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# Analyzing Changes in Stockholders' Equity

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P2-11 Changes in stockholders' equity Listed are the equity sections of balance sheets for years 2008 and 2009 as reported by Mountain Air Ski Resorts, Inc. The overall value of stockholders' equity has risen from \$2,000,000 to \$7,500.000. Use the statements to discover how and why this happened.

Mountain Air Ski Resorts, Inc.
Balance Sheets (partial)
Stockholders' equity 2008 2009
Common stock (\$1.00 par)
Authorized - 5,000,000 share
Outstanding - 1,500,000 share 2009 \$1,500,000
- 500,000 share 2008 \$ 500,000

Paid - in capital in excess of par 500,000 4,500,000
Retained earnings 1,000,000 1,500,000
Total stockholders' equity \$2,000, 000 \$7,500,000

The company paid total dividends of \$200,000 during fiscal 2009.

a. What was Mountain Air's net income for 2009?
b. How many new shares did the corporation issue and sell during the year?
c. At what average price per share did the new stock sold during 2009 sell?
d. At what price per share did Mountain Air's original 500,000 shares sell?

#### Solution Preview

a. What was Mountain Air's net income for 2009?

The basic formula to determine a company's ending retained earnings is: Beginning Retained Earnings + Net Income - Net Loss - Dividends Issued = Ending Retained Earnings.

Beginning Retained Earnings + Net Income - Net Loss - Dividends Issued = Ending Retained Earnings.
\$1,000,000 + Net Income - \$0 - \$200,000 = \$1,500,000
\$1,000,000 + Net Income - \$200,000 = \$1,500,000
Net Income - \$200,000 = \$1,500,000-\$1,000,000
Net Income = ...

#### Solution Summary

This solution illustrates how to analyze the changes in the Stockholders' Equity section to determine things such as net income earned and the market price of stock sold.

\$2.19

## Analysis of changes in stockholders' equity accounts

Stockholders' Equity (December 31, 2002)
Common Stock - \$4 par value, 50,000 shares authorized, 20,000 shares issued and outstanding

\$80,000
Contributed capital in excess of par value, common stock
\$60,000
Total contributed capital
\$140,000
Retained Earnings
\$160,000
Total Stockholders' Equity
\$300,000

Stockholders' Equity (December 31, 2003)
Common Stock - \$4 par value, 50,000 shares authorized,23,700 shares issued,1,500 shares in treasury

\$94,800
Contributed capital in excess of par value, common stock
\$89,600
Total contributed capital
\$184,400
Retained Earnings (\$57,200 restricted by Treasury Stock)
\$200,000 = 384,400
Less Treasury Stock at Cost
(15,000)
Total Stockholders' Equity
\$369,400

The following transactions and events affect its equity accounts during year 2003:

Feb. 15 Declared a \$0.50 per share cash dividend, date of record February 20.
Mar. 2 Purchased treasury stock for cash.
May 15 Declared a \$0.50 per share cash dividend, date of record May 20.
Aug. 15 Declared a \$0.50 per share cash dividend, date of record August 20.
Oct.4 Declared a 20% stock dividend when the stock's market value is \$12 per share.
Oct. 20 Issued a stock dividend that was declared on October 4.
Nov. 15 Declared a \$0.50 per share cash dividend, date of record November 20.

Required:

1. How many common shares are outstanding on each cash dividend date?
*To find this, do I need to subtract the issued stock by the treasury stock
2. What is the total dollar amount for each of the four cash dividends?
*Honestly, I don't understand.
3. What is the amount of the capitalization of retained earnings for the stock dividend?
*The teacher got an answer of \$44,400. I have know idea how and could you explain what it means by capitalization.
4. What is the per share cost of the treasury stock purchased?
*I have know idea how she got answer of \$10 per share either.
5. How much net income did the company earn during year 2003?
*Did she get an answer of \$124,000 by simply subtracting beginning retained earnings by the end retained earnings and adding the dividends.

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