2102 Exam 2 Version A Spring 2008/KEY Select the best answer.

Do not erase on your scantron (these are marked wrong from trace pencil lead). Use a new scantron to change your answer. Mis-marked scantrons are NOT fixed. Present Value tables attached. Name: _______________________________ Breakout section time (circle): 8 9 10 11 TA Name (circle one) : Ashley Emilee Leslie Vaughn Instructor: 1. Kerry Corporation has a forklift that it paid $40,000 for a few years ago and the current book
value (carrying value) is $17,000. Kerry is going to sell the forklift for $22,000. In recording this transaction, Kerry should record: a. a gain of $5,000. b.a loss of $18,000. c. a loss of $23,000. d.a reduction of accumulated depreciation of $17,000 e. a reduction of the asset account of $17,000 Book value of $17,000 vs. proceeds of $22,000 = $5,000 gain. Blue: Q. 37

2. Tofu, Inc. had Net Income of $60,000 in 2006: Tofu had 4,000 shares of 3% $75 par value
preferred stock outstanding during 2006. Tofu declared preferred dividends in 2006. Tofu had 30,000 shares of common stock outstanding at the beginning of 2006 and had only one transaction during 2006they reissued 3,000 shares held in treasury on Oct 1st 2006. The basic earnings per share for 2006 is: a. $ 1.77 b. $ 1.87 c. $ 1.95 d. $ 1.66

60,000 [.03 x $75 x 4,000] / weighted average common shares 30,000 x 9/12 = 22,500 33,000 x 3/12 = 8,250 51,000 / 30,750 = 1.66 rounded

Blue: Q. 38

Is Version A on your SCANTRON ?

3. Brightmore Company purchased land and building for $240,000. The appraised values of the
land and building are $80,000 and $240,000, respectively. Based on this information, the journal entry to record the purchase would include a: a. debit to LAND for $80,000. b.credit to BUILDING for $60,000. c. debit to LAND for $60,000. d.credit to BUILDING for $180,000.

Land 80,000/320,000 = $60,000. Building 240,000/320,000 = $180,000. Both are debits.

Blue: Q. 39

4. Edna Enterprises sold a crane with an original cost of $200,000, an estimated life of 10 years
and no salvage. Edna used straight line depreciation. The sale transaction was at the end of the seventh year of the cranes use and Edna received $50,000 for the crane. In recording this transaction, Edna should record: a. a gain of $90,000. b.a loss of $10,000. c. a loss of $60,000. d.a reduction in the asset account of $60,000. e. a credit to cash of $50,000.

200,000/10 = 20,000 per year x 7 years = $140,000 accumulated deprecation. Book value of $60,000 results in $10,000 loss.

Blue: Q. 40

Use the following information for the next 3 questions. Equipment with an 8-year useful life is acquired for $125,000. The estimated salvage value is $5,000. The equipment is expected to produce 25,000 units over its useful life.

5. Using the double-declining balance method, depreciation expense for Year 3 is:
a. $15,000. b.$16,875. c. $16,000. d.$17,578. e. $11,963. 125,000 x 2/8 = 31,250 year 1. 93,750 x 2/8 = 23,438 year 2. 70,313 x 2/8 = 17,578 year 3 Blue: Q. 1

6. If the equipment produces 3,800 units during 2003 (first year)and the units-of-production
method is used, the book value (carrying value) at the End of Year 1 is: a. $106,760.

Is Version A on your SCANTRON ?

b.$121,200. c. $106,000. d.$19,000. e. $101,760. (125,000 5,000) x 3,800/25,000 = 18,240 year 1 deprec exp. BV $125,000 18,240 = 106,760 Blue: Q. 2

7. If the straight-line method is used, the accumulated depreciation after 4 years will be:
a. $62,500. b.$65,000. c. $60,000. d.$57,500. e. $55,000. (125,000 5,000) /8 = $15,000 x 4 = $60,000 Blue: Q. 3

8. LOSS ON THE SALE OF MACHINERY is reported on the income statement as: a. part of gross margin computation. b. part of operating income computation. c. a non-operating item after operating income. d. an extraordinary item at the bottom on the income statement.
Blue: Q. 4 9. The journal entry to record the DECLARATION of a cash dividend would include a: a. credit to CASH. b. debit to RETAINED EARNINGS. c. credit to DIVIDEND EXPENSE. d. debit to DIVIDEND PAYABLE

Blue: Q. 5 10. The cost of an asset that is capitalized on the balance sheet and depreciated over its useful life should include: a. The costs of operating and insuring the asset. b. The property taxes associated with owning the asset. c. The allocated purchase price without sales taxes. d. The costs of getting it ready for initial use. Blue: Q. 6 Use the information below for the next 2 questions.

Is Version A on your SCANTRON ?

A company wants to compare the performance of its 4 divisions using the following information: Division A
Ave. Assets Net Income Sales $100,000 $13,000 $200,000

Division B
$240,000 $29,000 $360,000

Division C
$180,000 $18,000 $300,000

Division D
$120,000 $16,000 $252,000

11. The correct ranking (from best to worst) of the 4 divisions based on return on assets? a. D, A, B, C
b. c. d. B, A, D, C B, A, C, D D, B, A, C none of the above

e.

Blue: Q. 7 Return on assets: A:13%, B 12.08% C 10% D13.3%

12. Which division had the best return on sales?

a. b. c. Division A Division B Division C

d.
Blue: Q. 8

Division D

Return on sales: A 6.5% B 8.05% C 6% D 6.35%

Use the information below for the next 3 questions.
On January 1 Kwok Corp. purchases equipment by signing a $100,000, 10-year noninterestbearing (lump sum) note. The market rate of interest is 8%; and interest is compounded SEMIANNUALLY.

13. The journal entry to record the purchase would include: a. a credit to CASH b. a debit to NOTES PAYABLE c. a debit to DISCOUNT ON NOTES PAYABLE d. a credit to EQUIPMENT
Blue: Q. 9

14. The proceeds obtained when signing this note will be:
a. $61,590. b. $21,911. c. $95,000. d. $46,610. e. $45,640.

Is Version A on your SCANTRON ?

100,000 x PV p=20 i=4% is .4564 = 45,640 Blue: Q. 10

15. In regards to the note that Kwok signed, which of the following is correct?
a. b. c. d. Interest expense will decrease each period. Discount on Notes Payable will increase each period. Notes Payable will decrease each period. The carrying value or net liability increases each period.

Blue: Q. 11 16. Companies would rather classify an expenditure on an existing asset as a renovation that can be added to the cost of an asset (and depreciated going forward) because otherwise they have to expense the full amount and reduce their earnings. In which of these cases can a company get renovation treatment for spending money on an existing asset? a. Expenditure causes management to recalculate all year end bonuses. b. Expenditure adds a new ability to the existing asset. c. Invoice says repair anywhere in the description of services performed. d. Expenditure is 10% or more of the initial cost of the long term asset. Blue: Q. 12

17. Beta Co. reports $220,000 of net income for 2004 and declared a total cash dividend of

$100,000. Throughout 2004, Beta had 120,000 shares of $10 par value common stock issued, and 100,000 shares outstanding. It also had 20,000 shares of $50 par, 8% preferred stock issued and outstanding. Earnings per share for 2004 is: a. $2.00. b. $1.20. c. $1.17. d. $1.40.

$220,000 80,000 / 100,000 outstanding = $1.40

Blue: Q. 13 Use the information below for the next 2 questions.
Nakano Company purchased equipment by issuing a $100,000, 4% periodic note. The note requires 12 annual payments of principal and interest.

18. The amount of Nakanos ANNUAL PAYMENT is: a. $8,859. b. $6,655. c. $10,655. d. $14,651.
100,000 / PV annuity p=12 i=4% 9.3851 = 10,655

Is Version A on your SCANTRON ?

Blue: Q. 14

19. The amount of INTEREST EXPENSE associated with the SECOND PAYMENT will be: a. higher than the interest expense associated with the first payment.
b. lower than the interest expense associated with the first payment. c. the same as the interest expense associated with the first payment. d. unable to determine without more information Blue: Q. 15

20. Bozo Clown Inc. signed a $20,000 note requiring 24 monthly payments of principal and

interest of $941.47 with an annual rate of interest of 12%. When the first monthly payment is made, what is the entry to record the payment? a. Debit CASH for $941.47. b. Credit NOTES PAYABLE for $741.47. c. Debit INTEREST EXPENSE for $200.00. d. Credit INTEREST EXPENSE for $240.00 Entry includes: Interest Expense 20,000 x .12/12 = 200 debit Notes Payable 941.47 200 = 741.47 debit Cash 941.47 credit

Blue: Q. 16

21. A company sells electronics. If their gross profit is down, which of these may be a cause? a. Increase in depreciation expense. b. Loss on sale of warehouse. c. Increase in salaries and wages. d. Decrease in sales volume. e. New law increasing tax rates. Blue: Q. 17 Use the information below for the next 3 questions.
Arial Industries issued $100,000 of bonds on January 1 2004. The bonds pay interest SEMIANNUALLY. A partial amortization schedule follows. Amounts have been left blank on purpose. Interest Expense $2,706.03 $212.21 X Change in Disc Disc. on Bonds 9,799 Bond Face Amount $100,000 Carrying Value $90,201

Date Month 6 Month 12 Month 18

Payment $2,500 $2,500 $2,500

22. What is the face rate of interest on the bonds (hint: remember to express your answer as an
annual rate)?

Is Version A on your SCANTRON ?

a. 4%
b. 3% c. 5% d. 6% Blue: Q. 18

23. Which of these best describes the interest rate in the market when these bonds were issued? a. Market rate was the same as the face rate.
b. Market rate was below the face rate. c. Market rate was above the face rate. d. You dont have enough information to determine the market interest rate. Blue: Q. 19

24. What is the interest expense for the third payment (month 18)? I am looking for the amount
that goes where the X is shown. a. $2,500.00 b. $2,718.58 c. $2,712.21 d. $2,693.85 Blue: Q. 20

Use the information below for the next 2 questions.

ABC, whose tax rate is 30%, has the following account balances (listed randomly) at the end of the year. Taxes Salaries and wages expense Rent expense Cost of goods sold Dividends declared and paid GAIN on the sale of equipment LOSS on discontinued operation Interest expense Sales Treasury stock Utilities expense Advertising & commissions expense 204,00 0 60,000 5,000 140,000 18,000 15,000 40,000 40,000 960,000 14,000 10,000 40,000

25. On its income statement, ABC will report Income before extraordinary items,
discontinued operation and taxes of: a. $448,000 b. $680,000 c. $495,000 d. $640,000 e. $465,500
Sales

$960,00

Is Version A on your SCANTRON ?

COGS Gross Profit Operating expenses: Salaries and wages expense Rent expense Utilities expense Advertising & commissions expense operating income Interest expense Gain on sale of equipment income before taxes and extra items Taxes income before extra items Extraord items: Loss on discontinued op, net of tax Net Income

0 $140,00 0 $820,00 0 $ 60,000 $ 5,000 $ 10,000 $ 40,000 $705,00 0 $ 40,000 $ 15,000 $680,00 0 $204,00 0 $476,00 0 $ 28,000 $448,00 0

Blue: Q. 21

26. On its income statement, ABC will report Gross Profit of:
a. b. c. d. e. $710,000. $574,000. $820,000. $806,000. $834,000.

Blue: Q. 22

Use the information below for the next 2 questions.

On January 1, 2000, a corporation issued $1,000,000 of 18-year bonds with a face rate of 6%. Interest is paid SEMIANNUALLY. The market rate of interest on January 1, 2000 was 8%.

27. The PROCEEDS from the bond issue were:

a. $804,008 b. $1,206,120 c. $1,117,040 d. $810,949

1,000,000 x.03 = 30,000 x pv annuity p=36 i=4% 18.9083 = 567,249 1,000,000 x pv p=36 i=4% .2437 = 243,700 $810,949

Is Version A on your SCANTRON ?

Blue: Q. 23

28. If the market rate on the issue date of the above bond had been 5% instead of 8%, which of
these would be TRUE? a. the initial entry to record the bond would include a debit to discount on bond payable account. b. interest expense on this bond would be less than the interest payments. c. the carrying value of the bond would go up each payment. d. the proceeds upon issue would be less than the face amount. Blue: Q. 24 29. Brother Inc. has a truck that cost $60,000 when originally purchased. Brother Inc. decided to replace the engine and transmission at the end of year 4 when the accumulated depreciation was $45,000. The replacements cost $10,000 and are expected to increase the useful life and salvage value of the truck. What is the proper way to record the cost of the engine and transmission replacement? a. Record it as repair expense. b. Add it to the cost of the asset and recompute depreciation expense going forward. c. Add it to the cost of the asset and recompute depreciation expense for every year since purchase. d. Add it to the accumulated depreciation account and recomputed depreciation expense going forward. Blue: Q. 25

30. Gold Inc. had the following transactions during 2006, its first year of operation:
Issued 6,000 shares $50 par value preferred stock for $50. Issued 50,000 shares common stock, par value $2.00 for $10.00 per share. Reported Net Income of $160,000. Purchased $20,000 worth of treasury stock. Declared (but didnt pay) a dividend of $40,000. What is their total equity at the end of 2006? a. $980,000 b. $940,000 c. $920,000 d. $900,000 300,000 + 500,000 + 160,000 20,000 40,000 = $900,000 Blue: Q. 26

31. Sally rebuilt her generator with an original cost of $12,000 (no salvage expected) on the first

day of the fifth year of a six year estimated life. Sally uses the straight-line depreciation method. The rebuilding cost $1,400 and will extend the life of the generator to a seventh year with no salvage. What is the depreciation in year 5? a. b. $2,000 $1,333

Is Version A on your SCANTRON ?

c. d.

$1,800 $2,700

Blue: Q. 27

32. George Ryan obtained a car loan that requires him to make payments of $235 per month for 36 months at which time the loan is paid off. This is an example of a: a. lump-sum note b. periodic payment note c. noninterest-bearing note d. periodic and lump-sum note
Blue: Q. 28

33 .Hunter Corporation beginning of year retained earnings balance was $28,300. The corporation declared and paid $19,400 during the year and ended the year with a $36,500 balance. The net income or loss for the year was: a. $(11,200) b. $ 8,200 c. $ 17,100 d. $ 27,600
Blue: Q. 29

34. Carolina Corporation just issued 10,000 shares of $2 par value common stock for $7.50 per share. The journal entry to record this transaction will include a: a. debit to Donated Capital for $75,000 b. credit to Common Stock for $75,000 c. debit to Retained Earnings for $20,000 d. credit to Paid-in-Capital in Excess of Par--Common Stock for $55,000
Blue: Q. 30

35. Where in the balance sheet is preferred stock usually reported? a. long-term liabilities b. stockholders' equity c. contra stockholders' equity d. After long-term liabilities but before stockholders' equity
Blue: Q. 31

36.

When the market rate of interest on the date bonds are issued is higher than the face rate of interest on the bonds: a. the proceeds from the issuance of the bonds will be greater than the face value of the bonds b. the bonds are issued at a premium c. the bonds are issued at a discount

10

Is Version A on your SCANTRON ?

d. both a and c are correct

Blue: Q. 32

37. Ferris Corporation issued $40,000,000 of 20-year, 9 percent bonds, paying interest semi-annually. The market interest rate at the time of issuance was 10 percent. One step in computing the issue price of the bonds is to multiply the interest payment times the present value of a. $1 for 40 periods and 5 percent b. $1 for 40 periods and 4.5 percent c. an annuity of $1 for 40 periods and 4.5 percent d. an annuity of $1 for 40 periods and 5.0 percent
Blue: Q. 33

38. Lester Corporation purchased equipment with a fair value of $150,000 on a 6 percent note. The note requires four end-of-year payments of $43,290. What would be the carrying value of the note immediately after the first payment. a. $106,710 b. $115,710 c. $141,000 d. unable to determine from the information given
Blue: Q. 34

39. Water Products Company incurred a pre-tax extraordinary loss of $248,000 and a pre-tax extraordinary gain of $193,500 in the same accounting period. Assuming an effective tax rate of 37%, the net amount that would appear on Water's income statement for extraordinary items is a: a. $54,500 loss b. $34,335 loss c. $20,165 loss d. $37,260 gain
Blue: Q. 35

40. Noncash assets given to a corporation in exchange for stock would be recorded at: a. their book value when owned directly by the stockholder b. cost less accumulated depreciation c. fair market value d. depreciable cost
Blue: Q. 36

11

Is Version A on your SCANTRON ?

You are done! Enjoy the rest of your day!

12

Is Version A on your SCANTRON ?

Present Value of $1: interest rate 1% 4% # of periods 2 3 12 20 24 36 .9803 .9246 .9706 .8890 .8874 .6246 .8195 .4564 .7876 .3901 .6989 .2437 Future Value of $1: interest rate 1% 4%

8% .8573 .7938 .3971 .2145 .1577 .0626

12% .7972 .7118 .2567 .1037 .0659 .0169

8% # of periods 2 1.0201 1.0816 1.1664 3 1.0303 1.1249 1.2597 12 1.1268 1.6010 2.5182 20 1.2202 2.1911 4.6610 24 1.2697 2.5633 6.3412 36 1.4308 4.1039 15.9682 Present Value of an annuity of $1: interest rate 1%

12% 1.2544 1.4049 3.8960 9.6463 15.1786 59.1356

4%

8%

12% 1.6901 2.4018 6.1944 7.4694 7.7843 8.1924

# of periods 2 1.9704 1.8861 1.7833 3 2.9410 2.7751 2.5771 12 11.2551 9.3851 7.5361 20 18.0456 13.5903 9.8181 24 21.2434 15.2470 10.5288 36 30.1075 18.9083 11.7172 Future Value of an annuity of $1: interest rate 1% # of periods 2 3 12 20 24 36 2.0100 3.0301 12.6825 22.0190 26.9735 43.0769

4% 2.0400 3.1216 15.0258 29.7781 39.0826 77.5983

8% 2.0800 3.2464 18.9771 45.7620 66.7648 187.1021

12% 2.1200 3.3744 24.1331 72.0524 118.1552 484.4631

13

Is Version A on your SCANTRON ?