Chapter 12, Problem 4BP

To determine

Compute the stockholders’ equity, number of common shares outstanding, and book value per share after each of the successive transactions.

Explanation of Solution

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.

Common stock: Common stock is the cash raised by the company by issuing common or ordinary shares to the stockholders. This is an investment for the shareholders for which they receive the dividends from the issuing company, and have voting rights.

Book value per share: This is a financial ratio which measures the value of shareholders’ equity available per common share.

Formula for book value per common share:

$\begin{array}{l}\text{Book value per }\\ \text{common share}\end{array}\}\text{ = }\frac{\text{Shareholders’ equity applicable to common shares}}{\text{Number of common shares}}$

Compute the stockholders’ equity, number of common shares outstanding, and book value per share after each of the successive transactions.

Transaction	Stockholders’ Equity ($)	Number of Common Shares	Book Value Per Share ($)
Beginning balance	$1,200,000	20,000	$60.00
January 16		1,000
Balance	1,200,000	21,000	57.14
February 9	(33,000)	(300)
Balance	1,167,000	20,700	56.38
March 3	39,000	300
Balance	1,206,000	21,000	57.43
July 5		21,000
Balance	1,206,000	42,000	28.71
November 22	(504,000)
Balance	702,000	42,000	16.71
December 31	174,000
Balance	$876,600	42,000 shares	$20.86

Table (1)

Working Notes:

Compute the number of stock dividend shares distributed on January 16.

$\begin{array}{c}\text{Stock dividends shares = }\left\{\begin{array}{l}\text{Number of shares outstanding }\times \\ \text{ Stock dividend percentage}\end{array}\right\}\\ \text{= 20,000 shares × 5\%}\\ \text{= 1,000 shares}\end{array}$

Compute the book value per share after the January 16 transaction.

$\begin{array}{c}\begin{array}{l}\text{Book value per }\\ \text{common share}\end{array}\}\text{ = }\frac{\text{Shareholders’ equity applicable to common shares}}{\text{Number of common shares}}\\ \text{=}\frac{\text{\$1,200,000}}{\text{21,000 shares}}\\ \text{=\$57}\text{.14}\end{array}$

Compute the reduction in stockholders’ equity due to buy back of shares as treasury stock on February 9.

$\begin{array}{c}\text{Treasury stock}=\left\{\begin{array}{l}\text{Number of common shares bought back}\times \\ \text{Cost per share}\end{array}\right\}\\ =300\text{ shares}\times \$110\text{ per share}\\ =\$33,000\end{array}$

Compute the book value per share after the February 9 transaction.

$\begin{array}{c}\begin{array}{l}\text{Book value per }\\ \text{common share}\end{array}\}\text{ = }\frac{\text{Shareholders’ equity applicable to common shares}}{\text{Number of common shares}}\\ \text{=}\frac{\text{\$1,167,000}}{\text{20,700 shares}}\\ \text{=\$56}\text{.38}\end{array}$

Compute the increase in stockholders’ equity due to sale of buy back of shares as treasury stock on March 3.

$\begin{array}{c}\text{Paid-in capital =}\left\{\begin{array}{l}\text{Number of common shares bought back×}\\ \text{Sale price per share}\end{array}\right\}\\ \text{=300 shares×\$130 per share}\\ \text{=\$39,000}\end{array}$

Compute the book value per share after the March 3 transaction.

$\begin{array}{c}\begin{array}{l}\text{Book value per }\\ \text{common share}\end{array}\}\text{ = }\frac{\text{Shareholders’ equity applicable to common shares}}{\text{Number of common shares}}\\ \text{=}\frac{\text{\$1,206,000}}{\text{21,000 shares}}\\ \text{=\$57}\text{.43}\end{array}$

Compute the number of shares after stock split on July 5.

$\begin{array}{c}\begin{array}{l}\text{Total number of shares }\\ \text{after stock-split}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Total number of shares }\\ \text{outstanding × Stock split}\end{array}\right)\\ \text{= 21,000 shares × }\frac{2}{1}\\ \text{= 42,000 shares}\end{array}$

Compute the book value per share after the July 5 transaction.

$\begin{array}{c}\begin{array}{l}\text{Book value per }\\ \text{common share}\end{array}\}\text{ = }\frac{\text{Shareholders’ equity applicable to common shares}}{\text{Number of common shares}}\\ \text{=}\frac{\text{\$1,206,000}}{\text{42,000 shares}}\\ \text{=\$28}\text{.71}\end{array}$

Compute the decrease in stockholders’ equity due to declaration of cash dividends on November 22.

$\begin{array}{c}\text{Dividends}=\left\{\begin{array}{l}\text{Number of shares outstanding on December 15}\times \\ \text{Dividend per share}\end{array}\right\}\\ =42,000\text{ shares}\times \$12\text{ per share}\\ =\$504,000\end{array}$

Compute the book value per share after the November 22 transaction.

$\begin{array}{c}\begin{array}{l}\text{Book value per }\\ \text{common share}\end{array}\}\text{ = }\frac{\text{Shareholders’ equity applicable to common shares}}{\text{Number of common shares}}\\ \text{=}\frac{\text{\$702,000}}{\text{42,000 shares}}\\ \text{=\$16}\text{.71}\end{array}$

Compute the book value per share after the December 31 transaction.

$\begin{array}{c}\begin{array}{l}\text{Book value per }\\ \text{common share}\end{array}\}\text{ = }\frac{\text{Shareholders’ equity applicable to common shares}}{\text{Number of common shares}}\\ \text{=}\frac{\text{\$876,000}}{\text{42,000 shares}}\\ \text{=\$20}\text{.86}\end{array}$