HW#10 - Commerce 293, Homework Ten Shareholders’ Equity '...

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Unformatted text preview: Commerce 293, Homework Ten Shareholders’ Equity ' Question 1 (30 marks, suggested time 30 minutes) 011 January 1, 20x0, two families, the Logos family and the Gold family, decided to incorporate a public corporations called Logos Ltd. and Gold Ltd. Each cempany aUthorized 40,000,000 no . par value summon shares and 1,000,000, $1 Cumulative preferred shares. PART A I Logos Ltd had the following transactions for the year 20x0: January 1: Logos Ltd. issued 20,000,000 common shares to family members for $.12 per share. . July 2: Issued 5,000,000 common shares for $.14 per share to the general public. August 15: Purchased 4,000,000 common shares for $.16 per Share and immediately cancelled/retired these shares. December 10:Purchased (redeemed) 2,000,000 common shares for a total $220,000. These shares were immediately cancelled. December 15: Declared and paid a dividend of $.01 per common share The market value of the shares on December 31, 20x0 was $.22. Net income for the year was $470,000. Required: a. Prepare all journal entries for Logos Ltd. for 20x0 including year end entries. (8 marks) b. Prepare the shareholders’ equity section of the balance sheet, and all accompanying notes, for Logos Ltd. at December 31, 20x0. (8 marks) c. On January 1, 20x3, Logos Ltd. raised $4,000,000 in cash by issuing COmmon shares. The shareholder's return on equity was 9% in 20x2. Fully explain the impact on ROE if they had decided to issue bonds at 7% (after tax)? Return on assets (after tax) is 10% in 20x3. Restated, w0uid ROE change, and if so, in what direction, if bonds were issued? Explain your conclusion. Assume net income was $500,000 in 20x3, what would net income have been if the $2,000,000 in financing had been bonds with a 7% after tax interest rate? (4 marks) PART B: Gold Ltd had the following transactions for the year 20x0: . January 1: Gold Ltd issued 5,000,000 cemmon shares for $4.50 each to the Gold family. J annary 2: Gold Ltd issued 1,000,000 preferred shares for $7 a share. February 5: A private placement for 3,000,000 common shares at $12.00 per share. February 12: An initial public offering of 700,000 to the general public at $20/common share August 1: ' Gold purchased 500,000 common shares at $28 each. Gold immediately retired/ cancelled these shares. August 10: The common stock was split 3 for 1. The pre—split market value on this date was $23 per common share. I Dec. 30: A cash dividend of $.25 per common share was declared, payable January 15, 20x1 Dec. 31: Gold Ltd. declared and distributed a 1% stock dividend. The market value of the stock was $10 per share. Net income for the year was $13,400,000. Required: Prepare journal entries for Gold Ltd. for 20x0. Ignore closing entries. (10 marks) ...
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This note was uploaded on 09/01/2011 for the course COMM 293 taught by Professor Jackes during the Spring '08 term at The University of British Columbia.

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HW#10 - Commerce 293, Homework Ten Shareholders’ Equity '...

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