Question 1 - Sagan Co. had these transactions during the current period. June 12Issued 80,000 shares of $1 par value common stock for cash of $300,000. July 11Issued 3,000 shares of $100 par value preferred stock for cash at $106 per share. Nov. 28Purchased 2,000 shares of treasury stock for $9,000. Instructions Prepare the journal entries for the Sagan Co. transactions.
Question 2 - On October 31, the stockholders' equity section of Manolo Company's balance sheet consists of common stock $648,000 and retained earnings $400,000. Manolo is considering the following two courses of action: (1) declaring a 5% stock dividend on the 81,000 $8 par value shares outstanding or (2) effecting a 2-for-1 stock split that will reduce par value to $4 per share. The current market price is $17 per share.
Instructions- Prepare a tabular summary of the effects of the alternative actions on the company's stockholders' equity and outstanding shares. Use these column headings: Before Action, After Stock Dividend, and After Stock Split.
Question 3 - Kojak Corporation decided to issue common stock and used the $300,000 proceeds to redeem all of its outstanding bonds on January 1, 2017. The following information is available for the company for 2017 and 2016.
| |
2017 |
2016 |
| Net income |
$ 182,000 |
$ 150,000 |
| Dividends declared for preferred stockholders |
8,000 |
8,000 |
| Average common stockholders' equity |
1,000,000 |
700,000 |
| Total assets |
1,200,000 |
1,200,000 |
| Current liabilities |
100,000 |
100,000 |
| Total liabilities |
200,000 |
500,000 |
Instructions
(a) Compute the return on common stockholders' equity for both years.
(b) Explain how it is possible that net income increased but the return on common stockholders' equity decreased.
(c) Compute the debt to assets ratio for both years, and comment on the implications of this change in the company's solvency.