Financial Accounting In An Economic Context 3rd Edition Jamie Pratt - Solutions

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The balance sheet of Lamont Bros, follows. Assets Liabilities and Stockholders’ Equity Current assets $ 85,000 Current liabilities $ 52,000 Noncurrent assets 315,000 Long-term note payable 35,000 Preferred stock 50,000 Common stock 80,000 Additional paid-in capital: Preferred stock 50,000 Common
The following are possible transactions that affect stockholders’ equity. 1. A company issues common stock above par value for cash. 2. A company declares a 3-for-l stock split.
A company repurchases 10,000 shares of its own common stock in exchange for cash.
A company declares and issues a stock dividend. Assume that the fair market value of the stock is greater than the par value.
A company reissues 1,000 shares of treasury stock for $75 per share. The stock was acquired for $60 per share.
A company pays a cash dividend that had been declared fifteen days earlier.
A company generates net income of $250,000. REQUIRED: For each transaction above indicate the following:a. The accounts within the stockholders’ equity section that would be affected.b. Whether these accounts would be increased or decreased.c. The effect (increase, decrease, or no effect) of the
Deming Contractors was involved in the following events involving stock during 1997. Prepare entries, if appropriate, for each event, describe how each event affects the basic accounting equation, and explain the economic significance of par value. 1. Authorized to issue: (a) 100,000 shares of $100
On December 30, 1996, Washington and Associates purchased 500 of its 5,000 outstanding common shares at a price of $50 per share. Before the treasury stock purchase, the company’s financial statements appeared as below. Income Statement Revenues $800,000 Expenses 560,000 Net income $240,000
Twin Lakes incorporated on April 1, 1997, and was authorized to issue 100,000 shares of $5 par value common stock and 10,000 shares of $8, no par preferred stock. During the remain¬ der of 1997 the company entered into the following transactions. 1. Issued 25,000 shares of common stock in exchange
The stockholders’ equity section of Rodman Corporation as of December 31, 1996, follows. Common stock $ 80,000 Additional paid-in capital (C/S) 10,000 Retained earnings 60,000 Total stockholders’ equity $150,000 During 1997 the company entered into the following transactions. 1. Purchased
In 1987 Stuart Corporation began operations issuing 100,000 shares of $1 par value common stock for $25 per share. Since that time the company has been very profitable. The stockhold¬ ers’ equity section as of December 31, 1996, follows. Common stock Additional paid-in capital (C/S) Retained
The condensed balance sheet of Hemmer, Inc., follows. (Book value per share, stock issuances, and treasury stock purchases) Assets $400,000 Liabilities _ Stockholders’ equity Total liabilities and Total assets $400,000 stockholders’ equity $140,000 260,000 $400,000 Ten thousand shares of common
The information below was taken from the statement of stockholders’ equity of Chinook Furs. (Inferring equity transactionsfrom the 1997 1996 Preferred stock (no par) $ 700 $400 statement of Common stock ($1 par value) 1,000 900 stockholders’ equity) Additional paid-in capital: Common stock 40
The information below was taken from the statement of stockholders’ equity of Zielow Siding as of December 31, 1997. The par value of the Zielow stock is $5, and as of the beginning of 1997 the company held 400 shares in treasury. Common Additional Retained Treasury Stock Paid-In Capital Earnings
The information below was taken from the statement of stockholders’ equity of Kidd Sports as of December 31, 1997. The par value of Kidd stock is $1, and as of the beginning of 1997 the company held ,1,500 shares in treasury. Common Stock Additional Retained Paid-In Capital Earnings Treasury
The stockholders’ equity section of Mayberry Corporation, as of the end of 1997, follows. Mayberry began operations in 1993. The 5,000 shares of preferred stock have been outstand¬ ing since 1993. Preferred stock (10,000 sh. authorized, 5,000 issued, cumulative, nonparticipating, $5 dividends,
The stockholders’ equity section of Pioneer Enterprises as of December 31, 1997, follows. Common stock (10,000 shares issued @ $6 par) $ 60,000 Additional paid-in capital (C/S) 100,000 Retained earnings 60,000 Less: Treasury stock (2,000 shares @ $12) 24,000 Total stockholders’ equity $196,000
The December 31, 1994, balances in Retained Earnings and Additional Paid-In Capital for Railway Shippers Company are $135,000 and $50,000, respectively. Five thousand, $10 par value common shares are outstanding with a market value of $85 each. The company’s cash posi¬ tion at year-end is lower
Taylor Manufacturing entered into a borrowing arrangement that requires the company to maintain a Retained Earnings balance of $500,000. The company also wishes to finance inter¬ nally a major plant addition in the not-too-distant future. Accordingly, the board of directors has decided to
Lambert Corporation issued 1,000 shares of $100 par value, 8 percent, cumulative, nonpartic¬ ipating preferred stock for $100 each. The stock is preferred to assets, redeemable after five years at a prespecified price, and the preferred stockholders do not vote at the annual stock¬ holders’
The balance sheet of Alex Bros, follows. Assets $840,000 Liabilities $300,000 Preferred stock 50,000 Common stock 300,000 Additional paid-in capital (C/S) 100,000 Retained earnings 130,000 _ Less: Treasury stock 40,000 Total liabilities and Total assets $840,000 stockholders’ equity $840,000 Of
Several independent transactions are listed below. Prepare journal entries for each transaction. 1. 10,000 shares of no-par common stock are issued for $50 per share. 2. 10,000 shares of $1 par value common stock are issued for $40 per share. 3. 10,000 shares of $10 par value common stock are
Royal Company is currently considering declaring a dividend to its common shareholders, according to one of the following plans: 1. Declare a cash dividend of $15 per share. 2. Declare a 10 percent stock dividend. Royal Company would distribute 1 share of common stock for every 10 shares of common
The following information was extracted from the financial records of Maverick Corporation. Preferred stock: 15,000 shares outstanding, 10 percent, $50 par value Common stock: 50,000 shares outstanding, $15 par value Maverick began operations on January 1, 1991. The company has paid the following
The following selected financial information was extracted from the December 31, 1996, financial records of Cotter Company: Debit Credit Cash 25,000 Short-term investments (2,500 shares of Oreton Corporation) 80,000 Common stock ($10 par value, 100,000 shares authorized, 50,000 issued) 500,000
Stevenson Enterprises is considering the following items: 1. The company may declare a 10 percent stock dividend, issuing an additional share of com¬ mon stock for every 10 shares outstanding; the common stock is currently selling for $25 per share. 2. The company may issue a 2:1 stock split.
The stockholders’ equity section of Rudnicki Corp. contained the following balances as of December 31, 1996. Preferred stock (10%, $10 par value, cumulative) $1,000 Preferred stock (12%, $10 par value, noncumulative) 1,500 Common stock ($1 par value, 5,000 shares authorized, 3,500 issued and 400
The company has not declared a dividend since 1995. (Rudnicki Corp. uses a separate dividend account for each type of stock.) 5. On December 27, the company pays the dividend declared on December 2. 6. On December 29, the company declares a 2:1 stock split on the company’s common stock.
The stockholders’ equity section of Buzytown Industries balance sheet reports the following: 1997 1996 Preferred stock (9%, $100 par value) $ 200,000 $ 110,000 Common stock ($10 par value, 750,000 shares authorized, 90,000 issued and 5,000 held in treasury) 900,000 750,000 Additional paid-in
Tracey Corporation reports the following in its December 31, 1996, financial report. 1996 1995 Cumulative preferred stock (10%, $100 par value) Common stock ($10 par value, 11,000 shares $ 400,000 $ 400,000 authorized, issued, and outstanding) Additional paid-in capital: 110,000 70,000 Common stock
Aspen Industries incorporated in the state of Colorado on March 23, 1994. The company was authorized to issue 1,000,000 shares of $6 par value common stock. Since the date of incor¬ poration, Aspen Industries has entered into the following transactions that affected contributed and earned
Five shareholders together own 35 percent of the outstanding stock of Edmonds Industries. The remaining 65% is divided among several thousand stockholders. There are 400,000 shares ol Edmonds stock currently outstanding. A condensed balance sheet follows. Assets Liabilities and Stockholders’
The balance sheet of Natathon International is provided below. (Bankruptcy and protecting the interests ofthe creditors) Assets Liabilities and Stockholders* Equity Current assets $200,000 Liabilities $400,000 Fixed assets 500,000 Common stock 150,000 Additional paid-in capital 50,000 _ Retained
Egghead, Inc., is a software chain with over 120 stores nationwide. Until recently, all the com¬ mon shares of the company were held by its founders and employees. Several years ago the company filed for an initial public offering of 3.6 million common shares. The shares were priced at $15 each.
F.W. Woolworth Co, a major retailer, recently increased its quarterly dividend by 24 percent, from 33 cents to 41 cents per share. The new dividend was declared on April 10, payable June 1 to the shareholders of record on May 2. The company cited strong earnings as the reason for the increase.
Between 1957 and 1977 Westinghouse Electric Corp. used PCBs in the manufacture of elec¬ trical capacitors at its plant in Bloomington, Indiana. A federal consent-decree has ordered the company to be prepared to build an incinerator in the future to destroy the PCB-contaminated materials. The
On April 26, 1990, Quantum Chemical Corporation declared a 2 percent stock dividend. After the stock dividend, the number of shares outstanding increased to approximately 27.54 million. Assume that the stock dividend was declared and paid on the same day. REQUIRED:a. How many shares of stock were
The Wall Street Journal (September 1, 1994) reported that “Philip Morris Cos., in an aggres¬ sive move to boost its stock price, announced a $6 billion stock buy-back plan and raised its quarterly dividend nearly 20% . . . The announcement, which came after a regularly scheduled board meeting,
The following quotes are from The Wall Street Journal. RJR Nabisco Inc. said it plans to buy back as much as 8 percent of its outstanding stock for $52 to $58 dollars per share, or up to $1.2 billion. Analysts said the move probably signals that the tobacco andfood giant has decided not to acquire
Forbes (June 3, 1985) points out that companies wishing to protect their credit ratings and unwilling to issue more stock are raising capital by issuing hybrid securities. The article specif¬ ically mentions certain kinds of preferred stock issuances. REQUIRED:a. What is a hybrid security? Explain
The two quotes below were taken from The Wall Street Journal. A month after he staved offfinancial ruin by getting his bankers to lend him $65 million, Donald Trump is about to ask his casino bondholdersfor a similarfinancialfavor. Mr. Trump and his advisers have tentatively decided to propose to
Business Week (October 2, 1989) notes that Rupert Murdoch’s company, News Corp., is rapidly approaching limits on its ability to borrow, as indicated by covenants imposed by the large group of banks that have provided most of the company’s financing. An executive close to News Corp. commented
In 1991 the Big 3 automakers all slashed dividends in response to weak earnings reports: Ford by 47% (from 75 cents to 40 cents), and both General Motors and Chrysler cut their dividends in half. USA Today (April 21, 1991) noted that “some analysts were predicting a bigger Ford dividend cut [but]
On February 19, 1992, Walt Disney Co. declared a 4:1 split of its common stock, an announce¬ ment that boosted the entertainment company’s shares up $3.50 to close at a record price of $146.50. REQUIRED:a. What is a 4:1 stock split, and how did it affect the financial statements ofWalt Disney
The major roadblock to foreign companies listing their overseas stock on U.S. exchanges has long been the big difference between accounting standards in the United States and abroad. Recently, several of the major accounting policymaking boards, including the FASB, have shown an interest in
Although Japanese investments in large, high technology U.S. businesses have won increasing attention recently, a number of small U.S. manufacturing firms are attracting Japanese capital as well. MASI Limited, an investment banking firm, recently raised over $75 million in equity financing from
Review the annual report of MCI and answer the following questions.a. As of December 31, 1994, how many preferred and common shares was MCI authorized to issue? How was this established?b. MCI had a major preferred stock issuance during 1993. How many shares were issued, how much cash was
1. Why is the amount of income such an important number? Briefly explain how it is used by investors, creditors, and other interested parties.
List the basic assumptions, principles, and exceptions underlying the preparation of finan¬ cial accounting statements. What is the difference between an assumption and a principle, an assumption and an exception, and a principle and an exception?
If the financial statements of two legally separate companies are combined to produce a set of consolidated financial statements, the entity for accounting purposes is different from the entity for legal purposes. In such a case, what basic accounting assumption is being invoked? State this
A given balance sheet contains dollar amounts resulting from transactions that occurred in several different time periods. Accountants add these dollar amounts in the computation of such numbers as current assets and total assets, even though the amount of goods and ser¬ vices a dollar could
What basic assumption allows the preparation of financial reports on a timely basis? What important trade-off is introduced because this assumption is necessary? In general, which dollar amount is more reliable: net income for a month or net income for a five-year period? Which of the two net
What is a fiscal year? Why do some companies prepare financial statements on a fiscal year basis?
What basic assumption underlies the definition of an asset and the process of capitalizing and amortizing? Is this assumption realistic?
The principles of accounting measurement determine the valuation bases used on the bal¬ ance sheet. The chapter describes four valuation bases. Name them.
Differentiate an individual company’s input market from its output market. Why are these two markets relevant to financial accounting measurements? Describe each of the four val¬ uation bases in terms of the input and output markets.
Name the accounts on the balance sheet, and indicate the valuation base used for each.
Which principle of accounting measurement is the most pervasive? Define it and describe how it determines which valuation bases are used for which balance sheet accounts.
Which valuation base is considered to reflect economic value? Why is this base not used to value all assets and liabilities? Under what circumstances is it used?
In what two ways are market values limited as valuation bases for assets and liabilities?
What basic principle underlies the measure of performance? State this principle, and explain how it is applied to the methods used to account for inventories and fixed assets.
What principle triggers the matching process? That is, what principle must be applied before the matching principle can be implemented?
What criteria must be met before revenue can be recognized, and how does revenue recog¬ nition, in general, relate to the matching principle? As an example, explain how invento¬ ries are accounted for in terms of revenue recognition and the matching principle.
What basic principle of financial accounting measurement favors the use of historical costs on the balance sheet?
Consider a piece of machinery that was purchased two years ago for $3,000, can be replaced for $4,500, and can be sold for $5,000. If the machinery is kept in operation, it will produce 500 widgets per year for five years. The widgets can be sold at the end of each year at a profit of $4 each.
Critique the following statement: “The financial statements are prepared on the basis of historical costs.”
Differentiate uniformity from consistency. Which is a principle of financial accounting measurement? Why?
What is materiality? Why is it considered a departure from the principles of financial accounting measurement? Is there an economic reason that explains why it is followed? What factors are important in determining that which is material and that which is not?
What is conservatism? Why is it considered a departure from the principles of financial accounting measurement? Explain how the legal liability faced by managers and auditors might encourage conservatism in the financial statements. In general, would it be more costly to overstate or understate the
From the valuation bases used on the balance sheet, provide an example of conservatism.
Briefly characterize the accounting systems used in countries from the Continental group. What role does conservatism play in these systems, and how is that role different from that in the United States?
(Appendix 4A) Briefly explain why a dollar received today is worth more than a dollar received in the future? What two factors determine the size of the time value of money?
(Appendix 4A) In the real world interest rates are set to reflect two factors. Describe these two factors and how they are treated in the financial statements.
(Appendix 4A) What is the difference between simple and compound interest?
(Appendix 4A) Would you rather receive a 10-year ordinary annuity or a 10-year annuity due? Why? Which form of payment is more common in business? Provide several exam¬ ples.
(Appendix 4A) What role does simple interest play in the formula for present value?
(Appendix 4A) What is the difference between future and present value? Explain the con¬ cept of equivalent value.
(Appendix 4A) An individual recently won a $10 million lottery where the prize involved receiving $1 million each year for 10 years. Do you believe that the lottery winnings were actually worth $10 million? Why? How would these winnings be valued on a balance sheet? Explain.
(Appendix 4A) When computing the present value of a series of future cash inflows, how is the risk that the cash payments may not be received treated? Discuss.
(Appendix 4A) Why are fixed assets on the balance sheet not valued at present value?
(Appendix 4A) The concept of present value plays what two roles in financial accounting? Provide several examples. Why would a manager need to know how present value is used in financial accounting—from both a management perspective and a financial statement user’s perspective.
(Appendix 6A) Two basic methods are used to account for notes receivable. Compare the two methods in terms of the net values of the assets related to the note (i.e., Notes Receivable and Interest Receivable) and the amount and timing of interest revenue recog¬ nition. One of the methods uses a
The statement of cash flows is divided into three sections. Name these sections, and explain how such a division is useful.
How is cash defined with respect to the statement of cash flows? Why is this definition used?
Define cash provided (used) by operating activities, and differentiate this dollar amount from net income, which appears on the income statement.
Cash can be generated by selling inventory or services, selling long-term assets like invest¬ ments and equipment, and borrowing or issuing equity. How are these various forms of gen¬ erating cash treated on the statement of cash flows, and why are they treated differently?
Of what use is the statement of cash flows to investors, creditors, and others interested in the financial situation of a company?
How does the statement of cash flows complement the other financial statements? What kind of information does it provide that the others do not?
What is a capital transaction, and how can it be differentiated from an operating transaction?
What is financial flexibility, and how does the statement of cash flows provide information about it?
What is involved in cash management, and why is it important that a company manage its cash correctly?
What is solvency, and of what use is the statement of cash flows in evaluating the solvency position of a company?
In what ways can the statement of cash flows be used to evaluate a company’s ability to generate cash and its cash management policies?
Why do managers have incentives to manipulate the dollar amounts on the statement of cash flows? Provide several examples of how managers might window dress the statement of cash flows. What has the FASB done to mitigate this problem?
Why is manipulating information on the statement of cash flows often not in the best inter¬ est of management?
Describe the differences between the income statement and the operating section ofthe state¬ ment of cash flows. Do both operating statements provide the same kind of information? If not, how do they differ?
Provide several examples of important financing and investment transactions that would not appear on the statement of cash flows. What does the FASB require with respect to such transactions?
Explain how one could infer the existence of operating transactions that do not affect the Cash account. For example, how could a reader of a company’s financial statements be able to determine if the company made a large inventory purchase on account?
Differentiate the direct method from the indirect method in preparing the statement of cash flows. Which method is more straightforward, and why? Which method provides more disclosure?

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Financial Accounting In An Economic Context 3rd Edition Jamie Pratt - Solutions

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