Question 1. Question : (TCO A) Amazon Building, Inc. won a bid for a new warehouse building contract.
Below is information from the project accountant.
Total Construction Fixed
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Question 1. Question : (TCO A) Amazon Building, Inc. won a bid for a new warehouse building contract.
Below is information from the project accountant.
Total Construction Fixed Price $10,000,000
Construction Start Date June 13, 2012
Construction Complete Date December 16, 2013
As of Dec. 31… 2012 2013
Actual cost incurred $4,500,000 $2,360,000
Estimated remaining costs $2,250,000 $-
Billed to customer $6,000,000 $4,000,000
Received from customer $5,000,000 $3,500,000
Assuming Amazon Building, Inc. uses the completed contract method, what amount of gross profit would be recognized in 2013?
Answer: $973,333
$1,640,000
$2,093,333
$3,140,000
Instructor Explanation: General Feedback: See Chapter 18. 10000000 - (4500000 + 2360000)
Question 2. Question : (TCO B) At the beginning of 2012, Annie, Inc. has a deferred tax asset of $7,500 and deferred tax liability of $10,500. In 2012, pretax financial income was $826,000 and the tax rate was 35%.
Pretax income included:
Interest income from municipal bonds $15,000
Accrued warranty costs, estimated to be used in 2013 $74,000
Prepaid rent expense, will be used in 2013 $31,000
Installment sales revenue, to be collected in 2013 $56,000
Operating loss carryforward $71,000
What is the adjustment needed to correct the balance of deferred tax asset for 2012?
Answer: $ 25,900 DR
$ 30,450 CR
$ 30,450 DR
$ 18,400 DR
Instructor Explanation: General Feedback:
See Chapter 19. (74000 * 0.35) - 7500
Question 3. Question : (TCO C) Presented below is pension information related to Amazing Goods, Inc. for the year 2013.
Service cost $105,000
Interest on projected benefit obligation $65,000
Interest on vested benefits $14,000
Amortization of prior service cost due to increase in benefits $17,000
Expected return on plan assets $23,000
The amount of pension expense to be reported for 2013 is
Answer: $178,000.
$201,000.
$164,000.
$147,000.
Instructor Explanation: General Feedback:
See Chapter 20. 105000 + 65000 + 17000 - 23000
Question 4. Question : (TCO C) Apple Dumpling, Inc. sponsors a defined-benefit pension plan. The following data relates to the operation of the plan for the year 2013.
Service cost $280,000
Contributions to the plan $270,000
Actual return on plan assets $260,000
Projected benefit obligation (beginning of year) $2,900,000
Fair value of plan assets (beginning of year ) $2,700,000
The expected return on plan assets and the settlement rate were both 10%. The amount of pension expense reported for 2013 is
Answer: $280,000.00.
$310,000.00.
$300,000.00.
$570,000.00.
Instructor Explanation: General Feedback:
See Chapter 20. 280000 + (2900000 * 0.1) - (2700000 * 0.1)
Question 5. Question : (TCO D) Animal, Inc. leased equipment from Zoo Enterprises under a 5-year lease requiring equal annual payments of $63,000, with the first payment due at lease inception. The lease does not transfer ownership, nor is there a bargain purchase option. The equipment has a 5-year useful life and no salvage value. Animal, Inc.’s incremental borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is 8%. Assuming that this lease is properly classified as a capital lease, what is the amount of interest expense recorded by Animal, Inc. in the first year of the asset’s life?
PV Annuity Due PV Ordinary Annuity
8%, 5 periods 4.31213 3.99271
10%, 5 periods 4.16986 3.79079
Answer: $16,693
$20,123
$21,733
0
Instructor Explanation: General Feedback:
See Chapter 21. ((63000 * 4.31213) - 63000) * 0.08
Question 6. Question : (TCO E) On December 31, 2013, Bob's Trucking, Inc. appropriately changed its inventory valuation method from weighted-average cost to FIFO method for financial statement and income tax purposes. The change will result in a $750,000 increase in the beginning inventory at January 1, 2013. Assume a 35% income tax rate. The cumulative effect of this accounting change on beginning retained earnings is
Answer: $-.
$262,500.
$750,000.
$487,500.
Instructor Explanation: General Feedback:
See Chapter 22. 750000 * (1 - 0.35)
Question 7. Question : (TCO E) Which of the following is not a change in accounting estimate?
Answer: Change in the loss rate on warranty costs.
Change from FIFO to LIFO inventory procedures.
Change in residual value of a depreciable plant asset.
Change from straight-line to sum-of-the-years'-digits method of depreciation.
Instructor Explanation: General Feedback:
See Chapter 22.
Question 8. Question : (TCO F) Amazing Glory, Inc. recognized a net income of $206,300 including $32,000 in depreciation expense.
Additional changes from the balance sheet are as follows.
Accounts Receivable $2,500 decrease
Prepaid Expenses $14,000 decrease
Inventory $7,000 increase
Accrued Liabilities $9,000 decrease
Accounts Payable $21,600 increase
Compute the net cash from operating activities based on the above information.
Answer: $260,400
$234,900
$158,300
$166,200
Instructor Explanation: General Feedback:
See Chapter 23. 206300 + 32000 + 21600 – 7000 + 2500 + 14000 - 9000
Question 9. Question : (TCO G) Which of the following events that occurred after the balance sheet date but before issuance of the financial statements would require adjustment of the accounts before issuance of the financial statements?
Answer: Loss on a lawsuit, the outcome of which was deemed uncertain at year end
Loss of plant as a result of fire
Loss on an uncollectible account receivable resulting from a customer’s major flood loss
Changes in the quoted market prices of securities held as an investment
Instructor Explanation: General Feedback:
See Chapter 24.
Question 10. Question : (TCO G) Adventure, Inc. is a company that operates in four different divisions. The following information relating to each segment is available for 2013.
Sales revenue Operating profit (loss) Identifiable assets
A $9,000 $2,000 $60,000
B $32,000 $(14,000) $65,000
C $65,500 $130,000 $525,000
D $21,000 $8,000 $38,000
Required:
For which of the segments would information have to be disclosed in accordance with professional pronouncements?
Answer: Segments B, C, and D
Segments A, B, and C
Segments A and B
Segments C and D
Instructor Explanation: General Feedback: See Chapter 24.
Question 11. Question : (TCO A) Adam's Adorable Creations Company provided the following financial information for its installment sales for the current year.
Financial Data:
Installment sales for current year $3,000,000
Cost of goods sold on installment basis $1,500,000
Repossessed merchandise: Estimated value $18,000
Repossessed merchandise: Unpaid balances $65,000
Payments by customers $2,000,000
Required:
(a) Prepare journal entries for the end of the year based on the information above.
(b) Prepare the entry to record the gross profit realized in the current year.
Answer: (A) Installment A/C....................................$3,000,000 Installment Sales.....................................$3,000,000 Cost of goods sold...............................$1,500,000 Inventory................................................$1,500,000 Cash.....................................................$2,000,000 Installment A/R........................................$2,000,000 Repossessed Merchandise......................$18,000 Deferred gross profit...............................$32,500 Loss on repossession..............................$14,500 Installment Account Receivable......................$65,000 Installment Sales...................................$3,000,000 Cost of Goods Sold.........................................$1,500,000 Deferred Gross Profit......................................$1,500,000 (B) Deferred Gross Profit...............................$1,000,000 Realized gross profit......................................$1,000,000 ($2,000,000 X 50%) Gross margin = (3000000-1500000)/3000000=50% Deferred gross profit = 65000 X 50%= $32,500 Unpaid balance $65,000 Less: Repossessed Merchandise -$18,000 Less: deferred gross profit -$32,500 Loss on repossession =$14,500
Instructor Explanation: Correct Answer:
See Chapter 18.
(a) Installment Accounts Receivable $3,000,000
Installment Sales Revenue $3,000,000
Cash $2,000,000
Installment Accounts Receivable $2,000,000
Cost of Installment Sales $1,500,000
Inventory $1,500,000
Repossessed Merchandise $18,000
Deferred Gross Profit * $32,500
Loss on Repossession ** $14,500
Installment Accounts Receivable $65,000
Rate of Gross Profit $1,500,000 50%
$3,000,000
*50% * $65000 = $32,500
**[$18000 - ($65000 - $32500)]
Installment Sales Revenue $3,000,000
Cost of Installment Sales $1,500,000
Deferred Gross Profit $1,500,000
(b) Deferred Gross Profit $1,000,000
Realized Gross Profit $1,000,000
Question 12. Question : (TCO B) The Accent Corporation shows the following information.
On January 1, 2012, Accent purchased a donut machine for $900,000.
(a) Pretax financial income is $2,000,000 in 2012 and $2,500,000 in 2013.
(b) Taxable income is expected in future years with an expected tax rate of 40%.
(c) The company recognized an extraordinary gain of $250,000 in 2013 (which is fully taxable).
(d) Tax-exempt municipal bonds yielded interest of $50,000 in 2013.
(e) Straight-line basis for 8 years for financial reporting (See Appendix 11A.)
(f) Half-year convention basis depreciation for 5 years for tax purposes.
Required:
(a) Compute taxable income and income taxes payable for 2013.
(b) Prepare the journal entries for income tax expense, income taxes payable, and deferred taxes for 2013.
(c) Prepare the deferred income taxes presentation for December 31, 2013 balance sheet.
Answer: (A) Year 2012 Year 2013 Depreciation for 8yr financial reporting $112,500 $112,500 Depreciation for 5yr tax purposes $90,000 $180,000 Difference =$22,500 -$67,500 Year 2012 Year 2013 Pretax Financial income $2,000,000 $2,500,000 Tax-exempt municipal bonds -$50,000 Depreciation Adjustment -$67,500 Taxable income =$2,382,500 Tax rate: 40% Income tax payable =$953,000 (B). Income tax expense = (2,500,000-50,000) x 40%= $980,000 Income tax expense..........................$980,000 Deferred tax assets...........................................$9,000 Deferred tax liabilities........................................$18,000 Tax payable.......................................................$953,000 (C). Deferred Liability Non-current deferred tax liabilities 2013=$18,000
Instructor Explanation: Correct Answer:
See Chapter 19.
Book Depreciation Tax Depreciation Difference
2012 $112,500 $90,000 $22,500
2013 112,500 180,000 (67,500)
2014 112,500 180,000 (67,500)
2015 112,500 180,000 (67,500)
2016 112,500 180,000 (67,500)
2017 112,500 90000 22,500
2018 112,500 0 112,500
2019 112,500 0 112,500
Totals $900,000 $900,000 $0
(a) Pretax financial income for 2013 $2,500,000
Nontaxable interest $(50,000)
Excess depreciation ($180,000 – $112,500) $(67,500)
Taxable income for 2013 $2,382,500
Tax rate 40%
Income taxes payable for 2013 $953,000
(b) Income Tax Expense $980,000
Income Taxes Payable $953,000
Deferred Tax Liability 18,000
Deferred Tax Asset 9,000
*Def Tax Asset is sum of 2013-2019 tax-fin depr * tax rate - to reverse prior yr entry
**Def Tax Liab is sum of 2014-2019 tax-fin depr * tax rate
(c) Long-term liabilities
Deferred tax liability 18,000
Question 13. Question : (TCO D) Absolute Leasing, Inc. agrees to lease equipment to Allen, Inc. on January 1, 2012. They agree on the following terms:
(a) The normal selling price of the equipment is $350,000 and the cost of the asset to Absolute Leasing Inc. was $275,000.
(b) At the end of the lease, the equipment will revert to Absolute Leasing, Inc. and have an unguaranteed residual value of $25,000. Their implicit interest rate is 10%.
(c) The lease is noncancelable with no renewal option. The lease term is 10 years (the same as the estimated economic life).
(d) Absolute Leasing, Inc. incurred costs of $5,000 in negotiating and closing the lease. There are no uncertainties regarding additional costs yet to be incurred and the collectability of the lease payments is reasonably predictable.
(e) The lease begins on January 1, 2012 and payments will be in equal annual installments.
(f) Allen will pay all maintenance, insurance, and tax costs directly and annual payments of $55,000 on January 1 of each year.
Required:
(a) Determine what type of lease this would be for the lessee and calculate the initial obligation.
(b) Prepare Allen, Inc.'s amortization schedule for the lease terms.
(c) Prepare all the journal entries for Allen, Inc. for 2012. Assume a calendar year fiscal year.
Answer: (A). Initial Obligation=PV of Annuity Due $55,000 X 6.75902= $371,746 Capital Lease (B). Year Installment Interest Principal Balance $371,746 1 $55,000 $55,000 $316,746 2 $55,000 $31,675 $23,325 $293,421 3 $55,000 $29,342 $25,658 $267,763 4 $55,000 $26,776 $28,224 $239,539 5 $55,000 $23,954 $31,046 $208,493 6 $55,000 $20,849 $34,151 $174,343 7 $55,000 $17,434 $37,566 $136,777 8 $55,000 $13,678 $41,322 $ 95,455 9 $55,000 $9,545 $45,455 $ 50,000 10 $55,000 $5,000 $50,000 0 (C). January 1, 2012 Equipment....................................$371,746 Lease Liability................................$371,746 December 31, 2012 Interest Expense..........................$31,675 Interest Payable............................$31,675 Depreciation Expense..............................$37,175 Accumulated Depreciation......................$37,175
Instructor Explanation: Correct Answer:
See Chapter 21.
(a) The lease is a capital lease because (1) the lease term exceeds 75% of the asset’s economic life and (b) the present value of the minimum lease payments exceeds 90% of the fair value of the leased asset.
(c) Initial Obligation Under Capital Leases:
Minimum lease payments ($55,000) X PV of an annuity due for 10 periods at 10% (6.75902)
$371,746
Lease Amortization Schedule
(Annuity due basis and URV)
Beginning of Year Annual Lease Interest (10%) Reduction Lease
Payment on Lease of Lease Liability
plus res value Liability Liability
(a) (b) (c) (d)
Initial PV $371,746
1 $55,000 $0 $55,000 316,746
2 $55,000 $31,675 $23,325 293,421
3 $55,000 $29,342 $25,658 267,763
4 $55,000 $26,776 $28,224 239,539
5 $55,000 $23,954 $31,046 208,493
6 $55,000 $20,849 $34,151 174,342
7 $55,000 $17,434 $37,566 136,776
8 $55,000 $13,678 $41,322 95,454
9 $55,000 $9,545 $45,455 50,000
10 $55,000 $5,000 $50,000 0
$550,000 $178,253 $371,747
(a) Annual lease payment required by lease contract.
(b) Preceding balance of (d) X 10%, except beginning of first year of lease term.
(c) (a) minus (b).
(d) Preceding balance minus (c).
Question 14. Question : (TCO F) Drexon Corp., which follows U.S. GAAP, uses the direct method to report its cash flows. The CFO is assessing the impact on cash flows of 12 events during the fiscal year. Specify which category each event falls under (under the direct method) and note whether it increases cash, decreases cash, or has no impact on cash:
# Event
1 Accounts payable decreases from $400,000 to $385,000.
2 An interest payment of $85,000 is made on a new debt issuance.
3 Drexon purchases a trading security which it classifies as non¬current.
4 A gain of $8,200 is booked on the sale of an asset.
5 40,000 new shares of stock are issued near the close of the fiscal year.
6 Dividends of $12,000 are paid on Drexon company stock.
7 Capital expenditures of $35,000 are made for equipment used in day to day operations.
8 Drexon purchases 60% of a subsidiary company.
9 Depreciation and amortization expense totaling $50,000 is booked.
10 Accounts receivable decreases from $620,000 to $610,000.
11 Dividends of $6,500 are received from a stock classified as available for sale.
12 Accrued liabilities increase from $245,000 to $250,000.
Answer: # Event Category Impact on cash 1 Accounts payable decreases from $400,000 to $385,000. decreases 2 An interest payment of $85,000 is made on a new debt issuance. Operating decreases 3 Drexon purchases a trading security which it classifies as non¬current. Investing decreases 4 A gain of $8,200 is booked on the sale of an asset. N/A no impact 5 40,000 new shares of stock are issued near the close of the fiscal year. Financing increases 6 Dividends of $12,000 are paid on Drexon company stock. Financing decreases 7 Capital expenditures of $35,000 are made for equipment used in day to day operations. Investing decreases 8 Drexon purchases 60% of a subsidiary company. Investing decreases 9 Depreciation and amortization expense totaling $50,000 is booked. N/A no impact 10 Accounts receivable decreases from $620,000 to $610,000. N/A increases 11 Dividends of $6,500 are received from a stock classified as available for sale. Operating increases 12 Accrued liabilities increase from $245,000 to $250,000. N/A increases
Instructor Explanation: 1. Operating- decreases cash
2.Operating -decreases cash
3. Investment-decreases cash
4. Investmenty- increases cash
5. Financing- Increase cash
6.Financing- decreases cash
7.Investment-decreases cash
8. Investment-decreases cash
9. Non cash - No effect
10.Operating- increases cash
11.Operating- increases cash
12.Operating-increases cash
Question 15. Question : (TCO G) Selected financial ratios.
The following information pertains to Allbright, Inc.
Cash $53,000
Accounts receivable $186,000
Inventory $82,000
Plant assets (net) $320,000
Total assets $641,000
Accounts payable $85,000
Accrued taxes and expenses payable $12,000
Long-term debt $268,000
Common stock ($10 par) $120,000
Paid-in capital in excess of par $6,000
Retained earnings $150,000
Total equities $641,000
Net sales (all on credit) $980,000
Cost of goods sold $760,000
General & Admin Expenses $160,000
Net income $60,000
Required
Compute the following: (It is not necessary to use averages for any balance sheet figures involved.)
(a) Current ratio
(b) Inventory turnover
(c) Receivables turnover
(d) Book value per share
(e) Earnings per share
(f) Debt to total assets
(g) Profit margin on sales
(h) Return on common stock equity
Answer: (A). Current ratio=current assets/current liabilities ($53000+$186000+$82000)/($85000+$12000)= 3.31 (B). Inventory turnover=Cost of goods sold/Average inventory $760000/$82000 = 9.27 (C). Receivable turnover=Net sales/Average trade receivable $980000/$186000= 5.27 (D). Book value per share=Common stockholders' equity/outstanding shares= ($120000+$6000+$150000)/$12000= $23 (E). Earnings per share=(Net income - Preferred dividends)/weighted-average shares outstanding=$60000/$12000= $5 (F). Debt to total assets=Total debt/Total Assets ($85000+$12000+$365000)/$641000= 0.72 (G). Profit margin on sales=Net income/Net sales $60000/$980000= 6.12% (H). Return on common stock equity=Net income - Preferred dividends/Average common stockholders' equity $60000/($120000+$6000+$150000)= 21.74%
Instructor Explanation: Correct Answer:
See Chapter 24.
Current ratio $3.31 (53000 + 186000 + 82000) / (85000 + 12000)
Inventory turnover 9 760000 / 82000
Receivables turnover 5.27 980000 / 186000
Book value per share $23.00 (120000 + 6000 + 150000) / (120000 / 10)
Earnings per share $5.00 60000 / (120000 / 10)
Debt to total assets 56.94% (85000 + 12000 + 268000) / (641000)
Profit margin on sales 6% 60000 / 980000
Return on common stock equity 21.7% (60000) / (120000 + 6000 + 150000)
Question 16. Question : (TCO E) Discuss the three approaches for reporting changes in accounting principles. Include additional points about how these approaches may be impacted by the adoption of new IFRS standards.
Answer: (A). Retroactively: For this approach, a retroactive adjustment of previous years’ financial statements is made. The company will show any cumulative effect of the change as an adjustment to beginning retained earnings of the earliest year presented. (B). Currently: The cumulative effect of the new method is computed and reported in the current year’s income statement. The company will report the cumulative effect of the change in the current year’s income statement as an irregular item. The cumulative effect is the difference in prior years’ income between the newly adopted and prior accounting method. The effect of the change on prior years’ income appears only in the current-year income statement under the current approach. The company does not change prior-year financial statements. (C). Prospectively: No change is made in previously reported results. The effects of change are spread out over the years. As a result, the company does not adjust opening balances to reflect the change in principle. The belief is that once management presents financial statements based on acceptable accounting principles, they should be not revision. The management cannot change prior periods by adopting a new principle. Thus, the current-period cumulative adjustment is not appropriate, because the current-period approach includes amounts that have little to no relationship to the current year’s income. IFRS standards generally require retrospective application to prior years for accounting changes. But the IAS 8 permits the prospective method if a company cannot reasonably determine the amounts to which to restate prior periods.
Instructor Explanation: Correct Answer:
See Chapter 22.
The three approaches suggested for reporting changes in accounting principles are:
(a) Currently: The cumulative effect of the change is reported in the current year’s income as a special item.
(b) Retrospectively: The cumulative effect of the change is reported as an adjustment to retained earnings. The prior year’s statements are changed on a basis consistent with the newly adopted principle.
(c) Prospectively: No adjustment is made for the cumulative effect of the change. Previously reported results remain unchanged. The change shall be accounted for in the period of the change and in subsequent periods if the change affects future periods.
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