Intermediate Accounting III ACCTG 303 Section D Spring 2005 Exam #1 April 19, 2005 Name: ____________________________ INSTRUCTIONS:

Instructor J.B. Paperman

a) This exam is closed book. You may use one double-sided sheets of notes. You may use a calculator to assist in computations. b) You must complete this exam on your own. No assistance is allowed except that provided by the instructor. c) If you feel there is ambiguity in a problem, state your assumptions clearly. d) The exam has 9 pages in total and 14 questions with 100 points.

Multiple Choice (5 points each) Circle the MOST correct answer

1.

When a corporation issues its capital stock in payment for services, the LEAST appropriate basis for recording the transaction is the a. market value of the services received. b. par value of the shares issued. c. market value of the shares issued. d. Any of these provides an appropriate basis for recording the transaction. B market value of the service or stock, whichever is more reliable, but par value is not appropriate.

2.

Which of the following best describes a possible result of treasury stock transactions by a corporation? a. May increase but not decrease retained earnings. b. May increase net income if the cost method is used. c. May decrease but not increase retained earnings. d. May decrease but not increase net income. C Never a gain/loss so no income effect. gains go to APIC TS and losses to RE so may decrease but not increase RE.

3.

Cash dividends are paid on the basis of the number of shares a. authorized. b. issued. c. outstanding. d. outstanding less the number of treasury shares. C outstanding (treasury shares have already been subtracted so you dont need to take out again)

4.

A dividend which is a return to stockholders of a portion of their original investments is a a. liquidating dividend. b. property dividend. c. liability dividend. d. participating dividend. A return of investment is a liquidation of the owners investment.

5.

Stock warrants outstanding should be classified as

a. b. c. d.

liabilities. reductions of capital contributed in excess of par value. assets. none of these.

D an INCREASE in contributed capital 6. 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.

D subtract one year of dividends. Not deductible so no tax effect 7. What effect will the acquisition of treasury stock have on stockholders' equity and earnings per share, respectively? a. Decrease and no effect b. Increase and no effect c. Decrease and increase d. Increase and decrease Fewer shares

C cash down and SE down when repurchased. so EPS increases. 8.

The if-converted method of computing earnings per share data assumes conversion of convertible securities as of the a. beginning of the earliest period reported (or at time of issuance, if later). b. beginning of the earliest period reported (regardless of time of issuance). c. middle of the earliest period reported (regardless of time of issuance). d. ending of the earliest period reported (regardless of time of issuance).

A beginning of period or when issued

9.

(10 points) Landon Corporation has issued 2,000 shares of common stock and 400 shares of preferred stock for a lump sum of $68,000 cash. INSTRUCTIONS a) Give the entry for the issuance assuming the par value of the common was $5 and the market value $30, and the par value of the preferred was $40 and the market value $50. (Each valuation is on a per share basis and there are ready markets for each stock.) b) Give the entry for the issuance assuming the same facts as (a) above except the preferred stock has no ready market and the common stock has a market value of $25 per share.

(a) Cash ................................... 68,000 Common Stock ......................... Paid-in Capital in Excess of Par Common ... Preferred Stock ............................ Paid-in Capital in Excess of Par Preferred common preferred $30 x 2,000 $50 x 400 $60,000 20,000 $80,000

10,000 41,000 16,000 1,000

market value

60/80 x $68,000 = 20/80 x $68,000 =

$51,000 17,000 $68,000

common preferred

(b) Cash .................................. 68,000 Common Stock ......................... Paid-in Capital in Excess of Par Common ... Preferred Stock ............................ Paid-in Capital in Excess of Par Preferred Incremental common $25 * 2000 $50,000 Remainder preferred 18,000

10,000 40,000 16,000 2,000

10. (10 points) Camby Corporation's balance sheet reported the following: Capital stock outstanding, 5,000 shares, par $30 per share Paid-in capital in excess of par Retained earnings

$150,000 80,000 100,000

The following transactions occurred this year: (1) Purchased 80 shares of capital stock to be held as treasury stock, paying $60 per share. (2) Sold 60 of the shares of treasury stock at $65 per share. (3) Sold the remaining shares of treasury stock at $50 per share. INSTRUCTIONS (a) Prepare the journal entry for these transactions under the cost method of accounting for treasury stock. (b) Prepare the journal entry for these transactions under the par method of accounting for treasury stock. (a) (1) Treasury Stock (80*$60)............... 4,800 Cash ............................... (2) Cash (60*$65)......................... 3,900 Treasury Stock (60*$60 from 1)...... Paid-in Capital from Treasury Stock .. (3) Cash (20*$50)......................... 1,000 Paid-in Capital from Treasury Stock (plug) 200 Treasury Stock (20*$60 from 1)...... (would limit the PIC from TS to the $300 created in 2) (b) (1) Treasury Stock (80*$30 par)........... 2,400 PIC CS (80*$80,000/5,000) .......... 1,280 Retained Earnings .................... 1,120 Cash ............................... (2) Cash (60*$65)......................... 3,900 Treasury Stock (60*$30 from 1)...... Paid-in Capital - Common Stock .. (3) Cash (20*$50)......................... 1,000

4,800

3,600 300

1,200

4,800

1,800 2,100

Treasury Stock (20*$30 from 1)...... Paid-in Capital - Common Stock ..

600 400

11. (10 points) Prepare the necessary entries from 1/1/03-2/1/05 for the following events using the fair value method. If no entry is needed, write "No Entry Necessary." 1. On 1/1/03, the stockholders adopted a stock option plan for top executives whereby each might receive rights to purchase up to 10,000 shares of common stock at $40 per share. The par value is $10 per share. 2. On 2/1/03, options were granted to each of five executives to purchase 10,000 shares. The options were nontransferable and the executive had to remain an employee of the company to exercise the option. The options expire on 2/1/05. It is assumed that the options were for services performed equally in 2003 and 2004. The BlackScholes option pricing model determines total compensation expense to be $1,100,000. 3. At 2/1/05, four executives exercised their options. The fifth executive chose not to exercise his options, which therefore were forfeited. 1. 1/1/03 No entry necessary. 2/1/03 No entry necessary.

2.

12/31/03 Compensation Expense .................... Paid-in Capital Stock Options ........ 12/31/04 Compensation Expense .................... Paid-in Capital Stock Options ........

550,000 550,000

550,000 550,000

3. 2/1/05 Cash (4 x 10,000 x $40) ................. 1,600,000 Paid-in-Cap Stock Options($1,100,000 x 4/5) 880,000 Common Stock .......................... Paid-in Capital in Excess of Par ...... Paid-in Capital Stock Options .......... 220,000 Paid-in Capital from Expired Stock Options

400,000 2,080,000

220,000

12. (10 points) For each of the unrelated transactions described below, present the entry(ies) required to record the bond transactions. 1. On August 1, 2004, Ryan Corporation called its 10% convertible bonds for conversion. The $6,000,000 par bonds were converted into 240,000 shares of $20 par common stock. On August 1, there was $525,000 of unamortized premium applicable to the bonds. The fair market value of the common stock was $20 per share. Ignore all interest payments. 2. Garnett, Inc. decides to issue convertible bonds instead of common stock. The company issues 10% convertible bonds, par $2,000,000, at 97. The investment banker indicates that if the bonds had not been convertible they would have sold at 94. 3. Gomez Company issues $3,000,000 of bonds with a coupon rate of 8%. To help the sale, detachable stock warrants are issued at the rate of ten warrants for each $1,000 bond sold. It is estimated that the value of the bonds without the warrants is $2,961,000 and the value of the warrants is $189,000. The bonds with the warrants sold at 101.

1. Bonds Payable ...................... Premium on Bonds Payable ........... Common Stock .................. Paid-in Capital in Excess of Par . 2. Cash ............................... Discount on Bonds Payable .......... Bonds Payable ....................

6,000,000 525,000 4,800,000 1,725,000 1,940,000 60,000 2,000,000

3. Cash ............................... 3,030,000 Discount on Bonds Payable .......... 151,800 Bonds Payable .................... Paid-in Capital Stock Warrants .. ($189,000+$2,961,000 = $3,150,000) (189,000/3,150,000 x $3,030,000 = $181,800)

3,000,000 181,800

13. (10 points) The following information was taken from the books and records of Simonic, Inc.: 1. Net income $ 840,000 2. Capital structure: a. Convertible 6% bonds. Each of the 300, $1,000 bonds is convertible into 50 shares of common stock at the present date and for the next 10 years. 300,000 b. $10 par common stock, 400,000 shares issued and outstanding during the entire year. 4,000,000 c. Stock warrants outstanding to buy 16,000 shares of common stock at $20 per share 3. Other information: a. Bonds converted during the year None b. Income tax rate 30% c. Convertible debt was outstanding the entire year d. Average market price per share of common stock during the year $32 e. Warrants were outstanding the entire year f. Warrants exercised during the year None INSTRUCTION Compute basic and diluted earnings per share. Basic EPS = $840,000/400,000 shares = $2.10 Bond Adjustment Income effect = 300,000 x .06 x (1-.3) = 12,600 Shares effect = 300 bonds x 50 shares = 15,000 shares Ratio = 12,600/15,000 = .84 Warrant Adjustment (Mkt value > exercise so consider) Issue stock 16,000 shares get cash of $20*16,000 = $320,000 Use cash to repurchase shares = $320,000/$32 = 10,000 shares Net effect 16,000 issued 10,000 repurchased = 6,000 shares Ratio = 0/6,000 = 0 So add warrants then bonds Net Income Adjust ment Adjusted Net Inc. Adjust Adjusted Shares ment Shares EPS

Security

Com. Stock 840,000 $840,000 400,000 400,000 2.10 Warrant ratio of 0 is less than 2.10 so add them Warrants 840,000 840,000 400,000 6,000 406,000 2.07

Bond ratio of 0.84 is less than 2.07 so add them Conv. Bonds 840,000 12,600 852,600 406,000 15,000 421,000 2.03

14. Corporation shows the following on December 31, 2004: Preferred stock 5%, $100 par, 4,000 shares outstanding $ Common stock $10 par, 60,000 shares outstanding Paid-in capital in excess of par Retained earnings Total stockholders' equity

400,000 600,000 200,000 110,000

$1,310,000

INSTRUCTIONS Assuming that all of the company's retained earnings are to be paid out in dividends on 12/31/04 and that preferred dividends were last paid on 12/31/02, show how much the preferred and common stockholders should receive if the preferred stock is cumulative. Because preferred was last paid on 12/31/02 the 03 dividends are in arrears. Because cumulative must pay the arrears 03 dividends and the 04 preferred dividends before paying anything to common Preferred dividend = 5% * 400,000 = $20,000 per year 3 4 Total $20,000 20,000 $40,000 to preferred

Remainder to Common $110,000 - $40,000 = 70,000 to common

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