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o you may present your answers in a Word, excel or pdf file. o Show your work (computations), in good form, where applicable for full credit Multiple Choice Problems (Show your work for any computation, and full credit) 1. A company with a June 30 fiscal year entered into a $3,000,000 construction project on April 1, to be completed on September 30. The cumulative construction-in-progress balances at April 30, May 31, and June 30 were $500,000, $800,000, and $1,500,000 respectively. The interest rate on the company's debt used to finance the construction project was 5% from April 1 through June 30, and 6% from July 1 through September 30. Assuming that the asset is placed into service on October 1, what amount of interest should be capitalized to the project on June 30? a. $11,666 b. $18,750 c. $75,000 d. $90,000 2. A company reports the following information for Year 1: Sale of Equipment Issuance of the company's bonds Dividends paid Purchase of stock of another company Purchase of U.S. Treasury note Income taxes paid Interest income received $20,000 $10,000 $5,000 $2,000 $2,000 $2,000 $500 What is the company's net cash flow from financing activities? a. ($9,000) b. $5,000 c. $5,500 d. $15,000 3. Long Co. invested in marketable securities. At year-end, fair-value changes in this investment were included in Long's other comprehensive income. How would Long classify this investment? a. Held-to-maturity securities b. Trading securities c. Equity securities d. Available-for-sale securities 4. Howell Co. had the following first-year amounts for a $7,000,000 construction contract: Actual costs $2,000,000 Estimated costs to complete: $6,000,000 Progress billings: $1,800,000 Cash collected: $1,500,000 What amount should Howard recognize as gross profit (loss) using the percentage-ofcompletion method? a. b. c. d. ($1,000,000) ($200,000) $800,000 $1,750,000 5. Angie, Inc. owns 35% of Caifeng Corporation. During the calendar year 2016, Caifeng had net earnings of $300,000 and paid dividends of $30,000. Angie, Inc. 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. b. c. d. Understate, overstate, overstate Overstate, understate, understate Overstate, overstate, overstate Understate, understate, understate 6.Daley Co. holds a 30% stake in DiMarco Co. which was purchased in 2016 at a cost of $3,000,000. After applying the equity method, the Investment in DiMarco Co. account has a balance of $3,040,000. At December 31, 2016 the fair value of the investment is $3,120,000. Which of the following values is acceptable for Daley to use in its balance sheet at December 31, 2016? 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. 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. 8. 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. 9. In accounting for a long-term construction-type contract using the percentage-ofcompletion 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. 10. 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. 11. 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. 12. Scott 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, 2016. Assets Industry Revenue Profit 12/31/16 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 2016, how many reportable segments does Scott have? a. Three b. Four c. Five d. Six 13. The following information pertains to Agnew Corp. and its divisions for the year ended December 31, 2016. 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 Agnew and all of its divisions are engaged solely in manufacturing operations. Agnew has a reportable segment if that segment's revenue exceeds a. $462,000. b. $455,000. c. $357,000. d. $350,000. 14. Major Corp. has estimated that total depreciation expense for the year ending December 31, 2016 will amount to $400,000, and that 2016 year-end bonuses to employees will total $800,000. In Minor's interim income statement for the six months ended June 30, 2016, 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. 15. 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. 16. 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. 17. 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. 18. When a company purchases a security it considers a cash equivalent, the cash outflow is: A. B. C. D. Reported as an operating activity. Reported as an investing activity. Reported as a financing activity. Not reported on a statement of cash flows. 19. 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. B. C. D. 20. $214,000. $289,000. $264,000. $239,000. 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. B. C. D. Gain on sale of equipment. Interest revenue. Gain on early extinguishment of bonds. Proceeds from sale of land. Problems 1. Lewis Inc. purchased several investment securities during 2014, its first year of operations. The following information pertains to these securities. The fluctuations in their fair values are not considered permanent. Fair Value Held to Maturity Baxter Co. Bonds 12/31/15 $375,000 Fair Value 12/31/16 $400,000 Amortized Cost 12/31/15 $367,500 Trading Securities Ready Co. Stock SkyInc Stock Brandy Inc Stock $48,000 $47,000 $44,000 $62,500 $78,000 $40,500 $66,000 $39,000 $32,900 Available for Sale Securities OverarmorCo Stock $130,500 $150,600 $140,000 Amortized Cost 12/31/16 $360,000 What balance sheet amount would Lewis report for its total investment securities at 12/31/2016? 2. Moore 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-ofcompletion 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. Moore began work on a lump-sum contract at the beginning of 2016. As bid, the statistics were as follows: Lump-sum price (contract price) Estimated costs Labor Materials and subcontractor Indirect costs $12,000,000 $2,550,000 5,250,000 1,200,000 9,000,000 $3,000,000 At the end of the first year, the following was the status of the contract: Billings to date Costs incurred to date Labor Materials and subcontractor Indirect costs Latest forecast total cost $6,690,000 $1,392,000 3,294,000 579,000 5,265,000 9,000,000 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 $315,000. These costs should not be considered in the costs incurred to date. Instructions (a) Compute the percentage of completion on the contract at the end of 2016. (b) Indicate the amount of gross profit that would be reported on this contract at the end of 2016. (c) Make the journal entry to record the income (loss) for 2016 on Moore's books. 3. Prepare a cash flow statement for the following information. (Indirect Method) Balance Sheet ($) ASSETS: Current Assets: Cash Marketable Securities Accounts Receivable, net Inventory Prepaid Expenses Total Current Assets Jan 1 310,000 1,200,000 290,000 3,000,000 200,000 5,000,000 Dec 31 600,000 1,000,000 330,000 4,000,000 300,000 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 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 1,000,000 4,000,000 1,500,000 4,300,000 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 Income Statement (for problem 3) 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 4. An analyst compiled the following information for Uver Inc. for the year ended December 31, 2016: 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 Uver Inc.'s net cash flow from operating activities for the year ended December 31, 2016? 5. Computation of selected ratios. The following data is given: Cash Accounts receivable (net) Inventories Plant assets (net) December 31, 2016 2015 $ 68,000 $ 50,000 70,000 60,000 90,000 130,000 383,000 325,000 Accounts payable Salaries and wages payable Bonds payable 10% Preferred stock, $40 par Common stock, $10 par Paid-in capital Retained earnings 60,000 10,000 70,000 100,000 120,000 80,000 170,000 Net credit sales Cost of goods sold Net income 800,000 600,000 80,000 Instructions Compute the following ratios: (a) Acid-test ratio at 12/31/16 (b) Receivables turnover in 2016 (c) Inventory turnover in 2016 (d) Profit margin on sales in 2016 40,000 5,000 70,000 100,000 90,000 65,000 175,000