Intermediate Accounting II, ACCT 3322

Review Questions for Final Exam

1. On September 1, 2002, Spencer Company stock was selling for $60 per shares. The
companys capital accounts were as follows:
Capital stock (par value, $25, 50,000 shares issued and outstanding
Additional paid-in capital
Retained earnings
Total stockholders' equity

1,250,000
800,000
3,200,000
5,250,000

On September 1, 2002, the company declared and distributed a 50% stock dividend and the par
value of the stock remained at $25 per share. What would the balance be in the capital stock
account after the dividend distribution?
Analysis of capital stock:
Number of shares outstanding
Dividend rate
Additional shares issued
Par value
Increase in common stock account
Original balance
Final balance

50,000
50%
25,000
$25
625,000
1,250,000
$1,875,000

2. The stockholders equity of Spencer Company at June 30, 2002 is as follows:

Common stock, par value $25, 400,000 shares authorized,

200,000 shares issued and outstanding
Additional paid-in capital
Retained earnings
Total stockholders' equity

5,000,000
1,500,000
6,000,000
12,500,000

On July 1, 2002, the board of directors of Spencer Company declared a 15% stock dividend on
common stock, to be distributed on August 15, 2002. The market price of Spencer Companys
stock was $35 on July 1, 2002 and $40 on August 15, 2002. What is the amount of the debit to
retained earnings as a result of the declaration and distribution of this stock dividend?
Analysis of charge to retained earnings:
Number of shares issued and outstanding
Small stock dividend
Shares of small stock dividend
Market value at declaration date
Charge to retained earnings

200,000
15%
30,000
$35
$1,050,000

3. Spencer Company accepted a share purchase contract for 50,000 shares of $25 par value
common stock on June 30, 2002 when the stock was selling for $50 per share. A 40% down
payment was received with the remainder due in six months. On December 30, 2002, the
balance of the share purchase contract is received and the shares are issued. Prepare the
journal entries for June 30, 2002 and December 31, 2002.
DATE
ACCOUNT
6/30/02 Share purchase contract receivable
Common stock
Paid-in capital, common stock
Analysis of paid-in capital, common stock:
Number of shares subscribed
Market value per share
Par value
Paid-in capital, Common stock
DATE
ACCOUNT
6/30/02 Cash
Share purchase contract receivable
Analysis of cash receipts:
Share purchase contract receivable
Percentage down payment
Cash received
DATE
ACCOUNT
12/31/02 Cash
Share purchase contract receivable

DEBIT
$2,500,000

CREDIT
$1,250,000
1,250,000

50,000
$50 $2,500,000
25 1,250,000
$1,250,000
DEBIT
$1,000,000

CREDIT
$1,000,000

$2,500,000
40%
$1,000,000
DEBIT
$1,500,000

CREDIT
$1,500,000

4. On June 30, 2002 Spencer Company issued $50 par value common shares which was recorded
in the accounting records as follows:
ACCOUNT
Cash
Common stock
Additional paid-in capital

DEBIT
500,000

CREDIT
200,000
300,000

The following transactions took place during the remainder of the year.
On July 15 the company bought 100 shares of common stock as treasury stock at $150
On August 1 the company sold 30 shares of treasury stock at $140.
On August 15 the company sold 30 shares of treasury stock at $155
On September 30 the company retired 40 shares of treasury stock

Prepare the journal entries to record the treasury stock transactions that took place during 2002.
DATE
ACCOUNT
7/15/02 Treasury stock
Cash

DEBIT
15,000

DATE
ACCOUNT
8/1/02 Cash
Retained earnings
Treasury stock

DEBIT
4,200
300

DATE
ACCOUNT
8/15/02 Cash
Treasury stock
Paid-in capital, treasury stock

DEBIT
4,650

DATE
ACCOUNT
9/30/02 Common stock
Paid-in capital, common stock
Paid-in capital, treasury stock
Retained earnings
Treasury stock

DEBIT
2,000
3,000
150
850

CREDIT
15,000
CREDIT

4,500
CREDIT
4,500
150
CREDIT

6,000

5. Spencer Company has $400,000 of 5% preferred stock and $600,000 of common stock
outstanding, each having a par value of $10 per share. No dividends have been paid or
declared during 2000 and 2001. As of December 31, 2002, the company has decided to
distribute $300,000 in dividends. If the preferred stock is cumulative and fully participating
how much will be distributed to the common stockholders and how much will be distributed to
the preferred stockholders?

Description
Preferred stock, $400,000 * 5%
In arrears for 2000
In arrears for 2001
Dividends for 2002

Preferred
$20,000
20,000
20,000

Common stock, $600,000

Dividends for 2002
$600,000 * 5%
Participating dividends: ($300,000-$90,000)
Preferred dividends
400,000/1,000,000 * $210,000
Common dividends
600,000/1,000,000 * $210,000

Common

$20,000
20,000
20,000

$30,000

84,000

$144,000

Total

30,000

84,000
126,000
$156,000

126,000
$300,000

6. On November 1, 2002, Spencer Company issued at 102, three hundred of its 10%, $1,000
bonds. Attached to each bond was one detachable stock warrant entitling the holder to
purchase 10 shares of Spencer Companys common stock. On November 1, 2002 the market
value of the bonds, without the stock warrants, was 99, and the market value of each stock
warrant was $40. The amount of the proceeds from the issuance that should be accounted for
as the initial carrying value of the bonds payable would be.
Selling price of bonds with warrants:
Face amount
Number of bonds
Total face value
Sold at
Selling price

$1,000
300
300,000
102

Market value of bonds:

Face amount
Number of bonds
Total face value
Market ratio
Market value

$1,000
300
300,000
99

Market value of stock warrants:

Number of warrants
Market value per share
Market value

$306,000

$297,000

300
$40
$12,000

FMV
$297,000
12,000
$309,000

Bonds
Warrants
Total
Carrying value of bonds payable:
Bonds payable
Discount on bonds payable
Carrying value of bonds payable
Account
Cash
Bond payable
Discount on bonds payable
Stock Warrants

%
96.12%
3.88%
100%

Cost
$294,117
11,883
$306,000

$300,000
5,883
$294,117
Debit
$306,000

Credit
$300,000

5,883
11,883

7. On January 1, 2002 Spencer Company had 300,000 shares of common stock issued and
outstanding. On September 1, 2002 the company issued an additional 150,000 shares of
common stock. Net income for the year ended December 31, 2002 was $500,000. What were
the earnings per share for the year ended December 31, 2002?
Date
Shares
# Shares
1/1/02 Beginning balance
300,000
9/1/02 Issued shares
150,000
Adjusted balance
450,000
Weighted average number of shares outstanding
Net income
Weighted average common shares
Basic EPS

Period
Wgt. Avg.
8/12
200,000
4/12

150,000
350,000

$500,000
350,000
$1.43

8. On January 1, 2000, Spencer Company issued at par $400,000 10% convertible bonds. Each
$1,000 bond is convertible into 40 shares of common stock. No bonds were converted during
2000. The company had 50,000 shares of common stock outstanding during 2000. Net
income for the year was $160,000 and the income tax rate was 30%. Calculate Spencer
Companys diluted earnings per share for 2000.
Diluted EPS:
Recalculated net income
Diluted number of shares
Diluted EPS

$188,000
66,000
$2.85

Diluted number of shares:

Face value of bonds
Par value of each bond
Number of bonds
Conversion ratio to common stock
Number of common shares in dilution
Shares issued and outstanding
Total diluted number of shares
Recalculated diluted earnings:
Net income
Bond interest expense:
Fact value of bonds
Interest rate
Annual interest
Less: income tax (30%)
Bond interest net of tax
Recalculated income available to common

$400,000
1,000
400
40
16,000
50,000
66,000

160,000
$400,000
10%
40,000
12,000
28,000
$188,000

9. During 1999 Spencer Co. purchased 1,000, $1,000, 9% bonds. The carrying value of the bonds
at December 31, 2001 was $980,000. The bonds mature on March 1, 2006, and pay interest on
March 1 and September 1. Spencer Co. sells 500 bonds on September 1, 2002, for $494,000,
after the interest has been received. Spencer uses straight-line amortization. Calculate the gain
on the sale of the bonds.

Analysis of gain on sale:

Carrying value of bonds at 9/1/02
Percentage of bonds sold
Carrying value of bonds sold
Selling price of bonds
Gain on sale of bonds
Carrying value of bonds at 9/1/02:
Face value of bonds
Carrying value of bonds on 12/31/01
Unamortized discount
Number of months
Monthly amortization of discount
Months to 9/1/02
Amortization of discount
Unamortized discount at 9/1/02
Face value of bonds
Carrying value of bonds on 9/1/02

$983,200
50%
$491,600
494,000
$2,400

$1,000,000
980,000
20,000
50
400
8
3,200
($16,800)
1,000,000
$983,200

10. The following differences enter into the reconciliation of financial income and taxable income
for Spencer Company for the year ended December 31, 2000. The enacted income tax rate is
30% for all years.
Pretax accounting income
Excess tax depreciation
Litigation accrual
Unearned rent revenue
Interest earned on municipal bonds
Taxable income

$450,000
(240,000)
35,000
25,000
(10,000)
$260,000

The unearned revenue is deferred on the books but appropriately recognized in taxable income.
Excess tax depreciation will reverse equally over a four-year period. It is estimated that the
litigation liability will be paid in 2005. Rent revenue will be recognized during the last year of
the lease which is 2005. Interest revenue from the Texas bonds is expected to be $10,000 each
year until their maturity at the end of 2005. The balance in the deferred tax accounts at January
1, 2000 are as follows:

Deferred tax assets

Deferred tax liabilities

DR (CR)
$22,000
($50,000)

Prepare a schedule of deferred tax (assets) and liabilities for December 31, 2000.

Schedule of Deferred Tax Asset and (Liability):

Deferred Tax
Future
Amounts
Temporary Differences:
Tax Rate
Asset
Liability
Depreciation
($240,000)
30%
($72,000)
Litigation
35,000
30%
$10,500
Unearned rent
25,000
30%
7,500
Totals
($180,000)
$18,000
($72,000)

Prepare T-accounts to analyze the changes in deferred tax assets and deferred tax liabilities for
the year of 2000.
T-Account Analysis: Deferred Tax Asset
Description
Debit
Beginning balance
22,000
AJE deferred tax expense for 2000
Required ending balance
$18,000
T-Account Analysis: Deferred Tax Liability
Description
Debit
Beginning balance
AJE deferred tax expense for 2000
Required ending balance

Credit
$4,000

Credit
$50,000
22,000
$72,000

Prepare the schedule of net deferred tax expense for the year ended December 31, 2000.
Schedule of Net Deferred Tax Expense
Deferred tax expense (deferred tax asset)
$4,000
Deferred tax expense (deferred tax liability)
22,000
Net deferred tax expense

$26,000

Calculate income tax payable for the year ended December 31, 2000.

Taxable income
Tax rate
Income tax payable

Analysis of Income Tax Payable

$260,000
30%
$78,000

Calculate income tax expense for the year ended December 31, 2000.
Analysis of Income Tax Expense
Deferred tax expense
$26,000
Current tax expense
78,000
Total income tax expense

$104,000

Prepare the journal entry to record income tax expense, changes in deferred tax assets and
liabilities and income tax payable.
Account
Income tax expense
Deferred tax asset
Deferred tax liability
Income tax payable

Debit
$104,000

Credit
$4,000
22,000
78,000

11. On January 1, 2001, Spencer Company signs a 10-year noncancelable lease agreement to lease
a warehouse from Texas Warehouse Company. Collectibility of lease payments is reasonably
predictable and no important uncertainties surround the amount of costs yet to be incurred by
the lessor. The following information pertains to this lease agreement.
9 The agreement requires equal rental payments at the end of each year.
9 The fair value of the building on January 1, 2001 is $900,000; however, the book value
to Texas is $750,000.
9 The building has an estimated economic life of 10 years, with no residual value.
Spencer depreciates similar buildings on the straight-line method.
9 At the termination of the lease, the title to the building will be transferred to the lessee.
9 Spencers incremental borrowing rate is 11% per year. Texas Warehouse Co. set the
annual rental to insure a 10% rate of return. The implicit rate of the lessor is known by
Spencer Company.
9 The yearly rental payment includes $3,000 of executory costs related to taxes on the
property.
Calculate the minimum annual lease payment? (Rounded to the nearest dollar.)
Analysis of Minimum Annual Lease Payments
PVOA = R * T(pvoa)
$900,000 = R * 6.14457
R = $900,000/6.14457
R = $146,471
$146,471

10

What is the amount of the total annual lease payment?

Analysis of the Annual Lease Payment
Minimum lease payment
$146,471
Executory costs
3,000
Annual lease payment

$149,471

Calculate the depreciation expense that Spencer Company would record for the year ended
December 31, 2001 (Rounded to the nearest dollar.)
Analysis of Annual Depreciation Expense
PV of minimum lease payments
$900,000
Service life of building
10
Annual depreciation

$90,000

12. Spencer Company enters into a lease agreement on June 30, 2001 to lease manufacturing
equipment. The lease agreement has the following terms and conditions.
9 The term of the noncancelable lease is 8 years, with no renewal option. An initial
payment of $150,000 was paid at the signing of the lease. Annual payments of
$150,000 are due on June 30th of each year.
9 The normal retail price of the equipment is approximately $880,000. The equipment
has an economic life of 10 years.
9 The company normally depreciates manufacturing equipment on a straight-line basis.
9 The lessee pays all executory costs.
9 Spencer Companys incremental borrowing rate is 12% per year. The lessee is aware
that the lessor used an implicit rate of 10% in computing the lease payments.
Calculate the present value of the minimum lease payments.
Minimum lease payment
PVAD, n=8, i=10%
PV of minimum lease payments

$150,000
5.86842
$880,263

11

Prepare a lease amortization schedule.

DATE
6/30/01
6/30/01
6/30/02
6/30/03
6/30/04
6/30/05
6/30/06
6/30/07
6/30/08

PAYMENT

INTEREST

$150,000
150,000
150,000
150,000
150,000
150,000
150,000
150,000

$0
73,026
65,329
56,862
47,548
37,303
26,033
13,636

PRINCIPLE
$150,000
76,974
84,671
93,138
102,452
112,697
123,967
136,364

BALANCE
$880,263
730,263
653,289
568,618
475,480
373,028
260,331
136,364
0

Prepare the journal entries on June 30, 2001.

Date
6/30/01

6/30/01

Account
Equipment under capital lease
Obligation under capital lease

Debit
$880,263

Obligation under capital lease

Cash

$150,000

Credit
$880,263

$150,000

Prepare the journal entries for December 31, 2001

Date
Account
12/31/01 Interest expense
Interest payable
Analysis of interest expense:
Interest on June 2002 payment
Months in short period
Interest accrual at 12/31/01
12/31/01 Depreciation expense
Accumulated depreciation
Analysis of depreciation expense:
PV of minimum lease payments
Service life of lease
Annual depreciation
Short period
Depreciation accrual at 12/31/01

Debit
$36,513

Credit
$36,513

$73,026
6/12
$36,513
$55,016
$55,016

$880,263
8
110,033
6/12
$55,016

12

13. Spencer Company purchased machinery that cost $135,000 on January 4, 2000. The entire cost
was recorded as an expense. The machinery has a nine-year life and a $9,000 residual value.
The error was discovered on December 20, 2002. Ignore income tax considerations.
How will it be reported on Spencer Companys income statement for the year ended December
31, 2002?

The purchase of the machinery will not be reported on the income statement.
Prepare the journal entries for December 20, 2002 and December 31, 2002.
Date
Account
12/20/02 Machinery
Accumulated depreciation
Retained earnings
Analysis of correction of error:
Cost of machinery
Salvage value
Depreciable base
Service life
Annual depreciation
Years since error
Accumulated depreciation
Adjustment to retained earnings
Date
Account
12/31/02 Depreciation expense
Accumulated depreciation

Debit
$135,000

Credit
$28,000
107,000

$135,000
9,000
126,000
9
14,000
2
28,000
$107,000
Debit
$14,000

Credit
$14,000

14. The following are the comparative balance sheets for Spencer Company for the years ended
December 31, 2002 and 2001. Addition information regarding the activities of the company
during 2002 are as follows:
(1) Net income for the year was $84,000.
(2) Cash dividends amounting to 6% of the par value of the common stock were declared and
paid.
(3) Land was sold for $80,000.
(4) The company sold equipment, which cost $150,000 and had accumulated depreciation of
$60,000, for $70,000.

13

Spencer Company
Cash Flow Worksheet
December 31,

Cash
Accounts receivable (net)
Inventory
Land
Building
Accumulated depreciation
Equipment
Accumulated depreciation
Accounts payable
Bonds payable
Capital stock, $10 par
Retained earnings

2002
$43,000

2001
$24,000

35,000
114,000
120,000
200,000
(50,000)
1,030,000
(118,000)
(115,000)
(320,000)
(750,000)
(189,000)
$0

38,000
82,000
190,000
200,000
(40,000)
600,000
(94,000)
(100,000)
0
(750,000)
(150,000)
$0

Calculate the cash provided by (used by) operating activities.

Cash flow from operating activities:
Net income
Depreciation
Decrease in accounts receivable
Increase in inventory
Increase in accounts payable
Less gain on sale of land
Plus loss on sale of equipment
Net cash provided by operating activities

$84,000
$94,000
3,000
(32,000)
15,000
(10,000)
20,000

90,000
$174,000

Calculate the cash provided by (used by) investing activities.

Cash flow from investing activities:
Cash received from sale of land
Cash received from sale of equipment
Cash paid for equipment
Net cash used in investing activities

$80,000
70,000
(580,000)
($430,000)

14

Calculate the cash provided by (used by) financing activities.

Cash flow from financing activities:

Cash received from sale of bonds
Cash paid for dividends
Net cash provided by financing activities

$320,000
(45,000)
$275,000

15. Pension data for the Ben Franklin Company include the following for the current
calendar year:
Discount rate
Expected return on plan assets
Actual return on plan assets
Service Cost
January 1:
PBO
ABO
Plan assets
Amortization of prior service cost
Amortization of net gain
December 31:
Cash contributions to pension fund
Benefit payments to retirees

8%
10%
9%
$200,000

1,400,000
1,000,000
1,500,000
20,000
4,000
220,000
240,000

15

Calculate pension expense for the year.

Pension Expense
Service cost
Interest cost
Expected return
Amortization of prior service cost
Amortization of net gain
Pension expense

$200,000
112,000
(150,000)
20,000
(4,000)
$178,000

Analysis of interest cost:

PBO
Discount rate
Interest cost

$1,400,000
8%

Analysis of expected return:

Plan assets
Expected return rate on plan assets
Expected return

$1,500,000
10%

$112,000

$150,000

Prepare the journal entry to record pension expense and funding for the year.

Account
Pension expense
Prepaid (accrued) pension cost
Cash

Debit
$178,000
42,000

Credit

$220,000

16

16. Carolina Consulting Company has a defined benefit pension plan. The following
pension-related data were available for the current calendar year:

PBO:
Balance, January 1, 2003
Service cost
Interest cost
Gain from changes in accurial assumptions
Benefits paid to retirees
Balance, December 31, 2003
Plan Assets:
Balance, January 1, 2003
Actual return
(expected return was $22,500)
Contributions
Benefits paid
Balance, December 31, 2003

240,000
41,000
12,000
(5,000)
(20,000)
268,000

250,000
20,000
35,000
(20,000)
285,000

ABO, December 31, 2003

January 1, 2003 balances
Prepaid (accrued) pension cost
Unrecognized prior service cost
(amortization $4,000 per year)
Unrecognized net gain
(amortization if any, over 15 years)

245,000

(6,000)
4,000
40,000

17

Calculate the 2003 pension expense. Show calculations.

Pension Expense
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service cost
Amortization of net gain
Pension expense
Analysis of expected return on plan assets:
Actual return on plan assets
Loss on plan assets
Expected return on plan assets
Analysis of amortization of net gain:
Unamortized net gain
Greater of 10% of beginning:
PBO , or
Plan assets
Amount to be amortized
Amortization period
Amortization of net gain

$41,000
12,000
(22,500)
4,000
(1,000)
$33,500

$20,000
2,500
$22,500

$40,000
$240,000
250,000

25,000
15,000
15
$1,000

Prepare the 2003 journal entry to record pension expense and funding.

Account
Pension expense
Prepaid (accrued) pension cost
Cash

Debit
$33,500
1,500

Credit

$35,000

Prepare any 2003 journal entry necessary to record any additional pension liability
needed.

No entry needed since the ABO does not exceed the plan assets

18

17. The following is the pension spreadsheet for the current year for Sparky Corporation.
Complete the following pension spreadsheet.
Net
Prior
Service (Gain)
Plan
Loss
Cost
PBO
Assets
Beginning balance
($400,000) $450,000 $60,000 $55,000
Service cost
(85,000)
Interest cost
(25,000)
Actual return on assets
52,000
(Gain) loss on assets
3,000
Amortization of:
Prior service cost
(6,000)
Net (gain) loss
(1,000)
Loss on PBO
(65,000)
65,000
Contributions to fund
40,000
Retiree benefits paid
250,000 (250,000)
Journal entry
Ending balance
($325,000) $292,000 $54,000 $122,000

Pension
Expense

Cash

Prepaid
(Accrued)
Cost
$165,000

85,000
25,000
(52,000)
(3,000)
6,000
1,000
(40,000)
$62,000 ($40,000)

(22,000)
$143,000

Prepare the journal entry to record pension expense for the year.

Account
Pension expense
Cash
Prepaid (accrued) pension cost

Debit
$62,000

Credit
$40,000
22,000

19

18. O'Brien Company provides postretirement health care benefits to employees who
provide at least 10 years of service and reach the age of 65 while in service. On January
1 of the current year, the following plan-related data were available.
Unrecognized transition obligation
APBO Balance
Fair value of plan assets
Average remaining service period to retirement
Average remaining service period to full eligibility

$40,000
104,000
0
20
15

On January 1 of the current year, O'Brien amends the plan to provide dental benefits.
The actuary determines that the cost of making the amendment increases the APBO by
$10,000. Management chooses to amortize this amount on a straight-line basis. The
service cost is $30,000. The appropriate interest rate is 10%.
Calculate the postretirement benefit expense for the current year.
Postretirement Benefit Expense
Service cost
Interest cost
Return on plan assets
Amortization of transition obligation
Amortization of prior service cost
Postretirement benefit expense
Analysis of interest cost:
Beginning balance APBO
Plan amendment (beginning of year)
Adjusted beginning balance APBO
Interest rate
Interest cost
Analysis of amortization of transition obligation:
Unrecognized transition obligation
Remaining service period to retirement
Amortization of transition obligation
Analysis of amortization of period service cost:
Prior service cost (plan amendment)
Remaining service period to full eligibility

$30,000
11,400
0
2,000
667
$44,067

$104,000
10,000
114,000
10%
$11,400

$40,000
20
$2,000

$10,000
15
$667

20

19. Cartel Products Inc. offers a restricted stock award plan to its vice presidents. On
January 1, 2003, the corporation granted 12 million of its $1 par common shares, subject
to forfeiture if employment is terminated within 2 years. The common shares have a
market value of $6 per share on the date the award is granted.
Assume that no shares are forfeited. Determine the total compensation cost pertaining to the
restricted shares.
Compensation Cost
Shares in restricted stock award
Market value on grant date
Compensation cost

12,000,000
$6
$72,000,000

Prepare the appropriate journal entries related to the restricted stock through December
31, 2004.
Date
Account
12/31/03 Compensation expense
Paid-in capital, restricted stock
Analysis of compensation expense:
Total compensation cost
Period of service
Compensation expense

Debit
$36,000,000

$36,000,000

$72,000,000
2
$36,000,000

12/31/04 Compensation expense

Paid-in capital, restricted stock

$36,000,000

12/31/04 Paid-in capital, restricted stock

Common stock
Paid-in capital, excess of par

$72,000,000

Analysis of paid-in capital, excess of par:

Compensation cost
Shares issued
Par value
Total par value of shares issued
Paid-in capital, excess of par

Credit

$36,000,000

$12,000,000
60,000,000

$72,000,000
12,000,000
$1
12,000,000
$60,000,000

21

20. Olde Corporation provides an executive stock option plan. Under the plan, the company
granted options on January 1, 2003, that permit executives to acquire 2 million of the
company's $1 par value common shares within the next five years, but not before
December 31, 2004 (the vesting date). The exercise price is the market price of the
shares on the date of the grant, $14 per share. The fair value of the options, estimated by
an appropriate option pricing model, is $2 per option. No forfeitures are anticipated.
Ignore taxes.
Determine the total compensation cost pertaining to the options, assuming the fair value
approach has been selected.

Number of options
Fair value of options
Compensation costs

Compensation Costs
2,000,000
$2
$4,000,000

Prepare the appropriate journal entry to record the award of the options on January 1,
2003.

No journal entry on January 1, 2003, date options are granted

Prepare the journal entry to record compensation expense on December 31, 2003.
Date
Account
12/31/03 Compensation expense
Paid-in capital, stock options
Analysis of compensation expense:
Compensation costs
Vesting period
Compensation expense

Debit
$2,000,000

Credit
$2,000,000

$4,000,000
2
$2,000,000

Prepare the journal entry to record compensation expense on December 31, 2004.
Date
Account
12/31/04 Compensation expense
Paid-in capital, stock options

Debit
$2,000,000

Credit
$2,000,000

22

21. Spencer Company sells animal entertainment centers for $2,500 each. The
entertainment centers carry a three year warranty covering parts and labor. The
company has been in business 10 years and has an established stable pattern of warranty
expense. On average the company incurs $50 in labor costs and $10 in parts for each
entertainment center sold. During 2004 Spencer Company sold 500 animal
entertainment centers and incurred warranty costs of $6,000 for labor and $1,200 for
parts. On January 1, 2004 the balance in the Estimated Liability under Warranties
account was $87,500. In the space provided prepare the journal entries required to
record warranty expense and warranty costs incurred for 2004.
Account
Warranty Expense
Estimated Liability under Warranties
To record warranty expense for the year
Analysis of warranty expense:
Warranty expense per unit
Units sold
Warranty expense

Debit
$30,000

Credit
$30,000

$60
500

Account
Debit
Estimated Liability under Warranties
$7,200
Inventory-parts
Labor expense
To record warranty costs incurred during the year

$30,000
Credit
$1,200
6,000

Using the format provided prepare a T-Account analysis of the Estimated Liability
Under Warranties account to determine the balance at year end.
T-Account Analysis: Estimated Liability under Warranties
Description
Debit
Credit
Beginning balance
$87,500
Warranty expense for 2004
30,000
Warranty costs incurred in 2004
$7,200
Ending balance
$110,300

23

22. On September 1, 2004, Spencer Company issued a $500,000, 9-month, non-interestbearing note to the bank. Interest was discounted at a 14% discount rate.
Prepare the appropriate journal entry for Spencer Company to record the issuance of the
non-interest-bearing note.
Date
Account
Debit
Credit
9/1/04 Cash
$447,500
Discount on notes payable
52,500
Notes payable
$500,000
To record the issuance of a 9-month $500,000 note discounted at 14%
Analysis of discount on notes payable:
Face amount
Annual interest rate
Annual interest
Months in short period
Discount on notes payable

$500,000
14%
70,000
9/12
$52,500

In the space provided determine the effective interest rate.

Effective interest rate:
Discount
Cash
Discount for short period
Number of months in short period
Monthly interest rate
Annualized (multiply by 12)
Annualized effective interest rate

52,500
447,500

11.73%

11.73%
9
1.30%
12
15.64%

24

23. On March 1, 1999, Spencer Company issued 1,000, $1,000 9% bonds when the market
interest rate was 10%. The bonds are for 10 years and pay interest on March 1 and
September 1.
Calculate the issue price of the bonds (rounded to the nearest dollar).

Issue price of bonds:

PV of principal amount:
Face amount
PV $1, n = 20; i = 5%
PV of principal

$1,000,000
0.37689
$376,890

PV of annuity:
Face amount
Stated interest rate
Annual interest
Number of payments per year
Annuity
PVOA, n = 20; i = 5%
PV of annuity
Issue price of bonds

$1,000,000
9%
90,000
2
45,000
12.46221
560,799
$937,689

Prepare an amortization schedule through March 1, 2002.

Date
3/1/99
9/1/99
3/1/00
9/1/00
3/1/01
9/1/01
3/1/02

Payment
$45,000
45,000
45,000
45,000
45,000
45,000

Interest
$46,884
46,979
47,078
47,181
47,291
47,405

Amortization
of Discount
$1,884
1,979
2,078
2,181
2,291
2,405

Balance
$937,689
939,573
941,552
943,630
945,811
948,102
950,507

Prepare the journal entries to record the sale of the bonds.

Date
Account
3/1/99 Cash
Discount on bonds payable
Bonds payable

Debit
$937,689
62,311

Credit

$1,000,000

To record the issuance of 1,000, $1,000 9% bonds at an effective interest

rate of 10%.

25

Prepare the journal entry to record interest expense, amortization of discount and payment of
interest on September 1, 1999.
Date
Account
Debit
Credit
9/1/99 Interest expense
$46,884
Discount on bonds payable
$1,884
Cash
45,000
To record the payment of interest and amortization of discount.

Prepare the journal entry to record interest expense, amortization of discount and accrual of
interest on December 31, 1999.

Date
Account
12/31/99 Interest expense
Discount on bonds payable
Interest payable
To accure interest through December 31, 1999.
Analysis of interest expense:
Interest expense 3/1/00
Short period
Interest expense
Analysis of amortization of discount:
Amortization 3/1/00
Short period
Discount on bonds payable
Analysis of interest payable:
Interest payment 3/1/00
Short period
Interest payable

Debit
$31,319

Credit
$1,319
30,000

$46,979
4/6
$31,319

$1,979
4/6
$1,319

$45,000
4/6
$30,000

On October 31, 2001, Spencer Company redeemed 500 bonds at 101. Prepare the journal entry
to bring the accounting records up to the date of redemption.
Date
Account
Debit
Credit
10/31/01 Interest expense
$15,802
Discount on bonds payable
$802
Interest payable
15,000
To bring the accounting records current prior to redemption of bonds.

26

Interest expense:
Interest expense, 3/1/02
Short period
Interest expense
Discount on bonds payable:
Amortization of discount, 3/1/02
Short period
Discount on bonds payable
Interest payable:
Interest payment, 3/1/02
Short period
Interest payable

$47,405
2/6
$15,802

$2,405
2/6
$802

$45,000
2/6
$15,000

Prepare the October 31, 2001 journal entry to record the redemption of the bonds.

Date
Account
10/31/01 Bonds payable
Loss on bonds payable
Discount on bonds payable
Cash
To record the redemption of 500 bonds at 101
Analysis of cash:
Face amount of bonds redemed
Redemption rate
Cash paid
Analysis of loss on redemption of bonds:
Cash paid
Carrying amount at 10/31/01:
Carrying amount at 9/1/01
Short period amortization of discount
Carrying amount at 10/31/01
Percentage of bonds redemed
Carrying value of bonds redemed
Loss on redemption of bonds

Debit
$500,000
30,548

Credit

$25,548
505,000

$500,000
101
$505,000

$505,000
$948,102
802
948,903
50%
474,452
30,548

27