Question

The equity sections from Atticus Group’s 2016 and 2017 year-end balance sheets follow.

The following transactions and events affected its equity during year 2017.

Required

1. How many common shares are outstanding on each cash dividend date?

2. What is the total dollar amount for each of the four cash dividends?

3. What is the amount of the capitalization of retained earnings for the stock dividend?

4. What is the per share cost of the treasury stock purchased?

5. How much net income did the company earn during year 2017?

Answer 1

Common stock

Common stock provides ownership and voting power in the organization. They do not receive fixed amount of dividend and dividend may not be paid yearly like in case of preference stock.

Common stock are reported at their par value in the balance sheet, any excess amount received on issuance of common stock over the par value are shown as part of additional paid in capital.

Retained earnings

Retained earnings are the accumulated earnings of the company. Retained earnings are shown as part of stockholders equity.

Treasury stock

When the common stock are repurchased by the company it leads to reduction of equity of the company and are shown separately as treasury stock in the stockholders equity section.

Dividend

Dividend is the distribution of profits to the shareholders. Dividend are of two type cash and stock dividend. In cash dividend cash is paid to shareholders and in stock dividend additional shares are issued to the shareholders without any consideration. Both are paid from retained earnings which has accumulated profits.

1.

Formula to calculate number of shares outstanding.

The first cash dividend was paid on 05^th January to shareholders on record till 10^th January, in this period there was no new stock issued or repurchased and so the number of shares outstanding would remain the same as was on 31^st December 2016 that is 40,000 shares

Thus, on 05 ^th January the number of shares outstanding is

On 20^th March shares were repurchased and so the shares outstanding would be issued share as on 31^st Dec 2016 less the treasury shares purchased.

Calculation of shares outstanding as on 05 ^th April

Thus, on 10 ^th April the number of shares outstanding is

The number of shares outstanding on 05^th July would be same as on 05^th April as no new shares were issued.

Thus, on 05 ^h July the number of shares outstanding is

There was stock dividend of 20% declared on July 31 and so the number of shares outstanding will increase by stock dividend

Calculation of shares outstanding as on 05 ^th October

Thus, on 05 ^th October the number of shares outstanding is

2.

Formula to calculate cash dividend

Calculation of cash dividend paid on 05 ^th January

Cash dividend paid on 05 ^th January is

Calculation of cash dividend paid on 05 ^th April

Cash dividend paid on 05 ^th April is

Calculation of cash dividend paid on 05 ^th July

Cash dividend paid on 05 ^th July is

Calculation of cash dividend paid on 05 ^th October

Cash dividend paid on 05 ^th October is

3.

Stock dividend is paid from the retained earnings and so retained earnings would reduce for the stock dividend issued. The account to be debited to retained earnings would be equal to number of stock dividend issued multiplied by market share price.

Calculation of amount to be capitalized in retained earnings for stock dividend

The amount to be capitalized of retained earnings for stock dividend is

4.

Formula to calculate purchase price for treasury shares

Calculation of per share cost of treasury stock

The per share cost of treasury stock is

5.

Formula to calculate net income from retained earnings

Calculation of net income is shown below

The dividend would reduce the retained earnings balance and therefore it is added back to calculate the net income.

Net income earned in 2017 is

Following shows the working