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Accounting (Bus.) 302
Intermediate Accounting 2
Fall, 2009
Test 2
Name ________________________
Student #_______________________
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Problem 1 Bonds and Notes Payable
Part 1 Bonds
On 1/1/x2, the ABC company issued a bond with a $300,000 face value ($1,000 face
value per bond). The bond has a nominal interest rate of 6% and a five year term. The
bond pays interest at 12/31 of each year.
A: Assume that the bond has a yield rate of 5%. Please calculate/provide:
1) The price of the bond.
2) The interest expense for the year x3.
3) The carrying value at 12/31/x4
B: Assume that the bond has a yield rate of 7%. Please calculate/provide:
4) The price of the bond.
5) The interest expense for the year x2.
6) The carrying value at 12/31/x3
C: Assume the 7% scenario in “A” above. Provide the entries to record the issuance of
the bond and first two annual interest payments.
D. Assume the 5% scenario in “A” above. Provide the entries to record the issuance of
the bond and first two annual interest payments. Assume that bond is called at 98 at
the end of the second year. Provide the entry to record the sale of the bond.
Part 2: Bond Conversion
Consider the 7% (B) scenario above. Assume that on June 1, 19x3 all of the bonds are
converted into shares of the company’s $10 par common stock. Each bond is convertible
into 3 shares of stock. Provide the entries to:
1) Record the payment of interest to bondholders on 6/1/x3.
2) Record the conversion of the bonds into common stock.
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Problem 2: Shareholders’ Equity
Camby Corporation's balance sheet reported the following shareholders equity at 1/1/x1:
Capital stock outstanding, 5,000 shares, par $30 per share $150,000
Paid-in capital in excess of par 80,000
Retained earnings 100,000
The following transactions occurred during year x1:
(a) Issued 5,000 shares of common stock at $50 per share.
(b) Declared a 10% stock dividend. The market value of was $75 per share.
(c) Issued the shares in the stock dividend.
(d) Purchased 100 shares of capital stock to be held as treasury stock, paying $60 per
share.
(e) Sold 70 of the shares of treasury stock at $65 per share.
(f) Sold the 30 remaining shares of treasury stock at $59 per share.
(g) Declared a .25 per share dividend on outstanding shares of common stock
(h) Declared a 2-1 stock split.
Instructions
A. Prepare the journal entries for these transactions.
B. Prepare a basic shareholders equity section, in good form, after considering the
transactions provided above.
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Problem 3: Stock Options.
Prepare the necessary entries from 1/1/03-2/1/05 for the following events using the fair
value method. If no entry is needed, write "No Entry Necessary."
1. On 1/1/03, the stockholders adopted a stock option plan for top executives whereby
each might receive rights to purchase up to 10,000 shares of common stock at $30 per
share. The par value is $10 per share.
2. On 1/1/03, options were granted to each of five executives to purchase 10,000 shares.
The options were non-transferable and the executive had to remain an employee of
the company to exercise the option. The options expire on 1/1/05. It is assumed that
the options were for services performed equally in 2003 and 2004. The Black-Scholes
option pricing model determines total compensation expense to be $1,100,000.
3. At 2/1/05, three executives exercised their options. The fourth executive chose not to
exercise his options, which therefore were forfeited.
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Problem 4—Earnings per share.
ABC Corp. had $1,200,000 net income in 2004. On January 1, 2004 there were 300,000 shares of
common stock outstanding. There are 50,000 options to buy common stock at $30 a share
outstanding. The market price of the common stock averaged $40 during 2004. The tax rate is
30%.
During 2004, there were 40,000 shares of convertible preferred stock outstanding. The preferred
is $100 par, pays 7% a year dividend, and is convertible into 4 shares of common stock.
Birney issued $3,400,000 of 6% convertible bonds at face value during 2003. Each
$1,000 bond is convertible into 10 shares of common stock.
Instructions
Please Show following computations
1) Options
a) Numerator Effect
b) Denominator Effect
2) Preferred Stock
a) Numerator Effect
b) Denominator Effect
3) Convertible Bonds
a) Numerator Effect
b) Denominator Effect
4)
a) Basis EPS
b) Diluted EPS
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Business 302
Fall, 2008
Name ______________________ ID#______________________
Problem 1 Bonds and Notes Payable
A. 5% Yield Rate
1) The price of the bond. ____$312,988________________
` ` 5%
0 Cash Factor PV
1 $18,000 0.952381 $17,143
2 $18,000 0.907029 $16,327
3 $18,000 0.863838 $15,549
4 $18,000 0.822702 $14,809
5 $18,000 0.783526 $14,103
5 $300,000 0.783526 $235,058
Price 4.329477 $312,988
2) The interest expense for the year x3._ $15;649, $15,532, $15,408________
3) The carrying value at 12/31/x4._$308,171; $305,578; $302,857_________
Int. Exp Cash Change CV
0 $312,988
1 $15,649 18000 -$2,351 $310,638
2 $15,532 18000 -$2,468 $308,170
3 $15,408 18000 -$2,592 $305,578
4 $15,279 18000 -$2,721 $302,857
5 $15,143 18000 -$2,857 $300,000
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4) 9% Yield Rate
5) The price of the bond. ___$287,699_______________________
Price 7%
0 Cash Factor PV
1 $18,000 0.934579 $16,822
2 $18,000 0.873439 $15,722
3 $18,000 0.816298 $14,693
4 $18,000 0.762895 $13,732
5 $18,000 0.712986 $12,834
5 $300,000 0.712986 $213,896
Price 4.100197 $287,699
6) The interest expense for the year x3._$20,139; $20,289; $20,449______________
7) The carrying value at 12/31/x4.__$289,838; $292,127; $294,576______________
Int. Exp Cash Change CV
0 $287,699
1 $20,139 18000 $2,139 $289,838
2 $20,289 18000 $2,289 $292,127
3 $20,449 18000 $2,449 $294,576
4 $20,620 18000 $2,620 $297,196
5 $20,804 18000 $2,804 $300,000
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C: Assume the 5% scenario in “A” above. Provide the entries to record the issuance of
the bond and first two annual interest payments.
Issuance:
Cash 312,988
Premium 12,988
B/P 300,000
Interest Payment 1
Interest Expense 15,649
Premium 2,351
Cash 18,000
Interest Payment 2
Interest Expense 15,532
Premium 2,468
Cash 18,000
D. Assume the 9% scenario in “B” above. Provide the entries to record the issuance of
the bond and first two annual interest payments. Assume that bond is sold at 98 at the
end of the second year. Provide the entry to record the sale of the bond.
Issuance:
Cash 287,699
Discount 12,301
B/P 300,000
Interest Payment 1
Interest Expense 20,139
Discount 2,139
Cash 18,000
Interest Payment 2
Interest Expense 20,289
Discount 2,289
Cash 18,000
Sale of Bond at 98
B/P 300,000
Loss 1,873
Discount 7,873
Cash 294,000
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Part 2: Bond Conversion
1) Entry to Record payment of Interest to Bondholders
Interest Expense $8,521 (20449*5/12)
Discount on Bonds Payable $1,020 (2449*5/12)
Cash $7,500 (18000*5/12)
2) Entry to record conversion of Bonds
New Carrying Value
Bond Payable 300,000 +0 = $300,000
-Discount -7873+1020 = - $6,853
$293,147
Entry
Bond Payable $300,000
Discount $6,853
Common Stock $90,000 ($9,000)
APIC $203,147 ($284,147)
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Problem 2: Shareholders’ Equity
C. Prepare the journal entries for these transactions.
(a) Issued 5,000 Shares of common stock at $50 per share.
Cash $250,000
C/S $150,000
APIC $100,000
(b) Declared a 10% stock dividend. The market value of was $75 per share.
This would be for 1000 shares
RE $75,000
C/S Div. Dist. $30,000
APIC $45,000
(c) Issued the shares in the stock dividend.
C/S. Div. Dist. $30,000
C/S $30,000
(d) Purchased 100 shares of capital stock to be held as treasury stock, paying $60 per
share.
T/S $6,000
Cash $6,000
(e) Sold 70 of the shares of treasury stock at $65 per share.
Cash 4,550 (70*65)
TS 4,200
PIC TST 350
(f) Sold the 30 remaining shares of treasury stock at $59 per share.
Cash 1770 (30*59)
PIC-TST 30
TS 1800 (30*60)
(g) Declared a .25 per share dividend on outstanding shares of common stock.
(11,000 shares * .25)
RE $2,750
D/P $2,750
(h) 2-1 stock split
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B. Shareholders Equity Section of Balance Sheet
PIC
Common Stock (150+150+30) $330,000
APIC (80+100+45) $225,000
PIC-TST (350-30) $320
Total PIC $555,320
Retained Earnings $22,250
-TS -0-
Total SE $577,570
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Problem 3: Stock Options
1. 1/1/03
No entry necessary.
2. 2/1/03
No entry necessary.
12/31/03
Compensation Expense .................................................................. 550,000
Paid-in Capital—Stock Options ......................................... 550,000
12/31/04
Compensation Expense .................................................................. 550,000
Paid-in Capital—Stock Options ......................................... 550,000
3. 2/1/05
Cash (3 × 10,000 × $30) ................................................................ 900,000
Paid-in Capital—Stock Options ($1,100,000 × 4/5) ...................... 825,000
Common Stock ................................................................... 300,000
Paid-in Capital in Excess of Par ......................................... 1,425,000
Paid-in Capital—Stock Options ..................................................... 275,000
Paid-in Capital from Expired Stock Options ..................... 275,000
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Problem 4 EPS
1) Options
a) Numerator Effect ______0________
b) Denoninator Effect__12,500 Shares____________
Options
Proceeds 50000 30 1500000
Stock 40 37500
Shares Issued 50000
Treasury
Shares -37500
Den. Effect 12500
2) Preferred Stock
a) Numerator Effect____$280,000___________
Dividends
Avoided 4,000,000 7% $280,000
b) Denominator Effect___160,000__________
40,000 4 160,000
3) Convertible Bonds
a) Numerator Effect____$126,000____________
Interest
Avoided 3,000,000 0.06 180,000
3,000,000 0.4 -54,000
126,000
b) Denominator Effect____30,000 __________
3,000,000 1000 3000
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30.000
4) EPS
a) Basic EPS ___3.07__________
EPS = ($1,200,000 -$280,000)/(300,000) = 3.07
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b) Diluted EPS_____2.54______________
EPS = ($1,200,000 )/(300,000+12500+160,000) = 2.54
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