Intermediate accounting II (ACCT 311) Solutions

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)
June 1              2-for-1 split                                                     1,300,000
November 1    Issued (1/6 × 180,000)                                         30,000
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:
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

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
Text Box: --Cash outflow from investing activitiesAdd increase in machinery                                         $130,000
Purchase of machinery                                               $204,000  

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