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ACCT 3432 and ACCT 5134 Exam 1, FALL 2011 First Name SOLUTION Last Name Any gains

Instructions: 1. You have 120 minutes to complete this exam. 2. The exam has 12 pages, including this cover page. Check to make sure you have all 12 pages. 3. There are 24 multiple choices and 2 problem solving questions. Each multiple choice problem is worth 3 points and maximum points for each problem solving question are shown at each question (By writing your answers for multiple choices on the ANSWER SHEET, you will get additional 3 points). 4. Closed notes, closed books. Only the exam, writing utensils, and a calculator are permitted on your desk. 5. Please write your answers for multiple choices CAREFULLY on the ANSWER SHEET. 6. Please write answers CLEARLY on the exam for problem solving questions. If I cannot read them, I will NOT GIVE YOU ANY PARTIAL CREDIT. 7. DO NOT START EXAM UNTIL I TELL YOU TO BEGIN. ANSWER SHEET Question 1 No. Answer A 2 D 3 C 4 A 5 B 6 C 7 C 8 B 9 D 10 B 11 B 12 A 13 D

Question 14 No. Answer A

15 A

16 D

17 B

18 B

19 C

20 B

21 B

22 C

23 D

24 A

Multiple Choice

Part I. Multiple Choices: 1. Any gains or losses from the early extinguishment of debt should be a. recognized in income of the period of extinguishment. b. treated as an increase or decrease in Paid-In Capital. c. allocated between a portion that is an increase (decrease) in Paid-In Capital and a portion that is recognized in current income. d. amortized over the remaining original life of the extinguished debt. ANS: A 2. When interest expense is calculated using the effective-interest amortization method, interest expense (assuming that interest is paid annually) always equals the a. actual amount of interest paid. b. maturity value of the bonds multiplied by the effective interest rate. c. carrying value of the bonds multiplied by the stated interest rate.. d. carrying value of the bonds multiplied by the effective interest rate ANS: D 3. Foster Corporation issued a $100,000, 10-year, 10 percent bond on January 1, 2008, for $120,000. Foster uses the straight-line method of amortization. On January 1, 2011, Foster reacquired the bonds for retirement when they were selling at 108 on the open market. How much gain or loss should Foster recognize on the retirement of the bonds? a. $2,000 loss b. $3,900 loss c. $6,000 gain d. $5,000 gain ANS: C 4. Which of the following does NOT meet the FASB's definition of a liability? a. The signing of a three-year employment contract at a fixed annual salary b. An obligation to provide goods or services in the future c. A note payable with specified maturity date d. An obligation that is estimated in amount ANS: A 5. Scott Inc. neglected to amortize the discount on outstanding ten-year bonds payable. What is the effect of the failure to record discount amortization on interest expense and bond carrying value, respectively? a. Overstate; overstate 2

b. Understate; understate c. Overstate; understate d. Understate; overstate ANS: B 6. How would the carrying value of a bond payable be affected by amortization of each of the following? a. b. c. d. Discount Decrease Increase Increase Decrease Premium Decrease Increase Decrease Increase

ANS: C Question 7 and 8. Kiyabu County issued a $1,000,000, 10 percent, 10-year bond on January 1, 2011, for 88.8 when the effective interest rate was 12 percent. Interest is payable on June 30 and December 31. Kiyabu uses the effective-interest method to amortize all premiums and discounts. 7. How much premium or discount should be amortized on June 30, 2011? a. b. c. d. $4,790 $4,280 $3,280 $3,100

ANS: C 8. How much interest expense should Kiyabu record on December 31, 2011? a. $53,286.00 b $53,476.80 . c. $42,628.80 d $39,920.10 . ANS: B 9. Which of the following is an appropriate presentation of treasury stock? a. As a marketable security. b. As a deduction at par from total stockholders equity. c. As a deduction at cost from contingent liabilities 3

d. As a deduction at cost from total stockholders equity. ANS: D 10. How would the declaration of a 30 percent stock dividend by a corporation affect each of the following on its books? Retained Total StockEarnings holders' Equity Increase No effect a. Decrease No effect b. No effect Decrease c. No effect No effect d. ANS: B 11. On September 20, 2014, Shunt Corporation declared the distribution of the following dividend to its stockholders of record as of September 30, 2014: Investment in 100,000 shares of Ramen Corporation stock, carrying value $600,000; fair market value on September 20, $1,450,000; fair market value on September 30, $1,575,000. The entry to record the declaration of the property dividend would include a debit to Retained Earnings of a. $1,575,000. b. $1,450,000. c. $850,000. d. $600,000. ANS: B 12. How would a 2-for-1 stock split affect each of the following? Total Stockholders' Additional Assets Equity Paid-In Capital a. No effect No effect No effect b Increase Increase No effect . c. No effect No effect Increase d Decrease Decrease Decrease . ANS: A 13. The stockholders' equity section of Dolphin Corporation as of December 31, 2011, contained the following accounts: 4

$ 30,000 40,000 80,000 $150,000 Dolphin's board of directors declared a 10 percent stock dividend on April 1, 2012, when the market value of the stock was $7 per share. Accordingly, 1,000 new shares were issued. All of Dolphin's stock has a par value of $3 per share. Assuming Dolphin sustained a net loss of $9,000 for the quarter ended March 31, 2012, what amount should Dolphin report as retained earnings as of April 1, 2012? a. b. c. d. $80,000 $71,000 $68,000 $64,000

Common stock, 25,000 shares authorized; 10,000 shares issued and outstanding .............................. Paid in Capital in excess of par .................. Retained earnings .....................................

ANS: D 14. Thorpe Corporation holds 10,000 shares of its $10 par common stock as treasury stock, which was purchased in 2010 at a cost of $120,000. On December 10, 2011, Thorpe sold all 10,000 shares for $200,000. Assuming that Thorpe used the cost method of accounting for treasury stock, this sale would result in a credit to a. Paid-In Capital from Treasury Stock of $80,000. b Paid-In Capital from Treasury Stock of $110,000. . c. Gain on Sale of Treasury Stock of $80,000. d Retained Earnings of $80,000. . ANS: A 15. Harbottle Corporation was organized on January 3, 2011. During 2011, Harbottle had the following transactions affecting stockholders' equity: January 7--Issued 60,000 shares at $12 per share (par value $10) December 2--Purchased 6,000 shares of treasury stock at $16 per share The cost method was used to record the treasury stock transaction. Harbottle's net income for 2011 is $200,000. What is the amount of stockholders' equity at December 31, 2011? a. b. c. d. $824,000 $836,000 $702,000 $622,000

ANS: A 16. On January 2, 2011, Stoner Corporation granted stock options to key employees for the purchase of 60,000 shares of the company's common stock at $25 per share. The options are intended to compensate employees for the next three years. The options are exercisable within a four-year period beginning January 1, 2014, by grantees still in the employ of the company. The fair value of the option determined by an option pricing model is $8 at the grant date. Assume that no stock options were terminated during the year. How much should Stoner charge to Compensation Expense for the year ended December 31, 2011? $90,000 $210,000 $180,000 $160,000 ANS: D 17. When an investor uses the equity method to account for investments in common stock, the investment account will be increased when the investor recognizes a. a cash dividend received from the investee. b. a proportionate share of the net income of the investee c. periodic amortization of an intangible arising from contractual rights acquired in the purchase. d. depreciation related to the excess of market value over book value of the investee's depreciable assets at the date of purchase by the investor. ANS: B 18.An investor that uses the equity method of accounting for its investment in a 30 percentowned investee that earned $50,000 and paid $8,000 in dividends, made the following entries: Investment in Equity Securities Equity income from Investee Cash Dividend Revenue 15,000 15,000 2,400 2,400

a. b. c. d.

What effect will these entries have on the parent corporations statement of financial position? a. Investment in subsidiary understated, retained earnings understated. b. Investment in subsidiary overstated, retained earnings overstated. c. Investment in subsidiary overstated, retained earnings understated. 6

d. Financial position will be fairly stated. ANS: B 19. A debit balance in the account Market Adjustment-Trading Securities at the end of a year should be interpreted as a. b. c. d. the net realized holding gain for that year the net unrealized holding loss to date. the net unrealized holding gain to date the net realized holding loss for that year.

ANS: C 20. In March of 2013, Mars Corp. bought 45,000 shares of Elite Corp.'s listed stock for $450,000 and classified the shares as available-for-sale securities. The market value of these shares had declined to $300,000 by December 31, 2013. Mars changed the classification of these shares to trading securities in June of 2014 when the market value of this investment in Elite's stock had risen to $340,000. How much should Mars include as a loss on transfer of securities in its determination of net income for 2014? a. $0 b. $110,000 c. $40,000 d. $150,000 ANS: B 21. Marino Corporation purchased the following portfolio of trading securities during 2010 and reported the following balances at December 31, 2010. No sales occurred during 2010. All declines are considered to be temporary. Security X Y Z Cost $ 80,000 140,000 34,000 Market Value at 12/31/10 $ 82,000 132,000 28,000

The only transaction in 2011 was the sale of security X for $84,000 on December 31, 2011. The market values for the other securities at December 31, 2011, were the same as at December 31, 2010. Marino's entry to record the sale of security X would include a. A debit of $4000 to Realized Loss on the Sale of Trading Securities. b. A credit of $4000 to Realized Gain on the Sale of Trading Securities. c. A $4000 debit to Market Adjustment- Trading Securities. d. A $4000 credit to Market Adjustment- Trading Securities. 7

ANS:

22. For which type of investments would unrealized increases and decreases be recorded directly in an owners' equity account? a. Equity method securities b. Trading securities c. Available-for-sale securities d. Held-to-maturity securities ANS: C 23. Edwards Company began business in February 2010. During the year, Edwards purchased the three trading securities listed below. On its December 31, 2010, balance sheet, Edwards appropriately reported a $5,000 debit balance in its Market Adjustment--Trading Securities account. There was no change in 2011 in the composition of Edward's portfolio of marketable equity securities held as a temporary investment. Pertinent data are as follows: Market Value Security Cost December 31, 2011 A $120,000 $126,000 B 90,000 90,000 C 160,000 157,000 $370,000 $374,000 What amount should Edwards credit to the Market Adjustment--Trading Securities account at December 31, 2011? a. $4,000 b. $5,000 c. $3,000 d. $1,000 ANS: D 24. Martin Co. purchased the following portfolio of available-for-sale securities during 2011 and reported the following balances at December 31, 2011. No sales occurred during 2011. All declines are considered to be temporary. Security Cost Market Value at 12/31/11 X $ 80,000 $ 82,000 Y 140,000 132,000 Z 32,000 28,000 Martin Co. should report what amount related to the securities transactions in its 2011 income statement? a. $0 b. $2,000 unrealized loss 8

c. $10,000 unrealized loss d. $12,000 unrealized loss ANS: A

II. Problem Solving Questions 1. (13 pts) The Gorman Group issued $150,000 of 10% bonds on June 30, 2011. The bonds mature in 10 years. For bonds of similar risk and maturity, the market yield is 12%. Interest is paid semiannually on December 31 and June 30, and is recorded using the effective rate method. (i.e., the first interest payment will be made on December 31, 2011). Round up decimal point. Required: a) Determine whether the company sold the bond at discount or premium. (1 pt) Discount b) Prepare the journal entry to record the issuance of the bonds at June 30, 2011. (3 pts) Price of bond = PV of maturity value + PV of interest payments =$150,000 * 0.3118 + $7,500* 11.4699 = $46,770 + $86,024 = $132,794 Dr. Cash Dr. Discount on bonds payable Cr. Bond Payable $132,794 $17,206 $150,000

c) Prepare the journal entry to record interest on December 31, 2011 and June 30, 2012 (4 pts) i) First interest payment on December 31, 2011 Dr. Interest expense $7,968 (.06* $132,794) Cr. Cash $7,500 Cr. Discount on bonds payable $468 Carrying value on Dec. 31, 2011 = ($132794 + $468) = $133,262 ii) Second interest payment on June 30, 2012 Dr. Interest expense $7,996 Cr. Cash Cr. Discount on bonds payable

$7,500 $496

Carrying value on June 30, 2012 = $133,262+ $496= $133,758

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d) The Gorman Group did not hold the bond to maturity and retired entire these bonds on October 1, 2012, at 95, including accrual of interest since last payment of coupon and amortization (i.e., total cash amount paid to retire the bond is 95% of face value). Prepare the journal entry to record the retirement of the bonds on October 1, 2012. October 1, 2012
i)

Accrue interest expense and amortize premium or discount up to October 1, 2012. (2 pts) Dr. Interest expense $4,013 ($133,758 * 12% *(3/12)) Cr. Interest Payable Cr. Discount on bonds payable

$3,750 $263

Carrying value on October 1, 2012 = $133,758 + $263 = $134,021


ii)

Retire $150,000 of the bond (3 pts) Dr. Bonds Payable Dr. Interest Payable Dr. Loss on Early Retirement of Bonds Cr. Cash ($150,000* 95%) Cr. Discount on Bonds Payable $150,000 $3,750 $4,729 (difference) $142,500 $15,979

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2.

(12 pts) On January 1, 2010, the board of directors of Tyler Company authorized stock options to certain employees. Each stock option permits the purchase of one share of Tyler common stock ($1 par) at a price of $40 per share; the market price of the stock on January 1, 2010, was also $40 per share. The options vest, or become exercisable, beginning on January 1, 2013, and only if the employees stay with the company for the entire three-year vesting period. The number of options granted is contingent on Tylers level of net income for 2012. If Tylers net income for 2012 is less than $10 million, then only 10,000 options will vest. If Tylers 2012 net income is between $10 million and $15 million, an additional 2,000 options will vest, making a total of 12,000. Finally, if Tylers 2012 net income exceeds $15 million, a total of 16,000 options will vest. The options expire on December 31, 2013. Assume that an option pricing formula is used to estimate a grant value of $6 for each of the employee stock options. As of Dec. 31, 2010 Tyler Company expects 2012 net income to be $12 million. a. Make a journal entry to record compensation expense for 2010 (3 pts) Net income forecast $12 million: 12,000 options Total compensation expense: 12,000 $6 (fair value of option) = $72,000 Dec. 31, 2010 (Dr) Compensation expense ($72,000/3yrs) (Cr) PIC from stock option $24,000 $24,000

As of Dec. 31, 2011 Tyler Company expects 2012 net income be $9 million b. Make a journal entry to record compensation expense for 2011 (3 pts) Net income forecast $9 million: 10,000 options Total compensation expense: 10,000 $ 6(fair value of option) = $60,000 Estimated compensation expense up to 2011: $60,000 2/3 yrs = $40,000 Dec. 31, 2011 (Dr) Compensation expense ($40,000 $24,000) (Cr) PIC from stock option $16,000 $16,000

Actual net income Tyler Company for 2012 is $16 million: 16,000 options

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c. Make a journal entry to record compensation expense for 2012 (3 pts) Total compensation expense: 16,000 $6(fair value of option) = $96,000 Dec. 31, 2012 (Dr) Compensation expense ($96,000 $40,000) $56,000 (Cr) PIC from stock option $56,000 d. Entire stock options granted to key employees exercised before the expiration date. Make a journal entry to record the exercise of stock option in 2013 (3 pts) (Dr) Cash (16,000 $40) $640,000 (Dr) PIC from stock option $96,000 (Cr) Common Stock $16,000 (Cr) Paid in Capital in excess of par $720,000

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