Chapter 2, Problem 1P

a.

To determine

The company’s current assets, current liabilities, working capital and shareholders’ equity using the given balance sheet.

Explanation of Solution

The current asset is calculated as follows.

$\begin{array}{c}\text{Current assets}=\left[\begin{array}{l}\text{Cash}+\text{Marketable}\text{securities}+\text{Account}\text{receivables}+\\ \text{Inventories}+\text{Prepaid}\text{insurances}\text{and}\text{taxes}\end{array}\right]\\ =\$150,000+\$200,000+\$150,000+\$50,000+\$30,000\\ =\$580,000\end{array}$

The current asset is $580,000.

The current liabilities is calculated as follows.

$\begin{array}{c}\text{Current liabilities}=\left[\text{Notes}\text{payable}+\text{Accounts}\text{payable}+\text{Income}\text{tax}\text{payable}\right]\\ =\$50,000+\$100,000+\$80,000\\ =\$230,000\end{array}$

The current liabilities is $230,000.

The working capital is calculated as follows.

$\begin{array}{c}\text{Working capital}=\text{Current}\text{assets}-\text{Current}\text{liabilites}\\ =\$580,000-\$230,000\\ =\$350,000\end{array}$

The working capital is $350,000.

The shareholders equity is calculated as follows.

$\begin{array}{c}\text{Shareholders equity}=\left[\begin{array}{l}\text{Accounts}\text{payable}+\text{Common}\text{stock}+\\ \text{Capital}\text{surplus}+\text{Retained}\text{earnings}\end{array}\right]\\ =\$100,000+\$150,000+\$150,000+\$70,000\\ =\$520,000\end{array}$

The shareholders equity is $520,000.

b.

To determine

The earnings per share when the company has a net income of $500,000.

Explanation of Solution

The price earning per share is calculated as follows.

$\begin{array}{c}\text{Price earning ratio}=\frac{\text{Price}\text{per}\text{share}}{\text{Earnings}\text{per}\text{}\text{share}}\\ \text{=}\frac{\text{\$500,000}}{\text{\$10,000}}\\ =\$50\end{array}$

The price earning per share is $50.

c.

To determine

The market price of the stock when the company issues common stock.

Explanation of Solution

The capital surplus value  is calculated as follows.

$\begin{array}{c}\text{Capital surplus}=\frac{\text{Share value}}{\text{Number of shares}}\\ \text{=}\frac{\text{\$150,000}}{\text{\$10,000}}\\ =\$15\end{array}$

The capital surplus value is $50.

The market price of the stock is calculated as follow.

$\begin{array}{c}\text{Market price}=\text{Capital surplus}+\text{Par value}\\ \text{=\$15+\$15}\\ =\$30\end{array}$

The market price of the stock is $30.