Chapter 9 This Caused The Amortization The Bond Premium

Document Type
Test Prep
Book Title
Financial Accounting: A Bridge to Decision Making 6th Edition
Robert W. Ingram, Thomas L. Albright
Financing Activities 321
22. Williams and Tennessee, Inc. had 120,000, $10 par value common shares outstanding at June 30,
2007. On July 15, 2009, the Board of Directors declared and distributed a 4% stock dividend when
the common stock was selling at $40 per share.
Assume that on the date of record you owned 1,000 shares of this company. Explain
how the information above would affect (1) your personal wealth, and (2) the wealth
of the company.
Show how this event would be entered into the accounting system of the company
paying the dividend using spreadsheet format.
23. Alana Company has 20,000 shares of $100 par value, 8% cumulative preferred stock outstanding.
In addition, it has 80,000 shares of common stock outstanding. The company began operations and
issued both classes of stock on January 1, 2007. The total amount of cash dividends declared and
paid each of the first four years of the firm's life is shown below. Complete the table by indicating
the dollars of dividends that should be paid each year to each class of stock.
dividends paid
Dividends to
Dividends to
to Preferred
322 Chapter 9
24. Spiritlight Ventures has 30,000 shares of $100 par value, 7% cumulative preferred stock
outstanding. In addition, it has 100,000 shares of common stock outstanding. The company began
operations and issued both classes of stock on January 1, 2007. The total amount of cash
dividends declared and paid each of the first four years of the firm's life is shown below. Complete
the table by indicating the dollars of dividends that should be paid each year to each class of stock.
Dividends to
Dividends to
Financing Activities 323
25. On June 1, Consuelo Corporation, declared and issued a 15% stock dividend to each of its 400,000
outstanding shares of $2 par value common stock. On November 1, Consuelo declared a 4-for-1
stock split and changed its par value accordingly. The market value of Consuelo's stock was $10
per share on June 1 and $14 per share on November 1. Immediately before the stock dividend,
Consuelo's stockholders' equity appeared as follows:
Common stock (400,000 $2 par shares issued)
$ 800,000
Paid-in capital in excess of par
Contributed capital
Retained earnings
Total stockholders' equity
Prepare the stockholders' equity section after the stock dividend and stock split.
26. Ramirez Company reports the following information in its annual report for the year ending
December 31, 2007:
Notes payable (due 2009)
$ 7,000
Treasury stock
Accounts payable
Paid-In Capitalexcess over par on common
Plant, property & equipment
Bonds payable (due 2012)
Retained earnings
Preferred stock
Common stock, $3 par
Capital lease obligation (due 2009)
Capital lease obligation (due 2012)
Wages payable
What is the total amount of long-term liabilities?
What is the total amount of stockholders' equity?
How many shares of common stock are outstanding?
What was the average selling price of the common stock?
324 Chapter 9
27. Lightning Fast Computer Company recently began operations and had the following transactions
related to common stock. Enter each transaction into the accounting system using the spreadsheet
a. 16,000 shares of $2 par value common stock were sold at a price of $25 a share.
b. 1,500 shares of common stock were reacquired by the issuing firm at $45 per share.
c. A dividend of $6 per share was declared and paid.
d. a 10% stock dividend was declared and distributed when the market price per share was $40.
Financing Activities 325
28. Bobby’s Beepers, Inc. reports the following stockholders' equity section of its balance sheet
immediately before the two transactions that follow:
Stockholders' Equity
8% Preferred stock, $10 par, cumulative, nonparticipating, 50,000
shares authorized, 20,000 issued (cash dividends are two years in
$ 200,000
Paid-in Capital in Excess of par on preferred stock
Common stock, $1 par, 600,000 shares authorized, 400,000 shares
Paid-in Capital in Excess of par on common stock
Retained earnings
Translation adjustments
Total stockholders' equity
A 6% stock dividend is declared and distributed when the market price of common
stock is $20 per share.
Two months later, 1,000 shares of treasury stock are purchased by the company at
$19 each.
Answer the following questions, taking into account both the original information and the two
subsequent transactions. Show your work, if any.
What is the number of outstanding preferred shares?
What is the number of outstanding common shares?
What is the dollar amount of contributed capital?
What is the dollar amount of retained earnings?
326 Chapter 9
1. The bookkeeper at Pinewoods, Inc. is recording today's transactions. A specific transaction has
occurred, however, that is puzzling. The bookkeeper is not sure whether the event should result in
a liability being recorded or not. Help the bookkeeper by identifying the three fundamental
attributes that define a liability.
2. Francine, the bookkeeper is reviewing the accounting records at year-end and is unsure about a
couple of items. One situation seems to indicate that the firm may have a liability, but Francine is
not sure. Francine concludes that, because she cannot determine the exact person to whom the
obligation is owed, she will not recognize a liability on the financial statement.
What criteria have to be met in order for a liability to exist?
Did Francine act correctly in this situation?
3. Siddartha Company has just issued bonds having a $500,000 face value, a 10% stated rate and a
life of 30 years. The bonds were sold at the market rate, which was 8%. Would you expect that the
selling price was greater or less than the face value? Explain your thinking.
Financing Activities 327
4. Bonds having a face value of $5,000,000 are being offered for sale by Markham, Inc. The market
rate of interest for bonds of this type is 10%, but the coupon rate is 8%. The bonds have an
expected life of 20 years. How much do you think will be obtained in the sale: face value, more
than face value, or less than face value? Explain the reasons for your answer.
5. The price at which bonds sell is determined by the interaction of stated rates of interest and market
rates of interest. Describe the two types of interest rates and explain how they interact to determine
the selling prices of bonds.
6. Desert Inn Hotel Corp. sold $3 million of 8% bonds payable to finance construction of a new
facility. The bonds have a 5-year life and were sold for the price of $3,318,000 to yield buyers a
return of 7%. (a) Describe the relationship between the cash flows and interest expense related to
these bonds over their 5 year-life and discuss why it occurs. (b) Compute (and clearly label) the
difference between cash flow and interest expense for the first year the bonds are outstanding.
328 Chapter 9
7. Bonds payable have been sold to investors at less than face value. (a) What does this tell us about
the relationship between the coupon interest rate and market interest rate on the date the bonds
were sold? (b) Compare the cash outflow for interest in each year of the bond's life with the
interest expense for each year of the bond's life. Explain how you identified this relationship.
8. The following article appeared in a local newspaper:
Datapoint Corp. restated its most recent financial results to include a $15.3 million charge for the
expected settlement of two patent lawsuits. With the charge, the San Antonio, Texas, data
processing concern reported a net loss of $8.8 million, or $1.47 a share, for the fiscal year ended
Aug. 1. Datapoint had previously announced fiscal-year net income of $6.5 million.
For the fourth quarter, the charge changed results from net income of $5.1 million, or 33 cents a
share, to a loss of $10 million, or 76 cents a share.
Though no formal settlement of the lawsuits has yet been announced, Datapoint said it expects the
litigation to end soon. Datapoint was sued by Northern Telecom, Inc., a unit of Montreal-based
BCE Inc., and Compagnie Internationale de Services en Informatique S.A, for violations of the
company's computer patents.
Financing Activities 329
What accounting term or concept describes the situation reported here? Explain the
underlying issues that are the basis for this news article and explain what judgments
management has made.
Show how this item was entered into the firm's accounting system using the
spreadsheet format:
9. On April 1, 2007, Horse & Buggy Enterprises entered into a contract with Saddle Horse Company
to provide employee training and motivational seminars to Saddle Horse's employees throughout
the U.S. Horse & Buggy will provide 50 such seminars during the balance of 2007 (starting in
June 2007) and 100 seminars during calendar year 2008. Saddle Horse will pay $250,000 for the
2007 seminars and $500,000 for 2008. Does Saddle Horse have a liability to Horse & Buggy at
April 1, 2007? Discuss.
330 Chapter 9
10. Define the term "commitment." Is a leased asset a form of commitment? If so, describe how a
lease is a commitment.
11. The terms "authorized, issued, and outstanding" are commonly used to describe shares of capital
stock. Carefully distinguish among those terms as you define and describe each.
Financing Activities 331
12. At its December 15 Board of Directors meeting, the Bank of Geneva voted a 2-for-1 split of its
common stock and raised its common-share dividend 5.7%. The bank made the announcement at
its annual meeting later that month and reported that the stock split and cash dividend would be
paid March 20 to shareholders of record March 5. In a statement, a Bank of Geneva official said
the changes "reflect the bank's confidence in its improved financial position over the past few
Define and discuss a stock split, being careful to point out the effects that such an action has on an
investor in this firm. Separately, define the terms "date of record," "date of declaration," and "date
of payment" and illustrate how they are related to the cash dividend in the above facts.
332 Chapter 9
13. Stock dividends and stock splits are rather similar in that both have the effect of reducing the per-
share market value of common stock. When accounting for a stock dividend, an entry must be
made to the accounting system. When accounting for a stock split, however, no entry needs to be
made. Explain the reason for this difference.
14. Most preferred stock is cumulative. In fact, it is rare to find non-cumulative preferred stock.
Common stock never has the cumulative feature. Why is it so important with preferred stock?

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