Chapter 11, Problem 9BP

a.

To determine

Prepare the stockholders’ equity section of the balance sheet for L Industries at December 31, 2015.

Explanation of Solution

Stockholders’ Equity Section: It is refers to the section of the balance sheet that shows the available balance of stockholders’ equity accounts as on reported date at the end of the financial year.

Prepare the stockholders’ equity section of the balance sheet for L Industries at December 31, 2015:

L Industries
Balance Sheet (Partial)
December 31, 2015
Particulars	Amount ($)	Amount ($)
Stockholders’ equity:
6% of preferred stock, $100 par, cumulative, authorized, issued, and outstanding 10,000 shares		1,000,000
Common stock, $20 par,150,000 shares authorized,80,000 sharesissued, of which 400 shares are held in treasury		1,600,000
Additional paid-in capital: Common stock		1,200,000
Additional paid-in capital: Treasury stock		6,000
Total paid-in capital		3,806,000
Retained earnings		3,261,440
Sub total		7,067,440
Less: Treasury stock		16,000
Total stockholders’ equity		$7,051,440

Table (1)

Working notes:

Calculate the amount of additional paid in capital on treasury stock:

Step 1: Calculate the purchase price per share.

$\begin{array}{c}\text{Purchase price per share = }\left(\frac{\text{Purchase price}}{\text{Number of shares}}\right)\\ \text{ = }\left(\frac{\text{\$40,000}}{\text{1,000}}\right)\\ =\$40\text{ Per share}\end{array}$

Step 2: Calculate the reissue price per share.

$\begin{array}{c}\text{Reissue price per share = }\left(\frac{\text{Reissue price}}{\text{Number of shares reissued}}\right)\\ \text{ = }\left(\frac{\text{\$30,000}}{\text{600}}\right)\\ =\$50\text{ Per share}\end{array}$

Step 3: Calculate the paid-in capital per share reissued.

$\begin{array}{c}\text{Paid-in capital per share reissued= }\left(\begin{array}{l}\text{Reissue price per share}-\\ \text{Purchase price per share}\end{array}\right)\\ \text{ = }\left(\text{\$50}-\$40\right)\\ =\$10\text{ Per share}\end{array}$

Step 4: Calculate the total paid-in capital on treasury stock.

$\begin{array}{c}\text{Total paid-in capital on treasury stock= }\left(\begin{array}{l}\text{Number of treasury shares reissued}\times \\ \text{ Paid-in capital per share reissued}\end{array}\right)\\ \text{ = }\left(\text{600}\times \$10\right)\\ =\$6,000\end{array}$

Calculate the amount of retained earnings at December 31, 2015:

Step 1: Calculate the amount of preferred dividends.

$\begin{array}{c}\text{Amount of preferred dividends = }\left(\begin{array}{l}\text{Par value}\times \text{}\text{Dividend percentage}\\ \times \text{Number of shares in cumulative}\\ \text{ preferred stock}\times \text{ Number of years}\end{array}\right)\\ \text{ = }\left(\text{\$100}\times 6\%\times 10,000\times 5\text{ Years}\right)\\ =\$300,000\end{array}$

Step 2: Calculate the amount of common dividends paid during 2011-2012.

$\begin{array}{c}\begin{array}{l}\text{Common dividends paid}\\ \text{during 2011-2012}\end{array}\}\text{= }\left(\begin{array}{l}\text{Outstanding number of shares in 2011-2012}\\ \times \text{Price per share each year}\times \\ \text{Number of years}\end{array}\right)\\ \text{ = }\left(\text{80,000}\times \$.60\times 2\text{ Years}\right)\\ =\$96,000\end{array}$

Step 3: Calculate the amount of common dividends paid during 2013-2014.

$\begin{array}{c}\begin{array}{l}\text{Common dividends paid }\\ \text{during 2013-2014}\end{array}\}\text{= }\left(\begin{array}{l}\text{Outstanding number of shares in 2013-2014}\\ \times \text{Price per share each year}\times \\ \text{Number of years}\end{array}\right)\\ \text{ = }\left(\text{79,000}\times \$.60\times 2\text{ Years}\right)\\ =\$94,800\end{array}$

Step 4: Calculate the amount of common dividends paid during 2015.

$\begin{array}{c}\begin{array}{l}\text{Common dividends paid }\\ \text{during 2015}\end{array}\}\text{= }\left(\begin{array}{l}\text{Outstanding number of shares in 2015}\\ \times \text{Price per share each year}\times \\ \text{Number of years}\end{array}\right)\\ \text{ = }\left(\text{79,600}\times \$.60\times \right)\\ =\$47,760\end{array}$

Step 4: Calculate the amount of retained earnings at December 31, 2015.

$\begin{array}{c}\begin{array}{l}\text{Retained earnings at}\\ \text{December 31, 2015}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Net income for 2011-2015 }\\ -\text{Preferred dividend}\\ -\text{Common dividends}\end{array}\right)\\ =\left(\begin{array}{l}\$3,800,000-\$300,000\\ -\$238,560\end{array}\right)\\ =\$3,261,440\end{array}$

Calculate the amount of treasury stock.

$\begin{array}{c}\text{Treasury stock = }\left(\begin{array}{l}\text{Reissue number of treasury stock }\\ \times \text{Purchase price per share}\end{array}\right)\\ =\left(400\text{ shares}\times \text{\$40 per share}\right)\\ =\$16,000\end{array}$

b.

To determine

Compute the book value per share of common stock.

Explanation of Solution

The book value per share of common stock:

$\begin{array}{c}\begin{array}{l}\text{Book value per share }\\ \text{of common stock}\end{array}\}=\left(\frac{\text{Total stockholders' equity}-\text{Preferred stock}}{\begin{array}{c}\text{Number of shares of }\\ \text{common stock outstanding}\end{array}}\right)\\ =\left(\frac{\text{\$7,051,440}-\$1,000,000}{79,600\text{ Shares}}\right)\\ =\left(\frac{6,051,440}{79,600\text{ Shares}}\right)\\ =\$76.02\end{array}$

Conclusion

Therefore, the book value per share of common stock is $76.02.

c.

To determine

Explain what would have happened to the market price per share of the company, if the company had split its stock 2-for-1 at December 31, 2015 and explain what would have happened to the par value of the common stock and to the number of common shares outstanding.

Explanation of Solution

On December 31, 2015, the company decided to split its common stock 2-for-1. The market value of the share is decreases about $28 per share $\left(\frac{\$56}{2}\right)$. The par value of the common stock decrease to $10.00$\left(\frac{\$20}{2}\right)$ and the number of outstanding shares are increase about 159,200 shares $\left(79,600\times 2\right)$.