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Acc 310 – Intermediate Accounting I Practice Exam 1 Problem I (50 Points, 2.5 Points Each) Choose the best answer for the following questions.
- Over the past year, Mosey Airlines has incurred significant losses and the company’s officers believe that the company is likely to go bankrupt. Mosey’s financial statements do not mention that the company’s future is in doubt. What assumption or principle does this violate? A. Historical cost principle B. Conservatism C. Periodicity D. Going-concern
- Which of the following items may a company report as a cash equivalent on its December 31, 2009 balance sheet? A. Accounts receivable due on January 31, 2009 B. Treasury bill purchased on September 1, 2009 and maturing on January 1, 2010 C. Short-term stock investment D. Treasury bill purchased on November 1, 2009 and maturing on February 1, 2010
- During 2009, Gilchrist Co. changed from straight-line depreciation of its equipment to the units-of-production method. Which quality or qualities of accounting information are impaired by this change? Reliability Consistency A. Yes No B. No Yes C. Yes Yes D. No No
- Which of the following is a correct application of the materiality concept? A. Smith Co.’s auditors discovered 20 revenue and expense items that were not recorded in Smith’s financial statements. Each item is immaterial when considered separately, but in aggregate the items are material. Since each item is immaterial when considered separately, Smith Co. does not need to record the missing items. B. Korolis Inc.’s auditors discovered that upper management intentionally failed to record their bonuses and pay raises in the financial statements in order to hide these amounts from investors. Korolis does not need to correct its financial statements for these amounts because the amounts are immaterial, both separately and in aggregate. C. Chandler Inc. mistakenly failed to record two items: $5 M loss on markdown of obsolete inventory $5.5 M gain on sale of stock Although the amounts are material when considered separately, Chandler does not have to record the amounts because the net effect of the two omissions is immaterial. D. Penny Co. prepays its insurance premiums 2 years in advance. Penny expenses the entire amount when the premiums are paid instead of recording a prepaid insurance asset on its books. Since the amount is immaterial to Penny’s financial statements and Penny has no other misstatements, Penny Co. does not need to correct its financial statements for the amount of the unexpired insurance premiums.
- Pear Corp. had $35,500 in accrual expenses for 2009. Using the following information, what is Pear’s cash basis expense for 2009? 1/1/09 12/31/ Accrued utility expense payable $ 150,000 $ 125, Prepaid expenses 75,000 35, A. $15, B. $20, C. $50, D. $100,
Use the following information to answer Questions 9-11. Schembechler Co. reported the following information on its 2009 income statement: Cost of goods sold $ 150, Extraordinary gain, net of tax 10, Income tax expense 50, Operating expenses 100, Other expenses and losses 40, Other revenues and gains 30, Sales 600, Schembechler had the following account balances at January 1, 2009: Common stock $ 250, Retained earnings 350, Treasury stock (15,000) Accumulated other comprehensive income 35, During 2009, Schembechler purchased 10,000 shares of common stock for the treasury at a cost of $50,000 and had a foreign currency translation gain of $20,000, net of tax.
- What is other comprehensive income for 2009? A. $(30,000) B. $20, C. $300, D. $320,
- What is comprehensive income for 2009? A. $270, B. $310, C. $320, D. $355,
- What is total stockholders’ equity? A. $640, B. $890, C. $910, D. $955,
- Lamb Co. reported the following information for 2009: Revenue $ 500, Depreciation expense 45, Interest revenue 4, Salary expense 125, In addition, the company incurred a $20,000 loss when assets from its African operations were expropriated by the Ugandan government in 2009. What would the company report as income before tax under U.S. GAAP and IFRS? U.S. GAAP IFRS A. $314,000 $330, B. $334,000 $314, C. $330,000 $334, D. $314,000 $314,
- A company must report EPS for all of the following EXCEPT : A. Income from continuing operations before tax B. Income from continuing operations C. Extraordinary gain or loss D. Discontinued operations
17. Selected information from Repucci Designs’ 2009 balance sheet is presented below.
- Cash $ 45,
- Accounts receivable 85,
- Merchandise inventory 36,
- Office supplies 12,
- Short-term investments 24,
- Prepaid expenses 13,
- Long-term notes receivable 35,
- Accounts payable 12,
- Salaries payable 52,
- Bonds payable – due 3/20/11 60,
- A. 2. What Is Repucci’s acid test/quick ratio?
- B. 2.
- C. 3.
- D. 3.
- Average total assets $ 1,600, 18. Selected information from Sheib Co.’s 2009 financial records is shown below.
- Average total inventory $ 200,
- Asset turnover. Days in inventory 182.5 days
- A. $200, What is Sheib’s 2009 gross profit?
- B. $400,
- C. $600,
- D. $1,000,
- Kramerica Corp. is being sued for manufacturing faulty products. The company anticipates that it will have to pay a $10,000,000 judgment in five years related to the lawsuit. Kramerica plans to make quarterly payments to fund so that it will be able to pay the judgment when it comes due. Assuming the fund earns 8% interest compounded quarterly and Kramerica makes the first payment today, what is the quarterly payment that Kramerica needs to make? A. $403, B. $411, C. $1,578, D. $1,883,
- Mohammed deposits $30,000 in account at the end of each year for 15 years. His investments earn 6% annually. How much will Mohammed have invested at the end of 15 years? A. $291, B. $477, C. $698, D. $1,078,
Case 2: In order to increase sales, Herb Street Used Cars offers a promotional payment program that allows customers to make no payments until December 31, 2009. On January 1, 2008, a customer purchases a car under the program. The customer is required to pay $2,000 at the end of each year for four years, with the first payment due on December 31, 2009. Assuming a 10% annual interest rate, what amount of revenue will Herb Street recognize from the sale? Part B In 2007, the FASB issued FAS 159. The pronouncement gives companies the option to report certain financial assets and liabilities at fair value, including accounts receivable, investments in stocks and bonds, and payables. Why does the FASB allow these items to be reported at fair value? What assets cannot be reported at fair value? What is the FASB’s rationale for only allowing only a few types of assets to be reported at fair value?
Solutions Problem I
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Current Liabilities: Accounts payable $ 45, Refundable customer deposits 10, Current maturity of long-term debt 20, Total Current Liabilities 75, Long-Term Liabilities: Note payable 80, Bonds payable 200, Total Long-Term Liabilities 280, Total Liabilities $ 355, Stockholders’ Equity: Common stock, $1.00 par value, 100,000 shares authorized and issued, 80,000 shares outstanding
Retained earnings 188, Accumulated other comprehensive income 24, Treasury stock (90,000) Total Stockholders’ Equity 222, Total Liabilities And Stockholders’ Equity $ 577,
Problem III Part A Case 1: A. Fund Balance = PV = 30,000 X PV FactorA (5%, 6 Periods) PV = 30,000 X 5.07569 = $152, B. 152,271 is the future value of the contributions 152,271 = Payment X FV FactorA (5%, 5 Periods) 152,271 = Payment X 5. Payment = 152,271/5.52563 = $27, Case 2: PV of a deferred annuity Step 1: PV of the annuity at 12/31/ PV FactorA (10%, 4 Periods) = 3. PV = 2,000 X 3.16987 = $6, Step 2: PV of single sum at 1/1/ PV Factor (10%, 1 Period) =. PV = 6,340 X .90909 = $5, Case 2 – Alternate Solution #1: PV FactorA (10%, 5 Periods): 3.
- PV FactorA (10%, 1 Periods):.
2.8817 X 2,000 = $5,
