1. What are the missing numbers for the below income statement? Revenues 100 Cost of Goods Sold ? Gross Margin 60 SG&A Expense ? Pre-tax Income 20 Tax Expense (40% of Pre-tax Income) ? Net Income ? 2. What is the missing number from the below cash flow statement? Beginning Balance Operating Cash Flow Investing Cash Flow Financing Cash Flow Ending Balance 60 – 20 ? 100 80 3. What are the missing numbers for the below balance sheet? Assets Cash 15 Accounts Receivable ? Inventory 60 Total Current Assets 97 Property, Plant, and Equipment, net ? Intangible Assets 20 Total Assets 257 Liabilities Accounts Payable 40 Accrued Operating Expenses 50 Total Current Liabilities ? Notes Payable ? Total Liabilities 190 Owners’ Equity Stock 20 Retained Earnings ? Total Liabilities and Owners’ Equity ? 1 4. Given the following data, what is net income? (Note: Not all items shown below will be included in income.) Cost of Goods Sold 8 Accounts Payable 22 Taxes Payable 6 Tax Expense 8 Revenues 40 SG&A Expense 2 Interest Payable 14 Accumulated Depreciation 11 Depreciation Expense 6 Interest Expense 4 Dividends 3 5. What is the missing number in the below Retained Earnings account. (Provide both the amount and the name.) Beginning Balance Net Income (Loss) ? Ending Balance 100 21 ? 98 6. What is the correct journal entry for the purchase of office supplies for $10 cash, if the supplies are capitalized? Assets Liabilities Owners’ Equity Debit Credit $ $ 7. What are the effects on current income and on future income, if a firm incorrectly capitalizes an expenditure that it should have expensed? State your answer for both current income and future income as “overstated” or “understated”. Overstated or Understated? Current Income Future Income 8. What is the correct journal entry for the following transaction. A firm sells a car for $40 cash. The cost of the car is $30. The firm is a car dealer, and the car is therefore classified as inventory. Assets Liabilities Owners’ Equity Debit Credit $ $ 2 9. Refer to the above. If the firm had not been a car dealer and had classified the car as property, plant, and equipment (PP&E), rather than inventory, which of the below would be correct?. (Circle your answer.) a. Net Income would be unaffected. b. A gain would be reported instead of revenues and COGS. c. PP&E would be reduced, instead of Inventory. d. All of the above. e. None of the above. 10. Provide the closing entry, given the following temporary accounts, with amounts in parentheses: Revenues (80), COGS (25), SG&A Expense (15), Interest Expense (10), and Tax Expense (8). Assets Liabilities Owners’ Equity Debit Credit $ $ 11. Indicate by check mark (“9”) or “X” which accounts are found on the income statement and which accounts are found on the balance sheet. Account Name Income Statement Balance Sheet Allowance for Bad Debt Bad Debt Expense Prepaid Expense Unearned Revenue Revenue 12. What is insurance expense for the year 2012, given the following set of facts? The firm prepays two years of insurance premiums on 7/1/12. The amount paid is $24. The firm’s fiscal yearend (FYE) is 12/31. 13. What are the journal entries to recognize the following two, related transactions? a. On January 1, 2010, the firm sells a gift card for $100. Assets Liabilities Owners’ Equity Debit Credit $ $ 3 b. On March 15, 2010, the gift card is used by a customer to buy merchandise for $80. The cost of the merchandise sold was $60. Assets Liabilities Owners’ Equity Debit Credit $ $ 14. What are the journal entries to recognize the following two, related transactions? a. A firm prepays $7 in insurance premiums. Assets Liabilities Owners’ Equity Debit Credit $ $ b. A firm expenses $6 of previously prepaid insurance premiums. Assets Liabilities Owners’ Equity Debit Credit $ $ 15. What, if any, is the journal entry to recognize a possible contingent liability (for example, resulting from a lawsuit) of $20. Assets Liabilities Owners’ Equity Debit Credit $ $ 16. What, if any, is the proper journal entry for a firm to recognize the increase in the value of its own stock from $40 to $50? Assets Liabilities Owners’ Equity Debit Credit $ $ 17. What is the formula for the ratio that would answer the following questions: Question Formula for Ratio to Answer Question How long does it take a firm to pay its bills (on average)? How long does it take a firm to sell its inventory (on average)? 4 18. What was the amount of cash a firm collected from its customers, given the following fact set? The firm’s balance sheets at the beginning and end of the year show gross accounts receivable of $32 and $28, respectively. Also, the firm’s beginning and ending allowance for uncollectible accounts are -$4 and -$5, respectively. Bad debt expense was $4, which was 2% of credit sales. The firm makes all sales on account. 19. What is bad debt expense, using the aging method (also called the “percentage of receivables” method), given the following set of facts? x A firm has $80 of gross accounts receivable. x The firm estimates that for $20 of the receivables, 10% are expected to be uncollectible. x The firm estimates that for the remaining $60 of the receivables, 50% are expected to be uncollectible. x The opening balance in the allowance account was $45 and write-offs for the period were $20. Thus, the amount in the allowance account, after write-offs, but before bad debt expense was $25. 20. Given the below information, what are the values for COGS and ending inventory for each costing method below? Number of Units Price per Unit Beginning inventory 10 2 Purchases 20 3 Sales 15 Ending inventory 15 Goods Available for Sale COGS Ending Inventory FIFO 20 + 60 = 80 LIFO 20 + 60 = 80 21. Given the below information, what is the dollar amount that the LIFO liquidation added to gross margin? Number of Units Price per Unit Beginning inventory 10 1 Purchases 12 3 Sales 15 Ending inventory 7 5 22. What inventory costing method gives the lowest inventory valuation in inflationary periods? a. FIFO b. LIFO c. Average d. LILO e. FILO 23. What inventory costing method gives the lowest net income in inflationary periods? a. FIFO b. LIFO c. Average d. LILO e. FILO 24. What is the effect on net income if inventory is overstated? a. Net income will also be overstated. b. Net income will be understated. c. Net income will be unaffected. d. It depends on whether the firm is using LIFO for FIFO. e. None of the above. 25. What are the journal entries to recognize each of the below events. a. The firm records bad debt expense of 5% of credit sales, which were $300. The firm uses the Percentage of Credit Sales Method. Journalize bad debt expense. Assets Liabilities Owners’ Equity Debit Credit $ $ b. The firm subsequently writes-off $10 of receivables. Record the write-off. Assets Liabilities Owners’ Equity Debit Credit $ $ 26. Given the following set of facts, what is the net amount of cash received by the seller? The seller records a credit sale for $1,000. Shortly after the sale, the buyer returns $250 and the seller credits the receivable by this amount. The seller also grants a further allowance to the buyer for $100. Finally, the buyer pays within the discount period to take advantage of a 2% discount. 6 27. Refer to the data in the above problem. With respect to the above purchase, what is the amount that the buyer will show as inventory on its balance sheet after all returns, discounts, and allowances? 28. What is the proper journal entry for a firm that factors a $100 receivable at a bank, which charges a 1% fee. Assets Liabilities Owners’ Equity Debit Credit $ $ 29. With respect to “factoring,” what is the difference between “with recourse” and “without recourse”? a. With recourse means that the bank ultimately bears the credit risk. b. Without recourse means that the bank ultimately bears the credit risk. c. With recourse means that the firm that factored the receivable ultimately bears the credit risk. d. Without recourse means that the firm that factored the receivable ultimately bears the credit risk. e. Both b and c. 30. What is the name of the accounting method that is used when the level of ownership in an equity investment rises to the level of significant influence? a. fair value method b. mark-to-market method c. control method d. equity method e. cost method 31. What is the main attribute of an intangible asset that is used to determine whether or not it will be amortized? 32. What is the main attribute of a repair or maintenance expenditure that determines whether or not it will be capitalized? 33. Given the below facts, what is the total income effect for the year for an investor for its passive-level, trading investment? (Note: the investment is not sold during the year.) Type of Investment: Passive Ownership, Trading Cost of Investment $80 Fair value of investment at end of the year $60 Dividends received from investment over the year $10 Total income effect for the year 7 34. Given the below facts, what is the total income effect for the year for an investor for its passive-level, available-for- sale security? (Note: the investment is not sold during the year.) Type of Investment: Passive Ownership, Available for Sale Cost of Investment $80 Fair value of investment at end of the year $60 Dividends received from investment over the year $10 Total income effect for the year 35. Given the below facts, what is the total income effect for the year for an investor for its equity-method investment? Type of Investment: Equity Method Cost of Investment $80 Fair value of investment at end of the year $90 Total dividends received from investment over the year $10 Total Net income of investee over the year $200 Percentage of voting shares of investee owned by investor 20% Income for the year 36. What is depreciation expense for an asset’s first year, using the double declining balance method, given the following information? The cost of the asset is $800, the expected useful life is 5 years, and the salvage value is estimated to be $160. 37. What is the journal entry to record the sale of a depreciable asset (PP&E) that costs $100 and has accumulated depreciation of $40, assuming a selling price of $40. Assume that the PP&E is sold for cash. Assets Liabilities Owners’ Equity Debit Credit $ $ 38. What is the journal entry to record a $1,000 (cash) expenditure on ordinary repairs and maintenance? Assets Liabilities Owners’ Equity Debit Credit $ $ 8 39. What is the amount of a) interest capitalized and b) interest expensed, given the following information? The firm spends $100 to self-construct a building for its own use. The firm has debt of $500 that has an interest rate of 6%. 40. What is the journal entry, if any, given the following set of facts? A firm has equipment with a book value (cost minus accumulated depreciation) of $380. However, the fair value of the equipment is only $200 and is not likely to recover. Assets Liabilities Owners’ Equity Debit Credit $ $ 41. What is the amount of goodwill recognized where an acquirer buys 100% of the below target firm by paying $50 of cash to the target firm’s shareholders. Note: all items below are at market value. Balance Sheet Items of Target Firm Cash $10 Inventory 20 Property, Plant, and Equipment 30 Total Assets $60 Liabilities 20 42. What is the main purpose of the closing entry? 43. What is one perceived deficiency of the fundamental equation of accounting (Assets = Liabilities + Owners’ Equity)? 44. Which of the below cash flows is classified as an operating cash flow? a. Cash paid to investors as a dividend. b. Cash received in a loan from a bank c. Cash paid to suppliers for inventory d. Cash paid to suppliers for property, plant, and equipment e. None of the above 9 45. Which of the below is a temporary account? a. Selling, General, and Administrative Expenses b. Prepaid Expenses c. Retained Earnings d. Unearned Revenues e. Stock 46. What is the main distinction between a revenue and a gain? a. Gains are from a firm’s central and ongoing operations b. Revenues are from a firm’s peripheral activities c. Gains are always realized, but revenues are not d. Gains result from a sale of inventory e. None of the above. 47. What does NCI stand for and when is this account used in a firm’s financial statements? 48. How much cash did the following firm pay its vendors, given the below information about its accounts payable account (amounts are in parentheses): Beginning balance of accounts payable ($16); credit purchases of inventory ($20); ending balance of accounts payable ($6). 49. What is the amount of compensation expense recognized for stock options for each year of the vesting period, given the following information? x A firm awards stock options at-the-money when the stock is trading at $18 per share. x The Black-Scholes value of the options is $6. x The vesting period is two years. x Upon vesting, the stock is trading at $20 per share. 10 50. What are the missing amounts for the below amortization table, given the following information? x A firm borrows $100,000 from a bank. x The terms of the loan require the firm to make equal, yearly payments, at the end of each year, over the next five years. x The bank charges 4% interest. Cash Interest Principal Adjustment Principal Balance 4% 100,000 4,000 18,463 81,537 2,493 19,969 42,367 1,695 20,768 21,599 864 21,599 0 51. Refer to the previous question. What is the journal entry, from the borrower’s perspective, to recognize the second payment to the bank. Assets Liabilities Owners’ Equity Debit Credit $ $ 52. Refer to the previous question. Under U.S. GAAP, how much of the cash payment is classified as operating cash flow? 53. Given the below, partial bond accretion table, what was the market rate of interest when the bond was issued? Cash Interest Principal Adjustment Principal Balance 803.637 60.000 807.928 54. Refer to the above problem. What is the proper journal entry to recognize the first coupon payment? Assets Liabilities Owners’ Equity Debit Credit $ $ 11 55. A firm (a lessee) leases equipment from a lessor. The lease is an operating lease. The yearly lease payment is $1,000. Journalize the first lease payment. Assets Liabilities Owners’ Equity Debit Credit $ $ 56. A firm (a lessee) leases equipment from a lessor. The lease is a capital lease. The yearly (end of year) lease payment is $1,000 and the appropriate interest rate is 10%. The lease’s duration is 2 years. Journalize the first lease payment. Assets Liabilities Owners’ Equity Debit Credit $ $ 57. How many shares of stock would be classified as issued and outstanding, given the following fact set? x The board authorized 1,000 shares. x The firm sold 400 shares in its IPO x The firm subsequently repurchased 100 shares. 58. How much of a dividend would be allocated to a firm’s preferred shareholders and to its common shareholders, given the following set of facts? x The firm declares a $10,000 dividend. x The firm has 100,000 shares of 6%, $1 par value preferred stock issued and outstanding. x The firm also has 200,000 shares of $1 par value common stock issued and outstanding. x The firm has 2,000 shares of common stock in treasury. Class of Stock Total Amount of Dividend Preferred Common 59. What is the cash flow category for a firm’s initial sale of its own stock (Operating, Investing, Financing)? a. Operating b. Investing c. Financing d. Both b and c. 60. What is the cash flow category for a firm’s repurchase of its own stock (Operating, Investing, Financing)? a. Operating b. Investing c. Financing d. Both a and b. 12 61. What is the cash flow category for a firm’s payment of a dividend to its investors (Operating, Investing, Financing)? a. Operating b. Investing c. Financing d. Both a and c. 62. What are the journal entries for the following two transactions? a. A firm buys back two shares of its own stock for $40 per share. Assets Liabilities Owners’ Equity Debit Credit $ $ b. The firm sells one of the above treasury shares for $50 per share. Assets Liabilities Owners’ Equity Debit Credit $ $ 63. What is the formula for calculating operating cash flows using the indirect method? a. Net Income + Gains – Losses + Changes in Operating Assets – Changes in Operating Liabilities b. Net Income – Gains + Losses + Changes in Operating Assets – Changes in Operating Liabilities c. Net Income + Gains – Losses – Changes in Operating Assets + Changes in Operating Liabilities d. Net Income – Gains + Losses – Changes in Operating Assets + Changes in Operating Liabilities 64. True / False: Cash paid for equipment that is purchased by a firm would be classified as an investing cash flow if the equipment is classified as PP&E, but operating cash flow if the equipment is classified as inventory. 65. True / False: Under U.S. GAAP, the payment of interest is classified as a financing cash flow, but the receipt of interest is classified as an investing cash flow. 66. True / False: Under U.S. GAAP, the receipt of a cash dividend is classified as an investing cash flows, but the payment of a dividend is classified as a financing cash flow. 67. True / False: Under U.S. GAAP, both the cash paid to purchase PP&E and cash received from the sale of PP&E are classified as investing cash flows. 68. How much cash did a firm pay for purchases of PP&E given the following fact set (and assuming that the firm pays cash for all “capex”)? x The beginning and ending balances in the PP&E account are $100 and $80, respectively. x The beginning and ending balances in accumulated depreciation are 50 and 20, respectively. x Depreciation expense for the period is $10. x The firm also sold PP&E with a cost of $60 and a book value of $20. x Finally, the firm also recognized an impairment of PP&E of $40. 13 69. How much cash did a firm collect from its customers, given the following fact set? Beginning and ending accounts receivable were $50 and $60, respectively. Beginning and ending allowance for doubtful accounts were $8 and $10, respectively. The firm had credit sales of $100. The firm also estimated bad debt expense to be $5. Finally, the firm wrote-off $3 of receivables as uncollectible. 70. Assume a lessee signs a lease agreement to lease property for 15 years. The lease is a capital lease. Assume the appropriate interest rate is 10% and the yearly lease payment is $1,000. The lessee has no other debt on its balance sheet and it has total Owners’ Equity of $10,000. What is the lessee’s debt to capital ratio? a. 0% b. 10% c. 25% d. 43% e. 62% 71. A firm has $1,000,000 in its bank account. The interest earned on the account is 5% per year. The firm needs to withdraw $100,000 per year over the next five years, at the end of each year. At the end of the fifth year, how much will the firm have in its bank account? a. 750,000 b. 723,718 c. 500,689 d. 489,268 72. What is the issue price of a bond with the following terms: x The bond matures in 10 years. x The stated rate of interest on the bond is 6%. x The market rate of interest is 4%. x The bond pays interest every year (on a yearly basis). x The par value of the bond is $1,000. 14 Consider the following consecutive balance sheets and income statement for a firm. In the space provided, derive the statement of cash flows, using the indirect method for operating cash flows. Note: The loss refers to the sale of the long term investment. Note: You must calculate the dividends (which are assumed to be paid). 2012 Sales 250 COGS -100 Depreciation Expense -10 Interest Expense -10 Loss -5 Pre-tax Income 125 Income Tax Expense -50 Net Income 75 Dividends Paid ? 2012 2011 Change Cash 105 86 19 Accounts Receivable 28 32 -4 Inventory 34 35 -1 Long term Investment 8 20 -12 PP&E 140 130 10 A/D -60 -50 -10 Total Assets 255 253 2 Accounts Payable 32 30 2 Interest Payable 2 4 -2 Income Tax Payable 1 4 -3 Notes Payable 110 140 -30 Stock 40 40 0 Treasury Stock -5 -5 0 Retained Earnings 75 40 35 Total Liabilities & O.E. 255 253 2 15 76. Given the below information, provide the journal entry to recognize tax expense. Assume taxes are paid immediately (with cash). Note: the statutory rate is assumed to be 40%. Assume the interest income is permanently non-taxable. You will have to decide whether there is any deferred tax position, given these facts. Income Statement Tax Return Difference: Permanent Revenues 400 400 Cost of Goods Sold – 150 – 150 SG&A Expense – 50 – 50 Depreciation Expense – 20 – 20 Interest Income 20 0 20 Pre-Tax Income 200 Taxable Income 180 Statutory Rate 40% 40% Tax Expense ? Taxes Paid (Cash) ? Deferred Tax? ? Tax Expense: Assets Liabilities Owners’ Equity Debit Credit $ $ 77. Refer to the previous problem. Calculate the effective tax rate: 78. Given the below information, calculate the amount of tax expense. Assume taxes are paid immediately (with cash). Note: the statutory rate is assumed to be 35%. You will have to decide whether there is any deferred tax position, given these facts. Income Statement Tax Return Difference: Temporary Revenues 500 500 Expenses – 100 – 100 Depreciation Expense – 40 – 100 60 Pre-tax Income 360 Taxable Income 300 Statutory Tax Rate 35% 35% Tax Expense ? Taxes Paid (Cash) ? Deferred Tax ? 16 79. What is the amount of tax expense? 80. Describe the controversy with respect to the recognition of deferred tax liabilities. 17
1
. What are the missing numbers for the below income statement
?
|
Revenue s |
1 0 0 |
|||||||||||||||||||||
|
Cost of Goods Sold |
? |
|||||||||||||||||||||
|
Gross Margin |
6 0 |
|||||||||||||||||||||
|
SG&A Expense |
||||||||||||||||||||||
|
Pre-tax Income |
2 0 |
|||||||||||||||||||||
|
Tax Expense ( 4 0 % of Pre-tax Income) |
||||||||||||||||||||||
|
Net Income |
2. What is the missing number from the below cash flow statement?
|
Beginning Balance |
Operating Cash Flow |
Investing Cash Flow |
Financing Cash Flow |
Ending Balance |
|
– 20 |
8 0 |
3
. What are the missing numbers for the below balance sheet?
Assets
1
5
Accounts Receivable
?
Inventory
60
Total Current Assets
9
7
Property, Plant, and Equipment
, net
?
Intangible Assets
20
Total Assets
257
Liabilities
Accounts Payable
40
Accrued Operating
Expenses
50
Total Current Liabilities
?
Notes Payable
?
Total Liabilities
19
0
Owners’ Equity
Stock
20
Retained Earnings
?
Total Liabilities and Owners’ Equity
?
1
4. Given the following data, what is net income? (Note: Not all items shown below will be included in income.)
Cost of Goods Sold
8
Accounts Payable
2
2
Taxes Payable
6
Revenues
40
Interest
Payable
1
4
Accumulated Depreciation
11
Depreciation Expense
Interest Expense
Dividends
3
5. What is the missing number in the below Retained Earnings account. (Provide both the amount and the name.)
|
Beginning Balance |
Net Income ( Loss ) |
Ending Balance |
|
21 |
98 |
6. What is the correct journal entry for the purchase of office supplies for
$
10 cash, if the supplies are capitalized?
|
Owners’ Equity |
Debit |
Credit |
$ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
7. What are the effects on current income and on future income, if a firm incorrectly capitalizes an expenditure that it should have expensed?
State your answer for both current income and future income as “overstated” or “understated”.
|
Overstated or Understated? |
|
Current Income |
|
Future Income |
8. What is the correct journal entry for the following transaction. A firm sells a car for $40 cash. The cost of the car is
$
30
. The firm is a car dealer, and the car is therefore classified as inventory.
Assets
Liabilities
Owners’ Equity
Debit
Credit
$
$
2
9. Refer to the above. If the firm had not been a car dealer and had classified the car as property, plant, and equipment (
PP&E
), rather than inventory, which of the below would be correct?. (Circle your answer.)
a. Net Income would be unaffected.
b. A gain would be reported instead of revenues and
COGS
. c. PP&E would be reduced, instead of Inventory.
d. All of the above.
e. None of the above.
10. Provide the closing entry, given the following temporary accounts, with amounts in parentheses: Revenues (80), COGS (25), SG&A Expense (
15
), Interest Expense (10), and Tax Expense (8).
11. Indicate by check mark (“9”) or “X” which accounts are found on the income statement and which accounts are found on the balance sheet.
|
Account Name |
Income Statement |
Balance
Sheet |
|
Allowance for Bad Debt |
||
|
Bad Debt Expense |
||
|
Prepaid Expense |
||
|
Unearned Revenue |
||
| Revenue |
12
. What is insurance expense for the year
2012
, given the following set of facts? The firm prepays two years of insurance premiums on 7/1/12. The amount paid is $24. The firm’s fiscal yearend (FYE) is 12/31.
13. What are the journal entries to recognize the following two, related transactions?
a. On January 1, 2010, the firm sells a gift card for
$10
0.
Assets
Liabilities
Owners’ Equity
Debit
Credit
$
$
b. On March 15, 2010, the gift card is used by a customer to buy merchandise for $80. The cost of the merchandise sold was
$60
.
Assets
Liabilities
Owners’ Equity
Debit
Credit
$
$
14
. What are the journal entries to recognize the following two, related transactions?
a. A firm prepays $7 in insurance premiums.
Assets
Liabilities
Owners’ Equity
Debit
Credit
$
$
b. A firm expenses $6 of previously prepaid insurance premiums.
Assets
Liabilities
Owners’ Equity
Debit
Credit
$
$
15. What, if any, is the journal entry to recognize a possible contingent liability (for example, resulting from a lawsuit)
of $20.
Assets
Liabilities
Owners’ Equity
Debit
Credit
$
$
16. What, if any, is the proper journal entry for a firm to recognize the increase in the value of its own stock from $40 to $50?
Assets
Liabilities
Owners’ Equity
Debit
Credit
$
$
17. What is the formula for the ratio that would answer the following questions:
|
Question |
Formula for Ratio to Answer Question |
|
How long does it take a firm to pay its bills (on average)? |
|
|
How long does it take a firm to sell its inventory (on average)? |
4
18. What was the amount of cash a firm collected from its customers, given the following fact set?
The firm’s balance sheets at the beginning and end of the year show gross accounts receivable of $
32
and $
28
, respectively.
Also, the firm’s beginning and ending allowance for uncollectible accounts are -$4 and -$5, respectively. Bad debt expense was $4, which was 2% of credit sales. The firm makes all sales on account.
19. What is bad debt expense, using the aging method (also called the “percentage of receivables” method), given the following set of facts?
x
A firm has
$80
of gross accounts receivable.
x
The firm estimates that for $20 of the receivables, 10% are expected to be uncollectible.
x
The firm estimates that for the remaining $60 of the receivables, 50% are expected to be uncollectible.
x
The opening balance in the allowance account was $45 and write-offs for the period were $20. Thus, the amount in the allowance account, after write-offs, but before bad debt expense was $25.
20. Given the below information, what are the values for COGS and ending inventory for each costing method below?
Number of Units
Price per Unit
Beginning inventory
10
2
Purchases
20
3
Sale
s
15
Ending inventory
|
Goods Available for Sale |
COGS |
Ending Inventory |
|
|
FIFO |
20 + 60 = 80 |
||
|
LIFO |
21. Given the below information, what is the dollar amount that the LIFO liquidation added to gross margin?
Number of Units
Price per Unit
Purchases
12
3
Sales
15
5
22
. What inventory costing method gives the lowest
inventory valuation in inflationary periods?
a. FIFO
b. LIFO
c. Average d. LILO
e. FILO
23. What inventory costing method gives the lowest
net income in inflationary periods?
a. FIFO
b. LIFO
c. Average d. LILO
e. FILO
24. What is the effect on net income if inventory is overstated?
a. Net income will also be overstated. b. Net income will be understated.
c. Net income will be unaffected.
d. It depends on whether the firm is using LIFO for FIFO. e. None of the above.
25. What are the journal entries to recognize each of the below events.
a. The firm records bad debt expense of 5% of credit sales, which were $
300
. The firm uses the Percentage of
Credit Sales Method. Journalize bad debt expense.
Assets
Liabilities
Owners’ Equity
Debit
Credit
$
$
b. The firm subsequently writes-off $10 of receivables. Record the write-off.
Assets
Liabilities
Owners’ Equity
Debit
Credit
$
$
26. Given the following set of facts, what is the net amount of cash received by the seller?
The seller records a credit sale for $1,000. Shortly after the sale, the buyer returns $
250
and the seller credits the receivable by this amount. The seller also grants a further allowance to the buyer for $100. Finally, the buyer pays within the discount period to take advantage of a 2% discount.
6
27. Refer to the data in the above problem. With respect to the above purchase, what is the amount that the buyer
will show as inventory on its balance sheet after all returns, discounts, and allowances?
28. What is the proper journal entry for a firm that factors a $100 receivable at a bank, which charges a 1% fee.
Assets
Liabilities
Owners’ Equity
Debit
Credit
$
$
29. With respect to “factoring,” what is the difference between “with recourse” and “without recourse”?
a. With recourse means that the bank ultimately bears the credit risk.
b. Without recourse means that the bank ultimately bears the credit risk.
c. With recourse means that the firm that factored the receivable ultimately bears the credit risk.
d. Without recourse means that the firm that factored the receivable ultimately bears the credit risk. e. Both b and c.
30. What is the name of the accounting method that is used when the level of ownership in an equity investment rises to the level of significant influence?
a. fair value method
b. mark-to-market method c. control method
d. equity method e. cost method
31. What is the main attribute of an intangible asset that is used to determine whether or not it will be amortized?
32. What is the main attribute of a repair or maintenance expenditure that determines whether or not it will be capitalized?
33. Given the below facts, what is the total income effect for the year for an investor for its passive-level, trading investment? (Note: the investment is not sold during the year.)
|
Type of Investment: Passive Ownership, Trading |
|||||
|
Cost of Investment |
$80 | ||||
|
Fair value of investment at end of the year |
$60 |
||||
|
Dividends received from investment over the year |
$10 | ||||
|
Total income effect for the year |
7
34
. Given the below facts, what is the total income effect for the year for an investor for its passive-level, available-for- sale security? (Note: the investment is not sold during the year.)
|
Type of Investment: Passive Ownership, Available for Sale |
35
. Given the below facts, what is the total income effect for the year for an investor for its equity-method investment?
|
Type of Investment: Equity Method |
|
|
$90 |
|
|
Total dividends received from investment over the year |
|
|
Total Net income of investee over the year |
$ 200 |
|
Percentage of voting shares of investee owned by investor |
20% |
|
Income for the year |
36. What is depreciation expense for an asset’s first year, using the double declining balance method, given the following information? The cost of the asset is $800, the expected useful life is 5 years, and the salvage value is estimated to be $160.
37. What is the journal entry to record the sale of a depreciable asset (PP&E) that costs $100 and has accumulated depreciation of $40, assuming a selling price of $40. Assume that the PP&E is sold for cash.
38. What is the journal entry to record a $1,000 (cash) expenditure on ordinary repairs and maintenance?
Assets
Liabilities
Owners’ Equity
Debit
Credit
$
$
8
39. What is the amount of a) interest capitalized and b) interest expensed, given the following information? The firm spends $100 to self-construct a building for its own use. The firm has debt of $
500
that has an interest rate of
6%.
40. What is the journal entry, if any, given the following set of facts? A firm has equipment with a book value (cost minus accumulated depreciation) of $380. However, the fair value of the equipment is only $200 and is not likely to recover.
Assets
Liabilities
Owners’ Equity
Debit
Credit
$
$
41. What is the amount of goodwill recognized where an acquirer buys 100% of the below target firm by paying $50 of cash to the target firm’s shareholders. Note: all items below are at market value.
|
Balance Sheet Items of Target Firm |
||
| Property, Plant, and Equipment | 30 | |
|
Total Assets |
$60 | |
42. What is the main purpose of the closing entry?
43. What is one perceived deficiency of the fundamental equation of accounting (Assets = Liabilities + Owners’ Equity)?
44. Which of the below cash flows is classified as an operating cash flow?
a. Cash paid to investors as a dividend. b. Cash received in a loan from a bank c. Cash paid to suppliers for inventory
d. Cash paid to suppliers for property, plant, and equipment e. None of the above
9
45. Which of the below is a temporary account?
a. Selling, General, and Administrative Expenses b. Prepaid Expenses
c. Retained Earnings
d. Unearned Revenues e. Stock
46. What is the main distinction between a revenue and a gain?
a. Gains are from a firm’s central and ongoing operations b. Revenues are from a firm’s peripheral activities
c. Gains are always realized, but revenues are not d. Gains result from a sale of inventory
e. None of the above.
47. What does NCI stand for and when is this account used in a firm’s financial statements?
48. How much cash did the following firm pay its vendors, given the below information about its accounts payable account (amounts are in parentheses):
Beginning balance of accounts payable ($16); credit purchases of inventory ($20); ending balance of accounts payable ($6).
49. What is the amount of compensation expense recognized for stock options for each year of the vesting period, given the following information?
x
A firm awards stock options at-the-money when the stock is trading at $18 per share.
x
The Black-Scholes value of the options is $6.
x
The vesting period is two years.
x
Upon vesting, the stock is trading at $20 per share.
10
50. What are the missing amounts for the below amortization table, given the following information?
x
A firm borrows $
100,000
from a bank.
x
The terms of the loan require the firm to make equal, yearly payments, at the end of each year, over the next five years.
x
The bank charges
4%
interest.
| Interest |
Principal Adjustment |
Principal Balance |
|||
| 4% | 100,000 | ||||
|
4,000 |
18,463 |
81,537 |
|||
|
2,493 |
19,969 |
42,367 |
|||
|
1,695 |
20,768 |
21,599 |
|||
|
86 4 |
0 |
51. Refer to the previous question.
What is the journal entry, from the borrower’s perspective, to recognize the second payment to the bank.
|
Debit |
52. Refer to the previous question.
Under U.S. GAAP, how much of the cash payment is classified as operating cash flow?
53. Given the below, partial bond accretion table, what was the market rate of interest when the bond was issued?
|
803.637 |
|
|
60.000 |
807.928 |
54. Refer to the above problem. What is the proper journal entry to recognize the first coupon payment?
Assets
Liabilities
Owners’ Equity
Debit
Credit
$
$
55. A firm (a lessee) leases equipment from a lessor. The lease is an operating lease. The yearly lease payment is
$1,000. Journalize the first lease payment.
Assets
Liabilities
Owners’ Equity
Debit
Credit
$
$
56. A firm (a lessee) leases equipment from a lessor. The lease is a capital lease. The yearly (end of year) lease payment is $1,000 and the appropriate interest rate is 10%. The lease’s duration is 2 years. Journalize the first lease payment.
Assets
Liabilities
Owners’ Equity
Debit
Credit
$
$
57. How many shares of stock would be classified as issued and outstanding, given the following fact set?
x
The board authorized 1,000 shares.
x
The firm sold
400
shares in its IPO
x
The firm subsequently repurchased 100 shares.
58. How much of a dividend would be allocated to a firm’s preferred shareholders and to its common shareholders, given the following set of facts?
x
The firm declares a $10,000 dividend.
x
The firm has 100,000 shares of 6%, $1 par value preferred stock issued and outstanding. x
The firm also has 200,000 shares of $1 par value common stock issued and outstanding. x
The firm has 2,000 shares of common stock in treasury.
|
Class of Stock |
Total Amount of Dividend |
|
Preferred |
|
|
Common |
59. What is the cash flow category for a firm’s initial sale of its own stock (Operating, Investing, Financing)?
a. Operating b. Investing c. Financing
d. Both b and c.
60. What is the cash flow category for a firm’s repurchase of its own stock (Operating, Investing, Financing)?
a. Operating b. Investing c. Financing
d. Both a and b.
61. What is the cash flow category for a firm’s payment of a dividend to its investors (Operating, Investing, Financing)?
a. Operating b. Investing c. Financing
d. Both a and c.
62. What are the journal entries for the following two transactions?
a. A firm buys back two shares of its own stock for $40 per share.
Assets
Liabilities
Owners’ Equity
Debit
Credit
$
$
b. The firm sells one of the above treasury shares for $50 per share.
Assets
Liabilities
Owners’ Equity
Debit
Credit
$
$
63. What is the formula for calculating operating cash flows using the indirect method?
a. Net Income + Gains – Losses +
Change
s in Operating Assets – Changes in Operating Liabilities b. Net Income – Gains + Losses + Changes in Operating Assets – Changes in Operating Liabilities c. Net Income + Gains – Losses – Changes in Operating Assets + Changes in Operating Liabilities d. Net Income – Gains + Losses – Changes in Operating Assets + Changes in Operating Liabilities
64. True / False: Cash paid for equipment that is purchased by a firm would be classified as an investing cash flow if the equipment is classified as PP&E, but operating cash flow if the equipment is classified as inventory.
65. True / False: Under U.S. GAAP, the payment of interest is classified as a financing cash flow, but the receipt of interest is classified as an investing cash flow.
66. True / False: Under U.S. GAAP, the receipt of a cash dividend is classified as an investing cash flows, but the payment of a dividend is classified as a financing cash flow.
67. True / False: Under U.S. GAAP, both the cash paid to purchase PP&E and cash received from the sale of
PP&E are classified as investing cash flows.
68. How much cash did a firm pay for purchases of PP&E given the following fact set (and assuming that the firm pays cash for all “capex”)?
x
The beginning and ending balances in the PP&E account are $100 and $80, respectively.
x
The beginning and ending balances in accumulated depreciation are 50 and 20, respectively.
x
Depreciation expense for the period is $10.
x
The firm also sold PP&E with a cost of $60 and a book value of $20.
x
Finally, the firm also recognized an impairment of PP&E of $40.
13
69. How much cash did a firm collect from its customers, given the following fact set? Beginning and ending accounts receivable were $50 and $60, respectively. Beginning and ending allowance for doubtful accounts were $8 and
$10, respectively. The firm had credit sales of $100. The firm also estimated bad debt expense to be $5. Finally, the firm wrote-off $3 of receivables as uncollectible.
70. Assume a lessee signs a lease agreement to lease property for 15 years. The lease is a capital lease. Assume the appropriate interest rate is 10% and the yearly lease payment is $1,000. The lessee has no other debt on its balance sheet and it has total Owners’ Equity of $10,000. What is the lessee’s debt to capital ratio?
a. 0% b. 10% c. 25% d. 43% e. 62%
71. A firm has $1,000,000 in its bank account. The interest earned on the account is 5% per year. The firm needs to withdraw $100,000 per year over the next five years, at the end of each year. At the end of the fifth year, how much will the firm have in its bank account?
a.
75
0,000 b. 723,718 c. 500,689 d. 489,268
72. What is the issue price of a bond with the following terms:
x
The bond matures in 10 years.
x
The stated rate of interest on the bond is 6%.
x
The market rate of interest is 4%.
x
The bond pays interest every year (on a yearly basis).
x
The par value of the bond is $1,000.
14
Consider the following consecutive balance sheets and income statement for a firm. In the space provided, derive the statement of cash flows, using the indirect method for operating cash flows. Note: The loss refers to the sale of the long term investment. Note: You must calculate the dividends (which are assumed to be paid).
| 2012 | |||
| 250 | |||
|
-1 0 0 |
|||
|
-10 |
|||
| Loss |
-5 |
||
|
125 |
|||
|
Income Tax Expense |
-50 |
||
| 75 | |||
|
Dividends Paid |
|
2011 |
Change | ||
|
105 |
86 | 19 | |
| 28 | 32 |
-4 |
|
| 34 | 35 | -1 | |
|
Long term Investment |
-12 |
||
| PP&E |
140 |
130 |
|
|
A/D |
-60 |
||
|
255 |
253 |
||
|
-2 |
|||
|
Income Tax Payable |
-3 |
||
|
110 |
-30 |
||
|
Treasury Stock |
|||
|
Total Liabilities & O.E. |
15
76. Given the below information, provide the journal entry to recognize tax expense. Assume taxes are paid immediately
(with cash). Note: the statutory rate is assumed to be
40%
.
Assume the interest income is permanently non-taxable. You will have to decide whether there is any deferred tax position, given
these facts.
|
Income
Statement |
Tax Return |
Difference: Permanent |
||
| 400 | ||||
|
– 150 |
||||
|
– 50 |
||||
|
Interest Income |
||||
|
Pre-Tax Income |
200 | |||
|
Taxable Income |
180 |
|||
|
Statutory Rate |
40% | |||
|
Taxes Paid (Cash) |
||||
|
Deferred Tax ? |
Tax Expense:
Assets
Liabilities
Owners’ Equity
Debit
Credit
$
$
77. Refer to the previous problem. Calculate the effective tax rate:
78. Given the below information, calculate the amount of tax expense. Assume taxes are paid immediately (with cash).
Note: the statutory rate is assumed to be
35%
. You will have to decide whether there is any deferred tax position, given
these facts.
|
Difference: Temporary |
|||
| 500 | |||
| Expenses |
– 100 |
||
|
– 40 |
|||
|
360 |
|||
| 300 | |||
|
Statutory Tax Rate |
35% | ||
| Deferred Tax |
16
79. What is the amount of tax expense?
80. Describe the controversy with respect to the recognition of deferred tax liabilities.
17
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Answer both questions (50 points each: total = 100 points). Please show all work, including calculator keystrokes or Excel functions for time value of money calculations, so the maximum partial credit may be given.
1.
The president of Receding Airlines has asked you to calculate the company’s cost of capital. To start, you have gathered the following information:
(1)
RecedingAir has the following securities outstanding:
· $1,000 face value, 8% annual coupon bonds with 15 years remaining to maturity and a current market price of $1,150.
· $100 par value preferred stock that pays an 11% annual dividend and has a current market price of $92.
· Common stock with a current market price of $50/share. Investors expect the next annual dividend to be $4.00 and to grow after that at a constant rate of 7% per year into the foreseeable future.
(2)
If RecedingAir were to issue new securities today:
· New bonds would pay interest annually, have a 15-year life, and incur a flotation cost of 3%.
· A new issue of preferred stock would pay annual dividends and incur flotation costs of 6%
· A new issue of common stock would incur flotation costs of 8%.
(3)
RecedingAir’s income is taxed at a 35% marginal rate.
(4)
RecedingAir’s target capital structure is 35% long-term debt, 15% preferred stock, and 50% common equity.
(5)
RecedingAir forecasts it will retain $25,000,000 of earnings in the coming year.
Required
a.
What is the required rate of return of RecedingAir’s bondholders?
b.
What is RecedingAir’s cost of debt?
c.
What is the required rate of return of RecedingAir’s preferred stockholders?
d.
What is RecedingAir’s cost of preferred stock financing?
e.
What is the required rate of return of RecedingAir’s common stockholders?
f.
What is RecedingAir’s cost of retained earnings financing?
g.
What is RecedingAir’s cost of a new common stock issue?
h.
What is RecedingAir’s weighted-average cost of capital (WACC) for its first dollar of new financing?
i.
How much total new financing can RecedingAir raise before its supply of new retained earnings financing is exhausted and there is a break in the cost of capital schedule?
j.
What would RecedingAir’s weighted-average cost of capital (WACC) become should it require more financing this year than the amount you calculated in part h, above?
2.
You have just been hired by Edifice Wrecks, Inc. (the demolition company) to evaluate a proposal to purchase a new solar-powered, web-enabled building smasher to replace an existing hand-powered smasher. You have discovered that:
· The old hand-powered smasher was purchased 5 years ago for $90,000 and is being depreciated for tax purposes using the straight-line method over an 8-year life to a $10,000 salvage value. The old smasher’s salvage value remains $10,000, however, it could be sold today for $25,000. $15,000 is invested in working capital in support of this smasher.
· The new smasher would cost $125,000 and be depreciated for tax purposes using the straight-line method over a 3-year life to a salvage value of $5,000. With the new smasher, revenues are expected to increase from $4,000,000 to $4,055,000 in each of the next 3 years. At the end of the 3 years, the new smasher could be sold for its accounting salvage value of $5,000. The new smasher would require $25,000 in supporting working capital.
· The firm is in the 35% marginal income tax bracket and has a 13% cost of capital.
Required
a.
Prepare the cash flow spreadsheet for the analysis of this project.
b.
Calculate the project’s:
1)
net present value (NPV)
2)
internal rate of return (IRR)
c.
Should the new smasher be purchased? Why or why not?
