Deck 8: Accounting for Financing Transactions

Question 1

Information related to Lamar Co.for the years ending December 31, 2009 and 2008 follows: Dividends declared for 2009 totaled $20,000.How much was generated through operations?

A) $30,000
B) $50,000
C) $10,000
D) $70,000

Answer 1

$50,000

Question 2

Haggar Corp's $1 par value, common stock was selling for $20 per share.Haggar Corp's owners' equity accounts were as follows:

How many shares of common stock are outstanding?

A) 30,000
B) 600,000
C) 800,000
D) Not enough information to determine.

Answer 2

600,000

Question 3

Identify the effect(s) on the debt/equity ratio (a through c) as a result of each transaction numbered below.You may use each letter more than once or not at all.

-Acquired the use of equipment under a capital lease

A) Increase in debt/equity ratio
B) Decrease in debt/equity ratio
C) Does not change debt/equity ratio

Answer 3

Increase in debt/equity ratio

Question 4

Identify the effect(s) on the debt/equity ratio (a through c) as a result of each transaction numbered below.You may use each letter more than once or not at all.

-Paid the interest portion of the payment on a capital lease

A) Increase in debt/equity ratio
B) Decrease in debt/equity ratio
C) Does not change debt/equity ratio

Question 5

Identify the effect(s) on the debt/equity ratio (a through c) as a result of each transaction numbered below.You may use each letter more than once or not at all.

-Paid the principal portion of the payment on a capital lease

A) Increase in debt/equity ratio
B) Decrease in debt/equity ratio
C) Does not change debt/equity ratio

Question 6

Identify the effect(s) on the debt/equity ratio (a through c) as a result of each transaction numbered below.You may use each letter more than once or not at all.

-Acquired the use of equipment under an operating lease

A) Increase in debt/equity ratio
B) Decrease in debt/equity ratio
C) Does not change debt/equity ratio

Question 7

Identify the effect(s) on the debt/equity ratio (a through c) as a result of each transaction numbered below.You may use each letter more than once or not at all.

-Payment required on an operating lease

A) Increase in debt/equity ratio
B) Decrease in debt/equity ratio
C) Does not change debt/equity ratio

Question 8

Management wishes to obtain financing.For each attribute/characteristic listed in 1 through 5, determine which type of financing it describes from management's perspective .

-No tax savings

A) debt financing
B) applies to equity

Question 9

Management wishes to obtain financing.For each attribute/characteristic listed in 1 through 5, determine which type of financing it describes from management's perspective .

-Credit rating effects

A) debt financing
B) applies to equity

Question 10

Management wishes to obtain financing.For each attribute/characteristic listed in 1 through 5, determine which type of financing it describes from management's perspective .

-Contractual restrictions

A) debt financing
B) applies to equity

Question 11

Management wishes to obtain financing.For each attribute/characteristic listed in 1 through 5, determine which type of financing it describes from management's perspective .

-Contractual future payments

A) debt financing
B) applies to equity

Question 12

Management wishes to obtain financing.For each attribute/characteristic listed in 1 through 5, determine which type of financing it describes from management's perspective .

-Cash flows are discretionary

A) debt financing
B) applies to equity

Question 13

Select the effect (a, b, or c) that each transaction listed in would most likely cause on the debt/equity ratio.

-Issued debt to finance the purchase of property

A) Decrease in debt/equity ratio
B) Increase in debt/equity ratio
C) Does not change debt/equity ratio

Question 14

Select the effect (a, b, or c) that each transaction listed in would most likely cause on the debt/equity ratio.

-Issued common stock to finance the purchase of property

A) Decrease in debt/equity ratio
B) Increase in debt/equity ratio
C) Does not change debt/equity ratio

Question 15

Select the effect (a, b, or c) that each transaction listed in would most likely cause on the debt/equity ratio.

-Used money resulting from profits to finance the purchase of property

A) Decrease in debt/equity ratio
B) Increase in debt/equity ratio
C) Does not change debt/equity ratio

Question 16

Select the effect (a, b, or c) that each transaction listed in would most likely cause on the debt/equity ratio.

-Declared dividends to shareholders

A) Decrease in debt/equity ratio
B) Increase in debt/equity ratio
C) Does not change debt/equity ratio

Question 17

Select the effect (a, b, or c) that each transaction listed in would most likely cause on the debt/equity ratio.

-Paid the previously declared dividends

A) Decrease in debt/equity ratio
B) Increase in debt/equity ratio
C) Does not change debt/equity ratio

Question 18

Select the effect (a, b, or c) that each transaction listed in would most likely cause on the debt/equity ratio.

-Skipped dividends on cumulative preferred stock

A) Decrease in debt/equity ratio
B) Increase in debt/equity ratio
C) Does not change debt/equity ratio

Question 19

Select the effect (a, b, or c) that each transaction listed in would most likely cause on the debt/equity ratio.

-Declared and paid a 10% stock dividend

A) Decrease in debt/equity ratio
B) Increase in debt/equity ratio
C) Does not change debt/equity ratio

Question 20

Select the effect (a, b, or c) that each transaction listed in would most likely cause on the debt/equity ratio.

-Declared and paid a 200% stock dividend

A) Decrease in debt/equity ratio
B) Increase in debt/equity ratio
C) Does not change debt/equity ratio

Question 21

Select the effect (a, b, or c) that each transaction listed in would most likely cause on the debt/equity ratio.

-Distributed a two-for-one stock split

A) Decrease in debt/equity ratio
B) Increase in debt/equity ratio
C) Does not change debt/equity ratio

Question 22

List two distinct examples of financing activities.

Question 23

Tanner Corporation shareholders' equity section of its balance sheet as of December 31, 2008 is as follows:

The following events occurred during 2009:
March 3 - 5,000 shares of authorized and unissued common stock were sold for $22 per share.
March 16 - Declared a cash dividend of $3 per share payable May 15 to holders of record on May 5.
A. At March 31, 2009, how many more shares of stock can be issued?
B. At March 31, 2009, how many shares are issued and outstanding?

Question 24

Metallic Paper Corporation has the following balance sheet accounts immediately preceding an investing and financing decision:

A long-term debt covenant specifies that Metallic Paper's debt/equity ratio cannot be greater than 1.0 and its current ratio must be at least 2.0.
Metallic Paper is going to invest $70,000 in new equipment.It is considering two methods of financing the investment.It can use $10,000 of its own money and obtain $60,000 from the issue of long-term debt.Alternatively, Metallic Paper can use $15,000 of its own money and obtain the remaining financing from the issue of stock.
A.Recalculate the balance sheet amounts given above for each of the two financing alternatives immediately after financing is achieved and the investment is undertaken.
B.Use numerical calculations to determine if the debt covenants are respected under each of the two financing alternatives.If the covenants are broken for each alternative, suggest financing options that Metallic Paper might use to finance the $70,000 investment in equipment.