CH 11

CH11_Solutions_DEP

Chapter 11

Reporting and Analyzing Stockholders Equity

MINI EXERCISES

M11-19. (10 minutes)

Balance SheetIncome Statement

TransactionCash Asset+Noncash Assets=Liabil-ities+Contrib. Capital+Earned CapitalRevenues-Expenses=Net Income

Issue 8,000 shares of $50 par value preferred stock at $68 cash per share.+544,000Cash=+400,00PreferredStock

+144,000AdditionalPaid-inCapital-=

Issue 12,000 shares of $1 par value common stock at $10 cash per share.+120,000Cash=+12,000Common Stock

+108,000AdditionalPaid-inCapital-=


a.9/1Cash (+A) 864,000

Preferred stock (+SE) 180,000

Additional paid-in capital (+SE) 684,000

9/1Cash (+A) 4,440,000

Common stock (+SE) 240,000

Additional paid-in capital (+SE) 4,200,000

b.+ Cash (A) -- Preferred Stock (SE) +

9/1864,000180,0009/1

9/14,440,000

- Common Stock (SE) +- Additional Paid-in Capital (SE) +

240,0009/1684,0009/1

4,200,0009/1

continued next page

M11-20. concluded

c.Balance SheetIncome Statement


Issue 18,000 shares of $10 par value preferred stock at $48 per share.+864,000Cash=+180,000PreferredStock

+684,000AdditionalPaid-in Capital-=

Issue 120,000 shares of $2 par value common.+4,440,000Cash=+240,000CommonStock

+4,200,000AdditionalPaid-in Capital-=


Common stock$ 5.298aAdditional paid in capital 39,265.702Total$39,271.000

a 5,298 million shares issued $0.001 par value, rounded.


a.1/1Cash (+A) 1,250,000

Preferred stock (+SE) 500,000


3/1Treasury stock (+XSE, -SE) 415,000

Cash (-A) 415,000

b.+ Cash (A) -- Preferred Stock (SE) +

1/11,250,000500,0001/1

415,0003/1

+ Treasury Stock (XSE) -- Additional Paid-in Capital (SE) +

3/1415,000750,0001/1

continued next page

M11-22. concluded

c.

Balance SheetIncome Statement

TransactionCash Asset+Noncash Assets=Liabil-ities+Contributed Capital+EarnedCapital-ContraEquityRevenues-Expenses=Net Income

Issue 5,000 shares of $100 par value preferred stock at $250 per share.+1,250,000Cash=+500,000PreferredStock

+750,000AdditionalPaid-inCapital--=

Repurchase 5,000 shares of $1 par value common stock at $83 per share.-415,000Cash=-+415,000TreasuryStock-=


A stock split does not result in an accounting transaction and, as a result, does not require an entry into the accounting records. The number of outstanding shares must be changed in the parenthetical note to the common and preferred stock accounts in the stockholders equity section of the balance sheet, and the par value of the stock must also be adjusted. In the three-for-one stock split affected by Cigna, each shareholder receives two additional shares for each share owned, thus tripling the outstanding shares, and the par value of the shares is reduced to one-third. The dollar amount of total paid-in capital, thus, remains unchanged, as does the total dollar amount of stockholders equity. Only the parenthetical note relating to the number of outstanding shares and their par value is adjusted for all periods presented. Earnings per share is also recomputed for all years presented in the income statement to reflect the additional shares outstanding.


a.Basic EPS: [$501,000 (16,000 x $2)] / 134,000 = $3.50Calculation of weighted average shares outstanding:

120,000x2/12=20,000

130,000x5/12=54,167

146,000x3/12=36,500

140,000x2/12=23,333

134,000

b.Diluted EPS: $501,000 / 150,000 = $3.34

c.Given a simple capital structure, only basic EPS need be reported.


a.Treasury shares are deducted from issued shares to yield outstanding shares. The outstanding shares are, therefore:Shares outstanding = 103,300,000 17,662,000 = 85,638,000

b.If the stock repurchase took place on March 31, 2011, two months after the end of the previous fiscal year, the denominator of the basic EPS calculation would decrease by 17,662,000 x 10/12. That is, the weighted average shares outstanding would be 103,300,000 [17,662,000 x (10/12)] = 88,581,667 shares.


a.Preferred dividend:12/31Retained earnings (-SE) 18,000

Cash (-A) 18,000

Common dividend:12/31Retained earnings (-SE) 88,000

Cash (-A) 88,000

b.+ Cash (A) -- Retained earnings (SE) +

18,00012/3112/3118,000

88,00012/3112/3188,000

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M11-26. concluded



Declared and paid cash dividend on preferred stock.-18,000Cash=-18,000Retained Earnings-=

Declared and paid cash dividend on common stock.-88,000Cash=-88,000Retained Earnings-=


Because this is a small stock dividend (4%), retained earnings is debited for the market value of the stock (70,000 x 4% x $21).

a.1/1Retained earnings (-SE) 58,800



b.- Retained Earnings (SE) +- Common Stock (SE) +

12/3158,80014,00012/31

- Additional Paid-in Capital (SE) +

44,80012/31



Declaration and payment of stock dividend.=+14,000CommonStock

+44,800AdditionalPaid-inCapital-58,800Retained Earnings-=


a. Immediately after the 3for2 stock split, the company has 375,000 shares of $10 par value common stock [250,000 shares (3/2) = 375,000 shares] issued and outstanding.

b. The dollar balance in the Common Stock account is unchanged by the stock split; the balance remains at $3,750,000 (375,000 shares at the new $10 par value per share).

c. The usual reason for a corporation to split its stock is to reduce the per share market price of the stock and, therefore, improve the stock's marketability. The market price of the common stock prior to the split is $165 per share, which is somewhat high. Splitting the stock would reduce the per-share price (though not the total market value).


Distribution to

PreferredCommon

a.$1,000,000 6%$60,000Balance to common$100,000Per share$60,000/20,000 shares$3.00$100,000/80,000 shares$1.25

b.$1,000,000 6% 2 years$120,000Balance to common$40,000Per share$120,000/20,000 shares$6.00$40,000/80,000 shares$0.50


a.No entry is made when the dividend is declared; an entry is required only when the additional stock is issued. Because this is a large stock dividend, the dividend is recorded at par value:

Retained earnings (-SE) 400,000


b.The stock split would reduce the par value, but no journal entry would be recorded. As a consequence, neither the common stock nor the retained earnings accounts are affected.


a.Basic EPS: [$440,000 (10,000 x $50 x 8%)] / 50,000 = $8.00 per share

b. Diluted EPS: $440,000 / (50,000 + 10,000x3) = $5.50 per share


a.Basic EPS: $234,000 / 45,000 = $5.20

Calculation of weighted average shares outstanding:

38,000x4/12=12,667

48,000x4/12=16,000

49,000x4/12=16,333

45,000

b.Basic EPS: [$234,000 (6,000 x $50 x 6%)] / 45,000 = $4.80


a. Basic earnings per share is computed as net income less any preferred dividends divided by the weighted average number of common shares outstanding for the period. Diluted earnings per share adjusts for dilutive securities (such as convertible securities or employee stock options) by including the securities in the denominator and also adjusting for any effect on the numerator. Consequently, diluted earnings per share is always less than or equal to basic earnings per share.

b. In the case of 3M, it has 708.5 million weighted average common shares outstanding, and an additional 10.5 million weighted average common shares that could potentially be issued (dilutive). These dilutive shares relate to employee stock options and convertible securities, like convertible debt and convertible preferred stock, that potentially could be converted into common shares. (Note: with 708.5 million shares and a basic EPS of $6.05, the implied earnings number is $4,286.425 million, computed as 708.5 million $6.05. For diluted EPS, 719.0 million times $5.96 implies earnings of $4,285.24 million, a difference of $1.185 million. This difference is likely due to the interest/dividends on convertible securities.)

c. While diluted EPS are favored over basic EPS by analysts, the data reflect events that have not and may never occur. In addition, the dilution is assumed to be made at the years start.


a.No entry is required when the options are granted. The compensation expense is recognized ratably over the vesting period. As the options vest, the following entry is required (assume one-third vested in 2011):

Compensation expense (+E, -SE) 14,749

Additional paid in capital (+SE) 14,749

b.Granted stock options (whether vested or not) are included in the denominator of diluted EPS whenever the stock price is greater than the exercise price. These options would reduce diluted EPS but have no effect on basic EPS.

c.Cash (+A) 321,000

Contributed capital (+SE) 321,000

d.When options are exercised, the number of outstanding shares increases. This would reduce basic EPS. It might also lower diluted EPS, though most likely to a lesser degree. This is because the dilutive effect may already be reflected in diluted EPS prior to exercise.


YearTotal AssetsTotal LiabilitiesTotal Stockholders EquityEPSOperating Income

1 ..IncreaseNo effectIncreaseDecreaseNo effect

2 ..DecreaseNo effectDecreaseIncreaseNo effect

3 ..No effectIncreaseDecreaseNo effectNo effect


a.$30 = $18,000,000 / 600,000 sharesb.$10 = $6,000,000 / 600,000 sharesc.$12,000,000 = $18,000,000 - $6,000,000d.$4,000,000 = $5,000,000 $1,000,000e.50,000 shares = 600,000 550,000f.$8.70 = $5,000,000 (600,000 + 550,000)/2. 600,000 shares were outstanding for the first half year but only 550,000 during the second half of the year.


a.The diluted EPS calculation is made to reflect a worst-case scenario (conservative) EPS figure.b.$86/278.689 = $0.309 or $0.31 per sharec.$98/346.467 = $0.283 or $0.28 per shared.Options that are under water (the stock price is below the exercise price) are not included in the calculation of diluted EPS. This is because diluted EPS is supposed to be the most conservative possible outcome. Including under water options would actually increase EPS. Thus these options are anti-dilutive.

Cambridge Business Publishers, 201511-10Financial & Managerial Accounting for Decision Makers, 2nd EditionCambridge Business Publishers, 2015Solutions Manual, Chapter 1111-1

CH 11

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