Accounting 381

Midterm Exam Winter 2010

Name _____________________________________
Section: 10:00 11:50
General Instructions:
1. Please observe the Portland State University ode o! onduct.
". #his e$am %ac&et should have 13 pages. Please con!irm that you have all o! the %a'es.
(. )ou may use a * + , note card -both sides. and a calculator. ell %hone calculators may N/# be used.
*. 0evie1 the com%lete e$am in order to allocate your time a%%ro%riately. )ou 1ill have one hour and 50
minutes to com%lete the e$am.
5. In !airness to all students2 3uestions 1ill not be ans1ered durin' the e$am2 e$ce%t to e$%lain 1ords or
%hrases. I! a 3uestion is ambi'uous2 1rite your assum%tions on the e$am alon' 1ith your ans1er. )ou
1ill receive credit %rovided your assum%tions are necessary and reasonable.
,. 4rite your ans1ers neatly in the s%ace %rovided.
5. 6onitor your time and 'ood luc&7
Points Available Points Received
8uestion I ""
8uestion II 15
8uestion III (0
8uestion I9 1:
8uestion 9 (0
TTA! 115
"uestion #$ #ncome %tatement &22 points'
Sho1n belo1 is an income statement !or "00; that 1as %re%ared by a %oorly trained boo&&ee%er o! Sa'uaro
or%oration.
Sa'uaro or%oration
Income Statement
<ecember (12 "00;
Sales revenue =12,502000
Interest revenue "*2000
ost o! 'oods sold -12"002000.
Sellin'2 'eneral and administrative e$%enses -1"02000.
Interest e$%ense -(12000.
Income be!ore s%ecial items ("(2000
S%ecial items
6a>or casualty loss -e$traordinary item. -1002000.
?oss on dis%osal o! a com%onent o! the business -502000.
Net !ederal income ta$ liability -,;2"00.
Net income = 10(2:00
#nstructions
)ou have been hired to correctly %re%are the 1"@(1@0; income statement. /n the !ollo1in' %a'e2 %resent in
'ood !orm the income statement o! Sa'uaro or%oration !or "00; starting (it) *income +rom continuing
operations, be+ore tax-* Present %er share in!ormation !or the a%%ro%riate line items. Assume that Sa'uaro
or%orationBs ta$ rate is *0C. ommon stoc& dividends declared and %aid durin' "00; 1ere =(02000.
Pre!erred dividends declared and %aid 1ere =*(2:00. 0ound all earnin's %er share !i'ures to the nearest cent.
#here 1ere 1002000 %re!erred shares outstandin' at 1@1@0;. #here 1ere no sales or re%urchases o! %re!erred
shares durin' the year. ommon shares outstandin' throu'hout the year 1ere as !ollo1s:
1@1@0; "@"(@0;: 1"2000 shares
(@1@0; ,@(0@0;: *:2000 shares
5@1@0; 1"@(1@0;: :*2000 shares
Weig)ted average calculation$ 2.12 / 12,000 0 1.12/18,000 0 2.12/ 81,000 3 20,000 s)ares
"
Sa'uaro or%oration
Income Statement
Dor the )ear Ended <ecember (12 "00;
Income !rom continuin' o%erations2 be!ore ta$ ("(2000 1 %t
Income #a$ E$%ense F1";2"00 1 %t
Income !rom continuin' o%erations2 a!ter ta$ 1;(2:00 1 %t
1 %t ?oss !rom discontinued o%erations2 net o! a%%licable income ta$ o! ="02000 F(02000 " %t
1 %t Income be!ore e$traordinary item 1,(2:00 1 %t
1 %t E$traordinary casualty loss2 net o! a%%licable income ta$ o! =*02000 F,02000 " %t
1 %t Net income = 10(2:00 1 %t
Per share o! common stoc&G
Income !rom continuin' o%erations1@" %t -1;(2:00 -1@" %t. *(2:00 -1%t..@,02000 -"%t. =".50
<iscontinued o%erations loss net o! ta$1@" %t -0.50. 1 %t
Income be!ore e$traordinary item1@" %t ".001@" %t
E$traordinary item2 net o! ta$1@" %t -1.00. 1 %t
Net income1@" %t =1.001@" %t

(
"uestion ##$ 4alance %)eet E++ects o+ Errors or missions &15 points'
Usin' the notation /@S -overstated.2 U@S -understated.2 and N/ -no e!!ect.2 indicate the e!!ect on assets2
liabilities2 and shareholdersH e3uity as o! <ecember (12 )ear 52 o! the !ollo1in' inde%endent errors or
omissions. I'nore income ta$ im%lications. 0ecord your ans1ers on the schedule belo1. )ou do not have to
indicate the dollar e!!ect.
a. A chec& !or =500 1as received !rom a customer durin' )ear * !or merchandise to be delivered durin'
Ianuary )ear 5. Unearned revenue 1as credited 1hen the chec& 1as received. No !urther >ournal
entries related to this sale 1ere recorded in )ear 5.
b. Interest accrued on Notes 0eceivable o! =5*0 as o! <ecember (12 )ear 52 1as recorded as *50.
c. <e%reciation on Juildin's o! =,2000 as o! <ecember2 (12 )ear 52 1as not recorded.
d. An e$%enditure o! =52000 made on November 12 )ear 52 !or !ive months rent on a vehicle 1as debited
to Pre%aid 0ent. No ad>ustin' entry 1as made on <ecember (12 )ear 5.
e. #he com%any rented out e$cess o!!ice s%ace !or the si$Fmonth %eriod be'innin' November 12 )ear 5.
A rental chec& !or this %eriod o! =12:00 1as received on November 12 )ear 52 and credited to 0ent
0evenue. No !urther >ournal entries 1ere made relatin' to this rental durin' )ear 5.
A%%ET% !#A4#!#T#E% %6ARE6!7ER%8
E"9#T:
a.
N/ /@S =500 U@S =500
b.
U@S =;0 N/ U@S =;0
c.
/@S ,K N/ /@S =,K
d.
/@S ="K N/ /@S ="K
e.
N/ U@S =1"00 /@S =1"00
*
"uestion ###$ 4alance %)eet and ;as) <lo( %tatement &30 points'
1. 4alance s)eet terminolog= &> points'
In the s%ace %rovided at ri'ht2 1rite the 1ord or %hrase that is de!ined or indicated.
1. /bli'ations e$%ected to be li3uidated 1._____________________________________
throu'h use o! current assets.
". Statement sho1in' !inancial condition at a "._____________________________________
%oint in time.
(. Events that de%end u%on !uture outcomes. (._____________________________________
*. Probable !uture sacri!ices o! economic *._____________________________________
bene!its.
5. 0esources e$%ected to be converted to 5._____________________________________
cash in one year or the o%eratin' cycle2
1hichever is lon'er.
,. 0esources o! a durable nature used in ,._____________________________________
o%erations.
5. Economic ri'hts or com%etitive advanta'es 5._____________________________________
1hich lac& %hysical substance.
:. Probable !uture economic bene!its. :._____________________________________
;. 0esidual interest in the net assets o! an ;._____________________________________
entity.
Solution 5-108
1. urrent liabilities. ,. Pro%erty2 %lant2 and e3ui%ment.
". Jalance sheet. 5. Intan'ible assets.
(. ontin'encies. :. Assets.
*. ?iabilities. ;. E3uity.
5. urrent assets.
5
"uestion ### &cntd-'
2- ?e= ;onceptual Terms &5 pts'
9arious accountin' assum%tions2 %rinci%les2 constraints2 and characteristics are listed belo1. Select those
1hich best >usti!y the !ollo1in' accountin' %rocedures and indicate the corres%ondin' letter-s. in the
s%ace-s. %rovided. A letter may be used more than once or not at all.
a. Listorical cost !. Economic entity &. 0evenue reco'nition
b. 0elevance '. 6ateriality l. Dull disclosure
c. 6onetary unit h. onservatism m. Substance over !orm
d. Goin' concern i. Periodicity n. Industry %ractices
e. onsistency >. 6atchin' o. 0eliability
L_____ 1. Usin' the lo1er o! cost or mar&et a%%roach in valuin' inventories.
?_____ ". <escribin' the de%reciation methods used in the !inancial statements.
K_____ (. 0ecordin' a transaction 1hen 'oods or services are e$chan'ed !or cash or claims to cash.
G_____ *. E$%ensin'2 1hen ac3uired2 metal o!!ice 1astebas&ets havin' a li!e o! ten years.
/_____ 5. 0e%ortin' in!ormation 1hich is !aith!ully re%resentative o! economic events.
(. 4or&in' ca%ital is -" %ts.
a. ca%ital 1hich has been reinvested in the business.
b. una%%ro%riated retained earnin's.
c. cash and receivables less current liabilities.
d- none o+ t)ese-
*. 4hich o! the !ollo1in' is not a re3uired su%%lemental disclosure !or the balance sheetM -" %ts.
a. ontin'encies
b- <inancial +orecasts
c. Accountin' %olicies
d. ontractual situations
5. Accountin' %olicies disclosed in the notes to the !inancial statements ty%ically include all o! the
!ollo1in' e$ce%t -" %ts.
a. the cost !lo1 assum%tion used
b. the de%reciation methods used
c. si'ni!icant estimates made
d- signi+icant inventor= purc)asing policies
,
"uestion ### &cntd-'
,. I! common stoc& 1as issued to ac3uire an =:2000 machine2 ho1 1ould the transaction a%%ear on the
statement o! cash !lo1s -" %ts.M
a. It 1ould de%end on 1hether you are usin' the direct or the indirect method.
b. It 1ould be a %ositive =:2000 in the !inancin' section and a ne'ative =:2000 in the investin'
section.
c. It 1ould be a ne'ative =:2000 in the !inancin' section and a %ositive =:2000 in the investin'
section.
d- #t (ould not appear on t)e statement o+ cas) +lo(s but rat)er on a sc)edule o+ noncas)
investing and +inancing activities-
5. In %re%arin' a statement o! cash !lo1s2 1hich o! the !ollo1in' transactions 1ould be considered an
investin' activity -" %ts.M
a- %ale o+ e@uipment at booA value
b. Sale o! merchandise on credit
c. <eclaration o! a cash dividend
d. Issuance o! bonds %ayable at a discount
:. 4hen %re%arin' a statement o! cash !lo1s2 a decrease in accounts receivable durin' a %eriod 1ould cause
1hich one o! the !ollo1in' ad>ustments in determinin' cash !lo1 !rom o%eratin' activities -" %ts.M
<irect 6ethod Indirect 6ethod
a. Increase <ecrease
b. <ecrease Increase
c- #ncrease #ncrease
d. <ecrease <ecrease
;. 4hen %re%arin' a statement o! cash !lo1s2 an increase in accounts %ayable durin' a %eriod 1ould re3uire
1hich o! the !ollo1in' ad>ustments to in determinin' cash !lo1s !rom o%eratin' activities -" %ts.M
Indirect 6ethod <irect 6ethod
a- #ncrease 7ecrease
b. <ecrease Increase
c. Increase Increase
d. <ecrease <ecrease
10. #he !ollo1in' in!ormation on selected cash transactions !or "011 has been %rovided by 6ancuso
om%any -" %ts.M
Proceeds !rom sale o! land =1,02000
Proceeds !rom issuance o! lon'Fterm debt *002000
Purchases o! %lant assets 1**2000
Purchases o! inventories ,:02000
Proceeds !rom sale o! 6ancuso common stoc& "*02000
4hat is the cash %rovided -used. by investin' activities !or the year ended <ecember (12 "0112 as a
result o! the above in!ormationM
a- B12,000
b. ="5,2000.
c. =1,02000.
d. =:002000.
5
"uestion #C$ Miscellaneous &18 points'
1. 0ecord the ori'inal >ournal entry !or the !ollo1in' transactions in the desired manner !or 0eed o. and
'ive the ad>ustin' entry on <ecember (12 "010. -#1o entries !or each %art.. -: %oints.
a. An insurance %olicy !or t1o years 1as ac3uired on A%ril 12 "010 !or =:2000.
b. 0ent o! =1"2000 !or si$ months !or a %ortion o! the buildin' 1as received on November 12 "010.
Solution 3-126
1. Pre%aid Insurance ........................................................................ :2000
ash ................................................................................. :2000
Insurance E$%ense ...................................................................... (2000
Pre%aid Insurance ............................................................ (2000
". ash .......................................................................................... 1"2000
Unearned 0ent ................................................................ 1"2000
Unearned 0ent ............................................................................ *2000
0ent 0evenue .................................................................. *2000
". Allo1in' !irms to estimate rather than %hysically count inventory at interim -3uarterly. %eriods is an
e$am%le o! a tradeFo!! bet1een -" %ts.
a- timeliness and veri+iabilit=-
b. veri!iability and reliability.
c. reliability and com%arability.
d. neutrality and consistency.
:
"uestion #C &cntd-'
(. #he !ollo1in' in!ormation 1as re%orted by Elmo o. !or "00;:
Sales revenue =("*2000
ost o! 'oods sold ""02000
/%eratin' e$%enses *(2000
UnrealiNed holdin' 'ain on availableF!orFsale securities (02000
ash dividends received on the securities *2000
Dor "00;2 Elmo o. 1ould re%ort com%rehensive income o! -( %ts.:
=___________________________
B>5,000.
*. Accordin' to the assi'ned article O#he Numbers GameP by Arthur ?evitt2 1hich o! the !ollo1in' is N/#
a techni3ue used to mana'e earnin'sM -" %ts.
a- ;)anges in accounting principle
b. OJi' JathP restructurin' char'es
c. Ooo&ie IarP reserves
d. 0evenue reco'nition
5. Name and 'ive a brie! descri%tion o! the three &inds o! moral theories discussed in the assi'ned article O#he
Ethics o! /r'aniNational PoliticsP by avana'h2 6ober'2 and 9elas3uesa. -( %ts.
Utilitarian theories action that %roduces the 'reatest 'ood !or the 'reatest number
#heory o! ri'hts certain ri'hts should be res%ected in all decisions -to be treated as
they &no1in'ly and !reely consent to be treated2 ri'ht to %rivacy2 ri'ht to not do thin's
that violate their moral norms2 ri'ht o! !ree s%eech2 ri'ht to due %rocess i! their ri'hts
violated.
#heory o! >ustice 'uided by e3uity2 !airness and im%artiality
;
"uestion C$ %tatement o+ ;as) <lo(s &30 points'
#he !ollo1in' !inancial statements are available !or Kitts o. on <ecember (12 "00;.
?itts ;o-
;omparative 4alance %)eets
As o+ 7ecember 31, 2008 and 200>
1"@(1@0: 1"@(1@0;
Assets
ash and cash e3uivalents =5"02000 =5*52000
Accounts 0eceivable2 Net ;",2000 ;,02000
Inventory (""2000 "*:2000
Pre%aid assets ,2000 *2000
?and 5"12000 ,"*2000
Pro%erty Q E3ui%ment (2*,"2000 *21":2000
?ess Accumulated de%reciation F12::"2000 F"21"02000
#otal Assets =(2:552000 =*2(;12000
!iabilities and E@uit=
Accounts %ayable =,52000 =1::2000
Interest Payable "02000 (*2000
Notes %ayable "2"002000 "21002000
ommon Stoc& 12"002000 12,5*2000
0etained Earnin's (::2000 *152000
#otal ?iabilities
and Stoc&holdersB E3uity =(2:552000 =*2(;12000
10
"uestion C, continued
?itts ;o-
#ncome %tatement
<or t)e :ear Ended 7ecember 31, 200>
Sales =,2*002000
Gain on sale o! assets *,2000 ,2**,2000
?ess:
ost o! 'oods sold "21502000
4a'es e$%ense "2"002000
<e%reciation e$%ense *0"2000
/ther e$%ense =5""2000
Interest e$%ense 512000 52("52000
Net income 121"12000
/ther available in!ormation:
Ne1 %lant assets costin' =:;02000 1ere %urchased durin' the year.
No ?and 1as sold durin' the year.
All de%reciation is char'ed directly to de%reciation e$%ense.
No ne1 debt 1as issued durin' the year.
<ividends 1ere declared and %aid durin' the year. #here 1ere no re%urchases o! com%any stoc& durin'
the year.
Re@uired$
Pre%are the Statement o! ash Dlo1s !or Kitts o. !or the year ended <ecember (12 "00; usin' the indirect method
to calculate cash !lo1s !rom o%erations. Please use the tem%late %rovided on %a'e 1" !or your ans1er. )ou may use
the s%ace %rovided on %a'e 1( !or other calculations ho1ever2 %lease note that only the statement o! cash !lo1s
%rovided on %a'e 1" 1ill be 'raded.
11
"uestion C, continued
?itts ;o-
%tatement o+ ;as) <lo(s D #ndirect Met)od
<or =ear ended 7ecember 31, 200>
SEE S/?U#I/N JE?/4
;as) +rom perating Activities:
;as) +rom #nvesting Activities:
;as) +rom <inancing Activities:
1"
"uestion C, continued
#his s%ace is %rovided !or calculations. Please note that 1or& on this %a'e 1ill N/# be 'raded.
Cash from Operating activities:
A Net Income

1,121,000
+ depreciation

402,000
- gain

(46,000)
Change in working cap. Items
C !"

(#4,000)
! In$entor%

&4,000
!! 'repaid e(p

2,000
" !'

121,000
# Interest pa%a)*e

14,000
Cash from operations

1,6+4,000
Cash from investing:
$ ,a*e o- e./ipment (I)

106,000
% !c./isition o- ''01 (I)

(230,000)
!!! '/rchase o- *and (I)

(10#,000)
Net cash -rom in$esting

(22&,000)
Cash from financing:
& Iss/ance o- c4s (5)

4+4,000
' 'a%ment on N' (5)

(100,000)
( 'a%ment o- di$idends (5)

(1,034,000)
Net cash -rom -inancing

(&40,000)
) 6ota* change in cash

2&,000
Cash, )eg

+20,000
Cash, end

+4&,000
1(