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As we enter week 8, what did you learn from this course? How will the information be useful in your other classes and in your career? Running Head: STOCKS AND TRANSACTONS ASSGNMENT Assignment Title Student Name Course Name Instructor Name Date 1 STOCKS AND TRANSACTONS ASSGNMENT 2 1) Chen, Inc. purchases 1,000 shares of its own previously issued $5 per common stock for $12,000. Assuming the shares are held in the treasury, what effect does this transaction have on (a) net income, (b) total assets, (c) total paid-in capital, and (d) total stockholders' equity? Answer: Treasury stocks do not have any voting rights and dividend rights. Treasury stocks are accounted using the cost method. In this case, the price paid per share for reacquiring the shares are taken into consideration (Weygandt, Kieso, & Kimmel, n.d., p. 521-522). Following are impacts on various accounts: a) Net income: There will be no impact on the net income. Purchase of treasury stock will not affect the income statement of the company. b) Total assets: Cash will be used for purchasing the treasury stocks. Therefore, cash account will be credited with $12,000, and it will reduce the cash balance by $12,000. Reduction in the cash balance will reduce the total assets by $12,000 (Weygandt, Kieso, & Kimmel, n.d., p. 521-522). c) Total paid-in-capital: There will be no impact on the total paid-in-capital because it will not change the number of shares issued by the company. d) Total stockholders' equity: In this section, there will be a reduction in the total stockholders' equity value by $12,000. Treasury stocks will be subtracted from the total paid in capital and the retained earnings of the company (Weygandt, Kieso, & Kimmel, n.d., p. 521-522). 2) The treasury stock purchased in the above question was resold by Chen, Inc. for $15,000. What effect does this transaction have on (a) net income, (b) total assets, (c) total paid-in capital, and (d) total stockholders' equity? STOCKS AND TRANSACTONS ASSGNMENT 3 Answer: Treasury stocks purchase price is determined as follows (Weygandt, Kieso, & Kimmel, n.d., p. 522-523): Purchase price = Total cash paid/Number of shares acquired = $12,000/1,000 = $12 Selling price = Total cash received/Number of shares = $15,000/1,000 = $15 Result of disposal = (Selling price - Purchase price)* Number of shares = ($15-$12)*1,000 = $3,000 From the above transaction, it is clear that company has generated profit. Selling of treasury stock will have impact only on the balance sheet of the company (Weygandt, Kieso, & Kimmel, n.d., p. 522-523). a) Net income: It will not affect the income statement even though it is sold at a profit. Treasury stocks are not assets. Therefore, profit from selling them will not have an impact on the income statement. Similarly, a company will not realize both profit and loss from the stock transactions with their shareholders. Therefore, it will not have any impact on the net income (Weygandt, Kieso, & Kimmel, n.d., p. 522-523). b) Total assets: Cash will be received from the sale of stocks. Cash account will be debited by $15,000 that is the receipt of cash. As the cash increases by $15,000, total assets will increase by $15,000 (Weygandt, Kieso, & Kimmel, n.d., p. 522-523). STOCKS AND TRANSACTONS ASSGNMENT 4 c) Total paid-in-capital: There will be the impact on the total paid-in-capital. In this case, the shares are sold above the cost and resulted in higher cash inflow of $3,000 from the transaction. The amount that is earned over and above the cost will be credited to the total paid-in capital account (Weygandt, Kieso, & Kimmel, n.d., p. 522-523). Therefore, total paid-in capital will increase by $3,000. d) Total stockholders' equity: In this section, there will be an increase in the total stockholders' equity value by $12,000. Treasury stocks will become zero that is there will be no amount to reduce the shareholders' equity and the retained earnings as the company sold their treasury stocks (Weygandt, Kieso, & Kimmel, n.d., p. 522-523). Therefore, treasury stocks will be nullified after this transaction, and thus, total stockholders' equity will bounce back to their previous level that is there will increase in $12,000. STOCKS AND TRANSACTONS ASSGNMENT References Weygandt, J. J., Kieso, D. E., & Kimmel, P. D. (n.d.). Chapter 11 - Corporations: Organization, Stock Transactions, Dividends, and Retained Earnings. In Financial Accounting: IFRS (pp. 521-523). USA: Wiley. 5 Q2: Distinguish between the cost and equity methods of accounting for investments in stocks Answer: Both cost and equity methods are used for accounting for the investments made by other companies. When an investment is passive and long-term in nature, then cost method will be used. If the investments are not giving any influence over the company that is if the company has an ownership stake of 20% or lesser, then cost method will be used. On the other hand, if the ownership stake is more than 20% equity method is used. Under the cost method, purchased stocks are recorded as non-current assets at historical prices on the balance sheet. On the other hand, equity method will record the initial amount similar to cost method but the amount related to the profit or loss of the other company is adjusted to the net income. Under the cost method, dividends are treated as income whereas equity method will not treat them as income, but they will be treated as a return on investment. Running Head: VALUATON, DEPRECATON, AMORTZATON, & DEPLETON Assignment Title Student Name Course Name Instructor Name Date 1 VALUATON, DEPRECATON, AMORTZATON, & DEPLETON 2 Differentiate between valuation, depreciation, amortization, and depletion. Is it appropriate to calculate depreciation using two different methods? Why? Answer: Valuation is the process that is used for valuing the assets of the company. It is mainly used for the purpose of accounting and in disclosing in the financial statement. It is an estimation of the value of the asset held by the company. Depreciation is the writing off of loss in the value of asset due to various reasons like wear and tear, usage etc for the tax purposes over the lifetime of the assets from their original value or cost of the asset in the balance sheet (Accounting Coach, n.d.). It is applicable to all tangible assets. Amortization is the process of deducting or writing off the loss in the asset value over the lifetime of the asset. It is applicable to the intangible assets held by the company. Depletion is the term used in accounting for determining the amount of depreciation of natural resources like oil well, mines, trees etc (Accounting Coach, n.d.). Valuation is completely different from the depreciation, amortization, and depletion as it deals with estimating the value of asset whereas the remaining are used for writing off the loss of the asset value. Depreciation is used for tangible assets whereas amortization is used of the intangible assets, writing of other costs and depletion is used for the natural resources. All these variables are subtracted from the value of asset. Depreciation is used for assets like machinery, building, plant, equipment etc (Thomsett, 2004, p. 162). On the other hand, amortization is used for grants, patents, license, franchise, copyrights and leases. Amortization is used for writing off the discount or premium of the bond over the lifetime of the bond that is not applicable to depreciation and depletion. Amortization is used for the loan repayment to determine the amount paid towards the interest, principle and remaining loan balance after every loan payment. Amortization is used for various purposes unlike depreciation and depletion. VALUATON, DEPRECATON, AMORTZATON, & DEPLETON 3 Valuation is entirely a different concept (Thomsett, 2004, p. 169). Similarly cost incurred by the company for improving any asset will be amortized over the period of time. Amortization is used for spreading the costs incurred by the company over the period of time which is entirely different from other three (Thomsett, 2004, p. 169). For depletion of the natural resources used by the company can be measured only by depletion and not by any other ways. Hence, depreciation, amortization and depletion are different as they serve different purposes. It is acceptable to make use of two methods of depreciation by the company. It is common in many companies (Accounting Coach, n.d.). There are chances where the company can make use of different methods of depreciation for different assets held by the company. A machine that manufactures ball bearing can be depreciated using the number of units produced whereas the other asset can be depreciated using the MACRS depreciation rate or straight line method (Accounting Coach, n.d.). Such different methods are used and acceptable due to the difference in the nature of assets held by the company. For instance a company is having higher amount of fixed assets like plants and equipment. Company can make use of straight line of depreciation for these fixed assets in the financial statement of the company and company can make use of accelerated method of depreciation for tax purposes. It will enable the company to reduce the amount of taxes payable and boost their profits. Using accelerated method or double declining method for the tax purposes the-the amount of tax payable during the initial year will be lesser. It will be acceptable. Due to the fast growth in the technology and demand for innovative product, obsolesce of the fixed assets held by the company has increased and it can be used for providing higher depreciation for tax purposes. Company can use normal depreciation in the financial statement to boost their profits and indicate about the worthiness of their assets. Thus, using two method will reduce tax burden and boost the profitability and worth of the assets in the financial statement of the company. VALUATON, DEPRECATON, AMORTZATON, & DEPLETON References Accounting Coach. (n.d.). Are depreciation, depletion and amortization similar? | AccountingCoach. Retrieved from http://www.accountingcoach.com/blog/are-depreciation-depletion-andamortization-similar Accounting Coach. (n.d.). Is it acceptable for companies to use two methods of depreciation? | AccountingCoach. Retrieved from http://www.accountingcoach.com/blog/depreciation-methods Thomsett, M. C. (2004). Equipment Records. In Builder's guide to accounting. Carlsbad, CA: Craftsman Book Co. 4 Assignment Title Student Name Course Name Instructor Name Date Question: E10-6 According to the accountant of Ulner Inc., its payroll taxes for the week were as follows: $198.40 for FICA taxes, $19.84 for federal unemployment taxes, and $133.92 for state unemployment taxes. Instructions Journalize the entry to record the accrual of the payroll taxes. Solution: Computation of the entry to record the accrual of the payroll taxes. Particular Debit Amount Credit Amount Payroll Taxes Expense A/c---------Dr $352.16 To FICA Tax Payable A/c $198.40 To Federal Unemployment Tax Payable A/c $19.84 To State Unemployment Tax Payable A/c $133.92 (Being To record accrual of payroll taxes) Question: E10-8: Jim Thome has prepared the following list of statements about bonds. 1. Bonds are a form of interest-bearing notes payable. 2. When seeking long-term financing, an advantage of issuing bonds over issuing common stock is that stockholder control is not affected. 3. When seeking long-term financing, an advantage of issuing common stock over issuing bonds is that tax savings result. 4. Secured bonds have specific assets of the issuer pledged as collateral for the bonds. 5. Secured bonds are also known as debenture bonds. 6. Bonds that mature in installments are called term bonds. 7. A conversion feature may be added to bonds to make them more attractive to bond buyers. 8. The rate used to determine the amount of cash interest the borrower pays is called the stated rate. 9. Bond prices are usually quoted as a percentage of the face value of the bond. 10. The present value of a bond is the value at which it should sell in the marketplace. Instructions: Identify each statement above as true or false. If false, indicate how to correct the statement. Solution: Computation of the True or False 1. Bonds are a form of interest-bearing notes payable. 2. When seeking long-term financing, an advantage of issuing bonds over issuing common stock is that stockholder control is not affected. 3. When seeking long-term financing, an advantage of issuing common stock over issuing bonds is that tax savings result. 4. Secured bonds have specific assets of the issuer pledged as collateral for the bonds. 5. Secured bonds are also known as debenture bonds. 6. Bonds that mature in installments are called term bonds. 7. A conversion feature may be added to bonds to make them more attractive to bond buyers. 8. The rate used to determine the amount of cash interest the borrower pays is called the stated rate. 9. Bond prices are usually quoted as a percentage of the face value of the bond. 10. The present value of a bond is the value at which it should sell in the marketplace. True or False True True 0 When seeking long-term financing, an advantage of issuing bonds over issuing ordinary shares is that tax savings result True False. Unsecured bonds are also known as debenture bonds False. Bonds that mature in installments are called serial bonds True True True True Question: E10-18: Hrabik Corporation issued $600,000, 9%, 10-year bonds on January 1, 2011, for $562,613.This price resulted in an effective-interest rate of 10% on the bonds. Interest is payable semiannually on July 1 and January 1. Hrabik uses the effective-interest method to amortize bond premium or discount. Instructions: Prepare the journal entries to record the following. (Round to the nearest dollar.) (a) The issuance of the bonds. Solution: Computation of the Journal Entries Jan. 1 Cash A/c-------------Dr To Bonds Payable A/c $562,613 $562,613 (b) The payment of interest and the discount amortization on July 1, 2011, assuming that interest was not accrued on June 30. Solution: Computation of the Journal Entries July 1 Bond Interest Expense A/c $28,130.65 562613*0.05 To Bonds Payable A/c $1,130.65 To Cash A/c $27,000.00 600000*0.09*1/2 (c) The accrual of interest and the discount amortization on December 31, 2011. Solution: Computation of the Journal Entries Dec. 31 Bond Interest Expense A/c $28,187.20 To Bonds Payable A/c $1,187.20 To Bond Interest Payable A/c $27,000.00 (562613+1131)*0.05 600000*0.09*1/2 Question: P10-3A On May 1, 2011, Newby Corp. issued $600,000, 9%, 5-year bonds at face value. The bonds were dated May 1, 2011, and pay interest semiannually on May 1 and November 1. Financial statements are prepared annually on December 31. Instructions: (a) Prepare the journal entry to record the issuance of the bonds. Solution: Computation of the Journal Entries May 1 Cash A/c-------------Dr $600,000 To Bonds Payable A/c $600,000 (b) Prepare the adjusting entry to record the accrual of interest on December 31, 2011. Solution: Computation of the Journal Entries Dec. 31 Bond Interest Expense A/c------------Dr $9,000 To Bonds Payable A/c $9,000 600000*0.09*2/12 (c) Show the balance sheet presentation on December 31, 2011. Solution: Computation of the balance sheet presentation on December 31, 2011 Non-current Liabilities Bonds Payable, due 2016 $600,000 Current Liabilities Bond Interest Payable $9,000 (d) Prepare the journal entry to record payment of interest on May 1, 2012, assuming no accrual of interest from January 1, 2012, to May 1, 2012. Solution: Computation of the Journal Entries 2012 May 1 Bond Interest Payable A/c------------Dr $9,000 600000*0.09*2/12 Bond Interest Expense A/c------------Dr $18,000 600000*0.09*4/12 To Cash A/c $27,000 e) Prepare the journal entry to record payment of interest on November 1, 2012. Solution: Computation of the Journal Entries 2012 Nov. 1 Bond Interest Expense A/c------------Dr $27,000 To Cash A/c $27,000 600000*0.09*6/12 (f) Assume that on November 1, 2012, Newby calls the bonds at 102. Record the redemption of the bonds. Solution: Computation of the Journal Entries 2012 Nov. 1 Bonds Payable A/c------------Dr $600,000.00 Loss on Bond Redemption A/c------------Dr $12,000.00 To Cash A/c $612,000.00 600000*1.02 Question: P10-6A On July 1, 2011, Atwater Corporation issued $2,000,000 face value, 10%, 10-year bonds at $2,271,813.This price resulted in an effective-interest rate of 8% on the bonds. Atwater uses the effective-interest method to amortize bond premium or discount. The bonds pay semiannual interest July 1 and January 1. Instructions: (Round all computations to the nearest dollar.) (a) Prepare the journal entry to record the issuance of the bonds on July 1, 2011. Solution: Computation of the Journal Entries July 1 2011 Cash A/c-------------Dr $2,271,813 To Bonds Payable A/c $2,271,813 (b) Prepare an amortization table through December 31, 2012 (3 interest periods) for this bond issue. Solution: Computation of the amortization table through December 31, 2012 ATWATER CORPORATION Bond Premium Amortization Effective-Interest MethodSemiannual Interest Payments 10% Bonds Issued at 8% Semi annual Interest Periods Interest to Be Paid Interest Expense Premium Amort Bond Carrying Value Issue Date $2,271,813.00 1 $100,000.00 $90,872.52 $9,127.48 $2,262,685.52 2 $100,000.00 $90,507.42 $9,492.58 $2,253,192.94 3 $100,000.00 $90,127.72 $9,872.28 $2,243,320.66 (c) Prepare the journal entry to record the accrual of interest and the amortization of the premium on December 31, 2011. Solution: Computation of the Journal Entires Dec. 31 Bond Interest Expense A/c-------------Dr $90,873 Bonds Payable A/c-------------Dr $9,127 To Bond Interest Payable A/c $100,000 (d) Prepare the journal entry to record the payment of interest and the amortization of the premium on July 1, 2012, assuming no accrual of interest on June 30. Solution: Computation of the Journal Entires Dec. 31 2012 Bond Interest Expense A/c-------------Dr $90,507 Bonds Payable A/c-------------Dr $9,493 To Bond Interest Payable A/c $100,000 (e) Prepare the journal entry to record Solution: Computation of the Journal Entires Dec. 31 2012 Bond Interest Expense A/c-------------Dr Bonds Payable A/c-------------Dr To Bond Interest Payable A/c $90,128 $9,872 $100,000 1 Assignment Title Student Name Course Name Instructor Name Date E-15: 2 Before Action Stockholders' equity Paid-in capital Common stock In excess of par value Total paid-in capital Retained earnings Total stockholders' equity Outstanding shares Book value per share After Stock Dividend After Stock Split 600,000 0 600,000 900,000 $1,500,000 6,300,000 12,000 6,312,000 858,000 $1,500,000 600,000 0 600,000 900,000 $1,500,000 60000 63000 120000 $25.00 $23.81 $12.50 E12-1: i. Organizations purchase investments in debt or stock securities on the grounds that they have overabundance money, to create profit from speculation pay, or for key reasons. ii. A corporation would have overabundance money that it doesn't requirement for operations because of occasional variances in sales and as a consequence of economic cycles. iii. The investment when investing cash for short periods of time will be low-risk, high liquidity, short-term securities such as government-issued securities. iv. The typical investments when investing cash to generate earnings are debt securities and stock securities. v. A company would put resources into securities that give no present money streams to theoretical reasons. They are theorizing that the venture will increment in value.. vi. The typical investments when investing cash for strategic reasons are stocks of companies in a similar/related industry or in an unrelated industry that the company wishes to enter. E12-2 3 a) Jan. 1 Particulars Debt Investments Cash ($50000 + $900) 1-Jul Cash (50000 * 8% * 1/2) Interest Revenue 1-Jul Cash (34000 - 500) Debt Investments (50900* 3/5) Gain on Sale of Debt Investments (33500-30540) Dr. 50,900 Cr. 50,900 2000 2000 33,500 30,540 2960 b) Particulars Dec. 31 Interest Receivable Interest Revenue (20000*8%*1/2) Dr. 800 Cr. 800 P11-6A a) Particulars 1) 2) Land Preferred Stock (2,400 * $100) Paid-in Capital in Excess of Par Value- preferred stock Cash (2000,000 + 5700,000) Dr. 296,000 240,000 56,000 7,700,00 0 Common Stock (400,000 * $5) Paid-in Capital in Excess of Stated Value- common stock 3) 4) Cr. 2,000,000 5,700,000 Treasury StockCommon (1500*22) Cash 33,000 Cash (500 * $28) Treasury StockCommon (500*22) Paid-in Capital from Treasury stock (500*6) 14,000 b) ARNOLD CORPORATION Stockholders' equity 33,000 11,000 3,000 4 Paid-in capital, Capital stock 8% Preferred stock, $100 Par value, noncumulative, 40,000 shares authorized, 2,400 shares issued and outstanding Common stock, no par, $5.00 stated value, 2,000,000 shares authorized, 400,000 shares issued, and 399,000 Outstanding Total capital stock Additional paid-in capital In excess of par value preferred stock In excess of stated valuecommon stock From treasury stockCommon Total additional paid-in capital Total paid-in capital Retained earnings Total paid-in capital and retained earnings Less: Treasury stock (1,000 common shares) Total stockholders' equity 240,000 2,000,000 2,240,000 56,000 5,700,000 3,000 5,759,000 7,999,000 560,000 8,559,000 (22,000) 8,537,000 Running Head: REVENUE EXPENDITURES AND CAPITAL EXPENDITURES Assignment Title Student Name Course Hero Instructor Name Date 1 REVENUE EXPENDITURES AND CAPITAL EXPENDITURES 2 Capital Expenses Capital expenditure is the amount that is spent on improving the existing asset or acquisition of new long-term assets (Accounting Coach, n.d.). It also includes that expenditure that is incurred for increasing the earning potential of the asset. Examples (Accounting-Simplified.com, n.d.): Cost of purchasing the assets. Delivery cost. Installation charges. Replacement costs. Cost of upgrading the asset etc. Revenue Expenditure Revenue expenditure is those expenses that are charged immediately and charged against the revenue (Accounting Coach, n.d.). These expenses are matched with the revenue of the particular period. Revenue expenses are those that are used for maintaining the earning capacity of the asset and not incurred for enhancing their capacity. Examples (Accounting-Simplified.com, n.d.): Maintenance costs. Repair costs. Renewal costs. Cost of repainting etc. Difference Capital expenses are expected to create future economic benefits. They are expected to increase the future cash flow. Capital expenses even reduce the cost of production. On the other hand, revenue expenses do not create future economic benefits, no future cash flow or expected to reduce the cost of production (Surbhi, 2015). Revenue expenses will create only benefit for the current year. REVENUE EXPENDITURES AND CAPITAL EXPENDITURES 3 Capital expenses are considered as a one-time investment in that particular asset. On the other hand, revenue expenses are continuous (Surbhi, 2015). Revenue expenses frequently incurred as they are incurred for maintaining the assets. They are not one-time expenses like capital expenses. Capital expenses are disclosed in the assets as a reduction from the fixed assets of the company in the form of depreciation/accumulated depreciation. Similarly, they are disclosed as depreciation expenses in the income statement of the company (Surbhi, 2015). On the other hand, revenue expenses are adjusted only in the income statement, and they are not part of balance sheet of the company. Capital expenses are categorized as long-term expenditure while revenue expenses are categorized as short-term expenditure (Surbhi, 2015). The company capitalizes capital expenses. On the other hand, revenue expenses are not capitalized by the company (Surbhi, 2015). For example, purchase of a computer is a capital expenditure it is one-time expenses and depreciation will be charged on this asset over its useful life. Repair and maintenance of the computer is a revenue expense and it will be incurred now and then as per the requirement and their benefit will last only for short period. Similarities Both these expenses are incurred only towards a non-current asset. Both capital and revenue expenses intended for the benefit of the company. It is essential to acquire the required asset and at the same time it is mandatory to maintain them. Both capital and revenue expenses will improve the revenue and cash flow. Cash expenses are straightforward in contributing to the cash flow. On the other hand, revenue expenses are incurred for maintaining the assets, if assets not maintained properly, they cannot perform well. Maintenance of the asset is essential to boost the revenue and cash generating capacity of the asset. REVENUE EXPENDITURES AND CAPITAL EXPENDITURES 4 Both these expenses have the impact on the income statement. Revenue expenses are directly charged to the revenue, and they will appear only in the income statement. Current year depreciation charged over the capital assets is a capital expenses, and it will appear in the income statement as depreciation expenses. Both these expenses will reduce the net income of the company. Journal entry Capital expenses (Accounting-Simplified.com, n.d.): Debit fixed assets. Credit cash or accounts payable. Entry for annual depreciation: Debit depreciation expenses. Credit Balance sheet accumulated depreciation Revenue expenses (Accounting-Simplified.com, n.d.): Debit Revenue expenses. Credit cash or accounts payable. References Accounting Coach. (n.d.). What is a capital expenditure versus a revenue expenditure? | AccountingCoach. Retrieved from http://www.accountingcoach.com/blog/capital-expenditure-revenue-expenditure Accounting-Simplified.com. (n.d.). Accounting for Capital and Revenue Expenditure - Explanation and Examples. Retrieved from http://accounting-simplified.com/financial/fixed-assets/capital-and-revenueexpenditure.html REVENUE EXPENDITURES AND CAPITAL EXPENDITURES Surbhi, S. (2015, February 12). Difference Between Capital Expenditure and Revenue Expenditure (with Comparison Chart) - Key Difference. Retrieved from http://keydifferences.com/difference-between-capital-and-revenue-expenditure.html 5 1 Assignment Title Student Name Course Name Instructor Nam Date E13-8: Prepare a statement of cash flows for 2011 using the indirect method. TAGUCHI COMPANY Statement of Cash Flows-Indirect Method For the Year Ended December 31, 2011 Cash flows from operating activities Net income $103,000 Adjustments to reconcile net income to net cash Provided by operating activities: Depreciation expense $66,000 Loss on sale of machinery 0 Increase in accounts receivable (9,000) Decrease inventories 19,000 Decrease in accounts payable 8,000 Net cash provided by operating activities (84,000) 19,000 Cash flows from investing activities Sale of land 25,000 Purchase of equipment 60,000 Net cash used by investing activities 85,000 Cash flows from financing activities Redemption of bonds (50,000) Sale of common stock 42,000 Payment of dividends (45,000) Net cash provided by financing activities (53,000) Net increase in cash 51,000 Cash at beginning of period 22,000 Cash at end of period 73,000 3 E14-3: A) Prepare a horizontal analysis of the balance sheet data for Conard Corporation using 2011 as a base. CONARD CORPORATION Comparative Condensed Balance Sheets December 31 Increase or (Decrease) during 2012 2012 2011 Amount Percent Current assets $74,000 $80,000 ($6,000) (7.5%) Property, plant, and equipment (net) 99,000 90,000 9,000 10% Intangibles 27,000 40,000 (13,000) (32.5%) $200,000 $210,000 ($10,000) (4.8%) Current liabilities $42,000 $48,000 ($6,000) (12.5%) Long-term liabilities 143,000 150,000 (7,000) (4.7%) Stockholders' equity 15,000 12,000 3,000 25% ($10,000) (4.8%) Assets Total assets Liabilities and stockholders' equity Total liabilities and stockholders' equity $200,000 $210,000 Prepare a vertical analysis for the balance sheet data for Conard Corporation in columnar form for 2012. CONARD CORPORATION Comparative Condensed Balance Sheet December 31 2012 2011 Amount Percent Amount $74,000 37% $80,000 38.1% 99,000 49.5% 90,000 42.9% 27,000 13.5% 40,000 19% $200,000 100% $210,000 100% Current liabilities $42,000 21% $48,000 22.9% Long-term liabilities 143,000 71.5% 150,000 71.4% 185,000 92.5% 198,000 94.3% $15,000 7.5% $12,000 5.7% $200,000 100% $210,000 100% Assets Current assets Property, plant and Equipment (net) Intangibles Total assets Liabilities Total liabilities Stockholders' Equity Stockholders' equity Total liabilities and stockholders' equity Percent Assignment Title Student Name Course Name Instructor Name Date E9-1 A) The following expenditures relating to plant assets were made by Spaulding Company during the first 2 months of 2011. Explain the application of the cost principle in determining the acquisition cost of plant assets. Answer: According to the principle of cost, the acquisition of the plant asset will include all the required and related expenditure that are incurred by the company for acquiring an asset and in making them ready for operation. Let us take an example of acquiring a machinery. It will include freight cost, purchase price, insurance, cost of installation along with the cost of purchase of machinery. B) List the numbers of the foregoing transactions, and opposite each indicate the account title to which each expenditure should be debited. Debit Credit 2) Answer: Paid $5,000 of accrued taxes at time plant site was acquired. Paid $200 insurance to cover possible accident loss on new factory machinery while the machinery was in transit. 3) 4) Paid $850 sales taxes on new delivery truck. Paid $17,500 for parking lots and driveways on new plant site. Equipment: Delivery Truck Land Improvements Cash Cash 5) Paid $250 to have company name and advertising slogan painted on new delivery truck. Paid $8,000 for installation of new factory machinery. Equipment: Delivery Truck Cash Equipment: Factory Machinery Prepaid Insurance: Delivery Truck Equipment: Delivery Truck Cash Cash Cash 1) 6) 7) 8) Paid $900 for one-year accident insurance policy on new delivery truck. Paid $75 motor vehicle license fee on the new truck. Land Cash Equipment: Factory Machinery Cash E9-7 Brainiac Company purchased a delivery truck for $30,000 on January 1, 2011. The truck has an expected salvage value of $2,000, and is expected to be driven 100,000 miles over its estimated useful life of 8 years. Actual miles driven were 15,000 in 2011 and 12,000 in 2012. A) 1) Compute depreciation expense for 2011 and 2012 using: The straight-line method Answer: Cost - salvage value = Depreciable Cost = 30000 2000 $28,000 Depreciable Cost / Useful Life = Annual Depreciation 28000 / 8 = $3,500 2011 = $3,500 2012 = $3,500 2) The units-of-activity method Answer: Depreciation cost/total units of activity = depreciation cost per unit $30,000 / 100,000 = $0.30 Depreciation cost per unit * units of activity during the year = annual depreciation expense 2011 2012 $ $ 0.30 0.30 * * 15,000 12,000 = = $4,500 $3,600 3) The double-declining balance method Answer: The double-declining balance method = book value at the beginning of the year * declining balance rate = A.D.E $30,000 * 12.5% = $3,750 2011 $7,500 = $22,500 2012 $5,625 = $16,875 B) 1) Assume that Brainiac uses the straight-line method: Prepare the journal entry to record 2011 depreciation Answer: Depreciation Expense 3,500 Accumulated Depreciation (To record depreciation for delivery truck) 2) 3,500 Show how the truck would be reported in the December 31, 2011, balance sheet Answer: Depreciation Expense (Income Statement) 3,500 Accumulated Depreciation (Balance Sheet) 3,500 Equipment: Delivery Truck Less: accumulated depreciation Net Property, Plant and Equipment $30,000 (3,500) $26,500 quipment ruck Brainiac Company December 31, 2011 Balance Sheet Less: Accumulated depletion Net Property, Plant and Equipment $30,000 (3,500) $26,500 E9-12 The following are selected 2011 transactions of Franco Corporation. Jan. 1 Purchased a small company and recorded goodwill of $150,000. Its useful life is indefinite. May 1 Purchased for $90,000 a patent with an estimated useful life of 5 years and a legal life of 20 years. Instructions: Prepare necessary adjusting entries at December 31 to record amortization required by the events above. Answer: $90,000 / 5 = $18,000 Patent Amortization For 7 Months = $10,500 Dec. 31 Amortization Expense: Patent Patent Nothing needs to be done for goodwill. $10,500 $10,500 P9-7B The intangible assets section of Time Company at December 31, 2011, is presented below. Patent ($100,000 cost less $10,000 amortization) $ 90,000 Copyright ($60,000 cost less $24,000 amortization) 36,000 Total $126,000 Prepare entries to record transactions related to acquisition and amortization of intangibles; prepare the intangible assets section The patent was acquired in January 2011 and has a useful life of 10 years.The copyright was acquired in January 2008 and also has a useful life of 10 years.The following cash transactions may have affected intangible assets during 2012. Jan 2 Paid $45,000 legal costs to successfully defend the patent against infringement by another company. Jan-June Sept 1 Paid $125,000 to an Xgames star to appear in commercials advertising the company's products. The commercials will air in September and Oct 1 a) Developed a new product, incurring $230,000 in research and development costs. A patent was granted for the product on July 1. Its useful l Acquired a copyright for $200,000. The copyright has a useful life of 50 years. Instructions: Prepare journal entries to record the transactions above. Answer: Jan. 2 Jan.-June Sept. 1 Oct. 1 b) Legal Fees: Patent Cash $45,000 R&D expense Cash $230,000 Advertising expense Cash $125,000 Copyright Cash $200,000 $45,000 $230,000 $125,000 $200,000 Prepare journal entries to record the 2012 amortization expense for intangible assets. Answer: Amortization Expense: Patents $15,000 Patents $15,000 Amortization Expense: Copyrights Copyrights c) $7,000 $7,000 Prepare the intangible assets section of the balance sheet at December 31, 2012. Answer: Time Company December 31, 2012 Balance Sheet Intangible Assets *Patents **Copyrights2 Total Intangible Assets $120,000 $229,000 $349,000 Notes: *Cost ($100,000 + $45,000 = $145,000); amortization ($10,000 + $15,000 = $25,000) = **Cost ($60,000 + $200,000 = $260,000); amortization ($24,000 + $7,000 = $31,000) = d) $120,000 $229,000 $349,000 Prepare the note to the financials on Time's intangibles as of December 31, 2012. Answer: There are two patents as of 2012 year end for TImes Company. One patent's total cost is $145,000 and has seful life is equal to its legal life. r and October. I would like you to answer the question and comment on my classmates' answers to the question. QUESTION (150WORDS): How are bad debts accounted for under the direct write-off method? What are the disadvantages of this method? My Answer: It is one of the most commonly used methods. According to the direct write-off method, the expenses of bad debts are written off during the period in which they are identified as uncollectable. The uncollectable accounts receivables are written off directly against the income during the time when these accounts are determined to be bad debts. In this case, a journal entry is passed by debiting the bad debts and crediting the accounts receivables. They do not make use of any reserves or allowances. The main disadvantage is that it will record for bad debts only when it is incurred that may pertain to the previous period. It will make the statement to contain non-relevant information of specific accounting period. It will not hold the matching concepts in preparing the financial statement. It will result in misleading accounting statement as the financial statement contains various information that are relevant to the period. It will not provide actual performance and position of the business. For instance, deducting the bad debts pertaining to 2013 in the year 2014 will make both statement misleading. It is the major disadvantage of this method. Clarence's Answer (50 words): Hello Mr. WeitnerWhen a company is writing off a bad debts account they will determine whether a particular account is uncollectible. They would use the direct write-off method which is charged to the Bad Debt Expense. The company will report accounts receivable as an actual loss for the uncollectible. For example, in November of 2014 a customers has a loan of the amount of $3000.00 for merchandise. After a few payments the customer defaults on the loan. The company will determine that it is uncollectible. The actual amount that owed is placed in accounts receivable. Now the $3000.00 will make the books look good for the year 2014 for the company. The disadvantages of this method is that in the following year 2015 for the books will show a lose. With method companies will report the bad debt expense in a different period from the period that its was reported as revenue. This will also be a loss for the future growth of the company, through raises, bonuses, and hiring new employees'. Also if there are high amount of defaults on loans the company might be forced to close the doors ( going out of business do too defaulted loans). My Comment to Clarence's Answer: The answer related to the direct method of writing off is appropriate. In this case, a detailed explanation is being provided with the example that makes the reader understand the concept of the direct write-off method. A detailed explanation of the years being provided that explains the disadvantage clearly. Dakotah's Answer (50 words): A possible disadvantage of this could be a mismatched expense. Though any bad debt expense of an uncollected accounts receivable is accompanied with the original credit sales. However with using the direct write off method businesses are more likely to record the loss when the account is actually uncollectible. Consequently, the bad-debt expense is inappropriately recorded against the revenue of sales from a later period, mismatching the bad-debt expense with the revenue of the original credit sales. My Comment to Dakotah's Answer: It is explained that direct write-off method will deduct the bad debts only on the actual loss basis is clearly explained. The disadvantage of the method is being made precise, and they are selfexplanatory. Chances of the financial statement containing information that does not pertain to the period of the financial statement being prepared are the main disadvantage of this method. Maria's Answer (50 Words): Write off method is one of the most common accounting techniques of bad debts treatment. Uncollectible accounts receivable are directly written off against income at the time when they are actually determined as bad debts. When a debt is determined as uncollectible, a journal entry is passed in which bad debts expense account is debited and accounts receivable account. The write off method is simple but it also has some drawbacks might make it inappropriate for some small businesses. My Comment to Maria's Answer: There is clear explanation about the direct write off method. Information about the journal entry that is used for recording the bad debts is adding more value in explaining the concept. It is not alone inappropriate for small businesses but they are inappropriate for all businesses. It provides misleading financial statement. It will make the statement to contain non-relevant information pertaining to specific accounting period. Melody's Answer (50 words): Write off method is one of the most common accounting techniques of bad debts treatment. Uncollectible accounts receivable are directly written off against income at the time when they are actually determined as bad debts. When a debt is determined as uncollectible, a journal entry is passed in which bad debts expense account is debited and accounts receivable account. The write off method is simple but it also has some drawbacks might make it inappropriate for some small businesses. My Comment to Melody's Answer: There is clear explanation about the direct write off method. Information about the journal entry that is used for recording the bad debts is adding more value in explaining the concept. It is inappropriate for all businesses. It will result in providing a misleading financial statement by containing information that are not relevant to the specific accounting period due to bad debts write off. Yolanda's Answer (50 words): When a company cannot collect on a debt, it charges the loss to Bad Debt Expense. The Bad Debt Expense will only show the actual losses from the uncollected debt. The company records that bad debt expense in a different period from when the revenue is recorded. This method does not match bad debt expense to sales revenue in the income statement. This method does not show accounts receivable in the balance sheet as the amount the company is actually expecting to receive. This method is not acceptable for reporting the financial unless there is an insignificant debt loss. My Comment to Yolanda's Answer: The explanation provided is appropriate. It clearly explains that bad debts will be deducted as and when they are incurred. The disadvantage of this method is well narrated. It will result writing off bad debts that are not relevant to the particular accounting period and thus resulting in misleading financial statement. It is correct that they are not acceptable as per GAAP. QUESTION: (100 Words) What types of industries have unearned revenue? Why is unearned revenue considered a liability? When is the unearned revenue recognized in the financial statements? My Answer: Any company that is receiving advances, deposits for the services or products that to be delivered in the future will have unearned revenues. Airlines, railways, transportation industry, entertainment (theaters), print media are some examples. In this case, most travelers book their tickets in advance and travel as per the schedule. It is recognized as unearned revenue till customer travel and it is a liability.It is reported in the income statement as the unearned revenue. It is considered as the liability because the company has received the payment for the services or products that are not delivered at the time of payment receipt. In this case, the company is liable to deliver them in the future for the payment received in advance. After receiving the payment from the customer, it will be recognized as unearned revenue till the product delivered, or service rendered.Once the product or services delivered to the customer, then it will be recognized as revenue in the financial statement of the company. CLARENCE's Answer: (70 Words) The types industries that have unearned revenue are Air Lines, Ticket Sellers ( professional sports, college sports, and for concerts), and magazine company's. These are some of the industries that have unearned revenue. Unearned revenues is revenues that are received before the company delivers goods or provides services. The unearned revenue is considered a liability because if a customer does not fulfill their end of the bargain or contract the company will be in risk of losing money. The unearned revenue is recognized in the financial statement when the money has been collected. My Comments to Clarence's Answer: Examples of types of industries like airlines, magazines are appropriate for the unearned revenues, as they receive payment in advance from the customer and render the service or product later. Unearned revenues are considered as liabilities because the company has received the payment in advance without rendering the service or delivering the product from customers. It is correctly explained. It is essential to mention that the unearned revenue is recognized once the cash is received and revenue is recognized once the service is rendered or product is delivered. MATHEW's Answer: (70 Words) I think that there are many types of businesses that have unearned revenue. I will say that i do myself. When I do clinics and lessons i get payment in advance. But not only do I offer refunds I also have a lot of bills that come out when the events are over paying for facilities, insurance, the final order of t shirts etc. So if i spend all the money that i receive as a prepay, i will have nothing left after the camps and clinics are over. The companies that run into this trouble use accrual accounting methods, unearned income, and adjusting entry. The unearned revenue shows up on the financial statements a month or two down the road for businesses that have this type of issue. Especially when they are trying to figure out taxation for the business. My Comments to Mathew's Answer: Mentioning that it can be present in any industry is correct but it is essential to provide some example like Airline or Transportation industry. In this case, mostly travelers book their tickets in advance and travel as per the schedule till they travel it will be considered as unearned revenue, and it is a liability. The answer is focusing on explaining the trouble that are associated with using accrual accounting. It would be better to mention the way it will be recognized. It is essential to mention that the unearned revenue is recognized once the cash is received and revenue is recognized once the service is rendered or product is delivered. QUESTION: (100 Words) What types of industries have unearned revenue? Why is unearned revenue considered a liability? When is the unearned revenue recognized in the financial statements? Answer: Any company that is receiving advances, deposits for the services or products that to be delivered in the future will have unearned revenues. Airlines, railways, transportation industry, entertainment (theaters), print media are some examples. In this case, most travelers book their tickets in advance and travel as per the schedule. It is recognized as unearned revenue till customer travel and it is a liability.It is reported in the income statement as the unearned revenue. It is considered as the liability because the company has received the payment for the services or products that are not delivered at the time of payment receipt. In this case, the company is liable to deliver them in the future for the payment received in advance. After receiving the payment from the customer, it will be recognized as unearned revenue till the product delivered, or service rendered.Once the product or services delivered to the customer, then it will be recognized as revenue in the financial statement of the company. Q1: (100 words) Why do companies issue bonds? Would you rather buy a bond at a discount or a premium rate? Why? What is the determining factor of whether a bond is sold at a discount, face, or premium? My Answer: Companies issue bonds to raise capital that are essential for the business. Bonds are one of the main sources of capital for the company. It is easy to raise the capital for the companies without affecting the share price of the company, and it will enable them to continue with their business ventures. It will not affect some shares outstanding, and bondholders do not take share on the profits of the company, unlike shareholders. Interest paid to the bondholders on the bonds issued is tax exempted and will boost the profit of the company. I would prefer a discount bond over a premium bond as the return on capital investment will be higher. Discount bonds can be purchased at a lower rate than the par value and will pay lower interest, but upon maturity the bondholder will get the face value of the bond. If a bond's coupon rate is lesser than the yield to maturity of the bond and such bonds will be selling at lower price than its face value. It indicates that the bond is selling at a discount. If a bond's coupon rate is higher than YTM of the bond, then the bond is selling at a premium. If the coupon rate and YTM of the bond are equivalent, then the bond is selling at par. Q1 YOLANDA's Answer: (50-70 words) There are reasons why companies issue bonds. One reason is that the bonds do not affect stockholder control. Bondholders do not have voting rights. So, with bonds, owners can raise capital and still maintain corporate control. Another reason companies issue bonds is because cost of bond interest is tax- deductible. Another reason is that bonds may result in lower cost of capital than equity financing. I would rather buy a bond at a discount rate than a premium rate. The profit is the difference between the discount price and the par value, plus coupons. The determining factor of whether a bond is sold at a discount, face, or premium is company credit rating, duration, and economic risks. My Comment to Yolanda's Answer: The reason for issuing the bond is to raise the capital, to protect the shareholders interest and to protect the voting rights of the company. Justifying the preference of choosing discount bond of capital gain from these bonds is essential that was made. The determining factor of whether a bond is sold at discount, premium or par is the comparison of coupon rate with the YTM of the bond that was to be added to add value to the point. Q1 BARBARA's Answer: (50-70 words) A company may choose to sell bonds to fund their operations. They may choose to issue bonds to generate money to pay for an expansion or other type of growth in the company. These become debts of the company which are repayed by ongoing principal payments. There are a lot of opinions about purchasing bonds at a premium or a discount. An advantage to a discount bond is they cost less, and can reach above face value but the profit margin is smaller. One advantage of buying premium bonds is their interest rates fluctuate less than discount bonds and an investor can capitalize on the higher income paid, but having paid more for the bond it's kind of 'a wash'. My Comment to Barbara's Answer: The reason for issuing the bond is to raise the capital to fund the future venture is appropriately mentioned. But there is a requirement to add the interest tax shield point for justifying. There is a clear description of the advantage of discount and premium bond, but the selection, and reason for selection of particular bond are essential. Determining factor of whether a bond is sold at discount, premium or par is the comparison of coupon rate with the YTM of the bond is essential to answer them. --------------------------------------------Q2: (100 words) What is the straight-line method of amortizing discount and premium on bonds payable? Provide an explanation of the process. My Answer: A bond can be issued at a discount or premium or par by the company. It is essential for the company to amortize such discount or premium raised due to the issue of bond. Straight line method of amortization is the allocation of bond discount or premium systematically to every period till the bonds are outstanding. According to the straight line method, every period equal amount is allocated to the interest expenses. Formula used for determining the amortization amount is: Bond discount/premium amortization amount = Bond discount/Bond premium/ Number pf periods interest paid In case of a discounted bond, the amount will be decreased from the Discount Bonds Payable every year, and the amount of reduction will equal every year. The same is applicable incase of bonds premium till the time of maturity. At the time of bond maturity amortization balance will be zero. Q2 YOLANDA's ANSWER: (50-70 words) Companies distribute bond discount fully to each period in which the bonds are outstanding. The straight- line method of amortization distributes the same amount to interest expense in each interest period. The formula for doing this is bond discount divided by the number of interest periods is equal to the bond discount amortization. Over the bond terms, the balance in discount on bonds payable will annually decrease by the same amount until it has a zero balance at the maturity date of the bond. The carrying value of the bonds at the maturity date will be will equal the face value. The premium on bonds payable is parallel to that of the discount on bonds payable. The formula for determining bond premium amortization under the straight- line method is bond premium divided by number of interest periods is equal to bond premium amortization. My Answer: Explanation about the straight line amortization that is equal amount will be adjusted during every period is clearly and narratively explained. The formula for determining the amount that is dividing the bond discount or premium by the number of period of interest payment is correctly mentioned. Explanation of the process of amortization is required that is it will be adjusted or deducted at every time during interest payment is essential to mention. Q2 CLARENCE's Answer: (50-70 words) The straight-line method of amortizing discount, companies should allocate bond discount systematically to each period in which the bonds are outstanding. The straight-line method of amortization allocates the same amount to interest expense in each interest period ( Ch. 10 p.481 - 482 ). Here is the formula for straight-line method of bond discount amortization: Bond Discount divide by Number of interest periods equals Bond Discount Amortization. The straight-line amortizing premium parallels that of bond discount. The formula is Bond Premiun divided by Number of Interest Periods equals Bond Premiun Amortization. For the bond discount over the term of the bonds, the balance in Discount Bonds Payable will decrease annually by the same amount until it has a zero balance at the maturity date of the bond (Ch. 10 p. 482). For the bond premium, over the term of the bonds, the balance in Premium on Bonds Payable will decrease annually by the same amount unit it has a zero balance at maturity. My Comment to Clarence's Answer: Explanation about the straight line amortization that is equal amount will be adjusted during every period is clearly and narratively explained. The formula for determining the amount that is dividing the bond discount or premium by the number of period of interest payment is correctly mentioned. There is a clear narration about the process of amortization that is by deducting at the time of interest payment. Write a 250- to 350-word paper explaining why preferred stock is referred to as preferred and what some of the features added to preferred stock are that make it more attractive to investors. Would you select preferred stock or common stock as an investment? Why? Format your paper consistent with APA guidelines