COMPREHENSIVE EXAMINATION F (CHAP 22-24)

Problem F-II — Statement of Cash Flows.

Sharp Company
Comparative Balance Sheet

December 31
2013 2012
Cash $ 54,000/ $ 36,000
Accounts receivable, net 53,000/ 57,000
Inventory 161,000/ 123,000
Land 180,000/ 285,000
Building 300,000/ 300,000
Accumulated depreciation (75,000)/ (60,000)
Equipment 1,565,000/ 900,000
Accumulated depreciation (177,000)/ (141,000)
TOTAL: $2,061,000/ $1,500,000
Accounts payable $ 202,000 $ 150,000
Bonds payable 450,000 -0-
Capital stock, $10 par 1,125,000 1,125,000
Retained earnings 284,000 225,000
TOTAL: $2,061,000/ $1,500,000
Additional Data:
1. Net income for the year amounted to $104,000.
2. Cash dividends were paid amounting to 4% of par value.
3. Land was sold for $120,000.
4. Sharp sold equipment, which cost $225,000 and had accumulated depreciation of $90,000,
for $105,000.
Instructions
Prepare a statement of cash flows using the indirect method.

Problem F-III — Accounting Changes, Error Corrections, and Prior Period Adjustments.
Molina Company’s reported net incomes for 2013 and the previous two years are presented
below.
2013: $105,000
2012: $95,000
2011: $70,000
2013’s net income was properly determined after giving effect to the following accounting
changes, error corrections, etc. which took place during the year. The incomes for 2011 and 2012
do not take these items into account and are stated at the amounts determined in those years.
Ignore income taxes.
Instructions
(a) For each of the six accounting changes, errors, or prior period adjustment situations
described below, prepare the journal entry or entries Molina Company should record during
2013. If no entry is required, write “none.”
(b) After recording the situation in part (a) above, prepare the year-end adjusting entry for
December 31, 2013. If no entry, write “none.”
1. Early in 2013, Molina determined that equipment purchased in January, 2011 at a cost of
$645,000, with an estimated life of 5 years and salvage value of $45,000 is now estimated
to continue in use until December 31, 2017 and will have a $15,000 salvage value. Molina
recorded its 2013 depreciation at the end of 2013.
(a)
(b)
2. Molina determined that it had understated its depreciation by $20,000 in 2012 owing to the
fact that an adjusting entry did not get recorded.
(a)

(b)
3. Molina bought a truck January 1, 2010 for $50,000 with a $5,000 estimated salvage value
and a six-year life. The company debited an expense account and credited cash on the
purchase date. The truck is expected to be traded at the end of 2015. Molina uses straight-
line depreciation for its trucks.

(a)

(b)

Problem F-III (cont.).

4. During 2013, Molina changed from the straight-line method of depreciating its cement plant
to the double-declining-balance method. The following calculations present depreciation on
both bases. (Ignore income taxes.) The 2013 amount applies double-declining balance to
the 1/1/13 carrying amount after straight-line was used.
2013 2012 2011
Straight-line $100,000 $100,000 $100,000
Double-declining $200,000 $160,000 $200,000

(a)

(b)

5. Molina, in reviewing its provision for uncollectibles during 2013, has determined that 1/2 of
1% is the appropriate amount of bad debt expense to be charged to operations. The
company had used 1% as its rate in 2012 and 2011 when the expense had been $20,000
and $14,000, respectively. The company would have recorded $50,000 of bad debt expense
on December 31, 2013 under the old rate.
(a)

(b)

6. During 2013, Molina decided to change from the LIFO method of valuing inventories to
average cost. The net incomes involved under each method were as follows:
2013 2012 2011
LIFO $51,000 $59,000 $42,000
Average cost $63,000 $67,000 $48,000
Assume no difference between LIFO and average cost inventory values in years prior to
2011.
(a)

(b)

Problem F-IV — Analysis of Financial Statements.

The market value of Farmington Corp.'s common shares was quoted at $54 per share at
December 31, 2013, and 2012. Planetarium 's balance sheet at December 31, 2013, and 2012,
and statement of income and retained earnings for the years then ended are presented below:

Farmington Corp.
Balance Sheet

December 31
2013/ 2012
Assets:
Current assets:
Cash $ 9,000,000/ $ 5,200,000
Short-term investments 17,200,000/ 15,400,000
Accounts receivable (net) 109,000,000/ 111,000,000
Inventories, lower of cost or market 122,000,000/ 140,000,000
Prepaid expenses 4,000,000/ 2,800,000
Total current assets $261,200,000/ $274,400,000
Property, plant, and equipment (net) 350,000,000/ 315,000,000
Investments, at equity 2,800,000/ 3,500,000
Long-term receivables 15,000,000/ 20,000,000
Copyrights and patents (net) 6,000,000/ 7,000,000
Other assets 8,000,000/ 9,100,000
Total assets $643,000,000/ $629,000,000
Liabilities and Stockholders' Equity:
Current liabilities:
Notes payable $ 7,000,000/ $ 17,000,000
Accounts payable 55,000,000/ 52,000,000
Accrued expenses 27,500,000/ 30,000,000
Income taxes payable 1,500,000/ 2,000,000
Current portion of long-term debt 10,000,000/ 9,500,000
Total current liabilities 101,000,000/ 110,500,000
Long-term debt 180,000,000/ 190,000,000
Deferred income taxes 69,000,000/ 65,000,000
Other liabilities 15,000,000/ 9,500,000
Total liabilities 365,000,000/ 375,000,000
Stockholders' equity:
Common stock, par value $1; authorized 20,000,000 shares; issued and outstanding 12,000,000
shares 12,000,000/ 12,000,000
10% cumulative preferred shares, par value $100; $100 liquidating value; authorized 100,000
shares; issued and outstanding 60,000 shares 6,000,000/ 6,000,000
Additional paid-in capital 119,000,000/ 119,000,000
Retained earnings 141,000,000/ 117,000,000
Total stockholders' equity 278,000,000/ 254,000,000
Total liabilities and stockholders' equity $643,000,000/ $629,000,000

*Problem F-IV (cont.).

Farmington Corp.
Statement of Income and Retained Earnings

Year ended December 31

2013 2012
Net sales $540,000,000/ $500,000,000
Cost and expenses:
Cost of goods sold 390,900,000/ 400,000,000
Selling, general, and administrative expenses 70,000,000/ 65,000,000
Other, net 9,100,000/ 6,000,000
Total costs and expenses 470,000,000/ 471,000,000
Income before income taxes 70,000,000/ 29,000,000
Income taxes 21,000,000/ 11,600,000
Net income 49,000,000/ 17,400,000
Retained earnings at beginning of period 117,000,000/ 113,100,000
Dividends on common stock (24,400,000)/ (12,900,000)
Dividends on preferred stock (600,000)/ (600,000)
Retained earnings at end of period $141,000,000/ $117,000,000
Instructions
Based on the above information, compute the following (for the year 2013 only): (Show
supporting computations in good form.)
(a) Current ratio.

(b) Acid-test (quick) ratio.

(c) Receivables turnover.

(d) Inventory turnover.

(e) Book value per share of common stock.

(f) Earnings per share on common stock.

(g) Price-earnings ratio on common stock.

(h) Payout ratio on common stock.

Problem F-V — Segment Reporting.

Baden Company is a diversified company which has developed the following information about
its
five segments:
SEGMENTS
A B C D E
Total sales $ 600,000 $1,700,00 $ 300,000 $ 320,000 $ 580,000
0
Operating profit (loss) (270,000) 480,000 40,000 (300,000) (10,000)

Identifiable assets 1,600,000 5,800,000 1,200,000 3,900,000 5,600,000

Instructions
Identify which segments are significant enough to warrant disclosure in accordance with FASB
No. 131, "Reporting Disaggregated Information about a Business Enterprise," by applying the
following quantitative tests:
a. Revenue test
b. Operating profit or loss test
c. Identifiable assets test
SOLUTION— COMPREHENSIVE EXAMINATION F

Problem F-II — Solution.

Sharp Company
Statement of Cash Flows
For the Year Ended December 31, 2013
Cash flows from operating activities

Net income $104,000

Adjustments to reconcile net income to net cash provided
by operating activities:
Decrease in accounts receivable $ 4,000
Increase in inventory (38,000)
Increase in accounts payable 52,000
Gain on sale of land (15,000)
Loss on sale of equipment 30,000
Depreciation expense—building 15,000

Depreciation expense—equipment 126,000 174,000

Net cash provided by operating activities 278,000

Cash flows from investing activities
Sale of land 120,000
Sale of equipment 105,000
Purchase of equipment (890,000)
Net cash used by investing activities (665,000)
Cash flows from financing activities
Payment of cash dividends (45,000)
Issuance of bonds 450,000
Net cash provided by financing activities 405,000
Net increase in cash 18,000
Cash, January 1, 2013 36,000
Cash, December 31, 2013 $ 54,000

Problem F-III — Solution.

1. (a) None
(b) Depreciation Expense ............................................................Dr 78,000
Accumulated Depreciation .............................................Cr 78,000
[($645,000 – $240,000 – $15,000) ÷ 5]
2. (a) Retained Earnings ..................................................................Dr 20,000
Accumulated Depreciation .............................................Cr 20,000
(b) None
3. (a) Truck .......................................................................................Dr 50,000
Accumulated Depreciation .............................................Cr 22,500
Retained Earnings .........................................................Cr 27,500
(b) Depreciation Expense ............................................................Dr 7,500
Accumulated Depreciation .............................................Cr 7,500
4. (a) None
(b) Depreciation Expense ............................................................Dr 200,000
Accumulated Depreciation .............................................Cr 200,000
5. (a) None
(b) Bad Debt Expense ..................................................................Dr 25,000
Allowance for Doubtful Accounts ...................................Cr 25,000
6. (a) Inventory (Beginning) .............................................................Dr 14,000
Retained Earnings .........................................................Cr 14,000
(b) None

*Problem F-IV — Solution.

(a) Current ratio:
Total current assets $261,200,000
—————————— = —————— = 2.59 to 1
Total current liabilities $101,000,000

(b) Acid-test (quick) ratio:

Total quick assets $135,200,000
—————————— = ——————— = 1.34 to 1
Total current liabilities $101,000,000
*Problem F-IV — Solution (cont.)
(c) Receivables turnover:
Net sales $540,000,000
————————————— = ————————————————– = 4.91 times
Average accounts receivable [($109,000,000 + $111,000,000) ÷ 2]
(d) Inventory turnover:
Cost of goods sold $390,900,000
————————— = —————— = 2.98 times
Average inventories $131,000,000
€ Book value per share of common stock:
(Total stockholders' equity – liquidating value of preferred stock)/ Common shares issued and
outstanding at December 31, 2013 = $272,000,000/12,000,000 =$22.67
(f) Earnings per share on common stock:
Net income – dividends on preferred stock $48,400,000
——————————————————————————— = —————— = $4.03
Average common shares issued and outstanding during 2013 12,000,000
(g) Price-earnings ratio on common stock:
Market value of common stock $54.00
————————————————— = ———— = 13.4
Earnings per share on common stock $4.03
(h) Payout ratio on common stock:
Dividends on common stock $24,400,000
——————————————————— = —————— = 50.4%
Net income – dividends on preferred stock $48,400,000
Problem F-V — Solution.
a. Revenue test — a segment is reportable if its total sales are $350,000 or more
(10% × $3,500,000). Segments A, B, and E satisfy the revenue test.
b. Operating profit or loss test — a segment's absolute profit or loss must be $58,000 or more
[10% of the absolute greater of $520,000 or ($580,000)]. Segments A, B, and D satisfy the
operating profit or loss test.
c. Identifiable assets test — a segment's identifiable assets must be $1,810,000 or more (10%
× $18,100,000). Segments B, D, and E satisfy the identifiable test.
Segments A, B, D, and E are identified as significant and therefore reportable because they
passed at least one of the significance tests.

COMPREHENSIVE EXAMINATION A (1-6)

Problem A-II — Adjusting and Reversing Entries.
The following list of accounts and their balances represents the unadjusted trial balance
of Alt Company at December 31, 2012:
Cash $ 29,090
Equity Investments (trading) 60,000
Accounts Receivable 69,000
Allowance for Doubtful Accounts $ 500
Inventory 54,720
Prepaid Rent 36,000
Plant Assets 160,000
Accumulated Depreciation-Plan Assets 14,740
Accounts Payable 11,370
Bonds Payable 90,000
Common Stock 170,000
Retained Earnings 97,180
Sales Revenue 214,800
Cost of Goods Sold 154,400
Freight-Out 11,000
Salaries and Wages Expense 32,000
Interest Expense 2,040
Rent Revenue 21,600
Miscellaneous Expense 890
Insurance Expense 11,050
$620,190 $620,190

Additional Data:
Problem A-II — (cont.)
1. The balance in the Insurance Expense account contains the premium costs of three
policies:
Policy 1, remaining cost of $2,550, 1-yr. term, taken out on May 1, 2011;
Policy 2, original cost of $7,200, 3-yr. term, taken out on Oct. 1, 2012;
Policy 3, original cost of $1,300, 1-yr. term, taken out on Jan. 1, 2012.
2. On September 30, 2012, Alt received $21,600 rent from its lessee for an eighteen
month lease beginning on that date.
3. The regular rate of depreciation is 10% per year. Acquisitions and retirements during
a year are depreciated at half this rate. There were no purchases during the year. On
December 31, 2011, the balance of the Plant and Equipment account was $240,000.
4. On December 28, 2012, the bookkeeper incorrectly credited Sales for a receipt on
account in the amount of $10,000.
5. At December 31, 2012, salaries and wages accrued but unpaid were $4,200.
6. Alt estimates that 1% of sales will become uncollectible.
7. On August 1, 2012, Alt purchased, as a short-term investment, 60 $1,000, 7% bonds
of Allen Corp. at par. The bonds mature on August 1, 2013. Interest payment dates
are July 31 and January 31.
8. On April 30, 2012, Alt rented a warehouse for $3,000 per month, paying $36,000 in
advance.
Instructions
(a) Record the necessary correcting and adjusting entries.
(b) Indicate which of the adjusting entries may be reversed at the beginning of the next
accounting period.

Problem A-III — Key Conceptual Terms.

Various accounting assumptions, principles, constraints, and characteristics are listed
below. Select those which best justify the following accounting procedures and indicate
the corresponding letter(s) in the space(s) provided. A letter may be used more than
once or not at all.
a. Historical cost
b. Relevance
c. Monetary unit
d. Going concern
e. Consistency
f. Economic entity
g. Materiality
h. Conservatism
i. Periodicity
j. Expense recognition
k. Revenue recognition
l. Full disclosure
m. Cost constraint
n. Industry practices
o. Faithful representation
____ 1. Chose the solution that will be least likely to overstate assets or income.
____ 2. Describing the depreciation methods used in the financial statements.
____ 3. Applying the same accounting treatment to similar accounting events.
____ 4. The quality which helps users make predictions about present, past, and future events.
____ 5. Recording a transaction when goods or services are exchanged for cash or claims to
cash.
____ 6. Preparing consolidated statements.
____ 7. Information must make a difference or a company need not disclose it.
____ 8. Provides the figure at which to record a liability.
____ 9. The preparation of timely reports on continuing operations.
____ 10. Accrual accounting (do not use "going concern").
____ 11. Reporting those items which are significant enough to affect decisions. Select two (11
and 12).
____ 12. See item 11 above.
____ 13. Ignoring the phenomenon of price-level changes (do not use "historical cost").
____ 14. Not reporting assets at liquidation prices (do not use "historical cost").
____ 15. Characterized by completeness, neutrality, and being free from error.
____ 16. Establishment of an allowance for doubtful accounts.
____ 17. Additivity of financial statement figures relating to different time periods.
____ 18. Carrying inventories at sales price less distribution costs.
____ 19. Use of estimating procedures for amortization policies. Select two (do not use
"periodicity") (19 and 20).
____ 20. See item 19 above.

Problem A-IV — Balance Sheet Form.

List the corrections needed to present in good form the balance sheet below. Errors
include misclassifications, lack of adequate disclosure, and poor terminology. Do not
concern yourself with the arithmetic. If an item can be classified in more than one
category, select the category most favored by the authors of your textbook.

Tanner Corporation
Balance Sheet
For the year ended December 31, 2012
Assets
Current Assets:
Cash $ 18,000
Equity investments-trading (fair value, $32,000) 27,000
Accounts receivable 75,000
Inventory 60,000
Supplies inventory 3,000
Investment in subsidiary company 60,000 $243,000
Investments:

Treasury stock 78,000

Tangible Fixed Assets:
Buildings and land 213,000
Less: Reserve for depreciation 60,000 153,000
Deferred Charges:
Discount on bonds payable 3,000
Other Assets:
Cash surrender value of life insurance 54,000
$531,000
Liabilities and Capital
Current Liabilities:
Accounts payable $ 45,000
Reserve for income taxes 42,000
Customer's accounts with credit balances 3 $ 87,003
Long-Term Liabilities:
Bonds payable 120,000
Total Liabilities 207,003
Capital Stock:
Capital stock 225,000
Earned surplus 74,997
Cash dividends declared 24,000 323,997
$531,000

Problem A-V — Balance Sheet and Income Statement Classifications.

Specify, to the left of each account, the letter of the financial statement classification the
account would appear in. Use only the classifications shown.
Balance Sheet Income and Retained Earnings
Statement
a. Current Assets j. Sales Revenue
b. Investments k. Cost of Goods Sold
c. Property, Plant, and Equipment l. Operating Expenses
d. Intangible Assets m. Other Revenues and Gains
e. Other Assets n. Other Expenses and Losses
f. Current Liabilities o. Extraordinary Item
g. Long-term Debt p. Retained Earnings Section
h. Capital Stock q. Not on the Statements
i. Retained Earnings

Account balances taken from the ledger of Morin Company on December 31, 2012
follow:
____ 1. Common Stock, $10 par _____ 16. Inventory
____ 2. Loss on Disposal of Equipment _____ 17. Salaries and Wages Expense
____ 3. Buildings _____ 18. Merchandise on order with supplier
____ 4. Office Expense _____ 19. Interest Revenue
____ 5. Allowance for Doubtful Accounts _____ 20. Selling Expenses
____ 6. Notes Payable (Short Term) _____ 21. Interest Expense
____ 7. Accum. Depreciation—Buildings _____ 22. Income Taxes Payable
____ 8. Mortgage Payable due 2014 _____ 23. Insurance Expense
____ 9. Depletion Expense _____ 24. Advertising Expense
____ 10. Freight-Out _____ 25. Equity Investments
____ 11. Sales Revenue _____ 26. Accounts Receivable
____ 12. Dividends _____ 27. Land
____ 13. Retained Earnings Dec. 31, 2011 _____ 28. Accounts Payable
_____ 29. Error made in computing 2010 depreciation expense
____ 14. Cash
____ 15. Sales Discounts _____ 30. Gain on Redemption of Debt

Problem A-VI — Future Value and Present Value.

In computing your answers to the cases below, you can round your answer to the
nearest dollar. Present value tables are provided on the next page.
Use the following information in answering Cases 1 and 2 below:
On January 1, 2006, Gray Company sold $800,000 of 10% bonds, due January 1, 2016.
Interest on these bonds is paid on July 1 and January 1 each year. According to the
terms of the bond contract, Gray must establish a sinking fund for the retirement of the
bond principal starting no later than January 1, 2014. Since Gray was in a tight cash
position during the years 2006 through 2011, the first contribution into the fund was
made on January 1, 2012.
Case 1: Assume that, starting with the January 1, 2012 contribution, Gray desires to
make a total of four equal annual contributions into this fund. Compute the
amount of each of these contributions assuming the interest rate is 8%
compounded annually.
Case 2: Assume, instead, that starting with the January 1, 2014 contribution, Gray
desires to make a total of five equal semiannual contributions into this fund.
Compute the amount of each of these contributions assuming the annual
interest rate is 12%, compounded semiannually.
Case 3: On January 2, 2012, Nelson Company loaned $90,000 to Holt Company. The
terms of this loan agreement stipulate that Holt is to make 5 equal annual
payments to Nelson at 10% interest compounded annually. Assume the
payments are to begin on December 31, 2012. Compute the amount of each of
these payments.
Case 4: Jim Marsh, a lawyer contemplating retirement on his 65th birthday, decides to
create a fund on an 8% basis which will enable him to withdraw $50,000 per
year beginning June 30, 2015, and ending June 30, 2019. To provide this fund,
he intends to make equal contributions on June 30 of each of the years 2010
through 2014.
(a) How much must the balance of the fund equal after the last contribution on
June 30, 2014 in order for him to satisfy his objective?
(b) What are each of his contributions to the fund?
SOLUTION— COMPREHENSIVE EXAMINATION A
Problem A-II — Solution.
(a)
1. Prepaid Insurance ........................................................................Dr 6,600
Insurance Expense ..........................................................Cr. 6,600
(Both Policies 1 and 3 have expired and their costs belong in Insurance Expense. The monthly
premium on Policy 2 is $7,200 ÷ 36 = $200. At 12/31/12, 33 mos. of insurance, or $6,600,
remains unexpired)
2. Rent Revenue ..............................................................................Dr 18,000
Unearned Rent .................................................................Cr 18,000
(Monthly rent is $21,600 ÷ 18 = $1,200. At 12/31/12, 15 mos. of rent, or $18,000, remains
unearned)
3. Depreciation Expense ..................................................................Dr 20,000
Accumulated Depreciation ................................................Cr 20,000
[(Equipment retired during 2012 = $240,000 – $160,000 = $80,000)
10% of $160,000 = $16,000
5% of $80,000 = 4,000
Total depreciation = $20,000]
4. Sales ...........................................................................................Dr 10,000
Accounts Receivable ........................................................Cr 10,000
(To correct the entry made in error)
5. Salaries and Wages Expense . .....................................................Dr 4,200
Salaries and Wages Payable ...........................................Cr 4,200
6. Bad Debt Expense .......................................................................Dr 2,048
Allowance for Doubtful Accounts ......................................Cr 2,048
(Corrected Sales balance is $214,800 – $10,000
= $204,800. 1% of $204,800 is $2,048.)
7. Interest Receivable .......................................................................Dr 1,750
Interest Revenue ..............................................................Cr 1,750
(Monthly interest is $60,000 × .07 × 1/12 = $350.
5 months' accrued interest is $1,750)
8. Rent Expense ............................................................................Dr 24,000
Prepaid Rent ..................................................................Cr 24,000
(To record 8 months' of rent expired at $3,000 per month)
(b) 1, 2, 5, and 7. Items No. 1 and No. 2 represent prepaid items that were initially
recorded in nominal accounts. Items No. 5 and No. 7 represent accrued items.

Problem A-III — Solution.

1. h 6. f 11. l 16. j
2. l 7. g 12. g or b 17. c
3. e 8. a 13. c 18. n
4. b 9. i 14. d 19. d
5. k 10. j or k 15. o 20. j

Problem A-IV — Solution.

1. "For the year ended" in the title should be deleted.
2. Equity investments should be reported at their fair value.
3. The amount of Allowance for Doubtful Accounts should be disclosed and
deducted from Accounts Receivable.
4. The inventory costing method (cost, lower of cost or market) and the basis for
pricing the inventory (LIFO, FIFO, etc.) should be disclosed.
5. Investment in Subsidiary should be classified as an investment.
6. Treasury Stock is misclassified under Investments. It should appear as a
deduction from the Stockholders' Equity section.
7. Buildings and Land should be separated.
8. "Reserve for" Depreciation should be either "Allowance for" or "Accumulated"
Depreciation.
9. Discount on Bonds Payable should be classified with and deducted from Bonds
Payable.
10. Cash Surrender Value of Life Insurance should be classified among Investments.
11. "Reserve" for Income Taxes should be titled Income Taxes Payable.
12. The small balance of $3 for customer's accounts with credit balances, while not
erroneously classified, might be offset against and buried in the Accounts
Receivable account because it is so small in amount.
13. The maturity date and the interest rate should be disclosed for the Bonds
Payable.
14. "Capital Stock" listed as title should be "Stockholders' Equity;" "Capital stock"
listed as account should be “Common stock.”
15. More information relative to the capital stock, such as par value and the number
of shares authorized, issued, and outstanding should be disclosed.
16. "Earned surplus" should not be used; Retained Earnings is the preferred title.
17. Cash dividends declared is actually Dividends Payable and should be classified
as a current liability.

Problem A-V — Solution.

1. h 7. c 13. p 19. m 25. b
2. n 8. g 14. a 20. l 26. a
3. c 9. k 15. j 21. n 27. c
4. l 10. l 16. a, k 22. f 28. f
5. a 11. j 17. l 23. l 29. p
6. f 12. p 18. q 24. l 30. m

Problem A-VI — Solution.

Case 1. $800,000 is the amount of an 8% annuity due for 4 periods. Use the table
factor for the future value of an 8% ordinary annuity for 4 periods, and multiply
by (1.08): 4.50611 × (1.08) = 4.86660.
Periodic payments = $800,000 ÷ 4.86660 = $164,386
Case 2. Since interest is compounded semiannually, divide the 12% annual interest
rate by 2, and use the table factor for the future value of a 6% ordinary annuity
for 5 periods.
Periodic payments = $800,000 ÷ 5.63709 = $141,917
Case 3. $90,000 is the present value of a 10% ordinary annuity for 5 periods.
Periodic payments = $90,000 ÷ 3.79079 = $23,742
Case 4. (a) At June 30, 2014, the balance in the fund is the present value of an 8% ordinary
annuity of $50,000 for 5 periods. Balance in the fund = $50,000 × 3.99271 = $199,636
(b) At June 30, 2014, $199,636 is the future value of an 8% ordinary annuity for five periods.
Periodic payments = $199,636 ÷ 5.8666 = $34,029
COMPREHENSIVE EXAMINATION B (CHAP7-9)
Problem B-II — Lower of Cost or Market
Presented below is data relative to the 12/31/12 inventory of Lance Company:
Number Units Original Cost Total Current
Item In Inventory Per Unit Original Cost Replacement Cost
A 5,000 $1.09 $5,450 $1.08
B 5,000 1.30 6,500 1.15
C 5,000 1.50 7,500 1.05
D 5,000 1.60 8,000 1.65
E 5,000 1.80 9,000 1.70
Total 2 5,000 $ 36,450

Appropriate
Upper Lower Inventory
Limit Limit Designated Valuation
Item ("Ceiling") ("Floor") Market (Totals)
A
B
C
D
E
Total

Additional Data:
Selling price is $ 2.00/unit for all items. Disposal costs amount to 10% of selling price
and a "normal" profit is 35% of selling price.
Instructions
Complete the last four columns above.
Problem B-III — Notes Receivable.
On December 31, 2011 Berry Corporation sold some of its product to Flynn Company,
accepting a 3%, four -year promissory note having a maturity value of $ 500,000
(interest payable annually on December 31). Berry Corporation pays 6% for its borrowed
funds. Flynn Company, however, pays 8% for its borrowed funds. The product sold is
carried on the books of Berry at a manufactured cost of $310,000. Assume Berry uses a
perpetual inventory system.
Instructions
(a) Prepare the journal entries to record the transaction on the books of Berry
Corporation at December 31, 2011. (Assume that the effective interest method is
used. Use the interest tables below and round to the nearest dollar.)
(b) Make all appropriate entries for 2012 on the books of Berry Corporation.
(c) Make all appropriate entries for 2013 on the books of Berry Corporation.

Problem B-IV — FIFO vs. LIFO.

In comparing and contrasting FIFO vs. LIFO inventory procedures, the following listing
was developed. You are to complete the tabulation with an answer of "YES" or "NO"
as demonstrated by the first item. Any combination of yes-no answers is possible in
each situation.

FIFO LIFO

0. Usually matches the actual physical flow of goods. Yes No _

1. Emphasizes the income statement in that it matches the more

recent costs with revenue. _____ _____

2. Defers tax payments in times of rising prices. _____ _____

3. Possibility of liquidating the base may be a significant negative

aspect. _____ _____

4. Will probably not be adopted if prices are expected to decline. _____ _____

5. Emphasizes the balance sheet in that the more recent costs

are contained in the inventory account. _____ _____

6. Can use price indexes to cost layers. _____ _____

7. Switching to this method could cause problems in the equity

markets, with loan covenants, etc. _____ _____

8. Income figure more accurately reflects cash available for

dividends, investments, etc. _____ _____

9. Tends to smooth income in periods of fluctuating prices. _____ _____

10. Income figure is more "real" in that it doesn't contain "paper

 profits." _____ _____

11. A change to this method must be justified (i.e., to the auditor)

other than solely on the basis of the tax effect. _____ _____

B-6 Comprehensive Exam B

12. Perpetual inventory results may be different from periodic

inventory results. _____ _____

13. Is acceptable to the IRS (i.e., for income tax purposes). _____ _____

14. Gives lower profits when prices rise. _____ _____

15. In a period of rising prices has an adverse effect on assets,

working capital, and stockholders' equity. _____ _____

16. Quick inventory turnover may have somewhat of a mitigating

effect on some of the method's claimed disadvantages. _____ _____

17. Improves cash flow in periods of rising prices. _____ _____

18. If used for tax purposes, it must be used for financial reporting
purposes. _____ _____

19. Somewhat opens door for profit manipulation and may cause
poor purchase decisions. _____ _____

20. Is a current value, rather than a historical cost, valuation method. _____ _____

Problem B-V — Year-end Inventory Cutoff.

Abel Company's business year ends on December 31. Listed below are purchase
transactions which occurred during the last few days of 2012 or during the first few days
of 2013. The inventory, determined by physical count, was taken after the close of
business on December 31, 2012. The only adjusting entry recorded to date has been to
enter the December 31 physical inventory on the books and to remove the beginning
inventory.
Instructions
(a) On the accompanying chart, indicate the effect of each of these transactions on the
ending inventory and on reported net income for 2012, by writing the words
overstated, understated, or no effect in the appropriate column. Both columns must
be answered for each transaction.
(b) Prepare all necessary correcting entries for 2012.
(c) Indicate which of the correcting entries must be reversed in 2011 by preparing
the necessary reversing entries.
 12/31/12
Physical 2012
Inventory Income

1. An invoice for $9,000, terms f.o.b. shipping point, was received

and entered December 30. The invoice shows that the
merchandise was shipped December 29, and the receiving
report indicates the merchandise was received January 2. ______ _______

2. An invoice for $300, terms f.o.b. shipping point, was received

and entered December 30. The invoice shows that
merchandise was shipped December 29, and the receiving
report shows the merchandise was received December 31. ______ _______

3. An invoice for $4,000, terms f.o.b. shipping point, was

received and entered January 2. The invoice shows the
merchandise was shipped December 30, and the receiving
report indicates the merchandise was received December 31. ______ _______

4. An invoice for $800, terms f.o.b. destination, was received

and entered December 30. The receiving report shows the
merchandise was received January 2. ______ _______

5. An invoice for $500, terms f.o.b. destination, was received and

entered December 29. The receiving report indicates that the
merchandise was received December 31. ______ _______

6. An invoice for $1,500, terms f.o.b. destination, was received

and entered January 2. The receiving report indicates the
merchandise was received December 31. ______ _______

7. Merchandise costing $12,000 and with a selling price of

$18,000 was on consignment to Maris Distributing Company
and was on that company's premises on December 31. No
entry has been made for the consignment.
Problem B-VI — Conventional and LIFO Retail Method.*
*Note to Instructor. Part B is based on Appendix 9-A.
A. Landmark Book Store uses the conventional retail method.
Instructions
Given the following data, prepare a neat, labeled schedule showing the computation of
the cost of inventory on hand at 12/31/12.
Cost Retail
Inventory 1/1/12 $ 28,900 $ 40,000
Purchases 366,600 610,000
Purchases Returns 9,000 20,000
Purchase Discounts 7,000
Sales (Gross) 615,000
Sales Returns 15,000
Employee Discounts 5,000
Freight-in 23,500
Freight-out 50,000
Loss from Breakage 2,500
Markups 38,000
Markup Cancellations 18,000
Markdowns 13,500
Markdown Cancellations 8,500

B. Landmark Book Store has decided to switch to the LIFO retail method for the
period beginning 1/1/13.
Instructions
Prepare a schedule showing the computation of the 12/31/13 inventory under the LIFO
retail method adjusted for price level changes (i.e., dollar-value LIFO Retail.) Without
prejudice to your answer in requirement A above, assume that the 12/31/12 inventory
computed under the LIFO Retail method was $40,000 and $27,500 at retail and cost,
respectively, for purposes of this requirement. Data for 2013 follows:
Cost Retail
Purchases (net) $360,000 $485,000
Sales (net) 402,000
Markups (net) 30,000
Markdowns (net) 15,000
2012 Price Index 100
2013 Price Index 120
SOLUTION— COMPREHENSIVE EXAMINATION B
Problem B-II — Solution.
Item Upper Limit Lower Limit Designated Market Appropriate Inventory Valuation
("Ceiling") ("Floor") (Totals)

A $1.80 $1.10 $1.10 $5,450

B $1.80 $1.10 1.15 5,750
C $1.80 $1.10 $1.10 5,500
D $1.80 $1.10 1.65 8,000
E $1.80 $1.10 1.70 8,500
$33,200

Problem B-III — Solution.

12/31/11
Notes Receivable ......................................................................... 500,000
Discount on Notes Receivable ......................................... 82,803
Sales Revenve .................................................................. 417,197

Computation of Present Value of Note: (using 8%)

$500,000 × .73503 = $ 367,515
15,000 × 3.31213 = 49,682
Present value of note 417,197
Face value of note 500,000
Amount of discount $ 82,803

12/31/11
Cost of Goods Sold ...................................................................... 310,000
Inventory ........................................................................... 310,000

(b)

(b) 12/31/12
Cash ............................................................................................ 15,000
Interest
Revenue ............................................................
.. 15,000

Discount on Notes Receivable ..................................................... 18,376

Interest
Revenue ............................................................
.. 18,376
($417,197 × .08 = $33,376 – $15,000)

(c) 12/31/13
 Cash ............................................................................................ 15,000
Interest
Revenue ............................................................
.. 15,000

Discount on Notes Receivable ..................................................... 19,846

Interest
Revenue ............................................................
.. 19,846
[($417,197 + $18,376) × .08 = $34,846 – $15,000]

Problem B-IV — Solution.

1. No-Yes 7. No-Yes 13. Yes-Yes 19. No-Yes
2. No-Yes 8. No-Yes 14. No-Yes 20. No-No
3. No-Yes 9. No-Yes 15. No-Yes
4. No-Yes 10. No-Yes 16. Yes-No
5. Yes-No 11. Yes-Yes 17. No-Yes
6. No-Yes 12. No-Yes 18. No-Yes

Problem B-V — Solution.

(a)
1. Understated/Understated
2. No effect/No effect
3. No effect/Overstated
4. No effect/Understated
5. No effect/No effect
6. No effect/Overstated
7. Understated/Understated
(b)
1. Inventory......................................................................................................9,000
Cost of Goods Sold
....................................................................................................................
9,000
2. None
3. Purchases...........................................................................................4,000
Accounts Payable 4,000
4. Accounts Payable..................................................................................800
Purchases . 800
5. None
6. Purchases...........................................................................................1,500
Accounts Payable
....................................................................................................................
1,500
7. Inventory...........................................................................................12,000
Cost of Goods Sold
..................................................................................................................
12,000
 (c) 3. Accounts Payable...............................................................................4,000
Purchases
....................................................................................................................
4,000

4. Purchases..............................................................................................800
Accounts Payable
.......................................................................................................................
800

6. Accounts Payable...............................................................................1,500
Purchases
....................................................................................................................
1,500

Problem B-VI — Solution.

Cost Retail
A. Beginning Inventory $ 28,900 $ 40,000
Purchases 366,600 610,000
Purchase Returns (9,000) (20,000)
Purchase Discounts (7,000)
Freight-In 23,500
Markups 38,000
Markup Cancellations (18,000)
Goods Available $ 403,000 650,000
Cost Ratio = 62%
Sales $615,000
Sales Returns (15,000) (600,000)
Employee Discounts (5,000)
Goods Broken (2,500)
Markdowns 13,500
Markdown Cancellations (8,500) (5,000)
Ending Inventory @ Retail $ 37,500
Est. Ending Inventory @ Cost (62% × $37,500) $ 23,250

*B. Cost Retail__

Inventory, December 31, 2012 $ 27,500 $ 40,000
Net purchases 360,000 485,000
Net markups 30,000
Net markdowns (15,000)
Total (excluding beginning inventory) 360,000 500,000
Total (including beginning inventory) $ 387,500 540,000
Net sales (402,000)
Inventory, December 31, 2013, at retail $ 138,000
Cost to retail percentage ($360,000 ÷ $500,000) 72%
12/31/13 inventory at base ($138,000 ÷ 1.20) $ 115,000
12/31/12 inventory at base $ 27,500 (40,000)
Increase at base $ 75,000
Increase at current prices, at cost ($75,000 × 1.20 × .72) 64,800
12/31/13 inventory at LIFO cost $ 92,300