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Finwk00w - SDK L151E Henry Sander Econ 136C Winter 2000 Final Exam C~1 Problem 1(40 mins The records of ABE Company provided the following data for

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Unformatted text preview: SDK L151E Henry Sander Econ 136C. Winter 2000 Final Exam C~1 Problem 1 (40 mins) The records of ABE Company provided the following data for the accounting year ended December 31, 1992: Comparative Balance Sheets, December 31, 1992: Increase 12/31/91 12/31/92 (Decrease) Debits , Cash . ’ " "' $30,000 $69000 ‘, $39,000 '(i’sldgngsimm, ,shortwterm ('X‘Co, stock) 10,000 8,000 ' (2,000) 0 Accounts receivable (net of $5,000 t 56,000 86,000 ‘ 30,000 ' allowance in both years) 0 c/Inventory ‘ - » -» 20,000 30,000 10,000 “9 vPrepaid interest (expense) " 2,600 , 2,600 g“) x/Land , 60,000 25,000 (35,000) mfiy'machinery"‘ 80,000 90,000 4 10,000 ‘ "Other assets 29,000 39,000 10,000 Discount on bonds payable 1.000 __§_QQ (700) Total debits M M M Credits Allowance for doubtful accounts $6,000 $7,000 $1,000 A; e V‘Accumulated depreciation 20,000 26,900 6,900 1,.Notes payable 33,000 45,000 12,000 M/Sélmes payable 5,000 2,000 (3,000) :ijBcome taxes payable 2,000 8,000 6,000 (“sf/fiends payable 70.000 55,000 (15,000) {:5 )1 Common stock, nopar 100,000 , 131,000 31,000 ,9 25"";Prefened stock, nopar 20,000 30,000 10,000 Retained earnings 30,000 45.000 15,000 Total credits M w m Income Statement Sales revenue $180,000 Cost of goods sold , (90,000) 9 Depreciation expense, ’ ' (6,900)/ Bad debt expense ‘ (1,000)/ Salaries (32,900) Interest expense ' (6,100) Remaining expenses (4,000) '1E Income tax expense (12.100) “‘9 ‘31? Gain on sale of land, condemnation ' 18:00.0/ \‘3 Loss on bond retirement 1 1,000)“; Net income M Analysis of selected accounts and transactions: issued bonds payable for cash,“$5,500. The par of the bond was $6,000. Sold land For:35100999511:‘beqlgxsleéfilé Q99; Purchased machineryforcashfi‘il ‘3 d Purchased-'sh'mort-‘term investments. for cash, sgnoo {a L """"" “” he? Declarédaproperty dividend on the preferredsmck and paid it with a short~terrn investment (X Company'stock): marlget valueand carryingpvalue are the same, $4,000. $t Prior to maturity date, retiredbondspayablewhich were originally sold at a discount and had a book value“ of $20,000 and—ariparyal'ue of $2l,‘0'QQ_by~issuing common stoCk; the common stock had a market value of $21,000. Assume the gain or loss is not extraordinary and that the rest of the change in the discount account is due to amonizatiorgwféf) WM) ‘1‘»? $3 3, Acquired other aSSets by issuing preferred stockiiév'ith amarket 'value of_$l9,000. h. Retained earnings statement: "L M Balance, January 1, I992 ‘ $30,000 Net income for 1992 44,000 Dividends paid, cash (15,000) Stock dividend issued, commonestock (10,000) Property dividend, X Company stock (4,000) Balance, December 31, 1992 m i. Bad debt allowance for the year was $8,000 and $8,000 of previously allowed bad debts were written off <_ * j. $4,000 of inventory was written offas obsolete clue to the ordinary course of business. ‘k. Assume the rest Of {Hangings in the discount on bond. is dad. is av‘mf'hU-illGA " l. Prepaid interest is due to the fact that when notes of were borrowed to invest in machinery, the following year’s interest had to beprepaid. V i ‘ Required Prepare the SCF, indirect method. k) Problem II (45 mins) CRT Company purchased a machine on January 1, 1991, for $240,000. At the date of acquisition, the machine had an estimated useful life of 10 years with an estimated residual value of 520.000. The machine is being depreciated on a straight-line basis for financial reporting purposes, but for income tax purposes, an accelerated method is used because of its cash flow advantage. 1. On January 1, 1994, CRT changed, for financial reporting purposes, to an accelerated method of depreciation for this machine (with no change in estimated useful life or residual value). The accelerated depreciation amounts: 1991, $40,000; 1992, $36,000; 1993, $32,000; and 1994, $28,000. The annual accounting period ends December 31. 'RL‘JA >95” "“ E3 2. A patent that cost $9,350 has been amortized (straight—line) for the past 7 years over its legal life of 17 years. It is now clear that its economic life will not be more than 12 years from the initial acquisition date. 3. The merchandise inventory at December 31. 1993, was overstated by $10,000 (periodic inventory system). Assume the books have been closed for 1993 but not for 1994 and the income tax rate for all years is 40%. The annual financial statements are presented on a comparative basis (1993 and 1994 presented). After tax income was 1993, $90,000; and 1994, $98,000. There are 10,000 shares of common stock outstanding and $2,000 of dividends were declared in 1994. Beam 1. Identify the type of accounting change involved in Parts 1~3 and indicate which. Which approach should be used? Explain why? 2. Give the entry to appropriately reflect the changes listed above. 3. Show how the change should affect the 1994 comparative balance sheet (1993 and 1994). 4. Indicate any changes that should be made on the 1993 and 1994 income statements. 5\ Pram. shame .9 file f..— 1%; _ 7w. mums/muuamt- «quarmh—kimnu—oub WWW"...w.-«mmmm«WWW—Hm...m---~a a“. W, , do Problem ill (15 mins) The following information pertains to a Firm with a postretirement benefit health care plan: Transition date: January 1. 1993 Accumulated postretirement benefit liability at transition: $100,000 The firm has no plan assets or balance sheet account relating to the plan at transition Discount rate: 12% Average remaining service period of active plan participants, 15 years Service cost, 1993: $25,000 Contribution to benefit fund, December 3 l, 1993: $32,000 Benefit payments, December 31, 1993: $1 1,000 Reguired Provide the entry to record 1993 postretirement benefit expense, and the balance sheet & income statement results, assuming the company wishes to minimize its current expense in 1993. Problem IV Short Answers (26 WA 1. Explain how the direct method of presenting a statement of cash flows differs from the indirect approach and why it may cost more to generate. 2. If a change in principal requires entries to adjust prior periods, why are pro forma footnotes necessary and what accounting principle demands this footnote disclosure? 3. Explain how a decease in the discount rate used to determine pension. obligations will affect the current income statement and balance sheet results of the current period. Indicate all potential changes. 4. Explain how a lessor might adjust lease terms to generate an operating lease result. Indicate what positives and negatives this result will generate for the lessor. l Problem V (20 mins) Applied Technology Laboratories (ATL). a medical equipment manufacturer. reported a loss before income taxes of $20.9 million in 1994. the income tax effect was a savings ofonly 5.7 million. The effective income tax rate is only 3.3 percent (OJ/20.9). ATL reported a loss before income tax of $1.7 million in 1993, yet had income tax expense of $1.6 million -— an effective tax rate of 94.1 percent. Assume a statutory income tax rate of 35 percent. This schedule from the notes to the 1994 ATL annual report explains its deferred tax assets and deferred tax liabilities (in thousands): 1994 1993 Deferred tax assets Receivables $3,230 $2,936 Inventories 1 1,564 8,800 Net Operating loss carryforwards 3,969 3,157 State taxes 3,106 2,087 Compensation 2,623 2,17 1 Provision for litigation claim 1,700 -- Research & experimentation credit carryforwards 6,602 6,425 Other 3,032 3,107 Gross deferred tax assets $35,826 $28,683 Less valuation allowance §27.2492 1 19.700) Net deferred tax assets / $8,577 $8,974 Deferred tax liabilities, primarily depreciation & intangible assets (4,472) (4.628) Net deferred income taxes ' $ 4,105 S 4,346 Reguired 1. What are some reasons why ATL’s effective tax rate might be so low in 1994? 2. Why might ATL Show an income tax expense in a year when it has a loss before income taxes for financial reporting? In general terms, explain why ATL has such a large amount reported as a valuation allowance. 4. What effect did the increase in the valuation allowance from 1993 to 1994 have on ATL’s income tax expense computation in fiscal 1994? 5. Using a tax rate of 35 percent, estimate the amount of net operating loss carryforwards that ATL has as of December 31, 1994. 6. Using a tax rate of 35 percent, estimate the amount of “research and experimentation credit carryfomards” that ATL has as of December 31, 1994. 7. Using a tax rate of 35 percent, estimate the amount of accrued liability for litigation claim that ATL has as of December 31, 1994. EN Henry Sander Econ 136C; Winter 2000 Final Exam Problem I (40 mins) At December 31, 1992, the following data for Lincoln Company were available: Balance Sheet: ' December 31 Increase 1991 > 1992 (Decrease) Debits , _ . ‘ Cash $8,000 $22,000 $14,000 Accounts receivable (net) 18,000 24,000 6,000 Inventory 16,000 10,000 (6,000) Long-term investments 4,000 (4,000) Plant 60,000 60,000 Equipment 40,000 44,000 4,000 . Land 20,000 80,000 60,000 Patents 16,000 14,000 , (2,000) M m LL 000 Credits Accumulated depreciation - plant $14,000 $20,000 $6,000 Accumulated depreciation - equipment 20,000 16,000 (4,000) Accounts payable 16,000 4,000 (12,000) Wages payable 2,000 (2,000) Notes payable, long term 20,000 38,000 18,000 Common stock, nepar 100,000 150,000 50,000 Retained earnings 10.000 26,000 16,000 M @0912 m Income Statement Sales revenue - $180,000 Cost of goods sold (110,000) Depreciation expense, plant (6,000) Depreciation expense, equipment (4,000) Patent amortization ‘ (2,000) Remaining expenses (40,000) é.“ Loss on sale of equipment (2,000) Income tax expense , (8,000) 4" Gain on sale of long-term investment (amount before tax) 16,000 Net income ’ w ,_,o of. fly A339 is” «w (JOL \ e 49 Analysis of selected accounts and entries: a. At the end of the year, sold equipment that cost $16,000 (50% depreciated) for $6,000 cash (this was not an extraordinary item). b. Purchased land that cost $20,000; paid $4,000 cash, gave long-term note for the balance. Purchased equipment costing $20,000; paid half in cash, balance due in three years (interest-bearing note). The rest of the change in notes payable is due to the payoff of notes at maturity. (1. Sold $20,000 common stock at par. .0 f. Issued 3,000 shares of common stock, market value $30,000, for land that cost $40,000; the balance was paid in cash. g. ‘Sold the long-term investments for cash. h. Declared dividends, $8,000. ' ' i. Accounts payable include dividends payable of $3,000 at the beginning of the year and $1,000 at the end of the year. " p I I j. Bad debt expense of $2,000 is in remaining expenses and $3,000 of bad debts were written off due to no chance of ever collecting them. ‘ p 5 g j k. Wages payable were from the balance owed to an officer which were not paid until after 3/15/92. Required . _, Prepare the SCF, indirect method. V" (‘ ark 066:2. ' , .ee” 6’” V6 w Problem II (45 mins) r? $- CRT Company purchased a machine on January 1, 1991, for $240,000. At the date of acquisition, the machine had an Wwith an estimated residual value of $40,099. The machine is being depreciated on a straight-line basis for financial reporting purposes, but for income tax purposes, an accelerated method is used because of its cash flow advantage. 1. On January 1, 1994, CRT changed, for financial reporting purposes, to an accelerate method of depreciation for this machine (with no change in estimated useful life or residual value). The accelerate depreciation amounts: 1991, $40,000; 1992, $36,000; 1993, $32,000; and 1994, $28,000. 1994 books are using the accelerated method and have not been closed. 2. At the end of 1993, sales revenue collected in advance of $3,000 was included in 1993 sales revenue. It was earned in 1994. The tax return also included it in,1993 revenues. t 3. The rate used for bad debts has been 1/2% of credit sales, which has proven to be too low based on . current data available; therefore, for 1994 and thereafter, the rate used will be 1% of credit sales. ' The amount of the expense recorded per year under the old rate was 1993, $800; and 1994, $1,000. The annual accounting period ends December 31. The annual financial statements are presented on a comparative basis (1993 and 1994 presented). CRT has‘a‘n aVerage income tax rate of 40%. Pretax income before depreciation and prior to giving effect .ytofthese changes was 1993, $90,000; and 1994, $98,000. There are 10,000 shares of common stock outstanding. ” Reguired 1. Identify the type of accounting change involved. Which approach should be used to adjust for each change? Explain why? - 2. Give the entry to appropriately reflect the accounting changes discussed in 1994, the year of change, including the 1994 adjusting enuychb‘it-dcferred-ifiee-me-taae- 5r t " 7" UN” 0' 9 3 Show how the change should be reported on the 1994 comparative balance sheet (1993 and 1994). Indicate any changes that should be shown on the 1993 and 1994 income statements. Prepare a statement of retained earnings for 1994 only, Assume CRT reported an ending retained earnings of $100,000 on their last 1993 financial statement. P‘PP’ Problem m (10 mg“) i Z f I The following to a firm with a postretirement benefit health care plan: transient; date: 1993 Accumulated positedremcnt benefit liability at transition: $100,000 . c firm has $10,000 plan assets and no balance sheet account relating to the plan at transition 12% * e Averageft'énxaining Service period of active plan participants, 15 years sateen 19.93:..525000 , , canni’bfiiiori‘mibcnefir fund, December 31, 1993: $30,000 = Ben December 31, 1993: $10,000 from company assets not the post retirement benefit fit: pfi‘ymentst try tufrecord 1993 postretirement benefit expense, and the balance sheet and income I at December 31, 1993. Assume the company wishes to minimize its current w change pm principal requires entries to adjust prior periods, why are pro forma footnotes ’ essarjf what accounting principle demands this footnote disclosure? X's“ vrltty negatives this result will generate for the lessor. V“ e government will pay your friend in installments over the next 5 years in accordance 'progress‘the project is making. Discuss all issues that should be considered in deciding what ' ting method your friend’s business should adopt in accounting for revenues. W rnpany changes‘its expected return on plan assets related to its pension plan, indicate how this illaffect‘their current year’s balance sheet and income statement. Explain thoroughly. .9,“ .u. . .mewwawm 73"“ ~ Problem V (20 mins) Applied Technology Laboratories (ATL), a medical equipment manufacturer, reported a loss before income taxes of $20.9 million in 1994, the income tax effect was a savings of only $.7 million. The effective income tax rate is only 3.3 percent (OJ/20.9). ATL reported a loss before income tax of $1.7 million in 1993, yet had income tax expense of $1.6 million - an effective tax rate of 94.1 percent. Assume a statutory income tax rate of 35 percent. This schedule from the notes to the 1994 ATL annual report eprains its deferred tax assets and deferred tax liabilities (in thousands): 1994 1993 Deferred tax assets Receivables $3,230 $2,936 Inventories 11,564 8,800 Net operating loss carryforwards 3,969 3,157 State taxes ‘ ' 3,106 2,087 ' Compensation . ' 2,623 2,171 Provision for litigation claim 1,700 -- Research & experimentation credit carryforwards 6,602 6,425 Other 3,032 3,107 Gross deferred tax aSSets $35,826 1 $28,683 Less valuation allowance - (27,2491 ( 19,700} Net deferred tax assets $8,577 $8,974 Deferred tax liabilities, primarily depreciation & intangible assets (4,472) (4,628) Net deferred income taxes $ 4,105 $ 4,346 Required 1. What are some reasons why ATL’s effective tax rate might be so low in 1994? 2. Why might ATL show an income tax expense in a year when it has a loss before income taxes for financial reporting? In general terms, explain why ATL has such a large amount reported as a valuation allowance. 4. 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I Problem X Answers 1. Explain how the direct method of presenting a statement of cash flows differs from the indirect approach and why it may cost more to generate. ‘ 2. If a change in principal requires entries to adjust prior periods, why are pro forma footnotes ‘ necessary and what accounting principle demands this footnote disclosure? ‘3. Explain how a decease in the discount rate used to determine pension obligations will affect the current income Statement and balance sheet results of the current period. Indicate all potential changes. 4. Explain how a lessor might adjust lease terms to generate an operating lease result. Indicate what positives and negatives this result’gvill generate for the lessor. M ' " ~ ~——_.. x r”); 3 cm reamr are: $435) : )M4\\ M”... g“ I; w We Warm/729774.; of M7: Wear/WW4 (7’. My 5c Thaw w 722 3 (5 we“: Seesaw "“;-i1.tfl ‘ n i i 7,. 515/ 7762~6KK lea? V641, [0174/51 age,_/Z'éamaro“g 771% from flaw '1‘ (@EMAM 777‘: We 4:31" 77,? gm- fie”ch r. SAN'fi-v‘éw A \ 3 I ‘ x //x /7‘ b4i'tt/7‘ -%v6. Tm” 77) .4102.” rad Cam/fixiWB/L/fi Ado/WW4 guidance/aw p/Lfg/L (I I F ‘ (J [Ugccgflflflw‘ 'flf (MW/fie /fl/VoLl/EA f5“ ((01) 4 m ‘ H {Va’VU‘C-{Q‘jbfln To Au.th flémlcc 72; .50; Long”. 7755 1%?“ My” - {IA/vie (Ga/N349 LI/(flr Problem [I (45 mins) / CRT Company purchased a machine on January I. 1991, for $240,000. At the date ofacquisition. the machine had an estimated useful life of 10 years with an estimated residual value of $20,000. The machine is being depreciated on a straight-line basis for financial reporting purposes. but for incometax purpOSes. an accelerated method is usod because of its cash flow advantage. 1. On January 1, 1994, CRT changed, for financial reporting purposes, to an accelerated method of depreciation for this machine (with no change in estimated useful life or residual value). The accelerated depreciation amounts: 1991. $40,000; 1992, $36,000; 1993, $32,000; and 1994, $28,000. The annual accounting period ends December 31. 2. A patent that cost $9,350 has been amortized (straight-line) for the past 7 years over its legallife of 17 years. It is now clear that its economic life will not be more than 12 years from the initial acquisition date. 3. The merchandise inventory at December 31, 1993, was overstated by $10,000 (periodic inventory system). ' ' 9 Assume the books have been closedifor 1993 but not for 1994 and the income tax rate for all years is 40%. The annual financial Statements are presented on a comparative basis—(1993 and 1994 presented). After tax income was 1993, $90,000; and 1994, $98,000. There are 10,000 shares of common stock outstanding and $2,000 of dividends were declared in 1994. - Required 1. Identify the type of accounting change involved in Parts 13 and indicate which. Which approach should be used? Explain why? 2. Give the entry to appropriately reflect the changes listed above. 3. Show how the change should affect the 1994 comparative balance sheet (1993 and 1994). 4. Indicate any changes that should be made on the 1993 and 1994 income statements. Ii Conpwuw os/c. m El \wa >< .t'L "4300 I I h f; ‘ (MW @ M. Amen—Mb“, _ O 1660‘?)- edTKETtafidm taxi) ' "(Zeuo ‘ Lt w‘toa. 0%.?) “no NOW lbs 0 Q anxm * CA5“- 3241c ®® hence 7.0) Soot: if; _ _ I am ed” 9 s1 Thom, Bags @413 -. 410230 Q00 M “8/5 113000 (mono «32000 .3 K T " “Man at, 3 Analysis of selected accounts and transactions: Issued bonds payable for cash. $5,500. The par value of the bond was $6.000. Sold land for $53,000 cash; book value, $35,000. Purchased machinery for cash, $10,000. { Purchased short-term investments for cash, $2,000. Declared a property dividend on the preferred stock and paid it with a short~term investment (X Company stock); market value and carrying value are the same, $4,000. 1’. Prior to maturity date, retired bonds payable which were originally sold at a discount and had a book value of $20,000 and a par value of $21,000 by issuing common stock; the common stock had a market value of $21,000. Assume the gain or loss is not extraordinary and that the rest of the change in thefldiscount account is due to amortization. g. Acquired other assetspby issuing preferred stock with a market value of $10,000. h. Retained earnings statement: ‘ EDP-99‘!” Balance, January 11,1992 $30,000 Net income for 1992 W ; 44,000 Dividends paid, cash ' (15,000) HStock‘ dividend issued, common stock (10,000) Property dividendgix Company stock ' (4,000) Balance, DecemberBl, 1992 m i. ' Bad debt allowance for the year was $8,000 and $8,000 of previously allowed bad debts were written off * $4,000 of inventory was written off as obsolete due to the ordinary course of business. Assume the rest of the change in the discount on bond. 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U4 Problem II; (15 ruins) The {gnawing information pertains to a firm With a postretirement benefit health care plan: \ ‘ Transition date: January 1. 1993 / Acénmuiarcd postietirement benefit liability at transition: $100,000 The flrrn has no plan assets or balance sheet account relating to the plan at transition Discountrate: 12% Average remaining service period of active plan participants, 15 years Service cost\l993: 9525.000 137.000 Contributionto benefit fimd,December3 " Benefit payments, December 31, 1993: a 10,000 01%., go- ._ ., ” H , r e R uired \ [190° A“ m gsgkuq TWJ'WCOai Emma—n" Provide the entry to reco a 1993 postretirement benefitexpense, . .0. , A ... . ..; .2 ' - ‘ atrucrs :.-~ 2,;L‘.L2.~r-‘Q -:.€'L»."' . ‘. :::,: !:‘:-:e‘ e “. thecompanywishesto C’s-Sum“; its current expens 'n 1993. Problem IV Short Answers 1. 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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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Finwk00w - SDK L151E Henry Sander Econ 136C Winter 2000 Final Exam C~1 Problem 1(40 mins The records of ABE Company provided the following data for

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