Option #1: The Accounting Cycle and Stockholders’ Equity Analysis Portfolio Proj
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Question
Option #1: The Accounting Cycle and Stockholders’ Equity Analysis
Portfolio Project Option #1 is for accounting students who are sensing learners, and learn best from concrete materials and examples. If this is your learning style preference, you are practical and careful with detail. For this assignment, you are required to complete all three accounting cases: Arizona Consultants Inc., Power and Demolition Company, and Warnerwood. You will then present Parts 1, 2, and 3 of the Portfolio Project in Excel as journal entries, following the exact instructions that accompany each part.
Assignment Template attached below
Part 1:
Arizona Consultants, Inc. opened in March and completed the following transactions:
March 1: Arizona Consultants Inc. issued 17,200 shares of $10 par value capital stock for $150,000 cash and equipment with fair market value of $22,000.
March 2: Arizona Consultants Inc. pre-paid $6,000 cash or six months’ rent for their office.
March 3: Arizona Consultants Inc. made credit purchases for office equipment for $3,000 and office supplies for $1,200. Payment is due within 10 days.
March 6: Arizona Consultants Inc. completed services for a client and immediately received $4,000 cash.
March 9: Arizona Consultants Inc. completed a $7,500 project for a client who must pay within 30 days.
March 12: Arizona Consultants Inc. paid $4,200 cash to settle the account payable created on March 3.
March 19: Arizona Consultants Inc. paid a $5,000 cash premium on a 12-month insurance policy.
March 22: Arizona Consultants Inc. received $3,500 cash as a partial payment for the work completed on March 9.
March 25: Arizona Consultants Inc. completed work for another client for $3,820 on credit.
March 29: Arizona Consultants Inc. declared dividends of $5,000 to its shareholders on record. Dividends were paid in cash the following day.
March 30: Arizona Consultants Inc. purchased $600 of additional office supplies on credit.
March 31: Arizona Consultants Inc. paid $500 cash for this month’s utility bill.
Instructions:
Using the following template, prepare journal entries for the above economic transactions. Enter your journals to the general ledger using the same file name. The following accounts should be used in recording your transactions: cash, accounts receivable, prepaid rent, office equipment, capital stock, prepaid insurance, office supplies, accounts payable, consulting revenue, dividends, and utility expense.
Journal Entries Template for Arizona Consultants Inc.
Part 2:
The following unadjusted trial balance is for Montana Construction Company as of year-end for the December 31, 20x7 fiscal year. The December 31, 20x6 credit balance of the stockholders’ equity account is $46,900, and the stockholders invested $40,000 cash in the company during 20x7.
NO. Account Title Debit Credit
101 Cash $7,000
126 Supplies $16,000
128 Pre-paid insurance $12,600
167 Equipment $200,000
168 Accumulated depreciation – equipment $14,000
201 Accounts payable $6,800
251 Long-term notes payable $30,000
301 Stockholders’ equity $86,900
302 Dividends $12,000
401 Demolition fees earned $187,000
623 Wage expense $41,400
633 Interest expense $3,300
640 Rent expense $13,200
683 Property tax expense $9,700
684 Repairs expense $4,700
690 Utilities expense $4,800
TOTALS $324,700 $324,700
Instructions:
a) Journalize the following adjusting entries as of fiscal year-end December 31, 20x7.
b) Using the worksheet, post the adjusting entries using the adjustments column and prepare the adjusted trial balance.
c) Create financial statements. Namely, i) the income statement, ii) statement of stockholders’ equity, and iii) the balance sheet for 20x7.
Adjustments needed:
The supplies available at the end of fiscal 20x7 year are at a cost of $7,900.
The cost of expired insurance for the fiscal year is $10,600.
Annual depreciation on equipment is $7,000; no other depreciation adjustment was made in 20x7.
The December utilities expense of $800 is not included in the adjusted trial balance because the bill arrived after the trial balance was prepared. The $800 amount owed needs to be recorded.
The company's employees have earned $2000 in accrued wages for the fiscal year.
The rent expense not yet paid or recorded in the fiscal year is $3000.
Additional property taxes of $550 have been assessed for the fiscal year, but have not yet been paid or recorded in the accounts.
The $300 accrued interest for December has not yet been paid and reported.
Use the following template
Montana Construction Company template
Part 3:
Assume you are the chief accountant making a presentation during the stockholders annual meeting for your corporation. Provide a brief explanation to stockholders on each of the following questions:
Shares
In what ways can shares be “preferred”? In which ways are they similar and different from common shares? Give real-world examples.
How does the book value of shares of stock differ from the market value of shares of stock? Use a real-world example in your answer.
Dividends
Discuss at least three key issues that a board of directors considers when making a dividend declaration decision.
How does a share dividend differ from a share split?
Retained Earnings
Explain why companies place restrictions on some of their retained earnings.
BE SURE TO CREATE A FINANCIAL STATEMENTS FROM THE ADJUSTED TRIAL BALANCE [Company Name] Income Statement [date] Revenues: List names $ - Expenses: List names 0 0 0 0 0 0 0 Total expenses $ - Net income - [Company Name] Statement of Stockholders' Equity [date] Stockholders' Equity, [date] $ - Plus: Additional shareholder investment 0 Net income 0 Less: Dividends $ - Stockholders' Equity, [date] $ - [Company Name] Balance Sheet [Date] Assets Liabilities & Stockholders' Equity $ - $ - - - - - - Total Liabilities - - $ - - Total stockholders' equity $ - Total Assets $ - Total liabilities and stockholders' equity $ -Explanation / Answer
Part C:
COMMON STOCK
Common stock is the most common type of stock that is issued by companies. It entitles shareholders to share in the company’s profits through dividends and/or capital appreciation. Common stockholders are usually given voting rights, with the number of votes directly related to the number of shares owned. Of course, the company’s board of directors can decide whether or not to pay dividends, as well as how much is paid.
Owners of common stock have “preemptive rights” to maintain the same proportion of ownership in the company over time. If the company circulates another offering of stock, shareholders can purchase as much stock as it takes to keep their ownership comparable.
Common stock has the potential for profits through capital gains. The return and principal value of stocks fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Shareholders are not assured of receiving dividend payments. Investors should consider their tolerance for investment risk before investing in common stock.
PREFERRED STOCK
Preferred stock is generally considered less volatile than common stock but typically has less potential for profit. Preferred stockholders generally do not have voting rights, as common stockholders do, but they have a greater claim to the company’s assets. Preferred stock may also be “callable,” which means that the company can purchase shares back from the shareholders at any time for any reason, although usually at a favorable price.
Preferred stock shareholders receive their dividends before common stockholders receive theirs, and these payments tend to be higher. Shareholders of preferred stock receive fixed, regular dividend payments for a specified period of time, unlike the variable dividend payments sometimes offered to common stockholders. Of course, it’s important to remember that fixed dividends depend on the company’s ability to pay as promised. In the event that a company declares bankruptcy, preferred stockholders are paid before common stockholders. Unlike preferred stock, though, common stock has the potential to return higher yields over time through capital growth. Remember that investments seeking to achieve higher rates of return also involve a higher degree of risk.
Book Value
Book value literally means the value of the business according to its "books" or financial statements. In this case, book value is calculated from the balance sheet, and it’s the difference between a company's total assets and total liabilities. On the company's balance sheet, book value is recorded as shareholders' equity.
For example, if Company XYZ has total assets of $100 million and total liabilities of $80 million, the book value of the company is $20 million. In a very broad sense, this means that if the company sold off its assets and paid down its liabilities, the equity value or net worth of the business would be $20 million.
For fundamental and value investors, book value is important to consider because a company with a higher book value than market value may indicate a buying opportunity. A stock might be considered undervalued if its book value exceeds the market value since it would be viewed by the market that the stock is trading at a cheaper price than the actual value of the company. As a result, value investors might buy the stock based on the lower market valuation with the expectation that the market will eventually catch up to the cheap valuation ultimately sending the stock price higher.
Market Value
Market value is the value of a company according to the stock market. Market value is calculated by multiplying a company's shares outstanding by its current market price. This is also known as market capitalization.
If Company XYZ has 1 million shares outstanding and each share trades for $50, then the company's market value is $50 million. Market value is most often the number analysts, newspapers and investors refer to when they mention the value of a company.
Factors :
Tax Factors
Dividends increase the taxable income of shareholders. Most dividends from U.S. corporations qualify for long-term capital gains rates. Nonetheless, some shareholders might prefer a company spend dividend money to buy back shares on the open market instead. Both alternatives tend to increase the stock’s price. However, only those who sell stocks face taxation, letting other shareholders avoid taxes on dividends. The merits of dividends vs. repurchase programs are often a hot topic among financial analysts and no doubt among corporate boards as well.
Growth Factors
Dividends reduce the amount of equity a company can invest in profit-making operations. The board must decide what new or existing projects would benefit from the cash used for payouts and whether those projects would increase the company’s return on equity. It’s the board’s job to maximize shareholder wealth. If it pays dividends instead of funding potentially profitable investments, shareholders might complain that the board is not doing its job. The investments should return an amount greater than company’s weighted average cost of capital, which is how much it pays for the money it uses for investments. When investments grow the company, the stock usually appreciates.
Cost Factors
Another set of factors for the board of directors to consider involves lowering the corporation’s cost structure. It can do this by paying down debt, restructuring operations or buying competitors that operate more efficiently. The board might better use dividend cash to improve the long-term financial health of the company, burnish its credit rating and increase its bottom line by permanently reducing costs.
Stock Dividends
Stock dividends are similar to cash dividends; however, instead of cash, a company pays out stock. As a result, a company's shares outstanding will increase, and the company's stock price will decrease. For example, suppose Newco decides to issue a 10% stock dividend. Each current stockholder will thus have 10% more shares after the dividend is issued.
Stock Splits
Stock splits occur when a company perceives that its stock price may be too high. Stock splits are usually done to increase the liquidity of the stock (more shares outstanding) and to make it more affordable for investors to buy regular lots (a regular lot = 100 shares). Companies tend to want to keep their stock price within an optimal trading range.
Restricted retained earnings refers to that amount of a company's retained earnings that are not available for distribution to shareholders as dividends. The primary reason why retained earnings are restricted is that a company is in arrears in its payment of dividends that were due in the past; if so, the amount of the restriction will match the cumulative amount of unpaid dividends. The restriction will then decline as the dividends are paid off.
It is possible that the board of directors of a business will vote to restrict other portions of retained earnings that do not relate to cumulative unpaid dividends, such as for funds to construct a building. However, these restrictions may not be legally binding if investors are determined to be paid a dividend.
ACT300 Principles of Accounting I Module 8: Portfolio Project Template Option #1 (Part 1) Journal Entries for Arizona Consultants Inc. Date Account Names Debit Credit 01-Mar Cash 150000 Office Equipment 22000 Capital Stock 172000 02-Mar Prepaid Rent 6000 Cash 6000 03-Mar Office Equipment 3000 Office Supplies 1200 Accounts Payable 4200 06-Mar Cash 4000 Consulting Revenue 4000 09-Mar Accounts Receivable 7500 Consulting Revenue 7500 12-Mar Accounts Payable 4200 Cash 4200 19-Mar Prepaid Insurance 5000 Cash 5000 22-Mar Cash 3500 Accounts Receivable 3500 25-Mar Accounts Receivable 3820 Consulting Revenue 3820 30-Mar Dividends 5000 Cash 5000 30-Mar Office Supplies 600 Accounts Payable 600 30-Apr Utilities 500 Cash 500Related Questions
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