Accounting 26e chapter 15 Comprehensive Problem 4

Selected transactions completed by Equinox Products Inc. during the fiscal year ended December 31, 2014, were as follows:

a. Issued 15,000 shares of $20 par common stock at $30, receiving cash.

b. Issued 4,000 shares of $80 par preferred 5% stock at $100, receiving cash.

c. Issued $500,000 of 10-year, 5% bonds at 104, with interest payable semiannually.

d. Declared a quarterly dividend of $0.50 per share on common stock and $1.00 per share on preferred stock. On the date of record, 100,000 shares of common stock were outstanding, no treasury shares were held, and 20,000 shares of preferred stock were outstanding.

e. Paid the cash dividends declared in (d).

f. Purchased 7,500 shares of Solstice Corp. at $40 per share, plus a $150 brokerage commission.

The investment is classified as an available-for-sale investment.

g. Purchased 8,000 shares of treasury common stock at $33 per share.

h. Purchased 40,000 shares of Pinkberry Co. stock directly from the founders for $24 per share. Pinkberry has 125,000 shares issued and outstanding. Equinox Products Inc. treated the investment as an equity method investment.

i. Declared a $1.00 quarterly cash dividend per share on preferred stock. On the date of record, 20,000 shares of preferred stock had been issued.

j. Paid the cash dividends to the preferred stockholders.

k. Received $27,500 dividend from Pinkberry Co. investment in (h).

l. Purchased $90,000 of Dream Inc. 10-year, 5% bonds, directly from the issuing company, at their face amount plus accrued interest of $375. The bonds are classified as a heldto maturity long-term investment.

m. Sold, at $38 per share, 2,600 shares of treasury common stock purchased in (g).

n. Received a dividend of $0.60 per share from the Solstice Corp. investment in (f).

o. Sold 1,000 shares of Solstice Corp. at $45, including commission.

p. Recorded the payment of semiannual interest on the bonds issued in (c) and the amortization of the premium for six months. The amortization is determined using the straight-line method.

q. Accrued interest for three months on the Dream Inc. bonds purchased in (l).

r. Pinkberry Co. recorded total earnings of $240,000. Equinox Products recorded equity earnings for its share of Pinkberry Co. net income.

s. The fair value for Solstice Corp. stock was $39.02 per share on December 31, 2014. The investment is adjusted to fair value, using a valuation allowance account.

Assume Valuation Allowance for Available-for-Sale Investments had a beginning balance of zero.

Instructions

1. Journalize the selected transactions.

2. After all of the transactions for the year ended December 31, 2014, had been posted [including the transactions recorded in part (1) and all adjusting entries], the data below and on the following page were taken from the records of Equinox Products Inc.

a. Prepare a multiple-step income statement for the year ended December 31, 2014, concluding with earnings per share. In computing earnings per share, assume that the average number of common shares outstanding was 100,000 and preferred dividends were $100,000. (Round earnings per share to the nearest cent.)

b. Prepare a retained earnings statement for the year ended December 31, 2014.

c. Prepare a balance sheet in report form as of December 31, 2014.

Income statement data:

Advertising expense ………………………………………… $ 150,000

Cost of merchandise sold……………………………………. 3,700,000

Delivery expense ……………………………………………. 30,000

Depreciation expense—office buildings and equipment…….. 30,000

Depreciation expense—store buildings and equipment ……… 100,000

Dividend revenue……………………………………………… 4,500

Gain on sale of investment…………………………………….. 4,980

Income from Pinkberry Co. investment………………………… 76,800

Income tax expense…………………………………………….. 140,500

Interest expense………………………………………………… 21,000

Interest revenue…………………………………………………. 2,720

Miscellaneous administrative expense…………………………… 7,500

Miscellaneous selling expense…………………………………… 14,000

Office rent expense………………………………………………. 50,000

Office salaries expense….………………………………………… 170,000

Office supplies expense…………………………………………… 10,000

Sales…………………………………….………………………… 5,254,000

Sales commissions………………………………………………… 185,000

Sales salaries expense…………………………………………….. 385,000

Store supplies expense……………………………………………. 21,000

Retained earnings and balance sheet data:

Accounts payable ………………………………………………… $ 194,300

Accounts receivable………………………………………………. 545,000

Accumulated depreciation—office buildings and equipment…… 1,580,000

Accumulated depreciation—store buildings and equipment …… 4,126,000

Allowance for doubtful accounts………………………………… 8,450

Available-for-sale investments (at cost) …………………………. 260,130

Bonds payable, 5%, due 2022……………………………………. 500,000

Cash …………………………………….……………………… 246,000

Common stock, $20 par (400,000 shares authorized;

100,000 shares issued, 94,600 outstanding) …………………… 2,000,000

Dividends:

Cash dividends for common stock……………………………… 155,120

Cash dividends for preferred stock……………………………. 100,000

Stock dividends for common stock …………………………… 66,240

Goodwill ………………………………………………………. 500,000

Income tax payable ……………………………………………. 44,000

Interest receivable ……………………………………………… 1,125

Investment in Pinkberry Co. stock (equity method)…………… 1,009,300

Investment in Dream Inc. bonds (long term) ………………….. 90,000

Merchandise inventory (December 31, 2014), at lower

of cost (FIFO) or market……………………………………….. $ 778,000

Office buildings and equipment………………………………… 4,320,000

Paid-in capital from sale of treasury stock……………………… 13,000

Excess of issue price over par—common stock………………… 886,800

Excess of issue price over par—preferred stock………………… 150,000

Preferred 5% stock, $80 par (30,000 shares authorized;

20,000 shares issued) ……………………………………………. 1,600,000

Premium on bonds payable……………………………………… 19,000

Prepaid expenses………………………………………………… 27,400

Retained earnings, January 1, 2014……………………………… 9,319,725

Store buildings and equipment……………………………………. 12,560,000

Treasury stock (5,400 shares of common stock at cost of

$33 per share) …………………………………………………….. 178,200

Unrealized gain (loss) on available-for-sale investments…….. (6,500)

Valuation allowance for available-for-sale investments ……… (6,500)