Solution manual financial accounting 8th by harrison CH09

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Chapter 9
Stockholders’ Equity
Short Exercises
(5 min.)

S 9-1

Corporation’s advantages:
Continuous life
Transferability of ownership (listed as two items on page
536)
Limited liability of the stockholders
Ease of raising capital (page 536)
Corporation’s disadvantages:
Corporate taxation
Government regulation
Separation of ownership and management (per text page
536)

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(5 min.)

S 9-2

1. The stockholders hold ultimate power in a corporation.
2. The chairperson of the board of directors is usually the most
powerful person in a corporation. Title is CEO.
3. The president is in charge of day-to-day operations. Title is
COO.
4. The chief financial officer is in charge of accounting and
finance. Title is CFO.

Chapter 9

Stockholders’ Equity

717


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(5-10 min.)

S 9-3

1. The common stockholders are the real owners of a
corporation
2. Preferred stockholders have priority over common
stockholders in (1) receipt of dividends and (2) receipt of
assets if the corporation liquidates.
3. Common stockholders benefit more from a successful
corporation because the preferred stockholders’ dividends
are limited to a specified amount. The common stockholders

take more risk so their potential for gains through an
increase in the company’s stock price is unlimited.

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(5-10 min.)
DATE:

_____________

TO:

Karen Scanlon and Jennifer Shaw

FROM:

Student Name

RE:

Steps in forming a corporation

S 9-4

The first step in organizing a corporation is to obtain a charter

from the state. The charter authorizes the corporation to issue
a certain number of shares of stock to the owners of the
business, who are called stockholders. The corporation will
exist when the incorporators
(Per page 536) Pay fees,
Sign the charter,
File documents with the state, and
Agree to a set of bylaws to determine how the corporation
is to be governed internally.
Later steps include the stockholders will electing a board
of directors who in turn appoint officers to manage the
corporation on a day-to-day basis. These officers consist
of the chairperson of the board (the chief executive
officer) and the president (the chief operating officer) who
lead the chief financial officer who manage the day to day
operations of the controller (accounting officer) and
treasurer (finance officer).
Chapter 9

Stockholders’ Equity

719


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(5-10 min.)

S 9-5

The $72,927,000 was paid-in capital. It was not a profit and
therefore had no effect on net income.
The par value of stock has no effect on total paid-in capital.
Total paid-in capital is the total amount that stockholders have
invested in (paid into) a corporation, including the par value of
stock issued plus any additional paid-in capital.

(10 min.)

S 9-6

Millions
Horris Printer:
Cash…………………………………………….
Common Stock…………………………….
Additional Paid-in Capital………………..
Delectable Doughnuts:
Cash…………………………………………….
Common Stock…………………………….

720

Financial Accounting 8/e Solutions Manual

17,123
23
17,100

292
292

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(10 min.)

S 9-7

Case A — Issue stock and buy the assets in separate
transactions:

Journal
DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Cash……………………………………….. 800,000
Common Stock (12,000 × $20)……...
240,000
Paid-in Capital in Excess of Par……
560,000
Issued stock.
Building…………………………………… 550,000
Equipment………………………………… 250,000
Cash……………………………………..
800,000

Purchased plant assets.
Case B — Issue stock to acquire the assets:

Journal
DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Building…………………………………… 550,000
Equipment………………………………... 250,000
Common Stock (12,000 × $20)…
240,000
Paid-in Capital in Excess of Par…...
560,000
Issued stock to acquire building and equipment.
The balances in all accounts are the same:
Building……………………………………
Equipment……………………………….…
Common Stock (12,000 x $20
Paid-in Capital in Excess of Par………
Chapter 9

$550,000
250,000
240,000
560,000

Stockholders’ Equity

721


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(5-10 min.)

S 9-8

Thousands
Stockholders’ equity:
Common stock, $.01 par, 400 thousand shares
issued……………………………………………...
Paid-in capital in excess of par…………………..
Retained earnings…………………………………..
Other stockholders’ equity………………………..
Total stockholders’ equity………………………...

$ 4
196
647
(22)
$825

(10 min.)

S 9-9

Amounts In Thousands
a. Total revenues………………………………………..
$1,340
Total expenses………………………………………..
806
Net income………………………………….…………
$ 534
b. Accounts payable……………………………………
Other current liabilities……………………………...
Long-term debt………………………………….
Total liabilities………………………………………...

$ 440
2,569
27
$3,036

c. Total liabilities (from Req. b)……………………….
Total stockholders’ equity (from S 9-7)…………..
Total assets……………………………………………

$3,036
825
$3,861

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(5 min.)

S 9-10

Journal
DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

Treasury Stock……………………………...
Cash………………………………………..
Cash…………………………………………..
Treasury Stock…………………………..
Paid-in Capital from Treasury Stock
Transactions…………………………..

CREDIT

Millions
29
29
8
2
6

Overall, stockholders’ equity decreased by $21 million ($29
million paid out minus $8 million received).

Chapter 9

Stockholders’ Equity

723


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(15-20 min.)

S 9-11

Req. 1
MEMORANDUM
TO:

Susan Smith Exports, Inc., Board of Directors

FROM:

Student Name

RE:

How the purchase of treasury stock will make it more
difficult for outsiders to take over the company

Purchasing treasury stock decreases the amount of stock
outstanding. If Susan Smith Exports holds a sufficient quantity
of company stock in the treasury, outsiders, such as the Mobile
investor group, may not be able to acquire a controlling interest
(50+ percent) of the outstanding stock from the remaining
stockholders. Because it takes cash to buy treasury stock, the
purchase decreases the size of the corporation. Reducing the
company’s cash position may make the company sufficiently
unattractive to cause the outside investors to abandon their
takeover plan.
Req. 2
Sales of treasury stock at prices above the purchase price
increase company assets because of the greater amount of
assets coming in from the sale than went out to buy the stock.
Treasury stock transactions do not affect liabilities, so the sale
of treasury stock also increases stockholders’ equity. These
sales of treasury stock will not affect net income because the
company is dealing with its owners. Transactions between the
corporation and its owners cannot generate a profit or a loss
that is reported on the income statement.
Student responses may vary.
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(10 min.)

S 9-12

Journal
DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

2010
Dec. 15 Retained Earnings
($110,000 × .06) + (45,000 × $1.00)… 51,600
Dividends Payable…………………
Declared a cash dividend……………
2011
Jan. 4 Dividends Payable…………………… 51,600
Cash………………………………….
Paid the cash dividend.

CREDIT

51,600

51,600

During 2010, Retained Earnings increased by $43,400 (net
income of $95,000 − dividends of $51,600).

(5-10 min.)

S 9-13

1. $360,000 (200,000 shares × $1.80 per share)
2. Preferred: $360,000
Common: $ 40,000
3. Cumulative, because it is not labeled noncumulative
4. Preferred: $1,080,000 ($360,000 × 3)
Common: $ 420,000 ($1,500,000 − $1,080,000)

Chapter 9

Stockholders’ Equity

725


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(5-10 min.)

S 9-14

Req. 1

Journal
DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

May 11 Retained Earnings (13,000 × .15 × $25.00)…… 48,750
Common Stock (13,000 × .15 × $3)………...
5,850
Paid-in Capital in Excess of Par-Common..
42,900

Req. 2
No effect on total assets.
No effect on total liabilities.
No effect on total stockholders’ equity.

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(10 min.)
Total stockholders’
equity……………………………..
Less: Preferred
stock………………………………….
Preferred dividends in arrears
(33,000 × .04 × $5 x
3)………………………

Common
equity………………………………………….
Number of common shares outstanding
(63,000 −
1,400)………………………………………..
Book value per share of common
stock…………….

S 9-15

$4,146,000
(195,000)

(19,800)
$3,931,200

÷ 61,600
$

Chapter 9

63.82

Stockholders’ Equity

727


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(5-10 min.)

S 9-16

(a)

Rate of return
on total
=
assets

(b)

Rate of return
on common
Net income − Preferred dividends
=
stockholders'
Average common stockholders’ equity
equity

Net income + Interest expense
Average total assets

1. Creditors have loaned money to the company and earn
interest. Stockholders have invested in the corporation’s
stock and thus own the company’s net income. The sum of
interest expense plus net income is the return to the two
groups that have financed the company’s assets.
2. Preferred stockholders have the first claim to the company’s

net income through preferred dividends. Therefore, preferred
dividends are subtracted from net income to compute ROE.

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(10-15 min.)
Rate of return
on total
assets

Net
Interest
income + expense
=
Average total assets

S 9-17

=

¥120 + ¥31
(¥10,624 + ¥9,515) / 2

=

¥151
¥10,070

=

1.5%

Note: 10% is considered good in most industries. Therefore,
Godhi’s 1.5% return on assets is very weak.

Rate of return
on common
stockholders’
equity

=

Net
Preferred
income − dividends
Average common
stockholders’ equity

=

¥120 − ¥0
(¥3,212 + ¥2,878) / 2

=

¥120
¥3,045

=

3.9%

Note: 15% is considered good in most industries, so Godhi’s
return on equity is very weak.

Chapter 9

Stockholders’ Equity

729


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(20-30 min.)

S 9-18

1. Corporations report common stock and retained earnings
separately to comply with state laws. The laws require
corporations to report stockholders’ equity by source to
distinguish paid-in capital, which cannot be used for cash
dividends, from retained earnings.
2. We should first determine the market value of the land. Then
divide the land’s value by the market value of each share of

stock. The result will tell us how many shares of our stock to
issue for the land.
3. Investors buy common stock in the hope of earning higher
returns on their investment than are available on an
investment in preferred stock.
4. The redemption value of our preferred stock requires us to
pay the preferred stockholders this amount when we buy
back the preferred stock.
5. Book value
per share of
common stock

=

Total stockholders’ equity − Preferred equity
Number of shares of common stock outstanding

The stockholder can multiply book value per share by the
number of shares she owns. The result will be the book value
of her stock.

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(5-10 min.)

S 9-19
Billions

Cash flows from financing activities:
Paid off long-term notes payable…………………….
Issued common stock………………………………….
Purchased treasury stock……………………………..
Paid cash dividends……………………………………
Cash flows from financing activities

Chapter 9

$(2.4)
1.1
(3.5)
(1.6)
$(6.4)

Stockholders’ Equity

731


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Exercises
Group A
(5-10 min.)

E 9-20A

Req. 1

Journal
DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

Jan. 19 Cash (12,000 × $6.00)…………………
Common Stock (12,000 × $2.00) ..
Paid-in Capital in Excess of
Par - Common .............................

72,000

Apr.

3 Cash ....................................................
Preferred Stock .............................

54,000

11 Inventory .............................................
Equipment ...........................................
Common Stock (3,700 × $2.00) ....
Paid-in Capital in Excess of
Par - Common .............................

16,000
9,500

CREDIT

24,000
48,000

54,000

7,400
18,100

Req. 2
Stockholders’ equity:
Preferred stock, $1.00, no par
10,000 shares authorized, 400 shares
issued………
Common stock, $2.00 par,
19,000 shares authorized, 15,700 shares issued…
Paid-in capital in excess of par-common
($48,000 +
$18,100)……………………………………….
Retained earnings (deficit)………………………….……
732

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$54,000

31,400
66,100
(43,000)


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Total stockholders’ equity……………………….……

Chapter 9

$108,500

Stockholders’ Equity

733


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(10-15 min.)

E 9-21A

Stockholders’ Equity
Preferred stock, $4.50 no-par, 10,000 shares
authorized, 600 shares issued ................................. $ 22,000
Common stock, $1.50 par, 19,000 shares
authorized, 5,000 shares issued
7,500

Paid-in capital in excess of par - common .................. 80,550*
Retained earnings .......................................................... 45,000
Total stockholders’ equity........................................ $155,050
_____
*Computation:
April 23: 1,700 shares × ($16.50 − $1.50) =……………………
$25,500
May 12: $19,000 + $41,000 − (3,300 shares × $1.50) =………. 55,050
$80,550

Journal entries (not required):
Apr. 23 Cash……………………………………...
Common Stock ..............................
Paid-in Capital in Excess of Par…

28,050

May

2 Cash ....................................................
Preferred Stock .............................

22,000

12 Inventory .............................................
Equipment ...........................................
Common Stock ..............................
Paid-in Capital in Excess of Par…

19,000

41,000

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2,550
25,500

22,000

4,950
55,050


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(10 min.)
Paid-in capital consists of:
Preferred equity:
Issued for cash (2,000 shares × $120) ...........
Common equity:
Issued for cash (22,000 shares × $1.00)……
Issued for organizing the corporation
Issued for patent………………………………..
Total paid-in capital……………………………………

E 9-22A

$240,000

22,000
23,000
82,000
$367,000

Unused data:
Net income
Dividends declared

Short-cut solution (also okay):
1. $ 23,000
2.
82,000
3.
240,000 (2,000 × $120)
4.
22,000 (22,000 × $1.00)
$367,000 = Total paid-in capital

Chapter 9

Stockholders’ Equity

735


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(10-15 min.)

E 9-23A

Stockholders’ Equity (Thousands)
Common stock, $0.75 par, 800 shares
authorized, 320 shares issued……………………… $

240

Paid-in capital in excess of par…………………………

899

Retained earnings…………………………………………

2,220

Other stockholders’ equity………………………………

(730)

Less: Treasury stock, common, 100 shares at cost..

(1,150)

Total stockholders’ equity…………………………...

$1,479

Patterson Software paid a higher price to acquire treasury
stock than the price Patterson received when it issued its

stock. This explains why Treasury Stock has a greater balance
than the sum of Common Stock plus Paid-in Capital in Excess
of Par.

736

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(10-15 min.)

E 9-24A

Journal
DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

CREDIT

Jan. 17 Cash (2,200 × $10)…………………….
22,000
Common Stock (2,200 × $2.50)………
5,500
Paid-in Capital in Excess of Par…….
16,500

To issue common stock.
May 23 Treasury Stock - Common (300 × $12)...
Cash……………………………………...
To purchase treasury stock.

3,600
3,600

Jul. 11 Cash (200 × $20)…………………………... 4,000
Treasury Stock - Common (200 × $12)
2,400
Paid-in Capital from Treasury
Stock Transactions………………..
1,600
To sell treasury stock.

Overall effect on stockholders’ equity
($22,000 − $3,600 + $4,000)………………………………
increase

Chapter 9

$22,400

Stockholders’ Equity

737


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(10 min.)

E 9-25A

Journal
DATE

ACCOUNT TITLES AND EXPLANATION

DEBIT

Millions
108
16
92

b.

Cash (8 million × $13.50)…………………….
Common Stock (8 million × $2.00)……...
Capital in Excess of Par Value………….

c.

Treasury Stock………………………………..
Cash………………………………………….

16

Retained Earnings……………………………
Dividends Payable…………………………

31

Dividends Payable……………………………
Cash……………………………………….…

31

or one entry only:
Retained Earnings …………………………...
Cash……………………………………….…

31

d.

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Financial Accounting 8/e Solutions Manual

CREDIT

16

31

31

31


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(10 min.)

E 9-26A
Dollars in
Millions

Stockholders’ Equity:
Common stock, $2.00 par value,
10.1 million shares issued ($4.2 + $16.0)
Capital in excess of par value ($8,400 + $92,000)
Retained earnings ($250 + $446 − $31)…………
Treasury stock, 2 million shares at cost………….
Total stockholders’ equity…………………………

Chapter 9

$ 20,200
100,400
665
(16,070)
$105,195

Stockholders’ Equity

739

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(20-30 min.)

E 9-27A

Req. 1
Conversion of preferred stock into common stock
Retirement of preferred stock

Req. 2
Issuance of common stock:
a. To preferred stockholders who converted their preferred
into common
b. For cash or other assets
c. Stock dividend

Req. 3
(Millions
of shares
of stock)
Dec. 31, 2011
Common shares issued…………………………….
300
Less: Treasury stock, number of shares………
(52)
Common shares outstanding……………………...
288

740

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