FinalReviewProblem:LongtermLiabilities

OnJanuary1st 2007,Etrade Inc.issued10yearbondswith couponrate8%andfacevalue$10,000,000.Themarket interestrateforthecompanyontheissuancedateis10%. p y InterestpayablesemiannuallyonJune30th andDecember 31st. Required: 1. Preparejournalentryforthebondissuance. 2. Preparejournalentriesforthetwointerest payments/interestexpenserecognitionin2007. payments/interest expense recognition in 2007 3. OnFebruary1st 2008,Etrade retiredthebondsearlyby purchasingthemintheopenmarketfor$8,700,000in cash.Preparethejournalentriesfortheearlyretirement. h P th j l t i f th l ti t 4. Whatlineitems(showdescriptionanddollaramounts) regardingthisbondwillbepresentedin2007and2008 financialstatements:incomestatements,balancesheets, andstatementsofcashflows?

1. Bondissuingprice=PV($10,000,000,n=20, 1 B di i i PV ($10 000 000 20 i=5%)+PVA($400,000,n=20,i=5%) =$10,000,000x0.3769+$400,000x12.4622 =$3,769,000+$4,984,880 =$8,753,880 Dr.Cash 8,753,880 Dr.DiscountonB/P 1,246,120 / Cr.BondsPayable 10,000,000

2. June30th: J 30 Interestexpense=bondcarryingamountxeffective interestrate=8,753,880x5% interest rate = 8 753 880 x 5% =$437,694 Dr.Interestexpense Dr Interest expense 437,694 437 694 Cr.DiscountonB/P 37,694 Cr.Cash Cr. Cash 400,000 December31st: Interestexpense=(8,753,880+37,694)x5%=439,579 p ( , , , ) , Dr.Interestexpense 439,579 Cr.DiscountonB/P 39,579 Cr.Cash 400,000

3.OnDecember31st,thecarryingamountofthe bondsis=facevalue di b d i f l discountonB/Pbalance t B/P b l =10,000,0001,168,847=8,831,153 SinceEtrade retiredthebondon2/1/2008,the Si Et d ti d th b d 2/1/2008 th interestforJanuaryhastobepaidand recognizedfirst: recognized first: Interestexpense=bondcarryingamountx5%x 1/6=73,593 1/6 = 73 593 Dr.Interestexpense 73,593 Cr.DiscountonB/P C Di t B/P 6,926 6 926 Cr.Cash 66,667

3.Continued Aftertheadjustingentries: Facevalue 10,000,000 Discount 1,161,921 Bondcarryingamount 8,838,079 y g , , Dr.Bondspayable Dr Bonds payable 10,000,000 10 000 000 Cr.DiscountonB/P 1,161,921 Cr.Cash Cr Cash 8,700,000 8 700 000 Cr.Gainonbondsretirement 138,079 138 079

4. 2007 Incomestatement: Income statement: Interestexpenses (887,273) Gainonearlyretirementofbonds Balancesheet(12/31): Inliabilities: Bondspayable: d bl 10,000,000 LessdiscountonB/P (1,168,847) Statementofcashflows: Statement of cash flows: Cashflowsfromoperatingactivities: Interestpayments: Interest payments: (800,000) Cashflowsfromfinancingactivities: Bondissuance: 8,753,880 Bondretirement:

2008 (73,593) 138,079

(66,667)

(8,700,000)

Finalreviewproblem:Equity
OnDecember31st 2008,RockvilleCorporationreported theshareholdersequityaccountsshownasfollows: Cumulative8%preferredstock,$100parvaluepershare, 10,000sharesissuedin2005. 1,000,000 Commonstock$1parvaluepershare, 1.2millionsharesissued 1,200,000 Additionalpaidincapital. 9,600,000 y , , , Less:Treasurystock,500,000shares, Costat$10pershare. (5,000,000)

During2009,Rockvillehadthefollowingtransactions: O J OnJanuary10th ,announced2for1stocksplit. 10 d 2 f 1 t k lit May2nd,reissued200,000sharesoftreasurystockat $12pershare. $12 per share OnJune30th,declared10%stockdividendforcommon stockholderstobepaidonJuly1st.Andthenpaidthe p y p dividendonJuly1st.Marketpriceafterstockdividend issuanceis$12/share. O D OnDecember31st,declaredcashdividendof$100,000 b 31 d l d h di id d f $100 000 tobepaidon1/1/2010.Assumethecompanydidnot declareanydividendsin2008and2007. declare any dividends in 2008 and 2007. Required:Journalizealltheabovetransactions.Show howthecompanyreportsthecommonstockand preferredstockonthebalancesheeton12/31/2009.

Stocksplit:
Forthestocksplit,nojournalentries necessary.However,havetoadjustparvalue ofcommonstockto$0.5/shareandtotal numberofsharesoutstandingto1.4million (issuedsharesto2.4millionandtreasury stockto1millionshares).Also,treasurystock costshouldbeadjustedto$5/share.

Reissuance
Notethatthetreasurystocknowhas1million sharesatcostof$5pershare.Reissue200,000 shares at cost of $5 per share. Reissue 200,000 shares Dr.Cash 2,400,000 Cr.TreasuryStock Cr.AdditionalPaidinCapital

1,000,000 1,400,000

Stockdividend
Commonstockoutstanding:1.6millionshares Originallyissued1.2millionshares,minustreasury stock500,000shares,numberofshares k h b f h outstandingatthebeginningoftheyearwas 700,000shares. 700,000 shares. Afterthestocksplitandreissuance,thenumberof sharesoutstandingbecomes1.6millionshares. The10%stockdividendisequivalentasissuing 160,000(1.6millionx10%)newsharesworth $1.92million(160,000x$12/share)and $1 92 million (160 000 x $12/share) and distributingthemtotheexistingcommonstock holders.

Stockdividend
June30th Dr.Dividend D Di id d 1,920,000 1 920 000 Cr.Dividendpayable 1,920,000 July1st Dr.Dividendpayable 1,920,000 p y , , Cr.Commonstock 80,000* Cr.Additionalpaidincapital Cr Additional paid in capital 1,840,000 1 840 000
*parvalue0.5/sharex160,000=80,000

CashDividend
The8%cumulativepreferredstockholders p havenotbeenpaiddividendinthelasttwo years.Sothedividendshouldfirstbepaid towardtothedividendsowed. Dr.Dividend Preferred 100,000 Cr.Dividendpayable Cr Dividend payable 100,000 100 000 preferred Dr.Dividendpayable preferred 100,000 Cr.Cash 100,000

LongtermAssetsBasketPurchase g
Mulan CapitalsInc.purchasedabuildingwithland p p g fortotalpriceof$1,000,000onApril1st 2010. Thelandisappraisedat$600,000andthe building$600,000.Thebuildingisexpectedto building $600 000 The building is expected to haveausefullifeof40yearswithnoresidual value. Required: Journalizethepurchasetransaction. H HowmuchdepreciationexpensesshouldMulan hd i i h ld M l reportonitsincomestatementfortheyearof 2010?

Allocationoflandandbuilding: Allocation of land and building: Totalappraisalvalue=0.6+0.6=1.2million Therefore, Land is 50% of the total value, and building Therefore,Landis50%ofthetotalvalue,andbuilding is50%. Total purchasing cost 1 million Totalpurchasingcost=1million. Landcost=0.5million Building cost = 0 5 million Buildingcost=0.5million Landisnotdepreciated. Buildingdepreciationexpenseperyear=$12,500 Thefirstyearisapartialyear,thereforethe depreciationexpenseshouldbe12,500x9/12=$9375 depreciation expense should be 12 500 x 9/12= $9375

IntangibleAssets
AllenCorpoperatesinseveralforeigncountries.OnMarch ll lf h 1st 2009,AllenacquiredBrianCompanybypaying$25 millionincash.Briansassetswereworth$15million measuredbyfairmarketvalue,andBrianalsohad$5 $ millionliabilities.Attheendoffiscalyear2009,the companyconductedimpairmenttestsforallitsintangible assetsanddecidedthatthegoodwillfromthetransaction hasanimpairmentchargeof$3million. Required: Required: HowmuchisthegoodwillrecognizedbyAllenCorpinthis transaction? H HowwillthegoodwillbepresentedonAllensbalance ill th d ill b t d All b l sheet,incomestatement,andthestatementofcashflows for2009?Pleasethewritethelineitemsrelatedtothe goodwillinthethreestatements,includingtheirdollar d ill i th th t t t i l di th i d ll amount.

 G d ill 25 il (15 il 5 il) 15 il Goodwill=25mil (15mil 5mil)=15mil Dr.AssetsfromBrian 15million Dr.Goodwill D G d ill 15million 15 illi Cr.LiabilitiesfromBrian 5million Cr.Cash C C h 25million 25 illi Balancesheetasoftheendof2009: Goodwill 12million Incomestatementfor2009 co e state e t o 009 Goodwillimpairmentloss (3million)