ACC291 Week6 E11-15, E12-1, E12-2, P11-6A
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.
Title Before Action After Stock Dividend After Stock Split
Common Stock $600,000 $630,000 $600,000
In excess of par value 0 $12,000 0
Total paid-in capital 600,000 642,000 600,000
Retained earnings 900,000 858,000 900,000
Total stockholder’s equity $1,500,000 $1,500,000 $1,500,000
Outstanding Shares 60,000 63,000 120,000
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? Companies purchase securities to liquidate excess cash, generate interest income, to diversify their funds and in order to obtain control over a start-up company or meet their strategic goals.
2. Why would a corporation have excess cash that it does not need for operations?
Excess cash is often kept in case of emergencies to provide a protective cushion for the company should they need quick access to funds.
3. What is the typical investment when investing cash for short periods of time?
Trading securities and treasury bills
4. What are the typical investments when investing cash to generate earnings? Certificates of deposit issued by banks, money market certificates, treasury bills issued by the U.S. Government, bonds and commercial paper (notes) issued by other corporations.
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.
Title Before Action After Stock Dividend After Stock Split
Common Stock $600,000 $630,000 $600,000
In excess of par value 0 $12,000 0
Total paid-in capital 600,000 642,000 600,000
Retained earnings 900,000 858,000 900,000
Total stockholder’s equity $1,500,000 $1,500,000 $1,500,000
Outstanding Shares 60,000 63,000 120,000
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? Companies purchase securities to liquidate excess cash, generate interest income, to diversify their funds and in order to obtain control over a start-up company or meet their strategic goals.
2. Why would a corporation have excess cash that it does not need for operations?
Excess cash is often kept in case of emergencies to provide a protective cushion for the company should they need quick access to funds.
3. What is the typical investment when investing cash for short periods of time?
Trading securities and treasury bills
4. What are the typical investments when investing cash to generate earnings? Certificates of deposit issued by banks, money market certificates, treasury bills issued by the U.S. Government, bonds and commercial paper (notes) issued by other corporations.