August 17, 2005 Anderson ECON 136A Exam #1 Name

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1 August 17, 2005 Anderson ECON 136A Exam #1 Name Answer the multiple choice on your green scantron, the problems in your blue-book. Be sure to leave a trail in your problems for partial credit. 1. Another term for the balance sheet is: a. Statement of sources and uses of cash b. Statement of activity for the period c. Statement of financial position d. I have no idea 2. Under accounting principles generally accepted in the United States of America, which of the following statements are true: a. Revenue is recorded when the payment has been received and expenses are recorded when paid. b. Revenue is recorded when it has been earned and expenses when the associated benefit has been received. c. Revenue is recorded when the expense for the revenue has been paid. d. Revenue is recorded when estimable by the Company's management and expenses are recorded when it is reasonably determined. 3. Under the cash basis of accounting, revenues are recorded a. when they are earned and realized. b. when they are earned and realizable. c. when they are earned. d. when they are realized. 4. When converting from cash basis to accrual basis accounting, which of the following adjustments should be made to cash receipts from customers to determine accrual basis service revenue? a. Subtract ending accounts receivable. b. Subtract beginning unearned service revenue. c. Add ending accounts receivable. d. Add cash sales. 5. Why are certain costs of doing business capitalized when incurred and then depreciated or amortized over subsequent accounting cycles? a. To reduce the federal income tax liability b. To aid management in cash-flow analysis c. To match the costs of production with revenues as earned d. To adhere to the accounting constraint of conservatism

2 Exam #1--Page 2 6. Which of the following statements is true about unrealized gains and losses on available for sale securities. a. They should be reflected on the income statement. b. They should be ignored as available for sale securities are presented at cost. c. They should be reflected as a component of other comprehensive income in the statement of stockholder's equity. d. They should be reflected as a component of other comprehensive income, which is a component of net income. 7. A Company has sold a portion of their business during the year. This should be presented in the income statement: a. As a discontinued operation in two components, (1) the results of operating the operation until it was sold and (2) any gain or loss from the sale of the operation. Both should be presented net of tax. b. As a discontinued operation, in one line-tem on the income statement, and presented net of tax. c. The operations during the portion of the year should be included in the operating section of the income statement and any gain or loss from the sale of the discontinued operation should be presented as "discontinued operations" on a net of tax basis. d. Should not impact the income statement, and be reported solely in the statement of cash flows. 8. Items which do not appear on the income statement above the tax provision should be presented on a "net of tax" basis. a. true b. false 9. Information in the income statement helps users to a. evaluate the past performance of the enterprise. b. provide a basis for predicting future performance. c. help assess the risk or uncertainty of achieving future cash flows. d. all of these. 10. Which of the following is NOT a generally practiced method of presenting the income statement? a. Including prior period adjustments in determining net income b. The single-step income statement c. The consolidated statement of income d. Including gains and losses from discontinued operations of a component of a business in determining net income

3 Exam #1--Page The balance sheet is useful for analyzing all of the following except a. liquidity. b. solvency. c. profitability. d. financial flexibility. 12. The net assets of a business are equal to a. current assets minus current liabilities. b. total assets plus total liabilities. c. total assets minus total stockholders' equity. d. none of these. 13. The basis for classifying assets as current or noncurrent is conversion to cash within a. the accounting cycle or one year, whichever is shorter. b. the operating cycle or one year, whichever is longer. c. the accounting cycle or one year, whichever is longer. d. the operating cycle or one year, whichever is shorter. 14. The current assets section of the balance sheet should include a. machinery. b. patents. c. goodwill. d. inventory. 15. Equity or debt securities held to finance future construction of additional plants should be classified on a balance sheet as a. current assets. b. property, plant, and equipment. c. intangible assets. d. long-term investments. 16. The statement "risk is commensurate with reward" means that the higher the perceived risk, the: a. Higher the interest rate b. Lower the interest rate c. No impact on the interest rate d. More likely an investor is to abstain from investment. 17. Real estate is sold for $1 million, payable as follows: $850,000 paid in cash on the day of sale and $150,000 due in five years, bearing interest at 0%. Would the seller compute their gain on the sale of that real estate using a sales price: a. equal to $1 million b. less than $1 million c. more than $1 million d. none of the above

4 Exam #1--Page If a savings account pays interest at 4% compounded quarterly, then the amount of $1 left on deposit for 5 years would be found in a table using a. 5 periods at 4%. b. 5 periods at 1%. c. 20 periods at 4%. d. 20 periods at 1%. 19. Present value is a. the value now of a future amount. b. the amount that must be invested now to produce a known future value. c. always smaller than the future value. d. all of these. 20. Which of the following is true? a. Rents occur at the beginning of each period of an ordinary annuity. b. Rents occur at the end of each period of an annuity due. c. Rents occur at the beginning of each period of an annuity due. d. None of these. 21. Icantdoastatementofstockholdersequitybutitwillbeonthefinal!, Inc. has properly applied their percentage of sales consistently all year in recording bad debt expenses. At the end of the year, they note that the allowance for doubtful accounts balance is $150,000. Management reviews the accounts receivable aging and notes that there are very old balances and other items which lead them to estimate that the allowance needs to be $225,000. Given these facts, which of the following statements is accurate: a. Management should adjust the percentage of sales to increase the allowance on future transactions, but do nothing to adjust the bad debt expense now; b. Management should report a restatement of $75,000; c. Management should do nothing as the additional expense could result in negative comments from financial analysts; d. Management should record an additional bad debt expense of $75,000, reflecting a change in their estimate. 22. A company using the percentage of sales method has gone through its normal process of allowing for doubtful accounts, and written off certain accounts. Subsequently one of the balances they wrote-off has been paid by the customer! This should: a. Result in a credit to the income statement b. Reduce the allowance for bad debts c. Increase the allowance for bad debts d. Increase the bad debt expense

5 Exam #1--Page A company employs the percentage of sales method for estimating the allowance for doubtful accounts. Using this method, they estimated during the year that the bad debt expense is $100,000. Also during the year, the Company dertermined that the uncollectible accounts to be written-off are $20,000. The proper amount for them to include as bad debt expense during the year is: a. $100,000 b. $120,000 c. $ 80,000 d. $ 40, Bank overdrafts, if material, should be a. reported as a deduction from the current asset section. b. reported as a deduction from cash. c. netted against cash and a net cash amount reported. d. reported as a current liability. 25. If a company employs the gross method of recording accounts receivable from customers, then sales discounts taken should be a. reported as a deduction from sales in the income statement. b. reported as an item of "other expense" in the income statement. c. reported as a deduction from accounts receivable in determining the net realizable value of accounts receivable. d. reported as sales discounts forfeited in the cost of goods sold section of the income statement. 26. $1,000,000 of bonds are sold on January 1, 2005 when the fair value rate of those bonds (aka market rate) is 10%. The stated rate of the bonds is 8%, they pay interest at the end of each year, compound annually and mature in 10 years. For a period of 10 years: PV of a lump sum of $1, at 10% is PV of a lump sum of $1, at 8% is PV of ordinary annuity of $1 at 10% is PV of ordinary annuity of $1 at 8% is I. What amount would the bonds sell for? Show your computation! II. Show the accounting entry required by the company selling the bonds: i. the day that the bonds are issued (January 1, 2005) ii. and for the end of the first year (December 31, 2005)

6 Exam #1--Page We sell goods to a customer on credit for a gross value of $100,000 and offer terms 2/10 n 30. The customer subsequently pays $49,000 5 days after the sale and $50, days after the date of the sale. Report the following journal entries assuming we use the "gross" method for sales discounts: a) On the date of the sale b) On the date the $49,000 is received 5 days after the sale c) On the date the $50,000 is received 25 days after the sale. Now do the same please assuming we use the "net" method for sales discounts.

7 EXAM #1, -- Page 7 ANSWER IN YOUR BLUE-BOOK. BE SURE TO LEAVE A TRAIL FOR PARTIAL CREDIT ALLOCATIONS. 28. XYZ, Inc. experienced the following activity for the year ended December 31, 2004: - Sold an operating property. The disposal qualifies as a discontinued operation under SFAS No The operations during the year generated income of $50,000 until it was diposed of for a $100,000 loss. - Impairment of a fixed asset for $100,000, which is not infrequent. - A maniac poured detergent into one of their machines, rendering it useless. This resulted in a loss of $200,000. The maniac's destruction was deemed both unusual and infrequent. - Sales of $1,500,000; COGS $1,250,000; Selling general & administrative expense $20,000; interest expense was $5,000; depreciation expense was $80,000 (all of these values exclude the operations of the discontinued operation noted above.) - XYZ's effective income tax rate is 35% - Common stock was $100,000 at the beginning of the year and there was no common stock activity during the year - Retained earnings was $205,000 at the beginning of the year. - Dividends were declared and paid in the amount of $10,000 - After recording the depreciation expense noted above, XYZ discovered that the useful life of an asset which has a net book value of $60,000 and one year remaining has increased to 3 years from December 31, Depreciation expense recorded for this asset was $60,000 prior to this discovery. (assume straight-line depreciation) - XYZ discovered that they had made a material error in 1975 which was never rectified. The impact was to overstate 1999 income by $100, Weighted average shares outstanding for the year were 100,000 - Accumulated other comprehensive income at the beginning of the year was $325,000. During the year, $130,000 of unrealized gains (pre-tax) were recorded on "available for sale" securities. Based on this information, prepare a multiple step income statement AND combined statement of stockholders equity and comprehensive income for XYZ for the year ended December 31, 2004.

8 Exam #1--Page 7 August 17, 2005 ANSWER KEY Anderson ECON 136A Text Bank Exam Ques Diff Lrng Chapter Ref Question Answer Type Cat Lvl Obj Page c MChoice b MChoice d MChoice C c MChoice C c MChoice C c MChoice a MChoice a MChoice d MChoice C a MChoice C c MChoice C d MChoice C b MChoice C d MChoice C d MChoice C a MChoice b MChoice d MChoice P d MChoice C c MChoice C d MChoice a MChoice a MChoice d MChoice C a MChoice C Exercise Problem

9 Exam #1--Page 8 August 17, Total assets minus total liabilities x 5 = 20 periods; 4% 4 = 1%. 26. The annual interest payment is 8%*1,000,000=80,000 PV of interest=80,000* = 491,566 PV of Principle=1,000,000*38554= 385,540 TOTAL VALUE 877,106 II (i) Entry on date of issue Cash 877,106 Bond discount 122,894 Bond payable 1,000,000 I(ii) Entry at end of first year: Interest expense= FV of bond * FV rate= 877,106*10%=87,711 Interest expense 87,711 Cash 80,000 Bond discount 7, GROSS METHOD: a) Accounts receivable $100,000 Sales $100,000 b) Cash $49,000 Accounts receivable $50,000 Sales discounts (or sales) $1,000 c) Cash $50,000 Accounts receivable $50,000 NET METHOD: a) Accounts receivable $98,000 Sales $98,000 b) Cash $49,000 Accounts receivable $49,000 c) Cash $50,000 Accounts receivable $49,000 Sales discounts lost (or sales) $1,000

10 #28 income statement solution XYZ, INC. INCOME STATEMENT YEAR ENDED DECEMBER 31, 2004 Sales $ 1,500,000 COGS 1,250, ,000 Operating expenses Selling General & Admin 20,000 NOTE: impact of change in useful life Interest expense 5,000 60,000 NBV at end of 2004 Depreciation expense 50,000 60,000 Current year deprec. 75, ,000 NBV at beginning of 2004 Fixed asset impairment 100,000 4 Years remaining beg Income from continuing operations 30,000 Deprec. Should be before income taxes 75,000 60,000 Deprec. Recorded Income tax provision 26,250 (30,000) OVER recorded depr.- adjust INCOME FROM CONTIN. OPS 48,750 80,000 Total deprec. B4 adjust Discontinued operations 50,000 Revised total deprec. Operation, net of $17,500 tax provision 32,500 Loss on sale, net of $35,000 tax benefit (65,000) (32,500) Loss before extraordinary loss 16,250 Extraordinary loss, net of $70,000 tax benefit (130,000) NET LOSS $ (113,750) PER SHARE (100,000 wtd average o/s): Income from continuing operations $ 0.49 Loss before extr. Items $ 0.16 Net loss $ (1.14)

11 #28 stockholders equity solution XYZ, INC. STATEMENT OF STOCKHOLDERS EQUITY YEAR ENDED DECEMBER 31, 2004 Comp. Retained Accum. Other Income Com. Stock Earnings Comp. Income Total Balance at 12/31/03, as previously reported 100, , , ,000 Restatement, net of $35,000 tax provision (65,000) (65,000) Balance st 12/31/03, as restated 100, , , ,000 Net loss (113,750) (113,750) (113,750) OCI- Unrealized gains, net of $45,500 def. tax liability 84,500 84,500 84,500 Comprehensive loss (29,250) - Dividends (10,000) (10,000) Balance at 12/31/04 100,000 16, , ,750