Ex.

13-98 Premiums
Modern Music gives its customers coupons which are redeemable for a poster plus a Hens and Chicks
DVD. One coupon is issued for each dollar of sales. On presentation of 100 coupons and $5.00 cash,
the customer receives the poster and DVD. Modern estimates that 80% of the coupons will be
presented for redemption. Sales for Year One were $1,050,000, and 510,000 coupons were redeemed.
Sales for Year Two were $1,260,000, and 1,275,000 coupons were redeemed. Modern bought 30,000
posters at $2.00 each, and 30,000 DVDs at $5.50 each.

Instructions
Prepare the following entries for both years, assuming all the coupons expected to be redeemed from
Year One were redeemed by the end of Year Two.
Entry Year One Year Two
——————————————————————————————————————————
a) To record coupons redeemed
——————————————————————————————————————————
b) To record estimated liability
——————————————————————————————————————————

Solution 13-98
Entry Year One Year Two
a) Estimated Liability for Premiums 8,250
Premium Expense 12,750 *23,625
[($510,000 ÷ 100) x ($7.50 – $5)]
Cash ($510,000 ÷ 100) × $5 25,500 **63,750
Inventory of Premiums 38,250 95,625

*[($1,275,000 ÷ 100) x ($7.50 – $5)] – $8,250

**($1,275,000 ÷ 100) x $5

b) Premium Expense *8,250 1,575

Estimated Liability for Premiums 8,250 1,575

*[($1,050,000 x.80) – $510,000] ÷ 100 × $2.50

Ex. 14-81 Sale and subsequent buyback of bonds
On July 1, 2023, Davis Corp. issued $800,000 par value, 10%, 10-year bonds, with interest payable
semi-annually on January 1 and July 1. The bonds were issued for $908,722. On January 2, 2025, Davis
offered to buy back the bonds at 103. Forty percent of the bondholders accepted the offer. Davis uses
the effective-interest method of amortizing premium or discount.

Instructions
a) Prepare the journal entry to record the bond issuance.
b) Prepare the adjusting entry at December 31, 2023, the end of the fiscal year.
c) Prepare the entry for the interest payment on January 1, 2024.
d) Prepare the entry to record the retirement of the bonds on January 2, 2025.
Round all values to the nearest dollar.

Solution 14-81
First you need to solve for the yield, which is 8%.

PV 908722 N 20 PMT (40000) FV (800000) CPT %i => 8%

Interest
Paymen Interest Premium Carrying
Date t Expense Amortization Value
Jul 1/23 908,722
Jan 1/24 40,000 36,349 3,651 905,071
Jul 1/25 40,000 36,203 3,797 901,274
Jan 1/27 40,000 36,051 3,949 897,325

a) Cash……………………………………………………................................ 908,722
Bonds Payable................................................................................... 908,722

b) Interest Expense........................................................................................ 36,349

Bonds Payable........................................................................................... 3,651
Interest Payable................................................................................. 40,000
(Interest expense: $908,722 × 8% × ½ = $36,349)

c) Interest Payable........................................................................................ 40,000

Cash.................................................................................................... 40,000

d) Bonds Payable (897,325 x 40%)……........................................................ 358,930

Cash.................................................................................................... 329,600
Gain on Redemption of Bonds.......................................................... 29,330

Bond retirement price = 800,000 x 1.03 x 40% = 329,600

Ex. 15-143 Dividends on preferred shares
Lithuania Corp. has been authorized to issue 20,000 no par value, $6, cumulative and fully
participating preferred shares and 100,000 no par value common shares. The account balances at
December 31, 2023 are:
$6 Preferred shares, 4,000 shares outstanding........................................ $ 400,000
Common shares, 60,000 shares outstanding........................................... 1,600,000

No dividends have been paid since December 31, 2019. The corporation now desires to pay $280,000
in dividends.

Instructions
Calculate how much the preferred and common shareholders will receive.

Solution 15-143
Preferred Common Total
Dividends in arrears (4,000 × $6 x 3)..................... $ 72,000 $ — $ 72,000
Current year's dividends (1:4)............................... 24,000 96,000 120,000
Participating dividend (1:4).................................. 17,600 70,400 88,000
$113,600 $166,400 $280,000
Ex. 16-100 Stock options
Carbon Energy Inc. is a new technology start up. It has decided to adopt a stock option plan for its
executive management team, since it does not believe it will have available cash on hand for year-end
bonuses. The plan was implemented on July 1, 2023, and provides participants with the right to
purchase up to 4,000 common shares at $30 per share. The current fair value of the shares is
estimated at $26.50 per share. Options for the maximum number of shares allowed under the plan
was granted to three members of the executive management team on September 15, 2023, for
services performed in 2023. The options have an expiry date of January 31, 2024. The compensation
expense was estimated at $270,000 based on an appropriate option pricing model. Only two of the
executives exercised their options in January prior to the deadline.

Instructions
Record all of Carbon Energy’s required entries to properly account for the stock option plan.

Solution 16-100
December 31, 2023
Compensation Expense............................................................................ 270,000
Contributed Surplus—Stock Options............................................... 270,000

January 31, 2024

Cash (2 × 4,000 × $30)................................................................................ 240,000
Contributed Surplus—Stock Options ($270,000 × 2 ÷ 3).......................... 180,000
Common Shares................................................................................ 420,000

Contributed Surplus—Stock Options ($250,000 – $180,000).................. 90,000

Contributed Surplus—Expired Stock Options.................................. 90,000
Pr. 17-78 Basic and diluted earnings per share
Chamaa Ltd. provides the following information for 2023
1. Net income..................................................................................................................... $560,000
2. Capital structure
a) Convertible 6% bonds. Each of the 300, $1,000 bonds is convertible
into 50 common shares for the next 10 years....................................................... 300,000
b) Common shares, 200,000 shares issued and outstanding during the
entire year.............................................................................................................. 2,000,000
c) Stock options outstanding to buy 16,000 common shares at $20 per share.
3. Other information
a) Bonds converted during 2023................................................................................... None
b) Income tax rate.......................................................................................................... 30%
c) Convertible debt was outstanding the entire year
d) Average market price per common share during 2023............................................ $32
e) Stock options were outstanding the entire year
f) Stock options exercised during 2023......................................................................... None

Instructions
Calculate basic and diluted earnings per share for 2023.

Solution 17-78
Basic EPS = $560,000 ÷ 200,000 = $2.80

Net Adjust Adjusted Adjust Adjusted Diluted

Security Income -ment Net Income Shares -ment Shares EPS
Com. Shares $560,000 — $560,000 200,000 — 200,000 $2.80
Options 560,000 — 560,000 200,000 6,000a 206,000 2.72
Conv. Bonds 560,000 $12,600b 572,600 206,000 15,000 221,000 2.59

a
16,000
320,000
32 = (10,000)
6,000 SA

$12,600
b
$300,000 ×.06 ×.7 = $12,600; 15,000 = $.84