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final_f2003

# final_f2003 - University of Waterloo Final Examination Term...

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Term: Fall Year: 2003 Student Name UW Student ID Number Course Abbreviation and Number AFM 121 Course Title Understanding and Using Financial Accounting Information Section(s) S01 8:30 – 10:00 a.m. T/TH S02 11:30-1:00 p.m. T/TH S03 1:00 – 2:30 p.m. T/TH Please circle the section you are enrolled in Instructor R. J. Sproule, Jerry Sun Date of Exam December 5, 2003 Time Period Start time: 2:00 p.m. End time: 5:00 .m. Duration of Exam 3 hours Number of Exam Pages 20 (including this cover sheet) Exam Type Closed Book Additional Materials Allowed Calculator Marking Scheme: Question Score Question Score 1. 16 6. 15 2. 11 7. 16 3. 12 8. 35 4. 12 5. 8 Total. 125 AFM 121 Fall 2003 Page 1 of 20 University of Waterloo Final Examination

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Question 1 (16 marks, 23 minutes) Great Corp. acquired equipment with the cost of \$50,000 at the beginning of 1998, with an estimated residual value of \$2,000 and an estimated useful life of 8 years. a. Please prepare the journal entry to record the acquisition of the equipment if Great Corp. purchased it with cash. Property, Plant and Equipment \$50,000 Cash \$50,000 b. If Great Corp. uses the straight-line method to compute the amortization of the equipment, what is the amount of annual amortization? \$50,000 - \$2,000 = \$6,000 8 c. If Great Corp. uses the double-declining-balance method to compute the amortization of the equipment, please calculate the declining-balance rate and the amortization of 1999 . 1/8 X 2 = 25% 1998: \$50,000 X 25% = \$12,500 1999: (\$50,000 - \$12,500) X 25% = \$9,375 AFM 121 Fall 2003 Page 2 of 20
d. If Great Corp. uses the straight-line method to compute the amortization of the equipment, please calculate the balance of accumulated amortization and the book value of the equipment at the beginning of 2000 . Amortization for each of 1998 and 1999: \$6,000 Book value at January 1, 2000: \$50,000 - \$12,000 = \$38,000 e. Great Corp. uses the straight-line method to compute the amortization of the equipment, and sold the equipment for cash \$10,000 at the end of 2001, did a gain or loss on the sale of the equipment occur? What is its amount? Amortization: 1998 thru 2001 \$6,000 X 4 = \$24,000 Book value at end of 2001: \$50,000 - \$24,000 = \$26,000 Loss of: \$26,000 - \$10,000 = \$16,000 AFM 121 Fall 2003 Page 3 of 20

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Question 2 (11 marks, 16 minutes) The 20B financial statements of Companies A and B showed the following Item Company A B Net sales revenue \$150,000 \$200,000 Interest expense (net of tax) \$1,000 \$800 Profit margin 6% 5% Average total assets \$40,000 \$80,000 Financial leverage +4% +3% a. For each company, compute the items listed Item Company A B 1. Reported net income -- \$ \$150,000 x .06 = \$9,000 \$200,000 x .05 = \$10,000 2. Return on assets -- % \$9,000 + \$1,000 = \$40,000 25% \$10,000 + \$800 = \$80,000 13.5% 3. Return on equity -- % 25% + 4% = 29% 13.5% + 3% = 16.5% 4. Amount of owners’ equity -- \$ \$9,000 = \$31,034 .29 \$10,000 = \$60,606 .165 b. Assuming both Company A and Company B are in the same industry, which company (A or B) appears to be the better investment and why? Company A is a better investment. Company A has a higher return on equity and assets or Company A Utilizes higher financial leverage effectively. Do not write below this line AFM 121 Fall 2003 Page 4 of 20
Question 3 (12 marks, 17 minutes) Here are the inventory purchase and sales records of MVW Company for 2001: Date Description Quantity Unit costs (\$) Total costs (\$) Jan 1 beginning 8000 \$3.00 \$24,000 Feb 20 purchase 2000 \$3.20 \$ 6,400 Apr 15 purchase 3000 \$3.30 \$ 9,900 June 20 sale 4000 Oct 18 purchase 6000 \$3.40 Dec 12 sale 5000 \$20,400 Total \$60,700 a. Please compute the quantity of ending inventory for 2001.

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