Date: January 1, 2013
1. Issued 200,000 shares of $1 par value common stock for $10 per share.
2. Issued a $1,000,000 face value zero-coupon bond with a five-year maturity for $747,260 that is convertible into 100,000 shares of stock.
3. Leased equipment for 5 years. The lease required five payments of $120,100 paid on January 1 of each year with the first payment due on 1/1/13. XYZ guarantees a residual of $85,300. The implicit rate is equal to the incremental borrowing rate of 6%. The equipment has a useful life of 6 years.
4. Provided employees a defined benefit pension plan. The under the plan, each employee will receive annual retirement benefits equal to [2% x Number of years of service x Final salary (expected to total $800,000)]. We expect each employee to work for 20 years until retirement and to receive retirement benefits for 15 years. The actuary uses an annual 5% discount rate. To fund the plan, we contributed $4,000 into the fund.
5. Paid $400,000 to purchase furniture and fixtures that have a useful life of 10 years and for financial reporting are depreciated on a straight-line basis to 10% of their purchase cost.
6. Purchased a portfolio of securities for $200,000. Expect to hold the securities for investment indefinitely.
7. Purchased a municipal bond for $83,560. The bond has a coupon rate of 5% (payable December 31 of each year), face value of $80,000, and a five-year maturity. The interest is not taxable and XYZ intends to hold the bond until maturity.
Date: July 1, 2013
Today we entered into the following transactions:
1. Paid $350,000 to purchase furniture and leased it to DEF Corp. for 5 years. DEF agreed to pay $89,955 on July 1 for each of the next 5 years. At the end of the lease term we expect the furniture to have a value of $60,000 and one year of useful life remaining. We expect to earn a return of 8% on the lease.
2. Paid $120,000 to purchase 10,000 shares of our (XYZ) common stock.
3. Issued 25,000 stock options to our employees with the strike price equal to the current price of $12 per share. Each option has a fair value of $4. We expect none of our employees will forfeit their options. The options carry a one-year vesting period and mature in 5 years.
Date: September 30, 2013: We sold 8,000 shares of stock from our treasury for a price of $11 per share.
Date: December 31, 2013: Declared and paid a cash dividend of $0.50 per share.
Activity throughout 2013
1. Credit sales of 10,000 units at a price of $200 per unit.
2. Cash collections on credit sales totaled $1,200,000
3. Purchased 14,000 units for cash at a cost of $90 per unit
4. Replaced 400 defective units that were covered under warranty
5. Paid employees salaries of $480,000.
Estimates and assumptions as of December 31, 2013
1. Expected future warranty claims = 300 units; unit cost is expected to rise to $100.
2. Income tax rate is 30% and assumed to be constant over time. All taxes paid in 2014
3. Expected bad debts = 5% of accounts receivable (no accounts written off during 2013)
4. Average stock price is $15 per share
5. The expected return on plan assets is 6%
6. The value of plan assets on December 31, 2013 = $3,500
7. The value of the portfolio of investment securities is $210,000.
8. The value of the municipal bond is $80,000.
Required: Prepare a multiple step income statement, and classified balance sheet for XYZ Corporation for 2013 in good form. The income statement should include the proper earnings per share calculations. You are also required to provide the following:
1. A listing of the deferred tax assets and liabilities.
2. The determination of the earnings per share calculations.
3. Adjusted trial balance as of 12/31/2013.
For this assignment, only the specified schedules are required, i.e., no text. Round account balances to the nearest dollar and per share amounts to the nearest cent. For the balance sheet you will need to classify the leases as current or noncurrent, however for deferred taxes, classify the entire deferred tax effect as noncurrent.
Assume the following tax regulations:
Warranty costs are deducted when claims are fulfilled.
Pension costs are deductible in the amount of the contribution.
Depreciation is find outd using the double declining balance method.
All leases are taxed as operating leases.
The firm receives a deduction equal to the employee’s gain on the exercise of the option when the option is exercised.
Interest expense on the zero-coupon convertible bond is fully tax-deductible.