Chapter 12, Problem 4PA

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	$840,000	40,000	$21.00
January 10		2,000
Balance	840,000	42,000	20.00
March 15	(42,000)	(2,000)
Balance	798,000	40,000	19.95
May 30	63,000	2,000
Balance	861,000	42,000	20.50
July 31		42,000
Balance	861,000	84,000	10.25
December 15	(92,400)
Balance	768,600	84,000	9.15
December 31	525,000
Balance	$1,293,600	84,000 shares	$15.40

Table (1)

Working Notes:

Compute the number of stock dividend shares distributed on January 10.

$\begin{array}{c}\text{Stock dividends shares = }\left\{\begin{array}{l}\text{Number of shares outstanding }\times \\ \text{ Stock dividend percentage}\end{array}\right\}\\ \text{= 40,000 shares × 5\%}\\ \text{= 2,000 shares}\end{array}$

Compute the book value per share after the January 10 transaction.

$\begin{array}{c}\begin{array}{l}\text{Book value per }\\ \text{common share}\end{array}\}\text{ = }\frac{\text{Shareholders’ equity applicable to common shares}}{\text{Number of common shares}}\\ \text{=}\frac{\text{\$840,000}}{\text{42,000 shares}}\\ \text{=\$21}\text{.00}\end{array}$

Compute the reduction in stockholders’ equity due to buy back of shares as treasury stock on March 15.

$\begin{array}{c}\text{Treasury stock}=\left\{\begin{array}{l}\text{Number of common shares bought back}\times \\ \text{Cost per share}\end{array}\right\}\\ =2,000\text{ shares}\times \$12\text{ per share}\\ =\$42,000\end{array}$

Compute the book value per share after the March 15 transaction.

$\begin{array}{c}\begin{array}{l}\text{Book value per }\\ \text{common share}\end{array}\}\text{ = }\frac{\text{Shareholders’ equity applicable to common shares}}{\text{Number of common shares}}\\ \text{=}\frac{\text{\$798,000}}{\text{40,000 shares}}\\ \text{=\$19}\text{.95}\end{array}$

Compute the increase in stockholders’ equity due to sale of buy back of shares as treasury stock on May 30.

$\begin{array}{c}\text{Paid-in capital =}\left\{\begin{array}{l}\text{Number of common shares bought back×}\\ \text{Sale price per share}\end{array}\right\}\\ \text{=2,000 shares×\$31}\text{.50 per share}\\ \text{=\$63,000}\end{array}$

Compute the book value per share after the May 30 transaction.

$\begin{array}{c}\begin{array}{l}\text{Book value per }\\ \text{common share}\end{array}\}\text{ = }\frac{\text{Shareholders’ equity applicable to common shares}}{\text{Number of common shares}}\\ \text{=}\frac{\text{\$861,000}}{\text{42,000 shares}}\\ \text{=\$20}\text{.50}\end{array}$

Compute the number of shares after stock split on July 31.

$\begin{array}{c}\begin{array}{l}\text{Total number of shares }\\ \text{after stock-split}\end{array}\}\text{ = }\left(\begin{array}{l}\text{Total number of shares }\\ \text{outstanding × Stock split}\end{array}\right)\\ \text{= 42,000 shares × }\frac{2}{1}\\ \text{= 84,000 shares}\end{array}$

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

$\begin{array}{c}\begin{array}{l}\text{Book value per }\\ \text{common share}\end{array}\}\text{ = }\frac{\text{Shareholders’ equity applicable to common shares}}{\text{Number of common shares}}\\ \text{=}\frac{\text{\$861,000}}{\text{84,000 shares}}\\ \text{=\$10}\text{.25}\end{array}$

Compute the decrease in stockholders’ equity due to declaration of cash dividends on December 15.

$\begin{array}{c}\text{Dividends}=\left\{\begin{array}{l}\text{Number of shares outstanding on December 15}\times \\ \text{Dividend per share}\end{array}\right\}\\ =84,000\text{ shares}\times \$1.10\text{ per share}\\ =\$92,400\end{array}$

Compute the book value per share after the December 15 transaction.

$\begin{array}{c}\begin{array}{l}\text{Book value per }\\ \text{common share}\end{array}\}\text{ = }\frac{\text{Shareholders’ equity applicable to common shares}}{\text{Number of common shares}}\\ \text{=}\frac{\text{\$768,600}}{\text{84,000 shares}}\\ \text{=\$9}\text{.15}\end{array}$

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

$\begin{array}{c}\begin{array}{l}\text{Book value per }\\ \text{common share}\end{array}\}\text{ = }\frac{\text{Shareholders’ equity applicable to common shares}}{\text{Number of common shares}}\\ \text{=}\frac{\text{\$1,293,600}}{\text{84,000 shares}}\\ \text{=\$15}\text{.40}\end{array}$