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Accounting II

Review Chapters 12, 13 and 14


1. The accountant at Borg Industries was preparing the financial statements for the year
ended December 31, 2003 when he discovered an error. Apparently, the income tax
expense for 2002 was understated by $32,500. He is not sure how to handle this situation
and has come to you for help. He has also gathered the following information:
Retained earnings at 12/31/2002
Cash dividends declared during 2003
Stock dividends declared during 2003
Net income for the year ended 12/31/2003

$467,800*
46,500
114,000
168,300

*As originally reported


Required:
1. Make the appropriate entry to correct the error.
2. Prepare a statement of retained earnings for Borg Industries for the year ended
December 31, 2003.

2. Swansee Corporation reported the following stockholders equity:


Paid in capital:
Common stock, $10 par, 140,000 shares authorized,
65,000 shares issued
Paid in Capital in excess of par common
Total paid in capital
Retained earnings
Total stockholders equity

$650,000
162,500
$812,500
184,300
$996,800

Swansee then reported the following transactions:


a. Purchased 5,000 shares of its own common stock at $14.00 per share.
b. Sold 3,500 of the shares purchased in (a) above for $13.50 per share.
Required: Prepare the necessary journal entries to record the above transactions.

3. DeCosta Nurseries has 5,500 shares of 5%, $100 par value, preferred stock
outstanding as well as 45,000 shares of $1 par value common stock outstanding.
DeCosta completed the following transactions during 2006:
May 15

Declared the required cash dividend on the preferred stock and a $ .75
cash dividend on the common stock.

May 31

Paid the cash dividends declared on May 15.

June 8

Discovered the income tax expense of 2005 was overstated by $17,500.


Recorded a prior period adjustment to correct the error.

June 30

The board of directors announced a 2 for 1 stock split on the common


stock.

Oct 3

Declared a 10% common stock dividend when the market value of the
common stock was $8.50 per share.

Oct 26

Distributed the common stock dividend that was declared on October 3.

Dec 31

Earned net income of $675,000.

Required: Prepare the necessary journal entries to record the above transactions.
4. Grey Corporation has 65,000 shares of $5 par value common stock outstanding. The
average issue price of this stock was $8.25 per share and its market value is currently
$9.50 per share. The board of directors has just announced a 10% common stock
dividend.
Required: Prepare the necessary journal entries to record the declaration and the
distribution of the common stock dividend.
5. On January 1, 2006, Walter Corporation had Retained Earnings of $378,000. During
the year, Walter had the following selected transactions:
a. Declared stock dividends of $40,000.
b, Declared cash dividends of $60,000.
c. A 2 for 1 stock split involving the issue of 200,000 shares of $5 par value common
stock for 100,000 shares of $10 par value common stock.
d. Suffered a net loss of $70,000.
e. Corrected understatement of 2005 net income because of an inventory error of
$58,000.
Required: Prepare a retained earnings statement for the year.

6. The following accounts appear in the ledger of Osuna Inc. after the books are closed
on December 31, 2006.
Common stock, $1 par value, 500,000 shares authorized,
400,000 shares issued
Common Stock Dividends Distributable
Paid in Capital in Excess of Par Value Common Stock
Preferred Stock, $100 par value, 8%, 10,000 shares
authorized, 3,000 shares issued
Retained Earnings
Treasury Stock (10,000 common shares)
Paid in Capital in Excess of Par Value Preferred Stock

$400,000
80,000
850,000
300,000
950,000
85,000
310,000

Prepare the stockholders equity section at December 31, 2006, assuming that retained
earnings is restricted for plant expansion in the amount of $200,000.

7. Place each of the items listed below in the appropriate subdivision of the stockholders
equity section of a balance sheet.
Common Stock, $10 stated value
Retained earnings
8% Preferred stock, $100 par value
Paid in capital in excess of par value
Paid in capital in excess of stated value
Treasury stock
Paid in capital from treasury stock
8. The Carey Corporation has the following capital stock outstanding at December 31,
2006:
9% Preferred stock, $100 par value, cumulative
10,000 shares issued and outstanding
Common stock, no par, $10 stated value, 500,000
shares authorized, 300,000 shares issued and
outstanding

$1,000,000

3,000,000

The preferred stock was issued at $107 per share. The common stock was issued at an
average per share price of $18.
Prepare the paid in capital section of the balance sheet at December 31, 2006.

9. Partners Albert, Betty and Colter partnership agreement stipulates a salary, interest on
beginning capital, and profit and loss ratios as follows:
Albert
Betty
Colter

Salary
$20,000
15,000
-0-

Interest
10%
10%
10%

P/L Ratio
40%
20%
40%

Additional Data:
Beginning Capital
$40,000
60,000
80,000

Albert
Betty
Colter

Drawing
$15,000
10,000
-0-

Complete schedules and prepare entries to close the income summary account and the
drawing accounts under the following circumstances:
a. net income
b. net income

$100,000
$20,000

10. Alt and Bell agree to admit Stark to the partnership with a 30% interest. The
following data is provided:
Alt
Bell

Capital
$80,000
70,000

Profit/Loss Ratio
60%
40%

Determine Starks equity and record admission under the following assumptions:
a. Stark invests $80,000
b. Stark invests $30,000

11. Good, Bye and Sam are partners. Mr. Sam wishes to retire from the partnership. The
capital accounts and profit/loss ratios before withdrawal are as follows:
Capital
$40,000
20,000
20,000

Good
Bye
Sam

Profit/Loss Ratio
3
2
5

Prepare entries to retire Mr. Sam under the following circumstances:


a. Mr. Sam receives $26,000
b. Mr. Sam receives $15,000
12. Ken, Barbie and Midge invested $85,000, $110,000 and $135,000 respectively, in a
partnership they called KBM Enterprises. They have agreed to share profits and losses in
the following manner: (1) salary allowances of $35,000 to Ken and $43,000 to Barbie,
(2) interest on the original capital balance of each partner at the rate of 10%, and (3) any
remainder allocated equally.
Required: Compute the partners shares of profits and losses in each of the following
years:
a) 2004 net income is $153,000
b) 2005 net income is $34,500
c. 2006 net income is ($16,500)

13. The Over and Dun Partnership agree to liquidate and sell their remaining assets for
$50,000. Partners Over and Dun share income and losses in a 2:3 ratio. The following
balances are available (they are all normal balances).
Cash Other Assets
Accounts Payable
Over, Capital
Dunn, Capital

070,000
10,000
40,000
20,000

Prepare entries to liquidate the partnership by recording the following:


a.
b.
c.
d.

Sale of assets
Distribution of loss/gain upon sale of assets
Settlement of liabilities
Distribution of cash to partners

14. Simon and Syed formed the S & S partnership by investing the following assets and
liabilities in the business:
Cash
Equipment
Accumulated Depreciation
Equipment
Notes Payable

Simon Book Value


$12,000
36,000
( 8,200)

Syed Book Value


$17,500
51,500
(9,700)

(14,000)

(27,000)

*Parentheses denotes a credit balance.


An independent appraiser believes that Simons equipment has a market value of $29,000
and Syeds is worth $37,500. Simon and Syed agreed to share profits and losses in a
60:40 ratio. During the first year of operations, the business had net income of $49,000
and each partner withdrew $30,000 cash.
a. Prepare the journal entry to record the initial investments in the business by Simon and
Syed.
b. Determine the year end balances in the capital accounts of Simon and Syed after all
closing entries have been prepared.
15. Wayne and Jayne are partners sharing profits and losses in a 7:5 ratio. Their capital
balances on the date they agree to admit Layne are $136,000 and $164,000 respectively.
Layne is investing $60,000 cash in the business.
Required: Give the journal entry to record Laynes admission to the partnership under
each of the following assumptions:
a. Layne is given a 20% interest in the business.
b. Layne is given a 1/6 interest in the business.
c. Layne is given a 15% interest in the business.
16. Bill and Jill have capital balances of $217,000 and $233,000, respectively, and
previously agreed to share profits and losses equally. On this date they agree to admit
Phil into the partnership and give him a 25% interest in the business.
Required: Determine the balance in each of the partners capital accounts immediately
following the admission of Phil in each of the following cases:
a. Phil contributes $200,000 cash to the business.
b. Phil contributes inventory valued at $150,000 to the business.
c. Phil contributes equipment valued at $100,000 to the business.

17. Xeni, Yvonne and Zachary formed the XYZ Company and agreed to share profits
and losses equally. After closing the books for the period, their capital balances were
$50,000, $60,000 and $70,000 respectively. Xeni has decided to withdraw from the
partnership.
Required: Prepare the journal entry to record Xenis departure in each of the following
independent cases:
a. Xeni sells her interest to Wally for $42,500.
b. Xeni sells an equal share of her interest to Zachary and Yvonne. Yvonne gives her
$30,000 cash and Zachary signs a $30,000, 1 year, 8% promissory note.
c. Xeni takes $47,500 in cash form the partnership.
d. Xeni takes $45,000 in cash and a $10,000, 6 month, 7% promissory note from the
partnership.
18. Catherine, Alexander and Nicolas are partners in the Royal Company, sharing profits
in a 6:5:4 ratio, respectively. Business has been slowing down so they have decided to
liquidate. At the start of the liquidation process, their capital account balances were
$124,000, $212,000 and $171,000, respectively. After the disposal of all non-cash assets
and the payment of all debts, cash of $152,000 remains to be distributed to the partners.
Required: Assuming that any partner with a deficit cannot pay in the amount owed,
determine the amount of cash to be distributed to each of the partners. Round your
answers to the nearest whole dollar.
19. The following transactions occurred during the month of June:
June 1 Obtained a charter from the state authorizing 50,000 shares of no par common
stock and 10,000 shares of $6, no par preferred stock.
June 1 Paid $4,300 in fees to establish the corporation.
June 2 Issued 4,500 shares of no-par common stock at $8.50 per share.
June3 Received land valued at $125,000 from the town of Salem in exchange for the
promise to build a new corporate headquarters on the site.
June 5 Issued 3,000 shares of $6, no par preferred stock at $50 per share.
June 8 Received land valued at $85,000 and a building valued at $130,000 in exchange
for 20,000 shares of no par common stock.
Prepare the journal entries to record the above transactions.

20. The Floridian Corporation reported the following transactions during the month of
July:
July1 Obtained a charter from the state authorizing 100,000 shares of $10 par value
common stock and 6,000 shares of 5%, $100 par value preferred stock.
July 1 Paid $6,800 in fees to establish the corporation.
July 2 Issued 35,000 shares of common stock at $15 per share.
July 4 Received land valued at $95,000 from the town of Cape Coral in exchange for
the promise to build a new corporate headquarters on the site.
July 5 Issued 1,400 shares of preferred stock for a total of $144,200.
July 7 Exchanged 5,000 shares of common stock for a patent valued at $82,000.
Required: Prepare the journal entries to record the above transactions.
21. McKenny Corporation, whose year end is December 31, lost some of its accounting
records in a recent fire on June 25, 2006. The following information has been salvaged
from the rubble.
The preferred stock account has a balance of $225,000 and the par value of each share is
$50. The common stock has a par value of $10 per share and the average issue price of a
share of common stock was $13.50. The paid in capital in excess of par value preferred
account has a $11,250 balance. There are 80,000 shares of common stock issued. The
retained earnings account had a balance of $152,600 at January 1, 2006, and a balance of
$138,100 at June 25, 2006. (Closing entries have not been made.)
Required:
1. Determine the number of shares of preferred stock issued.
2. What is the balance in the common stock account?
3. What was the average issue price of a share of preferred stock?
4. Determine the balance in the paid in capital in excess of par value common account.
5. What is the total paid in capital?
6. Determine the amount of dividends declared during the period from January 1, 2006
through June 25, 2006.

22. DiPietro Corporation has 14,500 shares of 7%, $50 par, cumulative, preferred stock
outstanding, as well as 78,000 shares of $1 par value common stock. The following
transactions were reported during the last month of the fiscal year:
1

Declared the required dividend on the preferred stock and a $.75 per share
dividend on the common stock.

14

The date of record for the dividend declared on the 1st.

28

Paid the dividend declared on the 1st.

31

Closed out the income summary account. Net income for the year was $345,000.

Required:
a. Prepare the journal entries to record the above transactions.
b. Assuming the amount of earned capital was $49,800 at the beginning of the year,
determine the amount of earned capital at the end of the year.
23. Fixer Upper Corporation issued 8,000 shares of 6%, $100 par, cumulative,
nonparticipating preferred stock and 75,000 shares of $5 par value common stock during
the first week of its existence. No additional stock has been issued since, and dividends
have been paid during the first 4 years of operations as follows:
Year 1
Year 2
Year 3
Year 4

$ -0
25,000
50,000
150,000

Required:
a. Determine the amount of dividends paid to each class of stockholders in each of the
four years.
b. Determine the amount of dividends in arrears at the end of each year.

24. The stockholders equity section of the ORear Corporations balance sheet at
December 31, 2006 appears below:
Stockholders equity:
Paid in capital
Common stock, $10 par value, 400,000 shares authorized;
250,000 shares issued and outstanding
$2,500,000
Paid in capital in excess of par
Total paid in capital
Retained earnings
Total stockholders equity

1,200,000
3,700,000
600,000
$4,300,000

During 2007, the following stock transactions occurred:


Jan 18 Issued 40,000 shares of common stock at $25 per share.
Aug 20Purchased 15,000 shares of ORear Corporations common stock at $22 per share
to be held in the treasury.
Nov 5 Reissued 5,000 shares of treasury stock for $26 per share.
Required:
a. Prepare the journal entries to record the above transactions.
b. Prepare the stockholders equity section of the balance sheet for ORear Corporation at
December 31, 2007. Assume that net income for the year was $150,000 and that no
dividends were declared.

25. Allagash Corporation has outstanding 60,000 shares of $5 par value common stock.
The average issue price of the stock was $7.50 per share, and the market value per share
is currently $13.50. Allagash reported the following transactions:
a. Purchased 4,000 shares of its own stock at a price of $13.50 per share.
b. Sold 1,500 of the shares purchased in (a) above for $15.00 per share.
c. Sold the remaining 2,500 shares purchased in (a) above for $11.50 per share.
Required:
Prepare the journal entries to record the above transactions.