Prepare your solution in an MS Excel Workbook with one Worksheet devoted to each question. Each worksheet should contain the answers to only one question. Name the bottom tab of each worksheet according to the question number being addressed. Failure to follow the above instructions may cost you some points. o Only MS Excel format is acceptable for submission. Please do not use any other software or I may have to return the file without grading it. o All questions should be answered keeping in mind ??US GAAP?, unless mentioned otherwise. Read each question carefully before you attempt to answer. 1. UM Contractors received a contract to construct a mental health facility for $2,500,000. Construction was begun in 2008 and completed in 2009. Cost and other data are presented below: 2008 2009 Cost incurred during the year 1,500,000 1,300,000 Estimated costs to complete 1,200,000 0 Billings during the year 1,200,000 1,300,000 Cash collections during the year 1,000,000 1,500,000 (i) Assume that UMU uses the percentage-of-completion method for revenue recognition. Required: Compute and show separately the amounts of gross profit (loss) recognized during 2008 and 2009 from the above contract. (6 points) (ii) Assume that UMU reports under the completed contract method of revenue recognition. Required: Compute and show separately the amounts of gross profit (loss) recognized during 2008 and 2009 from the above contract. (4 points) 2. Answer each of the following multiple-choice questions by picking the appropriate answer from the given choices. (1 point each) (i) The percentage-of-completion method violates the general rule on revenue recognition that: A. Collection is reasonably assured. B. Costs are known or reasonably estimated. C. The earnings process is complete. D. Collections have been received. (ii) For a typical manufacturing company, the most common critical point for recognizing revenue is the date: A. An order is received. B. Production is completed. C. The product is delivered. D. Payment is received. (iii) Reliable Enterprises sells distressed merchandise on extended credit terms. Collections on these sales are not reasonably assured and bad debt losses cannot be reasonably predicted. It is unlikely that repossessed merchandise will be in salable condition. Merchandise costing $30,000 was sold for $55,000 in 2008. Collections on this sale were $20,000 in 2008, $15,000 in 2009, and $20,000 in 2010. In 2008, Reliable would recognize gross profit of: A. $ 0. B. $25,000. C. $ 8,090. D. $ 8,333. (iv) Boomerang Computer Company sells computers with an unconditional right to return the computer if the customer is not satisfied. Boomerang has a long history selling these computers under this returns policy, and can provide precise estimates of the amount of returns associated with each sale. Boomerang most likely should recognize revenue: A. When Boomerang delivers a computer to a customer. B. When Boomerang receives cash from the customer. C. When a customer returns a computer. D. Never, because the right of return is unconditional. (v) Gunk Goblin sells vacuums and just launched a policy where customers have the right to return a vacuum during a three-year period following purchase. Gunk management has no experience under this sort of policy, and does not believe it can accurately estimate returns. What is the longest period of time that Gunk may have to wait before recognizing gross profit associated with one of these sales? A. No time delay, recognize gross profit upon delivery. B. Gunk should recognize gross profit as cash is received under the installment method. C. Gunk should defer gross until costs are recovered under the cost recovery method. D. Three years, after the right of return has expired. (vi) Todd Sweeney is an artist who sells his work under consignment (he displays his work in local barbershops, and customers buy the work there). Sweeney recently transferred a painting to a local barbershop. 83. Sweeney most likely should recognize revenue when: A. He paints the painting, as the painting is accreting. B. When he transfers a painting to a barbershop. C. When the barbershop sells the painting. D. When the barbershop's right of return expires. (vii) In question vi above, after Sweeney has transferred a painting to a barbershop, the painting: A. Should be counted in Sweeney's inventory until the barbershop sells it. B. Should be counted in the barbershop's inventory, as they now possess it. C. Should be counted in either Sweeney's or the barbershop's inventory, depending on which incurred the cost of preparing the painting for display. D. None of these. Chapter 6 3. Answer each of the following multiple-choice questions by picking the appropriate answer from the given choices. (2 points each) (i) LeAnn wishes to know how much she should set aside now at 7% interest in order to accumulate a sum of $5,000 in four years. She should use a table for the: A. Present value of 1. B. Future value of 1. C. Present value of an ordinary annuity of 1. D. Future value of an annuity due of 1. (ii) Polo Publishers purchased a multi-color offset press with terms of $50,000 down and a noninterest-bearing note requiring payment of $20,000 at the end of each year for five years. The interest rate implicit in the purchase contract is 11%. Polo would record the asset at: A. $109,618. B. $123,918. C. $130,000. D. $169,560. (iii) Loan A has the same original principal, interest rate, and payment amount as Loan B. However, Loan A is structured as an annuity due, while Loan B is structured as an ordinary annuity. The maturity date of Loan A will be: A. Earlier than Loan B. B. Later than Loan B. C. The same as Loan B. D. Indeterminate with respect to loan B. (iv) Yamaha Inc. hires a new chief financial officer and promises to pay him a lump sum bonus four years after he joins the company. The new CFO insists that the company invest an amount of money at the beginning of each year in a 7% fixed rate investment fund to insure the bonus will be available. To determine the amount that must be invested each year, a computation must be made using the formula for: A. The future value of a deferred annuity. B. The future value of an ordinary annuity. C. The future value of an annuity due. D. None of these is correct. (v) Zulu Corporation hires a new chief executive officer and promises to pay her a signing bonus of $2 million per year for 10 years, starting five years after she joins the company. The liability for this bonus when the CEO is hired: A. Is the present value of a deferred annuity. B. Is the present value of an annuity due. C. Is $20 million. D. Is zero because no cash is owed for five years. Chapter 7 4. AT&T's financial statements for the 2007 and 2006 fiscal years contained the following information: Balance sheets (in millions) 2007 2006 Current assets: Account receivable, net of allowances for Uncollectibles of 1,364 and 1,276 16,185 16,194 Income statements (in millions) 2007 2006 Revenues 118,928 63,055 In addition, the statement of cash flows disclosed bad debt expense of $1,617 million in 2007 and $586 million in 2006. Required: 1. Determine the amount of actual bad debt write-offs made during 2007. (4 points) 2. Determine the amount of cash collected from customers during 2007. (5 points) 3. Compute the receivables turnover ratio for 2007. (3 points) 5. Companies can have accounts receivable from ordinary trade customers and from related parties (e.g., directors, employees or large shareholders). How do U.S. GAAP and IFRS differ in their requirements about separate disclosure of trade receivables and related-party receivables? Why might separate disclosure of related party receivables be useful? (4 points) Chapter 8 6. Indicate in each of the spaces provided, the effect of the described errors on the various elements of our company's financial statements. Use the following codes: O = amount is overstated; U = amount is understated; NE = no effect. Assume a periodic inventory system, and that all purchases and sales are on credit. (20 points) A/R Inven A/P Sales COGS EXAMPLE: Goods kept in a rented warehouse were excluded from our inventory NE U NE NE O A Goods in transit shipped "f.o.b. shipping point" to us by a supplier were recorded by us as a purchase, but were not included in our ending inventory B Goods sent to us on consignment agency basis by another company were included in our inventory count and were recorded as our purchase. C Goods in transit shipped by us "f.o.b. destination" to a customer were recorded by us as a sale and were not included in our ending inventory. D Goods were shipped to us by a supplier that were appropriately excluded from our ending inventory. But the purchase was inappropriately recorded by us. Chapter 9: 7. Henderson Company uses the gross profit method to estimate ending inventory and cost of goods sold when preparing monthly financial statements required by its bank. Inventory on hand at the end of July was $82,500. The following information for the month of August was available from company records: Purchases 219,000 Freight in 5,200 Sales 350,000 Sales returns 9,000 Purchases returns 4,300 In addition, the controller is aware of $14,000 of inventory that was stolen during August from one of the company's warehouses. Calculate the estimated inventory as per books at the end of August, assuming a markup on cost of 25%. (9 points) Each of questions 8a ???? 8c is worth 2 points. 8a. An argument against the use of LCM is its lack of: A. Relevance. B. Reliability. C. Consistency. D. Objectivity. 8b. Masterlink Co., in applying the lower of cost or market method, reports its inventory at net realizable value. Which of the following statements are correct? Cost is greater than NRV is greater than Net realizable value replacement cost a. yes yes b. no no c. yes no d. no yes A. Option A B. Option B C. Option C D. Option D 8c. On July 10, 2011, Johnson Corporation signed a purchase commitment to purchase inventory for $200,000 on or before February 15, 2012. The company's fiscal year-end is December 31. The contract was exercised on February 1, 2012 and the inventory was purchased for cash at the contract price. On the purchase date of February 1, the market price of the inventory was $210,000. The market price of the inventory on December 31, 2011, was $180,000. The company uses a perpetual inventory system. How much loss on purchase commitment will Johnson recognize in 2011? A. $10,000. B. $20,000. C. $30,000. D. None. Chapter 10 (Each question is worth 2 points) 9a. Cantor Corporation acquired a manufacturing facility on four acres of land for a lump- sum price of $8,000,000. The building included used but functional equipment. According to independent appraisals, the fair values were $4,500,000, $3,000,000, and $2,500,000 for the building, land, and equipment, respectively. The initial values of the building, land, and equipment would be: Building land equipment A. 4,500,000 3,000,000 2,500,000 B. 4,500,000 3,000,000 500,000 C. 3,600,000 2,400,000 2,00,000 D. NONE OF THE ABOVE. A. Option a B. Option b C. Option c D. Option d 9b. Alamos Co. exchanged equipment and $18,000 cash for similar equipment. The book value and the fair value of the old equipment were $82,000 and $90,000, respectively. Assuming that the exchange has commercial substance, Alamos would record a gain/(loss) of: A. $26,000. B. $8,000. C. $(8,000). D. $0. 9c. Asset retirement obligations: A. Increase the balance in the related asset account. B. Are measured at fair value in the balance sheet. C. Are liabilities associated with the restoration of a long-term asset. D. All of the above are correct. 9d. If a company incurs disposition obligations as a result of acquiring an asset: A. The company recognizes the obligation at fair value when the asset is acquired. B. The company recognizes the obligation at fair value when the asset is disposed. C. The company records the difference between the fair value of the asset and the obligation when the asset is acquired. D. None of the above. 9e. Under International Financial Reporting Standards, development expenditures are: A. Expensed in the period incurred. B. Expensed in the period they are determined to be unsuccessful. C. Capitalized if certain criteria are met. D. None of the above is correct. Chapter 11 (Each multiple choice question on this page is worth 2 points) 10a. At the end of its 2011 fiscal year, a triggering event caused Janero Corporation to perform an impairment test for one of its manufacturing facilities. The following information is available: Book Value 65 million Estimated undiscounted future cash flow 60 million Fair Value 50 million The manufacturing facility is: A. Impaired because its book value exceeds undiscounted future cash flows B. Not impaired because its book value exceeds undiscounted future cash flows. C. Not impaired because it continues to produce revenue. D. Impaired because its book value exceeds fair value 10b. According to International Financial Reporting Standards, the impairment loss for property, plant, and equipment is the difference between book value and: A. The undiscounted sum of estimated future cash flows. B. The present value of future cash flows. C. Fair value less costs to sell. D. The higher of the present value of estimated future cash flows and the fair value less costs to sell. 10c. A major expenditure increased a truck's life beyond the original estimate of life. GAAP permits the expenditure to be debited to: A. Repairs. B. Accumulated depreciation. C. Major repairs. D. None of the above. 10d. Short Corporation purchased Hathaway, Inc. for $52,000,000. The fair value of Hathaway's all identifiable tangible and intangible assets was $48,000,000, which resulted in a goodwill amount. The last time Short Corporation purchased a company at goodwill in 1990, it was amortized over 10 years. What is the annual amortization of goodwill from this Hathaway acquisition? A. $100,000. B. $400,000. C. $200,000. D. None of the above numbers is correct. Chapter 12 11. At December 31, 2010, McKnight Brothers Corp. had the following investments that originally were purchased during 2004, its first year of operations: Cost Fair Value Trading Securities: Security A 700,000 725,000 B 210,000 200,000 Total 910,000 925,000 Securities Available for Sale: Security C 500,000 560,000 D 850,000 865,000 Total 1,382,000 1,425,000 Securities to Be Held to Maturity: Security E 970,000 980,000 F 412,000 409,000 Total 1,382,000 1,389,000 No investments were sold during 2010. Security A, Security B and Security D are considered short-term investments. None of the market-value changes is considered permanent. Required: (1 point each) Determine the following amounts to be shown in the financial statements for 2010: a. The total amount of Investments reported as current assets at Dec 31, 2010. b. The total amount of Investments reported as non-current assets at Dec 31, 2010. c. Unrealized gain (or loss) component, if any, of income before taxes. d. Unrealized gain (or loss) component, if any, of Other Comprehensive Income under shareholders?? equity.