ExamI-F2006-Solutions

ExamI-F2006-Solutions - Accounting 101, Fall, 2006 Name:...

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Unformatted text preview: Accounting 101, Fall, 2006 Name: PENN ID: RECITATION SECTION: ACCOUNTING 101, EXAMINATION 1 Fall Semester, 2006 INSTRUCTIONS: 1. There are 19 numbered pages in this booklet. Make sure you have all of the pages. 2. Please print your name and student number in the space provided on top of this page AND on all subsequent pages. 3. This is a 97 point exam. You have 120 minutes to complete it. Budget your time to achieve maximum points. 4. Answer the problems in the space provided within this booklet. Present your work in an orderly fashion to facilitate the awarding of partial credit. For partial credit, you must show your work. Partial credit can only be given for work that is presented in a clear, legible and logical manner. 5. In the interest of fairness to all students, NO questions will be answered during the exam. If you think a question is ambiguous, state an appropriate assumption explicitly and continue. 6. The exam is closed book. You are allowed only ONE 8.5 x 11 inch double-sided cheat sheet. 7. Exams written in pencil will not be considered for a regrade. Use a pen if you think you may like to submit a regrade request. Question I II III IV V Total Mid-term Examination 1 Points Allocated 14 23 15 26 19 97 Page 1 Points Scored Accounting 101, Fall, 2006 Name: Question1 – Accounting “Sudoku” (14 points) Please find below excerpts from the balance sheet, statement of operations (income statement), and statement of cash flows Apple Computer, Inc. filed with the SEC for its fiscal year ended on September 24, 2005. Please note that to solve the question, you will need to consider the link between the three statements. Fill in the blanks that are marked with “?”. Each “?” is worth one point. No partial credit will be assigned for each “?”. Also, due to the number of exams we will be grading, we will not pay attention to carrythrough mistakes (i.e. if one wrong answer is the reason for another wrong answer, each wrong answer will be penalized). Assume that Apple did not declare any dividends in fiscal year 2005. Apple Computer, Inc. Consolidated Balance Sheet (in millions, except share amounts) September 24, 2005 September 25, 2004 $ 3,491 6,809 817 69 27 338 $ 11,551 2,969 4,086 707 80 17 191 $ 8,050 $ 1,779 1,705 3,484 601 4,085 $ 1,451 1,200 2,651 323 2,974 3,521 (60 ) 4,005 — 7,466 $ 11,551 2,514 (93 ) 2,670 (15 ) 5,076 $ 8,050 ASSETS: Cash and cash equivalents Other Current assets Property, plant, and equipment, net Goodwill Acquired intangible assets, net Other assets Total assets LIABILITIES AND SHAREHOLDERS’ EQUITY: Current liabilities: Accounts payable Accrued expenses Total current liabilities Non-current liabilities Total liabilities Commitments and contingencies Shareholders’ equity: Common stock, no par value; 1,800,000,000 shares authorized; 835,019,364 and 782,887,234 shares issued and outstanding, respectively Deferred stock compensation Retained earnings Accumulated other comprehensive income (loss) Total shareholders’ equity Total liabilities and shareholders’ equity Mid-term Examination 1 Page 2 Accounting 101, Fall, 2006 Name: Apple Computer, Inc, Consolidated Statement of Operations Three fiscal years ended September 24, 2005 2005 Net sales Cost of sales Gross margin Operating expenses: Research and development Selling, general, and administrative Restructuring costs Total operating expenses Operating income (loss) $ 13,931 9,888 4,043 8,279 6,020 2,259 534 1,859 — 2,393 1,650 Other income and expense: Gains on non-current investments, net Interest and other income, net Total other income and expense Income before provision for income taxes Provision for income taxes Income before accounting changes Cumulative effects of accounting changes, net of income taxes Net income Mid-term Examination 1 2004 $ Page 3 $ 489 1,421 23 1,933 326 — 165 165 1,815 480 1,335 — 1,335 4 53 57 383 107 276 — 276 2003 $ $ 6,207 4,499 1,708 471 1,212 26 1,709 (1 ) $ 10 83 93 92 24 68 1 69 Accounting 101, Fall, 2006 Name: Apple Computer, Inc, Consolidated Statement of Cash Flows Three fiscal years ended September 24, 2005 2005 Operating Activities: Net income Cumulative effects of accounting changes, net of taxes Adjustments to reconcile net income to cash generated by operating activities: Depreciation, amortization and accretion Stock-based compensation expense Non-cash restructuring Provision for (benefit from) deferred income taxes Tax benefit from stock options Loss on disposition of property, plant, and equipment Gains on sales of short-term investments, net Gains on non-current investments, net Gain on forward purchase agreement Changes in operating assets and liabilities: Accounts receivable Inventories Other current assets Other assets Accounts payable Other liabilities Cash generated by operating activities 1,335 — 2003 Page 4 150 33 5 20 99 7 (1 ) (4 ) — 113 16 12 (11 ) 7 2 (21) (10 ) (6) (121) (64 ) (150) (61 ) 328 533 2,535 $ 69 (1) (8 ) (45 ) (176 ) (39 ) 297 320 934 (201) (11 ) (34) (30 ) 243 152 289 (11,470) 8,609 586 — (260) (21 ) (2,556) Financing Activities: Payment of long-term debt Proceeds from issuance of common stock Cash used for repurchase of common stock Cash generated by financing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents, end of the year 276 — 179 42 — 52 453 9 — — — Investing Activities: Purchases of short-term investments Proceeds from maturities of short-term investments Proceeds from sales of short-term investments Proceeds from sales of non-current investments Purchases of property, plant, and equipment Other Cash (used for) generated by investing activities Mid-term Examination 1 2004 (3,270 ) 1,141 801 5 (176 ) 11 (1,488 ) (2,648) 2,446 1,116 45 (164) 33 828 — 543 — 543 522 3,491 (300 ) — 427 53 — (26) 127 27 (427 ) 1,144 $ 2,969 $ 3,396 Accounting 101, Fall, 2006 Name: Question 2: Multiple choice and true/false (23 points) Please answer the following questions by either choosing from multiple choices or indicating true or false. Unless otherwise noted, the questions are independent from each other and will be graded accordingly. Each multiple-choice question is worth 2 points, and each true/false question is worth 1 point. No partial credit will be granted for each question. 1. Phillips Corporation has on its balance sheet the following amounts: Assets Liabilities Contributed capital $6,100,000 3,100,000 1,000,000 What is the amount of retained earnings that should appear on Phillips' balance sheet? A) $1,800,000. B) $3,000,000. C) $7,100,000. D) None of the above. 2. During 2006, Gia Pronto incurred operating expenses amounting to $200,000, of which $58,000 was paid in cash; the balance will be paid in January 2007. On the 2006 income statement of the company, what amount should be reported for operating expenses? A) $200,000. B) $58,000. C) $142,000. D) None of the above. 3. On January 1, 2009, Lisa Company paid the premium in advance on a four-year insurance policy on equipment in the amount of $6,000. At that time, the full amount paid was recorded as prepaid insurance. After recording the adjusting entry for the insurance policy on December 31, 2009, Lisa Company's records would reflect a balance in the prepaid insurance account of A) $1,000. B) $2,000. C) $6,000 D) $4,500. E) None of the above. Mid-term Examination 1 Page 5 Accounting 101, Fall, 2006 Name: Use the following to answer questions 4-5: The adjusted trial balance of Lamont Corp. included the following accounts. Note that (1) Prepaid Insurance represents expenses that will be incurred during the next fiscal year (2) Unearned Rent represents revenues that will be earned during the next fiscal year. Accounts Payable Accounts Receivable Accumulated Depreciation – Building Building Capital Stock Cash Interest Payable Merchandise Inventory Land Prepaid Insurance Retained Earnings Currently maturing portion of the Note Payable Supplies Unearned Rent Note Payable (due in annual installments over five years) $ 13,000 21,000 25,000 110,000 60,000 27,000 2,000 20,000 60,000 3,000 64,000 5,000 1,000 2,000 22,000 4. What amount of current assets would appear on the balance sheet? A) $48,000. B) $72,000. C) $132,000. D) $69,000. E) None of the above. 5. What amount of current liabilities would appear on the balance sheet? A) $42,000. B) $19,000. C) $21,000. D) $22,000. E) None of the above. Mid-term Examination 1 Page 6 Accounting 101, Fall, 2006 Name: 6. On Tuesday October 10, 2006, Greek Lady sold 200 chicken gyro sandwiches for $5.35 each. The cost of each sandwich to Greek Lady is $3.25. Which one of the following is the correct journal entry to account for the benefits and the costs of sale of 200 chicken gyro sandwiches in aggregate? A) Debit cash by $5.35, credit inventory by $3.25, and credit net income by $2.10. B) Debit cash by $1,070, debit cost of goods sold by $1,070, credit inventory by $650, and credit sales revenue by $650. C) Credit cash by $1,070, debit cost of goods sold by $670, debit inventory by $670, and credit revenue by $1,070. D) Debit cash by $1,070, debit cost of goods sold by $650, credit inventory by $650, and credit sales revenue by $1,070. E) None of the above. 7. If a company has liabilities of $100,000 and their stockholders' equity is $70,000, then total assets must be $30,000. A) True B) False 8. Liability accounts are reported on the income statement as they represent goods or services consumed or used. A) True B) False 9. A primary objective of accounting is to disclose the fair market value of assets on the balance sheet so investors and creditors know their current value. A) True B) False 10. Gains are inflows of net assets from non-operating transactions. A) True B) False 11. Under accrual accounting, interest expense would be recognized when the interest has accrued with the passage of time even though cash has not been paid. A) True B) False Mid-term Examination 1 Page 7 Accounting 101, Fall, 2006 Name: 12. An example of deferred revenue would be cash collected by Papa John's from franchisees where Papa John's has not yet provided the franchisee the promised services such as site selection and restaurant design. A) True B) False 13. In the long run, companies must report positive cash flow from operating activities in order to be successful. A company that shows positive cash flows from operations over time will be less likely to need to borrow or issue more stock to finance expansion. A) True B) False 14. Deferred expenses are previously unrecorded expenses that need to be recorded at the end of the accounting period to reflect the amount incurred and its related payable. A) True B) False 15. Rent of $4,000 collected in advance was recorded as unearned rent revenue. At the end of the accounting period, half the rent was earned. The related adjusting entry should be a credit to rent revenue for $2,000 and a debit to unearned rent revenue for $2,000. A) True B) False 16. On June 30, 2006, a one-year insurance policy was paid for in advance and debited to prepaid insurance for $3,600; therefore; on December 31, 2006, the adjusting entry for the expiration of this item should be a debit to insurance expense for $1,800 and a credit to cash for $1,800. A) True B) False 17. The following t-accounts show how the journal entry for issuance of 5,000 shares of nopar common stock for $2 per share is posted. Cash Additional Paid-in Capital 10,000 10,000 A) True B) False Mid-term Examination 1 Page 8 Accounting 101, Fall, 2006 Name: Question 3 – Revenue recognition for a long-term contract. (15 total points) Lincoln Financial Field, the Philadelphia Eagles NFL Stadium, was build by a joint venture of multiple construction companies with total construction cost of $320 million. Canam Steel Corporation (CANAM), a US-based company specialized in the design and fabrication of steel components, contracted for part of the construction, which generated $60 million in total revenues for CANAM. CANAM estimated initially its total costs for the construction to be $40 million over the three year construction period 2001-2003. The City of Philadelphia agreed to make the following cash payments to CANAM: $10 million in 2001, $10 million in 2002, $20 million in 2003, and $20 million in 2004. CANAM started to work on the contract on April 1, 2001 and it incurred $13.6 million of actual costs in 2001 and $15.1 of actual costs in 2002. Before CANAM recognized revenue for 2002, it revised its total cost estimate to $45 million. Actual costs for 2003 then finally amounted to $18.3 million. The contract was completed at the end of August 2003 as scheduled. CANAM used the percentage-of-completion method to recognize revenues from long-term contracts. 1) How much revenue did CANAM recognize from the Lincoln Financial Field contract in 2001? (3 points) Actual Costs incurred up to the end of 2001 / Total Cost Estimate at the end of 2001 =$13.6 million / $40 million =34% of the project completed until the end of 2001 Revenue recognized in 2001 = ($60 million * 34%) – 0 = $20.4 million 2) What amount of net income did CANAM report from the Lincoln Financial Field contract in 2002, ignoring income taxes? (4 points) Actual Cost in 2001 Actual Cost in 2002 New Total Cost Estimate $13.6 million $15.1 million $45 million Percentage of completion up to the end of 2002 = ($13.6 + $15.1)/$45 = 63.78% Revenue recognized in 2002 = ($60 million * 63.78%) – (20.4 million recognized in 2001) = $17.87 million Net income for 2002 = Revenue recognized – Actual Cost = $17.87 million – $15.1 million = $2.77 million Mid-term Examination 1 Page 9 Accounting 101, Fall, 2006 Name: 3) What amount of net income would CANAM have reported from the Lincoln Financial Field contract in 2002, ignoring income taxes, if it had changed the estimate of its total costs on the project to be $45 million before recognizing revenue for 2001? (4 points) Actual Costs incurred up to the end of 2001 / Total Cost Estimate at the end of 2001 =$13.6 million / $45 million =30.22% of the project completed until the end of 2001 Revenue recognized in 2001 = ($60 million * 30.22%) – 0 = $18.13 million Percentage of completion up to the end of 2002 = ($13.6 + $15.1)/$45 = 63.78% Revenue recognized in 2002 = ($60 million * 63.78%) – (18.13 million recognized in 2001) = $20.14 million Net income for 2002 = Revenue recognized – Actual Cost = $20.14 million – $15.1 million = $5.04 million 4) If CANAM were using the completed contract method, how much net income (ignoring taxes) would it report due to the Lincoln Financial Field contract for its fiscal year ending December 31, 2003? (3 points) Net income = Total Revenue – Total Expense = $60 millions – ($13.6 + $15.1 + $18.3) = $13 million 5) Where would you find the information about which method of accounting for long-term contracts CANAM used when constructing another football field, e.g. CMGI Field, home of the New England Patriots? Be specific. (1 point) In the notes to the financial statements, in the annual report or 10-K (e.g. in 2001, on page 26). Mid-term Examination 1 Page 10 Accounting 101, Fall, 2006 Name: Question 4 – Errors in Financial Statements. (26 total points) Creative Accounting, Inc. (CA, a U.S. company) made the following errors when preparing their financial statement for the fiscal year ending December 31, 2005. Indicate the effect of the error (+ / - or overstate / understate) and the amount of the effect (and any other related errors) on each of the components of the balance sheet and income statement by filling in the appropriate spaces. You should have a response under each component (i.e. indicate the effect on assets, liabilities, shareholders’ equity, revenues, expenses and net income). Also make the correct journal entries that should have been made for each of the question. [Hint: Consider the difference between the entry(s) that the firm actually made and the entry(s) that it should have made to record the transaction(s). See the following EXAMPLE as a reference on how to complete the other questions.] EXAMPLE: 0) In making the adjusting entries at year-end, CA failed to record the adjusting entry for wages earned by employees, but not yet paid, amounting to $5,000 for the last four days of the year. Assets No effect BALANCE SHEET INCOME STATEMENT Liabilities Shareholders’ Revenues / Expenses / Net Income Equity Gains Losses -5000 +5000 No effect -5000 +5000 Account title Wages expense Wages payable Mid-term Examination 1 Debit $5,000 Credit $5,000 Page 11 Accounting 101, Fall, 2006 Name: 1) CA declared dividends for the fiscal year 2005 to be $5 per share (CA has 50,000 shares outstanding). Although it has not paid the dividends as of December 31, 2005, it has recorded the following journal entry: Retained Earnings Cash $250,000 $250,000 (5 points) Assets -250,000 BALANCE SHEET INCOME STATEMENT Liabilities Shareholders’ Revenues / Expenses / Net Income Equity Gains Losses -250,000 No effect No effect No effect No effect Account title Retained earnings Dividends payable 2) Assets +1000 Debit $250,000 Credit $250,000 CA has recorded a full year of interest revenue on a $20,000, 6 percent note receivable that has been outstanding only since November 1. (5 points) BALANCE SHEET INCOME STATEMENT Liabilities Shareholders’ Revenues / Expenses / Net Income Equity Gains Losses No effect +1000 +1000 No effect +1000 Account title Interest Receivable Interest Revenue Mid-term Examination 1 Debit $200 Credit $200 Page 12 Accounting 101, Fall, 2006 Name: 3) On January 1, 2005, CA capitalized $500,000 costs it incurred to internally develop a patent. CA paid these costs in cash. It further reported an amortization expense in the 2005 fiscal year for the patent. CA estimated the amortization expense for 2005 for the patent to be one tenth of the original cost. (8 points) Assets +500,000 BALANCE SHEET INCOME STATEMENT Liabilities Shareholders’ Revenues / Expenses / Net Income Equity Gains Losses No effect +500,000 No effect -500,000 +500,000 -50,000 No effect -50,000 No effect +50,000 -50,000 +450,000 No effect +450,000 No effect -450,000 +450,000 Account title Expense (internally generated patent) Cash 4) Debit $500,000 Credit $500,000 On December 31, 2005, CA sold a machine it had initially acquired for $100,000 on January 1, 2004 for $85,000 in Cash. Accumulated Depreciation until December 31, 2005 totaled $20,000. When CA recorded the transaction, it made the following journal entry: Cash $85,000 Machine (7 points) Assets -20,000 BALANCE SHEET INCOME STATEMENT Liabilities Shareholders’ Revenues / Expenses / Net Income Equity Gains Losses No effect -5,000 -5,000 No effect -5,000 Account title Cash Accumulated depreciation PPE Gain on Sale of PPE 5) $100,000 Debit $85,000 $20,000 Credit $100,000 $5,000 Which of the four errors 1) to 4) could you potentially detect utilizing a trial balance? (1 points) Error 4, as debits do not equal credits under journal entry 4) Mid-term Examination 1 Page 13 Accounting 101, Fall, 2006 Name: Question 5 – Financial Statements and the Statement of Cash Flows (19 total points) Refer to the attached financial statement excerpts from the annual reports for the fiscal year 2005 of: - Continental Airlines, a US carrier, reporting cash flow from operations under the INDIRECT method in their “Consolidated Statement of Cash Flows”. For Continental Airlines, the Statement of Cash Flows, Income Statement and the Balance Sheet are provided. - Qantas, an Australian carrier, reporting cash flow from operations under the DIRECT method in their “Statement of Cash Flows”. For Qantas, only the Statement of Cash Flows is provided. Assumptions: 1. All sales are made on account. 2. All payments to employees in “wages, salaries and related costs” are made on account through “accrued payroll” by Continental Airlines. 3. Qantas’ cash collections from operations are only collections from customers. 4. There are no foreign currency translation adjustments or merger and acquisition activity affecting the financial statements. 1) How much cash did Continental Airlines collect from its customers (passengers, cargo, mail and other) in 2005 in $millions? (4 points) Cash collected = Revenue – Change in Accounts receivable = 11,208 – (515-472) = 11,165 2) How much cash did Continental Airlines pay to its employees in wages, salaries and related costs in 2005 in $millions? (4 points) Cash paid = Wages, salaries and related costs – Change in Accrued payroll = 2649 – (234-281) = 2,696 3) How much did the Qantas Group collect from its customers in 2005 in $millions? (3 points) Cash receipts in the course of operations = 13,211 Mid-term Examination 1 Page 14 Accounting 101, Fall, 2006 Name: 4) How much total operating cash outflows did the Qantas Group have for the year ended June 30, 2005 in $millions? (2 points) Total operating cash outflows = 11,015.9 + 287.2 + 102.9 = 11,406 5) What is the difference between Continental’s and Qantas’ cash outflow for depreciation in 2004 (ignoring income taxes)? (3 points) None, since they each have no cash outflow for depreciation. 6) EBITDA, a “pro-forma” earnings number, typically defined by Wall Street as “Earnings (net income) Before Interest expense, income Tax expense, and Depreciation and Amortization” is often used as an approximation for Cash Flows from Operations. Which important part of the typical reconciliation from net income to cash flows from operations is missing by this approximation? (Hint: Make use of Continental’s Statement of Cash Flows to help you answer the question.) (3 points) In EBITDA, the changes in current operating assets and liabilities (i.e. changes in the net working capital) of the firm are not considered. For Continental Airways, those effects would be summarized under the so-called “Changes in operating assets and liabilities”. Mid-term Examination 1 Page 15 Accounting 101, Fall, 2006 Name: Mid-term Examination 1 Page 16 Accounting 101, Fall, 2006 Name: Mid-term Examination 1 Page 17 Accounting 101, Fall, 2006 Name: Mid-term Examination 1 Page 18 Accounting 101, Fall, 2006 Name: Qantas Group: Statement of Cash Flows, 30 June 2005 Mid-term Examination 1 Page 19 ...
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