Soln8-07 - PROBLEM SOLUTIONS 8-1 Shareholders' Equity 1....

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Problem Solutions – Chapter 8 247 PROBLEM SOLUTIONS 8-1 Shareholders’ Equity 1. The two main components of Shareholders’ equity are: a. Contributed capital (amounts provided by shareholders); b. Earned capital (amounts earned and retained in the business). 2. Comprehensive income is a broad measure of income that encompasses Net Income and includes other gains and losses not in Net Income. It is also defined as the total change in the net assets of the firm from all non-owner transactions for a specified period of time. 3. A stock dividend has no impact on the ownership interest of an individual shareholder. 4. A stock split has no impact on the ownership interest of an individual shareholder. 5. Treasury stock is stock that has been authorized and issued and then repurchased by the issuing company and held for future use/issue. 6. Treasury stock appears as a negative (contra) component of shareholders’ equity, reducing total shareholders’ equity by the amount paid for the shares. 7. Gains and/or losses on treasury stock transactions are not recognized in income or comprehensive income. These are owner related transactions, and when treasury shares are re-issued these “gains” or “losses” increase or decrease the contributed capital accounts. 8-2 Common and Preferred Stock The journal entries are: a. Cash 5,500,000 Common Stock 5,500.000 b. Cash 5,500,000 Common Stock, $1 par 1,000,000 Capital in Excess of Par 4,500,000 c. Cash 500,000 Preferred Stock, $100 par 500,000 d. Preferred Stock, $100 par 100,000 Common Stock, $1 par 20,000 Capital in Excess of Par 80,000 e. Assets 500,000 Preferred Stock, $50 par 300,000 Capital in Excess of Par 200,000
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INTRODUCTION TO FINANCIAL REPORTING AND ANALYSIS – 4 TH EDITION 248 8-3 Analyzing Shareholders’ Equity Amounts 1. $65 million ÷ 520,000 shares = $125 per share 2. Par value: $216 million ÷ 432,000,000 shares = $0.50 Issue price: ($216 million + $1,792.8 million) ÷ 432,000,000 shares = $4.65 3. Preferred: $7.50 x 520,000 shares = $3,900,000 Common: $0.60 x 432,000,000 shares = $259,200,000 8-4 Analyzing Shareholders’ Equity Amounts 1. $41.0 million ÷ 800,000 shares = $51.25 per share 2. Par value: $5 million ÷ 10,000,000 shares = $0.50 Issue price: ($5 million + $728.2 million) ÷ 10,000,000 shares = $73.32 3. $62.5 million ÷ 500,000 shares = $125 average repurchase price 8-5 Stock Dividends 1. Retained Earnings 90,000,000 (9,000,000 shares x $10 par value) Common Stock 90,000,000 2. $1,335,000,000 ÷ 9,000,000 shares = $148.33 per share 3. $1,335,000,000 ÷ 18,000,000 shares = $74.17 per share 4. The amount of net income for 2007 was $238 million . This is the beginning balance in retained earnings of $872 million + net income – $15 million of dividends – $90 million for the stock dividend = $1,005 million ending balance; solving for net income = $238 million. Using a T-account: Retained Earnings 872 15 90 238 1,005
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Problem Solutions – Chapter 8 249 8-6 Stock Dividends and Stock Splits
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This note was uploaded on 04/04/2008 for the course ACC 271 taught by Professor Klem during the Winter '08 term at University of Michigan.

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Soln8-07 - PROBLEM SOLUTIONS 8-1 Shareholders' Equity 1....

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