978-1337276337 Test Bank Chapter 11 Part 6

Chapter 11

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218. [APPENDIX] Body Sports is a surf shop owned by Chris, Nicole, and Dan in partnership. On January 1, 2017, their

capital balances were as follows:

Chris, Capital $30,000

Nicole, Capital 60,000

Dan, Capital 40,000

During 2017, Chris withdrew $10,000; Nicole, $20,000; and Dan, $15,000. Income for the partnership for 2017 was

$75,000.

Required

If the partners agreed to allocate income equally, what was the ending balance in each of their capital accounts on

December 31, 2017?

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219. Stella Gregson received a windfall from one of her investments. She would like to invest $100,000 of the money in

Shoreline Industries, which is offering common stock, preferred stock, and bonds on the open market. The common stock

1. What are the advantages and disadvantages of each type of investment?

2. Recommend one type of investment over the others to Stella and justify your reason.

2. The return on the preferred stock depends on its issue price. If it is assumed that the stock is issued at par value, the

return is 8%. Since all three instruments yield the same rate of return, 8%, Stella should choose to invest in the bonds

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220. On May 1, 2017, Xiu Inc. had common stock of $345,000, additional paid-in capital of $1,298,000, and retained

earnings of $3,013,000. Xiu did not purchase or sell any common stock during the year. The company reported net

income of $556,000 and declared dividends in the amount of $78,000 during the year ended April 30, 2018.

Required

Prepare a financial statement that explains the differences between the beginning and ending balances for the accounts in

the Stockholders’ Equity category of the balance sheet.

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221. Assume that Cosmo Company’s Stockholders’ Equity category of the balance sheet appears as follows as of

December 31, 2017:

1. How many shares of stock are outstanding at year-end?

2. What is the par value per share of these shares?

3. Develop the Stockholders’ Equity category of Cosmo’s balance sheet as of December 31, 2018.

2. $10/2 = $5 per share

3. Stockholders’ Equity:

Common stock, $5 par value, 138,000 shares

issued and outstanding……………………………. $ 690,000

Additional paid-in capital………………………….… 570,000*

Retained earnings [$1,240,000 – (9,000 × $20)].. 1,060,000

Total stockholders’ equity.……………………… $2,320,000

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222. Falcon Company has 1,000 shares of $100 par value, 9% preferred stock and 10,000 shares of $10 par value common

stock outstanding. The preferred stock is cumulative and nonparticipating. Dividends were paid in 2015. Since 2015,

1. Determine the amount of the dividends to be allocated to preferred and common stockholders for each year 2017 to

2019.

2. If the preferred stock had been noncumulative, how much would have been allocated to the preferred and common

stockholders each year?

2. Year Preferred Dividends Common Dividends

2016 $ 0 $ 0

2017 9,000 1,000

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223. At December 31, 2017, Forgione Company has the following:

Common stock, $10 par, 10,000 shares authorized, 8,000 issued, 7,000 outstanding

1. Compute the amount of dividend to be received by the common and preferred stockholders in 2017 if the company

2. How many shares of treasury stock does Forgione have?

3. What are the dividends per share of common stock as a result of this distribution?

4. What are the dividends per share of preferred stock as a result of this distribution?

2. 8,000 – 7,000 = 1,000 shares of treasury stock

3. $29,000/7,000 = $4.14/share of common stock

4. $21,000/1,000 = $21/share of preferred stock (including cumulative amounts)

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224. At December 31, 2017, Marley Company has the following:

Common stock, $10 par, 10,000 shares authorized, 9,000 issued, 8,000 outstanding

Required

1. A company declares and pays a cash dividend of $25,000.

2. A company declares and issues a 10% stock dividend.

2. No change in assets

Decrease retained earnings

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225. At December 31, 2017, North Company and South Company have identical amounts of common stock and retained

earnings as follows:

Common stock, $10 par, 50,000 shares authorized, 9,000 issued, 9,000 outstanding

Retained earnings, $500,000

At December 31, 2017, North Company declares and issues a 100% stock dividend, while South Company declares and

issues a 2-for-1 stock split.

Required

Determine for each company the following amounts as of January 1, 2018:

_______ Number of shares of common stock outstanding

_______ Par value per share of the common stock

_______ Total amount reported in Common Stock account

_______ Retained earnings

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226. At December 31, 2017, Corning Company has the following:

Common stock, $10 par, 10,000 shares authorized, 9,000 issued, 8,000 outstanding

Preferred stock, $100 par, 8%, cumulative, 1,000 shares authorized, issued, and outstanding

The company did not pay any dividend during 2016 or 2015.

Required

Compute the amount of dividend to be received by the common and preferred stockholders in 2017 if the company

declared a dividend of $24,000.

227. At December 31, 2017, Corning Company has the following:

Common Stock, $10 par, 10,000 shares authorized, 9,000 issued, 8,000 outstanding

Preferred Stock, $100 par, 8%, cumulative, 1,000 shares authorized, issued, and outstanding

The company did not pay any dividend during 2016 or 2015.

Required

Compute the amount of dividend to be received by the common and preferred stockholders in 2017 if the company

declared a dividend of $60,000.

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228. Use the comparative financial statements of Penny Company for the year ended December 31, 2017 to answer the

following question(s).

Penny Company

Statement of Stockholders’ Equity

For the Year Ended December 31, 2017

in thousands, except share data

Common Stock Retained Treasury Stock

Shares Amount Earnings Shares Amount Total

Balance, January 1, 2017 57,936,988 $ 89,861 $20,037 $109,898

Exercise of stock options

including tax benefit of $4,754

945,780

7,911

Sale of common stock 12,050,000 163,873 163,873

Stock subscription notes

repayments

3,671

Conversion of convertible

debentures, net

6,798

100

Sale of common stock under

employee stock purchase plan

17,424

263

Net earnings 26,102 26,102

Unrealized holding gains, net 141 141

Translation adjustment 272 272

Balance, December 31, 2017 70,956,990 $265,679 $46,552 0 $ 0 $312,231

See notes to consolidated financial statements.

Required

Prepare a statement of retained earnings for the year ended December 31, 2017.

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232. Why is stockholders’ equity viewed as a residual amount?

233. Explain the difference between IFRS and U.S. GAAP presentation for bonds that can be converted by investors into

stock.

234. Explain the difference between authorized, issued, and outstanding shares.

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235. What is the difference between par value and market value? Which is the better indicator of the true worth of the

stock?

236. What is meant by the balance in the Retained Earnings account?

237. What is substance over form, and how does this concept relate to the presentation of preferred stock?

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238. Explain the two ways that a dividend rate on preferred stock may be stated by giving examples.

1. It may be stated as a percentage of the stock’s par value. For example, if a stock is presented on the balance sheet as

2. The dividend may be stated as a per-share amount. For example, a stock may appear on the balance sheet as $100 par,

239. Gemini Company has the following accounts in the Stockholders’ Equity category of the balance sheet:

Common stock, $10 no par, 10,000 shares authorized, 9,000 issued, 8,000 outstanding

Preferred stock, $100 par, 8%, cumulative, participating, 1,000 shares authorized, issued, and outstanding

1. Explain how the issuance of stock affects the financial statements when the stock has no par value.

2. Why would preferred stockholders want to have a cumulative feature in preferred stock?

3. When a participating feature is present in preferred stock, how does it affect the amount of dividends that preferred

stockholders can expect to receive?

2. The cumulative feature gives the stockholders some assurance that a dividend will eventually be received. If the

dividends on preferred stock are cumulative, then the dividends that are not paid are considered to be in arrears. Before a

3. If a participating feature is present in preferred stock, then it allows the preferred stockholders to receive a dividend in

240. Name two different examples of items that can be received (in addition to cash) in exchange for issuing stock.

Describe how the value of each item affects additional paid-in capital.

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242. What is treasury stock? How is it reported on the financial statements?

243. a. Explain what the dividend payout ratio is and which firms typically have a high ratio and which firms may have

the lowest.

b. Many firms operate at a dividend payout ratio of less than 50%. Why do many firms not pay a larger percentage of

income as dividends?

244. Contrast stock dividends and stock splits.

245. What is comprehensive income, and what is contained in a statement of comprehensive income?

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248. [APPENDIX] Explain the differences between a partnership and sole proprietorship. Include in your discussion

whether either is considered a separate legal entity.

249. [APPENDIX] What are the advantages of organizing a company as a corporation instead of a partnership or sole

proprietorship?

250. [APPENDIX] Which accounts are used by a sole proprietorship that are not used by a corporation?