UNIVERSITA BOCCONI

Department of Accounting

Accounting and Financial Statement Analysis 30005

REVIEW SESSION N5

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Chapter 11

Exercise 1 Which of the following entries would be recorded when a company reissues 1,000 shares of treasury stock for $50 per share when they were repurchased at a cost of $47 per share and have a $1 par value?

A. Cash 50,000 Treasury Stock 47,000 Capital in excess of par value 3,000 B. Cash 50,000 Treasury Stock 47,000 Retained Earnings 3,000 C. Cash 50,000 Common Stock 1,000 Capital in excess of par value 49,000 D. Cash 50,000 Treasury Stock 47,000 Gain on sale of treasury stock 3,000

Exercise 2 Slickers, Inc. had the following capital structure during 2010:

Preferred stock, 7%, $50 par value, 1,000 shares issued and outstanding with dividends in arrears for 2008 and 2009.

Common stock, $100 par value, 2,000 shares issued and outstanding.

The total dividends declared and paid during 2010 totaled $25,000. How much of the dividend is paid to the common stockholders during 2010 assuming the preferred stock is cumulative?

A. $3,500

B. $7,000

C. $22,500

D. $14,500

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Exercise 3 DORA Company declared and distributed a 10% stock dividend on 20,000 shares of issued and outstanding $5 par value common stock. The market price per share on the declaration date was $9 and was $10 on the distribution date. Which of the following correctly describes the accounting for the declaration and distribution of the stock dividend?

A. Retained earnings decreased $20,000.

B. Capital in excess of par increased $10,000.

C. Common stock increased $18,000.

D. Retained earnings decreased $18,000.

Exercise 4 On January 1, 2010, the stockholders' equity section of Gibbons Corporation's balance sheet reported the following:

Common Stock, par $10, authorized 100,000 shares, Issued 10,000 shares $ 100,000

Capital in excess of par value 50,000 Retained Earnings 160,000

During 2010, the following selected transactions occurred (assume they occurred in the order given):

(1) Issued a 10% stock dividend; 1,000 shares issued when the market price was $12.

(2) 200 shares of treasury stock were purchased at $11 per share.

(3) Declared and paid a cash dividend of $19,800.

(4) Net income was $30,000.

Prepare the stockholders' equity section of the balance sheet as of December 31, 2010.

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Exercise 5 Wedge Corporation has the following capital stock outstanding:

$1 par value common stock, 250,000 shares.

8% preferred stock, par $100, 5,000 shares, cumulative, with 2 years in arrears. Cash dividends of $150,000 were declared and paid near the end of the current year.

Requirements:

A. Calculate the dividends received by the preferred stockholders.

B. Calculate the dividends received by the common stockholders.

Exercise 6

On January 1, 2010, the accounts of Mac Corporation showed the following:

Common Stock, par $1, authorized 100,000 shares ? Capital in excess of par value ($2 per share) 60,000 Retained Earnings 140,000

During 2010, the following transactions occurred affecting stockholders' equity (in the order given):

A. Issued a 100% stock dividend when the market price was at $5 per share.

B. Purchased treasury stock, 1,000 shares at a total cost of $8,000.

C. Declared and paid cash dividends, $15,000.

D. Net income for 2010, $25,000.

Required: The stockholders' equity section of the balance sheet for the company must be prepared for the December 31, 2010 balance sheet. It is given below with certain amounts missing. Supply the missing amounts by entering them in the blanks.

STOCKHOLDERS EQUITY

(1) Common Stock, par $1 authorized shares 100,000, Shares issued _________________________

(2) $ _____________________

Capital in excess of par value (3) $ _____________________ Total Contributed Capital (4) $ _____________________ Retained Earnings (5) $ _____________________ (6) Treasury Stock, shares _____________________ (7) $ _____________________ Total Stockholders equity (8) $ _____________________

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Exercise 7 WorldWide Transport, Incorporated, was issued a charter on 1st January 2015, that authorized the following capital stock:

- Common stock, no-par, 93,000 shares;

- Preferred stock, 5 percent, par value 10 per share, 4,750 shares.

The board of directors established a stated value on the no-par common stock of 12 per share. During 2015, the following selected transactions were completed in the order given:

a. Sold and issue 15,000 shares of the no-par common stock at 27 cash per share;

b. Sold and issue 2,000 shares of preferred stock at 25 cash per share;

c. Declared and paid preferred dividends in the amount of 4 per share;

d. Declared and paid dividends on common stock in the amount of 2 per share;

e. At the end of 2015, the accounts showed net income of 60,000.

Required:

1. Prepare a journal entry to record the above transactions.

2. Prepare the stockholders equity section of the balance sheet at December 31, 2015.

3. Assume that you are a common stockholder. If WorldWide Transport needed additional capital, would you prefer to have it issue additional common stock or additional preferred stock? Explain.

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Appendix E

Exercise 1 Libby Company purchased equity securities for $100,000 and classified them as available-for-sale securities on September 15, 2010. At December 31, 2010, the current market value of the securities was $105,000. How should the investment be reported in the 2010 financial statements?

A. The investment in available-for-sale securities would be reported on the balance sheet at its $100,000 cost.

B. The $5,000 unrealized gain is reported within the income statement.

C. The $5,000 realized gain is reported within the income statement.

D. The investment in available for sale securities would be reported in the balance sheet at its $105,000 market value and an unrealized holding gain on available-for-sale securities would be reported in the stockholders' equity section of the balance sheet.

Exercise 2

Rye Company purchased 15% of Lena Company's common stock during 2010 for $150,000. The 15% investment in Lena had a $160,000 fair value at the end of 2010 and a $140,000 fair value at the end of 2011. Which of the following statements is correct if Rye classifies the investment as an available-for-sale security and sold it at the beginning of 2012 for $148,000?

A. The 2012 realized loss reported on the income statement is $2,000.

B. The 2012 realized gain reported on the income statement is $8,000.

C. The 2012 unrealized gain reported on the income statement is $8,000.

D. The 2012 unrealized loss reported on the income statement is $2,000.

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Exercise 3 On March 1, 2011, Young Company purchased the following stock as long-term investments in available-for-sale securities:

- Old Corporation common stock (par $5), 2,000 shares at $5 per share (10% of outstanding shares);

- ABC Corporation common stock (par $10), 3,000 shares at $25 per share (15% of outstanding shares);

- XYZ Corporation common stock (par $10), 3,000 shares at $20 per share (10% of outstanding shares).

The market prices per share at December 31, end of the accounting period, were as follows:

Stock Dec. 31, 2011 Dec. 31, 2012 Old Common $ 6 $ 7 ABC Common $ 24 $ 25 XYZ Common $ 21 $ 17

Prepare the required journal entries at the following dates: March 1, 2011, December 31, 2011 and December 31, 2012.

Exercise 4 Orleans Corporation purchased 1,000,000 shares of Creole Corporation's common stock which constitutes 10% of Creole's voting stock on June 30, 2010 for $42 per share. Orleans' intent is to keep these shares beyond the current year. On December 20, 2010, Creole paid a $4,000,000 cash dividend. On December 31, 2010, Creole's stock was trading at $45 per share and their reported 2010 net income was $52 million.

A. Record the transaction to record the acquisition of Creole Corporation on June 30, 2010.

B. Record the transaction for the dividend received by Orleans on December 20, 2010.

C. Record any year-end entries needed by Orleans Corporation.

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Exercise 5 On January 1, 2010, Alden Company acquired 15,000 shares of the nonvoting common stock of Maxim Corporation as a long-term investment. Maxim reported a 2010 net income of $35,000. On January 2, 2011, Maxim declared and paid a $10,000 cash dividend. The market value of the Maxim stock held by Alden on December 31, 2010, was $224,000. Alden Company has recorded only the following journal entries:

January 1, 2010: Long-term investment, Maxim stock (15,000 shares) 225,000 Cash 225,000 December 31, 2010 (end of the accounting period): No Entry January 2, 2011: Cash 400 Investment Income 400

Based on the above information, answer the following questions:

A. What method did Alden use to account for the investment?

B. Did Alden fail to make an adjusting entry on December 31, 2010?

C. Assuming the market value method is used; calculate the valuation of the net investment on January 3, 2011.

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Exercise 6 Company A purchased a certain number of Company Bs outstanding voting shares at 35 per share as a long-term investment. Company B had outstanding 46,000 shares of 20 par value stock. Complete the following table relating to the measurement and reporting by Company A after acquisition of the shares of Company B stock.

Please answer the questions below considering the following assumptions:

Parameter Scenario A Scenario B

Number of shares acquired of Company B stock 6,900 13,800

Net income reported by Company B in first year 48,000 48,000

Dividends declared by Company B in first year 16,000 16,000

Market price at end of first year, Company B stock 32 32

Questions:

Fair Value Method

Equity Method

a. What level of ownership by Company A of Company B is required to apply the method? % - % % - %

b. At acquisition, the investment account on the books of Company A should be debited at what amount?

c. When should Company A recognize revenue earned on the stock of Company B? Explanation required.

d. After the acquisition date, how should Company A change the balance of the investment account with respect to the stock owned in Company B (other than for disposal of the investment)? Explanation required.

e. What is the balance in the investment account on the balance sheet of Company A at the end of the fisrt year?

f. What amount of revenue from the investment in Company B should Company A report at the end of the first year?

g. What amount of unrealized loss should Company A report at the end of the first year?

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Exercise 1Exercise 2Exercise 3Exercise 4Exercise 5Exercise 6Exercise 7Exercise 1Exercise 2Exercise 3Exercise 4Exercise 5Exercise 6