Chapter 11 Graded Assignment

Chapter 11 Graded Assignment

Problem I: (30 pts) Indicate whether each of the following statements is true (T) or false (F).

a. / ___ / Privately held corporations tend to have more stockholders than publicly held ones.
b. / ___ / Only individuals may qualify as stockholders.
c. / ___ / Both public and private corporations are regulated by the Securities and Exchange Commission (SEC).
d. / ___ / A corporation is not required to pay yearly dividends to its stockholders.
e. / ___ / Stockholders are held personally liable for debts the corporation incurs but is unable to pay back.
f. / ___ / An S-corporation is a type of corporation which avoids double taxation and also allows stockholders to receive limited liability.
g. / ___ / A privately-held corporation automatically qualifies as an S-corporation.
h. / ___ / A corporation should list its “Treasury Stock” as an asset on its balance sheet.
i. / ___ / Preferred stock shareholders should always receive a higher dividend per share than common stock shareholders.
j. / ___ / Treasury shares are entitled to receive their share of dividends declared.
k. / ___ / Expressed as a percentage of the total outstanding shares, stock dividends result in a shareholder maintaining the same ownership percentage after the stock dividend as the shareholder held before.
l. / ___ / The amount of dividends-in-arrears on preferred stock should appear in the liability section of the balance sheet.
m. / ___ / All else being equal, earnings per share is decreased when a company purchases treasury stock.
n. / ___ / A stock dividend has no effect on the total stockholders’ equity balance.
o. / ___ / The higher a stock’s par value, the higher its market value should be.

Problem II: (18 pts) Each of the following transactions are for the same company. For each transaction, prepare the required journal entry and answer the two questions which immediately follow.

On 8/1/X4, Oberlin Corp. issued 4,000 shares of $10 par common stock for $28 per share. These are the first shares Oberlin has issued.

Date / Account Name / Debit / Credit
8/1/X4

Question #1: Using the words increase, decrease, or no effect along with the amount, indicate how this transaction affects each component of Oberlin’s accounting equation? Note: “no effect” must be indicated where appropriate. Part of the first answer is already completed as an example.

Answer:

Assets / = / Liabilities / + / Stockholders’ Equity
Increase $112,000 / No effect

Question #2: After the above transaction, how many shares are issued and outstanding as of August 1, 20X4?

Answer:

Issued shares as of 8/1/X4 =
Outstanding shares 8/1/X4 =

Continuing with the above, on 10/1/X4, Oberlin Corp. bought back 600 shares of its $10 par common stock for $30 per share. Oberlin uses the cost method to account for its treasury stock.

Date / Account Name / Debit / Credit
10/1/X4

Question #1: Using the words increase, decrease, or no effect along with the amount, indicate how this transaction affects each component of Oberlin’s accounting equation? Note: “no effect” must be indicated where appropriate.

Answer:

Assets / = / Liabilities / + / Stockholders’ Equity

Question #2: How many shares are issued and outstanding as of October 1, 20X4?

Answer:

Issued shares as of 10/1/X4 =
Outstanding shares 10/1/X4 =

Problem III: (14 pts) The stockholders’ equity section of Preston Inc.’s balance sheet at 12/31/X4 is as follows:

Common stock: / $5 par, 400,000 shares authorized, 300,000 shares issued, and 275,000 shares outstanding / $1,500,000
Paid-in capital in excess of par / 1,000,000
Total paid-in capital / 2,500,000
Retained earnings / 5,000,000
Less: Treasury stock: 25,000 shares / ( 250,000)
Total stockholders’ equity / $7,250,000

Required: Using the above information, answer the following three questions:

Question #1: Assume Preston declares a cash dividend of $.50 per share on 5/1/X4 payable on 6/15/X4. In the space below, prepare the journal entry on the declaration date and the subsequent payment date.

Date / Account Name / Debit / Credit
5/1/X4
6/15/X4

Question #2: Using the words increase, decrease, or no effect along with the amount, indicate how the 5/1/X4 transaction (dividend declaration) affects each component of Preston’s accounting equation? Note: “no effect” must be indicated where appropriate.

Assets / = / Liabilities / + / Stockholders’ Equity

Question #3: Using the words increase, decrease, or no effect along with the amount, indicate how the 6/15/X4 transaction (dividend payment) affects each component of Preston’s accounting equation? Note: “no effect” must be indicated where appropriate.

Assets / = / Liabilities / + / Stockholders’ Equity

Problem IV: (6 pts) Wolfpack Inc. has the following information available at 12/31/X4.

Common Stock: $10 par value, 200,000 shares issued and outstanding.
Preferred Stock: $75 par, 8%, 100,000 shares issued and outstanding.

Additional information: The preferred stock is cumulative and no dividends were paid in the prior year (20X3). A total dividend of $1,500,000 is declared and paid in 20X4.

Question: What portion of the $1,500,000 total dividend should be allocated to the preferred and common shares? Complete the following chart below with your answers.

Answer:

Preferred shareholders will receive a total of: / $
Common shareholders will receive a total of: / $

Problem V: (8 pts) On February 1, 20X4, Lassiter Corp. has 200,000 shares of $1 par common stock outstanding before it declares a 5% stock dividend. The market price per share is $65 on the declaration date.

How many shares will the company distribute as a stock dividend? Answer: ______

What will be the value of the shares distributed as a dividend?Answer: $______

What will be the journal entry to record the issuance of this stock dividend? Assume the stock dividend is declared and distributed on the same day.

Date / Account Name / Debit / Credit
2/1/X4

Problem VI: (8 pts) On February 1, 20X4, Kane Enterprises Inc. had 400,000 shares of $6 par common stock issued and outstanding before it declared a 2:1 stock split. The market price of Kane’s stock immediately before the split was $200 per share.

Required: The chart below summarizes Kane’s stock information immediately before the split. Complete the chart for Kane’s stock information immediately after the split.

# of Shares / Par Value per share / Total Par Value / Market price per share
Before split / 400,000 / $6 / $2,400,000 / $200
After 2:1 split

Problem VII: (8 pts)

What does the return on common stockholders’ equity (ROE) ratio measure? (1-2 sentences)

The stockholders’ equity section of Apple Inc.’s consolidated balance sheet is shown in Appendix A (page A-3) of your textbook. Its consolidated income statement is shown on page A-2.

Using its financial statements, answer the following questions:

*Note: Page references refer to the page numbers shown at the top of Apple’s annual report.

Page
Reference*
a. / A-3 / Question: How many shares of common stock were authorized at 9/27/14 and 9/28/13, respectively?
Answer:
b. / A-3 / Question: How many shares of common stock were issued and outstanding at 9/27/14 and 9/28/13, respectively?
Answer:
c. / A-3 / Question: Does Apple have any preferred stock issued and outstanding at either 9/27/14 or 9/28/13?
Answer:
d. / A-2 and A-3 / Question: What was Apple’s return on common stockholders’ equity (ROE) at 9/27/14?
Answer:

Problem VIII: (8 pts) Briefly list four common reasons why a corporation might back its own stock.