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Multiple accounting problems.

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Problem 1: Botox Facial Care had earnings after taxes of $280,000 in 2006 with 200,000 shares of stock outstanding. The stock price was $30.80. In 2007, earnings after taxes increased to $320,000 with the same 200,000 shares outstanding. The stock price was $40.00.

Compute earnings per share and the P/E ratio for 2006. The P/E ratio equals the stock price divided by the earnings per share.

Compute earnings per share and the P/E ratio for 2007.

Problem 2: Assume the following data for Cable Corporation and Multi-Media, Inc.

Cable
Corporation
Multi-
Media, Inc.
Net Income
$ 30,000
$ 100,000
Sales
300,000
2,000,000
Total Assets
400,000
900,000
Total Debt
150,000
450,000
Stockholders Equity
250,000
450,000

Compute return on stockholders equity for both firms using ratio 3a. Which firm has the higher return?

Compute the following additional ratios for both firms

Net Income / Sales
Net Income / Total Assets
Sales / Total Assets
Debt / Total Assets

Problem 3: If you borrow $4,000 at $500 interest for one year, what is your effective interest rate for the following payment plans?

Annual payment

Semiannual payments

Quarterly payments

Monthly payments

Problem 4: The Western Sweepstakes has just informed you that you have won $1 million. The amount is to be paid out at a rate of $50,000 a year for the next 20 years. With a discount rate of 12 percent, what is the present value of your winnings?

Problem 5: Martha Reed has been depositing $1,500 in her savings account every December since 1998. Her account earns 6 percent compounded annually. How much will she have in December of 2007? (Assume that a deposit is made in 2007. Make sure to count the years carefully.)

For Problems 6 and 7 assume interest payments are on an annual basis.

Problem 6: Ron Rhodes called his broker to inquire about purchasing a bond for Golden Years Recreation Corporation. His broker quotes a price of $1,170. Ron is concerned that the bond might be overpriced based on the facts involved. The $1,000 par value bond pays 13 percent interest, and it has 18 years remaining until maturity. The current yield to maturity on similar bonds is 11 percent.

Do you think the bond is overpriced? Do the necessary calculations.

Problem 7: Wilson Oil Company issued bonds five years ago at $1,000 per bond. These bonds had a 25-year life when issued and the annual interest payment was then 8 percent. This return was in line with the required returns by bondholders at that point in time as described below:

Real rate of return
2%
Inflation premium
3
Risk premium
3
Total return
8%

Assume that 10 years later, due to bad publicity, the risk premium is now 6 percent and is appropriately reflected in the required return (or yield to maturity) of the bonds. The bonds have 15 years remaining until maturity. Compute the new price of the bond.
Problem 8: Compute Ke and Kn under the following circumstances:

D1 = $4.60, P0 = $60, g = 6%, F = 3.00

D1 = $0.25, P0 = $20, g = 9%, F = 1.50

Problem 9: Cox Media Corporation pays an 11 percent coupon rate on debentures that are due in 20 years. The current yield to maturity on bonds of similar risk is 8 percent. The bonds are currently callable at $1,060. The theoretical value of the bonds will be equal to the present value of the expected cash flow from the bonds.

Find the theoretical market value of the bonds using semiannual analysis.

Do you think the bonds will sell for the price you arrived at in part (a)? Why?

Problem 10: You buy a 7 percent, 30-year, $1,000 par value, floating rate bond in 2001. By the year 2007, rates on bonds of similar risk are up to 9 percent. What is your one best guess as to the value of the bond?

Problem 11: Midland Petroleum is holding a stockholders meeting next month. Ms. Ramsey is the president of the company and has the support of the existing board of directors. All 11 members of the board are up for reelection. Mr. Clark is a dissident stockholder. He controls proxies for 40,001 shares. Ms. Ramsey and her friends on the board control 60,001 shares. Other stockholders, whose loyalties are unknown, will be voting the remaining 19,998 shares. The company uses cumulative voting.

How many directors can Mr. Clark be sure of electing?

How many directors can Ms. Ramsey and her friends be sure of electing?

How many directors could Mr. Clark elect if he obtains all the proxies for the uncommitted votes? (Uneven values must be rounded down to the nearest whole number regardless of the amount.) Will he control the board?

Problem 12: Walker Machine Tools has 5 million shares of common stock outstanding. The current market price of common stock is $42 per share rights-on. The companys net income this year is $15 million. A rights offering has been announced in which 500,000 new shares will be sold at $36.50 per share. The subscription price plus 10 rights is needed to buy one of the new shares.

What are the earnings per share and price-earnings ratio before the new shares are sold via the rights offering?
Problem 13: The stock of North American Dandruff Company is selling at $80 per share. The firm pays a dividend of $2.50 per share.

What is the dividend yield?

If the firm has a payout rate of 50 percent, what is the firms P/E ratio?

Problem 14: Ms. Reeves is in a 35 percent marginal tax bracket. If she receives $2.40 in cash dividends, how much in taxes (per share) will she pay? (Recall the 15 percent rule.)

Problem 15: The bonds of Generic Labs, Inc., have a conversion premium of $75. Their conversion price is $25. The common stock price is $21.50. What is the price of the convertible bond?

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Solution Summary

The solution deals with problems, in accounting, which include calculating dividends per share, return on equity, earnings per share, bond valuation etc.

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Accounting Problems: 42 multiple choice 1st year accounting.

Question 1
Moss County Bank agrees to lend the Blackwood Brick Company $100,000 on January 1. Blackwood Brick Company signs a $100,000, 6%, 9-month note.
The entry made by Blackwood Brick Company on January 1 to record the proceeds and issuance of the note is

a. Debit Interest Expense 4,500
Debit Cash 95,500
Credit Notes Payable 100,000
b. Debit Cash 100,000
Credit Notes Payable 100,000
c. Debit Cash 100,000
Debit Interest Expense 4,500
Credit Notes Payable 104,500
d. Debit Cash 100,000
Debit Interest Expense 4,500
Credit Notes Payable 100,000
Credit Interest Payable 4,500

Question 2
What is the adjusting entry required if Blackwood Brick Company prepares financial statements on June 30?

a. Debit Interest Expense 3,000
Credit Interest Payable 3,000
b. Debit Interest Expense 3,000
Credit Cash 3,000
c. Debit Interest Payable 3,000
Credit Cash 3,000
d. Debit Interest Payable 3,000
Credit Interest Expense 3,000

Question 3
What entry will Blackwood Brick Company make to pay off the note and interest at maturity assuming that interest has been accrued to September 30?

a. Debit Notes Payable 104,500
Credit Cash 104,500
b. Debit Notes Payable 100,000
Debit Interest Payable 4,500
Credit Cash 104,500
c. Debit Interest Expense 4,500
Debit Notes Payable 100,000
Credit Cash 104,500
d. Debit Interest Payable 3,000
Debit Notes Payable 100,000
Debit Interest Expense 1,500
Credit Cash 104,500

Question 4
A cash register tape shows cash sales of $1,000 and sales taxes of $60. The journal entry to record this information is

a. Debit Cash 1,000
Credit Sales 1,000
b. Debit Cash 1,060
Credit Sales Tax Revenue 60
Credit Sales 1,000
c. Debit Cash 1,000
Debit Sales Tax Expense 60
Credit Sales 1,060
d. Debit Cash 1,060
Credit Sales 1,000
Credit Sales Taxes Payable 60

Question 5
Use the following information to answer the following four questions.
Totals taken from the payroll register of Main Company:
Salaries..................................$12,000
FICA taxes withheld.................... 550
Income taxes withheld...............2,500
Medical insurance deductions.......450

Tax Rates:
Federal unemployment Taxes .8%
State Unemployment Taxes....1.8%
None of the employees have yet exceeded the $7,000 maximum annual limit.

The journal entry to record the monthly payroll on April 30 would include a

a. debit to Salaries Expense for $12,000.
b. credit to Salaries Payable for $12,000.
c. debit to Salaries Payable for $12,000.
d. debit to Salaries Expense for $8,500.

Question 6
The entry to record the payment of net payroll would include a

a. debit to Salaries Payable for $8,050.
b. debit to Salaries Payable for $8,500.
c. debit to Salaries Payable for $7,950.
d. credit to Cash for $9,050.

Question 7
The entry to record accrual of employer's payroll taxes would include a

a. debit to Payroll Tax Expense for $312.
b. debit to Payroll Tax Expense for $862.
c. credit to FICA Taxes Payable for $1,100.
d. credit to Payroll Tax Expense for $312.

Question 8
The entry to record the payment of federal unemployment tax would include a

a. debit to Federal Unemployment Taxes Payable for $96.
b. credit to Federal Unemployment Taxes Expense for $960.
c. debit to Payroll Tax Expense for $960.
d. credit to Federal Unemployment Taxes Payable for $96.

Question 9
Which of the following is not an advantage of issuing bonds instead of common stock?

a. Stockholder control is not affected.
b. Earnings per share on common stock may be lower.
c. Income to common shareholders may increase.
d. Tax savings result

Question 10
Bonds that may be exchanged for common stock at the option of the bondholders are called

a. options.
b. stock bonds.
c. convertible bonds.
d. callable bonds.

Question 11
A bond with a face value of $100,000 and a quoted price of 103 ¼ has a selling price of

a. $130,325.
b. $103,025.
c. $100,325.
d. $103,250.

Question 12
If the market rate of interest is greater than the contractual rate of interest, bonds will sell

a. at a premium.
b. at face value.
c. at a discount.
d. only after the stated rate of interest is increased.

Question 13
A corporation issues $100,000, 10%, 5-year bonds on January 1, 2003, for $95,800. Interest is paid semiannually on January 1 and July 1. If the corporation uses the straight-line method of amortization of bond discount, the amount of bond interest expense (include the discount amortizaton) to be recognized on July 1, 2003, is

a. $10,420.
b. $5,000.
c. $5,420.
d. $4,580.

Question 14
If the market rate of interest is 10%, a $10,000, 12%, 10-year bond that pays interest semiannually would sell at an amount

a. less than face value.
b. equal to the face value.
c. greater than face value.
d. that cannot be determined.

Question 15
The Torrez Corporation issues 1,000, 10-year bonds, 8%, $1,000 bonds dated January 1, 2004, at 97. The journal entry to record the issuance will show a

a. debit to Cash of $1,000,000.
b. credit to Discount on Bonds Payable for $30,000.
c. credit to Bonds Payable for $970,000.
d. debit to Cash for $970,000.

Question 16
One thousand bonds with a face value of $1,000 each, are sold at 103. The entry to record the issuance is

a. Debit Cash 1,030,000
Credit Bonds Payable 1,030,000
b. Debit Cash 1,000,000
Debit Premium on Bonds Payable 30,000
Credit Bonds Payable 1,030,000
c. Debit Cash 1,030,000
Credit Premium on Bonds Payable 30,000
Credit Bonds Payable 1,000,000
d. Debit Cash 1,030,000
Credit Discount on Bonds Payable 30,000
Credit Bonds Payable 1,000,000

Question 17
If bonds have been issued at a discount, then over the life of the bonds the

a. carrying value of the bonds will decrease.
b. carrying value of the bonds will increase.
c. interest expense will increase, if the discount is being amortized on a straight-line basis.
d. unamortized discount will increase.

Question 18
In a recent year Night Corporation had net income of $130,000, interest expense of $30,000, and tax expense of $20,000. What was Night Corporation's times interest earned ratio for the year?

a. 4.33
b. 6.50
c. 9.00
d. 6.00

Question 19
Sunwood Company issued $200,000 of 6%, 5-year bonds at 98, which pays interest annually. Assuming straight-line amortization, what is the carrying value of the bonds after one year?

a. $196,000
b. $196,400
c. $196,800
d. $197,600

Question 20
Terrance Company issued $200,000 of 8%, 5-year bonds at 106, which pays interest annually. Assuming straight-line amortization, what is the total interest cost of the bonds (don't forget the premium)?

a. $92,000
b. $68,000
c. $56,000
d. $80,000

Question 21
Terrance Company issued $200,000 of 8%, 5-year bonds at 106, which pays interest annually. Assuming straight-line amortization, what is the carrying value of the bonds after one year?

a. $212,000
b. $210,800
c. $209,600
d. $213,200

Question 22
Terrance Company issued $200,000 of 8%, 5-year bonds at 106. Assuming straight-line amortization and annual interest payments, what is the amount of the amortization at each interest payment point?

a. $1,200
b. $2,400
c. $16,000
d. $13,600

Question 23
Under the corporate form of business organization

a. a stockholder is personally liable for the debts of the corporation.
b. stockholders' acts can bind the corporation even though the stockholders have not been appointed as agents of the corporation.
c. the corporation's life is stipulated in its charter.
d. stockholders wishing to sell their corporation shares must get the approval of other stockholders.

Question 24
Which of the following statements is not considered a disadvantage of corporate form of organization?

a. Additional taxes
b. Government regulations
c. Limited liability of stockholders
d. Separation of ownership and management

Question 25
The amount of stock that may be issued according to the corporation's charter is referred to as the

a. authorized stock.
b. issued stock.
c. unissued stock.
d. outstanding stock.

Question 26
If Lesser Company issues 1,000 shares of $5 par value common stock for $70,000, the account

a. Common stock will be credited for $70,000.
b. Paid-in capital in excess of par value will be credited for $5,000.
c. Paid-in capital in excess of par value will be credited for $65,000.
d. Cash will be debited for $65,000.

Question 27
New Corp. issues 1,000 shares of $10 par value common stock at $14 per share. When the transaction is recorded, credits are made to:

a. Common stock $10,000 and Paid-in capital in excess of state value $4,000.
b. Common stock $14,000.
c. Common stock $10,000 and Paid-in capital in excess of par value $4,000.
d. Common stock $10,000 and Retained earnings $4,000.

Question 28
Treasury stock is

a. stock issued by the U.S. Treasury Department.
b. stock purchased by a corporation and held as an investment in its treasury.
c. corporate stock issued by the treasurer of a company.
d. a corporation's own stock, which has been reacquired and held for future use.

Question 29
The acquisition of treasury stock by a corporation

a. increases its total assets and total stockholders' equity.
b. decreases its total assets and total stockholders' equity.
c. has no effect on total assets and total stockholders' equity.
d. requires that a gain or loss be recognized on the income statement.

Question 30
Which of the following is the appropriate general journal entry to record the declaration of cash dividends?

a. Debit Retained earnings
Credit Cash
b. Debit Dividends payable
Credit Cash
c. Debit Paid-in capital
Credit Dividends payable
d. Debit Retained earnings
Credit Dividends Payable

Question 31
The board of directors of Weston Company declared a cash dividend of $1.50 per share on 42,000 shares of common stock on July 15, 2005. The dividend is to be paid on August 15, 2005, to stockholders of record on July 31, 2005. The effects of the journal entry to record the declaration of the dividend on July 15, 2005, are to

a. decrease stockholders' equity and increase liabilities.
b. decrease stockholders' equity and decrease assets.
c. increase stockholders' equity and increase liabilities.
d. increase stockholders' equity and decrease assets.

Question 32
The board of directors of Weston Company declared a cash dividend of $1.50 per share on 42,000 shares of common stock on July 15, 2005. The dividend is to be paid on August 15, 2005, to stockholders of record on July 31, 2005. The correct entry to be recorded on August 15, 2005, will include a

a. debit to Retained Earnings.
b. credit to Retained Earnings.
c. credit to Dividends Payable.
d. debit to Dividends Payable.

Question 33
Indicate the respective effects of the declaration of a cash dividend on the following balance sheet sections:
Total Assets ............Total Liabilities ........Total Stockholders' Equity

a. Increase................ Decrease ............................No change
b. No change ..............Increase............................... Decrease
c. Decrease............... Increase............................... Decrease
d. Decrease............... No change ............................Increase

Question 34
Sun Inc. has 5,000 shares of 5%, $100 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2005. What is the annual dividend on the preferred stock?

a. $50 per share
b. $25,000 in total
c. $600 in total
d. $0.50 per share

Question 35
Cuther Inc., has 1,000 shares of 8%, $50 par value, cumulative preferred stock and 50,000 shares of $1 par value common stock outstanding at December 31, 2004, and December 31, 2005. The board of directors declared and paid a $3,000 dividend in 2004. In 2005, $12,000 of dividends are declared and paid. What are the dividends received by the common stockholders in 2005?

a. $7,000
b. $6,000
c. $5,000
d. $4,000

Question 36
Which of the following show the proper effect of a stock split and a stock dividend?
.................Item........................ Stock Split...........Stock Dividend

a. Total paid-in capital ..............Increase................ Increase
b. Total retained earnings.......... Decrease.............. Decrease
c. Total par value (common) .....Decrease ................Increase
d. Par value per share .................Decrease .............No change

Question 37
What is the total stockholders' equity based on the following account balances?
Common Stock ..............................................$550,000
Paid-In Capital in Excess of Par ......................... 50,000
Retained Earnings .............................................180,000
Treasury Stock ................................................. 30,000

a. $600,000
b. $810,000
c. $780,000
d. $750,000

Question 38
Paid-in capital in excess of stated value would appear on a balance sheet under the category

a. capital stock.
b. retained earnings.
c. additional paid-in capital.
d. contra to stockholders' equity.

Question 39
Two classifications appearing in the paid-in capital section of the balance sheet are

a. preferred stock and common stock.
b. paid-in capital and retained earnings.
c. capital stock and additional paid-in capital.
d. capital stock and treasury stock.

Question 40
On January 1, Runner Corporation had 60,000 shares of $10 par value common stock outstanding. On March 17 the company declared a 10% stock dividend to stockholders of record on March 20. Market value of the stock was $13 on March 17. The entry to record the transaction of March 17 would include a

a. debit to Retained Earnings for $78,000.
b. credit to Cash for $78,000.
c. credit to Common Stock Distributable for $78,000.
d. credit to Common Stock Distributable for $18,000.

Question 41
On January 1, Runner Corporation had 60,000 shares of $10 par value common stock outstanding. On March 17 the company declared a 10% stock dividend to stockholders of record on March 20. Market value of the stock was $13 on March 17. The stock was distributed on March 30. The entry to record the transaction of March 30 would include a

a. credit to Common stock for $60,000.
b. debit to Common stock distributable for $60,000.
c. credit to Paid-in capital in excess of par value for $18,000.
d. debit to Retained earnings for $18,000.

Question 42
Which one of the following events would not require a journal entry on a corporation's books?

a. 2 for 1 stock split
b. 100% stock dividend
c. 2% stock dividend
d. $1 per share cash dividend

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