Practice Review over Liabilities, Time Value of Money, and Stockholders Equity Chapters

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1 Practice Review over Liabilities, Time Value of Money, and Stockholders Equity Chapters Use the following information to answer questions 1-3. When Sample Corporation was formed on January 1, the corporate charter provided for 50,000 shares of $20 par value stock. The following transactions were among those engaged in by the corporation during the first month of operation. What are the following entries? 1. The corporation issued 200 shares to its lawyer in full payment of the $5,000 bill for drawing up the articles of incorporation. 2. The company issued 8,000 shares of stock at a price of $25 per share. 3. The company issued 7,000 shares in exchange for equipment that had a fair market value of $160,000. Use the following information to answer questions 4-5. Sample Corporation has 60,000 shares of $10 par value common stock outstanding. What are the following entries? 4. On March 17 declared a 10% stock dividend to stockholders of record March 20. The market value of the stock was $13 on March On March 30 distributed the stock dividend. 6. What type of account is Stock dividends distributable? 7. What type of account is Cash dividends payable? 8. On May 1 Sample Corporation had 100,000 shares of $100 par value common stock outstanding with a market value of $160 per share. On May 2, Sample Corporation announced a 4 for 1 stock split. After the split, what were the par value, market value, and number of shares outstanding? What entry was made on May 2? 1

2 Use the following information to answer questions On January 1, Sample Corporation had 50,000 shares of $10 par value common stock issued and outstanding. All 50,000 shares had been issued in a prior period for $15 per share. On February 1, Sample Corporation purchased 2,000 shares of its own stock for $18 per share. On March 2 Sample Corporation sold 1,000 shares of this stock for $20 per share. On April 1 it sold 500 shares of this stock for $15 per share. On May 1 Sample Corporation retired the remaining shares. 9. What is the entry on February 1? 10. What is the entry on March 2? 11. What is the entry on April 1? 12. What is the entry on May 1? 13. Calculate the number of shares outstanding if: 80,000 shares are authorized; 30,000 shares are unissued; and 5,000 shares are in the treasury. 14. When a cash dividend is declared, three different dates are usually involved. Assume a $5,000 cash dividend. List the three dates and the journal entries made on them. 2

3 15. On December 31, Sample Corporation reported the following balances on its balance sheet. Prepare the Stockholders Equity section of the balance sheet with all proper disclosures. Cash $22,000; Treasury stock ($8 per share, at cost) ($16,000); Retained Earnings $130,000; Common stock, $5 par (authorized 100,000 shares, issued? shares of which? shares are held as treasury stock) $400,000; Paid in Capital in excess of par $?; and Total Contributed Capital $540, Which of the following is not true about a 30% stock dividend? a. Retained earnings decreases. b. Contributed capital increases. c. Par value per share remains the same. d. The market value of the stock is needed to record the stock dividend. 17. At the beginning of the year, Sample Corporation had 30,000 shares of $10 par value common stock issued and outstanding. During January the corporation declared and distributed a 10 percent stock dividend. The market value of the stock was $24 throughout the month of January. As a result of this stock dividend, total stockholders equity should increase (decrease) by a. 0 b. $30,000 c. $42,000 d. ($72,000) 18. On June 1 Sample Corporation had 200,000 shares of $4 par value common stock outstanding with a market value of $160 per share. On June 2 the corporation declared a 4 for 1 stock split. After the split, what were the par value, market value, and number of shares outstanding? 3

4 19. Sample Corporation has 60,000 shares of $10 par value common stock outstanding. On March 17 a 10% stock dividend was declared to stockholders of record on March 20, and to be distributed on March 30. The market value of the stock on March 17 was $13 per share. a. What is the entry on March 17? b. What is the entry on March 20? c. What is the entry on March 30? 20. According to generally accepted accounting principles, treasury stock should be recorded at: a. par or stated value b. cost c. original issue cost d. net realizable value 21. On the balance sheet, treasury stock owned by the company is classified properly as a. current assets b. investments c. a note to the financial statements d. contra-stockholders equity 22. Compute the missing numbers from the following information: Par value per common share $10 Common stock account balance $150,000 Number of shares authorized 20,000 shares Number of shares issued and outstanding shares Paid in Capital in excess of Par balance $ Retained Earnings account balance $80,000 Total Contributed Capital $ Total Stockholders Equity $300,000 4

5 23. Comprehensive Stockholders' Equity Transactions and Financial Ratios Sample Corporation was chartered in the state of Massachusetts. The company was authorized to issue 10,000 shares of $100 par value, 6 percent preferred stock and 50,000 shares of no-par common stock. The common stock has a $2 stated value. The stock-related transactions for the quarter ended October 31, 2010, were as follows: Aug. 3 Issued 10,000 shares of common stock at $22 per share. 15 Issued 8,000 shares of common stock for land. Asking price for the land was $100,000. Common stock's market value was $12 per share. 22 Issued 5,000 shares of preferred stock for $500,000. Oct. 4 Issued 5,000 shares of common stock for $60, Purchased 2,500 shares of common stock for the treasury for $6, Declared a quarterly cash dividend on the outstanding preferred stock and $.10 per share on common stock outstanding, payable on October 31 to stockholders of record on October Date of record for cash dividends. 31 Paid cash dividends. Required 1. Record transactions for the quarter ended October 31, 2010, in T accounts. 2. Prepare the stockholders' equity section of the balance sheet as of October 31, Net income for the quarter was $23,000. 5

6 24. Treasury Stock Sample Corporation had the following treasury stock transactions during 2011: 1. Purchased 80,000 shares of its $1 par value common stock on the market for $2.50 per share. 2. Purchased 16,000 shares of its $1 par value common stock on the market for $2.80 per share. 3. Sold 44,000 shares purchased in a for $131, Sold the other 36,000 shares purchased in a for $72, Sold 6,000 of the remaining shares of treasury stock for $1.60 per share. 6. Retired all the remaining shares of treasury stock. All shares originally were issued at $1.50 per share. Required 1. Record the treasury stock transactions in T accounts. 2. What is the reasoning behind treating the purchase of treasury stock as a reduction in stockholders' equity as opposed to treating it as an investment asset? 25. Valuing Bonds Using Present Value Use Tables on present value tables to calculate the issue price of a $300,000 bond issue in each of the following independent cases. Assume interest is paid semiannually. 1. A 10-year, 8 percent bond issue; the market interest rate is 10 percent. 2. A 10-year, 8 percent bond issue; the market interest rate is 6 percent. 3. A 10-year, 10 percent bond issue; the market interest rate is 8 percent. 4. A 20-year, 10 percent bond issue; the market interest rate is 12 percent. 5. A 20-year, 10 percent bond issue; the market interest rate is 6 percent. 6

7 26. Effective Interest Method Sample Corporation has $4,000,000 of 9.5 percent, 25-year bonds dated March 1, 2010, with interest payable on February 28 and August 31. The company's fiscal year end is February 28. It uses the effective interest method to amortize bond premiums or discounts. (Round amounts to the nearest dollar.) Required 1. Assume the bonds are issued at on March 1, 2010, to yield an effective interest rate of 9.2 percent. Prepare entries in journal form for March 1, 2010, August 31, 2010, and February 28, Assume the bonds are issued at 97.5 on March 1, 2010, to yield an effective interest rate of 9.8 percent. Prepare entries in journal form for March 1, 2010, August 31, 2010, and February 28, Explain the role that market interest rates play in causing a premium in requirement 1 and a discount in requirement 2. 7

8 27. Bonds Issued at a Discount and a Premium Effective Interest Method Sample Corporation issued bonds twice during A summary of the transactions involving the bonds follows Jan. 1 Issued $3,000,000 of 9.9 percent, ten-year bonds dated January 1, 2010, with interest payable on June 30 and December 31. The bonds were sold at 102.6, resulting in an effective interest rate of 9.4 percent. Mar. 1 Issued $2,000,000 of 9.2 percent, ten-year bonds dated March 1, 2010, with interest payable March 1 and September 1. The bonds were sold at 98.2, resulting in an effective interest rate of 9.5 percent. June 30 Paid semiannual interest on the January 1 issue and amortized the premium, using the effective interest method. Sept. 1 Paid semiannual interest on the March 1 issue and amortized the discount, using the effective interest method. Dec. 31 Paid semiannual interest on the January 1 issue and amortized the premium, using the effective interest method. 31 Made an end-of-year adjusting entry to accrue interest on the March 1 issue and to amortize two-thirds of the discount applicable to the second interest period Mar. 1 Paid semiannual interest on the March 1 issue and amortized the remainder of the discount applicable to the second interest period. Required 1. Prepare entries in journal form to record the bond transactions. (Round amounts to the nearest dollar.) 2. Describe the effect on profitability and liquidity by answering the following questions. a. What is the total interest expense in 2010 for each of the bond issues? b. What is the total cash paid in 2010 for each of the bond issues? c. What differences, if any, do you observe and how do you explain these differences? 8

9 28. Valuing Bonds Using Present Value Sample, Inc., is considering the sale of two bond issues. Choice A is a $600,000 bond issue that pays semiannual interest of $32,000 and is due in 20 years. Choice B is a $600,000 bond issue that pays semiannual interest of $30,000 and is due in 15 years. Assume that the market interest rate for each bond is 12 percent. Calculate the amount that Sample, Inc. will receive if both bond issues occur. (Calculate the present value of each bond issue and sum.) 29. Effective Interest Method On March 1, 2010, Sample Company sold $400,000 of its 9.5 percent, 20-year bonds at 106. The semiannual interest payment dates are March 1 and September 1. The market interest rate is 8.9 percent. The firm's fiscal year ends August 31. Prepare entries in journal form to record the sale of the bonds on March 1, the accrual of interest and amortization of premium on August 31, and the first interest payment on September 1. Use the effective interest method to amortize the premium. 30. Effective Interest Method On March 1, 2010, Sample Corporation issued $1,200,000 of 10 percent, five-year bonds. The semiannual interest payment dates are February 28 and August 31. Because the market rate for similar investments was 11 percent, the bonds had to be issued at a discount. The discount on the issuance of the bonds was $48,670. The company's fiscal year ends February 28. Prepare entries in journal form to record the bond issue on March 1, 2010, the payment of interest, and the amortization of the discount on August 31, 2010 and on February 28, Use the effective interest method. (Round answers to the nearest dollar.) 31. Bond Retirement The Sample Corporation has outstanding $200,000 of 8 percent bonds callable at 104. On December 1, immediately after the payment of the semiannual interest and the amortization of the bond discount were recorded, the unamortized bond discount equaled $5,250. On that date, $120,000 of the bonds were called and retired. Prepare the entry in journal form to record the retirement of the bonds on December Bond Conversion The Sample Corporation has $2,000,000 of 6 percent bonds outstanding. There is $40,000 of unamortized discount remaining on the bonds after the March 1, 2009, semiannual interest payment. The bonds are convertible at the rate of 20 shares of $10 par value common stock for each $1,000 bond. On March 1, 2009, bondholders presented $1,200,000 of the bonds for conversion. Prepare the entry in journal form to record the conversion of the bonds. 9

10 33. Bond Retirement The Sample Corporation has outstanding $400,000 of 8 percent bonds callable at 104. On September 1, immediately after recording the payment of the semiannual interest and the amortization of the discount, the unamortized bond discount equaled $10,500. On that date, $240,000 of the bonds was called and retired. 1. How much cash must be paid to retire the bonds? 2. Is there a gain or loss on retirement, and if so, how much is it? 34. Bond Conversion The Sample Corporation has $400,000 of 6 percent bonds outstanding. There is $20,000 of unamortized discount remaining on these bonds after the July 1, 2011, semiannual interest payment. The bonds are convertible at the rate of 20 shares of $5 par value common stock for each $1,000 bond. On July 1, 2011, bondholders presented $300,000 of the bonds for conversion. 1. Is there a gain or loss on conversion, and if so, how much is it? 2. How many shares of common stock are issued in exchange for the bonds? 3. In dollar amounts, how does this transaction affect the total liabilities and the total stockholders' equity of the company? In your answer, show the effects on four accounts. 35. Effective Interest Method Sample Company sold $500,000 of 9.5 percent, 20-year bonds on April 1, 2009, at 106. The semiannual interest payment dates are March 31 and September 30. The market interest rate is 8.9 percent. The company's fiscal year ends September 30. Use the effective interest method to calculate the amortization. 1. With regard to the bond issue on April 1, 2009: a. How much cash is received? b. How much is Bonds Payable? c. What is the difference between a and called and how much is it? 2. With regard to the bond interest payment on September 30, 2009: a. How much cash is paid in interest? b. How much is the amortization? c. How much is interest expense? 3. With regard to the bond interest payment on March 31, 2010: a. How much cash is paid in interest? b. How much is the amortization? c. How much is interest expense? 10

11 36. Income tax expense represents the amount of income taxes a. actually payable to the IRS for the period. b. applicable to the amount of taxable income for the period. c. applicable to the amount of accounting income for the period. d. computed in accordance with the income tax code. 37. An excess of an income tax expense over income tax payable for a period is associated with a. an excess of accounting income over taxable income. b. an excess of taxable income over accounting income. c. an error. d. a debit to the Deferred Income Taxes account. 38. An excess of income tax expense over income taxes payable will result recording a a. debit to Deferred Income Taxes. b. credit to Deferred Income Taxes. c. debit to Income Taxes Payable. d. credit to Income Tax Expense. 39. Notes Payable Sample Corporation, whose fiscal year ended June 30, 2010, completed the following transactions involving notes payable: May 21 Obtained a 60-day extension on an $18,000 trade account payable owed to a supplier by signing a 60-day, $18,000 note. Interest is in addition to the face value, at the rate of 14 percent. June 30 Made the end-of-year adjusting entry to accrue interest expense. July 20 Paid off the note plus interest due the supplier. Required 1. Prepare entries in journal form for the notes payable transactions. 2. When notes payable appears on the balance sheet, what other current liability would you look for to be associated with the notes? What would it mean if this other current liability did not appear? 40. Interest Expense on Note Payable On the last day of August, Sample Company borrowed $240,000 on a bank note for 60 days at 12 percent interest. Assume that interest is stated separately. Prepare the following entries in journal form: (1) August 31, recording of note; and (2) October 30, payment of note plus interest. 41. Interest Expense on Discounted Note Payable On the last day of August, Sample Company borrowed $240,000 on a bank note for 60 days at 12 percent interest. Assume that interest is included in face. Prepare the following entries in journal form: (1) August 31, recording of note; and (2) October 30, payment of note plus interest. 11

12 42. Product Warranty Liability Sample Company is engaged in the retail sale of high-definition televisions (HDTVs). Each HDTV has a 24-month warranty on parts. If a repair under warranty is required, a charge for the labor is made. Management has found that 20 percent of the HDTVs sold require some work before the warranty expires. Furthermore, the average cost of replacement parts has been $60 per repair. At the beginning of January, the account for the estimated liability for product warranties had a credit balance of $14,300. During January, 112 HDTVs were returned under the warranty. The cost of the parts used in repairing the HDTVs was $8,765, and $9,442 was collected as service revenue for the labor involved. During January, the month before the Super Bowl, Sample Company sold 450 new HDTVs. Required 1. Prepare entries in journal form to record each of the following: (a) the warranty work completed during the month, including related revenue; (b) the estimated liability for product warranties for HDTVs sold during the month. 2. Compute the balance of the Estimated Product Warranty Liability account at the end of the month. 3. If the company's product warranty liability is overestimated, what are the effects on current and future years' income? 43. Product Warranty Liability Sample Company manufactures and sells electronic games. Each game costs $50 to produce, sells for $90, and carries a warranty that provides for free replacement if it fails during the two years following the sale. In the past, 7 percent of the games sold had to be replaced under the warranty. During July, Sample sold 6,500 games, and 700 games were replaced under the warranty. 1. Prepare an entry in journal form to record the estimated liability for product warranties during the month. 2. Prepare an entry in journal form to record the games replaced under warranty during the month. 44. Types of Liabilities Indicate whether each of the following is (a) a definitely determinable liability, (b) an estimated liability, (c) a commitment, or (d) a contingent liability: 1. Dividends payable 2. Pending litigation 3. Income taxes payable 4. Current portion of long-term debt 5. Vacation pay liability 6. Guaranteed loans of another company 7. Purchase agreement 12