Chapter 14-15 Solutions - 1
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Chapter 14-15 Solutions - 1

Course Number: ACC 551, Spring 2012

College/University: Keller Graduate School...

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E14-1 Classification of Liabilities Presented below are various account balances. (a) Bank loans payable of a winery due March 10, 2014. (The product requires aging for 5 years before sale). Current liability IF current assets are used to satisfy debt. (b) Unamortized premium on bonds payable, of which $3,000 will be amortized during the next year. Valuation account relating to the long-term liability, bonds...

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Classification E14-1 of Liabilities Presented below are various account balances. (a) Bank loans payable of a winery due March 10, 2014. (The product requires aging for 5 years before sale). Current liability IF current assets are used to satisfy debt. (b) Unamortized premium on bonds payable, of which $3,000 will be amortized during the next year. Valuation account relating to the long-term liability, bonds payable (sometimes referred to as an adjunct account). The $3,000 would continue to be reported as long-term. Serial bonds payable,$1,000,000, of which $250,000 are due each July 31. Current liability, $250,000; long-term liability, $750,000. (d) Amounts withheld from employees' wages for income taxes. Current liability (e) Notes payable due January 15, 2013. Probably noncurrent, although if operating cycle is greater than one year and current assets are used, this item would be classified as current. (f) Credit balances in customers' accounts arising from returns and allowances after collection in full of account. Current liability (g) Bonds payable of $2,000,000 maturing June 30, 2012. Current liability unless (a) a fund for liquidation has been accumulated which is not classified as a current asset or (b) arrangements have been made for refinancing. (h) Overdraft of $1,000 in a bank accounts. (No other balances are carried at this bank). Current liability (i) Deposits made by customers who have ordered goods. Current liability Instructions: Indicate whether each of the items above should be classified on December 31, 2011, as a current liability, a long-term liability, or under some other classification. Consider each one independently from all others; that is, do not assume that all of them relate to one particular business. If the classification of some of the items is doubtful, explain why in each case. years before E14-2 Classification The following items are found in the financial statements. (a) Discount on bonds payable Contra account to bonds payable on balance sheet. (b) Interest expense (credit balance) Reclassify to interest payable on balance sheet. Unamortized bond issue costs Classified as "Other Assets" on balance sheet. (d) Gain on repurchase of debt Classify as part of other gains and losses on the income statement. (e) Mortgage payable (payable in equal amounts over next 3 years). Classify one-third as current liability and the remainder as long-term liability on balance sheet. (f) Debenture bonds payable (maturing in 5 years) Classify as long-term liability on balance sheet. (g) Premium on bonds payable. Classify as adjunct account to Bonds Payable on balance Sheet. (h) Notes payable (due in 4 years) Classify as long-term on balance sheet (i) Income bonds payable (due in 3 years) Classify as long-term liability on balance sheet. Instructions: Indicate how each of these items should be classified in the financial statements. E14-3 (Entries for Bond Transactions) Presented below are two independent situations. 1 On January 1, 2010, Divac Company issued $300,000 of 9%, 10-year bonds at par. Interest is payable quarterly on April 1, July 1, October 1, and January 1. 2 On June 1, 2010, Verbitsky Company issued $200,000 of 12%, 10-year bonds dated January 1 at par plus accrued interest. Interest is payable semiannually on July 1 and January 1. Instructions For each of these two independent situation, prepare journal entries to record the following: (a) The issuance of the bonds. (b) The payment of interest on July 1. The accrual of interest on December 31. Divac Company (a) The issuance of the bonds. 1-Jan-10 Cash Bonds Payable (b) The payment of interest on July 1. 1-Jul-10 Bond Interest Expense ($300,000 * 9% * 3/12) Cash The accrual of interest on December 31. 31-Dec-10 Bond Interest Expense Interest Payable 300,000 300,000 6,750 6,750 6,750 6,750 Verbitsky Company: (a) The issuance of the bonds. 1-Jun-10 Cash Bonds Payable Bond Interest Expense ($200,000* 12% * 5/12) (b) The payment of interest on July 1. 1-Jul-10 Bond Interest Expense Cash ($200,000 * 12% 6/12) The accrual of interest on December 31. 12/31/2010 Bond Interest Expense Interest Payable 210,000 200,000 10,000 12,000 12,000 12,000 12,000 E14-4 Entries for Bond Transactions - Straight Line Foreman Company issued $800,000 of 10%, 20-year bonds on January 1, 2011, at 102. Interest is payable semiannually on July 1 and January 1. Foreman Company uses the straight-line method of amortization for bond premium or discount. Instructions: Prepare the journal entries to record the following: (a) The issuance of the bonds 1-Jan-11 Cash ($800,000 * 102%) Bonds Payable Premium on Bonds Payable 816,000 800,000 16,000 (b) The payment of interest and the related amortization on July 1, 2011. 1-Jul-11 Bond Interest Expense Premium on Bonds Payable ($16,000/ 40) Cash ($800,000 * 10% * 6/12) 39,600 400 40,000 The accrual of interest and the related amortization on December 31, 2011. 31-Dec-11 Bond Interest Expense Premium on Bonds Payable Interest Payable 39,600 400 40,000 Exercise 14-5 - Entries for Bond Transactions - Effective Interest) Assume the same information as in E14-4, except that Foreman Company uses the effective interest method of amortization for bond premium or discount. Assume an effective yield of 9.7705%. Info from E14-4: Foreman Company issued $800,000 of 10%, 20-year bonds on January 1, 2011, at 102. Interest is payable semiannually on July 1 and January 1. Foreman Company uses the straight-line method of amortization for bond premium or discount. Instructions Prepare the journal entries to record the following. (Round to the nearest dollar). (a) The issuance of bonds. 1-Jan-11 Cash ($800,000 * 102%) Bonds Payable Premium on Bonds Payable 816,000 800,000 16,000 (b) The payment of interest and related amortization on July 1, 2008. 1-Jul-11 Bond Interest Expense ($816,000 * 9.7705% * 1/2) Premium on Bonds Payable Cash ($800,000 * 10% * 6/12) 39,864 $136 40,000 Carrying amounts of bonds at July 1, 2011: Carrying amount of bonds at January 1, 2011 Less: Amortization of bond premium ($40,000 - $39,864) Carrying amount of bonds at July 1, 2011 $816,000 $136 $815,864 The accrual of interest and the related amortization on December 31, 2011. 31-Dec-11 Bond Interest Expense 39,857 ($815,864 * 9.7705% * 1/2) Premium on Bonds Payable $143 Interest Expense (1) Year (2) Credit Int. Pay (10% of MV) * (6/12) 1-Jan-11 1-Jul-11 1-Jan-12 1-Jul-12 1-Jan-13 1-Jul-13 $40,000 $40,000 $40,000 $40,000 $40,000 40,000 Schedule of Premium Amortization Effective Interest Method (3) (4) (5) Debit Debit Carrying Int. Exp Bond Prm Val of Bond (CV * 9.7705%) (Col 3 - Col 2) (Col 5 previous year * (6/12) Col 4 of current year) $39,864 $39,857 $39,850 $39,843 $39,835 $136 $143 $150 $157 $165 $816,000 $815,864 $815,721 $815,571 $815,413 $815,248 Selling price E14-6 (Amortization Schedules - Straight line) Spencer Company sells 10% bonds having a maturity value of $3,000,000 for $2,783,724. The bonds are dated January 1, 2010, and mature January 1, 2015. Interest is payable annually on January 1. Instructions: Set up a schedule of interest expense and discount amortization under the straight-line method. Schedule of Discount Amortization Straight-Line Method (a) Year 1-Jan-10 31-Dec-10 31-Dec-11 31-Dec-12 31-Dec-13 31-Dec-14 (b) Credit Interest Payable (or cash) (10% of maturity value) $300,000 $300,000 $300,000 $300,000 $300,000 Debit Interest Expense (d) Credit Bond Discount* (e) Carrying Value of Bonds Col (b)+ Col (d) See below for calc Previous carrying value of bond + Col (d) $343,255.20 $343,255.20 $343,255.20 $343,255.20 $343,255.20 $43,255.20 $43,255.20 $43,255.20 $43,255.20 $43,255.20 $2,783,724 $2,826,979.20 $2,870,234.40 $2,913,489.60 $2,956,744.80 $3,000,000.00 *To calculate the "credit bond discount" column, we take the maturity value of the bond ($3,000,000) less the sale price of the bond ($2,783,724). This amount is $216,276. We then divide this by the life of the bond (2010 - 2015 is 5 years). This amount is $43,255.20. E14-7 Amortization Schedule - Effective Interest) Spencer Company sells 10% bonds having a maturity value of $3,000,000 for $2,783,724. The bonds are dated January 1, 2010, and mature January 1, 2015. Interest is payable annually on January 1. Instructions Set up a schedule of interest expense and discount amortization under the effective interest method. The effective-interest or yield rate is 12%. It is determined through trial and error using Table 6-2 for the discounted value of the principal ($1,702,290) and Table 6-4 for the discounted value of the interest ($1,081,434); $1,702,290 plus $1,081,434 equals the proceeds of $2,783,724. (A financial calculator may be used to determine the rate of 12%.) Schedule of Discount Amortization Effective Interest Method Year Credit Interest Payable Debit Interest Payable Credit Bond Discount Carrying Value of Bonds (1) (2) (3) (4) (5) Calcs: (10% of MV) (Col 5 * 12%) (Col 3 - Col 2) (Col 5 previous year + Col 4 of current year) 1-Jan-10 31-Dec-10 31-Dec-11 31-Dec-12 31-Dec-13 31-Dec-14 Rounded amount. $300,000 $300,000 $300,000 $300,000 $300,000 $334,046.88 $338,132.51 $342,708.41 $347,833.42 $353,554.79 $34,046.88 $38,132.51 $42,708.41 $47,833.42 $53,554.79 $2,783,724 $2,817,770.88 $2,855,903.39 $2,898,611.79 $2,946,445.21 $3,000,000.00 given Exercise 14-8 (Determine Proper Amounts in Account Balances) Presented below are three independent situations (a) Chinook Corporation incurred the following costs in connection with the issuance of bonds; (1) printing and engraving costs, $15,000; (2) legal fees, $49,000, and (3) commissions paid to underwriter, $60,000. What amount should be reported as Unamortized Bond Issue Costs, and where should this amount be reported on the balance sheet? Printing and engraving costs of bonds Legal fees Commissions paid to underwriter Amount to be reported as Unamortized Bond Issue Costs $15,000 49,000 60,000 $124,000 The Unamortized Bond Issue Costs, $124,000, should be reported as a deferred charge in the Other Assets section on the balance sheet. (b) McEntire Co. sold $2,500,000 of 10%, 10-year bonds at 104 on January 1, 2010. The bonds were dated January 1, 2010, and pay interest on July 1 and January 1. If McEntire uses the straight-line method to amortize bond premium or discount, determine the amount of interest expense to be reported on July 1, 2010, and December 31, 2010. Interest paid for the period from January 1 (July 1) to June 30 (December 31), 2010; $2,500,000 * 10% * 6/12 Less: Premium amortization for the period from January 1, (July 1) to June 30 (December 31), 2010 [($2,500,000 * 1.04) - $2,500,000] / 20 Interest expense to be recorded on July 1 (December 31,) 2010 $125,000 5,000 120,000 Cheriel Inc. issued $600,000 of 9%, 10-year bonds on June 30, 2010, for $562,500. This price provided a yield of 10% on the bonds. Interest is payable semiannually on Decmeber 31 and June 30. If Cheriel uses the effective interest method, determine the amount of interest expense to record if financial statements are issued on October 31, 2010. Carrying amount of bonds on June 30, 2010 Effective-interest rate for the period from June 30 to October 31, 2010 (10% * 4/12) Interest expense to be recorded on October 31, 2010 $562,500 X .033333 $18,750 Exercise 14-9 (Entries and Questions for Bonds Transactions) On June 30, 2010, Mackes Company issued $5,000,000 face value of 13%, 20-year bonds at $5,376,150, a yield of 12%. Mackes uses the effective interest method to amortize bond premium or discount. The bonds pay semiannual interest on June 30 and December 31. Instructions: (a) Prepare the journal entries to record the following transactions. (1) The issuance of the bonds on June 30, 2010. Cash 5,376,150 Bonds Payable Premium on Bonds Payable 5,000,000 376,150 (2) The payment of interest and the amortization of the premium on December 31, 2010. Bond Interest Expense ($5,375,150 * 12% * 6/12) Premium on Bonds Payable Cash ($5,000,000 * 13% * 6/12) 322,569.00 2,431.00 325,000 (3) The payment of interest and the amortization of the premium on June 30, 2011. Bond Interest Expense [($5,376,150 - $2,431.00) * 12% * 6/12] Premium on Bonds Payable Cash 322,423.14 2,576.86 325,000 (4) The payment of interest and the amortizationn of the premium on December 31, 2011. Bond Interest Expense [($5,376,150 - $2,431.00 - $2,576.86) * 12% * 6/12] Premium on Bonds Payable Cash 322,268.53 2,731.47 325,000 (b) Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2011, balance sheet. Long-term liabilities: Bonds payable, 13% (due on June 30, 2030) Premium on Bonds Payable Book value of bonds payable *($5,376,150 - $5,000,000) - ($2,431 + $2,576.86 + 2,731.47) = $368,410.67 $5,000,000 368,410.67 $5,368,411 Provide the answers to the following questions (1) What amount of interest expense is reported for 2011? Interest expense for the period from Jan 1 to June 30, 2011 (from a3) Interest expense fro the period rom July 1 to Dec 31, 2011 (from a4) Amount of bond interest expense reported for 2011 $322,423.14 322,268.53 $644,691.67 (2) Will the bond interest expense reported in 2011 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used? The amount of bond interest expense reported in 2011 will be greater than the amount that would be reported if the straight-line method of amortization were used. Under the straight-line method, the amortization of bond premium is $18,808 ($376,150/20). Bond interest expense for 2011 is the difference between the amortized premium, $18,808, and the actual interest paid, $650,000 ($5,000,000 X 13%). Thus, the amount of bond interest expense is $631,192, which is smaller than the bond interest expense under the effective- interest method. (3) Determine the total cost of borrowing over the life of the bond. Total interest to be paid for the bond ($5,000,000 X 13% X 20) Less: Premium Total cost of borrowing over the life of the bond 13,000,000 376,150 12,623,850 (4) Will the total bond interest expense for the life of the bond be greater than, the same as, or less than the total interest expense if the straight-line method of amortization were used? The TOTAL interest expense will be the same, regardless of the method used. The differences in interest expense are essentially timing differences; that is, the effective interest will recognize greater interest expense in earlier years and less in the later years, whereas the straight-line will recognize a set amount each year. However, in the end, the total amount of interest recognized over the life of the bond will be the same. Exercise 14-15 Entries for Retirement and Issuance of Bonds Friedman Company had bonds outstanding with a maturity value of $500,000. On April 30, 2011, when these bonds had an unamortized discount of $10,000, they were called in at 104. To pay for these bonds, Friedman had issued other bonds a month earlier bearing a lower interest rate. The newly issued bonds had a life of 10 years. The new bonds were issued at 103 (face value $500,000). Issue costs related to the new bonds were $3,000. Instructions: Ignoring interest, compute the gain or loss and record this refunding transaction. Reacquisition price ($500,000 * 104%) Less: Net carrying amount of bonds redeemed: Par value Unamortized discount Loss on redemption $520,000 $500,000 (10,000) $490,000 $30,000 Bonds Payable Loss on Redemption of Bonds Discount on Bonds Payable Cash (To record redemption of bonds payable) 500,000 30,000 Cash Unamortized Bond Issue Costs Premium on Bonds Payable Bonds Payable (To record issuance of new bonds) 512,000 3,000 10,000 520,000 15,000 500,000 Exercise 14-16 (Entries for Zero-Interest Bearing Notes) On January 1, 2011, McLean Company makes the two following acquisitions. (1) Purchases land having a fair market value of $300,000 by issuing a 5-year, zero-interest-bearing promissory note in the face amount of $505,518. (2) Purchases equipment by issuing a 6%, 8-year promissory note having a maturity value of $400,000 (interest payable annually). The company has to pay 11% interest for funds from its bank. Instructions: (a) Record the two journal entries that should be recorded by McLean Company for the two purchases on January 1, 2011. (b) Record the interest at the end of the first year on both notes using the effective interest method. (1) Purchases land having a fair market value of $300,000 by issuing a 5-year, zero-interestbearing promissory note in the face amount of $505,518. 1-Jan-11 Land Discount on Notes Payable Notes Payable 300,000 205,518 505,518 (The $300,000 capitalized land cost represents the present value of the note discounted for five years at 11%). (2) Purchases equipment by issuing a 6%, 8-year promissory note having a maturity value of $400,000 (interest payable annually). Equipment Discount on Notes Payable* Notes Payable 297,078.88 102,921.12 400,000 *Computation of the discount on notes payable Maturity value Present value of $400,000 due in 8 years at 11% $400,000 * .43393 Present value of $24,000 payable annually for 8 years at 11% annually - 24,000 X 5.14612 Present value of the note Discount 1b Interest Expense Discont on Notes Payable ($300,000 * .11) $400,000 $173,572.00 123,506.88 $297,078.88 $102,921.12 33,000 33,000 2b Interest Expense ($297,078.88 * .11) Discount on Notes Payable Cash ($400,000 * .06) 32,678.68 8,678.68 24,000.00 Exercise 14-20 - Settlement of Debt Strickland Company owes $200,000 plus $180,000 of accrued interest to Moran State Bank. The debt is a 10-year, 10% note. During 2010, Strickland's business deteriorated due to a a faltering regional economy. On December 31, 2010, Moran State Bank agrees to accept an old machine and cancel the entire debt. The machine has a cost of $390,000, accumulated depreciation of $221,000, and a fair market value of $180,000. Instructions: (a) Prepare journal entries for Strickland Company and Moran Bank to record this debt settlement. To record transfer or property on December 31, 2007: Strickland Company (Debtor): Note Payable Interest Payable Accumulated Depreciation - Machine Machine Gain on Disposition of Machine Gain on Debt Restructuring 200,000 18,000 221,000 390,000 11,000 * 38,000 ** To determine Gain on Disposition of Machine: $180,000 - ($390,000 - $221,000) = $11,000 To determine Gain on Debt Restructuring: ($200,000 + $18,00) - $180,000 = $38,000 Moran State Bank (Creditor): Machine Allowance for Doubtful Accounts Note Receivable Interest Receivable 180,000 38,000 200,000 18,000 (b) How should Strickland report the gain or loss on the disposition of machine and on restructuring of debt in its 2010 income statement. "Gain on Machine Disposition" and the "Gain on Debt Restructuring" should be reported as an ordinary gain in the income statement in accordance with APB Opinion No. 30 and SFAS No. 145. Assume that, instead of transferring the machine, Strickland decides to grant 15,000 shares of its common stock ($10 par) which has a fair market value of $180,000 in full settlement of the loan obligation. If Moran State Bank treats Strickland's stock as a trading investment, prepare the entries to record the transaction for both parties. Granting of equity interest on December 31, 2010: Strickland Company (Debtor): Note Payable Interest Payable Common Stock Additional Paid-in Capital Gain on Debt Restructuring Moran State Bank (Creditor): Investment (Trading) Allowance for Doubtful Accounts Note Receivable Interest Receivable 200,000 18,000 150,000 30,000 38,000 180,000 38,000 200,000 18,000 Exercise 14-21 (Term Modificaiton without Gain - Debtor's Entries) On December 31, 2010, the American Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $3,000,000 note receivable by the following modifications: 1. Reducing the principal obligation from $3,000,000 to $2,400,000 2. Extending the maturity date from December 31, 2010, to January 31, 2014. 3. Reducing the interest rate from 12% to 10%. Barkley pays interest at the end of each year. On January 1, 2014, Barkley Company pays $2,400,000 in cash to American Bank. Instructions (a) Will the gain recorded by Barkley be equal to the loss recorded by American Bank under the debt restructuring? No. The gain recorded by Barkley is not equal to the loss recorded by American Bank under the debt restructuring agreement. (You wil see why this happens in the following four exercises). In response to this "accounting assymmetry" treatment, GAAP did not address debtor accounting because the FASB was concerned that expansion of the scope of its pronouncement would delay issuance of GAAP for the creditor. (b) Can Barkley Company record a gain under the term modification mentioned above? Explain. No. There is no gain under the modified terms because the total future cash flows after restructuring exceed the total pre-restructuring carrying of the note (principal). Total future cash flows after restructuring are: Principal Interest ($2,400,000 * 10% * 3) Total Total pre-restructuring carrying amount of note (principal) $2,400,000 720,000 $3,120,000 $3,000,000 Assuming that the interest rate Barkley should use to compute interest expense in future periods is 1.4276%, prepare the interest payment schedule of the note for Barkley Company after the debt restructuring. BARKLEY COMPANY Interest Payment Schedule After Debt Restructuring Effective- Interest Rate of 1.4276% Date 12/31/2007 12/31/2008 12/31/2009 12/31/2010 Cash Paid 10% Interest Expense 1.4276% Reduction of Carrying Amount $240,000 $240,000 $240,000 $42,828 $40,013 $37,159 $197,172 $199,987 $202,841 Total $720,000 $120,000 $600,000 Carrying Amount of Note $3,000,000 $2,802,828 $2,602,841 $2,400,000 To determine cash paid: $2,400,000 (Principal) * 10% (stated interest rate) = $240,000 To determine the Interest Expense each period: CV of note at beginning of year * 1.4276 (effective interest rate); So: Year 1: $3,000,000 * 1.4276% = $42,828 Year 2: $2,802,828 * 1.4276% = $40,013 Year 3: $2,602,841 * 1.4276% = $37,159 Note: The above figures are all rounded. To determine the reduction of carrying amount: Cash paid - Interest expense each period: Year 1: $240,000 - $42,828 = $197,172 Year 2: $240,000- $40,013 = $199,987 Year 3: $240,000 - $37,159 = $202,841 To determine the carrying value of the note: CV of current year - reduction to CV. Year 1: $3,000,000 - $197,172 = $2,802,828 Year 2: $2,802,828 - $199,987= $2,602,841 Year 3: $2,602,841 - $202,841 = $2,400,000 (d) Prepare the interest payment entry for Barkley Company on December 31, 2012. 31-Dec-12 Note Payable Interest Expense Cash 199,987 40,013 240,000 (e) What entry should Barkley on January 1, 2014? 1-Jan-14 Note Payable Cash 2,400,000 2,400,000 Exercise 14-22 (Term Modification without Gain - Creditor's Entries) Using the same information as in E14-21 above, answer the following questions ralted to American Bank (creditor). Info from E14-21 On December 31, 2010, the American Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $3,000,000 note receivable by the following modifications: 1. Reducing the principal obligation from $3,000,000 to $2,400,000 2. Extending the maturity date from December 31, 2010, to January 31, 2014. 3. Reducing the interest rate from 12% to 10%. Barkley pays interest at the end of each year. On January 1, 2014, Barkley Company pays $2,400,000 in cash to American Bank. Instructions. (a) What interest rate should American Bank use to calculate the loss on the debt restructuring? The American Bank should use the historical interest rate of 12% to calculate the loss. (b) Compute the loss that American Bank will suffer from the debt restructuring. Prepare the journal entry to record the loss. The loss is computed as follows: Pre-restructuring carrying amount of note Less: Present value of restructured future cash flows: Present value of principal $2,400,000 due in 3 years at 12%* Present value of interest $240,000 paid annually for 3 years at 12% ** Loss on debt restructuring $3,000,000 $1,708,272 576,439 $2,284,711 $715,289 TVM tables are located at the back of chapter 6 * $2,400,000 * .71178 = $1,708,272 ** $240,000 * 2.40183 = $576,439 31-Dec-10 Bad Debt Expense Allowance for Doubtful Accounts 715,289 715,289 Prepare the interest receipt schedule for American Bank after the debt restructing. AMERICAN BANK Interest Payment Schedule After Debt Restructuring Effective- Interest Rate of 1.4276% Date 12/31/2010 12/31/2011 12/31/2012 12/31/2013 Cash Received 10% Interest Revenue 12% $240,000 * $240,000 $240,000 274,165 ** 278,265 282,857 $720,000 835,288 * Carrying Amount of Note 2,284,711 2,318,877 2,357,142 2,400,000 34,165 *** 38,265 42,857 115,288 (rounded) $2,400,000 * 10% = $240,000 ** Increase Carrying Amount $2,284,711 * 12% = $274,165 *** $274,165 - $240,000 = $34,165 (d) Prepare the interest receipt entry for American Bank on Decmeber 31, 2012. 31-Dec-12 Cash Allowance for Doubtful Accts Interest Revenue 240,000 38,265 278,265 (e) What entry should American Bank make on January 1, 2014? 1-Jan-14 Cash Allowance for Doubtful Accts Note Receivable 2,400,000 600,000 3,000,000 tructuring? are the journal Exercise 14-23 - Term Modification with Gain - Debtor's Entries) Use the same information as in E14-21 above except that American Bank reduced the principal to $1,900,000 rather than $2,400,000. On January 1, 2014, Barkley pays $1,900,000 in cash to American Bank for the principal. Info from E14-21 On December 31, 2010, the American Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $3,000,000 note receivable by the following modifications: 1. Reducing the principal obligation from $3,000,000 to $2,400,000 2. Extending the maturity date from December 31, 2010, to January 31, 2014. 3. Reducing the interest rate from 12% to 10%. Barkley pays interest at the end of each year. On January 1, 2014, Barkley Company pays $2,400,000 in cash to American Bank. Instructions: (a) Can Barkley Company record a gain under this term modification? If yes, compute the gain for Barkley Company. Yes. Barkley Company can record a gain under this term modification. The gain is calculated as follows: Total future cash flows after restructuring are: Principal Interest ($1,900,000 * 10% * 3) Total $1,900,000 570,000 $2,470,000 Total pre-restructuring carrying amount of note (principal) $3,000,000 Therefore, the gain = $3,000,000 - $2,470,000 = $530,000 (b) Prepare the journal etnries to record the gain on Barkley's books. The entry to record the gain on December 31, 2010: Note Payable Gain on Debt Restructuring 530,000 530,000 What interest rate should Barkley use to compute its interest expense for future periods? Will your answer be the same as in E14-21 above? Why or why not? Because the new carrying value of the note ($3,000,000 - 5310,000 = $2,470,000) equals the sum of the undiscounted future cash flows ($1,900,000 principal + $570,000 interest = $2,470,000), the imputed interest rate is 0%. Consequently, all the future cash flows reduce the principal balance and no interest expense is recognized. (d) Prepare the interest payment schedule of the note for Barkley Company after the debt restructuring. BARKLEY COMPANY Interest Payment Schedule After Debt Restructuring Effective- Interest Rate of 1.4276% Date 12/31/2010 12/31/2011 12/31/2012 12/31/2013 Cash Received 10% Interest Revenue 12% Increase Carrying Amount $0 0 0 $0 $2,470,000 $2,280,000 ** 2,090,000 1,900,000 190,000 190,000 190,000 570,000 * 190,000 * 190,000 190,000 Carrying Amount of Note $570,000 $1,900,000 * 10% = $190,000 ** $2,470,00 - $190,000 = $2,280,000 (e) Prepare the interest payment entries for Barkley Company on December 31, of 2011, 2012, and 2013 Cash interest payment entries for Bradtke Company are: December 31, 2011, 2012 and 2013 Note Payable Cash 190,000 190,000 (f) What entry should Barkley make on Janaury 1, 2014? The payment entry at maturity is: 1-Jan-14 Note Payable Cash 1,900,000 1,900,000 eriods? Will Exercise 14-24 (Term Modificaiton with Gain - Creditor's Entries) Using the same information as in E14-21 and E14-23 above, answer the following questions related to American Bank (creditor). Info from E14-21 On December 31, 2010, the American Bank enters into a debt restructuring agreement with Barkley Company, which is now experiencing financial trouble. The bank agrees to restructure a 12%, issued at par, $3,000,000 note receivable by the following modifications: 1. Reducing the principal obligation from $3,000,000 to $2,400,000 2. Extending the maturity date from December 31, 2010, to January 31, 2014. 3. Reducing the interest rate from 12% to 10%. Barkley pays interest at the end of each year. On January 1, 2014, Barkley Company pays $2,400,000 in cash to American Bank. Info from E14-23 Use the same information as in E14-21 above except that American Bank reduced the principal to $1,900,000 rather than $2,400,000. On January 1, 2014, Barkley pays $1,900,000 in cash to American Bank for the principal. Instructions (a) Compute the loss American Bank will suffer under this new term modificaiton. Prepare the journal entry to record the loss on American's books. The loss can be calculated as follows: Pre-restructurng amount carrying of note Less: Present value of restructured future cash flows Present value of principal $1,900,000 due in 3 years at 12% Present value of interest $130,000 paid annually for 3 years at 12% Loss on debt restructuring $3,000,000 ### 456,348 $1,808,730 $1,191,270 $1,900,000 * .71178 = $1,352,382 $190,000 * 2.40183 = $456,348 31-Dec-10 Bad Debt Expense Allowance for Doubtful Accounts ### $1,191,270 (b) Prepare the interest receipt schedule for American Bank after the debt restructuring. AMERICAN BANK Interest Receipt Schedule After Debt Restructuring Effective- Interest Rate of 12% Date 12/31/2010 12/31/2011 12/31/2012 12/31/2013 Cash Received 10% Interest Revenue 12% Increase in Carrying Amount $190,000 * $190,000 $190,000 $217,048 ** 220,293 223,928 $27,048 *** 30,293 33,929 $570,000 $661,269 $91,270 Carrying Amount of Note $1,808,730 1,835,777 1,866,071 1,900,001 rounded * ** *** $1,900,000 * 10% = $190,000 $1,808,730 * 12% = $217,048 $217,048 - $190,000= $27,048 Prepare the interest receipt entry for American Bank on December 31, 2011, 2012 , and 2013. Interest receipt entries for Firstar Bank are: 31-Dec-11 Cash Allowance for Doubtful Accounts Interest Revenue 190,000 $27,048 217,048 31-Dec-12 Cash Allowance for Doubtful Accounts Interest Revenue 190,000 30,293 220,293 31-Dec-13 Cash Allowance for Doubtful Accounts Interest Revenue (d) 190,000 33,929 223,929 What entry should American Bank make on January 1, 2014? The receipt entry at maturity is: 1-Jan-14 Cash Allowance for Doubtful Accounts Note Receivable 1,900,000 1,100,000 3,000,000 Exercise 14-25 (Debtor/ Creditor Entries for Settlement of Troubled Debt) Gottlieb Co. owes $199,800 to Ceballos Inc. The debt is a 10-year, 11% note. Because Gottlieb Co. is in financial trouble, Ceballos Inc. agrees to accept some property and cancel the entire debt. The property has a book value of $90,000 and a fair market value of $140,000. Instructions (a) Prepare the journal entry on Gottlieb's books for debt restructure. Gottlieb Co.'s entry: Note Payable Property Gain on Property Disposition ($140,000 - $90,000) Gain on Restructuring 199,800 90,000 50,000 59,800 To calculate gain on restructuring: $199,800 (Note payable) - $140,000 (FMV of property) (b) Prepare the journal entry on Ceballos's books for debt restructure. Ceballos Inc. entry: Property Allowance for Doubtful Accounts (or Bad Debt Expense) Note Receivable 140,000 59,800 199,800 lieb Co. is in P14-8 (Entries for Non-Interest-Bearing Debt) On December 31, 2010, Faital Company acquired a computer from Plato Corporation by issuing a $600,000 zero-interest-bearing note, payable in full on December 31, 2014. Faital Company's credit rating permits it to borrow funds from its several lines of credit at 10%. The computer is expected to have a 5-year life and a $70,000 salvage value. Instructions: (a) Prepare the journal entry for the purchase on December 31, 2010. (b) Prepare any necessary adjusting entries relative to depreciation (use straight-line) and amortization (use effective interest method) on December 31, 2011. Prepare any necessary adjusting entries relative to depreciation and amortization on December 31, 2012. Solution: First, solve for the present value of the computer: FV = $600,000 I = 10% T = 4 years PVF (4, 10) = .68301 Present value = ($600,000 * .68301) = $409,806 (a) 31-Dec-10 Computer Equipment Discount on Notes Payable Notes Payable 409,806 190,194 600,000 (b) To calculate depreciation expense: (PV computer - Salvage Value)/ 5 ($409,806 - $70,000)/5 = $67,961.20 31-Dec-11 Depreciation Expense 67,961.20 Accumulated Depreciation Computer 67,961.20 31-Dec-11 Interest Expense Discount on Notes Payabe (see schedule below for calcs) 40,980.60 40,980.60 Schedule of Note Discount Amortization (a) Date (b) Debit Interest Expense Credit Discount on Note Payable Col * 10% 12/31/2010 12/31/2011 12/31/2012 12/31/2013 12/31/2014 40,980.60 45,078.66 49,586.53 54,548.22 Carrying Value of Note Col c + Col b 409,806.00 450,786.60 495,865.26 545,451.79 600,000.00 rounded 31-Dec-12 Depreciation Expense 67,961.20 Accumulated Depreciation Acomputer 67,961.20 31-Dec-12 Interest Expense Discount on Notes Payable 45,078.66 45,078.66 P14-9 (Entries for Non- Interest Bearing Debt; Payable in Installments) Sabonis Cosmetics Co. purchased machinery on December 31, 2009, paying $50,000 down and agreeing to pay the balance in four equal installments of $40,000 payable each December 31. An assumed interest of 8% is implicit in the purchase price. Instructions: Prepare the journal entries that would be recorded for the purchase and for the payments and interest on the following dates. (a) (b) (d) (e) December 31, 2009 December 31, 2010 December 31, 2011 December 31, 2012 December 31, 2013 To record the capitalized value of the machinery: Annual rents X PV o A (4, 8) $40,000 3.31 132,485.20 Add: Down Payment 50,000.00 Capitalized value of machine 182,485.20 (a) 12/31/2009 Machinery Discount on Notes Payable Cash Notes Payable 182,485.20 27,514.80 50,000 160,000 To compute Discount on Notes Payable: $50,000 (down payment) + $160,000 (sum of annual payments) - $182,485.50 (cap value of machine) = $27,514.80 (b) 12/31/2010 Notes Payable Cash this is to reflect our annual payments 40,000 40,000 Interest Expense 10,598.82 Discount on Note Payable 10,598.82 (see schedule below for calc) Schedule of Note Discount Amortization (a) Date Credit Cash (b) (c ) Dr Interest Expense Amortization Cr. Disc. Notes Payable (d) Carrying Value of Note (Col "d" - col "c") 12/31/2009 12/31/2010 12/31/2011 12/31/2012 12/31/2013 40,000 40,000 40,000 40,000 10,598.82 8,246.72 5,706.46 2,962.80 29,401.184 31,753.279 34,293.541 37,037.200 # is off due to rounding 12/31/2011 Notes Payable Cash 40,000 40,000 Interest Expense 8,246.72 Discount on Notes Payable 8,246.72 (d) 12/31/2012 Notes Payable Cash 40,000 40,000 Interest Expense 5,706.46 Disc. On Notes Payable 5,706.46 (e) 12/31/2013 Notes Payable Cash 40,000 Interest Expense 2,962.80 Disc. On Notes Payable 40,000 2,962.80 $132,485.20 $103,084.02 $71,330.74 $37,037.20 ($0.00) E15-1 (Recording the Issuances of Common Stock) During its first year of operations, Stiwell Corporation had the following transactions pertaining to its common stock. Jan 10: Issued 80,000 shares for cash at $6 per share Mar 1: Issued 5,000 shares to attorneys in payment of a bill for $35,000 for services rendered in helping the company to incorporate. July 1: Issued 30,000 shares for cash at $8 per share. Sept. 1: Issued 60,000 shares for cash at $10 per share. Instructions: (a) Prepare the journal entries for these transactions, assuming tha the common stock has a par value of $3 per share. (b) Prepare the journal entries for these transactions, assuming that the common stock is no par value a stated value of $2 per share. Solutions: Jan 10: Issued 80,000 shares for cash at $6 per share (a) - Assume common stock has a par value of $3 per share (a) (b) 10-Jan (a) 480,000 240,000 240,000 (b) - Assume that the common stock is no par value and a stated value of $2 per share. 10-Jan Mar 1: Cash (80,000 * $6) Common Stock (80,000 * $3) Paid in Capital in Excess of Par Cash (80,000 * $6) 480,000 Common Stock (80,000 * $2) Paid-in Capital in Excess of Stated Val 160,000 320,000 Issued 5,000 shares to attorneys in payment of a bill for $35,000 for services rendered in helping the company to incorporate. (a) - Assume common stock has a par value of $3 per share 1-Mar Organization Expense Common Stock (5,000 * $3) Paid in Capital in Excess of Par 35,000 15,000 20,000 (b) - Assume that the common stock is no par value and a stated value of $2 per share. (b) 1-Mar Organization Expense 35,000 Common Stock (5,000 * $2) Pain in Capital in Excess of State Value ($35,000 - $10,000) 10,000 25,000 July 1: Issued 30,000 shares for cash at $8 per share. (a) - Assume common stock has a par value of $3 per share (a) 1-Jul Cash (30,000 * $8) Common Stock (30,000 * $3) Paid in Capital in Excess of Par 240,000 90,000 150,000 (b) - Assume that the common stock is no par value and a stated value of $2 per share. (b) 1-Jul Cash (30,000 * $8) 240,000 Common Stock (30,000 * $2) Paid in Capital in Excesss of Stated Val, 60,000 180,000 Sept. 1: Issued 60,000 shares for cash at $10 per share. (a) - Assume common stock has a par value of $3 per share 1-Sep Cash (60,000 * $10) Common Stock (60,000 * $3) Paid in Capital in Excess of Par 600,000 180,000 420,000 (b) - Assume that the common stock is no par value and a stated value of $2 per share. 1-Sep Cash (60,000 * $10) 600,000 Common Stock (60,000 * $2) Paid in Capital in Excess of Stated Value 120,000 480,000 Exercise 15-2 (Recording the Issuance of Common and Preferred Stock) Abernathy Corporation was organized on January 1, 2010. It is authorized to issue 10,000 shares of 8%, $50 par value preferred stock and 500,000 shares of no par common stock with a stated value of $2 per share. The following stock transactions were completed during the year. ### 10-Jan 1-Mar Issued 80,000 shares of common stock for cash at $5 per share. Cash (80,000 * $5) Common Stock (80,000 * $2) Paid in Capital in Excess of Stated Value Common Stock (80,000 * $3) 540,000 250,000 290,000 80,000 48,000 32,000 Issued 80,000 shares of common stock for cash at $7 per share. Cash (80,000 * $7) Common Stock (80,000 * $2) Paid in Capital in Excess of Stated Value Common Stock (80,000 * $5) 1-Aug 240,000 Issued 24,000 shares of common stock for land. The asking price of the land was $90,000 and the fair market value of the land was $80,000. Land Common Stock (24,000 * $2) Paid in Capital of Stated Value Common Stock ( $80,000 - $48,000) 1-May 160,000 Issued 5,000 shares of preferred stock for cash at $108 per share. Cash (5,000 * $108) Preferred Stock (5,000 * $50) Paid in Capital in Excess of Par Value Preferred Stock (5,000 * $58) 1-Apr $400,000 560,000 160,000 400,000 Issued 10,000 shares of common stock to attorneys in payment of their bill of $50,000 for services rendered in helping the company organize. Organization Expense Common Stock (10,000 * 2 Paid in Capital in Excess of Stated Value Common Stock ($50,000 - $20,000) 50,000 20,000 30,000 1-Sep Issued 10,000 shares of common stock for cash at $9 per share. Cash (10,000 * $9) Common Stock (10,000 * $2) Paid-in Capital in Excess of Stated Value Common Stock (10,000 * $7) 1-Nov 90,000 20,000 70,000 Issued 1,000 shares of preferred stock for cash at $112 per share. Cash (1,000 * $112) Preferred Stock (1,000* $50) Paid-in Capital in Excess of Par Value Preferred Stock (1,000 * $62) 112,000 50,000 62,000 Instructions: Prepare the journal entries to record the above transactions. (see entries above) Exercise 15-3 (Stock Issued for Land) Twenty-five thousand shares reacquired by Pierce Corporation for $48 per share were exchanged for undeveloped land that has an appraised value of $1,700,000. At the time of the exchange the common stock was trading at $60 per share on an organized exchange. Instructions (a) Prepare the journal entry to record the acquisition of land assuming that the purchase of the stock was originally recorded using the cost method. Land ($60 * 25,000) Treasury Stock ($48 * 25,000) Paid in Capital from Treasury Stock 1,500,000 1,200,000 300,000 (b) Briefly identify the possible alternatives (including those that are totally unacceptable) for quantifying the cost of the land and briefly support your choice. One might use the cost of Treasury Stock. However, this is not a relevant measure of this economic event. Rather, it is a measure of a prior, unrelated event. The appraised value of the land is a reasonable alternative (if based on appropriate fair value estimation techniques). However, it is an appraisal as opposed to a market-determined price. The trading price of the stock is probably the best measure of fair value in this transaction. Exercise 15-5 Lump Sum Sales of Stock with Preferred Stock Hartman Inc. issues 500 shares of $10 par value common stock and 100 shares of $100 par value preferred stock for a lump sum of $100,000. Instructions: (a) Prepare the journal entry for the issuance when the market value of the common shares is $168 each and market value of the preferred is $210 each. (Round to nearest dollar). FMV of Common (500 * $168) FMV of Preferred (100 * $210) Total $84,000 21,000 $105,000 Allocated to Common: ($84,000/$105,000) * $100,000 Allocated to Preferred: ($21,000/$105,000) * $100,000 Total allocation (rounded to nearest dollar) $80,000 20,000 $100,000 Cash 100,000 Common Stock (500* $10) Paid in Capital in Excess of Par Common (80,000 - 5,000) Preferred Stock (100 * $100) Paid in Capital in Excess of Par Preferred ($20,000 - $10,000) 5,000 75,000 10,000 10,000 (b) Prepare the journal entry fo the issuance when only the market value of the common stock is known and it is $170 per share. Lump-sum receipt Allocated to common (500 * $170) Balance allocated to preferred Cash $100,000 85,000 $15,000 100,000 Common Stock (500 * $1) Paid in Capital in Excess of Par Common Stock ($85,000 - $5,000) Preferred Stock Paid in Capital in Excess of Par Preferred Stock ($15,000 - $10,000) 5,000 80,000 10,000 5,000 Exercise 15-6 Stock Issuances and Repurchase Loxley Corporation is authorized to issue 50,000 shares of $10 par value common stock. During 2010, Lindsey Hunter took part in the following selected transactions: 1 Issued 5,000 shares of stock at $45 per share, less costs related to the issuance of the stock totaling $7,000. 2 Issued 1,000 shares of stock for land appraised at $50,000. The stock was actively traded on a national stock exchange at approximately $46 per share on the date of issuance. 3 Purchased 500 shares of treasury stock at $44 per share. The treasury shares purchased were issued in 2006 at $40 per share. Instructions (a) Prepare the journal entry to record item 1. 1 Issued 5,000 shares of stock at $45 per share, less costs related to the issuance of the stock totaling $7,000. Cash [(5,000 * $45) - $7,000] Common Stock (5,000 * $10) Paid-in Capital in Excess of Par (b) 218,000 50,000 168,000 Prepare the journal entry to record item 2. 2 Issued 1,000 shares of stock for land appraised at $50,000. The stock was actively traded on a national stock exchange at approximately $46 per share on the date of issuance. Land (1,000 * $46) Common Stock (1,000 * $10) Paid in Capital in Excess of Par ($46,000 $10,000) 46,000 10,000 36,000 Note: The (fair) market value of the stock ($46,000) is used to value the exchange because it is a more objective measure than the appraised value of the land ($50,000). Prepare the journal entry to record item 3 using the cost method. 3 Purchased 500 shares of treasur stock at $44 per share. The treasury shares purchased were issued in 2006 at $40 per share. Treasury Stock (500 * $44) Cash 22,000 22,000 Exercise 15-7 Effect of Treasury Stock Transactions on Financials Sanborn Company has outstanding 40,000 shares of $5 par common stock which had been issued at $30 per share. Sanborn then entered into the following transactions. (1) Purchased 5,000 treasury shares at $45 per share. (2) Resold 500 of treasury shares at $40 per share. (3) Resold 2,000 of the treasury shares at $49 per share. Instructions: Use the following code to indicate the effect each of the three transactions has on the financial statement cateogries listed in the table below, assuming Joe Dumars Company uses the cost method: (I - increase, D- decrease, NE- No effect). # Assets Liabilities S/H Equity Paid in Cap Ret. Earn Net Income 1 D NE D NE NE NE 2 I NE I NE D NE 3 I NE I I NE NE Exercise 15-8 (Preferred Stock Entries and Dividends) Weisberg Corporation has 10,000 shares of $100 par value, 6% , preferred stock and 50,000 shares of $10 par value common stock outstanding at December 31, 2010. Instructions: Answer the questions in each of the following independent situations: (a) If the preferred stock is cumulative and dividends were paid on the preferred stock on December 31, 2007, what are the dividends in arrears that should be reported on the December 31, 2010, balance sheet? How should these dividends be reported? $1,000,000 * 6% = $60,000 $60,000 * 3 = $180,000 The cumulative dividend is disclosed in a note to the stockholders' equity section; it is not reported as a liability (b) If the preferred stock is convertible into seven shares of $10 par value common stock and 3,000 shares are converted, what entry is required for the conversion assuming the preferred stock was issued at par value? Preferred Stock (3,000 * 100) Common Stock (3,000 * 7 * $10) Paid-in Capital in Excess of Par Value - Common 300,000 210,000 90,000 If the preferred stock was issued at $107 per share, how should the preferred stock be reported in the stockholder's equity section? Paid in capital Preferred stock, $100 par 6%, 10,000 shares issued Paid-in capital in excess of par (10,000 * $7) $1,000,000 70,000 Exercise 15-9 (Correcting Entries for Equity Transactions) Davison Inc. recently hired a new accountant with extensive experience in accounting for partnerships. Because of the pressure of the new job, the accountant was unable to review what he had learned earlier about corporation accounting. During the first month, he made the following entries for the corporation's capital stock. 2-May Cash 192,000 Capital Stock 192,000 (Issued 12,000 shares of $10 par value common stock at $16 per share) 10-May Cash 600,000 Capital Stock 600,000 (Issued 10,000 shares of $30 par value preferre stock at $60 per share) 15-May Capital Stock 14,000 Cash 14,000 (Purchased 1,000 shares of common stock for the treasury at $14 per share) 31-May Cash Capital Stock Gain on Sale of Stock (Sold 500 shares of treasury stock at $17 per share). 8,500 5,000 3,500 Instructions: On the basis of the explanation for each entry, prepare the entries that should have been made for capital stock transactions. (Issued 12,000 shares of $10 par value common stock at $16 per share) 2-May Cash Common Stock (12,000 * $10) Paid in Capital in Excess of ParCommon Stock (12,000 * $6) 192,000 120,000 72,000 (Issued 10,000 shares of $30 par value preferre stock at $60 per share) 10-May Cash Preferred Stock (10,000 * $30) Paid-in Capital in Excess of Par Preferred Stock (10,000 * $30) 600,000 300,000 300,000 (Purchased 1,000 shares of common stock for the treasury at $14 per share) 15-May Treasury Stock Cash 14,000 14,000 (Sold 500 shares of treasury stock at $17 per share). 31-May Cash Treasury Stock (500 * $17) Paid-in Capital from Treasury Stock (500* $3) To find PIC- Treasury stock: $17 (selling price) - $14 (cost basis) = $3 8,500 8,500 1,500 Exercise 15-11 Equity Items on the Balance Sheet The following are selected transactions that may affect stockholders' equity. 1 Recorded accrued interest earned on a note receivable. 2 Declared and distributed a stock split. 3 Declared a cash dividend. 4 Recorded a retained earnings restriction. 5 Recorded the expiration of insurance coverage that was previously recorded as prepaid insurance. 6 Paid the cash dividend declared in item 3 above. 7 Recorded accrued interest expense on a note payable. 8 Declared a stock dividend. 9 Distributed the stock dividend declared in item 8. # Assets Liabilities S/H Equity Paid in Cap Ret. Earn Net Income 1 I NE I NE I I NE NE Recorded accrued interest earned on a note receivable. 2 NE NE NE NE Declared and distributed a stock split. 3 NE I Declared a cash dividend. 4 NE NE Recorded a retained earnings restriction 5 D NE D NE D NE NE NE NE NE D NE D D Recorded the expiration of insurance coverage that was previously recorded as prepaid insurance. 6 D D NE NE NE NE Paid the cash dividend declared in item 2 above. 7 NE I D Recorded accrued interest expense on a note payable. 8 NE NE NE Declared a stock dividend. 9 NE NE NE Distributed the stock dividend declared in item 8. NE D D I D NE NE NE NE Exercise 15-12 (Cash Dividend and Liquidating Dividend) Addison Corporation has ten million shares of common stock issued and outstanding. On June 1 the board of directors voted a 60 cents per share cash dividend to stockholders of record as of June 14, payable June 30th. Instructions: (a) Prepare the journal etnry for each of the date above assuming the dividend represents a distribution of earnings. 1-Jun Retained Earnings Dividends Payable 14-Jun Dividends Payable Cash 6,000,000 No entry on date of record 30-Jun 6,000,000 6,000,000 6,000,000 (b) How would the entry differ if the dividend were a liquidating dividend? If this were a liquidating dividend, the debit entry on the date of declaration would be to Additional Paid-in Capital rather than Retained Earnings. Exercise 15-13 (Stock Splits and Stock Dividend) The common stock of Warner Inc. is currently selling at $110 per share. The directors wish to reduce the share price and increase share volume prior to a new issue. The per share par value is $10; book value is $70 per share. Five million shares are issued and outstanding. Instructions Prepare the necessary journal entries assuming the following: (a) The board votes a 2-for-1 stock split. No entry - simply a memorandum note indicating the number of shares has increased to 10 million and par value has been reduced from $10 to $5 per share. (b) The board votes a 100% stock dividend. Retained Earnings ($10 * 5,000,000) Common Stock Dividend Distributable Common Stock Dividend Distributable Common Stock 50,000,000 50,000,000 50,000,000 50,000,000 Briefly discuss the accounting and securities market differences between these two methods of increasing the number of shares oustanding. Stock dividends and splits serve the same function with regard to the securities markets. Both techniques allow the board of directors to increase the quantity of shares and reduce share prices into a desired "trading range." For accounting purposes the 20%-25% rule reasonably views large stock dividends as substantive stock splits. In this case, it is necessary to capitalize par value with a stock dividend because the number of shares is increased and the par value remains the same. Earnings are capitalized for purely procedural reasons. Exercise 15-15 Dividend Entries The following data were taken from the balance sheet accounts of Wickham Corporation on December 31, 2010. Current assets Investments Common Stock (par value $10) Paid-in capital in excess of par Retained earnings $540,000 624,000 600,000 150,000 840,000 Instructions: Prepare the required journal entries for the following unrelated items. (a) A 5% stock dividend is declared and distributed at a time when the market value of the shares is $39 per share. Retained Earnings* Common Stock Dividend Distributable** Paid-in Capital in Excess of Par * ** 117,000 30,000 87,000 (60,000 shares * 5% * $39 = $117,000) (60,000 shares * 5% * $10 par value) Common Stock Dividend Distributable Common Stock 30,000 30,000 (b) The par value of the capital stock is reduced to $2 with a 5-for-1 stock split. No entry, memorandum note to indicate that par value is reduced to $2 and shares outstanding are now 300,000 (60,000 * 5). A dividend is declared January 5, 2011, and paid January 25, 2011, in bonds held as an investment. The bonds have a book value of $90,000 and a fair market value of $125,000. 5-Jan-11 Investments (Bonds) Gain on Appreciation of Investments (Bonds) Retained Earnings Property Dividends Payable 35,000 35,000 125,000 125,000 25-Jan-11 Property Dividends Payable Investments (Bonds) 125,000 125,000 Exercise 15-16 (Computation of Retained Earnings) The following information has been taken from the ledger accounts of Sampras Corporation. Total income since incorporation Total cash dividends paid Total value of stock dividends distributed Gains on treasury stock transactions Unamortized discount on bonds payable $287,000 60,000 40,000 18,000 32,000 Instructions Determine the current balance of retained earnings. Total income since incorporation Less: Total cash dividends paid Total value of stock dividends Current balance of retained earnings $287,000 $60,000 40,000 $100,000 $187,000 The unamortized discount on bonds payable is shown as a contra liability; the gain on treasury stock is recorded as additional paid-in capital Exercise 15-17 (Stockholders' Equity Section) Teller Corporation's post-closing trial balance at December 31 2010, was as follows. Teller Corporation Post Closing Trial Balance 31-Dec-10 Dr. Accounts payable Accounts receivable Accumulated depreciation- building and equipment Additional paid in capital - common In excess of par value From sale of treasury stock Allowance for doubtful accounts Bonds payable Building and equipment Cash Common stock ($1 par value) Dividends payable on preferred stock - cash Inventories Land Preferred stock ($50 par value) Prepaid expenses Retained Earnings Treasury stock - common at cost Totals Cr. $310,000 $480,000 185,000 1,000,000 160,000 30,000 700,000 1,450,000 190,000 200,000 4,000 560,000 400,000 500,000 40,000 201,000 170,000 $3,290,000 $3,290,000 At December 31, 2010, Teller had the following number of common and preferred shares. Common Preferred Authorized 600,000 60,000 Issued 200,000 10,000 Outstanding 190,000 10,000 The dividends on preferred stock are $4 cumulative. In addition, the preferred stock has a preference in liquidation of $50 per share. Teller Corporation Stockholders' Equity 31-Dec-10 Capital stock Preferred stock, $4 cumulative, par value $50 per share; authorized 60,000 shares, issued and outstanding 10,000 shares Common stock, par value $1 per share, authorized 600,000 shares, issued 200,000 shares, and outstanding 190,000 shares Total capital stock Additional paid-in capital In excess of par value From sale of treasury stock Total paid-in capital Retained earnings Total paid-in capital and retained earnings Less: Treasury stock, 10,000 shares at cost Total stockholders' equity $500,000 200,000 $700,000 1,000,000 160,000 1,860,000 201,000 2,061,000 170,000 1,891,000 P15-2 (Treasury Stock Transactions and Presentation) Clemson Company had the following stockholders' equity as of January 1, 2010. Common stock, $5 par value, 20,000 shares issued Paid-in capital in excess of par Retained earnings Total stockholder's equity 100,000 300,000 320,000 $720,000 During 2010, the following transactions occurred. Feb. 1: Mar 1: Mar 18: April 22: Clemson repurchased 2,000 shares of treasury stock at a price of $19 per share. 800 shares of treasury stock repurchased above were resissued at $17 per share. 500 shares of treasury stock repurchased above were reissued at $14 per share. 600 shares of treasury stock repurchased above were reissued at $20 per share. Instructions: (a) Prepare the journal entries to record the treasury stock transaction in 2010, assuming Clemson uses the cost method. (b) Prepare the stockholders' equity section as of April 30, 2010. Net income for the first 4 months of 2010 was $130,000. (Disregard this section) Solutions Note: (The cost method states that the Treasury Stock account is maintained at the cost of the shares purchased. It results in debiting the Treasury Stock account for the reacquisition cost and in reporting this account as a deduction from the total paid-in capital and retained earnings on the Balance Sheet.) Feb. 1: Clemson repurchased 2,000 shares of treasury stock at a price of $19 per share. Treasury Stock ($19 * 2,000) Cash Mar 1: 38,000 800 shares of treasury stock repurchased above were resissued at $17 per share. Cash ($17 * 800) Retained Earnings ($2 * 800) Treasury Stock ($19 * 800) Mar 18: 38,000 13,600 1,600 15,200 500 shares of treasury stock repurchased above were reissued at $14 per share. Cash ($14 * 500) Retained Earnings ($5 * 500) Treasury Stock ( $19 * 500) 7,000 2,500 9,500 April 22: 600 shares of treasury stock repurchased above were reissued at $20 per share. Cash ($20 * 600) Treasury Stock ($19 * 600) Paid in Capital from Treasury Stock 12,000 11,400 600 Notice on March 1 and March 18 that we are debiting Retained Earnings. This is because, at this time, there is no balance in the Paid in Capital from Treasury Stock account. A balance arises in this account when Treasury Stock is reissued (sold) at a higher price than it was reacquired for. Once we have a balance in the Paid in Capital from Treasury Stock account, if we sell our Treasury Stock for less than it cost to acquire it, we would Debit Cash and Debit the Paid in Capital from Treasury Stock, up to the amount of the balance. Any excess amounts that could not be covered by the Paid in Capital from Treasury Stock account would then be debited to Retained Earnings. (The credit will be to Treasury Stock). (b ) Clemson Company Stockholders' Equity 30-Apr-10 Common stock, $5 par value, 20,000 shares issued 19,900 outstanding Paid in capital in excess of par - common Paid in capital from treasury stock Total paid in capital Retained Earnings* Disregard for now Less: Treasury stock (100 shares) Total stockholders' equity $100,000 300,000 600 400,600 445,900 846,500 1,900 844,600 Retained Earnings (beginning balance) March 1 reissuance March 18 reissuance Net income for period Retained Earnings (ending balance) $320,000 (1600) (2500) 130,000 $445,900 Treasury Stock (beginning balance) February 1 purchase (2,000 shares) March 1 sale (800 shares) March 18 sale (500 shares) April 12 sale (600 shares) Treasury Stock (ending balance) $0 38,000 (15,200) (9,500) (11,400) $1,900

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Keller Graduate School of Management - ACC - 551
E14-1 Classification of LiabilitiesPresented below are various account balances.(a) Bank loans payable of a winery due March 10, 2014. (The product requires aging for 5 years beforesale).Current liability IF current assets are used to satisfy debt.(b
Keller Graduate School of Management - ACC - 551
Intermediate Accounting 12th Edition (by D. E. Kieso, J. J. Weygandt, T. D. Warfield 2007CHAPTER 15STOCKHOLDERS EQUITYTRUE-FALSEConceptualAnswerTFTFTFTFFTFTTFFTTFFTNo.Description1.2.3.4.5.6.7.8.9.10.11.12.13.14.15.
Keller Graduate School of Management - ACC - 551
CHAPTER 15Stockholders EquityASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)Topics 1. Stockholders rights; corporate form. 2. Stockholders equity. Questions 1, 2, 3 4, 5, 6, 16, 17, 18, 29, 30, 31 7, 10 8, 9 11, 12, 17 3, 13, 14, 15 3 7, 10, 16, 17 1, 2, 4,
Keller Graduate School of Management - ACC - 551
CHAPTER 16DILUTIVE SECURITIES AND EARNINGS PER SHAREIFRS questions are available at the end of this chapter.TRUE-FALSEDilutive SecuritiesConceptualAnswerTFTFFTFTFTFFTFTFT.F.TFNo.Description1.2.3.4.5.6.7.8.9.10.11.12.
Keller Graduate School of Management - ACC - 551
CHAPTER 16Dilutive Securities and Earnings Per ShareASSIGNMENT CLASSIFICATION TABLE (BY TOPIC)Topics 1. 2. 3. Convertible debt and preferred stock. Warrants and debt. Stock options, restricted stock. Earnings Per Share (EPS)terminology. EPSDetermining
Keller Graduate School of Management - ACC - 551
CHAPTER 17InvestmentsASSIGNMENT CLASSIFICATION TABLETopics 1. Debt securities. (a) (b) (c) 2. 3. Held-to-maturity. Trading. Available-for-sale. Questions 1, 2, 3, 15 4, 5, 7, 8, 15, 21 4, 6, 7, 8, 12, 21 4, 7, 8, 9, 12, 21 8, 9 1, 13, 14, 15, 16 7, 10,
Keller Graduate School of Management - ACC - 551
Keller Graduate School of Management - ACC - 505
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Keller Graduate School of Management - ACC - 505
ACC 505 Managerial AccountingFormula Reference SheetChapter 2 - Page 42 & 43Basic Equation for Inventory AccountsBeginningBalanceAdditionsto Inventory+=EndingBalance=Withdrawalsfrom InventoryCost of Goods Sold in a Merchandising CompanyCos
Keller Graduate School of Management - ACC - 505
Computing Contribution MarginContribution Margin = Sales (Revenue) Total Variable CostsComputing Contribution Margin RatioContribution Margin = Sales (Revenue) Total Variable CostsContribution Margin Ratio = Contribution Margin/Sales (Revenue)Computi
Keller Graduate School of Management - ACC - 505
AC505 MANAGERIAL ACCOUNTING PRACTICE FINALINSTRUCTIONS: Please fill in the blank for question 1 and select the appropriate response to questions2 through 45.1.Use the following information to determine the gross margin for Pacific States Manufacturing
Keller Graduate School of Management - ACC - 505
AC505PracticeQuiz#2Student:1. Returnoninvestment(ROI)canbedecomposedintotheassetturnoverandthe:A.B.C.D.Grossmarginratio.Profitmarginratio.Operatingmarginratio.Contributionmarginratio.Assetturnover profitmarginratio=ROI2. Howwilldecreasesinthef
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Chapter 14 Seeley Integration of Nervous System Function1. Senses are divided into two basic groups, they are : _. Which group containstouch, temperature. What are proprioceptors? What do they do?2.3. Do all sensory receptors result in the sensory per
Auburn - HIST - 1010
20 August 2012 Lecture NotesPaleolithic Age (400,000 8,000 BCE)Called the Old Stone Age. People lived as hunter/gathers in caves. They were not farmers living in asedentary way. It is a very difficult and precarious way of life. People are nomadic livi
Auburn - HIST - 1010
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Auburn - HIST - 1010
29 August 2012 Lecture NotesAncient IndiaThe earliest period in Ancient India is known as the Harappan period. This is because Harrapa is one ofthe most important archaeological sites that lets us study ancient India. Mohen jo-Daro is alsosignificant
Kentucky - ECO - 202
Kentucky - MGT - 410
Decision MakingMGT 4101. What is the rational model of decision making (i.e., what are its main assumptions)?Compare and contrast it from Simons model of bounded rationality. (See slides onthis.)2. Closely read the article Cognitive bias: systematic
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Kentucky - MGT - 410
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Kentucky - MGT - 410
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Georgia State - GEOG - 1113
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Geography 1113Earths Internal Structure8/23/2012I.Earths Internal StructureA.The Earths Radius is 6,370kmB.The Earths layers are:1.Crust: Has a mass of 0.01% and a volume that is less than 1%.Combined, for mWhich is composed of Oceanic and Con
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Augusta State University - MGS - 8110
MGS 8110Fall 2010Home Work #10READING:YouaredonereadingforthetimebeingyouarenowworkingonyourTakeHomeMidTerm.EXERCISES:Iscreweduplastweek'sHWbyleavingtheanswersontheAnswerSheet.SowehavetohaveasecondHWonNonlinearfitting.AccessthedatainDATAHW10.xls.Th
Augusta State University - MGS - 8110
MGS 8110Fall 2010Home Work #11READING:Anewreadingassignment.ReadChapters6through8ofForecastingandTimeSeries.Economic Forecasting Seminar: IstronglyencourageyoutoattendtheEconomicForecastingConferenceon November17thfrom8:30toNoon.Goto http:/register.e
Augusta State University - MGS - 8110
MGS 8110Fall 2010Home Work #12READING: ReadChapters6through8ofForecastingandTimeSeries.EXERCISES:Part A Smoothing Models0. GetthedatafileData HW12 MGS8110.xls.Therearethreesetsofdata,eachinaseparateworksheet.Allof thedataistimeseriesdataasfollows:B
Augusta State University - MGS - 8110
SolutionHomework #1MGS 8110Review of StatisticsREADING:ReviewthematerialinLecturesL00A,L00DandL00E.ReadChapters2ofthetextbook.ReadChapters3through5.Thisisalotofreadingandyouhave5(to7)weekstocompletethisfirstreadingassignment.Pleasestepupandtakeabi
Augusta State University - MGS - 8110
Solution DEG #3HomeworkIDRB 8110MGSAMS Equation, IF statements & Scatter plotsREADING:ReviewthematerialinLecturesL00D,L00E,L00FandL00I.ReadChapters3through5(pages79through260)of Forecasting,TimeSeries,andRegression .Thisisalotofreadingandyouh
Augusta State University - MGS - 8110
SolutionHomework #4MGS 8110Confidence Intervals, Probability functionsand PlottingREADING:ReviewthematerialinLecturesL00D,L01AandL01B.AlsoreviewthelasthalfofSOLNHW03.ppt.ReadChapters3through5(pages79through260)of Forecasting,TimeSeries,andRegressio
Augusta State University - MGS - 8110
SolutionHomework #5MGS 8110Regression AnalysisREADING:ReviewthematerialinLecturesL01A,L01BandL01D.ReadChapters3through5(pages79through260)of Forecasting,TimeSeries,andRegression .YouhaveuntiltheDropDatetocompletethisfirstreadingassignment.Solution
Augusta State University - MGS - 8110
SolutionHomework #6MGS 8110Regression & Prediction Confidence IntervalsREADING:ReviewthematerialinLecturesL01B,L01C(thruslide34)andL01D(slides33thru39).ReadChapters3through5(pages79through260)of Forecasting,TimeSeries,andRegression .Thisisalotofread
Augusta State University - MGS - 8110
SolutionHomework #7MGS 8110Multicollinearity & Model BuildingREADING:ReviewthematerialinLecturesL01C(thruslide34)andL01DReadChapters3through5(pages79through260)of Forecasting,TimeSeries,andRegression .ThisisalotofreadingandyouhaveuntiltheDropDateto
Augusta State University - MGS - 8110
SolutionHomework #8MGS 8110Dummy Variables & Residual AnalysisREADING:ReviewthematerialinLecturesL01D,L01E1,L0E2&L01E3.Yesyouarestillcontinuingyouroriginalreadingassignment.ReadChapters3through5(pages79through260)ofForecasting,TimeSeries,andRegress
Augusta State University - MGS - 8110
SolutionHomework #9MGS 8110Non-Linear RegressionREADING:ReviewthematerialinLecturesL01D,L01E1,L0E2&L01E3.Thismaybeyourlastchancetofinishyourreading.ReadChapters3through5(pages79through260)of Forecasting,TimeSeries,andRegression.Solution to Homewor
Augusta State University - MGS - 8110
SolutionHomework #10MGS 8110Non-linear RegressionA. Non-Linear RegressionLetthedependentvariablebeSalesandtheindependentvariablebeCustSize(ignorethefirstandlastcolumnsofdataintheDATAworksheet).Fittwodifferentregressionlinestothedata.Thefirstmodelca
Augusta State University - MGS - 8110
SolutionHomework #11MGS 8110Projection Forecasting with Seasonal EffectsPart A - Projection method for electricity usage. G e td a ta file Da ta HW1 1 .xls .T h e Me g a wa ttd a ta is g ive nb yq u a rte ro ve ra 4 y e a rP e rio d .1. Us ing P ro
Augusta State University - MGS - 8110
Dummy-Variable RegressionModel 1999 Prentice-Hall, Inc.Chap. 14 - 1Multiple RegressionModelsMultipleRegressionModelsLinearLinearPolyNomial 1999 Prentice-Hall, Inc.DummyVariableSquareRootNonLinearInteractionLogReciprocalExponentialCha
Augusta State University - MGS - 8110
Archana Kath##A#r#c#h#a#n#a# #K#a#t#h#?b#)b#9#
Augusta State University - MGS - 8110
MGS 8110Summer 2011Home Work #1READING:Review the material inLecture s L00A, L00D, L00E and L00I.Read Chapter s 2 ofthe textbook.Read Chapter s 3 through 5. This is a lotofreading and you have 5 (to 7) week s toco m pl et e this firstreading assign
Augusta State University - MGS - 8110
MGS 8110Summer 2011Home Work #2READING:ReviewthematerialinLecturesL01A,L01B,L00F,L00L,L01A&L01B.ReadChapters3through5(pages79through260)ofForecasting,TimeSeries,andRegression.Thisisalotofreadingandyouhave3weekstocompletethisfirstreadingassignment.Pl
Augusta State University - MGS - 8110
MGS 8110Summer 2011Home Work #3READING:Review the material inLecture s L00C, L00E, L01Z(skim), L01CL, L01D1 and L01D2. Read Chapter s 3 through 5 (pag e s 79 through 260) of Tim e S erie s , and Regr e s si o n lotofreading and youFore c a sting,.T
Augusta State University - MGS - 8110
MGS 8110Summer 2011Home Work #3READING:Review the material inLecture s L00C, L00E, L01Z(skim), L01CL, L01D1 and L01D2. Read Chapter s 3 through 5 (pag e s 79 through 260) of Tim e S erie s , and Regr e s si o n lotofreading and youFore c a sting,.T
Augusta State University - MGS - 8110
MGS 8110Summer 2011Home Work #4READING:ReviewthematerialinLecturesL01E1,L01E2&L01E3.ContinuetoreadChapters3through5(pages79through260)ofForecasting,TimeSeries,andRegression.EXERCISESReviewtheAnswerSheetbeforedoinganycalculationssothatyouknowwhatyou
Augusta State University - MGS - 8110
MGS 8110Summer 2011Home Work #5READING:ReviewthematerialinLecturesL01FandL01H.SkimL01GandL01I.ContinuetoreadChapters3through5(pages79through260)ofForecasting,TimeSeries,andRegression.Mid-term ExamTheduedateforthemidtermexamhasbeenchangedtoJuly20th(
Augusta State University - MGS - 8110
Goal Seek &Data/TableCommandsMGS 8110Regression Analysis and ForecastingObjective of module Learnhowtocreatehorizontal,1dimensionalsensitivityanalysistables. Learnhowtocreatevertical,1dimensionalsensitivityanalysistables. Learnhowtocreate2dimens
Augusta State University - MGS - 8110
SOLVER(Excel Add-In)MGS 8110Regression & ForecastingUses of SOLVER1 .S o lvin g a s e to fs im u lta ne o u s e q u a tio n s .2 .O p tim izin g a n e q ua tio n(m a xim ize o rm in im ize ) .3 .O p tim izin g a n e q u a tio n s u b je c tto a s e
Augusta State University - MGS - 8110
Pivot TablesMBA 7020Business AnalysisNo tre vie we d inDe c is io n Mo d e lin g with Mic ro s o ftExc e lObjective of module LearnhowtoaccessthePivotTablecommand. Learnsomeofthebasicformattingprocedures. Realizethepotentialofthiscommandinanalyzin
Augusta State University - MGS - 8110
RegressionAnalysisReference TutorialLINEST function in ExcelObjectives of moduleBeawareoftheexistenceofRegressionfunctionsinExcel:INTERCEPT,SLOPE&RSQ.BeawareoftheexistenceoftheLINESTinExceltodoregression.PracticeusingRegressionfunctionsandLINEST.
Augusta State University - MGS - 8110
IF CommandsMGS 8110Regression Analysis & ForecastingObjective of module LearntherulesforusingIFstatements. PracticeusingIFstatementsL00I MGS 8110 - IF statements2Need for IF Statements Providesthecapabilitytomodifythecalculationprocedures.Curren
Augusta State University - MGS - 8110
HistogramsMGS 8110Regression & ForecastingObjective of module Learnhowtoderiveahistogramfromaseriesofdata. Practicederivingandinterpretinghistograms.L00H MGS 8110 - Histograms20.40.410.420.430.440.450.460.470.480.490.50.510