Fall 70-122 2007 Introduction to Accounting Professor Nan
Name_______________ Section_____________
Mid-term Exam 2 Version A Solution
Instructions: This is a close-book, close-notes exam. You are allowed to use a non-programming calculator. There are two required parts with totally 100 points (Part I: 30 points, and Part II: 70 points). Partial credits will be awarded for Part II. 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) (3 in B)1. Villaa Co. issued 35,000 shares of common stock on its IPO on January 1, 2006. On March 3, 2006, Villaa bought back 5,000 shares. The closing price of Villaa's common stock was $20 per share on December 31, 2006. Total common shareholders' equity on the December 31, 2006 balance sheet was $550,000. Calculate the market-to-book ratio for Villaa at December 31, 2006. A. 0.86 C. 1.09 B. 0.92 D. 1.27
(4 in B)2. Which strategy is NOT allowed by GAAP? A. B. C. D. LIFO for financial statements, LIFO for tax purpose LIFO for financial statements, FIFO for tax purpose FIFO for financial statements, FIFO for tax purpose FIFO for financial statements, LIFO for tax purpose
(3 in B)3. MorningStar Co. has $10,000 cash, $9,000 inventory, $1,000 prepaid expense, $4,000 marketable securities, $5,000 net accounts receivable, and $15,000 property, plant and equipment. MorningStar Co.'s current liabilities are totally $25,000. What is the quick ratio? A. 0.76 C. 0.98 B. 1.76 D. 1.16
(1 in B)4. On January 1, 2004, Kennywoods Co. purchased $10,000 of marketable debt securities classified as Available-For-Sale. The interest rate was 3%. On December 31, 2004, the market value of these securities was $17,396. What will be the book value in the account marketable securities- available-For-Sale, as of December 31, 2004, after necessary adjustment? A. $9,500 C. $17,396 B. $10,300 D. $17,696
(6 in B)5. Huaqi Co. had sales of $800,000 in the year 2005, and bad debts were estimated to be 3% of sales. During the year the total write off of accounts receivables was $10,000. What should be the bad debt expense for Huaqi in 2005, assuming income statement method? A. $34,000 C. $10,000 B. $14,000 D. $24,000
(7 in B)6. Dannon Inc.'s days receivables outstanding is 45 days, and Sara Lee Inc.'s days receivables outstanding is 28 days. Which one has a higher receivables turnover ratio? A. Dannon C. Can't tell B. Sara Lee
(8 in B)7. GoldenDays Inc. had gross accounts receivable of $550,000, and allowance for doubtful accounts of $30,000. Now GoldenDays finds $20,000 receivable is uncollectible for sure. What should be the net accounts receivable now? A. $520,000 C. $500,000 B. $580,000 D. $530,000
(5 in B)8. Guava Co. had net income in 2003 of $30,000. During 2003 Guava distributed $5,000 dividends. The Jan. 1 2003 market price of Guava was $5 per share, and the Dec. 31 2003 market price was $6 per share. During 2003, the outstanding common shares were always 10,000 shares. What was its economic return on equity for 2003? A. 0.20 C. 0.50 B. 0.30 D. 0.60
(10 in B)9. Which method would result in the greatest inventory turnover in periods of inflation if inventory levels are not A. decreasing? FIFO C. average cost B. LIFO
(9 in B)10. In periods of inflation, which method would result in the greatest market-to-book ratio if year-end market price is fixed? A. FIFO C. average cost B. LIFO
Part II. Problems (3 problems, 70 points) (1 in B)1.(10 pt) Panera Co. purchased a held-to-maturity security on Jan. 1, 2003. The company was expecting a 7% rate of return. The security will pay off $100,000 on Dec. 31, 2004. (a). Determine the amount that Panera would have been willing to pay for the security on Jan. 1, 2003. (5 pt) $100,000/[1.07^2]=$87,343.87
(b). What should be journal entries on Dec 31, 2003, related to this security? (5 pt) Marketable securities--held-to-maturity 6,114.07 Interest revenue (87,343.87*7%=6,114.07)
6,114.07
(3 in B)2. (30 pt) YaoMing Co. began on January 1. 2000. In the year 2000, it made the following purchases of inventory: Date Units Cost per unit Total Jan 1 2,000 $7 $14,000 April 1 2,500 $8 $20,000 July 1 3,000 $9 $27,000 Dec 1 3,500 $11 $38,500 YaoMing sold 6,000 units at $25 per unit during the year. YaoMing computes ending inventory and cost of goods sold under the periodic inventory system. (a). What is YaoMing's ending inventory using FIFO, LIFO and average cost assumptions? (15 pt) Using FIFO: 3,500*$11+1,500*$9=$52,000
Using LIFO: 2,000*$7 +2,500*$8+500*$9=$38,500
Using average cost: ($14,000+$20,000+$27,000+$38,500)/(2,000+2,500+3,000+3,500)=$99,500/11,000=$9.05, $9.05*(11,000-6,000)=$45,250
(b). On January 25, 2001, the market price for each unit changed to be $8. According to LOCM, what entries should YaoMing make, if necessary? (regard all loss as immaterial) (15 pt) Using FIFO: COGS 12,000 Inventory 12,000
Using LIFO: No entry necessary
Using average cost: COGS 5,250 Inventory 5,250 (Market value for ending inventory=$8*5000units=$40,000)
(2 in B)3. (30 pt) (a) Italiantown Co. purchased $2,000 of trading marketable securities on November 15th 2003. On December 31, 2003, the market value of the marketable securities was $1,950. On March 15, 2004, Italiantown sold the securities for $2,100. What are the journal entries to record the transaction on November 15, 2003, December 31, 2003 and March 15, 2004? (Please include the related closing entries, if needed.) (15 pt) November 15, 2003 Marketable securities--trading Cash
2,000 2,000
Dec 31, 2003 Unrealized loss on marketable securities-trading 50 Marketable securities--trading Closing entries: Income Summary 50 Unrealized loss on marketable securities-trading 50 Retained earnings 50 Income summary
50
50
March 15, 2004 Cash 2,100 Marketable securities-trading Gain on marketable securities-trading
1,950 150
(b). Using the information in (a), but assume Italiantown classified the marketable securities as available-for-sale, what are the journal entries to record the transaction on November 15, 2003, December 31, 2003 and March 15, 2004? (Please include the related closing entries, if needed.) (15 pt) November 15, 2003 Marketable securities--AFS Cash
2,000 2,000
Dec 31, 2003 Unrealized loss on marketable securities-AFS 50 Marketable securities--AFS March 15, 2004 Cash 2,100 Unrealized loss on MS-AFS Marketable securities-AFS Gain on marketable securities-AFS
50
50 1,950 100