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SM_Chap011 - Chapter 11 porting and Interpreting...

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Chapter 11 - porting and Interpreting Stockholders’ Equity Chapter 11 Reporting and Interpreting Stockholders’ Equity ANSWERS TO MINI-EXERCISES M11–3 The number of issued shares cannot exceed the number authorized. The number authorized is given in the exercise (300,000). Currently issued shares consist of those outstanding with investors (247,000) and those in treasury (20,000). Thus, the number of currently issued shares is 267,000 (= 247,000 + 20,000). This implies the company can issue 33,000 additional shares (300,000 – 267,000) before it reaches the maximum authorized of 300,000. Prior to the new issuance, the number of authorized, currently issued, and treasury and outstanding shares can be illustrated as: M11–5 Assets Liabilities Stockholders’ Equity Cash +7,500,000 NE Common Stock +7,500,000 dr Cash (+A) (100,000 × $75) ............................................... 7,500,000 cr Common Stock (+SE) (100,000 × $75) ........................ 7,500,000 Assuming the no-par value stock is issued for the same price as the par value stock ($75 per share), the effects on total assets, total liabilities, and total stockholders’ equity do not differ between no-par and par value stock. 11-1 Outstanding 247,000 shares Treasury Stock 20,000 shares Authorized 300,000 shares Currently Issued 267,000 shares
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Chapter 11 - porting and Interpreting Stockholders’ Equity M11–6 Common stock is the basic voting stock issued by a corporation. It ranks after preferred stock for dividends and assets distributed upon liquidation of the corporation. The dividend rate for common stock is determined by the board of directors, and is based on the company’s profitability. The dividend rate for preferred stock often is fixed by a contract. Common stock has more potential for growth than preferred stock if the company is profitable. On the other hand, the investor may lose more money with common stock than with preferred stock if the company is not profitable. It is advisable to invest in the common stock. If the company is similar to National Beverage Corp., it will most likely be profitable, which will lead to greater dividends and share price appreciation. If this is the case, common stock likely will generate a greater return on the $100,000 than preferred stock would. M11–7 11-2 Total Assets Total Liabilities Total Stockholders’ Equity Net Income 1. Sold 5,000 shares Cash: increase by $250,000 No change Increase by $250,000 No change 2. Sold 10,000 shares Cash: increase by $370,000 No change Increase by $370,000 No change 3. Purchased 20,000 shares of treasury stock Cash: decrease by $900,000 No change Decrease by $900,000 No change
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Chapter 11 - porting and Interpreting Stockholders’ Equity M11–9 April 15, 2010: dr Dividends Declared (+D,-SE) (500,000 x 0.40) ................ 200,000 cr
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