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Homework 4

Course B10.1306.11 Financial Accounting and Reporting Ana S iatschi Blue Core !roup E9-12 Professor Joshua Ronen

als6"#$stern.n%u.edu

Computing Deferred Income Tax (Supplement B)

The following information pertains to the Lewis Corporation.

Required: 1. For each year, compute income tax expense (assume that no taxes have been paid . !. "xplain why tax expense is not simply the amount of cash paid during the year

1. &ear '011 (nco)e *a+ e+pense ,,,,,,,,..-30./000 0eferred *a+es,,,,,,,,,,,, -1./000 (nco)e *a+ Pa%a2le,,,,,,,,,. -'10/000 &ear '01' (nco)e *a+ e+pense ,,,,,,,,..-3."/000 0eferred *a+es,,,,,,,,,,,, -1"/000 (nco)e *a+ Pa%a2le,,,,,,,,,. -'30/000 '. *a+ e+pense not al4a%s e5uals the a)ount of cash paid during the %ear 2ecause there are separate rules for !AAP and ta+ return. (n order to reflect this difference co)panies esta2lish a separate account called 0eferred *a+es.

E10-

Computing I!!ue "rice! of Bond! for T#ree Ca!e!

#ames Corporation is planning to issue $%&&,&&& worth of bonds that mature in 1& years and pay ' percent interest each #une (& and )ecember (1. *ll of the bonds will be sold on #anuary 1, !&11. Required: Compute the issue (sale price on #anuary 1, !&11, for each of the following independent cases (show computations +
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Homework 4
Course B10.1306.11 Financial Accounting and Reporting Ana S iatschi Blue Core !roup
a. Ca!e $% ,ar-et (yield rate, . percent. b. Ca!e B% ,ar-et (yield rate, ' percent. c. Ca!e C% ,ar-et (yield rate, / percent

Professor Joshua Ronen

als6"#$stern.n%u.edu

Principal6 -100/000 Coupon6 37 se)iannual Coupon (nterest6 -11/000 se)iannual 8aturit%6 10%rs Periods6 '0
&ar'e) (ield "re!ent -alue *) 2 intere!t "re!ent +alue of annuit) of period! ,1 ,1 &ar'et (ield a .0 !0 &.'1(& 1'.(%1. b '0 (0 &.%%(1 1../11% c /0 .0 &..%'. 1(.%2&( "re!ent -alue of "rincipal $ ((',%&& $ !1',/%& $ !!/,!&& "re!ent -alue of intere!t $ !.%,!11 $ !!(,1'( $ !&(,/%% I!!ue Sale "rice %/1,111 %&&,&1( .(!,&%%

E10-1

E-aluating Bond .eature!

3ou are a personal financial planner wor-ing with a married couple in their early .&s who have decided to invest $1&&,&&& in corporate bonds. 3ou have found two bonds that you thin- will interest your clients. 4ne is a 5ero coupon bond issued by 6epsiCo with an effective interest rate of 2 percent and a maturity date of !&!&. 7t is callable at par. The other i&&1( a 8alt )isney bond that matures in !&2(. 7t has an effective interest rate of 2.% percent and is callable at 1&% percent of par. 8hich bond would you recommend and why9 8ould your answer be different if you expected interest rates to fall significantly over the next few years9 8ould you prefer a different bond if the couple were in their late '&s and retired9

( 4ould reco))end Pepsico9s Bonds 2ecause it is a 4ell di ersified co)pan% 4ith less 2usiness c%cle ris: co)pared to 0isne%6 Pepsico9s products are less affected 2% econo)ic crisis co)pared to 0isne%9s. Pepsico is part of the consu)er goods industr% and historicall% 4hen econo)ic crisis occur/ first ad;ust)ent are on leisure/ tra el and entertain)ent 4hich affects 0isne%. <ot onl% Pepsico9s 2onds represent less industr%=credit ris:/ 2ut also the% )ature in '0'0 s '033/ the% ha e less sensiti it% to changes in interest rate.
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Homework 4
Course B10.1306.11 Financial Accounting and Reporting Ana S iatschi Blue Core !roup Professor Joshua Ronen

als6"#$stern.n%u.edu

(f ( e+pect interest rates to fall/ then ( 4ould reco))end in esting in 0isne% 2onds since the% ha e higher effecti e interest rate and/ 2eing longer ter)/ the 2enefits fro) lo4ering interest rates 4ould 2e greater. For a couple that is retiring soon/ ( 4ould suggest to 2u% short ter) 2onds 4ith lo4 ris: li:e Pepsico offer or e en )ore conser ati e >S treasur% Bonds 4ith 1 %ear )aturit%.

E11-/

0eporting Stoc'#older!1 E2uit)

The financial statements for :ighland 6ublications Corporation included the following selected information+

The common stoc- was sold at a price of $!& per share. Required: 1. !. (. .. 8hat is the amount of capital in excess of par9 8hat was the amount of retained earnings at the beginning of the year9 :ow many shares are in treasury stoc-9 Compute earnings per share.

1. Cash Co))on Stoc: Capital in excess of par


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0e2it 1/600/000

Credit

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Homework 4
Course B10.1306.11 Financial Accounting and Reporting Ana S iatschi Blue Core !roup Professor Joshua Ronen

als6"#$stern.n%u.edu 177,778

Par ?alue of Co))on Stoc:

1#.##"

'. Retained @arning end of %ear <et (nco)e 0i idends Retained @arning 2eginning of the %ear

-300/000 -1/000/000 -"00/000 -1/100/000

3. *reasur% Stoc: share A 30/000B"0/000 A 10/000 .. @PS A <et (nco)e=A erage nu)2er of shares outstanding for the period @PS A -1/000/000="0/000 A 1'.1

E11-9

Determining t#e Effect! of Tran!action! on Stoc'#older!3 E2uit)

;uic- Fix<it Corporation was organi5ed in #anuary !&11 to operate several car repair businesses in a large metropolitan area. The charter issued by the state authori5ed the following capital stoc-+ Common stoc-, $1& par value, 2/,&&& shares 6referred stoc-, $%& par value, / percent, %2,&&& shares )uring #anuary and February !&11, the following stoc- transactions were completed+ a. =old 1/,&&& shares of common stoc- at $!& per share and collected cash. b. =old !&,&&& shares of preferred stoc- at $/& per share> collected the cash and immediately issued the stoc-. c. ?ought .,&&& shares of common stoc- from a current stoc-holder for $!& per share. Required: @et income for !&11 was $2&,&&&> cash dividends declared and paid at year<end were $(&,&&&. 6repare the stoc-holdersA eBuity section of the balance sheet at )ecember (1, !&11.
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Homework 4
Course B10.1306.11 Financial Accounting and Reporting Ana S iatschi Blue Core !roup
)ebit Credit 1,%'&,&&& 1/&,&&& 1/&,&&& 1,'&&,&&& 1,&&&,&&& '&&,&&& /&,&&& /&,&&&

Professor Joshua Ronen

als6"#$stern.n%u.edu
Common Stoc' =hares 7ssued =hares non issued "referred Stoc' =hares 7ssued =hares non issued Trea!ur) Stoc' ?ought Common stoc; 1/,&&& !&,&&& 6 $ $ !& 1&

a Cash Common =tocCapital in excess of par b Cash 6referred =tocCapital in excess of par c Treasury =tocCash

!&,&&& (2,&&&

$ $

/& %& !&

.&&& $

@et 7ncome )ividends Cetained "arnings

$ $

2&,&&& ((&,&&& '&,&&&

Stoc'#older1! E2uit) Contributed Capital 6referred =toc-, /0 (par value $%&, authori5ed %2,&&& shares, issued (2,&&& Capital in excess of par, preferred stocCommon stoc- (par value $1&, authori5ed 2/,&&& shares, issued 1/,&&& of which .&&& are held as treasury stocCapital in excess of par, common stocTotal Contributed Capital Cetained "arnings Total Contributed Capital and Cetained "arnings Less cost of common treasury stoc- held (.,&&& shares Total =toc-holderAs eBuity

1,&&&,&&& '&&,&&&

1/&,&&& 1/&,&&& $ $ (,1'&,&&& '&,&&& (,!!&,&&& (/&,&&& $ (,1.&,&&&

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