Question

Required information CC11-1 Accounting for Equity Financing [LO 11-1, LO 11-2, LO 11-3, LO 11-4, LO 11-5] [The following information applies to the questions displayed below.]   Nicole has been financing Nicole’s Getaway Spa (NGS) using equity financing. Currently NGS has authorized 100,000 no-par preferred shares and 200,000 $2 par common shares. Outstanding shares include 59,000 preferred shares and 49,000 common shares.   Recently the following transactions have taken place.    NGS issues 1,450 preferred shares for $12 a share. NGS repurchases 1,450 common shares for $11 a share. On November 12, the board of directors declares a $0.50 cash dividend on each outstanding preferred share. The dividend is paid December 20. CC11-1 Part 1 Required: Prepare the journal entries needed for each of the transactions. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)


Required information CC11-1 Accounting for Equity Financing [LO 11-1, LO 11-2, LO 11-3, LO 11-4, LO 11-5] [The following information applies to the questions displayed below.]   Nicole has been financing Nicole’s Getaway Spa (NGS) using equity financing. Currently NGS has authorized 100,000 no-par preferred shares and 200,000 $2 par common shares. Outstanding shares include 59,000 preferred shares and 49,000 common shares.   Recently the following transactions have taken place.    NGS issues 1,450 preferred shares for $12 a share. NGS repurchases 1,450 common shares for $11 a share. On November 12, the board of directors declares a $0.50 cash dividend on each outstanding preferred share. The dividend is paid December 20. CC11-1 Part 2 If you were a common shareholder concerned about your voting rights, would you prefer Nicole to issue additional common shares or additional preferred shares?   Additional Common Shares Additional Preferred Shares

Required information CC11-1 Accounting for Equity Financing [LO 11-1, LO 11-2, LO 11-3, LO 11-4, LO 11-5] [The following information applies to the questions displayed below.]   Nicole has been financing Nicole’s Getaway Spa (NGS) using equity financing. Currently NGS has authorized 100,000 no-par preferred shares and 200,000 $2 par common shares. Outstanding shares include 59,000 preferred shares and 49,000 common shares.   Recently the following transactions have taken place.    NGS issues 1,450 preferred shares for $12 a share. NGS repurchases 1,450 common shares for $11 a share. On November 12, the board of directors declares a $0.50 cash dividend on each outstanding preferred share. The dividend is paid December 20. CC11-1 Part 4 How would each transaction affect the ROE ratio? (Use + for increase, − for decrease, and NE for no effect.)  

Answer 1

CC11-1 Part 1:

Journal entries

For an issue of preference shares:

Cash/bank account (1450*$12) Dr $17400

To Preference share capital account Cr $17400

For repurchase of common shares:

Common share capital a/c (1450*$11) Dr $15950

To Cash/bank a/c Cr $15950

For dividend due entry

Dividend a/c (59000+1450)*$0.5 Dr $302.25

Dividend payable a/c Cr $302.25

For dividend paid December

Dividend payable a/c Dr $ 302.25

Cash/bank a/c Cr $302.25

CC11-1 Part 2:

Meaning of No par value: No-par value stock prices are determined by the amount that investors are willing to pay for the stocks on the open market. So this will benefit a company in terms of finance because doing this gives them the flexibility to set higher prices.

When common shares are issued there will be no change in the voting rights of existing shareholders right to vote if the issue is within the limit of the authorized share capital of common shares. so for the benefit of the company in terms of finance company may issue additional preference shares at no par value. the company may go for the issue of common shares for long-term finance because the preference shares are to be redeemed at a predefined time.

CC11-1 Part 4

ROE = Return( net income)/ shareholders equity

Return= net profit before the issue of the common share dividend

Shareholders equity= Assets - liabilities

The information regarding the income is not given so ROE is not possible to determine.