Financing Activities ♦ 309
PROBLEM
1. Off-Shore Corporation reported the following items in its December 31, 2007, financial
statements:
Capital lease obligations (10% due in 2008
$ 40,000
Treasury stock
10,000
Preferred stock
150,000
Accounts payable
4,500
Bonds payable (due 2012)
450,000
Contingent liability (reasonably possible to require payment
in 2009)
20,000
Common stock
125,000
Wages payable
7,500
Required:
Prepare schedules of (a) current and (b) long-term liabilities.
2. Mooreland Corporation issued $500,000 of 10-year, 7% bonds on January 1, 2007. The bonds pay
interest semiannually. How much did the bonds sell for under each of the following situations?
a.
The bonds sold to yield 8%.
b.
The bonds sold to yield 6%.
Issue price of bonds
b.
Issue price of bonds
(a)
Current liabilities:
Accounts payable
Wages payable
7,500
Current portion of capital lease obligation
Total current liabilities
$ 16,000
(b)
Long-term liabilities
Capital lease obligation
$ 36,000
Bonds payable (due 2012)
Total long-term liabilities
310 ♦ Chapter 9
3. Mazeltov Corporation issued $100,000 of 15-year, 8% bonds on January 1, 2006 The bonds pay
interest annually and sold at 109.10% to yield 7%.
a.
How much interest expense should Mazeltov recognize on the bonds for the year
ended December 31, 2008?
b.
What amount of net liability should Mazeltov report for the bonds on its December
31, 2009 balance sheet?
c.
What amount of its 2010 payment will be interest?
4. Following is an amortization table for an issue of three-year bonds:
Year
Present value at
beginning of year
Interest
incurred
Amount
paid
Amortization
of principal
Value at
end of year
1
$105,154
$ 8,412
$10,000
$1,588
$103,566
2
103,566
8,285
10,000
1,715
101,851
3
101,851
8,148
10,000
1,852
100,000
Total
24,845
30,000
5,155
Required:
Using spreadsheet format, record the entries that are necessary throughout the life of the bond.
a.
$7,585
b.
$107,499
c.
$7,525
2006
$7,638
$8,000
$108,746
$7,612
$388
$108,358
$7,585
$415
$107,943
2009
$7,556
$8,000
$107,499
$7,525
$475
$107,024
Financing Activities ♦ 311
5. Adam and Eva Company reported the following items in its December 31, 2007, financial
statements:
Capital lease obligations (10% due in 2008)
$ 50,000
Treasury stock
12,500
Preferred stock
100,000
Accounts payable
5,500
Bonds payable (due 2010)
500,000
Contingent liability (reasonably possible to require payment in 2007)
25,000
Common stock
175,000
Wages payable
6,500
Required:
Prepare schedules of (a) current and (b) long-term liabilities.
(a)
Current liabilities:
Accounts payable
Wages payable
Current portion of capital lease obligation
Total current liabilities
(b)
Long-term liabilities
Capital lease obligation
Bonds payable (due 2006)
Total long-term liabilities
312 ♦ Chapter 9
6. Weston Corporation issued $1,000,000 of 10-year, 9% bonds on January 1, 2007. The bonds pay
interest semiannually. How much did the bonds sell for under each of the following situations?
a.
The bonds sold to yield 8%.
b.
The bonds sold to yield 10%
7. Sonics Corporation issued $120,000 of 10-year, 9% bonds on January 1, 2007. The bonds pay
interest annually and sold at 93.86% to yield 10%.
a.
How much interest expense should Sonics recognize on the bonds for the year ended
December 31, 2009?
b.
What amount of net liability should Sonics report for the bonds on its December 31,
2010 balance sheet?
c.
What is the firm’s amount for amortization of principal in 2008?
a.
$11,361
b.
$114,783
c.
$510
Financing Activities ♦ 313
8. Cuneiform, Inc. reported the following items on its December 31, 2007 balance sheet:
Accounts payable
$ 24,600
Capitalized lease obligations (5% due in 2008)
86,000
Wages payable
11,000
Machinery and equipment
100,000
Bonds payable (due June 2008)
42,000
Note payable (due April 2010)
17,200
Treasury stock
16,800
Required:
a.
Prepare a schedule listing the current liabilities, the amounts, and total.
b.
Prepare a schedule listing the long-term liabilities, the amounts, and total.
9. Flying Things, Inc. is planning to issue bonds having a $250,000 face value, a 10% stated rate and
a life of 10 years. Assume the bonds are sold to yield 8%.
Required:
a.
At what price would you expect the bonds to sell? Clearly and neatly show your
supporting computations.
b.
Complete the first three years of the amortization table below:
Year
Beginning
Principal
Interest
Paid
Interest
Expense
Decrease in
Principal
Ending
Principal
1
2
3
c.
What total amount of interest expense will be incurred on these bonds during the first
three years? Describe how you obtained this amount.
Current liabilities at 12-31-2007
Accounts payable
Wages payable
11,000
Bonds payable (Due June 2008)
42,000
Current portion of capital lease obligation
4,300
Total current liabilities
$81,900
b.
Long-term liabilities at 12-31-2007
Capitalized lease obligations
$81,700
Note payable (Due April 2010)
Total long-term liabilities
314 ♦ Chapter 9
10. River Rim Enterprises issued $100,000 face value, 5% coupon, 4-year bonds on January 1, 2007.
The bonds were sold to yield 6% and will pay interest semi-annually.
Required:
a.
Determine the selling price of the bonds. Clearly and neatly show the computations
that support your answer.
b.
Prepare an amortization table for the bonds for the first two periods.
c.
What is the total amount of interest expense on these bonds during the first year?
a.
$96,489.00;
The bonds will sell for $283,549.50 as computed below:
Financing Activities ♦ 315
11. On January 1, 2007 Healing Health Food Stores issued $400,000 face value of five-year, annual
bonds. The stated rate was 12% and on the date of sale, the market rate is 10%.
Required:
a.
Will these bonds sell at face value, above, or below? Why?
b.
Determine the selling price of these bonds. Show your work. If you can’t solve this
part of the problem, merely make up an answer, write it in the space below, and use
that answer as the basis for your answer to part (c) below.
c.
What amount will be reported on the year-end 2007 income statement for the first
year’s interest expense?
d.
What amount will be reported on the year-end 2007 statement of cash flows for the
interest on these bonds?
12. Velox Corporation borrowed $200,000 at 10% annual interest. The loan is to be repaid in three
equal year-end installments.
Required:
a.
Determine the size of the required payments.
b.
Complete the amortization table below:
Year
Beginning
Principal
Payment
Interest
Expense
Principal
Repaid
Ending
Principal
1
2
3
price up to a point above the face value.
316 ♦ Chapter 9
13. Following is the first three years of an amortization table for an issue of ten-year bonds:
Year
Beginning
Principal
Interest
Paid
Interest
Expense
Decrease
in Principal
Ending
Principal
1
$66,886
$5,000
$4,682
$318
$66,568
2
66,568
5,000
4,660
340
66,228
3
66,228
5,000
4,636
364
65,864
Required:
a.
Were these bonds sold at face value, above, or below?
b.
What was the market rate at which these bonds were sold?
$80,423; ($200,000 ÷ 2.48685)
Principal
66,465
73,112
80,423
73,112
0
Financing Activities ♦ 317
14. Matterhorn Company’s charter allows it to sell 250,000 shares of $2 par value common stock. To
date, the firm has sold 100,000 shares for a total of $600,000. Matterhorn has reacquired 4,000
shares from shareholders at a price of $8 per share. Retained earnings equals $250,000.
a.
What total amount of contributed capital should Mattherhorn report?
b.
What amount should be reported for the Common Stock account?
c.
What was the average selling price of each share of common stock?
d.
How many shares of stock are outstanding?
e.
What amount should be reported for stockholders’ equity?
15. Brechner Corporation’s charter allows it to sell 400,000 shares of $1 par value common stock. To
date the firm has sold 150,000 shares for a total of $1,050,000. Brechner has reacquired 3,000
shares from shareholders at a price of $10 per share. Retained earnings equals $350,000.
a.
What total amount of contributed capital should Brechner report?
b.
What amount should be reported for the Common Stock account?
c.
What was the average selling price of each share of common stock?
d.
How many shares of stock are outstanding?
e.
What amount should be reported for stockholders’ equity?
a.
Contributed capital = $1,050,000
b.
Common Stock = $150,000 = 150,000 × $1
c.
Average selling price = $7 ($1,050,000/150,000)
d.
Shares of stock outstanding = 147,000 (150,000 – 3,000)
e.
$1,370,000
a.
Contributed capital = $600,000
c.
Average selling price = $6 ($600,000/100,000)
d.
Shares of stock outstanding = 96,000 (100,000 – 4,000)
e.
$818,000
318 ♦ Chapter 9
16. On March 1, Pluto Corporation declared and issued a 10% stock dividend on its 200,000
outstanding shares of $3 par value common stock. On September 1, Pluto declared a 3-for-1 stock
split and changed its par value accordingly. The market value of Pluto’s stock was $20 per share
on March 1 and $24 per share on September 1. On February 28, Pluto’s stockholders’ equity
appeared as follows:
Common stock (200,000 $3 par shares issued)
$ 600,000
Paid-in capital in excess of par
1,800,000
Contributed capital
2,400,000
Retained earnings
1,600,000
Total stockholders’ equity
$4,000,000
Required:
Prepare the stockholders’ equity section after the stock split.
17. Rodriguez, Incorporated, began operations on January 1, 2009. The firm paid no dividends during
2009 or 2010. On December 31, 2009 and 2010, it reported the following stockholders’ equity
section of its balance sheet:
2009
2010
Preferred stock $100 par
$ 500,000
$ 500,000
Paid-in capital in excess of par
150,000
150,000
Common stock $2 par
50,000
60,000
Paid-in capital in excess of par
350,000
480,000
Retained earnings
450,000
550,000
Total stockholders’ equity
$1,500,000
$1,740,000
Required:
a.
How many preferred shares has Rodriguez issued?
b.
How many common shares have been issued at year-end 2009? At year-end 2010?
c.
What was the average price at original issuance of common stock as of year-end
2010?
d.
What was net income for 2010?
Common stock (660,000 $1 par shares issued)
$ 660,000
Contributed capital
2,800,000
Total stockholders’ equity
$4,000,000
Financing Activities ♦ 319
18. Beverly, Incorporated, began operations on January 1, 2007. The firm paid no dividends during
2007 or 2008. On December 31 it reported the following stockholders’ equity section of its balance
sheet:
2007
2008
Preferred stock $25 par
$ 750,000
$ 750,000
Paid-in capital in excess of par
250,000
250,000
Common stock $0.25 par
75,000
90,000
Paid-in capital in excess of par
300,000
450,000
Retained earnings
400,000
600,000
Total stockholders’ equity
$1,775,000
$2,140,000
Required:
a.
How many preferred shares has Beverly issued?
b.
How many common shares have been issued at year-end 2006? At year-end 2007?
c.
What was the average price at original issuance of common stock as of year-end 2007?
d.
What was net income for 2007?
a.
b.
300,000 = $75,000/$0.25; 360,000 = $90,000/$0.25
c.
$1.50 = ($90,000 + $450,000)/360,000
d.
$200,000 = $600,000 – $400,000
19. Upon formation, Maracas, Inc. received permission from the state government to issue 3,000,000
shares. To date, a total of 650,000 shares have been sold to investors. Currently, the corporation
owns 48,000 of its own shares that it purchased recently on the open market.
Required:
Determine the number of authorized, issued and outstanding shares.
Authorized shares
=
Issued shares
=
Outstanding shares
=
b.
25,000 = $50,000/$2 ; 30,000 = $60,000/$2
c.
$18 = ($60,000 + $480,000)/30,000
d.
$100,000 = $550,000 – $450,000
320 ♦ Chapter 9
20. On July 9, the Board of Directors at Innoculator, Inc. met and voted a cash dividend of $0.75 per
share on common stock and the annual $4 per share cash dividend on preferred. Persons owning
the shares as of July 24 are to receive the dividends which will be paid on August 12. In this set of
facts:
a.
August 12 is the date of ______________.
b.
July 24 is the date of ________________.
c.
July 9 is the date of _________________.
21. The stockholders’ equity section of Famous Choppers Company’s balance sheet at December 31,
2007 is shown below:
Contributed Capital:
Preferred stock, 12%, cumulative, $12.50 par value, 10,000 shares
authorized, 8,000 shares issued and outstanding, callable at $65
$ 100,000
Common stock, $2.50 par value, 100,000 shares authorized, 90,000
issued and 76,000 outstanding
225,000
Paid-in capital in excess of par – Preferred
16,000
Paid-in capital in excess of par – Common
1,395,000
Total contributed capital
$1,736,000
Retained earnings
350,000
Total contributed capital and retained earnings
$2,086,000
Less: Treasury stock, 14,000 shares at cost
297,500
Total stockholders’ equity
$1,788,500
Required:
a.
At what average price per share was the common and preferred stock originally sold?
b.
Assuming the treasury stock consists solely of common shares, at what average price
per share was it acquired?
a.
Common = $18 per share ($225,000 + $1,395,000 ÷ 90,000 shares)
Preferred = $14.50 per share ($100,000 + $16,000 ÷ 8,000 shares)
b.
Treasury stock = $297,500 cost ÷ 14,000 shares = $21.25 per share
a.
payment
b.
record
c.
declaration