ACTG 2011 Study Guide - Midterm Guide: Net Income, Comprehensive Income, Financial Statement

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25 Mar 2016

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There are two type of shares a corporation can issue: Common shares represent residual ownership in an entity. Common shareholders are entitled to earnings and asset after: Obligation to debt holders and preferred shareholders have been satisfied. Par value - a value assigned to each common share in the articles of incorporation. No par value shares - shares that don"t have a par value. Canada business corporation act don"t permit par value share. Preferred shares are shares with rights that must be satisfied before those of common shareholders. > must be paid before any are paid to common shareholders. > recovers their investment before common shareholder if liquidation. Are taxed at a lower rate than interest. > if preferred divided is missed, dividends on common shares can"t be paid until all missed preferred dividends have been paid. > shareholders can exchange preferred shares for a specified number of common shares for each preferred share.

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Trask Corporation, a public company whose shares are traded in the over-the-counter market, had the following shareholders' equity account balances at December 31, 2016:

Common stock $7,875,000

Additional paid-in capital (including stock options) $16,050,000

Retained earnings $16,445,000

Treasury common stock $750,000

Transactions during 2017 and other information relating to the shareholders' equity accounts follow:

As of January 1, 2017, Trask had 4,000,000 authorized shares of $5 par-value common stock; it had issued 1,575,000 shares of which 75,000 were held in treasury.

On January 21, 2017, Trask issued 50,000 shares of $100 par value, 6% cumulative preferred stock at par in exchange for all of Rover Company's assets and liabilities. On that date, the net carrying amount of Rover's assets and liabilities equaled their fair values.

On January 22, 2017, Rover distributed the Trask shares to its stockholders in a complete liquidation and dissolution of Rover. Trask had 150,000 authorized shares of preferred stock.

On February 17, 2017, Trask formally retired 25,000 of 75,000 treasury common stock shares. The shares were originally issued at $15 per share and had been acquired on September 25, 2016, for $10 per share.

Trask owned 15,000 shares of Harbor Inc. common stock purchased in 2016 for $600,000. The Harbor stock shares are carried t fair value with price changes included in net income. On March 5, 2017, Trask declared a property dividend of one share of Harbor common stock for every 100 shares of Trask common stock held by a shareholder of record on April 16, 2017. Harbor stock's market price on March 5, 2017, was $60 per share. The property dividend was distributed on April 29, 2017.

On January 2, 2012, Trask granted stock options to employees to purchase 200,000 shares of the company's common stock at $12 per share, which was also the market price on that date. The options had a grant date fair value of $1.50 per share and are exercisable within a three-year period, beginning January 2, 2017. On June 1, 2017, employees exercised 150,000 options when the stock's market value was $25 per share. Trask issued new shares to settle the transaction.

On December 12, 2017, Trask declared the yearly cash dividend on preferred stock, payable on January 11, 2018, to shareholder of record on December 31, 2017.

On January 16, 2018, before the accounting records were closed for 2017, Trask learned that depreciation expense had been understated by $350,000 for the year ended December 31, 2016. The after-tax effect on 2016 net income was $245,000. The appropriate correcting entry to adjust January 1, 2017 retained earnings was recorded on the same day.

Net income for 2017 was $2,400,000.

Required:

Prepare a schedule to show how Trask's retained earnings changed from January 1, 2017, to December 31, 2017.

Prepare the shareholders' equity section of Trask's balance sheet at December 31, 2017.

Compute the book value per share of common stock at December 31, 2017

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Match the items below by selecting the appropriate number in thespace provided.

Net income retained in the corporation.
The amount that must be retained in the business for theprotection of creditors.
Preferred stockholders have a right to receive current andunpaid prior-year dividends before common stockholders receive anydividends.
Creditors only have corporate assets to satisfy theirclaims.
Responsible to stockholders for corporate activity.
The amount assigned to each share of stock in the corporatecharter.
Unit of ownership in a corporation.
Enables stockholders to maintain their same percentageownership when new shares are issued.
Corporation's own stock that has been reacquired by thecorporation but not retired.
Total amount paid-in on capital stock.

1.	Limited liability
2.	Capital stock
3.	Board of directors
4.	Paid-in capital
5.	Retained earnings
6.	Preemptive right
7.	Par value
8.	Legal capital
9.	Treasury stock
10.	Cumulative feature

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6. Hasbrooke Corporation has 50,000 shares of $1 par value commonstock and 20,000 shares of cumulative 8%, $100 par preferred stockoutstanding. Hasbrooke has not paid a dividend for the prior year.If Hasbrooke declares a $1.50 per share dividend this year, whatwill be the total amount they must pay their shareholders?

A) $30,000

B) $320,000

C) $395,000

D) $75,000

7. Retained earnings represents:

A) Cash available for dividends.

B) The amount initially invested in the business bystockholders.

C) Cash available for expansion and growth.

D) Income that has been reinvested in the business rather thandistributed as dividends to stockholders.

8. On January 1,2006, Lane Corporation had 50,000 shares of $5 par value commonstock outstanding. On March 31, 2006, Lane issued an additional8,000 shares in exchange for a building. What number of shares willbe used in the computation of basic EPS for the year 2006?

A) 50,000.

B) 58,000.

C) 56,000.

D) 52,000.

9. Mirage Corporation's financial statements for the current yearinclude the following:

Income from continuingoperations...............................................................	$620,000
Prior period adjustment (increase in prior year net income, net oftaxes)......................................................................	190,000
Cash dividends paid to preferredstockholders............................................................	202,000
Gain on sale of discontinued operations (net oftaxes)......................................................................	410,000
Operating loss on discontinued operations (net of taxes) net income, net of taxbenefit)...................................................................	320,000
Extraordinary loss (net of taxbenefit)...................................................................	95,000

On the basis of this information, net income for the current yearis:

A) $1,007,000.

B) $ 620,000.

C) $1,445,000.

D) $ 615,000.

10. During the year 2007,Moonglow Corporation suffered a $600,000 loss when its factory wasdestroyed in a flood. Assuming the corporate income tax rate is34%, what amount will Moonglow report as an extraordinary loss onits income statement for 2007? Assume floods are not common in thisarea.

A) $600,000

B) $396,000

C) $204,000.

D) Nothing, since this does not qualify as an extraordinaryitem.

11. Galaxy Corporation was organized on January 1 and issued 500,000shares of common stock on that date. On July 1, an additional200,000 shares were issued for cash. Net income for the year was$2,160,000. Net earnings per share amounted to:

A) $4.32.

B) $3.75.

C) $3.09.

D) $3.60.

18. Kims Corporation plansto invest $100 million to earn about 20% before income taxes. Thecompany is considering whether it should raise the $100 million byissuing 10% bonds payable or capital stock. If the company issuesthe bonds, it will probably report:

A) Lower net income and lower income taxes expense than if itissues capital stock.

B) Higher net income and higher income taxes expensethan if it issues capital stock.

C) Lower net income and higher income taxes expensethan if it issues capital stock.

D) Higher net income and lower income taxes expense than if itissues capital stock.

19. The amortization of a bonddiscount:

A) Decreases the carrying value of a bond and increases interestexpense.

B) Decreases the carrying value of a bond and decreasesinterest expense.

C) Increases the carrying value of a bond and increasesinterest expense.

D) Increases the carrying value of abond and decreases interest expense.

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ACTG 2011 Study Guide - Midterm Guide: Net Income, Comprehensive Income, Financial Statement

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