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Effect of Transactions on Financial Statements and Ratios

The transactions listed below
relate to Botticelli Inc. You are to assume that on the date on which each of the transactions occurred the
corporation's accounts showed only common stock ($100 par) outstanding, a current ratio of 2.7:1, and a
substantial net income for the year to date (before giving effect to the transaction concerned). On that date
the book value per share of stock was $151.53.
Each numbered transaction is to be considered completely independent of the others, and its related
answer should be based on the effect(s) of that transaction alone. Assume that all numbered transactions
occurred during 2007 and that the amount involved in each case is sufficiently material to distort reported
net income if improperly included in the determination of net income. Assume further that each transaction
was recorded in accordance with generally accepted accounting principles and, where applicable,
in conformity with the all-inclusive concept of the income statement.
For each of the numbered transactions you are to decide whether it:
a. Increased the corporation's 2007 net income.
b. Decreased the corporation's 2007 net income.
c. Increased the corporation's total retained earnings directly (i.e., not via net income).
d. Decreased the corporation's total retained earnings directly.
e. Increased the corporation's current ratio.
f. Decreased the corporation's current ratio.
g. Increased each stockholder's proportionate share of total owner's equity.
h. Decreased each stockholder's proportionate share of total owner's equity.
i. Increased each stockholder's equity per share of stock (book value).
j. Decreased each stockholder's equity per share of stock (book value).
k. Had none of the foregoing effects.
Instructions
List the numbers 1 through 9. Select as many letters as you deem appropriate to reflect the effect(s) of
each transaction as of the date of the transaction by printing beside the transaction number the letter(s)
that identifies that transaction's effect(s).
Transactions
_____ 1. Treasury stock originally repurchased and carried at $127 per share was sold for cash at $153
per share.
_____ 2. The corporation sold at a profit land and a building that had been idle for some time. Under
the terms of the sale, the corporation received a portion of the sales price in cash immediately,
the balance maturing at 6 month intervals.
_____ 3. In January the board directed the writeoff of certain patent rights that had suddenly and unexpectedly
become worthless.
_____ 4. The corporation wrote off all of the unamortized discount and issue expense applicable to
bonds that it refinanced in 2007.
_____ 5. The corporation called in all its outstanding shares of stock and exchanged them for new
shares on a 2-for-1 basis, reducing the par value at the same time to $50 per share.
_____ 6. The corporation paid a cash dividend that had been recorded in the accounts at time of declaration.
_____ 7. Litigation involving Botticelli Inc. as defendant was settled in the corporation's favor, with
the plaintiff paying all court costs and legal fees. In 2004 the corporation had appropriately
established a special contingency for this court action. (Indicate the effect of reversing the
contingency only.)
1344 ? Chapter 24 Full Disclosure in Financial Reporting
Using Your Judgment ? 1345
_____ 8. The corporation received a check for the proceeds of an insurance policy from the company
with which it is insured against theft of trucks. No entries concerning the theft had been made
previously, and the proceeds reduce but do not cover completely the loss.
_____ 9. Treasury stock, which had been repurchased at and carried at $127 per share, was issued as
a stock dividend. In connection with this distribution, the board of directors of Botticelli Inc.
had authorized a transfer from retained earnings to permanent capital of an amount equal
to the aggregate market value ($153 per share) of the shares issued. No entries relating to this
dividend had been made previously.

Solution Preview

Dear student,

1. Treasury stock originally repurchased and carried at $127 per share was sold for cash at $153
per share.
Ans:c,e
_____ 2. The corporation sold at a profit land and a building that had been idle for some time. Under
the terms of the sale, the corporation received a portion of the sales price in cash immediately,
the balance maturing at 6 month intervals.
Ans:a, c, e ,i
_____ 3. In January the board directed the writeoff of certain patent rights that had suddenly and unexpectedly
become worthless. ...

Solution Summary

The effects of transactions on financial statements and ratios are examined.

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