Supplemental Instruction Handouts Financial Accounting Review Chapters 12, 13, 14 and 16 Answer Key 1. Coach Motor Company is authorized by its articles of incorporation to issue an unlimited number of common shares and 50,000 shares of $10, noncumulative preferred. The company completed the following transactions: 2019: February 2 nd issued for cash 100,000 common shares at $3 per share. February 28 th gave the corporations promoters 40,000 common shares for their services in organizing the corporation. The director s valued the services at $120,000. March 10 th issued 100,000 common shares in exchange for the following assets with the indicated reliable market values: land, $70,000; buildings, $130,000; and machinery, $100,000. April 1 st issued for cash 6,000 preferred shares at $100 per share. May 1 st the board of directors declared a $10 cash dividend to preferred shares and $0.20 per share cash dividend to outstanding common shares, payable on May 25 th to the May 16 th shareholders of record. May 25 th paid the previously declared dividends. June 5 th the board declared a 10% share dividend, distributable on July 2 nd to the June 20 th shareholders of record. The shares were selling at $5 per share. July 2 nd distributed the share dividend declared on June 5 th. August 5 th the board of directors voted to split the corporation s shares two for one. The split was completed on August 5. September 13 th purchased and retired 5,000 common shares for $1.50 per share. October 26 purchased and retired 15,000 common shares for $2 per share. December 31 st closed the Income Summary account. A $362,000 profit was earned. A) Prepare the journal entries for these transactions. B) Prepare the Statement of Changes in Equity for the year ended December 31, 2019. C) Prepare the Equity Section of the Balance Sheet for December 31, 2019 General Journal Date Account Titles and Explanations PR Debit Credit Feb 2 Cash (100,000 x $3) 300,000 Common Shares 300,000 Feb 28 Organization Expense 120,000 Common Shares 120,000
General Journal Mar 10 Land 70,000 Building 130,000 Machinery 100,000 Common Shares 300,000 April 1 Cash 600,000 Preferred Shares 600,000 May 1 Retained Earnings 108,000 Preferred Dividend Payable (6000 x 10) 60,000 Common Dividend Payable (240,000 x 0.20) 48,000 (100,000 + 40,000 + 100,000 = 240,000) May 25 Preferred Dividend Payable 60,000 Common Dividend Payable 48,000 Cash 108,000 June 5 Retained Earnings (240,000 x 0.10 = 24,000 x $5) 120,000 Common Shares Dividend Distributable 120,000 July 2 Common Shares Dividend Distributable 132,000 Common Shares 132,000 Aug 5 No Entry 240,000 + 24,000 = 264,000 x 2 = 528,000 Common shares outstanding after split Sept 13 Common Shares (5,000 x $1.59) 7,950 Cash (5,000 x $1.50) 7,500 Contributed Capital from Retirement of Common Shares ($7,950 - $7,500) 450 ($300,000 + $120,000 + $300,000 + $120,000 = $840,000/528,000 = $1.59 average issue price) Oct 26 Common Shares (15,000 x $1.59) 23,850 Contributed Capital from retirement of common shares 450 Retained Earnings ($30,000 - $23,850 - $450) 5,700 Cash (15,000 x $2) 30,000 Dec 31 Income Summary 362,000 Retained Earnings 362,000
1 B) Coach Motor Company Statement of Changes in Equity For the year ended December 31, 2019 Preferred Shares Common Shares Retained Earning Total Balance Jan 1 $0 $0 $0 $0 Issuance of 600,000 720,000 1,320,000 Shares Profit (Loss) 362,000 362,000 Cash Dividend (108,000) (108,000) Share Dividend 120,000 (120,000) 0 Retirement of (31,800) (5,700) (37,500) Shares Balance Dec 31 $600,000 $808,200 $128,300 $1,536,500 1 C) Coach Motor Company Equity Section of the Balance Sheet December 31, 2019 Contributed Capital: Preferred Shares, $10, noncumulative, 50,000 shares authorized, 6,000 shares issued and outstanding $600,000 Common Shares, unlimited shares authorized, 528,000 shares issued and Outstanding 808,200 Total Contributed Capital $1,408,200 Retained Earnings 128,300 Total Equity $1,536,500
2. Alphalon Cookware Company has 4,000 outstanding shares of $8 preferred and 56,000 shares of common. During a seven year period, the company paid out the following amounts in dividends: 2019 $0 2020 46,000 2021 0 2022 60,000 2023 74,000 2024 68,400 2025 144,000 A) Calculate the amount of dividends each class would get if the preferred shares were noncumulative. Year Preferred Common 2019 0 0 2020 32,000 14,000 2021 0 0 2022 32,000 28,000 2023 32,000 42,000 2024 32,000 36,400 2025 32,000 112,000 Totals 160,000 232,400 B) Calculate the amount of dividends each class would get if the preferred shares were cumulative. Year Preferred Common Owed to Preferred 2019 0 0 $32,000 - $0 = $32,000 2020 46,000 0 $32,000 + $32,000 = $64,000 - $46,000 = $18,000 2021 0 0 $18,000 + $32,000 = $50,000 - $0 = $50,000 2022 60,000 0 $50,000 + $32,000 = $82,000 - $60,000 = $22,000 2023 54,000 20,000 $22,000 + $32,000 = $54,000 - $54,000 = $0 2024 32,000 36,400 $0 + $32,000 = $32,000 - $32,000 = $0 2025 32,000 112,000 $0 + $32,000 = $32,000 - $32,000 = $0 Totals 224,000 168,400
Jan 1 to Mar 1 3. The KMD Company reported a profit of $1,200,000 in 2020 and declared $300,000 in preferred dividends. The following changes in common shares outstanding occurred during the year: January 1 150,000 common shares were outstanding. March 1 sold 50,000 common shares. May 1 purchased and retired 25,000 common shares. August 1 declared and issued a 15% common share dividend. September 1 completed a two for one share split. Calculate the weighted average number of common shares outstanding during the year and earnings per share. (Round EPS calculations to two decimal places) Outstanding Shares Effect of Dividend Effect of Split Fraction of Year Weighted Average 150,000 X 1.15 X 2 X 2/12 57,500 Sold + 50,000 200,000 X 1.15 X 2 X 2/12 76,667 Mar 1 to May 1 Retired -25,000 May 1 to 175,000 X 1.15 X 2 X 3/12 100,625 Aug 1 Share Dividend Aug 1 to Sept 1 Share Split Sept 1 to Dec 31 X 1.15 201,250 X 2 X 1/12 33,542 X 2 402,500 X 4/12 134,167 Total = 402,501 EPS = $1,200,000 - $300,000 / 402,501 = $2.236019289 or $2.24
4. Helmer Co. issued a group of bonds on January 1 st, 2019, that pay interest semiannually on June 30 th and December 31 st. The face value of the bond is $40,000, the annual contract rate is 8%, and the bonds mature in 3 years. These bonds were issued at their par value on January 1 st, 2019. Give the general journal entry that would be required on the date of issuance of the bond and the first interest payment dates. General Journal Date Account Titles and Explanations PR Debit Credit Jan 1 Cash 40,000 Bonds Payable 40,000 June 30 Bond Interest Expense 1,600 Cash ($40,000 x 8% x 6/12) 1,600
5. Helm Co. has a group of bonds dated July 1 st, 2019, that pays interest semiannually on December 31 st and June 30th. The face value of the bond is $40,000, the annual contract rate is 8%, and the bonds mature in 3 years. These bonds were issued at their par value on October 1 st, 2019. Give the general journal entry that would be required on the date of issuance of the bond and the first two interest payment dates. General Journal Date Account Titles and Explanations PR Debit Credit 2019 Oct 1 Cash ($40,000 + $800) 40,800 Bonds Payable 40,000 Interest Payable 800 ($40,000 x 8% x 3/12) Dec 31 Bond Interest Expense 800 Interest Payable 800 Cash 1,600 2020 June 30 Bond Interest Expense 1,600 Cash 1,600
6. Reason Co. issued a group of bonds on January 1 st, 2019, that pay interest semiannually on June 30 th and December 31 st. The face value of the bond is $80,000, the annual contract rate is 8%, and the bonds mature in 3 years. On January 1 st, 2019, these bonds were issued at a market rate of 6% semiannually. a) Calculate the issue price of the bond. Number of payments = 3 years x 2 (semiannual) = 6 Market Interest Rate = 6% 2 (semiannual) = 3% From Present Value of 1 Due in n Periods Table = 0.8375 $80,000 x 0.8375 = $67,000 From Present Value of an Annuity of 1 Period Table = 5.4172 $80,000 x 8% x 6/12 = $3,200 (Cash interest to be paid every six months) $3,200 x 5.4172 = $17,335.04 round down to $17,335 $67,000 + $17,335 = $84,335 b) Calculate the total bond interest expense that will be recognized over the life of these bonds. $80,000 - $84,335 = ($4,335) Premium $3,200 x 6 = $19,200 - $4,335 = $14,865 c) Using the effective interest method, calculate the interest expense for the first two interest payments. $84,335 x 3% = $2,530.05 round down to $2,530 (Bond Interest Expense for the first interest payment) $3,200 - $2,530 = $670 (Premium Amortization for the first interest payment) $84,335 - $670 = $83,665 (Book Value of the bond after the first interest payment) $83,665 x 3% = $2,509.95 round up to $2,510 (Bond Interest Expense for the second interest payment) $3,200 - $2,510 = $690 (Premium Amortization for the second interest payment) d) Give the general journal entry that would be required on the date of issuance of the bond and the first two interest payment dates. General Journal Date Account Titles and Explanations PR Debit Credit Jan 1 Cash 84,335 Premium on Bonds 4,335 Bonds Payable 80,000 June 30 Bonds Interest Expense 2,530 Premium on Bonds 670 Cash 3,200 Dec 31 Bonds Interest Expense 2,510 Premium on Bonds 690 Cash 3,200
7. Stark Co. issued a group of bonds on January 1 st, 2019, that pay interest semiannually on June 30 th and December 31 st. The face value of the bond is $100,000, the annual contract rate is 6%, and the bonds mature in 3 years. On January 1 st, 2019, these bonds were issued at a market rate of 10% semiannually. a) Calculate the issue price of the bonds. Number of Payments = 3 years x 2 (Semiannual) = 6 Market Interest Rate = 10% 2 = 5% From Present Value of 1 Due in n Periods Table = 0.7462 $100,000 x 0.7462 = $74,620 From Present Value of an Annuity of 1 Period Table = 5.0757 $100,000 x 6% x 6/12 = $3,000 (Cash interest to be paid every six months) $3,000 x 5.0757 = $15,227.10 round down to $15,227 $74,620 + $15,227 = $89,847 b) Calculate the total bond interest expense to be recognized over the life of these bonds. $100,000 - $89,847 = $10,153 Discount $3,000 x 6 = $18,000 + $10,153 = $28,153 c) Using the effective interest method, calculate the interest expense for the first two interest payments. $89,847 x 5% = $4,492.35 round down to $4,492 (Bond Interest Expense for the first interest payment) $4,492 - $3,000 = $1,492 (Discount Amortization for the first interest payment) $89,847 + $1,492 = $91,339 (Book Value of the bond after the first interest payment) $91,339 x 5% = $4,566.95 round up to $4,567 (Bond Interest Expense for the second interest payment) $4,567 - $3,000 = $1,567 (Discount Amortization for the second interest payment) d) Give the general journal entry that would be required on the date of issuance of the bond and the first two interest payment dates. General Journal Date Account Titles and Explanations PR Debit Credit Jan 1 Cash 89,947 Discount on Bonds Payable 10,153 Bonds Payable 100,000 June 30 Bond Interest Expense 4,492 Discount on Bonds Payable 1,492 Cash 3,000 Dec 31 Bond Interest Expense 4,567 Discount on Bonds Payable 1,567 Cash 3,000
8. Tanaka Company Statement of Cash Flow For the year ended December 31, 2019 Cash Flows from Operating Activities: Profit $88,425 Adjustments to reconcile profit to net cash provided by operating activities: Decrease in Accounts Receivable 3,825 Increase in Merchandise Inventory (35,475) Increase in Accounts Payable 2,850 Decrease in Income Tax Payable (2,250) Depreciation Expense 17,700 Net Cash Inflow from Operating Activities $75,075 Cash Flows from Investing Activities: Cash paid for purchase of equipment (28,950) Cash Flows from Financing Activities: Cash received for Issuance of common shares $42,000 Cash paid for dividends (66,000) Net Cash Outflow from Financing Activities (24,000) Net increase in cash $22,125 Cash balance at beginning of 2019 31,800 Cash balance at the end of 2019 $53,925