The stockholders’ equity section on the December 31, 2011, balance sheet of Amer

Question

The stockholders’ equity section on the December 31, 2011, balance sheet of American Corporation follows:
Stockholders’ Equity
Contributed capital
Preferred stock (par $24; authorized 13,000 shares, ? issued, of which 800 shares
are held as treasury stock) $ 168,000
Common stock (no-par; authorized 22,000 shares, issued and outstanding 8,000 shares) 720,000
Contributed capital (includes $3,100 from treasury stock transactions) 17,100
Retained earnings 49,000
Cost of treasury stock, preferred (16,800 )

Required:

3.
Calculate the average sale price of the preferred stock when issued? (Omit the "$" sign in your response.)

Sales price per share $

4.
Have the treasury stock transactions increased corporate resources or decreased corporate resources? By how much? (Input the amount as positive value. Omit the "$" sign in your response.)

by $

5.
By how much the treasury stock transactions increased (decreased) stockholders’ equity? (Input the amount as positive value. Omit the "$" sign in your response.)

by $

6.
How much did the preferred treasury stock held cost per share? (Omit the "$" sign in your response.)

Cost per share $

7.
Calculate the value of total stockholders’ equity? (Omit the "$" sign in your response.)

Total stockholders’ equity $

8.
Calculate the average issue price of the common stock? (Omit the "$" sign in your response.)

Average issue price $

Explanation / Answer

For such questions, you need to keep an eye on the number of common and preferred shares issued and outstanding (o/s). Beginning status: Common stock 120,000 shares; preferred stock 0 shares 1. Record the above transactions in journal form. Jan. 4 The board of directors obtained authorization for 40,000 shares of $40 par value noncumulative preferred stock that carried an indicated dividend rate of $4 per share and was callable at $42 per share. No entry required. They just authorised, they didn't issue. Jan 14 The company sold 24,000 shares of the preferred stock at $40 per share and issued another 4,000 in exchange for a building valued at $160,000. Dr Cash $960,000 Cr Preferred stock $960,000 Dr Building $160,000 Cr Preferred stock $160,000 Status: Common stock 120,000 shares; preferred stock 28,000 shares March 8 The board of directors declared a 2-for-1 stock split on the common stock. No journal entry required, but par value is halved and no. of shares doubles. Status: Common stock 240,000 shares; preferred stock 28,000 shares April 20 After the stock split, the company purchased 6,000 shares of common stock for the treasury at an average price of $12 per share. Dr Treasury stock $72,000 Cr Cash $72,000 Status: Common stock 234,000 shares; preferred stock 28,000 shares May 4 The company sold 2,000 of the shares purchased on April 20, at an average price of $16 per share. Dr Cash $32,000 Cr Treasury stock $24,000 (2,000 shares at cost of $12 ea.) Cr Add'l paid-in capital – treasury stock $8,000 Status: Common stock 236,000 shares; preferred stock 28,000 shares July 15 The board of directors declared a cash dividend of $4 per share on the preferred stock and $0.40 per share on the common stock. Dr Retained earnings $206,400 Cr Dividend payable - common $94,400 (236,000 x $0.40) Cr Dividend payable - preferred $112,000 (28,000 x $4) July 25 Date of record. No entry required Aug. 15 Paid the cash dividend. Dr Dividend payable - common $94,400 Dr Dividend payable - preferred $112,000 Cr Cash $206,400 Nov. 28 The board of directors declared a 15 percent stock dividend when the common stock was selling for $20 per share to be distributed on Jan. 5 to stockholders of record on Dec. 15 Dr Retained earnings $708,000 (236,000 x 15% x $20) Cr Common stock distributable $141,600 (236,000 x 15% x $4 par) Cr Add'l paid-in capital - common $566,400 Status: Common stock 271,400 shares; preferred stock 28,000 shares Dec. 15 Date of record for the stock dividend No entry reqd. 2. Prepare the stockholders’ equity section of the company’s balance sheet as of Dec. 31, 2011. Net loss for 2011 was $436,000 Noncumulative preferred stock, $40 par value, 40,000 authorized, 28,000 shares issued $1,120,000 Common stock, $4 par value, 800,000 shares authorized, 275,400 shares (issued + distributable) $1,101,600 Additional paid-in capital – common $3,126,400 Total contributed capital = $5,348,000 Retained Earnings = $297,600 Sub-total $5,645,600 Treasury stock, 4,000 shares, at cost ($48,000) Additional paid-in capital – treasury stock 8,000 Total stockholders’ equity = $5,605,600 3. Compute the book value per share for preferred and common stock (including common stock distributable) on Dec. 31, 2010 ad 2011, using end-of-year shares outstanding. What effect would you expect the change in book value to have on the market price per share pf the company? Book value of common stock 2010 = $5,168,000/120,000 = $43.07 per share Book value of preferred stock 2010 – Not applicable since there was no preferred stock in 2010 Book value of common stock 2011 = ($5,605,600 – preferred stock at call price)/271,400 = (5,605,600 - $1,176,000)/271,400 = $4,429,600/271,400 = $16.32 per share Book value of preferred stock 2011 = the call price per share = $42 since the preferred stock is noncumulative

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