P19-1 p19-5 p20-1 p20-7 p20-8 p20-12

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.


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;



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


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.



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.



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.



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.



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.


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