ACCT 1A Lecture Notes - Lecture 21: No Entry, Retained Earnings, Issued Shares
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Problem 18-12 Various shareholders' equity topics; comprehensive[LO18-1, 18-4, 18-5, 18-6, 18-7, 18-8]
| Part A |
In late 2015, the Nicklaus Corporation was formed. The corporatecharter authorizes the issuance of 5,000,000 shares of common stockcarrying a $1 par value, and 1,000,000 shares of $5 par value,noncumulative, nonparticipating preferred stock. On January 2,2016, 3,000,000 shares of the common stock are issued in exchangefor cash at an average price of $15 per share. Also on January 2,all 1,000,000 shares of preferred stock are issued at $30 pershare. |
| Required: |
| 1. | Prepare journal entries to record these transactions.(If no entry is required for a particular transaction,select "No journal entry required" in the first accountfield.) |
| 2. | Prepare the shareholders' equity section of the Nicklaus balancesheet as of March 31, 2016. (Assume net income for the firstquarter 2016 was $1,500,000.) |
| Part B | |
| During 2016, the Nicklaus Corporation participatedin three treasury stock transactions: |
| a. | On June 30, 2016, the corporation reacquires 190,000 shares forthe treasury at a price of $17 per share. |
| b. | On July 31, 2016, 45,000 treasury shares are reissued at $20per share. |
| c. | On September 30, 2016, 45,000 treasury shares are reissued at$15 per share. |
| Required: |
| 1. | Prepare journal entries to record these transactions.(If no entry is required for a transaction/event, select"No journal entry required" in the first accountfield.) |
| 2. | Prepare the Nicklaus Corporation shareholders' equity section asit would appear in a balance sheet prepared at September 30, 2016.(Assume net income for the second and third quarter was$2,950,000.) |
| Part C |
On October 1, 2016, Nicklaus Corporation receives permission toreplace its $1 par value common stock (5,000,000 shares authorized,3,000,000 shares issued, and 2,900,000 shares outstanding) with anew common stock issue having a $.50 par value. Since the new parvalue is one-half the amount of the old, this represents a 2-for-1stock split. That is, the shareholders will receive two shares ofthe $.50 par stock in exchange for each share of the $1 par stockthey own. The $1 par stock will be collected and destroyed by theissuing corporation. |
On November 1, 2016, the NicklausCorporation declares a $0.13 per share cash dividend on commonstock and a $0.30 per share cash dividend on preferred stock.Payment is scheduled for December 1, 2016, to shareholders ofrecord on November 15, 2016. |
On December 2, 2016, the NicklausCorporation declares a 1% stock dividend payable on December 28,2016, to shareholders of record on December 14. At the date ofdeclaration, the common stock was selling in the open market at $15per share. The dividend will result in 58,000 (0.01 Ã 5,800,000)additional shares being issued to shareholders. |
| Required: |
| Prepare journal entries to record the declaration and payment ofthese stock and cash dividends. (If no entry is requiredfor a transaction/event, select "No journal entry required" in thefirst account field.) 1.Record the entry for a 2-for-1 stock split. 2.Record declaration of cash dividend for common shares andpreferred shares. 3.Record the entry on date of record. 4.Record payment of cash dividend for common shares andpreferred shares. 5.Record declaration of common stock dividend. 6.Record distribution of common stock dividend. | |
| 2. | Prepare the December 31, 2016, shareholders' equity section ofthe balance sheet for the Nicklaus Corporation. (Assume net incomefor the fourth quarter was $2,450,000.) |
| 3. | Prepare a statement of shareholders' equity for NicklausCorporation for 2016. (Amounts to be deducted should beindicated with a minus sign. Enter your answers inthousands.) |
| The financial statements for Armstrong and Blair companies are summarized here: |
| Armstrong Company | Blair Company | |||||
| Balance Sheet | ||||||
| Cash | $ | 27,000 | $ | 14,000 | ||
| Accounts Receivable, Net | 32,000 | 22,000 | ||||
| Inventory | 84,000 | 24,000 | ||||
| Equipment, Net | 164,000 | 284,000 | ||||
| Other Assets | 37,000 | 400,000 | ||||
| Total Assets | $ | 344,000 | $ | 744,000 | ||
| Current Liabilities | $ | 84,000 | $ | 34,000 | ||
| Note Payable (long-term) | 44,000 | 354,000 | ||||
| Total Liabilities | 128,000 | 388,000 | ||||
| Common Stock (par $10) | 142,000 | 192,000 | ||||
| Additional Paid-in Capital | 22,000 | 102,000 | ||||
| Retained Earnings | 52,000 | 62,000 | ||||
| Total Liabilities and Stockholdersâ Equity | $ | 344,000 | $ | 744,000 | ||
| Income Statement | ||||||
| Sales Revenue | $ | 426,000 | $ | 786,000 | ||
| Cost of Goods Sold | 237,000 | 397,000 | ||||
| Other Expenses | 152,000 | 307,000 | ||||
| Net Income | $ | 37,000 | $ | 82,000 | ||
| Other Data | ||||||
| Estimated value of each share at end of year | $ | 18 | $ | 27 | ||
| Selected Data from Previous Year | ||||||
| Accounts Receivable, Net | $ | 12,000 | $ | 30,000 | ||
| Inventory | 84,000 | 37,000 | ||||
| Equipment, Net | 164,000 | 284,000 | ||||
| Note Payable (long-term) | 44,000 | 62,000 | ||||
| Total Stockholdersâ Equity | 223,000 | 432,000 | ||||
| The companies are in the same line of business and are direct competitors in a large metropolitan area. Both have been in business approximately 10 years and each has had steady growth. Despite these similarities, the management of each has a different viewpoint in many respects. Blair is more conservative, and as its president said, âWe avoid what we consider to be undue risk.â Both companies use straight-line depreciation, but Blair estimates slightly shorter useful lives than Armstrong. No shares were issued in the current year and neither company is publicly held. Blair Company has an annual audit by a CPA, but Armstrong Company does not. Assume the end-of-year total assets and net equipment balances approximate the yearâs average and all sales are on account. |
| Required: |
| 1. | Calculate the following ratios. |
| TIP: To calculate EPS, use the balance in Common Stock to determine the number of shares outstanding. Common Stock equals the par value per share times the number of shares. (Use 365 days in a year. Round your intermediate calculations and your final answers to 2 decimal places.) |
| Ratio | Armstrong Company | Blair Company | |||
| Tests of Profitability: | |||||
| 1. | Net Profit Margin | 8.69 | % | 10.43 | % |
| 2. | Gross Profit Percentage | % | % | ||
| 3. | Fixed Asset Turnover | ||||
| 4. | Return on Equity | % | % | ||
| 5. | Earnings per Share | ||||
| 6. | Price/Earnings Ratio | ||||
| Tests of Liquidity: | |||||
| 7. | Receivables Turnover | ||||
| Days to Collect | |||||
| 8. | Inventory Turnover | ||||
| Days to Sell | |||||
| 9. | Current Ratio | ||||
| Tests of Solvency: | |||||
| 10. | Debt-to-Assets | ||||
Exhibit 13-1
Xavier Company reported the following income statement andbalance sheet amounts on December 31, 2017.
2017 | 2016 | |
Net sales revenue (all credit) | $1,700,000 | |
Cost of goods sold | 1,040,000 | |
Gross margin | 660,000 | |
Selling and general expenses | 420,000 | |
Interest expense | 60,000 | |
Net income | $ 180,000 | |
Current assets | $ 100,000 | $ 90,000 |
Long-term assets | 830,000 | 800,000 |
Total assets | $930,000 | $890,000 |
Current liabilities | $ 72,000 | $ 56,000 |
Long-term liabilities | 204,000 | 390,000 |
Common stockholdersâ equity | 654,000 | 444,000 |
Total liabilities and stockholders' equity | $930,000 | $890,000 |
Inventory and prepaid expenses account for $50,000 of the 2017current assets.
Average inventory for 2017 is $36,000.
Average net accounts receivable for 2017 is $62,000.
Average one-day sales are $5,900.
There are 12,000 shares of common stock outstanding at the endof 2017.
The market price per share of common stock is $27 at the end of2017.
The EPS for 2017 is equal to $1.50 per share.
72. Refer to Exhibit 13-1. What is the debt to assets ratio for2016 (rounded to two decimal places)?
a. 0.30
b. 0.50
c. 2.00
d. 2.05
e. None of the answer choices is correct.
73. Refer to Exhibit 13-1. What is the debt to assets ratio for2017 (rounded to two decimal places)?
a. 0.30
b. 0.50
c. 2.00
d. 1.00
e. None of the answer choices is correct.
74. Declan Inc. calculated its accounts receivable turnover for2017 to be 20.0. Both years prior to 2017 showed accountsreceivable turnovers to be 12.0. Based on this information, what isthe best explanation for the change?
a. The company had fewer accounts receivable in 2017than the prior two years.
b. The company had more sales in 2017 than in theprior two years.
c. The company had fewer sales in 2017 than in theprior two years.
d. The company took longer to collect their accountsreceivable in 2017 than the prior two years.
e. None of the answer choices is correct.
75.The following debt to equity ratio is for two companies inthe same industry.
Company A | Company B | |
Debt to equity ratio | 4.5 to 1 | 13.6 to 1 |
Which of the following statements is always true?
a. Company A is more profitable than Company B.
b. Company B is more profitable than Company A.
c. Company A is more highly leveraged than CompanyB.
d. Company B is more highly leveraged than CompanyA.
e. None of the answer choices is correct.
