Financial Accounting

Examination Three Review

Examination Three Point Composition

Multiple choice (bonds and corporations) 30%

Bond amortization table 10%

Bond journal entries 30%

Corporation journal entries 30%

Carrying value moves toward face as the contra account is amortized away. For bonds issued at a premium, the carrying value will be decreasing. For bonds issued at a discount, the carrying value will be increasing.

For demonstration purposes (to see full amortization of bond discounts and premiums), the bonds in this and the other on-line handout at this site have unrealistically short terms.

Problem One $100,000, 4.5% bonds are issued at 97.69374 (for $97,693.71) when the market rate of interest for similar bonds is 5.5%. The bonds have regular interest payments each year on June 30^th and December 31^st. Prepare an amortization schedule showing each of the five payments. The column labels will be carrying value, interest expense, interest payment, and amortization.

Problem Two $100,000, 4.5% bonds are issued at 102.61513 (for $102,615.13) when the market rate of interest for similar bonds is 3.4%. The bonds have regular interest payments each year on June 30^th and December 31^st.

REQUIRED:

(1) Prepare an amortization schedule showing each of the five payments. The column labels will be carrying value, interest expense, interest payment, and amortization.

(2) Make journal entries for

(a) January 1, 2004 issuance

(b) June 30, 2004 first interest payment

(c) December 31, 2004 second interest payment

Problem Three $400,000, 8% bonds are issued at 102.0289 (for $408115.60) when the market rate of interest for similar bonds is 7.1%. Regular interest payment dates are June 30^th and December 31^st each year. Prepare journal entries for the following.

a. January 1, 2004 issuance

b. June 30, 2004, first interest payment

c. December 31, 2004 second interest payment

d. June 30, 2005, third interest payment

e. December 31, 2005, fourth interest payment

f. June 30, 2006 fifth interest payment

Problem Four CORPORATION JOURNAL ENTRIES

The articles of incorporation of Acme, Inc. indicate it has 5 million shares authorized of its $1 par value common stock. Make journal entries for each of the following. If no journal entry is required, state that a journal entry is not required.

1. The corporation issued 5,000 shares of its $1 par value common stock for $13 cash per share.
2. The corporation issued 8,000 shares of its $1 par value common stock for $8 cash per share.
3. The corporation issued 500 shares of its $1 par value common stock to its accountant who performed incorporation related services. The stock does not have a public market value, but the value of the accounting services received in exchange for the stock is $4,500.
4. The corporation repurchased 1,000 shares for $4 per share to be held in treasury.
5. The corporation resold the shares in treasury purchased in “d” for $7,000 cash.
6. The board of directors declared a cash dividend of $11,000.
7. Date of record on the “f” dividend
8. Date of payment on the “f” dividend
9. The board decides to appropriate $2,000,000 in retained earnings for a plant project.

Problem Five CORPORATION JOURNAL ENTRIES

The articles of incorporation of Johnson, Inc. indicate it has 10 million shares authorized of its $1 par value common stock. Make journal entries for each of the following. If no journal entry is required, state that a journal entry is not required.

1. The corporation issued 7,000 shares of its $1 par value common stock for $20 cash per share.
2. The corporation issued 2,000 shares of its $1 par value common stock for $11 cash per share.
3. The corporation issued 400 shares of its $1 par value common stock to its accountant who performed incorporation related services. The stock does not have a public market value, but the value of the accounting services received in exchange for the stock is $3,700.
4. The corporation repurchased 500 shares for $5 per share to be held in treasury.
5. The corporation resold the shares in treasury purchased in “d” for $4,000 cash.
6. The board of directors declared a cash dividend of $8,000.
7. Date of record on the “f” dividend
8. Date of payment on the “f” dividend
9. The board decides to appropriate $4,000,000 in retained earnings for a plant project.

Problem Six STOCK SPLITS Compute after split par value and outstanding shares for each of the following.

1. Before the stock split, there are 400,000 shares outstanding of $10 par value common stock. There is a 2 for 1 split.
2. Before the stock split, there are 100,000 shares outstanding of $12 par value common stock. There is a 4 for 3 split.

• Stock split—does not affect retained earnings or paid in capital account balances

The goal of a stock split usually is to make stock more affordable since the market price will usually respond to the split.

• Stock dividend—like other dividends, a stock dividend will reduce retained earnings. Journal entries are prepared that have the effect of (1) increasing common stock and paid in capital in excess of par, and (2) reducing retained earnings. The stock dividend is a return to investors.

Problem Seven PRIORITY OF DIVIDENDS The number of outstanding shares of each class of stock is provided below. In 2001, there were no dividends in arrears. In 2002 and 2003 dividends were not declared. In 2004, the board of directors declared a cash dividend of $287,800. How much of the declared dividend will each class be entitled to?

50,000 shares	5%, $10 par value Cumulative Preferred
40,000 shares	4%, $8 par value Non-cumulative Preferred
100,000 shares	$1 par value Common Stock

Problem Eight BASIC EARNINGS PER COMMON SHARE Compute basic earnings per common share for each of the following.

a. Net income is $454,000. The preferred dividend is $50,000. January 1^st, 400,000 common shares were outstanding. July 1^st, 200,000 more common shares were issued. The business year end is December 31^st.

b. Net income is $333,000. The preferred dividend is $30,000. January 1^st, 10,000 common shares were outstanding. December 1^st, 1,080,000 more common shares were issued.

Problem Nine QUALITY OF EARNINGS

1. What are the three categories presented in the non-operating section of the income statement?
2. How could net income have increased, but quality of earnings be considered poor?