Questions -
Q1. (a) Company sells a machine for $6,500 under a 12-month warranty agreement that requires the company to replace all defective parts and to provide the repair labor at no cost to the customers. With sales being made evenly throughout the year, the company sells 600 machines in 2010 (warranty expense is incurred 30% in 2010, 20% in 2011 and 50% in 2012). As a result of product testing, the company estimates that the warranty cost is $400 per machine ($250 parts and $150 labor).
Required: Assuming that actual warranty costs are incurred exactly as estimated, prepare the journal entries that would be made under application of the expense warranty accrual method for the following:
i. Warranty costs incurred in 2010.
ii. Warranty costs incurred in 2011.
(b) Yellow Cab Co. began operations on January 2, 2010. It employs 15 drivers who work 8-hour days. Each employee earns 10 paid vacation days annually. Vacation days may be taken after January 10 of the year following the year in which they are earned. The average hourly wage rate was $28.00 in 2010 and $20.00 in 2011. The average vacation days used by each driver in 2011 was 8. Yellow Cab Co. accrues the cost of compensated absences at rates of pay in effect when earned.
Required: Prepare journal entries to record the transactions related to paid vacation days during 2010 and 2011.
Q2. Roman Company had the following stockholders' equity as of January 1, 2010.
Common Stock, $5 par value, 20,000 shares issued $100,000
Paid-in capital in excess of par $300,000
Retained earnings $320,000
Total stockholder's equity $720,000
During 2010, the following transactions occurred:
- Jan 31 Roman issued 5,000 shares of common stock at $10 per share.
- Feb 25 Roman repurchased 2,000 shares of treasury stock at a price of $19 per share.
- Mar 2 1,300 shares of treasury stock repurchased above were reissued at $20 per share.
- Apr 22 600 shares of treasury stock repurchased above were reissued at $18 per share.
- Apr 24 A 5% stock dividend was declared (the market price of the stock was $15)
- Apr 25 The 5% stock dividend was distributed ( market price of the stock was still $15)
Required:
(a) Prepare the journal entries to record the stock transactions in 2010, assuming Roman uses the cost method to account for treasury stock.
(b) How many shares of common stock were outstanding as of April 30, 2010? (9 points)
Q3. Truck Leasing Company (TLC) buys trucks for leasing to various delivery companies. On April 1, 2010, TLC leases a truck to Showman Delivery Company. The cost of the truck of $289,875 and its fair value were the same. The lease payments stipulated in the lease are $40,000 per year in advance for the 10-year period of the lease. The expected economic life of the equipment is also 10 years. The title to the equipment remains in the hands of TLC at the end of the lease term, although only nominal residual value is expected at that time. Showman incremental borrowing rate is 5%, and it uses the straight-line method of depreciation on all owned equipment. Both Showman and TLC have fiscal year ending March 31, while lease payments are made on April 1 each year.
Required:
(a) Determine the rate implicit in the lease.
(b) Determine the present value of the minimum lease payments for the lessee.
(c) Prepare the entries to record the lease and the first lease payment on the books of the lessor and lessee, assuming the lease meets the criteria of a direct financing lease for the lessor and a capital lease for the lessee.
(d) Describe the criteria for a Lease to be classified as a Capital Lease by the lessee.
(e) Apart from your responses to (d) above, describe the additional criteria for a Lease to be classified as a Capital Lease by the lessor.
Q4. Part 1 - On December 31, 2010, before the books were closed, the management and accountants of Baker Inc made the following determinations about 2 of its depreciable assets:
1. Depreciable asset A was purchased January 1, 2006. It originally cost $630,000 and, for depreciation purposes, the straight-line method was originally chosen. The asset was originally expected to be useful for 20 years and have a zero salvage value. In 2010 the decision was made to change the depreciation method from straight-line to sum-of-the-years'-digits, and the estimates relating to useful life and salvage value remained unchanged.
2. Depreciable asset B was purchased January 1, 2006. It originally cost $120,000 and was depreciated on the straight-line method basis. The asset was originally expected to be useful for 15 years and have a zero salvage value. In 2010, the decision was made to shorten the total life of this asset to 8 years and to estimate the salvage value at $8,000.
Additional data:
- Income in 2010 before depreciation expense amounted to $390,000
- Depreciation expense on assets other than A and B totaled $50,000 in 2010.
- Income in 2009 was reported at $350,000
- Ignore all income tax effects.
- 200,000 shares of common stock were outstanding in 2009 and 2010.
Required:
a) Prepare all necessary journal entries in 2010 for the above determinations.
b) Prepare comparative retained earnings statements for Baker Inc for 2009 and 2010. The company had retained earnings of $100,000 at December 31, 2008.
Part 2 - a) Distinguish between a change in an Accounting Estimate and a change in an Accounting Principle.
Q5. XYZ Company is building a new baseball stadium at a cost of $5,000,000. It received a down payment of $3,000,000 from local businesses to support the project, and now needs to borrow $2,000,000 to complete the project. It therefore decides to issue $2,000,000 of 8%, 10-year bonds. These bonds were issued on January 1, 2010, and pay interest semi-annually on each January 1 and July 1, beginning 2010. The bonds yield 10%.
Required:
a) Prepare the journal entry to record the issuance of the bonds on January 1, 2010.
b) Prepare a bond amortization schedule up to and including January 1, 2015, using the effective-interest method.
c) Assume that on July 2, 2014, XYZ Company retires all of the bonds at a cost of $1,900,000. Prepare the journal entry to record this retirement.
Q6. Minal Hair Products, a New York-based corporation is preparing financial statements for its financial year ended June 30, 2010. The equity capital on July 1, 2009 consisted of 1 million shares of common stock outstanding and 20,000 shares of $50 par value, 6%, convertible preferred stock. Each preferred stock was convertible into 20 shares of common stock. There were no preferred dividends in arrears. The debt capital consisted of $900,000 worth of 5%, $1,000 convertible bonds. Each bond was convertible into 50 shares of common stock. Assume a Tax Rate of 40%.
The net income for the financial year ended June 30, 2010 was $200,000.
On October 1, 2009, Minal required some funds for expansion into New Jersey and sold an additional 600,000 shares of the common stock at $20 per share. On April 1, 2010, Minal also had a 10 for 1 stock split of its common shares. These were the only stock transactions that occurred during the financial year.
Required: For the financial year ended June 30, 2010, determine the:
(a) Basic EPS
(b) Diluted EPS
(Assume that the stock transactions which took place on October 1, 2009 and April 1, 2010 would still have occurred with conversion)