ACCT IS 301 / 701 Financial Reporting ISpring 2014

Practice Exam – Exam 3(This practice exam provides an example of the nature and types of

questions on the actual exam. It is not intended to be representative of the length or difficulty of the actual exam)

Note: Solutions are at the end of the exam

Multiple Choice - Circle the best answer for each question.

1. Brust Co., a retailer, made cash sales during the month of October of $132,600. The sales are subject to a 6% sales tax that was also collected (included in the $132,600). Which of the following would not be included in the summary journal entry to reflect the sale transactions?

a. Debit Cash for $132,600.b. Credit Sales Tax Payable for $7,506.c. Credit Sales for $125,094.d. Credit Sales Tax Payable for $7,956.

2. 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. c. the same as if the straight-line method were used. d. less than if the straight-line method were used.

3. 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.

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4. At December 31, 2013 the following balances existed on the books of Evans Corporation:

Bonds Payable $2,000,000Discount on Bonds Payable 160,000Interest Payable 50,000Unamortized Bond Issue Costs 120,000

If the bonds are retired on January 1, 2014, at 102 plus accrued interest, what will Evans report as a loss on redemption?

a. $370,000b. $320,000c. $270,000d. $200,000

5 Dekker Corp. purchased its own par value stock on January 1, 2014 for $20,000 and debited the

treasury stock account for the purchase price. The stock was subsequently sold for $12,000. The

$8,000 difference between the cost and sales price should be recorded as a deduction from

a. paid-in capital from treasury stock to the extent that previous net "gains" from sales of the same class of stock are included therein; otherwise, from retained earnings.

b. paid-in capital from treasury stock without regard as to whether or not there have been previous net "gains" from sales of the same class of stock included therein.

c. retained earnings.d. net income.

6. Dukan Corporation has 50,000 shares of $10 par common stock authorized. The following

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transactions took place during 2013, 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 Dukan’s first year, total paid-in capital amounted to

a. $40,000.b. $90,000.c. $100,000.d. $190,000.

7. Gasser Company estimates its warranty expense as 4% of net sales. Net sales 2013………………………………………$1,500,000 Warranty Liability account: Balance, Dec. 31, 2012…………………………. $10,000 debit before

adjustment Balance, Dec. 31, 2013…………………………..$50,000 credit after

adjustment

Which one of the following entries was made to record the 2013 estimated warranty expense?

a. Warranty Expense ............................ 60,000 Retained Earnings (prior-period adjustment)

10,000 Warranty Liability ...................... 50,000

b. Warranty Expense ............................ 50,000 Retained Earnings (prior-period adjustment) 10,000 Warranty Liability ...................... 60,000

c. Warranty Expense ............................ 40,000 Warranty Liability ...................... 40,000

d. Warranty Expense ............................ 60,000 Warranty Liability ...................... 60,000

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8. On January 1, 2014, Bohannon, Inc., declared a 10% stock dividend on its common stock when the market value of the common stock was $20 per share. Stockholders' equity before the stock dividend was declared consisted of:

Common stock, $10 par value, authorized 200,000 shares; issued and outstanding 120,000 shares $1,200,000

Additional paid-in capital on common stock 150,000Retained earnings 700,000Total stockholders' equity $2,050,000

What was the effect on Bohannon’s retained earnings as a result of the above transaction?

a. $120,000 decreaseb. $240,000 decreasec. $400,000 decreased. $200,000 decrease

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9. The printing costs and legal fees associated with the issuance of bonds, according to GAAP, should

a. be expensed when incurred. b. be reported as a deduction from the face amount of bonds payable. c. be accumulated in a deferred charge account and amortized over the

life of the bonds. d. deferred credit to be amortized over life of new debt.

10. Which of the following is not an accurate representation concerning revenue recognition?

a. Revenue from selling products is recognized at the date of sale, usually interpreted to mean the date of delivery to customers.

b. Revenue from services rendered is recognized when cash is received or when services have been performed.

c. Revenue from permitting others to use enterprise assets is recognized as time passes or as the assets are used.

d. Revenue from disposing of assets other than products is recognized at the date of sale.

11. When work to be done and costs to be incurred on a long-term contract can be estimated

dependably, which of the following methods of revenue recognition is preferable?

a. Installment-sales methodb. Percentage-of-completion methodc. Completed-contract methodd. None of these

12. How should the balances of progress billings and construction in process be shown at reporting

dates prior to the completion of a long-term contract?

a. Progress billings as deferred income, construction in progress as a deferred expense.

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b. Progress billings as income, construction in process as inventory.c. Net, as a current asset if debit balance, and current liability if credit

balance.d. Net, as income from construction if credit balance, and loss from

construction if debit balance.

13. Similar to U.S. practice, IFRS requires that companies present current and noncurrent liabilities on the face of the balance sheet with current liabilities

a. generally presented in order of magnitude.b. presented in alphabetic order.c. presented in order of liquidity.d. presented in the order in which they were incurred.

14. The realization of income on installment sales transactions involves

a. recognition of the difference between the cash collected on installment sales and the cash expenses incurred.

b. deferring the net income related to installment sales and recognizing the income as cash is collected.

c. deferring gross profit while recognizing operating or financial expenses in the period incurred.

d. deferring gross profit and all additional expenses related to installment sales until cash is ultimately collected.

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PROBLEMS

Problem 1 - Stockholders’ Equity.

Indicate the effect of each of the following transactions on total stockholders' equity by placing an "X" in the appropriate column.

Increase Decrease None Effect

1. Treasury stock is resold at more than cost._________ __________ __________

2. Operating loss for the period. __________ __________ __________

3. Retirement of bonds payable at more than book value. __________ __________ __________

4. Declaration of a stock dividend. __________ __________ __________

5. Acquisition of machinery for common stock.________ __________ __________

6. Conversion of bonds payable into commonstock. __________ __________ __________

7. Not declaring a dividend on cumulative preferred stock. __________ __________ __________

8. Declaration of cash dividend. __________ __________ __________

9. Payment of cash dividend. __________ __________ __________

Hint: Where possible, prepare a journal entry to reflect the transaction to help assess the effect of the transaction on total stockholders’ equity.

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Problem 2 – Installment sales.

Koenig Furniture Company concluded its first year of operations in which it made sales of $800,000, all on installment. Collections during the year from down payments and installments totaled $300,000. Purchases for the year totaled $400,000; the cost of merchandise on hand at the end of the year was $80,000.

InstructionsUsing the installment-sales method, make summary entries to record:(a) the installment sales and cash collections

(b) the cost of installment sales

(c) the unrealized gross profit

(d) the realized gross profit

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Problem 3 - Bonds

On January 1, 2013, Hayes Co. issued ten-year bonds with a face value of $200,000 and a stated interest rate of 10%, payable semiannually on June 30 and December 31. The bonds were sold to yield 12%. Table values are:

Present value of 1 for 10 periods at 10% .386Present value of 1 for 10 periods at 12% .322Present value of 1 for 20 periods at 5% .377Present value of 1 for 20 periods at 6% .312Present value of an ordinary annuity for 10 periods at 10%

6.145

Present value of an ordinary annuity for 10 periods at 12%

5.650

Present value of an ordinary annuity for 20 periods at 5%

12.462

Present value of an ordinary annuity for 20 periods at 6%

11.470

(a) Calculate the issue price of the bonds at January 1, 2013:

(b) Ignore your answer to part (a) and assume that the issue price was $177,000. Prepare the amortization table for 2013 assuming the effective interest method and that amortization is recorded on interest payment dates

Date Cash Payment Interest Expense

Amortization Book Value or Carrying Amount

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(c) Now assume that instead of issuing the bonds on January 1, 2013, the bonds were issued on June l, 2013 and assume that the issue price was $177,000.

Prepare the journal entry to record the issuance of the bond.

Account Debit Credit

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Problem 4 – Current Liabilities and Contingencies

Presented below is a list of transactions occurring for the Kaminsky Company in 2013:

1. Recorded cash sales of $20,000,000 which includes 6% sales tax.

2. Recorded wage expense of $350,000 for 2013, but only paid cash of $300,000 for this in 2013. The difference was due to various amounts withheld which will be paid in 2014.

3. Became involved in a tax dispute with the IRS. As of December 31, 2013 Kaminsky Company legal counsel believed that it was probable that the company would lose the tax dispute and would have to pay the IRS between $80,000 and $140,000.

4. One of the Kaminsky Company manufacturing facilities in Kosovo was destroyed in 2010  during the war and recorded as a complete loss at that time.  In 2013, Kaminsky Company has been assured by the government that it will receive compensation in 2014 for the plant equal to 70% of the plant’s fair value of $1,000,000.  The book value of the plant was $500,000.

5. Kaminsky Company began a new policy in 2013 of providing paid vacation time for employees. Vacation days may be taken after January 15th of the year following the year in which they are earned. Kaminsky Company has chosen to value the cost of these compensated absences at rates of pay in effect during the period when earned. Vacation time is 10% of paid time. Earned wages for 2013 equals $350,000.

Analyze the effect of the above transactions on the Kaminsky Company 2013 financial statements by filling in the categories indicated. Use the following codes: I = Increase D = Decrease NE = No Effect. Also write in the dollar amount of the effect.Hint: Where possible, prepare a journal entry to reflect the transaction to help assess the effect of the transaction on the various financial statement components.

# Assets

$ Amoun

t

Liab-ilitie

s

$ Amou

nt

Net Incom

e

$ Amount

1.

2.

3.

4.

5.

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Problem 5 – Liabilities

At the financial statement date of December 31, 2013, the liabilities outstanding of the Showalter Corporation included the following:

1. Cash dividends on common stock, $55,000, payable on January 15, 2014.

2. Note payable to Admire State Bank, $470,000, due January 20, 2014, which Showalter Corporation intends to refinance.

3. Serial bonds, $1,000,000, of which $250,000 mature during 2014.

4. Note payable to Third National Bank, $300,000, due March 27, 2014, which Showalter Corporation intends to refinance.

The following transactions occurred early in 2014:

January 5: The corporation entered into a non-cancelable financing agreement with Admire State Bank, enabling it to borrow up to $500,000 at any time through the end of 2014. Amounts borrowed under the agreement would bear interest at 1% above the bank's prime rate and would mature 3 years from the date of the loan.

January 15: The cash dividends on common stock were paid.

January 19: Showalter Corporation borrowed $500,000 under the January 5 financing agreement and used the funds to pay the Admire State Note Payable due January 20th.

February 1: The financial statements for 2013 were issued.

1. The amount of liabilities that should be presented as Current liabilities at December 31, 2013 equals $_______________________

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2. The amount of liabilities that should be presented as Long Term liabilities at December 31, 2013 equals

$_______________________

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Problem 6 - Computation of selected financial ratios.

The following information pertains to Jackson Co at year end:

Preferred stock, cumulative:Par per share $100Dividend rate 8%Shares outstanding 5,000Dividends in arrears none

Common stock:Par per share $10Shares issued 60,000Dividends paid per share $2.70Market price per share $48.00

Additional paid-in capital $200,000Unappropriated retained earnings (after closing) $135,000Retained earnings appropriated for contingencies $150,000Common treasury stock:

Number of shares 5,000Total cost $125,000

Net income $370,000

InstructionsCompute (assume no changes in balances during the past year):(a) Total amount of stockholders’ equity in the balance sheet

(b) Earnings per share of common stock

(c) Book value per share of common stock

(d) Payout ratio of common stock

(e) Return on common stock equity

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Problem 7 – Percentage-of-completion.

Marshall Construction Company was awarded a contract to construct an interchange at the junction of U.S. 94 and Highway 30 at a total contract price of $8,000,000. The estimated total costs to complete the project were $6,000,000.

Instructions(a) Make the entry to record construction costs of $3,600,000, on

construction in process to date.

(b) Make the entry to record progress billings of $2,000,000.

(c) Make the entry to recognize the profit that can be recognized to date, on a percentage-of-completion basis.

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Answer Key

Multiple Choice 1. d 2. a 3. c 4. b 5. a 6. d 7. d 8.b. 9. c 10. b. 11. b. 12. c. 13. c. 14. c.

Problem 1 – Stockholders’ EquityIncrease Decrease No

Effect

1. Treasury stock is resold at more than cost. X

2. Operating loss for the period. X

3. Retirement of bonds payable at more than book value. X

4. Declaration of a stock dividend. X

5. Acquisition of machinery for common stock. X

6. Conversion of bonds payable into commonstock. X

7. Not declaring a dividend on cumulative preferred stock. X

8. Declaration of cash dividend. X

9. Payment of cash dividend. X

Problem 2 – Installment Sales(a) Installment Accounts Receivable..................................... 800,000

Installment Sales....................................................800,000

Cash.................................................................................. 300,000Installment Accounts Receivable...........................

300,000

(b) Cost of Installment Sales ($400,000 – $80,000)............... 320,000Inventory................................................................

320,000

(c) Installment Sales.............................................................. 800,000Cost of Installment Sales.......................................

320,000

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Deferred Gross Profit (60%)...................................480,000

(d) Deferred Gross Profit (60% × $300,000)......................... 180,000Realized Gross Profit on Installment Sales............

180,000

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Problem 3 – Bondsa) (200,000 x .312) + (10,000 x 11.47) = 177,100

Book Value orb) Cash Int Exp Amort Carrying Value1/1/13 177,0006/30/13 10,000 10,620 620 177,62012/31/13 10,000 10,657 657 178,277

c)Cash 177,000 Cash (10,000 X 5/6 or 20,000 X 5/12) 8,333

8,333 Discount on Bonds Payable 23,000

Interest Expense (or payable) 8,333Bond Payable 200,000

Problem 4 – Current Liabilities and Contingencies# Asset Amount Liabilitie

sAmount

Net income

Amount

1 I 20,000,000

I 1,132,075

I 18,867,925

2 D 300,000 I 50,000 D 350,0003 NE 0 I 80,000 D 80,0004 NE 0 NE 0 NE 05 NE 0 I 35,000 D 35,000or 5 D 350,000 I 35,000 D 385,000

Problem 5 – LiabilitiesCurrent Liabilities  

Dividends payable 55,000  Notes Payable-Third National 300,000  Current maturity of   Serial bonds 250,000  

Total Current Liabilities 605,000

 Long Term Liabilities  

Note payable-Admiral, refinanced  in January 2014 470,000  Serial bonds 750,000  

Total Long Term Liabilities

1,220,000

 

Ok if combined into one Cash debit entry of $185,333

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Total Liabilities1,825,0

00

 

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Problem 6 – Computation of Selected Financial Ratios(a) (5,000 × $100) + (60,000 × $10) + $200,000 + $135,000 + $150,000 – $125,000

= $1,460,000.

(b) [$370,000 – (5,000 × $100 × 8%)] ÷ (60,000 – 5,000) = 330,000 ÷ 55,000

= $6.00 per share.

(c) ($1,460,000 – $500,000) ÷ (60,000 – 5,000) = $960,000 ÷ 55,000 = $17.45 per share.

(d) $2.70 ÷ $6 = 45% or [($2.70 × 55,000) ÷ ($370,000 – $40,000)].

(e) ($370,000 – $40,000) ÷ ($1,460,000 – $500,000) = 34.4%.

Problem 7 – Percentage-of-completion(a) Construction in Process...................................................3,600,000

Materials, Cash, Payables, Etc............................... 3,600,000

(b) Accounts Receivable.........................................................2,000,000Billings on Construction in Process....................... 2,000,000

(c) Construction Expenses.....................................................3,600,000Construction in Process (60% complete).........................1,200,000

Revenue from Long-Term Contracts...................... 4,800,000

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