ACC 356 Financial Reporting II Spring 2012 Exam 1 (CH 13, 14) I. Multiple Choice: 15 2 points each 30. II.

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1 Name Section ACC 356 Financial Reporting II Spring 2012 Exam 1 (CH 13, 14) I. Multiple Choice: 15 2 points each 30 II. Contingencies 18 III. Current Liabilities 14 IV. Bonds 27 V. Troubled-Debt Restructuring 11 Total 100 INSTRUCTIONS: Do not take your exam apart! No other paper is permitted at this exam. Carefully read and follow the instructions given on each question or problem. On the problem portion of the exam, show and label your computations (required for any partial credit). Round amounts to the nearest dollar. Define any acronyms/abbreviations used since your command of upper-division level accounting terminology is evaluated; otherwise, reasonable abbreviations for other words are acceptable. Please check to make sure you have all 6 pages of this exam. You have 90 minutes to complete this exam. Allocate your time wisely! Stay calm and good luck!!!

2 ACC 356 Exam 1 Spring 2012, Page 1 I. Multiple Choice: Select the best answer for each question and carefully record your answers on the scantron. Only the answers you bubble in on the scantron will be graded. 1. Current liabilities are defined as obligations whose liquidation is reasonably expect to: A. Be paid within one year. B. Require use of current assets. C. Require use of current assets or creation of other current liabilities. D. Require the distribution of cash. 2. Glaus Corp. signed a 3-month, zero-interest-bearing $250,000 note on November 1 for the purchase of $246,250 of inventory. Glaus borrowing rate is 6%. Assuming Glaus uses the straight-line method for amortization, how much interest expense should be recorded in the December 31 adjusting entry? A. $0. B. $625. C. $2,463. D. $2, On December 31, 2011, Valentine Co. had $3 million of short-term notes payable due on February 14, On February 3, 2012, Valentine borrowed $1,800,000 on a 4-year note and used $800,000 additional cash to liquidate $2,600,000 of the short-term notes payable. The amount of the notes payable that should be reported as a current liability in Valentine s December 31, 2011 balance sheet, which was issued on March 2, 2012, is: A. $3,000,000. B. $1,200,000. C. $800,000. D. $400, Purchase Retailer made cash sales during the month of January of $221,000. The sales are subject to a 6% sales tax that was also collected. Which of the following would be included in the summary journal entry to reflect the sales transactions, assuming Purchase Retailer separately records sales taxes at the time of sale? A. Credit Sales Taxes Payable for $13,260. B. Credit Sales Revenue for $208,491. C. Debit Cash for $221,000. D. Credit Sales Taxes Payable for $12, Which of the following taxes does not represent a common payroll deduction for employees? A. FICA taxes. B. State unemployment taxes. C. Federal income taxes. D. State income taxes. 6. Espinosa Co. has a loss contingency to accrue. The loss amount can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The amount of loss accrual should be A. the maximum of the range. B. the mid-point of the range. C. the minimum of the range. D. zero. 7. Yummy Frosted Flakes (YFF) Company offers its customers a cereal bowl if they send in 4 boxtops and $1. YFF estimates that 60% of the boxtops will be redeemed. In 2012, YFF sold 500,000 boxes of cereal and customers redeemed 220,000 boxtops for 55,000 bowls. If the bowls cost YFF $3 each, how much liability for outstanding premiums should be recorded at the end of 2012? A. $40,000. B. $60,000. C. $84,000. D. $150,000.

3 ACC 356 Exam 1 Spring 2012, Page 2 8. At the date of sale of an extended 3-year warranty, a company should credit: A. Warranty Expense. B. Warranty Revenue. C. Warranty Liability. D. Unearned Warranty Revenue. 9. Which of the following is not acceptable for balance sheet presentation of current liabilities? A. Offsetting current liabilities against assets that are to be applied to their liquidation. B. Showing currently maturing long-term debt as part of current liabilities. C. Listing current liabilities in order of maturity. D. Listing current liabilities according to amount. 10. When bonds sell between interest payment dates, the purchaser will pay the seller: A. The face value of the bonds. B. The selling price of the bonds only. C. The selling price of the bonds less the accrued interest. D. The selling price of the bonds plus the accrued interest. 11. Which of the following statements is correct regarding use of the straight-line method of amortization of premiums or discounts on long-term debt? A. The straight-line method may never be used for long-term debt. B. The straight-line method may always be used for long-term debt. C. The straight-line method may be used for long-term debt if the results are not materially different from the effective interest method. D. The straight-line method is the preferred method for long-term debt if the results are materially different from the effective interest method. 12. Which of the following statements is correct regarding the amount of bond interest expense when a company had a premium on the bond s issue date and uses the straight-line method of amortization? A. Interest expense equals the cash interest payment. B. Interest expense equals the cash interest payment less the amount of the premium amortized. C. Interest expense equals the cash interest payment plus the amount of the premium amortized. D. Interest expense equals the bond s carrying value multiplied by the effective interest rate. 13. On February 13, 2012, Spartans Co. issued a $600,000, 3-year, zero-interest bearing note to Mustangs Inc. for the purchase of land. The land originally cost Mustangs $350,000. There was no established exchange price for the land, although the county levies property taxes on the land based on its assessed value of $420,000. The note has no ready market but the prevailing rate of interest for a note of this type is 7%. In the journal entry to record the issuance of the note for the land, Spartans should record the land for: A. $600,000. B. $489,780. C. $420,000. D. $350, On January 1, 2012, Gise loaned $90,156 to Carter in exchange for a 3-year, zero-interest bearing note with a face amount of $120,000. The prevailing rate of interest for a loan of this type is 10%. Assuming Carter uses the effective interest method, the adjusting entry at December 31, 2012 for the note will include: A. A credit to Discount on Notes Payable for $9,016. B. A debit to Interest Expense for $12,000. C. A credit to Interest Payable for $6,000. D. A credit to Cash for $9, Past-Dew Inc. is experiencing financial difficulties and is past due on a $1,000,000 note owed to The Bank. The Bank agrees to settle the debt in exchange for property having a fair value of $750,000. Past-Dew s carrying value for the property is $600,000. What amount will Past-Dew recognize for its gain on debt restructuring? A. $0. B. $150,000. C. $250,000. D. $400,000.

4 ACC 356 Exam 1 Spring 2012, Page 3 II. Contingencies (18 points) Part A Warranties (4 points): Aloha Electronics Company manufactures and sells various electronics that carry a 2-year warranty against defects. Industry experience indicates that warranty costs are expected to be 2% of sales in the 1 st year of the warranty of 3% in the 2 nd year. During its first year of operations in 2012, Aloha Electronics had sales of $1,200,000 and incurred actual warranty costs of $18,000. Required: What amounts should Aloha Electronics report for warranty expense for 2012 and warranty liability at the end of 2012? Warranty Expense Warranty Liability Part B Litigation Contingency (3 points): In August 2012, a worker was injured at the Pineapple Cannery Factory (PCF) in an accident partially the result of his own negligence. The worker has sued PCF for $800,000. PCF s legal counsel believes it is reasonably possible that the outcome of the suit will be unfavorable and that the settlement would cost PCF from $250,000 to $500,000. Required: Discuss PCF s proper accounting treatment for this situation, including your justification. Part C Asset Retirement Obligation (11 points): On January 1, 2012, Kona Coffee Company (KCC) entered into new 5-year store leases to sell its brewed coffee and pastries, as well as various coffee-related products. KCC paid $2,500,000 for various leasehold improvements to the stores. KCC is contractually obligated to remove the leasehold improvements at the end of the lease in order to comply with the lease agreement. KCC estimates the cost of removal of the leasehold improvements at the end of the lease will be $400,000; the present value of these costs using a discount rate of 6% is $298,904. KCC has a December 31 year-end. KCC uses straight-line depreciation and estimates a zero residual value for the leasehold improvements. Required: Prepare KCC s all appropriate journal entries related to the leasehold improvements and asset retirement obligation at: January 1, 2012 December 31, 2012

5 ACC 356 Exam 1 Spring 2012, Page 4 III. Current Liabilities (14 points) Part A Payroll (8 points): Kihei Adventures Inc. (KAI) has 3 salaried employees whom are paid on a monthly basis on the last working day of the month. KAI s salary and federal income tax withholding information for the month of January are: Employee Salary Federal Income Tax Kaila $ 5,000 $ 1,000 Lopaka 6,000 1,200 Naneki 9,000 3,000 Total $ 20,000 $ 5,200 Information regarding other taxes, rates, and limits are as follows: FICA tax: 7.65% on the first $106,800 per employee and 1.45% for amounts in excess of $106,800. Federal unemployment tax: 0.6% (net of the standard SUTA rate) on the first $7,000 per employee. State unemployment tax: standard rate is 5.4% on the first $7,000 per employee; however the actual rate for the state is 3.5%. Required: Prepare KAI s journal entry to record the January employer s payroll taxes. Part B Compensated Absences (6 points): Island Travel Corporation (ITC) began operations on January 2, ITC employs 5 people who work 8-hour days. Each employee earns 14 paid vacation days annually. Vacation days may be taken in the year following the year in which they are earned. The average hourly wage rate was $9.50 in 2011 and $10.00 in The average vacation days used in 2012 by each employee was 9. ITC has a December 31 year-end and accrues the cost of compensated absences at rates of pay in effect when earned. Required: Prepare ITC s 2012 journal entry to record payment for vacation days taken. IV. Bonds (27 points) Part A (6 points): Dragon Corp. issued $2,000,000 of 10%, 15-year bonds, with interest payable semiannually. At this date, the market rate for bonds of similar risk is 8%. Required: Calculate the issue price (in dollars) of the bonds. Place your answer in the space provided. Answer

6 ACC 356 Exam 1 Spring 2012, Page 5 Part B (16 points): On March 1, 2012, Bon Temps, Inc. issued $1,500,000 of 10-year, 5% bonds at to yield an effective interest rate of 6% (use the effective interest method for amortization of any premium or discount). Interest is paid semiannually on September 1 and March 1. Also, on March 1, 2012, Bon Temps paid printing costs and legal fees associated with the bond issuance of $150,000 (use straight-line amortization for these costs). Required: Bon Temps has a December 31 year-end. Prepare Bon Temps appropriate journal entries on the following dates: March 1, 2012 December 31, 2012 Part C (5 points): On February 1, 2012 (an interest payment date), Maui No Ka Oi Corporation extinguished its $5,000,000, 10%, 10-year bonds at a call price of 103. The bonds had originally been issued at a premium of $200,000 on February 1, 2008; related bond issue costs paid on the issue date were $50,000. Maui No Ka Oi uses straight-line amortization for the premium and the bond issue costs. Required: Calculate Maui No Ka Oi s gain or loss on the bond extinguishment. Place your answer in the space provided and clearly label whether the amount is a gain or loss. Answer

7 ACC 356 Exam 1 Spring 2012, Page 6 V. Troubled-Debt Restructuring (11 points) As of January 1, 2012, Sea Urchin Neutralizer Kit (SUNK) Company is past due on the $750,000 principal owed to Aloha Bank under a 9% note. The note was originally issued at face value. Due to SUNK s financial difficulties, Aloha Bank agrees to a troubled debt restructuring with modified terms. Aloha Bank agrees to reduce the principal to $600,000, extend the maturity date by 2 years, and reduce the interest rate to 7%, payable annually on December 31. Part A Debtor (7 points): (1) Calculate the amount of the gain on the debt restructure recognized by SUNK (the debtor). Gain recognized (2) Prepare SUNK s necessary journal entries on: Janaury 1, 2012 December 31, 2012 Part B Creditor (4 points): (1) Calculate the amount of the loss on the debt restructure recognized by Aloha Bank (the creditor). Loss recognized