Class Exam plus solution

Sheet3 Sheet2 Sheet1 CIS Class exam Managerial Accounting Spring 2010 10% of Final grade Answer all questions The Stock Holders Equity Section of the Balance Sheet of ABC Inc on 31 December 2008 is as follows: Paid In Capital in excess of Par Retained Earnings Total Stock Holders Equity The following transactions took place in 2009 1) Declare and pay a 50 cents per share dividend 2) 3) 4) 5 for 1 stock split 5) 6) Declare a 10 cent per share cash dividend For the above transactions show journals and Stockholders Equity at the 31 December 2009 Marks will be given for showing claculations of the value of dividends and for keeping track of the number of stocks issued and their par value Common Stock 200,000 $2 par stocks issued Declare and distribute a 10% stock dividend when market price is $3 per stock Declare and distribute a 30% stock dividend when market price is 70 cents per stock Question 1 40 marks Question 2 40 Marks 2) What are the rights and duties of stockholders 4) What is a dividend? Why do corporations pay dividends? 3) What value is always allocated to common stock account? Why? 5) What is a stock split. Why do corporations carry out stock splits? 6) What is a stock dividend? Why do corporations carry out stock dividends? 7) What are the main differences between preference stocks and common stocks? 8) Explain the following; Callable preference stocks, convertible preference stocks, cumulative preference stocks and non-cumulative preference stocks 7 marks 3 marks 1) What are the characteristics, advantages and disadvantages of corporations Question 3 20 Marks dividend will have on the market value of the corporation, the stock price of Half the marks will be given for including clear calculations in your answer. Currently there are 100,000 $5 dollar par stocks in issue and the market price per stock is $8 the corporation and the value of Ms. Jones' investment. You are the Investor Relations Manager of your corporation. You receive an angry email from Ms. Jones, an investor who controls 10% of the corporation. She says the following: "I am completely against the proposed 20% stock dividend next week as it will reduce market price of our stock, thereby reducing the market value of the corporation and so reducing the market value of my investment" In 150 words, reply to Ms.Jones by email explaining what effect the stock Solution CIS Accounting Exam 2 Feb 2010 Dr Cr Cash Common Stock $2 stocks Retained earnings Value dividend Common Stock dividend no of extra stocks Distributable market value PIC excess par Common Stock No of stocks Dividend payable 50 cents per share After split par value 30% stock split extra stocks Par dividend value Stockholders Equity 31 December 2009 Common stock PIC Excess par Issue 50000 $2 par common Stocks at $2 Div Payable Question 2 See book and notes for answer Question 3 cents per share div Market Value of Corporation is now Stock Dividend will not change this as no new cashflows, revenues, products, markets or cost reductions are involved There are now 100,000 shares each worth $8 Stock dividend will involve the issue of 20000 new stocks Market Value of corporation will be 800,000 There will now be 120,000 stocks Market price per stock will be Her investment remains unchanged. But instead of having 10000 $8 stocks, value $80,000 The value of her investment is still But the lower stock price should create trading liquidity in the stock and so increase demand and so increase stock price. So, for example, if stock price increases to $7, her investment is now worth She now has 12000 stocks valued at $6.67 each Therefore, the result of the stock dividend will be hopefully to increase the value of the company and so also the value of Ms. Jones' investment Dividend Payable 000000.00 00000.00 000000.00 0000000.00 0.00 000000.00 000000.00 000000.00 0.00 00000.00 00000.00 00.00 00000.00 0.00 0.00 00000.00 00000.00 0.00 00000.00 00000.00 0.00 000000.00 000000.00 000000.00 000000.00 0.00 000000.00 000000.00 0.00 0000000.00 0.00 0.00 0.00 0.00 0.00 000000.00 000000.00 000000.00 0.00 000000.00 000000.00 000000.00 0.00 000000.00 000000.00 0000000.00 00.00 000000.00 0.00 000000.00 000000.00 00000.00 00000.00 000000.00 000000.00 0000000.00 000000.00 000000.00 0.00 0.00 000000.00 000000.00 00000.00 00000.00 0.00 00000.00 00000.00 0.00