(Accounting for equity transactions, LO 2, 3) During the year ended December 31, 2006 Oyama Corp. (Oyama) had the following equity related transactions and economic events. On December 31, 2005 the balance in Oyama’s Common Stock account was $8,000,000 with 1,000,000 shares outstanding, the balance in its Preferred Stock account was $0 with no shares outstanding, and Retained Earnings was $4,750,000.

i. On January 2 Oyama issued 200,000 common shares for $2,000,000.

ii. On February 28 Oyama issued 50,000 preferred shares for $2,500,000.

iii. On June 30 Oyama paid a dividend of $0.10 per common share.

iv. On September 30 Oyama declared a reverse stock split whereby the number of shares outstanding was reduced by half. A shareholder that had 1,000 shares before the reverse stock split would have 500 after the split.

v. On December 31 Oyama paid dividends to preferred shareholders of $2 per share.

vi. On December 31 Oyama paid a dividend of $0.10 per common share.

vii. Net income for 2006 was $2,300,000.

Required:

a. Prepare the journal entries required to record items (i) through (vi).

b. Prepare the equity section of Oyama’s balance sheet on December 31, 2006 and provide comparative information for December 31, 2005.

c. Show the equity section of Oyama’s balance sheet as it would have been reported in the December 31, 2005 financial statements. Explain the difference between the equity section for 2005 as reported in the 2006 annual report versus the 2005 annual report.

d. Calculate earnings per share and return on shareholders’ equity for the year ended December 31, 2006. If earnings per share for 2005 had been reported as

$1.75 per share, what amount would be reported for the year ended December 31, 2005 in the 2006 annual report?

e. How did the reverse stock split affect the performance of Oyama?