"Intermediate Accounting Stockholders Equity"
Intermediate Accounting II, ACCT 3322 Review Questions for Final Exam 1 1. On September 1, 2002, Spencer Company stock was selling for $60 per shares. The company’s capital accounts were as follows: Capital stock, par value, $25 50,000 shares issued and outstanding $1,250,000 Additional paid-in capital 800,000 Retained earings 3,200,000 Total stockholders' equity $5,250,000 On September 1, 2002, the company declared and distributed a 50% stock dividend and the par value of the stock remained at $25 per share. What would the balance be in the capital stock account after the dividend distribution? 2. The stockholders’ equity of Spencer Company at June 30, 2002 is as follows: Common stock, par value, $25, 400,000 shares authorized, 200,000 shares issued and outstanding $5,000,000 Additional paid-in capital 1,500,000 Retained earnings 6,000,000 Total stockholders' equity $12,500,000 On July 1, 2002, the board of directors of Spencer Company declared a 15% stock dividend on common stock, to be distributed on August 15, 2002. The market price of Spencer Company’s stock was $35 on July 1, 2002 and $40 on August 15, 2002. What is the amount of the debit to retained earnings as a result of the declaration and distribution of this stock dividend? 2 3. Spencer Company accepted a share purchase contract for 50,000 shares of $25 par value common stock on June 30, 2002 when the stock was selling for $50 per share. A 40% down payment was received with the remainder due in six months. On December 30, 2002, the balance of the share purchase contract is received and the shares are issued. Prepare the journal entries for June 30, 2002 and December 31, 2002. 4. On June 30, 2002 Spencer Company issued $50 par value common shares which was recorded in the accounting records as follows: ACCOUNT DEBIT CREDIT Cash 500,000 Common stock 200,000 Additional paid-in capital 300,000 The following transactions took place during the remainder of the year. On July 15 the company bought 100 shares of common stock as treasury stock at $150 On August 1 the company sold 30 shares of treasury stock at $140. On August 15 the company sold 30 shares of treasury stock at $155 On September 30 the company retired 40 shares of treasury stock Prepare the journal entries to record the treasury stock transactions that took place during 2002. 3 5. Spencer Company has $400,000 of 5% preferred stock and $600,000 of common stock outstanding, each having a par value of $10 per share. No dividends have been paid or declared during 2000 and 2001. As of December 31, 2002, the company has decided to distribute $300,000 in dividends. If the preferred stock is cumulative and fully participating how much will be distributed to the common stockholders and how much will be distributed to the preferred stockholders? 4 6. On November 1, 2002, Spencer Company issued at 102, three hundred of its 10%, $1,000 bonds. Attached to each bond was one detachable stock warrant entitling the holder to purchase 10 shares of Spencer Company’s common stock. On November 1, 2002 the market value of the bonds, without the stock warrants, was 99, and the market value of each stock warrant was $40. The amount of the proceeds from the issuance that should be accounted for as the initial carrying value of the bonds payable would be. 7. On January 1, 2002 Spencer Company had 300,000 shares of common stock issued and outstanding. On September 1, 2002 the company issued an additional 150,000 shares of common stock. Net income for the year ended December 31, 2002 was $500,000. What were the earnings per share for the year ended December 31, 2002? 5 8. On January 1, 2000, Spencer Company issued at par $400,000 10% convertible bonds. Each $1,000 bond is convertible into 40 shares of common stock. No bonds were converted during 2000. The company had 50,000 shares of common stock outstanding during 2000. Net income for the year was $160,000 and the income tax rate was 30%. Calculate Spencer Company’s diluted earnings per share for 2000. 9. During 1999 Spencer Co. purchased 1,000, $1,000, 9% bonds. The carrying value of the bonds at December 31, 2001 was $980,000. The bonds mature on March 1, 2006, and pay interest on March 1 and September 1. Spencer Co. sells 500 bonds on September 1, 2002, for $494,000, after the interest has been received. Spencer uses straight-line amortization. Calculate the gain on the sale of the bonds. 6 10. The following differences enter into the reconciliation of financial income and taxable income for Spencer Company for the year ended December 31, 2000. The enacted income tax rate is 30% for all years. Pretax accounting income $450,000 Excess tax depreciation (240,000) Litigation accrual 35,000 Unearned rent revenue 25,000 Interest earned on municipal bonds (10,000) Taxable income $260,000 The unearned revenue is deferred on the books but appropriately recognized in taxable income. Excess tax depreciation will reverse equally over a four-year period. It is estimated that the litigation liability will be paid in 2005. Rent revenue will be recognized during the last year of the lease which is 2005. Interest revenue from the Texas bonds is expected to be $10,000 each year until their maturity at the end of 2005. The balance in the deferred tax accounts at January 1, 2000 are as follows: DR (CR) Deferred tax assets $22,000 Deferred tax liabilities ($50,000) Prepare a schedule of deferred tax (assets) and liabilities for December 31, 2000. Prepare T-accounts to analyze the changes in deferred tax assets and deferred tax liabilities for the year of 2000. 7 Prepare the schedule of net deferred tax expense for the year ended December 31, 2000. Calculate income tax payable for the year ended December 31, 2000. Calculate income tax expense for the year ended December 31, 2000. Prepare the journal entry to record income tax expense, changes in deferred tax assets and liabilities and income tax payable. 8 11. On January 1, 2001, Spencer Company signs a 10-year noncancelable lease agreement to lease a warehouse from Texas Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. The agreement requires equal rental payments at the end of each year. The fair value of the building on January 1, 2001 is $900,000; however, the book value to Texas is $750,000. The building has an estimated economic life of 10 years, with no residual value. Spencer depreciates similar buildings on the straight-line method. At the termination of the lease, the title to the building will be transferred to the lessee. Spencer’s incremental borrowing rate is 11% per year. Texas Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Spencer Company. The yearly rental payment includes $3,000 of executory costs related to taxes on the property. Calculate the minimum annual lease payment? (Rounded to the nearest dollar.) What is the amount of the total annual lease payment? Calculate the depreciation expense that Spencer Company would record for the year ended December 31, 2001 (Rounded to the nearest dollar.) 9 12. Spencer Company enters into a lease agreement on June 30, 2001 to lease manufacturing equipment. The lease agreement has the following terms and conditions. The term of the noncancelable lease is 8 years, with no renewal option. An initial payment of $150,000 was paid at the signing of the lease. Annual payments of $150,000 are due on June 30th of each year. The normal retail price of the equipment is approximately $880,000. The equipment has an economic life of 10 years. The company normally depreciates manufacturing equipment on a straight-line basis. The lessee pays all executory costs. Spencer Company’s incremental borrowing rate is 12% per year. The lessee is aware that the lessor used an implicit rate of 10% in computing the lease payments. Calculate the present value of the minimum lease payments. Prepare a lease amortization schedule. Prepare the journal entries on June 30, 2001. Prepare the journal entries for December 31, 2001 10 13. Spencer Company purchased machinery that cost $135,000 on January 4, 2000. The entire cost was recorded as an expense. The machinery has a nine-year life and a $9,000 residual value. The error was discovered on December 20, 2002. Ignore income tax considerations. How will it be reported on Spencer Company’s income statement for the year ended December 31, 2002? The purchase of the machinery will not be reported on the income statement. Prepare the journal entries for December 20, 2002 and December 31, 2002. 14. The following are the comparative balance sheets for Spencer Company for the years ended December 31, 2002 and 2001. Addition information regarding the activities of the company during 2002 are as follows: (1) Net income for the year was $84,000. (2) Cash dividends amounting to 6% of the par value of the common stock were declared and paid. (3) Land was sold for $80,000. (4) The company sold equipment, which cost $150,000 and had accumulated depreciation of $60,000, for $70,000. 11 Spencer Company Cash Flow Worksheet December 31, 2002 2001 Cash $43,000 $24,000 Accounts receivable (net) 35,000 38,000 Inventory 114,000 82,000 Land 120,000 190,000 Building 200,000 200,000 Accumulated depreciation (50,000) (40,000) Equipment 1,030,000 600,000 Accumulated depreciation (118,000) (94,000) Accounts payable (115,000) (100,000) Bonds payable (320,000) 0 Capital stock, $10 par (750,000) (750,000) Retained earnings (189,000) (150,000) $0 $0 Calculate the cash provided by (used by) operating activities. Calculate the cash provided by (used by) investing activities. Calculate the cash provided by (used by) financing activities. 12 15. Pension data for the Ben Franklin Company include the following for the current calendar year: Discount rate 8% Expected return on plan assets 10% Actual return on plan assets 9% Service Cost $200,000 January 1: PBO 1,400,000 ABO 1,000,000 Plan assets 1,500,000 Amortization of prior service cost 20,000 Amortization of net gain 4,000 December 31: Cash contributions to pension fund 220,000 Benefit payments to retirees 240,000 Calculate pension expense for the year. Prepare the journal entry to record pension expense and funding for the year. 13 16. Carolina Consulting Company has a defined benefit pension plan. The following pension-related data were available for the current calendar year: PBO: Balance, January 1, 2003 240,000 Service cost 41,000 Interest cost 12,000 Gain from changes in accurial assumptions (5,000) Benefits paid to retirees (20,000) Balance, December 31, 2003 268,000 Plan Assets: Balance, January 1, 2003 250,000 Actual return 20,000 (expected return was $22,500) Contributions 35,000 Benefits paid (20,000) Balance, December 31, 2003 285,000 ABO, December 31, 2003 245,000 January 1, 2003 balances Prepaid (accrued) pension cost (6,000) Unrecognized prior service cost 4,000 (amortization $4,000 per year) Unrecognized net gain 40,000 (amortization if any, over 15 years) Calculate the 2003 pension expense. Show calculations. 14 Prepare the 2003 journal entry to record pension expense and funding. Prepare any 2003 journal entry necessary to record any additional pension liability needed. 17. The following is the pension spreadsheet for the current year for Sparky Corporation. Complete the following pension spreadsheet. Prior Prepaid Service Net (Gain) Pension (Accrued) PBO Plan Assets Cost Loss Expense Cash Cost Beginning balance $450,000 $60,000 $55,000 $165,000 Service cost ($85,000) Interest cost (25,000) Actual return on assets 52,000 (Gain) loss on assets 3,000 Amortization of: Prior service cost Net (gain) loss (1,000) Loss on PBO (65,000) Contributions to fund 40,000 Retiree benefits paid Journal entry Ending balance ($325,000) $54,000 $122,000 Prepare the journal entry to record pension expense for the year. 15 18. O'Brien Company provides postretirement health care benefits to employees who provide at least 10 years of service and reach the age of 65 while in service. On January 1 of the current year, the following plan-related data were available. Unrecognized transition obligation $40,000 APBO Balance 104,000 Fair value of plan assets 0 Average remaining service period to retirement 20 Average remaining service period to full eligibility 15 On January 1 of the current year, O'Brien amends the plan to provide dental benefits. The actuary determines that the cost of making the amendment increases the APBO by $10,000. Management chooses to amortize this amount on a straight-line basis. The service cost is $30,000. The appropriate interest rate is 10%. Calculate the postretirement benefit expense for the current year. 19. Cartel Products Inc. offers a restricted stock award plan to its vice presidents. On January 1, 2003, the corporation granted 12 million of its $1 par common shares, subject to forfeiture if employment is terminated within 2 years. The common shares have a market value of $6 per share on the date the award is granted. 16 Assume that no shares are forfeited. Determine the total compensation cost pertaining to the restricted shares. Prepare the appropriate journal entries related to the restricted stock through December 31, 2004. 20. Olde Corporation provides an executive stock option plan. Under the plan, the company granted options on January 1, 2003, that permit executives to acquire 2 million of the company's $1 par value common shares within the next five years, but not before December 31, 2004 (the vesting date). The exercise price is the market price of the shares on the date of the grant, $14 per share. The fair value of the options, estimated by an appropriate option pricing model, is $2 per option. No forfeitures are anticipated. Ignore taxes. Determine the total compensation cost pertaining to the options, assuming the fair value approach has been selected. Prepare the appropriate journal entry to record the award of the options on January 1, 2003. 17 Prepare the journal entry to record compensation expense on December 31, 2003. Prepare the journal entry to record compensation expense on December 31, 2004. 21. Spencer Company sells animal entertainment centers for $2,500 each. The entertainment centers carry a three year warranty covering parts and labor. The company has been in business 10 years and has an established stable pattern of warranty expense. On average the company incurs $50 in labor costs and $10 in parts for each entertainment center sold. During 2004 Spencer Company sold 500 animal entertainment centers and incurred warranty costs of $6,000 for labor and $1,200 for parts. On January 1, 2004 the balance in the “Estimated Liability under Warranties” account was $87,500. In the space provided prepare the journal entries required to record warranty expense and warranty costs incurred for 2004. Using the format provided prepare a T-Account analysis of the “Estimated Liability Under Warranties” account to determine the balance at year end. 18 22. On September 1, 2004, Spencer Company issued a $500,000, 9-month, non-interest- bearing note to the bank. Interest was discounted at a 14% discount rate. Prepare the appropriate journal entry for Spencer Company to record the issuance of the non-interest-bearing note. In the space provided determine the effective interest rate. 23. On March 1, 1999, Spencer Company issued 1,000, $1,000 9% bonds when the market interest rate was 10%. The bonds are for 10 years and pay interest on March 1 and September 1. Calculate the issue price of the bonds (rounded to the nearest dollar). Prepare an amortization schedule through March 1, 2002. 19 Prepare the journal entries to record the sale of the bonds. Prepare the journal entry to record interest expense, amortization of discount and payment of interest on September 1, 1999. Prepare the journal entry to record interest expense, amortization of discount and accrual of interest on December 31, 1999. On October 31, 2001, Spencer Company redeemed 500 bonds at 101. Prepare the journal entry to bring the accounting records up to the date of redemption. Prepare the October 31, 2001 journal entry to record the redemption of the bonds. 20