Review Problems Part 1

Review problems part 1 1. Anteater Company issued 100 bonds, each with a face value of $ 1,000, with detachable stock warrants at 101. Each warrant entitled its holder to acquire one share of $ 100 par value stock for $ 120 per share. Through discussion with its investment bankers, it is determined that the bonds would sell for 97 without the warrants. The market value of the warrants is $ 50. a. Record the issuance of the bonds. b. How would your answer change if the MV of the warrants is not known c. Record the entry for part a if all the warrants are exercised d. Record the entry for part a if the warrants expire 2. During 2007, Bradley Corp issued for $ 110 per share, 5,000 shares of $ 100 par value convertible preferred stock. One share of preferred stock can be converted into 3 shares of Bradley’s $ 25 par value common stock at the option of the preferred stockholder. On December 31, 2008, all the preferred stock was converted into common stock. The market value of the common stock was $ 40 per share on that date. 3. Ace Corp. grants its employees the option to buy 200 shares of its $ 2 par value common stock for $ 30 after completing a three year service period. The Black Scholes option pricing model provides a compensation amount of $ 120,000 for the three years. At the end of three years, when the market price of the stock was $ 45, 150 options were exercised. The rest expired. 4. Determine the Weighted Average shares outstanding January 1 20,000 shares April 2 Issued 5,000 shares June 4 Issued 4,000 shares July 1 Issued a 10% stock dividend Sept. 28 2 for 1 stock split Oct. 3 Reacquired 1,000 shares Nov. 27 Reissued 1,000 shares 5. Burke Co. shows the following condensed income statement for December 31, 2007 Income before extraordinary items 29, 936 Extraordinary loss (2,176) Net income 27,760 The company declared dividends of $ 6,000 on preferred stock and $ 17, 280 on common stock. At the beginning of 2007, 10,000 shares of common stock were outstanding. On May 4, 2007, the company issued 2,000 additional shares. On October 29, it issued a 20% stock dividend. Compute basic EPS

6. Caldwell Company has 20,000 shares of common stock outstanding during 2007. It also has the following two convertible securities: a. Convertible preferred stock: 2,000 shares of 9.5%, $ 50 par, issued at $ 60 per share. Each share of preferred stock is convertible into 3 shares of common stock. Current dividends have been declared b. Convertible bonds: Ten year bonds with a face value of $ 200,000 and an interest rate of 5.7% were issued at 102. Each $ 1,000 bond is convertible into 22 shares of common stock. The company earned a net income of $ 61,500. Its tax rate is 30% 7. You are given the following information: a. Net income $ 150,500 b. Bonds Payable: The company issues 10%, $ 200,000 bonds at 98. The discount is being amortized at $ 1,000 per year. Each $ 1,000 bond is convertible into 5 shares of common stock. c. Preferred stock: The company has 3,800 shares of preferred stock 7.5%, $ 100 par, issued at $ 108. Each share of preferred stock is convertible into 2.45 shares of common stock. The preferred stock is non-cumulative, and the dividends are in arrears. d. AT the beginning of the year, 25,000 shares of common stock were outstanding. On August 3, 7,000 shares were issued; on September 1, a 20% stock dividend was issued; on November 30, 2,000 shares were reacquired. e. Options to acquire common stock at $ 33 were outstanding – 4,000 shares could be acquired with the options. f. Warrants to acquire common stock at $ 45 per share were also outstanding – 1,000 shares could be acquired with these warrants. g. The average stock price was $ 40; tax rate is 30% 8. On October 1, 2006, Happy issued $ 500,000, 5 year $ 1,000 face value bonds at 102 plus accrued interest. Each bond is convertible into 20 shares of $ 5 par stock. Interest dates are June 30 and December 31. On July 1, 2008, the 60% of the bonds are converted into common stock. 9. On September 1, 2008, the McClellen Company acquired $ 100,000, 8% bonds of Lankford Co. for $ 105,800 plus accrued interest. The interest is due on July 31 and January 31 each year, and the bonds mature in five years. The premium is amortized using the straight line method. On December 31, 2008 and December 31, 2009, the bonds have market values of $ 105,000 and $ 105,500 respectively. 10. Schmidt Corp. purchased $ 100,000 of 10%, 10 year bonds on January 1, 2004, with interest payable on July 1 and January 1. The bonds sell for $ 88,530, which gives an effective interest rate of 12%. The following are the year end market values of the bonds for the first four years: 2004: $ 89,000 2005: $ 91,000 2006: $ 90,500 2007: $ 90,000

a. Provide journal entries for the first four years assuming the bonds are HTM, AVS or Trading b. Assume that the bonds are AFS. Provide the journal entries if the bonds are sold for $ 90,000 on July 2, 2005. 11. Funk Company has the following securities in its investment portfolio on Dec. 31, 2008 • 5,000 shares of Beem common stock that cost $ 55,000 • 30,000 shares of Lenard stock that cost $ 150,000 • 4,000 shares of Taylor stock that cost $ 120,000 In 2009, Funk completed the following transactions: a. On March 15, sold 2,000 shares of Beem at $ 10 per share and paid fees of $ 150 b. On June 1, purchased 10,000 shares of Chong stock for $ 12 and paid fees of $ 200 On December 31, the market values per share of the securities were: • Beem $ 8 • Lenard $ 10 • Taylor $ 18 • Chong $ 15 Account for these investments assuming AFS or Trading securities. 12. Silverman bought 8,000 shares of DeFano common stock out of a total of 20,000 shares for $ 200,000. For the next two years, DeFano earns income of $ 100,000 and $ 120,000, and pays dividends of $ 80,000 and $ 90,000. At the end of the second year, 3,000 shares are sold for $ 85,000. Journalize the purchase, the income and dividend recognition for two years, and the sale.