INTERMEDIATE ACCOUNTING II

Module 1: Critical Thinking

Important! Read First

Choose one of the following two assignments to complete this week. Do not do both assignments. Identify your assignment choice in the title of your submission. When you are ready to submit, click the Module 1 Critical Thinking header on the Assignments page to upload the document.

Assignment Option #1: Journal Entry: Bonds and Stocks

Bonds:Intel Inc. is the pioneer in the manufacture of microprocessors for computers. The company’s fiscal year runs from April 1 to March 31. On 4/1/2015, Intel Issued $5,000,000 of 11% Bonds due in 10 years. The interest is payable annually on April 1. The market rate of interest on that date for bonds of similar risk is 10%.

Prepare the journal entry for the issuance of the bonds and on the first interest payment date.

Use the Excel Template linked at the bottom of this page to prepare an amortization schedule for the bonds. Any written comments should be included in Excel’s comments function and formatted according to CSU-Global Guide to Writing and APA Requirements.

Stocks; presented below is the stockholders’ equity section of AMR Corporation. All amounts are in millions except for number of shares and par value.

  

Stockholders’ Equity   (Deficit)

 

Current

Year

 

Prior

Year

 

Preferred stock –   20,000,000 shares authorized; none issued

 

$ -0-

 

$ -0-

 

Common stock – $1   par value; 750,000,000 shares authorized; 182,350,259 shares issued

 

182

 

182

 

Additional paid-in   capital

 

2521

 

2605

 

Treasury shares at   cost: current year-21,194,312; prior year-22,768,027

 

(1,308)

 

(1,405)

 

Accumulated other   comprehensive loss

 

(664)

 

(785)

 

Accumulated deficit

 

(1,312)

 

(551)

 

 

$(581)

 

$46

1. Explain why the common stock is classified as part of the stockholders’ equity.

2. Explain why treasury stock is not classified as an asset.

3. Explain what is meant by “Accumulated other comprehensive loss.”

4. Why is the accumulated deficit larger in the current year than in the prior year?

5. Compute book value per share for AMR for the current year

Assignment Option #2: Essay: Bonds and Stocks

1. J. J. Walter is the Chief Executive Officer of JJW Industries. He and other executives are contemplating whether or not to issue long- term debt to finance plant expansion and renovation. In the past, his company has issued traditional debt instruments that require regular interest payments and a retirement of the principal on the maturity date. However, he has noticed that several competitors have recently issued bonds that either do not require interest payments or defer interest payments for several years. He has asked you, the company’s controller, to prepare a two-page memo addressing the following questions.

1. Why would a company issue bonds that require interest payments if bonds that do not require interest payments are being sold in the open market?

2.If the company were to issue 10-year bonds with a face value of $ 100,000 and the market rate of interest is 10%, what would be the proceeds from the sale if the bonds were zero- interest bonds? What would be the proceeds if the annual interest payments did not begin for five years and the stated rate of interest were 10%? What would be the proceeds if the bonds paid interest annually for 10 years at 10%?

3.What factors must a business consider when determining the interest terms associated with long- term debt?

2. Damijo Company has been very successful in recent years. Cash flow from operations is more than sufficient to cover the cost of all capital expenditures as well as regular cash dividends. To utilize some of the extra cash, Damijo decided to begin a program of repurchasing its shares in the open market. The shares will not be retired but will be held for potential reissue. Because Damijo has never repurchased its shares before, it has not had to make a choice between the par value and cost methods of accounting for treasury stock.

As the chief accounting officer in the company, you have been asked to draft a memo to the board of directors recommending either the cost method or the par value method of accounting for treasury stock. Your memo should address issues such as the prevailing practice, the likely effect on the financial statements (particularly the Equity section), and the potential impact of the treasury stock accounting treatment on the ability to maintain steady cash dividend payments in the future. 

Your well-written paper must be 2-3 pages, in addition to title and reference pages. The paper should be formatted according to the CSU-Global Guide to Writing and APA Requirements. Any supporting calculations should be inserted in a table in your Word document.