Zicklin School of Business, Baruch College ACC 3000 Financial Accounting 1 Fall Sample Final Exam

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1 Zicklin School of Business, Baruch College ACC 3000 Financial Accounting 1 Fall 2004 Sample Final Exam Instructor: Prof. Donal Byard Name: Office: VC Phone: (646) Last 4 Digits of SSN: donal_byard@baruch.cuny.edu General Instructions: This is a closed book, closed notes, closed discussion exam. Your exam must reflect only your work. Please verify that you have all eight pages of the exam booklet. You may bring an ordinary non-memory programmable calculator into the exam. There are 400 points for this exam and you 2 hours to complete. The exam points are divided as follows: 16 Multiple-choice questions (5 points each) 80 points 4 Numerical Problem questions (80 points each) 320 points each 400 You must return the entire exam book when you are complete. There are no extra credit options available for this exam. For the multiple choice questions, circle your choice of answer on the exam paper. For the discussion question and the numerical problem questions, provide your answers in the spaces provided on this exam. For numerical problems you must show all your supporting calculations/explanations, where appropriate. All supporting calculations and schedules must be legible and in good form. Be neat with your answers. Cheating Policy: You must honor Baruch College s standards regarding integrity, honesty, and cheating at all times; sharing of information during this exam in any form is strictly forbidden. Any breach of these standards will be dealt with in accordance with Baruch College s Code of Academic Integrity and will be reported to the Office of the Dean of Students. Re-grade Policy: If, after reviewing the answers posted on Blackboard after the exams have been returned, you feel there was a mistake grading your exam you should: write a brief explanation of the problem on a cover sheet, attach the cover sheet to your exam, and re-submit the exam to be regarded. Under no circumstance should you write anything on the exam. This will be viewed as attempted cheating and reported to the Office of the Dean of Students. Your exam will be re-graded. Keep in mind that grades can increase on decrease when they are re-graded. This policy applied to all students. No exceptions. 1

2 Part A -- Multiple Choice Questions [16 questions, 4 points each] Question 1 If a corporation purchases a lot and building and subsequently tears down the building and uses the property as a parking lot, the proper accounting treatment of the cost of the building would depend on a. the significance of the cost allocated to the building in relation to the combined cost of the lot and building. b. the length of time for which the building was held prior to its demolition. c. the contemplated future use of the parking lot. d. the intention of management for the property when the building was acquired. Question 2. Assets that qualify for interest cost capitalization include a. assets under construction for a company's own use. b. assets that are ready for their intended use in the earnings of the company. c. assets that are not currently being used because of excess capacity. d. All of these assets qualify for interest cost capitalization. Question 3. The period of time during which interest must be capitalized ends when a. the asset is substantially complete and ready for its intended use. b. no further interest cost is being incurred. c. the asset is abandoned, sold, or fully depreciated. d. the activities that are necessary to get the asset ready for its intended use have begun. Question 4. For income statement purposes, depreciation is a variable expense if the depreciation method used is a. units-of-production. b. straight-line. c. sum-of-the-years'-digits. d. declining-balance. Question 5. When using a perpetual inventory system, a. no Purchases account is used. b. a Cost of Goods Sold account is used. c. two entries are required to record a sale. d. all of these. Question 6. Depreciation is normally computed on the basis of the nearest a. half year. b. full month. c. day and to the nearest cent. d. day and to the nearest dollar. 2

3 Question 7. Goods in transit which are f.o.b. destination should be a. included in the inventory of the seller. b. included in the inventory of the buyer. c. included in the inventory of the shipping company. d. none of these. Question 8. Which of the following methods of amortization is normally used for intangible assets? a. Sum-of-the-years'-digits b. Straight-line c. Units of production d. Double-declining-balance Question 9. Factors considered in determining an intangible asset's useful life include all of the following except a. the expected use of the asset. b. any legal or contractual provisions that may limit the useful life. c. any provisions for renewal or extension of the asset's legal life. d. the amortization method used. Question 10. The cost of purchasing patent rights for a product that might otherwise have seriously competed with one of the purchaser's patented products should be a. charged off in the current period. b. amortized over the legal life of the purchased patent. c. added to factory overhead and allocated to production of the purchaser's product. d. amortized over the remaining estimated life of the original patent covering the product whose market would have been impaired by competition from the newly patented product. Question 11. Which of the following is a current liability? a. A long-term debt maturing currently, which is to be paid using funds in a sinking fund b. A long-term debt maturing currently, which is to be retired with proceeds from a new debt issue c. A long-term debt maturing currently, which is to be converted into common stock d. None of these Question 12. Which of the following is NOT true about the discount on short-term notes payable? a. The Discount on Notes Payable account has a debit balance. b. The Discount on Notes Payable account should be reported as an asset on the balance sheet. c. When there is a discount on a note payable, the effective interest rate is higher than the stated discount rate. d. All of these are true. 3

4 Question 13. Which of the following should NOT be included in the current liabilities section of the balance sheet? a. Trade notes payable b. Short-term zero-interest-bearing notes payable c. The discount on short-term notes payable d. All of these are included Question 14. Designated market value a. is always the middle value of replacement cost, net realizable value, and net realizable value less a normal profit margin. b. should always be equal to net realizable value. c. may sometimes exceed net realizable value. d. should always be equal to net realizable value less a normal profit margin. Question 15. Lower of cost or market a. is most conservative if applied to the total inventory. b. is most conservative if applied to major categories of inventory. c. is most conservative if applied to individual items of inventory. d. must be applied to major categories for taxes. Question 16. Goods in consignment are a. included in the consignee's inventory. b. recorded in a Consignment Out account which is an inventory account. c. recorded in a Consignment In account which is an inventory account. d. all of these 4

5 Part B -- Numerical Problems [4 questions, 80 points each] Question 17. On August 1, Arna, Inc., exchanged productive assets with Bontemps, Inc. Arna s asset is referred to below as Asset A, and Bontemps is referred to as Asset B. The following facts pertain to these assets: Asset A Asset B Original cost $96,000 $110,000 Accumulated depreciation (to date of exchange) 45,000 52,000 Fair market value at date of exchange 60,000 75,000 Cash paid by Arna, Inc. and received by Bontemps, Inc. 15,000 Instructions Assuming that Asset A and Asset B are similar assets, record the exchange for both Arna, Inc. and Bontemps Inc. in accordance with GAAP. 5

6 Question 18. MB Inc. purchases equipment for $212,000 on October 1, It is estimated that the equipment will have a useful life of 8 years and a salvage value of $12,000. Estimated production is 40,000 units of output and estimated working hours is 20,000. During 2003, MB uses the equipment for 525 hours and the equipment produces 1,000 units of output. Fiscal years correspond to calender years for MB Inc. Instructions a) Calculate the 2003 depreciation expense using an activity method based on the number of hours the equipment works; b) Calculate the 2003, 2004 and 2005 annual depreciation for the equipment if the sum-of-years -digits method is used; c) Calculate the 2003, 2004 and 2005 annual depreciation for the equipment if the double-declining balance method. 6

7 Question 19. AP Inc. sells machines for $7,400 under a 12-month warranty agreement that requires the company to replace all defective parts and to provide repair labor at no cost to the customer. Sales are distributed evenly throughout the year. The company sells 650 machines in 2005 (warranty expenses are incurred half in 2005 and half in 2006). As a result of production testing, AP estimates that the warranty cost is $370 per machine ($170 parts and $200 labor). Instructions Assuming that the actual warranty costs are as expected, what are the journal entries to record: a) The sale of machines in 2005; b) Warranty expenses charged against 2005 revenues; c) Warranty costs incurred in 2005; and d) Warranty costs incurred in

8 Question 20. Eller Company manufactures one product. On December 31, 2002, Eller adopted the dollar-value LIFO inventory method. The inventory on that date using the dollarvalue LIFO inventory method was $200,000. Inventory data are as follows: Inventory at Price index Year year-end prices (base year 2002) 2003 $336, , , Instructions Compute the inventory at December 31, 2003, 2004, and 2005, using the dollarvalue LIFO method for each year. 8

9 Part A: [16 Questions, 5 points each] Answer Key Version A Multiple Choice Questions Text Bank Exam Ques Diff Lrng Chapter Ref Question Answer Type Cat Lvl Obj Page d MChoice C a MChoice C a MChoice C a MChoice C d MChoice C b MChoice C a MChoice C b MChoice C d MChoice C d MChoice C d MChoice C b MChoice C d MChoice C a MChoice C c MChoice C b MChoice C A long-term debt maturing currently to be paid with current assets is a current liability. 9

10 Question 17 [80 points] Arna Inc. s Books Asset B ($75,000 $9,000) 66,000* Accumulated Depreciation Asset A 45,000 Asset A 96,000 Cash 15,000 [20 pts] *Computation of gain deferred: Fair value $60,000 [10 pts] Book value (51,000) Gain deferred $ 9,000 Bontemps Inc. s Books Cash 15,000 Asset A 46,400* Accumulated Depreciation Asset B 52,000 Asset B 110,000 Gain on Disposal of Plant Assets 3,400** Computation of total gain: Fair value of Asset B $75,000 [25 pts] Book value of Asset B (58,000) Total gain $17,000 *Fair value of asset $60,000 Book value of $58,000 acquired OR Asset B Less gain deferred Portion of book ($17,000 $3,400) 13,600 value sold (11,600) Basis of Asset A $46,400 $46,400 **Gain recognized = $15,000 $15,000 + $60,000 X $17,000 = $3,400 [15 pts] 10

11 Question 18. [80 points] (a) 2003 Working hours $212,000 $12,000 20,000 = $10.00/hour 525 hours X $10.00 = $5,250 [20 pts] (b) = 36 OR n (n + 1) 8(9) = 2 2 = 36 Allocated to Sum-of-the-years -digits Total Year 1 8/36 X $200,000 = $44,444 $11,111 $33, /36 X $200,000 = $38,889 9,722 $29, /36 X $200,000 = $33,333 8,333 $11,111 $43,055 $37,500 [3 x 10 pts] 2005: $37,500 = (9/12 of 2 nd year of machine s life plus 3/12 of 3 rd year of machine s life) (c) Double Declining Balance 1 st Year 212,000 x 25% = 53,000 2 nd Year (212,000 53,000) x 25% 39,750 [give partial credit 3 rd Year (212,000 (53, ,750)) x 25% 29, (c) Allocate To: st Year 53,000 13,250 39,750 2 nd Year 39,750 9, , rd Year 29, , ,250 49, , [3 x 10 pts] 11

12 Question 19 [Total of 80 points] 1. Cash or Accounts Receivable 4,810,000 Sales (650 X $7,400) 4,810,000 [20 pts] 2. Warranty Expense 120,250 Parts Inventory ($170 X 650 X 1/2) 55,250 Accrued Payroll ($200 X 650 X 1/2) 65,000 ($120,250 = 650 X $370) 2 [20 pts] 3. Warranty Expense 120,250 Estimated Liability Under Warranties 120,250 (650 machines X $370) $120,250 [20 pts] 4. Estimated Liability Under Warranties 120,250 Parts Inventory 55,250 Accrued Payroll 65,000 [20 pts] 12

13 Question 20 [80 points] Eller Company Dollar-Value LIFO Computations At December 31, 2003, 2004, and 2005 Ending Inven- Layers at Ending Inventory tory at Base- Base-Year Price at Dollar-Value Year Price Prices Index LIFO At 12/31, $336,000/1.05 $200,000 x 1.00 = $200, : = $320,000 $120,000 x 1.05 = 126,000 $326,000 [20 pts] At 12/31, $437,000/1.15 $200,000 x 1.00 = $200, : = $380,000 $120,000 x 1.05 = 126,000 $ 60,000 x 1.15 = 69,000 $395,000 [30 pts] At 12/31, $425,000/1.25 $200,000 x 1.00 = $200, : = $340,000 $120,000 x 1.05 = 126,000 $ 20,000 x 1.15 = 23,000 $349,000 [30 pts] 13