Accounting 303
Test 2, Chapters 3, 4, D
Fall 1998
Name ________________________
Section _______
Row _______
I.
Multiple Choice - (2 points each, 38 points total) Read each
question carefully and indicate your answer by circling the
letter preceding the one best answer.
1.
Which is not a characteristic of an asset?
a.
the resource must be useful only in the entity's activities
and have been acquired by purchase, production, or
stockholder investment
b.
the entity must be able to obtain the future benefit and
control others' access to it
c.
the transaction or event giving rise to the entity's right
to or control over the benefit must have already occurred
d.
the resource must singly, or in combination with other
resources, have the capacity to contribute directly, or
indirectly, to the entity's future net cash inflows
2.
All of the following assets are reported at historical cost on
the balance sheet except
a.
the building owned by the firm and used as corporate
headquarters
b.
equipment used in the firm's operations
c.
net accounts receivable
d.
prepaid insurance
3.
Which measurement alternative is in use if an asset is measured
by the amount of cash (or its equivalent) into which it is
expected to be converted in due course of business less direct
costs necessary to make that conversion?
a.
current exit value
b.
current cost/current proceeds
c.
present value
d.
net realizable value
4.
The amount of cash (or equivalent) that would be required to
obtain an asset shown on a balance sheet, on the date of the
balance sheet, is called the asset's
a.
historical cost
b.
replacement cost (current cost)
c.
current exit value
d.
present value
2
5.
Current assets are cash or other assets that are reasonably
expected to be converted into cash, sold, or consumed within
a.
one year
b.
one normal operating cycle
c.
one year or normal operating cycle, whichever is shorter
d.
one year or normal operating cycle, whichever is longer
6.
Activities between affiliated entities such as subsidiaries must
be disclosed in the financial statements of a corporation as
a.
segment analysis
b.
significant relationships
c.
related party transactions
d.
contingent activities
7.
In distinguishing between revenues and gains, which of the
following statements is false?
a.
more gains than revenues are beyond the entity's control
b.
gains are associated more with peripheral, non-operating
activities than are revenues
c.
revenues are associated more with the central, ongoing
operations of an entity than are gains
d.
revenues are reported net (rather than gross) more often
than gains
8.
Which of the following statements regarding income reporting is
true?
a.
current GAAP requires that both comprehensive income and
net income be reported on the income statement
b.
distributions to owners do not appear on the income
statement for both the current operating and all-inclusive
concepts of income
c.
if the all-inclusive concept of income is used, dividends
paid will appear on the income statement
d.
current GAAP follows the current operating concept of
income to a greater extent than the all-inclusive concept
9.
From the following information, compute cost of goods sold.
Purchase returns..............................
$ 100
Inventory, December 31........................
1,600
Freight-in....................................
200
Inventory, January 1..........................
1,200
Purchases.....................................
4,000
a.
$3,500
b.
$3,600
c.
$3,700
d.
$4,500
3
10.
Which of the following material gains/losses would be disclosed
as an extraordinary item on an entity's income statement?
a.
a loss arising from the write-off of a large uncollectible
accounts receivable balance
b.
a loss arising from the early repayment of bonds classified
as a long-term debt
c.
a gain from sale of a segment of the entity's business
d.
a gain from the sale of manufacturing equipment no longer
needed by the entity
11.
Which of the following items would not be reported on a net-oftax basis in an entity's financial statements?
a.
a revision in the remaining useful life of depreciable
equipment, which is accounted for as a change in accounting
estimate
b.
a gain arising from the disposal of a segment of the
business
c.
an adjustment to the financial statements that is accounted
for as a prior-period adjustment
d.
a loss that qualifies as an extraordinary item
12.
A company that discontinues and disposes of an operation
(segment) should include the gain or loss on disposal in the
income statement as
a.
a prior period adjustment
b.
an extraordinary item
c.
an amount after continuing operations and before
extraordinary items
d.
a bulk sale of fixed assets included in earnings from
continuing operations
13.
Under which of the following conditions would frost damage be
considered an extraordinary item for income reporting purposes?
a.
only if frosts are normal in the geographical area but do
not occur frequently
b.
only if frosts in the geographical area are unusual in
nature and occur infrequently
c.
only if frosts occur frequently in the geographical area
but can be covered by insurance policies
d.
under any circumstances frost damage should be classified
as an extraordinary item
14.
Jones & Jones will receive $100,000 at the end of four years as
a result of a settlement against the city of Overisel. Assuming
an interest rate of 8% compounded semiannually, the present
value today is
a.
$ 73,069
b.
$ 73,503
c.
$ 85,480
d.
$100,000
4
15.
On January 2, 1997, Carrie Company adopted a corporate strategy
to accumulate funds for future pension and postretirement
benefits to employees. Carrie plans to make five equal annual
deposits of $30,000 in a fund that will earn 8% compounded
annually. The first deposit is made on January 2, 1997. How much
will be on deposit on January 2, 2001, immediately after the
last deposit?
a.
$150,000
b.
$164,592
c.
$175,998
d.
$190,078
16.
Using the table approach, the future amount of an annuity due
may be calculated by finding the table factor for the future
amount of an ordinary annuity of
a.
n+1 rents and then subtract 1
b.
n+1 rents and then add 1
c.
n-1 rents and then add 1
d.
n-1 rents and then subtract 1
17.
The future amount of an annuity due is determined one period
a.
before the next rent in the series
b.
after the last rent in the series
c.
before the last rent in the series
d.
after the first rent in the series
18.
You would like to deposit a sum of money today that would enable
you to withdraw $1,000 a year for five years. If the interest
paid on the amount deposited is 10% compounded annually and if
the first withdrawal is made one year from today, the formula
you would use to determine the amount of the initial deposit is
a.
the present value of an ordinary annuity
b.
the present value of a deferred annuity
c.
the present value of an annuity due
d.
the future value of an ordinary annuity
19.
The number .9423 is taken from the column marked 2% and the row
marked three periods in a certain time value of money table.
From what table is this number taken?
a.
Future value of 1
b.
Present value of an ordinary annuity of 1
c.
Present value of an annuity due of 1
d.
Present value of 1
5
II.
1.
Problems - Show your work as appropriate.
(12 points) The balance sheet contains the following major
sections:
A.
B.
C.
D.
Current assets
Long-term investments
Fixed assets
Intangible assets
E.
F.
G.
H.
I.
Current liabilities
Long-term liabilities
Contributed capital
Unrealized capital
Retained Earnings
Using the letters A through I, indicate in which section of the
balance sheet each of the following accounts would be
classified. Put parentheses around the letter used if the
account is a contra account. If the account does not appear on
the balance sheet, use the letter X.
____
1. Unexpired insurance
____
2. Donated capital
____
3. Land
____
4. Fund to retire preferred stock
____
5. Additional paid-in capital on common stock
____
6. Deferred income tax liability - noncurrent
____
7. Raw materials inventory
____
8. Unearned ticket sales
6
2.
(12 points) The December 31, 1998, liabilities and equity section of Caulk
Company’s Balance Sheet is shown below.
Liabilities
Current Liabilities
Accounts Payable........................... $200
Current Portion of Long-term Note..........
50 $ 250
Long-term Liabilities
Long-term Note Payable.....................
500
Bonds Payable..............................
300
800
Total Liabilities........................
1,050
Stockholders’ Equity
Preferred Stock, $10 Par.....................
50
Common Stock, $5 Par.........................
150
Additional Paid-in Capital – Common Stock....
375
Additional Paid-in Capital – Preferred Stock.
50
625
Retained Earnings............................
465
Total Stockholders’ Equity.................
1,090
Total Liabilities and Stockholders’ Equity.....
$2,140
Additional Information:
 December 31, 1997, accounts payable was $175.
 The Long-term Note Payable requires a $50 payment every June 30.
 The Bonds Payable were issued in 1988 and mature in 2008.
 During 1998 10 shares of Common Stock were issued at $18 per share, and 1
share of Preferred Stock was issued at $20 per share.
 Net Income for 1998 was $85.
 Dividends were paid in 1998 in the amount of $15.
Using all the above information, reconstruct the Liabilities and Stockholders’
Equity section of Caulk’s December 31, 1997, Balance Sheet by showing your numbers
in the following form.
Liabilities
Current Liabilities
Accounts Payable........................... $_____
Current Portion of Long-term Note..........
_____
Long-term Liabilities
Long-term Note Payable.....................
_____
Bonds Payable..............................
_____
Total Liabilities........................
$_____
_____
_____
Stockholders’ Equity
Preferred Stock, $10 Par.....................
_____
Common Stock, $5 Par.........................
_____
Additional Paid-in Capital – Common Stock....
_____
Additional Paid-in Capital – Preferred Stock.
_____
_____
Retained Earnings............................
_____
Total Stockholders’ Equity.................
_____
Total Liabilities and Stockholders’ Equity.....
$ _____
7
3.
(9 points) Income statement information for KGC Company is as
follows:
Beginning inventory.....................
Ending inventory........................
General and administrative expenses.....
Gross profit............................
Net income..............................
Net sales...............................
Purchases...............................
Purchases returns and allowances........
Sales...................................
Sales returns and allowances............
Selling expenses........................
Transportation-in.......................
Required:
$ 70,000
50,000
(c)
310,000
20,000
(b)
490,000
20,000
(a)
20,000
60,000
10,000
Find the missing amounts labeled (a) through (c) above.
Show your work in the space provided.
a.
Sales
b.
Net Sales
c.
General and Administrative Expenses
8
4.
(13 points) On May 1, 1998, Wardle Company decided to dispose
of its entire European Division (considered a major segment).
The segment was sold on November 24, 1998, for $820,000. The
book value of the Division on the date of the sale was $906,000.
The Division’s operations from January 1, 1998, until the date
of disposal was a $260,000 profit, with 75% of that amount
earned in the period from January 1, 1998, to May 1, 1998.
During June 1998, Wardle Company decided to change their
depreciation method from the declining balance method to the
straight-line method. Under the straight-line method,
depreciation would have been $78,000 less than with the
declining balance method.
Wardle’s pretax income from continuing operations for 1998 was
$238,000. Wardle Company is subject to a 30% income tax rate.
Prepare Wardle Company's income statement for 1998 from Pretax
Income From Continuing Operations through net income. Omit the
heading and earnings per share amounts.
9
5.
(16 points) Solve each of the following unrelated questions.
a.
Tom Turner deposited $10,000 in a fund that earns 8% interest
compounded annually. How many years will it take for the fund to
grow to $21,589.25?
b.
Ted Banks wants to borrow some money from the bank to start a
small business. Ted can afford to pay off the loan in 15 annual
installments of $9,500. The bank charges an annual interest rate
of 12%. If Ted makes the first payment one year from the date of
the loan, how much can Ted borrow?
c.
Susan’s grandmother has agreed to deposit a lump sum into an
account that pays 10% interest compounded annually in order to
pay for Susan’s college education. Susan estimated that she will
need to withdraw $10,000 at the beginning of each year for four
years to pay for room, board, tuition, and books. Susan’s
grandmother will deposit the lump sum on September 1, 1997, and
Susan will make the first withdrawal on September 1, 2001.
Determine the amount that Susan’s grandmother must deposit.
Clearly label all work.
10
ANSWERS TO MULTIPLE CHOICE QUESTIONS
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
a
c
d
b
d
c
d
b
c
b
11.
12.
13.
14.
15.
16.
17.
18.
19.
a
c
b
a
c
a
b
a
d
ANSWERS TO PROBLEM QUESTIONS:
1.
1.
2.
3.
4.
A
H
C
B
5.
6.
7.
8.
G
F
A
E
2.
Liabilities
Current Liabilities
Accounts Payable...........................
Current Portion of Long-term Note..........
Long-term Liabilities
Long-term Note Payable.....................
Bonds Payable..............................
Total Liabilities........................
Stockholders’ Equity
Preferred Stock, $25 Par.....................
Common Stock, $5 Par.........................
Additional Paid-in Capital – Common Stock....
Additional Paid-in Capital – Preferred Stock.
Retained Earnings............................
Total Stockholders’ Equity.................
Total Liabilities and Stockholders’ Equity.....
500 +
50 150 -
50 = 550
10 = 40
50 = 100
375 - 130 = 245
50 - 10 = 40
465 - 85 + 15 = 395
$175
50
550
300
40
100
245
40
$ 225
850
1,075
425
395
820
$1,895
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3.
Sales..................................
830,000(a)
Less Sales Returns & Allowances........
20,000
Net Sales..............................
(b)810,000
Cost of Goods Sold.....................
Beginning Inventory..................
70,000
Purchases............................
490,000
Less: Purchases Ret & Allow.........
<20,000>
Add: Transportation-In..............
10,000
Cost of Goods Available for Sale.....
550,000
Ending Inventory.....................
50,000
Cost of Goods Sood.................
500,000
Gross Profit...........................
310,000
General and Admin Expenses.............(c)230,000
Selling Expenses.......................
60,000
290,000
Net Income.............................
20,000
4.
Pretax income for continuing operations....
Income tax expense.........................
Income before discontinued operations......
Results of discontinued operation:
Income from operations of discontinued
segment(net of $58,500 income taxes)... $136,500
Loss on disposal of segment (net of
$6,300 income tax credit)............... <14,700>
Income before accounting change............
Cumulative effect of change in
depreciation method (net of $23,400
income taxes)...........................
Net Income.. .............................
260,000 x 75% = 195,000;
195,000 x .7 = 136,500
260,000 – 195,000 = 65,000
820,000 – 906,000 = <86,000>
<21,000>
<21,000> x .3 = <6,300>
78,000 x .7 = 54,600
$238,000
71,400
$166,600
121,800
288,400
54,600
$343,000
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5.
a.
Future value of a single sum, i = 8%, n = ?
$21,589.25
---------- = 2.158925
$10,000.00
= 10 years
b.
(i = 8%, n = ?)
Present value of an ordinary annuity when the annual payments
are known:
P = R x PVIF
n = 15, i = 12%
= $9,500 x 6.810864
= $64,703
c. Defferred annuity problem - three ways to work the problem are
shown
(1)
Deferred annuity = R x (converted table factor)
Table factor for n + k = 7, i = 10%
Less table factor for k = 3, i = 10%
Converted table factor
4.868419
2.486852
2.381567
deferred annuity = $10,000 x (2.381567)
= $23,816
(2)
Deferred annuity = R x (converted table factor)
Table factor for PV of ordinary annuity,
n = 4, i = 10%
Times table factor for PV of single sum,
n = 3, i = 10%
Converted factor
3.169865
x .751315
2.381567
deferred annuity = $10,000 x (2.381567)
= $23,816
(3)
Find PV as of September 1, 2000:
PV of ordinary annuity, r = 10,000, i = 10%, n = 4
PV = 10,000 x 3.169865
= 31,698.65
Find PV as of September 1, 1997:
PV of single sum, FV = 31,698.65, i = 10%, n = 3
PV = 31,698.65 x .751315
= $23,816
13