Assignment Intermediate Accounting II Week 4

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E 18-18 Transactions affecting retained earnings

Shown below in T-account format are the changes affecting retained earnings of Brenner-Jude Corporation during 2011.  At January 1, 2011, the corporation had outstanding 105 million common shares, $1 par per share.

                                                                 Retained Earnings ($ in millions)

                                                                                                  90 beginning balance        

Retirement of 5 million common

Share for 22 million                                          2

                                                                                                       88 Net income for the year

Declaration and payment of a

$.33 per share cash dividend                         33

Declaration and distribution

of a 4% stock dividend                                    20    

                                                                                                          123 Ending Balance  

Required:

1.       From the information provided by the account changes you should be able to recreate the transaction that affected Brenner-Jude’s retained earnings during 2011.  Prepare the journal entries that Brenner-Jude must have recorded during the year for these transactions.

2.       Prepare a statement of retained earnings for Brenner-Jude for the year ended 2011.

P 18-5 Shareholders’ equity transactions; statement of shareholders’ equity 

Listed below are the transactions that affected the shareholders’ equity of Branch-Rickie Corporation during the period 2011-2013.  At December 31, 2010, the corporation’s accounts include:

($ in 000)

Common stock, 105 million shares at $1 par                                               105,000

Paid-in capital-excess of par                                                                            630,000

Retained earnings                                                                                              970,000

a.       November 1, 2011, the board of directors declared a cash dividend of $.80 per share on its common shares, payable to shareholders of record November 15, to be paid December 1.

b.      On March 1, 2012, the board of directors declared a property dividend consisting of corporate bonds of Warner Corporation that Branch-Rickie was holding as an investment.  The bonds had a fair value of 1.6 million, but were purchased two years previously for 1.3 million.  Because they were intended to be held to maturity, the bonds had not been previously written up.  The property dividend was payable to shareholders of record March 13, to be distributed April 5. 

c.       On July 12, 2012, the corporation declared and distributed a 5% common stock dividend (when the market value of the common stock was $21 per share).  Cash was paid in lieu of fractional shares representing 250,000 equivalent whole shares.

d.      On November 1, 2012, the board of directors declared a cash dividend of $.80 per share on its common shares, payable to shareholders of record November 15, to be aid December 1.

e.      On January 15, 2013, the board of directors declared and distributed a 3-for-2 stock split effected in the form of a 50% stock dividend when the market value of the common stock was $22 per share.

f.        On November 1, 2013, the board of directors declared a cash dividend of $.65 per share on its common shares, payable to shareholders of record November 15, to be paid December 1.

Required:

1.       Prepare the journal entries that Branch-Rickie recorded during the three-year period for these transactions.

2.       Prepare comparative statements of shareholders equity for Branch-Rickie for the three-year period ($ in 000s).  Net income was 330 million, 395 million, and 455 million for 2011, 2012, and 2013, respectively.

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 grand 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.

E 19-4 Restricted stock award plan; forfeitures anticipated

Magnetic-Optical Corporation offers a variety of share-based compensation plans to employees. Under its restricted stock award plan, the company on January 1, 2011, granted 4 million of its $1 par common shares to various division managers.  The shares are subject to forfeiture if employment is terminated within three years.  The common shares have a market price of 22.50 per share on the grant date.

Restricted:

1.       Determine the total compensation cost pertaining to the restricted shares.

2.       Prepare the appropriate journal entry to record the award of restricted shares of January 1, 2011.

3.       Prepare the appropriate journal entry to record compensation expense on December 31, 2011.

4.       Suppose Magnetic-Optical expected a 10% forfeiture rate on the restricted shares prior to vesting.  Determine the total compensation cost.

E 19-5 Stock option

 Its American Optical Corporation provides a variety of share-based compensation plans to its employees.  Under its executive stock option plan, the company granted options on January 1, 2011, that permit executives to acquire 4 million of the company’s $1 par common shares within the next five years, but not December 31, 2012 (the vesting date).  The exercise price is the market price of the shares on the date of grant, $14 per share.  The fair value of the 4 million options, estimated by an appropriate option pricing model, is $3 per option.  No forfeitures are anticipated.  Ignore taxes.

Required:

1.       Determine the total compensation cost pertaining to the options.

2.       Prepare the appropriate journal entry to record the award of options 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.

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

 

 

 

                                                           

   E 18-24 Profitability ratio

Comparative balance sheets for Softech Canvas Goods for 2011 and 2010 are shown below.  Softech pays no dividends, and instead reinvest all earnings for future growth.

Comparative Balance Sheets

($ in 000s)

December 31

                                                                                                                                      2011                                   2010     

Assets:

Cash                                                                                                                               50                                   40

Accounts Receivable                                                                                                 100                                 120  

Short-term investments                                                                                              50                                   40 

Inventory                                                                                                                      200                                140

Property, plant, and equipment (net)                                                                     600                                550

                                                                                                                                     1,000                               890   

Liabilities and Shareholder’s  Equity:

Current Liabilities                                                                                                        240                                210

Bonds payable                                                                                                             160                                160

Paid-in capital                                                                                                              400                                400

Retained earnings                                                                                                       200                                120    

                                                                                                                                     1,000                             1,000     

Required:

1.       Determine the return on shareholders’ equity for 2011.

2.       What does the ratio measure?                                                                  

 

                                                                                                                                                                                                                                                                      

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