Accounting Study Set 8

Business

Quiz 13 :

Corporations:organization,capitalstocktransactions,and Dividends

Quiz 13 :

Corporations:organization,capitalstocktransactions,and Dividends

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Entries for issuing stock On May 10, Century Realty Inc. issued for cash 90,000 shares of no-par common stock (with a stated value of $30) at $42. On September 3, Century Realty Inc. issued at par value 36,000 shares of preferred 1% stock, $25 par for cash. On December 1, Century Realty Inc. issued for cash 14,000 shares of preferred 1% stock, $25 par at $33. Journalize the entries to record the May 10, September 3, and December 1 transactions. On January 22, Zentric Corporation issued for cash 180,000 shares of no-par common stock at $4. On February 14, Zentric Corporation issued at par value 44,000 shares of preferred 2% stock, $55 par for cash. On August 30, Zentric Corporation issued for cash 9,000 shares of preferred 2% stock, $55 par at $60. Journalize the entries to record the January 22, February 14, and August 30 transactions.
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2A: Journal entries in the books of Century Realty Inc.
Amount In $
img 2B: Journal entries in the books of Zentric Corporation.
Amount In $
img

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Stock transaction for corporate expansion Pulsar Optics produces medical lasers for use in hospitals. The accounts and their balances appear in the ledger of Pulsar Optics on April 30 of the current year as follows: img At the annual stockholders' meeting on August 5, the board of directors presented a plan for modernizing and expanding plant operations at a cost of approximately $9,000,000. The plan provided (a) that the corporation borrow $1,500,000, (b) that 20,000 shares of the unissued preferred stock be issued through an underwriter, and (c) that a building, valued at $4,150,000, and the land on which it is located, valued at $800,000, be acquired in accordance with preliminary negotiations by the issuance of 300,000 shares of common stock. The plan was approved by the stockholders and accomplished by the following transactions: img Instructions Journalize the entries to record the October transactions.
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Prepare journal entries in the books of Pulsar Optics:
img

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Ethics and professional conduct in business Lou Hoskins and Shirley Crothers are organizing Red Lodge Metals Unlimited Inc. to undertake a high-risk gold-mining venture in Canada. Lou and Shirley tentatively plan to request authorization for 400,000,000 shares of common stock to be sold to the general public. Lou and Shirley have decided to establish par of $0.03 per share in order to appeal to a wide variety of potential investors. Lou and Shirley feel that investors would be more willing to invest in the company if they received a large quantity of shares for what might appear to be a "bargain" price. Discuss whether Lou and Shirley are behaving in a professional manner.
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Ethics and professional conduct of business:
R L Metals Unlimited Inc.
R L Metals Unlimited Inc., a high-risk gold mining venture in Canada is being organized by Lou and Shirley. They are planning to issue 400 million shares @ $0.03 per share to the public. They decided fix the lowest par value to the share with the intention of appealing the wide variety if investors, so that they can easily raise the required money from the public.
Discuss regarding idea of the company to issue shares:
This type of idea is not at all prudent from the public point of view. It is not at all a professional manner of raising funds from the public. It is against the ethics of business.
The venture itself is very risky, since it is the mining of gold. The expected quantity of gold may or may not be available in the mine. The company is inducing the innocent investors to invest in the company by fixing very low par value.

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Issuing stock Epstein Engineering Inc. began operations on January 5, 2014, with the issuance of 500,000 shares of $80 par common stock. The sole stockholders of Epstein Engineering Inc. are Barb Abrams and Dr. Amber Epstein, who organized Epstein Engineering Inc. with the objective of developing a new flu vaccine. Dr. Epstein claims that the flu vaccine, which is nearing the final development stage, will protect individuals against 90% of the flu types that have been medically identified. To complete the project, Epstein Engineering Inc. needs $25,000,000 of additional funds. The local banks have been unwilling to loan the funds because of the lack of sufficient collateral and the riskiness of the business. The following is a conversation between Barb Abrams, the chief executive officer of Epstein Engineering Inc., and Amber Epstein, the leading researcher. Barb: What are we going to do The banks won't loan us any more money, and we've got to have $25 million to complete the project. We are so close! It would be a disaster to quit now. The only thing I can think of is to issue additional stock. Do you have any suggestions Amber: I guess you're right. But if the banks won't loan us any more money, how do you think we can find any investors to buy stock Barb: I've been thinking about that. What if we promise the investors that we will pay them 5% of net sales until they have received an amount equal to what they paid for the stock Amber: What happens when we pay back the $25 million Do the investors get to keep the stock If they do, it'll dilute our ownership. Barb: How about, if after we pay back the $25 million, we make them turn in their stock for $120 per share That's one and one-half times what they paid for it, plus they would have already gotten all their money back. That's a $120 profit per share for the investors. Amber: It could work. We get our money, but don't have to pay any interest, dividends, or the $80 per share until we start generating net sales. At the same time, the investors could get their money back plus $120 per share profit. Barb: We'll need current financial statements for the new investors. I'll get our accountant working on them and contact our attorney to draw up a legally binding contract for the new investors. Yes, this could work. In late 2014, the attorney and the various regulatory authorities approved the new stock offering, and 312,500 shares of common stock were privately sold to new investors at the stock's par of $80. In preparing financial statements for 2014, Barb Abrams and Dan Fisher, the controller for Epstein Engineering Inc., have the following conversation: Dan: Barb, I've got a problem. Barb: What's that, Dan Dan: Issuing common stock to raise that additional $25 million was a great idea. But… Barb: But what Dan: I've got to prepare the 2014 annual financial statements, and I am not sure how to classify the common stock. Barb: What do you mean It's common stock. Dan: I'm not so sure. I called the auditor and explained how we are contractually obligated to pay the new stockholders 5% of net sales until $80 per share is paid. Then, we may be obligated to pay them $120 per share. Barb: So… Dan: So the auditor thinks that we should classify the additional issuance of $25 million as debt, not stock! And, if we put the $25 million on the balance sheet as debt, we will violate our other loan agreements with the banks. And, if these agreements are violated, the banks may call in all our debt immediately. If they do that, we are in deep trouble. We'll probably have to file for bankruptcy. We just don't have the cash to pay off the banks. 1. Discuss the arguments for and against classifying the issuance of the $25 million of stock as debt. 2. What do you think might be a practical solution to this classification problem
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Selected stock transactions Diamondback Welding Fabrication Corporation sells and services pipe welding equipment in Illinois. The following selected accounts appear in the ledger of Diamondback Welding Fabrication Corporation on July 1, 2014, the beginning of the current fiscal year: img During the year, the corporation completed a number of transactions affecting the stockholders' equity. They are summarized as follows: a. Purchased 87,500 shares of treasury common for $8 per share. b. Sold 55,000 shares of treasury common for $11 per share. c. Issued 20,000 shares of preferred 2% stock at $84. d. Issued 400,000 shares of common stock at $13, receiving cash. e. Sold 18,000 shares of treasury common for $7.50 per share. f. Declared cash dividends of $1.60 per share on preferred stock and $0.05 per share on common stock. g. Paid the cash dividends. Instructions Journalize the entries to record the transactions. Identify each entry by letter.
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Dividends on preferred and common stock Partridge Theatre Inc. owns and operates movie theaters throughout Texas and Oklahoma. Partridge Theatre Inc. has declared the following annual dividends over a six-year period: 2009, $18,000; 2010, $40,000; 2011, $80,000; 2012, $120,000; 2013, $150,000; and 2014, $228,000. During the entire period ended December 31 of each year, the outstanding stock of the company was composed of 40,000 shares of cumulative, preferred 1% stock, $75 par, and 200,000 shares of common stock, $5 par. Instructions 1. Calculate the total dividends and the per-share dividends declared on each class of stock for each of the six years. There were no dividends in arrears on January 1, 2009. Summarize the data in tabular form, using the following column headings: img 2. Calculate the average annual dividend per share for each class of stock for the six-year period. 3. Assuming a market price per share of $125 for the preferred stock and $7.60 for the common stock, calculate the average annual percentage return on initial shareholders' investment, based on the average annual dividend per share (a) for preferred stock and (b) for common stock.
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Of two corporations organized at approximately the same time and engaged in competing businesses, one issued $80 par common stock, and the other issued $1 par common stock. Do the par designations provide any indication as to which stock is preferable as an investment Explain.
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Dividends per share Lightfoot Inc., a software development firm, has stock outstanding as follows: 40,000 shares of cumulative preferred 1% stock, $125 par, and 100,000 shares of $150 par common. During its first four years of operations, the following amounts were distributed as dividends: first year, $36,000; second year, $58,000; third year, $75,000; fourth year, $124,000. Calculate the dividends per share on each class of stock for each of the four years.
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Dividends on preferred and common stock Yosemite Bike Corp. manufactures mountain bikes and distributes them through retail outlets in California, Oregon, and Washington. Yosemite Bike Corp. has declared the following annual dividends over a six-year period ended December 31 of each year: 2009, $24,000; 2010, $10,000; 2011, $126,000; 2012, $100,000; 2013, $125,000; and 2014, $125,000. During the entire period, the outstanding stock of the company was composed of 25,000 shares of cumulative preferred 2% stock, $90 par, and 100,000 shares of common stock, $4 par. Instructions 1. Determine the total dividends and the per-share dividends declared on each class of stock for each of the six years. There were no dividends in arrears on January 1, 2009. Summarize the data in tabular form, using the following column headings: img 2. Determine the average annual dividend per share for each class of stock for the six-year period. 3. Assuming a market price of $100 for the preferred stock and $5 for the common stock, calculate the average annual percentage return on initial shareholders' investment, based on the average annual dividend per share (a) for preferred stock and (b) for common stock.
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Entries for cash dividends The declaration, record, and payment dates in connection with a cash dividend of $1,250,000 on a corporation's common stock are August 1, October 15, and November 14. Journalize the entries required on each date. The declaration, record, and payment dates in connection with a cash dividend of $480,000 on a corporation's common stock are February 1, March 18, and May 1. Journalize the entries required on each date.
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A stockbroker advises a client to "buy preferred stock. … With that type of stock, … [you] will never have to worry about losing the dividends." Is the broker right
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An owner of 2,500 shares of Simmons Company common stock receives a stock dividend of 50 shares. a. What is the effect of the stock dividend on the stockholder's proportionate interest (equity) in the corporation b. How does the total equity of 2,550 shares compare with the total equity of 2,500 shares before the stock dividend
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Selected stock transactions The following selected accounts appear in the ledger of Orion Inc. on February 1, 2014, the beginning of the current fiscal year: img During the year, the corporation completed a number of transactions affecting the stockholders' equity. They are summarized as follows: a. Issued 360,000 shares of common stock at $22, receiving cash. b. Issued 14,000 shares of preferred 1% stock at $43. c. Purchased 66,000 shares of treasury common for $18 per share. d. Sold 51,000 shares of treasury common for $21 per share. e. Sold 10,000 shares of treasury common for $16 per share. f. Declared cash dividends of $0.40 per share on preferred stock and $0.03 per share on common stock. g. Paid the cash dividends. Instructions Journalize the entries to record the transactions. Identify each entry by letter.
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Interpret stock exchange listing The following stock exchange data for Microsoft Corporation were taken from the Yahoo! Finance Web site on February 29, 2012: img a. If you owned 500 shares of Mircosoft, what amount would you receive as a quarterly dividend b. Compute the percentage decrease in price from the Previous Close to the Last Trade. Round to two decimal places. c. What is Microsoft's percentage change in market price from the 52-week low to the Previous Close on February 28, 2012 Round to one decimal place. d. If you bought 500 shares of GE at the Last Trade price on February 29, 2012, how much would it cost, and who gets the money
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Entries for issuing par stock On February 25, Madison County Rocks Inc., a marble contractor, issued for cash 120,000 shares of $36 par common stock at $40, and on June 3, it issued for cash 50,000 shares of preferred stock, $8 par at $9. a. Journalize the entries for February 25 and June 3. b. What is the total amount invested (total paid-in capital) by all stockholders as of June 3
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A corporation with both preferred stock and common stock outstanding has a substantial credit balance in its retained earnings account at the beginning of the current fiscal year. Although net income for the current year is sufficient to pay the preferred dividend of $150,000 each quarter and a common dividend of $90,000 each quarter, the board of directors declares dividends only on the preferred stock. Suggest possible reasons for passing the dividends on the common stock.
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Dividends per share Swan Creek Company has 40,000 shares of cumulative preferred 2% stock, $60 par and 50,000 shares of $50 par common stock. The following amounts were distributed as dividends: img Determine the dividends per share for preferred and common stock for each year. Zero Calories Company has 16,000 shares of cumulative preferred 1% stock, $40 par and 80,000 shares of $150 par common stock. The following amounts were distributed as dividends: img Determine the dividends per share for preferred and common stock for each year.
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Dividends per share Wallace Inc., a developer of radiology equipment, has stock outstanding as follows: 30,000 shares of cumulative preferred 2% stock, $90 par and 125,000 shares of $10 par common. During its first four years of operations, the following amounts were distributed as dividends: first year, $24,000; second year, $81,000; third year, $92,000; fourth year, $139,000. Calculate the dividends per share on each class of stock for each of the four years.
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Stock transactions for corporate expansion On December 1 of the current year, the following accounts and their balances appear in the ledger of Latte Corp., a coffee processor: img At the annual stockholders' meeting on March 31, the board of directors presented a plan for modernizing and expanding plant operations at a cost of approximately $11,000,000. The plan provided (a) that a building, valued at $3,375,000, and the land on which it is located, valued at $1,500,000, be acquired in accordance with preliminary negotiations by the issuance of 125,000 shares of common stock, (b) that 40,000 shares of the unissued preferred stock be issued through an underwriter, and (c) that the corporation borrow $4,000,000. The plan was approved by the stockholders and accomplished by the following transactions: img Instructions Journalize the entries to record the May transactions.
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Board of directors' actions Bernie Ebbers, the CEO of WorldCom, a major telecommunications company, was having personal financial troubles. Ebbers pledged a large stake of his WorldCom stock as security for some personal loans. As the price of WorldCom stock sank, Ebbers' bankers threatened to sell his stock in order to protect their loans. To avoid having his stock sold, Ebbers asked the board of directors of WorldCom to loan him nearly $400 million of corporate assets at 2.5% interest to pay off his bankers. The board agreed to lend him the money. Comment on the decision of the board of directors in this situation.
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