Chapter 11, Problem 4PSB

1.

To determine

Financial statement analysis:

Company and its users use financial analysis as a way to analyse the company’s financial statements to take investment and business decisions. Some of the common financial analysis techniques include ratio analysis, vertical analysis, horizontal analysis, time series analysis etc.

Outstanding common shares on each cash dividend date.

Explanation of Solution

Date	No. of outstanding shares
Feb 15	17,000 shares
May 15	16,000 shares
Aug 15	16,000 shares
Nov 15	18,000 shares

Feb 15: As per the beginning data, 17,000 shares are issued and outstanding. So, outstanding shares on Feb 15 will be 17,000 and dividend will be paid on same number of shares.

May 15: Treasury stock was purchased on March 2. As per the ending data, 1,000 shares were purchased as treasury stock.This means outstanding shares on May15 would be 16,000.

Aug15: No transactions took place between May15 and Aug 15. Thus, number of outstanding shares remain same.

Nov 15: 12.5% stock dividend was released on Oct 20. So, number of outstanding shares will increase by 12.5%. This means total outstanding shares would be 18,000.

2.

To determine

Financial statement analysis:

Company and its users use financial analysis as a way to analyse the company’s financial statements to take investment and business decisions. Some of the common financial analysis techniques include ratio analysis, vertical analysis, horizontal analysis, time series analysis etc.

To compute:Amount of cash dividend on each of the four dividend dates.

Explanation of Solution

As computed above,

Date	No. of outstanding shares
Feb 15	17,000 shares
May 15	16,000 shares
Aug 15	16,000 shares
Nov 15	18,000 shares

Considering dividend per share, total cash dividend on each date can be computed as:

Date	No. of outstanding shares (i)	Dividend per share (ii)	Total cash dividend[(i)*(ii)]
Feb 15	17,000 shares	$0.40	$6,800
May 15	16,000 shares	$0.40	$6,400
Aug 15	16,000 shares	$0.40	$6,400
Nov 15	18,000 shares	$0.40	$7,200

3.

To determine

Financial statement analysis:

Company and its users use financial analysis as a way to analyse the company’s financial statements to take investment and business decisions. Some of the common financial analysis techniques include ratio analysis, vertical analysis, horizontal analysis, time series analysis etc.

To compute:Retained earnings transferred to paid-in capital accounts for stock dividend.

Explanation of Solution

Stock dividend is declaring dividend of stock to existing shareholders. It has no impact on total stockholders’ equity while it reduces retained earnings and increases paid-in capital for stock dividend.

Given:

No. of shares outstanding, before declaring stock dividend = 16,000

Stock dividend declared = 12.5%

Market value of share = $42

Now, number of shares issued as stock dividend can be computed as:

Stock dividend shares = No. of shares outstanding*Stock dividend declared

Stock dividend shares = 16,000*12.5%

Stock dividend shares = 2,000

Amount to be transferred from retained earnings can be computed as:

Value of stock dividend = Stock dividend shares*Market value of share

Value of stock dividend = 2,000*$42

Value of stock dividend = $84,000

4.

To determine

Financial statement analysis:

Company and its users use financial analysis as a way to analyse the company’s financial statements to take investment and business decisions. Some of the common financial analysis techniques include ratio analysis, vertical analysis, horizontal analysis, time series analysis etc.

To compute:Per share cost of treasury stock.

Explanation of Solution

Treasury stock is created when the company purchases its own shares from the market. It is shown as a part of issued shares but are not counted in outstanding shares as they are held by the company.

Given:

No. of shares in treasury stock = 1,000

Cost of treasury stock = $40,000

Cost per share of treasury stock can be computed as:

Cost of treasury stock, per share = Cost of treasury stock/No. of shares in treasury stock

Cost of treasury stock, per share = $40,000/1,000

Cost of treasury stock, per share = $40

5.

To determine

Financial statement analysis:

Company and its users use financial analysis as a way to analyse the company’s financial statements to take investment and business decisions. Some of the common financial analysis techniques include ratio analysis, vertical analysis, horizontal analysis, time series analysis etc.

To compute:Net income earned during the year.

Explanation of Solution

Net income can be computed as:

Particulars	$
Retained earnings, closing	295,200
Less: Retained earnings, beginning	(270,000)
Add: Cash dividend	26,800
Add: Stock dividend	84,000
Net income	136,000

Workings:

As computed, total cash dividend can be calculated as:

Date	Total cash dividend
Feb 15	$6,800
May 15	$6,400
Aug 15	$6,400
Nov 15	$7,200
	$26,800

Also, stock dividend worth $84,000 is transferred from retained earnings to paid-in capital for stock dividend.