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182. Which of the following is/are true concerning accumulated other comprehensive income?
183. Which of the following is/are not true concerning accumulated other comprehensive income?
184. Which of the following is/are true concerning accumulated other comprehensive income?
185. Which of the following is/are true concerning accumulated other comprehensive income?
186. The shareholders’ equity section of the balance sheet reports the sources of financing provided by
preferred and common shareholders and their claims on the net assets of the firm. Which of the following is/are
true?
187. The shareholders’ equity section of the balance sheet reports the sources of financing provided by
preferred and common shareholders and their claims on the net assets of the firm. Which of the following is/are
true?
188. Income from continuing operations includes
189. Treasury shares arise when a corporation reacquires its own previously issued common shares. A reason
for reacquiring outstanding common stock is to use the treasury shares in various option arrangements. When
holders of stock options, stock rights, stock warrants, and convertible securities exercise their options, firms
usually receive
190. A firm decides to issue stock, pursuant to a stock split, on a 2-for-1 basis. What entry is necessary for this
issuance?
191. If 10,000 stock warrants are issued to the general public for $10,000, and later those warrants and
$150,000 are exchanged for 10,000 shares of no-par stock, the entry to record the exercise of the warrants
would be:
192. A firm issues convertible bonds that pay 8% interest and receives $100,000. The firm could have issued
nonconvertible bonds that pay 8% interest but would have received only $80,000 in bond proceeds. What
journal entry is necessary under GAAP to record the issuance of the convertible bonds?
193. In what way are stock rights generally different from stock warrants?
194. If the accountant cannot objectively measure the value of the stock warrants separately from the value of
the bond or preferred stock at date of issuance, the accountant credits
195. Treasury stock can be defined as
196. A firm owns 1,000 treasury shares which it acquired for $15 per share (par value $1). The firm sells 500 of
the treasury shares for $20 per share. Using the cost method, what is the entry to record the sale of the treasury
stock using the cost method?
197. (CMA adapted, Jun 87 #4) The major segments of the statement of retained earnings for a period are
198. Firms may periodically distribute net assets generated by earnings to shareholders as a dividend. Firms
199. A firm must pay all current and previously postponed preferred dividends before it can pay any dividends
on common shares, thus the preferred shares have the feature called
200. If the firm becomes insolvent, in order to settle debts creditors can claim
201. Landau Corporation
Excerpts from the Statement of Financial Position for Landau Corporation as of September 30, Year 5, are
presented below.
Cash
$ 950,000
Accounts receivable (net)
1,675,000
Inventories
2,806,000
Total current assets
$5,431,000
Accounts payable
$1,004,000
Accrued liabilities
785,000
Total current liabilities
$1,789,000
The Board of directors of Landau Corporation met on October 4, Year 5, and declared regular quarterly cash
dividends amounting to $750,000 ($0.60 per share). The dividend is payable on October 25, Year 5, to all
shareholders of record as of October 12, Year 5.
Assume that the only transactions to affect Landau Corporation during October Year 5 are the dividend
transactions and that the closing entries have been made.
(CMA adapted, Dec 89 #15) Refer to the Landau Corporation example. Landau's total shareholders' equity
would be
202. Landau Corporation
Excerpts from the Statement of Financial Position for Landau Corporation as of September 30, Year 5, are
presented below.
Cash
$ 950,000
Accounts receivable (net)
1,675,000
Inventories
2,806,000
Total current assets
$5,431,000
Accounts payable
$1,004,000
Accrued liabilities
785,000
Total current liabilities
$1,789,000
The Board of directors of Landau Corporation met on October 4, Year 5, and declared regular quarterly cash
dividends amounting to $750,000 ($0.60 per share). The dividend is payable on October 25, Year 5, to all
shareholders of record as of October 12, Year 5.
Assume that the only transactions to affect Landau Corporation during October Year 5 are the dividend
transactions and that the closing entries have been made.
(CMA adapted, Dec 89 #16) Refer to the Landau Corporation example. If the dividend declared by Landau
Corporation had been a 10 percent stock dividend instead of a cash dividend, Landau's current liabilities would
have been
203. Landau Corporation
Excerpts from the Statement of Financial Position for Landau Corporation as of September 30, Year 5, are
presented below.
Cash
$ 950,000
Accounts receivable (net)
1,675,000
Inventories
2,806,000
Total current assets
$5,431,000
Accounts payable
$1,004,000
Accrued liabilities
785,000
Total current liabilities
$1,789,000
The Board of directors of Landau Corporation met on October 4, Year 5, and declared regular quarterly cash
dividends amounting to $750,000 ($0.60 per share). The dividend is payable on October 25, Year 5, to all
shareholders of record as of October 12, Year 5.
Assume that the only transactions to affect Landau Corporation during October Year 5 are the dividend
transactions and that the closing entries have been made.
(CMA adapted, Dec 89 #17) Refer to the Landau Corporation example. If the dividend declared by Landau
Corporation had been a ten percent stock dividend instead of a cash dividend, Landau's total shareholders'
equity would have been
204. A stock dividend indicates
205. A firm may postpone or omit
206. (CMA adapted, Jun 88 #19) Which one of the following items would likely increase earnings per share
(EPS) of a corporation?
207. How would total stockholders' equity be affected by the declaration of each of the following?
Stock Stock
Dividend Split
208. On September 30, PMM Corporation declared and issued a 10% common stock dividend. Prior to this
dividend, PMM had 50,000 shares of $5 par value common stock issued and outstanding. The fair value of
PMM's common stock was $52 per share on September 30. As a result of this stock dividend, PMM's total
stockholders' equity
209. (CMA adapted, Dec 89 #8) On January 1, Year 1, Toga Corporation granted stock options to top
management. The options were exercisable within 4 years from the date of grant only if the employee was still
in Toga's employ. When computing year-end earnings per share at December 31, Year 1, Toga should
210. Indicate how each of the following items would be treated in the financial statements.
a.
Loss on manufacturing plant destroyed by an earthquake, in an area where earthquakes are not common.
b.
Loss on manufacturing plant destroyed by an earthquake, in an area where earthquakes are common.
c.
Discover that a piece of depreciable equipment with an estimated life of 10 years will actually last 15
years. The equipment has been held for 5 years.
d.
Discover that ending inventory of the prior period was misstated.
e.
Income from an operation that is abandoned in the current year.
a.
Report separately as loss from extraordinary item
b.
Report in earnings from continuing operations
c.
Adjust current and future years' depreciation
d.
Adjust beginning retained earnings for the current period and need to disclose the effect on or restate
prior periods financial statements.
e.
Report separately as income from discontinued operations, while also reporting the estimated loss from
disposal of the operation
211. Prepare the journal entries necessary to record the following transactions for the Boulder Company:
a.
On January 1, Year 1, the company issued 10,000 shares of common stock (par value $5) at $15 per
share.
b.
On January 1, Year 2, the company issued $200,000 of convertible bonds at par. The bonds have a
face value of $1,000, pay 8% annually and are convertible into 40 shares of common shares. Without
the conversion feature, the bonds would have been issued at 98.
c.
On June 1, Year 2, the company repurchased 8,000 of the common shares when the market price per
share was $25.
d.
On January 1, Year 3, the convertible bonds were exchanged for treasury shares. The market price of
common stock on that date is $30. (Hint: recognize a gain or loss on conversion.)
a.
Cash
150,000
Common Stock--Par Value
50,000
Additional Paid-in Capital
100,000
b.
Cash
200,000
Convertible Bonds payable
200,000
c.
Treasury Shares--Common
200,000
Cash
200,000
d.
Convertible Bonds Payable
200,000
Loss on Bond Conversion
40,000
Treasury Shares--Common
200,000
Additional Paid-in Capital
40,000
212. MAFCO has an extensive stock option program for its employees. Prepare journal entries to record the
following transactions:
a.
On July 1, Year 1, MAFCO issues 10,000 stock options to employees when the market price per share
is $5. The option allows the holder the right to acquire shares at $6 per share. Par value of the common
shares is $1.
b.
On July 31, Year 1, 1,000 stock options previously granted when the market value per share was $4
expire.
c.
On August 31, Year 1, 4,000 stock options were exercised when the market value per share was $5. The
options allowed the holder to acquire the shares at $4 per share and the options were granted when the
market price per share was $3.
a.
No entry
b.
No entry
c.
Cash
16,000
Common Stock-Par Value
4,000
Additional Paid-in Capital
12,000
213. Selected data from the comparative balance sheets of Morrissey Company as of December 31, Year 1, and
Year 2 appear below:
Year 1
Year 2
Preferred stock, $100 Par, Issued at Par
$ 0
$ 600,000
Common Stock, $30 Par
300,000
345,000
Additional Paid-in Capital
120,000
177,000
Retained Earnings
1,260,000
1,320,000
Total
$1,680,000
$2,442,000
Less Cost of Treasury Shares (Cost of 1,500 shares).
(72,000)
-
Total Shareholders' Equity
$1,608,000
$2,442,000
The following transactions occurred during Year 2:
a.
March 1, Year 2: The company resold the Treasury shares on the market for $57 per share.
b.
June 30, Year 2: The company declared and issued a 10-percent stock dividend at a time when the
market price was $63 per share.
c.
September 15, Year 2: The company issued additional shares of common stock on the open market for
cash.
d.
November 16, Year 2: The company issued new preferred shares on the open market for cash.
e.
December 31, Year 2: Net income for Year 2 was $195,000. The company declared and paid cash
dividends of $72,000 on the last day of the year.
Required:
Prepare journal entries for each of the transactions and events affecting these shareholders' equity accounts
during Year 2.
a.
March 1, Year 2
Cash
85,500
Treasury Shares
72,000
Additional Paid-in Capital
13,500
1,500 shares ´ $57 = $85,500.
b.
June 30, Year 2
Retained Earnings
63,000
Common Stock
30,000
Additional Paid-in Capital
33,000
1,000 shares ´ $63 = $63,000.
c.
September 15, Year 2
Cash
25,500
Common Stock ($345,000 - $330,000)
15,000
Additional Paid-in Capital
10,500
$120,000 + $13,500 + $33,000 + X = $177,000; X = $10,500.
d.
November 16, Year 2
Cash
600,000
Preferred Stock
600,000
e.
December 31, Year 2
Income Summary
195,000
Retained Earnings
195,000
Retained Earnings
72,000
Cash
72,000
214. Based on the following summary of shareholders' equity accounts, answer the following questions. No
dividends were paid during the Year 1 and Year 2.
December 31, Year 1
December 31, Year 2
Common stock, $5 par value
$1,000,000
$1,250,000
Additional paid-in capital
1,500,000
2,000,000
Net unrealized loss on investment
in marketable equity securities
(100,000)
(150,000)
Retained earnings
2,000,000
2,500,000
Less: Cost of treasury shares
(200,000)
(224,000)
Total shareholders' equity
$4,200,000
$5,376,000
a.
What is net income during Year 2?
b.
How many additional common shares were issued in Year 2?
c.
What was the cost per share of the treasury stock acquired during Year 2? 2,000 additional shares were
acquired during the year.
d.
What price was paid for the additional common shares issued in Year 2?
e.
What happened to the portfolio of long-term marketable equity securities?
a.
$500,000 ($2,500,000 - $2,000,000)
b.
50,000 (($1,250.000 - $1,000,000) / $5)
c.
$12 (($224,000 - $200,000) / 2,000)
d.
$15 ($2,000,000 - $1,500,000) / 50,000 = $10 + $5 par
e.
Cost is $150,000 greater than market at December 31, Year 2
215. Prepare journal entries for the following transactions:
a.Issue 15,000 shares, selling price is $45 and par value is $1.
b.Buy back 650 shares of outstanding stock at $48 per share.
c.Sell 500 shares of treasury stock at $50 per share.
a.
Cash
675,000
Common Stock
15,000
Additional Paid-in Capital
660,000
b.
Treasury Stock
31,200
Cash
31,200
c.
Cash
25,000
Treasury Stock
24,000
Additional Paid-in Capital-Treasury Shares
1,000
216. Prepare journal entries to record each of the following transactions for Big Co.
a.
Big Co. issues stock warrants for $20,000 cash. The warrants allow holders to purchase 5,000 common
shares (par value $5) for $50 each.
b.
One-half of the warrants are exercised.
c.
The remaining warrants expire.
a.
Cash
20,000
Common Stock Warrants
20,000
b.
Cash
125,000
Common Stock Warrants
10,000
Common Stock-Par Value
12,500
Additional Paid-in Capital
122,500
c.
Common Stock Warrants
10,000
Additional Paid-in Capital-Expired Warrants
10,000
217. Prepare journal entries to record each of the following transactions for Keith's Camping Supplies (KCS) on
January 1, Year 1.
a. KCS issues $100,000 of convertible bonds at 98% of par. Without the conversion feature, the bonds
would have traded at 88% of par. The bonds each have a $1,000 face value and an 8% stated rate. Each bond
can be converted into 50 shares of stock with a $5 par value. The bonds have a 10-year maturity and the straight
line method of discount amortization is used. Interest is paid annually on January 1.
b.Prepare any entry necessary on December 31, Year 1.
c.Prepare any entry necessary on December 31, Year 2.
d.On January 1, Year 3, $25,000 par value of bonds are converted when the market price per share $25. (Hint:
do not record a gain or loss on conversion.)
a.
Cash
98,000
Discount on Bonds Payable
2,000
Convertible Bonds Payable
100,000
b.
Interest Expense
8,200
Discount on Bonds Payable
200
Interest Payable
8,000
c.
Interest Expense
8,200
Discount on Bonds Payable
200
Interest Payable
8,000
d.
Convertible Bonds Payable
25,000
Common Stock - $5 par
6,250
Additional Paid-in Capital
18,350
Discount on Bonds Payable
400
218. Based on the following information, determine how many shares of common stock would be outstanding if
all conversion features were exercised.
Convertible Bonds Payable
$ 80,000
Convertible Preferred Stock - par
50,000
Common Stock - par
2,000,000
Additional Paid-in Capital
1,800,000
Retained Earnings
3,000,000
Shares held in Treasury
(600,000)
Additional information:
a.
Common stock was issued when the market price was $10 per share
b.
The treasury stock was acquired when the market value per share was $15.
c.
Current fair market value of the common stock is $18 per share.
d.
Each share of $1,000 par value preferred stock is convertible to 50 shares of common stock.
e.
Each $1,000 face value bond can be converted to 40 shares of common stock. The bonds were issued at
par.
165,700 shares if fully converted
Common stock
($2,000,000/$10)
200,000
shares
Less: Treasury shares
($600,000/$15)
(40,000)
Plus: Convertible preferred
[($50,000/$1,000) ´ 50]
2,500
Plus: Convertible bonds
[($80,000/$1,000) ´ 40]
3,200
Total
165,700
219. Prepare journal entries to record each of the following Year 1 transactions for SomCo.
a.Issue 12,000 shares of common stock with a par value of $2 for $5 a share.
b.Issue 30 shares of 8% cumulative preferred stock with a par value of $1,000 for $1,100 a share.
c.Pay dividends of $10,000 with cash.
d.Repurchase 1,000 shares of common stock for $6 a share.
e.Resell 400 shares of the treasury stock for $7 a share.
a.
Cash
60,000
Common Stock--Par Value
24,000
Additional Paid-in Capital
36,000
b.
Cash
33,000
Preferred Stock--Par Value
30,000
Additional Paid-in Capital--Preferred Stock
3,000
c.
Preferred Stock Dividends
2,400
Common Stock Dividends
7,600
Cash
10,000
d.
Common Stock--Treasury Shares
6,000
Cash
6,000
e.
Cash
2,800
Common Stock--Treasury Shares
2,400
Additional Paid-in Capital--Treasury Shares
400
220. As part of their normal course of business, companies sometimes sell off entire divisions or segments. The
accounting treatment for such sales is composed of two components and a reporting format.
Required:
a.Describe the accounting treatment and reporting format used for such sales.
b.Discuss why such sales are separated from other parts of the income statement.
a.
The income/loss from the operations of the discontinued division or segment are removed from the
continuing operations amount. The gain/loss from the actual sale is shown. Both amounts are reported
net of applicable taxes. The numbers are shown in a separate section entitled "Earnings, Gains, and
Losses from Discontinued Operations," which is shown directly below the subtotal of "Income from
Continuing Operations."
b.
Such sales are separated from continuing operations. Financial statement users should understand
which items are from recurring operations and which items are not to continue into the future. These
amounts are different from extraordinary items, as they arose from the normal business processes of
the firm.
221. (CMA adapted, Jun 97 #2) Morgan Aircraft Products is a publicly-held corporation that manufactures
airframe and engine parts for the light aircraft producers and for the home-built aircraft market. During Year 6,
the Board of Directors decided to expand into aircraft kit production. The company plans to complete new
facilities for the partial assembly of the kit airplanes by the fourth quarter of Year 7. In order to finance the new
facilities, Morgan authorized and issued 50,000 shares of 7.15 percent, $100 par value, non-participating,
cumulative preferred stock for $110 per share on November 26, Year 6. As of the current year end, the company
has paid all preferred stock dividends.
William McElroy, controller for Morgan, is responsible for the preparation of the company's financial
statements. He has assigned Alice York, assistant controller, to complete the shareholders' equity statement and
any related notes. In addition to the preferred stock described above, York has assembled the following
information that she believes may affect shareholders' equity at May 31, Year 7.
·
7 percent, $50 par value, cumulative preferred stock with 100,000 shares authorized and 30,000 shares
issued and outstanding. The shares were sold for $57 per share. The dividends are current as of the end
of the year.
·
$1 par value common stock with 1,000,000 shares authorized and 307,160 shares issued. The shares
were sold for an average of $6.20 per share.
·
9,500 shares of common treasury stock is held by the company at an average cost of $5.86 per share.
·
Retained earnings at May 31, Year 7, after closing, was $25,330,000.
·
The cumulative unrealized translation adjustment at May 31, Year 7, had a $1,400,000 credit balance.
·
Unrealized holding gain on available-for-sale securities was $442,000.
·
Unrealized holding loss on trading securities was $289,000.
·
Retained earnings have been appropriated for treasury stock and an amount of $2,000,000 for
contingencies.
McElroy has agreed to meet with York to discuss the first draft of the shareholders' equity statement.
Required:
a.
Define retained earnings.
b.
List and explain three reasons that would cause a company to appropriate retained earnings.
c.
Prepare the portion of the shareholders' equity section of the balance sheet, in good form and including
notes, for Morgan Aircraft Products at May 31, Year 7. Be sure to support your answer with appropriate
schedules and calculations. Indicate the reason for omitting any accounts listed by Alice York above
from the shareholders' equity statement.
a.
Retained earnings is the company's cumulative net earnings (losses) less
cumulative declared dividends from the date the company began operations.
Retained earnings are increased by net income and decreased by net losses,
declared dividends, and certain treasury transactions. Retained earnings may also
be increased or decreased by prior period adjustments and certain changes in
accounting principles.
b.
Appropriated retained earnings are retained earnings that are set aside for a
specific purpose and are not available for dividends. At least three reasons that
would cause a company to appropriate retained earnings include the following.
Legal restrictions. Some state laws prohibit the purchase of treasury stock by the
company unless there are earnings available for dividends. Retained earnings are
restricted in an amount equal to the cost of any treasury stock acquired.
Contractual restrictions. Bond indenture agreements may require that specific
amounts of retained earnings be restricted each year during the life of the bonds
to meet sinking fund requirements for the retirement of the bonds.
Protection of working capital positions. The Board of Directors may authorize an
appropriation of working capital out of retained earnings to indicate that the
amount specified is not available for dividends. This may be done to maintain a
strong working capital position or to set aside internal funds to finance specific
expansion projects.
c.
The shareholders' equity section of the balance sheet, including notes, for
Morgan Aircraft Products at May 31, Year 7, is presented below.
Morgan Aircraft Products
Shareholders' Equity
As of May 31, Year 7
Capital Stock
7% cumulative preferred stock, $50 par value, 100,000 shares
authorized, 30,000 shares issued and outstanding
$ 1,500,000
7.15% cumulative preferred stock, $ 100 par value, 50,000
shares authorized, issued, and outstanding
5,000,000
Common stock, $1 par value, 1,000,000 shares authorized,
307,160 shares issued, and 297,660 shares outstanding
307,160
Additional paid-in capital (1)
2,307,232
Retained earnings (2)
25,330,000
Cumulative unrealized translation adjustment
1,400,000
Cumulative unrealized holding gain on available-for-sale securities
442,000
Less: Cost of common treasury stock (9,500 shares)
(55,670)
Total shareholders' equity
$36,230,722
7% cumulative preferred stock
Par value - $50 ´ 30,000 shares outstanding
$1,500,000
Contribution in excess of par ($57 - $50) ´ 30,000 shares
210,000
Total proceeds - $57 ´ 30,000 shares
$1,710,000
7.15% cumulative preferred stock
Par value - $100 ´ 50,000 shares outstanding
$5,000,000
Contribution in excess of par ($110 - $100) ´ 50,000 shares
500,000
Total proceeds - $110 ´ 50,000 shares
$5,500,000
Common stock
Par value - $1 ´ 307,160 shares outstanding
$ 307,160
Contribution in excess of par ($6.20 - $1) ´ 307,160 shares
1,597,232
Total proceeds - $6.20 ´ 307,160 shares
$1,904,392
Treasury stock - $5.86 ´ 9,500 shares
$ 55,670
222. As part of a company's normal course of business, errors, omissions, and changes occur in the financial
statements. Certain items may be reported on the income statement, some may directly adjust the balance in
retained earnings, while others do not affect the current period's income statement or retained earnings.
Required:
a.
Consider a change in estimate, such as the useful life of an asset moving from five to eight years. How
is this handled on the income statement and/or through the retained earnings account?
b.
Consider an error/omission, such as merchandise inventory being left out of the final yearly count. How
is this handled on the income statement and/or through the retained earnings account?
a.
A change in estimate such as the useful life is handled in the period of the change (by altering the
depreciation expense amount, which is ultimately closed to Retained Earnings) and future periods (also
reflected in a different depreciation expense amount). The income statement in the year of the change
(and in subsequent years) would reflect the altered depreciation expense.
b.
An error/omission such as leaving off ending inventory amounts is handled by directly increasing the
retained earnings account in the period the error/omission was discovered. The income statement in the
year of discovery is unaffected.
223. What is shareholders’ equity?
1. Shareholders’ equity is a residual interest. It represents the shareholders’ claim on the assets of a firm after
the firm satisfies all higher-priority claims.
224. Most publicly traded firms operate as corporations. Discuss three advantages of the corporate form.
Most publicly traded firms operate as corporations. The corporate form has at least three advantages:
