Zicklin School of Business, Baruch College ACC Financial Accounting 1 Fall Mid Term 1 -- B -- BLUE EXAM

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1 Zicklin School of Business, Baruch College ACC Financial Accounting 1 Fall 2004 Mi Term 1 -- B -- BLUE EXAM Instructor: Prof. Donal Byar Name: Office: VC Phone: (646) Last 4 Digits of SSN: onal_byar@baruch.cuny.eu General Instructions: This is a close book, close notes, close iscussion exam. Your exam must reflect only your work. Please verify that you have all eight pages of the exam booklet. You may bring an orinary non-memory programmable calculator into the exam. There are 250 points for this exam an you have 100 minutes to complete (finishing at 9:20pm). The exam points are ivie as follows: 1 Discussion question with a written answer (20 points) 20 points 3 Numerical Problem questions (60 point each) 180 points 15 Multiple-choice questions (3.33 points each) 50 points 250 NOTE: One of the multiple choice questions was treate as an extra creit an I marke the essay out of 30 instea of 20 (that is, I gave 10 extra creit points for the essay). As a result, each correct multiple choice question was worth approximately 3.57 points, an there was an extra 10 points for the essay. As a result, the maximum possible number of points attainable was points. For the multiple choice questions, circle your choice of answer on the exam paper. For the iscussion question an the numerical problem questions, provie your answers in the spaces provie on this exam. For numerical problems you must show all your supporting calculations/explanations, where appropriate. All supporting calculations an scheules must be legible an in goo form. Be neat with your answers. You must honor Baruch College s stanars regaring integrity, honesty, an cheating at all times; sharing of information uring this exam in any form is strictly forbien. Any breach of these stanars will be ealt with in accorance with Baruch College s Coe of Acaemic Integrity. There are no extra creit options available for this exam. You must return the entire exam book when you are complete. 1

2 Part 1 -- Discussion Question Question 1 (20 points) Traitional accounting practice relies upon the historical cost principle. For example, fixe assets (property, plant, an equipment) are reporte at book value in the balance sheet, that is, at the cost to acquire them less accumulate epreciation. However, the fair value of these assets coul be more or less than the recore book value. Requirements 1) Describe the concept of relevance. 2) For investors, which measurement criteria is likely to be more relevant historical cost or fair value? Briefly explain why. [Do not write beyon this point] 2

3 Part 2 -- Numerical Problems [3 questions, 60 points each] Question 2 Young Corporation ha income from continuing operations of $500,000 in 2004 before a number of ajustments ha been mae. These ajustement are: 1) In 2004, Young aopte the ouble-eclining-balance metho of epreciating equipment. Prior to 2004, Young ha use the straight-line metho. The change ecreases income for 2004 by $30,000 (pre-tax) an the cumulative effect of the change on prior years' income was a $150,000 (pre-tax) ecrease. 2) A machine was sol for $170,000 cash uring the year at a time when its book value was $100,000. (Depreciation has been properly recore.) This type of machine is part of the continuing operations of the business at the en of the year an the company often sells machinery of this type. 3) Young ecie to iscontinue its stereo ivision in During the current year, the loss on the isposal of this component of the business was $110,000 less applicable taxes. Instructions Present in goo form the income statement for 2004 starting with the correct upate figure for "Income from Continuing Operations." Assume that Young's tax rate is 25% an there were 100,000 shares of common stock outstaning throughout the year. 3

4 Question 3 Presente below are selecte accounts from the ajuste trial balance of Jones Company as of December 31, Inventory 12/31/05 $ 60,000 Cost of goos sol $275,700 Common stock 75,000 Selling expenses 16,000 Retaine earnings 27,000 Amin. Expenses 36,000 Diviens 33,000 Income tax expense 30,000 Sales an return allowances 12,000 Sales iscounts 15,000 Sales 465,000 Instructions 1) Prepare the closing journal entries for Jones Company on December 31, ) Show the statement of retaine earnings for the perio, if in 2005 Jones iscovere that there ha been a material mistake in The mistake was that they unerepreciate by $2,700 (net of any taxes) in fiscal year

5 Question 4 The following is the ajuste trial balance of Braley Company for the month ening April 30, Ajuste Trial Balance Debit Creit Cash $19,472 Accounts receivable 6,920 Prepai rent 2,280 Equipment 18,050 Accumulate epreciation $ 4,895 Notes payable 5,700 Accounts payable 5,472 Common stock 10,000 Aitional pai-in capital 5,000 Shareholer capital 19,960 Drawings by Mr. Braley 6,650 Service revenue 11,590 Salaries expense 6,840 Rent expense 2,260 Depreciation expense 145 Interest Expense 83 Interest Payable 83 Instructions Prepare a balance sheet for Braley as of April 30,

6 Part 3 -- Multiple Choice Questions [15 questions, 3.33 points each] Question 5 An accounting recor into which the essential facts an figures in connection with all transactions are initially recore is calle the a. leger. b. account. c. trial balance.. none of these. Question 6. A common set of accounting stanars an proceures are calle a. financial accounting stanars. b. generally accepte accounting principles. c. objectives of financial reporting.. statements of financial accounting concepts. Question 7. In orer to be classifie as an extraorinary item in the income statement, an event or transaction shoul be a. unusual in nature, infrequent, an material in amount. b. unusual in nature an infrequent, but it nee not be material. c. infrequent an material in amount, but it nee not be unusual in nature.. unusual in nature an material, but it nee not be infrequent. Question 8. The Financial Accounting Stanars Boar a. has issue a series of pronouncements entitle Statements on Auiting Stanars. b. was the forerunner of the current Accounting Principles Boar. c. is the arm of the Securities an Exchange Commission responsible for setting financial accounting stanars.. is appointe by the Financial Accounting Founation. Question 9. Generally accepte accounting principles a. are funamental truths or axioms that can be erive from laws of nature. b. erive their authority from legal court proceeings. c. erive their creibility an authority from general recognition an acceptance by the accounting profession.. have been specifie in etail in the FASB conceptual framework. Question 10. 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.. the operating cycle or one year, whichever is shorter. 6

7 Question 11. Accounting information is consiere to be relevant when it a. can be epene on to represent the economic conitions an events that it is intene to represent. b. is capable of making a ifference in a ecision. c. is unerstanable by reasonably informe users of accounting information.. is verifiable an neutral. Question 12. Accoring to STATEMENT OF FINANCIAL ACCOUNTING CONCEPTS NO. 2, which of the following relates to both relevance an reliability? a. Materiality b. Unerstanability c. Usefulness. All of these Question 13. Users of financial reports inclue all of the following except a. creitors. b. government agencies. c. unions.. All of these are users. Question 14. Uner the cash basis of accounting, revenues are recore a. when they are earne an realize. b. when they are earne an realizable. c. when they are earne.. when they are realize. Question 15. Information in the income statement helps users to a. evaluate the past performance of the enterprise. b. provie a basis for preicting future performance. c. help assess the risk or uncertainty of achieving future cash flows.. all of these. Question 16. Companies that are liste on a stock exchange are require to submit their financial statements to the a. AICPA. b. APB. c. FASB.. SEC. 7

8 Question 17. 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 stockholers' equity.. none of these. Question 18. The correct orer to present current assets is a. Cash, accounts receivable, prepai items, inventories. b. Cash, accounts receivable, inventories, prepai items. c. Cash, inventories, accounts receivable, prepai items.. Cash, inventories, prepai items, accounts receivable. Question 19. A sounly evelope conceptual framework of concepts an objectives shoul a. increase financial statement users' unerstaning of an confience in financial reporting. b. enhance comparability among companies' financial statements. c. allow new an emerging practical problems to be more quickly soluble.. all of these. 8

9 Answer Key Version B Multiple Choice Questions Question 1 [30 points] Relevance. To be relevant, accounting information must be capable of making a ifference in a ecision. Since the users of financial statements are investors an creitors, if financial information is capable of makeing investors an creitors change their mins about the investment they make, then this accounting information can be sai to be relevant. In contrast, if accounting information ha no bearing (no effect) on investors an creitors ecisions, then it woul be sai to be irrelivant. Fair value is likely to be more relevant. Fair value is an estimate of what the asset is worth toay (its market value toay). Information on what the asset is worth toay is likely to be more relevant to investors then information on what the asset was worth in the past (which is what historic cost measures). Remember, historic cost was the price (value) of the asset when it was originally purchase. If this original purchase happene in the istant past, then this historic cost amount might bear little relationship to what the asset is worth toay. Question 2. [60 points] Correct Income from Continuing Operations 500,000 Less: 30,000 (30,000) 470,000 Income from continuing operations 470,000 Other Gains/Losses Gain on isposal of machine 70,000 Income before income tax 540,000 Tax (25%) (135,000) Income after income tax 405,000 Irregular Items 1) Loss on iscontinue operations 110,000 x (1-0.25) (82,500) 2) Prior perio income effect of change in Accounting policy 150,000 x (1-0.25) (112,500) Net Income 210,000 Earning Per Share Computation Income after tax 4.05 Discontinue operations (0.83) Change in accounting principle (1.12) EPS

10 Question 3. [60 points] (1) Sales , pts Cost of Goos Sol ,700 Sales Returns an Allowances... 12,000 Sales Discounts... 15,000 Selling Expenses... 16,000 Aministrative Expenses... 36,000 Income Tax Expense... 30,000 Income Summary... 81,000 (or) Sales ,000 Income Summary ,000 Income Summary ,000 Cost of Goos Sol ,700 Sales Returns an Allowances... 12,000 Sales Discounts... 15,000 Selling Expense... 16,000 Aministrative Expense... 36,000 Income Tax Expense... 30,000 (or) Sales 465,000 Sales Returns an Allowances 12,000 Sales Discounts 15,000 Income Summary 438,000 Income Summary 357,000 Cost of Goos Sol ,700 Selling Expense... 16,000 Aministrative Expense... 36,000 Income Tax Expense... 30,000 (2) Income Summary... 80, pts Retaine Earnings... 80,300 Retaine Earnings... 33,000 Diviens... 33,000 (3) 20 pts Smith Company Statement of Retaine Earnings For the Year Ene December 31, 2005 Retaine Earnings, Jan. 1, $ 27,000 Less: Ajustment for uner-epreciation in 2004 (2,700) Ajuste Opening Balance of Retaine Earnings 24,300 A: Net Profit... 80,300 Less: Divien (33,000) Retaine Earnings, Dec. 31, $71,600 10

11 Question 4. [60 points] E Braley Co.Balance Sheet April 30, 2005 Assets Current Assets Cash $19,472 Accounts receivable 6,920 Prepai rent 2,280 Total current assets 28,672 Property, plant, an equipment Equipment $18,050 Less Accumulate epreciation (4,895) 13,155 Total assets $41,827 Liabilities an Owner s Equity Current liabilities Accounts payable $ 5,472 Interest payable 83 Notes payable 5,700 Total current liabilities 11,255 Owner s equity Common stock 10,000 Aitional pai-in capital 5,000 Retaine earnings 15,572 30,572 Total liabilities an owner s equity $41,827 *Beg. Balance Drawings + Net Income = Ening Balance $19,960 $6,650 + $2,262 = $15,572 Part C: [15 Questions, 4 points each] Question Q5 Q6 Q7 Q8 Q9 Q10 Q11 Q12 Q13 Q14 Q15 Q16 Q17 Q18 Q19 Answer b a c b b b 11