The Fall 2005 Accounting Tribe

The Second Encounter

Version A

Rules:
No Cheating
No Marking on PV Table

Instructor:
Circle

Mrs. Kirch Mrs. Freeland

 ___________________________
Name

____________________________
PID or SSN

____________________________
Days &Time of Your Class

The following data is for Bella Corporation:

Balance
Balance
12/31/04 12/31/05

Cash
15,000 45,000
Accounts Receivable 40,000
75,000
Allowance for Doubtful Accounts 5,000 10,000
Inventory 50,000
70,000
Equipment
 200,000
250,000
Accumulated Depreciation 20,000
30,000
Land
60,000
Accounts Payable 40,000
64,000
Wages Payable 10,000
6,000
Note Payable 100,000
80,000
Common Stock ($1 each) 50,000 110,000
Retained Earnings 80,000 200,000
Sales
1,000,000
Cost of Goods Sold
500,000
Wage Expense 200,000
Rent Expense
36,000
Office Expenses
22,000
Depreciation Expense
20,000
Bad Debt Expense
10,000
Interest Expense 8,000
Income Tax Expense
60,000
Loss on Sale of Equipment
4,000

The land was acquired on October 1, 2005 by exchanging 40,000 shares of common stock worth $40,000 and
cash for the balance of the purchase price. The additional common stock (other than that issued for the purchase
of the land) was sold on April 1, 2005 for $1 per share. The company sold only one piece of equipment during
the year. The equipment which was sold originally cost $20,000 and had accumulated depreciation of $10,000
at the date of the sale. All equipment purchased during the year was purchased for cash. The retained earnings
balance for both years is after all closing entries have been made. The market price per share at December
31, 2005 was $25. The Note Payable requires payments of $20,000 principal plus interest at 10% on December
31st of each year.
Prepare, in good form, an Income Statement for Bella Corporation. (60 points)

Bella Corporation
Income Statement
For the Year Ended December 31, 2005

Sales

$1,000,000
Cost of Sales

500,000
Gross Profit

500,000

Operating Expenses
Wage Expense $200,000
Rent Expense 36,000
Office Expenses 22,000
Depreciation Expense 20,000
Bad Debt Expense 10,000
Total Operating Expenses
288,000
Operating Income
212,000
Other Revenues & <Expenses>
Interest Expense < 8,000>
Loss on Sale of Equipment < 4,000>
Total Other Revenues & <Expenses> < 12,000>
Taxable Income
200,000
Income Tax Expense
60,000
Net Income
$
140,000

Earnings Per Share

$ 1.87

$140,000
(50,000)(3/12) + (70,000)(6/12) + (110,000)(3/12)
 $140,000
12,500 + 35,000 + 27,500

$140,000
75,000

Bella Corporation
Comparative Balance Sheets

December 31,
2005 2004
Assets
Current Assets
Cash

$
45,000

$
15,000
Accounts Receivable $ 75,000
$ 40,000
Less: Allowance for
Doubtful Accounts 10,000
5,000
Net Accounts Receivable

65,000

35,000
Inventory

70,000
 50,000
Total Current Assets

180,000

100,000

Plant, Property & Equipment

Equipment 250,000

200,000
Less: Accumulated
Depreciation 30,000
20,000
Subtotal 220,000

180,000
Land
60,000
-0-
Net Plant, Property & Equipment

280,000

180,000

Other Assets
None

Total Assets

$460,000
 $280,000

Liabilities
Current Liabilities
Accounts Payable

$
64,000

$
40,000
Wages Payable

6,000

10,000
Current Maturities of
Long-Term Debt

20,000

20,000
Total Current Liabilities

90,000

70,000

Long-Term Debt
Note Payable

60,000

80,000
Total Liabilities
 150,000

150,000

Owners= Equity
Common Stock 110,000
50,000
Retained Earnings 200,000
80,000
Total Owners= Equity

310,00
0

130,00
0
Total Liabilities & Owners= Equity

$460,000

$280,000

Prepare, in good form, a Statement of Cash Flows using the indirect method for Bella Corporation.
(100 points)

Bella Corporation
Statement of Cash Flows
For the Period Ending December 31, 2005

Operating Activities
Net Income

$140,000
 Adjustment to Net Income:
Add: Depreciation Expense

20,000
Add: Loss on Sale of Equipment
4,000
Changes in:
Increase in Net Accounts Receivable <
30,000>
Increase in Inventory
<
20,000>
Increase in Accounts Payable
24,000
Decrease in Wages Payable
<
4,000>
Net Cash Provided by Operating Activities

134,000

Investing Activities
Sale of Equipment $
6,000
Purchases of Equipment < 70,000>
Purchase of Land <
20,000>
Net Cash Used for Investing Activities
<
84,000>

Financing Activities
Issuance of Common Stock 20,000
Payment on Note Payable < 20,000>
Payment of Dividends < 20,000>
Net Cash Used for Financing Activities
<
20,000>

Net Increase in Cash

30,000
Beginning Cash Balance, December 31, 2004
15,000
Ending Cash Balance, December 31, 2005
$
45,000
 Significant Noncash Transactions:
Exchanged 40,000 shares of Common Stock for
partial payment for land purchased

$
40,000

Multiple Choice Circle answer on exam AND bubble in on scan sheet. (5 points each)

The next 6 questions refer to Bella Corporation. Where appropriate, use a 365 day year.

1) At December 31, 2005, the current ratio is approximately

A. 2.00
B. 2.11 $180,000
C. 2.57 $90,000
D. 2.71
E. some other number

2) For 2005, return on equity was approximately

A. 30.43%
B. 45.16% $140,000 $140,000
C. 63.64% ($130,000 + $310,000) / 2 $220,000
D. 70.00%
E. some other number

3) For 2005, the return on assets was approximately

A. 30.43%
B. 37.84% $140,000 $140,000
C. 45.16% ($280,000 + $460,000) / 2  $370,000
D. 50.00%
E. some other number

4) For 2005, the average collection period was (for this question, ignore the allowance for doubtful accounts)
A. 17 days $1,000,000  $1,000,000  17.39 times
B. 23 days ($40,000 + $75,000) / 2 $57,500
C. 25 days
D. 20 days 365
 E. 32 days 17.39

5) For 2005, the inventory turn was approximately:

A. 8.33 times
B. 17.39 times $500,000
C. 7.14 times ($50,000 + $70,000) / 2
D. 10.00 times
E. some other number

6) The book value per share at 12/31/05 was approximately

A. $ 2.82
B. $ 4.18 $310,000
C. $ 1.00 110,000
D. $ 3.88
E. some other number

7) During periods of rising prices, the inventory system preferred for tax reporting is
A. FIFO
B. LIFO
C. NINO
D. Weighted Average
E. None of the above

8) J D Co. had a beginning balance (12/31/x4 )in Accounts Receivable of $400,000 and a beginning credit
balance in the Allowance for Doubtful Accounts of $10,000. During 20x5 she sold $800,000 of goods
on credit and collected $700,000. If J D estimates that 3% of his ending accounts receivable will
eventually not be collected, his adjusting journal entry for the bad debt expense will include a credit to
allowance for doubtful accounts of:

A. $ 2,000 Accounts Receivable Allowance for Doubtful Accounts

B. $ 15,000 BB 400,000 10,000 BB
C. $ 5,000 (1) 800,000 700,000 (2) 5,000 Bad Debt
Exp
D. $ 4,000 1,200,000 700,000 15,000
E. None of the above 500,000

500,000 * 3% = 15,000

9) Still J D Co. - The ending balance in the Allowance for Doubtful Accounts at December 31, 20x5 would be:

A. $ 12,000
B. $ 15,000
C. $ 5,000
D. $ 4,000
E. None of the above
10) Still J D Co. - If J D Co. had written off $5,000 of accounts receivable during 20x5, the debit to bad
debt expense would have been:
Accounts Receivable Allowance for Doubtful Accounts
A. $ 4,850 BB 400,000 700,000 (2) (3) 5,000 10,000 BB
B. $ 10,000 (1) 800,000 5,000 (3) 5,000
C. $ 9,850 1,200,000 705,000 9,850 Bad
Debt Exp
D. $ 15,000 495,000 14,850
E. $ 5,000

495,000 * 3% = 14,850

11) If a customer=s account is written off by the company and then the customer comes back and pays what
they owe,
A. you would debit bad debt expense for the amount
B. you would only debit the accounts receivable for the amount
C. you would both debit and credit accounts receivable for the amount
D. you would debit both bad debt expense and the allowance for doubtful accounts for the amount
E. you would debit accounts receivable and credit cash for the amount
12) The Dariko Company prepares annual financial statements at December 31 of each year. On April 1,
20x5 the Company borrowed $100,000 from the bank. The Dariko Company must pay interest of 8%
on the unpaid balance plus $10,000 on the principal on April 1 of each year. The journal entry on
December 31, 20x5 is:

A. Interest Payable $ 6,000

Interest Expense $ 6,000

B. Interest Expense $ 6,000

Cash $ 6,000

C. Interest Expense $ 6,000

Note Payable $ 10,000
Cash $ 11,000

D. Interest Expense $ 6,000

Interest Payable $ 6,000

E. Interest Expense $ 2,000

Interest Payable $ 2,000

13) Still Dariko - The journal entry on April 1, 20x6 is:

A. Interest Expense $ 2,000

Interest Payable $ 2,000
Note Payable $ 10,000
Cash $ 10,000

B. Interest Expense $ 6,000

Note Payable $ 10,000
Cash $ 16,000

C. Interest Payable $ 6,000

Interest Expense $ 2,000
Note Payable $ 10,000
Cash $ 18,000

D. Interest Payable $ 2,000

Cash $ 2,000

E. Interest Payable $ 2,000

Interest Expense $ 6,000
Note Payable $ 10,000
Cash $ 18,000
14) The accounting equation is

A. Debits = Credits
B. Assets = Liabilities + Owners= Equity
C. Revenues - Cost of Goods Sold = Gross Margin
D. Recording all expenses incurred in generating the revenues of the period
E. The same as the book value

15) Kylie will sell you a Doodlebop for $30,000. The deal is you pay for the Doodlebop in three equal
annual payments that include interest at 6%. You put no money down and the first payment is not due
until one year from today!! You called the bank and they said that they would charge you 10% for a
similar loan.

How much are the payments if you take Kylie=s deal?

A. $ 12,063.21 PVA = A ( IF )
B. $ 10,000 + interest at 6% 30,000 = A ( 2.6730 )
C. $ 10,000 + interest at 10% A = 30,000 / 2.6730
D. $ 11,223.34 A = 11,223.34
E. None of the above

16) How much are you really paying for the Doodlebop under Kylie=s deal?

A. $ 27,015.42 PVA = A ( IF )
B. $ 32,244.96 PVA = 11,223.34 ( 2.4869 )
C. $ 30,000.00
D. $ 27,911.34
E. None of the above

17) If you amortize the Kylie deal properly, the interest for the first year would be

A. $ 2,701.54 Yr Payment Interest 10% Principal Ending Principal

Balance
B. $ 3,000.00 Cost 27,911.34
C. $ 3,224.50 1 11,223.34 2,791.13 8,432.21 19,479.13
D. $ 2,791.13
E. None of the above

18) You are preparing a bid for a note that has exactly five years to go. It was originally for $100,000
payable in 10 equal annual payments which included interest at 10%. Current interest rates are 8%.
How much do you offer for the note so that you will earn 8%?
100,000 = A ( 6.1446 )
A. $ 107,987.00 A = 100,000 / 6.1446
B. $ 105,326.07 A = 16,274.45
C. $ 64,979.00
D. $ 56,493.95 PVA = 16,274.45 ( 3.9927 )
E. None of these is close to the correct number PVA = 64,979.00
19) Cory=s Corporation is buying all the assets and assuming all the liabilities of Dan=s, Inc. The
following information is available for Dan=s at the date of the purchase:

Accounts Receivable 300,000 Accounts payable 40,000

Inventory 100,000 Wages Payable 10,000
Equipment 200,000 Note Payable 100,000
Accumulated Depreciation 80,000 Common Stock 300,000
Land 300,000 Retained Earnings
270,000

The inventory is worth $60,000, the land is worth $400,000 and the equipment is worth $300,000.
Everything else is worth its book value. Cory=s Corporation will pay $1,000,000 for Dan=s, Inc. How
much of the purchase price will Cory=s Corporation debit to goodwill?

A. $ 330,000 Accounts Receivable 300,000

B. $ 240,000 Inventory 60,000
C. $ 90,000 Equipment 300,000
D. $ 390,000 Land 400,000
E. Some other number which is not here Accounts Payable 40,000
Wages Payable 10,000
Note Payable 100,000
Cash 1,000,000
Goodwill 90,000

20) An increase in accumulated depreciation

A. increases total assets.

B. decreases total assets.
C. decreases the current ratio.
D. increases the current ratio.
E. both B and C are correct.

21) On a statement of cash flows, depreciation expense is treated as an adjustment to net income because
depreciation expense:

A. is a direct source of cash.

B. reduces reported income but does not involve an outflow of cash.
C. reduces reported income because it involves an inflow of cash.
D. is an inflow of cash to an account set up for the replacement of assets.
E. None of the above

22) Which of the following would not be an adjustment in arriving at net cash flow from operations:

A. Changes in wages payable

B. Depreciation expense for the year
 C. Changes in prepaid expenses
D. Gain or loss from sale of equipment
E. Net increase in long-term debt

For the next three questions, use the following data:

On January 1, 20x5 Daryl=s Company had 12 cases which cost him $10 each in his inventory. During the
year, the following transactions occurred:
Sales
Jan 1 Sold 5 cases for $30 each = 150
Feb 1 Bought 8 cases @ $20 each
Mar 1 Sold 6 cases @ $40 each = 240
Jun 1 Sold 7 cases for $50 each = 350
Sept 1 Bought 3 @ $30 each
Dec 1 Sold 2 @ $60 each = 120
860

Inventory (FIFO)
23) Cost of Goods Sold under FIFO would be 12 @ $10 BB 120 50 (1/1) 5 @ $10

A. $ 580 8 @ $20 (2/1) 160 60 (3/1) 6 @ $10

B. $ 320
C. $ 280 130 (6/1) 1 @ $10
D. $ 370 6 @ $20
E. None of the above
3 @ $30 (9/1) 90 40 (12/1) 2 @ $20
24) Ending Inventory using LIFO would be 370 280
90
A. $ 50
B. $ 90
C. $ 370 Inventory (LIFO)
D. $ 70 12 @ $10 BB 120 50 (1/1) 5 @ $10
E. None of the above
8 @ $20 (2/1) 160 120 (3/1) 6 @ $20
25) Gross Margin using LIFO would be
90 (6/1) 2 @ $20
A. $ 540 5 @ $10
B. $ 580
C. $ 490 3 @ $30 (9/1) 90 60 (12/1) 2 @ $30
D. $ 370 370 320
E. None of the above 50

26) On July 10, Mark=s Company made a $10,000 credit sale under the terms 2/10, n/30. If Mark receives full
payment of the account on July 19, the amount of cash received is:

A. $ 9,800 $10,000 - ($10,000*2%) = $9,800

B. $ 9,000
 C. $ 9,990
D. $10,200
E. $10,000

27) Rajni, Inc. is buying all the assets and assuming all the liabilities of Feijie, Inc. for $500,000. The
following information is available for Feijie, Inc. at the date of purchase:

Accounts Receivable 70,000

Accounts
Payable
20,000
Inventory 80,000
Note Payable
100,000
Equipment
90,000
Common Stock
50,000
Accumulated Depreciation 10,000
Retained
Earnings
60,000

The accounts receivable are worth $60,000, the inventory is worth $70,000 and the equipment is worth
$70,000. Additionally, the Note Payable debt is payable interest only at 12% per year for the next 5 years
and then the principal is due. The current interest rate for similar debt is 9%. How much of the purchase
price will Rajni, Inc. debit to goodwill?
100,000 * 12% = 12,000
A. $390,000 PVA = 12,000 ( 3.8897) = 46,676.40
B. $420,000 PV = 100,000 ( .6499 ) = 64,990.00
C. $431,666.40 111,666.40
D. $427,903.35
E. $409,183.20 Accounts Receivable 60,000.00
Inventory 70,000.00
Equipment 70,000.00
Accounts Payable 20,000.00
Note Payable 111,666.40
Cash 500,000.00
Goodwill 431,666.40

28) The major difference on the income statement between a retail operation and a service company is:

A. The owners= equity is shown differently

B. A service company has no Cost of Goods Sold
C. A retail company includes interest in the operating expense section
D. A service company=s income statement is as of a certain date, not for a period ending
E. There is no difference