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Ch12 - Test bank for Intermediate Accounting, IFRS Edition,
3e
Financial Accounting I (香港科技大學)
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CHAPTER 12
INTANGIBLE ASSETS
CHAPTER LEARNING OBJECTIVES
1.
Discuss the characteristics valuation, and amortization of intangible assets.
2.
Describe the accounting for various types of intangible assets.
3.
Explain the accounting issues for recording goodwill.
4.
Identify impairment procedures and presentation requirements for intangible assets.
5.
Describe the accounting and presentation for research and development and similar
costs.
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12 - 2
Test Bank for Intermediate Accounting, IFRS Edition, 3e
TRUE-FALSE—Conceptual
1.
Intangible assets derive their value from the right (claim) to receive cash in the future.
2.
All research phase and development phase costs are expensed as incurred.
3.
Research phase costs are capitalized as an intangible asset once the project has
economic viability.
4.
Companies are required to assess the estimated useful life and salvage value of
intangible assets at least annually.
5.
Impairment testing is conducted annually for both limited–life and indefinite-life intangible
assets.
6.
Amortization of limited-life intangible assets should not be impacted by expected residual
values.
7.
Some intangible assets are not required to be amortized every year.
8.
Limited-life intangibles are amortized by systematic charges to expense over their useful
life.
9.
The cost of acquiring a customer list from another company is recorded as an intangible
asset.
10.
The cost of purchased patents should be amortized over the remaining legal life of the
patent.
11.
If a new patent is acquired through modification of an existing patent, the remaining book
value of the original patent may be amortized over the life of the new patent.
12.
In a business combination, a company assigns the cost, where possible, to the identifiable
tangible and intangible assets, with the remainder recorded as goodwill.
13.
Goodwill is considered a master valuation account because it measures the value of
specifically identifiable intangible assets.
14.
Internally generated goodwill should not be capitalized in the accounts.
15.
Internally generated goodwill associated with a business may be recorded as an asset
when a firm offer to purchase that business unit has been received.
16.
All intangibles are subject to periodic consideration of impairment with corresponding
potential write-downs.
17.
If the recoverable amount of an indefinite-life intangible other than goodwill is less than its
carrying value, an impairment loss must be recognized.
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Intangible Assets
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18.
A cash-generating unit is the smallest identifiable group of assets in a business that can
generate cash flow independently of the cash flows from the business’s other assets.
19.
The impairment test for goodwill is conducted based on the cash-generating unit to which
the goodwill has been assigned.
20.
Recoveries of impairments for intangible long-lived assets are reported in "other income
and expense" on the income statement.
21.
A recovery of impairment for an intangible long-lived asset is limited to the carrying value
that would have been reported had the impairment not occurred.
22.
After an impairment loss is recorded for a limited-life intangible asset, the recoverable
amount becomes the basis for the impaired asset and is used to calculate amortization in
future periods.
23.
After an impairment loss is recorded for goodwill, the recoverable amount becomes the
basis for the impaired asset and is used to calculate amortization in future periods.
24.
Accounting for impairments for limited-life intangible assets follows the same rules used to
account for impairments of plant and equipment.
25.
IFRS permits reversals of impairment losses for all limited and indefinite-life intangible
assets.
26.
Periodic alterations to existing products are an example of research and development
costs.
27.
Research and development costs that result in patents may be capitalized to the extent of
the fair value of the patent.
28.
IFRS requires that start-up costs and initial operating losses during the early years be
capitalized.
29.
Research and development costs are recorded as an intangible asset if it is felt they will
provide economic benefits in future years.
30.
Contra accounts must be reported for intangible assets in a manner similar to the
reporting of property, plant, and equipment.
True False Answers—Conceptual
Item Ans.
1.
F
2.
F
3.
F
4.
T
5.
F
Item
6.
7.
8.
9.
10.
Ans.
F
T
T
T
F
Item
11.
12.
13.
14.
15.
Ans.
T
T
F
T
F
Item
16.
17.
18.
19.
20.
Ans.
T
T
T
T
T
Item
21.
22.
23.
24.
25.
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Ans.
T
T
F
T
F
Item
26.
27.
28.
29.
30.
Ans.
F
F
F
F
F
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Test Bank for Intermediate Accounting, IFRS Edition, 3e
MULTIPLE CHOICE—Conceptual
31.
Which of the following does not describe intangible assets?
a. They lack physical existence.
b. They are monetary assets.
c. They provide long-term benefits.
d. They are classified as long-term assets.
32.
Which of the following characteristics do intangible assets possess?
a. Physical existence.
b. Claim to a specific amount of cash in the future.
c. Long-lived.
d. Held for resale.
33.
Which characteristic is not possessed by intangible assets?
a. Physical existence.
b. Identifiable.
c. Result in future benefits.
d. Expensed over current and/or future years.
34.
Costs incurred internally to create intangibles are
a. capitalized.
b. capitalized if they have an indefinite life.
c. expensed as incurred.
d. expensed only if they have a limited life.
35.
Which of the following costs incurred internally to create an intangible asset is generally
expensed?
a. Research phase costs.
b. Filing costs.
c. Legal costs.
d. All of these choices are correct.
36.
The major problem of accounting for intangibles is determining
a. fair value.
b. separability.
c. salvage value.
d. useful life.
37.
Copyrights should be amortized over
a. their legal life.
b. the life of the creator plus fifty years.
c. twenty years.
d. their useful life or legal life, whichever is shorter.
38.
A patent should be amortized over
a. twenty years.
b. its useful life.
c. its useful life or twenty years, whichever is longer.
d. its useful life or twenty years, whichever is shorter.
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Intangible Assets
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39.
Limited-life intangibles are reported at their
a. replacement cost.
b. carrying amount unless impaired.
c. acquisition cost.
d. liquidation value.
40.
Which of the following methods of amortization is normally used for intangible assets?
a. Sum-of-the-years'-digits
b. Straight-line
c. Units of production
d. Double-declining-balance
41.
The cost of an intangible asset includes all of the following except
a. purchase price.
b. legal fees.
c. other incidental expenses.
d. all of these are included.
42.
Factors considered in determining an intangible asset’s useful life include all of the
following except
a. the expected use of the asset.
b. any legal or contractual provisions that may limit the useful life.
c. any provisions for renewal or extension of the asset’s legal life.
d. the amortization method used.
43.
Under current accounting practice, intangible assets are classified as
a. amortizable or unamortizable.
b. limited-life or indefinite-life.
c. specifically identifiable or goodwill-type.
d. legally restricted or goodwill-type.
44.
Companies should evaluate indefinite life intangible assets at least annually for:
a. recoverability.
b. amortization.
c. impairment.
d. estimated useful life.
45.
One factor that is not considered in determining the useful life of an intangible asset is
a. salvage value.
b. provisions for renewal or extension.
c. legal life.
d. expected actions of competitors.
46.
Which intangible assets are amortized?
Indefinite-Life
Limited-Life
a.
Yes
Yes
b.
Yes
No
c.
No
Yes
d.
No
No
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12 - 6
Test Bank for Intermediate Accounting, IFRS Edition, 3e
47.
The cost of purchasing patent rights for a product that might otherwise have seriously
competed with one of the purchaser's patented products should be
a. charged off in the current period.
b. amortized over the legal life of the purchased patent.
c. added to factory overhead and allocated to production of the purchaser's product.
d. amortized over the remaining estimated life of the original patent covering the product
whose market would have been impaired by competition from the newly patented
product.
48.
Broadway Corporation was granted a patent on a product on January 1, 2008. To protect
its patent, the corporation purchased on January 1, 2019 a patent on a competing product
which was originally issued on January 10, 2015. Because of its unique plant, Broadway
Corporation does not feel the competing patent can be used in producing a product. The
cost of the competing patent should be
a. amortized over a maximum period of 20 years.
b. amortized over a maximum period of 16 years.
c. amortized over a maximum period of 9 years.
d. expensed in 2019.
49.
Wriglee, Inc. went to court this year and successfully defended its patent from infringement by a competitor. The cost of this defense should be charged to
a. patents and amortized over the legal life of the patent.
b. legal fees and amortized over 5 years or less.
c. expenses of the period.
d. patents and amortized over the remaining useful life of the patent.
50.
Which of the following is not an intangible asset?
a. Trade name
b. Research and development costs
c. Franchise
d. Copyrights
51.
Which of the following intangible assets should not be amortized?
a. Copyrights
b. Customer lists
c. Perpetual franchises
d. All of these intangible assets should be amortized.
52.
When a patent is amortized, the credit is usually made to
a. the Patents account.
b. an Accumulated Amortization account.
c. an Accumulated Depreciation account.
d. an expense account.
53.
When a company develops a trademark the costs directly related to securing it should
generally be capitalized. Which of the following costs associated with a trademark would
not be allowed to be capitalized?
a. Attorney fees.
b. Consulting fees.
c. Research and development fees.
d. Design costs.
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54.
In a business combination, the excess of the cost of the purchase over the fair value of
the identifiable net assets purchased is
a. other assets.
b. indirect costs.
c. goodwill.
d. a bargain purchase.
55.
Goodwill may be recorded when
a. it is identified within a company.
b. one company acquires another in a business combination.
c. the fair value of a company’s assets exceeds their cost.
d. a company has exceptional customer relations.
56.
When a new company is acquired, which of these intangible assets, unrecorded on the
acquired company’s books, might be recorded in addition to goodwill?
a. A trade name.
b. A patent.
c. A customer list.
d. All of the above.
57.
Which of the following intangible assets could not be sold by a business to raise needed
cash for a capital project?
a. Patent.
b. Copyright.
c. Goodwill.
d. Trade name.
58.
The reason goodwill is sometimes referred to as a master valuation account is because
a. it represents the purchase price of a business that is about to be sold.
b. it is the difference between the fair value of the net identifiable assets as compared
with the purchase price of the acquired business.
c. the value of a business is computed without consideration of goodwill and then
goodwill is added to arrive at a master valuation.
d. it is the only account in the financial statements that is based on value, all other
accounts are recorded at an amount other than their value.
59.
Purchased goodwill should
a. be written off as soon as possible against retained earnings.
b. be written off as soon as possible as an other expense item.
c. be written off by systematic charges as a regular operating expense over the period
benefited.
d. not be amortized.
60.
The intangible asset goodwill may be
a. capitalized only when purchased.
b. capitalized either when purchased or created internally.
c. capitalized only when created internally.
d. written off directly to retained earnings.
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Test Bank for Intermediate Accounting, IFRS Edition, 3e
61.
A loss on impairment of an intangible asset is the difference between the asset’s
a. carrying amount and the expected future net cash flows.
b. carrying amount and its recoverable amount.
c. recoverable amount and the expected future net cash flows.
d. book value and its fair value.
62.
Recovery of impairment is recognized for all the following except
a. Patent held for sale.
b. Patent held for use.
c. Trademark.
d. Goodwill.
63.
All of the following are true regarding recovery of impairments for intangible assets except
a. After a recovery of impairment has been recognized, the carrying value of the asset
reported on the statement of financial position will be the higher of the fair value less
cost to sell or the value-in-use.
b. No recovery of impairment is allowed for Goodwill.
c. A recovery of impairment will be reported in the "Other income and expense" section
of the income statement.
d. The amount of the recovery is limited to the carrying value of the asset that would
have been reported had no impairment occurred.
64.
Which of the following is not a criteria which must be met before development costs can
be capitalized?
a. The company has sufficient financial resources to complete the project.
b. The company intends to complete the project and either use or sell the intangible
asset.
c. The company can reliably identify the research costs incurred to bring the project to
economic feasibility.
d. The project has achieved technical feasibility.
65.
Which of the following research and development related costs should be capitalized and
depreciated over current and future periods?
a. Research and development general laboratory building which can be put to alternative
uses in the future
b. Inventory used for a specific research project
c. Administrative salaries allocated to research and development
d. Research findings purchased from another company to aid a particular research
project currently in process
66.
Which of the following principles best describes the current method of accounting for
research and development costs?
a. Associating cause and effect
b. Systematic and rational allocation
c. Income tax minimization
d. Immediate recognition as an expense
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67.
How should research and development costs be accounted for, according to an IASB
Statement?
a. Must be capitalized when incurred and then amortized over their estimated useful
lives.
b. Must be expensed in the period incurred.
c. May be either capitalized or expensed when incurred, depending upon the materiality
of the amounts involved.
d. Must be expensed in the period incurred unless it can be clearly demonstrated that the
expenditure will have alternative future uses or unless contractually reimbursable.
68.
Which of the following would be considered research and development?
a. Routine efforts to refine an existing product.
b. Periodic alterations to existing production lines.
c. Marketing research to promote a new product.
d. Construction of prototypes.
69.
Research and development costs
a. are intangible assets.
b. may result in the development of a patent.
c. are easily identified with specific projects.
d. all of the above.
70.
Which of the following is considered research and development costs?
a. Laboratory research aimed at discovery of new knowledge.
b. Application of research findings or other knowledge to a plan or design for a new
product or process.
c. Conceptual formulation and design of possible product or process alternatives.
d. all of the above.
71.
Which of the following is considered research and development costs?
a. Planned investigation undertaken with the prospect of gaining new scientific or
technical knowledge and understanding.
b. Application of research findings or other knowledge to a plan or design for a new
product or process.
c. Neither a nor b.
d. Both a and b.
72.
Which of the following costs should be capitalized in the year incurred?
a. Research and development costs.
b. Costs to internally generate goodwill.
c. Organizational costs.
d. Costs to successfully defend a patent.
73.
Which of the following costs would be capitalized?
a. Acquisition cost of equipment to be used on current research project only.
b. Engineering costs incurred to advance the product to the full production stage.
c. Cost of research to determine whether a market for the product exists.
d. Salaries of research staff.
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12 - 10 Test Bank for Intermediate Accounting, IFRS Edition, 3e
74.
Which of the following costs would not be capitalized?
a. Acquisition cost of equipment to be used on current and future research projects.
b. Engineering costs incurred to advance the project to the full production stage.
c. Cost incurred to file for patent.
d. Cost of testing prototype before economic feasibility has been demonstration.
75.
Which of the following costs should be excluded from research and development
expense?
a. Modification of the design of a product
b. Acquisition of R & D equipment for use on a current project only
c. Cost of marketing research for a new product
d. Engineering activity required to advance the design of a product to the manufacturing
stage
76.
If a company constructs a laboratory building to be used as a research and development
facility, the cost of the laboratory building is matched against earnings as
a. research and development expense in the period(s) of construction.
b. depreciation deducted as part of research and development costs.
c. depreciation or immediate write-off depending on company policy.
d. an expense at such time as productive research and development has been obtained
from the facility.
77.
Operating losses incurred during the start-up years of a new business should be
a. accounted for and reported like the operating losses of any other business.
b. written off directly against retained earnings.
c. capitalized as a deferred charge and amortized over five years.
d. capitalized as an intangible asset and amortized over a period not to exceed 20 years.
78. Start-up costs include organizational costs, such as legal and state fees incurred to
organize a new business entity. These costs should be
a. capitalized and never amortized.
b. capitalized and amortized over 40 years.
c. capitalized and amortized over 5 years.
d. expensed as incurred.
79. Which of the following would not be considered an R & D activity?
a. Adaptation of an existing capability to a particular requirement or customer's need.
b. Application of research findings or other knowledge to a plan for a new product or
process.
c. Laboratory research aimed at discovery of new knowledge.
d. Conceptual formulation and design of possible product or process alternatives.
80. Which of the following intangible assets should be shown as a separate item on the
statement of financial position?
a. Goodwill
b. Franchise
c. Patent
d. Trademark
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81. Which of the following should not be reported under the “Other income and expense”
section of the income statement?
a. Goodwill impairment losses.
b. Trade name amortization expense.
c. Recovery of impairment losses
d. All of these choices are correct.
82. The total amount of patent cost amortized to date is usually
a. shown in a separate Accumulated Patent Amortization account which is shown contra
to the Patent account.
b. shown in the current income statement.
c. reflected as credits in the Patent account.
d. reflected as a contra property, plant and equipment item.
83. Intangible assets are reported on the statement of financial position
a. with an accumulated depreciation account.
b. in the property, plant, and equipment section.
c. as a separate item.
d. None of these choices are correct.
Multiple Choice Answers—Conceptual
Item
31.
32.
33.
34.
35.
36.
37.
38.
Ans.
b
c
a
c
a
d
d
d
Item
39.
40.
41.
42.
43.
44.
45.
46.
Ans.
b
b
d
d
b
c
a
b
Item
47.
48.
49.
50.
51.
52.
53.
54.
Ans.
d
c
d
b
c
a
c
c
Item
55.
56.
57.
58.
59.
60.
61.
62.
Ans.
b
d
c
b
d
a
b
d
Item
63.
64.
65.
66.
67.
68.
69.
70.
Ans.
a
c
a
d
d
d
b
d
Item
71.
72.
73.
74.
75.
76.
77.
78.
Ans.
d
d
b
d
c
b
a
d
Item
79.
80.
81.
82.
83.
Ans.
a
a
b
c
c
MULTIPLE CHOICE—Computational
84. Lynne Corporation acquired a patent on May 1, 2019. Lynne paid cash of €40,000 to the
seller. Legal fees of €1,000 were paid related to the acquisition. What amount should be
debited to the patent account?
a. €1,000
b. €39,000
c. €40,000
d. €41,000
85. Contreras Corporation acquired a patent on May 1, 2019. Contreras paid cash of €35,000
to the seller. Legal fees of €900 were paid related to the acquisition. What amount should
be debited to the patent account?
a. €900
b. €34,100
c. €35,000
d. €35,900
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12 - 12 Test Bank for Intermediate Accounting, IFRS Edition, 3e
86. Mini Corp. acquires a patent from Maxi Co. in exchange for 2,500 shares of Mini Corp.’s
€5 par value ordinary shares and €85,000 cash. When the patent was initially issued to
Maxi Co., Mini Corp.’s shares were selling at €7.50 per share. When Mini Corp. acquired
the patent, its shares were selling for €9 a share. Mini Corp. should record the patent at
what amount?
a. € 97,500
b. €103,750
c. €107,500
d. € 85,000
87. Alonzo Co. acquires 3 patents from Shaq Corp. for a total of £300,000. The patents were
carried on Shaq’s books as follows: Patent AA: £5,000; Patent BB: £2,000; and Patent
CC: £3,000. When Alonzo acquired the patents their fair values were: Patent AA: £20,000;
Patent BB: £240,000; and Patent CC: £60,000. At what amount should Alonzo record
Patent BB?
a. £100,000
b. £240,000
c. £2,000
d. £225,000
88. Jeff Corporation purchased a limited-life intangible asset for €150,000 on May 1, 2017. It
has a useful life of 10 years. What total amount of amortization expense should have been
recorded on the intangible asset by December 31, 2019?
a. € -0b. €30,000
c. €40,000
d. €45,000
89. Rich Corporation purchased a limited-life intangible asset for €270,000 on May 1, 2017. It
has a useful life of 10 years. What total amount of amortization expense should have been
recorded on the intangible asset by December 31, 2019?
a. € -0-.
b. €54,000
c. €72,000
d. €81,000
90. Thompson Company incurred research and development costs of €100,000 and legal
fees of €50,000 to acquire a patent. The patent has a legal life of 20 years and a useful
life of 10 years. What amount should Thompson record as Patent Amortization Expense in
the first year?
a. €0.
b. € 5,000.
c. € 7,500.
d. €15,000.
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91. ELO Corporation purchased a patent for £135,000 on September 1, 2017. It had a useful
life of 10 years. On January 1, 2019, ELO spent £33,000 to successfully defend the patent
in a lawsuit. ELO feels that as of that date, the remaining useful life is 5 years. What
amount should be reported for patent amortization expense for 2019?
a. £30,900.
b. £30,000.
c. £28,200.
d. £23,400.
92.
Danks Corporation purchased a patent for €540,000 on September 1, 2017. It had a
useful life of 10 years. On January 1, 2019, Danks spent €132,000 to successfully defend
the patent in a lawsuit. Danks feels that as of that date, the remaining useful life is 5
years. What amount should be reported for patent amortization expense for 2019?
a. €134,400.
b. €120,000.
c. €123,600.
d. € 93,600.
93.
The general ledger of Vance Corporation as of December 31, 2019, includes the following
accounts:
Copyrights
Deposits with advertising agency (will be used to promote goodwill)
Bond sinking fund
Excess of cost over fair value of identifiable net assets of
Acquired subsidiary
Trademarks
£ 30,000
27,000
70,000
390,000
120,000
In the preparation of Vance's statement of financial position as of December 31, 2019,
what should be reported as total intangible assets?
a. £510,000.
b. £537,000.
c. £540,000.
d. £537,000.
94.
In January, 2014, Findley Corporation purchased a patent for a new consumer product for
€840,000. At the time of purchase, the patent was valid for fifteen years. Due to the
competitive nature of the product, however, the patent was estimated to have a useful life
of only ten years. During 2019 the product was permanently removed from the market
under governmental order because of a potential health hazard present in the product.
What amount should Findley charge to expense during 2019, assuming amortization is
recorded at the end of each year?
a. €560,000.
b. €420,000.
c. € 84,000.
d. € 56,000.
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12 - 14 Test Bank for Intermediate Accounting, IFRS Edition, 3e
95.
Day Company purchased a patent on January 1, 2018 for €480,000. The patent had a
remaining useful life of 10 years at that date. In January of 2019, Day successfully
defends the patent at a cost of €216,000, extending the patent’s life to 12/31/30. What
amount of amortization expense would Kerr record in 2019?
a. €48,000
b. €54,000
c. €58,000
d. €72,000
96.
On January 2, 2019, Klein Co. bought a trademark from Royce, Inc. for €1,200,000. An
independent research company estimated that the remaining useful life of the trademark
was 10 years. Its unamortized cost on Royce’s books was €900,000. In Klein’s 2019
income statement, what amount should be reported as amortization expense?
a. €120,000.
b. € 90,000.
c. € 60,000.
d. € 45,000.
97. A company acquires a patent for a drug with a remaining legal and useful life of six years
on January 1, 2017 for £2,100,000. The company uses straight-line amortization for
patents. On January 2, 2019, a new patent is received for a timed-release version of the
same drug. The new patent has a legal and useful life of twenty years. The least amount
of amortization that could be recorded in 2019 is
a. £350,000.
b. £ 70,000.
c. £ 95,454.
d. £ 80,500.
98. Blue Sky Company’s 12/31/19 statement of financial position reports assets of €5,000,000
and liabilities of €2,000,000. All of Blue Sky’s assets’ book values approximate their fair
value, except for land, which has a fair value that is €300,000 greater than its book value.
On 12/31/19, Horace Wimp Corporation paid €5,400,000 to acquire Blue Sky. What
amount of goodwill should Horace Wimp record as a result of this purchase?
a. € -0b. €400,000
c. €2,100,000
d. €2,400,000
99. Dotel Company’s 12/31/19 statement of financial position reports assets of €6,000,000
and liabilities of €2,500,000. All of Dotel’s assets’ book values approximate their fair value,
except for land, which has a fair value that is €400,000 greater than its book value. On
12/31/19, Egbert Corporation paid €6,500,000 to acquire Dotel. What amount of goodwill
should Egbert record as a result of this purchase?
a. € -0b. € 500,000
c. €2,600,000
d. €3,000,000
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12 - 15
100. Floyd Company purchases Haeger Company for €840,000 cash on January 1, 2019. The
book value of Haeger Company’s net assets, as reflected on its December 31, 2018
statement of financial position is €620,000. An analysis by Floyd on December 31, 2018
indicates that the fair value of Haeger’s tangible assets exceeded the book value by
€60,000, and the fair value of identifiable intangible assets exceeded book value by
€45,000. How much goodwill should be recognized by Floyd Company when recording
the purchase of Haeger Company?
a. € -0b. €220,000
c. €160,000
d. €115,000
101. During 2019, Bond Company purchased the net assets of May Corporation for
£1,300,000. On the date of the transaction, May had £300,000 of liabilities. The fair value
of May's assets when acquired were as follows:
Current assets
Noncurrent assets
£ 540,000
1,260,000
£1,800,000
How should the £200,000 difference between the fair value of the net assets acquired
(£1,500,000) and the cost (£1,300,000) be accounted for by Bond?
a. The £200,000 difference should be credited to retained earnings.
b. The £200,000 difference should be recognized as a gain.
c. The current assets should be recorded at £540,000 and the noncurrent assets should
be recorded at £1,060,000.
d. A deferred credit of £200,000 should be set up and then amortized to income over a
period not to exceed forty years.
102. Grande Company purchases Enfant Company for €14,485,000 cash on January 1, 2019.
The book value of Enfant Company’s net assets reported on its December 31, 2018
statement of financial position was €12,620,000. Grande's December 31, 2018 analysis
indicated that the fair value of Enfant's tangible assets exceeded the book value by
€860,000, and the fair value of identifiable intangible assets exceeded book value by
€145,000. How much goodwill should be recognized by Grande Company when recording
the purchase of Enfant?
a. $ -0b. €860,000
c. €1,865,000
d. €2,870,000
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12 - 16 Test Bank for Intermediate Accounting, IFRS Edition, 3e
Use the following information for questions 103 and 104.
On January 1, 2017, Bingham Inc. purchased a patent with a cost €2,320,000, a useful life of 5
years. The company uses straight-line depreciation. At December 31, 2018, the company
determines that impairment indicators are present. The fair value less costs to sell the patent is
estimated to be €1,080,000. The patent's value-in-use is estimated to be €1,130,000. The asset's
remaining useful life is estimated to be 2 years.
103. Bingham's 2018 income statement will report Loss on Impairment of
a. €0.
b. €262,000.
c. €312,000.
d. €1,190,000.
104. The company's 2019 income statement will report amortization expense for the patent of
a. €377,000.
b. €464,000.
c. €565,000.
d. €1,190,000.
105. On August 1, 2017, Li Inc. purchased a license with a cost of HK$10,530,000 and a useful
life of 10 years. At December 31, 2019, when the carrying value of the asset was
HK$7,985,250, the company determined that impairment indicators were present. The fair
value less costs to sell the license was estimated to be HK$7,386,400. The asset's value in-use is estimated to be HK$7,605,000. Li's 2019 income statement will report Loss on
Impairment of
a. HK$218,600.
b. HK$380,250.
c. HK$598,850.
d. HK$2,545,000.
Use the following information for questions 106 and 107.
On January 2, 2018, Lutz Inc. purchased a patent with a cost CHF1,880,000 a useful life of
4 years. At December 31, 2018, and December 31, 2019, the company determines that
impairment indicators are present. The following information is available for impairment testing at
each year end:
Fair value less costs to sell
Value-in-use
12/31/2018
CHF1,430,000
CHF1,500,000
12/31/2019
CHF840,000
CHF890,000
No changes were made in the asset's estimated useful life.
106. The company's 2018 income statement will report
a. Amortization Expense of CHF470,000
b. Amortization Expense of CHF470,000 and Loss on Impairment of CHF20,000.
c. Amortization Expense of CHF470,000 and a Recovery of Impairment of CHF90,000.
d. Loss on impairment of 380,000.
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107. The company's 2019 income statement will report
a. Amortization Expense of CHF470,000.
b. Amortization Expense of CHF500,000 and Loss on Impairment of CHF110,000.
c. Amortization Expense of CHF470,000 and a Loss on Impairment of CHF50,000.
d. Loss on impairment of CHF140,000.
108. On June 2, 2018, Lindt Inc. purchased a trademark with a cost €9,440,000. The trademark
is classified as an indefinite-life intangible asset. At December 31, 2018 and December
31, 2019, the following information is available for impairment testing:
12/31/2019
12/31/2018
Fair value less costs to sell
€9,115,000
€9,050,000
Value-in-use
€9,370,000
€9,550,000
The 2019 income statement will report
a.
b.
c.
d.
no Impairment Loss or Recovery of Impairment.
Impairment Loss of €70,000.
Recovery of Impairment of €70,000.
Recovery of Impairment of €180,000.
109. India Enterprises has four divisions. It acquired one of them, Bombay Products, on
January 1, 2019 for Rs400,000,000, and recorded goodwill of Rs50,750,000 as a result
of that purchase. At December 31, 2019, Bombay Products had a recoverable amount of
Rs375,000,000. The carrying value of the company’s net assets at December 31, 2019
was Rs355,000,000 (including goodwill). What amount of loss on impairment of goodwill
should India record in 2019?
a. Rs
-0b. Rs20,000,000
c. Rs25,000,000
d. Rs45,000,000
110. Chow Company purchased the Chee Division in 2019 and appropriately recorded
HK$6,000,000 of goodwill related to the purchase. On December 31, 2019, the
recoverable amount of Chee Division is HK$68,000,000 and it is carried on Chow’s books
for a total of HK$64,000,000, including the goodwill. What goodwill impairment should be
recognized by Chow in 2019?
a. HK$0.
b. HK$2,000,000.
c. HK$4,000,000.
d. HK$10,000,000.
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12 - 18 Test Bank for Intermediate Accounting, IFRS Edition, 3e
111. On June 2, 2018, Olsen Inc. purchased a trademark with a cost €2,360,000. The
trademark is classified as an indefinite-life intangible asset. At December 31, 2018 and
December 31, 2019, the following is available for impairment testing:
Fair value less costs to sell
Value-in-use
12/31/2018
€2,280,000
€2,340,000
12/31/2019
€2,265,000
€2,390,000
The 2019 income statement will report
a. no Impairment Loss or Recovery of Impairment.
b. Impairment Loss of €20,000.
c. Recovery of Impairment of €20,000.
d. Recovery of Impairment of €50,000.
112. Tokyo Enterprises has four divisions. It acquired on of them, Green Products, on January
1, 2019 for ¥640,000,000, and recorded goodwill of ¥81,200 as a result of that purchase.
At December 31, 2019, Green Products had a recoverable amount of ¥592,000,000. The
carrying value of the Company’s net assets at December 31, 2019 was
¥568,000,000(including goodwill). What amount of loss on impairment of goodwill should
Tokyo record in 2019?
a. ¥
-0b. ¥24,000,000
c. ¥48,000,000
d. ¥72,000,000
Use the following information for questions 113 and 114.
On January 1, 2017, Dillman Inc. purchased a patent with a cost €2,320,000, a useful life of 5
years. The company uses straight-line depreciation. At December 31, 2018, the company
determines that impairment indicators are present. The fair value less costs to sell the patent is
estimated to be €1,080,000. The patent's value-in-use is estimated to be €1,130,000. The asset's
remaining useful life is estimated to be 2 years.
113. Bingham's 2018 income statement will report Loss on Impairment of
a. €0.
b. €262,000.
c. €312,000
d. €1,130,000
114. The company's 2019 income statement will report amortization expense for the patent of
a. €375,000.
b. €464,000.
c. €565,000.
d. €1,130,000.
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12 - 19
115. On August 1, 2017, Wei Inc. purchased a license with a cost of HK$4,212,000 and a
useful life of 10 years. At December 31, 2019, when the carrying value of the asset was
HK$3,194,100, the company determined that impairment indicators were present. The fair
less costs to sell the license was estimated to be HK$2,954,560. The asset's value-in-use
is estimated to be HK$3,042,000. Wei's 2019 income statement will report Loss on
Impairment of
a. HK$54,650.
b. HK$152,100.
c. HK$149,712.
d. HK$636,250.
Use the following information for questions 116 and 117.
On January 2, 2018, Ace Inc. purchased a patent with a cost CHF2,820,000, and a useful life of 4
years. At December 31, 2018, and December 31, 2019, the company determines that impairment
indicators are present. The following information is available for impairment testing at each year
end:
Fair value less cost to sell
Value-in-use
12/31/2018
CHF2,145,000
CHF2,250,000
12/31/2019
CHF1,260,000
CHF1,335,000
No changes were made in the asset's estimated useful life.
116. The company's 2019 income statement will report
a. Amortization Expense of CHF705,000.
b. Amortization Expense of CHF705,000 and Loss on Impairment of CHF30,000.
c. Amortization Expense of CHF705,000 and a Recovery of Impairment of CHF135,000.
d. Loss on impairment of CHF570,000.
117. The company's 2019 income statement will report
a. Amortization Expense of CHF705,000.
b. Amortization Expense of CHF750,000 and Loss on Impairment of CHF165,000.
c. Amortization Expense of CHF705,000 and a Loss of Impairment of CHF75,000.
d. Loss on impairment of 210,000.
118.
The following information is available for Barkley Company’s patents:
Cost
Carrying amount
Recoverable amount
€2,280,000
1,290,000
975,000
Barkley would record a loss on impairment of
a.
-0b. €315,000.
c. €990,000.
d. €1,305,000.
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12 - 20 Test Bank for Intermediate Accounting, IFRS Edition, 3e
119. Harrel Company acquired a patent on an oil extraction technique on January 1, 2018 for
€6,000,000. It was expected to have a 10 year life and no residual value. Harrel uses
straight-line amortization for patents. On December 31, 2019, the recoverable amount of
the patent was estimated to be €5,400,000. At what amount should the patent be carried
on the December 31, 2019 statement of financial position?
a. €6,000,000
b. €5,400,000
c. €4,800,000
d. €3,360,000
120. Malrom Manufacturing Company acquired a patent on a manufacturing process on
January 1, 2018 for €4,000,000. It was expected to have a 10 year life and no residual
value. Malrom uses straight-line amortization for patents. On December 31, 2019, the
recoverable amount of the patent was estimated to be €2,720,000. At what amount should
the patent be carried on the December 31, 2019 statement of financial position?
a. €4,000,000
b. €3,600,000
c. €3,200,000
d. €2,720,000
121. In 2018, Edwards Corporation incurred research and development costs as follows:
Materials and equipment
Personnel
Indirect costs
£105,000
120,000
150,000
£375,000
These costs relate to a product that will be marketed in 2019. It is estimated that these
costs will be recouped by December 31, 2021, but its process has not achieved economic
viability. The equipment has no alternative future use. What is the amount of research and
development costs that should be expensed in 2018?
a. £0.
b. £225,000.
c. £270,000.
d. £375,000.
122. Hall Co. incurred research and development costs in 2019 as follows:
Materials used in research and development projects
€ 850,000
Equipment acquired that will have alternate future uses in future research
and development projects
3,000,000
Depreciation for 2019 on above equipment
300,000
Personnel costs of persons involved in research and development projects
750,000
Consulting fees paid to outsiders for research and development projects
300,000
Indirect costs reasonably allocable to research and development projects
225,000
€5,425,000
Assume economic viability has not been achieved.
The amount of research and development costs charged to Hall's 2019 income statement
should be
a. €1,900,000.
b. €2,200,000.
c. €2,425,000.
d. €4,900,000.
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Intangible Assets
123. Loazia Inc. incurred the following costs during the year ended December 31, 2019:
Laboratory research aimed at discovery of new knowledge
Costs of testing prototype and design modifications (economic viability
not achieved)
Quality control during commercial production, including routine testing
of products
Construction of research facilities having an estimated useful life of
6 years but no alternative future use
€200,000
45,000
270,000
360,000
The total amount to be classified and expensed as research and development in 2019 is
a. €515,000.
b. €875,000.
c. €605,000.
d. €315,000.
124. MaBelle Corporation incurred the following costs in 2019:
Acquisition of R&D equipment with a useful life of
4 years in R&D projects
€500,000
Start-up costs incurred when opening a new plant
140,000
Advertising expense to introduce a new product
700,000
Engineering costs incurred to advance a product to full
production stage (economic viability not achieved)
400,000
What amount should MaBelle record as research & development expense in 2019?
a. € 525,000
b. € 640,000
c. € 900,000
d. €1,040,000
125. Leeper Corporation incurred the following costs in 2019:
Acquisition of R&D equipment with a useful life of
4 years in R&D projects
£900,000
Cost of making minor modifications to an existing product
140,000
Advertising expense to introduce a new product
700,000
Engineering costs incurred to advance a product to full
production stage (economic viability not achieved)
600,000
What amount should Leeper record as research & development expense in 2019?
a. £ 825,000
b. £1,040,000
c. £1,375,000
d. £1,740,000
126. Platteville Corporation has the following account balances at 12/31/19:
Amortization expense
€ 10,000
Goodwill
140,000
Patents, net of €30,000 amortization
90,000
What amount should Platteville report for intangible assets on the 12/31/19 statement of
financial position?
a. € 90,000
b. €120,000
c. €230,000
d. €240,000
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12 - 22 Test Bank for Intermediate Accounting, IFRS Edition, 3e
Multiple Choice Answers—Computational
Item
84.
85.
86.
87.
88.
89.
90.
91.
Ans.
d
d
c
d
c
c
b
b
Item
92.
93.
94.
95.
96.
97.
98.
99.
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
b
c
b
b
a
b
c
c
100.
101.
102.
103.
104.
105.
106.
107.
d
b
b
b
c
b
a
c
108.
109.
110.
111.
112.
113.
114.
115.
c
a
a
c
a
b
c
b
116.
117.
118.
119.
120.
121.
122.
123.
a
c
b
c
d
d
c
c
124.
125.
126.
a
a
c
MULTIPLE CHOICE—CPA Adapted
127.
Lopez Corp. incurred €420,000 of research costs to develop a product for which a patent
was granted on January 2, 2014. Legal fees and other costs associated with registration
of the patent totaled €80,000. On March 31, 2019, Lopez paid €130,000 for legal fees in a
successful defense of the patent. The total amount capitalized for the patent through
March 31, 2019 should be
a. €210,000.
b. €500,000.
c. €550,000.
d. €650,000.
128.
On June 30, 2019, Cey, Inc. exchanged 2,000 shares of Seely Corp. €25 par value
ordinary shares for a patent owned by Gore Co. The Seely stock was acquired in 2019 at
a cost of €55,000. At the exchange date, Seely ordinary shares had a fair value of €48 per
share, and the patent had a net carrying value of €110,000 on Gore's books. Cey should
record the patent at
a. €50,000.
b. €55,000.
c. €96,000.
d. €110,000.
129.
On May 5, 2019, MacDougal Corp. exchanged 2,000 shares of its £25 par value ordinary
treasury shares for a patent owned by Masset Co. The treasury shares were acquired in
2018 for £45,000. At May 5, 2019, MacDougal's ordinary shares was quoted at £38 per
share, and the patent had a carrying value of £68,000 on Masset's books. MacDougal
should record the patent at
a. £45,000.
b. £50,000.
c. £60,000.
d. £76,000.
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130.
Ely Co. bought a patent from Baden Corp. on January 1, 2019, for €360,000. An
independent consultant retained by Ely estimated that the remaining useful life at January
1, 2019 is 15 years. Its unamortized cost on Baden’s accounting records was €180,000;
the patent had been amortized for 5 years by Baden. How much should be amortized for
the year ended December 31, 2019 by Ely Co.?
a. €0.
b. €18,000.
c. €24,000.
d. €36,000.
131.
January 2, 2016, Koll, Inc. purchased a patent for a new consumer product for €450,000.
At the time of purchase, the patent was valid for 15 years; however, the patent’s useful life
was estimated to be only 10 years due to the competitive nature of the product. On
December 31, 2019, the product was permanently withdrawn from the market under
governmental order because of a potential health hazard in the product. What amount
should Koll charge against income during 2019, assuming amortization is recorded at the
end of each year?
a. € 45,000
b. €270,000
c. €315,000
d. €360,000
132.
On January 1, 2015, Russell Company purchased a copyright for £1,200,000, having an
estimated useful life of 16 years. In January 2019, Russell paid £180,000 for legal fees in
a successful defense of the copyright. Copyright amortization expense for the year ended
December 31, 2019, should be
a. £0.
b. £75,000.
c. £86,250.
d. £90,000.
133.
Which of the following legal fees should be capitalized?
Legal fees to
obtain a copyright
a.
No
b.
No
c.
Yes
d.
Yes
134.
Legal fees to successfully
defend a trademark
No
Yes
Yes
No
Which of the following costs of goodwill should be amortized over their estimated useful
lives?
Costs of goodwill from a
Costs of developing
business combination
goodwill internally
a.
No
No
b.
No
Yes
c.
Yes
Yes
d.
Yes
No
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12 - 24 Test Bank for Intermediate Accounting, IFRS Edition, 3e
135.
During 2019, Leon Co. incurred the following costs:
Testing in search for process alternatives
€ 380,000
Costs of marketing research for new product
250,000
Modification of the formulation of a process
510,000
Research and development services performed by Beck Corp. for Leon
425,000
In Leon's 2019 income statement, research and development expense should be
a. €510,000.
b. €935,000.
c. €1,315,000.
d. €1,565,000.
136.
Riley Co. incurred the following costs during 2019:
Significant modification to the formulation of a chemical product
Trouble-shooting in connection with breakdowns during commercial
production
Cost of exploration of new formulas
Seasonal or other periodic design changes to existing products
Laboratory research aimed at discovery of new technology
€160,000
150,000
200,000
185,000
275,000
In its income statement for the year ended December 31, 2019, Riley should report
research and development expense of
a. €635,000.
b. €785,000.
c. €820,000.
d. €970,000.
Multiple Choice Answers—CPA Adapted
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
127.
128.
a
c
129.
130.
d
c
131.
132.
c
d
133.
134.
c
a
135.
136.
c
a
DERIVATIONS — Computational
No.
Answer Derivation
84.
d
€40,000 + €1,000 = €41,000.
85.
d
€35,000 + €900 = €35,900.
86.
c
(2,500 x €9) + €85,000 = €107,500.
87.
d
£300,000 x (£240,000 / £320,000) = £225,000.
88.
c
(€150,000 ÷ 10) × 2 2/3 = €40,000.
89.
c
(€270,000 ÷ 10) × 2 2/3 = €72,000.
90.
b
€50,000 ÷ 10 = €5,000.
91.
b
£135,000 – [(£135,000 ÷ 10) × 1 1/3] = £117,000.
(£117,000 + £33,000) ÷ 5 = £30,000.
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DERIVATIONS — Computational (cont.)
No.
Answer Derivation
92.
b
€540,000 – [(€540,000 ÷ 10) × 1 1/3] = €468,000.
(€468,000 + €132,000) ÷ 5 = €120,000.
93.
c
£30,000 + £390,000 + £120,000 = £540,000.
94.
b
(€840,000 ÷ 10) × 5 = €420,000.
95.
b
[(€480,000 – €48,000) + €216,000] ÷ 12 = €54,000.
96.
a
€1,200,000 ÷ 10 = €120,000.
97.
b
£2,100,000 – [(£2,100,000 ÷ 6) × 2] = £1,400,000.
£1,400,000 ÷ 20 = £70,000.
98.
c
(€5,000,000 + €300,000) – €2,000,000 = €3,300,000
€5,400,000 – €3,300,000 = €2,100,000.
99.
c
(€6,000,000 + €400,000) – €2,500,000 = €3,900,000.
€6,500,000 – €3,900,000 = €2,600,000.
100.
d
€620,000 + €60,000 + €45,000 = €725,000.
€840,000 – €725,000 = €115,000.
101.
b
£1,500,000 – £1,300,000 = £200,000 gain.
102.
b
€14,485,000 – (€12,620,000 + €860,000 + €145,000) = 860,000
103.
b
€2,320,000/ 5 = €464,000 × 2 = €928,000; €2,320,000 – €928,000 =
€1,392,000; €1,392,000 – €1,130,000 = €262,000
104.
c
€1,130,000/ 2 = €565,000
105.
b
HK$7,985,250 – HK$7,605,000 = HK$380,250
106.
a
CHF1,880,000/ 4 = CHF470,000; CHF1,880,000 – CHF470,000 =
CHF1,410,000
107.
c
CHF1,410,000 – CHF470,000 = CHF940,000; CHF940,000 – CHF890,000 =
CHF50,000
108.
c
€9,440,000 – €9,370,000 = €70,000
109.
a
Recoverable amount > Carrying value
110.
a
HK$68,000,000 > HK$64,000,000
111.
c
€2,360,000 – €2,340,000 = €20,000
112.
a
Recoverable amount > Carrying value
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12 - 26 Test Bank for Intermediate Accounting, IFRS Edition, 3e
DERIVATIONS — Computational (cont.)
No.
Answer Derivation
113.
b
€2,320,000/ 5 = €464,000 × 2 = €928,000; €2,320,000 – €928,000 =
€1,392,000; €1,392,000 – €1,130,000 = €262,000
114.
c
€1,130,000/ 2 = €565,000
115.
b
HK$3,194,100 – HK$3,042,000 = HK$152,100
116.
a
CHF2,820,000/ 4 = CHF705,000; CHF2,820,000 – CHF705,000 =
CHF2,115,000
117.
c
CHF2,115,000 – CHF705,000 = CHF1,410,000; CHF1,410,000 –
CHF1,335,000 = CHF75,000
118.
b
€1,290,000 – €975,000 = €315,000.
119.
c
€6,000,000 – [(€6,000,000 ÷ 10) 2] = €4,800,000.
120.
d
€4,000,000 – [(€4,000,000 ÷ 10) × 2] = €3,200,000.
Since €3,200,000 > €2,720,000, patent is reported at €2,720,000.
121.
d
Expense total of £375,000.
122.
c
€5,425,000 – €3,000,000 = €2,425,000.
123.
c
€200,000 + €45,000 + €360,000 = €605,000.
124.
a
(€500,000 ÷ 4) + €400,000 = €525,000.
125.
a
(£900,000 ÷ 4) + £600,000 = £825,000.
126.
c
€140,000 + €90,000 = €230,000.
DERIVATIONS — CPA Adapted
127.
a
€80,000 + €130,000 = €210,000.
128.
c
2,000 × €48 = €96,000.
129.
d
2,000 × £38 = £76,000.
130.
c
€360,000 ÷ 15 = €24,000.
131.
c
€450,000 – [(€450,000 ÷ 10) × 3] = €315,000.
132.
d
(£1,200,000 – [(£1,200,000 ÷ 16) × 4] = £900,000
(£900,000 + £180,000) ÷ 12 = £90,000.
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Intangible Assets
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12 - 28 Test Bank for Intermediate Accounting, IFRS Edition, 3e
DERIVATIONS — CPA Adapted (cont.)
No.
Answer Derivation
133.
c
Conceptual.
134.
a
Conceptual.
135.
c
€380,000 + €510,000 + €425,000 = €1,315,000.
136.
a
€160,000 + €200,000 + €275,000 = €635,000.
EXERCISES
Ex. 12-137
Intangible assets have three main characteristics: (1) they are identifiable, (2) they lack
physical existence, and (3) they are not monetary assets.
Instructions
(a) Explain why intangibles are classified as assets if they have no physical existence.
(b) Explain why intangibles are not considered monetary assets.
Solution 12-137
(a) Intangible assets derive their value from the rights and privileges granted to the
company using them.
(b) Intangibles are not considered monetary assets because they do not derive their value
from the right (claim) to receive cash or cash equivalents in the future.
Ex. 12-138
Intangible assets may be internally generated or purchased from another party. In either
case, what costs should be included in the initial valuation of the asset is an issue.
Instructions
(a) Identify the typical costs included in the cash purchase of an intangible asset.
(b) Discuss how to determine the cost of an intangible asset acquired in a non-cash
transaction.
(c) Describe how to determine the cost of several intangible assets acquired in a “basket
purchase.”
Solution 12-138
(a) The typical costs included in the purchase of an intangible asset are: purchase price,
legal fees, and other incidental expenses.
(b) In a non-cash acquisition of an intangible asset, the initial cost of the intangible is
either the fair value of the consideration given or the fair value of the intangible
received, whichever is more clearly evident.
(c) When several intangible assets are acquired in a “basket purchase”, the cost of the
individual assets is based on their relative fair values.
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Ex. 12-139
Why does the accounting profession make a distinction between internally created intangible
assets and purchased intangible assets?
Solution 12-139
When intangible assets are created internally, it is often difficult to determine the validity of
any future service potential. To permit deferral of these types of costs would lead to a great
deal of subjectivity because management could argue that almost any expense could be
capitalized on the basis that it will increase future benefits. The cost of purchased intangible
assets, however, is capitalized because its cost can be objectively verified and reflects its fair
value at the date of acquisition.
Ex. 12-140—Short essay questions.
1.
2.
What are intangible assets?
How are limited-life intangibles accounted for subsequent to acquisition?
Solution 12-140
1. Intangible assets are assets that derive their value from the rights and privileges granted to
the company using them. They provide services over a period of years and are normally
classified as long-term assets. Examples are patents, copyrights, franchises, goodwill,
trademarks, and trade names.
2. Limited-life intangibles are amortized by systematic charges to expense over their useful life.
In addition, they are reviewed for impairment each year. Impairment occurs when the
recoverable amount is less than the carrying amount of the intangible asset. The intangible
asset is reduced for the amount by which its carrying value exceeds the recoverable amount
at year end.
Ex. 12-141
If intangible assets are acquired for shares, how is the cost of the intangible determined?
Solution 12-141
If intangible assets are acquired for shares, the cost of the intangible is the fair value of the
consideration given or the fair value of the consideration received, whichever is more clearly
evident.
Ex. 12-142
Redstone Company spent €180,000 developing a new process (economic viability not
achieved), €55,000 in legal fees to obtain a patent, and €91,000 to market the process that
was patented. How should these costs be accounted for in the year they are incurred?
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12 - 30 Test Bank for Intermediate Accounting, IFRS Edition, 3e
Solution 12-142
The €180,000 should be expensed when incurred as research and development expense.
The €91,000 is expensed as selling and promotion expense when incurred. The €55,000 of
costs to legally obtain the patent should be capitalized and amortized over the useful or legal
life of the patent, whichever is shorter.
Ex. 12-143
Intangible assets have either a limited useful life or an indefinite useful life. How should these
two different types of intangibles be amortized?
Solution 12-143
Limited-life intangible assets should be amortized by systematic charges to expense over the
shorter of their useful life or legal life. An intangible asset with an indefinite life is not
amortized.
Ex. 12-144
What are factors to be considered in estimating the useful life of an intangible asset?
Solution 12-144
Factors to be considered in determining useful life are:
a. The expected use of the asset by the company.
b. The effects of obsolescence, demand, competition, and other economic factors.
c. Any legal, regulatory or contractual provisions that enable renewal or extension of the
asset’s legal or contractual life without substantial cost.
d. The level of maintenance expenditure required to obtain the expected future cash flows
from the asset.
e. Any legal, regulatory, or contractual provisions that may limit the useful life.
f. The expected useful life of another asset or a group of assets to which the useful life of
the intangible asset may relate.
Ex. 12-145
Barkley Corp. obtained a trade name in January 2017, incurring legal costs of €20,000. The
company amortizes the trade name over 8 years. Barkley successfully defended its trade
name in January 2018, incurring €4,900 in legal fees. At the beginning of 2019, based on new
marketing research, Barkley determines that the recoverable amount of the trade name is
€16,500.
Instructions
Prepare the necessary journal entries for the years ending December 31, 2017, 2018, and
2019. Show all computations.
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Solution 12-145
2017
Dec. 31
2018
Dec. 31
2019
Dec. 31
Amortization Expense - Trade Name
Trade Name
(€20,000 ÷ 8 years)
2,500
2,500
Amortization Expense – Trade Name 3,200
Trade Name
[(€20,000 - €2,500 + €4,900) ÷ 7 years]
Loss on Impairment
Trade Name
3,200
2,700
2,700
Carrying value = €20,000 - €2,500 + €4,900 - €3,200 = €19,200
Carrying value
= €19,200
Recoverable amount = (16,500)
Loss on impairment = € 2,700
2019
Dec. 31
Amortization Expense – Trade Name 2,750
Trade Name
(€16,500 ÷ 6 years)
2,750
Ex. 12-146
Listed below is a selection of accounts found in the general ledger of Marshall Corporation
as of December 31, 2019:
Accounts receivable
Goodwill
Organization costs
Prepaid insurance
Radio broadcasting rights
Notes receivable
Trade name
Research & development costs
Internet domain name
Initial operating loss
Non-competition agreement
Customer list
Video copyrights
Instructions
List those accounts that should be classified as intangible assets.
Solution 12-146
Goodwill
Radio broadcasting rights
Trade name
Internet domain name
Non-competition agreement
Customer list
Video copyrights
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12 - 32 Test Bank for Intermediate Accounting, IFRS Edition, 3e
Ex. 12-147
Define the following terms.
(a) Goodwill (b) Bargain purchase
Solution 12-147
(a) Varying approaches are used to define goodwill. They are:
 Goodwill is measured as the excess of the cost of the purchase over the fair value
identifiable of the net assets acquired.
 Goodwill is sometimes referred to as a plug, a gap filler, or a master valuation
account.
 Goodwill represents the future economic benefits arising from the other assets
acquired in a business combination that are not individually identified and
separately recognized.
(b) A bargain purchase occurs when the fair value of the identifiable net assets purchased
is higher than the cost. This situation results from a market imperfection. In this case,
the seller would have been better off to sell the assets individually than in total.
However, situations do occur (e.g., a forced liquidation or distressed sale due to the
death of the company founder), in which the purchase price is less than the value of the
identifiable net assets.
Ex. 12-148—Carrying value of patent.
Sisco Co. purchased a patent from Thornton Co. for €220,000 on July 1, 2016. Expenditures of
€68,000 for successful litigation in defense of the patent were paid on July 1, 2019. Sisco
estimates that the useful life of the patent will be 20 years from the date of acquisition.
Instructions
Prepare a computation of the carrying value of the patent at December 31, 2019.
Solution 12-148
Cost of patent
Amortization 7/1/16 to 7/1/19 [(€220,000 ÷ 20) × 3]
Carrying value at 7/1/19
Cost of successful defense
Carrying value
Amortization 7/1/19 to 12/31/19 [€255,000 × 1/(20 – 3) × 1/2]
Carrying value at 12/31/19
€220,000
(33,000)
187,000
68,000
255,000
(7,500)
€247,500
Ex. 12-149—Accounting for patent.
In early January 2017, Lerner Corporation applied for a patent, incurring legal costs of £60,000. In
January 2018, Lerner incurred £9,000 of legal fees in a successful defense of its patent.
Instructions
(a) Compute 2017 amortization, 12/31/17 carrying value, 2018 amortization, and 12/31/18
carrying value if the company amortizes the patent over 10 years.
(b) Compute the 2019 amortization and the 12/31/19 carrying value, assuming that at the
beginning of 2019, based on new market research, Lerner determines that the recoverable
amount of the patent is £48,000.
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Solution 12-149
(a) 2017 amortization: £60,000 ÷ 10 yrs. = £6,000
12/31/17 carrying value: £60,000 – £6,000 = £54,000
2018 amortization: (£54,000 + £9,000) ÷ 9 yrs. = £7,000
12/31/18 carrying value: (£54,000 + £9,000) – £7,000 = £56,000
(b) Loss on impairment: £56,000 carrying value – £48,000 recoverable amount = £8,000
2019 amortization: £48,000 ÷ 8 yrs. = £6,000
12/31/19 carrying value: £48,000 – £6,000 = £42,000
Ex. 12-150
Under what circumstances is it appropriate to record goodwill in the accounts? How should
goodwill, properly recorded on the books, be written off in accordance with IFRS?
Solution 12-150
Goodwill is recorded only when it is acquired through a business combination. Goodwill
acquired in a business combination is considered to have an indefinite life and therefore
should not be amortized, but should be tested for impairment on at least an annual basis.
Ex. 12-151
Fred’s Company is considering the write-off of a limited life intangible asset because of its
lack of profitability. Explain to the management of Fred’s how to determine whether a
writeoff is permitted.
Solution 12-151
Accounting standards require that if events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable, then the carrying amount of the
asset should be assessed. If the recoverable amount is less than the carrying amount, the
asset has been impaired. The impairment loss is measured as the amount by which the
carrying amount exceeds the recoverable amount of the asset. The recoverable amount of
assets is the higher of fair value less costs to sell or value-in-use. Value-in-use is the
present value of cash flows expected from the future use and eventual sale of the asset at
the end of its useful life.
Ex. 12-152
Leon Corp. purchased Spinks Co. 4 years ago and at that time recorded goodwill of
€300,000. The Sinks Division’s net assets, including goodwill, have a carrying amount of
€720,000. The recoverable amount of the division is estimated to be €750,000.
Instructions
(a) Explain whether or not Leon Corp. must prepare an entry to record impairment of the
goodwill. Include the entry, if necessary.
(b) Repeat instruction (a) assuming that the recoverable amount of the division is estimated
to be €650,000.
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12 - 34 Test Bank for Intermediate Accounting, IFRS Edition, 3e
Solution 12-152
(a) The recoverable amount of the division (€750,000) exceeds the carrying amount of its
assets (€720,000). Therefore, goodwill is not impaired and no entry is necessary.
(b) The recoverable amount of the division (€650,000) is less than the carrying amount of
its assets (€720,000). Therefore, goodwill is impaired. The amount of the impairment
loss is €70,000.
Loss on Impairment……………… 70,000
Goodwill…………………….
70,000
Ex. 12-153
Presented below is information related to copyrights owned by Wamser Corporation at December
31, 2018.
Cost
€2,700,000
Carrying amount
2,350,000
Recoverable amount
1,500,000
Assume Wamser will continue to use this asset in the future. As of December 31, 2018, the
copyrights have a remaining useful life of 5 years.
Instructions
(a) Prepare the journal entry (if any) to record the impairment of the asset at December 31,
2018.
(b) Prepare the journal entry to record amortization expense for 2019.
(c) The recoverable amount of the copyright at December 31, 2019 is €1,600,000. Prepare the
journal entry (if any) necessary to record this increase in fair value.
Solution 12-153
(a)
December 31, 2018
Loss on Impairment.....................................................................
Copyrights.........................................................................
Carrying amount
Recoverable amount
Loss on impairment
(b)
850,000
€2,350,000
1,500,000
€ 850,000
December 31, 2019
Amortization Expense.................................................................
Copyrights.........................................................................
New carrying amount
Useful life
Amortization
850,000
300,000
300,000
€1,500,000
÷ 5 years
€ 300,000
(c)
Copyrights...................................................................................
Recovery of Impairment Loss...........................................
[€1,600,000 – (€1,500,000 – €300,000)]
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400,000
400,000
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Intangible Assets
12 - 35
Ex. 12-154
Research and development activities may include (a) personnel costs, (b) materials and
equipment costs, and (c) indirect costs. What is the recommended accounting treatment for
these three types of R&D costs?
Solution 12-154
(a) Personnel type costs incurred in R & D activities should be expensed as incurred.
(b) Materials and equipment costs should be expensed immediately unless the items have
alternative future uses. If the items have alternative future uses, the materials should be
recorded as inventories and allocated as consumed and the equipment should be
capitalized and depreciated as used.
(c) Indirect costs of R & D activities should be reasonably allocated to R & D (except for
general and administrative costs, which must be clearly related in order to be included)
and expensed.
Ex. 12-155
Recently, a group of university students decided to incorporate for the purposes of selling a
process to recycle the waste product from manufacturing cheese. Some of the initial costs
involved were legal fees and office expenses incurred in starting the business, and stamp
taxes. One student wishes to charge these costs against revenue in the current period.
Another wishes to defer these costs and amortize them in the future. Which student is
correct and why?
Solution 12-155
These costs are referred to as start-up costs, or more specifically organizational costs in this
case. Accounting for start up costs is straightforward—expense these costs as incurred.
The profession recognizes that these costs are incurred with the expectation that future
revenues will occur or increased efficiencies will result. However, to determine the amount
and timing of future benefits is so difficult that a conservative approach—expensing these
costs as incurred—is required.
Ex. 12-156
Vasquez Manufacturing Company decided to expand further by purchasing Wasserman
Company. The statement of financial position of Wasserman Company as of December 31, 2019
was as follows:
Wasserman Company
Statement of Financial Position
December 31, 2019
Assets
Plant assets (net)
Inventory
Receivables
Cash
Total assets
€1,025,000
275,000
550,000
210,000
€2,060,000
Equity and Liabilities
Share capital-ordinary
Retained earnings
Accounts payable
€ 800,000
885,000
375,000
Total equity and liabilities
€2,060,000
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Ex. 12-156 (cont.)
An appraisal, agreed to by the parties, indicated that the fair value of the inventory was €350,000
and the fair value of the plant assets was €1,125,000. The fair value of the receivables is equal to
the amount reported on the statement of financial position. The agreed purchase price was
€2,095,000, and this amount was paid in cash to the previous owners of Wasserman Company.
Instructions
Determine the amount of goodwill (if any) implied in the purchase price of €2,095,000. Show
calculations.
Solution 12-156
Purchase price
Less tangible net assets acquired:
Book value (€2,060,000 – €375,000)
Appraisal increment—inventory
Appraisal increment—plant assets
Total fair value of tangible net assets acquired
Goodwill
€2,095,000
€1,685,000
75,000
100,000
1,860,000
€ 235,000
PROBLEMS
Pr. 12-157—Intangible assets.
The following transactions involving intangible assets of Minton Corporation occurred on or near
December 31, 2018. Complete the chart below by writing the journal entry(ies) needed at that
date to record the transaction and at December 31, 2019 to record any resultant amortization. If
no entry is required at a particular date, write "none needed."
On Date
of Transaction
1. Minton paid Grand Company £500,000 for the
exclusive right to market a particular product,
using the Grand name and logo in promotional
material. The franchise runs for as long as
Minton is in business.
2. Minton spent £600,000 developing a new manufacturing process (economic viability not
achieved). It has applied for a patent, and it
believes that its application will be successful.
3. In January, 2019, Minton's application for a
patent (#2 above) was granted. Legal and
registration costs incurred were £140,000. The
patent runs for 20 years. The manufacturing
process will be useful to Minton for 10 years.
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12 - 38 Test Bank for Intermediate Accounting, IFRS Edition, 3e
4. Minton incurred £172,000 in successfully defending one of its patents in an infringement suit. The
patent expires during December, 2022.
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Pr. 12-157 (cont.)
5. Minton incurred £480,000 in an unsuccessful
patent defense. As a result of the adverse
verdict, the patent, with a remaining unamortized
cost of £252,000, is deemed worthless.
6. Minton paid Sneed Laboratories £104,000 for
research and development work performed by
Sneed under contract for Minton. The benefits
are expected to last six years.
Solution 12-157
On Date of Transaction
1. Franchise.............
Cash..............
2. Research and
Devel. Expense....
Cash..............
3. Patents.................
Cash..............
4. Patents.................
Cash..............
500,000
1. “None needed.”
500,000
2. "None needed."
600,000
600,000
140,000
140,000
172,000
172,000
5. Legal Fees Exp....
Cash..............
480,000
Patent Expense. . .
Patents...........
252,000
6. Research and
Devel. Expense....
Cash..............
On December 31, 2019
3. Patent Amortization
Expense..................... 14,000
Patents.................
14,000
4. Patent Amortization
Expense..................... 43,000
Patents.................
43,000
5. “None needed.”
480,000
252,000
6. "None needed."
104,000
104,000
Pr. 12-158—Goodwill, impairment.
On May 31, 2019, Armstrong Company paid €3,400,000 to acquire all of the ordinary shares of
Hall Corporation, which became a division of Armstrong. Hall reported the following statement of
financial position at the time of the acquisition:
Non-current assets
Current assets
€2,700,000
900,000
Total assets
€3,600,000
Equity
Non-current liabilities
Current liabilities
Total equity and liabilities
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€2,500,000
500,000
600,000
€3,600,000
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Intangible Assets
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Pr. 12-158 (cont.)
It was determined at the date of the purchase that the fair value of the identifiable net assets of
Hall was €2,800,000. At December 31, 2019, Hall reports the following statement of financial
position information:
Current assets
Non-current assets (including goodwill recognized in purchase)
Current liabilities
Non-current liabilities
Net assets
€ 800,000
2,400,000
(700,000)
(500,000)
€2,000,000
It is determined that the recoverable amount value of the Hall division is €2,100,000.
Instructions
(a) Compute the amount of goodwill recognized, if any, on May 31, 2019.
(b) Determine the impairment loss, if any, to be recorded on December 31, 2019.
(c) Assume that the recoverable amount of the Hall division is €1,800,000 instead of
$2,100,000. Prepare the journal entry to record the impairment loss, if any, on December 31,
2019.
Solution 12-158
(a) Goodwill = Fair value of the division less the fair value of the identifiable assets.
€3,400,000 – €2,800,000 = €600,000.
(b) No impairment loss is recorded, because the recoverable amount of Hall (€2,100,000) is
greater than the carrying value (€2,000,000) of the new assets.
(c) Computation of impairment loss:
Recoverable amount of Hall division
Carrying value of division
Loss on impairment
Loss on Impairment..................................................................
Goodwill.........................................................................
€1,800,000
2,000,000
€ (200,000)
200,000
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200,000
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Test Bank with Answers Intermediate Accounting 12e by
Kieso Chapter 14
Accounting (Đại học Hà Nội)
StuDocu is not sponsored or endorsed by any college or university
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CHAPTER 14
LONG-TERM LIABILITIES
TRUE-FALSE—Conceptual
Answer
T
F
T
F
F
T
F
F
F
T
T
F
T
T
T
T
F
F
F
F
No.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
*19.
*20.
Description
Bond interest payments.
Debenture bonds.
Definition of serial bonds.
Market rate vs. coupon rate.
Definition of stated interest rate.
Stated rate and coupon rate.
Amortization of premium and discount.
Issuance of bonds.
Interest paid vs. interest expense.
Accounting for bond issue costs.
Refunding of bond issue.
Long-term notes payable.
Implicit interest rate.
Imputation and imputed interest rate.
Off-balance-sheet financing.
Debt to total assets ratio.
Refinancing long-term debt.
Times interest earned ratio.
Loss recognized on impaired loan.
Gain/loss in troubled debt restructuring.
MULTIPLE CHOICE—Conceptual
Answer
a
a
b
a
d
a
d
d
d
d
b
a
d
d
c
d
d
c
No.
21.
22.
23.
P
24.
S
25.
S
26.
S
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
Description
Liability identification.
Bond terms.
Definition of "debenture bonds."
Definition of bearer bonds.
Definition of income bonds.
Effective-interest vs. straight-line method.
Interest rate of the bond indenture.
Rate of interest earned by the bondholders.
Calculating the issue price of bonds.
Calculating the issue price of bonds.
Premium and interest rates.
Interest and discount amortization.
Effective-interest amortization method.
Impact of effective-interest method.
Recording bonds issued between interest dates.
Bonds issued at other than an interest date.
Classification of bond issuance costs.
Bond issuance costs.
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14 - 2
Test Bank for Intermediate Accounting, Twelfth Edition
MULTIPLE CHOICE—Conceptual (cont.)
Answer
b
d
d
c
c
a
d
d
c
d
c
d
d
d
c
c.
c
d
b
b
c
No.
39.
40.
41.
P
42.
P
43.
S
44.
45.
46.
47.
48.
S
49.
S
50.
51.
52.
53.
54.
*55.
*56.
*57.
*58.
*59.
Description
Classification of treasury bonds.
Early extinguishment of bonds payable.
Gain or loss on extinguishment of debt.
In-substance defeasance.
Reporting long-term debt.
Debt instrument exchanged for property.
Valuation of note issued in noncash transaction.
Stated interest rate of note.
Accounting for discount on notes payable.
Off-balance-sheet financing.
Off-balance-sheet financing.
Long-term debt maturing within one year.
Required bond disclosures.
Long-term debt disclosures.
Times interest earned ratio.
Debt to total assets ratio.
Modification of terms in debt restructure.
Gain/loss on troubled debt restructuring.
Gain/loss on troubled debt restructuring.
Interest and troubled debt restructuring.
Creditor's calculations for modification of terms.
P
These questions also appear in the Problem-Solving Survival Guide.
These questions also appear in the Study Guide.
* This topic is dealt with in an Appendix to the chapter.
S
MULTIPLE CHOICE—Computational
Answer
a
b
a
c
c
c
c
c
a
d
d
c
a
d
d
b
c
c
b
No.
60.
61.
62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.
74.
75.
76.
77.
78.
Description
Calculate the present value of bond principal.
Calculate the present value of bond interest.
Determine the issue price of bonds.
Proceeds from bond issuance.
Bonds issued between interest dates.
Proceeds from bond issuance.
Bonds issued between interest dates.
Effective-interest method interest expense.
Effective-interest method carrying value.
Straight-line method carrying value.
Straight-line amortization/interest expense.
Effective-interest method interest expense.
Effective-interest method carrying value.
Straight-line method carrying value.
Straight-line method amortization/interest expense.
Interest expense using effective-interest method.
Interest expense using effective-interest method.
Calculate gain on retirement of bonds.
Calculate gain on retirement of bonds.
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Long-Term Liabilities
MULTIPLE CHOICE—Computational (cont.)
Answer
b
b
b
b
b
a
c
b
d
b
d
a
No.
79.
80.
81.
82.
83.
84.
85.
86.
87.
*88.
*89.
*90.
Description
Calculate loss on retirement of bonds.
Bond retirement with call premium.
Calculate loss on retirement of bonds.
Early extinguishment of debt.
Early extinguishment of debt.
Interest on noninterest-bearing note.
Interest on installment note payable.
Determine balance of discount on notes payable.
Calculate times interest earned ratio.
Transfer of equipment in debt settlement.
Recognizing gain on debt restructure.
Interest and troubled debt restructuring.
MULTIPLE CHOICE—CPA Adapted
Answer
a
b
a
c
a
d
d
c
c
a
d
No.
91.
92.
93.
94.
95.
96.
97.
98.
99.
100.
*101.
Description
Determine proceeds from bond issue.
Determine unamortized bond premium.
Determine unamortized bond discount.
Calculate bond interest expense.
Calculate loss on retirement of bonds.
Calculate loss on retirement of bonds.
Calculate gain on retirement of bonds.
Determine carrying value of bonds to be retired.
Carrying value of bonds with call provision.
Classification of gain from debt refunding.
Classification of gain from troubled debt restructuring.
EXERCISES
Item
E14-102
E14-103
E14-104
E14-105
E14-106
E14-107
*E14-108
*E14-109
*E14-110
Description
Terms related to long-term debt.
Bond issue price and premium amortization.
Amortization of discount or premium.
Entries for bonds payable.
Retirement of bonds.
Early extinguishment of debt.
Accounting for a troubled debt settlement.
Accounting for troubled debt restructuring.
Accounting for troubled debt.
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14 - 3
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Test Bank for Intermediate Accounting, Twelfth Edition
14 - 4
PROBLEMS
Item
P14-111
P14-112
P14-113
P14-114
*P14-115
Description
Bond discount amortization.
Bond interest and discount amortization.
Entries for bonds payable.
Entries for bonds payable.
Accounting for a troubled debt settlement.
CHAPTER LEARNING OBJECTIVES
1.
Describe the formal procedures associated with issuing long-term debt.
2.
Identify various types of bond issues.
3.
Describe the accounting valuation for bonds at date of issuance.
4.
Apply the methods of bond discount and premium amortization.
5.
Describe the accounting for the extinguishment of debt.
6.
Explain the accounting for long-term notes payable.
7.
Explain the reporting of off-balance-sheet financing arrangements.
8.
Indicate how to present and analyze long-term debt.
*9.
Describe the accounting for a loan impairment.
*10.
Describe the accounting for debt restructuring.
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Long-Term Liabilities
14 - 5
SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS
Item
Type
Item
Type
Item
1.
TF
21.
MC
22.
2.
TF
3.
TF
23.
4.
5.
6.
TF
TF
TF
26.
27.
28.
MC
MC
MC
29.
30.
60.
7.
8.
9.
10.
31.
TF
TF
TF
TF
MC
32.
33.
34.
35.
36.
MC
MC
MC
MC
MC
37.
38.
39.
67.
68.
11.
40.
41.
P
42.
TF
MC
MC
MC
77.
78.
79.
80.
MC
MC
MC
MC
81.
82.
83.
95.
12.
13.
TF
TF
14.
43.
TF
MC
S
15.
TF
48.
MC
S
16.
17.
TF
TF
18.
50.
TF
MC
51.
52.
19.
20.
55.
TF
TF
MC
56.
57.
58.
MC
MC
MC
59.
88.
89.
Note:
S
P
S
44.
45.
TF = True-False
MC = Multiple Choice
49.
Type
Item
Type
Item
Learning Objective 1
MC
Learning Objective 2
P
S
MC
24. MC
25.
Learning Objective 3
MC
61. MC
64.
MC
62. MC
65.
MC
63. MC
66.
Learning Objective 4
MC
69. MC
74.
MC
70. MC
75.
MC
71. MC
76.
MC
72. MC
91.
MC
73. MC
92.
Learning Objective 5
MC
96. MC
100.
MC
97. MC
102.
MC
98. MC
105.
MC
99. MC
106.
Learning Objective 6
MC
46. MC
84.
MC
47. MC
85.
Learning Objective 7
MC
Learning Objective 8
MC
53. MC
87.
MC
54. MC
Learning Objective *10
MC
90. MC
109.
MC
101. MC
110.
MC
108.
E
115.
Type
Item
Type
MC
MC
MC
102.
103.
111.
E
E
P
MC
MC
MC
MC
MC
93.
94.
102.
103.
104.
MC
MC
E
E
E
MC
E
E
E
107.
113.
E
P
MC
MC
86.
MC
Item
Type
105.
111.
112.
113.
114.
E
P
P
P
P
MC
MC
E
E
P
E = Exercise
P = Problem
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14 - 6
Test Bank for Intermediate Accounting, Twelfth Edition
TRUE FALSE—Conceptual
1.
Companies usually make bond interest payments semiannually, although the interest rate
is generally expressed as an annual rate.
2.
A mortgage bond is referred to as a debenture bond.
3.
Bond issues that mature in installments are called serial bonds.
4.
If the market rate is greater than the coupon rate, bonds will be sold at a premium.
5.
The interest rate written in the terms of the bond indenture is called the effective yield or
market rate.
6.
The stated rate is the same as the coupon rate.
7.
Amortization of a premium increases bond interest expense, while amortization of a
discount decreases bond interest expense.
8.
A bond may only be issued on an interest payment date.
9.
The cash paid for interest will always be greater than interest expense when using
effective-interest amortization for a bond.
10.
Bond issue costs are capitalized as a deferred charge and amortized to expense over the
life of the bond issue.
11.
The replacement of an existing bond issue with a new one is called refunding.
12.
If a long-term note payable has a stated interest rate, that rate should be considered to be
the effective rate.
13.
The implicit interest rate is the rate that equates the cash received with the amounts
received in the future.
14.
The process of interest-rate approximation is called imputation, and the resulting interest
rate is called an imputed interest rate.
15.
Off-balance-sheet financing is an attempt to borrow monies in such a way to minimize the
reporting of debt on the balance sheet.
16.
The debt to total assets ratio will go up if an equal amount of assets and liabilities are
added to the balance sheet.
17.
If a company plans to refinance long-term debt or retire it from a bond retirement fund, it
should report the debt as current.
18.
The times interest earned ratio is computed by dividing income before interest expense by
interest expense.
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Long-Term Liabilities
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*19.
The loss to be recognized by a creditor on an impaired loan is the difference between the
investment in the loan and the expected undiscounted future cash flows from the loan.
*20.
In a troubled debt restructuring, the loss recognized by the creditor will equal the gain
recognized by the debtor.
True False Answers—Conceptual
Item
1.
2.
3.
4.
5.
Ans.
T
F
T
F
F
Item
6.
7.
8.
9.
10.
Ans.
T
F
F
F
T
Item
11.
12.
13.
14.
15.
Ans.
T
F
T
T
T
Item
16.
17.
18.
19.
20.
Ans.
T
F
F
F
F
MULTIPLE CHOICE—Conceptual
21.
An example of an item which is not a liability is
a. dividends payable in stock.
b. advances from customers on contracts.
c. accrued estimated warranty costs.
d. the portion of long-term debt due within one year.
22.
The covenants and other terms of the agreement between the issuer of bonds and the
lender are set forth in the
a. bond indenture.
b. bond debenture.
c. registered bond.
d. bond coupon.
23.
The term used for bonds that are unsecured as to principal is
a. junk bonds.
b. debenture bonds.
c. indebenture bonds.
d. callable bonds.
P
Bonds for which the owners' names are not registered with the issuing corporation are
called
a. bearer bonds.
b. term bonds.
c. debenture bonds.
d. secured bonds.
S
Bonds that pay no interest unless the issuing company is profitable are called
a. collateral trust bonds.
b. debenture bonds.
c. revenue bonds.
d. income bonds.
24.
25.
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14 - 8
S
Test Bank for Intermediate Accounting, Twelfth Edition
26.
If bonds are issued initially at a premium and the effective-interest method of amortization
is used, interest expense in the earlier years will be
a. greater than if the straight-line method were used.
b. greater than the amount of the interest payments.
c the same as if the straight-line method were used.
d. less than if the straight-line method were used.
27.
The interest rate written in the terms of the bond indenture is known as the
a. coupon rate.
b. nominal rate.
c. stated rate.
d. coupon rate, nominal rate, or stated rate.
28.
The rate of interest actually earned by bondholders is called the
a. stated rate.
b. yield rate.
c. effective rate.
d. effective, yield, or market rate.
Use the following information for questions 29 and 30:
Cox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are
sold to yield 8%.
29.
One step in calculating the issue price of the bonds is to multiply the principal by the table
value for
a. 10 periods and 10% from the present value of 1 table.
b. 20 periods and 5% from the present value of 1 table.
c. 10 periods and 8% from the present value of 1 table.
d. 20 periods and 4% from the present value of 1 table.
30.
Another step in calculating the issue price of the bonds is to
a. multiply $10,000 by the table value for 10 periods and 10% from the present value of
an annuity table.
b. multiply $10,000 by the table value for 20 periods and 5% from the present value of an
annuity table.
c. multiply $10,000 by the table value for 20 periods and 4% from the present value of an
annuity table.
d. none of these.
31.
Stone, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years
from date of issue. If the bonds were issued at a premium, this indicates that
a. the effective yield or market rate of interest exceeded the stated (nominal) rate.
b. the nominal rate of interest exceeded the market rate.
c. the market and nominal rates coincided.
d. no necessary relationship exists between the two rates.
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Long-Term Liabilities
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32.
If bonds are initially sold at a discount and the straight-line method of amortization is used,
interest expense in the earlier years will
a. exceed what it would have been had the effective-interest method of amortization
been used.
b. be less than what it would have been had the effective-interest method of amortization
been used.
c. be the same as what it would have been had the effective-interest method of amortization been used.
d. be less than the stated (nominal) rate of interest.
33.
Under the effective-interest method of bond discount or premium amortization, the
periodic interest expense is equal to
a. the stated (nominal) rate of interest multiplied by the face value of the bonds.
b. the market rate of interest multiplied by the face value of the bonds.
c. the stated rate multiplied by the beginning-of-period carrying amount of the bonds.
d. the market rate multiplied by the beginning-of-period carrying amount of the bonds.
34.
When the effective-interest method is used to amortize bond premium or discount, the
periodic amortization will
a. increase if the bonds were issued at a discount.
b. decrease if the bonds were issued at a premium.
c. increase if the bonds were issued at a premium.
d. increase if the bonds were issued at either a discount or a premium.
35.
If bonds are issued between interest dates, the entry on the books of the issuing
corporation could include a
a. debit to Interest Payable.
b. credit to Interest Receivable.
c. credit to Interest Expense.
d. credit to Unearned Interest.
36.
When the interest payment dates of a bond are May 1 and November 1, and a bond issue
is sold on June 1, the amount of cash received by the issuer will be
a. decreased by accrued interest from June 1 to November 1.
b. decreased by accrued interest from May 1 to June 1.
c. increased by accrued interest from June 1 to November 1.
d. increased by accrued interest from May 1 to June 1.
37.
Theoretically, the costs of issuing bonds could be
a. expensed when incurred.
b. reported as a reduction of the bond liability.
c. debited to a deferred charge account and amortized over the life of the bonds.
d. any of these.
38.
The printing costs and legal fees associated with the issuance of bonds should
a. be expensed when incurred.
b. be reported as a deduction from the face amount of bonds payable.
c. be accumulated in a deferred charge account and amortized over the life of the bonds.
d. not be reported as an expense until the period the bonds mature or are retired.
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14 - 10 Test Bank for Intermediate Accounting, Twelfth Edition
39.
Treasury bonds should be shown on the balance sheet as
a. an asset.
b. a deduction from bonds payable issued to arrive at net bonds payable and outstanding.
c. a reduction of stockholders' equity.
d. both an asset and a liability.
40.
An early extinguishment of bonds payable, which were originally issued at a premium, is
made by purchase of the bonds between interest dates. At the time of reacquisition
a. any costs of issuing the bonds must be amortized up to the purchase date.
b. the premium must be amortized up to the purchase date.
c. interest must be accrued from the last interest date to the purchase date.
d. all of these.
41.
The generally accepted method of accounting for gains or losses from the early
extinguishment of debt treats any gain or loss as
a. an adjustment to the cost basis of the asset obtained by the debt issue.
b. an amount that should be considered a cash adjustment to the cost of any other debt
issued over the remaining life of the old debt instrument.
c. an amount received or paid to obtain a new debt instrument and, as such, should be
amortized over the life of the new debt.
d. a difference between the reacquisition price and the net carrying amount of the debt
which should be recognized in the period of redemption.
P
"In-substance defeasance" is a term used to refer to an arrangement whereby
a. a company gets another company to cover its payments due on long-term debt.
b. a governmental unit issues debt instruments to corporations.
c. a company provides for the future repayment of a long-term debt by placing
purchased securities in an irrevocable trust.
d. a company legally extinguishes debt before its due date.
P
A corporation borrowed money from a bank to build a building. The long-term note signed
by the corporation is secured by a mortgage that pledges title to the building as security
for the loan. The corporation is to pay the bank $80,000 each year for 10 years to repay
the loan. Which of the following relationships can you expect to apply to the situation?
a. The balance of mortgage payable at a given balance sheet date will be reported as a
long-term liability.
b. The balance of mortgage payable will remain a constant amount over the 10-year
period.
c. The amount of interest expense will decrease each period the loan is outstanding, while
the portion of the annual payment applied to the loan principal will increase each period.
d. The amount of interest expense will remain constant over the 10-year period.
S
A debt instrument with no ready market is exchanged for property whose fair market value
is currently indeterminable. When such a transaction takes place
a. the present value of the debt instrument must be approximated using an imputed
interest rate.
b. it should not be recorded on the books of either party until the fair market value of the
property becomes evident.
c. the board of directors of the entity receiving the property should estimate a value for
the property that will serve as a basis for the transaction.
d. the directors of both entities involved in the transaction should negotiate a value to be
assigned to the property.
42.
43.
44.
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Long-Term Liabilities
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45.
When a note payable is issued for property, goods, or services, the present value of the
note is measured by
a. the fair value of the property, goods, or services.
b. the market value of the note.
c. using an imputed interest rate to discount all future payments on the note.
d. any of these.
46.
When a note payable is exchanged for property, goods, or services, the stated interest
rate is presumed to be fair unless
a. no interest rate is stated.
b. the stated interest rate is unreasonable.
c. the stated face amount of the note is materially different from the current cash sales
price for similar items or from current market value of the note.
d. any of these.
47.
Discount on Notes Payable is charged to interest expense
a. equally over the life of the note.
b. only in the year the note is issued.
c. using the effective-interest method.
d. only in the year the note matures.
48.
Which of the following is an example of "off-balance-sheet financing"?
1. Non-consolidated subsidiary.
2. Special purpose entity.
3. Operating leases.
a. 1
b. 2
c. 3
d. All of these are examples of "off-balance-sheet financing."
S
When a business enterprise enters into what is referred to as off-balance-sheet financing,
the company
a. is attempting to conceal the debt from shareholders by having no information about
the debt included in the balance sheet.
b. wishes to confine all information related to the debt to the income statement and the
statement of cash flow.
c. can enhance the quality of its financial position and perhaps permit credit to be
obtained more readily and at less cost.
d. is in violation of generally accepted accounting principles.
S
Long-term debt that matures within one year and is to be converted into stock should be
reported
a. as a current liability.
b. in a special section between liabilities and stockholders’ equity.
c. as noncurrent.
d. as noncurrent and accompanied with a note explaining the method to be used in its
liquidation.
49.
50.
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14 - 12 Test Bank for Intermediate Accounting, Twelfth Edition
51.
Which of the following must be disclosed relative to long-term debt maturities and sinking
fund requirements?
a. The present value of future payments for sinking fund requirements and long-term
debt maturities during each of the next five years.
b. The present value of scheduled interest payments on long-term debt during each of
the next five years.
c. The amount of scheduled interest payments on long-term debt during each of the next
five years.
d. The amount of future payments for sinking fund requirements and long-term debt
maturities during each of the next five years.
52.
Note disclosures for long-term debt generally include all of the following except
a. assets pledged as security.
b. call provisions and conversion privileges.
c. restrictions imposed by the creditor.
d. names of specific creditors.
53.
The times interest earned ratio is computed by dividing
a. net income by interest expense.
b. income before taxes by interest expense.
c. income before income taxes and interest expense by interest expense.
d. net income and interest expense by interest expense.
54.
The debt to total assets ratio is computed by dividing
a. current liabilities by total assets.
b. long-term liabilities by total assets.
c. total liabilities by total assets.
d. total assets by total liabilities.
*55.
In a troubled debt restructuring in which the debt is continued with modified terms and the
carrying amount of the debt is less than the total future cash flows,
a. a loss should be recognized by the debtor.
b. a gain should be recognized by the debtor.
c. a new effective-interest rate must be computed.
d. no interest expense or revenue should be recognized in the future.
*56.
A troubled debt restructuring will generally result in a
a. loss by the debtor and a gain by the creditor.
b. loss by both the debtor and the creditor.
c. gain by both the debtor and the creditor.
d. gain by the debtor and a loss by the creditor.
*57.
In a troubled debt restructuring in which the debt is settled by a transfer of assets with a
fair market value less than the carrying amount of the debt, the debtor would recognize
a. no gain or loss on the settlement.
b. a gain on the settlement.
c. a loss on the settlement.
d. none of these.
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Long-Term Liabilities
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*58.
In a troubled debt restructuring in which the debt is continued with modified terms, a gain
should be recognized at the date of restructure, but no interest expense should be
recognized over the remaining life of the debt, whenever the
a. carrying amount of the pre-restructure debt is less than the total future cash flows.
b. carrying amount of the pre-restructure debt is greater than the total future cash flows.
c. present value of the pre-restructure debt is less than the present value of the future
cash flows.
d. present value of the pre-restructure debt is greater than the present value of the future
cash flows.
*59.
In a troubled debt restructuring in which the debt is continued with modified terms and the
carrying amount of the debt is less than the total future cash flows, the creditor should
a. compute a new effective-interest rate.
b. not recognize a loss.
c. calculate its loss using the historical effective rate of the loan.
d. calculate its loss using the current effective rate of the loan.
Multiple Choice Answers—Conceptual
Item
21.
22.
23.
24.
25.
26.
Ans.
a
a
b
a
d
a
Item
27.
28.
29.
30.
31.
32.
Ans.
d
d
d
d
b
a
Item
33.
34.
35.
36.
37.
38.
Ans.
d
d
c
d
d
c
Item
39.
40.
41.
42.
43.
44.
Ans.
Item
b
d
d
c
c
a
45.
46.
47.
48.
49.
50.
Ans.
Item
Ans.
Item
Ans.
d
d
c
d
c
d
51.
52.
53.
54.
*55.
*56.
d
d
c
c
c
d
*57.
*58.
*59.
b
b
c
Solutions to those Multiple Choice questions for which the answer is “none of these.”
30.
multiply $5,000 by the table value for 20 periods and 4% from the present value of an
annuity table.
MULTIPLE CHOICE—Computational
Use the following information for questions 60 through 62:
On January 1, 2007, Bleeker Co. issued eight-year bonds with a face value of $1,000,000 and a
stated interest rate of 6%, payable semiannually on June 30 and December 31. The bonds were
sold to yield 8%. Table values are:
Present value of 1 for 8 periods at 6% ..........................................
Present value of 1 for 8 periods at 8% ..........................................
Present value of 1 for 16 periods at 3% ........................................
Present value of 1 for 16 periods at 4% ........................................
Present value of annuity for 8 periods at 6% ................................
Present value of annuity for 8 periods at 8% ................................
Present value of annuity for 16 periods at 3% ..............................
Present value of annuity for 16 periods at 4% ..............................
Downloaded by Abdallah AL droubi (aldroubiabdallah35@gmail.com)
.627
.540
.623
.534
6.210
5.747
12.561
11.652
lOMoARcPSD|5474829
14 - 14 Test Bank for Intermediate Accounting, Twelfth Edition
60.
The present value of the principal is
a. $534,000.
b. $540,000.
c. $623,000.
d. $627,000.
61.
The present value of the interest is
a. $344,820.
b. $349,560.
c. $372,600.
d. $376,830.
62.
The issue price of the bonds is
a. $883,560.
b. $884,820.
c. $889,560.
d. $999,600.
63.
Limeway Company issues $5,000,000, 6%, 5-year bonds dated January 1, 2007 on
January 1, 2007. The bonds pay interest semiannually on June 30 and December 31. The
bonds are issued to yield 5%. What are the proceeds from the bond issue?
Present value of a single sum for 5 periods
Present value of a single sum for 10 periods
Present value of an annuity for 5 periods
Present value of an annuity for 10 periods
a.
b.
c.
d.
2.5%
.88385
.78120
4.64583
8.75206
3.0%
.86261
.74409
4.57971
8.53020
5.0%
6.0%
.78353
.74726
.61391
.55839
4.32948 4.21236
7.72173 7.36009
$5,000,000
$5,216,494
$5,218,809
$5,217,308
64.
Amstop Company issues $20,000,000 of 10-year, 9% bonds on March 1, 2007 at 97 plus
accrued interest. The bonds are dated January 1, 2007, and pay interest on June 30 and
December 31. What is the total cash received on the issue date?
a. $19,400,000
b. $20,450,000
c. $19,700,000
d. $19,100,000
65.
Houghton Company issues $10,000,000, 6%, 5-year bonds dated January 1, 2007 on
January 1, 2007. The bonds pays interest semiannually on June 30 and December 31.
The bonds are issued to yield 5%. What are the proceeds from the bond issue?
Present value of a single sum for 5 periods
Present value of a single sum for 10 periods
Present value of an annuity for 5 periods
Present value of an annuity for 10 periods
2.5%
.88385
.78120
4.64583
8.75206
3.0%
.86261
.74409
4.57971
8.53020
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5.0%
6.0%
.78353
.74726
.61391
.55839
4.32948 4.21236
7.72173 7.36009
lOMoARcPSD|5474829
Long-Term Liabilities
a.
b.
c.
d.
14 - 15
$10,000,000
$10,432,988
$10,437,618
$10,434,616
66.
Benton Company issues $10,000,000 of 10-year, 9% bonds on March 1, 2007 at 97 plus
accrued interest. The bonds are dated January 1, 2007, and pay interest on June 30 and
December 31. What is the total cash received on the issue date?
a. $9,700,000
b. $10,225,000
c. $9,850,000
d. $9,550,000
67.
A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2007.
Interest is paid on June 30 and December 31. The proceeds from the bonds are
$19,604,145. Using effective-interest amortization, how much interest expense will be
recognized in 2007?
a. $780,000
b. $1,560,000
c. $1,568,498
d. $1,568,332
68.
A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2007.
Interest is paid on June 30 and December 31. The proceeds from the bonds are
$19,604,145. Using effective-interest amortization, what will the carrying value of the
bonds be on the December 31, 2007 balance sheet?
a. $19,612,643
b. $20,000,000
c. $19,625,125
d. $19,608,310
69.
A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2006.
Interest is paid on June 30 and December 31. The proceeds from the bonds are
$19,604,145. Using straight-line amortization, what is the carrying value of the bonds on
December 31, 2008?
a. $19,670,231
b. $19,940,622
c. $19,633,834
d. $19,663,523
70.
A company issues $20,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2006.
Interest is paid on June 30 and December 31. The proceeds from the bonds are
$19,604,145. What is interest expense for 2007, using straight-line amortization?
a. $1,540,207
b. $1,560,000
c. $1,569,192
d. $1,579,793
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14 - 16 Test Bank for Intermediate Accounting, Twelfth Edition
71.
A company issues $5,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2007.
Interest is paid on June 30 and December 31. The proceeds from the bonds are
$4,901,036. Using effective-interest amortization, how much interest expense will be
recognized in 2007?
a. $195,000
b. $390,000
c. $392,124
d. $392,083
72.
A company issues $5,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2007.
Interest is paid on June 30 and December 31. The proceeds from the bonds are
$4,901,036. Using effective-interest amortization, what will the carrying value of the bonds
be on the December 31, 2007 balance sheet?
a. $4,903,160
b. $5,000,000
c. $4,906,281
d. $4,902,077
73.
A company issues $5,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2006.
Interest is paid on June 30 and December 31. The proceeds from the bonds are
$4,901,036. Using straight-line amortization, what is the carrying value of the bonds on
December 31, 2008?
a. $4,917,558
b. $4,985,156
c. $4,908,458
d. $4,915,881
74.
A company issues $5,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2006.
Interest is paid on June 30 and December 31. The proceeds from the bonds are
$4,901,036. What is interest expense for 2007, using straight-line amortization?
a. $385,052
b. $390,000
c. $392,298
d. $394,948
75.
On January 1, 2007, Foley Co. sold 12% bonds with a face value of $600,000. The bonds
mature in five years, and interest is paid semiannually on June 30 and December 31. The
bonds were sold for $646,200 to yield 10%. Using the effective-interest method of
amortization, interest expense for 2007 is
a. $60,000.
b. $64,436.
c. $64,620.
d. $72,000.
76.
On January 2, 2007, a calendar-year corporation sold 8% bonds with a face value of
$600,000. These bonds mature in five years, and interest is paid semiannually on June 30
and December 31. The bonds were sold for $553,600 to yield 10%. Using the effectiveinterest method of computing interest, how much should be charged to interest expense in
2007?
a. $48,000.
b. $55,360.
c. $55,544.
d. $60,000.
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Long-Term Liabilities
77.
14 - 17
The December 31, 2006, balance sheet of Eddy Corporation includes the following items:
9% bonds payable due December 31, 2015
Unamortized premium on bonds payable
$1,000,000
27,000
The bonds were issued on December 31, 2005, at 103, with interest payable on July 1
and December 31 of each year. Eddy uses straight-line amortization. On March 1, 2007,
Eddy retired $400,000 of these bonds at 98 plus accrued interest. What should Eddy
record as a gain on retirement of these bonds? Ignore taxes.
a. $18,800.
b. $10,800.
c. $18,600.
d. $20,000.
78.
On January 1, 2001, Gonzalez Corporation issued $4,500,000 of 10% ten-year bonds at
103. The bonds are callable at the option of Gonzalez at 105. Gonzalez has recorded
amortization of the bond premium on the straight-line method (which was not materially
different from the effective-interest method).
On December 31, 2007, when the fair market value of the bonds was 96, Gonzalez
repurchased $1,000,000 of the bonds in the open market at 96. Gonzalez has recorded
interest and amortization for 2007. Ignoring income taxes and assuming that the gain is
material, Gonzalez should report this reacquisition as
a. a loss of $49,000.
b. a gain of $49,000.
c. a loss of $61,000.
d. a gain of $61,000.
79.
The 10% bonds payable of Klein Company had a net carrying amount of $570,000 on
December 31, 2006. The bonds, which had a face value of $600,000, were issued at a
discount to yield 12%. The amortization of the bond discount was recorded under the
effective-interest method. Interest was paid on January 1 and July 1 of each year. On July
2, 2007, several years before their maturity, Klein retired the bonds at 102. The interest
payment on July 1, 2007 was made as scheduled. What is the loss that Klein should
record on the early retirement of the bonds on July 2, 2007? Ignore taxes.
a. $12,000.
b. $37,800.
c. $33,600.
d. $42,000.
80.
A corporation called an outstanding bond obligation four years before maturity. At that
time there was an unamortized discount of $300,000. To extinguish this debt, the
company had to pay a call premium of $100,000. Ignoring income tax considerations, how
should these amounts be treated for accounting purposes?
a. Amortize $400,000 over four years.
b. Charge $400,000 to a loss in the year of extinguishment.
c. Charge $100,000 to a loss in the year of extinguishment and amortize $300,000 over
four years.
d. Either amortize $400,000 over four years or charge $400,000 to a loss immediately,
whichever management selects.
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14 - 18 Test Bank for Intermediate Accounting, Twelfth Edition
81.
The 12% bonds payable of Keane Co. had a carrying amount of $832,000 on December 31,
2006. The bonds, which had a face value of $800,000, were issued at a premium to yield
10%. Keane uses the effective-interest method of amortization. Interest is paid on June 30
and December 31. On June 30, 2007, several years before their maturity, Keane retired the
bonds at 104 plus accrued interest. The loss on retirement, ignoring taxes, is
a. $0.
b. $6,400.
c. $9,920.
d. $32,000.
82.
Axlon Company issues $10,000,000 face value of bonds at 96 on January 1, 2006. The
bonds are dated January 1, 2006, pay interest semiannually at 8% on June 30 and
December 31, and mature in 10 years. Straight-line amortization is used for discounts and
premiums. On September 1, 2009, $6,000,000 of the bonds are called at 102 plus
accrued interest. What gain or loss would be recognized on the called bonds on
September 1, 2009?
a. $600,000 loss
b. $272,000 loss
c. $360,000 loss
d. $453,333 loss
83.
Goebel Company issues $5,000,000 face value of bonds at 96 on January 1, 2006. The
bonds are dated January 1, 2006, pay interest semiannually at 8% on June 30 and
December 31, and mature in 10 years. Straight-line amortization is used for discounts and
premiums. On September 1, 2009, $3,000,000 of the bonds are called at 102 plus
accrued interest. What gain or loss would be recognized on the called bonds on
September 1, 2009?
a. $300,000 loss
b. $136,000 loss
c. $180,000 loss
d. $226,667 loss
84.
On January 1, 2007, Ann Rosen loaned $45,078 to Joe Grant. A zero-interest-bearing
note (face amount, $60,000) was exchanged solely for cash; no other rights or privileges
were exchanged. The note is to be repaid on December 31, 2009. The prevailing rate of
interest for a loan of this type is 10%. The present value of $60,000 at 10% for three years
is $45,078. What amount of interest income should Ms. Rosen recognize in 2007?
a. $4,508.
b. $6,000.
c. $18,000.
d. $13,524.
85.
On January 1, 2007, Garner Company sold property to Agler Company which originally
cost Garner $760,000. There was no established exchange price for this property. Agler
gave Garner a $1,200,000 zero-interest-bearing note payable in three equal annual
installments of $400,000 with the first payment due December 31, 2007. The note has no
ready market. The prevailing rate of interest for a note of this type is 10%. The present
value of a $1,200,000 note payable in three equal annual installments of $400,000 at a
10% rate of interest is $994,800. What is the amount of interest income that should be
recognized by Garner in 2007, using the effective-interest method?
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Long-Term Liabilities
a.
b.
c.
d.
14 - 19
$0.
$40,000.
$99,480.
$120,000.
86.
On January 1, 2007, Glenn Company sold property to Henry Company. There was no
established exchange price for the property, and Henry gave Glenn a $2,000,000 zerointerest-bearing note payable in 5 equal annual installments of $400,000, with the first
payment due December 31, 2007. The prevailing rate of interest for a note of this type is
9%. The present value of the note at 9% was $1,442,000 at January 1, 2007. What should
be the balance of the Discount on Notes Payable account on the books of Henry at
December 31, 2007 after adjusting entries are made, assuming that the effective-interest
method is used?
a. $0
b. $428,220
c. $446,400
d. $558,000
87.
Nyland Company’s 2007 financial statements contain the following selected data:
Income taxes
Interest expense
Net income
$40,000
20,000
60,000
Nyland’s times interest earned for 2007 is
a. 3 times
b. 4 times.
c. 5 times.
d. 6 times.
Use the following information for questions *88 through *90:
On December 31, 2005, Reese Co. is in financial difficulty and cannot pay a note due that day. It
is a $600,000 note with $60,000 accrued interest payable to Trear, Inc. Trear agrees to accept
from Reese equipment that has a fair value of $290,000, an original cost of $480,000, and
accumulated depreciation of $230,000. Trear also forgives the accrued interest, extends the
maturity date to December 31, 2008, reduces the face amount of the note to $250,000, and
reduces the interest rate to 6%, with interest payable at the end of each year.
*88.
Reese should recognize a gain or loss on the transfer of the equipment of
a. $0.
b. $40,000 gain.
c. $60,000 gain.
d. $190,000 loss.
*89.
Reese should recognize a gain on the partial settlement and restructure of the debt of
a. $0.
b. $15,000.
c. $55,000.
d. $75,000.
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14 - 20 Test Bank for Intermediate Accounting, Twelfth Edition
*90.
Reese should record interest expense for 2008 of
a. $0.
b. $15,000.
c. $30,000.
d. $45,000.
Multiple Choice Answers—Computational
Item
60.
61.
62.
63.
64.
Ans.
a
b
a
c
c
Item
65.
66.
67.
68.
69.
Ans.
c
c
c
a
d
Item
70.
71.
72.
73.
74.
Ans.
d
c
a
d
d
Item
75.
76.
77.
78.
79.
Ans.
b
c
c
b
b
Item
80.
81.
82.
83.
84.
Ans.
Item
Ans.
Item
Ans.
b
b
b
b
a
85.
86.
87.
*88.
*89.
c
b
d
b
d
*90.
a
MULTIPLE CHOICE—CPA Adapted
91.
On July 1, 2007, Pryce Co. issued 1,000 of its 10%, $1,000 bonds at 99 plus accrued
interest. The bonds are dated April 1, 2007 and mature on April 1, 2017. Interest is
payable semiannually on April 1 and October 1. What amount did Pryce receive from the
bond issuance?
a. $1,015,000
b. $1,000,000
c. $990,000
d. $965,000
92.
On January 1, 2007, Gomez Co. issued its 10% bonds in the face amount of $3,000,000,
which mature on January 1, 2017. The bonds were issued for $3,405,000 to yield 8%,
resulting in bond premium of $405,000. Gomez uses the effective-interest method of
amortizing bond premium. Interest is payable annually on December 31. At December 31,
2007, Gomez's adjusted unamortized bond premium should be
a. $405,000.
b. $377,400.
c. $364,500.
d. $304,500.
93.
On July 1, 2005, Kitel, Inc. issued 9% bonds in the face amount of $5,000,000, which
mature on July 1, 2015. The bonds were issued for $4,695,000 to yield 10%, resulting in a
bond discount of $305,000. Kitel uses the effective-interest method of amortizing bond
discount. Interest is payable annually on June 30. At June 30, 2007, Kitel's unamortized
bond discount should be
a. $264,050.
b. $255,000.
c. $244,000.
d. $215,000.
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Long-Term Liabilities
14 - 21
94.
On January 1, 2007, Nott Co. sold $1,000,000 of its 10% bonds for $885,296 to yield
12%. Interest is payable semiannually on January 1 and July 1. What amount should Nott
report as interest expense for the six months ended June 30, 2007?
a. $44,266
b. $50,000
c. $53,118
d. $60,000
95.
On January 1, 2007, Kite Co. redeemed its 15-year bonds of $2,500,000 par value for
102. They were originally issued on January 1, 1995 at 98 with a maturity date of January
1, 2010. The bond issue costs relating to this transaction were $150,000. Kite amortizes
discounts, premiums, and bond issue costs using the straight-line method. What amount
of loss should Kite recognize on the redemption of these bonds (ignore taxes)?
a. $90,000
b. $60,000
c. $50,000
d. $0
96.
On its December 31, 2006 balance sheet, Lane Corp. reported bonds payable of
$6,000,000 and related unamortized bond issue costs of $320,000. The bonds had been
issued at par. On January 2, 2007, Lane retired $3,000,000 of the outstanding bonds at
par plus a call premium of $70,000. What amount should Lane report in its 2007 income
statement as loss on extinguishment of debt (ignore taxes)?
a. $0
b. $70,000
c. $160,000
d. $230,000
97.
On January 1, 2002, Pine Corp. issued 1,000 of its 10%, $1,000 bonds for $1,040,000.
These bonds were to mature on January 1, 2012 but were callable at 101 any time after
December 31, 2005. Interest was payable semiannually on July 1 and January 1. On July
1, 2007, Pine called all of the bonds and retired them. Bond premium was amortized on a
straight-line basis. Before income taxes, Pine's gain or loss in 2007 on this early
extinguishment of debt was
a. $30,000 gain.
b. $12,000 gain.
c. $10,000 loss.
d. $8,000 gain.
98.
On June 30, 2007, Rosen Co. had outstanding 8%, $3,000,000 face amount, 15-year
bonds maturing on June 30, 2017. Interest is payable on June 30 and December 31. The
unamortized balances in the bond discount and deferred bond issue costs accounts on
June 30, 2007 were $105,000 and $30,000, respectively. On June 30, 2007, Rosen
acquired all of these bonds at 94 and retired them. What net carrying amount should be
used in computing gain or loss on this early extinguishment of debt?
a. $2,970,000.
b. $2,895,000.
c. $2,865,000.
d. $2,820,000.
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14 - 22 Test Bank for Intermediate Accounting, Twelfth Edition
99.
A ten-year bond was issued in 2005 at a discount with a call provision to retire the bonds.
When the bond issuer exercised the call provision on an interest date in 2007, the carrying
amount of the bond was less than the call price. The amount of bond liability removed
from the accounts in 2007 should have equaled the
a. call price.
b. call price less unamortized discount.
c. face amount less unamortized discount.
d. face amount plus unamortized discount.
100.
Starr Co. took advantage of market conditions to refund debt. This was the fourth
refunding operation carried out by Starr within the last three years. The excess of the
carrying amount of the old debt over the amount paid to extinguish it should be reported
as a
a. gain, net of income taxes.
b. loss, net of income taxes.
c. part of continuing operations.
d. deferred credit to be amortized over the life of the new debt.
*101. Brye Co. is indebted to Dole under a $400,000, 12%, three-year note dated December 31,
2005. Because of Brye's financial difficulties developing in 2007, Brye owed accrued
interest of $48,000 on the note at December 31, 2007. Under a troubled debt
restructuring, on December 31, 2007, Dole agreed to settle the note and accrued interest
for a tract of land having a fair value of $360,000. Brye's acquisition cost of the land is
$290,000. Ignoring income taxes, on its 2007 income statement Brye should report as a
result of the troubled debt restructuring
Gain on Disposal Restructuring Gain
a.
$158,000
$0
b.
$110,000
$0
c.
$70,000
$40,000
d.
$70,000
$88,000
Multiple Choice Answers—CPA Adapted
Item
91.
92.
Ans.
a
b
Item
93.
94.
Ans.
a
c
Item
95.
96.
Ans.
a
d
Item
97.
98.
Ans.
Item
Ans.
Item
Ans.
d
c
99.
100.
c
a
*101.
d
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Long-Term Liabilities
14 - 23
DERIVATIONS — Computational
No.
Answer Derivation
60.
a
$1,000,000 × .534 = $534,000.
61.
b
($1,000,000 × .03) × 11.652 = $349,560.
62.
a
$534,000 + $349,560 = $883,560.
63.
c
($5,000,000 × .78120) + ($150,000 × 8.75206) = $5,218,809.
64.
c
($20,000,000 × .97) + ($1,800,000 × 2/12) = $19,700,000.
65.
c
($10,000,000 × .78120) + ($300,000 × 8.75206) = $10,437,618.
66.
c
($10,000,000 × .97) + ($900,000 × 2/12) = $9,850,000.
67.
c
($19,604,145 × .04) + ($19,608,310 × .04) = $1,568,498.
68.
a
$19,604,145 + [($19,604,145 × .04) – $780,000]
+ [$19,608,310 × .04) – $780,000] = $19,612,643.
69.
d
$19,604,145 + ($395,855 × 3/20) = $19,663,523.
70.
d
($20,000,000 × .078) + ($395,855 ÷ 20) = $1,579,793.
71.
c
($4,901,036 × .04) + ($4,902,077 × .04) = $392,124.
72.
a
$4,901,036 + [($4,901,036 × .04) – $195,000] + [($4,902,077 × .04) – $195,000]
= $4,903,160.
73.
d
$4,901,036 + ($98,964 × 3/20) = $4,915,881.
74.
d
($5,000,000 × .078) + ($98,964 ÷ 20) = $394,948.
75.
b
$646,200 × .05
[$646,200 – ($36,000 – $32,310)] × .05
= $32,310
= 32,126
$64,436
76.
c
$553,600 × .05
[$553,600 + ($27,680 – $24,000)] × .05
= $27,680
= 27,864
$55,544
77.
c
2
[$1,027,000 – ( $27,000
———— × — )] × .4 = $410,600 (CV of retired bonds)
18
6
$410,600 – ($400,000 × .98) = $18,600.
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14 - 24 Test Bank for Intermediate Accounting, Twelfth Edition
DERIVATIONS — Computational (cont.)
No.
78.
Answer Derivation
b
[$4,500,000 × 1.03 – ($135,000
———— × 7)] × 2/9 = $1,009,000 (CV of retired bonds)
10
$1,009,000 – ($1,000,000 × .96) = $49,000.
79.
b
$570,000 + [($570,000 × .06) – ($600,000 × .05)] = $574,200 (CV of bonds)
$574,200 – ($600,000 × 1.02) = $37,800.
80.
b
$300,000 + $100,000 = $400,000.
81.
b
$832,000 – [($800,000 × .06) – ($832,000 × .05)] = $825,600 (CV of bonds)
($800,000 × 1.04) – $825,600 = $6,400.
82.
b
{$9,600,000 + [$400,000 × (3 2/3 ÷ 10)]} × .60 = $5,848,000
$6,120,000 – $5,848,000 = $272,000.
83.
{$4,800,000 + [$200,000 × (3 2/3 ÷ 10)]} × .60 = $2,924,000
$3,060,000 – $2,924,000 = $136,000.
84.
a
$45,078 × .10 = $4,508.
85.
c
$994,800 × .10 = $99,480.
86.
b
$2,000,000 – $1,442,000 – ($1,442,000 × .09) = $428,220.
87.
d
$60,000 + $40,000 + $20,000
————————————— = 6 times.
$20,000
*88.
b
$290,000 – ($480,000 – $230,000) = $40,000.
*89.
d
($600,000 + $60,000) – [$290,000 + $250,000 + ($250,000 × .06 × 3)]
= $75,000.
*90.
a
0. The effective-interest rate is 0%.
DERIVATIONS — CPA Adapted
No.
Answer Derivation
91.
a
($1,000,000 × .99) + ($1,000,000 × .10 × 3/12) = $1,015,000.
92.
b
$405,000 – [($3,000,000 × .10) – ($3,405,000 × .08)] = $377,400.
93.
a
2005-2006: $4,695,000 + [($4,695,000 × .1) – ($5,000,000 × .09)]
= $4,714,500.
2006-2007: $4,714,500 + ($471,450 – $450,000) = $4,735,950
$5,000,000 – $4,735,950 = $264,050.
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Long-Term Liabilities
DERIVATIONS — CPA Adapted (cont.)
No.
Answer Derivation
94.
c
$885,296 × .06 = $53,118.
95.
a
$200,000
($2,500,000 × 1.02) – $2,300,000 + ————— × 12
15
96.
d
($3,000,000 + $70,000) – [($6,000,000 – $320,000) × 1/2] = $230,000.
97.
d
$40,000
[$1,040,000 – ( ————
× 11)] – ($1,000,000 × 1.01) = $8,000.
20
98.
c
$3,000,000 – ($105,000 + $30,000) = $2,865,000.
99.
c
Conceptual.
100.
a
Conceptual.
*101.
d
$360,000 – $290,000 = $70,000
($400,000 + $48,000) – $360,000 = $88,000.
[
(
)] = $90,000.
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14 - 25
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14 - 26 Test Bank for Intermediate Accounting, Twelfth Edition
EXERCISES
Ex. 14-102—Terms related to long-term debt.
Place the letter of the best matching phrase before each word.
____ 1.
Indenture
____ 6.
Times Interest Earned Ratio
____ 2.
Treasury Bonds
____ 7.
Mortgage
____ 3.
Bonds Issued at Par
____ 8.
Premium on Bonds
____ 4.
Carrying Value
____ 9.
Reacquisition Price
____ 5.
Nominal Rate
____ 10.
Market Rate
a. Requires that bond discount be reported in the balance sheet as a direct deduction from the
face of the bond.
b. Rate set by party issuing the bonds which appears on the bond instrument.
c. The interest paid each period is the effective interest at date of issuance.
d. Rate of interest actually earned by the bondholders.
e. Results when bonds are sold below par.
f.
Results when bonds are sold above par.
g. Bonds payable reacquired by the issuing corporation that have not been canceled.
h. Price paid by issuing corporation for its own bonds.
i.
Book value of bonds at any given date.
j.
Ratio of current assets to current liabilities.
k. The bond contract or agreement.
l.
Indicates the company’s ability to meet interest payments as they come due.
m. Ratio of debt to equity.
n. Exclusive right to manufacture a product.
o. A document that pledges title to property as security for a loan.
Solution 14-102
1. k
2. g
3.
4.
c
i
5.
6
b
l
7.
8
o
f
9.
10.
h
d
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Long-Term Liabilities
14 - 27
Ex. 14-103—Bond issue price and premium amortization.
On January 1, 2007, Lowry Co. issued ten-year bonds with a face value of $1,000,000 and a
stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were
sold to yield 12%. Table values are:
Present value of 1 for 10 periods at 10% ..................................
.386
Present value of 1 for 10 periods at 12% ..................................
.322
Present value of 1 for 20 periods at 5% ....................................
.377
Present value of 1 for 20 periods at 6% ....................................
.312
Present value of annuity for 10 periods at 10% ........................
6.145
Present value of annuity for 10 periods at 12% ........................
5.650
Present value of annuity for 20 periods at 5% ..........................
12.462
Present value of annuity for 20 periods at 6% ..........................
11.470
Instructions
(a) Calculate the issue price of the bonds.
(b) Without prejudice to your solution in part (a), assume that the issue price was $884,000.
Prepare the amortization table for 2007, assuming that amortization is recorded on interest
payment dates.
Solution 14-103
(a) .312 × $1,000,000 =
11.470 × $50,000 =
(b) Date
1/1/07
6/30/07
12/31/07
$312,000
573,500
$885,500
Cash
Expense
Amortization
$50,000
50,000
$53,040
53,222
3,040
3,222
Carrying Amount
$884,000
887,040
890,262
Ex. 14-104—Amortization of discount or premium.
Benson Industries, Inc. issued $6,000,000 of 8% debentures on May 1, 2006 and received cash
totaling $5,323,577. The bonds pay interest semiannually on May 1 and November 1. The maturity
date on these bonds is November 1, 2014. The firm uses the effective-interest method of amortizing
discounts and premiums. The bonds were sold to yield an effective-interest rate of 10%.
Instructions
Calculate the total dollar amount of discount or premium amortization during the first year (5/1/06
through 4/30/07) these bonds were outstanding. (Show computations and round to the nearest
dollar.)
Solution 14-104
Date
5/1/06
11/1/06
5/1/07
Interest
Expense
Cash
Interest
Discount
Amortized
$266,179
267,488
$240,000
240,000
$26,179
27,488
$53,667
Total
Carrying
Value of Bonds
$5,323,577
5,349,756
5,377,244
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14 - 28 Test Bank for Intermediate Accounting, Twelfth Edition
Ex. 14-105—Entries for Bonds Payable.
Prepare journal entries to record the following transactions related to long-term bonds of Starr Co.
(a) On April 1, 2006, Starr issued $500,000, 9% bonds for $537,868 including accrued interest.
Interest is payable annually on January 1, and the bonds mature on January 1, 2016.
(b) On July 1, 2008 Starr retired $150,000 of the bonds at 102 plus accrued interest. Starr uses
straight-line amortization.
Solution 14-105
(a) Cash...............................................................................................
Bonds Payable ....................................................................
Interest Expense ($500,000 × 9% × 3/12) ...........................
Premium on Bonds Payable ................................................
537,868
(b) Interest Expense ............................................................................
Premium on Bonds Payable ($26,618 × .3 × 6/117) ......................
Cash ($150,000 × 9% × 6/12)..............................................
6,340
410
Bonds Payable ...............................................................................
Premium on Bonds Payable ($26,618 × .3 × 90/117) ....................
Cash ....................................................................................
Gain on Redemption of Bonds.............................................
150,000
6,142
500,000
11,250
26,618
6,750
153,000
3,142
Ex. 14-106—Retirement of bonds.
Prepare journal entries to record the following retirement. (Show computations and round to the
nearest dollar.)
The December 31, 2007 balance sheet of Marin Co. included the following items:
7.5% bonds payable due December 31, 2015
Unamortized discount on bonds payable
$1,200,000
48,000
The bonds were issued on December 31, 2005 at 95, with interest payable on June 30 and
December 31. (Use straight-line amortization.)
On April 1, 2008, Marin retired $240,000 of these bonds at 101 plus accrued interest.
Solution 14-106
Interest Expense .............................................................................
Cash ($240,000 × 7.5% × 3/12)...........................................
Discount on Bonds Payable ($48,000 × 1/5 × 1/8 × 3/12) ...
4,800
Bonds Payable ................................................................................
Loss on Redemption of Bonds ........................................................
Discount on Bonds Payable [(1/5 × $48,000) – $300] .........
Cash ....................................................................................
240,000
11,700
4,500
300
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9,300
242,400
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Long-Term Liabilities
14 - 29
Ex. 14-107—Early extinguishment of debt.
Pratt, Incorporated sold its 8% bonds with a maturity value of $3,000,000 on August 1, 2005 for
$2,946,000. At the time of the sale the bonds had 5 years until they reached maturity. Interest on
the bonds is payable semiannually on August 1 and February 1. The bonds are callable at 104 at
any time after August 1, 2007. By October 1, 2007, the market rate of interest has declined and
the market price of Pratt's bonds has risen to a price of 101. The firm decides to refund the bonds
by selling a new 6% bond issue to mature in 5 years. Pratt begins to reacquire its 8% bonds in
the market and is able to purchase $500,000 worth at 101. The remainder of the outstanding
bonds is reacquired by exercising the bonds' call feature. In the final analysis, how much was the
gain or loss experienced by Pratt in reacquiring its 8% bonds? (Assume the firm used straightline amortization.) Show calculations.
Solution 14-107
Reacquisition price:
$500,000 × 1.01 =
$2,500,000 × 1.04 =
Less net carrying amount:
$2,946,000 + ($54,000 × 26/60) =
Loss on early extinguishment
$ 505,000
2,600,000
$3,105,000
2,969,400
$ 135,600
*Ex. 14-108—Accounting for a troubled debt settlement.
Cole, Inc., which owes Henry Co. $600,000 in notes payable with accrued interest of $54,000, is
in financial difficulty. To settle the debt, Henry agrees to accept from Cole equipment with a fair
value of $570,000, an original cost of $840,000, and accumulated depreciation of $195,000.
Instructions
(a) Compute the gain or loss to Cole on the settlement of the debt.
(b) Compute the gain or loss to Cole on the transfer of the equipment.
(c) Prepare the journal entry on Cole's books to record the settlement of this debt.
(d) Prepare the journal entry on Henry's books to record the settlement of the receivable.
*Solution 14-108
(a) Note payable
Interest payable
Carrying amount of debt
Fair value of equipment
Gain on settlement of debt
$600,000
54,000
654,000
570,000
$ 84,000
(b) Cost
Accumulated depreciation
Book value
Fair value of plant assets
Loss on disposal of equipment
$840,000
195,000
645,000
570,000
$ 75,000
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14 - 30 Test Bank for Intermediate Accounting, Twelfth Edition
*Solution 14-108 (cont.)
(c) Notes Payable................................................................................
Interest Payable .............................................................................
Accumulated Depreciation .............................................................
Loss on Disposal of Equipment .....................................................
Equipment ..........................................................................
Gain on Settlement of Debt ................................................
600,000
54,000
195,000
75,000
(d) Equipment ......................................................................................
Allowance for Doubtful Accounts ...................................................
Notes Receivable ...............................................................
Interest Receivable ............................................................
570,000
84,000
840,000
84,000
600,000
54,000
*Ex. 14-109—Accounting for a troubled debt restructuring.
On December 31, 2006, Poore Co. is in financial difficulty and cannot pay a note due that day. It
is a $500,000 note with $50,000 accrued interest payable to Edsen, Inc. Edsen agrees to forgive
the accrued interest, extend the maturity date to December 31, 2008, and reduce the interest rate
to 4%. The present value of the restructured cash flows is $428,000.
Instructions
Prepare entries for the following:
(a) The restructure on Poore's books.
(b) The payment of interest on December 31, 2007.
(c) The restructure on Edsen’s books.
*Solution 14-109
(a) Interest Payable .............................................................................
Notes Payable ($500,000 × 4% × 2) ..................................
Gain on Restructuring ........................................................
50,000
(b) Notes Payable................................................................................
Cash ...................................................................................
20,000
(c) Allowance for Doubtful Accounts ...................................................
Notes Receivable ...............................................................
Interest Receivable ............................................................
122,000
40,000
10,000
20,000
72,000
50,000
*Ex. 14-110—Accounting for troubled debt.
(a) What are the general rules for measuring and recognizing a gain or loss by the debtor on a
settlement of troubled debt which includes the transfer of noncash assets?
(b) What are the general rules for measuring and recognizing a gain and for recording future
payments by the debtor in a troubled debt restructuring?
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14 - 31
*Solution 14-110
(a) If the settlement of debt includes the transfer of noncash assets, a gain is measured by the
debtor as the difference between the fair value of the assets transferred and the carrying
amount of the debt, including accrued interest. The debtor also recognizes a gain or loss on
the disposal of assets as the difference between the fair value of the assets transferred and
their book value.
(b) If the carrying amount of the payable is greater than the undiscounted total future cash flows,
the gain is measured by the debtor as the difference between the carrying amount and the
future cash flows. Future payments reduce the principal; no interest expense is recorded by
the debtor.
If the carrying amount of the payable is less than the future cash flows, no restructuring gain
is recognized by the debtor. A new effective-interest rate is calculated that equates the
present value of the future cash flows with the carrying amount of the debt. A part of the
future cash flows is recorded as interest expense by the debtor.
PROBLEMS
Pr. 14-111—Bond discount amortization.
On June 1, 2006, Janson Bottle Company sold $400,000 in long-term bonds for $351,040. The
bonds will mature in 10 years and have a stated interest rate of 8% and a yield rate of 10%. The
bonds pay interest annually on May 31 of each year. The bonds are to be accounted for under
the effective-interest method.
Instructions
(a) Construct a bond amortization table for this problem to indicate the amount of interest
expense and discount amortization at each May 31. Include only the first four years. Make
sure all columns and rows are properly labeled. (Round to the nearest dollar.)
(b) The sales price of $351,040 was determined from present value tables. Specifically explain
how one would determine the price using present value tables.
(c) Assuming that interest and discount amortization are recorded each May 31, prepare the
adjusting entry to be made on December 31, 2008. (Round to the nearest dollar.)
Solution 14-111
(a)
Date
6/1/06
5/31/07
5/31/08
5/31/09
5/31/10
(b)
(1)
(2)
Credit Cash
Debit
Interest Expense
Credit
Bond Discount
$32,000
32,000
32,000
32,000
$35,104
35,414
35,756
36,131
$3,104
3,414
3,756
4,131
Carrying Amount
of Bonds
$351,040
354,144
357,558
361,314
365,445
Find the present value of $400,000 due in 10 years at 10%.
Find the present value of 10 annual payments of $32,000 at 10%.
Add (1) and (2) to obtain the present value of the principal and the interest payments.
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14 - 32 Test Bank for Intermediate Accounting, Twelfth Edition
Solution 14-111 (cont.)
(c)
Interest Expense...........................................................................
Interest Payable ................................................................
Discount on Bonds Payable..............................................
20,858*
18,667**
2,191
*7/12 × $35,756 (from Table) = $20,858
**7/12 × 8% × $400,000 = $18,667
Pr. 14-112—Bond interest and discount amortization.
Logan Corporation issued $800,000 of 8% bonds on October 1, 2006, due on October 1, 2011.
The interest is to be paid twice a year on April 1 and October 1. The bonds were sold to yield
10% effective annual interest. Logan Corporation closes its books annually on December 31.
Instructions
(a) Complete the following amortization schedule for the dates indicated. (Round all answers to
the nearest dollar.) Use the effective-interest method.
Credit Cash
Debit
Interest Expense
Credit
Bond Discount
October 1, 2006
April 1, 2007
October 1, 2007
Carrying Amount
of Bonds
$738,224
(b) Prepare the adjusting entry for December 31, 2007. Use the effective-interest method.
(c) Compute the interest expense to be reported in the income statement for the year ended
December 31, 2007.
Solution 14-112
(a)
Credit Cash
October 1, 2006
April 1, 2007
October 1, 2007
$32,000
32,000
Debit
Interest Expense
$36,911
37,157
Credit
Bond Discount
$4,911
5,157
(b) Interest Expense ($748,292 × 10% × 3/12) .....................................
Interest Payable (1/2 × $32,000) ........................................
Discount on Bonds Payable ($18,707 – $16,000) ..............
(c)
$18,456
37,157
18,707
$74,320
Carrying Amount
of Bonds
$738,224
743,135
748,292
18,707
(1/2 of $36,911)
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16,000
2,707
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Long-Term Liabilities
14 - 33
Pr. 14-113—Entries for bonds payable.
Prepare the necessary journal entries to record the following transactions relating to the long-term
issuance of bonds of Titus Co.:
March 1
Issued $800,000 face value Titus Co. second mortgage, 8% bonds for $872,160, including
accrued interest. Interest is payable semiannually on December 1 and June 1 with the bonds
maturing 10 years from this past December 1. The bonds are callable at 102.
June 1
Paid semiannual interest on Titus Co. bonds. (Use straight-line amortization of any premium or
discount.)
December 1
Paid semiannual interest on Titus Co. bonds and purchased $400,000 face value bonds at the
call price in accordance with the provisions of the bond indenture.
Solution 14-113
March 1: Cash .....................................................................................
Bonds Payable .........................................................
Premium on Bonds Payable .....................................
Interest Expense ($800,000 × 8% × 3/12) ................
872,160
June 1: Interest Expense ..................................................................
Premium on Bonds Payable ($56,160 × 3/117) ...................
Cash .........................................................................
30,560
1,440
Dec. 1: Interest Expense ..................................................................
Premium on Bonds Payable ($56,160 × 6/117) ...................
Cash .........................................................................
29,120
2,880
Bonds Payable .....................................................................
Premium on Bonds Payable* ...............................................
Gain on Redemption of Bonds .................................
Cash .........................................................................
400,000
25,920
800,000
56,160
16,000
32,000
32,000
17,920
408,000
*1/2 × ($56,160 – $1,440 – $2,880) = $25,920.
Pr. 14-114—Entries for bonds payable.
Prepare journal entries to record the following transactions relating to long-term bonds of Grier,
Inc. (Show computations.)
(a) On June 1, 2006, Grier, Inc. issued $600,000, 6% bonds for $587,640, which includes
accrued interest. Interest is payable semiannually on February 1 and August 1 with the
bonds maturing on February 1, 2016. The bonds are callable at 102.
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14 - 34 Test Bank for Intermediate Accounting, Twelfth Edition
Pr. 14-114 (cont.)
(b) On August 1, 2006, Grier paid interest on the bonds and recorded amortization. Grier uses
straight-line amortization.
(c) On February 1, 2008, Grier paid interest and recorded amortization on all of the bonds, and
purchased $360,000 of the bonds at the call price. Assume that a reversing entry was made
on January 1, 2008.
Solution 14-114
(a) Cash...............................................................................................
Discount on Bonds Payable ...........................................................
Bonds Payable ...................................................................
Interest Expense ($600,000 × 6% × 4/12) .........................
587,640
24,360
(b) Interest Expense ($600,000 × 6% × 6/12) + $420 .........................
Cash ...................................................................................
Discount on Bonds Payable ($24,360 × 2/116)..................
18,420
(c) Interest Expense ($18,000 + $1,260).............................................
Cash ...................................................................................
Discount on Bonds Payable ($24,360 × 6/116).................
19,260
Bonds Payable ...............................................................................
Loss on Bond Redemption .............................................................
Discount on Bonds Payable [.6 × ($24,360 – $4,200)] ......
Cash ...................................................................................
360,000
19,296
600,000
12,000
18,000
420
18,000
1,260
12,096
367,200
*Pr. 14-115—Accounting for a troubled debt settlement.
Finney, Inc., which owes Carson Co. $800,000 in notes payable, is in financial difficulty. To
eliminate the debt, Carson agrees to accept from Finney land having a fair market value of
$610,000 and a recorded cost of $450,000.
Instructions
(a) Compute the amount of gain or loss to Finney, Inc. on the transfer (disposition) of the land.
(b) Compute the amount of gain or loss to Finney, Inc. on the settlement of the debt.
(c) Prepare the journal entry on Finney's books to record the settlement of this debt.
(d) Compute the gain or loss to Carson Co. from settlement of its receivable from Finney.
(e) Prepare the journal entry on Carson's books to record the settlement of this receivable.
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Long-Term Liabilities
14 - 35
*Solution 14-115
(a)
Fair market value of the land
Cost of the land to Elton, Inc.
Gain on disposition of land
$610,000
450,000
$160,000
(b)
Carrying amount of debt
Fair market value of the land given
Gain on settlement of debt
$800,000
610,000
$190,000
(c)
Notes Payable ...............................................................................
Land ..................................................................................
Gain on Disposition of Land ..............................................
Gain on Settlement of Debt ...............................................
(d)
Carrying amount of receivable
Land received in settlement
Loss on settled debt
(e)
Land ..............................................................................................
Allowance for Doubtful Accounts ..................................................
Notes Receivable ..............................................................
800,000
450,000
160,000
190,000
$800,000
610,000
$190,000
610,000
190,000
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800,000
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Kieso 15e testbank ch15
Intermediate Accounting I (Eastern Michigan University)
StuDocu is not sponsored or endorsed by any college or university
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CHAPTER 15
STOCKHOLDERS’ EQUITY
IFRS questions are available at the end of this chapter.
TRUE-FALSE—Conceptual
Answer
T
F
T
F
T
F
T
F
F
T
F
T
T
F
F
T
T
F
F
T
No.
Description
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
State a corporation incorporates in.
Definition of preemptive right.
Common stock as residual interest.
Earned capital definition.
Reporting true no-par stock.
Allocating proceeds in lump sum sales.
Accounting for stock issued for noncash consideration.
Definition of treasury stock.
Reporting treasury stock under cost method.
Selling treasury stock below cost.
Participating preferred stock.
Callable preferred stock.
Restricting legal capital.
Disclosing dividend policy.
Affect of dividends on total stockholders’ equity.
Property dividends definition.
Accounting for small stock dividend.
Stock splits and large stock dividends.
Computing rate of return on common stock equity.
Computing payout ratio.
MULTIPLE CHOICE—Conceptual
Answer
c
b
d
b
c
c
d
d
d
b
a
b
a
d
b
a
d
c
No.
Description
21.
22.
23.
S
24.
S
25.
26.
27.
28.
29.
30.
31.
32.
P
33.
S
34.
S
35.
S
36.
P
37.
38.
Nature of stockholders' interest.
Pre-emptive right.
Pre-emptive right.
Definition of legal capital.
Definition of residual owner.
Nature of stockholders' equity.
Sources of stockholders' equity.
Classification of stockholders' equity.
Allocation methods for a lump sum issuance.
Capital stock issued in payment of services.
Costs of issuing capital stock.
Creation of "secret reserves."
Authorized shares.
Par value stock.
Legal restrictions for profit distributions.
Acquisition of treasury shares.
Treasury shares definition.
Purchase of treasury stock at greater than par value.
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Test Bank for Intermediate Accounting, Fifteenth Edition
MULTIPLE CHOICE—Conceptual (cont.)
Answer
a
a
b
c
c
b
b
c
c
b
c
c
a
a
b
b
b
b
b
a
a
b
b
c
b
a
b
c
a
c
a
a
No.
Description
39.
40.
41.
42.
43.
44.
P
45.
S
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
66.
P
67.
*68.
*69.
*70.
Sale of treasury stock.
Reissued treasury stock at less than acquisition cost.
Reissued treasury stock at greater than acquisition cost.
Effect of treasury stock transactions.
Preferred stock—debt features.
Cumulative feature of preferred stock.
Reporting redeemable stock.
Reporting dividends in arrears.
Issued vs. outstanding common stock.
Timing of entry to record dividends.
Shares entitled to receive a cash dividend.
Accounting for a property dividend.
Distribution of a property dividend.
Liquidating dividend.
Entry to record a liquidating dividend.
Effects of a stock dividend.
Effects of a stock dividend.
Effect of a large stock dividend.
Large stock dividend.
Small stock dividend.
Small stock dividend.
Classification of stock dividends distributable.
Effect of stock splits and stock dividends.
Effect of a stock split.
Disclosures in the balance sheet.
Return on common stock equity calculation.
Payout ratio calculation.
Book value per share.
Computing book value per share.
Dividends and treasury stock.
Noncumulative preferred stock and dividends in arrears.
Disclosure of preferred dividends in arrears.
P
These questions also appear in the Problem-Solving Survival Guide.
These questions also appear in the Study Guide.
*This topic is dealt with in an Appendix to the chapter.
S
MULTIPLE CHOICE—Computational
Answer
a
b
b
c
d
b
c
No.
Description
71.
72.
73.
74.
75.
76.
77.
Composition of stockholders' equity.
Calculation of total paid-in capital.
Allocating proceeds in lump sum sales.
Allocating proceeds in lump sum sales.
Computing total paid-in capital.
Allocating proceeds in lump sum sales.
Allocating proceeds in lump sum sales.
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Stockholders’ Equity
MULTIPLE CHOICE—Computational (cont.)
Answer
d
d
b
c
c
d
c
a
c
c
a
a
c
d
b
d
d
a
c
a
b
b
b
a
a
c
a
d
d
c
c
a
b
c
a
b
b
b
d
b
c
b
No.
78.
79.
80.
81.
82.
83.
84.
85.
86.
87.
88.
89.
90.
91.
92.
93.
94.
95.
96.
97.
98.
99.
100.
101.
102.
103.
104.
105.
106.
107.
108.
109.
110.
111.
112.
113.
114.
*115.
*116.
*117.
*118.
*119.
Description
Computing paid-in capital from treasury stock transactions.
Recording purchase of treasury stock.
Reissue treasury stock—above acquisition cost.
Reissue treasury stock—cost method.
Additional paid-in capital with treasury stock transactions.
Calculation of additional paid-in capital.
Calculation of additional paid-in capital.
Total stockholders' equity with treasury stock transactions.
Total stockholders' equity with treasury stock exchange.
Calculate dividends for cumulative preferred shares.
Calculate dividends for common shares.
Calculate dividends for common shares.
Reduction in retained earnings from property dividends.
Reduction in retained earnings from property dividends.
Reduction in retained earnings caused by a property dividend.
Reduction in retained earnings from property dividends.
Reduction in retained earnings from property dividends.
Decrease in retained earnings from cash and stock dividends.
Calculation of a large stock dividend.
Calculation of a small stock dividend.
Calculation of a small stock dividend.
Small stock dividend's effect on retained earnings.
Balance of retained earnings after a small stock dividend.
Calculate retained earnings available for dividends.
Calculate decrease in retained earnings.
Calculate the payout ratio.
Calculate book value per share.
Calculate retained earnings available for dividends.
Calculate decrease in retained earnings.
Calculate rate of return on common stock equity.
Calculate price-earnings ratio.
Calculate dividends paid to common stockholders.
Rate of return on common stock equity.
Determine the rate of return on common stock equity.
Determine book value per share.
Computation of payout ratio.
Computation of book value per share.
Allocation of cash dividend to common and preferred shares.
Cash dividends for cumulative preferred shares.
Cash dividends for cumulative participating preferred shares.
Cash dividend allocation with participating preferred shares.
Cash dividend for cumulative preferred shares.
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Test Bank for Intermediate Accounting, Fifteenth Edition
MULTIPLE CHOICE—CPA Adapted
Answer
d
b
c
b
c
d
b
d
d
a
c
No.
120.
121.
122.
123.
124.
125.
126.
127.
128.
129.
*130.
Description
Capital stock issued in payment of services.
Proceeds from preferred stock in lump sum issue.
Determine paid-in capital from treasury stock.
Reissue treasury stock—cost method.
Effect of the reissuance of treasury stock.
Entry to record property dividends declared.
Effect of a liquidating dividend.
Effect of a stock dividend.
Stock dividend when market price exceeds par value.
Balance of retained earnings following stock dividend.
Allocation of cash dividend to common and preferred shares.
EXERCISES
Item
E15-131
E15-132
E15-133
E15-134
E15-135
E15-136
E15-137
E15-138
E15-139
*E15-140
*E15-141
Description
Lump sum issuance of stock.
Treasury stock.
Treasury stock.
Treasury stock.
Treasury stock.
Stockholders’ equity.
Stock dividends.
Stock dividends and stock splits.
Computation of selected ratios.
Dividends on preferred stock.
Dividends on preferred stock.
PROBLEMS
Item
P15-142
P15-143
P15-144
P15-145
*P15-146
Description
Equity transactions.
Treasury stock transactions.
Stock dividends.
Equity transactions.
Dividends on preferred and common stock.
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Stockholders’ Equity
15 - 5
CHAPTER LEARNING OBJECTIVES
1.
Discuss the characteristics of the corporate form of organization.
2.
Identify the key components of stockholders' equity.
3.
Explain the accounting procedures for issuing shares of stock.
4.
Describe the accounting for treasury stock.
5.
Explain the accounting for and reporting of preferred stock.
6.
Describe the policies used in distributing dividends.
7.
Identify the various forms of dividend distributions.
8.
Explain the accounting for small and large stock dividends, and for stock splits.
9.
Indicate how to present and analyze stockholders’ equity.
*10.
Explain the different types of preferred stock dividends and their effect on book value per
share.
*11.
Compare the procedures for accounting for stockholders’ equity under GAAP and IFRS.
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Test Bank for Intermediate Accounting, Fifteenth Edition
SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS
Item
Type
1.
TF
4.
TF
5.
6.
7.
TF
TF
TF
8.
9.
10.
TF
TF
TF
S
Item
Type
2.
TF
3.
25.
MC
26.
29.
30.
31.
MC
MC
MC
S
P
MC
MC
MC
41.
42.
78.
79.
MC
40.
MC
11.
12.
TF
TF
43.
44.
MC
MC
13.
TF
14.
TF
TF
TF
MC
32.
33.
S
34.
P
37.
38.
39.
36.
15.
16.
47.
Item
48.
49.
50.
MC
MC
MC
P
45.
46.
S
Item
Type
Item
Learning Objective 1
TF
21. MC
22.
Learning Objective 2
MC
27. MC
28.
Learning Objective 3
S
MC
35. MC
73.
MC
71. MC
74.
MC
72. MC
75.
Learning Objective 4
MC
80. MC
84.
MC
81. MC
85.
MC
82. MC
86.
MC
83. MC
122.
Learning Objective 5
MC
87. MC
89.
MC
88. MC
Learning Objective 6
Type
Item
Type
Item
Type
23.
MC
S
24.
MC
MC
MC
MC
76.
77.
120.
MC
MC
MC
121.
131.
142.
MC
E
P
MC
MC
MC
123.
124.
132.
134.
135.
143.
E
E
P
MC
133.
MC
MC
ECT
E
MC
MC
MC
51.
52.
53.
Learning Objective 7
MC
90. MC
93.
MC
91. MC
94.
MC
92. MC
125.
MC
MC
MC
126.
136.
144.
MC
E
PCT
145.
P
Learning Objective 8
MC
99. MC
104.
MC
127.
MC
144.
MC
MC
MC
MC
128.
129.
137.
138.
MC
MC
E
E
145.
PCT
P
MC
MC
112.
113.
MC
MC
114.
139.
MC
E
MC
E
141.
146.
E
P
Learning Objective 11- IFRS
TF
7. MC
9. MC
MC
8. MC
10. MC
11.
12.
SA
SA
17.
TF
57.
MC
62.
18.
54.
55.
56.
TF
MC
MC
MC
58.
59.
60.
61.
MC
MC
MC
MC
95.
96.
97.
98.
19.
20.
TF
TF
63.
64.
MC
MC
65.
66.
68.
69.
MC
MC
70.
115.
MC
MC
116.
117.
1.
2.
TF
TF
3.
4.
TF
TF
5.
6.
Note:
Type
MC
100. MC
105.
MC
101. MC
106.
MC
102. MC
107.
MC
103. MC
108.
Learning Objective 9
P
MC
67. MC
110.
MC
109. MC
111.
Learning Objective *10
MC
118. MC
130.
MC
119. MC
140.
TF = True-False
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Stockholders’ Equity
MC = Multiple Choice
E = Exercise
P = Problem
CT = Critical Thinking
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Test Bank for Intermediate Accounting, Fifteenth Edition
TRUE-FALSE—Conceptual
1.
A corporation is incorporated in only one state regardless of the number of states in which
it operates.
2.
The preemptive right allows stockholders the right to vote for directors of the company.
3.
Common stock is the residual corporate interest that bears the ultimate risks of loss.
4.
Earned capital consists of additional paid-in capital and retained earnings.
5.
True no-par stock should be carried in the accounts at issue price without any additional
paid-in capital reported.
6.
Companies allocate the proceeds received from a lump-sum sale of securities based on
the securities’ par values.
7.
Companies should record stock issued for services or noncash property at either the fair
value of the stock issued or the fair value of the consideration received, whichever is more
clearly determinable.
8.
Treasury stock is a company’s own stock that has been reacquired and retired.
9.
The cost method records all transactions in treasury shares at their cost and reports the
treasury stock as a deduction from capital stock only.
10.
When a corporation sells treasury stock below its cost, it usually debits the difference
between cost and selling price to Paid-in Capital from Treasury Stock.
11.
Participating preferred stock requires that if a company fails to pay a dividend in any year,
it must make it up in a later year before paying any common dividends.
12.
Callable preferred stock permits the corporation at its option to redeem the outstanding
preferred shares at specified future dates and at stipulated prices.
13.
The laws of some states require that corporations restrict their legal capital from
distribution to stockholders.
14.
The SEC makes it mandatory for companies to disclose their dividend policy in their
annual report.
15.
All dividends, except for liquidating dividends, reduce the total stockholders’ equity of a
corporation.
16.
Dividends payable in assets of the corporation other than cash are called property
dividends or dividends in kind.
17.
When a stock dividend is less than 20-25 percent of the common stock outstanding, a
company is required to transfer the fair value of the stock issued from retained earnings.
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Stockholders’ Equity
18.
19.
20.
15 - 9
Stock splits and large stock dividends have the same effect on a company’s retained
earnings and total stockholders’ equity.
The rate of return on common stock equity is computed by dividing net income by the
average common stockholders’ equity.
The payout ratio is determined by dividing cash dividends paid to common stockholders
by net income available to common stockholders.
True-False Answers—Conceptual
Item
1.
2.
3.
4.
5.
Ans.
T
F
T
F
T
Item
6.
7.
8.
9.
10.
Ans.
F
T
F
F
T
Item
11.
12.
13.
14.
15.
Ans.
F
T
T
F
F
Item
16.
17.
18.
19.
20.
Ans.
T
T
F
F
T
MULTIPLE CHOICE—Conceptual
S
21.
The residual interest in a corporation belongs to the
a. management.
b. creditors.
c. common stockholders.
d. preferred stockholders.
22.
The pre-emptive right of a common stockholder is the right to
a. share proportionately in corporate assets upon liquidation.
b. share proportionately in any new issues of stock of the same class.
c. receive cash dividends before they are distributed to preferred stockholders.
d. exclude preferred stockholders from voting rights.
23.
The pre-emptive right enables a stockholder to
a. receive the same amount of dividends on a percentage basis as the preferred
stockholders.
b. receive cash dividends before other classes of stock without the pre-emptive right.
c. sell capital stock back to the corporation at the option of the stockholder.
d. none of these answers are correct.
24.
In a corporate form of business organization, legal capital is best defined as
a. the amount of capital the state of incorporation allows the company to accumulate
over its existence.
b. the par value of all capital stock issued.
c. the amount of capital the federal government allows a corporation to generate.
d. the total capital raised by a corporation within the limits set by the Securities and
Exchange Commission.
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15 - 10 Test Bank for Intermediate Accounting, Fifteenth Edition
S
25.
Common stockholders of a business enterprise are said to be the residual owners. The
term residual owner means that shareholders
a. are entitled to a dividend every year in which the business earns a profit.
b. have the rights to specific assets of the business.
c. bear the ultimate risks and uncertainties and receive the benefits of enterprise
ownership.
d. can negotiate individual contracts on behalf of the enterprise.
26.
Total stockholders' equity represents
a. a claim to specific assets contributed by the owners.
b. the maximum amount that can be borrowed by a company.
c. a claim against a portion of the total assets of a company.
d. only the amount of earnings that have been retained in the business.
27.
A primary source of stockholders' equity is
a. income retained by the corporation.
b. appropriated retained earnings.
c. contributions by stockholders.
d. both income retained by the corporation and contributions by stockholders.
28.
Stockholders' equity is generally classified into two major categories:
a. contributed capital and appropriated capital.
b. appropriated capital and retained earnings.
c. retained earnings and unappropriated capital.
d. earned capital and contributed capital.
29.
The accounting problem in a lump sum issuance is the allocation of proceeds between the
classes of securities. An acceptable method of allocation is
a. the pro forma method.
b. the proportional method.
c. the incremental method.
d. either the proportional method or the incremental method.
30.
When a corporation issues its capital stock in payment for services, the least appropriate
basis for recording the transaction is the
a. market value of the services received.
b. par value of the shares issued.
c. market value of the shares issued.
d. Any of these provides an appropriate basis for recording the transaction.
31.
Direct costs incurred to sell stock such as underwriting costs should be accounted for as
1. a reduction of additional paid-in capital.
2. an expense of the period in which the stock is issued.
3. an intangible asset.
a.
b.
c.
d.
1
2
3
1 or 3
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Stockholders’ Equity
15 - 11
32.
A "secret reserve" will be created if
a. inadequate depreciation is charged to income.
b. a capital expenditure is charged to expense.
c. liabilities are understated.
d. stockholders' equity is overstated.
P
33.
Which of the following represents the total number of shares that a corporation may issue
under the terms of its charter?
a. Authorized shares
b. Issued shares
c. Unissued shares
d. Outstanding shares
S
34.
Stock that has a fixed per-share amount printed on each stock certificate is called
a. stated value stock.
b. fixed value stock.
c. uniform value stock.
d. par value stock.
S
35.
Which of the following is not a legal restriction related to profit distributions by a
corporation?
a. The amount distributed to owners must be in compliance with the state laws governing
corporations.
b. The amount distributed in any one year can never exceed the net income reported for
that year.
c. Profit distributions must be formally approved by the board of directors.
d. Dividends must be in full agreement with the capital stock contracts as to preferences
and participation.
S
36.
In January 2014, Finley Corporation, a newly formed company, issued 10,000 shares of
its $10 par common stock for $15 per share. On July 1, 2014, Finley Corporation
reacquired 1,000 shares of its outstanding stock for $12 per share. The acquisition of
these treasury shares
a. decreased total stockholders' equity.
b. increased total stockholders' equity.
c. did not change total stockholders' equity.
d. decreased the number of issued shares.
P
37.
Treasury shares are shares
a. held as an investment by the treasurer of the corporation.
b. held as an investment of the corporation.
c. issued and outstanding.
d. issued but not outstanding.
38.
When treasury stock is purchased for more than the par value of the stock and the cost
method is used to account for treasury stock, what account(s) should be debited?
a. Treasury stock for the par value and paid-in capital in excess of par for the excess of
the purchase price over the par value.
b. Paid-in capital in excess of par for the purchase price.
c. Treasury stock for the purchase price.
d. Treasury stock for the par value and retained earnings for the excess of the purchase
price over the par value.
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15 - 12 Test Bank for Intermediate Accounting, Fifteenth Edition
P
39.
“Gains" on sales of treasury stock (using the cost method) should be credited to
a. paid-in capital from treasury stock.
b. capital stock.
c. retained earnings.
d. other income.
40.
Porter Corp. purchased its own par value stock on January 1, 2014 for $20,000 and
debited the treasury stock account for the purchase price. The stock was subsequently
sold for $12,000. The $8,000 difference between the cost and sales price should be
recorded as a deduction from
a. additional paid-in capital to the extent that previous net "gains" from sales of the same
class of stock are included therein; otherwise, from retained earnings.
b. additional paid-in capital without regard as to whether or not there have been previous
net "gains" from sales of the same class of stock included therein.
c. retained earnings.
d. net income.
41.
How should a "gain" from the sale of treasury stock be reflected when using the cost
method of recording treasury stock transactions?
a. As ordinary earnings shown on the income statement.
b. As paid-in capital from treasury stock transactions.
c. As an increase in the amount shown for common stock.
d. As an extraordinary item shown on the income statement.
42.
Which of the following best describes a possible result of treasury stock transactions by a
corporation?
a. May increase but not decrease retained earnings.
b. May increase net income if the cost method is used.
c. May decrease but not increase retained earnings.
d. May decrease but not increase net income.
43.
Which of the following features of preferred stock makes it more like a debt than an equity
instrument?
a. Participating
b. Voting
c. Redeemable
d. Noncumulative
44.
The cumulative feature of preferred stock
a. limits the amount of cumulative dividends to the par value of the preferred stock.
b. requires that dividends not paid in any year must be made up in a later year before
dividends are distributed to common shareholders.
c. means that the shareholder can accumulate preferred stock until it is equal to the par
value of common stock at which time it can be converted into common stock.
d. enables a preferred stockholder to accumulate dividends until they equal the par value
of the stock and receive the stock in place of the cash dividends.
45.
According to the FASB, redeemable preferred stock should be
a. included with common stock.
b. included as a liability.
c. excluded from the stockholders’ equity heading.
d. included as a contra item in stockholders' equity.
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S
15 - 13
46.
Cumulative preferred dividends in arrears should be shown in a corporation's balance
sheet as
a. an increase in current liabilities.
b. an increase in stockholders' equity.
c. a footnote.
d. an increase in current liabilities for the current portion and long-term liabilities for the
long-term portion.
47.
At the date of the financial statements, common stock shares issued would exceed
common stock shares outstanding as a result of the
a. declaration of a stock split.
b. declaration of a stock dividend.
c. purchase of treasury stock.
d. payment in full of subscribed stock.
48.
An entry is not made on the
a. date of declaration.
b. date of record.
c. date of payment.
d. An entry is made on all of these dates.
49.
Cash dividends are paid on the basis of the number of shares
a. authorized.
b. issued.
c. outstanding.
d. outstanding less the number of treasury shares.
50.
Which of the following statements about property dividends is not true?
a. A property dividend is usually in the form of securities of other companies.
b. A property dividend is also called a dividend in kind.
c. The accounting for a property dividend should be based on the carrying value (book
value) of the nonmonetary assets transferred.
d. All of these statements are true.
51.
Houser Corporation owns 4,000,000 shares of stock in Baha Corporation. On December
31, 2014, Houser distributed these shares of stock as a dividend to its stockholders. This
is an example of a
a. property dividend.
b. stock dividend.
c. liquidating dividend.
d. cash dividend.
52.
A dividend which is a return to stockholders of a portion of their original investments is a
a. liquidating dividend.
b. property dividend.
c. liability dividend.
d. participating dividend.
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15 - 14 Test Bank for Intermediate Accounting, Fifteenth Edition
53.
A mining company declared a liquidating dividend. The journal entry to record the
declaration must include a debit to
a. Retained Earnings.
b. a paid-in capital account.
c. Accumulated Depletion.
d. Accumulated Depreciation.
54.
If management wishes to "capitalize" part of the earnings, it may issue a
a. cash dividend.
b. stock dividend.
c. property dividend.
d. liquidating dividend.
55.
Which dividends do not reduce stockholders' equity?
a. Cash dividends
b. Stock dividends
c. Property dividends
d. Liquidating dividends
56.
The declaration and issuance of a stock dividend larger than 25% of the shares previously
outstanding
a. increases common stock outstanding and increases total stockholders' equity.
b. decreases retained earnings but does not change total stockholders' equity.
c. may increase or decrease paid-in capital in excess of par but does not change total
stockholders' equity.
d. increases retained earnings and increases total stockholders' equity.
57.
Quirk Corporation issued a 100% stock dividend of its common stock which had a par
value of $10 before and after the dividend. At what amount should retained earnings be
capitalized for the additional shares issued?
a. There should be no capitalization of retained earnings.
b. Par value
c. Fair value on the declaration date
d. Fair value on the payment date
58.
The issuer of a 5% common stock dividend to common stockholders should transfer from
retained earnings to paid-in capital an amount equal to the
a. fair value of the shares issued.
b. book value of the shares issued.
c. minimum legal requirements.
d. par or stated value of the shares issued.
59.
At the date of declaration of a small common stock dividend, the entry should not include
a. a credit to Common Stock.
b. a credit to Paid-in Capital in Excess of Par.
c. a debit to Retained Earnings.
d. All of these are acceptable.
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60.
The balance in Common Stock Dividend Distributable should be reported as a(n)
a. deduction from common stock issued.
b. addition to capital stock.
c. current liability.
d. contra current asset.
61.
A feature common to both stock splits and stock dividends is
a. a transfer to earned capital of a corporation.
b. that there is no effect on total stockholders' equity.
c. an increase in total liabilities of a corporation.
d. a reduction in the contributed capital of a corporation.
62.
What effect does the issuance of a 2-for-1 stock split have on each of the following?
a.
b.
c.
d.
Par Value per Share
No effect
Increase
Decrease
Decrease
Retained Earnings
No effect
No effect
No effect
Decrease
63.
Which one of the following disclosures should be made in the equity section of the
balance sheet, rather than in the notes to the financial statements?
a. Dividend preferences
b. Liquidation preferences
c. Call prices
d. Conversion or exercise prices
64.
The rate of return on common stock equity is calculated by dividing
a. net income less preferred dividends by average common stockholders’ equity.
b. net income by average common stockholders’ equity.
c. net income less preferred dividends by ending common stockholders’ equity.
d. net income by ending common stockholders’ equity.
65.
The payout ratio can be calculated by dividing
a. dividends per share by earnings per share.
b. cash dividends by net income less preferred dividends.
c. cash dividends by market price per share.
d. dividends per share by earnings per share and dividing cash dividends by net income
less preferred dividends.
66.
Younger Company has outstanding both common stock and nonparticipating, noncumulative preferred stock. The liquidation value of the preferred is equal to its par value.
The book value per share of the common stock is unaffected by
a. the declaration of a stock dividend on preferred payable in preferred stock when the
market price of the preferred is equal to its par value.
b. the declaration of a stock dividend on common stock payable in common stock when
the market price of the common is equal to its par value.
c. the payment of a previously declared cash dividend on the common stock.
d. a 2-for-1 split of the common stock.
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15 - 16 Test Bank for Intermediate Accounting, Fifteenth Edition
P
67.
Assume common stock is the only class of stock outstanding in the Manley Corporation.
Total stockholders' equity divided by the number of common stock shares outstanding is
called
a. book value per share.
b. par value per share.
c. stated value per share.
d. fair value per share.
*68.
Dividends are not paid on
a. noncumulative preferred stock.
b. nonparticipating preferred stock.
c. treasury common stock.
d. Dividends are paid on all of these.
*69.
Noncumulative preferred dividends in arrears
a. are not paid or disclosed.
b. must be paid before any other cash dividends can be distributed.
c. are disclosed as a liability until paid.
d. are paid to preferred stockholders if sufficient funds remain after payment of the
current preferred dividend.
*70.
How should cumulative preferred dividends in arrears be shown in a corporation's
statement of financial position?
a. Note disclosure
b. Increase in stockholders' equity
c. Increase in current liabilities
d. Increase in current liabilities for the amount expected to be declared within the year or
operating cycle, and increase in long-term liabilities for the balance
Multiple Choice Answers—Conceptual
Item
21.
22.
23.
24.
25.
26.
27.
28.
Ans.
c
b
d
b
c
c
d
d
Item
29.
30.
31.
32.
33.
34.
35.
36.
Ans.
d
b
a
b
a
d
b
a
Item
37.
38.
39.
40.
41.
42.
43.
44.
Ans.
d
c
a
a
b
c
c
b
Item
45.
46.
47.
48.
49.
50.
51.
52.
Ans.
b
c
c
b
c
c
a
a
Item
53.
54.
55.
56.
57.
58.
59.
60.
Ans.
Item
Ans.
Item
Ans.
b
b
b
b
b
a
a
b
61.
62.
63.
64.
65.
66.
67.
*68.
b
c
b
a
b
c
a
c
*69.
*70.
a
a
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Stockholders’ Equity
15 - 17
MULTIPLE CHOICE—Computational
Use the following information for questions 71 and 72.
Presented below is information related to Hale Corporation:
Common Stock, $1 par
Paid-in Capital in Excess of Par—Common Stock
Preferred 8 1/2% Stock, $50 par
Paid-in Capital in Excess of Par—Preferred Stock
Retained Earnings
Treasury Common Stock (at cost)
$4,500,000
550,000
2,000,000
400,000
1,500,000
150,000
71.
The total stockholders' equity of Hale Corporation is
a. $8,800,000.
b. $8,950,000.
c. $7,300,000.
d. $7,450,000.
72.
The total paid-in capital (cash collected) related to the common stock is
a. $4,500,000.
b. $5,050,000.
c. $5,450,000.
d. $4,900,000.
73.
Manning Company issued 10,000 shares of its $5 par value common stock having a fair
value of $25 per share and 15,000 shares of its $15 par value preferred stock having a fair
value of $20 per share for a lump sum of $530,000. How much of the proceeds would be
allocated to the common stock?
a. $250,000
b. $240,909
c. $289,091
d. $281,563
74.
Norton Company issues 4,000 shares of its $5 par value common stock having a fair
value of $25 per share and 6,000 shares of its $15 par value preferred stock having a fair
value of $20 per share for a lump sum of $210,000. What amount of the proceeds should
be allocated to the preferred stock?
a. $171,818
b. $131,250
c. $114,545
d. $95,454
75.
Berry Corporation has 50,000 shares of $10 par common stock authorized. The following
transactions took place during 2014, the first year of the corporation’s existence:
Sold 10,000 shares of common stock for $13.50 per share.
Issued 10,000 shares of common stock in exchange for a patent valued at $150,000.
At the end of the Berry’s first year, total paid-in capital amounted to
a. $60,000.
b. $135,000.
c. $150,000.
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15 - 18 Test Bank for Intermediate Accounting, Fifteenth Edition
76.
d. $285,000.
Glavine Company issues 6,000 shares of its $5 par value common stock having a fair
value of $25 per share and 9,000 shares of its $15 par value preferred stock having a fair
value of $20 per share for a lump sum of $297,000. The proceeds allocated to the
common stock is
a. $118,800
b. $135,000
c. $150,000
d. $162,000
77.
Wheeler Company issued 5,000 shares of its $5 par value common stock having a fair
value of $25 per share and 7,500 shares of its $15 par value preferred stock having a fair
value of $20 per share for a lump sum of $264,000. The proceeds allocated to the
preferred stock is
a. $158,400
b. $150,000
c. $144,000
d. $120,000
78.
Pember Corporation started business in 2009 by issuing 200,000 shares of $20 par
common stock for $36 each. In 2014, 25,000 of these shares were purchased for $52 per
share by Pember Corporation and held as treasury stock. On June 15, 2015, these 25,000
shares were exchanged for a piece of property that had an assessed value of $1,010,000.
Pember’s stock is actively traded and had a market price of $60 on June 15, 2015. The
cost method is used to account for treasury stock. The amount of paid-in capital from
treasury stock transactions resulting from the above events would be
a. $1,000,000.
b. $ 600,000.
c. $ 190,000.
d. $ 200,000.
79.
On September 1, 2014, Valdez Company reacquired 20,000 shares of its $10 par value
common stock for $15 per share. Valdez uses the cost method to account for treasury
stock. The journal entry to record the reacquisition of the stock should debit
a. Treasury Stock for $200,000.
b. Common Stock for $200,000.
c. Common Stock for $200,000 and Paid-in Capital in Excess of Par for $75,000.
d. Treasury Stock for $300,000.
80.
Gannon Company acquired 10,000 shares of its own common stock at $20 per share on
February 5, 2014, and sold 5,000 of these shares at $27 per share on August 9, 2015.
The fair value of Gannon's common stock was $24 per share at December 31, 2014, and
$25 per share at December 31, 2015. The cost method is used to record treasury stock
transactions. What account(s) should Gannon credit in 2015 to record the sale of 5,000
shares?
a. Treasury Stock for $135,000.
b. Treasury Stock for $100,000 and Paid-in Capital from Treasury Stock for $35,000.
c. Treasury Stock for $100,000 and Retained Earnings for $35,000.
d. Treasury Stock for $120,000 and Retained Earnings for $15,000.
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Stockholders’ Equity
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81.
Long Co. issued 100,000 shares of $10 par common stock for $1,200,000. A year later
Long acquired 12,000 shares of its own common stock at $15 per share. Three months
later Long sold 6,000 of these shares at $19 per share. If the cost method is used to
record treasury stock transactions, to record the sale of the 6,000 treasury shares, Long
should credit
a. Treasury Stock for $114,000.
b. Treasury Stock for $60,000 and Paid-in Capital from Treasury Stock for $54,000.
c. Treasury Stock for $90,000 and Paid-in Capital from Treasury Stock for $24,000.
d. Treasury Stock for $90,000 and Paid-in Capital in Excess of Par for $24,000.
82.
An analysis of stockholders' equity of Hahn Corporation as of January 1, 2014, is as
follows:
Common stock, par value $20; authorized 100,000 shares;
issued and outstanding 90,000 shares
Paid-in capital in excess of par
Retained earnings
Total
$1,800,000
800,000
760,000
$3,360,000
Hahn uses the cost method of accounting for treasury stock and during 2014 entered into
the following transactions:
Acquired 2,500 shares of its stock for $75,000.
Sold 2,000 treasury shares at $35 per share.
Sold the remaining treasury shares at $20 per share.
Assuming no other equity transactions occurred during 2014, what should Hahn report at
December 31, 2014, as total additional paid-in capital?
a. $795,000
b. $800,000
c. $805,000
d. $815,000
83.
Percy Corporation was organized on January 1, 2014, with an authorization of 1,200,000
shares of common stock with a par value of $6 per share. During 2014, the corporation
had the following capital transactions:
January 5
July 28
December 31
issued 450,000 shares @ $10 per share
purchased 60,000 shares @ $11 per share
sold the 60,000 shares held in treasury @ $18 per share
Percy used the cost method to record the purchase and reissuance of the treasury
shares. What is the total amount of additional paid-in capital as of December 31, 2014?
a. $-0-.
b. $1,380,000.
c. $1,800,000.
d. $2,220,000.
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15 - 20 Test Bank for Intermediate Accounting, Fifteenth Edition
84.
Sosa Co.'s stockholders' equity at January 1, 2014 is as follows:
Common stock, $10 par value; authorized 300,000 shares;
Outstanding 225,000 shares
Paid-in capital in excess of par
Retained earnings
Total
$2,250,000
600,000
2,190,000
$5,040,000
During 2014, Sosa had the following stock transactions:
Acquired 6,000 shares of its stock for $270,000.
Sold 3,600 treasury shares at $50 a share.
Sold the remaining treasury shares at $41 per share.
No other stock transactions occurred during 2014. Assuming Sosa uses the cost method
to record treasury stock transactions, the total amount of all additional paid-in capital
accounts at December 31, 2014 is
a. $591,600.
b. $570,000.
c. $608,400.
d. $627,600.
85.
Presented below is the stockholders' equity section of Oaks Corporation at December 31,
2014:
Common stock, par value $20; authorized 75,000 shares;
issued and outstanding 45,000 shares
$ 900,000
Paid-in capital in excess of par value
350,000
Retained earnings
300,000
$1,550,000
During 2015, the following transactions occurred relating to stockholders' equity:
3,000 shares were reacquired at $28 per share.
3,000 shares were reacquired at $35 per share.
1,800 shares of treasury stock were sold at $30 per share.
For the year ended December 31, 2015, Oaks reported net income of $450,000.
Assuming Oaks accounts for treasury stock under the cost method, what should it report
as total stockholders' equity on its December 31, 2015, balance sheet?
a. $1,865,000.
b. $1,861,400.
c. $1,857,800.
d. $1,415,000.
86.
On December 1, 2014, Abel Corporation exchanged 40,000 shares of its $10 par value
common stock held in treasury for a used machine. The treasury shares were acquired by
Abel at a cost of $40 per share, and are accounted for under the cost method. On the date
of the exchange, the common stock had a fair value of $55 per share (the shares were
originally issued at $30 per share). As a result of this exchange, Abel's total stockholders'
equity will increase by
a. $ 400,000.
b. $1,600,000.
c. $2,200,000.
d. $1,800,000.
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87.
Luther Inc., has 4,000 shares of 6%, $50 par value, cumulative preferred stock and
100,000 shares of $1 par value common stock outstanding at December 31, 2015, and
December 31, 2014. The board of directors declared and paid a $10,000 dividend in 2014.
In 2015, $48,000 of dividends are declared and paid. What are the dividends received by
the preferred stockholders in 2015?
a. $34,000
b. $24,000
c. $14,000
d. $12,000
88.
Anders, Inc., has 15,000 shares of 5%, $100 par value, cumulative preferred stock and
60,000 shares of $1 par value common stock outstanding at December 31, 2015. There
were no dividends declared in 2013. The board of directors declares and pays a $135,000
dividend in 2014 and in 2015. What is the amount of dividends received by the common
stockholders in 2015?
a. $45,000
b. $75,000
c. $135,000
d. $0
89.
Colson Inc. declared a $320,000 cash dividend. It currently has 12,000 shares of 7%,
$100 par value cumulative preferred stock outstanding. It is one year in arrears on its
preferred stock. How much cash will Colson distribute to the common stockholders?
a. $152,000.
b. $168,000.
c. $236,000.
d. None.
90.
Pierson Corporation owned 10,000 shares of Hunter Corporation. These shares were
purchased in 2011 for $90,000. On November 15, 2015, Pierson declared a property
dividend of one share of Hunter for every ten shares of Pierson held by a stockholder. On
that date, when the market price of Hunter was $28 per share, there were 90,000 shares
of Pierson outstanding. What gain and net reduction in retained earnings would result
from this property dividend?
Net Reduction in
Gain
Retained Earnings
a.
$0
$252,000
b.
$0
$ 81,000
c.
$171,000
$ 81,000
d.
$171,000
$ 36,000
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15 - 22 Test Bank for Intermediate Accounting, Fifteenth Edition
91.
Stinson Corporation owned 30,000 shares of Matile Corporation. These shares were
purchased in 2011 for $270,000. On November 15, 2015, Stinson declared a property
dividend of one share of Matile for every ten shares of Stinson held by a stockholder. On
that date, when the market price of Matile was $28 per share, there were 270,000 shares
of Stinson outstanding. What gain and net reduction in retained earnings would result from
this property dividend?
Gain
Net Reduction in
Retained Earnings
a.
$0
$243,000
b.
$0
$756,000
c.
$513,000
$108,000
d.
$513,000
$243,000
92.
Winger Corporation owned 600,000 shares of Fegan Corporation stock. On December 31,
2014, when Winger's account “Equity Investments (Fegan Corporation”) had a carrying
value of $5 per share, Winger distributed these shares to its stockholders as a dividend.
Winger originally paid $8 for each share. Fegan has 2,000,000 shares issued and
outstanding, which are traded on a national stock exchange. The quoted market price for
a Fegan share was $7 on the declaration date and $9 on the distribution date.
What would be the reduction in Winger's stockholders' equity as a result of the above
transactions?
a. $2,400,000.
b. $3,000,000.
c. $4,800,000.
d. $5,400,000.
93.
Gibbs Corporation owned 20,000 shares of Oliver Corporation’s $5 par value common
stock. These shares were purchased in 2011 for $180,000. On September 15, 2015,
Gibbs declared a property dividend of one share of Oliver for every ten shares of Gibbs
held by a stockholder. On that date, when the market price of Oliver was $28 per share,
there were 180,000 shares of Gibbs outstanding. What NET reduction in retained
earnings would result from this property dividend?
a. $162,000
b. $504,000
c. $171,000
d. $342,000
94.
Melvern’s Corporation has an investment in 15,000 shares of Wallace Company common
stock with a cost of $654,000. These shares are used in a property dividend to
stockholders of Melvern’s. The property dividend is declared on May 25 and scheduled to
be distributed on July 31 to stockholders of record on June 15. The fair value per share of
Wallace stock is $63 on May 25, $66 on June 15, and $68 on July 31. The net effect of
this property dividend on retained earnings is a reduction of
a. $1,020,000.
b. $ 990,000.
c. $ 945,000.
d. $ 654,000.
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Stockholders’ Equity
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95.
Hernandez Company has 560,000 shares of $10 par value common stock outstanding.
During the year, Hernandez declared a 10% stock dividend when the market price of the
stock was $30 per share. Four months later Hernandez declared a $.50 per share cash
dividend. As a result of the dividends declared during the year, retained earnings
decreased by
a. $1,988,000.
b. $ 840,000.
c. $ 308,000.
d. $ 280,000.
96.
On June 30, 2014, when Ermler Co.'s stock was selling at $65 per share, its capital
accounts were as follows:
Capital stock (par value $50; 50,000 shares issued)
Premium on capital stock
Retained earnings
$2,500,000
600,000
4,200,000
If a 100% stock dividend were declared and distributed, capital stock would be
a. $2,500,000.
b. $3,100,000.
c. $5,000,000.
d. $7,300,000.
97.
The stockholders' equity section of Gunkel Corporation as of December 31, 2014, was as
follows:
Common stock, par value $2; authorized 20,000 shares;
issued and outstanding 10,000 shares
$ 20,000
Paid-in capital in excess of par
30,000
Retained earnings
95,000
$145,000
On March 1, 2015, the board of directors declared a 15% stock dividend, and accordingly
1,500 additional shares were issued. On March 1, 2015, the fair value of the stock was $6
per share. For the two months ended February 28, 2015, Gunkel sustained a net loss of
$15,000.
What amount should Gunkel report as retained earnings as of March 1, 2015?
a. $71,000.
b. $77,000.
c. $81,000.
d. $87,000.
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15 - 24 Test Bank for Intermediate Accounting, Fifteenth Edition
98.
The stockholders' equity of Howell Company at July 31, 2014 is presented below:
Common stock, par value $20, authorized 400,000 shares;
issued and outstanding 160,000 shares
Paid-in capital in excess of par
Retained earnings
$3,200,000
160,000
650,000
$4,010,000
On August 1, 2014, the board of directors of Howell declared a 10% stock dividend on
common stock, to be distributed on September 15th. The market price of Howell's
common stock was $70 on August 1, 2014, and $76 on September 15, 2014. What is the
amount of the debit to retained earnings as a result of the declaration and distribution of
this stock dividend?
a. $ 640,000.
b. $1,120,000.
c. $1,216,000.
d. $ 800,000.
99.
On January 1, 2014, Dodd, Inc., declared a 15% stock dividend on its common stock
when the fair value of the common stock was $30 per share. Stockholders' equity before
the stock dividend was declared consisted of:
Common stock, $10 par value, authorized 200,000 shares;
issued and outstanding 120,000 shares
Additional paid-in capital on common stock
Retained earnings
Total stockholders' equity
$1,200,000
150,000
700,000
$2,050,000
What was the effect on Dodd’s retained earnings as a result of the above transaction?
a. $270,000 decrease
b. $540,000 decrease
c. $900,000 decrease
d. $450,000 decrease
100.
On January 1, 2014, Culver Corporation had 110,000 shares of its $5 par value common
stock outstanding. On June 1, the corporation acquired 10,000 shares of stock to be held
in the treasury. On December 1, when the market price of the stock was $10, the
corporation declared a 15% stock dividend to be issued to stockholders of record on
December 16, 2014. What was the impact of the 15% stock dividend on the balance of the
retained earnings account?
a. $937,500 decrease
b. $150,000 decrease
c. $165,000 decrease
d. No effect
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Stockholders’ Equity
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101.
At the beginning of 2015, Flaherty Company had retained earnings of $350,000. During
the year Flaherty reported net income of $100,000, sold treasury stock at a “gain” of
$36,000, declared a cash dividend of $60,000, and declared and issued a small stock
dividend of 3,000 shares ($10 par value) when the fair value of the stock was $20 per
share. The amount of retained earnings available for dividends at the end of 2015 was
a. $330,000.
b. $360,000.
c. $366,000.
d. $396,000.
102.
Masterson Company has 420,000 shares of $10 par value common stock outstanding.
During the year Masterson declared a 15% stock dividend when the market price of the
stock was $36 per share. Three months later Masterson declared a $.60 per share cash
dividend. As a result of the dividends declared during the year, retained earnings
decreased by
a. $2,683,800
b. $2,268,000
c. $ 415,800
d. $ 396,000
103.
Layne Corporation had the following information in its financial statements for the years
ended 2014 and 2015:
Cash dividends for the year 2015
Net income for the year ended 2015
Market price of stock, 12/31/14
Market price of stock, 12/31/15
Common stockholders’ equity, 12/31/14
Common stockholders’ equity, 12/31/15
Outstanding shares, 12/31/15
Preferred dividends for the year ended 2015
$
10,000
83,000
10
12
1,600,000
1,980,000
180,000
15,000
What is the payout ratio for Layne Corporation for the year ended 2015?
a. 30.1%
b. 18.1%
c. 14.7%
d. 12.0%
104.
Layne Corporation had the following information in its financial statements for the years
ended 2014 and 2015:
Cash dividends for the year 2015
Net income for the year ended 2015
Market price of stock, 12/31/14
Market price of stock, 12/31/15
Common stockholders’ equity, 12/31/14
Common stockholders’ equity, 12/31/15
Outstanding shares, 12/31/15
Preferred dividends for the year ended 2015
$
10,000
83,000
10
12
1,600,000
1,980,000
180,000
15,000
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15 - 26 Test Bank for Intermediate Accounting, Fifteenth Edition
What is the book value per share for Layne Corporation for the year ended 2015?
a. $11.00
b. $9.92
c. $9.94
d. $8.89
105.
At the beginning of 2015, Hamilton Company had retained earnings of $250,000. During
the year Hamilton reported net income of $75,000, sold treasury stock at a “gain” of
$27,000, declared a cash dividend of $45,000, and declared and issued a small stock
dividend of 1,500 shares ($10 par value) when the fair value of the stock was $30 per
share. The amount of retained earnings available for dividends at the end of 2015 was:
a. $284,500.
b. $262,000.
c. $257,500.
d. $235,000.
106.
Mingenback Company has 560,000 shares of $10 par value common stock outstanding.
During the year Mingenback declared a 15% stock dividend when the market price of the
stock was $48 per share. Two months later Mingenback declared a $.60 per share cash
dividend. As a result of the dividends declared during the year, retained earnings
decreased by:
a. $ 386,400.
b. $ 528,000.
c. $4,032,000.
d. $4,418,400.
107.
Sealy Corporation had the following information in its financial statements for the years
ended 2014 and 2015:
Cash dividends for the year 2015
Net income for the year ended 2015
Market price of stock, 12/31/14
Market price of stock, 12/31/15
Common stockholders’ equity, 12/31/14
Common stockholders’ equity, 12/31/15
Outstanding shares, 12/31/15
Preferred dividends for the year ended 2015
$
5,000
87,000
10
12
1,000,000
1,200,000
100,000
10,000
What is the rate of return on common stock equity for Sealy Corporation for the year
ended 2015?
a. 7.9%
b. 6.4%
c. 7.0%
d. 6.5%
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Stockholders’ Equity
108.
15 - 27
Sealy Corporation had the following information in its financial statements for the years
ended 2014 and 2015:
Cash dividends for the year 2015
Net income for the year ended 2015
Market price of stock, 12/31/14
Market price of stock, 12/31/15
Common stockholders’ equity, 12/31/14
Common stockholders’ equity, 12/31/15
Outstanding shares, 12/31/15
Preferred dividends for the year ended 2015
$
5,000
87,000
10
12
1,000,000
1,200,000
100,000
10,000
What is the payout ratio for Sealy Corporation for the year ended 2015?
a. 13.0%
b. 5.7%
c. 6.5%
d. 17.2%
109.
Mays, Inc. had net income for 2014 of $1,060,000 and earnings per share on common
stock of $5. Included in the net income was $150,000 of bond interest expense related to
its long-term debt. The income tax rate for 2014 was 30%. Dividends on preferred stock
were $200,000. The payout ratio on common stock was 25%. What were the dividends on
common stock in 2014?
a. $215,000.
b. $265,000.
c. $241,250.
d. $322,500.
110.
Presented below is information related to Orender, Inc.:
Common stock
4% Preferred stock
Retained earnings (includes net income for current year)
Net income for year
December 31,
2015
2014
$ 75,000
$ 60,000
350,000
350,000
90,000
75,000
35,000
32,000
What is Orender’s rate of return on common stock equity for 2015?
a. 23.3%
b. 14.0%
c. 31.1%
d. 21.2%
111.
The following data are provided:
5% Cumulative preferred stock, $50 par
Common stock, $10 par
Additional paid-in capital
Retained earnings (includes current year net income)
Net income
December 31,
2015
2014
$100,000
$100,000
140,000
90,000
80,000
70,000
240,000
215,000
60,000
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15 - 28 Test Bank for Intermediate Accounting, Fifteenth Edition
Additional information:
On May 1, 2015, 5,000 shares of common stock were issued. The preferred dividends were not
declared during 2015. The market price of the common stock was $50 at December 31, 2015.
The rate of return on common stock equity for 2015 is calculated as
a. 60 ÷ 415.
b. 60 ÷ 460.
c. 55 ÷ 415.
d. 55 ÷ 460.
112.
The following data are provided:
5% Cumulative preferred stock, $50 par
Common stock, $10 par
Additional paid-in capital
Retained earnings (includes current year net income)
Net income
December 31,
2015
2014
$100,000
$100,000
140,000
90,000
80,000
70,000
240,000
215,000
60,000
Additional information:
On May 1, 2015, 5,000 shares of common stock were issued. The preferred dividends were not
declared during 2015. The market price of the common stock was $50 at December 31, 2015.
The book value per share of common stock at 12/31/15 is calculated as
a. 455 ÷ 14.
b. 380 ÷ 14.
c. 220 ÷ 14.
d. 460 ÷ 14.
113.
Turner Corporation had the following information in its financial statements for the year
ended 2014 and 2015:
Cash dividends for the year 2015
Net income for the year ended 2015
Market price of stock, 12/31/15
Common stockholders’ equity, 12/31/14
Common stockholders’ equity, 12/31/15
Outstanding shares, 12/31/15
Preferred dividends for the year ended 2015
$ 15,000
130,000
24
2,200,000
2,400,000
150,000
30,000
What is the payout ratio for Turner Corporation for the year ended 2015?
a. 11.5%
b. 15.0%
c. 23.1%
d. 34.6%
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Stockholders’ Equity
114.
15 - 29
Turner Corporation had the following information in its financial statements for the year
ended 2014 and 2015:
Cash dividends for the year 2015
Net income for the year ended 2015
Market price of stock, 12/31/15
Common stockholders’ equity, 12/31/14
Common stockholders’ equity, 12/31/15
Outstanding shares, 12/31/15
Preferred dividends for the year ended 2015
$ 15,000
130,000
24
2,200,000
2,400,000
150,000
30,000
What is the book value per share for Turner Corporation for the year ended 2015?
a. $15.80
b. $16.00
c. $14.67
d. $15.70
*115. Written, Inc. has outstanding 600,000 shares of $2 par common stock and 120,000 shares
of no-par 8% preferred stock with a stated value of $5. The preferred stock is cumulative
and nonparticipating. Dividends have been paid in every year except the past two years
and the current year.
Assuming that $300,000 will be distributed as a dividend in the current year, how much
will the common stockholders receive?
a. Zero.
b. $156,000.
c. $204,000.
d. $252,000.
*116. Written, Inc. has outstanding 600,000 shares of $2 par common stock and 120,000 shares
of no-par 8% preferred stock with a stated value of $5. The preferred stock is cumulative
and nonparticipating. Dividends have been paid in every year except the past two years
and the current year.
Assuming that $126,000 will be distributed as a dividend in the current year, how much
will the preferred stockholders receive?
a. $42,000.
b. $48,000.
c. $96,000.
d. $126,000.
*117. Written, Inc. has outstanding 600,000 shares of $2 par common stock and 120,000 shares
of no-par 8% preferred stock with a stated value of $5. The preferred stock is cumulative
and nonparticipating. Dividends have been paid in every year except the past two years
and the current year.
Assuming that $366,000 will be distributed, and the preferred stock is also participating,
how much will the common stockholders receive?
a. $222,000.
b. $180,000.
c. $186,000.
d. $ 96,000.
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15 - 30 Test Bank for Intermediate Accounting, Fifteenth Edition
*118. Yoder, Inc. has 150,000 shares of $10 par value common stock and 75,000 shares of $10
par value, 6%, cumulative, participating preferred stock outstanding. Dividends on the
preferred stock are one year in arrears. Assuming that Yoder wishes to distribute
$405,000 as dividends, the common stockholders will receive
a. $ 90,000.
b. $165,000.
c. $240,000.
d. $315,000.
*119. Mann Co. has outstanding 80,000 shares of 8% preferred stock with a $10 par value and
150,000 shares of $3 par value common stock. Dividends have been paid every year
except last year and the current year. If the preferred stock is cumulative and
nonparticipating and $400,000 is distributed, the common stockholders will receive
a. $0.
b. $272,000.
c. $336,000.
d. $400,000.
Multiple Choice Answers—Computational
Item
71.
72.
73.
74.
75.
76.
77.
Ans.
a
b
b
c
d
b
c
Item
78.
79.
80.
81.
82.
83.
84.
Ans.
d
d
b
c
c
d
c
Item
85.
86.
87.
88.
89.
90.
91.
Ans.
a
c
c
a
a
c
d
Item
92.
93.
94.
95.
96.
97.
98.
Ans.
Item
Ans.
b
d
d
a
c
a
b
99.
100.
101.
102.
103.
104.
105.
b
b
a
a
c
a
d
Item
106.
107.
108.
109.
110.
111.
112.
Ans.
Item
Ans.
d
c
c
a
b
c
a
113.
114.
*11
*11
*11
*11
*11
b
b
b
d
b
c
b
MULTIPLE CHOICE—CPA Adapted
120.
A corporation was organized in January 2014 with authorized capital of $10 par value
common stock. On February 1, 2014, shares were issued at par for cash. On March 1,
2014, the corporation's attorney accepted 7,000 shares of common stock in settlement for
legal services with a fair value of $90,000. Additional paid-in capital would increase on
February 1, 2014 March 1, 2014
a.
Yes
No
b.
Yes
Yes
c.
No
No
d.
No
Yes
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Stockholders’ Equity
15 - 31
121.
On July 1, 2014, Nall Co. issued 2,500 shares of its $10 par common stock and 5,000
shares of its $10 par convertible preferred stock for a lump sum of $130,000. At this date
Nall's common stock was selling for $24 per share and the convertible preferred stock for
$18 per share. The amount of the proceeds allocated to Nall's preferred stock should be
a. $65,000.
b. $78,000.
c. $90,000.
d. $71,500.
122.
Horton Co. was organized on January 2, 2014, with 500,000 authorized shares of $10 par
value common stock. During 2014, Horton had the following capital transactions:
January 5—issued 375,000 shares at $14 per share.
July 27—purchased 25,000 shares at $11 per share.
November 25—sold 18,000 shares of treasury stock at $13 per share.
Horton used the cost method to record the purchase of the treasury shares. What would
be the balance in the Paid-in Capital from Treasury Stock account at December 31, 2014?
a. $0.
b. $18,000.
c. $36,000.
d. $54,000.
123.
In 2014, Hobbs Corp. acquired 12,000 shares of its own $1 par value common stock at
$18 per share. In 2015, Hobbs issued 8,000 of these shares at $25 per share. Hobbs
uses the cost method to account for its treasury stock transactions. What accounts and
what amounts should Hobbs credit in 2015 to record the issuance of the 6,000 shares?
a.
b.
c.
d.
124.
Treasury
Stock
$144,000
$144,000
Additional
Paid-in Capital
$56,000
$192,000
$136,000
Retained
Earnings
$140,000
Common
Stock
$56,000
$8,000
$8,000
At its date of incorporation, Sauder, Inc. issued 100,000 shares of its $10 par common
stock at $11 per share. During the current year, Sauder acquired 20,000 shares of its
common stock at a price of $16 per share and accounted for them by the cost method.
Subsequently, these shares were reissued at a price of $12 per share. There have been
no other issuances or acquisitions of its own common stock. What effect does the
reissuance of the stock have on the following accounts?
a.
b.
c.
d.
Retained Earnings
Decrease
No effect
Decrease
No effect
Additional Paid-in Capital
Decrease
Decrease
No effect
No effect
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15 - 32 Test Bank for Intermediate Accounting, Fifteenth Edition
125.
Farmer Corp. owned 20,000 shares of Eaton Corp. purchased in 2011 for $450,000. On
December 15, 2014, Farmer declared a property dividend of all of its Eaton Corp. shares
on the basis of one share of Eaton for every 10 shares of Farmer common stock held by
its stockholders. The property dividend was distributed on January 15, 2015. On the
declaration date, the aggregate market price of the Eaton shares held by Farmer was
$750,000. The entry to record the declaration of the dividend would include a debit to
Retained Earnings of
a. $0.
b. $300,000.
c. $450,000.
d. $750,000.
126.
A corporation declared a dividend, a portion of which was liquidating. How would this
distribution affect each of the following?
a.
b.
c.
d.
Additional
Paid-in Capital
Decrease
Decrease
No effect
No effect
Retained Earnings
No effect
Decrease
Decrease
No effect
127.
On May 1, 2014, Ziek Corp. declared and issued a 10% common stock dividend. Prior to
this dividend, Ziek had 200,000 shares of $1 par value common stock issued and
outstanding. The fair value of Ziek 's common stock was $20 per share on May 1, 2014.
As a result of this stock dividend, Ziek's total stockholders' equity
a. increased by $400,000.
b. decreased by $400,000.
c. decreased by $20,000.
d. did not change.
128.
How would the declaration and subsequent issuance of a 10% stock dividend by the
issuer affect each of the following when the fair value of the shares exceeds the par value
of the stock?
Additional
Common Stock
Paid-in Capital
a.
No effect
No effect
b.
No effect
Increase
c.
Increase
No effect
d.
Increase
Increase
129.
On December 31, 2014, the stockholders' equity section of Arndt, Inc., was as follows:
Common stock, par value $10; authorized 30,000 shares;
issued and outstanding 9,000 shares
Additional paid-in capital
Retained earnings
Total stockholders' equity
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$ 90,000
116,000
184,000
$390,000
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Stockholders’ Equity
15 - 33
On March 31, 2015, Arndt declared a 10% stock dividend, and accordingly 900 additional
shares were issued, when the fair value of the stock was $18 per share. For the three
months ended March 31, 2015, Arndt sustained a net loss of $32,000. The balance of
Arndt’s retained earnings as of March 31, 2015, should be
a. $135,800.
b. $143,000.
c. $144,800.
d. $152,000.
*130. At December 31, 2014 and 2015, Plank Corp. had outstanding 4,000 shares of $100 par
value 8% cumulative preferred stock and 20,000 shares of $10 par value common stock.
At December 31, 2014, dividends in arrears on the preferred stock were $16,000. Cash
dividends declared in 2015 totaled $60,000. What amounts were payable on each class of
stock?
a.
b.
c.
d.
Preferred Stock
$32,000
$44,000
$48,000
$60,000
Common Stock
$28,000
$16,000
$12,000
$0
Multiple Choice Answers—CPA Adapted
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
120.
121.
d
b
122.
123.
c
b
124.
125.
c
d
126.
127.
b
d
128.
129.
d
a
*130.
c
DERIVATIONS — Computational
No. Answer Derivation
71.
a
$4,500,000 + $400,000 + $550,000 + $2,000,000 + $1,500,000 – $150,000
= $8,800,000.
72.
b
$4,500,000 + $550,000 = $5,050,000.
73.
b
(10,000  $25) + (15,000  $20) = $550,000
($250,000 ÷ $550,000)  $530,000 = $240,909.
74.
c
(4,000  $25) + (6,000  $20) = $220,000
($120,000 ÷ $220,000)  $210,000 = $114,545.
75.
d
(10,000  $13.50) + $150,000 = $285,000.
76.
b
[(6,000  $25) ÷ [(6,000  $25) + (9,000  $20)]]  $297,000 = $135,000.
77.
c
[(7,500  $20) ÷ [(5,000  $25) + (7,500  $20)]]  $264,000 = $144,000.
78.
d
($60 – $52)  25,000 = $200,000.
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15 - 34 Test Bank for Intermediate Accounting, Fifteenth Edition
DERIVATIONS — Computational (cont.)
No.
Answer Derivation
79.
d
20,000  $15 = $300,000.
80.
b
5,000  $20 = $100,000; 5,000  $7 = $35,000.
81.
c
6,000  $15 = $90,000; 6,000  $4 = $24,000.
82.
c
$800,000 + (2,000  $5) – (500  $10) = $805,000.
83.
d
(450,000  $4) + (60,000  $7) = $2,220,000.
84.
c
$600,000 + (3,600  $5) – (2,400  $4) = $608,400.
85.
a
$1,550,000 – (3,000  $28) – (3,000  $35) + (1,800  $30) + $450,000 =
$1,865,000.
86.
c
40,000  $55 = $2,200,000.
87.
c
4,000  $50  .06 = $12,000
($12,000 – $10,000) + $12,000 = $14,000.
88.
a
15,000  $100  .05 = $75,000
($135,000  2) – ($75,000  3) = $45,000.
89.
a
12,000  $100  .07 = $84,000
$320,000 – ($84,000  2) = $152,000.
90.
c
($90,000 ÷ $10)  $28 = $252,000
[$28 – ($90,000 ÷ 10,000)]  9,000 = $171,000
$252,000 – $171,000 = $81,000.
91.
d
($270,000 ÷ $10)  $28 = $756,000
[$28 – ($270,000 ÷ 30,000)]  27,000 = $513,000
$756,000 – $513,000 = $243,000.
92.
b
(600,000  $7) – [($7 – $5)  600,000] = $3,000,000.
93.
d
(180,000 ÷ 10)  $28 = $504,000
$504,000 – [$504,000 – ($180,000  18/20)] = $342,000.
94.
d
(15,000  $63) = $945,000
$945,000 – ($945,000 – $654,000) = $654,000.
95.
a
560,000  .10 × $30 = $1,680,000
$1,680,000 + (560,000  1.10  $.50) = $1,988,000.
96.
c
(50,000  $50) + $2,500,000 = $5,000,000.
DERIVATIONS — Computational (cont.)
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Stockholders’ Equity
No.
15 - 35
Answer Derivation
97.
a
$95,000 – $15,000 – (1,500  $6) = $71,000.
98.
b
160,000  .10  $70 = $1,120,000.
99.
b
120,000  .15  $30 = $540,000.
100.
b
100,000  .15  $10 = $150,000.
101.
a
$350,000 + $100,000 – $60,000 – (3,000  $20) = $330,000.
102.
a
(420,000  .15  $36) + ($420,000  1.15  $.60) = $2,683,800.
103.
c
$10,000 ÷ ($83,000 – $15,000) = 14.7%.
104.
a
$1,980,000 ÷ 180,000 = $11.00.
105.
d
$250,000 + $75,000 – $45,000 – (1,500  $30) = $235,000.
106.
d
(560,000  .15  $48) + (560,000  1.15  $.60) = $4,418,400.
107.
c
($87,000 – $10,000) ÷ [($1,000,000 + $1,200,000)2] = 7.0%.
108.
c
($5,000) ÷ ($87,000 – $10,000) = 5.7%.
109.
a
X
——————————— = .25, X = $215,000.
($1,060,000 – $200,000)
110.
b
111.
c
$35, 000   .04 $350, 000 
  $60, 000  $75, 000    $75, 000  $90, 000   2
= .14 = 14%.
$60, 000   $100, 000 .05 
  $140, 000  $80, 000  $240, 000  $5, 000    $90, 000  $70, 000  $215, 000   2
= $55 ÷ 415.
$140,000 + $80,000 + (240,000 – $5,000)
——————————————————— = $455 ÷ 14.
14,000
112.
a
113.
b
$15,000 ÷ ($130,000 – $30,000) = 15.0%.
114.
b
$2,400,000 ÷ 150,000 = $16.00.
*115.
b
$300,000 – (120,000  $5  .08  3) = $156,000.
DERIVATIONS — Computational (cont.)
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15 - 36 Test Bank for Intermediate Accounting, Fifteenth Edition
No.
Answer Derivation
*116.
d
120,000  $5  .08  3 = $144,000 > $126,000.
*117.
b
8%  $1,200,000 = $96,000 (current year)
7%*  $1,200,000 = 84,000 (participating)
$180,000
*$600,000  8%  3 =$ 144,000 (preferred dividends)
$1,200,000  8% =
96,000 (common current dividends)
$240,000
$366,000 – $240,000
—————————— = 7%.
$1,200,000 + $600,000
*118.
c
Common Stock
$1,500,000  6% = $90,000 (current year)
$1,500,000  10%*= 150,000 (participating)
$240,000
*$405,000 – $90,000 – ($750,000  6% × 2) = $225,000
$225,000
————-- = 10%.
$2,250,000
*119.
b
$400,000 – ($800,000  8% × 2) = $272,000.
DERIVATIONS — CPA Adapted
No. Answer Derivation
120.
d
Conceptual.
121.
b
($24  2,500) + ($18  5,000) = $150,000.
$90,000
————— × $130,000 = $78,000.
$150,000
122.
c
18,000  $2 = $36,000.
123.
b
(8,000  $18) = $144,000; (8,000  $7) = $56,000.
124.
c
Conceptual.
125.
d
$750,000 (fair value).
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Stockholders’ Equity
15 - 37
DERIVATIONS — CPA Adapted (cont.)
No.
Answer Derivation
126.
b
Conceptual.
127.
d
Conceptual.
128.
d
Conceptual.
129.
a
$184,000 – $32,000 – (900  $18) = $135,800.
*130.
c
($400,000  .08) + $16,000 = $48,000
$60,000 – $48,000 = $12,000.
EXERCISES
Ex. 15-131—Lump sum issuance of stock.
Parker Corporation has issued 2,000 shares of common stock and 400 shares of preferred stock
for a lump sum of $74,000 cash.
Instructions
(a) Give the entry for the issuance assuming the par value of the common stock was $5 and the
fair value $30, and the par value of the preferred stock was $40 and the fair value $50. (Each
valuation is on a per share basis and there are ready markets for each stock.)
(b) Give the entry for the issuance assuming the same facts as (a) above except the preferred
stock has no ready market and the common stock has a fair value of $24 per share.
Solution 15-131
(a) Cash..............................................................................................
Common Stock ................................................................
Paid-in Capital in Excess of Par—Common......................
Preferred Stock ................................................................
Paid-in Capital in Excess of Par—Preferred ....................
(common $30 × 2,000
$60,000
preferred $50 × 400
20,000
$80,000 fair value
60/80 × $74,000 =
20/80 × $74,000 =
74,000
10,000
45,500
16,000
2,500
$55,500 common
18,500 preferred
$74,000)
(b) Cash..............................................................................................
Common Stock...................................................................
Paid-in Capital in Excess of Par—Common.......................
Preferred Stock..................................................................
Paid-in Capital in Excess of Par—Preferred.......................
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74,000
10,000
38,000
16,000
10,000
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15 - 38 Test Bank for Intermediate Accounting, Fifteenth Edition
Ex. 15-132—Treasury stock.
For numerous reasons, a corporation may reacquire shares of its own capital stock. When a
company purchases treasury stock, it usually accounts for the stock using the cost method.
Instructions
Explain how a company would account for each of the following:
1. Purchase of treasury shares at a price less than par value.
2. Subsequent resale of treasury shares at a price less than purchase price, but more than par
value.
3. Subsequent resale of treasury shares at a price greater than both purchase price and par
value.
4. Effect on net income.
Solution 15-132
1. Treasury Stock is debited for the purchase price of the shares even though the purchase
price is less than par value.
2. Treasury Stock is credited for the original cost (purchase price) of the shares, and the excess
of the original cost (purchase price) over the sales price first is debited to Paid-in Capital from
Treasury Stock from earlier sales of treasury stock and any remainder then is debited to
Retained Earnings.
3. Treasury Stock is credited for the original cost (purchase price) of the shares, and the excess
of the sales price over the original cost (purchase price) is credited to Paid-in Capital from
Treasury Stock.
4. There is no effect on net income as a result of treasury stock transactions.
Ex. 15-133—Treasury stock.
Agler Corporation's balance sheet reported the following:
Capital stock outstanding, 5,000 shares, par $30 per share
Paid-in capital in excess of par
Retained earnings
$150,000
80,000
100,000
The following transactions occurred this year:
(a) Purchased 200 shares of capital stock to be held as treasury stock, paying $60 per share.
(b) Sold 150 of the shares of treasury stock at $65 per share.
(c) Sold the remaining shares of treasury stock at $50 per share.
Instructions
Prepare the journal entry for these transactions under the cost method of accounting for treasury
stock.
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Stockholders’ Equity
15 - 39
Solution 15-133
(a) Treasury Stock................................................................................
Cash.......................................................................................
12,000
(b) Cash ...............................................................................................
Treasury Stock.......................................................................
Paid-in Capital from Treasury Stock.......................................
9,750
(c) Cash................................................................................................
Paid-in Capital from Treasury Stock................................................
Treasury Stock.......................................................................
2,500
500
12,000
9,000
750
3,000
Ex. 15-134—Treasury stock.
Ellison Company's balance sheet shows:
Common stock, $20 par
Paid-in capital in excess of par
Retained earnings
$3,000,000
1,050,000
750,000
Instructions
Record the following transactions by the cost method.
(a) Bought 8,000 shares of its common stock at $29 a share.
(b) Sold 4,000 treasury shares at $30 a share.
(c) Sold 2,000 shares of treasury stock at $26 a share.
Solution 15-134
(a)
(b)
(c)
Treasury Stock.............................................................................
Cash.................................................................................
232,000
Cash.............................................................................................
Treasury Stock..................................................................
Paid-in Capital from Treasury Stock..................................
120,000
Cash.............................................................................................
Paid-in Capital from Treasury Stock.............................................
Retained Earnings........................................................................
Treasury Stock..................................................................
52,000
4,000
2,000
232,000
116,000
4,000
58,000
Ex. 15-135—Treasury stock.
In 2014, Mordica Co. issued 300,000 of its 500,000 authorized shares of $10 par value common
stock at $35 per share. In January, 2015, Mordica repurchased 25,000 shares at $30 per share.
Assume these are the only stock transactions the company has ever had.
Instructions
(a) What are the two methods of accounting for treasury stock?
(b) Prepare the journal entry to record the purchase of treasury stock by the cost method.
(c) 9,000 shares of treasury stock are reissued at $33 per share. Prepare the journal entry to
record the reissuance by the cost method.
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15 - 40 Test Bank for Intermediate Accounting, Fifteenth Edition
Solution 15-135
(a)
The two methods of accounting for treasury stock are the cost method and the par value
method.
(b)
Treasury Stock.............................................................................
Cash.................................................................................
750,000
Cash.............................................................................................
Paid-in Capital from Treasury Stock..................................
Treasury Stock..................................................................
297,000
(c)
750,000
27,000
270,000
Ex. 15-136—Stockholders’ Equity.
Indicate the effect of each of the following transactions on total stockholders' equity by placing an
"X" in the appropriate column.
Decrease
No Effect
Increase
1. Treasury stock is resold at more than cost.
_________
_________
_________
2. Operating loss for the period.
_________
_________
_________
3. Retirement of bonds payable at more than
book value.
_________
_________
_________
4. Declaration of a stock dividend.
_________
_________
_________
5. Acquisition of machinery for common stock.
_________
_________
_________
6. Conversion of bonds payable into common
stock.
_________
_________
_________
7. Not declaring a dividend on cumulative
preferred stock.
_________
_________
_________
8. Declaration of cash dividend.
_________
_________
_________
9. Payment of cash dividend.
_________
_________
_________
Solution 15-136
Increase
1. Treasury stock is resold at more than cost.
Decrease
X
2. Operating loss for the period.
X
3. Retirement of bonds payable at more than
book value.
X
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No Effect
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Stockholders’ Equity
15 - 41
Solution 15-136 (Cont.)
X
4. Declaration of a stock dividend.
5. Acquisition of machinery for common stock.
X
6. Conversion of bonds payable into common
stock.
X
7. Not declaring a dividend on cumulative
preferred stock.
X
8. Declaration of cash dividend.
X
9. Payment of cash dividend.
X
Ex. 15-137—Stock dividends.
Describe the journal entry for a stock dividend on common stock (which has a par value).
Solution 15-137
A stock dividend results in the transfer from retained earnings to paid-in capital of an amount
equal to the fair value of each share, if the dividend is less than 20-25%, or par value of each
share, if the dividend is greater than 20-25%. Retained Earnings is debited for the total amount
transferred, Common Stock Dividend Distributable is credited for the total par value of the shares,
and, for a small stock dividend, the excess of fair value over par value is credited to Paid-in
Capital in Excess of Par.
Ex. 15-138—Stock dividends and stock splits.
Indicate the principal effects of a stock dividend versus a stock split on the issuing corporation.
Respond in the spaces as follows: "C" for change; "NC" for no change.
Stock Dividend
Stock Split
Number of Shares Outstanding
_________
_________
Par Value per Share
_________
_________
Total Par Outstanding
_________
_________
Retained Earnings
_________
_________
Total Stockholders' Equity
_________
_________
Composition of Stockholders' Equity
_________
_________
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15 - 42 Test Bank for Intermediate Accounting, Fifteenth Edition
Solution 15-138
Number of Shares Outstanding
Par Value per Share
Total Par Outstanding
Retained Earnings
Total Stockholders' Equity
Composition of Stockholders' Equity
Stock Dividend
C
NC
C
C
NC
C
Stock Split
C
C
NC
NC
NC
NC
Ex. 15-139—Computation of selected financial ratios.
The following information pertains to Parsons Co.:
Preferred stock, cumulative:
Par value per share
Dividend rate
Shares outstanding
Dividends in arrears
Common stock:
Par value per share
Shares issued
Dividends paid per share
Market price per share
Additional paid-in capital
Unappropriated retained earnings (after closing)
Retained earnings appropriated for contingencies
Common treasury stock:
Number of shares
Total cost
Net income
$100
8%
10,000
none
$10
120,000
$2.10
$48.00
$500,000
$270,000
$300,000
10,000
$250,000
$630,000
Instructions
Compute (assume no changes in balances during the past year):
(a) Total amount of stockholders’ equity in the balance sheet
(b) Earnings per share of common stock
(c) Book value per share of common stock
(d) Payout ratio of common stock
(e) Return on common stock equity
Solution 15-139
(a)
(10,000 × $100) + (120,000 × $10) + $500,000 + $270,000 + $300,000 – $250,000
= $3,020,000.
(b)
[$630,000 – (10,000 × $100 × 8%)] ÷ (120,000 – 10,000) = 550,000 ÷ 110,000
= $5.00 per share.
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Stockholders’ Equity
15 - 43
Solution 15-139 (Cont.)
(c)
($3,020,000 – $1,000,000) ÷ (120,000 – 10,000) = $2,020,000 ÷ 110,000 = $18.36 per
share.
(d)
$2.10 ÷ $5 = 42% or [($2.10 × 110,000) ÷ ($630,000 – $80,000)].
(e)
($630,000 – $80,000) ÷ ($3,020,000 – $1,000,000) = 27.2%.
*Ex. 15-140—Dividends on preferred stock.
The stockholders' equity section of Lemay Corporation shows the following on December 31,
2015:
Preferred stock—5%, $100 par, 5,000 shares outstanding
Common stock—$10 par, 60,000 shares outstanding
Paid-in capital in excess of par
Retained earnings
Total stockholders' equity
$ 500,000
600,000
200,000
113,000
$1,413,000
Instructions
Assuming that all of the company's retained earnings are to be paid out in dividends on 12/31/15
and that preferred dividends were last paid on 12/31/13, show how much the preferred and
common stockholders should receive if the preferred stock is cumulative and fully participating.
*Solution 15-140
Dividends in arrears (5% of $500,000)
Current year's dividends
Participating dividend (2%)
[($33,000 ÷ $1,100,000) x $500,000]
Preferred
$25,000
25,000
Common
$ —
30,000
Total
$ 25,000
55,000
15,000
$65,000
18,000
$48,000
33,000
$113,000
*Ex. 15-141—Dividends on preferred stock.
In each of the following independent cases, it is assumed that the corporation has $800,000 of
6% preferred stock and $3,200,000 of common stock outstanding, each having a par value of
$10. No dividends have been declared for 2013 and 2014.
(a) As of 12/31/15, it is desired to distribute $250,000 in dividends. How much will the preferred
stockholders receive if their stock is cumulative and nonparticipating?
(b) As of 12/31/15, it is desired to distribute $800,000 in dividends. How much will the preferred
stockholders receive if their stock is cumulative and participating up to 11% in total?
(c) On 12/31/15, the preferred stockholders received a $240,000 dividend on their stock which is
cumulative and fully participating. How much money was distributed in total for dividends
during 2015?
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15 - 44 Test Bank for Intermediate Accounting, Fifteenth Edition
*Solution 15-141
(a) $144,000 ($800,000 x .06 x 3 yrs.).
(b) $184,000 ($800,000 x .06 x 3 yrs.) + [$800,000 x (.11 -.06)].
(c) $816,000 ($576,000* to common and $240,000 to preferred).
* ($3,200,000 x .06) + [($240,000 - $144,000) ÷ $800,000) x $3,200,000].
PROBLEMS
Pr. 15-142—Equity transactions.
Presented below is information related to Wyrick Company:
1. The company is granted a charter that authorizes issuance of 15,000 shares of $100 par
value preferred stock and 40,000 shares of no-par common stock.
2. 9,000 shares of common stock are issued to the founders of the corporation for land valued
by the board of directors at $300,000. The board establishes a stated value of $10 a share for
the common stock.
3. 6,000 shares of preferred stock are sold for cash at $110 per share.
4. The company issues 150 shares of common stock to its attorneys for costs associated with
starting the company. At that time, the common stock was selling at $60 per share.
Instructions
Prepare the general journal entries necessary to record these transactions.
Solution 15-142
1. No entry necessary.
2. Land................................................................................................
Common Stock....................................................................
Paid-in Capital in Excess of Stated Value............................
300,000
3. Cash................................................................................................
Preferred Stock....................................................................
Paid-in Capital in Excess of Par—Preferred Stock...............
660000
4. Organization Expense.....................................................................
Common Stock....................................................................
Paid-in Capital in Excess of Stated Value............................
9,000
90,000
210,000
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600,000
60,000
1,500
7,500
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Stockholders’ Equity
15 - 45
Pr. 15-143—Treasury stock transactions.
The original sale of the $50 par value common shares of Gray Company was recorded as follows:
Cash.......................................................................................... 290,000
Common Stock..............................................................
250,000
Paid-in Capital in Excess of Par.....................................
40,000
Instructions
Record the treasury stock transactions (given below) under the cost method:
Transactions:
(a) Bought 400 shares of common stock as treasury shares at $62.
(b) Sold 120 shares of treasury stock at $60.
(c) Sold 60 treasury shares at $68.
Solution 15-143
(a)
(b)
(c)
Treasury Stock...................................................................................
Cash..........................................................................................
24,800
Cash...................................................................................................
Retained Earnings..............................................................................
Treasury Stock..........................................................................
7,200
240
Cash...................................................................................................
Paid-in Capital from Treasury Stock..........................................
Treasury Stock..........................................................................
4,080
24,800
7,440
360
3,720
Pr. 15-144—Stock dividends.
The stockholders' equity section of Benton Corporation's balance sheet as of December 31, 2014
is as follows:
Stockholders' Equity
Common stock, $5 par value; authorized, 2,000,000 shares;
issued, 400,000 shares
$2,000,000
Paid-in capital in excess of par
850,000
Retained earnings
3,000,000
$5,850,000
The following events occurred during 2015:
1. Jan. 5
30,000 shares of authorized and unissued common stock were sold for $8 per
share.
2. Jan. 16
Declared a cash dividend of 20 cents per share, payable February 15 to stockholders of record on February 5.
3. Feb. 10
40,000 shares of authorized and unissued common stock were sold for $12 per
share.
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15 - 46 Test Bank for Intermediate Accounting, Fifteenth Edition
Pr. 15-144 (Cont.)
4. March 1
A 30% stock dividend was declared and issued. Fair value per share is currently
$15.
5. April 1
A two-for-one split was carried out. The par value of the stock was to be reduced
to $2.50 per share. Fair value on March 31 was $18 per share.
6. July 1
A 15% stock dividend was declared and issued. Fair value is currently $10 per
share.
7. Aug. 1
A cash dividend of 20 cents per share was declared, payable September 1 to
stockholders of record on August 21.
Instructions
Enter the above events into the following work sheet showing how each event affects the column.
Event No. 1 will serve as an example.
Common Stock
No. of
Total
Item
Shares Issued
Par Value
Beginning Balance—1/1/13
400,000
$2,000,000
Event #1—Jan. 5
30,000
150,000
Balance
430,000
$2,150,000
Paid-in Capital In
Excess of Par Retained Earnings
$850,000
$3,000,000
90,000
-0$940,000
$3,000,000
Event # 2—Jan. 16 (and events 3 through 7)
Solution 15-144
Event #2—Jan. 16
-0-0-0(86,000)
———————————————————————————————————————————
Balance
430,000
$2,150,000
$940,000
$2,914,000
#3—Feb. 10
40,000
200,000
280,000
-0———————————————————————————————————————————
Balance
470,000
$2,350,000
$1,220,000
$2,914,000
#4—March 1
141,000
705,000
-0(705,000)
———————————————————————————————————————————
Balance
611,000
$3,055,000
$1,220,000
$2,209,000
#5—April 1
611,000
-0-0-0———————————————————————————————————————————
Balance
1,222,000
$3,055,000
$1,120,000
$2,209,000
#6—July 1
183,300
458,250
1,374,750
(1,833,000)
———————————————————————————————————————————
Balance
1,405,300
$2,596,750
$2,594,750
$376,000
#7—Aug. 1
-0-0-0(281,060)
———————————————————————————————————————————
Balance
1,405,300
$2,596,750
$2,594,750
$94,940
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15 - 47
Pr. 15-145—Equity transactions.
Foley Corporation has the following capital structure at the beginning of the year:
4% Preferred stock, $50 par value, 20,000 shares authorized,
6,000 shares issued and outstanding
Common stock, $10 par value, 60,000 shares authorized,
40,000 shares issued and outstanding
Paid-in capital in excess of par
$
300,000
400,000
110,000
Total paid-in capital
Retained earnings
Total stockholders' equity
810,000
440,000
$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 15% common stock dividend was declared. The average fair value of the common stock
is $22 a share.
3. Assume that net income for the year was $140,000 (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.
Solution 15-145
(a) 1. Retained Earnings..................................................................
Dividends Payable—Preferred ($300,000 × .04)..........
Dividends Payable—Common......................................
2.
90,000
12,000
78,000
40,000 shares
15%
6,000 shares as stock dividend
$22
$132,000 total dividend
Retained Earnings..................................................................
Common Stock Dividend Distributable........................
Paid-in Capital in Excess of Par..................................
132,000
3. Income Summary....................................................................
Retained Earnings.......................................................
140,000
Retained Earnings..................................................................
Retained Earnings Appropriated for Plant Expansion.
70,000
60,000
72,000
140,000
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15 - 48 Test Bank for Intermediate Accounting, Fifteenth Edition
Solution 15-145 (Cont.)
(b) Stockholders' equity
4% Preferred stock, $50 par value, 20,000 shares authorized,
6,000 shares issued and outstanding
Common stock, $10 par value, 60,000 shares authorized,
40,000 shares issued and outstanding
Common stock dividend distributable
Paid-in capital in excess of par
Total paid-in capital
Retained earnings—unappropriated*
$288,000
Appropriated for plant expansion
70,000
Total retained earnings
Total stockholders' equity
$ 300,000
400,000
60,000
182,000
942,000
358,000
$1,300,000
*$440,000 – $90,000 – $132,000 + $140,000 – $70,000 = $288,000
*Pr. 15-146—Dividends on preferred and common stock.
Rensing, Inc., has $800,000 of 5% preferred stock and $1,200,000 of common stock outstanding,
each having a par value of $10 per share. No dividends have been paid or declared during 2013
and 2014. As of December 31, 2015, it is desired to distribute $340,000 in dividends.
Instructions
How much will the preferred and common stockholders receive under each of the following
assumptions:
(a) The preferred is noncumulative and nonparticipating.
(b) The preferred is cumulative and nonparticipating.
(c) The preferred is cumulative and fully participating.
(d) The preferred is cumulative and participating to 9% total.
*Solution 15-146
(a)
Current year's dividend (5% of $800,000)
Remainder to common
Preferred
$ 40,000
$ 40,000
(b)
Dividends in arrears, 5% of $800,000 for two years
Current year's dividend
Remainder to common
(c)
Dividends in arrears, 5% of $800,000 for two years
Current year's dividend
Participating dividend 8% ($160,000 ÷ $2,000,000)
Preferred
$80,000
40,000
Common
$ —
300,000
$348,000
Total
$ 40,000
300,000
$340,000
$120,000
Common
$ —
—
220,000
$220,000
Total
$80,000
40,000
252,000
$340,000
Preferred
$80,000
40,000
64,000
$184,000
Common
$ —
60,000
96,000
$156,000
Total
$80,000
100,000
160,000
$340,000
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Stockholders’ Equity
15 - 49
Solution 15-146 (Cont.)
(d)
Dividends in arrears, 5% of $800,000 for two years
Current year's dividend
Participating dividend (4%)
Remainder to common
Preferred
$80,000
40,000
32,000
—
$152,000
Common
$ —
60,000
48,000
80,000
$188,000
Total
$80,000
100,000
80,000
80,000
$340,000
IFRS QUESTIONS
True/False
1. In the United States, like many other countries, banks are major creditors as well as the
largest investors.
2. The IFRS statement of recognized income and expenses is identical to the U.S. GAAP
statement of retained earnings – beginning balance retained earnings, plus net income, less
dividends, equals ending balance retained earnings.
3. Under IFRS companies report preference shares at par value as the last item in the equity
section.
4. Under IFRS true no-par shares should be carried in the accounts at issue price without any
share premium reported.
5. Under IFRS compliance requirements the revaluation surplus is not considered contributed
capital.
Answers to True/False:
1. False
2. False
3. False
4. True
5. True
Multiple Choice
6. The accounting for treasury stock retirements under IFRS requires
a. a charge for the entire amount to paid-in capital.
b. a charge for the excess to paid-in capital, depending on the original transaction related to
the issuance of the stock.
c. a charge for the excess of the cost of treasury stock over par value to retained earnings.
d. an allocation for the difference between paid-in capital and retained earnings.
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15 - 50 Test Bank for Intermediate Accounting, Fifteenth Edition
7. The Revaluation Surplus of IFRS is
a. similar to U.S. GAAP in that it allows both increases and decreases in valuation.
b. similar to U.S. GAAP in that it only allows for the decrease in valuation.
c. similar to U.S. GAAP in that it only allows for the increase in valuation.
d. different than U.S. GAAP in that it allows the increase in valuation.
8. The IFRS statement of recognized income and expenses
a. does not recognize charges to equity such as revaluation surplus values.
b. is a required report under IFRS reporting requirements.
c. reports the items that were charged directly to equity such as revaluation surplus.
d. is similar to the U.S. GAAP income statement in that it only reports revenues and
expenses of the period.
9.Under IFRS compliance requirements the Revaluation Surplus is
a. only utilized to record the changes in depreciable items – plant and equipment.
b. considered as revenue when utilizing the U.S. GAAP formatted income statement.
c. utilized to record the changes in property, plant, and equipment and intangible assets.
d. reported as contributed capital.
10. The current project of the IASB and the FASB related to financial statement presentation
indicates
a. that the IFRS statement of recognized income and expenses will most likely be adopted
by the FASB as a U.S. requirement in the near future.
b. that the IFRS statement of recognized income and expenses will probably be eliminated.
c. that the U.S. GAAP standard for reporting comprehensive income will most likely be
adopted by the IASB for IFRS.
d. that hybrid financial instruments are unacceptable.
Answers to Multiple Choice:
6. b
7. d
8. c
9. c
10. b
Short Answer
11. Briefly describe some of the similarities and differences between U.S. GAAP and IFRS with
respect to the accounting for stockholders’ equity.
11. Key similarities between IFRS and U.S. GAAP for transactions related to stockholders’
equity pertain to (1) issuance of shares, (2) purchase of treasury stock, (3) declaration and
payment of dividends, (4) the accounting for start up costs—that is, they should be expensed
as incurred, (5) the costs associated with issuing stock reduce the proceeds from the
issuance and reduce paid in capital, and (6) the accounting for par, no par and no par stock
with a stated value.
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Major differences relate to terminology used, introduction of items such as revaluation
surplus, and presentation of stockholder equity information. In addition, the accounting for
treasury stock retirements differs between IFRS and U.S. GAAP. Under U.S. GAAP a
company has the option of charging the excess of the cost of treasury stock over par value to
(1) retained earnings, (2) allocate the difference between paid-in capital and retained
earnings, or (3) charge the entire amount to paid-in capital. Under IFRS, the excess may have
to be charged to paid-in capital, depending on the original transaction related to the issuance
of the stock. An IFRS/U.S. GAAP difference relates to the account Revaluation Surplus.
Revaluation surplus arises under IFRS because companies are permitted to revalue their
property, plant and equipment to fair value under certain circumstances. This account is part
of general reserves under IFRS and is not considered contributed capital. While both IFRS
and U.S. GAAP consider the statement of stockholders’ equity a primary financial statement,
under IFRS, a company has the option of preparing a statement of stockholders’ equity
similar to U.S. GAAP or preparing a statement of recognized income and expense (SoRIE).
The statement of SoRIE reports the items that were charged directly to equity such as
revaluation surplus and then adds the net income for the period to arrive at total recognized
income and expense. In this situation, additional note disclosure is required to provide
reconciliations of other equity items.
12. Briefly discuss the implications of the financial statement presentation project for the reporting
of stockholders’ equity.
12. It is likely that the statement of stockholders’ equity and its presentation will be examined
closely in the financial statement presentation project. The statement of recognized income
and expense now permitted under IFRS will probably be eliminated. In addition the options of
how to present other comprehensive income under U.S. GAAP will change in any converged
standard in this area. Also, the FASB has been working on a standard that will likely converge
to IFRS in the area of hybrid financial instruments.
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