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Financial Accounting an introduction to concepts, methods and uses 13th Edition Clyde P. Stickney, Roman L. Weil, Katherine Schipper, Jennifer Francis - Solutions
On January 1, 2011, Park Corporation sold a $600,000, 7.5 percent bond issue (8.5 percent market rate). The bonds were dated January 1, 2011, pay interest each June 30 and December 31, and mature in four years.Required:1. Give the journal entry to record the issuance of the bonds.2. Give the
Using data from the previous exercise, complete each of the requirements in Exercise 10-9 without using a discount account.
Westover Corporation had $300,000, 10-year bonds outstanding on December 31, 2011 (end of the accounting period). Interest is payable each December 31. The bonds were issued on January 1, 2011. The company uses the straight-line method to amortize any premium or discount. The December 31, 2011,
Santa Corporation sold a $1,000 bond on January 1, 2011. The bond specified an interest rate of 6 percent payable at the end of each year. The bond matures at the end of 2013. It was sold at a market rate of 8 percent per year. The following spreadsheet was completed:Required:1. What was the
The annual report of American Airlines contained the following note:The Company recorded the issuance of $775 million in bonds (net of $25 million discount) as long-term debt on the consolidated balance sheet. The bonds bear interest at fixed rates, with an average effective rate of 8.06 percent,
The annual report for Walt Disney Company contained the following note:The Company has outstanding $1.3 billion of convertible senior notes due on April 15, 2023. The notes bear interest at a fixed annual rate of 2.13%. The notes are convertible into common stock, under certain circumstances, at a
You are a personal financial planner working with a married couple in their early 40s who have decided to invest $100,000 in corporate bonds. You have found two bonds that you think will interest your clients. One is a zero coupon bond issued by PepsiCo with an effective interest rate of 9 percent
On January 1, 2011, Victor Corporation sold a $1,400,000, 8 percent bond issue (6 percent market rate). The bonds were dated January 1, 2011, pay interest each June 30 and December 31, and mature in four years.Required:1. Give the journal entry to record the issuance of the bonds.2. Give the
On January 1, 2011, Frog Corporation sold a $2,000,000, 10 percent bond issue (8.5 percent market rate). The bonds were dated January 1, 2011, pay interest each June 30 and December 31, and mature in 10 years.Required:1. Give the journal entry to record the issuance of the bonds.2. Give the journal
Using data from the previous exercise, complete each of the requirements in Exercise 10-17 without using a premium account.
Houston Company issued a $10,000, three-year, 5 percent bond on January 1, 2011. The bond interest is paid each December 31. The bond was sold to yield 4 percent.Required:1. Complete a bond amortization schedule. Use the effective-interest method.2. What amounts will be reported on the income
Denver Corporation sold a $300,000, 6 percent bond issue on January 1, 2011, at a market rate of 3 percent. The bonds were dated January 1, 2011, with interest to be paid each December 31; they mature in 10 years. The company uses the straight-line method to amortize any discount or
Gateway Company issued a $1 million bond that matures in 10 years. The bond has a 10 percent stated rate of interest. When the bond was issued, the market rate was 8 percent. The bond pays interest each six months. Record the issuance of the bond on June 30. Notice that the company received more
Several years ago, Walters Company issued a $600,000 bond at par value. As a result of declining interest rates, the company has decided to call the bond at a call premium of 5 percent. Record the retirement of the bonds.
The Mira Vista Company issued $500,000 in bonds at a discount five years ago. The current book value of the bonds is $475,000. The company now has excess cash on hand and plans to retire the bonds. The company must pay a 7 percent (of par) call premium to retire the bonds. Record the retirement of
A number of events over the life of a bond have effects that are reported on the statement of cash flows. For each of the following events, determine whether the event affects the statement of cash flows. If so, describe the impact and specify where on the statement the effect is
Arbor Corporation's financial statements for 2011 showed the following:Income StatementRevenues ......... $300,000Expenses .......... (196,000)Interest expense ....... (4,000)Pretax income ........ 100,000Income tax (40%) ....... (40,000)Net income ......... $ 60,000Balance SheetAssets
On January 1, 2011, Nowell Company issued $300,000 in bonds that mature in five years. The bonds have a stated interest rate of 8 percent and pay interest on June 30 and December 31 each year. When the bonds were sold, the market rate of interest was 8 percent.Required:1. What was the issue price
Barnett Corporation sold a $500,000, 7 percent bond issue on January 1, 2011. The bonds pay interest each June 30 and December 31 and mature 10 years from January 1, 2011. For comparative study and analysis, assume three separate cases. Use straight-line amortization and disregard income tax unless
Akron Corporation, whose annual accounting period ends on December 31, issued the following bonds:Date of bonds: January 1, 2011Maturity amount and date: $100,000 due in 10 yearsInterest: 10 percent per annum payable each June 30 and December 31Date sold: January 1, 2011Straight-line amortization
On January 1, 2011, Cunningham Corporation issued $200,000 in bonds that mature in 10 years. The bonds have a stated interest rate of 6 percent and pay interest on December 31. When the bonds were sold, the market rate of interest was 8 percent. The company uses the effective-interest method. By
On January 1, 2011, Antonio Company issued $700,000 in bonds that mature in 10 years. The bonds have a stated interest rate of 8 percent and pay interest on June 30 and December 31 each year. When the bonds were sold, the market rate of interest was 10 percent. The company uses the straight-line
On January 1, 2011, TCU Utilities issued $1,000,000 in bonds that mature in 10 years. The bonds have a stated interest rate of 10 percent and pay interest on June 30 and December 31 each year. When the bonds were sold, the market rate of interest was 12 percent. The company uses the
Electrolux Corporation manufactures electrical test equipment. The company’s board of directors authorized a bond issue on January 1, 2011, with the following terms:Maturity (par) value: $800,000Interest: 8 percent per annum payable each December 31Maturity date: December 31,
On January 1, 2011, Vigeland Corporation issued $2,000,000 in bonds that mature in 10 years. The bonds have a stated interest rate of 10 percent and pay interest on June 30 and December 31 each year. When the bonds were sold, the market rate of interest was 8 percent. The company uses the
On January 1, 2011, Cron Corporation issued $700,000 in bonds that mature in five years. The bonds have a stated interest rate of 13 percent and pay interest on June 30 and December 31 each year. When the bonds were sold, the market rate of interest was 12 percent. The company uses the
Commonwealth Company issued bonds with the following provisions:Maturity value: $300,000Interest: 11 percent per annum payable annually each December 31Terms: Bonds dated January 1, 2011, due five years from that dateThe annual accounting period ends December 31. The bonds were sold on January 1,
MBTA Corporation issued bonds and received cash in full for the issue price. The bonds were dated and issued on January 1, 2011. The stated interest rate was payable at the end of each year. The bonds mature at the end of four years. The following schedule has been completed (amounts in
DirectTV is the largest provider of direct-to-home digital television services and the second largest provider in the multichannel video programming distribution industry in the United States. It provides over 16 million subscribers with access to hundreds of channels of digital-quality video
McDermott International is an engineering and construction company with significant oil and gas operations. The annual report for McDermott contains the following note:The company used cash on hand to purchase the entire $200 million in aggregate principal amount of its Secured Notes outstanding
Determine whether each of the following would be reported in the financing activities section of the statement of cash flows and, if so, specify whether it is a cash inflow or outflow.1. Sale of bonds at a discount.2. Payment of interest on a bond.3. Early retirement of a bond with a 5 percent call
On January 1, 2011, Trucks R Us Corporation issued $2,000,000 in bonds that mature in five years. The bonds have a stated interest rate of 10 percent and pay interest on June 30 and December 31 each year. When the bonds were sold, the market rate of interest was 10 percent.Required:1. What was the
On January 1, 2011, Bidden Corporation sold and issued $100,000, five-year, 10 percent bonds. The bond interest is payable each June 30 and December 31. Assume three separate and independent selling scenarios: Case A, at par; Case B, at 95; and Case C, at 110.Required:Complete a schedule similar to
On January 1, 2011, Kennedy Corporation issued $1,000,000 in bonds that mature in five years. The bonds have a stated interest rate of 7 percent and pay interest on December 31 each year. When the bonds were sold, the market rate of interest was 9 percent. The company uses the straight-line
On January 1, 2011, Avaya Corporation issued $2,000,000 in bonds that mature in five years. The bonds have a stated interest rate of 6 percent and pay interest on December 31 each year. When the bonds were sold, the market rate of interest was 7 percent. The company uses the effective-interest
On January 1, 2011, Grand Isle Corporation issued $900,000 in bonds that mature in five years. The bonds have a stated interest rate of 10 percent and pay interest on December 31 each year. When the bonds were sold, the market rate of interest was 9 percent. The company uses the straight-line
On January 1, 2011, Thomas Insurance Corporation issued $4,000,000 in bonds that mature in five years. The bonds have a stated interest rate of 9 percent and pay interest on December 31 each year. When the bonds were sold, the market rate of interest was 6 percent. The company uses the
AMC Entertainment, Inc., owns and operates 243 movie theaters with 1,617 screens in 22 states. The company sold 11 7/8 percent bonds in the amount of $52,720,000 and used the cash proceeds to retire bonds with a coupon rate of 13.6 percent. At that time, the 13.6 percent bonds had a book value of
Finding Financial Information Refer to the financial statements of American Eagle Outfitters given in Appendix B at the end of this book.Required:1. How much interest was paid in cash during the most recent reporting year?2. Explain why the company does not report bonds payable on its balance
Finding Financial Information Refer to the financial statements of Urban Outfitters given in Appendix C at the end of this book.Required:1. Unlike most companies, Urban Outfitters does not report the amount of interest paid in cash during the most recent reporting year. Explain why you think the
Comparing Companies within an Industry Refer to the financial statements of American Eagle (Appendix B) and Urban Outfitters (Appendix C) and the Industry Ratio Report (Appendix D) at the end of this book. Most companies report some amounts of bonds payable on their balance sheets. It is somewhat
JCPenney Company was one of the first companies to issue zero coupon bonds. It issued bonds with a face (maturity) value of $400 million due eight years after issuance. When the bonds were sold to the public, similar bonds paid 15 percent effective interest. An article in Forbes magazine discussed
You work for a small company considering investing in a new Internet business. Financial projections suggest that the company will be able to earn in excess of $40 million per year on an investment of $100 million. The company president suggests borrowing the money by issuing bonds that will carry
Assume that you are a portfolio manager for a large insurance company. The majority of the money you manage is from retired school teachers who depend on the income you earn on their investments. You have invested a significant amount of money in the bonds of a large corporation and have just
Distinguish between the following pairs of terms:a. Debt securities classified as held to maturity” versus “available for sale”b. Equity securities classified as ‘trading securities” versus “available for sale.”c. Amortized acquisition t versus fair value of debt securities.d.
What is the justification of authoritative guidance for including unrealized holding gains and losses on trading securities in income but reporting unrealized holding gains and losses on securities available for sale in Accumulated Other Comprehensive Income, a separate shareholders’ equity
Reporting marketable securities available for sale at fair value on the balance sheet but not including the unrealized holding gains and losses in income is inconsistent and provides an opportunity for earnings management. Do you agree? Why or why not
When is a derivative also an accounting hedge? When is it not also an accounting hedge? Can management manipulate earnings by its choice of whether to use hedge accounting?
Distinguish between a fair value hedge and a cash flow hedge.
The recognition of a derivative classified as a fair value hedge of a firm commitment as an asset but not recognizing the commitment that the derivative is hedging as a liability is inconsistent. Do you agree? Why or why not?
Both U.S. GAAP and IFRS require the immediate recognition in net income of unrealized gains and losses on derivatives hedging recognized assets and liabilities treated as lair value hedges. Both U.S. GAAP and IFRS delay recognition in net income of unrealized gains and losses on derivatives hedging
Suggest reasons why a firm would acquire a derivative and not treat it as an accounting hedge.
Adopting the fair value option for marketable securities and derivatives collapses the accounting methods discussed in this chapter to a single accounting method. Do you agree? Why or why not?
Classifying securities. Firms that do not elect the fair value option classify marketable securities along two dimensions:• Purpose of investment: debt securities held to maturity, trading securities, or securities available for sale.• Length of expected holding period: current asset
Accounting principles for marketable securities and derivations. For each of the items a to d below describe its accounting using one of the following four systems, assuming that the firm does not elect the fair value option:(1) Measured at fair value with changes recognized in net income.(2)
Accounting for bonds held to maturity. Murray Company acquired $ 100.000 face value of the outstanding bonds of Campbell Company on January 1. 2008. The bonds pay interest semiannually on June 30 and December 31 at an annual rate of 6% and mature on December 31, 2011. The market priced these bonds
Accounting for bonds held to maturity. Kelly Company acquired $500.000 face value of the outstanding bonds of Steedly Company on January 1 2008. The bonds pay interest semiannually on June 30 and December 31 at an annual rate of 7% and mature on December 31, 2010. The bonds were priced on the
Accounting for securities available for sale. Events related to Elston Corporation's investments of temporarily excess cash appear below. The firm classifies these investments as securities available for sale and does not adopt the fair value option.Elston received no dividends on Security A. It
Accounting for securities available for sale. Events related to Simmons Corporation's investments of temporarily excess cash appear below. The firm classifies these investments as securities available for sale and does not elect the fair value option.None of these three securities paid dividends.
Working backward from data on marketable securities transaction. (Adapted from a problem by S.A. Zeff.) During 2008, Fischer/Black Co. purchased equity securities classified as securities available for sale. On May 22, 2009, the company recorded the following correct journal entry to record the
Working backward from data on marketable securities transaction. (Adapted from a problem by S. A. Zeff.) On December 12, 2008, Canning purchased 2,000 shares of Werther. By December 31, the market price of these shares had dropped by $1,000. On March 2, 2009, Canning sold the 2,000 shares for
Reconstructing events from journal entries. Give the likely transaction or event that would result in making each of the independent journal entries thatfollow:
Reconstructing transactions involving short-term securities available for sale. During 2008, Zeff Corporation sold marketable securities for $14,000 that had a carrying value of $13,000 at the time of sale. The financial statements of Zeff Corporation reveal the following information with respect
Accounting for forward foreign exchange contract is a fair value hedge. On September 1, 2008, Turner Corporation places an order with a Japanese supplier for manufacturing equipment for delivery on June 30, 2009. The purchase is denominated in Japanese yen in the amount of ¥5,200,000. Turner
Accounting for forward foreign exchange contract as a cash flow hedge. On October 1, 2008, Riddle Corporation purchases equipment from a supplier in France on account at a purchase price of €40,000 and denominates the transaction in euros. Biddle Corporation must pay the €40,000 on
Journal entries and financial statement presentation of short-term securities available for sale. The following information summarizes data about Dostal Corporation's marketable securities held as current assets and classified as securities available for sale:a. Give all journal entries relating to
Journal entries and financial statement presentation of long-term securities available for sale. The following information summarizes data about Rice Corporation's investments in equity securities held as noncurrent assets and classified as securities available for sale:a. Give all journal entries
Analysis of financial statement disclosures for securities available for sale. Exhibit 12.9 reproduces data about the marketable equity securities held as securities available for sale for Moonlight Mining Company. Assume that Moonlight held no current market-able securities at the end of 2008,
Effect of various methods of accounting for marketable equity securities. Information related to marketable equity securities of Callahan Corporation appears on the next page.a. Assume that these securities are trading securities Indicate the nature and amount of income recognized during 2008 and
Analysis of financial statement disclosures related to marketable securities and quality of earnings. A commercial bank reports the following information relating to its marketable securities classified as securities available for sale for a recent year (amounts in millions):Cash proceeds from
Accounting for forward commodity price contract as a cash flow hedge. Refer to Examples 15 and 19 in the chapter. Firm D holds 10,000 gallons of whiskey in inventory on October 31, 2008, that costs $225 per gallon. Firm D contemplates selling the whiskey On March 31, 2009, when it completes the
Accounting for forward foreign exchange contract as a fair value hedge and a cash flow hedge. On October 1, 2008, Owens Corporation places an order with a European supplier for manufacturing equipment for delivery on June 30, 2009. The purchase is denominated in euros in the amount of
Accounting for an interest rate snap as a fair value hedge. Sandretto Corporation issues a note payable on January 1, 2008, to a supplier in return for equipment. The note has a face value of $50,000 and bears interest at 6% each year. Interest is payable annually on December 31, and the note
Accounting for an interest rate swap as a cash flow hedge. Avery Corporation issues a note payable on January 1, 2008, to a supplier in return for equipment. The note has a face value of $50.000 and bears interest at a variable interest rate; the variable interest rate is 6% on January 1, 2008.
Distinguish between significant influence and control, and describe how these concepts relate to the method of accounting for intercorporate investments.
“Dividends received or receivable from another company are a revenue in calculating net income, a return of investment, or eliminated, depending on the method of accounting the investor uses.” Explain.
Describe the rationale for why an investor using the equity method must amortize any excess purchase price attributable to undervalued assets with a limited life.
Describe the rationale for why an investor using the equity method must eliminate any intercompany profit or loss on transactions between the investor and the investee.
Describe the rationale for why an investor using the equity method must recognize its share of Other Comprehensive Income of the investee.
Why is the equity method sometimes described as a one-line consolidation? Consider both the balance sheet and the income statement in your response.
“Accounting for an investment in a subsidiary using the equity method and not consolidating it yields the same net income as consolidating the subsidiary. Total assets will differ, however, depending on whether or not the investor consolidates the subsidiary.” Explain.
Distinguish between minority investments in other companies and the non-controlling, or minority, interest in a consolidated subsidiary.
Define the concept of an economic entity and explain its importance in preparing consolidated financial statements of a parent company with its controlled subsidiaries.
The investment in Subsidiary account is an asset. Why must an investor eliminate this account when preparing consolidated financial statements with the subsidiary?
Distinguish between the non-controlling, or minority, interest in net income and the non- controlling, or minority, interest in net assets of a consolidated subsidiary
Does accounting for an investment in a joint venture using (1) the equity method or (2) proportionate consolidation reflect better the nature of the relation between each joint owner and the joint venture? Explain, giving examples as needed to support your reasoning.
Under what circumstances might majority ownership of another entity not serve as an indicator of control?
Equity method entries. Hanna Company purchased 100% of the common stock of Denver Company on January 2 for $550,000. The common stock of Denver Company at this date was $200,000, and the retained earnings balance was $350,000. During the year, net income of Denver Company was $120,000 and dividends
Equity method entries. Weber Corporation acquired significant influence over Albee Computer Company on January 2 by purchasing 20% of its outstanding stock for $100 million. Weber Corporation attributes the entire excess of acquisition cost over the carrying value of Albee Computer Company's net
Journal entries to apply the equity method of accounting for investments in securities. Wood Corporation made three long-term inter-corporate investments on January 2. Data relating to these investments for the year appear next.Give the journal entries to record the acquisition of these investments
Journal entries to apply the equity method of accounting for investment in securities. The following information summarizes data about the minority, active investments of Stebbins Corporation.Company R owns a building with 10 years of remaining life and with a fair value exceeding its carrying
Working backward to consolidation relations. Laesch Company, as parent, owns shares in Lily Company. Laesch has owned the shares since it formed Lily. Lily has never declared a dividend. Laesch has retained earnings from its own Operations independent of inter-corporate investments of $100,000. The
Working backward from consolidated income statements. Dealco Corporation published a consolidated income statement for the year, shown in Exhibit 13.10. The unconsolidated affiliate retained 25% of its earnings of $140 million during the year, having paid out the rest as dividends. The consolidated
Conso1idation policy and principal consolidation concepts. CAR Corporation manufactures computers in the United States. It owns 75% of the voting stock of Charles Electronics, 80% of the voting stock of Alexandre du France Software Systems (in France), and 90% of the voting stock of R Credit
Equity method entries. Vogel Company is a subsidiary of Joyce Company. Joyce Company accounts for its investment in Vogel Company using the equity method on its single- company books Present journal entries for the following selected transactions. Record the set of entries on the books of Vogel
Working backward from data that has eliminated intercompany transactions. (Adapted from a problem by S. A. Zeff.) Alpha owns 100% of Omega and consolidates Omega in an entity called Alpha/Omega. Beginning in 2008, Alpha sold merchandise to Omega at a price 50% larger than Alpha€™s costs
Working backward from purchase data. (Adapted from a problem by S. A. Zeff.) On May 1, 2008, Homer acquired the assets and agreed to take on and pay off the liabilities of Tonga in exchange for 10,000 of Homers common shares. Homer accounted for the acquisition of the net assets of Tonga using the
Effect of equity method versus consolidation. Exhibit 13.11 presents a spreadsheet that we use to compare the effects of using the equity method with using consolidated financial statement. The Web site for this book contains an Excel spreadsheet that duplicates the one in Exhibit 13.11. Download
Effect of errors on financial statements. Using the notation O/S (overstated), U/S (understated), or NO (no effect), indicate the effects on assets, liabilities, shareholders equity, and net income of each of the independent errors that follow. Ignore income tax effects.a. In applying the equity
Accounting for a joint venture. Exhibit 13.12 presents selected balance sheet data for Parrot Corporation and for a joint venture in which it has a 50% ownership interest.a. Prepare a balance sheet of Parrot Corporation in which it accounts for its investment in the joint venture using
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