Accounting
27th Edition
ISBN: 9781337514071
Author: WARREN
Publisher: Cengage
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Chapter 13, Problem 13.6CP
(1)
To determine
Common stock: These are the ordinary shares that a corporation issues to the investors in order to raise funds. In return, the investors receive a share of profit from the profits earned by the corporation in the form of dividend.
Case study
To discuss: The arguments for and against classifying the issuance of the $25 million of stock as debt.
(2)
To determine
To elect: A practical Explanation to this classification problem.
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Epstein Engineering Inc. began operations on January 5, 20Y8, with the issuance of 500,000 shares of $80 par common stock. The sole stockholders of Epstein Engineering Inc. are Barb Abrams and Dr. Amber Epstein, who organized Epstein Engineering Inc. with the objective of developing a new flu vaccine. Dr. Epstein claims that the flu vaccine,which is nearing the final development stage, will protect individuals against 90% of the flu types that have been medically identified. To complete the project, Epstein Engineering Inc. needs $25,000,000 of additional funds. The local banks have been unwilling to loan the funds because of the lack of sufficient collateral and the riskiness of the business.The following is a conversation between Barb Abrams, the chief executive officer of Epstein Engineering Inc., and Amber Epstein, the leading researcher:Barb: What are we going to do? The banks won’t loan us any more money, and we’ve got to have $25 million to complete the project. We are so close!…
The following is a news item reported by Reuters:WASHINGTON, Jan 29 (Reuters)—Crossfire Medical Group, a maker of reconstructive implants for knees and hips, on Tuesday filed to sell 3 million shares of common stock. In a filing with the U.S. Securities and Exchange Commission, it said it plans to use the proceeds from the offering for general corporate purposes, working capital, research and development, and acquisitions. After the sale there will be about 32.5 million shares outstanding in the Arlington, Tennessee-based company, according to the SEC filing. Wright shares closed at $17.25 on Nasdaq. The common stock of Crossfire Medical Group has a par of $0.03 per share. Required:Prepare the journal entry to record the sale of the shares assuming the price existing when the announcement was made and ignoring share issue costs.
On 1/1/2020 Coopers issued 20 restricted stock shares when the stock was selling for $22. The stock has a $1 par and vesting occurs after two years. Prepare the necessary entries for all of the dates assuming the employees are still working for the company in 2 years.
On 1/1/2020 Coopers issued 2,000 shares of restricted-stock units to its CEO, Lisa Leslie. Each unit has a fair value of $30 per share, which is equal to the fair value of one share of stock. Additional information is as follows.
The service period related to the restricted stock units is 3 years.
Vesting occurs if Leslie stays with the company for 3 years.
The par value of the stock is $1 per share.
Prepare the necessary entries for all of the dates assuming the employees are still working for the company in 3 years.
Chapter 13 Solutions
Accounting
Ch. 13 - Of two corporations organized at approximately the...Ch. 13 - Prob. 2DQCh. 13 - A corporation with both preferred stock and common...Ch. 13 - An owner of 2,500 shares of Simmons Company common...Ch. 13 - Prob. 5DQCh. 13 - What is the primary purpose of a stock split?Ch. 13 - Prob. 7DQCh. 13 - The treasury stock in Discussion Question 7 is...Ch. 13 - What are the three classifications of restrictions...Ch. 13 - Indicate how prior period adjustments should he...
Ch. 13 - A Dividends per share Reinhardt Furniture Company...Ch. 13 - Dividends per share Zero Calories Company has...Ch. 13 - Entries for issuing stock On May 23, Stoltz Realty...Ch. 13 - Entries for issuing stock On January 22, Zentric...Ch. 13 - Prob. 13.3APECh. 13 - Entries for cash dividends The declaration,...Ch. 13 - Prob. 13.4APECh. 13 - Entries for stock dividends Antique Buggy...Ch. 13 - Prob. 13.5APECh. 13 - Entries for treasury stock On May 27, Hydro...Ch. 13 - Reporting stockholders' equity Using the following...Ch. 13 - Reporting stockholders' equity Using the following...Ch. 13 - Retained earnings statement Rockwell Inc. reported...Ch. 13 - Retained earnings statement None Cruises Inc....Ch. 13 - Earnings per share Financial statement data for...Ch. 13 - Earnings per share Financial statement data for...Ch. 13 - Dividends per share Imaging Inc., a developer of...Ch. 13 - Dividends per share Lightfoot Inc., a software...Ch. 13 - Prob. 13.3EXCh. 13 - Prob. 13.4EXCh. 13 - Issuing stock for assets other than cash On April...Ch. 13 - Prob. 13.6EXCh. 13 - Issuing stock Willow Creek Nursery, with an...Ch. 13 - Issuing stock Work Place Products Inc., a...Ch. 13 - Entries for cash dividends The declaration,...Ch. 13 - Prob. 13.10EXCh. 13 - Prob. 13.11EXCh. 13 - Prob. 13.12EXCh. 13 - Prob. 13.13EXCh. 13 - Prob. 13.14EXCh. 13 - Treasury stock transactions Lawn Spray Inc....Ch. 13 - Prob. 13.16EXCh. 13 - Reporting paid-in capital The following accounts...Ch. 13 - Stockholders' Equity section of balance sheet The...Ch. 13 - Prob. 13.19EXCh. 13 - Retained earnings statement Sumter Pumps...Ch. 13 - Prob. 13.21EXCh. 13 - Statement of stockholders' equity The...Ch. 13 - EPS Junkyard Am, Inc., had earnings of 516,000 for...Ch. 13 - Prob. 13.24EXCh. 13 - EPS Caterpillar Inc. and Deere Company are two...Ch. 13 - Prob. 13.1APRCh. 13 - Prob. 13.2APRCh. 13 - Selected stock transactions The following selected...Ch. 13 - Entries for selected corporate transactions Morrow...Ch. 13 - Entries for selected corporate transactions...Ch. 13 - Prob. 13.1BPRCh. 13 - Stock transaction for corporate expansion Pulsar...Ch. 13 - Selected stock transactions Diamondback Welding ...Ch. 13 - Entries for selected corporate transactions Nav-Go...Ch. 13 - Entries for selected corporate transactions West...Ch. 13 - Prob. 13.1CPCh. 13 - Prob. 13.2CPCh. 13 - Communication Motion Designs Inc. has paid...Ch. 13 - Prob. 13.5CPCh. 13 - Prob. 13.6CP
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- Issuing stock Epstein Engineering Inc. began operations on January 5, 20Y8, with the issuance of 500,000shares of 80 par common stock. The sole stockholders of Epstein Engineering Inc. are Barb Abrams and Dr. Amber Epstein, who organized Epstein Engineering Inc. with the objective of developing a new flu vaccine. Dr. Epstein claims that the flu vaccine, which is nearing the final development stage, will protect individuals against 90% of the flu types that have been medically identified. To complete the project, Epstein Engineering Inc. needs 25,000,000 of additional funds. The local banks have been unwilling to loan the funds because of the lack of sufficient collateral and the riskiness of the business. The following is a conversation between Barb Abrams, the chief executive officer of Epstein Engineering Inc., and Amber Epstein, the leading researcher: Barb: What are we going to do? The banks wont loan us any more money, and weve got to have 25 million to complete the project. We are so close! It would be a disaster to quit now. The only thing I can think of is to issue additional stock. Do you have any suggestions? Amber: I guess youre right. But if the banks wont loan us any more money, how can we find any investors to buy stock? Barb: Ive been thinking about that. What if we promise the investors that we will pay them 5% of sales until they receive an amount equal to what they paid for the stock? Amber: What happens when we pay back the 25 million? Do the investors get to keep the stock? If they do, itll dilute our ownership. Barb: How about if after we pay back the 25 million, we make them turn in their stock for 120 per share? Thats one and one-half times what they paid for it, and they would have already gotten all their money back. Thats a 120 profit per share for the investors. Amber: It could work. We get our money but dont have to pay any interest, dividends, or the 80 per share until we start generating sales. At the same time, the investors could get their money back plus 120 per share profit. Barb: Well need current financial statements for the new investors. Ill get our accountant working on them and contact our attorney to draw up a legally binding contract for the new investors. Yes, this could work. In late 20Y8, the attorney and the various regulatory authorities approved the new stock offering, and 312,500 shares of common stock were privately sold to new investors at the stocks par of 80. In preparing financial statements for 20Y8, Barb Abrams and Dan Fisher, the controller for Epstein Engineering Inc., have the following conversation: Dan: Barb, Ive got a problem. Barb: Whats that, Dan? Dan: Issuing common stock to raise that additional 25 million was a great idea. But . . . Barb: But what? Dan: Ive got to prepare the 20Y8 annual financial statements, and I am not sure how to classify the common stock. Barb: What do you mean? Its common stock. Dan: Im not so sure. I called the auditor and explained how we are contractually obligated to pay the new stockholders5% of sales until 80 per share is paid. Then we may be obligated to pay them 120 per share. Barb: So . . . Dan: So the auditor thinks that we should classify the additional issuance of 25 million as debt, not stock! And if we put the 25 million on the balance sheet as debt, we will violate our other loan agreements with the banks. And if these agreements are violated, the banks may call in all our debt immediately. If they do that, we are in deep trouble. Well probably have to file for bankruptcy. We just dont have the cash to pay off the banks. 1. Discuss the arguments for and against classifying the issuance of the 25 million of stock as debt. 2. What might be a practical solution to this classification problem?arrow_forwardIssuing stock Sahara Unlimited Inc. began operations on January 2,20Y4. with the issuance of 250.000 shares of $8 par common stock. The sole stockholders of Sahara Unlimited Inc. are Karina Takemoto and Dr. Noah Grove, who organized Sahara Unlimited Inc. with the objective of developing a new flu vaccine. Dr. Grove claims that the flu vaccine, which is nearing the final development stage, will protect individuals against 80% of the flu types mat have been medically identified. To complete me project, Sahara Unlimited Inc. needs $25,000,000 of additional funds. The banks have been unwilling to loan the funds because of the lack of sufficient collateral and the riskiness of the business. The following is a conversation between Karina Takemoto, the chief executive officer of Sahara Unlimited Inc., and Dr. Noah Grove, the leading researcher: Karina: What are we going to do? The hanks won't loan us any more money, and we've got to have $25 million to complete the project. We are so close! It would be a disaster to quit now. The only thing I can think of is to issue additional stock. Do you have any suggestions? Noah: I guess you're right. But if the banks won't loan us any more money, how do you think we can find any investors to buy stock? Karina: I've been thinking about that. What if we promise the investors that we will pay them 2% of sales until they have received an amount equal to what they paid for the stock? Noah: What happens when we pay back the $25 million? Do the investors get to keep the Stock? If they do, it'll dilute our ownership. Karina: How about, if after we pay back the $25 million, we make them turn in their stock for what they paid for it? Plus, we could pay them an additional $50 per share. Thai's a $50 profit per share for the investors. Noab: It could work. We gel our money, but don't have to pay any interest or dividends until we start generating sales. At the same time, the investors could get their money back plus $50 per share. Karina: We'll need current financial statements for the new investors. I'll get our accountant working on them and contact our attorney to draw up a legally binding contract for the new investors. Yes, this could work. In late 20Y4, the attorney and the various regulatory authorities approved the new stock offering, and shares of common stock were privately sold to new investors for $25,000,000. In preparing financial statements for 20Y4, Karina Takemoto and Glenn Bergum, the controller for Sahara Unlimited Inc., have the following conversation: Glenn: Karina, I've got a problem. Karina: What's that, Glenn? Glenn: Issuing common stock to raise that additional $25 million was a great idea. But ... Karina: But what? Glenn: I've got to prepare the 20Y4 annual financial statements, and I am not sure how to classify the common stock. Karina: What do you mean? It's common stock. Glenn: I'm not so sure. I called the auditor and explained how we are contractually obligated to pay the new stockholders 2% of sales until they receive what they paid for the stock. Then. we may be obligated to pay them $50 per share. Karina: So ... Glenn: So the auditor thinks that we should classify the additional issuance of $25 million as debt, not stock! And, if we put the $25 million on the balance sheet as debt, we will violate our other loan agreements with the banks. And, if these agreements are violated- the banks may call in all our debt immediately. If they do that, we are in deep trouble. We'll probably have to file for bankruptcy. We just don't have the cash to pay off the banks. What do you ihink might be a practical solution to this classification problem?arrow_forwardThe following is a news item reported by Reuters: WASHINGTON, Jan 29 (Reuters)— Wright Medical Group, a maker of reconstructive implants for knees and hips, on Tuesday filed to sell 3 million shares of common stock. In a filing with the U.S. Securities and Exchange Commission, it said it plans to use the proceeds from the offering for general corporate purposes, working capital, research and development, and acquisitions. After the sale there will be about 31.5 million shares outstanding in the Arlington, Tennessee-based company, according to the SEC filing. Wright shares closed at $17.15 on Nasdaq. The common stock of Wright Medical Group has a par of $.01 per share. Required: Prepare the journal entry to record the sale of the shares assuming the price existing when the announcement was made and ignoring share issue costs.arrow_forward
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