[ladyblaque1979]

Flameco Corp. was incorporated on January 1, 2003, and issued the following stock, for cash:

1 1,500,000 shares of $6 par per share common stock were authorized; 700,000 shares were issued on January 1, 2003, at $25 per share.
2 250,000 shares of $60 par value, 8.00% cumulative, preferred stock were authorized, 120,000 shares were issued on January 1, 2003, at $100 per share

3 Net income for the years ended December 31, 2003, 2004, and 2005, was $4,250,000, $5,500,000, and $6,500,000, respectively.

4 No dividends were declared or paid during 2003 or 2004. However, on December 1, 2005, the board of directors of Flameco Corp. declared dividends of$4,000,000 , payable on January 31, 2006, to holders of record as of January 4, 2006.

I need to:
a. Prepare journal entries for the following
1. The issuance of common stock and preferred stock on January 1, 2003.
2. The declaration of dividends on December 1, 2005.
3. The payment of dividends on January 31, 2006.
b. Of the total amount of dividends declared during 2005, how much will be
received by preferred shareholders?

[morgaine300]

Have you made some attempt at this problem yet? Please see the guidelines for posting homework:
Ask Me Help Desk - Announcements in Forum : Homework Help

[ladyblaque1979]

I have made an attempt at the problem. I know how to calculate it with the whole useful life of five years, but I am confused as to hot to calculate with only 4 out of 5 years

[ArcSine]

I think you might be mixing up your questions... "useful life of 5 years" sounds like you're referring to a depreciable asset issue, rather than a stock issuance / dividend issue. Double check your questions.

[ladyblaque1979]

I do have them mixed up! This is the question, and answer I came up with for this Depreciation Calculation Methods scenario:
Depreciation calculation methods. Hill Co. acquired a new delivery truck at the
beginning of its current fiscal year. The following information is available

cost $100,000
estimated useful life 5 years
estimated salvage value $5,000

Required:
a. Calculate depreciation expense for the first 4 years of the truck’s life using:
1. Straight-line depreciation.
2. Sum-of-the-years’-digits depreciation.
3. Double-declining-balance depreciation.

b. Calculate the truck’s net book value at the end of its third year of use under
each depreciation method.

c. Assume that Hill Co. had no more use for the truck after the end of the
third year and that at the beginning of the fourth year it had an offer from a
buyer who was willing to pay $6,200 for the truck. Should the depreciation
method used by Hill Co. affect the decision to sell the truck?

Answer

Cost of the truck: 100,000
Useful Life (years) 5
Salvage Value 5,000
A.
1. Straight Line Depreciation

Depreciable Value 95,000 (100,000-5000)
Depreciation per year 19,000 (100,000-5,000)/5
Depreciation Expense for 4 years 76,000 (19,000*4)

2. Sum of the Years Digit Depreciation

Life is 5 years, sum of digits are 5+4+3+2+1=15 or: n(n+1)/2 = 5(5+1)/2 = 5(6)/2 = 30/2 = 15
Depreciation in 4 years: 5/15+4/15+3/15 +2/15 = 14/15
Depreciation Expense: in 4 years = $12,666.67

3. Double Declining Balance Depreciation

The declining rate is 1/5 = 20%. Double declining rate: 40%
Amortization Schedule
Year Opening BV Depreciation Closing BV
1 100,000 40,000 80,000
2 80,000 32,000 64,000
3 64,000 25,600 51,200
4 51,200 20,480 40,960
Total Depreciation 118,080
Depreciation expense in 4 years: = $118,080

B.

1. Straight Line Depreciation
Depreciation for 3 years is 19,000*3= 57,000
Opening Book Value 100,000
Book Value at the end of three years 43,000

2. Sum of the years digit depreciation
Depreciation for 3 years is 5/15+4/15+3/15 = 12/15 19,000
Opening Book Value 100,000
Book Value at the end of three years 81,000

3. Double Declining Balance Depreciation
From the table above: book value at the end of 3 years as 51,200

C.
Depreciation method not relevant to the decision to sell truck in scenario. Truck should be sold if there
is no more use for this. Depreciation method will not affect the cash flow from the sale of the
truck. The accounting gain or loss may be different due to depreciation methods, but sale price will not be affected.

I would like this to be checked for any errors before I turn it in, especially the Sum of Years' Digits Depreciation portion(s).

[morgaine300]

Required:
a. Calculate depreciation expense for the first 4 years of the truck’s life using:

Re-read this sentence. "for the first 4 years" -- it doesn't say "for the 4th year." i.e. ALL FOUR years.

The S/L one is fine but there's some confusion I think on what the problem is actually asking you for.

2. Sum of the Years Digit Depreciation

Life is 5 years, sum of digits are 5+4+3+2+1=15 or: n(n+1)/2 = 5(5+1)/2 = 5(6)/2 = 30/2 = 15
Depreciation in 4 years: 5/15+4/15+3/15 +2/15 = 14/15
Depreciation Expense: in 4 years = $12,666.67

This is the depreciation for the 4th year, not for the first 4 years in total. You need to calculate each year. There's two issues here. One, if they ask for the first four years, they very likely are wanting the expense for each individual year given, not just the total. 14/15 would be the total depreciation for all 4 years. Second issue, even if you just give the total of the 4 years, $12,667 is 2/15ths, not the total. That's the depreciation only for the 4th year.

3. Double Declining Balance Depreciation

The declining rate is 1/5 = 20%. Double declining rate: 40%
Amortization Schedule
Year Opening BV Depreciation Closing BV
1 100,000 40,000 80,000
2 80,000 32,000 64,000
3 64,000 25,600 51,200
4 51,200 20,480 40,960
Total Depreciation 118,080
Depreciation expense in 4 years: = $118,080

Always think about the logic of your answers. How can you depreciate more than the thing costs?

This is, um... way off. 40% rate is correct. It's book value x rate = current expense. So 100,000 x 40% = 40,000. That's fine just through there.

However, book value is cost less accumulated depreciation. You already have 40,000 in depreciation just for the first year, so how can book value be 80,000? I'm not quite sure where you are getting the closing book values - I don't get what kind of calculation you're doing to get that.

As for part B, the S/L again is fine, but the others aren't fine since the calculations above aren't correct.

2. Sum of the years digit depreciation
Depreciation for 3 years is 5/15+4/15+3/15 = 12/15 19,000
Opening Book Value 100,000
Book Value at the end of three years 81,000

Again, the 19,000 is the depreciation for the 3rd year, not for the first three years. And 81,000 book value is pretty big for something that only depreciates for 5 years. Book value is cost less accumulated depreciation - you can't just take off the 3rd year and ignore that the first two years happened also.

C.
Depreciation method not relevant to the decision to sell truck in scenario. Truck should be sold if there
is no more use for this. Depreciation method will not affect the cash flow from the sale of the
truck. The accounting gain or loss may be different due to depreciation methods, but sale price will not be affected.

I'd say this is partially correct. While they should sell it if they have no more use for it, that doesn't mean they should sell it for the price offered. I think the point of the question is probably that you understand that book value is not the same as market value. They are methods determined for use ahead of time, and once you get these answers correct you can see how drastically different they can be. The method is just a method, and the value of something has nothing to do with that. The amount offered seems quite low, given that it's a $100,000 truck and only 3 years old. So they may not want to sell it for that, but the depreciation method isn't relevant to the decision.

[ladyblaque1979]

Ok... you just beat me down... I understand that I was off... please help me!! This is a particular problem I've been having too many inssues with!

[morgaine300]

I wasn't attempting to "beat you down." And I've already given you some useful information.

There are a couple of main points I was trying to make.

First, too often you have just figured out the depreciation for only the 3rd or 4th (whichever is the case), instead of through that year.

"First 4 years" means years 1, 2, 3 and 4, and you just do year 4. That's not the same thing.

Second, you need to know that book value is cost less accumulated depreciation. I can't give you anything else about it cause that's what it is. You have cost. So if you have accumulated depreciation, then just do the above equation.

Accumulated depreciation is exactly what it says it is: an accumulation of all the depreciation. You do year 1. Then you do year 2. The accumulated at this point is 1 & 2 together. Then you do year 3. So you add that on and accumulate it too. You're literally accumulating it. I've already stated that you need to do each year individually. If you don't, you can't accumulate them.

I think the reason you're not getting this is because you're trying to go directly to the 4th year (A) and the 3rd year (B), and you're skipping the years in between.

It's a long, involved problem. I'm just repeating myself. I can't know what else to tell you when I don't know what you do or don't understand. Did you understand anything of what I posted? If so, use that and try to re-work something. If not, then you've got to ask specifically what you don't understand. I even said I wasn't sure how you calculated one thing -- if you tell me how you did it, I can maybe figure out what you're doing wrong. (And I've already said how to do it right.)

If you want help, you have to at least participate.

[morgaine300]

I just realized there's only 7 minutes between when I posted and when you responded. That's barely enough to read a post like that, let alone digest it, try to make sense of it, and then try to apply it.

Sounds a bit like you gave up before even trying to understand it.

[ladyblaque1979]

You know what? I do apologize. It is not yout fault that I was having issues. I'm trying to work problems on paper and tending to a new infant at the same time. I really did try to work the problems after you told me what t odo, but at this point, my mind is fried. This is my last class, before I graduate in September (if I graduate). I just want to do good. A long time ago, I knew how to work these concepts, now they seem a little foreign.
If you can just please go step by step with me (and I understand you gave me info about this already, but I am the type of math student that has to really ask for thorough help) it would really be appreciated.

[morgaine300]

The apology is accepted. Sometimes it is frustrating.

And then I'm hoping you won't take this post as being rude or anything, but since I'm still not sure what things you don't understand, you're basically asking me to lecture an entire chapter, or at least a very good chunk of one. There's concepts you need to understand (which I have already attempted to explain), and three methods you're needing to use. That is a very good chunk of a plant asset chapter. I can't possibly do a post that would cover all of that. And... I do not do people's problems for them. It's still your work and your responsibility.

So instead I'm going to give you a couple of links since they cover most of this information. There's explanations and examples. You can also see the amount of information there and hopefully can see that I just can't post that much stuff. Try to read through this and do what you can with it. (Note there's stuff there you don't need also.)
http://www.principlesofaccounting.com/chapter%2010.htm
Depreciation | AccountingCoach.com

You are definitely welcome to ask questions about specific items that you don't understand.