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Mid1Solution - ACTG38’l Winter 2009 Midterm 1 Name Part1...

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Unformatted text preview: ACTG38’l Winter 2009 . Midterm 1 Name: Part1: Multi le Choice 10 uestions 2 ts ea. Su nested time 10 minutes For each question, circle the letter corresponding to the “best" answer. 1. Preparation of consolidated financial statements when a parent-subsidiary relationship exists is an example of the a. economic entity assumption. b. relevance characteristic. c. comparability characteristic. d. neutrality characteristic. 2. The assumption that a business enterprise will not be sold or liquidated in the near future' Is known as the . a. economic entity assumption. b. monetary unit assumption. c. conservatism assumption. _d. going concern assumption 3. The allowance for doubtful accounts, which appears as a deduction from accounts receivable on a balance sheet and which" Is based on an estimate of bad debts, is an application of the a. consistency characteristic. b. matching principle. 6; materiality constraint. d. revenue recognition principle. 4. Which of the following serves as the justification for the periodic recording of depreciation expense? ' a. Direct association of expense with revenue generated b. Systematic and rational allocation of cost over the periods benefited c. Immediate recognition of an expense d. Minimization of income tax liability 5. Why are certain costs of doing business capitalized when- incurred and then depreciated or amortized over subsequent accounting cycles? ' a To reduce the federal' Income tax liability b. To aid management in cash-flow analysis _ 'c. To match the costs of with revenues as earned d. To adhere to the accounting constraint of conservatism 6. An accrued expense can best be described as an amount a. paid and currently matched with earnings. . b. paid and not currently matched with earnings. c. not paid and not currently matched with earnings. d. not paid and currently matched with earnings. 7. A deferred revenue can best be described as an amount ' - a. collected and not yet earned. b. Collected and earned. -c. not collected and not yet earned. d. not collected and earned. 8. How should an unusual event not meeting the criteria for an extraordinary item be disclosed in the financial statements? a. Shown as a separate item in either operating or non-operating section of the" Income statement. b. Shown” In operating revenues or expenses but not shown as a separate item. 0. Shown net of' Income tax after ordinary net earnings but before extraordinary items d. Shown net of' Income tax after extraordinary items but before net earnings. 9. The'balance sheet is useful for analyzing all of the following except a. liquidity. b. solvency. . c. profitability. d. financial flexibitity. _ 10. The statement of cash flows provides answers to all of the following questions except a. Where did the cash come from during the period? b. What was the cash used for during the period? - c. What is the impact of inflation on the cash balance at the end of the year? d. What was the change in the cash balance during the period? Part II Problem 1: (10 possible points. Suggested time 10 "minutes! Selected amounts from Trent Company‘ 5 trial balance of 12131107 appear below: Accounts Payable _ - $ 160, 000 Accounts Receivable 150,000 Accumulated Depreciation—Equipment 200,000 Allowance for Doubtful Accounts . . 20,000 Bonds Payable ' _ _ _ ' 500,000 , Cash - _ 150,000 Common Stock 60,000 Equipment ' . 840,000 Interest Expense 10,000 Merchandise Inventory 300,000 Notes Payable (due 6/1/08) _ 200,000 Prepaid insurance 30,000 Prepaid Rent _ ' 150,000 Retained Earnings . 818,000 Salaries and Wages Expense . 328,000 (All of the above accoimts have their standard or normal debit or credit balance.) . Reguired: In the space provided on the next page,‘ prepare adjusting journal entries at year end, December 31, 2007, based on the foliowing supplemental information. a. During 2007, no depreciation was recorded. The company uses the straight-line method to depreciate all equipment whichhas a 15 year useful life with no salvage value. There were no acquisitions or disposals of equipment during the year. 840,000115 = 56,000 _ DR Depreciation expense 56,000 CR Accumulated depreciation 56,000 b. 'Accrued interest of $15,000 needs to be recorded for the bonds payable as of 12131107.- _ DR Interest expense 15,000 CR Bond interest payable 15,000 0. Expired insurance at 12131107 is $20,000. 7 DR insurance expense ' 20,000 CR Prepaid insurance 20,000 d. The rent payment of $150,000 covered the six months from 11130107 through 5131108. 150,000 x 116 = 25,000 .DR Rent expense , 25,000 CR Prepaid rent 25,000 a. Salaries and wages earned but unpaid at 12131107, $22,000. DR Sataries expense 22,000 _ I CR Salaries and wages payable 22,000 MM..-__,_..,_.,.__..._r.......,1.....~.........m__.WW , _ _Wm_m,_~._,_m-”Amps-WT w’r— .‘—___.,—_._—.=---—m—--_..-_---.--—- ---t-.A. rrr a, ... ‘ Problem 2: (10 possible points. Suggested time 10 minutes! - ' The balance sheet below contains numerous errors including misclassifications, lack of adequate disclosure and poor terminology. Reguired: List FIVE errors in the space provided Do not concern yourself with the arithmetic. if an item can be classified in more than one category, select the category most favored by the authors of your textbook Horton Corporation Balance Sheet For the year ended December 31, 2007 13—88% Current Assets: ' Cash $ 8,000 _ Certificates of deposit (30 day maturities) ' - 10,000 - , Trading securities (fair value, $32,000) 7 27,000 ‘ ,Accounts receivable 75,000 Merchandise inventory ‘ 60,000 Supplies inventory 7 3,000 . Stock investment in subsidiary company 60,000 $243,000 investments: 1 - , . ' Treasury stock 78,000 Tangible Fixed Assets: _ ' ' Buildings and land - 213,000 - Less: Reserve for depreciation _ ' 60,000 153,000 Deferred Charges: , . Prepaid insurance ' 3,000 Other Assets: - , _ Cash surrender value of life insurance ' 54,000 M Liabilities and Capital Current Liabilities: , Accounts payable , $' 45,003 Reserve for income taxes ' 42,000 $ 87,003 Long-Term Liabilities: Note payable including current year obligation 120,000 Total Liabilities 207,003 Capital Stock: Capital stock 225,000 Earned surplus 74,997 ' Cash dividends declared 7 24,000 323,997 M Errors: 2. 3. 4. 5. Solution. _ 1. "For the year ended" in the title should be deleted. _ 2. CDs should be included as “Cash Equivalents 3. Trading securities'should be reported at their fair value ‘4. The amount of Allowance for Doubtful Accounts should be disclosed and deducted from 'Accounts Receivable. 5. The inVentory costing method (cost, lowerof cost or market) and the basis for pricing the inventory (LIFO, FIFO, etc.) should be disclosed. 6. Stock Investment in Subsidiary should be classified as an investment. 7. Treasury Stock is misclassified under lnvestments.‘ It should appear as a deduction from the _ Stockhoiders' Equity section. ' 8. Buildings and Land should be separated. 9_. "Reserve for" Depreciation should be either "Allowance for" or "Accumulated" Deprecia-tion. 10. Prepaid' Insurance should be listed as a current asset. , 11. ' Cash Surrender Value of Life Insurance should be classified among investments. 12. ' "Reserve" for Income Taxes should be titled Income Taxes Payable. 13. The current portion of the note Payable should be ctassified under current liabilities. 14. "Capital Stock" listed as title should be "Stockholders' Equity;" "Capital stock" listed as account _ should be “Common stock." 15. More information relative to the capital stock, such as par value and the number of shares authorized, issued, and outstanding should be disclosed. . 7 16. "Earned surplus" should not be used; Retained Earnings is the preferred title. 17. ' Cash dividends declared is actually Dividends Payable and should be ciassified as a current , liability. - w ested time 20 minutes Shown below is an income statement for 2007 that was prepared by a poorly trained bookkeeper of Jensen Corporation Jensen Corporation ' INCOME STATEMENT December 31 , 2007 Sales revenue investment revenue _ Cost of merchandise sold Selling expenses Administrative expense Interest expense Income before special items Special" items Loss on disposal of a component of the business Major casualty loss (extraordinary item) Net federal income tax liability Net income instructions . Using appropriateGAAP format and terminology, prepare a multiple-step income statement for 2007 for $945,000 19,500 (408,500) (145,000) (215,000) 113,000) 183,000 (30,000) (70,000) (24,900) m Jensen Corporation. Jensen has 50,000 shares of common stock outstanding and has a 30% federal income tax rate on all tax related items. Round all earnings per share figures to the nearest cent. Solution Jensen Corporation INCOME STATEMENT For the Year Ended December 31, 2007 Sales Cost of goods sold Gross profit _ Selling expenses . $145,000 Administrative expenses ‘ . - _ 215,000 Income from operations Other revenue: Investment revenue Other expenses: Interest expense Income from continuing operations before taxes Income taxes Income from continuing operations Loss from discontinued operations, net of applicable Income tax of $9,000 Income before extraordinary item Extraordinary casualty loss, net of applicable' Income tax of $21, 000 Net Income ' Per share of common stock—‘ ' Income from continuing operations $2.56 Discontinued operations loss net of tax - (.42) Income before extraordinary item - 2.14 Extraordinary item, net of tax _ . ' (.98) Net income ' - $945,000 408,500 536,500 360,000 . 176,500 19,500 196,000 13,000 183,000 54,900 128,100 21,000 107,100 49,000 M Problem 4: 40 ossible oints. Su ested time 30 minutes The balance sheets for Hafner Company showed the following information. Additional information concerning transactions and events during 2008 are presented below , Hafner Company Balance Sheet December 31 - 2008 2007 Cash $ 30,900 $ 10,200 Accounts receivable (net) . 43,300 20,300 Inventory ' . ' 35,000 _ 42,000 _ Long—term investments ' 0 15,000 Property, plant 8: equipment 236,500 150,000 Accumulated depreciation - (37,700) (25,000) ' M M12 Accounts payable - ‘ $ 17,000 $ 26,500 Accrued liabilities ' _ 7 _ 21,000 17,000 , Long-term notes payable 70,000 50,000 Common stock 130,000 ' 90, 000 Retained earnings ' _7,_0 000 29 000 ' M M212 Additional data: Net income for the year 2008, $76, 000. Depreciation on plant assets for the year $12, 700. Sold the long-term investments for $28,000 (assume gain or loss Is ordinary). Paid dividends of $35, 000. Purchased machinery costing $26,500, paid cash. Purchased machinery and gave a $60,000 long—term note payable. No {m 929% Q n “33$?“ Paid a $40,000 longéterm note payable by issuing common stock. N0 ‘0) P ad?" 4’56 ,5» 2 a. .rdsnsnssn’bae instructions - Using the format provided on the next page, prepare a statement of cash flows (using the indirect method) for 2008 for Hafner Company. PPS “‘63 Pm— mega - -» , W Note. the; ' ' (00,00 he s'm eta-t: 259,500 °"‘ 3° '1 IT My Cash 03% Qty“ P96 Hafner Company Statement of Cash Flows . For the Year Ended December 31, 2008 ' increase (Decrease) in Cash ' Cash flows from operating activities . ' ' Net inCome ' I - mm Adjustment to reconcile net income to net cash provided by operating activities: Depreciation expense ' § 12,700 Gain on sale of investments , (13,000) increase in accounts receivable - (23,000) Decrease in inventoLy _ 7,000 Decrease in accounts payable - (9,500) increase in accrued liabilities 4,000 (21,800) Net cash provided by operating activities 54,200 Cash flows from investing activities A - Sale of long-term investments ‘ 7 28,000 Purchase of machineEy (26,500) Net cash provided by investing activities 7 1,500 Cash flows from financing activities _ Paid dividends (35,000) Net cash used by financing activities , (35,000) ' Net increase (decrease) in cash 3 20,700 Cash, January 1, 2008 10,200 Cash, December 31, 2008 ' , - M ...
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