accounting week 6
E11-15
Before Action
After Stock
Dividend
After Stock
Split
Stockholder’s Equity
Paid-In Capital
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
Book Value Per Share
25.00
23.81
12.50
E12-1
1. One reason a company may purchase investments in debt or stock securities is they may have extra cash that they don’t need in the immediate future. Another reason may be to generate earnings from investment income. A third reason may be for strategic reasons, such as gaining some influence over customers or suppliers.
2. A company might have excess cash that it doesn’t need for operations due to seasonal fluctuations, or it could result from a better than normal economic cycle.
3. The typical investment when investing cash for short periods of time is low-risk, highly liquid securities that are usually short-term government securities.
4. Typical investments when investing cash to generate earnings are debt securities from banks and other financial institutions, and stock securities such as mutual funds and pension funds.
5. A company may invest in securities that provide no current cash flow for strategic purposes, such as to gain influence with customers or suppliers, or to simply to establish a presence in that company or industry. They may also purchase controlling stock in another company to be able to enter that industry without having to worry about incurring undue costs.
6. The typical stock investment when investing cash for strategic reasons is stock of companies in related industries or in companies in unrelated industries that they wish to enter.
E12-2
Jan 1
Debt Investment
50,900
Cash
50,900
July 1
Cash
2,000
Interest Revenue
2,000
July 1
Cash
Before Action
After Stock
Dividend
After Stock
Split
Stockholder’s Equity
Paid-In Capital
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
Book Value Per Share
25.00
23.81
12.50
E12-1
1. One reason a company may purchase investments in debt or stock securities is they may have extra cash that they don’t need in the immediate future. Another reason may be to generate earnings from investment income. A third reason may be for strategic reasons, such as gaining some influence over customers or suppliers.
2. A company might have excess cash that it doesn’t need for operations due to seasonal fluctuations, or it could result from a better than normal economic cycle.
3. The typical investment when investing cash for short periods of time is low-risk, highly liquid securities that are usually short-term government securities.
4. Typical investments when investing cash to generate earnings are debt securities from banks and other financial institutions, and stock securities such as mutual funds and pension funds.
5. A company may invest in securities that provide no current cash flow for strategic purposes, such as to gain influence with customers or suppliers, or to simply to establish a presence in that company or industry. They may also purchase controlling stock in another company to be able to enter that industry without having to worry about incurring undue costs.
6. The typical stock investment when investing cash for strategic reasons is stock of companies in related industries or in companies in unrelated industries that they wish to enter.
E12-2
Jan 1
Debt Investment
50,900
Cash
50,900
July 1
Cash
2,000
Interest Revenue
2,000
July 1
Cash