SELF-­STUDY  

9  SOLUTIONS  
 
Chapter  12  
Income  and  Equity  
 
 
Quick  Study  12-­9  (10  minutes)  
 
1.   This  change  in  the  expected  useful  life  is  a  change  in  an  accounting  
estimate—affecting  current  and  future  accounting  periods.    Therefore,  
the  current  year  depreciation  should  be  modified  to  reflect  the  change  
and   the   revised   depreciation   expense   reported   on   the   income  
statement   as   a   regular   part   of   income.     The   remaining   years’  
depreciation  also  should  reflect  this  new  estimate  of  useful  life.  
2.   This  error  should  be  reported  on  the  statement  of  changes  in  equity  
as   a   prior   period   adjustment   to   the   beginning   retained   earnings  
balance.     Also,   if   prior   year’s   financial   numbers   are   reported,   they  
should  be  revised  to  show  the  correct  numbers.  
 
 
Exercise  12-­9  (10  minutes)  
a.   SPLOCI  
b.   SPLOCI  
c.   SCE  
d.   SCE  
e.   SCE  
f.   SPLOCI  
g.   SCE  
h.   SCE  
 
 
 
Ethics  Challenge    —  BTN    12-­3  
 
During   the   course   of   her   duties,   Gianna   has   learned   information   that  
others   might   not   know.     If   she   uses   this   information   to   trade   in   Post  
Pharmaceuticals’  shares,  Gianna  may  be  violating  securities  laws,  so  she  
should  be  careful  if  she  buys  or  sells  any  Post  shares.  
 
It  is  possible  that  the  new  drug  will  not  be  as  profitable  as  expected,  and  
the  share  might  not  increase  as  much  as  Gianna  expects.    Nevertheless,  
Gianna  might  be  accused  of  insider  trading  in  the  future  if  she  buys  the  
shares.  
 
 

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 Global  Decision    —  BTN    12-­9  
 
1.   Book  value  per  ordinary  share  =      
Equity  applicable  to  ordinary  shares  /  Number  of  ordinary  shares  
outstanding  
 
  Nokia’s  book  value  per  ordinary  share  
 
  =   €14,749  /  3,708   =  €3.98  
   
2.   Earnings  per  share  =      
Net  profit  –  Preference  dividends  /  Weighted-­average  ordinary  shares  
outstanding  
  Nokia’s  earnings  per  share   =      €  260  /  3,708   =  €0.07  
 
3.   Nokia’s  EPS  is  €0.07,  and  its  statement  of  changes  in  shareholders’  
equity   reports   that   Nokia   declared   €1,481   Euro   million   (or   €0.40  
Euro/share)  in  cash  dividends  during  the  year.    Consequently,  for  the  
current   year,   Nokia   is   paying   out   dividends   per   share   more   than  
approximately   5   times   its   earnings   per   share.     Five   is   a   rather   large  
multiple.     There   is   also   probably   some   unwillingness   by   Nokia   to  
reduce   its   dividend   payments   in   response   to   fluctuations   in   annual  
 
 
profits.  
 

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