Chapter 18 Discussion Question
Nike is the world’s leading designer, marketer, and distributor of authentic athletic footwear, apparel, equipment, and accessories. The following is a press release from the company:
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NIKE, INC. ANNOUNCES 11 PERCENT INCREASE IN QUARTERLY DIVIDEND
BEAVERTON, Ore.—(BUSINESS WIRE)—NIKE, Inc. (NYSE: NKE) announced today that its Board of Directors has approved a quarterly cash dividend of $0.20 per share. . . . This represents an increase of 11 percent versus the prior quarterly dividend rate of $0.18 per share. The dividend declared today is payable on January 2, to shareholders of record at the close of business December 4. “Today’s announcement, combined with the four-year $12 billion share repurchase program we announced . . ., demonstrates our continued confidence in generating strong cash flow and returns for shareholders through our new Consumer Direct Offense as we continue to invest in fueling sustainable, long-term growth and profitability.” |
When the share repurchase program was announced the company also declared a stock split distributed in the form of a 100% stock dividend. At that time Nike’s 1,200 million shares were trading at $130 per share. Nike’s shares have a stated value of $0.001 per share.
Based on the information above and answer the following questions:
- Prepare the journal entry that Nike recorded to account for the stock split?
- Assume Nike repurchased 50 million shares after the stock split at an average price of $59 per share. The original issue price of the shares, after adjusting for the six stock splits since the shares were issued, was $0.15 per share. What entry would Nike have recorded to account for the repurchase? Nike views the repurchase of stock as a formal retirement of shares.
- Suppose Nike views the repurchase of stock as an acquisition of treasury stock. What entry would Nike have recorded to account for the repurchase?
- Prepare the entries for the declaration and for the payment of the cash dividend announced in the press release.
- Chapter 19 Discussion Question
Del Conte Construction Company has experienced generally steady growth since its inception in 1976. Management is proud of its record of having maintained or increased its earnings per share in each year of its existence.
The economic downturn has led to disturbing dips in revenues the past two years. Despite concerted cost-cutting efforts, profits have declined in each of the two previous years. Net income in 2022, 2023, and 2024 was as follows:
| 2022 | $145 million |
| 2023 | $134 million |
| 2024 | $ 95 million |
A major shareholder has hired you to provide advice on whether to continue her present investment position or to curtail that position. Of particular concern is the declining profitability, despite the fact that earnings per share has continued a pattern of growth:
| Basic | Diluted | |
| 2022 | $2.15 | $1.91 |
| 2023 | $2.44 | $2.12 |
| 2024 | $2.50 | $2.50 |
She specifically asks you to explain this apparent paradox. During the course of your investigation you discover the following events:
- For the decade ending December 31, 2021, Del Conte had 60 million common shares and 20 million shares of 8%, $10 par nonconvertible preferred stock outstanding. Cash dividends have been paid quarterly on both.
- On July 1, 2023, half the preferred shares were retired in the open market. The remaining shares were retired on December 30, 2023.
- $55 million of 8% nonconvertible bonds were issued at the beginning of 2024, and a portion of the proceeds were used to call and retire $50 million of 8% debentures (outstanding since 2019) that were convertible into 9 million common shares.
- In 2022, management announced a share repurchase plan by which up to 24 million common shares would be retired. 12 million shares were retired on March 1 of both 2023 and 2024.
- Del Conte’s income tax rate is 25% and has been for the last several years.
In preparation for your explanation of the apparent paradox to which your client refers, calculate both basic and diluted earnings per share for each of the three years.
- Chapter 20 Discussion Question
Danville Bottlers is a wholesale beverage company. Danville uses the FIFO inventory method to determine the cost of its ending inventory. Ending inventory quantities are determined by a physical count. For the fiscal year-end June 30, 2024, ending inventory was originally determined to be $3,265,000. However, on July 17, 2024, John Howard, the company’s controller, discovered an error in the ending inventory count. He determined that the correct ending inventory amount should be $2,600,000.
Danville is a privately owned corporation with significant financing provided by a local bank. The bank requires annual audited financial statements as a condition of the loan. By July 17, the auditors had completed their review of the financial statements, which are scheduled to be issued on July 25. They did not discover the inventory error.
John’s first reaction was to communicate his finding to the auditors and to revise the financial statements before they are issued. However, he knows that his and his fellow workers’ profit-sharing plans are based on annual pretax earnings and that if he revises the statements, everyone’s profit-sharing bonus will be significantly reduced.
Based on the information above and answer the following questions:
- Why will bonuses be negatively affected? What is the effect on pretax earnings?
- If the error is not corrected in the current year and is discovered by the auditors during the following year’s audit, how will the error be reported in the company’s financial statements?
- Discuss the ethical dilemma Howard faces.
- Chapter 21 Discussion Question
“Why can’t we pay our shareholders a dividend?” shouted your new boss. “This income statement you prepared for me says we earned $5 million in our first half-year!”
You were hired last month as the chief accountant for Enigma Corporation, which was organized on July 1 of the year just ended. You recently prepared the financial statements below.
| ENIGMA CORPORATION | |
| Income Statement | |
| For the Six Months Ended December 31, 2024 | |
| ($ in millions) | |
| Sales revenue | $75 |
| Cost of goods sold | (30) |
| Depreciation expense | (5) |
| Remaining expenses | (35) |
| Net income | $5 |
| ENIGMA CORPORATION | |
| Balance Sheet | |
| December 31, 2024 | |
| ($ in millions) | |
| Cash | $1 |
| Accounts receivable (net) | 20 |
| Merchandise inventory | 15 |
| Equipment (net) | 44 |
| Total | $80 |
| Accounts payable | $2 |
| Accrued liabilities | 7 |
| Notes payable | 36 |
| Common stock | 30 |
| Retained earnings | 5 |
| Total | $80 |
You just explained to your boss, Robert James, that although net income was $5 million, operating activities produced a net decrease in cash. Unable to understand your verbal explanation, he asked you to prepare a written report explaining the apparent discrepancy between Enigma’s profitability and its cash flows. To increase the chances of your boss’s understanding the situation, you want to include in your report a determination of net cash flows from operating activities demonstrating how it is possible for operating activities to simultaneously produce a positive net income and negative net cash flows.
