MyAccountingLab Access Code
3rd Edition
ISBN: 9780132952644
Author: Pearson
Publisher: Pearson College Div
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Chapter 10B, Problem 5EB
To determine
Indicate the manner that the effects of each group of securities will be reported on the financial statements.
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Delights, Inc., recently issued new securities to finance a new TV show. The project cost $35 million, and the company paid $2.2 million in flotation costs. In addition, the equity issued had a flotation cost of 7 percent of the amount raised, whereas the debt issued had a flotation cost of 3 percent of the amount raised. If the company issued new securities in the same proportion as its target capital structure, what is the company’s target debt-equity ratio?
Wide Angle Bhd is investing RM2 million in the construction of a new office building. Wide Angle Bhd is having financial issues as the building nears completion, since the business need a capital of RM450,000 to finish the project. Wide Angle Bhd's management team decides to issue bonds rather than shares in order to raise cash without eroding current shareholders' stake. The RM450,000 5-year bonds with an interest rate of 8% were issued on January 1, 2019 and pay interest semi-annually on January 1 and July 1 each year, with the first payment beginning in July 2019. Bonds with a market rate of 6% interest are available. The fiscal year comes to a conclusion on September 30th. Wide Angle Bhd amortises its debt using the effective interest rate. bond premium or discount.Needed:
(Exhibit your methods.) Your answer should be rounded up to the nearest RM.)
Prepare a journal entry to document the bond issue on January 1, 2019.
Prepare a journal entry to record the bond trades on July 1st…
The Bank of Willaine, Inc. issued an obligation to depositors who agree to pay ten (10) percent failsafe for one year. With the funds it acquires, The Bank of Willaine, Inc. can invest in different financial assets like in the stock market. What is the risk if the bank uses the funds it acquired from the depositors to invest in common stock? What liability type does the bank has by issuing that obligation?
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- Wide Angle Bhd is constructing a new office building at a cost of RM2 million.When building is in the final stage of completion, Wide Angle Bhd faces financial difficulties as the company needs a fund amounted RM450,000 to complete the construction. The management team of Wide Angle Bhd decides to issue bonds instead of shares since that is a way to raise capital without diluting the current shareholders' equity. The RM450,000 of 8%, 5-year bonds were issued on 1 January 2019 and pay interest semi-annually on each 1 January and 1 July, which the payment is starting on July 2019. The market rate of bonds yield 6%. The financial year ends on 30 September. Wide Angle Bhd uses the effective interest method to amortize bond premium or discount. REQUIRED: (Show your workings. Round your answer to the nearest RM) Prepare the journal entry to record the issuance of the bonds on 1 January 2019. Prepare the journal entry to record the related transactions of bonds on 1 July 2019 and 30…arrow_forwardThe Lohr Company needs $40 million in cash to expand several of its facilities. Company officials chose to issue bonds to raise this money rather than capital stock. What are some of the possible reasons for this decision?arrow_forwardPicollo had after tax earnings of P5,000,000 in 2014. The company needs P5,000,000 for new investments and plans to finance 70% of those investments with debt. If Picollo follows a residual a dividend policy, what total dividend will be paid? *arrow_forward
- Swifty Company has several investments in the securities of other companies. The following information regarding these investments is available at December 31, 2020. 1. Swifty holds bonds issued by Dorsel Corp. The bonds have an amortized cost of $316,000 and their fair value at December 31, 2020, is $405,000. Swifty intends to hold the bonds until they mature on December 31, 2028. 2. Swifty has invested idle cash in the equity securities of several publicly traded companies. Swifty intends to sell these securities during the first quarter of 2021, when it will need the cash to acquire seasonal inventory. These equity securities have a cost basis of $808,000 and a fair value of $927,000 at December 31, 2020. 3. Swifty has an ownership stake in one of the companies that supplies Swifty with various components Swifty uses in its products. Swifty owns 6% of the common stock of the supplier, does not have any representation on the supplier’s board of directors, does not…arrow_forwardBridgeport Corp. invested its excess cash in securities during 2020. As of December 31, 2020, the securities portfolio consisted of the following common stocks. Security Quantity Cost Fair Value Lindsay Jones, Inc. 1,000 shares $15,100 $21,100 Poley Corp. 2,000 shares 39,900 41,800 Arnold Aircraft 2,000 shares 72,500 60,300 Totals $127,500 $123,200 What should be reported on Bridgeport’s December 31, 2020, balance sheet relative to these securities? What should be reported on Bridgeport’s 2020 income statement?arrow_forwardShadow, Inc., is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt-equity ratio is expected to rise from 30 percent to 50 percent. The firm currently has $4.5 million worth of debt outstanding. The cost of this debt is 8 percent per year. Shadow expects to have an EBIT of $1.8 million per year in perpetuity. Shadow pays no taxes. (1) What is the market value of Shadow, Inc. before and after the repurchase announcement? (2) What is the expected return on the firm’s equity before the announcement of the stock repurchase plan?arrow_forward
- Assume these are the only securities Martin owns and that the company accounts for them as trading securities. How will changes in the prices of the securities affect net income? What would the effect on net income be if the Nichols Inc. securities were worth $463,000 at year-end (instead of $558,000)arrow_forwardFernandez Corp. invested its excess cash in securities during 2020. As of December 31, 2020, the securities portfolio consisted of the following common stocks. Security Quantity Cost Fair Value Lindsay Jones, Inc. 1,000 shares $ 15,000 $ 21,000 Poley Corp. 2,000 shares 40,000 42,000 Arnold Aircraft 2,000 shares 72,000 60,000 Totals $127,000 $123,000 Instructions a. What should be reported on Fernandez's December 31, 2020, balance sheet relative to these securities? What should be reported on Fernandez's 2020 income statement? On December 31, 2021, Fernandez's securities portfolio consisted of the following common stocks. Security Quantity Cost Fair Value Lindsay Jones, Inc. 1,000 shares $ 15,000 $20,000 Lindsay Jones, Inc. 2,000 shares 33,000 40,000 Duff Company 1,000 shares 16,000 12,000 Arnold Aircraft 2,000 shares 72,000 22,000 Totals $136,000 $94,000 During the year 2021,…arrow_forward1. In January 2028. Interesado Bank reported a net income of P500,000, net of debt securities trading loss of P100,000. In February 2028, the bank reported the following gross receipts: Interest income with maturity more than 5 year 400,000Leasehold income 300,000How much is the gross receipts tax on the collections of Interesado for February 2028? 2. Macmod sold 2,000 shares of his investment in stock eCare. The sale is made through the Philippine Stock Exchange (PSE) tor P1,000,000. How much is the percentage tax if Macmod acquired the shares of stock for P800,000 3. Macmod sold 2,000 shares of his investment in stock eCare. The sale is made through the Philippine Stock Exchange (PSE) tor P1,000,000. How much is the percentage tax if Macmod acquired the shares of stock for P800,000arrow_forward
- ABC Corporation has decided to sell ₱1000 bonds which will pay semiannual dividends of ₱20 (2% per period) and will mature in 5 years. The bonds are sold at ₱830, but after brokers' fees and other expenses the company ends up receiving ₱760. What is the company's cost of the capital raised through the sale of these bonds?arrow_forwardThe Sprite Toy Company needs to raise funds for a major expansion of its manufacturing operations. Sprite has determined that it will issue $100 millionof financing, but it has not decided whether to issue debt or equity. The companyis publicly traded.a. Based on the information given in Table 3-3, compute the flotation costs thatSprite would incur if it raises the needed funds by issuing equity only.b. Based on the information given in Table 3-3, compute the flotation costs thatSprite would incur if it raises the needed funds by issuing straight debt only.c. If Sprite wants to keep its flotation costs low, which form of financingshould it use? Discuss some factors other than flotation costs that thecompany should consider. TABLE 3-3 Flotation (Issuance) Costs for Issuing Debt and EquityaIssue Size Bondsb Equityc($ millions) Straight Convertible Seasoned Issues IPOsUnder…arrow_forwardLancaster Corporation, an investment banking company, often has extra cash to invest. Suppose Lancaster buys500 shares of Knight Corporation stock at $40 per share, representing less than 5% of Knight’soutstanding stock. Lancaster expects to hold the Knight stock for one month and then sell it.The purchase occurs on December 15, 2018. On December 31, the market price of one share ofKnight stock is $47 per share.Requirements1. What type of investment is this for Lancaster? Give the reason for your answer.2. Record Lancaster’s purchase of the Knight stock on December 15 and the adjustment tomarket value on December 31.3. Show how Lancaster would report this investment on its balance sheet at December 31 andany gain or loss on its income statement for the year ended December 31, 2018arrow_forward
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What Are Stock Buybacks and Why Are They Controversial?; Author: TD Ameritrade;https://www.youtube.com/watch?v=2O4bmcliaog;License: Standard youtube license