Question 3: 15% points:
Brovo Construction Company uses the percentage-of-completion method of accounting. In 2015, Brovo began work under a contract with a contract price of $1,500,000. Other details follow:
|
Common Stock |
$800,000 |
|
Additional Paid in Capital |
1,600,000 |
|
Retained Earnings |
1,845,000 |
|
2015 |
2016 |
|
|
Cost incurred during the year |
$980,000 |
$1,375,000 |
| Estimated Cost to complete, as of December 31 |
420,000 |
0 |
|
Billings to date |
800,000 |
1,500,000 |
|
Collections to date |
250,000 |
1,500,000 |
Prepare all required general journal entries for 2015. (Use 12/31/15 as transaction dates.)
Question 4: 20% points:
Warren Buffet, an investor in Alpha Co., asked you for advice on the propriety of Alpha’s financial reporting for two of its investments. Assume that Alpha does not elect the fair value option for reporting its financial assets and liabilities. You obtained the following information related to the investments from Alpha’s December 31, 2015 financial statements:
> 20% ownership interest in Beta Co., represented by 200,000 shares of outstanding common stock purchased on January 2, 2015, for $600,000. > 20% ownership interest in Charlie Co., represented by 20,000 shares of outstanding common stock purchased on January 2, 2015, for $300,000. > On January 2, 2015, the carrying values of the acquired shares of both investments equaled their purchase price.
> Beta reported earnings of $400,000 for the year ended December 31, 2015, and declared and paid dividends of $100,000 on 12/15/2015.
> Charlie reported earnings of $350,000 for the year ended December 31, 2015, and declared and paid dividends of $60,000 on 12/15/2015.
> On December 31, 2015, Beta’s and Charlie’s common stock were trading over-the-counter at $18 and $20 per share, respectively.
> The investment in Charlie is accounted for using the equity method.
> The investment in Beta is accounted for as available-for-sale securities.
You recalculated the amounts reported in Alpha’s December 31, 2015 financial statements, and determined that they were correct. Stressing that the information available in the financial statements was limited, you advised Warren that, assuming Alpha properly applied generally accepted accounting principles, Alpha may have appropriately used two different methods to account for its investments in Beta and Charlie, even though the investments represent equal ownership interests.
Prepare the general journal entries for the following:
1. Alpha’s investment in Charlie Co. on January 2, 2015.
2. Dividends received from Charlie in 2015.
3. Required for Charlie’s reported income for the year ending on December 31, 2015.
4. Alpha’s investment in Beta Co. on January 2, 2015.
5. Dividends received from Beta in 2015.
6. Required for Beta’s reported income for the year ending on December 31, 2015
Question 5: 30% points:
The following is a condensed trial balance of Bravo Co., a publicly held company, after adjustments for income tax expense.
| Bravo Co. |
||
| Condensed Trial Balance |
||
|
Accounts |
12/31/2015 Balances Dr. (Cr .) |
12/31/2014 Balances Dr. (Cr.) |
|
Cash |
$484,000 |
$817,000 |
|
Accounts receivable, net |
670,000 |
610,000 |
|
Property, plant, and equipment |
1,070,000 |
995,000 |
|
Accumulated depreciation |
(345,000) |
(280,000) |
|
Dividends payable |
(25,000) |
(10,000) |
|
Income taxes payable |
(60,000) |
(150,000) |
|
Deferred income tax liability |
(63,000) |
(42,000) |
|
Bonds payable |
(500,000) |
(1,000,000) |
|
Unamortized premium on bonds |
(71,000) |
(150,000) |
|
Common stock |
(350,000) |
(150,000) |
|
Additional paid-in capital |
(430,000) |
(375,000) |
|
Retained earnings |
(185,000) |
(265,000) |
|
Sales |
(2,420,000) |
|
|
Cost of sales |
1,863,000 |
|
|
Selling and administrative expenses |
220,000 |
|
|
Interest income |
(14,000) |
|
|
Interest expense |
46,000 |
|
|
Depreciation |
88,000 |
|
|
Loss on sale of equipment |
7,000 |
|
|
Gain on extinguishment of bonds |
(90,000) |
|
|
Income tax expense |
105,000 |
_________ |
|
T otals |
$0 |
$0 |
Additional information:
> During 2015 equipment with an original cost of $50,000 was sold for cash, and equipment costing $125,000 was purchased.
> On January 1, 2015, bonds with a par value of $500,000 and related premium of $75,000 were redeemed. The $1,000 face value, 10% par bonds had been issued on January 1, 2006 to yield 8%. Interest is payable annually every December 31 through 2025.
> Bravo’s tax payments during 2015 were debited to Income Taxes Payable. Bravo recorded a deferred income tax liability of $42,000 based on temporary differences of $120,000 and an enacted tax rate of 35% at December 31, 2014; prior to 2014 there were no temporary differences. Bravo’s 2015 financial statement income before income taxes was greater than its 2015 taxable income, due entirely to temporary differences, by $60,000. Bravo’s cumulative net taxable temporary differences at December 31, 2015, were $180,000. Bravo’s enacted tax rate for the current and future years is 35%.
> 60,000 shares of common stock, $2.50 par, were outstanding on December 31, 2014.
> Bravo issued an additional 80,000 shares on April 1, 2015.
> There were no changes to retained earnings other than dividends declared.
Prepare a statement of cash flows using the indirect method.
