INTERMEDIATE ACCOUNTING MIDTERM 2
19) Selected information from Mercer Corporation's accounting records and financial statements for 2016 is as follows ($in millions): Cash paid to acquire equipment 18 Treasury stock purchased for cash 25 Proceeds from sale of land and building 45 Gain from the sale of land and buildings 26 Investment revenue received 33 Cash paid to acquire office equipment 40 On its statement of cash flows, Mercer should report net cash outflows from investing activities of:
A) 13 million 45-18-40
7) The dividend yield on preferred stock is 10% on a market price of $80 per share at the end of year one. The preferred stock is selling for $40 at the end of year two. What is its dividend at the end of year two?
A) 20% Dividend yield equals the preferred dividend divided by the market price of the preferred stock. The dividend in year one was 80*.1=$8 dividend per share. The dividend in year two is 8/40.
5)-8% cumulative preferred stock $100 par value authorized 50000 shares and issued 20000 shares $2,000,000 -Additional paid in capital preferred stock 500,000 -Common stock $1 par value authorized 10m shares issued 5m shares 5,000,000 -additional paid in cap common stock 1,200,000 -retained earnings 3,200,000 Calculate the total paid in capital of the corporation
A) 8,700,000 2,000,000+500,000+5,000,000+1,200,000
5) Interest paid to bondholders is reported in connection with a statement of cash flows as:
A) An operating activity. Since interest expense is reported in the income statement under GAAP, it is reported in the operating activities section of the statement of cash flows. Interest paid to bondholders is an operating activity under US GAAP even though some would argue that logically it should be a financing activity.
ch 8 6) Motorsports Company retires shares it buys back. In its first share repurchase transaction, Motorshports purchased stock for more than the price at whichthe stock was originally issued. What is the effect of the purchase of the stock on each of the following? Paid in capital and retained earnings
A) Paid in capital decrease Retained earnings decrease
21) Consistent with U.S. GAAP, IFRS classifies cash flows as operating, investing, or financing. However, U.S. GAAP designates cash outflows for interest payments and cash inflows from interest and dividends received as operating cash flows. IFRS
A) allows companies to report cash inflows from interest and dividends as either operating or investing cash flows. IFRS allows companies to report cash inflows from interest and dividends as operating, investing, or financing cash flows.
12) A statement of cash flows and its related disclosure note typically do not report:
C) Stock dividends Stock dividends do not affect assets or liabilities and are no considered investing or financing activities.
Q5) Distinguish between publicly held and privately held corporations.
Publicly held corporations have stocks for purchase by the general public, while privately held companies are held by few individuals and are not available to the general public.
P7) 1) What is the purpose of the statement of shareholders equity?
Shows how various shareholders equity items in the bs change from period to period. It shows beginning and ending balances in primary shareholders equity accounts and any changes that occur during the years reported.
What are shares outstanding?
They are shares that share holders own. Issued shares can be authorized
What are stocks issued?
They are stocks authorized that were sold by the shareholders.
What are the two types of preferred shares?
a) cumulative- if not paid in a given year, they will accumulate to the next and must be paid before dividends are paid on common shares (arrears) b) noncumulative- they dont accumulate and go away at the end of the year
13) Sean-McDonald Company sold a printer with a cost of $34,000 and accumulated depreciation of $21,000 for $10,000 cash. This transaction would be reported as:
B) An investing activity. Selling as well as buying fixed assets are considered investing activities
E15) Explain why presentation formats are different and why some account balances are different for the two methods.
If a share is retired it has half of their status restored to that of authorized but unissued shares. Treasury shares are issued but not outstanding. Treasury stocks reduce the total shareholders equity, but Retiring stocks returns the share to unissued shares.
Which of the following is not a loss contingency
D) Retailers extended warranties because of separate performance obligation. Separate performance obligation and they are sold separately from warranted product so it is a separate transaction.
E10) The shareholders' equity of WBL industries includes the items shown below. The board of dcirectors of WBL declared cash dividends of $8 million, $20 million, and $150 million in its first three years of operation-2016, 2017, and 2018, respectively. Common stock $100 Paid in capital excess of par com 980 Preferred stock 8% $200 Paid in capital excess of par pref 555 Determine the amount of dividends to be paid to preferred and common shareholders in each of the three years assuming that the preferred stock is cumulative and nonparticipating.
2016: 8million to preferred 2017: 20 million to preferred 2018: 20 million to preferred and 130 million to common 8 million in arrears plus 12 mill of the 16 mill current preference 4 mill dividends plus the 16 mill current preference.
E6) William Industries has outstanding 30 million class A shares, and 20 million class B shares. Williams has the right but not the obligation to repurchase the class A shares if a change in ownership of the voting common shares causes JP williams, founder and CEO to have less than 50% ownership. Williams has the unconditional obligation to repurchase the class B shares upon the death of JP williams. Which of the shares should be reported in Williams balance sheet as liabilities? Explain.
20m class B shares as long term liabilities in balance sheet not as share holders equity. William has the right but not the obligation to repurchase the class A shares if a change in ownership of voting common shares changes, there is no unconditional obligation to repurchase class B shares.
10b) Explain why the premium amortization needs to be deducted in the indirect statement of cash flows:
Bond premium amortization is a reduction in interest expense; therefore the adjustment is an addition to interest costs, and a reduction in cash flows relative to net income.
BE1) Schaeffer Corporation reports $50 million accumulated other comprehensive income in its balance sheet as a component of shareholders equity. In a related statement reporting comprehensive income for the year, the company reveals net income of $400 million and other comprehensive income of $15 million. What was the balance in accumulated other comprehensive income in last years balance sheet?
35 million balance last year because it increased by 15 million and 50 is the cumulative sum through each year.
17) If bond interest expense is $400,000, bond interest payable increased by $4000 and bond discount decreased by 1000, cash paid for bond interest is:
A) $395,000 400,000-4,000-1,000 Bind interest payable means that some of the expense has not yet been paid. Discount amortization increases interest expense but it is not a cash expense therefore it has to be deducted.
9) Eastern Manufacturing Company owns 40% of the outstanding common stock of Southern Supply Company. During 2016, Eastern received a $50 million cash dividend from Southern. What effect did this dividend have on Eastern's 2016 statement of cash flows?
A) Cash from operating activities increased. Even though the equity method is used to account of the investment, cash dividends are received and therefore reported in the operating section of the statement of cash flows. Normally dividends received go into financing activities, but since we own such a large percentage of the investee, we treat it as operating.
CPA5) When a company issues a stock dividend which of the following would be affected?
A) Earnings per share When a company issues a stock dividend, earnings per share decreases as the number of shares outstanding increases. There is no effect on total assets, total liabilities or total stockholders' equity
22) A company can report interest payments and interest received as operating cash flows using
A) Either US GAAP and IFRS GAAP requires interest payments and interest received to bge reported as an operating activity. IFRS allows interest payments to be reported as either and operating activity or financing activity and interest received as either an operating activity or investing activity.
16) If sales revenue is $20 million and accounts receivable increased by $3 million, the amount of cash received from customers:
A) was $17 million. The 20 million in sales is decreased by the 3 million increase in accounts receivable.
11) The net income for World Class 11) Corporation was $140 million for the year ended December 31, 2016. Related information is as follows: Amortization of patent, $1 million. Cash dividend paid, $14 million. Decrease in accounts receivable, 9 million Decrease in salaries payable $1 million Depreciation expense $20 million Increase in long term notes payable $13 million Sale of preferred stock for cash $17 Cash flows from operating activities during 2016 should be reported as
B) 169 million 140+1(amortization)+9 (acc rec)-1(sal pay)+20 (dep exp) cash dividends paid, increase in long term notes payable and sale of preferred stock for cash are all financing activities.
20) Selected information from Phillips Corporation's accounting records and financial statements for 2016 is as follows ($ in millions): Cash paid to retire bonds $30 Treasury stock purchased for cash 50 Proceeds from issuance of common stock 70 Proceeds from issuance of mortgage bonds 90 Cash dividends paid on common stock 25 Cash interest paid to bondholders 35 On its statement of cash flows, Phillips should report net cash inflows from financing activities of
B) 55 million 70+90-30-50-25 Everything is financing except the last which is operating
10) A corporation purchased treasury stock for 50,000 cash. The Journal entry for this transaction included which of the following?
B) A debit to Treasury stock and a credit to cash Treasure stock (a contra-equity account) is debited and cash is credited for the purchase price.
7) On January 4, Childers Corporation issued $200 million of bonds for $193 million. During the same year, $500,000 of the bond discount was amortized. On a statement of cash flows prepared by the indirect method, Childers Corporation should report:
B) An addition of net income of $500,000 The amortization of bond discount is added back back to net income in arriving at cash flow from operations under the indirect method since it does not require a cash outflow (similar to depreciation). DR interest expense and credit cash and discounts. 193 million financing activity.
CMA1) The par value of common stock represents
B) The liability ceiling of a shareholder when a company undergoes bankruptcy proceedings. Par value represents a stocks legal capital. It is an arbitrary value assigned to stock before it is issued. Par value represents a shareholders liability ceiling because, as long as the par value has been paid in to the corporation, the shareholders obtain the benefits of limited liability.
4) Property dividends are reported in connection with a statement of cash flows as:
C) A noncash activity. A property dividend does not involve a cash outflow and therefore is reported as a noncash activity. A property dividend on the other hand has elements of both financing and investing activities and must be disclosed but does not appear on the statement because there is no cash involved. They reduce assets but not cash so must be disclosed and not as a cash flow
10) In determining cash flows from operating activities (indirect method), adjustments to net income should not include:
C) An addition for a gain on sale of equipment. The gain would be deducted from net income.
8) Which of the following is false? A) Book value is a historical concept. B) Investors' confidence in a company's management can be measured. C) Book value excludes amounts earned and retained by the corporation. D) The sign of a successful corporation is when the market price of its stock exceeds the book value of its stock.
C) Book value excludes amounts earned and retained by the corporations. Book value represents the amounts invested by stockholders plus the amounts earned and retained by the corporation.
1) Cash equivalents have each of the following characteristics except:
C) Maturity of at least 3 months
ch 8 7) Gabriel Company views share buybacks as treasury stock. In its first treasury stock transaction, Gabriel purchased treasury stock for more than the price at which the stock was originally issued. What is the effect of the purchase of the treasury stock on each of the following? Paid in capital and retained earnings.
C) No effect on paid in capital and retained earnings.
19a) In what section and under what method would you include the gain on sale? In what section? Under which method? As an addition or subtraction?
Cash inflow from the gain on sale is a cash inflow from investing activities in its statement of cash flows. It is not reported when using the direct method and when using the indirect method the gain would be subtracted from net income to avoid double counting it.
P7 4) What is comprehensive income? What is other comprehensive income?
Comprehensive income is the total nonowner change in equity for a reporting period. Other comprehensive income are all items that are not included in profit and loss or net income.
2) A publicly owned corporation is required by law to do which of the following?
D) Do all of the following Prepare and issue financial statements in conformity with general accepted accounting principles, have their annual statements audited by independent firm of cpa and comply with federal securties laws A public held corporation is required to submit much of their financial information to the securities and exchange commissions.
23) A company can report interest received and dividends received as investing activities using
D) IFRS IFRS allows interest and dividends received to be reported as either operating or investing. GAAP requires these to be reported as operating.
3) Stock dividends are reported in connection with a statement of cash flow as:
D) Not reported on the statement of cash flows. Stock dividends do not involve a cash outflow and don't represent a significant operating, investing, or financing activity and therefore are no reported in the statement of cash flows or disclosure note. Stock dividends are not a cash transaction and do not be disclosed on the statement of cash flows. They have no effect on assets and liabilities and therefore do not need to be disclosed in relation to the statement of cash flows.
E7) ICOT industries issued 15 million of its $1 par common shares for $424 million on April 11. Legal, promotional and accounting services necessary to effect the sale cost $2 million. Prepare the journal entry to record the issuance of the shares and explain how recording the share issue costs differs from the way debt issue costs are recorded.
DR Cash 422 (424-2) CR common stock 15 CR paid in capital excess of par 407 The cost of services related to the sale reduced the net proceeds from selling the shares. Paid in capital is credited for excess of proceeds, the effect of share issue costs is to reduce the amount credited to that amount. However debt issue is recorded in a separate debt issue cost account and amortized to expense over the life of the debt.
BE2) Penne Pharmaceuticals sold 8 million shares of its $1 par common stock to provide funds for research and development. If the issue price is $12 per share, what is the journal entry to record the sale of the shares?
DR Cash 96 CR Common stock 8 CR paid in capital excess of par 88
10a) What does the interest expense journal entry look like when there is a premium amortization (relates to chapter 14)?
DR interest expense 120 DR premium 10 CR Cash 130
When bonds are issued between interest dates the entry to record the issuance of the bonds contains:
DR. Cash CR Bonds payable CR Interest payable
E5) During its first year of operations, Eastern Data Links Corporation entered into t he following transactions relating to shareholders equity. The articles of incorporation authorized the issue of 8 million common shares, $1 par per share, and 1 million preferred shares, $50 par per share. Prepare journal entries to record each transaction FEB 12 Sold 2 million common shares for $9 per share FEB 13 Issued 40,000 common shares to attorneys in exchange for legal service. FEB 13 Sold 80,000 of its common shares and 4,000 preferred shares for a total of $945,000. NOV15 Issued 380,000 of its common shares in exchange for equipment for which the cash price was known to be $3,688,000.
FEB 12 DR Cash 18m CR Common stock 2m CR Paid in capital 16m FEB 13 DR Legal expense 360k CR Common stock 40k CR Paid in capital excess of par 320k FEB13 DR Cash 945k CR Common stock 80k CR Paid in capital excess of par com 640k (80k*9-1) CR Preferred stock 200k (4000*50) CR paid in capital excess of par pref 25k NOV 15 DR prop plant equip 3,688,000 CR comm stock 380k CR paid in capital excess of par 3,308,000
What is authorized common stock?
It represents the maximum number of common shares that can be issued legally by the company as stated in the company's charter.
Q15) At times, companies issue their shares for consideration other than cash. What is the measurement objective in those cases?
It should be recorded at fair value. It can be fair value of the shares or of the noncash assets or service received.
P7 5) What caused the change in Cisco's comprehensive income for the period shown? What was the amount of Accumulated other comprehensive income (loss) that Cisco reported in its January 25, 2014, balance sheet? Be specific.
The change in comprehensive income in the period presented was due to net income (3425m) and other comprehensive income (95m). Accumulated other comprehensive income is $703 million. This is the cumulative sum of the changes in each component created during each reporting period throughout the year.
P7 3) For its share buybacks in the period shown, was the price Cisco paid for the shares repurchased more or less than the average price at which Cisco had sold the shares previously? Reconstruct the journal entry Cisco used to record the buyback. The par amount of Cisco's shares is $0.0001.
The price paid was more than average at which Cisco had sold the shares previously. The statement of equity reports a reduction in retained earnings resulting from that transaction. DR Common stock 282 DR additional paid in capital 2145 DR retained earnings 3902 CR Cash 6329
Q1) Identify and briefly describe the two primary sources of shareholders equity.
They are the amounts invested by shareholders in corporations (paid in capital) and amounts earned by corporation on behalf of shareholders (retained earnings).
P7) 2) How does Cisco account for its share buybacks?
They formally retire them. The statement of equity reports the repurchase of common stock and yet has no column in the statement of equity for treasury stock.
Q10) Most preferred shares are cumulative. Explain what this means.
When unpaid in a given year, the dividends accumulate in the following year and get paid before any dividends are paid on common shares. Unpaid dividends are dividends in arrears.
What are the fundamental share rights?
a) the right to vote on matters tat come before the shareholders including the election of corporate directors. b) right to share in profits when dividends are declared. c) right to share in the distribution of assets if dividends are liquidated. preemptive right- you get the right to maintain ones percentage share of ownership when new shares are issued.
