This action might not be possible to undo. Are you sure you want to continue?
Paperman Midterm Exam 2 February 16, 2005 Name: ____________________________ INSTRUCTIONS:
a) This exam is closed book. You may use one double-sided sheet of notes. You may use a calculator to assist in computations. b) You must complete this exam on your own. No assistance is allowed except that provided by the instructor. c) If you feel there is ambiguity in a problem, state your assumptions clearly. d) The last page of the exam is a PV table, you may remove this page if you desire. e) The exam has 9 pages in total and 14 questions with 100 points.
not be amortized. Which of the following is NOT true about the discount on short-term notes payable? A. The cost of the competing patent should be A. unless it is a long lived asset (such as a building) which can be used for other projects or it is contract research that has already been resold. May be either capitalized or expensed when incurred. C – discount is a contra to the note. C. B – Goodwill is no longer amortized. 4. C. depending upon the materiality of the amounts involved. B. 2004 a patent on a competing product. C. not an asset. 2000. only impaired 3. A – The useful life is that of the patent it is protecting which will expire 10 years after issued in 1995 or 11 years from now. C. Must be expensed in the period incurred. C. Amount of loss is reasonably estimable and occurrence of event is probable. Because of its unique plant. Which of the following sets of conditions would give rise to the accrual of a contingency under current generally accepted accounting principles? A. amortized over a maximum period of 16 years. How should research and development costs be accounted for. All of these are true. Must be capitalized when incurred and then amortized over their estimated useful lives. the effective interest rate is higher than the stated discount rate. Riser Corporation was granted a patent on a product on January 1.Multiple Choice (3pts each) – Circle the MOST correct answer 1. Event is unusual in nature and event occurs infrequently. B. 5. which was originally issued on January 10. Event is unusual in nature and occurrence of event is probable. Amount of loss is reasonably estimable and event occurs infrequently. the corporation purchased on January 1. amortized over a maximum period of 11 years. The Discount on Notes Payable account has a debit balance. 2 Acctg 302D . be written off as soon as possible as an extraordinary item. Must be expensed in the period incurred unless it can be clearly demonstrated that the expenditure will have alternative future uses or unless contractually reimbursable. The Discount on Notes Payable account should be reported as an asset on the balance sheet. amortized over a maximum period of 20 years. Purchased goodwill should A. be written off as soon as possible against retained earnings. B. D. B. B. according to a Financial Accounting Standards Board Statement? A. D. C – if either of these conditions aren’t met it does not need to be accrued. When there is a discount on a note payable. B – expense immediately. D. D. 2. Riser Corporation does not feel the competing patent can be used in producing a product. 1995. be written off by systematic charges as a regular operating expense over the period benefited. To protect its patent. D. expensed in 2004.
B. D. increased by accrued interest from June 1 to November 1. Vacation days earned in 2003 may first be taken on January 1. C. 2003. this indicates that A. the effective yield or market rate of interest exceeded the (stated) nominal rate. decreased by accrued interest from June 1 to November 1. A – premium means the effective rate was less than the contract rate 8. Inc. D. $50. $0. 2004.6. Stone. If the bonds were issued at a premium. $45. D. the amount of cash received by the issuer will be A. Information relative to these employees is as follows: Year 2003 2004 2005 Hourly Vacation Days Earned Wages by Each Employee $17.20/hour * 35 employees 7. B – 10 days * 8 hours/day * $17.00 19. the company began a program of granting its employees 10 days' paid vacation each year. C. the market and nominal rates coincided.20 18.400. B.000 and a maturity ten years from date of issue. Ritter Company has 35 employees who work 8-hour days and are paid hourly. B.920. $48. issued bonds with a maturity amount of $200. the nominal rate of interest exceeded the market rate. C.00 10 10 10 Vacation Days Used by Each Employee 0 8 10 Ritter has chosen to accrue the liability for compensated absences at the current rates of pay in effect when the compensated time is earned. decreased by accrued interest from May 1 to June 1. B – the buyer pays the accrued interest to date so increase by the may-june accrual 3 Acctg 302D .160. and a bond issue is sold on June 1. increased by accrued interest from May 1 to June 1. When the interest payment dates of a bond are May 1 and November 1. On January 1. What is the amount of expense relative to compensated absences that should be reported on Ritter's income statement for 2003? A. no necessary relationship exists between the two rates.
000 Equities Accounts payable Common stock Retained earnings $ 325.000) the goodwill is impaired.425. 2004 was as follows: Blye Company Balance Sheet December 31.300-325 = 1.000 (plug) $ 325.000.000 An appraisal.000 Total assets $2.025.625.000.000 Common stock 320.000 = 65. The balance sheet of Blye Company as of December 31.000 New goodwill = 2.000.960. 2004 Assets Cash Receivables Inventory Plant assets (net) Total assets $ 210.000<2.300.000 b) because the new fair value of the division is lower than the carrying value (2.500.000 Accounts payable 450.000 Total equities $1. The Inventory now has a fair value of $300.000 and the equipment has a fair value of $1. The fair market value of the receivables is equal to the amount reported on the balance sheet.000 4 Acctg 302D .000 $1. agreed to by the parties.000.300.000 – 65.000 800. and this amount was paid in cash to the previous owners of Blye Company.000 1. Total future cash flow the division is expected to generate is $4.000 = 155.000 and that the fair market value of the plant assets was $1. indicated that the fair market value of the inventory was $320. INSTRUCTIONS a) Prepare the Balance Sheet for the new division after the acquisition is completed (assume stock is nopar).000 275.300. Prepare the required journal entry for this event.300.000 220.000. The agreed purchase price was $2.935. New net identified asset value = 210+450+300+1.000 2.000 Impairment = 220. (15 points) Fowler Manufacturing Company decided to expand further by purchasing Blye Company.9.000-1.000 Goodwill 155.000 1.000 450.000.000 Impairment Expense 155.000 Total equities $2.425.960.935. b) On 1/1/2005 Fowler hears of a legal ruling that will reduce the likely sales of Blye resulting in a decrease in the fair value of the division to $2.000 835.000.625. a) Assets Cash Receivables Inventory Plant assets (net) Goodwill $ Equities 210.000.
04*1.700. Interest payment is 8% of 2.000.02* 300.2004. Prepare the required journal entries for the repurchase and call of the bonds (Assume the firm used straightline amortization of premium or discount.000 = total cash 306. The bonds are callable at 104 at any time after August 1. so 34 months remain unamortized. From 8/1/02 – 10/1/04 is 26 months.074.400 Cash received is: 1.000 94. First amortize the interest through the date of retirement Discount originally was $36.000 Bonds Payable Loss on Bond Retirement Discount on Bonds Payable Cash 5 Acctg 302D . Incorporated sold its 8% bonds with a maturity value of $2.000 annually Since August 1 payment was made we just need to recognize the 8/1 – 10/1 interest or 2 months Interest Expense 27.400 20.000 on 60 month bonds so amortization is $600 per month.000 on August 1. By October 1.000. The remainder of the outstanding bonds is reacquired by exercising the bonds' call feature.074.000. (15 points) Risen.000 1.867 Discount on Bonds Payable (2*$600) Cash ($160.000 2.) Show calculations.200 26. At the time of the sale the bonds had 5 years until they reached maturity.000. The firm decides to refund the bonds by selling a new 6% bond issue to mature in 5years.964.768.000 or $160. 2004.000 * 2/12) 1. Interest on the bonds is payable semiannually on August 1 and February 1.000 = 1.400 2. Risen begins to reacquire its 8% bonds in the market and is able to purchase $300. From above $600 * 34 – $20.667 To remove the bonds we need to determine the unamortized discount. the market rate of interest has declined and the market price of Risen's bonds has risen to a price of 102. 2002 for $1.000 worth at 102 (plus accrued interest).10.000 2.
6 Acctg 302D .000. Appraisers also determine that the license could be sold for $1. 2004 Radio One reevaluates their expected future cash flows and determines the license is expected to produce cash flows of $100. 2001.000 Cash 500.000 on January 1.500 and Radio One pays their first fee to the FCC on January 1. purchased a broadcasting license in Philadelphia for $500. b) Prepare any journal entries required for 12/31/04 (don’t forget that fee).500 (this will get expensed over the 3 year renewal period) b) First amortize another year of the fee Licensing expense Intangible Asset (renewal) 500 500 For an intangible asset that has a limited life but fairly low cost renewals the life is considered indefinite. 2003. The license is renewable every 3 years for a fee of $1.11.000 1/1/03 Intangible Asset (License renewal) 1. For and indefinite life asset the impairment check is a comparison of carrying value to fair value (cash flows is not considered as is the case with limited life intangibles). (8 points) Radio One Inc. a) 1/1/01 Intangible Assets (License) 500. it was supposed to be a fair value of $300.500 Cash 1.000 per year indefinitely. Required a) Prepare the journal entries required for the acquisition of the license and payment of the fee. Due to changes in demographics during 2004 on December 31.000). Because the fair value is greater than the carrying value no impairment is needed (okay so I typo’d.300.
689 Issue price = 49.915) 396 (plug. Prepare all the necessary journal entries for transactions related to the bonds that occur in 2005 and 2006 (Hanna uses the effective interest rate method).538) 377 (plug.000*8%/2 = $4.538+377 = 87. 2014.727) 4.538 We did know that since the effective rate was higher than the stated rate it would be at a discount so this seems reasonable.500 Discount on Bonds 12.000 6/30/05 interest payment Interest Expense 4.849 PV of maturity (10. 1/1/2005 issue with costs of issue Cash 84.311+416 = 88.727) 436 (5% * bv of bonds 87.46221*4000 = 49. The bonds will mature on December 31. Issue costs for the bonds total $3.37689*100.038 Bond Issue Costs 3. Interest payments are made semi-annually on June 30th and December 31st of each year.000 (5% * bv of bonds 88.311) 4.000 = 37.000= 12.880+37689 = 87.000 twice annually for 10 years PV of annuity(20.311) 416 (plug.915) 4.000 = .000 (5% * bv of bonds 87.5%) *$4.436 Discount on Bonds Payable 7 Acctg 302D .396 Discount on Bonds Payable Cash Interest Expense Bond Issue Costs 350 350 (5% * bv of bonds 88. new Bv of bonds = 87. new Bv of bonds = 87. (15 points) Hanna’s Hot Dogs issues new 8% debt on January 1. 2005 with a face value of $100.000 (cold also put into bond issue expense) 6/30/06 interest payment Interest Expense 4. First determine issue price: Interest payments are $100.12.000.416 Discount on Bonds Payable Cash 12/31/06 interest payment Interest Expense 4.915+396 = 88.462 Bonds Payable 100.377 Discount on Bonds Payable Cash 12/31/05 interest payment Interest Expense 4.5%) * 100. new Bv of bonds = 88. Investors in the market are requiring a 10% return on similar bonds.500.
000 (cold also put into bond issue expense) 350 8 Acctg 302D .Cash Interest Expense Bond Issue Costs 350 4.
000 9 Acctg 302D . During 2004 $750. sells 8.000 750. Each automobile is sold with a 3-year warranty covering various parts.225.000) Cash Warranty Expense Warranty Liability Warranty paid in 2004 Warranty Liability Cash Warranty paid in 2005 Warranty Liability Cash Warranty paid in 2006 Warranty Liability Cash 200.000.000. (8 points) Kenji and Sons Inc.000 200. The average cost of repairing warranted parts during the 3-year period is $400 per automobile.000.13.000 1.200.000 of repairs are made under the warranties and half of the remaining average amount is performed in each of 2005 and 2006.000 3.225.000 automobiles in 2004 for an average price of $25.225.000 1.225.000 1. 2004 First record sale Sales (8. Prepare the necessary journal entries to record the sale and repair work performed.000 1.000 *$25.000 3.000 750.200.
10 Acctg 302D .
000 of discount coupons to the plaintiffs in November of 2004. Litigation Loss2.000 suit is remote it is completely ignored – no accrual and no disclosure.000 and $2.500.000. We would probably disclose information about the litigation in the financial statements but usually in a muted way to avoid the appearance that management is “promising” a favorable ruling.000 worth of coupons were redeemed on gross sales of $1. If it is lost the settlement will most likely be for $90.000 Loss on Settlement 25. The second suit is probable and estimable so we must accrue. Give a very brief reason for the required treatment. During December of 2004 $25.000 Also disclose information about the case in the footnotes.000 Litigation Liability 2. b) This is a gain contingency and thus no accrual is made no matter how likely the positive outcome.000. Shores has never issued coupons of this type before and is unsure how many will be used by customers.250.000.000.750.(if you interpret unlikely as reasonably possible then disclosure needed). Shores lawyers are extremely confident that Shores will win the lawsuit and receive a settlement in the full amount of the case. c) Due to an unexpected problem with a product Shores was the defendant in a class action lawsuit during 2004. However the amount of the loss is not estimable so the amounts are expensed as incurred.000.250.000.000 11 Acctg 302D .000 and Shores attorneys believe it is unlikely the case will be lost. Accounts Receivable (or cash) 1.000 suit against DuCharme for copyright infringement. c) In this case the contingent loss is probable since coupons have been issued and some have even already been used.000 Sales 1. The second case involved a more severe injury and the lawsuit is for $4. released a new product in 2004 that was a blatant copy of Shores most popular selling product. b) DuCharme Inc.000. One case is for $150. a) Because the 150. Shores quickly settled the lawsuit by issuing $500. Shores Corporation does not have any insurance coverage that would pay either judgment. Shore’s attorneys believe it is probable that the company will lose this case and the likely settlement would be between $2. 2004 financial statements.000.000. Shores has filed a $50.000 based on previous history. Describe the required accounting treatment for each of these situations along with any required journal entries (don’t forget the sales in c).225. Given a range with no point more likely than another we use the lower end of $2.000. (15 points) Shores Corporation is reviewing three situations to determine the proper accounting treatment for their December 31. Details for each situation follow: a) Two customers slipped and fell at different retail locations owned by Shores and have sued the company.000. The attorneys for DuCharme have already contacted Shores Corporation to make multiple offers for settlement with the most recent offer at $30.14.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.