Treasury shares and their effects on performance ratios. Exhibit 12.15 presents the changes in common shareholders' equity of Merck for Year 3 through Year 5. Merck regularly purchases shares of its common stock and reissues them in connection with stock option plans. It will usually issue a small number of new common shares when it requires fractional shares to complete a stock option transaction. Earnings per common share were \(\$ 2.70\) in Year 3, \$3.20 in Year 4, and \$3.83 in Year 5.

a. Give the journal entries for Year 5 to record (1) the issue of common shares in connection with stock option plans, and (2) the purchase of treasury stock.

b. Compute the percentage change in net income and in earnings per share between Year 3 and Year 4 and between Year 4 and Year 5. Why do the percentage changes in earnings per share exceed the percentage changes in net income in both Year 4 and Year 5 ?

c. Compute the book value per outstanding common share at the end of Year 3, Year 4 , and Year 5 and the percentage change in book value per share between Year 3

and Year 4 and between Year 4 and Year 5. Why are the percentage changes in book value per common share less than the percentage changes in both net income and earnings per share?

d. Compute the rate of return on common shareholders' equity for Year 3, Year 4 and Year 5.

e. Do the treasury stock purchases appear to be motivated primarily by the need to satisfy commitments under stock option plans? Explain.

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BAIMAN CORPORATION EXHIBIT 12.14 Comparative Balance Sheets and Income Statement (Problem 42) December 31 Year 1 Year 2 BALANCE SHEETS Cash Accounts Receivable (net) Inventory Property, Plant, and Equipment Accumulated Depreciation Total Assets Accounts Payable Dividends Payable Bonds Payable (nonconvertible) Convertible Bonds Payable Deferred Income Tax Liability Total Liabilities Preferred Stock Common Stock (par) Additional Paid-in Capital Retained Earnings Total $ 45,000 $ 54,000 160,000 175,000 115,000 135,000 265,000 300,000 (120,000) (130,000) $465,000 $ 534,000 $105,000 $ 106,000 10,000 14,000 90,000 93,000 50,000 20,000 27,000 $275,000 $ 240,000 $ 60,000 $ 60,000 25,000 65,000 55,000 47,000 153,000 64,000 Cost of Treasury Stock Total Shareholders' Equity $205,000 $ 324,000 (15,000) (30,000) $190,000 $ 294,000 Total Liabilities and Shareholders' Equity $465,000 $ 534,000 INCOME STATEMENT Sales Cost of Goods Sold $1,000,000 Selling and Administrative Expenses 750,000 136,000 Depreciation Expense Loss on Sale of Equipment Interest Expense. Income Tax Expense Total Expenses Net Earnings Notes: 28,000 4,000 9,000 25,000 $ 952,000 $ 48,000 (1) Baiman Corporation acquired a machine during the period with a market value of $20,000. It issued shares of its common stock with a par value of $4,000 to acquire the machine. (2) The firm sold equipment originally costing $30.000 during Year 2. (3) Interest expense on the nonconvertible bonds payable exceeded the coupon cash payments by $3,000 during Year 2. (4) Holders of the firm's convertible bonds exercised their conversion option on January 1, Year 2. The common shares issued had a par value of $10,000. (5) Dividends declared during the year were $3,000 on preferred stock and $36,000 on common stock. (6) The firm reissued for $12,000 treasury stock that originally cost $10,000.