Question 1 ( 35 marks ) Use the following information for Midge Inc. to complete
ID: 2795714 • Letter: Q
Question
Question 1 (35 marks)
Use the following information for Midge Inc. to complete the requirements below.
Midge Inc. Shareholder’s Equity
As at Dec. 31, 2015
Common Shares, no-par; 500,000 shares authorized; 80,000 issued and outstanding
$600,000
Retained Earnings
1,000,000
Total Shareholders’ Equity
$1,600,000
2016 Transactions
Mar
3
Issued 5,000 common shares at $20 per share.
June
11
Declared a cash dividend of $0.25 per share to common shareholders of record on June 25, payable on July 6.
Aug.
21
Declared a 5% stock dividend to common shareholders of record on September 5, distributable on September 20. The shares were trading for $22 a share on August 21, $24 on September 5, and $26 on September 20.
Nov.
1
Issued 3,000 common shares at $25 per share.
Dec.
20
Declared a cash dividend of $0.30 per share to common shareholders of record on December 31, payable on January 10.
2016 Net Income: $217,610
Required
Record the above transactions for 2016. (Note: Closing entries are not required.)
ii) Prepare the Shareholders’ Equity section of their financial statements as at Dec. 31, 2016.
Question 1 (cont)
b) LX Corporation has 10,000 common shares issued when it announces a 3-for-1 split. Before the split, the shares were trading for $120 per share.
Required
i) After the split, how many shares will be issued?
ii) How should LX record the share split?
iii) Just following the split, what will be the likely share price?
Midge Inc. Shareholder’s Equity
As at Dec. 31, 2015
Common Shares, no-par; 500,000 shares authorized; 80,000 issued and outstanding
$600,000
Retained Earnings
1,000,000
Total Shareholders’ Equity
$1,600,000
Explanation / Answer
II) NUMBER OF SHARES OUTSTANDING AS ON 31.12.2016 DATE PARTICULARS SHARES PAR VALUE PREMIUM Jan-01 Number of shares outsnading = 80000 800000 Mar-03 Number share issued 5000 50000 50000 Nov-01 Number share issued 3000 30000 45000 SHARE CAPITAL = 600000+50000+30000 = 680000 AMOUNT OF RETAIN EARNINGS AS ON 31.12.2016 Jan-01 RETAIN EARNINGS 1000000 Mar-03 PREMIUM ON SHARE ISSUED 50000 Jun-11 DIVIDEND ISSUED = 85000*0.25 -21250 Aug-21 STOCK DIVIDEND = 85000*24*5% -102000 Nov-01 PREMIUM ON SHARE ISSUED 45000 Dec-20 CASH DIVIDEND = 88000*0.30 26400 Dec-31 NET INCOME 217610 CLOSING RETAIN EARNINGS 998150 B) Number of shares outstanding = 10000 split ratio = 3 for 1 current share price= 120 i) after split numebr shares = 10000*3= 30000 ii) Journal entry for split shares : old equity share capital a/c dr 120000 to new equity share capital 120000 iii) Market price based on split = 120*1/3 40 per share