PROBLEMS – Questions 1 – 8
1.
On March 31, 2009, Hanson Corporation sold $7,000,000 of its 8%, 10-year bonds for $6,730,500 including accrued interest. The bonds were dated January 1, 2009. Interest is paid semiannually on January 1 and July 1. On April 1, 2013, Hanson purchased 1/2 of the bonds on the open market at 99 plus accrued interest and canceled them. Hanson uses the straight-line method for amortization of bond premiums and discounts.
(a)
What was the amount of the gain or loss on retirement of the bonds?
(b)
Prepare the journal entry needed at April 1, 2013 to record retirement of the bonds. Assume that interest and premium or discount amortization have been recorded through January 1, 2013. Record interest and amortization on only the bonds retired.
(c)
Prepare the journal entry needed at July 1, 2013 to record interest and premium or discount amortization.
2.
On January 1 of the current year, Feller Corporation issued $3,000,000 of 10% debenture bonds on a basis to yield 9%, receiving $3,134,580. Interest is payable annually on December 31 and the bonds mature in 6 years. The effective-interest method is used.
(a)
What is the interest expense for the first year?
(b)
What is the interest expense for the second year?
3. Basic and Diluted Earnings Per Share
Assume that the following data relate to Rosen, Inc. for the year 2013:
Net income (30% tax rate)
$3,000,000
Average common shares outstanding 2013
1,000,000
shares
10% cumulative convertible preferred stock:
Convertible into 80,000 shares of common
$1,600,000
8% convertible bonds; convertible into 75,000
shares of common
$2,500,000
Stock options:
Exercisable at the option price of $25 per share;
average market price in 2013, $30
84,000
shares
Instructions
Compute (a) basic earnings per share, and (b) diluted earnings per share.
4. Available-for-Sale Equity Investments
On January 2, 2012, Norwin Company purchased 1,000 shares of Oslo Company common stock for $30,000. The stock has a par value of $10 and is part of the total stock outstanding of 20,000 shares of Oslo Company. Norwin Company intends the stock to be available for sale. Total stockholders’ equity of Oslo Company on January 2, 2012 was $600,000.
Instructions: Prepare necessary journal entries on the books of Norwin Company for the following transactions. If no entry is required, write “none” in the space provided. (Round all calculations to the nearest cent.)
(a)
January 2, 2012: Norwin purchases the shares described above.
(b)
December 31, 2012: Norwin receives a $.75 per share dividend from Oslo, and Oslo announces a net income for 2012 of $250,000.
(c)
December 31, 2012: According to The Wall Street Journal, Oslo common is selling for $27 per share. Norwin’s management views this decline as being only temporary in nature. Oslo’s common is Norwin’s only available-for-sale security.
(d)
February 15, 2013: Norwin sells 500 of the shares purchased on January 2, 2012 at $32 per share.
5. Trading Securities
The information below relates to Milton Company’s trading securities in 2012 and 2013.
(a)
Prepare the journal entries for the following transactions.
January 1, 2012
Purchased $300,000 par value of GLF Company bonds at 97 plus accrued interest. The bonds pay interest annually at 9% each December 31. Broker’s commission was $3,000.
September 1, 2012
Sold $150,000 par value of GLF Company bonds at 94 plus accrued interest. Broker’s commission, taxes, and fees were $1,500.
September 5, 2012
Purchased 5,000 shares of Hayes, Inc. common stock for $30 per share. The broker’s commission on the purchase amounted to $2,000.
December 31, 2012
Make the appropriate entry for the GLF Company bonds.
December 31, 2012
The market prices of the trading securities at December 31 were: Hayes, Inc. common stock, $31 per share; and GLF Company bonds, 99. Make the appropriate entry.
July 1, 2013
Milton sold 1/2 of the Hayes, Inc. common stock at $32 per share. Broker’s commissions, taxes, and fees were $1,000.
December 1, 2013
Milton purchased 600 shares of Ramirez, Inc. common stock at $45 per share. Broker’s commission was $500.
December 31, 2013
Make the appropriate entry for the GLF Company bonds.
December 31, 2013
The market prices of the trading securities at December 31 were: Hayes, Inc. common stock, $34 per share; GLF Company bonds, 98; and Ramirez, Inc. common stock, $47 per share. Make the appropriate entry.
(b)
Present the financial statement disclosure (balance sheet and income statement) of Milton Company’s transactions in trading securities for
each
of the years 2012 and 2013. Appropriate financial statement subheadings must be disclosed.
6. Segment Reporting.
Baden Company is a diversified company which has developed the following information about its five segments:
SEGMENTS
A
B
C
D
E
Total sales
$ 600,000
$1,700,000
$ 300,000
$ 320,000
$ 580,000
Operating profit (loss)
(270,000)
480,000
40,000
(300,000)
(10,000)
Identifiable assets
1,600,000
5,800,000
1,200,000
3,900,000
5,600,000
Instructions
Identify which segments are significant enough to warrant disclosure in accordance with FASB No. 131, “Reporting Disaggregated Information about a Business Enterprise,” by applying the following quantitative tests:
a.
Revenue test
b.
Operating profit or loss test
c.
Identifiable assets test
7. Long-Term Contracts.
Edwards Company contracted on 4/1/12 to construct a building for $2,300,000. The project was completed in 2014. Additional data follow:
2012
2013
2014
Costs incurred to date
$ 560,000
$1,350,000
$1,900,000
Estimated cost to complete
1,040,000
450,000
—
Billings to date
500,000
1,800,000
2,300,000
Collections to date
400,000
1,300,000
2,200,000
Instructions
(a)
Calculate the income recognized by Edwards under the percentage-of-completion method of accounting in each of the years 2012, 2013, and 2014.
(b)
Prepare all necessary entries for the year 2013.
(c)
Present the balance sheet disclosures at December 31, 2013. Proper headings or subheadings must be indicated.
8. Statement of Cash Flows.
Sharp Company
Comparative Balance Sheet
December 31
2013
2012
Cash
$ 54,000
$ 36,000
Accounts receivable, net
53,000
57,000
Inventory
161,000
123,000
Land
180,000
285,000
Building
300,000
300,000
Accumulated depreciation
(75,000)
(60,000)
Equipment
1,565,000
900,000
Accumulated depreciation
(177,000)
(141,000)
$2,061,000
$1,500,000
Accounts payable
$ 202,000
$ 150,000
Bonds payable
450,000
-0-
Capital stock, $10 par
1,125,000
1,125,000
Retained earnings
284,000
225,000
$2,061,000
$1,500,000
Additional Data:
1.
Net income for the year amounted to $104,000.
2.
Cash dividends were paid amounting to 4% of par value.
3.
Land was sold for $120,000.
4.
Sharp sold equipment, which cost $225,000 and had accumulated depreciation of $90,000, for $105,000.
Instructions
Prepare a statement of cash flows, in good form, using the indirect method.
MULTIPLE CHOICE – Questions 1 – 29
1.
Which of the following taxes does not represent a payroll deduction a company may incur?
a.
Federal income taxes.
b.
FICA taxes.
c.
State unemployment taxes.
d.
State income taxes.
2.
What is a contingency?
a.
An existing situation where certainty exists as to a gain or loss that will be resolved when one or more future events occur or fail to occur.
b.
An existing situation where uncertainty exists as to possible loss that will be resolved when one or more future events occur.
c.
An existing situation where uncertainty exists as to possible gain or loss that will not be resolved in the foreseeable future.
d.
An existing situation where uncertainty exists as to possible gain or loss that will be resolved when one or more future events occur or fail to occur.
The following information applies to both questions 3 and 4. On October 1, 2012 Macklin Corporation issued 5%, 10-year bonds with a face value of $2,000,000 at 104. Interest is paid on October 1 and April 1, with any premiums or discounts amortized on a straight-line basis.
3. The entry to record the issuance of the bonds would include a credit of
a.
$50,000 to interest Payable.
b.
$80,000 to Discount on Bonds Payable.
c.
$1,920,000 to Bonds Payable.
d.
$80,000 to Premium on Bonds Payable.
4.
Bond interest expense reported on the December 31, 2012 income statement of Macklin Corporation would be
a.
$23,000
b.
$25,000
c.
$27,000
d.
$46,000
Use the following information for questions 5 and 6.
Presented below is information related to Hale Corporation:
Common Stock, $1 par
$4,800,000
Paid-in Capital in Excess of Par—Common Stock
550,000
Preferred 8 1/2% Stock, $50 par
2,000,000
Paid-in Capital in Excess of Par—Preferred Stock
400,000
Retained Earnings
1,500,000
Treasury Common Stock (at cost)
150,000
5. The total stockholders’ equity of Hale Corporation is
a.
$9,100,000.
b.
$9,250,000.
c.
$7,600,000.
d.
$7,750,000.
6. The total paid-in capital (cash collected) related to the common stock is
a.
$4,800,000.
b.
$5,350,000.
c.
$5,750,000.
d.
$5,200,000.
7. In computing earnings per share for a simple capital structure, if the preferred stock is
cumulative, the amount that should be deducted as an adjustment to the numerator
(earnings) is the
a.
preferred dividends in arrears.
b.
preferred dividends in arrears times (one minus the income tax rate).
c.
annual preferred dividend times (one minus the income tax rate).
d.
none of these.
8. In computations of weighted average of shares outstanding, when a stock dividend or stock split occurs, the additional shares are
a.
weighted by the number of days outstanding.
b.
weighted by the number of months outstanding.
c.
considered outstanding at the beginning of the year.
d.
considered outstanding at the beginning of the earliest year reported.
9.
Investments in debt securities are generally recorded at
a.
cost including accrued interest.
b.
maturity value.
c.
cost including brokerage and other fees.
d.
maturity value with a separate discount or premium account.
10. Jordan Co. purchased ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to multiply the principal by the table value for
a.
10 periods and 10% from the present value of 1 table.
b.
10 periods and 8% from the present value of 1 table.
c.
20 periods and 5% from the present value of 1 table.
d.
20 periods and 4% from the present value of 1 table.
11. Under the completed-contract method
a.
revenue, cost, and gross profit are recognized during the production cycle.
b.
revenue and cost are recognized during the production cycle, but gross profit recognition is deferred until the contract is completed.
c.
revenue, cost, and gross profit are recognized at the time the contract is completed.
d.
none of these.
12.
Cost estimates on a long-term contract may indicate that a loss will result on completion of the entire contract. In this case, the entire expected loss should be
a.
recognized in the current period, regardless of whether the percentage-of-completion or completed-contract method is employed.
b.
recognized in the current period under the percentage-of-completion method, but the completed-contract method should defer recognition of the loss to the time when the contract is completed.
c.
recognized in the current period under the completed-contract method, but the percentage-of-completion method should defer the loss until the contract is completed.
d.
deferred and recognized when the contract is completed, regardless of whether the percentage-of-completion or completed-contract method is employed.
13.
Which of the following temporary differences results in a deferred tax asset in the year the temporary difference originates?
I.
Accrual for product warranty liability.
II.
Subscriptions received in advance.
III.
Prepaid insurance expense.
a.
I and II only.
b.
II only.
c.
III only.
d.
I and III only.
14.
Which of the following is not considered a permanent difference?
a.
Interest received on municipal bonds.
b.
Fines resulting from violating the law.
c.
Premiums paid for life insurance on a company’s CEO when the company is the beneficiary.
d.
Stock-based compensation expense.
15.
In determining the present value of the prospective benefits (often referred to as the projected benefit obligation), the following are considered by the actuary:
a.
retirement and mortality rate.
b.
interest rates.
c.
benefit provisions of the plan.
d.
all of these factors.
16.
In a defined-benefit plan, the process of funding refers to
a.
determining the projected benefit obligation.
b.
determining the accumulated benefit obligation.
c.
making the periodic contributions to a funding agency to ensure that funds are available to meet retirees’ claims.
d.
determining the amount that might be reported for pension expense.
17.
In all pension plans, the accounting problems include all the following except
a.
measuring the amount of pension obligation.
b.
disclosing the status and effects of the plan in the financial statements.
c.
allocating the cost of the plan to the proper periods.
d.
determining the level of individual premiums.
18. The methods of accounting for a lease by the lessee are
a.
operating and capital lease methods.
b.
operating, sales, and capital lease methods.
c.
operating and leveraged lease methods.
d.
none of these.
19. Which of the following is a correct statement of one of the capitalization criteria?
a.
The lease transfers ownership of the property to the lessor.
b.
The lease contains a purchase option.
c.
The lease term is equal to or more than 75% of the estimated economic life of the leased property.
d.
The minimum lease payments (excluding executory costs) equal or exceed 90% of the fair value of the leased property.
20. Minimum lease payments may include a
a.
penalty for failure to renew.
b.
bargain purchase option.
c.
guaranteed residual value.
d.
any of these.
21.
In computing the present value of the minimum lease payments, the lessee should
a.
use its incremental borrowing rate in all cases.
b.
use either its incremental borrowing rate or the implicit rate of the lessor, whichever is higher, assuming that the implicit rate is known to the lessee.
c.
use either its incremental borrowing rate or the implicit rate of the lessor, whichever is lower, assuming that the implicit rate is known to the lessee.
d.
none of these.
22. On December 31, 2013, Grantham, Inc. appropriately changed its inventory valuation method to FIFO cost from weighted-average cost for financial statement and income tax purposes. The change will result in a $2,000,000 increase in the beginning inventory at January 1, 2013. Assume a 30% income tax rate. The cumulative effect of this accounting change on beginning retained earnings is
a.
$0.
b.
$600,000.
c.
$1,400,000.
d.
$2,000,000.
23.
Which of the following transactions would be considered a financing activity in preparing a statement of cash flows?
a.
Amortizing a discount on bonds payable
b.
Recording net income from operations
c.
Selling common stock
d.
Purchasing inventory
24.
The net income for the year ended December 31, 2013, for Tax Consultants INC. was $920,000. Additional information is as follows:
Capital expenditures
$1,200,000
Depreciation on plant assets
450,000
Cash dividends paid on common stock
180,000
Increase in noncurrent deferred tax liability
45,000
Amortization of patents
21,000
Based on the information given above, what should be the net cash provided by operating activities in the statement of cash flows for the year ended December 31, 2013?
a.
$1,256,000.
b.
$1,346,000.
c.
$1,391,000.
d.
$1,436,000.
25.
Information concerning the debt of Cole Company is as follows:
Short-term borrowings:
Balance at December 31, 2012
$525,000
Proceeds from borrowings in 2013
325,000
Payments made in 2013
(450,000)
Balance at December 31, 2013
$400,000
Current portion of long-term debt:
Balance at December 31, 2012
$1,625,000
Transfers from caption “Long-Term Debt”
500,000
Payments made in 2013
(1,225,000)
Balance at December 31, 2013
$ 900,000
Long-term debt:
Balance at December 31, 2012
$9,000,000
Proceeds from borrowings in 2013
2,250,000
Transfers to caption “Current Portion of Long-Term Debt”
(500,000)
Payments made in 2013
(1,500,000)
Balance at December 31, 2013
$9,250,000
In preparing a statement of cash flows for the year ended December 31, 2013, for Cole Company, cash flows from financing activities would reflect
Outflow
a.
$2,000,000
b.
$2,250,000
c.
$2,575,000
d.
$3,175,000
26.
In considering interim financial reporting, how did the Accounting Principles Board conclude that such reporting should be viewed?
a.
As a “special” type of reporting that need not follow generally accepted accounting principles.
b.
As useful only if activity is evenly spread throughout the year so that estimates are unnecessary.
c.
As reporting for a basic accounting period.
d.
As reporting for an integral part of an annual period.
27. Which of the following items represents a potential use of cash?
a.
Patent amortization
b.
Sale of plant assets at a loss
c.
Net loss from operations
d.
Declaration of a stock dividend
28. Worthington Company purchased a machine on January 1, 2010, for $4,800,000. At the date of acquisition, the machine had an estimated useful life of six years with no salvage. The machine is being depreciated on a straight-line basis. On January 1, 2013, Worthington determined, as a result of additional information, that the machine had an estimated useful life of eight years from the date of acquisition with no salvage. An accounting change was made to reflect this additional information. What amount of depreciation expense should be reported in Worthington’s income statement for the year ended December 31, 2013?
a.
$800,000
b.
$600,000
c.
$480,000
d.
$300,000
29. On January 7, 2011, Yoder Corporation acquired machinery at a cost of $1,500,000. Yoder adopted the sum-of-the-years’-digits method of depreciation for this machine and had been recording depreciation over an estimated life of five years, with no residual value. At the beginning of 2013, a decision was made to change to the straight-line method of depreciation for this machine. Assuming a 30% tax rate, the cumulative effect of this accounting change, net of tax, is
a.
$0
b.
$200,000
c.
$210,000
d.
$300,000
PAGE
