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)

Answer 1

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