Chapter 11, Problem 11.1CC

CC11 Accounting for Equity Financing

Nicole has been financing Nicole's Getaway Spa (NGS) using equity financing. Currently NGS has authorized 100,000 no-par preferred shares and 200,000 $2 par common shares. Outstanding shares include 50,000 preferred shares and 40,000 common shares.

Recently the following transactions have taken place.

1. a. NGS issues 1,000 preferred shares for $12 a share.
2. b. NGS repurchases 1,000 common shares for $11 a share.
3. c. On November 12, the board of directors declares a $0.10 cash dividend on each outstand­ing preferred share.
4. d. The dividend is paid December 20.

Required:

1. 1. Prepare the journal entries needed for each of the transactions.
2. 2. If you were a common shareholder concerned about your voting rights, would you prefer Nicole to issue additional common shares or additional preferred shares? Why?
3. 3. Describe the overall effect of each transaction on the assets, liabilities, and shareholders’ equity of the company. (Use + for increase, − for decrease, and NE for no effect.)
4. 4. How would each transaction affect the ROE ratio?