Xytech was a high-tech company that had been started by three partners in early 20X0. Their successful product designs led to rapid growth of the company, with resulting needs for additional capital to support the growth. This case describes the major financing transactions entered into by Xytech in its first 10 years of existence. The firm's earnings history also is given.
You are to write a journal entry for each transaction as it is described. You should be explicit about what noncurrent liability and owners' equity-that is, invested capital-accounts are affected by the transactions, but effects on assets (including cash) and current liabilities can be recorded in a single account, "A&CL."
20X0: The firm began as a partnership on January 10, with the three equal partners, Able, Baker, and Cabot, each contributing $100,000 capital. The accountant set up a capital account for each of the three partners. On April 1 the partners arranged with a bank a $100,000, 8 percent, five-year "balloon" note, which meant that only quarterly interest was payable for five years, with the principal due in full as a lump sum at the end of the fifth year. The firm's net loss for 20X0 was $54,000. A salary for each partner was included in the calculation of net loss; no other payments were made to the partners.
20X1: To help the firm deal with a short-term liquidity problem, on April 26, Cabot liquidated some personal securities and loaned the firm the $50,000 proceeds. Cabot expected to be repaid these funds in no more than one year. In October Baker's ownership interest in the firm was sold out equally to Able and Cabot, with Baker receiving a total of $110,000 in notes and cash from Able and Cabot. The firm had $12,000 net income for the year. Able and Cabot planned to incorporate the firm as of January 1, 20X2. Prepare a statement of invested capital for the partnership as of December 31, 20X1.
20X2: The firm was incorporated on January 1, as planned. The articles of incorporation authorized 500 shares of $100 par value common stock, but only 100 shares were issued, 50 each to Able and Cabot. On March 21 the bank agreed to increase the $100,000 balloon note to $150,000; the $50,000 proceeds were used to repay Cabot's $50,000 loan. The net income for the year was $26,000.
20X3: In anticipation of a public offering of Xytech, Inc., stock, the firm effected a 1,000-for-l stock split in November. The year's net income was $43,000. Calculate the 20X3 basic earnings per share amount.
20X4: In January the firm went public. An investment banker sold 100,000 newly issued shares at $7.75 per share. The banker's fee and other issuance costs amounted to $55,000. The year's net income (after stock issuance costs) was $68,000. Prepare a statement of invested capital as of December 31, 20X4.
20X5: In January the company issued 500 20-year bonds with a face value of $ 1,000 each and a coupon rate of 6 percent. Although the bonds were issued at par, because of issuance costs the proceeds were only $950 per bond. Part of the proceeds was used to repay the firm's prior long-term debt. The year's net income was $85,000.
20X6: In April Able and Cabot each sold 25,000 of their common shares, receiving proceeds of $11 per share. The company earned net income of $111,000. On December 31, the firm declared a dividend of $0.15 per share, payable January 31, 20X7, to holders of record as of January 15. Prepare a statement of invested capital as of December 31,19X6.
20X7: Feeling that the market was undervaluing the company's stock, in June the management decided to purchase 20,000 shares on the open market. The purchase was effected July 1 at a price of $ 10 per share. The shares were held as treasury stock, available for possible reissuance. The year's net income was $152,000. In December, a $0.20 per share dividend was declared, payable the following month. Calculate the year's earnings per share.
20X8: In January the company issued 4,000 shares of convertible cumulative preferred stock with an annual dividend rate of $5 per share. Proceeds of the issuance were $200,000. Each share was convertible upon the holder's demand into two shares of Xytech common stock. Net income before preferred dividends was $186,000. In December, a dividend of $0.25 per common share was declared, payable the following month. Calculate the basic and diluted earnings per share of common stock in 20X8.
20X9: Net income before preferred stock dividends was $252,000. Instead of paying a cash dividend to common stock shareholders, on December 31, the firm declared a 5 percent stock dividend. The market price of the common stock on December 31 was $ 17 per share. No shares of preferred stock were converted during the year. Calculate the basic and diluted earnings per share for 20X9 and prepare a statement of invested capital as of December 31. What is the company's debt/capitalization ratio at year-end?