ACCT+2101+Quiz+6+V3+SOLUTION

ACCT+2101+Quiz+6+V3+SOLUTION - ACCT 2101 \L" Quiz #6...

Info iconThis preview shows pages 1–8. Sign up to view the full content.

View Full Document Right Arrow Icon
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 4
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 6
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 8
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: ACCT 2101 \L" Quiz #6 —- Version 3 Solution (MAKEUP QUIZ) Spring Semester, 2009 Name K623)” Wt‘i'ia gr‘ggoiing guideline— Section (please print clearly) Pledge: On my honor, I have neither given nor received any unauthorized help on this quiz. (signed) Instructions: 1. You may not ask questions during the quiz. However, all notes you write to the instructor will be read and considered during the grading process. 2. Please use your time wisely. Remember: Perfect answers are not required to get most of the points. 3. Only the approved calculators may be used during the quiz. 4. You must write legibly or your answers will not be graded. 5. Do NOT pull this quiz apart under any circumstances. 6. Make sure you have 7 numbered pages plus the two present value tables (without page numbers). 7. Good luck! Point Allocation: Problem 1: 3.6 Problem 2: 2.0 Problem 3: 1.4 Problem 4: fl TOTAL POINTS = points ACCT 2101 Quiz 6—3 Solution 1 of8 «W I,» “warm” N f {Ml parts @3, PROBLEM 1. a "Palfirb (“Baht ,m/"I W WWW.~WW‘NM_W_~W. On January 1, 2009, Hanson Corporation had the following stockholders’ equity accounts: Common Stock ($1 par value, 80,000 shares issued and outstanding) $ 80,000 Paid—in Capital in Excess of Far Value 1,500,000 Retained Earnings 1,620,000 REQUIRED: For each of the following events, record the necessary journal entry. Show your calculations for potential partial credit. Jan. 15 Declared a $050 cash dividend per share to stockholders of record on January 31, payable February 15. Retained Earnings 40,000 Dividends Payable 40,000 ($0.50 * 80,000 shares : $40,000) Feb. 15 Paid the dividend declared in January. Dividends Payable 40,000 Cash 40,000 Apr. 15 Declared a 10% stock dividend to stockholders of record on April 30, distributable May 15. On April 15, the market price of the stock was $17 per share. Retained Earnings 136,000 Common Stock (Dividend) Distributable 8,000 Paid in Capital — Stock Dividend 128,000 (80,000 * 10% = 8,000 shares *‘ $17 = $136,000) May 15 Issued the shares for the stock dividend declared on April 15. Common Stock (Dividend) Distributable 8,000 Common Stock 8,000 NOTE: Shares outstanding now = 80,000 + 8,000 = 88,000 ACCT 2101 Quiz 6—3 Solution 2 0f8 June 15 Declared a 4 0/0 stock dividend to stockholders of record on June 30, distributable July 15. On June 15, the market price of the stock was $16 per share. Retained Earnings 35,200 Common Stock (Dividend) Distributable 35,200 88,000 * 40% = 35,200 shares * $1 ar = $35,200) P July 15 Issued the shares for the stock dividend declared on June 15. Common Stock (Dividend) Distributable 35,200 Common Stock 35,200 NOTE: Shares outstanding now = 88,000 + 35,200 = 123,200 Aug. 15 Reacquired 3,000 shares of its own $1 par value stock, previously issued at $10, paying $20 per share in the market. Treasury Stock (3,000 ’* $20) 60,000 Cash 60,000 NOTE: Shares outstanding now = 123,200 — 3,000 = 120,200 Sept. 15 Reissued 1,000 of the shares purchased on August 15 receiving $22 per share. Cash (1,000 * $22) 22,000 Treasury Stock (1,000 * $20) 20,000 Paid-in Capital — Treasury Stock Trans 2,000 NOTE: Shares outstanding now = 120,200 + 1,000 = 121,200 Dec. 1 Declared a $0.60 per share cash dividend to stockholders of record on December 15, payable January 10, 2010. Retained Earnings (121,200 * $0.60) 72,720 Dividends Payable 72,720 ACCT 2101 Quiz 6—3 Solution 3 of8 PROBLEM 2. On January 2, 2009, the Turner Company issued $400,000 of 15—year bonds payable. The bonds carry a contract rate of interest of 16% paid semiannually. The market interest rate was 14% on the date of issuance. REQUIRED: (a) (b) ACCT 2101 Quiz 6-3 Solution Compute the market price of the bonds on the date of issuance. Show all work. Present Value of Principal: $400,000 "’ PV (i=7%, n=30) = $400,000 >*0.13137 = $ 52,548 1 P4- Present Value of Interest ($400,000 * 16% * 1/2 = $32,000): $32,000 * PVA (i=7%, n=30) = $32,000 * 12.40904 = 397,089 Price of Bond (Premium = $49,637) $ 449,637 Prepare the journal entry required on January 2, 2009, to record the bond issuance. Cash 449,637 400,000 49,637 Bonds Payable Premium on Bonds Payable Prepare the journal entry required on June 30, 2009, to record the first interest payment assuming straight—line amortization of any premium or discount. Bond Interest Expense ** 30,354.44 {3 77 3" pi” Premium on Bonds Payable * 1,654.56 Cash 32,000 * $49,637 / (15 * 12) = $275.76 per month amortization * 6 months = $1,654.56 ** $32,000 - $1,654.56 = $30,354.44 40f8 PROBLEM 3. Answer each of the following questions using complete sentences (a) (b) (C) A CCT 2101 Quiz 6—3 Solution (subject and predicate). What impact does a bond’s credit rating and its term—to~maturity have on its yield? Explain why. A bond’s credit rating determines the default risk component of the yield. That is, a better credit rating reduces the interest rate demanded by the market, and a lower credit rating increases the interest rate demanded by the market. A bond’s term-to-maturity also effects the default risk component of the yield. The longer the term, the greater the chance of default. Therefore, bonds with longer maturity dates have higher interest rates required by the market. Identify/explain two reasons that stock dividends are distributed. Four reasons that stock dividends are distributed were discussed in class (choose two): The corporation may desire a larger permanent capitalization. Stock dividends involve a transfer of amounts from retained earnings to paid—in capital. The market price of the stock may have risen above a desirable trading range. Stock dividends lower the market price since there are more shares outstanding representing the same ownership interest. The corporation may want to increase the number of stockholders. Decreasing the market price allows more participants in the ownership. The corporation may want to continue dividends but conserve cash. However, no one believes cash and stock dividends are equivalent distributions. (1) (2) (3) Identify/explain two advantages of the corporate form of business. Five advantages of the corporate form of business were discussed in class (choose two): (1) Corporations provide easy transfer of ownership though stock. (2) Corporations limit the liability of the individual owners. (3) Corporations are considered to have a continuous existence. (4) Corporations often hire professional management rather than depending on the expertise of the owners. (5) Corporations are legally separate from their owners ~ there is no mutual agency. 50f8 '59 (d) Describe two reasons that corporations reacquire their own outstanding common stock. Four reasons that corporations reacquire their own outstanding common stock were identified in class (name two): /’ (1) For issuance to employees: As a result of the pre-emptive right attached to most stock, companies must repurchase their own shares in the market to fund employee stock ownership plans or to distribute to executives as part of their compensation. (2) To reissue the stock later at a higher price: If the company believes their stock is trading at a price lower than its true value, they can repurchase their shares and reissue them later. If they sell at a higher price later, then the company’s value is increased through the additional paid—in capital. (3) To reduce the number of shares outstanding: Decreasing the number of shares outstanding will increase the earnings per share (EPS) of the remaining shareholders. In addition, share reduction generally increases the market value of the remaining shares as a result of the increase in EPS. (4) To avoid an outside takeover: If the company repurchases shares from disgruntled shareholders rather than allowing them to sell their shares to another company, they may be able to avoid an unwelcome (hostile) takeover by another company. ACC'I'ZIOI Quiz 6-3 Solution, 6 0f8 PROBLEM 4. REQUIRED: Use the comparative balance sheets and other information for the Bobo Company to prepare a Statement of Cash Flows using the indirect method. BOBO COMPANY Comparative Balance Sheets December 31 Assets: 2098 M Change Cash $ 50,000 $ 57,000 (7,000) Accounts receivable 77,000 84,000 (7,000) Inventory 192,000 120,000 72,000 Prepaid expenses 12,140 16,540 (4,400) Land 100,000 150,000 (50,000) Building 250,000 250,000 -0— Accumulated dcprec—building (70,000) (50,000) 20,000 Equipment 215,000 175,000 40,000 Accumulated deprec—equipment (70,000) (42,000) 28,000 Total $ 756,140 g 760,540 Liabilities 8: Stockholders’ Equity: Accounts payable $ 43,000 $ 25,000 18,000 Salaries payable 15,000 20,000 (5,000) Bonds payable 235,000 265,000 (30,000) Common stock, $1 par 280,000 250,000 30,000 Retained earnings 183,140 200,540 (17,400) Total 0,756 140 $760,540 Additional information: 1. Land was sold for cash at a gain of $22,000. 2. Cash dividends of $69,290 were paid. 3. Equipment was purchased for $80,000 cash. In addition, equipment costing $40,000 with a book value of $23,000 was sold for $20,000 cash. 4. Bonds with a face value by of $30,000 were redeemed for cash. ACCT 2101 Quiz 6-3 Solution 7 0f8 PLEASE NOTE: The direction of each item (cash inflow versus cash outflow) is very important. Please clearly mark cash outflows with either parentheses or brackets” BOBO COMPANY Statement of Cash Flows For the Year Ended December 31, 2008 Cash flows from operating activities Net income .......................................................... .. $ 51,890 fa Adjustments to reconcile net income to net cash provided by operating activities Depreciation expense .................................. .. $ 65,000 25 '2 Gain on sale of land .................................... .. (22,000) Loss on sale of equipment ........................... .. 3,000 Decrease in accounts receivable ................. .. 7,000 ~13 “6“ increase in inventory .................................... .. (72,000) Decrease in prepaid expenses ..................... .. 4,400 increase in accounts payable ....................... .. 18,000 Decrease in salaries payable ...................... .. (5,000) (1,600) Net cash provided by operating activities ................................................... .. $ 50,290 g" Cash flows from investing activities Sale of land .......................................................... .. 72,000 Purchase of equipment ........................................ .. (80,000) §~l Sale of equipment ................................................ .. 20,000 {15 Net cash provided by investing activities ...... .. 12,000 (2" Cash flows from financing activities Redemption of bonds ........................................... .. (30,000) {it-3 Issuance of common stock ................................. .. 30,000 g. 2. Payment of cash dividends .................................. .. (69,290) (is Net cash used by financing activities ........... .. (69,290) Net decrease in cash ................................................... .. (7,000) aim Cash at beginning of period ......................................... .. 57,000 Cash at end of period .................................................. .. § 50,000) NCI’FQ: *3 (OmPifi—Lfiiij LCDth- ACCT 2101 Quiz, 63 Solution 8 0f8 ...
View Full Document

This note was uploaded on 02/08/2011 for the course ACCT 2101 taught by Professor Turner during the Spring '08 term at Georgia Tech.

Page1 / 8

ACCT+2101+Quiz+6+V3+SOLUTION - ACCT 2101 \L" Quiz #6...

This preview shows document pages 1 - 8. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online