Intermediate I
Review (Chapters 4 and 5)
1. Listed below are five alternatives identified by the FASB for measuring balance
sheet items. Following the list is a series of balance sheet elements. Identify each
element with the correct measurement.
a.
b.
c.
d.
1.
2.
3.
4.
5.
6.
7.
8.
historical cost
current cost
net realizable value
present value
Receivables
Prepaid expenses
Patents
Raw materials inventory
Capital leases
Property, plant and equipment`
Bonds payable
Merchandise inventory
2. Accounting information might be reported in any of the following components of
the income statement or its supporting schedules and footnotes:
a. income from continuing operations or supporting schedules
b. extraordinary gains or losses
c. results from discontinued operations
d. cumulative effect of a change in accounting principle
e. statement of retained earnings
f. footnote disclosure
x. none of the above
Match the appropriate letter with each of the following:
1. Cash dividends declared during the accounting period.
2. Material effect of changing the estimated useful lives for a group of
depreciable assets from 20 years to 12 years.
3. Loss on sale by a diversified company of one of its four manufacturing plants.
4. Earthquake damage to the only silo owned by a company in Kansas, when the
damage caused a material loss to the company.
5. Operating loss of the current period of a segment sold late in the year.
6. Impact of a change in the method of valuing inventory form the first in, first
out method (FIFO) to the average cost method.
7. Total selling expenses incurred by a producer of farm equipment during the
year.
8. Total amount of cash paid to employees during the year.
3. Listed below in scrambled order are fourteen income statement categories. Use
the numerals 1 through 14 to indicate the order in which these categories should
appear on the multiple step income statement.
Discontinued operations
Cumulative effect of accounting change
Cost of goods sold
Other revenues and gains
Net income
Income taxes
Sales
Gross profit on sales
Income from operations
Income from continuing operations before income taxes
Operating expenses
Extraordinary item
Income before extraordinary items and cumulative effect of accounting change
Income from continuing operations
4. Shown below is an income statement for 2004 that was prepared by a poorly
trained bookkeeper of Henry Corporation. Prepare a multiple step income
statement for 2004 that is prepared in accordance with GAAP. Henry
Corporation has 50,000 shares of common stock outstanding and has a 30%
federal income tax rate.
Henry Corporation
Income Statement
December 31, 2004
Sales
Investment Revenue
Cost of merchandise sold
Selling expenses
Administrative expenses
Interest expense
Income before special items
Special items
Loss on disposal of a component of the business
Major casualty loss (extraordinary item)
Net federal income tax liability
Net income
$1,100,000
19,500
(530,500)
(155,000)
(215,000)
(13,000)
206,000
(30,000)
(90,000)
(25,800)
$60,200
5. Olson Corporation’s capital structure consists of 40,000 shares of common stock.
At December 31, 2004 an analysis of accounts and discussions with company
officials revealed the following information:
Sales
Purchase discounts
Purchases
Earthquake loss (net of tax) (extraordinary)
Selling expenses
Cash
Accounts receivable
Common stock
Accumulated depreciation
Dividend revenue
Inventory, January 1, 2004
Inventory, December 31, 2004
Unearned service revenue
Accrued interest payable
Land
Patents
Retained earnings, January 1, 2004
Interest expense
Cumulative effect of change from straight
line to accelerated depreciation (net of tax)
General and administrative expenses
Dividends declared
Allowance for doubtful accounts
Notes payable (maturity 7/1/07)
Machinery and equipment
Materials and supplies
Accounts payable
$1,400,000
18,000
820,000
42,000
128,000
60,000
90,000
200,000
180,000
8,000
152,000
125,000
4,400
1,000
370,000
100,000
270,000
17,000
28,000
210,000
29,000
5,000
200,000
450,000
40,000
60,000
The amount of income taxes applicable to ordinary income was $67,200, excluding the
tax effect of the earthquake loss which amounted to $18,000 and the tax effect of the
change in accounting principle which was $12,000. Prepare a multi-step income
statement and a retained earnings statement.
6. Write the word or phrase that is defined or indicated.
1. Obligations expected to be liquidated through use of
current assets.
2. Statement showing financial condition at a point in
time.
3. Events that depend upon future outcomes.
4. Probable future sacrifices of economic benefits.
5. Resources expected to be converted to cash in one year
or the operating cycle, whichever is longer.
6. Resources of a durable nature used in operations.
7. Economic rights or competitive advantages which lack
physical substance.
8. Probable future economic benefits.
9. Residual interest in the net assets of an entity.
7. Listed below are all of the December 31, 2004 balance sheet accounts of McCoy Co.
Prepare a properly classified balance sheet for McCoy Co. on December 31, 2004.
Land
Sinking fund for bond retirement
Discount on bonds payable
Equipment
Preferred stock, $100par
Accumulated depreciation: building
Investment in bonds held to maturity
Accrued wages
Additional paid in capital on common stock
Buildings
Bonds payable (due 2008)
Office supplies
Retained earnings
Inventory
Accounts receivable
Accounts payable
Prepaid insurance
Common stock, $10 par
Allowance for doubtful accounts
Interest payable
Cash
Treasury stock (at cost)
Dividends payable
Additional paid in capital on preferred stock
Notes payable (due 1/1/2006)
Income taxes payable (current)
Accumulated depreciation: equipment
$10,500
2,400
900
14,000
5,000
5,500
4,000
1,950
3,500
17,500
13,000
750
14,150
10,000
7,650
5,650
900
6,750
250
1,500
4,500
1,150
750
1,000
8,000
3,000
4,250
8. The balance sheet contains the following major sections:
a.
b.
c.
d.
e.
Current assets
Long-term investments
Property, plant, and equipment
Intangible assets
Other assets
f.
g.
h.
i.
j.
Current liabilities
Long-term liabilities
Contributed capital
Retained earnings
Accumulated other comprehensive income
____
1. Unexpired insurance
____
2. Idle machinery
____
3. Unrealized increase in available for sale securities
____
4. Land
____
5. Fund to retire preferred stock
____
6. Additional paid-in capital on common stock
____
7. Leased equipment under capital lease
____
8. Obligation for future pension payments
____
9. Trademark
____
10. Unearned ticket sales
Required:
Using the letters (a) through (j), indicate in what section the accounts would be classified.
9.
On October 1, 2006, Mexicana Corporation finalized its plans to discontinue operations of its
retail component. The plan calls for the sale of the retail operations to another company for
$700,000 (current fair market value) on April l, 2007. The current book value of the assets is
$800,000. For the first nine months of 2006, the component incurred a pretax operating income of
$60,000. During the last quarter of 2071, the pretax income was $10,000, while the expected
pretax income for the first quarter in 2007 is expected to be $20,000. Mexicana is subject to a
30% income tax rate.
Required:
Prepare the results from discontinued operations section of Mexicana's income statement for
2006, using good format. Show all computations.
10. Exercise 4-11, page 169.