CAUTION This is a sample of questions given in my previous exams.

DO NOT assume that the same topics will be covered in your exam. They may or may not be covered. Other topics may be covered in your exam as well. This sample should only make you familiar with the format of my questions and the manner of preparing your answers so you do not lose points because of poor, incomplete, and irrelevant answers or because of running out of time. The level of ease and difficulty may vary for each type of questions from one exam to another. This is to prevent students from preparing for my exams based on my old exams assuming I repeat them. To prepare for my exams, you should study the book, the homework, and the notes you took from my lectures. It will be a GREAT MISTAKE if you just study the PowerPoint slides. Hints: 1. Answer to my essay questions should be specific and right to the point without repeating and wandering. I give no credit for irrelevant answers. If you do not know the answer, writing something irrelevant only wastes your valuable exam time. 2. Long problems should not take more 10-15 minutes to solve in my exams. Time yourself when practicing at home. To save time in writing journal entries, use abbreviations that make sense for account titles. (see my solutions below) 3. For multiple choice questions, you should spend an average of 1-1.5 minutes per question. Practice on that. 4. Keep track of time during the exam. Allocate your time to each type of question. If you are taking too much time on a question, leave it and come back to it after trying all the other questions. DO NOT leave any problem blank. Thus, be careful not to spend too much time on the multiple-choice questions. *************************************************************

FOLLOWING ARE QUESTIONS TAKEN FROM DIFFERENT EXAMS. THEY ARE NOT THE CONTENT OF ONE EXAM! ALong-term Liabilities
On July 1, 2008, Molly, Inc., issued $100,000 of its 12-year, 10% bonds for $87,696. Bonds are dated January 1, 2008. Interest is payable semi-annually on June 30 and December 31 and the market rate was 12% on July 1, 2008. Issuance costs were $2,300. Required: 1. Prepare an amortization schedule, in good form, for calculation of interest expense, discount/premium amortization, and carrying value of the bond for 2008-2009 (two years only). Use the effective interest method. (Round to the nearest dollar) 2. Prepare the entry to record the issuance of the bonds and any other necessary journal entries for 2008 only. The issue cost is amortized on a straight-line basis. Date each journal entry. 3. On December 31, 2009, 50% of the bonds were purchased in the open market at 98 and retired. Prepare the journal entry to record the retirement. 4. What is the conceptual rationale for using the present value measurement for long-term liabilities?

BEarnings Per Share

The HTP Company had 200,000 shares of common stock outstanding on January 1, 2006. On September 30, 2006, HTP sold 96,000 shares of common stock for cash. HTP also had:

$1,000,000, 8%, convertible bonds outstanding throughout 2006. The bonds are convertible into 30,000 shares of common stock. The bonds sold originally at par. 100,000 stock options with an option price of $20 per share that were granted in 2005. Reported net income for 2006 was $600,000 with a 40% tax rate. Average price of the common shares was $18 per share during 2006. The regular common and preferred dividends were paid in 2006. Required: 1. Compute basic and diluted earnings per share for 2006 according to the GAAP. (Caution: Be sure to take all the necessary steps in your calculations) 2. What is anti-dilution of EPS and how should we treat it in the calculation of EPS?

20,000 shares of convertible preferred stock outstanding throughout 2006. The preferred stock is $100 par, 7%, and is convertible into 3 shares of common for each share of preferred.

CEquity Transactions
On January 1, 2008, Dotcom Inc. had the following account balances in its shareholders' equity accounts. Common stock, $1 par, Authorized, 1,000,000 shares; Issued, 250,000 shares Paid-in capital excess of par, common Paid-in capital excess of par, preferred Preferred stock, $100 par, 10,000 shares outstanding Retained earnings Treasury stock, at cost, 5,000 shares

$ 250,000 $ 500,000 $ 100,000 $1,000,000 $2,000,000 $ 25,000

During 2008, Dotcom Inc. had several transactions relating to stockholders equity: Jul. 18: Declared and distributed a 30% stock dividend on common stock; market value per share, $5. Aug. 15: Sold 1,000 shares of the treasury stock at $5.50 per share. Dec. 20: Sold 2,000 shares of the treasury stock at $4.30 per share. Dec. 22: Issued 5,000 shares of common stock and 1,000 shares of preferred stock for a lumpsum price of $115,000. On this date, the common stock and the preferred stock market prices were $2 and $110 per share respectively. Dec. 31: A 2-for-1 stock split was declared on common stock. Required: 1. Record the above transactions and events in journal entry format, if needed. Date all the journal entries. 2. Under the GAAP, why cant we report gains and losses from the stockholders equity transactions on the income statement?

DTroubled Debt
Dim Company has an overdue note payable of $640,000 plus accrued interest of $51,200. Due to a courtimposed settlement, Dim agreed to the following on December 31, 2000. The principal is to be reduced to $480,000 and the accrued interest is to be forgiven. Also, the maturity date is extended by two years. The interest payment for each of the last two-years is to be $40,000. Required: Prepare, for Dim,: a. The journal entry for the restructuring of the debt on December 31, 2000. b. The journal entry for the interest payment on December 31, 2001.

Multiple-choice
Use the following for questions 16-18. Wall Drugs offered an incentive stock option plan to its employees. On January 1, 2003, options were granted for sixty thousand $1 par common shares. The exercise price equals the $5 market price of the common stock on the grant date. The options cannot be exercised before January 1, 2006, and expire December 31, 2007. Each option has a fair value of $1 based on an option pricing model. 16. Which is the correct entry to record compensation expense for the year 2003? a)
Compensation expense Paid-in capital-stock options 80,000 80,000
20,000 20,000

b)
Compensation expense Paid-in capital-stock options

c)
Compensation expense Paid-in capital-stock options 12,000 12,000
20,000 20,000

d)
Compensation expense Common stock

17. What is the total compensation cost under the fair value approach? a) $60,000. b) $300,000. c) $0. d) $240,000. 18. Which is the correct entry to record the exercise of 90% the options on April 15, 2006, when the market price of the stock was $8? a)
Cash Paid-in capital-stock options Common stock Paid-in capital-excess of par 378,000 54,000 54,000 378,000

b)
Cash Paid-in capital-stock options Compensation expense Common stock Paid-in capital-excess of par 270,000 54,000 108,000 54,000 378,000
270,000 54,000 54,000 270,000 270,000 54,000 60,000 264,000

c)
Cash Paid-in capital-stock options Common stock Paid-in capital-excess of par

d)
Cash Paid-in capital-stock options Common stock Paid-in capital-excess of par

19. Characteristics of the corporate form that have led to the growth of this form of business ownership include all of the following except: a) Limited liability. c) Ease of ownership transfer. b) Ease of raising capital. d) Low government regulation. 20. a) b) c) d) The preemptive right refers to the shareholder's right to: Vote for members of the board of directors. Share in profits proportionally with all other stockholders. Maintain a proportional ownership interest in the corporation. Receive a share of dividends.

Answer Key
Problem A Problem A 1. Bond Discount Amortization Schedule Int. Exp. Cash Int. Disc. Carrying Date (@6%) (@5% Amort. Value___ 7/1/08 $87,696 12/31/08 5,262 5,000 262 87,958 6/30/09 5,277 5,000 277 88,235 12/31/09 5,294 5,000 294 88,529 2. July 1, 2008 Cash (87,696 - 2,300)...... 85,396 Deferred Bond Issue Costs.. 2,300 Disc. on B/P 12,304 B/Payable......... 100,000 12/31/2008 Bond Interest Expense......... 5,262 Bond Issue Expense 100 Deferred Bond Issue Costs..... 100* Disc. on B/P 262 Cash.......................... 5,000 *2,300/23 = $100 per period 3. Retirement Cost (price) ($100,000 x 98% x 50%) 50% of the BV of Bonds at 12/31/09: CV at 12/31/09: $88,529 X 50% $44,265 Unamortized issues costs ($2,300 -$300) x 50% ( 1,000) Loss on Retirement B/P ($100,000 x 50%) Loss on Retirement of Bonds Disc. On B/P ($11,471 x 50%)* Deferred Bond Issue Costs Cash 50,000 5,735 5,735 1,000 49,000

$49,000

($43,265) $ 5,735

*Unamortized Disc (12/31/09) = $100,000 - $88,529 = $11,471 4. For long-term liabilities, their face value is significantly different from their

present value. The amount, timing, and the discount rate for these liabilities are certain and require no estimations. Thus, these liabilities can be measured objectively using the present value techniques. The present value of such liabilities is also a more relevant measure than their face value.

Problem B-- EPS 1. Basic EPS [$600,000 - (7% x $100 x 20,000)] / [(200,000 + (96,000 x 3/12)] = [$600,000 - $140,000] / [200,000 + 24,000] = $460,000/224,000 = $2.054 BEPS Diluted EPS: Options are Anti-dilutive: Average price, $18 < option price $20 Rank 2

EE (Conv. Pref.) = $140,000 / (20,000 x 3) = $2.33 EE (Conv. Bond) = [$1,000,000 x 8% x (1-40%)] / 30,000 = = ($48,000) / 30,000 = $1.60 EE (Conv. Bond) $1.60 < BEPS $2.054, dilutive DEPS(1) = [$460,000 + $48,000)/ (224,000 + 30,000) = $508,000 / 254,000 = $2.000 EE (Conv. Pref.) $2.33 > $2.00, anti-dilutive BEPS = $2.05 DEPS = $2.00

2. Anti-dilution increases EPS and it is not allowed because it defeats the purpose of the EPS standard to show maximum dilution of EPS.

Problem C

1.
July 18, 2008 Retained earnings [(30% x 245,000) x $1 Common stock Aug. 15 Cash (1,000 x $5.50) T/S APIC-T/S Dec. 20 Cash (2,000 x $4.30) APIC-TS RE T/S Dec. 22, Cash P/S C/S APICP/S APIC-C/S Dec. 31. Memo entry! Total Mkt value = (5,000 x $2) + (1,000 x $110) = $120,000 Price allocated to P/S = (110/120) x $115,000 = $105,417 Price allocated to C/S = (10/120) x $115,000 = $9,583 2. A company is not make profit from selling and buying its own stock. Rather, income should be derived from selling products and services. 115,000 100,000 5,000 5,417 4,583 8,600 500 900 10,000 5,500 5,000 500 73,500 73,500

Problem D a. Carrying Value (CV) of the Old Note ($640,000 + $51,200) = Total Future Cash Flows (TFC) based on the restructure: New Principal Interest payments (2 x $40,000) Total Gain TFC < CV, then Effective rate = 0 $480,000 80,000 ($560,000) $131,200 $691,200

Accrued Interest Payable Note Payable (old) Note Payable (new) Gain on restructuring b. Note payable Cash

51,200 640,000 560,000 131,200 40,000 40,000

Multiple-choice
16. B
Compensation expense Paid-in capital-stock options 20,000 20,000

Response: (60,000 x $1)/3 = $20,000 17. a $60,000. Response: 60,000 x $1 = $60,000 18. c
Cash Paid-in capital-stock options Common stock Paid-in capital-excess of par 270,000 54,000 54,000 270,000

19. d Low government regulation. 20. c Maintain a proportional ownership interest in the corporation.