Income and Changing in Retained Earningss Free Essay Example

Exercise 12.2, pages 544–545

The following are 10 technical accounting terms introduced or emphasized in chapter 11 and 12.

Extraordinary item

Treasury stock

Stock dividend

Additional paid-in capital

Prior period adjustment

P/e ratio

Comprehensive income

Diluted earnings per share

Basic earnings per share

Exercise 12.5, page 545

Foster furniture, Inc.

Earnings per share

Earnings per Share = Net Income / No of shares = 1,920,000 / 400,000 = $4.8EPS

ii. Amount paid to preferred stock = Price * No of Shares * Rate of Interest = 100 * 100,000 * 0.08 = $800,000

Now amount available to common stock = $1,920,000 - $800,000 = $1,120,000

Earnings per share = Net Income / No of shares = 1,120,000 / 300,000 = $3.73EPS

The earnings per share figure that has been computed in part a (2) can be considered as the basic earnings per share and not the diluted earnings. Diluted earnings are computed for companies that have outstanding securities convertible into shares of common stock. The purpose of showing diluted earnings is to alert investors on the extent which conversions of securities could reduce the basic earnings per share.

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Exercise 12.7, page 546

HiTech Manufacturing company.

Journal Entries

Date	Account title and explanation	Debit ($)	Credit ($)
30-Apr	Memorandum: Issued an additional 1,000,000 shares of capital stock in a 2-for-1 stock split. Par value reduced from $1 per share to $0.50 per share.
1-Jun	Dividends	1,200,000
	Dividends Payable		1,200,000
	To record the declaration of a dividend of $0.60per share on 2 million shares of stock outstanding.
1-July	Dividends Payable	1,200,000
	Cash		1,200,000
	To record payment of the dividend declared on June 1.
1-Aug	Retained earnings	1,900,000
	Stock Dividend to be distributed		50,000
	Additional paid-in Capital: stock dividends		1,850,000
	To record declaration of a 5% stock dividend consisting of 100,000 shares (2,000,000 shares x 5%) of $0.50 par value common stock. Amount of retained earnings transferred to paid-in capital is based on market price of $19 a share.
10-sep	Stock Dividend to be distributed	50,000
	Common stock		50,000
	(To record distribution of a stock dividend of 100,000 shares)

Number of shares of capital stock outstanding at year-end.

= 1,000,000 + 1,000,000 + 100,000 = $ 2,100,0000

$0.50 par value per share ($1 par reduced to $0.50 par due to 2-for-1 stock split on April 30.)

Stock split has no effect. Declaration/payment of cash dividend decreases retained earnings. Declaration/distribution of stock dividend has not effect.

Problem 12.6A, page 551

a.
General Journal
Date		Description		Debit ($)	Credit ($)
2007
Jan	3	Dividends		382,000
			Dividends Payable			382,000
		To record declaration of $1 per share cash
		dividend payable on Feb. 15 to stockholders of
		record on Jan. 31

Feb	15	Dividends Payable		382,000
			Cash			382,000
		To record payment of dividend declared Jan. 3.

Apr	12	Treasury Stock		240,000
			Cash			240,000
		Purchased 6,000 shares of treasury stock at $40
		per share.

May	9	Cash		176,000
			Treasury Stock			160,000
			Additional Paid-in Capital: Treasury Stock			16,000
		Sold 4,000 shares of treasury stock, which cost
		$160,000, at a price of $44 per share.

June	1	Retained Earnings		798,000
			Stock Dividend to Be Distributed			19,000
			Additional Paid-in Capital: Stock Dividends			779,000
		Declared a 5% stock dividend (19,000 shares) on
		380,000 outstanding shares. Market price $42, par
		value $1. To be distributed on June 30 to
		stockholders of record.

	30	Stock Dividend to Be Distributed		19,000
			Capital Stock			19,000
		Issued 19,000 shares of capital stock as 5% stock
		dividend.

Aug	4	Cash		22,200
		Additional Paid-in Capital: Treasury Stock		1,800
			Treasury Stock			24,000
		Sold 600 shares of treasury stock, which cost $24,000,
		at a price of $37 per share.

Dec	31	Income Summary		1,928,000
			Retained Earnings			1,928,000
		To close Income Summary account for the year.

Dec	31	Retained Earnings		382,000
			Dividends			382,000
		To close Dividends account.

b.
THOMPSON SERVICE
Partial Balance Sheet
December 31, 2007
Stockholders’ equity:
	Capital stock, $1 par value, 500,000 shares authorized,
	401,000 shares issued, of which 1,400 are held in the treasury				401,000
	Additional paid-in capital:
		From issuance of capital stock		4,202,000
		From stock dividend		779,000
		From treasury stock		14,200	4,995,200
		Total paid-in capital			5,396,200
	Retained earnings*				3,452,600
					8,848,800
	Less: Treasury stock, 1,400 shares at cost				56,000
	Total stockholders’ equity				8,792,800


*Computation of retained earnings at Dec. 31, 2007:
	Retained earnings at beginning of year				2,704,600
	Add: Net income for year				1,928,000
		Subtotal			4,632,600
	Less:		Cash dividend declared Jan. 3	382,000
			Stock dividend declared June 1	798,000	1,180,000
	Retained earnings, Dec. 31, 2007				3,452,600

c.	Computation of maximum legal cash dividend
		per share at Dec. 31, 2007:
		Retained earnings at Dec. 31, 2007	3,452,600
		Less: Restriction of retained earnings for
		treasury stock owned	56,000
		Unrestricted retained earnings	3,396,600
		Number of shares of capital stock outstanding
		(401,000 shares issued, minus 1,400 shares
		held in treasury)	399,600
	Maximum legal cash dividend per share ($3,396,600
	divided by 399,600 shares)		8.50

Problem 12.9A, page 552

ESPER CORP.
Partial Income Statement
For the Year Ended December 31
	(Dollars in Thousand)
Loss from continuing operations	$ (16,026)
Income from discontinued operations	6,215
Loss before extraordinary loss	(9,811)
Extraordinary loss on extinguishment of debt	(8,490)
Net loss	(18,301)

b.
Net loss	(18,301)
Less: Preferred dividend requirements	(2,778)
Net loss applicable to common stockholders	(21,079)
Weighted-average number of shares of common stock	39,739
Loss per share ($21,079 ÷ 39,739)	$(0.53)

Income and Changing in Retained Earnings

Partial Balance Sheet

Partial Income Statement

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