Concept explainers
Concept introduction:
Stocks (Common Stock and Preferred Stock):
These are two types of the share capital of a company. Common Stock represents the Common shares issued to the shareholders and preferred stock represents the
Return on Equity:
Return on Equity is the
The Average stock holder’s equity calculated with the help of following formula:
To calculate:
The Return on Equity before and after the acquisition for both financing alternatives.
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Cornerstones of Financial Accounting
- Assume that the acquisition was completed in 5 months (150 days). Assume further that Siegel purchased 300,000 shares of AXYS at an average cost of $4.15, and shorted 29,800 shares of Celera. Siegel funded 70% of his purchase with debt. Celera's share price on the closing date was $27.43. Assuming a borrowing cost of 8%, calculate the return on Siegel's investment for the holding period and on an annualized basis.arrow_forwardMadison Corporation purchases an investment in Lake Geneva, Inc. at a purchase price of $20 million cash, representing 40% of the book value of Lake Geneva, Inc. During the year, Lake Geneva reports net income of $3,400,000 and pays $838,000 of cash dividends. At the end of the year, the market value of Madison’s investment is $24 million. What is the year-end balance of the equity investment in Lake Geneva? Select one: a. $21,024,800 b. $24,000,000 c. $20,000,000 d. $22,562,000 e. $21,360,000arrow_forwardYou are given the following information about Target Inc.: Identifiable assets: Carrying amount: $ 540,000 Fair value: $ 485,000 Identifiable Liabilities: Carrying amount: $ 150,000 Fair value: $ 190,000 The total number of shares issued by Target is 20,000, at an average market price of $23 per share. Consider two scenarios: 1) Shell Inc. is set up to acquire Target, and buys for cash 100% of the issued share capital of Target for $ 510,000. 2) Shell buys an 82% stake in Target, thus acquiring a majority interest. The price paid is now $425,000. Assume that the tax rate is 0, so that you can ignore any deferred tax considerations. REQUIRED: A) Calculate the value of goodwill at acquisition date for the two scenarios, using both the full and partial method of goodwill in scenario 2). B) Provide all of the consolidation entries at the date of acquisition (not only those related to the elimination…arrow_forward
- From the data given, compute the goodwill or gain from bargain purchase for the different items. If CARDO Co purchases the net assets of SYANO Co by issuing 5,000 shares of their P20 par value shares with a fair value of P40 per share, incurs a mortgage loan for P90,000, pays P150,000 cash and paying direct, indirect and stock issue costs of P75,000, P50,000 and P40,000 respective. What is the amount of GOODWILL?arrow_forwardAdams, Inc., acquires Clay Corporation on January 1, 2020, in exchange for $732,300 cash. Immediately after the acquisition, the two companies have the following account balances. Clay’s equipment (with a five-year remaining life) is actually worth $604,900. Credit balances are indicated by parentheses. Adams Clay Current assets $ 326,000 $ 290,000 Investment in Clay 732,300 0 Equipment 781,900 526,000 Liabilities (280,000 ) (170,000 ) Common stock (350,000 ) (150,000 ) Retained earnings, 1/1/20 (1,210,200 ) (496,000 ) In 2020, Clay earns a net income of $62,700 and declares and pays a $5,000 cash dividend. In 2020, Adams reports net income from its own operations (exclusive of any income from Clay) of $193,000 and declares no dividends. At the end of 2021, selected account balances for the two companies are as follows: Adams Clay Revenues $ (452,000 ) $ (272,000 ) Expenses 327,700 204,000 Investment…arrow_forwardPalm Corporation and Staple Company have announced terms of an exchange agreement under which Palm will issue 9,000 shares of its $11 par value common stock to acquire all of Staple Company's assets. Palm shares currently are trading at $55, and Staple $6 par value shares are trading at $19 each. Historical cost and fair value balance sheet data on January 1, 20X2, are as follows: Balance Sheet Item Assets Cash and Receivables Land Buildings and Equipment (net) Total Assets Equities Common Stock Additional Paid-In Capital Retained Earnings Total Equities Palm Corporation Book Value a. Common Stock b. Cash and Receivables c. Land d. Buildings and Equipment (net) e. Goodwill f. Additional paid-In Capital g. Retained Earnings $ 158,000 117,000 307,000 $ 582,000 $ 197,000 18,000 367,000 $ 582,000 Fair Value Amounts $ 158,000 184,000 419,000 $ 761,000 Staple Company Book Value $ 60,000 65,000 163,000 $ 288,000 $ 93,000 8,300 186,700 $ 288,000 Fair Value Required: What amount will be…arrow_forward
- Z Corporation has the following transactions relating to its investment during 2020: Jan 5 Acquired 16,000 shares of Y company for P1,500,000 paying an additional P10,000 for brokerage and P5,000 for commission. Feb 14 Received dividends from Y company declared January 10,2020 to the stockholders of records January 31,2020, P16,000. Required:prepare all the necessary entries assuming the investment is 1. Financial asset at Fair Value through profit and loss 2. Financial asset at Fair Value through other comprehensive incomearrow_forwardAdams, Inc., acquires Clay Corporation on January 1, 2020, in exchange for $713,300 cash. Immediately after the acquisition, the two companies have the following account balances. Clay’s equipment (with a five-year remaining life) is actually worth $641,000. Credit balances are indicated by parentheses. Adams Clay Current assets $ 382,000 $ 272,000 Investment in Clay 713,300 0 Equipment 837,000 584,000 Liabilities (202,000 ) (224,000 ) Common stock (350,000 ) (150,000 ) Retained earnings, 1/1/20 (1,380,300 ) (482,000 ) In 2020, Clay earns a net income of $74,100 and declares and pays a $5,000 cash dividend. In 2020, Adams reports net income from its own operations (exclusive of any income from Clay) of $160,000 and declares no dividends. At the end of 2021, selected account balances for the two companies are as follows: Adams Clay Revenues $ (544,000 ) $ (286,000 ) Expenses 394,400 214,500 Investment…arrow_forwardFollowing are the non-strategic investment transactions of Corona Inc.: 2023 Jan. 1 Purchased for $93,059 an 9.5%, $88,000 bond that matures in 22 years from Hanna Corporation when the market interest rate was 8.9%. There was a $50 transaction fee included in the above-noted payment amount. Interest is paid semiannually beginning June 30, 2023. The acquisition was made with intention to hold to maturity. June 30 Received interest on the Hanna bond. July 1 Paid $128,591 for a Trust Inc. bond with a par value of $133,000 and a seventeen-years term. The bond pays interest quarterly beginning September 30, 2023, at the annual rate of 9.3%; the market interest rate on the date of purchase was 9.7%. There was a $50 transaction fee included in the above-noted payment amount. Sept. 30 Received interest on the Trust bond. Dec. 31 Received interest on the Hanna and Trust bonds. 31 The fair values of the bonds on this date equalled the fair values. Required: 1. For each of the bond investments,…arrow_forward
- Adams, Inc., acquires Clay Corporation on January 1, 2020, in exchange for $713,300 cash. Immediately after the acquisition, the two companies have the following account balances. Clay’s equipment (with a five-year remaining life) is actually worth $641,000. Credit balances are indicated by parentheses. Adams Clay Current assets $ 382,000 $ 272,000 Investment in Clay 713,300 0 Equipment 837,000 584,000 Liabilities (202,000 ) (224,000 ) Common stock (350,000 ) (150,000 ) Retained earnings, 1/1/20 (1,380,300 ) (482,000 ) In 2020, Clay earns a net income of $74,100 and declares and pays a $5,000 cash dividend. In 2020, Adams reports net income from its own operations (exclusive of any income from Clay) of $160,000 and declares no dividends. At the end of 2021, selected account balances for the two companies are as follows: Adams Clay Revenues $ (544,000 ) $ (286,000 ) Expenses 394,400 214,500 Investment…arrow_forwardPineapple Company acquired an 80% interest in Samsung Company for $272,000 cash on January 1, 2018. Samsung had the following Balance Sheet on the date of acquisition: Assets $ Liabilities $ Accounts receivable 90,000 Accounts payable 50,000 Depreciable fixed asstes 200,000 Bonds payable 50,000 Land 50,000 Discount on bonds payable (1,620) Goodwill 10,000 Comm stock ($10 par) 100,000 Retained Earnings 151,620 Total Asstes 350,000 Total liabilities & Equity 350,000 The excess of the price paid over book value is attributable to the Depreciable Fixed Assets, which have a fairvalue of $260,000. The Depreciable Assets have a 10 year remaining life.Samsung sold a piece of Land to Pineapple for $60,000 on January 1, 2019. It cost Samsung $50,000 to purchasethe land.On January 1, 2020, Samsung held merchandise acquired from Pineapple for $20,000. This beginning inventoryhad an applicable gross profit of 40%. During 2020, Pineapple sold $60,000 worth of merchandise…arrow_forwardInvestment in SW Traders LimitedDuring the 2022 financial year, SendIT Limited and Wheels Limited incorporated SW Traders Limited. SW Traders Limited will be a tyre dealer. SendIT Limited acquired 60% of SW Traders Limited’s share capital for R300 000, and Wheels Limited acquired 40% of the share capital for R200 000. In terms of the agreement that governs the operations of SW Traders Limited, all decisions relating to the operations of SW Trad-ers Limited need to be taken by both SendIT Limited and Wheels Limited. Neither party can make decisions without each other’s consent. SW Traders Limited does not have any administrative staff and is 100% administered by a combination of SendIT Limited and Wheels Limited staff, which includes the company’s finance function. More than half of SW Traders Limited’s sales are channelled to SendIT Limited and Wheels Limited. SW Traders Limited will always give preference to the needs of SendIT Lim-ited and Wheels Limited over that of any third party…arrow_forward
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