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(Solved) The effects of transactions on shareholder's equity The following


The effects of transactions on shareholder's equity

The following are possible transactions that effect shareholder's equity:

  1. A company issues common stock above par value for cash.
  2. A company declares a 3-for-1 stock split.
  3. A company repurchases 10,000 shares of its own common stock in exchange for cash.
  4. A company declares and issues a stock dividend. Assume that the fair market value of the stock is greater than the par value.
  5. A company reissues 1,000 shares of treasury stock for $75 per share. The stock was acquired for $60 per share.
  6. A company pays a cash dividend that had been declared fifteen days earlier.
  7. A company generates net income of $250,000.

Accounts Account Stockholders' Equity

(1.1) Common Stock Increase Increase

(1.2) Additional Paid-In Capital, C/S Increase

(2) None N/A No effect

(3)

(4.1)

(4.2)

(4.3)

(5.1) Treasury Stock Decrease Increase

(5.2)

(6)

(7) Increase

For each transaction above, indicate the following:

  1. a. The accounts within the shareholders' equity section that would be affected.
  2. b. Whether these accounts would be increased or decreased.
  3. c. The effect (increase, decrease, or no effect) of the transaction on total shareholders' equity.

Exercise 12-2 on page 532

Debt, contributed and earned capital, and the classification of preferred stock

The balance sheet of Lamont Bros. follows:

ASSETS

LIABILITIES AND SHAREHOLDERS' 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 stock

100,000

Retained earnings

113,000

Less: Treasury stock

(80,000)

Total assets

$400,000

Total liabilities and shareholders' equity

$400,000

  1. a. What portions of Lamont's assets were provided by debt, contributed capital, and earned capital? Reduce contributed capital by the cost of the treasury stock.
  2. b. Compute the company's debt/equity ratio. Compute the debt/equity ratio if the preferred stock issuance was classified as a long-term debt.
  3. c. In most states, to what dollar number of dividends would the company be limited?

A Double taxation

B .Market value

c. None

d common stock

e. none

f publicily owned corporation

g paid in capital

h Retained earnings

i none

j none

a.

Debt Liabilities

Contributed Capital = Preferred Stock + Common Stock + Additional Paid-In Capital, Preferred Stock + Additional Paid-In Capital, Common Stock - Treasury Stock

Earned Capital = Retained Earnings

What is the Porportion of each to Total Assets?

b.

b.1 Debt/Equity = Total Liabilities ÷ Stockholders' Equity

= Total Liabilities ÷ (Contributed Capital + Earned Capital)

b.2 Debt/Equity = Total Liabilities ÷ Total Stockholders' Equity

= (Total Liabilities + Contributed Preferred Capital) ÷ (Contributed Common Capital + Earned Capital - Treasury Stock)

Exercise 12-3 on pages 532-533

Authorizing and issuing preferred and common stock

Deming Contractors was involved in the following events involving stock during 2015:

  1. Authorized to issue: (a) 100,000 shares of $100 par value, 8 percent preferred stock; (b) 150,000 shares of no-par, $5 preferred stock; and (c) 250,000 shares of $5 par value, common stock.
  2. Issued 10,000 shares of $5 par value common stock for $30 per share.
  3. Issued 25,000 shares of the $100 par value preferred stock for $150 per share.
  4. Issued 50,000 shares of no-par preferred stock for $50 each.

Prepare entries, if appropriate, for each event, describe how each event affects the basic accounting equation, and explain the economic significance of par value.

Page 1 of 2 of Problem Assistant for Week ,

(1)

(2) Cash (+A)................................................................................... 300,000

Common Stock (+SE)............................................................. ?

Additional Paid-In Capital, Common Stock (+SE)....................... 250,000

Issued common stock.

(3)

Issued preferred stock.

(4)

Issued preferred stock.

 


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