Intermediate Accounting II – ACCT 2164
Exam 3 Study Guide: Chapters 18, 20 & 21
Exam 3 may be comprised of multiple choice, true/false, matching, short answer and problem questions. The
study questions and sample problems below should help you prepare for the exam. Please note that the study
format may not directly match the exam format.
Solutions to identification questions and problems can be found at the end of this study guide.
1. Distinguish between authorized, issued, and outstanding stock.
2.
Explain what it means to account for an accounting change retrospectively and give some examples of
changes that should be accounted for retrospectively.
3.
Explain what it means to account for an accounting change prospectively and give some examples of
changes that should be accounted for prospectively.
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4.
Define “change in accounting principle”.
5.
Describe how a change in entity is accounted for.
6.
Distinguish between common and preferred stock.
7.
Describe how to account for retired stock.
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8.
Describe the data found in the shareholders’ equity section of the balance sheet.
9.
Differentiate between a stock dividend and a stock split and describe how each would be accounted for.
10.
Describe how to calculate the ending balance for retained earnings.
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11. Explain the purpose of the Statement of Cash Flows.
12. Describe each of the following cash flow classifications:
a. operating activity
b. financing activity
c. investing activity
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Identification # 1
For each item listed below, identify the category of cash flow by writing Operating, Investing, or Financing under the
Type column across from the item. For each item listed below, identify whether the item was a source or use of cash by
writing Source or Use under the Source/Use column across from the item. If the item is an Operating Activity, indicate
N/A (not applicable) for Source/Use.
Type
Source/Use
a.
Issued Bonds
____________
____________
b.
Issued Common Stock
____________
____________
c.
Sold long-term Investments
____________
____________
d.
Paid Cash Dividends
____________
____________
e.
Redeemed bonds
____________
____________
f.
Decrease in Prepaid Expenses
____________
____________
g.
Issued preferred stock
____________
____________
h.
Net income
____________
____________
i.
Sold equipment
____________
____________
j.
Purchased treasury stock
____________
____________
k.
Purchased buildings
____________
____________
l.
Purchased patents
____________
____________
m.
Increase in Accounts Payable
____________
____________
Identification # 2
Identify the account type and normal balance of the accounts listed below.
Account Type
Normal Balance
a. Retained Earnings
____________________ ____________________
b. Treasury Stock
____________________ ____________________
c. Dividends Payable
____________________ ____________________
d. Depreciation Expense
____________________ ____________________
e. Cost of Goods Sold
____________________ ____________________
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Problem 1
The following transactions relating to stocks occurred during 2015. No balances existed in any equity account
prior to July 1, 2015. The cost method is used to account for treasury stock.
Jul 1 Exchanged 2,000 shares of common stock with a par value of $1 for computer equipment. The
computer equipment had a market value of $8,000.
Aug 1 Issued 1,000 shares of common stock with a par value of $1 for $5 per share.
Oct 15 Declared and distributed a 5% stock dividend. The market value of the common stock on this date was
$12 per share and the par value was $1.
Oct 30 Reaquired 500 shares of common stock for $3.00 per share
Dec 1 Reissued 200 shares of common stock for $2.50 per share.
Required: Journalize the entries necessary to record the stock transactions.
Problem 2
May Inc. changed from LIFO to the Average Cost inventory costing method on January 1, 2015. Cost of Goods
Sold for each year since the inception of the company are as follows:
Cost of Goods Sold
LIFO
Avg Cost
2013
$360,000
$400,000
2014
$800,000
$720,000
Required:
1) Calculate the cumulative change and prepare the journal entry to record the change in accounting
method.
2) Explain how this change would be reported in the financial statements.
Problem 3
On June 1, the board of directors of Mania Industries declares a cash dividend of $1.50 per share on its 10
million shares, payable to shareholders of record June 15, to be paid July 1.
Required:
1) Prepare the journal entry required on the date of declaration.
2) Prepare the journal entry required on the date of payment.
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Problem 4
Cherokee Company's auditor discovered some errors. No errors were corrected during 2012. The errors are described
as follows:
(1.) Beginning inventory on January 1, 2012, was understated by $5,000.
(2.) A two-year insurance policy purchased on April 30, 2012, in the amount of $24,000 was debited to
Prepaid Insurance. No adjustment was made on December 31, 2012, or on December 31, 2013.
Required: Prepare appropriate journal entries (assume the 2013 books have not been closed). Ignore income taxes.
Problem 5
April Company purchased a piece of machinery for $50,000 on January 1, 2011, and has been depreciating
the machine using the sum-of-the-years'-digits method based on a five-year estimated useful life and no
salvage value. On January 1, 2013, April decided to switch to the straight-line method of depreciation. The
salvage value is still zero and the estimated useful life is changed to a total of six years from the date of
purchase.
Required:
(1) Prepare the appropriate journal entry, if any, to record the accounting change ignoring income tax.
(2) Prepare the journal entry to record depreciation for 2013.
Problem 6
On October 1, the board of directors of Craft Industries declares a property dividend of 2 million shares of
Beaman Corporation’s preferred stock that Craft had purchased in March as an investment (book value: $9
million). The investment shares have a fair market value of $5 per share and are payable to shareholders of
record Oct 15, to be distributed Nov 1.
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Problem 7
Partial balance sheets and additional information are listed below for Monaco Company.
Additional information for 2013:
Net income was $270,000.
Depreciation expense was $30,000.
Sales totaled $800,000.
Cost of goods sold totaled $305,000.
Required:
(1) Calculate the amount of cash received from customers.
(2) Calculate the amount of cash paid to suppliers.
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Problem 8
Gazelle Corporation, a merchandiser, recently completed its calendar-year 2013 operations. For the year, (1)
all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, (3) all
purchases of inventory are on credit, (4) all debits to Accounts Payable reflect cash payments for inventory,
and (5) Other Expenses are paid in advance and are initially debited to Prepaid Expenses. The company's
balance sheets and income statement follow.
D
Continued on next page
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Additional Information on Year 2013 Transactions
a. The loss on the cash sale of equipment was $2,100 (details in b).
b. Sold equipment costing $51,000, with accumulated depreciation of $22,850, for $26,050 cash.
c. Purchased equipment costing $113,250 by paying $43,250 cash and signing a long-term note payable for the
balance.
d. Borrowed $5,000 cash by signing a short-term note payable.
e. Paid $47,500 cash to reduce the long-term notes payable.
f. Issued 3,000 shares of common stock for $15 cash per share.
g. Declared and paid cash dividends of $53,600.
Required
Prepare a complete statement of cash flows; report its operating activities using the indirect method.
Gazelle Corporation
Statement of Cash Flows
For Year Ended December 2013
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Intermediate Accounting I - ACCT 2164
Exam 3 Study Guide: Chapters 18, 20 & 21
Answer Key
Identification #1
Type
Source/Use
a.
Issued Bonds
Financing
Source
b.
Issued Common Stock
Financing
Source
c.
Sold long-term Investments
Investing
Source
d.
Paid Cash Dividends
Financing
Use
e.
Redeemed bonds
Financing
Use
f.
Decrease in Prepaid Expenses
Operating
N/A
g.
Issued preferred stock
Financing
Source
h.
Net income
Operating
N/A
i.
Sold equipment
Investing
Source
j.
Purchased treasury stock
Financing
Use
k.
Purchased buildings
Investing
Use
l.
Purchased patents
Investing
Use
m.
Increase in Accounts Payable
Operating
N/A
Identification #2
Account Type
Normal
Balance
a. Retained Earnings
Equity
Credit
b. Treasury Stock
Contra-Equity
Debit
c. Dividends Payable
Liability
Credit
d. Depreciation Expense
Expense
Debit
e. Cost of Goods Sold
Expense
Debit
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Problem 1
Date
Jul 1
Aug 1
Oct 15
Account
Debit
Equipment
Credit
8,000
Common Stock
2,000
Paid-in Capital in Excess of Par Value, Common
6,000
Cash
5,000
Common Stock
1,000
Paid-in Capital in Excess of Par Value, Common
4,000
Retained Earnings ([2,000+1,000]*5%*$12)
1,800
Common Stock([2,000+1,000]*5%*$1)
150
Paid-in Capital in Excess of Par Value, Common
Oct 30
Treasury Stock (500 shares X $3)
1,650
1,500
Cash
Dec 1
1,500
Cash (200 x $2.50)
500
Retained Earnings
100
Treasury Stock (200 X $3)
600
Problem 2
Account
Debit
Inventory
40,000
Retained Earnings
Cost of Goods Sold
LIFO
Avg Cost
Yearly Difference
Net Difference
Credit
40,000
2013
$360,000
$400,000
<$40,000>
2014
$800,000
$720,000
$80,000
$40,000
Ending inventory was understated and cost of goods sold was overstated by $40,000.
Requirement 2: This change in accounting principle would be reported retrospectively. In addition to the
journal entry updating retained earnings, any comparative financial statements presented from 2013 & 2014
would be restated. A note to the financial statements would describe the change in accounting principle
including a justification for the change and a description of how the financial statements were affected.
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Problem 3
Date
Jun 1
Account
Debit
Retained Earnings
15,000,000
Cash Dividend Payable
Jul 1
Credit
15,000,000
Cash Dividend Payable
15,000,000
Cash
15,000,000
Problem 4
(1.) No journal entry is required for the inventory error. It will have self-corrected by the end of 2012 since the 2012
beginning inventory was the 2011 ending inventory and the error in each individual year balances out in the second
year
(2012).
(2.)
Problem 5
(1) No entry is required as this is treated prospectively under GAAP.
(2)
Depreciation Expense
Accumulated Depreciation
5,000
5,000
Original Cost
$50,000
Less: Accum. Dep*. 30,000
Book Value
$20,000/4 = $5,000
* 5/15 X $50,000 = $16,667 (rounded)
4/15 X $50,000 = 13,333
Accum. Dep
30,000
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Problem 6
Date
Oct 1
Account
Debit
Investment in Beaman Preferred Stock
Credit
1,000,000
Gain on Appreciation of Investments
1,000,000
(Fair Value: $10,000,000 – Book Value: $9,000,000)
Oct 1
Retained Earnings (2,000,000 shares X $5)
10,000,000
Property Dividend Payable
Nov 1
10,000,000
Property Dividend Payable
10,000,000
Investment in Beaman Preferred Stock
10,000,000
Problem 7
(1) Cash received from customers:
Sales + Decrease in Accounts Receivable
$800,000 + $30,000 = $830,000
Alternatively:
Account
Cash (plug)
Debit
Credit
830,000
Accounts Receivable
30,000
Sales
800,000
(2) Cash paid to suppliers:
Cost of Goods Sold - Decrease in Inventory + Decrease in Accounts Payable
$305,000 - $15,000 + $12,000 = $302,000
Alternatively:
Account
Cost of Goods Sold
Accounts Payable
Debit
Credit
305,000
12,000
Inventory
15,000
Cash (plug)
302,000
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Problem 8
GAZELLE CORPORATION
Statement of Cash Flows
For Year Ended December 31, 2013
Cash flows from operating activities
Net income ....................................................................................................
$158,100
Adjustments to reconcile net income to net
cash provided by operating activities
Decrease in accounts receivable ($80,750 - $77,100)................ 3,650
Decrease in inventory ($250,700 - $240,600) .............................
10,100
Decrease in prepaid expenses ($17,000 - $15,100).................... 1,900
Decrease in accounts payable ($102,000 - $17,750) ..................
(84,250)
Depreciation expense ...................................................................38,600
Loss on disposal of equipment .................................................. 2,100
Net cash provided by operating activities ....................................
$130,200
Cash flows from investing activities
Cash received from sale of equipment .........................................26,050
Cash paid for equipment..................................................................
(43,250)
Net cash used in investing activities .............................................
(17,200)
Cash flows from financing activities
Cash borrowed on short-term note ............................................... 5,000
Cash paid on long-term note...........................................................
(47,500)
Cash received from issuing stock (3,000 x $15)............................45,000
Cash paid for dividends ...................................................................
(53,600)
Net cash used in financing activities .............................................
Net increase in cash.............................................................................
Cash balance at December 31, 2012.................................................
Cash balance at December 31, 2013.................................................
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(51,100)
)
$ 61,900
61,550
$123,450