Problem 19-11 EPS; nonconvertible preferred stock; treasury shares; shares sold; stock dividend [LO19-4, 19-5, 19-6, 19-7]

On December 31, 2017, Dow Steel Corporation had 780,000 shares of common stock and 48,000 shares of 10%, noncumulative, nonconvertible preferred stock issued and outstanding. Dow issued a 5% common stock dividend on May 15 and paid cash dividends of $580,000 and $87,000 to common and preferred shareholders, respectively, on December 15, 2018.

On February 28, 2018, Dow sold 68,000 common shares. In keeping with its long-term share repurchase plan, 5,000 shares were retired on July 1. Dow's net income for the year ended December 31, 2018, was $3,000,000. The income tax rate is 40%.
  
Required:
Compute Dow's earnings per share for the year ended December 31, 2018. (Do not round intermediate calculations. Enter your answers in thousands.)

Discuss the advantages of a cash distribution policy. What are the tax consequences of cash distributions? Identify the most widely used cash distribution policies.

1.Explain why the balance sheet does not portray the market value of an entity?

2.Distinguish between property, plant, and equipment and intangible assets.

Question three (Total mark: 5 marks, word limit: 500 words)

You will need to do some research – via the Internet and/or via articles and papers. Investigate the goals for three organizations, covering one private-sector organization, one in the public sector and one not-for-profit organization. Briefly compare and contrast the detail in their goals.

1. Un-jumble the Income statement, put in the proper format, and find the profit or loss.
2. Compute the Break-even Analysis.
3. If profit increased 15,000, how much sales in dollars would need to be generated?
4. If the Avg Sales price is 74.00, how many Units will be needed to break even?  

Office Supplies Expense 2,500
Cost of Goods Sold 113,500
Depreciation 5,000
Advertising Expense 17,000
Labor Expense 52,500 (65% Fixed)
Benefits Expense 17,500 (65% Fixed)
Insurance Expense 3,000
Income Taxes 12,725
Administrative Expense 21,825
Sales Returns 4,000
Rent Expense 19,000
Gross Sales 380,000
Utilities Expense 7,000
Sales Allowances 4,500
Interest Expense 4,600
Selling Expense 16,500
Legal Expense 4,500

The following summaries for ¹Maryland Service, Inc., and ²Grapone, Co., provide the information needed to prepare the stockholders’ equity section of each company’s balance sheet. The two companies are independent.

1. Maryland is authorized to issue 44,000 shares of $1 par common stock. All the stock was issued at $11 per share. The company incurred net losses of $47,000 in 2009 and $15,000 in 2010. It earned net income of $32,000 in 2011 and $178,000 in 2012. The company declared no dividends during the four-year period.    

2. Grapone’s charter authorizes the issuance of 70,000 shares of 5%, $14 par preferred stock and 470,000 shares of no-par common stock. Grapone issued 1,400 shares of the preferred stock at $14 per share. It issued 130,000 shares of the common stock for $260,000. The company’s retained earnings balance at the beginning of 2012 was $60,000. Net income for 2012 was $98,000, and the company declared the specified preferred dividend for 2012. Preferred dividends for 2011 were in arrears.

Requirements:

1. For each company, prepare the stockholders’ equity section of its balance sheet at December 31, 2012. Show the computation of all amounts. Entries are not required.

Financial statements from the end-of-period spreadsheet

Demo Consulting is a consulting firm owned and operated by Jesse Flatt. The following end-of-period spreadsheet was prepared for the year ended August 31, 20Y9:

During the year ended August 31, 20Y9, $15,000 of additional common stock was issued.

Based on the preceding spreadsheet, prepare an income statement for Demo Consulting.

Feedback

Revenue and expense accounts flow into the income statement.

Based on the preceding spreadsheet, prepare a statement of stockholders’ equity for Demo Consulting. If a net loss is incurred or dividends were paid, enter that amount as a negative number using a minus sign. If an amount box does not require an entry, leave it blank.

Feedback

The statement of stockholders' equity shows the beginning balances of common stock and retained earnings. The common stock balance will be increased by any stock issued during the period, and retained earnings will be increased by any net income and decreased by any net losses and dividends.

Based on the preceding spreadsheet, prepare a balance sheet for Demo Consulting.

Chart your personal required yield curve vs. treasury yields. Write a paragraph with your observations and conclusions with respect to your personal investment decisions

Profitability Ratios

The following selected data were taken from the financial statements of Vidahill Inc. for December 31, 20Y7, 20Y6, and 20Y5:

The 20Y7 net income was $39,770, and the 20Y6 net income was $27,125. No dividends on common stock were declared between 20Y5 and 20Y7. Preferred dividends were declared and paid in full in 20Y6 and 20Y7.

a. Determine the return on total assets, the rate earned on stockholders' equity, and the return on common stockholders’ equity for the years 20Y6 and 20Y7. When required, round to one decimal place.

b. The profitability ratios indicate that Vidahill Inc.'s profitability has ______ . Since the rate of return on assets is _______ the return on stockholders' equity in both years, there must be______ leverage from the use of debt.

The exemption amount is used to determine which of the following?

a.Whether certain taxpayers are spouses

b.The tax rate applicable to the taxpayer's dependency exemption

c.Whether married taxpayers filing separate returns must claim dependents

d.The tax rate applicable to the taxpayer's personal exemption

e.Whether certain taxpayers are dependents

During 2020, Hayden had the following transactions:

Hayden's AGI is:

a.$79,000.

b.$82,000.

c.$83,000.

d.$136,000.

e.$125,000.

The kiddie tax applies to the unearned income of dependent children.

True

False

A strategy taxpayers can use to maximize the use of the standard deduction is to:

a.Spread charitable contributions across several years.

b.Employ a child in a business.

c.Purchase stock in a child's name.

d.Use the cash method to concentrate multiple years' deductions, such as charitable contributions, in a single year.

e.Reduce the amount of charitable contributions made in the year.

E9-14 (L04) (Gross Profit Method) Mark Price Company uses the gross profit method to estimate inventory for monthly
reporting purposes. Presented below is information for the month of May.
Inventory, May 1 $ 160,000
Purchases (gross) 640,000
Freight-in 30,000
Sales revenue 1,000,000
Sales returns 70,000
Purchase discounts 12,000
Instructions
(a) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of sales.
(b) Compute the estimated inventory at May 31, assuming that the gross profit is 30% of cost.

Question One (Total mark: 11 marks, word limit: 900 words)

Jordan Fit is a leading shoe retailer in the UK. During the last two years Jordan Fit has experienced considerable financial pressures: its performance has been declining, along with its share price. The accountants of the company have been ordered by their executives to review various aspects of their business and recommend some fundamental changes to improve the company’s financial performance.

One area of the business that has become very costly is holding stocks of saleable products in the stores. Storage and handling of stock is identified as an expensive operation for Jordan Fit. The accountants want this aspect of the business to be better controlled than it has been to date.

            As a new and more immediate mechanism for control within the business, the accountants decide to introduce a charge into the profit statements of individual stores. Every store has its own profit statement which broadly speaking records revenues and costs attributable to that store. These are internal management reports, compiled by the management accountants, and constituting an important part of how executive and divisional managers assess store performance over time. Importantly, the senior managers in each store, including the store manager, have a significant proportion of their salary and annual bonus based on a percentage of their store’s net profit figure. The new charge is to be based on the amount of stocks being held on average, over a year, by a particular store. The higher the average stocks held, the higher the charge in a store’s profit statement and, consequently, the lower the net profit. All other employees of a store (retail assistants, administrators and storeroom staff) also receive an annual ‘Christmas bonus’ that is calculated in relation to their store’s net profitability.

The accountants will implement the changes to stores’ reporting within two months, in time for the start of the new financial year. The changes, approved recently by majority vote at executive level, will be ‘sold’ to employees mostly via memos and email on the basis that the organization is facing a serious crisis, costs must be cut drastically, and that the introduction of a charge for holding stocks in stores was a sensible way to improve control over this particular element of business costs. No further consultation was planned, and the accountants intended to run brief training courses for their store managers, at which the technicalities of calculating the new charges for stock-holding (but not much else) would be explained.

Required:

You are a senior management accountant in Jordan Fit, although you are not actually leading this particular change programme. You have serious reservations about what is being proposed. Write a memo to the CFO of Jordan Fit explaining the reasons why you have serious reservations about the proposed changes, and describe alternative options (not just accounting related) that might be considered during this extremely testing time for the organization.

Write answers to each of the five (5) situations described below addressing the required criteria (i.e. 1 & 2) in each independent case. You may use a tabulated format if helpful having “Threats”, “Safeguards” and “Objective Assessment” as column headings.

Stephen Taylor has been appointed as a junior auditor of Simnett Chartered Accountants (SCA). One of his first tasks is to review the firm’s audit clients to ensure that independence requirements of APES 110 (Code of Ethics for Professional Accountants) are being met. His review has revealed the following:

(a) SCA has been providing its audit client Kaplan Limited (Kaplan) with non-audit services for a number of years. Andrew Ferguson is SCA’s partner in charge for providing non-audit services to Kaplan. While having a conversation with Andrew, Stephen becomes aware that Andrew’s wife Michelle Ferguson is planning to purchase a significant number of shares in Kaplan.

(b) Duxton Motels Limited (DML) is a chain of ten motels operating in Western Australia and is one of the oldest companies listed on the Australian Securities Exchange. SCA performs audit work for DML. This is the second year that SCA’s total fee from DML will comprise of around 20% of SCA’s total fee revenue from all clients.

(c) Super Tech Limited (STL), an Australian IT company, has not paid any of its audit fees for the last three years to SCA, citing cash flow problems. This has resulted in a significant amount of overdue audit fees for SCA. The audit partner in charge, Grant Richardson has been reluctant to push the issue further, as STL is a high profile client who he wishes to retain.

(d) Gregory Taylor, an audit senior with SCA is very excited to be a part of the audit team of Jumbo Metals Limited (JML). Gregory feels that he will be a valuable asset to the audit team as his wife, Christina Taylor, is JML’s financial controller who is responsible for the preparation of JML’s financial report.

(e) SCA has recently accepted an engagement to provide audit services to Yummy Donuts Limited. Robert Durand is an audit partner at SCA. Robert’s wife Rebecca Durand currently works as a financial accountant at Yummy Donuts. Robert is not on the audit team of Yummy Donuts.

Required: For each of the independent situations above, and using the conceptual framework in APES 110 (Code of Ethics for Professional Accountants), answer the following questions:

1. Identify potential threat(s) to independence & recommend safeguards (if any) to reduce the independence threat(s) identified.

2. Provide an objective assessment of whether audit independence can be achieved (Total 10 Mark)

Bradley-Link’s December 31, 2021, balance sheet included the following items:

Note 8: Bonds (in part)

The 9.6% bonds were issued in 2008 at 97.5 to yield 10%. Interest is paid semiannually on June 30 and December 31. Each $1,000 bond is convertible into 40 shares of the Company’s no par common stock.

The 10.4% bonds were issued in 2012 at 102 to yield 10%. Interest is paid semiannually on June 30 and December 31. Each $1,000 bond was issued with 40 detachable stock warrants, each of which entitles the holder to purchase one share of the Company’s no par common stock for $25, beginning 2022.

On January 3, 2022, when Bradley-Link’s common stock had a market price of $32 per share, Bradley-Link called the convertible bonds to force conversion. 90% were converted; the remainder were acquired at the call price. When the common stock price reached an all-time high of $37 in December of 2022, 40% of the warrants were exercised.

Required:

1. Prepare the journal entries that were recorded when each of the two bond issues was originally sold in 2008 and 2012.
2. Prepare the journal entry to record (book value method) the conversion of 90% of the convertible bonds in January 2022 and the retirement of the remainder.
3. Assume Bradley-Link induced conversion by offering $150 cash for each bond converted. Prepare the journal entry to record (book value method) the conversion of 90% of the convertible bonds in January 2022.
4. Assume Bradley-Link induced conversion by modifying the conversion ratio to exchange 45 shares for each bond rather than the 40 shares provided in the contract. Prepare the journal entry to record (book value method) the conversion of 90% of the convertible bonds in January 2022.
5. Prepare the journal entry to record the exercise of the warrants in December 2022.

i need help with this question. i cannot get the logic of warranty exercise. please