Chapter 11, Problem 4PSA

1.

To determine

To compute: Number of common shares outstanding on each cash dividend date.

Explanation of Solution

Outstanding shares

Formula for number of outstanding shares:

$\text{Number}\text{of}\text{outstanding}\text{shares}=\text{Issued}\text{shares}-\text{Treasury}\text{shares}$

Jan. 5

Given,
Issued shares are 40,000.
Treasury Shares are 0.

Substitute 40,000 for issue shares and 0 for treasury shares in the above formula,

$\begin{array}{c}\text{Number}\text{of}\text{outstanding}\text{shares}=40,000-0\\ =40,000\end{array}$

Hence, number of shares outstanding is 40,000.

Apr. 5

Given,
Issued shares are 40,000.
Treasury Shares are 3,000.

Substitute 40,000 for issue shares and 3,000 for treasury shares in the above formula,

$\begin{array}{c}\text{Number}\text{of}\text{outstanding}\text{shares}=40,000-3,000\\ =37,000\end{array}$

Hence, number of shares outstanding is 37,000.

July 5

Given,
Issued shares are 40,000.
Treasury Shares are 3,000.

Substitute 40,000 for issue shares and 3,000 for treasury shares in the above formula,

$\begin{array}{c}\text{Number}\text{of}\text{outstanding}\text{shares}=40,000-3,000\\ =37,000\end{array}$

Hence, number of shares outstanding is 37,000.

Oct. 5

Given,
Issued shares are 47,400.
Treasury Shares are 3,000.

Substitute 47,400 for issue shares and 3,000 for treasury shares in the above formula,

$\begin{array}{c}\text{Number}\text{of}\text{outstanding}\text{shares}=47,400-3,000\\ =44,400\end{array}$

Hence, number of shares outstanding is 44,400.

2.

To determine

To compute: Value of each cash dividend.

Explanation of Solution

Cash dividend

Formula to calculate cash dividend:

$\text{Total}\text{amount}\text{of}\text{cash}\text{dividend}=\left(\begin{array}{l}\text{Number}\text{of}\text{outstanding}\text{shares }\\ \times \text{Cash}\text{dividend}\text{per}\text{share}\end{array}\right)$

Jan. 5

Given,
Number of outstanding shares is 40,000.
Cash dividend per share is $0.50

Substitute 40,000 for number of outstanding shares and $0.50 for cash dividend per share in the above formula,

$\begin{array}{c}\text{Total}\text{amount}\text{of}\text{cash}\text{dividend}=40,000\times \$0.50\\ =\$20,000\end{array}$

Hence, total amount of cash dividend is $20,000.

Apr. 5

Given,
Number of outstanding shares is 37,000.
Cash dividend per share is $0.50

Substitute 37,000 for number of outstanding shares and $0.50 for cash dividend per share in the above formula,

$\begin{array}{c}\text{Total}\text{amount}\text{of}\text{cash}\text{dividend}=37,000\times \$0.50\\ =\$18,500\end{array}$

Hence, total amount of cash dividend is $18,500.

July 5

Given,
Number of outstanding shares is 37,000.
Cash dividend per share is $0.50

Substitute 37,000 for number of outstanding shares and $0.50 for cash dividend per share in the above formula,

$\begin{array}{c}\text{Total}\text{amount}\text{of}\text{cash}\text{dividend}=37,000\times \$0.50\\ =\$18,500\end{array}$

Hence, total amount of cash dividend is $18,500.

Oct. 5

Given,
Number of outstanding shares is 44,400.
Cash dividend per share is $0.50

Substitute 44,400 for number of outstanding shares and $0.50 for cash dividend per share in the above formula,

$\begin{array}{c}\text{Total}\text{amount}\text{of}\text{cash}\text{dividend}=44,400\times \$0.50\\ =\$22,200\end{array}$

Hence, total amount of cash dividend is $22,200.

3.

To determine

To explain: Amount of capitalization of retained earnings..

Explanation of Solution

Amount of capitalization of retained earnings for stock dividend refer to that amount which is used from retained earnings account to issue common stock account and that amount is $88,800.

Working notes:

Calculation for amount capitalized:

$\begin{array}{c}\text{Number}\text{of}\text{shares}\text{issued}=\text{Number}\text{of}\text{outsanding}\text{shares}\times \text{Stock}\text{dividend}\\ =37,000\times \frac{20}{100}\\ =7,400\end{array}$

$\begin{array}{c}\text{Total}\text{amount}\text{capitalized}=\text{Number}\text{of}\text{shares}\text{issued}\times \text{Share}\text{price}\\ =7,400\times \$12\\ =\$88,800\end{array}$

Hence, total amount capitalized is $88,800.

4.

To determine

To compute: Per share cost of the treasury stock.

Explanation of Solution

Formula for per share cost of the treasury stock:

$\text{Per}\text{share}\text{cost}\text{of}\text{the}\text{treasury}\text{stock}=\frac{\text{Cost}\text{of}\text{treasury}\text{stock}}{\text{Number}\text{of}\text{shares}\text{in}\text{treasury}\text{stock}}$

Given,
Cost of treasury stock is $30,000.
Number of shares in treasury stock is 3,000.

Substitute $30,000 for cost of treasury stock and 3,000 for number of shares in treasury stock in the above formula,

$\begin{array}{c}\text{Per}\text{share}\text{cost}\text{of}\text{the}\text{treasury}\text{stock}=\frac{\$30,000}{3,000}\\ =\$10\end{array}$

Hence, per share cost of treasury stock is $10.

5.

To determine

To compute: Net income earned by the company during the year 2017.

Explanation of Solution

Formula for net income during the year:

$\text{Net}\text{income}=\left(\begin{array}{l}\text{Closing}\text{balance}\text{of}\text{retained}\text{earnings }\\ -\text{Opening}\text{balance}\text{of}\text{retained}\text{earnings }\\ +\text{Dividend}\text{paid}\text{during}\text{the}\text{year}\end{array}\right)$

Substitute $400,000 for closing balance of retained earnings, $320,000 for opening balance of retained earnings and $168,000 for dividend paid during the year in the above formula,

$\begin{array}{c}\text{Net}\text{income}=\$400,000-\$320,000+\$168,000\\ =\$248,000\end{array}$

Hence, the net income is $248,000.