Temple University
Fox School of Business and
Management
Dr. Steven Balsam
Accounting 011
Final Exam-Answer Key
May 6, 2004
Instructions: You have 150 minutes. Answer the questions on the pages provided and
please remember to show all work so that you may receive partial credit. Also please
put your name on each page in case the pages get separated. Good luck!
Name _____________________________
1.
When a plant asset is acquired by issuance of common stock, the cost of the
plant asset is properly measured by the
a. par value of the stock.
b. stated value of the stock.
c. book value of the stock.
d. market value of the stock
2.
A plant site donated by a township to a manufacturer that plans to open a new
factory should be recorded on the manufacturer's books at
a. the nominal cost of taking title to it.
b. its market value.
c. one dollar (since the site cost nothing but should be included in the balance
sheet).
d. the value assigned to it by the company's directors.
3.
The sale of a depreciable asset resulting in a loss indicates that the proceeds
from the sale were
a. less than current market value.
b. greater than cost.
c. greater than book value.
d. less than book value.
Use the following information for questions 4 through 6.
On March 1, 2004, Fairly Company purchased land for an office site by paying $360,000
cash. Fairly began construction on the office building on March 1. The following
expenditures were incurred for construction:
Date
Expenditures
March 1, 2004
$240,000
April 1, 2004
336,000
May 1, 2004
600,000
June 1, 2004
960,000
The office was completed and ready for occupancy on July 1. To help pay for
construction, $480,000 was borrowed on March 1, 2004 on a 9%, 3-year note payable.
Other than the construction note, the only debt outstanding during 2004 was a $200,000,
12%, 6-year note payable dated January 1, 2004.
4.
The weighted-average accumulated expenditures on the construction project
during 2004 were
a. $256,000.
b. $1,956,000.
c. $208,000.
d. $464,000.
($600,000 × 4/12) + ($336,000 × 3/12) + ($600,000 × 2/12) +
($960,000 × 1/12) = $464,000.
2
Name _____________________________
5.
The actual interest cost incurred during 2004 was
a. $60,000.
b. $67,200.
c. $33,600.
d. $56,000.
($480,000 × 9% × 10/12) + ($200,000 × 12%) = $60,000
6.
Assume the weighted-average accumulated expenditures for the construction
project are $580,000. The amount of interest cost to be capitalized during 2004
is
a. $52,200.
b. $55,200.
c. $60,000.
d. $67,200.
7.
Wriglee, Inc. went to court this year and successfully defended its patent from
infringe-ment by a competitor. The cost of this defense should be charged to
a. patents and amortized over the legal life of the patent.
b. legal fees and amortized over 5 years or less.
c. expenses of the period.
d. patents and amortized over the remaining useful life of the patent.
8.
Purchased goodwill should
a. be written off as soon as possible against retained earnings.
b. be written off as soon as possible as an extraordinary item.
c. be written off by systematic charges as a regular operating expense over the
period benefited.
d. not be amortized.
9.
How should research and development costs be accounted for, according to a
Financial Accounting Standards Board Statement?
a. Must be capitalized when incurred and then amortized over their estimated
useful lives.
b. Must be expensed in the period incurred.
c. May be either capitalized or expensed when incurred, depending upon the
materiality of the amounts involved.
d. Must be expensed in the period incurred unless it can be clearly
demonstrated that the expenditure will have alternative future uses or
unless contractually reimbursable.
3
Name _____________________________
10.
Dade Company purchased a patent on January 1, 2003 for $120,000. The patent
had a remaining useful life of 10 years at that date. In January of 2004, Dade
successfully defends the patent at a cost of $54,000, extending the patent’s life
to 12/31/15. What amount of amortization expense would Dade record in 2004?
a. $12,000
b. $13,500
c. $14,500
d. $18,000
2003 amortization is 12,000 (120,000/10). At the beginning of 2004 you capitalize the
54,000 giving you a balance of 162,000 in the account. You amortize the 162,000 over
the new useful life which is 12 years (beginning of 04 to end of 15).
11.
Hall Co. incurred research and development costs in 2004 as follows:
Materials used in research and development projects
$ 540,000
Equipment acquired that will have alternate future uses in future research
and development projects
3,600,000
Depreciation for 2004 on above equipment
360,000
Personnel costs of persons involved in research and development projects
660,000
Consulting fees paid to outsiders for research and development projects
180,000
Indirect costs reasonably allocable to research and development projects
270,000
$5,610,000
The amount of research and development costs charged to Hall's 2004 income
statement should be
a. $1,560,000.
b. $1,740,000.
c. $2,010,000.
d. $4,620,000.
540,000 + 360,000 + 660,000 + 180,000 + 270,000
12.
Gomez Corp. incurred $350,000 of research and development costs to develop a
product for which a patent was granted on January 2, 1999. Legal fees and other
costs associated with registration of the patent totaled $100,000. On March 31,
2004, Gomez paid $150,000 for legal fees in a successful defense of the patent.
The total amount capitalized for the patent through March 31, 2004 should be
a. $250,000.
b. $450,000.
c. $500,000.
d. $600,000.
13.
Among the short-term obligations of Lance Company as of December 31, the
balance sheet date, are notes payable totaling $250,000 with the Madison
National Bank. These are 90-day notes, renewable for another 90-day period.
These notes should be classified on the balance sheet of Lance Company as
a. current liabilities.
b. deferred charges.
4
Name _____________________________
c. long-term liabilities.
d. intermediate debt.
5
Name _____________________________
14.
Which of the following is a condition for accruing a liability for the cost of
compensation for future absences?
a. The obligation relates to the rights that vest or accumulate.
b. Payment of the compensation is probable.
c. The obligation is attributable to employee services already performed.
d. All of these are conditions for the accrual.
Use the following information for questions 15 and 16.
Ritter Company has 35 employees who work 8-hour days and are paid hourly. On
January 1, 2003, the company began a program of granting its employees 10 days' paid
vacation each year. Vacation days earned in 2003 may first be taken on January 1,
2004. Information relative to these employees is as follows:
Year
2003
2004
2005
Hourly
Wages
$17.20
18.00
19.00
Vacation Days Earned
by Each Employee
10
10
10
Vacation Days Used
by Each Employee
0
8
10
Ritter has chosen to accrue the liability for compensated absences at the current rates of
pay in effect when the compensated time is earned.
15.
What is the amount of expense relative to compensated absences that should be
reported on Ritter’s income statement for 2003?
a. $0.
b. $45,920.
c. $50,400.
d. $48,160.
35 employees * 8 hour days * 17.20 per hour * 10 days earned = 48,160
16.
What is the amount of the accrued liability for compensated absences that should
be reported at December 31, 2005?
a. $63,280.
b. $60,480.
c. $53,200.
d. $63,840.
12 days remain, 2 of which were earned in 2004 & 10 in 2005 (assumption is that first
earned days are used first, i.e., FIFO).
From 2004 – 35 employees * 8 hour days * $18 per hour * 2 days remaining = 10,080
From 2005 – 35 employees * 8 hour days * $19 per hour * 10 days remaining= 53,200
10,080 + 53,200 = 63,280
6
Name _____________________________
17.
Included in Turner Corp.'s liability account balances at December 31, 2004, were
the following:
14% note payable issued October 1, 2004, maturing September 30, 2005
$375,000
16% note payable issued April 1, 2004, payable in six equal annual
installments of $150,000 beginning April 1, 2005
900,000
Turner 's December 31, 2004 financial statements were issued on March 31,
2005. On January 15, 2005, the entire $900,000 balance of the 16% note was
refinanced by issuance of a long-term obligation payable in a lump sum. In
addition, on March 10, 2005, Turner consummated a noncancelable agreement
with the lender to refinance the 14%, $375,000 note on a long-term basis, on
readily determinable terms that have not yet been implemented. On the
December 31, 2004 balance sheet, the amount of the notes payable that Turner
should classify as short-term obligations is
a. $525,000.
b. $375,000.
c. $150,000.
d. $0.
Turner has refinanced the 900,000 obligation and contracted to refinance the 375,000
note, both prior to the issuance of the financial statements. Since these liabilities can be
extinguished without the use of short-term assets they should not be classified as shortterm obligations.
7
Name _____________________________
Use the following information for questions 18 through 20:
On December 31, 2003, Queen Co. is in financial difficulty and cannot pay a note due
that day. It is a $1,200,000 note with $120,000 accrued interest payable to Trear, Inc.
Trear agrees to accept from Queen equipment that has a fair value of $580,000, an
original cost of $960,000, and accumulated depreciation of $460,000. Trear also forgives
the accrued interest, extends the maturity date to December 31, 2006, reduces the face
amount of the note to $500,000, and reduces the interest rate to 6%, with interest
payable at the end of each year.
18.
Queen should recognize a gain or loss on the transfer of the equipment of
a. $0.
b. $80,000 gain.
c. $120,000 gain.
d. $380,000 loss.
$580,000 – ($960,000 – $460,000) = $80,000.
19.
Queen should recognize a gain on the partial settlement and restructure of the
debt of
a. $0.
b. $30,000.
c. $110,000.
d. $150,000.
($1,200,000 + $120,000) – [$580,000 + $500,000 + ($500,000 × .06 × 3)] = $150,000.
20.
Queen should record interest expense for 2006 of
a. $0.
b. $30,000.
c. $60,000.
d. $90,000.
8
Name _____________________________
Problem 1 (10 points)
Kiner Equipment Company sells computers for $2,000 each and also gives each
customer a 2-year warranty that requires the company to perform periodic services and
to replace defective parts. During 2004, the company sold 700 computers. Based on
past experience, the company has estimated the total 2-year warranty costs as $40 for
parts and $80 for labor. (Assume sales all occur at December 31, 2004.)
In 2005, Kiner incurred actual warranty costs relative to 2004 computer sales of $10,000
for parts and $24,000 for labor.
Instructions
(a) Under the expense warranty treatment, give the entries to reflect the above
transactions (accrual method) for 2004 and 2005.
2004
Accounts Receivable ...................................................................... 1,400,000
Sales ...................................................................................
1,400,000
Warranty Expense ..........................................................................
84,000
Estimated Liability Under Warranties ..................................
84,000
Total warranty expense per computer is 120 (40+ 80). 700 * 120 = 84,000
2005
Estimated Liability Under Warranties ..............................................
Inventory .............................................................................
Accrued Payroll ...................................................................
9
34,000
10,000
24,000
Name _____________________________
Problem 2 (10 points)
On January 1, 2003 Beta Alpha Psi sells bonds with a face value of $10,000, and a
stated interest rate of 10%. The bonds pay interest annually on December 31st and
mature in 20 years. The applicable interest rate for bonds of this length and risk, is 12%.
A. How much do the bonds sell for?
_________8,506_____________
Present value of the bond is equal to present value of $10,000 at the end of 20 years
plus present value of a 20 year annuity of $1,000 (10% of $10,000).
10,000 * .10367 (from table 6-2, n=20, i=.12)= 1,036.70
1,000 * 7.46944 (from table 6-4, n=20, i=.12)=7,469.44
1,036.70+7,469.44=8,506.14
B Calculate amortization for both 2003 and 2004 under both the Effective and Straightline methods.
Effective Interest
Straight-Line
2003
(8,506*.12)-1,000=21
1,494/20=75
2004
(8,527*.12)-1,000=23
1,494/20=75
C. Record the sale and the first (annual) interest payment (recognize amortization using
the straight-line method).
Sale
Cash
Discount on Bonds Payable
Bonds Payable
Interest
Interest Expense
Cash
Interest Expense
Discount on Bonds
Payable
8,506
1,494
10,000
1,000
1,000
75
75
10
Name _____________________________
Problem 3 (10 points)
Finney Company exchanged machinery with an appraised value of $585,000, a
recorded cost of $900,000 and Accumulated Depreciation of $450,000 with Penny
Corporation for machinery Penny owns. The machinery has an appraised value of
$565,000, a recorded cost of $1,080,000, and Accumulated Depreciation of $594,000.
Penny also gave Finney $20,000 in the exchange. Assume depreciation has already
been updated.
Instructions
(a) Prepare the entries on both companies' books assuming that it is considered an
exchange of dissimilar assets. (Round all computations to the nearest dollar.)
Finney
Machinery .....................................
Cash ..............................................
Accum. Depreciation—
Machinery..................................
Gain on Exchange of
Plant Assets..................
Machinery........................
Penny
Machinery .....................................
Accum. Depreciation—
Machinery..................................
Gain on Exchange of
Plant Assets..................
Machinery........................
Cash................................
565,000
20,000
Cost
A/D
BV
FV
Gain
450,000
$900,000
450,000
450,000
585,000
$135,000
135,000
900,000
585,000
594,000
79,000
1,080,000
20,000
Cost $1,080,000
A/D
594,000
BV
486,000
FV
565,000
Gain $ 79,000
(b) Prepare the entries on both companies' books assuming that it is considered an
exchange of similar assets. (Round all computations to the nearest dollar.)
Finney
Machinery .................................................................................
Cash ...........................................................................................
Accumulated Deprecation—Machinery.......................................
Gain on Exchange........................................................
Machinery.....................................................................
900,000
434,615
20,000
450,000
4,615
$20,000 ÷ ($20,000 + $565,000) × $135,000 = $4,615
Penny
Machinery .................................................................................
Accumulated Depreciation—Machinery......................................
Machinery.....................................................................
1,080,000
Cash.............................................................................
11
506,000
594,000
20,000
Name _____________________________
12
Name _____________________________
Problem 4 (10 points)
Sleepless Nights Inc just purchased some new manufacturing equipment for $1,500,000.
The expected life of the equipment is 10 years and the expected residual value is
$1,000,000. Calculate depreciation expense for 2004 and 2005 (the equipment was
purchased on January 1, 2004) using the straight-line, sum-of-years digits, and doubledeclining balance methods.
2004
2005
Straight-Line
___50,000___
______50,000___
Sum-of-Years Digits
___90,909___
______81,818___
Double-Declining Balance
__300,000___
_____200,000*___
* The answer is 200,000 rather than 240,000 because we are not allowed to
depreciate below the residual value of 1,000,000.
13
Name _____________________________
Problem 5 – 10 points
Measure or
Ratio
Working
capital
Current ratio
Ratio
Computation
Current assets
– Current
liabilities
Current assets
÷ Current
liabilities
Net income ÷
(Average
shareholders’
equity –
Preferred stock)
Net income ÷
Average total
assets
2003
32,107,000-11,537,000
20,570,000
32,107,000/11,537,000
2.78
3,593,000/(.5*(71,051,000+66,616,000))
0.052 or
5.2%
3,593,000/(.5*(83,705,000+77,849,000))
0.044 or
4.4%
27,281,000/(.5*(959,000+780,000))
Cost of sales ÷
Average
inventory
Accounts
102,959,000/(.5*(1,869,000+1,304,000))
Revenues ÷
receivable Average accounts
turnover
receivable
Debt to total Total liabilities ÷
12,654,000/83,705,000
assets
Total assets
Debt to
12,654,000/71,051,000
Total liabilities ÷
equity
Shareholders’
equity
Interest
(Profit before
(5,437,000+21,000)/21,000
coverage
taxes + Interest
(Income
expense) ÷
statement)
Interest expense
Dividend
Annual dividends
They don’t pay
payout
dividends
per share ÷ EPS
31.4
Return on
equity
(ROE)
Return on
assets
(ROA)
Inventory
turnover
14
64.9
0.151 or
15.1%
0.178 or
17.8%
259.9
0
CHICAGO PIZZA & BREWERY INC 10-K 2003-12-28: Balance Sheet
2003/12/28
ASSETS
Current assets:
Cash and cash equivalents
$4,899,000
Investments
$22,041,000
Accounts and other receivables
$1,869,000
Inventories
$959,000
Prepaids and other current assets
$1,164,000
Deferred taxes
$1,175,000
Total current assets
$32,107,000
Property and equipment, net
$46,306,000
Deferred income taxes
$0
Goodwill
$4,762,000
Other assets, net
$530,000
Total assets
$83,705,000
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities:
Accounts payable
$2,796,000
Accrued expenses
$8,533,000
Current portion of reserve for st
$55,000
Current portion of notes payable
$151,000
Current portion of long-term debt
$2,000
Total current liabilities
$11,537,000
Notes payable to related parties
$0
Long-term debt
$0
Deferred income taxes
$143,000
Reserve for store closures
$74,000
Other liabilities
$900,000
Total liabilities
$12,654,000
Commitments and contingencies (Note 5)
Shareholders equity:
Preferred stock, 5,000 shares aut
$0
issued or outstanding
Common stock, no par value, 60,00
$62,513,000
authorized and 19,649 and 19,305 shares issued and
outstanding as of December 28, 2003 and December
2002/12/28
$28,440,000
$3,681,000
$1,304,000
$780,000
$1,322,000
$384,000
$35,911,000
$36,177,000
$170,000
$4,762,000
$829,000
$77,849,000
$4,868,000
$4,709,000
$0
$399,000
$9,000
$9,985,000
$151,000
$2,000
$0
$185,000
$910,000
$11,233,000
$0
$62,085,000
Name _____________________________
29, 2002, respectively
Capital surplus
Retained earnings
Total shareholders equity
Total liabilities and shareholder
$2,109,000
$6,429,000
$71,051,000
$83,705,000
$1,695,000
$2,836,000
$66,616,000
$77,849,000
16
Name _____________________________
CHICAGO PIZZA & BREWERY INC 10-K 2003-12-28: Income Statement
2003/12/28
Revenues
$102,959,000
Costs and expenses:
Cost of sales (Note 12)
$27,281,000
Labor and benefits
$36,828,000
Occupancy
$7,889,000
Operating expenses
$11,780,000
General and administrative
$8,522,000
Depreciation and amortization
$3,928,000
Restaurant opening expense
$1,467,000
Restaurant closing recovery
($25,000)
Total costs and expenses
$97,670,000
Income from operations
$5,289,000
Other income (expense):
Interest income
$397,000
Interest expense
($21,000)
Other (expense) income, net
($228,000)
Total other income (expense)
$148,000
Income before income taxes
$5,437,000
Income tax expense
($1,844,000)
Net income
$3,593,000
Net income per share:
Basic
$180
Diluted
$180
Weighted average number of shares outstanding:
Basic
$19,422,000
Diluted
$20,482,000
17
2002/12/28
$75,705,000
2001/12/28
$64,683,000
$19,241,000
$28,057,000
$5,970,000
$8,361,000
$7,782,000
$2,714,000
$1,717,000
($8,000)
$73,834,000
$1,871,000
$17,415,000
$23,196,000
$4,963,000
$6,843,000
$5,056,000
$2,117,000
$734,000
($799,000)
$59,525,000
$5,158,000
$526,000
($264,000)
$414,000
$676,000
$2,547,000
($880,000)
$1,667,000
$95,000
($440,000)
$168,000
($177,000)
$4,981,000
($1,804,000)
$3,177,000
$100
$90
$330
$300
$17,273,000
$18,775,000
$9,515,000
$10,419,000