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Midterm II Spring semester 2018, questions and answers

Principles of Financial Accounting (New York University)

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Principles of Financial Accounting

Mid-Term Exam 2 (Practice Exam)
Professor Yiwei Dou

Name ____________________________

Section: 8:00 AM Class / 9:30 AM Class / 11:00 AM Class (Please circle)

General Instructions:
Please follow the Stern School’s Code of Conduct requirements. The penalty for cheating is
an automatic grade of F for the course and appearance before the Student Disciplinary
Committee.

1. You have 1 hour and 10 minutes to complete the exam.

2. This exam is closed book. You are permitted to use a calculator.
3. Please check that you have all the pages. Do not begin until instructed to do so.
4. If a question is ambiguous, write your assumptions on the exam along with your
answer. You will receive credit provided your assumptions are necessary and
reasonable.
5. Write your answers neatly in the space provided.
6. You must turn in your exam packet before you leave, even if you don’t want to
have it graded.
7. Exams written in pencil will not be considered for a re-grade. Use a pen if you
think you might submit your exam for a re-grade request.
8. Review the complete exam in order to allocate your time appropriately.
9. Good luck!

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Question I (7 Multiple choice questions; 21 points)

Write your answers to each multiple-choice question in the table below (Do not
circle the answers).

Question Answer

1 (3 points) C

2 (3 points) D

3 (3 points) C

4 (3 points) A

5 (3 points) A

6 (3 points) D

7 (3 points) D

1. Which of the following would not be a cash flow from financing activities?
A. Issuance of common stock for cash.
B. Borrowing cash on a long-term note payable.
C. Collection of a cash dividend.
D. Repayment of principal on a long-term note payable.

2. Which of the following statements about bonds that were issued at par is incorrect?
A. The market rate of interest equals the coupon rate.
B. The interest expense over the life of the bonds will equal the cash interest payments.
C. The present value of the bonds' future cash flows equals the bonds' face value.
D. The book value of the bond payable decreases over the life of the bonds.

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3. Which of the following statements about the statement of cash flows is correct?
A. The statement of cash flow shows the cash change of a company on a specific date.
B. Cash received for interest from debt investing would be classified as an investment
cash flow.
C. The acquisition of land by issuing bonds payable would not appear on the statement of
cash flows.
D. Cash paid for interest would be classified as a financing cash flow.

4. A company prepared the following journal entry:

Dr: Cash 9750
Dr: Discount on bonds payable 250
Cr: Bonds payable 10000
Which of the following statements incorrectly describes the effect of this journal entry
on the financial statements?
A. Total liabilities increase by $10000.
B. Discount on bonds payable is reported on the balance sheet as a contra-liability
account.
C. Assets increase by $9750.
D. The cash inflow $9750 is reported as a cash flow from financing activities.

5. GJ Company, a manufacturer, has provided the following information pertaining to its

recent year of operation:

 Net income, $500,000;

 Accounts payable decreased $42,000;
 Prepaid assets increased $31,000;
 Depreciation expense was $53,000;
 Accounts receivable decreased $41,000;
 Loss on sale of a depreciable asset was $31,000;
 Wages payable increased $19,000;
 Unearned revenue decreased $31,000;
 Patent amortization expense was $5,000.

How much was GJ's net cash inflow from operating activities?
A. $545,000
B. $607,000
C. $514,000
D. $463,000

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6. On January 1, 2010, Tonika Corporation issued a four-year, $10,000, 7% bond. The

interest is payable annually each December 31. The issue price was $9,668 based on an
8% effective interest rate. Assuming effective-interest amortization is used, what is the
book value of the bonds as of December 31, 2010 (to the nearest dollar)?
A. $8,968
B. $9,945
C. $9,641
D. $9,741

7. Atkins Corporation has provided the following information for the year ended
December 31, 2010:

 The equipment account balance increased $200,000.

 The equipment accumulated depreciation account increased $35,000.
 Equipment costing $50,000 was sold during the year resulting in a $10,000 gain.
 Depreciation expense on the equipment recorded during the year was $65,000.

Which of the following statements is correct with respect to cash flow from investing
activities determination? Assume that the equipment purchase and sale resulted in cash
flows.
A. A $60,000 cash inflow is reported from the equipment sale.
B. A $200,000 cash outflow is reported for equipment purchases.
C. A $50,000 cash outflow is reported for the equipment sale.
D. A $250,000 cash outflow is reported for equipment purchases.

Question II (18 points)

Border Company purchased a truck that cost $17,000. The company signed a $17,000
note payable that specified four equal annual payments (at each year-end), each of which
includes a payment on the principal and interest on the unpaid balance at 10% per annum.

Requirements:

1. Calculate the amount of each equal payment (round to the nearest dollar).

$17,000  3.1699 (present value of annuity, 10%, 4 periods) = $5,363

2. Prepare the journal entry to record the purchase of the truck.

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Truck 17,000
Notes payable 17,000

3. Prepare the journal entry to record the first annual payment on the note (assume no
interest has been accrued during the year).

Notes payable 3,663

Interest expense 1,700
Cash 5,363

4. Prepare the journal entry to record the last annual payment on the note (assume no
interest has been accrued during the year).

Notes payable 4,875

Interest expense 488
Cash 5,363

5. Will the interest paid with the first annual payment be more or less than the interest
paid with the second annual payment? Explain your answer.

The interest paid on the first installment will be more than the interest on the second
payment because the book value of notes payable decreases over years.

Question III (31 points)

Alethea Inc.
Comparative Balance Sheets

Dec. 31, 2010 Dec. 31, 2011

Assets
Current Assets:
Cash and cash equivalents $50,000 $65,000
Accounts Receivable, net 160,000 166,000
Inventory 210,000 214,000

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Total Current Assets 420,000 445,000

Property & Equipment - at cost 350,000 380,000
Less Accumulated depreciation (120,000) (152,000)
Net Property & Equipment 230,000 228,000
Total Assets $650,000 $673,000
Liabilities and Equity
Current Liabilities:
Accounts payable - trade $85,000 $83,000
Deferred Revenue 12,000 $15,000
Interest Payable 8,000 9,000
Total Current Liabilities 105,000 107,000
Long-term Bonds Payable 120,000 90,000
Common Stock 300,000 350,000
Retained Earnings 125,000 126,000
Total Liabilities and Equity $650,000 $673,000

Alethea Inc.
Income Statement
For year ended December 31, 2011
Revenues $800,000
Cost of Goods Sold 450,000
Gross Profit 350,000
Wages and Salaries 200,000
Depreciation Expense 48,000
Interest Expense 7,000
Total operating expense 255,000
Operating Profit 95,000
Plus: Gain on Sale of Equipment 5,000
Income before tax 100,000
Income Tax Expense 30,000
Net Income $70,000

Additional information:
 During the year 2011, Alethea Inc. sold equipment costing $30,000 with $16,000 in
Accumulated Depreciation.
 Dividends were declared and paid to common stockholders during the year. No
shares were repurchased during the year.
 No new debt was issued during 2011.

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Required:
1. Prepare a Statement of Cash Flows for Alethea Inc. for the year ended December
31, 2011. Show the cash flows from operations using the indirect method. Check
whether the total change in cash can articulate with the beginning and the ending
balances of cash. Show your work for each part if you want partial credit.
Answers with no work (i.e. with only final numbers) will not be given full credit.

Change in A/R=166,000-160,000=6,000
Change in Inventory=214,000-210,000=4,000
Change in A/P=83,000-85,000= (2,000)
Change in Deferred Revenue= 15,000-12,000=3,000
Change in Interest Payable=9,000-8,000=1,000

Alethea Inc.
Statement of Cash flows
December 31, 2011

CFFO section-indirect method

Net income 70,000
Adjustments: +Depreciation expense 48,000
–Gain on sale of Equipment (5,000)
–Change in A/R (6,000)
–Change in Inventory (4,000)
+Change in A/P (2,000)
+Change in Deferred Revenue 3,000
+Change in Interest Payable 1,000
Net CFFO 105,000

Cash spent to acquire PPE= end balance-beginning balance+deprecation + BVof

PPE sold =228,000-230,000+48,000+(30,000-16,000)
=60,000

Cash received from the sale of PPE= BV of PPE sold + gain on sale of PPE
= 30,000-16,000+5,000=19,000
CFFI section:
Cash received from the sale of PPE 19,000
Cash spent to acquire PPE (60,000)
Net CFFI (41,000)

Repayment of debt= 120,000-90,000=30,000

Cash received from new stock issuance=350,000-300,000=50,000
Cash dividends=Beginning balance of RE+NI- Ending balance of RE
=125,000+70,000-126,000
=69,000

CFFF section:

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Repayment of debt (30,000)

Cash received from new stock issuance 50,000
Cash dividends (69,000)
Net CFFF (49,000)

Total change in cash 15,000

Beginning cash 50,000
Ending cash 65,000

2. Calculate the total cash paid to suppliers during 2011.

New inventory purchased= change in inventory + COGS=4,000+450,000=454,000

Cash paid to suppliers= New inventory purchased- Change in A/P

=454,000+2,000=456,000

Question IV (30 points)

On January 1, 2010, AML company issues bonds maturing in 5 years. The par value of
the bonds is $100,000, the coupon rate is 8%, and the compounding period is semi-
annually. The market initially prices these bonds using market interest rate 10%
compounded semi-annually. The market interest rate on June 30, 2010 was 6%. On
Dec.31, 2012, the company had excess cash and purchased back all the bonds. The
market interest rate on Dec. 31, 2012 was 8%.
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1. Were the bonds issued at par, a discount or a premium?

At a discount

2. Calculate the issue price.

The amount of periodic cash interest payment= 100,000*4%=4,000

Issue price=4,000*[1/(1+5%)+1/(1+5%)2+….+1/(1+5%)10]+100,000/(1+5%)10
=4,000*7.7217+100,000*0.6139
=92,277

3. Record journal entry on the date of issuance.

Cash 92,277
Discount on bonds payable 7,723
Bonds payable 100,000

4. Will the interest expense increase or decrease over the years?

Increase

5. Calculate the interest expense on Jun 30, 2010.

Interest expense = 92,277*5%= 4,614

6. Record journal entry on the interest expense on Jun 30, 2010.

Interest expense 4,614

Discount on bonds payable 614
Cash 4,000

7. What is the net book value of bonds payable on Dec 31, 2012?

The book value of bonds payable on Dec 31, 2012

=4,000*[1/(1+5%)+1/(1+5%)2+….+1/(1+5%)4]+100,000/(1+5%)4

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= 4,000*3.5460+100,000*0.8227
=96,454

8. What is the market value of bonds payable on Dec 31, 2012?

The market value of bonds payable on Dec 31, 2012

=4,000*[1/(1+4%)+1/(1+4%)2+….+1/(1+4%)4]+100,000/(1+4%)4
= 4,000*3.6299+100,000*0.8548
=100,000

9. Record journal entry on the retirement of bonds on Dec 31, 2012.

Bonds Payable 100,000

Loss on the retirement of bonds 3,546
Cash 100,000
Discount on bonds payable 3,546

10. Describe the effects of the journal entries in questions 3, 6, and 9 on CFFO, CFFI,
and CFFF. For example, “CFFF decreases by ** amount.”

In 3, CFFF increases by 92,277

In 6, CFFO decreases by 4,000
In 9, CFFF decreases by 100,000

Points Available Points Received

Question I 21

Question II 18

Question III 31

Question IV 30

TOTAL 100

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Present Value of $1
Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.9009 0.8929 0.8850 0.8772 0.8696 0.8621 0.8547 0.8475 0.8403 0.8333
2 0.9803 0.9612 0.9426 0.9246 0.9070 0.8900 0.8734 0.8573 0.8417 0.8264 0.8116 0.7972 0.7831 0.7695 0.7561 0.7432 0.7305 0.7182 0.7062 0.6944
3 0.9706 0.9423 0.9151 0.8890 0.8638 0.8396 0.8163 0.7938 0.7722 0.7513 0.7312 0.7118 0.6931 0.6750 0.6575 0.6407 0.6244 0.6086 0.5934 0.5787
4 0.9610 0.9238 0.8885 0.8548 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830 0.6587 0.6355 0.6133 0.5921 0.5718 0.5523 0.5337 0.5158 0.4987 0.4823
5 0.9515 0.9057 0.8626 0.8219 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209 0.5935 0.5674 0.5428 0.5194 0.4972 0.4761 0.4561 0.4371 0.4190 0.4019
6 0.9420 0.8880 0.8375 0.7903 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645 0.5346 0.5066 0.4803 0.4556 0.4323 0.4104 0.3898 0.3704 0.3521 0.3349
7 0.9327 0.8706 0.8131 0.7599 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132 0.4817 0.4523 0.4251 0.3996 0.3759 0.3538 0.3332 0.3139 0.2959 0.2791
8 0.9235 0.8535 0.7894 0.7307 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665 0.4339 0.4039 0.3762 0.3506 0.3269 0.3050 0.2848 0.2660 0.2487 0.2326
9 0.9143 0.8368 0.7664 0.7026 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241 0.3909 0.3606 0.3329 0.3075 0.2843 0.2630 0.2434 0.2255 0.2090 0.1938
10 0.9053 0.8203 0.7441 0.6756 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855 0.3522 0.3220 0.2946 0.2697 0.2472 0.2267 0.2080 0.1911 0.1756 0.1615

Present Value of Annuity of $1

Period 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.9901 0.9804 0.9709 0.9615 0.9524 0.9434 0.9346 0.9259 0.9174 0.9091 0.9009 0.8929 0.8850 0.8772 0.8696 0.8621 0.8547 0.8475 0.8403 0.8333
2 1.9704 1.9416 1.9135 1.8861 1.8594 1.8334 1.8080 1.7833 1.7591 1.7355 1.7125 1.6901 1.6681 1.6467 1.6257 1.6052 1.5852 1.5656 1.5465 1.5278
3 2.9410 2.8839 2.8286 2.7751 2.7232 2.6730 2.6243 2.5771 2.5313 2.4869 2.4437 2.4018 2.3612 2.3216 2.2832 2.2459 2.2096 2.1743 2.1399 2.1065
4 3.9020 3.8077 3.7171 3.6299 3.5460 3.4651 3.3872 3.3121 3.2397 3.1699 3.1024 3.0373 2.9745 2.9137 2.8550 2.7982 2.7432 2.6901 2.6386 2.5887
5 4.8534 4.7135 4.5797 4.4518 4.3295 4.2124 4.1002 3.9927 3.8897 3.7908 3.6959 3.6048 3.5172 3.4331 3.3522 3.2743 3.1993 3.1272 3.0576 2.9906
6 5.7955 5.6014 5.4172 5.2421 5.0757 4.9173 4.7665 4.6229 4.4859 4.3553 4.2305 4.1114 3.9975 3.8887 3.7845 3.6847 3.5892 3.4976 3.4098 3.3255
7 6.7282 6.4720 6.2303 6.0021 5.7864 5.5824 5.3893 5.2064 5.0330 4.8684 4.7122 4.5638 4.4226 4.2883 4.1604 4.0386 3.9224 3.8115 3.7057 3.6046
8 7.6517 7.3255 7.0197 6.7327 6.4632 6.2098 5.9713 5.7466 5.5348 5.3349 5.1461 4.9676 4.7988 4.6389 4.4873 4.3436 4.2072 4.0776 3.9544 3.8372
9 8.5660 8.1622 7.7861 7.4353 7.1078 6.8017 6.5152 6.2469 5.9952 5.7590 5.5370 5.3282 5.1317 4.9464 4.7716 4.6065 4.4506 4.3030 4.1633 4.0310
10 9.4713 8.9826 8.5302 8.1109 7.7217 7.3601 7.0236 6.7101 6.4177 6.1446 5.8892 5.6502 5.4262 5.2161 5.0188 4.8332 4.6586 4.4941 4.3389 4.1925

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