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Answer 1:
Computation
of weighted average shares outstanding during the year:
January
1 Outstanding 700,000
March
1 Repurchase (5/6 × 60,000) (50,000)
650,000
June
1 2-for-1 split 1,300,000
November
1 Issued (1/6 × 180,000) 30,000
1,330,000
Additional
shares for purposes of diluted earnings per share:
Potentially
dilutive securities
8%
convertible preferred stock 200,000
Proceeds
from exercise of 90,000 options (90,000 × $25) $2,250,000
Shares
issued upon exercise of options 90,000
Less:
T.S purchasable with proceeds ($2,250,000 ÷ $30) 75,000 15,000
Dilutive
securities—additional shares 215,000
(a) Basic earnings per share:
$2,740,000 – $80,000/1,330,000 = $2
(b)
Diluted earnings per share: $2,740,000/1,330,000 + 215,000 = $1.77
Answer 2:
Income applicable to CS shareholders $350,000
Weighted average of CS outstanding $200,000
Basic EPS
(350,000/200,000) $1.75
Step
1: Stand-alone effects:
1.
Interest expense for
year (6% * 300,000) $18,000
Income tax deduction due to interest
(30%*18,000) (5,400)
Interest expense avoided (Net of
tax)
$12,600
Number of CS issued assuming conversion of
bonds 300*50=15,000
Per share effect:
Incremental numerator effect = $12,600 =
$0.84
Incremental denominator effect
15,000
2) Number of shares under warrant
16,000
Warrant price per share
x
$20
Proceeds upon assumed exercise of warrants $320,000
Average market price of common
$32
Treasury shares that could be acquired with proceeds
(320,000/32) 10,000
Excess of shares under option over treasury shares
Repurchased (16,000-10,000) 6,000
Per share effect:
Incremental numerator
effect = 0
= $0
Incremental denominator effect
6,000
Step
2: Ranking of per share effect:
1. Warrants $0
2. 6% convertible bonds $0.84
Step
3: Fully diluted EPS computation:
1) Warrants
NI applicable to CS shareholders $350,000
Add: incremental numerator effect of warrants none
Total
$350,000
Weighted average number of CS outstanding 200,000 shares
Add: incremental denominator effect of warrants 6,000
Total
206,000
Recomputed EPS (350,000/206,000) $1.69
2)
6% convertible bond
Numerator from previous calculation $350,000
Add: interest expense avoided (Net of
tax) 12,600
Total
362,600
Denominator from previous calculation 206,000
Add: number of CS assumed issued upon
conversion of bonds 15,000
Total
221,000
Recomputed EPS (362,600/221,000) $1.64
Bond conversion reduce EPS from $1.69
to $1.64. This is “fully diluted” EPS.
Answer 3:
(a) Balance
12/31/11 (result of that year's adjusting entry) $(25,000)
Deduct unrealized gain for 2012 10,000
Add: Unrealized loss for 2013 (20,000)
Balance at 12/31/13 $(35,000)
(b)
Aggregate cost and fair value for trading securities at
12/31/14
Cost Fair Value
BKD Common 10,000 shares $300,000 $280,000 LRF
Preferred 2,000 shares 210,000 220,000
Horton Common, 1,000 shares 41,000 45,000
Drake Bonds, 100 bonds
115,000
102,000
Total
$666,000
$647,000
(c)
Adjusting entry at 12/31/14:
Fair Value Adjustment (trading).
..................................................... 16,000
Unrealized Holding Gain or
Loss—Income
. ....................... 16,000
Balance at 1/1/14 $35,000
Balance needed at 12/14 19,000
Recovery $16,000
Answer 4:
Cost
$500,000
Share
of net income (.30 × $360,000) 108,000
Share
of dividends (.30 × $160,000)
(48,000)
Balance
in equity investment account
$560,000
Answer
5:
a)
Answer:
Percentage-of-Completion Method
Under the percentage-of-completion method, revenue on long-term
construction contracts is recognized as construction progresses. Costs
pertaining to the contract plus gross profit earned to date are accumulated in
a Construction in Process account. The
amount of revenue recognized in each accounting period is based on a percentage
of the total revenue to be recognized on the contract. The most popular method
of estimating the amount of revenue to recognize is based on the costs incurred on the contract to date
divided by the most recent
estimated total costs (cost-to-cost basis).
a.The journal entry to recognize revenue under
the percentage-of-completion as follows:
Construction in Process
Construction Expenses
Revenue
from Long-Term Contracts
b. In any
subsequent year, total revenue to recognize to date is estimated based on the
current cost-to-cost basis, and any revenue recognized in prior years in
subtracted, leaving revenue to recognize in the current year (that is, only
incremental revenue is recognized each year).
c. The Billings on Construction in
Process account is subtracted from the Construction in Process accounts; if the
amount is a debit it is reported as a current asset, if the amount is a credit
it is reported as a current liability.
Completed-Contract Method
Under the completed-contract method,
revenue and gross profit are recognized when the contract is completed. The
principal advantage of the completed-contract method is that reported revenue
is based on final results rather than on estimates of unperformed work. Its
major disadvantage is the distortion of earnings that may occur. The accounting entries made under the
completed-contract method are the same as those made under the
percentage-of-completion method, with the notable exception of periodic income
recognition.
b) Answer:
The percentage-of-completion
method must be used when estimates of progress toward completion, revenues, and
costs are reasonably dependable and all the following conditions exist:
a)
The contract clearly specifies the enforceable rights regarding goods
or services to be provided and received by the parties, the consideration to be
exchanged, and the manner and terms of settlement.
b)
The buyer can be expected to satisfy all obligations under the
contract.
c)
The contractor can be expected to perform contractual obligations.
The
completed-contract method should be used only when
a)
An entity has primarily short-term contracts,
b)
The conditions for using the percentage-of-completion method cannot be
met,
c)
There are inherent hazards in the contract beyond normal, recurring
business risks.
6 Answer:
Percentage-of-Completion Completed-Contract
Gross profit
Gross Profit
2012 $675,000 2012 0
2013 $165,000 2013 0
2014 $360,000 2014 $ 800,000
7 Answer:
a)
Stucks, Inc.
Statement of
Cash flow
for the year
ended December 31, 2013.
Cash flow from
operating activities
Net Income $221,000
Adjustments to
reconcile net income to net cash provided by operating activities:
Depreciation expense 75,000
Patent amortization 21,000
Increase in receivables (32,000)
Decrease in inventory 30,000
Decrease in prepaid
expenses 9,000
Decrease in accounts
payable (15,000)
Increase in accrued
liabilities 18,000 106,000
Net cash provided by
operating activities 327,000
Cash used in investing
activities
Purchase of plant assets (230,000)
Cash flows from
financing activities
Payment of cash dividend (158,000)
Retirement of mortgage
payable (450,000)
Sale of preferred stock 645,000
Net cash provided by
financing activities 37,000
Net increase in cash 134,000
Cash, January 1, 2013 153,000
Cash, December 31, 2013 287,000
b)
Stucks, Inc.
Schedule of
Cash Provided by Operating Activities
For Year
Ended December 31, 2013
Cash flows from operating activities
Cash received from
customers 1,948,000
Cash paid to suppliers 1,074,000
Operating expenses paid 547,000 1,621,000
Net cash provided by operating activities 327,000
8 Answer:
1.
Cash inflow from investing
activities $73,000
2.
Sales price $73,000
Book value $70,000
Gain on sale $3,000
----Deduct from net income
3.
Cost $120,000
Book value $70,000
Accumulated
depreciation $50,000
Deduct decrease in accumulated
depreciation (15,000)
Depreciation expense $35,000 ----Add to net income
9 Answer:
Butt Corporation
Statement of Cash Flows
For the Year Ended December 31, 2013
Cash flows from
operating activities
Net income $63,300
Adjustment to
reconcile net income to net cash provided by operating activities:
Depreciation expense 19,000
Patent amortization 5,000
Increase in accounts
receivable
(20,600)
Decrease in inventory 20,000
Increase in prepaid
expenses (700)
Increase in accounts
payable 6,000
Decrease in accrued
liabilities
(9,000) 19,700
Net cash provided by
operating activities 83,000
Cash flows from
investing activities
Purchase of land (40,000)
Purchase of buildings (43,000)
Sale of patents 10,000
Net cash used by
investing activities (73,000)
Cash flows from financing
activities Sale of bonds 65,000
Purchase of treasury
stock
(7,000)
Payment of cash dividends
(25,000)
Net cash provided by
financing activities 33,000
Net increase in cash $43,000
Cash, January 1, 2013 $27,000
Cash, December 31, 2013 $70,000
10 Answer:
1. Cash inflow from
investing activities $48,000
2. Sales price $48,000
Book value $44,000
Gain on sale
$4,000 --Deduct from net income
3. Cost $74,000
Book value $44,000
Accumulated depreciation $30,000
Add increase in accumulated
depreciation $54,000
Depreciation expense $84,000
-- Add to net income
4. Cost of machine
sold $
74,000
Add increase in machinery $130,000
Purchase of machinery $204,000
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