Leases and Other Commitments

Problems: Set C

Note 6. Leases and Other Commitments

The Company’s leases are generally for equipment and warehouse space. Future mini-mum annual lease payments under noncancelable operating leases were as follows: 2005,

$87.2; 2006, $72.5; 2007, $57.0; 2008, $44.9; 2009, $76.7; after 2009, $65.9.

Instructions

(a) Calculate each of the following ratios for 2004 and 2003.

(1) Current ratio.

(2) Free cash flow.

(3) Debt to total assets.

(4) Times interest earned ratio.

(b) Comment on the trend in ratios.

(c) Read the company’s note on leases. If the operating leases had instead been accounted for like a purchase, assets and liabilities would increase by approximately $324.2 mil-lion. Recalculate the debt to total assets ratio for 2004 in light of this information, and discuss the implictions for analysis.

*P10-7C The information below is taken from Lolly Corp.’s balance sheet at December 31, 2007.

Other information:

2004 2003

Net income (loss) $ 890.6 $ 787.1

Income tax expense 475.3 382.4

Interest expense 308.6 371.4

Cash provided by operations 1,229.0 1,171.0

Capital expenditures 278.6 247.2

Cash dividends 417.6 412.4

Prepare journal entries to record interest payments, straight-line discount amortization, and redemption of bonds.

(SO 5, 6, 8) Current liabilities

Bond interest payable $ 105,000

Long-term liabilities

Bonds payable, 7%, due January 1, 2014 $1,500,000

Plus: Premium on bonds payable 13,500 1,513,500

Interest is payable annually on January 1. The bonds are callable on any annual interest date. Lolly uses straight-line amortization for any bond premium or discount. From December 31, 2007, the bonds will be outstanding for an additional 6 years (72 months).

Instructions

(Round all computations to the nearest dollar.)

(a) Journalize the payment of bond interest on January 1, 2008.

(b) Prepare the entry to amortize bond premium and to accrue the interest on December 31, 2008.

(c) Assume on January 1, 2009, after paying interest, that Lolly Corp. calls bonds hav-ing a face value of $600,000. The call price is 104. Record the redemption of the bonds.

(d) Prepare the adjusting entry at December 31, 2009, to amortize bond premium and to accrue interest on the remaining bonds.

*P10-8C Nish Corporation sold $2,200,000, 8%, 5-year bonds on January 1, 2007. The bonds were dated January 1, 2007, and pay interest on January 1. Nish Corporation uses the straight-line method to amortize bond premium or discount.

Instructions

(a) Prepare all the necessary journal entries to record the issuance of the bonds and bond interest expense for 2007, assuming that the bonds sold at 102.

(b) Prepare journal entries as in part (a) assuming that the bonds sold at 99.

(c) Show the balance sheet presentation for the bond issue at December 31, 2007, using (1) the 102 selling price, and then (2) the 99 selling price.

Prepare journal entries to record issuance of bonds, interest, and straight-line amortization, and balance sheet presentation.

(SO 5, 7, 8)

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Problems: Set C

43

*P10-9C Zaidi Co. sold $3,000,000, 7%, 8-year bonds on January 1, 2007. The bonds were dated January 1, 2007, and pay interest on January 1. The company uses straight-line amor-tization on bond premiums and discounts. Financial statements are prepared annually.

Instructions

(a) Prepare the journal entries to record the issuance of the bonds assuming they sold at:

(1) 103.

(2) 98.

(b) Prepare amortization tables for both assumed sales for the first three interest payments.

(d) Show the balance sheet presentation for both assumed sales at December 31, 2007.

*P10-10C On January 1, 2007, Chiu Corporation issued $800,000 face value, 6%, 15-year bonds at $727,137. This price resulted in an effective-interest rate of 7% on the bonds. Chiu uses the effective-interest method to amortize bond premium or dis-count. The bonds pay annual interest January 1.

Instructions

(Round all computations to the nearest dollar.)

(a) Prepare the journal entry to record the issuance of the bonds on January 1, 2007.

(b) Prepare an amortization table through December 31, 2009 (three interest periods) for this bond issue.

(c) Prepare the journal entry to record the accrual of interest and the amortization of the discount on December 31, 2007.

(d) Prepare the journal entry to record the payment of interest on January 1, 2008.

(e) Prepare the journal entry to record the accrual of interest and the amortization of the discount on December 31, 2008.

*P10-11C On January 1, 2007, Lopez Company issued $1,600,000 face value, 7%, 10-year bonds at $1,780,903. This price resulted in a 5.5% effective-interest rate on the bonds.

Lopez uses the effective-interest method to amortize bond premium or discount. The bonds pay annual interest on each January 1.

Instructions

(a) Prepare the journal entries to record the following transactions.

(1) The issuance of the bonds on January 1, 2007.

(2) Accrual of interest and amortization of the premium on December 31, 2007.

(3) The payment of interest on January 1, 2008.

(4) Accrual of interest and amortization of the premium on December 31, 2008.

(b) Show the proper balance sheet presentation for the liability for bonds payable on the December 31, 2008, balance sheet.

(1) What amount of interest expense is reported for 2008?

(2) Would the bond interest expense reported in 2008 be the same as, greater than, or less than the amount that would be reported if the straight-line method of amortization were used?

*P10-12C Masood purchased a new piece of equipment to be used in its new facility.

The $380,000 piece of equipment was purchased with a $40,000 down payment and with cash received through the issuance of a $340,000, 9%, 5-year mortgage note payable is-sued on October 1, 2007. The terms provide for quarterly installment payments of

$21,298 on December 31, March 31, June 30, and September 30.

Instructions

(Round all computations to the nearest dollar.)

(a) Prepare an installment payments schedule for the first five payments of the notes payable.

(b) Prepare all journal entries related to the notes payable for December 31, 2007.

Be sure to distinguish between the current and long-term portions of the note.)

*P10-13C Hakan Paydak has just approached a venture capitalist for financing for a new business venture, the development of a local ski hill. On July 1, 2007, Hakan was loaned

Prepare journal entries to record issuance of bonds, interest, and straight-line amortization, and balance sheet presentation.

(SO 5, 6, 8)

Prepare journal entries to record issuance of bonds, payment of interest, and amortization of bond schedule, journal entries, and balance sheet presentation for a mortgage note payable.

(SO 7, 10)

Prepare journal entries to record payments for long-term note payable, and balance sheet presentation.

(SO 7, 10)

Prepare journal entries to record issuance of bonds, payment of interest, and effective-interest amortization,

Expense $198,750

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44

CHAPTER 10 Reporting and Analyzing Liabilities

$120,000 at an annual interest rate of 8%. The loan is repayable over 5 years in annual installments of $30,055, principal and interest, due each June 30. The first payment is due June 30, 2008. Hakan uses the effective-interest method for amortizing debt. The ski hill company’s year-end will be June 30.

Instructions

(a) Prepare an amortization schedule for the 5 years, 2007–2012. Round all calculations to the nearest dollar.

(b) Prepare all journal entries for Hakan Paydak for the first 2 fiscal years ended June 30, 2008, and June 30, 2009. Round all calculations to the nearest dollar.

Be sure to distinguish between the current and long-term portions of the note.) (b) 6/30/08 Interest

Expense $9,600

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Problems: Set C

45

Problems: Set C

P11-1C Pickwick Corporation was organized on January 1, 2007. It is authorized to issue 50,000 shares of 8%, $75 par value preferred stock and 700,000 shares of no-par common stock with a stated value of $2 per share. The following stock transactions were completed during the first year.

Jan. 7 Issued 90,000 shares of common stock for cash at $5 per share.

Feb. 12 Issued 7,000 shares of preferred stock for cash at $77 per share.

June 30 Issued 65,000 shares of common stock for cash at $6 per share.

Aug. 24 Issued 25,000 shares of common stock for cash at $6.50 per share.

Dec. 1 Issued 2,000 shares of preferred stock for cash at $79 per share.

Instructions

(a) Journalize the transactions.

(b) Post to the stockholders’ equity accounts. (Use T accounts.)

P11-2C The stockholders’ equity accounts of Pareek Corporation on January 1, 2007, were as follows.

Preferred Stock (6%, $50 par noncumulative, 8,000 shares authorized) $ 175,000 Common Stock ($1 stated value, 400,000 shares authorized) 250,000 Paid-in Capital in Excess of Par Value—Preferred Stock 7,000 Paid-in Capital in Excess of Stated Value—Common Stock 4,000,000

Retained Earnings 950,000

Treasury Stock—Common (12,000 shares) 66,000

During 2007 the corporation had the following transactions and events pertaining to its stockholders’ equity.

Feb. 1 Issued 7,000 shares of common stock for $126,000.

July 12 Purchased 2,000 additional shares of common treasury stock at $17 per share.

Oct. 1 Declared a 6% cash dividend on preferred stock, payable November 1.

Nov. 1 Paid the dividend declared on October 1.

Dec. 1 Declared a $2.00 per share cash dividend to common stockholders of record on December 15, payable December 31, 2007.

31 Determined that net income for the year was $930,000. Paid the dividend declared on December 1.

Instructions

(a) Journalize the transactions. (Include entries to close net income to Retained Earnings.) (b) Enter the beginning balances in the accounts and post the journal entries to the

stock-holders’ equity accounts. (Use T accounts.)

(d) Calculate the payout ratio, earnings per share, and return on common stockholders’

equity ratio. (Note: Use the common shares outstanding on January 1 and December 31 to determine the average shares outstanding.)

P11-3C On December 31, 2006, Jochims Company had 820,000 shares of $10 par common stock issued and outstanding. The stockholders’ equity accounts at December 31, 2006, had the balances listed here.

Common Stock $8,200,000

Additional Paid-in Capital 2,460,000 Retained Earnings 1,600,000

Transactions during 2007 and other information related to stockholders’ equity accounts were as follows.

1. On January 18, 2007, issued at $107 per share 80,000 shares of $100 par value, 7%

cumulative preferred stock.

$1,699,500

Journalize transactions, post, and prepare a stockholders’

equity section; calculate ratios.

(SO 2, 3, 5, 7, 8)

$4,558,000

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CHAPTER 11 Reporting and Analyzing Stockholders’ Equity

2. On March 23, 2007, reacquired 20,000 shares of its common stock for $15 per share.

3. On June 8, 2007, declared a cash dividend of $1.60 per share on the common stock outstanding, payable on July 10, 2007, to stockholders of record on July 1, 2007.

4. On December 15, 2007, declared the yearly cash dividend on preferred stock, payable January 12, 2008, to stockholders of record on December 15, 2007.

5. Net income for the year was $2,900,000.

Instructions

Prepare the stockholders’ equity section of Jochims’ balance sheet at December 31, 2007.

P11-4C The ledger of Ninomiya Corporation at December 31, 2007, after the books have been closed, contains the following stockholders’ equity accounts.

Preferred Stock (8,000 shares issued) $ 800,000

Common Stock (430,000 shares issued) 860,000

Paid-in Capital in Excess of Par Value—Preferred Stock 100,000 Paid-in Capital in Excess of Stated Value—Common Stock 1,750,000

Retained Earnings 2,872,000

A review of the accounting records reveals this information:

1. Preferred stock is 10%, $100 par value, noncumulative. Since January 1, 2006, 8,000 shares have been outstanding; 20,000 shares are authorized.

2. Common stock is no-par with a stated value of $2 per share; 500,000 shares are authorized.

3. The January 1, 2007, balance in Retained Earnings was $2,450,000.

4. On October 1, 80,000 shares of common stock were sold for cash at $8 per share.

5. A cash dividend of $553,000 was declared and properly allocated to preferred and com-mon stock on November 1. No dividends were paid to preferred stockholders in 2006.

6. Net income for the year was $975,000.

7. On December 31, 2007, the directors authorized disclosure of a $160,000 restriction of retained earnings for plant expansion. (Use Note A.)

Instructions

(a) Reproduce the retained earnings account (T account) for the year.

(b) Prepare the stockholders’ equity section of the balance sheet at December 31.

P11-5C Romero Corporation has been authorized to issue 25,000 shares of $100 par value, 8%, noncumulative preferred stock and 1,000,000 shares of no-par common stock.

The corporation assigned a $4 stated value to the common stock. At December 31, 2007, the ledger contained the following balances pertaining to stockholders’ equity.

Preferred Stock $ 400,000

Paid-in Capital in Excess of Par Value—Preferred Stock 72,000

Common Stock 2,400,000

Paid-in Capital in Excess of Stated Value—Common Stock 6,600,000

Treasury Stock—Common (40,000 shares) 680,000

Retained Earnings 3,630,000

The preferred stock was issued for $472,000 cash. All common stock issued was for cash.

In November 40,000 shares of common stock were purchased for the treasury at a per share cost of $17. No dividends were declared in 2007.

Instructions

(a) Prepare the journal entries for the following.

(1) Issuance of preferred stock for cash.

(2) Issuance of common stock for cash.

(3) Purchase of common treasury stock for cash.

(b) Prepare the stockholders’ equity section of the balance sheet at December 31, 2007.

P11-6C On January 1, 2007, Matusiak Inc. had these stockholders’ equity balances.

Common Stock, $5 par (2,000,000 shares authorized, 600,000

shares issued and outstanding) $3,000,000

Paid-in Capital in Excess of Par Value 1,800,000

Retained Earnings 810,000

Tot. stockholders’ equity

$21,580,000 Reproduce retained earnings account, and prepare a stockholders’ equity section.

(SO 5, 6, 7)

(b) Tot. paid-in capital

$3,510,000 Prepare entries for stock transactions, and prepare a stockholders’ equity section.

(SO 2, 3, 4, 7)

Prepare a stockholders’

equity section.

(SO 7)

(b) Tot. stockholders’ equity

$12,422,000

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Problems: Set C

47

During 2007, the following transactions and events occurred.

1. Issued 75,000 shares of $5 par value common stock for $9 per share.

2. Issued 60,000 shares of common stock for cash at $9.50 per share.

3. Purchased 25,000 shares of common stock for the treasury at $10 per share.

4. Declared and paid a cash dividend of $355,000.

5. Earned net income of $860,000.

Instructions

Prepare the stockholders’ equity section of the balance sheet at December 31, 2007.

P11-7C Devang Company manufactures disc golf equipment. During 2007 Devang issued bonds at 8% interest and used the cash proceeds to purchase treasury stock.

The following financial information is available for Devang Company for the years 2007 and 2006.

2007 2006

Sales $ 6,000,000 $ 6,000,000

Net income 1,460,000 1,500,000

Interest expense 280,000 120,000

Tax expense 630,000 660,000

Dividends paid 770,000 800,000

Total assets (year-end) 9,500,000 8,600,000

Average total assets 8,800,000 9,100,000

Total liabilities (year-end) 4,000,000 2,000,000 Average total stockholders’ equity 5,700,000 7,400,000 Instructions

(a) Use the information above to calculate the following ratios for both years: (i) return on assets ratio, (ii) return on common stockholders’ equity ratio, (iii) payout ratio, (iv) debt to total assets ratio, (v) times interest earned ratio.

(b) Referring to your findings in part (a), discuss the changes in the company’s prof-itability from 2006 to 2007.

(d) Based on your findings in (b), was the decision to issue debt to purchase common stock a wise one?

*P11-8C On January 1, 2007, Labovitz Corporation had these stockholders’ equity accounts.

Common Stock ($2 par value, 80,000 shares issued and outstanding) $160,000

Paid-in Capital in Excess of Par Value 400,000

Retained Earnings 580,000

During the year, the following transactions occurred.

Jan. 10 Declared a $0.50 cash dividend per share to stockholders of record on January 31, payable February 28.

Feb. 28 Paid the dividend declared in January.

May 1 Declared a 5% stock dividend to stockholders of record on May 10, distributable June 1. On May 1, the market price of the stock was

$9 per share.

June 1 Issued the shares for the stock dividend.

Dec. 1 Declared a $0.75 per share cash dividend to stockholders of record on December 15, payable January 10, 2008.

31 Determined that net income for the year was $320,000.

Instructions

(a) Journalize the transactions. (Include entries to close net income to Retained Earnings.)

(b) Enter the beginning balances and post the entries to the stockholders’ equity T accounts. (Note: Open additional stockholders’ equity accounts as needed.)

(d) Calculate the payout ratio and return on common stockholders’ equity ratio.

Tot. stockholders’ equity prepare a stockholders’ equity section, and calculate ratios.

(SO 5, 7, 8, 9)

$1,357,000 GLS

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CHAPTER 12 Statement of Cash Flows

Problems: Set C

P12-1C You are provided with the following transactions that took place during a re-cent fiscal year.

Cash Inflow, Where Reported Outflow, or

Transaction on Statement No Effect?

(a) Purchased shares of common treasury stock.

(b) Distributed a stock dividend to common stockholders.

(d) Recorded sales on account.

(e) Recorded prepayment of insurance expense.

(f ) Purchased supplies on account.

(g) Recorded amortization expense on a patent.

(h) Recorded and received interest revenue.

(i) Recorded cash proceeds from a sale of plant assets.

(j) Acquired land by issuing a note payable.

Instructions

Complete the table indicating whether each item (1) should be reported as an operating (O) activity, investing (I) activity, financing (F) activity, or as a noncash (NC) transaction reported in a separate schedule, and (2) represents a cash inflow or cash outflow or has no cash flow effect. Assume use of the indirect approach.

P12-2C The following account balances relate to the stockholders’ equity accounts of Bakhtiar Corp. at year-end.

2007 2006

Common stock, 9,800 and 8,000 shares,

respectively, for 2007 and 2006 $200,600 $160,000 Preferred stock, 3,000 shares 225,000 225,000

Retained earnings 218,400 210,000

A small stock dividend was declared and issued in 2007. The market value of the shares was $17,600. Cash dividends were $18,000 in both 2007 and 2006. The common stock has no par or stated value.

Instructions

(a) What was the amount of net income reported by Bakhtiar Corp. in 2007?

(b) Determine the amounts of any cash inflows or outflows related to the common stock and dividend accounts in 2007.

(c) Indicate where each of the cash inflows or outflows identified in (b) would be clas-sified on the statement of cash flows.

P12-3C The income statement of Von Roenn Company is presented here.

Distinguish among operating, investing, and financing activities.

(SO 6)

Determine cash flow effects of changes in equity accounts.

(SO 4)

VON ROENN COMPANY

In document Problems: Set C. Problems: Set C 1 (Page 42-48)