CHAPTER 11

DISCUSSION QUESTIONS

1. Debt financing is borrowing money and 7. Corporate profits are subject to double taxa-
almost always involves the payment of inter- tion in that most corporations pay taxes on
est on the amount borrowed. Debt holders do their profits, and then stockholders pay taxes
not receive any ownership in the company on dividends distributed to them by corpora-
from loaning the money. Equity tions.
financing is raising money by selling stock or
8. The major difference between common and
ownership interests in the company. While
preferred stock is in the rights granted to
equity (stock) holders aren’t guaranteed
holders. Common stockholders have voting
periodic interest payments as are debt hold-
rights, while preferred stockholders usually
ers, they often receive dividends on their eq-
do not. Common stockholders also have a re-
uity investments. With equity, you are buying
sidual type of equity in that each stockholder
ownership in the organization; with debt, you
shares dividends and assets upon liquidation,
are loaning money.
after the rights and privileges of creditors and
2. Partnerships are unincorporated businesses preferred stockholders are satisfied. Pre-
that are easy to start and easy to terminate; ferred stockholders usually have dividend
they are not legally separate from their own- and liquidation privileges that are superior to
ers nor are they separately taxed. Corpora- those of the common stockholders. Two divi-
tions are legal entities authorized by states; dend privileges associated with preferred
they are separately taxed and offer limited li- stock are the current-dividend preference
ability to their creditors. and the cumulative-dividend preference.
3. When a person decides to establish a propri- 9. Historically, all stock was par-value stock.
etorship, he or she merely acquires the nec- When sold at a price above par, it was said to
essary cash, inventory, equipment, business have sold at a “premium.” When sold at a
license, and other assets and begins provid- price below par, it was said to have sold at a
ing goods or services to customers. The “discount.” Now, however, most states have
same is true for a partnership, except that two passed laws that forbid the initial sale of stock
or more persons are involved and so together by corporations to investors below par, so par
must decide which assets will be acquired value has become less meaningful. Originally,
and how business will be conducted. the concept of par value was thought to pro-
tect creditors and investors because it pro-
4. Anything that terminates or changes the con-
vided a minimum level of assets that could
tract between partners (including the death of
not be impaired. Par value does not establish
a partner) legally dissolves the partnership.
value in the market, and the idea that it pro-
The legal dissolution does not mean that the
vided a realistic minimum level of protection
business must cease operations, however.
for creditors was ill conceived. Accountants
Usually, partnership agreements specify how
use par value to identify the approximate le-
modifications in ownership should be han-
gal capital of a corporation, although some
dled, so there is often no outward indication
states view all paid-in capital as the corpora-
that any change has taken place.
tion’s legal capital.
5. As long as the partners’ actions are within the
10. There are many reasons why a firm would
scope of the normal business activity of the
buy back shares of its own stock. Five of the
partnership, all partners are legally responsi-
most common are that management may (1)
ble for each other’s actions. In fact, creditors
want the stock for a profit-sharing, bonus, or
can even seek payment for claims authorized
by a departed partner from the personal as- stock-option plan for the employees; (2) feel
sets of the remaining partners. that the stock is selling for an unusually low
price and is a good buy; (3) want to stimulate
6. The only type of business entity in which all
trading in the company’s stock; (4) want to re-
owners have limited liability is the corporation.
move some shares from the market in order

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 Chapter 11

to avoid a hostile takeover; and (5) want to losses and by certain treasury stock transac-
increase reported earnings per share by re- tions.
ducing the number of shares of stock out-
15. A firm can have a large Retained Earnings
standing.
balance and no cash because cash coming
11. Treasury stock is not an asset, because in into a firm through earnings may be used to
many ways it is not different from the un-is- purchase other assets such as plant or equip-
sued stock of a corporation. Some people ar- ment. If a firm did not spend any of its earn-
gue that the debit balance in the treasury ings, it would be difficult to have a large Re-
stock account should be reported on the bal- tained Earnings balance and no cash. A
ance sheet as an asset rather than as a re- cash-poor, high-earnings firm is like an indi-
duction in equity. Their vidual who makes $1 million a year but, be-
argument is that treasury stock can be sold cause he or she spends $2 million, is always
for cash just as readily as can the shares of in financial difficulty. Retained Earnings
other corporations. However, because treas- merely shows that a firm has had earnings; it
ury stock does not provide voting or dividend does not guarantee that the cash from those
rights, as do investments in stocks of other earnings is still on hand.
corporations, it is not considered an asset.
16. Companies are usually barred from paying
Also, most states impose certain restrictions
cash dividends if their Retained Earnings bal-
on the amount of treasury stock a corporation
ance (or sometimes their total equity) is less
can hold at any one time.
than the amount of the dividend. Sometimes,
Finally, it is generally agreed that a company
a company’s board of directors will also place
cannot own part of itself.
formal restrictions on retained earnings,
12. Treasury stock is usually accounted for on which become legally binding.
the cost basis. That is, when repurchased, it
17. A person buying common stock should ex-
is recorded at cost regardless of whether or
amine the dividend preferences of the pre-
not it has a par value. When sold, it is taken
ferred stock because those preferences can
off the books at cost. And, while being held,
significantly affect the amount of dividends
treasury stock is shown on the balance sheet
common stockholders receive. For example,
as a contra-equity account.
if preferred stock is cumulative, common
13. The equity section identifies sources of as- stockholders will usually receive substantially
sets by showing the ways money comes into less in dividends than if the preferred stock is
a firm. There are only three major sources of noncumulative.
funds: borrowing money, earning money, and
18. The dividend payout ratio is computed by di-
issuing stock. The latter two sources are re-
viding the dividends declared by the net in-
ported in the equity section. Thus, by study-
come for the year. The result can be inter-
ing the equity section, a financial statement
preted as the percentage of income for the
reader can identity how much of a firm’s as-
year that was paid out to stockholders in the
sets were financed by earnings and how
form of cash dividends. The dividend payout
much by issuing stock. (Note: There is one
ratio for Deedle Company indicates that the
other way to obtain funds: by selling produc-
company paid out 40% of its net income for
tive assets such as plant or equipment. How-
the year as cash dividends.
ever, this source cannot be viewed as a long-
term solution to a business’s funding prob- 19. Accumulated other comprehensive income is
lems.) a separate category of equity that summa-
rizes the effect on equity that results from
14. The Retained Earnings balance of a corpora-
market-related increases and decreases in
tion is increased by net income and can also
the reported values of assets and liabilities.
be increased by prior-period adjust-ments
that would have increased prior years’ earn- This concept was adopted to allow the report-
ings. Retained Earnings is decreased by the ing of market values on the balance sheet
declaration of dividends and can also be de- while keeping the statement of comprehen-
creased by prior-period adjustments that sive income uncluttered with gains and
would have reduced prior years’ earnings. losses from market value changes. This ap-
Retained Earnings is also decreased by net proach allows the balance sheet to report
more relevant numbers and yet keep the

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 Chapter 11

statement of comprehensive income focused referred to as “other equity items.” Two of the
on reporting profits from the activities of the most common are:
business.
a. Foreign currency translation adjustments
20. There are a few equity items that bypass the b. Unrealized gains and losses on certain
statement of comprehensive income and are investments

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 Chapter 11

PRACTICE EXERCISES

PE 11-1 (LO1) Characteristics of Debt and Equity Financing

The correct answer is B.

PE 11-2 (LO1) Characteristics of Debt and Equity Financing

The correct answer is A.

PE 11-3 (LO1) Characteristics of Proprietorships and Partnerships

The correct answer is A. Proprietorships and partnerships are not limited in size.
However, most proprietorships and partnerships are smaller than corporations be-
cause of the nature of their businesses.

PE 11-4 (LO1) Characteristics of Proprietorships and Partnerships

The correct answer is D.

PE 11-5 (LO2) Characteristics of Corporations

The correct answer is B. Corporations do not have a limited life. For example,
DuPont, one of the oldest corporations in the world, began operations in 1802.

PE 11-6 (LO2) Characteristics of Corporations

The correct answer is A.

PE 11-7 (LO2) Characteristics of Common Stock and Preferred Stock

The correct answer is B.

a. False. Preferred stockholders usually do not have any voting power in corpo-
rate matters.
b. True. Once all loans have been repaid and the claims of the preferred stock-
holders have been met, all the excess assets belong to the common stockhold-
ers.
c. False. Preferred stock is not better than common stock. It is just different.
d. False. Preferred stockholders receive dividends before common stockholders.
e. False. Companies may issue convertible preferred stock, which may be con-
verted into common stock at a specified conversion rate.

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Chapter 11

PE 11-8 (LO2) Characteristics of Common Stock and Preferred Stock

The correct answer is B.

PE 11-9 (LO3) Issuance of No-Par Common Stock

Cash ...................................................................................... 1,125,000

Common Stock................................................................ 1,125,000
Issued 25,000 shares of no-par common stock at
$45 per share.

PE 11-10 (LO3) Issuance of Common Stock for Cash

Cash (3,000 shares  $40) .................................................... 120,000

Common Stock (3,000 shares  $1 par value) .............. 3,000
Paid-In Capital in Excess of Par, Common Stock
(3,000 shares  $39) ................................................... 117,000
Issued 3,000 shares of $1 par-value common
stock at $40 per share.

PE 11-11 (LO3) Issuance of Common Stock for Other Assets

Buildings (10,000 shares  $40) ..................................................... 400,000

Common Stock (10,000 shares  $0.01 par value) .................. 100
Paid-In Capital in Excess of Par, Common Stock
(10,000 shares  $39.99) ....................................................... 399,900
Issued 10,000 shares of $0.01 par-value common
stock for buildings (10,000 shares  $40 per share
= $400,000).

PE 11-12 (LO3) Accounting for Stock Repurchases

Treasury Stock, Common (1,500 shares  $64) ............................ 96,000

Cash ............................................................................................ 96,000
Purchased 1,500 shares of treasury stock at $64
per share.

PE 11-13 (LO3) Accounting for Sale of Treasury Stock at Price Higher than
Cost

Cash (400 shares  $80) .................................................................. 32,000

Treasury Stock, Common (400 shares  $64 cost) ................. 25,600
Paid-In Capital, Treasury Stock [400  ($80 – $64)]................. 6,400
Reissued 400 shares of treasury stock at $80 per share.

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 Chapter 11

PE 11-14 (LO3) Accounting for Sale of Treasury Stock at Price Lower than Cost

Cash (300 shares  $56) .................................................................. 16,800

Paid-In Capital, Treasury Stock* .................................................... 2,400
Treasury Stock, Common (300 shares  $64 cost) ................. 19,200
Reissued 300 shares of treasury stock at $56 per share.
* According to PE 11-13, $6,400 credit balance is in this account. Otherwise, the
debit would be to Retained Earnings.

PE 11-15 (LO3) Accounting for Sale of Treasury Stock at Price Lower than Cost

Cash (800 shares  $60) .................................................................. 48,000

Paid-In Capital, Treasury Stock ..................................................... 2,000
Retained Earnings ........................................................................... 1,200
Treasury Stock, Common (800 shares  $64 cost) ................. 51,200
Reissued 800 shares of treasury stock at $60 per share;
original cost was $64 per share.

PE 11-16 (LO4) Dividend Declaration Accounting

Dividends, Preferred Stock ............................................................ 45,000*

Dividends, Common Stock ............................................................. 30,000
Dividends Payable ..................................................................... 75,000
Declared dividends on preferred and common stock.
*Preferred stock dividend = $30  0.10  15,000 shares = $45,000.

PE 11-17 (LO4) Dividend Payment Accounting

Dividends Payable........................................................................... 75,000

Cash ............................................................................................ 75,000
Paid dividends on preferred and common stock.

PE 11-18 (LO4) Dividend Closing Entry (or Entries)

Retained Earnings ........................................................................... 75,000

Dividends, Preferred Stock ....................................................... 45,000
Dividends, Common Stock ....................................................... 30,000
To close dividends to Retained Earnings.

PE 11-19 (LO4) Dividend Payout Ratio

Cash dividends $38,000
Dividend payout ratio = = = 25.0%
Net income $152,000

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Chapter 11

PE 11-20 (LO4) Stock Dividends and Stock Split

Items Stock dividend Stock split

(a) Number of shares outstanding Increase Increase
(b) Total equity No change No change
(c) Retained earnings Decrease No change
(d) Common stock Increase No change

PE 11-21 (LO4) Stock Split

There’s no entries necessary to record on the book, just to memo it.

PE 11-22 (LO5) Balance Sheet Preparation

Contributed capital:
Preferred stock ($20 par value, 2,500 shares issued and out standing) $ 50,000
Common stock ($1 par value, 8,400 shares issued, 8,000 outstanding) 8,000
Paid-in capital in excess of par, common stock ...................................... 492,000
Total contributed capital ...................................................................... $550,000
Retained earnings ...................................................................................... 200,000
Total contributed capital and retained earnings ................................ $750,000
Less treasury stock (400 shares of $1 common at cost of $45) ............. (18,000)
Total equity ............................................................................................ $732,000

PE 11-23 (LO5) Statement of Comprehensive Income

Net income .................................................................................................. $ 208,000

Foreign currency translation adjustment ................................................. 16,000
Unrealized loss on investments ................................................................ (44,000)
Comprehensive income ............................................................................. $180,000

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 Chapter 11

EXERCISES

E 11-1 (LO2) Characteristics of a Corporation

1. True.
2. True.
3. False. Most of the largest U.S. corporations are publicly held corporations.
4. True.
5. False. The net income of a corporation is taxed as a separate entity.
6. False. Creditors have no legal claim on the personal assets of the owners of
a corporation if the corporation does not pay its debts.
7. False. The transfer of shares from one owner to another does not require the
approval of either the corporation or other shareholders; it is entirely at the dis-
cretion of the shareholder.
8. False. The board of directors of a corporation manages the corporation for the
shareholders, who legally own the corporation.
9. True.
10. False. Corporations are subject to more government regulations than part-
nerships or proprietorships.

E 11-2 (LO3) No-Par Stock Transactions

1. a. Cash ......................................................................... 744,000

Common Stock ................................................... 744,000
Issued 31,000 shares of no-par common
stock at $24 per share.
b. Cash ......................................................................... 109,200
Common Stock ................................................... 109,200
Issued 3,900 shares of no-par common
stock at $28 per share.
c. Buildings ................................................................. 90,000
Common Stock ................................................... 90,000
Issued 3,000 shares of no-par common
stock for a building.
d. Dividends ................................................................. 56,850
Dividends Payable .............................................. 56,850
Declared a $1.50-per-share dividend on
common stock. (31,000 + 3,900 + 3,000) × $1.50 = 56,850

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Chapter 11

e. Revenues ................................................................. 405,000

Retained Earnings .............................................. 187,000
Expenses ............................................................. 218,000
Closed revenues and expenses for the year
to Retained Earnings.
f. Retained Earnings .................................................. 56,850
Dividends............................................................. 56,850
Closed dividends to Retained Earnings.

2. Common stock (no par) ............................................................... $ 943,200

Retained earnings ........................................................................ 130,150*
Total equity .............................................................................. $1,073,350
*$187,000 – $56,850 = $130,150

E 11-3 (LO3) Treasury Stock Transactions

a. No journal entry is required, but a memo note would be recorded in the com-
pany’s board of directors’ minutes.

b. Cash ...................................................................................... 750,000

Common Stock ............................................................... 500,000
Paid-In Capital in Excess of Par Value, Common Stock 250,000
Issued 50,000 shares of $10 common stock at $15
per share.

c. Treasury Stock ..................................................................... 57,000

Cash ................................................................................. 57,000
Purchased 3,000 shares of treasury stock at $19
per share.

d. Treasury Stock ..................................................................... 31,500

Cash ................................................................................. 31,500
Purchased 1,500 shares of treasury stock at $21
per share.

e. Cash ...................................................................................... 28,800

Treasury Stock ................................................................ 22,800
Paid-In Capital, Treasury Stock ..................................... 6,000
Reissued 1,200 shares of treasury stock that cost
$19 per share for $24 per share.

f. Cash ...................................................................................... 24,000

Paid-In Capital, Treasury Stock .......................................... 6,000
Retained Earnings ................................................................ 1,500
Treasury Stock ................................................................ 31,500

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 Chapter 11

Reissued 1,500 shares of treasury stock that cost

$21per share for $16 per share.

g. $ 57,000 (c)
+ 31,500 (d)
– 22,800 (e)
– 31,500 (f)
$ 34,200 balance

E 11-4 (LO4) Dividend Calculations

Case Preferred Stock Common Stock

A $3,200,000 6%= $ 192,000 $608,000 (remaining portion)
B $3,200,000 6%= $ 192,000 (current year) $ 32,000 (remaining portion)
576,000 (arrears—3 years)
$768,000

E 11-5 (LO4) Dividend Payout Ratio

Iris Orchid Columbine

Cash dividends ................................................ $ 60 $ 400 $ 680
Net income .......................................................  $620  $840  $920
Dividend payout ratio...................................... 9.68% 47.62% 73.91%

E 11-6 (LO4) Stock Dividends

July 1 Stock Dividends (NT$33 37,500) ..................................... 1,237,500

Stock Dividends Distributable (NT$10 37,500) 375,000
Paid-in Capital in Excess of Par (NT$23 37,500) 862,500
Declaration of 15% stock dividends. Small stock dividends are
calculated on the basis of market value.

July 31 Stock Dividends Distributable .......................................... 375,000

Common Stock ................................................... 375,000
Issuing 37,500 dividend shares

E 11-7 (LO4) Stock Dividends

July 1 Stock Dividends (NT$10 62,500) ..................................... 625,000

Stock Dividends Distributable ......................... 625,000
Declaration of 25% stock dividends. Large stock dividends are
calculated on the basis of par value.

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Chapter 11

E 11-8 (LO4) Comparing Effects of Stock Dividends and Stock Split

After After
Before Share Share
Action Dividend Split
Equity
Common stock $ 600,000 $ 642,000 $ 600,000
Capital Surplus 0 49,000 (1) 0
Retained earnings 1,720,000 1,629,000 (2) 1,720,000
Total equity $2,320,000 $2,320,000 $2,320,000

Outstanding shares 100,000 107,000 200,000

Par value per share $6 $6 $3

(1) (2)
7,000 × ($13 – $6) = 49,000 $1,720,000 – (7,000 × $13) = 1,629,000

E 11-9 (LO4) Stock Issuance and Cash Dividends

a. Cash ................................................................................. 1,000,000

Common Stock .......................................................... 1,000,000
Issued 25,000 shares of no-par common stock
at $40 per share.

b. Buildings .......................................................................... 100,000

Preferred Stock .......................................................... 75,000
Paid-In Capital in Excess of Par, Preferred Stock... 25,000
Issued 3,000 shares of preferred stock in
exchange for a building (building fair market
value = $100,000; 3,000  $25 = $75,000).

c. Dividends, Preferred Stock ............................................ 9,000

Dividends, Common Stock ............................................. 100,000
Dividends Payable ..................................................... 109,000
Declared dividends on preferred and common
stock (preferred: 3,000  $25  0.12 = $9,000;
common: 25,000  $4.00 = $100,000).

E 11-10 (LO3, LO4) Stock Issuance, Treasury Stock, and Dividends

a. Cash ................................................................................. 2,090,000

Common Stock .......................................................... 475,000
Paid-In Capital in Excess of Par, Common Stock ... 1,615,000
Issued 95,000 shares of common stock at $22

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 Chapter 11

per share (95,000  $22 = $2,090,000; 95,000 

$5 = $475,000).

b. Cash ................................................................................. 234,000

Preferred Stock .......................................................... 180,000
Paid-In Capital in Excess of Par, Preferred Stock... 54,000
Issued 18,000 shares of preferred stock at $13
per share (18,000  $13 = $234,000; 18,000  $10
= $180,000).

c. Treasury Stock ................................................................ 300,000

Cash ............................................................................ 300,000
Purchased 10,000 shares of outstanding common
stock at $30 per share (10,000  $30 = $300,000).

d. Cash ...................................................................................... 27,000

Retained Earnings ................................................................ 3,000
Treasury Stock ................................................................ 30,000
Reissued 1,000 shares of treasury stock at $27 per
share (1,000  $27 = $27,000).

e. Dividends, Preferred Stock ................................................. 12,600

Dividends, Common Stock .................................................. 14,800
Dividends Payable .......................................................... 27,400
Declared dividends on preferred and common stock.
Dividend calculations:
Preferred dividend:
18,000  $10  7% = $12,600
Common dividend:
Total dividend ................................................................. $27,400
Less preferred dividend ................................................. 12,600
Common stock dividend...................................................... $14,800

f. Dividends Payable ............................................................... 27,400

Cash ................................................................................. 27,400
Paid dividends to preferred and common stock-
holders.

E 11-11 (LO3, LO4) Stock Transactions and Dividends

a. Cash ...................................................................................... 896,000

Common Stock ............................................................... 896,000
Issued 28,000 shares of common stock at $32 per
share (28,000  $32).
b. Land....................................................................................... 200,000

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Chapter 11

Preferred Stock ............................................................... 120,000

Paid-In Capital in Excess of Par, Preferred Stock........ 80,000
Issued 15,000 shares of preferred stock at $13.33
per share for land (15,000 shares  $8 par value =
$120,000; remainder is paid-in capital).
c. Dividends, Preferred Stock ................................................. 14,400
Dividends, Common Stock .................................................. 56,000
Dividends Payable .......................................................... 70,400
Declared dividends on preferred and common stock
(preferred: 15,000  $8  12%; common: 28,000  $2).
d. The entire amount of the dividend would be paid to preferred stockholders.

E 11-12 (LO3, LO4) Stock Issuance, Treasury Stock, and Dividends

1. 2022
Jan. 15 Cash.......................................................................... 104,000
Common Stock ................................................... 104,000
Issued 6,500 shares of common stock at
par value.
Feb. 6 Dividends, Common Stock ..................................... 60,650
Dividends Payable ............................................. 60,650
Declared a 50¢-per-share dividend to com-
mon stockholders of record on March 6,
2022. 121,300 x $0.50 = $60,650
Mar. 6 No entry
8 Cash.......................................................................... 346,000
Common Stock ................................................... 320,000
Paid-In Capital in Excess of Par, Common
Stock ................................................................... 26,000
Issued 20,000 shares of stock for $346,000
or $17.30 per share (20,000  $16 =
$320,000; 20,000  $1.30 = $26,000).
Apr. 6 Dividends Payable ................................................... 60,650
Cash .................................................................... 60,650
Paid 50¢-per-share dividend on common
stock.
June 19 Treasury Stock ........................................................ 9,350
Cash .................................................................... 9,350
Purchased 800 shares of treasury stock.
Sept. 6 Dividends, Common Stock ..................................... 77,275
Dividends Payable ............................................. 77,275
Declared a 55¢-per-share dividend to com-

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 Chapter 11

mon stockholders of record on October 15

(121,300 + 20,000 – 800 = 140,500; 140,500  $0.55
= $77,275).
2022
Oct. 6 No entry
15 No entry
Nov. 16 Dividends Payable ................................................... 77,275
Cash .................................................................... 77,275
Paid 55¢-per-share dividend on common
stock.
Dec. 15 Dividends, Preferred Stock ..................................... 34,560
Cash .................................................................... 34,560
Paid 6% cash dividend on preferred stock
(18,000 shares  $32  6%).

2. The following dividends were paid during 2022.

To common stockholders ($60,650 + $77,275) ................................ $137,925
To preferred stockholders ................................................................. 34,560
Total dividends paid ..................................................................... $172,485

E 11-13 (LO3, LO4) Analysis of Equity

1. 6,000 shares at $40 = $240,000

$318,000$129,000
2. = $8.43 per share
53,000 shares
3. $3 ($43 – $40)  6,000 shares = $18,000
4. $2,000/350 shares = $5.71 per share
5. $240,000 + $318,000 + $18,000 + $129,000 + $86,000 – $2,000 = $789,000
6. $67,000 – (6%  $240,000) = $52,600

E 11-14 (LO3, LO4) Preparing the Equity Section

Spring Company
Partial Balance Sheet
December 31, 2022
Equity
Contributed capital:
Preferred stock (8%, $50 par value, 50,000 shares authorized,
5,000 shares issued and outstanding) ................................................ $ 250,000
Common stock ($1 par value, 100,000 shares authorized,
70,000 shares issued and outstanding) .............................................. 70,000
Paid-in capital in excess of par, preferred stock ..................................... 5,000
Paid-in capital in excess of par, common stock ...................................... 1,330,000

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Chapter 11

Total contributed capital ...................................................................... $1,655,000

Retained earnings ...................................................................................... 400,000*
Total equity ............................................................................................ $2,055,000
*$350,000 (beginning balance) + $125,000 (net income) – $75,000
(dividends) = $400,000

E 11-15 (LO5) Other Equity Items

1. $46.4 ($70.9 – $24.5)

2. $24.5—the total amount of retained earnings
3. $30.8 ($25.6 + $5.2)
4. Most of the increase in equity came from the market value increase in certain
debt and equity securities. None of the increase came from earnings that were
retained.

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 Chapter 11

PROBLEMS

P 11-1(LO3) Accounting for Treasury Stock

1. Apr. 1 Treasury Stock (10,000 × £7) ................................ 70,000

Cash............................................................... 70,000

July 1 Cash (1,600 × £10) ................................................. 16,000

Treasury Stock (1,600 × £7) ......................... 11,200
Paid-in Capital—Treasury Stock
(1,600 × £3) ................................................... 4,800

Oct. 1 Cash (3,400 × £9) ................................................... 30,600

Treasury Stock (3,400 × £7) ......................... 23,800
Paid-in Capital—Treasury Stock
(3,400 × £2) .................................................... 6,800

Dec. 1 Cash (2,000 × £5) ................................................... 10,000

Paid-in Capital—Treasury stock
(2,000 × £2) ......................................................... 4,000
Treasury Stock (2,000 × £7) ........................ 14,000

31 Revenues ............................................................... 120,000

Expensed....................................................... 40,000
Retained Earnings ........................................ 80,000

2.

Paid-In Capital—Treasury stock Retained Earnings

12/1 4,000 7/1 4,800 Beg. Bal. 200,000
10/1 6,800 12/31 80,000
End. Bal. 7,600 End. Bal. 280,000

Treasury Stock
4/1 70,000 7/1 11,200
10/1 23,800
12/1 14,000
End. Bal 21,000

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Chapter 11

3. Lilbourg Company
Balance Sheet (Partial)
December 31, 2022
Equity
Common Stock
£1 par, 800,000 shares issued and
797,000 outstanding .................................. £ 800,000
Paid-in Capital in excess of par................ 1,000,000
Paid-in Capital—Treasury stock............... 7,600
Retained Earnings ................................................. 280,000
Less: Treasury Stock (3,000 shares) ................ 21,000
Total Equity ................................. £2,066,600

P 11-2 (LO4) Dividend Calculations

1. In this case, preferred stockholders should receive $15,000 for each year
(10,000 shares  0.10  $15) and common stockholders will receive the rest.
Thus, the allocations for 2021 and 2022 are as follows:
Total
Year Dividends Preferred Common
2021 $ 8,000 $ 8,000 $ 0
2022 92,000 15,000 77,000
$100,000 $23,000 $77,000

2. In this case, preferred stockholders should receive $15,000 each year plus div-
idends in arrears. In 2022, dividends of $7,000 are in arrears from 2021. Com-
mon stockholders receive the remainder.
Total
Year Dividends Preferred Common
2021 $ 8,000 $ 8,000 $ 0
2022 92,000 22,000 70,000
$100,000 $30,000 $70,000
3. In this case, preferred stockholders would receive $8,000 in 2021, and common
stockholders would get nothing. In 2022, preferred stockholders would get
$52,000 ($15,000 for 2022, $7,000 for 2021, $15,000 for 2020, and $15,000 for
2019). Common stockholders would get the remaining $40,000.
Total
Year Dividends Preferred Common
2021 $ 8,000 $ 8,000 $ 0
2022 92,000 52,000 40,000
$100,000 $60,000 $40,000

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 Chapter 11

P 11-3 (LO4) Dividend Calculations

1. In this case, preferred stockholders should receive $256,000 (80,000 shares 

$40 par value  0.08), and common stockholders should get the rest. Thus, in
the years 2022–2024, the allocation would be as follows:
Year Total Dividends Preferred Stock Common Stock
2022 $ 50,000 $ 50,000 $ 0
2023 280,000 256,000 24,000
2024 340,000 256,000 84,000
2. In this case, preferred stockholders should receive $256,000 each year plus
dividends in arrears. In 2023, dividends of $206,000 are in arrears from 2022. In
2024, dividends of $182,000 are in arrears from 2023.($206,000+256,000–
280,000=$182,000) Common stockholders then receive all other dividends, as
shown below.
Year Total Dividends Preferred Stock Common Stock
2022 $ 50,000 $ 50,000 $ 0
2023 280,000 280,000 0
2024 340,000 340,000 0
3. A common stockholder should know about the dividend privileges of preferred
stockholders because, as the above shows, those privileges can significantly
affect the amount of dividends common stockholders receive.

P 11-4 (LO4) Dividend Payout Ratio

1. A B C
Cash dividends ........................................ $ 0 $ 400 $2,400
Net income ...............................................  $1,600  $2,800  $3,600
Dividend payout ratio.............................. 0 14.29% 66.67%

2. The company most likely to be a high-growth Internet company is A, which has

a 0% dividend payout ratio. Young or rapidly growing companies tend to have
low dividend payout ratios, preferring to retain the profits in the business in
order to help fund their expansion. The company most likely to be an old, stable
company is C with the highest dividend payout ratio.

P 11-5 (LO3, LO4) Stock Transactions and Analysis

1. a. Cash .................................................................................... 4,000

Common Stock ............................................................. 2,000
Paid-In Capital in Excess of Par, Common Stock ...... 2,000
Issued 200 shares of common stock.
b. $125,000 + $2,000 = $127,000

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Chapter 11

2. a. Cash .................................................................................... 20,400

Preferred Stock ............................................................. 20,000
Paid-In Capital in Excess of Par, Preferred Stock ..... 400
Issued 200 shares of preferred stock.
b. $1,000 + $400 = $1,400

3. a. Buildings ............................................................................ 11,000

Common Stock ............................................................. 5,000
Paid-In Capital in Excess of Par, Common Stock ...... 6,000
Issued 500 shares of common stock for a building.
b. $850,000 + $11,000 = $861,000

4. a. Treasury Stock ................................................................... 23,000

Cash ............................................................................... 23,000
Purchased 1,000 shares of treasury stock.
Cash .................................................................................... 21,500
Paid-In Capital, Treasury Stock ........................................ 1,000
Retained Earnings ............................................................. 500
Treasury Stock.............................................................. 23,000
Reissued 1,000 shares of treasury stock.
b. $1,000 – $1,000 = $0

5. a. Dividends, Preferred Stock ............................................... 36,400

Dividends, Common Stock ............................................... 38,600
Dividends Payable ........................................................ 75,000
Declared dividends on preferred and common
stock (5,200 shares  $100 par  7% = $36,400;
$75,000 – $36,400 = $38,600).
b. $310,000 – $75,000 = $235,000

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 Chapter 11

P 11-6 (LO3, LO4) Stock Transactions and the Equity Section

1. a. Cash .................................................................................... 186,000

Preferred Stock ............................................................. 150,000
Paid-In Capital in Excess of Par, Preferred Stock ..... 36,000
Issued 3,000 shares of preferred stock at $62 per
share.
b. Treasury Stock ................................................................... 42,500
Cash ............................................................................... 42,500
Purchased 2,500 shares of treasury stock at $17
per share.
c. Retained Earnings ............................................................. 179,250
Cash ............................................................................... 179,250
Paid dividends to common and preferred stock-
holders (preferred: 12,000 shares  $50 par  7% =
$42,000; common: 91,500 shares  $1.50 = $137,250).
d. Cash .................................................................................... 18,000
Treasury Stock.............................................................. 15,300
Paid-In Capital, Treasury Stock ................................... 2,700
Reissued 900 shares of treasury stock at $20 per
share.
e. Cash .................................................................................... 25,600
Paid-In Capital, Treasury Stock ........................................ 1,600
Treasury Stock.............................................................. 27,200
Reissued 1,600 shares of treasury stock at $16 per
share.
f. Revenues ............................................................................ 350,000
Retained Earnings ........................................................ 83,000
Expenses ....................................................................... 267,000
Closed net income for the year to Retained Earnings.

2. The equity section can be easily prepared if T-accounts are used to update the
account balances, as follows:

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Chapter 11

P 11-6 (LO3, LO4) (Continued)

Preferred Stock Common Stock

Beg. Bal. 450,000 Beg. Bal. 752,000
(a) 150,000
End. Bal. 600,000 End. Bal. 752,000

Paid-In Capital in Excess of Par, Paid-In Capital in Excess of Par,

Preferred Stock Common Stock
Beg. Bal. 125,000 Beg. Bal. 326,000
(a) 36,000
End. Bal. 161,000 End. Bal. 326,000

Treasury Stock Paid-In Capital, Treasury Stock

(b) 42,500 (d) 15,300 (e) 1,600 (d) 2,700
(e) 27,200
End. Bal. 0 End. Bal. 1,100

Retained Earnings
(c) 179,250 Beg. Bal. 540,000
(f) 83,000
End. Bal. 443,750

Saratoga Springs Company

Partial Balance Sheet
December 31, 2022
Equity
Contributed Capital:
Preferred stock (7%, $50 par value, noncumulative, 22,000 shares
authorized, 12,000 shares issued and outstanding) .................. $ 600,000
Common stock (110,000 shares authorized, $8 par value,
94,000 shares issued and outstanding) ...................................... 752,000
Paid-in capital in excess of par, preferred stock................................ 161,000
Paid-in capital in excess of par, common stock ................................ 326,000
Paid-in capital, treasury stock ............................................................. 1,100
Total contributed capital .............................................................. $1,840,100
Retained earnings ................................................................................. 443,750
Total equity .................................................................................... $2,283,850

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 Chapter 11

P 11-7 (LO3, LO4) Equity, Dividends, and Treasury Stock

1. 2022
Jan. 20 Dividends Payable ................................................... 10,000
Cash .................................................................... 10,000
Paid the $2-per-share cash dividend on
common stock that was declared on
December 15, 2021.
Aug. 15 Treasury Stock ........................................................ 20,000
Cash .................................................................... 20,000
Reacquired 1,000 shares of common stock
at $20 per share.
Sept. 30 Cash.......................................................................... 10,500
Treasury Stock ................................................... 10,000
Paid-In Capital, Treasury Stock ........................ 500
Reissued 500 shares of treasury stock at
$21 per share (purchase price = $20).
Oct. 15 Dividends, Common Stock ..................................... 13,500
Cash .................................................................... 13,500
Declared and paid cash dividends of $3
per share on common stock.
Number of shares is calculated as follows:
5,000) Beginning balance
(1,000) August 15
500) September 30
4,500) Ending balance
Nov. 1 Cash.......................................................................... 3,600
Paid-In Capital, Treasury Stock .............................. 400
Treasury Stock ................................................... 4,000
Issued 200 shares of treasury stock at $18
per share (purchase price = $20).
Dec. 15 Dividends, Preferred Stock ..................................... 5,000
Cash .................................................................... 5,000
Declared and paid the 10% cash dividend
on preferred stock ($50,000  0.10).
31 Revenues ................................................................. 260,000
Retained Earnings.............................................. 40,000
Expenses ............................................................ 220,000
Closed net income to Retained Earnings.
31 Retained Earnings ................................................... 18,500
Dividends, Preferred Stock ............................... 5,000
Dividends, Common Stock ................................ 13,500

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Chapter 11

Closed dividends to Retained Earnings.

2. The equity section is easily prepared by using the following T-accounts to ac-
cumulate the end-of-period balances.

Preferred Stock Common Stock

Beg. Bal. 50,000 Beg. Bal. 75,000

Paid-In Capital in Excess of Par, Paid-In Capital in Excess of Par,

Preferred Stock Common Stock
Beg. Bal. 2,000 Beg. Bal. 25,000

Retained Earnings Treasury Stock

Beg. Bal. 102,000 8/15 20,000 9/30 10,000
12/31 18,500 12/31 40,000 11/1 4,000
End. Bal. 123,500 End. Bal. 6,000

Paid-In Capital, Treasury Stock Dividends, Common Stock

11/1 400 9/30 500 10/15 13,500 12/31 13,500
End. Bal. 100 End. Bal. 0
Dividends, Preferred Stock
12/15 5,000 12/31 5,000
End. Bal. 0

Nielsen Corporation
Partial Balance Sheet
December 31, 2022
Equity
Contributed Capital:
Preferred stock ($50 par value, 10%, 10,000 shares authorized,
1,000 shares issued and outstanding) ........................................ $ 50,000
Common stock ($15 par value, 100,000 shares authorized,
5,000 shares issued, 4,700 shares outstanding) ........................ 75,000
Paid-in capital in excess of par, preferred stock ............................. 2,000
Paid-in capital in excess of par, common stock .............................. 25,000
Paid-in capital, treasury stock .......................................................... 100
Total contributed capital .............................................................. $152,100
Retained earnings .............................................................................. 123,500
Total contributed capital plus retained earnings ....................... $275,600
Less treasury stock (300 shares of common stock at $20 cost) .... (6,000)
Total equity .................................................................................... $269,600

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 Chapter 11

3. Earnings per share is computed by dividing net income by the number of

shares of common stock outstanding. When a company purchases treasury
stock, fewer shares are outstanding. However, purchasing treasury stock also
uses corporate assets (cash), so the amount of assets available to generate
earnings also decreases. Accordingly, the net effect on earnings per share
from a treasury stock purchase is not certain.

P 11-8 (LO3, LO4) Dividend Transactions and Calculations

1. 2022
Jan. 1 Memo entry: Received authorization for 150,000 shares of 5%
cumulative preferred stock, par value $15.
2 Cash.......................................................................... 280,000
Preferred Stock .................................................. 210,000
Paid-In Capital in Excess of Par, Preferred
Stock ................................................................ 70,000
Issued 14,000 shares of preferred stock at
$20 per share.

June 1 Treasury Stock ........................................................ 900,000

Cash .................................................................... 900,000
Repurchased 36,000 shares of common
stock at $25 per share.
2 Dividends, Preferred Stock ..................................... 10,500
Dividends, Common Stock ..................................... 9,500
Dividends Payable ............................................. 20,000
Declared a $20,000 cash dividend.
Calculation of Dividend Distribution:
Preferred Common
Stock Stock
Current preference ............................. $10,500
Remaining portion .............................. $9,500
$10,500 $9,500
*14,000 shares × $15 par value × 5% = $10,500
30 Dividends Payable ................................................... 20,000
Cash .................................................................... 20,000
Paid the cash dividend.

2. Total Preferred Common

Dividends Stock Stock
June 2 ....................................................... $ 20,000 $10,500 $ 9,500
December 31 ............................................ 150,000 0 150,000
$170,000 $10,500 $159,500

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Chapter 11

3. The preferred stockholders did not receive the current-dividend preference of

$10,500 in part (2) because they had already received the full annual dividend
for 2022 on June 30 (declared June 2).

P 11-9 (LO3, LO4) Preparing the Equity Section and Recording Dividends

1. The Candy Jar

Partial Balance Sheet
December 31, 2022
Equity
Contributed Capital:
Preferred stock (10%, $20 par value, cumulative 50,000 shares
authorized, issued, and outstanding) ......................................... $1,000,000
Common stock ($15 par value, 300,000 shares authorized,
150,000 shares issued and outstanding) .................................... 2,250,000
Paid-in capital in excess of par, preferred stock ............................. 100,000
Paid-in capital in excess of par, common stock .............................. 750,000
Total contributed capital .............................................................. $4,100,000
Retained earnings .............................................................................. 700,000*
Total equity .................................................................................... $4,800,000
*Retained earnings calculation:
Beginning balance ............................................................................. $ 0
Net income (2019–2022)..................................................................... 1,250,000
Less dividends (2019–2022) .............................................................. (550,000)
Ending balance ................................................................................... $ 700,000

2. To determine how much of the 2022 dividends go to the preferred and common
stockholders, dividends paid in the years 2019–2022 must be examined for div-
idends in arrears as follows:
Dividends
Total in Arrears
Year Dividend Preferred Common at the End of Year
2019 $100,000 $100,000 $ 0 $ 0
2020 300,000 100,000 200,000 0
2021 0 0 0 100,000
2022 150,000 150,000 0 50,000
Dividends, Preferred Stock .................................................... 150,000
Cash .................................................................................... 150,000
Paid cash dividends of $150,000.

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 Chapter 11

P 11-10 (LO3, LO4) Equity Calculations

1. Answers to parts (a)–(d) are based on the following journal entries:

Cash (7,000 shares  $12)............................................ 84,000
Common Stock (7,000 shares  $1) ....................... 7,000
Paid-In Capital in Excess of Par, Common Stock 77,000
Dividends, Preferred Stock ......................................... 25,000
Dividends Payable .................................................. 25,000
Dividends Payable ....................................................... 25,000
Cash ......................................................................... 25,000
Treasury Stock (3,000 shares  $14)........................... 42,000
Cash ......................................................................... 42,000
Cash (2,500 shares  $16)............................................ 40,000
Treasury Stock (2,500 shares  $14) ..................... 35,000
Paid-In Capital, Treasury Stock ............................. 5,000
a. $8,000 + $7,000 = $15,000
b. $12,000 + $77,000 = $89,000
c. $5,000
d. $3,000 + $15,000 + $1,500 + $89,000 + $5,000 + $7,400 – $7,000 = $113,900

2. Beginning retained earnings + Net income – Dividends = Ending retained earn-

ings $18,200 + Net income – $25,000 = $7,400
Net income = $14,200

P 11-11 (LO3, LO4) Unifying Concepts: Stock Transactions and the Equity Section

1. a. No journal entry is required, but a memo entry will be made in the board
of directors’ minutes.
b. Cash ................................................................................. 600,000
Common Stock .......................................................... 500,000
Paid-In Capital in Excess of Par, Common Stock ... 100,000
Issued 25,000 shares of $20 par-value common
stock at $24 per share.
c. Cash ................................................................................. 80,000
Preferred Stock .......................................................... 50,000
Paid-In Capital in Excess of Par, Preferred Stock ... 30,000
Issued 10,000 shares of $5 par-value preferred
stock at $8 per share.
d. Cash ................................................................................. 110,000
Common Stock, No-Par ............................................. 110,000
Issued 5,000 shares of no-par common stock at
$22 per share.

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Chapter 11

e. Treasury Stock, Common ............................................... 25,000

Cash ............................................................................ 25,000
Repurchased 1,000 shares of $20 par-value
common stock at $25 per share.
f. Treasury Stock, Common, No-Par ................................. 10,000
Cash ............................................................................ 10,000
Repurchased 500 shares of no-par common
stock for $20 per share.
g. Cash ................................................................................. 5,750
Retained Earnings ........................................................... 500
Treasury Stock, Common ......................................... 6,250
Resold, for $23 per share, 250 shares of $20 par-
value common stock that was previously pur-
chased at $25 per share.
h. Cash ................................................................................. 11,500
Treasury Stock, Common, No-Par ............................ 10,000
Paid-In Capital, Treasury Stock ................................ 1,500
Reissued no-par treasury stock for $23 per share;
the stock was previously purchased for $20 per share.
i. Revenues ......................................................................... 90,000
Retained Earnings ..................................................... 14,000
Expenses .................................................................... 76,000
Closed net income to Retained Earnings.

2. The equity section can be easily prepared if T-accounts are used to update the
account balances, as follows:

Paid-In Capital in Excess of Par,

Common Stock Common Stock
(b) 500,000 (b) 100,000

Paid-In Capital in Excess of Par,

Preferred Stock Preferred Stock
(c) 50,000 (c) 30,000

Common Stock, No-Par Treasury Stock, Common

(d) 110,000 (e) 25,000 (g) 6,250
End. Bal. 18,750

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 Chapter 11

Treasury Stock, Common, No-Par Retained Earnings

(f) 10,000 (h) 10,000 (g) 500 (i) 14,000
End. Bal. 0 End. Bal. 13,500

Paid-In Capital, Treasury Stock

(h) 1,500

Richard Corporation
Partial Balance Sheet
December 31, 2022
Equity
Contributed Capital:
Preferred stock ($5 par value, 6%, 50,000 shares authorized, 10,000
shares issued and outstanding) .................................................. $ 50,000
Common stock ($20 par value, 100,000 shares authorized, 25,000
shares issued, 24,250 shares outstanding) ................................ 500,000
Common stock (no par, 50,000 shares authorized, 5,000 shares
issued and outstanding) .............................................................. 110,000
Paid-in capital in excess of par, preferred stock ............................. 30,000
Paid-in capital in excess of par, common stock .............................. 100,000
Paid-in capital, treasury stock .......................................................... 1,500
Total contributed capital .............................................................. $791,500
Retained earnings .............................................................................. 13,500
Total contributed capital plus retained earnings ....................... $805,000
Less treasury stock (750 shares at cost) ......................................... (18,750)
Total equity .................................................................................... $786,250

P 11-12 (LO5) Equity Section with Selected “Other Information”

1. Glory Company did make a profit in 2022. Since retained earnings was affected
by only net income and dividends and since the balance in retained earnings
increased by $10.6 million ($51.8 – $41.2), net income exceeded dividends by
$10.6 million.
2. Two contributed capital accounts increased during 2022. Common Stock in-
creased by $5.2 million ($48.4 – $43.2) and Paid-In Capital increased by $7.3
million ($22.6 – $15.3) during 2022. Thus, the total amount of money raised by
selling stock was $12.5 million.
3. The market value of Glory Company’s securities that affect the equity section
decreased substantially during the year. The amount of the decrease was $37.6
million ($46.4 accumulated loss at end of year – $8.8 accumulated loss at be-
ginning of year).

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Chapter 11

4. Even though total equity decreased substantially, it wasn’t necessarily man-

agement’s fault. In fact, it appears that the company was quite profitable in the
year 2022 as shown by part (1). The substantial decrease was caused by factors
beyond management’s control. In particular, the negative foreign currency
translation adjustment and the reduction in market value of debt and equity
securities were to blame. Unless the board of directors believes management
can control such things as the stock market and exchange rates, they probably
should not punish management for the decrease in equity.

P 11-13 (LO3, LO5) Unifying Concepts: Stock Transactions, the Equity Section,
and the Statement of Changes in Equity

1. 2022
Feb. 15 Treasury Stock ........................................................ 108,000
Cash .................................................................... 108,000
Purchased 6,000 shares of treasury stock
at $18 per share.
May 21 Cash.......................................................................... 73,500
Treasury Stock ................................................... 63,000
Paid-In Capital, Treasury Stock ........................ 10,500
Reissued 3,500 of the treasury shares pur-
chased on February 15; selling price was
$21 per share.
Sept. 15 Cash.......................................................................... 264,000
Common Stock ................................................... 120,000
Paid-In Capital in Excess of Par, Common
Stock ................................................................ 144,000
Issued 12,000 shares of common stock at
$22 per share.
Dec. 21 Cash.......................................................................... 57,500
Treasury Stock ................................................... 45,000
Paid-In Capital, Treasury Stock ........................ 12,500
Reissued the remaining 2,500 treasury shares
purchased on February 15; selling price was
$23 per share.
31 Revenues ................................................................. 291,600
Retained Earnings.............................................. 91,600
Expenses ............................................................ 200,000
Closed net income to Retained Earnings.

2. Probably the easiest way to prepare the equity section of the balance sheet is
to first prepare T-accounts with the beginning equity balances, then post the
equity part of the journal entries, and finally compute the ending balances to
be reported in the equity section.

© 2021 Cengage. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
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 Chapter 11

P 11-13 (LO3, LO5) (Continued)

Paid-In Capital in Excess of Par,

Common Stock Common Stock
Beg. Bal. 700,000 Beg. Bal. 140,000
9/15 120,000 9/15 144,000
End. Bal. 820,000 End. Bal. 284,000

Treasury Stock Paid-In Capital, Treasury Stock

2/15 108,000 5/21 63,000 5/21 10,500
12/21 45,000 12/21 12,500
End. Bal. 0 End. Bal. 23,000

Retained Earnings
Beg. Bal. 173,000
12/31 91,600
End. Bal. 264,600

JCB Corporation
Partial Balance Sheet
December 31, 2022
Equity
Contributed Capital:
Common stock, $10 par value, 150,000 shares authorized,
82,000 shares issued and outstanding ....................................... $ 820,000
Paid-in capital in excess of par, common stock .............................. 284,000
Paid-in capital, treasury stock .......................................................... 23,000
Total contributed capital .............................................................. $1,127,000
Retained earnings .............................................................................. 264,600
Total equity .................................................................................... $1,391,600

© 2021 Cengage. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
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Chapter 11

P 11-13 (LO3, LO5) (Continued)

3. JCB Corporation
Statement of Changes in Equity
For the Year Ended December 31, 2022
Paid-In
Capital
in Excess Paid-In
Common of Par, Capital, Total
Stock Common Retained Treasury Treasury Stockholders’
Shares Amount Stock Earnings Stock Stock Equity
Balance, December 31, 2021 ....... 70,000 $700,000 $140,000 $173,000 $ 0 $ 0 $1,013,000
Net income .................................... ........... .............. ........... 91,600 ............. ........... 91,600
Purchase of treasury stock
(6,000 shares at $18) ............... ........... .............. ........... ............. (108,000) ........... (108,000)
Sale of treasury stock
(3,500 shares at $21) ............... ........... .............. ........... ............. 63,000 10,500 73,500
Issuance of 12,000 previously
unissued shares at $22 .......... 12,000 120,000 144,000 ............. ............. ........... 264,000
Sale of treasury stock
(2,500 shares at $23) ............... ........... .............. ........... ............. 45,000 12,500 57,500

Balance, December 31, 2022 ....... 82,000 $820,000 $284,000 $264,600 $ 0 $23,000 $1,391,600

© 2021 Cengage. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different from the U.S. Edition. May not be scanned, copied,
duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 11

ANALYTICAL ASSIGNMENTS

AA 11-1 To Pay or Not To Pay Dividends

Discussion
Some companies, often known as growth companies, prefer to plow their earnings back into the company
rather than to pay dividends. They rationalize that by investing earnings in the company, the company will
grow and investors will benefit, because the stock price of the company will increase to recognize the
increased value of the company. This is especially true in the high-tech, computer area, where business
changes so quickly that earnings must often be invested to keep up. Although investors of Lenny Company
are not getting cash dividends, the stock price has gone up 400% so they should be happy. Many investors
have doubled, tripled, and even quadrupled their money, depending on when they bought the stock. Paying
dividends and investing only part of the earnings back in the company is a more conservative approach,
and the stock price of these companies usually doesn’t increase as fast as that of growth companies.

AA 11-2 You Decide: Should partners of a business be held personally liable

for the debts of the business, or should their business activities and
debts be kept separate from their personal activities?

Judgment Call
Issues to be discussed with this question are:

1. When one becomes a partner, he or she is liable for the debts of the other partners. Any partner can
sign the partnership’s name, so there must be a level of trust among the partners.
2. Because of partnership obligations, partners often create a written partnership agreement when they
form the partnership that specifies how much money each partner will contribute, how profits and losses
will be shared, and so forth. However, all partners are liable for the debts of the partnership.
3. If partners don’t want to be personally liable for the actions of the other partners, they should incorporate
as a corporation.

AA 11-3 You Decide: Should companies be required to pay cash dividends on

their stock to shareholders, or should it be left up to the companies’
discretion whether they pay dividends or reinvest those funds back in
the company?

Judgment Call
Issues to be discussed with this question are:

1. The return an investor gets comes from two sources: (1) from dividends and (2) from increases in the
stock price (you can sell the stock at a higher price than you bought it and make a profit).
2. Companies argue that if they don’t pay dividends, they can put the money back into the company, make
it grow faster, and thus the stock price will increase faster.
3. Companies that pay dividends regularly are referred to as dividend companies, and companies that
don’t are often referred to as growth companies. Having some companies that pay regular dividends
and some that don’t provides investors with options.

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 Chapter 11

AA 11-4 Philips

Real Company Analysis

1. Common stockholders received €453 million in dividends.
2. Looking at the statement of changes in equity would indicate that Philips repurchased more shares
than it issued during the 2019 fiscal year. Looking at the statement indicates that the company issued
9.1 million shares relating to the dividends distributed and 8.1 million shares relating to the re-issuance
of treasury shares and repurchased 40.4 million shares.
Note: For the complete Philips’s 2019 financial statements in Appendix B, please visit
[Link]

AA 11-5 Buying Your Own Shares Back

Ethics
Buying back the company’s own stock could result in the per-share stock price increasing because it
sends a signal that management believes the stock is a good buy. Although the value of the company ac-
tually decreases (because cash is used to buy back the stock), there are fewer shares outstanding over
which to allocate the smaller value. Theoretically, the stock price should stay the same because the total
assets of the company per share are the same. If the stock price goes up, this plan may seem like a win-
win situation. If the stock buyback is motivated by management’s sincere belief that the stock is under-
valued, or if management is using unneeded cash to finance the buyback, then the action seems to be a
responsible one. However, if the buyback is merely a ploy to temporarily boost the price per share in
order to benefit management bonuses, then clearly the action is not in the best interest of the share-hold-
ers.

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from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Chapter 11

SOLUTIONS TO "STOP & THINK"

Stop & Think (p. 492): If you were a Microsoft shareholder, would you want to receive a high level of cash
dividends, or would you prefer that Microsoft use your share of the profits for business expansion?

If Microsoft were to pay you a cash dividend, what would you do with the money? You might use it for living
expenses, for travel, for a new car, or to reinvest somewhere. If you want to use it to reinvest, do you have
an investment in mind that you think will be superior to Microsoft? If you don’t have any hot stock tips, you
might be better off to leave your investment money in the hands of Bill Gates.

Stop & Think (p. 500): Which will have a greater impact on a company’s stock price: net income of $100
million or a $100 million unrealized gain from a change in exchange rates or securities prices?

A $100 million unrealized gain from a change in exchange rates or securities prices is a one-time event that
reflects an increase of $100 million in the value of the company. There is no reason to believe that a favor-
able movement in prices or exchange rates this year will be followed by similar changes in future years. In
contrast, net income of $100 million represents not only an increase in wealth in the current year, but also
suggests that there will be a similar increase next year, the year after, and so on. This continuing stream of
income arises because the same business processes that produced the $100 million this year are likely to
be in place in future years. Thus, a one-time gain really reflects a single stroke of good fortune for a com-
pany, whereas the existence of net income indicates that the company has profitable business processes
in place. So, net income of $100 million should have a greater impact on a company’s stock price.

© 2021 Cengage. All Rights Reserved. This edition is intended for use outside of the U.S. only, with content that may be different
from the U.S. Edition. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.