accounting for lease mdash lessee and lessor astle manufacturing company manufacture 692687

Aug 30, 2021 | Uncategorized

Accounting for Lease—Lessee and Lessor

Astle Manufacturing Company manufactures and leases a variety of items. On January 2, 2008, Astle leased a piece of equipment to Haws Industries Co. The lease is for six years for an annual amount of $33,500, payable in advance. The lease payment includes executory costs of $1,500 per year. The equipment has an estimated useful life of nine years, and it was manufactured by Astle at a cost of $120,000. It is estimated that the equipment will have a residual value of $60,000 at the end of the 6 year lease term. There is no provision for purchase or renewal by Haws at the end of the lease term. However, a third party has guaranteed the residual value of $60,000. The equipment has a fair market value at the lease inception of $187,176. The implicit rate of interest in the contract is 10%, the same rate at which Haws can borrow money at its bank. All lease payments after the first one are made on December 31 of each year. Both companies use the straight line method of depreciation.

Instructions:

1. Give all the entries relating to the lease on the books of the lessor and lessee for 2008.

2. Show how the lease would appear on the balance sheet of Astle Manufacturing Company and Haws Industries Co. (if applicable) as of December 31, 2008.

3. Assume that Astle sold the equipment at the end of the 6 year lease for $85,000. Give the entry to record the sale, assuming that all lease entries have been properly made.

cash flow treatment of capital lease mdash lessor the following information relates 692688

Aug 30, 2021 | Uncategorized

Cash Flow Treatment of Capital Lease—Lessor

The following information relates to a capital lease between Bradford Electric Co. (lessee) and Widstoe Manufacturing Inc. (lessor). The lease term began on January 1, 2008.Widstoe recorded the lease as a sale and made the following entries related to the lease during 2008. Assume this was the only lease Widstoe had during the year.

Instructions:

1. Prepare the partial Operating Activities section of the statement of cash flows for 2008 for Widstoe Manufacturing Inc. under the indirect method. Widstoe reported net income of $148,504 inclusive of the lease revenue in the preceding entries.

2. Prepare the partial Operating Activities section of the statement of cash flows for 2008 for Widstoe Manufacturing Inc. under the direct method. Assume that cash provided by operating activities exclusive of the lease transactions is $124,262.

disclosure requirements mdash operating leases jaquar mining and manufacturing compa 692689

Aug 30, 2021 | Uncategorized

Disclosure Requirements—Operating Leases

Jaquar Mining and Manufacturing Company leases from Emory Leasing Company three machines under the following terms.

• Machine 1: Lease period—10 years, beginning April 1, 2002; lease payment—$18,000 per year, payable in advance.

• Machine 2: Lease period—10 years, beginning July 1, 2006; lease payment—$30,000 per year, payable in advance.

• Machine 3:Lease period—15 years, beginning January 1,2007;lease payment—$12,500 per year, payable in advance. All of the leases are classified as operating leases.

Instructions: Prepare the note to the 2008 financial statements that would be required to disclose the lease commitments of Jaquar Mining and Manufacturing Company. Jaquar uses the calendar year as its accounting period.

capitalizing the value of operating leases the following information comes from the 692690

Aug 30, 2021 | Uncategorized

Capitalizing the Value of Operating Leases

The following information comes from the financial statements of Travis Campbell Company.

In addition, Travis Campbell has a large number of operating leases. The payments on these operating leases total $30,000 per year for the next 10 years. All of these lease payments occur at the end of the year. The incremental borrowing rate of Travis Campbell Company is 10%. This is also the rate implicit in all of the leases that Travis Campbell signs.

Instructions:

1. Compute the following ratio values:

(a) Debt ratio (total liabilities/total assets).

(b) Debt ratio, assuming that Travis Campbell’s operating leases are accounted for as capital leases.

(c) Asset turnover (sales/total assets).

(d) Asset turnover, assuming that Travis Campbell’s operating leases are accounted for as capital leases.

2. Briefly describe how the accounting for assets used under operating leases distorts the values of financial ratios.

sample cpa exam questions 1 in a sale leaseback transaction a gain resulting from th 692691

Aug 30, 2021 | Uncategorized

Sample CPA Exam Questions

1. In a sale leaseback transaction, a gain resulting from the sale should be deferred at the time of the sale leaseback and subsequently amortized when:

I. The seller lessee has transferred substantially all the risks of ownership.

II. The seller lessee retains the right to substantially all of the remaining use of the property.

(a) I only.

(b) II only.

(c) Both I and II.

(d) Neither I nor II.

2. At the inception of a capital lease, the guaranteed residual value should be:

(a) Included as part of minimum lease payments at present value.

(b) Included as part of minimum lease payments at future value.

(c) Included as part of minimum lease payments only to the extent that guaranteed residual value is expected to exceed estimated residual value.

(d) Excluded from minimum lease payments.

sale leaseback of a building on january 3 2008 aspen inc sold a building with a book 692692

Aug 30, 2021 | Uncategorized

Sale Leaseback of a Building

On January 3, 2008,Aspen Inc. sold a building with a book value of $2,100,000 to Spruce Industries for $2,025,040. Aspen immediately entered into a leasing agreement wherein Aspen would lease the building back for an annual payment of $320,000. The term of the lease is 10 years, the expected remaining useful life of the building. The first annual lease payment is to be made immediately, and future payments will be made on January 1 of each succeeding year. Spruce’s implicit interest rate is 12%.

Instructions:

1. Prepare the journal entries that both Aspen and Spruce should make on January 3, 2008, relating to this sale leaseback transaction.

2. Prepare the journal entries that both parties should make at the end of 2008 to accrue interest and to amortize the leased building. (Assume a salvage value of $0 and use of the straight line method.)

how should the lease be recorded louise corporation entered into a leasing arrangeme 692693

Aug 30, 2021 | Uncategorized

How Should the Lease Be Recorded?

Louise Corporation entered into a leasing arrangement with Wilder Leasing Corporation for a certain machine. Wilder’s primary business is leasing; it is not a manufacturer or dealer.

Louise will lease the machine for a period of three years, which is 50% of the machine’s economic life. Wilder will take possession of the machine at the end of the initial 3 year lease. Louise does not guarantee any residual value for the machine. Louise’s incremental borrowing rate is 10%, and the implicit rate in the lease is 81⁄2%. Louise has no way of knowing the implicit rate used by Wilder. Using either rate, the present value of the minimum lease payments is between 90% and 100% of the fair value of the machine at the date of the lease agreement. Louise has agreed to pay all executory costs directly, and no allowance for these costs is included in the lease payments. Wilder is reasonably certain that Louise will pay all lease payments, and because Louise has agreed to pay all executory costs, there are no important uncertainties regarding costs to be incurred by Wilder.

1. With respect to Louise (the lessee), answer the following.

(a) What type of lease has been entered into? Explain the reason for your answer.

(b) How should Louise compute the appropriate amount to be recorded for the lease or asset acquired?

(c) What accounts will be created or affected by this transaction, and how will the lease or asset and other costs related to the transaction be matched with earnings?

(d) What disclosures must Louise make regarding this lease or asset?

2. With respect to Wilder (the lessor), answer the following:

(a) What type of leasing arrangement has been entered into? Explain the reason for your answer.

(b) How should this lease be recorded by Wilder, and how are the appropriate amounts determined?

(c) How should Wilder determine the appropriate amount of earnings to be recognized from each lease payment?

(d) What disclosures must Wilder make regarding this lease?

should we buy or lease meeker machine and die company has learned that a sophisticat 692694

Aug 30, 2021 | Uncategorized

Should We Buy or Lease?

Meeker Machine and Die Company has learned that a sophisticated piece of computer operated machinery is available to either buy or rent. The machinery will result in three employees being replaced, and quality of the output has been tested to be superior in every demonstration. There is no doubt that this machinery represents the latest in technology; however, new inventions and research make it difficult to estimate when the machinery will be made obsolete by new technology. The physical life expectancy of the machine is 10 years; however, the estimated economic life is between two and five years. Meeker has a debt to equity ratio of 0.75. If the machine is purchased and the minimum down payment is made, the outstanding loan balance on the machine will cause the debtto equity ratio to increase to 1.1. The monthly payments if the machine is purchased are 20% lower than the lease payments if it is leased. The incremental borrowing rate for Meeker is 11%. The rate implicit in the lease is 12%. What factors should Meeker consider in deciding how to finance the acquisition of the machine?

how should the leases be classified and accounted for on january 1 toronto company a 692695

Aug 30, 2021 | Uncategorized

How Should the Leases Be Classified and Accounted for?

On January 1,Toronto Company, a lessee, entered into three no cancelable leases for new equipment, lease J, lease K, and lease L. None of the three leases transfers ownership of the equipment to Toronto at the end of the lease term. For each of the three leases, the present value at the beginning of the lease term of the minimum lease payments is 75% of the fair value of the equipment to the lessor at the inception of the lease. This excludes that portion of the payments representing executory costs, such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon. The following information is peculiar to each lease:

(a) Lease J does not contain a bargain purchase option; the lease term is equal to 80% of the estimated economic life of the equipment.

(b) Lease K contains a bargain purchase option; the lease term is equal to 50% of the estimated economic life of the equipment.

(c) Lease L does not contain a bargain purchase option; the lease term is equal to 50% of the estimated economic life of the equipment.

1. How should Toronto Company classify each of the three leases and why? Discuss the rationale for your answer.

2. What amount, if any, should Toronto record as a liability at the inception of the lease for each of the three leases?

3. Assuming that the minimum lease payments are made on a straight line basis, how should Toronto record each minimum lease payment for each of the three leases?

more leases mean lower profits digital x ray inc has introduced a new line of equipm 692696

Aug 30, 2021 | Uncategorized

More Leases Mean Lower Profits

Digital X Ray, Inc., has introduced a new line of equipment that may revolutionize the medical profession. Because of the new technology involved, potential users of the equipment are reluctant to purchase the equipment, but they are willing to enter into a lease arrangement as long as they can classify the lease as an operating lease. The new equipment will replace equipment that Digital X Ray, Inc., has been selling in the past. It is estimated that a 25% loss of actual equipment sales will occur as a result of the leasing policy for the new equipment. Management must decide how to structure the leases so that they can treat them as operating leases. Some members of management want to structure the leases so that Digital X Ray, Inc., as lessor, can classify the lease as a sales type lease and thus avoid a further reduction of income. Others believe that they should treat the leases as operating leases and minimize the income tax liability in the short term. They are uncertain, however, as to how the financial statements would be affected under these two different approaches. They also are uncertain as to how leases could be structured to permit the lessee to treat the lease as an operating lease and the lessor to treat it as a sales type lease. You are asked to respond to their questions.

structuring a lease to avoid liability recognition johnson pharmaceuticals needs cas 692697

Aug 30, 2021 | Uncategorized

Structuring a Lease to Avoid Liability Recognition

Johnson Pharmaceuticals needs cash. One option being considered by the board of directors is to sell the plant facilities to a group of venture capitalists and then lease the facilities back for a long term period with the option of repurchasing the plant facilities at the end of the lease. The chairman has commented that this option will provide Johnson Pharmaceuticals the needed cash but will result in a large lease liability on the balance sheet. As the chief financial officer, you comment that if the company carefully structures the terms of the lease agreement, it may be able to avoid recognizing the lease liability. The chairman has asked you to prepare a memo discussing the specific ways in which a lease agreement can be structured to avoid recognizing the liability on the balance sheet.

recognizing a profit from leasing in june 1988 british amp commonwealth plc b amp c 692698

Aug 30, 2021 | Uncategorized

Recognizing a Profit from Leasing

In June 1988, British & Commonwealth PLC (B&C) acquired Atlantic Computers, the world’s third largest computer leasing company. In April 1990, B&C placed Atlantic Computers into administrative receivership and wrote off its $900 million investment in the company. The reason for the write off? Atlantic’s method of accounting for leases. Atlantic had developed what was called a “flexlease,” which allowed customers to upgrade their computers at specified points during the lease period. The flexlease involved two separate contracts, one with a financing institution and the other with Atlantic. When customers elected to exercise their flex options, Atlantic would take back the equipment, pay off the remainder of the contract to the lender, and sell the equipment in the used computer market. Even though the original lease arrangement did not meet the criteria for a sales type lease, Atlantic was estimating the profits to be made from the sale of those computers that would be returned, assuming customers exercised their flex options, and was recognizing these sales profits when the original lease contract was signed. 1. Is there anything wrong with Atlantic’s method of accounting for the profits to be made on the “flexleases”?

2. When would be the most appropriate time for Atlantic to recognize profits from the sale of a computer that was returned under a flex option?

3. Why would British & Commonwealth PLC get rid of Atlantic rather than simply change the accounting practice?

sales type lease with an unguaranteed residual value refer to practice 15 16 assume 692648

Aug 30, 2021 | Uncategorized

Sales Type Lease with an Unguaranteed Residual Value

Refer to Practice 15 16. Assume the same facts except that the $500 bargain purchase option is instead a $500 unguaranteed residual value. Make the journal entries necessary on the books of the lessor company to record (1) the lease signing (including receipt of the first lease payment) and (2) the recognition of interest revenue at the end of the first year.

Practice 15 16

Sales Type Lease with a Bargain Purchase Option

On January 1, the lessor company purchased a piece of equipment for $6,000 as inventory. The lessor company immediately leased the equipment under a sales type lease agreement. The lease calls for the lessor company to receive five annual lease payments of $2,500 per year, to be received at the beginning of the year. In addition to the five annual payments of $2,500 at the beginning of each year, the lessor is to receive a bargain purchase option amount of $500 at the end of five years. The interest rate implicit in the lease is 12%. Make the journal entries necessary on the books of the lessor company to record (1) the lease signing (including receipt of the first lease payment) and (2) the recognition of interest revenue at the end of the first year.

third party guarantees of residual value on january 1 the lessor company purchased a 692649

Aug 30, 2021 | Uncategorized

Third Party Guarantees of Residual Value

On January 1, the lessor company purchased a piece of equipment for $6,000 as inventory. The lessor company immediately leased the equipment under a sales type lease agreement. The lease calls for the lessor company to receive five annual lease payments of $2,500 per year, to be received at the beginning of the year. In addition to the five annual payments of $2,500 at the beginning of each year, the lessor is to receive a guaranteed residual value of $3,000 at the end of five years. The fair value on the date of the lease signing is equal to the present value of the lessor’s minimum payments; the interest rate implicit in the lease is 10%. The equipment has a useful life of eight years, there is no bargain purchase option, and the title does not transfer at the end of the lease term. Also, the residual value is guaranteed by a third party insurance company, not by the lessee company. Make the journal entries necessary to record the lease signing, including the first lease payment, (1) on the books of the lessor company and (2) on the books of the lessee company.

selling a leased asset during the lease term mdash lessor on december 31 of year 1 t 692650

Aug 30, 2021 | Uncategorized

Selling a Leased Asset During the Lease Term—Lessor

On December 31 of Year 1, the company, a lessor, sold some machinery that it had been leasing under a direct financing lease arrangement. On January 1 of Year 1 (after receipt of the lease payment for the year), the following account balances were associated with the lease:

The interest rate implicit in the lease is 10%. The leased machinery is sold for $65,000 cash. Make the journal entry or entries necessary on the books of the lessor to record this sale.

leases on a statement of cash flows mdash lessor on january 1 the lessor company pur 692651

Aug 30, 2021 | Uncategorized

Leases on a Statement of Cash Flows—Lessor

On January 1, the lessor company purchased some equipment (for cash) that the company then immediately leased. The lease contract calls for the receipt of $3,000 payments at the end of each year for 10 years. The residual value of the equipment at the end of the 10 year lease term is expected to be $4,000. The rate implicit in the lease is 12%. Except for lease related items, there were no changes in current operating assets or liabilities during the year; no purchases or sales of property, plant, or equipment; and no dividends paid, stock issued, or loans obtained or repaid. The equipment has a total useful life of 15 years with no salvage value. Prepare a complete statement of cash flows for the lessor using the indirect method of reporting operating cash flow assuming that the lease is accounted for as (1) an operating lease (net income was $20,000) and (2) a direct financing lease (net income was $20,405).

criteria for capitalizing leases atwater manufacturing co leases its equipment from 692654

Aug 30, 2021 | Uncategorized

Criteria for Capitalizing Leases

Atwater Manufacturing Co. leases its equipment from Westside Leasing Company. In each of the following cases, assuming none of the other criteria for capitalizing leases are met, determine whether the lease would be a capital lease or an operating lease under FASB

Statement No. 13.Your decision is to be based only on the terms presented, considering each case independently of the others.

(a) At the end of the lease term, the market value of the equipment is expected to be $20,000. Atwater has the option of purchasing it for $5,000.

(b) The fair market value of the equipment is $75,000. The present value of the lease payments is $67,000 (excluding any executory costs).

(c) Ownership of the property automatically passes to Atwater at the end of the lease term.

(d) The economic life of the equipment is 12 years. The lease term is eight years.

(e) The lease requires payments of $9,000 per year in advance plus executory costs of $500 per year. The lease period is three years, and Atwater’s incremental borrowing rate is 12%. The fair market value of the equipment is $28,000.

(f) The lease requires payments of $6,000 per year in advance, which includes executor costs of $500 per year. The lease period is three years, and Atwater’s incremental borrowing rate is 10%. The fair market value of the equipment is $16,650.

entries for operating lease mdash lessee alma inc leases some of the equipment it us 692656

Aug 30, 2021 | Uncategorized

Entries for Operating Lease—Lessee

Alma Inc. leases some of the equipment it uses. The lease term is five years, and the lease payments are to be made in advance as shown in the following schedule.

The equipment is to be used evenly over the 5 year period. For each of the five years, give the entry that should be made at the time the lease payment is made to allocate the proper share of rent expense to each period. The lease is classified as an operating lease by Alma Inc.

entries for lease mdash lessee bingham smelting company entered into a 15 year no ca 692657

Aug 30, 2021 | Uncategorized

Entries for Lease—Lessee

Bingham Smelting Company entered into a 15 year no cancelable lease beginning January 1, 2008, for equipment to use in its smelting operations. The term of the lease is the same as the expected economic life of the equipment. Bingham uses straight line depreciation for all plant assets. The provisions of the lease call for annual payments of $290,000 in advance plus $20,000 per year to cover executory costs, such as taxes and insurance, for the 15 year period of the lease. At the end of the 15 years, the equipment is expected to be scrapped. The incremental borrowing rate of Bingham is 10%. The lessor’s computed implicit interest rate is unknown to Bingham. Record the lease on the books of Bingham and give all the entries necessary to record the lease for its first year plus the entry to record the second lease payment on December 31, 2008. (Round to the nearest dollar.)

entries for lease mdash lessee on january 2 2008 jacques company entered into a no c 692658

Aug 30, 2021 | Uncategorized

Entries for Lease—Lessee

On January 2, 2008, Jacques Company entered into a no cancelable lease for new equipment. The equipment was built to Jacques Company’s specifications and is in an area in which rental to another lessee would be difficult. Rental payments are $300,000 a year for 10 years, payable in advance. The equipment has an estimated economic life of 20 years. The taxes, maintenance, and insurance are to be paid directly by Jacques Company, and the title to the equipment is to be transferred to Jacques at the end of the lease term. Assume the cost of borrowing funds for this type of an asset by Jacques Company is 12%.

1. Give the entry on Jacques’ books that should be made at the inception of the lease.

2. Give the entries for 2008 and 2009, assuming the second payment and subsequent payments are made on December 31 and assuming double declining balance amortization.

schedule of lease payments wallin construction co is leasing equipment from astro in 692659

Aug 30, 2021 | Uncategorized

Schedule of Lease Payments

Wallin Construction Co. is leasing equipment from Astro Inc. The lease calls for payments of $75,000 a year plus $5,000 a year executory costs for five years. The first payment is due on January 1, 2008, when the lease is signed, with the other four payments coming due on December 31 of each year. Wallin has also been given the option of purchasing the equipment at the end of the lease at a bargain price of $110,000.Wallin has an incremental borrowing rate of 8%, the same as the implicit interest rate of Astro. Wallin has hired you as an accountant and asks you to prepare a schedule showing how the lease payments will be split between principal and interest and the outstanding lease liability balance over the life of the lease.

entry for purchase by lessee cordon enterprise company leases many of its assets and 692660

Aug 30, 2021 | Uncategorized

Entry for Purchase by Lessee

Cordon Enterprise Company leases many of its assets and capitalizes most of the leased assets. At December 31, the company had the following balances on its books in relation to a piece of specialized equipment:

Amortization has been recorded up to the end of the year, and no accrued interest is involved. At December 31, Cordon decided to purchase the equipment for $32,000 and paid cash to complete the purchase. Give the entry required on Cordon’s books to record the purchase.

direct financing lease with residual value massachusetts casualty insurance company 692663

Aug 30, 2021 | Uncategorized

Direct Financing Lease with Residual Value

Massachusetts Casualty Insurance Company decides to enter the leasing business. It acquires a specialized packaging machine for $300,000 cash and leases it for a period of six years, after which the machine is to be returned to the insurance company for disposition. The expected unguaranteed residual value of the machine is $20,000. The lease terms are arranged so that a return of 12% is earned by the insurance company.

1. Calculate the annual lease payment, payable in advance, required to yield the desired return.

2. Prepare entries for the lessor for the first year of the lease, assuming the machine is acquired and the lease is recorded on January 1, 2008. The first lease payment is made on January 1, 2008, and subsequent payments are made each December 31.

3. Assuming that the packaging machine is sold by Massachusetts to the lessee at the end of the six years for $29,000, give the required entry to record the sale.

capital lease with guaranteed residual value mdash lessee mario automobile company l 692665

Aug 30, 2021 | Uncategorized

Capital Lease with Guaranteed Residual Value—Lessee

Mario Automobile Company leases automobiles under the following terms. A 3 year lease agreement is signed in which the lessor receives annual rental of $4,000 (in advance). At the end of the three years, the lessee agrees to make up any deficiency in residual value below $3,500. The cash price of the automobile is $13,251. The implicit interest rate is 12%,which is known to the lessee, and the lessee’s incremental borrowing rate is 14%. The lessee estimates the residual value at the end of three years to be $4,200 and depreciates its automobiles on a straight line basis.

1. Give the entries on the lessee’s books required in the first year of the lease, including the second payment on April 30, 2009. Assume the lease begins May 1, 2008, the beginning of the lessee’s fiscal year.

2. What balances relative to the lease would appear on the lessee’s balance sheet at the end of Year 3?

3. Assume that at the end of the three years, the automobile is sold by the lessee (with the permission of the lessor) for $3,800. Prepare the entries to record the sale and settlement with the lessor.

sales type lease mdash lessor salcedo co leased equipment to erickson inc on april 1 692666

Aug 30, 2021 | Uncategorized

Sales Type Lease—Lessor

Salcedo Co. leased equipment to Erickson Inc. on April 1, 2008. The lease, appropriately recorded as a sale by Salcedo, is for an 8 year period ending March 31, 2013. The first of eight equal annual payments of $175,000 (excluding executory costs) was made on

April 1, 2008. The cost of the equipment to Salcedo is $940,000. The equipment has an estimated useful life of eight years with no residual value expected. Salcedo uses straight line depreciation and takes a full year’s depreciation in the year of purchase. The cash selling price of the equipment is $1,026,900.

1. Give the entry required to record the lease on Salcedo’s books.

2. How much interest revenue will Salcedo recognize in 2008?

effect of lease on reported income mdash lessee and lessor on february 20 2008 topha 692668

Aug 30, 2021 | Uncategorized

Effect of Lease on Reported Income—Lessee and Lessor

On February 20, 2008,Topham Inc. purchased a machine for $1,200,000 for the purpose of leasing it. The machine is expected to have a 10 year life, no residual value, and is depreciated on the straight line basis to the nearest month. The machine was leased to Lutts Company on March 1, 2008, for a 4 year period at a monthly rental of $22,000. Assume that the lease payments are made at the end of the month and that the appropriate interest rate is 12% compounded monthly. There is no provision for the renewal of the lease or purchase of the machine by the lessee at the expiration of the lease term. Topham paid $60,000 of commissions associated with negotiating the lease in February 2008.

1. What expense should Lutts record as a result of the lease transaction for the year ended December 31, 2008?

2. What income or loss before income taxes should Topham record as a result of the lease transaction for the year ended December 31, 2008?

cash flow treatment of capital leases mdash lessor on january 1 2008 delhi club comp 692670

Aug 30, 2021 | Uncategorized

Cash Flow Treatment of Capital Leases—Lessor

On January 1, 2008, Delhi Club Company purchased some equipment for $45,372 in cash. Delhi Club immediately leased the equipment; Delhi Club is the lessor. The lease contract calls for the receipt of $10,000 payments at the end of each year for five years. The residual value of the equipment at the end of the 5 year lease term is expected to be $8,000. The rate implicit in the lease is 8%. Except for lease related items, there were no changes in current operating assets or liabilities during the year; no purchases or sales of property, plant, or equipment; and no dividends paid, stock issued, or loans obtained or repaid. The equipment has a total useful life of 10 years with no salvage value. Prepare a complete statement of cash flows for Delhi Club for 2008 using the indirect method of reporting operating cash flow assuming that the lease is accounted for as (1) an operating lease (net income was $50,000), (2) a direct financing lease (net income was $48,167), and (3) a sales type lease (net income was $48,167; for comparability, make the unreasonable assumption that sales and cost of good sold are the same amount).

lease disclosures mdash lessee the following lease information was obtained by a sta 692671

Aug 30, 2021 | Uncategorized

Lease Disclosures—Lessee

The following lease information was obtained by a staff auditor for a client, Kroller Inc., at December 31, 2008. Indicate how this information should be presented in Kroller’s 2 year comparative financial statements. Include any notes to the statements required to meet generally accepted accounting principles. Lease payments are made on December 31 of each year.

lease disclosure on the financial statements acme enterprises leased equipment from 692672

Aug 30, 2021 | Uncategorized

Lease Disclosure on the Financial Statements

Acme Enterprises leased equipment from Monument Equipment Co. on January 1, 2008. The terms of the lease agreement require five annual payments of $20,000 with the first payment being made on January 1, 2008, and each subsequent payment being made on December 31 of each year. Because the equipment has an expected useful life of five years, the lease qualifies as a capital lease for Acme. Acme does not know Monument’s implicit interest rate and therefore uses its own incremental borrowing rate of 12% to calculate the present value of the lease payments. Acme uses the sum of the years’ digits method for amortizing leased assets. The expected salvage value of the leased asset is $0.

1. Prepare a schedule that shows the lease obligation balance in each year of the lease.

2. Prepare an asset amortization schedule for the leased asset.

3. Compare the amount shown on the year end balance sheet for the leased asset with that of the lease obligation for the years 2008 through 2012 and explain why the amounts differ.

sale leaseback accounting on july 1 2008 baker corporation sold equipment it had rec 692674

Aug 30, 2021 | Uncategorized

Sale Leaseback Accounting

On July 1, 2008, Baker Corporation sold equipment it had recently purchased to an unaffiliated company for $570,000. The equipment had a book value on Baker’s books of $450,000 and a remaining life of five years. On that same day, Baker leased back the equipment at $135,000 per year, payable in advance, for a 5 year period. Baker’s incremental borrowing rate is 10%, and it does not know the lessor’s implicit interest rate. What entries are required for Baker to record the transactions involving the equipment during the first full year, assuming the second lease payment is made on June 30, 2009? Ignore consideration of the lessee’s fiscal year. The lessee uses the double declining balance method of depreciation for similar assets it owns outright.

entries for capital lease mdash lessee lease criteria extractor company leased a mac 692676

Aug 30, 2021 | Uncategorized

Entries for Capital Lease—Lessee; Lease Criteria

Extractor Company leased a machine on July 1, 2008, under a 10 year lease. The economic life of the machine is estimated to be 15 years. Title to the machine passes to Extractor Company at the expiration of the lease, and thus, the lease is a capital lease. The lease payments are $97,000 per year, including executory costs of $3,000 per year, all payable in advance annually. The incremental borrowing rate of the company is 9%, and the lessor’s implicit interest rate is unknown.Extractor Company uses the straight line method of amortization and the calendar year for reporting purposes.

Instructions:

1. Give all entries on the books of the lessee relating to the lease for 2008.

2. Assume that the lessor retains title to the machine at the expiration of the lease, that there is no bargain renewal or purchase option, and that the fair market value of the equipment is $710,000 as of the lease date. Using the criteria for distinguishing between operating and capital leases according to FASB Statement No.13, what would be the amortization expense for 2008?

operating lease mdash lessee and lessor calderwood industries leases a large special 692677

Aug 30, 2021 | Uncategorized

Operating Lease—Lessee and Lessor

Calderwood Industries leases a large specialized machine to Youngstown Company at a total rental of $1,800,000, payable in five annual installments in the following declining pattern: 25% for each of the first two years, 22% in the third year, and 14% in each of the last two years. The lease begins January 1, 2008. In addition to the rent, Youngstown is required to pay annual executory costs of $15,000 to cover unusual repairs and insurance. The lease does not qualify as a capital lease for reporting purposes. Calderwood incurred initial direct costs of $15,000 in obtaining the lease. The machine cost Calderwood $2,100,000 to construct and has an estimated life of 10 years with an estimated residual value of $100,000. Calderwood uses the straight line depreciation method on its equipment. Both companies report on a calendar year basis.

Instructions:

1. Prepare the journal entries on Calderwood’s books for 2008 and 2012 related to the lease.

2. Prepare the journal entries on Youngstown’s books for 2008 and 2012 related to the lease.

investment in common stock mdash fair market value less than book value jjj inc purc 692611

Aug 30, 2021 | Uncategorized

Investment in Common Stock—Fair Market Value Less than Book Value

JJJ Inc. purchased 35% of ABC Co. on January 4, 2008, for $280,000 when ABC’s book value was $810,000. On that day, the market value of the net assets of ABC equaled their book values with the following exceptions:

The equipment has a remaining useful life of 10 years, and the building has a remaining useful life of 20 years. ABC reported the following related to operations for 2008 and 2009:

Instructions: Provide the entries made by JJJ Inc. relating to its investment in ABC for the years 2008 and 2009.

accounting for marketable equity securities trans america trust co owns both trading 692613

Aug 30, 2021 | Uncategorized

Accounting for Marketable Equity Securities

Trans America Trust Co. owns both trading and available for sale securities. The following securities were owned on December 31, 2007:

Trading Securities:

Available for Sale Securities:

The following transactions occurred during 2008:

(a) Sold 500 shares of West Data, Inc., for $9,500.

(b) Sold 200 shares of Disks, Inc., for $3,000.

(c) Transferred all shares of Albert Groceries, Inc., to the available for sale portfolio when the total market value was $12,900.

(d) Transferred the remaining shares of Disks, Inc., to the trading securities portfolio when the market price was $20 per share. These shares were subsequently sold for $18 per share. At December 31, 2008, market prices for the remaining securities were as follows:

Instructions: Prepare all journal entries necessary to record Trans America Trust Co.’s marketable equity securities transactions and year end adjustments for 2008. Assume that all declines in market value are temporary.

accounting for long term investments on january 2 2006 bradley company acquired 20 o 692614

Aug 30, 2021 | Uncategorized

Accounting for Long Term Investments

On January 2, 2006, Bradley Company acquired 20% of the 100,000 shares of outstanding common stock of Caldecott Corp. for $20 per share. The purchase price was equal to Caldecott’s underlying book value. Bradley plans to hold this stock to influence the activities of Caldecott.

The following data are applicable for 2006 and 2007:

On January 2, 2008, Bradley Company sold 5,000 shares of Caldecott stock for $24 per share. During 2008, Caldecott reported net income of $64,000, and on October 31, 2008, Caldecott paid dividends of $20,000. At December 31, 2008, after a significant stock market decline, which is expected to be temporary, Caldecott’s stock was selling for $15 per share. After selling the 5,000 shares, Bradley does not expect to exercise significant influence over Caldecott, and the shares are classified as available for sale.

Instructions:

1. Make all journal entries for Bradley Company for 2006, 2007, and 2008, assuming the 20% original ownership interest allowed significant influence over Caldecott.

2. Make the year end valuation adjusting entries for Caldecott Company for 2006, 2007, and 2008, assuming the 20% original ownership interest did not allow significant influence over Caldecott.

investment securities and the statement of cash flows julie company came into existe 692615

Aug 30, 2021 | Uncategorized

Investment Securities and the Statement of Cash Flows

Julie Company came into existence with a $2,000 cash investment by owners on January 1, 2008, and entered into the following transactions during 2008:

The following additional information is available:

Instructions:

1. Prepare an income statement for 2008.

2. Prepare a complete statement of cash flows for 2008. Use the indirect method of reporting cash from operating activities.

3. Prepare a balance sheet as of December 31, 2008.

accounting for the impairment of a loan jayleen associates loaned norris company 750 692617

Aug 30, 2021 | Uncategorized

Accounting for the Impairment of a Loan

Jayleen Associates loaned Norris Company $750,000 on January 1, 2006. The terms of the loan were payment in full on January 1, 2011, plus annual interest payments at 11%. The interest payment was made as scheduled on January 1, 2007; however, due to financial setbacks, Norris was unable to make its 2008 interest payment. Jayleen considers the loan impaired and projects the following cash flows from the loan as of December 31, 2008, and 2009. Assume that Jayleen accrued the interest at December 31, 2007, but did not continue to accrue interest due to the impairment of the loan.

Projected Cash Flows:

Instructions:

1. Prepare the valuation adjusting entry at December 31, 2008.

2. Prepare the journal entry to record the $50,000 receipt on December 31, 2009.

3. Prepare the valuation adjusting entry at December 31, 2009.

4. Prepare the 2010 journal entries, assuming the receipt of $150,000 as scheduled; also assume that estimates for future cash flows remain the same as they were at the end of 2009.

but do we really have ldquo mark to market rdquo accounting now the movement toward 692618

Aug 30, 2021 | Uncategorized

But Do We Really Have “Mark to Market” Accounting Now?

The movement toward the use of market value for investments has been given the label “mark to market.” Previously, marketable equity securities were valued at the lower of cost or market. The shift to market, whether higher or lower than cost, is a significant departure from the past. Even though all investments classified as trading or available for sale are now valued at market values, only market changes for trading securities affect the income statement. To many accounting theorists, this is indeed a cop out on the part of the FASB. These accountants reason that if market changes are going to be recognized on the balance sheet, they should be recognized on the income statement as well. This position was held by the two FASB members who voted against the issuance of Statement No. 115. Evaluate the rationale for this compromise position. What arguments for the two different approaches (income and equity) do you think are most persuasive and why? What future events could cause standard setters to revise this approach?

i rsquo m not a bank so why must i worry about fasb statement no 115 accounting meth 692620

Aug 30, 2021 | Uncategorized

I’m Not a Bank, So Why Must I Worry about FASB Statement No. 115?

Accounting methods of financial institutions, such as savings and loan companies and banks, were the major reasons the FASB studied the valuation issues relating to investments. FASB Statement No. 115, however, affects all companies that invest in marketable debt and equity securities. As controller of a retailing company, you are concerned with the classification of “trading security.” How can you decide whether the investments you have are trading or available for sale securities? In discussing this issue with other controllers, you are surprised to hear some of them indicate that Statement No. 115 really doesn’t affect the reported income of nonfinancial institutions and that all securities for these companies are considered available for sale securities. Other controllers were concerned by this statement because this reasoning would make accounting for investments less conservative than it was before FASB Statement No.115. Do you agree with either of these points of view and why? In what way has FASB Statement No. 115 made accounting for investments less conservative?

why is 49 ownership enough in 1986 the coca cola company borrowed 2 4 billion to pur 692621

Aug 30, 2021 | Uncategorized

Why Is 49% Ownership Enough?

In 1986, The Coca Cola Company borrowed $2.4 billion to purchase several large soft drink bottling operations. Then a separate company, Coca Cola Enterprises, was formed to bottle and distribute Coke throughout the country. The Coca Cola Company sold 51% of Coca Cola Enterprises to the public and retained a 49% ownership. The $2.4 billion debt incurred to finance the purchase was transferred to the balance sheet of Coca Cola Enterprises. While 49% ownership does not guarantee control, it does give The Coca Cola Company significant influence over the bottling company. For example, The Coca Cola Company determines the price at which it will sell concentrate to Coca Cola Enterprises and reviews Coca Cola Enterprises’ marketing plan. In addition, The Coca Cola Company’s chief operating officer is chairman of Coca Cola Enterprises, and six other current or former Coca Cola Company officials are serving on Coca Cola Enterprises’ board of directors.             

1. From an accounting standpoint, what is the significance of owning more than 50% of a company’s stock?

2. Why would The Coca Cola Company elect to own less than 50% of its distribution network?

3. In the consolidation process, the parent’s and the subsidiary’s individual asset and liability account balances are added together and reported on the consolidated financial statements, whereas with the equity method, the net investment is reported as an asset on the investor company’s balance sheet. Why would The Coca Cola Company want to avoid consolidation?

which method of accounting for investments is appropriate international inc owns com 692622

Aug 30, 2021 | Uncategorized

Which Method of Accounting for Investments Is Appropriate?

International Inc. owns companies or the stock of companies in countries all over the world. International is reviewing its methods of accounting for those companies and has asked you to provide input as to whether the cost method, the equity method, or consolidation is appropriate for each of the following subsidiaries. Provide justification for your suggestions.

1. Subsidiary 1: This subsidiary, ME Oil, is an oil company located in the Middle East. A growing anti American sentiment in the country in which the company is located has led International to remove all non native employees. There is a growing fear that the government may nationalize ME Oil. International Inc. owns 75% of the oil company.

2. Subsidiary 2: Ecological Inc., a company that produces environmentally safe products, has production facilities in more than 10 states. The ownership of the company is widely held, with International Inc. holding the largest block of stock. International has succeeded in placing its president and vice president in two of the five board of directors’ seats of Ecological Inc. International owns 15% of Ecological Inc.’s outstanding stock.

3. Subsidiary 3: International Inc. recently purchased 100% of the outstanding stock of Harmon National Bank. This subsidiary represents International’s first purchase of a nonmanufacturing facility, and management has expressed concern about the comparability of the different accounting methods used by financial institutions.

4. Subsidiary 4: International has been involved in a takeover battle with Beatrix Inc. involving Campton Soups. Beatrix recently purchased 50% of the stock of Campton. International has owned 30% of Campton’s stock for five years.

what is the difference in accounting between the cost and equity methods logical cor 692623

Aug 30, 2021 | Uncategorized

What Is the Difference in Accounting between the Cost and Equity Methods?

Logical Corporation, a producer of medical products, disclosed the following investments in affiliates in the notes to its July 31, 2008, financial statements:

Discuss the factors that determine whether Logical uses the cost or the equity method in accounting for its investment in affiliates. What events are recorded when the security is accounted for as an available for sale security? What events are recorded when the equity method is used? What does the investment account represent when the security is classified as available for sale? What does it represent using the equity method?

deciphering financial statements the walt disney company locate disney rsquo s finan 692625

Aug 30, 2021 | Uncategorized

Deciphering Financial Statements (The Walt Disney Company)

Locate Disney’s financial statements and related notes on the Internet and answer the following questions:

1. Locate Disney’s note that discusses investments. What amount of the investment portfolio is classified as available for sale? Now look at Disney’s balance sheet. What percentage of the total investment account is available for sale securities? What types of securities constitute the balance in that account?

2. Locate Disney’s note that discusses what types of securities are included in “Investments” on the balance sheet. Also examine the note that defines cash and cash equivalents. Are all of Disney’s investment securities listed under Investments in the balance sheet?

3. Review the note on financial instruments to determine how the carrying value of investments compared to the fair value on September 30, 2004. Why is this number so much less than that reported as Investments on the balance sheet?

deciphering financial statements archer daniels midland company the investing activi 692626

Aug 30, 2021 | Uncategorized

Deciphering Financial Statements (Archer Daniels Midland Company)

The Investing Activities section of the statement of cash flows of Archer Daniels Midland

Company (ADM), seller of agricultural commodities and products, follows.

Based on the information given, answer the following questions.

Instructions:

1. Based on all the buying and selling activity associated with ADM’s marketable securities, how do you think the company classifies the bulk of its $3.0 billion portfolio of securities—as trading, available for sale, or held to maturity? Now, take a look at ADM’s note relating to its classification of all of its marketable securities.

Marketable Securities The Company classifies its marketable securities as available for sale, except for certain designated securities which are classified as trading securities. Available for sale securities are carried at fair value, with the unrealized gains and losses, net of income taxes, reported as a component of other comprehensive income (loss). Unrealized gains and losses related to trading securities are included in income on a current basis. The Company uses the specific identification method when securities are sold or classified out of accumulated other comprehensive income (loss) into earnings.

2. Was your answer to (1) the same as ADM’s classification policy? With the company selling one third of its investment portfolio in 2004, are the company’s actions consistent with its classification policy? Finally, take a look at a portion of ADM’s consolidated statements of shareholders’ equity from its 2004 annual report.

3. Assume that, other than available for sale securities, ADM had no other items that impacted other comprehensive income. Did the company’s portfolio of marketable securities experience an unrealized net gain or an unrealized net loss for the year? If these securities had been classified as trading, where would this amount have been reported?

deciphering financial statements ford motor company the following note is taken from 692627

Aug 30, 2021 | Uncategorized

Deciphering Financial Statements (Ford Motor Company)

The following note is taken from Ford Motor Company’s 2004 annual report:

Investments in available for sale securities at December 31, 2003, were as follows (in millions):

The proceeds and net gains/(losses) from available for sale securities sales were as follows (in millions):

1. What amount of gains and losses on available for sale securities is reported in the 2004 income statement? How much is realized? How much is unrealized?

2. What is the amount of the net adjustment for unrealized holding gains and losses on available for sale securities as of the end of 2004?

3. Using the amounts of realized and unrealized gains and losses, estimate the total economic return on Ford’s available for sale portfolio during 2004 (ignoring interest and dividends).

writing assignment going around the income statement fasb statement no 115 outlines 692628

Aug 30, 2021 | Uncategorized

Writing Assignment (Going around the income statement)

FASB Statement No. 115 outlines two different treatments for unrealized gains and losses depending on whether the security is classified as trading or available for sale. Unrealized gains and losses for trading securities are reported on the income statement while unrealized gains and losses for available for sale securities are reported as part of accumulated other comprehensive income in stockholders’ equity. Your assignment is to develop an argument, in writing, for including unrealized gains and losses for available for sale securities on the income statement. Include in your 1 page paper reasons as to why the FASB might have chosen the reporting rules that it did and be able to refute the Board’s reasoning.

researching accounting standards to help you become familiar with the accounting sta 692629

Aug 30, 2021 | Uncategorized

Researching Accounting Standards

To help you become familiar with the accounting standards, this case is designed to take you to the FASB’s Web site and have you access various publications. In this chapter, we discussed issues relating to investing in debt and equity securities.

For this case, we will use Statement of Financial Accounting Standards No.115, “Accounting for Certain Investments in Debt and Equity Securities.” Open FASB Statement No. 115.

1. In paragraph 13, the reporting of unrealized gains and losses is discussed. How are unrealized gains and losses accounted for with trading securities? With available for sale securities?

2. Paragraph 16 discusses the accounting for securities that may be impaired. If available for sale and held to maturity securities are determined to be permanently impaired, how is that impairment to be accounted for? Why aren’t trading securities included in the discussion in paragraph 16?

cumulative spreadsheet analysis this assignment is based on the spreadsheet prepared 692631

Aug 30, 2021 | Uncategorized

Cumulative Spreadsheet Analysis

This assignment is based on the spreadsheet prepared in (1) of the cumulative spreadsheet assignment for Chapter 13. Review that assignment for a summary of the assumptions made in preparing a forecasted balance sheet, income statement, and statement of cash flows for 2009 for Skywalker Company. This assignment involves changing assumption (h) in the Chapter 13 assignment. Assume that Skywalker’s investment securities portfolio contains the following available for sale securities as of December 31, 2008:

As mentioned in the Chapter 13 assignment, Skywalker intends to invest another $28 in available for sale securities (security F) in 2009 in order to increase the total value of the portfolio by 40% to $98 ($70 + $28). Because Skywalker cannot predict future stock prices, the best forecast is that the market values of Securities A through E will remain the same during 2009 and that the market value of security F, to be acquired in 2009 for $28, will remain at $28. Revise the spreadsheet made in (1) of the Chapter 13 assignment in accordance with the above and following assumptions. In each case, any gains or losses expected to be realized in 2009 should be reported in a separate income statement line, “Investment income, net.”

1. Skywalker intends to sell security A in 2009 at an anticipated price of $22. That $22 will be used to buy security G. Skywalker’s best forecast is that the market value of security G will remain at $22 through the end of 2009.

2. How does the sale of security A in (1) impact expected cash from operating activities in 2009? Explain.

3. Repeat (1) and (2) assuming that, instead of selling security A, Skywalker intends to sell security D in 2009 at an anticipated price of $15, which will be used to buy security G. Skywalker’s best forecast is that the market value of security G will remain at $15 through the end of 2009.

journal entries for a capital lease mdash lessee refer to practice 15 6 assume that 692639

Aug 30, 2021 | Uncategorized

Journal Entries for a Capital Lease—Lessee

Refer to Practice 15 6. Assume that the lease is to be accounted for as a capital lease. Also assume that the leased asset is to be amortized over the 12 year asset life rather than the 10 year lease term. Make the journal entries necessary on the books of the lessee company (1) on the lease signing date and (2) at the end of the first year, including the recording of the first lease payment.

Practice 15 6

Journal Entries for an Operating Lease—Lessee

On January 1, the lessee company signed an operating lease contract. The lease contract calls for $3,000 payments at the end of each year for 10 years. The rate implicit in the lease is 10%. Make the journal entries necessary on the books of the lessee company (1) on the lease signing date and (2) to record the first lease payment.

leases on a statement of cash flows mdash lessee refer to practice 15 6 net income f 692642

Aug 30, 2021 | Uncategorized

Leases on a Statement of Cash Flows—Lessee

Refer to Practice 15 6. Net income for the year was $10,000. Except for lease related items, there were no changes in current operating assets or liabilities during the year, no purchases or sales of property, plant, or equipment, and no dividends paid, stock issued, or loans obtained or repaid. Prepare a complete statement of cash flows using the indirect method of reporting operating cash flow assuming that the lease is accounted for as (1) an operating lease (net income was $10,000) and (2) a capital lease (net income was $9,621).

Practice 15 6

Journal Entries for an Operating Lease—Lessee

On January 1, the lessee company signed an operating lease contract. The lease contract calls for $3,000 payments at the end of each year for 10 years. The rate implicit in the lease is 10%. Make the journal entries necessary on the books of the lessee company (1) on the lease signing date and (2) to record the first lease payment.

journal entries for a direct financing lease mdash lessor refer to practice 15 12 as 692644

Aug 30, 2021 | Uncategorized

Journal Entries for a Direct Financing Lease—Lessor

Refer to Practice 15 12. Assume that the lease is accounted for as a direct financing lease instead of as an operating lease. The interest rate implicit in the lease is 15%. Make the journal entries necessary on the lessor’s books to record (1) the signing of the lease, (2) the receipt of the initial $2,600 lease payment on the lease signing date, and (3) the recognition of interest revenue at the end of the first year.

Practice 15 12

Journal Entries for an Operating Lease—Lessor

On January 1, the lessor company purchased a piece of equipment for $10,000. The equipment has an expected life of five years with zero salvage value. The lessor company immediately leased the equipment under an operating lease agreement. The lease calls for the lessor company to receive lease payments of $2,600 per year to be received at the beginning of the year. Make the journal entries necessary on the books of the lessor company to record (1) the purchase of the equipment for cash, (2) the lease signing (including receipt of the first lease payment), and (3) depreciation of the leased equipment.

sales type lease with a bargain purchase option on january 1 the lessor company purc 692647

Aug 30, 2021 | Uncategorized

Sales Type Lease with a Bargain Purchase Option

On January 1, the lessor company purchased a piece of equipment for $6,000 as inventory. The lessor company immediately leased the equipment under a sales type lease agreement. The lease calls for the lessor company to receive five annual lease payments of $2,500 per year, to be received at the beginning of the year. In addition to the five annual payments of $2,500 at the beginning of each year, the lessor is to receive a bargain purchase option amount of $500 at the end of five years. The interest rate implicit in the lease is 12%. Make the journal entries necessary on the books of the lessor company to record (1) the lease signing (including receipt of the first lease payment) and (2) the recognition of interest revenue at the end of the first year.

accounting methods for equity securities for each of the following independent situa 692584

Aug 30, 2021 | Uncategorized

Accounting Methods for Equity Securities

For each of the following independent situations, determine the appropriate accounting method to be used: cost or equity. For cost method situations, determine whether the security should be classified as trading or available for sale. For equity method situations, determine whether consolidated financial statements would be required. Explain the rationale for your decision.

(a) ATV Company manufactures and sells four wheel recreational vehicles. It also provides insurance on its products through its wholly owned subsidiary, RV Insurance Company.

(b) Buy Right Inc. purchased 20,000 shares of Big Supply Company common stock to be held as a long term investment. Big Supply has 200,000 shares of common stock outstanding.

(c) Super Tire Manufacturing Co. holds 5,000 shares of the 10,000 outstanding shares of nonvoting preferred stock of Valley Corporation. Super Tire considers the investment as being long term in nature.

(d) Takeover Company owns 15,000 of the 50,000 shares of common stock of Western Supply Company. Takeover has tried and failed to obtain representation on Western’s board of directors. Takeover intends to sell the securities if it cannot obtain board representation at the next stockholders’ meeting, scheduled in three weeks.

(e) Espino Inc. purchased 50,000 shares of Independent Mining Company common stock. Independent has a total of 125,000 common shares outstanding. Espino has no intention to sell the securities in the foreseeable future.

investment in equity securities on january 10 2008 washington corporation acquired 2 692585

Aug 30, 2021 | Uncategorized

Investment in Equity Securities

On January 10, 2008, Washington Corporation acquired 20,000 shares of the outstanding common stock of United Company for $900,000. At the time of purchase, United Company had outstanding 80,000 shares with a book value of $3.6 million. On December 31, 2008, the following events took place:

(a) United reported net income of $180,000 for the calendar year 2008.

(b) Washington received from United a dividend of $0.75 per share of common stock.

(c) The market value of United Company stock had temporarily declined to $40 per share.

Give the entries that would be required to reflect the purchase and subsequent events on the books of Washington Corporation, assuming that (1) the security is classified as available for sale and (2) the equity method is appropriate.

trading securities during 2008 litten company purchased trading securities as a shor 692591

Aug 30, 2021 | Uncategorized

Trading Securities

During 2008, Litten Company purchased trading securities as a short term investment. The costs of the securities and their market values on December 31, 2008, follow:

At the beginning of 2008, Litten had a zero balance in the market adjustment—trading securities account. Before any adjustments related to these trading securities, Litten had net income of $300,000.

1. What is net income after making any necessary trading security adjustments? (Ignore income taxes.)

2. What would net income be if the market value of security B were $95,000?

accounting for trading securities during 2007 sunbeam inc purchased the following tr 692592

Aug 30, 2021 | Uncategorized

Accounting for Trading Securities

During 2007, Sunbeam Inc. purchased the following trading securities:

At the beginning of 2007, Sunbeam had a zero balance in Market Adjustment—Trading Securities.

1. What entry would be made at year end, assuming the preceding values?

2. What entry would be made during 2008, assuming one half of the Luthor Corp. common stock is sold for $13,000?

3. Give the entry that would be made at the end of 2008, assuming the following situations:

(a) The market value of remaining securities is $41,000.

(b) The market value of remaining securities is $43,500.

(c) The market value of remaining securities is $48,000.

debt and equity securities american steel corp acquired the following securities in 692593

Aug 30, 2021 | Uncategorized

Debt and Equity Securities

American Steel Corp. acquired the following securities in 2008:

At the beginning of 2008,American Steel had a zero balance in each of its market adjustment accounts.

1. What entry or entries would be made at the end of 2008, assuming the preceding market values?

2. If net income before any adjustments related to marketable securities was $100,000, what would reported income be after adjustments? (Ignore income taxes.)

temporary and ldquo other than temporary rdquo changes in value the securities portf 692594

Aug 30, 2021 | Uncategorized

Temporary and “Other than Temporary” Changes in Value

The securities portfolio for Hill Top Industries contained the following trading securities:

1. Assuming that all changes in fair value are considered temporary, what is the effect of the changes in value on the 2007 and 2008 financial statements? Give the valuation entries for these years, assuming that the market adjustment account has a $0 balance at the beginning of 2007.

2. Assume that at December 31, 2008, management believed that the market value of the Streuling Co. common stock reflected an “other than temporary” decline in the value of that stock. Give the entries to be made on December 31, 2008, under this assumption.

reclassification of securities kyoto inc had the following portfolio of securities a 692595

Aug 30, 2021 | Uncategorized

Reclassification of Securities

Kyoto Inc. had the following portfolio of securities at the end of its first year of operations:

1. Provide the entry necessary to adjust the portfolio of securities to its market value.

2. In the following year, Kyoto elects to reclassify security B as an available for sale security. On the date of the transfer, security B’s market value is $16,500. Provide the journal entry to reclassify security B.

reclassification of securities bicknel technologies inc purchased the following secu 692596

Aug 30, 2021 | Uncategorized

Reclassification of Securities

Bicknel Technologies Inc. purchased the following securities during 2007:

At the beginning of 2007, Bicknel Technologies had a zero balance in each of its market adjustment accounts. During 2008, after the 2007 financial statements had been issued, Bicknel determined that security B should be reclassified as an available for sale security and security C should be reclassified as a trading security. The market values on the date of the transfer are $5,500 for security B and $17,000 for security C.

Prepare the journal entries to do the following:

1. Adjust the portfolio of securities to its market value at December 31, 2007.

2. Reclassify security B as an available for sale security in 2008.

3. Reclassify security C as a trading security in 2008.

valuation of securities bridgeman paper co reported the following selected balances 692597

Aug 30, 2021 | Uncategorized

Valuation of Securities

Bridgeman Paper Co. reported the following selected balances on its financial statements for each of the four years 2006–2009:

Based on these balances, reconstruct the valuation entries that must have been made each year.

accounting for securities during 2007 the first year of its operations profit indust 692598

Aug 30, 2021 | Uncategorized

Accounting for Securities

During 2007, the first year of its operations, Profit Industries purchased the following securities:

During 2008, Profit sold one half of security A for $8,000 and one half of security D for $15,000.

Provide the journal entries required to do the following:

1. Adjust the portfolio of securities to its market value at the end of 2007.

2. Record the sale of security A and security D.

3. Adjust the portfolio of securities to its market value at the end of 2008.

investment securities and the statement of cash flows indicate how each of the follo 692599

Aug 30, 2021 | Uncategorized

Investment Securities and the Statement of Cash Flows

Indicate how each of the following transactions or events would be reflected in a statement of cash flows prepared using the indirect method. Each transaction or event is independent of the others. For items (a) and (d), assume that the balance in the market adjustment account was zero at the beginning of the year.

(a) At year end, the trading securities portfolio has an aggregate cost of $185,000 and an aggregate fair value of $150,000.

(b) During the year, trading securities and available for sale securities were purchased for $50,000 and $70,000, respectively. The securities were paid for in cash.

(c) Trading securities on hand at the beginning of the period (cost $40,000) were sold for $62,000 cash.

(d) At year end, the trading securities portfolio has an aggregate cost of $170,000 and an aggregate fair value of $190,000.

accounting for the impairment of a loan galaxy enterprises loaned 200 000 to vader i 692601

Aug 30, 2021 | Uncategorized

Accounting for the Impairment of a Loan

Galaxy Enterprises loaned $200,000 to Vader Inc. on January 1, 2007. The terms of the loan require principal payments of $40,000 each year for five years plus interest at the market rate of interest of 8%. The first principal and interest payment is due on January 1, 2008. Vader made the required payments during 2008 and 2009. However, during 2009 Vader began to experience financial difficulties, requiring Galaxy to reassess the collectability of the loan. On December 31, 2009, Galaxy determines that the remaining principal payments will be collected, but the collection of interest is unlikely.

1. Compute the present value of the expected future cash flows as of December 31, 2009.

2. Provide the journal entry to record the loan impairment as of December 31, 2009.

3. Provide the journal entries for 2010 to record the receipt of the principal payment on January 1 and the recognition of interest revenue as of December 31, assuming that Galaxy’s assessment of the collectability of the loan has not changed.

accounting for trading securities fox company made the following transactions in the 692602

Aug 30, 2021 | Uncategorized

Accounting for Trading Securities

Fox Company made the following transactions in the common stock of NOP Company:

The end of year market prices for the shares were as follows:

Instructions: Prepare the necessary entries for 2006, 2007, and 2008, assuming the NOP stock is classified as a trading security.

recording and valuing trading securities myers amp associates reports the following 692603

Aug 30, 2021 | Uncategorized

Recording and Valuing Trading Securities

Myers & Associates reports the following information on its December 31, 2006, balance sheet:

Supporting records of Myers’ trading securities portfolio show the following debt and equity securities:

Interest dates on the treasury bonds are January 1 and July 1.Myers & Associates uses the revenue approach to record the purchase of bonds with accrued interest. During 2007 and 2008,Myers & Associates completed the following transactions related to trading securities:

2007

Jan. 1 Received semiannual interest on U.S. Treasury bonds. Assume that the appropriate adjusting entry was made on December 31, 2006.

Apr. 1 Sold $60,000 of the 7 1/2% U.S. Treasury bonds at 102 plus accrued interest. Brokerage fees were $200.

May 21 Received dividend of $0.25 per share on the Conway Co. common stock. The dividend had not been recorded on the declaration date.

July 1 Received semiannual interest on U.S. Treasury bonds and then sold the 7% bonds at 97 1/2. Brokerage fees were $250.

Aug. 15 Purchased 100 shares of Nieman Inc. common stock at $116 per share plus brokerage fees of $50.

Nov. 1 Purchased $50,000 of 8% U.S. Treasury bonds at 101 plus accrued interest. Brokerage fees were $125.

Interest dates are January 1 and July 1.

Dec. 31 Market prices of securities were Conway Co. common, $110; 7 1/2% U.S. Treasury bonds, 101 3/4; 8% U.S. Treasury bonds, 101; Nieman Inc. common, $116.75.

2008

Jan. 2 Recorded the receipt of semiannual interest on the U.S. Treasury bonds.

Feb. 1 Sold the remaining 7 1/2% U.S. Treasury bonds at 101 plus accrued interest. Brokerage fees were $300.

Instructions:

1. Prepare journal entries for the preceding transactions and to accrue interest on December 31, 2007. Ignore any amortization of premium or discount on U.S. Treasury bonds. Give computations in support of your entries.

2. Show how trading securities would be presented on the December 31,2007,balance sheet.

accounting for debt and equity securities during 2008 buzz company purchased 4 000 s 692604

Aug 30, 2021 | Uncategorized

Accounting for Debt and Equity Securities

During 2008, Buzz Company purchased 4,000 shares of Honey Company common stock for $12 per share and 2,500 shares of Pollen Company common stock for $27 per share. These investments are intended to be held as ready sources of cash and are classified as trading securities.

Also in 2008, Buzz purchased 4,500 shares of Flower Company common stock for $25 per share and $50,000 of treasury notes at 102. These securities are classified as available for sale.

During 2008, Buzz received the following interest and dividend payments on its investments:

Market values of the securities at December 31, 2008, were as follows:

On March 23, 2009, the 2,500 shares of Pollen common stock were sold for $18 per share. On June 30, 2009, the treasury notes were sold at 101 plus accrued interest.

Market values of remaining securities at December 31, 2009, were as follows:

Instructions:

1. Prepare all 2008 and 2009 journal entries related to these securities.

2. Describe how the following items would be treated on Buzz Company’s statement of cash flows for the year ended December 31, 2009. Buzz uses the indirect method of reporting cash flows from operating activities.

(a) Proceeds from the sale of Pollen shares and any realized gain or loss from the sale.

(b) Proceeds from the sale of the treasury securities and any realized gain or loss from the sale.

(c) Any unrealized gain or loss on the remaining securities.

journal entries and balance sheet presentation for investments in securities on dece 692605

Aug 30, 2021 | Uncategorized

Journal Entries and Balance Sheet Presentation for Investments in Securities

On December 31, 2006, Durst Company’s balance sheet showed the following balances related to its securities accounts:

Durst’s securities portfolio on December 31,2006,was made up of the following securities:

During 2007, the following transactions took place:

Jan. 3 Received interest on the New York City water bonds.

Mar. 1 Purchased 300 additional shares of Herzog Corp. stock for $22,950, classified as a trading security.

Apr. 15 Sold 400 shares of the Taylor Inc. stock for $69 per share.

May 4 Sold 400 shares of the Martin Inc. stock for $62 per share.

July 1 Received interest on the New York City water bonds.

Oct. 30 Purchased 1,500 shares of Cook Co. stock for $83,250, classified as a trading security.

The market values of the stocks and bonds on December 31, 2007, are as follows:

Instructions:

1. Make all necessary journal entries for 2007, including any year end accrual or adjusting entries.

2. Show how the marketable securities would be presented on the balance sheet at December 31, 2007. Assume that the available for sale securities are classified as current assets.

journal entries for trading securities during 2008 and 2009 kopson co made the follo 692606

Aug 30, 2021 | Uncategorized

Journal Entries for Trading Securities

During 2008 and 2009, Kopson Co. made the following journal entries to account for transactions involving trading securities:

The beginning balance in Market Adjustment—Trading Securities was a $500 credit. There were no other entries in 2008.

There were no other entries in 2009.

Instructions: For each incorrect entry, give the entry that should have been made. Assume the revenue approach is used. Ignore any premium or discount amortization on U.S. Treasury bonds.

valuation of equity securities the investment portfolio of morris inc on december 31 692607

Aug 30, 2021 | Uncategorized

Valuation of Equity Securities

The investment portfolio of Morris Inc. on December 31, 2007, contains the following securities:

• Opus Co. common, 3% ownership, 5,000 shares; cost, $100,000; market value, $95,000; classified as a trading security.

• Garrod Inc. preferred, 2,000 shares; cost, $40,000; market value, $43,000; classified as a trading security.

• Sherrill Inc. common, 30% ownership, 20,000 shares; cost, $1,140,000; market value,

$1,130,000; classified as an influencing investment.

• Jennings Co. common, 15% ownership, 25,000 shares; cost, $67,500; market value,

$50,000; classified as an available for sale security.

Instructions:

1. Give the valuation adjustment required at December 31, 2007, assuming that all investments were purchased in 2007 and none of the indicated declines in market value are considered other than temporary.

2. Assume that the Jennings Co.’s common stock market decline is considered other than temporary. Give the valuation entry required at December 31, 2007, under this change in assumption.

3. Assume that the market values for the long term investment portfolio at December 31, 2008, were as follows:

Give the valuation entries at December 31, 2008, assuming that the investment categories remain the same and that all declines in 2007 and 2008 are temporary except for the 2007 decline in Jennings Co. stock.

investments in common stock both seco inc and hillsborough corp have 100 000 shares 692608

Aug 30, 2021 | Uncategorized

Investments in Common Stock

Both Seco Inc. and Hillsborough Corp. have 100,000 shares of no par common stock outstanding. World Inc. acquired 10,000 shares of Seco stock for $6 per share and 30,000 shares of Hillsborough stock for $12 per share in 2005. Both securities are being held as long term investments. Changes in retained earnings for Seco and Hillsborough for 2007 and 2008 are as follows:

Instructions: Give the entries required on the books of World Inc. for 2007 and 2008 to account for its investments.

long term investments in stock mdash equity method on january 1 2008 compustat co bo 692609

Aug 30, 2021 | Uncategorized

Long Term Investments in Stock—Equity Method

On January 1, 2008, Compustat Co. bought 30% of the outstanding common stock of Freelance Corp. for $258,000 cash. Compustat Co. accounts for this investment by the equity method. At the date of acquisition of the stock, Freelance Corp.’s net assets had a carrying value of $590,000. Assets with an average remaining life of five years have a current market value that is $130,000 in excess of their carrying values. The remaining difference between the purchase price and the value of the underlying stockholders’ equity cannot be attributed to any identifiable tangible or intangible asset. Accordingly, the remaining difference is allocated to goodwill. At the end of 2008, Freelance Corp. reports net income of $180,000. During 2008, Freelance Corp. declared and paid cash dividends of $20,000.

Instructions: Give the entries necessary to reflect Compustat Co.’s investment in Freelance Corp. for 2008.

who gets the cash dividend on march 23 2008 the board of directors of mycroft compan 692554

Aug 30, 2021 | Uncategorized

Who Gets the Cash Dividend?

On March 23, 2008, the board of directors of Mycroft Company declared a quarterly cash dividend on its $1 par common stock of $0.50 per share, payable on May 10, 2008, to the shareholders of record on April 14, 2008. Before April 9, Mycroft’s shares traded in the stock market “with dividend,” meaning that the quoted stock price included the right to receive the dividend. After April 9, the shares traded “ex dividend,” meaning that the quoted price did not include the right to receive the dividend. Before April 9, Mycroft’s shares were selling for $30 per share. What should happen to Mycroft’s stock price on April 9, the dividend date? What should happen to Mycroft’s stock price on March 23, the dividend declaration date?

deciphering financial statements the walt disney company the 2004 financial statemen 692556

Aug 30, 2021 | Uncategorized

Deciphering Financial Statements (The Walt Disney Company)

The 2004 financial statements for The Walt Disney Company can be found on the Internet.

Locate those financial statements and consider the following questions.

1. What is the par value of Disney’s common stock? What was the average issuance price of Disney’s common stock?

2. Does Disney use the cost method or the par value method of accounting for treasury stock? As of September 30, 2004, what was the average cost of the repurchased shares held in treasury?

3. Combining information from questions (1) and (2), estimate the decrease in Disney’s retained earnings if all of the treasury shares were retired.

4. From Disney’s foreign currency translation adjustment, deduce whether the foreign currencies got stronger or weaker in 2004 (relative to the U.S. dollar) in the countries where Disney has subsidiaries.

5. In the notes to Disney’s financial statements, the accounting for stock options is summarized.

Does Disney use the fair value or the intrinsic value method?

deciphering financial statements general motors in 1993 general motors paid cash div 692557

Aug 30, 2021 | Uncategorized

Deciphering Financial Statements (General Motors)

In 1993, General Motors paid cash dividends on 11 different classes of capital stock. Those classes of stock were as follows:

1. The January 1, 1993, balance in General Motors’ retained earnings was a negative $3.354 billion. The December 31, 1993, balance was a negative $2.003 billion. How is it possible that General Motors was able to pay cash dividends during 1993?

2. This question will require a little research. What is the difference in stockholder rights between General Motors’ $12/3 common stock and the Class E and Class H common shares? How did the Class E and Class H shares come into existence?

3. In May 1993, General Motors redeemed all of the $5.00 series and $3.75 series preferred stock. The board of directors stated that the redemption of these preferred shares would give the company more financial flexibility by eliminating certain covenants associated with the shares. Get a copy of GM’s most recent annual report and find out how many of the 11 issues of General Motors’ capital stock outstanding in 1993 are still outstanding.

deciphering financial statements swire pacific limited the equity categories for swi 692558

Aug 30, 2021 | Uncategorized

Deciphering Financial Statements (Swire Pacific Limited)

The equity categories for Swire Pacific Limited are illustrated in Exhibit 13 9, on page 790. Using the information in the exhibit, answer the following questions:

1. Recall that the primary purpose of defining different reserve categories is to distinguish between distributable and no distributable equity. As of December 31, 2004, how much of Swire Pacific’s equity is distributable?

2. What is the U.S. equivalent of Swire Pacific’s revenue reserve?

3. What do you think is the purpose of the capital redemption reserve?

4. As of December 31, 2004, Swire Pacific has a property valuation reserve of HK$34,680 million. Assume that this reserve is recognized as part of one big revaluation—what journal entry would be made? The property valuation reserve is not distributable—why not?

5. What happened to property values related to Swire’s holdings during 2004?

writing assignment strategic accounting par value or cost method j d michael company 692559

Aug 30, 2021 | Uncategorized

Writing Assignment (Strategic accounting: par value or cost method?)

J.D. Michael Company has been very successful in recent years. Cash flow from operations is more than sufficient to cover the cost of all capital expenditures as well as regular cash dividends. J. D. Michael has decided to use some of its extra cash to begin a program of repurchasing its own shares in the open market. The shares will not be retired but will be held for potential reissue. Because J. D. Michael has never repurchased its own shares before, it has not had to make a choice between the par value and cost methods of accounting for treasury stock. As the resident expert on accounting in the company, you have been asked to Dr. aft a 1 page memo to the board of directors recommending either the cost method or the par value method of accounting for treasury stock. Your memo should adDr.ess issues like the prevailing practice, the likely effect on the financial statements (particularly the equity section), and the potential impact of the treasury stock accounting treatment on the ability to maintain steady cash dividend payments in the future.

researching accounting standards to help you become familiar with the accounting sta 692560

Aug 30, 2021 | Uncategorized

Researching Accounting Standards

To help you become familiar with the accounting standards, this case is designed to take you to the FASB’s Web site and have you access various publications.

In the chapter, we discussed share based payments and related disclosure. For this case, we will use Statement No. 123(R), Share Based Payments. Open FASB Statement No. 123(R).

1. Beginning with paragraph (a) of the summary, the standard details four reasons cited by the FASB for issuing SFAS 123(R). Briefly summarize those four reasons.

2. paragraph 1 of the standard specifies the measurement objective to be satisfied when valuing share based payments. What is the measurement objective?

3. Paragraph 64 of the standard details the disclosure requirements associated with share based payments. Briefly summarize the disclosure requirements.

cumulative spreadsheet analysis this spreadsheet assignment is a continuation of the 692562

Aug 30, 2021 | Uncategorized

Cumulative Spreadsheet Analysis

This spreadsheet assignment is a continuation of the spreadsheet assignments given in earlier chapters. If you completed those assignments, you have a head start on this one. Refer back to the instructions for preparing the revised financial statements for 2008 as given in (1) of the Cumulative Spreadsheet Analysis assignment in Chapter 3.

1. Skywalker wishes to prepare a forecasted balance sheet, a forecasted income statement, and a forecasted statement of cash flows for 2009. Use the financial statement numbers for 2008 as the basis for the forecast, along with the following additional information.

(a) Sales in 2009 are expected to increase by 40% over 2008 sales of $2,100.

(b) In 2009, new property, plant, and equipment acquisitions will be in accordance with the information in (q).

(c) The $480 in operating expenses reported in 2008 breaks down as follows: $15 in depreciation expense and $465 in other operating expenses.

(d) New long term debt will be acquired in 2009 in accordance with (u).

(e) Cash dividends will be paid in 2009 in accordance with (w).

(f) New short term loans payable will be acquired in an amount sufficient to make Skywalker’s current ratio in 2009 exactly equal to 2.0.

(g) Skywalker anticipates repurchasing additional shares of stock during 2009 in accordance with (x).

(h) Because changes in future prices and exchange rates are impossible to predict, Skywalker’s best estimate is that the balance in accumulated other comprehensive income will remain unchanged in 2009.

(i) In the absence of more detailed information, assume that the balances in Investment Securities, Long Term Investments, and Other Long Term Assets will all increase at the same rate as sales (40%) in 2009.The balance in Intangible Assets will change in accordance with item (r).

(j) In the absence of more detailed information, assume that the balance in the other long term liabilities account will increase at the same rate as sales (40%) in 2009.

(k) The investment securities are classified as available for sale securities. Accordingly, cash from the purchase and sale of these securities is classified as an investing activity.

(l) Assume that transactions impacting other long term assets and other long term liabilities accounts are operating activities.

(m) Cash and investment securities accounts will increase at the same rate as sales.

(n) The forecasted amount of accounts receivable in 2009 is determined using the forecasted value for the average collection period. The average collection period for 2009 is expected to be 14.08 days. To make the calculations less complex, this value of 14.08 days is based on forecasted end of year accounts receivable rather than on average accounts receivable.

(o) The forecasted amount of inventory in 2009 is determined using the forecasted value for the number of days’ sales in inventory. The number of days’ sales in inventory for 2009 is expected to be 107.6 days. To make the calculations simpler, this value of 107.6 days is based on forecasted end of year inventory rather than on average inventory.

(p) The forecasted amount of accounts payable in 2009 is determined using the forecasted value for the number of days’ purchases in accounts payable. The number of days’ purchases in accounts payable for 2009 is expected to be 48.34 days. To make the calculations simpler, this value of 48.34 days is based on forecasted end of year accounts payable rather than on average accounts payable.

(q) The forecasted amount of property, plant, and equipment (PP&E) in 2009 is determined using the forecasted value for the fixed asset turnover ratio. The fixed asset turnover ratio for 2009 is expected to be 3.518 times. To make the calculations simpler, this ratio of 3.518 is based on forecasted end of year gross property, plant, and equipment balance rather than on the average balance. (Note: For simplicity, ignore accumulated depreciation in making this calculation.)

(r) Skywalker has determined that no new intangible assets will be acquired in 2009.

Intangible assets are amortized according to the information in (t).

(s) In computing depreciation expense for 2009, use straight line depreciation and assume a 30 year useful life with no residual value. Gross PP&E acquired during the year is only depreciated for half the year. In other words, depreciation expense for 2009 is the sum of two parts: (1) a full year of depreciation on the beginning balance in PP&E, assuming a 30 year life and no residual value, and (2) a half year of depreciation on any new PP&E acquired during the year, based on the change in the gross PP&E balance.

(t) Skywalker assumes a 20 year useful life for its intangible assets. Assume that the $100 in intangible assets reported in 2008 is the original cost of the intangibles. Include the amortization expense with the depreciation expense in the income statement.

(u) New long term debt will be acquired (or repaid) in an amount sufficient to make

Skywalker’s debt ratio (total liabilities divided by total assets) in 2009 exactly equal to 0.80.

(v) Assume an interest rate on short term loans payable of 6.0% and on long term debt of 8.0%. Only a half year’s interest is charged on loans taken out during the year. For example, if short term loans payable at the end of 2009 is $15 and given that short term loans payable at the end of 2008 were $10, total short term interest expense for 2009 would be $0.75 [($10 x 0.06) + ($5 x 0.06 x 1/2)].

(w) Skywalker has decided to begin paying cash dividends in 2009. Skywalker intends to maintain a dividend payout ratio (cash dividends divided by net income) of 40%.

(Note: Make sure you adjust your spreadsheet formula so that if net income happens to be negative, cash dividends are no lower than $0.)

(x) Skywalker has decided to continue its stock repurchase program in 2009. Skywalker intends to spend $50 repurchasing shares during the year. Skywalker accounts for treasury stock purchases using the cost method. Clearly state any additional assumptions that you make.

2. According to the forecast for 2009, state whether Skywalker is expected to issue new shares of stock. Would your answer change if Skywalker were not to repurchase the shares as described in (x)?

3. Repeat (2), with the following changes in assumptions:

(a) The debt ratio in 2009 is exactly equal to 0.70.

(b) The debt ratio in 2009 is exactly equal to 0.95.

4. Comment on how it is possible for a company to have negative net paid in capital when net paid in capital is equal to paid in capital minus treasury stock.

cost method equity method and consolidation identify how each of the following inves 692565

Aug 30, 2021 | Uncategorized

Cost Method, Equity Method, and Consolidation

Identify how each of the following investments in equity securities should be classified by the investor company:

equity method cost greater than book value on january 1 of year 1 dr idge company pu 692569

Aug 30, 2021 | Uncategorized

Equity Method: Cost Greater than Book Value

On January 1 of Year 1, Dr. idge Company purchased 2,500 shares of the 10,000 outstanding shares of Company C for a total of $100,000. At the time of the purchase, the book value of Company C’s equity was $300,000.Company C assets having a market value greater than book value at the time of the acquisition were as follows:

Company C’s net income in Year 1 was $70,000. Dividends per share paid by Company C were $2.00 in Year 1. (1) Make all journal entries necessary on Dr. idge’s books to record its investment in Company C in Year 1. Assume that the goodwill is not impaired. (2) Compute the Year 1 ending balance in Dr. idge Company’s Investment in Company C account.

changes in value available for sale securities refer to practice 14 ndash 10 make th 692571

Aug 30, 2021 | Uncategorized

Changes in Value: Available for Sale Securities

Refer to Practice 14–10. Make the adjusting journal entries for (a) and (b) and the computations for (c) and (d), assuming that the securities are classified as available for sale.

Practice 14–10

Changes in Value: Trading Securities

On December 1, the company purchased securities for $1,000. On December 31, the company still held the securities. Make the necessary adjusting journal entry to record a change in value of the securities assuming that their December 31 market value was (a) $1,200 and (b) $850. In addition, before considering the impact of the change in value of the securities, the net income for the company was $1,500. Compute net income assuming that the December 31 market value of the securities was (c) $1,200 and (d) $850. Ignore income taxes. Assume that the securities are classified as trading.

changes in value held to maturity securities refer to practice 14 ndash 10 make the 692572

Aug 30, 2021 | Uncategorized

Changes in Value: Held to Maturity Securities

Refer to Practice 14–10. Make the adjusting journal entries for (a) and (b) and the computations for (c) and (d), assuming that the securities are classified as held to maturity. The changes in value are not deemed to be “other than temporary.”

Practice 14–10

Changes in Value: Trading Securities

On December 1, the company purchased securities for $1,000. On December 31, the company still held the securities. Make the necessary adjusting journal entry to record a change in value of the securities assuming that their December 31 market value was (a) $1,200 and (b) $850. In addition, before considering the impact of the change in value of the securities, the net income for the company was $1,500. Compute net income assuming that the December 31 market value of the securities was (c) $1,200 and (d) $850. Ignore income taxes. Assume that the securities are classified as trading.

changes in value equity method refer to practice 14 ndash 10 make the adjusting jour 692573

Aug 30, 2021 | Uncategorized

Changes in Value: Equity Method

Refer to Practice 14–10. Make the adjusting journal entries for (a) and (b) and the computations for (c) and (d), assuming that the securities are accounted for using the equity method. Ignore the impact of the investee company income and dividends. The changes in value are not deemed to be “other than temporary.”

Practice 14–10

Changes in Value: Trading Securities

On December 1, the company purchased securities for $1,000. On December 31, the company still held the securities. Make the necessary adjusting journal entry to record a change in value of the securities assuming that their December 31 market value was (a) $1,200 and (b) $850. In addition, before considering the impact of the change in value of the securities, the net income for the company was $1,500. Compute net income assuming that the December 31 market value of the securities was (c) $1,200 and (d) $850. Ignore income taxes. Assume that the securities are classified as trading.

sale of securities and the market adjustment account the company purchased the follo 692574

Aug 30, 2021 | Uncategorized

Sale of Securities and the Market Adjustment Account

The company purchased the following securities during Year 1:

On July 23, Year 2, the company sold all of the shares of security B for a total of $9,500. As of December 31, Year 2, the shares of security A had a market value of $5,800. No other activity occurred during Year 2 in relation to the trading security portfolio. (1) What amount should the company report as realized gain or loss in the Year 2 income statement? Clearly indicate whether the amount is a gain or a loss. (2) What amount should the company report as unrealized gain or loss in the Year 2 income statement? Clearly indicate whether the amount is a gain or a loss.

transfer between categories to and from trading the company purchased the following 692575

Aug 30, 2021 | Uncategorized

Transfer between Categories: To and From Trading

The company purchased the following securities during Year 1:

In Year 2, the company reclassified both of these securities. Security A was reclassified as available for sale; the market value of security A at the time of the reclassification was $5,500. Security B was reclassified as trading; the market value of security B at the time of the reclassification was $4,100. Make the journal entries necessary to record both of these reclassifications.

cash flow and available for sale securities the company entered into the following t 692577

Aug 30, 2021 | Uncategorized

Cash Flow and Available for Sale Securities

The company entered into the following transactions during the year:

The company had no investment securities at the beginning of the year. The cost of the investment securities sold was $350. The market value of the remaining securities was $65 on December 31.The net income for the year was $880. Assume that net income does not include any noncash items and does not reflect gains or losses related to investment securities. Assume that the securities are classified as available for sale. Compute (1) cash flow from operating activities and (2) cash flow from investing activities.

cash flow and trading securities refer to practice 14 ndash 18 assume that the secur 692578

Aug 30, 2021 | Uncategorized

Cash Flow and Trading Securities

Refer to Practice 14–18. Assume that the securities are classified as trading. Compute (1) cash flow from operating activities and (2) cash flow from investing activities.

Practice 14–18

Cash Flow and Available for Sale Securities

The company entered into the following transactions during the year:

The company had no investment securities at the beginning of the year. The cost of the investment securities sold was $350. The market value of the remaining securities was $65 on December 31.The net income for the year was $880. Assume that net income does not include any noncash items and does not reflect gains or losses related to investment securities. Assume that the securities are classified as available for sale. Compute (1) cash flow from operating activities and (2) cash flow from investing activities.

loan impairment initial measurement on january 1 of year 1 the lending company made 692580

Aug 30, 2021 | Uncategorized

Loan Impairment: Initial Measurement

On January 1 of Year 1, the lending company made a $10,000, 8% loan. The $800 interest is receivable at the end of each year, with the principal amount to be received at the end of five years. As of the end of Year 1, the first year’s interest of $800 has not yet been received because the borrower is experiencing financial difficulties. The lending company negotiated a restructuring of the loan. The payment of all of the interest ($4,000 = $800 x 5 years) will be delayed until the end of the 5 year loan term. In addition, the amount of principal repayment will be Dr. opped from $10,000 to $5,000. Make the journal entry necessary on the lending company’s books to record this loan impairment on December 31 of Year 1.

loan impairment subsequent interest revenue refer to practice 14 ndash 21 make all j 692581

Aug 30, 2021 | Uncategorized

Loan Impairment: Subsequent Interest Revenue

Refer to Practice 14–21. Make all journal entries necessary on the lending company’s books in connection with the loan during Year 2, Year 3,Year 4, and Year 5. Assume that all cash payments are received according to the renegotiated schedule.

Practice 14–21

Loan Impairment: Initial Measurement

On January 1 of Year 1, the lending company made a $10,000, 8% loan. The $800 interest is receivable at the end of each year, with the principal amount to be received at the end of five years. As of the end of Year 1, the first year’s interest of $800 has not yet been received because the borrower is experiencing financial difficulties. The lending company negotiated a restructuring of the loan. The payment of all of the interest ($4,000 = $800 x 5 years) will be delayed until the end of the 5 year loan term. In addition, the amount of principal repayment will be Dr. opped from $10,000 to $5,000. Make the journal entry necessary on the lending company’s books to record this loan impairment on December 31 of Year 1.

recording securities transactions the following transactions of knight inc occurred 692582

Aug 30, 2021 | Uncategorized

Recording Securities Transactions

The following transactions of Knight, Inc., occurred within the same accounting period:

(a) Purchased $105,000 U.S. Treasury 7% bonds, paying 103 plus accrued interest of $1,200. In addition, Knight paid brokerage fees of $470. Knight uses the revenue approach to record accrued interest on purchased bonds. Knight classified this security as a trading security.

(b) Purchased 1,700 shares of Sand Co. common stock at $85 per share plus brokerage fees of $1,750. Knight classifies this stock as an available for sale security.

(c) Received semiannual interest on the U.S. Treasury bonds.

(d) Sold 250 shares of Sand at $97 per share.

(e) Sold $30,000 of U.S. Treasury 7% bonds at 102 plus accrued interest of $350.

(f) Purchased a $20,000, 6 month certificate of deposit. The certificate is classified as a trading security.

Prepare the entries necessary to record these transactions.

accounting for the purchase and sale of securities during january 2008 aragorn inc p 692583

Aug 30, 2021 | Uncategorized

Accounting for the Purchase and Sale of Securities

During January 2008, Aragorn Inc. purchased the following securities:

During 2008, Aragorn received interest from Mirkwood and the U.S. Treasury totaling $3,630. Dividends received on the stock held amounted to $1,760. During November 2008, Aragorn sold 200 shares of the Gimli stock at $17 per share and 250 shares of the Glorfindel stock at $19 per share. Give the journal entries required by Aragorn to record the (1) purchase of the debt and equity securities; (2) receipt of interest and dividends during 2008; and (3) sale of the equity securities during November.

reconstruction of equity transactions manti company had the following account balanc 692530

Aug 30, 2021 | Uncategorized

Reconstruction of Equity Transactions

Manti Company had the following account balances on its balance sheet at December 31, 2008, the end of its first year of operations. All stock was issued on a subscription basis.

The reported net income for 2008 was $55,000. Assume that revenues and expenses were closed to a temporary account, Income Summary. Use this account to complete the closing process.

Instructions: From the data given, reconstruct in summary form the journal entries to record all transactions involving the company’s stockholders. Indicate the amount of dividends distributed on each class of stock.

comprehensive analysis and reporting of stockholders rsquo equity egbert company has 692531

Aug 30, 2021 | Uncategorized

Comprehensive Analysis and Reporting of Stockholders’ Equity

Egbert Company has two classes of capital stock outstanding: 10%,$20 par preferred and $1 par common. During the fiscal year ended November 30, 2008, the company was active in transactions affecting the stockholders’ equity. The following summarizes these transactions:

Balances of the accounts in the Stockholders’ Equity section of the November 30, 2007, balance sheet were

Dividends were paid at the end of the fiscal year on the common stock at $1.10 per share and on the preferred stock at the preferred rate. Net income for the year was $700,000.

Instructions: Based on the preceding data, prepare the Stockholders’ Equity section of the balance sheet as of November 30, 2008. (Note: A work sheet beginning with November 30, 2007, balances showing transactions for the current year will facilitate the preparation of this section of the balance sheet.)

accounting for various capital stock transactions the stockholders rsquo equity sect 692532

Aug 30, 2021 | Uncategorized

Accounting for Various Capital Stock Transactions

The stockholders’ equity section of Webster Inc. showed the following data on December 31, 2007: common stock, $3 par, 300,000 shares authorized, 250,000 shares issued and outstanding, $750,000; paid in capital in excess of par, $7,050,000; additional paid in capital from stock options, $150,000; retained earnings, $480,000. The stock options were granted to key executives and provided them the right to acquire 30,000 shares of common stock at $35 per share. The options had a value of $5 each on the grant date. The following transactions occurred during 2008.

Mar. 31 Key executives exercised 4,500 options outstanding at December 31, 2007. The market price per share was $44 at this time.

Apr. 1 The company issued bonds of $2,000,000 at par, giving each $1,000 bond a detachable warrant enabling the holder to purchase two shares of stock at $40 each for a 1 year period. Market values immediately following issuance of the bonds were $4 per warrant and $998 per $1,000 bond without the warrant.

June 30 The company issued rights to stockholders (one right on each share, exercisable within a 30 day period) permitting holders to acquire one share at $40 with every 10 rights submitted. Shares were selling for $43 at this time. All but 6,000 rights were exercised on July 31, and the additional stock was issued.

Sept. 30 All warrants issued with the bonds on April 1 were exercised.

Nov. 30 The market price per share Dr. opped to $33, and options came due. Because the market price was below the option price, no remaining options were exercised.

Instructions:

1. Provide entries to record these transactions.

2. Prepare the stockholders’ equity section of the balance sheet as of December 31, 2008 (assume net income of $210,000 for 2008).

accounting for various capital stock transactions pine view co organized on june 1 2 692533

Aug 30, 2021 | Uncategorized

Accounting for Various Capital Stock Transactions

Pine view Co., organized on June 1, 2007, was authorized to issue stock as follows:

• 80,000 shares of preferred 9% stock, convertible, $100 par

• 250,000 shares of common stock, $2.50 stated value

During the remainder of Pine view Co.’s fiscal year ended May 31, 2008, the following transactions were completed in the order given:

(a) 30,000 shares of preferred stock were subscribed for at $105, and 90,000 shares of common stock were subscribed for at $26. Both subscriptions were payable 30% upon subscription, the balance in one payment.

(b) The second subscription payment was received, except one subscriber for 6,000 shares of common stock defaulted on payment. The full amount paid by this subscriber was returned, and all of the fully paid stock was issued.

(c) 15,000 shares of common stock were reacquired by purchase at $28. (Treasury stock is recorded at cost.)

(d) Each share of preferred stock was converted into four shares of common stock.

(e) The treasury stock was exchanged for machinery with a fair market value of $430,000.

(f) There was a 2 for 1 stock split, and the stated value of the new common stock is $1.25.

(g) Net income was $83,000. Assume that revenues and expenses have been closed to a temporary account, Income Summary.

Instructions:

1. Give the journal entries to record these transactions. (For net income, give the entry to close the income summary account to Retained Earnings.)

2. Prepare the Stockholders’ Equity section as of May 31, 2008.

issuance repurchase and resale of capital stock papa tom rsquo s company had the fol 692534

Aug 30, 2021 | Uncategorized

Issuance, Repurchase, and Resale of Capital Stock

Papa Tom’s Company had the following transactions occur during 2008:

(a) Issued 10,000 shares of common stock to the founders for land valued at $350,000.Par value of the common stock is $1 per share.

(b) Issued 2,000 shares of $100 par preferred stock for cash at $115.

(c) Sold 3,000 shares of common stock to the company president for $50 per share.

(d) Purchased 500 shares of outstanding preferred stock issued in (b) for cash at par.

(e) Purchased 1,000 shares of the outstanding common stock issued in (a) for $42 per share.

(f) Reissued 200 shares of repurchased preferred stock at $104.

(g) Reissued 400 shares of reacquired common stock for $50 per share.

(h) Repurchased 100 shares of the common stock sold in (g) for $47 per share. These same

100 shares were later reissued for $45 per share.

Instructions:

1. Prepare the necessary entries to record the preceding transactions involving PapaTom’s preferred stock. Assume that the par value method is used for recording treasury stock.

2. Prepare the necessary entries for the common stock transactions assuming that the cost method is used for recording treasury stock.

treasury stock transactions transactions that affected barter company rsquo s stockh 692535

Aug 30, 2021 | Uncategorized

Treasury Stock Transactions

Transactions that affected Barter Company’s stockholders’ equity during 2008, the first year of operations, follow.

(a) Issued 30,000 shares of 9% preferred stock, $20 par, at $26.

(b) Issued 50,000 shares of $3 par common stock at $33.

(c) Purchased and immediately retired 4,000 shares of preferred stock at $28.

(d) Purchased 6,000 shares of its own common stock at $35.

(e) Reissued 1,000 shares of treasury stock at $37.

No dividends were declared in 2008, and net income for 2008 was $185,000.

Instructions:

1. Record each of the transactions. Assume that treasury stock acquisitions are recorded at cost.

2. Prepare the stockholders’ equity section of the balance sheet at December 31, 2008.

accounting for stock options the board of directors of muir company adopted a fixed 692536

Aug 30, 2021 | Uncategorized

Accounting for Stock Options

The board of directors of Muir Company adopted a fixed stock option plan to supplement the salaries of certain executives of the company. Options to buy common stock were granted as follows:

Options are nontransferable and can be exercised beginning three years after date of grant, provided the executive is still employed by the company. Stock options were exercised as follows:

Stock of the company has a $1 par value. The accounting period for the company is the calendar year.

Instructions:

1. Provide all entries that would be made on the books of Muir relative to the stock option plan for the period 2005 to 2010 inclusive.

2. Prepare the required note disclosure relative to the stock option plan for the year 2007 and for the year 2009.

performance based stock options bauil corporation a new environmental control compan 692537

Aug 30, 2021 | Uncategorized

Performance Based Stock Options

Bauil Corporation, a new environmental control company, initiated a performance based stock option plan for its management on January 1, 2007. The plan provided for the granting of a variable number of stock options to management personnel who worked for the entire 4 year period ending December 31, 2010, depending on the net income earned by the company in 2010. No options were granted for the first $50,000 of net income. Thereafter, the following options were available based on the level of net income in 2010.

The exercise price for the $5 par common stock was $25 per share. The fair value of the options on the grant date was $7. Assume the market price for the Bauil stock and Bauil’s forecasted 2010 net income were as follows at each of the following dates:

Instructions:

Prepare journal entries related to the stock options of Bauil for the period 2007–2010 assuming that all available options are exercised on December 31, 2010.

analysis of stock transactions you have been asked to audit greystone company during 692538

Aug 30, 2021 | Uncategorized

Analysis of Stock Transactions

You have been asked to audit Greystone Company. During the course of your audit, you are asked to prepare comparative data from the company’s inception to the present. You have determined the following:

(a) Greystone Company’s charter became effective on January 2, 2004, when 2,000 shares of no par common and 1,000 shares of 7% cumulative, nonparticipating, preferred stock were issued. The no par common stock had no stated value and was sold at $120 per share, and the preferred stock was sold at its par value of $100 per share.

(b) Greystone was unable to pay preferred dividends at the end of its first year. The owners of the preferred stock agreed to accept 2 shares of common stock for every 50 shares of preferred stock owned in discharge of the preferred dividends due on December 31, 2004. The shares were issued on January 2, 2005. The fair market value was $100 per share for common on the date of issue.

(c) Greystone Company acquired all of the outstanding stock of Booth Corporation on May 1, 2006, in exchange for 1,000 shares of Greystone common stock.

(d) Greystone split its common stock 3 for 2 on January 1, 2007, and 2 for 1 on January 1, 2008.

(e) Greystone offered to convert 20% of the preferred stock to common stock on the basis of two shares of common for one share of preferred. The offer was accepted, and the conversion was made on July 1, 2008.

(f) No cash dividends were declared on common stock until December 31, 2006. Cash dividends per share of common stock were declared as follows:

Instructions: Compute the following:

1. The number of shares of each class of stock outstanding on the last day of each year from 2004 through 2008.

2. Total cash dividends applicable to common stock for each year from 2006 through 2008.

accounting for stock transactions morris corporation is publicly owned and its share 692539

Aug 30, 2021 | Uncategorized

Accounting for Stock Transactions

Morris Corporation is publicly owned, and its shares are traded on a national stock exchange. Morris has 16,000 shares of $2 stated value common stock authorized. Only 75% of these shares have been issued, and of the shares issued, only 11,000 are outstanding. On December 31, 2007, the Stockholders’ Equity section revealed that the balance in Paid In Capital in Excess of Stated Value was $416,000, and the Retained Earnings balance was $110,000. Treasury stock was purchased at an average cost of $37.50 per share. During 2008, Morris had the following transactions:

Jan. 15 Morris issued, at $55 per share, 800 shares of $50 par, 5% cumulative preferred stock; 2,000 shares are authorized.

Feb. 1 Morris sold 1,500 shares of newly issued $2 stated value common stock at $42 per share.

Mar. 15 Morris declared a cash dividend on common stock of $0.15 per share, payable on April 30 to all stockholders of record on April 1.

Apr. 15 Morris reacquired 200 shares of its common stock for $43 per share. Morris uses the cost method to account for treasury stock.

30 Morris paid dividends.

30 Employees exercised 1,000 options granted in 2003 under a fixed stock option plan. When the options were granted, each option entitled the employee to purchase one share of common stock for $50 per share. The share price on the grant date was $51 per share. On April 30, when the market price was $55 per share, Morris issued new shares to the employees. The fair value of the options at the grant date was $6.

May 1 Morris declared a 10% stock dividend to be distributed on June 1 to stockholders of record on May 7.

The market price of the common stock was $55 per share on May 1 (before the stock dividend). (Assume that treasury shares do not participate in stock dividends.)

31 Morris sold 150 treasury shares reacquired on April 15 and an additional 200 shares costing $7,500 that had been on hand since the beginning of the year. The selling price was $57 per share.

June 1 Morris distributed the stock dividend.

Sept. 15 The semiannual cash dividend on common stock was declared, amounting to $0.15 per share. Morris also declared the yearly dividend on preferred stock. Both are payable on October 15 to stockholders of record on October 1.

Oct. 15 Morris paid dividends.

Net income for 2008 was $50,000. Assume that revenues and expenses were closed to a temporary account, Income Summary. Use this account to complete the closing process.

Instructions:

1. Compute the number of shares and dollar amount of treasury stock at the beginning of 2008.

2. Make the necessary journal entries to record the transactions in 2008 relating to stockholders’ equity.

3. Prepare the stockholders’ equity section of Morris Corporation’s December 31, 2008, balance sheet.

accounting for stock transactions ellis corporation was organized on june 30 2005 af 692540

Aug 30, 2021 | Uncategorized

Accounting for Stock Transactions

Ellis Corporation was organized on June 30,2005. After 2 1/2 years of profitable operations, the equity section of Ellis’s balance sheet was as follows:

During 2008, the following transactions affected stockholders’ equity:

Jan. 31 Reacquired 10,000 shares of common stock at $32; treasury stock is recorded at cost.

Apr. 1 Declared a 30% stock dividend. (Applies to all issued stock.)

30 Declared a $0.75 cash dividend. (Applies only to outstanding stock.)

June 1 Issued the stock dividend and paid the cash dividend.

Aug. 31 Sold all treasury stock at $35.

Instructions: Provide the journal entries to record the stock transactions.

stock dividend and cash dividend on january 1 2008 cozumel company had 100 000 share 692541

Aug 30, 2021 | Uncategorized

Stock Dividend and Cash Dividend

On January 1, 2008, Cozumel Company had 100,000 shares of $0.50 par value common stock outstanding. The market value of Cozumel’s common stock was $18 per share. Cozumel’s Retained Earnings balance on January 1 was $460,000. During 2007, Cozumel had declared and paid cash dividends of $0.75 per share. Net income for 2008 is expected to be $130,000. Cozumel has a large loan from McGraw Bank; part of the loan agreement stipulates that Cozumel must maintain a minimum Retained Earnings balance of $350,000. Cozumel’s board of directors is debating whether to declare a stock dividend in addition to its $0.75 per share annual cash dividend. Three proposals have been presented:

(1) no stock dividend, (2) a 10% stock dividend, and (3) a 25% stock dividend.

Instructions: As a shareholder in Cozumel Company, which of the three proposals do you favor? Support your answer.

stockholders rsquo equity transactions seneca inc was organized on january 2 2007 wi 692542

Aug 30, 2021 | Uncategorized

Stockholders’ Equity Transactions

Seneca Inc. was organized on January 2, 2007, with authorized capital stock consisting of 50,000 shares of 10%, $200 par value preferred, and 200,000 shares of no par, no statedvalue common. During the first two years of the company’s existence, the following selected transactions took place:

2007

Jan. 2 Sold 10,000 shares of common stock at $16.

2 Sold 3,000 shares of preferred stock at $216.

Mar. 2 Sold common stock as follows: 10,800 shares at $22; 2,700 shares at $25.

July 10 Acquired a nearby piece of land, appraised at $400,000, for 600 shares of preferred stock and 27,000 shares of common. (Preferred stock was recorded at $216, the balance being assigned to common.)

Dec. 16 Declared the regular preferred dividend and a $1.50 common dividend.

28 Paid dividends declared on December 16.

31 Assume that revenues and expenses were closed to a temporary account, Income Summary. The Income

Summary account showed a credit balance of $450,000, which was transferred to Retained Earnings.

2008

Feb. 27 Reacquired 12,000 shares of common stock at $19. The treasury stock is carried at cost. (State law requires that an appropriation of Retained Earnings be made for the purchase price of treasury stock. Appropriations are to be returned to Retained Earnings upon resale of the stock.)

June 17 Resold 10,000 shares of the treasury stock at $23.

July 31 Resold all of the remaining treasury stock at $18.

Sept. 30 Sold 11,000 additional shares of common stock at $21.

Dec. 16 Declared the regular preferred dividend and an $0.80 common dividend.

28 Dividends declared on December 16 were paid.

31 The income summary account showed a credit balance of $425,000, which was transferred to Retained Earnings.

Instructions:

1. Give the journal entries to record these transactions.

2. Prepare the Stockholders’ Equity section of the balance sheet as of December 31, 2008.

retained earnings and the statement of cash flows the following items relate to the 692544

Aug 30, 2021 | Uncategorized

Retained Earnings and the Statement of Cash Flows

The following items relate to the activities of Schmidt Company for 2008:

(a) Cash dividends declared and paid on common stock during the year totaled $90,000.

In addition, on January 15, 2008, dividends of $25,000 that were declared in 2007 were paid.

(b) Retained earnings of $145,000 were appropriated during the year in anticipation of a major capital expansion in future years.

(c) Depreciation expense was $59,000.

(d) Equipment was purchased for $215,000 in cash.

(e) Early in the year, a 10% stock dividend was declared and distributed. This stock dividend resulted in the distribution of 40,000 new shares of $1 par common stock. The market value per share immediately after the stock dividend was $55.

(f) Cash revenues for the year totaled $582,000.

(g) Cash expenses for the year totaled $305,000.

(h) Old machinery was sold for its book value of $20,000.

(i) Near the end of the year, a 2 for 1 stock split was declared. The 440,000 shares of $1 par common stock outstanding at the time were exchanged for 880,000 shares with a par value of $0.50.

(j) Cash dividends totaling $27,000 were declared and paid on preferred stock.

(k) Land was acquired in exchange for 5,000 shares of $0.50 par value common stock. The land had a fair market value of $170,000.

(l) Assume no changes in current operating receivable and payable balances during the year.

Instructions: Prepare a statement of cash flows for Schmidt Company for the year ended

December 31, 2008. Use the indirect method for reporting cash flows from operating activities.

reporting stockholders rsquo equity the stockholders rsquo equity section of nilsson 692545

Aug 30, 2021 | Uncategorized

Reporting Stockholders’ Equity

The Stockholders’ Equity section of Nilsson Corporation’s balance sheet as of December 31, 2007, is as follows:

Nilsson Corporation had the following stockholders’ equity transactions during 2008:

Jan. 15 Completed the building renovation, for which $500,000 of retained earnings had been restricted. Paid the contractor $485,000, all of which is capitalized.

Mar. 3 Issued 100,000 additional shares of the common stock for $8 per share.

May 18 Declared a dividend of $1.50 per share to be paid on July 31, 2008, to stockholders of record on June 30, 2008.

June 19 Approved additional building renovation to be funded internally. The estimated cost of the project is $400,000, and retained earnings are to be restricted for that amount.

July 31 Paid the dividend.

Nov. 12 Declared a property dividend to be paid on December 31, 2008, to stockholders of record on

November 30, 2008. The dividend is to consist of 35,000 shares of Hampton Inc. stock that are currently recorded in Nilsson’s books at $9 per share. The fair market value of the stock on

November 12 is $13 per share.

Dec. 31 Reported $885,000 of net income on the December 31, 2008, income statement. (Assume that revenues and expenses were closed to a temporary account, Income Summary. Use this account to complete the closing process.) In addition, the stock was distributed in satisfaction of the property dividend.

The Hampton stock closed at $14 per share at the end of the day’s trading.

Instructions:

1. Make all necessary journal entries for Nilsson to account for the transactions affecting stockholders’ equity.

2. Prepare the December 31, 2008, Stockholders’ Equity section of the balance sheet for Nilsson.

auditing stockholders rsquo equity you have been assigned to the audit of belcore in 692546

Aug 30, 2021 | Uncategorized

Auditing Stockholders’ Equity

You have been assigned to the audit of Belcore Inc., a manufacturing company. You have been asked to summarize the transactions for the year ended December 31, 2008, affecting stockholders’ equity and other related accounts. The Stockholders’ Equity section of Belcore’s December 31, 2007, balance sheet follows:

You have extracted the following information from the accounting records and audit working papers.

2008

Jan. 15 Belcore reissued 650 shares of treasury stock for $40 per share. The 1,210 shares of treasury stock on hand at December 31, 2007, were purchased in one block in 2007. Belcore used the cost method for recording the treasury shares purchased.

Feb. 2 Sold 90, $1,000, 9% bonds due February 1, 2011, at 103 with one detachable stock warrant attached to each bond. Interest is payable annually on February 1. The fair market value of the bonds without the stock warrants is 97. The detachable warrants have a fair value of $60 each and expire on February 1,

2009. Each warrant entitles the holder to purchase 10 shares of common stock at $40 per share.

Mar. 6 Subscriptions for 1,400 shares of common stock were issued at $44 per share, payable 40% down and the balance by March 20.

20 The balance due on 1,200 shares was received and those shares were issued. The subscriber who defaulted on the 200 remaining shares forfeited the down payment in accordance with the subscription agreement.

Nov. 1 There were 55 stock warrants detached from the bonds and exercised.

Instructions: Provide journal entries required to summarize the preceding transactions.

sample cpa exam questions 1 on january 2 2009 kine co granted morgan its president c 692547

Aug 30, 2021 | Uncategorized

Sample CPA Exam Questions

1. On January 2, 2009, Kine Co. granted Morgan, its president, compensatory stock options to buy 1,000 shares of Kine’s $10 par common stock. The options call for a price of $20 per share and are exercisable beginning on December 31, 2009. The options can be exercised any time during the three years beginning with this date. Morgan exercised the options on December 31, 2009. The market price of the stock was $40 on January 2, 2009, and $70 on December 31, 2009. The fair value of the options was $25. By what net amount should stockholders’ equity increase as a result of the grant and exercise of the options?

a. $20,000

b. $25,000

c. $30,000

d. $50,000

2. A company issued rights to its existing shareholders without consideration. The rights allowed the recipients to purchase unissued common stock for an amount in excess of par value. When the rights are issued, which of the following accounts will be increased?

3. If a corporation sells some of its treasury stock at a price that exceeds its cost, this excess should be

a. reported as a gain in the income statement.

b. treated as a reduction in the carrying amount of remaining treasury stock.

c. credited to Additional Paid In Capital.

d. credited to Retained Earnings

4. Which of the following should be reported as a stockholders’ equity contra account?

a. Discount on convertible bonds

b. Premium on convertible bonds

c. Cumulative foreign exchange translation loss

d. Organization costs

strategic conversion of preferred stock colter corporation suspended dividend paymen 692549

Aug 30, 2021 | Uncategorized

Strategic Conversion of Preferred Stock

Colter Corporation suspended dividend payments on all four classes of capital stock outstanding because of a downturn in the economy. The four classes of stock include 7% preferred stock, cumulative, $50 par; 5% preferred stock, noncumulative, convertible, $35 par; 9% preferred stock, noncumulative, $80 par; and common stock. Fifteen thousand shares of each class of stock were outstanding. Dividends had been paid through 2005.Colter did not pay dividends in 2006 or 2007. In 2008, the economy improved, and a proposal to pay a dividend of $1.50 per share of common stock was made. You own 100 shares of the 5%, noncumulative, convertible preferred stock and have been considering converting those 100 shares to common stock at the existing conversion rate of 3 to 1 (3 shares of common for 1 share of preferred). The rate is scheduled to Dr. op to 2 to 1 at the end of 2008. Because the price of common stock has been rising rapidly, you are trying to decide between retaining your preferred stock or converting to common stock before the price goes higher and the ratio is lowered. Assuming there is no conversion of preferred stock, how much cash does Colter need to pay the proposed dividend? What are the merits of converting your stock at this time as opposed to waiting until after the dividend is paid and the conversion ratio decreases? Explain the issues involved.

treasury stock transactions mdash you can rsquo t lose the following is adapted from 692552

Aug 30, 2021 | Uncategorized

Treasury Stock Transactions—You Can’t Lose!

The following is adapted from an article appearing in Forbes:

The board of HOSPITAL CORP. OF AMERICA authorized the buyback of 12 million of the firm’s own shares at a total cost of $564 million. However, after the stock market crash of 1987, HCA’s shares were trading at only 31 1/8. So, HCA was now out $190.5 million on its investment—right? Common sense would answer yes, but beyond common sense lurks the logic of accounting. According to generally accepted accounting principles, HCA didn’t lose a penny on the buyback. Call it a no risk investment. In this era of stock market volatility, stock buybacks offer firms the opportunity to tell shareholders that they have a terrific investment—without ever having to own up to the bad news if it turns sour. Consider the criticism in the preceding paragraph and evaluate the reasonableness of the accounting for treasury stock transactions.

how much should our dividend be largo corp has paid quarterly dividends of 0 70 per 692553

Aug 30, 2021 | Uncategorized

How Much Should Our Dividend Be?

Largo Corp. has paid quarterly dividends of $0.70 per share for the last three years and is trying to continue this tradition. Largo’s balance sheet is as follows:

Largo’s net income in 2008 was $400,000. Should Largo continue its $0.70 per share quarterly dividend in the first quarter of 2009? Should Largo increase the cash dividend?

accumulated other comprehensive income refer to practice 13 20 compute the balance i 692502

Aug 30, 2021 | Uncategorized

Accumulated Other Comprehensive Income

Refer to Practice 13 20. Compute the balance in (1) Retained Earnings and (2) Accumulated

Other Comprehensive Income as of the end of each year: 2006, 2007, 2008.

Practice 13 20

Comprehensive Income

The company started business on January 1, 2006. Net income and dividends for the first three years of the company’s existence are as follows:

The company has some foreign subsidiaries and also maintains a portfolio of available for sale securities. During 2006, 2007, and 2008, the U.S. dollar value of the equity of the foreign subsidiaries and the market value of the securities in the available for sale portfolio fluctuated as follows:

Compute comprehensive income for each of the three years: 2006, 2007, and 2008.

international equity reserves the company based in the united kingdom has the follow 692503

Aug 30, 2021 | Uncategorized

International Equity Reserves

The company, based in the United Kingdom, has the following equity accounts:

Compute the amount of (1) no distributable and (2) distributable equity.

statement of changes in stockholders rsquo equity beginning balances in the equity a 692504

Aug 30, 2021 | Uncategorized

Statement of Changes in Stockholders’ Equity

Beginning balances in the equity accounts were as follows:

The following is true for the year:

(a) Net income was $4,500.

(b) Equity increased $300 from an increase in value of available for sale securities.

(c) Dividends were $1,000.

(d) Treasury stock of $1,200 was purchased. Assume the cost method.

(e) Shares of stock for $500 were issued. Par value was $40.

Prepare a statement of changes in stockholders’ equity for the year.

issuance of common stock verdero company is authorized to issue 100 000 shares of 2 692505

Aug 30, 2021 | Uncategorized

Issuance of Common Stock

Verdero Company is authorized to issue 100,000 shares of $2 par value common stock. Verdero has the following transactions:

(a) Issued 20,000 shares at $30 per share; received cash.

(b) Issued 250 shares to attorneys for services in securing the corporate charter and for preliminary legal costs of organizing the corporation. The value of the services was $9,000.

(c) Issued 300 shares, valued objectively at $10,000, to the employees instead of paying them cash wages.

(d) Issued 12,500 shares of stock in exchange for a building valued at $295,000 and land valued at $80,000. (The building was originally acquired by the investor for $250,000 and has $100,000 of accumulated depreciation; the land was originally acquired for $30,000.)

(e) Received cash for 6,500 shares of stock sold at $38 per share.

(f) Issued 4,000 shares at $45 per share; received cash.

Make the journal entries necessary for Verdero Company to record each transaction.

issuance of capital stock with subscriptions timpview company was incorporated on ja 692508

Aug 30, 2021 | Uncategorized

Issuance of Capital Stock with Subscriptions

Timpview Company was incorporated on January 1, 2008, with the following authorized capitalization:

• 20,000 shares of common stock, stated value $5 per share

• 5,000 shares of 7% cumulative preferred stock, par value $15 per share

Make the entries required for each of the following transactions:

(a) Issued 12,000 shares of common stock for a total of $672,000 and 3,000 shares of preferred stock at $20 per share.

(b) Subscriptions were received for 2,500 shares of common stock at a price of $52. A 30% down payment is received.

(c) Collected the remaining amount owed on the stock subscriptions and issued the stock.

(d) Sold the remaining authorized shares of common stock at $61 per share.

acquisition and retirement of stock marci company reported the following balances re 692509

Aug 30, 2021 | Uncategorized

Acquisition and Retirement of Stock

Marci Company reported the following balances related to common stock as of December 31, 2007:

The company purchased and immediately retired 8,000 shares at $24 on August 1, 2008, and 15,000 shares at $17 on December 31, 2008. Make the entries to record the acquisition and retirement of the common stock. (Assume all shares were originally sold at the same price.)

treasury stock par value and cost methods the stockholders rsquo equity of thomas co 692510

Aug 30, 2021 | Uncategorized

Treasury Stock: Par Value and Cost Methods

The stockholders’ equity of Thomas Company as of December 31, 2007, was as follows:

On June 1, 2008, Thomas reacquired 15,000 shares of its common stock at $16. The following transactions occurred in 2008 with regard to these shares.

July 1 Sold 5,000 shares at $20.

Aug. 1 Sold 7,000 shares at $14.

Sept. 1 Retired 1,000 shares.

1. Using the cost method to account for treasury stock:

(a) Prepare the journal entries to record all treasury stock transactions in 2008.

(b) Prepare the stockholders’ equity section of the balance sheet at December 31, 2008, assuming Retained Earnings of $1,005,000 (before the effects of treasury stock transactions).

2. Using the par value method to account for treasury stock:

(a) Prepare the journal entries to record all treasury stock transactions in 2008.

(b) Prepare the Stockholders’ Equity section of the balance sheet at December 31, 2008, assuming Retained Earnings of $1,005,000 (before the effects of treasury stock transactions).

accounting for stock warrants western company wants to raise additional equity capit 692512

Aug 30, 2021 | Uncategorized

Accounting for Stock Warrants

Western Company wants to raise additional equity capital. After analysis of the available options, the company decides to issue 1,000 shares of $20 par preferred stock with detachable warrants. The package of the stock and warrants sells for $90. The warrants enable the holder to purchase 1,000 shares of $2 par common stock at $30 per share. Immediately following the issuance of the stock, the stock warrants are selling at $9 per share. The market value of the preferred stock without the warrants is $85.

1. Prepare a journal entry for Western Company to record the issuance of the preferred stock and the attached warrants.

2. Assuming that all the warrants are exercised, prepare a journal entry for Western to record the exercise of the warrants.

3. Assuming that only 70% of the warrants are exercised (and the remaining 30% lapse), prepare the journal entries for Western to record the exercise and expiration of the warrants.

accounting for a performance based stock option plan rhiener corporation initiated a 692514

Aug 30, 2021 | Uncategorized

Accounting for a Performance Based Stock Option Plan

Rhiener Corporation initiated a performance based employee stock option plan on January 1, 2007. The performance base for the plan is net sales in the year 2009. The plan provides for stock options to be awarded to the employees as a group on the following basis:

The options become exercisable on January 1, 2010. The option exercise price is $20 per share. On January 1, 2007, each option had a fair value of $9. The market prices of Rhiener stock on selected dates in 2007–2009 were as follows:

Year 2009 sales estimates as of selected dates were as follows:

Actual sales for 2009 were $700,000. Calculate the compensation expense Rhiener should report for the years 2007,2008, and 2009 related to this performance based stock option plan.

stock appreciation rights san juan corporation established a stock option plan that 692515

Aug 30, 2021 | Uncategorized

Stock Appreciation Rights

San Juan Corporation established a stock option plan that provides for cash payments to employees based on the appreciation of stock prices from an established option price. The plan was instituted on January 1, 2008, and provides benefits to employees who work for the succeeding three years. Cash payments to employees will be made on January 1, 2011, and will equal the excess of the stock price over the option price on that date. In total, 10,000 of these cash stock appreciation rights (SARs) were granted to employees. The option price established for the stock is $10 per share. The market price of San Juan stock on selected dates in 2008–2010 was as follows:

Prepare the journal entries on San Juan’s books for the years 2008, 2009, 2010, and 2011 related to this plan.

convertible preferred stock stockholders rsquo equity for yuri co on december 31 was 692516

Aug 30, 2021 | Uncategorized

Convertible Preferred Stock

Stockholders’ equity for Yuri Co. on December 31 was as follows:

Preferred stock is convertible into common stock.

Provide the entry made on Yuri Co.’s books assuming that 4,000 shares of preferred are converted under each assumption listed:

1. Preferred shares are convertible into common on a share for share basis.

2. Each share of preferred stock is convertible into 4.0 shares of common.

3. Each share of preferred stock is convertible into 1.5 shares of common.

reporting errors from previous periods endicott company rsquo s december 31 2007 bal 692517

Aug 30, 2021 | Uncategorized

Reporting Errors from Previous Periods

Endicott Company’s December 31, 2007, balance sheet reported retained earnings of $86,500, and net income of $124,000 was reported in the 2007 income statement. While preparing financial statements for the year ended December 31, 2008, Tom Dr. yden, accountant for Endicott Company, discovered that net income for 2007 had been overstated by $36,000 due to an error in recording depreciation expense for 2007. Net income for 2008 was $106,000, and dividends of $30,000 were declared and paid in 2008.

1. What effect, if any, would the $36,000 error made in 2007 have on the company’s 2008 financial statements?

2. Compute the amount of retained earnings to be reported in Endicott Company’s December 31, 2008, balance sheet.

stock dividends the balance sheet of carmen corporation shows the following common s 692520

Aug 30, 2021 | Uncategorized

Stock Dividends

The balance sheet of Carmen Corporation shows the following:

A 25% stock dividend is declared, with the board of directors authorizing a transfer from Retained Earnings to Common Stock at the stated value of the shares.

1. Provide entries to record the declaration and issuance of the stock dividend.

2. What was the effect of the issuance of the stock dividend on the ownership equity of each stockholder in the corporation?

3. Provide entries to record the declaration and issuance of the dividend if the board of directors had elected to declare a 15% stock dividend instead of 25%. The market value of the stock is $10 per share after the 15% stock dividend is issued.

stock dividends and stock splits the capital accounts for shop right market on june 692521

Aug 30, 2021 | Uncategorized

Stock Dividends and Stock Splits

The capital accounts for Shop Right Market on June 30, 2008, are as follows:

Shares of the company’s stock are selling at this time at $22. What entries would you make in each of the following cases?

(a) A 10% stock dividend is declared and issued.

(b) A 50% stock dividend is declared and issued.

(c) A 2 for 1 stock split is declared and issued.

correcting the retained earnings account the retained earnings account for gotfried 692524

Aug 30, 2021 | Uncategorized

Correcting the Retained Earnings Account

The retained earnings account for Gotfried Corp. shows the following debits and credits. Indicate all entries required to correct the account. What is the corrected amount of retained earnings?

Account: Retained Earnings

equity adjustments the following data are for radial company contributed capital and 692525

Aug 30, 2021 | Uncategorized

Equity Adjustments

The following data are for Radial Company:

Compute total stockholders’ equity for Radial Company.

analysis of owners rsquo equity from the following information reconstruct the journ 692526

Aug 30, 2021 | Uncategorized

Analysis of Owners’ Equity

From the following information, reconstruct the journal entries that were made by Rivers Corporation during 2008.

reporting stockholders rsquo equity kenny co began operations on january 1 2007 by i 692527

Aug 30, 2021 | Uncategorized

Reporting Stockholders’ Equity

Kenny Co. began operations on January 1, 2007, by issuing at $15 per share one half of the 950,000 shares of $1 par value common stock that had been authorized for sale. In addition, Kenny has 500,000 shares of $5 par value, 6% preferred shares authorized. During 2007,Kenny had $1,025,000 of net income and declared $237,500 of dividends.

During 2008,Kenny had the following transactions:

Jan. 10 Issued an additional 100,000 shares of common stock for $17 per share.

Apr. 1 Issued 150,000 shares of the preferred stock for $8 per share.

July 19 Authorized the purchase of a custom made machine to be delivered in January 2009. Kenny restricted $295,000 of retained earnings for the purchase of the machine.

Oct. 23 Sold an additional 50,000 shares of the preferred stock for $9 per share.

Dec. 31 Reported $1,215,000 of net income and declared a dividend of $635,000 to stockholders of record on January 15, 2009, to be paid on February 1, 2009.

1. Prepare the stockholders’ equity section of Kenny’s balance sheet for December 31, 2007.

2. Prepare a statement of changes in stockholders’ equity for 2008.

3. Prepare the stockholders’ equity section of Kenny’s balance sheet for December 31, 2008.

journalizing stock transactions vicars company began operations on january 1 authori 692528

Aug 30, 2021 | Uncategorized

Journalizing Stock Transactions

Vicars Company began operations on January 1. Authorized were 20,000 shares of $1 par value common stock and 4,000 shares of 10%, $100 par value convertible preferred stock. The following transactions involving stockholders’ equity occurred during the first year of operations:

Jan. 1 Issued 500 shares of common stock to the corporation promoters in exchange for property valued at $17,000 and services valued at $7,000. The property had cost the promoters $9,000 three years before and was carried on the promoters’ books at $5,000.

Feb. 23 Issued 1,000 shares of convertible preferred stock with a par value of $100 per share. Each share can be converted to five shares of common stock. The stock was issued at a price of $150 per share, and the company paid $7,500 to an agent for selling the shares.

Mar. 10 Sold 3,000 shares of the common stock for $39 per share. Issue costs were $2,500.

Apr. 10 Sold 4,000 shares of common stock under stock subscriptions at $45 per share. No shares are issued until a subscription contract is paid in full. No cash was received.

July 14 Exchanged 700 shares of common stock and 140 shares of preferred stock for a building with a fair market value of $51,000. The building was originally purchased for $38,000 by the investors and has a book value of $22,000. In addition, 600 shares of common stock were sold for $24,000 in cash.

Aug. 3 Received payments in full for half of the stock subscriptions and payments on account on the rest of the subscriptions. Total cash received was $140,000. Shares of stock were issued for the subscriptions paid in full.

Dec. 1 Declared a cash dividend of $10 per share on preferred stock, payable on December 31 to stockholders of record on December 15, and a $2 per share cash dividend on common stock, payable on January 5 of the following year to stockholders of record on December 15. (No dividends are paid on unissued subscribed stock.)

31 Paid the preferred stock dividend.

31 Received notice from holders of stock subscriptions for 800 shares that they would not pay further on the subscriptions because the price of the stock had fallen to $25 per share. The amount still due on those contracts was $30,000. Amounts previously paid on the contracts are forfeited according to the agreements.

Net income for the first year of operations was $60,000. Assume that revenues and expenses were closed to a temporary account, Income Summary. Use this account to complete the closing process.

Instructions:

1. Prepare journal entries to record the preceding transactions on Vicars’ books.

2. Prepare the Stockholders’ Equity section of the balance sheet at December 31 for Vicars.

stockholders rsquo equity transactions and balance sheet presentation atlantic pacif 692529

Aug 30, 2021 | Uncategorized

Stockholders’ Equity Transactions and Balance Sheet Presentation

Atlantic Pacific Corporation was organized on September 1, 2008, with authorized capital stock of 150,000 shares of 7% cumulative preferred stock with a $40 par value and 1,200,000 shares of no par common stock with a $2 stated value. During the balance of the year, the following transactions relating to capital stock were completed:

Oct. 1 Received subscriptions for 200,000 shares of common stock at $39, payable $20 down and the balance in two equal installments due November 1 and December 1. On the same date, 17,800 shares of common stock were issued to Alan Williams in exchange for his business. Assets transferred to the corporation were valued as follows: land, $195,000; buildings, $216,000; equipment, $62,000; merchandise, $105,000. Liabilities of the business assumed by the corporation were mortgage payable, $46,000; accounts payable, $14,000; accrued interest on mortgage, $900. The fair value of the net assets is considered to be a reliable reflection of the value of the business; no goodwill is recognized. 3 Received subscriptions for 110,000 shares of preferred stock at $51, payable $21 down and the balance in two equal installments due November 1 and December 1.

Nov. 1 Collected amounts due on this date from all common and preferred stock subscribers.

12 Received subscriptions for 390,000 shares of common stock at $42, payable $20 down and the balance in two equal installments due December 1 and January 1.

Dec. 1 Collected amounts due on this date from all common stock and preferred stock subscribers and issued stock fully paid for.

Instructions:

1. Prepare journal entries to record these transactions.

2. Prepare the Contributed Capital section of stockholders’ equity for the corporation as of December 31, including any equity offsets.

sample cpa exam questions 1 on december 31 2009 moss co issued 1 000 000 of 11 bonds 692463

Aug 30, 2021 | Uncategorized

Sample CPA Exam Questions

1. On December 31, 2009, Moss Co. issued $1,000,000 of 11% bonds at 109. Each $1,000 bond was issued with 50 detachable stock warrants, each of which entitled the bondholder to purchase one share of $5 par common stock for $25. Immediately after issuance, the market value of each warrant was $4. On December 31, 2009, what amount should Moss record as discount or premium on issuance of bonds?

a. $40,000 premium

b. $90,000 premium

c. $110,000 discount

d. $200,000 discount

2. On July 31, 2009, Dome Co. issued $1,000,000 of 10%, 15 year bonds at par and used a portion of the proceeds to call its 600 outstanding 11%, $1,000 face value bonds, due on July 31, 2019, at 102. On that date, unamortized bond premium relating to the 11% bonds was $65,000. In its 2009 income statement, what amount should Dome report as gain or loss, before income taxes, from retirement of bonds?

a. $53,000 gain

b. $0

c. ($65,000) loss

d. ($75,000) loss

troubled debt restructuring mdash modification of terms volatile company after havin 692464

Aug 30, 2021 | Uncategorized

Troubled Debt Restructuring—Modification of Terms

Volatile Company, after having experienced financial difficulties in 2006, negotiated with two major creditors and arrived at an agreement to restructure its debts on December 31, 2006. The two creditors were M. Voisin and G. Stock. Voisin was owed principal of $325,000 and interest of $40,000 but agreed to accept equipment worth $70,000 and notes receivable from Volatile Company’s customers worth $275,000. The equipment had an original cost of $95,000 and accumulated depreciation of $35,000. Stock was owed $650,000 and agreed to extend the terms and to accept immediate payment of $200,000 and the remaining agreed upon balance of $477,403 to be paid on December 31, 2008. All payments were made according to schedule.

Instructions: Prepare Volatile’s journal entries to record the restructuring on December 31, 2006, and the entries necessary to make the adjustments and record payments on December 31, 2007, and 2008.

troubled debt restructuring mdash modification of terms in the latter part of 2007 o 692465

Aug 30, 2021 | Uncategorized

Troubled Debt Restructuring—Modification of Terms

In the latter part of 2007, Odessa Company experienced severe financial pressure and was in default of meeting interest payments on long term notes of $6,000,000 due on December 31, 2012. The interest rate on the debt was 11%, payable semiannually on June 30 and December 31. In an agreement with Modern Investment Corporation, Odessa obtained acceptance of a change in principal and interest terms for the remaining 5 year life of the notes. The changes in terms are as follows:

(a) A reduction of principal of $475,000.

(b) A reduction in the interest rate to 8%.

(c) Odessa agreed to pay on December 31, 2007, both the $660,000 of interest in arrears and the normal interest payment under the old terms.

Instructions:

1. Compute the total dollar difference in cash payments by Odessa over the 5 year period as a result of the restatement of terms.

2. Prepare the journal entries for the restructuring of the debt, payment of interest under the old terms, and the first two interest payments under the new terms that Odessa would make.

leave my current ratio alone soto inc a closely held corporation has never been audi 692468

Aug 30, 2021 | Uncategorized

Leave My Current Ratio Alone!

Soto Inc., a closely held corporation, has never been audited and is seeking a large bank loan for plant expansion. The bank has requested audited financial statements. In conference with the president and majority stockholder of Soto, the auditor is informed that the bank looks very closely at the current ratio. The auditor’s proposed reclassifications and adjustments include the following:

(a) A note payable issued 41⁄2 years ago matures in six months from the balance sheet date.

The auditor wants to reclassify it as a current liability. The controller says no because “we are probably going to refinance this note with other long term debt.”

(b) An accrual for compensated absences. Again the controller objects because the amount of the pay for these absences cannot be estimated. “Some employees quit in the first year and don’t get vacation, and it is impossible to predict which employees will be absent for illness or other causes. Without being able to identify the employees, we can’t determine the rate of compensation.”

If you were the auditor, how would you respond to the controller?

accounting for bonds startup company decided to issue 100 000 worth of 10 5 year bon 692469

Aug 30, 2021 | Uncategorized

Accounting for Bonds

Startup Company decided to issue $100,000 worth of 10%, 5 year bonds dated January 1, 2007, with interest payable semiannually on January 1 and July 1 of each year. Due to printing and other delays, Startup was not able to sell the bonds until July 1, 2007. The bonds were sold to yield 12% interest, and they are callable at 102 after January 1, 2009. The company expects interest rates to fall during the next few years and is planning to retire this bond issue and to replace it with a less costly one if the expected decline occurs. Assume that you have just been hired as the accountant for Startup Company. The financial vice president would like you to identify the accounting issues involved with the bond transaction. You are also asked to explain why the company received less than $100,000 on the sale of the bonds and to compute the anticipated gain or loss on retirement of the bonds, assuming retirement on July 1, 2009, and use of straight line amortization.

disaster bonds natural disasters occur all too often californians worry about earthq 692470

Aug 30, 2021 | Uncategorized

Disaster Bonds

Natural disasters occur all too often. Californians worry about earthquakes. Residents of Florida worry about hurricanes. Folks along the Mississippi River worry about flooding. The Midwest has its twisters, and the Rocky Mountain states have wildfires. Insurance companies worry about them all. In simple terms, insurance companies make money by charging customers premiums that exceed the amount expected to be paid out in claims. What are insurance companies doing? They are spreading the risks and costs across many people. If your home is lost in a fire and you are not insured, you are responsible for paying to have your home rebuilt. If you are insured, all the policyholders of your insurance company chip in, in effect, to rebuild your house. In the case of a mega disaster, there is a risk that insurance companies will not have the resources to cover all losses of policyholders. The insurance industry estimates that a worst case disaster would result in $50 billion in losses—enough to force many insurance companies out of business. If a disaster of this magnitude were to occur, many insurance companies wouldn’t have enough policyholders over whom to spread the losses. So how do insurance companies deal with the enormous risks associated with “acts of God”? Disaster bonds! Disaster bonds are a relatively new invention. These bonds allow insurance companies to share the risks of mega disasters with bondholders. In August 1996, Merrill Lynch & Co. began marketing the first major “act of God” bond issue. The bonds are issued by USAA, a car and home insurer based in San Antonio. These are the terms of the bonds: If USAA incurs over $1 billion in hurricane claims from a single storm over a 1 year period, investors in the disaster bonds will lose both interest and principal payments. Thus, if a huge hurricane hits the East Coast and claims from policyholders of USAA exceed $1 billion, USAA can use the money it would have paid to bondholders to pay policyholders. USAA is trying to do what insurance companies do best—spread the risk. While yields for traditional bonds were around 8% in August 1996, the expected yield on disaster bonds was around 15%. Why do you think there is such a high yield on disaster bonds?

is there a loss on conversion holton co recently issued 1 000 000 face value 8 30 ye 692471

Aug 30, 2021 | Uncategorized

Is There a Loss on Conversion?

Holton Co. recently issued $1,000,000 face value, 8%, 30 year debentures at 97. The debentures are callable at 103 upon 30 days’ notice by the issuer at any time beginning five years after the date of issue. The debentures are convertible into $1 par value common stock of the company at the conversion price of $12.50 per share for each $500 or multiple thereof of the principal amount of the debentures ($500/$12.50 = 40 shares for each $500 of face value). Assume that no value is assigned to the conversion feature at the date of issue of the debentures. Assume further that five years after issue, debentures with a face value of $100,000 and book value of $97,500 are tendered for conversion on an interest payment date when the market price of the debentures is 104 and the common stock is selling at $14 per share. J. K. Biggs, the company accountant, records the conversion as follows:

Julie Robinson, staff auditor for the company’s CPA firm, reviews the transaction and feels the conversion entry should reflect the market value of the stock. According to Robinson’s analysis, a loss on the bond conversion of $14,500 should be recognized. Biggs objects to recognizing a loss, so Robinson discusses the problem with the audit manager, K. Ashworth. Ashworth has a different view and recommends using the market value of the debentures as a basis for recording the conversion and recognizing a loss of only $6,500. Evaluate the various positions. Include in your evaluation the substitute entries that would be made under both Robinson’s and Ashworth’s proposals.

deferred interest and interest rate resets corporations commonly incur debt in finan 692472

Aug 30, 2021 | Uncategorized

Deferred Interest and Interest Rate Resets

Corporations commonly incur debt in financing the acquisition of other companies or in fighting takeover attacks by competitors. Two strategies often employed involve deferring interest payments and incorporating interest rate resets. For example, Interco Inc. incurred large amounts of debt in 1989 to make itself unattractive as a takeover target. The debt postponed interest payments until 1991 at which time interest was to be paid at 14%. Interco’s strategy was to sell a portion of its business, Ethan Allen Inc., to redeem the debt.

However, the sale netted $120 million less than expected. Western Union incurred $500 million in debt that carried with it a reset provision. The provision called for increased interest rates if the bonds were not trading at a specified price. Western Union’s reset provision increased interest rates from 16.5% to 19.25% in 1990. While interest expense rose, revenues Dr.opped 28% from 1988 to 1989 as a result of fax machines making Western Union’s telex service obsolete.

1. What is the significance of debt with respect to company acquisitions?

2. Why would corporations use deferred interest features and interest rate resets?

3. In the case of Interco, how would incurring large amounts of debt be an effective method for fighting a takeover?

circle k corporation and its debt covenants when companies raise money through the i 692473

Aug 30, 2021 | Uncategorized

Circle K Corporation and Its Debt Covenants

When companies raise money through the issuance of bonds or other long term debt instruments, debt holders typically require the company to comply with certain conditions, or covenants. The notes to Circle K’s 1989 financial statements provide an example of debt covenants: The notes (Senior Secured Notes) required the Company to observe certain financial covenants, including covenants relating to maintenance of a minimum consolidated net worth, a fixed charge coverage ratio, limitations on dividends, purchases of capital stock and a requirement that any successor by merger or similar transaction to the Company have a comparable net worth and assume all the obligations under the notes. In addition to using debt to finance expansion, Circle K financed many of its store acquisitions through sales and leaseback transactions. These types of transactions represent a form of long term debt financing and often involve covenants as well. The notes to the 1989 financial statements detail the results of a violation of covenants: As of April 30, 1989, the Company was not in compliance with the fixed charge ratio of one of its sale and leaseback transactions involving 250 stores. Because of its noncompliance with such ratio, the Company is required to place $5 million per year into escrow.

1. What is the purpose of debt covenants?

2. What is the purpose of requiring an annual $5 million payment into escrow?

3. If Circle K’s financial condition is such that it violates its financing covenants, will requiring the company to place $5 million in escrow help to ease the financial strains?

in substance defeasance another form of early extinguishment of debt is referred to 692476

Aug 30, 2021 | Uncategorized

In Substance Defeasance

Another form of early extinguishment of debt is referred to as in substance defeasance, or economic defeasance. In substance defeasance is a process of transferring assets, generally cash and securities, to an irrevocable trust, and using the assets and earnings therefrom to satisfy the long term obligations as they come due. In some instances, the debt holders are not aware of these transactions and continue to rely on the issuer of the debt for settlement of the obligation. In other words, there has been no “legal defeasance” or release of the debtor from the legal liability. Before FASB Statement No. 125 was issued in 1996, an in substance defeasance was treated as an extinguishment of debt even though the debt is not actually repaid. The provisions of Statement No. 125 (and its successor, Statement No. 140) no longer allow debt to be removed from the balance sheet through in substance defeasance. Under Statement No. 140, what conditions must be satisfied for debt to be removed from the balance sheet? In what way do these conditions stop the use of in substance defeasance as a way to remove debt from the balance sheet?

do we really have income jefferson corporation has 20 000 000 of 10 bonds outstandin 692477

Aug 30, 2021 | Uncategorized

Do We Really Have Income?

Jefferson Corporation has $20,000,000 of 10% bonds outstanding. Because of cash flow problems, the company is behind in interest payments and in contributions to its bonds retirement fund. The market value of the bonds has declined until it is currently only 50% of the face value of the bonds. After lengthy negotiations, the principal bondholders have agreed to exchange their bonds for preferred stock that has a current market value of $10,000,000. The accountant for Jefferson Corporation recorded the transaction by charging Bond Liability for the entire $20,000,000 and crediting Preferred Stock for the same amount. This entry thus transfers the amount received by the company from debt to equity. The CPA firm performing the annual audit, however, does not agree with this treatment. The auditors argue that this transfer represents a troubled debt restructuring due to the significant concessions made by the bondholders, and under these conditions, the FASB requires Jefferson to use the market value of the preferred stock as its recorded value. The difference between the $20,000,000 face value of the bonds and the $10,000,000 market value of the preferred stock is a reportable gain. The controller of Jefferson, L. Rogers, is flabbergasted. “Here we are, almost bankrupt, and you tell us we must report the $10,000,000 as a gain. I don’t care what the FASB says; that’s a ridiculous situation. You can’t be serious.”

The auditor in charge of the engagement is adamant. “We really have no choice. You have had a forgiveness of debt for $10,000,000.You had use of the money, and based on current conditions, you won’t have to pay it back. That situation looks like a gain to me.” What position do you think should be taken? Consider the external users of the financial statements and their needs in your discussion.

deciphering financial statements boston celtics in december of 2002 the boston celti 692479

Aug 30, 2021 | Uncategorized

Deciphering Financial Statements (Boston Celtics)

In December of 2002, the Boston Celtics were purchased by a private investment group. Now that the Celtics are owned by a private group, their financial statements are not publicly available. However, prior to their going private, their financial statements were publicly available. A portion of those financial statements (the Liabilities and Equity section of the balance sheet) is shown below. Celtics Basketball Holdings Limited Partnership was the name of the entity under which the results of the Boston Celtics were reported prior to their going private. Review the Liabilities and Equity section of the balance sheet and answer the following questions.

1. What is Deferred Game Revenues? How would that liability have arisen?

2. What does the account Deferred Compensation represent? Note that this account has both a current and noncurrent portion.

3. As of June 30, 2001, what did the Celtics report as total assets?

4. Consider your answer to part (3) in light of the $50,000,000 amount of outstanding notes payable. If you were a creditor of the Celtics, would you be concerned? How is it possible for the organization to continue to function with such a large partners’ deficit?

deciphering financial statements hewlett packard amp dell review the 2004 balance sh 692480

Aug 30, 2021 | Uncategorized

Deciphering Financial Statements (Hewlett Packard & Dell)

Review the 2004 balance sheet data for Hewlett Packard (HP) and Dell shown below.

1. Compute each company’s current ratio for 2004. Based on the result, which company appears to be more liquid?

2. Compute each company’s debt to equity ratio for 2004. Which company appears to have the most debt in relation to stockholders’ equity?

3. Which company has a larger amount of long term debt in its financing mix?

4. Why would HP have such a large amount in retained earnings at the end of 2004 relative to Dell?

writing assignment i like these ldquo no interest rdquo bonds j r chump president of 692483

Aug 30, 2021 | Uncategorized

Writing Assignment (I like these “no interest” bonds.)

J. R. Chump, president of ProKeeper Industries, is contemplating the issuance of long term debt to finance plant expansion and renovation. J. R. Chump, president of ProKeeper Industries, is contemplating the issuance of long term debt to finance plant expansion and renovation. In the past, his company has issued traditional debt instruments that require regular interest payments and a retirement of the principal on the maturity date. However, he has noticed that several competitors have recently issued bonds that either do not require interest payments or defer interest payments for several years. He has asked you, his chief financial officer, to prepare a short memo adDr.essing the following questions.

1. Why would a company issue bonds that require interest payments if bonds that do not require interest payments are being sold in the open market?

2. If the company were to issue 10 year bonds with a face value of $100,000 and the market rate of interest is 10%, what would be the proceeds from the sale if the bonds were zero interest bonds? What would be the proceeds if the annual interest payments did not begin for 5 years and the stated rate of interest were 10%? What would be the proceeds if the bonds paid interest annually for 10 years at 10%?

3. What factors must a business consider when determining the interest terms associated with long term debt?

researching accounting standards to help you become familiar with the accounting sta 692484

Aug 30, 2021 | Uncategorized

Researching Accounting Standards

To help you become familiar with the accounting standards, this case is designed to take you to the FASB’s Web site and have you access various publications.

In this chapter, we have discussed off balance sheet financing and recent changes in the accounting for one of the more common methods of off balance sheet financing, variable interest entities. For this case, we will use Interpretation 46(R), “Consolidation of

Variable Interest Entities—An Interpretation of ARB No. 51. Open FIN 46(R).

1. Read paragraph 2. What does the term variable interests mean?

2. Read paragraph 23. What additional disclosure is required by the primary beneficiary of a variable interest entity?

ethical dilemma keeping our debt covenants you are the chief financial officer of a 692485

Aug 30, 2021 | Uncategorized

Ethical Dilemma (Keeping our debt covenants)

You are the chief financial officer of a local manufacturing company, Larsen Enterprises. This company is run by two brothers, Steve and John Larsen. The Larsen brothers have built this company up from a small 5 man shop to a company now employing over 200 people. The national economy has recently taken a turn for the worse, which has affected the Larsen’s business. In fact, the company’s performance of late has been such that it is in jeopardy of violating several of its debt covenants (promises made to the lending institution). If the company violates these covenants, the bank has the option of calling the debt due immediately. If the debt is called, Larsen is not sure what will happen, but it will certainly not be good. The covenant that is in jeopardy relates to the current ratio. If the current ratio Dr.ops below 2, Larsen Enterprises is considered in technical default on its debt. Steve and John have come to you and asked you to suggest ways in which the current ratio, which currently stands at 1.9, could be increased. Take a moment and think of ways in which the current ratio might be manipulated. Identify specific actions that the Larsen brothers might take to increase the current ratio. Is it in the best interests of shareholders and lending institutions for Steve and John to make business decisions that have cosmetic effects on the financial statements?

cumulative spreadsheet analysis this spreadsheet assignment is a continuation of the 692486

Aug 30, 2021 | Uncategorized

Cumulative Spreadsheet Analysis

This spreadsheet assignment is a continuation of the spreadsheet assignments given in earlier chapters. If you completed those assignments, you have a head start on this one. Refer back to the instructions for preparing the revised financial statements for 2008 as given in (1) of the Cumulative Spreadsheet Analysis assignment in Chapter 3.

1. Skywalker wishes to prepare a forecasted balance sheet, a forecasted income statement, and a forecasted statement of cash flows for 2009. Use the financial statement numbers for 2008 as the basis for the forecast, along with the following additional information.

(a) Sales in 2009 are expected to increase by 40% over 2008 sales of $2,100.

(b) In 2009, new property, plant, and equipment acquisitions will be in accordance with the information in (q).

(c) The $480 in operating expenses reported in 2008 breaks down as follows: $15 in depreciation expense and $465 in other operating expenses.

(d) New long term debt will be acquired in 2009 in accordance with (u).

(e) No cash dividends will be paid in 2009.

(f) New short term loans payable will be acquired in an amount sufficient to make Skywalker’s current ratio in 2009 exactly equal to 2.0.

(g) Skywalker does not anticipate repurchasing any additional shares of stock during 2009.

(h) Because changes in future prices and exchange rates are impossible to predict, Skywalker’s best estimate is that the balance in accumulated other comprehensive income will remain unchanged in 2009.

(i) In the absence of more detailed information, assume that the balances in Investment Securities, Long Term Investments, and Other Long Term Assets will all increase at the same rate as sales (40%) in 2009.The balance in Intangible Assets will change in accordance with item (r).

(j) In the absence of more detailed information, assume that the balance in the other long term liabilities account will increase at the same rate as sales (40%) in 2009.

(k) The investment securities are classified as available for sale securities. Accordingly, cash from the purchase and sale of these securities is classified as an investing activity.

(l) Assume that transactions impacting other long term assets and other long term liabilities accounts are operating activities.

(m) Cash and investment securities accounts will increase at the same rate as sales.

(n) The forecasted amount of accounts receivable in 2009 is determined using the forecasted value for the average collection period. The average collection period for 2009 is expected to be 14.08 days. To make the calculations less complex, this value of 14.08 days is based on forecasted end of year accounts receivable rather than on average accounts receivable.

(o) The forecasted amount of inventory in 2009 is determined using the forecasted value for the number of days’ sales in inventory. The number of days’ sales in inventory for 2009 is expected to be 107.6 days. To make the calculations simpler, this value of 107.6 days is based on forecasted end of year inventory rather than on average inventory.

(p) The forecasted amount of accounts payable in 2009 is determined using the forecasted value for the number of days’ purchases in accounts payable. The number of days’ purchases in accounts payable for 2009 is expected to be 48.34 days. To make the calculations simpler, this value of 48.34 days is based on forecasted end of year accounts payable rather than on average accounts payable.

(q) The forecasted amount of property, plant, and equipment (PP&E) in 2009 is determined using the forecasted value for the fixed asset turnover ratio. The fixed asset turnover ratio for 2009 is expected to be 3.518 times. To make the calculations simpler, this ratio of 3.518 is based on forecasted end of year gross property, plant, and equipment balance rather than on the average balance.

(r) Skywalker has determined that no new intangible assets will be acquired in 2009. Intangible assets are amortized according to the information in (t).

(s) In computing depreciation expense for 2009, use straight line depreciation and assume a 30 year useful life with no residual value. Gross PP&E acquired during the year is only depreciated for half the year. In other words, depreciation expense for 2009 is the sum of two parts: (1) a full year of depreciation on the beginning balance in PP&E, assuming a 30 year life and no residual value, and (2) a half year of depreciation on any new PP&E acquired during the year, based on the change in the gross PP&E balance.

(t) Skywalker assumes a 20 year useful life for its intangible assets. Assume that the $100 in intangible assets reported in 2008 is the original cost of the intangibles. Include the amortization expense with the depreciation expense in the income statement.

For this exercise, make the following additional assumptions:

(u) New long term debt will be acquired (or repaid) in an amount sufficient to make

Skywalker’s debt ratio (total liabilities divided by total assets) in 2009 exactly equal to 0.80.

(v) Assume an interest rate on short term loans payable of 6.0% and on long term debt of 8.0%. Only a half year’s interest is charged on loans taken out during the year.

For example, if short term loans payable at the end of 2009 is $15 and given that short term loans payable at the end of 2008 were $10, total short term interest expense for 2009 would be $0.75 [($10 x 0.06) + ($5 x 0.06 x 1/2)]. Clearly state any additional assumptions that you make.

2. Repeat (1) with the following changes in assumptions.

(a) The debt ratio in 2009 is exactly equal to 0.70.

(b) The debt ratio in 2009 is exactly equal to 0.90.

3. Comment on the differences in the forecasted values of cash from operating activities in 2009 under each of the following assumptions about the debt ratio: 0.70, 0.80, and 0.90. Explain exactly why a change in debt ratio has an impact on cash from operating activities.

accounting for a basic stock based compensation plan on january 1 the company grante 692491

Aug 30, 2021 | Uncategorized

Accounting for a Basic Stock Based Compensation Plan

On January 1, the company granted 100,000 stock options to key employees. Each option allows an employee to buy one share of $1 par common stock for $30, which was the market price of the shares on the grant date of January 1. In order to be able to exercise the options, the employees must remain with the company for three entire years. It is estimated that the fair value of each option on the date of grant was $3. At the end of three years, all of the options were exercised when the market price of the shares was $42 per share. Make all of the journal entries necessary with respect to these options in the first year. Also make the journal entry that would be made at the end of three years to record the exercise of the options.

accounting for a written put option on january 1 year 1 the company wrote a put opti 692495

Aug 30, 2021 | Uncategorized

Accounting for a Written Put Option

On January 1,Year 1, the company wrote a put option agreeing to purchase 100 shares of its own stock for $50 per share on December 31,Year 2, at the option of the purchaser of the put option. The market price of the company’s shares on January 1, Year 1, was $50 per share. As of January 1, Year 1, this put option has a fair value of $1,200. Because the company’s shares increased in value during Year 1, the put option has a fair value of just $350 on December 1, Year 1. On December 31, Year 2, the company’s shares have a market price of $46 per share, so the purchaser of the put option exercised the option on that date. Make the journal entries necessary on January 1, Year 1, on December 31, Year 1, and on December 31, Year 2 on the books of the company that wrote the put option.

comprehensive income the company started business on january 1 2006 net income and d 692501

Aug 30, 2021 | Uncategorized

Comprehensive Income

The company started business on January 1, 2006. Net income and dividends for the first three years of the company’s existence are as follows:

The company has some foreign subsidiaries and also maintains a portfolio of available forsale securities. During 2006, 2007, and 2008, the U.S. dollar value of the equity of the foreign subsidiaries and the market value of the securities in the available for sale portfolio fluctuated as follows:

Compute comprehensive income for each of the three years: 2006, 2007, and 2008.

working capital and current ratio using the following information compute 1 working 692414

Aug 30, 2021 | Uncategorized

Working Capital and Current Ratio

Using the following information, compute (1) working capital and (2) current ratio.

debt to equity ratio consider the following information 692423

Aug 30, 2021 | Uncategorized

Debt to Equity Ratio

Consider the following information:

Compute the debt to equity ratio assuming that (1) debt is defined to include all liabilities, (2) debt is defined to include just interest bearing debt, and (3) debt is defined to include just long term, interest bearing debt.

times interest earned ratio refer to practice 12 17 compute the times interest earne 692424

Aug 30, 2021 | Uncategorized

Times Interest Earned Ratio

Refer to Practice 12 17. Compute the times interest earned ratio.

Practice 12 17

Debt to Equity Ratio

Consider the following information:

Compute the debt to equity ratio assuming that (1) debt is defined to include all liabilities, (2) debt is defined to include just interest bearing debt, and (3) debt is defined to include just long term, interest bearing debt.

bond interest and premium or discount amortization assume that 200 000 of baker scho 692435

Aug 30, 2021 | Uncategorized

Bond Interest and Premium or Discount Amortization

Assume that $200,000 of Baker School District 6% bonds are sold on the bond issue date for $185,788. Interest is payable semiannually, and the bonds mature in 10 years. The purchase price provides a return of 7% on the investment.

1. What entries would be made on the investor’s books for the receipt of the first two interest payments, assuming premium or discount amortization on each interest date by (a) the straight line method and (b) the effective interest method? (Round to the nearest dollar.)

2. What entries would be made on Baker School District’s books to record the first two interest payments, assuming premium or discount amortization on each interest date by (a) the straight line method and (b) the effective interest method? (Round to the nearest dollar.)

discount and premium amortization tanzanite corporation issued 500 000 of 7 debentur 692436

Aug 30, 2021 | Uncategorized

Discount and Premium Amortization

Tanzanite Corporation issued $500,000 of 7% debentures to yield 11%, receiving $424,624.

Interest is payable semiannually, and the bonds mature in five years.

1. What entries would be made by Tanzanite for the first two interest payments, assuming premium or discount amortization on interest dates by (a) the straight line method and

(b) the effective interest method? (Round to the nearest dollar.)

2. What entries would be made on the books of the investor for the first two interest receipts, assuming premium or discount amortization on interest dates and that one party obtained all the bonds and used the straight line method of amortization? (Round to the nearest dollar.)

3. If the sale is made to yield 5%, $543,760 being received, what entries would be made by Tanzanite for the first two interest payments, assuming premium or discount amortization on interest dates by (a) the straight line method and (b) the effective interest method? (Round to the nearest dollar.)

retirement of bonds the december 31 2007 balance sheet of spring company includes th 692439

Aug 30, 2021 | Uncategorized

Retirement of Bonds

The December 31, 2007, balance sheet of Spring Company includes the following items:

The bonds were issued on December 31, 2006, at 105, with interest payable on June 30 and December 31 of each year. The straight line method is used for premium amortization. On April 1, 2008, Spring retired $100,000 of these bonds at 99 plus accrued interest. Prepare the journal entries to record retirement of the bonds, including accrual of interest since the last payment and amortization of the premium.

convertible bonds clarkston inc issued 1 000 000 of convertible 10 year 11 bonds on 692442

Aug 30, 2021 | Uncategorized

Convertible Bonds

Clarkston Inc. issued $1,000,000 of convertible 10 year, 11% bonds on July 1, 2007. The interest is payable semiannually on January 1 and July 1. The discount in connection with the issue was $9,500, which is amortized monthly using the straight line basis. The debentures are convertible after one year into five shares of the company’s $1 par common stock for each $1,000 of bonds. On August 1, 2008, $100,000 of the bonds were converted. Interest has been accrued monthly and paid as due. Any interest accrued at the time of conversion of the bonds is paid in cash. Prepare the journal entries on Clarkston’s books to record the conversion, amortization, and interest on the bonds as of August 1 and August 31, 2008. (Round to the nearest dollar.)

modification of debt terms moriarty co is experiencing financial difficulties income 692445

Aug 30, 2021 | Uncategorized

Modification of Debt Terms

Moriarty Co. is experiencing financial difficulties. Income has exhibited a downward trend, and the company reported its first loss in company history this past year. The firm has been unable to service its debt and, as a result, has missed two semiannual interest payments. In an attempt to turn the company around, management has negotiated a modification of its debt terms with bondholders. These modified terms are effective January 1, 2008. The bonds are $10,000,000, 10 year, 10% bonds that were issued on January 2, 2003, and currently have an unamortized premium of $210,000. Prepare the necessary journal entries on Moriarty’s books for each of the following independent situations.

(a) Bondholders agree to forgive past due interest and reduce the interest rate on the debt from 10% to 5%.

(b) Bondholders agree to forgive past due interest and forgive $3,000,000 of the face amount of the debt.

(c) Bondholders agree to forgive past due interest, reduce the interest rate on the debt from 10% to 6%, and forgive $2,000,000 of the face value of the debt.

amortizing a mortgage and the effect on the financial statements on january 1 2008 p 692447

Aug 30, 2021 | Uncategorized

Amortizing a Mortgage and the Effect on the Financial Statements

On January 1, 2008, Picard Inc. purchased a new piece of equipment from La Forge Engineering to expand its production facilities. The equipment was purchased at a cost of $800,000. Picard financed the purchase with an $800,000 mortgage to be repaid in annual payments over five years at a rate of 10%. The mortgage was arranged through Pulaski Bank. The annual payments of $211,038 are to be made on December 31 of each year.

Instructions:

1. Prepare a mortgage amortization schedule for the 5 year life of the mortgage.

2. Assuming the equipment is expected to last for five years (with zero salvage value), determine the net amount at which the equipment will be reported on the balance sheet at the end of each year for its 5 year life using straight line depreciation.

3. Compare the liability amount to be disclosed on the balance sheet at the end of each year for the 5 year mortgage term with the asset amount to be disclosed at the end of the same years. Identify the primary reasons for the differences each year.

bond issuance and adjusting entries on january 1 2008 encino company issued bonds wi 692448

Aug 30, 2021 | Uncategorized

Bond Issuance and Adjusting Entries

On January 1, 2008, Encino Company issued bonds with a face value of $1,000,000 and a maturity date of December 31, 2017. The bonds have a stated interest rate of 8%, payable on January 1 and July 1. They were sold to Sea Ray Company for $820,744, a yield of 11%. It cost Encino $40,000 to issue the bonds. This amount was deferred and amortized over the life of the issue using the straight line method. Assume that both companies have December 31 year ends and that Encino uses the effective interest method to amortize any premium or discount and Sea Ray uses the straight line method.

Instructions:

1. Make all entries necessary to record the sale and purchase of the bonds on each company’s books.

2. Prepare the adjusting entries as of December 31, 2008, for both companies. Assume Sea Ray is carrying the bonds as a long term held to maturity security.

computation of bond market price and amortization of premium or discount signal ente 692449

Aug 30, 2021 | Uncategorized

Computation of Bond Market Price and Amortization of Premium or Discount

Signal Enterprises decided to issue $900,000 of 10 year bonds. The interest rate on the bonds is stated at 7%, payable semiannually. At the time the bonds were sold, the market rate had increased to 8%.

Instructions:

1. Determine the maximum amount an investor should pay for these bonds. (Round to the nearest dollar.)

2. Assuming that the amount in (1) is paid, compute the amount at which the bonds would be reported by the investor after being held for one year. Use two recognized methods of handling amortization of the difference in cost and maturity value of the bonds and give support to the method you prefer. (Round to the nearest dollar.)

cash flow effects of a bond premium on january 1 2008 data link inc issued 100 000 1 692452

Aug 30, 2021 | Uncategorized

Cash Flow Effects of a Bond Premium

On January 1, 2008, Data link Inc. issued $100,000,10%,10 year bonds when the market rate of interest was 8%. Interest is payable on June 30 and December 31. The following financial information is available:

All purchases of inventory are on account. Other expenses are paid for in cash.

Instructions:

1. Prepare the journal entry to record the issuance of the bonds on January 1, 2008.

2. Compute (a) the amount of cash paid to bondholders for interest during 2008, (b) the amount of premium amortized during 2008, assuming Datalink uses the straight line method for amortizing bond premiums and discounts, and (c) the amount of interest expense for 2008.

3. Prepare the Cash Flows from Operating Activities section of Datalink’s statement of cash flows using (a) the direct method and (b) the indirect method.

bond entries mdash issuer greenwood company sold 4 000 000 of 7 first mortgage bonds 692454

Aug 30, 2021 | Uncategorized

Bond Entries—Issuer

Greenwood Company sold $4,000,000 of 7% first mortgage bonds on October 1, 2000, at $3,479,683 plus accrued interest. The bonds were dated July 1, 2000; interest payable semiannually on January 1 and July 1; redeemable after June 30, 2005, to June 30, 2008, at 101, and thereafter until maturity at 100; and convertible into $1 par value common stock as follows:

• Until June 30, 2005, at the rate of five shares for each $1,000 bond.

• from July 1, 2005, to June 30, 2008, at the rate of four shares for each $1,000 bond.

• after June 30, 2008, at the rate of three shares for each $1,000 bond.

The bonds mature 10 years from their issue date. The company adjusts its books monthly and closes its books as of December 31 each year.

The following transactions occur in connection with the bonds.

2006

July 1 Converted $1,500,000 of bonds into stock with no gain or loss recognized.

2007

Dec. 31 Reacquired $1,000,000 face value of bonds at 99.75 plus accrued interest. These were immediately retired.

2008

July 1 Called the remaining bonds for redemptions and paid accrued interest. For purposes of obtaining funds for redemption and business expansion, a $3,000,000 issue of 9% bonds was sold at 97. These bonds are dated July 1, 2008, and are due in 20 years.

Instructions: Prepare journal entries necessary for Greenwood Company in connection with the preceding transactions, including monthly adjustments, where appropriate, as of the following dates. Assume bond discount amortization is made using the straight line method. (Round to the nearest dollar.)

1. October 1, 2000

4. December 31, 2007

2. December 31, 2000

5. July 1, 2008

3. July 1, 2006

bond entries mdash investor on june 1 2007 sunderland inc purchased as a long term i 692455

Aug 30, 2021 | Uncategorized

Bond Entries—Investor

On June 1, 2007, Sunderland Inc. purchased as a long term investment 400 of the $1,000 face value, 8% bonds of Stateline Corporation for $364,547. The bonds were purchased to yield 10% interest. Interest is payable semiannually on December 1 and June 1. The bonds mature on June 1, 2013. Sunderland uses the effective interest method of amortization. On November 1, 2008, Sunderland sold the bonds for $392,500. This amount includes the appropriate accrued interest. Sunderland intended to hold these bonds until they matured, so year to year market value fluctuations were ignored in accounting for the bonds.

Instructions: Prepare a schedule showing the income or loss before income taxes from the bond investment that Sunderland should record for the years ended December 31, 2007, and 2008.

bond entries mdash investor on may 1 2005 glacier bay co acquired 30 000 of horizon 692456

Aug 30, 2021 | Uncategorized

Bond Entries—Investor

On May 1, 2005, Glacier Bay Co. acquired $30,000 of Horizon Corp. 8% bonds at 97 plus accrued interest. Interest on bonds is payable semiannually on March 1 and September 1, and bonds mature on September 1, 2008. On May 1, 2006, Glacier Bay Co. sold bonds of $10,000 for 103 plus accrued interest. On July 1, 2007, bonds of $15,000 were exchanged for 2,000 shares of Horizon Corp. common, no par value, quoted on the market on this date at $9. Interest was received on bonds to date of exchange. On September 1, 2008, remaining bonds were redeemed and accrued interest was received.

Instructions: Give journal entries for 2005–2008 to record the preceding transactions on the books for Glacier Bay Co., including any adjustments that are required at the end of each fiscal year ending on December 31. Assume bond premium or discount amortization is by the straight line method. Ignore any potential impact of year to year market value changes on the accounting for the bonds.

note payable entries mdash investor and issuer fitzgerald inc issued 750 000 of 8 ye 692457

Aug 30, 2021 | Uncategorized

Note Payable Entries—Investor and Issuer

Fitzgerald Inc. issued $750,000 of 8 year, 11% notes payable dated April 1, 2004. Interest on the notes is payable semiannually on April 1 and October 1. The notes were sold on April 1, 2004, to an underwriter for $720,000 net of issuance costs. The notes were then offered for sale by the underwriter, and on July 1, 2004, L. Baum purchased the entire issue as a long term investment. Baum paid 101 plus accrued interest for the notes. On June 1, 2007, Baum sold the investment in Fitzgerald notes to J. Gott as a short term investment. Gott paid 96 plus accrued interest for the notes as well as $1,500 for brokerage fees. Baum paid $1,000 brokerage fees to sell the notes. Gott held the investment until April 1, 2008, when the notes were called at 104 by Fitzgerald.

Instructions: Prepare all journal entries required on the books of Fitzgerald Inc. for 2004 and 2008; on the books of Baum for 2004 and 2007; and on the books of Gott for 2007 and 2008. Assume that each entity uses the calendar year for reporting purposes and that issue costs are netted against the note proceeds by Fitzgerald. Any required amortization is made using the straight line method. Ignore any potential impact of year to year market value changes on the accounting for the notes by the investors.

reacquisition of bonds gerona company authorized the sale of 300 000 of 10 10 year d 692459

Aug 30, 2021 | Uncategorized

Reacquisition of Bonds

Gerona Company authorized the sale of $300,000 of 10%, 10 year debentures on January 1, 2003. Interest is payable on January 1 and July 1. The entire issue was sold on April 1, 2003, at 103 plus accrued interest. On April 1,2008,$100,000 of the bond issue was reacquired and retired at 99 plus accrued interest. On June 30, 2008, the remaining bonds were reacquired at 98 plus accrued interest and refunded with an issue of $200,000 of 9% bonds which were sold at 100.

Instructions: Give the journal entries for 2003 and 2008 (through June 30) on Gerona Company’s books. The company’s books are kept on a calendar year basis. (Round to the nearest dollar. Assume straight line amortization of the premium or discount. Ignore any potential impact of year to year market value changes on the accounting for the bonds.)

deferred interest bonds and the selling of assets at the beginning of 2006 wheel r d 692460

Aug 30, 2021 | Uncategorized

Deferred Interest Bonds and the Selling of Assets

At the beginning of 2006, Wheel R. Dealer purchased the net assets of Consolidated Corp. by issuing 10 year, 10% bonds with a face value of $100,000,000, with semiannual interest payments made on June 30 and December 31 and no interest payments made until 2011. Dealer hopes to sell off assets of Consolidated and realize enough cash to buy back the bonds on the open market prior to interest payments becoming due in 2011. At the end of 2008, Dealer sold net assets with a carrying value of $85,000,000 for $70,000,000 and used the proceeds to retire the bond issue.

Instructions:

1. Prepare the journal entry to record the issuance of the bonds on January 2, 2006, assuming a market rate of 8%.

2. Prepare the journal entry to record the sale of the net assets.

3. Compute the market value of the bonds on January 3, 2009, the day of retirement, assuming a market rate of 14%.

4. Prepare the journal entry to record the retirement of the bond issue on January 3, 2009, assuming a carrying value of $96,000,000 and the market value as computed in (3).

5. Explain how Mr. Dealer can buy his bonds back three years after their initial sale for less than he originally sold them for and without ever having made an interest payment.

6. Should Mr. Dealer be able to reduce the liability to market value even if he does not retire the bonds?

convertible bonds robison co issued 1 000 000 of convertible 10 year debentures on j 692461

Aug 30, 2021 | Uncategorized

Convertible Bonds

Robison Co. issued $1,000,000 of convertible 10 year debentures on July 1, 2007. The debentures provide for 9% interest payable semiannually on January 1 and July 1. The discount in connection with the issue was $12,000, which is being amortized monthly on a straight line basis. The debentures are convertible after 1 year into seven shares of the Robison Co.’s $1 par value common stock for each $1,000 of debentures. On August 1, 2008, $100,000 of debentures were turned in for conversion into common stock. Interest has been accrued monthly and paid as due. Accrued interest on debentures is paid in cash upon conversion.

Instructions: Prepare the journal entries to record the conversion, amortization, and interest in connection with the debentures as of August 1, 2008, August 31, 2008,and December 31, 2008, including closing entries for year end. No gain or loss is to be recognized on the conversion. (Round to the nearest dollar.)

early extinguishment and conversion of bonds on january 1 2007 brewster company issu 692462

Aug 30, 2021 | Uncategorized

Early Extinguishment and Conversion of Bonds

On January 1, 2007, Brewster Company issued 2,000 of its 5 year, $1,000 face value, 11% bonds dated January 1 at an effective annual interest rate (yield) of 9%. Interest is payable each December 31. Brewster uses the effective interest method of amortization. On December 31, 2008, the 2,000 bonds were extinguished early through acquisition in the open market by Brewster for $1,980,000 plus accrued interest. On July 1, 2007, Brewster issued 5,000 of its 6 year, $1,000 face value, 10% convertible bonds dated July 1 at an effective annual interest rate (yield) of 12%. Interest is payable every June 30 and December 31. The bonds are convertible at the investor’s option into Brewster’s common stock at a ratio of 10 shares of common stock for each bond. On July 1, 2008, an investor in Brewster’s convertible bonds tendered 1,500 bonds for conversion into 15,000 shares of Brewster’s common stock, which had a fair market value of $105 and a par value of $1 at the date of conversion.

Instructions:

1. Make all necessary journal entries for the issuer and the investor to record the issuance of both the 11% and the 10% bonds. Ignore any potential impact of year to year market value changes on the investor accounting for the bonds.

2. Make all necessary journal entries to record the early extinguishment of both debt instruments assuming:

(a) Brewster considered the conversion to be a significant culminating event, and the investors considered their investment in convertible bonds to be debt rather than equity.

(b) Brewster considered the conversion to be a no culminating event, and the investors considered their investment in convertible bonds to be equity rather than debt.

accounting for patents on january 3 2000 merris company spent 89 000 to apply for an 692389

Aug 30, 2021 | Uncategorized

Accounting for Patents

On January 3, 2000, Merris Company spent $89,000 to apply for and obtain a patent on a newly developed product. The patent had an estimated useful life of 10 years. At the beginning of 2004, the company spent $16,000 in successfully prosecuting an attempted infringement of the patent. At the beginning of 2005, the company purchased for $37,000 a patent that was expected to prolong the life of its original patent by five years. On July 1,

2008, a competitor obtained rights to a patent that made the company’s patent obsolete.

Instructions: Give all the entries that would be made relative to the patent for the period 2000–2008, including entries to record the purchase of the patent, annual patent amortization, and ultimate patent obsolescence. (Assume the company’s accounting period is the calendar year.)

intangible impairment on december 31 2007 magily company acquired the following thre 692390

Aug 30, 2021 | Uncategorized

Intangible Impairment

On December 31, 2007, Magily Company acquired the following three intangible assets:

(a) A trademark for $30,000. The trademark has seven years remaining in its legal life. It is anticipated that the trademark will be renewed in the future, indefinitely, without problem.

(b) Goodwill for $150,000.The goodwill is associated with Magily’s Abacus Manufacturing reporting unit.

(c) A customer list for $22,000. By contract, Magily has exclusive use of the list for five years. Because of market conditions, it is expected that the list will have economic value for just three years. On December 31, 2008, before any adjusting entries for the year were made, the following information was assembled about each of the intangible assets:

(a) Because of a decline in the economy, the trademark is now expected to generate cash flows of just $1,000 per year. The useful life of the trademark still extends beyond the foreseeable horizon.

(b) The cash flow expected to be generated by the Abacus Manufacturing reporting unit is $25,000 per year for the next 22 years. Book values and fair values of the assets and liabilities of the Abacus Manufacturing reporting unit are as follows:

(c) The cash flows expected to be generated by the customer list are $12,000 in 2009 and $8,000 in 2010.

Instructions: The appropriate discount rate for all items is 6%. Make all journal entries necessary on December 31, 2008, in connection with these three intangible assets.

exchange of assets youth development co acquired the following assets in exchange fo 692392

Aug 30, 2021 | Uncategorized

Exchange of Assets

Youth Development Co. acquired the following assets in exchange for various nonmonetary assets.

2008

Mar. 15 Acquired from another company a large lathe in exchange for three small lathes. The small lathes had a total cost of $36,000 and a remaining book value of $13,000. The new lathe had a market value of $19,000, approximately the same value as the three small lathes. This transaction is deemed NOT to have commercial substance.

June 1 Acquired 250 acres of land by issuing 2,500 shares of common stock with par value of $1 and market value of $85. Market analysis reveals that the market value of the stock was a reasonable value for the land.

July 15 Acquired a used piece of heavy, earth moving equipment, market value, $105,000, by exchanging a used molding machine with a market value of $30,000 (book value, $6,000; cost, $42,000) and land with a market value of $95,000 (cost, $50,000). Cash of $20,000 was received by Youth Development Co. as part of the transaction.

Aug. 15 Acquired a patent, franchise, and copyright for two used milling machines. The book value of each milling machine was $3,500, and each originally cost $12,000. The market value of each machine is $15,000. It is estimated that the patent and franchise have about the same market values, and the market value of the copyright is 50% of the market value of the patent.

Nov. 1 Acquired a new packaging machine for four old packaging machines. The old machines had a total cost of $60,000 and a total remaining book value of $15,000. The new packaging machine has an indicated market value of $40,000, approximately the same value as the four machines. This transaction is deemed to have commercial substance.

Instructions: Prepare the journal entries required on Youth Development Co.’s books to record the exchanges.

computation of depreciation and amortization information pertaining to hedlund corpo 692393

Aug 30, 2021 | Uncategorized

Computation of Depreciation and Amortization

Information pertaining to Hedlund Corporation’s property, plant, and equipment for 2008 follows.

The salvage values of the depreciable assets are immaterial. Depreciation is computed to the nearest month.

Transactions during 2008 and other information are as follows:

(a) On January 2, 2008, Hedlund purchased a new car for $20,000 cash and trade in of a 2 year old car with a cost of $18,000 and a book value of $5,400. The new car has a cash price of $24,000; the market value of the trade in is not known.

(b) On April 1, 2008, a machine purchased for $23,000 on April 1, 2003,was destroyed by fire. Hedlund recovered $15,500 from its insurance company.

(c) On May 1, 2008, costs of $168,000 were incurred to improve leased office premises. The leasehold improvements have a useful life of eight years. The related lease terminates on December 31, 2014.

(d) On July 1, 2008, machinery and equipment were purchased at a total invoice cost of $280,000; additional costs of $5,000 for freight and $25,000 for installation were incurred.

(e) Hedlund determined that the automotive equipment comprising the $115,000 balance at January 1, 2008, would have been depreciated at a total amount of $18,000 for the year ended December 31, 2008.

Instructions:

1. Compute the total depreciation and amortization expense that would appear on Hedlund’s income statement for the year ended December 31, 2008. Also compute the accumulated depreciation and amortization that would appear on the balance sheet at December 31, 2008.

2. Compute the total gain or loss from disposal of assets that would appear in Hedlund’s income statement for the year ended December 31, 2008.

3. Prepare the noncurrent operating assets section of Hedlund’s December 31, 2008, balance sheet.

comprehensive depreciation and amortization at december 31 2007 martin company rsquo 692394

Aug 30, 2021 | Uncategorized

Comprehensive Depreciation and Amortization

At December 31, 2007, Martin Company’s noncurrent operating asset and accumulated depreciation and amortization accounts had balances as follows:

Depreciation is computed to the nearest month. The salvage values of the depreciable assets are immaterial.

Transactions during 2008 and other information are as follows:

(a) On January 6, 2008, a plant facility consisting of land and a building was acquired from Atlas Corp. for $600,000. Of this amount, 20% was allocated to land.

(b) On April 6, 2008, new parking lots, streets, and sidewalks at the acquired plant facility were completed at a total cost of $192,000. These expenditures had an estimated useful life of 12 years.

(c) The leasehold improvements were completed on December 31, 2004, and had an estimated useful life of eight years. The related lease, which would have terminated on December 31, 2010, was renewable for an additional 4 year term. On April 29, 2008, Martin exercised the renewal option.

(d) On July 1, 2008, machinery and equipment were purchased at a total invoice cost of $250,000. Additional costs of $10,000 for delivery and $30,000 for installation were incurred.

(e) On August 30, 2008, Martin purchased a new automobile for $15,000.

(f) On September 30, 2008, a truck with a cost of $24,000 and a carrying amount of $8,100 on the date of sale was sold for $11,500. Depreciation for the nine months ended September 30, 2008, was $2,352.

(g) On December 20, 2008, a machine with a cost of $17,000 and a carrying amount of $2,975 at date of disposition was scrapped without cash recovery.

Instructions: Compute total depreciation and amortization expense for the year ended December 31, 2008.

sample cpa exam questions 1 in january 2008 vorst co purchased a mineral mine for 2 692395

Aug 30, 2021 | Uncategorized

Sample CPA Exam Questions

1. In January 2008,Vorst Co. purchased a mineral mine for $2,820,000 with removable ore estimated at 1,200,000 tons. After it has extracted all the ore, Vorst believes it will be able to sell the property for $300,000. During 2008, Vorst incurred $360,000 of development costs preparing the mine for production and removed and sold 60,000 tons of ore. In its 2008 income statement, what amount should Vorst report as depletion?

(a) $135,000

(b) $144,000

(c) $150,000

(d) $159,000

2. Turtle Co. purchased equipment on January 2, 2006, for $50,000. The equipment had an estimated 5 year service life with an expected salvage value of $0. Turtle’s policy for 5 year assets is to use the double declining balance depreciation method for the first two years of the asset’s life and then switch to the straight line depreciation method. In its December 31, 2008, balance sheet, what amount should Turtle report as accumulated depreciation for equipment?

(a) $30,000

(b) $38,000

(c) $39,200

(d) $42,000

tax depreciation methods and the time value of money the following two depreciation 692396

Aug 30, 2021 | Uncategorized

Tax Depreciation Methods and the Time Value of Money

The following two depreciation methods are acceptable for tax purposes:

(a) Straight line with a half year convention. The half year convention is the assumption that all assets are acquired in the middle of the year. Therefore, a half year’s depreciation is allowed in the first year.

(b) 200% declining balance with a half year convention. There is a switch to straight line depreciation on the remaining cost when straight line yields a larger amount than does 200% declining balance. On January 1, 2008, Marci Company purchased a piece of equipment for $350,000. The equipment has an estimated useful life of five years and no estimated residual value.

Instructions:

1. For tax purposes, depreciation reduces taxes payable by reducing taxable income. If the tax rate is 40%, for example, a $100 depreciation deduction will reduce taxes by $40. Ignoring the time value of money, calculate the total reduction in taxes Marci will realize through the recovery of the asset cost over the life of the equipment. Assume that the tax rate is 40%. Is the answer the same for each of the two acceptable depreciation methods?

2. For each of the acceptable methods, compute the present value (as of January 1, 2008) of the depreciation tax savings. Assume that the appropriate interest rate is 10% and that the tax savings occur at the end of the year.

3. Should a company be required to use the same depreciation method in its financial statements as it uses for tax purposes?

we don rsquo t need no depreciation the managements of two different companies argue 692397

Aug 30, 2021 | Uncategorized

We Don’t Need No Depreciation!

The managements of two different companies argue that because of specific conditions in their companies, recording depreciation expense should be suspended for 2008. Evaluate carefully their arguments.

(a) The president of Guzman Co. recommends that no depreciation be recorded for 2008 because the depreciation rate is 5% per year, and price indexes show that prices during the year have risen by more than this figure.

(b) The policy of Liebnitz Co. is to recondition its building and equipment each year so that they are maintained in perfect repair. In view of the extensive periodic costs incurred in 2008, officials of the company believe that the need for recognizing depreciation is eliminated.

goodwill must be amortized nevada corporation purchased stardust club for 2 000 000 692398

Aug 30, 2021 | Uncategorized

Goodwill Must Be Amortized!

Nevada Corporation purchased Stardust Club for $2,000,000, which included $500,000 for goodwill. Nevada Corporation incurs large promotional and advertising expenses to maintain Stardust Club’s popularity. As the annual financial statements are being prepared, the CPA of Nevada Corporation, N. Ander Thal, insists that some of the goodwill be amortized against revenue. Thal received his accounting degree in 1971 and cites APB Opinion No. 17, which requires goodwill to be written off over a maximum life of 40 years. Marie Stevenson, Nevada Corporation’s controller, feels that amortization of the purchased goodwill in the same periods as heavy expenses are incurred to maintain the goodwill in effect creates a double charge against income of the period. Stevenson argues that no write off of goodwill is necessary and that goodwill has actually increased in value. In addition, Stevenson claims that current GAAP does not require goodwill to be amortized. Evaluate these two positions.

is it really worth that much ferris bueller inc owns a building in des moines iowa t 692399

Aug 30, 2021 | Uncategorized

Is It Really Worth that Much?

Ferris Bueller, Inc., owns a building in Des Moines, Iowa, that was built at a cost of $5,000,000 in 1997. The building was used as a manufacturing facility from 1998 to 2007. However, economic conditions have made it necessary to consolidate Ferris Bueller’s operations, and the building has been leased as of January 1, 2008, as a warehouse for 10 years at an annual rental of $240,000. Taxes, insurance, and normal maintenance costs are to be paid by the lessee. At the end of the 10 year period, Ferris Bueller may offer the lessee a renewal of the lease or again use the building in its operations. The building is being depreciated on a straight line basis over a 40 year life. In early 2008, Julie Ramos, a new staff accountant for Ferris Bueller, was assigned to review the building accounts and raised a question to Alison Crowther, her supervisor, concerning the carrying value of the Des Moines building. As of January 1, 2008, Julie feels the Des Moines building was impaired and should be written down in value. Alison is unsure about the current position of the FASB on this issue and invites Julie to prepare a memorandum recommending a specific write down amount, with supporting justification. Prepare the memorandum, assuming current interest rates are 10%.

is nothing sacred fasb statement no 93 requires all not for profit organizations to 692403

Aug 30, 2021 | Uncategorized

Is Nothing Sacred?

FASB Statement No. 93 requires all not for profit organizations to compute and report depreciation expense in their external financial statements. Previously, many not for profits, including many religious institutions, did not report depreciation expense. Many users and preparers of financial statements for religious institutions were upset about the idea of depreciating churches. Robert Anthony, a well known professor of accounting at Harvard University, was quoted as saying, “Depreciating catheDr.als and churches is stupid.” Monsignor Austin Bennett of Brooklyn claimed that the rule would cause “more trouble for American churches than all the sinners in their congregations.” Robert K. Mautz in “Monuments, Mistakes and Opportunities,” Accounting Horizons, June 1988, argued that buildings and monuments owned by governments and not for profit institutions may be more liabilities than assets because no revenue is generated from them, but they must be maintained. Consider the following questions.

1. Why do churches prepare external financial statements?

2. It is claimed that requiring churches to record depreciation expense will increase the cost of a church’s annual audit. How?

3. One person was quoted in The Wall Street Journal as saying, “As some . . . communities change in character, so does the value of the churches. Our depreciation values would have to change every year.” Evaluate this comment.

let rsquo s take a bath professor linda de angelo found evidence suggesting that whe 692404

Aug 30, 2021 | Uncategorized

Let’s Take a Bath!

Professor Linda De Angelo found evidence suggesting that when the management of a company is ousted under fire, the new management tends to take an earnings “bath” after gaining control. A “bath” is a large reduction in earnings due to asset write downs, reorganization charges, discontinuance of segments, and other extraordinary charges. As an example, Circle K Corporation declared Chapter 11 bankruptcy and changed management during fiscal 1990. For the year, Circle K reported a reorganization and restructuring charge of $639 million, consisting primarily of write downs of long term assets. This contributed to a net loss for the year of $773 million, compared to average net income for the previous four years of about $40 million per year. Why might the new management of a company want to “take a bath” in its first year?

should financial reporting follow tax legislation during the 1960s and 1970s the u s 692405

Aug 30, 2021 | Uncategorized

Should Financial Reporting Follow Tax Legislation?

During the 1960s and 1970s, the U.S. Congress used a tax measure known as the investment tax credit to encourage companies to expand their investment base. Under these provisions,companies received reductions of their tax liabilities based on a percentage of newinvestments in noncurrent operating assets. This approach was used in lieu of reducing taxrates as a stimulus to expansion. In 1981, the adoption of the ACRS method of cost allocationfor noncurrent operating assets added further stimulation to the economy by permittingcompanies to write off the cost of their property over a shorter than normal period.In 1986, Congress passed a massive Tax Reform Act that significantly reduced tax ratesfor all taxpaying entities. At the same time, the investment tax credit was eliminated andthe ACRS legislation was replaced by a modified ACRS approach that lengthened the timeperiod for the allocation. These latter provisions reduced the net impact of the reduced taxrates. Because elected government officials do not like to be identified with increased taxrates, there remains the possibility that further modifications to tax accounting for noncurrentoperating assets will be made.Should financial reporting for noncurrent operating assets be affected by tax legislation?Support your answer.

deciphering financial statements the walt disney company locate the 2004 financial s 692406

Aug 30, 2021 | Uncategorized

Deciphering Financial Statements (The Walt Disney Company)

Locate the 2004 financial statements for The Walt Disney Company on the Internet and consider the following questions:

1. What depreciation method does Disney use for its parks, resorts, and other property? For its film and television costs?

2. Where do you have to look to find out that Disney’s 2004 total depreciation and amortization expense was $1,210 million?

3. As of September 30, 2004, what percentage of film and television production costs was expected to be amortized within the next three years? 4. In 1996, Disney acquired ABC. The following information concerning the acquisition was provided in Disney’s 1997 annual report:

On February 9, 1996, the Company completed its acquisition of ABC. The aggregate consideration paid to ABC shareholders consisted of $10.1 billion in cash and 155 million shares of Company common stock valued at $8.8 billion based on the stock price as of the date the transaction was announced. The acquisition has been accounted for as a purchase and the acquisition cost of $18.9 billion was allocated to the assets acquired and liabilities assumed based on estimates of their respective fair values. Assets acquired totaled $4.0 billion (of which $1.5 billion was cash) and liabilities assumed were $4.3 billion. A total of $19.0 billion, representing the excess of acquisition cost over the fair value of ABC’s net tangible assets, was allocated to intangible assets and is being amortized over forty years. As seen in the consolidated balance sheet of Disney’s 2004 financial statements, the original cost associated with the total goodwill was only $16.966 billion as of September 30, 2004. What do you think is the explanation for this difference between the $19.0 billion originally recorded for goodwill and the $16.966 billion listed in 2004?

deciphering financial statements delta air lines the following information is from t 692407

Aug 30, 2021 | Uncategorized

Deciphering Financial Statements (Delta Air Lines)

The following information is from the June 30, 1998, balance sheet for Delta Air Lines (all dollar amounts are in millions):

Delta also included this note to its financial statements:

Depreciation and Amortization—Effective July 1, 1998, the Company increased the depreciable life of certain new generation aircraft types from 20 to 25 years. Owned flight equipment is depreciated on a straight line basis to a residual value equal to 5% of cost.

1. Assume that all flight equipment will be affected by this change in policy. The new policy will not be reflected in the 1998 financial statements because the policy was changed on July 1, 1998. Estimate the total depreciation expense recognized by Delta on flight equipment for the year ended June 30, 1998, using the old 20 year life and the new 25 year life. Assume that there were no flight equipment retirements during the year and that new acquisitions are depreciated for half the year.

2. How reasonable is the assumption that there were no flight equipment retirements in 1998?

deciphering financial statements ford motor company the following information comes 692408

Aug 30, 2021 | Uncategorized

Deciphering Financial Statements (Ford Motor Company)

The following information comes from the 2004 financial statements of Ford Motor Company (all dollar amounts are in millions):

1. Estimate the book value of property and equipment disposed of during 2004.

2. Assume that a half year’s depreciation is taken on all assets acquired and disposed of during the year. Estimate the average depreciation life of Ford’s property and equipment. Assume that none of the disposals was land, and eliminate the land balance when estimating the average depreciation life.

3. Estimate the average age of property and equipment (excluding land) owned by Ford as of December 31, 2004.

deciphering financial statements at amp t corporation the following information was 692409

Aug 30, 2021 | Uncategorized

Deciphering Financial Statements (AT&T Corporation)

The following information was extracted from the 1998 annual report of AT&T Corporation (all dollar amounts are in millions):

• 1998 data reflect $2.5 billion of pretax business restructuring charges.

• 1995 data reflect $7.8 billion of pretax business restructuring and other charges.

• 1993 data reflect a $9.6 billion net charge for three accounting changes.

• 1991 data reflect $4.5 billion of pretax business restructuring and other charges.

Instructions:

1. For each year 1991–1998,calculate operating income as a percentage of total revenues, net income (loss) as a percentage of total revenues, and return on common equity (use end of year equity).

2. Repeat (1) after adding back the effects of the special charges in 1991, 1993, 1995, and 1998. For calculating net income, assume that the incremental income tax rate is 40%.

3. A large portion of the special charges in 1991 and 1995 were related to asset write downs. These write downs were recorded before FASB Statement No. 144 was issued; thus, more flexibility occurred in determining when an asset was impaired. Comment on the impact of special charges on the usefulness of financial accounting data.

writing assignment one depreciation method please the fasb frequently receives recom 692410

Aug 30, 2021 | Uncategorized

Writing Assignment (One depreciation method, please!)

The FASB frequently receives recommendations about areas it should consider for study. Depreciation accounting has not been ad Dr. essed as a separate topic by the FASB, and several alternative methods are used for recording this expense on the books. Assume that a group of financial analysts recommends to the FASB that a study be made of depreciation accounting with the objective of selecting one method as the only acceptable one. The analysts reason that only then will comparability in financial statements be achieved. You have recently been hired as a member of the FASB’s research staff. Write a summary memo presenting the arguments for and against the FASB following the recommendation by the analysts.

researching accounting standards to help you become familiar with the accounting sta 692411

Aug 30, 2021 | Uncategorized

Researching Accounting Standards

To help you become familiar with the accounting standards, this case is designed to take you to the FASB’s Web site and have you access various publications. In this chapter, we discussed issues relating to fixed assets. For this case, we will use

Statement of Financial Accounting Standards No.153,“Exchanges of Nonmonetary Assets.”

Open FASB Statement No. 153.

1. What previous accounting standard does FASB Statement No. 153 amend?

2. In paragraph 2 of the summary, two International Accounting Standards are identified that relate to this Statement. What are those two International Accounting Standards?

3. Read paragraph 21. When is a nonmonetary exchange considered to have commercial substance?

ethical dilemma profit manipulation during labor negotiations you and your partner o 692412

Aug 30, 2021 | Uncategorized

Ethical Dilemma (Profit manipulation during labor negotiations)

You and your partner own a small data entry company. You contract with businesses to manually enter data, such as library card catalogs and medical records, into a computer database. Your most significant physical assets are a large office building you own, along with the computer hardware and software necessary for operations. Your business has been running for five years, and you now have 100 employees. Operating cash flow has always been healthy, and you and your partner have been able to withDr.aw significant amounts of cash from the business. Recently, you have seen growing discontent among your employees because of their low wages and lack of fringe benefits. You and your partner are preparing for the first meeting with an employee grievance committee. Your partner has taken responsibility for preparing the company’s financial statements. You are embarrassed to admit that this is the first set of financial statements you have ever examined—you have never sought bank financing and all equity funding has come from you and your partner. You are surprised when you first review the statements because they reveal that the company has experienced significant losses in each of its five years of operation. A closer look at the statements reveals that your partner has used the double declining balance method of depreciation for your office building and computer equipment. He has also assumed very short useful lives and zero residual values. Your calculations indicate that using the straight line method with more realistic useful life and residual value assumptions would increase profits Dr. amatically, even to the extent that substantial profits would be reported in each of the first five years of operation. The meeting with the employee grievance committee is tomorrow. Your partner has been your friend since first grade. What, if anything, should you do?

group depreciation holdaway inc a small furniture manufacturer purchased the followi 692356

Aug 30, 2021 | Uncategorized

Group Depreciation

Holdaway, Inc., a small furniture manufacturer, purchased the following assets at the end of 2007.

Compute the following amounts for 2008 using group depreciation on a straight line basis:

1. Depreciation expense

2. Group depreciation rate

3. Average life of the assets

group depreciation entries lundquist inc uses the group depreciation method for its 692357

Aug 30, 2021 | Uncategorized

Group Depreciation Entries

Lundquist, Inc., uses the group depreciation method for its furniture account. The depreciation rate used for furniture is 21%. The balance in the furniture account on December 31, 2007, was $125,000, and the balance in Accumulated Depreciation—Furniture was $61,000. The following purchases and dispositions of furniture occurred in the years 2008–2010 (assume that all purchases and disposals occurred at the beginning of each year).

1. Prepare the summary journal entries Lundquist should make each year (2008–2010) for the purchase, disposition, and depreciation of the furniture.

2. Prepare a summary of the furniture and accumulated depreciation accounts for the years 2008 2010.

depreciation of special components jackson manufacturing acquired a new milling mach 692358

Aug 30, 2021 | Uncategorized

Depreciation of Special Components

Jackson Manufacturing acquired a new milling machine on April 1, 2003. The machine has a special component that requires replacement before the end of the useful life. The asset was originally recorded in two accounts, one representing the main unit and the other for the special component. Depreciation is recorded by the straight line method to the nearest month, residual values being disregarded. On April 1, 2009, the special component is scrapped and is replaced with a similar component. This component is expected to have a residual value of approximately 25% of cost at the end of the useful life of the main unit, and because of its materiality, the residual value will be considered in calculating depreciation. Specific asset information is as follows:

What are the depreciation charges to be recognized for the years (1) 2003, (2) 2009, and (3) 2010?

depletion expense on january 2 2007 cynthia foster purchased land with valuable natu 692360

Aug 30, 2021 | Uncategorized

Depletion Expense

On January 2, 2007, Cynthia Foster purchased land with valuable natural ore deposits for $10 million. The estimated residual value of the land was $2 million. At the time of purchase, a geological survey estimated 2 million tons of removable ore were under the ground. Early in 2007, roads were constructed on the land to aid in the extraction and transportation of the mined ore at a cost of $750,000. In 2007, 50,000 tons were mined. In 2008, Cynthia fired her mining engineer and hired a new expert. A new survey made at the end of 2008 estimated 3 million tons of ore were available for mining. In 2008,150,000 tons were mined. Assuming that all the ore mined was sold, how much was the depletion expense for 2007 and 2008?

recording an impairment loss della bee company purchased a manufacturing plant build 692363

Aug 30, 2021 | Uncategorized

Recording an Impairment Loss

Della Bee Company purchased a manufacturing plant building 10 years ago for $1,300,000. The building has been depreciated using the straight line method with a 30 year useful life and 10% residual value. Della Bee’s manufacturing operations have experienced significant losses for the past two years, so Della Bee has decided that the manufacturing building should be evaluated for possible impairment. Della Bee estimates that the building has a remaining useful life of 15 years, that net cash inflow from the building will be $50,000 per year, and that the fair value of the building is $380,000.

1. Determine whether an impairment loss should be recognized.

2. If an impairment loss should be recognized, make the appropriate journal entry.

3. How would your answer to (1) change if the fair value of the building was $560,000?

impairment of intangibles an intangible asset cost 300 000 on january 1 2008 on janu 692366

Aug 30, 2021 | Uncategorized

Impairment of Intangibles

An intangible asset cost $300,000 on January 1, 2008. On January 1, 2009, the asset was evaluated to determine whether it was impaired. As of January 1, 2009, the asset was expected to generate future cash flows of $25,000 per year (at the end of the year). The appropriate discount rate is 5%.

1. Give the entries to record amortization in 2008 and any impairment loss in 2009 assuming that as of January 1, 2008, the asset was assumed to have a total useful life of 10 years and that as of January 1, 2009, there were nine years remaining.

2. Give the entries to record amortization in 2008 and any impairment loss in 2009 assuming that as of January 1, 2008, the asset was assumed to have an indefinite useful life and that as of January 1, 2009, the remaining life was still indefinite.

impairment of goodwill largest company acquired large company on january 1 as part o 692367

Aug 30, 2021 | Uncategorized

Impairment of Goodwill

Largest Company acquired Large Company on January 1. As part of the acquisition,$10,000 in goodwill was recognized; this goodwill was assigned to Largest’s Production reporting unit. During the year, the Production reporting unit reported revenues of $13,000. Publicly traded companies with operations similar to those of the Production unit had price to revenue ratios averaging 1.60. The fair values and book values of the assets and liabilities of the Production reporting unit are as follows:

Make the journal entry necessary to recognize any goodwill impairment loss.

long term operating asset held for sale on april 1 2008 brandoni company has a piece 692369

Aug 30, 2021 | Uncategorized

Long Term Operating Asset Held for Sale

On April 1, 2008, Brandoni Company has a piece of machinery with a cost of $100,000 and accumulated depreciation of $75,000. On April 1, Brandoni decided to sell the machine within 1 year. As of April 1, 2008, the machine had an estimated selling price of $10,000 and a remaining useful life of 2 years. It is estimated that selling costs associated with the disposal of the machine will be $1,000. On December 31, 2008, the estimated selling price of the machine had increased to $15,000, with estimated selling costs increasing to $1,600.

1. Make the entry to record the initial classification of the machine as held for sale on April 1, 2008.

2. Make the entry to record depreciation expense on the machine for the period April 1 through December 31, 2008.

3. Make the entry, if any, needed on December 31, 2008, to reflect the change in the expected selling price.

exchange of machinery assume that coaltown corporation has a machine that cost 52 00 692370

Aug 30, 2021 | Uncategorized

Exchange of Machinery

Assume that Coaltown Corporation has a machine that cost $52,000, has a book value of $35,000, and has a market value of $40,000. The machine is used in Coaltown’s manufacturing process. For each of the following situations, indicate the value at which the company should record the new asset and why it should be recorded at that value.

(a) Coaltown exchanged the machine for a truck with a list price of $43,000.

(b) Coaltown exchanged the machine with another manufacturing company for a similar machine with a list price of $41,000.

(c) Coaltown exchanged the machine for a newer model machine from another manufacturing company. The new machine had a list price of $62,000, and Coaltown paid a “large” amount of cash of $15,000.

(d) Coaltown exchanged the machine plus a “small” amount of cash of $3,000 for a similar machine from Newton Inc., a manufacturing company. The newly acquired machine is carried on Newton’s books at its cost of $55,000 with accumulated depreciation of $42,000; its fair market value is $43,000. In addition to determining the value, give the journal entries for both companies to record the exchange.

exchange of truck on january 2 2008 butler delivery company traded with a dealer an 692371

Aug 30, 2021 | Uncategorized

Exchange of Truck

On January 2, 2008, Butler Delivery Company traded with a dealer an old delivery truck for a newer model. Data relative to the old and new trucks follow: