Accounting 387 - Exam II Name

Fall 1999, Duffy October 15, 1999

Multiple Choice (4 points each) Select the best answer to each question.

Answers in Bold

1.  On January 1, 1999, Investment Bank purchased, as a held to maturity investment, $40,000 of 8%, 5-year bonds for $43,412 to yield 6%. The bonds pay interest

Semiannually June 30 and December 31. The market value of the bonds on December 31, 1999 is $42,000. The bonds should appear on the December 31, 1999 balance sheet at a carrying value of:

a.  $40,000

b.  $43,412

c.  $42,000

d.  $42,817

e.  $42,808

2.  Securities transferred between categories should be transferred at:

a.  Fair value with all unrealized gains and losses charged income

b.  Fair value with some unrealized gains and losses charged to net income

c.  Cost with no income impacts

d.  Cost or fair value, depending on the type of transfer

3.  In 1997, Pac purchased 500 shares of Mann Corporation common stock for $5,000, and classified it as an available for sale security. At the end of 1998, the stock had a fair value of $6,200, and at the end of 1999, the stock had a fair value of $5,800. This is the only available for sale security owned by Pac. At the end of 1999, Pac should

a.  debit the securities fair value adjustment for $800

b.  credit the securities fair value adjustment for $400

c.  debit the securities fair value adjustment for $400

d.  credit the securities fair value adjustment for $800

4.  Trading securities should be

a.  carried at fair value with changes in value included in net income.

b.  carried at fair value with changes in value included in comprehensive income, but not net income.

c.  carried at cost.

d.  carried at the lower of cost or market applied to the portfolio as a whole, with changes included in net income.

5.  Yogi Bear Company sold equipment to Magilla Company for $20,000. The equipment was in Yogi's inventory at $14,000. Yogi collected $10,000 in 1998, $5,000 in 1999, and $5,000 in 2,000 plus appropriate interest. What amount of gross profit should be recognized in each year if Yogi uses the cost recovery method?

1998 1999 2000

a. $3,000 $1,500 $1,500

b. $6,000 0 0

c. $0 $1,000 $5,000

d. $2,000 $2,000 $2,000

6.  If a company has a tax loss carryforward, it should:

a.  recognize a deferred tax asset only if it is more likely than not that it will realize it.

b.  always recognize a deferred tax asset, and reduce it by a valuation allowance if it is more likely than not that some portion of it will not be realized.

c.  not recognize a deferred tax asset since it is contingent on future taxable income.

d.  recognize it only if it has an equal amount of deferred tax liability to offset it.

7.  Which of the following would give rise to a future deductible amount?

a.  A fine for pollution of $11,000 which is not deductible for tax purposes.

b.  Tax depreciation this year exceeds book depreciation by $10,000.

c.  Revenue is recognized at point of sale for book purposes, but the installment method is used for tax purposes.

d.  Warranty expense is accrued for book purposes, but cash basis is used for taxes.

8.  If a tax rate change is enacted during the current year effective in future years:

a.  all deferred taxes must be figured with the newly enacted rates, with the effect shown as an adjustment to income tax expense this year.

b.  all deferred taxes must be figured with the newly enacted rates, with the effect shown as a cumulative change in accounting principle.

c.  all deferred taxes must be figured with the newly enacted rates, with the effect always shown as extraordinary

d.  deferred taxes are not adjusted as the rates in effect when they are created are more relevant.

9.  Speed Racer Inc charges an initial franchise fee of $75,000 for the right to operate a franchise. Of this amount, $25,000 is collected initially and the remainder is collected in 4 installments of $12,500 each. These installments have a present value of $39,623. If the probability of refunding the initial franchise fee is extremely low, the amount of the future services to be provided is minimal, collectibility of the note is reasonably assured, and substantial performance has occurred, the amount of revenue to be recognized is:

a.  $25,000

b.  $75,000

c.  $50,000

d.  $64,623

e.  $39,623

10.  DT Company has deferred tax assets related to current items of $50,000, deferred tax liabilities relating to current items of $60,000, deferred tax assets relating to noncurrent items of $180,000 and deferred tax liabilities relating to noncurrent items of $220,000. How should these appear on the balance sheet?

a.  A current liability of $10,000 and a noncurrent liability of $40,000.

b.  Each should appear separately.

c.  A noncurrent liability of $50,000.

d.  An other asset of $230,000 and an other liability of $270,000


Problems (You must show work to receive partial credit) 15 points each:

1.  On January 1, 1999, Bart Starr purchased 30% of the outstanding common stock of Lombardi Enterprises for $30,000,000. The balance sheet of Lombardi reported the following information at the date of acquisition:

Assets $100,000,000

Liabilities 20,000,000

Of the excess paid over book value, 70% is attributable to depreciable assets having remaining life of 6 years, and the rest to intangibles that are amortized over 20 years.

Lombardi reported income of $4,000,000 for the year and paid dividends of $1,000,000. The market value of the investment at year end is $34,000,000.

Prepare all journal entries required by Starr to account for the investment during 1999.

Investment 30000000

Cash 30000000

Cash 300000

Investment 300000

Investment 1200000

Investment Income 1200000

Investment Income 790000

Investement 790000

Excess dep and GW writeoff


Presented below is summarized information for the Dumbell Company which sells home gyms and uses the installment method.

1998 1999 2000

Sales $500,000 $600,000 $700,000

Cost of Sales 300,000 366,000 413,000

Gross Profit $200,000 $234,000 $287,000

Gross Profit Rate 40% 39% 41%

Collections from customers on:

1998 Sales $120,000 $100,000 $150,000

1999 Sales $160,000 $176,000

2000 Sales $340,000

a.  Compute the realized gross profit for each year.

1998 / 120000 * .4
48000
1999 / 100000*.4 / 160000*.39
102400
2000 / 150000 *.4 / 176000 * .39 / 340000 * .41
162460

b.  Prepare all journal entries necessary for 1999.

Installment AR - 99 600000

Sales 600000

COGS 366000

Inventory 366000

Sales 600000

COGS 366000

Deferred GP - 99 234000

Cash 260000

Inst A/R 98 100000

Inst A/R 99 160000

Deferred GP - 98 40000

Deferred GP - 99 62400

Realized GP 102400

2.  On January 10, 1998, Wolf Construction signed a contract to build a school for the Ames School District for $16,800,000. The building was completed in November of 2,000. The actual annual contract costs, estimated cost to complete, and Billings to date for each year appear below.

1998 1999 2000

Contract costs incurred for year $6,400,000 $5,200,000 $2,900,000

Estimated cost to complete $6,400,000 $2,900,000 -0-

Billings during year $6,400,000 $7,000,000 $3,400,000

a.  Using percentage of completion, prepare a table showing the profit to be recognized each year from 1998 through 2000.


b. Give journal entries to record the project during 1998.

3.  Olean Company reports the following amounts in the first three years of operations:

1999 2000 2001

Taxable Income $200,000 $260,000 $500,000

Pretax financial income $350,000 $230,000 $460,000

The difference in income is due to a single temporary difference. The tax rate is 40%, and the company expects profitable operations to continue.

Prepare journal entries to record taxes in each year.

99

Tax Expense 140000

Tax Payable 80000

DT Liab 60000

00

Tax Expense 92000

DT liabl 12000

Tax payable 104000

01

Tax Expense 184000

DT liab 16000

Tax payable 200000