Chapter 11 Solution of fundamental of financial accouting by EDMONDS (4th edition)

ANSWERS TO QUESTIONS - CHAPTER 11

1. The three major forms of business organizations are the sole proprietorship, the partnership, and the corporation.

The sole proprietorship is a business owned by one individual.

The partnership is a business that is owned by two or more persons with the intent to make a profit.

The corporation is a legal entity that is organized according to the laws of the state in which it is formed. The business organization is separate from its owners.

2. The sole proprietorship is formed when an individual decides to engage in some activity that provides goods or services, with the intent of making a profit.

3. The partnership agreement is a legal agreement that defines the responsibilities of each partner and specifies the division of profits and losses. In order to form a partnership, there must be some type of agreement. It can simply be the agreement between parties to perform certain duties or make certain contributions of resources or services. While a written agreement is not required for legal purposes, a written document reduces the chance for a misunderstanding.

4. The phrase separate legal entity simply means that the business organization operates separately from its owners. The corporation is referred to as a "separate legal entity" and conducts business with the same rights and responsibilities as a person.

5. The articles of incorporation constitute a legal document that is filed with the appropriate state agency requesting the official formation of a corporation. The articles of incorporation generally set forth the name of the corporation, the proposed date of incorporation, the purpose for which the corporation is formed, the

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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.

6. The stock certificate is issued as evidence of ownership in a corporation and represents a certain proportionate share of the business ownership.

7. The stock market crash of 1929 and the subsequent economic depression led to the passage of the Securities and Exchange Acts of 1933 and 1934. The acts were passed to regulate the issuance of stock and govern exchanges of publicly traded stock. A part of this regulation extends to the establishment of certain accounting policies for companies listed on the stock exchanges (publicly traded stock).

8. The corporate form of business has both advantages and disadvantages.Advantages: (1) Limited liability. Owners are not held personally responsible for the actions of the corporation. Generally, the maximum amount an owner can lose is limited to the amount of the investment.(2) Continuity of existence. Corporations do not cease to exist when an owner dies, disposes of his interest, retires, etc.(3) Free transferability of ownership interest. An owner can readily sell or transfer an interest to another party without interfering with the corporation's business.(4) Ease of raising capital. It is generally easier to attract many small investors rather than one or two investors willing to invest large sums of money or assets in one business.

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.

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(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.

9. The limited liability company is a relatively new organizational form in the United States and operates similar to a partnership in that income is taxed at the owner level. That is, the limited liability company does not pay tax, but the owners must pay tax on company profits. It is similar to a corporation in that the owners have limited personal liability similar to a corporation. The personal assets of the owners are protected from business creditors.

10. The term double taxation as it refers to a corporation means that earnings are taxed at both the corporate level and the shareholder level when earnings are distributed in the form of dividends. For example, assume JCL, Inc. had taxable income of $100,000 and distributed $50,000 of the earnings to the shareholders as dividends. The corporation would pay tax on the $100,000 at corporate income tax rates, and the shareholders would pay tax on the $50,000 at each individual shareholder's income tax rate. Consequently, $50,000 of the income from the corporation would be taxed twice.

11. Contributed capital is the capital that is acquired by the corporation from owners of the corporation. For example, the sale of stock to an investor is a type of contributed capital.Retained earnings is the capital of a corporation that has been generated through the earnings process of a corporation and kept in the corporation (i.e., not distributed to owners).

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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.

13. Because corporations can be owned by millions of individuals, they are able to pool the resources of many individuals which permits access to billions of dollars of capital. Proprietorships and partnerships are bound by the financial condition of a few, private investors.

14. a. Legal capital: Par value multiplied by the number of shares issued. This represents the minimum amount of assets that should be maintained as a protection for creditors.

b. Par value of stock: An arbitrary value that is assigned to a share of stock usually at the time of incorporation. Par value, historically, has represented the maximum liability of the investor.

c. Stated value of stock: An arbitrary value that is assigned to a share of stock by the board of directors. It has little relevance to investors or creditors.

d. Market value of stock: The price that must be paid to purchase a share of stock.

e. Book value of stock: The amount of equity of one share of stock, i.e., (assets liabilities) divided by the number of shares of stock outstanding.

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f. Authorized stock: The number of shares that a corporation has been authorized by the state to issue.

g. Issued stock: Stock that has been sold to shareholders.

h. Outstanding stock: Issued stock that is owned by outside parties, i.e., stock that has been issued and not repurchased by the corporation.

i. Treasury stock: Previously issued stock that has been repurchased by the corporation.

j. Common stock: A class of stock that possesses certain rights usually not given to other classes of stock. These rights include the right to share in the distribution of profits, the right to share in the distribution of corporate assets upon liquidation, the right to vote on certain matters that affect the corporate charter, and the right to participate in the selection of directors for the corporation.

k. Preferred stock: A class of stock that is given preferential treatment over common shareholders in some matters, usually in the distribution of earnings. However, certain other shareholder rights may not be present; for instance, voting rights.

l. Dividends: Distributions of corporate profits to shareholders.

15. Cumulative preferred stock: A class of preferred stock for which the stipulated dividend, if not paid, accumulates from one year to the next. If a corporation does not pay a dividend one year, the unpaid dividend amount is carried forward and when dividends are paid, any unpaid portion of a past dividend (called dividends in arrears) is paid first, before any dividends may be paid on common stock.

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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.

18. The amount credited to the common stock account is equal to par value times the number of shares issued or $200,000 (10,000 x $20). The amount of cash received is $300,000 (10,000 x $30).

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.

20. A company will repurchase its own stock for a number of reasons. Some of the most common reasons include: (1) to reduce the number of shares outstanding and thus increase the earnings per share, (2) to accumulate stock to use for employee bonus plans, (3) to accumulate stock to be used in a merger or acquisition, (4) to avoid a hostile takeover, and (5) to keep the stock price high with active trading.

21. The purchase of treasury stock decreases total equity by debiting the cost of the treasury stock to a contra-equity account.

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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.

23. The declaration date is the date the dividend is officially declared by the corporation's board of directors. The declaration of the dividend creates a legal liability to pay the dividend. The record date is the date that establishes the ownership of the stock by specific shareholders to whom the dividends will be paid. Payment date is the date the dividend checks are actually written and mailed to the shareholders.

24. A stock dividend may be declared to give the shareholders some reward when the corporation does not have other assets to distribute. The stock dividend will give each shareholder additional shares in proportion to their stock ownership. After the stock dividend, each shareholder owns exactly the same proportion of the corporation as he owned before the dividend. The effect on the accounting equation is to transfer the amount of the stock dividend from retained earnings to contributed capital.

A stock split is a method used to lower the market price of a share of stock. A stock split replaces old shares with a proportionate number of new shares. For instance, in a three-for-one stock split, a shareholder that owns one share of stock would now own three shares; in addition, the par value is proportionately reduced.

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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.

26. The primary reason for declaring a stock split is to reduce the market value of stock by increasing the number of shares on the market. This makes the stock more affordable and may, therefore, increase demand for the stock.

27. In a stock split, the number of shares are increased according to the amount of the split and the par is reduced proportionately. In a five-for-one split, the new number of shares would be five times the old: 10,000 x 5 = 50,000. The par amount would be reduced to one fifth of the original amount: $20 ÷ 5 = $4.

28. When retained earnings are appropriated, cash in the same amount is not necessarily set aside. However, retained earnings that are appropriated are not available to be paid out in dividends.

29. Equity financing (i.e., capital acquired from owners) is the largest source of financing for most U.S. businesses.

30. Equity financing refers to capital acquired from owners; usually the term refers to issuance of stock.

Debt financing refers to borrowing in the form of notes and bonds payable.

31. A widely held corporation is one in which the stock is held by a large number of investors.

A closely held corporation is one in which ownership is concentrated in the hands of a few people.

32. In deciding whether to declare dividends, the board of directors must consider whether the corporation has sufficient cash to cover operating requirements and meet emergencies. The board may also wish to retain earnings

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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.

33. The price-earnings ratio is defined as:

Selling Price per Share Earnings per Share

This ratio provides insight into how analysts and investors view the future prospects of the company. A high price-earnings ratio indicates that investors are optimistic about the firm’s future.

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SOLUTIONS TO EXERCISES -SERIES A - CHAPTER 11

EXERCISE 11-1A

TransactionsCash Acquired from Owner

$50,000

Revenues 25,000Expenses 14,500Withdrawals 1,500

Edd Simms Sole ProprietorshipFinancial Statements

For the Year Ended December 31, 2005

Income Statement

Revenues $25,000

Expenses (14,500)

Net Income $10,500

Capital Statement

Beginning Capital Balance $ -0-

Plus: Capital Acquired from Owner

50,000

Plus: Net Income 10,500

Less: Withdrawal by Owner (1,500)

Ending Capital Balance $59,000

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EXERCISE 11-1A (cont.)

Edd Simms Sole ProprietorshipFinancial Statements


Balance Sheet

AssetsCash $59,000

Total Assets $59,000

Liabilities $ -0-

EquitySimms, Capital 59,000

Total Liabilities and Equity $59,000

Statement of Cash Flows

Cash Flows From Operating Activities:

Inflow from Revenues $25,000Outflow for Expenses (14,500)

Net Cash Flow from Operating Activities

$10,500

Cash Flows From Investing Activities

-0-

Cash Flows From Financing Activities:

Inflow from Owner 50,000Outflow for Owner Withdrawals (1,500)

Net Cash Flow from Financing Activities

48,500

Net Change in Cash 59,000Plus: Beginning Cash Balance -0-

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Ending Cash Balance $59,000

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EXERCISE 11-2A

Transactions:Cash Contributions

B. Bailey $ 40,000 35%R. Clark 75,000 65%Total $115,000

Revenues $ 75,000Expenses 36,000Bailey Withdrawal 1,000Clark Withdrawal 3,000

BC PartnershipFinancial Statements


Income Statement

Revenues $75,000

Expenses (36,000)

Net Income $39,000

Capital Statement


Plus: Capital Acquired from Owners

115,000


Less: Withdrawal by Owners (4,000)


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Prepared for the instructor’s use:

Analysis of Capital Accounts:

Bailey Clark TotalBeginning Capital Balance

$ -0-

$ -0-

$ -0-

Investments 40,000 75,000 115,000Net Income 39,000

B. Bailey 35% 13,650R. Clark 65% 25,350

Withdrawals (1,000) (3,000) (4,000)Ending Capital Balances $52,65

0$97,35

0$150,00

0

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BC PartnershipFinancial Statements


Balance Sheet

AssetsCash $150,00

0Total Assets $150,00

0

Liabilities $ -0-

EquityB. Bailey, Capital 52,650R. Clark, Capital 97,350

Total Equity 150,000






$39,000


-0-


Inflow from Partners 115,000Outflow for Partners’

Withdrawals(4,000)

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111,000

Net Change in Cash 150,000Plus: Beginning Cash Balance -0-Ending Cash Balance $150,00

0

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EXERCISE 11-3A

Transactions:Issued 2,000 shares of $10 par stock @ $22

$44,000

Revenues 46,000Expenses 34,000Dividends Paid 2,500

Hill CorporationFinancial Statements


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 Stock

44,000

Ending Common Stock $44,000

Beginning Retained Earnings -0-Plus: Net Income 12,000Less: Dividend Distributions (2,500)Ending Retained Earnings 9,500

Total Stockholders’ Equity $53,500

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Hill CorporationFinancial Statements


Balance Sheet

AssetsCash $53,500


Liabilities $ -0-

Stockholders’ EquityCommon Stock, $10 par value,2,000 shares issued and

outstanding$20,000

Paid-In Capital in Excess of Par 24,000Total Paid-In Capital 44,000

Retained Earnings 9,500

Total Liabilities and Stockholders’ Equity

$53,500





$12,000


-0-


Inflow from Sale of Stock 44,000

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Outflow for Dividends (2,500)Net Cash Flow from Financing Activities

41,500


0

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EXERCISE 11-4Aa.

Balance Sheet Income Statement Stmt. ofEvent

Assets = Liab

+ Stkholders’ Equity

Rev.

Exp.

= Net Inc.

Cash Flow

Cash = + C. Stk.

+ PIC Exc.

3/1120,000

= NA + 40,000

+ 80,000 NA NA = NA 120,000 FA

5/2330,000

= NA + 75,000

+ 255,000

NA NA = NA 330,000 FA

b.Common Stock:

8,000 shs. x $5= $ 40,00015,000 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 $5)=

255,000

Total $335,000

d. Total Paid-In Capital:Common Stock $115,000Paid-In Capital in Excess of Par 335,000Total $450,000

e. Total Assets: Cash $450,000

f.General Journal

Dat Account Titles Debit Credit

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e

3/1 Cash 120,000Common Stock 40,000Paid-In Capital in Excess of

Par80,000

5/2 Cash 330,000Common Stock 75,000Paid-In Capital in Excess

of Par255,000

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EXERCISE 11-5Aa.

General Journal

Event

Account Titles Debit Credit

1. Cash (20,000 x $9) 180,000Common Stock, $5 par 100,000Paid-In Capital in Excess of

Par, CS80,000

2. Cash (5,000 x $22) 110,000Preferred Stock, $20 stated

value100,000

Paid-In Capital in Excess of SV, PS

10,000

3. Cash (100,000 x $12) 1,200,000

Common Stock, $5 par 500,000Paid-In Capital in Excess of

Par, CS700,000

b.Stockholders’ Equity:

Preferred Stock, $20 stated value, 5% cumulative class A, 50,000 shares authorized, 5,000 shares issued and outstanding

$ 100,000

Common Stock, $5 par value, 400,000 shares authorized, 120,000 shares issued and outstanding

600,000

Paid-In Capital in Excess of SV, Preferred Stock

10,000

Paid-In Capital in Excess of Par, Common Stock

780,000

Retained Earnings -0-

Total Stockholders’ Equity $1,490,00

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0

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EXERCISE 11-6A

a.

Balance Sheet Income Statement Stmt. ofEven

tAssets = Stockholders’ Equity Rev Exp

.= Net

Inc.Cash Flow

Cash =Pref. Stock +

No-ParC.

Stock+

PIC in Exces

s

1. 50,000 = NA + 50,000 + NA NA NA = NA 50,000 FA2. 70,000 =50,000 + NA + 20,00

0NA NA = NA 70,000 FA

b.General Journal

Event


1. Cash 50,000Common Stock, No Par 50,000

2. Cash 70,000Preferred Stock, $50 par

value50,000

Paid-In Capital in Excess of Par, PS

20,000

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EXERCISE 11-7A

a. $36,000 3,000 = $12 market value per share2,000 shares x $12 market value per share of stock =

$24,000

b.


Assets = Stockholders’ Equity

Rev.

Exp.

= Net Inc.

Cash Flows

Cash + Van = C. Stk. + PIC Exc.

1.36,000

+ NA = 15,000 + 21,000 NA NA = NA 36,000 FA

2. NA +24,000

= 10,000 + 14,000 NA NA = NA NA

EXERCISE 11-8Aa.

Russ CorporationGeneral Journal

Date Account Titles Debit Credit

1. Treasury Stock (1,000 x $45) 45,000Cash 45,000

2. Cash (700 x $55) 38,500Treasury Stock (700 x $45) 31,500Paid-In Capital in Excess of

Cost, TS7,000

b.

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Treasury Stock1. 45,000 2. 31,500Bal. 13,500

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EXERCISE 11-9A

a. & b.Common Stock Issued Outstandin

g

Beginning Number of Shares

650 650

Issued This Period 1,000 1,000Repurchased as Treasury Stock

(200)

Resold Treasury Stock 50Ending Number of Shares (b)

1,650(a) 1,500

c.Smoot Corporation

General Journal


1. Cash (1,000 X $50) 50,000Common Stock, $10 par 10,000Paid-in Capital in Excess of Par,

CS40,000

2. Treasury Stock (200 x $40) 8,000Cash 8,000

3. Cash (50 x $44) 2,200Treasury Stock (50 x $40) 2,000Paid-In Capital in Excess of Cost,

TS200

d.Stockholders’ Equity

Common Stock, $10 par value, 10,000 shares authorized, 1,650 shares issued, and 1,500 shares outstanding

$16,500

Paid-In Capital in Excess of Par, Common

65,350

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Paid-In Capital in Excess of Cost, TS

200

Total Paid-In Capital $82,050


Less: Treasury Stock (6,000)


EXERCISE 11-10Aa.

Balance Sheet Income Statement Stmt. ofDate Assets = Liab. + C.

Stk.+ Ret. Ear. Rev Exp. = Net

Inc.Cash Flows

10/1 NA =75,000 + NA + (75,000) NA NA = NA NA11/20

NA = NA + NA + NA NA NA = NA NA

12/30

(75,000)=(75,000) + NA + NA NA NA = NA (75,000) FA

b.Med CorporationGeneral Journal


10/1/05 Dividends 75,000Dividends Payable 75,000

11/20/05

No Entry

12/30/05

Dividends Payable 75,000

Cash 75,000

12/31/05


Dividends 75,000

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EXERCISE 11-11A

Computation of Preferred Dividends:

Par x Dividend %

=Dividend Per Share

x

Number of shares

outstanding=

Total Preferred

Dividends for Year

$50 x 8% = $4 x 1,000 = $4,000

a. Dividend arrearage as of January 1, 2004: $4,000 (one year)

b.Dist. to

ShareholdersAmount Preferre

dCommo

n

Total Dividend Declared

$20,000

2003 Arrearage (4,000) $ 4,0002004 Preferred Dividends

(4,000) 4,000

Available for Common Shs.

12,000

Distributed to Common

(12,000) $12,000

Total Distribution $8,000 $12,000

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EXERCISE 11-12A

a.

Computation of Dividends to Be Paid:

Preferred Stock

$50 par value x 8% x 20,000 shs=

$80,000

Common Stock

$1 x 200,000 shs = 200,000

Total Dividend

$280,000

b.Date Account Titles Debit Credit


5/30/02 No Entry

6/15/02 Dividends Payable 280,000Cash 280,000

12/31/02


(Closing Entry)

Dividends 280,000

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EXERCISE 11-13A

a. Distribution of Dividend:

Distributed to Shareholders

Preferred Common


$120,000

Preferred Arrearage* (60,000) $ 60,000Current Preferred Dividend

(60,000) 60,000

Available for Common -0-Distributed to Common

-0- $-0-

Total $120,000 $-0-

*$50 x 6% x 20,000 Shares = $60,000b.

Ming, Inc.General Journal for 2006


Feb. 1 Dividends 120,000Dividends Payable 120,000

Mar. 10

No Entry

Mar. 31


Cash 120,000

Closing EntryDec. 31


Dividends 120,000

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EXERCISE 11-14A

a. (20,000 shares x .04) x $35 = $28,000

b.

Balance Sheet Income Statement Stmt. of

Assets= Liab + Stockholders’ Equity Rev. Exp. = Net Inc. Cash Flows

C. Stock+ PIC. Ex.

+ Ret. Ear.

NA = NA + 16,000 +12,000+(28,000)

NA NA = NA NA

c.General Journal

Account Title Debit Credit

Retained Earnings 28,000Common Stock, $20 par 16,000Paid-In Capital in Excess of

Par, CS12,000

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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. 200,000 shares x 2 = 400,000 new shares outstanding

$10 par value 2 = $5 new par value

c. Theoretically, the market value per share would be reduced to $80 ($160 2) after the split. However, if this is perceived as a good move by the company, the price per share may increase to something over $80.

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EXERCISE 11-16A

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.Frontier Corporation:

Earnings per Share (EPS):Net Income Common Shs.

Outst.= EPS

$60,000 15,000 = $4.00

Price/Earnings Ratio:Selling Price/Share

Earnings per Share

= P/E Ratio

$70.00 $4 = 17.50

Upton Corporation:

Earnings Per Share (EPS):Net Income Common Shs

Outst.= EPS

$112,000 15,000 = $7.47


Earnings per Share

= P/E Ratio

$90.00 $7.47 = 12.05

b. Frontier Corporation appears to have greater potential for growth. Investors are willing to pay more for today’s

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earnings because they believe that tomorrow’s earnings will be higher.

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EXERCISE 11-17A (Appendix)

Not-for-profit organizations have three general purpose external financial statements: (1) Statement of Financial Position - reports on the

organization’s assets, liabilities, and net assets.(2) Statement of Activities for the Period - reports on

revenues, expenses, gains and losses that increase or decrease net assets.

(3) Statement of Cash Flows for the Period - reports the cash inflows and outflows from operating, investing and financing activities.

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SOLUTIONS TO PROBLEMS - SERIES A - CHAPTER 11

PROBLEM 11-18A


$300,000

Revenues 80,000Expenses 52,000Withdrawals 10,000

a. Sole ProprietorshipMMX Company

Financial StatementsFor the Year Ended December 31, 2007

Income Statement

Revenues $80,000

Expenses (52,000)

Net Income $ 28,000

Capital Statement



300,000




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PROBLEM 11-18A a. (cont.)

MMX CompanyFinancial Statements


Balance Sheet

AssetsCash $318,00


0

Liabilities $ -0-

EquityMayer, Capital 318,000




Inflow from Revenues $ 80,000Outflow for Expenses (52,000)


$ 28,000


-0-


Inflow from Owner 300,000Outflow for Owner Withdrawals (10,000)


290,000

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0

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PROBLEM 11-18A (cont.)b. Partnership



Income Statement

Revenues $80,000

Expenses (52,000)

Net Income $28,000

Capital Statement



300,000


Less: Withdrawals by Owners (10,000)




Mayer Mitchell Total Beginning Capital Balance

$ -0- $ -0-$ -0-

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

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*Mayer: $28,000 x 30% = $8,400Mitchell: $28,000 x 70% = $19,600

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PROBLEM 11-18A b. (cont.)



Balance Sheet

AssetsCash $318,00


0

Liabilities $ -0-

EquityMartin Mayer, Capital 202,400Kay Mitchell, Capital 115,600




Inflow from Revenues $ 80,000Outflow for Expenses (52,000)


$ 28,000


-0-


Inflow from Partner 300,000Outflow for Partners’

Withdrawals(10,000)

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290,000


0

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PROBLEM 11-18A (cont.)c. Corporation

MMX Inc.Financial Statements


Income Statement

Revenues $80,000

Expenses (52,000)

Net Income $28,000



300,000




11-46

PROBLEM 11-18A c. (cont.)

MMX, Inc.Financial Statements


Balance Sheet

AssetsCash $318,00


0

Liabilities $ -0-


outstanding$120,00

0Paid-In Capital in Excess of Par 180,000

Total Paid-In Capital 300,000



$318,000





$ 28,000


-0-


Inflow from Sale of Stock 300,000Outflow for Dividends (10,000)

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290,000


0

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PROBLEM 11-19Aa.

General Journal


2003Jan. 2 Cash (20,000 x $8) 160,000

Common Stock (20,000 x $5)

100,000

PIC in Excess of Par, CS 60,000

Jan. 15

Cash (4,000 x $130) 520,000

Preferred Stock (4,000 x $100)

400,000

PIC in Excess of Par, PS 120,000

Feb. 14

Cash (10,000 x $9) 90,000

Common Stock (10,000 x $5)

50,000

PIC in Excess of Par, CS 40,000

Dec. 31

Cash 270,000

Service Revenue 270,000

Dec. 31

Operating Expenses 160,000

Cash 160,000

Dec. 31

Dividends [4,000 x ($100 x 8%)]

32,000


Closing Entries

Dec. 31



Dec. 31


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Dec. 31


Dividends 32,000

2004Jan. 31


Cash 32,000

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PROBLEM 11-19A a. (cont.)

General Journal


2004Mar. 1 Cash (2,000 x $150) 300,000

Preferred Stock, $100 par 200,000PIC in Excess of Par, PS 100,000

June 1 Treasury Stock (Common)(400 x $11)

4,400

Cash 4,400

Dec. 31

Cash 250,000


Dec. 31


Cash 175,000

Dec. 31

Dividends 53,920*


Closing Entries

Dec. 31



Dec. 31



Dec. 31


Dividends 53,920

*Preferred Stock: $8 x 6,000 shares = $48,000 Common Stock: $.20 x 29,600 shares = 5,920

11-51

Total Dividend $53,920

11-52

PROBLEM 11-19A (cont.)b.2003

Stockholders’ EquityPreferred Stock, $100 par value, 8% cumulative, 10,000 shares

authorized, 4,000 shares issued and outstanding

$400,000

Common Stock, $5 par value, 50,000 shares authorized, 30,000 shares

issued, and outstanding 150,000Paid-In Capital in Excess of ParPreferred Stock

120,000

Paid-In Capital in Excess of ParCommon Stock

100,000




11-53

PROBLEM 11-19A (cont.)c.

Oak CorporationBalance Sheet

As of December 31, 2004

AssetsCash $1,218,60

0Total Assets $1,218,60

0

LiabilitiesDividends Payable $ 53,920

Total Liabilities $ 53,920

Stockholders’ EquityPreferred Stock, $100 par value, 8%

cumulative, 10,000 shares authorized,

6,000 shares issued and outstanding600,000

Common Stock, $5 par value, 50,000 shares

authorized, 30,000 shares issued, 29,600

shares outstanding

150,000

Paid-In Capital in Excess of ParPreferred Stk.

220,000

Paid-In Capital in Excess of ParCommon Stk.

100,000

Total Paid-In Capital 1,070,000

Retained Earnings 99,080Less: Treasury Stock (4,400)

Total Stockholders’ Equity 1,164,680


$1,218,600

11-54

PROBLEM 11-19A c. (cont.)

Schedule provided for use of instructor.

Schedule of Number ofShares of Common Stock

Shares Issued

Shares Outstandi

ng2003Jan. 2 20,000 20,000Feb. 14 10,000 10,000Totals 30,000 30,0002004June 1 (400)Totals 30,000 29,600

Shares issued and outstanding are the same for 2003. However, for 2004, the 400 shares of treasury stock reduce the number of outstanding shares. In 2004, there are 30,000 shares issued but only 29,600 outstanding.

11-55

PROBLEM 11-20Aa.

General Journal


1. Cash (10,000 x $10) 100,000Common Stock, $10 par 100,000

2. Cash (2,000 x $30) 60,000Preferred Stock, $30 stated

value60,000

3. Treasury Stock (Common Stock)(500 x $18)

9,000

Cash 9,000

4. Dividends ($30 x 6% x 2,000) 3,600Dividends Payable 3,600

5. Cash (300 x $23) 6,900Treasury Stock (300 x $18) 5,400PIC in Excess of CostTS 1,500

6. Dividends Payable 3,600Cash 3,600

7. Cash (assumed cash) 57,000Service Revenue 57,000

Operating Expenses 36,000Cash (assumed cash) 36,000

Closing Entries

8. Service Revenue 57,000Retained Earnings 57,000

Retained Earnings 36,000Operating Expenses 36,000

Retained Earnings 3,600Dividends 3,600

9. Retained Earnings 6,000Appropriated Retained 6,000

11-56

Earnings

11-57

PROBLEM 11-20A (cont.)b.

Stockholders’ EquityPreferred Stock, $30 stated value,

2,000 shares issued and outstanding $ 60,000Common Stock, $10 par value,10,000 shares

issued, and 9,800 shares outstanding100,000

Paid-In Capital in Excess of Cost, Treasury Stk.

1,500


Retained EarningsAppropriated 6,000Unappropriated 11,400

Total Retained Earnings 17,400Less: Treasury Stock (200 shares) (3,600)


11-58

PROBLEM 11-21A

a.



2. Cash (300 x $20) 6,000Treasury Stock (300 x $16) 4,800PIC in Excess of Cost, TS 1,200

3. Cash 64,000Service Revenue 64,000

4. Operating Expenses 38,000Cash 38,000

b.

Stockholders’ EquityCommon Stock, $10 par value, 50,000 shares authorized, 40,000 shares

issued, and 39,300 shares outstanding$400,00

0Paid-In Capital in Excess of ParCommon Stock

150,000

Paid-In Capital in Excess of CostTreasury Stk.

1,200


Retained Earnings 126,000Less: Treasury Stock (700 shares) (11,200)


11-59

PROBLEM 11-22Aa.

Granger Corp.Statements Model For 2004

Balance Sheet Income Statement Statement of

Event Assets = Stockholders’ Equity Rev. - Exp. = Net Inc. Cash FlowsP. Stock+ C.

Stock+ PIC CS +Ret. Ear.

1. 600,000 = NA +300,000+ 300,000

+ NA NA NA = NA 600,000 FA

2. 250,000 =250,000 + NA+ NA + NA NA NA = NA 250,000 FA3. (12,500)1= NA + NA+ NA +(12,500) NA NA = NA (12,500) FA4. NA = NA + 15,000+37,500 +(52,500)2 NA NA = NA NA5. memo

no entry3

= NA + NA+ NA + NA NA NA = NA NA

6a. 210,000 = NA + NA+ NA +210,000 210,000

NA = 210,000 210,000 OA

6b. (128,000)

= NA + NA+ NA +(128,000)

NA 128,000

= (128,000)

(128,000) OA

Totals 919,500 =250,000 +315,000+337,500

+ 17,000 210,000

128,000

= 82,000 919,500 NC

1$50 x 5% = $2.50; $2.50 x 5,000 = $12,500215,000 x 5%=750 shares; 750 shares x $70 = $52,5003Memo: 2:1 stock split reduces common’s par to $10 and increases number of shares outstanding to 31,500

11-60

PROBLEM 11-22A (cont.)b.

General Journal


1. Cash (15,000 x $40) 600,000Common Stock $20 par 300,000Paid in Capital in Excess of

Par, CS300,000

2. Cash (5,000 x $50) 250,000Preferred Stock 250,000

3. Dividends ($50 x 5% x 5,000) 12,500Cash 12,500

4. Retained Earnings 37,500*Common Stock, $20 Par 15,000Paid-in Capital in Excess of

Par, CS22,500

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 210,000Service Revenue 210,000

6b. Operating Expenses 128,000Cash 128,000

*15,000 shares x 5% = 750 shares; 750 shares x $50 per share = $37,500

11-61

PROBLEM 11-22A (cont.)c.

Stockholders’ EquityPreferred Stock, $50 par value, 5%,

5,000 shares issued and outstanding

$250,000

Common Stock, $10, par, 31,500 shares issued and outstanding 315,000Paid-In Capital in Excess of Par, Common Stock

337,500




11-62

PROBLEM 11-23A

a. $600,000 30,000 shares = $20 per share

b. $20 par value per share x 6% = $1.20 per share

c. $500,000 + $200,000 = $700,000;$700,000 50,000 shares = $14 per share

d. 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.

e. 1. 50,000 x 2 = 100,000 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).

11-63

PROBLEM 11-24A

Note: The memo incorporates a schedule showing the after-tax cash flows under each form of ownership and discusses LLCs.

MemoTo: Owners of Bates and AssociatesFrom: John Q CPADate: X/X/20XXRe: Forms of business ownership

As requested, this memo describes the advantages and disadvantages of the partnership versus corporate forms of business ownership.

Advantages DisadvantagesPartnership Ease of formation

Less regulation Lower effective

tax rate

Limited life Mutual agency Unlimited

liabilityCorporation Unlimited life

Limited liability Capital easier to

acquire & ownership easily transferred

More regulation Higher effective

tax rate

The most important of these advantages and disadvantages relate to taxation and owner’s liability.

11-64

PROBLEM 11-24A (cont.)

The schedule below illustrates the after-tax cash flows under each form:

Partnership CorporationIncome before taxes

$200,000 $200,000

Tax at entity level -0 - (50,000 ) Net Income distributed to owners

200,000 150,000

Less: Individual income tax (36%) (72,000 ) (54,000 )After-tax cash flow

$128,000 $ 96,000

After-tax cash flow available to each investor

$128,000 5 =$25,600

$96,000 5 =$19,200

Effective tax rate($72,000 $200,000)

=36%($104,000 $200,000)

=52%

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.

11-65

PROBLEM 11-25AAbbot Inc.

Statements Model

Balance Sheet Income Statement Statement of

Event

Assets

= Liab. + S. Equity

Rev. Exp. = Net Inc.

Cash Flows

1. + NA + NA NA NA + FA2. + NA + NA NA NA + FA3. NA NA + NA NA NA NA4. + NA + NA NA NA + FA5. NA NA + NA NA NA NA6. NA NA NA NA FA7. NA + NA NA NA NA8. NA NA NA NA FA9. + NA + NA NA NA + FA10. *NA NA NA NA NA NA NA

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

11-66

PROBLEM 11-26A

Note: The worksheet is provided for the use of the instructor.

Assets = Net Assets

Event CashEndowed Fund Theater

Theatrical

Equip.=

Perm. Rest.

Temp. Rest. Unrest. Cash Flows

1a. 300,000 200,000 100,000 300,000 OA

1b. 600,000 600,000

600,000 FA

2. (600,000)

600,000 (600,000) IA

3. 55,000 55,000 55,000 OA4. (200,00

0)200,000 (200,00

0)200,000 (200,000)

IA5. (50,000) 50,000 (50,000) IA6. 120,000 120,000 120,000

OA7. (110,00

0)(110,00

0)(110,000)

OA8. (4,500)* (10,000)

*(14,500) NA

Bal. 115,000 600,000 195,500 40,000 = 600,000

-0- 350,500 115,000 NC

*Computation of Depreciation Expense:

11-67

Theater: ($200,000 $20,000) 40 = $4,500Equipment: ($50,000 $-0-) 5 = $10,000

11-68


The Little TheatreStatement of Activities


Changes in Unrestricted Net AssetsDonor Contributions $100,000Investment Revenue 55,000Released from Temporarily

Restricted200,000

Ticket Revenue 120,000Operating Expenses (110,000

)Depreciation Expense (14,500)

Net Change in Unrestricted Net Assets $350,500

Changes in Temporarily Restricted Assets

-0-

Donor Contributions 200,000Released to Purchase Theater (200,000

)Net Change in Temporarily Restricted Assets

-0-

Changes in Permanently Restricted Assets

Donor Contributions 600,000Net Change in Permanently Restricted Assets

600,000

Increase in Net Assets 950,500Net Assets at the Beginning of the Period

-0-

Net Assets at the End of the Period $950,500

11-69


The Little TheatreStatement of Financial Position

As of the December 31, 2006

AssetsCash $115,00

0Endowed Investments Fund 600,000Theater $200,000Less: Accumulated Depreciation (4,500) 195,500

Theatrical Equipment 50,000Less: Accumulated Depreciation (10,000) 40,000


Net AssetsPermanently Restricted Assets $600,000Temporarily Restricted Assets -0-Unrestricted Assets 350,500

Total Net Assets $950,500

11-70


The Little TheatreStatement of Cash Flows


Cash Flows From Operating Activities:Temporarily Restricted Donor Cont. $200,000Unrestricted Donor Contributions 100,000Inflow from Investment Revenue 55,000Inflow from Ticket Revenue 120,000Outflow for Expenses (110,000

)Net Cash Flow from Operating Activities

$365,000

Cash Flows From Investing Activities:Outflow to Endowed Investment

Fund(600,000

)Outflow for Purchase of Theater (200,000

)Outflow to Purchase Theatrical

Equip.(50,000)

Net Cash Flow from Investing Activities (850,000)

Cash Flows From Financing Activities:Inflow from Permanently Rest.

Contribution600,000


600,000


11-71

SOLUTIONS TO EXERCISES - SERIES B - CHAPTER 11

EXERCISE 11-1B


$20,000

Revenues 14,500Expenses 9,300Withdrawal 500

Dan Jones Sole ProprietorshipFinancial Statements


Income Statement

Revenues $14,500

Expenses (9,300)

Net Income $ 5,200

Capital Statement



20,000


Less: Withdrawal by Owner (500)


11-72

EXERCISE 11-1B (cont.)

Dan Jones Sole ProprietorshipFinancial Statements


Balance Sheet

AssetsCash $24,700


Liabilities $ -0-

EquityJones, Capital 24,700






$ 5,200


-0-


Inflow from Owner 20,000Outflow for Owner Withdrawals (500)


19,500

Net Change in Cash 24,700

11-73

Plus: Beginning Cash Balance -0-Ending Cash Balance $24,700

11-74

EXERCISE 11-2B

Transactions:Cash Contributions

C. Mills $24,500

35%

P. Price 45,500 65%Total $70,00

0

Revenues $15,000

Expenses 6,300Mills Withdrawal 600Price Withdrawal 1,400

M&P PartnershipFinancial Statements


Income Statement

Revenues $15,000

Expenses (6,300)

Net Income $ 8,700

Capital Statement



70,000


Less: Withdrawal by Owners (2,000)


11-75




Mills Price TotalBeginning Capital Balance

$ -0-

$ -0-

$ -0-

Investments 24,500 45,500 70,000Net Income 8,700

C. Mills 35% 3,045P. Price 65% 5,655

Withdrawals (600) (1,400) (2,000)Ending Capital Balances $26,94

5$49,75

5$76,70

0

11-76


M&P PartnershipFinancial Statements


Balance Sheet

AssetsCash $76,700


Liabilities $ -0-

EquityC. Mills, Capital 26,945P. Price, Capital 49,755






$ 8,700


-0-

Cash Flows From Financing Activities


Withdrawals(2,000)


68,000

Net Change in Cash 76,700

11-77

Plus: Beginning Cash Balance -0-Ending Cash Balance $76,700

11-78

EXERCISE 11-3B

Transactions:Issued 1,000 shares of $5 par stock @ $18

$18,000

Revenues 23,000Expenses 17,000Dividends Paid 1,200

Stone CorporationFinancial Statements


Income Statement

Revenues $23,000

Expenses (17,000)

Net Income $ 6,000



18,000


Beginning Retained Earnings -0-Plus: Net Income 6,000Less: Dividend (1,200)Ending Retained Earnings 4,800


11-79


Stone CorporationFinancial Statements


Balance Sheet

AssetsCash $22,800


Liabilities $ -0-


outstanding$ 5,000




$22,800





$ 6,000


-0-



Net Cash Flow from Financing 16,800

11-80

Activities


0

11-81

EXERCISE 11-4Ba.


tAssets = Lia

b+ Stockholders’

EquityRev

. Exp

.= Net

Inc.Cash Flow

Cash = + C. Stk.

+ PIC Exc.

3/1 100,000

= NA + 50,000

+ 50,000 NA NA = NA 100,000 FA

5/2 144,000

= NA + 60,000

+ 84,000 NA NA = NA 144,000 FA

b.Common Stock:

5,000 shs. x $10= $ 50,0006,000 shs. x $10= 60,000

Total $110,000

c.Paid-In Capital in Excess of Par

5,000 shs x ($20 $10)= $ 50,0006,000 shs x ($24 $10)= 84,000

Total $134,000

d. Total Contributed Capital:Common Stock $110,000Paid-In Capital 134,000Total $244,000

e. Total Assets: Cash $244,000

f.General Journal

Date


3/1 Cash 100,000

Common Stock 50,000Paid-In Capital in Excess of 50,000

11-82

Par

5/2 Cash 144,000

Common Stock 60,000Paid-In Capital in Excess of

Par84,000

11-83

EXERCISE 11-5Ba.

General Journal

Event


1. Cash 80,000Common Stock, $5 par 50,000Paid-In Capital in Excess of

Par, CS30,000

2. Cash 240,000Preferred Stock, $50 stated

value150,000

Paid-In Capital in Excess of SV, PS

90,000

3. Cash 800,000Common Stock, $5 par 400,000Paid-In Capital in Excess of

Par, CS400,000

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 and outstanding

450,000

Paid-In Capital in Excess of SV, Preferred Stock

90,000

Paid-In Capital in Excess of Par, Common Stock

430,000

Retained Earnings -0-

Total Stockholders’ Equity $1,120,000

11-84

11-85

EXERCISE 11-6B

a.


tAssets = Stockholders’ Equity Rev Exp

.= Net

Inc.Cash Flow

Cash =Pref. Stock +

No-ParC.

Stock+

PIC in Exces

s

1.120,000

= NA +120,000

+ NA NA NA = NA 120,000 FA

2. 80,000 =50,000 + NA + 30,000

NA NA = NA 80,000 FA

b.General Journal

Event


1. Cash 120,000

Common Stock, No Par 120,000

2. Cash 80,000Preferred Stock, $50 par value 50,000Paid-In Capital in Excess of

Par, PS30,000

11-86

EXERCISE 11-7B

a. 1,000 shares x $31 market value per share of stock = $31,000

b.


Assets = Stockholders’ Equity

Rev. Exp.

= Net Inc.

Cash Flows

Cash + Land = C. Stk. + PIC Exc.

1. NA + 31,000

= 10,000 + 21,000 NA NA = NA NA

2. 12,400

+ NA = 4,000 + 8,400 NA NA = NA 12,400 FA

EXERCISE 11-8Ba.

Hawk CorporationGeneral Journal



2. Cash (500 x $55) 27,500Treasury Stock (500 x $38) 19,000Paid-In Capital in Excess of

Cost, TS8,500

b.Treasury Stock

1. 38,000 2. 19,000Bal. 19,000

11-87

11-88

EXERCISE 11-9Ba. & b.

Common Stock Issued Outstanding

Beginning Number of Shares

800 800

Issued This Period 2,000 2,000Repurchased as Treasury Stock

(300)

Resold Treasury Stock 100Ending Number of Shares (b)

2,800(a) 2,600

c.Sneed Corporation

General Journal


1. Cash (2,000 X $43) 86,000Common Stock, $10 par 20,000Paid-in Capital in Excess of Par,

CS66,000

2. Treasury Stock (300 x $38) 11,400Cash 11,400

3. Cash (100 x $40) 4,000Treasury Stock (100 x $38) 3,800Paid-In Capital in Excess of Cost,

TS200

d.Stockholders’ Equity

Common Stock, $10 par value, 10,000 shares authorized, 2,800 shares issued, and 2,600 shares outstanding

$28,000

Paid-In Capital in Excess of Par, Common

78,000

Paid-In Capital in Excess of Cost, TS 200Total Paid-In Capital $106,20

11-89

0


Less: Treasury Stock (7,600)


11-90

EXERCISE 11-10Ba.

Balance Sheet Income Statement Stmt. ofDate Assets = Liab. + C.

Stk.+ Ret. Ear. Rev Exp. = Net

Inc.Cash Flows

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

0)= (120,00

0)+ NA + NA NA NA = NA (120,000)F

A

b.Lott CorporationGeneral Journal



5/15/05 No Entry


12/31/05


Dividends 120,000

11-91

EXERCISE 11-11B

Computation of Preferred Dividends

Par Value of Stock

x Dividend %

=Dividend per Share x

Preferred shares

outstanding=

Total Dividend

s per Year

$50 x 7% = $3.50 x 2,000 = $7,000

a. Dividend arrearage as of January 1, 2008: $7,000

b.Dist. to

ShareholdersAmount Preferre

dCommon


$30,000

2007 Arrearage (7,000) $ 7,0002008 Preferred Dividends

(7,000) 7,000

Available for Common Shs.

16,000

Distributed to Common (16,000) $16,000

Total Distribution $14,000 $16,000

11-92

EXERCISE 11-12B

a.

Computation of Dividends to Be Paid:

Preferred Stock

$100 par value x 8% x 10,000 shs=

$ 80,000

Common Stock

$1 x 100,000 shs = 100,000

Total Dividend

$180,000

b.Date Account Titles Debit Credit


6/20/05 No Entry


12/31/05 Retained Earnings 180,000(Closing Entry)

Dividends 180,000

11-93

EXERCISE 11-13B

a. Distribution of Dividend:

Distributed to Shareholders

Preferred Common

Total Dividend Declared $200,000

Preferred Arrearage* (80,000)

$ 80,000

Current Preferred Dividend

(80,000)

80,000

Available for Common 40,000Distributed to Common (40,000

)$40,000

Total $160,000 $40,000

*$100 X 8% X 10,000 Shares = $80,000b.

Varsity, Inc.General Journal for 2004


Mar. 8 Dividends 200,000Dividends Payable 200,000

Mar. 20

No Entry

Mar. 31


Cash 200,000

Dec. 31


Dividends 200,000

11-94

11-95

EXERCISE 11-14B

a. (10,000 shares x .05) x $14 = $7,000

b.

Balance Sheet Income Statement Stmt. of

Assets= Liab + Stockholders’ Equity Rev. Exp. = Net Inc. Cash Flows

+C. Stock+ PIC. Ex.

+ Ret. Ear.

NA = NA + 5,000 + 2,000 + (7,000) NA NA = NA NA

c.General Journal

Account Title Debit Credit

Retained Earnings 7,000Common Stock, $10 par 5,000Paid-In Capital in Excess of Par,

CS2,000

11-96

EXERCISE 11-15B

a. No formal entry would be made in the accounting records. A memo entry would indicate the number of shares had quadrupled and the par value had been reduced by three-fourths.

b. 100,000 shares x 4 = 400,000 new shares outstanding

$20 par value 4 = $5 new par value

c. Theoretically, the market value per share would be reduced to $60 ($240 4) after the split. However, if this is perceived as a good move by the company, the price per share may decrease to something over $60.

11-97

EXERCISE 11-16B

Computation of Price-Earnings Ratio:


2. Compute Price-Earnings Ratio:Selling Price per Share Earnings per Share

a.Cooper Corporation:


Outst.= EPS

$80,000 15,000 = $5.33


Earnings per Share

= P/E Ratio

$70.00 $5.33 = 13.13

Eastman Corporation:


Outst.= EPS

$55,000 15,000 = $3.67


Earnings per Share

= P/E Ratio

$90.00 $3.67 = 24.52

b. Eastman Corporation appears to have greater potential for growth. Investors are willing to pay more for today’s

11-98


11-99

EXERCISE 11-17B

Sewon Ow is correct if the organization in question is a not-for-profit. Donor contributions to a NFP are classified as revenues on the statement of activities. If the contributions are unrestricted or temporarily restricted, the amount is included in the operating activities section of the statement of cash flows. Permanently restricted contributions are considered financing activities.

Mark Hayes is correct if the organization is a for-profit business. In this case, capital acquisitions appear on the capital statement and as a financing activity on the statement of cash flows.

11-100

SOLUTIONS TO PROBLEMS - SERIES B - CHAPTER 11

PROBLEM 11-18B


$40,000

Revenues 18,000Expenses 12,500Distributions 3,000

a. Sole ProprietorshipCalloway Co.

Financial StatementsFor the Year Ended December 31, 2009

Income Statement

Service Revenues $18,000

Operating Expenses (12,500)

Net Income $ 5,500

Capital Statement



40,000




11-101

PROBLEM 11-18B a. (cont.)

Calloway Co.Financial Statements


Balance Sheet

AssetsCash $42,500


Liabilities $ -0-

EquityMacy Calloway, Capital 42,500




Inflow from Revenues $18,000Outflow for Expenses (12,500

)Net Cash Flow from Operating Activities

$ 5,500


-0-



Withdrawals(3,000)

11-102


37,000


0

11-103

PROBLEM 11-18B (cont.)b. Partnership



Income Statement

Service Revenue $18,000


Net Income $ 5,500

Capital Statement



40,000


Less: Withdrawals by Owners (3,000)


Prepared for the instructor’s use:Analysis of Capital Accounts:

M. Calloway

A. Calloway

Total

Beginning Capital Balance

$ -0- $ -0- $ -0-

Investments 25,000 15,000 40,000Net Income* 2,200 3,300 5,500Withdrawals (1,800) (1,200) (3,000)Ending Capital Balances $25,400 $17,100 $42,500

*M. Calloway: $5,500 x 40% = $2,200A. Calloway: $5,500 x 60% = $3,300

11-104

PROBLEM 11-18B b. (cont.)



Balance Sheet

AssetsCash $42,500


Liabilities $ -0-

EquityMacy Calloway, Capital 25,400Artie Calloway, Capital 17,100






$ 5,500


-0-



Withdrawals(3,000)


37,000

11-105


11-106

PROBLEM 11-18B (cont.)c. Corporation

Calloway Inc.Financial Statements


Income Statement

Service Revenues $18,000


Net Income $ 5,500



40,000




11-107

PROBLEM 11-18B c. (cont.)

Calloway Inc.Financial Statements


Balance Sheet

AssetsCash $42,500


Liabilities $ -0-


outstanding$25,000




$42,500





$ 5,500


-0-



Net Cash Flow from Financing 37,000

11-108

Activities


11-109

PROBLEM 11-19Ba.

General Journal


2008Jan. 5 Cash (10,000 x $28) 280,000

Common Stock, $10 par 100,000PIC in Excess of ParCS 180,000

Jan. 12

Cash (1,000 x $70) 70,000

Preferred Stock, $50 par 50,000PIC in Excess of ParPS 20,000

Apr. 5 Cash (40,000 x $40) 1,600,000Common Stock, $10 Par 400,000PIC in Excess of ParCS 1,200,000

Dec. 31

Cash 170,000


Dec. 31


Cash 110,000

Dec. 31

Dividends ($50 x 6% x 1,000 shs.)

3,000


Closing Entries

Dec. 31



Dec. 31



Dec. 31


11-110

Dividends 3,000

2009Feb. 15


Cash 3,000

11-111


General Journal


2009Mar. 3 Cash (10,000 x $78) 780,000

Preferred Stock, $50 par 500,000PIC in Excess of ParPS 280,000

May 5 Treasury Stock (Common) (500 x $43)

21,500

Cash 21,500

Dec. 31

Cash 210,000


Dec. 31


Cash 140,000

Dec. 31

Dividends 62,700*


Closing Entries

Dec. 31



Dec. 31



Dec. 31


Dividends 62,700

*Preferred Stock: $3 x 11,000 shares = $33,000 Common Stock: $.60 x 49,500 shares = 29,700

11-112

Total Dividend $62,700

11-113

PROBLEM 11-19B (cont.)b.

Hamby CorporationBalance Sheet




0

LiabilitiesDividends Payable $

3,000Total Liabilities $

3,000


cumulative, 50,000 shares authorized, 1,000 shares issued and outstanding 50,000


authorized, 50,000 shares issued andoutstanding

500,000

Paid-In Capital in Excess of ParPreferred Stock

20,000

Paid-In Capital in Excess of ParCommon Stock

1,380,000





$2,010,000

11-114


Hamby CorporationBalance Sheet




0

LiabilitiesDividends Payable $

62,700Total Liabilities $

62,700


cumulative, 50,000 shares authorized, 11,000 shares issued and outstanding

550,000


authorized, 50,000 shares issued, 49,500 shares outstanding

500,000

Paid-In Capital in Excess of ParPreferred Stk.

300,000

Paid-In Capital in Excess of ParCommon Stk.

1,380,000


Retained Earnings 64,300Less: Treasury Stock (21,500)



$2,835,500

11-115

11-116

PROBLEM 11-19B (cont.)c.

Schedule of Number ofShares of Common Stock

Shares Issued

Shares Outstandi

ng2008Jan. 5 10,000 10,000Apr. 5 40,000 40,000Totals 50,000 50,0002009May 5 (500)Totals 50,000 49,500

Shares issued and outstanding are the same for 2008. However, for 2009, the 500 shares of treasury stock reduce the number of outstanding shares. In 2009, there are 50,000 shares issued but only 49,500 outstanding.

11-117

PROBLEM 11-20Ba.

General Journal

Date


1. Cash (20,000 x $5) 100,000Common Stock, $5 par 100,000

2. Cash (1,000 x $20) 20,000Preferred Stock, $20 stated value 20,000

3. Treasury Stock (Common Stock) (1,000 x $7)

7,000

Cash 7,000

4. Dividends 1,500Dividends Payable 1,500

5. Cash 5,000Treasury Stock (500 x $7) 3,500PIC in Excess of CostTS 1,500

6. Dividends Payable 1,500Cash 1,500


Operating Expenses 32,000Cash 32,000

Closing Entries


Retained Earnings 32,000Operating Expenses 32,000

Retained Earnings 1,500Dividends 1,500

9. Retained Earnings 5,000Appropriated Retained Earnings 5,000

11-118


One Co.Balance Sheet


AssetsCash $138,50


Liabilities $ -0-

Stockholders’ EquityPreferred Stock, $20 stated value, 1,000

shares issued and outstanding $ 20,000Common Stock, $5 par value, 20,000 shares

issued and 19,500 shares outstanding

100,000

Paid-In Capital in Excess of CostTreasury Stock

1,500


Retained EarningsAppropriated 5,000Unappropriated 15,500

Total Retained Earnings 20,500Less: Treasury Stock (500 shares) (3,500)

Total Stockholders’ Equity 138,500

Total Liabilities and Stockholders’ Equity $138,500

11-119

PROBLEM 11-21B

a. $2,100,000 200,000 shares =$10.50 per share

b. $22,500 $15 per share = 1,500 shares

c. $12,000 $15 per share = 800 shares

d.Outstanding Shares

Prior to Event 2 200,000Less: Treasury Stock (Event 2)

(1,500)

Total After Event 2 198,500

Plus: Treasury Stock Reissued

(Event 3)800

Total After Event 3 199,300

11-120

PROBLEM 11-22Ba.

Deaton Co.Statements Model For 2006

Balance Sheet Income Statement Stmt. ofEvent Assets = Liab

.+ Stockholders’ Equity Rev. Exp. = Net Inc. Cash Flows

P. Stock

+ C. Stock

+ Ret. Ear.

1. 200,000 = NA + NA + 200,000

+ NA NA NA = NA 200,000 FA

2. 100,000 = NA + 100,000

+ NA + NA NA NA = NA 100,000 FA

3. (6,000) = NA + NA + NA + (6,000) NA NA = NA (6,000) FA4.* NA = NA + NA + 30,000 + (30,000) NA NA = NA NA5. memo

NA = NA + NA + NA + NA NA NA = NA NA

6a. 145,000 = NA + NA + NA + 145,000 145,000

NA = 145,000 145,000 OA

6b. (97,000) = NA + NA + NA + (97,000) NA 97,000 = (97,000) (97,000) OATotals 342,000 = NA + 100,00

0+ 230,00

0+ 12,000 145,00

0 97,000 = 48,000 342,000 NC

*20,000 shares x 10% = 2,000 shares; 2,000 shares x $15 = $30,000

11-121


General Journal


1. Cash (20,000 x $10) 200,000Common Stock, No Par 200,000

2. Cash (5,000 x $20) 100,000Preferred Stock, $20 Par 100,000

3. Dividends 6,000Cash 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.


7. Operating Expenses 97,000Cash 97,000

Closing Entries


9. Retained Earnings 97,000Operating Expenses 97,000

10. Retained Earnings 6,000Dividends 6,000

*20,000 shares x 10% = 2,000 shares; 2,000 shares x $15 per share = $30,000

11-122

PROBLEM 11-22B (cont.)c.

Stockholders’ EquityPreferred Stock, $20 par value, 6%, 5,000 shares issued and outstanding $100,00

0Common Stock, no par value, 44,000 shares issued and outstanding 230,000Total Paid-In Capital $330,00

0



d. Theoretically, the market value after the split will be reduced to $17.50 per share, one-half the value of the shares before the 2-for-1 split. In reality, this may not be the exact result because of other market factors.

11-123

PROBLEM 11-23B

a. $250,000 5,000 shares = $50 per share

b. $50 par value per share x 8% = $4 per share

c. $2,000,000 + $500,000 = $2,500,000;$2,500,000 100,000 shares = $25 per share

d. The par value of the preferred sock is $50 per share. This is a value that is assigned to the stock when the corporation was formed or in a later request for an addition stock issue. This value is usually unrelated to the market value. However, with preferred stock the market value and the par value are more closely aligned. The difference between market value and par value of preferred stock is usually driven by the difference between current interest rates and the amount of dividend the stock is paying.

e. 1. 100,000 x 3 = 300,000 shares outstanding after the split.

2. No amount will be transferred from retained earnings.

3. Theoretically, the market price will be $12 ($36 3).

11-124

PROBLEM 11-24B

Note: This exercise can be used to assess writing skills. If a more comprehensive answer is desired, this exercise can be assigned as a short research project.

Under common law, partners in a partnership have joint liability. This means that any and all partners are responsible for the debts of a partnership. This puts the personal assets of all of the partners at risk. Any partner can bind a partnership to a business agreement. In this case, all of the personal assets of Salvy are at risk. Even though he did not personally order the shipment, as a partner in the partnership, he is liable for partnership debts.

One of the primary advantages of the corporate form of organization is limited liability. Since a corporation is a separate legal entity, the assets of the owners are separate from that of the business. If this had been a corporation, only the investment that Salvy had made in the business would be lost. He would not be held personally liable for debts and claims of the business.

11-125

PROBLEM 11-25B

Baskin Inc.Statements Model


tAsset

s= Liab

.+ S.

EquityRev. Exp. = Net

Inc.Cash Flows

1. + NA + NA NA NA + FA2. NA NA NA NA FA3. NA + NA NA NA NA4. + NA + NA NA NA + FA5. + NA + NA NA NA + FA6. NA NA + NA NA NA NA7. + NA + NA NA NA + FA8. NA NA + NA NA NA NA9. NA NA NA NA NA NA NA10. NA NA NA NA FA

11-126

PROBLEM 11-26Ba.

MCPLFinancial Statements


Income Statement

Revenue $120,000

Expenses (105,000)

Net Income $ 15,000

Balance Sheet

AssetsCash $ 90,000Facilities and Equipment $450,000Less: Accumulated Depreciation (25,000) 425,000


Liabilities $ -0-

Stockholders’ EquityCommon Stock $500,000Retained Earnings 15,000

Total Stockholders’ Equity 515,000


$515,000

11-127


MCPLStatement of Cash Flows


Cash Flows From Operating Activities:Inflow from Revenue $120,000Outflow for Expenses (80,000)


$ 40,000

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


500,000

Net Change in Cash 90,000Plus: Beginning Cash Balance -0-Ending Cash Balance $ 90,000

b.Worksheet provided for instructor’s use:

Assets = Net Assets

Event

CashFac. & Equip. =

Perm.

Rest.

Temp.

Rest.Unrest. Cash Flows

1, 500,000 500,000 500,000 OA2. (450,00

0)450,00

0(450,000)IA

11-128

3. 120,000 120,000 120,000 OA4. (80,000) (80,000) (80,000) OA5. (25,00

0)(25,000) NA

Tot. 90,000 425,000

= -0- -0- 515,000 90,000 NC

11-129


MCPLFinancial Statements


Statement of Activities

Changes in Unrestricted Net AssetsDonor Contributions $500,000Revenues 120,000Expenses (80,000)Depreciation Expense (25,000)

Net Change in Unrestricted Net Assets $515,000

Changes in Temporarily Restricted Assets

-0-

Changes in Permanently Restricted Assets

-0-

Increase in Net Assets 515,000Net Assets at the Beginning of the Year

-0-

Net Assets at the End of the Year $515,000

Statement of Financial Position

AssetsCash $

90,000Facilities and Equipment $450,000Less, Accumulated Depreciation (25,000) 425,000


Net AssetsPermanently Restricted Assets $ 0-

11-130

Temporarily Restricted Assets -0-Unrestricted Assets 515,000

Total Net Assets $515,000

11-131


MCPLStatement of Cash Flows


Cash Flows From Operating Activities:Unrestricted Donor Contributions $500,000Inflow from Revenues 120,000Outflow for Expenses (80,000)


$540,000

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 90,000Plus: Beginning Cash Balance -0-Ending Cash Balance $ 90,000

11-132

ATC 11-1

Financial Statement Analysis

a. Yes, $.01 per share. See the balance sheet, page 27.

b. 2,601 million shares (See the balance sheet).

c. No. (See the Statement of Cash Flows)

d. The number of shares outstanding increased because of employee stock options that were exercised.

e. The NASDAQ (See page 1 of the 10-K, in the last paragraph of the “General” section).

11-133

ATC 11-2

b. Wendy’s stated value per share:$12,074 136,188 = .089 per share

Coca-Cola par value per share:$870,000,000 3,481,882,834= .25 per share

Harley Davidson par value per share:$3,210,000 321,185,567 = .010 per share

c. Wendy’s average issue price of common stock:2000: $435,218 136,188 = $3.201999: $410,521 134,856 = $3.04

Coca-Cola’s average issue price of common stock:2000: $4,066 3,482 = $1.171999: $3,445 3,466 = $.99

Harley Davidson’s average issue price of common stock:2000 : $288,600 321,186 = $.901999: $238,132 318,586 = $.75

d. Wendy’s stock outstanding at end of year:2000: 136,188,000 21,978,000 = 114,210,0001999: 134,856,000 16,626,000 = 118,230,000

Coca-Cola’s stock outstanding at end of year:2000: 3,481,882,834 997,121,427 = 2,484,761,4071999: 3,466,371,904 994,796,786 = 2,471,575,118

Harley Davidson’s stock outstanding at end of year:2000: 321,185,567 19,114,822 = 302,070,7451999: 318,586,144 15,863,518 = 302,722,626

11-134

ATC 11-2 (cont.)

e. Wendy’s average cost per share of treasury stock:2000: $492,957,000 21,978,000 = $22.431999: $399,522,000 16,626,000 = 24.03

Coca-Cola’s average cost per share of treasury stock:2000: $13,293,000,000 997,121,427 = $13.331999: $13,160,000,000 994,796,786 = $13.23

Harley Davidson’s average cost per share of treasury stock:2000: $313,994,000 19,114,822 = $16.431999: $187,992,000 15,863,518 = $11.85

f. All three of the companies appeared to be profitable because retained earnings increased from 1999 to 2000.

g. You can determine the amount of increase in retained earnings, which would be caused by profit, but net income cannot be determined because the dividends paid are not given and the payment of dividends will decrease retained earnings.

h.Wendy’s

(in thousands)

Stockholders’ Equity 2000 1999Common Stock $ 12,074 $ 11,941Capital in Excess of Stated Value 423,144 398,580Total Paid-in Capital 435,218 410,521

Retained Earnings 1,211,015 1,068,883

Other Adjustments (27,133) (14,443)Treasury Stock (492,957) (399,522)

Total Stockholders’ Equity $1,126,143 $1,065,439

11-135

ATC 11-2 h. (cont.)

Cola-Cola(in millions)

Stockholders’ Equity 2000 1999Common Stock $ 870 $ 861Capital Surplus 3,196 2,584Total Paid-in Capital 4,066 3,445

Retained Earnings 21,265 20,773

Other Adjustments (2,722) (1,551)Treasury Stock (13,293) (13,160)

Total Stockholders’ Equity $ 9,316 $ 9,507

Harley Davidson(in thousands)

Stockholders’ Equity 2000 1999Common Stock $ 3,210 $ 3,184Additional Paid-in Capital 285,390 234,948Total Paid-in Capital 288,600 238,132

Retained Earnings 1,431,017 1,113,376

Other Adjustments 308 (2,067)Treasury Stock (313,994) (187,992)Unearned Compensation (276) (369)

Total Stockholders’ Equity $1,405,655 $1,161,080

11-136

ATC 11-3Thinking About the Numbers -- Computing the P/E Ratios for Four Companiesa.

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

TargetStock price $35.59 $35.59

EPS $1.40 = 25.4 times $1.39 = 25.6 times

CiscoStock price $19.22 $19.22 EPS $.39 = 49.3 times $.22 = 87.4 times

OracleStock price $19.58 $19.58

EPS $2.22 = 8.8 times $2.02 = 9.7 times

b. Two general conclusions may be reached based on the analysis of these four companies. First, investors are very optimistic about the growth potential of Cisco.

The second conclusion is that technology companies pay their executives a lot more in stock options than do retail companies. Stock compensation costs caused the EPS of the two retail companies to decline an average of 2%, while the EPS of the technology companies decreased an average of 14% as a result of stock options.

11-137

ATC 11-4

Only the stock market on which each company is listed is provided below. The closing price and P/E ratio will obviously change depending on the date this problem is assigned.

The NASDAQ is technically not a stock exchange, but an electronic over-the-counter system. However, many business persons think of it as a stock exchange nonetheless, so it is referred to as such here.

Company Symbol

Stock Exchang

e

Closing

Price

P/E Ratio

Berkshire Hathaway

BRKA NYSE

Intel INTC NASDAQ

Iomega IOM NYSE

Yahoo YHOO NASDAQ

Xerox XRX NYSE

11-138

ATC 11-5

Computation of Price Earnings Ratio:


2. Compute Price Earnings Ratio:Selling Price per Share Earnings per Share

a.Geolock Corporation:


Outst.= EPS

$8,000 2,000 = $4.00


Earnings per Share

= P/E Ratio

$48.00 $4.00 = 12.00

Minerals Corporation:


Outst.= EPS

$9,400 2,000 = 4.70


Earnings per Share

= P/E Ratio

$94.00 $4.70 = 20.00

b. Minerals Corporation appears to have greater potential for growth. Investors are willing to pay more for today’s

11-139


11-140

ATC 11-6

Note to Instructor: The factors given below are only selected factors and not meant to be all inclusive.

MEMO

TO: Jim and Scott

FROM:

The advantages and disadvantages of the partnership and the corporate forms of business organizations are shown below.

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.

Based on above information, I would recommend that the business be formed as a _____________________.

11-141

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.

2. Increasing the receivables expected to be uncollectible would increase the amount of bad debt expense on the income statement with the resultant effect of reducing net income, and thereby stockholders’ equity (i.e., retained earnings), on the balance sheet. Further, it would reduce assets by reducing the value of receivables (increase the ending balance in the contra asset allowance for doubtful accounts).

3. Increasing the percentage of estimated warranty claims would increase warranty expense in the current period. This action would reduce net income and stockholders’ equity (i.e., retained earnings) on the balance sheet. Other balance sheet accounts affected would be warranties payable, which would increase liabilities for the period.

b. Stinson’s actions would cause an increase in stockholders’ equity in subsequent accounting periods. If inventory were written down in the current period, future periods would show less product costs (costs of goods sold in the future period when the inventory is sold would be less). The other three strategies would result in lower expenses and higher profits in subsequent periods with the resultant effect of increasing stockholders’ equity. However, the overall value of the firm would not be as high as it would have been because 10% of the second period’s earnings would be transferred to management through the bonus system.

11-142

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.

d. If bonuses were tied to stock prices, management would be motivated to make decisions that maximize the company’s value. Actions that increase the value of the firm would be reflected in the price of the stock. Accordingly, there would be goal congruence (i.e., maximization of the value of the firm) between the interest of the owners (i.e., investors) and the managers’ personal 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.

11-143

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.

a. As of December 30, 2000, PepsiCo’s total shareholders’ equity was $7,249.

b. The par value of common stock is 1.67 cents per share.

c. As of December 30, 2000 PepsiCo held approximately 280 million shares of treasury stock.

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.

11-144

Documents

Chapter 11 Solution of fundamental of financial accouting by EDMONDS (4th edition)