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Financial Accounting and ReportingSection 1: Statement of Cash FlowsHarnish Decorators provides the Statement of Operations, Statement of Financial Position and Statement of Shareholders’ Equity and footnote information for use in preparing its 2012 statement of cash flows. REQUIRED: Prepare an indirect statement of cash flows for 2012. Identify non-cash transactions.  Cash paid for interest and income taxes are not necessaryFootnote Information: FIXED ASSETS During 2012, Harnish had no asset purchases or sales. Carrying Value 2012 2011 Property Plant, and Equipment, at cost $4,880 $4,880 Accumulated Depreciation $3,150 $3,105 Property, Plant and Equipment, Net $1,730 $1,775 INVESTMENTS Harnish holds securities designated as trading securities and as available-for-sale securities.  All securities are reported at their fair-market-values, in accordance with GAAP.  During 2012, Harnish purchased addition available-for-sale securities with excess cash. DEBT AND LEASES On June 30, 2012 Harnish repaid all of the outstanding installment notes, incurring a pre-payment penalty of $18.  Harnish issued $300 of 3% bonds due in 2020 at par to replace the financing provided by the installment note.  No other bonds were issued or retired during 2012.  Also during 2012, Harnish leased a new warehouse under a capital lease and a new steamer under an operating lease.  The minimum lease payments for the capital lease totaled $125. The operating lease payments totaled $45 for 2012.  Operating lease expense is included in selling costs on the income statement. Face Value Carrying Value 2012 2011 6% Installment Note $0 $425 3% Bond due in 2020 $300 $300 5% Bond due in 2018 $500 $501 $503 Total Debt $801 $928 Capital Lease Liability $545 $450 Total Debt and Lease Liability $1,346 $1,378 Current Portion ($46) ($177) Total Long-term Debt and Lease Liability $1,300 $1,201 PENSIONS Harnish provides a defined-benefit pension plan for its employees.  During 2012, Harnish increased cash contributions to reduce underfunding. Pension 2012 2011 Benefit Obligation Beginning Balance  $  1,230  $1,125
Service Cost  $  142  $140
Interest Cost  $66  $  65
Benefits Paid  $
(120)  $  (100) Ending Balance  $  1,318  $1,230 Plan Assets Beginning Balance  $  430  $330
Actual Return  $  (15)  $  60
Contributions  $  203  $140
Benefits Paid  $
(120)  $  (100) Ending Balance  $  498  $430 Net Pension Asset  $
(820)  $  (800) Net Accumulated Other Comprehensive Income
Prior Service Costs  $ –
 $

Net Pension Gains & (losses)  $  (58)  $

2012 2011 Pension Expense Service Cost  $  142  $140 Interest Cost  $66  $  65 Expected Return  $  (43) $(33) Pension Expense  $  165  $172 SHAREHOLDERS EQUITY During 2012, Harnish preferred shareholders converted all shares of preferred stock to common stock.  During 2012, Harnish awarded its founder stock options with a value of $18.  The stock options vest over three years. Harnish Designs Income Statement 2012 Sales Revenue   973 Wage Expense (320) Selling General and Administrative Expenses (120) Depreciation Expense   (85) Income from Operations   448 Interest Expense   (60) Loss on early repayment of installment note   (18) Loss on investment in trading securities   (20) Pretax Income   350 Income Tax Expense (100) Net Income   250 Harnish Statement of Shareholders’ Equity for 2012 PS CS APIC TS RE AOCI Total December 31, 2011 Balance  $ 200 $ 45  $ 320  $ (12)  $349  $ (8)  $694 Net Income  $250  $250 Pension gains and (losses)  $ (58)  $ (58) Unrealized loss on available-for-sale securities  $ (8)  $(8) Conversion of preferred stock  $ 100 $ 5  $ 95  $100 Employee compensation  $6  $ 6 Purchase of Treasury Stock  $ (11)  $ (11) Cash Dividend  $ (64)  $ (64) December 31, 2012 Balance  $ 300 $ 50  $ 421  $ (23)  $535  $ (74)  $909 Harnish Design Balance Sheet 2012 2011  Change Cash $77 $114 -37 Investments – Trading Securities $16 $36 -20 Investments – Available-for-Sale $800 $695 105 Total Current Assets $893 $845 48 Property, Plant and Equipment, net $1,730 $1,775 -45 Capital Lease Assets $550 $465 85 Deferred Tax Asset $133 $81 52 Total Assets $3,306 $3,166 140 Accounts Payable $76 $56 20 Deferred Revenue $18 $14 4 Dividends Payable $1 $3 -2 Deferred Tax Liability $36 $21 15 Current portion of Long-term Debt $1 $127 -126 Current portion of Capital Lease Liability $45 $50 -5 Total Current Liabilities $177 $271 -94 Long-term Debt $800 $801 -1 Capital Lease Liability $500 $400 100 Net Pension Liability $820 $800 20 Total Liabilities $2,297 $2,272 25 Preferred Stock $100 $200 -100 Common Stock $50 $45 5 Additional Paid in Capital $421 $320 101 Treasury Stock -$23 -$12 -11 Retained Earnings $535 $349 186 Accumulated Other Comprehensive Income (Loss) -$74 -$8 -66 Total Shareholders’ Equity $1,009 $894 115 Total Liabilities and Shareholders’ Equity $3,306 $3,166 140 Section II Bond Amortization Tables (select the appropriate table) A. FV $3,000,000.00 Payment $150,000.00 Int. Rate for period 6% Number of Periods  5 Present Value $2,873,629.09 End of period Cash Payment Interest Expense Principal Carrying Value  2,873,629.09 12/31/2011  150,000.00  172,417.75  (22,417.75)  2,896,046.83 12/31/2012  150,000.00  173,762.81  (23,762.81)  2,919,809.64 12/31/2013  150,000.00  175,188.58  (25,188.58)  2,944,998.22 12/31/2014  150,000.00  176,699.89  (26,699.89)  2,971,698.11 B. FV $3,000,000.00 Payment $75,000.00 Int. Rate for period 3% Number of Periods   10 Present Value $2,872,046.96 End of period Cash Payment Interest Expense Principal Carrying Value  2,872,046.96 6/30/2011  75,000.00  86,161.41  (11,161.41)  2,883,208.37 12/31/2011  75,000.00  86,496.25  (11,496.25)  2,894,704.62 6/30/2012  75,000.00  86,841.14  (11,841.14)  2,906,545.76 12/31/2012  75,000.00  87,196.37  (12,196.37)  2,918,742.13 C. FV $3,000,000.00 Payment $90,000.00 Int. Rate for period 2.5%   Number of Periods   10 Present Value $3,131,280.96 End of period Cash Payment Interest Expense Principal Carrying Value  3,131,280.96 6/30/2011  90,000.00  78,282.02  11,717.98  3,119,562.98 12/31/2011  90,000.00  77,989.07  12,010.93  3,107,552.06 6/30/2012  90,000.00  77,688.80  12,311.20  3,095,240.86 12/31/2012  90,000.00  77,381.02  12,618.98  3,082,621.88 D. FV $3,000,000.00 Payment $150,000.00 Int. Rate for period 6% Number of Periods   10 Present Value $2,779,197.39 End of period Cash Payment Interest Expense Principal Carrying Value  2,779,197.39 6/30/2011  150,000.00  166,751.84  (16,751.84)  2,795,949.23 12/31/2011  150,000.00  167,756.95  (17,756.95)  2,813,706.19 6/30/2012  150,000.00  168,822.37  (18,822.37)  2,832,528.56 12/31/2012  150,000.00  169,951.71  (19,951.71)  2,852,480.27 Section 2: Equity ProblemsQuestion 1: Mentzer Health Care, Incorporated is a hospital management firm.  Mentzer reports the following on December 31, 2011.  Common Stock: $1 par, 3 million shares authorized, 500 thousand shares issued and outstanding $500,000 Additional Paid in Capital     4,000,000 Retained Earnings     1,246,000 Accumulated Other Comprehensive Income      2,100 Total Stockholders’ Equity     5,748,100 REQUIRED: Prepare the journal entries needed in 2012 to account for the following transactions On February 1, 2012, Mentzer repurchased 10,000 shares of common stock for $18.00 per share.  The shares were originally issued for $9.  Mentzer accounts for the shares as retired common stock.1. On May 1, 2012 Mentzer issued 200,000 of $1 par common stock to the public throughan initial public offering.  Shares sold for $25 each. The underwriting firm withheld $135,000 to cover issue costs.  2. Also on May 1, 2012, Mentzer issued 10,000 shares of $1 par common stock to Nursing Associates, in exchange for title to office space in their facility.  The space was appraised for $275,000.3. On June 30, 2012 Mentzer’s bond holders converted 3,000 bonds to common stock.  The 5% bonds were issued on January 1, 2011 and pay interest semi-annually on June 30th and December 31st.  The bonds mature on December 31, 2015.  The market rate at the time the bonds were issued was 6%.  Each bond converts to 50 shares of common stock.  The market price of common stock on June 30, 2012 is $28 per share. (See the bond tables in the cover section)4. On September 1, 2012, Mentzer reissued the 10,000 shares repurchased in February for $30 per share.  5. On December 1, 2012, Mentzer declares a $1.00 per share common stock dividend, payable on January 5, 2013 to shareholders of record on December 13, 2012.6. On December 31, 2012 Mentzer determine that the value of a put option tied to the NYSE health-care index has declined in value from $2.10 per contract on December 31, 2011 to $1.85 per contract.  Mentzer purchased 1,000 contracts in 2011 and designated them as a cash-flow hedge against changes in reimbursements in 2013.  The options expire in 2013.  Question 2:  Slade Manufacturing Reports the following information for 2012.  REQUIRED: Compute Basic and Diluted Earnings per share.Slade had the following transactions related to common stock during 2012On January 1, 2012 Slade had 1,000,000 share of common stock issued and 165,000 shares in treasury.On March 1, 2012 Slade issued 250,000 shares of common stock for $68 per shareOn April 1, 2012 Slade declared a 150% stock dividend.On May 1, 2012, Slade repurchased 750,000 shares of common stock for $28 per shareOn December 1, 2012 Slade declared a $0.50 cash dividend payable on December 29, 2012.For 2012, Slade had Net Income of $3,500,000 and paid cash dividends on the convertible preferred stock of $1,100,000 and cash dividends on common stock of $981,250.  Interest Expense on debt totaled  $790,000.Slade also had the following potentially dilutive securities. Assume the tax rate is 35%. 500,000 shares of preferred stock outstanding that are each convertible to 3 shares of common stock at the option of the shareholders. The firm has 8,000,000 stock options issued.  At the end of the year, the average stock price was $30. 5,000,000 options allow the holder to purchase a share of common stock for $32.  3,000,000 options allow the holder to purchase a share of common stock for $12.  Section 3: Review Problems GRADE         Part 1: PROBLEM 1                        Part 2: PROBLEM 2Part 1, Problem 1 Michelle’s Bridal Emporium misses both 2012 interest payments on the company’s $1,000,000 outstanding 10% bonds, due to a cash crunch.  The semi-annual interest payments were scheduled for June 30th and December 31st. On December 31, 2012, bond holders agree to modify the terms of the bond as follows:  1) Interest for 2012 is forgiven.  2) Beginning on December 31, 2013 will make four equal, annual payments of $240,000 in settlement of the debt.  Required:1. Assuming the bond was originally sold at par, give any journal entries necessary for Michelle’s Bridal to account for the debt restructuring on December 31, 2012. (4 points)2. Indicate the interest rate the lender will use to calculate and record interest expense in 2013 following the debt restructuring. (4 points)Part 1, Problem  2: On December 31, 2011 Food Truck Corp leases a food truck to Rosa’s Mexican Food.  Food Truck agrees lease the vehicle for four years, with the payment schedule below.  Present values are also shown.  Assume Food Truck Corp. purchased the leased vehicle for $7,811.48.  December 31 fiscal-year-end: Date Payment Present Value (Rate=6%) 12/31/2011 $      – $0.00 12/31/2012 $
1,000.00 $943.40 12/31/2013 $
3,000.00 $2,669.99 12/31/2014 $
5,000.00 $4,198.10 Total $ (9,000.00) $7,811.48 1. Assuming the lease is properly classified as an operating lease determine the following for the lessee, Food Tuck Corp. (2 points each):a. Net effect on 2012 cash flow from operations (direction and amount) b. Net effect on 2012 pretax income (direction and amount). 2. Assuming the lease is properly classified as a capital lease, determine the following (2 points each):a. Net effect on 2012 cash flow from operations (direction and amount)b. Net effect on 2012 pretax income (direction and amount).Part 2: GRADE    Part 2: PROBLEM 1            Part 2: PROBLEM 2Part 2, Problem 1 Required: Using the financial statements and footnotes for the cash flow problem in section 1:1. Compute cash paid for income taxes.Part 2, Problem 2Required: Decker Corporation is defending against a lawsuit and believes the likelihood of losing is only slightly more than 50%.  If they lose, the expected range of loss is between $2 million and $10 million.  Determine the total liability Decker would record under the following assumptions:1. Decker follows U.S. GAAP.2. Decker follows IFRS.Part 3Part 2: PROBLEM 1               Part 2: PROBLEM 2
Part 3, Problem 1 Russell Interiors recorded a contingent liability of $80 in 2011.  For tax purposes the firm cannot deduct the expense until it is paid in cash.  In 2011 Russell recorded a deferred tax asset of $28.  In 2013, legislators and the president agree on a tax bill and lower the statutory corporate tax rate to 25%.
Required: Assuming the lawsuit remains unsettled, determine the effect of the rate change on the following:1. Net Income for 20132. Cash flow from operations for 2013Part 3, Problem 2 Russell Interiors claimed a tax credit for research in 2010.  Because there was uncertainty about whether paint samples were considered research, Russell Interiors recorded an unrecognized tax benefit of $64, which increased tax expense.  Following an audit in 2013, Russell paid $48 in income tax to settle the IRS claim.  Required:  Determine the effect on the following:1. Net Income for 20132. Cash flow from operations for 2013