1. Tutorials Amsterdam Business School
Accounting P 6011P0148 / PE 6011P0150
Tutorials
Amsterdam Business School

2. Contents
CH7: E7.23, P7.26, C7.34
CH8: P8.28, P8.32
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3. E7.23
Transaction/ Current Noncurrent Current Noncurrent Stockholders' Net
Adjustment Assets Assets Liabilities Liabilities Equity Income
a Income Taxes Deferred Tax Income Tax
Payable Liabilities Expense
b Cash Bonds Payable
+4, ,000
Discount on
Bonds Payable
-50
c Cash Land
-3, ,000
d Inventory Estimated Warranty
Liability
-64
e Cash Notes Payable
+19, ,000
Notes Payable
-600
f Current Serial Bonds
Maturities Payable
of Long-term -35,000
Debt
+ 35,000
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4. E7.23
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5. E7.23
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6. P7.26 a. Balance Sheet Income Statement .
Assets = Liabilities + Stockholders’ Equity  Net income = Revenues - Expenses
1. To record the cash collection of subscription fees received in advance:
Cash Unearned
+15, Subscription
Revenue
+15,000
2. To record subscription revenue earned from delivering magazines:
Unearned Subscription
Subscription Revenue
Revenue
-750
1. Dr. Cash ($75 * 200 subscriptions) ……… ,000
Cr. Unearned Subscription Revenue ……… ,000
To record the cash collection of subscription fees received in advance.
2. Dr. Unearned Subscription Revenue
Cr. Subscription Revenue ($75 * 120 subscribers * 1/12)…
To record subscription revenue earned from delivering magazines.
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7. P7.26 b.
Revenue earned during September ($75 * 120 subscribers * 1/12) $ 750
Revenue earned from October-December ($75 * 200 subscribers * 3/12) ,750
Total subscription revenue earned during $4,500
Solution approach: Assuming that the “profile” of lifetime subscribers for Evans Ltd. will be similar to that of current subscribers, an average lifetime membership will last for 40 years. The present value of a lifetime subscription, discounted at 12% for 40 years =
($75 per year revenues foregone * ) = $618.29
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8. C7.34 a. The average-for-the-year interest rate = (7% + 8%) / 2 = 7.5%
The average liability balance = ($190,000 + $250,000) / 2 = $220,000
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ Equity  Net income = Revenues - Expenses
Interest Interest
Payable Expense
+16, ,500
Dr. Interest Expense ($220,000 * 7.5%) ……… ,500
Cr. Interest Payable ……… ,500
To accrue interest on working capital loans for the year.
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9. C7.34 b.
No. The “current maturities of long-term debt” is related to the “serial bonds due in equal annual installments.” The current maturities owed at the end of 2013 would have been paid at some point during 2014 (at the date specified in the serial bond indenture). At the end of 2014, an entry would have been made to reclassify the 2015 installment of the long-term serial bond as a current liability. Thus, the “current maturities” account would have decreased and then increased by equal amounts during the year.
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10. C7.34
c. The bonds pay a higher than market-rate of interest, so their price will increase. That is, investors are willing to pay more for bonds offering a higher than market interest rate because such an investment will increase their ROI. Since the bonds are a liability to Corless Co. (the issuer), it is likely that the call feature will be exercised so that bonds with a lower interest rate can be issued in the near future. It would not be to the bondholders’ advantage to exercise the conversion feature at this point.
Other factors to consider before deciding to call the bonds? 1) cost of the call premium, and 2) cost of registration and issuance of a new bond issue; both factors should be considered relative to the remaining term of the outstanding bonds.
Note that interest rate expectations are not terribly relevant because the new bond issue will have a fixed interest rate (at or near 7%), and if interest rates continue to drop, the call feature can be exercised on the new bonds as well.
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11. C7.34
d. The market value would be more than the book value of $400,000 because the price of the bonds would increase, as described in item c. This is bad news to Corless Co. because it is paying a higher than market interest rate.
Why doesn’t the firm adjust the book value of its liability for the change in market value caused by interest rate movements? That is, why not record the unrealized gain or loss each year as a year-end adjusting entry so that the Bonds Payable account will be marked to market?
1) This would violate the historical cost principle--bonds are initially recorded at their market value at the time of issuance, and the initial amount of discount or premium is amortized over the life of the bond issue (much like the depreciation of the historical cost of long-term assets). Accounting for liabilities should be consistent with the accounting for long-term assets.
2) The going concern concept suggests that, in the end, the bonds will be appropriately valued--the book value will be equal to the face amount at the maturity date, and this is the amount of cash the issuer must ultimately pay to satisfy its obligation. So why keep adjusting the “value” of the Bonds Payable liability up and down if the market adjustments are not going to be realized by the firm. This provides a good opportunity to discuss/reinforce alternative valuation approaches for liabilities (and assets) with emphasis on the historical cost/market value debate.
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12. C7.34
The following adjusting entry was made at year-end to reclassify the 2015 installment of
the serial bond as a current liability:
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ Equity  Net income = Revenues - Expenses
Serial Bonds Payable
-80,000
Current Maturities
of Long-Term Debt
+80,000
Dr. Serial Bonds Payable ……… ,000
Cr. Current Maturities of Long-Term Debt ,000
To reclassify the 2015 installment of the serial bond as a current liability.
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13. P8.28 P8.28. Other Paid-in Retained Treasury Net
Other Paid-in Retained Treasury Net
Cash Assets Liabilities Capital Earnings Stock * Income a.
+89, ,250 b.
+38, ,130 c.
+135, ,000 d.
-39, ,200 e.
+14, ,000 f.
+50, ,220
* Note that an increase in treasury stock (for a purchase transaction such as item d) decreases
total stockholders’ equity, and a decrease in treasury stock (for a sale transaction such as item e) increases total stockholders’ equity. The effects shown are with respect to the Treasury Stock account, which is a contra stockholders’ equity account.
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14. a.
Dr. Cash ($52.50 * 1,700 shares) ,250
Cr. Preferred Stock ($50 par * 1,700 shares) ,000
Cr. Additional Paid-In Capital ($2.50 excess * 1,700 shares) ,250 b.
Dr. Retained Earnings ($4.10 per share * 9,300 shares) ,130
Cr. Dividends Payable ,130 c.
Dr. Building ($54 per share * 2,500 shares) ,000
Cr. Preferred Stock ($50 per share * 2,500 shares) ,000
Cr. Additional Paid-In Capital ($4 excess * 2,500 shares) ,000 d.
Dr. Treasury Stock ($56 per share * 700 shares) ,200
Cr. Cash ,200 e.
Dr. Cash ($57 per share * 250 shares) ,250
Cr. Treasury Stock ($56 per share * 250 shares) ,000
Cr. Additional Paid-In Capital ($1 excess * 250 shares) f.
Dr. Retained Earnings ($36 per share * 9,300 issued * 15%) ,220
Cr. Common Stock ($1 par * 1,395 dividend shares) ,395
Cr. Additional Paid-In Capital ($35 excess * 1,395 shares) ,825
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15. P8.32 a.
Common stock = ($5 par value * 300,000 shares issued) = $1,500,000 b.
Price per share = Increase in paid‑in capital / Number of shares issued.
Increase in common stock ($1,500,000 - $1,350,000) $ 150,000
Increase in additional paid‑in capital ($12,990,000 - $11,610,000) ,380,000
Total increase in paid‑in capital $1,530,000
/ Number of shares issued in May ,000
= Price per share of shares sold in May $51 c.
Increase in cost of treasury stock ($2,202,000 - $2,074,000) $128,000
/ Increase in number of shares of treasury stock (36,000 – 34,000) ,000
= Cost per share $64
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16. Retained earnings, April 30, 2013 $17,320,000 Add: Net income ?
Less: Preferred stock dividend (1/2 year * 9% * $120 par * 70,000 share) ……… (378,000)
Retained earnings, May 31, $18,100,000
Solving for the unknown amount, net income = $1,158,000 e.
1. Shares outstanding = (300,000 shares issued - 36,000 treasury shares) = 264,000
Total cash dividend = ($0.30 dividend per share * 264,000 outstanding) = $79,200
2. The June 30, 2013, balance sheet will reflect a reduction in retained earnings and an increase in dividends payable (a current liability) for the same amount. Dividends declared have no effect on the income statement.
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17. Balance Sheet Income Statement . Retained Earnings - 990,000 f.
Number of dividend shares = (5% dividend rate * 300,000 shares issued) = 15,000
Balance Sheet Income Statement
Assets = Liabilities + Stockholders’ Equity  Net income = Revenues - Expenses
Retained Earnings
- 990,000
Common Stock
+ 75,000
Additional
Paid-In Capital
+ 915,000
Dr. Retained Earnings (15,000 $66 per share) ,000
Cr. Common Stock (15,000 $5 per share) ,000
Cr. Additional Paid‑In Capital (15,000 $61 per share) ,000
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18. g.
1. New par value will be 1/2 of prior par value = ($5 / 2) = $ The number of authorized shares will double (500,000 * 2 = 1,000,000) to accommodate the new total number of shares issued.
2. The market price will drop to about 1/2 of the pre‑split market price = (1/2 * $66) = $33
3. The number of treasury shares will double = (36,000 * 2) = 72,000 shares h.
Total stockholders’ equity will not change from either a stock dividend or a stock split.
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