2007Exam1

Name

A505 (303)

Summer, 2007

Exam I

You have from 9:00 – 11:00 to finish the exam. I suspect some people will not

complete it.

You may use two sheets of notes, both front and back.

Points are shown next to each question (total = 100 points).

To receive full (or partial) credit you must clearly show all calculations.

Exam I is worth 50% of your overall grade.

Please check to see that you have 13 pages (they are numbered).

A303—Exam I 16 July, 2007 Page 1 of 14

When done turn in all pages of the exam.


Multiple Choice (3 points each) – Circle the MOST correct answer 1. The pre-emptive right of a common stockholder is the right to

a. share proportionately in corporate assets upon liquidation.b. share proportionately in any new issues of stock of the same class.c. receive cash dividends before they are distributed to preferred

stockholders.d. exclude preferred stockholders from voting rights.

2. When a corporation issues its capital stock in payment for services, the least appropriate basis for recording the transaction is the

a. market value of the services received.b. market value of the shares issued.c. par value of the shares issued.d. Any of these provides an appropriate basis for recording the transaction.

3. How should a "gain" from the sale of treasury stock be reflected when using the cost method of recording treasury stock transactions?

a. As ordinary earnings shown on the income statement.b. As paid-in capital from treasury stock transactions.c. As an increase in the amount shown for common stock.d. As an extraordinary item shown on the income statement.

4. Cumulative preferred dividends in arrears should be shown in a corporation's balance sheet as

a. an increase in current liabilities.b. an increase in stockholders' equity.c. a footnote.d. an increase in current liabilities for the current portion and long-term

liabilities for the long-term portion.


5. The date on which total compensation expense is computed in a stock option plan is the date

a. of grant.b. of exercise.c. that the market price coincides with the option price.c. that the market price exceeds the option price.

6. Antidilutive securities

a. should be included in the computation of diluted earnings per share but not basic earnings per share.

b. are those whose inclusion in earnings per share computations would cause basic earnings per share to exceed diluted earnings per share.

c. include stock options and warrants whose exercise price is less than the average market price of common stock.

d. should be ignored in all earnings per share calculations.

7. The rationale for interperiod income tax allocation is to

a. recognize a tax asset or liability for the tax consequences of temporary differences that exist at the balance sheet date.

b. recognize a distribution of earnings to the taxing agency.c. reconcile the tax consequences of permanent and temporary differences

appearing on the current year's financial statements.d. adjust income tax expense on the income statement to be in agreement

with income taxes payable on the balance sheet.

8. Which of the following are temporary differences that are normally classified as expenses or losses that are deductible after they are recognized in financial income?

a. Advance rental receipts.b. Product warranty liabilities.c. Depreciable property.d. Fines and expenses resulting from a violation of law.


9. (8 points) Landon Corporation has issued 2,000 shares of common stock and 400 shares of preferred stock for a lump sum of $72,000 cash.

Instructions(a) Give the entry for the issuance assuming the par value of the common was $5

and the market value $30, and the par value of the preferred was $40 and the market value $50. (Each valuation is on a per share basis and there are ready markets for each stock.)

(b) Give the entry for the issuance assuming the same facts as (a) above except the preferred stock has no ready market and the common stock has a market value of $25 per share.


10. (8 points) Gagne Company's balance sheet shows:Common stock, $20 par $3,000,000Paid-in capital in excess of par 1,050,000Retained earnings 750,000

InstructionsRecord the following consecutive transactions by the cost method.

(a) Bought 5,000 shares of its common stock at $29 a share.(b) Sold 2,500 treasury shares at $30 a share.(c) Sold 1,000 shares of treasury stock at $26 a share.


11. (6 points) Sands Corporation has the following capital structure at the beginning of the year:

6% Preferred stock, $50 par value, 20,000 shares authorized, 6,000 shares issued and outstanding $ 300,000

Common stock, $10 par value, 60,000 shares authorized, 40,000 shares issued and outstanding 400,000

Paid-in capital in excess of par 110,000Total paid-in capital 810,000Retained earnings 440,000Total stockholders' equity $1,250,000

InstructionsRecord the following transactions which occurred consecutively (show all

calculations).

1. A total cash dividend of $90,000 was declared and payable to stockholders of record. Record dividends payable on common and preferred stock in separate accounts.

2. A 10% common stock dividend was declared and distributed. The average market value of the common stock is $18 a share.


(0 points) Dahl Co. issued $5,000,000 of 12%, 5-year convertible bonds on December 1, 2006 for $5,020,800 plus accrued interest. The bonds were dated April 1, 2006 with interest payable April 1 and October 1. Bond premium is amortized each interest period on a straight-line basis. Dahl Co. has a fiscal year end of September 30.

On October 1, 2007, $2,500,000 of these bonds were converted into 35,000 shares of $15 par common stock. Accrued interest was paid in cash at the time of conversion.

Instructions(a) skip this problem and use the space for calculations if you need it – scary eh!


12. (14 points) Adcock Corp. had $500,000 net income in 2007. On January 1, 2007 there were 200,000 shares of common stock outstanding. On April 1, 20,000 shares were issued and on September 1, Adcock bought 30,000 shares of treasury stock. A 2:1 stock split was completed on November 1.

All of the conversion numbers given below is based on end of year numbers.There are 60,000 options to buy common stock at $20 a share outstanding. The market price of the common stock averaged $25 during 2007. The tax rate is 40%.

During 2007, there were 40,000 shares of cumulative convertible preferred stock outstanding. The preferred is $100 par, pays $3.50 a year dividend, and is convertible into six shares of common stock.

Adcock issued $2,000,000 of 8% convertible bonds at face value during 2006. Each $1,000 bond is convertible into 56 shares of common stock.

InstructionsCompute basic and diluted earnings per share for 2007. Show all the steps taken! (Round to the nearest penny.)(Next page is blank for workspace)



12. (16 points) The records for Orkin Co. show this data for 2008:

Gross profit on installment sales recorded on the books was $360,000. Gross profit from collections of installment receivables was $270,000.

Life insurance on officers was $3,800.

Machinery was acquired in January for $300,000. Straight-line depreciation over a ten-year life (no salvage value) is used. For tax purposes, MACRS depreciation is used and Orkin may deduct 14% for 2008.

Interest received on tax exempt Iowa State bonds was $9,000.

The estimated warranty liability related to 2008 sales was $19,600. Repair costs under warranties during 2008 were $13,600. The remainder will be incurred in 2009.

Pretax financial income is $600,000. The tax rate is 30%.

Instructions(a) Prepare a schedule starting with pretax financial income and compute taxable income.(b) Prepare the journal entry to record income taxes for 2008.(Next page is blank for workspace)



13. (12 points) In 2007, its first year of operations, Penner Corp. has a $900,000 net operating loss when the tax rate is 30%. In 2008, Penner has $360,000 taxable income and the tax rate remains 30%.

InstructionsAssume the management of Penner Corp. thinks that it is more likely than not that the loss carryforward will not be realized in the near future because it is a new company (this is before results of 2008 operations are known).

(a) What are the entries in 2007 to record the tax loss carryforward?

(b) What entries would be made in 2008 to record the current and deferred income taxes and to recognize the loss carryforward? (Assume that at the end of 2008 it is more likely than not that the deferred tax asset will be realized.)


14.(12 points) Prepare the necessary entries from 1/1/07-2/1/09 for the following events using the fair value method. If no entry is needed, write "No Entry Necessary."

1. On 1/1/07, the stockholders adopted a stock option plan for top executives whereby each might receive rights to purchase up to 12,000 shares of common stock at $40 per share. The par value is $10 per share.

2. On 2/1/07, options were granted to each of five executives to purchase 12,000 shares. The options were non-transferable and the executive had to remain an employee of the company to exercise the option. The options expire on 2/1/09. It is assumed that the options were for services performed equally in 2007 and 2008. The Black-Scholes option pricing model determines total compensation expense to be $1,300,000. Include year end entries for 2007 and 2008.

3. At 2/1/09, four executives exercised their options. The fifth executive chose not to exercise his options, which therefore were forfeited.


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2007Exam1