Reference no: EM13891247

Question 1:

On December 31. 2012. Ainsworth, Inc.. had 600 million shares of common stock outstanding. Twenty million shares of 8%, $100 par value cumulative. nonconvertible preferred stock were sold on January 2. 2013. On April 30, 2013. Ainsworth purchased 30 million shares of its common stock as treasury stock. Twelve million treasury shares were sold on August 31. Ainsworth issued a 5% common stock dividend on June 12. 2013. No cash dividends were declared in 2013. For the year ended December 31. 2013, Ainsworth reported a net loss of $140 million, including an after-tax extraordinary loss of $400 million from a litigation settlement.

Required:

1. Determine Ainsworth's net loss per share for the year ended December 31. 2013.

2. Determine the per share amount of income or loss from continuing operations for the year ended December 31. 2013.

3. Prepare an EPS presentation that would be appropriate to appear on Ainsworth's 2013 and 2012 comparative income statements. Assume EPS was reported in 2012 as $.75. based on net income (no extraordinary items) of $450 million and a weighted-average number of common shares of 600 million.

Question 2:

(Note: This is a variation of the previous problem. modified to include convertible bonds and contingently issuable shares.)

On December 31, 2012, Dow Steel Corporation had 600.000 shares of common stock and 300.000 shares of 8%. noncumulative. nonconvertible preferred stock issued and outstanding. Dow issued a 4% common stock dividend on May 15 and paid cash dividends of $400.000 and $75,000 to common and preferred shareholders. respectively. on December 15. 2013.

On February 28. 2013. Dow sold 60.000 common shares. In keeping with its long-term share repurchase plan. 2,000 shares were retired on July 1. Dow's net income for the year ended December 31. 2013. was $2.100.000. The income tax rate is 40%. Also. as a part of a 2012 agreement for the acquisition of Merrill Cable Company, another 23.000 shares (already adjusted for the stock dividend) are to be issued to former Merrill shareholders on December 31. 2014, if Merrill's 2014 net income is at least $600.000. In 2013. Merrill's net income was $630.000.

As part of an incentive compensation plan. Dow granted incentive stock options to division managers at December 31 of the current and each of the previous two years. Each option permits its holder to buy one share of common stock at an exercise price equal to market value at the date of grant and can be exercised one year from that date. Information concerning the number of options granted and common share prices follows:

Date Granted                                               Options Granted                                 Share Prke

                                          (adjusted for the stock 4114dend)

December 31, 2011                                                    8,000                                      $24

December 31, 2012                                                   3,000                                       $33

December 31, 2013                                                 6,500                                         $32

The market price of the common stock averaged $32 per share during 2013.

On July 12. 2011. Dow issued $800.000 of convertible 10% bonds at face value. Each $1,000 bond is convertible into 30 common shares (adjusted for the stock dividend).

Required:

Compute Dow's basic and diluted earnings per share for the year ended December 31. 2013.

Question 3:

Witter House is a calendar-year firm with 300 million common shares outstanding throughout 2013 and 2014. As part of its executive compensation plan. at January 1. 2012. the company had issued 30 million executive stock options permitting executives to buy 30 million shares of stock for $10 within the next eight years. but not prior to January 1. 2015. The fair value of the options was estimated on the grant date to be $3 per option.

In 2013. Witter House began granting employees stock awards rather than stock options as part of its equity compensation plans and granted 15 million restricted common shares to senior executives at January 1. 2013. The shares vest four years later. The fair value of the stock was $12 per share on the grant date. The average price of the common shares was $12 and $15 during 2013 and 2014. respectively.

The stock options qualify for tax purposes as an incentive plan. The restricted stock does not. The company's net income was $150 million and $160 million in 2013 and 2014. respectively. Its income tax rate is 40%.

Required:

1. Determine basic and diluted earnings per share for Witter House in 2013.

2. Determine basic and diluted earnings per share for Witter House in 2014.

The DeVille Company reported pretax accounting income on its income statement as follows:

2013                                    3350,000

2014                                    270,000

2015                                    340,000

2016                                    380,000

Included in the income of 2013 was an installment sale of property in the amount of $50.000. However. for tax purposes. DeVille reported the income in the year cash was collected. Cash collected on the installment sale was $20.000 in 2014. $25.000 in 2015. and $5.000 in 2016.

Included in the 2015 income was $15.000 interest from investments in municipal bonds.

The enacted tax rate for 2013 and 2014 was 30%. but during 2014 new tax legislation was passed reducing the tax rate to 25% for the years 2015 and beyond.

Required:

Prepare the year-end journal entries to record income taxes for the years 2013-2016.

Question 4:

Sherrod. Inc.. reported pretax accounting income of $76 million for 2013. The following information relates to differences between pretax accounting income and taxable income:

a. Income from installment sales of properties included in pretax accounting income in 2013 exceeded that reported for tax purposes by $3 million. The installment receivable account at year-end had a balance of $4 million (representing portions of 2012 and 2013 installment sales). expected to be collected equally in 2014 and 2015.

b. Sherrod was assessed a penalty of $2 million by the Environmental Protection Agency for violation of a federal law in 2013. The fine is to be paid in equal amounts in 2013 and 2014.

c. Sherrod rents its operating facilities but owns one asset acquired in 2012 at a cost of $80 million. Depreciation is reported by the straight-line method assuming a four-year useful life. On the tax return. deductions for depreciation will be more than straight-line depreciation the first two years but less than straight-line depreciation the next two years ($ in millions):

d. Warranty expense of $3 million is reported in 2013. For tax purposes, the expense is deducted when costs are incurred. $2 million in 2013. At December 31. 2013. the warranty liability was $2 million (after adjusting entries). The balance was $1 million at the end of 2012.

e. In 2013. Sherrod accrued an expense and related liability for estimated paid future absences of $7 million relating to the company's new paid vacation program. Future compensation will be deductible on the tax return when actually paid during the next two years ($4 million in 2014: $3 million in 2015).

f. During 2012. accounting income included an estimated loss of $2 million from having accrued a loss contingency. The loss is paid in 2013 at which time it is tax deductible.

Balances in the deferred tax asset and deferred tax liability accounts at January 1. 2013. were $1.2 million and $2.8 million. respectively. The enacted tax rate is 40% each year.

Required:

1. Determine the amounts necessary to record income taxes for 2013 and prepare the appropriate journal entry.

2. Mat is the 2013 net income?

3. Show how any deferred tax amounts should be classified and reported in the 2013 balance sheet.