Case 15-6 Effects of stock options

On January 1, 2016, as an incentive to improved performance of duties, Recycling Corp adopted a qualified stock option plan to grant corporate executives nontransferable stock options to 500,000 shares of its unissued $1 par value common stock. The options were granted on May 1, 2016, at $25 per share, the market price on that date. All the options were exercisable one year later and four years thereafter, providing that grantee was employed by the corporation at the date of exercise.

The market price of this stock was $40 per share on May 1, 2017. All options were exercised before December 31, 2017, at times when the market price varied between $40 and $50 per share.

Required:

a. What information on this option plan should be presented in the financial statements of Recycling Corporation at i)December 31, 2016 and ii)December 31, 2017? Explain.

b. It has been said that the exercise of such a stock option would dilute the equity of existing stockholders in the corporation.

i. How could this happen? Discuss.

ii. What conditions could prevent a dilution of existing equities from taking place in this transaction? Discuss.

Question 3

Level Up reported the following information for 2016 and 2017:

Accounts payable, 31 December 2016 $50 000      

Accounts payable, 31 December 2017 $80 000    

Inventory, 31 December 2016 $60 000  

Inventory, 31 December 2017 $150 000    

Cost of goods sold—2017 $1 000 000

Assume that all merchandise purchases are on account. How much cash was paid to suppliers for inventory purchases during 2017?

1. $1 085 000                              
2. $1 060 000                               
3. $1 070 000                          
4. $1 115 000

Question 4:

Which of the following statements is false regarding how the cash flow effects of the changes in the equipment and accumulated depreciation accounts would be reported on a statement of cash flows if the indirect method is used to prepare the operating activities section?                               

1. The cash paid to purchase equipment would be reported as a cash outflow in the investing activities section                                
2. Cash proceeds from the sale of the equipment would be reported as a cash inflow in the investing activities section

3. Depreciation expense would be added to total comprehensive income in the operating activities section                                
4. A loss on the sale of the equipment would be subtracted from total comprehensive income in the operating activities section

The Nathan Company acquired all of the outstanding stock of Caleb Company on January 1, 2014 for P267,800 cash. Caleb had a book value of only P182,000 on that date. However, equipment (having an eight-year life) is undervalued by P52,000 on Caleb’s financial records. A building with a 20-year life was overvalued by P13,000. Subsequent to the acquisition, Caleb reported the following:

In accounting for this investment, Nathan has used the cost method. Selected accounts taken from the financial records of these two companies as of December 31, 2016, are as follows:

Required:

Determine the following account balances as of December 31, 2016.

1. Net Income Attributable to Equity Holders of the Parent
2. Non-controlling Interest in Net Income of Subsidiary
3. Consolidated Net Income
4. Consolidated Equipment (net)
5. Consolidated Buildings (net)
6. Consolidated Goodwill (net)
7. Consolidated Ordinary Shares
8. Consolidated Accumulated Profits

Condensed financial data of Waterway Company for 2017 and 2016 are presented below.

Additional information:

During the year, $70 of common stock was issued in exchange for plant assets. No plant assets were sold in 2017.

Prepare a statement of cash flows using the indirect method.

Condensed financial data of Waterway Company for 2017 and 2016 are presented below.

WATERWAY COMPANY
COMPARATIVE BALANCE SHEET
AS OF DECEMBER 31, 2017 AND 2016
2017
2016
Cash      
$1,780
$1,170
Receivables      
1,760
1,280
Inventory      
1,620
1,880
Plant assets      
1,910
1,670
Accumulated depreciation      
(1,210
)
(1,160
)
Long-term investments (held-to-maturity)      
1,330
       
1,440

$7,190
       
$6,280

                       
Accounts payable      
$1,230
$920
Accrued liabilities      
210
250
Bonds payable      
1,370
1,560
Common stock      
1,920
1,680
Retained earnings      
2,460
       
1,870

$7,190
       
$6,280

WATERWAY COMPANY
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2017
Sales revenue      
$6,820
Cost of goods sold      
4,600
Gross margin      
2,220
Selling and administrative expenses      
910
Income from operations      
1,310
Other revenues and gains      
Gain on sale of investments      
80
Income before tax      
1,390
Income tax expense      
540
Net income       850
Cash dividends
260
Income retained in business
$590

Additional information:

During the year, $70 of common stock was issued in exchange for plant assets. No plant assets were sold in 2017.

Prepare a statement of cash flows using the indirect method.

Daan Corporation wholesales repair products to equipment manufacturers. On April 1, 2016, Daan Corporation issued $2,600,000 of 10-year, 11% bonds at a market (effective) interest rate of 8%, receiving cash of $3,130,023. Interest is payable semiannually on April 1 and October 1.

a. Journalize the entry to record the issuance of bonds on April 1, 2016. For a compound transaction, if an amount box does not require an entry, leave it blank.

b. Journalize the entry to record the first interest payment on October 1, 2016, and amortization of bond premium for six months, using the straight-line method. The bond premium amortization is combined with the semiannual interest payment. (Round to the nearest dollar.) For a compound transaction, if an amount box does not require an entry, leave it blank.

c. Why was the company able to issue the bonds for $3,130,023 rather than for the face amount of $2,600,000?

The market rate of interest is   the contract rate of interest.

Macro economics

Table contains some data about the economy of Potsteel. Assume that this is a complete record of the economy. Some parts of this question ask for numerical solutions. You must include both the final answer, and how you found that answer

As the percentage change in the GDP deflator and inflation are both measures of changes in price levels, why is there a difference between your answers to parts (b) and (c)

(b) Calculate the GDP deflator for 2017 to 2019, taking 2016 as the base year. Find the percentage change in GDP deflator for 2017 to 2019

(c) A survey help in 2016 found that the average person in Potsteel consumed 2 potatoes, and 1 unit of steel each year, while the average firm consumed 2 units of steel and no potatoes each year. Use the CPI to find the inflation rate from 2017 to 2019

Analysis Case 15–4 Lease concepts; Walmart

Real World Financials

Walmart Stores, Inc. is the world’s largest retailer. A large portion of the premises that the company occupies are leased. Its financial statements and disclosure notes revealed the following information:

Required:

1.Discuss some possible reasons why Walmart leases rather than purchases most of its premises.

2. The net asset “property under finance lease” has a 2016 balance of $6,345 million ($11,096 – 4,751). Liabilities for finance leases total $6,367 ($551 + 5,816). Why do the asset and liability amounts differ?

3. Prepare a 2016 summary entry to record Walmart’s lease payments, which were $600 million.

4. What is the approximate average interest rate on Walmart’s finance leases? (Hint: See Req. 3)

Apollo Corporation issued $560,000 of 7%, 12-year bonds payable on March 31, 2016. The market interest rate at the date of issuance was 10%, and the Apollo Corporation bonds pay interest semiannually. Apollo Corporation's year-end is March 31. Calculate the issue price of the bonds using the PV function in Microsoft® Excel®. Prepare an effective-interest amortization table for the bonds through the first three interest payments. Round amounts to the nearest dollar. Record Apollo Corporation's issuance of the bonds on March 31, 2016, and payment of the first semiannual interest amount and amortization of the bond discount on September 30, 2016. Note. Explanations are not required. Show all calculations for your solution. * I need help on calculations* Can you direct me on how to calculate the issue price on an excel worksheet ?

Semiannual Interest : 560000 *.07 *6/12 = 19600

semiannual months : 12* 2 = 24

semiannual yield : 10*6/12 = 5%

Issue Price : [PVA 5%,24*interest ]+[PVF 5%,24*face value]

       =[13.79864*19600]   +[.31007*560000]

        =270453.34+ 173639.2

             = $ 444093 rounded **how do I enter on excel worksheet?

Flounder Company began operations on January 1, 2016, adopting the conventional retail inventory system. None of the company’s merchandise was marked down in 2016 and, because there was no beginning inventory, its ending inventory for 2016 of $37,300 would have been the same under either the conventional retail system or the LIFO retail system. On December 31, 2017, the store management considers adopting the LIFO retail system and desires to know how the December 31, 2017, inventory would appear under both systems. All pertinent data regarding purchases, sales, markups, and markdowns are shown below. There has been no change in the price level. Inventory, Jan. 1, 2017 cost:$37,300 retail:$60,100 Markdowns (net) retail:12,900 Markups (net) retail:22,100 Purchases (net) cost:128,800 retail:178,800 Sales (net) retail:169,300 Determine the cost of the 2017 ending inventory under both (a) the conventional retail method and (b) the LIFO retail method. (Round ratios for computational purposes to 2 decimal place, e.g. 78.72% and final answers to 0 decimal places, e.g. 28,987.) (a) Ending inventory using conventional retail method $ (b) Ending inventory LIFO retail method $