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fin04f_a - -~ NOV-OT—‘ZOOT 21:87 UCSB ECONOMICS...

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Unformatted text preview: / ' '-~. NOV-OT—‘ZOOT 21:87 UCSB ECONOMICS 8058938830 {F2001 Henry Sander Econ 136C-1 Fall 2004 Final Exam Problem I (20 mins) James Company started business on 1/ l/ 1. James Company estimates warranty costs for the last 3 years at 1% of sales which were 32000000 in each year. Actual costs for warranty repairs are much lower than expected and on H] 5/04 an expert determines that 1/4 of 1% of sales is a more accurate estimate. The books for Year 3 have been completed but not closed and the tax rate on all years is 40%. Assume warranties are tax deductible when repairs take place and the estimated percentage doesn’t affect tax deductions. Required Record any entries that are necessary and indicate the changes that will be necessary to James’ Years 2 & 3 comparative financial statements (excluding footnotes) if A) the original estimate is considered reasonable. B) the original estimate is not considered reasonable. Problem [I (15 mins) Technic Engineering Company is a young and growing producer of electron measuring instruments and technical equipment. YOu have been retained by the company to advise it in the preparation of a statement of cash flows. Y0u have obtained the following information concerning certain events and transactions for the company during the fiscal year ended October 31, 1995: a) Depreciation expense of $240,000 was included in the inc0mc statement. b) Sold a Bond with a face value (“$30,000 for $32,000. The premium of$2,000 was amortized in the amount of $500 during this year . c) A gain of$4,700 was realized on the sale of a machine. The machine originally cost $75,000, of which $25,000 was undeprecinted on the date of sale. d) On July 3, I995. a building and some land were purchased for $600,000. Technic gave in payment $ l00.000 cash, $200,000 market value of its unissued common stock. and a $300,000 mortgage note. On 10/31/95 Technic paid 3 [0,000 on the note of which $2,000 was allocated to interest. c) On August 3, 1995, Technic purchased 3 l 00,000 ofits common stock on the open market. f) The board of directors declared a $320,000 cash dividend on October 20. 1995. 1/2 was paid immediately and 1/2 was payable on November 15, 1995 to stockholders of record on November 5, 1995. Required Explain how each of the items above should be disclosed in Technic’s statement of cash flows for the fiscal year ended October 31, 1995. If any item is neither an inflow nor an outflow of cash, explain why it is not and indicate how the item should be disclosed, if at all, in Technic’s statement of cash flows. Technic uses the indirect approach in reporting cash flows from operating activities. NOV—OT—LZOO'T 21:87 UCSB ECONOMICS 0 8068938830 (_P.OOZ,' Problem 111 (15 mins) Indirect determination of cash flows from operations. For Cornelius, inc. you have the following data: Income Statement Item A mount Depreciation expense $ 1 1,000 Net income 38,000 Sales 120,000 ‘ Cost of goods sold 50,000 Operating expenses (excluding depreciation) 2 l ,000 Balance Sheet Item Ending Beginning Accounts receivable $27,000 $21,000 Inventory (using perpetual inventory accounting) 43,000 47,000 Accounts payable for inventory only 32,000 24,000 Re_quired 1. Determine the net cash flow previdcd by operations under the A. indirect approach (present the Operating section of the statement of cash flows) B. direct approach 2. indicate the primary and secondary purpose of the statement 01" cash flows. Problem IV (20 mins) You recently graduated from a major state university and accepted a position in the ace0unting and finance department of _ Door Open/Doors Closed, a large computer software company whose common shares are traded on the American Stock Exchange. A few years ago, the company established two postretiremem benefit plans for its employees: a defined benefit pension plan and a defined benefit health care plan. For the past several days. you have been assisting the controller in preparing the income statement expenses and related footnote disclosures related to the company’s two posu-etirement benefit plans. The task has been fairly mechanical in that the company’s computer system provides the output, based on the accounting requirements of Statements No. 87 and 106 and data provided by an actuarial consulting firm. This morning yOu and the controller were reviewing the expense numbers and related disclosures. In the course of your review, the controller questions whether the accounting requirements for these two retirement benefit plans are similar in concept. Specifically, the following questions were raised by the controller. 1. What is the similarity between the projected benefit obligation for pensions and the accumulated benefit obligation for other postretirernent benefits? ' 2. From an actuarial standpoint, would the calcalation of pension benefits entail more assumptions than the calculation of health care benefits? Indicate what assumptions are ditferent. What is the relationship between the expected postretirement benefit obligation and the acoumulated post'etirement benefit obligation associated with the health care plan? 4. How do IRS minimum funding standards affect each plan’s funding decisions? What is the likely explanation for the fact that the calculation of the pcnsiOn plan expense contains a transition prior service cost component in the past but not currently, while the calculation of OPRB expense for the health care plan contains no transition component? b.) LA Rgg uired Draft a brief response to each of the questions raised by the company's controller. Problem V Short Answers (10 mins) (I) Explain why a company may recognize initial profit fiom a franchise agreement when the agreement has a term of 10 years. (2) List the four primary issues a company should consider when deciding to lease or buy an asset. ...
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