Convertible Preferred Stock, Convertible Bonds, and EPS

Francis Company has 31,200 shares of common stock outstanding at the beginning of 2016. Francis issued 3,900 additional shares on May 1 and 2,600 additional shares on September 30. It also has two convertible securities outstanding at the end of 2016. These are:

1. Convertible preferred stock: 3,250 shares of 9.0%, $50 par, preferred stock were issued on January 2, 2013, for $60 per share. Each share of preferred stock is convertible into 3 shares of common stock. Current dividends have been declared and paid. To date, no preferred stock has been converted.
2. Convertible bonds: Bonds with a face value of $325000 and an interest rate of 5.0% were issued at par in 2015. Each $1000 bond is convertible into 25 shares of common stock. To date, no bonds have been converted.

Francis earned net income of $79000 during 2016. The income tax rate is 30%.

Required:

1. Compute the number of shares of common stock that Francis should use in calculating basic earnings per share for 2016.

Weighted average shares outstanding:  shares

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2. Calculate basic earnings per share for 2016. If required, round your answer to two decimal places.

Basic earnings per share: $

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3. Calculate diluted earnings per share for 2016 and the incremental EPS of the preferred stock and convertible bonds. If required, round your answers to two decimal places.

Diluted earnings per share: $

Case Study - Budgeting

The Financial Controller of Sunny Limited reported the following comment on the practice of participation in the setting of budgets in his company.

‘We bring in the Supervisors of budget areas, we tell them that we want their frank opinion but most of them just sit there and just nod their heads. We know they are not coming out with exactly how they feel. I guess budgets scare them.’

Required:

Suggest reasons why managers may be reluctant to participate fully in setting budgets and suggest also unwanted side effects which may arise from the imposition of budgets by senior management.

Sunspot Beverages, Ltd., of Fiji uses the weighted-average method in its process costing system. It makes blended tropical fruit drinks in two stages. Fruit juices are extracted from fresh fruits and then blended in the Blending Department. The blended juices are then bottled and packed for shipping in the Bottling Department. The following information pertains to the operations of the Blending Department for June.

5. Prepare a cost reconciliation report for the Blending Department for June.

places.)

1) Identify activities/transactions associated with companies engaged in the development stage.

2) Identify activities/transactions associated with companies engaged in the launch stage.

3) Identify activities/transactions associated with companies engaged in the growth stage.

4) Identify activities/transactions associated with companies engaged in the maturity stage.

5) Identify activities/transactions associated with companies engaged in the decline stage.

6) Explain how companies can be engaged in activities associated with more than one stage.

7) Explain the difference between a) investments/marketable securities, b) equity method investments or joint ventures and c) consolidated entities.

8) Discuss the differences between US GAAP and IFRS in accounting for intercompany investments.

Comparative Earnings per Share

Lucas Company reports net income of $5,125 for the year ended December 31, 2016, its first year of operations. On January 4, 2016, Lucas issued 9,000 shares of common stock. On August 2, 2016, it issued an additional 3,000 shares of stock, resulting in 12,000 shares outstanding at year-end.

During 2017, Lucas earned net income of $16,400. It issued 2,000 additional shares of stock on March 3, 2017, and declared and issued a 2-for-1 stock split on November 3, 2017, resulting in 28,000 shares outstanding at year-end.

During 2018, Lucas earned net income of $23,520. The only common stock transaction during 2018 was a 20% stock dividend issued on July 2, 2018.

If required, round your final answers to two decimal places.

Required:

1. Compute the basic earnings per share that would be disclosed in the 2016 annual report.
   $  per share
2. Compute the 2016 and 2017 comparative basic earnings per share that would be disclosed in the 2017 annual report.
   2017:   $  per share
   2016:   $  per share
3. Compute the 2016, 2017, and 2018 comparative basic earnings per share that would be disclosed in the 2018 annual report.
   2018:   $  per share
   2017:   $  per share
   2016:   $  per share

Lopez Company reported the following current-year data for its only product. The company uses a periodic inventory system, and its ending inventory consists of 360 units—120 from each of the last three purchases.

  
Determine the cost assigned to ending inventory and to cost of goods sold for the following. (Do not round intermediate calculations and round your answers to 2 decimal places.)
  

Which method yields the highest net income?
  

• LIFO

• Specific identification

• FIFO

• Weighted average

Below is a traditional cost-volume–profit graph for Willow, Inc for the month of July. Willow, Inc sells a single product- a specialty chair. The graph is not to scale. cvp graph The points on the graph are as follows: A: (0, 2800) B: (1000,47500) C: (1000, 36000) 1. What is the per unit selling price for each chair? 2. What is the fixed costs for the month of July? 3. What is net income when 1000 chairs are sold? 4. What is the variable cost of one chair?

Gustin Corp manufactures, sells, and leases medical equipment. Gustin Corp agrees to lease 3 CAT scanners, 2 MRIs, and 2 surgical Robots to Murray Hospital. The cost for Gustin to manufacture is 5,000,000. The lease term is eight years and requires eight lease payments of 1,800,000 each. Gustin expects the equipment to be worth 2,000,000 at the end of the lease but non of that amount is guaranteed by Murray hospital.

The lease begins on January 1, Year 1 and will last through December 31, Year 8. The first Lease payment of 1,800,000 is due on January 1, Year, 1 the next payment is due on December 31 year 1 and the remaining payments will continue on December 31 every year until the last one on December 31, Year 7. At the end of the lease term on December 31 Year 8 the medical equipment will be returned to Gustin Corp.

Both companies have December 31 fiscal year end. The implicit rate in the lease is 11 percent and Murray hospital is aware of that rate.

1.) what kind of lease is this for Gustin Corp and for Murray Hospital?

2.)Record the lease on the books for both the lessee and the lessor at the inception of the lease on January 1, year 1.

3.)prepare the amortization table for the lessor

4.) prepare the amortization table for the lessee

5.) Prepare journal entries for the first cash payment on January 1, year 1 for both the lessee and lessor.

6.) Provide any journal entries for the lessee and the lessor during year 1 including the second cash payment on December 31, year 1 for both the lessee and the lessor.

7 .)Provide all journal entries for the lessee and the lessor during year 5.

8.) What amounts would the lessee and the lessor report on their income statement and on the balance sheet for year 5

9.) prepare all necessary entries on the books of the lessor and lessee at the termination of the lease on December 31, Year 8 assuming that the actual residual value of the equipment at the time is: A) 2,000,000 B) 3,000,000 C) 1,000,000

Controllership in Accounting

Topic:   Revenue & Misrepresentation by Clients

Characters: Rachel Hanson, Senior in CPA firm

Jim Thompson, Owner/manager of Fashion Line

Sharon, part-time bookkeeper of Fashion Line

In addition to the usual mix of compilation, review and audit clients for which Rachel Hunt

serves as a senior in a small office of a regional CPA firm, she has been assigned a new

client that recently engaged the firm. Fashion Line, an incorporated retail outlet, is a thriving

local store. The business is run by a single owner/manager, Jim Thompson, who makes

all major decisions. The business has not previously used the services of a CPA firm. In

addition to preparation of financial statements, the CPA firm will handle tax returns for the

business.

At her Line visit to the client’s office, Rachel is introduced to Sharon, the part-time

bookkeeper who is also a full-time accounting student at the local university. At a

subsequent meeting, Sharon confides to Rachel that she found the job at the beginning of the

semester after an extensive search. Sharon really needs the money to help finance her

education, and feels lucky to have found a good-paying job during the current economic

downturn. Feeling that Rachel is someone she can talk to and get advice from, Sharon

describes a situation that has been on her mind for some time now.

Sharon’s concern relates to the handling of sales revenues. When monies from sales revenues

are counted and deposited on a weekly basis, a chart is filled out with categories carefully

delineating the type of payment: cash, checks, American Express, or Visa/Mastercard.

Sharon’s employer, after depositing the weekly total, brings this chart back with his own

written-in total of the actual amount deposited.

After looking over some of these weekly deposit chats, Sharon noticed that $500 cash was

missing from each deposit. After a more thorough inspection of monthly tax documents that

Jim Thompson has filled out, Sharon noticed that the reported monthly gross revenue was

$2,000 less than what had been actually counted.

The employer is the only person handling the money after it has been counted. He is also the

only one to deposit the money. When Sharon asked Mr. Thompson about revenue not being

reported for tax purposes, he assured her that every dollar of income was reported on the tax

forms. Furthermore, Jim asserted, since Sharon wasn’t the person who signed the forms,

she shouldn’t be concerned.

Answer the following question from the case above :-

1. What are the relevant facts of the case?

2. What, if any, are the ethical issues?

3. Who are the stakeholders?

4. What are the possible alternatives including any ethical concerns?

5. What are the practical constraints?

6. What action(s) should be taken?

Required information [The following information applies to the questions displayed below.] Simon Company’s year-end balance sheets follow. At December 31 2017 2016 2015 Assets Cash $ 31,313 $ 36,602 $ 36,999 Accounts receivable, net 88,959 63,420 49,332 Merchandise inventory 110,719 83,805 53,069 Prepaid expenses 10,084 9,418 4,153 Plant assets, net 284,405 259,755 233,947 Total assets $ 525,480 $ 453,000 $ 377,500 Liabilities and Equity Accounts payable $ 129,536 $ 78,854 $ 50,827 Long-term notes payable secured by mortgages on plant assets 98,790 103,148 82,593 Common stock, $10 par value 162,500 162,500 162,500 Retained earnings 134,654 108,498 81,580 Total liabilities and equity $ 525,480 $ 453,000 $ 377,500 The company’s income statements for the years ended December 31, 2017 and 2016, follow. For Year Ended December 31 2017 2016 Sales $ 683,124 $ 539,070 Cost of goods sold $ 416,706 $ 350,396 Other operating expenses 211,768 136,385 Interest expense 11,613 12,399 Income taxes 8,881 8,086 Total costs and expenses 648,968 507,266 Net income $ 34,156 $ 31,804 Earnings per share $ 2.10 $ 1.96 Calculate the company’s long-term risk and capital structure positions at the end of 2017 and 2016 by computing the following ratios.

(1) Debt and equity ratios.

Debt Ratio Choose Numerator: / Choose Denominator: = Debt Ratio / = Debt ratio 2017: / = % 2016: / = %

Equity Ratio Choose Numerator: / Choose Denominator: = Equity Ratio / = Equity ratio 2017: / = % 2016: / = %

(2) Debt-to-equity ratio.

Debt-To-Equity Ratio Choose Numerator: / Choose Denominator: = Debt-To-Equity Ratio / = Debt-to-equity ratio 2017: / = 0 to 1 2016: / = 0 to 1

Describe (50 to 80 words) the process to add a costing unit to an accounting system.

explain the rules regarding the accounting periods available to corporate taxpayers

High Country, Inc., produces and sells many recreational products. The company has just opened a new plant to produce a folding camp cot that will be marketed throughout the United States. The following cost and revenue data relate to May, the first month of the plant’s operation:

Management is anxious to assess the profitability of the new camp cot during the month of May.

Required:

1. Assume that the company uses absorption costing.

a. Determine the unit product cost.

b. Prepare an income statement for May.

2. Assume that the company uses variable costing.

a. Determine the unit product cost.

b. Prepare a contribution format income statement for May.

Ogilvy Company manufactures and sells one product. The following information pertains to each of the company’s first three years of operations:

The company does not incur any variable manufacturing overhead costs or variable selling and administrative expenses. During its first year of operations, Ogilvy produced 79,000 units and sold 79,000 units. During its second year of operations, it produced 79,000 units and sold 73,400 units. In its third year, Ogilvy produced 79,000 units and sold 84,600 units. The selling price of the company’s product is $78 per unit.

Required:

1. Assume the company uses super-variable costing:

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

2. Assume the company uses a variable costing system that assigns $28 of direct labor cost to each unit produced:

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

3. Reconcile the difference between the super-variable costing and variable costing net operating incomes in Years 1, 2, and 3.

Client X offers a generous employee compensation package that includes employee stock options. The exercise price has always been equal to the market price of the stock at the date of grant. The corporate controller, John Jones, believes that employee stock options, like all obligations to issue the corporation's own stock, are equity. The new staff accountant, Marcy Means, disagrees. Marcy argues that when a company issues stock for less than current value, the value of preexisting stockholders' shares is diluted. Write a team consensus response of no more than 700 words in which you answer the following requirements: Pretend you are hired to debate the issue of the proper treatment of options written on a company's own stock. Formulate your argument, citing concepts and definitions to buttress your case, assuming: You are siding with John