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# In 2003, David Corp. acquired 15,000 shares of its own \$1 par value common stock at \$18 per share.

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1. In 2003, David Corp. acquired 15,000 shares of its own \$1 par value
common stock at \$18 per share. In 2004, David issued 10,000 of these
shares at \$25 per share. David uses the cost method to account for
its treasury stock transactions. What accounts and what amounts
should David credit in 2004 to record the issuance of the 10,000
shares?
Treasury Paid-in Retained Common
Stock Capital Earnings Stock
???????? ?????????? ???????? ???????
a. \$180,000 \$70,000
b. \$180,000 \$ 70,000
c. \$240,000 \$10,000
d. \$170,000 \$70,000 \$10,000

2. Lynn Co. issued 150,000 shares of \$10 par common stock for
\$1,800,000. Lynn acquired 6,000 shares of its own common stock
at \$15 per share. Three months later, Lynn sold 3,000 of these
shares at \$19 per share. If the cost method is used to record
treasury stock transactions, to record the sale of the 3,000
treasury shares, Lynn should credit
a. Treasury Stock for \$57,000.
b. Treasury Stock for \$30,000 and Paid-in Capital from Treasury
Stock for \$27,000.
c. Treasury Stock for \$45,000 and Paid-in Capital from Treasury
Stock for \$12,000.
d. Treasury Stock for \$45,000 and Paid-in Capital in Excess of
Par for \$12,000
3. Farmer Corporation owns 4,000,000 shares of stock in Baha
Corporation. On December 31, 2003, Farmer distributed these shares
of stock as a dividend to its stockholders. This is an example of a
a. property dividend.
b. stock dividend.
c. liquidating dividend.
d. cash dividend.

4. Franco Company acquired 16,000 shares of its own common stock at
\$20 per share on February 5, 2003, and sold 8,000 of these shares
at \$27 per share on August 9, 2004. The market value of Franco's
common stock was \$24 per share at December 31, 2003, and \$25 per
share at December 31, 2004. The cost method is used to record
treasury stock transactions. What account(s) should Franco credit
in 2004 to record the sale of 8,000 shares?
a. Treasury Stock for \$216,000.
b. Treasury Stock for \$160,000 and Paid-in Capital from Treasury
Stock for \$56,000.
c. Treasury Stock for \$160,000 and Retained Earnings for \$56,000.
d. Treasury Stock for \$192,000 and Retained Earnings for \$24,000.

5. Dryer Company had 300,000 shares of common stock issued and
outstanding at December 31, 2003. During 2004, no additional common
stock was issued. On January 1, 2004, Dryer issued 400,000 shares
of nonconvertible preferred stock. During 2004, Dryer declared and
paid \$240,000 cash dividends on the common stock and \$200,000 on the
nonconvertible preferred stock. Net income for the year ended
December 31, 2004, was \$1,280,000. What should be Dryer's 2004
earnings per common share, rounded to the nearest penny?
a. \$1.55.
b. \$2.80.
c. \$3.60.
d. \$4.26.

6. At December 31, 2003, Olsen Company had 600,000 shares of common
stock outstanding. On October 1, 2004, an additional 120,000 shares
6% convertible bonds outstanding at December 31, 2003, which are
convertible into 270,000 shares of common stock. No bonds were
converted into common stock in 2004. The net income for the year
ended December 31, 2004, was \$1,500,000. Assuming the income tax
rate was 30%, the diluted earnings per share for the year ended
December 31, 2004, should be (rounded to the nearest penny)
a. \$2.72.
b. \$2.00.
c. \$1.90.
d. \$1.67.

------------------------------
The summarized balance sheets of Elston Company and Alley Company
as of December 31, 2004 are as follows:

Elston Company
Balance Sheet
December 31, 2004
Assets \$800,000

Liabilities \$100,000
Capital stock 400,000
Retained earnings 300,000
????????
Total equities \$800,000

Alley Company
Balance Sheet
December 31, 2004
Assets \$600,000

Liabilities \$150,000
Capital stock 370,000
Retained earnings 80,000
????????
Total equities \$600,000

7. If Elston Company acquired a 30% interest in Alley Company on
December 31, 2004 for \$150,000 and the equity method of accounting
for the investment were used, the amount of the debit to Investment
in Alley Company Stock would have been
a. \$180,000.
b. \$150,000.
c. \$120,000.
d. \$135,000.

------------------------------
Karter Company purchased 200 of the 1,000 outstanding shares of
Flynn Company's common stock for \$180,000 on January 2, 2004. During
2004, Flynn Company declared dividends of \$30,000 and reported
earnings for the year of \$120,000.

8. If Karter Company used the fair value method of accounting for its
investment in Flynn Company, its Investment in Flynn Company account
on December 31, 2004 should be
a. \$174,000.
b. \$198,000.
c. \$180,000.
d. \$204,000.

9. When investments in debt securities are purchased between interest
payment dates, preferably the
a. securities account should include accrued interest.
b. accrued interest is debited to Interest Expense.
c. accrued interest is debited to Interest Revenue.
d. accrued interest is debited to Interest Receivable.

10. Byner Corporation accounts for its investment in the common stock
of Yount Company under the equity method. Byner Corporation
should ordinarily record a cash dividend received from Yount as
a. a reduction of the carrying value of the investment.
c. an addition to the carrying value of the investment.
d. dividend income.

------------------------------
Lansing Co. at the end of 2004, its first year of operations,
prepared a reconciliation between pretax financial income and
taxable income as follows:
Pretax financial income \$ 900,000
Estimated litigation expense 1,200,000
Extra depreciation for taxes (1,800,000)
??????????
Taxable income \$ 300,000

The estimated litigation expense of \$1,200,000 will be deductible in
2005 when it is expected to be paid. Use of the depreciable assets
will result in taxable amounts of \$600,000 in each of the next three
years. The income tax rate is 30% for all years.

11. The deferred tax liability to be recognized is

Current Noncurrent
??????? ??????????
a. \$180,000 \$360,000
b. \$180,000 \$270,000
c. \$0 \$540,000
d. \$0 \$450,000

12. In its 2004 income statement, Simon Corp. reported depreciation of
\$740,000 and interest revenue on municipal obligations of \$140,000.
Simon reported depreciation of \$1,100,000 on its 2004 income tax
return. The difference in depreciation is the only temporary
difference, and it will reverse equally over the next three years.
Simon's enacted income tax rates are 35% for 2004, 30% for 2005, and
25% for 2006 and 2007. What amount should be included in the
deferred income tax liability in Simon's December 31, 2004 balance
sheet?
a. \$96,000.
b. \$124,000.
c. \$150,000.
d. \$175,000.

------------------------------
Easton Co. at the end of 2004, its first year of operations,
prepared a reconciliation between pretax financial income and
taxable income as follows:

Pretax financial income \$ 400,000
Estimated litigation expense 1,000,000
Installment sales (800,000)
??????????
Taxable income \$ 600,000

The estimated litigation expense of \$1,000,000 will be deductible in
2006 when it is expected to be paid. The gross profit from the
installment sales will be realized in the amount of \$400,000 in each
of the next two years. The estimated liability for litigation is
classified as noncurrent and the installment accounts receivable are
classified as \$400,000 current and \$400,000 noncurrent. The income
tax rate is 30% for all years.

13. The income tax expense is
a. \$120,000.
b. \$180,000.
c. \$200,000.
d. \$400,000.

14. One component of pension expense is expected return on plan assets.
Plan assets include
employee when a contributory plan of some type is involved.
b. plan assets still under the control of the company.
c. only assets reported on the balance sheet of the employer as
prepaid pension cost.
d. none of these.

15. A company using a perpetual inventory system neglected to record a
purchase of merchandise on account at year end. This merchandise was
omitted from the year-end physical count. How will these errors
affect assets, liabilities, and stockholders' equity at year end and
net income for the year?

Assets Liabilities Stockholders' Equity Net Income
?????? ??????????? ???????????????????? ??????????
a. No effect Understate Overstate Overstate
b. No effect Overstate Understate Understate
c. Understate Understate No effect No effect
d. Understate No effect Understate Understate

PROBLEMS

A. Sands Corporation has the following capital structure at the
beginning of the year:

6% Preferred stock, \$50 par value, 20,000 shares
authorized, 6,000 shares issued and
outstanding \$ 300,000
Common stock, \$10 par value, 60,000 shares
authorized, 40,000 shares issued and
outstanding 400,000
Paid-in capital in excess of par 110,000
??????????
Total paid-in capital 810,000
Retained earnings 340,000
??????????
Total stockholders' equity \$1,150,000

INSTRUCTIONS
(a) Record the following transactions which occurred consecutively
(show all calculations).

1. A total cash dividend of \$70,000 was declared and payable to
stockholders of record. Record dividends payable on common
and preferred stock in separate accounts.

2. A 10% common stock dividend was declared. The average market
value of the common stock is \$15 a share.

3. Assume that net income for the year was \$240,000 (record the
closing entry) and the board of directors appropriated
\$80,000 of retained earnings for plant expansion.

(b) Construct the stockholders' equity section incorporating all the
above information.

B. Norway Company purchased equipment for \$270,000 on January 2, 2003,
its first day of operations. For book purposes, the equipment will
be depreciated using the straight-line method over three years with
no salvage value. Pretax financial income and taxable income are as
follows:
2003 2004 2005
???????? ???????? ????????
Pretax financial income \$156,000 \$170,000 \$180,000
Taxable income 120,000 170,000 216,000

The temporary difference between pretax financial income and taxable
income is due to the use of accelerated depreciation for tax
purposes.

INSTRUCTIONS
(a) Prepare the journal entries to record income taxes for all three
years (expense, deferrals, and liabilities) assuming that the
enacted tax rate applicable to all three years is 30%.

(b) Prepare the journal entries to record income taxes for all three
years (expense, deferrals, and liabilities) assuming that the
enacted tax rate as of 2003 is 30% but that in the middle of
2004, Congress raises the income tax rate to 35% retroactive to
the beginning of 2004.

#### Solution Preview

Solution denoted by: *

1. In 2003, David Corp. acquired 15,000 shares of its own \$1 par value
common stock at \$18 per share. In 2004, David issued 10,000 of these
shares at \$25 per share. David uses the cost method to account for
its treasury stock transactions. What accounts and what amounts
should David credit in 2004 to record the issuance of the 10,000
shares?
Treasury Paid-in Retained Common
Stock Capital Earnings Stock
???????? ?????????? ???????? ???????
a. \$180,000 \$70,000
* b. \$180,000 \$ 70,000

When buying stock back, the entire value goes into Cash account and treasury stock account. When reselling, the stock gain goes into APIC (additional paid-in capital) and is recorded in the Treasury account.

c. \$240,000 \$10,000
d. \$170,000 \$70,000 \$10,000

2. Lynn Co. issued 150,000 shares of \$10 par common stock for
\$1,800,000. Lynn acquired 6,000 shares of its own common stock
at \$15 per share. Three months later, Lynn sold 3,000 of these
shares at \$19 per share. If the cost method is used to record
treasury stock transactions, to record the sale of the 3,000
treasury shares, Lynn should credit
a. Treasury Stock for \$57,000.
b. Treasury Stock for \$30,000 and Paid-in Capital from Treasury
Stock for \$27,000.
* c. Treasury Stock for \$45,000 and Paid-in Capital from Treasury
Stock for \$12,000.

Lynn sold 3,000 of treasury stock: 3,000*15 = 45,000 goes to treasury account; excess value (19-15)*3,000 = 12,000 goes into APIC.

d. Treasury Stock for \$45,000 and Paid-in Capital in Excess of
Par for \$12,000

3. Farmer Corporation owns 4,000,000 shares of stock in Baha
Corporation. On December 31, 2003, Farmer distributed these shares
of stock as a dividend to its stockholders. This is an example of a
a. property dividend.
* b. stock dividend.
c. liquidating dividend.
d. cash dividend.

4. Franco Company acquired 16,000 shares of its own common stock at
\$20 per share on February 5, 2003, and sold 8,000 of these shares
at \$27 per share on August 9, 2004. The market value of Franco's
common stock was \$24 per share at December 31, 2003, and \$25 per
share at December 31, 2004. The cost method is used to record
treasury stock transactions. What account(s) should Franco credit
in 2004 to record the sale of 8,000 shares?
a. Treasury Stock for \$216,000.
* b. Treasury Stock for \$160,000 and Paid-in Capital from Treasury
Stock for \$56,000.
c. Treasury Stock for \$160,000 and Retained Earnings for \$56,000.
d. Treasury Stock for \$192,000 and Retained Earnings for \$24,000.

5. Dryer Company had 300,000 shares of common stock issued and
outstanding at December 31, 2003. During 2004, no additional common
stock was issued. On January 1, 2004, Dryer issued 400,000 shares
of nonconvertible preferred stock. During 2004, Dryer declared and
paid \$240,000 cash dividends on the common stock and \$200,000 on the
nonconvertible preferred stock. Net income for the year ended
December 31, 2004, was \$1,280,000. What should be Dryer's 2004
earnings per common share, rounded to the nearest penny?
a. \$1.55.
* b. \$2.80.

Earnings = 1,280,000 - (240,000 + 200,000) = 840,000. The company has 300,000 common shares outstanding; earnings per common share = 840,000/300,000 = \$2.8.

c. \$3.60.
d. \$4.26.

6. At December 31, 2003, Olsen Company had 600,000 shares of common
stock outstanding. On October 1, 2004, an additional 120,000 shares
6% convertible bonds outstanding at December 31, 2003, which are
convertible into 270,000 shares of common stock. No bonds were
converted into common stock in 2004. The net income for the year
ended December 31, 2004, was \$1,500,000. Assuming the income tax
rate was 30%, the diluted earnings per share for the year ended
December 31, 2004, should be (rounded to the nearest penny)
a. \$2.72.
...

#### Solution Summary

In 2003, David Corp. acquired 15,000 shares of its own \$1 par value common stock at \$18 per share.

\$2.19