Intermediate Accounting II, ACCT 3322
Review Questions for Final Exam
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1. On September 1, 2002, Spencer Company stock was selling for $60 per shares. The
company’s capital accounts were as follows:
Capital stock, par value, $25
50,000 shares issued and outstanding
Additional paid-in capital
Retained earings
Total stockholders' equity
$1,250,000
800,000
3,200,000
$5,250,000
On September 1, 2002, the company declared and distributed a 50% stock dividend and the par
value of the stock remained at $25 per share. What would the balance be in the capital stock
account after the dividend distribution?
2. The stockholders’ equity of Spencer Company at June 30, 2002 is as follows:
Common stock, par value, $25, 400,000 shares
authorized, 200,000 shares issued and outstanding
Additional paid-in capital
Retained earnings
Total stockholders' equity
$5,000,000
1,500,000
6,000,000
$12,500,000
On July 1, 2002, the board of directors of Spencer Company declared a 15% stock dividend on
common stock, to be distributed on August 15, 2002. The market price of Spencer Company’s
stock was $35 on July 1, 2002 and $40 on August 15, 2002. What is the amount of the debit to
retained earnings as a result of the declaration and distribution of this stock dividend?
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3. Spencer Company accepted a share purchase contract for 50,000 shares of $25 par value
common stock on June 30, 2002 when the stock was selling for $50 per share. A 40% down
payment was received with the remainder due in six months. On December 30, 2002, the
balance of the share purchase contract is received and the shares are issued. Prepare the
journal entries for June 30, 2002 and December 31, 2002.
4. On June 30, 2002 Spencer Company issued $50 par value common shares which was recorded
in the accounting records as follows:
ACCOUNT
Cash
Common stock
Additional paid-in capital
DEBIT
500,000
CREDIT
200,000
300,000
The following transactions took place during the remainder of the year.
On July 15 the company bought 100 shares of common stock as treasury stock at $150
On August 1 the company sold 30 shares of treasury stock at $140.
On August 15 the company sold 30 shares of treasury stock at $155
On September 30 the company retired 40 shares of treasury stock
Prepare the journal entries to record the treasury stock transactions that took place during 2002.
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5. Spencer Company has $400,000 of 5% preferred stock and $600,000 of common stock
outstanding, each having a par value of $10 per share. No dividends have been paid or
declared during 2000 and 2001. As of December 31, 2002, the company has decided to
distribute $300,000 in dividends. If the preferred stock is cumulative and fully participating
how much will be distributed to the common stockholders and how much will be distributed to
the preferred stockholders?
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6. On November 1, 2002, Spencer Company issued at 102, three hundred of its 10%, $1,000
bonds. Attached to each bond was one detachable stock warrant entitling the holder to
purchase 10 shares of Spencer Company’s common stock. On November 1, 2002 the market
value of the bonds, without the stock warrants, was 99, and the market value of each stock
warrant was $40. The amount of the proceeds from the issuance that should be accounted for
as the initial carrying value of the bonds payable would be.
7. On January 1, 2002 Spencer Company had 300,000 shares of common stock issued and
outstanding. On September 1, 2002 the company issued an additional 150,000 shares of
common stock. Net income for the year ended December 31, 2002 was $500,000. What were
the earnings per share for the year ended December 31, 2002?
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8. On January 1, 2000, Spencer Company issued at par $400,000 10% convertible bonds. Each
$1,000 bond is convertible into 40 shares of common stock. No bonds were converted during
2000. The company had 50,000 shares of common stock outstanding during 2000. Net
income for the year was $160,000 and the income tax rate was 30%. Calculate Spencer
Company’s diluted earnings per share for 2000.
9. During 1999 Spencer Co. purchased 1,000, $1,000, 9% bonds. The carrying value of the bonds
at December 31, 2001 was $980,000. The bonds mature on March 1, 2006, and pay interest on
March 1 and September 1. Spencer Co. sells 500 bonds on September 1, 2002, for $494,000,
after the interest has been received. Spencer uses straight-line amortization. Calculate the gain
on the sale of the bonds.
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10. The following differences enter into the reconciliation of financial income and taxable income
for Spencer Company for the year ended December 31, 2000. The enacted income tax rate is
30% for all years.
Pretax accounting income
Excess tax depreciation
Litigation accrual
Unearned rent revenue
Interest earned on municipal bonds
Taxable income
$450,000
(240,000)
35,000
25,000
(10,000)
$260,000
The unearned revenue is deferred on the books but appropriately recognized in taxable income.
Excess tax depreciation will reverse equally over a four-year period. It is estimated that the
litigation liability will be paid in 2005. Rent revenue will be recognized during the last year of
the lease which is 2005. Interest revenue from the Texas bonds is expected to be $10,000 each
year until their maturity at the end of 2005. The balance in the deferred tax accounts at January
1, 2000 are as follows:
Deferred tax assets
Deferred tax liabilities
DR (CR)
$22,000
($50,000)
Prepare a schedule of deferred tax (assets) and liabilities for December 31, 2000.
Prepare T-accounts to analyze the changes in deferred tax assets and deferred tax liabilities for
the year of 2000.
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Prepare the schedule of net deferred tax expense for the year ended December 31, 2000.
Calculate income tax payable for the year ended December 31, 2000.
Calculate income tax expense for the year ended December 31, 2000.
Prepare the journal entry to record income tax expense, changes in deferred tax assets and
liabilities and income tax payable.
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11. On January 1, 2001, Spencer Company signs a 10-year noncancelable lease agreement to lease
a warehouse from Texas Warehouse Company. Collectibility of lease payments is reasonably
predictable and no important uncertainties surround the amount of costs yet to be incurred by
the lessor. The following information pertains to this lease agreement.
9 The agreement requires equal rental payments at the end of each year.
9 The fair value of the building on January 1, 2001 is $900,000; however, the book value
to Texas is $750,000.
9 The building has an estimated economic life of 10 years, with no residual value.
Spencer depreciates similar buildings on the straight-line method.
9 At the termination of the lease, the title to the building will be transferred to the lessee.
9 Spencer’s incremental borrowing rate is 11% per year. Texas Warehouse Co. set the
annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by
Spencer Company.
9 The yearly rental payment includes $3,000 of executory costs related to taxes on the
property.
Calculate the minimum annual lease payment? (Rounded to the nearest dollar.)
What is the amount of the total annual lease payment?
Calculate the depreciation expense that Spencer Company would record for the year ended
December 31, 2001 (Rounded to the nearest dollar.)
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12. Spencer Company enters into a lease agreement on June 30, 2001 to lease manufacturing
equipment. The lease agreement has the following terms and conditions.
9 The term of the noncancelable lease is 8 years, with no renewal option. An initial
payment of $150,000 was paid at the signing of the lease. Annual payments of
$150,000 are due on June 30th of each year.
9 The normal retail price of the equipment is approximately $880,000. The equipment
has an economic life of 10 years.
9 The company normally depreciates manufacturing equipment on a straight-line basis.
9 The lessee pays all executory costs.
9 Spencer Company’s incremental borrowing rate is 12% per year. The lessee is aware
that the lessor used an implicit rate of 10% in computing the lease payments.
Calculate the present value of the minimum lease payments.
Prepare a lease amortization schedule.
Prepare the journal entries on June 30, 2001.
Prepare the journal entries for December 31, 2001
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13. Spencer Company purchased machinery that cost $135,000 on January 4, 2000. The entire cost
was recorded as an expense. The machinery has a nine-year life and a $9,000 residual value.
The error was discovered on December 20, 2002. Ignore income tax considerations.
How will it be reported on Spencer Company’s income statement for the year ended December
31, 2002?
The purchase of the machinery will not be reported on the income statement.
Prepare the journal entries for December 20, 2002 and December 31, 2002.
14. The following are the comparative balance sheets for Spencer Company for the years ended
December 31, 2002 and 2001. Addition information regarding the activities of the company
during 2002 are as follows:
(1) Net income for the year was $84,000.
(2) Cash dividends amounting to 6% of the par value of the common stock were declared and
paid.
(3) Land was sold for $80,000.
(4) The company sold equipment, which cost $150,000 and had accumulated depreciation of
$60,000, for $70,000.
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Spencer Company
Cash Flow Worksheet
December 31,
Cash
Accounts receivable (net)
Inventory
Land
Building
Accumulated depreciation
Equipment
Accumulated depreciation
Accounts payable
Bonds payable
Capital stock, $10 par
Retained earnings
2002
$43,000
2001
$24,000
35,000
114,000
120,000
200,000
(50,000)
1,030,000
(118,000)
(115,000)
(320,000)
(750,000)
(189,000)
$0
38,000
82,000
190,000
200,000
(40,000)
600,000
(94,000)
(100,000)
0
(750,000)
(150,000)
$0
Calculate the cash provided by (used by) operating activities.
Calculate the cash provided by (used by) investing activities.
Calculate the cash provided by (used by) financing activities.
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15. Pension data for the Ben Franklin Company include the following for the current
calendar year:
Discount rate
Expected return on plan assets
Actual return on plan assets
Service Cost
January 1:
PBO
ABO
Plan assets
Amortization of prior service cost
Amortization of net gain
December 31:
Cash contributions to pension fund
Benefit payments to retirees
8%
10%
9%
$200,000
1,400,000
1,000,000
1,500,000
20,000
4,000
220,000
240,000
Calculate pension expense for the year.
Prepare the journal entry to record pension expense and funding for the year.
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16. Carolina Consulting Company has a defined benefit pension plan. The following
pension-related data were available for the current calendar year:
PBO:
Balance, January 1, 2003
Service cost
Interest cost
Gain from changes in accurial assumptions
Benefits paid to retirees
Balance, December 31, 2003
Plan Assets:
Balance, January 1, 2003
Actual return
(expected return was $22,500)
Contributions
Benefits paid
Balance, December 31, 2003
240,000
41,000
12,000
(5,000)
(20,000)
268,000
250,000
20,000
35,000
(20,000)
285,000
ABO, December 31, 2003
January 1, 2003 balances
Prepaid (accrued) pension cost
Unrecognized prior service cost
(amortization $4,000 per year)
Unrecognized net gain
(amortization if any, over 15 years)
245,000
(6,000)
4,000
40,000
Calculate the 2003 pension expense. Show calculations.
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Prepare the 2003 journal entry to record pension expense and funding.
Prepare any 2003 journal entry necessary to record any additional pension liability
needed.
17. The following is the pension spreadsheet for the current year for Sparky Corporation.
Complete the following pension spreadsheet.
PBO
Beginning balance
Plan Assets
$450,000
Service cost
($85,000)
Interest cost
(25,000)
Actual return on assets
Prior
Service
Cost
$60,000
Net (Gain) Pension
Loss
Expense
$55,000
Cash
Prepaid
(Accrued)
Cost
$165,000
52,000
(Gain) loss on assets
3,000
Amortization of:
Prior service cost
Net (gain) loss
Loss on PBO
(1,000)
(65,000)
Contributions to fund
40,000
Retiree benefits paid
Journal entry
Ending balance
($325,000)
$54,000
$122,000
Prepare the journal entry to record pension expense for the year.
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18. O'Brien Company provides postretirement health care benefits to employees who
provide at least 10 years of service and reach the age of 65 while in service. On January
1 of the current year, the following plan-related data were available.
Unrecognized transition obligation
APBO Balance
Fair value of plan assets
Average remaining service period to retirement
Average remaining service period to full eligibility
$40,000
104,000
0
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On January 1 of the current year, O'Brien amends the plan to provide dental benefits.
The actuary determines that the cost of making the amendment increases the APBO by
$10,000. Management chooses to amortize this amount on a straight-line basis. The
service cost is $30,000. The appropriate interest rate is 10%.
Calculate the postretirement benefit expense for the current year.
19. Cartel Products Inc. offers a restricted stock award plan to its vice presidents. On
January 1, 2003, the corporation granted 12 million of its $1 par common shares, subject
to forfeiture if employment is terminated within 2 years. The common shares have a
market value of $6 per share on the date the award is granted.
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Assume that no shares are forfeited. Determine the total compensation cost pertaining to the
restricted shares.
Prepare the appropriate journal entries related to the restricted stock through December
31, 2004.
20. Olde Corporation provides an executive stock option plan. Under the plan, the company
granted options on January 1, 2003, that permit executives to acquire 2 million of the
company's $1 par value common shares within the next five years, but not before
December 31, 2004 (the vesting date). The exercise price is the market price of the
shares on the date of the grant, $14 per share. The fair value of the options, estimated by
an appropriate option pricing model, is $2 per option. No forfeitures are anticipated.
Ignore taxes.
Determine the total compensation cost pertaining to the options, assuming the fair value
approach has been selected.
Prepare the appropriate journal entry to record the award of the options on January 1,
2003.
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Prepare the journal entry to record compensation expense on December 31, 2003.
Prepare the journal entry to record compensation expense on December 31, 2004.
21. Spencer Company sells animal entertainment centers for $2,500 each. The
entertainment centers carry a three year warranty covering parts and labor. The
company has been in business 10 years and has an established stable pattern of warranty
expense. On average the company incurs $50 in labor costs and $10 in parts for each
entertainment center sold. During 2004 Spencer Company sold 500 animal
entertainment centers and incurred warranty costs of $6,000 for labor and $1,200 for
parts. On January 1, 2004 the balance in the “Estimated Liability under Warranties”
account was $87,500. In the space provided prepare the journal entries required to
record warranty expense and warranty costs incurred for 2004.
Using the format provided prepare a T-Account analysis of the “Estimated Liability
Under Warranties” account to determine the balance at year end.
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22. On September 1, 2004, Spencer Company issued a $500,000, 9-month, non-interestbearing note to the bank. Interest was discounted at a 14% discount rate.
Prepare the appropriate journal entry for Spencer Company to record the issuance of the
non-interest-bearing note.
In the space provided determine the effective interest rate.
23. On March 1, 1999, Spencer Company issued 1,000, $1,000 9% bonds when the market
interest rate was 10%. The bonds are for 10 years and pay interest on March 1 and
September 1.
Calculate the issue price of the bonds (rounded to the nearest dollar).
Prepare an amortization schedule through March 1, 2002.
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Prepare the journal entries to record the sale of the bonds.
Prepare the journal entry to record interest expense, amortization of discount and payment of
interest on September 1, 1999.
Prepare the journal entry to record interest expense, amortization of discount and accrual of
interest on December 31, 1999.
On October 31, 2001, Spencer Company redeemed 500 bonds at 101. Prepare the journal entry
to bring the accounting records up to the date of redemption.
Prepare the October 31, 2001 journal entry to record the redemption of the bonds.
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