Accounting 303
Exam 2, Chapters 4, 5, 20
Spring 2010
I.
Name _______________________
Section _______
Row _______
Multiple Choice Questions. (2 points each, 22 points in total) Read each question
carefully and indicate your answer by circling the letter preceding the one best answer.
1. The distinction between operating income and non-operating (other income and expenses)
income relates to
a. continuity of income.
b. principal activities of the reporting entity.
c. consistency of income stream.
d. reliability of measurements.
2. The single-step income statement emphasizes
a. the gross profit figure.
b. total revenues and total expenses.
c. extraordinary items and accounting changes more than these are emphasized in the
multiple-step income statement.
d. the various components of income from continuing operations.
3. How should an unusual event not meeting the criteria for an extraordinary item be disclosed
in the financial statements?
a. Shown as a separate item in operating revenues or expenses if material and
supplemented by a footnote if deemed appropriate.
b. Shown in operating revenues or expenses if material but not shown as a separate item.
c. Shown net of income tax after ordinary net earnings but before extraordinary items.
d. Shown net of income tax after extraordinary items but before net earnings.
4. Which of the following is true about intraperiod tax allocation?
a. It arises because certain revenue and expense items appear in the income statement
either before or after they are included in the tax return.
b. It is required for extraordinary items but not for discontinued operations.
c. Its purpose is to allocate income tax expense evenly over a number of accounting
periods.
d. Its purpose is to relate the income tax expense to the items which affect the amount of
tax on the income statement.
5. Cole Company, with an applicable income tax rate of 30%, reported net income of
$210,000. Included in income for the period was an extraordinary loss from flood damage
of $30,000 before deducting the related tax effect. The company's income before income
taxes and extraordinary items was
a. $240,000.
b. $300,000.
c. $330,000.
d. $231,000.
1
6. For Garret Wolfe Company, the following information is available:
Cost of goods sold
Dividend revenue
Income tax expense
Operating expenses
Sales revenue
$ 60,000
2,500
6,000
23,000
100,000
In Garret Wolfe’s multiple-step income statement, gross profit
a. should not be reported
b. should be reported at $13,500.
c. should be reported at $40,000.
d. should be reported at $42,500.
7. Under the realization principle, revenue should not be recognized until the earnings process
is deemed virtually complete and
a. Revenue is realized.
b. Any receivable is collected.
c. Collection is reasonably certain.
d. Collection is absolutely assured.
8. For a typical manufacturing company, the most common critical point for recognizing
revenue is the date
a. an order is received.
b. production is completed.
c. the product is delivered.
d. payment is received.
9. Sullivan Software sells packages of a software program and one year's worth of technical
support for $500. Their packaging lists the $500 sales price as comprised of a software
program at a price of $450 and technical support with a price of $100, with a $50 discount
for the package deal. All of Sullivan's sales are for cash, and there are no returns. How
should Sullivan recognize revenue for the two parts of the arrangement?
a. Recognize the entire $500 when the customer pays cash to buy the package.
b. Recognize the portion of the $500 attributable to the software program when the
customer pays cash to buy the package, defer the portion attributable to technical
support and recognize over the support period.
c. Defer the entire $500 and recognize over the support period.
d. Recognize the revenue following the installment sales method.
10. An accounting change that is reported by the prospective approach is reflected in the
financial statements of
a. Prior years only.
b. Prior years plus the current year.
c. The current year only.
d. Current and future years.
2
11. Which of the following accounting changes should be accounted for using the retrospective
approach?
a. A change in the estimated life of a depreciable asset.
b. A change from straight-line to declining balance depreciation.
c. Correcting an error in a prior financial statement.
d. A change from the completed-contract method of accounting for long-term construction
contracts.
3
II. Problems – (78 points in total) Show all work where appropriate!
1.
(10 points) Below are listed several types of accounting changes or error corrections. For
each one, indicate your answer by using the code letter to indicate the type of change or
error correction.
Code Letter
A
B
C
D
Type of change or error correction
Change in accounting principle
Change in accounting estimate
Change in reporting entity
Error correction
_____
a. Changing the companies included in consolidated financial statements.
_____
b. Change from LIFO to FIFO inventory method.
_____
c. Change from an unacceptable to an acceptable accounting principle.
_____
d. Change in the salvage value of a fixed asset.
_____
e. Change in the remaining life of a fixed asset.
4
2.
(16 points) ADDI, Inc. had income from continuing operations of $821,000 (after tax) in
2009. In addition, ADDI has the following information to report on their income statement.

In early 2009 ADDI experienced an uninsured earthquake loss on one of its warehouses
in the amount of $200,000. ADDI considers the earthquake loss as unusual and
infrequent.

In July 2009 ADDI decided to discontinue its stereo division. The stereo division
qualifies as a component of the entity according to SFAS No. 144. Up to the date of
closing, the stereo division operated at a loss of $400,000 during 2009. On September 4,
2009, ADDI sold all the assets of the division for a profit of $250,000.
Required: Present in proper form the lower portion of ADDI's 2009 income statement starting
with "income from continuing operations." Also, prepare the proper earnings per share
disclosures required on the income statement. ADDI's tax rate is 30% and they have 1,000,000
shares of common stock outstanding for the entire year.
ADDI, Inc.
Partial Income Statement
For the Year Ended December 31 2009
5
3.
(17 points) During 2009, Clapton Company sold a guitar to Beck Company for $21,000.
The guitar had a cost to Clapton of $14,910. Beck paid $10,000 in cash in 2009 and paid the
remainder in two equal installments, one in 2010 and the final installment in 2011. Ignore
any interest
Required: Complete each of the two unrelated parts of this problem.
a.
Assume Clapton Company appropriately used the installment sales method to account
for this sale.
i.
How much gross profit will Clapton report in each of the years?
2009
$____________
2010
$____________
2011
$____________
ii. Make all the journal entries Clapton would record in 2009 to properly record this
transaction.
b. Assume Clapton Company appropriately used the cost recovery method to account for
this sale. How much gross profit will Clapton report in each of the years?
2009
$____________
2010
$____________
2011
$____________
6
4.
(19 points) In 2008, Nebraska Construction Company began work on a new building for
UNO's College of Business. The contract price for the building is $36,000,000 and it will be
completed in 2010. Actual and estimated costs for the building are as follows.
Item
Contract price
Actual costs to date
Estimated Costs to complete
Total actual and est. to complete
Progress billings
Cash collections
a.
2008
2009
2010
$36,000,000 $36,000,000 $36,000,000
$5,900,000 $20,650,000 $29,900,000
$23,600,000 $8,850,000
$29,500,000 $29,500,000 $29,900,000
$7,000,000 $17,000,000 $12,000,000
$6,000,000 $17,500,000 $12,500,000
Prepare the 2008 entries to record this project assuming percentage of completion
accounting is used.
b. How much gross profit would be recognized each year under the completed contract
method?
2008 $______________
2009 $______________
2010 $______________
7
5.
(14 points) During 2010 the internal auditors for Alonso Company discovered the following
errors were made in last year's financial statements.
a.
Give the proper entries to correct the errors in 2010.
i.
Salaries of $12,000 were not accrued at the end of 2009. The salaries were paid in
2010 and charged to salaries expense.
ii. 2009 depreciation was overstated by $14,000 because of a computational error.
Nothing was recorded in 2010 related to this error.
b. Determine the effect each of the above errors had on the 2009 financial statements.
Indicate the effect on each of the following by using a "U" to indicate understatement
and a "O" to indicate overstatement.
Error
Assets
Liabilities
Stockholders'
Equity
Revenues
Expenses
Net
Income
i
ii
8
Solutions
Multiple Choice
Question
Number
1
2
3
4
5
6
7
8
9
10
11
Answer
b
b
a
d
c
c
c
c
b
d
d
Problems
1.
a. C
b. A
c. D
d. B
e. B
2.
ADDI, Inc.
Partial Income Statement
For the Year Ended December 31 2009
Income from continuing operations before tax
Income tax expense
Income before discontinued operations
Discontinued operations:
Loss on discontinued operations (net of
$250,000 gain on disposal)
<150,000>
Income tax benefit
45,000
Loss on discontinued operations
Extraordinary earthquake loss (net of 60,000
income tax benefit)
Net Income
Earnings per share:
Income before discontinued operations
Loss on discontinued operations
Extraordinary earthquake loss
1,172,857
351,857
821000
105,000
<140,000>
576,000
.82
<.11>
<.14>
9
Net Income
.57
3.
a.
i.
2009
$__2,900______
2010
$__1,595______
2011
$__1,595______
ii.
Cash
A/R
10,000
11,000
Inventory
Deferred GP
14,910
6,090
Deferred GP
Realized GP
2,900
2,900
b.
2009
$______0______
2010
$____590______
2011
$___5,500______
4.
Item
Contract price
Actual costs to date
Estimated Costs to complete
Total actual and est. to complete
Estimated GP
Progress billings
Cash collections
2008
$36,000,000
$5,900,000
$23,600,000
$29,500,000
6,500,000
$7,000,000
$6,000,000
2009
$36,000,000
$20,650,000
$8,850,000
$29,500,000
6,500,000
$17,000,000
$17,500,000
2010
$36,000,000
$29,900,000
$29,900,000
6,100,000
$12,000,000
$12,500,000
Percentage completed: 5.9/29.5 = 20%
a.
Construction in Progress
Cash
5,900,000
A/R
7,000,000
Progress Billings
5,900,000
7,000,000
10
Cash
A/R
6,000,000
Construction Expense
Construction in Progress
Revenue
5,900,000
1,300,000
6,000,000
7,200,000
b.
2008 $__________0___
2009 $__________0___
2010 $___6,100,000___
5.
a. i.
Retained Earnings
Salaries Expense
12,000
12,000
ii.
Accumulated Depreciation
Retained Earnings
Error
Assets
14,000
Liabilities
U
i
ii
14,000
O
Stockholders'
Equity
Expenses
Net
Income
O
U
O
O
U
O
Revenues
11