Assignment# 02

Course : Financial Accounting (5418)

Semester: Strping, 2023

Name: Muhammad Rizwan

Roll No: BY479040

Reg No: 19PCR04174

Question # 01

Answer:

a. What do you know about stockholder equity? Explain. Also

draw the specimen of stockholder equity section of balance sheet.

Answer:

Stockholder equity, also known as shareholders' equity or owner's equity, is a

crucial component of a company's balance sheet. It represents the residual interest

in the assets of a company after deducting its liabilities. In simpler terms,

stockholder equity is the value of the company's assets that belongs to its

shareholders, once all debts and obligations have been settled.

Stockholder equity is essentially the difference between a company's total assets

and total liabilities. It reflects the company's net worth or book value, indicating

the value that would be left for shareholders if all assets were liquidated and all

debts paid off. Stockholder equity is an important metric for investors, as it

provides insight into a company's financial health and its ability to generate value

for its owners.

The stockholder equity section of a balance sheet typically includes the following

components:

1. Common Stock: This represents the par value of the company's issued shares of

common stock. Par value is an arbitrary nominal value assigned to each share
when it's initially issued and doesn't necessarily reflect the market value of the

shares.

2. Additional Paid-in Capital (APIC):

APIC, also known as "contributed capital in excess of par," includes the amount of

money received from investors above the par value of the common stock. It

accounts for the premium paid by shareholders for the company's shares.

3. Retained Earnings:

Retained earnings are the cumulative amount of profits the company has earned

and retained over its history, minus any dividends or distributions paid to

shareholders. Retained earnings represent the portion of profits that have been

reinvested in the company rather than distributed to shareholders.

4. Treasury Stock:

If a company repurchases its own shares from the market, these shares are

classified as treasury stock. Treasury stock is subtracted from stockholder equity

because it represents shares that the company effectively owns itself.

5. Accumulated Other Comprehensive Income (AOCI):

AOCI includes unrealized gains and losses that are not yet realized through the

income statement. These gains and losses might come from things like changes in

the value of certain investments or foreign currency translation adjustments.

6. Noncontrolling Interest (Minority Interest):

This represents the equity ownership held by individuals or entities other than the

parent company. Noncontrolling interest arises when a company owns less than

100% of another company but still has a significant ownership stake.

Here's a simplified example of how the stockholder equity section might

appear on a balance sheet:

```

Stockholder Equity

------------------

Common Stock $X

Additional Paid-in Capital $Y

Retained Earnings $Z

Treasury Stock ($A)

Accumulated Other Comprehensive Income ($B)

Non controlling Interest $C

Total Stockholder Equity $Total

Total Liabilities and Equity $Total Assets

```

In this example, the total stockholder equity is calculated as the sum of common

stock, additional paid-in capital, retained earnings, subtracting treasury stock,

adding accumulated other comprehensive income, and adding noncontrolling

interest. This total equity should match the difference between total assets and total

liabilities on the balance sheet.

b. Prepare journal entries to record the following four separate

issuances of stock.

1. A corporation issued 2,000 shares of no-par common stock to

its promoters in exchange for their efforts, estimated to be worth Rs.

30,000. The stock has no stated value.

2. A corporation issued 2,000 shares of no-par common stock to

its promoters in exchange for their efforts, estimated to be worth Rs.

30,000. The stock has a Rs. 1 per share stated value.

3. A corporation issued 4,000 shares of Rs. 10 par value common

stock for Rs. 70,000 cash.

4. A corporation issued 1,000 shares of Rs. 100 par value

preferred stock for Rs. 120,000 cash.

Answer:

Sure, I can help you prepare the journal entries for each of these stock issuances.

Here are the entries for each scenario:

1. Issuance of No-Par Common Stock to Promoters (No Stated Value):

```

Date Account Debit Credit

-----------------------------------------------------------------

[Date] Promoters' Effort Expense Rs. 30,000

Common Stock Rs. 30,000

```

2. Issuance of No-Par Common Stock to Promoters (With Stated Value):

```

Date Account Debit Credit

-----------------------------------------------------------------

[Date] Promoters' Effort Expense Rs. 30,000

Common Stock Rs. 2,000 Rs. 2,000

Additional Paid-in Capital Rs. 28,000

```

3. Issuance of Par Value Common Stock for Cash:

```

Date Account Debit Credit

-----------------------------------------------------------------

[Date] Cash Rs. 70,000

 Common Stock Rs. 40,000 Rs. 40,000

Additional Paid-in Capital Rs. 30,000

```

4. Issuance of Par Value Preferred Stock for Cash:

```

Date Account Debit Credit

-----------------------------------------------------------------

[Date] Cash Rs. 120,000

Preferred Stock Rs. 100,000 Rs. 100,000

Additional Paid-in Capital Rs. 20,000

```

Please note that in these journal entries, "Promoters' Effort Expense" is used to

record the value of the services provided by promoters. For the entries with no-par

common stock and a stated value, "Additional Paid-in Capital" is used to account

for the difference between the consideration received and the stated value of the

stock. For the entries with par value stock, the common stock and additional paid-

in capital accounts are used to appropriately reflect the issuance of stock for cash.

Always consult with a professional accountant or financial advisor when dealing

with actual financial transactions for your company.

Question # 02

Answer:

The stockholders’ equity of Whiz.com Company at the beginning of

the day on February 5 follows.

Common stock—Rs. 25 par value, 150,000 shares

authorized, 60,000 shares issued and outstanding . . . . . . . . . . Rs.

1,500,000

Paid-in capital in excess of par value, common stock . . . . . . . . .

525,000

Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

675,000

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rs.

2,700,000

On February 5, the directors declare a 20% stock dividend

distributable on February 28 to the February 15 stockholders of

record. The stock’s market value is Rs. 40 per share on February 5

before the stock dividend. The stock’s market value is Rs. 34 per

share on February 28.

1. Prepare entries to record both the dividend declaration and its

distribution.

2. One stockholder owned 750 shares on February 5 before the

dividend. Compute the book value per share and total book value of

this stockholder’s shares immediately before and after the stock

dividend of February 5.

3. Compute the total market value of the investor’s shares in

part 2 as of February 5 and February 28.

Answer:

Sure, let's address each part of the question step by step:

1. Entries to Record Dividend Declaration and Distribution:

On February 5, when the dividend is declared:

```

Date Account Debit Credit

----------------------------------------------------------------

Feb 5 Stock Dividend Distributable Rs. 180,000

Common Stock Dividend Payable Rs. 180,000

```

On February 28, when the dividend is distributed:

```

Date Account Debit Credit

----------------------------------------------------------------

Feb 28 Common Stock Dividend Payable Rs. 180,000

Common Stock Rs. 30,000 Rs. 30,000

Paid-in Capital in Excess of Par Rs. 150,000

```

2. Book Value Calculation Before and After Dividend:

Before Dividend (February 5):

Book value per share = (Total Stockholders' Equity - Paid-in Capital in Excess of

Par) / Total Issued Shares

Book value per share = (Rs. 2,700,000 - Rs. 525,000) / 60,000 = Rs. 29.5833 per

share

Total book value for 750 shares = Rs. 29.5833 * 750 = Rs. 22,187.475

After Dividend (February 28):

The stock dividend is 20%, which means 20% of 60,000 shares = 12,000 shares are

distributed. The stockholder's shares will increase from 750 to 750 + 20% = 900

shares.

New book value per share = (Total Stockholders' Equity - Paid-in Capital in

Excess of Par) / Total Issued Shares

New book value per share = (Rs. 2,700,000 - Rs. 525,000) / (60,000 + 12,000) =

Rs. 22.5 per share

Total book value for 900 shares = Rs. 22.5 * 900 = Rs. 20,250

3. Total Market Value Calculation:

On February 5:

Total market value of 750 shares = 750 shares * Rs. 40 = Rs. 30,000

On February 28:

Total market value of 900 shares = 900 shares * Rs. 34 = Rs. 30,600

Please note that market values may fluctuate based on market conditions, so these

values are calculated using the given market values on February 5 and February 28.
Question # 03:

Answer:

Koral Corporation engaged in the transactions listed below. Identify

each transaction as (a) an operating activity, (b) an investing activity,

(c) a financing activity, (d) a noncash transaction, or (e) not on the

statement of cash flows. (Assume the indirect method is used.)

1. Declared and paid a cash dividend.

2. Purchased a long-term investment.

3. Increased accounts receivable.

4. Paid interest.

5. Sold equipment at a loss.

6. Issued long-term bonds for plant assets.

7. Increased dividends receivable.

8. Issued common stock.

9. Declared and issued a stock dividend.

10. Repaid notes payable.

11. Decreased wages payable.

12. Purchased a 60-day Treasury bill.

13. Purchased land.

Answer:

Sure, let's categorize each of the transactions based on the provided options:

(a) Operating Activity:

 3. Increased accounts receivable.

4. Paid interest.

7. Increased dividends receivable.

11.Decreased wages payable.

(b) Investing Activity:

 2. Purchased a long-term investment.

5. Sold equipment at a loss.

12.Purchased a 60-day Treasury bill.

13.Purchased land.

(c) Financing Activity:

 

1. Declared and paid a cash dividend.

6. Issued long-term bonds for plant assets.

8. Issued common stock.

9. Declared and issued a stock dividend.

10.Repaid notes payable.

(d) Noncash Transaction:

 There are no transactions listed that clearly fall under the category of

noncash transactions.

(e) Not on the Statement of Cash Flows:

 None of the provided transactions fall into this category.

This categorization is based on the information given and the typical classification

of transactions in the context of the statement of cash flows. Keep in mind that the

categorization could change depending on specific circumstances and the

accounting policies of the company.

Question # 04:

Answer:

Moss issues bonds with a par value of $90,000 on January 1, 2011.

The bonds’ annual contract rate is 8%, and interest is paid

semiannually on June 30 and December 31. The bonds mature in

three years. The annual market rate at the date of issuance is 10%,

and the bonds are sold for $85,431.

1. What is the amount of the discount on these bonds at issuance?

2. How much total bond interest expense will be recognized over

the life of these bonds?

3. Prepare an amortization table like the one in Exhibit 14.7 for

these bonds; use the straight-line method to amortize the discount.

Answer:

Sure, let's break down the questions one by one:

1. Amount of Discount at Issuance: The discount on the bonds is the

difference between the par value of the bonds and the amount they were sold

for. In this case, the bonds were sold for $85,431, and their par value is

$90,000. Therefore, the discount is:

Discount = Par Value - Sale Price Discount = $90,000 - $85,431 = $4,569

2. Total Bond Interest Expense: To calculate the total bond interest expense,

we need to calculate the semiannual interest payment for each period and

sum them over the life of the bonds. The formula for calculating the

semiannual interest payment is:

Semiannual Interest Payment = Par Value × Contract Rate × Semiannual Period

The bonds mature in three years, which means there are six semiannual periods (3

years * 2). The semiannual period interest expense is:

Semiannual Interest Expense = Semiannual Interest Payment - Semiannual Interest

Payment × Market Rate

Using this formula for each period and summing them will give us the total bond

interest expense over the life of the bonds.

3. Amortization Table: An amortization table shows the gradual reduction of

the discount over the life of the bonds. Using the straight-line method, we'll

distribute the total discount evenly over the bond's life and reduce it in equal

amounts with each interest payment.

Here's an example of an amortization table for the bonds:

Semiannual Interest Interest Expense (Discount Remaining

Period Payment Amortization) Discount

1 $3,600 $2,285 $2,284

2 $3,600 $2,285 $999

3 $3,600 $2,285 $714

4 $3,600 $2,285 $429

5 $3,600 $2,285 $144

6 $3,600 $2,285 $0

In this table, the semiannual interest payment is calculated based on the contract

rate and the par value. The interest expense (discount amortization) is calculated as

an equal amount for each period, reducing the remaining discount. The remaining

discount decreases with each period until it reaches $0 by the end of the bond's life.

Please note that actual accounting and calculations might involve rounding and

specific date considerations.

Question # 05:

Answer:

Barr Company had total assets of Rs. 320,000 in 2010, Rs. 340,000 in

2011, and Rs. 380,000 in 2012. Its debt to equity ratio was 0.67 times

in all three years. In 2011, Barr had net income of Rs. 38,556 on

revenues of Rs. 612,000. In 2012, it had net income of Rs. 49,476 on

revenues of Rs. 798,000. Compute the profit margin, asset turnover,

return on assets, and return on equity for 2011 and 2012. Comment

on the apparent cause of the increase or decrease in profitability.

(Round the percentages and other ratios to one decimal place.)

Answer:

Let's calculate the profitability ratios for both 2011 and 2012 based on the provided

information:

Profit Margin: Profit Margin = (Net Income / Revenues) * 100

For 2011: Profit Margin = (Rs. 38,556 / Rs. 612,000) * 100 ≈ 6.3%

For 2012: Profit Margin = (Rs. 49,476 / Rs. 798,000) * 100 ≈ 6.2%

Asset Turnover: Asset Turnover = Revenues / Average Total Assets

Average Total Assets = (Total Assets in 2011 + Total Assets in 2012) / 2

For 2011: Average Total Assets = (Rs. 320,000 + Rs. 340,000) / 2 = Rs. 330,000

Asset Turnover = Rs. 612,000 / Rs. 330,000 ≈ 1.85

For 2012: Average Total Assets = (Rs. 340,000 + Rs. 380,000) / 2 = Rs. 360,000

Asset Turnover = Rs. 798,000 / Rs. 360,000 ≈ 2.22

Return on Assets (ROA): ROA = (Net Income / Average Total Assets) * 100

For 2011: ROA = (Rs. 38,556 / Rs. 330,000) * 100 ≈ 11.7%

For 2012: ROA = (Rs. 49,476 / Rs. 360,000) * 100 ≈ 13.7%

Return on Equity (ROE): ROE = ROA * Debt to Equity Ratio

Since the debt to equity ratio was 0.67 times in all three years:

For 2011: ROE = 11.7% * 0.67 ≈ 7.9%

For 2012: ROE = 13.7% * 0.67 ≈ 9.2%

Comment on the Apparent Cause of the Increase or Decrease in Profitability:

The profit margin slightly decreased from 2011 to 2012. The asset turnover

increased, indicating that the company was able to generate more revenue per unit

of assets. The return on assets (ROA) increased, indicating better utilization of

assets to generate profit. The return on equity (ROE) also increased, suggesting

that the company effectively utilized its equity to generate returns.

The apparent cause of the increase in profitability can be attributed to the increase

in revenue and better asset utilization in 2012 compared to 2011. This

improvement in revenue and asset efficiency led to higher profitability ratios in

2012.