Exam 2 Answers - ECON 3A W08 REVIEW FOR EXAM 2 CHAPTERS 4 5...

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Econ 3A–W’08–Exam # 2 Review – Key p1 ECON 3A – W’08 – REVIEW FOR EXAM # 2 – CHAPTERS 4 & 5 CHAPTER 4 – ACCRUAL ACCOUNTING FROM PRIOR EXAMS Page 97 – Problem 1 - Conceptual framework (F’01 Ex#3) The following information relates to Dollar Thrifty Automotive Group. The Group operates Dollar Rent A Car and Thrifty, Inc., both focused on value-conscious and leisure travelers. Locations include airports in the top 50 U.S. markets. Required: Identify which one of the elements, qualitative characteristics, assumptions, principles, or exceptions best relates to each statement below concerning the Group’s financial statements. 1. The financial statements of the Group include the accounts of Dollar Rent A Car, Thrifty, and other subsidiaries. ECONOMIC ENTITY 2. No adjustments to the financial statements have been made relating to the sudden and expectedly prolonged downturn in leisure travel following events of September 11, 2001. GOING CONCERN 3. Gains on sales of vehicles are not included in revenue from vehicle rentals and leasing. REVENUES 4. Provisions for public liability and property damage on self-insured claims are made by charges primarily to direct vehicle and operating expense. MATCHING 5. Deloitte & Touche LLP expressed their professional opinion that the Group’s financial statements are fairly presented in accordance with generally accepted accounting principles. RELIABILITY Page 95 – Problem 1 – Adjusting entries (F’01 Ex#2) Tootsie Roll Industries, the 104 year-old candy company, is preparing its financial statements for the calendar year 2000. You have been asked to prepare adjusting entries as of December 31, 2000 for the following items. a. Candy-making equipment purchased in 1999 for $2,500,000 has an estimated useful life of 10 years. The straight-line method is used. b. During the year factory supplies were purchased for $327,000. Inventory of supplies at the beginning of the year was $44,000. At year-end 2000 a physical count revealed $38,000 of supplies on hand. c. Insurance premiums of $480,000 were paid on May 1, 2000, the inception of the one-year policy.
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Econ 3A–W’08–Exam # 2 Review – Key p2 d. $10,000,000 was borrowed from the bank on August 31, 2000 to finance the build-up of inventory for Halloween. Principal plus interest at 9% per annum is all due and payable on January 31, 2001. e. Tootsie Roll receives advertising rebates of 5% of expenditures for ads placed the prior month. The total cost of ads placed during December 2000 was $600,000. DR CR a. Depreciation expense 250,000 Accumulated depreciation 250,000 2,500,000÷10 b. Supplies expense 333,000 Supplies inventory 333,000 BI + Purch - EI = Used 44,000+327,000-38,000=333,000 c. Insurance expense 320,000 Prepaid insurance 320,000 480,000 x 8/12 d. Interest expense 300,000 Accrued interest payable 300,000 10,000,000 X .09 x 4/12 e. Accrued rebates receivable 30,000 Advertising expense 30,000 (or some sort of income account) 5% x 600,000
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Econ 3A–W’08–Exam # 2 Review – Key p3 END OF CHAPTER EXERCISES Page 195 in the text – E4-5 – Cash vs accrual accounting EXERCISE 4-5 (a) Cash Basis Accrual Basis Service Revenue – Operating Expenses – Insurance Expense Net Income $22,000 13,000 3,600 $ 5,400 $28,000 14,500 $13,500
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