Solution manual accounting 25th editon warren chapter 13

CHAPTER 13 CORPORATIONS: ORGANIZATION, STOCK TRANSACTIONS, AND DIVIDENDS DISCUSSION QUESTIONS No Common stock with a higher par is not necessarily a better investment than common stock with a lower par because par is an amount assigned to the shares The broker is not correct Corporations are not legally liable to pay dividends until the dividends are declared If the company that issued the preferred stock has operating losses, it could omit dividends, first, on its common stock and, later, on its preferred stock The company may not have had enough cash on hand to pay a dividend on the common stock, or resources may be needed for plant expansion, replacement of facilities, payment of liabilities, etc a b No change Total equity is the same a b Current liability Stockholders’ equity a b It has no effect on revenue or expense It reduces stockholders’ equity by $3,000,000 a b It has no effect on revenue It increases stockholders’ equity by $3,750,000 The three classifications of restrictions on retained earnings are legal, contractual, and discretionary Restrictions are normally reported in the notes to the financial statements Such prior period adjustments should be reported as an adjustment to the beginning balance of retained earnings 10 The primary purpose of a stock split is to bring about a reduction in the market price per share and thus to encourage more investors to buy the company’s shares 13-1 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER 13 Corporations: Organization, Stock Transactions, and Dividends PRACTICE EXERCISES PE 13–1A Year Amount distributed………………………………… $30,000 30,000 Preferred dividend (40,000 shares)…………… $ Common dividend (50,000 shares)……………… Year Year $90,000 66,000* $24,000 $125,000 48,000 $ 77,000 $1.65 $0.48 $1.20 $1.54 * $18,000 + $48,000 Dividends per share: Preferred stock………………………………… Common stock………………………………… PE 13–1B Amount distributed……………………………… Preferred dividend (16,000 shares)…………… Common dividend (80,000 shares)…………… * $0.75 None Year Year Year $21,600 6,400 $4,000 4,000 $100,800 8,800* $15,200 $ $ 92,000 $0.25 None $0.55 $1.15 $2,400 + $6,400 Dividends per share: Preferred stock………………………………… Common stock………………………………… $0.40 $0.19 PE 13–2A May Sept Dec 10 Cash (90,000 shares × $42) Common Stock (90,000 shares × $30) Paid-In Capital in Excess of Stated Value— Common Stock [90,000 shares × ($42 – $30)] 3,780,000 2,700,000 1,080,000 Cash Preferred Stock (36,000 shares × $25) 900,000 Cash (14,000 shares × $33) Preferred Stock (14,000 shares × $25) Paid-In Capital in Excess of Par— Preferred Stock [14,000 shares × ($33 – $25)] 462,000 900,000 350,000 112,000 13-2 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part PE 13–2B Jan Feb Aug 22 Cash Common Stock (180,000 shares × $4) 720,000 14 Cash Preferred Stock (44,000 shares × $55) 2,420,000 30 Cash (9,000 shares × $60) Preferred Stock (9,000 shares × $55) Paid-In Capital in Excess of Par— Preferred Stock [9,000 shares × ($60 – $55)] 720,000 2,420,000 540,000 495,000 45,000 PE 13–3A Aug Cash Dividends Cash Dividends Payable Oct 15 No entry required Nov 14 Cash Dividends Payable Cash 1,250,000 1,250,000 1,250,000 1,250,000 PE 13–3B Feb Mar May Cash Dividends Cash Dividends Payable 480,000 480,000 18 No entry required Cash Dividends Payable Cash 480,000 480,000 PE 13–4A Feb Mar 15 Stock Dividends (250,000 shares × 2% × $52) Stock Dividends Distributable (5,000 shares × $40) Paid-In Capital in Excess of Par— Common Stock [$5,000 shares × ($52 – $40)] 260,000 200,000 60,000 27 No entry required May Stock Dividends Distributable Common Stock 200,000 200,000 PE 13–4B June Stock Dividends (820,000 shares × 5% × $63) Stock Dividends Distributable (41,000 shares × $35) Paid-In Capital in Excess of Par— Common Stock [41,000 shares × ($63 – $35)] July 13 No entry required Aug 12 Stock Dividends Distributable Common Stock 2,583,000 1,435,000 1,148,000 1,435,000 1,435,000 PE 13–5A Jan Apr Oct 31 Treasury Stock (22,500 shares × $31) Cash 697,500 20 Cash (12,800 shares × $40) Treasury Stock (12,800 shares × $31) Paid-In Capital from Sale of Treasury Stock [12,800 shares × ($40 – $31)] 512,000 Cash (9,700 shares × $28) Paid-In Capital from Sale of Treasury Stock [9,700 shares × ($31 – $28)] Treasury Stock (9,700 shares × $31) 697,500 396,800 115,200 271,600 29,100 300,700 PE 13–5B May 27 Treasury Stock (75,000 shares × $8) Cash Aug Nov Cash (54,000 shares × $11) Treasury Stock (54,000 shares × $8) Paid-In Capital from Sale of Treasury Stock [54,000 shares × ($11 – $8)] 14 Cash (21,000 shares × $7) Paid-In Capital from Sale of Treasury Stock [21,000 shares × ($8 – $7)] Treasury Stock (21,000 shares × $8) 600,000 600,000 594,000 432,000 162,000 147,000 21,000 168,000 PE 13–6A Stockholders’ Equity Paid-in capital: Common stock, $60 par (250,000 shares authorized, 200,000 shares issued) Excess of issue price over par From sale of treasury stock Total paid-in capital Retained earnings $12,000,000 3,200,000 $15,200,000 320,000 $15,520,000 18,500,000 $34,020,000 1,137,500 $32,882,500 Total Deduct treasury stock (17,500 shares at cost) Total stockholders’ equity PE 13–6B Stockholders’ Equity Paid-in capital: Common stock, $120 par (500,000 shares authorized, 400,000 shares issued) Excess of issue price over par $48,000,000 6,400,000 $ 54,400,000 From sale of treasury stock Total paid-in capital Retained earnings 4,500,000 $ 58,900,000 63,680,000 Total Deduct treasury stock (40,000 shares at cost) Total stockholders’ equity $122,580,000 5,200,000 $117,380,000 PE 13–7A ROCKWELL INC Retained Earnings Statement For the Year Ended June 30, 2014 Retained earnings, July 1, 2013 Net income Less dividends declared Increase in retained earnings Retained earnings, June 30, 2014 $3,900,000 $714,000 150,000 564,000 $4,464,000 PE 13–7B NORIC CRUISES INC Retained Earnings Statement For the Year Ended October 31, 2014 Retained earnings, November 1, 2013 $2,350,000 Net income Less dividends declared 475,000 Increase in retained earnings Retained earnings, October 31, 2014 $12,400,000 1,875,000 $14,275,000 PE 13–8A a 2014: Earnings per Share = = = 2013: Earnings per Share = = = b 2014: Earnings per Share = = = 2013: Earnings per Share = = = b $448,750 – $40,000 75,000 shares $408,750 = $5.45 75,000 shares Net Income – Preferred Dividends Avg Number of Common Shares Outstanding $376,000 – $40,000 60,000 shares $336,000 = $5.60 60,000 shares The decrease in the earnings per share from $5.60 to $5.45 indicates an unfavorable trend in the company’s profitability PE 13–8B a Net Income – Preferred Dividends Avg Number of Common Shares Outstanding Net Income – Preferred Dividends Avg Number of Common Shares Outstanding $2,485,700 – $50,000 115,000 shares $2,435,700 = $21.18 115,000 shares Net Income – Preferred Dividends Avg Number of Common Shares Outstanding $1,538,000 – $50,000 80,000 shares $1,488,000 = $18.60 80,000 shares The increase in the earnings per share from $18.60 to $21.18 indicates a favorable trend in the company’s profitability EXERCISES Ex 13–1 a b 1st Year 2nd Year 3rd Year 4th Year Total dividend declared…………… $24,000 $81,000 Preferred dividend (current)……… $24,000 $51,000* $92,000 $54,000 $139,000 $ 54,000 Preferred dividend in arrears……… — 30,000 3,000 — Total preferred dividends………… $24,000 $81,000 $57,000 $ 54,000 Preferred shares outstanding…… ÷ 30,000 ÷ 30,000 ÷ 30,000 ÷ 30,000 Preferred dividend per share…… $ $ $ 0.80 2.70 1.90 $ 1.80 * $51,000 = $81,000 – $30,000 Dividend for common shares $ 35,000 $ 85,000 Common shares outstanding…… ÷ 125,000 ÷ 125,000 Common dividend per share……… $ $ (a – b.)……………………………… $ Ex 13–2 a — $ — 0.28 1st Year 2nd Year 3rd Year Total dividend declared…………… $36,000 $58,000 Preferred dividend (current)……… $36,000 $44,000* $75,000 $50,000 0.68 4th Year $124,000 $ 50,000 — Preferred dividend in arrears…… b 14,000 6,000 — $36,000 $58,000 $56,000 $ 50,000 ÷ 40,000 ÷ 40,000 ÷ 40,000 ÷ 40,000 $ $ Total preferred dividends………… Preferred shares outstanding…… Preferred dividend per share……… $ 0.90 1.45 1.40 $ 1.25 * $44,000 = $58,000 – $14,000 Dividend for common shares (a – b.)……………………………… $ Common shares outstanding……… Common dividend per share…… — $ — $ 19,000 $ 74,000 ÷ 100,000 ÷ 100,000 $ $ 0.19 0.74 CHAPTER 13 Corporations: Organization, Stock Transactions, and Dividends Ex 13–3 a Feb June b 25 Cash (120,000 shares × $40) Common Stock (120,000 shares × $36) Paid-In Capital in Excess of Par— Common Stock [120,000 shares × ($40 – $36)] Cash (50,000 shares × $9) Preferred Stock (50,000 shares × $8) Paid-In Capital in Excess of Par— Preferred Stock [50,000 shares × ($9 – $8)] 4,800,000 4,320,000 480,000 450,000 400,000 50,000 $5,250,000 ($4,800,000 + $450,000) Ex 13–4 a Aug Dec b Cash (500,000 shares × $3) Common Stock (500,000 shares × $1) Paid-In Capital in Excess of Stated Value— Common Stock [500,000 shares × ($3 – $1)] 17 Cash (5,000 shares × $200) Preferred Stock (5,000 shares × $180) Paid-In Capital in Excess of Par— Preferred Stock [5,000 shares × ($200 – $180)] 1,500,000 500,000 1,000,000 1,000,000 900,000 100,000 $2,500,000 ($1,500,000 + $1,000,000) Ex 13–5 May 10 Land (3,600 shares × $28) Common Stock (3,600 shares × $4) Paid-In Capital in Excess of Par— Common Stock [3,600 shares × ($28 – $4)] 100,800 14,400 86,400 13-10 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER 13 Corporations: Organization, Stock Transactions, and Dividends Prob 13–5A Jan Feb May July Sept Oct Dec No entry required The stockholders’ ledger would be revised to record the increased number of shares held by each stockholder and new par value 28 Treasury Stock (40,000 shares × $28) Cash 1,120,000 1,120,000 Cash Dividends {(75,000 shares × $0.80) + [(1,200,000 shares – 40,000 shares) + $0.12]} Cash Dividends Payable 10 Cash Dividends Payable Cash 199,200 199,200 199,200 199,200 Cash (30,000 shares × $34) Treasury Stock (30,000 shares × $28) Paid-In Capital from Sale of Treasury Stock [30,000 shares × ($34 – $28)] 1,020,000 840,000 180,000 Cash Dividends {(75,000 shares × $0.80) + [(1,200,000 shares – 10,000 shares) × $0.12]} Cash Dividends Payable 202,800 Stock Dividends [(1,200,000 shares – 10,000 shares) × 2% × $36] Stock Dividends Distributable (23,800 shares × $25) Paid-In Capital in Excess of Par— Common Stock [23,800 shares × ($36 – $25)] 856,800 Cash Dividends Payable Cash 202,800 Stock Dividends Distributable Common Stock 595,000 202,800 595,000 261,800 202,800 595,000 13-28 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER 13 Corporations: Organization, Stock Transactions, and Dividends Prob 13–30 Year Total Dividends 2009…………… $ 24,000 2010………… 10,000 2011…………… 126,000 2012………… 100,000 2013…………… 125,000 2014………… 125,000 Preferred Dividends Per Total Share $ 24,000 10,000 101,000 * 45,000 45,000 45,000 $ 0.96 0.40 4.04 1.80 1.80 1.80 Common Dividends Per Total Share $ 0 25,000 55,000 80,000 80,000 $10.80 $0.00 0.00 0.25 0.55 0.80 0.80 $2.40 * $101,000 = (2009 dividends in arrears of $11,000) + (2010 dividends in arrears of $45,000) + (2011 current dividend of $45,000) Average annual dividend for preferred: $1.80 per share ($10.80 ÷ 6) Average annual dividend for common: $0.40 per share ($2.40 ÷ 6) a b Oct 1.8% ($1.80 ÷ $100) 8.0% ($0.40 ÷ $5.00) Cash Mortgage Note Payable 1,500,000 1,500,000 17 Cash (20,000 shares × $126) Preferred Stock (20,000 shares × $120) Paid-In Capital in Excess of Par— Preferred Stock [20,000 shares × ($126 – $120)] 2,520,000 28 Building Land Common Stock (300,000 shares × $15) Paid-In Capital in Excess of Par— Preferred Stock [300,000 shares × ($16.50 – $15.00)] 4,150,000 800,000 2,400,000 120,000 4,500,000 450,000 13-29 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER 13 Corporations: Organization, Stock Transactions, and Dividends Prob 13–3B a b c d e f g Treasury Stock (87,500 shares × $8) Cash 700,000 Cash (55,000 shares × $11) Treasury Stock (55,000 shares × $8) Paid-In Capital from Sale of Treasury Stock [55,000 shares × ($11 – $8)] 605,000 Cash (20,000 shares × $84) Preferred Stock (20,000 shares × $80) Paid-In Capital in Excess of Par—Preferred Stock [20,000 shares × ($84 – $80)] 1,680,000 Cash (400,000 shares × $13) Common Stock (400,000 shares × $9) Paid-In Capital in Excess of Par—Common Stock [400,000 shares × ($13 – $9)] 5,200,000 700,000 440,000 165,000 1,600,000 80,000 3,600,000 1,600,000 Cash (18,000 shares × $7.50) Paid-In Capital from Sale of Treasury Stock [18,000 shares × ($8.00 – $7.50)] Treasury Stock (18,000 shares × $8) 135,000 9,000 Cash Dividends {(80,000 shares × $1.60) + [(1,750,000 shares – 87,500 shares + 55,000 shares + 400,000 shares + 18,000 shares) × $0.05]} Cash Dividends Payable 234,775 Cash Dividends Payable Cash 234,775 144,000 234,775 234,775 CHAPTER 13 Corporations: Organization, Stock Transactions, and Dividends Prob 13–4B and Common Stock Jan Apr 13 July 16 Dec 31 Bal 3,100,000 1,000,000 123,000 Bal 4,223,000 Paid-In Capital in Excess of Stated Value—Common Stock Jan Bal 1,240,000 Apr 13 600,000 June 14 61,500 Dec 31 Bal 1,901,500 Retained Earnings Dec 31 248,068 Jan Dec 31 Bal Dec 31 Bal Treasury Stock Jan Oct Dec 30 31 Bal 288,000 300,000 300,000 Bal Mar 4,875,000 775,000 5,401,932 288,000 15 Paid-In Capital from Sale of Treasury Stock Mar 15 36,000 June 14 123,000 Dec 31 184,500 Stock Dividends Distributable July 16 123,000 S t o c k D i v i d e n d s June 14 184,500 13-32 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER 13 Corporations: Organization, Stock Transactions, and Dividends Prob 13–4B Dec 13-32 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER 13 Corporations: Organization, Stock Transactions, and Dividends Prob 13–4B (Continued) Jan Mar Apr June July Oct Dec 15 Cash Dividends Payable [(620,000 shares – 48,000 shares) × $0.06] Cash 15 Cash (48,000 shares × $6.75) Treasury Stock (48,000 shares × $6.00) Paid-In Capital from Sale of Treasury Stock [48,000 shares × ($6.75 – $6.00)] 13 Cash (200,000 shares × $8) Common Stock (200,000 shares × $5) Paid-In Capital in Excess of Stated Value—Common Stock [200,000 shares × ($8 – $5)] 34,320 34,320 324,000 288,000 36,000 1,600,000 1,000,000 600,000 14 Stock Dividends [(620,000 shares + 200,000 shares) × 3% × $7.50] Stock Dividends Distributable (24,600 shares × $5) Paid-In Capital in Excess of Stated Value—Common Stock [24,600 shares × ($7.50 – $5.00)] 184,500 16 Stock Dividends Distributable Common Stock 123,000 30 Treasury Stock (50,000 shares × $6) Cash 300,000 123,000 61,500 123,000 300,000 30 Cash Dividends [(620,000 shares + 200,000 shares + 24,600 shares – 50,000 shares) × $0.08] Cash Dividends Payable 63,568 63,568 31 Income Summary Retained Earnings 775,000 31 Retained Earnings Stock Dividends Cash Dividends 248,068 775,000 184,500 63,568 13-33 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER 13 Corporations: Organization, Stock Transactions, and Dividends Prob 13–4B (Concluded) NAV-GO ENTERPRISES INC Retained Earnings Statement For the Year Ended December 31, 2014 Retained earnings, January 1, 2014 Net income Less: Cash dividends Stock dividends Increase in retained earnings Retained earnings, December 31, 2014 $4,875,000 $ 775,000 (63,568) (184,500) 526,932 $5,401,932 Stockholders’ Equity Paid-in capital: Common stock, $5 stated value (900,000 shares authorized, 844,600 shares issued) Excess of issue price over stated value From sale of treasury stock $4,223,000 1,901,500 36,000 Total paid-in capital Retained earnings $ 6,160,500 5,401,932 Total Deduct treasury stock (50,000 shares at cost) $11,562,432 300,000 Total stockholders’ equity $11,262,432 13-34 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER 13 Corporations: Organization, Stock Transactions, and Dividends Prob 13–5B Jan Mar Apr May Aug Sept 15 No entry required The stockholders’ ledger would be revised to record the increased number of shares held by each stockholder and new par value Cash Dividends [(100,000 shares × $0.25) + (800,000 shares × $0.07)] Cash Dividends Payable 30 Cash Dividends Payable Cash 81,000 81,000 81,000 31 Treasury Stock (60,000 shares × $32) Cash 1,920,000 17 Cash (40,000 shares × $38) Treasury Stock (40,000 shares × $32) Paid-In Capital from Sale of Treasury Stock [40,000 shares × ($38 – $32)] 1,520,000 1,920,000 1,280,000 240,000 Cash Dividends {(100,000 shares × $0.25) + [(800,000 shares – 60,000 shares + 40,000 shares) × $0.09]} Cash Dividends Payable Stock Dividends [(800,000 shares – 60,000 shares + 40,000 shares) × 1% × $40] Stock Dividends Distributable (7,800 shares × $30) Paid-In Capital in Excess of Par— Common Stock [7,800 shares × ($40 – $30)] Oct 81,000 31 Cash Dividends Payable Cash 95,200 95,200 312,000 234,000 78,000 95,200 95,200 31 Stock Dividends Distributable Common Stock 234,000 234,000 13-35 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CHAPTER 13 Corporations: Organization, Stock Transactions, and Dividends CASES & PROJECTS CP 13–1 At the time of this decision, the WorldCom board had come under intense scrutiny This was the largest loan by a company to its CEO in history The SEC began an investigation into this loan, and Bernie Ebbers was eventually terminated as the CEO, with this loan being cited as part of the reason The board indicated that the decision to lend Ebbers this money was to keep him from selling his stock and depressing the share price Thus, it claimed that it was actually helping shareholders by keeping these shares from being sold However, this argument wasn’t well received, given that the share price dropped from around $15 per share at the time of the loan to about $2.50 per share when Ebbers was terminated In addition, critics were scornful of the low “sweetheart” interest rate given to Ebbers for this loan In addition, many critics viewed the loan as risky, given that it was not supported by any personal assets WorldCom has since entered bankruptcy proceedings, Ebbers has gone to prison, and the Ebbers loan went uncollected Some press comments: When he borrowed money personally, he used his WorldCom stock as collateral As these loans came due, he was unwilling to sell at “depressed prices” of $10 to $15 (it’s now around $2.50) So WorldCom lent him the money to consolidate his loans, to the tune of $366 million How a board of directors, representing you and me at the table, allowed this to happen is beyond comprehension They should resign with Bernie (Source: Andy Kessler, “Bernie Bites the Dust,” The Wall Street Journal, May 1, 2002, p A18.) It was astonishing to read the other day that the board of directors of the United States’ second-largest telecommunications company claims to have had its shareholders’ interests in mind when it agreed to grant more than $430 million in low-interest loans to the company’s CEO, mainly to meet margin calls on his stock Yet that’s the level to which fiduciary responsibility seems to have sunk on the board of Clinton, Mississippi-based WorldCom, the deeply troubled telecom giant, as it sought to bail Bernard Ebbers out of the folly of speculating in shares of WorldCom itself Sadly, WorldCom is hardly alone “The very essence of why Mr Ebbers was granted a loan was to protect shareholder value,” said a WorldCom spokesman in mid-March, just as the U.S Securities & Exchange Commission was unfurling a probe of the loan and 23 other matters related to WorldCom’s finances Yes, folks, you read that right On March 14, 2002, a spokesman for a publicly traded, $20 billion company actually stood up and declared that of all the uses to which the company could have put almost half-a-billion dollars, the 13-37 © 2014 Cengage Learning All Rights Reserved May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part CP 13–1 (Concluded) best one by far—at least from the point of view of the shareholders—was to spend it on some sort of stock-parking scheme in order to keep the CEO out of bankruptcy court (Source: Christopher Byron, “Bernie’s Bad Idea,” Red Herring , April 16, 2002.) Note to Instructors: Bernie Ebbers is currently serving a 25-year prison sentence for conspiracy, securities fraud, and making false statements to securities regulators CP 13–2 Lou and Shirley are behaving in a professional manner as long as full and complete information is provided to potential investors in accordance with federal regulations for the sale of securities to the public If such information is provided, the marketplace will determine the fair value of the company’s stock CP 13–3 This case involves a transaction in which a security has been issued that has characteristics of both stock and debt The primary argument for classifying the issuance of the common stock as debt is that the investors have a legal right to an amount equal to the purchase price (face value) of the security This is similar to a note payable or a bond payable The additional $120 payment could be argued to be equivalent to an interest payment, whose payment has been deferred until a later date Arguments against classifying the security as debt include the fact that the investors will not receive fixed “annual” interest payments In fact, if Epstein Engineering Inc does not generate any net sales, the investors not have a right to receive any payments One could argue that the payments of 5% of net sales are, in substance, a method of redeeming the stock As indicated in the case, the stockholders must surrender their stock for $120 per share after the $25 million payment has been made Overall, the arguments would seem to favor classifying the security as common stock In practice, the $25 million stock issuance would probably be classified as common stock However, full disclosure should be made of the 5% of net sales and $120 per share payment obligations in the notes to the financial statements In addition, as Epstein Engineering Inc generates net sales, a current liability should be recorded for the payment to stockholders Such payments would be classified as dividend payments rather than as interest payments Dan Fisher should also investigate whether such payments might violate any loan agreements with the banks Banks often restrict dividend payments in loan agreements If such an agreement has been violated, Epstein Engineering Inc should notify the bank immediately and request a waiver of the violation CP 134 a 500 shares ì ($0.80 ữ 4) = $100 b (0.4)% = ($31.74 – $31.87) ÷ $31.87 c 34.8% = ($31.87 – $23.65) ÷ $23.65 d 500 shares × $31.74 = $15,870 plus brokerage commission e The $15,870 paid for 500 shares of Microsoft common stock goes to the seller of the common stock (another shareholder) CP 13–5 Before a cash dividend is declared, there must be sufficient retained earnings and cash On December 31, 2014, the retained earnings balance of $4,630,000 is available for use in declaring a dividend This balance is sufficient for the payment of the normal quarterly cash dividend of $0.50 per share, which would amount to $90,000 ($0.50 × 180,000) Motion Designs Inc.’s cash balance at December 31, 2014, is $250,000, of which $100,000 is committed as the compensating balance under the loan agreement This leaves only $150,000 to pay the dividend of $90,000 and to finance normal operations in the future Unless the cash balance can be expected to increase significantly in early 2015, it is questionable whether sufficient cash will be available to pay a cash dividend and to provide for future cash needs Other factors that should be considered include the company’s working capital (current assets – current liabilities) position and the loan provision pertaining to the current ratio, resources needed for plant expansion or replacement of facilities, future business prospects of the company, and forecasts for the industry and the economy in general The working capital is $5,000,000 ($7,000,000 – $2,000,000) on December 31, 2014 The current ratio is therefore 3.5:1 ($7,000,000 ÷ $2,000,000) on December 31, 2014 However, after deducting the $3,000,000 committed to store modernization and product-line expansion, the ratio drops to 2:1 ($4,000,000 ÷ $2,000,000) If the cash dividend were declared and paid and the other current assets and current liabilities remain unchanged, the current ratio would drop to 1.955:1 ($3,910,000 ÷ $2,000,000), and this would violate the loan agreement Further, working capital commitments for 2015 and any additional funds that might be required, such as funds for the replacement of fixed assets, would suggest that the declaration of a cash dividend for the fourth quarter of 2014 might not be wise Given the cash and working capital position of Motion Designs Inc on December 31, 2014, a stock dividend might be an appropriate alternative to a cash dividend CP 13–5 (Concluded) a From the point of view of a stockholder, the declaration of a stock dividend would continue the dividend declaration trend of Motion Designs Inc In addition, although the amount of the stockholders’ equity and proportional interest in the corporation would remain unchanged, the stockholders might benefit from an increase in the fair market value of their total holdings of Motion Designs Inc stock after distribution of the dividend b From the point of view of the board of directors, a stock dividend would continue the dividend trend, while the cash and working capital position of the company would not be jeopardized Many corporations use stock dividends as a way to “plow back” retained earnings for use in acquiring new facilities or for expanding their operations Motion Designs Inc has sufficient unissued common stock to declare a stock dividend without changing the amount authorized CP 13–6 Note to Instructors: The purpose of this activity is to familiarize students with sources of information about corporations and how that information is useful in evaluating the corporation’s activities The following information was prepared for Google Inc based upon the SEC 10-K filing for the year ending December 31, 2011 Google Inc Delaware The following is taken from Google’s 10-K: “Google is a global technology leader focused on improving the ways people connect with information We aspire to build products that improve the lives of billions of people globally Our mission is to organize the world’s information and make it universally accessible and useful Our innovations in web search and advertising have made our website a top internet property and our brand one of the most recognized in the world We generate revenue primarily by delivering relevant, cost-effective online advertising Businesses use our AdWords program to promote their products and services with targeted advertising In addition, the third parties that comprise the Google Network use our AdSense program to deliver relevant ads that generate revenue and enhance the user experience.” CP 13–6 (Continued) $72,574,000,000 $37,905,000,000 $9,737,000,000 Convertible preferred stock, $0.001 par value, 100,000 shares authorized; no shares issued and outstanding Class A and Class B common stock and additional paid-in capital, $0.001 par value per share: 9,000,000 shares authorized; 321,301 (Class A 250,413, Class B 70,888) and par value of $321 (Class A $250, Class B $71) and 324,895 (Class A 257,553, Class B 67,342) and par value of $325 (Class A $258, Class B $67) shares issued and outstanding Note to Instructors: The rights of Class A and Class B common stock are identical except for voting rights Specifically, each share of Class A common stock is entitled to one vote per share Each share of Class B common stock is entitled to 10 votes per share Shares of Class B common stock may be converted at any time at the option of the stockholder and automatically convert upon sale or transfer to Class A common stock The Class A common stock is the stock that is actively traded on the New York Stock Exchange The Class B common stock allows the founders of Google (Sergery Brin and Larry Page) and Executive Chairman (Eric Schmidt) to maintain control of the corporation Specifically, the following stated in Google’s 10-K: “… As of December 31, 2011, Larry, Sergey, and Eric beneficially owned approximately 92% of our outstanding Class B common stock, representing approximately 66% of the voting power of our outstanding capital stock Larry, Sergey, and Eric therefore have significant influence over management and affairs and over all matters requiring stockholder approval, including the election of directors and significant corporate transactions, such as a merger or other sale of our company or our assets, for the foreseeable future.” $618.39 as of close on February 28, 2012 $642.96 – $473.02 CP 13–6 (Concluded) 10 Google Inc does not pay dividends In its SEC 10-K filing for the year ending December 31, 2011, Google states: “We have never declared or paid any cash dividend on our common stock We intend to retain any future earnings and not expect to pay any dividends in the foreseeable future.” Note to Instructors: The preceding information, which may be updated as needed, can be used as a basis for class discussion Some issues that you may want to raise in class are (1) the high price of Google’s Class A stock; (2) control of the corporation by the founders, using the voting rights of their Class B stock; (3) the no dividend policy; and (4) future prospects for Google, including appreciation in value of the Class A stock ... shares × ( $131 – $120)] 4,500,000 4,500,000 10,000 10,000 200,000 550,000 135 ,000 750,000 135 ,000 1, 113, 500 1,020,000 93,500 Ex 13 9 July 10 Cash Dividends Cash Dividends Payable Aug Sept 187,500 187,500... 31, 2014 $12,400,000 1,875,000 $14,275,000 PE 13 8A a 2014: Earnings per Share = = = 2 013: Earnings per Share = = = b 2014: Earnings per Share = = = 2 013: Earnings per Share = = = b $448,750 – $40,000... — $ — $ 19,000 $ 74,000 ÷ 100,000 ÷ 100,000 $ $ 0.19 0.74 CHAPTER 13 Corporations: Organization, Stock Transactions, and Dividends Ex 13 3 a Feb June b 25 Cash (120,000 shares × $40) Common Stock