Chapter 12 sample test

 

1.      Calculate the total cash the First Corporation would receive if it issues 1,000 shares of $.02 par value per share common stock at a $9 market price per share.

 

The key to this problem is to recognize that the cash a company receives when it issues stock is based on the number of share issued and the market price per share.  The company would receive $9,000 when it issues the 1,000 shares.

 

1,000 shares x $9 market price per share = $9,000 cash.

 

See text exercise 12.1 for similar material.

 

 

2.      The Second Corporation is authorized to issue a total of 10,000 shares of $.10 par value common stock.

 

Calculate the price per share the corporation must receive in order to raise $80,000 by issuing 10,000 common shares to the public.

 

The key to this problem is to recognize that the cash a company receives when it issues stock is based on the number of share issued and the market price per share.  Since the company wants to receive $80,000 when it issues the 10,000 shares, it must receive $8 per share for the shares.

 

10,000 shares x market price per share = $80,000 cash.

 

Market price per share = $80,000 cash / 10,000 shares = $8 per share.

 

See text exercise 12.2 for similar material.

 

 

3.      The Third Corporation's March 3 balance sheet included the following information.

 

Total assets

$620,000

Total liabilities

$320,000

Stockholders' equity

 

Contributed Capital

 

Common stock, $.50 par, 400,000 shares issued

$200,000

Retained earnings

$100,000

Total stockholders' equity

$320,000

 

On March 4, the corporation used $20,000 cash to buy back and retire 40,000 shares of its common stock.

 

Calculate the percentage of the corporation's assets obtained through owners' investments after the 40,000 common shares were retired on March 4.

 

The key to this problem is to recognize that when a company retires its stock, assets and stockholders' equity decrease.  In this case, since the company was able to acquire its stock at its par value ($.50 per share), cash and common stock both decrease by $20,000.  As a result, the company's assets decrease to $600,000 and its contributed capital decreases to $180,000.  So, immediately after the stock is retired, 30% of the corporation's assets were obtained from owners.

 

 

Before Retirement

After Retirement

Assets

$620,000

$600,000

Contributed capital

$200,000

$180,000

 

$180,000 contributed capital / $600,000 assets = .3 or 30%.

 

See text exercise 12.3 for similar material.

 

 

4.      On April 4, the Fourth Corporation acquired 20,000 shares of Lowell Corporation's common stock and still owns the shares on April 30.  There are a total of 2,000,000 common shares of Lowell Corporation outstanding on April 30.

 

Calculate the percentage of the Lowell Corporation owned by the Fourth Corporation on April 30.

 

The key to this problem is to recognize that corporate ownership is based on the number of shares owned.  Since the Fourth Corporation owns 20,000 shares out of a total of 2,000,000 shares, the Fourth Corporation owns 1% of the Lowell Corporation.

 

20,000 shares owned by the Fourth Corporation / 2,000,000 Lowell Corporation shares outstanding = .01 or 1%.

 

See text exercise 12.4 for similar material.

 

 

5.      The Fifth Corporation pays annual cash dividends of $.80 per share to its common stockholders.

 

Calculate the corporation's cash payments for dividends on common stock if it has 20,000,000 shares authorized, $.05 par value per share, 1,000,000 shares outstanding.

 

The key to this problem is to recognize that cash dividends paid are based on the number of shares outstanding and the dividends paid per share.  Since the company paid dividends of $.80 per share and had 1,000,000 shares outstanding, it would pay total cash dividends of $800,000.

 

$.80 cash dividends per share x 1,000,000 shares outstanding = $800,000 cash dividends.

 

See text exercise 12.5 for similar material.

 

 

6.      The Sixth Corporation's June 30 balance sheet included the following information.

 

Total assets

$40,000

Total liabilities

$30,000

Stockholders' equity

 

Contributed capital

 

Common stock, $.01 par, 20,000 shares issued

$200

Additional paid-in capital, common stock

$13,800

Total contributed capital

$14,000

Retained earnings (deficit)

($4,000)

Total stockholders' equity

$10,000

 

The company stopped operating on June 30.  It estimates it can sell all its assets for $35,000 cash and it intends to pay the full amount of its liabilities.

 

Calculate the amount of cash you would receive from the company if you own 200 shares of its common stock.

 

The key to this problem is to recognize that corporate ownership is based on the number of shares owned.  The owner of 200 shares of stock would receive 1% (200 / 20,000 = .01) of the assets remaining after the company paid its creditors.  In this case, the owner of 200 shares would receive 1% of $5,000, which is $50.

 

Cash resulting from sale of $40,000 assets

$35,000

Liabilities payment

$30,000

Cash remaining for stockholders

$5,000

 

See text exercise 12.6 for similar material.

 

 

7.      On July 7, the Seventh Corporation issued 500 shares of $.02 par common stock and received $6,000.

 

Show the effects of this transaction on the company's assets, liabilities, and stockholders' equity.

 

The key to this problem is to recognize that owners' investments are sources of corporate resources.  The issuance of stock increases the company's resources.  The sources of the increased resources are the owners.

 

 

 

Total

Resources

 

=

 

Sources of Borrowed Resources

 

+

Sources of

Owner

Invested Resources

 

 

+

Sources of

Management

Generated Resources

 

 

Assets

=

Liabilities

+

Stockholders' Equity

+ $6,000

=

 

 

+ $6,000

 

 

 

 

See text exercise 12.7 for similar material.

 

 

8.      On August 8, the Eighth Corporation issued 200 shares of $.10 par common stock and received $1,600.

 

Prepare the journal entry needed to account for this information.

 

The keys to this problem are to recognize that the par value of common stock issued is reported in the common stock account, while all cash received in excess of the par value is recorded in the additional paid-in capital, common stock account.

 

Date

Description

Debits

Credits

Aug. 8

Cash

1,600

 

 

Common Stock

 

20

 

Additional Paid-in Capital, Common Stock

 

1,580

 

Common stock issued

 

 

 

Common stock = 200 shares issued x $.10 par value per share = $20.

 

Additional paid-in capital, common stock = $1,600 total cash received - $20 par value of common stock issued = $1,580.

 

See text exercise 12.7 for similar material.

 

 

9.      On September 9, the Ninth Corporation declared $9,000 cash dividends on its common stock.  The dividends are to be paid on October 9.

 

Show the effects of the September 9 transaction on the company's assets, liabilities, and stockholders' equity.

 

The key to this problem is to recognize that dividends are distributions of resources generated by management.  One effect of dividends is a reduction in sources of management-generated resources.  Since dividends are often declared on one date and distributed on a later date, the declaration of dividends also increases liabilities.

 

 

 

Total

Resources

 

=

 

Sources of Borrowed Resources

 

+

Sources of

Owner

Invested Resources

 

 

+

Sources of

Management

Generated Resources

 

 

Assets

=

Liabilities

+

Stockholders' Equity

 

 

+ $9,000

 

 

+

- $9,000

 

 

See text exercise 12.7 for similar material.

 

 

10.    The Tenth Corporation had 1,000,000 authorized shares of $.05 common stock on October 10.  400,000 shares of the stock were outstanding on October 10.  On October 10, the Tenth Corporation declared common stock cash dividends of $.50 per share.  The dividends will be paid on November 9.

 

Prepare the journal entry needed to record the October 10 dividends.

 

The key to this problem is to recognize that cash dividends are based on the number of shares outstanding and the dividends declared per share.  Since the company declared dividends of $.50 per share and had 400,000 shares outstanding, it declared total cash dividends of $200,000.

 

$.50 cash dividends per share x 400,000 shares outstanding = $200,000 cash dividends.

 

One effect of dividends is a reduction in sources of management-generated resources.  Since dividends are often declared on one date and distributed on a later date, the declaration of dividends also increases liabilities.

 

Date

Description

Debits

Credits

Oct. 10

Dividends

200,000

 

 

Dividends Payable

 

200,000

 

Common stock cash dividends declared

 

 

 

See text exercise 12.7 for similar material.

 

 

11.    The Eleventh Corporation declared $5,000 cash dividends on October 12.  The Eleventh Corporation paid the $5,000 dividends on November 11.

 

Prepare the journal entry required to account for the November 11 dividends payment.

 

The key to this problem is to recognize that dividends are often declared on one date and paid on a later date.  One effect of the declaration of dividends is an increase in liabilities.  When the dividends are paid, assets and liabilities both decrease.

 

Date

Description

Debits

Credits

Nov.11

Dividends Payable

5,000

 

 

Cash

 

5,000

 

Common stock cash dividends paid

 

 

 

See text exercise 12.7 for similar material.

 

 

12.    The Twelfth Corporation had issued 1,000 shares of  $100 par value, 6% preferred stock at $105 per share.

 

Calculate the total dollar amount of cash the company must have available if it intends to pay preferred stockholders the full amount of their cash dividends.

 

The key to this problem is to recognize that preferred stock dividends are based on the number of preferred shares outstanding, the par value per share, and the dividends percentage.  The company's preferred dividends would be $6,000.

 

1,000 shares outstanding x $100 par value per share x .06 dividends percentage = $6,000 dividends.

 

See text exercise 12.8 for similar material.

 

 

13.    The Thirteenth Corporation issued 5,000 shares of $100 par, 6% preferred stock and received $530,000.

 

Show the effects of this transaction on the company's assets, liabilities, and stockholders' equity.

 

The key to this problem is to recognize that owners' investments are sources of corporate resources.  The issuance of stock increases the company's resources.  The sources of the increased resources are the owners.

 

 

 

Total

Resources

 

=

 

Sources of Borrowed Resources

 

+

Sources of

Owner

Invested Resources

 

 

+

Sources of

Management

Generated Resources

 

 

Assets

=

Liabilities

+

Stockholders' Equity

+ $530,000

=

 

 

+ $530,000

 

 

 

 

See text exercise 12.9 for similar material.

 

 

14.    The Fourteenth Corporation issued 2,000 shares of 5%, $100 par preferred stock and received $210,000 on February 14.

 

Prepare the journal entry needed to account for this information.

 

The keys to this problem are to recognize that the par value of preferred stock issued is reported in the preferred stock account, while all cash received in excess of the par value is recorded in the additional paid-in capital, preferred stock account.

 

Date

Description

Debits

Credits

Feb. 14

Cash

210,000

 

 

Preferred Stock

 

200,000

 

Add. Paid-in Capital, Preferred Stock

 

10,000

 

Preferred stock issued

 

 

 

Preferred stock = 2,000 shares issued x $100 par value per share = $200,000.

 

Additional paid-in capital, preferred stock = $210,000 total cash received - $200,000 par value of preferred stock issued = $10,000.

 

See text exercise 12.9 for similar material.

 

 

15.    The Fifteenth Corporation stopped doing business on March 31.  The company's March 31 balance sheet included the following information.

 

Total assets

$500,000

Total liabilities

$200,000

Stockholders' equity

 

Contributed capital

 

5% preferred stock, $100 par, 1,000 shares issued

$100,000

Common stock, $1 par, 50,000 shares issued

$50,000

Additional paid-in capital, common stock

$230,000

Total contributed capital

$380,000

Retained earnings (deficit)

($80,000)

Total stockholders' equity

$300,000

 

The preferred stock agreement requires that preferred stockholders receive $110 for each share they own when the firm is liquidated.  The company estimates it can sell all its assets for $440,000 cash.  The company intends to pay its creditors in full.

 

Calculate the amount of cash you would receive from the company if you own 100 shares of its common stock.

 

The key to this problem is to recognize that corporate ownership is based on the number of shares owned.  The owner of 100 shares of common stock would receive .2% (100 / 50,000 = .002) of the assets remaining after the company paid its creditors.  In this case, the owner of 100 shares would receive .2% of $130,000, which is $260.

 

Cash resulting from sale of $500,000 assets

$440,000

Liabilities payment

$200,000

Cash remaining for stockholders

$240,000

Cash for preferred stockholders

$110,000

Cash remaining for common stockholders

$130,000

 

Cash for preferred stockholders = 1,000 shares x $110 per share = $110,000.

 

See text exercise 12.10 for similar material.

 

 

16.    The Sixteenth Corporation's April 30 balance sheet included the following information.

 

Stockholders' equity

 

Contributed capital

 

6%, cumulative preferred stock, $100 par,

1,000 shares issued

 

$100,000

Common stock, $.10 par, 4,000,000 shares issued

$400,000

Additional paid-in capital, common stock

$700,000

Total contributed capital

$1,200,000

Retained earnings

$1,600,000

Total stockholders' equity

$2,800,000

 

All preferred stock was issued 16 months ago.  All dividends on preferred stock for prior years have been paid.  Total dividends declared and paid in the year ended April 30 were $146,000.

 

Calculate the total dollar amount of dividends paid to common stockholders in the year ended April 30.

 

The key to this problem is to recognize that preferred stockholders receive their dividends before common stockholders.  In order for common stockholders to receive dividends, owners of cumulative preferred stock must receive dividends for all years for which dividends were not previously paid to them.  In this case, all prior dividends had been paid to owners of cumulative preferred stock, so this year they would receive only this year's dividends of $6,000.  The common stockholders would receive the remainder of the dividends, $140,000.

 

Total dividends

$146,000

Less: Preferred stock dividends: 1,000 shares x $100 par x .06

$6,000

Common stock dividends

$140,000

 

See text exercise 12.11 for similar material.

 

 

17.    The Seventeenth Corporation's May 31 balance sheet included the following information.

 

Stockholders' equity

 

Contributed capital

 

6%, cumulative preferred stock, $100 par,

1,000 shares issued

 

$100,000

Common stock, $.10 par, 4,000,000 shares issued

$400,000

Additional paid-in capital, common stock

$700,000

Total contributed capital

$1,200,000

Retained earnings

$1,600,000

Total stockholders' equity

$2,800,000

 

All preferred stock was issued 17 months ago.  No dividends on preferred stock for prior years have been paid.  Total dividends declared and paid in the year ended May 31 were $192,000.

 

Calculate the total dollar amount of dividends paid to common stockholders in the year ended May 31.

 

The key to this problem is to recognize that preferred stockholders receive their dividends before common stockholders.  In order for common stockholders to receive dividends, owners of cumulative preferred stock must receive dividends for all years for which dividends were not previously paid to them.  In this case, dividends for the previous year had not been paid to owners of cumulative preferred stock, so this year they would receive dividends for last year and this year for a total of $12,000.  The common stockholders would receive the remainder of the dividends, $180,000.

 

Total dividends

 

$192,000

Less: Preferred stock dividends

 

 

    Previous year: 1,000 shares x $100 par x .06

$6,000

 

    Current year: 1,000 shares x $100 par x .06

$6,000

$12,000

Common stock dividends

 

$180,000

 

See text exercise 12.11 for similar material.

 

 

18.    Calculate the total cash dividends the Eighteenth Corporation will pay each year if it issues 10,000 shares of 8% noncumulative, $100 par preferred stock at a price of $105 per share.

 

The key to this problem is to recognize that preferred stock dividends are based on the number of preferred shares outstanding, the par value per share, and the dividends percentage.  The company's preferred dividends would be $80,000.

 

10,000 shares outstanding x $100 par value per share x .08 dividends percentage = $80,000 dividends.

 

See text exercise 12.12 for similar material.

 

 

19.    The Nineteenth Corporation's July 31 balance sheet included the following information.

 

Stockholders' equity

 

Contributed capital

 

Common stock, $.10 par, 100,000 shares

authorized, 60,000 shares issued

 

$6,000

Additional paid-in capital, common stock

$174,000

Total contributed capital

$180,000

Retained earnings

$255,000

Total stockholders' equity

$435,000

 

Calculate the company's total contributed capital after it retires the 1,000 common shares, assuming the company pays $3 per share to purchase the shares.

 

The key to this problem is to recognize that when a company retires its common stock, the common stock and additional paid-in capital, common stock are reduced by the dollar amounts at which the shares were originally issued.  In this case, the company's common stock was originally issued at $3 per share [($6,000 common stock + $174,000 additional paid-in capital, common stock)/60,000 shares issued = $3].  When the company retires the 1,000 shares, its contributed capital would be reduced by $3,000.

 

Common stock reduction: 1,000 shares x $.10 per share

$100

Additional paid-in capital reduction:

          1,000 shares x ($3 issue price - $.10 par value)

 

$2,900

Total contributed capital reduction

$3,000

 

 

Contributed capital before stock retirement

$180,000

Common stock retired

$3,000

Contributed capital after retirement

$177,000

 

See text exercise 12.13 for similar material.

 

 

20.    The Twentieth Corporation purchased 1,000 shares of its own $.10 par common stock.  The company paid $6 per share for the stock and intends to hold the shares for future use.  Prior to the purchase of 1,000 shares, there were 300,000 shares of the company's common stock outstanding.

 

Show the effects of this transaction on the company's number of common shares outstanding.

 

The key to this problem is to recognize that outstanding shares are those shares in the hands of the public.  When the company purchased 1,000 of its own shares, the 1,000 shares were removed from the public.  Thus, the company's outstanding shares decreased from 300,000 to 299,000.

 

See text exercise 12.14 for similar material.

 

 

21.    On September 1, the Twenty-first Corporation purchased 1,000 shares of its own $.05 par common stock by paying $4,000.  The company intends to hold the shares for future use.

 

Prepare the journal entry needed to account for this information.

 

The key to this problem is to recognize that when companies purchase their own shares and hold them for future use, the shares are called treasury stock.  Treasury stock is recorded at the dollar amount paid for the stock.  Treasury stock is a contra stockholders' equity account.  It has a debit balance while most stockholders' equity accounts have credit balances.

 

Date

Description

Debits

Credits

Sept. 1

Treasury Stock

4,000

 

 

Cash

 

4,000

 

Treasury stock purchased

 

 

 

See text exercise 12.14 for similar material.

 

 

22.    The stockholders' equity section of the Twenty-second Corporation's October 31 balance sheet included the  following.

 

Stockholders' Equity

 

Contributed Capital

 

6% Preferred stock, $100 par, 10,000 shares

authorized, 1,000 shares issued

 

$100,000

Common stock, $.01 par, 10,000,000 shares

authorized, 6,000,000 shares issued

 

$60,000

Additional paid-in capital, common stock

$4,140,000

Total contributed capital

$4,300,000

Retained earnings

$900,000

Total Stockholders' Equity

$5,200,000

 

On November 26, the company purchased 10,000 shares of its own common stock at a price of $15 per share.  The company intends to hold the shares for future use. 

 

Calculate the company's total stockholders' equity after it purchased the 10,000 shares of its own common stock.

 

The key to this problem is to recognize that when companies purchase their own shares and hold them for future use, the shares are called treasury stock.  Treasury stock is recorded at the dollar amount paid for the stock.  Treasury stock is a contra stockholders' equity account.  It has a debit balance while most stockholders' equity accounts have credit balances.

 

Total stockholders' equity before treasury stock purchase

$5,200,000

Treasury stock purchase: 10,000 shares x $15 per share

$150,000

Total stockholders' equity after treasury stock purchase

$5,050,000

 

See text exercise 12.14 for similar material.

 

 

23.    The stockholders' equity section of the Twenty-third Corporation's November 30 balance sheet included the following.

 

Stockholders' Equity

 

Contributed capital

 

6% Preferred stock, $100 par, 10,000 shares

authorized, 1,000 shares issued

 

$100,000

Common stock, $.01 par, 10,000,000 shares

authorized, 6,000,000 shares issued

 

$60,000

Additional paid-in capital, common stock

$4,140,000

Total contributed capital

$4,300,000

Retained earnings

$900,000

Less: Treasury stock, 10,000 shares

($150,000)

Total Stockholders' Equity

$5,050,000

 

Determine the company's number of outstanding shares of common stock on November 30.

 

The key to this problem is to recognize that outstanding shares are those shares in the hands of the public.  Treasury shares are shares issued to the public, purchased by the company, and being held by the company.  The company issued 6,000,000 common shares and has 10,000 treasury shares.  So, the company has 5,990,000 common shares outstanding.

 

Common shares issued

6,000,000

Less: Treasury shares

10,000

Common shares outstanding

5,990,000

 

See text exercise 12.15 for similar material.

 

 

24.    The stockholders' equity section of the Twenty-fourth Corporation's December 31 balance sheet included the following.

 

Stockholders' Equity

 

Contributed capital

 

6% Preferred stock, noncumulative, $100 par, 10,000

shares authorized, 1,000 shares issued

 

$100,000

Common stock, $.01 par, 10,000,000 shares

authorized, 6,000,000 shares issued

 

$60,000

Additional paid-in capital, common stock

$4,140,000

Total contributed capital

$4,300,000

Retained earnings

$900,000

Less: Treasury stock, 10,000 shares

($150,000)

Total Stockholders' Equity

$5,050,000

 

Calculate the dividends per share to be paid to the company's common stockholders if the company declares total cash dividends of $305,500.

 

The keys to this problem are to recognize that preferred stockholders receive their dividends before common stockholders and that common stock dividends are based on outstanding common shares.  In this case, the preferred stock is noncumulative, so dividends payments for previous years do not have to be considered. 

 

Total dividends

$305,500

Preferred stock dividends: 1,000 shares x $100 par x .06

$6,000

Common stock dividends

$299,500

 

 

Common shares issued

6,000,000

Less: Treasury shares

10,000

Common shares outstanding

5,990,000

 

 

Common stock dividends per share: $299,500 / 5,990,000

$.05

 

See text exercise 12.15 for similar material.

 

 

25.    On January 25, the Twenty-fifth Corporation called and retired 500 shares of its $100 par, 6% preferred stock.  The preferred stock was originally issued at par and had a call price was $110.

 

Show the effects of this transaction on the company's assets, liabilities, and stockholders' equity.

 

The key to this problem is to recognize that when a company retires its preferred stock, the preferred stock and additional paid-in capital, preferred stock are reduced by the dollar amounts at which the shares were originally issued.  In this case, since the company's preferred stock was originally issued at par of $100 per share, additional paid-in capital, preferred stock did not exist.  When the company retired the 500 preferred shares, it paid $5,000 more than it received when it issued the stock [($110 call price - $100 issue price) x 500 shares = $5,000].  This $5,000 represents a distribution of retained earnings to the preferred stockholders.

 

 

 

Total

Resources

 

=

 

Sources of Borrowed Resources

 

+

Sources of

Owner

Invested Resources

 

 

+

Sources of

Management

Generated Resources

 

 

Assets

=

Liabilities

+

Stockholders' Equity

- $55,000

=

 

 

- $50,000

+

- $5,000

 

 

Cash paid: 500 preferred shares x $110 call price = $55,000.

 

Preferred stock retired: 500 preferred shares x $100 par = $50,000.

 

Retained earnings reductions: $55,000 cash paid - $50,000 preferred stock retired = $5,000.

 

See text exercise 12.16 for similar material.

 

 

26.    The Twenty-sixth Corporation's February 28 balance sheet included the following information.

 

Total assets

$400,000

Total liabilities

$300,000

Stockholders' equity

 

Contributed capital

 

Common stock, $.10 par, 100,000 shares

authorized, 60,000 shares issued

 

$6,000

Additional paid-in capital, common stock

$54,000

Total contributed capital

$60,000

Retained earnings

$40,000

Total stockholders' equity

$100,000

 

Calculate the company's February 28 debt to equity ratio.

 

The key to this problem is to recognize that the debt to equity ratio is calculated by dividing total liabilities by total stockholders' equity.

 

Debt to equity ratio = total liabilities / total stockholders' equity.

 

Debt to equity ratio = $300,000 / $100,000 = 3.0.

 

See text exercise 12.17 for similar material.

 

 

27.    For the year ended March 31, 02 the Twenty-seventh Corporation reported net income of $27,000 and paid dividends of $7,000.  The company's balance sheets included the following.

 

 

3/31/02

3/31/01

Total assets

$400,000

$370,000

Total liabilities

$300,000

$290,000

Stockholders' equity

 

 

Contributed capital

 

 

Common stock, $.10 par, 100,000 shares

authorized, 60,000 shares issued

 

$6,000

 

$6,000

Additional paid-in capital, common stock

$54,000

$54,000

Total contributed capital

$60,000

$60,000

Retained earnings

$40,000

$20,000

Total stockholders' equity

$100,000

$80,000

 

Calculate the company's return on common stockholders' equity for the year ended March 31, 02.

 

The key to this problem is to recognize that the return on common stockholders' equity is calculated by dividing net income available to common stockholders' by average common stockholders' equity.  Since the company does not have any preferred stock outstanding, the full net income is available to common stockholders.

 

Return on common stockholders' equity = net income available to common stockholders / average common stockholders' equity.

 

Return on common stockholders' equity = $27,000 / [($80,000 + $100,000) / 2].

 

Return on common stockholders' equity = $27,000 / ($180,000 / 2).

 

Return on common stockholders' equity = $27,000 / $90,000 = .30 or 30%.

 

See text exercise 12.17 for similar material.

 

 

28.    For the year ended April 30, 02 the Twenty-eighth Corporation reported net income of $78,000.  During the year, the company declared and paid cash dividends of $38,000.  The company's balance sheets included the following.

 

 

4/30/02

4/30/01

Total assets

$500,000

$450,000

Total liabilities

$290,000

$280,000

Stockholders' equity

 

 

Contributed capital

 

 

6% noncumulative preferred stock, $100 par,

20,000 shares authorized, 1,000 shares issued

$100,000

100,000

Common stock, $.10 par, 100,000 shares

authorized, 60,000 shares issued

$6,000

$6,000

Additional paid-in capital, common stock

$54,000

$54,000

Total contributed capital

$160,000

$160,000

Retained earnings

$50,000

$10,000

Total stockholders' equity

$210,000

$170,000

 

Calculate the company's return on common stockholders' equity for the year ended April 30, 02.

 

The key to this problem is to recognize that the return on common stockholders' equity is calculated by dividing net income available to common stockholders' by average common stockholders' equity.  Since the company has 1,000 shares of preferred stock outstanding, the full net income is not available to common stockholders.

 

Net income available to common stockholders = net income - preferred stock dividends.

 

Net income available to common stockholders = $78,000 - (1,000 shares x $100 par x 6%).

 

Net income available to common stockholders = $78,000 - $6,000 = $72,000.

 

Common stockholders' equity = total stockholders' equity - preferred stock. 

 

Common stockholders' equity 4/30/01 = $170,000 - $100,000 = $70,000.

 

Common stockholders' equity 4/30/02 = $210,000 - $100,000 = $110,000.

 

Return on common stockholders' equity = net income available to common stockholders / average common stockholders' equity.

 

Return on common stockholders' equity = $72,000 / [($70,000 + $110,000) / 2].

 

Return on common stockholders' equity = $72,000 / ($180,000 / 2).

 

Return on common stockholders' equity = $72,000 / $90,000 = .80 or 80%.

 

See text exercise 12.17 for similar material.