Question

1. Arrange the following items in proper balance sheet presentation:

Accumulated depreciation................................................ $200,000

Retained earnings................................................................... 110,000

Cash................................................................................. ..............5,000

Bonds payable.......................................................................... 142,000

Accounts receivable.................................................................38,000

Plant and equipment—original cost.................................. 720,000

Accounts payable.......................................................................35,000

Allowance for bad debts............................................................6,000

Common stock, $1 par, 150,000 shares outstanding...150,000

Inventory...................................................................................... .66,000

Preferred stock, $50 par, 1,000 shares outstanding.....50,000

Marketable securities.................................................................15,000

Investments.................................................................................. . .20,000

Notes payable..................................................................................83,000

Capital paid in excess of par (common stock)......................88,000

2. Elite Trailer Parks has an operating profit or $200,000. Interest expense for the year was $10,000; preferred dividends paid were $18,750; and common dividends paid were $30,000. The tax was $61,250. The firm has 20,000 shares of common stock outstanding.

a. Calculate the earnings per share and the common dividends per share for Elite Trailer Parks.

b. What was the increase in retained earnings for the year?

Answer 1

1. Proper Balance Sheet Presentation:

Liabilities and Equity	Amount
Common Stock	1,50,000
Add: Capital paid in excess of par (Premium)	88,000
Total Common Stock	2,38,000
Preference Shares	50,000
Retained Earnings	1,10,000
Total Equity (1)	3,98,000
Bonds Payable	1,42,000
Accounts Payable	35,000
Notes Payable	83,000
Total Liabilities (2)	2,60,000
Total Liabilities and Equity (1+2)	6,58,000
Assets
Cash	5,000
Accounts Receivable	38,000
Less: Allowance for bad debts	6,000
Net Accounts Receivable	32,000
Plant and Equipment	7,20,000
Less: Accumulated Depreciation	2,00,000
Net Plant and Equipment	5,20,000
Inventory	66,000
Marketable Securities	15,000
Investments	20,000
Total Assets	6,58,000

2.a. To calculate Earnings per share, we will us the following formula,

Earnings Per Share = Net profit available to common shareholders / Number of common shares outstanding

Net Profit available to common shareholders = Operating Profit - Interest Expense - Tax - Preference dividends

= 2,00,000 - 10,000 - 61,250 - 18,750

= 1,10,000

Number of common shares outstanding = 20,000

EPS = 1,10,000 / 20,000

= $ 5.50 per share.

Common Dividend per share = Common Dividend paid / Number of common shares outstanding

= 30,000 / 20,000

= $ 1.50 per share.

2.b. Retained Earnings will be calculated by using the following formula:

= Operating Profit - Interest Expense - Tax - Preference dividends - Common dividends paid

= 2,00,000 - 10,000 - 61,250 - 18,750 - 30,000

= $ 80,000

So, in this year Retained Earnings has increased by $ 80,000