ACCY 593 EXAM II (solved) Fall 2004 UIUC
Name ______Suggested solutions ______
Section______
Instructions
This exam is 100 minutes long. Upon receiving the exam, you should write down your name and the section you attend the class. Then read the remainder of this page and stop.
Do not proceed beyond this cover page till you are told to do so by the proctor.
1.This exam has 4 questions and 10 pages. Check your copy of the exam to make sure you have a complete copy. Note that Question 1 has 3 parts, some with several sub-parts.
2.Use your time well: do the easy parts first.
3.Show all your work and write down your assumptions wherever possible. It may help you earn partial or substantial credit.
4.Make sure you read all pages of the exam and follow instructions exactly. If answers are illegible, incomprehensible or written down in the wrong place, we may fail to evaluate them correctly.
5.The exam is closed book, no-notes. Only numeric calculators should be used. Text-storing calculators may be used only if you have purged all stored text. Students are presumed to be familiar with the Code of Policies and Regulations Applying to All Students. In particular, please the following provision (ibid, §33):“It is the responsibility of the student to refrain from infractions of academic integrity, from conduct that may lead to suspicion of such infractions, and from conduct that aids others in such infractions.”
Detected violations of academic integrity will result in a score of zero for this exam as well as additional disciplinary action consistent with University policy.
6.No questions will be answered during the exam. If you cannot understand some part of the exam, if you find a typographical error or if you believe the exam is in any way erroneous or unworkable, please state your difficulty in writing on the exam itself.
7.This exam is a test of your individual knowledge and ability to complete the assigned tasks at this moment in time. You may not consult anybody regarding any portions of the exam before you turn it in to the proctor.
8.If you need to leave the room during the exam for personal reasons, you may do so after seeking the permission of the proctor. Before leaving your seat, please make sure that your exam is closed and turned over so that no writing is visible. You should turn off or put away your calculators as well.
Question 1. (27 points) This question has 3 parts. Each part has different point weights. Part 2 has three sub-parts while part 3 has six. You are required to answer all sub-parts. For each question, please circle the letter for the one answer that is most accurate.
1. (3 points): It is possible for segments to qualify as reportable, but not represent a material portion of the enterprise. What test is applied to ensure the segments reported represent a significant portion of enterprise activity?
a.Combined external segment revenues for reportable segments exceed 75% of internal and external segment revenues.
b.Total internal and external segment revenue exceeds 75% of total consolidated revenue.
c.Total external segment revenue of the reportable segments exceeds 75% of consolidated revenue.
d.Total segment assets of the reportable segments exceeds 75% of total consolidated assets.
2. (12 points -- 3 questions x 4 points each)
On December 31, 2003, Queen Co. is in financial difficulty and cannot pay a note due that day. It is a $1,200,000 note with $120,000 accrued interest payable to Trear, Inc. Trear agrees to accept from Queen equipment that has a fair value of $580,000, an original cost of $960,000, and accumulated depreciation of $460,000. Trear also forgives the accrued interest, extends the maturity date to December 31, 2006, reduces the face amount of the note to $500,000, and reduces the interest rate to 6%, with interest payable at the end of each year.
i.Queen should recognize a gain or loss on the transfer of the equipment of
a.$0.
b.$80,000 gain.
c.$120,000 gain.
d.$380,000 loss.
ii.Queen should recognize a gain on the partial settlement and restructure of the debt of
a.$0.
b.$30,000.
c.$110,000.
d.$150,000.
iii.Queen should record interest expense for 2006 of
a.$0.
b.$30,000.
c.$60,000.
d.$90,000.
3. (12 points -- 6 questions x 2 points each)
i. The accounting problem in a lump sum issuance is the allocation of proceeds between the classes of securities. An acceptable method of allocation is the
a.pro forma method.
b.proportional method.
c.incremental method.
d.either the proportional method or the incremental method.
ii. Direct costs incurred to sell stock such as underwriting costs should be accounted for as
1.a reduction of additional paid-in capital.
2.an expense of the period in which the stock is issued.
3.an intangible asset.
a.1
b.2
c.3
d.1 or 3
iii. "Gains" on sales of treasury stock (using the cost method) should be credited to
a.paid-in capital from treasury stock.
b.capital stock.
c.retained earnings.
d.other income.
iv. On December 1, 2004, Kole Corporation exchanged 15,000 shares of its $10 par value common stock held in treasury for a used machine. The treasury shares were acquired by Kole at a cost of $40 per share, and are accounted for under the cost method. On the date of the exchange, the common stock had a market value of $55 per share (the shares were originally issued at $30 per share). As a result of this exchange, Kole's total stockholders' equity will increase by
a.$150,000.
b.$600,000.
c.$825,000.
d.$675,000.
v. The stockholders' equity section of Milroy Corporation as of December 31, 2003, was as follows:
Common stock, par value $2; authorized 20,000 shares;
issued and outstanding 10,000 shares $ 20,000
Paid-in capital in excess of par 30,000
Retained earnings 90,000
$140,000
On March 1, 2004, the board of directors declared a 10% stock dividend, and accordingly 1,000 additional shares were issued. On March 1, 2004, the fair market value of the stock was $6 per share. For the two months ended February 28, 2004, Milroy sustained a net loss of $10,000.
What amount should Milroy report as retained earnings as of March 1, 2004?
a.$74,000.
b.$78,000.
c.$84,000.
d.$88,000.
vi. Presented below is information related to Riordan, Inc.:
December 31,
2004 2003
Common stock $ 75,000 $ 60,000
6% Preferred stock 350,000 350,000
Retained earnings (includes NI for current year) 90,000 75,000
Net income for year 45,000 32,000
What is Riordan’s rate of return on common stock equity for 2004?
a.30.0%
b.16%
c.15.4%
d.13.8%
Question 2 (10 points):
On January 1, 20X2, U.S.A. Inc. created an Algerian subsidiary, Niko, Inc. The books are kept in Algerian dinars, but the functional currency is the U.S. dollar. Dividends are paid on December 31, and income is earned evenly throughout the year. The earnings and dividends of Niko in dinars are as follows:
Net Income Dividends
20X2...... 100,000 50,000
20X3...... 200,000 80,000
20X4...... 325,000 105,000
Exchange rates are given below.
Yearly Average Dec. 31 Spot
20X2...... 0175 .0185
20X3...... 0188 .022
20X4...... 019 .025
Required:
Calculate the balance in retained earnings for Niko in dollars as of December 31, 20X4.
Ans: (Assuming 1 Dinar = $.0xxx.)
Net Income $ Dividends$
100,000* 0.0175 = 1,750 50,000 * 0.0185 = 925
200,000* 0.0188 = 3,760 80,000 * 0.022 =1,760
325,000* 0.019 = 6,175105,000 * 0.025 =2,625
Total 11,685Total5,310
Retained earnings: 11,685minus5,310= $ 6,375
(Assuming 1$ = .0xxx)
Net Income $ Dividends $
100,000 * 0.0175 = 5,714,286 50,000 * 0.0185 = 2,702,703
200,000 * 0.0188 =10,638,298 80,000 * 0.022 = 3,636,364
325,000 * 0.019 =17,105,263105,000 * 0.025 = 4,200,000
Total33,457,847Total10,539,067
Retained earnings33,457,847minus10,539,067 = $22,918,780
Question 3 (5 points):
Merreck Inc. began the year with 750 units of inventory valued at $20 each under LIFO. During the first quarter, 300 units were purchased at $25 each and another 250 units were purchased at $28 each. Assume that 200 units are on hand at the end of the first quarter and that the current replacement cost is $30 per unit.
Required:
If Merreck plans to have 500 units on hand at year end, determine the cost of goods sold for the first quarter.
Units sold = 750 + 300 + 250 - 200 = 1100
Cost of goods sold:
(You can do this two ways. Both are equivalent.)
Method 1 $
300 units x $25/unit7,500 (units bought and sold this period)
250 units x $28/unit7,000 (units bought and sold this period)
250 units x $20/unit 5,000 (units of BI used up this period, not to be replaced)
300 units x $30/unit 9,000 (replacement cost units of BI used up this period
that will be replaced)
Total $28,500
Method 2 $
550 units x $20/unit 11,000 (units of BI used up this period --- note that the
number of units differs from the previous method)
300 units x $25/unit 7,500 (units bought & sold this period: same as method 1)
250 units x $28/unit 7,000 (units bought & sold this period: same as method 1)
300 units x $10/unit 3,000 (incremental cost of replacing units of BI used up
this period and that will be replaced)
Total $28,500
Question 4 (8 points)
Landon Corporation has issued 2,000 shares of common stock and 400 shares of preferred stock for a lump sum of $68,000 cash. Direct issue costs (paid in cash, not included in the sale proceeds) were $1,020.
Required:
(a)Give the entry for the issuance assuming the par value of the common was $5 and the market value $30, and the par value of the preferred was $40 and the market value $50. (Each valuation is on a per share basis and there are ready markets for each stock.)
(b)Give the entry for the issuance assuming the same facts as (a) above except the preferred stock has no ready market and the common stock has a market value of $25 per share.
See next two pages
a)Cash (net, $68,000 - $1020)66,980
Common Stock 10,000
Paid-in Capital in Excess of Par -- Common40,235
Preferred Stock 16,000
Paid-in Capital in Excess of Par -- Preferred 745
Computations
Market Value of Bundle
Common $30 × 2,000$60,000
Preferred $50 × 400 20,000
Total market value$80,000
Proceeds allocated as:
60/80 × $68,000 = $51,000 to common, split up as $10,000 par, $41,000 APIC.
Note that we will subtract org costs related to CS
From this APIC number.
20/80 × $68,000 = 17,000 to preferred, split up as $ 16,000 par, $1,000 APIC.
The org costs allocated to preferred will be
subtracted from this APIC number.
Total $68,000
Organization costs are then allocated in the ratio 51:17 as follows:
51/68 × $ 1,020 = $ 765 common.
17/68 × $ 1,020 = $ 255 preferred.
Total $1,020
Finally, these organization costs are deducted from the respective APIC account balances, yield net APIC balances of
Common$41,000 - 765 = $40,235
Preferred$ 1,000 - 255 = $ 745
b)Cash 66,980
Common Stock 10,000
Paid-in Capital in Excess of Par -- Common39,250
Preferred Stock 16,000
Paid-in Capital in Excess of Par -- Preferred 1,730
Computations
Market Values (and imputed amounts)
$25 × 2,000 =$50,000 common: $10,000 par, $40,000 APIC
Balance $18,000 preferred: $16,000 par, $2000 APIC
Organization costs allocated
50/68 × $ 1,020 = $ 750 common (deduct from APIC -- CS)
18/68 × $ 1,020 = $ 270 preferred (deduct from APIC -- PS)
Total $1,020
Net APIC
Common$40,000 - 750 = $39,250
Preferred$ 2,000 - 270 = $ 1,730
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