Solution manual financial accounting 4e by wild chapter11

To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Chapter 11 Reporting and Analyzing Equity QUESTIONS Organization expenses (costs) are incurred in creating a corporation Examples include: legal fees, promoter fees, accountant fees, costs of printing stock certificates, and fees paid to obtain a state charter Organization expenses (costs) are reported as expenses when incurred—as part of operating expenses—because the amount and timing of their future benefit is difficult to determine (Instructor note: Prior to SOP 98-5, organization costs were classified as part of intangible assets and then allocated to amortization expense.) The board of directors of a corporation is responsible for directing the corporation's affairs The directors are elected by the corporation’s stockholders The preemptive right of common stockholders is the right to maintain their relative ownership interests in the corporation by having the first opportunity to purchase their proportionate share of any additional common shares issued by the corporation The general rights of common stockholders include: (1) the right to vote in stockholders’ meetings, (2) the right to sell or otherwise dispose of stock, (3) the preemptive right, (4) the right to share proportionately in dividends, and (5) the right to share proportionately in assets remaining after the creditors are paid when, and if, the corporation is liquidated In addition, stockholders have the general right to receive timely and useful financial reports that describe the corporation’s financial position and the results of its activities Authorized shares represent the maximum number of shares that a corporation’s charter allows it to sell Outstanding shares are the number of issued shares that are held by stockholders The number of authorized shares usually exceeds the number of issued shares, often by a large amount Convertible preferred stock is potentially attractive because it offers the safety of a regular return as well as the opportunity to share in the increased value of the issuer’s common stock through conversion (or potential conversion) The market value per share of stock is the price at which a share of stock is bought or sold Many factors—including expected future earnings, dividends, growth, and other company and economic factors—affect market value Par value per share is an arbitrary value assigned by the corporation in its charter The par value is an arbitrary value placed on a share of stock when it is authorized The call price is an amount that a corporation must pay if it exercises the option to buy back and retire a share of callable preferred stock ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 11 581 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com 10 The three important dates governing dividends are: a date of declarationthe date the directors vote to pay a dividend b date of recorda future date specified by the directors to identify the particular shareholders that are to receive the dividend c date of paymentthe date when shareholders receive the dividend payment 11 Cash dividends debited against paid-in capital accounts are called liquidating dividends because they represent a return of amounts originally invested in the corporation by the stockholders (They are a return of, not a return on, capital contributions.) 12 Declaring a stock dividend has no effect on assets, liabilities, or total equity Also, the subsequent distribution of the stock dividend has no effect on these items Instead, the stock dividend simply increases the number of shares outstanding and results in a transfer of equity from retained earnings to paid-in capital 13 A stock dividend results in a distribution of additional shares to stockholders and the capitalization of retained earnings A stock split calls in the old shares and replaces them with a different number of new shares with a new par value Also, no entry is made to any of the equity accounts with a stock split In spite of these technical differences, there is no practical difference in most cases between a stock split and a large stock dividend 14 A stock dividend should not be considered income because it does not transfer any assets from the corporation to the stockholders 15 A treasury stock purchase reduces total assets and total equity by equal amounts 16 Treasury stock purchases affect the corporate assets and stockholders’ equity just like a cash dividend To keep a company from dissipating its assets by paying an inordinate amount of dividends to its stockholders, state laws protect the company’s creditors by imposing limits on treasury stock purchases 17 With a simple capital structure, earnings per share is calculated by first subtracting any declared and cumulative preferred dividends from net income, and then dividing the difference by the weighted-average number of shares of outstanding common stock The resulting figure is called the basic earnings per share 18 A stock option is the right to purchase common stock at a fixed price over a specified period 19 When a corporation has no preferred stock, book value per share is calculated by dividing total stockholders’ equity by the number of common shares outstanding The main limitation of using book value per share to value a corporation is the potential difference between recorded value and market value for assets and liabilities 20 Best Buy has preferred stock and common stock listed on its balance sheet As of February 26, 2005, however, Best Buy has not issued any of the preferred stock 21 The par value for Circuit City’s common stock is $0.50 per share (as reported on its balance sheet) The company has likely set the par value to minimize the amount of legal capital the company must maintain (and that stockholders would be liable for) 22 Apple received $427,000,000 from the issue of common stock, but it did not repurchase any common stock for the year ended September 25, 2004 ©McGraw-Hill Companies, 2008 582 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com QUICK STUDIES Quick Study 11-1 (10 minutes) True statements: 3, 4, and Quick Study 11-2 (5 minutes) a Cash 375,000 Common Stock, $5 Par Value 375,000 Issued par value stock for cash (75,000 x $5) b Cash* 450,000 Common Stock, $5 Par Value Paid-In Capital in Excess of Par Value, Common Stock 375,000 75,000 Issued par value stock for cash *(75,000 x $6) Quick Study 11-3 (5 minutes) a Cash* 648,000 Common Stock, $2 Par Value** Paid-In Capital in Excess of Par Value, Common Stock*** 72,000 576,000 Issued par value stock for cash *36,000 x $18 = $648,000 **36,000 x $2 = $72,000 ***$648,000 - $72,000 = $576,000 b Cash* 648,000 Common Stock, $2 Stated Value** Paid-In Capital in Excess of Stated Value, Common Stock*** 72,000 576,000 Issued stated value stock for cash *36,000 x $18 = $648,000 **36,000 x $2 = $72,000 ***$648,000 - $72,000 = $576,000 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 11 583 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 11-4 (5 minutes) a Cash 1,827,000 Common Stock, No-Par Value 1,827,000 Issued no-par value stock for cash (63,000 x $29) b Land 1,827,000 Common Stock, No-Par Value 1,827,000 Issued no-par value stock for land Quick Study 11-5 (15 minutes) (a) Mar Cash 297,500 Common Stock, $4 Par Value Paid-In Capital in Excess of Par Value, Common Stock 170,000 127,500 Issued par value stock for cash (b) Apr Cash 70,000 Common Stock, No-Par Value 70,000 Issued no-par value stock for cash (c) Apr Inventory 45,000 Machinery 145,000 Note Payable Common Stock, $25 Par Value Paid-In Capital in Excess of Par Value, Common Stock 94,000 50,000 46,000 Issued stock for inventory, machinery, and note Quick Study 11-6 (5 minutes) Cash* 510,000 Preferred Stock, $100 Par Value** Paid-In Capital in Excess of Par Value, Preferred Stock*** 500,000 10,000 Issued par value stock for cash *5,000 x $102 = $510,000 **5,000 x $100 = $500,000 ***$510,000 - $500,000 = $10,000 Preferred dividend = $100 par value/share x 7% x 5,000 shares = $35,000 ©McGraw-Hill Companies, 2008 584 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 11-7 (10 minutes) May 15 Retained Earnings 54,000 Common Dividend Payable 54,000 Declared cash dividend on common June 31 Common Dividend Payable 54,000 Cash 54,000 Paid cash dividend to common Quick Study 11-8 (10 minutes) Jun Company Stockholders’ Equity April (after stock dividend) Common stock$5 par value, 375,000 shares authorized, 220,000 shares issued and outstanding Paid-in capital in excess of par value, common stock Total paid-in capital Retained earnings Total stockholders' equity $1,100,000 900,000 2,000,000 433,000 $2,433,000 Supporting work Apr Retained Earnings 400,000 Common Stock* Paid-In Capital in Excess of Par Value, Common Stock** 100,000 300,000 To record declaration and distribution of a 10% common stock dividend * 200,000 shares x 10% x $5 par value = $100,000 **200,000 shares x 10% x ($20 market value – $5 par value) = $300,000 Quick Study 11-9 (10 minutes) Total cash dividend To preferred shareholders Remainder to common shareholders $110,000 64,000* $ 46,000 *80,000 shares x $5 par x 08 x years = $64,000 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 11 585 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 11-10 (10 minutes) May Treasury Stock (4,000 shares) 36,000 Cash 36,000 Purchased treasury stock ($36,000 / 4,000 shares = $9 per share cost) Nov Cash 8,500 Treasury Stock (850 x $9*) Paid-In Capital, Treasury Stock 7,650 850 Reissued treasury stock at a price greater than its cost ($9 per share x 850 shares = $7,650) Quick Study 11-11 (10 minutes) This material error should be reported on the statement of retained earnings (and/or the statement of stockholders’ equity) as a prior period adjustment to the beginning retained earnings balance Also, if prior year’s financial numbers are reported, they should be revised to show the correct numbers This change in the expected useful life is a change in an accounting estimate—affecting current and future accounting periods Therefore, the current year depreciation should be modified to reflect the change and the revised depreciation expense reported on the income statement as a regular part of income from continuing operations The remaining years’ depreciation also should reflect this new estimate of useful life Quick Study 11-12 (10 minutes) Basic earnings per share: Net income - Preferred dividends = Weighted-average common shares outstanding = ($770,000 - $0) / 280,000 shares = $2.75 per share ©McGraw-Hill Companies, 2008 586 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Quick Study 11-13 (10 minutes) Basic earnings per share: Net income - Preferred dividends = Weighted-average common shares outstanding = ($900,000 - $20,000) / 400,000 shares = $2.20 per share Quick Study 11-14 (10 minutes) Price-earnings ratio = Market value per share Earnings per share = $32.60 $3.95 = 8.3 Analysis: Many analysts consider stocks with a PE less than to as potentially underpriced This stock with a PE of 8.3 would exceed this criterion (Instructor note: This is a good point at which to emphasize that PE is based on expectations—expectations can prove to be higher or lower than actual results.) Quick Study 11-15 (10 minutes) Dividend yield = Annual cash dividends per share Market value per share = $2.30 $32.50 = 7.1% Analysis: The company’s dividend yield of 7.1% indicates that it should be classified as an income stock That is, the company annually pays out cash dividends to its shareholders in an amount that equals 7.1% of the company’s market value Quick Study 11-16 (10 minutes) Total stockholders' equity $1,840,000 Less equity attributable to preferred shares Call price (20,000 shares x $40) 800,000 Equity applicable to common shares .$1,040,000 Book value of common shares ($1,040,000/150,000 shares) $ 6.93 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 11 587 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com EXERCISES Exercise 11-1 (15 minutes) Characteristic Corporations Owner authority and control One vote per share Ease of formation Requires government approval Transferability of ownership Readily transferred Ability to raise large amounts of capital .High ability Duration of life .Unlimited Owner liability Limited Legal status Separate legal entity Tax status of income Corporate income is taxed and its cash dividends are usually taxed at the 15% rate (some cases at a lower rate) Exercise 11-2 (15 minutes) Feb 20 Cash 152,000 Common Stock, No-Par Value 152,000 Issued common stock for cash Feb 20 Cash 152,000 Common Stock, $2 Par Value* 38,000 Paid-In Capital in Excess of Par Value, Common Stock** 114,000 Issued common stock for cash *19,000 shares x $2 per share = $38,000 **$152,000 - $38,000 = $114,000 Feb 20 Cash 152,000 Common Stock, $5 Stated Value* Paid-In Capital in Excess of Stated Value, Common Stock** 95,000 57,000 Issued common stock for cash *19,000 shares x $5 per share = $95,000 **$152,000 - $95,000 = $57,000 ©McGraw-Hill Companies, 2008 588 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 11-3 (15 minutes) Organization Expenses 40,000 Common Stock, No-Par Value 40,000 Issued stock to promoters Organization Expenses 40,000 Common Stock, $1 Stated Value Paid-In Capital in Excess of Stated Value, Common Stock 2,000 38,000 Issued stock to promoters Cash 35,000 Common Stock, $5 Par Value* Paid-In Capital in Excess of Par Value, Common Stock** 20,000 15,000 Issued common stock for cash *4,000 shares x $5 per share = $20,000 **$35,000 - $20,000 = $15,000 Cash 60,000 Preferred Stock, $50 Par Value* Paid-In Capital in Excess of Par Value, Preferred Stock** 50,000 10,000 Issued preferred stock for cash *1,000 shares x $50 per share = $50,000 **$60,000 - $50,000 = $10,000 Exercise 11-4 (15 minutes) Land Building Common Stock, $7 Par Value* Paid-In Capital in Excess of Par Value, Common Stock 45,000 85,000 49,000 81,000 Issued stock for land and building *7,000 shares x $7 per share = $49,000 **($45,000 + $85,000) – $49,000 = $81,000 Exercise 11-5 (10 minutes) C A F E B D ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 11 589 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Exercise 11-6 (20 minutes) a Retained earnings Before dividend $ 660,000 $10 par value of 25,000 dividend shares (250,000) After dividend $ 410,000 b Total stockholders’ equity Common stock$10 par value, 120,000 shares authorized, 75,000 shares issued and outstanding $ 750,000 Paid-in capital in excess of par value 200,000 Retained earnings 410,000 Total stockholders’ equity $1,360,000 c Number of outstanding shares Outstanding shares before the dividend Dividend shares Outstanding shares after the dividend a 50,000 25,000 75,000 Retained earnings (no change) Before and after stock split $ 660,000 b Total stockholders’ equity Common stock$5 par value, 180,000 shares authorized, 75,000 shares issued and outstanding $ 500,000 Paid-in capital in excess of par value 200,000 Retained earnings 660,000 Total stockholders’ equity $1,360,000 c Number of outstanding shares Outstanding shares before the split Additional split shares (3-for-2) Outstanding shares after the split 50,000 25,000 75,000 From a stockholder’s point of view, there is no practical difference between the stock dividend and the stock split The number of shares will be increased equivalently under either approach, and the market value change, if any, should be approximately the same ©McGraw-Hill Companies, 2008 590 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 11-2B (Concluded) Part BALTHUS CORP Statement of Retained Earnings For Year Ended December 31, 2009 Retained earnings, December 31, 2008 Plus net income $2,160,000 1,072,000 3,232,000 Less Cash dividends declared Treasury stock reissuances Retained earnings, December 31, 2009 (740,000) (16,000) $2,476,000 Part BALTHUS CORP Stockholders’ Equity Section of the Balance Sheet December 31, 2009 Common stock$1 par value, 320,000 shares authorized, 200,000 shares issued and outstanding $ 200,000 Paid in capital in excess of par value, common stock Retained earnings (from part 2) 1,400,000 2,476,000 Total stockholders’ equity $4,076,000 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 11 607 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 11-3B (45 minutes) Part Explanations for each of the journal entries Jan 17 Declared a cash dividend of $1 per share of common stock ($96,000 / 96,000 shares) Feb Paid the cash dividend on common stock Feb 28 Declared a 12.5% stock dividend when the market value is $21 per share ($120,000 / $10 par = 12,000 shares = 12.5% of 96,000 shares; $252,000 / 12,000 shares = $21 per share) Mar 14 Distributed the common stock dividend Mar 25 Executed a 2-for-1 stock split ($10 par / $5 par = 2-for-1 ratio) Mar 31 Closed the Income Summary account to Retained Earnings Part Jan 17 Feb Feb 28 Mar 14 Mar 25 Mar 31 Common stock $ 960,000 $ 960,000 $ 960,000 $1,080,000 $1,080,000 $1,080,000 Common stock dividend distributable 0 120,000 0 Paid-in capital in excess of par 384,000 384,000 516,000 516,000 516,000 516,000 Retained earnings 1,504,000 1,504,000 1,252,000 1,252,000 1,252,000 1,972,000 Total equity $2,848,000 $2,848,000 $2,848,000 $2,848,000 $2,848,000 $3,568,000 ©McGraw-Hill Companies, 2008 608 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 11-4B (45 minutes) Part Outstanding common shares Feb 15 Beginning balance 17,000 Less treasury stock (Mar 2) Plus dividend shares (Oct 4)* . Outstanding shares 17,000 May 15 Aug 15 Nov 15 17,000 17,000 17,000 (1,000) (1,000) (1,000) 2,000 16,000 16,000 18,000 *(12.5% x 8,000) Part Cash dividend amounts Feb 15 Outstanding shares 17,000 Dividend per share $ 0.40 Total dividend $6,800 May 15 16,000 $ 0.40 $6,400 Aug 15 16,000 $ 0.40 $6,400 Nov 15 18,000 $ 0.40 $7,200 Part Capitalization of retained earnings for small stock dividend Number of shares 2,000 Market value per share $ 42 Total capitalized $ 84,000 Part Cost per share of treasury stock Total amount paid $ 40,000 Shares purchased 1,000 Cost per share $ 40 Part Net income Retained earnings, beginning balance $270,000 Less dividends: Feb 15 (6,800) May 15 (6,400) Aug 15 (6,400) Oct (84,000) Nov 15 (7,200) Total before net income $159,200 Plus net income ? Retained earnings, ending balance $295,200 159,00,60 Therefore, net income = $136,000 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 11 609 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 11-5B (40 minutes) Market price = $90 per share (current stock exchange price given) Computation of stock par values Preferred: Paid-in amount / Number of shares = $375,000 / 1,500 = $250 Common: Paid-in amount / Number of shares = $900,000 /18,000 = $ 50 Book values with no dividends in arrears Book value per preferred share = par value (when not callable) = $250 Common stock Total equity $2,400,000 Less equity for preferred (375,000) Common stock equity $2,025,000 Number of outstanding shares 18,000 Book value per common share $ 112.50 ($2,025,000 / 18,000) Book values with two years’ dividends in arrears Preferred stock Preferred stock par value $ 375,000 Plus two years’ dividends in arrears* 60,000 Preferred equity $ 435,000 *2 years’ dividends = x ($375,000 x 8%) = $60,000 Number of outstanding shares Book value per preferred share $ 1,500 290.00 ($435,000 / 1,500) Common stock Total equity $2,400,000 Less equity for preferred (435,000) Common stock equity $1,965,000 Number of outstanding shares 18,000 Book value per common share $ 109.17 ($1,965,000 / 18,000) ©McGraw-Hill Companies, 2008 610 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Problem 11-5B (Concluded) Book values with call price and two years’ dividends in arrears Preferred stock Preferred stock call price (1,500 x $280) Plus two years’ dividends in arrears* Preferred equity $ 420,000 60,000 $ 480,000 *2 years’ dividends = x ($375,000 x 8%) = $60,000 Number of outstanding shares Book value per preferred share Common stock Total equity Less equity for preferred Common stock equity 1,500 $ $2,400,000 (480,000) $1,920,000 Number of outstanding shares Book value per common share 320.00 ($480,000 / 1,500) 18,000 $ 106.67 ($1,920,000 / 18,000) Dividend allocation in total years’ dividends in arrears Current year dividends Remainder to common Totals Preferred $ 60,000 30,000 — $ 90,000 Common $ — 10,000 $ 10,000 Total $ 60,000 30,000 10,000 $100,000 Dividends per share for the common stock $10,000 / 18,000 shares = $0.56 Equity represents the residual interest of owners in the assets of the business after subtracting claims of creditors With few exceptions, these assets and liabilities are valued at historical cost, not market value Therefore, the book value of common stock does not normally match its market value Also, the book value of common stock is based on past transactions and events, whereas the market value takes into account expected future earnings, growth, dividends, and other industry and economic factors ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 11 611 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com SERIAL PROBLEM — SP 11 Serial Problem — SP 11, Success Systems (25 minutes) 1a Journal entry for issuance of common stock to Cicely Cash 100,000 Common Stock 100,000 Issuance of common stock 1b Journal entry for issuance of preferred stock to Uncle Marcello Cash 100,000 Preferred Stock 100,000 Issuance of $100 par 7% preferred stock 1c Journal entry to record $100,000 borrowed from the bank Cash 100,000 Notes Payable 100,000 Borrowed $100,000 on a 10-year, 7% note payable Evaluation of the three proposals a Cicely’s investment as a common shareholder would mean that Adriana would have a second person who would be an owner Adriana has been working on her own for about 15 months, and may not wish to have a second person who may have authority to make decisions If Cicely and Adriana not agree completely on policies and procedures, this may create some difficulties for Adriana On the other hand, Cicely may have skills that could complement Adriana’s skills, and the two may make a great success As Cicely is an owner there is no need to repay the $100,000, nor is there any requirement that dividends be paid If Success Systems gets into cash flow difficulties, any dividends can be postponed until a later time ©McGraw-Hill Companies, 2008 612 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Serial Problem (concluded) b Having a preferred shareholder means that Adriana’s Uncle Marcello will not have the same voting rights as Adriana Uncle Marcello may be expecting regular dividend, however, so Adriana should be prepared to pay $7,000 ($100,000 x 7%) in dividends each year This is not a requirement, however, even if the preferred stock is cumulative The preferred stock does not require repayment, and technically, Adriana would have the use of the $100,000 for as long as Uncle Marcello wishes to be a preferred shareholder c The loan requires regular monthly payments, so Adriana will need to budget the $1,160 each month as a cash outflow The loan may be riskier because it does require regular payments Interest on the loan balance is a tax-deductible expense to Success Systems, while any dividends (whether to the common or preferred shareholders) are not a tax-deductible expense to Success Systems In addition, Adriana does not have an additional owner that could exert some control over her business There is no correct answer to the question of which proposal Adriana should adopt Class discussion may indicate which proposal the class prefers ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 11 613 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Reporting in Action — BTN 11-1 As of February 26, 2005, the number of shares of common stock issued and outstanding are 328,342,000 (see balance sheet) As of February 28, 2004, the number of shares of common stock issued is 324,648,000 The weighted average common shares used in calculating earnings per share can be found under Best Buy’s Income Statement At February 26, 2005, there were two weighted average common shares The basic weighted average shares were 325,900,000, and the diluted weighted average shares were 336,600,000 At February 28, 2004, the basic weighted average shares were 323,300,000 and the diluted weighted average shares were 333,900,000 Therefore, for both years, the number of shares outstanding at year-end were slightly higher than the basic weighted average shares outstanding during the year The number of shares outstanding was lower than the diluted weighted average number of shares Total stockholders’ equity as of February 26, 2005 $4,449,000,000 Book value of equity applicable to common stock* $4,449,000,000 * Given that there is only one class of stock, all the equity items listed can be considered to represent the book value of the common stock Best Buy paid cash dividends of $137,000,000 for the year ended February 26, 2005, and $130,000,000 for the year ended February 28, 2004 Best Buy’s income statement reports the following 2005 Basic earnings per common share $3.02 2004 $2.18 2003 $0.31 Its basic earnings per common share figure has consistently grown over this 3-year period Moreover, the 2003 amount is considerably smaller than the latter two years Best Buy’s consolidated balance sheet does not list any shares of treasury stock in 2005 or 2004 Answer depends on the financial statement information obtained ©McGraw-Hill Companies, 2008 614 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Comparative Analysis — BTN 11-2 Book value per common share = Error! Best Buy’s book value per common share = $4,449/ 328 = $13.56 Circuit City’s book value per common share = $2,087/ 188 = $11.10 Earnings per share = Error! Best Buy’s earnings per share: $984 / 326 = $3.02 Circuit City’s earnings per share: $ 62 / 193 = $0.32 Dividend Yield = Error! Best Buy dividend yield Circuit City dividend yield = $0.42 / $51.69= 0.81% = $0.07 / $15.63= 0.45% Analysis: The low dividend yield for both companies suggests that they are ―growth stocks.‖ Price-earnings ratio = Error! Best Buy price-earnings ratio: $51.69 / $3.02 = 17 Circuit City price-earnings ratio: $15.63 / $0.32 = 49 Interpretation: The price-earnings ratios of the companies are considerably different In Best Buy’s case, the market appears willing to pay a multiple of 17 times its earnings For Circuit City, that multiple is considerably greater at 49 times its earnings ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 11 615 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Ethics Challenge — BTN 11-3 During the course of her duties, Harriet has learned information that others might not know If she uses this information to trade in New World Pharmaceuticals’ stock, Harriet may be violating securities laws, so she should be careful if she buys or sells any New World stock It is possible that the new drug will not be as profitable as expected, and the stock might not increase as much as Harriet expects Nevertheless, Harriet might be accused of insider trading in the future if she buys the stock Communicating in Practice — BTN 11-4 There is no set solution to this activity Solutions will vary based on the industry and the companies selected Taking It to the Net — BTN 11-5 The balance sheet of McDonald’s shows that they have both preferred and common stock authorized, but it has only issued common stock The preferred stock has no par value There are 165.0 million preferred shares authorized, and none issued The common stock has a $0.01 par value There are 3.5 billion shares authorized and 1,660.6 million shares issued In 2004, the financing section of the statement of cash flows shows that McDonald’s paid $621 million to purchase treasury stock In 2004, the financing section of the statement of cash flows shows that McDonald’s paid cash dividends of $695 million ©McGraw-Hill Companies, 2008 616 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Teamwork in Action — BTN 11-6 The team statement should include the following: a When a corporation ―buys back‖ its stock (engages in a treasury stock acquisition), the effect on financial position is a decrease in both assets (cash) and equity (treasury stock) Also, treasury stock is a contra equity account that decreases equity b Reasons for ―buybacks‖:  to use shares to acquire another corporation  to avoid a hostile takeover by an investor seeking to take control of the company  to reissue shares to employees as compensation  to maintain a strong or stable market for the stock The team should establish the acquisition entry as follows Treasury Stock, Common 13,400 Cash 13,400 Reacquired 100 shares of $100 par value common stock at a cost of $134 per share Each member should prepare one of the following reissue entries: a Cash 13,400 Treasury Stock, Common 13,400 Received $134 per share for 100 treasury shares costing $134 per share b Cash 15,000 Paid-In Capital, Treasury Stock Treasury Stock, Common 1,600 13,400 Received $150 per share for 100 treasury shares costing $134 per share c Cash 12,000 Paid-In Capital, Treasury Stock 1,400 Treasury Stock, Common 13,400 Received $120 per share for 100 treasury shares costing $134 per share ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 11 617 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Teamwork in Action (Continued) d Cash 12,000 Paid-In Capital, Treasury Stock 1,000 Retained Earnings 400 Treasury Stock, Common 13,400 Received $120 per share for 100 treasury shares costing $134 per share e Cash 12,000 Retained Earnings 1,400 Treasury Stock, Common 13,400 Received $120 per share for 100 treasury shares costing $134 per share When presenting and explaining the above entries to the team, the following points should be made by the team members: The similarities in all reissue entries a through e are:  The net affect of the transaction is to increase assets and equity by the amount received on reissue  Cash (assets) is always increased by the amount received  Treasury Stock is always decreased by the full cost regardless of whether the reissue is at cost, above cost, or below cost The differences in reissue entries b through e are: (b) Reissuing above cost creates additional Paid-In Capital.* (c) Reissuing below cost reduces existing Paid-In Capital.* (d) Reissuing below cost reduces existing Paid-In Capital,* but after this account’s balance has been eliminated, then Retained Earnings must be reduced by the additional amount below cost (e) Reissuing below cost reduces Retained Earnings when Paid-In Capital* does not exist *Refers to the Paid-In Capital, Treasury Stock account ©McGraw-Hill Companies, 2008 618 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com BusinessWeek Activity — BTN 11-7 The tax cut increased companies’ propensity to pay dividends According to a study by Chetty and Saez, ―the tax reform made companies more likely to pay a dividend and pay a larger dividend.‖ Evidence indicates that companies increased their dividends if share ownership was concentrated among executives or taxable institutions Dividends did not increase among companies whose largest institutional investor was not affected by the tax change For individuals or other taxpayers, the tax on dividends decreased, so those investors could receive the cash dividend and pay little or no taxes on them These investors would prefer to get additional tax-free dividends Those who were not affected by the tax law changes, would not be as interested in receiving additional dividends ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 11 619 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Entrepreneurial Decision — BTN 11-8 Net income Less preferred dividends Net income for common stockholders Plan A $ 72,000 $ 72,000 Plan B $ 72,000 (10,000) $ 62,000 Chris’ share of common equity Chris’ share of income after any preferred stock dividends 80% 100% $ 57,600 $ 62,000 Chris’ initial equity $375,000 $375,000 Chris’ return on equity 15.4% 16.5% Net income Less preferred dividends Net income for common stockholders Plan A $ 16,800 $ 16,800 Plan B $ 16,800 (10,000) $ 6,800 Chris’ share of common equity Chris’ share of income after any preferred stock dividends $ 13,440 $ Chris’ initial equity $375,000 $375,000 Chris’ return on equity 3.6% 1.8% 80% 100% 6,800 The difference between the answers for parts and arises from the percent of return generated with the assets invested in the corporation In part 1, Chris’ return on equity is 15.4% for Plan A, which is less than the 16.5% for Plan B However, the return on equity is only 3.6% in part for Plan A, BUT this is more than the 1.8% for Plan B These results indicate that the 8% dividend rate on the preferred stock is advantageous to Chris as long as the rate of return on the assets is greater than 8% (this is the same as saying net income is over $40,000) This means Plan B is preferred Net income over $40,000 yields a return on assets greater than 8% (i.e., 8% equals $40,000/$500,000) If net income falls below $40,000 (or less than 8% return on assets), then Plan A is preferred ©McGraw-Hill Companies, 2008 620 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com Hitting the Road — BTN 11-9 There is no formal solution for this field activity Students often find this assignment interesting as it highlights the relevance of their accounting studies Global Decision — BTN 11-10 Book value per common share = Error! Dixons’ book value per common share = ₤1,428 / 1,945 = ₤0.73 = ₤ 283 / 1,945 = ₤0.15 Earnings per share = Error! Dixons’ earnings per share (Instructor’s note: At the date this problem was written, ₤1 was equal to about $1.8 This means that Dixons’ BVPS is about $1.3, and its EPS is about $0.3) Dixons’ EPS is ₤0.15, and its paid dividends of ₤0.07 It appears that Dixons is paying out about 50% of its income as dividends In comparison with most companies, this is a large proportion of income in the form of cash dividends ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 11 621 ... Divided by weighted-average outstanding shares 678,000 Basic earnings per share $3.41 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 11 595 To download more slides, ebook, solutions... $72,000 ***$648,000 - $72,000 = $576,000 ©McGraw-Hill Companies, 2008 Solutions Manual, Chapter 11 583 To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com... x 7% x 5,000 shares = $35,000 ©McGraw-Hill Companies, 2008 584 Financial Accounting, 4th Edition To download more slides, ebook, solutions and test bank, visit http://downloadslide.blogspot.com