Chapter 11, Problem 4PSA

1.

To determine

The number of common shares outstanding on each cash dividend date.

Answer to Problem 4PSA

Solution:

Calculate the number of common shares outstanding on each cash dividend date as shown below.

Explanation of Solution

Required formula:

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

Issued shares are 40,000.

Treasury shares are 0.

Calculate the number of common shares outstanding as on January 5.

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

Hence, the number of shares outstanding as on January 5 is 40,000.

Issued shares are 40,000.

Treasury shares are 3,000.

Calculate the number of common shares outstanding as on April 5.

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

Hence, the number of shares outstanding as on April 5 is 37,000.

Issued shares are 40,000.

Treasury shares are 3,000.

Calculate the number of common shares outstanding as on July 5.

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

Hence, the number of shares outstanding as on July 5 is 37,000.

Issued shares are 47,400.

Treasury shares are 3,000.

Calculate the number of common shares outstanding as on October 5.

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

Hence, the number of shares outstanding as on October 5 is 44,400.

Conclusion

Hence, the number of common shares outstanding on each cash dividend date is determined as above.

2.

To determine

The total dollar amount for each of the four cash dividends.

Answer to Problem 4PSA

Solution:

Calculate the total dollar amount for each of the four cash dividends as shown below.

Explanation of Solution

Required formula:

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

Number of outstanding shares is 40,000.

Cash dividend per share is $0.50

Calculate the total dollar amount for the dividend as on January 5.

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

Hence, the total dollar amount for the dividend as on January 5 is $20,000.

Number of outstanding shares is 37,000.

Cash dividend per share is $0.50

Calculate the total dollar amount for the dividend as on April 5.

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

Hence, the total dollar amount for the dividend as on April 5 is $18,500.

Number of outstanding shares is 37,000.

Cash dividend per share is $0.50

Calculate the total dollar amount for the dividend as on July 5.

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

Hence, the total dollar amount for the dividend as on July 5 is $18,500.

Number of outstanding shares is 44,400.

Cash dividend per share is $0.50

Calculate the total dollar amount for the dividend as on July 5.

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

Hence, the total dollar amount for the dividend as on July 5 is $22,200.

Conclusion

Hence, the total dollar amounts for each of the four cash dividends are determined as above.

3.

To determine

To explain:

The amount of capitalization of retained earnings for the stock dividend.

Answer to Problem 4PSA

Solution:

The amount of capitalization of retained earnings for stock dividend refers to that amount which is utilized from the retained earnings account to issue common stock account. This amount is $88,800.

Explanation of Solution

Calculate the amount of capitalization.

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

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

Hence, the total amount of capitalization is $88,800.

Conclusion

Hence, the amount of capitalization of retained earnings for the stock dividend is $88,800.

4.

To determine

To compute:

The per share cost of the treasury stock purchased.

Answer to Problem 4PSA

Solution:

The per share cost of the treasury stock purchased is $10.

Explanation of Solution

Cost of treasury stock is $30,000.

Number of shares in treasury stock is 3,000.

Calculate the per share cost of the treasury stock as shown below.

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

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

Conclusion

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

5.

To determine

To compute:

The net income earned by the company during the year 2016.

Answer to Problem 4PSA

Solution:

The net income earned by the company during the year 2016 is $248,000.

Explanation of Solution

Calculate the net income earned as shown below.

$\begin{array}{c}\text{Net}\text{income}=\left(\begin{array}{l}\text{Closing}\text{balance}\text{of}\text{retained}\text{earnings }\\ -\text{Opening}\text{balance}\text{of}\text{retained}\text{earnings }\\ +\text{Dividends}\text{paid}\text{during}\text{the}\text{year}\end{array}\right)\\ =\$400,000-\$320,000+\$168,000\\ =\$248,000\end{array}$

Hence, the net income is $248,000.

Conclusion

Hence, the net income earned by the company during the year 2016 is $248,000.