Question
# 1 (6 marks)
You
have been hired by Yew Corp. to advise them on how to reflect the events below
in their financial statements for the year ended December 31, 2017 under ASPE.
Event 1: The Division A employees union has been negotiating a new
contract with Yew Corp. The union is requesting a 5% wage increase retroactive
for two years. Yew’s management has offered the union a 2% wage increase
retroactive for one year. While the negotiations are still ongoing, the company
believes that an agreement will soon be reached for a 4% wage increase
retroactive for one year, but there is no guarantee that this will be the
outcome of the negotiations.
Event 2: The Division B employees union is also negotiating a new
contract with Yew Corp. However, these negotiations are proving to be very
tough. So far there has not been much progress and management is pessimistic
about a quick resolution. The company is concerned that during 2018 the Division
B employees will decide to go on strike; in fact, Yew considers it very likely.
At this point it is difficult to assess the economic consequences of the
potential strike.
Event 3: Toward the end of 2017, a fire destroyed one of Yew’s
plants. The damage is estimated to be $8,000,000 and the company’s insurance
policy has maximum coverage of $15,000,000 for this. The deductible on the
policy is $300,000. The company is concerned that the insurance premium
($200,000 in 2017) will double in 2018.
Instructions
For each of the above events, state the accounting treatment you
believe is most appropriate. Be specific, and give your rationale.
Question # 2 (12 marks)
Prepare
the necessary journal entries to record the following transactions relating to
the long-term issuance of bonds by Glendale Corp. Show calculations and round
to the nearest dollar.
March 1
Issued $200,000 (face value) 8% bonds for $218,040, including
accrued interest. Interest is payable semi-annually on December 1 and June 1
with the bonds maturing 10 years from the previous December 1. The bonds are
callable at 102.
June 1
Paid semi-annual interest on the bonds. Use straight-line
amortization for any premium or discount.
December 1
Paid semi-annual interest on the bonds, and then purchased $100,000
face value bonds at the call price in accordance with the provisions of the
bond indenture.
Question # 3 (14 marks)
In each of
the following independent cases, it is assumed that the corporation has outstanding
20,000, $0.80, preferred shares, with a carrying value of $200,000, and 80,000
common shares, with a carrying value of $800,000. Although dividends have been
paid regularly up to 2011, no dividends were declared in 2012 or 2016.
1. At
December 31, 2017, the board of directors wants to distribute $125,000 in
dividends. How much will the preferred shareholders receive if their shares are
cumulative and non-participating?
2. At
December 31, 2017, the board of directors wants to distribute $200,000 in
dividends. How much will the preferred shareholders receive if their shares are
cumulative and participating up to 15% in total?
3. On
December 31, 2017, the preferred shareholders received an $80,000 dividend on
their shares, which are cumulative and fully participating. How much money was
distributed in total for dividends?
Question # 4 (13 marks)
For each of
the unrelated situations described below, prepare the entries required to
record the transactions.
1. On
August 1, 2017, Alpha Corporation called its 10% convertible bonds for
conversion. The $4,000,000 par value bonds were converted into 160,000 no par
common shares. On August 1, there was $350,000 of unamortized premium
applicable to the bonds. At the time of issuance, Contributed
Surplus—Conversion Rights was credited for $150,000, which represented the
equity portion of the convertible bonds, and the market value of the common
shares was $20 per share. The company records the conversion using the book
value method. Ignore all interest payments.
2. Beta
Inc. issues 10% convertible bonds, par $1,000,000, at 97. The investment banker
indicates that if the bonds had not been convertible they would have sold at
94. Use the residual method.
3. Gamma
Ltd. issues $2,000,000 par value, 8% bonds. To help the sale, detachable stock warrants
are issued at the rate of ten warrants for each $1,000 bond sold. It is
estimated that the value of the bonds without the warrants is $1,974,000 and
the value of the warrants is $126,000. The bonds with the warrants sold at 101.
Use the residual method.
Question # 5 (10 marks)
Barker Inc.
reported net income (30% tax rate) of $1,600,000 for calendar 2017 and an
average of 500,000 common shares outstanding during the year.
Barker issued
$2,000,000 par value, 10-year, 9% convertible bonds on January 1, 2015 at a
$18,000 discount. The bonds are convertible into 60,000 common shares.
Barker uses
the straight-line method for amortizing the bond discount.
Instructions
Calculate basic
and diluted earnings per share for 2017.
Question #
6 (10 marks)
In the blank
to the left of each statement, fill in the letter from the following list which
best describes the treatment of the item on the financial statements of Sora
Inc. for the current year ending December 31, 2017:
a) Change in accounting policy
requiring retrospective application
b) Change in estimate
c) Correction of error
d) None of the above
____ 1. In
2017, the company changed its method of recognizing income from the completed-contract
method to the percentage-of-completion method.
____ 2. At
the end of 2017, an audit revealed that the corporation's allowance for
doubtful accounts was too large and should be reduced to 2%. When the audit was
performed in 2016, the allowance seemed appropriate.
____ 3. Depreciation
on a truck, acquired in 2013, was understated because the service life had been
overestimated. The understatement had been made in order to show higher net
income in 2014 and 2015.
____ 4. The
company switched from average cost to FIFO inventory costing during the current
year.
____ 5. In
2017, Sora introduced a new pension plan for its
employees, which included past service costs of $50,000. It decided to
recognize the $50,000 as part of its 2017 pension expense.
____ 6. During
2017, a long-term bond with a carrying value of $3,600,000 was retired at a
cost of $4,100,000.
____ 7. After
negotiations with Canada Revenue Agency, income taxes owing for 2016 were
established at $42,900. They were originally estimated to be $28,600.
____ 8. In
2017, the company incurred interest expense of $29,000 on a 20-year bond issue.
____ 9. In
calculating the depreciation in 2015 for buildings, an error was made which
overstated income in that year by $75,000. The error was discovered in 2017.
____ 10. In
2017, the company changed its method of depreciating plant assets from the
double declining-balance method to the straight-line method.
Question # 7 (6
marks)
On January 1, Lexy Corp. leases a truck they have
manufactured to Roxy Corp. Lexy has calculated the lease payments to Roxy to be
$40,000 per year for 4 years and the sales price of the truck is $130,000. It
cost Lexy $100,000 to manufacture the truck. Record the journal entries to set
up the lease on January 1 on Lexy’s books.
Question # 8 (16 marks)
BIRCH CORPORATION
Comparative Statements of Financial Position
December 31
2017 2016
Cash.................................................................................... $ 43,000 $ 24,000
Accounts
receivable, net........................................................ 31,000 38,000
Inventory................................................................................ 118,000 82,000
Land........................................................................................ 120,000 190,000
Building.................................................................................. 200,000 200,000
Accumulated
depreciation................................................. (50,000) (40,000)
Equipment.......................................................................... 1,030,000 600,000
Accumulated
depreciation..............................................
(118,000) (94,000)
$1,374,000 $1,000,000
Accounts
payable............................................................. $ 115,000 $ 100,000
4% Bonds
payable................................................................. 320,000 -0-
Common
shares..................................................................... 750,000 750,000
Retained
earnings.............................................................. 189,000 150,000
$1,374,000 $1,000,000
Additional data:
1. Net income for the year was $84,000.
2. Cash dividends were paid.
3. Land was sold for $80,000.
4. Old equipment was sold for $70,000. This
equipment had cost $150,000 and had accumulated depreciation of $60,000 to date
of sale. New equipment was purchased to replace it.
Instructions
Prepare a statement
of cash flows for calendar 2017, using the indirect method.
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