Accounting, Fifth Edition 10-12 EXAM REVIEW Accounting, Fifth Edition

Current Liabilities - Unearned Revenue Illustration: Superior University sells 10,000 season football tickets at $50 each for its five-game home schedule. The entry for the sales of season tickets is: Unearned ticket revenue 500,000 Cash 500,000 Aug. 6 As each game is completed, Superior records the earning of revenue. Ticket revenue 100,000 Unearned ticket revenue 100,000 Sept. 7 LO 3 Explain the accounting for other current liabilities.

Current Liabilities - Sales Tax Payable Illustration: The March 25 cash register readings for Cooley Grocery show sales of $10,000 and sales taxes of $600 (sales tax rate of 6%), the journal entry is: Mar. 25 Sales revenue 10,000 Cash 10,600 Sales tax payable 600 LO 3 Explain the accounting for other current liabilities.

Current Liabilities - Payroll Illustration: Assume Cargo Corporation records its payroll for the week of March 7 as follows: Salaries and wages expense 100,000 Federal income tax payable 21,864 FICA tax payable 7,650 State income tax payable 2,922 Salaries and wages payable 67,564 Mar. 7 Record the payment of this payroll on March 7. Cash 67,564 Salaries and wages payable 67,564 Mar. 7 LO 3

Current Liabilities – Payroll Taxes Payroll tax expense results from three taxes that governmental agencies levy on employers. These taxes are: FICA tax Federal unemployment tax (FUTA) State unemployment tax Illustration: Based on Cargo Corp.’s $100,000 payroll, the company would record the employer’s expense and liability for these payroll taxes as follows. Payroll tax expense 13,850 State unemployment taxes payable 800 FICA tax payable 7,650 Federal unemployment taxes payable 5,400 LO 3 Explain the accounting for other current liabilities.

Exercise 10-6 Exercise 10-4 Problem 10-1B

Accounting for Bond Issues A corporation records bond transactions when it issues or retires (buys back) bonds and when bondholders convert bonds into common stock. Bonds may be issued at face value, below face value (discount), or above face value (premium). Bond prices are quoted as a percentage of face value. LO 5 Prepare the entries for the issuance of bonds and interest expense.

Issuing Bonds at Face Value Illustration: Devor Corporation issues 100, five-year, 10%, $1,000 bonds dated January 1, 2014, at 100 (100% of face value). The entry to record the sale is: 1/1/14 Cash 100,000 Bonds payable 100,000 Prepare the entry Devor would make to accrue interest on December 31. ($100,000 x 10% x 12/12) 12/31/14 Interest expense 10,000 Interest payable 10,000 Prepare the entry Devor makes on Jan. 1, 2015 to pay the interest. 1/1/15 Interest payable 10,000 Cash 10,000 LO 5 Prepare the entries for the issuance of bonds and interest expense.

Issuing Bonds at a Discount Illustration: Assume that on January 1, 2014, Candlestick Inc. sells $100,000, five-year, 10% bonds at 98 (98% of face value) with interest payable on January 1. The entry to record the issuance is: Jan. 1 Cash 98,000 Discount on bonds payable 2,000 Bonds payable 100,000 LO 5 Prepare the entries for the issuance of bonds and interest expense.

Issuing Bonds at a Premium Illustration: Assume that the Candlestick Inc. bonds previously described sell at 102 rather than at 98. The entry to record the sale is: Jan. 1 Cash 102,000 Bonds payable 100,000 Premium on bonds payable 2,000 LO 5 Prepare the entries for the issuance of bonds and interest expense.

Appendix 10B Effective Interest Amortization Under the effective-interest method, the amortization of the discount or premium results in interest expense equal to a constant percentage of the carrying value. Required steps: Compute the bond interest expense. Compute the bond interest paid or accrued. Compute the amortization amount. Illustration 10B-1 LO 9

Appendix 10B Amortizing Bond Discount Effective Interest Amortization Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2014, for $98,000. The effective-interest rate is 10.53% and interest is payable on Jan. 1 of each year. Prepare the bond discount amortization schedule. LO 9 Apply the effective-interest method of amortizing bond discount and bond premium.

Appendix 10B Amortizing Bond Discount Effective Interest Amortization Illustration 10B-2 LO 9 Apply the effective-interest method of amortizing bond discount and bond premium.

Appendix 10B Amortizing Bond Discount Effective Interest Amortization Illustration: Candlestick, Inc. records the accrual of interest and amortization of bond discount on Dec. 31, as follows: Dec. 31 Interest expense 10,319 Discount on bonds payable 319 Interest payable 10,000 LO 9 Apply the effective-interest method of amortizing bond discount and bond premium.

Appendix 10B Amortizing Bond Premium Effective Interest Amortization Illustration: Candlestick, Inc., sold $100,000, five-year, 10% bonds on January 1, 2014, for $102,000. The effective-interest rate is 9.48% and interest is payable on Jan. 1 of each year. Prepare the bond premium amortization schedule. LO 9 Apply the effective-interest method of amortizing bond discount and bond premium.

Appendix 10B Amortizing Bond Premium Effective Interest Amortization Illustration 10B-4 LO 9 Apply the effective-interest method of amortizing bond discount and bond premium.

Appendix 10B Amortizing Bond Premium Effective Interest Amortization Illustration: Candlestick, Inc. records the accrual of interest and amortization of premium discount on Dec. 31, as follows: Dec. 31 Interest expense 9,670 Premium on bonds payable 330 Interest payable 10,000 LO 9 Apply the effective-interest method of amortizing bond discount and bond premium.

Straight-Line Amortization Appendix 10A Amortizing Bond Discount To follow the expense recognition principle, companies allocate bond discount to expense in each period in which the bonds are outstanding. Illustration 10A-1 LO 8 Apply the straight-line method of amortizing bond discount and bond premium.

Problem 10-10B

Stock Issue Considerations Par and No-Par Value Stocks Capital stock that has been assigned a value per share. Years ago, par value determined the legal capital per share that a company must retain in the business for the protection of corporate creditors. Today many states do not require a par value. No-par value stock is fairly common today. In many states the board of directors assigns a stated value to no-par shares. LO 2 Record the issuance of common stock.

Accounting for Common Stock Issuances Illustration: Assume that Hydro-Slide, Inc. issues 2,000 shares of $1 par value common stock. Prepare Hydro-Slide’s journal entry if (a) 1,000 share are issued for $1 per share, and (b) 1,000 shares are issued for $5 per share. Cash 1,000 Common stock (1,000 x $1) 1,000 Cash 5,000 Paid-in capital in excess of par value 4,000 a) b) LO 2 Record the issuance of common stock.

Preferred Stock Illustration: Stine Corporation issues 10,000 shares of $10 par value preferred stock for $12 cash per share. Journalize the issuance of the preferred stock. Cash 120,000 Preferred stock (10,000 x $10) 100,000 Paid-in capital in excess of par – Preferred stock 20,000 Preferred stock may have a par value or no-par value. LO 4 Differentiate preferred stock from common stock.

Preferred Stock – Cumulative vs Non-Cumulative Dividends If the preferred stock is noncumulative, these stockholders have no rights to the missed dividends of the year 2009. However, they get first distribution of the dividends declared in 2010. The dividend for the preferred stock in 2009 is calculated as follows: one hundred dollar par value times nine percent times one thousand shares. Since forty two thousand dollars in dividends were declared, preferred would first get their nine thousand dollars, and the remaining thirty three thousand dollars would be divided evenly among the common stockholders. If the preferred stock is cumulative, these stockholders have rights to the missed dividends of 2009 in addition to the dividend in 2010. The preferred stockholders first get a distribution of nine thousand dollars for the missed dividends of 2009. Then they get another nine thousand dollars for the dividend in 2010. Since forty two thousand dollars in dividends were declared, preferred would first get their eighteen thousand dollars and the remaining twenty four thousand dollars would be divided evenly among the common stockholders. An additional preference for preferred stock is participation in dividends if they are declared above certain limits. This participation feature does not apply until common stockholders receive dividends equal to the preferred stock’s dividend percent. This is not a common preference seen in practice. 11-23

Preferred Stock Review Question M-Bot Corporation has 10,000 shares of 8%, $100 par value, cumulative preferred stock outstanding at December 31, 2014. No dividends were declared in 2012 or 2013. If M-Bot wants to pay $375,000 of dividends in 2014, common stockholders will receive: $0. $295,000. $215,000. $135,000. LO 4 Differentiate preferred stock from common stock.

Accounting for Treasury Stock Treasury stock - corporation’s own stock that it has reacquired from shareholders, but not retired. Corporations purchase their outstanding stock: To reissue shares to officers and employees under bonus and stock compensation plans. To increase trading of the company’s stock in the securities market. To have additional shares available for use in acquiring other companies. To increase earnings per share. Another infrequent reason is to eliminate hostile shareholders. LO 3 Explain the accounting for the purchase of treasury stock.

Accounting for Treasury Stock Purchase of Treasury Stock Debit Treasury Stock for the price paid. Treasury stock is a contra stockholders’ equity account, not an asset. Normal side is a DEBIT. Treasury Stock decreases by the same amount when the company later sells the shares. LO 3 Explain the accounting for the purchase of treasury stock.

Accounting for Treasury Stock Illustration 11-6 Illustration: On February 1, 2014, Mead acquires 4,000 shares of its stock at $8 per share. Prepare the entry. Treasury stock (4,000 x $8) 32,000 Cash 32,000 LO 3 Explain the accounting for the purchase of treasury stock.

Accounting for Treasury Stock Stockholders’ Equity with Treasury stock Illustration 11-7 Both the number of shares issued (100,000), outstanding (96,000), and the number of shares held as treasury (4,000) are disclosed. LO 3 Explain the accounting for the purchase of treasury stock.

Dividends Dividends require information concerning three dates: LO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.

Dividends Illustration: On Dec. 1, the directors of Media General declare a $0.50 per share cash dividend on 100,000 shares of $10 par value common stock. The dividend is payable on Jan. 20 to shareholders of record on Dec. 22: December 1 (Declaration Date) Dividends 50,000 Dividends payable 50,000 December 22 (Record Date) No entry January 20 (Payment Date) Dividends payable 50,000 Cash 50,000 LO 5 Prepare the entries for cash dividends and understand the effect of stock dividends and stock splits.

Presentation of Stockholders’ Equity Balance Sheet Presentation Illustration 11-16 Two classifications of paid-in capital: * Capital stock * Additional paid-in capital LO 7 Prepare a comprehensive stockholders’ equity section.

Problem 11-2B

Usefulness and Format Classification of Cash Flows Operating Activities Investing Activities Financing Activities Income Statement Items Changes in Investments and Long-Term Asset Changes in Long-Term Liabilities and Stockholders’ Equity LO 2 Distinguish among operating, investing, and financing activities.

Usefulness and Format Preparing the Statement of Cash Flows Three Sources of Information: Comparative balance sheets Current income statement Additional information LO 3 Explain the impact of the product life cycle on a company’s cash flows.

Usefulness and Format Significant Noncash Activities Direct issuance of common stock to purchase assets. Conversion of bonds into common stock. Direct issuance of debt to purchase assets. Exchanges of plant assets. Companies report noncash activities in either a separate schedule (bottom of the statement) or separate note to the financial statements. LO 2 Distinguish among operating, investing, and financing activities.

Format of the Statement of Cash Flows Illustration 12-2 LO 2 Distinguish among operating, investing, and financing activities.

PROBLEM 12-11A PROBLEM 12-7A