E16-30 (Stock-Appreciation Rights) Derrick Company establishes a stock-appreciation rights program that entitles its new president Dan Scott to receive cash for the difference between the market price of the stock and a pre-established price of $30 (also market price) on December 31, 2008, on 40,000 SARs. The date of grant is December 31, 2008, and the required employment (service) period is 4 years. President Scott exercises all of the SARs in 2014. The fair value of the SARs is estimated to be $6 per SAR on December 31, 2009; $9 on December 31, 2010; $15 on December 31, 2011; $8 on December 31, 2012; and $18 on December 31, 2013.
(a) Prepare a 5-year (2009–2013) schedule of compensation expense pertaining to the 40,000 SARs granted to President Scott.
(b) Prepare the journal entry for compensation expense in 2009, 2012, and 2013 relative to the 40,000 SARs.
Click here for the solution: Derrick Company establishes a stock-appreciation rights program that entitles its new president Dan Scott
Showing posts with label stock. Show all posts
Showing posts with label stock. Show all posts
Wednesday, April 13, 2016
Thursday, January 14, 2016
Compute a fair rate of return for a common stock which has a 1.2 beta
Required rate of return using CAPM:
A. Compute a fair rate of return for a common stock which has a 1.2 beta. The risk free rate is 6% and the market portfolio has an expected return of 16%
B. Why is the rate computed considered a fair rate.
Click here for the solution: Compute a fair rate of return for a common stock which has a 1.2 beta
A. Compute a fair rate of return for a common stock which has a 1.2 beta. The risk free rate is 6% and the market portfolio has an expected return of 16%
B. Why is the rate computed considered a fair rate.
Click here for the solution: Compute a fair rate of return for a common stock which has a 1.2 beta
Wednesday, November 25, 2015
If intangible assets are acquired for stock, how is the cost of the intangible determined?
If intangible assets are acquired for stock, how is the cost of the intangible determined?
Click here for the solution: If intangible assets are acquired for stock, how is the cost of the intangible determined?
Click here for the solution: If intangible assets are acquired for stock, how is the cost of the intangible determined?
Describe the journal entry for a stock dividend on a common stock (which has a par value)
Describe the journal entry for a stock dividend on a common stock (which has a par value).
Click here for the solution: Describe the journal entry for a stock dividend on a common stock (which has a par value)
Click here for the solution: Describe the journal entry for a stock dividend on a common stock (which has a par value)
Wednesday, November 11, 2015
During its first year of operations, Collin Raye Corporation had the following transactions pertaining to its common stock
E15-1 (Recording the Issuances of Common Stock) During its first year of operations, Collin Raye Corporation had the following transactions pertaining to its common stock.
Jan 10 Issued 80,000 shares for case at $6 per share
Mar 1 Issued 5,000 shares to attorneys in payment of a bill for $35,000 for services rendered in helping the company to incorporate.
July 1 Issued 30,000 shares for cash at $8 per share
Instructions
a.) Prepare the journal entries for these transactions, assuming that the common stock has a par value of $5 per share.
b.) Prepare the journal entries for these transactions assuming that the common stock is no par with a stated value of $3 per share.
Click here for the solution: During its first year of operations, Collin Raye Corporation had the following transactions pertaining to its common stock
Jan 10 Issued 80,000 shares for case at $6 per share
Mar 1 Issued 5,000 shares to attorneys in payment of a bill for $35,000 for services rendered in helping the company to incorporate.
July 1 Issued 30,000 shares for cash at $8 per share
Instructions
a.) Prepare the journal entries for these transactions, assuming that the common stock has a par value of $5 per share.
b.) Prepare the journal entries for these transactions assuming that the common stock is no par with a stated value of $3 per share.
Click here for the solution: During its first year of operations, Collin Raye Corporation had the following transactions pertaining to its common stock
Monday, October 5, 2015
Pruitt Corporation owns 90% of the common stock of Sedbrook Company
Complete Equity with downstream sales:
Pruitt Corporation owns 90% of the common stock of Sedbrook Company. The stock was purchased for $540,000 on January 1, 2009, when Sedbrook Company’s retained earnings were $100,000. Preclosing trial balances for the two companies at December 31, 2013, are presented here.
Pruitt Sedbrook Corporation Company
Cash $ 83,000 $ 80,000
Accounts Receivable 213,000 112,500
Inventory 150,000 110,000
Investment in Sedbrook Co. 568,250
Other Assets 500,000 400,000
Dividends Declared 100,000 30,000
Purchases 850,000 350,000
Other expenses 180,000 137,500
$2, 644,250 $1,220,000
Accounts Payable 70,000 30,000
Other Liabilities 75,000 40,000
Common Stock 800,000 500,000
Retained Earnings 1/1 532,000 120,000
Sales 1,100,000 530,000
Equity in Subsidiary Income 67,250 $2,644,250 $1,220,000
Ending Inventory $ 200,000 $ 120,000
The January 1, 2013, inventory of Sedbrook Company includes $30,000 of profit recorded by Pruitt Corporation on 2012 sales. During 2013, Pruitt Corporation made intercompany sales of $200,000 with a markup of 25% on cost. The ending inventory of Sedbrook Company includes goods purchased in 2013 from Pruitt for $50,000. Pruitt Corporation uses the complete equity method to record its investment in Sedbrook Company.
a. Prepare the consolidated statements workpaper for the year ended December 31, 2013.
b. Calculate consolidated retained earnings on December 31, 2013, using the analytical or t-account approach.
Click here for the solution: Pruitt Corporation owns 90% of the common stock of Sedbrook Company
Pruitt Corporation owns 90% of the common stock of Sedbrook Company. The stock was purchased for $540,000 on January 1, 2009, when Sedbrook Company’s retained earnings were $100,000. Preclosing trial balances for the two companies at December 31, 2013, are presented here.
Pruitt Sedbrook Corporation Company
Cash $ 83,000 $ 80,000
Accounts Receivable 213,000 112,500
Inventory 150,000 110,000
Investment in Sedbrook Co. 568,250
Other Assets 500,000 400,000
Dividends Declared 100,000 30,000
Purchases 850,000 350,000
Other expenses 180,000 137,500
$2, 644,250 $1,220,000
Accounts Payable 70,000 30,000
Other Liabilities 75,000 40,000
Common Stock 800,000 500,000
Retained Earnings 1/1 532,000 120,000
Sales 1,100,000 530,000
Equity in Subsidiary Income 67,250 $2,644,250 $1,220,000
Ending Inventory $ 200,000 $ 120,000
The January 1, 2013, inventory of Sedbrook Company includes $30,000 of profit recorded by Pruitt Corporation on 2012 sales. During 2013, Pruitt Corporation made intercompany sales of $200,000 with a markup of 25% on cost. The ending inventory of Sedbrook Company includes goods purchased in 2013 from Pruitt for $50,000. Pruitt Corporation uses the complete equity method to record its investment in Sedbrook Company.
a. Prepare the consolidated statements workpaper for the year ended December 31, 2013.
b. Calculate consolidated retained earnings on December 31, 2013, using the analytical or t-account approach.
Click here for the solution: Pruitt Corporation owns 90% of the common stock of Sedbrook Company
Sunday, September 27, 2015
(Minicase 4 Thomson Corporation) During the current year, Thomson had the following stock transactions
Minicase 4 Thomson Corporation
Thomson Corporation
Stockholder’s Equity
December 31, 2007
Common stock (40,000 authorized, 25,000 issued and outstanding with par value of $10 per share.) $ 250,000.00
Excess paid in capital on common stock $ 125,000.00
Retained Earnings $ 500,000.00
Total stockholder's equity $ 875,000.00
During the current year, Thomson had the following stock transactions:
• The company authorized the sale of 10% preferred stock, 50,000 shares at par value of $50.
• Sold 20,000 shares of preferred stock at $75 per share.
• Purchased 5,000 shares of common stock at $20 per share for cash.
• Declared and distributed a 2% stock dividend to common stockholders when market price was $25 per share.
• Declared and paid $90,000 in cash dividends to common and preferred stockholders.
• Sold 2,000 shares of treasury stock at $16 per share.
• Net loss is $134,000.
Required:
1. Prepare the stockholder’s equity section of the balance sheet for year end 2008.
Click here for the solution: (Minicase 4 Thomson Corporation) During the current year, Thomson had the following stock transactions
Thomson Corporation
Stockholder’s Equity
December 31, 2007
Common stock (40,000 authorized, 25,000 issued and outstanding with par value of $10 per share.) $ 250,000.00
Excess paid in capital on common stock $ 125,000.00
Retained Earnings $ 500,000.00
Total stockholder's equity $ 875,000.00
During the current year, Thomson had the following stock transactions:
• The company authorized the sale of 10% preferred stock, 50,000 shares at par value of $50.
• Sold 20,000 shares of preferred stock at $75 per share.
• Purchased 5,000 shares of common stock at $20 per share for cash.
• Declared and distributed a 2% stock dividend to common stockholders when market price was $25 per share.
• Declared and paid $90,000 in cash dividends to common and preferred stockholders.
• Sold 2,000 shares of treasury stock at $16 per share.
• Net loss is $134,000.
Required:
1. Prepare the stockholder’s equity section of the balance sheet for year end 2008.
Click here for the solution: (Minicase 4 Thomson Corporation) During the current year, Thomson had the following stock transactions
On January 1, 2008, a U.S. company purchased 100% of the outstanding stock of Ventana Grains, a company located in Latz City, New Zealand
Problem 13-1 Translation—Local Currency Is the Functional Currency
On January 1, 2008, a U.S. company purchased 100% of the outstanding stock of Ventana Grains, a company located in Latz City, New Zealand. Ventana Grains was organized on January 1, 1994. All the property, plant, and equipment held on January 1, 2008, was acquired when the company was organized. The business combination was accounted for as a purchase transaction. The 2008 financial statements for Ventana Grains, prepared in its local currency, the New Zealand dollar, are given here.
VENTANA GRAINS
Comparative Balance Sheets
January 1 and December 31, 2008
Jan. 1 Dec. 31
Cash and Receivables 500,000 880,000
Inventories 600,000 500,000
Land 400,000 400,000
Buildings (net) 650,000 605,000
Equipment (net) 465,000 470,000
Totals 2,615,000 2,855,000
Jan. 1 Dec. 31
Short-Term Accounts and Notes 295,000 210,000
Long-Term Notes (600,000 issued
September 1, 2000, 80,000 issued
July 1, 2008) 600,000 680,000
Common Stock 800,000 800,000
Additional Paid-in Capital 200,000 200,000
Retained Earnings 720,000 965,000
Total 2,615,000 2,855,000
VENTANA GRAINS
Consolidated Income and Retained Earnings Statement
for the Year Ended December 31, 2008
Revenues 3,225,000
Cost of Goods Sold:
Beginning Inventory 600,000
Purchases 2,100,000
Goods Available for Sale 2,700,000
Less: Ending Inventory 500,000
Cost of Goods Sold 2,200,000
Gross Profit on Sales 1,025,000
Depreciation Expense 140,000
Other Expenses 540,000 680,000
Net Income 345,000
Jan. 1 Retained Earnings 720,000
Total 1,065,000
Less: Dividends Paid 100,000
Dec. 31 Retained Earnings 965,000
The account balances are computed in conformity with U.S. generally accepted accounting standards.
Other information is as follows:
1. Direct exchange rates for the New Zealand dollar on various dates were:
Date Exchange Rate
January 1, 1994 $.8011
September 1, 2004 .5813
January 1, 2008 .7924
July 1, 2008 .7412
December 31, 2008 .7298
Average for 2008 .7480
Average for the last four months of 2008 .7476
2. Ventana Grains purchased additional equipment for 100,000 New Zealand dollars on July 1, 2008, by issuing a note for 80,000 New Zealand dollars and paying the balance in cash.
3. Sales were made and purchases and “Other Expenses” were incurred evenly throughout the year.
4. Depreciation for the period in New Zealand dollars was computed as follows:
Building 45,000
Equipment—Purchased before 1/1/2008 85,000
Equipment—Purchased July 1, 2008 10,000
5. The inventory is valued on a FIFO basis. The beginning inventory was acquired when the exchange rate was $.7480. The ending inventory was acquired during the last four months of 2008.
6. Dividends of 50,000 New Zealand dollars were paid on July 1 and December 31.
Required:
A. Translate the financial statements into dollars assuming that the local currency of the foreign subsidiary was identified as its functional currency.
B. Prepare a schedule to verify the translation adjustment determined in requirement A. Describe how the translation adjustment would be reported in the financial statements.
Click here for the solution: On January 1, 2008, a U.S. company purchased 100% of the outstanding stock of Ventana Grains, a company located in Latz City, New Zealand
On January 1, 2008, a U.S. company purchased 100% of the outstanding stock of Ventana Grains, a company located in Latz City, New Zealand. Ventana Grains was organized on January 1, 1994. All the property, plant, and equipment held on January 1, 2008, was acquired when the company was organized. The business combination was accounted for as a purchase transaction. The 2008 financial statements for Ventana Grains, prepared in its local currency, the New Zealand dollar, are given here.
VENTANA GRAINS
Comparative Balance Sheets
January 1 and December 31, 2008
Jan. 1 Dec. 31
Cash and Receivables 500,000 880,000
Inventories 600,000 500,000
Land 400,000 400,000
Buildings (net) 650,000 605,000
Equipment (net) 465,000 470,000
Totals 2,615,000 2,855,000
Jan. 1 Dec. 31
Short-Term Accounts and Notes 295,000 210,000
Long-Term Notes (600,000 issued
September 1, 2000, 80,000 issued
July 1, 2008) 600,000 680,000
Common Stock 800,000 800,000
Additional Paid-in Capital 200,000 200,000
Retained Earnings 720,000 965,000
Total 2,615,000 2,855,000
VENTANA GRAINS
Consolidated Income and Retained Earnings Statement
for the Year Ended December 31, 2008
Revenues 3,225,000
Cost of Goods Sold:
Beginning Inventory 600,000
Purchases 2,100,000
Goods Available for Sale 2,700,000
Less: Ending Inventory 500,000
Cost of Goods Sold 2,200,000
Gross Profit on Sales 1,025,000
Depreciation Expense 140,000
Other Expenses 540,000 680,000
Net Income 345,000
Jan. 1 Retained Earnings 720,000
Total 1,065,000
Less: Dividends Paid 100,000
Dec. 31 Retained Earnings 965,000
The account balances are computed in conformity with U.S. generally accepted accounting standards.
Other information is as follows:
1. Direct exchange rates for the New Zealand dollar on various dates were:
Date Exchange Rate
January 1, 1994 $.8011
September 1, 2004 .5813
January 1, 2008 .7924
July 1, 2008 .7412
December 31, 2008 .7298
Average for 2008 .7480
Average for the last four months of 2008 .7476
2. Ventana Grains purchased additional equipment for 100,000 New Zealand dollars on July 1, 2008, by issuing a note for 80,000 New Zealand dollars and paying the balance in cash.
3. Sales were made and purchases and “Other Expenses” were incurred evenly throughout the year.
4. Depreciation for the period in New Zealand dollars was computed as follows:
Building 45,000
Equipment—Purchased before 1/1/2008 85,000
Equipment—Purchased July 1, 2008 10,000
5. The inventory is valued on a FIFO basis. The beginning inventory was acquired when the exchange rate was $.7480. The ending inventory was acquired during the last four months of 2008.
6. Dividends of 50,000 New Zealand dollars were paid on July 1 and December 31.
Required:
A. Translate the financial statements into dollars assuming that the local currency of the foreign subsidiary was identified as its functional currency.
B. Prepare a schedule to verify the translation adjustment determined in requirement A. Describe how the translation adjustment would be reported in the financial statements.
Click here for the solution: On January 1, 2008, a U.S. company purchased 100% of the outstanding stock of Ventana Grains, a company located in Latz City, New Zealand
Wednesday, September 23, 2015
On February 1, 2011, Punto Company purchased 95% of the outstanding common stock of Sara Company
PROBLEM 3-8 Intercompany Items, Two Subsidiaries
On February 1, 2011, Punto Company purchased 95% of the outstanding common stock of Sara Company and 85% of the outstanding common stock of Rob Company. Immediately before the two acquisitions, balance sheets of the three companies were as follows:
Punto Sara Rob
Cash $165,000 $ 45,000 $17,000
Accounts receivable 35,000 35,000 26,000
Notes receivable 18,000 0 0
Merchandise inventory 106,000 35,500 14,000
Prepaid insurance 13,500 2,500 500
Advances to Sara Company 10,000
Advances to Rob Company 5,000
Land 248,000 43,000 15,000
Buildings (net) 100,000 27,000 16,000
Equipment (net) 35,000 10,000 2,500
Total $735,500 $198,000 $91,000
Accounts payable $ 25,500 $ 20,000 $10,500
Income taxes payable 30,000 10,000 0
Notes payable 0 6,000 10,500
Bonds payable 100,000 0 0
Common stock, $10 par value 300,000 144,000 42,000
Other contributed capital 150,000 12,000 38,000
Retained earnings (deficit) 130,000 6,000 (10,000)
Total $735,500 $198,000 $91,000
The following additional information is relevant.
1. One week before the acquisitions, Punto Company had advanced $10,000 to Sara Company and $5,000 to Rob Company. Sara Company recorded an increase to Accounts Payable for its advance, but Rob Company had not recorded the transaction.
2. On the date of acquisition, Punto Company owed Sara Company $12,000 for purchases on account, and Rob Company owed Punto Company $3,000 and Sara Company $6,000 for such purchases. The goods purchased had all been sold to outside parties prior to acquisition.
3. Punto Company exchanged 13,400 shares of its common stock with a fair value of $12 per share for 95% of the outstanding common stock of Sara Company. In addition, stock issue fees of $4,000 were paid in cash. The acquisition was accounted for as a purchase.
4. Punto Company paid $50,000 cash for the 85% interest in Rob Company.
5. Three thousand dollars of Sara Companys notes payable and $9,500 of Rob Company's notes payable were payable to Punto Company.
6. Assume that for Sara, any difference between book value and the value implied by the purchase price relates to subsidiary land. However, for Rob, assume that any excess of book value over the value implied by the purchase price is due to overvalued buildings.
A. Give the book entries to record the two acquisitions in the accounts of Punto Company.
B. Prepare a consolidated balance sheet workpaper immediately after acquisition.
C. Prepare a consolidated balance sheet at the date of acquisition for Punto Company and its subsidiaries.
Click here for the solution: On February 1, 2011, Punto Company purchased 95% of the outstanding common stock of Sara Company
On February 1, 2011, Punto Company purchased 95% of the outstanding common stock of Sara Company and 85% of the outstanding common stock of Rob Company. Immediately before the two acquisitions, balance sheets of the three companies were as follows:
Punto Sara Rob
Cash $165,000 $ 45,000 $17,000
Accounts receivable 35,000 35,000 26,000
Notes receivable 18,000 0 0
Merchandise inventory 106,000 35,500 14,000
Prepaid insurance 13,500 2,500 500
Advances to Sara Company 10,000
Advances to Rob Company 5,000
Land 248,000 43,000 15,000
Buildings (net) 100,000 27,000 16,000
Equipment (net) 35,000 10,000 2,500
Total $735,500 $198,000 $91,000
Accounts payable $ 25,500 $ 20,000 $10,500
Income taxes payable 30,000 10,000 0
Notes payable 0 6,000 10,500
Bonds payable 100,000 0 0
Common stock, $10 par value 300,000 144,000 42,000
Other contributed capital 150,000 12,000 38,000
Retained earnings (deficit) 130,000 6,000 (10,000)
Total $735,500 $198,000 $91,000
The following additional information is relevant.
1. One week before the acquisitions, Punto Company had advanced $10,000 to Sara Company and $5,000 to Rob Company. Sara Company recorded an increase to Accounts Payable for its advance, but Rob Company had not recorded the transaction.
2. On the date of acquisition, Punto Company owed Sara Company $12,000 for purchases on account, and Rob Company owed Punto Company $3,000 and Sara Company $6,000 for such purchases. The goods purchased had all been sold to outside parties prior to acquisition.
3. Punto Company exchanged 13,400 shares of its common stock with a fair value of $12 per share for 95% of the outstanding common stock of Sara Company. In addition, stock issue fees of $4,000 were paid in cash. The acquisition was accounted for as a purchase.
4. Punto Company paid $50,000 cash for the 85% interest in Rob Company.
5. Three thousand dollars of Sara Companys notes payable and $9,500 of Rob Company's notes payable were payable to Punto Company.
6. Assume that for Sara, any difference between book value and the value implied by the purchase price relates to subsidiary land. However, for Rob, assume that any excess of book value over the value implied by the purchase price is due to overvalued buildings.
A. Give the book entries to record the two acquisitions in the accounts of Punto Company.
B. Prepare a consolidated balance sheet workpaper immediately after acquisition.
C. Prepare a consolidated balance sheet at the date of acquisition for Punto Company and its subsidiaries.
Click here for the solution: On February 1, 2011, Punto Company purchased 95% of the outstanding common stock of Sara Company
Tuesday, September 15, 2015
Glaser Services acquired 30% of the outstanding common stock of Nickels Company on January 1, 2008
Glaser Services acquired 30% of the outstanding common stock of Nickels Company on January 1, 2008, by paying $800,000 for the 45,000 shares. Nickels declared and paid $0.30 per share cash dividends on March 15, June 15, September 15, and December 15, 2008. Nickels reported net income of $320,000 for the year. At December 31, 2008, the market price of Nickels common stock was $24 per share.
Instructions
a) Prepare the journal entries for Glaser Services for 2008 assuming Glaser cannot exercise significant influence over Nickels. (Use the cost method and assume that Nickels common stock should be classified as a trading security.)
b) Prepare the journal entries for Glaser Services for 2008, assuming Glaser can exercise significant influence over Nickels. Use the equity method.
c) In tabular form, indicate the investment and income statement account balances at December 31, 2008, under each method of accounting.
Click here for the solution: Glaser Services acquired 30% of the outstanding common stock of Nickels Company on January 1, 2008
Instructions
a) Prepare the journal entries for Glaser Services for 2008 assuming Glaser cannot exercise significant influence over Nickels. (Use the cost method and assume that Nickels common stock should be classified as a trading security.)
b) Prepare the journal entries for Glaser Services for 2008, assuming Glaser can exercise significant influence over Nickels. Use the equity method.
c) In tabular form, indicate the investment and income statement account balances at December 31, 2008, under each method of accounting.
Click here for the solution: Glaser Services acquired 30% of the outstanding common stock of Nickels Company on January 1, 2008
Sunday, September 13, 2015
In 2011, Western Transport Company entered into the treasury stock transactions described below
E 18-13 Treasury stock
In 2011, Western Transport Company entered into the treasury stock transactions described below. In 2009, Western Transport had issued 140 million shares of its $1 par common stock at $17 per share.
Required:
Prepare the appropriate journal entry for each of the following transactions:
1. On January 23, 2011, Western Transport reacquired 10 million shares at $20 per share.
2. On September 3, 2011, Western Transport sold 1 million treasury shares at $21 per share.
3. On November 4, 2011, Western Transport sold 1 million treasury shares at $18 per share.
Click here for the solution: In 2011, Western Transport Company entered into the treasury stock transactions described below
In 2011, Western Transport Company entered into the treasury stock transactions described below. In 2009, Western Transport had issued 140 million shares of its $1 par common stock at $17 per share.
Required:
Prepare the appropriate journal entry for each of the following transactions:
1. On January 23, 2011, Western Transport reacquired 10 million shares at $20 per share.
2. On September 3, 2011, Western Transport sold 1 million treasury shares at $21 per share.
3. On November 4, 2011, Western Transport sold 1 million treasury shares at $18 per share.
Click here for the solution: In 2011, Western Transport Company entered into the treasury stock transactions described below
Thursday, September 10, 2015
Gordon & Groton, CPA's were the auditors of Bank & Company, a brokerage firm and member of a national stock exchange
Auditing P 5-26 Gordon & Groton, CPA's were the auditors of Bank & Company, a brokerage firm and member of a national stock exchange. Gordon & Groton audited and reported on the financial statements of Bank, which were filed with the Securities and Exchange Commission.
Several of Bank's customers were swindled by a fraudulent scheme perpetrated by Bank's president, who owned 90% of the voting stock of the company. The facts establish that Gordon & Groton were negligent but not reckless or grossly negligent in conduct of the audit, and neither participated in the fraudulent scheme or knew of its existence.
The customers are suing Gordon & Groton under the antifraud provisions of Section10b and Rule 10b-5 of the securities Exchange Act of 1934 for aiding and abetting the fraudulent scheme of the president. The customer’s suit for fraud is predicated exclusively on the nonfeasance of the auditors in failing to conduct a proper audit, thereby failing to discover the fraudulent scheme.
Required:
Answer the following questions, setting forth reasons for any conclusions stated:
a. What is the probable outcome of the lawsuit?
b. What other theory of liability might the customers have asserted?
Click here for the solution: Gordon & Groton, CPA's were the auditors of Bank & Company, a brokerage firm and member of a national stock exchange
Several of Bank's customers were swindled by a fraudulent scheme perpetrated by Bank's president, who owned 90% of the voting stock of the company. The facts establish that Gordon & Groton were negligent but not reckless or grossly negligent in conduct of the audit, and neither participated in the fraudulent scheme or knew of its existence.
The customers are suing Gordon & Groton under the antifraud provisions of Section10b and Rule 10b-5 of the securities Exchange Act of 1934 for aiding and abetting the fraudulent scheme of the president. The customer’s suit for fraud is predicated exclusively on the nonfeasance of the auditors in failing to conduct a proper audit, thereby failing to discover the fraudulent scheme.
Required:
Answer the following questions, setting forth reasons for any conclusions stated:
a. What is the probable outcome of the lawsuit?
b. What other theory of liability might the customers have asserted?
Click here for the solution: Gordon & Groton, CPA's were the auditors of Bank & Company, a brokerage firm and member of a national stock exchange
Tuesday, September 8, 2015
Axel Corporation acquires 100% of the stock of Wheal Company on December 31, Year 4
Axel Corporation acquires 100% of the stock of Wheal Company on December 31, Year 4. The following information pertains to Wheal Company on the date of acquisition:
Book Value Fair Value
Cash......................................................... $ 40,000 $ 40,000
Accounts receivable.................................. 60,000 55,000
Inventory................................................... 50,000 75,000
Property, plant, and equipment (net)........ 100,000 200,000
Secret formula (patent) ............................ - 30,000
Total assets .............................................. $250,000 $400,000
Accounts payable ..................................... $ 30,000 $ 30,000
Accrued employee pensions...................... 20,000 22,000
Long-term debt......................................... 40,000 38,000
Capital stock ............................................ 100,000 -
Other contributed capital ......................... 25,000 -
Retained earnings .................................... 35,000 -
Total liabilities and equity ........................ $250,000 $ 90,000
Axel Corporation issues $110,000 par value ($350,000 market value on December 31, Year 4) of its own stock to the shareholders of Wheal Company to consummate the transaction, and Wheal Company becomes a wholly owned, consolidated subsidiary of Axel Corporation.
Required:
a. Prepare journal entries for Axel Corp. to record the acquisition of Wheal Company stock assuming (1) pooling accounting and (2) purchase accounting.
b. Prepare the worksheet entries for Axel Corp. to eliminate the investment in Wheal Company stock in preparation for a consolidated balance sheet at December 31, Year 4 assuming (1) pooling accounting and (2) purchase accounting.
c. Calculate consolidated retained earnings at December 31, Year 4 (Axel's retained earnings at this date are $150,000), assuming:
(1) Axel Corp. uses the pooling method for this business combination.
(2) Axel Corp. uses the purchase method for acquisition of Wheal Company.
Click here for the solution: Axel Corporation acquires 100% of the stock of Wheal Company on December 31, Year 4
Book Value Fair Value
Cash......................................................... $ 40,000 $ 40,000
Accounts receivable.................................. 60,000 55,000
Inventory................................................... 50,000 75,000
Property, plant, and equipment (net)........ 100,000 200,000
Secret formula (patent) ............................ - 30,000
Total assets .............................................. $250,000 $400,000
Accounts payable ..................................... $ 30,000 $ 30,000
Accrued employee pensions...................... 20,000 22,000
Long-term debt......................................... 40,000 38,000
Capital stock ............................................ 100,000 -
Other contributed capital ......................... 25,000 -
Retained earnings .................................... 35,000 -
Total liabilities and equity ........................ $250,000 $ 90,000
Axel Corporation issues $110,000 par value ($350,000 market value on December 31, Year 4) of its own stock to the shareholders of Wheal Company to consummate the transaction, and Wheal Company becomes a wholly owned, consolidated subsidiary of Axel Corporation.
Required:
a. Prepare journal entries for Axel Corp. to record the acquisition of Wheal Company stock assuming (1) pooling accounting and (2) purchase accounting.
b. Prepare the worksheet entries for Axel Corp. to eliminate the investment in Wheal Company stock in preparation for a consolidated balance sheet at December 31, Year 4 assuming (1) pooling accounting and (2) purchase accounting.
c. Calculate consolidated retained earnings at December 31, Year 4 (Axel's retained earnings at this date are $150,000), assuming:
(1) Axel Corp. uses the pooling method for this business combination.
(2) Axel Corp. uses the purchase method for acquisition of Wheal Company.
Click here for the solution: Axel Corporation acquires 100% of the stock of Wheal Company on December 31, Year 4
On January 1, 2011, Adams-Meneke Corporation granted 25 million incentive stock options to division managers
E 19-6 Stock options; forfeiture of options
On January 1, 2011, Adams-Meneke Corporation granted 25 million incentive stock options to division managers, each permitting holders to purchase one share of the company's $1 par common shares within the next six years, but not before December 31, 2013 (the vesting date). The exercise price is the market price of the shares on the date of grant, currently $10 per share. The fair value of the options, estimated by an appropriate option pricing model, is $3 per option.
Required:
1. Determine the total compensation cost pertaining to the options on January 1, 2011.
2. Prepare the appropriate journal entry to record compensation expense on December 31, 2011.
3. Unexpected turnover during 2012 caused the forfeiture of 6% of the stock options. Determine the adjusted compensation cost, and prepare the appropriate journal entry(s) on December 31, 2012 and 2013.
Click here for the solution: On January 1, 2011, Adams-Meneke Corporation granted 25 million incentive stock options to division managers
On January 1, 2011, Adams-Meneke Corporation granted 25 million incentive stock options to division managers, each permitting holders to purchase one share of the company's $1 par common shares within the next six years, but not before December 31, 2013 (the vesting date). The exercise price is the market price of the shares on the date of grant, currently $10 per share. The fair value of the options, estimated by an appropriate option pricing model, is $3 per option.
Required:
1. Determine the total compensation cost pertaining to the options on January 1, 2011.
2. Prepare the appropriate journal entry to record compensation expense on December 31, 2011.
3. Unexpected turnover during 2012 caused the forfeiture of 6% of the stock options. Determine the adjusted compensation cost, and prepare the appropriate journal entry(s) on December 31, 2012 and 2013.
Click here for the solution: On January 1, 2011, Adams-Meneke Corporation granted 25 million incentive stock options to division managers
Sunday, September 6, 2015
On December 31, 2010, Dow Steel Corporation had 600,000 shares of common stock and 300,000 shares
P 19-13
(Note: This is a variation of the previous problem, modified to include stock options.)
On December 31, 2010, Dow Steel Corporation had 600,000 shares of common stock and 300,000 shares of 8%, noncumulative, nonconvertible preferred stock issued and outstanding. Dow issued a 4% common stock dividend on May 15 and paid cash dividends of $400,000 and $75,000 to common and preferred shareholders, respectively, on December 15, 2011.
On February 28, 2011, Dow sold 60,000 common shares. In keeping with its long-term share repurchase plan, 2,000 shares were retired on July 1. Dow's net income for the year ended December 31, 2011, was $2,100,000. The income tax rate is 40%.
As part of an incentive compensation plan, Dow granted incentive stock options to division managers at December 31 of the current and each of the previous two years. Each option permits its holder to buy one share of common stock at an exercise price equal to market value at the date of grant and can be exercised one year from that date. Information concerning the number of options granted and common share prices follows:
The market price of the common stock averaged $32 per share during 2011.
Required:
Compute Dow's earnings per share for the year ended December 31, 2011.
Click here for the solution: On December 31, 2010, Dow Steel Corporation had 600,000 shares of common stock and 300,000 shares
(Note: This is a variation of the previous problem, modified to include stock options.)
On December 31, 2010, Dow Steel Corporation had 600,000 shares of common stock and 300,000 shares of 8%, noncumulative, nonconvertible preferred stock issued and outstanding. Dow issued a 4% common stock dividend on May 15 and paid cash dividends of $400,000 and $75,000 to common and preferred shareholders, respectively, on December 15, 2011.
On February 28, 2011, Dow sold 60,000 common shares. In keeping with its long-term share repurchase plan, 2,000 shares were retired on July 1. Dow's net income for the year ended December 31, 2011, was $2,100,000. The income tax rate is 40%.
As part of an incentive compensation plan, Dow granted incentive stock options to division managers at December 31 of the current and each of the previous two years. Each option permits its holder to buy one share of common stock at an exercise price equal to market value at the date of grant and can be exercised one year from that date. Information concerning the number of options granted and common share prices follows:
The market price of the common stock averaged $32 per share during 2011.
Required:
Compute Dow's earnings per share for the year ended December 31, 2011.
Click here for the solution: On December 31, 2010, Dow Steel Corporation had 600,000 shares of common stock and 300,000 shares
Wednesday, September 2, 2015
In January 2010, the management of Noble Company concludes that it has sufficient cash to permit some short-term investments in debt and stock securities
P16-2A In January 2010, the management of Noble Company concludes that it has sufficient cash to permit some short-term investments in debt and stock securities. During the year, the following transactions occurred.
Feb. 1 Purchased 600 shares of Hiens common stock for $31,800, plus brokerage fees of $600.
Mar. 1 Purchased 800 shares of Pryce common stock for $20,000, plus brokerage fees of $400.
Apr. 1 Purchased 50 $1,000, 7% Roy bonds for $50,000, plus $1,000 brokerage fees. Interest is payable semiannually on April 1 and October 1.
July 1 Received a cash dividend of $0.60 per share on the Hiens common stock.
Aug. 1 Sold 200 shares of Hiens common stock at $58 per share less brokerage fees of $200.
Sept. 1 Received a $1 per share cash dividend on the Pryce common stock.
Oct. 1 Received the semiannual interest on the Roy bonds.
Oct. 1 Sold the Roy bonds for $50,000 less $1,000 brokerage fees.
At December 31, the fair value of the Hiens common stock was $55 per share. The fair value of the Pryce common stock was $24 per share.
Hint: Journalize investment transactions, prepare adjusting entry, and show statement presentation.
Instructions
(a) Journalize the transactions and post to the accounts Debt Investments and Stock Investments. (Use the T-account form.)
Gain on stock sale $600
(b) Prepare the adjusting entry at December 31, 2010, to report the investment securities at fair value. All securities are considered to be trading securities.
(c) Show the balance sheet presentation of investment securities at December 31, 2010.
(d) Identify the income statement accounts and give the statement classification of each account.
Click here for the solution: In January 2010, the management of Noble Company concludes that it has sufficient cash to permit some short-term investments in debt and stock securities
Feb. 1 Purchased 600 shares of Hiens common stock for $31,800, plus brokerage fees of $600.
Mar. 1 Purchased 800 shares of Pryce common stock for $20,000, plus brokerage fees of $400.
Apr. 1 Purchased 50 $1,000, 7% Roy bonds for $50,000, plus $1,000 brokerage fees. Interest is payable semiannually on April 1 and October 1.
July 1 Received a cash dividend of $0.60 per share on the Hiens common stock.
Aug. 1 Sold 200 shares of Hiens common stock at $58 per share less brokerage fees of $200.
Sept. 1 Received a $1 per share cash dividend on the Pryce common stock.
Oct. 1 Received the semiannual interest on the Roy bonds.
Oct. 1 Sold the Roy bonds for $50,000 less $1,000 brokerage fees.
At December 31, the fair value of the Hiens common stock was $55 per share. The fair value of the Pryce common stock was $24 per share.
Hint: Journalize investment transactions, prepare adjusting entry, and show statement presentation.
Instructions
(a) Journalize the transactions and post to the accounts Debt Investments and Stock Investments. (Use the T-account form.)
Gain on stock sale $600
(b) Prepare the adjusting entry at December 31, 2010, to report the investment securities at fair value. All securities are considered to be trading securities.
(c) Show the balance sheet presentation of investment securities at December 31, 2010.
(d) Identify the income statement accounts and give the statement classification of each account.
Click here for the solution: In January 2010, the management of Noble Company concludes that it has sufficient cash to permit some short-term investments in debt and stock securities
On October 31, the stockholders’ equity section of Huth Company consists of common stock $300,000 and retained earnings $900,000
On October 31, the stockholders’ equity section of Huth Company consists of common stock $300,000 and retained earnings $900,000. Huth is considering the following two courses of action:
(1) Declaring a 5% stock dividend on the 30,000, $10 par value shares outstanding, or
(2) Effecting a 2-for-1 stock split that will reduce par value to $5 per share. The current market price is $14 per share.
Instructions
Prepare a tabular summary of the effects of the alternative actions on the components of stockholders’ equity, outstanding shares, and par value per share. Use the following column headings: Before Action, After Stock Dividend, and After Stock Split
Click here for the solution: On October 31, the stockholders’ equity section of Huth Company consists of common stock $300,000 and retained earnings $900,000
(1) Declaring a 5% stock dividend on the 30,000, $10 par value shares outstanding, or
(2) Effecting a 2-for-1 stock split that will reduce par value to $5 per share. The current market price is $14 per share.
Instructions
Prepare a tabular summary of the effects of the alternative actions on the components of stockholders’ equity, outstanding shares, and par value per share. Use the following column headings: Before Action, After Stock Dividend, and After Stock Split
Click here for the solution: On October 31, the stockholders’ equity section of Huth Company consists of common stock $300,000 and retained earnings $900,000
Baucom Manufacturing Corporation was started with the issuance of common stock for $50,000
P12-13A Baucom Manufacturing Corporation was started with the issuance of common stock for $50,000. It purchased $7,000 of raw materials and worked on three job orders during 2012 for which data follow. (Assume that all transactions are for cash unless otherwise indicated.)
Direct raw material used Direct labor
Job 1 $1,000 $2,000
Job 2 $2,000 $4,000
Job 3 $3,000 $2,000
Total $6,000 $8,000
Factory overhead is applied using a predetermined overhead rate of $0.60 per direct labor dollar. Jobs 2 and 3 were completed during the period and Job 3 was sold for $10,000 cash. Baucom paid $400 for selling and administrative expenses. Actual factory overhead was $4,300.
Required
a. Record the preceding events in a horizontal statements model. The first event for 2012 has been recorded as an example.
b. Reconcile all subsidiary accounts with their respective control accounts.
c. Record the closing entry for over- or underapplied manufacturing overhead in the horizontal statements model, assuming that the amount is insignificant.
d. Prepare a schedule of cost of goods manufactured and sold, an income statement, and a balance sheet for 2012.
Click here for the solution: Baucom Manufacturing Corporation was started with the issuance of common stock for $50,000
Direct raw material used Direct labor
Job 1 $1,000 $2,000
Job 2 $2,000 $4,000
Job 3 $3,000 $2,000
Total $6,000 $8,000
Factory overhead is applied using a predetermined overhead rate of $0.60 per direct labor dollar. Jobs 2 and 3 were completed during the period and Job 3 was sold for $10,000 cash. Baucom paid $400 for selling and administrative expenses. Actual factory overhead was $4,300.
Required
a. Record the preceding events in a horizontal statements model. The first event for 2012 has been recorded as an example.
b. Reconcile all subsidiary accounts with their respective control accounts.
c. Record the closing entry for over- or underapplied manufacturing overhead in the horizontal statements model, assuming that the amount is insignificant.
d. Prepare a schedule of cost of goods manufactured and sold, an income statement, and a balance sheet for 2012.
Click here for the solution: Baucom Manufacturing Corporation was started with the issuance of common stock for $50,000
Monday, August 31, 2015
Steinar loaned a friend $9,500 to buy some stock 3 years ago
Steinar loaned a friend $9,500 to buy some stock 3 years ago. In the current year the debt became worthless.
a. How much is Steinar's deduction for the bad debt for this year? (Assume he has no other capital gains or losses.)
b. What can Steinar do with the deduction not used this year?
Click here for the solution: Steinar loaned a friend $9,500 to buy some stock 3 years ago
a. How much is Steinar's deduction for the bad debt for this year? (Assume he has no other capital gains or losses.)
b. What can Steinar do with the deduction not used this year?
Click here for the solution: Steinar loaned a friend $9,500 to buy some stock 3 years ago
Interest is said to drive the stock market
Interest is said to drive the stock market. But interest is paid on bonds and loans, while stocks pay dividends, never interest. It would seem that interest has nothing to do with the stock market. Explain this apparent contradiction.
Click here for the solution: Interest is said to drive the stock market
Click here for the solution: Interest is said to drive the stock market
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