PROBLEM

P 3-6 The following is the balance sheet of McDonald Company:

McDONALD COMPANY

December 31, 2012

Assets

Current assets:

Cash (including $10,000 restricted for payment of note)$ 40,000

Marketable equity securities 20,000

Accounts receivable, less allowance for doubtful

accounts of $12,000 70,000

Inventory 60,000

Total current assets $190,000

Plant assets:

Land $ 40,000

Buildings, net 100,000

Equipment $80,000

Less: Accumulated depreciation 20,000 60,000

Patent 20,000

Organizational costs 15,000

235,000

Other assets:

Prepaid insurance 5,000

Total assets $430,000

Liabilities and Stockholders' Equity

Current liabilities:

Accounts payable $ 60,000

Wages payable 10,000

Notes payable, due July 1, 2014 20,000

Bonds payable, due December 2018 100,000

Total current liabilities $190,000

Dividends payable 4,000

Deferred tax liability, long term 30,000

Stockholders' equity:

Common stock ($10 par, 10,000 shares authorized,

5,000 shares outstanding) $ 50,000

Retained earnings 156,000

Total stockholders' equity 206,000

Total liabilities and stockholders' equity $430,000

Required Indicate your criticisms of the balance sheet and briefly explain the proper treatment of any item criticized.

g. The stockholders' equity of Gaffney Company at November 30, 2012, is presented below.

Common stock, par value $5, authorized 200,000

shares,100,000 shares issued and outstanding $500,000

Paid-in capital in excess of par 100,000

Retained earnings 300,000 $900,000

On December 1, 2012, the board of directors of Gaffney Company declared a 5% stock dividend, to be distributed on December 20. The market price of the common stock was $10 on December 1 and $12 on December 20. What is the amount of the change to retained earnings as a result of the declaration and distribution of this stock dividend?

1. $0

2. $40,000

3. $50,000

4. $60,000

5. None of the above

h. Schroeder Company had 200,000 shares of common stock outstanding with a $2 par value and retained earnings of $90,000. In 2010, earnings per share were $0.50. In 2011, the company split the stock 2 for 1. Which of the following would result from the stock split?

1. Retained earnings will decrease as a result of the stock split.

2. A total of 400,000 shares of common stock will be outstanding.

3. The par value would become $4 par.

4. Retained earnings will increase as a result of the stock split.

5. None of the above.

i. Which of the following is not a category within accumulated other comprehensive income?

1. Foreign currency translation adjustments.

2. Unrealized holding gains and losses on available-for-sale marketable securities.

3. Changes to stockholders' equity resulting from additional minimum pension liability.

4. Unrealized gains and losses from derivative instruments.

5. Extraordinary item.