financial accounting e9

Homework 4

Course B10.1306.11 – Financial Accounting and Reporting Professor Joshua Ronen

Ana Sviatschi – Blue Core Group [email protected]

E9-12 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).2. Explain why tax expense is not simply the amount of cash paid during the year

1. Year 2011Income Tax expense ……………………..$304,000 Deferred Taxes……………………………… $54,000

Income Tax Payable………………………. $250,000Year 2012Income Tax expense ……………………..$348,000 Deferred Taxes……………………………… $58,000

Income Tax Payable………………………. $290,000

2. Tax expense not always equals the amount of cash paid during the year because there are separate rules for GAAP and tax return. In order to reflect this difference companies establish a separate account called Deferred Taxes.

E10-5 Computing Issue Prices of Bonds for Three Cases

James Corporation is planning to issue $500,000 worth of bonds that mature in 10 years and pay 6 percent interest each June 30 and December 31. All of the bonds will be sold on January 1, 2011.

Required:

Compute the issue (sale) price on January 1, 2011, for each of the following independent cases (show computations):

Ana Sviatschi 1 of 5

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a. Case A: Market (yield) rate, 4 percent.b. Case B: Market (yield) rate, 6 percent.c. Case C: Market (yield) rate, 8 percent

Principal: $500,000Coupon: 3% semiannualCoupon Interest: $15,000 semiannualMaturity: 10yrsPeriods: 20

Market Yield

Markey Yield by 2 interest

periodsPresent Value

$1

Present value of annuity of

$1Present value of Principal

Present value of interest

Issue Sale Price

a) 4% 2% 0.6730 16.3514 336,500$ 245,271$ 581,771 b) 6% 3% 0.5537 14.8775 276,850$ 223,163$ 500,013 c) 8% 4% 0.4564 13.5903 228,200$ 203,855$ 432,055

E10-15 Evaluating Bond Features

You are a personal financial planner working with a married couple in their early 40s who have decided to invest $100,000 in corporate bonds. You have found two bonds that you think will interest your clients. One is a zero coupon bond issued by PepsiCo with an effective interest rate of 9 percent and a maturity date of 2020. It is callable at par. The other i0073 a Walt Disney bond that matures in 2093. It has an effective interest rate of 9.5 percent and is callable at 105 percent of par. Which bond would you recommend and why? Would your answer be different if you expected interest rates to fall significantly over the next few years? Would you prefer a different bond if the couple were in their late 60s and retired?

I would recommend Pepsico’s Bonds because it is a well diversified company with less business cycle risk compared to Disney: Pepsico’s products are less affected by economic crisis compared to Disney’s. Pepsico is part of the consumer goods industry and historically when economic crisis occur, first adjustment are on leisure, travel and entertainment which affects Disney.

Not only Pepsico’s bonds represent less industry/credit risk, but also they mature in 2020 vs 2093, they have less sensitivity to changes in interest rate.


http://www.disney.com/

http://www.pepsico.com/

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If I expect interest rates to fall, then I would recommend investing in Disney bonds since they have higher effective interest rate and, being longer term, the benefits from lowering interest rates would be greater.

For a couple that is retiring soon, I would suggest to buy short term bonds with low risk like Pepsico offer or even more conservative US treasury Bonds with 5 year maturity.

E11-4 Reporting Stockholders' Equity

The financial statements for Highland Publications Corporation included the following selected information:

The common stock was sold at a price of $20 per share.

Required:

1. What is the amount of capital in excess of par?2. What was the amount of retained earnings at the beginning of the year?3. How many shares are in treasury stock?4. Compute earnings per share.

1. Debit Credit

Cash $ 1,600,000 Common Stock $ 1,422,222 Capital in excess of par $ 177,778

Par Value of Common Stock 17.778


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2. Retained Earning end of year $900,000 Net Income $1,000,000 Dividends $800,000 Retained Earning beginning of the year $1,100,000

3. Treasury Stock share = 90,000-80,000 = 10,000

4. EPS = Net Income/Average number of shares outstanding for the period

EPS = $1,000,000/80,000 = 12.5

E11-9 Determining the Effects of Transactions on Stockholders’ Equity

Quick Fix-it Corporation was organized in January 2011 to operate several car repair businesses in a large metropolitan area. The charter issued by the state authorized the following capital stock:

Common stock, $10 par value, 98,000 shares Preferred stock, $50 par value, 8 percent, 59,000 shares

During January and February 2011, the following stock transactions were completed:

a. Sold 78,000 shares of common stock at $20 per share and collected cash.b. Sold 20,000 shares of preferred stock at $80 per share; collected the cash and

immediately issued the stock.c. Bought 4,000 shares of common stock from a current stockholder for $20 per share.

Required:

Net income for 2011 was $90,000; cash dividends declared and paid at year-end were $30,000. Prepare the stockholders' equity section of the balance sheet at December 31, 2011.


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Debit Credit Common Stock Q P

a) Cash 1,560,000 Shares Issued 78,000 20$ Common Stock 780,000 Shares non issued 20,000 10$ Capital in excess of par 780,000

b) Cash 1,600,000 Preferred StockPreferred Stock 1,000,000 Shares Issued 20,000 80$ Capital in excess of par 600,000 Shares non issued 39,000 50$

c) Treasury Stock 80,000 Treasury StockCash 80,000 Bought Common stock 4000 20$

Net Income 90,000$ Dividends (30,000) Retained Earnings 60,000$

Stockholder's EquityContributed Capital

Preferred Stock, 8% (par value $50, authorized 59,000 shares, issued 39,000) 1,000,000$ Capital in excess of par, preferred stock 600,000

Common stock (par value $10, authorized 98,000 shares, issued 78,000 of which 4000 are held as treasury stock) 780,000 Capital in excess of par, common stock 780,000

Total Contributed Capital 3,160,000$ Retained Earnings 60,000

Total Contributed Capital and Retained Earnings 3,220,000$ Less cost of common treasury stock held (4,000 shares) (80,000)

Total Stockholder's equity 3,140,000$


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