PROBLEM SETS

PROBLEM 1

The following information was taken from the balance sheet of Laribee Company (amounts are in thousands of
dollars):
Current Liabilities* 24, 480
Long-term Debt 73,440
Common stock, par value 61,200
Paid in Capital 15,300
Retained earning 70,380
244,800
*includes 6,120 current portion of long-term debt
Required
Calculate debt/equity and debt capitalization ratios
What do these ratios measure?
 Debt/Equity Ratio Debt/Capitalization
Ratio
1. Including current 97,920 Rarely calculated
= = 66.7%
liabilities 146,880

2. Excluding current 79,560 79,560

= = 54.2% = = 35.1%
liabilities except current 146,880 226,400
portion of long-term debt
3. Excluding all current 73,440 73,440
= = 50.0% = = 33.3%
liabilities 146,880 220,320
 These two ratios measure the proportion of funds the company
has raised from creditors as opposed to owners. They indicate
how much leverage the firm has in its capital structure. The
basic trade-off a company makes in determining the right ratio
(i.e., capital structure) is between the risks inherent in taking on
fixed debt obligations versus the opportunity to increase the
shareholders profitability by having some debt in the capital
structure.
PROBLEM 9-2

During its fiscal year, Morey Corporation had outstanding 600,000 shares
of $6.50 preferred stock and 2,000,000 shares of common stock. Moreys
net income for the year was $19,550,000. The company also had granted
stock options to employees for 200,000 shares of common stock at $10
per share (exercise price). The average price of the companys common
stock during the fiscal year was $20 per share.
Required:
Calculate the companys basic earnings per share.
Calculate the companys diluted earnings per share.
A. BASIC EARNINGS PER SHARE

Review: basic earnings per share is a measurement of the

corporations per share performance over a period of time
Computation: Dividing net income applicable to the common
stock by the number of shares of common stock outstanding
(19,550,0003,900,000)
= = $7.83
2,000,000
B. DILUTED EARNINGS PER SHARE

REVIEW:
amount of earnings for the period applicable to each share of common stock outstanding (basic
earnings per share) adjusted to reflect dilution (lower earnings per share) assuming all potentially
dilutive common shares were outstanding during the period. q

(19,500,0003,900,000)
= = $7.45
2,000,000+(200,000100,000)
 PROBLEM 9-5

The Owners Equity section of the balance sheet of The Board of Directors took the following
Ovlov Corporation on December 31, 2009 was as Actions:
follows:
December 31, 2010
$8.00 preferred stock (40,000 shares, $4,000,000 A 2 for 1 stock split of common stock was declared
par value $100)
12,000 shares of it outstanding preferred stock were
Common stock (no par value 21,000,000 purchased by Ovlov at $114 per share
5,000,000 shares issued and January 1, 2011
outstanding) The preferred dividend of $8.00 was declared
Retained Earnings 7,000,000 A cash dividend of $0.15 of a share on common stock
outstanding on January 1 was declared
Total Owners Equity $32,000,000 A stock dividend of 1/10 of a share was declared on
common stock, effective Febraury 1.
February 1, 2011
The dividends declared in January were paid
 JOURNAL ENTRIES

DECEMBER 31, 2010

(A)
10,000,000 shares issued and outstanding
(B)
Dr. Treasury Stock 1,368,000
Cr. Cash 1,368,000
 JOURNAL ENTRIES

JANUARY 1, 2011
(A)
dr. Dividends on Preferred Stock 224,000
cr. Dividends Payable 224,000
(B)
dr. Dividends on Common Stock 1,500,000
dr. Dividends on Common Stock 1,500,000
(C)
No entry. (When this stock dividend is effective, retained earnings is diluted for the fair value of the additional shares
issued, paid-in-capital is credited for a like amount, and 1,000,000 additional shares are listed as issued and
outstanding.)
JOURNAL ENTRIES

FEBRUARY 1, 2011
dr. Dividends Payable 1,724,000
cr. Cash 1,724,000
PROBLEM 9-6
PROBLEM 9-6

Required
How many shares of common stock were issued during 2010? What was their
average issue price?
How many shares of preferred stock were issued during 2010? What was their
average issue price?
Give the entry for the companys purchase of treasury stock. What was the
average repurchase price?
What was the companys book value at the end of 2009? 2010?
How many shares of common stock were issued during 2010? What was their
average issue price?

15,000 ( 80,000 - 65,000) common shares issued in 2010.

Average price: $25
150,000+225,000
= = $25
15,000
How many shares of preferred stock were issued during 2010? What was their
average issue price?

$300,000$150,000
= = 3,000 shares
$50

Change in preferred stock 150,000

Change in paid capital 25,000
Total 175,000

$175,000
= = $58.33
3,000
Give the entry for the companys purchase of treasury stock. What was the
average repurchase price?

Dr Treasury Stock 150,000

Cr Cash 150,000

Average Price
$150,000
= = $15
10,000
What was the companys book value at the end of 2009? 2010?

2009: $1, 780,000

2010: $ 2,354,000
 PROBLEM 9-7
Eastman, Inc., incorporated in New Hampshire on April 15, 2007. Since the date of its inception, the following
transactions occurred:
On April 15, 2007, Eastman was authorized to issue
2,000,000 shares of $6 par value common stock.
On April 15, 2007, the company issued 100,000
shares of common stock for $15 per share.
The company issued and paid a 25 percent stock
dividend on December 21, 2007. The market value
on that date was $16 per share.
On July 1, 2008, Eastman sold 30,000 shares of
common for $30.
On November 15, 2008, the company repurchased
10,000 shares of stock for $42 per share.
On December 15, 2008, Eastman issued 5,000 shares
of treasury stock at $46 per share.
On February 1, 2009, the stock split 2 for 1.
On September 15, 2009, the remaining treasury
stock was sold for $35 per share.
On December 24, 2009, Eastman declared a cash
dividend of $150,000.
On January 24, 2010, the cash dividend was paid.
Required: Prepare the necessary journal
entries
JOURNAL ENTRIES

April 15, 2007

Dr cash
Cr common stock