SOLUTIONS TO PROBLEMS SET A

20 Minutes, Easy PROBLEM 11.1A

ROBBINSVILLE PRESS
a.
ROBBINSVILLE PRESS
Partial Balance Sheet
December 31, 2015
Stockholders' equity
8% cumulative preferred stock, $100 par
authorized 100,000 shares, iss $ 1,000,000
10,000 shares
Common stock, $1 par value, authorized
issued and outstanding 170,000 shares 170,000
Additional paid-in capital: Common stock 2,380,000
Total paid-in capital $ 3,550,000
Retained earnings* 555,000
Total stockholders' equity $ 4,105,000

*Computation of retained earnings at December 31,

Net income for the four-year period 2012 $ 1,385,000
Less: Preferred dividends ($80,000 per ye ###
Common dividends ($0.75 x 510,000 830,000
Retained earnings, December 31, 2015 $ 555,000

b. There are no dividends in arrears at December 31, 2015. We know this

because common dividends were paid in each of the four years that the
company was in existence. Common shareholders could not have
received dividends in each year of the company’s existence had any
dividends been in arrears on the preferred stock.
20 Minutes, Easy PROBLEM 11.2A
MCMINN PUBLICATIONS
a.
MCMINN PUBLICATIONS
Partial Balance Sheet
December 31, 2015
Stockholders' equity
10% cumulative preferred stock, $100 par
authorized, issued, and outsta $ 2,000,000
Common stock, $1 par value, authorized
issued and outstanding 300,000 shares 300,000
Additional paid-in capital: common stoc 5,700,000
Total paid-in capital $ 8,000,000
Retained earnings* 235,000
Total stockholders' equity $ 8,235,000

*Computation of retained earnings at December 31,

Net income for the five-year period 2010 $ 4,560,000
Less: Preferred dividends ($200,000 x 5 $ 1,000,000
Common dividends ($1 x 300 1,500,000 2,500,000
Retained earnings, December 2014 $ 2,060,000
Less: Net loss of 2015 1,825,000
Retained earnings, December 31, 2015 $ 235,000

b. Note to financial statements:

As of December 31, 2015, dividends on the 10%, $100 par value,
cumulative preferred stock were in arrears to the extent of $10 per share,
amounting in total to $200,000.
c. No. Dividends do not represent a liability of the corporation until they are
declared by the board of directors.
25 Minutes, Medium PROBLEM 11.3A
MANHATTAN TRANSPORT COMPANY
a.
MANHATTAN TRANSPORT COMPANY
Partial Balance Sheet
December 31, 2015
Stockholders' equity
8% cumulative preferred stock, $100 par, 5,000
shares authorized, issued, and outstanding
$9 cumulative preferred stock, no-par value, 10,000 shares
authorized, 5,000 shares issued and outstanding
Common stock, $2 par, 200,000 shares authorized, 100,000
shares issued and outstanding
Additional paid-in capital: Common stock
Total paid-in capital
Retained earnings*
Total stockholders' equity

*Computation of retained earnings at December 31, 2015:

Retained earnings at Dec. 31, 2013
Add: Net income for 2014 and 2015
Net income for four-year period
Less: Dividends paid on 8% preferred stock:
2013 ($40,000 in arrears) $ -
2014 ($40,000 in arrears for 2 years) 80,000
2015 (8% x $100 x 5,000 shares = $40,000) 40,000
Dividends on $9 preferred stock:
2014 ($9 x 5,000 shares) $ 45,000
2015 ($9 x 5,000 shares) 45,000
Dividends on common stock:
2014 ($0.50 x 100,000 shares) $ 50,000
2015 ($1.60 x 100,000 shares) 160,000
Retained earnings, December 31, 2015

b. A corporation might decide to use cumulative preferred stock rather than debt to finance operations for
any of the following reasons (only 2 required):

1. Although cumulative dividends must eventually be paid if the corporation is profitable, they do
not have to be paid each year and do not become a legal obligation of the corporation until they
are declared. Interest on debt is a legal obligation of the corporation and must be paid each year.
 Although cumulative dividends must eventually be paid if the corporation is profitable, they do
not have to be paid each year and do not become a legal obligation of the corporation until they
are declared. Interest on debt is a legal obligation of the corporation and must be paid each year.

2. Debt must be repaid at some future date. To be a permanent source of capital, debt must be
periodically refinanced. Preferred stock generally does not mature.

3. Increasing the amount of debt on a balance sheet can adversely affect financial ratios.
 PROBLEM 11.3A
RANSPORT COMPANY

$ 500,000

512,000

200,000
600,000
$ 1,812,000
640,000
$ 2,452,000

$ 170,000
890,000
$ 1,060,000

(120,000)

(90,000)

(210,000)
$ 640,000

n debt to finance operations for

corporation is profitable, they do

ation of the corporation until they
ration and must be paid each year.
 corporation is profitable, they do
ation of the corporation until they
ration and must be paid each year.

ource of capital, debt must be

ture.

y affect financial ratios.

35 Minutes, Medium PROBLEM 11.4A
SHARNES COMMUNICATIONS, INC.

a.
General Journal

20__
Jan 6 Cash 280,000
Common 40,000
Stock
Additional Paid-in 240,000
Capital:
Issued 20,000 Common
shares Stock
of $2 par
value
at $14common stock
per share.

7 Organization Costs Expense 7,000

Common 1,000
Stock
Additional Paid-in 6,000
Issued 500Capital:
shares Common
of common Stock
stock to Barnes
exchange in
for services relating to
formation of the
corporation. Implied issuance
price ($7,000
shares) = $14÷per
500share.

12 Cash 250,000
10% Cumulative 250,000
Preferred
Issued 2,500 shares Stock
of $100 par
value, 10%,
cumulative preferred stock at par
value.
June 4 Land 225,000
Common 30,000
Stock
Additional Paid-in 195,000
Capital:
Issued 15,000 Common
shares Stock
of common
stock in exchange
for land valued at $225,000 (15,000
shares x $15).
Nov 15 Dividends (Preferred Stock) 25,000
Dividends Payable 25,000
To record declaration of annual
dividends of $10
per share on 2,500 preferred
shares outstanding.
Payable Dec. 20.

Dec 20 Dividends Payable 25,000

Cash 25,000
To record payment of dividend
declared Nov. 15.
31 Income Summary
Retained 147,200
Earnings
To close the Income Summary 147,200
account for the
year.

31 Retained Earnings 25,000

Dividends (preferred 25,000
stock)
To close the Dividends account.