Chapter 11, Problem 11.2AP

(a)

To determine

Stockholders’ equity: It refers to the amount of capital that includes the amount of investment by the stockholders, earnings generated from the normal business operations, and less any dividends paid to the stockholders.

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.

Answer to Problem 11.2AP

Record the journal entries for the issuance of stock and payment of cash dividends for Corporation C.

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	Treasury Stock                                 (3)		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
		Retained Earnings			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.

  $\begin{array}{c}\begin{array}{l}\text{Common }\\ \text{stock value}\end{array}\}\text{ = Number of shares }\times \text{ Stated value of common stock}\\ \text{= 5,000 shares × \$4}\\ \text{= \$20,000}\end{array}$ (1)

Compute the paid-in capital in excess of stated value-Common stock.

  $\begin{array}{c}\begin{array}{l}\text{Paid-in capital in }\\ \text{excess of stated value}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Cash received –}\\ \text{Common stock value }\end{array}\right)\\ \text{= \$30,000 – \$20,000}\left(1\right)\\ \text{= \$10,000}\end{array}$ (2)

Compute the treasury stock amount for 1,000 shares at $7 per share.

  $\begin{array}{c}\text{Treasury stock = }\left\{\begin{array}{l}\text{Number of treasury stock purchased ×}\\ \text{Purchase price per share}\end{array}\right\}\\ \text{= 1,000 shares × \$7}\\ \text{= \$7,000}\end{array}$ (3)

Compute the amount of preferred dividend payable to preferred stockholders.

  $\begin{array}{c}\text{Cash}\text{dividends}\text{on}\text{preferred}\text{stock = }\left\{\begin{array}{l}\text{Total}\text{value}\text{of}\text{preferred}\text{stock ×}\\ \text{Percentage}\text{of}\text{preferred}\text{dividend}\end{array}\right\}\\ \text{= \$300,000}\times \text{7\%}\\ \text{= \$21,000}\end{array}$ (4)

Compute number of common shares issued as on January 1, 2017.

  $\begin{array}{c}\text{Number of common shares issued = }\frac{\text{Common stock value}}{\text{Stated value}}\\ \text{=}\frac{\text{\$1,000,000}}{\text{\$4}}\\ \text{= 250,000 shares}\end{array}$ (5)

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.

  $\begin{array}{c}\begin{array}{l}\text{Dividends payable to }\\ \text{common stockholders}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of shares outstanding}\times \\ \text{Dividend per share}\end{array}\right\}\\ \text{= 249,000 shares}\left(\text{refer}\text{Table}\text{2}\right)\times \text{\$0}\text{.50}\\ \text{= \$124,500}\end{array}$ (6)

Compute the amount of total cash dividends.

  $\begin{array}{c}\text{Total cash dividends}\}\text{ = }\left\{\begin{array}{l}\left(\begin{array}{l}\text{Cash dividends payable }\\ \text{to preferred stockholders}\end{array}\right)\text{+}\\ \left(\begin{array}{l}\text{Cash dividends payable}\\ \text{ to common stockholders}\end{array}\right)\end{array}\right\}\\ \text{= \$21,000+\$124,500}\\ \text{= \$145,500}\end{array}$ (7)

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 preferred stock.

• 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 determine

To post: the journal entries into stockholders’ equity accounts.

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 determine

To Prepare: the stockholders’ equity section of balance sheet for Corporation C as of December 31, 2017.

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 determine

To Calculate: the payout ratio for Corporation C.

Answer to Problem 11.2AP

Calculate the payout ratio for Corporation C for 2017.

  $\begin{array}{c}\text{Payout ratio = }\frac{\text{Cash dividend declared on common stock}}{\text{Net income}}\times 100\\ \text{=}\frac{\text{\$124,500}\left(6\right)}{\text{\$280,000}}\text{×100}\\ \text{=44}\text{.5\%}\end{array}$

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:

  $\text{Payout ratio = }\frac{\text{Cash dividend declared on common stock}}{\text{Net income}}\times 100$

Conclusion

Therefore, the Payout ratio for Corporation C for 2017 is 44.5%.

To determine

To calculate: the earnings per share for Corporation C.

Answer to Problem 11.2AP

Calculate the earnings per share for Corporation C.

  $\begin{array}{c}\text{Earnings per share}=\frac{\text{Net income –Preferred dividends}}{\text{Average number}\text{of}\text{common shares outstanding}}\\ =\frac{\text{\$280,000–\$21,000}\left(4\right)}{\text{247,000 shares}\left(8\right)}\\ =\text{\$1}\text{.05 per share}\end{array}$

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.

  $\begin{array}{c}\begin{array}{l}\text{Average common}\\ \text{shares outstanding}\end{array}\}\text{=}\left(\frac{\begin{array}{l}\text{Beginning balance of common shares outstanding }\\ \text{+}\text{Ending balance of common shares outstanding }\end{array}}{\text{2}}\right)\\ \text{=}\frac{\left[\begin{array}{l}\text{245,000 shares}\\ \left(\text{Refer}\text{Table11}\right)\end{array}\right]\text{+}\left[\begin{array}{l}\text{249,000 shares}\\ \left(\text{Refer}\text{Table2}\right)\end{array}\right]}{\text{2}}\\ \text{=247,000 shares}\end{array}$ (8)

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:

  $\begin{array}{l}\text{Earnings }\\ \text{per share}\end{array}\}\text{ = }\frac{\text{Net income – Preferred dividends}}{\text{Weighted average number of shares outstanding}}$

Conclusion

Therefore, the earnings per share for Corporation C is $1.05 per share.

To determine

To Calculate: the return on common stockholders’ equity for Corporation C.

Answer to Problem 11.2AP

Compute the return on common stockholders’ equity for Corporation C:

  $\begin{array}{c}\begin{array}{l}\text{Return on common}\\ \text{stockholders' equity}\end{array}\}=\frac{\text{Net income–Preferred dividends}}{\text{Average common stockholders' equity}}\times 100\\ =\frac{\$280,000–\$21,000\left(4\right)}{\text{\$2,206,750}\left(9\right)}\times 100\\ =11.7\%\end{array}$

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:

  $\begin{array}{l}\text{Return on common}\\ \text{stockholders' equity}\end{array}\}=\frac{\text{Net income–Preferred dividends}}{\text{Average common stockholders' equity}}\times 100$

Conclusion

Therefore, the Return on Common Stockholders’ equity for Corporation C is 11.7%

To determine

To Compute: The beginning balance of common stockholders’ equity value.

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.

  $\begin{array}{c}\begin{array}{l}\text{Average common}\\ \text{stockholders’ equity}\end{array}\}\text{=}\left(\frac{\begin{array}{l}\text{Beginning balance of stockholders’ equity }\\ \text{+}\text{Ending balance of stockholders’ equity }\end{array}}{\text{2}}\right)\\ \text{=}\frac{\left(\begin{array}{l}\text{\$2,128,000}\\ \left(\text{refer}\text{Table}\text{12}\right)\end{array}\right)\text{+}\left(\begin{array}{l}\text{\$2,285,500}\\ \left(\text{refer}\text{Table}\text{13}\right)\end{array}\right)}{\text{2}}\\ =\$2,206,750\end{array}$ (9)