ACCT+2101+Quiz+4+V3+SOLUTION

ACCT+2101+Quiz+4+V3+SOLUTION - ACCT 2101 Quiz#4 Version 3...

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Unformatted text preview: ACCT 2101 Quiz #4 -- Version 3 SOLUTION Spring Semester, 2009 Name Kat! '” W“ i L‘ flmahrlf) :lwafi‘a‘hafi” Section (please print clearly) Pledge: On my honor, I have neither given nor received any unauthorized help on this quiz. (signed) Instructions: 1. You may not ask questions during the quiz. However, all notes you write to the instructor will be read and considered during the grading process. 2. This quiz is comprised of numerous SHORT problems and questions. Please use your time wisely. Remember: Perfect answers are not required to get most of the points. 3. Only the approved calculators may be used during the quiz. 4. You must write legibly or your answers will not be graded. 5. PLEASE SHOW YOUR WORK TO RECEIVE ANY PARTIAL CREDIT!! 6. Do NOT pull this quiz apart under any circumstances. 7. Make sure you have 8 numbered pages including the cover sheet plus the Income Statement and the Balance Sheet for Wal—Mart (without page numbers). 8. Good luck! Point Allocation: Problem 1: 1.2 Problem 2: 1.6 Problem 3: 2.0 Problem 4: 2.0 Problem 5: 1.0 Problem 6: _2_._2 TOTAL POINTS = lg points ACCT 2101 Quiz 4—3 ,M/ e ‘ ”3% A“ \{rfircm 10f8 PROBLEM 1. (a) The Noble Company opened for business in April. During the month, the company made multiple purchases of inventory. Every time Noble Company purchased new inventory items, they cost more than they did at the time of the previous purchase. (That is, the company is experiencing rising prices.) At the end of the month, the company reports the following information to you. Please identify the inventory costing method (FIFO, LIFO, Weighted—Average) employed that resulted in these month—end numbers. Inventory Ending Cost of Gross Costing Method Inventory Goods Sold Margin FIFO 35 120,800 $ 174,000 $ 86,000 . 95 Mt)“ LIFO $ 112,400 $ 182,400 $ 77,600 «1 m w . mi“ 1” ed”) Weighted Average 33 116,549 $ 178,251 $ 81,749 U” ‘ (b) Define each of the following terms. Please use complete sentences (subject and predicate) to identify the differences among these terms. // (1) Depreciation: Depreciation is the allocation of the cost of property, plant & equipment assets to the future periods benefited by their use. It has nothing to do with determining the value of the asset. , I). 05 x (2) Depletion: Depletion is the recognition of the extraction of a natural resource a. . asset as the resource is exhausted (removed). (3) Amortization: Amortization is the allocation of the cost of intangible assets to the future periods benefited by their use. It has nothing to do with determining the value of the asset. ACCTZJOI Quiz 4—3 2 0f8 PROBLEM 2. USE COMPLETE SENTENCES (SUBJECT AND PREDICATE) TO ANSWER THE FOLLOWING QUESTIONS. (a) In class, we studied only one accelerated method of depreciation — the double— declining-balance method. Identify two reasons why this method of accelerated depreciation was selected for study. As explained in class, the two reasons we studied Double-Declining—Balance (DDB) depreciation are: (1) DUB is the most commonly used accelerated method of depreciation in financial reporting. ' 9" w (2) DDB is the basis for the depreciation tables in the tax code. Therefore, you 63“: have an understanding of tax depreciation from studying DDB. (b) Describe the concept of Lower—of-Cost—or—Market (LCM). Explain why this convention is considered important in financial reporting. I The lower-of—cost~or—market (LCM) convention requires that inventories not be 9‘ 1 reported at an amount above their market (replacement) cost. " The LCM convention is important because financial analysts depend on ,1). inventories generating gross margin and must be able to determine when that is not the case. (c) What is the connection between the book value of property, plant, and equipment and its fair market value? Explain. <‘ There is NO direct connection between the book value and the fair market value :1“ i of property, plant, and equipment assets. Book value is based on the allocation of the original cost of the asset whereas fair . 21 market value is based on a variety of independent market factors not tied to original cost. (d) Which inventory costing method is not used in financial statements for operations outside the United States? Explain why. ( LIFO is not used in financial statements for operations outside of the US. because .“i it only exists as a construct of US. tax law and it is not allowed by International GAAP (we discussed this in class!). ACCTZIOI Quiz 4—3 3 of8 PROBLEM 3. Turner Company takes a physical inventory at the end of each calendar-year accounting period to establish the ending inventory amount for financial statement purposes. Its financial statements for the past few years indicate an average gross margin on net sales of 39%. On July 18, a fire destroyed the entire store building and its contents. The records in a fireproof vault were intact. Through July 17, these records show: Merchandise inventory, January 1 $ 572,000 Merchandise purchases 8,408,000 Purchase returns 234,400 Transportation-in 604,000 Sales 12,336,000 Sales returns 672,000 The COmpany was fully covered by insurance and asks you to determine the amount of its claim for loss of merchandise. REQUIRED: Estimate the inventory balance as of July 17 using the gross margin estimation method. SHOW ALL WORK TO RECEIVE ANY CREDIT. Merchandise Inventory, January 1 $ 572,000 «M - Purchases $ 8,408,000 Less: Purchase Returns (234,400) Add: Transportation-In 604,000 8 777 600 “QM” Cost of Goods Available for Sale $ 9,349,600 Sales 35 12,336,000 Less: Sales Returns {672,000} Net Sales $ 11,664,000 Less: Estimated Gross Margin (39% * $11,664,000) (4,548,960) Estimated Cost of Goods Sold (7,115,040) ff“ Estimated Ending Inventory as of July 17 § 2,234,560 4;?“ ACCT2IOI Quiz 4—3 4of8 .35 PROBLEM 4. Equipment costing $550,000 was placed in service on January 2, 2007. The equipment was expected to have a useful life of 11 years and a residual value of $65,000. The company uses the double—declining-balance (DDB) method of depreciation and rounds to the closest dollar. On December 31, 2008, the company sells the equipment for $275,000. REQUIRED: (a) Record the journal entry for depreciation in 2007. (b) Record the journal entry for depreciation in 2008. (c) Record the journal entry for the sale of equipment on December 31, 2008. , (a), Depreciation Expense , 100,000 ,, ‘13) Accumulated Depreciation- Equipment 100,000 ((550,000t1/11 *2) = $100,000) (b) Depreciation Expense 81,818 2 . t3" Accumulated Depreciation—Equipment 81,818 3 [(550,000 — 100,000) 1‘ 1/11 * 2) = $81,818] (c) Cash 275,000 Accumulated Depreciation—Equipment 181,818 1 Loss on Disposal of Equipment 93,182 Equipment 550,000 [275,000 — (550,000 — (100,000 + 81,818» = $93,182 loss] Accr2m1 Quiz 4—3 5 of8 PROBLEM 5. The Turner Company acquired the Hanson Company for a cash price of $2,062,000. In addition, the Turner Company assumed all liabilities of the Hanson Company as part of the acquisition. The following are the fair market values of the assets and liabilities of the Hanson Company that were acquired: Accounts Receivable Inventories Property, Plant, and Equipment Patents FMV of ASSETS Accounts Payable Notes Payable LIABILITIESASSUMED , REQUIRED: $ 475,000 820,000 629,000 423,000 2,347,000 597,000 752,000 1 349 000 , l Record the journal entry to recognize the acquisition of the Hanson Company by the Turner Company. Accounts Receivable . \ Inventories (,th Property, Plant, and Equipment Patents '3 M? Goodwill * Accounts Payable Notes Payable Cash >*Goodwill: Cash Paid + Liabilities Assumed = Total Price — FMV of Assets ACCTZIOI Quiz 4—3 475,000 820,000 629,000 423,000 1,064,000 $ 2,062,000 1% $ 3,411,000 - 2,347,000 2 Goodwill 597,000 752,000 2,062,000 $1,064,000 g .\ each (5qu PROBLEM 6. Use the Wal—Mart Income Statement and Balance Sheet on the last two pages to answer the following questions. YOU MUST SHOW ALL OF YOUR WORK OR YOUR ANSWERS WILL NOT BE GRADED. (a) Compute the Inventory Turnover and Days Outstanding Inventory for 2007 and 2008. Inventory Turnover — 2007: Cost of Goods Sold / Average Inventory 264,152 / [(31,910 + 33,685) / 2] 2 264,152 / 32,7975 II 8.05 times 1| Inventory Turnover — 2008: ll 286,515 / [(33,685+35,180) /2] = 286,515/34,432.5 § .3 H 8.32 times Days Outstanding Inventory ~— 2007: 365 days / Inventory Turnover . a = 365/805 = 45.34 days I Days Outstanding Inventory — 2008: . 2 = 365/832 = 43.87 days g (b) What can you say about Wal—Mart’s inventory situation? It appears that Wal—Mart has improved their inventory management from 2007 to 2008. Reducing the number of days that inventory remains unsold results in huge savings to a company with an average investment in inventory over $34 billion. ACCT 2101 Quiz 4-3 7 0f8 PROBLEM 6 - continued. (c) Compute the Return on Assets Ratio for 2007 and 2008. Return on Assets Ratio — 2007: Net Income / Average Total Assets = 11,284/ [(138,187 + 151,587) / 2] = 11,284 / 144,887 gal = 0.07788 = 7.8% Alternative Approach = (Net Income / Net Sales ) * (Net Sales / Average Total Assets) _, =, (11,284 / 34499211132144.9922] 144,887): 3.27%,12138 times =78% Return on Assets Ratio — 2008: = 12,731 / [(151,587 + 163,514) / 2] = 12,731 / 1157,5505 3‘1 0.0808 = 8.1% Alternative Approach = (12,731 / 374,526) * (374,526 / 1575505) 8.1% I! = 3.4% * 2.38 times (d) What can you say about Wal—Mart’s effective use of its asset base? Wal—Mart has also made improvements in their overall use of their assets. Their overall return on assets has increased from 7.8% to 8.1%. The alternative approach makes it clear how it happened — the return on sales has increased from 3.2700 to 3.400 on the same asset turnover measure. ACCT2101 Quiz 4-3 8 of8 3U ...
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