INTERMEDIATE ACCOUNTING COMPREHENSIVE EXAMINATION 2

COMPREHENSIVE EXAMINATION 2

Approximate

Problem Topic Points Minutes

D - I Multiple Choice.............................................. 20 20

D - II Bonds Converted and Retired....................... 10 10

D - III Corporation Entries........................................ 28 20

D - IV Bonds Payable—Straight-line Method.......... 17 15

D - V Income Statement and Retained Earnings

Statement...................................................... 20 15

D - VI Compute Earnings per Share ....................... 5 5

100 85

Checking Work ............................................. 5

90

Problem D - I — Multiple Choice (20 points)

Instructions: Designate the best answer for each of the following questions.

1. The amortization of premium on bonds payable:

a. will increase bond interest expense.

b. should take place over a period not to exceed 20 years.

c. will increase bond interest revenue.

d. will decrease bond interest expense.

^a2. A corporation issued $500,000 of 8%, 5-year bonds on January 1, at 98. Interest is paid semiannually on January 1 and July 1. If the corporation uses the straight-line method of amortization, the amount of bond interest expense to be recognized on July 1 is:

a. $19,000.

b. $20,000.

c. $21,000.

d. $38,000.

3. Which of the following isnot a condition that indicates a capital lease?

a. The lessee may purchase the property at fair market value anytime during the lease period.

b. The lease transfers ownership to lessee.

c. The lease term is equal to 75% or more of the economic life of the property.

d. The present value of lease payments equals or exceeds 90% of the fair market value of the property.

4. A $600,000, 8%, 20-year bond was issued at 102. The proceeds received from the bond issuance are:

a. $588,000.

b. $594,000.

c. $600,000.

d. $612,000.

5. Both stock dividends and stock splits affect total:

a. paid-in capital.

b. par value of common stock.

c. retained earnings.

d. shares outstanding.

6. A prior period adjustment:

a. appears on the income statement as an other revenue/gain.

b. is made when preferred dividends in arrears are finally paid.

c. is a correction of an error, made directly to retained earnings.

d. is made to reverse an adjusting entry.

7. Frye Company sells 1,000 shares of treasury stock for $42,000. The shares had been previously acquired for $35,000. The $7,000 received over cost should be credited to:

a. retained earnings.

b. an asset account.

c. a revenue account.

d. a paid-in capital account.

8. Xavier Company has the following stock outstanding:

7% Preferred stock, $100 par value, cumulative $500,000

Common stock, $50 par value $800,000

Preferred stock dividends are in arrears for 2010 and 2011. If the company declares and pays $150,000 in dividends in 2012, the amount received by the preferred stockholders would be:

a. $35,000.

b. $42,000.

c. $70,000.

d. $105,000.

9. The return on common stockholders’ equity is computed by dividing net income available to common stockholders by:

a. average stockholders’ equity.

b. ending stockholders’ equity.

c. average common stockholders’ equity.

d. ending common stockholders’ equity.

10. Earnings per share is based on the:

a. weighted-average common shares issued.

b. ending common shares issued.

c. weighted-average common shares outstanding.

d. ending common shares outstanding.

Problem D - II — Bonds Converted and Retired (10 points)

1. Yaz Inc. retired $500,000 face value, 8% bonds on June 30, 2012, at 97. The carrying value of the bonds at the redemption date was $475,000. The interest payment due on June 30, 2012, has been made and recorded.

Instructions:Prepare the necessary journal entry for the conversion and retirement of the bonds.

2. Muskete Corporation has $600,000, 10%, 10-year convertible bonds that were sold at face value. The bonds are convertible into 20 shares of Muskete $10 par value common stock for each $1,000 bond. On December 31, 2012, after bond interest had been paid, $300,000 face value bonds were converted.

Instructions:Prepare the necessary journal entry for the conversion and retirement of the bonds.

Problem D - III — Corporation Entries (28 points)

Zippo Corporation stockholders' equity consisted of the following on January 1, 2012:

Stockholders' Equity

Paid-in capital

Capital stock

6% Preferred stock, $100 par value, cumulative,

50,000 shares authorized, 30,000 shares issued

and outstanding $ 3,000,000

Common stock, no par, $20 stated value, 1,000,000

shares authorized, 500,000 shares issued and

outstanding 10,000,000

Total capital stock 13,000,000

Additional paid-in capital

In excess of par value—preferred $300,000

In excess of stated value—common 600,000 900,000

Total paid-in capital 13,900,000

Retained earnings (Note A) 4,100,000

Total stockholders' equity $18,000,000

Note A: Preferred dividends are in arrears for 2011.

Instructions:Prepare the appropriate journal entries, if any, for the following transactions in 2012. You may omit journal entry explanations but you should show computations.

Jan. 25 Issued 60,000 shares of common stock for $40 per share.

Feb. 18 The Board of Directors declared a cash dividend on preferred and common stock totaling $700,000, payable on March 15, to stockholders of record on February 28. (Record dividends payable on preferred and common stock in separate accounts.)

Feb. 28 Date of record for cash dividends on preferred and common stock.

Mar. 15 Paid the cash dividend to preferred and common stockholders.

May 20 Declared a 10% stock dividend on the common stock, payable on June 15, to stockholders of record on May 31. The market value of Zippo Corporation's common stock was $40 per share.

June 15 Distributed stock dividend to common stockholders.

July 10 Purchased 40,000 shares of Zippo Corporation's common stock for $43 per share to be held in the company's treasury.

Aug. 13 Sold 13,000 shares of treasury stock for $46 per share.

Sept. 30 The Board of Directors declared and issued immediately a 2:1 stock split on all the common shares including shares held in the treasury. The stated value on the common stock was reduced to $10 per share.

Nov. 12 Sold 19,000 shares of treasury stock for $24 per share.

Problem D - IV — Bonds Payable—Straight-line Method (17 points)

Jozoi Company issues $700,000 of 10%, 10-year bonds on January 1, 2012, at 102. Interest is payable semiannually on July 1 and January 1. The company uses the straight-line method of amortization.

Instructions:

1. Journalize the entries on (1) January 1, 2012, (2) July 1, 2012, and (3) December 31, 2012.

2. Show the balance sheet presentation of the bonds at December 31, 2012.

Problem D-V — Income Statement and Retained Earnings Statement (20points)

The following information is available for Wrina Corporation for the year ended December 31, 2012:

Beginning retained earnings $ 340,000

Cost of goods sold 620,000

Declared cash dividends 50,000

Operating expenses 170,000

Other expenses and losses 40,000

Other revenues and gains 60,000

Sales 1,000,000

Tax rate 30%

Instructions:

1. Prepare a corporate income statement in good form.

2. Prepare a retained earnings statement for the year.

Problem D - VI — Compute Earnings per Share (5 points)

MK Company has a simple capital structure. At December 31, 2012, it had $500,000 of $100 par value 6% preferred stock outstanding, and $1,000,000 of $5 par value common stock outstanding. Net income for the year was $480,000.

Instructions:Compute the earnings per share of common stock assuming the dividend on preferred stock was not declared and the preferred stock is cumulative. The common shares remained unchanged during the year.