CHAPTER 11

Reporting and Analyzing

Stockholders Equity
MINI EXERCISES
M11-19. (10 minutes)

Transaction
Issue 8,000
shares of $50
par value
preferred stock
at $68 cash per
share.

Issue 12,000
shares of $1 par
value common
stock at $10
cash per share.

Cash
Asset

+ Noncash
Assets

Balance Sheet
Liabil=
+
ities

Income Statement
Contrib. +
Capital

Earned
Capital

Revenues -

Expenses

Net
Income

+400,00
Preferred
Stock
+544,000
Cash

+144,000
Additional
Paid-in
Capital

+12,000
Common Stock
+120,000
Cash

+108,000
Additional
Paid-in
Capital

M11-20. (15 minutes)

a.
9/1

Cash (+A) ...................................................................................................

864,000
Preferred stock (+SE) ................................................................................ 180,000
Additional paid-in capital (+SE) .................................................................. 684,000

9/1

Cash (+A) ...................................................................................................

4,440,000
Common stock (+SE) .................................................................................
240,000
Additional paid-in capital (+SE) .................................................................. 4,200,000

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b.
+

9/1
9/1

Cash (A)
864,000
4,440,000
- Common Stock (SE) +
240,000

- Preferred Stock (SE) +

180,000
9/1

9/1

- Additional Paid-in Capital (SE) +

684,000
9/1
4,200,000
9/1

continued next page

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M11-20. concluded
c.
Balance Sheet
Cash
Asset

Transaction
Issue 18,000
shares of $10
par value
preferred
stock at $48
per share.

+ Noncash
Assets

+864,000
Cash

Issue 120,000
shares of $2
par value
common.

+4,440,000
Cash

Liabilities

Income Statement
Contrib. +
Capital

Earned
Capital

+180,000
Preferred
Stock

Revenues -

Expenses

Net
= Income

+684,000
Additional
Paid-in Capital
+240,000
Common
Stock

+4,200,000
Additional
Paid-in Capital

M11-21. (10 minutes)

Common stock..............................................
Additional paid in capital...............................
Total..............................................................
a

$
5.298a
39,265.702
$39,271.000

5,298 million shares issued $0.001 par value, rounded.

M11-22. (15 minutes)

a.

Cash (+A) ............................................................................................

1,250,000
Preferred stock (+SE) ...........................................................................
Additional paid-in capital (+SE) ..............................................................

500,000
750,000

Treasury stock (+XSE, -SE) ...................................................................

415,000
Cash (-A) .............................................................................................

415,000

1/1

3/1
b.

1/1

+
Cash (A)
1,250,000

415,000

3/1

+ Treasury Stock (XSE) 415,000

- Preferred Stock (SE) +

500,000

1/1

3/1
- Additional Paid-in Capital (SE) +
750,000
1/1

continued next page

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M11-22. concluded
c.
Balance Sheet
Transaction
Issue 5,000
shares of
$100 par
value
preferred
stock at $250
per share.
Repurchase
5,000 shares
of $1 par
value
common stock
at $83 per
share.

Cash
Asset

Noncash
Assets =

Liabilities

Contributed
Capital

Income Statement
Earned
+ Capital -

Contra
Equity

Revenues

Net
= Income

Expenses

+500,000
Preferred
Stock
+1,250,000
Cash

-415,000
Cash

+750,000
Additional
Paid-in
Capital

+415,000
Treasury
Stock

M11-23. (10 minutes)

A stock split does not result in an accounting transaction and, as a result, does not require an
entry into the accounting records. The number of outstanding shares must be changed in the
parenthetical note to the common and preferred stock accounts in the stockholders equity
section of the balance sheet, and the par value of the stock must also be adjusted. In the threefor-one stock split affected by Cigna, each shareholder receives two additional shares for each
share owned, thus tripling the outstanding shares, and the par value of the shares is reduced to
one-third. The dollar amount of total paid-in capital, thus, remains unchanged, as does the total
dollar amount of stockholders equity. Only the parenthetical note relating to the number of
outstanding shares and their par value is adjusted for all periods presented. Earnings per share
is also recomputed for all years presented in the income statement to reflect the additional
shares outstanding.

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M11-24. (15 minutes)

a. Basic EPS: [$501,000 (16,000 x $2)] / 134,000 = $3.50
Calculation of weighted average shares outstanding:
120,000 x
2/12
=
130,000 x
5/12
=
146,000 x
3/12
=
140,000 x
2/12
=

20,000
54,167
36,500
23,333
134,000

b. Diluted EPS: $501,000 / 150,000 = $3.34

c. Given a simple capital structure, only basic EPS need be reported.

M11-25. (10 minutes)

a. Treasury shares are deducted from issued shares to yield outstanding shares. The
outstanding shares are, therefore:
Shares outstanding = 103,300,000 17,662,000 = 85,638,000
b. If the stock repurchase took place on March 31, 2011, two months after the end of the
previous fiscal year, the denominator of the basic EPS calculation would decrease by
17,662,000 x 10/12. That is, the weighted average shares outstanding would be
103,300,000 [17,662,000 x (10/12)] = 88,581,667 shares.

M11-26. (15 minutes)

a. Preferred dividend:
12/31 Retained earnings (-SE) .................................................................
18,000
Cash (-A) ................................................................................................... 18,000
Common dividend:
12/31 Retained earnings (-SE) .............................................................................
88,000
Cash (-A) ...................................................................................................88,000
b.
+

Cash (A)

18,000
88,000

12/31
12/31

- Retained earnings (SE) +

12/31
18,000
12/31
88,000
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M11-26. concluded
c.
Balance Sheet
Cash
Asset

Transaction
Declared and
paid cash
dividend on
preferred stock.
Declared and
paid cash
dividend on
common stock.

+ Noncash
Assets

Liabilities

Income Statement
Contrib. +
Capital

Earned
Capital

Revenues -

Expenses

-18,000
Cash

-18,000
Retained
Earnings

-88,000
Cash

-88,000
Retained
Earnings

Net
Income

M11-27. (15 minutes)

Because this is a small stock dividend (4%), retained earnings is debited for the market value of
the stock (70,000 x 4% x $21).
a.
1/1

Retained earnings (-SE) ........................................................................

58,800
Common stock (+SE) ............................................................................
14,000
Additional paid-in capital (+SE) ..............................................................
44,800

b.
12/31

Retained Earnings (SE)

58,800

- Common Stock (SE) +

14,000

12/31

- Additional Paid-in Capital (SE) +

44,800
12/31

c.
Balance Sheet
Transaction

Cash
Asset

+ Noncash
Assets

Declaration and
payment of
stock dividend.

Solutions Manual, Chapter 11

Liabilities

Income Statement
Contrib. +
Capital
+14,000
Common
Stock

+44,800
Additional
Paid-in
Capital

Earned
Capital

-58,800
Retained
Earnings

Revenues -

Expenses

Net
Income

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11-11

M11-28. (10 minutes)

a.

Immediately after the 3-for-2 stock split, the company has 375,000 shares of $10 par value
common stock [250,000 shares (3/2) = 375,000 shares] issued and outstanding.

b.

The dollar balance in the Common Stock account is unchanged by the stock split; the balance
remains at $3,750,000 (375,000 shares at the new $10 par value per share).

c.

The usual reason for a corporation to split its stock is to reduce the per share market price of
the stock and, therefore, improve the stock's marketability. The market price of the common
stock prior to the split is $165 per share, which is somewhat high. Splitting the stock would
reduce the per-share price (though not the total market value).

M11-29. (15 minutes)

Distribution to
Preferred
Common
a. $1,000,000 6%.................................................................
$60,000
Balance to common............................................................
$100,000
Per share
$60,000/20,000 shares............................................
$3.00
$100,000/80,000 shares..........................................
$1.25
b.

$1,000,000 6% 2 years................................................
Balance to common............................................................
Per share
$120,000/20,000 shares..........................................
$40,000/80,000 shares............................................

Solutions Manual, Chapter 11

$120,000
$40,000
$6.00
$0.50

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M11-31. (10 minutes)

a. No entry is made when the dividend is declared; an entry is required only when the
additional stock is issued. Because this is a large stock dividend, the dividend is recorded at
par value:
Retained earnings (-SE) .............................................................................
400,000
Common stock (+SE) .................................................................................400,000
b. The stock split would reduce the par value, but no journal entry would be recorded. As a
consequence, neither the common stock nor the retained earnings accounts are affected.

M11-32. (10 minutes)

a. Basic EPS: [$440,000 (10,000 x $50 x 8%)] / 50,000 = $8.00 per share
b. Diluted EPS: $440,000 / (50,000 + 10,000x3) = $5.50 per share

M11-33. (15 minutes)

a. Basic EPS: $234,000 / 45,000 = $5.20
Calculation of weighted average shares outstanding:
38,000 x
4/12
=
48,000 x
4/12
=
49,000 x
4/12
=

12,667
16,000
16,333
45,000

b. Basic EPS: [$234,000 (6,000 x $50 x 6%)] / 45,000 = $4.80

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M11-34. (15 minutes)

a.

Basic earnings per share is computed as net income less any preferred dividends
divided by the weighted average number of common shares outstanding for the period.
Diluted earnings per share adjusts for dilutive securities (such as convertible securities or
employee stock options) by including the securities in the denominator and also adjusting for
any effect on the numerator. Consequently, diluted earnings per share is always less than or
equal to basic earnings per share.

b.

In the case of 3M, it has 708.5 million weighted average common shares outstanding,
and an additional 10.5 million weighted average common shares that could potentially be
issued (dilutive). These dilutive shares relate to employee stock options and convertible
securities, like convertible debt and convertible preferred stock, that potentially could be
converted into common shares. (Note: with 708.5 million shares and a basic EPS of $6.05,
the implied earnings number is $4,286.425 million, computed as 708.5 million $6.05. For
diluted EPS, 719.0 million times $5.96 implies earnings of $4,285.24 million, a difference of
$1.185 million. This difference is likely due to the interest/dividends on convertible
securities.)

c.

While diluted EPS are favored over basic EPS by analysts, the data reflect events that
have not and may never occur. In addition, the dilution is assumed to be made at the years
start.

M11-35. (15 minutes)

a. No entry is required when the options are granted. The compensation expense is
recognized ratably over the vesting period. As the options vest, the following entry is
required (assume one-third vested in 2011):
Compensation expense (+E, -SE) ..............................................................
14,749
Additional paid in capital (+SE) ..................................................................

14,749

b. Granted stock options (whether vested or not) are included in the denominator of diluted
EPS whenever the stock price is greater than the exercise price. These options would
reduce diluted EPS but have no effect on basic EPS.
c.

Cash (+A) ...................................................................................................

321,000
Contributed capital (+SE) ...........................................................................

321,000

d. When options are exercised, the number of outstanding shares increases. This would
reduce basic EPS. It might also lower diluted EPS, though most likely to a lesser degree.
This is because the dilutive effect may already be reflected in diluted EPS prior to exercise.

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M11-36. (10 minutes)

Total Assets
Increase

Total
Liabilities
No effect

Total
Stockholders
Equity
Increase

EPS
Decrease

Operating
Income
No effect

2 ..

Decrease

No effect

Decrease

Increase

No effect

3 ..

No effect

Increase

Decrease

No effect

No effect

Year
1 ..

M11-37. (15 minutes)

a.
b.
c.
d.
e.
f.

$30 = $18,000,000 / 600,000 shares

$10 = $6,000,000 / 600,000 shares
$12,000,000 = $18,000,000 - $6,000,000
$4,000,000 = $5,000,000 $1,000,000
50,000 shares = 600,000 550,000
$8.70 = $5,000,000 (600,000 + 550,000)/2. 600,000 shares were outstanding for the first
half year but only 550,000 during the second half of the year.

M11-38. (10 minutes)

a. The diluted EPS calculation is made to reflect a worst-case scenario (conservative) EPS
figure.
b. $86/278.689 = $0.309 or $0.31 per share
c. $98/346.467 = $0.283 or $0.28 per share
d. Options that are under water (the stock price is below the exercise price) are not included
in the calculation of diluted EPS. This is because diluted EPS is supposed to be the most
conservative possible outcome. Including under water options would actually increase EPS.
Thus these options are anti-dilutive.

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