On October 31, the stockholders’ equity section of Omar Company consists of common stock $600,000 and retained earnings $900,000. Omar is considering the following two courses of action: (1) declaring a 5% stock dividend on the 60,000, $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 and outstanding shares. Use the following column headings: Before Action, After Stock Dividend, and After Stock Split.
After Stock Dividend
After Stock Split
In excess of par value
Total paid-in capital
Total stockholder’s equity
$1,500,000 Outstanding Shares
Max Weinberg is studying for an accounting test and has developed the following questions about investments.
1. What are three reasons why companies purchase investments in debt or stock securities?
Companies purchase securities to liquidate excess cash, generate interest income, to diversify their funds and in order to obtain control over a start-up company or meet their strategic goals. 2. Why would a corporation have excess cash that it does not need for operations? Excess cash is often kept in case of emergencies to provide a protective cushion for the company should they need quick access to funds.
3. What is the typical investment when investing cash for short periods of time? Trading securities and treasury bills
4. What are the typical investments when investing cash to generate earnings?
Certificates of deposit issued by banks, money market certificates, treasury bills issued by the U.S. Government, bonds and commercial paper (notes) issued by other corporations.
5. Why would a company invest in securities that provide no current cash flows? For taxes purposes by helping to delay their own cash flow.
6. What is the typical stock investment when investing cash for strategic reasons? A company might purchase an interest in another company in order to establish a presence in a specific industry or might attempt to purchase a large but not controlling interest in another company to generate influence over others. Sometimes, companies purchase stocks of other companies in an unrelated industry they might be interested in entering.
Foren Corporation had the following transactions pertaining to debt investments. Jan. 1 Purchased 50 8%, $1,000 Choate Co. bonds for $50,000 cash plus brokerage fees of $900. Interest is payable semiannually on July 1 and January 1. July 1 Received semiannual interest on Choate Co. bonds.
July 1 Sold 30 Choate Co. bonds for $34,000 less $500 brokerage fees. Instructions
Journalize the transactions.
Gain on Sale
(b) Prepare the adjusting entry for the accrual of interest at December 31. Title
Arnold Corporation has been authorized to issue 40,000 shares of $100 par value, 8%, noncumulative preferred stock and 2,000,000 shares of no-par common stock. The corporation assigned a $5 stated value to the common stock. At December 31, 2011, the ledger contained the following balances pertaining to stockholders’ equity.
Preferred Stock $ 240,000
Paid-in Capital in Excess of Par Value—Preferred 56,000
Common Stock 2,000,000
Paid-in Capital in Excess of Stated Value—Common 5,700,000 Treasury Stock—Common (1,000 shares) 22,000
Paid-in Capital from Treasury Stock...
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