EXAMINATION COMPREHENSIVE D
PART 4
(Chapters 15-17)
Problem
D-I D-II D-III D-IV D-V D-VI D-VII D-VIII
Topic
Treasury Stock. *Cash Dividends. Stock Dividends and Stock Splits. Earnings Per Share Concepts. Earnings Per Share Computations. Basic and Diluted Earnings Per Share. Available-for-Sale Equity Securities. Trading Securities.
Approximate Time
20 min. 10 min. 10 min. 10 min. 10 min. 20 min. 15 min. 30 min. 125 min.
*Part of this topic is dealt with in an Appendix to the chapter.
D-2
Test Bank for Intermediate Accounting, Fourteenth Edition
Problem D-I -- Treasury Stock The stockholders' equity section of Carey Co.'s balance sheet at December 31, 2012, was as follows: Common stock--$10 par (authorized 1,000,000 shares, issued and outstanding 600,000 shares) Paid-in capital in excess of par Retained earnings $ 6,000,000 1,500,000 3,250,000 $10,750,000
Instructions Prepare journal entries (1, 2, and 4) and show proper disclosure (3) to reflect the following treasury stock transactions showing how each is accounted for under the cost method. (Show computations.) 1. On January 4, 2013, having idle cash, Carey Co. repurchased 20,000 shares of its outstanding stock for $500,000. 2. On March 4, Carey sold 5,000 of these reacquired shares at $28 per share. 3. Show the proper disclosures in the stockholders' equity section of the balance sheet issued at the end of the first quarter, March 31, 2013. Assume net income of $100,000 during the first quarter. 4. On June 30, 2013 the firm sold 10,000 of the reacquired shares for $21 per share.
*Problem D-II -- Cash Dividends Bell Company has stock outstanding as follows: Common, $10 par value per share, 140,000 shares; Preferred, 5%; $100 par value per share, 8,000 shares. The Preferred is cumulative and participating up to an additional 4% of par; two years are in arrears (not including the current year); and the total amount of cash dividends declared for both classes of stock is $230,000. Instructions Prepare the entry for the dividend declaration, separating the dividend into the common and preferred portions.
Comprehensive Examination D Problem D-III -- Stock Dividends and Stock Splits
D-3
Stock dividends and stock splits are common forms of corporate stock distribution to stockholders. Consider each of the numbered statements. You are to decide whether it: A. B. C. D. E. F. Applies to both stock dividends and stock splits. Applies to neither. Applies to stock splits only. Applies to stock dividends only. Applies to stock splits effected in the form of a dividend only. Applies to both stock splits effected in the form of a dividend and a stock dividend.
(In each instance, the issuing company has only one class of stock.) Instructions Print next to the number of each statement below, the single capital letter of the description which applies to the statement. Statements _____ 1. The distribution is a multiple as contrasted to a fraction of the number of shares previously outstanding. _____ 2. The total number of shares outstanding is increased. _____ 3. The individual stockholder's share of net assets is increased. _____ 4. There is no transfer between retained earnings and capital stock accounts, other than to the extent occasioned by legal requirements. _____ 5. There is no change in the total stockholders' equity of the issuing corporation. _____ 6. The retained earnings available for dividends are increased. _____ 7. Retained earnings in the amount of the distribution are transferred to capital stock, in some instances in an amount in excess of that required by the laws of the state of incorporation. _____ 8. Subsequent per-share earnings, if any, are decreased. _____ 9. The par (or stated value) of the stock is unchanged.
D-4
Test Bank for Intermediate Accounting, Fourteenth Edition
Problem D-IV -- Earnings Per Share Concepts Indicate which of the following securities would be included in the computation of "basic earnings per share," and which would be included in the computation of "diluted earnings per share." Place a "B" before those which affect only basic EPS, a "D" before those which affect only diluted EPS, a "BD" before those which affect both basic and diluted EPS, and an "N" before those securities which do not affect EPS computations. Assume that, where applicable, the appropriate securities are dilutive. _____ 1. Warrants to purchase additional common shares. _____ 2. Common stock. _____ 3. Nonconvertible debenture bonds. _____ 4. Convertible, noncumulative preferred stock. _____ 5. Cumulative, nonconvertible preferred stock. _____ 6. Convertible bonds. _____ 7. Executive stock options. _____ 8. Notes payable.
Problem D-V -- Earnings Per Share Computations Jones, Inc. has net income (30% tax rate) of $1,200,000 for 2013, and an average number of shares outstanding during the year of 500,000 shares. The corporation issued $2,000,000 par value of 10-year, 9% convertible bonds on January 1, 2011 at a $180,000 discount. The convertible bonds are convertible into 70,000 shares of common stock. Assume the company uses the straight-line method for amortizing bond discount. Instructions Compute the earnings per share data, excluding any notes if required.
Comprehensive Examination D Problem D-VI -- Basic and Diluted Earnings Per Share Assume that the following data relate to Rosen, Inc. for the year 2013: Net income (30% tax rate) Average common shares outstanding 2013 10% cumulative convertible preferred stock: Convertible into 80,000 shares of common 8% convertible bonds; convertible into 75,000 shares of common Stock options: Exercisable at the option price of $25 per share; average market price in 2013, $30 $3,000,000 1,000,000 $1,600,000 $2,500,000 84,000 shares shares
D-5
Instructions Compute (a) basic earnings per share, and (b) diluted earnings per share.
Problem D-VII --Available-for-Sale Equity Investments On January 2, 2012, Norwin Company purchased 1,000 shares of Oslo Company common stock for $30,000. The stock has a par value of $10 and is part of the total stock outstanding of 20,000 shares of Oslo Company. Norwin Company intends the stock to be available for sale. Total stockholders' equity of Oslo Company on January 2, 2012 was $600,000. Instructions Prepare necessary journal entries on the books of Norwin Company for the following transactions. If no entry is required, write "none" in the space provided. (Round all calculations to the nearest cent.) (a) (b) (c) January 2, 2012: Norwin purchases the shares described above. December 31, 2012: Norwin receives a $.75 per share dividend from Oslo, and Oslo announces a net income for 2012 of $250,000. December 31, 2012: According to The Wall Street Journal, Oslo common is selling for $27 per share. Norwin's management views this decline as being only temporary in nature. Oslo's common is Norwin's only available-for-sale security. February 15, 2013: Norwin sells 500 of the shares purchased on January 2, 2012 at $32 per share.
(d)
D-6
Test Bank for Intermediate Accounting, Fourteenth Edition
Problem D-VIII -- Trading Securities The information below relates to Milton Company's trading securities in 2012 and 2013. (a) Prepare the journal entries for the following transactions. Purchased $300,000 par value of GLF Company bonds at 97 plus accrued interest. The bonds pay interest annually at 9% each December 31. Broker's commission was $3,000. Sold $150,000 par value of GLF Company bonds at 94 plus accrued interest. Broker's commission, taxes, and fees were $1,500. 5,000 Purchased shares of Hayes, Inc. common stock for $30 per share. The broker's commission on the purchase amounted to $2,000. Make the appropriate entry for the GLF Company bonds. The market prices of the trading securities at December 31 were: Hayes, Inc. common stock, $31 per share; and GLF Company bonds, 99. Make the appropriate entry. Milton sold 1/2 of the Hayes, Inc. common stock at $32 per share. Broker's commissions, taxes, and fees were $1,000. Milton purchased 600 shares of Ramirez, Inc. common stock at $45 per share. Broker's commission was $500. Make the appropriate entry for the GLF Company bonds. The market prices of the trading securities at December 31 were: Hayes, Inc. common stock, $34 per share; GLF Company bonds, 98; and Ramirez, Inc. common stock, $47 per share. Make the appropriate entry.
January 1, 2012
September 1, 2012 September 5, 2012 December 31, 2012 December 31, 2012
July 1, 2013 December 1, 2013 December 31, 2013 December 31, 2013
(b)
Present the financial statement disclosure (balance sheet and income statement) of Milton Company's transactions in trading securities for each of the years 2012 and 2013. Appropriate financial statement subheadings must be disclosed.
Comprehensive Examination D
D-7
Solutions -- Comprehensive Examination D
Problem D-I -- Solution. 1. Treasury Stock .................................................................................. Cash ...................................................................................... 2. Cash .................................................................................................. Treasury Stock ...................................................................... Paid-in Capital from Treasury Stock ..................................... 3. Stockholders' equity: Common stock, $10 par, 1,000,000 shares authorized, 600,000 shares issued, 585,000 shares outstanding Paid-in capital in excess of par value Paid-in capital from treasury stock Retained earnings Less: Cost of 15,000 shares held in treasury Total stockholders' equity 4. Cash .................................................................................................. Paid-in Capital from Treasury Stock ................................................. Retained Earnings ............................................................................ Treasury Stock ...................................................................... 500,000 500,000 140,000 125,000 15,000
$ 6,000,000 1,500,000 15,000 3,350,000 10,865,000 (375,000) $10,490,000 210,000 15,000 25,000 250,000
*Problem D-II -- Solution. Retained Earnings .................................................................................. Dividends Payable, Preferred ..................................................... Dividends Payable, Common ..................................................... Computations: Arrears--$800,000 5% 2 Preference--$800,000 5% Common--$1,400,000 5% Participating 2%* Preferred $80,000 40,000 16,000 $136,000 Common $ 70,000 24,000 $ 94,000 Total $ 80,000 40,000 70,000 40,000 $230,000 230,000 136,000 94,000
* [($230,000 $190,000) ($600,000 + $1,400,000)]
D-8
Test Bank for Intermediate Accounting, Fourteenth Edition
Problem D-III -- Solution. 1. C 2. A 3. B 4. E 5. A 6. B 7. F 8. A 9. F
Problem D-IV -- Solution. 1. 2. 3. 4. D BD N D 5. 6. 7. 8. BD D D N
Problem D-V -- Solution. Basic earnings per share ($1,200,000 500,000 shares) Diluted earnings per share $1,200,000 + .7($180,000 + $18,000) ---------------------------------- 500,000 + 70,000 $2.35 $2.40
Problem D-VI -- Solution. (a) (b) Start Convertible preferred Convertible bonds Options $3,300,000 $160,000 Basic EPS = ---------------------- = $2.09 1,500,000 Shares 1,500,000 80,000 75,000 14,000** 1,669,000 Earnings $3,140,000 160,000 140,000* 0 $3,440,000
*($2,500,000 .08) (1 .30) **[($30 $25) $30] 84,000 $3,440,000 1,669,000 = $2.06 DEPS
Comprehensive Examination D Problem D-VII -- Solution. (a) (b) Equity Investments ......................................................................... Cash ................................................................................... Cash .............................................................................................. Dividend Revenue .............................................................. 30,000
D-9
30,000 750 750
No entry to accrue investee profits because fair value, not equity, method is being used. (c) (d) Unrealized Holding Gain or Loss--Equity ..................................... Fair Value Adjustment (Available-for-Sale) ....................... Cash (500 $32) ........................................................................... Gain on Sale of Securities ................................................. Equity Investments (500 $30).......................................... 3,000 3,000 16,000 1000 15,000
Problem D-VIII -- Solution. January 1, 2012* Debt Investments ($300,000 .97) + $3,000 .......................................... Cash ............................................................................................ September 1, 2012 Cash ($141,000 + $9,000 $1,500) ...................................................... Loss on Sale of Investments .................................................................. Debt Investments ........................................................................ Interest Revenue ......................................................................... September 5, 2012 Equity Investments .................................................................................. Cash ............................................................................................ December 31, 2012* Cash ($150,000 .09)............................................................................. Interest Revenue ......................................................................... December 31, 2012 Fair Value Adjustment (Trading).............................................................. 4,500 Unrealized Holding Gain or Loss--Income ($299,000 $303,500) 294,000 294,000 148,500 7,500 147,000 9,000 152,000 152,000 13,500 13,500
4,500
D - 10 Test Bank for Intermediate Accounting, Fourteenth Edition July 1, 2013 Cash ($80,000 $1,000) ........................................................................ Gain on Sale of Investments ...................................................... Equity Investments ...................................................................... December 1, 2013 Equity Investments .................................................................................. Cash ............................................................................................ December 31, 2013 Cash ...................................................................................................... Interest Revenue ......................................................................... December 31, 2013 Fair Value Adjustment (Trading).............................................................. Unrealized Holding Gain or Loss--Income ............................... ($326,500 $345,200) - $4,500 December 31, Balance Sheet Current assets: Equity Investments, at fair value Income Statement Other revenue and gains: Interest Revenue Unrealized holding gain on trading securities Gain on sale of securities Other expenses and losses: Loss on sale of securities 2012 $303,500 2013 $345,200 14,200 14,200 79,000 3,000 76,000 27,500 27,500 13,500 13,500
$13,500 4,500 7,500
$13,500 14,200 3,000