fin08f - Henry Sander Econ l36C-l Fall 2008 Final Exam...

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Unformatted text preview: Henry Sander Econ l36C-l Fall 2008 Final Exam Problem I (35 mins) The records of Easy Trading Company provided the following information for the year ended December 31, 1998: Income Statement Sales revenue $80,000 Cost of goods sold (35,000) Depreciation expense (5,000) Bad debt expense (1,000) Insurance expense (1 ,000) Interest expense (2,000) Salaries and wages expense (12,000) Income tax expense (3,000) Remaining expenses (13,000) Loss on sale of operational assets (2,000) Net income $ 6.1100 Balance Sheet January 1, 1998 December 31, 1998 Cash $15,000 $31,000 Accounts receivable 30,000 28,500 Allowance for doubtful accounts (1,500) (2,000) Inventory 10,000 15,000 Prepaid insurance 2,400 1,400 Operational assets 80,000 81,000 Accumulated depreciation (20,000) (16,000) Land 40,100 81,100 Total $156,999 EMLQOQ Accounts payable $10,000 $1 1,000 Short term notes payable 2,000 1,000 Bond payable (net of premium) 1,000 Notes payable, long term 20,000 46,000 Common stock, no par 100,000 136,000 Retained eamings- M M Total $1 56109.9 $2203M Wrote off $500 accounts receivable as uncollectible. Sold operational asset for $4,000 cash (cost, $15,000; accumulated depreciation, $9,000). Issued common stock for $5,000 cash. Declared a cash dividend, $5,000 and paid $3,000 of this amount. The remaining $2,000 is recorded in accounts payable. No dividends were payable l/1/98. e. Purchased land, $20,000. Paid $10,000 in cash and the rest with a note payable of which $1,000 has been paid off. f. Acquired land for $21,000 and issued common stock as payment in full. g. Acquired operational assets, cost $16,000; issued a $13,000, three-year, interest-bearing note payable. 9-957!” h. Paid a $10,000 long-term note installment by issuing common stock to the creditor. i. Borrowed cash on long-term note $14,000. j. One—year bonds were issued with a par value of $2,000 for $2,200. Half of the bonds were immediately extinguished for their carrying value. There was also an amortization of bond premium of$100 this year. k. Paid off$1,500 on short term note payable. $500 of this amount was for interest expense. 1. Normal inventory obsolescence of $5,000 was recorded this year in cost of goods sold. Required 1) Prepare the statement of cash flows, indirect method. 2) Indicate what would be different about the direct method. Problem 11 (40 mins) Coleman Computer Company started operations on January 1, 1996. The accounting period ends December 31. This problem encompasses a four—year period, 1996 through 1999. During this period, the company has several differences and incurs an operating loss in 1997. The data are given in the following table. The enacted tax rate for all periods is 40 percent, and all amounts are given in thousands of dollars. 1996 1997 1998 1999 a. Pretax accounting income (loss) $400 $(700) $100 $200 b. Other differences: Gross margin on installment sales Accounting basis (when sold) 200 50 150 100 Tax basis (when collected) 0 125 _ 75 125 Deferred gross margin, Dec. 31 200 125 200 175 Accrued estimated warranty costs: Accounting basis 100 100 180 160 Tax basis 0 80 110 130 Accrued warranty costs, Dec. 31 100 I20 190 220 Depreciation expenses: Accounting basis 100 100 100 100 Tax basis 120 l 10 100 90 Municipal bond interest income Accounting basis 10 10 10 0 Tax basis 0 0 0 0 Bad debt expense: Accounting basis (allowance) 15 15 15 15 Tax basis (direct write off) 5 15 20 10 Assume that Coleman elects the carryforward only option for any NOL that occurs, and that management cannot expect positive taxable income exclusive of reversals oftemporary differences in any year. That is, in determining whether a valuation allowance is needed, assume that future taxable income exclusive oftemporary differences is zero. Also assume that the carryback option is not elected by Coleman and that a tax law changes the effective tax rate (to 35%) for Coleman in 1998 and thereafter. The tax rate change was enacted into law in October of 1997. Required 1. Complete the appropriate schedules and prepare thejournal entry to record income taxes for 1996- 1998 under the provisions of SFAS No. 109. 2. For '96 - '98, show how the income tax information would be reported on the income statement and balance sheet. You are not required to distinguish current and noncurrent classifications. 3. Based on the info in the problem, should the company have elected the carryback option? Why or why not? lfthey had, describe how the carryback would have been measured and presented differently. Problem 111 Short Answers (25 mins) . Indicate how deferred tax assets or liabilities are segregated between short term and long term presentations on a balance sheet and what 2 unusual items result from this rule. Why are changes in tax rates so common? What can cause a change in the tax rate? How and why are they handled the way they are? What affect does the change in the tax rate have on the matching principle? Explain. How does the use of valuation allowances afftect the income statement and the balance sheet, and why are they used? How does this presentation affect the matching principle in the year the allowance is established? In subsequent years? Name and contrast theoretically the two accounting methods that exist for an accounting change. Indicate in your answer how the previous financial statements are affected by each method and why this is acceptable. How does one determine the balance sheet account to use for recording the tax effect of an accounting change? Why does it vary? ...
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This note was uploaded on 01/31/2010 for the course ECON 136C taught by Professor Anderson during the Fall '08 term at UCSB.

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fin08f - Henry Sander Econ l36C-l Fall 2008 Final Exam...

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