第四版《财务会计》练习答案10

CHAPTER 10COVERAGE OF LEARNING OBJECTIVESChapter 10 Stockholders’ Equity 373CHAPTER 1010-1 The preemptive privilege gives present shareholders the opportunity to purchase additional shares directly from the corporation before new shares can be sold to the general public. In this way, the shareholders are able to maintain their percentage ownership.10-2 Unlike individual proprietors or partners, stockholders’personal assets cannot be claimed by creditors to satisfy the debts of an incorporated entity.10-3 No. Before a share of common stock can be outstanding, it must be duly authorized and issued.10-4 No. Treasury stock is issued stock that has been repurchased by the issuer and is no longer outstanding.10-5 Dividends are never liabilities unless declared. Here liabilities is used in the strict accounting sense. Cumulative dividends are conditional obligations as the statement implies.10-6 No. Liquidating value is the dollar measurement of the preference to receive assets in the event of corporate liquidation.10-7 Convertible securities are bonds and stocks that can be transformed into common shares at the option of the holder.10-8 Preferred stock and debt both have fixed payment rates. A payment on preferred stock is called a dividend while the payment on debt is called interest. While interest is a legal obligation on the periodic payment date, dividends on preferred and common stock are not an obligation of the company until declared by the board of directors. Interest is an expense and reduces net income while preferred and common dividends do not reduce net income. Finally interest and dividends are often taxed differently for both the issuer and the investor.10-9 Bonds are riskier for the corporation because interest and principal payments are legal responsibilities. Preferred stock is riskier for the investor because the corporation has no legal obligation to pay dividends and most preferred stocks have an infinite life.10-10 When a company grants a stock option to an executive, it is giving something of value for services rendered. Existing financial models allow us to measure the value of these options when they are granted. When the company grants other items of value to employees, they record an expense.10-11 Stock options reward the employees only if the stock appreciates in value. Stock options create incentives for employees to work hard in the best interests of the shareholders.There can also be tax advantages to options.37410-12 Cash dividends are real in the sense that they require the disbursement of assets. Stock dividends involve disbursement of real assets only when the dividend rate per share is maintained and a stock dividend results in an increase in total dividends.10-13 No. It is impossible to increase every shareholders’ fractional portion of the company because every shareholder receives the same proportional distribution.10-14 The use of high-percentage stock dividends (20% or more) is merely another way of obtaining a stock split. Sometimes such transactions are called a ―stock split effected in the form of a stock dividend.‖ While the economic effects are the same for large stock dividends and for splits, different stockholders’ equ ity accounts may be involved in the accounting.10-15 Yes, if shares are repurchased and permanently retired, the purchase price is charged against common stock, additional paid-in capital, and retained earnings. If the shares are to be held only temporarily, they are listed as treasury stock and deducted from stockholders’ equity in total, and individual parts of stockholders’ equity are not reduced.10-16 No. To retire shares, a company must pay the market price per share.10-17 There are many reasons a company might buy back its own stock. It might be the most efficient way to distribute excess cash to shareholders, especially after considering tax consequences. It also allows more flexibility in timing and amount of payment than does the payment of dividends. Further, it may not create an expectation of higher dividends in the future. Finally, it can demonstrate management’s confidence in the prospects for the company.10-18 Treasury stock is not an asset because it is a reduction of stockholders’ equity. Treasury stock is acquired by distributing cash or other assets to shareholders. It arises from a return of assets previously contributed by shareholders.10-19 Although the specific accounting for transactions in the company’s own stock may vary from company to company, one rule is paramount. Any difference between the acquisition price and resale price of treasury stock is never reported as a loss, expense, revenue, or gain in the income statement. Why? A corporation’s own capital stock is part of its capital structure. It is not an asset of the corporation. Nor is stock intended to be treated like merchandise for sale to customers at a profit. Therefore, changes in a corporation's capitalization should produce no accounting gain or loss, but should be recorded as direct adjustments to the stockholders’ equity.10-20 The proper amount is the ―fair value‖of either the issued securities or the incoming assets, whichever is more objectively determinable. That same amount should be used by both parties to the exchange.Chapter 10 Stockholders’ Equity 37510-21 A conversion option allows an investor to participate in a company’s success by converting to common shares. Meanwhile, the investor can receive the interest on bonds or dividends on preferred stock, and they do not bear the risk of declines in the price of the common stock. These options are valuable, so they make the bond or preferred stock more valuable to an investor.10-22 A voluntary restriction on dividend-declaring power may take the form of a reserve for contingencies (also called an appropriation of retained earnings for contingencies). The reserve may be used to restrict dividend payments in order to retain cash for a particular purpose such as plant expansion. Completely involuntary are restrictions under state law that prohibit payment of dividends if retained earnings is negative or debt covenants restrict such payments.10-23 Restrictions on dividend-declaring power protect the rights of creditors. Such restrictions may be a necessary to borrow money. They may also reduce the interest rate lenders would require. Finally, restrictions inform investors about the intentions of the board.10-24 ROE provides information about the returns investors in general get from the cumulative investments they have made in the company. However, most investors do not buy shares directly from the company; they buy them from other investors in the market. Thus, what a shareholder pays is often quite different from his or her share of stockholders’ equity (book value p er share). An individual investor’s return is best measured by dividends plus price increase divided by the price paid for the shares.10-25 A common stock with a market price of less than book value may not necessarily be an attractive investment. The forecasted earnings of the company may be too low to justifya higher market price. The book value may not recognize a large contingent liabilityfrom a law suit. For example, a major uncertainty for tobacco companies relates to the possibility that lawsuits by former smokers will be successful. While the risk is real, the outcome is far too uncertain to record on the books. Further, book value includes the original costs of assets, which may be far below or above their current values.37610-26 This is a reasonable argument if companies were allowed to repurchase shares without investors knowing what they were doing. However, in the United States, companiesmust announce programs to repurchase shares and are restricted from trading around thetime of certain information events such as earnings releases. So, as long as the companyannounces that they will be repurchasing before doing so, it does not seem there is muchof a problem. As pointed out in the text, everyone is better off with repurchases thanwith dividends. Repurchases allow those who desire cash to obtain it at lower tax costthan if it were received as a dividend and protects those who do not want cash fromreceiving a dividend, paying taxes, and having to reinvest the after tax proceeds from thedividend. Further, no shareholder is forced to sell shares back to the company.10-27 The notion of gains or losses in the income statement that arise from transactions in the compan y’s own stock is problematic for two reasons. First, it suggests that the companyis in the business of buying and selling its own stock. This is false. The companyshould never seek to make gains or losses in transactions with its shareholders. So if itis not an activity that is part of the ongoing profit-making intention of the company, itshould not be shown in the income statement. Moreover, companies announce theirintentions to buy shares of their stock. It is basically a transaction that is an alternativeto issuing dividends. If the goal is to facilitate stockholders in their desires to enhancetheir cash positions without committing to cash dividends every quarter going forward, itis not a source of operating gains and losses.10-28 Your friend is onto something. Par value and the related concept of stated value both have some legal significance in various states. However, the truth is that the number ofstates and individual companies for whom it matters is small. For practical purposes,this text would probably not cover the topic if it were not so common in publishedfinancial statements.10-29 Strictly speaking, this plan does not make sense. If a stock is split or a large stock dividend is issued (more than 25%), the price per share should usually decline inproportion with the new issue. The company has no more resources than it had beforeand if each of our shares represents a smaller percentage of ownership, we should expectthe value of a share to drop proportionately.However, practically speaking, over the recent past, this has been a reasonablysuccessful strategy. It is hard to explain why. Perhaps it suggests that management’sdecision provides new information. If management did not expect things to keep goingwell, they would not undertake this step. Thus, the act of issuing a split or dividend says, ―I am rather sure things will keep going well, as they have been.‖Chapter 10 Stockholders’ Equity 37710-30 (5 min.)There were 1,750,000 shares issued and outstanding, and 1,000,000 unissued shares: Issued and outstanding: 2,000,000 – 250,000 = 1,750,000Unissued: 3,000,000 – 2,000,000 = 1,000,000Summary (not required) Number of Shares Authorized 3,000,000Unissued (1,000,000)Issued 2,000,000Deduct: Shares held in treasury (250,000)Issued and outstanding 1,750,00010-31 (5 min.) (Amounts in millions.)Issued and outstanding: 2,097 – 758 = 1,339 sharesUnissued: 4,688 – 2,097 = 2,591 sharesSummary (not required): (in millions)Number of Shares Authorized 4,688Unissued (2,591)Issued 2,097Deduct: Shares held in treasury (758)Issued and outstanding 1,33910-32 (20 min.)See Exhibit 10-32 on the following page.378EXHIBIT 10-32Liquidation of Claims Under Various Alternatives(In Thousands)Total Cash Proceeds to be DistributedAccountBalances $1,400 $1,100 $800 $600 $400 $200 Accounts payable $ 300 $ 300 $ 300 $300 $300 $240*$120* Unsubordinated debentures 200 200 200 200 200 160*80* Subordinated debentures 300 300 300 300 100Preferred stock($20 par value and $24liquidating value per share) 100 120 120Common stock and retained earnings 300 480 180Total liabilities andshareholders’ equity $1,200Total cash proceeds distributed $1,400 $1,100 $800 $600 $400 $200 * Ratio of 60:40 because of claims of $300,000 and $200,000, respectively.Chapter 10 Stockholders’ Equity 37910-33 (5–10 min.) Amounts are in millions of yen.1. Issue price = ¥158,611 ÷ 1,669.629122 shares = ¥94.9977Cash 158,611Common stock 103,517Capital surplus 55,094 To account for ¥62 par value shares issued at¥95 per share: ¥62 × 1,669.629122 = ¥103,517And (¥94.9977 – ¥62) × 1,669.629122 = ¥55,0942. In the United States, par value is usually small in relation to the issue price of commonshares. For Kawasaki Heavy Industries, the par value is ¥62 ÷ ¥94.9977 = 65% of the issue price.10-34 (15–20 min.)1. Preferred Dividends CommonDividendsNet Income Declared In Arrears Declared 20X1 $(5,000,000) –$5,000,000 –20X2 (4,000,000) –10,000,000 –20X3 15,000,000 $ 6,000,000** 9,000,000* –20X4 20,000,000 14,000,000*** –$6,000,000*** 20X5 14,000,000 5,000,000 – 9,000,000Total $40,000,000 $25,000,000 $15,000,000* $5 million per year times 3 years, less $6 million paid in 20X3.** Available to declare = $(5) + $(4) + $15 = $6 million. All goes to preferred.*** Available to declare = $20 million, preferred receives $9 million arrearage plus $5 million for 20X4, balance to common.The board of directors is not legally obligated to declare dividends at any time. Whether these amounts would be declared and paid at the indicated times would depend on the cash position, liabilities, and general financial plans. Indeed, the likelihood of these large dividends being paid so soon is small. Nonetheless, as long as the balance of retained earnings is positive, in most states, the board could legally declare dividends that would decrease the balance to zero.Holders of cumulative stock would receive accumulated dividends before the holders of common shares received any dividends. Failure to pay dividends at the specific dates results in arrearages, which is a word commonly used to describe accumulated unpaid preferred dividends. The amount of dividends in arrears is not a liability. Why? Because no dividends are liabilities until declared.3802. Net Income Dividends DeclaredPreferred Common 19X1 $(5,000,000) ––19X2 (4,000,000) ––19X3 15,000,000 $5,000,000 $1,000,00019X4 20,000,000 5,000,000 15,000,00019X5 14,000,000 5,000,000 9,000,000$40,000,000 $15,000,000 $25,000,000 If the preferred is not cumulative, preferred shareholders get only $15,000,000 compared to $25,000,000 otherwise.10-35 (5–10 min.)This preferred stock is cumulative, so all missed preferred stock dividends must be paid before paying any common stock dividends. Preferred dividends for 20X1, 20X2, and 20X3 are: .07 × $3,000,000 × 3 = $630,000After paying $630,000 in preferred dividends, $370,000 is left for common stock dividends: $1,000,000 – $630,000 = $370,00010-36 (10 min.) Amounts are in millions of yen.Amount of dividends: 1,814.6 million × ¥77 = ¥139,724 millionDeclaration: Dividends declared 139,724Dividends payable 139,724 To record dividends of ¥77 per share.Payment: Dividends payable 139,724Cash 139,724 To record payment of cash dividends.Chapter 10 Stockholders’ Equity 38110-37 (10 min.)Cash 80,000Common stock 8,000Additional paid-in capital 72,000 To record issue of 4,000 shares upon exercise ofoptions to acquire them @ $20 per share.The managers have options on stock that has a value of 4,000 × $40 = $160,000. The gain is $80,000, since they must pay $80,000 to acquire the shares. This substantial economic benefit results from a significant rise in the stock price over 3 years. Proponents of stock options would say that managers had worked hard at the company and being rewarded appropriately for the benefits the company had experienced. Critics would ask whether the whole economy and the stock market had doubled during these 3 years and, if so, would argue that managers had benefited from that general improvement.10-38 (15 min.)Because the par value of the stock increased by 50%, from $8,802,000 to $13,203,000, Dean Foods had a 3-for-2 stock split or a 50% stock dividend. The classic idea of a stock split has been to issue a number of shares in exchange for each share of stock now outstanding. Thus a 3-for-2 split of a $30-par stock would mean that a shareholder would receive three $20-par shares for each two $30-par shares exchanged. This entails no formal change in the total dollar balance of common stock.As a practical matter, companies often accomplish such a split via a 50% ―stock dividend.‖ Dean Foods used the 50% stock dividend device, thereby automatically issuing one additional share for each two shares outstanding. This necessitated charging retained earnings at par for the total additional shares issued because the par value was not reduced as it often is for a stock split. This way of obtaining a split has a great attraction because it does not involve the bother and expense of exchanging certificates.―Stock dividends‖ of 25% or more are essentially stock splits and should be accounted for as such. However, even though a stock dividend requires a reduction of the balance in Retained Earnings and an increase in Common Stock, total stockholders’equity is unaffected. In substance, there is no important difference between the two ways of accomplishing stock splits. Thus, Dean’s accounting does not conflict with the definition of a stock split—all shareholders receive additional shares without paying any additional cash and thereby maintain their percentage ownership of the company.3821. A reverse stock split, like a regular stock split, does not affect any of the account balances.Only the number of shares and the par value (which is not shown by QED) are changed.QED EXPLORATION, INC.Stockholders’ equity:Common stock, 3,000,000 shares authorized,2,353,000 shares issued $ 287,637 Additional paid-in capital 3,437,547Retained earnings 2,220,895Less treasury stock, at cost, 101,755 shares (305,250)Total stockholders’ equity $5,640,829 2. Since the number of shares is reduced by a factor of ten, the value of each share should beten times higher. This is one motivation for the reverse split, to increase the market value of each share. These issues are not discussed at length in the text, but the subsequent discussion could ask, why is this desirable? Two reasons may be worth discussing.Some investors avoid, or are prohibited from trading in shares valued below some threshold, for example, $1. Some stock exchanges, such as the NYSE, require minimum prices to remain listed for trading.A more subtle point relates to the transactions costs investors face. Brokers’commissions may be based on a combination of number of shares and price per shares.Higher priced shares may produce lower commissions for a given percentage ownership of the firm. In a similar vein, the bid/ask spread is often an eighth or a quarter of a point.This cost is incurred per share. A reverse split reduces the number of shares involved in a $5,000 or $10,000 investment and thus may reduce transaction costs.Chapter 10 Stockholders’ Equity 3831.Retained Earnings 3,289,898Dividends Payable 3,289,898 To record $.34 cash dividend declaration on 10/28/2009.$.34 × (9,755,480 – 79,310) = $3,289,8982.Retained earnings 33,176,718Common stock 73,726Additional paid-in capital 33,102,992To record 10% stock dividend.10% × (7,397,133 – 24,529) × $45.00 = $33,176,7183.1995: 1.1 × 100 = 1101998: 1.5 × 110 = 1652003: 1.1 × 165 = 181.52005: 1.1 × 181.5 = 199.652006: 1.1 × 199.65 = 219.62Normally partial shares are paid in cash so an equally good answer is:2003: 1812005: 181 × 1.1 = 1992006: 199 × 1.1 = 21810-41 (5–10 min.)1. Treasury stock 58,005Cash 58,005Purchase treasury stock for$38.67 1,500= 58,0052. Common Stock, Paid-in Capital, and Retained Earnings will be decreased by $.01 ×1,500 = 15; ($25.00 –$.01) ×1,500 = 37,485; and ($38.67 –$25) ×1,500 = 20,505;respectively.Common stock 15Paid-in capital 37,485Retained earnings 20,505Cash 58,00538410-42 (15 min.) Amounts are in millions except per share amounts and percentage.1. Book value per common share= (Total stockholders’ equity – Book value of preferred stock) ÷ Number of commonshares outstanding = ($118- $15) ÷ 2 = $51.502. Rate of return on common equity = (Net income – Preferred dividends) ÷ Averagecommon equity = [$12 – (8% × $15)] ÷ ½ × [($112 – $15) + ($118 – $15)] = $10.8 ÷ 100 = 10.8%3. Beginningretained earnings +Netincome –Preferreddividends –Commondividends =Endingretainedearnings$65.2 + $12 – $1.2 – Common dividends = $69Common dividends = $7Using a T-account, let X = Common dividendsX = $7Chapter 10 Stockholders’ Equity 38510-43 (10 min.) Dollar amounts (except per share amount) are in thousands.Rate of return on common equity= (Net income – Preferred dividends)Average of (Total stockholders’ equity – Liquidating value of preferred stock)= ($2,400 – $400) ÷ ½ × [($18,400 – $4,400) + ($20,000 – $4,400)]= $2,000 ÷ ½ × ($14,000 + $15,600) = $2,000 ÷ $14,800 = 13.5%Earnings per share of common stock= (Net income – Preferred dividends) ÷ Average number of shares outstanding= $2,000 ÷ 4,000 = $.50Price-earnings ratio= Market price per share of common stock ÷ Earnings per share of common stock= $11.00 ÷ $.50 = 22Dividend-payout ratio= Common dividends per share ÷ Common earnings per share= $.20 ÷ $.50 = 40%Dividend-yield ratio= Common dividends per share ÷ Market price per share of common stock= $.20 ÷ $11.00 = 1.8%Book value per share of common stock= (Stockholders’ equity – Liquidating value of preferred stock)Number of common shares outstanding= ($20,000 – $4,400) ÷ 4,000 = $3.90Note that the book value is lower than the market value. This is typical. The shareholders are paying for earning power rather than for assets.386The dividends payable item is not part of stockholders’ equity.ROSELLI CORPORATIONStatement of Stockholders’ EquityDecember 31, 20X86% cumulative preferred stock, $40 par value,callable at $42, authorized 100,000 shares,issued and outstanding,100,000 shares $4,000,000 Common stock, $2.50 par value, authorized1.8 million shares, issued 1.2 million sharesof which 60,000 shares are in the treasury 3,000,000 Additional paid-in capital:Preferred $1,000,000Common 9,000,000 10,000,000* Retained earnings 12,000,000 Subtotal $29,000,000 Deduct: Cost of 60,000 shares of commonstock reacquired and held in treasury (4,000,000)Total stockholders’ equity $25,000,000* Many presentations would not show the detailed breakdown of par value and additional paid-in capital for preferred and common stocks. Preferred stock would be shown as the sum of par and additional paid-in capital of $5,000,000. Similarly, common would be $12,000,000.Chapter 10 Stockholders’ Equity 387You may wish to use a balance sheet equation to show the overall effects of each item.1. 0 5. 0 8. – $1,0002. 0 6. – $50,000 9. + $1,2003. + $600,000 7. 0 10. + $ 8004. 010-46 (15 min.)1. 20X7 and 20X8 preferred dividends must be paid before any common dividends can bepaid. Dividends are not paid on treasury stock.Preferred dividends = .06 × $10 × (52,136 – 11,528) × 2= $48,730Common dividends = $.04 × (1,322,850 – 93,091)= $49,190Retained earnings 48,730Cash 48,730 To record the declaration and paymentof preferred dividends for 20X7 and 20X8.Retained earnings 49,190Cash 49,190 To record the declaration and paymentof common dividends of $.04 per share.2. Ending balance = Beginning balance + Net income – Dividends= $2,463,951 + $400,000 – $48,730 – $49,190= $2,766,0313881. Note that a dividend reinvestment is not the same as a typical stock dividend.Retained earnings 2,480,000,000Dividends payable 2,480,000,000 Declaration of dividends,$.40 × 6,200,000,000 shares.Dividends payable 2,480,000,000Cash 2,232,000,000Common stock 248,000,000 To record payment of cash(90% of $2,480,000,000) and issuanceof 4,960,000 additional shares underautomatic dividend reinvestment program.Amount of reinvestment:10% ($2,480,000,000) $248,000,000Price per share ÷ $ 50Number of shares 4,960,0002. These automatic plans save brokerage fees and are a convenient way for a company toraise additional capital. The letter writer misses the point. The shareholder can have cash if desired (unlike stock dividends). Therefore, the amount is justifiably subject to personal income taxes because the cash is ―constructively received.‖Different corporations are at different stages in their growth cycles. Investors who do not desire dividends may prefer to invest in growth stocks that do not pay dividends. These investors can meet their periodic needs for cash by selling shares.10-48 (10 min.)1. The logical reasons would typically be historical, tax based, or related to access to capital.Sometimes they are linked to voting rights, as with Ford Motor Company where historical family holdings carry super voting rights. That is not the case with Shell. The differentclasses are an historical result of the 1907 merger of a Dutch company with a U.K.company. A historically complex structure was simplified in 2004 but the differentialpayment currencies continue. The U.S. ADR structure is a long-standing U.S. mechanism for providing access to international companies, but it is not about how companies issue stock. Rather is represents a mechanism for making international companies available to U.S. shareholders via a trust mechanism that holds cl ass A or B shares and issues ADR’s.2. Shell publishes its financial statements in U.S. dollars because that is the internationalcurrency in which oil transactions are priced.Chapter 10 Stockholders’ Equity 38910-49 (20–30 min.)1. Cash 10,000,000Common stock 1,600,000Additional paid-in capital 8,400,000To record the issuance of 400,000shares of $4 par value for an averageprice of $25 per share.2. Retained earnings 400,000Cash 400,000To record the declaration and paymentof cash dividends of $1 per share onMarch 31, 20X2.3. Retained earnings 1,000,000Common stock 80,000Additional paid-in capital 920,000To record a 5% common stock dividend,resulting in the issuance of 20,000 shares.Retained earnings is reduced at the rateof the market value of $50 per share atdate of issuance.Before 5% After 5%Stock StockDividend Changes Dividend Common stock, 400,000 $ 1,600,000 + (20,000 shares $ 1,680,000 shares @ $4par @ $4 par)= +80,000Additional paid-in capital 8,400,000 + [20,000 shares 9,320,000@ ($50 – $4)]= +920,000Retained earnings 9,000,000 – (20,000 @ $50) 8,000,000= –1,000,000Stockholders’ equity $19,000,000 $19,000,000 Overall market value of stock@ assumed $50 $20,000,000 @ assumed $47.62* $20,000,000* Total shares outstanding 400,000 420,000 Individual shareholder:Assumed ownership of shares 5,000 5,250 Percentage ownership interest 1.25% Still 1.25% 390。