Survey of Accounting (Accounting I)
8th Edition
ISBN: 9781337517386
Author: WARREN
Publisher: Cengage
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Chapter 8, Problem 8.3.1C
To determine
Concept introduction:
Common Stock:
The stock, also known as shares, which gives equity ownership and rights in the company in regard to voting for policies and to share profits of the company is termed as common stock.
Debt:
It is a liability of the company which it has to pay after a certain time along with a fixed rate of interest. This is used by the company for the expansion of the businesses.
To discuss:
The arguments on whether to classify the stock issuance as debt or not.
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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!…
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Chapter 8 Solutions
Survey of Accounting (Accounting I)
Ch. 8 - A business issued a $5,000, 60-day, 12% note to...Ch. 8 - Which of the following taxes are employers usually...Ch. 8 - Prob. 3SEQCh. 8 - Prob. 4SEQCh. 8 - A corporation has issued 25,000 shares of $100 par...Ch. 8 - For most companies, what two types of transactions...Ch. 8 - When are short-term notes payable issued?Ch. 8 - Prob. 3CDQCh. 8 - Prob. 4CDQCh. 8 - Identify the two distinct obligations incurred by...
Ch. 8 - A corporation issues $40,000,000 of 6% bonds to...Ch. 8 - The following data relate to an $8,000,000,7% bond...Ch. 8 - When should the liability associated with a...Ch. 8 - Prob. 9CDQCh. 8 - Prob. 10CDQCh. 8 - Prob. 11CDQCh. 8 - Prob. 12CDQCh. 8 - Prob. 13CDQCh. 8 - A corporation reacquires 18,000 shares of its Own...Ch. 8 - Prob. 15CDQCh. 8 - Prob. 16CDQCh. 8 - Prob. 17CDQCh. 8 - Prob. 18CDQCh. 8 - Effect of financing on earnings per share BSF Co.....Ch. 8 - Evaluate alternative financing plans Obj. 1 Based...Ch. 8 - Current liabilities Zahn Inc. -told 16.000annual...Ch. 8 - Notes payable Obj. A business issued a 90-day. 7%...Ch. 8 - Compute payroll An employee earns $28 per hour and...Ch. 8 - Prob. 8.6ECh. 8 - Prob. 8.7ECh. 8 - Prob. 8.8ECh. 8 - Bond price CVS Caremark Corp. (CVS) 5-3% bonds due...Ch. 8 - Issuing bonds Cyber Tech Inc. produces and...Ch. 8 - Accrued product warranty Back in Time Inc....Ch. 8 - Accrued product warranty Ford Motor Company (F)...Ch. 8 - Prob. 8.13ECh. 8 - Prob. 8.14ECh. 8 - Issuing par stock On January 29. Quality Marble...Ch. 8 - Issuing stock for assets other than cash Obj.5 On...Ch. 8 - Treasury stock transactions Obj.5 Blue Moon Water...Ch. 8 - Prob. 8.18ECh. 8 - Treasury stock transactions Banff Water Inc....Ch. 8 - Cash dividends The date of declaration, date of...Ch. 8 - Prob. 8.21ECh. 8 - Effect of stock split Audrey's Restaurant...Ch. 8 - Prob. 8.23ECh. 8 - Prob. 8.24ECh. 8 - Prob. 8.1.1PCh. 8 - Prob. 8.1.2PCh. 8 - Prob. 8.1.3PCh. 8 - Recording payroll and payroll taxes The following...Ch. 8 - Recording payroll and payroll taxes The following...Ch. 8 - Recording payroll and payroll taxes The following...Ch. 8 - Recording payroll and payroll taxes The following...Ch. 8 - Bond premium; bonds payable transactions Beaufort...Ch. 8 - Prob. 8.3.2PCh. 8 - Bond premium; bonds payable transactions Beaufort...Ch. 8 - Prob. 8.3.4PCh. 8 - Stock transactions for corporate expansion Vaga...Ch. 8 - Dividends on preferred and common stock Yukon Bike...Ch. 8 - Dividends on preferred and common stock Yukon Bike...Ch. 8 - Prob. 8.5.3PCh. 8 - Prob. 8.1.1MBACh. 8 - Prob. 8.1.2MBACh. 8 - Prob. 8.2.1MBACh. 8 - Prob. 8.2.2MBACh. 8 - Prob. 8.2.3MBACh. 8 - Prob. 8.3.1MBACh. 8 - Prob. 8.3.2MBACh. 8 - Prob. 8.3.3MBACh. 8 - Prob. 8.4MBACh. 8 - Prob. 8.5.1MBACh. 8 - Prob. 8.5.2MBACh. 8 - Prob. 8.6.1MBACh. 8 - Prob. 8.6.2MBACh. 8 - Prob. 8.6.3MBACh. 8 - Stock split Using the data from E8-22. indicate...Ch. 8 - Prob. 8.8.1MBACh. 8 - Prob. 8.8.2MBACh. 8 - Prob. 8.8.3MBACh. 8 - Prob. 8.8.4MBACh. 8 - Prob. 8.8.5MBACh. 8 - Prob. 8.8.6MBACh. 8 - Prob. 8.8.7MBACh. 8 - Prob. 8.8.8MBACh. 8 - Prob. 8.9.1MBACh. 8 - Prob. 8.9.2MBACh. 8 - Prob. 8.9.3MBACh. 8 - Prob. 8.9.4MBACh. 8 - Prob. 8.9.5MBACh. 8 - Prob. 8.9.6MBACh. 8 - Debt and price-earnings ratios Lowe's Companies...Ch. 8 - Prob. 8.10.1MBACh. 8 - Prob. 8.10.2MBACh. 8 - Prob. 8.10.3MBACh. 8 - Prob. 8.10.4MBACh. 8 - Prob. 8.10.5MBACh. 8 - Debt and price-earnings ratios Alphabet (formerly...Ch. 8 - Prob. 8.10.7MBACh. 8 - Prob. 8.10.8MBACh. 8 - Prob. 8.11MBACh. 8 - Prob. 8.1.1CCh. 8 - Prob. 8.1.2CCh. 8 - Prob. 8.2.1CCh. 8 - Prob. 8.2.2CCh. 8 - Prob. 8.3.1CCh. 8 - Issuing stock Sahara Unlimited Inc. began...Ch. 8 - Prob. 8.4CCh. 8 - Prob. 8.5.1CCh. 8 - Financing business expansion You hold a 30% common...
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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. 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