CHAPTER 15 SOLUTIONS TO B EXERCISES E15-1B (15–20 minutes) (a) Apr 26 May 11 Aug Nov 1 (b) Apr 26 May 11 Aug Nov 1 Cash (15,000 X $4.50) Common Stock (15,000 X $1) Paid-in Capital in Excess of Par 67,500 Organization Expense Common Stock (10,000 X $1) Paid-in Capital in Excess of Par 48,000 Cash (20,000 X $5) Common Stock (20,000 X $1) Paid-in Capital in Excess of Par 100,000 Cash (10,000 X $7) Common Stock (10,000 X $1) Paid-in Capital in Excess of Par 70,000 Cash (15,000 X $4.50) Common Stock (15,000 X $3) Paid-in Capital in Excess of Stated Value 67,500 Organization Expense Common Stock (10,000 X $3) Paid-in Capital in Excess of Stated Value 48,000 Cash (20,000 X $5) Common Stock (20,000 X $3) Paid-in Capital in Excess of Stated Value 100,000 Cash (10,000 X $7) Common Stock (10,000 X $3) Paid-in Capital in Excess of Stated Value 70,000 15,000 52,500 10,000 38,000 20,000 80,000 10,000 60,000 45,000 22,500 30,000 18,000 60,000 40,000 30,000 40,000 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 15-1 E15-2B (15–20 minutes) June 15 June 30 Aug 15 Sept Oct Oct 15 Nov Cash (165,000 X $5) Common Stock (165,000 X $1) Paid-in Capital in Excess of Stated Value—Common Stock 825,000 165,000 660,000 Cash (25,000 X $102) 2,550,000 Preferred Stock (25,000 X $100) Paid-in Capital in Excess of Par Value—Preferred Stock Building Common Stock (20,000 X $1) Paid-in Capital in Excess of Stated Value—Common Stock ($140,000 – $20,000) 2,500,000 50,000 140,000 20,000 120,000 Cash (200,000 X $7) 1,400,000 Common Stock (200,000 X $1) Paid-in Capital in Excess of Stated Value—Common Stock (200,000 X $6) Organization Expense Common Stock (5,000 X $1) Paid-in Capital in Excess of Stated Value—Common Stock ($40,000 – $5,000) 40,000 Cash (25,000 X $8.50) Common Stock (25,000 X $1) Paid-in Capital in Excess of Stated Value—Common Stock (25,000 X $7.50) 212,500 Cash (6,000 X $104) Preferred Stock (6,000 X $100) Paid-in Capital in Excess of Par Value—Preferred Stock (6,000 X $4) 624,000 200,000 1,200,000 5,000 35,000 25,000 187,500 600,000 24,000 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 15-2 E15-3B (10–15 minutes) (a) Land ($176 X 20,000) Treasury Stock ($153 X 20,000) Paid-in Capital from Treasury Stock 3,520,000 3,060,000 460,000 (b) One might use the cost of treasury stock However, this is not a relevant measure of this economic event Rather, it is a measure of a prior, unrelated event The appraised value of the land is a reasonable alternative since the value of the asset acquired should preferably determine the issue price of the stock However, it is an appraisal as opposed to a cash price The trading price of the stock is probably the best measure of market value in this transaction E15-4B (20–25 minutes) (a) Bond Issue Costs ($575,000 X $1,000/$1,150) 500,000 Cash ($1,150 X 9,500) 10,925,000 Bonds Payable 10,000,000 Common Stock (10,000 X X $5) 250,000 Paid-in Capital in Excess of Par 1,175,000 Assumes bonds properly priced and issued at par; residual attributed to common stock which has a less reliable measure of market value Investment banking costs 500 @ $1,150 = $575,000 allocate 1,000/1,150 to debentures and 150/1,150 to common stock Bond portion is bond issue cost; common stock portion is a reduction of paid-in capital in excess of par Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 15-3 E15-4B (Continued) Cash 10,925,000 Bond Issue Costs 511,111 Bonds Payable ($5,000,000 – $4,888,889) Bond Premium Common Stock Paid-in Capital in Excess of Par 10,000,000 222,222 250,000 963,889 $11,500,000 X (1,000/1,125) = $10,222,222 to Debentures $11,500,000 X (125/1,125) = $1,277,778 to Common $575,000 X (1,000/1,125) = $511,111 $575,000 X (125/1,125) = $63,889 Paid-in capital in excess of par = $1,277,778 – $250,000 – $63,889 = $963,889 (b) One is not better than the other This question is presented to stimulate some thought and class discussion E15-5B (10–15 minutes) (a) FMV of common (2,500 X $95) FMV of preferred (1,000 X $60) $237,500 60,000 $297,500 Allocated to common: $237,500/$297,500 X $275,000 Allocated to preferred: $60,000/$297,500 X $275,000 Total allocation (rounded to whole dollars) $219,538 55,462 $275,000 Cash Common Stock (2,500 X $1) Paid-in Capital in Excess of Par— Common ($219,538 – $2,500) Preferred Stock (1,000 X $50) Paid-in Capital in Excess of Par— Preferred ($55,462 – $50,000) 275,000 2,500 217,038 50,000 5,462 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 15-4 E15-5B (Continued) (b) Lump-sum receipt Allocated to common (2,500 X $90) Balance allocated to preferred Cash Common Stock Paid-in Capital in Excess of Par—Common ($225,000 – $2,500) Preferred Stock $275,000 225,000 $ 50,000 275,000 2,500 222,500 50,000 E15-6B (25–30 minutes)(a)Cash [(55,000 X $76) – $27,000] Common Stock (55,000 X $1) Paid-in Capital in Excess of Par (b) Land (10,000 X $78) Common Stock (10,000 X $1) Paid-in Capital in Excess of Par ($780,000 – $10,000) 4,153,000 55,000 4,098,000 780,000 10,000 770,000 Note: The market value of the stock ($780,000) is used to value the exchange because it is a more objective measure than the appraised value of the land ($815,000) (c) Treasury Stock (6,000 X $74) Cash 444,000 444,000 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 15-5 E15-7B (15–20 minutes) Stockholders’ Paid-in Retained Net # Assets Liabilities Equity Capital Earnings Income D NE D NE NE NE I NE I NE D NE I NE I I NE NE E15-8B (15–20 minutes) (a) 10% Preferred stock (30,000 shares X $75) Paid-in capital in excess of par (30,000 x [$83 - $75]) 2,450,000 240,000 (b) years in arrears: 2,250,000 X 10% X = $900,000 The cumulative dividend is disclosed in a note to the stockholders’ equity section; it is not reported as a liability (c) Preferred Stock (2,000 X $75) Common Stock (2,000 X X $1) Paid-in Capital in Excess of Par 150,000 14,000 136,000 E15-9B (15–20 minutes) Oct 12 Cash Common Stock (1,000 X $1) Paid-in Capital in Excess of Par— Common Stock (1,000 X $38) 39,000 Cash Preferred Stock (3,000 X $100) Paid-in Capital in Excess of Par— Preferred Stock (3,000 X $10) 330,000 1,000 38,000 300,000 30,000 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 15-6 E15-9B (Continued) 13 26 Treasury Stock Cash 20,000 Cash Treasury Stock (500 X $40) Paid-in Capital from Treasury Stock (500 X $5) 22,500 20,000 20,000 2,500 E15-10B (20–25 minutes) (a) The par value is $2.00 This amount is obtained from either of the following: 2014—$1,538 ÷ 769, or 2013—$1,512 ÷ 756 The average cost of treasury shares at December 31, 2014, was $6.35 per share ($400 ÷ 63); the average cost at December 31, 2013, was $7.00 per share ($595 ÷ 85) (b) Stockholders’ equity (in millions of dollars) Paid-in capital Common stock, $2 par value, 1,500,000,000 shares authorized, 769,000,000 shares issued, and 706,000,000 shares outstanding Additional paid-in capital Total paid-in capital Retained earnings Total paid-in capital and retained earnings Less: Cost of treasury stock (63,000,000 shares) Total stockholders’ equity $ 1,538 2,861 4,399 18,196 22,595 (400) $22,195 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 15-7 E15-11B (15–20 minutes) Item Stockholders’ Assets Liabilities Equity Paid-in Capital Retained Earnings Net Income D D NE NE NE NE NE NE NE NE NE NE I NE I NE I I D NE D NE NE NE NE I D NE D D NE I D NE D NE NE NE NE I D NE I NE I I NE NE E15-12B (10–15 minutes) (a) (b) 8/31 Retained Earnings 30,000,000 Dividends Payable 30,000,000 9/5 No entry on date of record 9/30 Dividends Payable 30,000,000 Cash 30,000,000 If this were a liquidating dividend, the debit entry on the date of declaration would be to Additional Paid-in Capital rather than Retained Earnings Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 15-8 E15-13B (10–15 minutes) (a) No entry—simply a memorandum indicating the number of shares has increased to 60 million and par value has been reduced from $4 to $1 per share (b) Retained Earnings 180,000,000 Common Stock Dividend Distributable 180,000,000 Common Stock Dividend Distributable 180,000,000 Common Stock 180,000,000 (c) Stock dividends and splits serve the same function with regard to the securities markets Both techniques allow the board of directors to increase the quantity of shares and channel share prices into the “popular trading range.” For accounting purposes the 20%–25% rule reasonably views large stock dividends as substantive stock splits It is necessary to capitalize par value with a stock dividend because the number of shares is increased and the par value remains the same Earnings are capitalized for purely procedural reasons E15-14B (10–12 minutes) (a) (b) (c) Retained Earnings (3,000,000 X $1) 3,000,000 Common Stock Dividend Distributable 3,000,000 Common Stock Dividend Distributable 3,000,000 Common Stock 3,000,000 Retained Earnings (150,000 X $17) 2,550,000 Common Stock Dividend Distributable Paid-in Capital in Excess of Par 150,000 2,400,000 Common Stock Dividend Distributable 150,000 Common Stock 150,000 No entry; the par value becomes $0.33, and the number of shares outstanding increases to 4,500,000 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 15-9 E15-15B (10–15 minutes) (a) No entry; company uses a memorandum note to indicate that par value is reduced to $0.50 and shares outstanding are now 140,000 (b) Retained Earnings 175,000 Common Stock Dividend Distributable Paid-in Capital in Excess of Par (70,000 shares X 10% X $25= $175,000 $175,000 – $7,000 = $168,000) (c) 7,000 168,000 Common Stock Dividend Distributable 7,000 Common Stock 7,000 September 12, 2014 Investments (Equity) 155,000 Gain on Appreciation of Investments (Equity) 155,000 Retained Earnings 205,000 Property Dividends Payable 205,000 October 1, 2014 Property Dividends Payable 205,000 Investments (Equity) 205,000 E15-16B (5–10 minutes) Total income since incorporation Less: Total cash dividends paid $260,000 Total value of stock dividends 2,000 Current balance of retained earnings $466,000 262,000 $204,000 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 15-10 E15-17B (20–25 minutes) CAPITAL NORTHEAST CORPORATION Stockholders’ Equity December 31, 2014 Capital stock Preferred stock, 6% cumulative, par value $100 per share; authorized 1,000,000 shares, issued and outstanding 65,000 shares Common stock, par value $1 per share; authorized 2,500,000 shares, issued 500,000 shares, and outstanding 490,000 shares Total capital stock Additional paid-in capital— In excess of par value—common From sale of treasury stock Total paid-in capital Retained earnings Total paid-in capital and retained earnings Less: Treasury stock, 10,000 shares at cost Total stockholders’ equity $6,500,000 500,000 7,000,000 1,900,000 35,000 8,935,000 982,000 9,917,000 125,000 $9,792,000 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 15-11 E15-18B (30–35 minutes) (a) Dividends Payable—Preferred (25,000 X $100 X 12%) 300,000 Dividends Payable—Common (300,000 X $0.50) 150,000 Cash 450,000 Treasury Stock 8,000 Cash (1,000 X $8) 8,000 Land (1,000 X $8.50) 8,500 Treasury Stock (1,000 X $8) Paid-in Capital From Treasury Stock 8,000 500 Cash (50,000 X $9) 450,000 Common Stock (50,000 X $1) Paid-in Capital in Excess of Par— Common No entry, memorandum note to indicate that par value is reduced to $0.50 and shares issued are now 700,000 Retained Earnings 650,000 Dividends Payable—Preferred (25,000 X $100 X 12%) Dividends Payable—Common (700,000 X $0.50) 50,000 400,000 300,000 350,000 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 15-12 E15-18B (Continued) (b) FOCUS FOOT COMPANY Stockholders’ Equity December 31, 2014 Capital stock Preferred stock, 12%, $100 par, 100,000 shares authorized, 25,000 shares issued and outstanding Common stock, $0.50 par, 2,000,000 shares authorized, 700,000 shares issued and outstanding Total capital stock Additional paid-in capital—Common Additional paid-in capital—Treasury Total additional paid-in capital Total paid-in capital Retained earnings Total stockholders’ equity $2,500,000 350,000 2,850,000 1,350,000 500 1,350,500 4,200,500 1,380,000 $5,580,500 Computations: Common stock: ($300,000 + $50,000) X = $700,000 Additional paid-in capital: $950,000 + $400,000 = $1,350,000 Retained earnings: $1,365,000 – $650,000 + $665,000 = $1,380,000 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 15-13 E15-19B (20–25 minutes) (a) Honey Dew Inc is the more profitable in terms of rate of return on total assets This may be shown as follows: Istar Company $96,000 = 9.6% $1,000,000 Honey Dew Inc $120,000 = 12.0% $1,000,000 It should be noted that these returns are based on net income related to total assets, where the ending amount of total assets is considered representative If the rate of return on total assets uses net income before interest but after taxes in the numerator, the rates of return on total assets are those shown below: Honey Dew Inc $120,000 = 12.0% $1,000,000 Istar Company $96,000 + $40,000 – $16,000 $120,000 = $1,000,000 $1,000,000 = 12.0% (b) Istar Company is the more profitable in terms of return on stockholders’ equity This may be shown as follows: Istar Company $96,000 = 19.2% $500,000 Honey Dew Inc $120,000 = 13.3% $900,000 (Note: The following schedule helps explain why the difference in rate of return on assets and rate of return on stockholders’ equity occurs.) Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 15-14 E15-19B (Continued) Fund Supplies Current liabilities Long-term debt Common stock Retained earnings ISTAR COMPANY Rate of Return Funds on Funds at Supplied 12.0%* $ 100,000 $ 12,000 400,000 48,000 200,000 24,000 300,000 36,000 $1,000,000 $120,000 Accruing to Cost of Common Funds Stock $ $12,000 24,000 ** 24,000 24,000 36,000 $24,000 $96,000 *Determined in part (a), 12.0% **The cost of funds is the interest of $40,000 ($400,000 X 10%) This interest cost must be reduced by the tax savings (40%) related to the interest The schedule indicates that the income earned on the total assets (before interest cost) was $120,000 The interest cost (net of tax) of this income was $24,000, which indicates a net return to the common equity of $96,000 (c) Istar Company earned a net income per share of $4.80 ($96,000 ÷ 20,000), while Honey Dew Inc had an income per share of $2.00 ($120,000 ÷ 60,000) Istar Company has borrowed a substantial portion of its assets at a cost of 10% and has used these assets to earn a return in excess of 10% The excess earned on the borrowed assets represents additional income for the stockholders and has resulted in the higher income per share Due to the debt financing, Istar has fewer shares of stock outstanding (d) Yes, from the point of view of income it is advantageous for the stockholders of the Istar Company to have long-term debt outstanding The assets obtained from incurrence of this debt are earning a higher return than their cost to Istar Company (e) Book value per share: Istar Company $200,000 + $300,000 = $25.00 20,000 Honey Dew, Inc $600,000 + $300,000 = $15.00 60,000 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 15-15 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 15-16 E15-20B (15 minutes) Rate of return on common stock equity: $327,000 $327,000 = = 13.0% $1,655,000 + $856,000 $2,511,000 Rate of interest paid on bonds payable: $305,000 = 10.2% $3,000,000 Yes, Todd Warner, Inc is trading on the equity successfully, since its return on common stock equity is greater than interest paid on bonds *E15-21B (10–15 minutes) Preferred Common (a) Preferred stock is noncumulative, participating $241,935 $8,065 $250,000 (b) Preferred stock is cumulative, nonparticipating $150,000 $100,000 $250,000 (c) Preferred stock is cumulative, participating $244,355 $5,645 *Dividends in arrears Current dividend Pro rata share to common ($25,000 X 10%) Balance dividend pro rata 750/775 X $97,500** 25/775 X $97,500** $ 75,000 75,000 $250,000* $ 75,000 75,000 $2,500 2,500 3,145 $5,645 94,355 3,145 $250,000 94,355 $244,355 Total **12.58% ($97,500/$775,000) of par value Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 15-17 *E15-22B (10–15 minutes) Preferred (a) One year in arrears Current year Participating (0.683%) $500,000 – $486,000 = 0.683% 2,050,000 (b) (c) Current year Participating (12.39%) $500,000 – $246,000 = 12.39% 2,050,000 Common Total $240,000 240,000 13,658 $493,658 $6,000 342 $6,342 $240,000 246,000 14,000 $500,000 $240,000 $260,000 $500,000 $240,000 247,805 $487,805 $ 6,000 6,195 $12,195 $246,000 254,000 $500,000 *E15-23B (10–15 minutes) Assumptions Year 2011 2012 2013 2014 a $0.30 = Paid-out $100,000 $150,000 $235,000 $635,000 (a) Preferred, noncumulative, and nonparticipating Preferred Common $5.00 –0– $7.50 –0– $8.00 $0.30a $8.00 $1.90c (b) Preferred, cumulative, and fully participating Preferred Common $5.00 –0– $7.50 –0– b $11.50 $0.02b $10.44d $0.10d $235,000 – $160,000* 250,000 *($160,000 = $8 X 20,000) Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 15-18 *E15-23B (Continued) b Total amount to be distributed Preferred dividends in arrears 2007 ($160,000 – $100,000 – $60,000) 2008 ($160,000 – $90,000) Current dividend Available for common and participation Ratable dividend to common (8% X $250,000 = $20,000) Available for participation Totals c $1.90 = Total $235,000 –0– 70,000 160,000 Per Share Preferred Common $ 3.50 8.00 5,000 $ (5,000) –0– $0.02 $11.50 $0.02 $635,000 – $160,000* 250,000 *($160,000 = $8 X 20,000) Total amount to be distributed Preferred dividends in arrears Current dividend Available for common and participation Ratable dividend to common (8% X $250,000) Available for participation Preferred (20.22% X $100) Common (20.22% X $1) $455,000 = 20.22% $2,000,000 + $250,000 Totals Total $635,000 –0– 160,000 Per Share Preferred Common $ 8.00 475,000 (20,000) $455,000 $0.08 20.22 0.20 $28.22 $0.28 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 15-19 *E15-24B (10–15 minutes) (a) Common Stockholders’ equity Preferred stock Common stock $ 50,000 Retained earnings Dividends in arrears (3 years at 16%) Remainder to common* 282,000 $332,000 Shares outstanding Book value per share ($332,000 ÷ 50,000) Shares outstanding Book value per share ($329,000 ÷ 50,000) *Balance in retained earnings ($200,000 – $640,000 + $950,000) Less: Liquidating premium to preferred Dividends to preferred Available to common 48,000 $148,000 $330,000 (48,000) $282,000 Common Stockholders’ equity Preferred stock Liquidating premium Common stock Retained earnings Dividends in arrears (3 years at 16%) Remainder to common* $100,000 50,000 $6.64 *Balance in retained earnings ($200,000 – $640,000 + $950,000) Less: Dividends to preferred Available to common (b) Preferred Preferred $100,000 3,000 $ 50,000 48,000 279,000 $329,000 $151,000 50,000 $6.58 $330,000 (3,000) (48,000) $279,000 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 15-20 ... Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 15-15 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For... capital in excess of par Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 15-3 E15-4B (Continued) Cash ... 2,500 217,038 50,000 5,462 Copyright © 2014 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 15/e, Exercise B Solutions (For Instructor Use Only) 15-4 E15-5B (Continued) (b) Lump-sum