Fa3-Assigment 1

LESSON 1

Assignment

Question 1 (24 marks)

The following transactions for Watcan Micros Co. have not been recorded in the general ledger. Refer to Exhibit A3-1, which is the statement of financial position as of December 31, 20X5. Before you record these transactions, you must first analyze the statement of financial position, and particularly the statement of retained earnings to determine what changes may be necessary and determine the number of shares outstanding.

a. On May 1, 20X5, Watcan declared a 10% stock dividend, distributed on June 1, 20X5. Immediately after the issuance of the dividend shares, the market price of the ordinary shares was €20. Market value should be used to record this dividend. The dividend is recorded when distributed on June 1, 20X5. For ordinary shares there were 100,000 shares authorized and 15,000 outstanding at the beginning of the year.

b. On July 1, 20X5, Watcan’s plant in Salzburg (land and building) was expropriated by the government. The total amount of compensation received by Watcan was €1.75 million in cash. Assume that there are no tax consequences of this compensation.

c. On October 1, 20X5, Watcan declared a cash dividend of €0.15 per ordinary share. The dividend was paid on November 1, 20X5.

d. On November 1, 20X5, Watcan reacquired and retired 1,000 ordinary shares for €19.50 per share.

e. During 20X4, the company inadvertently understated depreciation expense for the plant in Vienna by €15,000. This error has not been corrected in the general ledger as of December 31, 20X5, and thus accumulated depreciation is too low. Ignore the tax effect of this error.

Some of these journal entries entail a debit or credit to retained earnings in 20X5 (for example, dividends, error corrections, and share retirement “loss”). Instead of debiting or crediting retained earnings directly, create a temporary account in the equity account range (that is, statement of financial position accounts) to record the...