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1. P & P Products completed a contract to build a storage facility Company. The construction began on January 1, 2010. The President of P& P Products has consulted with the controller regarding estimated cost and the resulting profit. During her discussion with the controller she was informed that P & P Products used the completed contract method to account construction project. The president asked the controller about the percentage of completion method she remembered from her college accounting courses. She is concerned about recognizing all of the profit in a single year. She asked that the controller prepare a schedule showing the effect on the income statement and balance sheet under the percentage-of-completion vs the completed contract method. Unfortunately, the controller has delegated this task to you.
Cost = $3.2 million, cost = $5,760,000, cost = $3,840, 000
Estimated cost to complete as of the end of 2010, $10,800,000.00, estimated cost to complete as of the end of 2011 $4,000,000.00.
Billings to Alpha Company in 2010 was $3,000,000.00, $5,000,000.00 with remaining billings during 2012.
The contract price was $18,000,000.00
Requirement: Prepare a schedule showing how much profit is recognized 2010, 2011, and 2012 under the percentage of completion and completed contract method.
2. P & P Products entered into a lease agreement with Beta Company, Inc. to purchase a piece of equipment on January 1, 2012. The terms of the lease are 8%, 5years lease with a 6 year useful life. The first payment is made on January 1, 2012. The machine has a fair value of $600,000.00. The residual value is zero. P & P Products does not know the interest rate that Beta uses. Assume that the entries have not yet made on the books of P & P Products.
Requirement: Prepare a five year amortization schedule. Make all necessary entries on the books of P& P Products first year.
Long Term Liabilities
3. The following information is relevant to a bond issue. P & P Products issued $1,800,000.00 face value of bonds on April 1 of 2012. The bonds are sold for $1,908,000.00. They pay 8% interest each year on December 31 and become due in 10 years from their date of January 1 2012. One half of the bonds are redeemed on January 1 of 2015 for $918, 000.00. The company uses the effective interest method to amortize the bonds. The market rate is 6%.
Requirement: Prepare an amortization schedule first 5 years and make entries issuance, payment of interest 2012 through 2014 and the redemption of the bonds.
4. On January 1 2012 P & P Products purchased $1,000,000 of 8%, 5 years Delta Products ( a wholly owned subsidiary of P & P ) bonds on the open market for $960,000. The bonds are dated and were issued by Delta Products on January 1, 2010. The bonds pay interest each January 1 and July 1. The effective interest method is used. The market rate is 10%.
Requirement: Make any necessary entries Products.
5. The following information is provided:
Income before Taxes $900,000.00
Income before taxes included the following
-Interest income of = $80,000(from municipal bonds)
-Rental income was collected in advance in 2011 and earned in 2012 = $20,000
-A piece of equipment was purchased in 2012. Depreciation per books = $40, 000 and
per income taxes $100,000.
-Warranty expense in 2012 was $20, 000.00 but purposed only $5000
-Assume that at the beginning of 2012 deferred tax asset = $8,000 due to the rent income.
-Tax rate and the foreseeable future is 40%.
Requirement: a) Calculate the taxable income. b) Make the necessary tax entry. (Include the amounts expense and deferred taxes)
Property, Plant & Equipment
6. The following information is provided:
• Fourteen new computers- $140,000, additional $2,000 and 6% tax on $140,000. Estimated useful life is 5 years with 5% salvage value. They are treated as a single unit reporting purpose.
• Ten existing computers will be traded in (total trade in value $10,000) new computers. The computers are treated as a single unit with an original cost of $80,000 and book value of $8,000. The remainder was paid in cash.
• Additional IT personnel to support the additional workload created by HR department- $200,000 annually which includes fringe benefits and taxes.
Requirement: Prepare the potential journal entries above items (considered not having commercial substances)
9. P & P Products, during 2012, began and completed a small warehouse. Construction on the warehouse began January 2, 2012. Expenditures were made as follows: January 2, $1,000,000, March 1, $900,000, July 1, $400,000 and October 1, $800,000. P & P Products financed the project by issuing $1,000,000 in stock at the beginning of 2012 and borrowed $1,200,000 from The Last National Bank at an interest rate of 8%. In addition the company had the following debt: $1,000,000 interest rate of 9% borrowed in 2010, $2,000,000, 11% note borrowed in 2009. The warehouse was completed in 2013.
A) Calculate the 2012 weighted average accumulated expenditures
B) How much is avoidable interest
C) How much is actual interest
D) Make the entry capitalizing interest.
7. P & P owns the following securities. Information relating to the below available equity securities is presented.
Security Cost Market Value, December 31, 2012
A $10,000,000 $40,000,000
B $20,000,000 $14,000,000
C $5,000,000 $15,000,000
D $20,000,000 $12,000,000
Total $55,000,000 $81,000,000
P & P is concerned about meeting the annual earnings estimate. The CEO has made two proposal related to yearend investment activities:
1. Sell securities A and C. Assume the company will sell the securities 12/31/05 market value.
2. Tell the auditors that the company has decided to sell all of the securities in the near term. This decision is the basis reclassification of the securities from available-for-sale to trading.
Requirement: Compute the amount of the effect of each proposal on P & P’s Income statement. Ignore Income tax consideration.
8. The following facts pertain to the P & P Products’ pension plan . Expected return on plan assets is 15%, the FMV of plan assets, on January 1, 2012 is $100,000, the FMV on December 31, 2012 is $130,000, contribution to pension plan was $14,000 and benefits paid to retired employees was $8,000.
Requirement: Determine the Actual return on plan assets component of net pension cost 2012. Assume contribution and benefit payments were made at year end.
12. Refer to question 11, Consider the following information as of the beginning of 2012. The projected benefit obligation or PBO was $135, 000; the accumulated gain (loss) in Other Comprehensive Income (OCI) was $20,000 and the average remaining service period of active employees 20 years.
a) Determine the difference between the actual and expected return on plan assets .
b) Determine the amortization of the net gain or loss accumulated in OCI.
c) Determine the gain or loss recognized as a component of pension cost in 2012.
d) Determine the accumulated gain or loss that would be carried forward in OCI in 2013.
Stockholders’ Equity and Earnings Per Share
9. During 2012 P&P Products made the following common stock transactions ( class B stock). of the following give the entry(s) that P & P Products would have made. The common stock has a par value of $10.
A) On January 5th, P & P Products issued a property dividend. Investments (stock in the ABC company) comprising of 1000 shares was issued. The stock has a fair market value of $25 per share. The stock cost P &P Products $20 per share. They issued the ABC stock one month later. Make the entry(s).
B) On February 14, P & P Products declared a 10 % stock dividend (assume 92,623 shares of $10 par outstanding stock). On that date market value of the stock was $14. One month later they issued the common stock dividend. Make the entry(s)
C) On August 12th, P & P Products declared a cash dividend of $.50 per share of common stock. Assume 92, 623 shares plus those issued in (B). Make the entry(s).
D) On October 14th, P & P Products issued a 2 stock split. (assume the number of shares outstanding you used in (C). Make the entry(s).
E) On May 15th, P & P Products issued 5,000 shares of cumulative 8% preferred stock with a par value of $100 for $112 per share. Make the entry(s).
F) Assume the following: At the end of the year there were 92, 623 shares of common stock outstanding and $5,000 shares of non-cumulative/non-participating preferred stock outstanding. P & P Products wants to issue cash dividends totalling $77, 050. Calculate how much goes to preferred stock holders and common stock holders
9. The controller & Products, neglected to have her staff accrue the payroll last week in December, 2012. The following data should have been considered and accounted P & P Products’ book.
-Total Payroll = $1,350, 000
-Income taxes to be withheld = $ 150,000
– FICA taxes applicable to the payroll accrual = $28,000
-FUTA taxes on accrued payroll = $4,000
– Total compensated absences related to the payroll = $75,000 vacation time and $85,000 sick time.
-Employees who do not take vacation will receive compensation in lieu of time taken off. Sick time does not vest and if the employee does not used their sick time it is forfeited back to the company. Union dues that should have been withheld from employees’ payroll= $12, 000.
Required: Journalized all entries that are necessary to accrue the above payroll.