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167.Stockholders' equity consists of two main parts, paid-in capital and retained earnings. Paid-in capital consists of funds raised by the

issuance of stock, either common or preferred. Paid-in capital is the total amount of cash and other assets the corporation receives in exchangefor stock. Paid-in capital in excess of par value represents the amount a corporation receives from issuing stock when the market value exceeds thepar value of the stock. Retained earnings is the cumulative net income and loss retained by the corporation less any dividends declared.

168.Both common and preferred stock can represent shares of ownership in a corporation. Preferred stock has a priority (senior) status relative tcommon stock in one or more areas. The most common preference items are dividends and distribution of assets in the event of liquidation. Whecash or liquidating dividends are declared, preferred stockholders receive them before common stockholders. Preferred shareholders usually do nohave the voting rights that are assigned to common shareholders. Preferred stock may be convertible to common stock. Preferred stock also may bsubject to a call provision which allows the corporation to buy back the preferred stock under specified conditions.

169.Retained earnings generally consists of a company's cumulative net income less any net losses and dividends declared since its inception.Within retained earnings, companies may report restricted retained earnings, appropriated retained earnings, or prior period adjustments.Restrictions of retained earnings may be statutory or contractual. Many states restrict treasury stock purchases to the amount of retained earnings.Appropriated retained earnings refer to a voluntary transfer of amounts from Retained Earnings to Appropriated Retained Earnings to informusers of special activities that require funds. Prior period adjustments are corrections of errors in prior periods' financial statements. These shouldbe differentiated from changes in accounting estimates, which are not considered errors and are not reported as prior period adjustments.

170.Stock options are the rights to purchase common stock at a fixed price over a specified period. As the stock's price rises above the fixed price,the option's value increases. As a general rule, stock options motivate managers and employees to (1) focus on company performance, (2) take along-term perspective, and (3) remain with the company. A stock option is like having an investment with no risk.

171.The price-earnings ratio of a common stock is computed by dividing the stock's market value per share by its earnings per share. The price-earnings ratio represents the stock market's expectations of a company's future performance. Some analysts view a high PE (greater than 20 to 25,for instance) ratio as an indication that a stock is overvalued. A low ratio (less than 5 to 8) may indicate that a stock is undervalued.

172.Dividend yield is the ratio of annual cash dividends per share divided by the market value per share of stock. The resulting dividend yieldrepresents the percent of cash return investors receive from an investment in a company's stock. Dividend yield can be used to identify whethera stock is an income stock or a growth stock. Companies that pay large dividends on a regular basis are income stocks. Companies that distributelittle or no cash but use the cash to finance expansion are known as growth stocks.

173.Book value per share is calculated by dividing the stockholders' equity applicable to common shareholders by the number of common sharesoutstanding. Book value per share reflects value per share if a company were liquidated at balance sheet amounts. Book value per share is thestarting point in many stock valuation models, merger negotiation, price setting for public utilities and loan contracts. Its main limitation is thepotential difference between recorded value and market value for assets.

174.When stock is issued for cash, cash is debited. If the stock is issued for assets other than cash, those assets are debited for their marketvalue. If the stock is par value stock, Common Stock is credited for the par value of the stock, and any amounts over the par value are creditedto Paid- in Capital in Excess of Par Value, Common Stock. If the stock is stated value stock, Common Stock is credited for the stated value,and any additional amounts are credited to Paid-in Capital in Excess of Stated Value, Common Stock. If the stock is no-par, all amountsreceived are credited to Common Stock.

175.When a corporate board of directors declares a common stock dividend on the declaration date, Retained Earnings is debited and CommonDividends Payable is credited. No journal entry is recorded on the date of record. On the payment date, Common Dividends Payable is debited andCash is credited.

176.A stock split is the distribution of additional shares to stockholders according to their present ownership. When a stock split occurs, thecorporation "calls in" its outstanding shares and issues more than one new share in exchange for each old share. Stock splits reduce the par orstated value per share. Total paid-in capital, retained earnings, and stockholders' equity are unchanged by stock splits. Stock dividends aredistributions of additional shares of the corporation's own stock to its stockholders without the receipt of any payment in return. A stock dividenddoes not change the par or stated value per share. Total paid-in capital is increased, total retained earnings is decreased from a stock dividend, buttotal stockholders' equity is unchanged from a stock dividend.

177.A large stock dividend is a distribution of more than 25% of previously outstanding shares. A large stock dividend is recorded by capitalizingretained earnings for an amount equal to the par or stated value of the shares. A small stock dividend is a distribution of less than or equal to25% of the previously outstanding shares. A small stock dividend is recorded by capitalizing retained earnings for an amount equal to themarket value of the shares to be distributed.

178.Preferred shareholders usually have the right to receive dividends before common shareholders. When preferred stock is cumulative andin arrears, the preferred shareholders will receive the amount in arrears plus the current dividend before any dividend is distributed to commonshareholders.

179.Treasury stock is the company's own issued shares that it reacquires. The cost of these shares is debited to Treasury Stock. Treasury Stockis a contra equity account and the balance is subtracted from Stockholders' Equity on the balance sheet. If the treasury stock is reissued, anyproceeds in excess of the purchase price are credited to the Paid-in Capital, Treasury Stock account. If the proceeds are less than the purchaseprice then the deficit is debited to Paid-in Capital, Treasury Stock (provided a balance exists-if it does not, or the balance is driven to zero, thenRetained Earnings is debited).

180.When a company's own stock is retired, all paid-in capital amounts related to the retired shares are removed. If the purchase price exceedsthe net amount removed from the paid-in capital, the difference is debited to Retained Earnings. If the purchase price is less than the net amountremoved from the paid-in capital, the difference is credited to Paid-in Capital from Retirement of Stock.

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Feedback:181. Answers will vary



Supporting computations:

Feedback: $258,200184. Answers will vary

(2) The cost of stock options is reported in the income statement.Feedback: (1) This is an error that should be reported as a prior period adjustment. Accordingly, it should be reported in the statement of retainedearnings, net of taxes, as a reduction from the beginning retained earnings balance.

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Feedback: ($90,000 - $10,000)/12,500 shares = $6.40187.Answers will vary

Feedback: ($2,375,000 - $80,000) / 500,000 shares = $4.59188. Answers will vary

Feedback: $67.20 / $3.50 = 19.2189.Answers will vary

Feedback: $12 / ($850,000 / 425,000 shares) = 6190.Answers will vary

Feedback: $79.20/ ($990,000/150,000 shares) = 12.0191.Answers will vary

Feedback: $88.33/ [($3,730,000 - $100,000)/600,000 shares] = 14.6

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Feedback: $43.05 / [($478,000 - $5,500) / (100,000 shares - 10,000 shares)] = 8.2194. Answers will vary

Feedback: $2.45 / $35 = 7%195. Answers will vary

Feedback: $0.07 / $17.50 = 0.4%

196. Answers will vary

Feedback: $0.54 / $45 = 1.2%197. Answers will vary

(2.) $0.44 / $27.50 = 1.6%Feedback: (1.) $0.44 x (18,000 shares - 2,000 shares) = $7,040198. Answers will vary

(2) $0.24 / $15 = 1.6%Feedback: (1) $0.24 x (400,000 - 15,000) shares = $92,400199. Answers will vary

Feedback: $ 1,750,000/350,000 shares = $5.00 per common share200. Answers will vary

(2) Book value per common share: ($2,400,000 - $25,000)/250,000 shares = $9.50 per common shareFeedback: (1) Book value per preferred share: $50 per preferred share (the stock's par value when not callable).201. Answers will vary

(2) Book value per common share = $5,700,000/300,000 shares = $19Feedback: (1) Number of common shares outstanding = $3,000,000/$10 = 300,000 shares

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Feedback:206.Answerswill vary

Feedback:207.Answers

will vary

Feedback:208. Answerswill vary


(2) Common: $25,000 - $10,000 = $ 15,000

Feedback: (1) Preferred: 10% x $100,000 = $ 10,000

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Preferred dividend: 2,000 shares x $100 par x 10% = $20,000




Feedback:

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238. Stated value stock239. Capi ta l s tock240. Minimum legal capital241. Net income, net losses, dividends242. Preferred stock243. Prior period adjustments244. Earnings per share245. Book value per common share246. Dividend yield247. Market price per share; earnings per share248. The date of declaration; the date of record; the date of payment249. Cumulative preferred stock250. Dividend in arrears

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ch13 ans.docx