Questions -
Q1. Ravonette Corporation issued 300 shares of $10 par value common stock and 100 shares of $50 par value preferred stock for a lump sum of $13,500. The common stock has a market price of $20 per share, and the preferred stock has a market price of $90 per share. Prepare the journal entry to record the issuance.
Q2. The outstanding capital stock of Edna Millay Corporation consists of 2,000 shares of $100 par value, 8% preferred, and 5,000 shares of $50 par value common.
Assuming that the company has retained earnings of $90,000, all of which is to be paid out in dividends, and that preferred dividends were not paid during the 2 years preceding the current year, state how much each class of stock should receive under each of the following conditions.
a. The preferred stock is noncumulative and nonparticipating.
b. The preferred stock is cumulative and nonparticipating.
c. The preferred stock is cumulative and participating.
Q3. Matt Schmidt Company's ledger shows the following balances on December 31, 2014.
7% Preferred Stock-$10 par value, outstanding 20,000 shares $ 200,000
Common Stock-$100 par value, outstanding 30,000 shares 3,000,000
Retained Earnings 630,000
Assuming that the directors decide to declare total dividends in the amount of $366,000, determine how much each class of stock should receive under each of the conditions stated below. One year's dividends are in arrears on the preferred stock.
a. The preferred stock is cumulative and fully participating.
b. The preferred stock is noncumulative and nonparticipating.
c. The preferred stock is noncumulative and is participating in distributions in excess of a 10% dividend rate on the common stock.
Q4. Garfield Company purchased, as a held-to-maturity investment, $80,000 of the 9%, 5-year bonds of Chester Corporation for $74,086, which provides an 11% return.
Prepare Garfield's journal entries for (a) the purchase of the investment, and (b) the receipt of annual interest and discount amortization. Assume effective-interest amortization is used.
Q5. On January 2, 2014, Jones Company purchases a call option for $300 on Merchant common stock. The call option gives Jones the option to buy 1,000 shares of Merchant at a strike price of $50 per share. The market price of a Merchant share is $50 on January 2, 2014 (the intrinsic value is therefore $0). On March 31, 2014, the market price for Merchant stock is $53 per share, and the time value of the option is $200.
a. Prepare the journal entry to record the purchase of the call option on January 2, 2014.
b. Prepare the journal entries to recognize the change in the fair value of the call option as of March 31, 2014.
c. What was the effect on net income of entering into the derivative transaction for the period January 2 to March 31, 2014?
Q6. Simmons Corporation owns stock of Armstrong, Inc. Prior to 2014, the investment was accounted for using the equity method. In early 2014, Simmons sold part of its investment in Armstrong, and began using the fair value method. In 2014, Armstrong earned net income of $80,000 and paid dividends of $95,000.
Prepare Simmons's entries related to Armstrong's net income and dividends, assuming Simmons now owns 10% of Armstrong's stock.
Q7. For 2012, Campbell Soup Company had pension expense of $73 million and contributed $71 million to the pension fund.
Prepare Campbell Soup Company's journal entry to record pension expense and funding.
Q8. Hillsborough Co. has an available-for-sale investment in the bonds of Schuyler Corp. with a carrying (and fair) value of $70,000. Hillsborough determined that due to poor economic prospects for Schuyler, the bonds have decreased in value to $60,000. It is determined that this loss in value is other-than-temporary.
Prepare the journal entry, if any, to record the reduction in value.