EXERCISE 12.2

Accounting Terminology

The following are 10 technical accounting terms introduced or emphasized inChapters 11and12.

P/e ratio

Treasury stock

Discontinued operations

Stock dividend

Unusual or infrequent item

Prior period adjustment

Basic earnings per share

Additional paid-in capital

Diluted earnings per share

Comprehensive income

Each of the following statements may (or may not) describe one of these technical terms. For each statement, indicate the term described, or answer "None" if the statement does not correctly describe any of the terms.

a.A loss from tornado damage in a location where tornadoes are extremely rare.

b.The asset represented by shares of capital stock that have not yet been issued.

c.A distribution of additional shares of stock that reduces retained earnings but causes no change in total stockholders' equity.

d.The amount received when stock is sold in excess of par value.

e.An adjustment to the beginning balance of retained earnings to correct an error previously made in the measurement of net income.

f.A figure expressing a relationship between the current market value of a share of common stock and the underlying earnings per share.

g.A separate section sometimes included in an income statement as a way to help investors evaluate the profitability of ongoing business activities.

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h.A figure indicating what earnings per share would have been if all securities convertible into common stock had been converted at the beginning of the current year.

i.A broadly defined measure of financial performance that includes, but is not limited to, net income.

EXERCISE 12.3

Discontinued Operations

During the current year, Sports +, Inc., operated two business segments: a chain of surf and dive shops and a small chain of tennis shops. The tennis shops were not profitable and were sold near year-end to another corporation. Sports + operations for the current year are summarized as follows. The first two captions, "Net sales" and "Costs and expenses," relate only to the company's continuing operations.

Net sales

$12,500,000

Costs and expenses (including applicable income tax)

8,600,000

Operating loss from tennis shops (net of income tax benefit)

192,000

Loss on sale of tennis shops (net of income tax benefit)

348,000

The company had 182,000 shares of a single class of capital stock outstanding throughout the year.

a. condensed income statement for the year. At the bottom of the statement, show any appropriate earnings per share figures. (A condensed income statement is illustrated inExhibit 12-2.)

b.Which earnings per share figure in partado you consider most useful in predicting future operating results for Sports +, Inc.? Why?

EXERCISE 12.4

Reporting Discontinued Operations

For the year ended December 31, Southern Supply had net sales of $3,875,000, costs and other expenses (including income tax) of $3,100,000, and a gain from discontinued operations (net of income tax) of $210,000.

a.To the extent possible from the limited information provided, condensed income statement (including earnings per share), assuming that 620,000 shares of common stock were outstanding throughout the year. (A condensed income statement is illustrated inExhibit 12-2.)

b.Which earnings per share figure would you recommend be used to compute the price-earnings ratio for Southern Supply?Explain briefly.

EXERCISE 12.9

Reporting the Effects of Transactions

Five events pertaining to Lubbock Manufacturing Co. are described as follows.

Declared and paid a cash dividend.

Issued a 10 percent stock dividend.

Issued a 2-for-1 stock split.

Purchased treasury stock.

Reissued the treasury stock at a price greater than the purchase price.

Indicate the immediate effects of the events on the financial measurements in the four column headings listed. Use the code letters I for increase, D for decrease, and NE for no effect.

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EXERCISE 12.13

Cash and Stock Dividends

Kosmier Company has outstanding 500,000 shares of $50 par value common stock that originally sold for $60 per share. During the three most recent years, the company carried out the following activities in the order presented: declared and distributed a 10 percent stock dividend, declared and paid a cash dividend of $1 per share, declared and distributed a 2-for-1 stock split, and declared and paid a $0.60 per share cash dividend.

a.Determine the number of shares of stock outstanding after the four transactions described.

b.Determine the total amount of cash that the company paid in the four transactions described.

c.If you were a stockholder who held 100 shares of stock that you purchased four years ago when the market value of the shares was $65, how many shares would you own after the four transactions described? If the market value of the stock was $40 after the four transactions, would you be better or worse off than before the four transactions?

PROBLEM 12.2A

Format of an Income Statement and a Statement of Retained Earnings

The following data relate to the operations of Slick Software, Inc., during 2018.

Continuing operations:

Net sales

$19,850,000

Costs and expenses (including applicable income tax)

16,900,000

Other data:

Operating income during 2018 on segment of the business discontinued near year-end (net of income tax)

140,000

Loss on disposal of discontinued segment (net of income tax benefit)

550,000

Prior period adjustment (increase in 2017 depreciation expense, net of income tax benefit)

350,000

Cash dividends declared

950,000

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Instructions

a. condensed income statement for 2018, including earnings per share figures. Slick Software, Inc., had 200,000 shares of $1 par value common stock and 80,000 shares of $6.25, $100 par value preferred stock outstanding throughout the year.

b. statement of retained earnings for the year ended December 31, 2018. As originally reported, retained earnings at December 31, 2017, amounted to $7,285,000.

c.Compute the amount of cash dividend per share of common stock declared by the board of directors for 2018. Assume no dividends in arrears on the preferred stock.

d.Assume that 2018 earnings per share is a single figure and amounts to $8.00. Assume also that there are no changes in outstanding common or preferred stock in 2019. Do you consider the $8.00 earnings per share figure in 2019 to be a favorable or unfavorable figure in comparison with 2018 performance? Explain.