statement of cash flows Early in 2014, Herndon Industries was formed with author
ID: 2588373 • Letter: S
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statement of cash flows Early in 2014, Herndon Industries was formed with authorization to issue 250,000 shares of $10 par value common stock and 30,000 shares of $100 par value cumulative preferred stock. During 2014, all the preferred stock was issued at par, and 120,000 shares of common stock were sold for $16 per share. The preferred stock is entitled to a dividend equal to 10 percent of its par value before any dividends are paid on the common stock ck During its first five years of business (2014 through 2018), the company earned income totaling $3,700,000 and paid dividends of 50 cents per share each year on the common stock outstanding. On January 2, 2016, the company purchased 20,000 shares of its own common stock in the open market for $400,000. On January 2, 2018, it reissued 10,000 shares of this treasury stock for $250,000. The remaining 10,000 were still held in treasury at December 31, 2018 Instructions a. Prepare the stockholders' equity section of the balance sheet for Herndon Industries at Decem- ber 31, 2018. Include supporting schedules showing (1) your computation of any paid-in capital on treasury stock and (2) retained earnings at the balance sheet date. (Hint: Income increases retained carnings, whereas dividends reduce retained earnings. Dividends are not paid on shares of stock held in treasury.) b. As of December 31, compute Herndon's book value per share of common stock. (Hint: Book value per share is computed only on the shares of stock outstanding.) At December 31, 2018, shares of the company's common stock were trading at $30. Explain what would have happened to the market price per share had the company split its stock 3-for-1 at this date. Also explain what would have happened to the par value of the common stock and c. to the number of common shares outstanding.Explanation / Answer
a. Calculation of Total common stock & preferred Stock
Equity Stock till Jan 2018
Particulars
Amount
Common Stock at par Value (120,000 x 10)
1,200,000
Additional paid in capital in excess of par value
720,000
Less: Treasury Stock repurchased at cost
(20,000 x $20 per share)
(400,000)
Total common stock till Jan 2018
1,520,000
Equity Stock Dec 31 2018
Particulars
Amount
Common Stock at par Value (100,000 + 10,000) x 10
1,100,000
Additional paid in capital in excess of par value
720,000
Additional Paid in capital on treasury stock (10,000 x $5)
50,000
Less: Treasury Stock repurchased at cost
(10,000 x $20 per share)
(400,000)
Total common stock till Dec 2018
1,470,000
NOTE: Calculation of Paid in capital on treasury stock
Repurchase price = $20 per share
Reissue Price = $25 per Share (250,000 / 10,000)
Additional Paid in capital on treasury stock = ($25-$20) x 10,000 = $50,000
2. Calculation of Retained Earnings
Particulars
Amount
Total Income earned
3,700,000
Less: Dividend on Preferred stock
($3,000,000 x 10% x 5 years)
1,500,000
Less: Dividend on common stock
2014 – 2015
(120,000 x $0.50 x 2)
120,000
2016-2017
(100,000 x 0.50 x 2)
100,000
2018
(110,000 x 0.50)
55,000
Net Retained earning till dec 2018
1,925,000
Stockholder’s Equity
Particulars
Amount
Capital on common stock
Common Stock at par Value (100,000 + 10,000) x 10
1,100,000
Additional paid in capital in excess of par value
720,000
Additional Paid in capital on treasury stock (10,000 x $5)
50,000
Total Capital Contributed (A)
1,870,000
Capital on preferred stock
Preferred Stock at par value
3,000,000
Total Capital Contributed by preferred stock (B)
3,000,000
Retained Earnings
Net Retained earning till Dec 2018 (C)
1,925,000
Total Equity stock holder’s (A+B+C)
6,795,000
Less: Treasury stock (10,000 x $20)
(200,000)
Net stock holder’s
6,595,000
B. Book value per share of common stock
Book Value per share = Total Equity Stock Holder's amount / Outstanding common stock
Total Equity Stock holder's account = Total Stock holder's amount - Preferred Stock amount
= $6,595,000 - $3,000,000 = $3,595,000
Outstanding Common Stock = 110,000 shares
Book Value per share of common stock = 3,595,000 / 110,000 = $32.6818 per share
Particulars
Amount
Common Stock at par Value (120,000 x 10)
1,200,000
Additional paid in capital in excess of par value
720,000
Less: Treasury Stock repurchased at cost
(20,000 x $20 per share)
(400,000)
Total common stock till Jan 2018
1,520,000
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