CHAPTER 11
Reporting and Analyzing Stockholders’ Equity
ANSWERS TO QUESTIONS
1.
2.
(a)
Separate legal existence. A corporation is separate and distinct from its owners and it acts
in its own name rather than in the name of its stockholders. In contrast to a partnership, the
acts of the owners (stockholders) do not bind the corporation unless the owners are agents
of the corporation.
(b)
Limited liability of stockholders. Because of its separate legal existence, creditors of a corporation ordinarily have recourse only to corporate assets to satisfy their claims. Thus, the
liability of stockholders is normally limited to their investment in the corporation.
(c)
Transferable ownership rights. Ownership of a corporation is shown in shares of capital stock.
The shares are transferable units. Stockholders may dispose of part or all of their interest
by simply selling their stock. The transfer of ownership to another party is entirely at the
discretion of the stockholder.
(a)
Corporate management is an advantage to a corporation because it can hire professional
managers to run the company. Corporate management is a disadvantage to a corporation
because it prevents owners from having an active role in directly managing the company.
(b)
Two other disadvantages of a corporation are government regulations and additional taxes.
A corporation is subject to numerous state and federal regulations. For example, state laws
prescribe the requirements for issuing stock, and federal securities laws govern the sale of
stock to the general public. Corporations must pay both federal and state income taxes.
These taxes are substantial. In addition, stockholders must pay income taxes on cash dividends received.
3.
Kim is incorrect. A corporation must be incorporated in only one state. It is to the company’s advantage to incorporate in a state whose laws are favorable to the corporate form of business
organization. A corporation may incorporate in a state in which it does not have a headquarters
office or major operating facilities.
4.
In the absence of restrictive provisions, the basic ownership rights of common stockholders are
the rights to:
(1)
(2)
(3)
(4)
5.
vote in the election of the board of directors and in corporate actions that require stockholders’ approval.
share in corporate earnings.
maintain the same percentage ownership when additional shares of common stock are
issued (the preemptive right).
share in assets upon liquidation.
Legally, a corporation is an entity, separate and distinct from its owners. As a legal entity, a corporation possesses most of the privileges and is subject to the same duties and responsibilities as a
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11-1
Questions Chapter 11 (Continued)
natural person. The corporation acts under its own name rather than under the names of its
stockholders. A corporation may buy, own, and sell property, borrow money, enter into legally
binding contracts, and sue or be sued.
6.
The principal components of stockholders’ equity for a corporation are paid-in capital and retained
earnings.
7.
The maximum number of shares that a corporation is legally allowed to issue is the number
authorized. Earl Corporation is authorized to sell 100,000 shares. Of these shares, 70,000 shares
have been issued. Outstanding shares are those issued shares which have not been reacquired
by the corporation; in other words, issued shares less treasury shares. Earl has 66,000 shares
outstanding (70,000 issued less 4,000 treasury).
8.
The par value of common stock has no effect on its market value. Par value used to be a legal
amount per share which usually indicates the minimum amount at which a share of stock can be
issued. The market value of stock depends on a number of factors, including the company’s
anticipated future earnings, its expected dividend rate per share, its current financial position, the
current state of the economy, and the current state of the securities markets. Therefore, either
investment mentioned in the question could be the better investment, based on the above factors
and future potential. The relative par values should have no effect on the investment decision.
9.
A corporation may acquire treasury stock (1) to reissue the shares to officers and employees
under bonus and stock compensation plans, (2) to increase trading of the company’s stock in the
securities market in the hopes of enhancing its market value, (3) to have additional shares available
for use in the acquisition of other companies, (4) to reduce the number of shares outstanding and,
thereby, increase earnings per share, or (5) to avoid a takeover of the company by investors that
are hostile to management.
10.
When treasury stock is purchased, Treasury Stock is debited and Cash is credited at cost ($11,000
in this example). Treasury stock is a contra stockholders’ equity account and cash is an asset.
Thus, this transaction has (a) no effect on net income, (b) decreases total assets, (c) has no effect
on total paid-in capital, and (d) decreases total stockholders’ equity.
11.
(a)
Common stock and preferred stock both represent ownership of the corporation. Common
stock signifies the basic residual ownership; preferred stock is ownership with certain
privileges or preferences. Preferred stockholders typically have a preference as to dividends
and as to assets in the event of liquidation. However, preferred stockholders generally do
not have voting rights.
(b)
Some preferred stocks possess the additional feature of being cumulative. Cumulative preferred stock means that preferred stockholders must be paid both current year dividends
and unpaid prior year dividends before common stockholders receive any dividends.
(c)
Dividends in arrears are disclosed in the notes to the financial statements.
12.
The debits and credits to retained earnings are:
Debits
1.
2.
11-2
Net loss
Cash and stock dividends
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1.
Credits
Net income
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Questions Chapter 11 (Continued)
13.
The answers are summarized in the table below:
(a)
(b)
(c)
(d)
Account
Common Stock
Paid-in Capital in Excess of Par Value
Retained Earnings
Treasury Stock
(e)
(f)
Paid-in Capital in Excess of Stated Value
Preferred Stock
Classification
Paid-in capital—capital stock
Paid-in capital—additional paid-in capital
Retained earnings
Deducted from total paid-in capital and
retained earnings
Paid-in capital—additional paid-in capital
Paid-in capital—capital stock
14.
For a cash dividend to be paid, a corporation must have retained earnings, adequate cash, and a
dividend declared by the board of directors.
15.
May 1 is the date on which the board of directors formally declares (authorizes) and announces
the cash dividend. May 15 is the record date which marks the time when ownership of outstanding
shares is determined for dividend purposes from the stockholders’ records. May 31 is the date
when the dividend checks are mailed to stockholders. Accounting entries are made on May 1
(debit Cash Dividends and credit Dividends Payable), and on May 31 (debit Dividends Payable
and credit Cash).
16.
A cash dividend decreases assets, retained earnings, and total stockholders’ equity. A stock dividend decreases retained earnings, increases paid-in capital, and has no effect on total assets
and total stockholders’ equity.
17.
A corporation generally issues stock dividends for one of the following reasons:
(1)
(2)
(3)
To satisfy stockholders’ dividend expectations without spending cash.
To increase the marketability of its stock by increasing the number of shares outstanding
and thereby decreasing the market price per share. Decreasing the market price of the stock
makes it easier for small investors to purchase shares.
To emphasize that a portion of stockholder’s equity that had been reported as retained
earnings has been permanently reinvested in the business and therefore is unavailable for
cash dividends.
18.
In a stock split, the number of shares is increased in the same proportion that par value
is decreased. Thus, in the Henke Corporation the number of shares will increase to 30,000
(10,000 X 3) and the par value will decrease to $5 ($15 ÷ 3). The effect of a split on market value
is generally inversely proportional to the size of the split. In this case, the market price would fall
to approximately $40 per share ($120 ÷ 3).
19.
The different effects of a stock split versus a stock dividend are:
Item
Total paid-in capital
Total retained earnings
Total par value (common stock)
Par value per share
Copyright © 2010 John Wiley & Sons, Inc.
Stock Split
No change
No change
No change
Decrease
Stock Dividend
Increase
Decrease
Increase
No change
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11-3
Questions Chapter 11 (Continued)
20.
The cost of Tootsie Roll’s treasury stock at December 31, 2007 was $1,992,000. It declared cash
dividends of $17,421,000. The stock dividend reduced retained earnings by $46,685,000.
21.
(a)
The purpose of a retained earnings restriction is to indicate that a portion of retained earnings
is currently unavailable for dividends.
(b)
Restrictions may result from the following causes: legal, contractual, or voluntary.
22.
Par value is a legal amount per share, often set at an arbitrarily selected amount, which usually
indicates the minimum amount at which a share of stock can be issued. Market value is generally
unrelated to par value. A stock’s market value will reflect many factors, including the company’s
anticipated future earnings, its expected dividend rate per share, its current financial position, the
current state of the economy, and the current state of the securities markets.
23.
The payout ratio is computed by dividing cash dividends declared on common stock by net
income. The payout ratio indicates the percentage of earnings distributed as cash dividends to
common stockholders.
24.
Debt financing will increase the return on stockholders’ equity ratio when the return on assets rate
exceeds the interest rate paid on debt.
25.
The return on assets ratio will equal the return on stockholders’ equity ratio when a company has
no preferred stock dividends or debt.
26.
Since the proceeds from the new debt issuance will be used to retire current debt, total debt and
assets will not change. Therefore, the debt to total assets ratio will not change either. Since Emig’s
return on assets ratio is greater than the interest rate on the bonds, one would expect the return
on common stockholders’ equity to increase unless the interest rate paid on the retired debt is
less than the new 8% rate.
11-4
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SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 11-1
The advantages and disadvantages of a corporation are as follows:
Advantages
Separate legal existence
Limited liability of stockholders
Transferable ownership rights
Ability to acquire capital
Continuous life
Organizational structure—
professional management
Disadvantages
Organizational structure—
separation of ownership
and management
Government regulations
Additional taxes
BRIEF EXERCISE 11-2
May 10 Cash (2,000 X $13) .......................................
Common Stock (2,000 X $5) .................
Paid-in Capital in Excess of Par
Value (2,000 X $8)...............................
26,000
10,000
16,000
BRIEF EXERCISE 11-3
June 1 Cash (3,000 X $6) .........................................
Common Stock .....................................
18,000
18,000
BRIEF EXERCISE 11-4
Cash (8,000 X $108)....................................................
Preferred Stock (8,000 X $100) ...........................
Paid-in Capital in Excess of Par Value—
Preferred Stock (8,000 X $8) ............................
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864,000
800,000
64,000
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11-5
BRIEF EXERCISE 11-5
Nov.
1
Dec. 31
Cash Dividends (5,000 X $1) ....................
Dividends Payable.............................
5,000
Dividends Payable....................................
Cash ...................................................
5,000
5,000
5,000
BRIEF EXERCISE 11-6
(a) Stockholders’ equity
Paid-in capital
Common stock, $10 par
In excess of par value
Total paid-in capital
Retained earnings
Total stockholders’ equity
(b) Outstanding shares
Before
Dividend
After
Dividend
$1,000,000
–
1,000,000
300,000
$1,300,000
$1,100,000
90,000
1,190,000
110,000
$1,300,000
100,000
110,000
BRIEF EXERCISE 11-7
Total
Total
Total Stockholders’
Transaction
Assets Liabilities
Equity
(a) Declared cash dividend
N/A
+
–
(b) Paid cash dividend declared in (a)
–
–
N/A
(c) Declared stock dividend
N/A
N/A
N/A
(d) Distributed stock dividend declared in (c) N/A
N/A
N/A
(e) Split stock three-for-one
N/A
N/A
N/A
11-6
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BRIEF EXERCISE 11-8
Stockholders’ equity
Paid-in capital
Capital stock
Common stock, $10 par value, 5,000 shares
issued and 4,500 shares outstanding ................... $ 50,000
Additional paid-in capital
In excess of par value—common stock ....................
18,000
Total paid-in capital .............................................
68,000
Retained earnings .....................................................................
42,000
Total paid-in capital and retained earnings ....... 110,000
Less: Treasury stock—common (500 shares) .......................
(12,000)
Total stockholders’ equity .................................. $ 98,000
BRIEF EXERCISE 11-9
Payout ratio—last year =
$120,000
= 20%
$600,000
Dividends paid this year = $1,500,000 X .20 = $300,000 (assuming the same
payout ratio)
Maintaining a constant payout ratio may be considered a sign of stability
from the stockholders’ perspective. However, maintaining a constant payout
ratio may have a negative impact on the company’s cash flow and its ability
to grow.
BRIEF EXERCISE 11-10
Return on stockholders’ equity =
Net income–Preferred stock dividends
Average common stockholders' equity
$452 – $0
=11.41%
($2,619+ $5,306) ÷ 2
Supervalu’s 11.41% return on stockholders’ equity indicates that about
11 cents of net income was earned for each dollar invested by common
stockholders.
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11-7
BRIEF EXERCISE 11-11
Dec. 1
31
11-8
Stock Dividends (20,000 X $17) .....................
Common Stock Dividends Distributable
(20,000 X $10) .........................................
Paid-in Capital in Excess of Par
Value (20,000 X $7).................................
340,000
Common Stock Dividends Distributable.......
Common Stock .........................................
200,000
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200,000
140,000
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200,000
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SOLUTIONS TO DO IT! REVIEW EXERCISES
DO IT! 11-1
1.
2.
3.
4.
5.
True.
True.
False. Additional government regulation is a disadvantage of the corporate form of business.
True.
False. No-par value stock is quite common today.
DO IT! 11-2
Apr. 1
Cash ................................................................
Common Stock .........................................
Paid-in Capital in Excess of Par Value ....
780,000
300,000
480,000
DO IT! 11-3
Aug. 1
Treasury Stock ...............................................
Cash...........................................................
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120,000
120,000
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11-9
DO IT! 11-4
(1) The company has not missed past dividends and the preferred stock is
noncumulative; thus, the preferred stockholders are paid only this year’s
dividend. The dividend paid to preferred stockholders would be $21,000
(3,000 X .07 X $100). The dividend paid to common stockholders would
be $84,000 ($105,000 – $21,000).
(2) The preferred stock is noncumulative; thus, past unpaid dividends do
not have to be paid. The dividend paid to preferred stockholders would be
$21,000 (3,000 X .07 X $100). The dividend paid to common stockholders
would be $84,000 ($105,000 – $21,000).
(3) The preferred stock is cumulative; thus, dividends that have been missed
in the past (dividends in arrears) must be paid. The dividend paid to
preferred stockholders would be $63,000 (3 X 3,000 X .07 X $100). The
dividend paid to common stockholders would be $42,000 ($105,000 –
$63,000).
DO IT! 11-5
(a) 1.
The stock dividend amount is $3,060,000 [(400,000 X 15%) X $51].
The new balance in retained earnings is $8,940,000 ($12,000,000 –
$3,060,000).
2.
The retained earnings after the stock split would be the same as it
was before the split: $12,000,000.
(b) (1) and (2) The effects on the stockholders’ equity accounts are as follows:
Paid-in capital
Retained earnings
Total stockholder’s equity
Shares outstanding
Original
Balance
$ 2,400,000
12,000,000
$14,400,000
400,000
After
Dividend
$ 5,460,000
8,940,000
$14,400,000
460,000
After
Split
$ 2,400,000
12,000,000
$14,400,000
800,000
Total stockholders’ equity remains the same under both options.
11-10
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DO IT! 11-6
CONNOLLY CORPORATION
Balance Sheet (Partial)
Stockholder’s equity
Paid-in capital
Capital Stock
7% preferred stock, $100 par value,
10,000 shares authorized, 2,000
shares issued and outstanding...........
$ 200,000
Common stock, $5 par value, 500,000
shares authorized, 100,000 shares
issued, and 93,000 shares
outstanding...........................................
500,000
Total capital stock ...........................
700,000
Additional paid-in capital
In excess of par value—
preferred stock ..................................... $ 23,000
In excess of par value—
common stock......................................
287,000
Total additional paid-in capital .......
310,000
Total paid-in capital .........................
1,010,000
Retained earnings .................................................
372,000
Total paid-in capital and
retained earnings..........................
1,382,000
Less: Treasury stock—common
(7,000 shares) (at cost) ..............................
(46,000)
Total stockholder’s equity ..............
$1,336,000
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11-11
SOLUTIONS TO EXERCISES
EXERCISE 11-1
(a) Jan. 10
July 1
(b) Jan. 10
July 1
Cash (70,000 X $5) ................................
Common Stock..............................
350,000
Cash (40,000 X $7) ................................
Common Stock (40,000 X $5) .......
Paid-in Capital in Excess of Par
Value (40,000 X $2) .....................
280,000
Cash (70,000 X $5) ................................
Common Stock (70,000 X $1) .......
Paid-in Capital in Excess of
Stated Value (70,000 X $4) .........
350,000
Cash (40,000 X $7) ................................
Common Stock (40,000 X $1) .......
Paid-in Capital in Excess of
Stated Value (40,000 X $6) .........
280,000
350,000
200,000
80,000
70,000
280,000
40,000
240,000
EXERCISE 11-2
June
July
Nov.
11-12
12
11
28
Cash..........................................................
Common Stock (80,000 X $1) ...........
Paid-in Capital in Excess of Par
Value—Common Stock..................
300,000
Cash (3,000 X $104) .................................
Preferred Stock (3,000 X $100).........
Paid-in Capital in Excess of Par
Value—Preferred Stock
(3,000 X $4) .....................................
312,000
Treasury Stock .........................................
Cash...................................................
11,000
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80,000
220,000
300,000
12,000
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EXERCISE 11-3
(a) Feb. 1
July 1
Cash (60,000 X $51) ..............................
Preferred Stock
(60,000 X $50)..............................
Paid-in Capital in Excess of
Par Value—Preferred Stock
(60,000 X $1)................................
3,060,000
Cash (30,000 X $56) ..............................
Preferred Stock
(30,000 X $50)..............................
Paid-in Capital in Excess of
Par Value—Preferred Stock
(30,000 X $6)................................
1,680,000
3,000,000
60,000
1,500,000
180,000
(b)
Preferred Stock
2/1 3,000,000
7/1 1,500,000
4,500,000
Paid-in Capital in Excess of
Par Value—Preferred Stock
2/1
60,000
7/1
180,000
240,000
(c) Preferred Stock—listed first in paid-in capital under capital stock. Paid
in Capital in Excess of Par Value—Preferred Stock—listed first under
additional paid-in capital.
EXERCISE 11-4
(a) Common stock outstanding is 592,000 shares. (Issued shares 600,000
less treasury shares 8,000.)
(b) The stated value of the common stock is $3.50 per share. (Common
stock issued $2,100,000 ÷ 600,000 shares.)
(c) The par value of the preferred stock is $100 per share. (Preferred stock
$600,000 ÷ 6,000 shares.)
(d) The dividend rate is 6% ($36,000 ÷ $600,000).
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11-13
EXERCISE 11-4 (Continued)
(e) The Retained Earnings balance is still $1,158,000. Cumulative dividends
in arrears are only disclosed in the notes to the financial statements.
EXERCISE 11-5
May
2
10
15
Cash (10,000 X $12) ..................................
Common Stock (10,000 X $10)..........
Paid-in Capital in Excess of Par
Value—Common Stock
(10,000 X $2)....................................
120,000
Cash (10,000 X $53) ..................................
Preferred Stock (10,000 X $20) .........
Paid-in Capital in Excess of Par
Value—Preferred Stock
(10,000 X $33)..................................
530,000
Treasury Stock (600 X $12) ......................
Cash ...................................................
7,200
100,000
20,000
200,000
330,000
7,200
EXERCISE 11-6
(a) June 15
Cash Dividends
(68,000* X $1.50) .............................
Dividends Payable......................
102,000
102,000
*60,000 shares + 8,000 shares
July 10
Dec. 15
Dividends Payable.............................
Cash ............................................
102,000
Cash Dividends .................................
(72,000** X $1.75)
Dividends Payable......................
126,000
102,000
126,000
**68,000 shares + 4,000 shares
(b) In the retained earnings statement, dividends of $228,000 will be
deducted. In the balance sheet, Dividends Payable of $126,000 will be
reported as a current liability.
11-14
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EXERCISE 11-7
Stockholders’ equity
Paid-in capital
Retained earnings
Total stockholders’
equity
Outstanding shares
Before
Action
After Stock
Dividend
After Stock
Split
648,000
400,000
$1,048,000
704,700
343,300
$1,048,000
648,000
400,000
$1,048,000
81,000
85,050
162,000
EXERCISE 11-8
WELLS FARGO & COMPANY
Partial Balance Sheet
December 31, 2006
(in millions)
Stockholders’ equity
Paid-in capital
Capital stock
Preferred stock.................................................
Common stock, $1 2 3 par value,
6 billion shares authorized, 3,472,762,050
shares issued, and 3,377,149,861 shares
outstanding .................................................
Total capital stock .................................
Additional paid-in capital
In excess of par value—common stock .........
Total paid-in capital .........................................
Retained earnings ...................................................
Total paid-in capital and retained earnings....
Less: Treasury stock (95,612,189 shares)............
Total stockholders’ equity...............................
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$ 384
5,788
$ 6,172
7,739
13,911
35,277
49,188
(3,203)
$45,985
(For Instructor Use Only)
11-15
EXERCISE 11-9
KENTON CORPORATION
Partial Balance Sheet
December 31, 2010
Stockholders’ equity
Paid-in capital
Capital stock
8% Preferred stock, $100 par
value, noncumulative, 5,000
shares issued ..................................... $ 500,000
Common stock, no par, $5
stated value, 400,000 shares
issued, and 392,000 shares outstanding.............................................. 2,000,000
Total capital stock..........................
$2,500,000
Additional paid-in capital
In excess of par value—
preferred stock................................... $ 45,000
In excess of stated value—
common stock.................................... 1,050,000
Total additional paid-in capital .....
1,095,000
Total paid-in capital .......................
3,595,000
Retained earnings ........................................
1,334,000
Total paid-in capital and
retained earnings ........................
4,929,000
Less: Treasury stock (8,000
common shares)........................
(78,000)
Total stockholders’ equity.............
$4,851,000
11-16
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EXERCISE 11-10
ROSSWELL INC.
Partial Balance Sheet
December 31, 2010
Stockholders’ equity
Paid-in capital
Capital stock
8% Preferred stock, $50 par value,
40,000 shares authorized,
12,000 shares issued .......................
Common stock, no-par, $1 stated
value, 400,000 shares authorized,
250,000 shares issued and 240,000
outstanding ......................................
Total capital stock .......................
Additional paid-in capital
In excess of par value—
preferred stock.................................
In excess of stated value—
common stock .................................
Total additional paid-in capital ...
Total paid-in capital .....................
Retained earnings (See Note R) .......................
Total paid-in capital and
retained earnings......................
Less: Treasury stock (10,000 common
shares) ...................................................
Total stockholders’ equity ..........
$ 600,000
250,000
$ 850,000
24,000
1,200,000
1,224,000
2,074,000
700,000
2,774,000
(64,000)
$2,710,000
Note R: Retained earnings restricted for plant expansion, $100,000.
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11-17
EXERCISE 11-11
Payout ratio
Return on common
stockholders’ equity
2007
$298
= 59.1%
$504
$611
= 110.1%
$555
$504 – $0
=19.9%
$2,532
$555 – $0
= 21.4%
$2,591
2006
Sara Lee Corporation’s dividends decreased over 51% even though its net
income decreased only 9% and return on stockholders’ equity decreased
7%. The company’s dividend policies should be reviewed for an explanation
of these inconsistencies.
EXERCISE 11-12
2007
$326.2
=16.0%
$2,041.3
2006
275.2
=15.7%
$1,750.6
$2,041.3 – $0
= 19.2%
$10,610.1
$1,750.6 – $0
= 18.4%
$9,502.8
Payout ratio
Return on common
stockholders’ equity
Walgreen’s payout ratio and return on common stockholders’ equity remained relatively constant even though net income and average common
stockholders’ equity increased about 17% and 12% respectively.
EXERCISE 11-13
(a) 2010:
$182,000
=18.2%
$1,000,000
2009:
$150,000
= 21.4%
$700,000
11-18
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
EXERCISE 11-13 (Continued)
(b) Oslo Corporation’s net income increased in part because it retired bonds
and eliminated the interest expense associated with the bonds. Such an
increase in income would produce an increase in return on equity if
equity had remained constant. In this example, equity increased by 43%
[($1,000,000 – $700,000) ÷ $700,000] while income increased by only 21%.
(c) 2010:
2009:
$200,000
=16.7%
$1,200,000
$500,000
= 41.7%
$1, 200,000
Oslo Corporation retired all its long term debt on January 1, 2010. This
decreased its debt to total assets ratio from .417 to .167. Oslo Corporation would be considered to be very solvent.
EXERCISE 11-14
Income before interest and taxes .........
Interest ($2,700,000 X 13%) ...................
Income before taxes ..............................
Income tax expense (30%) ....................
Net income .............................................
Outstanding shares ...............................
Earnings per share ................................
Copyright © 2010 John Wiley & Sons, Inc.
(a)
Plan One
Issue Stock
$800,000
800,000
240,000
$560,000
150,000
$3.73
Kimmel, Financial Accounting, 5/e, Solutions Manual
(b)
Plan Two
Issue Bonds
$800,000
351,000
449,000
134,700
$314,300
90,000
$3.49
(For Instructor Use Only)
11-19
EXERCISE 11-15
(a)
Pre-debt net income ..............................
Adjustment for interest expense
($500,000 X .05) ...................................
Net income .............................................
Outstanding shares ...............................
Earnings per share ................................
(b)
Net income
Average common
stockholder’s equity
2009
$100,000
2010
$100,000
0
$100,000
50,000
$2
25,000
$ 75,000
25,000
$3
2009
$ 100,000
= 10%
$1,000,000
2010
$ 75,000
= 15%
$500,000
(c)
Total liabilities
Total assets
0
=0
$1,000,000
$500,000
= 50%
$1,000,000
(d) The issuance of debt reduced the company’s net income because of
the interest cost that was incurred. However, the debt significantly
increased the company’s earnings per share because it was used to
acquire treasury stock. This reduced the number of outstanding shares,
thus increasing earnings per share.
The issuance of debt also increased the company’s leverage. Because
the interest rate paid on the debt was only 5% but the company’s
return on assets was 10%, the company was able to earn much more on
each dollar invested in assets than it was paying on the debt. Thus, it
was able to significantly increase its return on common stockholders’
equity. This was especially true because it used the debt to repurchase
shares of stock.
The issuance of the debt did, however, reduce the company’s solvency.
Prior to the debt, the company had no liabilities. After issuing the debt,
it had a debt to total assets ratio of 50%. Investors might be concerned
that the increased reliance on debt has made the company too risky.
The determination as to whether this was a good decision depends on
one’s opinion regarding the tradeoff between the increased risk versus
the increased return.
11-20
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
*EXERCISE 11-16
(a) Stock Dividends (27,000* X $15) ........................
Common Stock Dividends Distributable
(27,000 X $10) ............................................
Paid-in Capital in Excess of Par Value
(27,000 X $5) ..............................................
405,000
270,000
135,000
*[($1,500,000 ÷ $10) + 30,000] X 15%
(b) Stock Dividends (49,500* X $8) ..........................
Common Stock Dividends Distributable
(49,500 X $5) ..............................................
Paid-in Capital in Excess of Par Value
(49,500 X $3) ..............................................
396,000
247,500
148,500
*[($1,500,000 ÷ $5) + 30,000] X 15%
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
11-21
SOLUTIONS TO PROBLEMS
PROBLEM 11-1A
(a) Jan. 10
Mar. 1
May
1
Sept. 1
Nov. 1
Cash (80,000 X $4) .............................
Common Stock (80,000 X $1) ....
Paid-in Capital in Excess of
Stated Value—Common
Stock (80,000 X $3)..................
320,000
Cash (12,000 X $54) ...........................
Preferred Stock (12,000 X $50) ....
Paid-in Capital in Excess of
Par Value—Preferred Stock
(12,000 X $4) ............................
648,000
Cash (120,000 X $5) ...........................
Common Stock (120,000 X $1) ..
Paid-in Capital in Excess of
Stated Value—Common
Stock (120,000 X $4)................
600,000
Cash (5,000 X $6)...............................
Common Stock (5,000 X $1) ......
Paid-in Capital in Excess of
Stated Value—Common
Stock (5,000 X $5)....................
30,000
Cash (3,000 X $56) .............................
Preferred Stock (3,000 X $50) ....
Paid-in Capital in Excess of
Par Value—Preferred Stock
(3,000 X $6) ..............................
168,000
80,000
240,000
600,000
48,000
120,000
480,000
5,000
25,000
150,000
18,000
(b)
Preferred Stock
3/1
600,000
11/1
150,000
12/31 Bal. 750,000
11-22
Copyright © 2010 John Wiley & Sons, Inc.
Paid-in Capital in Excess of
Par Value—Preferred Stock
3/1
48,000
11/1
18,000
12/31 Bal. 66,000
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 11-1A (Continued)
Common Stock
1/10
80,000
5/1
120,000
9/1
5,000
12/31 Bal. 205,000
(c)
Paid-in Capital in Excess of
Stated Value—Common Stock
1/10
240,000
5/1
480,000
9/1
25,000
12/31 Bal. 745,000
PINSON CORPORATION
Partial Balance Sheet
December 31, 2010
Stockholders’ equity
Paid-in capital
Capital stock
6% Preferred stock, $50 par
value, 20,000 shares
authorized and 15,000
shares issued..............................
Common stock, no-par, $1
stated value, 500,000 shares
authorized, 205,000 shares
issued ..........................................
Total capital stock ..................
Additional paid-in capital
In excess of par value—
preferred stock ...........................
In excess of stated value—
common stock ............................
Total additional paid-in
capital...................................
Total paid-in capital................
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
$750,000
205,000
$ 955,000
66,000
745,000
811,000
$1,766,000
(For Instructor Use Only)
11-23
PROBLEM 11-2A
(a) Feb.
1
Mar. 20
Oct.
Nov.
Dec.
1
1
1
Cash ..........................................................
Common Stock (5,000 X $5) .............
Paid-in Capital in Excess of
Stated Value—Common
Stock ...............................................
30,000
Treasury Stock—Common (1,000 X $7) ...
Cash ...................................................
7,000
Cash Dividends ($300,000 X .08) .............
Dividends Payable.............................
24,000
Dividends Payable....................................
Cash ...................................................
24,000
Cash Dividends ........................................
99,500
25,000
5,000
7,000
24,000
24,000
[200,000* + 5,000 – (5,000 + 1,000)] X $.50
Dividends Payable.............................
Dec. 31
31
31
99,500
Income Summary ..................................... 280,000
Retained Earnings.............................
280,000
Retained Earnings .................................... 123,500
Cash Dividends ($24,000 + $99,500)...
123,500
Dividends Payable....................................
Cash ...................................................
99,500
99,500
*$1,000,000 ÷ $5
(b)
11-24
Preferred Stock
1/1 Bal. 300,000
12/31 Bal. 300,000
Paid-in Capital in Excess of
Par Value—Preferred Stock
1/1 Bal. 15,000
12/31 Bal. 15,000
Common Stock
1/1 Bal. 1,000,000
2/1
25,000
12/31 Bal. 1,025,000
Paid-in Capital in Excess of
Stated Value—Common Stock
1/1 Bal.
480,000
2/1
5,000
12/31 Bal. 485,000
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 11-2A (Continued)
12/31
Retained Earnings
123,500 1/1 Bal. 688,000
12/31
280,000
12/31 Bal. 844,500
Cash Dividends
10/1
24,000
12/1
99,500 12/31
12/31 Bal.
–0–
(c)
Treasury Stock—Common
1/1 Bal. 40,000
3/20
7,000
12/31 Bal. 47,000
123,500
SIGMA CORPORATION
Partial Balance Sheet
December 31, 2010
Stockholders’ equity
Paid-in capital
Capital stock
8% Preferred stock, $100
par value, noncumulative,
5,000 shares authorized,
3,000 shares issued and
outstanding .................................
Common stock, no-par, $5
stated value, 300,000 shares
authorized, 205,000 shares
issued and 199,000 shares
outstanding .................................
Total capital stock ..................
Additional paid-in capital
In excess of par value—
preferred stock ...........................
In excess of stated value—
common stock ............................
Total additional paid-in
capital...................................
Total paid-in capital................
Retained earnings........................................
Total paid-in capital and
retained earnings.................
Less: Treasury stock (6,000 common
shares)...............................................
Total stockholders’ equity .....
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
$ 300,000
1,025,000
$1,325,000
15,000
485,000
500,000
1,825,000
844,500
2,669,500
(47,000)
$2,622,500
(For Instructor Use Only)
11-25
PROBLEM 11-2A (Continued)
(d) Payout ratio =
$99,500
=35.5%
$280,000
Earnings per share =
$280,000 – $24,000
$256,000
=
= $1.30
(195,000* + 199,000* *)÷ 2 197,000
*200,000 – 5,000
**205,000 – 6,000
Return on common stockholders’ equity =
$256,000
$280,000 – $24,000
=
= 11.5%
a
b
($2,128,000 + $2,307,500 ) ÷ 2 $2,217,750
a
Beginning common stockholders’ equity:
$1,000,000 + $480,000 + $688,000 – $40,000
b
11-26
Ending common stockholders’ equity:
$1,025,000 + $485,000 + $844,500 – $47,000
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 11-3A
MILO COMPANY
Partial Balance Sheet
December 31, 2010
Stockholders’ equity
Paid-in capital
Capital stock
8% Preferred stock, $100 par value,
cumulative, 120,000 shares issued
and outstanding............................... $12,000,000
Common stock, $5 par value,
1,300,000 shares issued and
1,280,000 shares outstanding .........
6,500,000
Total capital stock ..............................
$18,500,000
Additional paid-in capital
In excess of par value—
preferred stock.................................
1,080,000
In excess of par value—
common stock .................................
1,800,000
Total additional paid-in capital ...
2,880,000
Total paid-in capital .....................
21,380,000
Retained earnings .............................................
2,304,000*
Total paid-in capital and
retained earnings......................
23,684,000
Less: Treasury stock-common
(20,000 shares) ......................................
(220,000)
Total stockholders’ equity ..........
$23,464,000
*$1,200,000 + $3,600,000 – $1,536,000a – $960,000
a
1,300,000 shares issued less 20,000 shares in treasury = 1,280,000 shares;
outstanding; 1,280,000 X $1.20 = $1,536,000.
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
11-27
PROBLEM 11-4A
(a)
Retained Earnings
Dec. 31
(b)
400,000 Jan. 1 Balance
Dec. 31
Dec. 31 Balance
2,380,000
880,000
2,860,000
GAMMA CORPORATION
Partial Balance Sheet
December 31, 2010
Stockholders’ equity
Paid-in capital
Capital stock
7% Preferred stock, $100 par
value, noncumulative,
20,000 shares authorized,
10,000 shares issued and
outstanding ........................................ $1,000,000
Common stock, no-par, $5
stated value, 600,000 shares
authorized, 400,000 shares
issued and outstanding ..................... 2,000,000
Total capital stock ..................
$3,000,000
Additional paid-in capital
In excess of par value—
preferred stock................................... $ 200,000
In excess of stated value—
common stock.................................... 1,600,000
Total additional paid-in capital .....
1,800,000
Total paid-in capital .......................
4,800,000
Retained earnings (See Note A) .........................
2,860,000
Total stockholders’ equity.............
$7,660,000
Note A: Retained earnings restricted for plant expansion, $130,000.
11-28
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 11-5A
(a) 1.
2.
3.
Cash..............................................................
Preferred Stock (1,500 X $100).............
Paid-in Capital in Excess of Par
Value—Preferred Stock .....................
170,000
Cash..............................................................
Common Stock (400,000 X $5) .............
Paid-in Capital in Excess of Stated
Value—Common Stock......................
3,650,000
Treasury Stock (5,000 X $11).......................
Cash.......................................................
55,000
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
150,000
20,000
2,000,000
1,650,000
55,000
(For Instructor Use Only)
11-29
PROBLEM 11-5A (Continued)
(b)
BODLEY CORPORATION
Partial Balance Sheet
December 31, 2010
Stockholders’ equity
Paid-in capital
Capital stock
10% Preferred stock, $100
par value, noncumulative,
20,000 shares authorized,
1,500 shares issued and
outstanding ................................. $ 150,000
Common stock, no-par, $5
stated value, 1,000,000
shares authorized, 400,000
shares issued, and 395,000
shares outstanding..................... 2,000,000
Total capital stock ..................
$2,150,000
Additional paid-in capital
In excess of par value—
preferred stock............................ $ 20,000
In excess of stated value—
common stock ............................ 1,650,000
Total additional paid-in
capital ...................................
1,670,000
Total paid-in capital ................
3,820,000
Retained earnings.................................
82,000
Total paid-in capital and
retained earnings.................
3,902,000
Less: Treasury stock—common
(5,000 shares).............................
(55,000)
Total stockholders’ equity .....
$3,847,000
11-30
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 11-6A
SAMPSON INC.
Partial Balance Sheet
December 31, 2010
Stockholders’ equity
Common stock, $1 par value, 2,000,000 shares
authorized, 910,000* shares issued, and
890,000 shares outstanding ...........................................
Additional paid-in capital
In excess of par value—common stock ...................
Total paid-in capital ............................................
Retained earnings .............................................................
Total paid-in capital and retained earnings ......
Less: Treasury stock—common (20,000 shares) ..........
Total stockholders’ equity..................................
$ 910,000
1,780,000**
2,690,000
835,000***
3,525,000
(70,000)
$3,455,000
***800,000 + 50,000 + 60,000 = 910,000 shares
***$1,500,000 + (50,000 X $2) + (60,000 X $3) = $1,780,000
***$600,000 – $115,000 + $350,000
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
11-31
PROBLEM 11-7A
(a)
(i)
(ii)
(iii)
2010
Return on assets
ratio
Return on common
stockholders’ equity
ratio
Payout ratio
$2,240,000
$14,937,500
$2,240,000
$9,400,000
$890,000
$2,240,000
(iv)
(v)
Debt to total assets
ratio
Times interest
earned ratio
$6,000,000
= 15.0%
= 23.8%
= 39.7%
2009
$2,600,000
$17,647,000
$2,600,000
$14,100,000
$1,026,000
$2,600,000
$3,000,000
= 41.4%
$14,500,000
($2,240,000 + $500,000+ $670,000)
$500,000
= 6.8 times
$16,875,000
= 14.7%
= 18.4%
= 39.5%
= 17.8%
($2,600,000 + $140,000+ $780,000)
$140,000
= 25.1 times
(b) Parcells’s net income declined from $2,600,000 to $2,240,000. It’s return on
assets ratio increased slightly, but its return on common stockholders’
equity ratio increased 29%. Based on these two measures, profitability
improved. The payout ratio remained relatively constant.
(c) Parcells’s debt to total assets ratio increased from 17.8% to 41.4% and
its times interest earned ratio decreased from 25.1 to 6.8 times. These
changes indicate that Parcells is less solvent in 2010 than 2009.
(d) It appears that the decision to issue debt to purchase common stock
was wise. Parcells’s 10% interest rate was less than its return on assets
of 15.0%. This resulted in the 29% increase in return on common stockholders’ equity. Although the solvency ratios declined, Parcells does not
appear to be in trouble covering the extra debt. Its times interest earned
ratio of 6.8 times is probably good coverage. If Parcells’s earnings start to
drop, it could consider reissuing the treasury stock and paying off debt.
11-32
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
*PROBLEM 11-8A
(a) Jan. 15
Feb. 15
Apr. 15
May 15
Dec.
1
31
Cash Dividends (80,000 X $0.50) ......
Dividends Payable .....................
40,000
Dividends Payable.............................
Cash ............................................
40,000
Stock Dividends (8,000 X $14)..........
Common Stock Dividends
Distributable (8,000 X $10)......
Paid-in Capital in Excess of
Par Value (8,000 X $4) .............
112,000
Common Stock Dividends
Distributable ...................................
Common Stock (8,000 X $10) ....
40,000
40,000
80,000
32,000
80,000
80,000
Cash Dividends (88,000 X $0.55) ......
Dividends Payable .....................
48,400
Income Summary ..............................
Retained Earnings......................
400,000
Retained Earnings.............................
Stock Dividends .........................
112,000
Retained Earnings.............................
Cash Dividends ..........................
88,400
48,400
400,000
112,000
88,400
(b)
Common Stock
1/1 Bal. 800,000
5/15
80,000
12/31 Bal. 880,000
Copyright © 2010 John Wiley & Sons, Inc.
12/31
12/31
Retained Earnings
112,000 1/1 Bal.
620,000
88,400 12/31
400,000
12/31 Bal. 819,600
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
11-33
*PROBLEM 11-8A (Continued)
Paid-in Capital
in Excess of Par Value
1/1 Bal. 500,000
4/15
32,000
12/31 Bal. 532,000
Cash Dividends
1/15
40,000
12/1
48,400 12/31
12/31 Bal. –0–
(c)
88,400
Common Stock
Dividends Distributable
5/15
80,000 4/15
80,000
12/31 Bal.
–0–
Stock Dividends
4/15
112,000
12/31
112,000
12/31 Bal. –0–
WERTH CORPORATION
Partial Balance Sheet
December 31, 2010
Stockholders’ equity
Paid-in capital
Capital stock
Common stock, $10 par value,
88,000 shares issued and
outstanding ........................................
Additional paid-in capital
In excess of par value...........................
Total paid-in capital .......................
Retained earnings ...............................................
Total stockholders’ equity ............
11-34
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
$ 880,000
532,000
1,412,000
819,600
$2,231,600
(For Instructor Use Only)
*PROBLEM 11-8A (Continued)
(d) Payout ratio =
$88,400
=22.1%
$400,000
Return on common stockholders’ equity =
$400,000
$400,000 – 0
=
=19.3%
($1,920,000*+$2,231,600**) ÷ 2 $2,075,800
*$800,000 + $500,000 + $620,000
Copyright © 2010 John Wiley & Sons, Inc.
**from req. (c)
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
11-35
PROBLEM 11-1B
(a) Jan. 10
Mar. 1
May
1
Sept. 1
Nov. 1
Cash (60,000 X $3.50) ........................
Common Stock (60,000 X $2) ....
Paid-in Capital in Excess of
Stated Value-Common
Stock (60,000 X $1.50).........
210,000
Cash (5,000 X $102) ...........................
Preferred Stock (5,000 X $100) ....
Paid-in Capital in Excess of
Par Value—Preferred Stock
(5,000 X $2) ..............................
510,000
Cash (90,000 X $4) .............................
Common Stock (90,000 X $2) ....
Paid-in Capital in Excess of
Stated Value—Common
Stock (90,000 X $2)..................
360,000
Cash (10,000 X $5) .............................
Common Stock (10,000 X $2) ....
Paid-in Capital in Excess of
Stated Value—Common
Stock (10,000 X $3)..................
50,000
Cash (4,000 X $104) ...........................
Preferred Stock (4,000 X $100)....
Paid-in Capital in Excess of
Par Value—Preferred Stock
(4,000 X $4) ..............................
416,000
120,000
90,000
500,000
10,000
180,000
180,000
20,000
30,000
400,000
16,000
(b)
Preferred Stock
3/1
500,000
11/1
400,000
12/31 Bal. 900,000
11-36
Copyright © 2010 John Wiley & Sons, Inc.
Paid-in Capital in Excess of
Par Value—Preferred Stock
3/1
10,000
11/1
16,000
12/31 Bal. 26,000
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 11-1B (Continued)
Common Stock
1/10
5/1
9/1
12/31 Bal.
(c)
120,000
180,000
20,000
320,000
Paid-in Capital in Excess of
Stated Value—Common Stock
1/10
90,000
5/1
180,000
9/1
30,000
12/31 Bal. 300,000
CATES CORPORATION
Partial Balance Sheet
December 31, 2010
Stockholders’ equity
Paid-in capital
Capital stock
8% Preferred stock, $100 par
value, 10,000 shares
authorized, 9,000 shares
issued ..........................................
Common stock, no-par, $2
stated value, 500,000 shares
authorized, 160,000 shares
issued ..........................................
Total capital stock ..................
Additional paid-in capital
In excess of par value—
preferred stock ...........................
In excess of stated value—
common stock ............................
Total additional paid-in
capital...................................
Total paid-in capital................
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
$900,000
320,000
$1,220,000
26,000
300,000
326,000
$1,546,000
(For Instructor Use Only)
11-37
PROBLEM 11-2B
(a) Feb.
1
Nov. 10
Nov. 15
Dec.
1
Dec. 15
Dec. 31
31
(b)
Cash ...................................................
Common Stock (20,000 X $1) ....
Paid-in Capital in Excess of
Stated Value—Common
Stock ($60,000 – $20,000) .......
60,000
Treasury Stock—Common................
Cash ............................................
18,000
Cash Dividends ($300,000 X .07) ......
Dividends Payable......................
21,000
Cash Dividends
([1,000,000 – 10,000 + 20,000 –
4,000) X $0.30].................................
Dividends Payable......................
40,000
18,000
21,000
301,800
301,800
Dividends Payable.............................
Cash ............................................
21,000
Income Summary ..............................
Retained Earnings......................
408,000
Retained Earnings .............................
Cash Dividends ..........................
322,800
Dividends Payable.............................
Cash ............................................
301,800
Preferred Stock
1/1 Bal.
300,000
12/31 Bal. 300,000
Common Stock
1/1 Bal. 1,000,000
2/1
20,000
12/31 Bal. 1,020,000
11-38
20,000
Copyright © 2010 John Wiley & Sons, Inc.
21,000
408,000
322,800
301,800
Paid-in Capital in Excess of
Par Value—Preferred Stock
1/1 Bal. 80,000
12/31 Bal. 80,000
Paid-in Capital in Excess of
Stated Value—Common Stock
1/1 Bal. 1,400,000
2/1
40,000
12/31 Bal. 1,440,000
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 11-2B (Continued)
12/31
Retained Earnings
322,800 1/1 Bal. 1,716,000
12/31
408,000
12/31 Bal.1,801,200
Cash Dividends
11/15
21,000
12/1
301,800 12/31
12/31 Bal.
–0–
(c)
Treasury Stock—Common
1/1 Bal. 30,000
11/10
18,000
12/31 Bal. 48,000
322,800
MOTA CORPORATION
Partial Balance Sheet
December 31, 2010
Stockholders’ equity
Paid-in capital
Capital stock
7% Preferred stock, $50
par value, cumulative,
10,000 shares authorized,
6,000 shares issued and
outstanding .................................
Common stock, no-par, $1
stated value, 2,000,000 shares
authorized, 1,020,000 shares
issued and 1,006,000 shares
outstanding .................................
Total capital stock ..................
Additional paid-in capital
In excess of par value—
preferred stock ...........................
In excess of stated value—
common stock ............................
Total additional paid-in
capital...................................
Total paid-in capital................
Retained earnings........................................
Total paid-in capital and
retained earnings.................
Less: Treasury stock (14,000 common
shares)...............................................
Total stockholders’ equity .....
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
$ 300,000
1,020,000
$1,320,000
$
80,000
1,440,000
1,520,000
2,840,000
1,801,200
4,641,200
(48,000)
$4,593,200
(For Instructor Use Only)
11-39
PROBLEM 11-2B (Continued)
(d) Payout ratio =
$301,800
= 74.0%
$408,000
Earnings per share =
*1,000,000 – 10,000
$408,000 – $21,000
$387,000
=
= $0.39
(990,000* +1,006,000** )÷ 2 998,000
**1,020,000 – 14,000
Return on common stockholders’ equity =
$408,000 – $21,000
$387,000
=
= 9.3%
a
b
($4,086,000 + $4,213,200 ) ÷ 2 $4,149,600
a
Beginning common stockholders’ equity:
$1,000,000 + $1,400,000 + $1,716,000 – $30,000
b
11-40
Ending common stockholders’ equity:
$1,020,000 + $1,440,000 + $1,801,200 – $48,000
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 11-3B
BRANT COMPANY
Partial Balance Sheet
December 31, 2010
Stockholders’ equity
Paid-in capital
Capital stock
9% Preferred stock, $5 par value,
cumulative, 120,000 shares issued
and outstanding................................. $ 600,000
Common stock, $1 par value,
1,000,000 shares issued and
985,000 shares outstanding .............. 1,000,000
Total capital stock .........................
$1,600,000
Additional paid-in capital
In excess of par value—
preferred stock...................................
360,000
In excess of par value—
common stock ...................................
100,000
Total additional paid-in capital .....
460,000
Total paid-in capital .......................
2,060,000
Retained earnings ...............................................
2,161,000*
Total paid-in capital and
retained earnings........................
4,221,000
Less: Treasury stock (common 15,000
shares) .....................................................
(135,000)
Total stockholders’ equity ............
$4,086,000
*$800,000 + $2,400,000 – $985,000 – $54,000
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
11-41
PROBLEM 11-4B
(a)
Retained Earnings
Dec. 31
(b)
220,000 Jan. 1 Balance
Dec. 31 Net Income
Dec. 31 Balance
660,000
475,000
915,000
FERNETTI CORPORATION
Partial Balance Sheet
December 31, 2010
Stockholders’ equity
Paid-in capital
Capital stock
10% Preferred stock, $50 par
value, cumulative, 20,000
shares authorized, 8,000 shares
issued and outstanding ..................... $ 400,000
Common stock, $10 par value,
500,000 shares authorized,
350,000 shares issued and
outstanding ........................................ 3,500,000
Total capital stock ..................
$3,900,000
Additional paid-in capital
In excess of par value—
preferred stock...................................
250,000
In excess of par value—
common stock....................................
700,000
Total additional paid-in capital .....
950,000
Total paid-in capital .......................
4,850,000
Retained earnings (See Note X) .........................
915,000
Total stockholders’ equity.............
$5,765,000
Note X: Retained earnings restricted for plant expansion, $150,000.
11-42
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 11-5B
SELIG CORPORATION
Partial Balance Sheet
December 31, 2010
Stockholders’ equity
Paid-in capital
Capital stock
8% Preferred stock, $50
par value, noncumulative,
50,000 shares authorized,
18,000 shares issued and
outstanding ................................. $ 900,000
Common stock, no-par, $5
stated value, 800,000 shares
authorized, 580,000 shares
issued, and 560,000 shares
outstanding ................................. 2,900,000
Total capital stock ..................
$3,800,000
Additional paid-in capital
In excess of par value—
preferred stock ........................... $ 158,000
In excess of stated value—
common stock ............................ 1,500,000
Total additional paid-in
capital...................................
1,658,000
Total paid-in capital................
5,458,000
Retained earnings.................................
1,958,000
Total paid-in capital and
retained earnings.................
7,416,000
Less: Treasury stock—common
(20,000 shares) ..........................
(200,000)
Total stockholders’ equity .....
$7,216,000
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
11-43
PROBLEM 11-6B
LEYLAND INC.
Partial Balance Sheet
December 31, 2010
Stockholders’ equity
Paid-in capital
Common stock, $1 par value,
1,000,000 shares authorized,
590,000* shares issued, and
575,000 outstanding......................................
Paid in capital in excess of par value .................
Total paid-in capital ......................................
Retained earnings ................................................
Total paid-in capital and retained earnings....
Less: Treasury stock—common
(15,000 shares)..........................................
Total stockholders’ equity............................
$ 590,000
1,195,000**
1,785,000
890,000***
2,675,000
(60,000)
$2,615,000
***500,000 + 50,000 + 40,000 = 590,000 shares issued
***$1,000,000 + ($125,000 – $50,000) + (40,000 X $3) = $1,195,000
***$600,000 – $160,000 + $450,000 = $890,000
11-44
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
PROBLEM 11-7B
2009
2010
(a) (i)
Return on assets
ratio
(ii) Return on common
stockholders’
equity ratio
(iii) Payout ratio
(iv) Debt to total assets
ratio
(v) Times interest
earned ratio
$780,000
$5,312,500
$780,000
$3,312,500
$270,000
$780,000
$2,000,000
$5,000,000
$850,000
= 14.7%
$6,250,000
$850,000
= 23.5%
$5,250,000
$300,000
= 34.6%
$850,000
$1,200,000
= 40%
($780,000+$120,000+$166,000)
$5,625,000
= 13.6%
= 16.2%
= 35.3%
= 21.3%
($850,000+$50,000+$200,000)
$120,000
$50,000
= 8.9 times
= 22 times
(b) Willingham Company’s net income decreased $70,000 in 2010 even
though its sales remained constant. Its return on assets ratio, 14.7%
increased about 8% from 2009 to 2010. Its dividend payout ratio decreased 2.0%. Its return on common stockholders’ equity ratio increased
almost 45% from 2009 to 2010. An increase of this size indicates improved profitability.
(c) Willingham Company acquired more debt in 2010 and became less
solvent. Its debt to total assets ratio increased from 21.3% to 40%. In
2009, Willingham’s times interest earned ratio was 22 times compared
to 8.9 times in 2010. It is clear that Willingham is less solvent in 2010
than 2009.
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
11-45
PROBLEM 11-7B (Continued)
(d) It appears that the decision to issue bonds and purchase treasury stock
was a wise choice. The bonds require payment of 8% interest which is
less than Willingham’s 14.7% return on assets. This positive difference
resulted in the significant improvement in return on common stockholders’ equity.
Willingham is less solvent in 2010 than 2009 but does not appear to
have trouble covering interest payments.
If Willingham’s earnings drop, it could consider re-issuing the treasury
stock to pay off the bonds.
11-46
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
*PROBLEM 11-8B
(a) Feb.
Mar.
July
1
1
1
Cash Dividends (90,000 X $0.50) ......
Dividends Payable .....................
45,000
Dividends Payable.............................
Cash ............................................
45,000
Stock Dividends (9,000* X $26) ........
Common Stock Dividends
Distributable (9,000 X $20)......
Paid-in Capital in Excess of
Par Value (9,000 X $6) .............
234,000
45,000
45,000
180,000
54,000
*90,000 shares X 0.10
31
Dec.
1
31
Common Stock Dividends
Distributable ...................................
Common Stock...........................
180,000
180,000
Cash Dividends (99,000 X $1)...........
Dividends Payable .....................
99,000
Income Summary ..............................
Retained Earnings......................
500,000
Retained Earnings.............................
Stock Dividends .........................
234,000
Retained Earnings.............................
Cash Dividends ..........................
144,000
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
99,000
500,000
234,000
144,000
(For Instructor Use Only)
11-47
*PROBLEM 11-8B (Continued)
(b)
Common Stock
1/1 Bal. 1,800,000
7/31
180,000
12/31 Bal.1,980,000
12/31
12/31
Retained Earnings
234,000 1/1 Bal.
750,000
144,000 12/31
500,000
12/31 Bal. 872,000
Paid-in Capital
in Excess of Par Value
1/1 Bal.
240,000
7/1
54,000
12/31 Bal. 294,000
Cash Dividends
2/1
45,000
12/1
99,000 12/31
12/31 Bal. –0–
11-48
144,000
Copyright © 2010 John Wiley & Sons, Inc.
Common Stock
Dividends Distributable
7/31
180,000 7/1
180,000
12/31 Bal.
–0–
Stock Dividends
7/1
234,000
12/31
234,000
12/31 Bal. –0–
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
*PROBLEM 11-8B (Continued)
(c)
DOLEN CORPORATION
Partial Balance Sheet
December 31, 2010
Stockholders’ equity
Paid-in capital
Capital stock
Common stock, $20 par value,
99,000 shares issued and
outstanding ........................................
Additional paid-in capital
In excess of par value ..........................
Total paid-in capital.......................
Retained earnings...............................................
Total stockholders’ equity ............
$1,980,000
294,000
2,274,000
872,000
$3,146,000
$144,000 a
= 28.8%
(d) Payout ratio =
$500,000
a
($45,000 + $99,000)
Return on common stockholders’ equity =
$500,000 – 0
$500,000
=
= 16.8%
($2,790,000* + $3,146,000 **) ÷ 2 $2,968,000
*$1,800,000 + $240,000 + $750,000
Copyright © 2010 John Wiley & Sons, Inc.
**from req. (c)
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
11-49
COMPREHENSIVE PROBLEM SOLUTION
(a)
1. Cash ................................................................
Preferred Stock .......................................
Paid-in Capital in Excess
of Par—Preferred Stock ......................
33,000
2. Cash ................................................................
Common Stock........................................
Paid-in Capital in Excess
of Par—Common Stock ......................
21,000
3. Accounts Receivable .....................................
Service Revenue .....................................
280,000
4. Cash ................................................................
Unearned Service Revenue ....................
36,000
5. Cash ................................................................
Accounts Receivable ..............................
267,000
6. Supplies ..........................................................
Account Payable .....................................
35,100
7. Accounts Payable...........................................
Cash.........................................................
32,200
8. Treasury Stock................................................
Cash.........................................................
15,200
9. Other Operating Expenses ............................
Cash.........................................................
188,200
10. Cash Dividends ($2,100 + $10,200*) ..............
Dividends Payable ..................................
12,300
11. Allowance for Doubtful Accounts .................
Accounts Receivable ..............................
1,300
30,000
3,000
9,000
12,000
280,000
36,000
267,000
35,100
32,200
15,200
188,200
12,300
1,300
*[($80,000 ÷ $10) + 900 – 400] X $1.20
11-50
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
COMPREHENSIVE PROBLEM SOLUTION (Continued)
Adjusting Entries
1. Supplies Expense ($4,400 + $35,100 – $5,900) ..
Supplies...................................................
2. Unearned Service Revenue ...........................
Service Revenue ($36,000 X 9/12)..........
3. Bad Debts Expense [$3,500 – ($1,500 – $1,300)]....
Allowance for Doubtful Accounts..........
4. Depreciation Expense—Building ..................
Accumulated Depreciation—Building
($142,000 – $10,000) ÷ 30 ....................
5. Income Tax Expense ......................................
Income Tax Payable................................
(b)
33,600
33,600
27,000
27,000
3,300
3,300
4,400
4,400
23,250
23,250
HIATT CORPORATION
Adjusted Trial Balance
12/31/10
Account
Cash.....................................................................
Accounts Receivable ..........................................
Allowance for Doubtful Accounts......................
Supplies...............................................................
Land .....................................................................
Building ...............................................................
Accum. Depreciation—Building.........................
Accounts Payable ...............................................
Income Taxes Payable........................................
Unearned Service Revenue ................................
Dividends Payable ..............................................
Preferred Stock ...................................................
Paid-in Capital in Excess of Par Value—P.S. ....
Common Stock....................................................
Paid-in Capital in Excess of Par Value—C.S.....
Retained Earnings ..............................................
Cash Dividends ...................................................
Treasury Stock ....................................................
Service Revenue .................................................
Bad Debts Expense ............................................
Depreciation Expense.........................................
Supplies Expense ...............................................
Other Operating Expenses.................................
Income Tax Expense ..........................................
Total .................................................................
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
Debit
$146,000
57,200
Credit
$
3,500
5,900
40,000
142,000
26,400
28,500
23,250
9,000
12,300
30,000
3,000
89,000
12,000
127,400
12,300
15,200
307,000
3,300
4,400
33,600
188,200
23,250
$671,350
$671,350
(For Instructor Use Only)
11-51
COMPREHENSIVE PROBLEM SOLUTION (Continued)
(c) Optional T Accounts
Bal.
Bal.
Cash
24,600
33,000
21,000
36,000
267,000
146,000
32,200
15,200
188,200
Accum. Depreciation—Building
Bal.
22,000
4,400
Bal.
26,400
Accounts Payable
32,200 Bal.
25,600
35,100
Bal.
28,500
Accounts Receivable
45,500
267,000
280,000
1,300
57,200
Income Taxes Payable
23,250
Allowance for Doubtful Accounts
1,300 Bal.
1,500
3,300
Bal.
3,500
Unearned Service Revenue
27,000
36,000
Bal.
9,000
Bal.
Bal.
Bal.
Bal.
Supplies
4,400
35,100
5,900
Dividends Payable
12,300
33,600
Preferred Stock
Bal.
Bal.
11-52
30,000
Land
40,000
Building
142,000
Copyright © 2010 John Wiley & Sons, Inc.
Paid-in Capital in Excess
of Par Value—P.S.
3,000
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
COMPREHENSIVE PROBLEM SOLUTION (Continued)
(c) (Continued)
Common Stock
Bal.
Bal.
80,000
9,000
89,000
Paid-in Capital in Excess
of Par Value—C.S.
12,000
Bad Debts Expense
3,300
Depreciation Expense
4,400
Supplies Expense
33,600
Retained Earnings
127,400
Other Operating Expenses
188,200
Cash Dividends
12,300
Income Tax Expense
23,250
Treasury Stock
15,200
Service Revenue
Bal.
Copyright © 2010 John Wiley & Sons, Inc.
280,000
27,000
307,000
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
11-53
COMPREHENSIVE PROBLEM SOLUTION (Continued)
(d)
HIATT CORPORATION
Income Statement
For the Year ending 12/31/10
Service revenue ..........................................
Operating expenses
Supplies expense ................................
Depreciation expense..........................
Bad debts expense ..............................
Other operating expenses...................
Total operating expenses ...........................
Income before taxes ...................................
Income tax expense.............................
Net income...................................................
$307,000
$ 33,600
4,400
3,300
188,200
229,500
77,500
23,250
$ 54,250
HIATT CORPORATION
Statement of Retained Earnings
For the Year ending 12/31/10
Retained earnings, 1/1/10 ...........................................
Add: Net income .......................................................
Less: Dividends..........................................................
Retained earnings, 12/31/10 .......................................
11-54
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
$127,400
54,250
181,650
12,300
$169,350
(For Instructor Use Only)
COMPREHENSIVE PROBLEM SOLUTION (Continued)
HIATT CORPORATION
Balance Sheet
At 12/31/2010
Assets
Current assets
Cash ...................................................
Accounts receivable..........................
Allowance for doubtful accounts .....
Supplies .............................................
Total current assets.....................
$146,000
$ 57,200
(3,500)
53,700
5,900
205,600
Property, plant, and equipment
Land....................................................
40,000
Building.............................................. $142,000
Accumulated depreciation................ (26,400) 115,600 155,600
Total assets ...............................................
$361,200
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable...............................
Income taxes payable ........................
Dividends payable ..............................
Unearned service revenue .................
Total current liabilities...............................
Stockholders’ equity
Paid-in capital
Capital stock
Preferred stock......................... $30,000
Common stock ......................... 89,000
Total capital stock ................
Additional paid-in capital
In excess of par
value—preferred stock ...............
3,000
In excess of par
value—common stock ................ 12,000
Total additional paid-in capital ...
Total paid-in capital..................
Retained earnings ..............................
Total paid-in capital and
retained earnings ...................
Less: Treasury stock-common
(400 shares)..............................
Total stockholders’ equity .......
Total liabilities and stockholders’ equity .....
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
$ 28,500
23,250
12,300
9,000
$ 73,050
119,000
15,000
134,000
169,350
303,350
(15,200)
288,150
$361,200
(For Instructor Use Only)
11-55
BYP 11-1
FINANCIAL REPORTING PROBLEM
(a) The common stock has a par value of $0.69 4/9 per share.
(b) There are 160 million shares authorized (120 million class A and 40 million
class B) of which 54,296,000 are issued. The percentage is 34%
(54,296,000 ÷ 160,000,000).
2007
2006
54,233,000*
53,692,000**
(c)
The shares outstanding were ...............
*54,296,000 – 63,000
(d) Payout ratio =
**53,754,000 – 62,000
$17,421
= 33.7%
$51,625
Earnings per share = $0.94 (given under financial highlights and statement of earnings)
Return on common stockholders’ equity =
$51,625 – 0
= 8.1%
$634,455.5*
*($638,230 + $630,681) ÷ 2
11-56
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
BYP 11-2
COMPARATIVE ANALYSIS PROBLEM
(a)
Tootsie Roll
Hershey Foods
Return on common
stockholders’ equity
$214,154 ÷ $638,172.5* = 33.6%
*($592,922 + $683,423) ÷ 2
Debt to total assets
$51,625 ÷ $634,455.5** = 8.1%
**($638,230 + $630,681) ÷ 2
$3,623,593 ÷ $4,247,113 = 85.3%
$174,495** ÷ $812,725 = 21.5%
**($57,972 + $116,523)
Return on assets
$214,154 ÷ $4,202,339* = 5.1%
*($4,247,113 + $4,157,565) ÷ 2
$51,625 ÷ $802,182** = 6.4%
**($812,725 + $791,639) ÷ 2
(b) Hershey Foods’ return on assets, 5.1%, is lower than Tootsie Roll’s 6.4%
indicating that it is less profitable. Comparing the return on common
stockholders’ equity indicates that Hershey is significantly more profitable
because its shareholders earned 33.6% on each dollar invested while
Tootsie Roll’s investors earned only 8.1%.
These differences in profitability can be better understood by looking
at the debt to total assets ratios. Hershey Foods relies much more on
debt to provide a return to its investors. Hershey’s return to stockholders is higher than Tootsie Roll’s because it uses leverage to boost
its return to shareholders. Hershey’s interest rate on borrowing is less
than the rate it earns on its assets therefore by borrowing it can increase
its return. However, its reliance on debt increases its risk of default and
decreases its solvency.
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
11-57
BYP 11-2 (Continued)
(c) Payout ratio
Hershey Foods
Tootsie Roll
$252,263
= 117.8%
$214,154
$17,421
= 33.7%
$51,625
Hershey Foods pays out a much higher portion of its earnings as
dividends.
11-58
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
BYP 11-3
RESEARCH CASE
(a) Scotts didn’t see major investment opportunities on the horizon. It
believed it could keep producing profits for years, and interest rates on
debt were very low.
(b) Scotts borrowed $775 million in debt and then paid out $750 million to
shareholders by paying a special dividend and buying back shares.
(c) The chapter discusses the fact that if the interest rate paid on debt is
lower than the return on assets, the company can increase its return
on common shareholders’ equity by using leverage. In addition, the
article says that companies that take on additional debt are forced to
function in a more disciplined, efficient fashion. Also, by buying back
shares, companies decrease the number of shares that represent the
divisor for earnings per share, thus increasing earnings per share.
(d) Higher debt reduces solvency and therefore increases the risk of default.
If interest rates rise in the future and the company is forced to refinance
at higher rates, its profitability will fall. Also, if the economy slows, the
company will have a harder time meeting its debt payments.
(e) Some companies might take on large amounts of debt in order to reduce
the likelihood that they will be acquired by another company. Companies
with lots of available cash make good takeover targets because the
acquiring company can borrow money to buy the company, and then
use the acquired company’s cash to pay down the debt. If the target
company already has lots of debt, this approach is less likely to occur.
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
11-59
BYP 11-4
INTERPRETING FINANCIAL STATEMENTS
(a) This is a dividend transaction—a property dividend.
(b)
Debt to total assets
ratio
(c) Return on assets
Return on common
stockholders’ equity
Host Marriott
$3,112
= 81.4%
$3, 822
Marriott International
$2, 440
= 76.1%
$3, 207
$(25)
= (.7%)
$3, 822
$200
= 6.2%
$3, 207
$(25)
= (3.5%)
$710
$200
= 26.1%
$767
(d) The debtholders were concerned that by splitting the company and
leaving most of the debt with only one half of the original company the
likelihood that the debtholders would be repaid was reduced—that is,
the probability that Marriott would default on the debt increased. This
reduces the value of the debt investment.
11-60
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
BYP 11-5
INTERPRETING FINANCIAL STATEMENTS
(a)
Dividend yield is the annual dividend divided by the current stock
price. At the time of the article the dividend yield for Asian firms was
higher than that of companies for any other region in the world.
(b)
Asian company debt levels have decreased significantly in recent
years—much lower than U.S. or European firms. The article suggests
that this has resulted in lower returns on equity. As discussed in the
chapter, the return on equity is influenced by the return on assets and
by leverage. As a company reduces its reliance on leverage its return
on equity will decline as long as its borrowing rate is less than its
return on assets percentage.
(c)
The dividend payout ratio, computed as dividends divided by net income, reports the percentage of a firms’ earnings that it is distributing
as dividends. In 1990 Asian firms paid out 32% of their earnings as
dividends. They are projected to pay out 44% in 2005. Dividend paying
stocks have tended to outperform non-dividend paying stocks. The
explanation given is that “companies that pay dividends have free
cash flow, are shareholder-friendly and tend to have a higher return
on equity.”
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
11-61
BYP 11-6
FINANCIAL ANALYSIS ON THE WEB
Answers will vary depending on the company chosen by the student.
11-62
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
BYP 11-7
DECISION MAKING ACROSS THE ORGANIZATION
Year ended
Dec. 31, 2006
Dec. 28, 2003
$236.0 – 0
$94.3 – 0
=$.83
= $2.07
113.9
114.2
(a) Earnings per share
Return on common
stockholders’ equity
Return on assets
$94.3
= 6.1%
1,535.1
$236.0
=14.7%
$1,603.6
$94.3
= 3.4%
$2,750.3
$236.0
= 8.0%
$2,943.7
All three measures indicate a significant decrease in profitability.
(b) Payout ratio
Average cash dividend
per share
$69.7
=73.9%
$94.3
$27.3
=11.6%
$236.0
$69.7
=$.61
114.2
$27.3
=$.24
113.9
Wendy’s paid significantly more of its earnings as dividends in 2006 than
the year ended Dec. 28, 2003. Wendy’s appears to be distributing more of
its earnings instead of investing them in its operations.
(c) Debt to total
assets ratio
$1,048.7
= 50.9%
$2,060.3
$1,405.4
= 44.4%
$3,164.0
Times interest
earned ratio
($94.3 + $35.7 + $5.4)
$35.7
= 3.8 times
($236.0+ $45.8+ $141.6)
$45.8
= 9.2 times
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
11-63
BYP 11-7 (Continued)
Wendy’s debt to total assets ratio increased from 44.4% to 50.9% indicating a decrease in its solvency. This increase may be cause for concern
since Wendy’s times interest earned ratio also decreased significantly.
(d) Since Wendy’s return on assets and its return on common stockholders’ equity both decreased it can be concluded that the decline was
due partially to declining profitability in use of assets.
11-64
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
BYP 11-8
COMMUNICATION ACTIVITY
Dear Uncle Frank:
Thanks for your recent letter and for asking me to explain four terms.
Here are my explanations:
(1) Authorized stock is the total amount of stock that a corporation is
given permission to sell as indicated in its charter. If all authorized
stock is sold, a corporation must obtain the consent of the state to
amend its charter before it can issue additional shares.
(2) Issued stock is the amount of stock that has been sold either directly
to investors or indirectly through an investment banking firm.
(3) Outstanding stock is capital stock that has been issued and is being
held by stockholders. It represents the difference between the stock
issued by the company and the stock repurchased by the company.
(4) Preferred stock is capital stock that has contractual preferences over
common stock in certain areas.
I really enjoy my accounting classes and especially like the accounting
instructors. I hope your corporation does well, and I wish you continued
success with your inventions.
Regards,
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
11-65
BYP 11-9
ETHICS CASE
(a) The stakeholders in this situation are:
The director of Nanco’s R&D division.
The president of Nanco.
The shareholders of Nanco.
Those who live in the environment to be sprayed by the new
(untested) chemical.
(b) The president is risking the environment and everything and everybody in
it that is exposed to this new chemical in order to enhance his company’s
sales and to preserve his job. Presidents and entrepreneurs frequently
take risks in performing their leadership functions, but this action appears
to be irresponsible and unethical.
(c) A parent company may protect itself against loss and most reasonable
business risks by establishing separate subsidiary corporations, but
whether it can insulate itself against this type of action is a matter of
state corporate law and criminal law.
11-66
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
BYP 11-10
ETHICS CASE
(a) The stakeholders in this situation are:
Mr. Ripken, president of Tomlinson Corporation.
Angie Baden, financial vice-president.
The stockholders of Tomlinson Corporation.
(b) There is nothing unethical in issuing a stock dividend. But the president’s order to write a press release convincing the stockholders that
the stock dividend is just as good as a cash dividend is unethical. A
stock dividend is not a cash dividend and does not necessarily place
the stockholder in the same position. A stock dividend is a “paper”
dividend—the issuance of a certificate, not a check (cash).
(c) The stock dividend results in a decrease in retained earnings and an
increase of the same amount in paid-in capital with no change in total
stockholders’ equity. There is no change in total assets and no change
in total liabilities and stockholders’ equity.
As a stockholder, preference for a cash dividend versus stock dividend
is dependent upon one’s investment objective—income (cash flow) or
growth (reinvestment).
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)
11-67
BYP 11-11
ALL ABOUT YOU ACTIVITY
Student responses will vary depending on organization chosen by student.
11-68
Copyright © 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
(For Instructor Use Only)