Intermediate Accounting 2

Intermediate Accounting 2

ACC 233

Spring, 2009

MIDTERM EXAM

Name: ______Date: ______

DATE: February 17, 2009

Due Date:March 17, 2009 (extended to March 24th)

Read the attached questions carefully and answer each of them completely. Remember, you don’t lose points for incorrect information; you can only gain points for providing the correct information. It helps you to attempt each question even if you’re in doubt. Take a risk, and do your best.

Be sure to show all of your work and place your short answers in the answer sheet attached.

Good luck.

ANSWERS:

1) Which of the following is a current liability?

a.A long-term debt maturing currently, which is to be paid with cash in a sinking fund

b.A long-term debt maturing currently, which is to be retired with proceeds from a new debt issue

c.A long-term debt maturing currently, which is to be converted into common stock

d.None of these

2) Which of the following is not true about the discount on short-term notes payable?

a.The Discount on Notes Payable account has a debit balance.

b.The Discount on Notes Payable account should be reported as an asset on the balance sheet.

c.When there is a discount on a note payable, the effective interest rate is higher than the stated discount rate.

d.All of these are true.

3) On September 1, 2006, Looper Co. issued a note payable to National Bank in the amount of $1,200,000, bearing interest at 12%, and payable in three equal annual principal payments of $400,000. On this date, the bank's prime rate was 11%. The first payment for interest and principal was made on September 1, 2007. At December 31, 2007, Looper should record accrued interest payable of

a.$48,000.

b.$44,000.

c.$32,000.

d.$29,334

4) Barr Company’s salaried employees are paid biweekly. Occasionally, advances made to employees are paid back by payroll deductions. Information relating to salaries for the calendar year 2007 is as follows:

12/31/06 12/31/07

Employee advances$12,000$ 18,000

Accrued salaries payable65,000?

Salaries expense during the year650,000

Salaries paid during the year (gross)625,000

At December 31, 2007, what amount should Barr report for accrued salaries payable?

a.$90,000.

b.$84,000.

c.$72,000.

d.$25,000.

5) Dexter Co. sells major household appliance service contracts for cash. The service contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts are credited to unearned service contract revenues. This account had a balance of $480,000 at December 31, 2006 before year-end adjustment. Service contract costs are charged as incurred to the service contract expense account, which had a balance of $120,000 at December 31, 2006. Outstanding service contracts at December 31, 2006 expire as follows:

During 2007During 2008During 2009

$100,000$160,000$70,000

What amount should be reported as unearned service contract revenues in Dexter's December 31, 2006 balance sheet?

a.$360,000.

b.$330,000.

c.$240,000.

d.$220,000.

6) Lett Co. has a probable loss that can only be reasonably estimated within a range of outcomes. No single amount within the range is a better estimate than any other amount. The loss accrual should be

a.zero.

b.the maximum of the range.

c.the mean of the range.

d.the minimum of the range.

7) In March 2007, an explosion occurred at Howe Co.'s plant, causing damage to area properties. By May 2007, no claims had yet been asserted against Howe. However, Howe's management and legal counsel concluded that it was reasonably possible that Howe would be held responsible for negligence, and that $4,000,000 would be a reasonable estimate of the damages. Howe's $5,000,000 comprehensive public liability policy contains a $400,000 deductible clause. In Howe's December 31, 2006 financial statements, for which the auditor's fieldwork was completed in April 2007, how should this casualty be reported?

a.As a note disclosing a possible liability of $4,000,000.

b.As an accrued liability of $400,000.

c.As a note disclosing a possible liability of $400,000.

d.No note disclosure of accrual is required for 2006 because the event occurred in 2007.

8) On December 31, 2008, Mendez, Inc. leased machinery with a fair value of $840,000 from Cey Rentals Co. The agreement is a six-year noncancelable lease requiring annual payments of $160,000 beginning December 31, 2008. The lease is appropriately accounted for by Mendez as a capital lease. Mendez's incremental borrowing rate is 11%. Mendez knows the interest rate implicit in the lease payments is 10%.

The present value of an annuity due of 1 for 6 years at 10% is 4.7908.

The present value of an annuity due of 1 for 6 years at 11% is 4.6959.

In its December 31, 2008 balance sheet, Mendez should report a lease liability of

a.$606,528.

b.$680,000.

c.$751,344.

d.$766,528.

9) In a lease that is recorded as a sales-type lease by the lessor, interest revenue

a.should be recognized in full as revenue at the lease's inception.

b.should be recognized over the period of the lease using the straight-line method.

c.should be recognized over the period of the lease using the effective interest method.

d.does not arise.

Use the following information for the following two questions.

Risen Company, a dealer in machinery and equipment, leased equipment to Foran, Inc., on July 1, 2008. The lease is appropriately accounted for as a sale by Risen and as a purchase by Foran. The lease is for a 10-year period (the useful life of the asset) expiring June 30, 2018. The first of 10 equal annual payments of $621,000 was made on July 1, 2008. Risen had purchased the equipment for $3,900,000 on January 1, 2008, and established a list selling price of $5,400,000 on the equipment. Assume that the present value at July 1, 2008, of the rent payments over the lease term discounted at 8% (the appropriate interest rate) was $4,500,000.

10) Assuming that Foran, Inc. uses straight-line depreciation, what is the amount of depreciation and interest expense that Foran should record for the year ended December 31, 2008?

a.$225,000 and $155,160

b.$225,000 and $180,000

c.$270,000 and $155,160

d.$270,000 and $180,000

11) What is the amount of profit on the sale and the amount of interest income that Risen should record for the year ended December 31, 2008?

a.$0 and $155,160

b.$600,000 and $155,160

c.$600,000 and $180,000

d.$900,000 and $360,000

Use the following information for the following five questions.

Bohl Co. purchases land and constructs a service station and car wash for a total of $360,000. At January 2, 2007, when construction is completed, the facility and land on which it was constructed are sold to a major oil company for $400,000 and immediately leased from the oil company by Bohl. Fair value of the land at time of the sale was $40,000. The lease is a 10-year, noncancelable lease. Bohl uses straight-line depreciation for its other various business holdings. The economic life of the facility is 15 years with zero salvage value. Title to the facility and land will pass to Bohl at termination of the lease. A partial amortization schedule for this lease is as follows:

Payments Interest Amortization Balance

Jan. 2, 2007$400,000.00

Dec. 31, 2007$65,098.13$40,000.00$25,098.13374,901.87

Dec. 31, 200865,098.1337,490.1927,607.94347,293.93

Dec. 31, 200965,098.1334,729.3930,368.74316,925.19

12) From the viewpoint of the lessor, what type of lease is involved above?

a.Sales-type lease

b.Sale-leaseback

c.Direct-financing lease

d.Operating lease

13) What is the discount rate implicit in the amortization schedule presented above?

a.12%

b.10%

c.8%

d.6%

14) The total lease-related expenses recognized by the lessee during 2008 is which of the following? (Rounded to the nearest dollar.)

a.$64,000

b.$65,098

c.$73,490

d.$61,490

15) What is the amount of the lessee's liability to the lessor after the December 31, 2009 payment? (Rounded to the nearest dollar.)

a.$400,000

b.$374,902

c.$347,294

d.$316,925

16) The total lease-related income recognized by the lessee during 2008 is which of the following?

a.$ -0-

b.$2,667

c.$4,000

d.$40,000

17) On December 31, 2008, Dodd Corporation leased a plane from Aero Company for an eight-year period expiring December 30, 2016. Equal annual payments of $150,000 are due on December 31 of each year, beginning with December 31, 2008. The lease is properly classified as a capital lease on Dodd’s books. The present value at December 31, 2008 of the eight lease payments over the lease term discounted at 10% is $880,264. Assuming the first payment is made on time, the amount that should be reported by Dodd Corporation as the lease liability on its December 31, 2008 balance sheet is

a.$880,264.

b.$818,290.

c.$792,238.

d.$730,264.

18) The term used for bonds that are unsecured as to principal is

a.junk bonds.

b.debenture bonds.

c.indebenture bonds.

d.callable bonds

19) If bonds are issued initially at a premium and the effective-interest method of amortization is used, interest expense in the earlier years will be

a.greater than if the straight-line method were used.

b.greater than the amount of the interest payments.

cthe same as if the straight-line method were used.

d.less than if the straight-line method were used.

Use the following information for the following two questions:

Cox Co. issued $100,000 of ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%.

20) One step in calculating the issue price of the bonds is to multiply the principal by the table value for

a.10 periods and 10% from the present value of 1 table.

b.20 periods and 5% from the present value of 1 table.

c.10 periods and 8% from the present value of 1 table.

d.20 periods and 4% from the present value of 1 table.

21) Another step in calculating the issue price of the bonds is to

a.multiply $10,000 by the table value for 10 periods and 10% from the present value of an annuity table.

b.multiply $10,000 by the table value for 20 periods and 5% from the present value of an annuity table.

c.multiply $10,000 by the table value for 20 periods and 4% from the present value of an annuity table.

d.none of these.

22) If bonds are issued between interest dates, the entry on the books of the issuing corporation could include a

a.debit to Interest Payable.

b.credit to Interest Receivable.

c.credit to Interest Expense.

d.credit to Unearned Interest.

23) Treasury bonds should be shown on the balance sheet as

a.an asset.

b.a deduction from bonds payable issued to arrive at net bonds payable and outstanding.

c.a reduction of stockholders' equity.

d.both an asset and a liability.

24) Discount on Notes Payable is charged to interest expense

a.equally over the life of the note.

b.only in the year the note is issued.

c.using the effective-interest method.

d.only in the year the note matures.

25) Norton Co. was organized on January 2, 2007, with 500,000 authorized shares of $10 par value common stock. During 2007, Norton had the following capital transactions:

January 5—issued 375,000 shares at $14 per share.

July 27—purchased 25,000 shares at $11 per share.

November 25—sold 15,000 shares of treasury stock at $13 per share.

Norton used the cost method to record the purchase of the treasury shares. What would be the balance in the Paid-in Capital from Treasury Stock account at December 31, 2007?

a.$0.

b.$15,000.

c.$30,000.

d.$45,000.

26) Palmer Corp. owned 20,000 shares of Dixon Corp. purchased in 2003 for $240,000. On December 15, 2006, Palmer declared a property dividend of all of its Dixon Corp. shares on the basis of one share of Dixon for every 10 shares of Palmer common stock held by its stockholders. The property dividend was distributed on January 15, 2007. On the declaration date, the aggregate market price of the Dixon shares held by Palmer was $400,000. The entry to record the declaration of the dividend would include a debit to Retained Earnings of

a.$0.

b.$160,000.

c.$240,000.

d.$400,000.

27) On December 31, 2006, the stockholders' equity section of Clark, Inc., was as follows:

Common stock, par value $10; authorized 30,000 shares;

issued and outstanding 9,000 shares$ 90,000

Additional paid-in capital116,000

Retained earnings 174,000

Total stockholders' equity$380,000

On March 31, 2007, Clark declared a 10% stock dividend, and accordingly 900 additional shares were issued, when the fair market value of the stock was $18 per share. For the three months ended March 31, 2007, Clark sustained a net loss of $32,000. The balance of Clark’s retained earnings as of March 31, 2007, should be

a.$125,800.

b.$133,000.

c.$134,800.

d.$142,000.

28) Bleeker Company issued 10,000 shares of its $5 par value common stock having a market value of $25 per share and 15,000 shares of its $15 par value preferred stock having a market value of $20 per share for a lump sum of $480,000. How much of the proceeds would be allocated to the common stock?

a.$50,000

b.$218,182

c.$250,000

d.$255,000

29) Adler Corporation has 50,000 shares of $10 par common stock authorized. The following transactions took place during 2008, the first year of the corporation’s existence:

Sold 5,000 shares of common stock for $18 per share.

Issued 5,000 shares of common stock in exchange for a patent valued at $100,000.

At the end of the Adler’s first year, total paid-in capital amounted to

a.$40,000.

b.$90,000.

c.$100,000.

d.$190,000.

30) On September 1, 2008, Zelner Company reacquired 12,000 shares of its $10 par value common stock for $15 per share. Zelner uses the cost method to account for treasury stock. The journal entry to record the reacquisition of the stock should debit

a.Treasury Stock for $120,000.

b.Common Stock for $120,000.

c.Common Stock for $120,000 and Paid-in Capital in Excess of Par for $60,000.

d.Treasury Stock for $180,000.

31) An analysis of stockholders' equity of Jinn Corporation as of January 1, 2007, is as follows:

Common stock, par value $20; authorized 100,000 shares;

issued and outstanding 90,000 shares$1,800,000

Paid-in capital in excess of par900,000

Retained earnings 760,000

Total$3,460,000

Jinn uses the cost method of accounting for treasury stock and during 2007 entered into the following transactions:

Acquired 2,500 shares of its stock for $75,000.

Sold 2,000 treasury shares at $35 per share.

Sold the remaining treasury shares at $20 per share.

Assuming no other equity transactions occurred during 2007, what should Jinn report at December 31, 2007, as total additional paid-in capital?

a.$895,000

b.$900,000

c.$905,000

d.$915,000

32) Baden Corporation owned 20,000 shares of Terney Corporation’s $5 par value common stock. These shares were purchased in 2004 for $180,000. On September 15, 2008, Baden declared a property dividend of one share of Terney for every ten shares of Baden held by a stockholder. On that date, when the market price of Terney was $14 per share, there were 180,000 shares of Baden outstanding. What NET reduction in retained earnings would result from this property dividend?

a.$90,000

b.$252,000

c.$72,000

d.$162,000

33) On June 30, 2007, when Vietti Co.'s stock was selling at $65 per share, its capital accounts were as follows:

Capital stock (par value $50; 60,000 shares issued)$3,000,000

Premium on capital stock600,000

Retained earnings4,200,000

If a 100% stock dividend were declared and distributed, capital stock would be

a.$3,000,000.

b.$3,600,000.

c.$6,000,000.

d.$7,800,000.

34) On January 1, 2007, Golden Corporation had 110,000 shares of its $5 par value common stock outstanding. On June 1, the corporation acquired 10,000 shares of stock to be held in the treasury. On December 1, when the market price of the stock was $8, the corporation declared a 10% stock dividend to be issued to stockholders of record on December 16, 2007. What was the impact of the 10% stock dividend on the balance of the retained earnings account?

a.$50,000 decrease

b.$80,000 decrease

c.$88,000 decrease

d.No effect

35) On January 2, 2006, Carr Co. issued 10-year convertible bonds at 105. During 2008, these bonds were converted into common stock having an aggregate par value equal to the total face amount of the bonds. At conversion, the market price of Carr’s common stock was 50 percent above its par value. On January 2, 2006, cash proceeds from the issuance of the convertible bonds should be reported as

a.paid-in capital for the entire proceeds.

b.paid-in capital for the portion of the proceeds attributable to the conversion feature and as a liability for the balance.

c.a liability for the face amount of the bonds and paid-in capital for the premium over the face amount.

d.a liability for the entire proceeds.

36) On January 1, 2007, Doane Corp. granted an employee an option to purchase 6,000 shares of Doane's $5 par value common stock at $20 per share. The Black-Scholes option pricing model determines total compensation expense to be $140,000. The option became exercisable on December 31, 2008, after the employee completed two years of service. The market prices of Doane's stock were as follows:

January 1, 2007$30

December 31, 200850

For 2008, Doane should recognize compensation expense under the fair value method of

a.$90,000.

b.$30,000.

c.$70,000.

d.$0.

37) With respect to the computation of earnings per share, which of the following would be most indicative of a simple capital structure?

a.Common stock, preferred stock, and convertible securities outstanding in lots of even thousands

b.Earnings derived from one primary line of business

c.Ownership interest consisting solely of common stock

d.None of these

38) In computing earnings per share, the equivalent number of shares of convertible preferred stock are added as an adjustment to the denominator (number of shares outstanding). If the preferred stock is cumulative, which amount should then be added as an adjustment to the numerator (net earnings)?

a.Annual preferred dividend

b.Annual preferred dividend times (one minus the income tax rate)

c.Annual preferred dividend times the income tax rate

d.Annual preferred dividend divided by the income tax rate

39) Antidilutive securities

a.should be included in the computation of diluted earnings per share but not basic earnings per share.

b.are those whose inclusion in earnings per share computations would cause basic earnings per share to exceed diluted earnings per share.

c.include stock options and warrants whose exercise price is less than the average market price of common stock.

d.should be ignored in all earnings per share calculations.

40) Jett Corp. had 600,000 shares of common stock outstanding on January 1, issued 900,000 shares on July 1, and had income applicable to common stock of $1,050,000 for the year ending December 31, 2007. Earnings per share of common stock for 2007 would be

a.$1.75.

b.$.83.

c.$1.00.

d.$1.17.

PROBLEMS:

1) Warranties:

James Equipment Company sells computers for $1,500 each and also gives each customer a 2-year warranty that requires the company to perform periodic services and to replace defective parts. During 2006, the company sold 700 computers. Based on past experience, the company has estimated the total 2-year warranty costs as $30 for parts and $60 for labor. (Assume sales all occur at December 31, 2006.)

In 2007, James incurred actual warranty costs relative to 2006 computer sales of $10,000 for parts and $18,000 for labor.

Instructions

(a)Under the expense warranty treatment, give the entries to reflect the above transactions (accrual method) for 2006 and 2007.

(b)Under the cash basis method, what are the Warranty Expense balances for 2006 and 2007?

(c)The transactions of part (a) create what balance under current liabilities in the 2006 balance sheet?

2) Contingent liabilities:

Below are three independent situations.

1. In August, 2007 a worker was injured in the factory in an accident partially the result of his own negligence. The worker has sued Rooney Co. for $800,000. Counsel believes it is reasonably possible that the outcome of the suit will be unfavorable and that the settlement would cost the company from $250,000 to $500,000.