P19-1
P19-5 P20-1 P20-7 P20-8 P20-12
P19-1
On October 15, 2012, the board of directors of Ensor Materials Corporation
approved a stock option plan for key executives. On January 1, 2013, 20 million
stock options were granted, exercisable for 20 million shares of Ensor's $1 par
common stock. The options are exercisable between January 1, 2016, and December
31, 2018, at 80% of the quoted market price on January 1, 2013, which was $15.
The fair value of the 20 million options, estimated by an appropriate option
pricing model, is $6 per option.
Two
million options were forfeited when an executive resigned in 2014. All other
options were exercised on July 12, 2017, when the stock's price jumped
unexpectedly to $19 per share.
Required:
1. When is Ensor's stock option measurement date?
2.
Determine the compensation expense for the stock option plan in 2013. (Ignore
taxes.)
3.
What is the effect of forfeiture of the stock options on Ensor's financial
statements for 2014 and 2015?
4. Is this effect consistent with the general approach for accounting for
changes in estimates? Explain.
5. How should Ensor account for the exercise of the options in 2017? (Enter
your answers in millions. (Round your answers to the nearest dollar amount.
Omit the "$" sign in your response.)
P19-5
Apple inc provides its executives compensation under a variety of share based
compensation plan including restricted stock awards. The following disclosure note
from Apple’s 2009 annual report describes the plan created for the company’s
chief executive officer, Steve Jobs;
CEO
RESTRICTED STOCK AWARD
On
March 19, 2003, the company’s board of Directors granted 10 million shares of
restricted stock to the company’s CEO that vested on March 19, 2006. The amount
of the restrict stock award expensed by the company was based on the closing
market price of the company’s common stock on the date of grant and was amortized
ratably on a straight line basis over the three year requisite service period. Upon
vesting during 2006, the 10 million shares of restricted stock had a fair value
of $646.6 million and had grant date fair value of $7.48 per share. The restricted
stock award wat net share settled such that the company withheld shares with
value equivalent to the CEO’s minimum statutory obligation for the applicable
income and other employment taxes, and remitted the cash to the appropriate
taxing authorities. The total shares withheld of 4.6 million were based on the
value of the restricted stock awarded on the vesting date as determined by the
company’s closing stock price of $64.66. the remaining shares net of those
withheld were delivered to the company’s CEO. Total payments for the CEO’s tax
obligations to the taxing authorities were $296 million in 2006 and are reflected
as a financing activity within the consolidated statements of cash flows. The net
share settlement had the effect of share repurchases by the company as it
reduced and retired the number of shares outstanding and did not represent an
expense to the company. The company’s CEO has no remaining shares of restricted
stock.
Real
World Financials
Required.
1.
How much compensation did Apple record
for its CEO related to the restricted stock in its fiscal year ended.
2.
What was the CEO’s combined income tax and employment tax rate that Apple used
to determine the shares to be withheld at vesting?
3.
From the information provided in the disclosure note, recreate the journal
entries Apple used to record compensation expense and its related tax affects
on September 24, 2005 , the end of the 2005 fiscal year.
4.
From the information provided in the disclosure not, recreate the journal
entries Apple used to record the vesting of the restricted stock and its
related tax effect s on March 16, 2006, assuming the remaining compensation
expense already has been recorded.
P 20-1 Change in inventory costing methods; comparative
income statements
The
Cecil-Booker Vending Company changed its method of valuing inventory from the
average cost method to the FIFO cost method at the beginning of 2013. At
December 31, 2012, inventories were $120,000 (average cost basis) and were
$124,000 a year earlier. Cecil-Booker's accountants determined that the
inventories would have totaled $155,000 at December 31, 2012, and $160,000 at
December 31, 2011, if determined on a FIFO basis. A tax rate of 40% is in
effect for all years.
One
hundred thousand common shares were outstanding each year. Income from
continuing operations was $400,000 in 2012 and $525,000 in 2013. There were no
extraordinary items either year.
Required:
1. Prepare the journal entry to record the change in
accounting principle. (All tax effects should be reflected in the deferred tax
liability account.)
2.
Prepare the 2013–2012 comparative income statements beginning with income from
continuing operations. Include per share amounts.
P 20-7 Depletion; change in estimate
In
2013, the Marion Company purchased land containing a mineral mine for
$1,600,000. Additional costs of $600,000 were incurred to develop the mine.
Geologists estimated that 400,000 tons of ore would be extracted. After the ore
is removed, the land will have a resale value of $100,000.
To
aid in the extraction, Marion built various structures and small storage buildings
on the site at a cost of $150,000. These structures have a useful life of 10
years. The structures cannot be moved after the ore has been removed and will
be left at the site. In addition, new equipment costing $80,000 was purchased
and installed at the site. Marion does not plan to move the equipment to
another site, but estimates that it can be sold at auction for $4,000 after the
mining project is completed
In
2013, 50,000 tons of ore were extracted and sold. In 2014, the estimate of
total tons of ore in the mine was revised from 400,000 to 487,500. During 2014,
80,000 tons were extracted.
Required:
1. Compute depletion and depreciation of the mine and
the mining facilities and equipment for 2013 and 2014. Marion uses the
units-of-production method to determine depreciation on mining facilities and
equipment.
2.
Compute the book value of the mineral mine, structures, and equipment as of
December 31, 2014.
P 20-8 Accounting changes; six situations
Described
below are six independent and unrelated situations involving accounting
changes. Each change occurs during 2013 before any adjusting entries or closing
entries were prepared. Assume the tax rate for each company is 40% in all
years. Any tax effects should be adjusted through the deferred tax liability
account.
a. Fleming Home Products introduced a new line
of commercial awnings in 2012 that carry a one-year warranty against
manufacturer's defects. Based on industry experience, warranty costs were
expected to approximate 3% of sales. Sales of the awnings in 2012 were
$3,500,000. Accordingly, warranty expense and a warranty liability of $105,000
were recorded in 2012. In late 2013, the company's claims experience was
evaluated and it was determined that claims were far fewer than expected: 2% of
sales rather than 3%. Sales of the awnings in 2013 were $4,000,000 and warranty
expenditures in 2013 totaled $91,000.
b.
On December 30, 2009, Rival Industries acquired its office building at a cost
of $1,000,000. It was depreciated on a straight-line basis assuming a useful
life of 40 years and no salvage value. However, plans were finalized in 2013 to
relocate the company headquarters at the end of 2017. The vacated office
building will have a salvage value at that time of $700,000.
c.
Hobbs-Barto Merchandising, Inc., changed inventory cost methods to LIFO from
FIFO at the end of 2013 for both financial statement and income tax purposes.
Under FIFO, the inventory at January 1, 2014, is $690,000.
d.
At the beginning of 2010, the Hoffman Group purchased office equipment at a
cost of $330,000. Its useful life was estimated to be 10 years with no salvage
value. The equipment was depreciated by the sum-of-the-years'-digits method. On
January 1, 2013, the company changed to the straight-line method.
e.
In November 2011, the State of Minnesota filed suit against Huggins
Manufacturing Company, seeking penalties for violations of clean air laws. When
the financial statements were issued in 2012, Huggins had not reached a
settlement with state authorities, but legal counsel advised Huggins that it
was probable the company would have to pay $200,000 in penalties. Accordingly,
the following entry was recorded:
Loss—litigation
................................................ 200,000
Liability—litigation
........................................ 200,000
Late
in 2013, a settlement was reached with state authorities to pay a total of $350,000
in penalties.
f.
At the beginning of 2013, Jantzen Specialties, which uses the
sum-of-the-years'-digits method, changed to the straight-line method for newly
acquired buildings and equipment. The change increased current year net
earnings by $445,000.
Required:
For
each situation:
1.
Identify the type of change.
2.
Prepare any journal entry necessary as a direct result of the change as well as
any adjusting entry for 2011 related to the situation described.
3.
Briefly describe any other steps that should be taken to appropriately report
the situation.
P20-12 Accounting changes and error correction; eight
situations; tax effects ignored
Williams-Santana,
Inc., is a manufacturer of high-tech industrial parts that was started in 2001
by two talented engineers with little business training. In 2013, the company
was acquired by one of its major customers. As part of an internal audit, the
following facts were discovered. The audit occurred during 2013 before any
adjusting entries or closing entries were prepared.
a.
A five-year casualty insurance policy was purchased at the beginning of 2011
for $35,000. The full amount was debited to insurance expense at the time.
b.
Effective January 1, 2013, the company changed the salvage value used in
calculating depreciation for its office building. The building cost $600,000 on
December 29, 2002, and has been depreciated on a straight-line basis assuming a
useful life of 40 years and a salvage value of $100,000. Declining real estate
values in the area indicate that the salvage value will be no more than
$25,000.
c.
On December 31, 2012, merchandise inventory was overstated by $25,000 due to a
mistake in the physical inventory count using the periodic inventory system.
d.
The company changed inventory cost methods to FIFO from LIFO at the end of 2013
for both financial statement and income tax purposes. The change will cause a
$960,000 increase in the beginning inventory at January 1, 2014.
e.
At the end of 2012, the company failed to accrue $15,500 of sales commissions
earned by employees during 2012. The expense was recorded when the commissions
were paid in early 2013.
f.
At the beginning of 2011, the company purchased a machine at a cost of
$720,000. Its useful life was estimated to be 10 years with no salvage value.
The machine has been depreciated by the double-declining balance method. Its
carrying amount on December 31, 2012, was $460,800. On January 1, 2013, the
company changed to the straight-line method.
g.
Bad debt expense is determined each year as 1% of credit sales. Actual
collection experience of recent years indicates that 0.75% is a better indication
of uncollectible accounts. Management effects the change in 2013. Credit sales
for 2013 are $4,000,000; in 2012 they were $3,700,000.
Required:
For
each situation:
1.
Identify whether it represents an accounting change or an error. If an
accounting change, identify the type of change.
2.
Prepare any journal entry necessary as a direct result of the change or error
correction as well as any adjusting entry for 2013 related to the situation
described. (Ignore tax effects.)
3.
Briefly describe any other steps that should be taken to appropriately report
the situation.
TUTORIAL PREVIEW
SOLUTION
Requirement 1
Cost of mineral mine:
|
Purchase price
|
$1,600,000
|
|
Development costs
|
600,000
|
|
|
$2,200,000
|
Depletion:
Depletion per ton = ($2,200,000 – 100,000)/ 400,000 tons= $5.25 per ton
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