1. On August 31, Demich Co. partially refunded $180,000 of its outstanding 10% note payable made one year ago to Best Federal Bank by paying $180,000 plus $18,000 interest, having obtained the $198,000 by using $52,400 cash and signing a new one-year $160,000 note discounted at 9% by the bank. Instructions (1) Make the entry to record the partial refunding. Assume Demich Co. makes reversing entries when appropriate. (2) Prepare the adjusting entry at December 31, assuming straight-line amortization of the discount. 1. Below are three independent situations. a. In August, 2012 a worker was injured in the factory in an accident partially the result of his own negligence. The worker has sued Crusher Co. for $800,000. Counsel believes it is reasonably possible that the outcome of the suit will be unfavorable and that the settlement would cost the company from $250,000 to $500,000. b. A suit for breach of contract seeking damages of $2,400,000 was filed by an author against Parker Co. on October 4, 2012. Parker’s legal counsel believes that an unfavorable outcome is probable. A reasonable estimate of the award to the plaintiff is between $600,000 and $1,800,000. No amount within this range is a better estimate of potential damages than any other amount. c. Rose is involved in a pending court case. Rose’s lawyers believe it is probable that Rose will be awarded damages of $1,000,000. Instructions Discuss the proper accounting treatment, including any required disclosures, for each situation. Give the rationale for your answers. 2. ESSAY QUESTION: What accounting treatment is required for convertible debt? Why? What accounting treatment is required for debt issued with stock warrants? Why? 3. On July 1, 2013, Zheng Co. issued 1,000 of its 10%, $1,000 bonds at 99 plus accrued interest. The bonds are dated April 1, 2013 and mature on April 1, 2023. Interest is payable semiannually on April 1 and October 1. What amount did Zheng receive from the bond issuance? 4. Parker Corporation has issued 2,000 shares of common stock and 400 shares of preferred stock for a lump sum of $72,000 cash. Instructions (a) Give the entry for the issuance assuming the par value of the common was $5 and the market value $30, and the par value of the preferred was $40 and the market value $50. (Each valuation is on a per share basis and there are ready markets for each stock.) (b) Give the entry for the issuance assuming the same facts as (a) above except the preferred stock has no ready market and the common stock has a market value of $25 per share. 6. Weighted average shares outstanding. On January 1, 2012, Warren Corporation had 1,000,000 shares of common stock outstanding. On March 1, the corporation issued 150,000 new shares to raise additional capital. On July ...

1. 1. On August 31, Demich Co. partially refunded $180,000 of
its outstanding 10% note payable made one year ago to Best
Federal Bank by paying $180,000 plus $18,000 interest, having
obtained the $198,000 by using $52,400 cash and signing a new
one-year $160,000 note discounted at 9% by the bank.
Instructions
(1) Make the entry to record the partial refunding. Assume
Demich Co. makes reversing entries when appropriate.
(2) Prepare the adjusting entry at December 31, assuming
straight-line amortization of the discount.

2. 1. Below are three independent situations.
a. In August, 2012 a worker was injured in the factory in an
accident partially the result of his own negligence. The worker
has sued Crusher Co. for $800,000. Counsel believes it is
reasonably possible that the outcome of the suit will be
unfavorable and that the settlement would cost the company
from $250,000 to $500,000.
b. A suit for breach of contract seeking damages of $2,400,000
was filed by an
author against Parker Co. on October 4, 2012. Parker’s legal
counsel believes
that an unfavorable outcome is probable. A reasonable
estimate of the
award to the plaintiff is between $600,000 and $1,800,000.
No amount within
this range is a better estimate of potential damages than any
other amount.
c. Rose is involved in a pending court case. Rose’s lawyers
believe it is probable that Rose will be awarded damages of
$1,000,000.

3. Instructions
Discuss the proper accounting treatment, including any required
disclosures, for each situation. Give the rationale for your
answers.
2. ESSAY QUESTION: What accounting treatment is required
for convertible
debt? Why? What accounting treatment is required for debt
issued with stock warrants? Why?

5. 3. On July 1, 2013, Zheng Co. issued 1,000 of its 10%, $1,000
bonds at 99 plus accrued interest. The bonds are dated April 1,
2013 and mature on April 1, 2023. Interest is payable
semiannually on April 1 and October 1. What amount did Zheng
receive from the bond issuance?

6. 4. Parker Corporation has issued 2,000 shares of common stock
and 400 shares of preferred stock for a lump sum of $72,000
cash.
Instructions
(a) Give the entry for the issuance assuming the par value of
the common was $5 and the market value $30, and the par value
of the preferred was $40 and the market value $50. (Each
valuation is on a per share basis and there are ready markets for
each stock.)
(b) Give the entry for the issuance assuming the same facts as
(a) above except the preferred stock has no ready market and
the common stock has a market value of $25 per share.

7. 6. Weighted average shares outstanding.
On January 1, 2012, Warren Corporation had 1,000,000 shares
of common stock outstanding. On March 1, the corporation
issued 150,000 new shares to raise additional capital. On July 1,
the corporation declared and issued a 2-for-1 stock split. On
October 1, the corporation purchased on the market 600,000 of
its own outstanding shares and retired them.
Instructions
Compute the weighted average number of shares to be used in

8. computing earnings per share for 2012.
7 - 9. General Nuisance Inc. shipped 100 million coupons in
products it sold in 2013. The coupons are redeemable for thirty
cents each. General anticipates that 70% of the coupons will be
redeemed. The coupons expire on December 31, 2014. There
were 45 million coupons redeemed in 2013, and 30 million
redeemed in 2014.
7. What was General's coupon liability as of December 31,
2013?
8. What was General's coupon promotion expense in 2013?
9. What was General's coupon promotional expense in 2014? .

9. 10.Determine the price of a $200,000 bond issue under each of
the following independent assumptions:
MULTIPLE CHOICE.
1. Which of the following is generally associated with payables
classified as accounts payable?
Periodic Payment Secured
of Interest by Collateral
a. No No

10. b. No Yes
c. Yes No
d. Yes Yes
2. On January 1, 2013, Hershey Co. leased a building to Mars,
Corp. for a ten-year term at an annual rental of $80,000. At
inception of the lease, Hershey received $320,000 covering the
first two years' rent of $160,000 and a security deposit of
$160,000. This deposit will not be returned to Mars upon
expiration of the lease but will be applied to payment of rent for
the last two years of the lease. What portion of the $320,000
should be shown as a current and long-term liability,
respectively, in Hershey’s December 31, 2013 balance sheet?
Current Liability Long-term Liability
a. $0 $320,000
b. $80,000 $160,000
c. $160,000 $160,000
d. $160,000 $80,000
3. On September 1, 2013, Tavani Co. issued a note payable to
National Bank in the amount of $1,200,000, bearing interest at
12%, and payable in three equal annual principal payments of
$400,000. On this date, the bank's prime rate was 11%. The first
payment for interest and principal was made on September 1,
2013. At December 31, 2013, Tavani should record accrued
interest payable of
a. $48,000.

11. b. $44,000.
c. $32,000.
d. $29,334.
4. Focus Company’s salaried employees are paid biweekly.
Occasionally, advances made to employees are paid back by
payroll deductions. Information relating to salaries for the
calendar year 2013 is as follows:
12/31/12 12/31/13
Employee advances $12,000 $ 18,000
Accrued salaries payable $65,000 ?
Salaries expense during the year $650,000
Salaries paid during the year (gross)
$625,000
At December 31, 2013, what amount should Focus report for
accrued salaries payable?
a. $90,000.
b. $84,000.
c. $72,000.
d. $25,000.

12. 5. Smith Co. sells major household appliance service contracts
for cash. The service contracts are for a one-year, two-year, or
three-year period. Cash receipts from contracts are credited to
unearned service contract revenues. This account had a balance
of $480,000 at December 31, 2013 before year-end adjustment.
Service contract costs are charged as incurred to the service
contract expense account, which had a balance of $120,000 at
December 31, 2013. Outstanding service contracts at December
31, 2013 expire as follows:
During 2014 During 2015 During 2016
$100,000 $160,000 $70,000
What amount should be reported as unearned service contract
revenues in Smith’s December 31, 2013 balance sheet?
a. $360,000.
b. $330,000.
c. $240,000.
d. $220,000.
5. Duke Trading Stamp Co. records stamp service revenue and
provides for the cost of redemptions in the year stamps are sold
to licensees. Duke’s past experience indicates that only 80% of
the stamps sold to licensees will be redeemed. Duke’s liability
for stamp redemptions was $7,500,000 at December 31, 2011.
Additional information for 2012 is as follows:
Stamp service revenue from stamps sold to licensees
$5,000,000
Cost of redemptions $3,400,000
If all the stamps sold in 2012 were presented for redemption in
2013, the redemption cost would be $2,500,000. What amount
should Duke report as a liability for stamp redemptions at
December 31, 2012?

13. a. $9,100,000.
b. $6,600,000.
c. $6,100,000.
d. $4,100,000.
Use the following information for questions 7 through 9:
On January 1, 2012, Hutton Co. issued eight-year bonds with a
face value of $1,000,000 and a stated interest rate of 6%,
payable semiannually on June 30 and December 31. The bonds
were sold to yield 8%. Table values are:
Present value of 1 for 8 periods at 6% .627
Present value of 1 for 8 periods at 8% .540
Present value of 1 for 16 periods at 3% .623
Present value of 1 for 16 periods at 4% .534
Present value of annuity for 8 periods at 6% 6.210
Present value of annuity for 8 periods at 8% 5.747
Present value of annuity for 16 periods at 3% 12.561
Present value of annuity for 16 periods at 4% 11.652
7. The present value of the principal is
a. $534,000.
b. $540,000.
c. $623,000.
d. $627,000.
8. The present value of the interest is

14. a. $344,820.
b. $349,560.
c. $372,600.
d. $376,830.
9. The issue price of the bonds is
a. $883,560.
b. $884,820.
c. $889,560.
d. $999,600.
10. The term used for bonds that are unsecured as to principal is
a. junk bonds.
b. debenture bonds.
c. indebenture bonds.
d. callable bonds.
11. Shelby Inc. issued bonds with a maturity amount of
$200,000 and a maturity ten years from date of issue. If the
bonds were issued at a premium, this indicates that
a. the effective yield or market rate of interest exceeded the
stated (nominal) rate.
b. the nominal rate of interest exceeded the market rate.
c. the market and nominal rates coincided.
d. no necessary relationship exists between the two rates.

15. 12. The rate of interest actually earned by bondholders is called
the
a. stated rate.
b. yield rate.
c. effective rate.
d. effective, yield, or market rate.
13. The residual interest in a corporation belongs to the
a. management.
b. creditors.
c. common stockholders.
d. preferred stockholders.
14. In a corporate form of business organization, legal
capital is best defined as
a. the amount of capital the state of incorporation allows the
company to accumulate over its existence.
b. the par value of all capital stock issued.
c. the amount of capital the federal government allows a
corporation to generate.
d. the total capital raised by a corporation within the limits
set by the Securities and Exchange Commission.
15. The cumulative feature of preferred stock
a. limits the amount of cumulative dividends to the par value
of the preferred stock.
b. requires that dividends not paid in any year must be made
up in a later year before dividends are distributed to common
shareholders.
c. means that the shareholder can accumulate preferred stock
until it is equal to the par value of common stock at which time
it can be converted into common stock.

16. d. enables a preferred stockholder to accumulate dividends
until they equal the par value of the stock and receive the stock
in place of the cash dividends.
Presented below is information related to Lewis Corporation,
question 16 - 17:
Common Stock, $1 par $4,300,000
Paid-in Capital in Excess of Par—Common Stock 550,000
Preferred 8 1/2% Stock, $50 par 2,000,000
Paid-in Capital in Excess of Par—Preferred Stock 400,000
Retained Earnings 1,500,000
Treasury Common Stock (at cost) 150,000
16. The total stockholders' equity of Lewis Corporation is
a. $8,600,000.
b. $8,750,000.
c. $7,100,000.
d. $7,250,000.
17. The total paid-in capital (cash collected) related to
the common stock is
a. $4,300,000.
b. $4,850,000.
c. $5,250,000.
d. $4,700,000.

17. 18. Thomas Company has outstanding both common stock and
nonparticipating, non-cumulative preferred stock. The
liquidation value of the preferred is equal to its par value. The
book value per share of the common stock is unaffected by
a. the declaration of a stock dividend on preferred payable in
preferred stock when the market price of the preferred is equal
to its par value.
b. the declaration of a stock dividend on common stock
payable in common stock when the market price of the common
is equal to its par value.
c. the payment of a previously declared cash dividend on the
common stock.
d. a 2-for-1 split of the common stock.
19. Assume common stock is the only class of stock
outstanding in the Ochs Corporation. Total stockholders' equity
divided by the number of common stock shares outstanding is
called
a. book value per share.
b. par value per share.
c. stated value per share.
d. market value per share.

18. 20. In computations of weighted average of shares
outstanding, when a stock dividend or stock split occurs, the
additional shares are
a. weighted by the number of days outstanding.
b. weighted by the number of months outstanding.
c. considered outstanding at the beginning of the year.
d. considered outstanding at the beginning of the earliest year
reported.
21. What effect will the acquisition of treasury stock
have on stockholders' equity and earnings per share,
respectively?
a. Decrease and no effect
b. Increase and no effect
c. Decrease and increase
d. Increase and decrease
22. Due to the importance of earnings per share
information, it is required to be reported by all
Public Companies Nonpublic Companies
a. Yes Yes
b. Yes No
c. No No
d. No Yes
23. A convertible bond issue should be included in the

19. diluted earnings per share computation as if the bonds had been
converted into common stock, if the effect of its inclusion is
Dilutive Antidilutive
a. Yes Yes
b. Yes No
c. No Yes
d. No No
24. Stockholders of a business enterprise are said to be the
residual owners. The term residual owner means that
shareholders
a. are entitled to a dividend every year in which the business
earns a profit.
b. have the rights to specific assets of the business.
c. bear the ultimate risks and uncertainties and receive the
benefits of enterprise ownership.
d. can negotiate individual contracts on behalf of the
enterprise.
25. Bobich Corp. had 600,000 shares of common stock
outstanding on January 1, issued 900,000 shares on July 1, and
had income applicable to common stock of $1,050,000 for the
year ending December 31, 2012. Earnings per share of common
stock for 2012 would be
a. $1.75.
b. $.83.
c. $1.00.
d. $1.17.

20. 1