COMPREHENSIVE EXAMINATION D PART (Chapters 15-17) Problem D-I D-II D-III D-IV D-V D-VI D-VII D-VIII Topic Treasury Stock *Cash Dividends Stock Dividends and Stock Splits Earnings Per Share Concepts Earnings Per Share Computations Basic and Diluted Earnings Per Share Available-for-Sale Equity Securities Trading Securities *Part of this topic is dealt with in an Appendix to the chapter Approximate Time 20 10 10 10 10 20 15 30 125 D-2 TestBank for Intermediate Accounting, Fourteenth Edition Problem D-I — Treasury Stock The stockholders' equity section of Carey Co.'s balance sheet at December 31, 2012, was as follows: Common stock $10 par (authorized 1,000,000 shares, issued and outstanding 600,000 shares) Paid-in capital in excess of par Retained earnings $ 6,000,000 1,500,000 3,250,000 $10,750,000 Instructions Prepare journal entries (1, 2, and 4) and show proper disclosure (3) to reflect the following treasury stock transactions showing how each is accounted for under the cost method (Show computations.) On January 4, 2013, having idle cash, Carey Co repurchased 20,000 shares of its outstanding stock for $500,000 On March 4, Carey sold 5,000 of these reacquired shares at $28 per share Show the proper disclosures in the stockholders' equity section of the balance sheet issued at the end of the first quarter, March 31, 2013 Assume net income of $100,000 during the first quarter On June 30, 2013 the firm sold 10,000 of the reacquired shares for $21 per share *Problem D-II — Cash Dividends Bell Company has stock outstanding as follows: Common, $10 par value per share, 140,000 shares; Preferred, 5%; $100 par value per share, 8,000 shares The Preferred is cumulative and participating up to an additional 4% of par; two years are in arrears (not including the current year); and the total amount of cash dividends declared for both classes of stock is $230,000 Instructions Prepare the entry for the dividend declaration, separating the dividend into the common and preferred portions Comprehensive Examination D D-3 Problem D-III — Stock Dividends and Stock Splits Stock dividends and stock splits are common forms of corporate stock distribution to stockholders Consider each of the numbered statements You are to decide whether it: A B C D E F Applies to both stock dividends and stock splits Applies to neither Applies to stock splits only Applies to stock dividends only Applies to stock splits effected in the form of a dividend only Applies to both stock splits effected in the form of a dividend and a stock dividend (In each instance, the issuing company has only one class of stock.) Instructions Print next to the number of each statement below, the single capital letter of the description which applies to the statement Statements _ The distribution is a multiple as contrasted to a fraction of the number of shares previously outstanding _ The total number of shares outstanding is increased _ The individual stockholder's share of net assets is increased _ There is no transfer between retained earnings and capital stock accounts, other than to the extent occasioned by legal requirements _ There is no change in the total stockholders' equity of the issuing corporation _ The retained earnings available for dividends are increased _ Retained earnings in the amount of the distribution are transferred to capital stock, in some instances in an amount in excess of that required by the laws of the state of incorporation _ Subsequent per-share earnings, if any, are decreased _ The par (or stated value) of the stock is unchanged D-4 TestBank for Intermediate Accounting, Fourteenth Edition Problem D-IV — Earnings Per Share Concepts Indicate which of the following securities would be included in the computation of "basic earnings per share," and which would be included in the computation of "diluted earnings per share." Place a "B" before those which affect only basic EPS, a "D" before those which affect only diluted EPS, a "BD" before those which affect both basic and diluted EPS, and an "N" before those securities which not affect EPS computations Assume that, where applicable, the appropriate securities are dilutive _ Warrants to purchase additional common shares _ Common stock _ Nonconvertible debenture bonds _ Convertible, noncumulative preferred stock _ Cumulative, nonconvertible preferred stock _ Convertible bonds _ Executive stock options _ Notes payable Problem D-V — Earnings Per Share Computations Jones, Inc has net income (30% tax rate) of $1,200,000 for 2013, and an average number of shares outstanding during the year of 500,000 shares The corporation issued $2,000,000 par value of 10-year, 9% convertible bonds on January 1, 2011 at a $180,000 discount The convertible bonds are convertible into 70,000 shares of common stock Assume the company uses the straight-line method for amortizing bond discount Instructions Compute the earnings per share data, excluding any notes if required Comprehensive Examination D D-5 Problem D-VI — Basic and Diluted Earnings Per Share Assume that the following data relate to Rosen, Inc for the year 2013: Net income (30% tax rate) Average common shares outstanding 2013 10% cumulative convertible preferred stock: Convertible into 80,000 shares of common 8% convertible bonds; convertible into 75,000 shares of common Stock options: Exercisable at the option price of $25 per share; average market price in 2013, $30 $3,000,000 1,000,000 shares $1,600,000 $2,500,000 84,000 shares Instructions Compute (a) basic earnings per share, and (b) diluted earnings per share Problem D-VII —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 D-6 TestBank for Intermediate Accounting, Fourteenth Edition Problem D-VIII — 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 Comprehensive Examination D D-7 Solutions — Comprehensive Examination D Problem D-I — Solution Treasury Stock Cash 500,000 Cash Treasury Stock Paid-in Capital from Treasury Stock 140,000 Stockholders' equity: Common stock, $10 par, 1,000,000 shares authorized, 600,000 shares issued, 585,000 shares outstanding Paid-in capital in excess of par value Paid-in capital from treasury stock Retained earnings 500,000 125,000 15,000 $ 6,000,000 1,500,000 15,000 3,350,000 10,865,000 (375,000) $10,490,000 Less: Cost of 15,000 shares held in treasury Total stockholders' equity Cash Paid-in Capital from Treasury Stock Retained Earnings Treasury Stock 210,000 15,000 25,000 250,000 *Problem D-II — Solution Retained Earnings Dividends Payable, Preferred Dividends Payable, Common 230,000 136,000 94,000 Computations: Arrears—$800,000 × 5% × Preference—$800,000 × 5% Common—$1,400,000 × 5% Participating 2%* Preferred $80,000 40,000 16,000 $136,000 * [($230,000 – $190,000) ÷ ($600,000 + $1,400,000)] Common $ 70,000 24,000 $ 94,000 Total $ 80,000 40,000 70,000 40,000 $230,000 TestBank for Intermediate Accounting, Fourteenth Edition D-8 Problem D-III — Solution C A B E A B F A F Problem D-IV — Solution D BD N D BD DD N Problem D-V — Solution Basic earnings per share ($1,200,000 ÷ 500,000 shares) $2.40 Diluted earnings per share $1,200,000 + 7($180,000 + $18,000) ————————————————— 500,000 + 70,000 $2.35 Problem D-VI — Solution (a) $3,300,000 – $160,000 Basic EPS = ——————————— = $2.09 1,500,000 (b) Start Convertible preferred Convertible bonds Options Shares 1,500,000 80,000 75,000 14,000** 1,669,000 *($2,500,000 × 08) × (1 – 30) **[($30 – $25) ữ $30] ì 84,000 $3,440,000 ữ 1,669,000 = $2.06 DEPS Earnings $3,140,000 160,000 140,000* $3,440,000 Comprehensive Examination D D-9 Problem D-VII — Solution (a) (b) Equity Investments Cash 30,000 Cash Dividend Revenue 750 30,000 750 No entry to accrue investee profits because fair value, not equity, method is being used (c) (d) Unrealized Holding Gain or Loss—Equity Fair Value Adjustment (Available-for-Sale) 3,000 Cash (500 × $32) Gain on Sale of Securities Equity Investments (500 × $30) 16,000 3,000 1000 15,000 Problem D-VIII — Solution January 1, 2012* Debt Investments ($300,000 ×.97) + $3,000 Cash September 1, 2012 Cash ($141,000 + $9,000 – $1,500) Loss on Sale of Investments Debt Investments Interest Revenue 294,000 294,000 148,500 7,500 147,000 9,000 September 5, 2012 Equity Investments Cash 152,000 December 31, 2012* Cash ($150,000 × 09) Interest Revenue 13,500 152,000 13,500 December 31, 2012 Fair Value Adjustment (Trading) 4,500 Unrealized Holding Gain or Loss—Income ($299,000 – $303,500) 4,500 D - 10 TestBank for Intermediate Accounting, Fourteenth Edition July 1, 2013 Cash ($80,000 – $1,000) Gain on Sale of Investments Equity Investments 79,000 3,000 76,000 December 1, 2013 Equity Investments Cash 27,500 December 31, 2013 Cash Interest Revenue 13,500 27,500 13,500 December 31, 2013 Fair Value Adjustment (Trading) Unrealized Holding Gain or Loss—Income ($326,500 – $345,200) - $4,500 14,200 14,200 December 31, Balance Sheet Current assets: Equity Investments, at fair value Income Statement Other revenue and gains: Interest Revenue Unrealized holding gain on trading securities Gain on sale of securities Other expenses and losses: Loss on sale of securities 2012 2013 $303,500 $345,200 $13,500 4,500 $13,500 14,200 3,000 7,500 ... the dividend declaration, separating the dividend into the common and preferred portions Comprehensive Examination D D-3 Problem D- III — Stock Dividends and Stock Splits Stock dividends and stock... Applies to stock dividends only Applies to stock splits effected in the form of a dividend only Applies to both stock splits effected in the form of a dividend and a stock dividend (In each instance,... any, are decreased _ The par (or stated value) of the stock is unchanged D- 4 Test Bank for Intermediate Accounting, Fourteenth Edition Problem D- IV — Earnings Per Share Concepts Indicate which