Intermediate Accounting II, ACCT 3322 Review Questions for Final Exam

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1. On September 1, 2002, Spencer Company stock was selling for $60 per shares. The company’s capital accounts were as follows: Capital stock (par value, $25, 50,000 shares issued and outstanding Additional paid-in capital Retained earnings Total stockholders' equity

1,250,000 800,000 3,200,000 5,250,000

On September 1, 2002, the company declared and distributed a 50% stock dividend and the par value of the stock remained at $25 per share. What would the balance be in the capital stock account after the dividend distribution? Analysis of capital stock: Number of shares outstanding Dividend rate Additional shares issued Par value Increase in common stock account Original balance Final balance

50,000 50% 25,000 $25 625,000 1,250,000 $1,875,000

2. The stockholders’ equity of Spencer Company at June 30, 2002 is as follows:

Common stock, par value $25, 400,000 shares authorized, 200,000 shares issued and outstanding Additional paid-in capital Retained earnings Total stockholders' equity

5,000,000 1,500,000 6,000,000 12,500,000

On July 1, 2002, the board of directors of Spencer Company declared a 15% stock dividend on common stock, to be distributed on August 15, 2002. The market price of Spencer Company’s stock was $35 on July 1, 2002 and $40 on August 15, 2002. What is the amount of the debit to retained earnings as a result of the declaration and distribution of this stock dividend? Analysis of charge to retained earnings: Number of shares issued and outstanding Small stock dividend Shares of small stock dividend Market value at declaration date Charge to retained earnings

200,000 15% 30,000 $35 $1,050,000

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3. Spencer Company accepted a share purchase contract for 50,000 shares of $25 par value common stock on June 30, 2002 when the stock was selling for $50 per share. A 40% down payment was received with the remainder due in six months. On December 30, 2002, the balance of the share purchase contract is received and the shares are issued. Prepare the journal entries for June 30, 2002 and December 31, 2002. DATE ACCOUNT 6/30/02 Share purchase contract receivable Common stock Paid-in capital, common stock Analysis of paid-in capital, common stock: Number of shares subscribed Market value per share Par value Paid-in capital, Common stock DATE ACCOUNT 6/30/02 Cash Share purchase contract receivable Analysis of cash receipts: Share purchase contract receivable Percentage down payment Cash received DATE ACCOUNT 12/31/02 Cash Share purchase contract receivable

DEBIT $2,500,000

CREDIT $1,250,000 1,250,000

50,000 $50 $2,500,000 25 1,250,000 $1,250,000 DEBIT $1,000,000

CREDIT $1,000,000

$2,500,000 40% $1,000,000 DEBIT $1,500,000

CREDIT $1,500,000

4. On June 30, 2002 Spencer Company issued $50 par value common shares which was recorded in the accounting records as follows: ACCOUNT Cash Common stock Additional paid-in capital

DEBIT 500,000

CREDIT 200,000 300,000

The following transactions took place during the remainder of the year. On July 15 the company bought 100 shares of common stock as treasury stock at $150 On August 1 the company sold 30 shares of treasury stock at $140. On August 15 the company sold 30 shares of treasury stock at $155 On September 30 the company retired 40 shares of treasury stock

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Prepare the journal entries to record the treasury stock transactions that took place during 2002. DATE ACCOUNT 7/15/02 Treasury stock Cash

DEBIT 15,000

DATE ACCOUNT 8/1/02 Cash Retained earnings Treasury stock

DEBIT 4,200 300

DATE ACCOUNT 8/15/02 Cash Treasury stock Paid-in capital, treasury stock

DEBIT 4,650

DATE ACCOUNT 9/30/02 Common stock Paid-in capital, common stock Paid-in capital, treasury stock Retained earnings Treasury stock

DEBIT 2,000 3,000 150 850

CREDIT 15,000 CREDIT

4,500 CREDIT 4,500 150 CREDIT

6,000

5. Spencer Company has $400,000 of 5% preferred stock and $600,000 of common stock outstanding, each having a par value of $10 per share. No dividends have been paid or declared during 2000 and 2001. As of December 31, 2002, the company has decided to distribute $300,000 in dividends. If the preferred stock is cumulative and fully participating how much will be distributed to the common stockholders and how much will be distributed to the preferred stockholders?

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Description Preferred stock, $400,000 * 5% In arrears for 2000 In arrears for 2001 Dividends for 2002

Preferred $20,000 20,000 20,000

Common stock, $600,000 Dividends for 2002 $600,000 * 5% Participating dividends: ($300,000-$90,000) Preferred dividends 400,000/1,000,000 * $210,000 Common dividends 600,000/1,000,000 * $210,000

Common

$20,000 20,000 20,000

$30,000

84,000

$144,000

Total

30,000

84,000 126,000 $156,000

126,000 $300,000

6. On November 1, 2002, Spencer Company issued at 102, three hundred of its 10%, $1,000 bonds. Attached to each bond was one detachable stock warrant entitling the holder to purchase 10 shares of Spencer Company’s common stock. On November 1, 2002 the market value of the bonds, without the stock warrants, was 99, and the market value of each stock warrant was $40. The amount of the proceeds from the issuance that should be accounted for as the initial carrying value of the bonds payable would be. Selling price of bonds with warrants: Face amount Number of bonds Total face value Sold at Selling price

$1,000 300 300,000 102

Market value of bonds: Face amount Number of bonds Total face value Market ratio Market value

$1,000 300 300,000 99

Market value of stock warrants: Number of warrants Market value per share Market value

$306,000

$297,000

300 $40 $12,000

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FMV $297,000 12,000 $309,000

Bonds Warrants Total Carrying value of bonds payable: Bonds payable Discount on bonds payable Carrying value of bonds payable Account Cash Bond payable Discount on bonds payable Stock Warrants

% 96.12% 3.88% 100%

Cost $294,117 11,883 $306,000

$300,000 5,883 $294,117 Debit $306,000

Credit $300,000

5,883 11,883

7. On January 1, 2002 Spencer Company had 300,000 shares of common stock issued and outstanding. On September 1, 2002 the company issued an additional 150,000 shares of common stock. Net income for the year ended December 31, 2002 was $500,000. What were the earnings per share for the year ended December 31, 2002? Date Shares # Shares 1/1/02 Beginning balance 300,000 9/1/02 Issued shares 150,000 Adjusted balance 450,000 Weighted average number of shares outstanding Net income Weighted average common shares Basic EPS

Period Wgt. Avg. 8/12 200,000 4/12

150,000 350,000

$500,000 350,000 $1.43

8. On January 1, 2000, Spencer Company issued at par $400,000 10% convertible bonds. Each $1,000 bond is convertible into 40 shares of common stock. No bonds were converted during 2000. The company had 50,000 shares of common stock outstanding during 2000. Net income for the year was $160,000 and the income tax rate was 30%. Calculate Spencer Company’s diluted earnings per share for 2000. Diluted EPS: Recalculated net income Diluted number of shares Diluted EPS

$188,000 66,000 $2.85

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Diluted number of shares: Face value of bonds Par value of each bond Number of bonds Conversion ratio to common stock Number of common shares in dilution Shares issued and outstanding Total diluted number of shares Recalculated diluted earnings: Net income Bond interest expense: Fact value of bonds Interest rate Annual interest Less: income tax (30%) Bond interest net of tax Recalculated income available to common

$400,000 1,000 400 40 16,000 50,000 66,000

160,000 $400,000 10% 40,000 12,000 28,000 $188,000

9. During 1999 Spencer Co. purchased 1,000, $1,000, 9% bonds. The carrying value of the bonds at December 31, 2001 was $980,000. The bonds mature on March 1, 2006, and pay interest on March 1 and September 1. Spencer Co. sells 500 bonds on September 1, 2002, for $494,000, after the interest has been received. Spencer uses straight-line amortization. Calculate the gain on the sale of the bonds.

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Analysis of gain on sale: Carrying value of bonds at 9/1/02 Percentage of bonds sold Carrying value of bonds sold Selling price of bonds Gain on sale of bonds Carrying value of bonds at 9/1/02: Face value of bonds Carrying value of bonds on 12/31/01 Unamortized discount Number of months Monthly amortization of discount Months to 9/1/02 Amortization of discount Unamortized discount at 9/1/02 Face value of bonds Carrying value of bonds on 9/1/02

$983,200 50% $491,600 494,000 $2,400

$1,000,000 980,000 20,000 50 400 8 3,200 ($16,800) 1,000,000 $983,200

10. The following differences enter into the reconciliation of financial income and taxable income for Spencer Company for the year ended December 31, 2000. The enacted income tax rate is 30% for all years. Pretax accounting income Excess tax depreciation Litigation accrual Unearned rent revenue Interest earned on municipal bonds Taxable income

$450,000 (240,000) 35,000 25,000 (10,000) $260,000

The unearned revenue is deferred on the books but appropriately recognized in taxable income. Excess tax depreciation will reverse equally over a four-year period. It is estimated that the litigation liability will be paid in 2005. Rent revenue will be recognized during the last year of the lease which is 2005. Interest revenue from the Texas bonds is expected to be $10,000 each year until their maturity at the end of 2005. The balance in the deferred tax accounts at January 1, 2000 are as follows:

Deferred tax assets Deferred tax liabilities

DR (CR) $22,000 ($50,000)

Prepare a schedule of deferred tax (assets) and liabilities for December 31, 2000.

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Schedule of Deferred Tax Asset and (Liability): Deferred Tax Future Amounts Temporary Differences: Tax Rate Asset Liability Depreciation ($240,000) 30% ($72,000) Litigation 35,000 30% $10,500 Unearned rent 25,000 30% 7,500 Totals ($180,000) $18,000 ($72,000)

Prepare T-accounts to analyze the changes in deferred tax assets and deferred tax liabilities for the year of 2000. T-Account Analysis: Deferred Tax Asset Description Debit Beginning balance 22,000 AJE deferred tax expense for 2000 Required ending balance $18,000 T-Account Analysis: Deferred Tax Liability Description Debit Beginning balance AJE deferred tax expense for 2000 Required ending balance

Credit $4,000

Credit $50,000 22,000 $72,000

Prepare the schedule of net deferred tax expense for the year ended December 31, 2000. Schedule of Net Deferred Tax Expense Deferred tax expense (deferred tax asset) $4,000 Deferred tax expense (deferred tax liability) 22,000 Net deferred tax expense

$26,000

Calculate income tax payable for the year ended December 31, 2000.

Taxable income Tax rate Income tax payable

Analysis of Income Tax Payable $260,000 30% $78,000

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Calculate income tax expense for the year ended December 31, 2000. Analysis of Income Tax Expense Deferred tax expense $26,000 Current tax expense 78,000 Total income tax expense

$104,000

Prepare the journal entry to record income tax expense, changes in deferred tax assets and liabilities and income tax payable. Account Income tax expense Deferred tax asset Deferred tax liability Income tax payable

Debit $104,000

Credit $4,000 22,000 78,000

11. On January 1, 2001, Spencer Company signs a 10-year noncancelable lease agreement to lease a warehouse from Texas Warehouse Company. Collectibility of lease payments is reasonably predictable and no important uncertainties surround the amount of costs yet to be incurred by the lessor. The following information pertains to this lease agreement. 9 The agreement requires equal rental payments at the end of each year. 9 The fair value of the building on January 1, 2001 is $900,000; however, the book value to Texas is $750,000. 9 The building has an estimated economic life of 10 years, with no residual value. Spencer depreciates similar buildings on the straight-line method. 9 At the termination of the lease, the title to the building will be transferred to the lessee. 9 Spencer’s incremental borrowing rate is 11% per year. Texas Warehouse Co. set the annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by Spencer Company. 9 The yearly rental payment includes $3,000 of executory costs related to taxes on the property. Calculate the minimum annual lease payment? (Rounded to the nearest dollar.) Analysis of Minimum Annual Lease Payments PVOA = R * T(pvoa) $900,000 = R * 6.14457 R = $900,000/6.14457 R = $146,471 $146,471

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What is the amount of the total annual lease payment? Analysis of the Annual Lease Payment Minimum lease payment $146,471 Executory costs 3,000 Annual lease payment

$149,471

Calculate the depreciation expense that Spencer Company would record for the year ended December 31, 2001 (Rounded to the nearest dollar.) Analysis of Annual Depreciation Expense PV of minimum lease payments $900,000 Service life of building 10 Annual depreciation

$90,000

12. Spencer Company enters into a lease agreement on June 30, 2001 to lease manufacturing equipment. The lease agreement has the following terms and conditions. 9 The term of the noncancelable lease is 8 years, with no renewal option. An initial payment of $150,000 was paid at the signing of the lease. Annual payments of $150,000 are due on June 30th of each year. 9 The normal retail price of the equipment is approximately $880,000. The equipment has an economic life of 10 years. 9 The company normally depreciates manufacturing equipment on a straight-line basis. 9 The lessee pays all executory costs. 9 Spencer Company’s incremental borrowing rate is 12% per year. The lessee is aware that the lessor used an implicit rate of 10% in computing the lease payments. Calculate the present value of the minimum lease payments. Minimum lease payment PVAD, n=8, i=10% PV of minimum lease payments

$150,000 5.86842 $880,263

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Prepare a lease amortization schedule. DATE 6/30/01 6/30/01 6/30/02 6/30/03 6/30/04 6/30/05 6/30/06 6/30/07 6/30/08

PAYMENT

INTEREST

$150,000 150,000 150,000 150,000 150,000 150,000 150,000 150,000

$0 73,026 65,329 56,862 47,548 37,303 26,033 13,636

PRINCIPLE $150,000 76,974 84,671 93,138 102,452 112,697 123,967 136,364

BALANCE $880,263 730,263 653,289 568,618 475,480 373,028 260,331 136,364 0

Prepare the journal entries on June 30, 2001. Date 6/30/01

6/30/01

Account Equipment under capital lease Obligation under capital lease

Debit $880,263

Obligation under capital lease Cash

$150,000

Credit $880,263

$150,000

Prepare the journal entries for December 31, 2001 Date Account 12/31/01 Interest expense Interest payable Analysis of interest expense: Interest on June 2002 payment Months in short period Interest accrual at 12/31/01 12/31/01 Depreciation expense Accumulated depreciation Analysis of depreciation expense: PV of minimum lease payments Service life of lease Annual depreciation Short period Depreciation accrual at 12/31/01

Debit $36,513

Credit $36,513

$73,026 6/12 $36,513 $55,016 $55,016

$880,263 8 110,033 6/12 $55,016

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13. Spencer Company purchased machinery that cost $135,000 on January 4, 2000. The entire cost was recorded as an expense. The machinery has a nine-year life and a $9,000 residual value. The error was discovered on December 20, 2002. Ignore income tax considerations. How will it be reported on Spencer Company’s income statement for the year ended December 31, 2002?

The purchase of the machinery will not be reported on the income statement. Prepare the journal entries for December 20, 2002 and December 31, 2002. Date Account 12/20/02 Machinery Accumulated depreciation Retained earnings Analysis of correction of error: Cost of machinery Salvage value Depreciable base Service life Annual depreciation Years since error Accumulated depreciation Adjustment to retained earnings Date Account 12/31/02 Depreciation expense Accumulated depreciation

Debit $135,000

Credit $28,000 107,000

$135,000 9,000 126,000 9 14,000 2 28,000 $107,000 Debit $14,000

Credit $14,000

14. The following are the comparative balance sheets for Spencer Company for the years ended December 31, 2002 and 2001. Addition information regarding the activities of the company during 2002 are as follows: (1) Net income for the year was $84,000. (2) Cash dividends amounting to 6% of the par value of the common stock were declared and paid. (3) Land was sold for $80,000. (4) The company sold equipment, which cost $150,000 and had accumulated depreciation of $60,000, for $70,000.

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Spencer Company Cash Flow Worksheet December 31,

Cash Accounts receivable (net) Inventory Land Building Accumulated depreciation Equipment Accumulated depreciation Accounts payable Bonds payable Capital stock, $10 par Retained earnings

2002 $43,000

2001 $24,000

35,000 114,000 120,000 200,000 (50,000) 1,030,000 (118,000) (115,000) (320,000) (750,000) (189,000) $0

38,000 82,000 190,000 200,000 (40,000) 600,000 (94,000) (100,000) 0 (750,000) (150,000) $0

Calculate the cash provided by (used by) operating activities. Cash flow from operating activities: Net income Depreciation Decrease in accounts receivable Increase in inventory Increase in accounts payable Less gain on sale of land Plus loss on sale of equipment Net cash provided by operating activities

$84,000 $94,000 3,000 (32,000) 15,000 (10,000) 20,000

90,000 $174,000

Calculate the cash provided by (used by) investing activities. Cash flow from investing activities: Cash received from sale of land Cash received from sale of equipment Cash paid for equipment Net cash used in investing activities

$80,000 70,000 (580,000) ($430,000)

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Calculate the cash provided by (used by) financing activities.

Cash flow from financing activities: Cash received from sale of bonds Cash paid for dividends Net cash provided by financing activities

$320,000 (45,000) $275,000

15. Pension data for the Ben Franklin Company include the following for the current calendar year: Discount rate Expected return on plan assets Actual return on plan assets Service Cost January 1: PBO ABO Plan assets Amortization of prior service cost Amortization of net gain December 31: Cash contributions to pension fund Benefit payments to retirees

8% 10% 9% $200,000

1,400,000 1,000,000 1,500,000 20,000 4,000 220,000 240,000

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Calculate pension expense for the year. Pension Expense Service cost Interest cost Expected return Amortization of prior service cost Amortization of net gain Pension expense

$200,000 112,000 (150,000) 20,000 (4,000) $178,000

Analysis of interest cost: PBO Discount rate Interest cost

$1,400,000 8%

Analysis of expected return: Plan assets Expected return rate on plan assets Expected return

$1,500,000 10%

$112,000

$150,000

Prepare the journal entry to record pension expense and funding for the year.

Account Pension expense Prepaid (accrued) pension cost Cash

Debit $178,000 42,000

Credit

$220,000

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16. Carolina Consulting Company has a defined benefit pension plan. The following pension-related data were available for the current calendar year:

PBO: Balance, January 1, 2003 Service cost Interest cost Gain from changes in accurial assumptions Benefits paid to retirees Balance, December 31, 2003 Plan Assets: Balance, January 1, 2003 Actual return (expected return was $22,500) Contributions Benefits paid Balance, December 31, 2003

240,000 41,000 12,000 (5,000) (20,000) 268,000

250,000 20,000 35,000 (20,000) 285,000

ABO, December 31, 2003 January 1, 2003 balances Prepaid (accrued) pension cost Unrecognized prior service cost (amortization $4,000 per year) Unrecognized net gain (amortization if any, over 15 years)

245,000

(6,000) 4,000 40,000

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Calculate the 2003 pension expense. Show calculations. Pension Expense Service cost Interest cost Expected return on plan assets Amortization of prior service cost Amortization of net gain Pension expense Analysis of expected return on plan assets: Actual return on plan assets Loss on plan assets Expected return on plan assets Analysis of amortization of net gain: Unamortized net gain Greater of 10% of beginning: PBO , or Plan assets Amount to be amortized Amortization period Amortization of net gain

$41,000 12,000 (22,500) 4,000 (1,000) $33,500

$20,000 2,500 $22,500

$40,000 $240,000 250,000

25,000 15,000 15 $1,000

Prepare the 2003 journal entry to record pension expense and funding.

Account Pension expense Prepaid (accrued) pension cost Cash

Debit $33,500 1,500

Credit

$35,000

Prepare any 2003 journal entry necessary to record any additional pension liability needed.

No entry needed since the ABO does not exceed the plan assets

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17. The following is the pension spreadsheet for the current year for Sparky Corporation. Complete the following pension spreadsheet. Net Prior Service (Gain) Plan Loss Cost PBO Assets Beginning balance ($400,000) $450,000 $60,000 $55,000 Service cost (85,000) Interest cost (25,000) Actual return on assets 52,000 (Gain) loss on assets 3,000 Amortization of: Prior service cost (6,000) Net (gain) loss (1,000) Loss on PBO (65,000) 65,000 Contributions to fund 40,000 Retiree benefits paid 250,000 (250,000) Journal entry Ending balance ($325,000) $292,000 $54,000 $122,000

Pension Expense

Cash

Prepaid (Accrued) Cost $165,000

85,000 25,000 (52,000) (3,000) 6,000 1,000 (40,000) $62,000 ($40,000)

(22,000) $143,000

Prepare the journal entry to record pension expense for the year.

Account Pension expense Cash Prepaid (accrued) pension cost

Debit $62,000

Credit $40,000 22,000

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18. O'Brien Company provides postretirement health care benefits to employees who provide at least 10 years of service and reach the age of 65 while in service. On January 1 of the current year, the following plan-related data were available. Unrecognized transition obligation APBO Balance Fair value of plan assets Average remaining service period to retirement Average remaining service period to full eligibility

$40,000 104,000 0 20 15

On January 1 of the current year, O'Brien amends the plan to provide dental benefits. The actuary determines that the cost of making the amendment increases the APBO by $10,000. Management chooses to amortize this amount on a straight-line basis. The service cost is $30,000. The appropriate interest rate is 10%. Calculate the postretirement benefit expense for the current year. Postretirement Benefit Expense Service cost Interest cost Return on plan assets Amortization of transition obligation Amortization of prior service cost Postretirement benefit expense Analysis of interest cost: Beginning balance APBO Plan amendment (beginning of year) Adjusted beginning balance APBO Interest rate Interest cost Analysis of amortization of transition obligation: Unrecognized transition obligation Remaining service period to retirement Amortization of transition obligation Analysis of amortization of period service cost: Prior service cost (plan amendment) Remaining service period to full eligibility

$30,000 11,400 0 2,000 667 $44,067

$104,000 10,000 114,000 10% $11,400

$40,000 20 $2,000

$10,000 15 $667

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19. Cartel Products Inc. offers a restricted stock award plan to its vice presidents. On January 1, 2003, the corporation granted 12 million of its $1 par common shares, subject to forfeiture if employment is terminated within 2 years. The common shares have a market value of $6 per share on the date the award is granted. Assume that no shares are forfeited. Determine the total compensation cost pertaining to the restricted shares. Compensation Cost Shares in restricted stock award Market value on grant date Compensation cost

12,000,000 $6 $72,000,000

Prepare the appropriate journal entries related to the restricted stock through December 31, 2004. Date Account 12/31/03 Compensation expense Paid-in capital, restricted stock Analysis of compensation expense: Total compensation cost Period of service Compensation expense

Debit $36,000,000

$36,000,000

$72,000,000 2 $36,000,000

12/31/04 Compensation expense Paid-in capital, restricted stock

$36,000,000

12/31/04 Paid-in capital, restricted stock Common stock Paid-in capital, excess of par

$72,000,000

Analysis of paid-in capital, excess of par: Compensation cost Shares issued Par value Total par value of shares issued Paid-in capital, excess of par

Credit

$36,000,000

$12,000,000 60,000,000

$72,000,000 12,000,000 $1 12,000,000 $60,000,000

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20. Olde Corporation provides an executive stock option plan. Under the plan, the company granted options on January 1, 2003, that permit executives to acquire 2 million of the company's $1 par value common shares within the next five years, but not before December 31, 2004 (the vesting date). The exercise price is the market price of the shares on the date of the grant, $14 per share. The fair value of the options, estimated by an appropriate option pricing model, is $2 per option. No forfeitures are anticipated. Ignore taxes. Determine the total compensation cost pertaining to the options, assuming the fair value approach has been selected.

Number of options Fair value of options Compensation costs

Compensation Costs 2,000,000 $2 $4,000,000

Prepare the appropriate journal entry to record the award of the options on January 1, 2003.

No journal entry on January 1, 2003, date options are granted Prepare the journal entry to record compensation expense on December 31, 2003. Date Account 12/31/03 Compensation expense Paid-in capital, stock options Analysis of compensation expense: Compensation costs Vesting period Compensation expense

Debit $2,000,000

Credit $2,000,000

$4,000,000 2 $2,000,000

Prepare the journal entry to record compensation expense on December 31, 2004. Date Account 12/31/04 Compensation expense Paid-in capital, stock options

Debit $2,000,000

Credit $2,000,000

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21. Spencer Company sells animal entertainment centers for $2,500 each. The entertainment centers carry a three year warranty covering parts and labor. The company has been in business 10 years and has an established stable pattern of warranty expense. On average the company incurs $50 in labor costs and $10 in parts for each entertainment center sold. During 2004 Spencer Company sold 500 animal entertainment centers and incurred warranty costs of $6,000 for labor and $1,200 for parts. On January 1, 2004 the balance in the “Estimated Liability under Warranties” account was $87,500. In the space provided prepare the journal entries required to record warranty expense and warranty costs incurred for 2004. Account Warranty Expense Estimated Liability under Warranties To record warranty expense for the year Analysis of warranty expense: Warranty expense per unit Units sold Warranty expense

Debit $30,000

Credit $30,000

$60 500

Account Debit Estimated Liability under Warranties $7,200 Inventory-parts Labor expense To record warranty costs incurred during the year

$30,000 Credit $1,200 6,000

Using the format provided prepare a T-Account analysis of the “Estimated Liability Under Warranties” account to determine the balance at year end. T-Account Analysis: Estimated Liability under Warranties Description Debit Credit Beginning balance $87,500 Warranty expense for 2004 30,000 Warranty costs incurred in 2004 $7,200 Ending balance $110,300

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22. On September 1, 2004, Spencer Company issued a $500,000, 9-month, non-interestbearing note to the bank. Interest was discounted at a 14% discount rate. Prepare the appropriate journal entry for Spencer Company to record the issuance of the non-interest-bearing note. Date Account Debit Credit 9/1/04 Cash $447,500 Discount on notes payable 52,500 Notes payable $500,000 To record the issuance of a 9-month $500,000 note discounted at 14% Analysis of discount on notes payable: Face amount Annual interest rate Annual interest Months in short period Discount on notes payable

$500,000 14% 70,000 9/12 $52,500

In the space provided determine the effective interest rate. Effective interest rate: Discount Cash Discount for short period Number of months in short period Monthly interest rate Annualized (multiply by 12) Annualized effective interest rate

52,500 447,500

11.73%

11.73% 9 1.30% 12 15.64%

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23. On March 1, 1999, Spencer Company issued 1,000, $1,000 9% bonds when the market interest rate was 10%. The bonds are for 10 years and pay interest on March 1 and September 1. Calculate the issue price of the bonds (rounded to the nearest dollar).

Issue price of bonds: PV of principal amount: Face amount PV $1, n = 20; i = 5% PV of principal

$1,000,000 0.37689 $376,890

PV of annuity: Face amount Stated interest rate Annual interest Number of payments per year Annuity PVOA, n = 20; i = 5% PV of annuity Issue price of bonds

$1,000,000 9% 90,000 2 45,000 12.46221 560,799 $937,689

Prepare an amortization schedule through March 1, 2002.

Date 3/1/99 9/1/99 3/1/00 9/1/00 3/1/01 9/1/01 3/1/02

Payment $45,000 45,000 45,000 45,000 45,000 45,000

Interest $46,884 46,979 47,078 47,181 47,291 47,405

Amortization of Discount $1,884 1,979 2,078 2,181 2,291 2,405

Balance $937,689 939,573 941,552 943,630 945,811 948,102 950,507

Prepare the journal entries to record the sale of the bonds.

Date Account 3/1/99 Cash Discount on bonds payable Bonds payable

Debit $937,689 62,311

Credit

$1,000,000

To record the issuance of 1,000, $1,000 9% bonds at an effective interest rate of 10%.

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Prepare the journal entry to record interest expense, amortization of discount and payment of interest on September 1, 1999. Date Account Debit Credit 9/1/99 Interest expense $46,884 Discount on bonds payable $1,884 Cash 45,000 To record the payment of interest and amortization of discount.

Prepare the journal entry to record interest expense, amortization of discount and accrual of interest on December 31, 1999.

Date Account 12/31/99 Interest expense Discount on bonds payable Interest payable To accure interest through December 31, 1999. Analysis of interest expense: Interest expense 3/1/00 Short period Interest expense Analysis of amortization of discount: Amortization 3/1/00 Short period Discount on bonds payable Analysis of interest payable: Interest payment 3/1/00 Short period Interest payable

Debit $31,319

Credit $1,319 30,000

$46,979 4/6 $31,319

$1,979 4/6 $1,319

$45,000 4/6 $30,000

On October 31, 2001, Spencer Company redeemed 500 bonds at 101. Prepare the journal entry to bring the accounting records up to the date of redemption. Date Account Debit Credit 10/31/01 Interest expense $15,802 Discount on bonds payable $802 Interest payable 15,000 To bring the accounting records current prior to redemption of bonds.

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Interest expense: Interest expense, 3/1/02 Short period Interest expense Discount on bonds payable: Amortization of discount, 3/1/02 Short period Discount on bonds payable Interest payable: Interest payment, 3/1/02 Short period Interest payable

$47,405 2/6 $15,802

$2,405 2/6 $802

$45,000 2/6 $15,000

Prepare the October 31, 2001 journal entry to record the redemption of the bonds.

Date Account 10/31/01 Bonds payable Loss on bonds payable Discount on bonds payable Cash To record the redemption of 500 bonds at 101 Analysis of cash: Face amount of bonds redemed Redemption rate Cash paid Analysis of loss on redemption of bonds: Cash paid Carrying amount at 10/31/01: Carrying amount at 9/1/01 Short period amortization of discount Carrying amount at 10/31/01 Percentage of bonds redemed Carrying value of bonds redemed Loss on redemption of bonds

Debit $500,000 30,548

Credit

$25,548 505,000

$500,000 101 $505,000

$505,000 $948,102 802 948,903 50% 474,452 30,548

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