Problem 1. Sands Corp has the following capital structure at the beginning of the year:
6% preferred stock, $50 par value, 20,000 shares authorized,
6,000 shares issued and outstanding 300,000
Common stock, $10 par value, 60,000 shares authorized,
40,000 shares issued and outstanding 400,000
Paid-in capital in excess of par 110,000
Total paid-in capital 810,000
Retained earnings 440,000
Total stockholders' equity 1,250,000
Instructions:
(a) Record the following transactions which occurred consecutively (show all calculations).
1. A total cash dividend of 90,000 was declared and payable to stockholders of record. Record dividends payable on common and preferred stock in separate accounts.
2. A 10% common stock dividend was declared. The average market value of the common stock is $18 a share.
3. Assume that net income for the year was 150,000 (record the closing entry and the board of directors appropriated 70,000 of retained earnings for plant expansion.
(b) Construct the stockholders’ equity section incorporating all the above information.
Problem 2. Information concerning the capital structure of Simot Corp is as follows:
December 31
2007 2006
Common stock 150,000 shares 150,000 shares
Convertible preferred stock 15,000 shares 15,000 shares
9% convertible bonds 2,400,000 2,400,000
During 2007, Simot paid dividends of $1.20 per share on its common stock and $3.00 per share on its preferred stock. The preferred stock is convertible into 30,000 shares of common stock. The 9% convertible bonds are convertible bonds are convertible into 75,000 shares of common stock. The net income for the year ended December 31, 2007, was $600,000. Assume that the income tax rate was 30%.
A. What should be the basic earnings per share for the year ended December 31, 2007, rounded to the nearest penny?
B. What should be the diluted earnings per share for the year ended December 31, 2007, rounded to the nearest penny?
Problem 3. Kimm, Inc. acquired 30% of Carne Corp’s voting stock on January 1, 2007 for $400,000. During 2007, Carne earned $160,000 and paid dividends of $100,000. Kimm’s 30% interest in Carne gives Kimm the ability to exercise significant influence over Carne’s operating and financial policies. During 2008, Carne earned $200,000 and paid dividends of $60,000 on April 1 and $60,000 on October 1. On July 1, 2008, Kimm sold half of its stock in Carne for $264,000 cash.
A. Before income taxes, what amount should Kimm include in its 2007 income statement as a result of the investment?
B. The carrying amount of this investment in Kimm’s December 31, 2007 balance sheet should be?
C. What should be the gain on sale of this investment in Kimm’s 2008 income statement?
Problem 4. Listed below are items that are treated differently for accounting purposes than they are for tax purposes. Indicate whether the items are permanent differences or temporary differences. For temporary differences, indicate whether they will create deferred tax assets or deferred tax liabilities.
1. Investments accounted for by the equity method.
2. Advance rental receipts.
3. Fine for polluting.
4. Estimated future warranty costs.
5. Excess of contributions over pension expense.
6. Expenses incurred in obtaining tax-exempt revenue.
7. Installment sales.
8. Excess tax depreciation over accounting depreciation.
9. Long-term construction contracts.
10. Premiums paid on life insurance of officers (company is the beneficiary).
Problem 5. On January 1, 2008, Kinder Co. has the following balances:
Projected benefit obligation $2,100,000
Fair value of plan assets $1,800,000
The settlement rate is 10%. Other data related to the pension plan for 2008 are:
A. The balance of the projected benefit obligation at December 31, 2008 is?
B. The fair value of plan assets at December 31, 2008 is?
Problem 6. The four types of accounting changes, including error correction, are:
Code
a. Change in accounting principle.
b. Change in accounting estimate.
c. Change in reporting entity.
d. Error correction.
Instructions:
Following are a series of situations. You are to enter a code letter to the left to indicate the type of change.
____1. Change from presenting nonconsolidated to consolidated financial statements.
____2. Change due to charging a new asset directly to an expense account.
____3. Change from expensing to capitalizing certain costs, due to a change in periods benefited.
____4. Change from LIFO to LIFO inventory procedures.
____5. Change due to failure to recognize an accrued (uncollected) revenue.
____6. Change in amortization period for an intangible asset.
____7. Changing the companies included in combined financial statements.
____8. Change in the loss rate on warranty costs.
____9. Change due to failure to recognize and accrue income.
___10. Change in residual value of a depreciable plant asset.
___11. Change from an unacceptable to an acceptable accounting principle.
___12. Change in both estimate and acceptable accounting principles.
___13. Change due to failure to recognize a prepaid asset.
___14. Change from straight-line to sum-of-the-year’s-digits method of depreciation.
___15. Change in life of a depreciable plant asset.
___16. Change from one acceptable principle to another acceptable principle.
___17. Change due to understatement of inventory.
___18. Change in expected recovery of an account receivable.
Problem 7: Unruh Company reported net incomes for a three-year period as follows:
2006,$186,000; 2007,$189,000; 2008,$180,000.
In reviewing the accounts in 2009 after the books for the prior year have been closed, you find that the following errors have been made in summarizing activities:
2006 2007 2008
Overstatement of ending inventory $42,000 $51,000 $24,000
Understatement of accrued advertising expense $6,600 $12,000 $7,200
Instructions:
A. Determine corrected net incomes for 2006, 2007, and 2008.
B. Give the entry to bring the books of the company up to date in 2009, assuming that the books have been closed for 2008.