Transactions that affect earnings do not necessarily affect cash

BE4-1 Transactions that affect earnings do not necessarily affect cash. Identify the effect, if any, that each of the following transactions would have upon cash and net income. The first transaction has been completed as an example.

Cash NetIncome
(a) Purchased $100 of supplies for cash. -$100 $0
(b) Recorded an adjusting entry to record use of $20 of the above supplies.
(c) Made sales of $1,300, all on account.
(d) Received $800 from customers in payment of their accounts.
(e) Purchased equipment for cash, $2,500.
(f) Recorded depreciation of building for period used, $600.

Click here for the solution: Transactions that affect earnings do not necessarily affect cash

Jennings Co. has earnings after interest but before taxes of $3,000

Jennings Co. has earnings after interest but before taxes of $3,000. The Company's times interest earned ratio is 7.00. Calculate the company's interest charges.

Click here for the solution: Jennings Co. has earnings after interest but before taxes of $3,000

The agreement under which Patterson, Inc., issued its long-term debt requires the restriction of $200,000 of the company's retained earnings balance

The agreement under which Patterson, Inc., issued its long-term debt requires the restriction of $200,000 of the company's retained earnings balance. Total retained earnings is $250,000 and total paid in capital is $500,000.

Required
Show how to report stockholder's equity on Patterson's balance sheet, assuming the following:
A. Patterson discloses the restrictions in a note. Write the note.
B. Patterson appropriates retained earnings in the amount of the restriction and includes no note in its statements.
C. Patterson's cash balance is $100,000. What is the maximum amount of dividends Patterson can declare?

Click here for the solution: The agreement under which Patterson, Inc., issued its long-term debt requires the restriction of $200,000 of the company's retained earnings balance

The balance in retained earnings on January 1, 2010, for Persinger Inc, was $800,000

The balance in retained earnings on January 1, 2010, for Persinger Inc, was $800,000. During the year, the corporation paid cash dividends of $90,000 and distributed a stock dividend of $8,000. In addition, the company determined that it had understated its depreciation expense in prior years by $50,000. Net income for 2010 was $120,000.

Prepare retained earnings statement for 2010.


Click here for the solution: The balance in retained earnings on January 1, 2010, for Persinger Inc, was $800,000

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

Williams Glassware has estimated, at various debt ratios, the expected earnings per share

P12-21 (EPS and Optimal Debt Ratio) Williams Glassware has estimated, at various debt ratios, the expected earnings per share and the standard deviation of the earnings per share as shown in the following table.

Debt ratio Earnings per share (EPS) Standard deviation of EPS
0% $2.30 $1.15
20 3.00 1.80
40 3.50 2.80
60 3.95 3.95
80 3.80 5.53

a. Estimate the optimal debt ratio on the basis of the relationship between earnings per share and the debt ratio. You will probably find it helpful to graph the relationship.
b. Graph the relationship between the coefficient of variation and the debt ratio. Label the areas associated with business risk and financial risk.


Click here for the solution: Williams Glassware has estimated, at various debt ratios, the expected earnings per share

Don Walls's gross earnings for the week were $1,780, his federal income tax withholding was $301.63, and his FICA total was $135.73

E10-5 Don Walls's gross earnings for the week were $1,780, his federal income tax withholding was $301.63, and his FICA total was $135.73.

Instructions:
a. What was Walls's net pay for the week?
b. Journalize the entry for the recording of his pay in the general journal. (Note: Use Salaries Payable; not Cash.)
c. Record the issuing of the check for Walls's pay in the general journal.

Click here for the solution: Don Walls's gross earnings for the week were $1,780, his federal income tax withholding was $301.63, and his FICA total was $135.73

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

Final earnings estimates for Chilean Health Spa & Fitness Center have been prepared for the CFO of the company and are shown in the following table

(Dividend policies) Final earnings estimates for Chilean Health Spa & Fitness Center have been prepared for the CFO of the company and are shown in the following table. The firm has 7,500,000 shares of common stock outstanding. As assistant to the CFO, you are asked to determine the yearly dividend per share to be paid depending on the following possible policies:

YEAR PROFITS AFTER TAXES
1 $ 18,000,000
2 21,000,000
3 19,000,000
4 23,000,000
5 25,000,000

a. A stable dollar dividend targeted at 40 percent of earnings over a 5-year period
b. A small, regular dividend of $0.60 per share plus a year-end extra when the profits in any year exceed $20,000,000. The year-end extra dividend will equal 50 percent of profits exceeding $20,000,000.
c. A constant dividend payout ratio of 40 percent

Click here for the solution: Final earnings estimates for Chilean Health Spa & Fitness Center have been prepared for the CFO of the company and are shown in the following table

Dublin Medical (DM), a large established corporation with no growth in its real earnings, is considering acquiring 100% of the shares of Arlington Corporation

Dublin Medical (DM), a large established corporation with no growth in its real earnings, is considering acquiring 100% of the shares of Arlington Corporation, a young firm with a high growth rate of earnings. The acquisitions analysis group at DM has produced the following table of relevant data:

Dublin Medical Arlington
Earnings per share $3.00 $2.00
Dividend per share $3.00 $.80
Number of shares 200 million 10 million
Stock price $30 $20

DM's analysts estimate that investors currently expect growth of about 6% per year in Arlington's earnings and dividends. They assume that with the improvements in management that DM could bring to Arlington, its growth rate would be 10% per year beginning one year from now with no additional investment outlays beyond those already expected.

1. What is the expected gain from the acquisition?
2. What is the net present value (NPV) of the acquisition to DM shareholders if it costs an average $30 per share to acquire all of the outstanding shares?
3. Would it matter to DM's shareholders whether the shares of Arlington stock are acquired by paying cash or DM stock?

Click here for the solution: Dublin Medical (DM), a large established corporation with no growth in its real earnings, is considering acquiring 100% of the shares of Arlington Corporation