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Exam 2 Solutions

Exam 2 Solutions

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Intermediate Accounting II ACCTG 302 Section D Winter 2005 Instructor J.B.

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.


Acctg 302D

B. 2000. which was originally issued on January 10. All of these are true. B. Must be capitalized when incurred and then amortized over their estimated useful lives. amortized over a maximum period of 20 years. Event is unusual in nature and event occurs infrequently. Riser Corporation was granted a patent on a product on January 1. D. C. Must be expensed in the period incurred. C. the corporation purchased on January 1. The Discount on Notes Payable account should be reported as an asset on the balance sheet. Event is unusual in nature and occurrence of event is probable. Amount of loss is reasonably estimable and event occurs infrequently. 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. C. B – Goodwill is no longer amortized. C – discount is a contra to the note. not be amortized. B. be written off by systematic charges as a regular operating expense over the period benefited. Which of the following sets of conditions would give rise to the accrual of a contingency under current generally accepted accounting principles? A. 2 Acctg 302D . May be either capitalized or expensed when incurred. The Discount on Notes Payable account has a debit balance. D. depending upon the materiality of the amounts involved. B – expense immediately. Purchased goodwill should A. expensed in 2004. not an asset. D. D. according to a Financial Accounting Standards Board Statement? A. only impaired 3. Which of the following is NOT true about the discount on short-term notes payable? A. C.Multiple Choice (3pts each) – Circle the MOST correct answer 1. 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. C. Because of its unique plant. 5. B. 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. Riser Corporation does not feel the competing patent can be used in producing a product. amortized over a maximum period of 11 years. To protect its patent. the effective interest rate is higher than the stated discount rate. 2004 a patent on a competing product. 4. When there is a discount on a note payable. B. 1995. How should research and development costs be accounted for. The cost of the competing patent should be A. D. be written off as soon as possible against retained earnings. C – if either of these conditions aren’t met it does not need to be accrued. amortized over a maximum period of 16 years. Amount of loss is reasonably estimable and occurrence of event is probable. 2. be written off as soon as possible as an extraordinary item.

the market and nominal rates coincided. Vacation days earned in 2003 may first be taken on January 1. Ritter Company has 35 employees who work 8-hour days and are paid hourly. Information relative to these employees is as follows: Year 2003 2004 2005 Hourly Vacation Days Earned Wages by Each Employee $17. D. this indicates that A. $48. C. no necessary relationship exists between the two rates. the nominal rate of interest exceeded the market rate. Inc. $50. B – the buyer pays the accrued interest to date so increase by the may-june accrual 3 Acctg 302D .400. D. $45. C. B. decreased by accrued interest from June 1 to November 1. When the interest payment dates of a bond are May 1 and November 1. C. A – premium means the effective rate was less than the contract rate 8.20 18. On January 1.20/hour * 35 employees 7. B – 10 days * 8 hours/day * $17. B. issued bonds with a maturity amount of $200. What is the amount of expense relative to compensated absences that should be reported on Ritter's income statement for 2003? A. decreased by accrued interest from May 1 to June 1. the amount of cash received by the issuer will be A. the effective yield or market rate of interest exceeded the (stated) nominal rate.00 19. $0. 2004. increased by accrued interest from May 1 to June 1.00 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. and a bond issue is sold on June 1.160.920. increased by accrued interest from June 1 to November 1. 2003.000 and a maturity ten years from date of issue.6. D. the company began a program of granting its employees 10 days' paid vacation each year. If the bonds were issued at a premium. B. Stone.

000.000 Common stock 320. INSTRUCTIONS a) Prepare the Balance Sheet for the new division after the acquisition is completed (assume stock is nopar).000-1.000 = 155.000 275.000 – 65. agreed to by the parties.000 and that the fair market value of the plant assets was $1.000.000 b) because the new fair value of the division is lower than the carrying value (2. 2004 Assets Cash Receivables Inventory Plant assets (net) Total assets $ 210.000 (plug) $ 325.000 Equities Accounts payable Common stock Retained earnings $ 325.300.000 1.000 800.000. New net identified asset value = 210+450+300+1. Prepare the required journal entry for this event.9.300-325 = 1.960.000 Total equities $2.000<2.425. Total future cash flow the division is expected to generate is $4.000 Impairment = 220. 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) the goodwill is impaired.000 1.000 220. The Inventory now has a fair value of $300.025.425.000 2. The agreed purchase price was $2. The fair market value of the receivables is equal to the amount reported on the balance sheet.000 4 Acctg 302D .000 Impairment Expense 155.000. indicated that the fair market value of the inventory was $320. 2004 was as follows: Blye Company Balance Sheet December 31. (15 points) Fowler Manufacturing Company decided to expand further by purchasing Blye Company.000 835.960.000 New goodwill = 2. and this amount was paid in cash to the previous owners of Blye Company.300.000 Accounts payable 450.000.000.625.000 $1.000 and the equipment has a fair value of $1.000 An appraisal.935.000 = 65.625.000 450.000 Goodwill 155.300. The balance sheet of Blye Company as of December 31.000.000 Total assets $2.300. a) Assets Cash Receivables Inventory Plant assets (net) Goodwill $ Equities 210.000 Total equities $1.935.500.000.

867 Discount on Bonds Payable (2*$600) Cash ($160.04*1.667 To remove the bonds we need to determine the unamortized discount.200 26. 2004. 2002 for $1.000 on August 1. At the time of the sale the bonds had 5 years until they reached maturity.000. the market rate of interest has declined and the market price of Risen's bonds has risen to a price of 102.000 2.400 Cash received is: 1.000 = 1. The bonds are callable at 104 at any time after August 1.) Show calculations.768.000 * 2/12) 1.000 or $160.700.000 on 60 month bonds so amortization is $600 per month.000 Bonds Payable Loss on Bond Retirement Discount on Bonds Payable Cash 5 Acctg 302D .000 = total cash 306. From above $600 * 34 – $20. First amortize the interest through the date of retirement Discount originally was $36. From 8/1/02 – 10/1/04 is 26 months.000 annually Since August 1 payment was made we just need to recognize the 8/1 – 10/1 interest or 2 months Interest Expense 27.074.400 20. The remainder of the outstanding bonds is reacquired by exercising the bonds' call feature.000 2.000. Incorporated sold its 8% bonds with a maturity value of $2.000 worth at 102 (plus accrued interest). Interest payment is 8% of 2. Risen begins to reacquire its 8% bonds in the market and is able to purchase $300.000.2004. so 34 months remain unamortized.074. The firm decides to refund the bonds by selling a new 6% bond issue to mature in 5years. Interest on the bonds is payable semiannually on August 1 and February 1.02* 300.000 1.000 94. (15 points) Risen.000.10. By October 1. Prepare the required journal entries for the repurchase and call of the bonds (Assume the firm used straightline amortization of premium or discount.964.400 2.

Because the fair value is greater than the carrying value no impairment is needed (okay so I typo’d.300.500 (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. Required a) Prepare the journal entries required for the acquisition of the license and payment of the fee.000 on January 1.000 Cash 500.000 per year indefinitely.500 and Radio One pays their first fee to the FCC on January 1.000 1/1/03 Intangible Asset (License renewal) 1.500 Cash 1.000).11. 2001. (8 points) Radio One Inc. 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). 2003. a) 1/1/01 Intangible Assets (License) 500. The license is renewable every 3 years for a fee of $1. purchased a broadcasting license in Philadelphia for $500. 6 Acctg 302D . 2004 Radio One reevaluates their expected future cash flows and determines the license is expected to produce cash flows of $100. Due to changes in demographics during 2004 on December 31. Appraisers also determine that the license could be sold for $1. b) Prepare any journal entries required for 12/31/04 (don’t forget that fee). it was supposed to be a fair value of $300.000.

new Bv of bonds = 87.915) 396 (plug.000 (cold also put into bond issue expense) 6/30/06 interest payment Interest Expense 4. 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).000 6/30/05 interest payment Interest Expense 4. Interest payments are made semi-annually on June 30th and December 31st of each year.538+377 = 87.436 Discount on Bonds Payable 7 Acctg 302D . 1/1/2005 issue with costs of issue Cash 84.5%) *$4.538) 377 (plug.689 Issue price = 49. new Bv of bonds = 88.880+37689 = 87. First determine issue price: Interest payments are $100.000 (5% * bv of bonds 87. The bonds will mature on December 31.000 = .000*8%/2 = $4.311) 416 (plug.462 Bonds Payable 100.000 = 37. new Bv of bonds = 87.038 Bond Issue Costs 3. 2014.915+396 = 88.311+416 = 88.500.538 We did know that since the effective rate was higher than the stated rate it would be at a discount so this seems reasonable.377 Discount on Bonds Payable Cash 12/31/05 interest payment Interest Expense 4.37689*100.727) 4.500 Discount on Bonds 12. Investors in the market are requiring a 10% return on similar bonds. 2005 with a face value of $100.915) 4.5%) * 100.849 PV of maturity (10.000 twice annually for 10 years PV of annuity(20.311) 4.46221*4000 = 49.396 Discount on Bonds Payable Cash Interest Expense Bond Issue Costs 350 350 (5% * bv of bonds 88. (15 points) Hanna’s Hot Dogs issues new 8% debt on January 1.727) 436 (5% * bv of bonds 12. Issue costs for the bonds total $3.416 Discount on Bonds Payable Cash 12/31/06 interest payment Interest Expense 4.000 (5% * bv of bonds 88.

000 (cold also put into bond issue expense) 350 8 Acctg 302D .Cash Interest Expense Bond Issue Costs 350 4.

000 1. sells 200.225. 2004 First record sale Sales (8. (8 points) Kenji and Sons Inc.000 automobiles in 2004 for an average price of $25.000 of repairs are made under the warranties and half of the remaining average amount is performed in each of 2005 and 2006.000 1.225.000 750.000 750.000 9 Acctg 302D . During 2004 $750.000.000 1. Each automobile is sold with a 3-year warranty covering various parts. The average cost of repairing warranted parts during the 3-year period is $400 per automobile.000 1. Prepare the necessary journal entries to record the sale and repair work performed.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 200.200.000 3.000 *$25.

10 Acctg 302D .

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. One case is for $150. Shores quickly settled the lawsuit by issuing $500.000 of discount coupons to the plaintiffs in November of 2004.000 Sales 1. 2004 financial statements. Details for each situation follow: a) Two customers slipped and fell at different retail locations owned by Shores and have sued the company.000 and Shores attorneys believe it is unlikely the case will be lost. (15 points) Shores Corporation is reviewing three situations to determine the proper accounting treatment for their December 31. Shores lawyers are extremely confident that Shores will win the lawsuit and receive a settlement in the full amount of the case. Shore’s attorneys believe it is probable that the company will lose this case and the likely settlement would be between $2. The attorneys for DuCharme have already contacted Shores Corporation to make multiple offers for settlement with the most recent offer at $30.750.000 based on previous history. Shores has never issued coupons of this type before and is unsure how many will be used by customers. c) Due to an unexpected problem with a product Shores was the defendant in a class action lawsuit during 2004. The second case involved a more severe injury and the lawsuit is for $4. Given a range with no point more likely than another we use the lower end of $ The second suit is probable and estimable so we must accrue. Shores Corporation does not have any insurance coverage that would pay either judgment.000. During December of 2004 $25.000 suit against DuCharme for copyright infringement. If it is lost the settlement will most likely be for $90.000. c) In this case the contingent loss is probable since coupons have been issued and some have even already been used.000 Also disclose information about the case in the footnotes.000 and $2. Give a very brief reason for the required treatment. a) Because the 150.250.000 Loss on Settlement 25. Litigation Loss2.000 Litigation Liability 2.000.000 worth of coupons were redeemed on gross sales of $1.000 11 Acctg 302D . released a new product in 2004 that was a blatant copy of Shores most popular selling product. Shores has filed a $50. Accounts Receivable (or cash) 1.14.000. b) This is a gain contingency and thus no accrual is made no matter how likely the positive outcome.500.000 suit is remote it is completely ignored – no accrual and no disclosure. b) DuCharme Inc. Describe the required accounting treatment for each of these situations along with any required journal entries (don’t forget the sales in c). However the amount of the loss is not estimable so the amounts are expensed as incurred.225.(if you interpret unlikely as reasonably possible then disclosure needed).

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