Exercises & Problems Week 6

Complete Exercises E11-15, E12-1, & E12-2 and Problem 11-6

Exercise E11-15

Before After After Action Dividend Stock Split
Stockholders’ equity
Paid in capital
Common stock, $10 par 600,000 630,000 600,000
Paid in capital in excess par value 0 12,000 0
Total paid in capital 600,000 642,000 600,000
Return earnings 900,000 858,000 900,000
Total stock holders’ equity 1,500,000 1,500,000 1,500,000
Outstanding shares 60,000 66,000 120,000

Exercise E12-1

1. Companies purchase investments in debt or stock securities because they have excess cash, earnings from investment income, and strategic reasons. 2. A company will have excess cash it does not need for operations because of seasonal fluctuates it sales. The company will use excess funds for a bigger return than holding in the bank. 3. A typical investment when investing cash for a short period of time would be a short term government security. 4. A typical investment when investing in cash to generate earnings would be investing in debt. 5. A company would invest in securities that provide zero cash flow for strategic reasons such as influence over customers or make presence known by a related company in the industry. 6. A typical stock investment when investing cash for strategic reasons would be in a related or no related company. This will allow expansion and control.

Exercise E12-2

A.
Jan. 1 Debt Investments 50,000 Cash 50,000 (To record purchase of 50 Choate Co. bonds)

July1 Cash 2,000 Interest revenue 2,000 (To record receipt of interest on Choate Co. bonds)

July1 Cash 33,500 Loss on sale 8,050