E11-4 of Financial Accounting, 11th Edition (Patricia Libby, Robert Libby, Frank Hodge) The financial statements for Highland Corporation included the following selected information: The common stock was sold at a price of $30 per share. Required: 1. What is the amount of additional paid-in capital? 2. What was the amount of retained earnings at the beginning of the year? 3. How many shares are in treasury stock? 4. Compute earnings per share (assume the weighted average shares outstanding is equal to the shares (outstanding).
The Correct Answer and Explanation is:
Solutions to the Required Questions:
Given Information:
- Common stock = $1,600,000
- Shares issued = 90,000
- Shares outstanding = 80,000
- Stock price = $30/share
- Net income = $1,000,000
- Retained earnings (end of year) = $900,000
- Dividends declared and paid = $800,000
1. Additional Paid-in Capital (APIC)
Total proceeds from issuance = 90,000 shares × $30 = $2,700,000
Common stock (at par) = $1,600,000
Additional Paid-in Capital = $2,700,000 − $1,600,000 = $1,100,000
2. Retained Earnings at the Beginning of the Year
Ending retained earnings = Beginning retained earnings + Net income − Dividends
Let RE_beginning be the retained earnings at the beginning: REbeginning=900,000−1,000,000+800,000=700,000RE_{beginning} = 900,000 – 1,000,000 + 800,000 = 700,000
Answer: $700,000
3. Treasury Stock
Treasury stock = Shares issued − Shares outstanding
= 90,000 − 80,000 = 10,000 shares
4. Earnings Per Share (EPS)
EPS=Net IncomeWeighted Average Shares Outstanding=1,000,00080,000=12.50\text{EPS} = \frac{\text{Net Income}}{\text{Weighted Average Shares Outstanding}} = \frac{1,000,000}{80,000} = 12.50
Answer: $12.50 per share
Explanation
This exercise involves interpreting financial statement data to analyze key components of a company’s equity structure and profitability. The first step is calculating Additional Paid-in Capital (APIC), which represents the excess amount shareholders paid over the par value of the stock. Since the company issued 90,000 shares at $30 each, the total cash raised is $2.7 million. Of this, $1.6 million is recorded as common stock (likely based on a par value), and the remaining $1.1 million is APIC.
Next, we estimate the beginning Retained Earnings. The company’s retained earnings increased by $1 million (net income) during the year and decreased by $800,000 (dividends paid). By adjusting the ending retained earnings ($900,000), we can backtrack to find that the beginning retained earnings were $700,000.
The Treasury Stock amount is derived by subtracting the shares outstanding from the total issued shares. Treasury shares are those that were issued but later repurchased by the company; here, that’s 10,000 shares.
Lastly, we calculate Earnings Per Share (EPS) by dividing net income by the average number of shares outstanding. EPS is a critical metric for evaluating company profitability from a shareholder perspective. Assuming the number of shares remained constant during the year, EPS is $12.50.
This problem highlights essential concepts in accounting, including stockholders’ equity, retained earnings reconciliation, and EPS, reinforcing the importance of accurate interpretation of financial statement elements.
