FMGT 1321 Midterm 1 Review Questions

Question 1 Discontinued Operations.

During the year 2010, McCracken Ltd. entered into an agreement to sell its Trucking Division in order to focus effort on the refinancing and debt consolidation operations. For purposes of income statement reporting, the Trucking Division qualifies as a separate component of the business. The Trucking Division incurred a net loss of $250,000 from the beginning of the year to the date of the sale, December 15, 2010. The combined assets of the Trucking Division had a book value of $7,340,000 and were sold for $9,000,000 on December 15, 2010. Assume McCracken has a tax rate of 40 percent. Instructions

Determine the amounts McCracken should report for the following sections of the discontinued operations section of the December 31, 2010 income statement: 1. Loss on operation of Trucking Division. 2. Gain/Loss on Disposal of Trucking Division. Question 2 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 Statement a. Current Assets b. Investments c. Property, Plant, and Equipment d. Intangible Assets e. Other Assets f. Current Liabilities g. Long-term Debt h. Capital Shares i. Retained Earnings
Question 2 Continues on next page:

Income and Retained Earnings j. k. l. m. n. o. p. Sales Revenue Cost of Goods Sold Operating Expenses Other Revenues and Gains Other Expenses and Losses Retained Earnings Section Not on the Statements

Account balances taken from the ledger of the Broshko Company on December 31, 2010 follow: ____ ____ ____ ____ ____ ____ ____ ____ ____ 1. Capital Shares, no par 2. Loss on Sale of Equipment 3. Buildings 4. Office Expense 5. Allowance for Doubtful Accounts 6. Notes PayableShort Term 7. Accum. DepreciationBuildings 8. Mortgage Payable due 2012 9. Depletion Expense _____ 16. Merchandise Inventory _____ 17. Salaries and Wages Expense _____ 18.Merchandise on order with supplier _____ 19. Interest Revenue _____ 20. Selling Expense _____ 21. Interest Expense _____ 22. Taxes Payable _____ 23. Insurance Expense _____ 24. Advertising Expense _____ 25. Long-Term Investments _____ 26. Accounts Receivable _____ 27. Land _____ 28. Accounts Payable _____ 29. Error made in calculating 2008 depreciation expense _____ 30. Gain from early extinguishment of debt

____ 10. Freight-Out ____ 11. Sales ____ 12. Dividends Declared ____ 13. Retained Earnings Dec. 31, 2009 ____ 14. Cash ___ 15. Sales Discounts

Question 3 The following balance sheet has been submitted to you by an inexperienced bookkeeper. Instructions List your suggestions for improvements in the format of the balance sheet. Consider both terminology deficiencies as well as classification inaccuracies. Cowell Manufacturing, Inc. Balance Sheet For the Period Ended December 31, 2010 Assets Fixed AssetsTangible Equipment Less: reserve for depreciation Factory supplies Land and buildings Less: reserve for depreciation Plant site held for future use Current Assets Accounts receivable Cash Inventory Treasury stock (at cost) Fixed AssetsIntangible Goodwill Notes receivable Patents Deferred Charges Advances to salespersons Prepaid rent Returnable containers TOTAL ASSETS Liabilities Current Liabilities Accounts payable Allowance for doubtful accounts Common stock dividend distributable Income taxes payable Sales taxes payable Long-Term Liabilities, 5% debenture bonds, due 2016 Reserve for contingencies TOTAL LIABILITIES $110,000 (40,000) 400,000 (150,000)

$ 70,000 22,000 250,000 90,000 175,000 80,000 220,000 20,000 80,000 40,000 146,000 60,000 27,000 75,000

$ 432,000

495,000

26,000

162,000 $1,235,000

$140,000 8,000 35,000 42,000 17,000 500,000 150,000

$ 242,000 650,000 892,000

Equity Capital shares, no par value, issued 12,000 shares with 60 shares held as treasury stock $240,000 Dividends paid (20,000) Earned surplus 23,000 Other accumulated past earnings 100,000 TOTAL EQUITY 343,000 TOTAL LIABILITIES AND EQUITY $1,235,000 NOTES: Note 1. The reserve for contingencies has been created by charges to earned surplus and has been established to provide a cushion for future uncertainties. Note 2. The inventory account includes only items physically present at the main plant and warehouse. Items located at the company's branch sales office amounting to $20,000 are excluded since the company has consistently followed this procedure for many years.

Question 4 Fill in the blanks below with the accounting term(s) that best completes each sentence. 1. A soundly developed conceptual framework is a __________ set of standards and rules. ____________ and ____________________ are the fundamental qualities that make accounting information useful for decision-making. 2. Enhancing qualitative characteristics include __________________________ and ____________________. 3. Liabilities have two essential characteristics. 1. They represent an __________________ and 2. the entity has a _______________________. 4. While consolidated financial statements are prepared from the perspective of the _____________, taxes are paid from the perspective of the _______________. 5. Collectability is one of the three conditions of the revenue recognition principle. Assuming the other two conditions are met, revenue should only be recognized if collectability is ______________________. 6. The __________________ stipulates that anything that is relevant to decisions should be included in the financial statements. 7. A companys Management Discussion and Analysis (MD&A) is an example of ____________________________. 8. A ____________- based approach as used in Canadian GAAP and IFRS is sometimes criticized for being too ________. 9. Under the _____________ principle, ___________ incurred during a particular period are matched with ___________ earned during that same period. 10. The ___________________ is based on the assumption that a business enterprise will continue to operate for the foreseeable future. 11. One of the assumptions of the ____________________ is the valuation at a particular point in time. 12. ______________ is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. 13. Standard setters have given companies the option to use ___________ instead of historical costs. 14. Good financial reporting should be based on ____________ and _______________analysis.

Question 5 Accounting conceptsmatching. Listed below are several information characteristics and accounting principles and assumptions. Match the letter of each with the appropriate phrase that states its application. (Items a through k may be used more than once or not at all.) a. b. c. d. e. f. Economic entity assumption Going concern assumption Monetary unit assumption Periodicity assumption Historical cost principle Revenue recognition principle g. h. i. j. k. Matching principle Full disclosure principle Relevance characteristic Reliability characteristic Comparability characteristic

___ 1. Stable-dollar assumption (do not use historical cost principle). ___ 2. Earning process completed and realized or realizable. ___ 3. Presentation faithfulness. of error-free information with representational

___ 4. Yearly financial reports. ___ 5. Accruals and deferrals in adjusting and closing process. (Do not use going concern.) ___ 6. Useful standard measuring unit for business transactions. ___ 7. Notes as part of necessary information to a fair presentation. ___ 8. Affairs of the business distinguished from those of its owners. ___ 9. Business enterprise assumed to have a long life. ___ 10. Valuing assets at amounts originally paid for them. ___ 11. Application of the same accounting principles as in the preceding year. ___ 12. Summarizing significant accounting policies. ___ 13. Presentation of timely information with predictive and feedback value. Question 6 : Journal entriespercentage-of-completion. McCain Construction Company was awarded a contract to build a bridge in a suburb of Calgary at a total contract price of $9,000,000. The estimated total costs to complete the project were $7,000,000. Instructions (a) Make the entry to record construction costs of $4,200,000, on construction in process to date. (b) Make the entry to record progress billings of $1,800,000. (c) Make the entry to recognize the profit that can be recognized to date, on a percentage-of-completion basis. 5

Question 7 Presented below is information which relates to LeGeyt Company for 2010. Collections of credit sales Retained earnings, January 1, 2010 Sales Selling and administrative expenses Casualty loss (pre-tax) Cash dividends declared on common stock Cost of goods sold Loss resulting from calculation error on amortization charge in 2008 (pre-tax) Other revenues Other expenses Loss from early extinguishment of debt (pre-tax) Gain from transactions in foreign currencies (pre-tax) Proceeds from sale of Strathroy common stock Additional information: 1. Early in 2010, LeGeyt changed amortization methods for its plant assets from the double declining-balance to the straight-line method. The affected assets were purchased at the beginning of 2008 for $200,000, had no residual value, and had useful lives of 10 years. Amortization expense of $20,000 is included in the "Selling and Administrative Expenses" of $290,000 above. 2. On September 1, 2010, LeGeyt sold one of its segments (product line) to Best Industries for a gain (pre-tax) of $550,000. During the period January 1 to August 31, the discontinued segment incurred an operating loss (pre-tax) of $480,000. This loss is not included in any of the numbers shown above. 3. Included in "Selling and Administrative Expenses" is "Bad Debts Expense" of $19,000. LeGeyt bases its bad debts expense upon a percentage of sales. In 2008 and 2009, the percentage was .5 percent. In 2010, the percentage was changed to 1 percent. Instructions Prepare in good form a multiple-step income statement for 2010. Assume a 20 percent tax rate and that 20,000 shares of common stock were outstanding during the year. $1,100,000 800,000 1,900,000 290,000 350,000 34,000 1,100,000 460,000 180,000 120,000 340,000 220,000 60,000

Question 8 On February 1, 2010, Marcos Contractors agreed to construct a building at a contract price of $3,000,000. Marcos estimated total construction costs would be $2,000,000 and the project would be finished in 2012. Information relating to the costs and billings for this contract is as follows: Total costs incurred to date Estimated costs to complete Customer billings to date Collections to date 2010 $ 750,000 1,250,000 1,100,000 1,000,000 2011 $1,320,000 880,000 2,000,000 1,750,000 2012 $2,300,000 -03,000,000 2,950,000

Instructions Under the earnings approach Fill in the correct amounts on the following schedule. For percentage-ofcompletion accounting show the gross profit that should be recorded for 2010, 2011, and 2012. Percentage-of-Completion Gross Profit 2010 2011 2012 _________ _________ _________