October 20, 2004 Anderson ECON 136A Midterm #1 Name

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1 October 20, 2004 Anderson ECON 136A Midterm #1 Name Please write your name, perm # and ECON 136A Fall 2004 on both your scantron and blue-book. You may take this exam with you. Answer the multiple choice questions (#1-25) on the scantron and the exercises (#26-28) in your blue-book. Please answer on scantron 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. 2. Adjusting entries are necessary to 1. obtain a proper matching of revenue and expense. 2. achieve an accurate statement of assets and equities. 3. adjust assets and liabilities to their fair market value. a. 1 b. 2 c. 3 d. 1 and 2 3. 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 4. When an item of expense is paid and recorded in advance, it is normally called a(n) a. prepaid expense. b. accrued expense. c. estimated expense. d. cash expense. 5. An accrued expense can best be described as an amount a. paid and currently matched with earnings. b. paid and not currently matched with earnings. c. not paid and not currently matched with earnings. d. not paid and currently matched with earnings. 6. Year-end net assets would be overstated and current expenses would be understated as a result of failure to record which of the following adjusting entries? a. Expiration of prepaid insurance b. Depreciation of fixed assets c. Accrued wages payable d. All of these

2 Midterm #1--Page 2 7. If the inventory account at the end of the year is understated, the effect will be to a. overstate the gross profit on sales. b. understate the net purchases. c. overstate the cost of goods sold. d. overstate the goods available for sale. 8. Forbes Company paid $7,200 on June 1, 2004 for a two-year insurance policy and recorded the entire amount as Insurance Expense. The December 31, 2004 adjusting entry is a. debit Insurance Expense and credit Prepaid Insurance, $2,100. b. debit Insurance Expense and credit Prepaid Insurance, $5,100. c. debit Prepaid Insurance and credit Insurance Expense, $2,100 d. debit Prepaid Insurance and credit Insurance Expense, $5, Jim Wynn, M.D., keeps his accounting records on the cash basis. During 2004, Dr. Wynn collected $180,000 from his patients. At December 31, 2003, Dr. Wynn had accounts receivable of $25,000. At December 31, 2004, Dr. Wynn had accounts receivable of $35,000 and unearned revenue of $5,000. On the accrual basis, how much was Dr. Wynn's patient service revenue for 2004? a. $155,000. b. $185,000. c. $190,000. d. $195, The major elements of the income statement are a. revenue, cost of goods sold, selling expenses, and general expense. b. operating section, nonoperating section, discontinued operations, extraordinary items, and cumulative effect. c. revenues, expenses, gains, and losses. d. all of these. 11. 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. 12. 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 Midterm #1--Page In order to be classified as an extraordinary item in the income statement, an event or transaction should be a. unusual in nature, infrequent, and material in amount. b. unusual in nature and infrequent, but it need not be material. c. infrequent and material in amount, but it need not be unusual in nature. d. unusual in nature and material, but it need not be infrequent. 14. Under which of the following conditions would material flood damage be considered an extraordinary item for financial reporting purposes? a. Only if floods in the geographical area are unusual in nature and occur infrequently. b. Only if the flood damage is material in amount and could have been reduced by prudent management. c. Under any circumstances as an extraordinary item. d. Flood damage should never be classified as an extraordinary item. 15. Income taxes are allocated to a. cumulative effect of a change in accounting principle. b. discontinued operations. c. prior period adjustments. d. all of these. 16. Shank Corporation made a very large arithmetical error in the preparation of its year-end financial statements by improper placement of a decimal point in the calculation of depreciation. The error caused the net income to be reported at almost double the proper amount. Correction of the error when discovered in the following year should be treated as a. an increase in depreciation expense for the year in which the error is discovered. b. a component of income for the year in which the error is discovered, but separately listed on the income statement and fully explained in a note to the financial statements. c. an extraordinary item for the year in which the error was made. d. a prior period adjustment. 17. The approach most companies use to provide information related to the components of other comprehensive income is a a. second separate income statement. b. combined income statement of comprehensive income. c. separate column in the statement of changes in stockholders' equity. d. footnote disclosure. 18. Which of the following is a limitation of the balance sheet? a. Many items that are of financial value are omitted. b. Judgments and estimates are used. c. Current fair value is not reported. d. All of these

4 Midterm #1--Page The balance sheet is useful for analyzing all of the following except a. liquidity. b. solvency. c. profitability. d. financial flexibility. 20. 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. 21. The current assets section of the balance sheet should include a. machinery. b. patents. c. goodwill. d. inventory. 22. Which of the following is NOT a method of disclosing pertinent information? a. Supporting schedules b. Parenthetical explanations c. Cross reference and contra items d. All of these are methods of disclosing pertinent information. 23. A general description of the depreciation methods applicable to major classes of depreciable assets a. is not a current practice in financial reporting. b. is not essential to a fair presentation of financial position. c. is needed in financial reporting when company policy differs from income tax policy. d. should be included in corporate financial statements or notes thereto.

5 Midterm #1--Page Trent Corp.'s trial balance reflected the following account balances at December 31, 2004: Accounts receivable (net) $19,000 Trading securities 6,000 Accumulated depreciation on equipment and furniture 15,000 Cash 11,000 Inventory 30,000 Equipment 25,000 Patent 4,000 Prepaid expenses 2,000 Land held for future business site 18,000 In Trent's December 31, 2004 balance sheet, the current assets total is a. $85,000. b. $77,000. c. $72,000. d. $68, On January 1, 2004, Frye Co. leased a building to Cole Corp. for a ten-year term at an annual rental of $120,000. At inception of the lease, Frye received $480,000 covering the first two years' rent of $240,000 and a security deposit of $240,000. This deposit will not be returned to Cole upon expiration of the lease but will be applied to payment of rent for the last two years of the lease. What portion of the $480,000 should be shown as a current and long-term liability in Frye's December 31, 2004 balance sheet? Current Liability Long-term Liability a. $0 $480,000 b. $120,000 $240,000 c. $240,000 $240,000 d. $240,000 $120,000

6 Midterm #1--Page Please answer in your blue-book and remember to leave a trail of your work for earning partial credit points. 26. Selected amounts from Trent Company's trial balance of 12/31/04 appear below: 1. Accounts Payable $ 160, Accounts Receivable 150, Accumulated Depreciation Equipment 200, Allowance for Doubtful Accounts 20, Bonds Payable 500, Cash 150, Common Stock 60, Equipment 720, Insurance Expense 30, Interest Expense 10, Merchandise Inventory 300, Notes Payable (due 6/1/05) 200, Prepaid Rent 120, Retained Earnings 130, Salaries and Wages Expense 328,000 (All of the above accounts have their standard or normal debit or credit balance.) Prepare adjusting journal entries at year end, December 31, 2004, based on the following supplemental information. a. The equipment has a useful life of 18 years with no salvage value. (Straight-line method being used.) b. Interest accrued on the bonds payable is $15,000 as of 12/31/04. c. Unexpired insurance at 12/31/04 is $8,000. d. The rent payment of $120,000 covered the six months from November 30, 2004 through May 31, e. Salaries and wages earned but unpaid at 12/31/04, $22,000.

7 Midterm #1--Page Wasson Corporation had income from continuing operations of $600,000 (after taxes) in In addition, the following information, which has not been considered, is as follows. 1. In 2004, Wasson adopted the double-declining-balance method of depreciating equipment. Prior to 2004, Wasson had used the straight-line method. The change decreases income for 2004 by $40,000 (pre-tax) and the cumulative effect of the change on prior years' income was a $200,000 (pre-tax) decrease. 2. A machine was sold for $150,000 cash during the year at a time when its book value was $100,000. (Depreciation has been properly recorded.) The company often sells machinery of this type. 3. Wasson decided to discontinue its stereo division in During the current year, the loss on the disposal of this component of the business was $120,000 less applicable taxes. INSTRUCTIONS Present in good form the income statement of Wasson Corporation for 2004 starting with "income from continuing operations." Assume that Wasson's tax rate is 30% and 100,000 shares of common stock were outstanding during the year.

8 Midterm #1-- Page Answer in your blue-book. The following facts are relevant to the equity activity of Idunno, Inc. for the year ended December 31, Opening balances as of January 1, 2004: Retained earnings 1,500,000 Accumulated other comprehensive income 40,000 Common Stock 750,000 Additional Paid in Capiatl 5,000,000 - Net income for the year was $200,000 - Unrealized loss on available for sale securities was $10,000 - An error to the prior year, overstating prior year income by $35,000, was discovered - Idunno, Inc's tax rate is 30% - Dividend of $12,000 were declared and paid COMPLETE THE COMBINED STATEMENT OF STOCKHOLDER'S EQUITY AND COMPREHENSIVE INCOME FOR THEYEAR ENDED DECEMBER 31, 2004

9 Midterm #1--Page 9 October 20, 2004 ANSWER KEY Anderson ECON 136A Text Bank Exam Ques Diff Lrng Chapter Ref Question Answer Type Cat Lvl Obj Page d MChoice C d MChoice C c MChoice C a MChoice C d MChoice C d MChoice C c MChoice C d MChoice P b MChoice A c MChoice C d MChoice C a MChoice C a MChoice C a MChoice C d MChoice C d MChoice C c MChoice C d MChoice C c MChoice C b MChoice C d MChoice C d MChoice C d MChoice C d MChoice A b MChoice A Problem Problem

10 Midterm #1--Page 10 October 20, /24 x $7,200 = $5, $180,000 - $25,000 + $35,000 - $5,000 = $185, $19,000 + $6,000 + $11,000 + $30,000 + $2,000 = $68, Conceptual. 26. PART A. a. Depreciation Expense Equipment... 40,000 Accumulated Depreciation Equipment. 40,000 b. Interest Expense... 15,000 Interest Payable... 15,000 c. Prepaid (or Unexpired) Insurance... 8,000 Insurance Expense... 8,000 d. Rent Expense... 20,000 Prepaid Rent... 20,000 e. Salaries and Wages Expense... 22,000 Salaries and Wages Payable... 22,000

11 Midterm #1--Page 11 October 20, Wasson Corporation Partial Income Statement For the Year Ended December 31, 2004 Income from continuing operations $607,000* Discontinued operations Loss on disposal of a component of a business, less applicable income taxes, $36,000 ( 84,000) Income before cumulative effect of accounting change 523,000 Cumulative effect of change in accounting principle, less applicable income taxes of $60,000 (140,000) Net income $383,000 Per share of common stock Income from cont. operations $6.07 Discont. oper., net of tax (.84) Income before cum. effect of accounting change 5.23 Change in accounting principle, net of tax (1.40) Net income $3.83 *Income from cont. operations (unadjusted) $600,000 Gain on sale of machinery (after tax) 35,000 Current effect of change in acct. principle (net) (28,000) Income from cont. operations (adjusted) $607,000

12 Midrerm #1-- Page 12 #28 SOLUTION: Accumulated Comprehensive Retained Other Comp. Common Total Income Earnings Income Stock APIC Equity Balance at 1/1/04, as prev. reported 1,500,000 40, ,000 5,000,000 7,290,000 Restatement/ prior pd. Adjustment Net of tax10,500 (24,500) (24,500) Balance at 1/1/04, as restated 1,475,500 40, ,000 5,000,000 7,265,500 Net income 200, , ,000 Unrealized gain/ loss on available for sale securities net of tax of $3,000 (7,000) (7,000) (7,000) Comprehensive income 193,000 Dividends (12,000) (12,000) Balance at 12/31/04 1,663,500 33, ,000 5,000,000 7,446,500