Question

Please show all calculations!

Exercise 1:

Early in the year Bill Barnes and several friends organized a corporation called Barnes Communications, Inc. The corporation was authorized to issue 50,000 shares of $100 par value, 10% cumulative preferred stock and 400,000 shares of $2 par value common stock. The following transactions (among others) occurred during the year:

Jan. 6    Issued for cash 20,000 shares of common stock at $14 per share. The shares were issued to Barnes and 10 other investors.

Jan. 7    Issued an additional 500 shares of common stock to Barnes in exchange for his services in organizing the corporation. The stockholders agreed that these services were worth $7,000.

Jan. 12 Issued 2,500 shares of preferred stock for cash of $250,000.

June 4 Acquired land as a building site in exchange for 15,000 shares of common stock. In view of the appraised value of the land and the progress of the company, the directors agreed that the common stock was be valued for purposes of this transaction at $15 per share.

Nov. 15 The first annual dividend of $10 per share was declared on the preferred stock to be paid December 20.

Dec. 20 Paid the cash dividend declared on November 15.

Dec. 31 After the financial statements were prepared, the net income for the year was $147,200.

a. Prepare journal entries to record the above transactions.

b. Prepare the stockholders’ equity section of the Barnes Communications, Inc. balance sheet at December 31, 2016.

Exercise 2:

On April 1, 2015, Mattson Industries purchased new equipment at a cost of $325,000. The useful life of this equipment was estimated at 5 years, with a residual value of $25,000.

Compute the annual depreciation expense for each year until this equipment becomes fully depreciated under each depreciation method listed below.

a. Straight-line, with depreciation for fractional years rounded to the nearest whole month.

b. 200 percent declining-balance.

c. Assume that the equipment is sold at the end of December 2017, for $176,250 cash. Prepare the journal entry to record the sale of the equipment under the straight-line method.

Exercise 3:

During the fiscal year ended December 31, 2017, Swanson Corporation engaged in the following transactions involving notes payable:

Aug. 6     Borrowed $12,000 from Maple Grove Bank, signing a 45-day, 12%

             note payable.

Sept. 16 Purchased office equipment from Seawald Equipment. The invoice amount was $18,000, and Seawald agreed to accept, as full payment a 10 percent, three-month note for the invoice amount.

Sept. 20 Paid Maple Grove Bank the note plus accrued interest.

Nov. 1 Borrowed $250,000 from Mike Swanson, a major corporate stockholder. The corporation issued Swanson a $250,000, 15 percent, 90-day note payable.

Dec. 1 Purchased merchandise inventory in the amount of $5,000 from Gathman Corporation. Gathman accepted a 90-day, 14 percent note as full settlement of the purchase. Swanson Corporation uses a perpetual inventory system.

Dec. 16 The $18,000 note payable to Seawald Equipment matures today. Swanson paid the accrued interest on this note and issued a new 30-day, 16 percent note payable in the amount of $18,000 to replace the note that matured.

a. Prepare journal entries to record each of the above transactions. Use a 360-day year in making the interest calculations.

b. Prepare the adjusting entry needed at December 31 to accrue interest.

c. Provide a possible explanation why the new 30-day note payable to Seawald Equipment pays 16 percent interest instead of the 10 percent rate charged on the September 16 note.

Exercise 4

On January 1, 2017, Park Rapids Lumber Company issued $80 million in 20-year, 10% bonds payable. Interest is payable semiannually on June 30th and December 31st. Bond discounts and premiums are amortized straight-line at each interest payment date.

a. Record the journal entry when the bonds were issued on January 1, 2017, make the necessary the journal entry to record the payment of bond interest on June 30, 2017, under each of the following assumptions:

1. The bonds were issued at 98. Round your answers to the nearest dollar.

2. The bonds were issued at 101. Round your answers to the nearest dollar.

b. Compute the net bond liability at December 31, 2017, under assumptions 1 and 2 above. Round to the nearest dollar.

c. Under which of the above assumptions, 1 or 2 would the investor’s effective rate of interest be higher? Explain.

Exercise 5

Speed World Cycles sells high-performance motorcycles and Motocross racers. One of Speed World’s most popular models is the Kazomma 900 dirt bike. During the current year, Speed World purchased eight of these cycles at the following costs:

Purchase Date                               Units Purchased      Unit Cost   Total Cost

July 1                                                                 2                  $4,950          $9,900

July 22                                                              3                    5,000           15,000

August 3                                                  3                        5,100           15,300

                                                                  ------                         ------------

                                                                      8                                             $40,200

On July 28, Speed World sold four Kazomma 900 dirt bikes to the Vince Wilson racing team. The remaining four bikes remained in inventory at September 30, the end of Speed World’s fiscal year.

Assume that Speed World uses a perpetual inventory system.

a. Compute the cost of goods sold relating to the sale on July 28 and the ending inventory of Kazomma 900 dirt bikes at September 30, using the following cost flow assumptions:

1. Average cost

2. FIFO

3. LIFO

Show the number of units and the unit costs of each layer comprising the cost of goods sold and ending inventory.

b. Using the cost figures computed in part a. answer the following questions:

1. Which of the three cost flow assumptions will result in Speed World Cycles reporting the highest net income for the current year? Would this always be the case? Explain.

2. Which of the three cost flow assumptions will minimize the income taxes owed by Speed World Cycles for the year? Would you expect this usually to be the case? Explain.

3. May Speed World Cycles use the cost flow assumption that results in the highest net income for the current year in its financial statements, but use the cost flow assumption that minimizes taxable income for the current year in its income tax return? Explain.

Answer 1