Solutions Guide: Please do not present as your own. This is only meant as a solutions guide for you to answer the problem on your own.

P11-2A The stockholders’ equity accounts of Sigma Corporation on January 1, 2010, were as follows.

Preferred Stock (8%, $100 par noncumulative, 5,000 shares authorized) $ 300,000

Common Stock ($5 stated value, 300,000 shares authorized) 1,000,000

Paid-in Capital in Excess of Par Value—Preferred Stock 15,000

Paid-in Capital in Excess of Stated Value—Common Stock 480,000

Retained Earnings 688,000

Treasury Stock—Common (5,000 shares) 40,000

During 2010 the corporation had the following transactions and events pertaining to its stockholders’ equity.

Feb. 1 Issued 5,000 shares of common stock for $30,000.

Mar. 20 Purchased 1,000 additional shares of common treasury stock at $7 per share.

Oct. 1 Declared an 8% cash dividend on preferred stock, payable November 1.

Nov. 1 Paid the dividend declared on October 1.

Dec. 1 Declared a $0.50 per share cash dividend to common stockholders of record on December 15, payable December 31, 2010.

31 Determined that net income for the year was $280,000. Paid the dividend declared on December 1.

Instructions (a) Journalize the transactions. (Include entries to close net income and dividends to Retained Earnings.) (b) Enter the beginning balances in the accounts and post the journal entries to the stockholders’ equity accounts. (Use T accounts.) (c) Prepare the stockholders’ equity section of the balance sheet at December 31, 2010. (d) Calculate the payout ratio, earnings per share, and return on common stockholders’ equity ratio. (Note: Use the common shares outstanding on January 1 and December 31 to determine the average shares outstanding.)

(a)Feb.1Cash...... 30,000

Common Stock (5,000 X $5)...... 25,000

Paid-in Capital in Excess of

Stated Value—Common

Stock...... 5,000

Mar.20Treasury Stock—Common (1,000 X $7)...... 7,000

Cash...... 7,000

Oct. 1Cash Dividends ($300,000 X .08)...... 24,000

Dividends Payable...... 24,000

Nov.1Dividends Payable...... 24,000

Cash...... 24,000

Dec.1Cash Dividends...... 99,500

[200,000* + 5,000 – (5,000 + 1,000)] X $.50

Dividends Payable...... 99,500

Dec.31Income Summary...... 280,000

Retained Earnings...... 280,000

31Retained Earnings...... 123,500

Cash Dividends ($24,000 + $99,500)...... 123,500

31Dividends Payable...... 99,500

Cash...... 99,500

*$1,000,000 ÷ $5

(b)

Preferred Stock / Paid-in Capital in Excess of
Par Value—Preferred Stock
1/1 Bal. 300,000 / 1/1 Bal. 15,000
12/31 Bal.300,000 / 12/31 Bal.15,000
Common Stock / Paid-in Capital in Excess of
Stated Value—Common Stock
1/1 Bal.1,000,000 / 1/1 Bal.480,000
2/125,000 / 2/15,000
12/31 Bal.1,025,000 / 12/31 Bal.485,000
Retained Earnings / Treasury Stock—Common
12/31123,500 / 1/1 Bal.688,000 / 1/1 Bal.40,000
12/31280,000 / 3/207,000
12/31 Bal.844,500 / 12/31 Bal.47,000
Cash Dividends
10/124,000
12/199,500 / 12/31123,500
12/31 Bal.–0–

(c)SIGMA CORPORATION

Partial Balance Sheet

December 31, 2010

Stockholders’ equity

Paid-in capital

Capital stock

8% Preferred stock, $100

par value, noncumulative,

5,000 shares authorized,

3,000 shares issued and

outstanding...... $ 300,000

Common stock, no-par, $5

stated value, 300,000 shares

authorized, 205,000 shares

issued and 199,000 shares

outstanding...... 1,025,000

Total capital stock...... $1,325,000

Additional paid-in capital

In excess of par value—

preferred stock...... 15,000

In excess of stated value—

common stock...... 485,000

Total additional paid-in

capital...... 500,000

Total paid-in capital...... 1,825,000

Retained earnings...... 844,500

Total paid-in capital and

retained earnings...... 2,669,500

Less: Treasury stock (6,000 common

shares)...... (47,000)

Total stockholders’ equity...... $2,622,500

(d)

*200,000 – 5,000 **205,000 – 6,000

Return on common stockholders’ equity =

aBeginning common stockholders’ equity:

$1,000,000 + $480,000 + $688,000 – $40,000

bEnding common stockholders’ equity:

$1,025,000 + $485,000 + $844,500 – $47,000