Accounting: What the Numbers Mean 9th Edition by Wayne W McManus, Daniel F Viele, David H Marshall

Exercise 91

Comprehensive problem—calculate missing amounts, issue price, net income,  and dividends; interpret stock dividend and split Bacon, Inc., has the following owners’ equity section in its May 31, 2010, comparative balance sheets:

	May 31, 2010	April 30, 2010
Paid-in capital:
Preferred stock, $120 par value, 8%, cumulative,
100,000 shares authorized, 80,000 shares issued
and outstanding	$ 9,600,000	$ 9,600,000
Common stock, $6 par value, 600,000 shares
authorized, 400,000 and 380,000 shares
issued, respectively	?	2,280,000
Additional paid-in capital	16,800,000	16,480,000
Retained earnings	13,900,000	13,624,000
Less: Treasury common stock, at cost; 18,000 shares
and 17,000 shares, respectively	(1,660,000)	(1,632,000)
Total stockholders’ equity	$ ?	$40,352,000

Required:

a. Calculate the amount that should be shown on the balance sheet for common stock at May 31, 2010.

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b. The only transaction affecting additional paid-in capital during the month of May was the sale of additional common stock. At what price per share were the additional shares sold?

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c. What was the average cost per share of the common stock purchased for the treasury during the month?

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d. During May, dividends on preferred stock equal to one-half of the 2010 dividend requirement were declared and paid. There were no common dividends declared or paid in May. Calculate net income for May.

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e. Assume that on June 1 the board of directors declared a cash dividend of $0.21 per share on the outstanding shares of common stock. The dividend will be payable on July 15 to stockholders of record on June 15.

1. Calculate the total amount of the dividend.

2. Explain the impact this action will have on the June 30 balance sheet and on the income statement for June.

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f. Assume that on June 1 the market value of the common stock was $36 per share and that the board of directors declared a 6% stock dividend on the issued shares of common stock. Use the horizontal model (or write the entry) to show the issuance of the stock dividend.

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g. Assume that instead of the stock dividend described in f, the board of directors authorized a 2-for-1 stock split on June 1 when the market price of the common stock was $36 per share.

1. What will be the par value, and how many shares of common stock will be authorized after the split?

2. What will be the market price per share of common stock after the split?

3. How many shares of common stock will be in the treasury after the split?

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h. By how much will total stockholders’ equity change as a result of

1. The stock dividend described in part f?

2. The stock split described in part g?

Step 1 of 14

Computation of missing amounts, net income and dividends, issue price; stock dividend and split:

Stock dividend: It is a mode of dividend disbursement made in the terms of additional shares, instead of a cash payout.

Stock split: It is a corporate act in which existing shares of an organization's are divided into several shares.

Issue price: This is the price at which shares are commonly issued as IPO.