84 Chapter 3 Financing Activities COMPREHENSIVE PROBLEMS Problem 3-1 MI Air, Inc

Question

84 Chapter 3 Financing Activities COMPREHENSIVE PROBLEMS Problem 3-1 MI Air, Inc. engages in the following common stock transactions in 2017 for its 51 par value common stock. The firm earned $200 of net income during 2017, its first year of business. January 1-Issued 200 shares to an investor for $8 per share. December 1-Purchased 40 of the shares sold to the investor for $10 per share, and placed them in the corporate treasury December 10-Issued 75 shares to another investor at $9 per share in order to secure additional financing for the fim December 12-Issued 30 of the treasury shares when the market price was $11 per share December 16-Declared a $ 20 per share dividend. December 31-Paid the dividend declared on December 15 Requirements (Use T-accounts as necessary to track account balances) Journalive the above transactions. - Present the effects of the stock transactions on MI Air's 2017 income statement, Report stockholders' equity on the company's December 31, 2017 balance sheet Problem 3-2 Subtle Edge, Inc. presents the following excerpts from its December 31, 2017 balance sheet Current Liabuilities: Notes payable, 8% Long-term Liabilities Bonds payable, 10% s 200,000 1,000,000 Shareholders Equity Common stock, par Additional paid-in-capital,common stock Total contributed capital Retained earnings 50,000 350,000 400,000 250,000 650,000 Total sharehokders equity The accounting department also coniveys the following information Risk-free rate of return 3% Risk premium-4.05% Tax rate-30% Required: Compute Subtle Edge's weighted average cost of capital.

Explanation / Answer

Journal Entry in the Books of MI Inc. S. No. Account Title & Explanation Debit Credit 01-Jan Cash ( 200 Shares*$8) $1,600 Common Stock Par value ( 200Share* $1) $200 Paid Excess from Par Value - Common Stock $1,200 To record issuance of Common Stock 01-Dec Treasury Stock ( 40 Share*$10) $400 Cash $400 To record purchase of Stock under treasury 10-Dec Cash ( 75 Shares*$9) $675 Common Stock Par value ( 200Share* $1) $75 Paid Excess from Par Value - Common Stock $600 To record issuance of Common Stock 12-Dec Cash ( 30 Share* $11) $330 Treasury Stock $300 Paid Excess from Par Value - Treasury Stock $30 To record sale of Treasury Stock 15-Dec Retained Earning ( 265 Shares*0.20) $53 Dividend Payable $53 To record Dividedend on 265 Shares ( 200+75-40+30) Shares 31-Dec Dividend Payable $53 Cash $53 To record payment of Dividend b. Due to above stock transaction, no effect will be made on Income Statement MI Air Inc. Balance Sheet for Year ended on 31st Dec 20117 Liability & Equity Stockholder Equity Common Stock ( 275 Shares@$1) $275.00 Paid Excess from Par Value - Common Stock $1,800.00 Paid Excess from Par Value - Treasury Stock $30.00 $2,105.00 Retained Earning ($200-$53) $147.00 Total Paid In capital $2,252.00 Less: Treasury Stock -$100.00 Total Shareholder's Equity $2,152.00

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