Loki Corporation earned net income of $70,000 during the year ended December,

Question 1:
Loki Corporation earned net income of $70,000 during the year ended December, 31 2016. On
December 15, Loki had declared the annual cash dividend on its $0.50 preferred shares (10,000
shares issued for $100,000) and a $0.60 per share cash dividend on its common shares (25,000
shares issued for $50,000). Loki then paid the dividends on January 4, 2017.
Journalize the following for Loki Corporation.
1.

Declaring the cash dividends on December 15, 2016.

2.

Paying the cash dividends on January 4, 2017.

Did Retained Earnings increase or decrease during 2016? If so, by how much?

Question 2:
IMA Believer Corp’s balance sheet reported the following shareholders’ equity as of December
31, 2016:
Share Capital:



Preferred shares, $100 stated value; $5 cumulative,
10,000 shares authorized, 10,000 issued

$1,000,000

Common shares 200,000 shares authorized, 50,000
shares issued

500,000

Total share capital

$2,500,000

Retained earnings

500,000

Total shareholders’ equity

$3,000,000


Assuming there are 3 years’ dividends in arrears (including that of the current year), determine
(1) preferred equity and (2) book value per share of common shares.

Question 3:
Settlers of Catan Co is authorized to issue an unlimited number of common shares and 10,000
preferred shares. During its first year, the business completed the following share issuance
transactions:
July 19: Issued 10,000 common shares for cash of $6.50 per share.
Oct 3: Issued 500, $1.50 preferred shares for $50,000 cash.

Oct 11: Received inventory valued at $11,000 and equipment with fair value of $8,500 for
3,300 common shares.
Requirements:
1.
2.

Journalize the transactions. Explanations are not required.
Prepare the shareholders’ equity section of Settlers of Catan Co’s balance sheet. The
ending balance of Retained Earnings is a deficit of $42,000.

Question 4:
Given the following information for Victory Stables, calculate their return on assets, return on
equity and comment on the use of these ratios (why would we use them, what do they tell us).
Net income

$50,000

Interest expense

8,500

Income tax expense

15,250

Preferred dividends

2,500



Current assets

Beginning of the Year

End of the Year

$62,000

$82,000

25,000

55,000

Plant and equipment

300,000

350,000

Long­term liabilities

50,000

75,000

Common shareholders’ equity

125,000

225,000

Preferred shareholders’ equity

60,000

85,000

Current liabilities


Question 5:
Multigrain Health Foods Inc. is authorized to issue 5,000,000 common shares. In its initial public
offering during 2010, Multigrain issued 500,000 common shares for $7.00 per share. Over the
next year, Multigrain’s share price increased and the company issued 400,000 more shares at an
average price of $8.50.
During the next seven years, from 2010 to 2016, Multigrain earned net income of $920,000 and
declared and paid cash dividends of $140,000. A 10% stock dividend was distributed to the

shareholders in 2016 on the shares outstanding. The market price was $8.00 per share when the
stock dividend was distributed. At December 31, 2016, the company has total assets of
$14,500,000 and total liabilities of $6,820,000.
Show the computation of Multigrain’s total shareholders’ equity at December 31, 2016. Present a
detailed computation of each element of shareholder’s equity.

Evaluation
Financial Accounting focuses heavily on finding solutions to numerical problems. With that in
mind, most units will include a number of problems. For each problem, you will need to provide
more than a simple numerical response. Your solutions should thoroughly address the issue and
present the findings in a meaningful format similar to those developed within the chapters and as
part of the review exercises solutions. Part value may be assigned for incorrect responses
providing evidence of understanding of the principles exist.