ACCT 5301
Solution to Sample Exam II
I.
Multiple choice:
1.B
2,000 + 50 decrease in A/R
2.C
-900 – 5 incr. in Inven – 15 decr. in A/P
3.B
4.B
5.A
6.A
II. (in 000s)
A.
2.Div. (RE)
30
Cash
30 (30,000 sh. o/s x $1)
3.Stock Div (RE) 300
Common Stock 300
4.TS
46
Cash
46
5.Translation Adj 6
Other Comp Inc. 6
B.
Bal
NI
Div
Stock div
TS Purchase
Translation adjust
Bal
CS
300
APIC
900
300
RE
600
150
(30)
(300)
TS
0
OCI
0
(46)
600
900
420
(46)
C.
CS, $10 par, 100,000 shares authorized, 60,000 shares issued
and 58,000 shares outstanding
APIC
RE
OCI
TS, 2,000 shares at cost
Total SE
(6)
(6)
$600,000
900,000
420,000
(6,000)
(46,000)
$1,868,000
III. Pensions
A.
Pension expense:
Service cost
$ 30,000
Interest cost
20,000
Expected return
-18,000
Amortization of PSC
2,000
Amortization of gain
- 750
Total pension expense $ 33,250
B.
C.
Journal entry for 2008:
Pension expense
33,250
Pension A/L (plug)
Cash
Adjustment to OCI and Pension A/L
OCI
38,750
Pension A/L
13,250
20,000
for 2008
38,750 (see below)
Pension A/L
25,000
13,250 Entry B
38,750 Entry C (to get to Liab. balance)
======
27,000
Balance in OCI?
Liab.:
Beginning:
Beginning:
Change:
Balance:
+
-
285,000 - 258,000
20,000 decrease (cost)
30,000 increase (benefit)
38,750 decrease (entry C)
28,750
Balance in Pension A/L: $27,000 Liability
IV. Leases
A. Capital Lease
A.
PV of MLP = PV of Rent + PV of BPO
Factors for PV: n = 5, i = 6%
PVOA
Adj.*to adjust to annuity due
PVAD = 5,000 (4.21236)(1.06) = $22,326
PV1
PV1 = 1,000 (.74726) =
Total present value
=
B.
1.
2.
3.
747
$23,073
Equipment
23,073
Lease Liability
23,073
Lease Liability
Cash
5,000
Interest expense
Lease liability
Cash
1,084
3,916
5,000
18,073 x .06
plug
5,000
Depreciation expense
2,884
Accumulated Depr.
2,884
(Calc: (23,073 - 0)/8 = 2,884)
B. Operating lease
PV,6%
n=1 43 x .9434
n=2 28 x .89
n=3 22 x .83962
n=4 18 x .79209
n=5 16 x .74726
*n=6 16 x .70496
*n=7 16 x .66506
Total
= $ 40.56
=
24.92
=
18.47
=
14.26
=
11.96
=
11.28
=
10.64
$ 132.8
million
*since approx. 2 payments at $16 each, just do 2 more PV1 calculations.
Alt: PVOA of 2 pmts back to time 0: 2 pmts
back to time 0
16(PVOA, 6%, 2)(PV1, 6%,5) = 16 x (1.83339) x (.74726) = $21.92
V. Essays
1. Capital Leases versus Operating Leases
Capital leases meet FASB’s 4 criteria for the recognition of the lease as
the purchase of an asset with a liability. Operating leases do not have to
be capitalized, and the only thing that shows in the financials regarding
the lease is the periodic lease expense as the lease payments are made.
Companies prefer operating leases because they do not have to show any
liability on the books, even for long-term noncancelable leases. This is
called “off balance sheet financing” because the company finances the
purchase of an asset without showing any of the liability (or any of the
asset). This off balance sheet financing helps the company’s debt to
equity ratio, and keeps the company from violating debt covenants, and from
possibly having the loan called in (repaid before the due date).
2. In SFAS 87, FASB allowed smoothing of the following amounts:
Prior Service Costs
Unrecognized Net/Gain or loss
Transition amount
These items were allowed to be recogized in pension expense and
pension liability in small pieces, through amortization over many
years. SFAS 158 maintained the smoothing on the income statement, but
now requires immediate recognition in the Pension Asset/Liability
account, with the offset to Other Comprehensive Income in the
Statement of Stockholders’ Equity account. Now the balance sheet
reflects full liability or asset, but the income statement still only
recognizes part of the total cost of the pension plan.
3.Compensation Expense for Employee Stock Options.
Stock options are given to employees to encourage employees to work toward
increasing the value of the company (making their options more valuable at
exercise).
The debate over recognition stems from the form of the compensation
(eventual shares of stock rather than cash).
Pro: If the company issued shares of stock for cash, then distributed the
cash to employees, then the cash bonus would definitely qualify as
compensation expense to the company, very similar to the traditional salary
payments. The company is giving the employee something of value (the
option to buy shares of stock), and the fair value of that instrument
represents a non-cash form of compensation to the employee, and should be
recorded as compensation expense over the life of the option vesting
period.
Con: Regarding stock options, the employees are working, contributing
“sweat equity”, to become owners of the company, and owners of the company
do not receive salaries; they receive equity distributions through stock
price increases and dividends. The company never recognizes any expense
from these equity value changes. Additionally, this is not traditional
compensation, as the stock options may be “under water”, where the market
price is lower than the exercise price, and not worth exercising.
Compensation expense for stock options (and for restricted stock as well)
does not meet the definition of an expense (decrease in net assets used to
generate revenues), because the recognition of compensation expense is
entirely an equity transaction:
Compensation Expense
APIC-Stock Options
xx
xx
(equity)
(equity)
No assets or liabilities are affected, and it can be argued that the pure
equity transaction is equivalent to the potential owner contributing
his/her time (sweat equity), rather than cash, to become an owner. When
issuing stock for cash, no expense is involved.
VI. Statement of Cash Flows
(analysis in red)
Given the following income statement and comparative balance sheets for North
(all amounts are in thousands). Note that earliest year is presented first.
Cash
Accounts receivable
Inventory
Land
Equip
Less: Accumulated depr.
Investment.
Total assets
Comparative Balance Sheets
12/31/06
12/31/07
$
15
-6 $
9
17
23 +6 SUBTRACT(OP)
7
14 +7 SUBTRACT (OP)
38
28
50
73
( 18)
( 24)
37
37
$ 146
$ 160
Accounts payable
Unearned Revenues
Notes payable (long-term)
Bonds payable (long-term)
Add: Premium
Common stock
Retained earnings
Total Liab. & Eq.
Income Statement for 2006
Sales revenue
Service revenue
Gain on sale of land
Cost of goods sold
Depreciation expense - equipment
Interest expense
Other operating expenses (all cash)
Income tax expense
Net income
$
13
7
18
50
8
34
16
146
$
15 +2 ADD (OP)
5
10
50
5 –3 OP
55
20
160
$ 120
30
3 –3 OP
(82)
( 6)+6 OP
( 6)
(11)
(13)
$
35 TOP LINE OP
Additional information for 2006: FOR INVESTING AND FINANCING
1.
The only activities in retained earnings were for income and dividends.
BRE + NI – DIV = ERE
16+35-DIV=20 DIV=31 –31 FINANCING
2.
A building was purchased for $8 cash. –8 INVEST
3.
Equip. was purchased with a N/P of $15. SUPP SCHEDULE
4.
Land with a cost of $10 was sold at a gain of $3 . +13 INVEST
5.
Payment made on N/P for $23. –23 FINANCING
6.
The change in common stock was due to the issue of stock for cash. +21 FIN
Required:
On the next page, prepare the Statement of Cash Flows, including Indirect method
fo Operating Section.
Cash Flow from Operating Activity
Net Income
Add Depreciation
Subtract Premium amort.
Subtract gain
Less increase in A/R
Less increase in Inventory
Add increase in A/Pay
Less decrease in U. Rev
$35
6
(3)
(3)
( 6)
(7)
2
(2)
Net cash from operating activity
$ 22
Cash Flow from Investing Activity
Cash paid for equip
Cash received from land
$(8)
13
Net cash from investing
5
Cash Flow from Financing Activity
Cash paid for dividends
Cash paid on N/P
Cash received from stock
$ (31)
(23)
21
Net cash used for financing
(33)
Net decrease in cash
$(6) (Confirm: cash from $15 to $9)
________________________________________________
Supplementary schedule of non-cash activities:
Equip purchased with N/P
$15
Part 2: Operating section using direct method
Sales revenue
Service income
Gain on sale of land
COGS
Depr exp
Other
Interest exp
Income tax expense
Cash from operations
$120
30
3
-82
-6
-11
- 6
-13
- 6 = $
-2 =
- 3 =
-7 +2 =
+6 =
-3 =
=
114
28
0
(87)
0
(11)
( 9) adjust out prem. amort
(13)
$22
(same as indirect method)