5e Equity Recognition and Owner Financing Exam Questions

Module 8

Equity Recognition

and Owner Financing

Module 8: Stock Transactions, Dividends, and EPS

True/False

Topic: Stock Splits

LO: 5

1. A stock split is a monetary transaction. Consequently, a company that splits its stock must make several financial statement adjustments.

Topic: Gains (Losses) on Stock Transactions

LO: 2

2. When there is a purchase and sale of stock, or a payment of dividends, there is never any gain or loss recorded.

Topic: Stock Repurchase

LO: 2

3. Kimberly-Clark recently repurchased 6.198 million shares of common stock at a cost of $778 million. One plausible reason for this is that the company feels that its stock is overvalued at the current market price.

Topic: Stock Repurchase

LO: 2

4. When Kimberly-Clark recently repurchased its stock, this action “downsized” the company. This has the opposite financial statement effects as stock issuance.

Topic: Preferred Preference in Bankruptcy

LO: 1

5. If Home Depot loses its dominance in the retail home improvement market and eventually becomes bankrupt, its preferred shareholders carry senior positions as claimants in bankruptcy vis-à-vis common shareholders.

Topic: Paid-in Capital

LO: 1

6. Retained earnings and accumulated other comprehensive income (AOCI) can be found in the contributed capital section of stockholders’ equity.

Topic: Employee Stock Options

LO: 3

7. When stock options are granted, the contributed capital increase is equal to the number of options granted multiplied by the estimated fair-value of the stock on the grant date.

Topic: Employee Stock Options Grants (Numerical calculation required)

LO: 3

8. Mayhill Inc. reports 4,287,000 stock options granted during fiscal 2017 at a weighted-average fair-value of $23.10. The average vesting period for these options is four years. Mayhill should record a $99,029,700 expense on its income statement related to this option grant.

Topic: Sale of Treasury Stock

LO: 2

9. A re-issuance of treasury stock at a price lower than what it was repurchased for results in a loss on the income statement.

Topic: Cost vs. Market Value of Stockholders’ Equity

LO: 1

10. Stockholders’ equity is not accounted for at current fair value.

Topic: Income Statement Treatment of Dividends

LO: 1

11. A company is worse off by paying cash dividends because it must record a loss for this transaction in its income statement.

Topic: Cash Dividends

LO: 1

12. In 2017, Macy’s paid $459 million of cash dividends. These dividends reduced assets and reduced retained earnings.

Topic: Large Stock Dividends

LO: 5

13. When a “large” stock dividend is paid out, retained earnings are reduced by the par value of the stock.

Topic: Comprehensive Income

LO: 6

14. Net income is generally viewed as a more inclusive measure of performance than comprehensive income.

Topic: Earnings per Share

LO: 8

15. A company with outstanding in-the money employee stock options will report a diluted EPS that is lower than basic EPS.

Topic: Diluted EPS

LO: 8

16. Because diluted EPS include dilutive securities such as convertible securities and employee stock options, it must always be less than or equal to basic EPS.

Topic: Stock Repurchase

LO: 2

1. Why might a company repurchase its own stock?

A) It believes that the market undervalues its shares

B) To offset dilutive effects of employee stock options granted

C) To recognize an economic gain when the treasury shares are later sold for a profit

D) To improve earnings per share by reducing the denominator

E) All of the above

Topic: Par Value

LO: 1

2. Which best describes par value for a stock?

A) An arbitrary amount set by the company for each share of stock

B) The value of the stock if it is not sold for a premium or discount

C) The current market value of the stock

D) The value at which stock shares were originally issued

E) None of the above

Topic: Paid-In Capital

LO: 1

3. Which one of the following items is not a component of contributed capital?

A) Preferred stock

B) Retained earnings

C) Common stock

D) Additional paid-in capital

E) All of the above

Topic: Stock Split

LO: 5

4. In June 2017, Newcastle Inc. announced a 3-for-1 stock split. On the split date, Newcastle had about 81.9 million shares outstanding.

After the split the number of shares outstanding was:

A) 245.7 million

B) 54.6 million

C) 27.3 million

D) 163.8 million

E) None of the above

Topic: Accounting for Stock Issuance

LO: 2

5. If a company issues 2,500 shares of common stock at a market price of $48 per share, which of the following is the correct balance sheet effect?

A) Increase cash by $120,000 and increase contributed capital by $120,000

B) Increase cash by $120,000 and increase earned capital by $120,000

C) Increase stock revenues by $120,000

D) Stock issuances are not reported on the balance sheet

E) None of the above

Topic: Accounting for Stock Option Grants (Numerical calculation required)

LO: 3

6. eBay’s footnote regarding employee stock compensation details the grant of 2 million options during the year of 2015, the fair-value of which was computed as $6.84.

If the options have, on average, a four-year vesting schedule and the company faces a 35% tax rate on income, what affect would this option grant have on eBay’s accounts in 2015?

A) $1,197,000 increase to deferred tax asset, $1,197,000 decrease to tax expense

B) $4,788,000 increase to deferred tax asset, $4,788,000 decrease to tax expense

C) $1,197,000 decrease to deferred tax asset, $1,197,000 increase to tax expense

D) $4,788,000 decrease to deferred tax asset, $4,788,000 increase to tax expense

E) Indeterminable since the number of options exercised is unknown.

Topic: Accounting for Stock Option Exercises (Numerical calculation required)

LO: 3

7. During the fiscal year ended January 28, 2017, Abercrombie & Fitch reported the exercise of 2,000 shares at a weighted-average exercise price of $22.87.

If Abercrombie’s stock was trading at $11.36 on January 27, 2017 and $12.00 on December 30,2016, which of the following details an impact of this transaction on Abercrombie’s accounts?

A) A decrease of $24,000 to additional paid-in capital

B) An increase of $45,740 to cash

C) A decrease of $42,300 to additional paid-in capital

D) An increase of $22,720 to cash

E) None of the above

Topic: Accounting for Restricted Stock (Numerical calculation required)

LO: 3

8. Buffalo Co. compensates its executives with restricted stock. During 2017, the company granted 14,250 shares of $1 par value restricted common stock that will vest over ten (10) years. The market value of the shares was $9 at the time of the grant.

What is the impact of this transaction on additional paid-in capital?

A) Increase additional paid-in capital by $114,000

B) Increase additional paid-in capital by $14,250

C) Increase additional paid-in capital by $128,250

D) Increase additional paid-in capital by $40,750

E) Paid-in capital is not impacted by this transaction.

Topic: Treasury Stock Transaction (Numerical calculation required)

LO: 2

9. On its 2017 balance sheet, Walgreens Boot Alliance, Inc., reports treasury stock at cost of $4,934 million. The company has a total of 1,172,513,618 shares issued and 1,082,986,591 shares outstanding.

What average price did Walgreen pay for treasury shares?

A) $55.15

B) $53.29

C) $53.03

D) $55.11

E) None of the above

Topic: Preferred Dividends

LO: 1

10. The 2017 financial statements of Meadowlark Corporation report that the company paid dividends of $21,825,000 to its preferred shareholders before paying dividends to its common shareholders.

This practice is called:

A) Liquidation preference

B) Treasury preference

C) Dividend preference

D) Stock ownership preference

E) None of the above

Topic: Reconciling Retained Earnings (Numerical calculation required)

LO: 1

11. Thermopolis, Inc. reported retained earnings of $490,953 on December 31, 2017. During the year, Thermopolis recorded net income of $135,075 and paid dividends of $57,762. The company had no other transactions that affected retained earnings.

What must retained earnings have been on December 31, 2016?

A) $ 57,762

B) $237,250

C) $413,640

D) $478,842

E) None of the above

Topic: Small Stock Dividends (Numerical calculation required)

LO: 5

12. Riverton, Inc. declares a small stock dividend of 8.0% of the outstanding shares of common stock. Currently, Riverton, Inc. has 1,500,000 shares of $1 par value common stock outstanding. The current market price of the stock is $121.28 per share.

Riverton Partners will record a stock dividend in the amount of:

A) $ 1,300,000

B) $98,540,000

C) $13,613,600

D) $14,553,600

E) None of the above

Topic: Large Stock Dividend (Numerical calculation required)

LO: 5

13. DuBois, Inc. announces a large stock dividend of 65% of the 4.96 million outstanding shares of common stock. The current price per share is $13.85. Par value of the stock is $0.01 per share.

What effect does this dividend have on retained earnings?

A) $ 49,600 decrease

B) $ 32,240 decrease

C) $44,652,000 decrease

D) $11,591,288 decrease

E) None of the above

Topic: Comprehensive Income

LO: 6

14. Which of the following should not be included in accumulated other comprehensive income?

A) Minimum pension liability

B) Currency translation adjustment

C) Gains and losses on derivatives and hedges

D) Unrealized gains and losses on trading securities

E) None of the above

Topic: Accumulated Other Comprehensive Income (Numerical calculation required)

LO: 6

15. Teton, Inc., reported a net gain of $41,400 on its foreign assets due to the weakening of the U.S. dollar in 2017. In the same year, the company disclosed gains of $958,800 on its derivatives and hedges and a $112,800 unrealized gain on its trading securities. The company also reported a $556,200 loss on the sale of some equipment.

Which of the following best describes the impact of these transactions on Teton, Inc.’s accounts?

A) $1,113,000 increase to net income.

B) $1,000,200 increase to accumulated other comprehensive income.

C) $1,000,200 increase to net income.

D) $ 154,200 increase to accumulated other comprehensive income.

E) None of the above

Topic: Common Stock Dividend (Numerical calculation required)

LO: 4

16. Ennis, Inc. has 35,000 common shares issued at a $2.25 par value of which 22,000 are outstanding. If Ennis has no other outstanding stock, what size dividend must be paid such that each share receives $3.20?

A) $96,500

B) $52,500

C) $70,400

D) $44,000

E) None of the above

Topic: Common Stock Dividend With Cumulative Preferred (Numerical calculation required)

LO: 4

17. As of 2017, Buttle Corp. has $10 par, 2% preferred stock, 6,500 shares outstanding, and $1 par common stock with 32,000 shares outstanding. The preferred stock is cumulative and preferred stockholders last received a dividend in 2014.

If the company wants to distribute $4 per share to the common stockholders in 2017, what is the total amount of dividends that the company must pay at the end of the current year?

A) $129,300

B) $128,000

C) $ 3,900

D) $131,900

E) None of the above

Topic: Noncontrolling Interest

LO: 1

18. Which of the following is not a correct statement about noncontrolling interest?

A) Noncontrolling interest is reported as a component of stockholders’ equity on the balance sheet.

B) Noncontrolling interest represents their claim to their proportionate share of the net assets and net income of the subsidiary in which they own stock.

C) Noncontrolling interest is a residual claim, like that of any other shareholder.

D) Noncontrolling interests are entitled to preference in dividends and payouts in liquidation.

Topic: Convertible Securities

LO: 7

19. Convertible preferred stock conveys what additional benefit over common stock?

A) Convertible preferred stock has a fixed dividend yield exceeding the return for common stock.

B) Unpaid dividends on convertible preferred stock are never paid before common stock dividends.

C) Convertible preferred stock has a senior claimant position in bankruptcy.

D) Convertible stock can be converted into the company’s debt security.

E) All of the above

Topic: Computing Basic and Diluted EPS (Numerical calculations required)

LO: 8

20. Oracle Corporation reported the following earnings per share information in its 2016 Form 10-K. The company has only one class of stock outstanding. ($ in millions)

Basic and diluted earnings per share were, respectively:

A) $0.30 and $0.30

B) $0.77 and $0.74

C) $1.08 and $1.06

D) $2.11 and $2.07

E) None of the above

Topic: Diluted Earnings per Share (Numerical calculations required)

LO: 8

21. Oil Services Corp. reports the following EPS data in its 2017 annual report (in million except per share data).

How many weighted average shares were dilutive in 2017?

A) 1,172 million

B) 10 million

C) 14 million

D) 1,186 million

E) None of the above

Topic: Basic Earnings per Share (Numerical calculations required)

LO: 8

22. Cisco Systems Inc. reported the following in its income statement for the year ended July 30, 2016: Basic earnings per share of $2.13 and diluted earnings per share of $2.11. There were 5,053 million weighted average basic shares were outstanding during the year.

What approximate net income, did the company report for 2016?

A) $ 7,624 million

B) $10,662 million

C) $10,763 million

D) $ 4,310 million

E) None of the above

Topic: Earnings per Share Definition and Computations

LO: 8

23. All of the following are potentially dilutive in computing diluted EPS except:

A) Employee stock options

B) Convertible preferred stock

C) Convertible bonds

D) Warrants

E) All of the above are dilutive securities

Topic: Financial Statements Effects of Treasury Stock

LO: 1, 2

1. On June 5, 2017, Lewiston, a tile manufacturer, repurchased 2,000 of its $0.75 par value common shares for $22.50 cash per share. On October 5, 2017, Lewiston reissues the 2,000 common shares for $40.50 cash per share.

a. What is the change in the treasury stock account on June 5, 2017?

b. On October 5, does Lewiston recognize a profit from the $18 per share increase in the stock’s market value?

c. What is the change in the treasury stock account as a result of the October 5, 2017 transaction?

d. What is the change in the additional paid-in capital account as a result of the October 5, 2017 transaction?

Topic: Understanding Shares Issued and Average Price

LO: 1, 2

2. Following is the stockholders’ equity section of the 2017 balance sheet for Waitsburg Company:

a. Compute the number of shares issued at May 31, 2017.

b. At what average issue price were the shares issued?

c. At what average cost were the treasury shares purchased?

Topic: Analyzing Stock Splits

LO: 5

3. On September 20, 2017, Umatilla Company announced a 4 for 1 stock split. After the split, the company will have about 24.6 million shares outstanding. Shares traded for about $375 a share the day the split was announced.

a. What is a 4 for 1 stock split?

b. Why do companies like Umatilla Company split their stock?

c. How many shares were outstanding when the stock split was announced?

d. How will the equity section of the balance sheet be affected by this stock split?

Topic: Analyzing Impact of Stock Split

LO: 5

4. On April 15, 2017, Maryhill, Inc. has 275,000 shares of $9 par value common stock issued and outstanding. The balance sheet reports account balances as follows (excerpts only):

Common stock: $2,475,000

Paid in capital in excess of par value: 7,800,000

On June 2, the company splits its stock 3-for-2.

a. How many shares of common stock are issued and outstanding immediately after the stock split? What is the par value of common stock after the split?

b. What is the balance of common stock account immediately after the stock split?

c. What is the balance in paid-in capital (in excess of par value) after the stock split?

Topic: Stock Splits

LO: 5

5. On September 1, 2017, Hood River, Inc. announced a 3-for-2 stock split, in the form of a dividend, to be distributed on September 30, 2017, to stockholders of record on September 12, 2017.

a. What is a 3-for-2 stock split?

b. How will Hood River , Inc. balance sheet be affected by this split?

Topic: Computing Contributed Capital Amounts

LO: 1, 2

6. Following is the stockholders’ equity section of a recent balance sheet for Portlands, Inc.:

a. Verify the $302,205 balance for the common stock account.

b. What was the average issue price for the common shares issued?

c. How many common shares are outstanding as of year-end?

d. What was the average cost at which the treasury stock was purchased?

Topic: Employee Stock Option Grants

LO: 3

7. In their 2015 10-K report, eBay reported a stock option grant of 2 million options during the year, the per share fair-value of which was computed as $6.84.

If the options have, on average, a four-year vesting period. what expense did the company report in 2015 related to this grant?

Topic: Employee Stock Option Exercise

LO: 3

8. During fiscal 2016, Abercrombie & Fitch reported the exercise of 2,000 shares at a weighted-average exercise price of $22.87.

a. How much cash did Abercrombie & Fitch receive from this exercise?

b. What was the impact to shareholders’ equity as a result of this exercise?

Topic: Restricted Stock Plan

LO: 3

9. Salem, Inc. implemented a restricted stock plan in early 2017. The company transferred 420,000, $1 par shares to the restricted stock plan, that day the stock was trading at $24.83. The restricted shares vest over four years.

Use the financial statement effects template below to record the transfer of the shares in 2017 and the vesting in 2018.

Topic: Understanding Stockholders’ Equity Accounts

LO: 1, 2, 3, 4

10. Kimberly Clark’s 2017 Statement of Cash Flows included the following excerpt:

Which of Kimberly Clark’s financing activities listed above, affected equity accounts? For each item involving equity, specify which equity accounts were affected and the direction of the effect.

Topic: Accounting for Stockholders’ Equity Transactions

LO: 1, 2

11. Eugene Inc.’s statement of stockholders’ equity on December 31, 2016 is as follows:

The following transactions occurred during 2017:

Feb 3 Issued 2,500 shares of preferred stock for $75 per share.

Apr 25 Issued 50,000 shares of common stock for $15 per share.

Jun 15 Repurchased 15,000 shares of common stock at $10.50 per share.

Oct 24 Sold 7,500 shares of treasury stock bought on June 15 for $24 per share.

Use the financial statement effects template, below, to record these transactions.

Topic: Analyzing Equity Transactions

LO: 2, 3, 4

12. Chemult Company reported the following transactions on a recent statement of stockholders’ equity

a. Declare and pay cash dividends of $5.95 per common share. There are 205,000 shares issued and outstanding.

b. Repurchase 3,455 shares at $49 per share.

c. Issue 202 shares of common stock under employee stock option plan. Exercise price is $49 per share and market price is $67.20 per share.

Assume that the par value of common stock is $1 per share. Use the financial statement effects template, below to record these transactions.

Topic: Computing Retained Earnings

LO: 1, 4, 5

13. The stockholders’ equity of Crater, Inc. at December 31, 2016, appears below:

During 2017, the following transactions occurred:

May 10: Declared a 10% common stock dividend when market value was $50 per share

August 31: Issued the stock dividend declared on June 15.

December 10: Declared a cash dividend of $3.50 per share to be paid in January 2018.

December 31: Recognized net income of $ 1,630,500.

Compute the year-end balance of the retained earnings for 2017.

Topic: Cash Dividends With Cumulative Preferred

LO: 4, 5

14. At the start of 2013, Shasta Corporation has 15,000 outstanding shares of preferred stock, each with a $60 par value and a cumulative 7% annual dividend. The company also has 28,000 shares of common stock outstanding with par value of $37.50 per share. At the beginning of 2017, the company has a 3-for-2 common stock split. The company pays total cash dividends as follows.

2013 $0

2014 $ 49,500

2015 $178,500

2016 $ 123,000

2017 $ 94,500

Calculate the dividends paid to each category of stockholders, in total and per share.

Topic: Cash Dividends with Cumulative Preferred Stock

LO: 4

15. Redding Exports has the following stock outstanding:

25,000 shares of $120 par value, 6% cumulative preferred stock

150,000 shares of $3,075 par value, common stock

The company declares and pays the following dividends for the past four years:

2014 $ 97,500

2015 $618,000

2016 $454,500

2017 No dividends are paid

Compute the total cash dividends paid to each class of stock in 2014 through 2017.

Topic: Analyzing Comprehensive Income

LO: 6

16. Orland Restaurants Inc. reports the following comprehensive income in its 2016 consolidated financial statements ($ in millions):

a. In general, why do net earnings and comprehensive income differ?

b. How do foreign currency adjustments affect comprehensive income?

c. During the year did the U.S. dollar strengthen or weaken vis-à-vis the foreign currencies that Orland uses?

Topic: Computing Retained Earnings

LO: 1, 4, 6

17. The stockholders’ equity accounts of Petaluma, Inc. include the following at May 31, 2016:

During 2017, the following transactions occurred:

Feb 15 Declared and issued cash dividends of $4.50 per share

May 31 Recorded an unrealized loss on foreign currency translation of $12,400.

May 31 Recorded net income of $385,000

Calculate the year-ending balance of retained earnings for May 31, 2017.

Topic: Analyzing Convertible Debt

LO: 7

18. Miller Corp. reported the following in its 2016 10K report:

In September 2012, the Company sold $330,000,000 of its 4.75% variable interest senior convertible debentures due 2032 in a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933…The debentures are convertible into the Company’s common stock at the holder’s option. The conversion price at December 31, 2016 was $32.00 per share (31.25 shares of common stock per $1,000 principal amount of the note), is subject to adjustment for various events, including the issuance of stock dividends.

The company’s December 31, 2016, balance sheet reports the following:

If all of the convertible debentures were converted to common stock on January 1, 2017, what would the common stock and additional paid-in capital account totals be?

Topic: Computing EPS and Explaining Anti-Dilutive Stock Options (Numerical calculations required)

LO: 8

19. Oracle reported the following earnings per share information in its 2016 Form 10-K (in millions except per share data). The company has only one class of stock outstanding. Compute basic and diluted earnings per share.

Topic: Diluted Earnings per Share (Numerical calculations required)

LO: 8

20. Oil Services Corp. reports the following EPS data in its 2017 annual report (in millions except per share data).

a. Recompute basic earnings per share.

b. How many weighted average shares were dilutive in 2017?

Topic: Basic Earnings per Share (Numerical calculations required)

LO: 8

21. Cisco Systems Inc. reported the following in its income statement for the year ended July 30, 2016: Net income $10,739 million, basic earnings per share of $2.13 and diluted earnings per share of $2.11. How many additional dilutive shares did Cisco include in the diluted EPS for the year?

Topic: Earnings per Share Definition and Computations (Numerical calculations required)

LO: 8

22. Sketchers U.S.A., Inc. reports the following in its 2016 Form 10-K (in thousands). Use the information to calculate basic and diluted earnings per share (EPS) numbers from continuing operations.

Topic: Accounting for Stock-Based Compensation

LO: 3

1. The following is a summary of the stock option activity at NetFlix during 2016.

Required:

a. How many options did NetFlix grant to employees during the year? At what price may NetFlix employees buy shares in the future for options granted during 2016?

b. How many options did employees exercise during the year?

c. When employees exercised their options during 2016, how much cash did NetFlix receive?

d. Assume that NetFlix granted options “at the money” during 2016. How much profit did employees make at exercise?

Topic: Stockholders’ Equity Computations

LO: 1, 2

2. Below are excerpts from the 2016 Alleghany Corporation and Subsidiaries’ balance sheet and statement of stockholders’ equity:

Required:

a. How many common shares are issued at year-end 2016?

b. What is the par value of Alleghany’s common stock?

c. At what average price was the common stock issued as of 2016?

d. Explain the treasury stock transaction of $68,320 thousand during the year.

e. How much was net income in 2016? How much was comprehensive income? Explain the difference between the two.

Topic: Analyzing Contributed Capital

LO: 1

3 Following is the stockholders’ equity section of the Spirit Airlines, Inc. 2016 balance sheet ($ in thousands):

Required:

a. Spirit has 240 million shares of common stock authorized, but only 73,549,872 shares issued. Why is there a difference between these two numbers?

b. Verify that Spirit’s common stock balance is $7 thousand.

c. How many common shares did Spirit have outstanding at the end of the year?

d. Calculate the average cost at which Spirit repurchased its common stock.

Topic: Understanding Contributed and Earned Capital

LO: 1, 2, 6

4. Following is the stockholders’ equity section of the 2016 Kellogg Company balance sheet. ($ in millions, except par value):

Required:

a. How many common shares are issued at year end 2016?

b. At what average price was the common stock issued as of 2016?

c. How many common shares are outstanding at year end 2016?

d. How many shares of treasury stock (net) did Kellogg acquire or retire or sell during 2016?

e. What average price did Kellogg acquire its treasury stock as of year-end 2016?

f. In general, what is accumulated other comprehensive income? List three items that affect this account.

g. What is noncontrolling interest?

Topic: Financial Statement Effects of Stock Transactions

LO: 1, 4, 5

5. The following information is from 2016 statement of stockholders’ equity for Dynegy, Inc.

Dynegy has 420 million shares of common stock authorized. Assume the following transactions occurred during the 2017.

Mar 10 Declare and pay a cash dividend of $2.00 per share.

May 6 Split stock 2-for-1 reducing the par value of the stock to $0.005

Aug 25 Issue a large stock dividend of 80% of the outstanding shares of common stock

Required:

a. Use the financial statement effects template below to record the three transactions.

b. How did the cash dividend affect the company’s profitability for the year?

c. What effects does the stock split have on Dynegy’s financial statements?

d. What effects does the stock split have on an individual stockholder?

Topic: Interpreting Accumulated Other Comprehensive Income (Loss) Disclosures

LO: 6

6. Verizon Communications Inc. reported the following in its 2016 statement of shareholders’ equity.

Required:

a. In general, what is “Accumulated other comprehensive income (loss)”?

b. Explain each of the following components of Verizon’s accumulated other comprehensive income account:

• Foreign currency translation adjustment

• Unrealized losses on marketable securities

• Defined benefit pension and postretirement plans

c. If the U.S. $ weakens in 2017 vis-à-vis the foreign currency of Verizon’s foreign subsidiaries, what will be the effect on the foreign currency translation adjustment?

Topic: Stock Dividend

LO: 5

7. Josette Dupress, a sagacious investor, prefers the stock of a company with a higher ratio of retained earnings to contributed capital (common stock plus paid-in capital). The ratio should preferably be above 2.0, in Josette ’s opinion. She finds Collins Corporation acceptable because the equity breakdown at year-end is as follows:

Common stock, par $1 $51,900

Additional paid-in capital $99,750

Retained Earnings $336,000

The financial statement footnotes of Collins Corp. reveal that the company paid a stock dividend on the last day of the fiscal year. Specifically, the firm declared a stock dividend equivalent to 25% of the (then) outstanding shares and recorded the transaction as a large stock dividend. Assume that the stock price was $12 per share on the date the stock dividend was recorded.

Required:

a. Calculate the ratio that Josette Dupress is interested in, using the year-end numbers, above.

b. Prepare the shareholders’ equity for Collins Corp. showing the balances immediately before the company recorded the large stock dividend. Recalculate the ratio that Josette Dupress is interested in, using the numbers before the stock dividend.

c. Did Collins Corporation account for the dividend properly as a large stock dividend?

d. Prepare a pro forma statement of shareholders’ equity treating the stock dividend as a small stock dividend. Recalculate the ratio that Josette Dupress is interested in, using these pro forma numbers.

e. What advice would you give Josette Dupress?

Topic: Accounting for Shareholders’ Equity Transactions

LO: 1, 2, 4, 7

8. The following is an excerpt from the 2017 statement of cash flows of Fey Company.

A footnote to the Fey Company financial statements included the following:

(a) Mandatory Convertible Preferred Stock

On March 13, 2017, Fey Company completed an offering of 1,245,000 shares of its 5.75% mandatory convertible preferred stock (the “Preferred Stock”) at a public offering price of $582.40 per share, resulting in net proceeds of $714,212 million. At any time prior to March 14, 2020, holders of the Preferred Stock may elect to convert each share of Preferred Stock into 0.8680 shares of Common Stock, subject to anti-dilution adjustments.

Continued next page

Required:

a. Use the financial statements effects template below to record the convertible preferred stock issued during 2017. The company reduced additional paid-in capital for the issuance costs paid to the underwriter.

b. Use the financial statements effects template below to record the treasury stock acquired.

c. Use the financial statements effects template below to record the dividend paid to preferred stockholders.

d. Assume that on January 1, 2018, all preferred shares are converted to $2.00 par common stock. Explain how Fey Company’s balance sheet will be affected by this conversion. How would total equity change?

Topic: Accounting for Preferred Stock Conversion

LO: 1, 2, 4, 7

9. During the year, Salem, Inc. had several stockholders’ equity transactions, which are summarized in the following table. Preferred stock has a par value of $75 and is convertible into common stock at the ratio of 1:1. The common stock has a par value of $5.

a. How many shares of common stock did Salem sell during the year and at what price per share?

b. How many shares of preferred stock were converted during the year?

c. Why would a company such as Salem offer a conversion feature on preferred stock?

d. Why would a shareholder exercise the conversion privilege?

e. What dividends did Salem pay during the year?

Topic: Earnings per Share (Numerical calculations required)

LO: 8

10. The 2016 Form 10-K of NetFlix includes the following footnoted information. Use this information to answer the required.

The computation of net income per share is as follows:

Employee stock options with exercise prices greater than the average market price of the common stock were excluded from the diluted calculation as their inclusion would have been anti-dilutive.

The following table summarizes the potential common shares excluded from the diluted calculation (in thousands):

Required:

a. What are the potential sources of dilution of NetFlix’s earnings per share?

b. List two additional dilutive securities (other than those NetFlix includes).

c. NetFlix did not include all outstanding employee stock options in the calculation of diluted net income per share in 2016? Why not? How many options were excluded?

d. Calculate basic EPS for each of the three years.

e. Calculate diluted EPS for each of the three years.

Topic: Earnings per Share (Numerical calculations required)

LO: 8

11. The 2016 Form 10-K of Pacific Gas & Electric Corporation includes the following information in the income statement. Compute the missing amounts.

Topic: Preferred Stock Benefits

LO: 1

1. What are some of the benefits received from being a preferred stockholder vs. a common stock holder?

Topic: Stock Buyback

LO: 2

2. Many companies buy back their outstanding stock on an annual basis. List several reasons a company might want to repurchase shares of its stock, as well as the financial statement effects of this action.

Topic: Stock Split

LO: 5

3. What is a stock split? Why do firms split their stock?

Topic: Stock Issuances and Repurchases

LO: 2

4. Discuss the impact of stock issuance and repurchase on the balance sheet and income statement.

Topic: Dividend Payments and Stock Price

LO: 4

5. As a shareholder of General Mills, how would you have reacted to the following announcement?

How would you expect the stock price to move? How does the company reflect the payment of cash dividends in its financial statements?

General Mills (NYSE: GIS) said today that its board of directors has approved an 8 percent dividend increase for General Mills common stock. The new quarterly dividend of $0.33 per share is payable Aug. 1, 2012, to shareholders of record July 10, 2012.

The new annualized dividend rate of $1.32 per share represents a yield of roughly 3.4 percent at recent market prices for General Mills shares.

“We view dividends and dividend growth as a key component of value creation for shareholders,” said General Mills Chairman and Chief Executive Officer Ken Powell. Over the past five years, which was a challenging period for the capital markets overall, General Mills’ dividends per share increased at an 11 percent compound annual rate. The company’s dividend yield has averaged roughly 3 percent over this same period.

General Mills has one of the longest dividend histories in corporate America. The company and its predecessor firm have paid shareholder dividends, without interruption or reduction, for 113 years.

Topic: Comparing Large and Small Stock Dividends

LO: 5

6. Explain the accounting treatment difference between a large and a small stock dividend.

Topic: Comprehensive Income

LO: 6

7. Why do some suggest that comprehensive income is a more inclusive measure of company performance?

Topic: Earnings per Share Definitions and Computations

LO: 8

8. The SEC requires that firms report both basic and diluted earnings per share in their 10-K reports. Why do firms’ basic EPS and diluted EPS differ? Which EPS number is more informative to you as an investor?