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Brief Exercise 11.1

Alpha Company
Stockholders Equity section of the Balance Sheet
Issued and outstanding common stock (10,000 * 10)
100,000
Additional paid-in capital (10,000 * 3)
30,000
Total paid-in capital
130,000
Retained Earnings
75,000
Total Stockholder Equity
205,000

Brief Exercise 11.2

Beta Company
Stockholders Equity section of the Balance Sheet
Issued and outstanding common stock (10,000 * 25)
250,000
 
Issued and outstanding preferred stock (10,000 * 100)
100,000
350,000
Additional paid-in capital:
 
 
Common stock (10,000 * 2)
20,000
 
Preferred stock (1,000 * 10)
10,000
30,000
Retained Earnings
 
100,000
Total Stockholder Equity
 
480,000

Brief Exercise 11.3

Dividends on the arrears on the preferred stock for 3 years is calculated as:

100,000 shares * $100 par value * 6% dividend rate * 3 years = $1,800,000

The amount of dividends in arrears must be disclosed in the financial statements. They are generally written in the notes section at the end of the financial statements. They can be formally included in the statement as a liability once they are declared by th board of directors of the company.

Brief Exercise 11.4

Dividend on 6% preferred stock:

10,000 shares * $100 par value * 6% dividend rate = $60,000

Total dividend declared by the company
 
200,000
Less: preferred dividend in arrears
60,000
 
Less: preferred dividend in current year
60,000
 
Total preferred dividend
120,000
120,000
Common stock dividend
 
80,000

Brief Exercise 11.6

Common Stock (100,000 shares @ $10 par value)
1,000,000
Additional paid-in capital on common stock
750,000
Retained Earnings
600,000
Total stockholders’ equity
2,350,000

Book value per share = Total stockholder equity / Outstanding common stock = 2,350,000 / 100,000
= $23.50

Thus book value per share is $23.50. This is the price that is aid for these stocks. It does not change as long as the asset is owned. The market value is the current price at which one can sell the asset. The difference between the book value and the market value indicates the profit or loss of the business.

Brief Exercise 11.7

Common Stock (500,000 shares @ $10 par value)
5,000,000
Additional paid-in capital on common stock
800,000
Retained Earnings
1,750,000
Total stockholders’ equity
7,550,000

Book value per share = Total stockholder equity / Outstanding common stock

Book value per share = 7,550,000 / 500,000

Book value per share = $15.10

Brief exercise 11.8

a Impact of the 2 for 1 stock split on the number of shares outstanding:

Outstanding common stock = 100,000 shares
Declared stock split 2-for -1 (100,000 * 2) = 200,000 shares Thus,
Total number of shares outstanding after split = 200,000

b Impact of split on the market price of staock

The main purpose of a stock split is to reduce the market price of the company’s stock so that it becomes more affordable for the investors.

Smelling company owned 100,000 shares of the stock before the split and will own 200,000 shares after the split. As the number of outstanding shares double without any change in total assets or total stockholders’ equity, the market price of the stock should immediately drop to about half of the current market value. The current market value is $50 and so it should change to approximately $25 after the split.

c A stock split does not have any effect on the total stockholders’ equity as the total value still remains the same.

Brief Exercise 11.9

Melcher Company
Stockholders Equity section of the Balance Sheet
Issued and outstanding common stock (100,000 * 10)
1,000,000
Additional paid-in capital (100,000 * 15)
1,500,000
Total paid-in capital
2,500,000
Less: Treasury stock (10,000 * 55)
550,000
Total stockholder's equity
1,950,000

Exercise 11.1

a 1. Sole Proprietorship
The advantages of this form of organization is that it is easy to form and is...
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