Compute a fair rate of return for a common stock which has a 1.2 beta

Required rate of return using CAPM:

A. Compute a fair rate of return for a common stock which has a 1.2 beta. The risk free rate is 6% and the market portfolio has an expected return of 16%
B. Why is the rate computed considered a fair rate.

Click here for the solution: Compute a fair rate of return for a common stock which has a 1.2 beta

During its first year of operations, Collin Raye Corporation had the following transactions pertaining to its common stock

E15-1 (Recording the Issuances of Common Stock) During its first year of operations, Collin Raye Corporation had the following transactions pertaining to its common stock.

Jan 10 Issued 80,000 shares for case at $6 per share
Mar 1 Issued 5,000 shares to attorneys in payment of a bill for $35,000 for services rendered in helping the company to incorporate.
July 1 Issued 30,000 shares for cash at $8 per share

Instructions
a.) Prepare the journal entries for these transactions, assuming that the common stock has a par value of $5 per share.
b.) Prepare the journal entries for these transactions assuming that the common stock is no par with a stated value of $3 per share.

Click here for the solution: During its first year of operations, Collin Raye Corporation had the following transactions pertaining to its common stock

In order to encourage employee ownership of the company's $1 par common shares, Washington Distribution permits any of its employees

E 19-9 Employee share purchase plan

In order to encourage employee ownership of the company's $1 par common shares, Washington Distribution permits any of its employees to buy shares directly from the company through payroll deduction. There are no brokerage fees and shares can be purchased at a 15% discount. During March, employees purchased 50,000 shares at a time when the market price of the shares on the New York Stock Exchange was $12 per share.

Required:
Prepare the appropriate journal entry to record the March purchases of shares under the employee share purchase plan.

Click here for the solution: In order to encourage employee ownership of the company's $1 par common shares, Washington Distribution permits any of its employees

On January 1, 2011, VKI Corporation awarded 12 million of its $1 par common shares to key personnel, subject to forfeiture if employment is terminated within three years

E 19-2 Restricted stock award plan

On January 1, 2011, VKI Corporation awarded 12 million of its $1 par common shares to key personnel, subject to forfeiture if employment is terminated within three years. On the grant date, the shares have a market price of $2.50 per share.

Required:
1. Determine the total compensation cost pertaining to the restricted shares.
2. Prepare the appropriate journal entry to record the award of restricted shares on January 1, 2011.
3. Prepare the appropriate journal entry to record compensation expense on December 31, 2011.
4. Prepare the appropriate journal entry to record compensation expense on December 31, 2012.
5. Prepare the appropriate journal entry to record compensation expense on December 31, 2013.
6. Prepare the appropriate journal entry to record the lifting of restrictions on the shares at December 31, 2013.

Click here for the solution: On January 1, 2011, VKI Corporation awarded 12 million of its $1 par common shares to key personnel, subject to forfeiture if employment is terminated within three years

Pruitt Corporation owns 90% of the common stock of Sedbrook Company

Complete Equity with downstream sales:

Pruitt Corporation owns 90% of the common stock of Sedbrook Company. The stock was purchased for $540,000 on January 1, 2009, when Sedbrook Company’s retained earnings were $100,000. Preclosing trial balances for the two companies at December 31, 2013, are presented here.

Pruitt Sedbrook Corporation Company
Cash $ 83,000 $ 80,000
Accounts Receivable 213,000 112,500
Inventory 150,000 110,000
Investment in Sedbrook Co. 568,250
Other Assets 500,000 400,000
Dividends Declared 100,000 30,000
Purchases 850,000 350,000
Other expenses 180,000 137,500
$2, 644,250 $1,220,000

Accounts Payable 70,000 30,000
Other Liabilities 75,000 40,000
Common Stock 800,000 500,000
Retained Earnings 1/1 532,000 120,000

Sales 1,100,000 530,000
Equity in Subsidiary Income 67,250 $2,644,250 $1,220,000
Ending Inventory $ 200,000 $ 120,000

The January 1, 2013, inventory of Sedbrook Company includes $30,000 of profit recorded by Pruitt Corporation on 2012 sales. During 2013, Pruitt Corporation made intercompany sales of $200,000 with a markup of 25% on cost. The ending inventory of Sedbrook Company includes goods purchased in 2013 from Pruitt for $50,000. Pruitt Corporation uses the complete equity method to record its investment in Sedbrook Company.

a. Prepare the consolidated statements workpaper for the year ended December 31, 2013.
b. Calculate consolidated retained earnings on December 31, 2013, using the analytical or t-account approach.

Click here for the solution: Pruitt Corporation owns 90% of the common stock of Sedbrook Company

Benson, Inc. produces three separate products from a common process costing $100,000

ACC 560 Week 5 Assignment

E7-8 Benson, Inc. produces three separate products from a common process costing $100,000. Each of the products can be sold at the split-off point or can be processed further and then sold for a higher price. Shown below are cost and selling price data for a recent period.

Sales Value at Split-off Point Cost to Process Further Sales Value After Further Processing
Product 12 $50,000 $100,000 $190,000
Product 14 10,000 30,000 35,000
Product 16 60,000 150,000 220,000

a. Determine total net income if all products are sold at the split-off point.
b. Determine total net income if all products are sold after further processing.
c. Using incremental analysis, determine which products should be sold at the split-off point and which should be processed further.
d. Determine total net income using the results from the previous part of the question.

Click here for the solution: Benson, Inc. produces three separate products from a common process costing $100,000

On February 1, 2011, Punto Company purchased 95% of the outstanding common stock of Sara Company

PROBLEM 3-8 Intercompany Items, Two Subsidiaries

On February 1, 2011, Punto Company purchased 95% of the outstanding common stock of Sara Company and 85% of the outstanding common stock of Rob Company. Immediately before the two acquisitions, balance sheets of the three companies were as follows:

Punto Sara Rob
Cash $165,000 $ 45,000 $17,000
Accounts receivable 35,000 35,000 26,000
Notes receivable 18,000 0 0
Merchandise inventory 106,000 35,500 14,000
Prepaid insurance 13,500 2,500 500
Advances to Sara Company 10,000
Advances to Rob Company 5,000
Land 248,000 43,000 15,000
Buildings (net) 100,000 27,000 16,000
Equipment (net) 35,000 10,000 2,500
Total $735,500 $198,000 $91,000

Accounts payable $ 25,500 $ 20,000 $10,500
Income taxes payable 30,000 10,000 0
Notes payable 0 6,000 10,500
Bonds payable 100,000 0 0
Common stock, $10 par value 300,000 144,000 42,000
Other contributed capital 150,000 12,000 38,000
Retained earnings (deficit) 130,000 6,000 (10,000)
Total $735,500 $198,000 $91,000

The following additional information is relevant.
1. One week before the acquisitions, Punto Company had advanced $10,000 to Sara Company and $5,000 to Rob Company. Sara Company recorded an increase to Accounts Payable for its advance, but Rob Company had not recorded the transaction.
2. On the date of acquisition, Punto Company owed Sara Company $12,000 for purchases on account, and Rob Company owed Punto Company $3,000 and Sara Company $6,000 for such purchases. The goods purchased had all been sold to outside parties prior to acquisition.
3. Punto Company exchanged 13,400 shares of its common stock with a fair value of $12 per share for 95% of the outstanding common stock of Sara Company. In addition, stock issue fees of $4,000 were paid in cash. The acquisition was accounted for as a purchase.
4. Punto Company paid $50,000 cash for the 85% interest in Rob Company.
5. Three thousand dollars of Sara Companys notes payable and $9,500 of Rob Company's notes payable were payable to Punto Company.
6. Assume that for Sara, any difference between book value and the value implied by the purchase price relates to subsidiary land. However, for Rob, assume that any excess of book value over the value implied by the purchase price is due to overvalued buildings.

A. Give the book entries to record the two acquisitions in the accounts of Punto Company.
B. Prepare a consolidated balance sheet workpaper immediately after acquisition.
C. Prepare a consolidated balance sheet at the date of acquisition for Punto Company and its subsidiaries.


Click here for the solution: On February 1, 2011, Punto Company purchased 95% of the outstanding common stock of Sara Company

Glaser Services acquired 30% of the outstanding common stock of Nickels Company on January 1, 2008

Glaser Services acquired 30% of the outstanding common stock of Nickels Company on January 1, 2008, by paying $800,000 for the 45,000 shares. Nickels declared and paid $0.30 per share cash dividends on March 15, June 15, September 15, and December 15, 2008. Nickels reported net income of $320,000 for the year. At December 31, 2008, the market price of Nickels common stock was $24 per share.

Instructions
a) Prepare the journal entries for Glaser Services for 2008 assuming Glaser cannot exercise significant influence over Nickels. (Use the cost method and assume that Nickels common stock should be classified as a trading security.)
b) Prepare the journal entries for Glaser Services for 2008, assuming Glaser can exercise significant influence over Nickels. Use the equity method.
c) In tabular form, indicate the investment and income statement account balances at December 31, 2008, under each method of accounting.


Click here for the solution: Glaser Services acquired 30% of the outstanding common stock of Nickels Company on January 1, 2008

On December 31, 2010, Dow Steel Corporation had 600,000 shares of common stock and 300,000 shares

P 19-13

(Note: This is a variation of the previous problem, modified to include stock options.)

On December 31, 2010, Dow Steel Corporation had 600,000 shares of common stock and 300,000 shares of 8%, noncumulative, nonconvertible preferred stock issued and outstanding. Dow issued a 4% common stock dividend on May 15 and paid cash dividends of $400,000 and $75,000 to common and preferred shareholders, respectively, on December 15, 2011.

On February 28, 2011, Dow sold 60,000 common shares. In keeping with its long-term share repurchase plan, 2,000 shares were retired on July 1. Dow's net income for the year ended December 31, 2011, was $2,100,000. The income tax rate is 40%.

As part of an incentive compensation plan, Dow granted incentive stock options to division managers at December 31 of the current and each of the previous two years. Each option permits its holder to buy one share of common stock at an exercise price equal to market value at the date of grant and can be exercised one year from that date. Information concerning the number of options granted and common share prices follows:

The market price of the common stock averaged $32 per share during 2011.

Required:
Compute Dow's earnings per share for the year ended December 31, 2011.


Click here for the solution: On December 31, 2010, Dow Steel Corporation had 600,000 shares of common stock and 300,000 shares

On October 31, the stockholders’ equity section of Huth Company consists of common stock $300,000 and retained earnings $900,000

On October 31, the stockholders’ equity section of Huth Company consists of common stock $300,000 and retained earnings $900,000. Huth is considering the following two courses of action:

(1) Declaring a 5% stock dividend on the 30,000, $10 par value shares outstanding, or
(2) Effecting a 2-for-1 stock split that will reduce par value to $5 per share. The current market price is $14 per share.

Instructions
Prepare a tabular summary of the effects of the alternative actions on the components of stockholders’ equity, outstanding shares, and par value per share. Use the following column headings: Before Action, After Stock Dividend, and After Stock Split


Click here for the solution: On October 31, the stockholders’ equity section of Huth Company consists of common stock $300,000 and retained earnings $900,000

Baucom Manufacturing Corporation was started with the issuance of common stock for $50,000

P12-13A Baucom Manufacturing Corporation was started with the issuance of common stock for $50,000. It purchased $7,000 of raw materials and worked on three job orders during 2012 for which data follow. (Assume that all transactions are for cash unless otherwise indicated.)

Direct raw material used Direct labor
Job 1 $1,000 $2,000
Job 2 $2,000 $4,000
Job 3 $3,000 $2,000
Total $6,000 $8,000

Factory overhead is applied using a predetermined overhead rate of $0.60 per direct labor dollar. Jobs 2 and 3 were completed during the period and Job 3 was sold for $10,000 cash. Baucom paid $400 for selling and administrative expenses. Actual factory overhead was $4,300.

Required
a. Record the preceding events in a horizontal statements model. The first event for 2012 has been recorded as an example.
b. Reconcile all subsidiary accounts with their respective control accounts.
c. Record the closing entry for over- or underapplied manufacturing overhead in the horizontal statements model, assuming that the amount is insignificant.
d. Prepare a schedule of cost of goods manufactured and sold, an income statement, and a balance sheet for 2012.


Click here for the solution: Baucom Manufacturing Corporation was started with the issuance of common stock for $50,000

Fashionista Skincare has 10,000 shares of 3%, $20 par value preferred stock and 90,000 shares $2 par common stock outstanding

P12-32A Computing dividends on preferred and common stock.

Fashionista Skincare has 10,000 shares of 3%, $20 par value preferred stock and 90,000 shares $2 par common stock outstanding. During a three-year period, Fashionista declared and paid cash dividends as follows: 2010, $3,000; 2011, $13,000; and 2012, $17,000.

Requirements:
Compute the total dividends to preferred and to common for each of the three years if
a. preferred is noncumulative.
b. referred is cumulative,
For requirement 1.b., journalize the declaration of the 2012 dividends on December 22, 2012, and payment on January 14,2013. Use separate Dividends payable accounts for preferred and common.


Click here for the solution: Fashionista Skincare has 10,000 shares of 3%, $20 par value preferred stock and 90,000 shares $2 par common stock outstanding

The balance sheet of Lennox Health Foods, at December 31, 2011 reported 120,000 shares of no-par common stock authorized

P13-25A Journalizing dividend and treasury stock transactions, and preparing stockholders' equity

The balance sheet of Lennox Health Foods, at December 31, 2011 reported 120,000 shares of no-par common stock authorized, with 25,000 shares issued and a Common stock balance of $190,000. Retained earnings had a balance of $115,000. During 2012, the company completed the following selected transactions:

Mar 15 - Purchased 9,000 shares of treasury stock at $8 per share.
Apr 30 - Distributed a 10% stock dividend on the outstanding shares of common stock. The market value of common stock was $9 per share.
Dec 31 - Earned net income of $110,000 during the year. Closed net income to Retained

Requirements:
Record the transactions in the general journal. Explanations are not required. Prepare the stockholders' equity section of Lennox Health Foods' balance sheet at December 31, 2012.


Click here for the solution: The balance sheet of Lennox Health Foods, at December 31, 2011 reported 120,000 shares of no-par common stock authorized

In late 2010, you purchased the common stock of a company that has reported earnings increase in nearly every quarter since your purchase

In late 2010, you purchased the common stock of a company that has reported earnings increase in nearly every quarter since your purchase. The price of the stock increased from $12 a share at the time of purchase to a current level of $45. Notwithstanding the success of the company, competitors are gaining much strength. Further, your analysis indicates that the stock may be over-priced based on your projection of future earnings growth. Your analysis, however, was the same one year ago and the earnings have continued to increase. Actions that you might take range from an outright sale of the stock (and the payment of capital gains tax) to doing nothing and continuing to hold the shares. You reflect on these choices as well as other actions that could be taken. Describe the various actions that you might take and their implications.

Click here for the solution: In late 2010, you purchased the common stock of a company that has reported earnings increase in nearly every quarter since your purchase

Spinone Corporation directs its sole shareholder to exchange all of his common stock valued at $200,000 (basis of $50,000) for $100,000 of common stock, $80,000 of preferred stock, and $20,000 in cash

Spinone Corporation directs its sole shareholder to exchange all of his common stock valued at $200,000 (basis of $50,000) for $100,000 of common stock, $80,000 of preferred stock, and $20,000 in cash. In addition, Spinone directs its sole bondholder to exchange her $150,000 of bonds paying 6.0% for $170,000 of bonds paying 5.3% How are these transactions treated for tax purposes by the shareholder, the bondholder, and Spinone?

Click here for the solution: Spinone Corporation directs its sole shareholder to exchange all of his common stock valued at $200,000 (basis of $50,000) for $100,000 of common stock, $80,000 of preferred stock, and $20,000 in cash