Exercises For Lesson 1

Exercises for Lesson 1
------------------------Section 1. Multiple Choice Questions 1. The information provided by financial reporting pertains to a. individual business enterprises, rather than to industries or an economy as a whole or to members of society as consumers. b. business industries, rather than to individual enterprises or an economy as a whole or to members of society as consumers. c. individual business enterprises, industries, and an economy as a whole, rather than to members of society as consumers. d. an economy as a whole and to members of society as consumers, rather than to individual enterprises or industries. 2. An effective capital allocation process a. promotes productivity. b. encourages innovation. c. provides an efficient market for buying and selling securities. d. all of these. 3. Companies that are listed on a stock exchange are required to submit their financial statements to the a. AICPA. b. APB. c. FASB. d. SEC. 4. Compared to the accrual basis of accounting, the cash basis of accounting overstates income by the net increase during the accounting period of the Accounts Accrued Receivable Expenses Payable a. No No b. No Yes c. Yes No d. Yes Yes 5. The following information is available concerning the accounts of Franz Company: Accounts payable, January 1, 2004 Cash payments on account during 2004 Purchase discounts taken during 2004 on 2004 purchases Accounts payable, December 31, 2004 $18,000 75,000 1,200 10,000
Assuming the company records purchases at the gross amounts, the
total purchases for 2004 would be a. $82,200. b. $65,800. c. $68,200. d. $67,000. ------------------------Sectin 2. Excercises 6The Financial Accounting Standards Board was established because many groups interested in financial reporting believed that the Accounting Principles Board was not effective. Discuss the apparent advantages that the FASB should have over its earlier counterpart, the APB. 7. State the accounting assumption, principle, information characteristic, or constraint that is most applicable in the following cases. (1). All payments less than $25 are expensed as incurred. (Do not use conservatism.) ________________________________ (2). The company employs the same inventory valuation method from period to period. ________________________________ (3). A patent is capitalized and amortized over the periods benefited. ________________________________ (4). Assuming that dollars today will buy as much as ten years ago. ________________________________ (5). Rent paid in advance is recorded as prepaid rent. ________________________________ (6). Financial statements are prepared each year. ________________________________ (7). All significant post-balance sheet events are reported. ________________________________ (8). Personal transactions of the proprietor are distinguished from business transactions. ________________________________ Section 3. Problems 8. Yates Company's records provide the following information concerning certain account balances and changes in these account balances during the current year. Transaction information is missing from each
item below. INSTRUCTIONS Prepare the ENTRY to record the missing information for each account. (Consider each independently.) 1. Accounts Receivable: Jan. 1, balance $41,000, Dec. 31, balance $50,000, uncollectible accounts written off during the year, $6,000; accounts receivable collected during the year, $134,000. Prepare the entry to record sales. 2. Allowance for Doubtful Accounts: Jan. 1, balance $4,000, Dec. 31, balance $7,500, uncollectible accounts written off during the year, $30,000. Prepare the entry to record bad debt expense. 3. Accounts Payable: Jan. 1, balance $25,000, Dec. 31, balance $34,000, purchases on account for the year, $110,000. Prepare the entry to record payments on account. 4. Interest Receivable: Jan. 1 accrued, $3,000, Dec. 31 accrued, $2,100, earned for the year, $20,000. Prepare the entry to record cash interest received.
ANSWER KEY SECTION 1. 1.A 2.D 3.D 4.B 5.C SECTI0N 2. 6. (1). Smaller membership. The FASB is composed of seven members, replacing the relatively large 18-member APB. (2). Full-time, remunerated membership. FASB members are well-paid, full-time members, appointed for renewable five-year terms. The APB members were unpaid and part-time. (3). Greater autonomy. The APB was a senior committee of the AICPA, whereas the FASB is not an organ of any single professional organization. It is appointed by and answerable only to the Financial Accounting Foundation. (4). Increased independence. APB members retained their private positions with firms, companies, or institutions. FASB members must sever all such ties. (5). Broader representation. All APB members were required to be CPAs and members of the AICPA. Currently, it is not necessary to be a CPA to be a member of the FASB. 7. (1). Materiality constraint. (2). Consistency characteristic. (3). Matching principle or going concern assumption. (4). Monetary unit assumption. (5). Matching principle or going concern assumption. (6). Periodicity assumption. (7). Full disclosure principle. (8). Economic entity assumption. 8. 1. Ending balance $ 50,000 Ending balance $ 50,000 Beginning balance 41,000 Plus:Rec. collected 134,000 Write-offs 6,000 Difference 9,000 Uncollectible accts. 6,000 OR 190,000 Receivables coll. 134,000 Less: Beg. balance 41,000 Sales for period $149,000 Sales for period $149,000 Accounts Receivable .................... 149,000 Sales .............................. 149,000 2. Ending balance $ 7,500 Beginning balance 4,000 Ending balance $ 7,500 Write-off 30,000
Difference 3,500 OR 37,500 Write-off 30,000 Beginning balance 4,000 Adjusting entry $33,500 Adjusting entry $33,500 Bad Debt Expense ...................... 33,500 Allowance for Doubtful Accounts ... 33,500
3. Ending balance $ 34,000 Beginning balance $ 25,000 Beginning balance 25,000 Plus purchases 110,000 Difference 9,000 OR 135,000 Purchases 110,000 Less ending balance 34,000 Payments $101,000 Payments $101,000 Accounts Payable ................... 101,000 Cash ........................... 101,000 4. Revenue Earned $20,000 Beginning balance $ 3,000 Less: Dec. 31 acc. (2,100) Plus rev. earned 20,000 Plus: Jan. 1 accrual 3,000 OR 23,000 Cash received $20,900 Less ending balance 2,100 Cash received $20,900 Cash .............................. 20,900 Interest Receivable ........... (This entry assumes that the $20,000 interest earned was first recorded as a receivable.) 20,900

------------------------Section 1. Multiple Choice Questions 1. The debit and credit analysis of a transaction normally takes place a. before an entry is recorded in a journal. b. when the entry is posted to the ledger. c. when the trial balance is prepared. d. at some other point in the accounting cycle. 2. When converting from cash basis to accrual basis accounting, which of the following adjustments should be made to cash paid for operating expenses to determine accrual basis operating expenses? a. Add beginning accrued liabilities. b. Add beginning prepaid expense. c. Subtract ending prepaid expense. d. Subtract interest expense. 3. Which of the following is an acceptable method of presenting the income statement? a. A single-step income statement b. A multiple-step income statement c. A consolidated statement of income d. All of these 4. Which of the following is true about intraperiod tax allocation? a. It arises because certain revenue and expense items appear in the income statement either before or after they are included in the tax return. b. It is required for extraordinary items and cumulative effect of accounting changes but not for prior period adjustments. c. Its purpose is to allocate income tax expense evenly over a number of accounting periods. d. Its purpose is to relate the income tax expense to the items which affect the amount of tax. 5.The single-step income statement emphasizes a. the gross profit figure. b. total revenues and total expenses. c. extraordinary items and accounting changes more than these are emphasized in the multiple-step income statement. d. the various components of income from continuing operations. ------------------------Section 2. Exercises
6. What is disclosed in an income statement? Be specific. 7. Fill in the appropriate blanks for each of the independent situations below. Company A Company B Company C Sales (a) $_______ $343,400 $540,000 Beginning inventory 52,600 (d) _______ 110,000 Net purchases 190,300 255,600 (g) _______ Ending inventory 52,200 105,000 63,000 Cost of goods sold (b) _______ (e) _______ 407,000 Gross profit 85,300 98,000 (h) _______ Operating expenses (c) _______ 50,000 48,000 Income before taxes 10,000 (f) _______ (i) _______ ------------------------Section 3.Problems 8. The following information is available for Renn Corporation's first year of operations: Payment for merchandise purchases $350,000 Ending merchandise inventory 110,000 Accounts payable (balance at end of year) 60,000 Collections from customers 270,000 The balance in accounts payable relates only to merchandise purchases. All merchandise items were marked to sell at 40% above cost. What should be the ending balance in accounts receivable, assuming all accounts are deemed collectible? 9. Presented below is information related to Gregg Company. Retained earnings, December 31, 2003 $ 650,000 Sales 1,600,000 Selling and administrative expenses 240,000 Hurricane loss (pre-tax) on plant (extraordinary item) 250,000 Cash dividends declared on common stock 33,600 Cost of goods sold 960,000 Gain resulting from computation error on depreciation charge in 2002 (pre-tax) 520,000 Other revenue 60,000 Other expenses 50,000 INSTRUCTIONS Prepare in good form a multiple-step income statement for the year 2004. Assume a 30% tax rate and that 100,000 shares of common stock were outstanding during the year.
ANSWER KEY Section 1 Multiple Choice Questions 1.A 2.C 3.D 4.D 5.B 4. $246,000 - $60,000 - $34,000 - $12,000 = $140,000. Section 2 Exercises 6. An income statement discloses revenues, expenses, gains, and losses. It discloses the net income (loss) for a period and earnings per share data. The income statement may also include discontinued operations (net of tax), extraordinary items (net of tax), and cumulative effect of a change in accounting principle (net of tax). 7. (a) $276,000 (b) $190,700 (c) $75,300 (d) $94,800 (g) $360,000 (e) $245,400 (h) $133,000 (f) $48,000 (i) $85,000
8. Since this is the first year of operations and there were $270,000 of accounts receivable collected, one must compute total sales to determine the ending balance in accounts receivable. Cost of goods sold is $300,000 assuming the accounts payable are for inventory (the $350,000 constitutes only payments made for purchases). Since the markup is 40% on cost, the sales are $420,000 ($300,000 x 140%). Sales of $420,000 less collections of $270,000 results in an ending accounts receivable balance of $150,000 as calculated below. Cash purchases A/P balance $350,000 60,000 Total purchases 410,000 Ending inventory 110,000 Cost of goods sold 300,000 x 140% Sales 420,000 Less collections 270,000 Ending A/R $150,000 9. Gregg Company INCOME STATEMENT
For the Year Ended December 31, 2004 Sales Cost of goods sold $1,600,000 960,000 Gross profit 640,000 Selling and administrative expenses 240,000 Income from operations 400,000 Other revenue 60,000 Other expenses (50,000) Income before taxes 410,000 Income taxes (123,000) Income before extraordinary item 287,000 Extraordinary loss, net of applicable income taxes of $75,000 (175,000) Net income $ 112,000 Per share of common stock Income before extraordinary item $2.87 Extraordinary item, net of tax (1.75) Net income $1.12
Exercises for Lesson3

Section 1. Multiple Choice Questions 1. In a statement of cash flows, payments to acquire debt instruments of other entities (other than cash equivalents) should be classified as cash outflows for a. operating activities. b. investing activities. c. financing activities. d. lending activities. 2. Free cash flow is calculated as net cash provided by operating activities less a. capital expenditures. b. dividends. c. capital expenditures and dividends. d. capital expenditures and depreciation. 3. Which of the following should not be considered as a current asset in the balance sheet? a. Installment notes receivable due over 18 months in accordance with normal trade practice. b. Prepaid taxes which cover assessments of the following operating cycle of the business. c. Equity or debt securities purchased with cash available for current operations. d. The cash surrender value of a life insurance policy carried by a corporation, the beneficiary, on its president. -----------------------------A flood damaged a building and contents. Floods are unusual and infrequent in this area. The receipts from insurance companies totaled $500,000, which was $150,000 less than the book values. The tax rate is 30%. 4. Stark Company sold some of its plant assets during 2004. The original cost of the fixed assets was $450,000 and the accumulated depreciation at date of sale was $420,000. The proceeds from the sale of the plant assets were $63,000. The information concerning the sale of the plant assets should be shown on Stark's statement of cash flows (indirect method) for the year ended December 31, 2004, as a(n) a. subtraction from net income of $33,000 and a $30,000 increase in cash flows from financing activities. b. addition to net income of $33,000 and a $63,000 increase in cash flows from investing activities. c. subtraction from net income of $33,000 and a $63,000 increase in
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cash flows from investing activities. d. addition of $63,000 to net income. 5. In a statement of cash flows, the cash flows from investing activities section should report a. the issuance of common stock in exchange for a factory building. b. stock dividends received. c. a major repair to machinery charged to accumulated depreciation. d. the assignment of accounts receivable. ------------------------Section 2. Exercises 6. Define current assets without using the word "asset." Section 3. Problems 7. Edwards, Inc. has prepared the following comparative balance sheets for 2003 and 2004: 2004 2003 Cash $ 198,000 $102,000 Receivables 106,000 78,000 Inventory 100,000 120,000 Prepaid expenses 12,000 18,000 Plant assets 840,000 700,000 Accumulated depreciation (300,000) (250,000) Patent 102,000 116,000 $1,058,000 $884,000 Accounts payable $ 102,000 $112,000 Accrued liabilities 40,000 28,000 Mortgage payable 300,000 Preferred stock 350,000 Additional paid-in capitalpreferred 80,000 Common stock 400,000 400,000 Retained earnings 86,000 44,000 $1,058,000 $884,000 1. The Accumulated Depreciation account has been credited only for the depreciation expense for the period. 2. The Retained Earnings account has been charged for dividends of $92,000 and credited for the net income for the year. The income statement for 2004 is as follows:
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Sales Cost of sales
$1,320,000 726,000 Gross profit 594,000 Operating expenses 460,000 Net income $ 134,000 INSTRUCTIONS (a) From the information above, prepare a statement of cash flows (indirect method) for Edwards, Inc. for the year ended December 31, 2004. (b) From the information above, prepare a schedule of cash provided by operating activities using the direct method.
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ANSWER KEY Section 1 Multiple Choice Questions 1.b 2.c 3.d 4..c 5c 4. $63,000 - ($450,000 - $420,000) = $33,000, $63,000 (proceeds). Section 2 Exercises 6. Current assets are resources (future economic benefits) expected to be converted to cash, sold, or consumed in one year or the operating cycle, whichever is longer. 7. (a) Edwards, Inc. Statement of Cash Flows For the Year Ended December 31, 2004 Increase (Decrease) in Cash
Cash flows from operating activities Net income $134,000 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense $ 50,000 Patent amortization 14,000 Increase in receivables (28,000) Decrease in inventory 20,000 Decrease in prepaid expenses 6,000 Decrease in accounts payable (10,000) Increase in accrued liabilities 12,000 64,000 Net cash provided by operating activities 198,000 Cash used in investing activities Purchase of plant assets (140,000)
Cash flows from financing activities Payment of cash dividend (92,000) Retirement of mortgage payable (300,000) Sale of preferred stock 430,000 Net cash provided by financing activities Net increase in cash 96,000 Cash, January 1, 2004 102,000
38,000
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Cash, December 31, 2004 (b)
$198,000
Edwards, Inc. Schedule of Cash Provided by Operating Activities For Year Ended December 31, 2004
Cash flows from operating activities Cash received from customers (1) $1,292,000 Cash paid to suppliers (2) $716,000 Operating expenses paid (3) 378,000 1,094,000 Net cash provided by operating activities $ 198,000 (1) $1,320,000 - $28,000 (2) $726,000 - $20,000 + $10,000 (3) $460,000 - $50,000 - $14,000 - $6,000 - $12,000
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Section 1. Multiple Choice Questions 1. Under the completed-contract method a. revenue, cost, and gross profit are recognized during the production cycle. b. revenue and cost are recognized during the production cycle, but gross profit recognition is deferred until the contract is completed. c. revenue, cost, and gross profit are recognized at the time the contract is completed. d. none of these. 2. Venice Construction Company uses the percentage-of-completion method of accounting. In 2004, Venice began work on a contract it had received which provided for a contract price of $10,000,000. Other details follow: 2004 Costs incurred during the year $4,800,000 Estimated costs to complete as of December 31 3,200,000 Billings during the year 4,400,000 Collections during the year 2,600,000 What should be the gross profit recognized in 2004? a. $400,000. b. $5,200,000. c. $1,200,000. d. $2,000,000. -----------------------------In 2004, Drake Corporation began construction work under a threeyear contract. The contract price is $4,200,000. Drake uses the percentage-of-completion method for financial accounting purposes. The income to be recognized each year is based on the proportion of costs incurred to total estimated costs for completing the contract. The financial statement presentations relating to this contract at December 31, 2004, follow: Balance Sheet Accounts receivableconstruction contract billings $175,000 Construction in progress $525,000 Less contract billings 420,000 Costs and recognized profit in excess
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of billings
105,000
Income Statement Income (before tax) on the contract recognized in 2004
$105,000
3. What was the initial estimated total income before tax on this contract? a. $525,000. b. $560,000. c. $700,000. d. $840,000. 4. Under the cost-recovery method of revenue recognition, a. income is recognized on a proportionate basis as the cash is received on the sale of the product. b. income is recognized when the cash received from the sale of the product is greater than the cost of the product. c. income is recognized immediately. d. none of these. ------------------------Section 2. Exercises 5. Tanner Furniture Company concluded its FIRST year of operations in which it made sales of $1,500,000, ALL on installment. Collections during the year from down payments and installments totaled $600,000. Purchases for the year totaled $900,000; the cost of merchandise on hand at the end of the year was $180,000. INSTRUCTIONS Using the installment-sales method, make summary entries to record: (a) the installment sales and cash collections; (b) the cost of installment sales; (c) the unrealized gross profit; (d) the realized gross profit. 6. On February 1, 2003, Miley Contractors agreed to construct a building at a contract price of $5,600,000. Miley estimated total construction costs would be $4,000,000 and the project would be finished in 2005. Information relating to the costs and billings for this contract is as follows: 2003 2004 2005 Total costs incurred to date $1,500,000 $2,640,000 $4,600,000 Estimated costs to complete 2,500,000 1,760,000 -0Customer billings to date 2,200,000 4,000,000 5,600,000
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Collections to date
2,000,000
3,500,000
5,500,000
INSTRUCTIONS Fill in the correct amounts on the following schedule. For percentage-of-completion accounting and for completed-contract accounting, show the gross profit that should be recorded for 2003, 2004, and 2005. Percentage-of-Completion Completed-Contract Gross Profit Gross Profit 2003 ____________ 2003 ____________ 2004 2005 ____________ ____________ 2004 2005 ____________ ____________
------------------------Section 3.Problems 7. Cherry Construction specializes in the construction of commercial and industrial buildings. The contractor is experienced in bidding long-term construction projects of this type, with the typical project lasting fifteen to twenty-four months. The contractor uses the percentage-of-completion method of revenue recognition since, given the characteristics of the contractor's business and contracts, it is the most appropriate method. Progress toward completion is measured on a cost to cost basis. Cherry began work on a lump-sum contract at the beginning of 2004. As bid, the statistics were as follows: Lump-sum price (contract price) $4,000,000 Estimated costs Labor $ 850,000 Materials and subcontractor 1,750,000 Indirect costs 400,000 3,000,000 $1,000,000 At the end of the first year, the following was the status of the contract: Billings to date $2,230,000 Costs incurred to date Labor $ 414,000 Materials and subcontractor 1,098,000 Indirect costs 150,000 1,662,000
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Latest forecast total cost
3,000,000
It should be noted that included in the above costs incurred to date were standard electrical and mechanical materials stored on the job site, but not yet installed, costing $102,000. These costs should not be considered in the costs incurred to date. INSTRUCTIONS (a) Compute the percentage of completion on the contract at the end of 2004. (b) Indicate the amount of gross profit that would be reported on this contract at the end of 2004. (c) Make the journal entry to record the income (loss) for 2004 on Cherry's books. (d) Indicate the account(s) and the amount(s) that would be shown on the balance sheet of Cherry Construction at the end of 2004 related to its construction accounts. Also indicate where these items would be classified on the balance sheet. Billings collected during the year amounted to $1,960,000. (e) Assume the latest forecast on total costs at the end of 2004 was $4,100,000. How much income (loss) would Cherry report for the year 2004?
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ANSWER KEY Section 1 Mutiple Chice Questins 1.C 2.C 3.D 4.B 5. (a) Installment Accounts Receivable ........... 1,500,000 Installment Sales ....................... 1,500,000 Cash ...................................... 600,000 Installment Accounts Receivable ......... (b) Cost of Installment Sales ($900,000 $180,000) ................................ 720,000 Inventory ............................... 720,000 (c) Installment Sales ......................... 1,500,000 Cost of Installment Sales ............... 720,000 Deferred Gross Profit (52%) ............. 780,000 (d) Deferred Gross Profit (52% x $600,000) .... 312,000 Realized Gross Profit on Installment Sales .................................. 312,000 6. Percentage-of-Completion Completed-Contract Gross Profit Gross Profit 2003 $600,000a 2003 2004 $120,000b 2004 2005 $280,000c 2005 $1,000,000d a $1,500,000 x $1,600,000 = $600,000 $4,000,000
b
600,000
$2,640,000 x $1,200,000 = $720,000 $4,400,000 Less 2003 gross profit (600,000) 2004 gross profit $120,000
Total revenue $5,600,000 Total costs 4,600,000
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Total gross profit 1,000,000 Recognized to date (720,000) M 2005 gross profit $ 280,000
d
Total revenue $5,600,000 Total costs 4,600,000 Total gross profit $1,000,000
7. (a) Costs to date $1,662,000 Less materials on job site (102,000) $1,560,000 Costs Incurred to Date = Percentage of Completion Total Estimated Costs $1,560,000 = 52% $3,000,000 (b) 52% x $4,000,000 = $2,080,000 Costs incurred 1,560,000 Gross profit $ 520,000 (c) Construction Expense .................. 1,560,000 Construction in Process ............... 520,000 Revenue from Long-Term Project ...... 2,080,000 (d) Current Assets Accounts receivable $270,000 ($2,230,000 - $1,960,000) Current Liability Billings in excess of contract costs and recognized profit $150,000 ($2,230,000 - $2,080,000) (e) Total loss reported in 2004 Contract price $4,000,000 Estimated cost to complete 4,100,000 Amount of loss to be reported $ (100,000)
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------------------------Section 1.Multiple Choice Questions 1. Which table would show the largest factor for an interest rate of 8% for five periods? a. Future value of an ordinary annuity of 1 b. Present value of an ordinary annuity of 1 c. Future value of an annuity due of 1 d. Present value of an annuity due of 1 2. On May 1, 2004, a company purchased a new machine which it does not have to pay for until May 1, 2006. The total payment on May 1, 2006 will include both principal and interest. Assuming interest at a 10% rate, the cost of the machine would be the total payment multiplied by what time value of money factor? a. Future value of annuity of 1 b. Future value of 1 c. Present value of annuity of 1 d. Present value of 1 3. An amount is deposited for eight years at 8%. If compounding occurs quarterly, then the table value is found at a. 8% for eight periods. b. 2% for eight periods. c. 8% for 32 periods. d. 2% for 32 periods. -----------------------------Consider the following 8% interest factors. Present Value of Future Value of Ordinary Annuity Ordinary Annuity 7 periods 5.2064 8.92280 8 periods 5.7466 10.63663 9 periods 6.2469 12.48756 4. An accountant wishes to find the present value of an annuity of $1 payable at the beginning of each period at 10% for eight periods. The accountant has only one present value table which shows the present value of an annuity of $1 payable at the end of each period. To compute the present value, the accountant would use the present value factor in the 10% column for a. seven periods. b. eight periods and multiply by (1 + .10). c. eight periods. d. nine periods and multiply by (1 - .10).
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------------------------Section 2. Exercises 5. If $10,000 is deposited annually starting on January 1, 2004 and it earns 9%, how much will accumulate by December 31, 2013? 6. Find the present value of an investment in equipment if it is expected to provide annual savings of $12,000 for 10 years and to have a resale value of $30,000 at the end of that period. Assume an interest rate of 9% and that savings are realized at year end. ------------------------Section 3. Problems 7. Dolan Company owns a plot of land on which buried toxic wastes have been discovered. Since it will require several years and a considerable sum of money before the property is fully detoxified and capable of generating revenues, Dolan wishes to sell the land now. It has located two potential buyers: Buyer A, who is willing to pay $385,000 for the land now, and Buyer B, who is willing to make 20 annual payments of $60,000 each, with the first payment to be made 5 years from today. Assuming that the appropriate rate of interest is 9%, to whom should Dolan sell the land? Show calculations.
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ANSWER KEY Section 1Multiple Choice Questions 1.C 2.D 3.D 4..B 4. $30,000 x (7.5233 - 1) = $195,699 or $30,000 x 5.9847 x 1.09. Section2 Exercises 5. Future value of an annuity due of $10,000 for 10 periods at 9% ($10,000 x 15.19293 x 1.09) = $165,603. 6. Present value of $12,000 for 10 periods at 9% (6.41766 x $12,000) = $77,012 Present value of $30,000 discounted for 10 periods at 9% (.42241 x $30,000) = 12,672 Present value of investment in equipment $89,684 7. Buyer A. The present value of the purchase price is $385,000. Buyer B. The present value of the purchase price is: Present value of ordinary annuity of $60,000 for 24 periods at 9% 9.70661 Less present value of ordinary annuity of $60,000 for 4 periods (deferred) at 9% 3.23972 Difference 6.46689 Multiplied by annual payments x $60,000 Present value of payments $388,013 Conclusion: Dolan should sell to Buyer B.
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Section 1.Multiple Choice Questions 1. Linn Co.'s allowance for uncollectible accounts was $184,000 at the end of 2004 and $180,000 at the end of 2003. For the year ended December 31, 2004, Linn reported bad debt expense of $26,000 in its income statement. What amount did Linn debit to the appropriate account in 2004 to write off actual bad debts? a. $4,000 b. $22,000 c. $26,000 d. $30,000 2. On the December 31, 2004 balance sheet of Zebb Co., the current receivables consisted of the following: Trade accounts receivable $ 85,000 Allowance for uncollectible accounts (2,000) Claim against shipper for goods lost in transit (November 2004) 3,000 Selling price of unsold goods sent by Zebb on consignment at 130% of cost (not included in Zebb's ending inventory) 26,000 Security deposit on lease of warehouse used for storing some inventories 30,000 Total $142,000 At December 31, 2004, the correct total of Zebb's current net receivables was a. $86,000. b. $112,000. c. $116,000. d. $142,000. 3. If the month-end bank statement shows a balance of $28,000, outstanding checks are $12,000, a deposit of $4,000 was in transit at month end, and a check for $500 was erroneously charged by the bank against the account, the correct balance in the bank account at month end is a. $19,500. b. $20,500. c. $12,500. d. $35,500. 4. Which of the following is NOT a permissible method of calculating a bonus to an employee?
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a. The bonus is based on income before deductions for the bonus and income taxes. b. The bonus is based on income after deduction of the bonus but before deduction of income taxes. c. The bonus is based on income after deductions for the bonus and income taxes. d. All of these are permissible. Section 2. Exercises 5. When a company has a policy of making sales for which credit is extended, it is reasonable to expect a portion of those sales to be uncollectible. As a result of this, a company must recognize bad debt expense. There are basically two methods of recognizing bad debt expense: (1) direct write-off method, and (2) allowance method. INSTRUCTIONS (a) Describe fully both the direct write-off method and the allowance method of recognizing bad debt expense. (b) Discuss the reasons why one of the above methods is preferable to the other and the reasons why the other method is not usually in accordance with generally accepted accounting principles. 6. A trial balance before adjustment included the following: Debit Credit Accounts receivable $90,000 Allowance for doubtful accounts 730 Sales $360,000 Sales returns and allowances 8,000 Give journal entries assuming that the estimate of uncollectibles is determined by taking (1) 6% of gross accounts receivable and (2) 2% of net sales. Section 3.Problems 7. At the financial statement date of December 31, 2004, the liabilities outstanding of Nyland Corporation included the following: 1. Cash dividends on common stock, $50,000, payable on January 15, 2005. 2. Note payable to Girard State Bank, $470,000, due January 20, 2005. 3. Serial bonds, $1,000,000, of which $200,000 mature during 2005.
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4. Note payable to Third National Bank, $400,000, due January 27, 2005. The following transactions occurred early in 2005: January 15: The cash dividends on common stock were paid. January 20: The note payable to Girard State Bank was paid. January 25: The corporation entered into a financing agreement with Girard State Bank, enabling it to borrow up to $500,000 at any time through the end of 2007. Amounts borrowed under the agreement would bear interest at 1% above the bank's prime rate and would mature 3 years from the date of the loan. The corporation immediately borrowed $400,000 to replace the cash used in paying its January 20 note to the bank. January 26: 40,000 shares of common stock were issued for $400,000. $350,000 of the proceeds was used to liquidate the note payable to Third National Bank. February 1: The financial statements for 2004 were issued. INSTRUCTIONS Prepare a partial balance sheet for Nyland Corporation, showing the manner in which the above liabilities should be presented at December 31, 2004. The liabilities should be properly classified between current and long-term, and appropriate note disclosure should be included.
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ANSWER KEY Section 1 Multiple Choice Questions 1.b 2.a 3.b 4..d 5. (a) There are basically two methods of recognizing bad debt expense: (1) direct write-off and (2) allowance. The direct write-off method requires the identification of specific balances that are deemed to be uncollectible before any bad debt expense is recognized. At the time a specific account is deemed uncollectible, the account is removed from accounts receivable and a corresponding amount of bad debt expense is recognized. The allowance method requires an estimate of bad debt expense for a period of time by reference to the composition of the accounts receivable balance at a specific point in time (aging) or to the overall experience with credit sales over a period of time. Thus, total bad debt expense expected to arise as a result of operations for a specific period is estimated, the valuation account (allowance for doubtful accounts) is appropriately adjusted, and a corresponding amount of bad debt expense is recognized. As specific accounts are identified as uncollectible, the account is written off. It is removed from accounts receivable and a corresponding amount is removed from the valuation account (allowance for doubtful accounts). Net accounts receivable do not change, and there is no charge to bad debt expense when specific accounts are identified as uncollectible and written off using the allowance method. (b) The allowance method is preferable because it matches the cost of making a credit sale with the revenues generated by the sale in the same period and achieves a proper carrying value for accounts receivable at the end of a period. Since the direct write-off method does not recognize the bad debt expense until a specific amount is deemed uncollectible, which may be in a subsequent period, it does not comply with the matching principle and does not achieve a proper carrying value for accounts receivable at the end of a period. 6. (1) Bad Debt Expense.......................... 4,670 Allowance for Doubtful Accounts ........ Gross receivables $90,000 4,670
27
Rate
6% Total allowance needed 5,400 Present allowance (730) Adjustment needed $ 4,670 (2) Bad Debt Expense .......................... 7,040 Allowance for Doubtful Accounts......... Sales $360,000 Sales returns and allowances 8,000 Net sales 352,000 Rate 2% Bad debt expense $ 7,040 7,040
7. Current liabilities: Dividends payable on common stock $ 50,000 Notes payableGirard State Bank 470,000 Currently maturing portion of serial bonds 200,000 Total current liabilities $ 720,000 Long-term debt: Note payableThird National Bank, refinanced in January, 2005Note 1 350,000 Serial bonds not maturing currently 800,000 Total long-term debt 1,150,000 Total liabilities $1,870,000 Note 1: On January 26, 2005, the corporation issued 40,000 shares of common stock and received proceeds totaling $400,000, of which $350,000 was used to liquidate a note payable that matured on January 27, 2005. Accordingly, such note payable has been classified as long-term debt at December 31, 2004.
28

------------------------Section 1.Multiple Choice 1. Cross Co. accepted delivery of merchandise which it purchased on account. As of December 31, Cross had recorded the transaction, but did not include the merchandise in its inventory. The effect of this on its financial statements for December 31 would be a. net income, current assets, and retained earnings were understated. b. net income was correct and current assets were understated. c. net income was understated and current liabilities were overstated. d. net income was overstated and current assets were understated. 2. The use of a Discounts Lost account implies that the recorded cost of a purchased inventory item is its a. invoice price. b. invoice price plus the purchase discount lost. c. invoice price less the purchase discount taken. d. invoice price less the purchase discount allowable whether taken or not. -----------------------------During 2004, Elway Corporation transferred inventory to Howell Corporation and agreed to repurchase the merchandise early in 2005. Howell then used the inventory as collateral to borrow from Norwalk Bank, remitting the proceeds to Elway. In 2005 when Elway repurchased the inventory, Howell used the proceeds to repay its bank loan. 3. This transaction is known as a(n) a. consignment. b. installment sale. c. assignment for the benefit of creditors. d. product financing arrangement. -----------------------------Dexter, Inc. is a calendar-year corporation. Its financial statements for the years 2004 and 2003 contained errors as follows: 2003 Ending inventory $8,000 overstated $14,000 overstated Depreciation expense $4,000 understated $16,000 overstated 4. Howe Company's accounting records indicated the following information: 2004
29
Inventory, 1/1/04 Purchases during 2004 Sales during 2004
$ 300,000 1,500,000 2,000,000
A physical inventory taken on December 31, 2004, resulted in an ending inventory of $350,000. Howe's gross profit on sales has remained constant at 30% in recent years. Howe suspects some inventory may have been taken by a new employee. At December 31, 2004, what is the estimated cost of missing inventory? a. $50,000. b. $75,000. c. $100,000. d. $150,000. ------------------------Section 2.Exercises 5. Part A. Horne Company has a beginning inventory in year one of $300,000 and an ending inventory of $385,000. The price level has increased from 100 at the beginning of the year to 110 at the end of year one. Calculate the ending inventory under the dollar-value LIFO method. Part B. At the end of year two, Horne's inventory is $450,000 in terms of a price level of 120 which exists at the end of year two. Calculate the inventory at the end of year two continuing the use of the dollar-value LIFO method. 6. The December 31, 2004 inventory of Dwyer Company consisted of four products, for which certain information is provided below. Estimated Expected Normal Original Replacement Disposal Selling Profit Product Cost Cost Cost Price on Sales A $ 35.00 $ 32.00 $ 6.50 $ 50.00 15% B $ 52.00 $ 51.00 $10.00 $ 60.00 25% C $140.00 $135.00 $25.00 $200.00 30% D $ 24.00 $ 21.00 $ 3.00 $ 35.00 20% INSTRUCTIONS Using the lower of cost or market approach applied on an individualitem basis, compute the inventory valuation that should be reported for each product on December 31, 2004. ------------------------Section 3.Problems
30
7. Slone Company sells TVs. The perpetual inventory was stated as $30,500 on the books at December 31, 2004. At the close of the year, a new approach for compiling inventory was used and apparently a satisfactory cut-off for preparation of financial statements was not made. Some events that occurred are as follows. 1. TVs shipped to a customer January 2, 2005, costing $5,000 were included in inventory at December 31, 2004. The sale was recorded in 2005. 2. TVs costing $10,000 received December 30, 2004, were recorded as received on January 2, 2005. 3. TVs received during 2004 costing $4,600 were recorded twice in the inventory account. 4. TVs shipped to a customer December 28, 2004, f.o.b. shipping point, which cost $15,000, were not received by the customer until January, 2005. The TVs were included in the ending inventory. 5. TVs on hand that cost $6,100 were never recorded on the books. INSTRUCTIONS Compute the correct inventory at December 31, 2004. 8. On December 31, 2004, Beal Company's inventory burned. Sales and purchases for the year had been $1,300,000 and $980,000, respectively. The beginning inventory (Jan. 1, 2004) was $190,000; in the past Beal's gross profit has averaged 40% of selling price. INSTRUCTIONS Compute the estimated cost of inventory burned, and give entries as of December 31, 2004 to close merchandise accounts.
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ANSWER KEY Section 1 Multiple Choice Questions 1.A 2.D 3.D 4..A 4. $2,000,000 x .70 = $1,400,000 (COGS) $300,000 + $1,500,000 - $1,400,000 - $350,000 = $50,000. 5. Part A. Computation of Ending Inventory, Year One Ending Inventory Layers at Ending Inventory at Base-Year Base-Year at Dollar-Value Price Prices Price Index LIFO $385,000/1.10 = $300,000 x 1,00 = $300,000 $350,000 $50,000 x 1.10 = 55,000 $355,000 Part B. Computation of Ending Inventory, Year Two Ending Inventory Layers at Ending Inventory at Base-Year Base-Year at Dollar-Value Price Prices Price Index LIFO $450,600/1.20 = $300,000 x 1.00 = $300,000 $375,000 $50,000 x 1.10 = 55,000 $25,000 x 1.20 = 30,000 $385,000 6. DesigLower of nated Cost or Prod. Ceiling Floor Market Cost Market A $50.00 - $6.50 $43.50 - $7.50 = $43.50 = $36.00 $ 36.00 $ 35.00 $ 35.00 B $60.00 - $10.00 $50.00 - $15.00 = $50.00 = $35.00 $ 50.00 $ 52.00 $ 50.00 C $200.00 - $25.00 $175.00 - $60.00 = $175.00 = $115.00 $135.00 $140.00 $135.00 D $35.00 - $3.00 $32.00 - $7.00
32
= $32.00
= $25.00
$ 25.00 $ 24.00 $ 24.00
7. Inventory per books $30,500 Add: Shipment received 12/30/04 $10,000 TVs on hand 6,100 16,100 46,600 Deduct: TVs recorded twice 4,600 TVs shipped 12/28/04 15,000 19,600 Correct inventory 12/31/04 $27,000
8. Beginning inventory $ 190,000 Add: Purchases 980,000 Cost of goods available 1,170,000 Sales $1,300,000 Less 40% (520,000) 780,000 Estimated inventory lost $ 390,000 Sales .................................... 1,300 000 Income Summary ........................ 1,300,000
Cost of Goods Sold ....................... 780,000 Fire Loss ................................ 390,000 Beginning Inventory ................... 190,000 Purchases.............................. 980,000
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------------------------Section 1. Multiple choice Questions 1. When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies? a. The investor should always use the equity method to account for its investment. b. The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise "significant influence" over the investee. c. The investor must use the fair value method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee. d. The investor should always use the fair value method to account for its investment. 2. Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the a. investor sells the investment. b. investee declares a dividend. c. investee pays a dividend. d. earnings are reported by the investee in its financial statements. 3. A correct valuation is a. available-for-sale at amortized cost. b. held-to-maturity at amortized cost. c. held-to-maturity at fair value. d. none of these. 4. Byner Corporation accounts for its investment in the common stock of Yount Company under the equity method. Byner Corporation should ordinarily record a cash dividend received from Yount as a. a reduction of the carrying value of the investment. b. additional paid-in capital. c. an addition to the carrying value of the investment. d. dividend income. ------------------------Section 2. Exercises 5. Presented below are unrelated cases involving investments in equity securities. Case I. The fair value of the trading securities at the end of last year was 30% below original cost, and this was
34
properly reflected in the accounts. At the end of the current year, the fair value has increased to 20% above cost. Case II. The fair value of an available-for-sale security has declined to less than forty percent of the original cost. The decline in value is considered to be other than temporary. Case III. An equity security, whose fair value is now less than cost, is classified as trading but is reclassified as available-for-sale. INSTRUCTIONS Indicate the accounting required for each case separately. 6. On January 2, 2004, Reese Company issued a 5-year, $5,000,000 note at LIBOR, with interest paid annually. The variable rate is reset at the end of each year. The LIBOR rate for the first year is 6.8%. Reese Company decides it prefers fixed-rate financing and wants to lock in a rate of 6%. As a result, Reese enters into an interest rate swap to apy 7% fixed and receive LIBOR based on $5 million. The variable rate is reset to 7.4% on January 2, 2005. INSTRUCTIONS (a) Compute the net interest expense to be reported for this note and related swap transactions as of December 31, 2004. (b) Compute the net interest expense to be reported for this note and related swap transactions as of December 31, 2005. ------------------------Section 3. Problems 7. Yates Co. purchased a put option on Dixon common shares on January 7, 2004, for $270. The put option is for 300 shares, and the strike price is $64. The option expires on July 31, 2004. The following data are available with respect to the put option: Market Price Time Value Date of Dixon Shares of Put Option March 31, 2004 $60 per share $150 June 30, 2004 $62 per share 68 July 6, 2004 $58 per share 20 INSTRUCTIONS Prepare the journal entries for Yates Co. for the following dates: (a) January 7, 2004Investment in put option on Dixon shares.
35
(b) March 31, 2004Yates prepares financial statements. (c) June 30, 2004Yates prepares financial statements. (d) July 6, 2004Yates settles the put option on the Dixon shares. ANSWER KEY Section 1 Mutiple Choice Qeustions 1.b 2.d 3.b 4.a 5. Case I. At the end of last year, the company would have recognized an unrealized holding loss and recorded a Securities Fair Value Adjustment (Trading). At the end of the current year, the company would record an unrealized holding gain that would be reported in the other revenue and gains section. The adjustment account would now have a debit balance. Case II. When the decline in value is considered to be other than temporary, the loss should be recognized as if it were realized and earnings will be reduced. The fair value becomes a new cost basis. Case III. The security is transferred at fair value, which is the new cost basis of the security. The Available-for-Sale Securities account is recorded at fair value, and the Unrealized Holding LossIncome account is debited for the unrealized loss. The Trading Securities account is credited for cost. 6. (a) and (b) 12/31/04 12/31/05 Variable-rate debt $5,000,000 $5,000,000 Variable rate 6.8% 7.4% Debt payment $ 340,000 $ 370,000 Debt payment $ 340,000 $ 370,000 Swap receive variable (340,000) (370,000) Net income effect $ 0 $ 0 Swap payablefixed 350,000 350,000 Net interest expense $ 350,000 $ 350,000 7. (a) January 7, 2004 Put Option ........................................ 270 Cash .......................................... 270
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(b)
March 31, 2004 Put Option ........................................ 1,200 Unrealized Holding Gain or LossIncome ....... ($4 x 300) Unrealized Holding Gain or LossIncome ........... Put Option ($270 - $150) ...................... 120
1,200 120
(c)
June 30, 2004 Unrealized Holding Gain or LossIncome ........... Put Option ($2 x 300) ......................... 600 Unrealized Holding Gain or LossIncome ........... Put Option ($150 - $68) ....................... 82
600 82
(d)
July 6, 2004 Unrealized Holding Gain or LossIncome ........... Put Option ($68 - $20) ........................ 48 Cash (400 x $6) ................................... 2,400 Gain on Settlement of Put Option .............. Put Option* ................................... 620 *Value of Put Option settlement:
48
1,780
Put Option + 270 | 1,200 | 120 | 600 | 82 | 48 + 620 |
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------------------------Section 1. Multiple Choice Questions 1. The cost of land typically includes the purchase price and all of the following costs except a. grading, filling, draining, and clearing costs. b. street lights, sewers, and drainage systems cost. c. private driveways and parking lots. d. assumption of any liens or mortgages on the property. 2. Rich Co. exchanged merchandise that cost $24,000 and normally sold for $36,000 for a new delivery truck with a list price of $40,000. The delivery truck should be recorded on Rich's books at a. $24,000. b. $30,000. c. $36,000. d. $40,000. -----------------------------Equipment that cost $55,000 and has accumulated depreciation of $25,000 is exchanged for similar equipment with a fair value of $40,000 and $10,000 cash is received. 3. The new equipment should be recorded at a. $40,000. b. $30,000. c. $25,000. d. $24,000. 4. Gomez Corp. incurred $350,000 of research and development costs to develop a product for which a patent was granted on January 2, 1999. Legal fees and other costs associated with registration of the patent totaled $100,000. On March 31, 2004, Gomez paid $150,000 for legal fees in a successful defense of the patent. The total amount capitalized for the patent through March 31, 2004 should be a. $250,000. b. $450,000. c. $500,000. d. $600,000. 5. Which of the following intangible assets should not be amortized? a. Copyrights b. Customer lists c. Perpetual franchises d. All of these intangible assets should be amortized. -------------------------
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Section 2. Exercises 6. On March 1, Gatt Co. began construction of a small building. The following expenditures were incurred for construction: March 1 $ 90,000 May 1 210,000 July 1 100,000 April 1 June 1 $ 84,000 300,000
The building was completed and occupied on July 1. To help pay for construction, $60,000 was borrowed on March 1 on a 12%, three-year note payable. The only other debt outstanding during the year was a $500,000, 10% note issued two years ago. INSTRUCTIONS (a) Calculate the weighted-average accumulated expenditures. (b) Calculate avoidable interest. 7. Presented below is information related to copyrights owned by Yaeger Corporation at December 31, 2004: Cost $3,600,000 Carrying amount 3,200,000 Expected future net cash flows 2,800,000 Fair value 1,900,000 Assume that Yaeger will continue to use this asset in the future. As of December 31, 2004, the copyrights have a remaining useful life of 5 years. INSTRUCTIONS (a) Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2004. (b) Prepare the journal entry to record amortization expense for 2005. (c) The fair value of the copyright at December 31, 2005, is $2,000,000. Prepare the journal entry (if any) necessary to record this increase in fair value. ------------------------Section 3. Problems 8. Finney Company exchanged machinery with an appraised value of $585,000, a recorded cost of $900,000 and Accumulated Depreciation of $450,000 with Penny Corporation for machinery Penny owns. The machinery has an appraised value of $565,000, a recorded cost of $1,080,000, and Accumulated Depreciation of $594,000. Penny also gave Finney $20,000 in the exchange. Assume depreciation has already been updated.
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INSTRUCTIONS (a) Prepare the entries on both companies' books assuming that it is considered an exchange of dissimilar assets. (Round all computations to the nearest dollar.) (b) Prepare the entries on both companies' books assuming that it is considered an exchange of similar assets. (Round all computations to the nearest dollar.) 9. On July 1, 2004, Nyland Company purchased for $1,440,000, snow-making equipment having an estimated useful life of 5 years with an estimated salvage value of $60,000. Depreciation is taken for the portion of the year the asset is used. INSTRUCTIONS (a) Complete the form below by determining the depreciation expense and year-end book values for 2004 and 2005 using the 1. sum-of-the-years'-digits method. 2. double-declining-balance method. Sum-of-the-Years'-Digits Method 2004 2005 Equipment $1,440,000 $1,440,000 Less: Accumulated Depreciation Year-End Book Value Depreciation Expense for the Year ________ ________ ________
________ ________
________
Double-Declining-Balance Method Equipment $1,440,000 $1,440,000 Less: Accumulated Depreciation Year-End Book Value Depreciation Expense for the Year ________ ________ ________
________ ________
________
(b) Assume the company had used straight-line depreciation during 2004 and 2005. During 2006, the company determined that the equipment would be useful to the company for only one more year beyond 2006. Salvage value is estimated at $80,000. Compute the amount of depreciation expense for the 2006 income statement.
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ANSWER KEY Section 1 Mutiple Chioce Questions 1.C 2.C 3.D 4.A 5.C 4. $100,000 + $150,000 = $250,000. 6. (a) Capitalization Weighted-Average Date Expenditures Period Accum. Expend. March 1 $ 90,000 4/12 $ 30,000 April 1 84,000 3/12 21,000 May 1 210,000 2/12 35,000 June 1 300,000 1/12 25,000 July 1 100,000 0 -0 $111,000 (b) Weighted-Average Avoidable Accum. Expend. Rate Interest $ 60,000 .12 $ 7,200 51,000 .10 $ 5,100 $111,000 $12,300 7. (a) December 31, 2004
Loss on Impairment ...................... 1,300,000 Copyrights .......................... 1,300,000 Carrying amount $3,200,000 Fair value 1,900,000 Loss on impairment $1,300,000 (b) December 31, 2005
Amortization ............................ 380,000 Copyrights .......................... 380,000 New carrying amount $1,900,000 Useful life 5 years Amortization per year $ 380,000
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(c) No entry necessary. Restoration of any impairment loss is not permitted for assets held for future use. 8. (a) Dissimilar Assets Finney Machinery ........ 565,000 Cost $900,000 Cash ............. 20,000 A/D 450,000 Accum. Deprec. BV 450,000 Machinery ...... 450,000 FV 585,000 Gain on ExGain $135,000 change of Plant Assets.. 135,000 Machinery ..... 900,000 Penny Machinery ........ 585,000 Cost $1,080,000 Accum. Deprec. 594,000 A/D 594,000 Machinery ...... BV 486,000 Gain on ExFV 565,000 change of Plant Assets.. 79,000 Gain $ 79,000 Machinery ..... 1,080,000 Cash .......... 20,000 (b) Similar Assets Finney Machinery ........................... 434,615 Cash ................................ 20,000 Accum. Depre.Machinery ............ 450,000 Gain on Exchange ................ 4,615 Machinery ....................... 900,000 $20,000 ($20,000 + $565,000) x $135,000 = $4,615 Penny Machinery .......................... 506,000 Accum. DepreciationMachinery ..... 594,000 Machinery ...................... 1,080,000 Cash ........................... 20,000
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9. (a) Sum-of-the-Years'-Digits 2004 2005 Accumulated Depreciation $ 230,000 $644,000 Book Value 1,210,000 796,000 Depreciation Expense 230,000 414,000 Double-Declining-Balance Accumulated Depreciation $ 288,000 $748,800 Book Value 1,152,000 691,200 Depreciation Expense 288,000 460,800 (b) Cost $1,440,000 Depreciation (414,000) Salvage (80,000) $ 946,000 x 1/2 = $473,000, 2006 depreciation
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------------------------Section 1. Multiple Choice Questions A schedule of machinery owned by Colsen Co. is presented below: Estimated Estimated Total Cost Salvage Value Life in Years Machine A $260,000 $20,000 12 Machine C 390,000 30,000 10 Machine M 195,000 15,000 6 Colsen computes depreciation by the composite method. 1. The composite rate of depreciation (in percent) for these assets is a. 10.18. b. 10.77. c. 11.03. d. 11.67. 2. The following is true of depreciation accounting. a. It is not a matter of valuation. b. It is part of the matching of revenues and expenses. c. It retains funds by reducing income taxes and dividends. d. All of these. 3. If income tax effects are ignored, accelerated depreciation methods a. provide funds for the earlier replacement of fixed assets. b. increase funds provided by operations. c. tend to offset the effect of steadily increasing repair and maintenance costs on the income statement. d. tend to decrease the fixed asset turnover ratio. 4. Mintz Company acquired a tract of land containing an extractable natural resource. Mintz is required by the purchase contract to restore the land to a condition suitable for recreational use after it has extracted the natural resource. Geological surveys estimate that the recoverable reserves will be 4,000,000 tons, and that the land will have a value of $1,000,000 after restoration. Relevant cost information follows: Land $7,000,000 Estimated restoration costs 1,500,000 If Mintz maintains no inventories of extracted material, what should be the charge to depletion expense per ton of extracted material?
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a. $2.13 b. $1.88 c. $1.76 d. $1.50 5. Use of the sum-of-the-years'-digits method a. results in salvage value being ignored. b. means the denominator is the years remaining at the beginning of the year. c. means the book value should not be reduced below salvage value. d. all of these. ------------------------Section 2. Exercises 6. Hale Co. uses the composite method to depreciate its equipment. the following totals are for all of the equipment in the group: Initial Residual Depreciable Depreciation Cost Value Cost Per Year $600,000 $100,000 $500,000 $50,000 INSTRUCTIONS (a) What is the composite rate of depreciation? (To nearest tenth of a percent.) (b) A machine with a cost of $20,000 was sold for $15,000 at the end of the third year. What entry should be made? 7. Place T or F in front of each of the following statements. ___ 1. The straight-line method of depreciation is based on the assumption that depreciation expense can be regarded as a constant function of time. ___ 2. Plant assets should be written down (below cost) when their market value has declined temporarily. ___ 3. The accounting profession has developed specifically recommended procedures for recording appraisal increases with respect to plant assets. ___ 4. An asset's cost minus its accumulated depreciation equals its book value. ___ 5. The sum-of-the-years'-digits method of depreciation ignores salvage value in the computation of an asset's depreciable value.
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___ 6. When using the double-declining-balance method of determining depreciation, a declining percentage is applied to a constant book value. ___ 7. The book value of plant assets declines more rapidly under decreasing-charge methods than under the straight-line method. ___ 8. Accounting depreciation is computed by determining the change in the market value of a company's plant assets during the period under review. ___ 9. The methods of depreciation based upon output assume that obsolescence will not significantly affect the usefulness of the asset. ___ 10. The correction of prior periods' depreciation estimates would be disclosed on the retained earnings statement. ------------------------Section 3. Problems 8. A truck was acquired on July 1, 2001, at a cost of $270,000. The truck had a six-year useful life and an estimated salvage value of $30,000. The straight-line method of depreciation was used. On January 1, 2004, the truck was overhauled at a cost of $25,000, which extended the useful life of the truck for an additional two years beyond that originally estimated (salvage value is still estimated at $30,000). In computing depreciation for annual adjustment purposes, expense is calculated for each month the asset is owned. INSTRUCTIONS Prepare the appropriate entries for January 1, 2004 and December 31, 2004.
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ANSWER KEY Section 1 .Multiple Chioce Questions 1.A 2.D 3.C 4..B 5.C 1. ($260,000 - $20,000) 12 = $20,000 ($390,000 - $30,000) 10 = 36,000 ($195,000 - $15,000) 6 = 30,000 $845,000 $86,000 $86,000 = 10.18 $845,000 4. ($7,000,000 + $1,500,000 - $1,000,000) 4,000,000 = $1.88. 6. (a) $50,000 = 8.3% $600,000 (b) Cash ................................ 15,000 Accumulated Depreciation ............ 5,000 Equipment ........................ 20,000 7. 1. T 2. F 3. F 4. T 5. F 6. F 7. T 8. F 9. T 10. F
8. Cost Less salvage value
$270,000 30,000 Depreciable base, July 1, 2001 240,000 Less depreciation to date [($240,000 6) x 2 1/2] 100,000 Depreciable base, Jan. 1, 2004 (unadjusted) 140,000 Overhaul 25,000 Depreciable base, Jan. 1, 2004 (adjusted) $165,000
January 1, 2004 Accumulated Depreciation ....................... 25,000 Cash ........................................ 25,000 December 31, 2004 Depreciation Expense ........................... 30,000 Accumulated Depreciation ($165,000/5.5 yrs)..
30,000
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Lesson 11
1
a. What is the essential nature of a partnership? What distinguishes it from other forms of business organizations? b. What note disclosure must accompany the financial statements of a partnership? c. A business operated in 20X2 and earned profits, but at a very low level: $15,000. Why might it be better for tax purposes to have this entity organized as a partnership rather than a corporation? d. Explain the nature of a limited partnership. e. What is mutual agency? f. Compare the entity view of a firm to the proprietary view in terms of how payments made to employees are classified in the two different financial statements.
2. Rankin and Bui organized the RB Partnership on January 1, 20X2. Rankin had $25,000 in his capital account at the beginning of the year, and Bui had $30,000 in her account. Required
If the partnerships net income, computed without regard to salaries or interest, is $20,000 for 20X2, indicate its division between the partners under the following independent profit? sharing conditions: a. Interest at 4% is allowed on opening capital balance and the remainder is divided equally.
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b. A salary of $9,000 is to be allocated to Bui; 4% interest is allowed for each partner on opening capital balance; residual profits or losses are divided 60% to Rankin and 40% to Bui. c. Salaries are allowed for Rankin and Bui in the amounts of $8,300 and $19,500 respectively, and residual profits or residual losses are divided based on the partners relative capital balances at the beginning of the year.
3 Journalize the admission of Banks to the partnership of Walton and Rose in each of the following independent cases. The capital balances of Walton and Rose are $10,000 each and they share profits and losses equally.
a. Banks is admitted to a one-third interest in capital, profits, and losses, with a contribution of $10,000 to the partnership. b. Banks is admitted to a one-fourth interest in capital, profits, and losses, with a contribution of $12,000 to the partnership. Use the bonus method. Total capital of the new partnership is to be $32,000. c. Banks is admitted to a one-fifth interest in capital, profits, and losses upon contributing $3,000 to the partnership. Use the asset revaluation method; goodwill should be recognized. Total capital of the new partnership is to be $25,000. d. Banks is admitted to a one-fifth interest in capital, profits, and losses by the purchase of one-fifth of the interests of Walton and Rose, paying the money directly to the old partners. Total capital of the new partnership is to be $20,000.
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e. Banks is admitted to a one-third interest in capital, profits, and losses upon contributing $7,000 to the partnership, after which each partner is to have an equal capital equity in the new partnership. Use the bonus method. f. Banks is admitted to a one-fifth interest in capital, profits, and losses upon contributing $7,000 to the partnership. The total new capital will be $35,000. Use the asset revaluation method and recognize goodwill.
4. Wylie, MacIntosh, and Smith are partners who share income and losses in a 2:2:1 ratio. The capital balances for the partners are currently $50,000, $30,000, and $20,000, respectively. Assume Wylie decides to retire from the partnership.
a. Provide the journal entry to record Wylies retirement if Wylie is paid $38,000 in total settlement of his share, and the bonus method is used. b. Provide the journal entry to record Wylies retirement if Wylie is paid $68,000 in total settlement of his share, and the bonus method is used. c. Provide the journal entry to record Wylies retirement if Wylie is paid $68,000 in total settlement of his share, and the asset revaluation method is used (goodwill is recognized).
5. Ray, Mona, and Matt, partners in the Quality Photography Partners, prepare to liquidate their business. On December 31, 20X3, the partnership account balances are as follows:
QUALITY PHOTOGRAPHY PARTNERS Balance Sheet December 31, 20X3
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Cash Other assets
$5,430 61,870
Trade payables Ray Mona Matt Capital balances: Ray Mona Matt
$13,910 8,000 4,000 9,000
Loans from partners:
18,100 3,090 11,200 $67,300
$67,300
Ray, Mona, and Matt share profits and losses 50:30:20. Cash for capital and loan balances is to be distributed at the end of the liquidation process. Here is a summary of transactions for the three-month liquidation period. Newly discovered unrecorded Liquidation of non-cash assets Liquidation Book value January February March $24,700 33,170 4,000 partnership Cash realizedexpenses paidliability $18,180 26,810 3,000 $ 860 800 $2,000*
* The partnership bookkeeper failed to record a property tax liability in December 20X0.
Required
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Prepare a partnership liquidation schedule by month, showing the cash distribution at the end of March.
Note:
Show cash collected in a given month NET of liquidation expenses. Any debit balances in partner accounts should be first applied to that partners loan balance, if any, and then absorbed by the other partners. No partner will invest additional resources.
Lesson 12
1. Which of the following statements is correct? a. A company may exclude a short-term obligation from current liabilities if the firm intends to refinance the obligation on a long-term basis. b. A company may exclude a short-term obligation from current liabilities if the firm can demonstrate an ability to consummate a refinancing. c. A company may exclude a short-term obligation from current liabilities if it is paid off after the balance sheet date and subsequently replaced by long-term debt before the balance sheet is issued. d. None of these. 2. Stone, Inc. issued bonds with a maturity amount of $200,000 and a maturity ten years from date of issue. If the bonds were issued at a premium, this indicates that a. the effective yield or market rate of interest exceeded the (stated) nominal rate. b. the nominal rate of interest exceeded the market rate. c. the market and nominal rates coincided. d. no necessary relationship exists between the two rates. 3. Garret Music Shop gives its customers coupons redeemable for a poster plus a Dixie Chicks CD. One coupon is issued for each dollar of sales. On the surrender of 100 coupons and $5.00 cash, the poster and CD are given to the customer. It is estimated that 80% of the coupons will be presented for redemption. Sales for the first period were $1,050,000, and the coupons redeemed totaled 510,000.
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Sales for the second period were $1,260,000, and the coupons redeemed totaled 1,275,000. Garret Music Shop bought 30,000 posters at $2.00/poster and 30,000 CDs at $6.00/CD. INSTRUCTIONS Prepare the following entries for the two periods assuming all the coupons expected to be redeemed from the first period were redeemed by the end of the second period. Entry Period 2 (a) To record coupons redeemed Period 1
(b) To record estimated liability
4. Prepare journal entries to record the following retirement. (Show computations and round to the nearest dollar.) The December 31, 2004 balance sheet of Marin Co. included the following items: 7.5% bonds payable due December 31, 2012 $800,000 Unamortized discount on bonds payable 32,400 The bonds were issued on December 31, 2002 at 95, with interest payable on June 30 and December 31. (Use straight-line amortization.) On April 1, 2005, Marin retired $160,000 of these bonds at 101 plus accrued interest. 5. Elton, Inc., which owes Boston Co. $900,000 in notes payable, is in financial difficulty. To eliminate the debt, Boston agrees to accept from Elton land having a fair market value of $680,000 and a recorded cost of $510,000. INSTRUCTIONS
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(a) Compute the amount of gain or loss to Elton, Inc. on the transfer (disposition) of the land. (b) Compute the amount of gain or loss to Elton, Inc. on the settlement of the debt. (c) Prepare the journal entry on Elton's books to record the settlement of this debt. (d) Compute the gain or loss to Boston Co. from settlement of its receivable from Elton. (e) Prepare the journal entry on Boston's books to record the settlement of this receivable.
Lesson 13
1. The pre-emptive right enables a stockholder to a. share proportionately in any new issues of stock of the same class. b. receive cash dividends before other classes of stock without the pre-emptive right. c. sell capital stock back to the corporation at the option of the stockholder. d. receive the same amount of dividends on a percentage basis as the preferred stockholders. 2. Stockholders' equity is generally classified into two major categories: a. contributed capital and appropriated capital. b. appropriated capital and retained earnings. c. retained earnings and unappropriated capital. d. earned capital and contributed capital. 3. Direct costs incurred to sell stock such as underwriting costs should be accounted for as 1. a reduction of additional paid-in capital. 2. an expense of the period in which the stock is issued. 3. an intangible asset. a. 1 b. 2 c. 3 d. 1 or 3 4. In 2003, Nichols Co. issued 200,000 of its 500,000 authorized shares of $10 par value common stock at $35 per share. In January, 2004, Nichols repurchased 10,000 shares at $30 per share. Assume these are the only stock transactions the company has ever had. INSTRUCTIONS
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(a) stock? (b) treasury (c) share.
What are the two methods of accounting for treasury Prepare the journal entry to record the purchase of stock by the cost method. 3,000 shares of treasury stock are reissued at $33 per
Prepare the journal entry to record the reissuance by the cost method. 5. Describe the journal entry for a stock dividend on common stock (which has a par value). 6. Spencer, Inc., has $600,000 of 8% preferred stock and $900,000 of common stock outstanding, each having a par value of $10 per share. No dividends have been paid or declared during 2003 and 2004. As of December 31, 2005, it is desired to distribute $306,000 in dividends. INSTRUCTIONS How much will the preferred and common stockholders receive under each of the following assumptions: (a) (b) (c) (d) total. The The The The preferred preferred preferred preferred is is is is noncumulative and nonparticipating. cumulative and nonparticipating. cumulative and fully participating. cumulative and participating to 12%
Lesson 14
1. Convertible bonds a. have priority over other indebtedness. b. are usually secured by a first or second mortgage. c. pay interest only in the event earnings are sufficient to cover the interest. d. may be exchanged for equity securities. 2. When the cash proceeds from a bond issued with detachable stock warrants exceeds the sum of the par value of the bonds and the fair market value of the warrants, the excess should be credited to a. additional paid-in capital from stock warrants. b. retained earnings. c. a liability account. d. premium on bonds payable. 3. The date on which to measure the compensation element in a stock option granted to a corporate employee ordinarily is the date on which the employee
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a. b. option. c. d.
is granted the option. has performed all conditions precedent to exercising the may first exercise the option. exercises the option.
4. What accounting treatment is required for convertible debt? Why? What accounting treatment is required for debt issued with stock warrants? Why? 5. Define the following: (a) The computation of earnings per common share (b) Complex capital structure (c) Basic earnings per share (d) Diluted earnings per share 6. For each of the unrelated transactions described below, present the entry(ies) required to record the bond transactions. 1. On August 1, 2004, Ryan Corporation called its 10% convertible bonds for conversion. The $6,000,000 par bonds were converted into 240,000 shares of $20 par common stock. On August 1, there was $525,000 of unamortized premium applicable to the bonds. The fair market value of the common stock was $20 per share. Ignore all interest payments. 2. Garnett, Inc. decides to issue convertible bonds instead of common stock. The company issues 10% convertible bonds, par $2,000,000, at 97. The investment banker indicates that if the bonds had not been convertible they would have sold at 94. 3. Gomez Company issues $3,000,000 of bonds with a coupon rate of 8%. To help the sale, detachable stock warrants are issued at the rate of ten warrants for each $1,000 bond sold. It is estimated that the value of the bonds without the warrants is $2,961,000 and the value of the warrants is $189,000. The bonds with the warrants sold at 101.
Lesson 15
1. Which of the following is an advantage of leasing? a. Off-balance-sheet financing b. Less costly financing c. 100% financing at fixed rates d. All of these
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2. Which of the following is a correct statement of one of the capitalization criteria? a. The lease transfers ownership of the property to the lessor. b. The lease contains a purchase option. c. The lease term is equal to or more than 75% of the estimated economic life of the leased property. d. The minimum lease payments (excluding executory costs) equal or exceed 90% of the fair value of the leased property. 3. In the earlier years of a lease, from the lessee's perspective, the use of the a. capital method will enable the lessee to report higher income, compared to the operating method. b. capital method will cause debt to increase, compared to the operating method. c. operating method will cause income to decrease, compared to the capital method. d. operating method will cause debt to increase, compared to the capital method. 4. Explain the procedures used to account for a direct financing lease. 5. Silas Corp. is a manufacturer of truck trailers. On January 1, 2004, Silas Corp. leases ten trailers to Polley Company under a six-year noncancelable lease agreement. The following information about the lease and the trailers is provided: 1. Equal annual payments that are due on December 31 each year provide Silas Corp. with an 8% return on net investment (present value factor for 6 periods at 8% is 4.62288). 2. Titles to the trailers pass to Polley at the end of the lease. 3. The fair value of each trailer is $60,000. The cost of each trailer to Silas Corp. is $54,000. Each trailer has an expected useful life of nine years. 4. Collectibility of the lease payments is reasonably predictable and there are no important uncertainties surrounding the amount of costs yet to be incurred by Silas Corp. INSTRUCTIONS (a) What type of lease is this for the lessor? Discuss. (b) Calculate the annual lease payment. (Round to nearest dollar.)
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(c) Prepare a lease amortization schedule for Silas Corp. for the first three years. (d) Prepare the journal entries for the lessor for 2004 and 2005 to record the lease agreement, the receipt of the lease rentals, and the recognition of income (assume the use of a perpetual inventory method and round all amounts to the nearest dollar). 6. Kiner, Inc. enters into a lease agreement as lessor on January 1, 2004, to lease an airplane to National Airlines. The term of the noncancelable lease is eight years and payments are required at the end of each year. The following information relates to this agreement: 1. National Airlines has the option to purchase the airplane for $8,000,000 when the lease expires at which time the fair value is expected to be $14,000,000. 2. The airplane has a cost of $35,000,000 to Kiner, an estimated useful life of fourteen years, and a salvage value of zero at the end of that time (due to technological obsolescence). 3. National Airlines will pay all executory costs related to the leased airplane. 4. Annual year-end lease payments of $5,338,396 allow Kiner to earn an 8% return on its investment. 5. Collectibility of the payments is reasonably predictable, and there are no important uncertainties surrounding the costs yet to be incurred by Kiner. INSTRUCTIONS (a) What type of lease is this? Discuss. (b) Prepare a lease amortization schedule for the lessor for the first two years (2004-2005). (Round all amounts to nearest dollar.) (c) Prepare the journal entries on the books of the lessor to record the lease agreement, to reflect payments received under the lease, and to recognize income, for the years 2004 and 2005.
Lesson 16
1. The rationale for interperiod income tax allocation is to a. recognize a tax asset or liability for the tax consequences of temporary differences that exist at the balance sheet date.
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b. recognize a distribution of earnings to the taxing agency. c. reconcile the tax consequences of permanent and temporary differences appearing on the current year's financial statements. d. adjust income tax expense on the income statement to be in agreement with income taxes payable on the balance sheet. 2. Interperiod income tax allocation causes a. tax expense shown on the income statement to equal the amount of income taxes payable for the current year plus or minus the change in the deferred tax asset or liability balances for the year. b. tax expense shown in the income statement to bear a normal relation to the tax liability. c. tax liability shown in the balance sheet to bear a normal relation to the income before tax reported in the income statement. d. tax expense in the income statement to be presented with the specific revenues causing the tax. 3. An example of a permanent difference is a. proceeds from life insurance on officers. b. interest expense on money borrowed to invest in municipal bonds. c. insurance expense for a life insurance policy on officers. d. all of these. 4. (a) Describe a deferred tax asset. (b) When should a deferred tax asset be reduced by a valuation allowance? 5. In 2003, its first year of operations, Landon Corp. has a $700,000 net operating loss when the tax rate is 30%. In 2004, Landon has $300,000 taxable income and the tax rate remains 30%. INSTRUCTIONS Assume the management of Landon Corp. thinks that it is more likely than not that the loss carryforward will not be realized in the near future because it is a new company (this is before results of 2004 operations are known). (a) What are the entries in 2003 to record the tax loss carryforward? (b) What entries would be made in 2004 to record the current and deferred income taxes and to recognize the loss carryforward? (Assume that at the end of 2004 it is more likely than not that the deferred tax asset will be realized.)
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6. The following information is available for the first three years of operations for Taylor Company: 1. Year Taxable Income 2003 $250,000 2004 160,000 2005 200,000 2. On January 2, 2003, heavy equipment costing $800,000 was purchased. The equipment had a life of 5 years and no salvage value. The straight-line method of depreciation is used for book purposes and the tax depreciation taken each year is listed below: Tax Depreciation 2003 2004 2005 2006 Total $264,000 $360,000 $120,000 $56,000 $800,000 3. On January 2, 2004, $210,000 was collected in advance for rental of a building for a three-year period. The entire $210,000 was reported as taxable income in 2004, but $140,000 of the $210,000 was reported as unearned revenue at December 31, 2004 for book purposes. 4. The enacted tax rates are 40% for all years. INSTRUCTIONS (a) Prepare a schedule comparing depreciation for financial reporting and tax purposes. (b) Determine the deferred tax (asset) or liability at the end of 2003. (c) Prepare a schedule of future taxable and (deductible) amounts at the end of 2004. (d) Prepare a schedule of the deferred tax (asset) and liability at the end of 2004. (e) Compute the net deferred tax expense (benefit) for 2004. (f) Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2004.
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Lesson 17
1. In a defined benefit plan, the process of funding refers to a. determining the projected benefit obligation. b. determining the accumulated benefit obligation. c. making the periodic contributions to a funding agency to insure that funds are available to meet retirees' claims. d. determining the amount that might be reported for pension expense. 2. In a defined contribution plan, a formula is used that a. defines the benefits that the employee will receive at the time of retirement. b. ensures that pension expense and the cash funding amount will be different. c. requires an employer to contribute a certain sum each period based on the formula. d. ensures that employers are at risk to make sure funds are available at retirement. 3. Differing measures of the pension obligation can be based on a. all years of serviceboth vested and nonvestedusing current salary levels. b. only the vested benefits using current salary levels. c. both vested and nonvested service using future salaries. d. all of these. 4. Presented below is information related to Major Department Stores, Inc. pension plan for 2004. Accumulated benefit obligation (at year end) $450,000 Service cost 390,000 Funding contribution for 2004 375,000 Settlement rate used in actuarial computation 10% Expected return on plan assets 9% Amortization of prior service cost 75,000 Amortization of unrecognized net gains 36,000 Projected benefit obligation (at beginning of period) 360,000 Market-related asset value (at beginning of period) 270,000
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2004.
INSTRUCTIONS (a) Compute the amount of pension expense to be reported for
(Show computations.) (b) Prepare the journal entry to record pension expense and the employer's contribution for 2004. 5. Marin Company has 200 employees who are expected to receive benefits under the company's defined benefit pension plan. The total number of service-years of these employees is 2,000. The actuary for the company's pension plan calculated the following net gains and losses: For the Year Ended December 31 (Gain) Or Loss 2003 $440,000 2004 (396,000) 2005 660,000 Prior to 2003, there was no unrecognized net gain or loss. Information about the company's projected benefit obligation and market-related asset values follows: As of January 1 2005 Projected benefit obligation $1,960,000 Market-related asset values 1,700,000 2003 2004 $1,400,000 $1,560,000 1,120,000 1,640,000
INSTRUCTIONS Based on the above information about Marin Company, prepare a schedule which reflects the amount of unrecognized net gain or loss to be amortized by the company as a component of pension expense for the years 2003, 2004, and 2005. The company amortizes unrecognized net gains or losses using the straight-line method over the average service life of participating employees. 6. Presented below is information related to the pension plan of Vector Inc. for the year 2004. 1. The service cost of pension expense is $450,000 using the projected benefits approach.
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2. The projected benefit obligation and the accumulated benefit obligation at the beginning of the year are $560,000 and $525,000, respectively. The expected return on plan assets is 9% and the settlement rate is 10% 3. The unrecognized prior service cost at the beginning of the year is $260,000. The company has a workforce of 200 employees, all who are expected to receive benefits under the plan. The total number of service-years is 1,000 and the serviceyears attributable to 2004 is 200. The company has decided to use the years-of-service method of amortization for these costs. 4. At the beginning of the period, the market-related asset value was $525,000 and the fair value of pension plan assets, $530,000. The company had an unrecognized net loss at the beginning of the period of $170,000. Any amortization of unrecognized net loss is recognized on a straight-line basis over the average remaining service-life of the employees. 5. The contribution made to the pension fund in 2004 was $435,000. INSTRUCTIONS (a) Determine the pension expense to be reported on the income statement for 2004. (Round all computations to the nearest dollar.) (b) Prepare the journal entry(ies) to record pension expense for 2004.
Lesson 18
1. Which of the following is NOT a change in accounting principle? a. A change from LIFO to FIFO for inventory valuation b. Using a different method of depreciation for new plant assets c. A change from full-cost to successful efforts in the extractive industry d. A change from completed-contract to percentage-ofcompletion 2. A company changes from percentage-of-completion to completed-contract, which is the method used for tax purposes. The entry to record this change should include a a. debit to Construction in Process. b. debit to Cumulative Effect of Change in Accounting in the amount of the difference on prior years, net of tax.
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c. debit to Retained Earnings in the amount of the difference on prior years, net of tax. d. credit to Deferred Tax Liability. 3. Which of the following disclosures is required for a change from LIFO to FIFO? a. The cumulative effect on prior years, net of tax, in the current income statement b. The justification for the change c. Pro forma data on income and earnings per share d. All of these are required. 4. Show how the following independent errors will affect net income on the Income Statement and the stockholders' equity section of the Balance Sheet using the symbol + (plus) for overstated, - (minus) for understated, and 0 (zero) for no effect. 2004 2005 Income Balance Income Balance Statement Sheet Statement Sheet 1. Ending inventory in 2004 overstated. 2. Failed to accrue 2004 interest revenue. 3. A capital expenditure for factory equipment (useful life, 5 years) was erroneously charged to maintenance expense in 2004. 4. Failed to count office supplies on hand at 12/31/04. Cash expenditures have been charged to an office supplies expense account during the year 2004. 5. Failed to accrue 2004 wages.
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6. Ending inventory in 2004 understated. 7. Overstated 2004 depreciation expense; 2005 expense correct. 5. Discuss the accounting procedures for and illustrate the following: (a) Change in estimate (b) Change in entity (c) Correction of an error 6. Rand Company's net incomes for the past three years are presented below: 2005 2004 2003 $400,000 $375,000 $300,000 During the 2005 year-end audit, the following items come to your attention: 1. $10,000 debited for the Rand bought a truck January 1, 2002 for $160,000 with a estimated salvage value and a six-year life. The company an expense account and credited cash on the purchase date entire cost of the asset. (Straight-line method)
2. During 2005, Rand changed from the straight-line method of depreciating its cement plant to the double-declining-balance method. The following computations present depreciation on both bases: 2005 30,000 38,500 2004 30,000 50,000 2003 30,000 60,000
Straight-line Double-declining
The net income for 2005 was computed on the doubledeclining-balance method. 3. Rand, in reviewing its provision for uncollectibles during 2005,has determined that 1% is the appropriate amount of bad debt expense to be charged to operations. The company had used 1/2 of 1% as its rate in 2004 and 2003 when the expense had been $15,000 and $10,000, respectively. The company recorded bad
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debt expense under the new rate for 2005. The company would have recorded $5,000 less of bad debt expense on December 31, 2005 under the old rate. INSTRUCTIONS (a) Prepare in general journal form the entry necessary to correct the books for the transaction in part 1 of this problem, assuming that the books have not been closed for the current year. (b) Present comparative income statement data for the years 2003 to 2005 in accordance with generally accepted accounting principles starting with income before cumulative effect of accounting changes. Prepare pro forma amounts. Ignore all income tax effects. (c) Assume that the beginning retained earnings balance (unadjusted) for 2003 was $1,050,000. At what adjusted amount should this beginning retained earnings balance for 2003 be stated, assuming that comparative financial statements were prepared? (d) Assume that the beginning retained earnings balance (unadjusted) for 2005 is $1,500,000 and that non-comparative financial statements are prepared. At what adjusted amount should this beginning retained earnings balance be stated?
Lesson 19
1. The information provided by financial reporting pertains to a. individual business enterprises, rather than to industries or an economy as a whole or to members of society as consumers. b. business industries, rather than to individual enterprises or an economy as a whole or to members of society as consumers. c. individual business enterprises, industries, and an economy as a whole, rather than to members of society as consumers. d. an economy as a whole and to members of society as consumers,rather than to individual enterprises or industries. 2. An effective capital allocation process a. promotes productivity. b. encourages innovation. c. provides an efficient market for buying and selling securities. d. all of these.
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3. Which of the following statements is NOT an objective of financial reporting? a. Provide information that is useful in investment and credit decisions. b. Provide information about enterprise resources, claims to those resources, and changes to them. c. Provide information on the liquidation value of an enterprise. d. Provide information that is useful in assessing cash flow prospects. 4. The Financial Accounting Standards Board was established because many groups interested in financial reporting believed that the Accounting Principles Board was not effective. Discuss the apparent advantages that the FASB should have over its earlier counterpart, the APB. 5. Presented below are four independent, unrelated statements regarding the formulation of generally accepted accounting principles. Each statement contains some incorrect or debatable statement(s). Statement I The users of financial accounting statements have coinciding and conflicting needs for statements of various types. To meet these needs, and to satisfy the financial reporting responsibility of management, accountants prepare different sets of financial statements for different users. Statement II The FASB should be responsive to the needs and viewpoints of the entire economic community, not just the public accounting profession. The FASB therefore will succeed because it will deal effectively with all interested groups. Statement III Due to some well-publicized instances of corporate fraud, domestic and foreign bribery, and sudden bankruptcies, the Congress of the United States began in the mid-seventies to inquire into the structure and practices of the accounting profession and the accounting and auditing standard-setting process. As a consequence of these investigations and reports submitted by the committees, the government has now
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(1) assumed full responsibility through the Securities and Exchange Commission (SEC) for the development and enforcement of financial accounting and reporting standards and (2) assumed full responsibility through the General Accounting Office (GAO) for the development and enforcement of auditing standards. Statement IV The Securities and Exchange Commission is very concerned about financial reporting and has formulated a committee called the Accounting Standards Executive Committee (AcSEC) to provide input to the FASB. In addition, after each FASB Statement is issued, the AcSEC issues Statements of Position stating its position on the FASB statement. INSTRUCTIONS Evaluate each of the independent statements and identify the areas of fallacious reasoning in each. Explain why the reasoning is incorrect. Complete your discussion of each statement before proceeding to the next statement. 6. Yates Company's records provide the following information concerning certain account balances and changes in these account balances during the current year. Transaction information is missing from each item below. INSTRUCTIONS Prepare the ENTRY to record the missing information for each account. (Consider each independently.) 1. Accounts Receivable: Jan. 1, balance $41,000, Dec. 31, balance $50,000, uncollectible accounts written off during the year, $6,000; accounts receivable collected during the year, $134,000. Prepare the entry to record sales. 2. Allowance for Doubtful Accounts: Jan. 1, balance $4,000, Dec. 31, balance $7,500, uncollectible accounts written off during the year, $30,000. Prepare the entry to record bad debt expense. 3. Accounts Payable: Jan. 1, balance $25,000, Dec. 31, balance $34,000, purchases on account for the year, $110,000. Prepare the entry to record payments on account. 4. Interest Receivable: Jan. 1 accrued, $3,000, Dec. 31 accrued, $2,100, earned for the year, $20,000. Prepare the entry to record cash interest received.
Lesson 20
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1. An example of an inventory accounting policy that should be disclosed in a Summary of Significant Accounting Policies is the a. amount of income resulting from the involuntary liquidation of LIFO. b. major backlogs of inventory orders. c. method used for pricing inventory. d. composition of inventory into raw materials, work-inprocess, and finished goods. 2. All of the following information about each operating segment must be reported except a. unusual items. b. interest revenue. c. cost of goods sold. d. depreciation and amortization expense. 3. If a cumulative effect type accounting change is made in other than the first period of an enterprise's fiscal year, the cumulative effect of the change should be a. included in net income of the period of change. b. reported as an adjustment of prior years' financial statements. c. excluded from net income of the period of change and reported as a cumulative effect in the first quarter. d. reported as an extraordinary item in the period of change. 4. Recent proposals by investors and others have suggested that corporations include financial forecasts in their annual reports. It further has been suggested that the CPA attest to those forecasts. INSTRUCTIONS (a) What arguments are advanced to support the publication of such forecasts? (b) What arguments are advanced that oppose the publication of such forecasts? 5. The following data is given: December 31 2003 Cash 50,000 2004 $ 45,000 $
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Accounts receivable (net) 60,000 110,000 325,000 40,000 5,000 70,000 100,000 90,000 65,000 175,000 Accounts payable Wages payable Bonds payable 10% Preferred stock, $40 par Common stock, $10 par Paid-in capital Retained earnings Inventories Plant assets (net)
80,000 90,000 400,000 55,000 10,000 70,000 100,000 120,000 80,000 220,000
Net credit sales Cost of goods sold Net income INSTRUCTIONS Compute the following ratios: (a) Acid-test ratio at 12/31/04 (b) Receivables turnover in 2004 (c) Inventory turnover in 2004 (d) Profit margin on sales in 2004
700,000 450,000 84,000
(e) Rate of return on common stock equity in 2004 (f) Book value per share of common stock at 12/31/04 6. A central issue in reporting on operating segments of a business enterprise is the determination of which segments are reportable. INSTRUCTIONS 1. What are the tests to determine whether or not an operating segment is reportable?
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2. What is the test to determine if enough operating segments have been separately reported upon, and what is the guideline on the maximum number of operating segments to be shown?
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Lesson 11-20
Lesson 11
Question 1
a. A partnership is a union of two or more individuals associated in a joint profit-making endeavour. Certain characteristics of a partnership distinguish it from both a sole proprietorship and a corporation. A partner can act in the name of the enterprise and, in this capacity, bind his or her fellow partners to contracts and agreements. The partnership often offers an advantage over the sole proprietorship in that greater amounts of capital may be accumulated and various personal skills may be pooled. Unlike a corporation, a partnership lacks continuous life and imposes unlimited personal liability on the partners for partnership debts. In many instances, partnership interests cannot be easily transferred. A partnership can be formed and dissolved more easily than a corporation. From a tax standpoint, the general rule is that partnerships are not subject to income tax; rather, each partners share of partnership net income is included in determining the tax levied against the partner, whether or not the partnership income is distributed to the partners in the form of asset withdrawals. Corporations, on the other hand, are subject to income tax. In addition, dividend payments are possible in a corporation and are included in determining the shareholders taxable income at a different rate than salary payments. Furthermore, dividends do not reduce corporate taxable income. b. The CICA Handbook requires the following disclosures in the financial statements of a partnership:
name of the partnership and all partners; the fact that the business is not incorporated
and that the financial statements do not include personal assets and liabilities of the partners; salaries/interest paid to partners, if any, or a disclosure note that states that no salaries/interest were charged against income; a disclosure note stating that no income taxes were charged in the statements; and a schedule showing how the owner equity changed during the period, by source. c. There may be tax advantages to operating a business as a partnership when profit levels are low because partnership profits are taxed at personal tax rates that are lower than for corporations at low income levels. d. A limited partnership is one with two classes of partners: 1. One or more general partners, with unlimited liability and an active role in management.
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2. Limited partners, whose liability is limited to their initial investment, but whose role in management is passive. Limited partnerships are often formed for real estate investments that have a positive cash flow, but that report a loss after amortization of the real estate. Limited partners can claim their share of the resulting loss, up to the extent of their at-risk amount or cost of their investment, to reduce their taxable income, without any fear of unlimited personal liability. e. Partners have a mutual agency relationship, in that any partner can commit the partnership and thus, all the partners to legal contracts. Partners are thus agents for each other while they are partners. Since they have unlimited personal liability for the debts and liabilities of the partnership, this agency relationship is obviously very significant. A partners authority to contract may be limited by an agreement between the partners, but third parties must be made aware of any restriction before it is effective. f. Payments to employees are classified as an expense when following the proprietary view of the firm. They are classified as a distribution of earnings under the entity view.
Question 2
a. Rankin Interest on capital balances: 0.04 $25,000 0.04 $30,000 Residual profits divided equally* Total * ($20,000 $1,000 $1,200) 2 b. Salary Interest on capital balances: 0.04 $25,000 0.04 $30,000 Residual profits divided 60:40* Total $ $ 1,000 $ 8,900 9,900 1,200 8,900 $ 10,100 Bui $ Total 1,000 1,200 17,800 $ 20,000
Rankin $ $ $ 1,000 5,280 6,280
Bui 9,000 $
Total 9,000
1,200 3,520 $ 13,720
1,000 1,200 8,800 $ 20,000
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*($20,000 $9,000 $1,000 $1,200) 60% = $5,280 ($20,000 $9,000 $1,000 $1,200) 40% = $3,520 c. Salaries Residual profits divided based on capital ratios: ($25,000 $55,000) ($7,800*) ($30,000 $55,000) ($7,800*) Total * ($20,000 $27,800 = ($7,800)) Rankin $ 8,300 (3,545) $ 4,755 (4,255) $ 15,245 Bui $ 19,500 Total $ 27,800 (3,545) (4,255) $ 20,000
Question 3
a. Cash.............................................................................................. Banks, capital......................................................................... New capital ($20,000 + $10,000) = $30,000 1/3 thereof = (1/3 $30,000) = $10,000 b. Cash.............................................................................................. Banks, capital......................................................................... Walton, capital....................................................................... Rose, capital........................................................................... New capital = ($20,000 + $12,000) = $32,000 1/4 thereof = (1/4 $32,000) = $8,000 Bonus = ($12,000 $8,000) = $4,000 c. Cash.............................................................................................. Goodwill...................................................................................... Banks, capital......................................................................... New capital (given) = $25,000 1/5 thereof = (1/5 $25,000) = $5,000 Goodwill = ($5,000 $3,000 tangible) = $2,000 3,000 2,000 5,000 12,000 8,000 2,000 2,000 10,000 10,000
Note:
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Goodwill must be recognized since the tangible assets of the partnership are only $23,000 ($20,000 + $3,000) and you are told that the new capital is to be $25,000. The new partner is allocated all of this goodwill as it is awarded to his capital account.
d. Walton, capital............................................................................. Rose, capital................................................................................. Banks, capital......................................................................... 2,000 2,000 4,000
New capital (given) = $20,000; 1/5 thereof = (1/5 $20,000) = $4,000 Transfer from Walton: (1/2 $4,000) = $2,000 Transfer from Rose: (1/2 $4,000) = $2,000 e. Cash.............................................................................................. Walton, capital............................................................................. Rose, capital................................................................................. Banks, capital......................................................................... Total capital is $27,000 ($20,000 + $7,000). Desired capital balance of each partner: (1/3 $27,000) = $9,000 Transfer from Walton: ($10,000 $9,000) = $1,000 Transfer from Rose: ($10,000 $9,000) = $1,000 f. Goodwill...................................................................................... Walton, capital....................................................................... Rose, capital........................................................................... Total new capital 4/5 thereof Present capital Goodwill $ 35,000 $ 28,000 20,000 $ 8,000 7,000 7,000 8,000 4,000 4,000 7,000 1,000 1,000
9,000
Cash.............................................................................................. Banks, capital.........................................................................
Question 4 a. Wylie, capital............................................................................... 50,000 MacIntosh, capital ($12,000 (2 (2+1))........................... Smith, capital ($12,000 (1 (2+1))................................... Cash........................................................................................
8,000 4,000 38,000
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b. Wylie, capital............................................................................... 50,000 MacIntosh, capital ($18,000 (2 (2+1))................................. 12,000 Smith, capital ($18,000 (1 (2+1))......................................... 6,000 Cash........................................................................................ c. Goodwill...................................................................................... 45,000 MacIntosh, capital ($45,000 (2 (2+2+1))....................... Smith, capital ($45,000 (1 (2+2+1))............................... Wylie, capital ($45,000 (2 (2+2+1))............................... Wylies capital account must increase by $18,000 ($68,000 $50,000) Wylie has a 40% interest: 2 (2+2+1) = 40% $18,000 .4 = $45,000 Wylie, capital............................................................................... Cash........................................................................................ Question 5 Partnership liquidation schedule QUALITY PHOTOGRAPHY PARTNERS Schedule of Partnership Liquidation Dr (Cr)
Assets Liabilities Cash Non-cash Profit-and-loss ratio Preliquidation balances Realization and loss Balances Payment of liabilities Balances, Jan. 31, 20X4 Realization and loss Balances Unrecorded tax liability Balances Payment of liabilities Balances, Feb. 29, 20X4 Realization and loss Balances Ray Capital Loan 50% $ 5,430 $ 61,870 $ (13,910) $(18,100) $(8,000) (9,000) 17,320 22,750 (13,910) 8,840 26,010 34,850 34,850 (2,000) 32,850 3,000 35,850 4,000 (4,000) 37,170 (33,170) 4,000 4,000 (24,700) 37,170 (13,910) 13,910* (2,000) (2,000) 2,000* (9,830) 500 (9,330) (8,000) (8,000) 1,872 300 2,172 (14,410) 3,580 (10,830) 1,000 (9,830) (8,000) (8,000) (8,000) (876) 2,148 1,272 600 1,872 3,690 (14,410) (8,000)
68,000 18,000 9,000 18,000
68,000
68,000
Mona Capital Loan 30% $(3,090) 2,214 (876)
Capital
Matt Loan
20% $(4,000) $(11,200) $ 1,476 (9,724) (9,000)
(4,000)
(4,000) (4,000) (4,000)
(9,724) (9,000) 1,432 (8,292) (9,000) 400 (7,892) (9,000)
(4,000) (4,000)
(7,892) (9,000) 200 (7,692) (9,000)
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Offset of Monas capital/loan Pay loan balances (18,828) Balances 17,022 Payments to partners, capital (17,022) Balances, Mar. 31, 20X4 $ $
(2,172) (9,330) 9,330 $ $ $ $ $ 8,000
2,172 1,828 (7,692) 7,692 $ $ 9,000
* It is likely creditors would be paid as soon as possible. However, as long as creditors are paid prior to distributions to the partners, this payment may be delayed, perhaps until all assets are sold.
Lesson 12
MChoice 1 d 2 b 1. The company must both intend to refinance the obligation on a long-term basis and demonstrate the ability to consummate the refinancing to exclude a short-term obligation from current liabilities. 3. Entry Period 1 Period 2 (a) Estimated Liability for Premiums 9,900 Premium Expense 15,300 28,350 [(510,000 100) x ($8.00 - $5)] Cash (510,000 100) x $5 25,500 63,750 Inventory of Premium Posters and CDs 40,800 102,000 (b) Premium Expense 1,890 1,890 Estimated Liability for Premiums 9,900* 9,900
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*[(1,050,000 x .80) - 510,000] 100 x $3.00 4. Interest Expense .................... 3,200 Cash ($160,000 x 7.5% x 3/12) .............. Discount on Bonds Payable ($32,000 x 1/5 x 1/8 x 3/12) ............. 200 Bonds Payable......................... 160,000 Loss on Redemption of Bonds .......... 7,800 Discount on Bonds Payable [(1/5 x $32,000) - $200] .......... Cash................................. 5. (a) Fair market value of the land Cost of the land to Elton, Inc. Gain on disposition of land (b) Carrying amount of debt Fair market value of the land given Gain on settlement of debt (c) Notes Payable ................... 900,000 Land ........................... Gain on Disposition of Land ...... Gain on Settlement of Debt ........ (d) Carrying amount of receivable Land received in settlement Loss on settled debt $900,000 680,000 $220,000 3,000
6,200 161,600
$680,000 510,000 $170,000 $900,000 680,000 $220,000 510,000 170,000 220,000
(e) Land .............................. 680,000 Allowance for Doubtful Accounts .... 220,000 Notes Receivable ................. 900,000
Lesson 13
Mchoice: 1 2 3 a d a
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4. (a) The two methods of accounting for treasury stock are the cost method and the par value method. (b) Treasury Stock ................ Cash ......................... 300,000 300,000 9,000 90,000
(c) Cash ........................... 99,000 Paid-in Capital from Treasury Stock... Treasury Stock ........................
5. A stock dividend results in the transfer from retained earnings to paid-in capital of an amount equal to the market value of each share, if the dividend is less than 20-25%, or par value of each share, if the dividend is greater than 20-25%. Retained Earnings is debited for the total amount transferred, Common Stock Dividend Distributable is credited for the total par value of the shares, and, for a small stock dividend, the excess of market value over par value is credited to Paid-in Capital in Excess of Par. 6. (a) Total Current year's dividend (8% of $600,000) 48,000 Remainder to common 258,000 $306,000 (b) Total Dividends in arrears, 8% of $600,000 for two years 96,000 Current year's dividend 48,000 Remainder to common 162,000 $306,000 Preferred $ 48,000 $ Common 258,000 $ 48,000 Preferred $ 96,000 48,000 $ $258,000 Common 162,000 $144,000 $162,000 $ $
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Total
(c)
Preferred $ 96,000 48,000 36,000 $180,000 Preferred $ 96,000 48,000 24,000 $168,000 $ $
Common 72,000 54,000 $126,000 Common 72,000 36,000 30,000 $138,000 $ $
Dividends in arrears, 8% of $600,000 for two years 96,000 Current year's dividend 120,000 Participating dividend 6% ($90,000 $1,500,000) 90,000 $306,000 (d) Total Dividends in arrears, 8% of $600,000 for two years 96,000 Current year's dividend 120,000 Participating dividend (4%) 60,000 Remainder to common 30,000 $306,000
Lesson 14
MChoice 1 d 2 d 3 a MChoice MChoice MChoice
4. Convertible debt is treated solely as debt. One reason is that the debt and conversion option are inseparable. The holder cannot sell one and retain the other. The two choices are mutually exclusive.
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Another reason is that the valuation of the conversion option or the debt security without the conversion option is subjective because these values are not established separately in the marketplace. When debt is issued with stock warrants, the warrants are given separate recognition. After issue, the debt and the detachable warrants trade separately. The proceeds may be allocated to the two elements based on the relative fair values of the debt security without the warrants and the warrants at the time of issuance. The proceeds allocated to the warrants should be accounted for as paid-in capital. 5. (a) Earnings per common share is computed by dividing net income less preferred dividends by the weighted average of common shares outstanding. (b) A complex capital structure exists when a corporation has convertible securities, options, warrants or other rights that upon conversion or exercise could dilute earnings per share. (c) Basic earnings per share is earnings per share computed based on the common shares outstanding during the period. (d) Diluted earnings per share is earnings per share computed based on common stock and all dilutive potentially common shares that were outstanding during the period. 6. 1.Bonds Payable ................. 6,000,000 Premium on Bonds Payable ...... 525,000 Common Stock ................. 4,800,000 Paid-in Capital in Excess of Par . 1,725,000 2.Cash ........................... Discount on Bonds Payable ..... Bonds Payable ................ 2,000,000 1,940,000 60,000
3.Cash ........................... 3,030,000 Discount on Bonds Payable ...... 151,800 Bonds Payable ................ 3,000,000 Paid-in CapitalStock Warrants . 181,800 ($189,000 $3,150,000 x $3,030,000 = $181,800)
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Lesson 15
MChoice 1 d 2 c 3 b 4. The lessor records the gross amounts of the minimum lease payments(excluding executory costs) and the unguaranteed residual value (a guaranteed residual value is included in the minimum lease payments) as Lease Receivable and removes the asset from the books. The lessor records payments received as a reduction in the receivable. Interest revenue is recognized by using the effective interest method. The implicit interest rate is applied to the declining balance of the Lease Receivable balance. The implicit rate is the rate of interest that will discount the gross minimum lease payments (excluding executory costs) and the unguaranteed residual value to the fair value of the asset the inception of the lease. 5. (a) It is a sales-type lease to the lessor, Silas Corp. Silas's (the manufacturer) profit upon sale is $60,000, which is recognized in the year of sale (2004). It is not an operating lease because title to the assets passes to the lessee, the present value ($600,000) of the minimum lease payments equals or exceeds 90%($540,000) of the fair value of the leased trailers, collectibility is reasonably assured, and no important uncertainties surround the amount of unreimbursable costs yet to be incurred by the lessor. The remaining accounting treatment is similar to that accorded a direct financing lease. (b) ($60,000 x 10) 4.62288 = $129,789. (c) Lease Amortization Schedule (Lessor) Annual Lease Lease Date Receivable 1/1/04 $600,000 Rental Interest on Lease Receivable Lease Receivable Recovery
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12/31/04 518,211 429,879 334,480 (d) 12/31/05 12/31/06
$129,789 129,789 129,789
$48,000 41,457 34,390
$81,789 88,332 95,399
January 1, 2004 Lease Receivable ..................... 600,000 Cost of Goods Sold ................... 540,000 Sales Revenue .......................... Inventory .............................. December 31, 2004 Cash .................................. Lease Receivable .................... Interest Revenue .................... December 31, 2005 Cash ................................. Lease Receivable .................... Interest Revenue .................... 129,789
600,000 540,000
129,789
81,789 48,000
88,332 41,457
6. (a) The lease is a direct financing type lease from the lessor's point of view or a capital lease from the lessee's point of view. The lease contains a bargain purchase option which satisfies one of the criteria for classification as a direct financing lease. The option to buy for $8,000,000 at the termination of the lease when the asset is expected to have a fair value of $14,000,000 constitutes a bargain purchase option. Additionally, the payments are collectible, and there are no uncertainties as to future lessor costs. (b) Lessor's Lease Amortization Schedule Annual Lease Rental Interest Lease on Lease Receivable Lease Receivable Recovery Receivable $2,800,000 2,596,928 $2,538,396 2,741,468 32,461,604
Date 1/1/04 $35,000,000 12/31/04 $5,338,396* 12/31/05 5,338,396 29,720,136
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*[$35,000,000 - ($8,000,000 x .54027)] 5.74664 = $5,338,396. January 1, 2004 (c) Lease Receivable ................ 35,000,000* Airplanes ...................... 35,000,000 December 31, 2004 Cash ............................. 5,338,396 Lease Receivable ............... Interest Revenue ............... December 31, 2005 Cash ............................. 5,338,396 Lease Receivable .............. 2,741,468 2,596,928 Interest Revenue ..............
2,538,396 2,800,000
Lesson 16
MChoice 1 a 2 a 3 d 4. (a) A deferred tax asset is the deferred tax consequences attributable to deductible temporary differences and operating loss carryforwards. (b) A deferred tax asset should be reduced by a valuation allowance if, based on all available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. More likely than not means a level of likelihood that is at least slightly more than 50%. 5. (a) Deferred Tax Asset ($700,000 x 30%) .. 210,000 Benefit Due to Loss Carryforward ....... 210,000 Benefit Due to Loss Carryforward ...... 210,000 Allowance to Reduce Deferred Tax Asset to Expected Realizable Value .......... 210,000
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(b) Income Tax Expense ($300,000 x 30%) ... Deferred Tax Asset ................... 90,000
90,000
90,000 6. (a)
Allowance to Reduce Deferred Tax Asset to Expected Realizable Value .......... 90,000 Benefit Due to Loss Carryforward ....... Depreciation for Financial Reporting Purposes $160,000 160,000 160,000 160,000 160,000 $800,000
Temporary Year Difference 2003 $(104,000) 2004 (200,000) 2005 40,000 2006 104,000 2007 160,000 -0-
Depreciation for Tax Purposes $264,000 360,000 120,000 56,000 -0 $800,000 $
(b) 2004 2005 2006 2007 Total Future taxable (deduct.) amounts: Depreciation $(200,000) $40,000 $104,000 $160,000 $104,000 Deferred tax liability: $104,000 x 40% = $41,600 at the end of 2003. (c) 2005 2006 2007 Total Future taxable (deductible) amounts: Depreciation $40,000 $104,000 $160,000 $304,000 Rent (70,000) (70,000) (140,000)
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(d)
Temporary Differences Amounts Liability Depreciation $304,000 $121,600 Rent (140,000) Totals $164,000 $121,600
Future Taxable (Deductible)
Tax Rate 40% 40%
Deferred Tax (Asset)
$(56,000) $(56,000) $(56,000) -0-
(e) Deferred tax asset at end of 2004 Deferred tax asset at beginning of 2004 $(56,000) Deferred tax liability at end of 2004 Deferred tax liability at beginning of 2004 80,000 Deferred tax expense Deferred tax (benefit) Deferred tax expense Net deferred tax expense for 2004 Deferred tax (benefit)
$121,600 41,600 $
$(56,000) 80,000 $ 24,000 88,000 56,000
(f) Income Tax Expense ($64,000 + $24,000) .. Deferred Tax Asset ...................... Deferred Tax Liability ................ 80,000 Income Tax Payable ($160,000 x 40%) ..... 64,000
Lesson 17
MChoice 1 c 2 c 3 d
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4. (a) Service cost $390,000 Interest on projected benefit obligation ($360,000 x 10%) 36,000 Expected return on plan assets ($270,000 x 9%) Amortization of prior service cost 75,000 Amortization of unrecognized net gains (36,000) $440,700 Pension expense2004
(24,300)
(b) Pension Expense .................... 440,700 Prepaid/Accrued Pension Cost ...... 65,700 Cash ............................. 375,000 5. CORRIDOR TEST AND GAIN/LOSS AMORTIZATION SCHEDULE Beginning of Year PBO Plan Assets Amortization 2003 $1,400,000 2004 1,560,000 2005 1,960,000 $1,120,000 1,640,000 1,700,000 Cumulative (Gain) Or Loss
Corridor
$140,000 164,000 196,000
$ -0$ -0440,000 27,600* 16,400** -0-
Average Service Years = 2,000 200 = 10 years *$440,000 - $164,000 = $276,000 10 = $27,600 **$440,000 - $396,000 - $27,600 = $16,400. 6. (a) Service cost (projected benefits approach) $450,000 Interest on projected benefit obligation (10% x $560,000) 56,000 Expected return on plan assets (9% x $525,000) (47,250) Amortization of prior service cost (1) 52,000 Amortization of loss (2) 22,800
87
$533,550
Pension expense (1) $260,000 = $260 1,000 200 x $260 = $52,000 (2) Market-related asset value $525,000 10 $ Projected benefit obligation $560,000 10 $ Net loss (beginning of period) Higher of 10% of projected benefit obligation or market-related asset value $170,000
% 52,500
% 56,000
56,000
Amount to be amortized 1,000 200 = $114,000
Expected Future Years of Service = 5 years Number of Employees
$114,000 = $22,800 5 years (b) Pension Expense ..................... Prepaid/Accrued Pension Cost ....... 98,550 Cash ............................. 435,000 533,500
88
Lesson 18
MChoice 1 b 2 c 3 b 4. Balance Sheet 0 1. Ending inventory in 2004 overstated. 2. Failed to accrue 2004 interest revenue. 3. A capital expenditure for factory equipment (useful life, 5 years) was erroneously charged to maintenance expense in 2004. 4. Failed to count office supplies on hand at 12/31/04. Cash expenditures have been charged to Office Supplies Expense during the year 2004. 0 5. Failed to accrue 2004 wages. 0 6. Ending inventory in 2004 understated. 0 + + + 2004 Income Statement + Balance Sheet + 2005 Income Statement
89
7. Overstated 2004 depreciation expense; 2005 expense correct.
5. (a) Accounting estimates will change as new events occur, as more experience is acquired, or new information is obtained. Examples of changes in estimate are: (a) collectibility of receivables, (b) inventory obsolescence, (c) estimated lives or residual values, and (d) warranty costs. Changes in estimates are handled prospectively; that is, in current and future periods. No restatement of previous financial statements is made. (b) A change in accounting entity results in financial statements of a different entity. Examples of changes in entity are: (a) consolidated statements replacing individual statements, (b) different subsidiaries in the group for which consolidated statements are presented, (c) different companies included in combined financial statements, and (d) a pooling of interests. The financial statements of all prior periods presented should be restated to show the financial information for the new reporting entity for all periods. (c) Examples of accounting errors are: (a) a change from an accounting principle that is not generally accepted to an accounting principle that is accepted, (b) mathematical mistakes, (c) changes in estimates that occur because the estimates are not made in good faith, (d) an oversight, (e) a misuse of facts, and (f) misclassification of an asset as an expense or vice versa. Corrections of errors are recorded in the year discovered, are treated as prior period adjustments, and the beginning balance of retained earnings is adjusted. 6. (a)Equipment ........................ 160,000 Depreciation Expense ............. 25,000 Accumulated Deprec. (4 years, 02-05) 100,000 Retained Earnings ................. 85,000 2003 (b) 2005 $375,000* 2004
Income before cumulative effect of accounting changes 275,000* Cumulative effect on prior
$350,000*
90
years of retroactive application of new depreciation method $275,000
(50,000) $325,000
$350,000
*Reduced by $25,000 depreciation expense. Pro forma amounts: Net income $375,000 $330,000 $245,000 (c) Retained earnings (unadjusted) Correction of 2002 error ($160,000 - $25,000) Retained earnings (adjusted) (d) Retained earnings (unadjusted) Correction of error ($160,000 - $75,000) Retained earnings (adjusted) $1,050,000 135,000 $1,185,000 $1,500,000 85,000 $1,585,000
Lesson 19
MChoice 1 a 2 d 3 c 4. 1. Smaller membership. The FASB is composed of seven members, replacing the relatively large 18-member APB. 2. Full-time, remunerated membership. FASB members are wellpaid, full-time members, appointed for renewable five-year terms. The APB members were unpaid and part-time. 3. Greater autonomy. The APB was a senior committee of the AICPA, whereas the FASB is not an organ of any single professional organization. It is appointed by and answerable only to the Financial Accounting Foundation. 4. Increased independence. APB members retained their private positions with firms, companies, or institutions. FASB members must sever all such ties. 5. Broader representation. All APB members were required to be CPAs and members of the AICPA. Currently, it is not necessary to be a CPA to be a member of the FASB. 5. Statement I
91
It is true that users of financial accounting statements have coinciding and conflicting needs for statements of various types. However, to meet these needs, accountants generally prepare a single set of general-purpose financial statements, rather than a number of different types of financial statements. It may be argued that accountants often do prepare special statements for particular purposes, but in general the accounting profession has relied on general purpose financial statements prepared in conformance with generally accepted accounting principles. Statement II It is true that the FASB should be responsive to the needs of the entire economic community, not just the public accounting profession. However, it is not clear whether the FASB will succeed. The FASB will have the best chance of survival if it deals with problems promptly, sets proper priorities, takes whatever action it thinks is right and in the public interest, and handles pressures responsibly without overreacting to them. Statement III The first sentence of Statement III is correct in that during the mid-seventies Congress, through the Moss and Metcalf Committees, did make inquiries into the accounting profession's practices and the accounting and auditing standardsetting process. In fact, the reports submitted by these committees contained some incorrect conclusions and some very strong remedies, but the government has not assumed responsibility for either accounting or auditing standard-setting or their enforcement. Instead, the accounting profession has taken significant steps to overcome the criticisms which emanated from the congressional inquiries and has retained in the private sector both the accounting and auditing tandards-setting functions. At the present time the government appears willing to permit the accounting profession to develop its own standards and to regulate itself with minimal intervention. The AICPA formed the Special Committee on Financial Reporting in 1991. The Committee's charge was to recommend (1) the nature of information that should be made available to others by management and (2) the extent to which auditors should report on the various elements of that information. The Committee's report was made in October 1994. Statement IV The Accounting Standards Executive Committee (AcSEC) was established within the American Institute of Certified Public
92
Accountants, not the Securities and Exchange Commission, to respond to pronouncements of the FASB. The AcSEC does issue Statements of Position, but issues them before the FASB sets standards on the issue. 6. 1. Ending balance 50,000 Beginning balance 134,000 6,000 Difference Uncollectible accts. 190,000 Receivables coll. 41,000 Sales for period $149,000 50,000 41,000 9,000 6,000 134,000 OR Less: Beg. balance Sales for period Ending balance Plus:Rec. collected Write-offs $
$149,000
Accounts Receivable ................ 149,000 Sales .............................. 2. Ending balance 7,500 Beginning balance 30,000 Difference 37,500 Write-off 4,000 Adjusting entry $33,500 $ 7,500 4,000 3,500 30,000 $33,500 Adjusting entry 33,500 OR Beginning balance Ending balance Write-off
149,000 $
Bad Debt Expense ...................... Allowance for Doubtful Accounts ... 3. Ending balance 25,000 Beginning balance 110,000 $ 34,000 25,000
33,500 $
Beginning balance Plus purchases
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Difference 35,000 Purchases 34,000 Payments 101,000 9,000 110,000 OR Less ending balance
$101,000 Payments 101,000
Accounts Payable ................... Cash ........................... 4. Revenue Earned 3,000 Less: Dec. 31 acc. 20,000 Plus: Jan. 1 accrual 23,000 Cash received 2,100 20,900 $20,000 (2,100) 3,000 OR
101,000 $
Beginning balance Plus rev. earned
$20,900
Less ending balance
Cash received
Cash .............................. 20,900 Interest Receivable ........... 20,900 (This entry assumes that the $20,000 interest earned was first recorded as a receivable.)
Lesson 20
MChoice 1 c 2 c 3 c 4. (a) The BASIC ARGUMENT for the publication of financial forecasts in corporate annual reports is to provide the investor with additional information about the future activities of the company upon which to base investment decisions. A SECOND ARGUMENT is that some investors have access to the forecast data currently; it would be more equitable if all investors had access to such information. The attestation by the CPA to such
94
forecast data would provide the forecast data with reliability and permit the investor to have confidence in the forecast. A THIRD ARGUMENT is that circumstances now change so rapidly that historical information is no longer adequate for prediction. (b) ONE ARGUMENT raised against the publication of such forecasts is the expectation that management would present a conservative forecast in order to "look good" when actual results of the year are in. A SECOND POINT often considered is the prospect that the forecast would provide competitors with confidential information thus endangering business strategy and the performance of the firm. A THIRD ARGUMENT is that forecasts are narrow estimates, which makes them difficult to interpret given that the future is not a certainty, and as a result investors may be mislead by them. The attestation by CPAs also can be questioned. There may be a conflict of interest because the forecast in the current year report and the actual results of the next year are both audited by the CPA. There would be concern that the reported results might be adjusted so that the forecast appears to be borne out.
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Exercises For Lesson 1

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Exercises For Lesson 1

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Exercises for Lesson 1

Assuming the company records purchases at the gross amounts, the

Exercises for Lesson 2

Exercises for Lesson3

Sales Cost of sales

Cash, December 31, 2004 (b)

Exercises for Lesson 4

Income Statement Income (before tax) on the contract recognized in 2004

Latest forecast total cost

Total revenue $5,600,000 Total costs 4,600,000

Exercises for Lesson 5

Exercises for Lesson 6

Exercises for Lesson 7

Inventory, 1/1/04 Purchases during 2004 Sales during 2004

$ 300,000 1,500,000 2,000,000

$ 25.00 $ 24.00 $ 24.00

Exercises for Lesson 8

Put Option + 270 | 1,200 | 120 | 600 | 82 | 48 + 620 |

Exercises for Lesson 9

Exercises for Lesson 10

8. Cost Less salvage value

Cash Other assets

$13,910 8,000 4,000 9,000

Loans from partners:

18,100 3,090 11,200 $67,300

(b) To record estimated liability

(a) stock? (b) treasury (c) share.

INSTRUCTIONS (a) Compute the amount of pension expense to be reported for

700,000 450,000 84,000

Rankin $ $ $ 1,000 5,280 6,280

1,200 3,520 $ 13,720

1,000 1,200 8,800 $ 20,000

d. Walton, capital............................................................................. Rose, capital................................................................................. Banks, capital......................................................................... 2,000 2,000 4,000

Cash.............................................................................................. Banks, capital.........................................................................

8,000 4,000 38,000

68,000 18,000 9,000 18,000

Mona Capital Loan 30% $(3,090) 2,214 (876)

20% $(4,000) $(11,200) $ 1,476 (9,724) (9,000)

(4,000) (4,000) (4,000)

(9,724) (9,000) 1,432 (8,292) (9,000) 400 (7,892) (9,000)

(7,892) (9,000) 200 (7,692) (9,000)

(2,172) (9,330) 9,330 $ $ $ $ $ 8,000

2,172 1,828 (7,692) 7,692 $ $ 9,000

$680,000 510,000 $170,000 $900,000 680,000 $220,000 510,000 170,000 220,000

Common 72,000 54,000 $126,000 Common 72,000 36,000 30,000 $138,000 $ $

12/31/04 518,211 429,879 334,480 (d) 12/31/05 12/31/06

$129,789 129,789 129,789

$48,000 41,457 34,390

$81,789 88,332 95,399

Date 1/1/04 $35,000,000 12/31/04 $5,338,396* 12/31/05 5,338,396 29,720,136

Depreciation for Tax Purposes $264,000 360,000 120,000 56,000 -0 $800,000 $

Future Taxable (Deductible)

Tax Rate 40% 40%

Deferred Tax (Asset)

$(56,000) $(56,000) $(56,000) -0-

$(56,000) 80,000 $ 24,000 88,000 56,000

$140,000 164,000 196,000

$ -0$ -0440,000 27,600* 16,400** -0-

Amount to be amortized 1,000 200 = $114,000

Expected Future Years of Service = 5 years Number of Employees

7. Overstated 2004 depreciation expense; 2005 expense correct.

years of retroactive application of new depreciation method $275,000