ACCT1101 – Introduction to Financial Accounting

Tutorial Suggested solutions – Chapter 11

Discussion questions - suggested answers

(M13-3, M13-9, E11-3, E11-10, E11-11, E11-16 (Req. 1 & 2), E11-18 (Req. 1), E11-21, P11-1, P11-3,
P11-7)

M13–3.

$183,000 / [($1,100,000 + $1,250,000) ÷ 2] = 15.57%

M13–9.

Dividend Yield = Dividends per Share ÷ Market Price per Share

5% = $3.50 ÷ Market Price per Share

Market Price per Share = $70.00

E11–3.

Req. 1
Stockholders’ Equity
Common stock, authorized 103,000 shares;
issued and outstanding, 20,000 shares .................................................... $200,000
Preferred stock, authorized 4,000 shares;
issued and outstanding, 3,000 shares ...................................................... 24,000
Additional paid-in capital (common shares) ................................................ 120,000
Additional paid-in capital (preferred shares) ............................................... 36,000
Retained earnings ...................................................................................... 60,000
Total Stockholders’ Equity....................................................................... $440,000

Req. 2

The answer would depend on the profitability of the company and the stability of its
earnings. The preferred stock has a 9% dividend rate. If the company earns more than
9%, the additional earnings would accrue to the common stockholders. If the company
earns less than 9%, it would pay a higher rate to the preferred stockholders.

E11–10.
Net income: $942,000 - $800,000 - $80,000 - $15,000 = $47,000
EPS = $47,000 / 132,000 shares = $0.36
DC United’s EPS is positive, which is good, but one cannot say much else about the
number without information about DC United’s EPS in prior years or EPS information for
a comparison company. In isolation, ratios like EPS are not all that meaningful.

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ACCT1101 – Introduction to Financial Accounting
Tutorial Suggested solutions – Chapter 11

E11–11.

Req. 1
a. Cash (+A) (20,000 shares x $20) .......................................... 400,000
Common stock, no-par (+SE) ............................................ 400,000

b. Cash (+A) (6,000 shares x $40) ............................................ 240,000

Common stock, no-par (+SE) ............................................ 240,000

c. Cash (+A) (7,000 shares x $30) ............................................ 210,000

Preferred stock (+SE) (7,000 shares x $10) ...................... 70,000
Additional paid-in capital, preferred stock (+SE) ............... 140,000

Req. 2

Yes, it is ethical as long as there is full disclosure of relevant information. It is common

for founders to be given stock or pay a lower price for stock than outsiders when a
company is organized.

E11–16.

Req. 1
(a) Feb. 1:
Treasury stock (+XSE, -SE) (160 shares x $20) ................ 3,200
Cash (-A)........................................................................ 3,200

(b) July 15:

Cash (+A) (80 shares x $21) ............................................ 1,680
Treasury stock (-XSE, +SE) (80 shares x $20) .............. 1,600
Additional paid-in capital (+SE) ...................................... 80

(c) Sept. 1:
Cash (+A) (50 shares x $19) ............................................. 950
Additional paid-in capital (-SE) ......................................... 50
Treasury stock (-XSE, +SE) (50 shares x $20) .............. 1,000

Req. 2

Dividends are not paid on treasury stock. Dividends are computed on shares
outstanding. Therefore, the amount of total cash dividends paid is reduced when a
company repurchases outstanding shares.

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ACCT1101 – Introduction to Financial Accounting
Tutorial Suggested solutions – Chapter 11

E11–18.
Preferred Common
(5,000 (50,000
Req. 1 Shares) Shares) Total
a) Noncumulative:
Preferred ($50,000 x 10%) ...................................... $ 5,000 $ 5,000
Balance to common ($85,000 – $5,000) ................. $80,000 80,000
$ 5,000 $80,000 $85,000
Per share ................................................................ $1.00 $1.60
b) Cumulative:
Preferred, arrears ($50,000 x 10% x 2 years) ......... $ 10,000 $ 10,000
Preferred, current year ($50,000 x 10%) ................. 5,000 5,000
Balance to common ($85,000 – $10,000 – $5,000) $70,000 70,000
$15,000 $70,000 $85,000
Per share ................................................................ $3.00 $1.40

E11–21.

October 1
Retained earnings (-SE) (3 billion shares x $2.45)................ 7,350,000,000
Dividends payable (+L) ..................................................... 7,350,000,000

October 15
No journal entry required.

October 20
Dividends payable (-L) .......................................................... 7,350,000,000
Cash (-A)........................................................................... 7,350,000,000

P11–1.
1. a. Shares authorized (given) ........................................................................
200,000
b. Shares issued ($2,125,000  $17)............................................................
125,000
c. Shares outstanding (125,000 – 3,000) .....................................................
122,000

2. Additional paid-in capital: $2,125,000 – (125,000 shares issued x $10 par) =

$875,000.

3. Earnings per share: $240,340  122,000 shares = $1.97

4. Dividend paid per share: $123,220  122,000 shares = $1.01.

5. Treasury stock is listed as a deduction in the stockholders’ equity section of the

balance sheet (contra-equity account). Amount: 3,000 shares x $20 cost = $60,000.

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ACCT1101 – Introduction to Financial Accounting
Tutorial Suggested solutions – Chapter 11

P11–3.

(a) Cash (+A) (66,000 shares x $9) ............................................ 594,000

Common stock (+SE) (66,000 shares x $5) ...................... 330,000
Additional paid-in capital, common stock (+SE)
(remainder) ..................................................................... 264,000
.
(b) Cash (+A) (9,000 shares x $20) ............................................ 180,000
Preferred stock (+SE) (9,000 shares x $10) ...................... 90,000
Additional paid-in capital, preferred stock (+SE)
(remainder) ..................................................................... 90,000

(c) Cash (+A) (1,000 shares x $20) + (2,500 shares x $10) ...... 45,000
Preferred stock (+SE) (1,000 shares x $10) ...................... 10,000
Common stock (+SE) (2,500 shares x $5) ........................ 12,500
Additional paid in capital, preferred stock (+SE)
(remainder) ..................................................................... 10,000
Additional paid-in capital, common stock (+SE)
(remainder) ..................................................................... 12,500

P11–7.
($ in millions)
Req. 1

Treasury stock (+XSE, -SE) .................................................. 45,000

Cash (-A) ........................................................................... 45,000

Req. 2

Cash (+A) .............................................................................. 10

Treasury stock (-XSE, +SE) .............................................. 9
Additional paid-in capital (+SE) ......................................... 1