1. (TCO C) Redstone Company spent $190,000 developing a new process, $45,000 in legal fees to obtain a patent, and $91,000 to market the process that was patented. How should these costs be accounted for in the year they are incurred? (Points: 20)

The $190,000 should be expensed when incurred as research and development costs. The $91,000 is expensed as selling and promotion costs when incurred. The $45,000 legal fees to obtain a patent should be capitalized and amortized over the useful life or legal life of the patent, whichever is shorter.

2. (TCO D) Total payroll of Watson Co. was $920,000, of which $160,000 represented amounts paid in excess of $100,000 to certain employees. The amount paid to employees in excess of $7,000 was $720,000. Income taxes withheld were $225,000. The state unemployment tax is 1.2%, the federal unemployment tax is .8%, and the F.I.C.A. tax is 7.65% on an employee’s wages to $100,000 and 1.45% in excess of $100,000. (a) Prepare the journal entry for the wages and salaries paid.(b) Prepare the entry to record the employer payroll taxes.

(a) Wages and Salaries Expense 920,000Withholding Taxes Payable 225,000FICA Taxes Payable 60,460

[($920,000 – $160,000) × 7.65%] + ($160,000 × 1.45%)Cash 634,540

(b) Payroll Tax Expense 64,460FICA Taxes Payable 60,460

($760,000 × 7.65%) + ($160,000 × 1.45%)Federal Unemployment Tax Payable

[($920,000 – $720,000) × .8%] 1,600State Unemployment Tax Payable 2,400

($200,000 × 1.2%)

3. (TCO D). Prepare journal entries to record the following retirement.  (Show computations and round to the nearest dollar.)The December 31, 2010 balance sheet of Wolfe Co. included the following items:  7.5% bonds payable due December 31, 2018 $1,200,000 Unamortized discount on bonds payable 48,000The bonds were issued on December 31, 2008 at 95, with interest payable on June 30 and December 31.  (Use straight-line amortization.)On April 1, 2011, Wolfe retired $240,000 of these bonds at 101 plus accrued interest. (Points: 35)

Interest Expense 4,800 Cash ($240,000 x 7.5% x 3/12) 4,500 Discount on Bonds Payable ($48,000 x 1/5 x 1/8 x 3/12) 300

Bonds Payable 240,000Loss on Redemption of Bonds 11,700 Discount on Bonds Payable [($48,000 x 1/5) – 300] 9,300 Cash 242,400 4. (TCO E) Parker Corporation has issued 2,000 shares of common stock and 400 shares of preferred stock for a lump sum of $72,000 cash. Instructions(a) Give the entry for the issuance assuming the par value of the common was $5 and the market value $30, and the par value of the preferred was $40 and the market value $50. (Each valuation is on a per share basis and there are ready markets for each stock.)(b) Give the entry for the issuance assuming the same facts as (a) above except the preferred stock has no ready market value, and the common stock has a market value of $25 per share. (Points: 30)

(a) Cash 72,000 Common Stock (2,000*$5) 10,000 Paid-in Capital in Excess of Par - Common 44,000

($54,000 - $10,000) Preferred Stock (400*$40) 16,000 Paid-in Capital in Excess of Par – Preferred 2,000

($20,000 - $18,000)

Common stock $30 x 2,000 shares= $60,000Preferred stock $50 x 400 shares = $20,000

Total market value= $80,000

Common stock 60/80 x $72,000= $54,000Preferred stock 20/80 x $72,000= $18,000Total book value= $72,000

(b) Cash 72,000 Common Stock 10,000 Paid-in Capital in Excess of Par – Common 40,000

(2,000*$25) – (2,000*$5) Preferred Stock 16,000 Paid-in Capital in Excess of Par – Preferred 6,000

5. (TCO F) The stockholder’s equity section of Lemay Corp shows the following on Dec 31, 2011:Preferred stock- 6% $100 par, $4000 shares outstanding $400,000Common Stock-$10 par, 60,000 shares outstanding $600,000Paid-in capital in excess of par $200,000Retained earnings $114,000Total stockholders’ equity $1,314,000

Instructions:Assuming that all of the company’s retained earnings are to be paid out in dividends on 12/31/11 and that preferred dividends were last paid on 12/31/09, show how much the preferred and common stockholders should receive if the preferred stock is cumulative and fully participating.

Preferred Common Total Dividends in arrears (6% x $400,000) $24,000 $ — $24,000Current year's dividends 24,000 36,000 60,000Participating dividend (3%)[($30,000 ÷ $1,000,000) x $400,000] 12,000 18,000 30,000

$60,000 $54,000 $114,000

6. (TCO A) At December 31, 2010, Sager Co. had 1,200,000 shares of common stock outstanding. In addition, Sager had 450,000 shares of preferred stock which were convertible into 750,000 shares of common stock. During 2011, Sager paid $600,000 cash dividends on the common stock and $400,000 cash dividends on the preferred stock. Net income for 2011 was $3,400,000 and the income tax rate was 40%. What would be the diluted earnings per share for 2011 (rounded to the nearest penny)? Please show all computations. (Points: 25)

$3,400,000/ ($1,200,000 + 750,000) = $1.74

7. (TCO B) On May 1, 2010, Kirmer Corp. purchased $450,000 of 12% bonds, interest payable on January 1 and July 1, for $422,800 plus accrued interest. The bonds mature on January 1, 2016. Amortization is recorded when interest is received by the straight-line method (by months and rounded to the nearest dollar). (Assume bonds are available for sale.)

Instructions(a) Prepare the entry for May 1, 2010.(b) The bonds are sold on August 1, 2011 for $425,000 plus accrued interest. Prepare all entries required to properly record the sale. (Points: 30)

(a) Available-for-Sale Securities 422,800 Interest Revenue ($450,000 x 12% x 4/12) 18,000 Cash 440,800

(b) Available-for-Sale Securities ($27,200/ 68) 400 Interest Revenue 400

Cash ($450,000 x 12% x 1/12) 4,500 Interest Revenue 4,500

Cash 425,000 Loss on Sale of Securities 3,800 Available-for Sale Securities 428,800 [$422,800+ ($27,200/68) x 15]