Fall 70-122 2007 Introduction to Accounting Professor Nan
Name_______________ Section_____________
Mid-term Exam 1-Solution (Version A)
Instructions: This is a close-book, close-notes exam. You are allowed to use a non-programming calculator. There are two parts with totally 100 points (Part I : 30 points, and Part II: 70 points). Partial credits will be awarded for Part II. Submit your answers on the pages provided. Make sure your name and section are legible and your answer is neatly presented.
Part I: Multiple choice questions. Please circle the right answer (30 points, 3 points each) 1. (7 in Version B)Which of the following is NOT a permanent account? A. Prepaid rent B. Depreciation expense C. Accumulated depreciation D. Unearned revenue
2. (1 in version B)Assume a company has total assets of $85,000, non-current assets of $35,000, current liabilities of $22,000 and total stockholders' equity of $150,000. What is the company's working capital? A. $28,000 C. $13,000 B. $63,000 D. $150,000
3. (6 in version B) How much should Alice invest today if she would like to get $60,000 from her investment in 3 years? Assume the return rate is 10%. A. $37,566 C. $41,322 B. $45,079 D. $38,544
4. (2 in version B) Skibo Co. purchased a machine at $5,000 on January 1, 2001. The estimated useful life was 7 years and the salvage value was $100. On July 1, 2003, Skibo sold this machine at $3,500. What is the gain/loss from this disposal? A. $500 gain C. No gain/loss B. $500 loss D. $250 gain
5. (8 in version B) Cheesecake Factory has a machine with historical cost of $42,000. The useful life of this machine is 10 years and salvage value is $2,000. The current book value of the machine is $20,000. How long has this machine been in service at Cheesecake Factory? (assuming straight-line method) A. 5 years C. 7.5 years B. 10 years D. 5.5 years
6. (10 in version B) On January 1, 2001, Shelley Co.'s equity holders contributed $20,000 cash, $18,000 of which was immediately used to purchase land. No other transactions have occurred since then. The managers are considering selling the land. If Shelley were to sell its land on Dec 31, 2001, it would receive $25,000. The amount that should be reported for land on the December 31, 2001 balance sheet is: A. $18,000 B. $20,000 C. $25,000 D. Zero since the company is considering selling the land
7. (3 in version B)Assume CMU Bookstore purchased 200 calendars from a supplier at $5 each and sells 150 calendars at a retail selling price of $10 each. What is the total COGS incurred? A. $500 B. $1,000 C. $750 D. $1,500 8. (9 in version B) Tanya Co. invested in a project on 1/1/2006 and believed that the project would bring $5,000 return with probability of 40% and $3,000 return with probability of 60% in 2 years. The market interest rate is 10%. What is the normal economic earnings of this project on 1/1/2007? A. $345 B. $314 C. $380 D. $337 9. (4 in version B) Greentree Inc. holds 30,000 shares of Yellowstone Inc.' common stock and received $60,000 dividends from Yellowstone. The $60,000 is cash inflow from _______for Greentree and is cash outflow from _______for Yellowstone. A. operating, operating B. financing, operating C. investing, financing D. operating, financing
10. (5 in version B) On March 12, 2005, Anna Caf issued 10,000 shares of common stock and the issuing price per share was $5. The par value of each share is $1. On April 1 2005, Anna Caf's stock price was $6.50. What is the book value of Additional Paid-In Captial in Anna's accounting book on April 1 2005? A. $55,000 B. $50,000 C. $40,000 D. $65,000
Part II. Problems (70 points) 1. (4 in version B) The WhiteWater Co. made an investment on January 1, 2005, and expected that the investment would bring a return of $10,000 for 50% chance and a return of $20,000 for 50% on chance Dec 31, 2006. However, on January 1, 2006, WhiteWater reevaluated this investment and it expected this investment would bring $5,000 for 30% chance and $18,000 for 70% on Dec 31, 2006. The annual interest rate was 10%. What was the normal economic earnings on January 1, 2006? (7 points) What was the abnormal economic earnings? (7 points) (round to cent)
Jan 1, 2005 discounted expected cash flow: (50%*10,000+50%*20,000)/[(1+10%)^2]=$12,396.69 Jan 1, 2006 discounted expected cash flow: (30%*5,000+70%*18,000)/(1+10%)=$14,100/1.1=$12,818.18 Normal economic earnings: $12,396.69*10%=$1,239.67 Abnormal economic earnings: (12,818.18-12,396.69)-1,239.67=-$818.18
2. (1 in version B) Prepare journal entries for each of the following transactions for Kinko Co. (20 points) a. Kinko borrowed $30,000 from PNC Bank on Jan 1st, 2004. The annual interest rate was 10%. The interest would be due on Jan 1st 2005. Write down the journal entries for Jan. 1st 2004 and the adjusting journal entries for the interest on Dec 31, 2004. Jan 01, 2004: Cash 30,000 Notes payable 30,000
Dec. 31, 2004: Interest expense 3,000 Interest payable 3,000
b. Kinko purchased $26,000 inventory from a supplier, paid $10,000 in cash and the rest was on credit Inventory 26,000 Account payable 16,000 Cash 10,000
c. Kinko paid $10,000 it owed to the supplier in transaction b. Account payable 10,000 Cash 10,000 d. Kinko rented an office from Nov. 1st. Kinko made $24,000 payment for the next 6 month rent. Prepare the journal entries on Nov. 1 and the adjusting entry related to this rent on Dec 31, 2004. Nov. 1, 2004 Prepaid rent 24,000 Cash 24,000 Dec. 31. 2004 Rent expense 8,000 Prepaid rent 8,000
f. Kinko sold the entire inventory purchased in transaction b on credit for $30,000. Accounts receivable 30,000 Sales revenue 30,000 COGS 26,000 Inventory 26,000 g. Kinko received $5,000 on Nov. 1st from a customer for 500 units of merchandises. 250 units were delivered to the customer on Dec. 16th. The rest 250 units would be delivered on January 16, 2005. Prepare the journal entries on Nov 1st and on Dec 16th. Nov. 01, 2004: Cash 5,000 Unearned revenue 5,000 Dec. 16, 2004: Unearned revenue 2,500 Sales revenue 2,500
3. (2 in version B) (15 points) Following the last problem, what should be the 2004 closing entries for Kinko? Sales revenue 32,500 Income summary Income summary 37,000 Interest expense Rent expense COGS Retained Earnings 4,500 Income summary
32,500
3,000 8,000 26,000
4,500
4. (3 in version B) (21 points) Assume that Liana Inc. uses the indirect method to compute cash provided by operating activities. The following information pertains to operations for the accounting period, January 1, 2006 December 31, 2006 Net income Deprecation expense Accounts receivable balance (Jan. 1) Accounts receivable balance (Dec. 31) Inventory balance (Jan. 1) Inventory balance (Dec. 31) Accounts payable balance (Jan. 1) Accounts payable balance (Dec. 31) Interest payable balance (Jan. 1) Interest payable balance (Dec. 31) Bonds payable balance (Jan. 1) Bonds payable balance (Dec. 31) $600,000 $?????? $75,000 $60,000 $123,000 $135,000 $65,000 $40,000 $37,000 $48,000 $600,000 $700,000
Assume the cash flow from operations totals $759,000, what must have been the amount of Depreciation expense for this period? Net income +Decrease in accounts receivable - Increase in inventory - Decrease in accounts payable + Increase in interest payable Cash flow before depreciation adjustment + Depreciation expense Cash flow from operating activities $600,000 +15,000 - 12,000 - 25,000 +11,000 $589,000 170,000 $759,000
Notice that bonds payable is non-current liability, and bonds belong to financing activities. The change in the bonds payable account is irrelevant to the computation of cash flow from operations.