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Current Liability

Yates Co. began operations on January 2, 2014. It employs 15 people who work 8-hour
days. Each employee earns 10 paid vacation days annually. Vacation days may be taken
after January 10 of the year following the year in which they are earned. The average
hourly wage rate was $24.00 in 2014 and $25.50 in 2015. The average vacation days
used by each employee in 2015 was 9. Yates Co. accrues the cost of compensated
absences at rates of pay in effect when earned.
Prepare journal entries to record the transactions related to paid vacation days during 2014
and 2015.

Ans:
2014 Salaries and Wages Expense..................................................... 28,800 (1)
Salaries and Wages Payable.......................................... 28,800
(1) 15 × 8 × $24.00 = $2,880; $2,880 × 10 = $28,800.

2015 Salaries and Wages Expense..................................................... 1,620


Salaries and Wages Payable...................................................... 25,920 (2)
Cash.............................................................................. 27,540 (3)

Salaries and Wages Expense..................................................... 30,600 (4)


Salaries and Wages Payable.......................................... 30,600

(2) $2,880 × 9 = $25,920.


(3) 15  8  $25.50 = $3,060; $3,060  9 = $27,540.
(4) $3,060  10 = $30,600.

DILUTIVE SECURITIES & EPS


1st. problem
Barone Corporation issues 3,000 convertible bonds at January 1, 2015. The bonds
have a three year life, and are issued at par with a face value of €1,000 per bond,
giving total proceeds of €3,000,000. Interest is payable annually at 6 percent. Each
bond is convertible into 250 ordinary shares (par value of €1). When the bonds are
issued, the market rate of interest for similar debt without the conversion option is 8%.
(a) Compute the liability and equity component of the convertible bond on January 1,
2015.
(b) Prepare the journal entry to record the issuance of the convertible bond on January
1, 2015.
(c) Prepare the journal entry to record the conversion on January 1, 2016.
(d) Assume that the bonds were repurchased on January 1, 2016, for €2,910,000 cash
instead of being converted. The net present value of the liability component of the
convertible bonds on January 1, 2016, is €2,850,000. Prepare the journal entry to
record the repurchase on January 1, 2016.
Ans.

(a) Present Value of Principal:


(€3,000,000  .79383) .................................................................
€2,381,490
Present Value of Interest Payments:
(€180,000  2.57710) ..................................................................... 463,878
Present Value of the Liability Component........................................€2,845,368

Fair Value of Convertible Debt........................................................€3,000,000


Less: Fair Value of Liability Component.......................................... 2,845,368
Fair Value of Equity Component......................................................€ 154,362

(b) Cash............................................................................................... 3,000,000


Bonds Payable................................................................................ 2,845,368
Share Premium—Conversion Equity............................................... 154,632

(c) Share Premium—Conversion Equity .............................................. 154,632


Bonds Payable (€2,845,368 + €47,629).......................................... 2,892,997
Share Capital—Ordinary.......................................................... 750,000
Share Premium—Ordinary....................................................... 2,297,629*
*€154,632 + €2,892,997 – €750,000

(d) Share Premium—Conversion Equity .............................................. 60,000*


Bonds Payable................................................................................ 2,892,997
Cash........................................................................................ 2,910,000
Gain on Repurchase (€2,892,997 – €2,850,000)..................... 42,997
*€2,910,000 – €2,850,000

2nd. Problem
Santana Corporation has 400,000 ordinary shares outstanding throughout 2016. In
addition, the corporation has 5,000, 20-year, 7% bonds issued at par in 2014. Each
$1,000 bond is convertible into 20 ordinary shares after 9/23/17. During the year 2016,
the corporation earned $600,000 after deducting all expenses. The tax rate was 30%.
Compute the proper earnings per share for 2016.
Ans.
Net income $600,000
Earnings per share: ————————— = ———— = $1.50
Outstanding shares 400,000

Net income + Interest after taxes


Earnings per share assuming bond conversion: ———————————————
Assumed outstanding shares

$600,000 + $245,000
($350,000 × .7 = $245,000); —————————— = $1.69
400,000 + 100,000

Therefore the bonds are antidilutive, and earnings per share outstanding of $1.50
should be reported.
Note that the convertible security is antidilutive:

Bond interest after taxes $245,000


————————————— = ———— = $2.45
Assumed incremental shares 100,000

3rd. Problem

Assume that the following data relative to Kane Company for 2016 is available:
Net Income $2,100,000

Transactions in Ordinary Shares Change Cumulative


Jan. 1, 2016, Beginning number 700,000
Mar. 1, 2016, Purchase of treasury shares (60,000) 640,000
June 1, 2016, Share split 2-1 640,000 1,280,000
Nov. 1, 2016, Issuance of shares 120,000 1,400,000
8% Cumulative Convertible Preference Shares
Sold at par, convertible into 200,000 ordinary shares
(adjusted for split). $1,000,000
Share Options
Exercisable at the option price of $25 per share. Average
market price in 2016, $30 (market price and option price
adjusted for split). 60,000 shares
(a) Compute the basic earnings per share for 2016. (Round to the nearest penny.)
(b) Compute the diluted earnings per share for 2016. (Round to the nearest penny.)
Ans.

Computation of weighted average shares outstanding during the year:


January 1 Outstanding 700,000
March 1 Repurchase (5/6 × 60,000) (50,000)
650,000
June 1 2-for-1 split 1,300,000
November 1 Issued (1/6 × 120,000) 20,000
1,320,000

Additional shares for purposes of diluted earnings per share:


Potentially dilutive securities
8% convertible preference shares
200,000
Share options
Proceeds from exercise of 60,000 options (60,000 × $25) $1,500,000
Shares issued upon exercise of options 60,000
Less: treasury shares purchasable with proceeds
($1,500,000 ÷ $30) 50,000
10,000
Dilutive securities—additional shares
210,000
$2,100,000 – $80,000
(a) Basic earnings per share: —————————— = $1.53
1,320,000
$2,100,000
(b) Diluted earnings per share: ———–—————— = $1.37
1,320,000 + 210,000

LEASING

Windom Co. as lessee records a capital lease of machinery on January 1, 2008. The seven
annual lease payments of $350,000 are made at the end of each year. The present value of the
lease payments at 10% is $1,704,000. Windom uses the effective-interest method of
amortization and sum-of-the-years'-digits depreciation (no residual value).

Instructions (Round to the nearest dollar.)


(a) Prepare an amortization table for 2008 and 2009.
(b) Prepare all of Windom 's journal entries for 2008.

Ans.
(a) Annual Reduction
Date Payments 10% Interest Of Liability Lease
Liability
1/1/08 $1,704,000
12/31/08 $350,000 $170,400 $179,600 1,524,400
12/31/09 350,000 152,440 197,560 1,326,840

(b) Leased Machinery...................................................................1,704,000


Lease Liability............................................................................. 1,704,000

Interest Expense.........................................................................170,400
Lease Liability.............................................................................179,600
Cash............................................................................................ 350,000

Depreciation Expense (7/28 × $1,704,000)................................426,000


Accumulated Depreciation ........................................................ 426,000

REVENUE

Benson Construction specializes in the construction of commercial and industrial buildings. The
contractor is experienced in bidding long-term construction projects of this type, with the
typical project lasting fifteen to twenty-four months. The contractor uses the percentage-of-
completion method of revenue recognition since, given the characteristics of the contractor's
business and contracts, it is the most appropriate method. Progress toward completion is
measured on a cost to cost basis. Benson began work on a lump-sum contract at the beginning
of 2008. As bid, the statistics were as follows:
It should be noted that included in the above costs incurred to date were standard electrical
and mechanical materials stored on the job site, but not yet installed, costing $105,000. These
costs should not be considered in the costs incurred to date.

(a) Compute the percentage of completion on the contract at the end of 2008.
(b) Indicate the amount of gross profit that would be reported on this contract at the end of
2008.
(c) Make the journal entry to record the income (loss) for 2008 on Benson's books.
(d) Indicate the account(s) and the amount(s) that would be shown on the balance sheet of
Benson Construction at the end of 2008 related to its construction accounts. Also indicate
where these items would be classified on the balance sheet. Billings collected during the
year amounted to $1,980,000.
(e) Assume the latest forecast on total costs at the end of 2008 was $4,050,000. How much
income (loss) would Benson report for the year 2008?

Ans.
(a) Costs to date $1,755,000
Less materials on job site (105,000)
$1,650,000

Costs Incurred to Date


—————————— = Percentage of Completion
Total Estimated Costs

$1,650,000
————— = 55%
$3,000,000

(b) 55% × $4,000,000 = $2,200,000


Costs incurred 1,650,000
Gross profit $ 550,000

(c) Construction Expense..............................................................1,650,000


Construction in Process..............................................................550,000
Revenue from Long-Term Project............................................... 2,200,000
(d) Current Assets
Accounts receivable $250,000 ($2,230,000 – $1,980,000)

Current Liability
Billings in excess of contract costs and recognized profit $30,000
($2,230,000 – $2,200,000)

(e) Total loss reported in 2008


Contract price $4,000,000
Estimated cost to complete 4,050,000
Amount of loss to be reported $ (50,000)