COMPREHENSIVE EXAMINATION F
PART 6
(Chapters 22-24)
Problem
F-I
F-II
F-III
F-IV
F-V
Topic
Multiple Choice Questions.
Statement of Cash Flows.
Accounting Changes, Error Corrections, and
Prior Period Adjustments.
*Analysis of Financial Statements.
Segment Reporting.
*This topic is dealt with in an Appendix to the chapter.
Approximate
Time
25 min.
25 min.
30 min.
25 min.
15 min.
120 min.
F-2
Test Bank for Intermediate Accounting, Fourteenth Edition
Problem F-I — Multiple Choice Questions.
1.
Which of the following transactions would be considered a financing activity in preparing a
statement of cash flows?
a. Amortizing a discount on bonds payable
b. Recording net income from operations
c. Selling common stock
d. Purchasing inventory
2.
The net income for the year ended December 31, 2013, for Tax Consultants INC. was
$920,000. Additional information is as follows:
Capital expenditures
Depreciation on plant assets
Cash dividends paid on common stock
Increase in noncurrent deferred tax liability
Amortization of patents
$1,200,000
450,000
180,000
45,000
21,000
Based on the information given above, what should be the net cash provided by operating
activities in the statement of cash flows for the year ended December 31, 2013?
a. $1,256,000.
b. $1,346,000.
c. $1,391,000.
d. $1,436,000.
3.
Information concerning the debt of Cole Company is as follows:
Short-term borrowings:
Balance at December 31, 2012
Proceeds from borrowings in 2013
Payments made in 2013
Balance at December 31, 2013
$525,000
325,000
(450,000)
$400,000
Current portion of long-term debt:
Balance at December 31, 2012
Transfers from caption "Long-Term Debt"
Payments made in 2013
Balance at December 31, 2013
$1,625,000
500,000
(1,225,000)
$ 900,000
Long-term debt:
Balance at December 31, 2012
Proceeds from borrowings in 2013
Transfers to caption "Current Portion of Long-Term Debt"
Payments made in 2013
Balance at December 31, 2013
$9,000,000
2,250,000
(500,000)
(1,500,000)
$9,250,000
In preparing a statement of cash flows for the year ended December 31, 2013, for Cole
Company, cash flows from financing activities would reflect
Outflow
a. $2,000,000
b. $2,250,000
c. $2,575,000
d. $3,175,000
Comprehensive Examination F
F-3
Problem F-I — (cont.)
4.
In considering interim financial reporting, how did the Accounting Principles Board
conclude that such reporting should be viewed?
a. As a "special" type of reporting that need not follow generally accepted accounting
principles.
b. As useful only if activity is evenly spread throughout the year so that estimates are
unnecessary.
c. As reporting for a basic accounting period.
d. As reporting for an integral part of an annual period.
5.
Which of the following items represents a potential use of cash?
a. Patent amortization
b. Sale of plant assets at a loss
c. Net loss from operations
d. Declaration of a stock dividend
6.
Worthington Company purchased a machine on January 1, 2010, for $4,800,000. At the
date of acquisition, the machine had an estimated useful life of six years with no salvage.
The machine is being depreciated on a straight-line basis. On January 1, 2013,
Worthington determined, as a result of additional information, that the machine had an
estimated useful life of eight years from the date of acquisition with no salvage. An
accounting change was made to reflect this additional information. What amount of
depreciation expense should be reported in Worthington’s income statement for the year
ended December 31, 2013?
a. $800,000
b. $600,000
c. $480,000
d. $300,000
7.
On January 7, 2011, Yoder Corporation acquired machinery at a cost of $1,500,000.
Yoder adopted the sum-of-the-years’-digits method of depreciation for this machine and
had been recording depreciation over an estimated life of five years, with no residual
value. At the beginning of 2013, a decision was made to change to the straight-line
method of depreciation for this machine. Assuming a 30% tax rate, the cumulative effect
of this accounting change, net of tax, is
a. $0
b. $200,000
c. $210,000
d. $300,000
*8.
Information from Collins Company’s balance sheet is as follows:
Current assets:
Cash
Short-term investments
Accounts receivable
Inventories
Prepaid expenses
Total current assets
$ 12,000,000
20,000,000
50,000,000
66,000,000
2,000,000
$150,000,000
F-4
Test Bank for Intermediate Accounting, Fourteenth Edition
Problem F-I (cont.)
Current liabilities:
Notes payable
Accounts payable
Accrued expenses
Income taxes payable
Current portion of long-term debt
Total current liabilities
$ 11,000,000
18,000,000
13,000,000
3,000,000
5,000,000
$ 50,000,000
What is the acid-test (quick) ratio?
a. 1:24 to 1
b. 1.64 to 1
c. 1.68 to 1
d. 3.00 to 1
*9.
Fargo, Inc. disclosed the following information as of and for the year ended December 31,
2013:
Net cash sales
600,000
Net credit sales
900,000
Inventory at beginning
100,000
Inventory at end
150,000
Net income
30,000
Accounts receivable at beginning of year
110,000
Accounts receivable at end of year
130,000
Fargo’s receivables turnover is
a. 6.9 to 1.
b. 7.5 to 1.
c. 12.5 to 1.
d. 13.6 to 1.
*10.
The calculation of the number of times interest is earned involves dividing
a. net income by annual interest expense.
b. net income plus income taxes by annual interest expense.
c. net income plus income taxes and interest expense by annual interest expense.
d. none of the above.
Comprehensive Examination F
F-5
Problem F-II — Statement of Cash Flows.
Sharp Company
Comparative Balance Sheet
Cash
Accounts receivable, net
Inventory
Land
Building
Accumulated depreciation
Equipment
Accumulated depreciation
Accounts payable
Bonds payable
Capital stock, $10 par
Retained earnings
December 31
2013
2012
$ 54,000
$ 36,000
53,000
57,000
161,000
123,000
180,000
285,000
300,000
300,000
(75,000)
(60,000)
1,565,000
900,000
(177,000)
(141,000)
$2,061,000
$1,500,000
$ 202,000
450,000
1,125,000
284,000
$2,061,000
$ 150,000
-01,125,000
225,000
$1,500,000
Additional Data:
1.
Net income for the year amounted to $104,000.
2.
Cash dividends were paid amounting to 4% of par value.
3.
Land was sold for $120,000.
4.
Sharp sold equipment, which cost $225,000 and had accumulated depreciation of $90,000,
for $105,000.
Instructions
Prepare a statement of cash flows using the indirect method.
F-6
Test Bank for Intermediate Accounting, Fourteenth Edition
Problem F-III — Accounting Changes, Error Corrections, and Prior Period Adjustments.
Molina Company’s reported net incomes for 2013 and the previous two years are presented
below.
2013
2012
2011
$105,000
$95,000
$70,000
2013’s net income was properly determined after giving effect to the following accounting
changes, error corrections, etc. which took place during the year. The incomes for 2011 and 2012
do not take these items into account and are stated at the amounts determined in those years.
Ignore income taxes.
Instructions
(a) For each of the six accounting changes, errors, or prior period adjustment situations
described below, prepare the journal entry or entries Molina Company should record during
2013. If no entry is required, write “none.”
(b)
After recording the situation in part (a) above, prepare the year-end adjusting entry for
December 31, 2013. If no entry, write “none.”
1.
Early in 2013, Molina determined that equipment purchased in January, 2011 at a cost of
$645,000, with an estimated life of 5 years and salvage value of $45,000 is now estimated
to continue in use until December 31, 2017 and will have a $15,000 salvage value. Molina
recorded its 2013 depreciation at the end of 2013.
(a)
(b)
2.
Molina determined that it had understated its depreciation by $20,000 in 2012 owing to the
fact that an adjusting entry did not get recorded.
(a)
(b)
3.
(a)
(b)
Molina bought a truck January 1, 2010 for $50,000 with a $5,000 estimated salvage value
and a six-year life. The company debited an expense account and credited cash on the
purchase date. The truck is expected to be traded at the end of 2015. Molina uses straightline depreciation for its trucks.
Comprehensive Examination F
F-7
Problem F-III (cont.).
4.
During 2013, Molina changed from the straight-line method of depreciating its cement plant
to the double-declining-balance method. The following calculations present depreciation on
both bases. (Ignore income taxes.) The 2013 amount applies double-declining balance to
the 1/1/13 carrying amount after straight-line was used.
Straight-line
Double-declining
2013
$100,000
$200,000
2012
$100,000
$160,000
2011
$100,000
$200,000
(a)
(b)
5.
Molina, in reviewing its provision for uncollectibles during 2013, has determined that 1/2 of
1% is the appropriate amount of bad debt expense to be charged to operations. The
company had used 1% as its rate in 2012 and 2011 when the expense had been $20,000
and $14,000, respectively. The company would have recorded $50,000 of bad debt expense
on December 31, 2013 under the old rate.
(a)
(b)
6.
During 2013, Molina decided to change from the LIFO method of valuing inventories to
average cost. The net incomes involved under each method were as follows:
LIFO
Average cost
2013
$51,000
$63,000
2012
$59,000
$67,000
2011
$42,000
$48,000
Assume no difference between LIFO and average cost inventory values in years prior to
2011.
(a)
(b)
F-8
Test Bank for Intermediate Accounting, Fourteenth Edition
Problem F-IV — Analysis of Financial Statements.
The market value of Farmington Corp.'s common shares was quoted at $54 per share at
December 31, 2013, and 2012. Planetarium 's balance sheet at December 31, 2013, and 2012,
and statement of income and retained earnings for the years then ended are presented below:
Farmington Corp.
Balance Sheet
December 31
2013
2012
Assets:
Current assets:
Cash
Short-term investments
Accounts receivable (net)
Inventories, lower of cost or market
Prepaid expenses
Total current assets
Property, plant, and equipment (net)
Investments, at equity
Long-term receivables
Copyrights and patents (net)
Other assets
Total assets
Liabilities and Stockholders' Equity:
Current liabilities:
Notes payable
Accounts payable
Accrued expenses
Income taxes payable
Current portion of long-term debt
Total current liabilities
Long-term debt
Deferred income taxes
Other liabilities
Total liabilities
$
9,000,000
17,200,000
109,000,000
122,000,000
4,000,000
$261,200,000
$
350,000,000
2,800,000
15,000,000
6,000,000
8,000,000
$643,000,000
315,000,000
3,500,000
20,000,000
7,000,000
9,100,000
$629,000,000
$
7,000,000
55,000,000
27,500,000
1,500,000
10,000,000
101,000,000
$ 17,000,000
52,000,000
30,000,000
2,000,000
9,500,000
110,500,000
180,000,000
69,000,000
15,000,000
365,000,000
190,000,000
65,000,000
9,500,000
375,000,000
Stockholders' equity:
Common stock, par value $1; authorized 20,000,000
shares; issued and outstanding 12,000,000 shares
12,000,000
10% cumulative preferred shares, par value $100;
$100 liquidating value; authorized 100,000 shares;
issued and outstanding 60,000 shares
6,000,000
Additional paid-in capital
119,000,000
Retained earnings
141,000,000
Total stockholders' equity
278,000,000
Total liabilities and stockholders' equity
$643,000,000
5,200,000
15,400,000
111,000,000
140,000,000
2,800,000
$274,400,000
12,000,000
6,000,000
119,000,000
117,000,000
254,000,000
$629,000,000
Comprehensive Examination F
F-9
*Problem F-IV (cont.).
Farmington Corp.
Statement of Income and Retained Earnings
Net sales
Cost and expenses:
Cost of goods sold
Selling, general, and administrative expenses
Other, net
Total costs and expenses
Income before income taxes
Income taxes
Net income
Retained earnings at beginning of period
Dividends on common stock
Dividends on preferred stock
Retained earnings at end of period
Year ended December 31
2013
2012
$540,000,000
$500,000,000
390,900,000
70,000,000
9,100,000
470,000,000
400,000,000
65,000,000
6,000,000
471,000,000
70,000,000
21,000,000
49,000,000
29,000,000
11,600,000
17,400,000
117,000,000
(24,400,000)
(600,000)
$141,000,000
113,100,000
(12,900,000)
(600,000)
$117,000,000
Instructions
Based on the above information, compute the following (for the year 2013 only): (Show
supporting computations in good form.)
(a) Current ratio.
(b) Acid-test (quick) ratio.
(c) Receivables turnover.
(d) Inventory turnover.
(e) Book value per share of common stock.
(f)
Earnings per share on common stock.
(g) Price-earnings ratio on common stock.
(h) Payout ratio on common stock.
F - 10 Test Bank for Intermediate Accounting, Fourteenth Edition
Problem F-V — Segment Reporting.
Baden Company is a diversified company which has developed the following information about its
five segments:
SEGMENTS
A
B
C
D
E
Total sales
$ 600,000
$1,700,000
$ 300,000
$ 320,000
$ 580,000
Operating profit (loss)
Identifiable assets
(270,000)
1,600,000
480,000
40,000
5,800,000
1,200,000
(300,000)
3,900,000
(10,000)
5,600,000
Instructions
Identify which segments are significant enough to warrant disclosure in accordance with FASB
No. 131, "Reporting Disaggregated Information about a Business Enterprise," by applying the
following quantitative tests:
a.
b.
c.
Revenue test
Operating profit or loss test
Identifiable assets test
Comprehensive Examination F
F - 11
Solutions — Comprehensive Examination F
Problem F-I — Solution.
1.
2.
3.
4.
5.
c
d
d
d
c
6.
7.
*8.
*9.
*10.
c
a
b
b
c
Problem F-II — Solution.
Sharp Company
Statement of Cash Flows
For the Year Ended December 31, 2013
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided
by operating activities:
Decrease in accounts receivable
Increase in inventory
Increase in accounts payable
Gain on sale of land
Loss on sale of equipment
Depreciation expense—building
Depreciation expense—equipment
Net cash provided by operating activities
$104,000
$
4,000
(38,000)
52,000
(15,000)
30,000
15,000
126,000
Cash flows from investing activities
Sale of land
Sale of equipment
Purchase of equipment
Net cash used by investing activities
120,000
105,000
(890,000)
Cash flows from financing activities
Payment of cash dividends
Issuance of bonds
Net cash provided by financing activities
(45,000)
450,000
Net increase in cash
Cash, January 1, 2013
Cash, December 31, 2013
174,000
278,000
(665,000)
405,000
18,000
36,000
$ 54,000
F - 12 Test Bank for Intermediate Accounting, Fourteenth Edition
Problem F-III — Solution.
1. (a)
(b)
2. (a)
(b)
3. (a)
(b)
4. (a)
(b)
5. (a)
(b)
6. (a)
(b)
None
Depreciation Expense ............................................................
Accumulated Depreciation.............................................
[($645,000 – $240,000 – $15,000) ÷ 5]
78,000
Retained Earnings .................................................................
Accumulated Depreciation.............................................
20,000
Truck......................................................................................
Accumulated Depreciation.............................................
Retained Earnings .........................................................
50,000
Depreciation Expense ............................................................
Accumulated Depreciation.............................................
7,500
22,500
27,500
7,500
None
Depreciation Expense ............................................................
Accumulated Depreciation.............................................
200,000
200,000
None
Bad Debt Expense .................................................................
Allowance for Doubtful Accounts ...................................
25,000
Inventory (Beginning) .............................................................
Retained Earnings .........................................................
14,000
None
Current ratio:
Total current assets
——————————
Total current liabilities
(b)
20,000
None
*Problem F-IV — Solution.
(a)
78,000
$261,200,000
= —————— = 2.59 to 1
$101,000,000
Acid-test (quick) ratio:
Total quick assets
$135,200,000
—————————— = ——————— = 1.34 to 1
Total current liabilities
$101,000,000
25,000
14,000
Comprehensive Examination F
F - 13
*Problem F-IV — Solution (cont.)
(c)
Receivables turnover:
Net sales
$540,000,000
————————————— = ————————————————– = 4.91 times
Average accounts receivable
[($109,000,000 + $111,000,000) ÷ 2]
(d)
Inventory turnover:
Cost of goods sold
$390,900,000
————————— = —————— = 2.98 times
Average inventories
$131,000,000
(e)
Book value per share of common stock:
Total stockholders' equity – liquidating value of preferred stock
$272,000,000
———————————————————————————— = —————— = $22.67
Common shares issued and outstanding at December 31, 2013
12,000,000
(f)
Earnings per share on common stock:
Net income – dividends on preferred stock
$48,400,000
——————————————————————————— = —————— = $4.03
Average common shares issued and outstanding during 2013
12,000,000
(g)
Price-earnings ratio on common stock:
Market value of common stock
$54.00
————————————————— = ———— = 13.4
Earnings per share on common stock
$4.03
(h)
Payout ratio on common stock:
Dividends on common stock
$24,400,000
——————————————————— = —————— = 50.4%
Net income – dividends on preferred stock
$48,400,000
F - 14 Test Bank for Intermediate Accounting, Fourteenth Edition
Problem F-V — Solution.
a.
Revenue test — a segment is reportable if its total sales are $350,000 or more
(10% × $3,500,000). Segments A, B, and E satisfy the revenue test.
b.
Operating profit or loss test — a segment's absolute profit or loss must be $58,000 or more
[10% of the absolute greater of $520,000 or ($580,000)]. Segments A, B, and D satisfy the
operating profit or loss test.
c.
Identifiable assets test — a segment's identifiable assets must be $1,810,000 or more (10%
× $18,100,000). Segments B, D, and E satisfy the identifiable test.
Segments A, B, D, and E are identified as significant and therefore reportable because they
passed at least one of the significance tests.