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1 AC 375 Unit 4 Graded Assignment Modules 9 & 10 Spring 2013 due in UTest Thursday, April 25. Submit also your calculations to Forum (same due date) on your worksheet downloaded from Module 10 on our web site. 1. If company A buys 25% of company B stock, and pays $1,000 more than current market value for these shares, what percentage of company B's shareholder equity belongs to company A? A. 35% B. It depends on the dollar value of total shareholder equity for company B. C. 25% D. 26% 2. Which of the following statements is false in regards to the cost method? A. Investments for which no current market values exist must be accounted for using this method. B. Held-to-maturity investments are reported using the cost method. C. Dividends and interest received are not recognized in current income. D. The investment is consistently reported at its historical cost. 3. Which of the following would not be considered an intangible asset? A. Trademarks and internet domain names B. Plant, Property, and Equipment C. Patents, computer software, databases and trade secrets D. Customer lists, production backlog, and customer contracts 4. When the market value of a company's portfolio of available-for-sale equity securities is lower than its book value, the difference should be: A. Written off as an impairment B. Recorded as a liability on the company's balance sheet C. Recorded as an expense on the company's income statement D. Deducted from the investment account E. Added to stockholders' equity of the investor 5. This type of lease is considered a form of off-balance-sheet financing. A. Capital Lease B. Special Purpose Lease C. Operating Lease D. Variable Interest Lease 6. What are the three basic components of pension expense? A. Service cost, benefits paid, and actual return on plan assets B. Service cost, interest cost, and expected return on plan assets C. Service cost, benefits paid, and expected return on plan assets D. Service cost, interest cost, and actual return on plan assets 2 7. Which of the following is not a benefit of utilizing operating leases for the lessee? A. Lease liability is not reported on the balance sheet. B. Measures of leverage are improved. C. NOPAT is higher D. Net operating asset turnover is higher. 8. With reference to Cabella's lease data, A. Cabella's is the lessee B. Cabella's is the lessor C. Cabella's is both a lessee and a lessor D. Cabella's is neither a lessee nor a lessor 9. For the sake of example, assume that Cabella's leases all of its leased assets from TransGlobal Leasing Corp. A. TransGlobal should record as Revenue on all of its capital leases the present value of future cash flows. B. TransGlobal can claim tax benefits on the leased asset if it is a capital lease. C. The lease receivable is an asset on the balance sheet D. Interest revenue is recognized over the term of the lease as it is paid. E. All of these conditions are true for the lessor regarding capital leases. 10. Which of the following is NOT a condition requiring the use of the capital lease reporting method? A. The lease, by its terms, automatically transfers ownership of the leased asset from the lessor to the lessee at the termination of the lease. B. The lease term is at least 75% of the economic useful life of the leased asset C. The lease, by its terms, does not automatically transfer ownership of the leased asset from the lessor to the lessee at the termination of the lease. D. The lease provides that the lessee can purchase the leased asset for a nominal amount (bargain purchase price) at the termination of the lease. 11. The following is an excerpt from the Sante Fe 2011 annual report: Debt Equity Net present value of operating leases 2011 $ 6,780 15,312 3,513 What is the debt to equity ratio for Sante Fe for 2011? A. 0.541 B. 0.443 C. 0.721 D. 0.518 2010 $ 7,416 13,707 3,185 3 12. The following is an excerpt from the Sante Fe 2011 annual report: 2011 2010 Debt $ 6,780 $ 7,416 Equity 15,312 13,707 Net present value of operating leases 3,513 3,185 What is the recalculated (Pro forma) debt to equity ratio for 2011 under the assumption that leases were capitalized? A. 0.672 B. 0.773 C. 0.518 D. 0.229 13. Analysis of the footnotes to American Eagle Outfitters reveals the following about its operating leases. Year 2007 Operating Lease Payment Discount Factor (i=0.07) Present Value 166,582 0.93458 155,684 2008 168,450 0.87344 147,131 2009 163,394 0.81630 133,379 2010 151,500 0.76290 115,579 2011 132,763 0.71299 94,659 398,477 2.62432* 248,415** Thereafter Remaining life 3 years*** 894,847 * Present value of annuity factor for 3 years @ 7% ** $132,763 x 2.62432 x 0.71299 = $248,415 *** $398,477 $132,763 / year = 3.00142 years, rounded to 3 years Off-balance sheet operating leases have which of the following effects on financial statements and ratios? A. net operating asset turnover is overstated B. financial leverage (debt) is understated C. net operating profit margin is understated during periods in the asset's life when rent expense is greater than depreciation on the same leased assets D. net income is understated E. all of these conditions are true 14. If capitalized, American Eagle Outfitter's assets and liabilities would increase by how much, respectively? A. $398,477, $398,497 B. $0, $894,847 C. $398,497, 894,847 D. $894,847, 894,847 15. If capitalized, American Eagle Outfitter's current Income Statement would be affected by + or - adjustments of $______rent, $_____depreciation, and $______interest respectively? A. -$166,582, $111,586, and $11,661 C. -$166,582, +$111,586, and +$62,639. B. $0, $393,722, and $11,661 D. -$166,582, +$147,646, and $10,898 4 16. For which of the following types of intercorporate investments are unrealized gains reflected in the shareholders' equity section of the investor's balance sheet? A. Equity Method B. Trading Securities C. Available-for-Sale Securities D. Trading Securities, AND Available-for-Sale Securities E. Equity method, Trading Securities, AND Available-for-Sale Securities 17. On its 2011 balance sheet, Bank of America Corporation reports marketable debt securities of $311,416 million. The footnotes disclose that these securities have an amortized cost of $306,437 million. Which of the following is true? A. These are available-for-sale securities. B. These are trading securities. C. There are net unrealized gains of $4,979 on these securities. D. There are net unrealized gains of $4,979 on these securities AND they are available-for-sale securities. E. There are net unrealized gains of $4,979 on these securities AND they are trading securities 18. Which of the following statements is not true of the fair-value method of accounting for marketable securities? A. The investment account is recorded at current fair value on the balance sheet. B. Interim changes in the investments' fair value may or may not affect income depending on the securities' classification. C. This method is used when the reporting company generally owns less than 20% of the investee company. D. Dividends are treated as a return of the capital invested. E. None of these apply. 19. Following is a portion of the investments footnote from Allstate's 2011 10-K. (in millions) 2011 Amortized cost of available-for-sale securities $73,379 Gross unrealized gains 4,404 Gross unrealized losses 1,670 What amount does Allstate report for available-for-sale securities on its 2011 balance sheet? A. $2,734 million B. $71,709 million C. $76,113 million D. $77,783 million E. None of these apply 20. In footnotes to its 2011 annual report, Bancfirst Corp. reported that held-to-maturity securities with an amortized cost of $22,477 thousand had an estimated fair value of $22,958 thousand. The balance sheet reported: A. Held-to-maturity assets of $22,477 thousand B. Held-to-maturity assets of $22,958 thousand C. Accumulated other comprehensive income of $481 thousand related to held-to-maturity assets D. Held-to-maturity assets of $22,477 thousand AND accumulated other comprehensive income of $481 thousand related to held-to-maturity assets E. Held-to-maturity assets of $22,958 thousand AND Accumulated other comprehensive income of $481 thousand related to held-to-maturity assets 5 21. GAAP indentifies several levels of influence / control. If Company A owns 15% of the outstanding voting stock of Company B, which level of influence / control is in evidence? A. Passive B. Significant Influence C. Control D. Fair-value method E. None of these apply 22. How are operating leases reported in the lessee's balance sheet? A. As an asset that is depreciated, similar to the company's other assets. B. As either a short-term or long-term liability, depending on the length of the lease C. At the present value of the future minimum lease payments. D. Operating leases are not disclosed in the lessee's balance sheet or annual report. E. None of these apply 23. Kling Technology disclosed the following minimum rental commitments under non-cancelable operating leases in its 2012 annual report: Minimum operating Amount lease payments (in millions) 2013 $ 86 2014 56 2015 44 2016 36 2017 32 Thereafter 30 Total $284 What is the present value of these operating lease payments, assuming a 6% discount rate? A. $121 million B. $142 million C. $134 million D. $100 million E. None of these apply 24. Cabela's Corp. disclosed the following lease information in its 2011 annual report (in millions). What lease liability does Cabela's report on its balance sheet? 2012 2013 2014 2015 2016 Thereafter Total Amount representing interest Net present value of leases A. $ 24,500 B. $ 12,922 Capital Leases $ 1,000 1,000 1,000 1,000 1,000 19,500 24,500 (11,578) $ 12,922 Operating Leases $ 10,746 11,022 9,473 8,841 8,579 121,524 $170,185 6 C. $170,185 E. None of these apply D. $ 11,578 25. FunTimes, Inc., reported the following items in the 2012 pension footnote (in millions). Service cost $1,012 Benefits paid to retirees 290 Interest cost 980 Actual returns on invested assets 1,400 Expected returns on invested assets 1,540 Actuarial loss $ 38 The increase in the company's pension obligation during the year is: A. $1,702 million B. $1,740 million C. $1,664 million D. $ 340 million E. $ 200 million 26. Kids Fun Corp. reported the following items in the 2012 pension footnote (in millions). Service cost Benefits paid to retirees Interest cost Actual returns on pension plan assets Expected returns on pension plan assets Amortization of deferred amounts The company's pension expense for the year is: A. $312million B. $368 million C. $412 million D. $168 million E. None of these apply $ 724 1,140 906 1,362 1,318 100