Problem 1:
The HNR Company’s common stock information includes:
Current market price per share: $154
Current book value per share: $117
Current par value per share: $40
Shares issued and outstanding: 9,620,000
Instructions:
A. Prepare the journal entries necessary to record a 90% stock dividend.
B. Without regard to A., prepare the journal entries necessary to record a 5-for-1 stock split.
C. Discuss the differences between these methods of decreasing a stock’s price from the standpoint of both the securities market and the company’s accounting.
Problem 2:
The LMI Company’s stockholders’ equity section of the balance sheet as of December 31, 2008 follows:
Preferred stock, 12%, $60 par, (25,000 shares authorized, 5,000 shares issued and outstanding) $300,000
Common stock, $8 par (140,000 shares authorized, 40,000 shares issued and outstanding) 320,000
Total capital stock $620,000
Additional paid-in capital 200,000
Total paid-in capital $820,000
Retained earnings 1,160,000
Total stockholder’s equity $1,980,000
The LMI Company took the following actions during 2009:
1. On February 1, issued dividend payments in the amount of $2.00 per common share and $7.20 per preferred share. The dividends were declared by the Company’s board of directors on December 31, 2008.
2. On March 1, on the open stock market, purchased 6,000 shares of its own common stock at $33.
3. On April 1, acquired equipment valued at $83,200 in exchange for 2,400 of the shares of its own common stock purchased on March 1.
4. On May 1, issued 1,250 shares of preferred stock at $63 per share.
5. On June 1, the board of directors declared a 14% stock dividend on its outstanding common stock. On the date of the dividend, the stock was trading in the stock market at $37 per share.
6. On August 1, the company issued the stock dividend that was declared on June 1.
7. On December 31, the board of directors declared a dividend in the amount of $2.00 per common share and $7.20 per preferred share. The dividends will be paid on February 1 of the next year.
Instructions:
A. Assuming that the LMI Company uses the cost method to account for treasury stock, prepare the journal entries necessary to record the above transactions for 2009.
B. Assuming that net income for 2009 was $600,000, prepare the stockholder’s equity section of the Company’s balance sheet as of December 31, 2009.
Problem 3:
A manufacturer of camping equipment, the GWD Company’s condensed partial income statement for the year 2010 follows:
Revenue $381,000
Expenses other than interest and taxes 209,000
Net income before interest and taxes $172,000
All during 2010 the company had 100,000 shares of common stock issued and outstanding.
The Company’s income tax rate is 39%.
The Company issued 140, 7% convertible bonds at their face value of $1,000. Each bond may be converted to 120 shares of common stock.
Instructions:
Compute the basic and diluted earnings per share for 2010 in each of the following independent situations:
(Note: Compute EPS to the penny.)
A. The bonds were issued during 2009. During 2010 none of the bonds were converted.
B. The bonds were issued on March 1, 2010. During 2010 none of the bonds were converted.
C. The bonds were issued during 2009. 40 of the bonds were converted on August 1, 2010.
Problem 4:
The DRK Company was incorporated on January 20 , 2012. The articles of incorporation granted DRK Company the right to issue the following stock:
Common: 400,000 shares, $10 par.
Preferred: 80,000 shares, 6%, $75 par.
The preferred stock is noncumulative, nonconvertible and nonparticipating.
During 2012, the transactions involving DRK Company stock were as follows:
1. On February 22 DRK Company issued 160,000 shares of common stock at $21 per share.
2. On March 1 DRK Company acquired assets from the former owner of a similar company that had ceased business. The assets acquired included factory equipment, and land including a factory building. DRK Company issued 64,000 shares of preferred stock in exchange for the assets. On the day of the exchange, the fair market values of the assets acquired were:
Asset Acquired Fair Market Value
Land $3,214,000
Factory Building 1,348,000
Factory Equipment 622,000
3. On May 6 DRK Company repurchased 14,400 shares of its own stock for $25 per share.
4. On July 14 DRK Company resold the 14,400 shares of common stock that it had reacquired on May 6 for $19 per share.
5. On December 31, the board of directors of the DRK Company declared the preferred stock dividend. In addition it declared a cash dividend on the common stock of $0.33 per share.
Additional information:
The DRK Company ends its accounting year on December 31.
The company realized $619,000 net income for the year.
The Company uses the cost method to account for treasury stock.
Instructions:
A: Prepare the necessary journal entries to record all of the above transactions.
B: Prepare the equity section of the DRK Company’s balance sheet as of December 31, 2012.