OF CHAPTER 15

SOLUTIONS TO ASSIGNMENTS

OF CHAPTER 15

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EXERCISE 15-1

(a) June 15 Retained Earnings (90,000 X $1)............. 90,000

Dividends Payable........................................... 90,000

July 10 Dividends Payable..................................... 90,000

Cash.................................................................... 90,000

Dec. 15 Retained Earnings (92,000 X $1.30)....... 119,600

Dividends Payable........................................... 119,600

(b) In the retained earnings statement, dividends of $209,600 will be deducted. In the balance sheet, Dividends Payable of $119,600 will be
reported as a current liability.

EXERCISE 15-2

(a)		2001	2002		2003

	Total dividend declaration Allocation to preferred stock Remainder to common stock	$6,000 6,000 $ 0	$12,000 9,000 $ 3,000		$28,000 9,000 $19,000

(b)		2001	2002		2003

	Total dividend declaration Allocation to preferred stock Remainder to common stock	$6,000 6,000 $ 0	$12,000 12,000 $ 0	¹	$28,000 12,000 $16,000	²

¹Cumulative dividend for Year 1, $4,000 + $8,000 for Year 2.

²Cumulative dividend for Year 2, $2,000 + $10,000 for Year 3.

Dividends Payable............................................. 12,000

EXERCISE 15-3

(1) Retained Earnings (22,500* X $16)............................ 360,000

Stock Dividends Distributable.......................................... 225,000

(22,500 X $10)

Paid-in Capital in Excess of Par Value............................ 135,000

(22,500 X $6)

*[($1,000,000 ÷ $10) + 50,000] X 15%.

(2) Retained Earnings (37,500* X $20)............................ 750,000

Stock Dividends Distributable.......................................... 187,500

(37,500 X $5)

Paid-in Capital in Excess of Par Value............................ 562,500

(37,500 X $15)

*[($1,000,000 ÷ 5) + 50,000] X 15%.

EXERCISE 15-11

	2002	2001

Earnings per share	= $1.40	= $.89

Return on common stockholders’ equity	= 11.7%	= 8.4%

EXERCISE 15-12

(a) SASS CORPORATION

Partial Income Statement

For the Year Ended October 31, 2002

Income before income taxes....................................................... $640,000

Income tax expense ($640,000 X 30%)...................................... 192,000

Income before extraordinary item.............................................. 448,000

Extraordinary loss from fire, net of $30,000

income tax saving ($100,000 X 30%)..................................... 70,000

Net income....................................................................................... $378,000

EXERCISE 15-12 (Continued)

(b) To: Chief Accountant

From: Your name, Independent Auditor

After reviewing your income statement for the year ended 10/31/02, we believe it is misleading for the following reasons:

&nbbsp;

The amount reported for income before extraordinary items is overstated by $30,000. The income tax expense should be 30% of $640,000, or $192,000, not $162,000.

&nbbsp;

Also, the effect of extraordinary losses on net income is only $70,000, not $100,000. An income tax savings of $30,000 should be netted against the extraordinary loss.

&nbbsp;

PROBLEM 15-1A

(a) Feb. 1 Retained Earnings (65,000 X $1)............. 65,000

Dividends Payable........................................... 65,000

Mar. 1 Dividends Payable..................................... 65,000

Cash.................................................................... 65,000

Apr. 1 Memo—four-for-one stock split

increases number of shares to

260,000 = (65,000 X 4) and reduces

par value to $5 per share.

July 1 Retained Earnings (13,000 X $13)........... 169,000

Common Stock Dividends

Distributable (13,000 X $5)......................... 65,000

Paid-in Capital in Excess of

Par Value (13,000 X $8)............................... 104,000

31 Common Stock Dividends

Distributable........................................... 65,000

Common Stock................................................. 65,000

Dec. 1 Retained Earnings (273,000 X $.50)....... 136,500

Dividends Payable........................................... 136,500

31 Income Summary....................................... 350,000

Retained Earnings........................................... 350,000

(b)

Common Stock

Date

Explanation

Ref.

Debit

Credit

Balance

Jan. 1

Apr. 1

July 31

Balance

4 for 1 split—new

par $5

65,000

1,300,000

1,365,000

PROBLEM 15-1A (Continued)

Paid-in Capital in Excess of Par Value

Date

Explanation

Ref.

Debit

Credit

Balance

Jan. 1

July 1

Balance

104,000

200,000

304,000

Retained Earnings

Date

Explanation

Ref.

Debit

Credit

Balance

Jan. 1

Feb. 1

July 1

Dec. 1

Balance

Cash dividend

Stock dividend

Cash dividend

Net income

65,000

169,000

136,500

350,000

600,000

535,000

366,000

229,500

579,500

Common Stock Dividends Distributable

Date

Explanation

Ref.

Debit

Credit

Balance

July 1

65,000

Stockholders’ equity

Paid-in capital

Capital stock

Common stock, $5 par value, 273,000

shares issued and outstanding.................. $1,365,000

Additional paid-in capital

In excess of par value........................................ 304,000

Total paid-in capital.................................... 1,669,000

Retained earnings.............................................................. 579,500

Total stockholders’ equity........................ $2,248,500

PROBLEM 15-2A

(a) July 1 Retained Earnings..................................... 125,000

[($500,000 ÷ $2) X $.50]

Dividends Payable—Common

Stock.............................................................. 125,000

Aug. 1 Retained Earnings..................................... 45,000

Accumulated Depreciation............................. 45,000

Sept. 1 Dividends Payable—Common

Stock........................................................ 125,000

Cash.................................................................... 125,000

Dec. 1 Retained Earnings (25,000 X $18)........... 450,000

Common Stock Dividends

Distributable (25,000 X $2)......................... 50,000

Paid-in Capital in Excess of

Par Value—Common Stock....................... 400,000

(25,000 X $16)

15 Retained Earnings (12,000 X $4.50)....... 54,000

Dividends Payable—Preferred

Stock.............................................................. 54,000

31 Income Summary....................................... 385,000

Retained Earnings........................................... 385,000

(b)

Preferred Stock

Date		Explanation		Ref.		Debit		Credit		Balance
Jan. 1		Balance		T						600,000

Common Stock

Date		Explanation		Ref.		Debit		Credit		Balance
Jan. 1		Balance		T						500,000

PROBLEM 15-2A (Continued)

Paid-in Capital in Excess of Par Value—Preferred Stock

Date		Explanation		Ref.		Debit		Credit		Balance
Jan. 1		Balance		T						200,000

Paid-in Capital in Excess of Par Value—Common Stock

Date

Explanation

Ref.

Debit

Credit

Balance

Jan. 1

Dec. 1

Balance

400,000

300,000

700,000

Retained Earnings

Date

Explanation

Ref.

Debit

Credit

Balance

Jan. 1

July 1

Aug. 1

Dec. 1

Dec. 15

Dec. 31

Balance

Cash dividend—

common

Prior period

adjustment—

depreciation

Stock dividend—

common

Cash dividend—

preferred

Net income

125,000

45,000

450,000

54,000

385,000

800,000

675,000

630,000

180,000

126,000

511,000

Common Stock Dividends Distributable

Date		Explanation		Ref.		Debit		Credit		Balance
Dec. 1								50,000		50,000

PROBLEM 15-2A (Continued)

Retained Earnings Statement

For the Year Ended December 31, 2002

Balance, January 1, as reported....................................... $ 800,000

Correction of 2001 depreciation........................................ 45,000

Balance, January 1, as adjusted....................................... 755,000

Add: Net income.................................................................. 385,000

1,140,000

Less: Cash dividends—preferred................... $ 54,000

Stock dividends—common...................... 450,000

Cash dividends—common..................... 125,000 629,000

Balance, December 31......................................................... $ 511,000

(d) GREENE COMPANY

Stockholders’ equity

Paid-in capital

Capital stock

9% Preferred stock, $50 par

value, 6,000 shares issued........................ $ 600,000

Common stock, $2 par value,

250,000 shares issued............... $500,000

Common stock dividends

distributable

(25,000 shares)............................ 50,000 550,000

Total capital stock.................................... 1,150,000

Additional paid-in capital

In excess of par value—

preferred stock............................ 200,000

In excess of par value—

common stock............................. 700,000

Total additional paid-in

capital...................................................... 900,000

Total paid-in capital.................................. 2,050,000

Retained earnings (see Note B)................................... 511,000

Total stockholders’

equity...................................................... $2,561,000

Note B: Retained earnings is restricted for plant expansion, $200,000.

PROBLEM 15-3A

(a)

Retained Earnings

Sept. 1 PPA 42,000

Oct. 1 Cash Dividend 250,000

Dec. 1 Stock Dividend 320,000

Jan. 1 Balance 1,170,000

Dec. 31 Net Income 495,000

Dec. 31 Balance 1,053,000

(b) JAJOO CORPORATION

Retained Earnings Statement

For the Year Ended December 31, 2002

Balance, January 1, as reported....................................... $1,170,000

Correction of overstatement of 2001 net

income because of understatement of

depreciation....................................................................... 42,000

Balance, January 1, as adjusted....................................... 1,128,000

Add: Net income.................................................................. 495,000

1,623,000

Less: Cash dividends......................................... $250,000

Stock dividends........................................ 320,000 570,000

Balance, December 31......................................................... $1,053,000

Stockholders’ equity

Paid-in capital

Capital stock

10% Preferred stock,

$50 par value, cumulative,

20,000 shares authorized,

15,000 shares issued and

outstanding.................................................... $ 750,000

PROBLEM 15-3A (Continued)

JAJOO CORPORATION (Continued)

Common stock, $10 par value,

500,000 shares authorized,

250,000 shares issued and

outstanding................................ $2,500,000

Common stock dividends

distributable............................... 200,000 2,700,000

Total capital stock..................................... 3,450,000

Additional paid-in capital

In excess of par value—

preferred stock.......................... 250,000

In excess of par value—

common stock........................... 400,000

Total additional paid-in

capital...................................................... 650,000

Total paid-in capital................................... 4,100,000

Retained earnings (see Note X).................................... 1,053,000

Total stockholders’

equity....................................................... $5,153,000

Note X: Retained earnings is restricted for plant expansion, $200,000.

(d) = $1.75

*15,000 X $5 = $75,000

(e) Total cash dividend................................................................. $250,000

Allocated to preferred stock

Dividend in arrears—2001............................... $75,000

(15,000 X $5)

2002 dividend..................................................... 75,000 150,000

Remainder to common stock................................................ $100,000

PROBLEM 15-4A

(a) KNIGHT CORPORATION

Condensed Income Statement

For the Year Ended December 31, 2002

Operating revenues

($12,850,000 – $3,000,000) ............................................. $9,850,000

Operating expenses

($8,700,000 – $4,000,000) ............................................... 4,700,000

Income from operations...................................................... 5,150,000

Other revenues and gains.................................................. 100,000

Income before income taxes.............................................. 5,250,000

Income tax expense ($5,250,000 X 30%).......................... 1,575,000

Income from continuing operations................................. 3,675,000

Discontinued operations

Loss from operations of hotel

chain*, net of $300,000 income

tax savings................................................ $700,000

Gain on sale of hotels, net of

$150,000 income taxes........................... 350,000 350,000

Income before extraordinary item..................................... 3,325,000

Extraordinary item

Fire loss, net of $240,000 income

tax saving................................................................... 560,000

Net income.............................................................................. $2,765,000

*$3,000,000 – $4,000,000 = ($1,000,000)

(b) Earnings Per Share Amounts

Income from continuing operations................................................ $8.35

($3,675,000 ÷ 440,000)

Loss from discontinued operations ($350,000 ÷ 440,000).......... (.80 )

Income before extraordinary item ($3,325,000 ÷ 440,000).......... 7.55

Extraordinary loss ($560,000 ÷ 440,000)........................................ (1.27 )

Net income ($2,765,000 ÷ 440,000)................................................... $6.28

PROBLEM 15-5A

(a) MCGRATH CORPORATION

Income Statement

For the Year Ended December 31, 2002

Net sales.................................................................................. $1,700,000

Cost of goods sold................................................................ 1,000,000

Gross profit............................................................................. 700,000

Selling and administrative expenses................................ 250,000

Income from operations....................................................... 450,000

Other revenues and gains..................................... $20,000

Other expenses and losses.................................. 28,000 8,000

Income before income taxes............................................... 442,000

Income tax expense ($442,000 X 30%).............................. 132,600

Income from continuing operations.................................. 309,400

Discontinued operations

Income from operations of discon-

tinued division, net of $15,000

income taxes................................................ 35,000

Loss on sale of discontinued division,

net of $21,000 income tax saving............ 49,000 14,000

Income before extraordinary item and

cumulative effect of change in account-

ing principle........................................................................ 295,400

Extraordinary item

Gain from expropriation, net of $27,000

income taxes.............................................................. 63,000

Cumulative effect of change in accounting

principle

Effect on prior years’ net income of

change to straight-line depreciation,

net of $18,000 income taxes................................... 42,000

Net income.............................................................................. $ 400,400

PROBLEM 15-5A (Continued)

(b) Earnings per share

Income from continuing operations

($309,400 ÷ 100,000) .............................................................. $3.09

Loss from discontinued operations

($14,000 ÷ 100,000).................................................................. (.14 )

Income before extraordinary item and cumulative

effect of change in accounting principle

($295,400 ÷ 100,000)............................................................... 2.95

Extraordinary gain ($63,000 ÷ 100,000).................................. .63

Cumulative effect of change in accounting principle

($42,000 ÷ 100,000) ................................................................ .42

Net income ($400,400 ÷ 100,000).............................................. $4.00

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