Solutions Guide: Please do not present as your own. This is only meant as a solutions guide for you to answer the problem on
your own.
P11-2A The stockholders’ equity accounts of Sigma Corporation on January 1, 2010, were as follows.
Preferred Stock (8%, $100 par noncumulative, 5,000 shares authorized) $ 300,000
Common Stock ($5 stated value, 300,000 shares authorized) 1,000,000
Paid-in Capital in Excess of Par Value—Preferred Stock 15,000
Paid-in Capital in Excess of Stated Value—Common Stock 480,000
Retained Earnings 688,000
Treasury Stock—Common (5,000 shares) 40,000
During 2010 the corporation had the following transactions and events pertaining to its stockholders’ equity.
Feb. 1 Issued 5,000 shares of common stock for $30,000.
Mar. 20 Purchased 1,000 additional shares of common treasury stock at $7 per share.
Oct. 1 Declared an 8% cash dividend on preferred stock, payable November 1.
Nov. 1 Paid the dividend declared on October 1.
Dec. 1 Declared a $0.50 per share cash dividend to common stockholders of record on December 15, payable December 31, 2010.
31 Determined that net income for the year was $280,000. Paid the dividend declared on December 1.
Instructions (a) Journalize the transactions. (Include entries to close net income and dividends to Retained Earnings.) (b) Enter the
beginning balances in the accounts and post the journal entries to the stockholders’ equity accounts. (Use T accounts.) (c) Prepare the
stockholders’ equity section of the balance sheet at December 31, 2010. (d) Calculate the payout ratio, earnings per share, and return
on common stockholders’ equity ratio. (Note: Use the common shares outstanding on January 1 and December 31 to determine the
average shares outstanding.)
(a)
Feb.
1
Cash .................................................................... 30,000
Common Stock (5,000 X $5) ...............................
Paid-in Capital in Excess of
Stated Value—Common
Stock ..................................................................
5,000
Mar.
20
Treasury Stock—Common (1,000 X $7) ......................
Cash ......................................................................
7,000
7,000
Oct.
1
Cash Dividends ($300,000 X .08) .................................
Dividends Payable ...............................................
24,000
24,000
Nov.
1
Dividends Payable .........................................................
Cash ......................................................................
24,000
24,000
Dec.
1
Cash Dividends..............................................................
[200,000* + 5,000 – (5,000 + 1,000)] X $.50
Dividends Payable ...............................................
99,500
Income Summary ..........................................................
Retained Earnings ...............................................
280,000
Retained Earnings.........................................................
Cash Dividends ($24,000 + $99,500)......................
123,500
Dividends Payable .........................................................
Cash ......................................................................
99,500
99,500
Dec.
31
31
31
*$1,000,000 ÷ $5
(b)
25,000
99,500
280,000
123,500
Paid-in Capital in Excess of
Par Value—Preferred Stock
Preferred Stock
1/1
Bal.
300,000
1/1
Bal.
15,000
12/31 Bal.
300,000
12/31 Bal.
15,000
Paid-in Capital in Excess of
Stated Value—Common Stock
Common Stock
1/1 Bal.
2/1
1,000,000
25,000
1/1 Bal.
2/1
480,000
5,000
12/31 Bal.
1,025,000
12/31 Bal.
485,000
Retained Earnings
12/31
Treasury Stock—Common
123,500 1/1 Bal.
12/31
12/31 Bal.
688,000
280,000
1/1 Bal.
3/20
40,000
7,000
844,500
12/31 Bal.
47,000
Cash Dividends
10/1
12/1
12/31 Bal.
(c)
24,000
99,500 12/31
123,500
–0–
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) .................................................................
$ 300,000
1,025,000
$1,325,000
15,000
485,000
500,000
1,825,000
844,500
2,669,500
(47,000)
Total stockholders’ equity.....................
(d)
Payout ratio =
$99,500
=35.5%
$280,000
Earnings per share =
*200,000 – 5,000
$280,000 – $24,000
$256,000
=
= $1.30
(195,000* + 199,000* *)÷ 2 197,000
**205,000 – 6,000
Return on common stockholders’ equity =
$280,000 – $24,000
$256,000
=
= 11.5%
a
b
($2,128,000 + $2,307,500 ) ÷ 2 $2,217,750
aBeginning
common stockholders’ equity:
$1,000,000 + $480,000 + $688,000 – $40,000
bEnding
common stockholders’ equity:
$1,025,000 + $485,000 + $844,500 – $47,000
$2,622,500