The rookie staff accountant at Johnson Company prepared the income statement below for the fiscal year ended December 31, 2020. However, upon review by the Accounting Manager, it was noted that several transactions had not yet been recorded for December and that earnings per share information were not disclosed.

The following December 2020 transactions were not recorded in the income statement above:

On December 1, Johnson issued $500,000 of 6% convertible bonds, due December 1, 2025, with interest payable semiannually on December 1 and May 1. The bonds are convertible into 50,000 common shares. No conversion has been made as of December 31.

On December 5, Johnson purchased, as a trading investment, $80,000 of the 9%, 5-year bonds of Acme Inc. for $74,086, which provides an 11% return. The bonds pay interest annually and Johnson uses the effective interest method for amortizing any discount or premium. The fair value of the bonds on December 31, 2020, is $75,000.

On December 10, Johnson purchased 500 shares of Masters Corp. common stock for $50 per share (Masters Corp. had total common shares outstanding throughout 2020 of 150,000 shares). On December 15, Johnson sold 100 shares of the Masters Corp. common stock for $52 per share. The fair value of the common stock on December 31, 2020, is $55 per share.

On December 20, Johnson purchased at par, as a held-to-maturity investment, $30,000 of the 8%, 5-year bonds of Delco Company. The bonds pay interest semiannually. The fair value of the bonds on December 31, 2020, is $29,500.

Additional information:

On January 1, 2020, Johnson Company had 20,000 common shares outstanding. On October 1, 2020, an additional 10,000 shares were issued.

The tax rate is 25%.

Required (You must show all calculations made in completing the following requirements):

1. a) Prepare all necessary journal entries for the December transactions.

2. b) Prepare all necessary adjusting entries related to the December transactions.

3. c) Prepare the final Income Statement (multistep) and a Statement of Other Comprehensive

   Income, if required, for the year ended December 31, 2020.

4. d) Compute Basic and Diluted Earnings Per Share for the year ended December 31, 2020.

   Include the applicable earnings per share information, in good form, on the Income Statement prepared in step c).

Grading Note: Financial statements prepared in step c) should be in good form. Additional deductions will be made for statements not prepared in good form (e.g. incorrect titles and dates, statements not rounded to whole dollars, inappropriate inclusion/exclusion of “$” signs, underlines, and calculations on the face of the statement, or other formatting issues).

 

Johnson Company Income State ment For the year ended December 31, 2020 Sales 201,000 Cost of goods sold Gross margin 106,000 95,000 70,000 Salaries and wages expense Utilities expense 13,000 12,000 Income before tax Income tax 3,000 Net income 9,000 %24 %24