ACCT 5301
Solution to Sample Exam II
I.
Multiple choice:
1.B
2,000 + 50 decrease in A/R
2.C
-900 – 5 incr. in Inven – 15 decr. in A/P
3.B
4.B
5.A
6.A
II. (in 000s)
A.
2.Div. (RE)
30
Cash
30 (30,000 sh. o/s x $1)
3.Stock Div (RE) 300
Common Stock 300
4.TS
46
Cash
46
5.Other Comp Inc. 6
Investment
6
B. (not required)
Bal
NI
Div
Stock div
TS Purchase
AFS Invest. adjust
Bal
CS
300
APIC
900
300
RE
600
150
(30)
(300)
TS
0
OCI
0
(46)
600
900
420
(6)
(6)
(46)
C.
CS, $10 par, 100,000 shares authorized, 60,000 shares issued
and 58,000 shares outstanding
APIC
RE
OCI
TS, 2,000 shares at cost
Total SE
$600,000
900,000
420,000
(6,000)
(46,000)
$1,868,000
1
III. Pensions
A.
Pension expense:
Service cost
$ 30,000
Interest cost
20,000
Expected return
-18,000
Amortization of PSC
2,000
Amortization of gain
- 750
Total pension expense $ 33,250
B.
C.
Journal entry for 2008:
Pension expense
33,250
Pension A/L (plug)
Cash
13,250
20,000
Adjustment to OCI and Pension A/L
OCI
38,750
Pension A/L
for 2008
38,750 (see below)
Pension A/L
25,000
13,250 Entry B
38,750 Entry C (to get to Liab. balance)
======
27,000
Balance in OCI?
Liab.:
Beginning:
Beginning:
Change:
Balance:
+
-
285,000 - 258,000
20,000
30,000
38,750
28,750
DR decrease (cost)
CR increase (benefit)
DR decrease (entry C)
DR
Balance in Pension A/L: $27,000 Liability
2
IV. Leases
A. Capital Lease
A.
PV of MLP = PV of Rent + PV of BPO
Factors for PV: n = 5, i = 6%
PVOA
Adj.*to adjust to annuity due
PVAD = 5,000 (4.21236)(1.06) = $22,326
PV1
PV1 = 1,000 (.74726) =
Total present value
=
B.
1.
2.
3.
747
$23,073
Equipment
23,073
Lease Liability
23,073
Lease Liability
Cash
5,000
Interest expense
Lease liability
Cash
1,084
3,916
5,000
18,073 x .06
plug
5,000
Depreciation expense
2,884
Accumulated Depr.
2,884
(Calc: (23,073 - 0)/8 = 2,884)
B. Operating lease
PV,6%
n=1 43 x .9434
n=2 28 x .89
n=3 22 x .83962
n=4 18 x .79209
n=5 16 x .74726
*n=6 16 x .70496
*n=7 16 x .66506
Total
= $ 40.56
=
24.92
=
18.47
=
14.26
=
11.96
=
11.28
=
10.64
$ 132.8
million
*since approx. 2 payments at $16 each, just do 2 more PV1 calculations.
Alt: PVOA of 2 pmts back to time 0: 2 pmts
back to time 0
16(PVOA, 6%, 2)(PV1, 6%,5) = 16 x (1.83339) x (.74726) = $21.92
V. Essays – from class discussions
3
VI. Statement of Cash Flows
(analysis in red)
Given the following income statement and comparative balance sheets for North
(all amounts are in thousands). Note that earliest year is presented first.
Comparative Balance Sheets
12/31/06
12/31/07
$
15
-6 $
9
17
23 +6 SUBTRACT(OP)
7
14 +7 SUBTRACT (OP)
38
28
50
73
( 18)
( 24)
37
37
$ 146
$ 160
Cash
Accounts receivable
Inventory
Land
Equip
Less: Accumulated depr.
Investment.
Total assets
Accounts payable
Unearned Revenues
Notes payable (long-term)
Bonds payable (long-term)
Add: Premium
Common stock
Retained earnings
Total Liab. & Eq.
$
Income Statement for 2006
Sales revenue
Service revenue
Gain on sale of land
Cost of goods sold
Depreciation expense - equipment
Interest expense
Other operating expenses (all cash)
Income tax expense
Net income
13
7
18
50
8
34
16
146
$
15 +2 ADD (OP)
5
10
50
5 –3 OP
55
20
160
$ 120
30
3 –3 OP
(82)
( 6)+6 OP
( 6)
(11)
(13)
$
35 TOP LINE OP
Additional information for 2006: FOR INVESTING AND FINANCING
1.
The only activities in retained earnings were for income and dividends.
BRE + NI – DIV = ERE
16+35-DIV=20 DIV=31 –31 FINANCING
2.
Equip. was purchased for $8 cash. –8 INVEST
3.
Equip. was purchased with a N/P of $15. SUPP SCHEDULE
4.
Land with a cost of $10 was sold at a gain of $3 . +13 INVEST
5.
Payment made on N/P for $23. –23 FINANCING
6.
The change in common stock was due to the issue of stock for cash. +21 FIN
Required:
On the next page, prepare the Statement of Cash Flows, including Indirect method
fo Operating Section.
4
Cash Flow from Operating Activity
Net Income
Add Depreciation
Subtract Premium amort.
Subtract gain
Less increase in A/R
Less increase in Inventory
Add increase in A/Pay
Less decrease in U. Rev
$35
6
(3)
(3)
( 6)
(7)
2
(2)
Net cash from operating activity
$ 22
Cash Flow from Investing Activity
Cash paid for equip
Cash received from land
$(8)
13
Net cash from investing
5
Cash Flow from Financing Activity
Cash paid for dividends
Cash paid on N/P
Cash received from stock
$ (31)
(23)
21
Net cash used for financing
(33)
Net decrease in cash
$(6) (Confirm: cash from $15 to $9)
________________________________________________
Supplementary schedule of non-cash activities:
Equip purchased with N/P
$15
Part 2: Operating section using direct method
Sales revenue
Service income
Gain on sale of land
COGS
Depr exp
Other
Interest exp
Income tax expense
$120
30
3
-82
-6
-11
- 6
-13
- 6 = $
-2 =
- 3 =
-7 +2 =
+6 =
114
28
0
(87)
0
(11)
( 9) adjust out prem. amort
(13)
-3 =
=
Cash from operations
$22
5
(same as indirect method)
VII.
A. Record "cash equivalent price" which is the PV of future cash flows, single sum, discounted 3 years at 5%
(ignore appraisal): PV1 = $20,000 (.86384) = $17,277
Land
17,277
Discount on N/P 2,723
N/P
20,000
B. Int exp. = CV x Disc. Rate = 17,277 x .05 = 864
Int. Expense
864
Discount on N/P
864
C. Zero coupon bond promises to pay face value at maturity, but does NOT make any interest payments.
Calculation of issue price is similar to that for the noninterest bearing note in Part A. The entire difference
between face and PV is the "deep discount", and it contains all of the interest to be recognized each year.
In comparison, traditional bonds do promise a cash interest payment each year, and the discount
(or premium) account contains and adjustment to the cash payment. The two components together contain
the interest expense to be recognized.
VIII.
Part 1
A. The factors for discounting are i = 4% and n = 10 years
PV1 = $100,000 (.67556) = $ 67,556
PVOA = $5,000 (8.1109) = 40,554
Total price of bond $108,110 (rounded)
B(Omit amortiztaion table)
C.
Cash
108,110
Premium on B/P
8,110
Bonds Payable
100,000
D.
Interest Expense 4,324
Premium on B/P 676
Cash
5,000
Part 2
A. The factors for discounting are i = 5% and n = 10 years
PV1 = $100,000 (.61391) = $ 61,391
PVOA = $4,000 (7.72173) = 30,887
Total price of bond $ 92,277 (rounded)
B. Omit amortization table
C.
Cash
92,277
Disc. on B/P
7,723
Bonds Payable 100,000
D.
Interest Expense 4,614
Disc. on B/P
Cash
614
4,000
Part 3: in the first case, the company is offering 5%, and the market yield elsewhere for the same level of
risk is only 4%, so investors pay extra for the extra cash flow. In the second case, the company is offering
4% and the investors can get 5% elsewhere in the market. They will only buy the bonds, if they can pay
less than face value (a discount), then receive face value at maturity. In either case, the bonds are issued to
yield the investors their desired return.
6
Part IX. Classification
1. D
2. B
3. B
4. A
Part X
Schedule
Pretax financial income (loss)
Future Deductible:
Warranties
Subscription Revenues
Future Taxable:
Depreciation
2008 IT Pay
100,000
DIT
8,000
15,000
(8,000)
(15,000)
(800)
Taxable (deductible) amount
Tax rate
800
122,200
30%
Income tax payable
DIT - liab (asset)
(22,200)
30%
36,660
(6,660)
DIT
0
6,660
6,660
Journal entry:
Income tax expense (plug)
DIT
Income tax payable
0
30,000
6,660
36,660
7