Chapter 11, Problem 4PSA

1.

To determine

Financial statement analysis:

Company and its users use financial analysis as a way to analyse the company’s financial statements to take investment and business decisions. Some of the common financial analysis techniques include ratio analysis, vertical analysis, horizontal analysis, time series analysis etc.

Outstanding common shares on each cash dividend date.

Explanation of Solution

Date	No. of outstanding shares
Jan 5	40,000 shares
Apr 5	37,000 shares
Jul 5	37,000 shares
Oct 5	44,400 shares

Jan 5: As per the beginning data, 40,000 shares are issued and outstanding. So, outstanding shares on Jan 5 will be 40,000 and dividend will be paid on same number of shares.

Apr 5: Treasury stock was purchased on March 20. As per the ending data, 3,000 were purchased as treasury stock.This means outstanding shares on Apr 5 would be 37,000.

Jul 5: No transactions took place between Apr 5 and Jul 5. Thus, number of outstanding shares remain same.

Oct 5: 20% stock dividend was released on Aug 14. So, number of outstanding shares will increase by 20%. This means total outstanding shares would be 44,400.

2.

To determine

Financial statement analysis:

Company and its users use financial analysis as a way to analyse the company’s financial statements to take investment and business decisions. Some of the common financial analysis techniques include ratio analysis, vertical analysis, horizontal analysis, time series analysis etc.

To compute:Amount of cash dividend on each of the four dividend dates.

Explanation of Solution

As computed above,

Date	No. of outstanding shares
Jan 5	40,000 shares
Apr 5	37,000 shares
Jul 5	37,000 shares
Oct 5	44,400 shares

Considering dividend per share, total cash dividend on each date can be computed as:

Date	No. of outstanding shares (i)	Dividend per share (ii)	Total cash dividend[(i)*(ii)]
Jan 5	40,000 shares	$0.50	$20,000
Apr 5	37,000 shares	$0.50	$18,500
Jul 5	37,000 shares	$0.50	$18,500
Oct 5	44,400 shares	$0.50	$22,200

3.

To determine

Financial statement analysis:

Company and its users use financial analysis as a way to analyse the company’s financial statements to take investment and business decisions. Some of the common financial analysis techniques include ratio analysis, vertical analysis, horizontal analysis, time series analysis etc.

To compute:Retained earnings transferred to paid-in capital accounts for stock dividend.

Explanation of Solution

Stock dividend is declaring dividend of stock to existing shareholders. It has no impact on total stockholders’ equity while it reduces retained earnings and increases paid-in capital for stock dividend.

Given:

No. of shares outstanding, before declaring stock dividend = 37,000

Stock dividend declared = 20%

Market value of share = $12

Now, number of shares issued as stock dividend can be computed as:

Stock dividend shares = No. of shares outstanding*Stock dividend declared

Stock dividend shares = 37,000*20%

Stock dividend shares = 7,400

Amount to be transferred from retained earnings can be computed as:

Value of stock dividend = Stock dividend shares*Market value of share

Value of stock dividend = 7,400*$12

Value of stock dividend = $88,800

4.

To determine

Financial statement analysis:

Company and its users use financial analysis as a way to analyse the company’s financial statements to take investment and business decisions. Some of the common financial analysis techniques include ratio analysis, vertical analysis, horizontal analysis, time series analysis etc.

To compute:Per share cost of treasury stock.

Explanation of Solution

Treasury stock is created when the company purchases its own shares from the market. It is shown as a part of issued shares but are not counted in outstanding shares as they are held by the company.

Given:

No. of shares in treasury stock = 3,000

Cost of treasury stock = $30,000

Cost per share of treasury stock can be computed as:

Cost of treasury stock, per share = Cost of treasury stock/No. of shares in treasury stock

Cost of treasury stock, per share = $30,000/3,000

Cost of treasury stock, per share = $10

5.

To determine

Financial statement analysis:

Company and its users use financial analysis as a way to analyse the company’s financial statements to take investment and business decisions. Some of the common financial analysis techniques include ratio analysis, vertical analysis, horizontal analysis, time series analysis etc.

To compute:Net income earned during the year.

Explanation of Solution

Net income can be computed as:

Particulars	$
Retained earnings, closing	$400,000
Less: Retained earnings, beginning	($320,000)
Add: Cash dividend	$79,200
Add: Stock dividend	$88,800
Net income	$248,000

Workings:

As computed, total cash dividend can be calculated as:

Date	Total dividend
Jan 5	$20,000
Apr 5	$18,500
Jul 5	$18,500
Oct 5	$22,200
	$79,200

Also, stock dividend worth $88,800 is transferred from retained earnings to paid-in capital for stock dividend.