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Accounting 291 Excersice Week Four

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Autor:  people  04 September 2011
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Exercise and problems-Week 4

Acc/291

Exercise E11-15

On October 31, the stockholders’ equity section of Omar Company consists of common stock $600,000 and retained earnings $900,000. Omar is considering the following two courses of action: (1) declaring a 5% stock dividend on the 60,000, $10 par value shares outstanding, or (2) effecting a 2-for-1 stock split that will reduce par value to $5 per share. The current market price is $14 per share.

Instructions

Prepare a tabular summary of the effects of the alternative actions on the components of stockholders’ equity and outstanding shares. Use the following column headings: Before Action, After Stock Dividend, and After Stock Split.

Before Action:

Common Stocks $600,000

Outstanding Shares 60,000

Par Value Shares $10.00

Retained Earnings $900,000

Current Market Price (per share) $14.00

5% Stock Dividend (per share) $0.70

$0.70% (per share) x 60,000 = $42,000

After Stock Dividend:

Common Stocks $642,000

Outstanding Shares $64,200

Par Value $10.00

Retained Earnings $858,000 ($900,000 - $42,000)

After Stock Split:

Common Stocks $600,000

Outstanding Shares 120,000

Par Value (per share) $5.00

Retained Earnings $900,000

Exercise E12-1

Max Weinberg is studying for an accounting test and has developed the following questions about investments.

1. What are three reasons why companies purchase investments in debt or stock securities? The three reasons that company’s invest in debt or stocks securities is because they have excess cash that is not needed for operations, generate earnings from investment income, and they invest for strategic reasons.

2. Why would a corporation have excess cash that it does not need for operations? There are many companies that experience seasonal fluctuations’ or a result from economic cycles.

3. What is the typical investment when investing cash for short periods of time? Corporations invest in low-risk, highly liquid securities, to generate earnings from investment income, and they also invest for strategic reasons. Also a corporation may also choose to purchase a controlling interest in another company.

4. What are the typical investments when investing cash to genera ...



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