1. Isaac Inc. began operations in January 2013. For certain of its property sales, Isaac recognizes income in the period of sale for financial reporting

1. Isaac Inc. began operations in January 2013. For certain of its property sales, Isaac recognizes income in the period of sale for financial reporting purposes. However, for income tax purposes, Isaac recognizes income when it collects cash from the buyer's installment payments. In 2013, Isaac had $600 million in sales of this type. Scheduled collections for these sales are as follows: Assume that Isaac has a 30% income tax rate and that there were no other differences in income for financial statement and tax purposes. Ignoring operating expenses, what deferred tax liability would Isaac report in its year-end 2013 balance sheet? 2. Beresford Inc. purchased several investment securities during 2012, its first year of operations. The following information pertains to these securities. The fluctuations in their fair values are not considered permanent. What balance sheet amount would Beresford report for its total investment securities at 12/31/2012? 3. Hutton Construction specializes in the construction of commercial and industrial buildings. The contractor is experienced in bidding long-term construction projects of this type, with the typical project lasting fifteen to twenty-four months. The contractor uses the percentage-of-completion method of revenue recognition since, given the characteristics of the contractor's business and contracts, it is the most appropriate method. Progress toward completion is measured on a cost to cost basis. Hutton began work on a lump-sum contract at the beginning of 2014. As bid, the statistics were as follows: Lump-sum price (contract price) $4,000,000 Estimated costs Labor $ 850,000 Materials and subcontractor 1,750,000 Indirect costs 400,000 3,000,000 $1,000,000 At the end of the first year, the following was the status of the contract: Billings to date $2,230,000 Costs incurred to date Labor $ 464,000 Materials and subcontractor 1,098,000 Indirect costs 193,000 1,755,000 Latest forecast total cost 3,000,000 It should be noted that included in the above costs incurred to date were standard electrical and mechanical materials stored on the job site, but not yet installed, costing $105,000. These costs should not be considered in the costs incurred to date. Instructions (a) Compute the percentage of completion on the contract at the end of 2014. (b) Indicate the amount of gross profit that would be reported on this contract at the end of 2014. (c) Make the journal entry to record the income (loss) for 2014 on Hutton?s books. 4. Computation of selected ratios. The following data is given: December 31, 2013 2012 Cash $ 66,000 $ 50,000 Accounts receivable (net) 68,000 60,000 Inventories 90,000 110,000 Plant assets (net) 383,000 325,000 Accounts payable 57,000 40,000 Salaries and wages payable 10,000 5,000 Bonds payable 70,000 70,000 10% Preferred stock, $40 par 100,000 100,000 Common stock, $10 par 120,000 90,000 Paid-in capital 80,000 65,000 Retained earnings 170,000 175,000 Net credit sales 800,000 Cost of goods sold 600,000 Net income 80,000 Instructions Compute the following ratios: (a) Acid-test ratio at 12/31/13 (b) Receivables turnover in 2013 (c) Inventory turnover in 2013 (d) Profit margin on sales in 2013 (e) Rate of return on common stock equity in 2013 (f) Book value per share of common stock at 12/31/13 5. a. Prepare a cash flow statement for the following information. b. Include a cash reconciliation statement. Balance Sheet ($) Jan 1 Dec 31 ASSETS: Current Assets: Cash 310,000 600,000 Marketable Securities 1,200,000 1,000,000 Accounts Receivable, net 290,000 330,000 Inventory 3,000,000 4,000,000 Prepaid Expenses 200,000 300,000 Total Current Assets 5,000,000 6,230,000 Total Fixed Assets, net 2,500,000 2,000,000 Total Assets 7,500,000 8,230,000 LIABILITIES & EQUITIES Current Liabilities: Accounts Payable 1,500,000 1,000,000 Notes Payable 1,000,000 1,000,000 Accrued Expenses 500,000 800,000 Total Current Liabilities 3,000,000 2,800,000 Total Long-term Liabilities 1,000,000 1,500,000 Total Liabilities 4,000,000 4,300,000 Preferred Stock 500,000 500,000 Common Stock 500,000 500,000 Capital in Excess of Par 1,000,000 1,000,000 Retained Earnings 1,500,000 1,930,000 Total Stockholders Equity 3,500,000 3,930,000 Total Liabilities and Equity 7,500,000 8,230,000 Income Statement (for ques 6) Sales 10,000,000 COGS 6,000,000 Gross Profit 4,000,000 Administrative expenses 1,200,000 Depreciation 500,000 EBIT 2,300,000 Interest Expense 500,000 EBT 1,800,000 Taxes (40%) 720,000 Net Income 1,080,000 6. An analyst compiled the following information for U Inc. for the year ended December 31, 2013: ? Net income was $1,700,000. ? Depreciation expense was $400,000. ? Interest paid was $200,000. ? Income taxes paid were $100,000. ? Common stock was sold for $200,000. ? Preferred stock (8% annual dividend) was sold at par value of $250,000. ? Common stock dividends of $50,000 were paid. ? Preferred stock dividends of $20,000 were paid. ? Equipment with a book value of $100,000 was sold for $200,000. Using the indirect method, what was U Inc.'s net cash flow from operating activities for the year ended December 31, 2013? Multiple Choice 1. Santo Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods? Fair Value Method Equity Method a. No Effect Decrease b. Increase Decrease c. No Effect No Effect d. Decrease No Effect 2. An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as Fair Value Method Equity Method a. Income Income b. A reduction of the investment A reduction of the investment c. Income A reduction of the investment d. A reduction of the investment Income 3. Koehn Corporation accounts for its investment in the common stock of Sells Company under the equity method. Koehn Corporation should ordinarily record a cash dividend received from Sells as a. a reduction of the carrying value of the investment. b. additional paid-in capital. c. an addition to the carrying value of the investment. d. dividend income. 4. Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the a. investor sells the investment. b. investee declares a dividend. c. investee pays a dividend. d. earnings are reported by the investee in its financial statements. 5. Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2010, Cosby had net earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively? a. Understate, overstate, overstate b. Overstate, understate, understate c. Overstate, overstate, overstate d. Understate, understate, understate 6. Dublin Co. holds a 30% stake in Club Co. which was purchased in 2011 at a cost of $3,000,000. After applying the equity method, the Investment in Club Co. account has a balance of $3,040,000. At December 31, 2011 the fair value of the investment is $3,120,000. Which of the following values is acceptable for Dublin to use in its balance sheet at December 31, 2011? I. $3,000,000 II. $3,040,000 III. $3,120,000 a. I, II, or III. b. I or II only. c. II only. d. II or III only. 7. A sale should not be recognized as revenue by the seller at the time of sale if a. payment was made by check. b. the selling price is less than the normal selling price. c. the buyer has a right to return the product and the amount of future returns cannot be reasonably estimated. d. none of these. 8. The FASB concluded that if a company sells its product but gives the buyer the right to return the product, revenue from the sales transaction shall be recognized at the time of sale only if all of six conditions have been met. Which of the following is not one of these six conditions? a. The amount of future returns can be reasonably estimated. b. The seller's price is substantially fixed or determinable at time of sale. c. The buyer's obligation to the seller would not be changed in the event of theft or damage of the product. d. The buyer is obligated to pay the seller upon resale of the product. 9. In selecting an accounting method for a newly contracted long-term construction project, the principal factor to be considered should be a. the terms of payment in the contract. b. the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable. c. the method commonly used by the contractor to account for other long-term construc-tion contracts. d. the inherent nature of the contractor's technical facilities used in construction. 10. The percentage-of-completion method must be used when certain conditions exist. Which of the following is not one of those necessary conditions? a. Estimates of progress toward completion, revenues, and costs are reasonably dependable. b. The contractor can be expected to perform the contractual obligation. c. The buyer can be expected to satisfy some of the obligations under the contract. d. The contract clearly specifies the enforceable rights of the parties, the consideration to be exchanged, and the manner and terms of settlement. 11. When work to be done and costs to be incurred on a long-term contract can be estimated dependably, which of the following methods of revenue recognition is preferable? a. Installment-sales method b. Percentage-of-completion method c. Completed-contract method d. None of these 12. How should the balances of progress billings and construction in process be shown at reporting dates prior to the completion of a long-term contract? a. Progress billings as deferred income, construction in progress as a deferred expense. b. Progress billings as income, construction in process as inventory. c. Net, as a current asset if debit balance, and current liability if credit balance. d. Net, as income from construction if credit balance, and loss from construction if debit balance. 13. In accounting for a long-term construction-type contract using the percentage-of-completion method, the gross profit recognized during the first year would be the estimated total gross profit from the contract, multiplied by the percentage of the costs incurred during the year to the a. total costs incurred to date. b. total estimated cost. c. unbilled portion of the contract price. d. total contract price. 14. How should earned but unbilled revenues at the balance sheet date on a long-term construction contract be disclosed if the percentage-of-completion method of revenue recognition is used? a. As construction in process in the current asset section of the balance sheet. b. As construction in process in the noncurrent asset section of the balance sheet. c. As a receivable in the noncurrent asset section of the balance sheet. d. In a note to the financial statements until the customer is formally billed for the portion of work completed. 15. The principal disadvantage of using the percentage-of-completion method of recognizing revenue from long-term contracts is that it a. is unacceptable for income tax purposes. b. gives results based upon estimates which may be subject to considerable uncertainty. c. is likely to assign a small amount of revenue to a period during which much revenue was actually earned. d. none of these. 16. Which of the following facts concerning plant assets should be included in the summary of significant accounting policies? Depreciation Method Composition a. No Yes b. Yes Yes c. Yes No d. No No 17. Farr, Inc. is a multidivisional corporation which has both intersegment sales and sales to unaffiliated customers. Farr should report segment financial information for each division meeting which of the following criteria? a. Segment profit or loss is 10% or more of consolidated profit or loss. b. Segment profit or loss is 10% or more of combined profit or loss of all company segments. c. Segment revenue is 10% or more of combined revenue of all the company segments. d. Segment revenue is 10% or more of consolidated revenue. 18. Unruh Corp. and its divisions are engaged solely in manufacturing operations. The following data (consistent with prior years' data) pertain to the industries in which operations were conducted for the year ended December 31, 2013. Assets Industry Revenue Profit 12/31/13 A $ 8,000,000 $1,320,000 $16,000,000 B 6,400,000 1,120,000 14,000,000 C 4,800,000 960,000 10,000,000 D 2,400,000 440,000 5,200,000 E 3,400,000 540,000 5,600,000 F 1,200,000 180,000 2,400,000 $26,200,000 $4,560,000 $53,200,000 In its segment information for 2013, how many reportable segments does Unruh have? a. Three b. Four c. Five d. Six 19. The following information pertains to Nixon Corp. and its divisions for the year ended December 31, 2013. Sales to unaffiliated customers $3,500,000 Intersegment sales of products similar to those sold to unaffiliated customers 1,050,000 Interest earned on loans to other operating segments 70,000 Nixon and all of its divisions are engaged solely in manufacturing operations. Nixon has a reportable segment if that segment's revenue exceeds a. $462,000. b. $455,000. c. $357,000. d. $350,000. 20. Advertising costs may be accrued or deferred to provide an appropriate expense in each period for Interim Year-end Financial Reporting Financial Reporting a. Yes No b. Yes Yes c. No No d. No Yes 21. Mayo Corp. has estimated that total depreciation expense for the year ending December 31, 2013 will amount to $400,000, and that 2013 year-end bonuses to employees will total $800,000. In Mayo's interim income statement for the six months ended June 30, 2013, what is the total amount of expense relating to these two items that should be reported? a. $0. b. $200,000. c. $600,000. d. $1,200,000. 22. Fina Corp. had the following transactions during the quarter ended March 31, 2013: Loss from hurricane damage $350,000 Payment of fire insurance premium for calendar year 2013 600,000 What amount should be included in Fina's income statement for the quarter ended March 31, 2013? Extraordinary Loss Insurance Expense a. $350,000 $600,000 b. $350,000 $150,000 c. $87,500 $150,000 d. $0 $600,000 23. The required approach for handling extraordinary items in interim reports is to a. prorate them over all four quarters. b. prorate them over the current and remaining quarters. c. charge or credit the loss or gain in the quarter that it occurs. d. disclose them only in the notes. 24. If the financial statements examined by an auditor lead the auditor to issue an opinion that contains an exception that is not of sufficient magnitude to invalidate the statement as a whole, the opinion is said to be a. unqualified. b. qualified. c. adverse. d. exceptional. 25. The MD&A section of a company's annual report is to cover the following three items: a. income statement, balance sheet, and statement of owners' equity. b. income statement, balance sheet, and statement of cash flows. c. liquidity, capital resources, and results of operations. d. changes in the stock price, mergers, and acquisitions. 26. How is the amortization of patents reported in a statement of cash flows that is prepared using the direct method? A. Not reported. B. An increase in cash flows from operating activities. C. A decrease in cash flows from operating activities. D. A decrease in cash flows from investing activities. 27. Creditors and investors would generally find the statement of cash flows least useful for assessing the: A. Ability to generate future cash flows. B. Ability to pay dividdends C. Financial position at a point in time. D. Quality of earnings. 28. A firm reported ($ in millions) net cash inflows (outflows) as follows: operating $75, investing ($200), and financing $350. The beginning cash balance was $250. What was the ending cash balance? A. $875. B. $25. C. $475. D. $125. 29. Cash equivalents generally would not include short-term investments in: A. Commercial paper. B. Certificates of deposit. C. Held-to-maturity securities. D. Money market funds. 30. Cash equivalents have each of the following characteristics except: A. Little risk of loss. B. Highly liquid. C. Maturity of at least three months. D. Short-term. 31. When a company purchases a security it considers a cash equivalent, the cash outflow is: A. Reported as an operating activity. B. Reported as an investing activity. C. Reported as a financing activity. D. Not reported on a statement of cash flows. 32. When preparing a statement of cash flows using the direct method, accrual of payroll expense is: A. Reported as an operating activity. B. Reported as an investing activity. C. Reported as a financing activity. D. None of the above is correct. 33. A firm reported salary expense of $239,000 for the current year. The beginning and ending balances in salaries payable were $40,000 and $15,000, respectively. What was the amount of cash paid for salaries? A. $214,000. B. $289,000. C. $264,000. D. $239,000. 34. In a statement of cash flows in which operating activities are reported by the direct method, which of the following would increase reported cash flows from operating activities? A. Gain on sale of equipment. B. Interest revenue. C. Gain on early extinguishment of bonds. D. Proceeds from sale of land. 35. Which of the following is reported as an operating activity in the statement of cash flows? A. The payment of dividends. B. The sale of office equipment. C. The payment of interest on long-term notes. D. The issuance of a stock dividend. image text in transcribed

Quiz #2 (Chap 17, 18, 23, 24) Intermediate Accounting II Acct 311 Summer 2014 Professor: Leon Hutton, CPA Version B Student: ____________________________, Date: June 19 - 22, 2014 Administrative Notes: This quiz is open book & open notes; a calulator may be used. Write directly on this exam (or at your option, you may present your answers in an excel file - this is optional and not a requirement). Show your work for full credit; present your work in good form (i.e., ALL numbers displayed properly and labelled correctly) Due Date for maximum credit: Sunday, June 22 at 11pm Last day quiz will be accepted with grade penalties for late submisison: June 27 at 11pm; this quiz will not be accepted after June 27, unless for documented reasons. I will send out the solutions no later than Saturday, June 28 This quiz consists of the following: Component Points Problems 1 to 6 are worth 5 points each for a total of 30 points. 30 Record your answers directly after the questions (or as an option, in excel). Each problem is allocated a number of points; allocate your time accordingly. 35 multiple choice questions allocated 2 points each. Total Points 70 100 6.1 ACCT 311, Ver B, Summer 2014 1. Isaac Inc. began operations in January 2013. For certain of its property sales, Isaac recognizes income in the period of sale for financial reporting purposes. However, for income tax purposes, Isaac recognizes income when it collects cash from the buyer's installment payments. In 2013, Isaac had $600 million in sales of this type. Scheduled collections for these sales are as follows: Assume that Isaac has a 30% income tax rate and that there were no other differences in income for financial statement and tax purposes. Ignoring operating expenses, what deferred tax liability would Isaac report in its year-end 2013 balance sheet? ACCT 311, Ver B, Summer 2014 2. Beresford Inc. purchased several investment securities during 2012, its first year of operations. The following information pertains to these securities. The fluctuations in their fair values are not considered permanent. What balance sheet amount would Beresford report for its total investment securities at 12/31/2012? 3. Hutton Construction specializes in the construction of commercial and industrial buildings. The contractor is experienced in bidding long-term construction projects of this type, with the typical project lasting fifteen to twenty-four months. The contractor ACCT 311, Ver B, Summer 2014 uses the percentage-of-completion method of revenue recognition since, given the characteristics of the contractor's business and contracts, it is the most appropriate method. Progress toward completion is measured on a cost to cost basis. Hutton began work on a lump-sum contract at the beginning of 2014. As bid, the statistics were as follows: Lump-sum price (contract price) Estimated costs Labor Materials and subcontractor Indirect costs $4,000,000 $ 850,000 1,750,000 400,000 At the end of the first year, the following was the status of the contract: Billings to date Costs incurred to date Labor $ 464,000 Materials and subcontractor 1,098,000 Indirect costs 193,000 Latest forecast total cost 3,000,000 $1,000,000 $2,230,000 1,755,000 3,000,000 It should be noted that included in the above costs incurred to date were standard electrical and mechanical materials stored on the job site, but not yet installed, costing $105,000. These costs should not be considered in the costs incurred to date. Instructions (a) Compute the percentage of completion on the contract at the end of 2014. (b) Indicate the amount of gross profit that would be reported on this contract at the end of 2014. (c) Make the journal entry to record the income (loss) for 2014 on Hutton's books. ACCT 311, Ver B, Summer 2014 ACCT 311, Ver B, Summer 2014 4. Computation of selected ratios. The following data is given: Cash Accounts receivable (net) Inventories Plant assets (net) December 31, 2013 2012 $ 66,000 $ 50,000 68,000 60,000 90,000 110,000 383,000 325,000 Accounts payable Salaries and wages payable Bonds payable 10% Preferred stock, $40 par Common stock, $10 par Paid-in capital Retained earnings 57,000 10,000 70,000 100,000 120,000 80,000 170,000 Net credit sales Cost of goods sold Net income 40,000 5,000 70,000 100,000 90,000 65,000 175,000 800,000 600,000 80,000 Instructions Compute the following ratios: (a) Acid-test ratio at 12/31/13 (b) Receivables turnover in 2013 (c) Inventory turnover in 2013 (d) Profit margin on sales in 2013 (e) Rate of return on common stock equity in 2013 (f) Book value per share of common stock at 12/31/13 ACCT 311, Ver B, Summer 2014 5. a. Prepare a cash flow statement for the following information. b. Include a cash reconciliation statement. Balance Sheet ($) Jan 1 ASSETS: Current Assets: Cash Marketable Securities Accounts Receivable, net Inventory Prepaid Expenses Total Current Assets Total Fixed Assets, net Total Assets Dec 31 310,000 1,200,000 600,000 1,000,000 290,000 3,000,000 330,000 5,000,000 4,000,000 200,000 6,230,000 2,500,000 2,000,000 300,000 7,500,000 8,230,000 LIABILITIES & EQUITIES Current Liabilities: Accounts Payable Notes Payable Accrued Expenses Total Current Liabilities 1,500,000 1,000,000 500,000 3,000,000 1,000,000 1,000,000 800,000 2,800,000 Total Long-term Liabilities Total Liabilities 4,000,000 Preferred Stock Common Stock Capital in Excess of Par Retained Earnings Total Stockholders Equity 500,000 500,000 1,000,000 1,500,000 3,500,000 500,000 500,000 1,000,000 1,930,000 3,930,000 Total Liabilities and Equity 7,500,000 8,230,000 1,000,000 4,300,000 1,500,000 Income Statement (for ques 6) Sales COGS Gross Profit Administrative expenses Depreciation EBIT Interest Expense EBT Taxes (40%) Net Income 10,000,000 6,000,000 4,000,000 1,200,000 500,000 2,300,000 500,000 1,800,000 720,000 1,080,000 ACCT 311, Ver B, Summer 2014 ACCT 311, Ver B, Summer 2014 6. An analyst compiled the following information for U Inc. for the year ended December 31, 2013: Net income was $1,700,000. Depreciation expense was $400,000. Interest paid was $200,000. Income taxes paid were $100,000. Common stock was sold for $200,000. Preferred stock (8% annual dividend) was sold at par value of $250,000. Common stock dividends of $50,000 were paid. Preferred stock dividends of $20,000 were paid. Equipment with a book value of $100,000 was sold for $200,000. Using the indirect method, what was U Inc.'s net cash flow from operating activities for the year ended December 31, 2013? ACCT 311, Ver B, Summer 2014 Multiple Choice 1. Santo Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods? a. b. c. d. Fair Value Method No Effect Increase No Effect Decrease Equity Method Decrease Decrease No Effect No Effect 2. An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as a. b. c. d. Fair Value Method Equity Method Income Income A reduction of the investment A reduction of the investment Income A reduction of the investment A reduction of the investment Income 3. Koehn Corporation accounts for its investment in the common stock of Sells Company under the equity method. Koehn Corporation should ordinarily record a cash dividend received from Sells as a. a reduction of the carrying value of the investment. b. additional paid-in capital. c. an addition to the carrying value of the investment. d. dividend income. 4. Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the a. investor sells the investment. b. investee declares a dividend. c. investee pays a dividend. d. earnings are reported by the investee in its financial statements. 5. Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2010, Cosby had net earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded these transactions using the fair value method rather than ACCT 311, Ver B, Summer 2014 the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively? a. Understate, overstate, overstate b. Overstate, understate, understate c. Overstate, overstate, overstate d. Understate, understate, understate 6. Dublin Co. holds a 30% stake in Club Co. which was purchased in 2011 at a cost of $3,000,000. After applying the equity method, the Investment in Club Co. account has a balance of $3,040,000. At December 31, 2011 the fair value of the investment is $3,120,000. Which of the following values is acceptable for Dublin to use in its balance sheet at December 31, 2011? I. $3,000,000 II. $3,040,000 III. $3,120,000 a. I, II, or III. b. I or II only. c. II only. d. II or III only. 7. A sale should not be recognized as revenue by the seller at the time of sale if a. payment was made by check. b. the selling price is less than the normal selling price. c. the buyer has a right to return the product and the amount of future returns cannot be reasonably estimated. d. none of these. 8. The FASB concluded that if a company sells its product but gives the buyer the right to return the product, revenue from the sales transaction shall be recognized at the time of sale only if all of six conditions have been met. Which of the following is not one of these six conditions? a. The amount of future returns can be reasonably estimated. b. The seller's price is substantially fixed or determinable at time of sale. c. The buyer's obligation to the seller would not be changed in the event of theft or damage of the product. d. The buyer is obligated to pay the seller upon resale of the product. 9. In selecting an accounting method for a newly contracted long-term construction project, the principal factor to be considered should be a. the terms of payment in the contract. b. the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable. c. the method commonly used by the contractor to account for other long-term construc-tion contracts. ACCT 311, Ver B, Summer 2014 d. the inherent nature of the contractor's technical facilities used in construction. 10. The percentage-of-completion method must be used when certain conditions exist. Which of the following is not one of those necessary conditions? a. Estimates of progress toward completion, revenues, and costs are reasonably dependable. b. The contractor can be expected to perform the contractual obligation. c. The buyer can be expected to satisfy some of the obligations under the contract. d. The contract clearly specifies the enforceable rights of the parties, the consideration to be exchanged, and the manner and terms of settlement. 11. When work to be done and costs to be incurred on a long-term contract can be estimated dependably, which of the following methods of revenue recognition is preferable? a. Installment-sales method b. Percentage-of-completion method c. Completed-contract method d. None of these 12. How should the balances of progress billings and construction in process be shown at reporting dates prior to the completion of a long-term contract? a. Progress billings as deferred income, construction in progress as a deferred expense. b. Progress billings as income, construction in process as inventory. c. Net, as a current asset if debit balance, and current liability if credit balance. d. Net, as income from construction if credit balance, and loss from construction if debit balance. 13. In accounting for a long-term construction-type contract using the percentageof-completion method, the gross profit recognized during the first year would be the estimated total gross profit from the contract, multiplied by the percentage of the costs incurred during the year to the a. total costs incurred to date. b. total estimated cost. c. unbilled portion of the contract price. d. total contract price. ACCT 311, Ver B, Summer 2014 14. 15. 16. How should earned but unbilled revenues at the balance sheet date on a longterm construction contract be disclosed if the percentage-of-completion method of revenue recognition is used? a. As construction in process in the current asset section of the balance sheet. b. As construction in process in the noncurrent asset section of the balance sheet. c. As a receivable in the noncurrent asset section of the balance sheet. d. In a note to the financial statements until the customer is formally billed for the portion of work completed. The principal disadvantage of using the percentage-of-completion method of recognizing revenue from long-term contracts is that it a. is unacceptable for income tax purposes. b. gives results based upon estimates which may be subject to considerable uncertainty. c. is likely to assign a small amount of revenue to a period during which much revenue was actually earned. d. none of these. Which of the following facts concerning plant assets should be included in the summary of significant accounting policies? a. b. c. d. 17. Depreciation Method No Yes Yes No Composition Yes Yes No No Farr, Inc. is a multidivisional corporation which has both intersegment sales and sales to unaffiliated customers. Farr should report segment financial information for each division meeting which of the following criteria? a. Segment profit or loss is 10% or more of consolidated profit or loss. b. Segment profit or loss is 10% or more of combined profit or loss of all company segments. c. Segment revenue is 10% or more of combined revenue of all the company segments. d. Segment revenue is 10% or more of consolidated revenue. ACCT 311, Ver B, Summer 2014 18. Unruh Corp. and its divisions are engaged solely in manufacturing operations. The following data (consistent with prior years' data) pertain to the industries in which operations were conducted for the year ended December 31, 2013. Assets Industry Revenue Profit 12/31/13 A $ 8,000,000 $1,320,000 $16,000,000 B 6,400,000 1,120,000 14,000,000 C 4,800,000 960,000 10,000,000 D 2,400,000 440,000 5,200,000 E 3,400,000 540,000 5,600,000 F 1,200,000 180,000 2,400,000 $26,200,000 $4,560,000 $53,200,000 In its segment information for 2013, how many reportable segments does Unruh have? a. Three b. Four c. Five d. Six 19. The following information pertains to Nixon Corp. and its divisions for the year ended December 31, 2013. Sales to unaffiliated customers $3,500,000 Intersegment sales of products similar to those sold to unaffiliated customers 1,050,000 Interest earned on loans to other operating segments 70,000 Nixon and all of its divisions are engaged solely in manufacturing operations. Nixon has a reportable segment if that segment's revenue exceeds a. $462,000. b. $455,000. c. $357,000. d. $350,000. 20. Advertising costs may be accrued or deferred to provide an appropriate expense in each period for Interim Year-end Financial Reporting Financial Reporting a. Yes No b. Yes Yes c. No No d. No Yes 21. Mayo Corp. has estimated that total depreciation expense for the year ending December 31, 2013 will amount to $400,000, and that 2013 year-end bonuses to employees will total $800,000. In Mayo's interim income statement for the six ACCT 311, Ver B, Summer 2014 months ended June 30, 2013, what is the total amount of expense relating to these two items that should be reported? a. $0. b. $200,000. c. $600,000. d. $1,200,000. 22. Fina Corp. had the following transactions during the quarter ended March 31, 2013: Loss from hurricane damage Payment of fire insurance premium for calendar year 2013 $350,000 600,000 What amount should be included in Fina's income statement for the quarter ended March 31, 2013? Extraordinary Loss Insurance Expense a. $350,000 $600,000 b. $350,000 $150,000 c. $87,500 $150,000 d. $0 $600,000 23. The required approach for handling extraordinary items in interim reports is to a. prorate them over all four quarters. b. prorate them over the current and remaining quarters. c. charge or credit the loss or gain in the quarter that it occurs. d. disclose them only in the notes. 24. If the financial statements examined by an auditor lead the auditor to issue an opinion that contains an exception that is not of sufficient magnitude to invalidate the statement as a whole, the opinion is said to be a. unqualified. b. qualified. c. adverse. d. exceptional. 25. The MD&A section of a company's annual report is to cover the following three items: a. income statement, balance sheet, and statement of owners' equity. b. income statement, balance sheet, and statement of cash flows. c. liquidity, capital resources, and results of operations. d. changes in the stock price, mergers, and acquisitions. ACCT 311, Ver B, Summer 2014 26. How is the amortization of patents reported in a statement of cash flows that is prepared using the direct method? A. Not reported. B. An increase in cash flows from operating activities. C. A decrease in cash flows from operating activities. D. A decrease in cash flows from investing activities. 27. Creditors and investors would generally find the statement of cash flows least useful for assessing the: A. Ability to generate future cash flows. B. Ability to pay dividdends C. Financial position at a point in time. D. Quality of earnings. 28. A firm reported ($ in millions) net cash inflows (outflows) as follows: operating $75, investing ($200), and financing $350. The beginning cash balance was $250. What was the ending cash balance? A. $875 . B. $25. C. $475 . D. $125 . 29. Cash equivalents generally would not include short-term investments in: A. Commercial paper. B. Certificates of deposit. C. Held-to-maturity securities. D. Money market funds. ACCT 311, Ver B, Summer 2014 30. Cash equivalents have each of the following characteristics except: A. Little risk of loss. B. Highly liquid. C. Maturity of at least three months. D. Short-term. 31. When a company purchases a security it considers a cash equivalent, the cash outflow is: A. Reported as an operating activity. B. Reported as an investing activity. C. Reported as a financing activity. D. Not reported on a statement of cash flows. 32. When preparing a statement of cash flows using the direct method, accrual of payroll expense is: A. Reported as an operating activity. B. Reported as an investing activity. C. Reported as a financing activity. D. None of the above is correct. 33. A firm reported salary expense of $239,000 for the current year. The beginning and ending balances in salaries payable were $40,000 and $15,000, respectively. What was the amount of cash paid for salaries? A. $214,00 0. B. $289,00 0. C. $264,00 0. D. $239,00 0. ACCT 311, Ver B, Summer 2014 34. In a statement of cash flows in which operating activities are reported by the direct method, which of the following would increase reported cash flows from operating activities? A. Gain on sale of equipment. B. Interest revenue. C. Gain on early extinguishment of bonds. D. Proceeds from sale of land. 35. Which of the following is reported as an operating activity in the statement of cash flows? A. The payment of dividends. B. The sale of office equipment. C. The payment of interest on long-term notes. D. The issuance of a stock dividend. ACCT 311, Ver B, Summer 2014 Quiz #2 (Chap 17, 18, 23, 24) Intermediate Accounting II Acct 311 Summer 2014 Professor: Leon Hutton, CPA Version B Student: ____________________________, Date: June 19 - 22, 2014 Administrative Notes: This quiz is open book & open notes; a calulator may be used. Write directly on this exam (or at your option, you may present your answers in an excel file - this is optional and not a requirement). Show your work for full credit; present your work in good form (i.e., ALL numbers displayed properly and labelled correctly) Due Date for maximum credit: Sunday, June 22 at 11pm Last day quiz will be accepted with grade penalties for late submisison: June 27 at 11pm; this quiz will not be accepted after June 27, unless for documented reasons. I will send out the solutions no later than Saturday, June 28 This quiz consists of the following: Component Points Problems 1 to 6 are worth 5 points each for a total of 30 points. 30 Record your answers directly after the questions (or as an option, in excel). Each problem is allocated a number of points; allocate your time accordingly. 35 multiple choice questions allocated 2 points each. Total Points 70 100 6.1 ACCT 311, Ver B, Summer 2014 1. Isaac Inc. began operations in January 2013. For certain of its property sales, Isaac recognizes income in the period of sale for financial reporting purposes. However, for income tax purposes, Isaac recognizes income when it collects cash from the buyer's installment payments. In 2013, Isaac had $600 million in sales of this type. Scheduled collections for these sales are as follows: Assume that Isaac has a 30% income tax rate and that there were no other differences in income for financial statement and tax purposes. Ignoring operating expenses, what deferred tax liability would Isaac report in its year-end 2013 balance sheet? ACCT 311, Ver B, Summer 2014 2. Beresford Inc. purchased several investment securities during 2012, its first year of operations. The following information pertains to these securities. The fluctuations in their fair values are not considered permanent. What balance sheet amount would Beresford report for its total investment securities at 12/31/2012? 3. Hutton Construction specializes in the construction of commercial and industrial buildings. The contractor is experienced in bidding long-term construction projects of this type, with the typical project lasting fifteen to twenty-four months. The contractor ACCT 311, Ver B, Summer 2014 uses the percentage-of-completion method of revenue recognition since, given the characteristics of the contractor's business and contracts, it is the most appropriate method. Progress toward completion is measured on a cost to cost basis. Hutton began work on a lump-sum contract at the beginning of 2014. As bid, the statistics were as follows: Lump-sum price (contract price) Estimated costs Labor Materials and subcontractor Indirect costs $4,000,000 $ 850,000 1,750,000 400,000 At the end of the first year, the following was the status of the contract: Billings to date Costs incurred to date Labor $ 464,000 Materials and subcontractor 1,098,000 Indirect costs 193,000 Latest forecast total cost 3,000,000 $1,000,000 $2,230,000 1,755,000 3,000,000 It should be noted that included in the above costs incurred to date were standard electrical and mechanical materials stored on the job site, but not yet installed, costing $105,000. These costs should not be considered in the costs incurred to date. Instructions (a) Compute the percentage of completion on the contract at the end of 2014. (b) Indicate the amount of gross profit that would be reported on this contract at the end of 2014. (c) Make the journal entry to record the income (loss) for 2014 on Hutton's books. ACCT 311, Ver B, Summer 2014 ACCT 311, Ver B, Summer 2014 4. Computation of selected ratios. The following data is given: Cash Accounts receivable (net) Inventories Plant assets (net) December 31, 2013 2012 $ 66,000 $ 50,000 68,000 60,000 90,000 110,000 383,000 325,000 Accounts payable Salaries and wages payable Bonds payable 10% Preferred stock, $40 par Common stock, $10 par Paid-in capital Retained earnings 57,000 10,000 70,000 100,000 120,000 80,000 170,000 Net credit sales Cost of goods sold Net income 40,000 5,000 70,000 100,000 90,000 65,000 175,000 800,000 600,000 80,000 Instructions Compute the following ratios: (a) Acid-test ratio at 12/31/13 (b) Receivables turnover in 2013 (c) Inventory turnover in 2013 (d) Profit margin on sales in 2013 (e) Rate of return on common stock equity in 2013 (f) Book value per share of common stock at 12/31/13 ACCT 311, Ver B, Summer 2014 5. a. Prepare a cash flow statement for the following information. b. Include a cash reconciliation statement. Balance Sheet ($) Jan 1 ASSETS: Current Assets: Cash Marketable Securities Accounts Receivable, net Inventory Prepaid Expenses Total Current Assets Total Fixed Assets, net Total Assets Dec 31 310,000 1,200,000 600,000 1,000,000 290,000 3,000,000 330,000 5,000,000 4,000,000 200,000 6,230,000 2,500,000 2,000,000 300,000 7,500,000 8,230,000 LIABILITIES & EQUITIES Current Liabilities: Accounts Payable Notes Payable Accrued Expenses Total Current Liabilities 1,500,000 1,000,000 500,000 3,000,000 1,000,000 1,000,000 800,000 2,800,000 Total Long-term Liabilities Total Liabilities 4,000,000 Preferred Stock Common Stock Capital in Excess of Par Retained Earnings Total Stockholders Equity 500,000 500,000 1,000,000 1,500,000 3,500,000 500,000 500,000 1,000,000 1,930,000 3,930,000 Total Liabilities and Equity 7,500,000 8,230,000 1,000,000 4,300,000 1,500,000 Income Statement (for ques 6) Sales COGS Gross Profit Administrative expenses Depreciation EBIT Interest Expense EBT Taxes (40%) Net Income 10,000,000 6,000,000 4,000,000 1,200,000 500,000 2,300,000 500,000 1,800,000 720,000 1,080,000 ACCT 311, Ver B, Summer 2014 ACCT 311, Ver B, Summer 2014 6. An analyst compiled the following information for U Inc. for the year ended December 31, 2013: Net income was $1,700,000. Depreciation expense was $400,000. Interest paid was $200,000. Income taxes paid were $100,000. Common stock was sold for $200,000. Preferred stock (8% annual dividend) was sold at par value of $250,000. Common stock dividends of $50,000 were paid. Preferred stock dividends of $20,000 were paid. Equipment with a book value of $100,000 was sold for $200,000. Using the indirect method, what was U Inc.'s net cash flow from operating activities for the year ended December 31, 2013? ACCT 311, Ver B, Summer 2014 Multiple Choice 1. Santo Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods? a. b. c. d. Fair Value Method No Effect Increase No Effect Decrease Equity Method Decrease Decrease No Effect No Effect 2. An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as a. b. c. d. Fair Value Method Equity Method Income Income A reduction of the investment A reduction of the investment Income A reduction of the investment A reduction of the investment Income 3. Koehn Corporation accounts for its investment in the common stock of Sells Company under the equity method. Koehn Corporation should ordinarily record a cash dividend received from Sells as a. a reduction of the carrying value of the investment. b. additional paid-in capital. c. an addition to the carrying value of the investment. d. dividend income. 4. Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the a. investor sells the investment. b. investee declares a dividend. c. investee pays a dividend. d. earnings are reported by the investee in its financial statements. 5. Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2010, Cosby had net earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded these transactions using the fair value method rather than ACCT 311, Ver B, Summer 2014 the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively? a. Understate, overstate, overstate b. Overstate, understate, understate c. Overstate, overstate, overstate d. Understate, understate, understate 6. Dublin Co. holds a 30% stake in Club Co. which was purchased in 2011 at a cost of $3,000,000. After applying the equity method, the Investment in Club Co. account has a balance of $3,040,000. At December 31, 2011 the fair value of the investment is $3,120,000. Which of the following values is acceptable for Dublin to use in its balance sheet at December 31, 2011? I. $3,000,000 II. $3,040,000 III. $3,120,000 a. I, II, or III. b. I or II only. c. II only. d. II or III only. 7. A sale should not be recognized as revenue by the seller at the time of sale if a. payment was made by check. b. the selling price is less than the normal selling price. c. the buyer has a right to return the product and the amount of future returns cannot be reasonably estimated. d. none of these. 8. The FASB concluded that if a company sells its product but gives the buyer the right to return the product, revenue from the sales transaction shall be recognized at the time of sale only if all of six conditions have been met. Which of the following is not one of these six conditions? a. The amount of future returns can be reasonably estimated. b. The seller's price is substantially fixed or determinable at time of sale. c. The buyer's obligation to the seller would not be changed in the event of theft or damage of the product. d. The buyer is obligated to pay the seller upon resale of the product. 9. In selecting an accounting method for a newly contracted long-term construction project, the principal factor to be considered should be a. the terms of payment in the contract. b. the degree to which a reliable estimate of the costs to complete and extent of progress toward completion is practicable. c. the method commonly used by the contractor to account for other long-term construc-tion contracts. ACCT 311, Ver B, Summer 2014 d. the inherent nature of the contractor's technical facilities used in construction. 10. The percentage-of-completion method must be used when certain conditions exist. Which of the following is not one of those necessary conditions? a. Estimates of progress toward completion, revenues, and costs are reasonably dependable. b. The contractor can be expected to perform the contractual obligation. c. The buyer can be expected to satisfy some of the obligations under the contract. d. The contract clearly specifies the enforceable rights of the parties, the consideration to be exchanged, and the manner and terms of settlement. 11. When work to be done and costs to be incurred on a long-term contract can be estimated dependably, which of the following methods of revenue recognition is preferable? a. Installment-sales method b. Percentage-of-completion method c. Completed-contract method d. None of these 12. How should the balances of progress billings and construction in process be shown at reporting dates prior to the completion of a long-term contract? a. Progress billings as deferred income, construction in progress as a deferred expense. b. Progress billings as income, construction in process as inventory. c. Net, as a current asset if debit balance, and current liability if credit balance. d. Net, as income from construction if credit balance, and loss from construction if debit balance. 13. In accounting for a long-term construction-type contract using the percentageof-completion method, the gross profit recognized during the first year would be the estimated total gross profit from the contract, multiplied by the percentage of the costs incurred during the year to the a. total costs incurred to date. b. total estimated cost. c. unbilled portion of the contract price. d. total contract price. ACCT 311, Ver B, Summer 2014 14. 15. 16. How should earned but unbilled revenues at the balance sheet date on a longterm construction contract be disclosed if the percentage-of-completion method of revenue recognition is used? a. As construction in process in the current asset section of the balance sheet. b. As construction in process in the noncurrent asset section of the balance sheet. c. As a receivable in the noncurrent asset section of the balance sheet. d. In a note to the financial statements until the customer is formally billed for the portion of work completed. The principal disadvantage of using the percentage-of-completion method of recognizing revenue from long-term contracts is that it a. is unacceptable for income tax purposes. b. gives results based upon estimates which may be subject to considerable uncertainty. c. is likely to assign a small amount of revenue to a period during which much revenue was actually earned. d. none of these. Which of the following facts concerning plant assets should be included in the summary of significant accounting policies? a. b. c. d. 17. Depreciation Method No Yes Yes No Composition Yes Yes No No Farr, Inc. is a multidivisional corporation which has both intersegment sales and sales to unaffiliated customers. Farr should report segment financial information for each division meeting which of the following criteria? a. Segment profit or loss is 10% or more of consolidated profit or loss. b. Segment profit or loss is 10% or more of combined profit or loss of all company segments. c. Segment revenue is 10% or more of combined revenue of all the company segments. d. Segment revenue is 10% or more of consolidated revenue. ACCT 311, Ver B, Summer 2014 18. Unruh Corp. and its divisions are engaged solely in manufacturing operations. The following data (consistent with prior years' data) pertain to the industries in which operations were conducted for the year ended December 31, 2013. Assets Industry Revenue Profit 12/31/13 A $ 8,000,000 $1,320,000 $16,000,000 B 6,400,000 1,120,000 14,000,000 C 4,800,000 960,000 10,000,000 D 2,400,000 440,000 5,200,000 E 3,400,000 540,000 5,600,000 F 1,200,000 180,000 2,400,000 $26,200,000 $4,560,000 $53,200,000 In its segment information for 2013, how many reportable segments does Unruh have? a. Three b. Four c. Five d. Six 19. The following information pertains to Nixon Corp. and its divisions for the year ended December 31, 2013. Sales to unaffiliated customers $3,500,000 Intersegment sales of products similar to those sold to unaffiliated customers 1,050,000 Interest earned on loans to other operating segments 70,000 Nixon and all of its divisions are engaged solely in manufacturing operations. Nixon has a reportable segment if that segment's revenue exceeds a. $462,000. b. $455,000. c. $357,000. d. $350,000. 20. Advertising costs may be accrued or deferred to provide an appropriate expense in each period for Interim Year-end Financial Reporting Financial Reporting a. Yes No b. Yes Yes c. No No d. No Yes 21. Mayo Corp. has estimated that total depreciation expense for the year ending December 31, 2013 will amount to $400,000, and that 2013 year-end bonuses to employees will total $800,000. In Mayo's interim income statement for the six ACCT 311, Ver B, Summer 2014 months ended June 30, 2013, what is the total amount of expense relating to these two items that should be reported? a. $0. b. $200,000. c. $600,000. d. $1,200,000. 22. Fina Corp. had the following transactions during the quarter ended March 31, 2013: Loss from hurricane damage Payment of fire insurance premium for calendar year 2013 $350,000 600,000 What amount should be included in Fina's income statement for the quarter ended March 31, 2013? Extraordinary Loss Insurance Expense a. $350,000 $600,000 b. $350,000 $150,000 c. $87,500 $150,000 d. $0 $600,000 23. The required approach for handling extraordinary items in interim reports is to a. prorate them over all four quarters. b. prorate them over the current and remaining quarters. c. charge or credit the loss or gain in the quarter that it occurs. d. disclose them only in the notes. 24. If the financial statements examined by an auditor lead the auditor to issue an opinion that contains an exception that is not of sufficient magnitude to invalidate the statement as a whole, the opinion is said to be a. unqualified. b. qualified. c. adverse. d. exceptional. 25. The MD&A section of a company's annual report is to cover the following three items: a. income statement, balance sheet, and statement of owners' equity. b. income statement, balance sheet, and statement of cash flows. c. liquidity, capital resources, and results of operations. d. changes in the stock price, mergers, and acquisitions. ACCT 311, Ver B, Summer 2014 26. How is the amortization of patents reported in a statement of cash flows that is prepared using the direct method? A. Not reported. B. An increase in cash flows from operating activities. C. A decrease in cash flows from operating activities. D. A decrease in cash flows from investing activities. 27. Creditors and investors would generally find the statement of cash flows least useful for assessing the: A. Ability to generate future cash flows. B. Ability to pay dividdends C. Financial position at a point in time. D. Quality of earnings. 28. A firm reported ($ in millions) net cash inflows (outflows) as follows: operating $75, investing ($200), and financing $350. The beginning cash balance was $250. What was the ending cash balance? A. $875 . B. $25. C. $475 . D. $125 . 29. Cash equivalents generally would not include short-term investments in: A. Commercial paper. B. Certificates of deposit. C. Held-to-maturity securities. D. Money market funds. ACCT 311, Ver B, Summer 2014 30. Cash equivalents have each of the following characteristics except: A. Little risk of loss. B. Highly liquid. C. Maturity of at least three months. D. Short-term. 31. When a company purchases a security it considers a cash equivalent, the cash outflow is: A. Reported as an operating activity. B. Reported as an investing activity. C. Reported as a financing activity. D. Not reported on a statement of cash flows. 32. When preparing a statement of cash flows using the direct method, accrual of payroll expense is: A. Reported as an operating activity. B. Reported as an investing activity. C. Reported as a financing activity. D. None of the above is correct. 33. A firm reported salary expense of $239,000 for the current year. The beginning and ending balances in salaries payable were $40,000 and $15,000, respectively. What was the amount of cash paid for salaries? A. $214,00 0. B. $289,00 0. C. $264,00 0. D. $239,00 0. ACCT 311, Ver B, Summer 2014 34. In a statement of cash flows in which operating activities are reported by the direct method, which of the following would increase reported cash flows from operating activities? A. Gain on sale of equipment. B. Interest revenue. C. Gain on early extinguishment of bonds. D. Proceeds from sale of land. 35. Which of the following is reported as an operating activity in the statement of cash flows? A. The payment of dividends. B. The sale of office equipment. C. The payment of interest on long-term notes. D. The issuance of a stock dividend. ACCT 311, Ver B, Summer 2014