Question

Intermediate Accounting II

Homework Problems

Chapter 16

1. The stockholders’ equity section of Whaler Inc. at the beginning of the current year appears below.

  Common stock, $1 par value, authorized 5,000,000

  shares, 800,000 shares issued and outstanding $ 800,000

  Paid-in capital in excess of par—common stock   16,100,000

  Retained earnings 260,000

During the current year, the following transactions occurred:

a. The company issued to the stockholders 500,000 rights. Ten rights are needed to buy one share of stock at $21.

  The rights were void after 30 days. The market price of the stock at this time was $22 per share.

b. The company sold to the public a $1,000,000, 6% bond issue at 106. The company also issued with each $1,000

  bond two detachable stock purchase warrants, which provided for the purchase of common stock at $19 per

  share. Shortly after issuance, similar bonds without warrants were selling at 97 and the warrants at $4.50.

c.   All but 75,000 of the rights issued in (1) were exercised in 30 days.

d. At the end of the year, 60% of the warrants in (2) had been exercised, and the remaining were outstanding and in

  good standing.

e.   During the current year, the company granted stock options for 125,000 shares of common stock to company

executives.  The company, using a fair value option-pricing model, determines that each option is worth $2.60.

The option price is $27.  The options were to expire at year-end and were considered compensation for the

current year.

f.   All but 20,000 shares related to the stock-option plan were exercised by year-end. The expiration resulted because

  one of the executives failed to fulfill an obligation related to the employment contract.

Instructions

  (a) Prepare general journal entries for the current year to record the transactions listed above.

  (b) Prepare the stockholders’ equity section of the balance sheet at the end of the current year. Assume that

Retained earnings at the end of the current year is $467,000.

2. Janenda Inc. issued $5,000,000 of convertible 5-year bonds on July 1, 2020. The bonds provide for 6% interest

payable semiannually on January 1 and July 1. The discount in connection with the issue was $120,000, which is

being amortized monthly on a straight-line basis. The bonds are convertible after one year into 15 shares of Janenda

Inc.’s $1 par value common stock for each $1,000 of bonds. On October 1, 2021, $600,000 of bonds were turned in

for conversion into common stock. Interest has been accrued monthly and paid as due. At the time of conversion,

any accrued interest on bonds being converted is paid in cash.

Instructions

Prepare the journal entries to record the conversion, amortization, and interest in connection with the bonds as of

  the following dates. (Round to the nearest dollar.)

(a) October 1, 2021. (Assume the book value method is used.)

(b) October 31, 2021.

(c)  December 31, 2021, including closing entries for end-of-year.

3. JaimeTurino of the controller’s office of Reed Corporation was giventhe assignment of determining the basic and

  diluted earnings per share values for the year ending December 31, 2021. Jaime has compiled the information listed

  below.

  a. The company is authorized to issue 10,000,000 shares of $1 par value common stock. As of December 31, 2020,

  4,500,000 shares had been issued and were outstanding.

  b. The per share market prices of the common stock on selected dates were as follows:

  Price per Share

  July 1, 2020   $20.00

  January 1, 2021     21.00

April 1, 2021     25.00

July 1, 2021     11.00

  August 1, 2021   10.50

  November 1, 2021   12.00

  December 31, 2021       10.00

c. A total of 500,000 shares of an authorized 1,500,000 shares of convertible preferred stock had been issued on

  October 1, 2020.  The stock was issued at its par value of $100, and it has a cumulative dividend of $4 per share.

  The stock is convertible into common stock at the rate of one share of convertible preferred for five shares of

  common. The rate of conversion is to be automatically adjusted for stock splits and stock dividends. Dividends are

  paid semi-annually on September 30 and March 31.

d. Reed Corporation is subject to a 20% income tax rate.

e. The after-tax net income for the year ended December 31, 2021, was $6,890,000.

The following specific activities took place during 2021.

a. January 1—A 2-for-l split of the common stock became effective on this date. The board of directors had

  authorized the split on December 15, 2020.

b. April 1—A total of 500,000 shares of common stock were issued to acquire a distribution center.

c. July 1—A total of 200,000 shares of the $3 convertible preferred stock was converted into common stock. The

Company issued new common stock and retired the preferred stock. This was the only conversion of the preferred

  stock during 2021.

d. October 1—A 10% common stock dividend was issued. The dividend had been declared on September 10, 2021, to

All stockholders of record on September 29, 2021.

e. November 1—A total of 90,000 shares of common stock were purchased on the open market at $12 per share.

  These shares were to be held as treasury stock and were still in the treasury as of December 31, 2021.

  f. Common stock cash dividends—Cash dividends to common stockholders were declared and paid as follows:

November 15-$0.40 per share

  g. Preferred stock cash dividends—Cash dividends to preferred stockholders were declared and paid as scheduled.

Instructions

(a) Determine the number of shares used to compute basic earnings per share for the year ended December 31,

  2021.

(b) Determine the number of shares used to compute diluted earnings per share for the year ended December 31,

  2021.

(c) Compute the adjusted net income to be used as the numerator in the basic earnings per share calculation for the

  Year ended December 31, 2021.

4. The information below pertains to Payson Company for 2021.

Net income for the year     $8,670,000

6% convertible bonds issued at par ($1,000 per bond); each bond

  is convertible into 60 shares of common stock 5,000,000

4% convertible, cumulative preferred stock, $100 par value; each share

  is convertible into 4 shares of common stock   2,500,000

Common stock, $1 par value     9,500,000

Tax rate for 2021   20%

Average market price of common stock   $18 per share

There were no changes during 2021 in the number of common shares, preferred shares, or convertible bonds

outstanding. There is no treasury stock. The company also has common stock options (granted in a prior year) to

purchase 120,000 shares of common stock at $12 per share.

Instructions

  (a) Compute basic earnings per share for 2021.

  (b) Compute diluted earnings per share for 2021.

Answer 1

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4. The information below pertains to Payson Company for 2021.......

Solution:

(a) Basic earnings per share for 2021

$Basic EPS =\frac{Net income - Preferred Dividend }{No. of shares of commonstock}$

=($8,670,000-(2,500,000*4%))/9,500,000

Basic EPS =$ 0.902

(b) Diluted earnings per share for 2021.

(Net Income – Preferred dividend) + Interest savings (net of tax) Average common shares + Potentially diluted common shares

Net income =$8,670,000

Preferred Dividend =2,500,000x4%=$100, 000

Interest savings net of tax=5,000,000x6%x(1-0.2)=$240,000

Average common shares =9500000

Potentially Diluted common shares =((5,000,000/1000)*60)+((18-12)/18)*120000

=340000

Diluted EPS =($8,670,000-$100,000+240,000)/(9,500,000+340000)

=0.895