Reference no: EM131093408

I. Three different plans for financing a $15,000,000 corporation are under consideration by its organizers. Under each of the following plans, the securities will be issued at their par or face amount, and the income tax rate is estimated at 40% of income.

	Plan 1	Plan 2	Plan 3
5% bonds	-	-	$7,000,000
Preferred 8% stock, $40 par	-	$8,000,000	4,000,000
Common stock, $10 par	$15,000,000	7,000,000	4,000,000
	$15,000,000	$15,000,000	$15,000,000
Net Income (loss)

1. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $1,800,000.

2. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $1,250,000.

3. Discuss the advantages and disadvantages of each plan.Text Box: November 14 Received dividends of $0.44 per share on Devon Inc. stock.

II. McDaniel Corporation manufactures surveying equipment. Journalize the entries to record the following selected equity investment transactions completed by McDaniel during 2015:

February 26 Purchased for cash 1,100 shares of Demon Inc. stock for $73 per share plus a $75 brokerage commission.

April 16        Received dividends of $0.55 per share on Demon Inc. stock.

June 18        Purchased 500 shares of Demon Inc. stock for $68 per share plus a $50 brokerage fee.

August 19    Sold 1,250 shares of Demon Inc. stock for $75 per share less a $100 brokerage commission. McDaniel assumes that the first investments purchased are the first investments sold.

November 14 Received dividends of $0.44 per share on Devon Inc. stock.

III. The net income reported on the income statement for the current year was $176,400. Depreciation recorded on equipment and a building amounted to $68,600 for the year. Balances of the current asset and current liability accounts at the beginning and end of the year are as follows:

	End of Year	Beginning of Year
Cash	$ 54,000	$ 61,500
Accounts receivable (net)	68,000	73,400
Inventories	151,500	139,600
Prepaid Expenses	8,200	10,400
Accounts Payable (merchandise creditors)	61,250	68,900
Salaries Payable	10,500	7,600

a. Prepare the Cash Flows from Operating Activities section of the statement of cash flows, using the indirect method.

b. If the direct method had been used, would the net cash flow from operating activities have been the same? Explain.

IV. Revenue and expense data for the current calendar year for Smith Electronics Company and for the electronics industry are as follows. The Smith Electronics Company data are expressed in dollars. The electronics industry averages are expressed in percentages.

	Smith Electronics Company	Electronics Industry Average
Sales	$3,150,000	103.0%
Sales returns and allowances	86,000	3.0%
Net sales	$3,064,000	100.0%
Cost of goods sold	1,875,000	60.0%
Gross profit	$1,189,000	40.0%
Selling expenses	$700,000	23.0%
Administrative expenses	328,000	10.0%
Total operating expenses	$1,028,000	33.0%
Operating income	$161,000	7.0%
Other income	35,000	1.0%
	$196,000	8.0%
Other expense	35,800	1.0%
Income before income tax	$160,200	7.0%
Income tax expense	135,000	5.0%
Net income	$25,200	2.0%

a. Prepare a common-sized income statement comparing the results of operations for Smith Electronics Company with the industry average Round to one decimal place.

b. As far as the data permit, comment on significant relationships revealed by the comparisons.

V. At the beginning of the 2015 school year, Robert Logan decided to prepare a cash budget for the months of September, October, November and December. The budget must plan for enough cash on December 31 to pay the spring semester tuition, which is the same as the fall tuition. The following information relates to the budget:

Cash balance, September 1 (from a summer job)	$6,750
Purchase season football tickets in September	200
Additional entertainment for each month	175
Pay fall semester tuition on September 3	4,300
Pay rent at the beginning of each month	400
Pay for food each month	275
Pay apartment deposit on September 2 (to be returned December 15)	550
Part-time job earnings each month (net of taxes)	1,250

a. Prepare a cash budget for September, October, November, and December

b. Are the four monthly budgets that are presented prepared as static or flexible budgets?

c. What are the budget implications for Robert Logan?