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Chapter 9

Shareholders’ Equity

Short Exercises

(5 min.) S 9-1

Corporation’s advantages:

 Separate legal entity


 Continuous life
 Transferability of ownership
 Limited liability of the shareholders
 Ease of raising capital

Corporation’s disadvantages:

 Corporate taxation
 Government regulation
 Separation of ownership and management

Financial Accounting 8/e Solutions Manual 204


(5 min.) S 9-2

1. The shareholders hold ultimate power in a


corporation.

2. The chairperson of the board of directors is usually


the most powerful person in a corporation. Title is
CEO.

3. The president is in charge of day-to-day operations.


Title is COO.

4. The chief financial officer is in charge of accounting


and finance. Title is CFO*.

*An alternative title is the chief accounting officer, CAO.

205 Financial Accounting 8/e Solutions Manual


(5-10 min.) S 9-3

1. The ordinary shareholders are the real owners of a


corporation

2. Preference shareholders have priority over ordinary


shareholders in (1) receipt of dividends and (2)
receipt of assets if the corporation liquidates.
Preference shareholders may also have the right to
receive skipped past years’ dividends before
ordinary dividends can be declared (cumulative
rights).

3. Ordinary shareholders benefit more from a


successful corporation because the preference
shareholders’ dividends are limited to a specified
amount. The ordinary shareholders take more risk so
their potential for gains through an increase in the
company’s share price is correspondingly greater.

Chapter 9 Shareholders’ 206


Equity
207 Financial Accounting 8/e Solutions Manual
(5-10 min.) S 9-4
DATE: _____________

TO: Karen Scanlon and Jennifer Shaw

FROM: Student Name

RE: Steps in forming a corporation

The first step in organizing a corporation is to obtain a


charter from the state. The charter authorizes the
corporation to issue a certain number of shares to the
owners of the business, who are called shareholders.
The corporation will exist when the incorporators
 Pay fees,
 Sign the charter,
 File documents with the state, and
 Agree to a set of bylaws to determine how the
corporation is to be governed internally.
 Later steps include the shareholders will electing a
board of directors who in turn appoint officers to
manage the corporation on a day-to-day basis.
These officers consist of the chairperson of the
board (the chief executive officer) and the
Chapter 9 Shareholders’ 208
Equity
president (the chief operating officer) who lead
the chief financial officer who manage the day to
day operations of the controller (accounting
officer) and treasurer (finance officer).

(5-10 min.) S 9-5

The $72,927,000 was paid-in capital. It was not a profit


and therefore had no effect on net income.

The par value of shares has no effect on total paid-in


capital. Total paid-in capital is the total amount that
shareholders have invested in (paid into) a corporation,
including the par value of shares issued plus any
additional paid-in capital.

(10 min.) S 9-6

Millions
Horris Printer:
Cash……………………………………………. 17,123
Share 23
capital………………………………..
Additional Paid-in 17,100
Capital………………..

Delectable Doughnuts:
Cash……………………………………………. 292
Share 292

209 Financial Accounting 8/e Solutions Manual


capital………………………………..

Chapter 9 Shareholders’ 210


Equity
(10 min.) S 9-7

Case A — Issue shares and buy the assets in separate


transactions:

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.

Case B — Issue shares to acquire the assets:

Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Building………………………………… 550,0
… 00

211 Financial Accounting 8/e Solutions Manual


Equipment……………………………… 250,0
... 00
Share capital (12,000 × $20) 240,00
………... 0
Paid-in capital in excess of 560,00
par….... 0
Issued shares to acquire building and
equipment.

The balances in all accounts are the same:

Building……………………………………$550,000
Equipment………………………………. 250,000

Share capital (12,000 x $20) 240,000
……………
Paid-in capital in excess of 560,000
par………..

Chapter 9 Shareholders’ 212


Equity
(5-10 min.) S 9-8

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………………………..

(10 min.) S 9-9

Amounts in Thousands
a Total
$1,340
. revenues………………………………………..
Total
(806)
expenses………………………………………..
Net income…………………………………. $
………… 534

b Accounts $
. payable…………………………………… 440
Other current
2,569
liabilities……………………………...

213 Financial Accounting 8/e Solutions Manual


Long-term 27
debt……………………………………….
Total
$3,036
liabilities………………………………………...

c Total liabilities (from Req. b)


$3,036
. ……………………….
Total shareholders’ equity (from S 9-7) 825
………….
Total
$3,861
assets……………………………………………

Chapter 9 Shareholders’ 214


Equity
(5 min.) S 9-10

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…………………………..

Overall, shareholders’ equity decreased by $21 million


($29 million paid out minus $8 million received).

215 Financial Accounting 8/e Solutions Manual


Chapter 9 Shareholders’ 216
Equity
(15-20 min.) S 9-11
Req. 1

MEMORANDUM

TO: Susan Smith Exports, Inc., Board of Directors

FROM: Student Name

RE: How the purchase of treasury shares will make


it more difficult for outsiders to take over the
company

Purchasing treasury shares decreases the amount of


shares outstanding. If Susan Smith Exports holds a
sufficient quantity of company shares in the treasury,
outsiders, such as the Mobile investor group, may not
be able to acquire a controlling interest (>50%) of the
outstanding shares from the remaining shareholders.
Because it takes cash to buy treasury shares, the
purchase decreases the size of the corporation.
Reducing the company’s cash position may make the
company sufficiently unattractive to cause the outside
investors to abandon their takeover plan.

Req. 2

Sales of treasury shares at prices above the purchase


price increase company assets because of the greater
amount of assets coming in from the sale than went
out to buy the shares. Treasury shares transactions do
not affect liabilities, so the sale of treasury shares also
217 Financial Accounting 8/e Solutions Manual
increases shareholders’ equity. These sales of treasury
shares will not affect net income because the company
is dealing with its owners. Transactions between the
corporation and its owners cannot generate a profit or
a loss that is reported on the income statement.

Student responses may vary.

Chapter 9 Shareholders’ 218


Equity
(10 min.) S 9-
12

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.

During 2010, Retained Earnings increased by $43,400


(net income of $95,000 − dividends of $51,600).

(5-10 min.) S 9-13

1. $360,000 (200,000 shares × $1.80 per share)

219 Financial Accounting 8/e Solutions Manual


2. Preference: $360,000
Ordinary: $ 40,000

3. Cumulative, because it is not labeled noncumulative

4. Preference: $1,080,000 ($360,000 × 3)


Ordinary: $ 420,000 ($1,500,000 − $1,080,000)

Chapter 9 Shareholders’ 220


Equity
(5-10 min.) S 9-14

Req. 1

Journal
CREDI
DATE ACCOUNT TITLES AND EXPLANATION DEBIT T

Ma 11 Retained Earnings (13,000 × .15 × 48,75


y $25.00)….. 0
Share capital (13,000 × .15 × $3) 5,85
………....... 0
Paid-in Capital in Excess of Par- 42,90
Ordinary.. 0

Req. 2

No effect on total assets.


No effect on total liabilities.
No effect on total shareholders’ equity.

(10 min.) S 9-15

Total shareholders’ $4,146,00


equity……………………………. 0
Less: Preference (195,000)
shares……………………………..
Preference dividends in arrears
(33,000 × .04 × $5 x 3)
221 Financial Accounting 8/e Solutions Manual
……………………… (19,800)
Ordinary $3,931,20
equity…………………………………………. 0
Number of ordinary shares outstanding
(63,000 − 1,400) ÷
………………………………………. 61,600
Book value per share of ordinary $
shares………….. 63.82

Chapter 9 Shareholders’ 222


Equity
(5-10 min.) S 9-16

(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

1. Creditors have loaned money to the company and


earn interest. Shareholders have invested in the
corporation’s shares and thus own the company’s net
income. Both the funds from the creditors and the
shareholders financed the company’s total assets
used to generate said net income and to pay said
interest. The sum of interest expense plus net
income is the return to the company’s assets.

223 Financial Accounting 8/e Solutions Manual


2. Preference shareholders have the first claim to the
company’s net income through preference dividends.
Therefore, preference dividends are subtracted from
net income to compute ROE.

Chapter 9 Shareholders’ 224


Equity
(10-15 min.) S 9-17

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 =

Note: 10% is considered good in most industries.


Therefore, Godhi’s 1.5% return on assets is very
weak.

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

225 Financial Accounting 8/e Solutions Manual


Note: 15% is considered good in most industries, so
Godhi’s return on equity is very weak.

Chapter 9 Shareholders’ 226


Equity
(20-30 min.) S 9-18

1. Corporations report share capital and retained


earnings separately as prescribed by the relevant
laws and accounting standards. The laws and
standards require corporations to report
shareholders’ equity by source to distinguish paid-in
capital, which cannot be used for cash dividends,
from retained earnings.

2. We should first determine the market value of the


land. Then divide the land’s value by the market
value of each share of shares. The result will tell us
how many shares of our shares to issue for the land.

3. Investors buy ordinary shares in the hope of


potentially earning higher returns on their
investment than are available on an investment in
preference shares.

4. The redemption value of our preference shares


requires us to pay the preference shareholders this
amount when we buy back the preference shares.

5.
Book value Total shareholders’ equity − Preference
per share of equity
=
ordinary Number of shares of ordinary shares
shares outstanding

227 Financial Accounting 8/e Solutions Manual


The shareholder can multiply book value per share
by the number of shares she owns. The result will be
the book value of her shares.

Chapter 9 Shareholders’ 228


Equity
(5-10 min.) S 9-19

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)

229 Financial Accounting 8/e Solutions Manual


Exercises
Group A
(5-10 min.)
E 9-20A
Req. 1
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Jan. 19 Cash (12,000 × $6.00)................ 72,00


0
Share capital (12,000 × 24,00
$2.00).......................................... 0
Paid-in capital in excess of 48,00
par............................................... 0

Apr. 3 Cash............................................ 54,00


0
Preference shares................. 54,00
0

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

231 Financial Accounting 8/e Solutions Manual


(10-15 min.) E 9-21A

Shareholders’ Equity

Preference shares, $4.50 no-par, 10,000


shares
authorized, 600 shares issued..................... $
22,000
Share capital, $1.50 par, 19,000 shares
authorized, 5,000 shares issued....................... 7,500
Paid-in capital in excess of par........................
80,550*
Retained earnings.............................................
45,000
Total shareholders’ equity...........................
$155,050

_____
*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

Journal entries (not required):

Apr. 23 Cash…………………………………….. 28,050


.
Share capital......................... 2,550
Paid-in capital in excess of 25,500
Chapter 9 Shareholders’ 232
Equity
par….

May 2 Cash............................................ 22,000


Preference shares................. 22,000

12 Inventory.................................... 19,000
Equipment.................................. 41,000
Share capital......................... 4,950
Paid-in capital in excess of 55,050
par….

233 Financial Accounting 8/e Solutions Manual


(10 min.) E 9-22A

Paid-in capital consists of:


Preference equity:
Issued for cash (2,000 shares × $240,000
$120) ...........
Ordinary equity:
Issued for cash (22,000 shares × 22,000
$1.00)……
Issued for organizing the 23,000
corporation
Issued for 82,0
patent……………………………….. 00
Total paid-in $367,000
capital……………………………………

Unused data:
Net income
Dividends declared

Short-cut solution (also okay):


1. $ 23,000
2. 82,000
3. 240,000 (2,000 × $120)
4. 22,000 (22,000 × $1.00)
$367,000 = Total paid-in capital

Chapter 9 Shareholders’ 234


Equity
(10-15 min.) E 9-23A

Shareholders’ Equity (Thousands)

Share capital, $0.75 par, 800 shares


authorized, 320 shares $
issued……………………… 240
Paid-in capital in excess of
899
par…………………………
Retained
2,220
earnings…………………………………………
Other shareholders’
(730)
equity………………………………
Less: Treasury shares, ordinary, 100 shares
(1,150)
at cost.
Total shareholders’
$1,479
equity…………………………...

Patterson Software paid a higher price to acquire


treasury shares than the price Patterson received
when it issued its shares. This explains why Treasury
shares has a greater balance than the sum of Share
Capital plus Paid-in Capital in Excess of Par.

235 Financial Accounting 8/e Solutions Manual


(10-15 min.) E 9-24A

Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Jan 17 Cash (2,200 × $10) 22,00


. ……………………..... 0
Share capital (2,200 × $2.50) 5,500
………..
Paid-in capital in excess of 16,50
par…… 0
To issue share capital.

May 23 Treasury shares - Ordinary (300 × 3,60


$12). 0
3,600
Cash……………………………………...
To purchase treasury shares.

Jul. 11 Cash (200 × $20) 4,00


………………………….... 0
Treasury shares - Ordinary (200 2,400
×$12)
Paid-in Capital from Treasury
Shares 1,600
Transactions………………..
To sell treasury shares.

Chapter 9 Shareholders’ 236


Equity
Overall effect on shareholders’ equity
($22,000 − $3,600 + $4,000) -- $22,400 increase

237 Financial Accounting 8/e Solutions Manual


(10 min.) E 9-25A

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

or one entry only:


Retained Earnings 31
…………………………...

Chapter 9 Shareholders’ 238


Equity
Cash………………………………………. 31

239 Financial Accounting 8/e Solutions Manual


(10 min.) E 9-26A

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……………………

Chapter 9 Shareholders’ 240


Equity
(20-30 min.) E 9-27A

Req. 1

Conversion of preference shares into ordinary shares


Retirement of preference shares

Req. 2

Issuance of ordinary shares:


a. To preference shareholders who converted their
preference shares into ordinary shares
b. For cash or other assets
c. Shares dividend

Req. 3

(Millions
of shares)
Dec. 31,
2011
Ordinary shares 300
issued…………………………….
Less: Treasury shares, number of (52)
shares…….
Ordinary shares 288
outstanding……………………...

241 Financial Accounting 8/e Solutions Manual


Chapter 9 Shareholders’ 242
Equity
(continued) E 9-27A

Req. 4

Retained Earnings (Millions)


Dividends Dec. 31, 2010 Bal 5,06
. 6
during 2011 176 Net income 1,38
2011 0
Dec. 31, 2011 Bal 6,27
. 0

Req. 5 (All amounts in millions)

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.

243 Financial Accounting 8/e Solutions Manual


(15 min.) E 9-28A

PREFERENC ORDINAR TOTAL


E Y

2010 Total dividend……………. $ 60,000


Preference dividends
in arrears:
2008: 40,000 shares X $1,800
$0.50(par) per share X .
09 =
2009: 40,000 shares X 1,800
$0.50(par) per share X .
09 =
Current year —
2010: 40,000 shares X 1,800
$0.50(par) per share X .
09 =
Total to $5,400
preference………...
Remainder to ordinary…. $54,600

2011 Total dividend……………. $120,000


Preference dividends:
Current year —
2011: 40,000 shares X $1,800
$0.50(par) per share X .
09 =
Remainder to ordinary…. $118,200

Chapter 9 Shareholders’ 244


Equity
(15-20 min.) E 9-
29A

Req. 1

Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Ma 1 Retained Earnings (300,000 × .15 × 855,00


y 1 $19)… 0
Share capital (300,000 × .15 × 36,000
$0.80).
Paid-in Capital in Excess of
Par - 819,00
Ordinary………………………… 0
To distribute a shares dividend.

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……………………..

Chapter 9 Shareholders’ 246


Equity
(continued) E 9-29A

Req. 3

The shares dividend did not change total shareholders’


equity because the company didn’t distribute assets to
the shareholders as it would in a traditional dividend.
The company merely transferred $855,000 from
Retained Earnings to Share Capital ($36,000) and Paid-
in Capital in Excess of Par ($819,000).

Req. 4

HD’s maximum cash dividend is limited to $560,000,


the balance of its cash account.

247 Financial Accounting 8/e Solutions Manual


(15-20 min.) E 9-30A

a. Decrease shareholders’ equity by $78 million.

b. No effect.

c. No effect.

d. No effect.

e. Decrease shareholders’ equity by $997.50 (1,900 ×


$5.25).

f. Increase shareholders’ equity by $6,300 (900 × $7).

g. No effect.

Chapter 9 Shareholders’ 248


Equity
(10-15 min.) E 9-31A

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……………………….

249 Financial Accounting 8/e Solutions Manual


(10-15 min.) E 9-32A

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.

251 Financial Accounting 8/e Solutions Manual


(10-15 min.) E 9-33A
Rate of Net income +
return Interest expense $1,525 + $222 1,747
on assets = Average total = ($15,906 + $13,700) / = $14,803 = 0 .118
assets 2

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

*$ 44 + $11,522 − $3,010 = $8,556


**$390 + $16,490 − $9,044 = $7,836

These profitability measures suggest strength because


(1) Luna’s 18.6% return on equity is very good and (2)
it exceeds return on assets by a wide margin.

Chapter 9 Shareholders’ 252


Equity
(10-15 min.) E 9-34A
Net income +
Return Interest expense $1,878 + $1,439 $3,317
0.06
on assets = Average total = ($55,790* + = $53,924 =
2
assets $52,058**) / 2

*$32,315 + $23,475= $55,790


**$38,025 + $14,033 = $52,058

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

These rates of return are low — below the targets of


most companies — but not terribly weak. The
company is profitable, and return on equity exceeds
return on assets. But both return measures could
stand to be improved.

(10 min.) E 9-35A

Cash flows from financing activities:


Payment of long-term $(17,060)

253 Financial Accounting 8/e Solutions Manual


debt………………………..
Proceeds from issuance of share 8,500
capital…….
6,580
Borrowings…………………………………………...
Dividends
(230)
paid……………………………………….

Exercises
Group B
(5-10 min.) E 9-
36B

Req. 1

Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Aug 19 Cash (15,000 × $7.50) 112,50


. ………………… 0
Share capital (15,000 × 52,50
$3.50)….. 0
Paid-in capital in excess of 60,00
par 0

Chapter 9 Shareholders’ 254


Equity
Apr. 3 Cash............................................ 55,00
0
Preference shares................. 55,00
0

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

255 Financial Accounting 8/e Solutions Manual


(10-15 min.) E 9-37B

Shareholders’ Equity

Preference shares, $5.50 no-par, 7,000


shares
authorized, 400 shares issued..................... $
30,000
Share capital, $2.00 par, 16,000 shares
authorized, 5,200 shares issued
10,400
Paid-in capital in excess of par........................
74,850*
Retained earnings.............................................
46,000
Total shareholders’ equity...........................
$161,250

_____
*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

Journal entries (not required):

Jun. 23 Cash…………………………………….. 26,250


.
Share capital......................... 3,000

Chapter 9 Shareholders’ 256


Equity
Paid-in Capital in Excess of 23,250
Par…

July 2 Cash............................................ 30,000


Preference shares................. 30,000

12 Inventory.................................... 15,000
Equipment.................................. 44,000
Share capital.......................... 7,400
Paid-in Capital in Excess of 51,600
Par…

257 Financial Accounting 8/e Solutions Manual


(10 min.) E 9-38B

Paid-in capital consists of:


Preference equity:
Issued for cash (3,000 shares × $90) $270,000
...........
Ordinary equity:
Issued for cash (17,000 shares × 306,000
$18.00)
Issued for organizing the 24,000
corporation
Issued for 85,0
patent……………………………….. 00
Total paid-in $685,000
capital……………………………………

Unused data:
Net income
Dividends declared

Short-cut solution (also okay):


1. $ 24,000
2. 85,000
3. 270,000 (3,000 × $90)
4. 306,000 (17,000 × $18.00)
$685,000 = Total paid-in capital

Chapter 9 Shareholders’ 258


Equity
259 Financial Accounting 8/e Solutions Manual
(10-15 min.) E 9-39B

Shareholders’ Equity (Thousands)

Share capital, $0.50 par, 900 shares


authorized, 300 shares $
issued……………………… 150
Paid-in capital in excess of
897
par…………………………
Retained
2,270
earnings…………………………………………
Other shareholders’
(726)
equity………………………………
Less: Treasury shares, ordinary, 100 shares
(1,610)
at cost.
Total shareholders’ $
equity…………………………... 981

Bukala Software paid a higher price to acquire


treasury shares than the price Bukala received when
it issued its shares. This explains why Treasury shares
has a greater balance than the sum of Share capital
plus Paid-in Capital in Excess of Par.

Chapter 9 Shareholders’ 260


Equity
(10-15 min.) E 9-40B

Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Mar 17 Cash (2,400 × $7) 16,80


. ………………………….. 0
Share capital (2,400 × $1.50) 3,600
…………
Paid-in capital in excess of 13,200
par…….
To issue share capital.

Apr. 20 Treasury shares - Ordinary (800 × 12,80


$16).. 0
12,800
Cash……………………………………....
To purchase treasury shares.

261 Financial Accounting 8/e Solutions Manual


Aug 8 Cash (600 × $17) 10,20
. …………………………... 0
Treasury shares - Ordinary (600 9,600
×$16)
Paid-in capital from treasury
shares 600
transactions………………..
To sell treasury shares.

Overall effect on shareholders’ equity


($16,800 − $12,800 + $10,200) -- $14,200 increase

Chapter 9 Shareholders’ 262


Equity
(10 min.) E 9-41B

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

or one entry only:


Retained 34
earnings…………………………....
Cash………………………………………. 34
263 Financial Accounting 8/e Solutions Manual

Chapter 9 Shareholders’ 264


Equity
(10 min.) E 9-42B

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

265 Financial Accounting 8/e Solutions Manual


Chapter 9 Shareholders’ 266
Equity
(20-30 min.) E 9-43B

Req. 1

Conversion of preference shares into share capital


Retirement of preference shares

Req. 2

Issuance of ordinary shares:


a. To preference shareholders who converted their
preference shares into ordinary shares
b. For cash or other assets
c. Shares dividend

Req. 3

(Millions
of shares)
Dec. 31,
2011
Ordinary shares 500
issued…………………………….
Less: Treasury shares, number of (54)
shares…….
Ordinary shares 446
outstanding……………………...

267 Financial Accounting 8/e Solutions Manual


Chapter 9 Shareholders’ 268
Equity
(continued) E 9-43B

Req. 4

Retained Earnings (Millions)


Dividends Dec. 31, 2010 Bal 5,02
. 5
during 2011 200 Net income 1,47
2011 5
Dec. 31, 2011 Bal 6,30
. 0

Req. 5 (All amounts in millions)

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.

269 Financial Accounting 8/e Solutions Manual


(15 min.) E 9-44B

PREFERENC ORDINARY TOTAL


E

2010 Total dividend……………. $


100,000
Preference dividends
in arrears:
2008: 50,000 shares X $5,250
$1.50 (par) per share X .
07 =
2009: 50,000 shares X 5,250
$1.50 (par) per share X .
07
Current year —
2010: 50,000 shares X 5,250
$1.50 (par) per share X .
07 =
Total to $15,750
preference………...
Remainder to $84,250
ordinary….

2011 Total dividend……………. $200,00


0
Preference dividends:
Current year —
2011: 50,000 shares X $5,250
$1.50 (par) per share X .
07 =
Remainder to $194,750
ordinary….

Chapter 9 Shareholders’ 270


Equity
(15-20 min.) E 9-
45B

Req. 1

Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Aug. 1 Retained Earnings (400,000 × .20 × 1,200,0


1 $15) 00
Share capital (400,000 × .20 × 24,000
$0.30)
Paid-in Capital in Excess of Par -
Ordinary………………………… 1,176,0
00
To distribute a share capital dividend.

271 Financial Accounting 8/e Solutions Manual


Req. 2

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……………………..

Chapter 9 Shareholders’ 272


Equity
(continued) E 9-45B

Req. 3

The shares dividend did not change total shareholders’


equity because the company gave its shareholders no
assets. The company merely transferred $1,200,000
from Retained Earnings to Share Capital ($24,000) and
Paid-in Capital in Excess of Par ($1,176,000).

Req. 4

HD’s maximum cash dividend is limited to $590,000,


the balance of its cash account.

273 Financial Accounting 8/e Solutions Manual


Chapter 9 Shareholders’ 274
Equity
(15-20 min.) E 9-46B

a. Decrease shareholders’ equity by $85 million.

b. No effect.

c. No effect.

d. No effect.

e. Decrease shareholders’ equity by $11,250 (1,800 ×


$6.25).

f. Increase shareholders’ equity by $8,100 (900 × $9).

g. No effect.

(10-15 min.) E 9-47B

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

275 Financial Accounting 8/e Solutions Manual


earnings……………………………………..
(146)
Other……………………………………………………..
Total shareholders’ $2,697
equity……………………….

Chapter 9 Shareholders’ 276


Equity
(10-15 min.) E 9-48B

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.

Chapter 9 Shareholders’ 278


Equity
(10-15 min.) E 9-49B
Rate of Net income +
return Interest expense $1,530 + $219 1,749
on assets = Average total = ($16,000 + $13,790) / = $14,895 = 0 .117
assets 2

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

*$ 38 + $11,528 − $2,962 = $8,604


**$384 + $16,530 − $9,112 = $7,802

These profitability measures suggest strength because


(1) LaSalle Inn’s 18.7% return on equity is very good
and (2) it exceeds return on assets by a wide margin.

279 Financial Accounting 8/e Solutions Manual


(10-15 min.) E 9-50B
Net income +
Return Interest expense $1,872 + $1,443 $3,315
0.06
on assets = Average total = ($55,792* + $52,074**) = $53,933 =
1
assets /2

*$32,315 + $23,477= $55,792


**$38,031 + $14,043 = $52,074

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

These rates of return are low — below the targets of


most companies — but not terribly weak. The
company is profitable, and return on equity exceeds
return on assets. But both return measures could
stand to be improved.

Chapter 9 Shareholders’ 280


Equity
(10 min.) E 9-51B

Cash flows from financing activities:


Payment of long-term $(17,100)
debt………………………..
Proceeds from issuance of share 8,495
capital…….
6,590
Borrowings…………………………………………...
Dividends
(215)
paid……………………………………….

281 Financial Accounting 8/e Solutions Manual


Challenge Exercises

(20-25 min.) E 9-52

Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Cash (51,000* × $3)..........................153,00


(a)
0
Share capital............................... 51,000
Additional Paid-in Capital............ 102,00
0
Issued ordinary shares.

Treasury shares (950 × $9)


(b) 8,550
……………..
8,550
Cash…………………………………….
Purchased treasury shares.

Cash……………………………………….
(c) 900
.
Treasury shares ($8,550 − 900
$7,650)..
Resold treasury shares.

Revenues……………………………… 172,00
(d)
…. 0
114,00
Expenses……………………………… 0

Chapter 9 Shareholders’ 282


Equity
Retained 58,000
Earnings…………………...
Closed net income to Retained Earnings.

Retained Earnings ($58,000 −


(d) 23,000
$35,000)
23,000
Cash…………………………………….
Declared and paid dividends.

_____
*$51,000 ÷ $1 par value per share = 51,000 shares
issued.

283 Financial Accounting 8/e Solutions Manual


(20-25 min.) E 9-53

Statement of cash flows:


Cash Flows from Financing Activities:
Issuance of share $153,000
capital……………………….
Purchase of treasury (8,550)
shares…………………..
Sale of treasury 900
shares…………………………
Payment of (23,000)
dividends…………………………..

Journal entries are given in the solution to Exercise 9-


52.

T-accounts of the shareholders’ equity accounts:

Share capital
Issuance of 51,00
shares 0
Balance 51,00
0

Additional Paid-in Capital


Issuance of
shares 102,00
0
Balance 102,00
0
Chapter 9 Shareholders’ 284
Equity
Retained Earnings
Dividends 23,00 Net income 58,00
0 0
Balance 35,00
0

Treasury shares
Purchase 8,55 Sale
900
0
Balance 7,65
0

285 Financial Accounting 8/e Solutions Manual


(15 min.) E 9-54

Preference shares:
Space Walk retired preference shares of $131 million
($740 − $609).

Share capital and Additional paid-in capital:


Space Walk issued 16 million shares of
ordinary
shares for $48 million, computed as Millions
follows:
Share capital ($905 − $889) $ 16
……………………….
Additional paid-in capital ($1,514 − 32
$1,482)……
Total received for issuance of ordinary $48
shares

Retained earnings: Millions


Beginning $19,100
balance……………………………………..
Add: Net 2,980
income……………………………………..
Less: (1,455)*
Dividends……………………………………….
Ending $20,625
balance…………………………………………

*$19,100 + $2,980 − $20,625 = $1,455

Treasury shares:
Chapter 9 Shareholders’ 286
Equity
Apollo purchased treasury shares for $177 million
($2,777 − $2,600).

287 Financial Accounting 8/e Solutions Manual


(15 min.) E 9-55

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……

Computations (not required):

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

Chapter 9 Shareholders’ 288


Equity
Quiz

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%]

Chapter 9 Shareholders’ 290


Equity
Problems

Group A
( (30-45 min.) P 9-76A
Req. 1

Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

May 6Organization 22,500


Expense……………………
Share capital (900 × $5) 4,500
………………
Paid-in Capital in Excess of
Par - 18,000
Ordinary………....................
Issued shares to promoter for
assisting with issuance of shares.

9Cash (22,000 × $25 per share) 550,00


…………. 0
Share capital (22,000 × $5) 110,00
………….. 0
Paid-in Capital in Excess of
Par - 440,00
Ordinary………................... 0
Issued ordinary shares for cash.

10 Patent………………………………………20,000
291 Financial Accounting 8/e Solutions Manual
.
Preference 20,000
shares…….....................
Issued preference shares to acquire a
patent.

26Cash (1,000 × $25) 25,000


………………………...
Share capital (1,000 × $5) 5,000
……………
Paid-in Capital in Excess of
Par - 20,000
Ordinary………....................
Issued share capital for cash.

Chapter 9 Shareholders’ 292


Equity
(continued) P 9-76A

Req. 2

Cohen Canoes, Inc.


Balance Sheet (partial)
May 31, 2010
Shareholders’ equity:
Preference shares, $2, no-par, 9,000 shares authorized,
800 shares issued $20,000
……………………………………
Share capital, $5 par,
100,000 shared authorized, 23,900 shares 119,500
issued*.
Paid-in capital in excess of par - 478,000
ordinary**…………...
Retained 55,00
earnings………………………………………….. 0
Total shareholders’ $672,50
equity……………………………. 0

_____
* 900 + 10,000 + 12,000 + 1,000 = 23,900 shares
**$18,000 + $440,000 + $20,000 = $478,000

293 Financial Accounting 8/e Solutions Manual


(10-15 min.) P 9-77A

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:

Preference shares: 1,600 × $130 = $208,000

Share capital: Balance given as $513,000

Retained earnings: $74,000 + $94,000 − ($208,000


×.05 × 2) −
(120,000 × $.20) = $123,200

Chapter 9 Shareholders’ 294


Equity
(20-30 min.) P 9-78A

Share capital [(475,000 + 380,000) × $5] + $


$358,650. 4,633,650

Additional paid-in capital


475,000 × ($7 − $5) 950,000
………………………………..........
380,000 × ($10 − $5) 1,900,000
……………………………………..
41,000 × ($10 − $7.25) 112,750
………………………………….
From shares 286,920
dividend…………………………………..

Retained earnings ($1,010,000 − $610,000 − (245,570)


$645,570)

Treasury shares [(58,000 − 41,000) × $7.25]


(123,250)
……………

Total shareholders’
$7,514,500
equity……………………………….

Total assets…………………………………………….. $14,600,00


0

− Total ( 7,085,500
liabilities………………………………………….. )

= Total shareholders’ $7,514,500


295 Financial Accounting 8/e Solutions Manual
equity……………………………

Chapter 9 Shareholders’ 296


Equity
(25-35 min.) P 9-79A

Req. 1

Elegant Outdoor Furniture Company has Class A


cumulative preference shares, Class B cumulative
preference shares, and ordinary shares outstanding.

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

Cash ($1,400,000 + 6,400,00


$5,540,000)… 0
Share 870,000
capital……………………
Additional Paid-in Capital
-
5,530,00
297 Financial Accounting 8/e Solutions Manual
Ordinary…………………….. 0

Req. 3

Elegant Outdoor Furniture would have to pay all


preference dividends in arrears and pay the current
year’s dividends before paying dividends to ordinary
shareholders because the preference shares are
cumulative.

Chapter 9 Shareholders’ 298


Equity
(continued) P 9-79A

Req. 4

Elegant must pay preference dividends of $379,925


each year to avoid having preference dividends in
arrears.
_____
Computation:
Class A Preference: 78,000 x $35 × 0.065 =
$177,450
Class B Preference: 79,000 x $35 × 0.065 =
202,475
Total preference dividends………………….. $379,925

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

Chapter 9 Shareholders’ 300


Equity
(15-20 min.) P 9-80A

Req. 1

Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Feb. 13 Cash (5,400 × $5) 27,00


…………………………. 0
Share capital (5,400 × $4) 21,60
………….... 0
Paid-in capital in excess of par -
5,400
Ordinary………………………………

Jun. 7 Retained 210


earnings…………………………
Dividends payable
(300 shares × $0.70) 210
……………………

24 Dividends 210
payable………………………...
210
Cash………………………………………

Aug 9 Retained earnings


.
(11,900 shares × 0.10 × $6) 7,140
………………
Share capital 11,900 × 0.10 × 4,760
$4)……
Paid-in capital in excess of par -

301 Financial Accounting 8/e Solutions Manual


2,380
Ordinary………………………………

Oct. 26 Treasury shares (500 × $7) 3,500


………………
3,500
Cash………………………………………

Nov. 20 Cash (200 × $11) 2,200


…………………………...
Treasury shares, (200 × 7) 1,400
……………
Paid-in capital from treasury
shares 800
transactions………………..

Chapter 9 Shareholders’ 302


Equity
(continued) P 9-80A

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……………………………..

303 Financial Accounting 8/e Solutions Manual


Chapter 9 Shareholders’ 304
Equity
(20-30 min.) P 9-81A

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

305 Financial Accounting 8/e Solutions Manual


Chapter 9 Shareholders’ 306
Equity
(40-50 min.) P 9-82
Req. 1
Seagull Designers, Inc.
Balance Sheet
December 31, 2010
ASSETS LIABILITIES
Current: Current:
$ Accounts $136,00
Cash…………………... 55,000 payable………... 0
Accounts rec., 34,000 Dividends 6,000
net….. payable………..
Accrued 24,00
93,000
Inventory……………... liabilities………... 0
Prepaid expenses. Total current
13,000
…..
Total current liabilities…. 166,000
…………….
Long-term note 99,00
195,000 payable……
assets…………….. 0
Total 265,00
liabilities………………. 0
Property, plant, and
equipment, SHAREHOLDERS’
364,000
net………
EQUITY
Intangible assets: Preference shares, $.50,
no-par, 11,000 shares
Goodwill……………… 13,000
Trademark, 4,000 authorized and $
net……… issued…... 29,700
Share capital,
$2 par, 600,000 shares
authorized, 116,000
shares 232,000
307 Financial Accounting 8/e Solutions Manual
issued……………...
Paid-in capital in excess
of par — 20,000
ordinary…………
Retained 53,300*
earnings…………..
Less: Treasury shares,
ordinary, 21,000
shares
at (24,000
cost………………………. )
Total shareholders’ 311,000
equity...
Total liabilities and
Total $576,00 shareholders’ $576,00
assets……………. 0 equity…….. 0

*Retained earnings = Total assets − Total liabilities − Total paid-in capital


=
$576,000 − $265,000 − $29,700 − $232,000 − $20,000 − (− $24,000) =
$53,300

(continued) P 9-82A

Req. 2

Rate of Net income


Return + Interest $32,000 + $15,600 $47,600
expense 0.08
= = = =
on Average total ($576,000 + $534,50 9
assets assets $493,000) / 2 0

Rate of Net income


return = − Preference = $32,000 − (11,000 × = $26,500 = 0.10
on ordinary dividends $.50) 5
Chapter 9 Shareholders’ 308
Equity
shareholder Average ordinary ($281,300* + $251,65
s' $222,000) / 2 0
equity shareholders'
equity

*Total shareholders’ $311,000


equity………………………...
Less: Preference (29,700)
equity…………………………..
Ordinary shareholders’ $281,300
equity…………………...

Req. 3

These rates of return suggest some weakness. Return


on ordinary shareholders’ equity is well below 15%,
mentioned in the text as a good return on equity.
However return on equity does exceed return on
assets.

309 Financial Accounting 8/e Solutions Manual


(20-30 min.) P 9-83A

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……………………………………………..

Long-term notes 162


payable……………………….
162
Cash……………………………………………..

311 Financial Accounting 8/e Solutions Manual


Problems

Group B
(30-45 min.) P 9-84B
Req. 1
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Jan 6 Organization 7,500


. Expense……………………………
Share capital (500 × $5) 2,500
………………….......
Paid-in Capital in Excess of
Par - 5,000
Ordinary……………………………...
Issued shares to promoter for
assistance in issuing share capital.

9 Cash (19,000 × $15) 285,000


………………………………
Share capital (19,000 × $5) 95,000
………………….
Paid-in Capital in Excess of
Par - 190,000
Ordinary……………………………...
Issued ordinary shares for cash.

10 Patent…………………………………………… 12,000
….
Preference shares………………………. 12,000

Chapter 9 Shareholders’ 312


Equity
……
Issued preference shares to acquire a
patent.

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

Liard Canoes, Inc.


Balance Sheet (partial)
January 31, 2010
Shareholders’ equity:
Preference shares, $1 no-par, 5,000 shares authorized,
600 shares $ 12,000
issued………………………………………..
Share capital, $5 par, 140,000 shares
authorized, 20,900 shares 104,500
issued*…………...............
Paid-in capital in excess of par -
209,000**
ordinary………………
Retained 56,00
earnings…………………………………………… 0

313 Financial Accounting 8/e Solutions Manual


Total shareholders’ $381,500
equity……………………………...

_____
*500 + 19,000 + 1,400 = 20,900 shares
**$5,000 + $190,000 + $14,000 = $209,000

Chapter 9 Shareholders’ 314


Equity
(10-15 min.) P 9-85B

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:

Preference shares: 1,000 × $110 = $110,000

Share capital: Balance given as $512,000

Retained earnings: $71,000 + $92,000 − ($110,000 ×


0.08 x 2) – (80,000 x $0.60) = $97,400

315 Financial Accounting 8/e Solutions Manual


Chapter 9 Shareholders’ 316
Equity
(20-30 min.) P 9-86B

Share capital [(500,000 + 395,000) × $2] + $


$150,120. 1,940,120

Additional paid-in capital


500,000 × ($5.00 − $2.00) 1,500,000
……………………………….
395,000 × ($9.00 − $2.00) 2,765,000
……………………………….
38,000 × ($8 − $7.25) 28,500
……………………………………
From shares 450,360
dividend………………………………….

Retained earnings ($1,150,000 − $700,000 − (150,480)


$600,480).

Treasury shares [(61,000 − 38,000) × $7.25]


(166,750)
……………

Total shareholders’
$6,366,750
equity……………………………….

Total assets…………………………………………….. $14,200,00


0

− Total
(7,833,250)
liabilities…………………………………………..

= Total shareholders’ $6,366,750


317 Financial Accounting 8/e Solutions Manual
equity……………………………

Chapter 9 Shareholders’ 318


Equity
(25-35 min.) P 9-87B

Req. 1

Seasonal Outdoor Furniture Company has Class A


cumulative preference shares, Class B cumulative
preference shares, and ordinary shares outstanding.

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

Cash ($1,000,000 + 6,520,000


$5,520,000)
Share 1,000,00
capital………………… 0
Additional Paid-in
Capital -
319 Financial Accounting 8/e Solutions Manual
5,520,00
Ordinary……………………
0

Req. 3

Seasonal Outdoor Furniture would have to pay all


preference dividends in arrears before paying
dividends to ordinary shareholders because the
preference shares are cumulative.

Chapter 9 Shareholders’ 320


Equity
(continued) P 9-87B

Req. 4

Seasonal must pay preference dividends of $138,400


each year to avoid having preference dividends in
arrears.
_____
Computation:
Class A Preference: 76,000 x $20 × 0.04 = $ 60,800
Class B Preference: 97,000 x $20 × 0.04 = 77,600
Total preference dividends……………….. $138,400

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

321 Financial Accounting 8/e Solutions Manual


563,20
($840,000 − $121,600 − $155,200)
0

Chapter 9 Shareholders’ 322


Equity
(15-20 min.) P 9-88B

Req. 1

Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Feb. 13 Cash (5,200 × $6) 31,20


……………………………. 0
Share capital (5,200 × $2) 10,40
……………. 0
Paid-in capital in excess of par -
20,80
Ordinary………………………………...
0

June 7 Retained 320


earnings…………………………..
Dividends payable
(400 shares × $0.80) 320
……………………...

24 Dividends 320
payable…………………………..
320
Cash………………………………………...

Aug. 9 Retained earnings


(11,500 shares × 0.20 × $7) 16,10
………………… 0
Share capital (11,500 × 0.20 × $2) 4,600
……..
Paid-in capital in excess of par -
11,50
Ordinary………………………………...
323 Financial Accounting 8/e Solutions Manual
0

Oct. 26 Treasury shares, Ordinary (900 × 7,200


$8).......
Cash……………………………………….. 7,200

Nov. 20 Cash (600 × $12) 7,200


…………………………….
Treasury shares, Ordinary (600 × 4,800
$8)..
Paid-in Capital from Treasury
Shares
2,400
Transactions…………………...........

Chapter 9 Shareholders’ 324


Equity
(continued) P 9-88B

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……………………………..

325 Financial Accounting 8/e Solutions Manual


(20-30 min.) P 9-89B

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

Chapter 9 Shareholders’ 326


Equity
(40-50 min.) P 9-90B
Req. 1

Hawk Designers, Inc.


Balance Sheet
December 31, 2010
ASSETS LIABILITIES
Current: Current:
$ Accounts $ 133,000
Cash……………………. 43,000 payable............…..
Accounts Dividends 12,000
receivable, payable...........…..
Accrued 27,000
net……………………. 22,000 liabilities............…..
Total current 172,000
Inventory………………. 94,000 liabilities.…..
Prepaid Long-term note
expenses……. 16,000 payable.....….. 96,000
Total current Total 268,000
assets. 175,000 liabilities....................…...
SHAREHOLDERS’
Property, plant, and EQUITY
equipment, Preference shares, $.50
net……….. 359,000
Intangible assets: no- par, 12,000
Trademarks, shares authorized,
net……… 10,000
12,000 shares $
Goodwill……………….. 11,000 issued.........… 32,400
Share capital, $2
par, 300,000 shares
authorized, 117,000
shares 234,000
issued...................…..

327 Financial Accounting 8/e Solutions Manual


Additional paid-in
capital — 0
ordinary...........…..
Retained 42,600*
earnings...............…..
Less: Treasury shares, ordinary
19,000 shares at
cost..........… ( 22,000)
Total shareholders’ 287,000
equity.......
Total liabilities and
Total $555,000 shareholders’ $555,00
assets…………….. equity........….. 0
_____
*Retained earnings = Total assets − Total liabilities − Total paid-in
capital
= $555,000 −$268,000 − $32,400 − $234,000 − (−
$22,000)
= $42,600

Chapter 9 Shareholders’ 328


Equity
(continued) P 9-90B

Req. 2

Rate of Net income


return + Interest $30,000 + $16,000 $46,000
expense 0.08
= = = =
on Average total ($555,000 + $525,50 8
assets assets $496,000) / 2 0

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

**Total shareholders’ $287,000


equity……………………….
Less: Preference (32,400)
equity…………………………
Ordinary shareholders’ $254,600
equity………………….

Req. 3

These rates of return suggest a mid range. Return on


ordinary shareholders’ equity is below 15%, mentioned

329 Financial Accounting 8/e Solutions Manual


in the text as a good rate of return, but it’s higher than
return on assets — a good sign.

Chapter 9 Shareholders’ 330


Equity
(20-30 min.) P 9-91B

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……………….

331 Financial Accounting 8/e Solutions Manual


Treasury 3,080
shares………………………………
Cash………………………………………… 3,080

Long-term notes payable………………….. 162


Cash ……………………………………….. 162

Chapter 9 Shareholders’ 332


Equity
Decision Cases

(30-45 min.) Decision Case 1


Req. 1

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.

333 Financial Accounting 8/e Solutions Manual


Plan 2:
Cash………………………………………… 55,000
.
Preference 55,000
shares……………………..
To issue preference shares to outside
investors.

Cash………………………………………… 35,000
.
Share 35,000
capital……………………………
To issue ordinary shares to outside
investors.

Chapter 9 Shareholders’ 334


Equity
(continued) Decision Case 1

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

335 Financial Accounting 8/e Solutions Manual


Total shareholders’ $230,00
equity………………………… 0

Chapter 9 Shareholders’ 336


Equity
(continued) Decision Case 1

Req. 4

Plan 1 appears to fit the plans of Smith and Jones


better than Plan 2 because:
 Their primary goal is to raise as much capital as
possible without giving up control of the business.
Under Plan 2, the outside shareholders would have
60,000 votes [35,000 ordinary votes + 25,000
preference votes (500 shares × 50 votes per
share)]. Smith and Jones would lose control of the
business because they would have only 50,000
votes.
 Under Plan 1 preference shareholders have no
votes. Smith and Jones would have complete
control since they would hold all the voting shares.
 Plan 2 would raise only $10,000 more than Plan 1
whilst giving up more than 50% of the voting
control in the company.

(15-20 min.) Decision Case 2

337 Financial Accounting 8/e Solutions Manual


Req. 1

The shares dividend does not affect your proportionate


ownership in the company because all the
shareholders receive 10% new shares. All shareholders
are in the same relative position after the dividends as
they were before.
Req. 2

Cash dividends received last year were $7,150 (10,000


shares × $0.715 per share). Cash dividends after the
share dividend will be $7,150 (11,000 shares × $0.65
per share). Thus, there is no change in cash dividends.

Req. 3

You incur no loss in value because the market value of


your investment after the shares dividend — $610,203
(11,000 shares × $55.473) — is the same as it was
before the dividend — 10,000 shares × $61.02. The
increase in the number of shares you own at $55.473
per share offsets the decrease in the market price per
share. Any difference here is due to rounding.

Chapter 9 Shareholders’ 338


Equity
Req. 4

If the company continues paying the $0.715 cash


dividend per share, after issuing the 10% shares
dividend, total cash dividends will increase. (Your
annual dividends will rise to $7,865 [11,000 shares ×
$0.715].) The increase in dividends might attract new
investors, who view the increased cash dividends as
an indication that the business is operating quite well.
This investor interest may result in an increase in the
market value of UPS shares, or at least keep the value
higher than it would be without the increase in cash
dividends.
(20-30 min.) Decision Case 3

Req. 1

Millions

a. Net income, as reported for $979


2000…………………...

b. Net income after new developments


[$979 − $130 − ($2,000 × .12)] $609
…………….............
339 Financial Accounting 8/e Solutions Manual
c. The trend of net income is down. The reasons for
the downward trend are (a) inclusion of the money-
losing companies and (b) the interest expense on
the new debt.

Req. 2 (amounts in millions)

Asset = Liabilitie + Equity


s s
As $65,5 = $54,033 + $11,47
reported………………... 03 0
Adjustments
for 2001:
Inclusion of 5,700 = 5,600 + 100
companies
Exchange of notes
payable for
shares……. 0 = 2,000 – 2,000
Interest expense
on new 0 = 240 – 240
debt…………….
As $71,2 = $61,873 + $9,330
adjusted………………... 03

Chapter 9 Shareholders’ 340


Equity
(continued) Decision Case 3

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

I would recommend downgrading Enron’s debt for two


reasons:

1. Downturn in net income due to (a) inclusion of the


money-losing companies, and (b) the added
interest expense on the new debt.

2. Increase in the debt ratio due to the same two


factors.

341 Financial Accounting 8/e Solutions Manual


Ethical Issue 1

Req. 1

The ethical issue is, “What is the correct amount at


which to record and disclose the value of the franchise
on Campbell’s balance sheet?”

Req. 2 and Req.3

The stakeholders in the transaction include Campbell,


the potential buyers of the franchises, and potential
lenders who loan them the money to buy the franchises
in the future. Campbell and the corporation are
effectively the same entity. The third party serves no
purpose other than as an accomplice to overvalue the
franchise.

Analysis of the decision to overvalue the franchise:


(a) Economic: Campbell is better off temporarily,
unless potential buyers sue him for damages, in which
case he could be worse off. Potential buyers of the
individual-language franchises can be harmed.

Chapter 9 Shareholders’ 342


Equity
Campbell’s balance sheet overstates his assets. If
outsiders believe his balance sheet, they may be
induced to pay Campbell more than the individual-
language franchises are worth. Lenders can also be
harmed by loaning money to Campbell on more
favorable terms than his financial position warrants.
(b) Legal: If potential buyers are damaged by
Campbell’s actions, they might sue him for recovery of
those damages. In this situation, the public is also
defrauded if Campbell amortizes the cost of the
franchise for income tax purposes. Basing amortization
on $500,000 overstates tax deductions and
understates Campbell’s income. As a result, his tax
payments are lower than they should be. This could
expose Campbell to future investigations from the IRS.

(c) Ethical: This type of scheme is harmful to


everyone involved. It is not truthful, and it violates the
rights of individuals and business entities to full and
complete disclosure of the proper valuation of a
business. It is an example of the type of transaction

343 Financial Accounting 8/e Solutions Manual


that meets the letter of the law without meeting the
spirit of the law.

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.

Chapter 9 Shareholders’ 344


Equity
Ethical Issue 2

Req. 1

The ethical issue is whether the company acted


properly in purchasing their shares on the open market
based on inside information known only to them.

Req. 2 and Req. 3


Stakeholders include the company, its officers and
directors, the shareholders from whom the shares were
purchased, and the general public.

(a) Economic analysis: The company, and likely its


officers and directors, benefitted temporarily at the
other shareholders’ expense. The managers purchased
the shares at $6 and could sell it for $27. Thus, the
managers enriched shareholders who held on to their
shares at the expense of the shareholders who sold
company shares at $6.

Had the shareholders known of the oil discovery, those


selling shareholders probably would have held their St.
345 Financial Accounting 8/e Solutions Manual
Genevieve shares. Shareholders wanting to sell
company shares would have demanded a price based
on all relevant information about the company,
including news of the discovery.

(b) Legal analysis: If St. Genevieve is a public


company, their actions are illegal. The Securities
Exchange Act of 1934 prohibits insider trading. It
imposes stiff penalties for unethical conduct of this
type. The SEC will prosecute them for insider trading,
probably fine them, and possibly send the officers and
directors responsible for the decision to prison. In
addition, actions such as these have been the basis for
numerous civil shareholder lawsuits, to recover
monetary damages suffered because of the actions of
the company.

(c) Ethical analysis: The managers clearly did not


behave ethically, violating the rights of existing
shareholders as well as the good faith of the investing
public. Managers defrauded the shareholders by

Chapter 9 Shareholders’ 346


Equity
withholding important information prior to buying
company shares.

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.

Focus on Financials: Nokia Corporation


(20-30 min.)

Req. 1

According to Appendix A on page 866, Nokia has one


class of shares. As of 31 December 2008, Nokia has
3,800,948,552,000 shares issued with a total value of
$245,896,461.96. The number of outstanding shares is
3,697,872,000.

347 Financial Accounting 8/e Solutions Manual


Req. 2

Based on the comparative Consolidated Balance


Sheets, as well as the information in the Consolidated
Statements of Changes in Shareholders’ Equity and the
Consolidated Cash Flow Statements, Nokia
repurchased 157,390,000 treasury shares, paying 3,123
million in total at $19.84 per share.

Req. 3

The company earned and reported net income of


$3,988 million. It appears first in the Consolidated
Profit and Loss Accounts. It also appears as an
addition of the retained earnings in the Consolidated
Statements of Changes in Shareholders’ Equity, and as
the opening line of the Consolidated Cash Flow
Statements. This is a good thing.

Req. 4
Retained Earnings

$ 13,870 (beginning

Chapter 9 Shareholders’ 348


Equity
balance)
4,232 46
1,992 3,988
12
$ 11,692 (closing balance)

DR. Income Summaries $3,988


CR. Retained Earnings $3,988
DR. Retained Earnings $1,992
CR. Dividends Payable $1,992
DR. Retained Earnings $4,232
CR. Cash $4,232

Req. 5

Return on $3988
equity = ($16,510 + = 23.6%
$17,338) / 2

Return on $3988 + $185


assets = ($39,582 + = 10.8%
$37,599) / 2

These rates of return indicate financial strength for


two reasons:

349 Financial Accounting 8/e Solutions Manual


1. Both returns are high. Return on equity is
outstanding!

2. Return on equity is much higher than return on


assets, meaning that the ordinary shareholders are
earning a much higher return on their investment in the
business than they are paying creditors for borrowed
funds.

Chapter 9 Shareholders’ 350


Equity
Group Project in Ethics

(1-3 hours, including discussion)

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.

351 Financial Accounting 8/e Solutions Manual


Req. 3
The measures of “deficiency” can vary, but usually are:
excessively high debt ratios, continuing and increasing
deficits in retained earnings, debt covenants that are
being violated, labor troubles, litigation. If the
company is not too far gone, in some cases,
downsizing helps by cutting costs to be more in line
with revenues. Students’ teams might brainstorm this
question as well.

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

Chapter 9 Shareholders’ 352


Equity
crafted and sufficiently restricted to appear to have
more debt than equity features, perhaps this could be
justified in some people’s minds.

353 Financial Accounting 8/e Solutions Manual

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