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Chapter 11 - Solutions to Exercises - Series A
SOLUTIONS TO EXERCISES - SERIES A - CHAPTER 11
EXERCISE 11-1A
TransactionsCash Acquired from Owner
$60,000
Revenues 40,000Expenses 19,300Withdrawals 5,000
Mark Pruitt Sole ProprietorshipFinancial Statements
For the Year Ended December 31, 2011
Income Statement
Revenues $40,000
Expenses (19,300)
Net Income $20,700
Capital Statement
Beginning Capital Balance $ -0-
Plus: Capital Acquired from Owner
60,000
Plus: Net Income 20,700
Less: Withdrawal by Owner (5,000)
Ending Capital Balance $75,700
11-8
Chapter 11 - Solutions to Exercises - Series A
EXERCISE 11-1A (cont.)
Mark Pruitt Sole ProprietorshipFinancial Statements
Balance SheetAs of December 31, 2011
AssetsCash $75,700
Total Assets $75,700
Liabilities $ -0-
EquityPruitt, Capital 75,700
Total Liabilities and Equity $75,700
Statement of Cash FlowsFor the Year Ended December 31, 2011
Cash Flows From Operating Activities:
Inflow from Revenues $40,000Outflow for Expenses (19,300)
Net Cash Flow from Operating Activities
$20,700
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities:
Inflow from Owner $60,000Outflow for Owner Withdrawals (5,000)
Net Cash Flow from Financing Activities
55,000
Net Change in Cash 75,700
11-9
Chapter 11 - Solutions to Exercises - Series A
Plus: Beginning Cash Balance -0-Ending Cash Balance $75,700
11-10
Chapter 11 - Solutions to Exercises - Series A
EXERCISE 11-2A
Transactions:Cash Contributions
J. Harris $ 56,000
40%
P. Berryhill 84,000 60%Total $140,00
0100%
Revenues $ 65,000
Expenses 32,000Harris Withdrawal 2,000Berryhill Withdrawal 3,000
HB PartnershipFinancial Statements
For the Year Ended December 31, 2011
Income Statement
Revenues $65,000
Expenses (32,000)
Net Income $33,000
Capital Statement
Beginning Capital Balance $ -0-
Plus: Capital Acquired from Owners
140,000
Plus: Net Income 33,000
Less: Withdrawals by Owners (5,000)
Ending Capital Balance $168,000
11-11
Chapter 11 - Solutions to Exercises - Series A
EXERCISE 11-2A (cont.)
Prepared for the instructor’s use:
Analysis of Capital Accounts:
Harris Berryhill TotalBeginning Capital Balance
$ -0-
$ -0- $ -0-
Investments 56,000 84,000 140,000Net Income 33,000
J. Harris 40% 13,200P. Berryhill 60% 19,800
Withdrawals (2,000) (3,000) (5,000)Ending Capital Balances $67,20
0$100,80
0$168,00
0
11-12
Chapter 11 - Solutions to Exercises - Series A
EXERCISE 11-2A (cont.)
HB PartnershipFinancial Statements
Balance SheetAs of December 31, 2011
AssetsCash $168,00
0Total Assets $168,00
0
Liabilities $ -0-
EquityJ. Harris, Capital $ 67,200P. Berryhill, Capital 100,800
Total Equity 168,000
Total Liabilities and Equity $168,000
Statement of Cash FlowsFor the Year Ended December 31, 2011
Cash Flows From Operating Activities:
Inflow from Revenues $ 65,000
Outflow for Expenses (32,000)Net Cash Flow from Operating Activities
$33,000
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities:
Inflow from Partners $140,00
11-13
Chapter 11 - Solutions to Exercises - Series A
0Outflow for Partners’
Withdrawals(5,000)
Net Cash Flow from Financing Activities
135,000
Net Change in Cash 168,000Plus: Beginning Cash Balance -0-Ending Cash Balance $168,00
0
11-14
Chapter 11 - Solutions to Exercises - Series A
EXERCISE 11-3A
Transactions:Issued 5,000 shares of $10 par stock @ $18
$90,000
Revenues 63,000Expenses 41,000Dividends Paid 4,000
Morris CorporationFinancial Statements
For the Year Ended December 31, 2011
Income Statement
Revenues $63,000
Expenses (41,000)
Net Income $22,000
Statement of Changes in Stockholders’ Equity
Beginning Common Stock $ -0-Plus: Issuance of Common Stock
90,000
Ending Common Stock $ 90,000
Beginning Retained Earnings $ -0-Plus: Net Income 22,000Less: Dividends (4,000)Ending Retained Earnings 18,000
Total Stockholders’ Equity $108,000
11-15
Chapter 11 - Solutions to Exercises - Series A
EXERCISE 11-3A (cont.)
Morris CorporationFinancial Statements
Balance SheetAs of December 31, 2011
AssetsCash $108,000
Total Assets $108,000
Liabilities $ -0-
Stockholders’ EquityCommon Stock, $10 par value,5,000 shares issued and
outstanding$ 50,000
Paid-In Capital in Excess of Par 40,000Total Paid-In Capital 90,000
Retained Earnings 18,000
Total Liabilities and Stockholders’ Equity
$108,000
Statement of Cash FlowsFor the Year Ended December 31, 2011
Cash Flows From Operating Activities:
Inflow from Revenues $63,000Outflow for Expenses (41,000)
Net Cash Flow from Operating Activities
$ 22,000
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities:
Inflow from Issue of Stock $90,000Outflow for Dividends (4,000)
Net Cash Flow from Financing 86,000
11-16
Chapter 11 - Solutions to Exercises - Series A
Activities
Net Change in Cash 108,000Plus: Beginning Cash Balance -0-Ending Cash Balance $108,000
11-17
Chapter 11 - Solutions to Exercises - Series A
EXERCISE 11-4Aa.
Balance Sheet Income Statement Stmt. ofEvent
Assets = Liab
+ Stkholders’ Equity
Rev.
Exp.
= Net Inc.
Cash Flow
Cash = + C. Stk. + PIC Exc.
3/1120,000
= NA + 50,000 + 70,000 NA NA = NA 120,000 FA
5/2400,000
= NA + 100,000
+ 300,000
NA NA = NA 400,000 FA
b.Common Stock:
10,000 shares x $5= $ 50,00020,000 shares x $5= 100,000
Total $150,000
c.Paid-In Capital in Excess of Par
10,000 shares x ($12 $5)=
$ 70,000
20,000 shares x ($20 $5)=
300,000
Total $370,000
d. Total Paid-In Capital:Common Stock $150,000Paid-In Capital in Excess of Par 370,000Total $520,000
e. Total Assets: Cash $520,000
11-18
Chapter 11 - Solutions to Exercises - Series A
f.General Journal
Date
Account Titles Debit Credit
3/1 Cash 120,000Common Stock 50,000Paid-In Capital in Excess of
Par70,000
5/2 Cash 400,000Common Stock 100,000Paid-In Capital in Excess of
Par300,000
11-19
Chapter 11 - Solutions to Exercises - Series A
EXERCISE 11-5Aa.
General Journal
Event
Account Titles Debit Credit
1. Cash (20,000 x $15) 300,000Common Stock, $10 par 200,000Paid-In Capital in Excess of
Par, CS100,000
2. Cash (10,000 x $30) 300,000Preferred Stock, $25 stated
value250,000
Paid-In Capital in Excess of SV, PS
50,000
3. Cash (50,000 x $18) 900,000Common Stock, $10 par 500,000Paid-In Capital in Excess of
Par, CS400,000
b.Stockholders’ Equity:
Preferred Stock, $25 stated value, 4% cumulative class A, 50,000 shares authorized, 10,000 shares issued and outstanding
$ 250,000
Common Stock, $10 par value, 400,000 shares authorized, 70,000 shares issued and outstanding
700,000
Paid-In Capital in Excess of SV, Preferred Stock
50,000
Paid-In Capital in Excess of Par, Common Stock
500,000
Retained Earnings -0-
Total Stockholders’ Equity $1,500,000
11-20
Chapter 11 - Solutions to Exercises - Series A
11-21
Chapter 11 - Solutions to Exercises - Series A
EXERCISE 11-6A
a.
Balance Sheet Income Statement Stmt. ofEven
tAssets = Stockholders’ Equity Rev
. Exp
.= Net
Inc.Cash Flow
Cash =Pref. Stock +
No-ParC.
Stock+
PIC in Excess
1.100,000
= NA + 100,000
+ NA NA NA = NA 100,000 FA
2.120,000
=100,000
+ NA + 20,000
NA NA = NA 120,000 FA
b.General Journal
Event
Account Titles Debit Credit
1. Cash 100,000Common Stock, No Par 100,000
2. Cash 120,000Preferred Stock, $50 par
value100,000
Paid-In Capital in Excess of Par, PS
20,000
11-22
Chapter 11 - Solutions to Exercises - Series A
EXERCISE 11-7A
a. 2,500 shares x $12 market value per share of stock = $30,000
b.
Balance Sheet Income Statement Stmt. ofEvent
Assets = Stockholders’ Equity
Rev.
Exp.
= Net Inc.
Cash Flows
Cash + Van =Com. Stk. + PIC
Exc.
1. 60,000 + NA = 50,0001 + 10,000 NA NA = NA 60,000 FA2. NA + 30,00
0= 25,0002 + 5,000 NA NA = NA NA
15,000 x $10 = $50,00022,500 x $10 = $25,000
c.Even
tAccount Titles Debit Credit
1. Cash 60,000Common Stock 50,000Paid In Capital in Excess of
Par, CS10,000
2. Van (2,500 shs. x $12) 30,000Common Stock 25,000Paid in Capital in Excess of
Par, CS5,000
11-23
Chapter 11 - Solutions to Exercises - Series A
EXERCISE 11-8Aa.
Graves CorporationGeneral Journal
Date Account Titles Debit Credit
1. Treasury Stock (2,000 x $40) 80,000Cash 80,000
2. Cash (1,200 x $48) 57,600Treasury Stock (1,200 x $40) 48,000Paid-In Capital in Excess of
Cost, TS9,600
b.Treasury Stock
1. 80,000 2. 48,000Bal. 32,000
11-24
Chapter 11 - Solutions to Exercises - Series A
EXERCISE 11-9A
a. & b.Common Stock Issued Outstandin
g
Beginning Number of Shares 2,000 2,000Issued This Period 1,000 1,000Repurchased as Treasury Stock
(200)
Resold Treasury Stock 50Ending Number of Shares (b)
3,000(a) 2,850
c.Smoot Corporation
General Journal
Date Account Titles Debit Credit
1. Cash (1,000 x $28) 28,000Common Stock, $10 par 10,000Paid-in Capital in Excess of Par,
CS18,000
2. Treasury Stock (200 x $25) 5,000Cash 5,000
3. Cash (50 x $26) 1,300Treasury Stock (50 x $25) 1,250Paid-In Capital in Excess of Cost,
TS50
Cash Common Stock PIC in Exc. of Par, CS
Bal. not given
Bal.20,000
Bal. 15,000
1. 28,000 2. 5,000 1. 10,000 1. 18,0003. 1,300 Bal.
30,000Bal. 33,000
Bal. unknown
11-25
Chapter 11 - Solutions to Exercises - Series A
Treasury StockPIC in Excess of
Cost, TS2. 5,000 3. 1,250 3. 50Bal.3,750 Bal. 50
11-26
Chapter 11 - Solutions to Exercises - Series A
EXERCISE 11-9A (cont.)
d.Stockholders’ Equity
Common Stock, $10 par value, 10,000 shares authorized, 3,000 shares issued, and 2,850 shares outstanding
$30,000
Paid-In Capital in Excess of Par, Common
33,000
Paid-In Capital in Excess of Cost, TS
50
Total Paid-In Capital $63,050
Retained Earnings 65,000
Less: Treasury Stock (3,750)
Total Stockholders’ Equity $124,300
11-27
Chapter 11 - Solutions to Exercises - Series A
EXERCISE 11-10Aa.
Balance Sheet Income Statement Statement
Date
Assets = Liab. +Com. Stk. + Ret.
Ear.Rev Exp
.= Net
Inc.
ofCash Flows
10/1 NA =60,000 + NA + (60,000)
NA NA = NA NA
11/20
NA = NA + NA + NA NA NA = NA NA
12/30
(60,000)
= (60,000)
+ NA + NA NA NA = NA (60,000) FA
b.Smart Corporation
General Journal
Date Account Titles Debit Credit
10/1/11 Dividends 60,000Dividends Payable 60,000
11/20/11
No Entry
12/30/11
Dividends Payable 60,000
Cash 60,000
12/31/11
Retained Earnings (closing entry)
60,000
Dividends 60,000
Note: Closing entry is not required in the problem.
11-28
Chapter 11 - Solutions to Exercises - Series A
EXERCISE 11-11A
Computation of Preferred Dividends:
Par x Dividend %
=Dividend per Share
x
Number of Shares
Outstanding
=
Total Preferred
Dividends for Year
$50 x 5% = $2.50 x 5,000 = $12,500
a. Dividend arrearage as of January 1, 2012: $12,500 (one year)
b.Dist. to
ShareholdersAmount Preferre
dCommo
n
Total Dividend Declared
$40,000
2011 Arrearage (12,500) $12,5002012 Preferred Dividends
(12,500) 12,500
Available for Common Shs.
15,000
Distributed to Common
(15,000) $15,000
Total Distribution $25,000 $15,000
11-29
Chapter 11 - Solutions to Exercises - Series A
EXERCISE 11-12A
a.
Computation of Dividends to Be Paid:
Preferred Stock
$100 par value x 5% x 5,000 shares=
$25,000
Common Stock
$1 x 100,000 shares = 100,000
Total Dividend
$125,000
b.Date Account Titles Debit Credit
5/10/11 Dividends 125,000Dividends Payable 125,000
5/30/11 No Entry
6/15/11 Dividends Payable 125,000Cash 125,000
12/31/11
Retained Earnings 125,000
(Closing Entry)
Dividends 125,000
Note: Closing entry is not required in the problem.
11-30
Chapter 11 - Solutions to Exercises - Series A
EXERCISE 11-13A
a. Distribution of Dividend:
Distributed to Shareholders
Preferred Common
Total Dividend Declared
$100,000
Preferred Arrearage* (40,000) $40,000Current Preferred Dividend*
(40,000) 40,000
Available for Common 20,000Distributed to Common
(20,000) $20,000
Total $80,000 $20,000
*$100 x 4% x 10,000 Shares = $40,000
b.Wu Corp.
General Journal for 2011
Date Account Titles Debit Credit
Feb. 1 Dividends 100,000Dividends Payable 100,000
Mar. 10
No Entry
Mar. 31
Dividends Payable 100,000
Cash 100,000
Closing EntryDec. 31
Retained Earnings 100,000
Dividends 100,000
Note: Closing entry is not required in the problem.
11-31
Chapter 11 - Solutions to Exercises - Series A
11-32
Chapter 11 - Solutions to Exercises - Series A
EXERCISE 11-14A
a. (30,000 shares x .04) = 1,200 shares; 1,200 shares x $25 = $30,000
b.
Balance Sheet Income Statement Stmt. of
Assets =Liab + Stockholders’ Equity Rev. Exp. =Net Inc. Cash Flows
Com. Stk.
+ PIC. Ex.
+ Ret. Ear.
NA = NA + 12,000 +18,000 +(30,000)
NA NA = NA NA
c.General Journal
Account Titles Debit Credit
Retained Earnings 30,000Common Stock, $10 par 12,000Paid-In Capital in Excess of
Par, CS18,000
11-33
Chapter 11 - Solutions to Exercises - Series A
EXERCISE 11-15A
a. No formal entry would be made in the accounting records. A memo entry would indicate the number of shares had doubled and the par value had been reduced by one-half.
b. 300,000 shares x 2 = 600,000 total shares outstanding
$10 par value 2 = $5 new par value
c. Theoretically, the market value per share would be reduced to $90 ($180 2) after the split. However, if this is perceived as a good move by the company, the price per share may not fall that far, ending at something over $90.
11-34
Chapter 11 - Solutions to Exercises - Series A
EXERCISE 11-16A
a. The price per share of Mighty Drugs should increase substantially. This increase is a result of the expectation of future profits. The approval of the new drug signals that profits should be substantially higher in the future.
b. The balance sheet will not be affected by the announcements.
c. The income statement will not be affected when the announcements are made. Only when revenues increase will net income be affected.
d. The statement of cash flows will not be affected by the announcements.
11-35
Chapter 11 - Solutions to Exercises - Series A
EXERCISE 11-17A
Computation of Price Earnings Ratio:
1. Compute Earnings per Share:Net Income Number of Common Shares Outstanding
2. Compute Price Earnings Ratio:Selling Price per Share Earnings per Share
a. Carabella, Inc.:
Earnings per Share (EPS):Net Income ÷ Common Shs. Outst. = EPS $120,000 ÷ 50,000 = $2.40
Price/Earnings Ratio:Selling Price/Share ÷ Earnings per Share = P/E Ratio
$36.00 ÷ $2.40 = 15
Yamhill, Inc.:
Earnings Per Share (EPS):Net Income ÷ Common Shs. Outst. = EPS$140,000 ÷ 50,000 = 2.80
Price/Earnings Ratio:Selling Price/Share ÷ Earnings per Share = P/E Ratio
$31.00 ÷ $2.80 = 11
b. Carabella appears to have greater potential for growth. Investors are willing to pay more for today’s earnings because they believe that tomorrow’s earnings will be higher.
11-36
Chapter 11 - Solutions to Exercises - Series A
EXERCISE 11-18A
The memo should contain a defination of the price-earnings ratio. It is one of the most commonly reported measures of a company’s value. It is computed by dividing the market price per share by the earnings per share. A high P/E ratio may mean that investors believe that a company’s earnings are going to grow rapidly. A high-growth company will generaly have a higher P/E ratio than a low growth company.
11-37
Chapter 11 - Solutions to Exercises - Series A
SOLUTIONS TO PROBLEMS - SERIES A - CHAPTER 11
PROBLEM 11-19A
TransactionsCash Acquired from Owners
$160,000
Revenues 90,000Expenses 65,000Withdrawals/Distributions
10,000
a. Sole ProprietorshipJa-San Company
Financial StatementsFor the Year Ended December 31, 2011
Income Statement
Revenues $ 90,000
Expenses (65,000)
Net Income $ 25,000
Capital Statement
Beginning Capital Balance $ -0-
Plus: Capital Acquired from Owner
160,000
Plus: Net Income 25,000
Less: Withdrawal by Owner (10,000)
Ending Capital Balance $175,000
11-38
Chapter 11 - Solutions to Exercises - Series A
PROBLEM 11-19A a. (cont.)
Ja-San CompanyFinancial Statements
Balance SheetAs of December 31, 2011
AssetsCash $175,000
Total Assets $175,000
Liabilities $ -0-
EquitySanford, Capital 175,000
Total Liabilities and Equity $175,000
Statement of Cash FlowsFor the Year Ended December 31, 2011
Cash Flows From Operating Activities:
Inflow from Revenues $ 90,000Outflow for Expenses (65,000)
Net Cash Flow from Operating Activities
$ 25,000
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities:
Inflow from Owner $160,000Outflow for Owner Withdrawals (10,000)
Net Cash Flow from Financing Activities
150,000
11-39
Chapter 11 - Solutions to Exercises - Series A
Net Change in Cash 175,000Plus: Beginning Cash Balance -0-Ending Cash Balance $175,00
0
11-40
Chapter 11 - Solutions to Exercises - Series A
PROBLEM 11-19A (cont.)b. Partnership
Ja-San CompanyFinancial Statements
For the Year Ended December 31, 2011
Income Statement
Revenues $90,000
Expenses (65,000)
Net Income $25,000
Capital Statement
Beginning Capital Balance $ -0-
Plus: Capital Acquired from Owners
160,000
Plus: Net Income 25,000
Less: Withdrawals by Owners (10,000)
Ending Capital Balance $175,000
Prepared for the instructor’s use:
Analysis of Capital Accounts:
James Sanders Total Beginning Capital Balance
$ -0- $ -0- $ -0-
Investments 100,000 60,000 160,000 Net Income* 10,000 15,000 25,000 Withdrawals (7,000) (3,000) (10,000) Ending Capital Balances $103,000 $72,000 $175,000
*James: $25,000 x 40% = $10,000Sanders: $25,000 x 60% = $15,000
11-41
Chapter 11 - Solutions to Exercises - Series A
11-42
Chapter 11 - Solutions to Exercises - Series A
PROBLEM 11-19A b. (cont.)
Ja-San CompanyFinancial Statements
Balance SheetAs of December 31, 2011
AssetsCash $175,00
0Total Assets $175,000
Liabilities $ -0-
EquityKim James, Capital 103,000Mary Sanders, Capital 72,000
Total Liabilities and Equity $175,000
Statement of Cash FlowsFor the Year Ended December 31, 2011
Cash Flows From Operating Activities:
Inflow from Revenues $ 90,000
Outflow for Expenses (65,000)Net Cash Flow from Operating Activities
$ 25,000
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities:
Inflow from Partners $160,000
Outflow for Partners’ (10,000)
11-43
Chapter 11 - Solutions to Exercises - Series A
WithdrawalsNet Cash Flow from Financing Activities
150,000
Net Change in Cash 175,000Plus: Beginning Cash Balance -0-Ending Cash Balance $175,000
11-44
Chapter 11 - Solutions to Exercises - Series A
PROBLEM 11-19A (cont.)c. Corporation
Ja-San Inc.Financial Statements
For the Year Ended December 31, 2011
Income Statement
Revenues $90,000
Expenses (65,000)
Net Income $25,000
Statement of Changes in Stockholders’ Equity
Beginning Common Stock $ -0-Plus: Issuance of Common Stock
160,000
Ending Common Stock $160,000
Beginning Retained Earnings -0-Plus: Net Income 25,000Less: Dividends (10,000)Ending Retained Earnings 15,000
Total Stockholders’ Equity $175,000
11-45
Chapter 11 - Solutions to Exercises - Series A
PROBLEM 11-19A c. (cont.)
Ja-San Inc.Financial Statements
Balance SheetAs of December 31, 2011
AssetsCash $175,000
Total Assets $175,000
Liabilities $ -0-
Stockholders’ EquityCommon Stock, $10 par value,10,000 shares issued and
outstanding$100,000
Paid-In Capital in Excess of Par 60,000Total Paid-In Capital 160,000
Retained Earnings 15,000
Total Liabilities and Stockholders’ Equity
$175,000
Statement of Cash FlowsFor the Year Ended December 31, 2011
Cash Flows From Operating Activities:
Inflow from Revenues $90,000Outflow for Expenses (65,000)
Net Cash Flow from Operating Activities
$ 25,000
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities:
Inflow from Issue of Stock 160,000Outflow for Dividends (10,000)
Net Cash Flow from Financing 150,000
11-46
Chapter 11 - Solutions to Exercises - Series A
Activities
Net Change in Cash 175,000Plus: Beginning Cash Balance -0-Ending Cash Balance $175,000
11-47
Chapter 11 - Solutions to Exercises - Series A
PROBLEM 11-20A
Note: The memo incorporates a schedule showing the after-tax cash flows under each form of ownership and discusses LLCs.
MemoTo: Owners of Bates and AssociatesFrom: John Q CPADate: X/X/20XXRe: Forms of business ownership
As requested, this memo describes the advantages and disadvantages of the partnership versus corporate forms of business ownership.
Advantages DisadvantagesPartnership Ease of formation
Less regulation Lower effective
tax rate
Limited life Mutual agency Unlimited liability
Corporation Unlimited life Limited liability Capital easier to
acquire & ownership easily transferred
More regulation Higher effective
tax rate
The most important of these advantages and disadvantages relate to taxation and owner’s liability.
11-48
Chapter 11 - Solutions to Exercises - Series A
PROBLEM 11-20A (cont.)
The schedule below illustrates the after-tax cash flows under each form:
Partnership CorporationIncome before taxes
$200,000 $200,000
Tax at entity level -0 - (50,000 ) Net income distributed to owners
200,000 150,000
Less: Individual income tax (35%) (70,000 ) (52,500 )After-tax cash flow $130,000 $ 97,500 After-tax cash flow available to each investor
$130,000 5 =$26,000
$97,500 5 =$19,500
Effective tax rate($70,000 $200,000)
=35%($102,500 $200,000)
=51.25%
The corporate form limits the potential liability of owners. Creditors of partnerships may lay claim to the personal assets of the owners as payment of company debts. The corporation, as a separate legal entity, is responsible for its own debts. Owners risk only the amount of their investment.
Limited liability companies (LLCs) offer many of the benefits associated with corporate ownership, yet income is taxed like partnerships. Thus, the burden of both double taxation and personal liability for partnership debts are avoided.
11-49
Chapter 11 - Solutions to Exercises - Series A
PROBLEM 11-21A
a.
Date Account Titles Debit Credit
1. Treasury Stock (1,000 x $18) 18,000Cash 18,000
2. Cash (600 x $20) 12,000Treasury Stock (600 x $18) 10,800PIC in Excess of Cost, TS 1,200
3. Cash 64,000Service Revenue 64,000
4. Operating Expenses 38,000Cash 38,000
b.
Stockholders’ EquityCommon Stock, $10 par value, 50,000
shares authorized, 30,000 shares issued, and 29,600 shares outstanding $300,000
Paid-In Capital in Excess of ParCommon Stock
150,000
Paid-In Capital in Excess of CostTreasury Stock
1,200
Total Paid-In Capital $451,200
Retained Earnings1 126,000Less: Treasury Stock (400 shares) (7,200)
Total Stockholders’ Equity $570,000
1 Beginning Retained Earnings$100,0002011 Revenues 64,0002011 Expenses (38,000 ) Ending Retained Earnings $126,000
11-50
Chapter 11 - Solutions to Exercises - Series A
PROBLEM 11-22A
a.Chen Corp.
Statements Model For 2011
Balance Sheet Income Statement Statement of
Event Assets = Stockholders’ Equity Rev. Exp. = Net Inc. Cash Flows
Pfd. Stk.
+Com. Stk. +
PIC in Exc. PS +
PIC in Exc. CS +Ret.
Earn1. 600,000 NA 400,000 NA 200,000 NA NA NA NA 600,000 FA2. 255,000 250,00
0NA 5,000 NA NA NA NA NA 255,000 FA
3. (12,500)1
NA NA NA NA (12,500) NA NA NA (12,500) FA
4. NA NA 20,000 NA 20,000 (40,000)2
NA NA NA NA
5. memo
no entry3
NA NA NA NA NA NA NA NA NA
6a. 210,000 NA NA NA NA 210,000 210,000
NA 210,000 210,000 OA
6b. (140,000)
NA NA NA NA (140,000)
NA 140,000
(140,000)
(140,000) OA
Totals 912,500 = 250,000
+420,000 + 5,000 +220,000 + 17,500 210,000
140,000
= 70,000 912,500 NC
1$50 x 5% = $2.50; $2.50 x 5,000 = $12,500220,000 x 5%=1,000 shares; 1,000 shares x $40 = $40,0003Memo: 2:1 stock split reduces common’s par to $10 and increases number of shares outstanding to 42,000
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Chapter 11 - Solutions to Exercises - Series A
Note: Entry 7, the closing entry does not affect the horizontal statements model.
11-52
Chapter 11 - Solutions to Exercises - Series A
PROBLEM 11-22A (cont.)b.
General Journal
Date Account Titles Debit Credit
1. Cash (20,000 x $30) 600,000Common Stock, $20 par 400,000Paid-in Capital in Excess of
Par, CS200,000
2. Cash (5,000 x $51) 255,000Preferred Stock, $50 par 250,000Paid-in Capital in Excess of
Par, PS5,000
3. Dividends ($50 x 5% x 5,000) 12,500Cash 12,500
4. Retained Earnings 40,000*Common Stock, $20 Par 20,000Paid-in Capital in Excess of
Par, CS20,000
5. Chen’s declaration of a 2-for-1 stock split will replace the 21,000 shares of $20 par common stock with 42,000 shares of $10 par common stock.
6a. Cash 210,000Service Revenue 210,000
6b. Operating Expenses 140,000Cash 140,000
7. Service Revenue 210,000Operating Expenses 140,000Dividends 12,500Retained Earnings 57,500
11-53
Chapter 11 - Solutions to Exercises - Series A
*20,000 shares x 5% = 1,000 shares; 1,000 shares x $40 per share = $40,000
11-54
Chapter 11 - Solutions to Exercises - Series A
PROBLEM 11-22A b. (cont.)
Chen Corp. T-Accounts
Cash Retained Earnings Dividends1. 600,000 3. 12,500 4. 40,000 7. 57,500 3. 12,500 7. 12,5002. 255,000 6b. 140,000 Bal. 17,500 Bal. -0-6a. 210,000Bal. 912,500 Service Revenue
Preferred Stock 7. 210,000 6a.210,000
2. 250,000 Bal. -0-Bal. 250,000
Operating ExpensesCommon Stock 6b.140,000 7.140,000
1. 400,000 Bal. -0-4. 20,000Bal. 420,000
PIC in Exc. of Par Pref. Stk2. 5,000Bal. 5,000
PIC in Exc. of Par Com. Stk.1. 200,0004. 20,000Bal. 220,000
11-55
Chapter 11 - Solutions to Exercises - Series A
PROBLEM 11-22A (cont.)c.
Stockholders’ EquityPreferred Stock, $50 par value, 5%,
5,000 shares issued and outstanding
$250,000
Common Stock, $10, par, 42,000 shares issued and outstanding 420,000
Paid-In Capital in Excess of Par, Preferred Stock
5,000
Paid-In Capital in Excess of Par, Common Stock
220,000
Total Paid-In Capital $895,000
Retained Earnings 17,500
Total Stockholders’ Equity $912,500
11-56
Chapter 11 - Solutions to Exercises - Series A
PROBEM 11-23A
a.General Journal
Date Account Titles Debit Credit
2011Jan. 2 Cash (15,000 x $7) 105,000
Common Stock (15,000 x $5)
75,000
PIC in Excess of Par, CS 30,000
Jan. 15
Cash (2,000 x $110) 220,000
Preferred Stock (2,000 x $100)
200,000
PIC in Excess of Par, PS 20,000
Feb. 14
Cash (20,000 x $9) 180,000
Common Stock (20,000 x $5)
100,000
PIC in Excess of Par, CS 80,000
Dec. 31
Cash 310,000
Service Revenue 310,000
Dec. 31
Operating Expenses 240,000
Cash 240,000
Dec. 31
Dividends [2,000 x ($100 x 6%)]
12,000
Dividends Payable 12,000
Closing Entries
Dec. 31
Service Revenue 310,000
Retained Earnings 310,000
Dec. Retained Earnings 240,000
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Chapter 11 - Solutions to Exercises - Series A
31Operating Expenses 240,000
Dec. 31
Retained Earnings 12,000
Dividends 12,000
11-58
Chapter 11 - Solutions to Exercises - Series A
PROBLEM 11-23A a. (cont.)
General Journal
Date Account Titles Debit Credit
2012Jan. 31
Dividends Payable 12,000
Cash 12,000
Mar. 1 Cash (3,000 x $120) 360,000Preferred Stock, $100 par 300,000PIC in Excess of Par, PS 60,000
June 1 Treasury Stock (Common) (500 x $10)
5,000
Cash 5,000
Dec. 31
Cash 250,000
Service Revenue 250,000
Dec. 31
Operating Expenses 175,000
Cash 175,000
Dec. 31
Dividends 47,250*
Dividends Payable 47,250
Closing Entries
Dec. 31
Service Revenue 250,000
Retained Earnings 250,000
Dec. 31
Retained Earnings 175,000
Operating Expenses 175,000
Dec. 31
Retained Earnings 47,250
Dividends 47,250
11-59
Chapter 11 - Solutions to Exercises - Series A
*Preferred Stock: $100 x 6% x 5,000 shares = $30,000 Common Stock: $.50 x 34,500 shares = 17,250 Total Dividend $47,250
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Chapter 11 - Solutions to Exercises - Series A
PROBLEM 11-23A a. (cont.)
Lane Corporation T-Accounts for 2011
Cash Dividends Payable Retained Earnings2011 2011 20111/2 105,000 12/31
240,00012/3112,000 cl 240,000 cl 310,000
1/15 220,000 Bal. 12,000 cl 12,0002/14 180,000 Bal. 58,00012/31
310,000Bal. 575,000 Preferred Stock
1/15 200,000Bal. 200,000
Common Stock1/2 75,0002/14100,000Bal.175,000
PIC in Exc. of Par Pref. Stk.
1/15 20,000Bal. 20,000
PIC in Exc. of Par Com. Stk.
1/2 30,0002/14 80,000Bal. 110,000
Dividends12/31
12,000cl 12,000
Bal. -0-
Service Revenuecl 310,000 12/31
310,000Bal. -0-
Operating Expenses12/31
240,000cl 240,000
Bal. -0-
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Chapter 11 - Solutions to Exercises - Series A
PROBLEM 11-23A a. (cont.)
Lane Corporation T-Accounts for 2012
Cash Dividends Payable Retained EarningsBal. 575,000 1/31 12,000 Bal. 12,000 Bal. 58,0003/1 360,000 6/1 5,000 1/31
12,00012/3147,250 cl 175,000 cl 250,000
12/31250,000
12/31175,000
Bal. 47,250 cl 47,250
Bal. 993,000 Bal. 85,750
Preferred StockBal. 200,0003/1 300,000Bal. 500,000
Common StockBal. 175,000
PIC in Exc. of Par Pref. Stk.
Bal. 20,0003/1 60,000Bal. 80,000
PIC in Exc. of Par Com. Stk.
Bal. 110,000
Treasury Stock6/1 5,000Bal. 5,000
Dividends12/31
47,250cl 47,250
Bal. -0-
Service Revenuecl 250,000 12/31
250,000Bal. -0-
Operating Expenses12/31
175,000cl 175,000
Bal. -0-
11-62
Chapter 11 - Solutions to Exercises - Series A
PROBLEM 11-23A (cont.)b.2011
Stockholders’ EquityPreferred Stock, $100 par value, 6%
cumulative, 20,000 shares authorized, 2,000 shares issued and outstanding $200,000
Common Stock, $5 par value, 100,000shares authorized, 35,000 shares issued and outstanding 175,000
Paid-In Capital in Excess of ParPreferred Stock
20,000
Paid-In Capital in Excess of ParCommon Stock
110,000
Total Paid-In Capital 505,000
Retained Earnings 58,000
Total Stockholders’ Equity $563,000
11-63
Chapter 11 - Solutions to Exercises - Series A
PROBLEM 11-23A (cont.)c.Schedule provided for use of instructor.
Schedule of Number ofShares of Common Stock
Shares Issued
Shares Outstandi
ng2011Jan. 2 15,000 15,000Feb. 14 20,000 20,000Totals 35,000 35,0002012June 1 (500)Totals 35,000 34,500
Shares issued and outstanding are the same for 2011. However, for 2012, the 500 shares of treasury stock reduce the number of outstanding shares. In 2012, there are 35,000 shares issued but only 34,500 outstanding.
11-64
Chapter 11 - Solutions to Exercises - Series A
PROBLEM 11-23A (cont.)c.
Lane CorporationBalance Sheet
As of December 31, 2012
AssetsCash $993,000
Total Assets $993,000
LiabilitiesDividends Payable $ 47,250
Total Liabilities $ 47,250
Stockholders’ EquityPreferred Stock, $100 par value, 6% cumulative, 20,000 shares authorized, 5,000 shares issued and outstanding $500,000Common Stock, $5 par value, 100,000
shares authorized, 35,000 shares issued,
34,500shares outstanding
175,000
Paid-In Capital in Excess of ParPreferred Stock
80,000
Paid-In Capital in Excess of ParCommon Stock
110,000
Total Paid-In Capital 865,000
Retained Earnings 85,750Less: Treasury Stock (5,000)
Total Stockholders’ Equity 945,750
Total Liabilities and Stockholders’ Equity $993,000
11-65
Chapter 11 - Solutions to Exercises - Series A
PROBLEM 11-24A a.General Journal
Date Account Titles Debit Credit
1. Cash (20,000 x $10) 200,000Common Stock, $10 par 200,000
2. Cash (2,000 x $32) 64,000Preferred Stock, $30 stated
value60,000
Paid-In Capital in Excess of SV-PS
4,000
3. Treasury Stock (Common Stock)(500 x $15)
7,500
Cash 7,500
4. Dividends ($30 x 5% x 2,000) 3,000Dividends Payable 3,000
5. Cash (300 x $18) 5,400Treasury Stock (300 x $15) 4,500PIC in Excess of CostTS 900
6. Dividends Payable 3,000Cash 3,000
7. Cash (assumed cash) 75,000Service Revenue 75,000
Operating Expenses 42,000Cash (assumed cash) 42,000
Closing Entries
8. Service Revenue 75,000Retained Earnings 75,000
Retained Earnings 42,000Operating Expenses 42,000
Retained Earnings 3,000Dividends 3,000
9. Retained Earnings 6,000
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Chapter 11 - Solutions to Exercises - Series A
Appropriated Retained Earnings
6,000
11-67
Chapter 11 - Solutions to Exercises - Series A
PROBLEM 11-24A a. (cont.)Midwest Corp. T-Accounts for 2012
Cash Dividends Payable Retained Earnings1. 200,000 3. 7,500 6. 3,000 4. 3,000 cl 8. 45,000 cl 8 75,0002. 64,000 6. 3,000 Bal. -0- cl 9. 6,0005. 5,400 7. 42,000 Bal. 24,0007. 75,000Bal. 291,900 Appropriated Retained
Earn.cl 9. 6,000Bal. 6,000
Preferred Stock2. 60,000Bal. 60,000
Common Stock1. 200,000Bal.200,000
PIC in Exc. of SV Pref. Stk.
2. 4,000Bal. 4,000
PIC in Exc. of Cost TS5. 900Bal. 900
Treasury Stock3. 7,500 5. 4,500Bal. 3,000
Dividends4. 3,000 cl 8. 3,000Bal. -0-
Service Revenuecl 8. 75,000 7. 75,000
Bal. -0-
Operating Expenses7. 42,000 cl 8. 42,000Bal. -0-
11-68
Chapter 11 - Solutions to Exercises - Series A
PROBLEM 11-24A (cont.)b.
Stockholders’ EquityPreferred Stock, $30 stated value, 2,000
shares issued and outstanding $ 60,000Common Stock, $10 par value, 20,000 shares
issued, and 19,800 shares outstanding200,000
Paid-In Capital in Excess of Stated Value Pref. Stk.
4,000
Paid-In Capital in Excess of Cost, Treasury Stk.
900
Total Paid-In Capital $264,900
Retained EarningsAppropriated $ 6,000Unappropriated1 24,000
Total Retained Earnings 30,000Less: Treasury Stock (200 shares) (3,000)
Total Stockholders’ Equity $291,900
1 Service Revenue $75,000Operating Expenses(42,000)Dividends (3,000)Appropriated (6,000 ) Total $24,000
11-69
Chapter 11 - Solutions to Exercises - Series A
PROBLEM 11-25A
a. $300,000 30,000 shares = $10 per share
b. $10 par value per share x 6% = $.60 per share
c. Number of common shares outstanding = 49,000 (50,000 shares issued 1,000 treasury stock)
d. $500,000 + $200,000 = $700,000;$700,000 50,000 shares = $14 per share
e. The market price of the common stock is $11 more than the average issue price. There may be several reasons why this increase in share price has occurred. One reason is that investors anticipate above-average performance in the future. Also, improvement in general economic conditions can make the share price rise.
f. 1. 49,000 x 2 = 98,000 shares outstanding after the split.2. No amount will be transferred from retained earnings.3. Theoretically, the market price will be $12.50 ($25 2).
11-70
Chapter 11 - Solutions to Exercises - Series A
PROBLEM 11-26AAbbot, Inc.
Statements Model
Balance Sheet Income Statement Statement of
Event
Assets
= Liab. + S. Equity
Rev. Exp. = Net Inc.
Cash Flows
1. + NA + NA NA NA + FA2. + NA + NA NA NA + FA3. *NA NA NA NA NA NA NA4. + NA + NA NA NA + FA5. NA NA + NA NA NA NA6. + NA + NA NA NA + FA7. NA NA + NA NA NA NA8. NA NA NA NA FA9. NA + NA NA NA NA
10. NA NA NA NA FA
*No entry: memo record of change in par value and # of shares
11-71