1.

(TCO C) Redstone Company spent $190,000 developing a new process, $45,000 in legal fees to obtain a patent, and $91,000 to market the process that was patented. How should these costs be accounted for in the year they are incurred? (Points: 20) The $190,000 should be expensed when incurred as research and development costs. The $91,000 is expensed as selling and promotion costs when incurred. The $45,000 legal fees to obtain a patent should be capitalized and amortized over the useful life or legal life of the patent, whichever is shorter. 2. (TCO D) Total payroll of Watson Co. was $920,000, of which $160,000 represented amounts paid in excess of $100,000 to certain employees. The amount paid to employees in excess of $7,000 was $720,000. Income taxes withheld were $225,000. The state unemployment tax is 1.2%, the federal unemployment tax is .8%, and the F.I.C.A. tax is 7.65% on an employees wages to $100,000 and 1.45% in excess of $100,000. (a) Prepare the journal entry for the wages and salaries paid. (b) Prepare the entry to record the employer payroll taxes. (a) Wages and Salaries Expense 920,000 Withholding Taxes Payable FICA Taxes Payable [($920,000 $160,000) 7.65%] + ($160,000 1.45%) Cash Payroll Tax Expense 64,460 FICA Taxes Payable ($760,000 7.65%) + ($160,000 1.45%) Federal Unemployment Tax Payable [($920,000 $720,000) .8%] State Unemployment Tax Payable ($200,000 1.2%)

225,000 60,460 634,540

(b)

60,460

1,600 2,400

3. (TCO D). Prepare journal entries to record the following retirement. (Show computations and round to the nearest dollar.) The December 31, 2010 balance sheet of Wolfe Co. included the following items: 7.5% bonds payable due December 31, 2018 $1,200,000 Unamortized discount on bonds payable 48,000 The bonds were issued on December 31, 2008 at 95, with interest payable on June 30 and December 31. (Use straight-line amortization.) On April 1, 2011, Wolfe retired $240,000 of these bonds at 101 plus accrued interest. (Points: 35) Interest Expense 4,800 Cash ($240,000 x 7.5% x 3/12) Discount on Bonds Payable ($48,000 x 1/5 x 1/8 x 3/12) Bonds Payable 240,000 Loss on Redemption of Bonds 11,700 Discount on Bonds Payable [($48,000 x 1/5) 300] Cash

4,500 300

9,300 242,400

4. (TCO E) 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 value, and the common stock has a market value of $25 per share. (Points: 30) (a) Cash 72,000 Common Stock (2,000*$5) Paid-in Capital in Excess of Par - Common ($54,000 - $10,000) Preferred Stock (400*$40) Paid-in Capital in Excess of Par Preferred ($20,000 - $18,000)

10,000 44,000 16,000 2,000

Common stock $30 x 2,000 shares= $60,000 Preferred stock $50 x 400 shares = $20,000 Total market value= $80,000

Common stock 60/80 x $72,000= $54,000 Preferred stock 20/80 x $72,000= $18,000 Total book value= $72,000 (b) Cash 72,000 Common Stock Paid-in Capital in Excess of Par Common (2,000*$25) (2,000*$5) Preferred Stock Paid-in Capital in Excess of Par Preferred

10,000 40,000 16,000 6,000

5. (TCO F) The stockholders equity section of Lemay Corp shows the following on Dec 31, 2011: Preferred stock- 6% $100 par, $4000 shares outstanding $400,000 Common Stock-$10 par, 60,000 shares outstanding $600,000 Paid-in capital in excess of par $200,000 Retained earnings $114,000 Total stockholders equity $1,314,000 Instructions: Assuming that all of the companys retained earnings are to be paid out in dividends on 12/31/11 and that preferred dividends were last paid on 12/31/09, show how much the preferred and common stockholders should receive if the preferred stock is cumulative and fully participating. Preferred $24,000 24,000 12,000 $60,000 Common $ 36,000 18,000 $54,000 Total $24,000 60,000 30,000 $114,000

Dividends in arrears (6% x $400,000) Current year's dividends Participating dividend (3%) [($30,000 $1,000,000) x $400,000]

6. (TCO A) At December 31, 2010, Sager Co. had 1,200,000 shares of common stock outstanding. In addition, Sager had 450,000 shares of preferred stock which were convertible into 750,000 shares of common stock. During 2011, Sager paid $600,000 cash dividends on the common stock and $400,000 cash dividends on the preferred stock. Net income for 2011 was $3,400,000 and the income tax rate was 40%. What would be the diluted earnings per share for 2011 (rounded to the nearest penny)? Please show all computations. (Points: 25) $3,400,000/ ($1,200,000 + 750,000) = $1.74 7. (TCO B) On May 1, 2010, Kirmer Corp. purchased $450,000 of 12% bonds, interest payable on January 1 and July 1, for $422,800 plus accrued interest. The bonds mature on January 1, 2016. Amortization is recorded when interest is received by the straight-line method (by months and rounded to the nearest dollar). (Assume bonds are available for sale.) Instructions (a) Prepare the entry for May 1, 2010. (b) The bonds are sold on August 1, 2011 for $425,000 plus accrued interest. Prepare all entries required to properly record the sale. (Points: 30) (a) Available-for-Sale Securities Interest Revenue ($450,000 x 12% x 4/12) Cash Available-for-Sale Securities ($27,200/ 68) Interest Revenue Cash ($450,000 x 12% x 1/12) Interest Revenue Cash Loss on Sale of Securities Available-for Sale Securities [$422,800+ ($27,200/68) x 15] 422,800 18,000 440,800 400 400 4,500 4,500 425,000 3,800 428,800

(b)