These are excerpts from term examinations, given in prior semesters; I have grouped
problems by topic, but the numbering may not be sequential.
I. Fixed Assets
The Blooming Miracles Flower shop bought a delivery van for $88,000 on January 1, 2002. The van
had an expected life of 4 years and an expected salvage value of $20,000.
A. Depreciation expense
Calculate depreciation expense for Year 1 & Year 2 using each of the methods below. Show all your
work.
Straight Line Method
Double Declining Balance Method
Year 1
Year 2
1
B. Gain/Loss on Sale of a Depreciable Asset
At the end of 2004, the owners of Blooming Miracles decided to sell its building to buy a larger flower
shop. Assume that the old building cost $100,000, had accumulated depreciation of $60,000 and was
sold by Blooming Miracles for $25,000. Calculate the amount of the gain or loss on the sale and circle
either gain or loss to indicate the right answer.
Gain / Loss on Sale
2
III. Depreciation
QRT Corporation purchased some equipment for $149,000; the equipment has an expected Salvage
Value of $29,000 and an expected useful life of 4 years. The company estimates that the equipment will
produce 600,000 units of product during its expected life.
Part A: Depreciation expense
Required: Calculate depreciation expense for the years indicated, below. Please note the YEAR asked
for, not all of the questions focus on the first year. Show all your work.
1. Straight line method:
Depreciation expense (Year 1)
2. Double declining balance:
Depreciation expense (Year 1)
Depreciation expense (Year 2)
3. Units of production
Depreciation expense (Year 2)
Actual production:
Year 1
Year 2
80,000
90,000
B. BOOK VALUE
Calculate the book value of the equipment after Year 2 ASSUMING the company used straight line
depreciation:
BOOK VALUE (END OF YEAR 2)
3
II. Noncurrent Assets
A. Property, Plant and Equipment
Second Street Machine Corporation purchased a delivery truck for $90,000 in January 1997; the
company estimated that the truck would be used for 3 years or 180,000 miles. The company estimated
that the truck could be sold for $30,000 (salvage value) at the end of the three year period. The truck
was driven 40,000 miles in 1997 and 60,000 miles in 1998.
Calculate the depreciation expense that Second Street would record in 1998 (Second year of use) to
allocate the cost of the truck under each of the following assumptions:
Show your calculations; NO credit will be given if you show only the answer.
Straight line
method
Double Declining
Balance method
1998 depreciation expense
4
Units of
Production
Multiple Choice
These questions come from different exams, therefore, there is some redundancy. We have put them in
numerical order to make it easier to identify the solutions on the solutions page.
Use the following data for questions one and two
For its fiscal year ending January 31, 2001, Suns Corporation reported the following data:
Total Assets, 1/31/2000
Total Assets 1/31/2001
Equipment
Accumulated
depreciation (equipment)
$1,000,000
$1,500,000
800,000
Net sales
Net income
Depreciation expense
(Equipment)
(500,000)
$ 2,000,000
1,200,000
100,000
The company uses straight line depreciation for financial reporting.
1 Suns’s asset turnover is:
A.
B.
C
D.
E.
2 times
1.6 times
1.3 times
0.96 times
None of the above
2 If the savage value of Sun’s equipment is zero, then the average useful life of Suns’s equipment is:
A.
B.
C.
D.
E.
15 years
8 years
5 years
3 years
None of the above
3. The most widely used method of depreciation is the:
A
B
C
D
E
straight-line method.
declining-balance method.
units-of-activity method.
sum-of-the-years-digits method
Lifo
5
4. Depreciation is dependent on a number of estimates. When a change in an estimate is required, the
change is made:
A
B
C
D
E
in the current year.
in the future years.
to prior periods
both a and b above
both a and c above
5. Joey’s Manufacturing Corporation owned a delivery truck that the company purchased for $92,000
in January 1998. The sales manager estimated that the truck would be used for 10 years and have an
expected salvage value of $12,000. At the end of four years in January 2002, the sales manager revised
the estimate of the useful life of the truck. She concluded that the company would use the truck only for
3 more years and that the salvage value would be $18,000 at the end of the three year period (on
12/31/04). Joey’s reported on a calendar year basis.
On January 3, 2002, the following amounts appeared on the company’s books:
Delivery truck
Accumulated depreciation
$ 92,000
( 32,000)
The company uses straight line depreciation. What will the depreciation expense be at year end on
December 31, 2002 for the truck.
A
B
C
D
E
13,333
14,000
20,000
24,667
None of the above
6
6. Ruby’s Jewelry Corporation acquired Emerald Mines for $40,000,000 cash. At the time of
purchase, Emerald’s books provided the following information:
Assets
Liabilities
Cost
20,000,000
12,000,000
Fair Market Value
35,000,000
12,000,000
How much Goodwill should Ruby’s Jewelry Corporation report on its financial report after the
purchase?
A.
B.
C.
D.
______E.
None
32,000,000
27,000,000
17,000,000
None of the above
7. All of the following are intangible assets except:
A
B
C
D
E
goodwill..
research and development.
trademarks
patents
oil reserves
8. The excess of cost over the market value of identifiable net assets acquired in a purchase of another
company should be reporting in the financial statements as:
A.
B.
C.
D.
E
An intangible asset
A current asset
An expense of the period when acquired
A revenue of the period when acquired
A liability
9. Which of the following items is expensed when cost is incurred, rather than amoritized?
A.
B.
C.
D.
E
Goodwill
Patents
Copyrights
Organization costs
Research and development
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I
BOND SALES PRICE
Redeye Corporation issued an 12%, $1,000,000, 5 year bond that paid interest SEMIANNUALLY
on January 5, 1999 when the market interest rate (yield) was 8%.
Calculate the sales price of the bond, i.e., how much cash did Redeye receive for the bond issue?
You must use the present value tables, below. Please show all your work.
No credit will be given for an answer if you do not show how you calculated the sales price, using
present value factors in the tables on this page.
SALES PRICE
Present Value of a $ (Single Amount)
Period
5
6
7
8
9
10
.04
Interest Rate
.06
.08
.822
.790
.760
.730
.703
.676
.747
.705
.665
,627
.592
.558
.681
.630
.583
.540
.500
.463
.10
.12
.621
..564
.513
.467
.424
.386
.567
.507
.452
.404
.361
.322
Present Value of a Annuity
Period
.04
5
6
7
8
9
10
4.452
5.242
6.002
6.733
7.435
8.111
Interest Rate
.06
.08
.10
.12
4.212
4.917
5.582
6.210
6.802
7.360
3.791
4.355
4.868
5.335
5.795
6 .145
3.605
4.111
4 564
4.968
5.328
5.650
3.993
4.623
5.206
5.747
6.247
6.710
8
Use the present value tables on the prior page to do these problems.
II Bonds
A. Sales Price of a Bond
You must use the present value tables (on the prior page) to get credit for present value
calculations; no credit will be given for a correct answer if your work in not shown.
Exam A: DJM Corporation issues a 5 year, $500,000, 10% bond with annual interest payments when
the market interest rate is 8% on January 2, 2002. DJM is a calendar year corporation.
1. Premium/Discount
Will the bond issue sell at a premium or a discount
2. Sales Price Calculate the sales price of the bond.
.
Cash flows
PV Factor
Pv Of Cash Flows
SALES PRICE OF BOND
Exam B: DJM Corporation issues a 5 year, $500,000, 10% bond with annual interest payments
when the market interest rate is12% on January 2, 2002. DJM is a calendar year corporation.
1. Premium/Discount
Will the bond issue sell at a premium or a discount
.
2. Sales Price Calculate the sales price of the bond.
.
Cash flows
PV Factor
SALES PRICE OF BOND
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PV Of Cash Flows
B. Bond Amortization
Mavericks Corporation, a calendar year corporation, issued a 10 year, 10% $500,000 bond on
January 3, 1999 when the market interest rate was 8%. Interest is paid semiannually on June 30 and
December 31, each year. The bonds were sold to for $567,945
Required: Complete the Amortization Table Below for the first two interest payment dates--6/30/99
and 12/31/99
Show all your work.
Amortization Table
DATE
INTEREST
EXPENSE
CASH PAID
AMORTIZATION
1/03/99
6/30/99
12/31/99
CARRYING
VALUE
567,900
B. BOND AMORTIZATION
Blackbeards Inc., a calendar year company, issued a 5 year, 10% $200,000 bond on January 3,
1998, interest is paid annually; the bond was sold for $185,582, a yield of 12%. Complete the
amortization table below for 1998 and 1999. Show all your work.
REQUIRED: COMPLETE THE AMORTIZATION TABLE BELOW:
INTEREST
EXPENSE
CASH
PAID
AMORTIZATION
CARRYING
VALUE
185,582
(January 3, 1998)
1998
December 31, 1998
1999
December 31, 1999
10
B. Bond Amortization Table--Effective Interest Method Interpretation
ADM Corporation sold a $1,000,000, five year bond that paid interest annually on December 31 of
each year. The company sold the bond issue on January 1, 2000.
Complete the Amortization Table, below for the first 3 payment periods Show your work beneath the
table.
DATE
A
B
C
1/1/00
12/31/00
D
927,908
100,000
111,349
11,349
939,257
12/31/01
12/31/02
12/31/03
12/31/04
1,000,000
1. What is the stated interest rate on this bond
2. What is the market interest rate on this bond?
3. How much did ADM receive (sales price) for the bond?
4. What did ADM report as interest expense be on 12/31/01?
Interest expense (2001)
5. What is the principal (face) of the bond
11
B.
BOND DECISION CASE
On January 2, 1999, Rockets Inc. issued a $2,000,000 5 year, 8% bond at 96. The bond paid
interest annually on December 31 of each year. By January 2, 2001, the market rate of interest on
bonds of similar risk to Rockets Inc had risen and the Rocket bond issue could be repurchased for
$1,800,000. Rockets CEO suggested repurchasing all of the bonds and reissuing $2,000,000, 10
year, 10% bonds to replace the 5 year issue.
Rockets used STRAIGHT LINE amortization for its bonds and the carrying value of the bonds on
January 2, 2001 was $1,936,000.
1. Bond Refinancing
Record the entry (dr/cr or +/-) that Rockets would make if the company repurchases its bonds for
$1,800,000.
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
2.
Recommendation [5 points]
Right a short memo to the CEO, listing the economic factors that should be considered prior to making a
decision as to whether or not to repurchase the old issue and issue new bonds. Then make a
recommendation (repurchase/don’t repurchase) and justify your recommendation.
_________________________________
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III. Stockholders Equity
Catherine’s Legal Services, Inc. provides the following data from its stockholders’ equity statement at
the end of calendar year December 31, 2001.
Common stock, $1 par
Additional paid in capital
Retained earnings
Total stockholders’ equity
2001
$300,000
700,000
250,000
$1,250,000
Market price of Catherine’s Legal Services Stock on April 2, 2002 $20 per share
Part A. Stock Dividends
1. If Catherine’s management declared a 15% stock dividend on April 2, 2002, by what amount would
the following accounts increase or (decrease). Use ( ) to indicate a decrease.
Common stock
Additional paid in capital
Retained earnings
Total stockholders equity
2. Assume that instead of a 15% dividend, Catherine’s management declared a 40% stock dividend on
April 2, 2002. By what amount would the following accounts increase or (decrease)? Use ( ) to
indicate a decrease.
Common stock
Additional paid in capital
Retained earnings
Total stockholders equity
13
Part B. Treasury stock (4 points)
Explain how Treasury stock is recorded and provide two reason why a company’s may repurchase its
own stock.
MULTIPLE CHOICE (Stockholders’ Equity & Liabilities)
The following two questions are based on the information below:
The stockholders’ equity section of Ryan Corporation’s Balance Sheet contains the following
information:
Common stock $1 par value, 12,000 shares authorized,
9,000 shares issued. 8,000 shares outstanding
?
Additional paid in capital
72,000
Retained earnings
40,000
Treasury stock
(12,000)
1 What is the proper balance in the common stock account?
A. 12,000
B. 9,000
C. 8.000
D. 7,000
_____ E. None of the above
2. The total amount of stockholders’ equity is:
A.
B.
C.
D.
_____ E.
121,000
120,000
109,000
108,000
None of the above
3. The statement that dividends are not an expense is
A.
B.
C.
D.
E.
Never true
Sometimes true
Always true
True only for stock dividends
True only for cash dividends
14
4. A corporation reports the following activities related to stockholders’ equity during 1998:
December 31, 1997
$600,000
December 31, 1998
Retained earnings
Net income
Cash dividend declared
Treasury stock purchased during 1998
200,000
150,000
200,000
The balance in retained earnings on 12/31/98 is:
A.
B.
C.
D.
_____ E.
950,000
850,000
650,000
450,000
None of the above
5. GEM, Inc. declared a 2:1 stock split of its $2 par value common stock when 2,000,000 shares of its
stock had been issued and were outstanding. The market value of the GEM common stock was $40 at
the date of declaration.
Which of the following statement(s) is (are) TRUE after issuance of the stock dividend.
A.
B.
C.
D.
E.
Gem’s stockholder equity will increase by $80,000,000
4,000,000 shares of GEM common stock will be outstanding
The par value of GEM common stock will be $1
The common stock account will increase by $2,000,000
B & C are true
6. A contingency is reported on the balance sheet as a liability if:
A.
B.
C.
D.
_____ E.
a lawsuit has been filed
A loss is probable and can reasonable be estimated
A loss is possible and a large amount of money is at risk
A loss is probable but it cannot be reasonably estimated
All of the above should be reported as liabilities
7. Low dividend payout ratios are common for companies
A.
B.
C.
D.
high growth potential
low growth potential
stable earnings
declining earnings
15
8. The way a company finances its assets and operating activities is its:
A.
B.
C.
D.
E
Financial Leverage
Capital Structure
Return on Equity
Present Value
None of the above
9 . The acid-test ratio is:
A
B
C
D
E
a liquidity ratio.
a profitability ratio.
computed by dividing current assets by current liabilities
a solvency ratio
both a and c.
10. Financial leverage always:
A.
B.
C.
D.
E.
Increases profit
Decreases profit
Increases risk
Decreases risk
Both b and c are true
Questions 11-13 are based on the data below:
Jackson’s Clothiers, a major retailer, provides the following information for its last two calendar years of
operations.
1
2/31/01
12/31/02
Current ratio
1.5: 1
1.7: 1
Quick(acid test)ratio
1.2: 1
8:1
Gross profit ratio
28.0%
28.0%
Debt/equity ratio
.30
.50
Inventory turnover
3.5
2.1
Accounts receivable
turnover
3.2
4.0
Return on assets
6.0%
7.0%
Return on equity
8.2%
6.8%
16
11. The current ratio and the quick ratio provide different signals with respect to Jackson’s
performance; these two ratios provide measures of
A. Liquidity
B. Solvency
C. Profitability
D. Leverage
E. None of the above
12. The current ratio increased and the quick ratio (acid test) decreased; the most likely reason for the
difference between two ratios is:
A.
B.
C.
D.
E.
The debt/equity ratio increased
Average days in accounts receivable increased
Gross profit ratio remained constant
Inventory turnover decreased
None of the above
13. A comparison of Jackson’s ratios for 2001 and 2002 suggests which of the following statements is
false?
A.
B.
C.
D.
E.
The company has become less highly leveraged
The company’s management has not used leverage effectively in 2002
The company’s management has become more effective in managing receivables
The company’s management has become more effective in managing its inventory
None of the above are false
14. A bond issued at a premium
A
B
C
D
E
is issued by a corporation with an excellent credit rating..
has a stated rate of interest that exceeds the market (effective) interest rate
will result in the bond issuer receiving less cash than the face (principal) of the bond
will result in interest expense being greater than cash paid each payment period
both c and d are true of bonds sold at a premium
15. A bond issued at a discount
A
B
C
D
E
is issued by a corporation with an excellent credit rating..
has a stated rate of interest that exceeds the market (effective) interest rate
will result in the bond issuer receiving less cash than the face (principal) of the bond
will result in interest expense being less than cash paid each payment period
both c and d are true of bonds sold at a discount
17