pratt_8e_chapter_12_solns - CHAPTER 12 STOCKHOLDERS EQUITY...

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CHAPTER 12 STOCKHOLDERS' EQUITY BRIEF EXERCISES BE12–1 a. 67.8% of net income was paid in dividends during the year ($1,533/$2,260). b. The issuance of common stock affected the basic accounting equation by increasing assets (cash) and increasing stockholders equity by the same amount (common stock and additional paid-in capital). c. The purchase of treasury stock affected the basic accounting equation by reducing assets (cash) and reducing stockholders equity (treasury stock) by the same amount. d. The total dollars distributed to the company’s shareholders during the year totaled $1,591 ($1,533 + $58). This is comprised of dividends paid and the treasury stock that was purchased. e. The balance in retained earnings as of the end of the year was $2,115. ($1,388 + $2,260 – $1,533). BE12–2 a. The number of shares outstanding after the split would be 194 million shares (97 million x 2) and the price per share would be approximately $50 ($100/2). b. The company’s overall value or market capitalization is $9.7 billion ($50 x 194 million shares). The company’s overall market should not change simply because of the share split. The number of shares will double but the price per share will be cut in half. Sometimes company’s that announce a share split see their stock price rise because many investors see a share split as a positive sign from management but this shareholder action is inferring positive news that has not been announced. BE12–3 a. During 2007 the company paid an average of $51.65 per share in its repurchase program ($1,756/34). b. During 2008 the company paid an average of $58.00 per share in its repurchase program ($1,044/18). c. With no information regarding 2010 treasury purchases, the balance in the treasury stock account will be $24,198 ($25,398 - $1,200) . 1
EXERCISES E12–1 a.,b.,c. Effect on Effect on Total Accounts Account Stockholders' Equity (1) Common Stock Increase Increase Additional Paid-In Capital, C/S Increase (2) None N/A No effect (3) Treasury Stock Increase Decrease (4) Common Stock Increase No effect Additional Paid-In Capital, C/S Increase Retained Earnings Decrease (5) Treasury Stock Decrease Increase Additional Paid-In Capital, T/S Increase (6) None N/A No effect (7) Retained Earnings Increase Increase E12–2 a. Debt = Total Liabilities = $52,000 + $35,000 = $87,000 Contributed Capital = Preferred Stock + Common Stock + Additional Paid-In Capital, Preferred Stock + Additional Paid-In Capital, Common Stock – Treasury Stock = $50,000 + $80,000 + $50,000 + $100,000 – $80,000 = $200,000 Earned Capital = Retained Earnings = $113,000 The portions of Lamont's assets provided by debt, contributed capital, and earned capital are, therefore, 21.75%, 50%, and 28.25%, respectively. b. Debt/Equity = Total Liabilities ÷ Stockholders' Equity = Total Liabilities ÷ (Contributed Capital + Earned Capital) = $87,000 ÷ ($200,000 + $113,000) = .278 Debt/Equity = Total Liabilities ÷ Total Stockholders' Equity = (Total Liabilities + Contributed Preferred Capital) ÷ (Contributed Common Capital + Earned Capital – Treasury Stock) = ($87,000 + $50,000 + $50,000) ÷ ($80,000 + $100,000 + $113,000 – $80,000) = .878 c. Most states restrict the dollar amount of dividends to either the balance in Retained Earnings or the balance in Retained Earnings less any treasury stock. So in this case, Lamont Brothers, either would be restricted to $113,000 or $33,000, depending upon the state.
E12–3 (1)

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