Problem

D-I
D-II
D-III
D-IV
D-V
D-VI
D-VII
D-VIII

COMPREHENSIVE EXAMINATION D
PART 4
(Chapters 15-17)
Approximate
Topic
Time
Treasury Stock.
20 min.
*Cash Dividends.
10 min.
Stock Dividends and Stock Splits.
10 min.
Earnings Per Share Concepts.
10 min.
Earnings Per Share Computations.
10 min.
Basic and Diluted Earnings Per Share.
20 min.
Available-for-Sale Equity Securities.
15 min.
Trading Securities.
30 min.
125 min.

*Part of this topic is dealt with in an Appendix to the chapter.

Problem D-I Treasury Stock
The stockholders' equity section of Carey Co.'s balance sheet at December 31,
2012, was as follows:
Common stock--$10 par (authorized 1,000,000 shares,
issued and outstanding 600,000 shares) $ 6,000,000
Paid-in capital in excess of par
1,500,000
Retained earnings
3,250,000
$10,750,000
Instructions
Prepare journal entries (1, 2, and 4) and show proper disclosure (3) to reflect
the following treasury stock transactions showing how each is accounted for
under the cost method. (Show computations.)

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Test Bank for Intermediate Accounting, Fourteenth Edition

1. On January 4, 2013, having idle cash, Carey Co. repurchased 20,000 shares
of its out-standing stock for $500,000.
2. On March 4, Carey sold 5,000 of these reacquired shares at $28 per share.
3. Show the proper disclosures in the stockholders' equity section of the balance
sheet issued at the end of the first quarter, March 31, 2013. Assume net
income of $100,000 during the first quarter.
4. On June 30, 2013 the firm sold 10,000 of the reacquired shares for $21 per
share.
*Problem D-II Cash Dividends
Bell Company has stock outstanding as follows: Common, $10 par value per
share, 140,000 shares; Preferred, 5%; $100 par value per share, 8,000 shares.
The Preferred is cumulative and participating up to an additional 4% of par;
two years are in arrears (not including the current year); and the total amount of
cash dividends declared for both classes of stock is $230,000.
Instructions
Prepare the entry for the dividend declaration, separating the dividend into the
common and preferred portions.
Problem D-III Stock Dividends and Stock Splits
Stock dividends and stock splits are common forms of corporate stock
distribution to stockholders.
Consider each of the numbered statements. You are to decide whether it:
A.Applies to both stock dividends and stock splits.
B.Applies to neither.
C.Applies to stock splits only.
D.Applies to stock dividends only.

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Comprehensive Examination

E. Applies to stock splits effected in the form of a dividend only.

F. Applies to both stock splits effected in the form of a dividend and a stock
dividend.
(In each instance, the issuing company has only one class of stock.)
Instructions
Print next to the number of each statement below, the single capital letter of the
description which applies to the statement.
Statements
____ 1. The distribution is a multiple as contrasted to a fraction of the number
of shares previously outstanding.
____ 2. The total number of shares outstanding is increased.
____ 3. The individual stockholder's share of net assets is increased.
____ 4. There is no transfer between retained earnings and capital stock
accounts, other than to the extent occasioned by legal requirements.
____ 5. There is no change in the total stockholders' equity of the issuing
corporation.
____ 6. The retained earnings available for dividends are increased.
____ 7. Retained earnings in the amount of the distribution are transferred to
capital stock, in some instances in an amount in excess of that required
by the laws of the state of incorporation.
____ 8. Subsequent per-share earnings, if any, are decreased.

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Test Bank for Intermediate Accounting, Fourteenth Edition

____ 9. The par (or stated value) of the stock is unchanged.

Problem D-IV Earnings Per Share Concepts
Indicate which of the following securities would be included in the
computation of "basic earnings per share," and which would be included in the
computation of "diluted earnings per share." Place a "B" before those which
affect only basic EPS, a "D" before those which affect only diluted EPS, a
"BD" before those which affect both basic and diluted EPS, and an "N" before
those securities which do not affect EPS computations. Assume that, where
applicable, the appropriate securities are dilutive.
____ 1. Warrants to purchase additional common shares.
____ 2. Common stock.
____ 3. Nonconvertible debenture bonds.
____ 4. Convertible, noncumulative preferred stock.
____ 5. Cumulative, nonconvertible preferred stock.
____ 6. Convertible bonds.
____ 7. Executive stock options.
____ 8. Notes payable.
Problem D-V Earnings Per Share Computations
Jones, Inc. has net income (30% tax rate) of $1,200,000 for 2013, and an
average number of shares outstanding during the year of 500,000 shares. The
corporation issued $2,000,000 par value of 10-year, 9% convertible bonds on

D - 5D
Comprehensive Examination

January 1, 2011 at a $180,000 discount. The convertible bonds are convertible

into 70,000 shares of common stock. Assume the company uses the straightline method for amortizing bond discount.
Instructions
Compute the earnings per share data, excluding any notes if required.
Problem D-VI Basic and Diluted Earnings Per Share
Assume that the following data relate to Rosen, Inc. for the year 2013:
Net income (30% tax rate)
$3,000,000
Average common shares outstanding 20131,000,000
shares
10% cumulative convertible preferred stock:
Convertible into 80,000 shares of common$1,600,000
8% convertible bonds; convertible into 75,000
shares of common
$2,500,000
Stock options:
Exercisable at the option price of $25 per share;
average market price in 2013, $30
84,000 shares
Instructions
Compute (a) basic earnings per share, and (b) diluted earnings per share.
Problem D-VII Available-for-Sale Equity Investments
On January 2, 2012, Norwin Company purchased 1,000 shares of Oslo
Company common stock for $30,000. The stock has a par value of $10 and is
part of the total stock outstanding of 20,000 shares of Oslo Company. Norwin
Company intends the stock to be available for sale. Total stockholders' equity
of Oslo Company on January 2, 2012 was $600,000.
Instructions

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Test Bank for Intermediate Accounting, Fourteenth Edition

Prepare necessary journal entries on the books of Norwin Company for the
following transactions. If no entry is required, write "none" in the space
provided. (Round all calculations to the nearest cent.)
(a) January 2, 2012: Norwin purchases the shares described above.
(b) December 31, 2012: Norwin receives a $.75 per share dividend from Oslo,
and Oslo announces a net income for 2012 of $250,000.
(c) December 31, 2012: According to The Wall Street Journal, Oslo common is
selling for $27 per share. Norwin's management views this decline as being
only temporary in nature. Oslo's common is Norwin's only available-forsale security.
(d) February 15, 2013: Norwin sells 500 of the shares purchased on January 2,
2012 at $32 per share.
Problem D-VIII Trading Securities
The information below relates to Milton Company's trading securities in 2012
and 2013.
(a) Prepare the journal entries for the following transactions.
January 1, 2012
Purchased $300,000 par value of GLF Company bonds at
97 plus accrued interest. The bonds pay interest annually at 9%
each December 31. Broker's commission was $3,000.
September 1, 2012 Sold $150,000 par value of GLF Company bonds at 94 plus
accrued interest. Broker's commission, taxes, and fees were
$1,500.

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Comprehensive Examination

September 5, 2012 Purchased 5,000 shares of Hayes, Inc. common stock for
$30 per share. The broker's commission on the purchase
amounted to $2,000.
December 31, 2012 Make the appropriate entry for the GLF Company bonds.
December 31, 2012 The market prices of the trading securities at December 31
were: Hayes, Inc. common stock, $31 per share; and GLF
Company bonds, 99. Make the appropriate entry.
July 1, 2013

Milton sold 1/2 of the Hayes, Inc. common stock at $32 per
share. Broker's commissions, taxes, and fees were $1,000.

December 1, 2013 Milton purchased 600 shares of Ramirez, Inc. common

stock at $45 per share. Broker's commission was $500.
December 31, 2013 Make the appropriate entry for the GLF Company bonds.
December 31, 2013 The market prices of the trading securities at December 31
were: Hayes, Inc. common stock, $34 per share; GLF Company
bonds, 98; and Ramirez, Inc. common stock, $47 per share.
Make the appropriate entry.
(b) Present the financial statement disclosure (balance sheet and income
statement) of Milton Company's transactions in trading securities for each
of the years 2012 and 2013. Appropriate financial statement subheadings
must be disclosed.

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Test Bank for Intermediate Accounting, Fourteenth Edition

Solutions Comprehensive Examination D

Problem D-I Solution.
1. Treasury Stock ..............................................500,000
Cash .......................................................
500,000
2. Cash ...............................................................140,000
Treasury Stock ......................................
125,000
Paid-in Capital from Treasury Stock .....
15,000
3. Stockholders' equity:
Common stock, $10 par, 1,000,000 shares authorized,
600,000 shares issued, 585,000 shares outstanding$ 6,000,000
Paid-in capital in excess of par value
1,500,000
Paid-in capital from treasury stock
15,000
Retained earnings
3,350,000
10,865,000
Less:
Cost of 15,000 shares held in treasury
(375,000)
Total stockholders' equity
$10,490,000
4. Cash ...............................................................210,000
Paid-in Capital from Treasury Stock ............. 15,000
Retained Earnings ......................................... 25,000
Treasury Stock ......................................
250,000
*Problem D-II Solution.
Retained Earnings .............................................230,000
Dividends Payable, Preferred ....................
136,000
Dividends Payable, Common ....................
94,000
Computations:

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Comprehensive Examination

Preferred Common
Total
Arrears$800,000 5% 2 $80,000
$ 80,000
Preference$800,000 5% 40,000
40,000
Common$1,400,000 5%
$ 70,000 70,000
Participating 2%*
16,000 24,000 40,000
$136,000
$ 94,000$230,000
* [($230,000 $190,000) ($600,000 + $1,400,000)]
Problem D-III Solution.
1. C
4. E
7. F
2. A
5. A
8. A
3. B
6. B
9. F
Problem D-IV Solution.
1. D
5. BD
2. BD
6. D
3. N
7. D
4. D
8. N
Problem D-V Solution.
Basic earnings per share
($1,200,000 500,000 shares)
Diluted earnings per share
$1,200,000 + .7($180,000 + $18,000)

500,000 + 70,000
Problem D-VI Solution.
$3,300,000 $160,000

$2.40

$2.35

D - 10 Test Bank for Intermediate Accounting, Fourteenth Edition

(a) Basic EPS = = $2.09

1,500,000
(b)

Shares
Earnings
Start
1,500,000 $3,140,000
Convertible preferred80,000 160,000
Convertible bonds 75,000
140,000*
Options
14,000**
0
1,669,000 $3,440,000
*($2,500,000 .08) (1 .30)
**[($30 $25) $30] 84,000
$3,440,000 1,669,000 = $2.06 DEPS

Problem D-VII Solution.

(a) Equity Investments ...................................... 30,000
Cash .....................................................
30,000
(b) Cash .............................................................
Dividend Revenue ...............................

750
750

No entry to accrue investee profits because fair value, not equity, method is
being used.
(c) Unrealized Holding Gain or LossEquity . 3,000
Fair Value Adjustment (Available-for-Sale)
(d) Cash (500 $32) ......................................... 16,000
Gain on Sale of Securities ...................
1000
Equity Investments (500 $30)...........
15,000

3,000

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Comprehensive Examination

Problem D-VIII Solution.

January 1, 2012*
Debt Investments ($300,000 .97) + $3,000 ....294,000
Cash ...........................................................
294,000
September 1, 2012
Cash ($141,000 + $9,000 $1,500) ..................148,500
Loss on Sale of Investments ............................. 7,500
Debt Investments ......................................
147,000
Interest Revenue ........................................
9,000
September 5, 2012
Equity Investments ............................................152,000
Cash ...........................................................
152,000
December 31, 2012*
Cash ($150,000 .09)........................................ 13,500
Interest Revenue ........................................
13,500
December 31, 2012
Fair Value Adjustment (Trading)....................... 4,500
Unrealized Holding Gain or LossIncome ($299,000 $303,500)
4,500
July 1, 2013
Cash ($80,000 $1,000) ................................... 79,000
Gain on Sale of Investments .....................
3,000
Equity Investments ....................................
76,000
December 1, 2013
Equity Investments ............................................ 27,500
Cash ...........................................................
27,500
December 31, 2013
Cash ...................................................................
13,500
Interest Revenue ........................................
13,500
December 31, 2013

D - 12 Test Bank for Intermediate Accounting, Fourteenth Edition

Fair Value Adjustment (Trading)....................... 14,200

Unrealized Holding Gain or LossIncome
($326,500 $345,200) - $4,500
December 31,
Balance Sheet
Current assets:
Equity Investments, at fair value

14,200

2012

2013

$303,500

$345,200

Income Statement
Other revenue and gains:
Interest Revenue
$13,500
$13,500
Unrealized holding gain on trading securities4,500 14,200
Gain on sale of securities
3,000
Other expenses and losses:
Loss on sale of securities
7,500