Concept explainers
(a)
Cash dividends: The amount of cash provided by a corporation out of its distributable profits to its shareholders as a return for the amount invested by them is referred as cash dividends.
To Journalize: the issuance of stock and payment of cash dividends for Corporation C.
(a)
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Answer to Problem 11.2AP
Record the
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | |
2017 | |||||
February | 1 | Cash | 30,000 | ||
Common Stock (1) | 20,000 | ||||
Paid-in Capital in Excess of Stated Value-Common stock (2) | 10,000 | ||||
(To record issuance of common stock) | |||||
March | 20 | 7,000 | |||
Cash | 7,000 | ||||
(To record purchase of treasury stock) | |||||
October | 1 | Cash Dividends (4) | 21,000 | ||
Dividends Payable | 21,000 | ||||
(To record declaration of dividends) | |||||
November | 1 | Dividends Payable | 21,000 | ||
Cash | 21,000 | ||||
(To record payment of dividends) | |||||
December | 1 | Cash Dividends (6) | 124,500 | ||
Dividends Payable | 124,500 | ||||
(To record declaration of dividends) | |||||
December | 31 | Income Summary | 280,000 | ||
| 280,000 | ||||
(To record closing of net income to income summary account) | |||||
December | 31 | Retained Earnings | 145,500 | ||
Cash Dividends (7) | 145,500 | ||||
(To record closing of cash dividends to retained earnings account) | |||||
December | 31 | Dividends Payable | 124,500 | ||
Cash | 124,500 | ||||
(To record payment of dividends) |
Table (1)
Working Notes:
Compute common stock value for 5,000 shares at $ 4 stated value per share.
Compute the paid-in capital in excess of stated value-Common stock.
Compute the treasury stock amount for 1,000 shares at $7 per share.
Compute the amount of preferred dividend payable to preferred stockholders.
Compute number of common shares issued as on January 1, 2017.
Determine the number of outstanding shares as on December 15, 2017.
Particulars | Number of Shares |
Issued as at January 1 (5) | 250,000 shares |
Repurchased shares as at January 1 | (5,000) shares |
Additional shares issued on February 1 | 5,000 shares |
Repurchased shares on March 20 | (1,000) shares |
Outstanding shares as at December 31 | 249,000 shares |
Table (2)
Compute amount of dividends payable to common stockholders.
Compute the amount of total cash dividends.
Explanation of Solution
February 1: Issued 5,000 shares of common stock for $30,000.
- Cash is an asset account. The amount is increased because cash is received due to stock issue; therefore, debit Cash account with $30,000.
- Common Stock is a stockholders’ equity account and the amount has increased due to issuance of common stock. Therefore, credit Common Stock account with $20,000.
- Paid-in Capital in Excess of Stated Value is a stockholders’ equity account and the amount has increased due to increase in capital. Therefore, credit Paid-in Capital in Excess of Stated Value account with $10,000.
March 20: Purchased 1,000 shares of treasury stock at $7 per share.
- Treasury Stock is stockholders’ equity account. The amount has decreased because common stock is decreased due to purchase of treasury stock. Therefore, debit Treasury Stock account with $7,000.
- Cash is an asset account and the amount is decreased because cash is paid to buy treasury stock. Therefore, credit Cash account with $7,000.
October 1: Declared 7% cash dividend on
- Cash Dividends is a temporary stockholders’ equity account. The account is debited as the cash dividends are declared and eventually be transferred to Retained Earnings account. Therefore, debit Cash Dividends account with $21,000.
- Dividends Payable is a liability account and the amount owed is increased. Therefore, credit Dividends Payable account with $21,000.
November 1: Paid the cash dividends declared on preferred stock.
- Dividends Payable is a liability account and the amount is decreased because the dividends owed are paid off. Therefore, debit Dividends Payable with $21,000.
- Cash is an asset account and the amount is decreased because cash is paid. Therefore, credit Cash account with $21,000.
December 1: Declared cash dividends to common stockholders
- Cash Dividends is a temporary stockholders’ equity account. The account is debited as the cash dividends are declared and eventually be transferred to Retained Earnings account. Therefore, debit Cash Dividends account with $21,000.
- Dividends Payable is a liability account and the amount owed is increased. Therefore, credit Dividends Payable account with $124,500.
December 31: Transfer of net income to retained earnings.
- Income Summary is a clearing account or temporary account used to close revenues and expenses to Retained Earnings account. Therefore, debit Income Summary account with $280,000.
- Since Retained Earnings account’s amount has increased due to closing of Income Summary account to Retained Earnings account, stockholders’ equity amount has increased. Therefore, credit Retained Earnings account with $280,000.
December 31: Closing of cash dividends to retained earnings.
- Retained Earnings is a stockholders’ equity account. The amount has decreased because Cash dividends account is closed to Retained Earnings account. Therefore, debit Retained Earnings account with $145,500.
- Cash Dividends is a temporary stockholders’ equity account. The account is credited as the cash dividends are transferred to Retained Earnings account to eventually close Cash Dividends account. Therefore, credit Cash Dividends account with $145,500.
December 31: Paid cash dividends declared to common stockholders.
- Dividends Payable is a liability account and the amount is decreased because the dividends owed are paid off. Therefore, debit Dividends Payable with $124,500.
- Cash is an asset account and the amount is decreased because cash is paid. Therefore, credit Cash account with $124,500.
(b)
To
(b)
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Explanation of Solution
T Accounts: T- accounts are prepared for all the business transactions. First, journal entries are passed and then transferred to the respective ledger accounts where they are recorded, and summarized in either side of the ‘T’ format. It is divided into two parts by a vertical line, that is, the left side and the right side. The left side of the T-account is known as the debit side, and the right side of the T-account is known as the credit side. The account name appears on the top of the T-account.
Preferred stock account is a component of stockholders’ equity account with a normal credit balance.
Preferred Stock | ||||||
Date | Details | Debit ($) | Date | Details | Credit ($) | |
December 31, 2017 | Closing Balance | 300,000 | January 1 | Balance | 300,000 | |
Total | 300,000 | Total | 300,000 | |||
January 1, 2018 | Opening Balance | $300,000 |
Table (3)
Paid-in Capital in Excess of Par Value–Preferred Stock account is a component of stockholders’ equity account with a normal credit balance.
Paid-in Capital in Excess of Par Value–Preferred Stock | ||||||
Date | Details | Debit ($) | Date | Details | Credit ($) | |
December 31, 2017 | Closing Balance | 15,000 | January 1 | Balance | 15,000 | |
Total | 15,000 | Total | 15,000 | |||
January 1, 2018 | Opening Balance | 15,000 |
Table (4)
Common stock account is a component of stockholders’ equity account with a normal credit balance.
Common Stock account | ||||||
Date | Details | Debit ($) | Date | Details | Credit ($) | |
December 31, 2017 | Closing Balance | 1,020,000 | January 1 | Balance | 1,000,000 | |
February 1 | Cash | 20,000 | ||||
Total | 1,020,000 | Total | 1,020,000 | |||
January 1, 2018 | Opening Balance | 1,020,000 |
Table (3)
Paid-in Capital in Excess of Stated Value–Common Stock account is a component of stockholders’ equity account with a normal credit balance.
Paid-in Capital in Excess of Stated Value–Common Stock | ||||||
Date | Details | Debit ($) | Date | Details | Credit ($) | |
December 31, 2017 | Closing Balance | 490,000 | January 1 | Balance | 480,000 | |
February 1 | Cash | 10,000 | ||||
Total | $490,000 | Total | $490,000 | |||
January 1, 2018 | Opening Balance | $490,000 |
Table (4)
Retained earnings account is a component of stockholders’ equity account with a normal credit balance.
Retained Earnings | ||||||
Date | Details | Debit ($) | Date | Details | Credit ($) | |
December 31 | Cash dividends | 145,500 | January 1 | Balance | 688,000 | |
December 31,2017 | Closing Balance | 822,500 | December 31 | Income Summary | 280,000 | |
Total | 968,000 | Total | 968,000 | |||
January 1, 2018 | Opening Balance | $822,500 |
Table (7)
Treasury stock account is a contra-stockholders’ equity account with a normal debit balance.
Treasury Stock | ||||||
Date | Details | Debit ($) | Date | Details | Credit ($) | |
January 1 | Opening Balance | 40,000 | December 31,2017 | Closing Balance | 47,000 | |
March 20 | Cash | 7,000 | ||||
Total | 47,000 | Total | 47,000 | |||
January 1, 2018 | Opening Balance | 47,000 |
Table (8)
Cash dividends account is a component of stockholders’ equity account that is closed to retained earnings.
Cash Dividends | ||||||
Date | Details | Debit ($) | Date | Details | Credit ($) | |
October 1 | Dividends payable | 21,000 | December 31 | Retained Earnings | $145,500 | |
December 1 | Dividends payable | 124,500 | ||||
Total | 145,500 | Total | 145,500 |
Table (9)
(c)
To Prepare: the stockholders’ equity section of
(c)
![Check Mark](/static/check-mark.png)
Explanation of Solution
Prepare the stockholders’ equity section of balance sheet for Corporation C as of December 31, 2017.
Corporation C | ||
Balance Sheet (Partial) | ||
December 31, 2017 | ||
Particulars | Amount ($) | Amount ($) |
Stockholders’ equity | ||
Paid-in Capital | ||
Capital stock | ||
7% Preferred stock, $100 par value, noncumulative, 5,000 shares authorized, 3,000 shares issued | $300,000 | |
Common stock, no par, $4 stated value, 300,000 shares authorized, 255,000 shares issued, 249,000 shares issued and outstanding | 1,020,000 | |
Total capital stock | $1,320,000 | |
Additional paid-in capital | ||
Paid-in capital in excess of par value–Preferred stock | 15,000 | |
Paid-in capital in excess of stated value–Common stock | 490,000 | |
Total additional paid-in capital | 505,000 | |
Total paid-in capital | 1,825,000 | |
Retained earnings | 822,500 | |
Total paid-in capital and retained earnings | 2,647,500 | |
Less: Treasury stock (6,000 common shares) | (47,000) | |
Total stockholders’ equity | $2,600,500 |
Table (10)
(d)
To Calculate: the payout ratio for Corporation C.
(d)
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Answer to Problem 11.2AP
Calculate the payout ratio for Corporation C for 2017.
Explanation of Solution
Payout Ratio: It refers to a measure that evaluates the amount of dividends paid to the shareholders out of the net income earned by a corporation. It is generally expressed as a percentage. The formula to calculate the payout ratio is as follows:
Therefore, the Payout ratio for Corporation C for 2017 is 44.5%.
To calculate: the earnings per share for Corporation C.
![Check Mark](/static/check-mark.png)
Answer to Problem 11.2AP
Calculate the earnings per share for Corporation C.
Working notes:
Compute number of outstanding shares as at January 1, 2017.
Particulars | Number of Shares |
Issued as at January 1 (5) | 250,000 shares |
Repurchased shares as at January 1 | (5,000) shares |
Outstanding shares as at January 1 | 245,000 shares |
Table (11)
Compute average number of common shares outstanding.
Explanation of Solution
Earnings per share (EPS) refers to the share of earnings earned by the shareholder on each owned. The formula to calculate the earnings per share is as follows:
Therefore, the earnings per share for Corporation C is $1.05 per share.
To Calculate: the return on common stockholders’ equity for Corporation C.
![Check Mark](/static/check-mark.png)
Answer to Problem 11.2AP
Compute the return on common stockholders’ equity for Corporation C:
Explanation of Solution
Return on common stockholders’ equity ratio: It is a profitability ratio that measures the profit generating ability of the company from the invested money of the shareholders. The formula to calculate the return on common stockholders’ equity is as follows:
Therefore, the Return on Common Stockholders’ equity for Corporation C is 11.7%
To Compute: The beginning balance of common stockholders’ equity value.
![Check Mark](/static/check-mark.png)
Explanation of Solution
Particulars | Amount ($) |
Common stock value as on January 1 | 1,000,000 |
Paid-in capital in excess of stated value as on January 1 | 480,000 |
Retained earnings as on January 1 | 688,000 |
Treasury stock as at January 1 | (40,000) |
Beginning balance of common stockholders’ equity | $2,128,000 |
Table (12)
Compute ending balance of common stockholders’ equity value.
Particularss | Amount ($) |
Common stock value as on December 31 | 1,020,000 |
Paid-in capital in excess of stated value ass on December 31 | 490,000 |
Retained earnings as on December 31 | 822,500 |
Treasury stock as on December 31 | (47,000) |
Ending balance of common stockholders’ equity | $2,285,500 |
Table (13)
Compute average stockholders’ equity.
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