fin04f_b - Henry Sander Econ 13602 Fall 2004 Final Exam...

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Unformatted text preview: Henry Sander Econ 13602 Fall 2004 Final Exam Problem 1 (25 mins) Happy Company has discovered on 1/30/05 that its method of counting inventory has led to incorrect ending inventory totals on 12/31/04 and 12/31/03. The ending inventory of 12/31/03 was overstated by $10,000 and ending inventory of 12/31/04 was understated by $6,000. The financial statement for ’03 has been published but ’04 has not. Assume the tax rate for both years was 40% and that all entries for ’03 & ’04 have been made prior to your concctions. Regyired A) Show journal entries you would make to correct the situation and how the ’03 & ’04 comparative financial statements would change if the incorrect inventory was due to a reasonable % of inventory obsolescence that Happy estimated at each year end was wrong. B) Showjournal entries you would make to cerrect the situation and how the ’03 & ‘04 comparative financial statements would change if the incorrect inventory was due to poor inventory counting techniques used by Happy Co. C) Theoreticallyjustify any differences between your answer to A) verSus 8). Problem I] (15 mins) Technic Engineering Company is a yOung and grewing 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. You have obmined the following information concerning certain events and transactions for the company during the fiscal year ended October 31, 1995: a) Depletion costs were recorded to accumulated depletion of $200,000 but 1/2 01‘ the depletion relates to natural resources which were not sold and are part ot‘ending inventory . The C0. had no beginning inventory of the natural resource. b) Sold 3. Bond with a face value of $30,000 for $32,000. The premium of $2,000 was amortized in the amount of 3500 during this year c) A loss of $4,700 was realized on the sale of a machine. The machine originally cost $75,000, of which $25,000 was undepreciatcd on the date of sale. d) On July 3, 1995, a building and some land were purchased for $600,000. Technic gave in payment $ 100,000 cash, $200,000 market valucof its unissued common stock, and a $300,000 mortgage note. On 10/31/95 Technic paid $10,000 on the note of which $2,000 was allocated to interest. e) On August 3, 1995, Technic purchased $100,000 of its common stock on the open market of which S 10,000 was resold on 10/15/95. 0 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. Reg] nired Explain how each ot'the items above should be disclosed in chhnic‘s statement of cash flows for the fiscal year ended October 31, 1995. Ifany 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 ot‘cssh llows. 'l‘echnic uses the indirect approach in reporting cash flows from operating activities. NOV-OT-ZOO? 21:88 UCSB EC'JNOMICS 8058938830 @ Problem III (15 mins) Indirect determination of cash flows from operatimx. For Cornelius, lnc. you have the following data: Income Statement Item AmOunt Depreciation expense S l [.000 Net income <38,000> Sales l20.000 Cost of goods Sold 50,000 Operating expenses (including depreciation) 21,000 Balance Shcct ltcm Ending Beginning Accounts reCeivable (net of allowable ($3,000 $27,000 $2l .000 beg/$5.000 end) Inventory (using perpetual inventory accounting) 43,000 47,000 Accounts payable for inventory only 32,000 24,000 Short term investments (available for sale) |0,000 12,000 Reguired 1. Determine the net cash flow provided 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 of cash flows. Problem IV (20 mins) You recently graduated from a major state university and accepted a position in the accounting 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 postretirement 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 postretirement 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. 5'7 and 106 and data provided by an actuarial consulting firm. This morning you and the controller were reviewing the expense numbers and related disclosures. ln 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 postrctirement benefits? 2. From an actuarial standpoint, would the calculation of pension benefits entail more assumptions than the calculation of health care benefits? indicate what assumptions are different 3. What is the relationship between the expected postretirement benefit obligation and the accumulated postretircmcnt benefit obligation associated with the health care plan? 4. HOW do LRS minimum funding standards affect each plan’s funding decisions? What is the likely explanation for the fact that the calculation of the pension plan expense contains a transition prior service cost component in the past but not currently. while the calculation of OPRB expense fer the health care plan contains no transition component? 5" Rmuired Draft a brief response to each of the questions raised by the company‘s controller. Problem V Short Answers (10 mins) (1) Why do most lessee companies prefer operating leases to capital leases and indicate ways that the lessor and lessee can try to accomplish this goal. How and why does the lessor feel about capital vs. Operating? Why does the lessor often give in on this issue? (2) Why do so many errors take place in recognizing revenues in the software industry when the selling campany is responsible for installing and maintaining the software for :1 period of time? DiSCuss the issues involved and thematically justify the choices. TOTAL P.004 ...
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