91Ó°ÊÓ

(Effect of Transactions on Financial Statements and Ratios) The transactions listed below relate to Wainwright Inc. You are to assume that on the date on which each of the transactions occurred, the corporation’s accounts showed only common stock (\(100 par) outstanding, a current ratio of 2.7:1, and a substantial net income for the year to date (before giving effect to the transaction concerned). On that date, the book value per share of stock was \)151.53.

Each numbered transaction on the next page is to be considered completely independent of the others, and its related answer should be based on the effect(s) of that transaction alone. Assume that all numbered transactions occurred during 2018 and that the amount involved in each case is sufficiently material to distort reported net income if improperly included in the determination of net income. Assume further that each transaction was recorded in accordance with generally accepted accounting principles and, where applicable, in conformity with the all-inclusive concept of the income statement.

For each of the numbered transactions you are to decide whether it:

1. Increased the corporation’s 2018 net income.
2. Decreased the corporation’s 2018 net income.
3. Increased the corporation’s total retained earnings directly (i.e., not via net income).
4. Decreased the corporation’s total retained earnings directly.
5. Increased the corporation’s current ratio.
6. Decreased the corporation’s current ratio.
7. Increased each stockholder’s proportionate share of total stockholders’ equity.
8. Decreased each stockholder’s proportionate share of total stockholders’ equity.
9. Increased each stockholder’s equity per share of stock (book value).
10. Decreased each stockholder’s equity per share of stock (book value).
11. Had none of the foregoing effects.

Instructions

List the numbers 1 through 9. Select as many letters as you deem appropriate to reflect the effect(s) of each transaction as of the date of the transaction by printing beside the transaction number the letter(s) that identifies that transaction’s effect(s).

Transactions

9) Treasury stock, which had been repurchased at and carried at \(127 per share, was issued as a stock dividend. In connection with this distribution, the board of directors of Wainwright Inc. had authorized a transfer from retained earnings to permanent capital of an amount equal to the aggregate market value (\)153 per share) of the shares issued. No entries relating to this dividend had been made previously.

Step by step solution

01

Meaning of Retained Earnings

The percentage of net income of the company which is not distributed as a dividend is known as retained profit. This means that the money is kept in a ledger until they are reinvested in the company or used to pay future dividends.

02

Mentioning the effect of the transaction

The following transaction should be included for the above effect

1. Decreased the corporation’s total retained earnings directly.
2. Decreased each stockholder’s equity per share of stock (book value).

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