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Unformatted text preview: ACCT 410x Professor Bonner SOLUTION TO MIDTERM 1 (2007) NOTE TO 2008 STUDENTS: You have Version A, so use those answers below. NOTE: If you believe your exam has been graded incorrectly, please do the following by Monday, 10/29. If there is a simple addition error, just show me the error and I will correct it on the spot. If you believe that your answer substantially matches the solution below, please explain in writing why you believe this to be case and turn in your explanation along with your exam. Section I: Multiple Choice and other Short-Answer Questions (80 points) Multiple Choice: Each question was worth 4 points ONLY if you wrote the correct answer in the blank (no partial credit). Question Version A Version B 1 C B 2 C C 3 A A 4 C A 5 A C 6 C B 7 C A 8 D C 9 B B 10 C D 11 A A 12 B B Short Answer (Versions A and B the same): Question 1 (10 points) Each reasonable account was worth 2 pts. each and each reasonable example of a judgment or estimate that went with the given account was worth 3 pts. each. Some examples are as follows: (1) depreciation expense or accumulated depreciation – useful life of PPE; (2) revenues – whether “delivery” has occurred and/or whether cash collectibility is reasonably assured, (3) accounts receivable – whether cash collectibility is reasonably assured, (4) bad debt expense – proportion of credit customers who won’t pay; (5) warranty expense – proportion of products that will require service; etc. Common errors here: (1) talking about intangibles requiring judgment. To the extent intangibles are recorded, they do NOT require judgment, (2) mentioning PPE as the account that requires judgment rather than depreciation. Otherwise, people did well here. Question 2 (10 points) Retaining some profits in the firm benefits shareholders as follows. Firms can purchase more assets than they otherwise would (2 pts.), which should lead to more revenues than they otherwise would have (2 pts.), which should lead to more net income … (2 pts.), which eventually should lead to a higher stock price (2 pts.) and higher dividends (2 pts.) …, key benefits for shareholders. Common errors here: Leaving out one or more of the links. Question 3 (5 points) Any reasonable answer was worth 5 pts. if complete, 2 pts. if vague. Some examples are: (1) selling accounts receivable, (2) slowing down payments on accounts payable, (3) converting accounts payable into long-term debt, (4) showing purchases of ST investments in the investing section (as if they’re LT instead) instead of the operating section, or showing sales of LT investments in the operating section instead of the investing section (as if they’re ST instead); etc....
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