A. Fellups, Inc.

, had net income for the year just ended of $75,000, without considering the following
item or its tax effects. During the year, a tornado damaged one of the company’s warehouses and its
contents. Tornado damage is quite rare in Fellups’s location. The estimated amount of the loss from
the tornado is $100,000 and the related tax effect is 40 percent. Prepare the final section of Fellups’s
income statement, beginning with income before extraordinary items.
B. Walker Company had total revenue and expense numbers of $1,500,000 and $1,200,000,
respectively, in the current year. In addition, the company had a gain of $230,000 that resulted from
the passage of new legislation, which is considered unusual and infrequent for financial reporting
purposes. The gain is expected to be subject to a 35 percent income tax rate. Prepare an
abbreviated income statement for Walker for the year.
C. Wabash, Inc., had revenue and expenses from ongoing business operations for the current year of
$480,000 and $430,000, respectively. During the year, the company sold a division which had
revenue and expenses (not included in the previous figures) of $100,000 and $75,000, respectively.
The division was sold at a loss of $55,000. All items are subject to an income tax rate of 40 percent.
Prepare an abbreviated income statement for Wabash for the year.
D. Gannon, Inc., had 100,000 shares of common stock outstanding. During the current year, the
company distributed a 10 percent stock dividend and subsequently paid a $0.50 per share cash
dividend. Calculate the number of shares outstanding at the time of the cash dividend and the
amount of cash required to fund the cash dividend.
E. Messer Company had retained earnings at the beginning of the current year of $590,000. During the
year, the following activities occurred:
a. Net income of $88,000 was earned.
b. A cash dividend of $1.20 per share was declared and distributed on the 50,000 shares of
common stock outstanding.
Prepare a statement of retained earnings for the year.
F. Salt & Pepper, Inc., had retained earnings at the beginning of the current year of $460,000. During
the year the company earned net income of $250,000 and declared dividends as follows:
a. $1 per share for the current-year dividend on the 10,000 shares of preferred stock
outstanding.
b. $1 per share for the dividend in arrears for one year on the 10,000 shares of preferred
stock outstanding.
c. $0.50 per share for the current-year dividend on the 200,000 shares of common stock
outstanding.
In addition, the company discovered an overstatement in the prior year’s net income of $65,000 and
corrected that error in the current year. Prepare a statement of retained earnings for the year.
G. Gammon, Inc., declared dividends during the current year as follows:
a. The current year’s cash dividend on the 6 percent, $100 par value preferred stock.
100,000 shares were outstanding at the time of the declaration.
b. A cash dividend of $0.75 per share on the $10 par value common stock. 750,000 shares
were outstanding at the time of the declaration.
Prepare the general journal entries to record the declaration and payment of these dividends,
assuming the declaration is recorded directly to retained earnings.
H. WOW! Inc. declared a 5 percent stock dividend on its 500,000 shares of common stock. The $10 par
value common stock was originally sold for $12 and was selling at $15 at the time the stock dividend
was declared. Prepare the general journal entries to record and distribute the stock dividend.
I. Alexander, Inc., declared and distributed a 10 percent stock dividend on its 700,000 shares of
outstanding $5 par value common stock when the stock was selling for $12 per share. The
outstanding shares had originally been sold at $8 per share. The balance in retained earnings before
the declaration of the stock dividend, but after the addition of the current year’s net income, was
$995,000. Prepare the stockholders’ section of Alexander’s balance sheet to reflect these facts.
J. Assume that when you were in high school you saved $1,000 to invest for your college education.
You purchased 200 shares of Smiley Incorporated, a small but profitable company. Over the three
years that you have owned the stock, the corporation’s board of directors have taken the following
actions:
1. Declared a 2-for-1 stock split.
2. Declared a 20 percent stock dividend.
3. Declared a 3-for-1 stock split.
The current price of the stock is $12 per share.
a. Calculate the current number of shares and the market value of your investment.
b. Explain the likely reason the board of directors of the company has not declared a cash
dividend.
c. State your opinion as to whether or not you would have been better off if the board of
directors had declared a cash dividend instead of the stock dividend and stock splits.