ACCT 3311 Spring 2012 Exam 3 Version B

Name________________________ Signature_____________________

Part 1: Multiple Choice (3 points each), mark your answer on the scantron: The following information should be used to answer the next question. During 2007 & 2008, ABC Company incurred the following expenditures to construct a building: Jan 1, 2007 - $2,000,000. Sep 30,2008 - $1,000,000. The company has a December year end and the following debt was outstanding during 2007 & 2008: $2,500,000, 10-year, 10% note payable which was specifically borrowed for the construction of the building. The building was completed on Sep 30, 2008 1. What is the amount of interest that should be capitalized by the company during 2008 (rounded to the nearest dollar)? a. $165,000. b. $150,000. c. $200,000. d. $300,000. e. $109,000. In a period of falling prices, the inventory method which tends to give the highest reported Cost of Goods Sold balance is a. FIFO. b. moving average. c. LIFO. d. weighted-average. The replacement of a component of a machine cost $10,000 and increased the fair market value of the machine by $5,000. The component increased the machines quality of production. The original engine part cost $15,000 and had accumulated depreciation to date of $6,000. The entry to record the improvement should include: a. a debit to a loss account for $5,000. b. a debit to a loss account for $9,000. c. a credit to the machine account for $10,000. d. a credit to accumulated depreciation for $6,000. e. a debit to the machine account for $15,000. The purpose of Statements of Financial Accounting Concepts is to a. b. c. establish GAAP. modify or extend the existing FASB Standards Statement. form a conceptual framework for solving existing and emerging problems.

2.

3.

4.

d. 5.

determine the need for FASB involvement in an emerging issue.

Glen Inc. and Armstrong Co. have an exchange with no commercial substance. The asset given up by Glen Inc. has a book value of $12,000 and a fair market value of $15,000. The asset given up by Armstrong Co. has a book value of $20,000 and a fair market value of $19,000. Boot (cash) of $4,000 is received by Armstrong Co. What amount should Glen Inc. record for the asset received from Armstrong? a. $15,000 b. $16,000 c. $19,000 d. $20,000 e. $13,000 Differences between the FASB and the APB (Accounting Principles Board include which one of the following: a. The FASB has smaller membership. b. The FASB is less autonomous. c. The FASB has part-time, unpaid membership. d. The FASB has less independence. Bad Company paid $3,000 on Sep 30, 2010 for a three-year insurance policy and initially recorded the entire amount as a debit to Insurance expense and a credit to cash. Given this initial entry, the December 31, 2010 adjusting entry that is required to correctly record the balance sheet and income statement accounts is: a. debit Insurance Expense and credit Prepaid Insurance, $1,000. b. debit Insurance Expense and credit Prepaid Insurance, $2,750. c. debit Prepaid Insurance and credit Insurance Expense, $250 d. debit Prepaid Insurance and credit Insurance Expense, $2,750. e. debit Insurance expense and credit Prepaid Insurance, $250. Dan Corporation reports the following information: Net income $100,000 Depreciation expense 35,000 Loss on sale of equipment 20,000 Increase in Accounts Receivable 10,000 Increase in Common Stock 75,000 Decrease in Accounts Payable 50,000 Decrease in Long term Investments 90,000 Dan should report cash provided by operating activities of a. $155,000. b. $260,000. c. $170,000. d. $55,000. e. $95,000.

6.

7.

8.

9.

Aside from purchase price, which of the following events typically increase the value of the land account: a. The salvage value from selling parts of an old building purchased with the land and subsequently knocked down. 2

b. excavation costs in preparation for erecting the new building. c. private driveways and parking lots. d. assumption of any liens or mortgages. 10. Pink Printing Company determines that a printing press, that is being used in the operations of the business, has suffered a permanent impairment in value because of technological changes. Which of the following statements is most correct regarding the generally accepted accounting procedures relating to this item? a. An impairment loss should be recorded for the period. b. Future recovery of any impairment loss recorded is not allowed for this item. c. both a and b are correct statements. d. answers a, b, and c are incorrect statements. On January 1, 2008, Dani Company factored receivables with a carrying amount of $400,000 to Head factor Company. Head factor Company assesses a finance charge of 1% of the receivables and retains 5% of the receivables. Assume that Dani factors the receivables on a with recourse basis. The recourse obligation has a fair value of $1,500. Which of the following entries is correct when Head factor Company records their journal entries related to the transaction. a. Debit the financing revenue account for $4,000. b. Credit the Recourse Obligation account for $1,500. c. Debit the Cash account for $376,000. d. Debit the Accounts Receivable account for $400,000. e. Credit the financing revenue account for $5,500. The following data concerning the retail inventory method are taken from the financial records of Stone Company. Beginning inventory Purchases Cost $ 50,000 120,000 Retail $ 100,000 200,000

11.

12.

In addition, Sales for the period are $190,000, markdowns are $50,000, and freight costs were $5,000. The ending inventory at cost when using the LIFO retail inventory method is (rounded to the nearest dollar): a. $30,000. b. $42,000. c. $60,000. d. $50,000. 13. Black Company calculates the Net realizable value of product 20NT to be $25 per unit and a normal profit expected on the product is $5. The replacement cost is $28/unit. The cost of one unit of 20NT is $26, At what amount per unit should product 20NT be reported, applying lower-of-cost-or-market? a. $25. b. $26. c. $27. d. $28.

14.

Dandy Co. adopted the dollar-value LIFO method of inventory valuation on December 31, 2005. Its inventory at that date was $100,000 and the relevant price index was 100. Information regarding inventory for subsequent years is as follows: Date December 31, 2006 December 31, 2007 Inventory at Current Prices $120,000 250,000 Current Price Index 120 125

What is the cost of the ending inventory at December 31, 2007 under dollar-value LIFO? a. $200,000. b. $225,000. c. $250,000. d. $245,000. 15. Aged Inc. made a $100,000 sale on account with the following terms: 3/15, n/30. If the company uses the gross method to record sales made on credit, what is/are included in the correct journal entries related to the recording of the sale? a. Credit Sales for $97,000. b. Debit Accounts Receivable for $100,000 and Sales Discounts for $3,000. c. Debit cash for $100,000. d. Debit Accounts Receivable for $97,000 and credit Sales Discounts for $3,000. e. Debit Accounts Receivable for $100,000. On December 31, 2006, Grad Co. has $3,000,000 of short-term notes payable due on March 1, 2007. On March 1, 2007, Grad Co. refinanced $1,000,000 of the notes payables which is now due on March 1, 2008 and paid the remaining balance. Based upon this information, the amount of the short-term notes payable that should be reported as current liabilities on the December 31, 2006 balance sheet which is issued on March 3, 2007 is a. $0. b. $3,000,000. c. $2,000,000. d. $1,000,000 On January 1, 2010, Huber Co. sold 12% bonds with a face value of $600,000. The bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $646,200 to yield 10%. Using the effective-interest method of amortization, interest expense for 2010 is a. $60,000. b. $64,436. c. $64,620. d. $72,000.

16.

17.

18.

On Feb 1, 2010, Kat Corporation issues 30-year bonds, dated January 1, 2010, with a par value of $200,000 at 100. These bonds have an annual interest rate of

4 percent, payable semiannually on January 1 and July 1. Which of the following entries will be recorded on Feb, 1 2010 related to the issuance of the bonds between interest dates: a. a debit to Bonds Payable for $200,000. b. a credit to Bond Interest payable for $666.67. c. a debit to cash for $200,000. d. a credit to Premium on Bonds Payable for $333.33. e. a debit to Bond Interest expense for $333.33. 19. Shangra-La Company incurred $1,500,000 in costs ($400,000 in 2009 and $1,100,000 in 2010) to develop a computer software product. $500,000 of this amount was expensed before technological feasibility was established in early 2010. The product is expected to earn future revenues of $4,000,000 over its 5year life, as follows: 2010 $1,000,000; 2011 $1,000,000; 2012 $800,000; 2013 $800,000; and 2014 $400,000. What portion of the $1,500,000 computer software costs should be expensed in 2010 (Note: include any R&D expense and amortization expense)? a. $250,000 b. $300,000 c. $350,000 d. $1,100,000 Clip Corporation acquired Sign Products on January 1, 2008 for $4,000,000, and recorded goodwill of $750,000 as a result of that purchase. At December 31, 2008, the Sign Products Division had a fair value of $3,600,000 and a carrying value (including goodwill) of 3,500,000. The net identifiable assets of the Division (excluding goodwill) had a fair value of $2,900,000 at that time. What amount of loss on impairment of goodwill should Clip record in 2008? a. $300,000 b. $50,000 c. $200,000 d. $150,000 e. $ -0CakeMix Company includes 1 coupon in each box of cake mix that it packs, and 1 coupon and $5 is redeemable for a premium (a mixing bowl). In 2010, CakeMix Company purchased 100,000 mixing bowls at $10 each and sold 50,000 boxes of cake mix at $4 per box; 20,000 coupons were presented for redemption in 2010. It is estimated that 50% of the coupons will eventually be presented for redemption. The contingent liability (the Estimated Liability for Premiums) that CakeMix Co will record at December 31, 2010 will be: a. $5,000 b. $50,000. c. $25,000. d. $0. e. $150,000. Which of these is not included in an employer's payroll tax expense? a. Federal income taxes b. Federal unemployment taxes c. State unemployment taxes 5

20.

21.

22.

d. F.I.C.A. (social security) taxes 23. Pike Co. purchased a machine on July 1, 2010, for $600,000. The machine has an estimated useful life of ten years and a salvage value of $50,000. The machine is being depreciated from the date of acquisition by the activity method. Pike estimates that the machine will be used for 10,000 hours. The machine was used for 300 hours in 2010 and 2,000 hours in 2011. For the year ended December 31, 2011, Pike should record depreciation expense on this machine of a. $126,500. b. $120,000. c. $110,000. d. $55,000. e. $12,000. Raul Company purchased a machine on January 1, 2004 for $520,000. The machine was being depreciated on the straight-line method over an estimated useful life of 5 years, with salvage value of $20,000. At the beginning of 2007, the company paid $80,000 to overhaul the machine. As a result of this improvement, the company estimated that the useful life of the machine would be extended an additional 4 years (9 years total from the date of purchase) and the salvage value at the time would be zero. What should be the depreciation expense recorded for the machine in 2007? a. $34,375 b. $46,667 c. $50,000 d. $100,000 e. $36,667

24.

Part 2: Lower-of-cost-or-market (10 points) Yogi Company began operations in 2009 and determined its ending inventory at cost and at lower-of-cost-or-market at December 31, 2009, and December 31, 2010. This information is presented below. 12/31/09 12/31/10 Cost $ 865,000 1,025,000 Lower-of-Cost-or-Market $817,500 987,500

(a) Prepare the journal entries required at December 31, 2009, and December 31, 2010, assuming that the direct method is used.

(b) Prepare journal entries required at December 31, 2009, and December 31, 2010, assuming that the allowance method is used.

(c) Which (if any) of the two methods above provides the higher net income in each year? Circle one of the 3 possible answers below. 1. Allowance method 2. Direct Method 3. Both the Same

(a)

12/31/09

Cost of Goods Sold................................ Inventory....................................... Cost of Goods Sold................................ Inventory....................................... Loss Due to Market Decline of Inventory.............................................. Allowance to Reduce Inventory to Market.................................... Allowance to Reduce Inventory to Market............................................. Recovery of Loss Due to Market Decline of Inventory.......

47,500 47,500 37,500 37,500

12/31/10

(b)

12/31/09

47,500 47,500

12/31/10

10,000* 10,000 $ 865,000 (817,500) $ 47,500

*Cost of inventory at 12/31/09....................................... Lower-of-cost-or-market at 12/31/09........................... Allowance amount needed to reduce inventory to market (a)............................................................. Cost of inventory at 12/31/10...................................... Lower-of-cost-or-market at 12/31/10........................... Allowance amount needed to reduce inventory to market (b)............................................................. Recovery of previously recognized loss

$1,025,000 (987,500) $ 37,500

= (a) (b) = $47,500 $37,500 = $10,000

(c)

Both methods of recording lower-of-cost-or-market adjustments have the same effect on net income.

Part 3: Multiple-step income statement (10 points) Shown below are the general ledger account balances included in the partial trial balance for 2008 that was prepared by the bookkeeper of XYZ Corporation. XYZ Corporation INCOME STATEMENT As of December 31, 2008 Sales revenue Loss on sale of equipment Cost of goods sold Selling expenses Accounts Receivable $1,350,000 (8,500) (500,000) (150,000) 55,000

Administrative expense Interest income Prepaid Insurance Loss on disposal of a component of the business (gross amount) Cash Unearned Revenue Sales Discounts

(250,000) 10,500 26,000 (10,000) 44,000 24,000 50,000

Instructions: Prepare (on the next page) a Multiple-step income statement for 2008 for XYZ Corporation that is presented in accordance with generally accepted accounting principles (including Earnings per Share calculation). XYZ Corporation has a 30% federal income tax rate on all tax related items. XYZ has 100,000 common stock shares authorized and 10,000 issued and outstanding. It also has 50,000 preferred stock shares authorized and 2,000 issued and outstanding. There were no Preferred dividends for 2008.

XYZ Corporation INCOME STATEMENT For the period ended December 31, 2008

Sales Revenue Less sales discount Net sales Cost of goods sold.. Gross profit on sales............................................................................. Operating Expenses Selling expenses Administrative expenses. Income from operations........................................................................ Other Revenues and Gains Interest Income................................................................................ Other Expenses and Losses Loss on sale of Equipt..................................................................... Income before income tax..................................................................... Income tax........................................................................................ Income from continuing Operations.................................................... Discontinued Operations Loss on disposal, net of $3,000 tax Net Income 150,000 250,000

$1,350,000 (50,000) 1,300,000 500,000 800,000

400,000 400,000

10,500

(8,500) 402,000 120,600 218,400

(7,000) 211,400

Basic Earnings per Share: EPS from continuing operations EPS from continuing operations Total Basic Earnings per Share: 21.84 (0.70) 21.14

10

Part 4: Extinguishment/retirement and issuance of Bonds Payable (10 points) Dave, Inc. had outstanding $7,000,000 of 12% bonds (interest payable July 31 and January 31) due in 10 years. On July 1, it issued $10,000,000 of 10%, 15-year bonds (interest payable July 1 and January 1) at 101. A portion of the proceeds was used to call the 12% bonds at 102 on August 1. Unamortized bond premium and issue cost applicable to the 12% bonds were $200,000 and $50,000, respectively. A)Prepare the journal entries necessary to record the issue of the new bonds Cash....................................................................................... 10,100,000 Premium on Bonds Payable (.01 X $10,000,000).... 100,000 Bonds Payable ........................................................ 10,000,000

B)Prepare the journal entries necessary to record the issue of the refunding (retirement) of the bonds Bonds Payable................................................................... Premium on Bonds Payable ............................... 200,000 Cash ($7,000,000 X 1.02) ...................................... 7,140,000 Unamortized Bond Issue Costs......................... 50,000 Gain on redemption......................... 10,000 (To record retirement of 12% bonds) Calculation of loss: Reacquisition price........................................................... $7,140,000 Less: Net carrying amount of bonds redeemed: Par value.................................................................... Unamortized bond premium ............................... Unamortized bond issue costs.......................... 7,150,000 Gain on redemption ......................................................... 10,000 7,000,000

$7,000,000 200,000 (50,000) $

11

Part 5: Goodwill (10 points) Robbie Manufacturing Company decided to expand further by purchasing Cork Company. The balance sheet of Cork Company as of December 31, 2007 was as follows: Cork Company Balance Sheet December 31, 2007 Liabilities & Equities $ 300,000 Accounts payable $ 300,000 300,000 Common stock 800,000 100,000 Retained earnings 600,000 1,000,000 $1,700,000 Total Liabilities & Equities $1,700,000

Assets Cash Receivables Inventory Property Plant & Equipt (net) Total assets

An appraisal, agreed to by the parties, indicated that the fair market value of the Property Plant & Equipment was $1,100,000. In addition, Robbie identified a patent that was internally generated by Cork and assessed the fair market value of $10,000 for the patent. The fair market value of all other relevant accounts are equal to the amount reported on the balance sheet. The agreed purchase price was $1,450,000, and this amount was paid in cash to the previous owners of Cork Company. Instructions (a) Determine the amount of goodwill (if any) implied in the purchase price of $1,450,000. Show calculations. (b) Prepare Robbies journal entries to record the purchase of Cork Company.

a) Purchase price FV of identifiable net assets= 1,450,000 (1,700,000+100,000+10,000-300000)=-60,000 Therefore no goodwill is recorded b) Cash Receivables Inventory P, P, & E Patent A/P Cash Gain on sale 300,000 300,000 100,000 1,100,000 10,000 300,000 1,450,000 60,000

12

13

Present Value of $1
Perio ds 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 3% 0.97087 0.94260 0.91514 0.88849 0.86261 0.83748 0.81309 0.78941 0.76642 0.74409 0.72242 0.70138 0.68095 0.66112 0.64186 4% 0.96154 0.92456 0.88900 0.85480 0.82193 0.79031 0.75992 0.73069 0.70259 0.67556 0.64958 0.62460 0.60057 0.57748 0.55526 5% 0.95238 0.90703 0.86384 0.82270 0.78353 0.74622 0.71068 0.67684 0.64461 0.61391 0.58468 0.55684 0.53032 0.50507 0.48102 6% 0.94340 0.89000 0.83962 0.79209 0.74726 0.70496 0.66506 0.62741 0.59190 0.55839 0.52679 0.49697 0.46884 0.44230 0.41727 8% 0.92593 0.85734 0.79383 0.73503 0.68058 0.63017 0.58349 0.54027 0.50025 0.46319 0.42888 0.39711 0.36770 0.34046 0.31524 10% 0.90909 0.82645 0.75131 0.68301 0.62092 0.56447 0.51316 0.46651 0.42410 0.38554 0.35049 0.31863 0.28966 0.26333 0.23939 12% 0.89286 0.79719 0.71178 0.63552 0.56743 0.50663 0.45235 0.40388 0.36061 0.32197 0.28748 0.25668 0.22917 0.20462 0.18270

Present Value of an Ordinary Annuity of $1

Period s 1 2 3 4 5 6 7 8 9 10 11 12 13 14 3% 0.97087 1.91347 2.82861 3.71710 4.57971 5.41719 6.23028 7.01969 7.78611 8.53020 9.25262 9.95400 10.6349 6 11.2960 7 4% 0.96154 1.88609 2.77509 3.62990 4.45182 5.24214 6.00205 6.73274 7.43533 8.11090 8.76048 9.38507 9.98565 10.5631 2 5% 0.95238 1.85941 2.72325 3.54595 4.32948 5.07569 5.78637 6.46321 7.10782 7.72173 8.30641 8.86325 9.39357 9.89864 6% 0.94340 1.83339 2.67301 3.46511 4.21236 4.91732 5.58238 6.20979 6.80169 7.36009 7.88687 8.38384 8.85268 9.29498 8% 0.92593 1.78326 2.57710 3.31213 3.99271 4.62288 5.20637 5.74664 6.24689 6.71008 7.13896 7.53608 7.90378 8.24424 10% 0.90909 1.73554 2.48685 3.16987 3.79079 4.35526 4.86842 5.33493 5.75902 6.14457 6.49506 6.81369 7.10336 7.36669 12% 0.89286 1.69005 2.40183 3.03735 3.60478 4.11141 4.56376 4.96764 5.32825 5.65022 5.93770 6.19437 6.42355 6.62817

14

15

11.9379 4

11.1183 9

10.3796 6

9.71225

8.55948

7.60608

6.81086

15