Comprehensive Examination

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) $ 6,000,000

Paid-in capital in excess of par 1,500,000

Retained earnings 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.)

1. On January 4, 2013, having idle cash, Carey Co. repurchased 20,000 shares of its out-standing stock for $500,000.

2. On March 4, Carey sold 5,000 of these reacquired shares at $28 per share.

3. 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.

4. 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.

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. Applies to both stock dividends and stock splits.

B. Applies to neither.

C. Applies to stock splits only.

D. Applies to stock dividends only.

E. Applies to stock splits effected in the form of a dividend only.

F. 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

____ 1. The distribution is a multiple as contrasted to a fraction of the number of shares previously outstanding.

____ 2. The total number of shares outstanding is increased.

____ 3. The individual stockholder's share of net assets is increased.

____ 4. There is no transfer between retained earnings and capital stock accounts, other than to the extent occasioned by legal requirements.

____ 5. There is no change in the total stockholders' equity of the issuing corporation.

____ 6. The retained earnings available for dividends are increased.

____ 7. 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.

____ 8. Subsequent per-share earnings, if any, are decreased.

____ 9. The par (or stated value) of the stock is unchanged.

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 do not affect EPS computations. Assume that, where applicable, the appropriate securities are dilutive.

____ 1. Warrants to purchase additional common shares.

____ 2. Common stock.

____ 3. Nonconvertible debenture bonds.

____ 4. Convertible, noncumulative preferred stock.

____ 5. Cumulative, nonconvertible preferred stock.

____ 6. Convertible bonds.

____ 7. Executive stock options.

____ 8. 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.

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) $3,000,000

Average common shares outstanding 2013 1,000,000 shares

10% cumulative convertible preferred stock:

Convertible into 80,000 shares of common $1,600,000

8% convertible bonds; convertible into 75,000

shares of common $2,500,000

Stock options:

Exercisable at the option price of $25 per share;

average market price in 2013, $30 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.

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.