The following information relates to a contract through its second year. The con

Question

The following information relates to a contract through its second year. The contract price is $100,000. 558 Year 1 Year 2 Cost incurred through end of $40,000 $80,000 Estimated cost remaining at end of 45,000 34,000 Under the completed contract method, by what amount will pretax income for the second year be affected? A. Reduced $14,000 B. Reduced $34,000 C. Reduced $15,000 D. No effect Cans Corp. had outstanding 3,000 shares of 10% preferred stock, $100 par. On August 8, 1992, Can redeemed and retired 40% of these shares for $125,000. On that date, Can's additional paid-in capital from preferred stock totaled $50,000. To record this transaction, Can should debit (credit) its capital accounts as follows: Preferred Stock Additional Paid-in Capital Retained Earnings A. $120,000 $5,000 – B. $120,000 – (50,000) C. $120,000 $20,000 (15,000) D. $300,000 20000 (15,000) The following information relates to a contract through its second year. The contract price is $100,000. 558 Year 1 Year 2 Cost incurred through end of $40,000 $80,000 Estimated cost remaining at end of 45,000 34,000 Under the completed contract method, by what amount will pretax income for the second year be affected? A. Reduced $14,000 B. Reduced $34,000 C. Reduced $15,000 D. No effect Cans Corp. had outstanding 3,000 shares of 10% preferred stock, $100 par. On August 8, 1992, Can redeemed and retired 40% of these shares for $125,000. On that date, Can's additional paid-in capital from preferred stock totaled $50,000. To record this transaction, Can should debit (credit) its capital accounts as follows: Preferred Stock Additional Paid-in Capital Retained Earnings A. $120,000 $5,000 – B. $120,000 – (50,000) C. $120,000 $20,000 (15,000) D. $300,000 20000 (15,000)

Explanation / Answer

question 1:

A.reduced $14,000

at the end of second year the cost incurred + estimated remaining cost = $80,000 + 34,000

=>$114,000.

this $114,000 is $14,000 more than the contract price of $100,000.

So we need to recognised this loss of $14,000 immediately, so we will pretax income of second year will reduce by $14,000.

question 2:

C. preferred stock $120,000 additional paid in capital $20,000 retained earnings (15,000).

the following will be the journal entry

preferred stock a/c (3,000 * $100 * 40%) 120,000 additional paid in capital (50,000*40%) 20,000 ...................To Cash 125,000 ...................TO retained earnings a/c (120,000+20,000-125,000) . 15,000

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