of Solution the final exam COMM 217 Fall 2006 Question 1 (24 marks; 1.5 mark each) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13 14. 15. 16. A A B C B C A D A C B B C D D B
Question 2 (18 marks) Part A (12 marks) Req. 1 (3 marks) Units (boxes) sold = 500 + 700 = 1,200 Cost of goods sold (FIFO, periodic) consists of the following: All of the purchase of January 5 (i.e., 800 units) Plus: 400 units from the purchase of Jan. 15 (400 x $132,000 / 600) Cost of goods sold (FIFO, periodic) $160,000 88,000 $248,000
Req. 2 (4 marks) Units (cartons) sold = 1,200 (see Req. 1) Cost of goods sold (LIFO, periodic) consists of the following: All of the purchase of January 30, i.e., 500 units $110,000 Plus: all of the purchase of January 15, i.e., 600 units 132,000 Plus: 100 units from the purchase of Jan. 5 (100 x $160,000 / 800) 20,000 Cost of goods sold (LIFO, periodic) $262,000 The cost of goods sold is therefore higher under LIFO than FIFO by $14,000 (= $262,000 - $248,000). Income before tax is therefore lower by $14,000, and net income is lower by $9,800 (=$14,000 x 70%) under LIFO compared to FIFO.
Req. 3 (3 marks) The weighted average unit cost = $160,000 + $132,000 + $110,000 = $402,000 = $211.58 800 + 600 + 500 1,900 Since the net realizable value per unit is $205, the book value of inventory should be reduced by $6.58 per unit in conformity with the lower-of-cost-and-market rule . Units in ending inventory = 1,900 500 700 = 700 700 x $205 = $143,500 Req. 4 (2 marks) When a perpetual inventory system is used, the weighted average cost is calculated after each purchase. Since the purchase price per box increased during the month, the ending inventory would be higher.
Part B (6 marks) 1. November 25: Purchases ............................................................................ Accounts payable ............................................................. December 7: Transportation (or Freight) expense ....................................... Accounts Payable ............................................................. 2. November 27: Accounts receivable ............................................................... Sales revenue ................................................................... November 30: Delivery expense .................................................................... Cash ................................................................................. Sales Returns and Allowance (25 x $30) ................................ Accounts receivable .......................................................... Price per dress = $7,500 / (500/2) = $30
10,000 10,000
500 500
7,500 7,500
200 200 750 750
Question 3 (20 marks) 1. (4 marks) Acquisition cost = $20,000 (2,000 shares x $10) + $30,000 (note payable) + $ 9,900 [($60,000 $50,000) x 99% (the cash discount is not included in the cost) + $ 1,100 (freight costs) + $ 3,000 (cost of pollution-control device) + $ 6,000 (architect's fees) = $70,000 2. (4 marks) SL: ($70,000 - $5,000) / 10 = $6,500 (1.5 marks)
UOP: ($70,000 - $5,000) / 65,000) = $1 per unit 9,000 units x $1 per unit = $9,000 (1.5 marks) DDB: ($70,000 x 2 / 10) = $14,000 (1 mark)
3.
(8 marks) Annual amortization during 1998 to 2001 = ($111,000 $3,000) / 12 = $9,000
Accumulated amortization up to December 31, 2001: $9,000 x 4 = $36,000 Book value on January 1, 2002: = $111,000 - $36,000 = $75,000 Annual amortization during 2002 to 2006 = ($75,000 - $5,000) / 5 = $14,000 Accumulated amortization from January 1, 2002 through June 30, 2006: $14,000 x 4.5 years = $63,000 Total accumulated amortization = $36,000 + $63,000 = $99,000 Book value of machinery on July 1 = $111,000 - $99,000 $12,000 = Gain on sale = $16,000 - $12,000 = $4,000 Journal entry: Cash Notes receivable Accumulated amortization Gain on sale of machinery Machinery 4. 10,600 5,400 99,000 4,000 111,000
(4 marks) Goodwill = $400,000 ($750,000 - $450,000) = $100,000 Goodwill is not amortized over time. However, the company must evaluate goodwill every year to determine if its value has been impaired. If so, its book value should be reduced. (2 marks)
Question 4 (22 marks) 1. (7 marks) Calculation of proceeds: Use n = 8; i = 5%. PV of principal = ($16,000,000 x .6768) = $10,828,800 PV of interest payments = ($16,000,000 x .08 x 1/2 x 6.4632) = 4,136,448 Bond issue costs 100,000 $14,865,248 Journal entry: Cash Discount on bonds payable 14,965,248 1,034,752
Bonds payable Bond issue costs Cash 2. (8 marks) Recording of interest expense on September 30:
16,000,000 100,000 100,000
Bond interest expense ($14,965,248 x 5%) 748,262 Discount on bonds payable Cash ($16,000,000 x 4%) Bond interest expense Bond issue costs ($100,000 / 8 periods)
108,262 640,000
12,500 12,500
Accrual of interest on December 31, 2006 (3 months) Bond interest expense Discount on bonds payable Bond interest payable [$640,000 x (3/6) ] [($14,965,248 + $108,262) x 5%] x (3/6) Bond interest expense [$12,500 x (3/6) ] Bond issue costs 376,838 56,838 320,000
6,250 6,250
3. (5 marks) Excerpt from Parkco's balance sheet, December 31, 2006 Long-term Assets Deferred expenses: unamortized bond issue costs ($100,000 x 39/48 = $81,250) Current Liabilities Bond interest payable Long-term debt Bonds payable, 8%, due March 31, 2010 Less: Discount on bonds payable Book value
$ 81,250
$ 320,000
$16,000,000 869,652 $15,130,348
Unamortized bond discount = $1,034,752 $108,262 $56,838 = $869,652 4. (2 marks) Operating activities: the loss on bond redemption is added to net income Financing activities: cash paid to redeem the bonds is deducted as a use of cash
Question 5 (16 marks) Req. 1 (12 marks)
Profitability Ratios Calculation Explanation
Return on equity
= 540 / [(1,680 + 1,980) / 2] = 29.5%
Measures how much the firm earned for each dollar of shareholders' investment Measures how much the firm earned for each dollar of investment by both shareholders and creditors
Return on assets
= [540 + 60 (1 - 0.27)] / [(2,800 + 3,260) / 2] = 19% Tax rate = 200 / 740 = 27%
Net profit margin
= 540 / 3,280 = 16.46%
Measures how much profit the firm earned from every sales dollar generated during the period Represents the ability of management to effectively utilize property, plant and equipment to generate revenue
Fixed asset turnover ratio
= 3,280 / [(1,706 + 1,714) / 2] = 1.92
Liquidity Ratios Current ratio = 1,546 / 480 = 3.22 Ability of the company to pay its current liabilities It is a more stringent test of liquidity than the current ratio Measures the adequacy of available cash to meet current obligations Indicates how many times average trade receivables were recorded and collected during the period Reflects how many times the average inventory was purchased and sold during the period
Quick ratio
= (104 + 396 + 160) / 480 = 1.38
Cash ratio
= (104 + 160) / 480 = 0.55
Receivable turnover
= 3,280 / [(160 + 396) / 2] = 11.80
Inventory turnover
= 1,600 / [(720 + 880) / 2] = 2.00
Req. 2 (4 marks)
Transaction
Effect on Current Ratio Increase
Explanation
Sale of merchandise to customers
The numerator of the ratio (COGS) increases while the denominator (inventory) decreases.
Ordering new products for future No effect delivery
The merchandise inventory was simply ordered, so the inventory account will increase only when the merchandise is delivered.