Question: What is the treasury stock method of

> Refer to Practice 19-1. Make any necessary journal entry on the borrowing company’s books on December 31 of Year 1 in connection with the interest rate swap, assuming that the prime lending rate on December 31 is (1) 8%, (2) 12%, and (3) 10%. Even tho

> Compute the notional amount of the derivative contract for each of the following: 1. The interest rate swap contract. 2. The tree forward contract. 3. The copper futures contract. 4. The corn futures contract.

> A farmer expects to sell 5,000 bushels of corn on January 1 of Year 2. On December 1 of Year 1, the farmer enters into a futures contract to sell the corn on January 1 of Year 2 at $2.30 per bushel. The market price of corn on December 1 was also $2.30 p

> On December 1 of Year 1, the company made a $100,000 investment in a highly risky Internet stock. The investment is classified as a trading security. Part of the investment agreement prevents the company from selling the investment before January 1 of Ye

> Refer to Practice 19-3 and Practice 19-4. What would be the impact on the golf course developer’s total cash payment to purchase trees in Year 2 if the forward contract had been for just 1,500 trees rather than the full 5,000 trees expected to be purchas

> On January 1 of Year 1, the company entered into a 2-year $100,000 variable interest rate loan. In the first year of the loan, the interest rate is 10%. In its second year, the interest rate is equal to the prime lending rate on January 1 of Year 2. The

> What is the difference between a forward contract and a futures contract?

> The company had 100,000 shares of common stock outstanding on January 1. In addition, as of January 1, the company had issued 500 convertible bonds ($1,000 face value, 10%). The company has no other potentially dilutive securities. The bonds were convert

> The company had 200,000 shares of common stock outstanding on January 1. In addition, as of January 1, the company had issued 5,000 convertible preferred shares (cumulative, 5%, $100 par). These preferred shares were converted on September 1. Each prefer

> The company had 100,000 shares of common stock outstanding on January 1. In addition, as of January 1, the company had issued stock options that allowed employees to purchase 40,000 shares of common stock. The option exercise price is $10 per share. The

> Net income for the company for the year was $300,000, and 100,000 shares of common stock were outstanding during the year. The income tax rate is 30%. For each of the following potentially dilutive securities, perform the shortcut antidilution test to de

> Refer to Practice 18-10. Assume that the convertible bonds were issued on October 1. Compute diluted earnings per share, assuming that (1) Each bond was convertible into 100 shares of common stock and (2) Each bond was convertible into 15 shares of com

> The company had 50,000 shares of common stock outstanding throughout the year. In addition, as of January 1, the company had issued 100 convertible bonds ($1,000 face value, 10%). The company has no other potentially dilutive securities. Net income for t

> Refer to Practice 18-8. Assume that the convertible preferred stock was issued on February 1. Also assume that the issuance agreement stipulates that the preferred stockholders are entitled to their entire preferred dividend for the year even though the

> The company had 100,000 shares of common stock outstanding throughout the year. In addition, as of January 1, the company had issued 10,000 convertible preferred shares (cumulative, 5%, $100 par). The company has no other potentially dilutive securities.

> Refer to Practice 18-6. Assume that the options were issued on September 1 instead of being outstanding throughout the year. Compute diluted earnings per share, assuming that (1) The average stock price for the year and for the September 1–December 31 p

> The company had 200,000 shares of common stock outstanding throughout the year. In addition, as of January 1, the company had issued stock options that allowed employees to purchase 50,000 shares of common stock. The option exercise price is $10 per shar

> What distinguishes a simple capital structure from a complex capital structure?

> The company had the following shares of stock outstanding during the year. Data regarding dividend privileges and net income are also given. • Common shares outstanding: 320,000 for the entire year • Participating preferred shares outstanding: 100,000 sh

> On January 1, the company had 200,000 common shares outstanding. On April 1, the company issued 60,000 additional shares. On August 1, the company performed a 2-for-1 stock split. The company also had 20,000 shares of 8%, $50 par preferred stock outstand

> On January 1, the company had 100,000 common shares outstanding. This same number of common shares was outstanding throughout the year. The company also had 30,000 shares of 5%, $100 par preferred stock outstanding throughout the year. The company did no

> On January 1, the company had 150,000 common shares outstanding. During the year, the following events occurred: March 1: 2-for-1 stock split June 1: Issued 45,000 additional shares September 1: 20% stock dividend What was the weighted-average number

> On January 1, the company had 200,000 common shares outstanding. On April 1, the company issued 60,000 additional shares. On August 1, the company reacquired 100,000 shares. What was the weighted-average number of shares outstanding for the year?

> When does partial hedge ineffectiveness occur?

> Why is traditional historical cost accounting inappropriate when accounting for derivative contracts?

> Describe the purpose of a cash flow hedge, and give an example of a cash flow hedge.

> How does an option differ from the other types of derivatives discussed in the chapter?

> Why would a company enter into an interest rate swap?

> Why are EPS figures computed on the basis of common stock transactions that have not yet happened rather than on the basis of strictly historical common stock data?

> Briefly describe the four types of risk discussed in the chapter.

> Why is a derivative often an executory contract? Give another example of an executor contract.

> How does the accounting for a speculative derivative investment differ from that for a derivative that serves as a hedge?

> Derivatives are to be reported in the balance sheet at their fair value on the balance sheet date. How are unrealized gains and losses on derivatives recognized in the financial statements?

> Why should investors be careful in interpreting interim reports?

> Distinguish between the two primary viewpoints concerning the preparation of interim financial statements.

> Is segment information prepared according to GAAP? Explain.

> How large must an internally defined segment be for separate financial statement disclosure to be required?

> How is a business segment to be identified under the provisions of FASB ASC Topic 280 (Segment Reporting)?

> In what ways can segment information assist in the analysis of a company’s financial statements?

> What limitations should be recognized in using EPS data?

> How does a derivative differ from other financial instruments and contracts?

> What factors must a company consider in estimating the amount to recognize for a probable contingent liability?

> What factors are important in deciding whether a pending lawsuit should be reported as a liability on the balance sheet?

> Describe the appropriate treatment of contingent gains.

> If a company has multiple potentially dilutive securities, how are the computations made to ensure obtaining the lowest EPS figure?

> Why are all convertible securities and options antidilutive when a company is operating at a loss?

> If stock options are actually exercised during the year, how is diluted EPS affected?

> A derivative used as an economic hedge of foreign currency risk associated with a foreign currency–denominated asset or liability is not accounted for as a hedge under the provisions of FASB ASC Topic 815 (Derivatives and Hedging). How are these derivati

> What is the notional amount of a derivative? How can the notional amount be misleading?

> Earnings per share computations have received increased prominence on the income statement. How would an investor use such information in making investment decisions?

> The adjusted trial balance of Hodges Company shows these data pertaining to sales at the end of its fiscal year, October 31, 2014: Sales Revenue $900,000; Freight-Out $14,000; Sales Returns and Allowances $22,000; and Sales Discounts $13,500. Instructio

> On January 10, Allison Milo uses her Crawford Co. credit card to purchase merchandise from Crawford Co. for $1,700. On February 10, Milo is billed for the amount due of $1,700. On February 12, Milo pays $1,100 on the balance due. On March 10, Milo is bil

> The ledger of Wainwright Company at the end of the current year shows Accounts Receivable $78,000; Credit Sales $810,000; and Sales Returns and Allowances $40,000. Instructions: (a) If Wainwright uses the direct write-off method to account for uncollect

> Hinshaw Company purchased a new machine on October 1, 2014, at a cost of $90,000. The company estimated that the machine has a salvage value of $8,000. The machine is expected to be used for 70,000 working hours during its 8-year life. Instructions: Com

> Mountain Lake Corporation’s accounting records show the following at year-end December 31, 2014: Assuming that Mountain Lake Corporation uses the periodic system, compute (a) cost of goods purchased and (b) cost of goods sold. $ 5

> On March 20, Garber’s petty cash fund of $100 is replenished when the fund contains $19 in cash and receipts for postage $40, supplies $26, and travel expense $15. Prepare the journal entry to record the replenishment of the petty cash fund.

> On January 6, Aaron Co. sells merchandise on account to Foley Inc. for $9,200, terms 1/10, n/30. On January 16, Foley pays the amount due. Instructions: Prepare the entries on Aaron Co.’s books to record the sale and related collection. (Omit cost of go

> During October, Wichita Light Company experiences the following transactions in establishing a petty cash fund. Oct. 1 A petty cash fund is established with a check for $150 issued to the petty cash custodian. 31 A check was written to reimburse the

> In the month of November, Halladay Company Inc. wrote checks in the amount of $9,750. In December, checks in the amount of $11,762 were written. In November, $8,800 of these checks were presented to the bank for payment, and $10,889 in December. What is

> At July 31, Farmer Company has this bank information: cash balance per bank $7,291; outstanding checks $762; deposits in transit $1,350; and a bank service charge $40. Determine the adjusted cash balance per bank at July 31.

> These transactions took place for Glavine Co. 2013 May 1 Received a $5,000, 12-month, 6% note in exchange for an outstanding account receivable from S. Rooney. Dec. 31 Accrued interest revenue on the S. Rooney note. 2014 May 1 Received principal pl

> On December 31, 2013, when its Allowance for Doubtful Accounts had a debit balance of $1,400, Hunt Co. estimates that 9% of its accounts receivable balance of $90,000 will become uncollectible and records the necessary adjustment to Allowance for Doubtfu

> Ruth Company has been in business several years. At the end of the current year, the unadjusted trial balance shows: Accounts Receivable ………………………………. $ 310,000 Dr. Sales Revenue ………………………………………. 2,200,000 Cr. Allowance for Doubtful Accounts ……………………. 5

> Sadowski Video Center accumulates the following cost and market data at December 31. Compute the lower-of-cost-or-market valuation for Sadowski inventory. Market Inventory Categories Cost Data Data Cameras $12,500 9,000 13,000 $13,400 9,500 12,200 C

> Assume the same information as in BE5-8 and also that Tracy Company has beginning inventory of $60,000, ending inventory of $90,000, and net sales of $612,000. Determine the amounts to be reported for cost of goods sold and gross profit.

> Assume that Tracy Company uses a periodic inventory system and has these account balances: Purchases $404,000; Purchase Returns and Allowances $13,000; Purchase Discounts $9,000; and Freight-In $16,000. Determine net purchases and cost of goods purchased

> Sands Company sold goods with a total selling price of $800,000 during the year. It purchased goods for $380,000 and had beginning inventory of $67,000. A count of its ending inventory determined that goods on hand was $50,000. What was its cost of goods

> In 2014, Grossfeld Company has net credit sales of $1,600,000 for the year. It had a beginning accounts receivable (net) balance of $108,000 and an ending accounts receivable (net) balance of $120,000. Compute Grossfeld Company’s (a) accounts receivable

> Alvarado Company provides this information for the month ended October 31, 2014: sales on credit $300,000; cash sales $150,000; sales discounts $5,000; and sales returns and allowances $19,000. Prepare the sales section of the income statement based on t

> From the information in BE5-3, prepare the journal entries to record these transactions on Bernadina Company’s books under a perpetual inventory system. BE5-3: (a) On March 2, Horst Company sold $800,000 of merchandise to Bernadina Company, terms 2/10,

> Assume the same information as BE8-3 and that on March 4, 2014, Morley Co. receives payment of $4,300 in full from Spears Inc. Prepare the journal entries to record this transaction.

> Gerish Company buys merchandise on account from Mangus Company. The selling price of the goods is $900 and the cost of the goods sold is $590. Both companies use perpetual inventory systems. Journalize the transactions on the books of both companies.

> On January 1, 2014, the Ferman Company ledger shows Equipment $36,000 and Accumulated Depreciation $13,600. The depreciation resulted from using the straight line method with a useful life of 10 years and a salvage value of $2,000. On this date, the comp

> Speedy Taxi Service uses the units-of-activity method in computing depreciation on its taxicabs. Each cab is expected to be driven 150,000 miles. Taxi 10 cost $27,500 and is expected to have a salvage value of $500. Taxi 10 was driven 32,000 miles in 201

> Consider these transactions: (a) Draber Restaurant accepted a Visa card in payment of a $200 lunch bill. The bank charges a 3% fee. What entry should Draber make? (b) Marin Company sold its accounts receivable of $65,000. What entry should Marin make, gi

> At the end of 2013, Morley Co. has accounts receivable of $700,000 and an allowance for doubtful accounts of $25,000. On January 24, 2014, it is learned that the company’s receivable from Spears Inc. is not collectible and therefore management authorizes

> Record the following transactions on the books of Cohen Co. (Omit cost of goods sold entries.) (a) On July 1, Cohen Co. sold merchandise on account to Tracy Inc. for $23,000, terms 2/10, n/30. (b) On July 8, Tracy Inc. returned merchandise worth $2,400 t

> Suppose in 2014, Campbell Soup Company reported average total assets of $6,265 million, net sales of $7,586 million, and net income of $736 million. What was Campbell Soup’s return on assets?

> On January 1, 2014, Wolf Creek Country Club purchased a new riding mower for $15,000. The mower is expected to have a 10-year life with a $1,000 salvage value. What journal entry would Wolf Creek make on December 31, 2014, if it uses straight-line deprec

> Suppose during 2014 that Federal Express reported the following information (in millions): net sales of $35,497 and net income of $98. Its balance sheet also showed total assets at the beginning of the year of $25,633 and total assets at the end of the y

> These are selected 2014 transactions for Amarista Corporation: Jan. 1 Purchased a copyright for $120,000. The copyright has a useful life of 6 years and a remaining legal life of 30 years. Mar. 1 Purchased a patent with an estimated useful life of

> On July 4, Susie’s Restaurant accepts a Visa card for a $250 dinner bill. Visa charges a 4% service fee. Instructions: Prepare the entry on Susie’s books related to the transaction.

> On May 10, Renn Company sold merchandise for $4,000 and accepted the customer’s First Business Bank MasterCard. At the end of the day, the First Business Bank MasterCard receipts were deposited in the company’s bank account. First Business Bank charges a

> On March 3, Beachy Appliances sells $710,000 of its receivables to National Factors Inc. National Factors Inc. assesses a service charge of 4% of the amount of receivables sold. Instructions: Prepare the entry on Beachy Appliances’ books to record the s

> Hirdt Co. uses the percentage-of-receivables basis to record bad debt expense and concludes that 2% of accounts receivable will become uncollectible. Accounts receivable are $400,000 at the end of the year, and the allowance for doubtful accounts has a c

> The financial statements of Zetar plc are presented in Appendix C. Appendix C: Instructions: Use the company’s annual report, available in the Investors section at www.zetarplc.com, to answer the following questions. (a) According to

> Parman Industries spent $300,000 on research and $600,000 on development of a new product. Of the $600,000 in development costs, $400,000 was incurred prior to technological feasibility and $200,000 after technological feasibility had been demonstrated.

> Suppose the amounts presented here are basic financial information (in millions) from the 2014 annual reports of Nike and adidas. Instructions: Calculate the accounts receivable turnover and average collection period for both companies. Comment on the

> Holland Company constructed a warehouse for $280,000. Holland estimates that the warehouse has a useful life of 20 years and no residual value. Construction records indicate that $40,000 of the cost of the warehouse relates to its heating, ventilation, a

> On October 5, Narveson Company buys merchandise on account from Rossi Company. The selling price of the goods is $5,000, and the cost to Rossi Company is $3,000. On October 8, Narveson returns defective goods with a selling price of $640 and a scrap valu

> The following information pertains to Joyce Company. 1. Cash balance per bank, July 31, $7,328. 2. July bank service charge not recorded by the depositor $38. 3. Cash balance per books, July 31, $7,364. 4. Deposits in transit, July 31, $2,700. 5. Note fo

> Sally Rice is unable to reconcile the bank balance at January 31. Sally’s reconciliation is shown here. Cash balance per bank …………………………..$3,677.20 Add: NSF check ………………………………………..450.00 Less: Bank service charge …………………………..28.00 Adjusted balance per b

> At Nunez Company, checks are not prenumbered because both the purchasing agent and the treasurer are authorized to issue checks. Each signer has access to unissued checks kept in an unlocked file cabinet. The purchasing agent pays all bills pertaining to

> The following control procedures are used in Penny’s Boutique Shoppe for cash disbursements. 1. Each week, 100 company checks are left in an unmarked envelope on a shelf behind the cash register. 2. The store manager personally approves all payments befo

> The following control procedures are used in Kelton Company for over-the-counter cash receipts. 1. Each store manager is responsible for interviewing applicants for cashier jobs. They are hired if they seem honest and trustworthy. 2. All over-the-counter

> Lyle Company maintains a petty cash fund for small expenditures. These transactions occurred during the month of August. Aug. 1 Established the petty cash fund by writing a check on Westown Bank for $200. 15 Replenished the petty cash fund by writing

> Enright Company expects to have a cash balance of $46,000 on January 1, 2014. These are the relevant monthly budget data for the first two months of 2014. 1. Collections from customers: January $71,000, February $146,000. 2. Payments to suppliers: Januar

> A new accountant at Leftwich Inc. is trying to identify which of the amounts shown below should be reported as the current asset “Cash and cash equivalents” in the year-end balance sheet, as of April 30, 2014. 1. $60 of currency and coin in a locked box

> Werth Inc.’s bank statement from Hometown Bank at August 31, 2014, gives the following information. A summary of the Cash account in the ledger for August shows the following: balance, August 1, $18,700; receipts $74,000; disbursement

> Rosa’s Pizza operates strictly on a carryout basis. Customers pick up their orders at a counter where a clerk exchanges the pizza for cash. While at the counter, the customer can see other employees making the pizzas and the large ovens in which the pizz