Accountancy 421 Blue Book
COURSE POLICIES
The Blue Book is so named because in the days before the World Wide Web
students purchased it at the Oxford Copy Shop and it had a blue cover. These days it is
more convenient, and cheaper, for students to get the Blue Book from the course Web
page. The Blue Book contains course policies. I therefore encourage you to read it.
Accountancy 421 is an upper division course in financial accounting which builds
upon the foundation students have constructed in Accountancy 221, 225 and 321.
Understanding Accountancy 221, 225, and 321 course material is therefore essential to
success in this course. Our purpose is to explore how the financial statement reader can
glean useful information from published financial reports. We will use cooperative
learning and interactive lecture as the primary pedagogies in this course.
Accounting is by nature a building block discipline. I therefore encourage you to
attend class regularly and to keep pace as the course progresses. Students who adopt the
strategy of “cramming” to pass accounting examinations usually are disappointed with
the grade they earn.
Miami Plan
Accountancy 421 is the final course in the Liberal Education Thematic
Sequences, Financial Accounting and Reporting. The course will enable you to analyze
financial statements in such a way that you can discover the various business transactions
that the information contained in the financial statements represents. You will be
challenged to think critically about the ways business transactions have been
transformed and reported as information useful to the analyst. In doing this you must
understand the context of the capitalistic model and financial markets under which
accounting operates. You will engage with other learners in cooperative learning teams
to reflect and act on accounting concepts in a problem solving mode. Finally, by
completing the requirements of the written case analyses, described herein, you will
integrate and reinforce all four key components of the Miami Plan.
Teaching Philosophy
I believe that a college course should be a growth experience which is enjoyable
for instructor and student alike. A friend of mine expresses this by saying that both the
instructor and the student should come to each class expecting to have fun and learn
something new. I assume that you want to be in the course since you are paying a
considerable price in terms of both time and money. I know that each of you, because of
the rich experiences in your backgrounds, will bring to the course new insights from
which I can learn.
Part of my teaching philosophy consists of expectations I have of students and I
anticipate students will have of me. I consider these as an intellectual contract between
us—I expect you to carry out your part of the agreement and I will carry out mine as
well. If you have any questions about these expectations or would just like to talk about
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them, please come to see me in my office. I encourage this type of active dialogue
between us.
I expect each of my students to:
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read the syllabus, attend class regularly, and come to class on time and prepared.
participate in class discussions, pay attention, and take notes in class.
do the assignments, work hard, and have high expectations of themselves.
see me if they need help with the work.
contribute their share to their team and always think: one for all and all for one.
have fun and learn something new—enjoy the class and learning in general.
respect me and the rest of the class by not talking while I or someone else is talking.
have high standards of conduct, professionalism, and work ethic.
adhere to Miami University student responsibilities as stated in the Student
Handbook.
I think each of my students should expect me to:
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treat each student fairly, consistently, and with respect.
have high standards for student performance.
attend class regularly.
come to class on time, organized and well prepared.
encourage students in class discussions and team work.
challenge students to think critically.
enhance student’s ability to learn on their own and develop life long learning skills.
allow time for classroom assessment.
work hard and have high expectations of myself.
answer questions in and out of class, and explain the material clearly.
have tests graded and returned reasonably quickly.
be in my office (or nearby) during assigned office hours.
challenge my students intellectually and academically.
have a sense of humor, and create a healthy (not intimidating) learning environment.
have fun and learn something new—enjoy the class, teaching, and learning in general.
find out the answers to questions that I do not know.
adhere to the Miami University Statement of Good Teaching Practices.
How to Get the Most from Class
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Be prompt and regular in your attendance.
Listening not only to what is said but how it is said.
Participate actively—try out new ideas and behaviors. Enter into the discussion
enthusiastically.
Confine your discussion to the topic at hand.
Own your views. Use “I” instead of words like “we”, one”, “the organization” or
“they”.
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Respect the views of others. Acknowledge differences. Appreciate the other
person’s point of view.
Avoid blaming and attacking. Give constructive feedback. Receive feedback
graciously.
When confusion or conflict exists, take time out to stop the process, paraphrase, and
hear each other before starting again. Listen reflectively and accurately.
Honor confidences and assume that others will do the same.
Cooperative Learning
Over the course of my teaching career, I have become convinced of the truth of
two propositions. First, student learning is enhanced by their active participation in the
learning process as opposed to their passive reception of knowledge and information.
Second, students both learn better and enjoy learning more in an atmosphere of
cooperation rather than competition. Because of this I have become heavily involved in
the cooperative learning movement. Cooperative learning is a structured form of small
group work based on positive interdependence, individual accountability, appropriate
group-formation, group processing, and social skill development in which students work
together toward a common goal. This class will be conducted in a cooperative learning
environment.
Therefore, this semester we will use cooperative learning structures and
cooperative learning groups extensively. The cooperative learning groups are an integral
part of the class. Students are responsible for the learning that goes on in the groups,
which are called structured learning teams. Members of these teams will have rotating
roles as defined below:
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Chief Executive Officer(CEO)—keeps the team on the assigned task and insures
that all members of the team have the opportunity to learn, to participate, and to earn
the respect of their teammates. The CEO is responsible for seeing that all team
members have mastered the learning points in the accounting cases. If there is no
student assuming the role of lawyer, the CEO takes over all those functions. The
CEO asks questions of the instructor, including submitting written questions to Dr.
Cottell during Problem-Based Learning exercises. The CEO should inform me as
soon as the team has completed the accounting case upon which it has been working.
Chief Financial Officer (CFO)—acts as the timekeeper for timed exercises. The
CFO is responsible to assure the team’s work area is left the way that the team found
it. During many cooperative learning exercises only one calculator is permitted in the
team. In such instances the CFO is responsible for the operation of the calculator.
Controller—picks up and maintains file folders daily. Keeps records of all team
activities including material contributed by each member for later assessment.
Executive Vice President (EVP)—gives oral responses to the class about the team’s
activities or conclusions. Writes out solutions to accounting problems for team use as
notes or for submission to Dr. Cottell. Prepares memos to be submitted on behalf of
the team. Prepares transparencies for overhead projection when the team is expected
to make an oral presentation.
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Lawyer—acts as a skeptic for the team by questioning assumptions and conclusions.
Assumes the role of any missing team member. Consults other teams for assistance
when the instructor so indicates.
Each student will be given a playing card. The card identifies three things:
1. The rank of the card identifies the team to which you belong.
2. The suit of the card identifies which of the rotating roles you will perform
on a particular day.
3. The color of the suit of the card identifies your “suit partner.” You will
work with the person within your team who has the same color suit during
paired cooperative learning structures. Unless there is a missing team
member, wild cards will work with those students holding black suits.
You have the right to ask a question in your team; you have the duty to provide
assistance in your team. During team work you may ask me for help only after all
members of the team have been consulted. Only the CEO may ask the question.
I will need for you to cooperate with me from time to time in giving me back the
control of the class. In order to communicate my desire to speak to the class, I will raise
my hand. Upon seeing anyone’s hand in the class raised your response should be to stop
talking, signal those around you, and raise your hand.
Problem-Based Learning
Problem-Based Learning (PBL) is an instructional, student centered strategy that
uses a problem situation to drive the learning activities on a need-to-know basis. On
occasion we will use PBL to reinforce financial accounting concepts. Working in groups,
you will explore a problem by first identifying the relevant knowledge you can apply and
then pinpointing the knowledge you must acquire. During these sessions I will act as a
resource for pertinent information you need to solve the problem at hand.
Homework
The homework assigned on the syllabus is for your benefit to enhance your
learning. I recommend you record homework solutions on four-column accounting
paper. This will help you to prepare for recording solutions during examinations. If you
have questions about the use of accounting paper, please ask me early in the course.
Alternatively, you may prepare the homework using an Excel spreadsheet. Our primary
method for reviewing homework problems will be by cooperative learning in teams. Not
all homework problems will be reviewed in class. Any questions about homework which
are not resolved in teams may be brought to the instructor for whole class discussion. I
encourage you to attempt the homework assigned on a daily basis. Students who neglect
this aspect of the course usually experience difficulty on examinations. Homework must
be handed in on the occasion of class absence as specified under the attendance section
below.
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PowerPoint Notes
During most classes I will be using PowerPoint presentation software. In order to
facilitate student note taking, I am making the presentations available on the course web
page, http://www.sba.muohio.edu/cottelpg/acc421. I recommend that you obtain the
PowerPoint notes in advance of the class. Because these notes are available, I will not
stop class to enable a student who has not obtained the notes to manually copy them
while the prepared students “cool their heels.”
Course Grade
The course grade is based upon instructor evaluations, the average grade on two
case write-ups, performance on two written, 75 minute examinations, and one
comprehensive final examination. I have decided to implement the “flexible grading”
system in this class. Under this system instead of using a set weight assigned to each test
grade component, I will establish a range of weights as set forth below:
Instructor evaluation—from 10% to 20%
Average grade on case write-ups—from 10% to 20%
Each test—from 10% to 20%
Final exam—from 20% to 60%
Within this range each of you may choose how much weight should be given to
each grade component. Alternatively, I will assign those weights that will maximize your
grade.
The letter grade is based on a percentage score set forth below. I normally do not
grade on the curve.
A = 90%-100%
B = 80%-89.99%
C = 70%-79.99%
D = 60%-69.99%
F= Below 60%
Instructor Evaluation
I will evaluate class participation on a daily basis. Grades will be based on both
the quantity and the quality of your participation during the class and will reflect your
overall contribution to the class understanding of the accounting material under
discussion. Attendance does not equal participation; you will be evaluated on the overall
value of your comments, insights, observations, questions, and attitude in support of the
class goals and objectives.
I will give you feedback about your class participation at least twice during the
semester. You may ask for additional feedback at any time. The characteristics I look for
in my evaluation include responding to and/or asking questions during class discussion,
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actively engaging the accounting topics during team work, and assisting other students
during team work.
Please note: There is some room for subjectivity here. I will do my best to
evaluate each student fairly and rationally, but just as in the work world, some measures
must be a matter of educated opinion. Part of your evaluation will be based on
“willingness to take criticism” on “the ability to work with others” and on “quality of
input to class and team discussion.” These criteria are subjective, but important. One
learning objective lesson of this class is for you to learn to recognize and handle
appropriately subjective measures of performance. My experience indicates that students
who actively engage the course material during class discussion and team work tend to
perform better on examinations.
An old English Proverb states, “Punctuality is the courtesy of kings and queens.”
I consider habitual tardiness to be an indication of disrespect toward the discipline, the
instructor and fellow students. I also consider walking out of class without asking to be
excused to be rude to all the members of the learning community. Those who are tardy
for class or walk out of class without permission will receive a class participation grade
of "D" for the day.
Written Case Analyses
The written case analyses are papers in which you will present an analysis of a
case I will furnish. In the paper you should briefly summarize the facts of the case,
identify the issues at hand, present alternative solutions, and make a clear
recommendation. The maximum length of the paper is four, double spaced pages with
one inch margins and twelve point font. The papers may have attached exhibits such as
graphics or spreadsheets to add clarity to the discussion in the paper. The text of the
paper should clearly refer to any exhibits used.
I will use blind grading when I evaluate your case write-ups. Therefore, do not
put you name on the front of the case. Instead, print your name on the reverse side of the
back page of the paper. Papers will be graded on quality of writing and depth of analysis.
I will use the following criteria when grading the papers:
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Demonstrate understanding of case.
The best papers contain a brief statement of the pertinent case facts and the problems
to be resolved in a straightforward manner.
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Demonstrate clear understanding of purpose.
The best papers provide meaningful context for conclusions based upon financial
accounting research.
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Organize with audience and purpose clearly in mind.
The best papers prioritize information important to the reader through headings,
subheadings and appendices.
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Write in a concise, clear business language.
The best papers use active voice, strong verbs, and easily readable prose.
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Prepare final copy in professional form and style.
The best papers demonstrate careful proofreading, grammatical correctness, and
attention to conventional formats.
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Carefully follow directions
The best papers exhibit the required font size and margin size. These papers have
numbered pages and the author identified only on the back of the final page. They do
not exceed the specified length.
The written case analysis must be turned in at class time on the due date indicated
on the syllabus. If a case is late, I will assess a one-half letter grade penalty. This penalty
will increase by one-half letter grade each twenty-four hour period of lateness. For
example, if a case is turned in after class on the date due, the penalty is one-half letter
grade. The next day the penalty is one letter grade and so forth. We will discuss the
cases that are the subject of your papers in class on the day the papers are due. Therefore,
please make two copies—one to turn in at the beginning of class and one to which you
may refer during the case discussion.
The School of Business Administration provides a resource to assist you with
your writing via the Howe Website. I encourage you to take advantage of this resource,
which may be found at <http://www.muohio.edu/hwi/howe.html>
Attendance
In order for cooperative learning to achieve its full potential, all members of a
structured learning team must be present. In the past students who have missed class have
experienced difficulty keeping up with the material. However, I recognize that it is
unrealistic to require 100% of you to be present 100% of the time. In the past I have been
exasperated in attempts to classify student absences into “excused” or “unexcused.”
Accordingly, I have decided to implement a makeup policy for absences.
If you miss a class for any reason you must turn in the homework due that day.
The homework will be due either before the missed class or within twenty-four hours
after the missed class. If you need more time for the homework for reasons such as a
family emergency, you may apply for an extension in writing.
The homework problems must be prepared on accounting paper or on an
electronic spreadsheet. If there is an essay component to the problem, you should type
your response. I will grade the homework problem and record the grade as your class
participation grade for the day. Problems received after the twenty-four hour window
will receive a zero. This requirement is not an option. Any student who has missed class
and has not turned in a homework problem will receive an “I” for the course, which will
remain until the problem has been turned in.
Two classes in this course involve discussion of a case that has been analyzed by
each of you. In the event you miss this class, you must submit an accounting problem
Accountancy 421 Blue Book
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that you have composed. This problem should test another student’s ability to understand
the issues raised in the case scheduled for the class discussion. The problem must be
accompanied by a solution. Both the problem and the solution must be typed. I will
grade your problem and that grade will stand as your class participation grade for the day.
The same policies for homework problems apply to the problems you write.
There is a limit to my level of tolerance for absences. On the occasion of your
sixth absence from class, I will ask the registrar to drop you from the course under the
provisions of Section 701d of the Undergraduate Academic Regulations of the Student
Handbook.
Examinations
Mid-term examinations shall be seventy-five minutes in length. Many students
experience time pressure on accounting examinations, so budget your time. Please turn
in papers when called for.
Mid-term examinations will be given during class on the day scheduled. No
makeup examinations will be given. In the event of a bona fide and verifiable
emergency, the final examination grade will be substituted for a missed mid-term
examination grade. Inconvenience does not constitute an emergency. Students who miss
an examination without permission or verifiable emergency will receive a zero on the
examination.
On examination days you must bring both accounting paper and lined writing
paper to class. Answers to essay type questions and memos should be submitted on the
lined paper. Answers to accounting problems and accounting analysis and schedules
should be submitted on four-column accounting paper. I suggest you bring at least ten
sheets of both types of paper to mid-term examinations. Bring twenty sheets of each to
the final examination.
You may answer questions in any order that you wish. However, each question
response must be started on a separate page. Write on only one side of the paper. Your
papers must be assembled in proper numerical sequence when you hand them in.
You may write on the examination itself. However, nothing you write on the
examination will be considered in my grading. Write any and all things you wish to be
considered for grading in the essays, memoranda, or accounting analysis you turn in.
You may use calculators on examinations. However, in the event that you forget
to bring your calculator, or it fails to operate, it is not my responsibility to rescue you by
providing a calculator. In such an event you may have to use the calculator which rests
between your shoulders.
Neatness of form and presentation will be evaluated on examinations. Organize
your work into an easy-to-follow format. You must support your answers on
examinations with the details of the calculations you have made. Amounts may be
rounded to the nearest dollar; Rates should be rounded to four decimal places. Identify
(or label) all numbers used. Schedules and statements should always have a three line
heading identifying who, what and when. Skip lines between journal entries. No partial
credit will be awarded to answers not properly supported by calculations.
Accountancy 421 Blue Book
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Any abbreviation used on a paper must be defined prior to its being accepted. For
example, if you wish to abbreviate “accounts receivable” in your response to a question
write it out the first time and follow with the abbreviation you intend to use e.g.:
accounts receivable (A/R). You must define your abbreviations in this manner separately
for each question.
During examinations students frequently approach me with questions. In the past
my policy has been to refuse to answer these questions in the interest of fairness to other
students. However, this semester I have decided to change my policy to illustrate an
accounting principle, the cost of information. If you ask me a question on the
examination, I will tell you the cost of the information in terms of test points. You may
then decide whether to “buy” this additional information. If you decide to make the
purchase I will answer the question and deduct the points on your paper. There is no
penalty for asking the question. You decide whether the answer is worth the point
deduction. You may then proceed to work on the problem armed with your new
information. Naturally, there will be no charge if the examination has an error or
ambiguity.
I will be available to discuss any and all concerns over exam scores (i.e. class
standing) during my office hours (or by appointment). However, any questions with
respect to the grading of particular exam questions must be submitted in writing using
business memorandum format (see p. 12). Verbal appeals will not be considered until I
have evaluated a written appeal. The written appeal must be submitted within 48 hours
of the time of return of the examination. Otherwise a 50% late penalty will be assessed
on credit you might otherwise have earned. After 96 hours the penalty is 100%. I will
respond within a week of receiving any inquiry, also in writing.
This policy significantly reduces the chance of misunderstanding common in
"heat of-the-moment" verbal exchanges. In addition, many students find it easier to
clearly express their concerns through written communication. Finally, this procedure
ensures the complete documentation of any such exchanges. Therefore, do not come
running to the front of the room after class to question or confront me about the grading
of an examination.
No examination or course grade will be given out early by phone. No grades will
be posted. If you desire your examination and/or course grade early, bring a selfaddressed, stamped envelope to class on the day of the exam.
Cooperative Learning Review
An examination review is scheduled for the class after each examination. In the
event scores on the exam are at a level that warrant an upward scaling, I will give you an
opportunity to earn additional points by working an exam problem or problems in your
structured learning teams. I will select these problems from the examination that you
have just taken, including multiple choice problems. You must be present at this class to
be eligible for the additional points. In the event an upward scaling of exam grades is not
warranted, we will proceed with course material.
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Office Hours
My office hours are listed on the syllabus. If these are inconvenient, please feel
free to ask for an appointment at another time. You may call my office and leave a
message on my voice mail and I will return your call. I will also respond to inquiries you
may send me on e-mail. My e-mail address is cottelpg@muohio.edu. You may also
send e-mail to me by clicking the mailbox found on my World Wide Web home page
which may be found at http://www.muohio.edu/cottelpg/. Students with special learning
needs are encouraged to meet with me to discuss these needs and to plan for appropriate
accommodations.
Classroom Assessment
From time to time I will utilize Classroom Assessment Techniques (CATs) to ask
you about how the class is going or about your understanding of the course material.
These CATs are ungraded. However, I will provide you with feedback about the results.
As an additional CAT, the class will elect two students to serve on a quality control circle
(QCC) with which I will meet on a frequent basis during the semester. The purpose of
the QCC is to empower students in their own education and to give me feedback on how
the class is going. I frequently make changes and adjustments to courses based upon my
meetings with the QCC. I encourage all students to contact QCC members with
comments or concerns about the class. Members of the QCC will be instructed not to
reveal the names of students who contact them about class concerns. I will consider
student service on the QCC in my evaluation of class participation.
Additional Policies
In the past some students have expressed concern over differences between
accounting procedures presented in class and those found in the text. Many diverse
accounting methods exist. Therefore, in any instance where you discern a difference
between the “book method” and the “lecture method,” use the following guidelines:
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The “C” student may choose either method to arrive at the proper accounting
solution.
The “B” student should learn both methods.
The “A” student should learn both methods and be able to reconcile them.
Occasionally students ask me to cancel classes either right before or right after
scheduled vacation periods. University regulations prohibit me from doing this. I quote
from the Policy Manual, Section 4.1231:
“Members of the instructional staff shall conduct the entire
meeting of each class before and after each vacation period unless
excused by the chair or executive director concerned.”
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Any observed or reported instance of academic dishonesty, as defined in the
Miami University Student Handbook, will be prosecuted to the fullest extent possible. If
you have any problems with this course that you believe you cannot resolve with me, you
should contact the Department Chair, Dr. Cumming (310 Laws Hall, phone 529-6200).
Accountancy 421 Blue Book
M E M O R A N D U M
DATE:
Insert the date signed
TO:
[Names]
FROM:
[Names] You should sign the memorandum here
RE:
[Subject]
[Type your memo text here]
12
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Abnormal Earnings
Scott Edwards has an opportunity to invest $100,000 for a franchise motorcycle
accessories shop. The franchiser provided an analysis of pre-tax earnings based on
twenty years of experience for similar situations. Research on the franchiser indicates
that it is known for honesty in its business dealings. Scott would remove all earnings
from the business.
Estimated pre-tax earnings
Year 1
Year 2
Year 3
Year 4
Beyond year 4
$(15,000)
$10,000
$15,000
$25,000
$27,500
Required:
If Scott expects to earn 15% on his investment, should he make the investment? What is
the maximum he should pay for the franchise to earn 15%?
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Bad Debts
The following information was obtained from the records of Laurel Company:
Accounts receivable
(end-of-year)
Allowance of Uncollectibles
(end-of-year, all credit balances)
Sales:
Credit
Cash
1997
1998
1999
$310,200
$325,700
$369,900
18,000
23,750
23,050
820,000
320,000
1,010,000
260,000
870,000
470,000
During 1997, 1998, and 1999, $15,400, $16,500, and $20,800 of accounts were written
off as uncollectable, respectively. In addition, during 1998, $3,200 of accounts
previously written off as uncollectable were recovered. During the three-year period,
Laurel has consistently used the same procedure and the same percentage in estimating
bad debts expense.
Required:
a. Which allowance procedure—i.e., percentage of total sales, percentage of credit sales,
or percentage of accounts receivable — has Laurel employed during this three-year
period?
b. What percentage did Laurel use?
c. Prepare the journal entry to record the bad debts expense for 1997.
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Ross Johnson
Debt Extinguishment
Problem-Based Learning
On January 2, 2000 Ross Johnson, the Controller of Creative Cabinets Company,
approached you while you are doing preliminary work on the audit of his firm. He
intended to use some of the excess cash that the firm generated from operations in 1999
to retire debt by repurchasing it on the open market. He wanted to know what the effect
would be on his financial statements if he does this on that day.
Required:
Prepare the journal entry for this transaction and explain the financial statement effects to
Ross Johnson.
Directions:
This is a Problem-Based Learning exercise. The information above is insufficient to
work the problem. You must ask Dr. Cottell for the specific information you need to
answer the question. The Chief Executive Officer should submit these questions in
writing. Do not make assumptions. Ask!
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Lease Example
Turner Company
Turner Company has signed a contract to lease a building for ten years, starting on
January 1, 1994. Their accountant, who graduated from OU, has been charging all the
lease payments to the rent expense account on the day the payment is made. The terms
and facts of this lease follow:
Turner agreed to make payments of $50,000 every six months on June 30 and December
31. Turner has made all payments on time ever since. Turner was given an option to
purchase the building at the end of ten years for $100,000. Turner's management
considered this to be a bargain purchase option. At January 1, 1994, the rate implicit in
the lease, and also Turner's incremental borrowing rate, was ten percent per year. The
present value of $1 in twenty periods at five percent equals 0.37689. The present value
of an ordinary annuity of $1 for twenty periods at five percent equals 12.46221. Turner's
management thought the building would have a useful life of twelve years and no salvage
value. Turner Company uses straight line depreciation and closes its books every
December 31.
Required:
A. Assuming this error is caught during the audit for 1995, calculate the amount and the
effect (overstated, understated, or no effect) on each of the following for both 1994
and 1995:
1. Revenues
2. Expenses
3. Net income
B. Using the same set of assumptions, calculate the amount and the effect (overstated,
understated, or no effect) on each of the following for December 31, 1995:
1. Assets
2. Liabilities
3. Stockholders' equity
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Rose Office Equipment
Deferred Tax Liability with Net Operating Loss
In 1995, Rose Office Equipment began to manufacture copying machines that
were sold on the installment basis. For financial reporting purposes, the revenue is
recognized when the equipment is sold. For tax purposes, income is recognized when
installment payments are received. In 1995 the company recognized gross profit of
$2,250,000 for financial reporting purposes, and it recognized $450,000 for tax purposes.
The schedule below reflects the amounts that Rose expects to recognize in the future for
tax purposes.
Date
1996
1997
1998
Amount
$720,000
$540,000
$540,000
Rose Office Equipment guarantees the copying machines for two years. Warranty
costs are recognized on the accrual basis for financial accounting purposes and when paid
for tax purposes. Warranty expenses accrued in 1995 were $430,000, but only $130,000
of warranty costs were paid in 1995. Rose expects to pay $190,000 in warranty costs in
1996 and $110,000 in 1997.
In addition, during 1995, $90,000 of interest on municipal bonds was earned. The
payment will not be received until 1996. Premiums in the amount of $8,000 were paid on
a life insurance policy for Rose’s Chief Executive Officer. The beneficiary for this
policy is Rose Office Equipment Company. Pretax financial accounting income for 1995
is $675,000. The enacted tax rates are as follows:
1995
1996
1997
1998
40%
35%
30%
30%
Required:
Prepare a report to show the calculations related to income taxes for 1995. The report
should show all supporting calculations and should include the journal entry for taxes at
year-end, 1995. Assume any 1995 net operating loss will be carried forward.
Accountancy 421 Blue Book
18
Schatzinger Corporation
Convertible Debt
Problem-Based Learning
You are giving financial consulting to a client, Schatzinger Corporation. The
controller, Ann Dixon, tells you that on January 1, 2000 holders of 40% of the
corporation’s convertible debt had exercised their conversion options for the company’s
$30 par value stock. She mentions that on January 1, 1999 the company had declared a
three for one stock split and thinks that may have an effect on the accounting. She has
heard about two options for accounting for the conversion, and wants your advice on
which to use.
Required:
Prepare the journal entry for the conversion under the two acceptable methods and
explain to Ann the financial consequences of using both methods.
Directions:
This is a Problem-Based Learning exercise. The information above is insufficient to
work the problem. You must ask Dr. Cottell for the specific information you need to
answer the question. The Chief Executive Officer should submit these questions in
writing. Do not make assumptions. Ask!
Accountancy 421 Blue Book
19
Pippin Progressive Paradigms
Earnings Per Share
The accounting records of Pippin Progressive Paradigms, a high tech communication
concern, contain the following information pertaining to debt and equity securities:
Common stock, $2.50 par, authorized 400,000 shares.
1/1/97 —issued and outstanding 120,000 shares
6/1/97—25,000 additional shares were issued
10/1/97—Declared a 2 for 1 stock split on common stock
12/1/97—40,000 shares were acquired as treasury stock
Stock options outstanding, issued 7/1/96, for 50,000 shares of common stock (adjusted
for stock split). Exercise price of the options was $12 per share. Average market price of
the common stock during 1997 was $20 per share.
8% convertible bonds payable, issued at face value of $500,000 on 7/1/96. The
conversion rate is 50 shares of common stock (adjusted for the stock split) for each
$1,000 bond.
Both income from continuing operations and net income for the period were $300,000.
The marginal tax rate is 35%.
Required:
Calculate basic and diluted earnings per share for Pippin Progressive Paradigms.
Accountancy 421 Blue Book
20
Earnings Per Share
Problem-Based Learning
A client of yours in considering investing in the Jasper Corporation and is seeking
accounting information. She brings you the schedule below.
Jasper Corporation
Net Income
Less dividend on 10% convertible preferred stock
Weighted-average common shares outstanding
Basic EPS = $3.00
Stock option dilution
Series A convertible debt dilution
Series B convertible debt dilution
10% convertible preferred dilution
Diluted EPS = $2.40
EPS Calculation
Denominator
Numerator
$3,500,000
(500,000)
1,000,000
$3,000,000
1,000,000
-0300,000
240,000
500,000
$4,040,000
33,334
200,000
250,000
200,000
1,683,334
Required: Answer the following questions posed by your client.
a)
b)
c)
d)
e)
What is the common stock conversion rate for the preferred stock?
What is the common stock conversion rate for the Series A Bonds?
What is the common stock conversion rate for the Series B Bonds?
What is the average market price of the company’s common stock during 1998?
Assuming the Series A bonds and the Series B bonds were issued on the same day
and neither is subordinate, explain why they have a different interest rate.
Calculate interest rates if you have not done so in previous parts.
Directions:
This is a Problem Based Learning Exercise. The schedule that your client brought does
not contain sufficient information to answer these questions. As part of your analysis,
you must ascertain what additional information you need. Ask Dr. Cottell for the
additional information. The Chief Executive Officer should submit these questions in
writing. Do not assume; ask.