Finance Take Home Problems Set

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Problem 1:

Fourteen equity transactions are included in the following table.

Required: Indicate how each transaction affects each financial statement category: increase (+), decrease (-), or remain unchanged (NE = No effect).  Hint:  If confused, first write-out the appropriate journal entry.

The first one is done for you.

Transaction

 Paid-in Capital Retained Earnings Accu-mulated OCI Treasury Stock Total Stock-holders’ Equity Total Assets

Total Liabilities
Issue common stock for cash + NE NE NE + + NE
Issue common stock for land
Issue preferred stock for cash
Incur direct stock issue costs
Purchase shares for the treasury with Cash
Resale of treasury stock above cost for Cash
Declare a cash dividend

 
Pay a previously declared cash dividend
Declare a liquidating dividend
Declare a 5% stock dividend
Declare stock split effected in the form of a dividend
Declare a 2-for-1 stock split
Record an unrealized gain on available-for-sale debt securities (Investment account)

 

Problem 2:

On January 2, 2020, Liberty Corporation was authorized to issue 100,000 shares of $5 par value common stock.  Liberty issued 20,000 shares of common stock on January 15, 2020, at $15 per share.

Required:

  1. Record the entry on June 30, 2020, for purchase of 2,200 common shares for the treasury at $18 per share.
  2. Record the entry on September 20, 2020, for the sale of 800 treasury shares at $21 per share.
  3. Record the entry on November 3, 2020, for sale of 500 treasury shares at $17 per share.
  4. Record the entry on December 15, 2020, for sale of 400 treasury shares at $13 per share.
  5. Determine the number of shares issued and the number of shares outstanding on the following dates (after transactions have been recorded): June 30, 2020; September 20, 2020; November 3, 2020; and December 15, 2020.

Problem 3:

Following are four separate dividend scenarios.

Required: Record the entry for the declaration of dividends ( not payment) for each of the four separate scenarios.

  1. On April 1, 2020 Meriter Corporation declared a cash dividend of $5.00 per share on its 32,000 outstanding shares of common stock ($1 par). The dividend is payable on April 21, 2020, to stockholders of record on April 14, 2020.
  2. Axe Co. has issued and outstanding 1,000 shares of $100 par, cumulative, 5% preferred stock and 20,000 shares of $5 par common share. Dividends are in arrears for the past year (not including the current year). On December 15, 2020, the board of directors of Axe Co. declared dividends of $25,000 to be paid to shareholders at the end of its fiscal year. Use two separate liability accounts – one for Common Stock and one for Preferred Stock.
  3. Siri Corp. holds 1,000 shares of Mobile Co. common stock, purchased at the beginning of the year for $30 per share (carrying value on February 1,2020). On February 1, 2020, Siri Corp. declared a property dividend of 450 shares of Mobile Co. common stock when the shares were selling at $28 per share. (Two journal entries required)
  4. Treck Corporation declared a common stock dividend of $45,000 on April 1, 2020. Treck Corporation announced to shareholders that 70% of the dividend amount was a return of capital.

Problem 4:

Olivia Inc. had 30,000 outstanding shares of common stock, $0.01 par, and 8,000 outstanding shares of 7%, cumulative preferred stock, $50 par throughout its initial four years of operations.  The company declared dividends of $0, $40,000, $40,000, $40,000 in years 1,2,3, and 4 respectively.

Required:  Determine how the dividends were shared between the preferred and common shareholders in year 2, 3, and 4 in total and on a per share basis.

Problem 5:

The following data are from the accounts of Mitar Corp. at December 31, 2020 (dollars ($) in thousands)

Retained earnings, beginning balance                                                                         $   900

Common stock, $____ par, 100,000 shares authorized, 50,000 shares issued             1,000

Treasury stock, 1,000 shares                                                                                              20

Paid-in capital in excess of par – Common stock                                                            400

Bonds Payable                                                                                                                             200

Net income for 2020 (not included in retained earnings above)                                     190

Dividends declared and paid during 2020 (not included in retained earnings above)      80

Required:

  1. Determine the value of the following items. Type/write your response after each item where indicated.
    1. Total retained earnings at end of 2020; ANSWER:
    2. Par value per share of common stock; ANSWER:
    3. Number of shares of common stock outstanding; ANSWER:
    4. Total stockholders’ equity; ANSWER:
    5. Average original selling price per share; ANSWER:
    6. Cost per share of treasury stock; ANSWER:
  1. Prepare the stockholders’ equity section of the balance sheet at December 31, 2020

Problem 6:

Part 1:

Charter Company earned net income of $48,000 in 2020.  The company had 10,000 shares of common stock outstanding during the year and 1,000 shares of noncumulative preferred stock, each convertible into 5 shares of common stock with $10 par value per share. The relevant tax rate is 25%.  During the year, Charter Company paid $5,000 in preferred dividends and no common stock dividends.

Required:

  1. Compute basic earnings per share.
  2. Compute diluted earnings per share.

Part 2:

Mann Company had 300,000 shares of common stock issued and outstanding at December 31, 2019.  On July 1, 2020, an additional 50,000 shares of common stock were issued for cash.  Mann also had unexercised stock options to purchase 40,000 shares of common stock at $15 per share outstanding at the beginning and end of 2020.  The average market price of Mann’s common stock was $20 during 2020.  What is the number of shares that should be used in computing DILUTED earnings per share for the year ended December 31, 2020?  SHOW YOUR WORK BELOW:

Part 3:

A company has outstanding $100,000 of 8% convertible bonds due in five years.  Each $1,000 convertible bond is convertible into 40 shares of common stock.  Net income for the year was $640,000. Common shares outstanding for the year were 250,000. The relevant tax rate is 25%

Required:

  1. Compute basic earnings per share.
  2. Compute diluted earnings per share.

Part 4:

Lee Corporation. Had 200,000 weighted-average common shares outstanding in 2020 and 5,000 weighted-average preferred shares outstanding in 2020.  Lee Corp. reported net income of $450,000 in 2020 and declared and paid $50,000 and $10,000 of common stock and preferred stock dividends, respectively.  Lee Corporation. Also reported a loss from discontinued operations of $20,000, after tax.

Required:  What variations of earnings per share (EPS) numbers are required to be reported and at what amounts?

Problem 7:

Rex Corporation is authorized to issue 300,000 shares of common stock, $1 par, of which 140,000 shares had been issued.  The corporation initiated a stock bonus plan during 2020 for designated managers.  Under the plan, options vest with the grantee if still employed by the company two years from the date of grant.  The rights are nontransferable and expire immediately after December 31, 2024.  The exercise price is $20 per share.  Assume that manager Ruth Roe receives stock options on January 1, 2020, to purchase 1,000 shares of Rex common stock.  The market price of Rex common stock on the date of grant was $24 per share.  Using an option-pricing model the fair value of the options granted to Roe is computed to be $12 per option.

Required:
a.         Compute the total amount of compensation cost for the grant made to Roe.

ANSWER:

  1. What entry should be made on the date of the grant?
  2. What entry should be made at December 31, 2020?
  3. What entry should be made to record the exercise of the options held by Roe on December 31, 2024, when the stock of Rex Corporation was trading at $35 per share?
  4. Assume INSTEAD that the common stock is trading at $18 per share on December 31, 2024. What journal entry (if any) should be recorded?

Problem 8:

Match each separate scenario to the list of possible impacts on the EPS calculation below.  ASSUME a simple capital structure unless the scenario indicates otherwise.  IGNORE the possibility of antidilutive securities and the initial impact on net income of a particular transaction.

Required:

Match each term, 1 through 12, with its impact on EPS calculation, a through e.  A scenario may have more than one impact on the EPS calculation.

Impact on EPS Calculation:

  1. Effects numerator in basic EPS calculation
  2. Effects denominator in basic EPS calculation
  3. Effects numerator in diluted EPS calculation
  4. Effects denominator in diluted EPS calculation
  5. No impact on EPS calculations
Impact Scenario:
Noncumulative, 7% preferred stock dividend with no dividend declaration
Cumulative, 7% preferred stock dividend with no dividend declaration
Issuance of stock options
Retirement of common shares
Stock dividend declared during the year
Stock dividend declared after the calendar year but before financial statements are issued
Stock split
Issuance of convertible, noncumulative preferred stock with no dividend declaration
Issuance of convertible bonds
Conditions for issuance are met for unissued contingent shares
Purchase of shares for the treasury

Problem 9:

Match each security listed with its usual classification: (1) trading securities, (2) available-for-sale securities, (3) equity method securities, (4) held-to-maturity securities, or (5) equity security measured at fair value, (6) consolidated equity securities

Abbot common stock, no-par; acquired to use up temporarily-idle-cash with intent to sell next month
30% interest in Packing Inc.; acquired to drive costs down through vertical integration
Hasten Inc.’s 10-year bonds acquired.  Hasten intends to hold to maturity, but may need to sell the bonds earlier for cash
Staufer common stock, par $5; acquired to gain a significant influence, but not control
Frazer bonds, 9%, mature at the end of 10 years; acquired with the intent and ability to hold for 10 years
Foreign Corp. common stock; a 30% interest acquired but was not able to obtain representation on the Foreign Corporation’s board of directors.  Intent is to hold stock indefinitely. (2 classifications)
Astroid common stock, par $1 acquired as an investment (with insignificant influence) that management plans to hold indefinitely (2 classifications)
70% interest in ABC Inc. to take advantage of sizable cash holdings

Problem 10:

At December 31, 2020, the investments in the portfolio of the trading securities of Kennedy Company included the following:

Atlanta Corp. bonds, 5%, $100,000 face value, purchased on Oct. 1, 2020 at par

Dallas Inc. bonds, 4%, $50,000 face value, purchased on July 1, 2020 at par

 

Required:

  1. Record the receipt of quarterly interest from the Atlanta Corp. bonds on December 31, 2020.
  2. Record the receipt of semiannual interest from the Dallas Inc. bonds on December 31, 2020.
  3. Record the entry to adjust the bonds to fair value on December 31, 2020. The fair value of the Atlanta Corp. bonds and the Dallas Inc. bonds on December 31, 2020, were $110,000 and $45,000 respectively.
  4. Record the entry to sell the Atlanta Corporation bonds on January 2, 2021, for $112,500.
  5. Record the entry to sell the Dallas Inc. bonds on January 3, 2021 for $44,500.
  6. Adjust the Fair Value Adjustment account on December 31, 2021 to reflect that no trading securities are owned (if necessary).

Assume INSTEAD that the above bonds are held as available-for-sale investments.  Indicate (with an X) below if the journal entry for each of the six transactions changes if we assume the bonds are AFS Securities, not Trading Securities.Also if the accounting for the transaction should change, write out the complete corrected journal entry.

Problem 11:

On July 1, 2020, Allen Corporation purchased 30% of the 30,000 outstanding common shares of Towne Corporation at $17 per share as a long-term investment.  On the date of purchase, the book value and the fair value of the net assets of Towne Corporation were equal. Towne Corporation reported net income of $24,000 on December 31, 2020 and paid dividends of $8,000 on December 30, 2020, to shareholders on record.  As of December 31, 2020, common shares of Towne Corporation were trading at $20 per share.

Required:

Record Allen’s entries in 2020 assuming that Allen Corporation had significant influence over Towne Corporation.

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