Question

1.)Coffey's Coffee Shop was organized on January 1, 2005 and was authorized to issue 200,000 shares of $2 par value common stock and 100,000 shares of $100, 6% cumulative preferred stock. The preferred stock is convertible to common at the rate of 1 preferred share to 4 shares of common. The conversion rate is restated for all stock dividends and splits. Coffee had the following stock transactions in 2005:

1/1/2005 - Sold 30,000 shares of common stock at $20 per share.

1/1/2005 - Sold 10,000 shares of preferred stock at $100 per share.

4/1/2005 - Issued at 50 percent stock dividend when the market price is $26 per share.

9/1/2005 - Purchased 4,000 treasury shares at $30 per share.

10/1/2005 - Sold 1,000 of the treasury shares at $32 per share.

11/1/2005 - Sold 2,000 of the treasury shares at $25 per share.

12/1/2005 - Issued a 2-1 for stock split.

12/20/2005 - Declared the required dividend to preferred stock holders and a $.25 per share dividend to common stockholders. Dividends are payable on 12/31/2005.

12/31/2005 - Paid dividends declared on 12/20/2005.

Prepare journal entries to record all of the above business events

2.)

(A) Welson Co. is being sued for illness caused to local residents as a result of negligence on the company's part in permitting the local residents to be exposed to highly toxic chemicals from its plant. Welson's lawyer states that it is probable that Welson will lose the suit and be found liable for a judgment costing Welson anywhere from $400,000 to $2,000,000. However, the lawyer states that the most probable cost is $1,200,000. As a result of the above facts, Welson should accrue and what should be disclosed?

(B) On August 1, 2006, the Frost Company purchased property from Anderson that had a fair value of $399,271. Frost gave Anderson a $500,000 noninterest-bearing note payable in five equal annual installments of $100,000 with the first payment due July 31, 2007. What is the amount of interest expense that should be recognized by Frost in 2007, using the effective interest method?

(C) Pryor Corporation issued a 2-for-1 stock split of its common stock which had a par value of $10 before and after the split. At what amount should retained earnings be capitalized for the additional shares issued?

(D) On January 2, 2004, a calendar-year corporation sold 8% bonds with a face value of $1,500,000. These bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $1,384,000 to yield 10%. Using the effective interest method of computing interest, how much should be charged to interest expense in 2004?

(E) On its December 31, 2002, balance sheet, the Forge Corporation reported the following as investments in marketable equity securities which are classified as available for sale: Investment in marketable equity securities at cost $500,000 Less: valuation allowance 40,000 $460,000 At December 31, 2003, the market valuation of the portfolio was $490,000. What should Forge include in net income for 2003 as a result of the change in the market value of its investments?

(F) On February 10, 2005, after issuance of its financial statements for 2004, Goll Company entered into a financing agreement with Lebo Bank, allowing Goll Company to borrow up to $4,000,000 at any time through 2009. Amounts borrowed under the agreement bear interest at 2% above the bank's prime interest rate and mature two years from the date of loan. Goll Company presently has $1,500,000 of notes payable with First National Bank maturing March 15, 2005. The company intends to borrow $2,500,000 under the agreement with Lebo and liquidate the notes payable to First National. The agreement with Lebo also requires Goll to maintain a working capital level of $6,000,000 and prohibits the payment of dividends on common stock without prior approval by Lebo Bank. From the above information only, the total short-term debt of Goll Company as of the December 31, 2004 balance sheet date is __________________.

Answer 1

Solution:

Problem 1 --- Coffey’s Coffee

Date	General Journal	Debit	Credit
1/1/2005	Cash (30,000 Shares x $20)	$600,000
	Common Stock (30,000 Shares x $2)		$60,000
	Paid In Capital in Excess of Par - Common Stock (bal fig)		$540,000
1/1/2005	Cash (10,000 Shares x $100)	$600,000
	Preferred Stock (10,000 Shares x $100)		$1,000,000
4/1/2005	Retained Earnings (30,000*50%*MP $26)	$390,000
	Common Stock (15,000 Shares x Par $2)		$30,000
	Paid In Capital in Excess of Par - Common Stock (bal fig)		$360,000
9/1/2005	Treasury Stock (4,000 Shares x $30)	$120,000
	Cash		$120,000
10/1/2005	Cash (1,000 Shares x $32)	$32,000
	Treasury Stock (1,000 Shares x Cost $30)		$30,000
	Paid in Capital from Treasury Stock (bal fig)		$2,000
11/1/2005	Cash (2,000 Shares x $25)	$50,000
	Paid in Capital from Treasury Stock	$2,000
	Retained Earnings (Bal Fig)	$8,000
	Treasury Stock (2,000 Shares x Cost $30)		$60,000
12/1/2005	Memorandum: A 2 for 1 stock split increase the number of shares of common stock outstanding from 29,000 Shares to 58,000 Shares and reduced the par value from $2 to $1 Per share. The new 29,000 Shares were distributed
12/20/2005	Retained Earnings	$74,500
	Dividend Payable - Preferred Stock (10,000 Shares x 100 * 6%)		$60,000
	Dividend Payable - Common Stock (58,000 Shares x $0.25)		$14,500
12/31/2005	Dividend Payable - Preferred Stock	$60,000
	Dividend Payable - Common Stock	$14,500
	Cash		$74,500

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