Homework-5

Ans.

Kebler Company
Statement of Shareholders' Equity

Preferred Common Paid-In Treasury Retained

Particulars Stock Stock Capital Stock Earnings

Beginning Balance as on
January 1, 2021

Sale of preferred stock 1,00,000 20,000

Sale of common stock 40,000 6,00,000

Issuance of common stock for

10,000 1,30,000
building site

Purchase of treasury stock -60,000

Sale of treasury stock 500 6,000
Net income 80,000
Cash dividends—Preferred -7,000
Cash dividends—Common -45,500

Ending Balance as on 31
1,00,000 50,000 7,50,500 -54,000 27,500
December, 2021
Explanation:

a. Preferred stock - 1000 x $100 = 100,000 Additional

Paid-in Capital - 1000 x ($20) = $20,000
b. Common stock - 8000 x $5 = $40,000
Additional Paid-in Capital - 8000 x ($75) =
$600,000 c. Common stock - 2000 x $5 = $10,000
Additional Paid-in Capital - 2000 x ($65) = $20,000
d. Treasury stock - Treasury stock: 1000 x $60 = -$60,000
e. Resale of treasury stock - 100 x $60 = $6,000
Additional Paid-in Capital - 100 x ($65-$60) = $500
f. Net income: Retained Earnings - $80,000
g. Cash Dividends for Preferred Stock - (1,000 × $100 × 7%) = -$7,000
Cash Dividends for Common Stock: 9,100 outstanding × $5 per share = -$45,500

Ans.
1.
In Financial Accounting, Other Comprehensive Income (OCI) includes revenues, expenses, gains, and
losses that have yet to be realized and are excluded from net income on an income statement. A
common example of OCI is bonds that have not yet matured and haven't been redeemed. Gains or
losses from the changing value of the bonds cannot be fully determined until the time of their sale.
Therefore, the interim adjustments are finally recognized in the Other comprehensive income.

2.
Other than net income and other comprehensive income, other Items that impact stockholder's
equity include dividend payments, retained earnings, and Treasury stock
 3.
When a company pays cash dividends to its shareholders, its stockholders' equity is decreased by the
total value of all dividends paid. Stock dividends have no effect on the total amount of stockholders'
equity or on net assets. They merely decrease retained earnings and increase paid-in capital by an
equal amount. A stock dividend generally reduces the per share market value of the company's stock.

Ans.
1. a.
Cash increases by $100,000. Common Stock increases by $100,000
Assets increase and Shareholders’ Equity also increase.

1. b.
Patent Account increased by $100,000. Common Stock increases by $100,000
Assets increase and Shareholders’ Equity also increase.

1.c.
Cash decreases by $1,000. Treasury Stock is created for the shares bought back by $1,000
Assets decrease and Shareholders’ Equity also decrease.

1.d.
Dividend Account increases by $9,500. Retained Earnings decrease by $9,500.
Liabilities account increases and Shareholders’ Equity decreases.

When the dividend is paid, Cash (Asset) decreases and the liabilities created in Dividend Account for
$9,500 also decrease.

1.e.
Net Income increases by $340,000. Shareholders’ Equity increases as a result

2.
Contributed capital, also known as paid-in capital, refers to capital raised by issuing shares of a
company. In case of Hilton, it will comprise of capital raised by issuing 20,000 shares.
Retained earnings refer to the net income which the company retains into the business for its
expansion and growth. It comprises of undistributed profits generated by the company net of the
dividends distributed to shareholders. Examples of items included under Retained Earnings are sales
revenue, cost of goods sold, depreciation, and other operating expenses.
For Hilton, the reported income is $340,000 during the year with a reduction of dividend paid i.e.,
$9,500.

3.
Book Value per share: Total Equity Value 5,20,500.00
Total outstanding shares 19,000.00

BVPS 27.39

Ans.
1.
Madison Company
Cash Flow Statement (Indirect Method)
Particulars Amount ($)
Cash flow from Operating Activities
Net loss 21,800.00
Add: Depreciation 50,000.00
Increase in Inventory 1,000.00
Decrease in Accounts Receivables 2,000.00
Increase in income taxes payable 500.00
Decrease in short-term notes payable 2,500.00
Increase in prepaid rent 200.00

Net amount from operating activities 27,000.00

 Cash flow from Investing Activities
Plant & Equipment -50,000.00

Net amount from investing activities -50,000.00

Cash flow from Financing Activities

Bonds payable 25,000.00

Net amount from financing activities 25,000.00

Net amount of Cash flows 2,000.00

Cash at the beginning 10,000.00

Cash at the end 12,000.00

2.
Madison was able to increase its cash balance by $2,000 even after incurring net loss of $21,800 due
to some factors. Depreciation is a non-cash item and therefore needs to be adjusted. Accounts
receivables decreased which means that the company received cash from its debtors. Additionally,
bonds were issued by the company for an amount of $25,000.
 Ans.
Bannack Corp.
Cash Flow Statement (Direct Method)
Particulars Amount
Cash flow from Operating Activities
Cash received from the customers 3,89,000.00
Less cash paid for:
Payment to suppliers -2,60,000.00
General & Administration expenses including Prepaid Rent -24,000.00
Interest expense -10,000.00
Income Tax expense -15,000.00

Net amount from operating activities 80,000.00

Cash flow from Investing Activities

Plant assets -1,25,000.00
Sale of Land 90,000.00
Sale of plant assets 20,000.00

Net amount from investing activities -15,000.00

Cash flow from Financing Activities

Bank loan Repayment -75,000.00
Dividends paid -5,000.00

Net amount from financing activities -80,000.00

Net amount of Cash flows -15,000.00

Cash at the beginning 40,000.00

Cash at the end 25,000.00

Using the Indirect Method, lets prepare the Reconciliation of Net Income to Net cash from operating
activities
Bannack Corp.

Reconciliation of Net Income to Net Cash from Operating Activities

Particulars Amount

Net Income 10,000.00

Depreciation 80,000.00
Loss on sale of plants 10,000.00
Accounts receivables -11,000.00
Inventory -25,000.00
Prepaid Rent 16,000.00
Accounts Payable 5,000.00
Other accrued liabilities 5,000.00
Income Tax -10,000.00

Net amount from operating activities 80,000.00