September 7, 2005 Anderson ECON 136A Final exam Name Complete the multiple choice on your scantron (#1-25) and the problems in your blue-books (#26-29). Complete on your scantron. ------------------------- 1. 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. 2. Goods in transit which are f.o.b. shipping point 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. 3. Which of the following is correct? a. Selling costs are product costs. b. Manufacturing overhead costs are product costs. c. Interest costs for routine inventories are product costs. d. All of these. 4. An inventory pricing procedure in which the oldest costs incurred rarely have an effect on the ending inventory valuation is a. FIFO. b. LIFO. c. base stock. d. weighted-average. 5. Which of the following is true about lower of cost or market? a. It is inconsistent because losses are recognized but not gains. b. It usually understates assets. c. It can increase future income. d. All of these. 6. 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. 7. Net realizable value is a. acquisition cost plus costs to complete and sell. b. selling price. c. selling price plus costs to complete and sell. d. selling price less costs to complete and sell.
Final exam--page 2 8. If a material amount of inventory has been ordered through a formal purchase contract at the balance sheet date for future delivery at firm prices, a. this fact must be disclosed. b. disclosure is required only if prices have declined since the date of the order. c. disclosure is required only if prices have since risen substantially. d. an appropriation of retained earnings is necessary. 9. Which statement is NOT true about the gross profit method of inventory valuation? a. It may be used to estimate inventories for interim statements. b. It may be used to estimate inventories for annual statements. c. It may be used by auditors. d. None of these. 10. A major advantage of the retail inventory method is that it a. provides reliable results in cases where the distribution of items in the inventory is different from that of items sold during the period. b. hides costs from competitors and customers. c. gives a more accurate statement of inventory costs than other methods. d. provides a method for inventory control and facilitates determination of the periodic inventory for certain types of companies. 11. Which statement is true about the retail inventory method? a. It may not be used to estimate inventories for interim statements. b. It may not be used to estimate inventories for annual statements. c. It may not be used by auditors. d. None of these. 12. RAFS, Inc., receives a 2001 Dodge Durango from it's only shareholder and gives nothing to the shareholder in return. RAFS, Inc. is NOT a non-profit entity. a. RAFS should record the vehicle on their books at its fair value and credit revenue entitled "contributions"; b. RAFS should record the vehicle on their books at its fair value and credit an equity account for a contribution from shareholder; c. RAFS should make no entry as the asset has no "historical cost" to RAFS. d. I have no idea. 13. Capitalization of interest incurred in connection with construction of a fixed asset may begin when: a. Expenditures for construction have been incurred. b. Construction activities have begun. c. Interest has been incurred by the company. d. Only once each of the above conditions is present.
Final exam--page 3 14. When a company exchanges equipment for similar equipment, the company may report a gain: a. if the fair value of the equipment they give up exceeds that equipment's net book value. b. if the fair value of the equipment they give up exceeds that equipment's net book value and the transaction has commercial substance. c. if the company believes that it makes good common sense. d. if the new equipment is similar to the exchaged asset and the asset given up has a net book value less than it's fair value. 15. To qualify for capitalization, expenditures must: a. increase the useful life of the asset and the productivity of the asset. b. increase the productivity of the asset and the appearance of the asset. c. increase the useful life of the asset, or the productivity of the asset (either of the two). d. none of the above 16. Which of the following is NOT a major characteristic of a plant asset? a. Possesses physical substance b. Acquired for resale c. Acquired for use d. Yields services over a number of years 17. Cotton Hotel Corporation recently purchased Holiday Hotel and the land on which it is located with the plan to tear down the Holiday Hotel and build a new luxury hotel on the site. The cost of the Holiday Hotel should be a. depreciated over the period from acquisition to the date the hotel is scheduled to be torn down. b. written off as an extraordinary loss in the year the hotel is torn down. c. capitalized as part of the cost of the land. d. capitalized as part of the cost of the new hotel. 18. The cost of land does NOT include a. costs of grading, filling, draining, and clearing. b. costs of removing old buildings. c. costs of improvements with limited lives. d. special assessments. 19. If a fixed asset is deemed to be "available for sale", then: a. The asset should be written down to it's estimated market value less cost to sell, if less than it's net book value. b. Depreciation of the asset should stop. c. Recovery of previous impairment losses are permitted. d. All of the above.
Final exam--page 4 20. Once it has been determined that there has been a possible impairment, a company should: a. Test for impairment by applying a discounted cash flow analysis. b. Write the asset down to it's estimate market value. c. Test for impairment by applying an undiscounted cash flow analysis. d. Give up and go to the beach. 21. If there has been no "events or change in circumstance" indicating a possible impairment to a fixed asset, then: a. No further impairment testing is necessary. b. An undiscounted cash flow analysis should be performed. c. The net book value of the asset should be compared to it's fair value and an impairment recorded if the net book value exceeds the assets fair value. d. None of these. 22. On July 1, 2004, Gonzalez Corporation purchased factory equipment for $450,000. Salvage value was estimated to be $12,000. The equipment will be depreciated over ten years using the double-declining-balance method. Counting the year of acquisition as one-half year, Gonzalez should record depreciation expense for 2005 on this equipment of a. $90,000. b. $81,000. c. $78,840. d. $72,000. 23. On January 1, 2004, Tanner Company purchased a new machine for $2,800,000. The new machine has an estimated useful life of nine years and the salvage value was estimated to be $100,000. Depreciation was computed on the sum-of-the-years'-digits method. What amount should be shown in Tanner's balance sheet at December 31, 2005, net of accumulated depreciation, for this machine? a. $2,260,000 b. $1,780,000 c. $1,742,222 d. $1,659,000 24. The activity method of depreciation a. is a variable charge approach. b. assumes that depreciation is a function of the passage of time. c. conceptually associates cost in terms of input measures. d. all of these.
Final exam--page 5 25. Quayle Company acquired machinery on January 1, 1999 which it depreciated under the straight-line method with an estimated life of fifteen years and no salvage value. On January 1, 2004, Quayle estimated that the remaining life of this machinery was six years with no salvage value. How should this change be accounted for by Quayle? a. As a prior period adjustment b. As the cumulative effect of a change in accounting principle in 2004 c. By setting future annual depreciation equal to one-sixth of the book value on January 1, 2004 d. By continuing to depreciate the machinery over the original fifteen year life 26. Sunnydays Inc. utilizes dollar value LIFO and has only one "pool". The following information pertains to their computation of the inventory balance as of December 31, 2004: Inventort at Price Dec. 31 Year-end prices Index 2001 300,000 100 2002 350,000 105 2003 400,000 110 2004 410,000 115 Compute the ending inventory using "dollar value LIFO" as of December 31, 2001, 2002, 2003 and 2004. 27. Based on the following facts, please compute the ending inventory using each of the following three retail inventory methods: (1) LCM (Conventional LIFO retail)-- hint no markdowns (2) Cost method (Average Cost)-- hint markdowns included (3) Dollar Value Retail LIFO-- NO HINTS Cost Retail Beginning Inventory 200,000 300,000 Purchases 800,000 1,280,000 Markups, net 20,000 Markdowns, net (25,000) Net sales (1,100,000) Ending inventory at retail 475,000
Final Exam-- Page 6 28 Buff, Inc. is building a new gym facility for use in their business. They purchase the land in November 2004 for $700,000 and commence construction on February 1, 2005. The asset is still under active construction on December 31, 2005. Payments during 2005 occur as follows: Jan. 1, 2005 $ 500,000 (paid in advance to the contractor) June 1, 2005 750,000 Sept. 30, 2005 1,250,000 Buff, Inc. has not borrowed any money specifically for construction of the facility. They - following outstanding borrowings: Interest incurred during the year was $ 117,500 Outstanding Rate 250,000 10% 250,000 9% 1,000,000 7% (1) Compute the weighted average accumulated expenditures qualifying for interest capitalization during the year ended December 31, 2005. (2) Compute the weighted average interest rate. (3) Compute the avoidable interest during 2005 and indicate how much of that should be capitalized. (3) Compute the avoidable interest during 2005 if they borrowed $1,000,000 at 5% specifically for this construction.
Final Exam-- Page 7 29 THE FOLLOWING PERTAINS TO XYZ, INC. Cash 100,000 Accounts receivable, net of $5,000 allowance for doubtful accounts 55,000 Inventory 125,000 Marketable securities, at fair value, cost of $10,000 11,500 Fixed assets 675,000 Accumulated depreciation (225,000) Accounts payable 50,000 Debt 200,000 Retained earnings 391,500 Common stock 100,000 The following applies to the month ended January 31, 2005 (XYZ uses perpetual inventory accounting): 1. Combined inventory purchases for the month of $500,000, on credit, terms 2/10 net 30, XYZ uses the net method 2. Sell goods to customers for $1,200,000 (no discounts offered). Perpetual inventory system indicates that the cost of the goods sold was $800,000. 3. Combined collections from customers of $1,100,000 of accounts receivable during January. 4. Paid cash of $400,000 against open invoices; some of the invoices were paid after the discount period, resulting in $5,000 of discounts lost. 5. Compensation to employees who work directly on manufacturing was paid in the amount of 10,000. Management and the administrative staff were paid $25,000. 6. Management uses 2.0% of sales to provide the accounts receivable allowance. 7. Management review of the account receivable aging indicates that $12,500 of balances should be written-off. 8. The debt terms are: 10% rate, payments of interest plus $10,000 of principle per month until balance is reduced to zero. The January interest payment and principle payment were made on January 31. 9. The Company purchased fixed assets for $75,000, paid in cash. 10. On January 31, 2003, the company borrowed $100,000 under a line of credit. The borrowings must be paid by the end of the year. 11. The depreciation module indicates current month depreciation to be $25,000. 12. The effective tax rate is 35% and no estimated payments have been made. I. List the necessary journal entries based on the above information. It is best to number them as per above. II. PREPARE A CLASSIFIED BALANCE SHEET AND MULTIPLE-STEP INCOME STATEMENT AS OF AND FOR THE MONTH ENDED JANUARY 31, 2003. YOU CAN USE T-ACCOUNTS, A WORKSHEET OR WHATEVER YOU LIKE TO TRACK THE BALANCES AND ACTIVITY.
Final exam--page 6 September 7, 2005 ANSWER KEY Anderson ECON 136A +-------+------+--------+------+--------+--------+--------+--------+------+ Text Bank Exam Ques Diff Lrng Chapter Ref Question Answer Type Cat Lvl Obj Page +-------+------+--------+------+--------+--------+--------+--------+------+ 8 1 1 d MChoice C 2 8 2 2 b MChoice C 2 8 12 3 b MChoice C 4 8 22 4 a MChoice C 5 9 1 5 d MChoice C 1 9 5 6 a MChoice C 1 9 9 7 d MChoice C 2 9 12 8 a MChoice C 4 9 15 9 b MChoice C 5 9 16 10 d MChoice C 6 9 19 11 d MChoice C 6 10 72 12 b MChoice 10 70 13 d MChoice 10 71 14 b MChoice 10 69 15 c MChoice 10 2 16 b MChoice C 1 10 5 17 c MChoice C 2 10 6 18 c MChoice C 2 11 66 19 d MChoice 11 65 20 c MChoice 11 64 21 a MChoice 11 27 22 b MChoice P 3 11 32 23 b MChoice P 3 11 5 24 a MChoice C 3 11 15 25 c MChoice C 5 +-------------------------------------------------------------------------+
Solution to #26 Inventort at Price Inventory at Base Yr Base Yr ANSWER 31-Dec Year-end prices Index Base-Year Price Change Layer YE Balance 2001 300,000 100 300,000 300,000 300,000 300,000 2002 350,000 105 333,333 33,333 35,000 335,000 2003 400,000 110 363,636 30,303 33,333 368,333 2004 410,000 115 356,522 (7,115) (7,826) 360,507
27. SOLUTION Cost Retail Beginning Inventory 200,000 300,000 Purchases 800,000 1,280,000 Markups, net - 20,000 SUBTOTAL FOR LCM RATIO 1,000,000 1,600,000 62.5% Markdowns, net - (25,000) SUBTOTAL FOR COST RATIO 1,000,000 1,575,000 63.5% Net sales - (1,100,000) Ending inventory at retail 475,000 LCM ENDING INVENTORY 296,875 62.5% * 475,000 COST ENDING INVENTORY 301,587 63.5% * 475,000 DOLLAR VALUE RETAIL LIFO Cost Retail Purchases 800,000 1,280,000 Markups net 20,000 Mardowns net (25,000) 800,000 1,275,000 62.7% RETAIL COST CONV. ENDING RETAIL INVENTORY 475,000 OPENING LAYER (300,000) 200,000 300,000 opening layer had cost of $200,00 NEW LAYER 175,000 109,804 $175,000*62.7% LIFO RETAIL ENDING INVENTORY 309,804
Solution to problem # 28 WTD AVERAGE ACCUMULATED EXPENDITURES: Borrow date Amount Wtd. February 1, 2005 700,000 11 / 12 641,667 February 1, 2005 500,000 11 / 12 458,333 June 1, 2005 750,000 7 / 12 437,500 Sept. 30, 2005 1,250,000 3 / 12 312,500 Wtd Average accum exp. 1,850,000 WTD AVERAGE RATE Outstanding Rate % of total Extended $ 250,000 10% 16.7% 1.7% $ 250,000 9% 16.7% 1.5% $ 1,000,000 7% 66.7% 4.7% $ 1,500,000 100.0% 7.8% Wtd Rate AVOIDABLE INTEREST Wtd Avg accum expend 1,850,000 Wtd Avg Rate 7.8% $ 144,917 CAPITALIZABLE-- the interest expense is less than avoidable interest, so the amt $ 117,500 IF BORROWED $1,000,000 AT 5% SPECIFIC Wtd Avg expend. 1,850,000 Specific borrowing (1,000,000) Portion from other borrowings 850,000 Avoidable interest from specific borrowings $ 50,000 (1,000,000 @5%) Other avoidable interest 66,583 * $ 116,583 * Equals the portion from other borrowings * wtd rate $ 850,000 * 7.8%
Problem 29 Journal Entry Solution 1 Inventory 490,000 accounts payable 490,000 2 Accounts receivable 1,200,000 Sales 1,200,000 COS 800,000 Inventory 800,000 3 Cash 1,100,000 accounts receivable 1,100,000 4 Accounts payable 395,000 Cash 400,000 COS/ Discounts lost 5,000 5 Inventory 10,000 G&A expense 25,000 Cash 35,000 6 Bad debt exp (SG&A) 24,000 Allowance for DA's 24,000 7 Allowance for DA's 12,500 Accounts receivable 12,500 8 Interest expense 1,667 Debt 10,000 Cash 11,667 9 Fixed assets 75,000 Cash 75,000 10 Cash 100,000 Debt/ Line of credit 100,000 11 Depreciation expense 25,000 Accumulated depreciation 25,000 12 Income tax expense 111,767 Income tax payable 111,767
Problem Solution# 29 STATEMENT SOLUTION XYZ, INC. Cash Accounts receivable Allowance DA's BALANCE SHEET 100,000 400,000 60,000 1,100,000 12,500 5,000 AS OF 1/31/2004 1,100,000 35,000 1,200,000 12,500 24,000 100,000 11,667 Current Assets RECLASS 75,000 Cash 778,333 778,333 A/R, net of allowance of 131,000 131,000 Inventory (175,000) (175,000) Marketable securities, at fairvalue, cost 778,333 147,500 16,500 of 11,500 11,500 Total current assets 745,833 745,833 Inventory Marktble sec Fixed assets 125,000 800,000 11,500-675,000 Fixed assets 750,000 750,000 490,000-75,000 Accumulated depreciation (250,000) (250,000) 10,000-500,000 500,000 (175,000) 11,500 750,000 Liabilities & Stockholders Equity Total Assets 1,245,833 1,245,833 Accum. Dep. A/P Income tax payable Current liabilities 225,000 395,000 50,000 111,767 Accounts payable 145,000 145,000 25,000 490,000 Income tax payable 111,767 111,767 - Line of credit payable 100,000 100,000 Current maturities of debt 120,000 120,000 Total current liabilities 256,767 256,767 250,000 145,000 111,767 Long-term debt 290,000 (100,000) (120,000) 70,000 Debt Retained earnings Common stock Stockholders equity: 10,000 200,000 391,500 100,000 Common stock 100,000 100,000 100,000 207,567 Accumulated comprehensive loss - - Retained earnings 599,067 599,067 699,067 699,067 TOTAL liabilities and stockholders equity 1,245,833-1,245,833 290,000 599,067 100,000 Sales COS SG&A expense 1,200,000 800,000-25,000 5,000 24,000 XYZ, INC. INCOME STATEMENT MONTH ENDED JANUARY Sales 1,200,000 COS 805,000 Gross profit 395,000 1,200,000 805,000 49,000 Selling general & admin 49,000 AOCI Depreciation Impairment Depreciation expense 25,000-25,000 - Interest expense 1,667 Income from continuiing operations 319,333-25,000 - Income before income taxes 319,333 Income tax provision 111,767 ImIncome tax exp. Interest expense 111,767 1,667 - Net income 207,567 111,767 1,667