UIL Accounting 2016 Capital Conference UIL Accounting State 2011-S Group 8 As you read the given information, Write Down What You Know (as shown below). After reading the given information and the questions that are asked, we know that Stockholder’s Equity for this corporation is composed of only Common Stock and Retained Earnings. The only clear given is Common Stock as of 12-31-10 ($8,000). We are given the adjusted balances as of 12-31-10 for all assets, all liabilities, and Common Stock. The only unknowns as of 12-31-10 are Dividends and Retained Earnings. Write Down What You Know from reading the given information using the Accounting Equation: Step 1 Calculate Total Assets as of 12-31-10: A/Rec 2,400 + Bldg 17,200 + Cash 7,600 + Eq 4,200 + Veh 20,000 = 51,400 Step 2 Calculate Total Liabilities as of 12-31-10: A/Pay 5,300 + Note Pay 12,100 = 17,400 Common Retained Assets = Liabilities + Stock + Earnings - Dividends 1-1-10 During 2010 12-31-10 51,400 = 17,400 + 8,000 + - Step 3 Common Stock issued 5-1-10: 350 sh x $10 par = $3,500 We use par value because the given information states: “The account called Paid-in Capital in Excess of Par has a zero balance.” Step 4 Solve Q#36, Common Stock on 1-1-10: Common Stock End bal 8,000 – issued in May 3,500 = 4,500 Q#36 3,500 5-1-10 issued 350 sh @$10 par 8,000 ending balance is given After solving the Common Stock unknowns, this is what the Accounting Equation looks like: Common Retained Assets = Liabilities + Stock + Earnings - Dividends 1-1-10 4,500 During 2010 3,500 12-31-10 51,400 = 17,400 + 8,000 + - Step 5 Dividends: We know the only issuance of stock during 2010 was on 5-1-10, which means there were no additional issuances between 5-1-10 and 11-15-10 (the date of record). Therefore, the ending balance of $8,000 is the amount to use to calculate the number of shares eligible for the dividend. $8,000 ÷÷÷ $10 par = 800 shares x $5 declared dividend = $4,000. UIL Accounting State 2011-S Group 8 -2- After solving the Dividends account unknown, this is what the Accounting Equation looks like: Common Retained Assets = Liabilities + Stock + Earnings - Dividends 1-1-10 4,500 0 During 2010 3,500 4,000 12-31-10 51,400 = 17,400 + 8,000 + - 4,000 The reason the account called Dividends is shown in the accounting equation as a SUBTRACTION to the credit side of the equation is because Dividends will eventually be closed to Retained Earnings (as a reduction to Retained Earnings). Dividends is shown as a separate “element” of the equation because on the Worksheet, the Dividends account would be listed on a separate row from Retained Earnings. (And besides, it just makes things clearer in this demonstration.) Step 6 Solve Retained Earnings on 12-31-10 (AFTER closing Net Income or Net Loss only) using the accounting equation: First, let’s understand why this is Retained Earnings AFTER closing Net Income or Net Loss only. Since we are using adjusted balances for assets and liabilities in the accounting equation and we are showing Dividends separately, the net income or net loss has already been “closed” to Retained Earnings. All of the income statement accounts have already been “dumped” into Retained Earnings inside this accounting equation. If they had not already been “dumped,” we would have needed a column for 2010 Net Income or Net Loss. Assets 51,400 – Liab 17,400 – Common Stock 8,000 + Dividends 4,000 = 30,000 After solving the 12-31-10 balance of Retained Earnings (net income has been closed to RE, but Dividends have not), this is what the Accounting Equation looks like: Common Retained Assets = Liabilities + Stock + Earnings - Dividends 1-1-10 4,500 0 During 2010 3,500 4,000 12-31-10 51,400 = 17,400 + 8,000 + 30,000 - 4,000 Step 7 Solve Q#37 Retained Earnings after Dividends is closed: RE 30,000 – Div 4,000 = $26,000 (If you are skeptical at this point, wait until Step 12.) Step 8 Build a T-account and Write Down What You Know: Retained Earnings 1-1-10 2010 Dividends 4,000 2010 Net Income 26,000 Calculated in Step 7 UIL Accounting State 2011-S Group 8 -3- Step 9 Calculate Net Income or Net Loss (Use your calculator. This pretty version is just for communication purposes): Revenue 56,000 Eq Rental Expense 1,600 Gasoline Expense 9,000 Insurance Expense 8,000 Interest Expense 2,000 Payroll Tax Expense 800 Salary Expense 7,900 Utilities Expense 5,000 Total Expenses 34,300 Net Income 21,700 Step 10 Write Net Income in the T-Account for Retained Earnings: Retained Earnings 1-1-10 2010 Dividends 4,000 21,700 2010 Net Income 26,000 Calculated in Step 7 Step 11 Solve Q#38 Retained Earnings on 1-1-10: NI 21,700 – Div 4,000 – end bal RE 26,000 = $8,300 Step 12 Skeptical? Here’s the proof looking at 12-31-10 balances as they would appear on the Balance Sheet: Assets 51,400 Liabilities 17,400 Common Stock 8,000 Retained Earnings 26,000 51,400 51,400 Step 13 Solve Q#39 Return on Common Stockholder’s Equity using the formula: Net Income Average Stockholder’s Equity A very common pitfall is to ignore that word “Average.” We must calculate the Total Stockholder’s Equity on BOTH 1-1-10 and 12-31-10 and then take an average of the two amounts. (Abbreviation for Stockholder’s Equity is SE.) UIL Accounting State 2011-S Group 8 -4- Recall that this particular corporation’s SE contains only two elements: Common previously Retained previously + = Total SE Stock solved Earnings solved 1-1-10 4,500 Q#36 + 8,300 Q#38 = 12,800 12-31-10 8,000 given + 26,000 Q#37 = 34,000 46,800 divide by 2 to get average ÷÷÷ 2 denominator of formula 23,400 Net Income (Step 9) 21,700 Average Stockholder’s Equity 23,400 Return on Common SE = 21,700 ÷÷÷ 23,400 = .92735042735 (this is decimal format; not percentage format) = 92.7% (move decimal two places to the right to convert to percentage) Answer is choice “H” Step 14 Solve Q#40 Answer is choice “C” Recall that the account “Paid-in Capital in Excess of Par” will only have a balance when common shares are issued at an amount GREATER than par value. Since the given information states this account has a zero balance, all common shares were issued at par value. If you see things better in a more visual layout, please see the next page which summarizes all the above steps on a single page. And finally, the last page is a snapshot of the state director’s file copy of the test with work shown. As you can see, when you understand the theory, you should be able to minimize what you need to write down. In fact, a truly practiced contestant will not write as much as the director did! UIL Accounting State 2011-S Group 8 -5- UIL Accounting State 2011-S Group 8 -6- .