Comprehensive Problem # 3 ACCOUNTING MAJORS ONLY

chapter_12_solution_to_selected_problems.xlsx

P12.3A

			PROBLEM 12.3A
		PHOENIX, INC.
a.
PHOENIX, INC.
Income Statement
For the Year Ended December 31, 2015
Net sales				$ 10,800,000
Costs and expenses:
	Cost of goods sold		$ 6,000,000
	Selling expenses		1,104,000
	General and administrative expenses		1,896,000
	Loss from settlement of litigation		24,000
	Income tax on continuing operations		720,000	9,744,000
Income from continuing operations				$ 1,056,000
Discontinued operations:
	Operating loss on discontinued operations (net of
	income tax benefit)		$ (252,000)
	Loss on disposal of discontinued operations (net of
	income tax benefit)		(420,000)	(672,000)
Income before extraordinary item				$ 384,000
Extraordinary gain (net of income tax)				36,000
Net income				$ 420,000
Earnings per share on common stock:
	Income from continuing operations
	($1,056,000 ÷ 180,000 shares)			$ 5.86
	Loss from discontinued operations
	($672,000 ÷ 180,000 shares)			(3.73)
	Income before extraordinary item			$ 2.13
	Extraordinary gain ($36,000 ÷ 180,000 shares)			0.20
	Net earnings ($420,000 ÷ 180,000 shares)			$ 2.33
Note: Selected EPS numbers have been rounded $.01 in order for EPS schedule to foot.

			PROBLEM 12.3A
		PHOENIX, INC. (concluded)
b.
PHOENIX, INC.
Statement of Retained Earnings
For the Year Ended December 31, 2015
Retained earnings, December 31, 2014
	As originally reported			$ 2,175,000
	Add: Prior period adjustment (net of income tax)			60,000
	As restated			$ 2,235,000
Net income (from part a)				420,000
	Subtotal			$ 2,655,000
Less: Dividends				350,000
Retained earnings, December 31, 2015				$ 2,305,000


c.	The “gain on sale of treasury stock” represents the excess of reissue price received over the cost Phoenix paid to acquire some of its own shares of stock. Although a corporation may reissue treasury stock at prices above or below its cost of acquiring its own stock, the difference between amounts received and the cost of treasury shares does not result in gains or losses recognized in the income statement. Rather, the amount described as “gain on sale of treasury stock” is included as part of additional paid-in capital in the stockholders’ equity section of the balance sheet.

					PROBLEM 12.5A
	RIVERTON CORPORATION
RIVERTON CORPORATION
Statement of Stockholders' Equity
For the Year Ended December 31, 20xx
a.		Capital Stock	Additional			Total
		($10 par	Paid-in	Retained	Treasury	Stockholders'
		value)	Capital	Earnings	Stock	Equity
Balances, January 1, 20xx		$ 2,200,000	$ 3,530,000	$ 1,900,000	$ - 0	$ 7,630,000
Prior period adjustment (net of income tax benefit)				(160,000)		(160,000)
Issuance of common stock; 10,000 shares @ $68		100,000	580,000			680,000
Declaration and distribution of 5% stock dividend
(11,500 shares at market price of $40 per share)		115,000	345,000	(460,000)		0
Purchased 1,000 shares of treasury stock @$70					(70,000)	(70,000)
Sale of 500 treasury shares @ $72			1,000		35,000	36,000
Net income				1,690,000		1,690,000
Cash dividends				(285,400)		(285,400)
Balances, December 31, 20xx	=SUM(f10.f18)	$ 2,415,000	$ 4,456,000	$ 2,684,600	$ (35,000)	$ 9,520,600
(part b is on following page)

			PROBLEM 12.5A
		RIVERTON CORPORATION (concluded)

b.	Declaration/distribution of a 5% stock dividend has no effect on total stockholders’ equity. Declaration of a cash dividend reduces total stockholders’ equity by the amount of the dividend.
	The two types of dividends do not have the same impact upon stockholders’ equity. A cash dividend is a distribution of a corporation’s assets (cash) to stockholders and, as such, causes a decrease in stockholders’ equity. A stock dividend is simply issuing more stock certificates to the existing group of shareholders with no accompanying increase or outflow of assets; a corporation’s own stock is not an asset of the corporation. With both small and large stock dividends, stockholders’ equity is adjusted to reflect the increased number of shares outstanding, but there is no additional equity created and no decrease in equity.