Chapter 16, Problem 12P

1.

To determine

Prepare for Company I the long-term liabilities section for the year ended December 31, 2016.

Explanation of Solution

Retained earnings: Retained earnings are that portion of profits which are earned by a company but not distributed to stockholders in the form of dividends. These earnings are retained for various purposes like expansion activities, or funding any future plans.

Prepare for Company I the long-term liabilities section for the year ended December 31, 2016.

Particulars	Amount in $
Long -term liabilities:
9% unsecured note payable to bank, due in annual principal instalments of $800,000, less current portion (1)	3,200,000
11% debenture bonds payable due December 31, 2028, plus unamortized premium of $337,640 (2)	5,337,640
Total long-term liabilities	8,537,640

(Table 1)

Working notes:

(1) Calculation of 9% of notes payable to bank:

Particulars	Amount in $
9% of notes payable to bank:
Notes payable, 11/2/16	$ 4,000,000
Deduct  instalment due 11/2/17	($ 800,000)
Long-term portion,12/31/16	$ 3,200,000

(Table 2)

(2) Calculation of debenture on bonds payable:

Particulars	Amount in $	Amount in $
Carrying amount, 12/31/15		5,352,400
Deduct amortization of bond premium:
Interest paid 12/31/16 $\left(\$5,000,000\times 11\%\right)$	550,000
Less: effective interest $\left(\$5,352,400\times 10\%\right)$	(535,240)	(14,760)
Carrying amount, 12/31/16		5,337,640

(Table 3)

2.

To determine

Prepare Company I’s shareholder’s equity section for the year ended December 31, 2016, balance sheet.

Explanation of Solution

Prepare Company I’s shareholder’s equity section for the year ended December 31, 2016, balance sheet.

Company I
Shareholder's equity section
For the  year ended December 31,2016
Particulars	Amount in $	Amount in $
Contributed Capital:
Common stock, $10 par; 2,000,000 shares authorized; 840,000 shares issued; 829,500 shares outstanding(3)		8,400,000
Additional paid-in capital: (4)		2,485,000
Retained earnings (5)		4,765,000
Accumulated other comprehensive income (loss):
Unrealized decrease in value of marketable equity               Securities (6)		(20,000)
Total contributed capital, retained earnings, and accumulated other comprehensive loss		15,630,000
Less: Treasury stock, at cost, 10,500 shares (7)		(130,000)
Total Shareholders’ Equity		15,500,000

 (Table 4)

Working notes:

(3) Calculate the amount of common stock issued:

Particulars	Date	Shares	Amount in $
Balance	December 31,2015	$\left(800,000\times \$10\right)$	5,150,000
Add: 5% stock dividend issued $\left(800,000\times 5\%\right)$	March 3, 2016	$\left(40,000\times \$10\right)$	(150,000)
Balance	December 31,2016	$\left(840,000\times \$10\right)$	8,400,000

(Table 5)

(4) Calculate the amount of additional paid-in capital on common stock:

Particulars	Amount in $
Balance, December 31, 2015	3,500,000
Deduct: Treasury stock reissued 1/16/2016 $\left(\$225,000-\$195,000\left(\$325,000\times 60\%\right)\right)$	(30,000)
Stock dividend  issued on March 3, 2016 $\left(40,000\times \$4\left[\$14-\$10\right]\right)$	160,000
Balance, December 31, 2016	2,485,000

(Table 6)

(5) Calculate the amount of retained earnings:

Particulars	Amount in $
Balance, December 31, 2015	2,465,000
Deduct : Stock dividend issued, 3/2/2016$\left(40,000\times \$14\right)$	(560,000)
Net income for 2016	2,860,000
Balance, December 31, 2016	4,765,000

(Table 7)

(6) Calculate the amount of unrealised decrease in the value of available-for-sale of securities:

$\begin{array}{c}\begin{array}{l}\text{Unrealised decrease in the value }\\ \text{of available-for-sale of securities}\end{array}\}\text{=}\left(\begin{array}{l}\text{Shares owned by }\\ \text{Company I in Company R}\end{array}\right)\times \left(\begin{array}{l}\text{Purchase price }\\ -\text{Market price}\end{array}\right)\\ =10,000\text{Shares }\times \left(\$20-\$18\right)\\ =\$20,000\end{array}$

(7) Calculate the amount of treasury stock at cost:

$\begin{array}{c}\text{Treasury stock at cost = }\frac{\text{Treasury stock that is unissued }}{\text{Total number of treasury stock}}\times \left(\begin{array}{l}\text{Treasury stock at cost }\\ \text{during December31,2015}\end{array}\right)\\ =\frac{10,000\left(15,000-25,000\right)}{25,000}\times \$325,000\\ =\$130,000\end{array}$

3.

To determine

Prepare a schedule representing the interest expense for the year ended December 31, 2016.

Explanation of Solution

Prepare a schedule representing the interest expense for the year ended December 31, 2016.

Particulars	Amount in $
Interest expense:
Note payable to bank (8)	60,000
Debenture bonds payable (9)	535,240
Total interest expense	595,240

(Table 8)

Working notes:

(8) Calculate the amount of interest expense on the notes payable on bank:

$\begin{array}{c}\begin{array}{l}\text{Interest expense on the}\\ \text{ notes payable on bank}\end{array}\}\text{ =Amount borrowed }\times \text{Interest }\times \text{Time period}\\ \text{=\$4,000,000}\times \text{9\%}\times \frac{2\left(\text{November to December }\right)}{12}\\ =\$60,000\end{array}$

(9) Calculate the amount of interest expense on debentures bond payable:

$\begin{array}{c}\begin{array}{l}\text{Interest expense on }\\ \text{debenture bond payable}\end{array}\}\text{ =}\left(\begin{array}{l}\text{Interest paid for the year }\\ \text{ended December 31, 2016}\end{array}\right)-\left(\begin{array}{l}\text{Amortization on bond }\\ \text{premium for the year}\end{array}\right)\\ =\$550,000-\$14,760\\ =\$535,240\end{array}$