财务会计（英文版·原书第五版）课后习题答案。第13单元

财务会计（英文版·原书第五版）课后习 题 快递公司问题件快递公司问题件货款处理关于圆的周长面积重点题型关于解方程组的题及答案关于南海问题 答案 八年级地理上册填图题岩土工程勘察试题省略号的作用及举例应急救援安全知识车间5s试题及答案 。第13单元 CHAPTER 12 Corporations: Organization, Stock Transactions, Dividends, and Retained Earnings ASSIGNMENT CLASSIFICATION TABLE Brief A B Study Objectives Questions Exercises Exercises Problems Problems 1. Identify the major 1, 2, 3, 4, 5, 1 characteristics of a 6 corporation. 2. Record the issuance of 7, 8, 9, 10, 2, 3, 4 1, 2, 3, 6, 7 1A, 3A, 6A 1B, 3B common stock. 11 3. Explain the accounting for 12, 13, 14 5 2, 4, 6, 7 2A, 3A 6A 2B, 3B treasury stock. 4. Differentiate preferred 15 6 2, 5, 6, 7, 1A, 3A, 6A 1B, 3B stock from common stock. 16 5. Prepare the entries for 18, 19, 20, 7, 8, 9 8, 9, 10, 4A, 5A 7A 4B, 6B cash dividends and stock 21, 22, 23, 11, 17 dividends. 6. Identify the items that are 16, 24, 25, 10, 11 12 5A 5B, 6B reported in a retained earnings statement. 7. Prepare and analyze a 17 12 5, 6, 13, 1A, 2A, 3A, 1B, 2B, 3B, comprehensive stock- 14, 15, 17 4A, 5A, 6A, 4B, 5B, 6B, holder’s equity section. 7A, 8A 7B *8. Describe the use and 9A content of the stockhold- ers’ equity statement. *9 Compute book value per 26, 27 13 15, 16, 17 3A, 8A 3B, 7B share. *Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appen- dix to the chapter. 12-1 ASSIGNMENT CHARACTERISTICS TABLE Problem Difficulty Time Number Description Level Allotted (min.) 1A Journalize stock transactions, post, and prepare paid-in Simple 30 40 capital section. 2A Journalize and post treasury stock transactions, and Moderate 25 35 prepare stockholder’s equity section. 3A Journalize and post transactions, prepare stockholders’ Complex 40 50 equity section. 4A Prepare dividend entries and stockholders’ equity section. Moderate 30 40 5A Prepare retained earnings statement and stockholders’ Moderate 20 30 equity section, and compute earnings per share. 6A Prepare entries for stock transactions and stockholders’ Moderate 30 40 equity section. 7A Prepare dividend entries and stockholders’ equity section. Moderate 30 40 *8A Prepare stockholders’ equity section; compute book value Simple 20 30 per share. *9A Prepare stockholders’ equity statement. Simple 20 30 1B Journalize stock transactions, post, and prepare paid-in Simple 30 40 capital section. 2B Journalize and post treasury stock transactions, and pre- Moderate 25 35 pare stockholders’ equity section. 3B Journalize and post transactions, prepare stockholders’ Moderate 40 50 equity section. 4B Prepare dividend entries and stockholders’ equity section. Simple 30 40 5B Prepare retained earnings statement and stockholders’ Moderate 30 40 equity section. 6B Prepare retained earnings statement and stockholders’ Moderate 30 40 equity section, and compute earnings per share. *7B Prepare stockholders’ equity section; compute book value Simple 20 30 per share. 12-2 BLOOM'S TAXONOMY TABLE Study Objective Knowledge Comprehension Application Analysis Synthesis Evaluation Identify the major characteristics of Q121. -4 Q12-6 Q12-1 Q12-3 a corporation. Q12-5 BE12-1 Q12-2 BE12-1 E12-6 P12-3A E12-7 2.Record the issuance of common Q12-8 Q12-7 E12-1 stock. Q12-9 BE12-2 E12-2 P12-6A Q12-10 BE12-3 E12-3 P12-1B Q12-11 BE12-4 P12-1A P12-3B E12-6 P12-2B E12-7 3.Explain the accounting for treasury Q12-12 BE12-5 P12-2A stock. Q12-13 E12-2 P12-3A P12-3B Q12-14 E12-4 P12-6A P12-6A E12-7 4.Differentiate preferred stock from Q12-15 BE12-6 E12-16 common stock.. E12-6 E12-2 P12-1A P12-1B E12-5 P12-3A P12-3B Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Exercises and Problems P12-5A E12-11 5.Prepare the entries for cash divi - Q12-18 Q12-22 BE12-7 E12-9 dends and stock dividends. Q12-19 Q12-23 BE12-8 E12-10 P12-7A Q12-20 BE12-9 E12-17 P12-4B Q12-21 E12-8 P12-4A P12-6B 12-36.Identify the items that are reported Q12-16 BE12-10 P12-5A in a retained earnings statement. Q12-24 BE12-11 P12-5B Q12-25 E12-12 P12-6B 7.Prepare and analyze a comprehen - Q12-17 BE12-12 P12-2A P12-1B sive stockholders’ equity section. E12-6 E12-5 P12-3A P12-2B E12-13 E12-6 P12-4A P12-3B E12-14 P12-5A P12-4B E12-15 P12-6A P12-5B E12-17 P12-7A P12-6B P12-7B P12-1A P12-8A P12-9A *8. Describe the use and content of the stockholders’ equity statement. *9. Compute book value per share. Q12-27 Q12-26 BE12-13 E12-17 P12-3B E12-15 P12-3A P12-7B E12-16 P12-8A Broadening Your Perspective Research Case Financial Reporting Interpreting Ethics Case Cookie Chronicle Exploring the Web Comparative Analysis Financial Communication Statements A Global Focus Group Decision ANSWERS TO QUESTIONS 1. (a) Separate legal existence. A corporation is separate and distinct from its owners and it acts in its own name rather than in the name of its stockholders. In contrast to a partnership, the acts of the owners (stockholders) do not bind the corporation unless the owners are duly appointed agents of the corporation. (b) Limited liability of stockholders. Because of its separate legal existence, creditors of a cor- poration ordinarily have recourse only to corporate assets to satisfy their claims. Thus, the liability of stockholders is normally limited to their investment in the corporation. (c) Transferable ownership rights. Ownership of a corporation is held in shares of capital stock. The shares are transferable units. Stockholders may dispose of part or all of their interest by simply selling their stock. The transfer of ownership to another party is entirely at the discretion of the stockholder. 2. (a) Corporation management is an advantage to a corporation because it can hire professional managers to run the company. Corporation management is a disadvantage to a corporation because it prevents owners from having an active role in directly managing the company. (b) Two other disadvantages of a corporation are government regulations and additional taxes. A corporation is subject to numerous state and federal regulations. For example, state laws prescribe the requirements for issuing stock, and federal securities laws govern the sale of stock to the general public. Corporations must pay both federal and state income taxes. These taxes are substantial. In addition, stockholders must pay income taxes on cash divi- dends received. No, Kari is not correct. A corporation must be incorporated in only one state. It is to the com- 3. pany’s advantage to incorporate in a state whose laws are favorable to the corporate form of business organization. A corporation may incorporate in a state in which it does not have a headquarters office or major operating facilities. In the absence of restrictive provisions, the basic ownership rights of common stockholders are 4. the rights to: (1) vote in the election of the board of directors and on corporate actions that require stockhold- ers’ approval. (2) share in corporate earnings. (3) maintain the same percentage ownership when additional shares of common stock are is- sued (the preemptive right). (4) share in assets upon liquidation. Legally, a corporation is an entity, separate and distinct from its owners. As a legal entity, a cor- 5. poration has most of the privileges and is subject to the same duties and responsibilities as a person. The corporation acts under its own name rather than under the names of its stockhold- ers. A corporation may buy, own, and sell property, borrow money, enter into legally binding contracts, and sue or be sued. (a) The two principal components of stockholders’ equity for a corporation are paid-in capital 6. (the investment of cash and other assets in the corporation by stockholders in exchange for capital stock) and retained earnings. The principal source of retained earnings is net in- come. (b) Paid-in capital is the term used to describe the total amount paid-in on capital stock. Paid-in capital may result through the sale of common stock, preferred stock, or treasury stock. 12-4 Questions Chapter 12 (Continued) 7. The maximum number of shares that a corporation is legally allowed to issue is the number authorized. Sokol Corporation is authorized to sell 100,000 shares. Of these shares, 80,000 shares have been issued. Outstanding shares are those issued shares which have not been reacquired by the corporation; in other words, issued shares less treasury shares. Sokol has 73,000 shares outstanding (80,000 issued less 7,000 treasury). 8. The par value of common stock has no effect on its market value. Par value is a legal amount per share which usually indicates the minimum amount at which a share of stock can be issued. The market value of stock depends on a number of factors, including the com- pany’s anticipated future earnings, its expected dividend rate per share, its current financial position, the current state of the economy, and the current state of the securities markets. Therefore, either investment mentioned in the question could be the better investment, based on the above factors and future potential. The relative par values should have no ef- fect on the investment decision. Among the factors which influence the market value of stock are the company’s anticipated 9. future earnings, its expected dividend rate per share, its current financial position, the cur- rent state of the economy, and the current state of the securities markets. The sale of common stock below par value is not permitted in most states. 10. When stock is issued for services or noncash assets, the cost should be measured at either 11. the fair market value of the consideration given up (in this case, the stock) or the fair market value of the consideration received (in this case, the land), whichever is more clearly evi- dent. In this case, the fair market value of the stock is more objectively determinable than that of the land, since the stock is actively traded in the securities market. The appraised value of the land is merely an estimate of the land’s value, while the market price of the stock is the amount the stock was actually worth on the date of exchange. Therefore, the land should be recorded at $90,000, the common stock at $20,000, and the excess ($70,000) as paid-in capital in excess of par value. A corporation may acquire treasury stock: (1) to reissue the shares to officers and employ- 12. ees under bonus and stock compensation plans, (2) to increase trading of the company’s stock in the securities market in the hopes of enhancing its market value, (3) to have addi- tional shares available for use in the acquisition of other companies, (4) to reduce the num- ber of shares outstanding and, thereby, increase earnings per share, and (5) to rid the company of disgruntled investors. When treasury stock is purchased, Treasury Stock is debited and Cash is credited at cost 13. ($12,000 in this example). Treasury Stock is a contra stockholders’ equity account and cash is an asset. Thus, this transaction: (a) has no effect on net income, (b) decreases total as- sets, (c) has no effect on total paid-in capital, and (d) decreases total stockholders’ equity. When treasury stock is resold at a price above original cost, Cash is debited for the amount 14. of the proceeds ($15,000), Treasury Stock is credited at cost ($12,000), and the excess ($3,000) is credited to Paid-in Capital from Treasury Stock. Cash is an asset, and the other two accounts are part of stockholders’ equity. Therefore, this transaction: (a) has no effect on net income, (b) increases total assets, (c) increases total paid-in capital, and (d) in- creases total stockholders’ equity. 12-5 Questions Chapter 12 (Continued) 15. (a) Common stock and preferred stock both represent ownership of the corporation. Com- mon stock signifies the basic residual ownership; preferred stock is ownership with certain privileges or preferences. Preferred stockholders typically have a preference as to dividends and as to assets in the event of liquidation. However, preferred stockhold- ers generally do not have voting rights. (b) Some preferred stocks possess the additional features of being cumulative. Most pre- ferred stock is cumulative—preferred stockholders must be paid both current-year divi- dends and unpaid prior year dividends before common stockholders receive any dividends. (c) Dividends in arrears are disclosed in the notes to the financial statements. The debits and credits to retained earnings are: 16. Debits Credits 1. Net loss 1. Net income 2. Prior period adjustments for 2. Prior period adjustments for understate- overstatements of net income ments of net income Cash and stock dividends 3. 4. Some disposals of treasury stock 17. The answers are summarized in the table below: Account Classification (a) Common Stock Paid-in capital—capital stock (b) Paid-in Capital in Excess of Par Value Paid-in capital—additional paid-in capital (c) Retained Earnings Retained earnings (d) Treasury Stock Deducted from total paid-in capital and retained earnings Paid-in capital—additional paid-in capital (e) Paid-in Capital from Treasury Stock (f) Paid-in Capital in Excess of Stated Value Paid-in capital—additional paid-in capital (g) Preferred Stock Paid-in capital—capital stock 18. For a cash dividend to be paid, a corporation must have retained earnings, adequate cash, and a dividend declared by the board. 19. May 1 is the date on which the board of directors formally declares (authorizes) and an- nounces the cash dividend. May 15 is the record date which marks the time when owner- ship of outstanding shares is determined for dividend purposes from the stockholders’ re- cords. May 31 is the date when the dividend checks are mailed to stockholders. Accounting entries are made on May 1 (debit Retained Earnings and credit Dividends Payable), and on May 31 (debit Dividends Payable and credit Cash). 20. A cash dividend decreases assets, retained earnings, and total stockholders’ equity. A stock dividend decreases retained earnings, increases paid-in capital, and has no effect on total assets and total stockholders’ equity. 12-6 Questions Chapter 12 (Continued) 21. A corporation generally issues stock dividends for one of the following reasons: (1) To satisfy stockholders’ dividend expectations without spending cash. (2) To increase the marketability of its stock by increasing the number of shares outstanding and thereby decreasing the market price per share. Decreasing the market price of the stock makes the shares easier to purchase for smaller investors (3) To emphasize that a portion of stockholders’ equity that had been reported as retained earnings has been permanently reinvested in the business and therefore is unavailable for cash dividends. In a stock split, the number of shares is increased in the same proportion that par value is 22. decreased. Thus, in the Fields Corporation the number of shares will increase to 40,000 = (20,000 X 2) and the par value will decrease to $5 = ($10 ? 2). The effect of a split on mar- ket value is generally inversely proportional to the size of the split. In this case, the market price would fall to approximately $60 per share ($120 ? 2). The different effects of a stock split versus a stock dividend are: 23. Item Stock Split Stock Dividend Total paid-in capital No change Increase Total retained earnings No change Decrease Total par value (common stock) No change Increase Par value per share Decrease No Change 24. A prior period adjustment is a correction of an error in reporting income of a prior period. The correction is reported in the current year’s retained earnings statement as an adjust- ment of the beginning balance of retained earnings. 25. The purpose of a retained earnings restriction is to indicate that a portion of retained earn- ings is currently unavailable for dividends. Restrictions may result from the following causes: legal, contractual, or voluntary. *26. The formula for computing book value per share when a corporation has only common stock outstanding is: Total Number of Book Stockholders’ ? Common Shares = Value Equity Outstanding per Share Book value per share represents the equity a common stockholder has in the net assets of the corporation from owning one share of stock. 12-7 Questions Chapter 12 (Continued) *27. Par value is a legal amount per share, often set at an arbitrarily selected amount, which usually indicates the minimum amount at which a share of stock can be issued. Book value per share represents the equity a common stockholder has in the net assets of the corpora- tion from owning one share of stock. If the corporation has been reinvesting some of its earnings over the years, or if the stock was originally issued above par, or both, the book value per share will exceed the par value. Market value is generally unrelated to par value and at best is only remotely related to book value. A stock’s market value will reflect many factors, including the company’s anticipated future earnings, its expected dividend rate per share, its current financial position, the current state of the economy, and the current state of the securities markets. 12-8 SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 12-1 The advantages and disadvantages of a corporation are as follows: Advantages Disadvantages Separate legal existence Corporation management— Limited liability of stockholders separation of ownership Transferable ownership rights and management Ability to acquire capital Government regulations Continuous life Additional taxes Corporation management — professional managers BRIEF EXERCISE 12-2 May 10 Cash (1,000 X $18)................................................ 18,000 Common Stock (1,000 X $10) .................. 10,000 Paid-in Capital in Excess of Par Value (1,000 X $8) ................................... 8,000 BRIEF EXERCISE 12-3 June 1 Cash (3,000 X $7).................................................. 21,000 Common Stock (3,000 X $1)..................... 3,000 Paid-in Capital in Excess of Stated Value (3,000 X $6) ................................... 18,000 BRIEF EXERCISE 12-4 Land (5,000 X $16) .................................................................... 80,000 Common Stock (5,000 X $10)....................................... 50,000 Paid-in Capital in Excess of Par Value ..................... 30,000 (5,000 X $6) 12-9 BRIEF EXERCISE 12-5 July 1 Treasury Stock (500 X $9)................................... 4,500 Cash .................................................................. 4,500 Sept. 1 Cash (300 X $11) .................................................... 3,300 Treasury Stock (300 X $9).......................... 2,700 Paid-in Capital from Treasury Stock (300 X $2)........................................ 600 BRIEF EXERCISE 12-6 Cash (5,000 X $120).................................................................. 600,000 Preferred Stock (5,000 X $100) .................................... 500,000 Paid-in Capital in Excess of Par Value— Preferred Stock (5,000 X $20).................................. 100,000 BRIEF EXERCISE 12-7 Nov. 1 Retained Earnings (50,000 X $1/share) .......... 50,000 Dividends Payable........................................ 50,000 Dec. 31 Dividends Payable................................................. 50,000 Cash .................................................................. 50,000 BRIEF EXERCISE 12-8 Dec. 1 Retained Earnings (6,000 X $16)....................... 96,000 Common Stock Dividends Distributable (6,000 X $10)............................................... 60,000 Paid-in Capital in Excess of Par Value (6,000 X $6)..................................... 36,000 Common Stock Dividends Distributable ....... 31 60,000 Common Stock.............................................. 60,000 12-10 BRIEF EXERCISE 12-9 Before After Dividend Dividend (a) Stockholders’ equity Paid-in capital Common stock, $10 par $2,000,000 $2,200,000 In excess of par value — 80,000 (1) . Total paid-in capital 2,000,000 2,280,000 Retained earnings (2) 300,000 20,000 Total stockholders’ equity $2,300,000 $2,300,000 (b) Outstanding shares 200,000 220,000 (1) (2) [$300,000 – (20,000 X $14)] 20,000 X ($14 – $10) BRIEF EXERCISE 12-10 MOUNT INC. Retained Earnings Statement For the Year Ended December 31, 2006 Balance, January 1 $220,000 Add: Net income 120,000 340,000 85,000 Less: Dividends Balance, December 31 $255,000 BRIEF EXERCISE 12-11 OLA SMITH INC. Retained Earnings Statement For the Year Ended December 31, 2006 Balance, January 1, as reported $800,000 Correction for overstatement of net income in prior period (depreciation expense error) (50,000) Balance, January 1, as adjusted 750,000 Add: Net income 150,000 900,000 Less: Cash dividends $90,000 Stock dividends 8,000 98,000 Balance, December 31 $802,000 12-11 BRIEF EXERCISE 12-12 Stockholders’ equity Paid-in capital Capital stock Common stock, $10 par value, 5,000 shares issued and 4,500 shares outstanding $50,000 Additional paid-in capital In excess of par value—common stock 10,000 Total paid-in capital 60,000 Retained earnings 45,000 Total paid-in capital and retained earnings 105,000 Less: Treasury stock—common (500 shares) (11,000) Total stockholders’ equity $94,000 *BRIEF EXERCISE 12-13 Book value per share = ($810,000 ? 40,000) = $20.25 12-12 SOLUTIONS TO EXERCISES EXERCISE 12-1 (a) Jan. 10 Cash (70,000 X $5)....................................... 350,000 Common Stock.................................... 350,000 Cash (40,000 X $8)....................................... July 1 320,000 Common Stock (40,000 X $5).......... 200,000 Paid-in Capital in Excess of Par Value (40,000 X $3)................. 120,000 (b) Jan. 10 Cash (70,000 X $5)....................................... 350,000 Common Stock (70,000 X $1).......... 70,000 Paid-in Capital in Excess of Stated Value (70,000 X $4)........... 280,000 Cash (40,000 X $8)....................................... July 1 320,000 Common Stock (40,000 X $1).......... 40,000 Paid-in Capital in Excess of Stated Value (40,000 X $7)........... 280,000 EXERCISE 12-2 Mar. 2 Organization Expense....................................... 30,000 Common Stock (5,000 X $1) ................... 5,000 Paid-in Capital in Excess of Par Value—Common Stock ....................... 25,000 June 12 Cash ........................................................................ 375,000 Common Stock (60,000 X $1)................. 60,000 Paid-in Capital in Excess of Par Value—Common Stock ....................... 315,000 July 11 Cash (1,000 X $110)............................................ 110,000 Preferred Stock (1,000 X $100) .............. 100,000 Paid-in Capital in Excess of Par Value—Preferred Stock....................... 10,000 (1,000 X $10) 12-13 EXERCISE 12-2 (Continued) Nov. 28 Treasury Stock...................................................... 80,000 Cash................................................................. 80,000 EXERCISE 12-3 1. Land...................................................................................... 110,000 Common Stock (5,000 X $20) .............................. 100,000 Paid-in Capital in Excess of Par Value............. 10,000 2. Land (20,000 X $11) ......................................................... 220,000 Common Stock (20,000 X $10)............................ 200,000 Paid-in Capital in Excess of Par Value............. 20,000 (20,000 X $1) EXERCISE 12-4 (a) Mar. 1 Treasury Stock (50,000 X $16).................. 800,000 Cash ......................................................... 800,000 July 1 Cash (10,000 X $17)...................................... 170,000 Treasury Stock (10,000 X $16)......... 160,000 Paid-in Capital from Treasury Stock (10,000 X $1) ......................... 10,000 Cash (8,000 X $15)........................................ Sept. 1 120,000 Paid-in Capital from Treasury Stock (8,000 X $1) .................................... 8,000 Treasury Stock (8,000 X $16) ........... 128,000 (b) Sept. 1 Cash (8,000 X $13)........................................ 104,000 Paid-in Capital from Treasury Stock ............................................................ 10,000 Retained Earnings........................................ 14,000 Treasury Stock (8,000 X $16) ........... 128,000 12-14 EXERCISE 12-5 (a) Feb. 1 Cash (20,000 X $51)................................ 1,020,000 Preferred Stock............................... 1,000,000 (20,000 X $50) Paid-in Capital in Excess of Par Value—Preferred Stock (20,000 X $1) ................... 20,000 Cash (10,000 X $57)................................ July 1 570,000 Preferred Stock............................... 500,000 (10,000 X $50) Paid-in Capital in Excess of Par Value—Preferred Stock (10,000 X $7) ................... 70,000 (b) Preferred Stock Date Explanation Ref. Debit Credit Balance Feb. 1 1,000,000 1,000,000 July 1 500,000 1,500,000 Paid-in Capital in Excess of Par Value—Preferred Stock Date Explanation Ref. Debit Credit Balance Feb. 1 20,000 20,000 July 1 70,000 90,000 (c) Preferred stock—listed first in paid-in capital under capital stock. Paid-in Capital in Excess of Par Value—Preferred Stock—listed first under additional paid-in capital. 12-15 EXERCISE 12-6 MEMO To: President From: Your name , Chief Accountant Re: Questions about Stockholders’ Equity Section Your memorandum about the stockholders’ equity section was received this morning. I hope the following will answer your questions. (a) Common stock outstanding is 588,000 shares. (Issued shares 600,000 less treasury shares 12,000.) (b) The stated value of the common stock is $2 per share. (Common stock issued $1,200,000 ? 600,000 shares.) (c) The par value of the preferred stock is $100 per share. (Preferred stock $600,000 ? 6,000 shares.) (d) The dividend rate is 5%, or ($30,000 ? $600,000). (e) The Retained Earnings balance is still $1,858,000. Cumulative divi- dends in arrears are only disclosed in the notes to the financial statements. If I can be of further help, please contact me. 12-16 EXERCISE 12-7 May 2 Cash (10,000 X $12).............................................. 120,000 Common Stock (10,000 X $10) ................ 100,000 Paid-in Capital in Excess of Par Value—Common Stock ......................... 20,000 (10,000 X $2) Cash .......................................................................... 10 600,000 Preferred Stock (10,000 X $50)................ 500,000 Paid-in Capital in Excess of Par Value—Preferred Stock......................... 100,000 (10,000 X $10) Treasury Stock ...................................................... 15 14,000 Cash ................................................................. 14,000 Cash (500 X $16) ................................................... 31 8,000 Treasury Stock (500 X $14)....................... 7,000 Paid-in Capital from Treasury Stock (500 X $2)....................................... 1,000 EXERCISE 12-8 (a) June 15 Retained Earnings (110,000 X $1)......... 110,000 Dividends Payable ............................ 110,000 July 10 Dividends Payable ..................................... 110,000 Cash....................................................... 110,000 Retained Earnings (112,000 X $1.20) ... Dec. 15 134,400 Dividends Payable ............................ 134,400 (b) In the retained earnings statement, dividends of $244,400 will be deducted. In the balance sheet, Dividends Payable of $134,400 will be reported as a current liability. 12-17 EXERCISE 12-9 1. Retained Earnings (24,000* X $18) ............................. 432,000 Common Stock Dividends Distributable......... 240,000 (24,000 X $10) Paid-in Capital in Excess of Par Value............. 192,000 (24,000 X $8) *[($1,000,000 ? $10) + 60,000] X 15%. Retained Earnings (39,000* X $20) ............................. 2. 780,000 Common Stock Dividends Distributable......... 195,000 (39,000 X $5) Paid-in Capital in Excess of Par Value ............ 585,000 (39,000 X $15) *[($1,000,000 ? 5) + 60,000] X 15%. EXERCISE 12-10 After After Before Stock Stock Action Dividend Split Stockholders’ equity Paid-in capital Common stock $ 600,000 $ 630,000 $ 600,000 (1) In excess of par value 0 12,000 0 Total paid-in capital 600,000 642,000 600,000 (2) Retained earnings 900,000 858,000 900,000 Total stockholders’ equity $1,500,000 $1,500,000 $1,500,000 Outstanding shares 60,000 63,000 120,000 Book value per share $25.00 $23.81 $12.50 (1) (2) 3,000 X ($14 – $10) $900,000 – (3,000 X $14) 12-18 EXERCISE 12-11 1. Dec. 31 Retained Earnings .............................. 50,000 Interest Expense......................... 50,000 2. 31 Retained Earnings .............................. 6,000* Dividends Payable .............................. 10,000 Common Stock Dividends Distributable............................ 10,000 Paid-in Capital in Excess of Par Value ($16 – $10) X 1,000................. 6,000 *(1,000 X $16) – $10,000 3. 31 Common Stock .................................... 2,000,000 Retained Earnings ..................... 2,000,000 EXERCISE 12-12 CASTLE CORPORATION Retained Earnings Statement For the Year Ended December 31, 2006 Balance, January 1, as reported................................... $550,000 Correction for overstatement of 2005 net income (depreciation error)....................................... (30,000) Balance, January 1, as adjusted................................... 520,000 Add: Net income.............................................................. 350,000 870,000 Less: Cash dividends ..................................................... $120,000 Stock dividends .................................................... 80,000 200,000 Balance, December 31 ..................................................... $670,000 12-19 EXERCISE 12-13 Paid-in Capital Capital Retained Account Stock Additional Earnings Other Common Stock X Preferred Stock X Treasury Stock—Common X Paid-in Capital in Excess of Par Value—Preferred Stock X Paid-in Capital in Excess of Stated Value—Common Stock X Paid-in Capital from Treasury Stock X Retained Earnings X 12-20 EXERCISE 12-14 TIGER INC. Balance Sheet (Partial) December 31, 200X Stockholders’ equity Paid-in capital Capital stock 8% Preferred stock, $5 par value, 40,000 shares authorized, 30,000 shares issued ..................... $ 150,000 Common stock, no par, $1 stated value, 400,000 shares autho- rized, 300,000 shares issued and 290,000 outstanding .............. $ 300,000 Common stock dividends distributable...................................... 60,000 360,000 Total capital stock ...................... 510,000 Additional paid-in capital In excess of par value— preferred stock................................. 344,000 In excess of stated value— common stock.................................. 1,200,000 Total additional paid-in capital......................................... 1,544,000 Total paid-in capital.................... 2,054,000 Retained earnings (see Note R) ........................ 700,000 Total paid-in capital and retained earnings ................... 2,754,000 Less: Treasury stock (10,000 common shares)..................................................... 74,000 Total stockholders’ equity ....... $2,680,000 Note R: Retained earnings is restricted for plant expansion, $100,000. 12-21 *EXERCISE 12-15 ALUMINUM COMPANY OF AMERICA (a) Stockholders’ equity (in millions of dollars) Paid-in capital Capital stock Preferred stock, $100 par value, $3.75, cumulative, 557,740 shares authorized, 557,649 shares issued and 546,024 shares outstanding............................................ $ 56 Common stock, $1 par value, 1,800,000,000 shares authorized, 924,600,000 issued and 844,800,000 shares outstanding ............................................. 925 Total capital stock........................................... 981 Additional paid-in capital ............................................... 6,101 Total paid-in capital........................................ 7,082 Retained earnings...................................................................... 7,428 Total paid-in capital and retained earnings.............................................................. 14,510 Less: Treasury stock ................................................................ (2,828) Total stockholders’ equity ............................................. $11,682 (b) Total stockholders’ equity .............................................................. $11,682 Less: Preferred stock equity (par value).................................... 56 Common stock equity ...................................................................... $11,626 Common shares outstanding (in millions)................................ 844.8 Book value per share ($11,626 ? 844.8)...................................... $13.76 12-22 *EXERCISE 12-16 (a) (b) Total stockholders’ equity $3,000,000 $3,000,000 Less: Preferred stock equity Par value ($500,000) Call price (10,000 X $60) (600,000) Dividends in arrears ($10,000 X $5) (50,000) . Common stock equity $2,500,000 $2,350,000 Common shares outstanding 200,000 200,000 Book value per share $12.50 $11.75 *EXERCISE 12-17 (a) (1) Book value before the stock dividend was $7.50 ($300,000 ? 40,000). (2) Book value after the stock dividend is $6.82 ($300,000 ? 44,000). (b) Common stock Balance before dividend ........................................................ $200,000 Dividend shares (4,000 X $5) ................................................ 20,000 New balance ...................................................................... $220,000 Paid-in capital in excess of par value Balance before dividend ........................................................ $25,000 Excess over par of shares issued (4,000 X $10) ............ 40,000 New balance ...................................................................... $65,000 Retained earnings Balance before dividend ........................................................ $75,000 Dividend (4,000 X $15)............................................................. 60,000 New balance ...................................................................... $15,000 12-23 SOLUTIONS TO PROBLEMS PROBLEM 12-1A 300,000 (a) Jan. 10 Cash (100,000 X $3)..................................... Common Stock (100,000 X $2)........ 200,000 Paid-in Capital in Excess of Stated Value—Common Stock (100,000 X $1) ...................... 100,000 Mar. 1 Cash (10,000 X $55)..................................... 550,000 Preferred Stock (10,000 X $50) ....... 500,000 Paid-in Capital in Excess of Par Value—Preferred Stock ........ 50,000 (10,000 X $5) Land.................................................................. Apr. 1 85,000 Common Stock (25,000 X $2) .......... 50,000 Paid-in Capital in Excess of Stated Value—Common Stock ($85,000 – $50,000) ............ 35,000 Cash (75,000 X $4) ....................................... May 1 300,000 Common Stock (75,000 X $2) .......... 150,000 Paid-in Capital in Excess of Stated Value—Common Stock (75,000 X $2)......................... 150,000 Organization Expense ................................ 50,000 Aug. 1 Common Stock (10,000 X $2) .......... 20,000 Paid-in Capital in Excess of Stated Value—Common Stock ($50,000 – $20,000) ............ 30,000 Cash (5,000 X $6).......................................... Sept. 1 30,000 Common Stock (5,000 X $2) ............ 10,000 Paid-in Capital in Excess of Stated Value—Common Stock (5,000 X $4)........................... 20,000 12-24 PROBLEM 12-1A (Continued) Nov. 1 Cash (2,000 X $58) ........................................ 116,000 Preferred Stock (2,000 X $50) .......... 100,000 Paid-in Capital in Excess of Par Value—Preferred Stock ......... 16,000 (2,000 X $8) (b) Preferred Stock Date Explanation Ref. Debit Credit Balance Mar. 1 J1 500,000 500,000 Nov. 1 J1 100,000 600,000 Common Stock Ref. Debit Credit Balance Date Explanation Jan. 10 J1 200,000 200,000 Apr. 1 J1 50,000 250,000 May 1 J1 150,000 400,000 Aug. 1 J1 20,000 420,000 Sept. 1 J1 10,000 430,000 Paid-in Capital in Excess of Par Value—Preferred Stock Date Explanation Ref. Debit Credit Balance Mar. 1 J1 50,000 50,000 Nov. 1 J1 16,000 66,000 Paid-in Capital in Excess of Stated Value—Common Stock Date Explanation Ref. Debit Credit Balance Jan. 10 J1 100,000 100,000 Apr. 1 J1 35,000 135,000 May 1 J1 150,000 285,000 Aug. 1 J1 30,000 315,000 Sept. 1 J1 20,000 335,000 12-25 PROBLEM 12-1A (Continued) (c) HAYSLETT CORPORATION Stockholders’ equity Paid-in capital Capital stock 6% Preferred stock, $50 par value, 20,000 shares authorized, 12,000 shares issued................ $ 600,000 Common stock, no par, $2 stated value, 500,000 shares authorized, 215,000 shares issued ............. 430,000 Total capital stock................. 1,030,000 Additional paid-in capital In excess of par value— preferred stock ........................... $ 66,000 In excess of stated value— common stock ............................ 335,000 Total additional paid-in capital ................................... 401,000 Total paid-in capital.............. $1,431,000 12-26 PROBLEM 12-2A 35,000 (a) Mar. 1 Treasury Stock (5,000 X $7) ......................... Cash ............................................................ 35,000 June 1 Cash (1,000 X $10)........................................... 10,000 Treasury Stock (1,000 X $7) ................ 7,000 Paid-in Capital from Treasury Stock (1,000 X $3)............................... 3,000 Sept. 1 Cash (2,000 X $9) ............................................. 18,000 Treasury Stock (2,000 X $7) ................ 14,000 Paid-in Capital from Treasury Stock (2,000 X $2)............................... 4,000 Cash (1,000 X $5) ............................................. Dec. 1 5,000 Paid-in Capital from Treasury Stock ......... 2,000 (1,000 X $2) Treasury Stock (1,000 X $7) ................ 7,000 Income Summary............................................. 31 60,000 Retained Earnings .................................. 60,000 (b) Paid-in Capital from Treasury Stock Date Explanation Ref. Debit Credit Balance June 1 J12 3,000 3,000 Sept. 1 J12 4,000 7,000 Dec. 1 J12 5,000 2,000 Treasury Stock Date Explanation Ref. Debit Credit Balance Mar. 1 J12 35,000 35,000 June 1 J12 28,000 7,000 Sept. 1 J12 14,000 14,000 Dec. 1 J12 7,000 7,000 12-27 PROBLEM 12-2A (Continued) Retained Earnings Date Explanation Ref. Debit Credit Balance Jan. 1 100,000 Balance 160,000 J12 60,000 Dec. 31 (c) GREEVE CORPORATION Stockholders’ equity Paid-in capital Capital stock Common stock, $1 par, 400,000 shares issued and 399,000 outstanding ................. $ 400,000 Additional paid-in capital In excess of par value................... $500,000 From treasury stock ...................... 5,000 Total additional paid-in capital ................................... 505,000 Total paid-in capital.............. 905,000 Retained earnings............................................ 160,000 Total paid-in capital and retained earnings.............. 1,065,000 Less: Treasury stock (1,000 shares at cost) ............................................... (7,000) Total stockholders’ equity .................................... $1,058,000 12-28 PROBLEM 12-3A (a) Feb. 1 Cash................................................................ 25,000 Common Stock (3,000 X $5)........... 15,000 Paid-in Capital in Excess of Stated Value—Common Stock ................................................. 10,000 Mar. 20 Treasury Stock—Common...................... 12,000 (1,500 X $8) Cash....................................................... 12,000 June 14 Cash................................................................ 36,000 Treasury Stock—Common............. 32,000 (4,000 X $8) Paid-in Capital from Treasury Stock—Common.......................... 4,000 Patent ............................................................. Sept. 3 17,000 Common Stock (2,000 X $5)........... 10,000 Paid-in Capital in Excess of Stated Value—Common Stock ................................................. 7,000 Income Summary ....................................... Dec. 31 340,000 Retained Earnings ............................ 340,000 (b) Preferred Stock Date Explanation Ref. Debit Credit Balance Jan. 1 Balance 300,000 Common Stock Date Explanation Ref. Debit Credit Balance Jan. 1 1,000,000 Balance 1,015,000 J1 15,000 Feb. 1 J1 10,000 1,025,000 Sept. 3 12-29 PROBLEM 12-3A (Continued) Paid-in Capital in Excess of Par Value—Preferred Stock Date Explanation Ref. Debit Credit Balance Jan. 1 Balance 20,000 Paid-in Capital in Excess of Stated Value—Common Stock Date Explanation Ref. Debit Credit Balance Jan. 1 Balance 425,000 Feb. 1 J1 10,000 435,000 Sept. 3 J1 7,000 442,000 Retained Earnings Date Explanation Ref. Debit Credit Balance Jan. 1 488,000 Balance 828,000 J1 340,000 Dec. 31 Treasury Stock—Common Date Explanation Ref. Debit Credit Balance Jan. 1 40,000 Balance Mar. 20 J1 12,000 52,000 June 14 J1 20,000 32,000 Paid-in Capital from Treasury Stock—Common Date Explanation Ref. Debit Credit Balance June 14 J1 4,000 4,000 12-30 PROBLEM 12-3A (Continued) (c) JAJOO CORPORATION Stockholders’ equity Paid-in capital Capital stock 10% Preferred stock, $100 par value, noncumulative, 5,000 shares authorized, 3,000 shares issued and outstanding.................................... $ 300,000 Common stock, no par, $5 stated value, 300,000 shares authorized, 205,000 shares issued and 202,500 shares outstanding.................................... 1,025,000 Total capital stock.................... 1,325,000 Additional paid-in capital In excess of par value— preferred stock ............................. $ 20,000 In excess of stated value— common stock .............................. 442,000 From treasury stock—common ........................... 4,000 Total additional paid-in capital ...................................... 466,000 Total paid-in capital ................. 1,791,000 Retained earnings ............................................ 828,000 Total paid-in capital and retained earnings................. 2,619,000 Less: Treasury stock (2,500 common shares)................................................ (20,000) Total stockholders’ equity ....................................... $2,599,000 $2, 599, 000 $300, 000 *(d) Book value per share: = $11.35202, 500 12-31 PROBLEM 12-4A (a) Feb. 1 Retained Earnings (60,000 X $1) 60,000 Dividends Payable 60,000 Mar. 1 Dividends Payable 60,000 Cash 60,000 Apr. 1 Memo—Five-for-one stock split increases number of shares to 300,000 (60,000 X 5) and reduces par value to $4 per share. July 1 Retained Earnings (15,000* X $7) 105,000 Common Stock Dividends Distributable (15,000 X $4) 60,000 Paid-in Capital in Excess of Par Value ($15,000 X $3) 45,000 *300,000 shares X .05 31 Common Stock Dividends Distributable 60,000 Common Stock 60,000 Dec. 1 Retained Earnings (315,000 X $.50) 157,500 Dividends Payable 157,500 31 Income Summary 380,000 Retained Earnings 380,000 (b) Common Stock Date Explanation Ref. Debit Credit Balance Jan. 1 Balance 1,200,000 Apr. 1 5 for 1 split—new par $4 1,200,000 July 31 1,260,000 60,000 12-32 PROBLEM 12-4A (Continued) Paid-in Capital in Excess of Par Value Date Explanation Ref. Debit Credit Balance Jan. 1 Balance 200,000 July 1 45,000 245,000 Retained Earnings Date Explanation Ref. Debit Credit Balance Jan. Balance 500,000 1 Feb. 1 Cash dividend 60,000 440,000 July 1 Stock dividend 105,000 335,000 Dec. 1 Cash dividend 157,500 177,500 31 Net income 557,500 380,000 Common Stock Dividends Distributable Date Explanation Ref. Debit Credit Balance July 1 60,000 60,000 31 60,000 0 (c) GALACTICA CORPORATION Stockholders’ equity Paid-in capital Capital stock Common stock, $4 par value, 315,000 shares issued and outstanding $1,260,000 Additional paid-in capital In excess of par value 245,000 Total paid-in capital 1,505,000 557,500 Retained earnings Total stockholders’ equity 2,062,500 12-33 PROBLEM 12-5A (a) Retained Earnings Nov. 1 Cash Dividend 600,000 Jan. 1 Balance 2,450,000 Dec. 31 Stock Dividend *280,000 Dec. 31 795,000 Dec. 31 Balance 2,365,000 *(400,000 X .10) X $7 (b) NAKONA CORPORATION Retained Earnings Statement For the Year Ended December 31, 2006 Balance, January 1 ............................................... $2,450,000 Add: Net income ................................................. 795,000 3,245,000 Less: Cash dividends......................................... $600,000 Stock dividends........................................ 280,000 880,000 $2,365,000 Balance, December 31......................................... (c) NAKONA CORPORATION Partial Balance Sheet December 31, 2006 Stockholders’ equity Paid-in capital Capital stock 8% Preferred stock, $100 par value, noncumulative, callable at $125, 20,000 shares authorized, 10,000 shares issued and out- standing ....................................... $1,000,000 Common stock, no par, $5 stated value, 600,000 shares authorized, 400,000 shares issued and outstanding ......... $2,000,000 Common stock dividends distributable ............................... 200,000 2,200,000 Total capital stock ................ 3,200,000 12-34 PROBLEM 12-5A (Continued) NAKONA CORPORATION (Continued) Additional paid-in capital In excess of par value— preferred stock .......................... $ 200,000 In excess of stated value— common stock ........................... 1,100,000 Total additional paid-in capital ................................... 1,300,000 Total paid-in capital .............. 4,500,000 Retained earnings (see Note A)................ 2,365,000 Total stockholders’ equity .................................... $6,865,000 Note A: Retained earnings is restricted for plant expansion, $100,000. $795, 000 $80, 000* (d) = $2.20 325, 000 *10,000 X $8 = $80,000 (e) Total dividend ..................................................................................... $600,000 Allocated to preferred stock—current year only .................... 80,000 Remainder to common stock ........................................................ $520,000 12-35 PROBLEM 12-6A (a) (1) Land...................................................................... 296,000 Preferred Stock (2,400 X $100) ........... 240,000 Paid-in Capital in Excess of Par Value—Preferred Stock .................... 56,000 (2) Cash ($2,000,000 + $5,700,000) ................... 7,700,000 Common Stock (400,000 X $5)............ 2,000,000 Paid-in Capital in Excess of Stated Value—Common Stock..................... 5,700,000 (3) Treasury Stock—Common............................ 33,000 (1,500 X $22) Cash............................................................. 33,000 (4) Cash (500 X $28)............................................... 14,000 Treasury Stock—Common................... 11,000 (500 X $22) Paid-in Capital from Treasury Stock (500 X $6) .................................. 3,000 (b) ARNOLD CORPORATION Stockholders’ equity Paid-in capital Capital stock 8% Preferred stock, $100 par value, noncumulative, 40,000 shares authorized, 2,400 shares issued and outstanding ................................ $ 240,000 Common stock, no par, $5.00 stated value, 2,000,000 shares authorized, 400,000 shares issued, and 399,000 outstanding ................................ 2,000,000 Total capital stock ................ 2,240,000 12-36 PROBLEM 12-6A (Continued) ARNOLD CORPORATION (Continued) Additional paid-in capital In excess of par value— preferred stock .......................... $ 56,000 In excess of stated value— common stock ........................... 5,700,000 From treasury stock— common ....................................... 3,000 Total additional paid-in capital ................................... 5,759,000 Total paid-in capital .............. 7,999,000 560,000 Retained earnings ......................................... Total paid-in capital and retained earnings.............. 8,559,000 Less: Treasury stock (1,000 common shares)............................................. (22,000) Total stockholders’ equity .................................... $8,537,000 12-37 PROBLEM 12-7A 90,000 (a) Jan. 15 Retained Earnings (90,000 X $1)............ Dividends Payable............................. 90,000 Feb. 15 Dividends Payable...................................... 90,000 Cash ....................................................... 90,000 Retained Earnings (9,000 X $15)............ Apr. 15 135,000 Common Stock Dividends Distributable (9,000 X $10) ......... 90,000 Paid-in Capital in Excess of Par Value (9,000 X $5).................. 45,000 Common Stock Dividends May 15 Distributable ............................................ 90,000 Common Stock (9,000 X $10)......... 90,000 July 1 Memo—two-for-one stock split increases the number of shares outstanding to 198,000, or (99,000 X 2) and reduces the par value to $5 per share. Dec. 1 Retained Earnings (198,000 X $.50)...... 99,000 Dividends Payable............................. 99,000 31 Income Summary........................................ 250,000 Retained Earnings............................. 250,000 (b) Common Stock Date Explanation Ref. Debit Credit Balance Jan. 1 Balance 900,000 May 15 990,00090,000 July 1 2 for 1 stock split— new par value = $5 12-38 PROBLEM 12-7A (Continued) Paid-in Capital in Excess of Par Value Date Explanation Ref. Debit Credit Balance Jan. 1 Balance 200,000 Apr. 15 245,000 45,000 Retained Earnings Date Explanation Ref. Debit Credit Balance Jan. Balance 540,000 1 15 Cash dividends 90,000 450,000 Apr. 15 Stock dividends 135,000 315,000 Dec. 1 Cash dividends 99,000 216,000 31 Net income 466,000 250,000 Common Stock Dividends Distributable Date Explanation Ref. Debit Credit Balance Apr. 15 90,000 90,000 May 15 0 90,000 (c) SNIDER CORPORATION Balance Sheet (Partial) December 31, 2006 Stockholders’ equity Paid-in capital Capital stock Common stock, $5 par value, 198,000 shares issued and outstanding.................. $ 990,000 Additional paid-in capital In excess of par value ........................................ 245,000 Total paid-in capital.................................... 1,235,000 Retained earnings ................................................................. 466,000 Total stockholders’ equity ....................... $1,701,000 12-39 *PROBLEM 12-8A (a) MCGRATH CORPORATION Stockholders’ equity Paid-in capital Capital stock 8% Preferred stock, $100 par value, noncumulative, 4,000 shares issued and outstanding............................ $ 400,000 Common stock, no par, $10 stated value, 150,000 shares issued, and 142,000 outstanding .................................... 1,500,000 Total capital stock .................... 1,900,000 Additional paid-in capital In excess of par value— preferred stock.............................. $288,400 In excess of stated value— common stock............................... 690,000 From treasury stock......................... 6,000 Total additional paid-in capital....................................... 984,400 Total paid-in capital.................. 2,884,400 Retained earnings............................................. 776,000 Total paid-in capital and retained earnings ................. 3,660,400 Less: Treasury stock (8,000 common shares) ................................................ (88,000) Total stockholders’ equity........................................ $3,572,400 12-40 *PROBLEM 12-8A (Continued) (b) The book value of the common stock is $22.06 computed as follows: Total stockholders’ equity...................................................... $3,572,400 Less: Preferred stock equity Call price ($110 X 4,000).......................................... 440,000 Common stock equity.............................................................. $3,132,400 Common shares outstanding................................................ 142,000 Book value per share ($3,132,400 ? 142,000) ................... $22.06 Note: No preferred dividends are assigned to the preferred stock equity because the preferred stock is noncumulative. 12-41 *PROBLEM 12-9A HAMBLIN INC. Stockholders’ Equity Statement For the Year Ending December 31, 2006 (in thousands, except shares) Paid-in Common Capital in Stock Common Excess of Dividends Treasury Retained Stock Stock Earnings Par Value Distributable Total Balances, Jan. 1 $1,000 $500 $100 $ 0 $600 $2,200 Issued 50,000 share for stock 100 (100) 0 dividend Issued 30,000 shares for cash 60 90 150 Purchased 25,000 shares of treasury stock (150) (150) Declared cash dividend (111) (111) Sold 5,000 shares of treasury stock 48 48 Net income for year 360 360 . . . . Balances, Dec. 31 $1,160 $590 $ 0 $ (102) $849 $2,497 12-42 PROBLEM 12-1B (a) Jan. 10 Cash (80,000 X $4)....................................... 320,000 Common Stock (80,000 X $3).......... 240,000 Paid-in Capital in Excess of Stated Value—Common Stock (80,000 X $1) ........................ 80,000 Cash (5,000 X $105)..................................... Mar. 1 525,000 Preferred Stock (5,000 X $100)....... 500,000 Paid-in Capital in Excess of Par Value—Preferred Stock........ 25,000 (5,000 X $5) Land ................................................................. Apr. 1 85,000 Common Stock (24,000 X $3).......... 72,000 Paid-in Capital in Excess of Stated Value—Common Stock ($85,000 – $72,000) ............ 13,000 Cash (80,000 X $4.50) ................................. May 1 360,000 Common Stock (80,000 X $3).......... 240,000 Paid-in Capital in Excess of Stated Value—Common Stock (80,000 X $1.50) .................. 120,000 Organization Expense................................ Aug. 1 40,000 Common Stock (10,000 X $3).......... 30,000 Paid-in Capital in Excess of Stated Value—Common Stock ($40,000 – $30,000) ............ 10,000 Cash (10,000 X $5)....................................... Sept. 1 50,000 Common Stock (10,000 X $3).......... 30,000 Paid-in Capital in Excess of Stated Value—Common Stock (10,000 X $2) ........................ 20,000 12-43 PROBLEM 12-1B (Continued) Nov. 1 Cash (1,000 X $109) ...................................... 109,000 Preferred Stock (1,000 X $100) ........ 100,000 Paid-in Capital in Excess of Par Value—Preferred Stock ......... 9,000 (1,000 X $9) (b) Preferred Stock Date Explanation Ref. Debit Credit Balance Mar. 1 J5 500,000 500,000 Nov. 1 J5 100,000 600,000 Common Stock Date Explanation Ref. Debit Credit Balance Jan. 10 J5 240,000 240,000 Apr. 1 J5 72,000 312,000 May 1 J5 240,000 552,000 Aug. 1 J5 30,000 582,000 Sept. 1 J5 30,000 612,000 Paid-in Capital in Excess of Par Value—Preferred Stock Date Explanation Ref. Debit Credit Balance Mar. 1 J5 25,000 25,000 Nov. 1 J5 9,000 34,000 Paid-in Capital in Excess of Stated Value—Common Stock Date Explanation Ref. Debit Credit Balance Jan. 10 J5 80,000 80,000 Apr. 1 J5 13,000 93,000 May 1 J5 120,000 213,000 Aug. 1 J5 10,000 223,000 Sept. 1 J5 20,000 243,000 12-44 PROBLEM 12-1B (Continued) (c) KEELER CORPORATION Stockholders’ equity Paid-in capital Capital stock 8% Preferred stock, $100 par value, 10,000 shares authorized, 6,000 shares issued............................................ $ 600,000 Common stock, no par, $3 stated value, 500,000 shares authorized, 204,000 shares issued............................................ 612,000 Total capital stock ................ 1,212,000 Additional paid-in capital In excess of par value— preferred stock........................... $ 34,000 In excess of stated value— common stock............................ 243,000 Total additional paid-in capital................................... 277,000 Total paid-in capital.............. $1,489,000 12-45 PROBLEM 12-2B 40,000 (a) Mar. 1 Treasury Stock (5,000 X $8).......................... Cash............................................................. 40,000 June 1 Cash (1,000 X $12) ........................................... 12,000 Treasury Stock (1,000 X $8)................. 8,000 Paid-in Capital from Treasury Stock (1,000 X $4)............................... 4,000 Sept. 1 Cash (2,000 X $10) ........................................... 20,000 Treasury Stock (2,000 X $8)................. 16,000 Paid-in Capital from Treasury Stock (2,000 X $2)............................... 4,000 Cash (1,000 X $6).............................................. Dec. 1 6,000 Paid-in Capital from Treasury Stock ......... 2,000 (1,000 X $2) Treasury Stock (1,000 X $8)................. 8,000 Income Summary ............................................. 31 40,000 Retained Earnings .................................. 40,000 (b) Paid-in Capital from Treasury Stock Date Explanation Ref. Debit Credit Balance June 1 J10 4,000 4,000 Sept. 1 J10 4,000 8,000 Dec. 1 J10 6,000 2,000 Treasury Stock Date Explanation Ref. Debit Credit Balance Mar. 1 J10 40,000 40,000 June 1 J10 32,000 8,000 Sept. 1 J10 16,000 16,000 Dec. 1 J10 8,000 8,000 12-46 PROBLEM 12-2B (Continued) Retained Earnings Date Explanation Ref. Debit Credit Balance Jan. 1 100,000 Balance 140,000 J10 40,000 Dec. 31 (c) GOLDBERG CORPORATION Stockholders’ equity Paid-in capital Capital stock Common stock, $5 par, 100,000 shares issued and 99,000 outstanding ................... $500,000 Additional paid-in capital In excess of par value .................. $200,000 From treasury stock...................... 6,000 Total additional paid-in capital................................... 206,000 Total paid-in capital.............. 706,000 Retained earnings ........................................... 140,000 Total paid-in capital and retained earnings ............. 846,000 Less: Treasury stock (1,000 common shares, at cost) ............................... (8,000) Total stockholders’ equity.................................... $838,000 12-47 PROBLEM 12-3B 100,000 (a) Feb. 1 Cash ................................................................. Common Stock (25,000 X $1).......... 25,000 Paid-in Capital in Excess of Stated Value—Common Stock ($100,000 – $25,000).......... 75,000 Cash ................................................................. Apr. 14 33,000 Paid-in Capital from Treasury Stock—Common ............................ 9,000 ($33,000 – $24,000) Treasury Stock—Common .............. 24,000 (6,000 X $4) Patent............................................................... Sept. 3 30,000 Common Stock (5,000 X $1) ............ 5,000 Paid-in Capital in Excess of Stated Value—Common Stock ($30,000 – $5,000) .............. 25,000 Treasury Stock—Common ....................... Nov. 10 6,000 Cash ........................................................ 6,000 Income Summary......................................... Dec. 31 452,000 Retained Earnings .............................. 452,000 (b) Preferred Stock Date Explanation Ref. Debit Credit Balance Jan. 1 Balance 400,000 Common Stock Date Explanation Ref. Debit Credit Balance Jan. 1 1,000,000 Balance 1,025,000 J5 25,000 Feb. 1 J5 5,000 1,030,000 Sept. 3 12-48 PROBLEM 12-3B (Continued) Paid-in Capital in Excess of Par Value—Preferred Stock Date Explanation Ref. Debit Credit Balance Jan. 1 Balance 100,000 Paid-in Capital in Excess of Stated Value—Common Stock Date Explanation Ref. Debit Credit Balance Jan. 1 Balance 1,450,000 Feb. 1 J5 75,000 1,525,000 Sept. 3 J5 25,000 1,550,000 Retained Earnings Date Explanation Ref. Debit Credit Balance Jan. 1 1,816,000 Balance 2,268,000 J5 452,000 Dec. 31 Treasury Stock—Common Date Explanation Ref. Debit Credit Balance Jan. 1 40,000 Balance Apr. 14 J5 24,000 16,000 Nov. 10 J5 22,000 6,000 Paid-in Capital from Treasury Stock-Common Date Explanation Ref. Debit Credit Balance Apr. 14 J5 9,000 9,000 12-49 PROBLEM 12-3B (Continued) (c) PORT CORPORATION Stockholders’ equity Paid-in capital Capital stock 8% Preferred stock, $50 par value, cumulative, 10,000 shares authorized, 8,000 shares issued and outstanding ................................ $ 400,000 Common stock, no par, $1 stated value, 2,000,000 shares authorized, 1,030,000 shares issued and 1,025,000 shares outstanding ................................ 1,030,000 Total capital stock ................ 1,430,000 Additional paid-in capital In excess of par value— preferred stock.......................... $ 100,000 In excess of stated value— common stock........................... 1,550,000 From common treasury stock ............................................. 9,000 Total additional paid-in capital................................... 1,659,000 Total paid-in capital.............. 3,089,000 Retained earnings (see Note X) ............... 2,268,000 Total paid-in capital and retained earnings ............. 5,357,000 Less: Treasury stock (5,000 common shares) ............................................ (22,000) Total stockholders’ equity.................................... $5,335,000 Note X: Dividends on preferred stock totaling $32,000 [8,000 X (8% X $50)] are in arrears. $5, 335, 000 ($400, 000 ， $32, 000 ) *(d) Book value per share: = $4.781, 025, 000 12-50 PROBLEM 12-4B 75,000 (a) Feb. 1 Retained Earnings (75,000 X $1) ........... Dividends Payable ............................ 75,000 Mar. 1 Dividends Payable ..................................... 75,000 Cash....................................................... 75,000 Memo—two-for-one stock split Apr. 1 increases number of shares to 150,000 = (75,000 X 2) and reduces par value to $10 per share. July 1 Retained Earnings (15,000 X $13)......... 195,000 Common Stock Dividends Distributable (15,000 X $10) ...... 150,000 Paid-in Capital in Excess of Par Value (15,000 X $3) ............... 45,000 31 Common Stock Dividends Distributable............................................ 150,000 Common Stock .................................. 150,000 Dec. 1 Retained Earnings (165,000 X $.50) ..... 82,500 Dividends Payable ............................ 82,500 31 Income Summary ....................................... 350,000 Retained Earnings ............................ 350,000 (b) Common Stock Date Explanation Ref. Debit Credit Balance Jan. Balance 1,500,000 1 Apr. 1 2 for 1 split—new par $10 1,500,000 July 31 150,000 1,650,000 12-51 PROBLEM 12-4B (Continued) Paid-in Capital in Excess of Par Value Date Explanation Ref. Debit Credit Balance Jan. 1 Balance 200,000 July 1 245,000 45,000 Retained Earnings Date Explanation Ref. Debit Credit Balance Jan. Balance 600,000 1 Feb. 1 Cash dividend 525,000 75,000 July 1 Stock dividend 195,000 330,000 Dec. 1 Cash dividend 82,500 247,500 31 Net income 597,500 350,000 Common Stock Dividends Distributable Date Explanation Ref. Debit Credit Balance July 150,000 150,000 1 31 150,000 0 (c) ARGENTINA CORPORATION Balance Sheet (Partial) December 31, 2006 Stockholders’ equity Paid-in capital Capital stock Common stock, $10 par value, 165,000 shares issued and outstanding ................. $1,650,000 Additional paid-in capital In excess of par value........................................ 245,000 Total paid-in capital................................... 1,895,000 Retained earnings................................................................. 597,500 Total stockholders’ equity....................... $2,492,500 12-52 PROBLEM 12-5B (a) BRADSTROM COMPANY Retained Earnings Statement For the Year Ended December 31, 2006 Balance, January 1, as reported................................... $ 900,000 Correction for understatement of net income in 2004 (depreciation error)........................ 80,000 980,000 Balance, January 1, as adjusted................................... Add: Net income.............................................................. 3,600,000 4,580,000 Less: Cash dividends—common ................................ $1,485,000* Cash dividends—preferred ............................... 700,000 2,185,000 Balance, December 31 ..................................................... $2,395,000 *(1,500,000 – 15,000) X $1 12-53 PROBLEM 12-5B (Continued) (b) BRADSTROM COMPANY Partial Balance Sheet Stockholders’ equity Paid-in capital Capital stock Preferred stock, $100 par value, 7%, cumulative, 100,000 shares issued and outstanding ................... $10,000,000 Common stock, $10 par value, 1,500,000 shares issued and 1,485,000 shares outstanding ................................ 15,000,000 Total capital stock ................ 25,000,000 Additional paid-in capital In excess of par value— preferred stock.......................... $ 500,000 In excess of par value— common stock........................... 1,500,000 Total additional paid-in capital................................... 2,000,000 Total paid-in capital.............. 27,000,000 Retained earnings......................................... 2,395,000 Total paid-in capital and retained earnings ............. 29,395,000 Less: Treasury stock—common (15,000 shares)............................. (240,000) Total stockholders’ equity.................................... $29,155,000 12-54 *PROBLEM 12-6B (a) Retained Earnings Sept. 1 PPA 63,000 Jan. 1 Balance 1,170,000 Oct. 1 Cash Dividend 250,000 Dec. 31 Net Income 495,000 Dec. 31 Stock Dividend *450,000 Dec. 31 Balance 902,000 *(250,000 X .10) X $18 (b) CHEN CORPORATION Retained Earnings Statement For the Year Ended December 31, 2006 Balance, January 1, as reported....................... $1,170,000 Correction of overstatement of 2005 net income because of understatement of depreciation ........................................................ (63,000) Balance, January 1, as adjusted....................... 1,107,000 Add: Net income.................................................. 495,000 1,602,000 Less: Cash dividends ......................................... $250,000 450,000 700,000 Stock dividends ........................................ $ 902,000 Balance, December 31 ......................................... (c) CHEN CORPORATION Partial Balance Sheet December 31, 2006 Stockholders’ equity Paid-in capital Capital stock 8% Preferred stock, $50 par value, cumulative, 20,000 shares authorized, 15,000 shares issued and outstanding.................................. $ 750,000 12-55 PROBLEM 12-6B (Continued) CHEN CORPORATION (Continued) Common stock, $10 par value, 500,000 shares authorized, 250,000 shares issued and outstanding ................................ $2,500,000 Common stock dividends distributable ............................... 250,000 2,750,000 Total capital stock ................ 3,500,000 Additional paid-in capital In excess of par value— preferred stock.......................... 250,000 In excess of par value— common stock........................... 400,000 Total additional paid-in capital................................... 650,000 Total paid-in capital.............. 4,150,000 Retained earnings (see Note X) ............... 902,000 Total stockholders’ equity.................................... $5,052,000 Note X: Retained earnings is restricted for plant expansion, $200,000. $495, 000 $60, 000 * (d) = $1.81 240, 000 *15,000 X $4 = $60,000 (e) Total cash dividend..................................................... $250,000 Allocated to preferred stock Dividend in arrears—2005................................ $60,000 (15,000 X $4) 2006 dividend ....................................................... 60,000 120,000 Remainder to common stock................................... $130,000 12-56 *PROBLEM 12-7B (a) RIZZO CORPORATION Stockholders’ equity Paid-in capital Capital stock 8% Preferred stock, $50 par noncumulative, 16,000 shares issued ............... $ 800,000 Common stock, no par, $5 stated value, 500,000 shares issued and 490,000 outstanding................................. 2,500,000 Total capital stock................. 3,300,000 Additional paid-in capital In excess of par value— preferred stock .......................... $ 679,000 In excess of stated value— common stock ........................... 1,600,000 From treasury stock ..................... 10,000 Total additional paid-in capital ................................... 2,289,000 Total paid-in capital .............. 5,589,000 Retained earnings ......................................... 1,448,000 Total paid-in capital and retained earnings.............. 7,037,000 Less: Treasury stock (10,000 shares)............................................. (130,000) Total stockholders’ equity .................................... $6,907,000 12-57 *PROBLEM 12-7B (Continued) (b) The book value of the common stock is $12.14 computed as follows: Total stockholders’ equity ...................................................... $6,907,000 Less: Preferred stock equity Call price (16,000 X $60) .......................................... 960,000 Common stock equity .............................................................. $5,947,000 Common shares outstanding ................................................ 490,000 Book value per share ($5,947,000 ? 490,000) ................... $12.14 Note: No preferred dividends are assigned to the preferred stock equity because the preferred stock is noncumulative. 12-58 BYP 12-1 FINANCIAL REPORTING PROBLEM (a) The common stock of PepsiCo has a par value of 1 2/3 cents per share. (b) Per Note 12, there are 3.6 billion shares authorized of which 1.782 bil- lion are issued (see balance sheet). The percentage is 49.5% (1.782 ? 3.6). (c) The outstanding shares were: 2002 2003 Shares issued ...................................... 1,782,000,000 1,782,000,000 Less: Treasury shares ..................... 60,000,000 77,000,000 Shares outstanding............................ 1,722,000,000 1,705,000,000 *(d) Book value per share was: 2002 2003 $9,530,000,000 $11,896,000,000 Total stockholders’ equity.............. Shares outstanding .......................... ?1,722,000,000 ?1,705,000,000 Book value per share....................... $5.53 $6.98 (e) The high and low market price per share in the fourth quarter of fiscal 2003 was $48.88 and $44.11. 12-59 BYP 12-2 COMPARATIVE ANALYSIS PROBLEM PepsiCo Coca-Cola (a) $11,896,000,000 ? 1,705,000,000 = $6.98 $14,090,000,000 ? 2,441,531,784* = $5.77 Book value per share *3,494,799,258 – 1,053,267,474 (b) PepsiCo Coca-Cola $46.47 $50.90 Market value per share Book value per share $6.98 $5.77 PepsiCo’s common stock per share was selling at 6.7 times book value while Coca-Cola was selling for 8.8 times book value. (c) The market value of stock is dependent more on earnings and earn- ings potential while book value is a per-share computation based on the net historical cost of assets capitalized. (d) PepsiCo Coca-Cola Earnings per share $3, 568 3 $4, 347 = $2.08 = $1.77 1, 718 2, 462 Return on common $4, 347 $3, 568 3 = 33.3% = 33.6% stockholders’ $12, 945* $10, 713* equity *($9,530 + $11,896) ? 2 *($11,800 + $14,090) ? 2 Both PepsiCo and Coca-Cola have very high returns on common stockholders’ equity. Earnings per share measures cannot be com- pared across companies because they may use vastly different num- bers of shares to finance the company. (e) PepsiCo paid cash dividends of $1,070 million and Coca-Cola paid $2,166 million of cash dividends in 2003. 12-60 BYP 12-3 RESEARCH CASE (a) The author points out that companies aggressively bought treasury stock during the stock market rallies of 1999 and 2000. Since then, they have purchased fewer treasury shares even though prices are lower. (b) Companies are buying back fewer shares because they need to con- serve cash as the economy slows down. In addition, there is less need to repurchase shares to offset the dilu- tive effect of employee stock option programs. When stock prices de- cline, employees exercise fewer options. Therefore, fewer buy backs are needed to keep the number of shares outstanding constant. (c) IBM spent $38.9 billion buying back its stock between 1995 and 2000. (d) Yahoo announced its first buyback when its earnings fell and it searched for a new chief executive. Yahoo’s repurchase was probably designed to show its shareholders that it had enough confidence in its future earnings potential to invest its cash in its own stock. 12-61 BYP 12-4 INTERPRETING FINANCIAL STATEENTS (a) This is a dividend transaction—a property dividend. (b) Host Marriott Marriott International $3,112 $2,440 Debt to total assets = 81.4% = 76.1% $3,822 $3,207 ratio: $(25) $200 Return on assets (c) = 6.2% = –.7% $3,822 $3,207 Return on common $(25) $200 = –3.5% = 26.1% stockholders’ equity $710 $767 (d) The debtholders were concerned that by splitting the company and leaving most of the debt with only one half of the original company the likelihood that the debtholders would be repaid was reduced— that is, the probability that Marriott would default on the debt increased. This reduces the value of the debt investment. 12-62 BYP 12-5 A GLOBAL FOCUS (a) Holders of BP Amoco ADR’s are trying to offer a resolution that would address plans by BP Amoco to drill along the Alaska coastline. (b) Investors don’t expect to block the Alaskan drilling but getting it on the ballot would publicize their environmental concerns. (c) ADR’s are gaining popularity in the U.S. According to Citibank, the trading value of ADR’s rose 64% in 2000 compared to 1999. The total value reached $1.1 trillion in 2000. (d) The article mentions several advantages of investing in ADR’s rather than local shares. These include: 1. Investor liquidity 2. Compliance with U.S. regulation by issuers 3. Avoidance of some country-specific taxes 4. Cost savings 12-63 BYP 12-6 EXPLORING THE WEB Answers will vary depending on the company chosen by the student. 12-64 BYP 12-7 GROUP DECISION CASE (a) The cumulative provision means that preferred stockholders must be paid both current-year dividends and unpaid prior-year divi- dends before common stockholders receive any dividends. When preferred stock is cumulative, preferred dividends not declared in a given period are called dividends in arrears. (b) The market price of a share of stock is caused by many factors. Among the factors to be considered are: (1) the corporation’s an- ticipated future earnings, (2) its expected dividend rate per share, (3) its current financial position, (4) the current state of the econ- omy, and (5) the current state of the securities markets. Par value is the amount assigned to each share of stock in the cor- porate charter. Par value may be any amount selected by the corpo- ration. Generally, the amount of par value is quite low because states often levy a tax on the corporation based on par value. Par value is not indicative of the worth or market value of the stock. The significance of par value is a legal matter. Par value represents the legal capital per share that must be retained in the business for the protection of corporate creditors. (c) A corporation may acquire treasury stock to: (1) Reissue the shares to officers and employees under bonus or stock compensation plans. (2) Increase trading of the company’s stock in the securities mar- ket in hopes of enhancing its market value. (3) Have additional shares available for use in the acquisition of other companies. (4) Reduce the number of shares outstanding and thereby increase earnings per share. (5) To rid the company of disgruntled investors. Treasury stock is not an asset. If treasury stock was reported as an asset, then unissued stock should also be shown as an asset, al- ready an erroneous conclusion. Rather than being an asset, treasury stock reduces stockholder claims on corporate assets. This effect is correctly shown by reporting treasury stock as a deduction from to- tal paid-in capital and retained earnings. 12-65 BYP 12-7 (Continued) (d) It is important to distinguish between legal capital and total paid-in capital. Par value represents the legal capital per share that must be retained in the business for the protection of corporate creditors. Additional paid-in capital is not legal capital, and therefore a dis- tinction between par value and additional paid-in capital must be maintained. 12-66 BYP 12-8 COMMUNICATION ACTIVITY Dear Uncle Sal: Thanks for your recent letter asking me to explain these four terms. Here are my explanations: (1) Authorized stock is the total amount of stock that a corporation is given permission to sell as indicated in its charter. If all authorized stock is sold, a corporation must obtain consent of the state to amend its charter before it can issue additional shares. (2) Issued stock is the amount of stock that has been sold either di- rectly to investors or indirectly through an investment banking firm. (3) Outstanding stock is capital stock that has been issued and is be- ing held by stockholders. (4) Preferred stock is capital stock that has contractual preferences over common stock in certain areas. I really enjoy my accounting classes and especially like the accounting instructors. I hope your corporation does well, and I wish you continued success with your inventions. Regards, 12-67 BYP 12-9 ETHICS CASE (a) The stakeholders in this situation are: The director of Healy’s R & D division. The president of Healy. The shareholders of Healy. Those who live in the environment to be sprayed by the new (un- tested) chemical. (b) The president is risking the environment and everything and every- body in it that is exposed to this new chemical in order to enhance his company’s sales and to preserve his job. Presidents and entre- preneurs frequently take risks in performing their leadership func- tions, but this action appears to be irresponsible and unethical. (c) A parent company may protect itself against loss and most reason- able business risks by establishing separate subsidiary corpora- tions but whether it can insulate itself against this type of action is a matter of state corporate law and criminal law. 12-68 BYP 12-10 CONTINUING COOKIE CHRONICLE Part 1 (a) 1. One of the major advantages of issuing preferred stock is that the preferred stockholder does not have voting rights. In this case, Curtis’ dad and Natalie’s grandmother can participate in the future success of Cookie & Coffee Creations (by receiving annual dividends) without attempting to influence any decisions that would require stockholder approval. Both will receive an annual dividend of $6 per share as long as the dividend is declared. Any additional dividends declared and paid will be paid to the common stockholders. This could prove to be another advantage to both Natalie and Curtis if the com- pany is successful and has excess cash to pay out dividends. The advantages of offering your family cumulative preferred 2. stock is that when dividends were declared, the preferred stock- holders would receive dividends both for the current year and for years in which the preferred dividends were in arrears. However, from the common stockholders’ perspective, the big- gest disadvantage is that if the preferred shares are cumulative, any dividends that are in arrears (in addition to the current year’s preferred dividends) must be paid before any dividends can be paid to the common stockholders. It is possible to pay for the $750 legal bill by issuing common 3. stock. However, the cost principle still applies. Cost must equal the cash equivalent price which is generally the fair market value of the consideration given up. If this amount cannot be deter- mined, we then look to the fair market value of the consideration received to determine the cash equivalent price. In this case, Curtis and Natalie are receiving shares with a value of $1 per share. This $1 per share is the estimated fair value of the shares being given up in return for the legal fee expense. As a result, 750 shares should be given up valued at $750, which is the value of the legal fees. 12-69 CONTINUING COOKIE CHRONICLE (Continued) GENERAL JOURNAL J1 Date Account Titles and Explanation Debit Credit (b) Nov. 1 Cash 17,500 Accounts Receivable 600 Merchandise Inventory 1,580 Equipment 3,500 Common Stock 23,180 (c) Nov. 1 Cash 10,000 Preferred Stock 10,000 1 Legal Expense 750 Common Stock 750 12-70 CONTINUING COOKIE CHRONICLE (Continued) (d) COOKIE & COFFEE CREATIONS INC. Balance Sheet November 1, 2006 Assets Current assets Cash $27,500 Accounts receivable 600 Merchandise inventory 1,580 Total current assets 29,680 Plant and equipment Equipment 3,500 Total assets $33,180 Stockholders’ Equity Capital stock Preferred stock, no-par value. $6, cumulative, 10,000 shares authorized, 2,000 shares issued and outstanding $10,000 Common stock, $1 par 50,000 shares authorized, 23,930 shares issued and outstanding 23,930 Total capital stock 33,930 Deficit (750) Total stockholders’ equity $33,180 12-71 CONTINUING COOKIE CHRONICLE (Continued) Part 2 (a) GENERAL JOURNAL J1 Date Account Titles and Explanation Debit Credit Jan. 1 Cash 2,500 Preferred Stock 2,500 June 30 Treasury Stock 500 Cash 500 Oct. 15 Retained Earnings 25,000 Dividends Payable – Preferred (2,500 x $6) 15,000 Dividends Payable – Common ($25,000 – 15,000) 10,000 Oct. 31 Income Tax Expense ($462,500 – $406,500) X .20 11,200 Income Tax Payable 11,200 GENERAL JOURNAL J1 (b) Date Account Titles and Explanation Debit Credit Oct. 31 Revenues 462,500 Income Summary 462,500 31 Income Summary 417,700 Expenses 406,500 Income Tax Expense 11,200 31 Income Summary 44,800 Retained Earnings 44,800 12-72 CONTINUING COOKIE CHRONICLE (Continued) (c) COOKIE & COFFEE CREATIONS INC. Retained Earnings Statement For the Year Ended October 31, 2007 Balance, November 1, 2006 $ - Add: Net income 44,800 44,800 Less: Cash dividends—preferred $15,000 Cash dividends—common 10,000 25,000 Balance, October 31, 2007 $19,800 (d) COOKIE & COFFEE CREATIONS INC. Partial Balance Sheet October 31, 2007 Stockholders’ equity Paid-in capital Capital stock Preferred stock, no-par value, $6, cumulative, 10,000 authorized, 2,500 shares issued and outstanding $12,500 Common stock, $1 par, 50,000 shares authorized, 23,930 shares issued, and 23,180 outstanding 23,930 Total paid-in capital 36,430 Retained earnings 19,800 Total paid-in capital and retained earnings 56,230 Less: Treasury stock (750 common shares) 500 Total stockholders’ equity $55,730 12-73