1

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 1,250,000
Additional paid-in capital 800,000
Retained earnings 3,200,000
Total stockholders' equity 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?
Analysis of capital stock:
Number of shares outstanding
Dividend rate
Additional shares issued
Par value
Increase in common stock account
Original balance
Final balance
50,000
50%
25,000
$25
625,000
1,250,000
$1,875,000
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 5,000,000
Additional paid-in capital
Retained earnings
Total stockholders' equity
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?
Analysis of charge to retained earnings:
Number of shares issued and outstanding
Small stock dividend
Shares of small stock dividend
Market value at declaration date
Charge to retained earnings
200,000
15%
30,000
$35
$1,050,000
2

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.
DATE ACCOUNT DEBIT CREDIT
$2,500,000 6/30/02 Share purchase contract receivable
Common stock
Paid-in capital, common stock
$1,250,000
1,250,000
Analysis of paid-in capital, common stock:
Number of shares subscribed
Market value per share
Par value
Paid-in capital, Common stock
50,000
$50 $2,500,000
25 1,250,000
$1,250,000
DATE
6/30/02 Cash
ACCOUNT
Share purchase contract receivable
Analysis of cash receipts:
Share purchase contract receivable
Percentage down payment
Cash received
DEBIT
$1,000,000
CREDIT
$1,000,000
$2,500,000
40%
$1,000,000
DATE
12/31/02 Cash
ACCOUNT DEBIT
$1,500,000
CREDIT
Share purchase contract receivable $1,500,000
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
3

Prepare the journal entries to record the treasury stock transactions that took place during 2002.
DATE ACCOUNT DEBIT CREDIT
7/15/02 Treasury stock
Cash
15,000
15,000
DATE ACCOUNT
8/1/02 Cash
Retained earnings
Treasury stock
DATE
8/15/02 Cash
ACCOUNT
Treasury stock
Paid-in capital, treasury stock
DEBIT
4,200
300
CREDIT
4,500
DEBIT
4,650
CREDIT
4,500
150
DATE
9/30/02 Common stock
ACCOUNT
Paid-in capital, common stock
Paid-in capital, treasury stock
Retained earnings
DEBIT
2,000
3,000
150
850
CREDIT
Treasury stock 6,000
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?
4

Description
Preferred stock, $400,000 * 5%
In arrears for 2000
In arrears for 2001
Dividends for 2002
Common stock, $600,000
Dividends for 2002
$600,000 * 5%
Preferred Common
$20,000
20,000
20,000
Total
$20,000
20,000
20,000
$30,000 30,000
Participating dividends: ($300,000-$90,000)
Preferred dividends
400,000/1,000,000 * $210,000
Common dividends
600,000/1,000,000 * $210,000
84,000 84,000
$144,000
126,000
$156,000
126,000
$300,000
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.
Selling price of bonds with warrants:
Face amount
Number of bonds
Total face value
Sold at
Selling price
$1,000
300
300,000
102
$306,000
Market value of bonds:
Face amount
Number of bonds
Total face value
Market ratio
Market value
Market value of stock warrants:
Number of warrants
Market value per share
Market value
$1,000
300
300,000
99
300
$40
$297,000
$12,000
5

Bonds
Warrants
Total
FMV
$297,000
12,000
$309,000
%
96.12%
3.88%
100%
Cost
$294,117
11,883
$306,000
Carrying value of bonds payable:
Bonds payable
Discount on bonds payable
Carrying value of bonds payable
$300,000
5,883
$294,117
Account
Cash
Bond payable
Discount on bonds payable
Stock Warrants
Debit
$306,000
5,883
Credit
$300,000
11,883
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?
Date Shares # Shares Period Wgt. Avg.
8/12 200,000 1/1/02 Beginning balance
9/1/02 Issued shares
Adjusted balance
300,000
150,000
450,000 4/12 150,000
Weighted average number of shares outstanding 350,000
Net income
Weighted average common shares
Basic EPS
$500,000
350,000
$1.43
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.
Diluted EPS:
Recalculated net income
Diluted number of shares
Diluted EPS
$188,000
66,000
$2.85
6

Diluted number of shares:
Face value of bonds
Par value of each bond
Number of bonds
Conversion ratio to common stock
Number of common shares in dilution
Shares issued and outstanding
Total diluted number of shares
$400,000
1,000
400
40
16,000
50,000
66,000
Recalculated diluted earnings:
Net income
Bond interest expense:
Fact value of bonds
Interest rate
Annual interest
Less: income tax (30%)
Bond interest net of tax
Recalculated income available to common
$400,000
10%
40,000
12,000
160,000
28,000
$188,000
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.
7

Analysis of gain on sale:
Carrying value of bonds at 9/1/02
Percentage of bonds sold
Carrying value of bonds sold
Selling price of bonds
Gain on sale of bonds
$983,200
50%
$491,600
494,000
$2,400
Carrying value of bonds at 9/1/02:
Face value of bonds
Carrying value of bonds on 12/31/01
Unamortized discount
Number of months
Monthly amortization of discount
Months to 9/1/02
Amortization of discount
Unamortized discount at 9/1/02
Face value of bonds
Carrying value of bonds on 9/1/02
$1,000,000
980,000
20,000
50
400
8
3,200
($16,800)
1,000,000
$983,200
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.
8

Depreciation
Litigation
Unearned rent
Totals
Schedule of Deferred Tax Asset and (Liability):
Deferred Tax
Temporary Differences:
Future
Amounts
($240,000)
35,000
25,000
($180,000)
Tax Rate
30%
30%
30%
Asset
$10,500
7,500
$18,000
Liability
($72,000)
($72,000)
Prepare T-accounts to analyze the changes in deferred tax assets and deferred tax liabilities for the year of 2000.
T-Account Analysis: Deferred Tax Asset
Description
Beginning balance
AJE deferred tax expense for 2000
Required ending balance
Debit
22,000
$18,000
Credit
$4,000
T-Account Analysis: Deferred Tax Liability
Description
Beginning balance
Debit
AJE deferred tax expense for 2000
Required ending balance
Credit
$50,000
22,000
$72,000
Prepare the schedule of net deferred tax expense for the year ended December 31, 2000.
Schedule of Net Deferred Tax Expense
Deferred tax expense (deferred tax asset)
Deferred tax expense (deferred tax liability)
Net deferred tax expense
$4,000
22,000
$26,000
Calculate income tax payable for the year ended December 31, 2000.
Taxable income
Analysis of Income Tax Payable
$260,000
Tax rate
Income tax payable
30%
$78,000
9

Calculate income tax expense for the year ended December 31, 2000.
Analysis of Income Tax Expense
Deferred tax expense
Current tax expense
Total income tax expense
$26,000
78,000
$104,000
Prepare the journal entry to record income tax expense, changes in deferred tax assets and liabilities and income tax payable.
Account
Income tax expense
Deferred tax asset
Deferred tax liability
Debit
$104,000
Credit
$4,000
22,000
Income tax payable 78,000
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.)
Analysis of Minimum Annual Lease Payments
PVOA = R * T(pvoa)
$900,000 = R * 6.14457
R = $900,000/6.14457
R = $146,471 $146,471
10

What is the amount of the total annual lease payment?
Analysis of the Annual Lease Payment
Minimum lease payment
Executory costs
Annual lease payment
$146,471
3,000
$149,471
Calculate the depreciation expense that Spencer Company would record for the year ended
December 31, 2001 (Rounded to the nearest dollar.)
Analysis of Annual Depreciation Expense
PV of minimum lease payments $900,000
Service life of building
Annual depreciation
10
$90,000
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.
Minimum lease payment
PVAD, n=8, i=10%
PV of minimum lease payments
$150,000
5.86842
$880,263
11

Prepare a lease amortization schedule.
DATE PAYMENT INTEREST
6/30/01
6/30/01
6/30/02
6/30/03
6/30/04
6/30/05
6/30/06
6/30/07
6/30/08
$150,000
150,000
150,000
150,000
150,000
150,000
150,000
150,000
$0
73,026
65,329
56,862
47,548
37,303
26,033
13,636
Prepare the journal entries on June 30, 2001.
PRINCIPLE BALANCE
$880,263
$150,000
76,974
84,671
730,263
653,289
568,618
93,138
102,452
112,697
123,967
136,364
475,480
373,028
260,331
136,364
0
Date Account
6/30/01 Equipment under capital lease
Obligation under capital lease
Debit
$880,263
Credit
$880,263
$150,000 6/30/01 Obligation under capital lease
Cash
Prepare the journal entries for December 31, 2001
Date
12/31/01 Interest expense
Interest payable
Account
Analysis of interest expense:
Interest on June 2002 payment
Months in short period
Interest accrual at 12/31/01
Debit
$36,513
$73,026
6/12
$150,000
Credit
$36,513
$36,513
12/31/01 Depreciation expense
Accumulated depreciation
Analysis of depreciation expense:
PV of minimum lease payments
Service life of lease
Annual depreciation
Short period
Depreciation accrual at 12/31/01
$55,016
$880,263
8
110,033
6/12
$55,016
$55,016
12

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.
Date
12/20/02 Machinery
Account
Accumulated depreciation
Retained earnings
Debit
$135,000
Credit
$28,000
107,000
Analysis of correction of error:
Cost of machinery
Salvage value
Depreciable base
Service life
Annual depreciation
Years since error
Accumulated depreciation
Adjustment to retained earnings
$135,000
9,000
126,000
9
14,000
2
28,000
$107,000
Date Account
12/31/02 Depreciation expense
Debit
$14,000
Credit
Accumulated depreciation $14,000
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.
13

Spencer Company
Cash Flow Worksheet
December 31,
Cash
2002
$43,000
2001
$24,000
Accounts receivable (net)
Inventory
Land
Building
Accumulated depreciation
Equipment
Accumulated depreciation
Accounts payable
Bonds payable
Capital stock, $10 par
Retained earnings
35,000
114,000
120,000
200,000
(50,000)
1,030,000
(118,000)
(115,000)
(320,000)
(750,000)
(189,000)
$0
Calculate the cash provided by (used by) operating activities.
Cash flow from operating activities:
Net income
Depreciation
Decrease in accounts receivable
Increase in inventory
Increase in accounts payable
Less gain on sale of land
Plus loss on sale of equipment
Net cash provided by operating activities
$94,000
3,000
(32,000)
15,000
(10,000)
20,000
$84,000
90,000
$174,000
Calculate the cash provided by (used by) investing activities.
Cash flow from investing activities:
Cash received from sale of land
Cash received from sale of equipment
Cash paid for equipment
Net cash used in investing activities
$80,000
70,000
(580,000)
($430,000)
38,000
82,000
190,000
200,000
(40,000)
600,000
(94,000)
(100,000)
0
(750,000)
(150,000)
$0
14

Calculate the cash provided by (used by) financing activities.
Cash flow from financing activities:
Cash received from sale of bonds
Cash paid for dividends
Net cash provided by financing activities
$320,000
(45,000)
$275,000
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
8%
10%
9%
$200,000
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
1,400,000
1,000,000
1,500,000
20,000
4,000
220,000
240,000
15

Calculate pension expense for the year.
Pension Expense
Service cost
Interest cost
Expected return
Amortization of prior service cost
Amortization of net gain
Pension expense
$200,000
112,000
(150,000)
20,000
(4,000)
Analysis of interest cost:
PBO
Discount rate
Interest cost
$1,400,000
8%
$178,000
$112,000
Analysis of expected return:
Plan assets
Expected return rate on plan assets
Expected return
$1,500,000
10%
$150,000
Prepare the journal entry to record pension expense and funding for the year.
Account Debit Credit
Pension expense
Prepaid (accrued) pension cost
Cash
$178,000
42,000
$220,000
16

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
240,000
41,000
12,000
(5,000)
(20,000)
268,000
Plan Assets:
Balance, January 1, 2003
Actual return
(expected return was $22,500)
Contributions
Benefits paid
Balance, December 31, 2003
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)
250,000
20,000
35,000
(20,000)
(6,000)
4,000
40,000
285,000
245,000
17

Calculate the 2003 pension expense. Show calculations.
Pension Expense
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of net gain
Pension expense
$41,000
12,000
(22,500)
4,000
(1,000)
Analysis of expected return on plan assets:
Actual return on plan assets
Loss on plan assets
Expected return on plan assets
$20,000
2,500
$33,500
$22,500
Analysis of amortization of net gain:
Unamortized net gain
Greater of 10% of beginning:
PBO , or
Plan assets
Amount to be amortized
Amortization period
Amortization of net gain
$240,000
250,000
$40,000
25,000
15,000
15
$1,000
Prepare the 2003 journal entry to record pension expense and funding.
Pension expense
Account
Prepaid (accrued) pension cost
Debit
$33,500
1,500
Credit
Cash $35,000
Prepare any 2003 journal entry necessary to record any additional pension liability needed.
No entry needed since the ABO does not exceed the plan assets
18

17. The following is the pension spreadsheet for the current year for Sparky Corporation.
Complete the following pension spreadsheet.
Prior Net Prepaid
Beginning balance
Service cost
Interest cost
Actual return on assets
(Gain) loss on assets
Amortization of:
Prior service cost
Net (gain) loss
Loss on PBO
Contributions to fund
Retiree benefits paid
Journal entry
Plan Service (Gain) Pension
PBO Assets Cost Loss
($400,000) $450,000 $60,000 $55,000
(85,000)
(25,000)
52,000
Expense
85,000
25,000
(52,000)
3,000 (3,000)
Cash
(65,000)
40,000
250,000 (250,000)
(6,000) 6,000
(1,000) 1,000
65,000
(40,000)
(Accrued)
Cost
$165,000
$62,000 ($40,000) (22,000)
Ending balance ($325,000) $292,000 $54,000 $122,000 $143,000
Prepare the journal entry to record pension expense for the year.
Pension expense
Cash
Account
Prepaid (accrued) pension cost
Debit
$62,000
Credit
$40,000
22,000
19

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
20
15
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.
Postretirement Benefit Expense
Service cost
Interest cost
Return on plan assets
Amortization of transition obligation
Amortization of prior service cost
Postretirement benefit expense
$30,000
11,400
0
2,000
667
$44,067
Analysis of interest cost:
Beginning balance APBO
Plan amendment (beginning of year)
Adjusted beginning balance APBO
Interest rate
Interest cost
Analysis of amortization of transition obligation:
Unrecognized transition obligation
Remaining service period to retirement
Amortization of transition obligation
Analysis of amortization of period service cost:
Prior service cost (plan amendment)
Remaining service period to full eligibility
$104,000
10,000
114,000
10%
$40,000
20
$10,000
15
$11,400
$2,000
$667
20

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.
Assume that no shares are forfeited. Determine the total compensation cost pertaining to the restricted shares.
Compensation Cost
Shares in restricted stock award
Market value on grant date
Compensation cost
12,000,000
$6
$72,000,000
Prepare the appropriate journal entries related to the restricted stock through December
31, 2004.
Date Account
12/31/03 Compensation expense
Paid-in capital, restricted stock
Debit
$36,000,000
Credit
$36,000,000
Analysis of compensation expense:
Total compensation cost
Period of service
Compensation expense
$72,000,000
2
$36,000,000
12/31/04 Compensation expense
Paid-in capital, restricted stock
12/31/04 Paid-in capital, restricted stock
Common stock
Paid-in capital, excess of par
Analysis of paid-in capital, excess of par:
Compensation cost
Shares issued
Par value
Total par value of shares issued
Paid-in capital, excess of par
$36,000,000
$36,000,000
$72,000,000
$12,000,000
60,000,000
12,000,000
$1
$72,000,000
12,000,000
$60,000,000
21

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.
Number of options
Fair value of options
Compensation costs
Compensation Costs
2,000,000
$2
$4,000,000
Prepare the appropriate journal entry to record the award of the options on January 1,
2003.
No journal entry on January 1, 2003, date options are granted
Prepare the journal entry to record compensation expense on December 31, 2003.
Date Account Debit Credit
12/31/03 Compensation expense
Paid-in capital, stock options
$2,000,000
$2,000,000
Analysis of compensation expense:
Compensation costs
Vesting period
Compensation expense
$4,000,000
2
$2,000,000
Prepare the journal entry to record compensation expense on December 31, 2004.
Date Account
12/31/04 Compensation expense
Paid-in capital, stock options
Debit
$2,000,000
Credit
$2,000,000
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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.
Warranty Expense
Account Debit
$30,000
Credit
Estimated Liability under Warranties
To record warranty expense for the year
$30,000
Analysis of warranty expense:
Warranty expense per unit
Units sold
Warranty expense
$60
500
$30,000
Account
Estimated Liability under Warranties
Inventory-parts
Labor expense
To record warranty costs incurred during the year
Using the format provided prepare a T-Account analysis of the “Estimated Liability
Under Warranties” account to determine the balance at year end.
T-Account Analysis: Estimated Liability under Warranties
Description
Beginning balance
Warranty expense for 2004
Warranty costs incurred in 2004
Ending balance
Debit
$7,200
Debit
$7,200
Credit
$1,200
6,000
Credit
$87,500
30,000
$110,300
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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.
Date Account Debit Credit
9/1/04 Cash
Discount on notes payable
Notes payable
$447,500
52,500
$500,000
To record the issuance of a 9-month $500,000 note discounted at 14%
Analysis of discount on notes payable:
Face amount
Annual interest rate
Annual interest
Months in short period
Discount on notes payable
$500,000
14%
70,000
9/12
$52,500
In the space provided determine the effective interest rate.
Effective interest rate:
Discount
Cash
52,500
447,500
11.73%
Discount for short period
Number of months in short period
Monthly interest rate
Annualized (multiply by 12)
Annualized effective interest rate
11.73%
9
1.30%
12
15.64%
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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).
Issue price of bonds:
PV of principal amount:
Face amount
PV $1, n = 20; i = 5%
PV of principal
$1,000,000
0.37689
$376,890
PV of annuity:
Face amount
Stated interest rate
Annual interest
Number of payments per year
$1,000,000
9%
90,000
2
Annuity 45,000
PVOA, n = 20; i = 5%
PV of annuity
12.46221
Issue price of bonds
560,799
$937,689
Prepare an amortization schedule through March 1, 2002.
Amortization
Payment Interest Date
3/1/99
9/1/99
3/1/00
9/1/00
3/1/01
9/1/01
3/1/02
$45,000
45,000
45,000
45,000
45,000
45,000
$46,884
46,979
47,078
47,181
47,291
47,405 of Discount Balance
$937,689
$1,884
1,979
2,078
2,181
939,573
941,552
943,630
945,811
2,291
2,405
948,102
950,507
Prepare the journal entries to record the sale of the bonds.
Date Account
3/1/99 Cash
Discount on bonds payable
Bonds payable
Debit
$937,689
62,311
Credit
$1,000,000
To record the issuance of 1,000, $1,000 9% bonds at an effective interest rate of 10%.
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Prepare the journal entry to record interest expense, amortization of discount and payment of interest on September 1, 1999.
Date Account Debit Credit
$46,884 9/1/99 Interest expense
Discount on bonds payable
Cash
$1,884
45,000
To record the payment of interest and amortization of discount.
Prepare the journal entry to record interest expense, amortization of discount and accrual of interest on December 31, 1999.
Date Account Debit Credit
12/31/99 Interest expense
Discount on bonds payable
Interest payable
To accure interest through December 31, 1999.
$31,319
$1,319
30,000
Analysis of interest expense:
Interest expense 3/1/00
Short period
Interest expense
$46,979
4/6
$31,319
Analysis of amortization of discount:
Amortization 3/1/00
Short period
Discount on bonds payable
$1,979
4/6
$1,319
Analysis of interest payable:
Interest payment 3/1/00
Short period
Interest payable
$45,000
4/6
$30,000
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.
Date Account Debit Credit
10/31/01 Interest expense
Discount on bonds payable
$15,802
$802
Interest payable 15,000
To bring the accounting records current prior to redemption of bonds.
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Interest expense:
Interest expense, 3/1/02
Short period
Interest expense
Discount on bonds payable:
Amortization of discount, 3/1/02
Short period
Discount on bonds payable
$2,405
2/6
$802
Interest payable:
Interest payment, 3/1/02
Short period
Interest payable
$45,000
2/6
$15,000
Prepare the October 31, 2001 journal entry to record the redemption of the bonds.
Date Account Debit Credit
10/31/01 Bonds payable
Loss on bonds payable
Discount on bonds payable
Cash
$500,000
30,548
$25,548
505,000
To record the redemption of 500 bonds at 101
Analysis of cash:
Face amount of bonds redemed
Redemption rate
Cash paid
$500,000
101
$505,000
Analysis of loss on redemption of bonds:
Cash paid
Carrying amount at 10/31/01:
Carrying amount at 9/1/01
Short period amortization of discount
Carrying amount at 10/31/01
Percentage of bonds redemed
Carrying value of bonds redemed
Loss on redemption of bonds
$47,405
2/6
$948,102
802
948,903
50%
$15,802
$505,000
474,452
30,548
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