Two Accounting Problems - FairWeather Co. and Scott Corp.’s

For reviewing the last chapter and the final exam in April.

Question 1:

FairWeather Co. commenced operations in 2014. At the end of their first fiscal year, December 31^st, 2014 the Shareholder’s Equity Section of the Statement of Financial Position presented the following information.

Shareholders’ Equity:

Preferred Shares $8, $150 par value, non-cumulative

2,500 authorized; 1,000 issued and outstanding $ 150,000

Common Shares, no par value

25,000 authorized; 6,900 issued and outstanding 312,100

Retained Earnings 291,100

Total Shareholders’ Equity $ 753,200

During 2015, the following transactions related to the Shareholders’ Equity took place.

1) On Feb. 1^st, FairWeather Co. issued a further 700 common shares at a price of $85 per

share.

2) On May 1^st, FairWeather Co. declared the annual dividend on its preferred shares.

3) On June 1^st, the preferred dividend was paid.

4) On July 14^th, a parcel of land was purchased in exchange for a further 500 common shares at a time when the shares were trading at $98 per share.

5) On Nov. 2^nd, the common stock split of 2 for 1 was announced and issued.

6) On Dec. 30^th a further 200 preferred shares were issued at a price of $175 per share.

Required:

A. Prepare journal entries for each of the transactions discussed above.

B. Assuming that FairWeather Co’s Net Income (after taxes) for 2015 was $180,000, prepare the full Shareholders’ Equity section of the Statement of Financial Position as at December 31^st , 2015.

C. Discuss why FairWeather Co may have declared a common stock split on Nov. 2^nd?

D. What is the significance of the preferred shares in relation to declaring dividends on the common shares?

Question 2:

Scott Corp. had the following information at the end of 2014:

Income Statement

	For the year ended December 31, 2014
Sales revenue	$350,000
Cost of goods sold	275,000
Gross profit	75,000
Salaries and wages expense	21,000
Insurance expense	5,000
Depreciation expense	9,000
Operating income	40,000
Interest expense	3,000
Income before tax	37,000
Income tax expense	13,000
Profit	$24,000
Balance Sheet
	31-Dec
	2014	2013
Cash	$6,000	$8,000
Accounts receivable	31,000	32,000
Inventory	25,000	21,000
Prepaid Insurance	3,000	2,000
Land	65,000	40,000
Plant and Equipment	70,000	60,000
Accumulated Depreciation	(34,000)	(25,000)
Total assets	$166,000	$138,000
Accounts payable	$18,000	$15,000
Salaries and wages payable	11,000	5,000
Income taxes payable	5,700	3,000
Bank loan	0	25,000
Common Shares	76,000	51,000
Retained earnings	55,300	39,000
Total liabilities and shareholders’ equity	$166,000	$138,000

Question 2, Additional information:

1) Shares were issued to a real estate developer in exchange of Land which had a value of $25,000.

2) The additional Plant and Equipment was acquired for cash.

3) No Plant and Equipment items were sold.

4) Dividends were declared and paid during the year.

Required:

A. How much cash did Scott Corp. collect from its customers during 2014?

B. Prepare the Statement of Cash Flows for 2014, using the Indirect Method.

C. Based on the information available, would there be any necessary note(s) to the Statement of Cash Flows? What would be included?

D. Explain why Scott Corp.’s cash balance declined by $2,000 during the year even though it earned $24,000 in net income.