Questions

Exercise 1

On the balance sheet as of December 31, 2014, Groningen Robotics Corporation reported its stockholders' equity as follows:

Preferred Stock, 9% noncumulative, 100 par value, 10,000
shares authorized, 5,000 shares issued and outstanding                      $500,000

Common Stock, $5 par value, 1,500,000 shares authorized,
600,000 shares issued and outstanding                                               3,000,000

Additional Paid-in Capital-Common Stock                                           1,250,000

Retained Earnings                                                                               2,967,000

Total stockholders' equity                                                            $7,717,000

During 2015, the following transactions occurred:

• Feb 12 - Issued 30,000 shares of its $5 par value common stock for $750,000 cash.
• Feb 22 - Purchased 5,000 shares of its own stock for $30 per share, the current market price.
• Feb 28 - Issued 10,000 shares of its $5 par value common stock in exchange for land and a building. The building is estimated to have a market value of $170,000. Market value of stock is $30. Management records land at market value of stock minus market value of building.
• March 9 - Sold 1,000 shares of treasury stock purchased on Feb 22 for $31 per share
• April 30 - Declared cash dividend for a full year to preferred stockholders and a stock dividend for common stockholders. Dividend to preferred stockholders is to be paid on June 30 2015 to shareholders of record on May 1, 2015. Declared & issued a 10 percent stock dividend (Market value of the stock was $35.00 on April 30 and $28.00 on June 30).
• May 1 - Sold 2,500 shares of treasury stock purchased on Feb 22 for $30 per share.
• May 1 - Date of Record
• May 7 - Sold 1,500 shares of treasury stock purchased on Feb 22 for $27 per share.
• June 30 - Distributed the dividend.
• September 1 - Declared a 2-for-1 stock split.

Question A

Record the above transactions by preparing the appropriate journal. Skip a line between the different journal entries and state explicitly if no journal entry is needed. You are required to use accounts provided in the chart below only.

Chart of accounts exercise 1 (in alphabetical order)

Accounts Payable
Accounts Receivable
Additional Paid-in Capital, Common Stock
Additional Paid-in Capital, Preferred Stock
Building
Cash
Cash Dividends
Common Stock
Common Stock Distributable
Dividends Payable
Land
Paid-in Capital, Treasury Stock
Preferred Stock
Retained Earnings
Stock Dividends
Treasury Stock

Question B

Prepare the Statement of Stockholders' Equity as it should appear on December 31, 2015. There was no profit or loss to Groningen Robotics during 2015.

Groningen Robotics

Statement of Stockholders’ Equity

For the Year Ended December 31, 2015

Contributed Capital

             Preferred Stock, 9% noncumulative, $100 par value, 10,000 shares                                              $                   
             authorized, 5,000 shares issued and outstanding

             Common Stock, $________ par value, 1,500,000 shares                                      $                
             authorized, __________________ shares issued and outstanding

             Additional Paid-In Capital, Common Stock                                                                            

             Paid-in Capital, Treasury Stock, Common                                                                                                                                        

             Total Contributed Capital                                                                                               $                 

Retained Earnings                                                                                                                                                     

Total Contributed Capital & Retained Earnings                                                                                          $                 

Less: Treasury Stock                                                                                                                                                   

Total Stockholders’ Equity                                                                                                           $                  

Question C

Issuing common and preferred stock generally has been popular among corporations. However, some companies have bought back their common stock. What are 3 reasons why a company would buy back its own shares?

Question D

Compute the book value per share of preferred stock and the book value per share of common stock. Assume a call value of $105 for preferred stock. Round your answer to the nearest cent.

Question E

Repeat the above calculations (assumed that total stockholders’ equity of question D doesn’t change) and now assume that the preferred stock is cumulative and has two years' dividends in arrears. Compute the book value per share of preferred stock and the book value per share of common stock. Again, provide your answer rounded to cents.

Exercise 2

Star Company is a trading company specialized in buying and selling plastic figurines based on movie characters. The financial year starts on January 1 and ends on December 31. Star Company’s beginning balance sheet (in euros) on January 1, 2015, is as follows:

The information provided in the footnotes is as follows:

Star Company uses the straight-line method to depreciate its building, and the double- declining balance method to depreciate its trucks. The trucks have an expected useful life of ten years and no residual value.

The building has an expected useful life of twenty years and a residual value of € 5,000,000.

The interest on the mortgage is paid annually on June 30. The principal of the mortgage will be repaid in full on December 31, 2030.

All purchases and sales are on credit.

Accounts receivable trade (net) consists of the following items:

• Accounts receivable trade (gross): 730,000
• Allowance for uncollectible accounts: (80,000)
• Accounts receivable trade (net): 650,000

During the year, write-offs are equal to € 54,000. Star Company uses the accounts receivable aging method to estimate the Allowance for uncollectible accounts. An analysis of the Accounts receivable shows that € 97,000 may be uncollectible.

Gross sales during 2015 are € 6,400,000. During the year, total sales discounts are € 450,000. € 300,000 worth of sales were returned to Star Company during the year.

The table below gives an overview of all cash receipts and cash expenditures during 2015 (in euros).

Schedule of cash receipts and expenditures over 2015 (in euros)

Receipts                                                          Expenditures
Payments on accounts receivable 3.825.000       Payments on accounts payable 4.050.000
                                                                        Salaries paid 150.000
                                                                        Interest paid

On December 31, 2015, the amounts of the following balance sheet items are given:

• Trade inventory 730,000
• Accounts payable trade 380,000
• Salaries payable 44,000

Question A

Use the information provided to determine the purchase date of the trucks. Use a calculation to support your answer.

Question B

Complete the schedule of cash receipts and expenditures over 2015 and calculate the Cash balance on December 31, 2015.

Question C

Calculate the uncollectible accounts expense over the year 2015 and determine the Allowance for uncollectible accounts balance on December 31, 2015.

Question D

Calculate the purchase of trade inventory over the year 2015.

Question E

Calculate the cost of goods sold over the year 2015.

Question F

Complete the income statement for 2015 and show your calculations.

Income statement, 2015 (in euros)

Question G

Calculate the Accounts receivable trade (net) balance on December 31, 2015.

Question H

Complete the balance sheet on December 31, 2015 and show your calculations.

Balance sheet on December 31, 2015 (in euros)

Question I

Prepare the cash flow statement from operating activities according to the indirect method for
the year 2015.

Question J

Calculate the receivable turnover at the end of the year 2015.

Answers

Exercise 1

Question A

Question B

Groningen Robotics

Statement of Stockholders’ Equity

For the Year Ended December 31, 2015

Contributed Capital

             Preferred Stock, 9% noncumulative, $100 par value, 10,000 shares                                   $
             authorized, 5,000 shares issued and outstanding

             Common Stock, $ 2.5  par value, 1,500,000 shares                                     $3,518,000
             authorized, 1,407,200 shares issued and outstanding

             Additional Paid-In Capital, Common Stock                                                  4,008,000

             Paid-in Capital, Treasury Stock, Common                                                            0              7,526,000                

             Total Contributed Capital                                                                                               $

Retained Earnings                                                                                                                               692,500

Total Contributed Capital & Retained Earnings                                                                                $8,718,500

Less: Treasury Stock                                                                                                                         0

Total Stockholders’ Equity                                                                                                             $8,718,500

Exercise 2

Question A

The depreciable cost of the trucks is 420,000. Accumulated depreciation on Jan. 1, 2015, is
204,960. This means that the carrying value at that time is 215,040. Since the expected
useful life is equal to ten years and the company uses the double declining balance, the
annual depreciation rate is 20%. One year after the purchase, the carrying value is 420,000 *
0.80 = 336,000. Two years after the purchase the carrying value is 336,000 * 0.80 = 268,800,
and after three years the carrying value is 268,800 * 0.80 = 215,040. Hence, the purchase
date is January 1, 2012.

Question B

Interest paid: 4,000,000 * 5% = 200,000 (1 credit)
Cash balance 31/12/2015: 1,134,000+ 3,825,000 – 4,050,000 – 150,000 – 200,000
= 559,000

Question C

Uncollectible accounts expense: the target balance for the allowance is 97,000. Beginning
balance is 80,000, write-offs are 54,000. This means that the expense will need to be equal
to 97,000 – 80,000 + 54,000 = 71,000
Ending balance: aging method is used, so given: 97,000

Question D

Accounts Payable beginning + Purchases – Payments = Accounts Payable ending
440,000 + Purchases - 4,050,000= 380,000
Purchases = 3,990,000

Question E

Trade inventory beginning + Purchases – COGS = Trade inventory ending
820,000 + 3,990,000 - COGS = 730,000
Cost of goods sold = 4,080,000

Question F

The income statement for 2015 looks as follows

Calculations

Sales (and discounts and returns & allowances): given
Cost of goods sold: see question E
Salaries expense: salaries paid + change in salaries payable: payable has gone up, so this
difference needs to be added to salaries paid: 150,000 + (44,000 – 40,000) = 154,000

Depreciation building: depreciable cost is 8,500,000 – 5,000,000 = 3,500,000. The
depreciation rate is 5%, so depreciation expense is 0.05 * 3,500,000 = 175,000

Depreciation expense truck: The company uses the double-declining balance method,
estimated life is ten years. This means that the annual depreciation rate is 20%. The carrying
value of Trucks at the beginning of the year is 215,040. This means that depreciation
expense is 0.2* 215,040 = 43,008

Interest expense: 4,000,000 * 5% = 200,000

Uncollectible accounts expense: see question C

Question G

Beginning balance for acc. rec. trade gross is 730,000 (given). During the year, acc. rec.
trade gross was affected by net sales (5,650,000), payments on acc. rec. (3,825,000), and
the write-offs (54,000). The ending balance for acc. rec. trade gross is therefore 730,000 +
5,650,000 – 3,825,000 – 54,000 = 2,501,000.

The ending balance for the Allowance is 97,000 (given), so the ending balance for acc. rec.
trade (net) is 2,501,000 – 97,000 = 2,404,000.

Question H

Calculations

Acc. depr. building and trucks: beginning balance plus answers to question D and E
Trade inventory: given
Accounts receivable trade (net): see question G
Cash: see question B
Mortgage payable: remains the same; 4,000,000
Accounts payable trade: given
Salaries payable: given
Interest payable: 6/12 * 5% * 4,000,000 = 100,000
Common stock / additional paid in capital: given
Retained earnings: beginning + net income = 2,039,040+ 926,992 = 2,966,032

Question I

Question J

Receivable turnover = Net revenue / net average accounts receivable
= 5,650,000 / ((650,000 + 2,404,000) / 2) = 3.70