The following transactions occurred at Heckton Inc. during its first year of ope
ID: 2462606 • Letter: T
Question
The following transactions occurred at Heckton Inc. during its first year of operation: Issued 10,000 common shares at $10 each; 100,000 shares are authorized at no par value. Issued 10,000 common shares to acquire for a patent, which is expected to be effective for the next 15 years. The value of the patent is undeterminable. The shares are selling for $10 on the open market. Purchased 1,000 of its own common shares on the open market for $10 per share. Declared a dividend of $0.50 per share of outstanding common stock. The dividend is to be paid after the end of the first year of operations. Market value of the shares is $10. Income for the year is reported as $340,000. Indicate each transaction's effect on the assets, liabilities, and owners' equity of Heckton Inc Heckton's president has asked you to explain the difference between contributed capital and retained earnings. Discuss these terms as they relate to Heckton. Determine the book value per share at the end of the year.Explanation / Answer
A. Issue of 10,000 common shares at $ 10
This increase Asset (cash) by $ 100,000 and also increase owners' equity by $ 100,000
B. Issue of 10,000 common shares for acquiring patent at market value which is $ 10 each
Patent in an intangible asset. So the Asset of company rises by $100,000 and owners' equity increases by $100,000
C. repurchase of 1000 of its own shares on open market at $10.
On repurchase of shares the re-purchased shares will have to be cancelled. So, there is decrease of asset (cash) and also decrese of owners' equity by $ 10,000
D. declaring dividend of 0.50 per share
The total outstanding shares in the market is 19,000 shares. so the dividend payout is $9,500. This will decrease cash by 9,500 and owners' equity by 9,500
E. Retained earing is Profit after tax and payment of dividend. In the given case, PAT is 340,000 of which 9,500 is distributed as dividend. $ 330,500 is the retained earning which is shown under owners equity in balance sheet.
Contributed capital is the share capital which is issued for cash or kind. Retained earning is the profit retained in the business after distribution of dividend.
F. Book value of the share, the the total value of assets divided by the number of equity shares.
Assets - Cash - 100,000 ( shares issued) + 330,500 ( retained earning) - 10,000 (used for buyback of shares) Net cash is 420,500
Patent - 100,000
Total asset - 520,500
Total number of Shares in market is (10,000+10,000 -9000) = 21,000
Book value of share is 520,500/21000 = $24.79
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