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Clarence Company is a building contractor. Like all companies in the construction industry




Question;Clarence Company is a building contractor. Like all companies inthe construction industry, there are some doubts about thecollectability of its accounts receivable.Fiscal year. Clarence Company?s fiscal year end is December 31(12/31). The accounting year just ended for Clarence Company isthe fiscal year ending December 31, 2008 (12/31/08).Retained earnings, pretax financial income, tax rates.Clarence?s retained earnings on January 1, 2008 was $4,000,000and its tax rate for all past fiscal years, including 2008, is 30%. Thetax laws have changed and Clarence?s tax rate for all years after2008 will be 40%. Clarence?s pretax financial income (i.e.,accounting income before tax) is $2.2 million for fiscal 2008.Prior to 2008, Clarence never had any temporary or permanentdifferences between pretax financial income and taxable income(in other words, pretax financial income and taxable incomealways were the same prior to 2008).Investments. Clarence?s Chief Financial Officer loves to invest, sohe uses Clarence?s money to invest in shares of other companies?stock. On 1/1/2007, Clarence purchased 1,000 shares of LlamaCorporation. During fiscal 2008, Clarence purchased 1,000 sharesof Goat Corporation. The Llama shares were purchased for $10.50per share and the Goat shares were purchased for $7.20 per share.At the end of fiscal 2007, the fair market value of Llama was$10.90/share. At the end of fiscal 2008, the shares of Llama andGoat were worth $10.50 and $7.20 per share, respectively. LlamaCorporation declared and paid cash dividends of $0.75 per share inboth 2007 and 2008, Goat Corporation declared and paid a cashdividend of $0.50 per share in fiscal 2008.Clarence?s share of Llama?s stockholders? equity at the date ofpurchase was 10,000, with the entire difference between cost andbook value attributable to equipment with a remaining useful lifeof five years (Llama uses straight-line for all depreciation andamortization). Llama?s total net income was $3,000 in 2007 and$3,500 in 2008.6% Bonds. On July 1, 2007, Clarence issued 800 bonds. Thebonds are 6% stated (face, coupon) rate, 10-year, non-convertible,callable bonds (each bond has a face value of $1,000 and they wereissued at 107.7214). The bonds pay interest annually on July 1.The bond issue price was based on an effective interest rate of 5%.The bonds are callable anytime at 96 plus accrued interest.5.5% Convertible bonds. In 2005, Clarence issued, at face value,$1,000,000 of 5.5%, 8-year, convertible, non-callable bonds (thatis, it issued 1,000 bonds that each have a face value of $1,000).Each bond can be converted anytime by the bondholder into 24shares of common stock. The bonds were issued on January 1,2005 and pay interest annually on January 1.The effective interest method is used to amortize all bonddiscount or premium.Common Stock. On 1/1/08, there were 900,000 shares of $1 parvalue common stock authorized and 360,000 shares issued andoutstanding. The 360,000 shares were originally issued on August12, 2001 for $32 per share. Consequently, the balance in the paidin capital from common stock account on 1/1/08 totals$11,160,000. The market price of Clarence?s stock typicallyfluctuates quite a bit. The next page contains detailed informationabout Clarence?s common stock price.8% Convertible, cumulative, non-participating, PreferredStock. There are 850 shares of $1,000 par, 8% preferred stockissued and outstanding. The preferred stock is cumulative and nonparticipating. Each share of preferred stock is convertible into four(4) shares of common stock. The preferred stock was issued at parin 1995. Preferred stock dividends were last declared and paid infiscal 2006.Treasury Stock. Clarence purchased 40,000 shares of treasurystock on 4/1/08 for $32 per share and reissued 20,000 of theseshares on 9/1/08 for $37 per share. Clarence uses the cost methodto account for treasury stock transactions.Cookies or peanuts? Clarence?s CFO was on an airplane lastweek visiting the PCAOB and the flight attendants were asking ifthe passengers would like cookies or peanuts. Not one personasked ?what kind of cookies?? People need to be more curious.3Stock options as compensation. On November 1, 2007, Clarenceannounced that it planned to implement a compensatory stockoption plan?the company would distribute 40,000 options, eachof which allows the holder to purchase a share of stock for $40.Only employees in management would be eligible.On December 1, 2007, the company distributed the 40,000 optionsas planned. The employees eligible for the plan must work for thecompany until December 1, 2010, at which time the options can beexercised?all eligible employees are expected to remain with thecompany until they earn the options. As of December 1, 2007, thecompany forecasts that the market price per share will be $64 onDecember 1, 2010. The options expire on June 30, 2011.Using an option pricing model, the company estimates that eachoption was worth $19 on November 1, 2007, $21 on December 1,2007, and $23 on December 31, 2008. See below for the price ofthe common stock on each of those dates.Stock dividend. On October 1, 2008, Clarence declared a 15%stock dividend. The dividend was distributed on November 1,2008.Cash dividend. On December 15, 2008, Clarence declared a totalcash dividend of $500,000 payable to preferred and commonstockholders of record as of December 20, 2008. It will be paid onDecember 30, 2008.Inventory error. The company counted inventory incorrectly as of12/31/08. As a result, ending inventory for the year ended 12/31/08was overstated by $4,000.Accrued wages errors. Clarence forgot to accrue $3,400 of wagespayable as of 12/31/07. All of these wages were paid and expensedearly in fiscal 2008.Market value per share of common stock at the endof fiscal 2007, throughout Fiscal 2008, and forJanuary 1, 2009:Nov 1 2007 $33Dec 1 2007 $34Dec 31, 2007Jan 1 2008 $35Feb 1 2008 $37Mar 1 2008 $42April 1 2008 $32May 1 2008 $34June 1 2008 $45July 1 2008 $40Aug 1 2008 $41Sept 1 2008 $39Oct 1 2008 $29Nov 1 2008 $31Dec 1 2008 $37Dec 31 2008 $55Average for fiscal 2008 $41Jan 1 2009 $5510. HW5 - 6 pointsAssume that the two treasury stock transactionsthat occurred in the year ended12/31/08 are the only treasury stock transactions that Clarence hasever had.a.What is the effect of the two treasury stock transactions on totalstockholders? equity? You must indicate increase, decrease, or noeffect and, if increase or decrease, provide a dollar amount.b.What is the balance in the paid-in capital-treasury stock account asof 12/31/08?i. How would your answer to part b differ if, in addition to theother two treasury stock transactions, 10,000 treasury shares werereissued on 7/2/08 for $29 per share? You must indicate higher,lower, or no difference and, if higher or lower, provide a dollaramount.c. What is the net effect of the two treasury stock transactions oncash flows for the year ended 12/31/08 (ignore the hypotheticaltransaction in part b(i)). Provide a dollar amount and, if the amountis not zero, indicate whether it is a cash inflow or outflow andwhether it would appear as an operating, investing, or financingactivity in the cash flow statement?Anything you type in this window is automatically shared with the other person.Use the button with arrows in the top right corner to upload a document. Thissame button will let you download any updates you make. We recommend thatstudents download their progress regularly throughout the lesson.How do we do this?Restricted Stock: quickly replacing options as share-based compensationmethod of choice


Paper#50907 | Written in 18-Jul-2015

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