E 18 18 Brenner Jude Corporation Transactions affecting retained earnings LO6 LO7 Shown below in T account format are the changes affecting the retained earnings of Brenner Jude Corporation during 2011 At January 1 2011 the corporation had outstanding 105 million common shares 1 par per share Required 1 From the information provided by the account changes you should be able to recreate the transactions that affected Brenner Jude s retained earnings during 2011 Prepare the journal entries that Brenner Jude must have recorded during the year for these transactions 2 Prepare a statement of retained earnings for Brenner Jude for the year ended 2011 Exercise 18 18 Requirement 1 in millions Retirement of common shares Common stock 5 million shares x 1 par per share Paid in capital excess of par 22 5 2 Retained earnings given Cash given Net income closed to retained earnings Income summary Retained earnings given Declaration of a cash dividend Retained earnings given Cash Declaration of a stock dividend Retained earnings given Common stock 105 5 x 4 million shares at 1 par per share Paid in capital excess of par difference 5 15 2 88 33 20 22 88 33 4 16 Requirement 2 Brenner Jude Corporation Statement of Retained Earnings FOR THE YEAR ENDED DECEMBER 31 2011 in millions Balance at January 1 Net income for the year Deductions Retirement of common stock Cash dividends of 33 per share 4 stock dividend Balance at December 31 90 88 2 33 20 123 E 18 24 Softech Canvas Goods Profitability ratio LO1 Comparative balance sheets for Softech Canvas Goods for 2011 and 2010 are shown below Softech pays no dividends and instead reinvests all earnings for future growth Determine the return on shareholders equity for 2011 Required 1 2 What does the ratio measure Exercise 18 24 average shareholders equity 200 120 600 520 2 14 29 The return on shareholders equity is computed by dividing net income by increase in retained earnings which equals net income since no dividends were paid The ratio is a summary measure of profitability often used by investors and potential investors particularly common shareholders It measures the ability of company management to generate net income from the resources that owners provide However because shareholders equity is a measure of the book value of equity investors often relate earnings to the market value of equity calculating the earnings price ratio Information available in the exercise is insufficient to do so E 19 2 VKI Corporation Restricted stock award plan LO1 On January 1 2011 VKI Corporation awarded 12 million of its 1 par common shares to key personnel subject to forfeiture if employment is terminated within three years On the grant date the shares have a market price of 2 50 per share Required 1 2 3 4 5 6 Determine the total compensation cost pertaining to the restricted shares Prepare the appropriate journal entry to record the award of restricted shares on January 1 2011 Prepare the appropriate journal entry to record compensation expense on December 31 2011 Prepare the appropriate journal entry to record compensation expense on December 31 2012 Prepare the appropriate journal entry to record compensation expense on December 31 2013 Prepare the appropriate journal entry to record the lifting of restrictions on the shares at December 31 2013 Exercise 19 2 Requirement 1 Requirement 2 Requirement 3 Requirement 4 Requirement 5 Requirement 6 2 50 x 12 million 30 million fair value per share shares granted fair value of award no entry Compensation expense 30 million 3 years 10 Paid in capital restricted stock 10 in millions Compensation expense 30 million 3 years 10 Paid in capital restricted stock 10 Compensation expense 30 million 3 years 10 Paid in capital restricted stock 10 Paid in capital restricted stock 30 Common stock 12 million shares x 1 par Paid in capital excess of par remainder 12 18 E 19 5 American Optical Corporation Stock options LO2 American Optical Corporation provides a variety of share based compensation plans to its employees Under its executive stock option plan the company granted options on January 1 2011 that permit executives to acquire 4 million of the company s 1 par common shares within the next five years but not before December 31 2012 the vesting date The exercise price is the market price of the shares on the date of grant 14 per share The fair value of the 4 million options estimated by an appropriate option pricing model is 3 per option No forfeitures are anticipated Ignore taxes Determine the total compensation cost pertaining to the options Prepare the appropriate journal entry to record the award of options on January 1 2011 Prepare the appropriate journal entry to record compensation expense on December 31 2011 Prepare the appropriate journal entry to record compensation expense on December 31 2012 Required 1 2 3 4 Exercise 19 5 Requirement 1 3 4 million x 12 million fair value per option options granted total compensation Requirement 2 no entry Requirement 3 Requirement 4 Compensation expense 12 million 2 years Paid in capital stock options Compensation expense 12 million 2 years Paid in capital stock options in millions 6 6 6 6 E 19 9 Washington Distribution Employee share purchase plan LO3 In order to encourage employee ownership of the company s 1 par common shares Washington Distribution permits any of its employees to buy shares directly from the company through payroll deduction There are no brokerage fees and shares can be purchased at a 15 discount During March employees purchased 50 000 shares at a time when the market price of the shares on the New York Stock Exchange was 12 per share Prepare the appropriate journal entry to record the March purchases of shares under the employee share purchase plan Required Exercise 19 9 Cash 12 x 50 000 x 85 Compensation expense 12 x 50 000 x 15 510 000 90 000 Common stock 1 x 50 000 Paid in capital in excess of par 11 x 50 000 50 000 550 000 E 19 24 EPS concepts terminology LO5 through LO13 Listed below are several terms and phrases associated with earnings per share Pair each item from List A with the item from List B by letter that is most appropriately associated with it Exercise 19 24 List A List B e 1 Subtract preferred dividends m 2 Time weighted by 5 12 a 3 Time weighted shares assumed issued c Basic EPS a Options exercised b Simple capital structure plus time weighted actual shares i 4 Midyear event treated as if d Convertible preferred stock e Earnings available to