Question

The equity sections from Hovo Corporation’s 2016 and 2017 balance sheets follow.

Stockholders’ Equity (December 31, 2016)
Common stock—\(20 par value, 30,000 shares authorized, 17,000 shares issued and outstanding	\)340,000
Paid-in capital in excess of par value, common stock	60,000
Retained earnings	270,000
Total stockholders’ equity	\(670,000

Stockholders’ Equity (December 31, 2017)
Common stock—\)20 par value, 30,000 shares authorized, 19,000 shares issued, 1,000 shares in treasury	\(380,000
Paid-in capital in excess of par value, common stock	104,000
Retained earnings (\)40,000 restricted by treasury stock)	295,200
	779,200
Less cost of treasury stock	(40,000)
Total stockholders’ equity	\(739,200

The following transactions and events affected its equity during year 2017

Feb. 15	Declared a \)0.40 per share cash dividend, date of record five days later
Mar. 12	Purchased treasury stock for cash
May 15	Declared a \(0.40 per share cash dividend, date of record five days later
Aug. 15	Declared a \)0.40 per share cash dividend, date of record five days later
Oct. 4	Declared a 12.5% stock dividend when the stock’s market value is \(42 per share
Oct. 20	Issued the stock dividend that was declared on October 4.
Nov. 15	Declared a \)0.40 per share cash dividend, date of record five days later

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?

Short answer

S.no.	Particulars	Feb. 15	May 15	Aug. 15	Nov. 15
1	Outstanding share	17,000	16,000	16,000	18,000
2	Total dividend	$6,800	$6,400	$6,400	$7,200
3	Total capitalized	$84,000
4	Cost per share	$40
5	Net income	$136,000

Step-by-step solution

Meaning of Common Shares

The shares of ownership in a US firm are common stock. The term "common stockholders," "common shareholders," or simply "stockholders" or "shareholders" is used to describe the people who own common stock.

(a) Determining outstanding common shares

Particulars	Feb. 15	May 15	Aug. 15	Nov. 15
Beginning balance	17,000	17,000	17,000	17,000
Less: treasury stock (March 2)		(1,000)	(1,000)	(1,000)
Add: dividend shares (Oct. 4)	-	-	-	$\mathbf{(}\mathbf{12}\mathbf{.}\mathbf{5}\mathbf{\%}\mathbf{\times }\mathbf{16}\mathbf{,}\mathbf{000}\mathbf{)}$ 2,000
Outstanding shares	17,000	16,000	16,000	18,000

(b) Determining the total amount for each of the four cash dividends

Particulars	Feb. 15	May 15	Aug. 15	Nov. 15
Outstanding shares	17,000	16,000	16,000	18,000
Dividend per share	$0.40	$0.40	$0.40	$0.40
Total dividend	$6,800	$6,400	$6,400	$7,200

(c) Determining the amount of the capitalization of retained earnings for the stock dividend

Capitalization of retained earnings for small stock dividend
Number of shares	2,000
Market value per share	$42
Total capitalized	$84,000

(d) Determining the per share cost of the treasury stock purchased

Cost per share of treasury stock
Total amount paid	$40,000
Shares purchased	1,000
Cost per share	$40

(e) Determining the net income

Net income
Retained earnings at the beginning balance	$270,000
Less: Dividends
February 15	($6,800)
May 5	(6,400)
August 15	(6,400)
October 4	(84,000)
November 15	(7,200)
Total before net income	$159,200
Add: net income	$136,000
Retained earnings at the ending balance	$295,200

Working note:

$\begin{array}{c}\mathbf{Net}\mathbf{income}\mathbf{=}\mathbf{Retained}\mathbf{earnings}\mathbf{-}\mathbf{Total}\mathbf{before}\mathbf{net}\mathbf{income}\\ \mathbf{=}\mathbf{\$}\mathbf{295}\mathbf{,}\mathbf{200}\mathbf{-}\mathbf{\$}\mathbf{159}\mathbf{,}\mathbf{200}\\ \mathbf{=}\mathbf{\$}\mathbf{136}\mathbf{,}\mathbf{000}\end{array}$