Nicole has been financing Nicole\'s Gateway Spa (NGS) using equity financing. Cu

Question

Nicole has been financing Nicole's Gateway Spa (NGS) using equity financing. Currently NGS has authorized 100,000, $0.30 no-par preferred shares and 200,000, $1 par common shares. Outstanding shares include 50,000 preferred shares and 40,000 common shares. Recently the following trans actions took place. a. NGS repurchases 1,000 common shares for $10 a share b. NGS issues 1,000 preferred shares for $12 a share c. On November 12, 2011, the board of directors declared a cash dividend on each-outstanding preferred share. d. the dividend is paid December 20, 2011. Required: 1. Prepare journal entries needed for each of the transactions. 2. If you were a common shareholder concerned about your voting rights, would you prefer Nicole to issue additional common shares or additional preferred shares? Why? 3.Describe the overall effect of each transaction on the assets, liabilities, and shareholders' equity of the company. (Use + for increase, - for decrease, and NE for no effect) 4. How would each transaction affect the ROE ratio?

Explanation / Answer

follow this 1. issued common stock to investors in exchange for cash received from inventors Increase assets (cash), increase equity 2.paid monthly rent Decrease equity, decrease assets (cash) 3.received cash from customers when service was rendered Increase assets (cash), increase equity 4. billed customers for services performed Increase assets (AR), increase equity 5.paid dividend to stockholders Decrease equity, decrease assets (cash) 6.incurred advertising expense on account Decrease equity, increase liability (AP) 7.received cash from customers billed in (4) Increase asset (cash), decrease asset (AR) 8.purchased additional (asset?) for cash Increase asset, decrease asset (cash) 9.purchased equipment on account Increase asset (equipment), increase liabilities (AP)

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