101, Name:
Accounting Fall 2008
Name:
PENN ID:
__________________________
ACCOUNTING 101, EXAM #2
Fall Semester, 2008
Instructions:
1. There are 19 numbered pages in this booklet. Make sure you have all the pages
before you begin.
2. Please print your name and student number at the top of this page. Also print your
name on all subsequent pages.
3. This exam has 90 total points. You have 120 minutes to complete the exam so please
budget your time accordingly.
4. Answer the problems in the space provided within this booklet. Present your work in
an orderly fashion to facilitate the awarding of partial credit for certain questions. In
order to receive partial credit, you must show your work. Partial credit can only be
awarded for work that is presented in a clear, legible, and logical manner.
5. In the interest of fairness to all students, NO questions will be answered during the
exam. If you think a question is ambiguous, explicitly state an appropriate
assumption and continue with the question.
6. The exam is closed book and the use of a laptop computer is prohibited. You are
permitted to use ONE double-sided 8 x 11 inch reference sheet. You are also
permitted to use a calculator.
7. Exams written in pencil will not be considered for a re-grade. Use a pen if you think
you might submit your exam for a re-grade request.
Question
1
2
3
4
5
Points Allocated
20
11
20
23
16
1
Points Earned
Name:
Accounting 101, Fall 2008
Question 1 Multiple Choice (20 points)
1. Warren Company plans to depreciate a new building using declining-balance
depreciation with a 200 percent acceleration rate. The building cost $800,000. The
estimated residual value of the building is $50,000 and it has an expected useful life of 25
years. Assuming the first year's depreciation expense was recorded properly, what would
be the amount of depreciation expense for the second year?
A)
B)
C)
D)
E)
$30,720.
$32,000.
$58,880.
$64,000.
None of the above is correct.
2. Roberts Company sold equipment for $250,000, purchased a building for $6,500,000,
sold shares in Peter Company for $280,000, purchased $500,000 of inventory and repaid
a note payable for $2,300,000 plus $230,000 of interest. The net cash flow from
investing activities was
A)
B)
C)
D)
E)
$6,250,000 outflow.
$8,320,000 outflow.
$8,270,000 outflow.
$5,970,000 outflow.
None of the above is correct.
3. The financial statements of Madison Company show the following:
Sales, net of bad debt expense, return allowances and discounts: $154,000
Accounts Receivable, net
Accounts Payable
Beginning Balance
$22,000
21,000
Ending Balance
$28,000
25,000
Madison operates only in the U.S. and was not involved in any mergers or
acquisitions during the year. Cash collected from customers is
A) $148,000.
B) $150,000.
C) $154,000.
D) $160,000.
E) None of the above is correct.
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Name:
Accounting 101, Fall 2008
4. The financial statements for World Company show the following:
Cost of goods sold $725,000
Merchandise Inventory
Accounts Receivable
Accounts Payable
Beginning Balance
$45,000
53,000
37,000
Ending Balance
$56,000
50,000
42,000
World Company operates only in the U.S. and was not involved in any mergers or
acquisitions during the year. Cash paid for merchandise is
A) $731,000.
B) $736,000.
C) $719,000.
D) $714,000.
E) None of the above is correct.
5. Allen Company's 2009 income statement reported total revenues, $850,000 and total
expenses (including $40,000 depreciation) of $720,000. The 2009 balance sheet reported
the following: accounts receivablebeginning balance, $50,000 and ending balance,
$40,000; accounts payablebeginning balance, $22,000 and ending balance, $28,000.
Allen Company operates only in the U.S. and was not involved in any mergers or
acquisitions during the year. Therefore, based only on this information, the 2009 net cash
inflow from operating activities was
A)
B)
C)
D)
E)
$126,000
$166,000
$174,000
$186,000
None of the above is correct.
6. If a business declared and paid a $5,000 dividend, it would appear on the
A)
B)
C)
D)
E)
income statement only.
statement of stockholders' equity and statement of cash flows.
balance sheet only.
statement of stockholders' equity only.
income statement and statement of stockholders' equity.
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Name:
Accounting 101, Fall 2008
7. Which of the following statements is correct?
A) FIFO reports lower income amounts than LIFO when prices are rising.
B) LIFO reports a higher income amount than FIFO when prices are rising.
C) LIFO reports a higher income amount than FIFO when prices are
decreasing.
D) LIFO reports the same amount of income as FIFO when prices are rising.
E) None of the above is correct.
8. On a balance sheet, assets are listed in the order of
A)
B)
C)
D)
dollar amount (largest first).
date of acquisition (earliest first).
ease of conversion to cash.
importance to the operation of the business.
9. Burger Palace Corporation reports a net use of cash for investing activities of $3.4
million and a net source of cash provided by financing of $1.6 million. If cash increased
by $1.1 million during the year, what was the net cash flow provided from operating
activities?
A)
B)
C)
D)
$0.7 million
$2.9 million
$3.9 million
$6.1 million
10. A landlord received $5,000 cash for December 2008's rent but the tenant's rent for
December is $8,000. Which of the following is true for year ended 2008.
A)
B)
C)
D)
E)
$5,000 would be reported on the statement of cash flows.
$3,000 would appear on the balance sheet as rent receivable.
$8,000 would appear on the income statement as rent revenue earned.
All of the above are true.
None of the above is true.
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Name:
Accounting 101, Fall 2008
Question 2 Foreign Currency Translation and Impairment (11 points)
Blanche Dael B.V., a Dutch company, is a wholly owned subsidiary of Coffeelovers Inc.,
a U.S. Corporation. On July 31, 2006, the fiscal year end date of both Blanche Dael and
Coffeelovers, Blanche Dael acquires two buildings for 650,000 euros. The exchange rates
between the US dollar and the euro between July 31, 2006 and July 31, 2008 are as
follows:
Date/Period
On July 31, 2006
Average between July 31, 2006 and July 31, 2007
On July 31, 2007
Average between July 31, 2007 and July 31, 2008
On July 31, 2008
Exchange rate
1 US dollar = 0.784 euro
1 US dollar = 0.758 euro
1 US dollar = 0.732 euro
1 US dollar = 0.743 euro
1 US dollar = 0.754 euro
Coffeelovers does not recognize depreciation on the two buildings in its financial
statements.
1) What is the journal entry that Coffeelovers needs to make on July 31, 2006 to record
Blanche Daels acquisition of the two buildings? (2 points)
On July 31, 2006, 650,000 euro is equal to 829,082 US dollar (650,000/0.784).
Dr. Property, plant and equipment (Buildings)
Cr. Cash
$829,082
$829,082
2) What is the journal entry that Coffeelovers needs to make on July 31, 2007 to account
for changes in the dollar value of Blanche Daels two buildings? (2 points)
On July 31, 2007, 650,000 euro is equal to 887,978 US dollar (650,000/0.732). The
change in the dollar value of the two buildings = 887,978 829,082= $58,896
Dr. Property, plant and equipment (Buildings)
Cr. Other comprehensive income
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$58,896
$58,896
Name:
Accounting 101, Fall 2008
3) What is the journal entry that Coffeelovers needs to make on July 31, 2008 to account
for changes in the dollar value of Blanche Daels two buildings? (2 points)
On July 31, 2008, 650,000 euro is equal to 862,069 US dollar (650,000/0.754). The
change in the dollar value of the two buildings = 862,069 887,978 = -$25,909
Dr. Other comprehensive income
Cr. Property, plant and equipment (Buildings)
$25,909
$25,909
4) Blanche Dael also prepares its own financial statements in euro, following US
Generally Accepted Accounting Principles. On July 31, 2009, Blanche Dael estimates
that the sum of all undiscounted future cash flows generated by the two buildings is
680,000 euro. The fair value of the two buildings is 620,000 euro. Is Blanche Dael
required to record an impairment loss related to its two buildings on July 31, 2009?
Shortly explain why or why not. (2 points)
Recording an impairment loss is not needed because the sum of the undiscounted
future cash flows is still greater than the current book value of the two buildings.
5) On July 31, 2010, Blanche Dael estimates that the sum of all undiscounted future cash
flows generated by the two buildings is 600,000 euro. The fair value of the two
buildings is 580,000 euro. Assume that the carrying value of the buildings is 650,000
euros at the time the impairment loss is evaluated. What are the journal entries that
Blanche Dael needs to make to record the impairment loss on its two buildings? (3
points)
Dr. Impairment loss
Cr. Property, plant and equipment (Buildings)
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70,000 euro
70,000 euro
Name:
Accounting 101, Fall 2008
Question 3 Gardner Denver I: Accounts Receivable (20 points)
The following questions relate to the financial statement extracts for Gardner Denver for
the fiscal year ended December 31, 2007. For this question assume that the amount of
sales revenue reported on Gardner Denvers income statement is the amount of sales net
of return allowances, discounts, and the provision for bad debts.
1) What amount did Gardner Denvers customers owe to the company at the end of
fiscal 2007? (2 points)
The amount that customers owe to GD equals:
Net accounts receivable + allowance for doubtful accounts =
308,748 + 9,737 = $318,485
2) Gardner Denver (GD) uses the allowance method to account for its bad How
much debts. greater or less would GDs Income Before Income Taxes have been in fiscal
2007, if it had used the direct write-off method to account for its bad debts? (Clearly
indicate whether Income Before Income Taxes would have been greater or less.) (3
points)
Bad debt expense in 2007 (see Note 3) = $960
Write-off in 2007 (see Note 3) = $2,162
Write-off bad debt expense = 2,162 960 = $1,202
If GD had used the direct write-off method, IBIT would have been $1,202 less.
3) What journal entries did Gardner Denver make to recognize the bad debt expense and
the write-off of accounts receivable in 2007? (3 points)
Dr. Bad debt expense
960
Cr. Allowance for doubtful accounts
Dr. Allowance for doubtful accounts
Cr. Accounts receivable
960
2,162
2,162
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Name:
Accounting 101, Fall 2008
4) Below is the T-account for Gardner Denvers Gross Accounts Receivable. There are
6 items (labeled A through F) missing from the T-account. Your task is to fill in the
missing numbers. Make use of the information from Gardner Denvers financial
statements and footnotes to the financial statements to find the answers. Assume that
all sales are credit sales. Each missing item is worth two points. Enter your answers in
the chart below the T-account. (12 points)
T-account Gross Accounts Receivable
Debit
Credit
Beginning balance
(1/1/07)
A
Gross credit sales revenue
B Write-off
E
Other transactions (e.g.,
foreign currency
translation, mergers &
acquisitions)
C Collections from
customers
F
Ending balance (12/31/07)
D
Item
A
B
C
Amount
Item
D
E
F
Amount
A: BB = 261,115 + 10,314 = $271,429
B: Gross Sales revenue = 1,868,844 + 960 = $1,869,804
E: Write-off = $2,162
D: EB = 308,749 + 9,737
F: Collections = Net sales change in net receivables (on CF statement) = 1,868,844
36,374 = $1,832,470
C: Other transactions = -(A + B E F D) = $11,884
The effect of other transactions on gross receivables (C) can also be calculated as the
sum of:
- the effect on net accounts receivables = Change in net AR on the balance sheet
Change in net AR on the cash flow statement = 47,663 - 36,374 = 11,259
the effect on the allowance for doubtful accounts (see Note 3) = 625
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Name:
Accounting 101, Fall 2008
Question 4 Gardner Denver II: Inventories (23 points)
The following questions relate to the financial statement extracts for Gardner Denver for
the fiscal year ended December 31, 2007. For this question assume that Gardner
Denvers tax rate equals 35 percent!
1) In the footnotes to its financial statements, Gardner Denver (GD) indicates that
inventories consist of materials, labor and manufacturing overhead. The company
further indicates that it uses the allowance method to account for inventory
obsolescence. For this question assume that the following events occurred during
fiscal year 2007:
1. GD recorded depreciation of $42,000 on its Production Property, Plant and
Equipment and $13,000 on its Sales and Delivery Property, Plant and Equipment.
2. GD used $1,029,000 of raw materials to manufacture its products.
3. GDs production staff earned $210,000 in salaries; the companys sales, delivery
and administrative staff earned $105,000 in salaries. All salaries were paid out in
cash.
4. At the end of the year, GD transferred an amount from work-in-process to finished
goods to account for all products finished during the year. The beginning and
ending FIFO balances of work-in process were as reported in the footnotes to the
financial statements. The beginning and ending LIFO reserves for work-inprocess inventories were $2,000 and $3,000, respectively.
5. At the end of the year, GD recognized a write-down of $15,000 to account for the
fact that part of its finished goods inventory had become obsolete.
Further assume (for this question) that no other events than the first four affected the
companys work-in-process account. What were the journal entries that GD made to
account for these four events? (10 points [2 points for each event])
Event 1:
Dr. Work-in-process
Dr. Depreciation expense (SG&A)
Cr. Accumulated depreciation
Event 2:
Dr. Work-in-process
Cr. Raw materials
$42,000
$13,000
$55,000
$1,129,000
$1,129,000
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Name:
Accounting 101, Fall 2008
Event 3:
Dr. Work-in-process
Dr. Wage expense (SG&A)
Cr. Cash
$210,000
$105,000
$315,000
Event 4:
Ending balance WiP = Beginning balance WiP + 42,000 + 1,029,000 + 210,000
transfers to finished goods
Transfers to finished goods = (38,052-2,000) + 42,000 + 1,029,000 + 210,000 (47,622
3,000) = 1,272,430
Dr. Finished goods
Cr. Work-in-process
$1,272,430
$1,272,430
Event 5:
Dr. Allowance for inventory obsolescence $15,000
Cr. Finished goods
$15,000
2) What would GDs Income Before Income Taxes (IBIT) in 2007 have been, if it had
valued all of its inventories using the FIFO method? (3 points)
COGS LIFO COGS FIFO = Change in LIFO Reserve = 11,351 10,491 = $860
IBIT would have been: 268,360 + 860 = $269,220
3) What would GDs Retained Earnings at the end of 2007 have been, if it had valued all
of its inventories using the FIFO method? (3 points)
LIFO reserve at the end of 2007 = 11,351. This amount represents the sum of the past
differences between LIFO IBIT and FIFO IBIT. The cumulative after-tax effect on
Retained Earnings is therefore: 11,351 x (1 - .35) = 7,378. Hence, Retained Earnings
would have been: 545,084 + 7,378 = $552,462.
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Name:
Accounting 101, Fall 2008
4) What would GDs Income Before Income Taxes (IBIT) in 2007 have been, if it had
not liquidated old LIFO layers? (3 points)
The after-tax effect of LIFO liquidations = $801
In the absence of LIFO liquidations, IBIT would have been: 268,360 (801/.65) =
$267,128
5) An analyst wants to track GDs inventory turnover ratio over time. She makes the
following calculation for 2007:
Inventory turnover =
Cost of Sales 2007 (as reported)
1,248,921
=
= 5.19
Average Inventory 2007 (as reported) (256,446 + 225,067 ) / 2
The analyst is aware that the inventory turnover ratio that she calculated is biased
because of the inventory valuation method that GD uses. What adjustments should
the analyst make to remove this bias? Recalculate the inventory turnover ratio after
making these adjustments. (4 points)
The analyst should make two adjustments:
1. add back the effect of LIFO liquidation to Cost of Sales
2. Calculate the average inventory based on FIFO inventory (most recent
purchase prices)
After making these adjustments, the inventory turnover ratio would be:
Inventory turnover =
LIFO Cost of Sales 2007 + pre - tax LIFO liquidatio n effect
=
Average FI FO Inventory 2007
1,248,921 + [801 x 1/.65]
= 4.97
(256,446 + 11,351 + 225,067 + 10,491)/2
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Name:
Accounting 101, Fall 2008
Question 5 Gardner Denver III: Property, Plant, and Equipment and Intangibles
(16 points)
The following questions relate to the financial statement extracts for Gardner Denver
(GD) for the fiscal year ended December 31, 2007.
1) Assume that 15 percent of GDs depreciation and amortization expense in 2007
related to the amortization of other intangibles. What journal entries did GD make to
record the amortization of other intangibles? (3 points)
Dr. Depreciation and amortization expense
Cr. Accumulated amortization
$8,788
$8,788
2) How much did Gardner Denver depreciate on its land in 2007? (2 points)
Zero, land has an infinite economic useful life
3) For this question assume that (1) the (weighted) average economic useful life of
Gardner Denvers (GD) machinery and equipment is 11 years, (2) the residual value
of GDs machinery and equipment is $0 (zero), (3) accumulated depreciation on
GDs machinery and equipment at the end of 2007 was $65,545, and (4) GD plans
not to acquire or dispose of machinery and equipment during 2008. How much
greater or less would GDs depreciation on machinery and equipment be in 2008, if
the company would use the double-declining-balance depreciation method instead of
its currently used method? (4 points)
The currently used method is the straight-line method. Under this method, depreciation
on machinery and equipment in 2008 would be: (240,333 0)/11 = 21,848.
Under the double-declining-balance method, depreciation would be: 2/11 * (240,333
65,545) = 31,780.
Hence, 2008 depreciation would be $9,932 greater under the double-declining-balance
method than under the straight-line method.
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Name:
Accounting 101, Fall 2008
4) In fiscal 2007, GD disposed of some of its property, plant and equipment. What was
the net book value of the property, plant and equipment that GD disposed of? (3
points)
See cash flow statement: the proceeds were $1,676; the net loss on the disposition was
$364.
Net book value of assets disposed of = Net proceeds + Net loss on disposition = 1,676 +
364 = $2,040.
5) What were the journal entries that Gardner Denver made to record the disposition of
property, plant and equipment, if the gross book value of property, plant and
equipment disposed of in 2007 was $8,000? (If you were not able to answer the
previous question, clearly state your assumption about the net book value of assets
disposed.) (4 points)
Dr. Cash
$1,676
Dr. Loss on asset disposition
$364
Dr. Accumulated depreciation
$5,960
Cr. Property, plant and equipment
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$8,000
Name:
Accounting 101, Fall 2008
Form-10-K Extracts
GARDNER DENVER, INC.
For the fiscal year ended December 31, 2007
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Accounting 101, Fall 2008
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Accounting 101, Fall 2008
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Accounting 101, Fall 2008
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Accounting 101, Fall 2008
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Accounting 101, Fall 2008
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