2.
This assignment is part of the instructor designated points. A hardcopy must be submitted at the beginning of your class. Late submissions will not be accepted. The assignment is late (1) after the assignment is collected, (2) your professor asks if there are any more submissions, and (3) no one offers a submission. No assignment will be accepted by email or any electronic method. This assignment is due on Monday (April 14, 2014). Circle the letter of the best answer. This assignment is worth eight (8) points. GIVING OR RECEIVING ANY ASSISTANCE ON THIS ASSIGNMENT IS CHEATING.
1. Which of the following transactions would never cause the return on equity ratio to increase.
(All other things being equal.) a. a reissuance of treasury stock at an amount greater than the original purchase price. b. c. d. an increase in sales. a decrease in operating expenses. an increase in net income.
A is the correct answer.
Assume one share of treasury stock is purchased for $10. The journal entry would be:
Treasury stock
Cash
Cash
Treasury Stock
10
15
Additional Paid-in Capital
10
Assume it is reissued for $15. The journal entry would be:
10
5
This entry increase stockholders’ equity by $15 but does not change net income. That is, the denominator of ROE is increased but the numerator remains the same. Therefore it would
DECREASE ROE.
B increases the numerator and would increase ROE.
C increases the numerator and would increase ROE.
D increases the numerator and would increase ROE.
The DMG Company records provide the following for 2014:
Average Total Assets
Average Total Liabilities
Total Revenue
Total Expenses
$11,000,000 (Should have been $69,000,000)
$29,000,000
$10,000,000
$ 8,000,000
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3.
What is the percentage return on equity (rounded to the nearest tenth of a percent)? a. 27.5%. b. 25.0% c. d.
6.9%
5.0%
D is the correct answer.
Assets = Liabilities + Stockholders’ Equity
$69,000,000 = $29,000,000 + ???? (Stockholders’ Equity)
$69,000,000 - $29,000,000 = ???? (Stockholders’ Equity)
$40,000,000 = Stockholders’ Equity (Average)
Revenue – Expenses = Net Income
$10,000,000 - $8,000,000 = $2,000,000
ROE = Net Income/Average Stockholders’ Equity = $2,000,000/$40,000,000 = .05 or 5.0%.
DMG Company reported net income of $2,100,000 for 2014. On January 1, 2014, the number of shares of issued shares was 1,000,000 and there were 200,000 shares of treasury stock. On
December 31, 2014 the number of issued shares was 1,000,000 and there were 400,000 shares of treasury stock. Earnings per share would be (rounded to the nearest cent) a. $2.10. b. c.
$2.63.
$3.00. d. $3.50.
C is the correct answer.
January 1, 2014
Shares Issued 1,000,000
Minus Treasury Stock - 200,000
Shares Outstanding 800,000
December 31, 2014
1,000,000
- 400,000
600,000
Average number of shares outstanding = (800,000 + 600,000)/2 = 700,000 shares
Earnings Per Share = Net Income/Average Number Shares of Common Stock Outstanding
EPS = $2,100,000/700,000 shares = $3.00 per share.
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4.
5.
DMG Company declared a $1,750,000 dividend. You own 1,000 shares of the DMG Company stock. Additional information is:
2,000,000 shares of $1 par value common stock are authorized.
1,200,000 shares have been issued.
200,000 shares are in the treasury.
How much of a cash dividend will you receive? a. b. c. d.
$ 875.00.
$1,250.00.
$1,458.33.
$1,750.00.
D is correct.
Only stock outstanding receives a dividend.
Stock outstanding = Stock issued – Treasury Stock
1,000,000 = 1,200,000 – 200,000
Total dividends declared divided by stock outstanding give dividends per share.
$1,750,000/1,000,000 shares = $1.75 per share. d. b. c.
Multiply number of shares times dividend per share to get you share of dividends.
1,000 shares X $1.75 = $1,750.00.
DMG issues 1,000 shares of $2 par value common stock for $10 per share. The journal entry would be a. Cash
Retained Earnings
Common Stock
10,000
8,000
2,000
Cash
Common Stock
10,000
Cash
Common Stock
10,000
Additional paid-in capital-common
10,000
2,000
8,000
Cash
Common Stock
Common Stock Liability
10,000
3
2,000
8,000

6.
C is correct.
The amount of cash is the number of shares issued times the market price per share.
$10 X 1,000 shares = $10,000
Common stock increases by the par value times the number of shares issued.
$2 X 1,000 shares = $2,000 b. c.
Any amount received above the par value goes into Additional Paid-in Capital-Common
($10 - $2) X 1,000 shares = $8,000
DMG Company buys 1,000 shares of treasury stock for $15 per share on March 31, 2014. On
May 1, 2014 DMG Company reissues the treasury stock for $20 per share. The stock has a $1 par value. What is the proper journal entry to record the reissuance of the treasury stock? a. Cash 20,000
Treasury stock
Additional Paid-in Capital-Treasury
15,000
5,000
Cash
Treasury stock
Retained Earnings
20,000
15,000
5,000
Cash
Common Stock
20,000
1,000
Additional Paid-in Capital-Common 19,000 d. Cash
A is correct.
Treasury Stock
Gain on Sale of Treasury Stock
20,000
15,000
5,000
When treasury stock is bought it is recorded at cost. The entry on March 31, 2014 would be:
Treasury stock (1,000 shares X $15 per share) 15,000
Cash 15,000
When treasury stock is sold at a gain, no gain may be recorded. The gain is recorded as additional paid-in capital. There is a $5,000 gain in this problem ($20,000 - $15,000 = $5,000 gain). Therefore the journal entry is:
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7.
8. b. c. d.
Cash
Treasury stock
20,000
15,000
Additional Paid-in Capital-Treasury 5,000
ACCT2010 Company declared and distributed a 15% stock dividend on 100,000 shares of issued and outstanding $1 par value common stock. The market price on the date of declaration was
$180.00. Which of the following correctly describes the accounting for the declaration and distribution of the stock dividend? a. Retained earnings decreased $15,000.
Additional paid-in capital increased $15,000.
Common stock increased $2,700,000.
Retained earnings decreased $2,700,000.
D is correct.
A 15% stock dividend is considered a “small” stock dividend and is accounted for at market.
An additional 15,000 shares will be issued (100,000 shares X 0.15 = 15,000 shares) at $180.00 each for a total of $2,700,000 (15,000 shares X $180.00 = $2,700,000). The journal entry is:
Retained Earnings
Common Stock ($1 par value X 15,000 shares)
2,700,000
Additional Paid-in Capital (2,700,000 – 15,000)
15,000
2,685,000
ACCT2010 provided the following information for 2014:
Common stock with a $1,000,000 par value (total par value) was sold for $3,000,000 cash.
Cash dividends totaling $200,000 were declared and paid.
Net Income was $3,000,000.
A 10% stock dividend resulted in a common stock distribution which had a $1,000,000 par value and a $4,000,000 market value.
Treasury stock, purchased last year at a cost of $900,000 was sold this year for $700,000.
How much did ACCT2010 Company’s total stockholders’ equity increase during 2014? a. b. c.
$3,000,000.
$6,000,000.
$6,500,000. d. e.
$6,700,000.
Total stockholders’ equity did not increase, it decreased.
C is correct.
The journal entry to record the issuance of the common stock is:
Cash
Common Stock
3,000,000
5
1,000,000

Additional Paid-in Capital 2,000,000
Both Common Stock and Additional Paid-in Capital are stockholders’ equity accounts and they are being increased. Therefore this causes a $3,000,000 increase.
The declaration and payment of a cash dividend reduces retained earnings.
Retained earnings
Cash
200,000
200,000
Retained earnings is a stockholders’ equity account and it is going down. Therefore stockholders’ equity is reduced by $200,000.
Net income increase retained earnings which is a stockholders’ equity account. The journal entry would be:
Revenues
Retained Earnings
Expenses
XXXXX(Unknown)
Therefore stockholders’ equity goes up by $3,000,000.
3,000,000 (net income given)
XXXXXX(Unknown)
A stock dividend does not change total stockholders’ equity. The journal entry is:
Retained Earnings
Common Stock
4,000,000
Additional Paid-in Capital
1,000,000
3,000,000
Total stockholders’ equity does not change.
The reissuance of Treasury Stock at a loss increases stockholders’ equity. The journal entry would be:
Cash
Retained Earnings
Treasury Stock
Additional Paid-in Capital OR
700,000
200,000
900,000
The credit to Treasury Stock increases stockholders’ equity by 900,000. The debit to either
Additional Paid-in Capital or Retained Earnings decreases stockholders’ equity by 200,000.
The net change in stockholders’ equity is an increase of 700,000.
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Therefore the total effect is:
Sold stock
Declared and Paid Dividends
Net Income
Declared and Distributed Common Stock
Dividend
Reissued Treasury Stock
Total Change in Stockholders’ Equity
$3,000,000 increase
(200,000) decrease
$3,000,000 increase
0 no effect
$ 700,000 increase
$6,500,000 increase
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