TR20-9 Basic and Diluted EPS (LO 20-2, 20-3)

Farmhill Ltd. had 1,400,300 common shares outstanding on 1 January 20X6, the beginning of its 20X6 fiscal year. During the year, on 1 May, the company issued 520,000 preferred shares convertible into common shares on a 1-for-1 basis. These preferred shares have a $0.75 annual cumulative dividend. The investors must convert the shares to common shares by 30 April 20X9. During the year, there were no conversions and the dividends were declared and paid on 30 November. The company reported net profit of $2,900,800 and total comprehensive income of $2,250,600 for the year ended 31 December 20X6.

Required:
Calculate the company’s basic and diluted EPS for 20X6.

(Business Management)

Using this assignment prompt below, you will determine what two action to take as a team. Choose people to lay off and save money so that you are on budget.

A brief background about the situation. You each are members of the executive team. Recently, your organization has been experiencing no growth. As a matter of fact, you've been losing money. You have 20 employees. Your team is currently on track to post a negative gain for the 3rd quarter of the year. Your team of 20 employees does not include the executive team (which makes $450,000). You have 1 receptionist ($35,000), 1 office manager ($65,000), 5 consultants (averaging about $78,000), 3 sales consultants (averaging $90,000), 1 marketer ($55,000), 1 web designer ($84,000), a graphic designer ($72,000), 1 accounts payable (38,000), 1 accounts receivable (37,000), 2 IT specialist ( averaging $62,000) and an IT manager ($92,000), an HR manager ($75,000), and a facilities manager ($65,000). You have enough money in the budget ($1,250,000)to pay only 12-15 of those employees based off of your current projects. You may get another project but you won't know if you won the contract for 2 months. If you do get the project, it would start a month after that date and you would have to hire additional staff.

The following facts relate to Waterway Corporation.

Compute income taxes payable for 2017. (Round answer to the nearest dollar amount, e.g. $1,525.)

eTextbook and Media

List of Accounts

Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round answers to the nearest dollar amount, e.g. $1,525.)

eTextbook and Media

List of Accounts

Prepare the income tax expense section of the income statement for 2017, beginning with the line “Income before income taxes.” (Enter loss using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Morningside Technologies Inc. uses flexible budgets that are based on the following data:

Prepare a flexible selling and administrative expenses budget for April for sales volumes of $90,000, $115,000, and $135,000. Enter all amounts as positive numbers.

8. Exercise 15-12 Securities transactions; equity method LO P4

Listed below are a few events and transactions of Kodax Company.

2017

2018

Prepare journal entries to record the above transactions and events of Kodax Company. (Do not round intermediate calculations and round your final answers to the nearest dollar amount.)

At the beginning of 2020, Brown Corporation had the following stockholders’ equity balances in its general ledger:

The paid-in capital from stock options relates to options granted on 1/1/18 to the CEO as incentive compensation. As of 1/1/20, the remaining expected benefit period is four years; expense has been and will be recorded evenly over the benefit period.

The following events were among the many occurring in 2020:

1. January 2: Purchased 5,000 shares of its common stock for $15 per share. Brown uses the cost method of accounting for treasury stock transactions.

2. February 1: Declared and paid a cash dividend of $2 per share on the outstanding common stock.

3. April 1: Issued 20,000 shares of $50 par, noncumulative, convertible 6% preferred stock for $60 per share, where one share of preferred stock is convertible into three shares of common stock.

4. July 1: 2,000 shares of treasury stock that had been purchased in a prior year for $18 per share were re-issued for $10 per share.

5. August 1: Holders of 6,000 shares of the preferred stock converted their shares into common stock when the market value of the common stock was $22 per share. Brown uses the book value method of accounting for conversions.

6. October 1: Declared and distributed a 1% stock dividend on common stock outstanding when the market price of the stock was $24 per share.

7. November 1: Corrected an error that was made several years ago, when land that had been purchased for $60,000 was inadvertently expensed.

8. December 1: Declared and distributed a property dividend of land to preferred shareholders. The land had a fair value of $60,000 and a carrying value of $75,000.

1. December 31: Recorded 2020 compensation expense related to the stock options.

The 2020 Final Net Income, including the effects of any net income items listed above (and the 2020 tax effects on net income items), was $700,000. There were 500,000 shares authorized for both preferred and common stock.

(OVER)

Required:                                                                                                                                            

1. All journal entries for the items (a. through i.) above. No explanations.  Ignore tax effects.
2. The 12/31/20 Stockholders’ Equity section. Use the format from the Frost Company example in Chapter 15 of the text. Include parenthetical disclosures for preferred stock and common stock.

David is a high school senior. He must decide whether to work or go to college. If he has a high school degree, he will make $20,000 per year. If he has a college degree, he will make $35,000 per year. To get a college degree, he must go to school for one period at a tuition cost of $10,000. Assume David lives for 3 periods and his discount is 0.1.

a) What is David’s direct cost of attending college? What is his opportunity cost? What will he decide to do?

b) Now, assume David can get a full-ride scholarship (thus H = 0). Now what will he do?

c) Since David is receiving a scholarship for his undergrad degree, he is now debating about going to grad school. If he decides to get his PhD, he must go to school in the first period (undergrad) at a cost of $0, and he must go to school in the second period (grad school) at a cost of $0. With a PhD, David can make $77,000 per year. Will David go to grad school? You only need to compare undergrad and grad school.

Morning Dove Company manufactures one model of birdbath, which is very popular. Morning Dove sells all units it produces each month. The relevant range is 0–1,800 units, and monthly production costs for the production of 1,300 units follow. Morning Dove’s utilities and maintenance costs are mixed with the fixed components shown in parentheses.  

Suppose it sells each birdbath for $20.

Required:

1. Calculate the unit contribution margin and contribution margin ratio for each birdbath sold.

2. Complete the contribution margin income statement assuming that Morning Dove produces and sells 1,500 units.

Bravo Community Hospital is a nonprofit hospital operated by the county. The hospital’s administrator is considering a proposal to open a new outpatient clinic in the nearby city of New Castle. The administrator has made the following estimates pertinent to the proposal.

1. Construction of the clinic building will cost $840,000 in two equal installments of $420,000, to be paid at the end of 20x0 and 20x1. The clinic will open on January 2, 20x2. All staffing and operating costs begin in 20x2.
2. Equipment for the clinic will cost $105,000, to be paid in December of 20x1.
3. Staffing of the clinic will cost $720,000 per year.
4. Other operating costs at the clinic will be $138,000 per year.
5. Opening the clinic is expected to increase charitable contributions to the hospital by $210,000 per year.
6. The clinic is expected to reduce costs at Allegheny Community Hospital. Annual cost savings at the hospital are projected to be $920,000.
7. A major refurbishment of the clinic is expected to be necessary toward the end of 20x5. This work will cost $135,000.
8. Due to shifting medical needs in the county, the administrator doubts the clinic will be needed after 20x9.
9. The clinic building and equipment could be sold for $210,000 at the end of 20x9.
10. The hospital’s hurdle rate is 12 percent.

Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.)

Required:

1. 1-3. Fill in the following table to compute the net present value of the proposed outpatient clinic.

2. 4. Should the administrator recommend to the hospital's trustees that the clinic be built? YES OR NO

Fill in the following table to compute the net present value of the proposed outpatient clinic. (Negative amounts should be indicated by a minus sign. Round your "Discount factors" to 3 decimal places.)

The 2017 annual report of Albany Corporation reports the following (in millions):

a. What amount does Albany report as trading debt securities on its balance sheets for 2017?

b. How do the net unrealized gains (losses) on the company’s trading debt securities affect pretax income for 2017?

3. W.T. Grant was the largest retailer in the United States when it caught nearly everyone by surprise by filing for bankruptcy in 1975. W. T. Grant had been in existence since the turn of the century and had a long history of profitability including regularly paying dividends from 1906 to 1974. How is it possible that a company can report positive net income and yet be forced to seek bankruptcy protection?

Nasir, a house painter, and Miguel, a general contractor, met for lunch one day. During lunch, Nasir and Miguel decided to go into business together, wherein Miguel would send painting referrals to Nasir, Nasir would perform the work and both Nasir and Miguel would split the profits from the business evenly. Miguel has a large net worth and so he was worried about personal liability in the event Nasir caused any damage and was sued. To reassure Miguel, Nasir takes out a piece of paper and writes up a very simple agreement detailing how the business will be run, and that Miguel will not have any management of the day to day operations of the business and will instead only provide upfront capital of $2,000 to help the business get off the ground. Both of them sign the document drafted by Nasir and go their separate ways. No documents are ever filed with the State. Six months later the house painting business has earned $50,000. Miguel has never provided a referral or performed any of the work, so Nasir has elected not to pay Miguel. Miguel sues Nasir seeking 50% of the income earned by the house painting business. What is the outcome?

Use IRAC method for this question.

PREPARING JOURNAL ENTRIES

Part A

On January 2, 2017, Kesha Company purchased 10,000 shares of the stock of Petty Corp., and did not obtain significant influence.  The investment is intended as a long-term investment. The stock was purchased for $5 per share, and represents a 10% ownership stake. Petty Corp made $20,000 of net income in 2017, and paid dividends of $5,000 on December 15, 2017. On December 31, 2017, Petty Corp's stock was trading on the open market for $8 per share at the end of the year.  Use this information to prepare the General Journal entry(ies) for January 2 purchase and the December 15 & 31, 2017 record of income & gain/loss. If no entry is required then write "No Entry Required."

Part B

On January 1, 2017, Kesha Company purchased a significant influence shares investment in the Winehouse Company for $250,000.  This investment balance represents 40% of the equity of the Winehouse Company.  During 2017, Winehouse Company reported Net Income of $25,000 on November 15, 2017 Winehouse Company paid cash dividends of $10,000 to its shareholders. Use this information to prepare the January 1, November 15 and December 31, 2017 General Journal entry (without explanation.) If no entry is required, then write "No Entry Required."

Blue Bayou Middle School wants to raise money for a new sound system for its auditorium. The primary fund-raising event is a dance at which the famous disc jockey Kray Zee will play classic and not-so-classic dance tunes. Grant Hill, the music and theater instructor, has been given the responsibility for coordinating the fund-raising efforts. This is Grant’s first experience with fund-raising. He decides to put the eighth-grade choir in charge of the event; he will be a relatively passive observer. Grant had 500 unnumbered tickets printed for the dance. He left the tickets in a box on his desk and told the choir students to take as many tickets as they thought they could sell for $5 each. In order to ensure that no extra tickets would be floating around, he told them to dispose of any unsold tickets. When the students received payment for the tickets, they were to bring the cash back to Grant, and he would put it in a locked box in his desk drawer. Some of the students were responsible for decorating the gymnasium for the dance. Grant gave each of them a key to the money box and told them that if they took money out to purchase materials, they should put a note in the box saying how much they took and what it was used for. After 2 weeks, the money box appeared to be getting full, so Grant asked Lynn Dandi to count the money, prepare a deposit slip, and deposit the money in a bank account that Grant had opened. The day of the dance, Grant wrote a check from the account to pay Kray Zee. The DJ said, however, that he accepted only cash and did not give receipts. So Grant took $200 out of the cash box and gave it to Kray. At the dance, Grant had Dana Uhler working at the entrance to the gymnasium, collecting tickets from students and selling tickets to those who had not pre-purchased them. Grant estimated that 400 students attended the dance. The following day, Grant closed out the bank account, which had $250 in it, and gave that amount plus the $180 in the cash box to Principal Sanchez. Principal Sanchez seemed surprised that, after generating roughly $2,000 in sales, the dance netted only $430 in cash. Grant did not know how to respond. Identify as many internal control weaknesses as you can in this scenario, and suggest how each could be addressed.

PREPARING JOURNAL ENTRIES

Legend Company uses the straight-line method for amortization of all bond premium & discounts. During fiscal year 2018 Legend had the following bond payable transactions:

January 2, issued ten, $1,000 bonds at 101. These 5-year bonds are dated January 1, 2017. The contract interest rate is 6%.  Interest is payable semi-annual on January 1 and July 1.

July 1, Legend issued $400,000 of 10%, 10-year bonds.  The bonds are dated January 1, 2017 were issued at 90, and pay interest on July 1 and January 1.

October 1, Legend issued 10-year bonds $10,000 face value bonds for $10,860 cash. The bonds have a stated rate of 8%. Interest is payable on October 1 and April 1.

Use this information to prepare General Journal entries for the three bonds issued and any interest accruals and payments for the fiscal year 2018. (Round all calculations to nearest whole dollar.)