Finance Chapter 8 5 Treasury Stock This Type Account Because Its

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42) Team Instructions: Divide the class into teams of three or four people. Each team member

should work the following problem separately outside of class. Then give the students time in

class to compare answers with their teammates and put together a final correct copy of the

problem. Each team should turn in only one copy of the problem for grading, along with a copy

of the annual report that it used. All team members will receive the same grade.

Part A: Enter the August transactions and adjustments in the accounting equation that follows.

1. Aug. 1 Purchased 1,500 caps @ $6.40 each on account, FOB destination

2. Aug. 1 Collected $11,400 of accounts receivable

3. Aug. 1 Paid $900 for a 3-month insurance policy beginning August 1

4. Aug. 1 Sold an additional 8,000 shares of $0.50 par common stock for $20,000 cash. Tim, the

original owner, was issued 12,000 shares of $0.50 par value common stock when the company

began.

5. Aug. 1 Tim’s Tams paid $1,000 to buy back 400 of the 12,000 shares of stock issued to Tim in

January.

6. Aug. 6 Paid $6,985 of its accounts payable from July purchases

7. Aug. 31 During August, Tim’s Tams sold 1,400 caps @ $10 each on account. Tim’s uses a

FIFO perpetual inventory system. August beginning inventory is 200 caps @ $6.35 each.

8. Aug. 31 Declared and paid a $0.10 per share cash dividend to all shares outstanding.

9. Aug. 31 Made the monthly payment of $1,000 on the 6%, installment note (round interest

expense to the nearest dollar)

10. Aug. 31 Wrote off a $300 account receivable because a customer went bankrupt is unable to

pay for the sale made to him in July

11. Aug. 31 Recorded the adjusting entry for uncollectible accounts: $600 of accounts receivable

is estimated to be uncollectible

12. Aug. 31 Found that all of the office supplies have been used

13. Aug. 31 Adjusted for insurance used during the month

14. Aug. 31 Recorded one month’s straight-line depreciation on the $18,000 truck that has a 6-

year useful life and no salvage value

Part A:

Part B: Complete the financial statement.

Part C: Complete the financial statement.

Part D: Complete the financial statement.

Part E: Use the August financial statements for Tim Tam’s aboveto answer the following:

43) Analyze each of the following items. Indicate on which financial statement(s) each would

appear. SOME ITEMS MAY APPEAR ON MORE THAN ONE FINANCIAL

STATEMENT.

a. income statement

b. statement of changes in shareholders’ equity

c. balance sheet

______ 1. Net income

______ 2. Earnings per share

______ 3. Dividends

______ 4. Outstanding stock

______ 5. Retained earnings

44) Match each of the following items with the appropriate definition. Each item should be used

only once.

a. contra-equity account

b. stock split

c. shareholders’ equity

d. return on equity

e. retained earnings

f. shareholders

g. earnings per share

h. stock dividends

i. paid-in capital

______ 1. A corporation’s distribution of new shares of stock to current shareholders

______ 2. The division of the current shares’ par value by some number, to increase the number

of shares

______ 3. The amount of earnings kept in a company

______ 4. The total value of the ownership rights to a corporation

______ 5. Net income divided by average shareholders’ equity

______ 6. A company’s net income, less preferred dividends, divided by the weighted average

common shares outstanding

______ 7. Treasury stock is this type of an account because its balance is deducted to arrive at

total shareholders’ equity

______ 8. Owners’ contributions to a firm

______ 9. Owners of a corporation

45) Match each of the following items with the appropriate definition. Each item should be used

only once.

a. shareholders

b preferred stock

c. dividends

d. date of record

e. paid-in capital

f. declaration date

g. earnings per share

h. contra-equity account

i. cash dividends

______ 1. Type of corporate stock which has preference rights over common stock

______ 2. Corporate distribution of earnings to the shareholders of the corporation

______ 3. A distribution of earnings in the form of cash to the shareholders of a corporation

______ 4. Date when the board of directors of a corporation authorizes the payment of dividends

to the shareholders of the corporation

______ 5. Date used to determine which shareholders should receive dividends; anyone owning

stock on this date is entitled to receive dividends

______ 6. A company’s net income stated on a per share basis

______ 7. Treasury stock is this type of an account because its balance is deducted to arrive at

total shareholders’ equity

______ 8. Owners’ contributions to a firm

______ 9. Owners of a corporation

46) Apply each of the following items to the information needed by analysts in each of the

following situations. More than one item may be applied to some situation(s).

a. earnings per share

b. retained earnings

c. net income

d. return on equity

______ 1. Morgan Washington, Certified Financial Planner, wants to understand how well the

management of a company is using the owners’ equity invested in a company to earn profit.

______ 2. Board member Amy Jackson wants to know if authorizing a $1.00 per share dividend

is prudent.

______ 3. Investor Craig Little is comparing the profitability of several companies.

Learning Objective 8-8

1) Risks associated with owning an investment in a company’s stock include the risk that

________.

A) the company will not be successful

B) the company may not be able to buy back the stock when it matures

C) the company will not be able to make regular interest payments to shareholders

D) this particular stock becomes part of a diversified portfolio

2) Mr. Fitch purchased 100 shares of Tommy Hilfiger, Inc.’s common stock for a total of $2,000.

Mr. Fitch sells the 100 shares to Mr. Abercrombie for $2,300. This sale will cause Tommy

Hilfiger, Inc.’s ________.

A) total assets to decrease

B) total shareholders’ equity to decrease

C) net income to increase

D) This sale has no effect on Tommy Hilfiger’s accounting equation.

3) An investor can reduce the risk of investing in a particular company’s stock by ________.

A) investing in the stock of other companies in other industries

B) buying the same company’s bonds as well as its stock

C) buying additional shares of stock in the same company

D) investing in the stock of other companies in the same industry

4) Which of these can best help shareholders monitor the behavior and decisions of

management?

A) the tabloid press

B) internet blogs

C) independent audits

D) frequent unannounced, random personal visits to the company

5) Shareholders purchase stock and assume the business risks associated with the company

issuing the stock in exchange for sharing in the potential earnings and growth of the company.

6) The management of Krupt, Inc. decided to buy back 30% of the shares of stock outstanding.

What effect would this have on the company’s total assets? Why would management want to do

this? Is this ethical?

7) The management of Krupt, Inc. issued two shares of $0.50 par value common stock in

exchange for each share of all common shareholder’s $1.00 par value stock. What effect will this

have on total shareholders’ equity? What is this practice called? Is this ethical?

8) Discuss the types of business risks associated with equity financing.