1.

In an after-tax analysis, what are the primary differences between investing in a

depreciable asset with the use of retained earnings (no borrowing) versus
borrowed capital?
a. The retained earnings scenario has depreciation allowances, but the borrowed
capital scenario does not have depreciation allowances.
b. The borrowed capital scenario has depreciation allowances, but the retained
earnings scenario does not have depreciation allowances.
c. The retained earnings scenario has interest payments, which are deductible,
but the borrowed capital scenario does not have interest payments.
d. The borrowed capital scenario has interest payments, which are deductible, but
the retained earnings scenario does not have interest payments .

Retained Earnings:
Retained earnings are the leftover from the net income after the payment for
dividends. Retained earnings will be reinvested in the operation to grow the
value of the business in the future.

Answer and Explanation:

The answer is D.

A & b are incorrect. Regardless of the type of funding, the asset will be
depreciated over the lifetime. Thus, the depreciation expense does exist when
the firm uses either retained earnings or borrowing to finance the purchase of
the asset.

c. Incorrect. Borrowed capital requires the interest payment, but not the
retained earnings.

d. Correct. The firm will make interest payments to the lenders, which is a
qualified deduction for the firm. The retained earnings are the available fund in
the business, which there will no interest payments. However, note that there is
still an opportunity cost on the retained earnings.

2. On September 1, 2017, Hyde Corp., a newly formed company, had

the following stock issued and outstanding:
(i) Common stock, no par, $1 stated value, 5,000 shares originally
issued at $15 per share.
(ii) Preferred stock, $10 par value, 1,500 shares originally issued for
$25 per share.
Hyde's September 1, 2017 statement of stockholders' equity should
report
Common stock, Preferred stock, Additional Paid-in capital
a. $5,000, $37,500, $70,000
b. $75,000, $37,000, $0
c. $75,000, $15,000, $22,500
d. $5,000, $15,000, $92,500

Stockholders' Equity
Stockholders' Equity is one of the section in the financial statements. It is
reported under the balance sheet or statement of financial position. It
summarizes the net assets of the company or the excess of total assets over
total liabilities as of a period.

Answer and Explanation:

Answer: d. $5,000, $15,000, $92,500

Common stock (Equivalent to number of shares $5,00

because no par) 0

Preferred shares issued 1,500

X Par value $10

$15,0
Preferred stock
00

Additional Paid-in capital common stock (5,000 $70,0

shares * ($15-1)) 00

Additional Paid-in capital preferred stock (1,500 $22,5

shares * ($25-10)) 00

$92,5
Total Additional Paid-in capital
00

3. Question:
Do retained earnings go on the balance sheet?

Retained Earnings:
At the end of each quarter, publicly traded companies have to calculate what their income is
and how that income should be allocated. Large companies often spend a portion of their
income by issuing dividends, which divides up some or all of the profit to their shareholders.
Sometimes, however, a company may choose note to distribute these earnings and, instead,
reinvest them into the company for new investments.

Answer and Explanation:

Yes, retained earnings go on the balance sheet on the right-hand column.
The balance sheet, a financial statement issued by a company to reflect its current book value,
shows the assets a company owns in terms of value on the left side and whether those assets
are owed or owned on the right side. When a company does not disperse the earnings as
dividends, the equity portion of the balance sheet will show what equity is held by stockholders
and what the value of the income retained for reinvestment or future dividends is.

4. Question:
1) The following changes in Flip Corp.'s account balances occurred during 2014:

$98,0
Increase Assets
00

27,00
Liabilities
0

60,00
Capital Stock
0

Additional Paid-In
6,000
Capital
Except for a $13,000 dividend payment and the year's earnings, there were no
other reductions in retained earnings for 2014. What was Flip's net income for
2014?

2) January 1, 2014, Frick Co. issued 3,000 of its 9%, $1,000 face value bonds at
102 1/2. In connection with the sale of these bonds, Frick paid the following
expenses:

$
Promotion costs
20,000

Engraving and
35,000
printing
Legal fees & 200,00
commissions 0
What amount should Frick record as?

a) Bond issue costs to be amortized over the term of the bonds

b) Bond premium or discount

3) During year 1, Flop Company engaged in the following transactions:

Salary expense to key employees who are also $100,0

principal owners 00

250,00
Sales to affiliated enterprises
0
Which of the two transactions would be disclosed as related-party transactions
in Flop's year 1 financial statement?

a) Both transactions.

b) Neither transaction.

c) The $250,000 transaction only.

d) The $100,000 transaction only.

Retained Earnings:
Retained Earnings is the accumulated net income and net losses throughout the
operations of the company less any dividends declared. Retained Earnings is
presented as a component of the stockholders equity and can be classified as
either restricted or unrestricted. A retained earnings is considered restricted
when amount will be used for the future.

Answer and Explanation:

1.

Increase in 98,00
Assets 0

13,00
Dividends
0

111,0
Net Income
00

2.
What amount should Frick record as?

a) Bond issue costs to be amortized over the term of the bonds

20,00
Promotion Costs
0

Engraving and 35,00

printing 0

55,00
Bond Issue Cost
0

b) Bond premium or discount

Face Value 3,000,0

(3,000*1,000) 00

Issue Rate 102.5%

3,075,0
Issue Price
00

Face Value 3,000,0

(3,000*1,000) 00

Premium 75,000

3. Which of the two transactions would be disclosed as related-party

transactions in Flop's year 1 financial statement?

a) Both transactions.

5. Question:
You have been given the following information for Kelly girl’s Athletic Wear Corp.
for the year 2015:

a. Net sales = $38,850,000.

b. Cost of goods sold = $22,210,000.

c. Other operating expenses = $6,300,000.

d. Addition to retained earnings = $1,209,500.

e. Dividends paid to preferred and common stockholders = $1,940,500.

f. Interest expense = $1,845,000.

g. The firm's tax rate is 30%.

h. In 2016, net sales are expected to increase by $9.85 million.

i. Cost of goods sold is expected to be 60% of net sales.

j. Depreciation and other operating expenses are expected to be the same as in

2015.

k. Interest expense is expected to be $2,120,000.

l. The tax rate is expected to be 30% of EBT.

m. Dividends paid to preferred and common stockholders will not change.

Calculate the addition to retained earnings expected in 2016. (Enter your answer
in dollars, not millions.)

Retained Earnings:
The retained earnings are the leftover of net income after dividends are paid out
to the shareholders. The retained earnings will be reinvested in the operation to
increase the value of the firm.

Answer and Explanation:

2015:

 Net sales = $38,850,000.

 Cost of goods sold = $22,210,000.
 Other operating expenses = $6,300,000.
 Addition to retained earnings = $1,209,500.
 Dividends paid to preferred and common stockholders = $1,940,500.
 Interest expense = $1,845,000.
 The firm's tax rate is 30%.

2016:

 Net sales = $38,850,000 + $9,850,000 = $48,700,000

 Cost of goods sold = 60% x $48,700,000 = $29,220,000
 Depreciation and other operating expenses = $6,300,000
 Interest expense = $2,120,000.
 Net income = ($48,700,000 - $29,220,000 - $6,300,000 - $2,120,000) x (1 -
30%) = $7,742,000
 Dividends paid to preferred and common stockholders = $1,940,500
 Additional to retained earnings = $7,742,000 - $1,940,500 = $5,801,500

6. Question:
At January 1, 2017, Bridgeport Company reported retained earnings of
$2,181,000. In 2017, Bridgeport discovered that the 2016 depreciation expense
was understated by $435,000. In 2017, net income was $854,000 and dividends
declared were $241,000. The tax rate is 40%.

Prepare a 2017 retained earnings statement for Bridgeport Company.

Statement of Retained Earnings:

The statement of retained earnings shows a breakdown of how companies
calculated their ending retained earnings balance. Retained earnings are an
equity account that is permanent meaning that the balance is carried forward
from year to year.

Answer and Explanation:

Answer:

_____Bridgeport Company_____

_____Statement of Retained
Earnings_____

_____As of December 31, 2017_____

2,181,0
Beginning Balance, January 1, 2017
00

(261,00
Prior Period Adjustment
0)

Adjusted Beginning Balance, 1,920,0

January 1, 2017 00

Add: Net Income 854,000

(241,00
Less: Dividends declared
0)

2,533,0
Ending Balance, December 31, 2017
00
Explanation:
Net prior period adjustment is calculated as:
Prior period adjustment - (Prior period adjustment * Income tax rate)

$435,000 - ($435,000 * .40) = $261,000

Prior period adjustments are shown net of income tax on the statement of
retained earnings. These adjustments occur when a material error has been
made on the income statement in a prior year that has already been closed.

7. Question:
From the following information, determine the ending balance in Retained
Earnings.

1. Beginning Retained Earnings $6,200

2. Cash 1,900

3. Accounts Payable 1,100

4. Sales 27,000

5. Merchandise Inventory 9,200

6. Cost of Goods Sold 14,400

7. Salary Expense 9,900

A. $12,700

B. $18,900

C. $ 8,900

D. $20,000

E. $ 6,200

Retained Earnings Statement:

Retained earnings represent the earnings that are not distributed as dividends to
the shareholders of the company and are used as a source of internal financing.
In every period, the undistributed portion of net income is added to the existing
balance in the retained earnings. A statement of retained earnings is prepared to
determine the ending balance in the retained earnings account at the end of the
period.

Answer and Explanation:

Correct answer: Option C) $8,900.

Explanation:

The first step is to determine the net income:

 Net income = Sales - Cost of goods sold - Salaries expense

  Net income = $27,000 - $14,400 - $9,900
 Net income = $2,700

The second step is to determine the ending balance in retained earnings:

 Ending retained earnings = Beginning retained earnings + Net income -

Dividends
 Ending retained earnings = $6,200 + $2,700 - $0
 Ending retained earnings = $8,900

8. Question:
How are appropriated and inappropriate retained earnings shown on the
statement of retained earnings?

Retained Earnings:
When preparing the statement of retained earnings, the account includes the
beginning retained earnings and adding the net income generate during the
period, deducting the net loss and deducting the dividends, cash or stocks,
declared during the period, regardless of these are paid or not.

Answer and Explanation:

The stockholders' equity of the balance sheet include the common stock,
preferred stocks, paid in capital in excess of par, treasury stocks and retained
earnings, among others. Retained Earnings can be appropriated or not,
depending on the decision of the management. In case a portion of the retained
earnings is appropriated, such portion in deducted from the inappropriate
retained earnings and separately reported as such, under the inappropriate
retained earnings. However, the amounts are at the same time totaled to get the
total balance of the retained earnings accounts. The appropriated amount is also
disclosed on the notes to financial statements.

9. Question:
What is the primary reason for appropriating retained earnings?

Stockholders' Equity:
This is counterpart account for the owner's equity, in terms of sole
proprietorship, or partners' equity in case of a corporation. The stockholders'
equity portion of the balance sheet includes the retained earnings account,
where revenues, expenses and dividends are closed at the end of the reporting
period.

Answer and Explanation:

Appropriated retained earnings are the portion of retained earnings which is
decided by management to be allotment for a particular purpose. The said
account is already earmarked and may not be sued for other purposes aside from
to which it is allotted to. Usually, it is used for the following: (1) business
expansion, especially when there are plans for mergers; (2) to pay for the
outstanding debt to reduce the financial leverage and focus on equity financing;
(3) purchase of capital expenditures to increase the capacity of the machines,
especially when demand and sales are expected to increase; and (4) to invest in
research and development as a response to the rapidly emerging changes in
operations through technology.

10. Question:
For what reason do corporations retain earnings in the business?

Retained Earnings:
Retained Earnings is an equity account disclosed into he Stockholder's Equity
section of a company's balance sheet. The movements in the Retained Earnings
account are disclosed in detail in the Statement of Retained Earnings.

Answer and Explanation:

Retained Earnings is the total accumulated net income of a company over its
lifetime that has not been paid out to stockholders in the form of dividends.

Corporations rating earnings in the business for several reasons:

 To manage cash flow.

 To increase the equity component of financing.
 To ensure consistent dividend payments in the future.
 To provide capital for expansion.
 To limit interest expenses by reducing external finance.

11. Question:
During the summer between his junior and senior years, James Cook needed to
earn sufficient money for the coming academic year. Unable to obtain a job with
a reasonable salary, he decided to try the lawn care business for three months.
After a survey of the market potential, James bought a used pickup truck on
June 1 for $1,230. On each door he painted "James Cook Lawn Service, Phone
471-4487." He also spent $820 for mowers, trimmers, and tools. To acquire these
items, he borrowed $2,720 cash by signing a note payable promising to pay the
$2,720 plus interest of $75 at the end of the three months (ending August 31).

By the end of the summer, James had done a lot of work and his bank account
looked good. This prompted him to wonder how much profit the business had
earned

A review of the check stubs showed the following: Bank deposits of collections
from customers totaled $12,400. The following checks had been written: gas, oil,
and lubrication, $1,040; pickup repairs, $440, mower repair, $120, miscellaneous
supplies used, $250; helpers, $5,800, payroll taxes, $360; payment for assistance
in preparing payroll tax forms, $35, insurance, $195, telephone, $150: and $2,795
to pay off the note including interest (on August 31). A notebook kept in the
pickup. Plus some unpaid bills, reflected that customers still owed him $810 for
lawn services rendered and that he owed $220 for gas and oil (credit card
charges). He estimated that the cost for use of the truck and the other
equipment (called depreciation) for three months amounted to $770.

Required 1. Prepare a quarterly income statement for James Cook Lawn Service
for the months June, July and August. Assume that the company will not be
subject to income tax.

Income Statement:
Income statement is also called as the statement of financial performance.
Income statement for a merchandising company starts with the sales and
deducting the cost of goods sold to compute for the gross profit. After which,
selling and administrative expenses is deducted to get the operating income.

Answer and Explanation:

Required 1. Prepare a quarterly income statement for James Cook Lawn Service
for the months June, July and August. Assume that the company will not be
subject to income tax.

12,40
Cash Sales
0

Credit Sales 810

13,21
Total Revenues
0

Gas, Oil and -

 Lubrication 1,260

Pick-up Repairs -440

Mower Repair -120

Miscellaneous Supplies
-250
Used

-
Helpers' Salary
5,800

Payroll Taxes -360

Payroll Assistance -35

Insurance -195

Telephone -150

Depreciation -770

Operating Income 4,190

Interest -75

Net Income 4,115

12. Question:
External equity financing

Northern Pacific Heating and Cooling Inc. have a 6-month backlog of orders for
its patented solar heating system. To meet this demand, management plans to
expand production capacity by 50% with a $20 million investment in plant and
machinery. The firm wants to maintain a 35% debt-to-total-assets ratio in its
capital structure. It also wants to maintain its past dividend policy of distributing
30% of last year's net income. In 2012, net income was $5 million. How much
external equity must Northern Pacific seek at the beginning of 2013 to expand
capacity as desired? Assume the firm uses only debt and common equity in its
capital structure. Write out your answer completely. For example, 25 million
should be entered as 25,000,000. Round your answer to the nearest cent.

$ ..........

Investment.
Investment refers to the acquiring and selling of the assets. Investment is made
to earn profit from it. Investments are made in stock, bonds, and others. The
investor purchases a monetary asset and to earn the profit from that asset.
Answer and Explanation:
RE=NI(1−PR)=5,000,000(1−0.30)=5,000,000(0.70)=3,500,000RE=NI(1−
PR)=5,000,000(1−0.30)=5,000,000(0.70)=3,500,000
External Equity needed is as follows:

TE=NewInvestment(1−DR)=20,000,000(1−0.35)=20,000,000(0.65)=13,0
00,000TE=NewInvestment(1−DR)=20,000,000(1−0.35)=20,000,000(0.
65)=13,000,000
NEE=TE−RE=13,000,000−3,500,000=9,500,000NEE=TE−RE=13,000,00
0−3,500,000=9,500,000
Here,

RE is retained earnings.

NI is net income.

PR is payout ratio.

TE is total equity required.

DR is debt ratio.

NEE is new external equity.

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