LO 14.1You are the president of Duke Company and are leading the company through the process of incorporation. The next step is determining the type of stock the company should offer. You are relying on feedback from several key executives at Duke to help you assess the wisdom in this decision. Prepare a memo to your executive team outlining the differences between common stock and preferred stock. The memo should be complete enough to assist them with assessing differences and providing you with robust feedback.
LO 14.1You are the president of Duke Company and are leading the company through the process of incorporation. The company has determined that common stock shares will be issued, but several key executives at Duke are not quite sure they understand the preemptive right feature associated with common shares. Prepare a memo to your executive team outlining the meaning of this right.
LO 14.2Autumn Corporation was organized in August. It is authorized to issue 100,000 shares of $100 par value 7% preferred stock. It is also authorized to issue 500,000 shares of $5 par value common stock. During the year, the corporation had the following transactions:
| Aug. 22 | Issued 2,000 shares of preferred stock at $105 per share |
| Sep. 3 | Issued 80,000 shares of common stock at $13.25 per share |
| Oct. 11 | Issued 12,000 shares of common stock for land valued at $156,000. The stock is currently trading at $12 per share, and the stock’s trading value is a more accurate determinant of the land’s value. |
| Nov. 12 | Issued 5,000 shares of common stock at $15 per share |
| Dec. 5 | Issued 1,000 shares of preferred stock at $112 per share |
Journalize the transactions.
LO 14.2MacKenzie Mining Corporation is authorized to issue 50,000 shares of $500 par value 7% preferred stock. It is also authorized to issue 5,000,000 shares of $3 par value common stock. In its first year, the corporation has the following transactions:
| May 1 | Issued 3,000 shares of preferred stock for cash at $750 per share |
| May 23 | Issued 6,000 shares of common stock at $12.50 per share |
| Jun. 10 | Issued 5,000 shares of common stock for equipment without a readily determinable value. The stock is currently trading at $11 per share |
Journalize the transactions.
LO 14.2Paydirt Limestone, Incorporated was organized several years ago and was authorized to issue 3,000,000 shares of $40 par value 9% preferred stock. It is also authorized to issue 3,750,000 shares of $2 par value common stock. In its fifth year, the corporation has the following transactions:
| Mar. 1 | Purchased 2,000 shares of its own common stock at $15 per share |
| Apr. 10 | Reissued 1,000 shares of its common stock held in the treasury for $18 per share. |
| Jun. 12 | Reissued 1,000 shares of common stock at $12 per share |
Journalize the transactions.
LO 14.3Tent & Tarp Corporation is a manufacturer of outdoor camping equipment. The company was incorporated ten years ago. It is authorized to issue 50,000 shares of $10 par value 5% preferred stock. It is also authorized to issue 500,000 shares of $1 par value common stock. It has issued 5,000 common shares and none of the preferred shares. Tent & Tarp has the following transactions:
| Mar. 1 | Declares a cash dividend of $3 per share |
| Mar. 30 | Pays the cash dividend |
| Jul. 10 | Declares a 35% stock dividend when the stock is trading at $15 per share |
| Aug. 5 | Issues the stock dividend |
Journalize these transactions.
LO 14.3Tent & Tarp Corporation is a manufacturer of outdoor camping equipment. The company was incorporated ten years ago. It is authorized to issue 50,000 shares of $10 par value 5% preferred stock. It is also authorized to issue 500,000 shares of $1 par value common stock. It has issued 5,000 common shares and none of the preferred shares. Tent & Tarp has the following transactions:
| Mar. 1 | Declares a cash dividend of $5 per share |
| Mar. 30 | Pays the cash dividend |
| Jul. 10 | Declares a property dividend of one 6-person camping tent per share of stock when the price per tent is $150. |
Journalize these transactions.
LO 14.3Tent & Tarp Corporation is a manufacturer of outdoor camping equipment. The company was incorporated ten years ago. It is authorized to issue 50,000 shares of $10 par value 5% preferred stock. It is also authorized to issue 500,000 shares of $1 par value common stock. It has issued 5,000 common shares and 2,000 of the preferred shares. The corporation has never declared a dividend and the preferred shares are one years in arrears. Tent & Tarp has the following transactions:
| Mar. 1 | Declares a cash dividend of $10,000 |
| Mar. 30 | Pays the cash dividend |
| Jul. 10 | Declares a 5-for-1 stock split of its common shares |
Journalize these transactions. For the stock split, show the calculation for how many shares are outstanding after the split and the par value per share after the split
LO 14.4You are a CPA working with sole proprietors. Several of your clients are considering incorporating because they need to expand and grow. One client is curious about how her financial reports will change. She’s heard that she may need to prepare a statement of retained earnings and a statement of stockholder’s equity. She’s confused about the difference between the two and what they report. How would you explain the characteristics and functions of the two types of statements?
LO 14.4You are a consultant for several emerging, high growth technology firms that were started locally and have been a part of a business incubator in your area. These firms start out as sole proprietorships but quickly realize the need for more capital and often incorporate. One of the common questions you get is about stockholder’s equity. Explain the key ways the companies need to view retained earnings if they want to use it as a source of capital for future expansion and growth after incorporating.
LO 14.4You are the accountant for Trumpet and Trombone Manufacturing, Inc. and you oversee the preparation of financial statements for the year just ended 6/30/2020. You have the following information from the company’s general ledger and other financial reports (all balances are end-of-year except for those noted otherwise):
Prepare the company’s Statement of Retained Earnings
LO 14.5You have some funds that you would like to invest and you are relying heavily on the EPS calculation to help you make your decision. Initially you are baffled about why preferred dividends are subtracted in the numerator and why a weighted average is used in the denominator, so you do some research and reflection and come to understand why. Your friend is interested in hearing about your thought process. How would you explain to your friend why it’s important to subtract preferred dividends and to use weighted averages?
LO 14.5You are a consultant working with various companies that are considering incorporating and listing shares on a stock exchange. One of your clients asks you about the various acronyms she has been hearing in conjunction with financial analysis. Explain the following acronyms and how they measure different things but may complement each other: EPS (earnings per share), EBITDA (earnings before interest, taxes, depreciation, and amortization), and NOPAT (net operating profit after taxes).