Accounting 291 Excersice Week Four
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Exercise and problems-Week 4
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Exercise E11-15
On October 31, the stockholders equity section of Omar Company consists of common stock $600,000 and retained earnings $900,000. Omar is considering the following two courses of action: (1) declaring a 5% stock dividend on the 60,000, $10 par value shares outstanding, or (2) effecting a 2-for-1 stock split that will reduce par value to $5 per share. The current market price is $14 per share.
Instructions
Prepare a tabular summary of the effects of the alternative actions on the components of stockholders equity and outstanding shares. Use the following column headings: Before Action, After Stock Dividend, and After Stock Split.
Before Action:
Common Stocks $600,000
Outstanding Shares 60,000
Par Value Shares $10.00
Retained Earnings $900,000
Current Market Price (per share) $14.00
5% Stock Dividend (per share) $0.70
$0.70% (per share) x 60,000 = $42,000
After Stock Dividend:
Common Stocks $642,000
Outstanding Shares $64,200
Par Value $10.00
Retained Earnings $858,000 ($900,000 – $42,000)
After Stock Split:
Common Stocks $600,000
Outstanding Shares 120,000
Par Value (per share) $5.00
Retained Earnings $900,000
Exercise E12-1
Max Weinberg is studying for an accounting test and has developed the following questions about investments.
1. What are three reasons why companies purchase investments in debt or stock securities? The three reasons that companys invest in debt or stocks securities is because they have excess cash that is not needed for operations, generate earnings from investment income, and they invest for strategic reasons.
2. Why would a corporation have excess cash that it does not need for operations? There are many companies that experience seasonal fluctuations or a result from economic cycles.
3. What is the typical investment when investing cash for short periods of time? Corporations invest in low-risk, highly liquid securities, to generate earnings from investment income, and they also invest for strategic reasons. Also a corporation may also choose to purchase a controlling interest in another company.
4. What are the typical investments when investing cash to generate earnings? The typical investments when investing cash to generate earnings are debt securities and stock securities.
5. Why would a company invest in securities that provide no current cash flows? A company invests in securities that provide no current cash flows because of so many reasons. The reason for this is because the company believes that when they invest in securities with no cash flow would have an increase in value.
6. What is the typical stock investment when investing cash for strategic reasons? The typical investments when investing for cash for strategic reasons are stocks of companies in a related industry and or an unrelated industry that the company wishes to enter.
Instructions:
Provide answers for Max.
Exercise E12-2
Foren Corporation had the following transactions pertaining to debt investments.
Jan. 1 Purchased 50 8%, $1,000 Choate Co. bonds for $50,000 cash plus brokerage fees of
$900. Interest is payable semiannually on July 1 and January 1.
July 1 Received semiannual interest on Choate Co. bonds.
July 1 Sold 30 Choate Co. bonds for $34,000 less $500 brokerage fees.
Instructions
(a) Journalize the transactions.
(b) Prepare the adjusting entry for the