Genius Tech SpA
Genius Tech SpA is a high-tech company that was set up by three partners in early 1995. Their successful product designs led to rapid growth of the enterprise, with resulting needs for additional capital to support the growth.
This case describes the major financing transactions entered into by Genius Tech in its first years of existence. The enterprise's earnings history is also given.
You are required to analyse with the accounting equation each transaction as it is described. You should be explicit about what non-current liabilities and owners' equity - that is, capital employed - accounts are affected by the transactions; but effects on assets (including cash and cash equivalents) and current liabilities can be recorded in a single account, ‘A&CL' (assets and current liabilities).
1995 - The firm began as a partnership on 9 January with the three equal partners, Alison, Betty and Carlotta, each contributing EUR 100,000 capital. The accountant set up a capital account for each of the three partners. On 3 April the partners arranged with a bank a loan of EUR 100,000, on which quarterly interest (8 per cent on an annual basis) was payable for five years, with the principal due in full as a lump sum at the end of the fifth year. The enterprise's net loss for 1995 was EUR 54,000. A salary for each partner was paid during the year and included in the calculation of net loss; no other payments were made to the partners.
1996 - To help the enterprise deal with a short-term liquidity problem, on 29 April Carlotta liquidated some personal securities and loaned the enterprise the proceeds of EUR 50,000. Carlotta expected to be repaid in no more than one year. In October, Betty's ownership interest in the enterprise was sold equally to Alison and Carlotta with Betty receiving a total of EUR 110,000 in cash and cash equivalents from Alison and Carlotta. The firm had EUR 12,000 net income for the year. Alison and Carlotta planned to incorporate the firm as at 1 January
1997 as a limited liability company. Prepare the equity section of the balance sheet of the partnership as at 31 December 1996.
1997 - The enterprise was incorporated on 1 January as planned. One hundred shares with a par value of EUR 100 were issued, 50 each to Alison and Carlotta. In March the bank agreed to increase the loan from EUR 100,000 to EUR 150,000; the proceeds of EUR 50,000 were used to repay Carlotta's EUR 50,000 loan. The net income for the year was EUR 26,000.
1998 - The net income was EUR 43,000. Calculate the EPS for 1998. 1999 - In January the company went public. One hundred thousand newly issued shares were sold at EUR 7.75 per share. The year's net income was EUR 68,000. Prepare a statement of invested capital as at 31 December 1999.
2000 - In January the company issued 500 20-year bonds with a face value of EUR 1,000 with an interest rate of 6 per cent. A part of the proceeds was used to repay the company's long-term debt. The year's net income was EUR 85,000.
2001 - In April Alison and Carlotta each sold 25,000 of their ordinary shares, receiving proceeds of EUR 11 per share. The company realised a net income of EUR 11,000. On 31 December, the company declared a dividend of EUR 0.15 per share, payable on 31 January 2002. Prepare the equity section of the balance sheet as at 31 December 2001.
2002 - Feeling that the market was undervaluing the company's shares, in June the management decided to purchase 20,000 on the open market. The purchase was made on 1 July at a price of EUR 10 per share. The shares were held as treasury shares, available for possible reissuance. The net income for 2002 was EUR 152,000. In December a dividend of EUR 0.20 per share was declared, payable the following month. Calculate the EPS for 2002.
2003 - In January the company issued 4,000 convertible preference shares with an annual dividend rate of EUR 5 per share. Proceeds of the issuance were EUR 200,000. Each share was convertible on demand into two ordinary shares. Net income before preferred dividends was EUR 186,000. In December a dividend of EUR 0.20 per ordinary share was declared, payable the following month. Calculate the basic and diluted EPS for 2003.
2004 - Net income before preference share dividends was EUR 252,000. On 31 December the company declared a dividend to be paid to ordinary shareholders of EUR 25,000. The market price of the ordinary shares on 31 December was EUR 17 per share. No preference shares were converted during the year. Calculate the basic and diluted EPS for 2004 and prepare the equity section of the balance sheet as at 31 December 2004. What is the company's debt-toequity ratio at the end of 2004?