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Surveys of Accounting, 2nd Edition

SOLUTIONS TO EXERCISES - CHAPTER 8

EXERCISE 8-1

Transactions
Cash Acquired from Owner $80,000
Revenues 50,000
Expenses 22,400
Withdrawals 5,000

Derek Hughes Sole Proprietorship


Financial Statements
For the Year Ended December 31, 2010

Income Statement

Revenues $50,000

Expenses (22,400)

Net Income $27,600

Capital Statement

Beginning Capital Balance $ -0-

Plus: Capital Acquired from Owner 80,000

Plus: Net Income 27,600

Less: Withdrawal by Owner (5,000)

Ending Capital Balance $102,600


EXERCISE 8-1 (cont.)

Derek Hughes Sole Proprietorship


Financial Statements

Balance Sheet
As of December 31, 2010

Assets
Cash $102,600
Total Assets $102,600

Liabilities $ -0-

Equity
Hughes, Capital 102,600

Total Liabilities and Equity $102,600

Statement of Cash Flows


For the Year Ended December 31, 2010

Cash Flows From Operating Activities:


Inflow from Revenues $50,000
Outflow for Expenses (22,400)
Net Cash Flow from Operating Activities $27,600

Cash Flows From Investing Activities -0-

Cash Flows From Financing Activities:


Inflow from Owner 80,000
Outflow for Owner Withdrawals (5,000)
Net Cash Flow from Financing Activities 75,000

Net Change in Cash 102,600


Plus: Beginning Cash Balance -0-
Ending Cash Balance $102,600

EXERCISE 8-2

Transactions:
Cash Contributions
W. Poole $ 60,000 40%
R. King 90,000 60%
Total $150,000 100%

Revenues $ 56,000
Expenses 32,000
Poole Withdrawal 2,000
King Withdrawal 3,000
PK Partnership
Financial Statements
For the Year Ended December 31, 2010

Income Statement

Revenues $56,000

Expenses (32,000)

Net Income $24,000

Capital Statement

Beginning Capital Balance $ -0-

Plus: Capital Acquired from Owners 150,000

Plus: Net Income 24,000

Less: Withdrawals by Owners (5,000)

Ending Capital Balance $169,000

EXERCISE 8-2 (cont.)

Prepared for the instructor’s use:

Analysis of Capital Accounts:


Poole King Total
Beginning Capital Balance $ -0- $ -0- $ -0-
Investments 60,000 90,000 150,000
Net Income 24,000
W. Poole 40% 9,600
R. King 60% 14,400
Withdrawals (2,000) (3,000) (5,000)
Ending Capital Balances $67,600 $101,400 $169,000
EXERCISE 8-2 (cont.)

PK Partnership
Financial Statements

Balance Sheet
As of December 31, 2010

Assets
Cash $169,000
Total Assets $169,000

Liabilities $ -0-

Equity
W. Poole, Capital $ 67,600
R. King, Capital 101,400
Total Equity 169,000

Total Liabilities and Equity $169,000

Statement of Cash Flows


For the Year Ended December 31, 2010

Cash Flows From Operating Activities:


Inflow from Revenues $56,000
Outflow for Expenses (32,000)
Net Cash Flow from Operating Activities $24,000

Cash Flows From Investing Activities -0-

Cash Flows From Financing Activities:


Inflow from Partners 150,000
Outflow for Partners’ Withdrawals (5,000)
Net Cash Flow from Financing Activities 145,000

Net Change in Cash 169,000


Plus: Beginning Cash Balance -0-
Ending Cash Balance $169,000
EXERCISE 8-3

Transactions:
Issued 8,000 shares of $10 par stock @ $18 $144,000
Revenues 58,000
Expenses 39,000
Dividends Paid 4,000

Premo Corporation
Financial Statements
For the Year Ended December 31, 2010

Income Statement

Revenues $58,000

Expenses (39,000)

Net Income $19,000

Statement of Changes in Stockholders’ Equity

Beginning Common Stock $ -0-


Plus: Issuance of Common Stock 144,000
Ending Common Stock $144,000

Beginning Retained Earnings -0-


Plus: Net Income 19,000
Less: Dividends (4,000)
Ending Retained Earnings 15,000

Total Stockholders’ Equity $159,000


EXERCISE 8-3 (cont.)

Premo Corporation
Financial Statements

Balance Sheet
As of December 31, 2010

Assets
Cash $159,000
Total Assets $159,000

Liabilities $ -0-

Stockholders’ Equity
Common Stock, $10 par value,
8,000 shares issued and outstanding $80,000
Paid-In Capital in Excess of Par 64,000
Total Paid-In Capital 144,000

Retained Earnings 15,000

Total Liabilities and Stockholders’ Equity $159,000

Statement of Cash Flows


For the Year Ended December 31, 2010

Cash Flows From Operating Activities:


Inflow from Revenues $58,000
Outflow for Expenses (39,000)
Net Cash Flow from Operating Activities $ 19,000

Cash Flows From Investing Activities -0-

Cash Flows From Financing Activities:


Inflow from Issue of Stock 144,000
Outflow for Dividends (4,000)
Net Cash Flow from Financing Activities 140,000

Net Change in Cash 159,000


Plus: Beginning Cash Balance -0-
Ending Cash Balance $159,000

EXERCISE 8-4
a.

Balance Sheet Income Statement Stmt. of


Event Assets = Liab + Stkholders’ Equity Rev.  Exp. = Net Inc. Cash Flow
Cash = + C. Stk. + PIC Exc.
3/1 240,000 = NA + 100,000 + 140,000 NA  NA = NA 240,000 FA
5/2 450,000 = NA + 150,000 + 300,000 NA  NA = NA 450,000 FA
b.
Common Stock:
20,000 shares x $5= $ 100,000
30,000 shares x $5= 150,000
Total $250,000
c.
Paid-In Capital in Excess of Par
20,000 shares x ($12  $5)= $140,000
30,000 shares x ($15  $5)= 300,000
Total $440,000

d. Total Paid-In Capital:


Common Stock $250,000
Paid-In Capital in Excess of Par 440,000
Total $690,000

e. Total Assets: Cash $690,000

EXERCISE 8-5

Summary of Transactions

Cash Received Common Stock PIC in Excess CS Preferred Stock PIC in Excess PS
Event

1. 280,000 200,000 80,000


2. 320,000 300,000 20,000
3. 540,000 300,000 240,000
Totals 1,140,000 500,000 320,000 300,000 20,000

Stockholders’ Equity:
Preferred Stock, $30 stated value, 5% cumulative class A, 50,000 shares authorized,
10,000 shares issued and outstanding
$ 300,000
Common Stock, $10 par value, 400,000 shares authorized, 50,000 shares issued and
outstanding 500,000

Paid-In Capital in Excess of SV, Preferred Stock 20,000


Paid-In Capital in Excess of Par, Common Stock 320,000

Retained Earnings -0-

Total Stockholders’ Equity $1,140,000

EXERCISE 8-6

Balance Sheet Income Statement Stmt. of


Event Assets = Stockholders’ Equity Rev.  Exp. = Net Inc. Cash Flow
Pref. Stock No-Par PIC in
Cash = + C. Stock + Excess

1. 200,000 = NA + 200,000 + NA NA  NA = NA 200,000 FA


2. 110,000 = 100,000 + NA + 10,000 NA  NA = NA 110,000 FA
EXERCISE 8-7

a. $75,000  5,000 = $15 market value per share


2,000 shares x $15 market value per share of stock = $30,000 value of the van

b.

Balance Sheet Income Statement Stmt. of


Event Assets = Stockholders’ Equity Rev.  Exp. = Net Inc. Cash Flows
Cash + Van = C. Stk. + PIC Exc.

1. 75,000 + NA = 50,0001 + 25,000 NA  NA = NA 75,000 FA


2. NA + 30,000 = 20,0002 + 10,000 NA  NA = NA NA
1
5,000 x $10 = $50,000
2
2,000 x $10 = $20,000

EXERCISE 8-8
Transactions:
Purchase: 3,000 x $40 = $120,000
Sale: 1,500 x $40 = $60,000 (Stock is removed from the Treasury stock account at the
purchase amount; any difference is shown in Paid in Capital in Excess of Cost – Treasury Stock)

Treasury Stock
1. 120,000
2. (60,000)
Bal. 60,000

EXERCISE 8-9

a. & b.
Common Stock Issued Outstanding

Beginning Number of Shares 2,000 2,000


Issued This Period 2,000 2,000
Repurchased as Treasury Stock (200)
Resold Treasury Stock 50
Ending Number of Shares (b) 4,000 (a) 3,850

c.
Kwon Corporation Accounting Equation

Event Assets = Stockholders’ Equity


Comm Stock PIC in Excess PIC in Excess Treasury
Cash = + CS + TS  Stock

1. 50,000 20,000 30,000 NA NA


2. (4,400) NA NA NA 4,400
3. 1,300 NA NA 200 (1,100)
Bal. 46,900 20,000 30,000 200 3,300
d.
Stockholders’ Equity
Common Stock, $10 par value, 10,000 shares authorized, 4,000
shares issued, and 3,850 shares outstanding
$40,000
Paid-In Capital in Excess of Par, Common 45,000
Paid-In Capital in Excess of Cost, TS 200
Total Paid-In Capital $85,250

Retained Earnings 65,000

Less: Treasury Stock (3,300)

Total Stockholders’ Equity $146,900

EXERCISE 8-10

Evans Corporation Horizontal Statements Model


Balance Sheet Income Statement Statement
Com. of
Date Assets = Liab. + Stk. + Ret. Ear. Rev  Exp. = Net Inc. Cash Flows
10/1 NA = 50,000 + NA + (50,000) NA  NA = NA NA
11/20 NA = NA + NA + NA NA  NA = NA NA
12/30 (50,000) = (50,000) + NA + NA NA  NA = NA (50,000) FA

EXERCISE 8-11
Computation of Preferred Dividends:
Number of Shares Total Preferred Dividends
Dividend per Outstanding for Year
Par x Dividend % = Share x =

$60 x 5% = $3.00 x 10,000 = $30,000

a. Dividend arrearage as of January 1, 2012: $30,000 (one year)

b.
Dist. to Shareholders
Amount Preferred Common

Total Dividend Declared $80,000


2011 Arrearage (30,000) $30,000
2012 Preferred Dividends (30,000) 30,000
Available for Common Shs. 20,000
Distributed to Common (20,000) $20,000

Total Distribution $60,000 $20,000


EXERCISE 8-12

Computation of Dividends to Be Paid:

Preferred Stock $100 par value x 5% x 5,000 shares= $25,000

Common Stock $1 x 50,000 shares = 50,000

Total Dividend $75,000

EXERCISE 8-13

Distribution of Dividend:

Distributed to Shareholders
Preferred Common

Total Dividend Declared $100,000


Preferred Arrearage* (30,000) $30,000
Current Preferred Dividend* (30,000) 30,000
Available for Common 40,000
Distributed to Common (40,000) $40,000
Total $60,000 $40,000

*$100 x 3% x 10,000 Shares = $30,000

EXERCISE 8-14

a. (30,000 shares x .04) = 1,200 shares; 1,200 shares x $30 = $36,000

b.

Magee Corporation Horizontal Statements Model

Balance Sheet Income Statement Stmt. of


Assets = Liab + Stockholders’ Equity Rev.  Exp. = Net Inc. Cash Flows
Com. Stk. + PIC. Ex. + Ret. Ear.

NA = NA + 12,000 + 24,000 + (36,000) NA  NA = NA NA

EXERCISE 8-15

a. No formal entry would be made in the accounting records. A memo entry would indicate the number of
shares had doubled and the par value had been reduced by one-half.

b. 400,000 shares x 2 = 800,000 new shares outstanding

$10 par value  2 = $5 new par value

c. Theoretically, the market value per share would be reduced to $80 ($160  2) after the split. However, if
this is perceived as a good move by the company, the price per share may not fall that far, ending at
something over $80.
EXERCISE 8-16
a. The price per share of Mighty Drugs should increase substantially. This increase is a result of the expectation
of future profits. The approval of the new drug signals that profits should be substantially higher in the future.

b. The balance sheet will not be affected by the announcements.

c. The income statement will not be affected when the announcements are made. Only when revenues increase
will net income be affected.

d. The statement of cash flows will not be affected by the announcements.

EXERCISE 8-17

Note: The stock price for a day two months after the end of the company’s fiscal year was used because this
about the time the company’s audited financial statements and annual report would be released to
the public.

a. Price-earnings ratios:

2008: $44.06 ÷ $1.51 = 29.18 times


2007: $43.99 ÷ $2.04 = 21.56 times

b. The financial markets were more optimistic about Merck’s future financial performance in 2007 than in
2006.

c. The number of shares outstanding can be approximated by dividing the net earnings by the EPS, as follows:

$3,275,400,000 ÷ $1.51 = 2,169,139,073 shares (2.17 billion)

As a reference, Merck’s 2007 balance sheet reported 2,172,502,884 shares outstanding.