Chapter 16, Problem 12P

1.

To determine

Prepare for Company I the long-term liabilities section for the year ended December 31, 2019.

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, 2019.

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, 11/2/19	$ 4,000,000
Deduct  instalment due 11/2/20	($ 800,000)
Long-term portion,12/31/19	$ 3,200,000

(Table 2)

(2) Calculation of debenture on bonds payable:

Particulars	Amount in $	Amount in $
Carrying amount, 12/31/18		5,352,400
Deduct amortization of bond premium:
Interest paid 12/31/19 $\left(\$5,000,000\times 11\%\right)$	550,000
Less: effective interest $\left(\$5,352,400\times 10\%\right)$	(535,240)	(14,760)
Carrying amount, 12/31/19		5,337,640

(Table 3)

2.

To determine

Prepare Company I’s shareholder’s equity section for the year ended December 31, 2019, balance sheet.

Explanation of Solution

Company I
Shareholder's equity section
For the  year ended December 31,2019
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
Balance	December 31,2018	$\left(800,000\times \$10\right)$	5,150,000
Add: 5% stock dividend issued $\left(800,000\times 5\%\right)$	March 3, 2019	$\left(40,000\times \$10S\right)$	(150,000)
Balance	December 31,2019	$\left(840,000\times \$10\right)$	8,400,000

(Table 5)

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

Particulars	Amount in $
Balance, December 31, 2018	3,500,000
Deduct: Treasurystockreissued1/16/2019 $\left(\$225,000-\$195,000\left(\$325,000\times 60\%\right)\right)$	(30,000)
Stock dividend  issued on March 3, 2019 $\left(40,000\times \$4\left[\$14-\$10\right]\right)$	160,000
Balance, December 31, 2019	2,485,000

(Table 6)

(5) Calculate the amount of retained earnings:

Particulars	Amount in $
Balance, December 31, 2018	2,465,000
Deduct : Stock dividend issued,3/2/2019$\left(40,000\times \$14\right)$	(560,000)
Net income for 2019	2,860,000
Balance, December 31, 2019	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:

$\begin{array}{c}\text{Treasury stock at cost = }\frac{\text{Treasury stock that is unissued }}{\text{Total number of treasury stock}}\times \left(\begin{array}{l}\text{Treasury stock at cost }\\ \text{during December31,2018}\end{array}\right)\\ =\frac{10,000\left(15,000-25,000\right)}{25,000}\times \$325,000\\ =\$130,000\end{array}$

3.

To determine

Prepare a schedule representing the interest expense for the year ended December 31, 2019.

Explanation of Solution

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:

$\begin{array}{c}\begin{array}{l}\text{Interest expense on }\\ \text{debenture bond payable}\end{array}\}\text{ =}\left(\begin{array}{l}\text{Interest paid for the year }\\ \text{ended December 31, 2019}\end{array}\right)-\left(\begin{array}{l}\text{Amortization on bond }\\ \text{premium for the year}\end{array}\right)\\ =\$550,000-\$14,760\\ =\$535,240\end{array}$