Make your own free website on Tripod.com

Final Exam Practice Questions

 

Chapter 7

 

7.     The Spirit Company, a manufacturer of cheerleading products, had a beginning balance in raw materials inventory of $20,000. During the year, an additional $80,000 of raw materials was purchased. Raw materials worth $75,000 was transferred to work-in-process inventory during the year. What is Spirit's ending raw materials inventory?

a.

$15,000

b.

$20,000

c.

$25,000

d.

$75,000

 

 

ANS:    C

 

        10.    Using these abbreviations-DL = Direct Labor, MO = Manufacturing Overhead, RM = Raw Materials, WIP = Work-in-Process, FG = Finished Goods, COGS = Cost of Goods Sold-how would you represent the flow of manufacturing costs through the accounts? (Use + to mean "add to" and ( to mean "is transferred to.")

a.

DL + MO ® WIP ® RM ® COGS

b.

RM + DL + MO ® WIP ® FG ® COGS

c.

WIP ® FG ® COGS

d.

RM + DL ® WIP + MO ® FG ® COGS

 

 

ANS:    B

 

Value Company's beginning and ending inventories for the fiscal year ended September 30, Year 5, are

 

 

October 1, Year 4

September 30, Year 5

Raw materials

$15,000

$22,000 

Work-in-process

 40,000

35,000

Finished goods

  8,000

12,000

 

 

 

Production data for the fiscal year ended September 30, Year 5, are

Raw materials purchased

 

$ 80,000  

Purchase discounts

 

 1,000

Direct labor

 

100,000 

Manufacturing overhead

 

75,000

 

 

        12.    (CMA adapted, Dec 95 #28) Refer to the Value Company example. Cost of goods sold for the year ended September 30,Year 5, for Value Company is

a.

$262,000

b.

$252,000

c.

$260,000

d.

$248,000

 

 

ANS:    D

 

        13.    (CMA adapted, Dec 95 #29) Refer to the Value Company example. The total value of inventory to be reported on the balance sheet as of September 30, Year 5, for Value Company is

a.

$22,000

b.

$35,000

c.

$12,000

d.

$69,000

 

 

ANS:    D

 

        23.    In a period of rising prices, use of the FIFO rather than LIFO inventory cost flow assumption results in

a.

a lower cost of goods sold and a lower ending inventory

b.

a lower beginning inventory and a lower ending inventory

c.

a higher cost of goods sold

d.

a lower cost of goods sold and a higher ending inventory

 

 

ANS:    D

Inventory

 

 

Date

Units

$/unit

Beginning inventory, Year 1

January

10

1.00

 

 

 

 

Purchases

January

15

1.10

 

February

20

1.20

 

June

15

1.30

 

September

15

1.25

Ending inventory, Year 1

December

30

 

 

 

        31.    Refer to the Inventory example. Under a periodic inventory system, what is the cost of goods sold reported in the Year 1 income statement using the FIFO cost flow assumption?

a.

$38.25

b.

$50.50

c.

$53.25

d.

$56.25

 

 

ANS:    B

 

        32.    Refer to the Inventory example. Under a periodic inventory system, what is the ending inventory reported on the Year 1 balance sheet using the LIFO cost flow assumption?

a.

$32.50

b.

$38.25

c.

$50.50

d.

$56.25

 

 

ANS:    A

 

        33.    Refer to the Inventory example. Under a periodic inventory system, what is the cost of goods sold reported in the Year 1 income statement using the weighted-average cost flow assumption?

a.

$32.73

b.

$49.80

c.

$51.40

d.

$53.25

 

 

ANS:    D

 

        34.    Using the LIFO cost flow assumption can mislead users of financial statement by

a.

encouraging managers to increase purchases

b.

manipulating net income

c.

showing increases in short-term liquidity

d.

overstating the balance sheet

 

 

ANS:    B

 

Addison Hardware

 

Addison Hardware began the month of November with 150 large brass switchplates on hand at a cost of $4.00 each. These switchplates sell for $7.00 each. The following schedule presents the sales and purchases of this item during the month of November.

 

 

Purchases

 

 

 Date of Transaction

 Quantity Received

 Unit Cost

 Units Sold

November 5

 

 

100

November 7

200

$4.20 

 

November 9

 

 

150

November 11

200

4.40

 

November 17

 

 

220

November 22

250

4.80

 

November 29

 

 

100

 

 

        35.    (CMA adapted, Dec 92 #25) Refer to the Addison Hardware example. If Addison uses FIFO inventory pricing, the value of the inventory on November 30 would be

a.

$936

b.

$1,046

c.

$1,076

d.

$1,104

 

 

ANS:    D

 

        36.    (CMA adapted, Dec 92 #27) Refer to the Addison Hardware example. If Addison uses weighted average inventory pricing, the gross profit for November would be

a.

$1,046

b.

$1,482

c.

$1,516

d.

$1,574

 

 

ANS:    B

 

        37.    (CMA adapted, Dec 92 #28) Refer to the Addison Hardware example. If Addison uses periodic LIFO inventory pricing, the cost of goods sold for November would be

a.

$2,416

b.

$2,474

c.

$2,508

d.

$2,584

 

 

ANS:    D

 

        38.    Refer to the Addison Hardware example. A growing firm is contemplating switching from a FIFO to a LIFO cost flow assumption for inventories and cost of goods sold because it have recently experienced increasing manufacturing costs for its products and anticipates a prolonged period of increasing quantities and manufacturing costs in the future. The firm wishes to know which of the following statements about the effect of the switch to LIFO is correct, relative to remaining on FIFO (ignore income tax effects):

a.

the current ratio will be higher

b.

the inventory turnover will be lower

c.

the cost of goods sold to sales percentage will be lower

d.

none of the above

 

 

ANS:    D

 

Inventory Record

 

The inventory record for a particular item for Year 2 appears below. The firm uses a periodic inventory system.

 

Inventory, January 1, Year 2

20,000

$0.20

$4,000

Purchases:

 

 

 

   March 2

 4,000

  .24

$  960

   April 30

 3,000

  .28

   840

   June 15

 6,000

  .32

 1,920

   September 30

 2,000

  .26

   520

   December 15

 1,000

  .20

   200

      Total purchases

16,000

 

$4,440

Total available for sale

36,000

 

$8,440

Units sold

28,000

 

 

 

 

        39.    Refer to the Inventory Record example. The cost of goods sold for year 2 under FIFO is:

a.

$6,120

b.

$6,320

c.

$6,520

d.

$6,840

 

 

ANS:    A

 

        40.    Refer to the Inventory Record example. The cost of goods sold for year 2 under LIFO is:

a.

$6,120

b.

$6,320

c.

$6,520

d.

$6,840

 

 

ANS:    D

 

        41.    Refer to the Inventory Record example. The cost of goods sold for year 2 under weighted-average cost-flow assumption is (rounded to the nearest dollar):

a.

$7,772

b.

$6,972

c.

$6,564

d.

$6,220

 

 

ANS:    C

 

        42.    A firm using FIFO had a beginning inventory of $48,000, an ending inventory of $56,000, and a pretax income of $400,000. If it had used LIFO, its beginning inventory would have been $20,000, its ending inventory would have been $16,000, and its pretax income would have been:

a.

$388,000

b.

$396,000

c.

$404,000

d.

$412,000

 

 

ANS:    A

 

        43.    A firm using FIFO had a beginning inventory of $48,000, an ending inventory of $56,000, and a pretax income of $400,000. If it had used LIFO, its beginning inventory would have been $20,000, and its ending inventory would have been $16,000. From the information provided, one can conclude that

a.

quantities increased and prices decreased

b.

quantities decreased and prices increased

c.

prices increased but we cannot conclude what happened to quantities

d.

quantities decreased but we cannot conclude what happened to prices

 

 

ANS:    B

 

16.          The inventory record for Item S9 reveals the following for Year 4. The firm uses a periodic inventory system.

 

 

Units

Per Unit Cost

Total

Inventory, January 1, Year 4

1,800

1.60

2,880

Purchases:

 

 

 

   February 18

  600

1.68

1,008

   May 2

  900

1.72

1,548

   July 26

1,500

1.80

2,700

   September 29

1,200

1.84

2,208

   December 3

1,800

1.88

3,384

      Total purchases

6,000

 

$10,848  

      Total available for sale

7,800

 

$13,728  

Less inventory, December 31, Year 4

(2,400)

 

    ?

Units sold during Year 4

5,400

 

    ?

 

Required:

a.

Compute the cost of ending inventory assuming that a FIFO cost-flow assumption is used.

b.

Compute the cost of ending inventory assuming that a LIFO cost-flow assumption is used.

c.

Compute the cost of goods sold for the period assuming a FIFO cost flow assumption

 

 

 ANS:  

 

a.

FIFO ending inventory

 

 

   1,800 ´ $1.88

$3,384

 

   600 ´ $1.84

 1,104

 

   Total

$4,488

b.

LIFO ending inventory

 

 

   600 ´ $1.60

$2,880

 

   200 ´ $1.68

 1,008

 

   Total

$3,888

 

 

 

c

 

 

 

 

 

        17.    For the following six items, assume that Talbot Company, a growing profitable company, has large and growing inventories. Assume that Talbot Company has been using a FIFO cost flow assumption and plans to switch to LIFO for both financial reporting and tax reporting. Assume that Talbot pays all income taxes currently, as accrued, in cash.

 

Required:

Fill in each of the blanks below with one of these: larger, smaller, unchanged, or insufficient (information given to answer question). Several years after the switch from FIFO to LIFO:

 

1.

Working capital will be ___________________________.

2.

Accounts payable will be __________________________.

3.

On the statement of cash flows, cash provided by operating activities will be ______________.

4.

Total stockholders' equity will be ___________________.

5.

Deferred tax balance on the balance sheet will be ______________________.

6.

Inventory turnover will be ____________________.

 

 

ANS:   

1. smaller

2. unchanged

3. larger

4. smaller

5. unchanged

6. larger

 

        Chapter 8

 

Chapter 9

 

 

        5.  (CMA adapted, Jun 92 #20) According to SFAS No. 5, Accounting for Contingencies, a loss contingency should be accrued on a company's records only if it is

a.

reasonably possible that a liability has been incurred and the amount of the loss is known

b.

probable that a liability has been incurred and the amount of the loss is unknown

c.

probable that a liability has been incurred and the amount of the loss can be reasonably estimated

d.

reasonably possible that a liability has been incurred and the amount of the loss can be reasonably estimated

 

 

ANS:    C

 

        6.  (CMA adapted, Jun 92 #21) According to SFAS No. 5, Accounting for Contingencies, a gain from contingencies would

a.

be recorded when condemnation awards are probable and can be reasonably estimated.

b.

be recorded when damages to be awarded in a copyright infringement suit are highly probable.

c.

be recorded when disclosure in the notes to financial statements only could be misleading.

d.

not be recorded under any circumstances.

 

 

ANS:D

 

        8.  If a customer pays in advance for a subscription to a magazine, how does the magazine publisher account for that advance payment when received?

a.

debit to subscription advances from customers and credit to cash

b.

debit to accounts receivable and credit to inventory

c.

debit to cash and credit to subscription advances from customers

d.

debit to inventory and credit to accounts receivable

 

 

ANS:    C

           

 

Matthew Company

 

On January 1, Year 4, Matthew Company issued 7 percent term bonds with a face amount of $1 million due January 1, Year 12. Interest is payable semi-annually on January 1 and July 1. On the date of issue, investors were willing to accept an effective interest rate of 6 percent.

 

        17.    (CMA adapted, Jun 96 #22) Refer to the Matthew Company example. Assume the bonds were issued on January 1, Year 4. for $1,062,809. Using the effective interest amortization method, Matthew Company recorded interest expense for the six months ended June 30, Year 4, in the amount of

a.

$35,000

b.

$70,000

c.

$63,769

d.

$31,884

 

 

ANS:    D

 

        18.    (CMA adapted, Jun 96 #23) Refer to the Matthew Company example. The bonds were issued on January 1, Year 4, at

a.

a premium

b.

an amortized value

c.

a discount

d.

face value

 

 

ANS:    A

 

        19.    On February 1, Year 1, a firm issues $100,000 semi-annual 12% bonds at par plus accrued interest. The interest is payable on July 1 and January 1 of each year. What entry is necessary to record the issuance of the bonds on February 1?

a.

Cash                      100,000

     Bonds Payable                       100,000

b.

Cash                      101,000

     Bonds Payable                       101,000

c.

Cash                      100,000

Interest Payable            1,000

     Bonds Payable                       101,000

d.

Cash                      101,000

     Bonds Payable                       100,000

     Interest Payable                      1,000

 

 

ANS:    D

 

        20.    In Year 7, Band Manufacturing issued $100,000 semi-annual 12% bonds at par. Interest is payable on July 1 and January 1. What entry is necessary at December 31, Year 9?

a.

Interest Expense            6,000

     Cash                                  6,000

b.

Interest Expense            6,000

     Bonds Payable                         6,000

c.

Interest Expense            6,000

     Interest Payable                      6,000

d.

Interest Expense           12,000

     Interest Payable                     12,000

 

 

ANS:    C

 

        22.    Bonds are issued at greater than par value when

a.

the bonds are risk free

b.

the market interest rate is less than the stated interest rate on the bond

c.

the market rate of interest is declining

d.

the market interest rate is greater than the stated interest rate on the bond

 

 

ANS:    B

 

The Drum Co

 

On January 1, Year 1, The Drum Co., Inc., issues $100,000 par value, 10% bonds maturing in 10 years to yield 12% per year, compounded semiannually on January 1. Use the present value tables.

 

        23.    Refer to The Drum Co example. How much are the initial issue proceeds?

a.

$32,197

b.

$88,530

c.

$100,000

d.

$112,462

 

 

ANS:    B

 

        24.    Refer to The Drum Co example. What is the bonds payable account (net of any bond discount or premium) at the end of Year 2?

a.

$104,374

b.

$100,000

c.

$89,894

d.

$85,519

 

 

ANS:    C

 

        25.    When the market interest rate exceeds the coupon rate;

a.

the market price of the bond will be more than par

b.

the market price of the bond will be less than par

c.

the market price of the bond will be equal to par

d.

the market price is not affected

 

 

ANS:    B

 

        26.    (CMA adapted, Jun 86 #5) A bond issue sold at a premium is valued on the statement of financial position at the

a.

maturity value

b.

maturity value plus the unamortized portion of the premium

c.

maturity value less the unamortized portion of the premium

d.

current market value

 

 

ANS:    B

 

        27.    (CMA adapted, Dec 86 #20) On January 1, Year 1, Straf Company sold its 5-year, $100,000 face value, 8% bonds at $108,530, to yield an effective annual interest rate of 6%. The bonds are dated January 1, Year 1, and interest is payable annually on January 1. Using the effective interest method of premium amortization, the amount of interest expense (rounded to the nearest dollar) reported by Straf Company in Year 1 is

a.

$1,488

b.

$6,512

c.

$8,000

d.

$8,682

 

 

ANS:    B

 

Harris Corporation

 

Harris Corporation issued $2,000,000, 10-percent, 10-year bonds on January 2, Year 2. The bonds pay interest semiannually on January 1 and July 1. The bonds were priced on the market to yield 8 percent.

 

        28.    Refer to the Harris Corporation example. The issue price of the bonds is calculated as follows:

a.

the present value of $2,000,000 at 10 percent for 10 periods, plus the present value of an annuity of $100,000 at 4 percent for 20 periods

b.

the present value of $2,000,000 at 5 percent for 20 periods, plus the present value of an annuity of $100,000 at 5 percent for 20 periods

c.

the present value of $2,000,000 at 8 percent for 10 periods, plus the present value of an annuity of $100,000 at 4 percent for 20 periods

d.

the present value of $2,000,000 at 4 percent for 20 periods, plus the present value of an annuity of $100,000 at 4 percent for 20 periods

 

 

ANS:    D

 

        29.    Refer to the Harris Corporation example. Assume that the issue price for the bonds in previous question was $2,270,000. Interest expense for Year 2 (to the nearest dollar) using the effective-interest method of amortization is:

a.

$227,675

b.

$200,000

c.

$181,600

d.

$181,232

 

 

ANS:    D

 

        30.    Refer to the Harris Corporation example. On January 2, Year 12, 10 years after issue, the market prices these bonds to yield 12 percent. The amount at which Harris Corporation shows these bonds on its books at this date is equal to:

a.

the present value of $2,000,000 at 4 percent for 20 periods, plus the present value of an annuity of $100,000 at 4 percent for 20 periods

b.

the present value of $2,000,000 at 5 percent for 20 periods, plus the present value of an annuity of $100,000 at 5 percent for 20 periods

c.

the present value of $2,000,000 at 6 percent for 20 periods, plus the present value of an annuity of $100,000 at 6 percent for 20 periods

d.

the present value of $2,000,000 at 12 percent for 10 periods, plus the present value of an annuity of $100,000 at 6 percent for 20 periods

 

 

ANS:    A

 

        32.    (CMA adapted, Dec 90 #12) Marquette, Inc. issued $6,000,000 of 12% bonds on December 1, Year 1, due on December 1, Year 6, with interest payable each December 1 and June 1. The bonds sold for $5,194,770 to yield 16%. If the discount is amortized by the effective interest method, Marquette, Inc.'s interest expense for the fiscal year ended November 30, Year 2 related to its $6,000,000 bond issue will be

a.

$623,372

b.

$720,000

c.

$835,610

d.

$881,046

 

 

ANS:    C

 

PROBLEMS

 

        1.  For each of the following independent situations, indicate the journal entry to record a liability, if necessary. If not necessary, so indicate.

a.

A manufacturer signs an agreement to become the sole purchaser of parts from its main supplier.

b.

A corporation leases a car on a 5-year noncancelable lease. The car has a 5-year estimated life.

c.

AAA Corporation signs a 5-year lease for office space.

d.

A supplier signs a contract in which the supplier agrees to provide 100,000 units a year to Company A. Company A pays a $50,000 deposit.

e.

A firm agrees to pay its CFO $100,000 a year for 5 years. A contract is signed.

f.

At year end, employees have earned wages but the wages are not payable until one week after year end.

g.

At year end, utilities of $3,000 have been consumed but the payment is not due for 3 weeks.

h.

A company hires three new employees but they will not start their jobs for three months.

i.

A light fixture manufacturer offers a one-year warranty to repair any faulty fixtures sold.

j.

An elderly person slipped in the entrance to a building owned by a company. Attorneys feel that there is an adequate defense to the lawsuit.

 

 

ANS:   

 

a.

No entry needed

b.

Automobile

 

   Capital Lease Liability

c.

No entry needed

d.

Cash

 

   Advance from Customer

e.

No entry needed

f.

Wage Expense

 

   Accrued Wages Payable

g.

Utilities Expense

 

   Accrued Utilities Payable

h.

No entry needed

i.

Warranty Expense

 

   Warranty Liability

j.

No entry needed

 

 

 

 

        3.  On June 1, Year 1 a firm receives $24,000 from subscribers for three-month introductory magazine subscriptions. The magazines will be delivered in June, July, and August.

 

Required:

Prepare the entries necessary to record the following:

 

a.

Record receipt of cash on June 1.

b.

Record the adjusting journal entry at June 30 for magazines delivered during June.

c.

Record the adjusting journal entry at June 30 for magazines delivered during July.

d.

Record the adjusting journal entry at June 30 for magazines delivered during August.

 

 

ANS:   

 

a.

Cash

24,000

 

 

     Advances from Customers

 

24,000

b.

Advances from Customers

8,000

 

 

     Subscription Revenue

 

8,000

c.

Advances from Customers

8,000

 

 

     Subscription Revenue

 

8,000

d.

Advances from Customers

8,000

 

 

     Subscription Revenue

 

8,000

 

 

 

        5.  For each of the following independent bond situations, solve for the unknown value:

(Use the present value tables in the textbook's Appendix.)

 

 

CASE A

CASE B

CASE C

Face amount

A

$90,000

$100,000

Stated rate

10%

B

8%

Present value, at issue date

$86,388

$90,000

C

Market rate

8%

8%

10%

Term

5 years

10 years

4 years

Compounded

annually

annually

annually

Interest paid

$8,000

 

 

ANS:   

 

A.

$80,000

B.

8%

C.

$93,660

 

 

        6.  On January 1, Year 1, a firm issued $500,000 bonds. The stated rate of interest was 8% and the market rate of interest was 10%. The bonds had a 5-year maturity and paid interest annually on December 31st. Determine the amount of cash received by the firm and prepare an amortization schedule using the effective interest method of amortization. (Round to the nearest dollar and disregard any minor rounding differences.)

 

ANS:   

 

 

Beginning

Effective

Stated

Inc/Dec

Ending

Date

Balance

Interest

Interest

in BV

Balance

1/1/01

$462,091 

 

 

 

 

12/31/01

462,091

$46,209 

$40,000 

$6,209 

$468,300 

12/31/02

468,300

46,830

40,000

6,830

475,130

12/31/03

475,130

47,513

40,000

7,513

482,643

12/31/04

482,643

48,264

40,000

8,264

490,907

12/31/05

490,907

49,091

40,000

9,091

499,998

 

 

 

        9.  On March 1, Year 1, a firm issues $475,000 bonds at par value plus accrued interest. The stated rate on the bonds was 12% and the bonds pay interest semi-annually on June 30 and December 31. Prepare the entries necessary to record

 

a.

the issuance of the bonds on March 1, Year 1

b.

the payment of interest on June 30, Year 1

c.

the payment of interest on December 31, Year 1

 

 

ANS:   

 

a.

Cash

484,500

 

 

     Bonds Payable

 

475,000

 

     Interest Payable

 

9,500

b.

Interest Expense

18,500

 

 

Interest Payable

9,500

 

 

     Cash

 

28,500

c.

Interest Expense

28,500

 

 

     Cash

 

28,500

 

 

        10.    If a $75,000 bond is issued at par at 10% stated interest for 5 years on July 1, Year 1. If the company uses a December 31 year-end, what are the journal entries for the borrower

 

a.

on July 1, Year 1

b.

on December 31, Year 1

c.

on January 1, Year 2

 

 

ANS:   

 

July 1, Year 1

 

 

    Cash

75,000

 

        Bonds Payable

 

75,000

December 31, Year 1

 

 

    Interest Expense

3,750

 

        Interest Payable

 

3,750

January 1, Year 2

 

 

    Interest Payable

3,750

 

 

        15.    On January 2, Year 2, Merrill Corporation issued $4,000,000 par value 20-year bonds. The bonds pay interest semiannually on January 1 and July 1 at an annual rate of 8 percent. The bonds were priced to yield 6 percent on the date of issue.

 

Required:

a.

Compute the issue price of the bonds.

b.

Compute the amount of interest expense on the bonds for Year 2 assuming that Merrill Corporation uses the effective-interest method of amortizing bond premium and discount.

 

ANS:   

 

a.

Issue Price

 

Present Value of Par: $4,000,000 ´ 0.30656 = $1,226,240

 

Present Value of Coupon Payments: $160,000 ´ 23.11477 = $3,698,363

 

Total $4,924,603

b.

Interest Expense for Year 2

 

First 6 Months: 0.03 ´ $4,924,603 = $147,738

 

Second 6 Months: 0.03 ´ ($4,924,603 + $147,738 - $160,000) = $147,370

 

Total $295,108

 

 

        18.    On January 1, Year 6, Trembley Corporation issued $1,000,000 face value, 20-year bonds. The bonds carry coupon interest of 6 percent per year, payable semiannually on June 30 and December 31. The bonds were initially priced on the market to yield 8 percent, compounded semiannually (for an effective annualized yield greater than 8 percent).

 

Required:

a.

Compute the issue price of these bonds on January 1, Year 6.

b.

Compute the amount of interest expense on these bonds for Year 6, assuming that the firm uses the effective-interest method of amortizing bond premium or discount.

c.

Assume for this part that the firm recorded interest expense in Part b. in an amount equal to interest paid for the year. That is, it failed to record amortization of bond premium or discount. Indicate the effect (direction and amount) of this omission on the line items in the statement of cash flows using "O/S" (overstated), "U/S" (understated), or "No" (no effect). Ignore income taxes.

 

 

 

 

 

Direction

Amount

 

1)

Net Income

 

 

 

2)

Adjustments that are added to net income

 

 

 

3)

Adjustments that are subtracted from net income

 

 

 

4)

Cash Flow from Operations

 

 

 

d.

On January 1, Year 16, Trembley Corporation acquires $500,000 face value of these bonds on the open market and retires them. At this time, the bonds were priced on the market to yield 6%, compounded semiannually (for an effective annualized yield greater than 6%). Assuming that Trembley Corporation had used the effective-interest method of amortizing bond premiums or discount, give the journal entry to record the retirement of the bonds.

 

 

ANS:   

 

a.

Coupon:

$30,000 ´ 19.79277

$593,783

 

Face:

$1,000,000 ´ 0.20829

 208,290

 

Issue Price:

 

$802,073

 

 

 

 

b.

First 6 months:

0.04 ´ $802,073

$ 32,083

 

Second 6 months:

.04($802,073 + $32,082 - $30,000)

  32,166

 

 

 

$ 64,249

 

 

c.

 

Direction

Amount

 

1)

O/S

4,249

 

2)

U/S

4,249

 

3)

No

No

 

4)

No

No

 

 

d.

Book value (4% for 20 periods)

 

 

$ 15,000 ´ 13.59033

$203,855

 

$500,000 ´ 0.45639

 288,195

 

 

$432,050

 

 

 

 

Market value (3% for 20 periods)

 

 

$ 15,000 ´ 14.87747

$223,162

 

$500,000 ´ 0.55368

 276,840

 

 

$500,002

 

Note: Market value should equal par value, except due to rounding.

 

 

 

 

Bonds Payable

432,050

 

Loss on Retirement

67,950

 

     Cash

500,000

 

 

Chapter 10

 

        3.  Ford Manufacturing signed a 3-year contract for the use of certain manufacturing equipment with an estimated life of three years. Ford cannot cancel the contract. What entry is made to record the contract?

a.

Rent Expense

     Rent Payable

b.

Manufacturing Equipment

     Rent Payable

c.

Manufacturing Equipment Leasehold

     Rent Payable

d.

Manufacturing Equipment Leasehold

     Present Value of Lease Obligation

 

 

ANS:    D

 

        4.  (CMA adapted, Jun 92 #20) According to SFAS No. 5, "Accounting for Contingencies," a loss contingency should be accrued on a company's records only if it is

a.

reasonably possible that a liability has been incurred and the amount of the loss is known

b.

probable that a liability has been incurred and the amount of the loss is unknown

c.

probable that a liability has been incurred and the amount of the loss can be reasonably estimated

d.

remotely probable that a liability has been incurred but the amount of the loss can be reasonably estimated

 

 

ANS:    C

 

        6.  (CMA adapted, Dec 95 #6) Careful reading of an annual report will reveal that off-balance sheet debt includes

a.

amounts due in future years under operating leases

b.

transfers of accounts receivable without recourse

c.

premium on long-term debt

d.

current portion of long-term debt

 

 

ANS:    A

 

        10.    Which of the following is one of the conditions that must be met for a lease of property to be classified as a capital lease?

a.

transfer of ownership to the lessor at the end of the lease term

b.

lessor regains ownership because of "bargain" purchase option

c.

transfer of ownership to lessee

d.

contractual lease payments are equal to 75% of fair market value

 

 

ANS:    C

 

        11.    When a capital lease for equipment is signed, the lessee records an asset called

a.

lease obligation

b.

present value of capital lease payments

c.

equipment

d.

equipment leasehold

 

 

ANS:    D

 

        12.    When a capital lease for equipment is signed, the lessee records a liability called

a.

lease liability

b.

future value of capital lease payments

c.

equipment

d.

equipment leasehold

 

 

ANS:    A

 

        14.    (CMA adapted, Jun 91 #19) Garber Corporation is the lessee in a lease arrangement with Janos Inc. to lease land and a building. If the lease contains a bargain purchase option, Garber should record the land and the building, in accordance with SFAS No. 13, "Accounting for Leases," as a(n)

a.

operating lease and capital lease, respectively

b.

capital lease and operating lease, respectively

c.

operating lease

d.

capital lease but separately classified

 

 

ANS:    D

 

        15.    Which of the following is true of capital lease transactions?

a.

capital leases may only be recorded if the transaction involves a third party

b.

capital leases always have a bargain purchase option

c.

the lease is valued at the future value of the benefits provided

d.

the accounting treatment adopted is generally the same for lessors and lessees

 

 

ANS:    D

 

        16.    (CMA adapted, Dec 92 #10) There are many similarities between lessee and lessor accounting for the capitalization of leases. Which one of the following is a criterion for the capitalization of a lease by a lessee?

a.

The lease transfers ownership of the property to the lessee by the end of the lease term.

b.

The lease term is at least 90% of the remaining life of the asset at the beginning of the lease.

c.

The present value of the minimum lease payments is 75% or more of the fair market value of the leased asset.

d.

Future costs are reasonably predictable.

 

 

ANS:    A

 

       

4.     Wade Corporation entered into a five-year lease for a computer on January 2, Year 2. The lease requires Wade to make equal payments of $50,000 at the end of each of the five years of the lease. Wade's incremental borrowing rate is 8 percent. 

Required:

a.

Assuming that the lease is an operating lease, give the journal entries that Wade Corporation would make during Year 2 to account for the leased computer.

b.

Repeat (a), assuming that the lease is a capital lease.

 

 

 

 

 

 

ANS:   

 

a.

December 31, Year 2

 

 

 

Rent Expense

50,000

 

 

     Cash

 

50,000

 

 

 

 

b.

January 2, Year 2

 

 

 

Equipment

199,635.50

 

 

     Lease Liability

 

199,635.50

 

$50,000 ´ 3.99271 = $199,635.50.

 

 

 

 

 

 

 

December 31, Year 2

 

 

 

Interest Expense (.8 ´ $199,635.50)

15,970.84

 

 

Lease liability

34,029.16

 

 

     Cash

 

50,000.00

 

Depreciation Expense

66,545.17

 

 

     Accumulated Depreciation

 

66,545.17

 

$199,635.50 ´ 5/15 = $66,545.17.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        5.  On January 1, Year 1, XYZ Company acquires new equipment in exchange for a note. XYZ must pay a lump sum of $32,000 on December 31, Year 3. The equipment is being specifically manufactured for XYZ, so no market price exists for the equipment. On similar types of equipment purchases, XYZ has paid 15% interest. The equipment has a five-year life and the company uses straight-line depreciation with a 10% salvage value.

 

Required:

Prepare journal entries to record the following:

a.

original acquisition of equipment

b.

any adjusting journal entry necessary at December 31, Year 1

c.

entry to record depreciation at December 31, Year 2

d.

entry to record payment on December 31, Year 3

 

 

ANS:   

 

a.

Equipment

21,041

 

 

     Note Payable

 

21,041

b.

Interest Expense

3,156

 

 

     Note Payable

 

3,156

c.

Depreciation Expense

3,787

 

 

     Accumulated Depreciation

 

3,787

d.

Note Payable

32,000

 

 

     Cash

 

32,000

 

 

            7.    Delco Corporation entered into a five-year lease for a computer on January 1, Year 3. The lease requires Delco to make equal payments of $20,000 on January 1 each year for the five years of the lease, with the first payment made on January 1, Year 3. Delco's borrowing rate is 10 percent. Delco uses the straight-line depreciation method for financial reporting and the double-declining-balance method for tax reporting. It estimates a zero salvage value. The accounting period is the calendar year. Round amounts to the nearest dollar.

 

Required:

a.

Give the journal entries that Delco would make during Year 3 if this lease were considered an operating lease for financial reporting.

b.

Repeat [a] but assume the lease is a capital lease for financial reporting.

c.

Assume that this lease is considered a capital lease for both financial and tax reporting. Calculate depreciation expense for both financial and tax reporting purposes for Year 3 and Year 4.

 

 

Financial Reporting

Year 3

_________

 

Year 4

_________

Tax Reporting

Year 3

_________

 

Year 4

_________

 

d.

Compute the total expenses (ignore income taxes) that Delco would recognize over the 5-year term of the lease, assuming it is an operating lease.

e.

Repeat [d] but assume the lease is a capital lease.

 

 

ANS:   

 

a.

January 1, Year 3

 

 

 

Prepaid Rent

20,000

 

 

     Cash

 

20,000

 

December 31, Year 3

 

 

 

Rent Expense

20,000

 

 

     Prepaid Rent

 

20,000

b.

January 1, Year 3

 

 

 

Leased Asset

83,397

 

 

     Lease Liability

 

63,397

 

     Cash

 

20,000

 

$83,397 = $20,000 + ($20,000 ´ 3.16987).

 

 

 

December 31, Year 3

 

 

 

Interest Expense

6,340

 

 

     Lease Liability

 

6,340

 

$6,340 = .10 ´ $63,397.

 

 

 

Depreciation Expense

16,679

 

 

     Accumulated Depreciation

 

16,679

 

$16,679 = $83,397/5.

 

 

c.

Straight-line (see above)

 

$ 16,679

 

Double-Declining Balance:

 

 

 

     Year 3: $83,397 ´ .40

 

$ 33,359

 

     Year 4: ($83,397 - $33,359).40

 

$ 20,015

d.

Rent expense: $20,000 ´ 5

 

$100,000

 

 

 

 

e.

Depreciation Expense

 

$ 83,397

 

Interest Expense ($100,000 - $83,397)

 

  16,603

 

 

 

$100,000

 

 

        8.  On January 1, Year 1, a firm agrees to lease equipment on the following terms:

 

3 annual payments of $4,000 due on December 31, of each year.

Assume the market interest rate is 10% and no accruals are made on interim financial statements.

 

Required:

Prepare entries to record the above transactions as follows:

a.

As if a capital lease:

 

1. signing of the contract

 

2. December 31, Year 1 payment

 

3. December 31, Year 1 depreciation/amortization

b.

As if an operating lease:

 

1. signing of the contract

 

2. December 31, Year 1 payment

 

3. December 31, Year 1 depreciation/amortization

 

 

ANS:   

 

a.

1.

Equipment Leasehold

9,947

 

 

 

     Present Value of Lease Obligation

 

9,947

 

2.

Interest Expense

995

 

 

 

Present Value of Lease Obligation

3,005

 

 

 

     Cash

 

4,000

 

3.

Amortization Expense

3,316

 

 

 

     Equipment Leasehold

 

3,316

b.

1.

No entry

 

 

 

2.

Rent Expense

4,000

 

 

 

     Cash

 

4,000

 

3.

No entry

 

 

 

 

           

 

        10.    For a corporation that wants to increase its earnings per share in the current year, choose which of the following methods or alternatives the corporation should prefer. (Assume the appropriate terms or rules can be met to use various alternatives available for financial statement reporting.)

 

a.

The corporation can enter into an operating lease or a capital lease. Assume the net present value of both transactions is exactly the same.

b.

The corporation may purchase land and finance the entire purchase price or the corporation may purchase an option on the land (the option price is also financed). The option payment could be applied against the purchase price.

c.

The corporation can invest in tax-exempt bonds that earn 6% interest or taxable bonds that earn 9% interest. The tax rate is 34%.

 

 

ANS:   

 

a.

Capital lease

b.

Option

c.

Tax exempt bonds

 

 

        11.    The annual report of MCI Communications Corporation for Year 1 reports capital leases requiring payments totaling $228 million over future years, including $58 million payable at the end of Year 2. The interest rate on these obligations is 12 percent and their present value (discounted at 12 percent) at the end of Year 1 was $181 million. The assets financed by capital leases appear on the Year 1 year-end balance sheet at $220 million. Assume no new leases were entered into during Year 2 and that leasehold assets have remaining useful life of 10 years at the start of Year 2, but no salvage value. Ignore income taxes.

 

Required:

a.

What would be the total expense for Year 2 for the leasehold assets and the financing thereof?

b.

What would be the total cash expenditure during Year 2 related to the leasehold assets and the financing thereof?

c.

What would be the effect on MCI's cash flow from operations for Year 2 of the transactions related to the capital leases?

d.

What would be the balance sheet amount for leasehold assets at the end of Year 2?

e.

What would be the balance sheet amount for lease obligations at the end of Year 2?

 

 

ANS:   

 

a.

43.7 = 220/10 + .12 ´ 181 = 22 + 21.7

b.

58

c.

Reduce operating cash flow by interest expense = 21.7 = .12 ´ 181

d.

198 = 220 ´ 9/10 = 220 - 22

e.

144.7 = (181 ´ 1.12) - 58 = 202.7 - 58.0

 

 

Chapter 11

 

        7.  Short-term marketable equity securities were acquired on July 1, Year 1 for $23,000, and classified as available-for-sale. On December 31, Year 1, the securities had a market value of $24,000, determined as follows:

 

 

Cost

Fair Market Value

 

July 1, Year 1

December 31, Year 1

Security AA

$ 9,000

$ 7,000

Security BB

  5,000

 10,000

Security CC

  9,000

  7,000

Total

$23,000

$24,000

 

What adjustment is required to reflect December 31, Year 1 fair value?

a.

unrealized holding gain on available-for-sale securities of $1,000, reported in other comprehensive income

b.

unrealized holding gain on available-for-sale securities of $1,000, reported in the income statement

c.

realized holding gain on available-for-sale securities available for sale of $1,000, reported in the income statement

d.

realized holding gain on available-for-sale securities available for sale of $1,000, reported in other comprehensive income

 

 

ANS:    A

 

 

 

        10.    If a corporation has a minority passive investment, it must account for that investment using

a.

the equity method

b.

the consolidated method

c.

the lower-of-cost-or-market method

d.

the market value method

 

 

ANS:    D

 

        11.    In Year 2, ABC Corp. acquired a 15% interest in XYZ, Inc., for $50,000. During the year, XYZ paid dividends of $10,000 and had net income of $30,000. ABC sold the shares of XYZ for $65,000 cash. What entry will ABC make to record the sale?

a.

Cash                           65,000

     Gain on Sale                         12,000

     Investment in XYZ                    53,000

b.

Cash                           65,000

     Gain on Sale                          9,000

     Investment in XYZ                    56,000

c.

Cash                           65,000

     Additional Paid-in Capital           15,000

     Investment in XYZ                    50,000

d.

Cash                           65,000

     Gain on Sale                         15,000

     Investment in XYZ                    50,000

 

 

ANS:    D

 

        12.    When dividends are received by a minority, passive investor, which of the following entries is made?

a.

Cash

       Dividend Revenue

b.

Investment in Subsidiary

       Cash

c.

Cash

       Investment

d.

Cash

       Income from Subsidiary

 

 

ANS:    A

        13.    A minority, active investment is generally

a.

an investment in another company of less than 15%

b.

an investment in another company's stock of between 15% and 60%

c.

an investment in another company's stock of between 20% and 50%

d.

dependent upon management's intent

 

 

ANS:    C

        15.    If BG Company purchases a minority active interest in LG Company for $150,000, BG will make which of the following entries to record the purchase using the equity method?

a.

Equity in LG Company          150,000

     Cash                                   150,000

b.

Investment in LG Company      150,000

     Cash                                   150,000

c.

Deferred Revenue-LG Company   150,000

     Cash                                   150,000

d.

No entry is made; the companies are consolidated.

 

 

ANS:    B

 

        16.    Pareto Corporation owns 40% of Spring Corporation. During Year 3, Spring has net income of $60,000. What entry should Pareto record related to its investment in Spring during Year 3?

a.

Investment in Spring Corp.           24,000

     Equity in Earnings of Affiliate              24,000

b.

Dividend Receivable                  24,000

     Dividend Income                              24,000

c.

Investment Receivable                24,000

     Investment Income                            24,000

d.

Investment in Spring Corp.           24,000

     Investment Income                            24,000

 

 

ANS:    A

 

        17.    If The Woodbury Company pays $55,000 in dividends to its corporate investor LMT Corporation (LMT owns 35% of The Woodbury Company), what entry should LMT Corporation record when it receives the dividends?

a.

Cash                           55,000

     Dividend Income                         55,000

b.

Cash                           55,000

     Investment Income                       55,000

c.

Cash                           55,000

     Investment in Buff Company              55,000

d.

Cash                           55,000

     Additional Paid-in Capital              55,000

 

 

ANS:    C

 

 

        19.    Purl Co. purchased 40% of the stock of Stitch Co. in Year 1 for $100,000. Stitch had net income in Year 1 of $50,000 and net income in Year 2 of $30,000. Stitch also paid total dividends of $20,000 in Year 2. On January 1, Year 3, Purl Co. sold its investment in Stitch Co. to Shoemaker Capital Corporation (SCC) for $130,000. What entry would Purl Co. make to record the sale of Stitch Co.?

a.

Cash                          130,000

     Gain on Sale                             6,000

     Investment in Stitch                   124,000

b.

Cash                          130,000

Loss on Sale                    2,000

     Investment in Stitch                   132,000

c.

Cash                          130,000

Loss on Sale                   10,000

     Investment in Stitch                   140,000

d.

Cash                          130,000

Loss on Sale                   30,000

     Investment in Stitch                   160,000

 

 

ANS:    A

 

23.   If a corporation owns more than 50% of the stock of another corporation and can exercise control over the subsidiary,

a.

the two corporations must prepare consolidated financial statements

b.

the parent corporation will be able to control dividend policy

c.

the two corporations may prepare consolidated financial statements at the parent corporation's discretion

d.

both (a) and (b)

 

 

ANS:    D

 

        4.  At the end of last period, the cost of the portfolio of current asset marketable securities exceeded its market value by $45,000. At the end of the current period, the cost of marketable securities on hand is $200,000 and their market value is $197,000. What adjusting entry is made?

 

ANS:   

 

Marketable Securities

38,000

 

Unrealized Gain on Marketable Securities

 

38,000

 

 

        5.  In Year 1, the firm purchased a portfolio of marketable securities for $1,000, which it holds as current assets. At the end of Year 1, the portfolio had a market value of $700. During Year 2, the firm sold some of the securities for $160 which had originally cost $100, but which had a market value of $80 at the end of Year 1. At the end of Year 2, the remaining securities had a market value of $850.

 

Required:

a.

Assume the firm treats its holdings as available for sale.

 

1. Record the entry made at the end of Year 1.

 

2. Record the entries made during Year 2 and at the end of Year 2.

b.

Assume firm treats its holdings as trading securities.

 

1. Record the entry made at the end of Year 1.

 

2. Record the entries made during Year 2 and at the end of Year 2.

 

 

ANS:   

 

a.

1.

Unrealized Loss on Marketable Securities (SE/CompY)

300

 

 

 

    Marketable Securities

 

300

 

2.

Cash

160

 

 

 

    Marketable Securities

 

80

 

 

    Unrealized Loss on Marketable Securities

 

20

 

 

    Realized Gain on Sale of Marketable Securities

 

60

 

 

Marketable Securities

230

 

 

 

    Unrealized Gain on Marketable Securities

 

230

b.

1.

Unrealized Loss on Marketable Securities (IncSt)

300

 

 

 

    Marketable Securities

 

300

 

2.

Cash

160

 

 

 

    Marketable Securities

 

80

 

 

    Realized Gain on Sale of Marketable Securities

 

80

 

 

Marketable Securities

230

 

 

 

    Unrealized Gain on Marketable Securities

 

230

 

        12.    Assume that P uses the equity method of accounting for its investment in S. Solve for the unknown in each of the following independent cases:

 

 

CASE A

CASE B

CASE C

P's ownership of S

40%

25%

40%

Investment in S—beg. of year

$100 

$100 

$130 

Investment in S—end of year

120

150

120

S's income (loss)

A

300

C

S's dividends paid

 80

B

  0

 

 

ANS:   

 

A.

$130

B.

$100

C.

$(25)