Practice Test 4 (Chaps 11-12

The management team of Wickersham Brothers Inc. is preparing its annual financial statements. The statements are complete except for the statement of cash flows. The completed comparative balance sheets and income statements are summarized. Current Year Prior Year Balance Sheet Assets Cash$104,100 $122,700 Accounts receivable 132,000 115,500 Merchandise inventory 99,000 107,250 Property and equipment 188,000 99,000 Less: Accumulated depreciation (54,320) (28,000) Total assets$468,780 $416,450 Liabilities: Accounts payable$16,500 $19,800 Salaries and Wages Payable 3,300 1,650 Notes payable, long-term 82,500 99,000 Stockholders' Equity: Common stock 152,000 132,000 Retained earnings 214,480 164,000 Total liabilities and stockholders' equity$468,780 $ 416,450 Income Statement Sales$460,000 Cost of goods sold 240,000 Depreciation expense 26,320 Other expenses 115,000 Net income$78,680 Other information from the company's records includes the following: Bought equipment for cash, $89,000. Paid $16,500 on long-term note payable. Issued new shares of common stock for $20,000 cash. Cash dividends of $28,200 were declared and paid to stockholders. Accounts Payable arose from inventory purchases on credit. Income tax expense ($19,670) and interest expense ($4,950) were paid in full at the end of both years and are included in Other Expenses. Required: Prepare the statement of cash flows using the indirect method. Include any supplemental disclosures. (Enter any deductions and cash outflows as a negative value.)

WICKERSHAM BROTHERS Inc. Statement of Cash Flows For the Year Ended December 31 Cash Flows from Operating Activities: Net income $78,680 Adjustments to reconcile net income to net cash provided by operating activities:Depreciation Expense 26,320 Changes in current assets and current liabilites: Accounts Receivable (16,500) Inventories 8,250 Accounts Payable (3,300) Salaries and Wages Payable 1,650 Net Cash Provided by Operating Activities $95,100 [sum(b5,b7,b9:b13)] Cash Flows from Investing Activities:Additions to Property, Plant, and Equipment $(89,000) Net Cash Used in Investing Activities $(89,000) [sumb16:b17} Cash Flows from Financing Activities:Payments on long-term debt $(16,500) Proceeds from issuance of Stock 20,000 Payment of cash dividends (28,200) Net Cash Used in Financing Activities $(24,700) [sum(b20:b23)] Net Decrease in Cash and Cash Equivalents (18,600) Cash and Cash Equivalents, beginning of period 122,700 Cash and Cash Equivalents, end of period $104,100 [sum(b25:b26)] Supplemental Disclosures:Cash paid for interest $4,950 Cash paid for income tax 19,670

Pettygrove Company had 1,000,000 shares of $10 par value common stock outstanding. The amount of additional paid-in capital is $5,000,000, and Retained Earnings is $1,500,000. The company issues a 2-for-1 stock split. The market price of the stock is $12. What is the balance in the Common Stock account after this issuance?

$10,000,000 Explanation Stock splits involve a decrease in the par value per share offset by an increase in the number of shares outstanding. Before the stock split, the company has 1,000,000 shares of $10 par value stock which is $10,000,000. After the stock split, the company has 2,000,000 shares of $5 par value common stock which is still $10,000,000.

A corporate charter specifies that the company may sell up to 25 million shares of stock. The company issues 17 million shares to investors and later repurchases 5.5 million shares. The number of issued shares after these transactions have been accounted for is:

17 million shares. Explanation Issued shares are the shares of stock that have been distributed by the corporation. This corporation has 17 million shares issued.

A corporate charter specifies that the company may sell up to 28 million shares of stock. The company sells 20 million shares to investors and later buys back 7.0 million shares. The number of authorized shares after these transactions are accounted for is:

28 million shares. Explanation Authorized shares are the maximum number of shares of capital stock of a corporation that can be issued, as specified in the charter. This corporation has 28 million shares authorized.

Anthem Inc. issues 200,000 shares of stock with a par value of $0.04 for $153 per share. Three years later, it repurchases these shares for $83 per share. Anthem records the repurchase in which of the following ways?

Debit Treasury Stock for $16.60 million and credit Cash for $16.60 million. Explanation The repurchase of stock is recorded with a debit to Treasury Stock and a credit to Cash for $16,600,000 (or 200,000 shares × cost of $83 per share).

On February 16, Hawthorne Co. declares a $0.48 dividend to be paid on April 5. Hawthorne has 2,140,000 shares of common stock issued and outstanding. The entry recorded by the company on February 16 includes a debit to:

Dividends and a credit to Dividends Payable for $1,027,200. Explanation The entry to record the declaration of the dividend on February 16 includes a debit to Dividends and a credit to Dividends Payable for $1,027,200 (2,140,000 shares × $0.48 per share).

A corporate charter specifies that the company may issue up to 39 million shares of stock. The company sells 31 million shares to investors and later buys back 12.5 million shares. The current number of shares of treasury stock after these transactions have been accounted for is:

12.5 million shares. Explanation Treasury Stock reports shares that were previously issued to and owned by stockholders but have been reacquired and are now held by the corporation. The current number of shares of treasury stock equals the 12.5 million that were bought back.

A company issues 1 million shares of common stock with a par value of $0.05 for $15.30 a share. The entry to record this transaction includes a debit to Cash for:

$15,300,000, a credit to Common Stock for $50,000, and a credit to Additional Paid-in Capital for $15,250,000. Explanation The entry to record the issuance of 1 million shares of common stock with a par value of $0.05 for $15.30 a share includes a debit to Cash for $15,300,000 (or 1,000,000 shares × issue price of $15.30 per share), a credit to Common Stock for $50,000 (or 1,000,000 shares × par value of $0.05 per share), and a credit to Additional Paid-in Capital for $15,250,000 [or 1,000,000 shares × (issue price of $15.30 per share − par value of $0.05 per share)].

Galaxy Industries buys back 301,000 shares of its stock from investors at $46 a share. Two years later it reissues this stock for $66 a share. The stock reissue would be recorded with a debit to Cash for:

$19.87 million, a credit to Treasury Stock for $13.85 million, and a credit to Additional Paid-in Capital for $6.02 million. Explanation The stock reissue would be recorded with a debit to Cash for $19.87 million (or 301,000 shares × $66 per share), a credit to Treasury Stock for $13.85 million (or 301,000 shares × $46 per share), and a credit to Additional Paid-in Capital for $6.02 million [or 301,000 shares × ($66 per share − $46 per share)].

Brandies, Inc. reported net income of $11.7 million. At the beginning of the year, 4.4 million shares of common stock were outstanding and at the end of the year, 4.6 million shares were outstanding. No dividends were declared. The EPS is approximately:

$2.60. Explanation EPS = (Net income − Preferred dividends) ÷ Average number of common shares outstanding= ($11,700,000 − $0) ÷ 4,500,000 shares = $2.60 per share

Ross Island Co. issues 24,000 shares of no-par value preferred stock for cash at $67.00 per share. The journal entry to record the transaction will consist of a debit to Cash for $1,608,000 and a credit (or credits) to:

Preferred Stock for $1,608,000. Explanation The journal entry to record the issuance of 24,000 shares of no-par value preferred stock for cash at $67.00 per share includes a debit to Cash and a credit to Preferred Stock for $1,608,000 (or 24,000 shares × issue price of $67.00 per share).

Columbia Clay, Inc. issues 1.01 million shares of preferred stock with a par value of $2.50 at its market price of $26.50 per share. The issuance should be recorded with a debit to Cash for:

$26.77 million, a credit to Preferred Stock for $2.53 million, and a credit to Additional Paid-in Capital for $24.24 million. Explanation The entry to record the issuance of 1.01 million shares of $2.50 par value preferred stock at its market price of $26.50 per share includes a debit to Cash for $26.77 million (or 1,010,000 shares × issue price of $26.50 per share), a credit to Preferred Stock for $2.50 million (or 1,010,000 shares × par value of $2.50 per share), and a credit to Additional Paid-in Capital for $24.24 million [or 1,010,000 shares × (issue price of $26.50 - par value of $2.50 per share].

Barbur, Inc. reported net income of $11.55 million. During the year the average number of common shares outstanding was 3.3 million. The price of a share of common stock at the end of the year was $5. There were 520,000 shares of preferred stock outstanding on average and no dividends were declared and the preferred stock is noncumulative.The EPS is approximately:

$3.50. Explanation EPS = (Net income − Preferred dividends) ÷ Average number of common shares outstanding= ($11,550,000 − $0) ÷ 3,300,000 shares = $3.50 per share

Carla Vista Enterprises buys back 318,000 shares of its stock from investors at $15.50 a share. Two years later, it reissues this stock for $15.00 a share. The stock reissue would be recorded with a debit to Cash for:

$4,770,000, a debit to Additional Paid-in Capital for $159,000, and a credit to Treasury Stock for $4,929,000. Explanation The stock reissue would be recorded with a debit to Cash for $4,770,000 (or 318,000 shares × $15.00 per share), a credit to Treasury Stock for $4,929,000 (or 318,000 shares × $15.50 per share), and a debit to Additional Paid-in Capital for $159,000 [or 318,000 shares × ($15.50 per share − $15.00 per share)].

Sylvan Heights Company issues 118,000 shares of preferred stock for $42 per share. The stock has a fixed dividend rate of 8% and a par value of $5 per share. The company records the issuance with a debit to Cash for:

$4.96 million, a credit to Preferred Stock for $590,000, and a credit to Additional Paid-in Capital for 4.37 million. Explanation The entry to record the issuance of 118,000 shares of $5 par value preferred stock for $42 per share is recorded with a debit to Cash for $4.96 million (or 118,000 shares × issue price $42 per share), a credit to Preferred Stock for $590,000 (or 118,000 shares × par value of $5 per share), and a credit to Additional Paid-in Capital for $4.37 million [or 118,000 shares × (issue price of $42 per share − par value of $5 per share)].

Seville Co. issued 800 shares of $54 par value stock for $60,000. What is the total amount of contributed capital?

$60,000 Explanation Contributed capital is the amount of capital the company received from investors' contributions, in exchange for the company's common stock and preferred stock. This corporation has $60,000 of contributed capital.

Gladstone company issues 110,000 shares of preferred stock for $42 a share. The stock has fixed annual dividend rate of 5% and a par value of $13 per share. If sufficient dividends are declared, preferred stockholders can anticipate receiving dividends of:

$71,500 each year. Explanation Preferred dividend = Number of shares outstanding × Par value × Annual dividend rate= 110,000 shares × $13 per share × 0.05 = $71,500 (if declared)

A company has net income of $34.10 million. Stockholders' equity at the beginning of the year is $80.05 million and, at the end of the year, it is $133.15 million. The only change to stockholders' equity came from net income. The return on equity ratio is approximately:

0.32. Explanation Return on equity (ROE) = (Net income − Preferred dividends) ÷ Average common stockholders' equity= ($34,100,000 − $0) ÷ [($80,050,000 + $133,150,000) ÷ 2] = 0.32 (rounded)

A corporate charter specifies that the company may sell up to 28 million shares of stock. The company sells 20 million shares to investors and later buys back 7.0 million shares. The current number of outstanding shares after these transactions have been accounted for is:

13.0 million shares. Explanation Outstanding shares are issued shares that are currently held by stockholders and not the corporation itself. This corporation has 13.0 million shares outstanding (or 20 million shares issued − 7.0 million shares of treasury stock).

A company sells 1 million shares of common stock with no par value for $15.40 a share. In recording the transaction, it would debit:

Cash and credit Common Stock for $15.40 million. Explanation Since the common stock does not have a par or stated value, the entry includes a debit to Cash and a credit to Common Stock for $15.40 million (or 1 million shares × issue price of $15.40 per share).

Mapleleaf Industries declared a $0.90 per share cash dividend. The company has 260,000 shares authorized, 77,000 shares issued, and 74,000 shares of common stock outstanding. What is the journal entry to record the dividend declaration?

Debit Dividends and credit Dividends Payable for $66,600. Explanation The journal entry to record the dividend declaration includes a debit to Dividends and credit Dividends Payable for $66,600 (or 74,000 shares outstanding × dividend rate of $0.90 per share).

Selected balance sheet information and the income statement for Pioneer Industries for the current year are presented below. Selected Balance Sheet Accounts Prior Year Current Year Accounts Receivable$24,000 $16,000 Merchandise Inventory 32,000 35,200 Prepaid Rent 1,600 0 Accounts Payable 17,600 22,400 Salaries and Wages Payable 3,200 4,800 Income Statement Sales Revenue$480,000 Expenses: Cost of Goods Sold 288,000 Depreciation Expense 32,000 Salaries Expense 48,000 Rent Expense 19,200 Insurance Expense 19,200 Interest Expense 17,600 Utilities Expense 16,000 Net Income $40,000 Required: Prepare the cash flows from operating activities section of the statement of cash flows using the indirect method. (Enter any deductions and cash outflows as a negative value.)

Pioneer Industries Cash Flows from Operating Activities Net Income $40,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Expense 32,000 Changes in current assets and current liabilities: Accounts Receivable 8,000 Inventories (3,200) Prepaid Rent 1,600 Accounts Payable 4,800 Salaries and Wages Payable 1,600 Net cash provided by (used in) operating activities $84,800

A company has outstanding 11.00 million shares of $3.00 par common stock and 1.2 million shares of $4.20 par preferred stock. The preferred stock has an 10% dividend rate. The company declares $320,000 in total dividends for the year. Which of the following is correct if the preferred stockholders only have a current dividend preference?

Preferred stockholders will receive the entire $320,000, but will receive nothing more relating to this dividend declaration. Common stockholders will receive nothing. Explanation Preferred dividend = Number of shares outstanding × Par value × Annual dividend rate= 1,200,000 shares × $4.20 per share × 0.10 = $504,000 (but only if fully declared)Preferred stockholders receive the entire $320,000 and nothing more relative to this declaration.