FINANCE –EXAM 3 1. The Hasting Hasting Company began operations operations on January January 1, 2003 2003 and uses the the FIFO method in costing its ra materia! in"entory. #n ana!yst is ondering hat net income ou!d ha"e been i$ the company had consistent!y $o!!oed $o!!oed %IFO &instead o$ FIFO' $rom the beginning, 1(1(2003. He has the $o!!oing in$ormation a"ai!ab!e to him) *hat ou!d net income ha"e been in 200+ i$ Hastings had used %IFO since 1(1(2003
$ 110,000
$ 150,000 - 10,000 - 230,000
2. # customer is curr current!y ent!y suing a company company.. # reasonab!e reasonab!e estimate can be be made o$ the costs that ou!d resu!t $rom a ru!ing un$a"orab!e to the company, and the amount in"o!"ed is materia!. The company/s managers, !ayers, and auditors agree agr ee tha thatt the there re is on! on!y y a re remot mote e !i !ie e!ih !ihood ood o$ an un$ un$a"o a"orab rab!e !e ru ru!in !ing. g. Th This is contingency)
Should be disclosed in a footnote . Should be disclosed as a parenthetical comment in the balance sheet . eed not to be disc!osed. hou!d be disc!osed by an appropriation o$ retained earnings.
3. The #C Company operates a catering ser"ice specia!i4ing in business !uncheons $or !arge corporations. #C re5uires customers to p!ace their orders 2 ees in ad"ance o$ the schedu!ed e"ents. #C bi!!s its customers on the tenth day o$ the month $o!!oing the date o$ ser"ice and re5uires that payment be made ithin 30 days o$ the bi!!ing date. Co!!ections $rom customers ha"e ne"er been an issue in the past. #C shou!d recogni4e re"enue $rom its catering ser"ices at the date hen a)
Customer places an order. %uncheon is ser"ed. i!!ing is mai!ed. Customer/s payment is recei"ed.
+. On June 30, 2001, Co!e Inc., e6changed 3,000 shares o$ tone Corp. -30 par "a!ue common stoc $or a patent oned by 7ore Co.. The tone stoc as ac5uired in 1888 at a cost o$ -90,000. #t the e6change date, tone common stoc had a $air "a!ue o$ -+: per share, and the patent had a net carrying "a!ue o$ -1;0,000 on 7ore/s boos. Co!e shou!d record the patent at) -90,000 -80,000
$135,000 -1;0,000 umber o$ tone Corp. shares 6 Fair "a!ue Cost o$ patent to be recorded
3,000 -+: -1,3:,000
:. On June 30, 2001, Co!e Inc., e6changed 3,000 shares o$ tone Corp. -30 par "a!ue common stoc $or a patent oned by 7ore Co.. The tone stoc as ac5uired in 1888 at a cost o$ -90,000. #t the e6change date, tone common stoc had a $air "a!ue o$ -+: per share, and the patent had a net carrying "a!ue o$ -1;0,000 on 7ore/s boos. Co!e shou!d record the patent at)
-90,000 -80,000
$135,000 -1;0,000
Check once both questions word to word same if 4 is correct then wh can!t 5th ri"ht kindl check ;. On January 1, 188,
c in$ormation on the !ease is as $o!!os)
On January 1, 188,
-2:,000 -3:8,+;+ -0
$#50,000
. F?C Inc. ac5uired @areting Inc on 1(1(200+. @areting Inc. has 10,000 shares outstanding. Aach share in @areting Inc. as e6changed $or ha!$ a share in F?C, Inc. hares o$ F?C Inc., ere trading at -100 per share at the date o$ the announcement o$ the transaction. @areting Inc, had the $o!!oing assets and !iabi!ities that ere assumed by F?C Inc.
The amount o$ 7oodi!! recogni4ed by F?C, Inc. on January 1, 200+ is)
$400,000 -3;0,000 -+8:,000 -+::,000 9. #C e6penses stoc options as re5uired by 7##<. On January 1,200:, #C granted :0 ey e6ecuti"es 100 options each. Aach option entit!ed the option ho!der to purchase 1 share o$ #C common stoc at -;0 per share. The options i!! "est on January 1st 2009. On the grant date, January 1st, 200:, the stoc as 5uoted on the stoc e6change at -;3 per share. The $air "a!ue o$ the options on the grant date as estimated at -1: per option. The amounts o$ compensation e6pense #C shou!d recogni4e ith respect to the options during 200:, 200;, and 200 are)
1. 2.
3. +.
8. *hich o$ the $o!!oing situations i!! not cause a de$erred income ta6 amount to be recorded
An expense that is recognized in 2005 for income tax prposes and in 200! for "nancia# statement prposes$ Interest income $rom municipa! bonds that is recogni4ed in 200: $or >nancia! statement purposes but is ta6 e6empt $or income ta6 purposes. # re"enue is recogni4ed in 200: $or income ta6 purposes and in 200; $or >nancia! statement purposes. None of the above situations would cause a deferred income tax amount.
10.In periods ith rising prices and increasing 5uantities o$ in"entories, hich o$ the $o!!oing re!ationships among in"entory "a!uation methods is genera!!y correct) FIFO has a hiher inventor! balance and a lower net income than "IFO.
%& has a hi"her in'entor balance and a hi"her net income than (%& . %IFO has a higher in"entory ba!ance and a higher net income than FIFO. %IFO has a higher in"entory ba!ance and a !oer net income than FIFO.
11.Benny Co. se!!s maor househo!d app!iance ser"ice contracts $or cash. The ser"ice contracts are $or a oneDyear, toDyear, or threeDyear period. Cash receipts $rom contracts are credited to =nearned er"ice ?e"enues. This account had a ba!ance o$ -800,000 at Becember 31, 2001 be$ore yearDend adustment. er"ice contracts sti!! outstanding at Becember 31, 2001 e6pire as $o!!os)
*hat amount shou!d be reported as =nearned er"ice ?e"enues in Benny/s Becember 31, 2001 ba!ance sheet -800,000
$)00,000 -1,:00,000 -300,000
12.#C signed a :Dyear operating !ease agreement hereby *E ?enta!s i!! pro"ide a truc hich cost *E -20,000. The !ease payments are -2,:00, payab!e at the end o$ each year. The truc i!! re"ert to *E at the end o$ >"e years. The truc has a 10Dyear use$u! !i$e. #t the inception o$ the !ease, #C shou!d)
make no *ournal entr record renta! e6pense o$ -2,:00 $or the >rst year/s renta! record the !ease asset and a corresponding !iabi!ity, at its current maret "a!ue record the !ease asset and a corresponding !iabi!ity, at the present "a!ue o$ the >"e e5ua! annua! !ease payments.
13.@erry Co. purchased a machine costing -12:,000 $or its manu$acturing operations and paid shipping costs o$ -20,000. @erry spent an additiona! -10,000 testing and preparing the machine $or use. *hat amount shou!d @erry record as the cost o$ the machine -1::,000 -1+:,000 -13:,000 -12:,000
1+.Ignoring any re!ated ta6 imp!ications, hat is the eGect on a company/s ba!ance sheet hen depreciation e6pense is recogni4ed This transaction aGects on!y the income statement, so no change on the ba!ance sheet i!! occur.
+otal assets and total stockholders equit will decrease b the same amount .
There i!! be no change in the tota! assets, !iabi!ities and stocho!ders e5uity accounts. Tota! !iabi!ities i!! increase and tota! stocho!der/s e5uity i!! decrease by the same amount.
1:.The Hastco Company had the $o!!oing ba!ances in their stocho!ders/ e5uity accounts as o$ Becember 31, 2000)
$11,000 -3,000 -:,000 -;1,000 1;.#!! o$ the $o!!oing ou!d 5ua!i$y a !ease as a capita! !ease e6cept) The !ease term is 90 o$ the asset/s estimated use$u! !i$e. The !ease agreement contains a bargain purchase option. The present "a!ue o$ the !ease payments e5ua!s 0 o$ the $air maret "a!ue o$ the !eased asset. Tit!e to the !eased asset trans$ers to the !essee at the end o$ the !ease term.
1.*hich o$ the $o!!oing is(are criteria $or recogni4ing re"enue $rom a sa!e Tit!e and riss o$ onership ha"e been e6changed. The company is reasonab!y assured o$ co!!ecting the recei"ab!e.
The customer has, in turn, so!d the product to its on customer.
-oth title and risks of ownership ha'e been echan"ed and the compan is reasonabl assured of collectin" the recei'able .
19.=se the $o!!oing in$ormation to anser the ne6t to 5uestions. Boney Company bought a de!i"ery truc $or -;2,000 on January 1, 200:. They insta!!ed a rear hydrau!ic !i$t $or -9,000 and paid sa!es ta6 o$ -3,000. In addition, Boney paid -2,+00 $or a oneDyear insurance po!icy. They estimate the use$u! !i$e o$ the truc to be 10 years and its residua! "a!ue to be -9,000. I$ Boney uses the straightD!ine method o$ depreciation, hat is the depreciation e6pense $or 200; and boo "a!ue at the end o$ 200; -,300 and -:9,+00
$),500 and $)0,000 -;,80 and -;2,320 -;,:00 and -;;,:00
18. Boney Company bought a de!i"ery truc $or -;2,000 on January 1, 200:. They insta!!ed a rear hydrau!ic !i$t $or -9,000 and paid sa!es ta6 o$ -3,000. In addition, Boney paid -2,+00 $or a oneDyear insurance po!icy. They estimate the use$u! !i$e o$ the truc to be 10 years and its residua! "a!ue to be -9,000. I$ Boney uses the doub!e dec!iningDba!ance method, ho much is the truc/s depreciation e6pense $or200;
$11,)/0 -12,1++ -10,+00 -11,;0
20.For accounting purposes, goodi!! is recorded hene"er a company achie"es a !e"e! o$ net income that e6ceeds the industry a"erage.
is recorded when a compan purchases another business. is e6pensed in the period it is recorded because bene>ts $rom goodi!! are dicu!t to identi$y. is ne"er recorded
21.7oodi!! shou!d be ritten oG as soon as possib!e against retained earnings. absent impairment, not be ritten oG because it has an inde>nite !i$e. ritten oG as soon as possib!e as an e6pense.
amortied o'er a maimum of fort ears.
22.Freeman, Inc., reported net income o$ -+0,000 $or 200:. Hoe"er, the company/s income ta6 return e6c!uded a re"enue item o$ -3,000 &reported on the income statement' because under the ta6 !as the -3,000 ou!d not be reported $or ta6 purposes unti! 200;. #ssuming a 30 income ta6 rate, this situation ou!d cause a 200: de$erred ta6 amount o$ -3,000 asset. -3,000 !iabi!ity - 800 asset.
$ 00 liabilit.
23.e$ore c!osing entries ere recorded at the end o$ the accounting period &Becember 31, 200:', the $o!!oing data ere taen $rom the accounts o$ uyno Corporation)
The tota! amount o$ oners/ e5uity that shou!d be reported on the ba!ance sheet dated Becember 31, 200:, a$ter a!! the c!osing entries, is - 339,000. -129,000. -300,000.
%30&'000$
2&$ The maor accounting diGerence beteen interest incurred during a period and cash di"idends dec!ared during the same period is) Interest decreases retained earnings hi!e di"idend dec!ared increases retained earnings
%nterest reduces net income while di'idends declared do not a2ect net income Interest does not aGect net income hi!e di"idends reduce net income There is no maor diGerence. oth are treated identica!!y $or accounting purposes.
2:.In Becember, a 7!oba! 7rocer customer pays in time and recei"es a 2 discounts $or prompt payment. The customer had purchased goods orth -:00. *hich o$ the possib!e ansers be!o correct!y states the ourna! entries to record the payment and the discount taen.
ebit Cash $406 ebit 7llowance for sales discounts $106 Credit 7ccounts recei'able $500 one o$ the abo"e
2;.Here is Internationa! Corp./s income statement $or the month o$ Becember.
*hat is the company/s Becember AITB# to tota! interest co"erage ratio ;.:6 19.:6
14.5 20.26
2.The $o!!oing >nancia! ratios are $or #"erage Corp. and uperior Corp., to hardare stores.
*hich o$ the $o!!oing statements is inconsistent ith the abo"e ratios uperior Corp has a higher return on e5uity primari!y because it has a signi>cant!y higher net income margin #"erage Corp. on a re!ati"e basis uses signi>cant!y more debt >nancing than uperior Corp. #"erage Corp. uti!i4es its assets more eGecti"e!y than uperior Corp. uperior Corp. generates more income per do!!ar o$ sa!es than #"erage Corp.
29.On June 30, 2000, @icroso$t Corporation as ho!ding -+.9 bi!!ion o$ cash that it had co!!ected $rom customers in ad"ance $or $uture so$tare !icenses and the $uture de!i"ery o$ other products and ser"ices. In its >nancia! statements, @icroso$t c!assi>ed and recorded this amount as) part o$ re"enue on its income statement. the asset #ccounts ?ecei"ab!e on its ba!ance sheet.
the liabilit 8nearned 9e'enue on its balance sheet. an e6pense on its income statement.
28.*hich statement is $a!se #n unrea!i4ed gain or !oss on ho!dDtoDmaturity maretab!e securities is recogni4ed in income. #n unrea!i4ed gain or !oss on trading securities is recogni4ed in income.
7n unrealied "ain or loss on a compans common stock held b the owners of the compan is not reco"nied b the compan. #n unrea!i4ed gain or !oss on a"ai!ab!eD$orDsa!e maretab!e securities is not recogni4ed in income.
30.Internationa!, Inc. estab!ished an a!!oance $or bad debts at the end o$ October. In o"ember, Internationa! rote oG a -:00 account recei"ab!e because payment as considered to be remote. *hat ou!d be the eGect o$ the -:00 account recei"ab!e riteDoG on Internationa!/s o"ember >nancia! statements #ssets ou!d decrease, !iabi!ities ou!d remain constant and retained earning ou!d decrease. #ssets ou!d remain constant !iabi!ities ou!d increase and retained earnings ou!d decrease.
o change ou!d be made in tota! assets, !iabi!ities or shareho!der/s e5uity. #ssets ou!d decrease, !iabi!ities ou!d decrease and retained earnings ou!d remain constant.
