John M. Olin School of Business
ACCOUNTING 562 – SUMMER 2017
FINANCIAL ACCOUNTING II
FINAL EXAM (100 Points)
There are a total of 100 points on this exam. There are six problems, and the total amount of
points allocated to each problem is as follows:
Points
Earned
Problem 1 – 15 Points
_______
Problem 2 – 20 Points
_______
Problem 3 – 20 Points
_______
Problem 4 – 15 Points
_______
Problem 5 – 15 Points
_______
Problem 6 – 15 Points
_______
Total - 100 Points
_______
Each problem is composed of multiple parts, and the points allocated to each part are indicated.
The contribution of this exam to your final score for the class is equal to the percentage of points
you earn on this exam multiplied by 50%.
This is an OPEN BOOK, OPEN NOTE EXAM. You may use a calculator. However, please
note that you are PROHIBITED from using any communication device during the exam. You
have two-and-a-half hours to complete the exam. Partial credit will be given, so be sure to
provide support for you answers.
Please note that by taking this exam you agree to abide by the Olin School Honor Code, and
may be subject to appropriate action for violation of any of its covenants.
GOOD LUCK!
Name____________________________
Problem 1 (15 Points) – Revenue Recognition and Related Issues
Electric Eddie’s sells many different kinds of electronic products and services. While Electric
Eddie employees have great expertise related to electronics, they unfortunately do not have much
familiarity with accounting. Accordingly, they have hired you to advise them on a number of
financial reporting matters related to revenue recognition.
Electric Eddie’s fiscal year ends on Dec. 31. They prepare their financial statements in
accordance with US GAAP, and for purposes of this problem, please assume that they will
“adopt” ASU 2014-09, “Revenue from Contracts with Customers”, on January 1, 2018.
Use the following information for Parts A through C:
On July 13, 2016, an apartment complex signed a contract which requested that Electric
Eddie’s deliver one flat panel television to the complex each month for the next twelve
months, with the first television being delivered on July 31, 2016, and with subsequent
deliveries being made on the last day of each month.
According to the contract, the apartment will pay Electric Eddie’s $ 400 within 10 days
after each delivery. The customer has a strong credit rating, and as a result, there is no
concern about the customer’s ability to pay.
While Electric Eddie does not consider it probable that the customer will exercise this right,
the apartment complex has the option to cancel the contract at any time after the eighth
delivery (i.e. the contract may be canceled by the client after the February 28, 2017 delivery).
Notification of cancelling the remainder of the contract must be received by Electric Eddie by
the 20th day of each month; otherwise, the apartment complex is required to receive and pay for
that month’s delivery. Electric Eddie purchases the flat panel televisions from their supplier
at a cost of $ 170 per television.
A. (3) Assuming that all deliveries are made as scheduled, how much revenue, if any, may
Electric Eddie report for the contract during their fiscal-year ending Dec. 31, 2016?
2
B. (3)
In accordance with US GAAP, would Electric Eddie be required to report a liability
on their Dec. 31, 2016 Balance Sheet to record their obligation for the remaining
deliveries on the contract described above? BRIEFLY support your answer.
C. (3)
Suppose that the contract was signed on July 13, 2018 (rather than 2016), but that
all other terms of the contract remained identical. Would Electric Eddie be required
to report a liability on their Dec. 31, 2018 Balance Sheet to record the remaining
performance obligations related to the contract? If so, what is the amount of the
liability? If NOT, would investors know about the remaining performance obligations?
3
D. (3) _____
In 2018, Electric Eddie began selling 72 inch screen televisions. Customers
could either pay $ 4,000 of cash, or make 48 monthly payments of $ 120 per
month. Assuming that a customer that selects the monthly payment plan and
receives “significant benefits of financing, what are the implications to
Electric Eddie for recognizing revenue for that customer?
A. Revenue Recognition must be deferred until all of the payments are
collected.
B. The revenue will be decomposed into a “Sales” and a “Financing
Revenue” (i.e. “Interest”) stream.
C. Both A and B
D. None of the above
E. (3)
Beginning in 2018, Electric Eddie decided to create a “customer loyalty” program.
A customer would earn “one point” for each dollar of merchandise purchased.
When a customer earned 1,000 “points”, the customer would receive a coupon
entitling the customer to a coupon which was worth $ 50 of “free merchandise”
at Electric Eddie’s.
On February 1, 2018, a customer purchased computing equipment at a price of
$ 1,000, and thus received a $ 50 coupon. The equipment sold had a cost of
$ 400, which is a normal margin in this industry.
Assuming that 100% of coupons will be redeemed, what journal entry should
Electric Eddie report on February 1, 2018 to record the transaction?
4
Problem 2 (20 Points) – Structure of the Income Statement – Special Items
In their 2016 Annual Report, Toy Company presented the following income statements
(all numbers on the income statement except EPS are expressed in millions):
Toy Company
Income Statement
Twelve-Months Ended
12/31/15
12/31/16
Sales
Less: COGS
Gross Profit
Less: Selling, Gen. & Admin. Exp.
Income from Cont. Operations
Before Income Taxes
Less: Income Taxes (@ 40%)
Income Before ExtraOrdinary Item
Extraordinary Item
(Net of $50.0 taxes)
Net Income
$ 1,700.0
1,000.0
700.0
200.0
1,800.0
1,200.0
600.0
300.0
500.0
200.0
300.0
300.0
120.0
180.0
75.0
375.0
----180.0
$ 1.00
$ 0.60
0.25
$ 1.25
___
0.60
Earnings Per Share:
Income Before ExtraOrdinary Item
ExtraOrdinary Item
(Net of $0.17 tax)
Net Income
$
On May 31, 2017, the Board of Directors of Toy Company held their annual meeting, and
discussed the deterioration of the financial performance of the Toy Company. After an in-depth
discussion, it was decided that the underlying problem was in the wholly-owned SchoolToys
subsidiary. Because management felt that the future of this subsidiary was bleak, the Board
formally decided to dispose of the SchoolToys subsidiary.
An investment banker was immediately hired. After working all night, the next morning the
banker provided the breakdown of actual and forecasted future operations of SchoolToys Inc., as
well as the remaining divisions of Toy Company. This breakdown of historical and projected
future results, split by division of Toy Company, are provided on the following page:
The banker indicated that a deal to sell SchoolToys, Inc. could be closed on February 28, 2018.
A buyer would pay approximately $ 102,000,000 in cash for SchoolToys, Inc., of which the
banker would collect an advisory fee of $ 2,000,000. On February 28, 2018, the assets of
SchoolToys, Inc. would have a book value of $ 350,000,000, and the liabilities of SchoolToys,
Inc., would have a book value of $ 50,000,000.
5
During all of 2015 and 2016, there were 300,000,000 shares of common stock of Toy
Company outstanding. No additional shares are expected to be issued or repurchased during
2017 or 2018.
TIME PERIOD
ACTUAL / EXPECTED
RESULTS OF OPERATIONS
(numbers are in millions)
1/1/1612/31/16
1/1/175/31/17
6/1/1712/31/17
1/1/182/28/18
1,300.0
800.0
180.0
320.0
500.0
300.0
80.0
120.0
1,000.0
550.0
120.0
330.0
250.0
140.0
_ 35.0
75.0
500.0
400.0
120.0
( 20.0)
150.0
140.0
50.0
( 40.0)
200.0
180.0
70.0
( 50.0 )
80.0
80.0
_ 20.0
( 20.0)
CONTINUING OPERATIONS
Sales
COGS
Selling, General, & Admin:
Pre-tax Income
SCHOOLTOYS INC.
Sales
COGS
Selling, General, & Admin:
Pre-tax Income
INSTRUCTIONS
A. (8) Assuming that the investment banker’s forecasts are accurate, prepare the Income
Statements for Toy Company (BOTH 2016 AND 2017) as they would appear in
Toy Company’s 2017 annual report. When doing so, please use the “template” for the
income statement that appears on the following page. Also, please note that the
template is not complete, and that you are expected to prepare the entire Income
Statement.
6
A. (8)
TOY COMPANY
INCOME STATEMENT
Twelve Months
Ending
Dec. 31, 2016
Twelve Months
Ending
Dec. 31, 2017
Revenues
____________
____________
Less: Cost of Sales
____________
____________
____________
____________
Gross Margin
Less: SG& A
Income from Continuing
Operations Before Taxes
Income Taxes
____________
7
____________
B. (4)
Do you AGREE or DISAGREE with the following statement:
Assume that the financial statements for the fiscal year ending December 31, 2017
were distributed to shareholders/filed with the SEC on February 17, 2018.
If, on February 28, 2018 Toy Company collected more than $ 100,000,000 of cash
from the sale of their SchoolToys subsidiary, Toy Company would be required under
U.S. GAAP to restate their income statement for the fiscal years ending Dec. 31, 2016
and Dec. 31, 2017.
Circle either AGREE or DISAGREE, and BRIEFLY support your answer.
Please use the following information for Parts C & D:
On April 5, 2017, Build-a-Brain Bookstore decided to change the method in which they
recognized revenue for “gift cards”. Prior to the change, Build-a-Brain recognized revenue at the
time gift cards were sold, using the argument that the aggregate sales of gift cards were
immaterial. However, as the magnitude of gift card sales increased, Build-a-Brain’s auditors
increasingly frowned on this treatment.
Build-a-Brain, began operations on January 1, 2014, and has a fiscal year that ends on
December 31. At the time of the change, Build-a-Brain prepared the following schedule:
Gift Cards Sold – 2014:
Gift Cards Redeemed-2014:
Unredeemed Gift Cards – Dec. 31, 2014
Gift Cards Sold - 2015:
Gift Cards Redeemed & Expired- 2015:
Unredeemed Gift Cards – Dec. 31, 2015:
Gift Cards Sold - 2016:
Gift Cards Redeemed & Expired – 2016:
Unredeemed Gift Cards – Dec. 31, 2016:
$
$
$
1,500
800
700
32,000
13,000
19,700
68,000
51,000
36,700
Build-a-Brain has a tax rate of 40%, and the financial statements for the year-ending
December 31, 2016 were issued on February 23, 2017
8
C. (4) _____
Assuming that Build-a-Brain reports the change in accounting method
in accordance with Current US GAAP (as originally prescribed in SFAS # 154,
which of the following statements is (are) true regarding the Income Statement
for the year-ending Dec. 31, 2016 as included in the Annual Report for the yearending Dec. 31, 2017?
A.
Revenue for the year-ending Dec. 31, 2016 will be reported at a
LOWER amount in the 2017 Annual Report than it was in the 2016
Annual Report.
B.
Net Income for the year-ending Dec. 31, 2016 will be reported at a
LOWER amount in the 2017 Annual Report than it was in the 2016
Annual Report.
C. Both Statements A and B are true.
D. None of the above statements are true.
D. (4) ______
Which of the following statements are true regarding other impacts of
Build-a-Brain’s “change” of accounting methods?
A.
The Balance Sheet dated Dec. 31, 2016 as included in the 2016 Annual
Report will be different than the Balance Sheet dated Dec. 31, 2016 as
included in the 2017 Annual Report.
B.
If Build-a-Brain uses the Direct Method for the Statement of Cash Flows,
their Cash Flow Statement for the year-ending Dec. 31, 2016 as reported
in the 2016 Annual Report will be identical to the statement for the same
time period as included in 2017 Annual Report.
C. Both Statements A and B are true.
D. None of the above statements are true.
9
Problem 3 (20 Points) – Cash Flow Statement
Below is the Balance Sheet for Hi-Tech Inc. for the years ending December 31, 2015 and
December 31, 2016. Using this information, as well as the referenced notes on the following
page, prepare the statement of cash flows for Hi-Tech Inc. for the year ending December 31,
2016. Use the Indirect Method.
Hi-Tech Inc.
Balance Sheet
ASSETS
Cash
Accounts Receivable
Less: Allowance for Doubtful Accts. [6]
Inventory [1]
Total Current Assets
Plant & Equipment [1] [2]
Less: Accumulated Depreciation [2] [3]
12/31/2015
12/31/2016
175,000
280,000
(40,000)
270,000
685,000
415,000
760,000
(50,000)
600,000
1,725,000
1,600,000
3,400,000
(600,000) (1,000,000)
TOTAL ASSETS
1,685,000
4,125,000
Accts. Payable
Dividends Payable
Bonds Payable [1]
520,000
80,000
0
290,000
100,000
1,000,000
TOTAL LIABILITIES
600,000
1,390,000
1,000,000
2,500,000
Retained Earnings [5]
TOTAL SHAREHOLDERS' EQUITY
85,000
1,085,000
235,000
2,735,000
TOTAL LIAB. & SHAREHOLDERS' EQUITY
1,685,000
4,125,000
LIABILITIES
SHAREHOLDERS' EQUITY
Common Stock [4]
10
[1] On June 30, 2016, Hi Tech acquired No More Corporation. Hi Tech paid $ 1,000,000 of Cash,
and issued shares of stock with a value of $ 1,500,000, in exchange for 100% of the outstanding
shares of No More Corporation.
The purchase price of $ 2,500,000 was allocated as follows:
Inventory
Plant & Equipment
Total Assets Acquired
300,000
2,200,000
2,500,000
No liabilities were assumed. High Tech raised the $ 1,000,000 by issuing $ 1,000,000
of Bonds Payable (@ face value) to the market in exchange for cash.
[2] Equipment with a cost of $ 400,000 was sold during the year. This equipment had $ 100,000
of Accumulated Depreciation at the time of sale, and was sold for $ 150,000
[3] During the year, High Tech recorded $ 300,000 of production related depreciation and
$ 200,000 of non-production related depreciation
[4] Stock in the amount of $ 1,500,000 was issued to shareholders of No More Corporation as part
of the total consideration paid to No More Corporation shareholders in the acquisition of No
More. See Item [1] above.
[5] Net Income for the year was $ 350,000, and dividends of $ 200,000 were declared during
the year
[6]
During the year, Bad Debt Expense was $ 70,000, and Hi-Tech “wrote off” Accounts
Receivable in the amount of $ 60,000
A. (14 Points)
On the following page, please prepare a “Statement of Cash Flows”
for Hi Tech Inc. for the year-ending December 31, 2016. Use the
Indirect Method.
11
Hi Tech Inc.
Statement of Cash Flows – INDIRECT METHOD
Year-Ending December 31, 2016
OPERATING ACTIVITY
___Net Income_ ________________
___________
______________________________
___________
______________________________
___________
______________________________
___________
______________________________
___________
______________________________
___________
______________________________
___________
______________________________
___________
Net Cash Provided By (Used By) Operating Activity
INVESTING ACTIVITY
______________________________
___________
______________________________
___________
______________________________
___________
Net Cash Provided By (Used By) Investing Activity
FINANCING ACTIVITY
______________________________
___________
______________________________
___________
______________________________
___________
Net Cash Provided By (Used By) Financing Activity
___________
Net Change in Cash
.
12
B. (3) Suppose that you were asked to prepare the Statement of Cash Flows using the
“Direct Method” rather than the “Indirect Method”. For the fiscal year ending
December 31, 2016, the subtotals of each section’s Statement of Cash Flows if
Hi-Tech used the “Direct Method” would be as follows:
i. Net Cash Provided By (Used By) Operating Activity
$ _____________
ii. Net Cash Provided By (Used By) Investing Activity
$ _____________
iii. Net Cash Provided By (Used By) Financing Activity
C. (3)
$ _____________
Do you AGREE or DISAGREE with the following statement:
“Any asset that is classified as “Level 1” within the Fair Value reporting framework
may be considered a “cash equivalent” for purposes of the Statement of Cash Flows.”
Circle either AGREE or DISAGREE, and BRIEFLY support your answer.
13
Problem 4 (15 Points) – Asset Impairment
Ned Blues operates two ice-cream stands in the St. Louis area. After a significant change in
Ned’s business environment (a new competitor entered the local ice cream business), Ned’s
auditor decided to investigate whether Ned’s assets were impaired. The auditor determined that
on December 31, 2015, prior to the consideration of any asset impairment, the carrying value of
the assets of Ned Blues totaled $ 1,500,000. Ned indicated that he expected to sell the assets of
the business for $ 600,000 on December 31, 2018. During the next three years, prior to the sale,
Ned expected to keep the business operating, and anticipated the following results:
Total Operations
Cash Revenues
Cash Expenses
Depreciation Expense
Net Income
2016
$ 1,000,000
500,000
300,000
$ 200,000
2017
$ 1,000,000
550,000
300,000
$ 150,000
2018
$ 1,000,000
600,000
300,000
$ 100,000
Carrying Value of Assets on December 31, 2015: $ 1,500,000
Expected Proceeds from Sale of Assets on December 31, 2018: $ 600,000
When answering the below questions, ignore taxes, and assume that the cash flows for a
given year occur at the end of that year. The appropriate discount rate to use for any present
value calculations is 12%, and the appropriate factors are as follows:
PV Factor
1-Year @ 12 %
0.8929
A. (4)
PV Factor
PV Factor
2-Years @ 12 % 3-Years @ 12 %
0.7972
0.7118
PV Annuity Factor
3-Years @ 12 %
2.4018
In accordance with US GAAP, should Ned Blues report an “asset impairment”
for the year ending December 31, 2015? Why or why not?
14
B. (4)
Instead of the original information, assume that the assets at both locations
would be worthless on December 31, 2018 (i.e. the selling price will be $ 0).
After testing for impairment, and recording any necessary impairment
journal entries, at what amount should the total assets be reported on the
December 31, 2015 Balance Sheet?
C. (4)
Suppose that in Part B, you concluded that the “asset group” of Ned Blues
was impaired. If, in 2016 and 2017, the cash flows Ned Blues were higher
than the earlier forecast, may Ned Blues recover any part of their impairment
loss? Why or why not?
D. (3)
Refer to the original information (i.e. consider the original expected selling
prices for the assets) and consider the rules related to “impairment”. What is the
minimum amount of total (i.e. both stores added together) cash revenue that
Ned could “forecast” each (i.e. the same amount every year) year for the next
three years that would enable him to avoid having to report an asset impairment?
(Assume that the forecasted cash expenses and expected selling prices of the
assets are “known”, and therefore are not subject to Ned’s judgement.)
15
Problem 5: Shareholders’ Equity (15 Points)
The “right side” of the Balance Sheet of Emerson Electric for the years ending September 30,
2013 and September 30, 2014 is as follows:
LIABILITIES AND STOCKHOLDERS’ EQUITY (in millions)
Current liabilities
Short-term borrowings and current maturities of long-term debt
Accounts payable
Accrued expenses
Income taxes
Total current liabilities
Long-term debt
Other liabilities
$
Stockholders’ equity
Preferred stock of $2.50 par value per share
Authorized 5,400,000 shares; issued - none
Common stock of $0.50 par value per share
A Authorized 1,200,000,000 shares; issued 953,354,012 shares; outstanding
788,434,076 shares in 2013 and 771,216,037 shares in 2014
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Less cost of common stock in treasury, 164,919,936 shares in 2013 and
182,137,975 shares in 2014
Total stockholders’ equity
$
A. (3)
2013
2014
404
2,501
2,337
304
5,546
3,372
1,990
1,221
2,699
2,480
173
6,573
3,297
2,057
-
-
477
31
12,536
382
13,426
477
146
14,002
141
14,766
4,654
8,772
19,680
5,653
9,113
21,040
If the only dividends that Emerson Electric paid during the year ending Sept.
30, 2014 were “cash dividends” in the amount of $ 1.20 per share, what is your
estimate of the “Net Income” for Emerson for the year-ending September 30,
2014?
16
B. (3) _____
Given the information provided above, which of the following
statements is(are) true?
A. The “average” price at which Emerson originally issued their
common stock is less than the “average” price at which Emerson
repurchased their treasury stock.
B. If Emerson Electric ever “went bankrupt”, any shareholders of
Emerson Electric common stock would be legally obliged to
contribute an additional $ 0.50 to Emerson Electric for each
share of common stock that they owned.
C. Both of the above statements are true.
D. None of the above statements are true.
C. (3) _____
Suppose that on October 1, 2014, Emerson issued a 10% stock
dividend. If the “market price” of a share of Emerson stock on October 1,
2014 was $ 40 per share, which of the following statements is (are) true?
Assume that Emerson’s par value per share remains unchanged.
A. Total Retained Earnings will decrease after Emerson records the
stock dividend.
B. Total Shareholders’ Equity will decrease after Emerson records the
stock dividend.
C. Both statements A and B are true.
D. None of the above statements are true.
17
D. (3)
Suppose that Emerson Electric uses the “average cost” method to account for
their Treasury Stock. If Emerson sold 10,000,000 shares that were “in the
treasury”, receiving at total of $ 400,000,000 in cash from the sale, total
shareholders’ equity would INCREASE / DECREASE / NOT CHANGE
in the amount of $ ___________________ as a result of this transaction (circle
the correct answer and fill in the blank with either the applicable amount or zero).
E. (3) ______
Suppose that Emerson Electric has an “extra” $ 100,000,000 of cash,
and is deciding whether to repurchase $ 100,000,000 of shares of
stock or pay $ 100,000,000 of dividends. Which of the following
Financial Statement Subtotals would “differ” as a consequence of the
two alternative methods of distributing cash to shareholders.
A. “Cash Flow from Financing Activity” on the Cash Flow Statement.
B. “Total Shareholders’ Equity” on the Balance Sheet.
C. Both A and B would differ, depending on whether Emerson
repurchased shares or paid out a cash dividend.
D. Both A and B would be the same, regardless of whether Emerson
repurchased shares or paid out a cash dividend.
18
Problem 6 (15 Points) – Pot Pourri
A. (4) _____
B. (4)
_____
Which of the following statements is (are) true regarding a Balance Sheet
prepared in accordance with US GAAP?
A.
Assets acquired as part of a business combination that occurs between
the end of a fiscal year and the date on which financial statements for
that fiscal year are released are required to be reported on the balance
sheet as of the end of the fiscal year in order to assist users of the financial
statements to accurately project future results.
B.
The amount of depreciation to be reported during the upcoming fiscal
year is reported as a “current asset” on the balance sheet at the end of
the preceding fiscal year.
C.
Both Statements A and B are true.
D.
None of the above statements are true.
Which of the following statements is (are) true regarding Current US
GAAP related to “Share-Based Compensation?
A. For stock options granted as “share-based compensation”, the total
“compensation cost” is fixed as of the “grant date”.
B.
When executives exercise “in the money” stock options, the firm
that had issued the options will report a loss equal to the excess of
market value at the time of exercise over the amount of the exercise
price.
C.
Both Statements A and B are true.
D.
None of the above statements are true.
19
C. (4)
On December 31, 2016, there was an outstanding lawsuit against Save-a-Dollar
filed by a former employee. The employee has alleged that he was
inappropriately terminated by Save-a-Dollar, and as a result, his reputation is
tarnished and he is unable to find work.
The case is going to court in July 2017, and the inevitable appeals are expected
To be completed in May 2018. Save-a-Dollar’s legal counsel estimates that the
outcomes of the case are as follows:
Outcome
Save-a-Dollar Wins
Likelihood
20%
Save-a-Dollar Damage Payments
$ 0
Court rules for Wrongful
Termination but NOT
Reputation Damage
70%
$ 500,000
Court Rules for Wrongful
Termination AND
Reputation Damage
10%
$ 2,000,000
What liability, if any, should Save-a-Dollar report on their Dec. 31, 2016 Balance Sheet?
BRIEFLY support your answer. For purposes of this exam, consider “probable” to mean 75%
D. (3) The following statement is TRUE / FALSE (circle one):
In periods of rising prices, Net Income as calculated under the theory of
Physical Capital Maintenance will be HIGHER than Net Income as calculated
under the theory of Financial Capital Maintenance.
20
Formulas and Tables
Present Value of 1:
1
2
3
4
5
6
7
8
9
10
4.0%
0.9615
0.9246
0.8890
0.8548
0.8219
0.7903
0.7599
0.7307
0.7026
0.6756
PVF n, i
5.0%
0.9524
0.9070
0.8638
0.8227
0.7835
0.7462
0.7107
0.6768
0.6446
0.6139
=
7.0%
0.9346
0.8734
0.8163
0.7629
0.7130
0.6663
0.6227
0.5820
0.5439
0.5083
1/ (1 + i)n
8.0%
0.9259
0.8573
0.7938
0.7350
0.6806
0.6302
0.5835
0.5403
0.5002
0.4632
9.0%
0.9174
0.8417
0.7722
0.7084
0.6499
0.5963
0.5470
0.5019
0.4604
0.4224
10.0%
0.9091
0.8264
0.7513
0.6830
0.6209
0.5645
0.5132
0.4665
0.4241
0.3855
Present Value of an Ordinary Annuity of 1: PVA n,i =
1
2
3
4
5
6
7
8
9
10

4.0%
0.9615
1.8861
2.7751
3.6299
4.4518
5.2421
6.0021
6.7327
7.4353
8.1109
25.0000
5.0%
0.9524
1.8594
2.7232
3.5460
4.3295
5.0757
5.7864
6.4632
7.1078
7.7217
20.0000
7.0%
0.9346
1.8080
2.6243
3.3872
4.1002
4.7665
5.3893
5.9713
6.5152
7.0236
14.2857
8.0%
0.9259
1.7833
2.5771
3.3121
3.9927
4.6229
5.2064
5.7466
6.2469
6.7101
12.5000
9.0%
0.9174
1.7591
2.5313
3.2397
3.8897
4.4859
5.0330
5.5348
5.9952
6.4177
11.1111
21
1
i
10.0%
0.9091
1.7355
2.4869
3.1699
3.7908
4.3553
4.8684
5.3349
5.7590
6.1446
10.0000
11.0%
0.9009
0.8116
0.7312
0.6587
0.5935
0.5346
0.4817
0.4339
0.3909
0.3522
12.0%
0.8929
0.7972
0.7118
0.6355
0.5674
0.5066
0.4523
0.4039
0.3606
0.3220
13.0%
0.8850
0.7831
0.6931
0.6133
0.5428
0.4803
0.4251
0.3762
0.3329
0.2946
- ____1___
i ( 1 + i )n
11.0%
0.9009
1.7125
2.4437
3.1024
3.6959
4.2305
4.7122
5.1461
5.5370
5.8892
9.0909
12.0%
0.8929
1.6901
2.4018
3.0373
3.6048
4.1114
4.5638
4.9676
5.3282
5.6502
8.3333
13.0%
0.8850
1.6681
2.3612
2.9745
3.5172
3.9975
4.4226
4.7988
5.1317
5.4262
7.6923
SOLUTION TO ACCT 562 – FINAL EXAM – SUMMER 2017 – SECTION 1
Problem 1
A.
As of December 31, 2016, a total of six flat panel televisions have been delivered.
The other elements of revenue recognition required by the SEC (persuasive evidence of
An arrangement, price is fixed, and collection is reasonably assured) have also been met,
so Electric Eddie’s may recognize revenue for six televisions, $ 2,400, during the fiscal
year ending Dec. 31, 2016.
Further, note that because the individual flat panel televisions have “stand alone” value,
and there is no right of return, each television may be considered a “separate unit” of
accounting.
B. No, Electric Eddie’s would NOT be required to report a liability related to the obligation
to deliver the remaining flat panel televisions required by the contract. No payment was
received in advance, so there is no “Deferred Revenue” account associated with the
undelivered televisions.
C.
Electric Eddie’s would NOT be required to report a liability on their Dec. 31, 2018
Balance Sheet related to the undelivered flat panel televisions. ASU 2014-09 does NOT
change the definition of liabilities, and thus if no liabilities are recorded under current
(2017) GAAP associated with the contract, then no liabilities will be reported at the end
of 2018, either. However, ASU 2014-09 DOES require firms to disclose the outstanding
performance obligations related to existing contracts, and thus readers of Electric Eddie’s
financial statements would be aware of the remaining contractual terms.
D.
The correct answer is “B”. If a customer receives “significant benefits” of financing,
the amounts to be received would be disaggregated into two revenue streams – sales and
interest. This answer assumes that it is “probable” that Electric Eddie’s will receive
payment, as a contract is not assumed to exist unless this claim can be made. Accordingly,
Answer A would be incorrect as Electric Eddie’s could initially recognize revenue equal to
the present value of the payments.
E. The “points” given by Electric Eddie’s to the customer for entering into a contract should
be considered a distinct “performance obligation” related to the contract, and as a result, a
portion of the transaction price should be allocated to the points. In this case, Electric
Eddie’s has an obligation to provide $ 50 of “free” merchandise to the customer. Since
Payment has been received in advance of providing the performance obligation, there would
Be a liability reported on the balance sheet.
Since Electric Eddie’s has delivered computer equipment, the total transaction price of
$ 1,000 should be allocated to the computer equipment, and to the remaining performance
obligation. In this case, allocating $ 50 to the coupon and the residual to the computing
equipment appears to be the appropriate calculation, and thus the entries would be made as
follows:
22
DR
CR
CR
Cash
Sales Revenue
Reward Program Payable (Unearned Revenue)
$ 1,000
$ 950
50
A related entry to record Cost of Goods Sold would be:
DB
CR
Cost of Goods Sold
Inventory
$ 400
$ 400
Problem 2
A.
Revenues
Less: Cost of Sales
Gross Margin
Less: SG& A
Income from Continuing
Operations Before Taxes
Income Taxes(@ 40%)
TOY COMPANY
INCOME STATEMENT
Twelve Months
Twelve Months
Dec. 31, 2016
Dec. 31, 2017
__1,300 [1] _
___1,500 [1]__
____800 [1]_
500
_____850 [1]_
650
___180 [1]
320
____ 200 [1]_
450
___128__
_____180___
Income Before Discontinued Operations
Discontinued Operations:
Operations (Net of Tax Benefits
of 8.0 and 36.0, respectively)
Loss on Disposal (Net of Tax
Benefit of $ 80.0)
Total Loss from Discontinued Operations
Net Income
$
Earnings Per Share:
Income from Cont. Operations
Discontinued Operations
Net Income
192
270
(12.0)
( 54.0)
------(12.0)
( 120.0) [2]
( 174.0)
180.0
0.64
(0.04)
$ 0.60
$
96.0
0.90
(0.58)
$ 0.32
[1] Amounts related to “Continuing Operations”
[2] Loss Calculated as {$ 100,000,000 – (350,000,000 – 50,000,000)} x (1 – Tax Rate)
23
B.
DISAGREE with the statement. If the actual proceeds received from the sale differed from
the original estimate, the difference would be considered a “revision of an estimate”, and
would be reflected in the 2018 Income Statement (rather than restating earlier years).
C.
Prior to the change in accounting method, $ 68,000 of Gift Card Sales Revenue
would have been recorded in 2016. Under the new accounting method, $ 51,000
of revenue would be recorded in 2016. Accordingly, Revenue for the year-ending
Dec. 31, 2016 will be lower in the 2017 Annual Report than in the 2016 Annual Report,
and answer A is correct.
.
In accordance with current US GAAP, Cumulative Changes in Accounting are no longer
included in the calculation of income. Thus, assuming that there are no changes in
reported expenses as a result of the accounting change, Net Income for 2016 would
be lower in the 2017 Annual Report than in the 2016 Annual Report. Accordingly, answer
“B” is also correct, implying that the best answer is “C”, both statements A and B are true.
D.
Statement A is true as the “As Adjusted” balance sheet dated Dec. 31, 2016 will now
contain a Deferred Revenue account for the unredeemed gift cards while prior to
the accounting change, the 12/31/16 Balance Sheet contained no such account. In this
case, since cash flows don’t change as a result of the change in accounting method,
a Statement of Cash Flows prepared using the Direct Method would not change.
According, the best answer is “C”, both statements A and B are true.
24
Problem 3
Hi-Tech Company
Statement of Cash Flows
Year-Ended 12/31/16
OPERATING ACTIVITY
Net Income
$ 350,000
Add: Depreciation
500,000 {Equal to 1,000,000 – (600,000 – 100,000)}
Plus: Loss on Sale of PP&E
150,000 {Loss equal to 150,000–(400,000–100,000)}
Less: Increase in Net Accts. Rec. ( 470,000) {Net Accounts Receivable increased from
$ 240,000 to $ 710,000}
Less: Increase in Inventory
(
30,000) {In absence of acquisition of No More Corp,
Inventory increased by $ 30,000}
Less: Decrease in Accts. Payable
(230,000)
Cash Provided by Operating Activity $ 270,000
INVESTING ACTIVITY
Cash Provided by Sale of Equipment
Cash Used to Purchase No More *
Cash Used by Investing Activity
150,000
( 1,000,000)
( 850,000)
FINANCING ACTIVITY
Cash Provided by Issuing Bonds
Cash Used to Pay Dividends
$ 1,000,000
( 180,000) Because Dividends Payable increased by
$ 20,000, conclude that dividends actually
paid were $ 20,000 less than the dividends
actually declared
Cash Provided by Financing Activity $ 820,000
Net Increase in Cash
$
240,000
Cash Balance – 1/1/16
Cash Balance – 12/31/16
$
175,000
415,000
*$ 1,500,000 of Common Stock was also issued as part of the consideration paid in exchange for
ownership of No More Corp. If this information is not reflected in the Cash Flow Statement (by
increase both Investing Outflows and Financing Inflows), it must be disclosed on either the
bottom of the cash flow statement or in the notes to the financial statements.
B. Cash Flow Statement subtotals under the Direct Method should be the same as the Cash
Flow Statement subtotals under the Indirect Method.
C. DISAGREE with the statement – a cash flow equivalent is an item whose value is not
dependent on market conditions. Some items that are classified at Level 1 (e.g. shares of
publicly traded common stock) have values that are dependent on market conditions.
25
Problem 4
A.
To determine whether there is impairment, consider the undiscounted sum of future
cash flows in comparison to the asset’s carrying value. Keeping in mind that
Depreciation is not a cash expense, the net cash flows for the 2016, 2017, and 2018
are $ 500,000, $ 450,000, and $ 400,000, respectively (equal to Net Income +
Depreciation). Furthermore, the expected selling price of the assets on Dec. 31, 2018
is $ 600,000, and thus the total undiscounted cash flows is $ 1,950,000. Since this
sum is greater than the carrying value of $ 1,500,000, the assets are not impaired as of
December 31, 2015.
B.
Under this scenario, the sum of the undiscounted cash flows equals $ 1,350,000 (i.e.
$ 500,000 + 450,000 + 400,000). Since this amount is less than the carrying value of
$ 1,500,000, the assets are impaired as of December 31, 2015.
Since the assets are impaired, they should be written-down to their fair value, which
may be measured as the present value of the expected cash flows. Accordingly, on Dec.
31, 2015, the assets would be reported at $ 1,089,910 (equal to $ 500,000 x PVFn=1,i=12%
+ $ 450,000 x PVFn=2,i=12% + $ 400,000 x PVFn=3,i=12% ).
C.
In this case, since the assets will continue to be “held for use”, Ned Blues may NOT
recover any of the impairment cost, even if the actual cash flows prove to be higher than
the earlier forecast. Note that in some circumstances – in particular, if impaired assets
were “held for sale”, some of the impairment cost may be recovered.
D.
In order to not report an impairment, the undiscounted cash flows may not be less than
The carrying value of the assets. Thus, one wants to solve for the minimum cash flows
such that:
Carrying Value - Exp. Selling Price + Σ Cash Expenses = Minimum Equal Annual
3 Years
Cash Revenue
Accordingly, the minimum cash revenues each year in order to not report an impairment
are $ 850,000, calculated as:
$ 1,500,000 – 600,000 + (500,000 + 550,000 + 600,000) = $ 850,000 Per Year
3 Years
26
Problem 5
A. Net Income can be estimated from the relationship:
Retained Earnings BEG + Net Income - Dividends = Retained Earnings END
 Net Income (in millions) = $ 14,002 + ($ 1.20 x (953.3 – 182.1 )) - $ 12,536
= $ 14,002 + $ 925.4 - $ 12,536
= $ 2,391.4
(Note that your answer may vary if you estimate total dividends using a number of
shares other than the year-end total.)
B.
The correct answer is “A” – “Average Issuance” price can be estimated at “Common
Stock” + “APIC” divided by the number of shares (i.e. ($ 477 + 146)/953.3 = $ 0.65),
while the “Average Repurchase Price” can be estimated as “Cost of Treasury Stock”
divided by the number of shares in the treasury (i.e. $ 5,653/182.1 = $ 31.04). Thus,
“A” is true. “B” is false - there would be a “contra-equity” account related to the par
value if the shares had initially been issued below par value.
C.
The correct answer is “A” – when a stock dividend is paid, Retained Earnings is
decreased by the fair value of the additional shares of stock being issued. Since this
amount gets added to the “Common Stock – Par Value” and “Additional Paid-in-Capital
accounts, total Shareholders’ Equity remains unchanged.
D.
Shareholders’ Equity would INCREASE by $ 400,000,000 if 10,000,000 treasury
shares were sold for $ 400,000,000. Using the “average cost” calculated in Part B,
the journal entry would be recorded as follows:
DB Cash
400,000,000
CR
Treasury Stock
310,400,000
CR
Add. Paid-in-Capital
89,600,000
E.
The correct answer is “D” – Cash dividends and stock repurchases both decrease
Cash from Financing Activity. Also, the $ 100,000,000 reduction of Retained
Earnings related to a cash dividend would result in a $ 100,000,000 decrease in
Shareholders’ Equity, as would acquiring $ 100,000,000 of Treasury Stock (which
would be reported in a “contra equity” account).
Problem 6
27
A. The correct answer is “D” – none of the above. Answer A is incorrect in that the
acquisition of a firm/assets does not relate to a balance sheet issue/condition that
existed as of the balance sheet date. While Answer B may be intuitively appealing,
that practice is not followed under US GAAP.
B. The correct answer is “A”. Answer B is incorrect as at the time executive options
Are exercised, the firm will record the shares being issued at the exercise price received.
C. Save-a-Dollar would report a liability of $ 500,000. The likelihood of having to
make a payment is 80% (i.e. 70% chance of paying $ 500,000 and 10% chance of
paying $ 2,000,000). Accordingly, since 80% exceeds the “probable” threshold,
Save-a-Dollar will report a liability on their balance sheet. Since $ 500,000 is the
“mode”, the amount of the liability reported will be $ 500,000. Further, since the
appeals process is not expected to be complete until May 2018 (more than one year
beyond the balance sheet date), the liability may be classified as “non-current”.
D.
The statement is FALSE. Under Physical Capital Maintenance, Cost of Goods
Sold would be reported at “Replacement Cost”, rather than “Historical Cost”. Given
The assertion of the problem, since costs are rising, Cost of Goods Sold would be
HIGHER under Physical Capital Maintenance and thus Net Income would be lower.
ACCOUNTING 562 – SUMMER 2017 – FINAL EXAM
28
DISTRIBUTION BY TOTAL
Score
> 89.5
85-89.5
80-84.5
75-79.5
70-74.5
65-69.5
60-64.5
55-59.5
50-54.5
45-49.5
40-44.5
< 40
Number
2
5
2
2
14
19
22
10
15
15
13
13
Mean
Std. Dev.
58.02
14.25
FINAL EXAM - DISTRIBUTION BY QUESTION
Question
1
2
3
4
5
6
TOTAL
Average
9.78
12.24
12.77
6.00
8.89
8.34
58.02
29
Possible
15
20
20
15
15
15
100