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14.7: Practice Questions

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    10109
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    Multiple Choice

    1.

    LO 14.1Which of the following is not a characteristic that sets preferred stock apart from common stock?

    1. voting rights
    2. dividend payments
    3. transferability
    4. ownership
    2.

    LO 14.1Issued stock is defined as stock that ________.

    1. is available for sale
    2. that is held by the corporation
    3. has been sold to investors
    4. has no voting rights
    3.

    LO 14.1Your friend is considering incorporating and asks for advice. Which of the following is not a major concern?

    1. colors for the logo
    2. which state in which to incorporate
    3. number of shares of stock to authorize
    4. selection of the corporation name
    4.

    LO 14.1Par value of a stock refers to the ________.

    1. issue price of a stock
    2. value assigned by the incorporation documents
    3. maximum selling price of a stock
    4. dividend to be paid by the corporation
    5.

    LO 14.1Which of the following is not one of the five primary responsibilities of the Securities and Exchange Commission (the SEC)?

    1. inform and protect investors
    2. regulate securities law
    3. facilitate capital formation
    4. assure that dividends are paid by corporations
    6.

    LO 14.1When a C corporation has only one class of stock it is referred to as ________.

    1. stated value stock
    2. par value stock
    3. common stock
    4. preferred stock
    7.

    LO 14.1The number of shares that a corporation’s incorporation documents allows it to sell is referred to as ________.

    1. issued stock
    2. outstanding stock
    3. common stock
    4. authorized stock
    8.

    LO 14.2The total amount of cash and other assets received by a corporation from the stockholders in exchange for the shares is ________.

    1. always equal to par value
    2. referred to as retained earnings
    3. always below its stated value
    4. referred to as paid-in capital
    9.

    LO 14.2Stock can be issued for all except which of the following?

    1. accounts payable
    2. state income tax payments
    3. property such as a delivery truck
    4. services provided to the corporation such as legal fees
    10.

    LO 14.3A company issued 40 shares of $1 par value common stock for $5,000. The journal entry to record the transaction would include which of the following?

    1. debit of $4,000 to common stock
    2. credit of $20,000 to common stock
    3. credit of $40 to common stock
    4. debit of $20,000 to common stock
    11.

    LO 14.3A company issued 30 shares of $.50 par value common stock for $12,000. The credit to additional paid-in capital would be ________.

    1. $11,985
    2. $12,000
    3. $15
    4. $10,150
    12.

    LO 14.3A corporation issued 100 shares of $100 par value preferred stock for $150 per share. The resulting journal entry would include which of the following?

    1. a credit to common stock
    2. a credit to cash
    3. a debit to paid-in capital in excess of preferred stock
    4. a debit to cash
    13.

    LO 14.3The date the board of directors votes to declare and pay a cash dividend is called the:

    1. date of stockholder’s meeting
    2. date of payment
    3. date of declaration
    4. date of liquidation
    14.

    LO 14.3Which of the following is true of a stock dividend?

    1. It is a liability.
    2. The decision to issue a stock dividend resides with shareholders.
    3. It does not affect total equity but transfers amounts between equity components.
    4. It creates a cash reserve for shareholders.
    15.

    LO 14.4Stockholders’ equity consists of which of the following?

    1. bonds payable
    2. retained earnings and accounts receivable
    3. retained earnings and paid-in capital
    4. discounts and premiums on bond payable
    16.

    LO 14.4Retained earnings is accurately described by all except which of the following statements?

    1. Retained earnings is the primary component of a company’s earned capital.
    2. Dividends declared are added to retained earnings.
    3. Net income is added to retained earnings.
    4. Net losses are accumulated in the retained earnings account.
    17.

    LO 14.4If a company’s board of directors designates a portion of earnings for a particular purpose due to legal or contractual obligations, they are designated as ________.

    1. retained earnings payable
    2. appropriated retained earnings
    3. cumulative retained earnings
    4. restricted retained earnings
    18.

    LO 14.4Corrections of errors that occurred on a previous period’s financial statements are called ________.

    1. restrictions
    2. deficits
    3. prior period adjustments
    4. restatements
    19.

    LO 14.4Owner’s equity represents which of the following?

    1. the amount of funding the company has from issuing bonds
    2. the sum of the retained earnings and accounts receivable account balances
    3. the total of retained earnings plus paid-in capital
    4. the business owner’s/owners’ share of the company, also known as net worth or net assets
    20.

    LO 14.5Which of the following is a measurement of earnings that represents the profit before interest, taxes, depreciation and amortization are subtracted?

    1. net income
    2. retained earnings
    3. EBITDA
    4. EPS
    21.

    LO 14.5Which of the following measures the portion of a corporation’s profit allocated to each outstanding share of common stock?

    1. retained earnings
    2. EPS
    3. EBITDA
    4. NOPAT
    22.

    LO 14.5The measurement of earnings concept that consists of a company’s profit from operations after taxed are subtracted is ________.

    1. ROI
    2. EPS
    3. EBITDA
    4. NOPAT
    23.

    LO 14.5The correct formula for the calculation of earnings per share is ________.

    1. (Net income + Preferred dividends) / Weighted average common shares outstanding
    2. Net income / Weighted average common shares outstanding
    3. (Net income – Preferred dividends) / Weighted average common shares outstanding
    4. (Net income – Preferred dividends) / Treasury shares outstanding
    24.

    LO 14.5Most analysts believe which of the following is true about EPS?

    1. Consistent improvement in EPS year after year is the indication of continuous improvement in the company’s earning power.
    2. Consistent improvement in EPS year after year is the indication of continuous decline in the company’s earning power.
    3. Consistent improvement in EPS year after year is the indication of fraud within the company.
    4. Consistent improvement in EPS year after year is the indication that the company will never suffer a year of net loss rather than net income.

    Questions

    1.

    LO 14.1Your corporation needs additional capital to fund an expansion. Discuss the advantages and disadvantages of raising capital through the issuance of stock. Would debt be a better option? Why or why not?

    2.

    LO 14.1How many shares of stock should your new corporation authorize? How did you arrive at your number?

    3.

    LO 14.1What factors should a new company consider in deciding in which state to incorporate?

    4.

    LO 14.1What are some of the reasons a business owner might choose the corporate form of business?

    5.

    LO 14.2Why would a company repurchase its own stock?

    6.

    LO 14.2The following data was reported by Saturday Corporation:

    • Authorized shares: 30,000
    • Issued shares: 25,000
    • Treasury shares: 5,000

    How many shares are outstanding?

    7.

    LO 14.2A corporation issues 6,000 shares of $1 par value stock for a parcel of land valued at $12,000. Prepare the journal entry to reflect this transaction.

    8.

    LO 14.2When corporations issue stock in exchange for professional services, what account(s) should be debited and what account(s) should be credited?

    9.

    LO 14.2A corporation issues 5,000 shares of $1 par value stock for some equipment with a clearly determined value of $10,000. Prepare the journal entry to reflect this transaction.

    10.

    LO 14.3On April 2, West Company declared a cash dividend of $0.50 per share. There are 50,000 shares outstanding. What is the journal entry that should be recorded?

    11.

    LO 14.3Assuming the same facts as Exercise 14.10, what is the journal that should be recorded on May 5, the date of payment?

    12.

    LO 14.3When does a corporation incur a liability for a dividend?

    13.

    LO 14.3How does a stock split affect the balance sheet of a corporation?

    14.

    LO 14.4Your friend has questions about retained earnings and dividends. How do you explain to him that dividends are paid out of retained earnings?

    15.

    LO 14.4What does owners’ equity mean for the owner?

    16.

    LO 14.4What types of transactions reduce owner’s equity? What types of transactions reduce retained earnings? What do they have in common?

    17.

    LO 14.4Sometimes financial statements contain errors. What type of liabilities may need correction as a prior period adjustment?

    18.

    LO 14.4Retained earnings may be restricted or appropriated. Explain the difference between the two and give an example of when each may be used.

    19.

    LO 14.5Which financial statements do you need to calculate EPS?

    20.

    LO 14.5Where is EPS disclosed for publicly traded companies?

    21.

    LO 14.5Should investors rely on EPS as an investing tool? Why or why not?

    22.

    LO 14.5What information do you need to calculate the weighted average common shares outstanding?

    23.

    LO 14.5Which is the only ratio required to be reported on the face of a company’s financial statements? What are the two ways the ratio is required to be reported?

    Exercise Set A

    EA1.

    LO 14.1You are an accountant working for a company that has recently decided to incorporate. The company has incurred $4,300 for attorney’s fees, promotion costs, and filing fees with the state of incorporation as a part of organizing the corporate entity. What is the journal entry to record these costs on March 13, assuming they are paid in cash?

    EA2.

    LO 14.1What is the impact on stockholders’ equity when a company uses debt financing as a source of funding?

    EA3.

    LO 14.1What is the most obvious difference between debt and equity financing?

    EA4.

    LO 14.1How do creditors assess risk when lending funds to a company?

    EA5.

    LO 14.2Fortuna Company is authorized to issue 1,000,000 shares of $1 par value common stock. In its first year, the company has the following transactions:

    Jan. 31 Issued 40,000 shares at $10 share
    Jun. 10 Issued 100,000 shares in exchange for land with a clearly determined value of $850,000
    Aug. 3 Purchased 10,000 shares of treasury stock at $9 per share

    Journalize the transactions and calculate how many shares of stock are outstanding at August 3.

    EA6.

    LO 14.2James Incorporated is authorized to issue 5,000,000 shares of $1 par value common stock. In its second year of business, the company has the following transactions:

    Mar. 31 Issued 30,000 shares at $10 share
    Jul. 9 Issued 100,000 shares in exchange for a building with a clearly determined value of $700,000
    Aug. 30 Purchased 7,000 shares of treasury stock at $9 per share

    Journalize the transactions.

    EA7.

    LO 14.2McVie Corporation’s stock has a par value of $2. The company has the following transactions during the year:

    Feb. 28 Issued 300,000 shares at $5 share
    Jun. 7 Issued 90,000 shares in exchange for equipment with a clearly determined value of $200,000
    Sep. 19 Purchased 3,000 shares of treasury stock at $7 per share

    Journalize the transactions.

    EA8.

    LO 14.2Anslo Fabricating, Inc. is authorized to issue 10,000,000 shares of $5 stated value common stock. During the year, the company has the following transactions:

    Jan. 3 Issued 60,000 shares at $10 share
    Jun. 15 Issued 5,000 shares in exchange for office equipment with a clearly determined value of $50,000
    Aug. 16 Purchased 4,000 shares of treasury stock at $20 per share

    Journalize the transactions.

    EA9.

    LO 14.2St. Marie Company is authorized to issue 1,000,000 shares of $5 par value preferred stock, and 5,000,000 shares of $1 stated value common stock. During the year, the company has the following transactions:

    Jan. 31 Issued 140,000 common shares at $10 share
    Jun. 10 Issued 160,000 preferred shares in exchange for land with a clearly determined value of $850,000
    Aug. 3 Issued 10,000 shares of common stock for $9 per share

    Journalize the transactions.

    EA10.

    LO 14.3Nutritious Pet Food Company’s board of directors declares a cash dividend of $1.00 per common share on November 12. On this date, the company has issued 12,000 shares but 2,000 shares are held as treasury shares. What is the journal entry to record the declaration of this dividend?

    EA11.

    LO 14.3Nutritious Pet Food Company’s board of directors declares a cash dividend of $1.00 per common share on November 12. On this date, the company has issued 12,000 shares but 2,000 shares are held as treasury shares. The company pays the dividend on December 14. What is the journal entry to record the payment of the dividend?

    EA12.

    LO 14.3Nutritious Pet Food Company’s board of directors declares a cash dividend of $5,000 on June 30. At that time, there are 3,000 shares of $5 par value 5% preferred stock outstanding and 7,000 shares of $1 par value common stock outstanding (none held in treasury). What is the journal entry to record the declaration of the dividend?

    EA13.

    LO 14.3Nutritious Pet Food Company’s board of directors declares a small stock dividend (20%) on June 30 when the stock’s market value per share is $30. At that time, there are 10,000 shares of $1 par value common stock outstanding (none held in treasury). What is the journal entry to record the declaration of the dividend?

    EA14.

    LO 14.4Blanket Company has paid quarterly dividends every quarter for the past 15 years. Lately, slowing sales have created a cash crunch for the company. While the company still has positive retained earnings, the retained earnings balance is close to zero. Should the company borrow to continue to pay dividends? Why or why not?

    EA15.

    LO 14.4Farmington Corporation began the year with a retained earnings balance of $20,000. The company paid a total of $3,000 in dividends and earned a net income of $60,000 this year. What is the ending retained earnings balance?

    EA16.

    LO 14.4Montana Incorporated began the year with a retained earnings balance of $50,000. The company paid a total of $5,000 in dividends and experienced a net loss of $25,000 this year. What is the ending retained earnings balance?

    EA17.

    LO 14.4Jesse and Mason Fabricating, Inc. general ledger has the following account balances at the end of the year:

    Cash 9,000, Common stock 5,000, Accounts receivable 7,000, Accounts payable 2,000, Additional paid-in capital 4,000, Prepaid insurance 5,000, Unearned revenue 4,000, Retained earnings 6,000.

    What is the total ending balance as reported on the company’s Statement of Stockholder’s Equity?

    EA18.

    LO 14.4Roxanne’s Delightful Candies, Inc. began the year with a retained earnings balance of $45,000. The company had a great year and earned a net income of $80,000. However, the company’s controller determined that it had made an error when calculating depreciation in the preceding year, resulting in an understated depreciation expense amount of $2,000. What is the ending retained earnings balance?

    EA19.

    LO 14.5Jupiter Corporation earned net income of $90,000 this year. The company began the year with 600 shares of common stock and issued 500 more on April 1. They issued $5,000 in preferred dividends for the year. What is Jupiter Corporation’s weighted average number of shares for the year?

    EA20.

    LO 14.5Longmont Corporation earned net income of $90,000 this year. The company began the year with 600 shares of common stock and issued 500 more on April 1. They issued $5,000 in preferred dividends for the year. What is the numerator of the EPS calculation for Longmont?

    EA21.

    LO 14.5James Corporation earned net income of $90,000 this year. The company began the year with 600 shares of common stock and issued 500 more on April 1. They issued $5,000 in preferred dividends for the year. What is the EPS for the year for James (rounded to the nearest dollar)?

    Exercise Set B

    EB1.

    LO 14.1Your high school friend started a business that has blossomed over the years, and she is considering incorporating so she can sell shares of stock and expand. She has asked you for help understanding the process she will need to undertake. How do you explain the process of incorporation to her?

    EB2.

    LO 14.1You are an accountant working for a manufacturing company that makes personal care products and has recently decided to incorporate. The company incurred a total of $7,900 for attorney’s fees, promotion costs, and filing fees with the state of incorporation as a part of organizing the corporate entity. What is the journal entry to record these costs on February 28, assuming they are paid in cash?

    EB3.

    LO 14.1What is the impact on stockholders’ equity when a company uses equity financing as a source of funding?

    EB4.

    LO 14.1What is the biggest disadvantage to be considered when exploring the option of equity financing versus debt financing?

    EB5.

    LO 14.1Your high school friend started a business that has blossomed over the years, and he is considering incorporating so he can sell shares of stock and expand. He has asked you for help understanding the costs of incorporating. What are some of the costs that he will face as he organizes the corporation and begins to sell shares of stock?

    EB6.

    LO 14.2Spring Company is authorized to issue 500,000 shares of $2 par value common stock. In its first year, the company has the following transactions:

    Mar. 1 Issued 40,000 shares of stock at $9.75 per share
    Apr. 10 Issued 1,000 shares of stock for legal services valued at $10,000.
    Oct. 3 Purchased 1,000 shares of treasury stock at $9 per share

    Journalize the transactions and calculate how many shares of stock are outstanding at August 3.

    EB7.

    LO 14.2Silva Company is authorized to issue 5,000,000 shares of $2 par value common stock. In its IPO, the company has the following transaction: Mar. 1, issued 500,000 shares of stock at $15.75 per share for cash to investors. Journalize this transaction.

    EB8.

    LO 14.2Juniper Company is authorized to issue 5,000,000 shares of $2 par value common stock. In conjunction with its incorporation process and the IPO, the company has the following transaction: Mar. 1, issued 4,000 shares of stock in exchange for equipment worth $250,000. Journalize the transaction.

    EB9.

    LO 14.2Vishnu Company is authorized to issue 500,000 shares of $2 par value common stock. In conjunction with its incorporation process and the IPO, the company has the following transaction: Apr. 10, issued 1,000 shares of stock for legal services valued at $15,000. Journalize the transaction.

    EB10.

    LO 14.2Ammon Company is authorized to issue 500,000 shares of $5 par value preferred stock. In its first year, the company has the following transaction: Mar. 1, issued 40,000 shares of preferred stock at $20.50 per share. Journalize the transaction.

    EB11.

    LO 14.3Nutritious Pet Food Company’s board of directors declares a small stock dividend (20%) on June 30 when the stock’s market value per share is $30. At that time, there are 10,000 shares of $1 par value common stock outstanding (none held in treasury). What is the journal entry to record the stock dividend distribution on July 31?

    EB12.

    LO 14.3Nutritious Pet Food Company’s board of directors declares a large stock dividend (50%) on June 30 when the stock’s market value per share is $30. At that time, there are 10,000 shares of $1 par value common stock outstanding (none held in treasury). What is the journal entry to record the declaration of the dividend?

    EB13.

    LO 14.3Nutritious Pet Food Company’s board of directors declares a large stock dividend (50%) on June 30 when the stock’s market value per share is $30. At that time, there are 10,000 shares of $1 par value common stock outstanding (none held in treasury). What is the journal entry to record the stock dividend distribution on July 31?

    EB14.

    LO 14.3Nutritious Pet Food Company’s board of directors declares a 2-for-1 stock split on June 30 when the stock’s market value per share is $30. At that time, there are 10,000 shares of $1 par value common stock outstanding (none held in treasury). What is the new par value of the shares and how many shares are outstanding after the split?

    EB15.

    LO 14.3Nutritious Pet Food Company’s board of directors declares a 2-for-1 stock split on June 30 when the stock’s market value per share is $30. At that time, there are 10,000 shares of $1 par value common stock outstanding (none held in treasury). What is the new par value of the shares and how many shares are outstanding after the split? What is the total amount of equity before and after the split?

    EB16.

    LO 14.4Birmingham Company has been in business for five years. Last year, it experienced rapid growth and hired a new accountant to oversee the physical assets and record acquisitions and depreciation. This year, the controller discovered that the accounting records were not in order when the new accountant took over, and a $3,000 depreciation entry was omitted resulting in depreciation expense being understated last year. How does the company make this type of correction and where is it reported?

    EB17.

    LO 14.4Chelsea Company is a sole proprietorship. Ashley, Incorporated is a corporation. Which company would report stockholder’s equity and retained earnings and not simply owner’s equity? Why? What is the difference between these accounts?

    EB18.

    LO 14.4Tart Restaurant Holdings, Incorporated began the year with a retained earnings balance of $950,000. The company paid a total of $14,000 in dividends and experienced a net loss of $20,000 this year. What is the ending retained earnings balance?

    EB19.

    LO 14.4Josue Fabricating, Inc.’s accountant has the following information available to prepare the Statement of Stockholder’s Equity for the year just ended.

    Cash 19,000, Common stock 15,000, Accounts receivable 17,000, Accounts payable 12,000, Preferred stock 18,000, Additional paid-in capital 14,000, Prepaid insurance 15,000, Unearned revenue 14,000, Retained earnings 16,000.

    What is the total balance on the company’s Statement of Stockholder’s Equity? What is the amount of the contributed capital?

    EB20.

    LO 14.4Trumpet and Trombone Manufacturing, Inc. began the year with a retained earnings balance of $545,000. The company had a great year and earned a net income of $190,000 this year and paid dividends of $14,000. Additionally, the company’s controller determined that it had made an error when calculating tax expense in the preceding year, resulting in an understated expense amount of $22,000. What is the ending retained earnings balance?

    EB21.

    LO 14.5Brunleigh Corporation earned net income of $200,000 this year. The company began the year with 10,000 shares of common stock and issued 5,000 more on April 1. They issued $7,500 in preferred dividends for the year. What is Brunleigh Corporation’s weighted average number of shares for the year?

    EB22.

    LO 14.5Errol Corporation earned net income of $200,000 this year. The company began the year with 10,000 shares of common stock and issued 5,000 more on April 1. They issued $7,500 in preferred dividends for the year. What is the numerator of the EPS calculation for Errol?

    EB23.

    LO 14.5Bastion Corporation earned net income of $200,000 this year. The company began the year with 10,000 shares of common stock and issued 5,000 more on April 1. They issued $7,500 in preferred dividends for the year. What is the EPS for the year for Bastion?

    Problem Set A

    PA1.

    LO 14.1You are a CPA who has been hired by DEF Company to assist with their initial public offering. Prepare a memo to the president of DEF outlining the steps you will take to launch the IPO.

    PA2.

    LO 14.1You are a CPA who has been hired by DEF Company to assist with their incorporation process. Prepare a memo to the president of DEF explaining the different statuses of shares of stock: authorized shares, issued shares, outstanding shares, and treasury shares.

    PA3.

    LO 14.1You are a CPA who has been hired by DEF Company to assist with their initial public offering. Prepare a memo to the president of DEF outlining the two most significant values, market value and par value, associated with stock.

    PA4.

    LO 14.2Wingra Corporation was organized in March. It is authorized to issue 500,000 shares of $100 par value 8% preferred stock. It is also authorized to issue 750,000 shares of $1 par value common stock. In its first year, the corporation has the following transactions:

    Mar. 1 Issued 10,000 shares of preferred stock at $115 per share
    Mar. 2 Issued 120,000 shares of common stock at $12.50 per share
    Apr. 10 Issued 15,000 shares of common stock for equipment valued at $196,000. The stock is currently trading at $12 per share, and is a more reliable indicator of the value of the equipment.
    Jun. 12 Issued 10,000 shares of common stock at $15 per share
    Aug. 5 Issued 1,000 shares of preferred stock at $112 per share

    Journalize the transactions.

    PA5.

    LO 14.2Copper Corporation was organized in May. It is authorized to issue 50,000,000 shares of $200 par value 7% preferred stock. It is also authorized to issue 75,000,000 shares of $5 par value common stock. In its first year, the corporation has the following transactions:

    May 1 Issued 1,000 shares of preferred stock for cash at $250 per share
    May 23 Issued 2,000 shares of common stock at $15.50 per share
    Jun. 10 Issued 15,000 shares of common stock for equipment without a readily determinable value. The stock is currently trading at $15 per share.

    Journalize the transactions.

    PA6.

    LO 14.2EllaJane Corporation was organized several years ago and was authorized to issue 4,000,000 shares of $50 par value 6% preferred stock. It is also authorized to issue 1,750,000 shares of $1 par value common stock. In its fifth year, the corporation has the following transactions:

    Mar. 1 Purchased 1,000 shares of its own common stock at $11 per share
    Apr. 10 Reissued 500 shares of its common stock held in the treasury for $15 per share.
    Jun. 12 Reissued 500 shares of common stock at $9 per share

    Journalize the transactions.

    PA7.

    LO 14.3Aggregate Mining Corporation was incorporated five years ago. It is authorized to issue 500,000 shares of $100 par value 8% preferred stock. It is also authorized to issue 750,000 shares of $1 par value common stock. It has issued only 50,000 of the common shares and none of the preferred shares. In its sixth year, the corporation has the following transactions:

    Mar. 1 Declares a cash dividend of $2 per share
    Mar. 30 Pays the cash dividend
    Jul. 10 Declares a 5% stock dividend when the stock is trading at $15 per share
    Aug. 5 Issues the stock dividend

    Journalize these transactions.

    PA8.

    LO 14.3Aggregate Mining Corporation was incorporated five years ago. It is authorized to issue 500,000 shares of $100 par value 8% preferred stock. It is also authorized to issue 750,000 shares of $1 par value common stock. It has issued only 50,000 of the common shares and none of the preferred shares. In its seventh year, the corporation has the following transactions:

    Mar. 1 Declares a cash dividend of $5 per share
    Mar. 30 Pays the cash dividend
    Jul. 10 Declares a property dividend of 1/2 ton of limestone per share when the price of limestone is $25 per ton

    Journalize these transactions.

    PA9.

    LO 14.3Aggregate Mining Corporation was incorporated five years ago. It is authorized to issue 500,000 shares of $100 par value 8% cumulative preferred stock. It is also authorized to issue 750,000 shares of $6 par value common stock. It has issued 50,000 of the common shares and 1,000 of the cumulative preferred shares. The corporation has never declared a dividend and the preferred shares are one years in arrears. Aggregate Mining has the following transactions this year:

    Mar. 1 Declares a cash dividend of $20,000
    Mar. 30 Pays the cash dividend
    Jul. 10 Declares a 3-for-1 stock split of its common shares

    Journalize these transactions. For the stock split, show the calculation for how many shares are outstanding after the split and the par value per share after the split

    PA10.

    LO 14.4The board of directors is interested in investing in a new technology. Appropriating existing retained earnings is a choice for funding the new technology. You are a consultant to the board. How would you explain this option to the board members so that they could make an educated decision?

    PA11.

    LO 14.4You are a consultant for several emerging, high-growth technology firms that were started locally and have been a part of a business incubator in your area. These firms start out as sole proprietorships but quickly realize the need for more capital and often incorporate. One of the common questions you are asked is about stockholder’s equity. Explain the characteristics and functions of the retained earnings account and how the account is different from contributed capital.

    PA12.

    LO 14.4You are the accountant for Kamal Fabricating, Inc. and you oversee the preparation of financial statements for the year just ended 6/30/2020. You have the following information from the company’s general ledger and other financial reports (all balances are end-of-year except for those noted otherwise:

    Cash 9,000, Common stock 5,000, Accounts receivable 7,000, Accounts payable 2,000, Cash dividends declared for the year 1,000, Additional paid-in capital 4,000, Prepaid insurance 5,000, Prior period adjustment net of income tax (2,000), Unearned revenue 4,000, Retained earnings beginning of the year 6,000, Net income for the year 9,000.

    Prepare the company’s Statement of Retained Earnings.

    PA13.

    LO 14.5You have some funds that you would like to invest. Do some internet research to find two publicly traded companies in the same industry and compare their earnings per share. Would the earnings per share reported by each company influence your decision in selecting which company to invest in?

    PA14.

    LO 14.5You are a consultant working with various companies that are considering incorporating and listing shares on a stock exchange. Explain the importance of the EPS calculation to financial analysts who follow companies on the stock exchanges.

    Problem Set B

    PB1.

    LO 14.1You are the president of Duke Company and are leading the company through the process of incorporation. The next step is determining the type of stock the company should offer. You are relying on feedback from several key executives at Duke to help you assess the wisdom in this decision. Prepare a memo to your executive team outlining the differences between common stock and preferred stock. The memo should be complete enough to assist them with assessing differences and providing you with robust feedback.

    PB2.

    LO 14.1You are the president of Duke Company and are leading the company through the process of incorporation. The company has determined that common stock shares will be issued, but several key executives at Duke are not quite sure they understand the preemptive right feature associated with common shares. Prepare a memo to your executive team outlining the meaning of this right.

    PB3.

    LO 14.2Autumn Corporation was organized in August. It is authorized to issue 100,000 shares of $100 par value 7% preferred stock. It is also authorized to issue 500,000 shares of $5 par value common stock. During the year, the corporation had the following transactions:

    Aug. 22 Issued 2,000 shares of preferred stock at $105 per share
    Sep. 3 Issued 80,000 shares of common stock at $13.25 per share
    Oct. 11 Issued 12,000 shares of common stock for land valued at $156,000. The stock is currently trading at $12 per share, and the stock’s trading value is a more accurate determinant of the land’s value.
    Nov. 12 Issued 5,000 shares of common stock at $15 per share
    Dec. 5 Issued 1,000 shares of preferred stock at $112 per share

    Journalize the transactions.

    PB4.

    LO 14.2MacKenzie Mining Corporation is authorized to issue 50,000 shares of $500 par value 7% preferred stock. It is also authorized to issue 5,000,000 shares of $3 par value common stock. In its first year, the corporation has the following transactions:

    May 1 Issued 3,000 shares of preferred stock for cash at $750 per share
    May 23 Issued 6,000 shares of common stock at $12.50 per share
    Jun. 10 Issued 5,000 shares of common stock for equipment without a readily determinable value. The stock is currently trading at $11 per share

    Journalize the transactions.

    PB5.

    LO 14.2Paydirt Limestone, Incorporated was organized several years ago and was authorized to issue 3,000,000 shares of $40 par value 9% preferred stock. It is also authorized to issue 3,750,000 shares of $2 par value common stock. In its fifth year, the corporation has the following transactions:

    Mar. 1 Purchased 2,000 shares of its own common stock at $15 per share
    Apr. 10 Reissued 1,000 shares of its common stock held in the treasury for $18 per share.
    Jun. 12 Reissued 1,000 shares of common stock at $12 per share

    Journalize the transactions.

    PB6.

    LO 14.3Tent & Tarp Corporation is a manufacturer of outdoor camping equipment. The company was incorporated ten years ago. It is authorized to issue 50,000 shares of $10 par value 5% preferred stock. It is also authorized to issue 500,000 shares of $1 par value common stock. It has issued 5,000 common shares and none of the preferred shares. Tent & Tarp has the following transactions:

    Mar. 1 Declares a cash dividend of $3 per share
    Mar. 30 Pays the cash dividend
    Jul. 10 Declares a 35% stock dividend when the stock is trading at $15 per share
    Aug. 5 Issues the stock dividend

    Journalize these transactions.

    PB7.

    LO 14.3Tent & Tarp Corporation is a manufacturer of outdoor camping equipment. The company was incorporated ten years ago. It is authorized to issue 50,000 shares of $10 par value 5% preferred stock. It is also authorized to issue 500,000 shares of $1 par value common stock. It has issued 5,000 common shares and none of the preferred shares. Tent & Tarp has the following transactions:

    Mar. 1 Declares a cash dividend of $5 per share
    Mar. 30 Pays the cash dividend
    Jul. 10 Declares a property dividend of one 6-person camping tent per share of stock when the price per tent is $150.

    Journalize these transactions.

    PB8.

    LO 14.3Tent & Tarp Corporation is a manufacturer of outdoor camping equipment. The company was incorporated ten years ago. It is authorized to issue 50,000 shares of $10 par value 5% preferred stock. It is also authorized to issue 500,000 shares of $1 par value common stock. It has issued 5,000 common shares and 2,000 of the preferred shares. The corporation has never declared a dividend and the preferred shares are one years in arrears. Tent & Tarp has the following transactions:

    Mar. 1 Declares a cash dividend of $10,000
    Mar. 30 Pays the cash dividend
    Jul. 10 Declares a 5-for-1 stock split of its common shares

    Journalize these transactions. For the stock split, show the calculation for how many shares are outstanding after the split and the par value per share after the split

    PB9.

    LO 14.4You are a CPA working with sole proprietors. Several of your clients are considering incorporating because they need to expand and grow. One client is curious about how her financial reports will change. She’s heard that she may need to prepare a statement of retained earnings and a statement of stockholder’s equity. She’s confused about the difference between the two and what they report. How would you explain the characteristics and functions of the two types of statements?

    PB10.

    LO 14.4You are a consultant for several emerging, high growth technology firms that were started locally and have been a part of a business incubator in your area. These firms start out as sole proprietorships but quickly realize the need for more capital and often incorporate. One of the common questions you get is about stockholder’s equity. Explain the key ways the companies need to view retained earnings if they want to use it as a source of capital for future expansion and growth after incorporating.

    PB11.

    LO 14.4You are the accountant for Trumpet and Trombone Manufacturing, Inc. and you oversee the preparation of financial statements for the year just ended 6/30/2020. You have the following information from the company’s general ledger and other financial reports (all balances are end-of-year except for those noted otherwise):

    Cash 18,000, Common stock 16,000, Accounts receivable 19,000, Accounts payable 11,000, Cash dividends declared for the year 12,000, Additional paid-in capital 17,000, Prepaid insurance 15,000, Unearned revenue 14,000, Retained earnings beginning of the year 26,000, Net income for the year 39,000.

    Prepare the company’s Statement of Retained Earnings

    PB12.

    LO 14.5You have some funds that you would like to invest and you are relying heavily on the EPS calculation to help you make your decision. Initially you are baffled about why preferred dividends are subtracted in the numerator and why a weighted average is used in the denominator, so you do some research and reflection and come to understand why. Your friend is interested in hearing about your thought process. How would you explain to your friend why it’s important to subtract preferred dividends and to use weighted averages?

    PB13.

    LO 14.5You are a consultant working with various companies that are considering incorporating and listing shares on a stock exchange. One of your clients asks you about the various acronyms she has been hearing in conjunction with financial analysis. Explain the following acronyms and how they measure different things but may complement each other: EPS (earnings per share), EBITDA (earnings before interest, taxes, depreciation, and amortization), and NOPAT (net operating profit after taxes).

    Thought Provokers

    TP1.

    LO 14.1Your bakery is incorporated and is looking for investors. Write a one paragraph story of why investors should buy stock in your company. What makes your bakery special?

    TP2.

    LO 14.1Do some research: why did Facebook choose to reincorporate in Delaware?

    TP3.

    LO 14.1Do some research: why is Comcast incorporated in Pennsylvania?

    TP4.

    LO 14.2On November 7, 2013, Twitter released its initial public offering (IPO) priced at $26 per share. When the day ended, it was priced at $44.90, reportedly making about 1600 people into millionaires in a single day.11 At the time it was considered a successful IPO. Four years later, Twitter is trading at around $18 per share. Why do you think that occurred? IsTwitter profitable? How can you find out? If it is not profitable, why do investors continue to support it?

    TP5.

    LO 14.2Research online to find a company that bought back shares of its own stock (treasury stock) within the last 6–12 months. Why did it repurchase the shares? What happened to the company’s stock price immediately after the repurchase and in the months since then? Is there any reason to think the repurchase impacted the price?

    TP6.

    LO 14.3As a bakery business continues to grow, cash flow has become more of a concern. The board of directors would like to maintain the market share price, so a discussion ensues about issuing a stock dividend versus a cash dividend. As a newly appointed board member you listen to the conversation and need to cast your vote. Which do you vote for: stock dividend or cash dividend?

    TP7.

    LO 14.3Use the internet to find a company that declared a stock split within the last 1–2 years. Why did it declare the split? What happened to the company’s stock price immediately after the split and in the months since then? Is there any reason to think the split impacted the price?

    TP8.

    LO 14.4Use the internet to find a publicly held company’s annual report. Locate the section reporting Stockholder’s Equity. Assume that you work for a consulting firm that has recently taken on this firm as a client, and it is your job to brief your boss on the financial health of the company. Write a short memo noting what insights you gather by looking at the Stockholder’s Equity section of the financial reports.

    TP9.

    LO 14.4Use the internet to find a publicly held company’s annual report. Locate the section that comments on the Stockholder’s Equity section of the financial reports. What additional insights are you able to learn by looking further into the commentary? Is there anything that surprised you or that you think is missing and could help you if you were deciding whether to invest $100,000 of your savings in this company’s stock?


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