Question

Use the information provided below to prepare the liabilities and stockholders’ equity part of the December 31, 2013 balance sheet for Lark Corporation. If a beginning of the year balance is not mentioned, you may assume that it was zero.

Information for Lark Corporation for 2013:

- Lark Corporation was authorized to issue 3,000,000 shares of $1 par value common stock and 100,000 shares of $100 par value 5% convertible preferred stock. Each share of preferred stock was convertible into 10 shares of common stock.

- As of January 1, 2013, 1,600,000 shares of the common stock had been issued for a total of $6,000,000 in cash and services valued at $400,000. In addition, 40,000 shares of the preferred stock had been issued for $4,400,000 cash.

- In early 2013 Lark Corporation issued 10,000 shares of the preferred stock for $1,200,000 cash and on June 30, 2013 it repurchased 200,000 shares of the common stock for $2,000,000.

- During November 2013, Lark Corporation declared and paid the regular annual $5 per share dividend to the preferred stock holders. In addition, a $.25 per share dividend was declared and paid to the common stock holders.

- Lark Corporation’s December 31, 2012 Retained Earnings balance was $11,000,000. Its 2013 before tax income was $2,200,000.

- The taxable income for 2013 was only $2,000,000. The difference was due to accelerated depreciation used for tax purposes and straight line used for financial accounting purposes. The marginal tax rate was 35% and this rate was expected to be in effect for the foreseeable future. (There was no deferred tax liability or asset balance at the beginning of 2013.)

- On the December 31, 2012 balance sheet Accumulated Other Comprehensive Income was reported with a net debit balance of $300,000. This net debit balance was a due to an unrealized holding loss during 2012 on available for sale debt securities.

- During 2013 Lark Corporation earned unrealized holding gains of $170,000 on its available for sale debt securities. This was its only 2013 Other Comprehensive Income.

- On December 31, 2012 Lark Corporation signed a 10-year lease for a building and made the first $400,000 cash payment. This lease met the criteria for a finance lease and it called for annual payments of $400,000 each Dec. 31, starting with the day the lease was signed. Since Lark’s incremental borrowing rate was 12%, the lease did not call for a guaranteed residual value and the lessor’s implicit interest rate is not known, on Dec. 31, 2012 Lark recorded an asset and a lease liability for $2,531,300.

- As of December 31, 2013 the company’s Accounts Payable totaled $100,000 and its various accrued liabilities (other than interest payable) totaled $30,000.

- Lark Corporation issued 3000 $1,000 10%10-year bonds on July 1, 2013. They sold at a discount of $344,112 to yield 12%. The semi-annual Interest is to be paid every January 1 and every July 1.  

Answer 1

LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts Payable	$100,000
Accrued Liabilities	$30,000
Interest Payable	$159,353
Total Current Liabilities
Long term Liabilities:
Lease Liability
Bonds Payable	$3,000,000
Less: Discount on Bonds Payable	($334,759)
Total Long term liabilities
Stockholder's Equity
Common stock	$6,400,000
Preferred Stock	$5,600,000
Total paid in capital	$12,000,000
Retained Earnings	$11,900,000
Accumulated OCI	($130,000)
Less: Treasury Stock	($2,000,000)
Total stockholder's equity
Total Liabilities and Stockholder's equity
Working Note:
Common Stock-1600000	$6,400,000
Preferred stock-40000	$4,400,000
Preferred stock-10000	$1,200,000
	$5,600,000
Treasury Stock	($2,000,000)
Retained Earning	$11,000,000
Less: Preferred Dividend (50000 x $5)	($250,000)
Common Stock Dividend (1400000 x $0.25)	($350,000)
Add: Net Income(2200000-700000income tax)	$1,500,000
	$11,900,000
Income tax (2000000 x 35%)	$700,000
Accumulated other comprehensive income	($300,000)
Add: Unrealized gain on securities available for sale	$170,000
Accumulated other comprehensive income	($130,000)
Lease liability	$2,531,300
Less: Cash payment for lease liability	($544,244)
Lease liability	$1,987,056
Cash Payment	$400,000
Interest expense @12% on 2131300 (2531300-400000)	255,756
Payment for lease liability	144,244
Interest payable on Bonds	$159,353

Date	Interest payment @ 10% (5% semiannually)	Interest expense @12% (6% semiannually)	Amortization of Bond Discount	Debit balance in Bond Discount Account	Credit balance in Bonds payable Account	BooK value of Bonds
7/1/2013				$344,112	$3,000,000	$2,655,888
1/1/2014	$150,000	$159,353	$9,353	$334,759	$3,000,000	$2,665,241
7/1/2014	$150,000	$159,914	$9,914	$324,844	$3,000,000	$2,675,156
1/1/2015	$150,000	$160,509	$10,509	$314,335	$3,000,000	$2,685,665
7/1/2015	$150,000	$161,140	$11,140	$303,195	$3,000,000	$2,696,805
1/1/2016	$150,000	$161,808	$11,808	$291,387	$3,000,000	$2,708,613
7/1/2016	$150,000	$162,517	$12,517	$278,870	$3,000,000	$2,721,130
1/1/2017	$150,000	$163,268	$13,268	$265,602	$3,000,000	$2,734,398
7/1/2017	$150,000	$164,064	$14,064	$251,538	$3,000,000	$2,748,462
1/1/2018	$150,000	$164,908	$14,908	$236,631	$3,000,000	$2,763,369
7/1/2018	$150,000	$165,802	$15,802	$220,828	$3,000,000	$2,779,172
1/1/2019	$150,000	$166,750	$16,750	$204,078	$3,000,000	$2,795,922
7/1/2019	$150,000	$167,755	$17,755	$186,323	$3,000,000	$2,813,677
1/1/2020	$150,000	$168,821	$18,821	$167,502	$3,000,000	$2,832,498
7/1/2020	$150,000	$169,950	$19,950	$147,552	$3,000,000	$2,852,448
1/1/2021	$150,000	$171,147	$21,147	$126,405	$3,000,000	$2,873,595
7/1/2021	$150,000	$172,416	$22,416	$103,990	$3,000,000	$2,896,010
1/1/2022	$150,000	$173,761	$23,761	$80,229	$3,000,000	$2,919,771
7/1/2022	$150,000	$175,186	$25,186	$55,043	$3,000,000	$2,944,957
1/1/2023	$150,000	$176,697	$26,697	$28,345	$3,000,000	$2,971,655
7/1/2023	$150,000	$178,299	$28,345	$0	$3,000,000	$3,000,000