11–44
EXERCISE 11-18A
The memo should contain a definition of the price-earnings ratio. It is one
of the most commonly reported measures of a company’s value. It is
of $0.01 whose stock is trading at $0.50 has a P/E ratio of 50, but this is
SOLUTIONS TO PROBLEMS – SERIES A – CHAPTER 11
PROBLEM 11-19A
Transactions
Cash Acquired from Owner(s)
$60,000
Revenues
35,000
Expenses
18,100
Distributions/Withdrawals
4,000
11–46
PROBLEM 11-19A a. (cont.)
Cascade Company
Financial Statements
Balance Sheet
As of December 31, 2016
Assets
Cash
$72,900
Total Assets
$72,900
Liabilities
$ -0-
Equity
Carl Cascade, Capital
72,900
Total Liabilities and Equity
$72,900
Statement of Cash Flows
For the Year Ended December 31, 2016
Cash Flows From Operating Activities:
Receipts from Revenues
$35,000
Paid for Expenses
(18,100)
Net Cash Flow from Operating Activities
$16,900
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities:
Proceeds from Owner
$60,000
Paid for Owner’s Withdrawals
(4,000)
Net Cash Flow from Financing Activities
56,000
Net Change in Cash
72,900
Plus: Beginning Cash Balance
-0-
Ending Cash Balance
$72,900
11–47
11–48
PROBLEM 11-19A (cont.)
b. Partnership
Cascade Company
Financial Statements
For the Year Ended December 31, 2016
Income Statement
Revenues
$35,000
Expenses
(18,100)
Net Income
$16,900
Capital Statement
Beginning Capital Balance
$ -0-
Plus: Capital Acquired from Owners
60,000
Plus: Net Income
16,900
Less: Withdrawals by Owners
(4,000)
Ending Capital Balance
$72,900
Prepared for the instructor’s use:
Analysis of Capital Accounts:
C. Cascade
B. Cascade
Total
Beginning Capital Balance
$ -0-
$ -0-
$ -0-
Investments
24,000
36,000
60,000
Net Income*
6,760
10,140
16,900
Withdrawals
(1,600)
(2,400)
(4,000)
Ending Capital Balances
$29,160
$43,740
$72,900
*C. Cascade: $16,900 x 40% = $6,760
B. Cascade: $16,900 x 60% = $10,140
11–49
PROBLEM 11-19A b. (cont.)
Cascade Company
Financial Statements
Balance Sheet
As of December 31, 2016
Assets
Cash
$72,900
Total Assets
$72,900
Liabilities
$ -0-
Equity
Carl Cascade, Capital
29,160
Beth Cascade, Capital
43,740
Total Liabilities and Equity
$72,900
Statement of Cash Flows
For the Year Ended December 31, 2016
Cash Flows From Operating Activities:
Receipts from Revenues
$35,000
Paid for Expenses
(18,100)
Net Cash Flow from Operating Activities
$16,900
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities:
Proceeds from Partners
$60,000
Paid for Partners’ Withdrawals
(4,000)
Net Cash Flow from Financing Activities
56,000
Net Change in Cash
72,900
Plus: Beginning Cash Balance
-0-
Ending Cash Balance
$72,900
11–50
11–51
PROBLEM 11-19A (cont.)
c. Corporation
Cascade, Inc.
Financial Statements
For the Year Ended December 31, 2016
Income Statement
Revenues
$35,000
Expenses
(18,100)
Net Income
$16,900
Statement of Changes in Stockholders’ Equity
Beginning Common Stock
$ -0-
Plus: Issuance of Common Stock
60,000
Ending Common Stock
$60,000
Beginning Retained Earnings
$ -0-
Plus: Net Income
16,900
Less: Dividends
(4,000)
Ending Retained Earnings
12,900
Total Stockholders’ Equity
$72,900
11–52
PROBLEM 11-19A c. (cont.)
Cascade, Inc.
Financial Statements
Balance Sheet
As of December 31, 2016
Assets
Cash
$72,900
Total Assets
$72,900
Liabilities
$ -0-
Stockholders’ Equity
Common Stock, $5 par value,
5,000 shares issued and outstanding
$25,000
Paid-In Capital in Excess of Par
35,000
Total Paid-In Capital
60,000
Retained Earnings
12,900
Total Liabilities and Stockholders’ Equity
$72,900
Statement of Cash Flows
For the Year Ended December 31, 2016
Cash Flows From Operating Activities:
Receipts from Revenues
$35,000
Paid for Expenses
(18,100)
Net Cash Flow from Operating Activities
$16,900
Cash Flows From Investing Activities
-0-
Cash Flows From Financing Activities:
Proceeds from Issue of Stock
$60,000
Paid for Dividends
(4,000)
Net Cash Flow from Financing Activities
56,000
Net Change in Cash
72,900
Plus: Beginning Cash Balance
-0-
11–53
Ending Cash Balance
$72,900
11–54
PROBLEM 11-20A
Note: The memo incorporates a schedule showing the after-tax cash
flows under each form of ownership and discusses LLCs.
Memo
To: Owners of Cagle and Associates
From: John Q CPA
11–55
PROBLEM 11-20A (cont.)
The schedule below illustrates the after-tax cash flows under each form:
Partnership
Corporation
Income before taxes
$220,000
$220,000
Tax at entity level
-0-
(55,000)
Net income
distributed to owners
220,000
165,000
Less: Individual
income tax (35%)
(77,000)
(57,750)
After-tax cash flow
$143,000
$107,250
After-tax cash flow
available to each
investor
$143,000 5 =
$28,600
$107,250 5 =
$21,450
Effective tax rate
(total tax paid to total
earnings)
($77,000 $220,000)
=35%
($112,750 $220,000)
=51.25%
The corporate form limits the potential liability of owners. Creditors of
partnerships may lay claim to the personal assets of the owners as
payment of company debts. The corporation, as a separate legal entity, is
responsible for its own debts. Owners risk only the amount of their
investment.
Limited liability companies (LLCs) offer many of the benefits associated
with corporate ownership, yet income is taxed like sole proprietorships or
partnerships. Thus, the burden of both double taxation and personal
liability for debts of the business are avoided.
PROBLEM 11-21A
a. $1,000,000 400,000 shares =$2.50 per share
b. $24,000 $5 per share = 4,800 shares
11–57
PROBLEM 11-22A
a. NC = Net Change in Cash
Brice Co.
Statements Model For 2016
Balance Sheet
Income Statement
Stmt. of
Event
Assets
=
Liab.
+
Stockholders’ Equity
Rev.
−
Exp.
=
Net Inc.
Cash Flow
P. Stock
+
C. Stock
+
Ret. Ear.
1.
400,000
=
NA
+
NA
+
400,000
+
NA
NA
−
NA
=
NA
400,000 FA
2.
160,000
=
NA
+
160,000
+
NA
+
NA
NA
−
NA
=
NA
160,000 FA
3.
(9,600)
=
NA
+
NA
+
NA
+
(9,600)
NA
−
NA
=
NA
(9,600) FA
4.*
NA
=
NA
+
NA
+
48,000
+
(48,000)
NA
−
NA
=
NA
NA
5.
memo
NA
=
NA
+
NA
+
NA
+
NA
NA
−
NA
=
NA
NA
6a.
140,000
=
NA
+
NA
+
NA
+
140,000
140,000
−
NA
=
140,000
140,000 OA
6b.
(72,000)
=
NA
+
NA
+
NA
+
(72,000)
NA
−
72,000
=
(72,000)
(72,000) OA
Totals
618,400
=
NA
+
160,000
+
448,000
+
10,400
140,000
−
72,000
=
68,000
618,400 NC
*40,000 shares x 10% = 4,000 shares; 4,000 shares x $12 = $48,000
Note: Entry No. 7, the closing entry, does not affect the horizontal statements model.
PROBLEM 11-22A (cont.)
b.
Brice Company
General Journal for 2016
Date
Account Titles
Debit
Credit
1.
Cash (40,000 x $10)
400,000
Common Stock, No Par
400,000
2.
Cash (8,000 x $20)
160,000
Preferred Stock, $20 Par
160,000
3.
Dividends
9,600
Cash
9,600
4.
Retained Earnings*
48,000
Common Stock, No Par
48,000
5.
Brice’s declaration of a 2-for-1
stock split will replace the 44,000
shares of no-par common stock
with 88,000 shares of no-par
common stock.
6a.
Cash
140,000
Service Revenue
140,000
6b.
Operating Expenses
72,000
Cash
72,000
7.
Service Revenue
140,000
Operating Expenses
72,000
Dividends
9,600
Retained Earnings
58,400
11–59
PROBLEM 11-22A b. (cont.)
Brice Co. T-Accounts for 2016
Cash
Retained Earnings
Dividends
1. 400,000
3. 9,600
4. 48,000
7. 58,400
3. 9,600
7. 9,600
2. 160,000
6b. 72,000
Bal. 10,400
Bal. -0-
6a. 140,000
Bal. 618,400
Service Revenue
Preferred Stock
7. 140,000
6a. 140,000
2. 160,000
Bal. -0-
Bal. 160,000
Operating Expenses
Common Stock
6b. 72,000
7. 72,000
1. 400,000
Bal. -0-
4. 48,000
Bal. 448,000