Question

One Product Corp. (OPC) incorporated at the beginning of last year. The balances on its post-closing trial balance prepared on December 31, at the end of its first year of operations, were:

Cash	$	19,780
Accounts Receivable		8,350
Allowance for Doubtful Accounts		1,065
Inventory		14,580
Prepaid Rent		1,960
Equipment		46,600
Accumulated Depreciation		4,560
Accounts Payable		0
Sales Tax Payable		500
FICA Payable		600
Withheld Income Taxes Payable		500
Salaries and Wages Payable		1,600
Unemployment Tax Payable		300
Deferred Revenue		4,500
Interest Payable		536
Note Payable (long-term)		23,800
Common Stock		18,500
Additional Paid-In Capital, Common		20,069
Retained Earnings		18,740
Treasury Stock		4,000

The following information is relevant to the first month of operations in the following year:

• OPC sells its inventory at $150 per unit, plus sales tax of 6%. OPC’s January 1 inventory balance consists of 180 units at a total cost of $14,580. OPC’s policy is to use the FIFO method, recorded using a perpetual inventory system.
• The $1,960 in Prepaid Rent relates to a payment made in December for January rent this year.
• The equipment was purchased on July 1 of last year. It has a residual value of $1,000 and an expected life of five years. It is being depreciated using the straight-line method.
• Employee wages are $4,000 per month. Employees are paid on the 16th for the first half of the month and on the first day of the following month for the second half of each month. Withholdings each pay period include $250 of income taxes and $150 of FICA taxes. These withholdings and the employer’s matching contribution are paid monthly on the second day of the following month. In addition, unemployment taxes of $50 are accrued each pay period, and will be paid on March 31.
• Deferred Revenue is for 30 units ordered and paid for in advance by two customers in late December. One order of 25 units is to be filled in January, and the other will be filled in February.
• Notes Payable arises from a three-year, 9 percent bank loan received on October 1 last year.
• The par value on the common stock is $2 per share.
• Treasury Stock arises from the reacquisition of 500 shares at a cost of $8 per share.

January Transactions

1. On 1/01, OPC paid employees’ salaries and wages that were previously accrued on December 31.
2. A truck is purchased on 1/02 for $10,500 cash. It is estimated this vehicle will be used for 50,000 miles, after which it will have no residual value.
3. Payroll withholdings and employer contributions for December are remitted on 1/03.
4. OPC declares a $0.50 cash dividend on each share of common stock on 1/04, to be paid on 1/10.
5. A $1,040 customer account is written off as uncollectible on 1/05.
6. On 1/06, recorded sales of 175 units of inventory on account. Sales tax is charged but not yet collected or remitted to the state.
7. Sales taxes of $500 that had been collected and recorded in December are paid to the state on 1/07.
8. On 1/08, OPC issued 300 shares of treasury stock for $2,400.
1. Collections from customers on account, totaling $18,071, are recorded on 1/09.
10. On 1/10, OPC distributes the $0.50 cash dividend declared on January 4. The company’s stock price is currently $5 per share.
11. OPC purchases on account and receives 70 units of inventory on 1/11 for $4,620.
50. The equipment purchased last year for $46,600 is sold on 1/15 for $48,200 cash. Record depreciation for the first half of January prior to recording the equipment disposal.
1000. Payroll for January 1-15 is recorded and paid on 1/16. Be sure to accrue unemployment taxes and the employer’s matching share of FICA taxes.
14. Having sold the equipment, OPC pays off the note payable in full on 1/17. The amount paid is $24,434, which includes interest accrued in December and an additional $98 interest through January 17.
15. On 1/27, OPC records sales of 30 units of inventory on account. Sales tax is charged but not yet collected or remitted.
16. A portion of the advance order from December (25 units) is delivered on 1/29. No sales tax is collected on this transaction because the customer is a U.S. governmental organization that is exempt from sales tax.
17. To obtain funds for purchasing new equipment, OPC issued bonds on 1/30 with a total face value of $108,000, stated interest rate of 5 percent, annual compounding, and six-year maturity date. OPC received $97,704 from the bond issuance, which implies a market interest rate of 7 percent.
18. On 1/31, OPC records units-of-production depreciation on the vehicle (truck), which was driven 2,000 miles this month.
19. OPC estimates that 2% of the ending accounts receivable balance will be uncollectible. Adjust the applicable accounts on 1/31, using the allowance method.
20. On 1/31, adjust for January rent expired.
21. Accrue January 31 payroll on 1/31, which will be payable on February 1. Be sure to accrue unemployment taxes and the employer’s matching share of FICA taxes.
5. Accrue OPC’s corporate income taxes on 1/31, estimated to be $5,140.

1. Rather than distribute a cash dividend in January, OPC considered issuing a 30% stock dividend on common stock. What journal entry would OPC record had a 30% stock dividend been issued?
2. What journal entry would OPC record had a 10% stock dividend been issued?
3. Use present value tables to show how the total bond issuance proceeds of $97,704 were determined in item 17 by calculating the present value of (a) the $108,000 face value and (b) the annual interest payments.
4. Rather than issue bonds to obtain cash for purchasing new equipment, OPC could have saved up and invested cash over several years. If OPC can earn 7 percent interest compounded annually, what single lump sum would it have to invest now to reach $116,000 in three years?
5. Instead of investing one large amount of cash, OPC could invest equal amounts over the next three years. If OPC can earn 7 percent interest compounded annually, how much cash would OPC need to invest equally at the end of each of the next three years to have saved $116,000?

Answer 1

If stock dividend is more than 25%, It is treated as large stock dividend
If stock dividend is less than 25%, It is treated as small stock dividend
Accounting treatment of above two dividends are different and are given below
Large stock dividend is recorded at par value
Small stock dividend is recorded at current stock price
Common stock in $=$ 18500
Par value=$2 per share
Number of common stock=18500/2=9250 shares
If 30% stock dividend is issued,
Number of stock to be issued=9250*30%=2775 shares
Date	Account titles			Debit	Credit
01/10.	Retained earnings		(2775*2)	5550
	Common stock				5550
If 10% stock dividend is issued,
Current stock price=$5
Number of stock to be issued=9250*10%=925 shares
Date	Account titles			Debit	Credit
01/10.	Retained earnings		(2775*5)	13875
	Common stock		(2775*2)		5550
	Additional Paid-In Capital, Common				8325
Life of the bond=6 years
Discount rate=market interest rate=7%
Issue price of bond=Present value of face value+Present value of annual interest payments
Present value of face value=Face value*Present value at 7% for 6th year=108000*0.66634=$ 71964.72
Annual interest payment=108000*5%=5400
Present value of annual interest payments=5400*4.76654=$25739.32
Issue price of bond=71964.72+25739.32=97704.04=$ 97704
In 3 years at 7% interest to reach $ 116000
Single lump sum to be invested=Present value of $ 116000 at 7% for the 3rd year=116000*0.8163=$ 94690.8=$ 94691
Equal annual payments required=$ 116000/Present value factor at 7% for 3 years=116000/2.62432=$ 44202