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

2. 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 ,000
Cash 500,000
Aug. 6
As each game is completed, Superior records the earning of revenue.
Ticket revenue ,000
Unearned ticket revenue 100,000
Sept. 7
LO 3 Explain the accounting for other current liabilities.

3. 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
LO 3 Explain the accounting for other current liabilities.

4. 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

5. 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.

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

7. 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.

8. 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.

9. 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.

10. 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 ,000
Bonds payable 100,000
Premium on bonds payable 2,000
LO 5 Prepare the entries for the issuance of bonds and interest expense.

11. 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

12. 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.

13. 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.

14. 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.

15. 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.

16. 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.

17. 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.

18. 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.

19. Problem 10-10B

20. 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.

21. 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.

22. 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) ,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.

23. 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 However, they get first distribution of the dividends declared in 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 The preferred stockholders first get a distribution of nine thousand dollars for the missed dividends of Then they get another nine thousand dollars for the dividend in 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

24. Preferred Stock Review Question
M-Bot Corporation has 10,000 shares of 8%, $100 par value, cumulative preferred stock outstanding at December 31, No dividends were declared in 2012 or 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.

25. 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.

26. 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.

27. 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.

28. 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.

29. 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.

30. 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.

31. 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.

32. Problem 11-2B

33. 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.

34. 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.

35. 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.

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

37. PROBLEM 12-11A
PROBLEM 12-7A