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Shareholders’ Equity
Short Exercises
(5 min.) S 9-1
Corporation’s advantages:
Corporation’s disadvantages:
Corporate taxation
Government regulation
Separation of ownership and management
Millions
Horris Printer:
Cash……………………………………………. 17,123
Share 23
capital………………………………..
Additional Paid-in 17,100
Capital………………..
Delectable Doughnuts:
Cash……………………………………………. 292
Share 292
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Cash………………………………………. 800,0
. 00
Share capital (12,000 × $20) 240,0
……....... 00
Paid-in capital in excess of 560,0
par……. 00
Issued shares.
Building………………………………… 550,0
… 00
Equipment……………………………… 250,0
… 00
800,0
Cash……………………………………..
00
Purchased PPE.
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Building………………………………… 550,0
… 00
Building……………………………………$550,000
Equipment………………………………. 250,000
…
Share capital (12,000 x $20) 240,000
……………
Paid-in capital in excess of 560,000
par………..
Thousands
Shareholders’ equity:
Share capital, $.01 par, 400,000 shares $ 4
issued
Paid-in capital in excess of 196
par………………….
Retained 647
earnings………………………………….
Other shareholders’ (22
equity………………………. )
Total shareholders’ $825
equity………………………..
Amounts in Thousands
a Total
$1,340
. revenues………………………………………..
Total
(806)
expenses………………………………………..
Net income…………………………………. $
………… 534
b Accounts $
. payable…………………………………… 440
Other current
2,569
liabilities……………………………...
Journal
DEBI CREDI
DATE ACCOUNT TITLES AND EXPLANATION T T
Millions
Treasury 29
shares…………………………….
29
Cash………………………………………..
Cash…………………………………………. 8
.
Treasury 2
shares………………………….
Paid-in Capital from Treasury
share
6
Transactions…………………………..
MEMORANDUM
Req. 2
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
2010
Dec 15 Retained Earnings
.
($110,000 × .06) + (45,000 × 51,600
$1.00)…
Dividends 51,600
Payable…………………
Declared a cash
dividend……………
2011
Jan Dividends 51,600
. 4 Payable……………………
51,600
Cash………………………………….
Paid cash dividend.
Req. 1
Journal
CREDI
DATE ACCOUNT TITLES AND EXPLANATION DEBIT T
Req. 2
(a
Net income +
) Rate of return
= Interest expense
on total assets
Average total assets
(b
)
Rate of return Net income −
on ordinary Preference dividends
=
shareholders' Average ordinary
equity shareholders’ equity
Net
Interest
Rate of income + ¥120 + ¥31
return expense
= =
on total Average total (¥10,624 + ¥9,515) /
assets assets 2
¥151
= 1.5%
¥10,070 =
Rate of Net
return Preference
on ordinary income − ¥120 − ¥0
dividends
= =
shareholders’ Average ordinary (¥3,212 +
¥2,878) / 2
equity shareholders’
equity
¥120
= ¥3,04 3.9%
=
5
5.
Book value Total shareholders’ equity − Preference
per share of equity
=
ordinary Number of shares of ordinary shares
shares outstanding
Billion
s
Cash flows from financing activities:
Paid off long-term notes $(2.4)
payable……………………
Issued share 1.1
capital……………………………………
Purchased treasury (3.5)
shares…………………………..
Paid cash (1.6)
dividends……………………………………
Cash flows from financing activities $(6.4)
11 Inventory.................................... 16,000
Equipment.................................. 9,50
0
Share capital (3,700 × 7,40
$2.00).......................................... 0
Paid-in capital in excess of 18,10
par............................................... 0
Req. 2
Chapter 9 Shareholders’ 230
Equity
Shareholders’ equity:
Preference shares, $1.00, no par
10,000 shares authorized, 400 shares $54,000
issued…….
Share capital, $2.00 par,
19,000 shares authorized, 15,700 shares 31,400
issued…
Paid-in capital in excess of par-ordinary
($48,000 + $18,100) 66,100
…………………………………….
Retained earnings (deficit)…………………………. (43,000)
……
Total shareholders’ equity………………………. $108,50
…… 0
Shareholders’ Equity
_____
*Computation:
April 23: 1,700 shares × ($16.50 − $1.50) $25,50
=…………………… 0
May 12: $19,000 + $41,000 − (3,300 shares × $1.50) 55,05
=………. 0
$80,55
0
12 Inventory.................................... 19,000
Equipment.................................. 41,000
Share capital......................... 4,950
Paid-in capital in excess of 55,050
par….
Unused data:
Net income
Dividends declared
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Journal
DEBI CREDI
DATE ACCOUNT TITLES AND EXPLANATION T T
Millions
Cash (8 million × $13.50) 108
b.
……………………
Share capital (8 million × $2.00) 16
…….....
Paid-in capital in excess of par…. 92
……..
Treasury 16
c.
shares………………………………
16
Cash………………………………………….
Retained 31
d.
Earnings……………………………
Dividends 31
Payable…………………………
Dividends 31
Payable……………………………
Cash………………………………………. 31
…
Dollars
in
Millions
Shareholders’ Equity:
Share capital, $2.00 par value,
2,108 million shares issued ($4,200 + $ 4,216
$16.0)
Capital in excess of par value ($8,400 + 8,492
$92)
Retained earnings ($250 + $446 − $31)
665
……….
Treasury shares (70 + 16)…………………..
(86)
……
Total shareholders’ $13,287
equity……………………
Req. 1
Req. 2
Req. 3
(Millions
of shares)
Dec. 31,
2011
Ordinary shares 300
issued…………………………….
Less: Treasury shares, number of (52)
shares…….
Ordinary shares 288
outstanding……………………...
Req. 4
December Purchases
31,
2011 2010 During
2011
Cost of treasury $1,14 $22 = $ 916
shares……………. 4− 8
Treasury shares, number of 52 12 = ÷ 40
shares −
Average price per share paid
for
treasury shares purchased during $22.90
2011.
Req. 1
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Req. 2
Shareholders’ equity
Share capital, $0.80 par, 2,600,000 shares
authorized,
345,000 issued ($240,000 + $36,000) $ 276,000
………..
Paid-in capital in excess of par -
ordinary
($307,200 + $819,000) 1,126,20
…………………………... 0
Retained earnings ($7,122,000 − 6,267,000
$855,000)…….
245 Financial Accounting 8/e Solutions Manual
(200,00
Other…………………………………………………..
0)
Total shareholders’ $7,469,200
equity……………………..
Req. 3
Req. 4
b. No effect.
c. No effect.
d. No effect.
g. No effect.
Shareholders’ equity:
Millions
Share capital, $0.50 par, 2,250 million shares
(750 million × 3) authorized,
1,260 million shares (420 million × 3) $ 630
issued…
Additional paid-in 318
capital…………………………….
Retained 2,399
earnings……………………………………..
(148)
Other……………………………………………………..
Total shareholders’ $3,199
equity……………………….
Req. 1
Ordinary:
Total shareholders’ $96,000
equity…………………………..
Less: Preference equity — redemption
(45,000)
value…..
Total ordinary $51,000
equity………………………………....
Book value per share ($51,000 / 6,000 $ 8.50
shares)….
Req. 2
Ordinary:
Total shareholders’ $ 96,000
equity…………………………...
Less: Preference equity [$45,000 +($30,000 (48,600
×.04 × 3)] )
Total ordinary $ 47,400
equity………………………………….
Book value per share ($47,400 /6,000 shares) $
……….. 7.90
Req. 3
Chapter 9 Shareholders’ 250
Equity
Luxury Rug’s shares are not necessarily a good buy.
Investment decisions should be based on more than
one ratio.
Net income
$1,525 − $1,52
− Preference
$0 5
Rate of return dividends
0.18
on ordinary Average ordinary = ($8,556* = $8,19 =
= 6
shareholders' equity shareholders’ + 6
equity $7,836**)
/2
Net income −
Return Preference $1,878− $0 $1,878
0.10
= dividends = = =
0
on equity Average ordinary ($23,475 + $14,033) / $18,75
equity 2 4
Exercises
Group B
(5-10 min.) E 9-
36B
Req. 1
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
11 Inventory.................................... 18,000
Equipment.................................. 10,50
0
Share capital (4,000 × $3.50) 14,00
0
Paid-in capital in excess of 14,500
par
Req. 2
Shareholders’ equity:
Preference shares, $2.00, no par
4,000 shares authorized, 400 shares $55,000
issued………
Share capital, $3.50 par,
110,000 shares authorized, 15,000 shares 52,500
issued…
Paid-in capital in excess of par - ordinary
($60,000 + $14,500) 74,500
……………………………………….
Retained earnings (deficit)…………………………. (47,000
……
Total shareholders’ equity………………………. $135,00
…… 0
Shareholders’ Equity
_____
*Computation:
JUNE 23: 1,500 shares × ($17.50 − $2.00) $23,25
=…………………… 0
JULY 12: $15,000 + $44,000 − (3,700 shares × 51,60
$2.00) =………. 0
$74,85
0
12 Inventory.................................... 15,000
Equipment.................................. 44,000
Share capital.......................... 7,400
Paid-in Capital in Excess of 51,600
Par…
Unused data:
Net income
Dividends declared
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Journal
DEBI CREDI
DATE ACCOUNT TITLES AND EXPLANATION T T
Millions
Cash (9 million × $12.50) 112.
b.
……………………. 5
Share capital (9 million × $1.50) 13.5
…….....
Paid-in capital in excess of 99
par…….…..
Treasury 15
c.
shares………………………………
15
Cash………………………………………….
Retained 34
d.
earnings…………………………….
Dividends 34
payable…………………………
Dividends 34
payable……………………………
Cash………………………………………. 34
…
Dollars
in
Millions
Shareholders’ Equity:
Share capital, $1.50 par value,
1,709 million shares issued ($2.550 + $
$13.5) 2,563.5
Capital in excess of par value ($7,650 + 7,749
$99)
Retained earnings ($260 + $447 − $34)
673
…………
Treasury shares...…………………………………..
(25)
Total shareholders’
$10,960.
equity……………………..
5
Req. 1
Req. 2
Req. 3
(Millions
of shares)
Dec. 31,
2011
Ordinary shares 500
issued…………………………….
Less: Treasury shares, number of (54)
shares…….
Ordinary shares 446
outstanding……………………...
Req. 4
December Purchases
31,
2011 2010 During
2011
Cost of treasury $1,24 $28 = $ 962
shares…………….. 2− 0
Treasury shares, number of 54 14 = ÷ 40
shares −
Average price per share paid
for
treasury shares purchased during $24.05
2011.
Req. 1
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Shareholders’ equity
Share capital, $0.30 par, 2,200,000 shares
authorized,
480,000 issued ($120,000 + $24,000) $ 144,000
………..
Paid-in capital in excess of par -
ordinary
($409,600 + $1,176,000) 1,585,60
……………………….. 0
Retained earnings ($7,133,000 − 5,933,00
$1,200,000)…. 0
(185,00
Other………………………………………………….. 0)
Total shareholders’ $7,477,600
equity……………………..
Req. 3
Req. 4
b. No effect.
c. No effect.
d. No effect.
g. No effect.
Shareholders’ equity:
Millions
Share capital, $0.10 par, 1,500 million shares
(500 million × 3) authorized,
1,350 million shares (450 million × 3) $ 135
issued…
Additional paid-in 315
capital…………………………….
Retained 2,393
Req. 1
Ordinary:
Total shareholders’
equity…………………………. $121,000
Less: Preference equity — redemption
(25,000)
value….
Total ordinary $
equity………………………………... 96,000
Book value per share ($96,000 / 10,000 $
shares) 9.60
Req. 2
Ordinary:
Total shareholders’ $ 121,000
equity…………………………...
Less: Preference equity [$25,000 + ($21,000 (31,300
×.10 × 3) )
Total ordinary $ 89,700
equity………………………………….
Book value per share ($89,700 / 10,000 $
shares)……. 8.97
Req. 3
277 Financial Accounting 8/e Solutions Manual
Eclectic Rug’s shares are not necessarily a good buy.
Investment decisions should be based on more than
one ratio.
Net income
Rate of return − Preference $1,530 − $0 $1,53
on ordinary dividends 0 0.18
shareholders' = = = =
Average ordinary $8,20 7
equity ($8,604* +
shareholders’ $7,802**) / 3
equity 2
Net income −
Return Preference $1,872− $0 $1,872
0.10
= dividends = = =
0
on equity Average ordinary ($23,477 + $14,043) / $18,76
equity 2 0
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Cash……………………………………….
(c) 900
.
Treasury shares ($8,550 − 900
$7,650)..
Resold treasury shares.
Revenues……………………………… 172,00
(d)
…. 0
114,00
Expenses……………………………… 0
_____
*$51,000 ÷ $1 par value per share = 51,000 shares
issued.
Share capital
Issuance of 51,00
shares 0
Balance 51,00
0
Treasury shares
Purchase 8,55 Sale
900
0
Balance 7,65
0
Preference shares:
Space Walk retired preference shares of $131 million
($740 − $609).
Treasury shares:
Chapter 9 Shareholders’ 286
Equity
Apollo purchased treasury shares for $177 million
($2,777 − $2,600).
Additiona
l
Retaine
Treasur
Share Paid-in d Total
+ − y
Capital Capital + Earning = Equity
Shares
Amounts in Millions s
Balance, Dec. 31,
$ 71 $10 $35 $52
2010.........
Issuance of
52 102 15
shares…………
Shares
1.23 65 (7.2)4 —
dividend……….........
Purchase of treasury
$(10)6 (10)
shares
Net income………………….. 22 22
Cash
(12) (12)
dividends……………..
Balance, Dec. 31,
$13.2 $26 $37.8 $(10) $67
2011……
1
7,000,000 × $1 par = $7,000,000
2
5,000,000 × $1 par = $5,000,000
5,000,000 × ($3 − $1) = $10,000,000
3
(7,000,000 + 5,000,000) × .10 × $1 par = $1,200,000
4
(7,000,000 + 5,000,000) × .10 × $6 market value = $7,200,000
5
$7,200,000 market value − $1,200,000 par value = $6,000,000
6
5,000,000 × $2 per share = $10,000,000
Q9-
56 c
Q9-
57 b
Q9-
58 e
Q9-
59 c
Q9-
60 a
Q9-
61 a
Q9- b ($317,000 + $220,000 + $85,000 =
62 $622,000)
Q9- a ($622,000 + $71,300 − $5,200 =
63 $688,100)
Q9- a {($119,100 − $8,500) / [($681,500 +
64 $603,100*) /
2] = .172}
*$688,100 − $85,000 = $603,100
Q9-
65 a
Q9-
66 a
Q9-
67 a
Q9-
68 a
Q9-
69 c
289 Financial Accounting 8/e Solutions Manual
Q9-
70 b 40,000 × $100 × .10 = $400,000
Q9-
71 c ($500,000 − $400,000) / 40,000 = $2.50
Q9-
72 e
Q9-
73 b
Q9-74 b
Q9-
75 a [($27,000 + $3,000) / $600,000 = 5.0%]
Group A
( (30-45 min.) P 9-76A
Req. 1
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
10 Patent………………………………………20,000
291 Financial Accounting 8/e Solutions Manual
.
Preference 20,000
shares…….....................
Issued preference shares to acquire a
patent.
Req. 2
_____
* 900 + 10,000 + 12,000 + 1,000 = 23,900 shares
**$18,000 + $440,000 + $20,000 = $478,000
Garman Corp.
Balance Sheet (partial)
December 31, 2010
Shareholders’ equity:
Preference shares, 5%, $130 par, 8,000
shares
authorized, 1,600 shares $208,000
issued…………………….
Share capital, no-par, 600,000 shares
authorized, 120,000 shares 513,000
issued………………….
Retained 123,200
earnings………………………………………….
Total shareholders’ $844,200
equity……………………………
_____
Computations:
Total shareholders’
$7,514,500
equity……………………………….
− Total ( 7,085,500
liabilities………………………………………….. )
Req. 1
Req. 2
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Cash………………………………… 2,730,00
. 0
Class A Preference 2,730,00
shares….. 0
Cash………………………………… 3,115,00
. 0
Class B Preference 3,115,00
shares….. 0
Req. 3
Req. 4
Req. 5
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
2011
Feb. 28 Retained 860,00
Earnings……………………….. 0
Dividends Payable, Class A
Preference ($2,730,000 354,90
×.065 × 2) 0
Dividends Payable, Class B
Preference ($3,115,000 404,95
×.065 × 2) 0
299 Financial Accounting 8/e Solutions Manual
Dividends Payable, Ordinary
100,15
($860,000 − $354,900 − $404,964).
0
Req. 1
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
24 Dividends 210
payable………………………...
210
Cash………………………………………
Req. 2
Shareholders’ equity:
$.70 cumulative preference shares, $5 par,
300 shares
issued……………………………………………………… $
…. 1,500
Share capital, $4 par, 13,090 shares issued
($26,000 + $21,600 + $4,760) 52,360
……………………………
Paid-in capital in excess of par - ordinary
($17,800 + $5,400 + $2,380) 25,580
…………………………….
Paid-in capital from treasury shares 800
transactions……
Retained earnings
($25,000 + $28,000 − $210 − $7,140) 45,650
……………….....
Less: Treasury shares, 300 shares at cost
($3,500 − $1,400)
(2,100)
……………………………………
Total shareholders’ $123,790
equity……………………………..
SHAREHOLDER
LIABILITIE S’
ASSETS = S + EQUITY
Feb. + = 0 + + 435,000
3 435,000
Mar. 19 − = 0 − 62,400
62,400
Apr. 24 + = 0 + + 41,600
41,600
Aug. 0 = + 7,200 − 7,200
15
Sept. − = − 7,200 + 0
1 7,200
Nov. 0 = 0 + 0
18
(continued) P 9-82A
Req. 2
Req. 3
Journal
ACCOUNT TITLES AND EXPLANATION DEBIT CREDI
T
Millions
Retained 1,89
earnings……………………………….. 0
Dividends 1,890
payable…………………………….
Dividends 1,89
payable……………………………….. 0
1,890
Cash……………………………………………..
OR
Retained 1,89
earnings……………………………….. 0
1,890
Cash……………………………………………..
Cash……………………………………………… 1,23
… 4
Share 1,234
capital……………………………….....
Cash……………………………………………… 58
…
Long-term notes 58
Chapter 9 Shareholders’ 310
Equity
payable…………………...
Treasury 3,0380
shares…………………………………..
3,080
Cash……………………………………………..
Group B
(30-45 min.) P 9-84B
Req. 1
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
10 Patent…………………………………………… 12,000
….
Preference shares………………………. 12,000
26 Cash……………………………………………… 21,000
…
Share capital (1,400 × $5) 7,000
……………………
Paid-in Capital in Excess of
Par - 14,000
Ordinary……………………………...
Issued share capital for cash.
(continued) P 9-84B
Req. 2
_____
*500 + 19,000 + 1,400 = 20,900 shares
**$5,000 + $190,000 + $14,000 = $209,000
Holman Corp.
Balance Sheet (partial)
December 31, 2010
Shareholders’ equity:
Preference shares, 8%, $110 par, 5,000 shares authorized,
1,000 shares $110,000
issued……………………………………...
Share capital, no-par, 400,000 shares
authorized,
80,000 shares 512,000
issued…………………………………….
Retained 97,400
earnings……………………………………………
Total shareholders’ $719,400
equity……………………………...
_____
Computations:
Total shareholders’
$6,366,750
equity……………………………….
− Total
(7,833,250)
liabilities…………………………………………..
Req. 1
Req. 2
Journal
DATE ACCOUNT TITLES AND DEBIT CREDIT
EXPLANATION
Cash………………………………. 1,520,000
Class A Preference 1,520,00
shares.. 0
Cash………………………………. 1,940,000
Class B Preference 1,940,00
shares.. 0
Req. 3
Req. 4
Req. 5
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
2011
Feb. 28 Retained 840,00
Earnings……………………….. 0
Dividends Payable, Class A
Preference ($1,520,000 × . 121,60
04 × 2) 0
Dividends Payable, Class B
Preference ($1,940,000 × . 155,20
04 × 2) 0
Dividends Payable, Ordinary
Req. 1
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
24 Dividends 320
payable…………………………..
320
Cash………………………………………...
Req. 2
Shareholders’ equity:
$0.80 cumulative preference shares, $15 par,
400 shares $
issued………………………………………. 6,000
Share capital, $2 par, 13,800 shares issued
($12,600 + $10,400 + $4,600) 27,600
……...............................
Paid-in capital in excess of par – ordinary
($17,400 + $20,800 + $11,500) 49,700
………………………….
Paid-in capital from treasury shares 2,400
transactions…..
Retained earnings ($23,000 + $25,000 − $320 − 31,580
$16,100)
Less: Treasury shares, ordinary, 300 shares
at cost ($7,200 − $4,800)
(2,400)
………………………….
Total shareholders’ $114,880
equity……………………………..
SHAREHOLDER
LIABILITIE S’
ASSETS = S + EQUITY
Feb. 4 +350,00 = 0 + +350,000
0
Mar. 20 -46,200 = 0 -46,200
Apr. 25 +27,000 = 0 + +27,000
Aug. 17 0 = +11,200 -11,200
Sept. 8 - 11,200 = -11,200 + 0
Nov. 28 0 = 0 + 0
Req. 2
Net income
Rate of
− Preference $30,000 − (12,000 × .
return $24,000
dividends 50) 0.10
on ordinary = = = =
Average ordinary ($254,600** + $239,80 0
shareholder
$225,000)/2 0
s'
shareholders'
equity
equity
Req. 3
Journal
ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Retained 1,890
earnings……………………………
Dividends 1,890
payable………………………..
Dividends 1,890
payable……………………………
1,890
Cash…………………………………………
OR
Retained 1,890
earnings……………………………
1,890
Cash…………………………………………
Cash…………………………………………… 1,234
.
Share 1,234
capital………………………………
Cash…………………………………………… 58
Long-term notes 58
payable……………….
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Smith, 25,000
Capital……………………………….
Jones, 25,000
Capital………………………………
Share 50,000
capital……………………………
To incorporate the business, close the capital
accounts of Smith and Jones, and issue share
capital to them.
Req. 2
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Plan 1:
Cash………………………………………… 80,000
.
Preference shares (800 × $100) 80,000
……..
To issue preference shares to outside
investors.
Cash………………………………………… 35,000
.
Share 35,000
capital……………………………
To issue ordinary shares to outside
investors.
Req. 3
Plan 1:
Shareholders’ Equity
Preference shares, 6%, $100 par, nonvoting,
10,000 shares authorized, 800 shares $
issued….. 80,000
Share capital, $1 par, 500,000 shares authorized,
50,000 shares 50,000
issued………………………………..
Retained earnings ($120,000 − $30,000) 90,0
……………. 00
Total shareholders’ $220,00
equity………………………… 0
Plan 2:
Shareholders’ Equity
Preference shares, $5, no-par, 5,000 shares
authorized,
500 shares $
issued…………………………………… 55,000
Share capital, $1 par, 500,000 shares authorized,
85,000 shares 85,000
issued………………………………..
Retained earnings ($120,000 − $30,000) 90,0
……………. 00
Req. 4
Req. 3
Req. 1
Millions
Req. 3
As As
Reported Adjusted
Dollars in millions
Total
Debt liabilities $54,033 $61,873
= =
ratio Total $65,503 $71,203
assets
= 0.82 = 0.87
Req. 4
Req. 1
Req. 4
The franchise should be valued at its true value, which
is $50,000. Campbell should focus his time and energy
on ways to make the business profitable in the long run
in other ways, rather than focusing on turning a quick
buck and playing legal games that could well get him
into trouble with a lot of other parties.
Note: One of the authors experienced this actual
situation in his first job after college.
Req. 1
Req. 4
The correct way to handle this transaction is never to
have proposed it in the first place. However, if it did
happen, the disclosure principle is relevant to the
situation. The transaction should be disclosed in the
footnotes to the financial statements, and if potential
liability to the SEC or others is probable and can be
estimated, a loss be disclosed in the income statement
and a liability should be accrued on the balance sheet.
Req. 1
Req. 3
Req. 4
Retained Earnings
$ 13,870 (beginning
Req. 5
Return on $3988
equity = ($16,510 + = 23.6%
$17,338) / 2
Req. 1
Stakeholders in a corporation vary widely with the
nature of the corporation. In the case of the
corporations included in this case (GM, Chrysler, AIG,
Citibank, Bank of America) because of their size and
the scope of their operations, stakeholders include the
shareholders, bondholders, other creditors, employees,
suppliers, customers, local, regional, national and
international economies, federal, state and local
governments—just about everyone in the broadest
sense of the term.
Req. 2
Student opinions on this will vary. It might be
interesting to divide the class into two teams and
conduct a debate, each team taking a side.
Req. 4
Student opinions on this will vary.
Req. 5
Student opinions on this will vary and should be
related to the opinions they express in requirement 4.
This question has economic, political and social
ramifications. Some would say that government taking
equity positions in private businesses violates
principles of free market economics and tends toward
socialism. If the equity positions were carefully