CZC1 - additional questions (Chapter 18, 21)

Record treasury stock transactions.

Treasury stock purchase is recorded as a debit to Treasury Stock and a credit to Cash.

Name two disadvantages of raising capital through the issue of bonds payable rather than through the issue of preferred stock.

Two disadvantages are (a) interest must be paid and (b) the face amount must be repaid at maturity.

Apply the Modified Accelerated Cost Recovery System (MACRS) for federal income tax purposes.

Under the federal income tax laws, new assets must be depreciated under the Modified Accelerated Cost Recovery System (MACRS), with minor exceptions. Under MACRS, each type of asset is assigned to a MACRS class. Each class is assigned a different depreciable life.

What entry, or entries, will be made when bonds are retired at maturity?

When bonds are retired at maturity, Bonds Payable is debited and Cash (or Bond Sinking Fund Investment) is credited. If the company has Retained Earnings Appropriated for the bonds, that account should be closed and returned to Retained Earnings Unappropriated.

The entry to record the adjustment for accrued bond interest includes ...

... a debit to Bond Interest Expense and a credit to Bond Interest Payable.

The Common Stock Dividend Distributable account ....

... appears on the balance sheet in the Stockholders' Equity section as a part of paid-in capital. Representation:

Retained Earnings Appropriated for Bond Retirement appears as a separate line item ....

... on the Balance Sheet.

Complete a worksheet for a corporation.

1) Enter the trial balance in the Trial Balance section; 2) Enter the adjustments, except income tax expense, in the Adjustments section. 3) Extend balances of all income and expense amounts except income tax expense to the Income Statement section; 4) Total its Debit and Credit columns. *The difference is the income or loss before income taxes; compute income tax based on it. 5) After entering the income tax adjustment, total the columns in the Adjustments section. 6) Extend Income Tax Expense to the Debit column of the Income Statement section. 7) Total the Debit and Credit columns of the Income Statement section; *The difference is net income after tax. 8) Extend the adjusted balances of the asset, liability, and stockholders' equity accounts to the Balance Sheet columns. 9) Enter net income after income tax to the Credit column of the Balance Sheet section. 10) Complete the worksheet in the usual manner.

When a depreciated asset sold, what steps to record the transaction we follow...

1) Record depreciation to the date of disposition 2)Remove the cost of the asset 3)Remove the accumulated depreciation. 4) Record the proceeds. 5) Determine and record the gain or loss, if any.

Why would a corporation purchase its own bonds and retire them?

Bonds may be retired prior to maturity because management has surplus cash, it wants to save interest costs, or it expects interest costs to decrease.

Record a corporation's receipt of donated assets

Property given to a corporation is recorded at fair market value and is credited to Donated Capital.

How do the adjusting entries for the beginning and ending inventories for a corporation differ, if at all, from those for a sole proprietorship?

These adjustments are the same for sole proprietorships and corporations.

What is "Paid-in capital"?

This is the amount of capital acquired from capital stock transactions.

On April 20, the board of directors of Pohl Corporation declared a 15 percent stock dividend payable on June 1 to stockholders of record on May 15. The market value is expected to be $33 per share. On the declaration date, there are 4,000 shares outstanding. The par value of the shares is $30. What amount is credited to the Paidin Capital in Excess of Par Value— Common Stock account?

$1,800 (600 shares × $3)

Ten-year bonds, dated January 1, 2013, with a face value of $200,000 are issued at 101 on January 1, 2013. How much premium will be amortized on the interest payment date, July 1, 2013?

$100 ($2,000/10 yrs. = $200/yr. or $100 per payment date)

The balance of the Retained Earnings on December 1 is $295,000. During December, dividends of $13,000 on common stock and $10,000 on preferred stock were declared. Neither dividend was paid in December. An Appropriation for Building Expansion account with a balance of $100,000 was closed and the balance transferred back to Retained Earnings. Net income after taxes is $90,000. What is the balance of unappropriated retained earnings on December 31?

$462,000

Estimate the federal corporate income tax and prepare related journal entries.

- Debit Income Tax Expense, - Credit Cash. - Amounts owed or overpaid are recorded as adjustments.

Common Stock Dividend Distributable account...

- Equity account used to record par, or stated, value of shares to be issued as the result of the declaration of a stock dividend.

Retained Earnings...

- Represent the cumulative profits and losses of the corporation not distributed as dividends. Dividends reduce retained earnings. - Retained earnings does not represent a cash fund. - Retained earnings are reinvested in inventory, plant and equipment, and various other types of assets.

Deferred income taxes...

- The amount of taxes that will be payable in the future as a result of the difference between taxable income and income for financial statement purposes in the current year and in past years.

Why would a corporation purchase its own stock as treasury stock?

A common reason is that the corporation's board decides the corporation has excess cash and concludes that its own stock represents the best available investment. Sometimes stock is repurchased to reduce the number of shares outstanding with the expectation of increasing net income per share and/or dividends per share for remaining shareholders.

What is a bond sinking fund investment?

A fund used to accumulate assets to pay off bonds when they mature.

Record stock splits.

A memorandum entry records it on the date of declaration, and another is made on the date of issuance.

At what point in preparing the corporate end-of-year worksheet does the accountant enter the adjustment for income taxes?

After the balances of income and expense accounts—other than income taxes—have been extended to the Income Statement of the worksheet, the debit column and credit column are totaled. The difference is the income before taxes. The taxes are computed on that income and entered as an adjustment and carried forward to the debit column of the income statement section.

What is the straight-line method for amortizing bond discount or premium?

An equal amount of discount or premium is amortized each month from the issue date to the maturity date.

Which of the following will decrease total stockholders' equity? a. stock dividend b. stock split c. cash dividend d. appropriation of retained earnings

Answer: Of these actions, only a cash dividend (c) will result in a decrease in stockholder equity.

The balance of an appropriated retained earnings account is reduced: a. as expenses are accrued. b. as payments are made. c. when the board of directors passes a resolution to return the amount to unappropriated retained earnings. d. when the board declares the appropriation's purpose is completed.

Answer: c. A board resolution is necessary to reduce appropriated retained earnings.

Why is amortization of a bond premium offset against interest expense?

Bond premium is a device to adjust the face amount of interest to the market interest rate at the date of issuance. Thus, the premium is directly related to interest expense.

Record corporate adjusting and closing entries.

Close revenues and expenses to the Income Summary account; close Income Summary to Retained Earnings.

What is the entry to record $200,000 of bonds that were retired at maturity? Retained earnings were appropriated for $200,000 for bond retirement. There was no bond sinking fund.

Debit Retained Earnings Appropriated for Bond Retirement for $200,000; credit Retained Earnings for $200,000. Debit Bonds Payable for $200,000 and credit Cash for $200,000.

Record appropriations of retained earnings.

Debit Retained Earnings; credit the Appropriated Retained Earnings account for the appropriation amount.

Formula of Depletion Expense

Depletion Expense = (Cost − Salvage Value/Estimated Number of Units) x Number of Units Extracted

How are bond discounts shown on the balance sheet?

Discount on bonds payable is shown on the balance sheet as a deduction from the face value of the bonds.

On the worksheet, column totals in the Income Statement section are debit, $192,000, and credit, $242,000. Assuming income and deductions for tax purposes are the same as those for financial accounting purposes and that the corporation had paid estimated taxes of $8,000, what is the adjusting entry for income taxes based on the income tax rates presented on page 730*? (image attached)

Dr. - Income Tax Refund Receivable (or a similar account), $500. Cr. - Federal Income Tax Expense, $500. ($8,000 estimate paid, minus $7,500 actual tax for the year.)

Compute and record amortization and impairment of intangible assets.

Except for software, intangibles have no physical characteristics. If they are bought from outside parties, intangibles are recorded at cost. Costs incurred by firms who produce their own intangible assets are not capitalized but are charged to Research and Development Expense in the year incurred. Costs of intangibles with identifiable lives are amortized. Costs of those with indefinite lives are charged to expense through impairment tests.

How is gain or loss on early retirement of bonds shown on the income statement?

Gain or loss on bond retirement is shown as an extraordinary item if the amount is significant. Otherwise, it is shown as Other Income or Other Expense.

Record asset trade-ins using financial accounting rules and income tax requirements.

If a business trades old equipment when purchasing new equipment, two transactions must be recorded. The depreciation on the used equipment must be brought up to date. Then, the trade and purchase are recorded. Using the financial accounting rules, a gain is not recognized, but a loss is recognized. Using the income tax method, no gain or loss is recorded on the trade-in of an asset on a new similar asset.

Recognize asset impairment and understand the general concepts of accounting for impairment.

If an asset's expected future net cash flows are less than the asset's book value, impairment may need to be recognized. The amount of impairment is the amount by which the book value exceeds the asset's fair value—usually defined as the discounted value of the future net cash flows from its use.

Where does the corporate income tax appear in the income statement?

Income tax expense is usually shown as a deduction at the bottom of the income statement, after Net Income Before Tax, but is sometimes shown as an Operating Expense to emphasize that taxes are a cost of doing business.

Record the declaration and issuance of stock dividends.

Issuance of stock dividends above par value price involves a debit to Retained Earnings, a credit to Common Stock Dividend Distributable, and a credit to Paid-in Capital in Excess of Par Value. Upon distribution, Common Stock Dividend Distributable is debited, and Common Stock is credited.

Does an appropriation of retained earnings include a transfer of cash to a restricted account? Explain.

No cash is involved in an appropriation of retained earnings. Cash is involved only if a separate fund is established to pay for the object of the appropriation.

How does a "stock split" differ from a "stock dividend," if at all, when the stock has no par value?

No entry is made in the accounts to record a stock split, except memorandum entries to note the board's action when the split is authorized and again on the date the additional shares are issued. A stock dividend also requires only a memorandum entry if the stock has no par value or stated value assigned.

Is the taxable income of a large corporation likely to be the same as its income for financial reporting purposes? Explain.

No. There are many special rules—for example, depreciation calculations—for tax purposes that are not acceptable under GAAP requirements.

Record sales of plant and equipment.

Property, plant, and equipment are disposed of in various ways; most commonly, they are sold or scrapped. At an asset's sale, its depreciation is brought up to date. Gain or loss at the time of disposal is computed by comparing the asset's net book value with the proceeds, if any, received on its disposal. For financial accounting purposes, a gain or loss may be recorded from the sale, retirement, or scrapping of an asset.

Record the declaration and payment of cash dividends.

Recording cash dividends involves the following: on the declaration date, - Debit Retained Earnings - Credit Dividends Payable. No journal entry is made on the record date. On the payment date, record the outgoing cash and the reduction of the Dividends Payable liability established on the declaration date.

What is meant by "retained earnings"?

Retained earnings represent the cumulative profits and losses of the corporation that have not been distributed as dividends or transferred to Paid-in Capital through cash dividends, stock dividends, or stock splits.

Generally, would an investor want secured bonds or debenture bonds? Why?

Secured bonds are bonds that have specific assets pledged as security. If the corporation does not pay the principal and interest, the bondholders may take possession of the assets. Debenture bonds have no specific assets pledged to secure payment. So, the secured bond is a more attractive investment.

Prepare an income statement for a corporation.

The corporation income statement is similar to that of a sole proprietorship, except for the inclusion of an income tax expense deduction. Extraordinary or Nonrecurring Items are shown in a separate section.

Determine the amount to record as an asset's cost.

The cost of an asset is its net purchase price, plus costs of transportation, installation, and all other costs necessary to put the asset into normal operation.

Should treasury stock be shown as an asset of the corporation?

The cost of treasury stock should not be shown as an asset on the balance sheet of the issuing corporation. It represents a deduction from the total of the corporation's other stockholders' equity accounts.

Compute and record depletion of natural resources

The costs of natural resources such as mineral deposits are charged to expense on a per-unit-of-production basis for financial accounting and reporting purposes. Special rules apply for income tax purposes.

Explain each of the three dates related to a stock dividend declaration and issue.

The date of declaration—the date the board of directors formally announces the dividend. The date of record—date on which owners of stock are determined and to whom dividends will be paid. The date of payment is the date on which payment is to be made.

If we sell a depreciated item for less than a book value...

The loss is recorded in the Loss on Sale of Equipment account. The loss appears on the income statement in the Other Expenses section.

Prepare financial statements for a corporation.

The major corporation financial statements discussed in this chapter are the income statement, statement of retained earnings, and balance sheet.

Book value...

The total equity applicable to a class of stock divided by the number of shares outstanding

Treasury stock is shown on the balance sheet as: a. a deduction from the sum of all other items in the Stockholders' Equity section. b. an asset. c. an addition to common stock in the Stockholders' Equity section. d. an addition to the total of all other Stockholders' Equity accounts.

a. a deduction from the sum of all other items in the Stockholders' Equity section.

If bonds are issued for a price below their face value, the bond discount is: a. debited to expense on the date the bonds are issued. b. amortized over the life of the bond issue. c. shown as an addition to bonds payable in the Long-Term Liabilities section of the balance sheet. d. shown as a deduction to bonds payable in the Current Liabilities section of the balance sheet.

b. amortized over the life of the bond issue.

The entry to record the issuance of bonds includes a: a. credit to Bond Interest Payable b. credit to Bonds Payable. c. debit to Bonds Payable. d. debit to Bond Interest Payable.

b. credit to Bonds Payable.

The entry to record retirement of a bond includes a debit to: a.Discount on Bonds Payable. b.Retained Earnings. c. Bonds Payable. d. Retained Earnings Appropriated for Bond Retirement.

c. Bonds Payable.

The entry to record income earned by a bond sinking fund investment includes a credit to: a. Bonds Payable. b. Bond Sinking Fund Investment. c. Income from Sinking Fund Investment. d. Interest Income.

c. income from Sinking Fund Investment.

Which of the following would not be found on the statement of retained earnings? a. Dividends on preferred stock. b. Appropriation for treasury stock. c. Appropriation for construction of an office building. d. The cash payment made when the corporation completes construction of a building for which an appropriation of retained earnings had been made.

d. the cash payment made to build a building for which an appropriation of retained earnings had previously been made.