Solutions — Practice Midterm 202

Practice Midterm 202 Covers Chapters 10 - 12 Problem - I — Multiple Choice (20 points) Circle the one best answer. 1. The amortization of premium on bonds payable a. will increase bond interest expense. b. should take place over a period not to exceed 40 years. c. will decrease bond interest expense. d. will increase bond interest revenue. 2. A corporation issued $600,000 of 6%, 5-year bonds on January 1, at 102. 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. $36,000. b. $18,000. c. $19,200. d. $16,800. 3. A $200,000, 5%, 20-year bond was issued at 99. The proceeds received from the bond issuance are a. $200,000. b. $198,000. c. $204,000. d. $196,000. 4. A prior period adjustment a. appears on the income statement as an extraordinary item. b. is a correction of an error, made directly to retained earnings. c. is made when preferred dividends in arrears are finally paid. d. is made to reverse an adjusting entry. 5. The Ewing Company purchases 1,000 shares of its common stock for $20,000. The $20,000 amount should be debited to a. an asset account. b. Treasury Stock. c. Common Stock. d. Retained Earnings. Problem - II — Ratios (8 points) The following information is available for Balken Corporation: Common stockholders' equity Dividends paid to common stockholders Dividends paid to preferred stockholders Net income Common shares outstanding 2006 $1,100,000 62,500 25,000 250,000 100,000 2005 $900,000 57,600 20,000 240,000 100,000 1 Instructions Calculate each of the following for 2006: (a) Payout ratio (b) Return on common stockholders’ equity Problem - III — Corporation Entries (24 points) Sunset Corporation stockholders' equity consisted of the following on January 1, 2006: Stockholders' Equity Paid-in capital Capital stock 6% Preferred stock, $100 par value, cumulative, 50,000 shares authorized, 30,000 shares issued and outstanding Common stock, no par, $10 stated value, 1,000,000 shares authorized, 400,000 shares issued and outstanding Total capital stock Additional paid-in capital In excess of par value—preferred In excess of stated value—common Total paid-in capital Retained earnings (Note A) Total stockholders' equity $ 3,000,000 10,000,000 13,000,000 $300,000 600,000 900,000 13,900,000 4,100,000 $18,000,000 Note A: Preferred dividends are in arrears for 2005. Instructions Prepare the appropriate journal entries, if any, for the following transactions in 2006. You may omit journal entry explanations but you should show computations. 1/25/06 Issued 60,000 shares of common stock for $40 per share. 2/18/06 The Board of Directors declared a cash dividend on preferred and common stock totaling $600,000, payable on March 15, to stockholders of record on February 28. (Record dividends payable on preferred and common stock in separate accounts.) 2/28/06 Date of record for cash dividends on preferred and common stock. 2 3/15/06 Paid the cash dividend to preferred and common stockholders. 5/20/06 Declared a 10% stock dividend on the common stock, payable on June 15, to stockholders of record on May 31. The market value of Sunset Corporation's common stock was $40 per share. 6/15/06 Distributed stock dividend to common stockholders. 7/10/06 Purchased 50,000 shares of common stock for the treasury at $38 per share. Problem - IV — Bonds Payable (20 points) Tipten Company issues $200,000 of 8%, 10-year bonds on January 1, 2006, at 103. Interest is payable semiannually on July 1 and January 1. The company uses the straight-line method of amortization. Instructions (a) Journalize the entries for the bonds on (1) January 1, 2006, (2) July 1, 2006, and (3) December 31, 2006. (b) Show the balance sheet presentation of the bonds at December 31, 2006. (c) Assume on July 1 2006, after paying interest, Tipten calls bonds having a face value of $100,000. The call price is 101. Record the redemption of the bonds. 3 Problem- V — Plant Asset Depreciation and Disposal Entries (16 points) Prepare the necessary journal entries to record the following transactions in 2006 for Jano Company. March 1 Discarded old store equipment that originally cost $24,000 and had a book value of $6,000 on the date of disposal. Assume depreciation on the equipment has already been recorded for the current year. July 31 Sold a delivery truck for $5,000. The delivery truck originally cost $28,000 and had accumulated depreciation of $20,000 on the date of sale. Assume the depreciation on the truck has already been recorded for the current year. Dec 31 Recorded straight-line depreciation on asset with cost of $34,000, salvage value of $2,000 and useful life of 4 years. Problem- VI — Depreciation Methods (12 points) The following information is available for Queen Company, which has an accounting year end on December 31, 2006. 1. A delivery truck was purchased on June 1, 2004, for $80,000. It was estimated to have an $8,000 salvage value after being driven 120,000 miles. During 2006, the truck was driven 20,000 miles. The units-of-activity method of depreciation used. 2. A building was purchased on January 1, 1979, for $2,400,000. It is estimated to have a $24,000 salvage value at the end of its 40-year useful life. The straight-line method of depreciation is being used. 3. Store equipment was purchased on January 1, 2005, for $270,000. It was estimated that the store equipment would have a $27,000 salvage value at the end of its 5 year useful life. The double-declining balance method of depreciation is being used. 4 Instructions Complete the table shown below by filling in the appropriate amounts. Accumulated Depreciation 1/1/06 Assets Depreciation Expense for 2006 Book Value at 12/31/06 Delivery truck $ 31,200 $ $ Building $1,603,800 $ $ Store equipment $ 108,000 $ $ Solutions — Practice Midterm 201 Problem - I — Solution 1. c 2. d 3. b 4. b 5. b Problem - II — Solution (a) Payout ratio: ($62,500 ÷ $250,000) = 25% (b) Return on common stockholders’ equity: $250,000 - $25,000 = 22.5% ($900,000 + $1,100,000) / 2 Problem C - III — Solution 1/25/06 2/18/06 Cash .......................................................................................................2,400,000 Common Stock (60,000 × $10) ................................................... Paid-in Capital in Excess of Stated Value ................................. (60,000 × $30) Retained Earnings ................................................................................. Dividends Payable—Preferred ................................................... Dividends Payable—Common ................................................... ($600,000 - $360,000) *Dividends in arrears, $6 × 30,000 Dividends for 2006, $6 × 30,000 Total dividends = = 600,000 360,000* 240,000 $180,000 180,000 $360,000 2/28/06 No entry required. 3/15/06 Dividends Payable—Preferred .............................................................. Dividends Payable—Common .............................................................. Cash ............................................................................................. 360,000 240,000 Retained Earnings (46,000 × $40) ......................................................... Common Stock Dividends Distributable ................................... (46,000 × $10) Paid-in Capital in Excess of Stated Value ................................. (46,000 × $30) 1,840,000 Common Stock Dividends Distributable ............................................. Common Stock ............................................................................ 460,000 Treasury Stock (50,000 × $38) .............................................................. Cash ............................................................................................. 1,900,000 5/20/06 6/15/06 7/10/06 600,000 1,800,000 600,000 460,000 1,380,000 460,000 1,900,000 5 Problem - IV — Solution (a) (b) (c) (1) Cash ($200,000 × 1.03) ............................................................................... Bonds Payable................................................................................. Premium on Bonds Payable ........................................................... (2) Bond Interest Expense ............................................................................. Premium on Bonds Payable ($6,000 ÷ 20) ............................................... Cash ($200,000 × 8% × 1/2) ............................................................ (3) Bond Interest Expense ............................................................................. Premium on Bonds Payable ..................................................................... Bond Interest Payable .................................................................... Long-term liabilities Bonds payable Plus: Premium on bonds payable ($6,000 - $300 - $300) Bonds Payable .................................................................................................... Premium on Bonds Payable [($6,000 - $300) × .50*]......................................... Cash ($100,000 × 1.01) ............................................................................... Gain on Bond Redemption ........................................................................ 206,000 200,000 6,000 7,700 300 8,000 7,700 300 8,000 $200,000 5,400 $205,400 100,000 2,850 101,000 1,850 *$100,000 ÷ $200,000 Problem - V — Solution March July 1 31 Dec. 31 Loss on Disposal .................................................................................... Accumulated Depreciation—Store Equipment ................................... Store Equipment ......................................................................... Cash ....................................................................................................... Accumulated Depreciation—Delivery Truck …. .................................. Loss on Disposal ($8,000 - $5,000) ....................................................... Delivery Truck ............................................................................. Depreciation Expense ($32,000/ 4) ....................................................... Accumulated Depreciation ......................................................... 6,000 18,000 24,000 5,000 20,000 3,000 28,000 8,000 8,000 Problem - VI — Solution Accumulated Depreciation 1/1/06 Assets Depreciation Expense for 2006 Book Value at 12/31/06 Delivery truck $ 31,200 $12,000 $ 36,800 Building $1,603,800 $59,400 $736,800 Store equipment $ 108,000 $64,800 $ 97,200 6