………………………..
4
Overall,stockholders’equitydecreasedby$21million($28millionpaidoutminus$7millionreceived).
(10min.)S9-10
Journal
DATE
ACCOUNTTITLESANDEXPLANATION
DEBIT
CREDIT
20X6
Dec.
15
RetainedEarnings
($100,000×.05)+(25,000×$.60)…..
20,000
DividendsPayable…………………
20,000
Declaredacashdividend……………
20X7
Jan.
4
DividendsPayable……………………
20,000
Cash………………………………….
20,000
Paidthecashdividend.
During20X6,RetainedEarningsincreasedby$50,000(netincomeof$70,000−dividendsof$20,000).
(5-10min.)S9-11
1.$150,000(100,000shares×$1.50pershare)
2.Preferred:
$150,000
Common:
$150,000
3.Cumulative,becauseitisnotlabelednoncumulative
4.Preferred:
$450,000($150,000×3)
Common:
$350,000($800,000−$450,000)
(5-10min.)S9-12
Req.1
Journal
DATE
ACCOUNTTITLESANDEXPLANATION
DEBIT
CREDIT
May
11
RetainedEarnings(60,000×.10×$11.50)……
69,000
CommonStock(60,000×.10×$1)………...
6,000
Paid-inCapitalinExcessofPar-Common..
63,000
Req.2
Noeffectontotalassets.
Noeffectontotalliabilities.
Noeffectontotalstockholders’equity.
(10min.)S9-13
Totalstockholders’equity……………………………..
$4,000,000
Less:
Preferredstock………………………………….
(330,000)
Preferreddividendsinarrears
(300,000×.08×3)……………………………
(72,000)
Commonequity………………………………………….
$3,598,000
Numberofcommonsharesoutstanding
(60,000−1,400)………………………………………..
÷58,600
Bookvaluepershareofcommonstock…………….
$61.40
(5-10min.)S9-14
(a)
Rateofreturn
ontotal
assets
=
Netincome+Interestexpense
Averagetotalasssets
(b)
Rateofreturn
oncommon
=
Netincome−Preferreddividends
stockholders'
Averagecommonstockholders’equity
equity
1.Creditorshaveloanedmoneytothecompanyandearninterest.Stockholdershaveinvestedinthecorporation’sstockandthusownthecompany’snetincome.Thesumofinterestexpenseplusnetincomeisthereturntothetwogroupsthathavefinancedthecompany’sassets.
2.Preferredstockholdershavethefirstclaimtothecompany’snetincomethroughpreferreddividends.Therefore,preferreddividendsaresubtractedfromnetincometocomputeROE.
(10-15min.)S9-15
Rateofreturn
ontotal
assets
NetInterest
=
income+expense
=
¥124+¥29
Averagetotalassets
(¥9,499+¥10,608)/2
=
¥153
=
1.5%
¥10,054
Note:
10%isconsideredgoodinmostindustries.Therefore,Sony’s1.5%returnonassetsisveryweak.
Rateofreturn
NetPreferred
oncommon
=
income−dividends
=
¥124−¥0
stockholders’
Averagecommon
(¥3,204+¥2,870)/2
equity
stockholders’equity
=
¥124
=
4.1%
¥3,037
Note:
15%isconsideredgoodinmostindustries,soSony’sreturnonequityisveryweak.
(5-10min.)S9-16
Billions
Cashflowsfromfinancingactivities:
Paidofflong-termnotespayable…………………….
$(2.7)
Issuedcommonstock………………………………….
1.2
Purchasedtreasurystock……………………………..
(3.0)
Paidcashdividends……………………………………
(1.9)
Exercises
(5-10min.)E9-17
DATE:
_____________
TO:
LanceBrownandMonicaKobelsky
FROM:
StudentName
RE:
Stepsinformingacorporation
Thefirststepinorganizingacorporationistoobtainacharterfromthestate.Thecharterauthorizesthecorporationtoissueacertainnumberofsharesofstocktotheownersofthebusiness,whoarecalledstockholders.Theincorporators(BrownandKobelsky)willneedasetofbylawstodeterminehowthecorporationistobegovernedinternally.Thestockholderswillelectaboardofdirectorswhointurnappointofficerstomanagethecorporationonaday-to-daybasis.
Studentresponsesmayvary.
(10-15min.)E9-18
Req.1
Journal
DATE
ACCOUNTTITLESANDEXPLANATION
DEBIT
CREDIT
July
19
Cash(10,000×$6.50)…………………
65,000
CommonStock(10,000×$2.50)
25,000
Paid-inCapitalinExcessof
Par-Common
40,000
Oct.
3
Cash
50,000
PreferredStock
50,000
11
Inventory
11,000
Equipment
8,500
CommonStock(3,300×$2.50)
8,250
Paid-inCapitalinExcessof
Par-Common
11,250
Req.2
Stockholders’equity:
Preferredstock,$1.50,nopar
5,000sharesauthorized,500sharesissued………
$50,000
Commonstock,$2.50par,
100,000sharesauthorized,13,300sharesissued…
33,250
Paid-incapitalinexcessofpar-common
($40,000+$11,250)……………………………………….
51,250
Retainedearnings(deficit)………………………….……
(42,000)
Totalstockholders’equity……………………….……
$92,500
(10-15min.)E9-19
Stockholders’Equity
Preferredstock,$4.50no-par,5,000shares
authorized,300sharesissued
$20,000
Commonstock,$1par,10,000sharesauthorized,
4,000sharesissued
4,000
Paid-incapitalinexcessofpar-common
70,000*
Retainedearnings
49,000
Totalstockholders’equity
$143,000
_____
*Computation:
June23:
1,000shares×($16−$1)=…………………………….
$15,000
July12:
$15,000+$43,000−(3,000shares×$1.00)=……….
55,000
$70,000
Journalentries(notrequired):
June
23
Cash……………………………………...
16,000
CommonStock
1,000
Paid-inCapitalinExcessofPar…
15,000
July
2
Cash
20,000
PreferredStock
20,000
12
Inventory
15,000
Equipment
43,000
CommonStock
3,000
Paid-inCapitalinExcessofPar…
55,000
(10min.)E9-20
Paid-incapitalconsistsof:
Preferredequit
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