Acc 232 Exam 1 - Problems

E16-28 Howat Corporation earned $360,000 during a period when it had an average of 100,000 shares of common stock outstanding. The common stock sold at an average market price of $15 per share during the period. Also outstanding were 15,000 warrants that could be exercised to purchase one share of common stock for $10 for each warrant exercised. a. are the warrants dilutive? b. computed basic earnings per share c. computed diluted earnings per share.

(a) The warrants are dilutive because the option price ($10) is less than the average market price ($15). Incremental shares = [($15 - $10)/ $15] X 15,000 = 5,000 OR Proceeds from assumed exercise: (15,000 warrants X $10 exercise price)= $150,000 Treasury shares purchasable with proceeds: ($150,000 ÷ $15 average market price) = 10,000 Incremental shares issued: (15,000 shares issued less 10,000 purchased)= 5,000 (b) Basic EPS = $3.60 ($360,000 ÷ 100,000 shares) (c) Diluted EPS = $3.43 ($360,000 ÷ 105,000 shares)

E16-18 Flagstad Inc. presented the following data. Net Income = $2,500,000 Preferred stock: 50,000 shares outstanding, $100 par value, 8% cumulative, not convertible = $5,000,000 Common stock: shares outstanding 1/1 = 750,000 Common stock: Issued for cash, 5/1 = 300,000 Common Stock: Acquired treasury stock for cash, 8/1 = 150,000 Common Stock: 2-for-1 stock split, 10/1 Compute Earnings Per Share

Event, Dates Outstanding, Shares Outstanding X Restatement X Fraction of Year = Weighted Shares Beginning balance Jan. 1-May 1 750,000 X 2 X 4/12 = 500,000 + Issued shares May 1-Aug. 1 1,050,000 X 2 X 3/12 = 525,000 + Reacquired shares Aug. 1-Dec. 31 900,000 X 2 X 5/12 = 750,000 = Weighted-average number of shares outstanding 1,775,000 Net income = $2,500,000 + Preferred dividend (50,000 X $100 X 8%)= (400,000) = Net income applicable to common stock $2,100,000 [2,500,000 + (400,000)] Net income applicable to common stock = $2,100,000 -------------------------------------- Weighted-average number of shares outstanding = 1,775,000 = Earnings Per Share = $1.18

E17-12 S2 Monica, Inc. obtained significant influence over Seles Corporation by buying 30% of Seles's 30,000 outstanding shares of common stock at a total cost of $9 per share on Jan 1 2017. On June 15, Seles declared and paid cash dividends of $36,000 to all stockholders. On Dec 31, Seles reported net income of $85,000 for the year. Prepare all necessary journal entries in 2017

Situation 2: Journal entries by Monica, Inc.: To record the purchase of 30% of Seles Corporation's common stock: January 1, 2017 Equity Investments (Seles Corp.). 81,000 Cash [(30,000 X 30%) X $9] 81,000 Since Monica, Inc. obtained significant influence over Seles Corp., Monica, Inc. now employs the equity method of accounting. To record the receipt of cash dividends from Seles Corporation: June 15, 2017 Cash ($36,000 X 30%) 10,800 Equity Investments (Seles Corp.) 10,800 To record Monica's share (30%) of Seles Corporation's net income of $85,000: December 31, 2017 Equity Investments (Seles Corp.) 25,500 (30% X $85,000) Investment Income 25,500

E16-7 Illiad Inc. has decided to raise additional capital by issuing $170,000 face value of bonds with a coupon rate of 10%. In Discussions with investment bankers, it was determined tha to help the sale of the bonds, detachable stock warrants should be issued at the rate of one warrant for each $100 bonds sold. The value of the bonds without the warrants is considered to be $136,000, and the value of the warrants in the market is $24,000. The bonds sold in the market at issuance for $152,000. a. What entry should be made at the time of the issuance of the bonds and warrants? b. If the warrants were nondetachable, would the entries be different?

[Value of bonds without warrants / (Value of bonds without warrants + Value of warrants)] X Issue price = Value assigned to bonds [Value of warrants / (Value of bonds without warrants + Value of warrants)] X Issue price = Value assigned to warrants [$136,000 /($136,000 + $24,000)]X $152,000 = $129,200 Value assigned to bonds [$24,000 /($136,000 + $24,000)]X $152,000 = 22,800 $152,000 Value assigned to warrants Total Cash 152,000 Discount on Bonds Payable 40,800 ($170,000 - $129,200) Bonds Payable 170,000 Paid-in Capital—Stock Warrants 22,800 (b) When the warrants are non-detachable, separate recognition is not given to the warrants. The accounting treatment parallels that given convertible debt because the debt and equity element cannot be separated. The entry if warrants were non-detachable is: Cash 152,000 Discount on Bonds Payable 18,000 Bonds Payable 170,000

E16-13 Derrick Company issues 4,000 shares of restricted stock to its CFO, Dane Yaping, on Jan 1 2017. The stock has a fair value of $120,000 on this date. The service period related to this restricted stock is 4 years. vesting occurs if Yaping stays with the company for 4 years. The par value of the stock is $5. At Dec. 31 2018, the fair value of the stock is $145,000 a. prepare the journal entries to record the restricted stock on Jan 1 2017, and Dec 31 2018. b. On March 4, 2019, Yaping leaves the company. Prepare the journal entry to account for this forfeiture.

(a) 1/1/17 Unearned Compensation 120,000 Common Stock (4,000 X $5) 20,000 Paid-in Capital Excess of Par— Common stock 100,000 12/31/18 Compensation Expense 30,000 Unearned Compensation ($120,000 ÷ 4) 30,000 (b) 3/4/19 Common Stock 20,000 Paid-in Capital Excess of Par 100,000 Unearned Compensation 60,000 Compensation Expense (2 X $30,000) 60,000

E15-12Lotoya Davis Corporation has 10 million shares of common stock issued and outstanding. On June 1 the board of directors voted an 80 cents per share cash dividend to stockholders of record as of June 14, payable June 30. a. prepare the journal entry for each of the dates above assuming the dividend represents a distribution of earnings. b. how would the entry differ if the dividend were a liquidating dividend?

(a) 6/1 Retained Earnings 8,000,000 Dividends Payable 8,000,000 6/14 No entry on date of record. 6/30 Dividends Payable 8,000,000 Cash 8,000,000 (b) If this were a liquidating dividend, the debit entry on the date of declaration would be to Additional Paid-in Capital rather than Retained Earnings.

P16-8 The information below pertains to Barkley Company for 2018. Net Income for the year = $1,200,000 7% Convertible bonds issued at par ($1,000 per bond); each bond is convertible into 30 shares of common stock = $2,000,000 6% convertible, cumulative preferred stock, $100 par value; each share is convertible into 3 shares of common stock = $4,000,000 Common stock, $10 par value = $6,000,000 Tax rate for 2018 = 40% Average market price of common stock = $25 per share There were no changes during 2018 in the number of common shares, preferred shares, or convertible bonds outstanding. there is no treasury stock. the company also has common stock options (granted in a prior year) to purchase 75,000 shared of common stock at $20 per share. a. compute basic earnings per share for 2018 b. compute diluted earnings per share for 2018

(a) Basic EPS = $1,200,000 - ($4,000,000 X .06) 600,000* = $1.60 per share *$6,000,000 ÷ $10 (b) Diluted EPS = (Net income - Preferred dividends) + Interest savings (net of tax) Weighted-average number of shares outstanding + Potentially dilutive common shares = $1,200,000 - $240,000a + $84,000b 600,000 + 15,000c + 60,000d = $1,044,000 675,000 = $1.54 per share aPreferred stock is not included since conversion would be antidilutive. That is, conversion of the preferred stock increases the numerator $240,000 ($4,000,000 X .06) and the denominator 120,000 shares [(4,000,000 ÷ 100) X 3] as shown in the following: Diluted EPS with preferred. = $1,200,000 + $84,000 600,000 + 15,000 + 60,000 + 120,000 = $1,284,000 795,000 = $1.61 per share > $1.54; therefore antidilutive. b$2,000,000 X .07 X (1 - .40) cMarket price - Option price X Number of options = incremental shares Market price $25 - $20 X 75,000 = 15,000 $25 d($2,000,000 ÷ $1,000) X 30 shares/bond Note: This problem can be used to apply the procedures in Appendix 17B for analysis of multiple dilutive securities. First, compute the dilutive effect for each security and rank from smallest to largest: Options: $0/15,000 = $0 Convertible bonds: $84,000/60,000 = $1.40 Preferred: $240,000/120,000 = $2 EPS with options: = $1,200,000 - $240,000 600,000 + 15,000 = $1.56 This is less than basic EPS; continue to bonds: $1.54 (see (b) above) which is less than diluted EPS with the options, so include. As indicated above, the preferred is anti-dilutive, so we stop.

BE 15-2 Swarten Corporation issued 600 shared of no-par common stock for $8,200. Prepare Swarten's journal entry if a. the stock has no stated value b. the stock has a stated value of $2 per share

(a) Cash 8,200 Common Stock 8,200 (b) Cash 8,200 Common Stock (600 X $2) 1,200 Paid-in Capital in Excess of Stated Value— Common Stock 7,000

E16-26 Venzuela Company's net income for 2017 is $50,000. The only potentially dilutive securities outstanding were 1,000 options issued during 2016 each exercisable for one share at $6. None has been exercised and 10,000 shares of commo were outstanding during 2017. The average market price of venzuela's stock during 2017 was $20. a. compute diluted earnings per hare b. assume the same facts as those assumed for part a exept that the 1,000 options were issued on Oct. 1 2017. The average market price during the last three months of 2017 was $20.

(a) D Shares assumed issued on exercise = 1,000 Proceeds (1,000 X $6 = $6,000) Less: Treasury shares purchased ($6,000/$20) =300 = Incremental shares 700 Diluted EPS = [($50,000 + 0)/ (10,000 + 700)] = $4.67 (rounded) (b) Diluted Shares assumed issued on exercise =1,000 Proceeds = $6,000 Less: Treasury shares purchased ($6,000/$20)= 300 = 700 X 3/12 = Incremental shares = 175 Diluted EPS = [($50,000 + 0)/ ( 10,000 + 175)] = $4.91 (rounded)

BE17-2 Garfield Company purchased, on Jan. 1 2017, as available-for-sale, $80,000 of the 9%, 5-year bonds of Chester Corporation for $74,086, which provides an 11% return. Prepare Garfield's journal entries for a. the purchase of the investment b. the receipt of annual interest and discount amortization. c. the year-end fair value adjustment The bonds have a year-end fair value of $75,500

(a) Debt Investments (available-for-sale) 74,086 Cash 74,086 (b) Cash ($80,000 X .09) 7,200 Debt Investments (available-for-sale) 949 Interest Revenue ($74,086 X .11) 8,149 (c) Fair Value Adjustment (available-for-sale) 465 Unrealized Holding Gain or Loss—Equity [($74,086 + $949) - $75,500] 465

BE17-4 Hendricks Corporation purchased trading investment bonds for $50,000 at par. At Dec. 31, Hendricks received annual interest of $2,000, and the fair value of the bonds was $47,400. Prepare Hendricks journal entries for a. the purchase of the investment b. the interest received c. the fair value adjustment

(a) Debt Investments (trading) 50,000 Cash 50,000 (b) Cash 2,000 Interest Revenue 2,000 (c) Unrealized Holding Gain or Loss—Income 2,600 Fair Value Adjustment (trading) ($50,000 - $47,400) 2,600

BE17-1 Garfield Company purchased, on Jan. 1 2017, as a held-to-maturity investment, $80,000 of the 9%, 5-year bonds of Chester Corporation for $74,086, which provides an 11% return. Prepare Garfield's journal entries for a. the purchase of the investment b. the receipt of annual interest and discount amortization. Assume effective-interest amortization is used

(a) Debt Investments 74,086 Cash 74,086 (b) Cash ($80,000 X .09) 7,200 Debt Investments 949 Interest Revenue ($74,086 X .11) 8,149

E17-16 Jaycie Phelps Inc. acquired 20% of the outstanding common stock to Theresa Kulikowski Inc. on Dec 31 2017. the purchase price was $1,200,000 for 50,000 shares. Kulikowski reported net income of $730,000 for 2018. The fair value of Kulikowski's stock was $27 per share and Dec 31 2016. A. Prepare the journal entries for Jaycie Phelps Inc. for 2017 and 2018, assuming the Phelps cannot exercise significant influence over Kulikowski. b. Prepare the journal entries for Jaycie Phelps Inc. for 2017 and 2018, assuming that Phelps can exercise significant influence over Kulikowski c. at what amount is the investment in securities reported on the balance sheet under each of these methods at Dec. 31 2018? What is the total net income reported in 2018 under each of these methods?

(a) December 31, 2017 Equity Investments 1,200,000 Cash 1,200,000 June 30, 2018 Cash 42,500 Dividend Revenue 42,500 December 31, 2018 Cash 42,500 Dividend Revenue 42,500 Fair Value Adjustment 150,000 Unrealized Holding Gain or Loss— Income 150,000 $27 X 50,000 = $1,350,000 $1,350,000 - $1,200,000 = $150,000 (b) December 31, 2017 Equity Investments (Kulikowski) 1,200,000 Cash 1,200,000 June 30, 2018 Cash 42,500 Equity Investments (Kulikowski Inc.) 42,500 December 31, 2018 Cash 42,500 Equity Investments (Kulikowski Inc.) 42,500 Equity Investment (Kulikowski Inc.) 146,000 Investment Income 146,000 (20% X $730,000) (c) Investment amount (balance sheet) FV= $1,350,000 EM = $1,261,000 Dividend revenue (income statement) FV=85,000 EM=0 Investment income (income statement) EM= 146,000

BE17-5 Fairbanks Corporation purchased 400 shares of Sherman Inc. common stock for $13,200. During the year, Sherman paid a cash dividend of $3.25 per share. At year-end, Sherman stock was selling for $34.50 per share. Prepare Fairbanks' journal entries to record a. the purchase of the investment b. the dividends received c. the fair value option

(a) Equity Investments 13,200 Cash 13,200 (b) Cash 1,300 Dividend Revenue (400 X $3.25) 1,300 (c) Fair Value Adjustment 600 Unrealized Holding Gain or Loss—Income [(400 X $34.50) - $13,200] 600

E15-5 Dave Matthew Inc. issues 500 shares of $10 par value common stock and 100 shares of $100 par value preferred stock for a lump sum of $100,000. a. prepare the journal entry for the issuance when the market price of the common shares is $165 each and market price of the preferred is $230 each. b. prepare the journal entry for the issuance when only the market price of the common stock is know and it is $170 per share.

(a) Fair Value of Common (500 X $165) $ 82,500 Fair Value of Preferred (100 X $230) 23,000 $105,500 Allocated to Common: $82,500/$105,500 X $100,000 $ 78,199 Allocated to Preferred: $23,000/$105,500 X $100,000 21,801 Total allocation (rounded to nearest dollar) $100,000 Cash 100,000 Common Stock (500 X $10) 5,000 Paid-in Capital in Excess of Par— Common Stock ($78,199 - $5,000) 73,199 Preferred Stock (100 X $100) 10,000 Paid-in Capital in Excess of Par— Preferred Stock ($21,801 - $10,000) 11,801 (b) Lump-sum receipt $100,000 Allocated to common (500 X $170) 85,000 Balance allocated to preferred $ 15,000 Cash 100,000 Common Stock 5,000 Paid-in Capital in Excess of Par— Common Stock ($85,000 - $5,000) 80,000 Preferred Stock 10,000 Paid-in Capital in Excess of Par— Preferred Stock ($15,000 - $10,000) 5,000

P17-7 The following information relates to the debt securities investments of Wildcat Company. 1. On Feb. 1, the company purchased 10% bonds of Gibbons Co. having a par value of $300,000 at 100 plus accrued interest. Interest is payable April 1 and Oct. 1. 2. on April 1, semiannual interest is received 3.On July 1, 9% bonds of Sampson, Inc. were purchased. These bonds with a par value of $200,000 were purchased at 100 plus accrued interest. Interest dates are June 1 and Dec. 1 4. on Sept. 1 bonds with a par value of $60,000 purchased on Feb. 1, are sold at 99 plus accrued interest. 5. On Oct. 1, Semiannual interest is received 6. On Dec. 1, Semiannual interest is received 7. On Dec. 31st, the fair value of the bonds purchased Feb 1 and July 1 are 95 and 93, respectively a. prepare any journal entries you consider necessary, including year-end entries, assuming these are available-for-sale securities b. If Wildcat classified these as held-to-maturity investments, explain how the journal entries would differ from those in part a.

(a) February 1 Debt Investments (available-for-sale) 300,000 Interest Revenue (4/12 X .10 X $300,000) 10,000 Cash 310,000 April 1 Cash 15,000 Interest Revenue ($300,000 X .10 X 6/12) 15,000 July 1 Debt Investments (available-for-sale) 200,000 Interest Revenue (1/12 X .09 X $200,000) 1,500 Cash 201,500 September 1 Cash [($60,000 X 99%) + ($60,000 X .10 X 5/12)] 61,900 Loss on Sale of Investments 600 Debt Investments (available-for-sale) 60,000 Interest Revenue (5/12 X .10 X $60,000 = $2,500) 2,500 October 1 Cash [($300,000 - $60,000) X .10 X 6/12] 12,000 Interest Revenue 12,000 December 1 Cash ($200,000 X 9% X 6/12) 9,000 Interest Revenue 9,000 December 31 Interest Receivable 7,500 Interest Revenue 7,500 (3/12 X $240,000 X .10 = $6,000) (1/12 X $200,000 X .09 = $1,500) ($6,000 + $1,500 = $7,500) December 31 Unrealized Holding Gain or Loss—Equity 26,000 Fair Value Adjustment (available-for-sale) 26,000 Available-for-Sale Portfolio Gibbons Co. $240,000- $228,000=$(12,000) Sampson, Inc. 200,000-186,000= (14,000) = Total Cost=$440,000 Total Fair Value = $414,000 Total Unrealized Gain (loss) = $(26,000) (Note: Some students may debit Interest Receivable at date of purchase instead of Interest Revenue. This procedure is correct, assuming that when the cash is received for the interest, an appropriate credit to Interest Receivable is recorded.) (b) All the entries would be the same except the account title Debt Investments (held-to-maturity) would be used instead of Debt Investments (available-for-sale). In addition, held-to-maturity securities would be carried at amortized cost and not valued at fair value at year-end, so the last entry would not be made.

E16-25 On January 1 2017, Crocker company issued 10-year $2,000,000face value, 6% bonds, at par. Each $1,000 bond is convertible into 15 shares of Crocker common stock. Crocker's net income in 2017 was $300,000 and its tax rate was 40%. The company had 100,000 shares of common stock outstanding throughout 2017. None of the bonds were converted in 2017 a. computed diluted earnings per share for 2017 b. Compute diluted earnings per share for 2017, assuming the same facts as above, except that $1,000,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 5 shares of Crocker common stock.

(a) Net income = $300,000 Add: Interest savings (net of tax) [$120,000 X (1 - .40)] = 72,000 = Adjusted net income $372,000 $2,000,000 ÷ $1,000 = 2,000 bonds X 15 = 30,000 shares Diluted EPS: $372,000 ÷ (100,000 + 30,000) = $2.86 (b) Shares outstanding =100,000 Add: Shares assumed to be issued [($1,000,000 ÷ $100) X 5]= 50,000 = Shares outstanding adjusted for dilutive securities =150,000 Diluted EPS: ($300,000 - $0) ÷ 150,000 = $2.00 Note: Preferred dividends are not deducted since preferred stock was assumed converted into common stock.

E15-14The stockholders equity accounts for G.K. Chesterton Company have the following balance on Dec. 31st 2017. Common Stock, $10 par, 300,000 shares issued and outstanding = $3,000,000 Paid-in Capital in excess of par- common stock = $1,200,000 Retained Earnings = $5,600,000 Shares of G.K. Chesterton Company stock are currently selling on the Midwest Stock Exchange at $37. a. A stock dividend of 5% is declared and issued b. a stock dividend of 100% is declared and issued c. a 2-for-1 stock split is declared and issued.

(a) Retained Earnings (15,000 X $37) 555,000 Common Stock Dividend Distributable (15,000x$10) 150,000 Paid-in Capital in Excess of Par— Common Stock 405,000 Common Stock Dividend Distributable 150,000 Common Stock 150,000 (b) Retained Earnings (300,000 X $10) 3,000,000 Common Stock Dividend Distributable 3,000,000 Common Stock Dividend Distributable 3,000,000 Common Stock 3,000,000 (c) No entry, the par value becomes $5 and the number of shares outstanding increases to 600,000.

BE15-9Arantxa Corporation has outstanding 20,000 shares of $5 par value common stock. On August 1, 2017 Arantxa reacquired 200 shares at $80 per share. On November 1, Arantxa reissued the 200 shares at $70 per share. Arantxa had no previous treasury stock transactions. Prepare Arantxa's journal entries to record these transactions using the cost method.

8/1/17 Treasury Stock (200 X $80) 16,000 Cash 16,000 11/1/17 Cash (200 X $70) 14,000 Retained Earnings 2,000 Treasury Stock 16,000

E16-16 On Jan. 1 2018, Wilke Corp. had 480,000 shares of common stock outstanding. During 2018, it had the following transactions that affected the common stock account. Feb 1. Issued 120,000 shares Mar. 1 Issued a 10% stock dividend May 1. Acquired 100,000 shares of treasury stock Jun. 1 Issued a 3-for-1 stock split Oct. 1 Reissued 60,000 shares of treasury stock a. determine the weighted-average number of shares outstanding as of Dec 31 2018. b. Assume that Wilke Corp, earned net income of $3,456,000 during 2018. In addition, it had 100,000 shares of 9%, $100 par nonconvertible, noncumulative preferred stock outstanding for the entire year. Because of liquid considerations, however, the company did not declare and pay a preferred dividend in 2018. Compute earnings per share for 2018 using the weighted-average number of shares determined in part a. c. Assume the same facts as in part b, except that the [referred stock was cumulative. COmpute earnings per share for 2018. d. Assume the same facts as in part b, except the net income included a loss form discounted operations of $432,000. Compute earnings per share for 2018.

(a) Beginning balance Jan. 1-Feb. 1 480,000 X (1.1 X 3.0) X 1/12 =132,000 Issued shares Feb. 1-Mar. 1 600,000 X (1.1 X 3.0) X 1/12 = 165,000 Stock dividend Mar. 1-May 1 660,000 X 3.0 X 2/12 = 330,000 Reacquired shares May 1-June 1 560,000 X 3.0 X 1/12 = 140,000 Stock split June 1-Oct. 1 1,680,000 X 4/12 =560,000 Reissued shares Oct. 1-Dec. 31 1,740,000 X 3/12 = 435,000 Weighted-average number of shares outstanding 1,762,000 (b) Earnings Per Share = [$3,456,000 (Net Income)/ 1,762,000 (Weighted-average Number Shares Outstanding)] = $1.96 (c) Earnings Per Share = [($3,456,000 - $900,000)/ 1,762,000]= $1.45 (d) Income from continuing operations(a)= $2.21 - Loss from discontinued operations(b)= (.25 ) = Net income $1.96 Net income $3,456,000 Add: Loss from discontinued operations 432,000 = Income from continuing operations $3,888,000

P15-5Before Gordon Corporation engages in the treasury stock transactions listed its general ledger reflects the account balances (par value of its stock is $30 per share) Paid-in Capital in Excess of par- Common Stock = $99,000 Common Stock = $270,000 Retained Earnings = $80,000 Record the treasury stock transactions under the cost method of handling treasury stock a. bought 380 shares of treasury stock at $40 per share b. bought 300 shares of treasury stock at $45 per share. c. sold 350 shares of treasury stock at $42 per share d. sold 110 shares of treasury stock at $38 per share.

(a) Treasury Stock (380 X $40) 15,200 Cash 15,200 (b) Treasury Stock (300 X $45) 13,500 Cash 13,500 (c) Cash (350 X $42) 14,700 Treasury Stock (350 X $40) 14,000 Paid-in Capital from Treasury Stock (350 X $2) 700 (d) Cash (110 X $38) 4,180 Paid-in Capital from Treasury Stock 620 Treasury Stock 4,800* *30 shares purchased at $40 = $1,200 80 shares purchased at $45 = 3,600 (Cost of treasury shares sold using FIFO = $4,800

E17-11 Aranda Corporation made the following cash purchases of securities during 2017, which is the first year in which Arantxa invested in securities. 1. On Jan 15, purchased 10,000 shares of Sanchez Company's common stock at $33.50 per share commission $1,980. 2. On April 1, purchased 5,000 shares of Vicario Co.'s common stock at $52.00 per share plus commission $3,370. 3.On Sep. 10, purchased 7,000 shares of WTA Co.'s preferred stock at $26.50 per share plus commission $4,910. On May 20, Aranda sold 4,000 shares of Sanchez Company's common stock at a market price of $35 per share leess brokerage commission, taxes, and fees of $3,850. The year-end fair values pershare were Sanchez $30, Vicario $55, and WTA $28. In addition, the chief accountant of Aranda told you that the corporation plans to hold these securities for the long-term but may sell them in order to earn profits from appreciation in prices. The equity method of accounting is not appropriate for these stock purchases. a.prepare the journal entries to record the above three security purchases. b. prepare the journal entry for the security sale on May 20 c. compute the unrealized gain or losses and prepare the adjusting entries for Aranda on Dec 31 2017.

(a) The total purchase price of these investments is: Sanchez: (10,000 X $33.50) + $1,980 = $336,980 Vicario: (5,000 X $52.00) + $3,370 = $263,370 WTA: (7,000 X $26.50) + $4,910 = $190,410 The purchase entries will be: January 15, 2017 Equity Investments 336,980 Cash 336,980 April 1, 2017 Equity Investments 263,370 Cash 263,370 September 10, 2017 Equity Investments 190,410 Cash 190,410 (b) Gross selling price of 4,000 shares at $35 = $140,000 Less: Commissions, taxes, and fees = (3,850) Net proceeds from sale= 136,150 Cost of 4,000 shares ($336,980 X 0.4) = (134,792) = Gain on sale of stock = $ 1,358 May 20, 2017 Cash 136,150 Equity Investments 134,792 Gain on Sale of Investments 1,358 (c) Sanchez Co. Cost = $202,188 FV= $180,000 Unrealized Gain (loss) = $(22,188) Vicario Co. Cost = 263,370 FV= 275,000 Unrealized Gain (loss) = 11,630 WTA Co. Cost = 190,410 FV = 196,000 Unrealized Gain (loss) = 5,590 Total portfolio value Cost = $655,968 Fair Value = $651,000 Unrealized Gain (loss) = (4,968) Previous fair value adjustment balance =0 Fair value adjustment—Cr. = $ (4,968) December 31, 2017 Unrealized Holding Gain or Loss—Income 4,968 Fair Value Adjustment 4,968

E16-12 On Jan. 1 2016, Nichols Corporation granted 10,000 options to key executives. Each option allows the executive to purchase on share of Nichols $5 par value common stock at a price of $20 per share. The options were exercisable within a 2-year period beginning Jan 1 2018, if the grantee is still employed by the company at the time o fhte exercise. On the grant date, Nichols stock was trading at $25 per share, and a fair value option-pricing model determines total compensation to be $400,000. On May 1 2018, 8,000 options were exercised when the market price of Nicholas stock was $30 per share. The remaining options lapsed in 2020 because executive decided not to exercise their options. Prepare the necessary journal entries related to the stock option plan for the years 2016 through 2020.

1/1/16 No entry 12/31/16 Compensation Expense 200,000 Paid-in Capital—Stock Options 200,000 ($400,000 X 1/2) 12/31/17 Compensation Expense 200,000 Paid-in Capital—Stock Options 200,000 5/1/18 Cash (8,000 X $20) 160,000 Paid-in Capital—Stock Options 320,000 * Common Stock (8,000 X $5) 40,000 Paid-in Capital in Excess of Par—Common Stock 440,000 *($400,000 X 8,000/10,000) 1/1/20 Paid-in Capital—Stock Options 80,000 Paid-in Capital—Expired Stock Options ($400,000 - $320,000) 80,000

BE15-8 Sprinkle inc. has outstanding 10,000 shares of $10 par value common stock. On July 1 2017 Sprinkle reacquired 100 shares at $87 per share. On September 1, Sprinkle reissued 60 shares at $90 per share. On November 1, Sprinkle reissued 40 shares at $83 per share. Prepare Sprinkles journal entries to record these transactions using the cost method.

7/1/17 Treasury Stock (100 X $87) 8,700 Cash 8,700 9/1/17 Cash (60 X $90) 5,400 Treasury Stock (60 X $87) 5,220 Paid-in Capital from Treasury Stock 180 11/1/17 Cash (40 X $83) 3,320 Paid-in Capital from Treasury Stock 160 Treasury Stock (40 X $87) 3,480

BE15-12 Graves Mining Company declared, on April 20th, a dividend of $500,000 payable on June 1. Of this amount, $125,000 is a return of capital. Prepare the April 20 and June 1 entries for Graves

Apr. 20 Retained Earnings ($500,000 - $125,000) 375,000 Paid-in Capital in Excess of Par— Common Stock 125,000 Dividends Payable 500,000 June 1 Dividends Payable 500,000 Cash 500,000

BE15-4Ravonette Corporation issued 300 shares of $10 par value common stock and 100 shares of $50 par value preferred stock for a lump sum of $13,500. The common stock has a market price of $20 per share, and the preferred stock has a market price of $90 per share. Prepare the journal entry to record the issuance.

Cash 13,500 Preferred Stock (100 X $50) 5,000 Paid-in Capital in Excess of Par— Preferred Stock 3,100 Common Stock (300 X $10) 3,000 Paid-in Capital in Excess of Par— Common Stock 2,400 FV of common (300 X $20) $ 6,000 FV of preferred (100 X $90) 9,000 Total FV $15,000 Allocated to common X $13,500 = $ 5,400 Allocated to preferred X $13,500 = 8,100 $13,500

BE16-1 Archer In. issued $4,000,000 par value, 7% convertible bonds at 99 for cash. If the bonds had not include the conversion feature, they would have sold for 95. Prepare the journal entry to record the issuance of the bonds.

Cash 3,960,000 Discount on Bonds Payable 40,000 Bonds Payable 4,000,000

E16-3 Vargo Company has bonds payable outstanding in the amount of $500,000, and the Premium on Bonds Payable account has a balance of $7,500. Each $1,000 bond is convertible into 20 shares of preferred stock of par value of $50 per share. All bonds are converted into preferred stock. Assuming that the book value method was used, what entry would be made?

Conversion recorded at book value of the bonds: Bonds Payable 500,000 Premium on Bonds Payable 7,500 Preferred Stock (500 X 20 X $50) 500,000 Paid-in Capital in Excess of Par (Preferred Stock) 7,500

BE16-10 Douglas Corporation had 120,000 shares of stock outstanding on Jan. 1 2017. On May 1 2017, Douglas issued 60,000 shares. On July 1, Douglas purchased 10,000 treasury shares, which were reissued on October 1. Compute Douglas's weighted-average number of shares outstanding for 2017.

Dates Outstanding, Shares Outstanding X Fraction of Year = Weighted Shares 1/1-5/1 120,000 X 4/12 =40,000 5/1-7/1 180,000 X2/12 =30,000 7/1-10/1 170,000 X3/12 =42,500 10/1-12/31 180,000 X 3/12 = 45,000 Total Weighted Shares = 157,500

BE15-13 Green Day Corporation has outstanding 400,000 shares of $10 par value common stock. The corporation declares a 5% stock dividend when the fair value of the stock is $65 per share. Prepare the journal entries for Green Day Corporation for both the date of decoration and the date of distribution.

Declaration Date. Retained Earnings 1,300,000 Common Stock Dividend Distributable 200,000 Paid-in Capital in Excess of Par— Common Stock 1,100,000 (20,000 X $65 = $1,300,000; 20,000 X $10 = $200,000) Distribution Date. Common Stock Dividend Distributable 200,000 Common Stock 200,000

BE17-7 Zoop Corporation purchased for $300,000 a 30% interest in Murphy,Inc. This investment enables Zoop to exert significant influence over Murphy. During the year, Murphy earned net income of $180,000 and paid dividends of $60,000. Prepare Zoops journal entries related to this investment

Equity Investments 300,000 Cash 300,000 Equity Investments 54,000 Investment Income (30% X $180,000) 54,000 Cash 18,000 Equity Investments (30% X $60,000) 18,000

E15-2 Kathleen Battle Corporation was organized on January 1, 2017. it is authorized to issue 10,000 shares of 8%, $100 par value preferred stock, and 500,000 shares of no-par common stock with a stated value of $1 per share. The following stock transaction were completed during the first year. Jan. 10 Issued 80,000 shares of common stock for cash at $5 per share Mar. 1 Issued 5,000 shares of preferred stock for cash at $108 per share Apr. 1 Issued 24,000 shares of common stock for land. The asking price of the land was $90,000; the fair value was $80,000 May 1 Issued 80,000 shares for common stock for cash at $7 per share Aug 1 issued 10,000 shares of common stock to attorneys in payment of their bill of $50,000 for service rendered in helping the company organize Sept. 1 Issued 10,000 shares of common stock for cash at $9 per share Nov. 1 Issued 1,000 shares of preferred stock for cash at $112 per share

Jan. 10 Cash (80,000 X $5) 400,000 Common Stock (80,000 X $1) 80,000 Paid-in Capital in Excess of Stated Value—Common Stock 320,000 (80,000 X $4) Mar. 1 Cash (5,000 X $108) 540,000 Preferred Stock (5,000 X $100) 500,000 Paid-in Capital in Excess of Par— Preferred Stock 40,000 (5,000 X $8) April 1 Land 80,000 Common Stock (24,000 X $1) 24,000 Paid-in Capital in Excess of Stated Value—Common Stock 56,000 ($80,000 - $24,000) May 1 Cash (80,000 X $7) 560,000 Common Stock (80,000 X $1) 80,000 Paid-in Capital in Excess of Stated Value—Common Stock 480,000 (80,000 X $6) Aug. 1 Organization Expense 50,000 Common Stock (10,000 X $1) 10,000 Paid-in Capital in Excess of Stated Value—Common Stock 40,000 ($50,000 - $10,000) Sept. 1 Cash (10,000 X $9) 90,000 Common Stock (10,000 X $1) 10,000 Paid-in Capital in Excess of Stated Value—Common Stock 80,000 (10,000 X $8) Nov. 1 Cash (1,000 X $112) 112,000 Preferred Stock (1,000 X $100) 100,000 Paid-in Capital in Excess of Par— Preferred Stock 12,000 (1,000 X $12)

BE16-13 Rockland Corporation earned net income of $300,000 in 2017 and had 100,000 shares of common stock outstanding throughout the year. Also outstanding all year was $800,000 of 9% bonds, which are convertible into 16,000 shares of common. Rockland's tax rate is 40%. Compute Rockland's 2017 diluted earnings per share.

Net income =$300,000 + Adjustment for interest, net of tax [$72,000 X (1 - .40)] = 43,200 = Adjusted net income $343,800 / Weighted-average number of shares outstanding adjusted for dilutive securities (100,000 + 16,000)= 116,000 = Diluted EPS = $2.96

E15-21The outstanding capital stock of Edna Millay Corporations consists of 2,000 shares of $100 par value, 8% preferred, and 5,000 shares of $50 par value common. Assuming that the company has retained earnings of $90,000 all of which is to be paid out in dividends, and that preferred dividends were not paid during the 2 years preceding the current year, state how much each class of stock should received under each of the following conditions. a. the preferred stock is noncumulative and nonparticipating b. the preferred stock is cumulative and nonparticipating c. the preferred stock is cumulative and participating.

Preferred Common Total (a) Preferred stock is noncumulative, nonparticipating (2,000 X $100 X 8%) $16,000 Remainder ($90,000 - $16,000) $74,000 $90,000 (b) Preferred stock is cumulative, nonparticipating ($16,000 X 3) $48,000 Remainder ($90,000 - $48,000) $42,000 $90,000 Preferred Common Total (c) Preferred stock is cumulative, participating $57,778 $32,222 $90,000

BE16-3 Pechstein Corporation has outstanding 2,000 shares of $10 par value common stock upon conversion of 1,00 shares of $50 par value preferred stock. The preferred stock was originally issued at $60 per share. The common stock is trading at $26 per share at the time of conversion. Record the conversion of the preferred stock.

Preferred Stock (1,000 X $50) 50,000 Paid-in Capital in Excess of Par— Preferred Stock ($60 - $50) X 1,000 10,000 Common Stock (2,000 X $10) 20,000 Paid-in Capital in Excess of Par—Common Stock ($60 X 1,000) - (2,000 X $10) 40,000

BE16-15 Bedard Corporation reported net income of $300,000 in 2017 and had 200,000 shares of common stock outstanding throughout the year. Also outstanding all year were 45,000 options to purchase common stock at $10 per share. The average market price of the stock during the year was $15. Computed diluted earnings per share.

Proceeds from assumed exercise of 45,000 options (45,000 X $10) = $450,000 Shares issued upon exercise = 45,000 + Treasury shares purchasable ($450,000 ÷ $15) =(30,000) = Incremental shares 15,000 Diluted EPS = [$300,000 / ( 200,000 + 15,000)] = $1.40

E17-12 S1: Conchita cosmetics aquired 10% of the 200,000 shares of common stock of Martinex Fashion at a total cost of $13 per share on March 18th 2017. On June 30, Martinex delared and paid $75,000 cash dividends to all stockholders. On Dec. 31, Martinez reported net income of $122,000 for the year. At Dec 31 the market price of Martinez Fashion was $15 per share. Prepare all necessary journal entries in 2017

Situation 1: Journal entries by Conchita Cosmetics: To record purchase of 20,000 shares of Martinez Fashion at a cost of $13 per share: March 18, 2017 Equity Investments 260,000 Cash 260,000 To record the dividend revenue from Martinez Fashion: June 30, 2017 Cash 7,500 Dividend Revenue ($75,000 X 10%) 7,500 To record the investment at fair value: December 31, 2017 Fair Value Adjustment 40,000 Unrealized Holding Gain or Loss—Income 40,000* *($15 - $13) X 20,000 shares = $40,000

BE16-9 Kalin Corporation had 2017 net income of $1,000,000. During 2017, Kalin paid a dividend of $2 per share on 100,000 shares of preferred stock. During 2017, Kalin had outstanding 250,000 shares of common stock. Compute Kalin's 2017 earnings per share.

[$1,000,000 - (100,000 X $2)]/250,000 shares = $3.20 per share