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) |