Chapter 11 - Reporting and Interpreting Owners’ Equity
E11–12. Req. 1
The number of shares that have been issuedis computed by dividing the common stock account ($4,008 million) by the par value of the shares ($1 per share) or approximately 4,008,000,000 shares. Req. 2
Retained earnings end of 2011 ............ $70,682,000,000 Net income for 2012 ............................ 10,756,000,000 Dividends for 2012 ............................... (5,811,600,000 ) Retained earnings end of 2012 ............ $75,626,400,000
The amount of retained earnings is an estimate because we do not know the exact
number of shares outstanding (because we do not know the number of shares in treasury stock). This number is needed to determine the amount of dividends paid during 2012. We based the dividends on the estimate calculated in the previous requirement.
E11–13.
The treasury stock account is a contra equity account, meaning that it subtracts from the total stockholders’ equity. Cash also decreases on the balance sheet by the same amount.
Req. 2
Many companies repurchase common stock in order to develop an employee bonus plan that provides workers with shares of the company’s stock as part of their compensation. Because of SEC regulations concerning newly issued shares,
companies find it cheaper to give their employees shares of stock that were purchased from stockholders than to issue new shares. In this case, the company mentions the goal of enhancing shareholders’ value. If the company maintains its current level of income, earnings per share will increase with fewer shares outstanding. The
management expects that the increase in EPS will be reflected in an increase in stock price. Req. 3
Shares that are held in treasury stock do not participate in dividend payments. As a result, the purchase of treasury stock will reduce the amount of dividends that the company must pay in future years.