Name SOLUTION

 I. ADJUSTING JOURNAL ENTRIES (12 points and minutes)

II. FINANCIAL STATEMENT RELATIONSHIPS (12 points and minutes)

1. a.  Sales for 1997 were $440,000. What was the amount of cash collected from customers in 1997?

Collections from customers = $432,000

b. Cash payments to suppliers for merchandise for 1997 were $260,000. What was the amount of Cost of goods sold?

Payments to suppliers for merchandise = $267,000

c. Insurance expense for 1997 totaled $19,500. What was the amount of insurance premiums paid?

Insurance premiums paid = $21,500

d. New equipment costing $125,000 was purchased in 1997,and old equipment was sold for $56,000 cash.     Depreciation expense for 1997 was $46,000. Give the journal entry to record the sale of the old equipment.

Cash                                              56,000
Accumulated depreciation           27,000
Equipment                                           83,000

III. NONOPERATING ITEMS (14 points and minutes)

1. Rats Limited has two operating segments: Wheelbarrows Manufacturing Inc., and Toothbrushes Supply Inc. The wheelbarrow segment has been unprofitable, and on December 31,1997, Rats agreed to sell the entire wheelbarrow business to another company on April 1, 1998 for $90,000. Rats continues to operate the unit until the sale date even though they expect to lose $16,000 (before taxes) on these operations. At December 31, 1997, the book value of Rats’ investment in Wheelbarrows Manufacturing Inc. was $80,000. In 1997 Rats had operating losses from Wheelbarrows Manufacturing Inc. of $20,000 before tax. The tax rate is 40% and losses are fully deductible.

Required:   Show how these events would be reported in Rats’ 1997 Income Statement.

DISCONTINUED OPERATIONS
Loss on operating discontinued segment (net of tax benefit of $8,000)             ($12,000)
Estimated loss on disposal of segment including operations during
phase-out period (net of tax benefit of $2,400)                                                      ( 3,600)
Loss on discontinued operations                                                                          ($15,600)
2. Risky Trucking Company does not carry insurance on its trucks. Operating income before taxes and before the following events was $2,800,000. During 1997 the following mishaps occurred. On June 23, Truck A was destroyed in crash on Franklin Boulevard. On July 15, Truck B was heavily damaged by a volcanic eruption in Texas, and on December 12, the Mexican Government seized Truck C when the driver tried to smuggle a case of Henry Weinhard’s into Tijuana. In all cases the trucks and their contents were a total loss. The book value of the trucks and their contents at the time of their loss were:
Truck A $120,000
Truck B $100,000
Truck C $220,000
Required:   Assume the losses are fully tax deductible and that the tax rate is 30%. Show how these losses would be reported on the Risky Company’s 1997 Income Statement.
 
Income from operations before tax and unusual items                                $2,800,000
Loss from truck crash                                                                                       ( 120,000)
Operating income before tax                                                                         $2,680,000
Provision for taxes (30%)                                                                                   804,000
Operating income                                                                                          $1,876,000
Extraordinary items:
    Truck lost in volcano (net of tax benefit of $30,000)          ( 70,000)
   Truck seized in Mexico (net of tax benefit of $66,000)      ( 154,000)
Extraordinary losses                                                                                       ( 224,000)
Net Income                                                                                                  $ 1,653,000

IV. OBJECTIVE QUESTIONS (62 points and minutes)

Relevance Reliability
a. no            yes
b. no            no
c. yes          no
d. yes          yes

D 2. Which of the following statements about the Statements of Financial Accounting Concepts (SFACs) is correct?

C 3. Choose the correct statement about generally accepted accounting principles (GAAP).

D 5. Money for operating the FASB comes from:

C 6. Before the establishment of the FASB in 1973, financial accounting standards in the U.S. were formulated by:

B 7. The sales manager of a firm uses a blue company-owned car to visit customers. The service manager owns an identical         red car paid for from her salary that she drives to service calls. The firm will report the cost of the blue car but not the red         car on its balance sheet. This is an example of:

 A 8. Revenue is recognized when:

a. service is rendered and collection is probable.
b. the contract is signed.
c. service is rendered.
d. it is collected in cash.

C 9. The list price of a new van is $30,000. The van cost the dealer $20,000. ABC company buys the van for $25,000. The          revenue that the dealer should recognize for the sale is:

a. $ 5,000
b. $20,000
c. $25,000
d. $30,000

 B 10. A company incurred $60,000 in wages in the current year to produce 30 fancy wooden desks. By the end of the year           20 of the desks were sold. $6,000 of the $60,000 in wages remained unpaid at year end. The wages expense that           should be recognized by the company for the year is:

a. $34,000
b. $40,000
c. $54,000
d. $60,000

D 11. Accrued interest revenue would be classified into which of the following categories for disclosure in the Statement of           Cash Flows?

a. not a cash flow reconciling item
b. item reconciling earnings and operating cash flow
c. investing cash flow
d. operating cash flow

C 12. DBB reported cost of goods sold for 1997 of $600,000; merchandise inventory decreased by $20,000 during the year,           and accounts payable decreased by $30,000 during the year. What would be DBB’s cash paid to suppliers for 1997.

D 13. The income statement for LCBA reported a net loss of $14,000 for 1997. The depreciation expense for 1997 was           $12,000 and amortization of patents was $6,000. Assuming no additional "adjustments to reconcile net income to cash           from operating activities," the cash flow from operations would be:

a. $4,000 outflow
b. $2,000 outflow
c. $6,000 inflow
d. $4,000 inflow

What would be BWL’s cash outflow for investing and financing activities for 1997?

Investing Financing
a. $100     $110
b. $100     $ 80
c. $150     $115
d. $150     $110

 C 15. Regulations requiring disclosure of information to those wanting it will likely lead to:

a. costs of information will be transferred from non-users to users.
b. users will understate their demand for information.
c. neither a. nor b.
d. both a. and b.

 

B 16. Any financial reporting regulation is likely to be favored by some groups and opposed by others. This implies:

a. regulation is hopeless since it cannot please everybody.
b. regulation involves social choices and, therefore, political trade-offs.
c. regulation will not be controversial if done by the government.
d. regulators can get agreement by having interested parties vote on the choices.
 

a. benefits of that arrangement are thought to exceed the costs.
b. accountants are trusted to put society’s interest above their own.
c. the FASB is a quasi-government agency.
d. all other social choices are handled this way.

D 18. The adjustment process is designed to:

a. record transactions occurring at year end.
b. reflect expenses no later than when cash is paid.
c. reflect revenues in the period in which cash is received.
d. reflect the effects of cash flows in periods other than when the flow occurred.

a. understated by $16,000.
b. overstated by $16,000.
c. cannot tell without more information.
d. no effect.

B 20. An accrued expense represents an amount:

a. not paid and not currently matched with earnings.
b. not paid and currently matched with earnings.
c. paid and not currently matched with earnings.
d. paid and currently matched with earnings.

C 21. Which of the following is an accrued liability?

a. current portion of long-term debt
b. rent revenue collected three months in advance
c. wages payable
d. dividends payable

 Accounting Terms

E  1. Revenues
G  2. Losses
B  3. Liabilities
F  4. Gains
A  5. Equity
D  6. Expense
C  7. Assets
H  8. Comprehensive income

Phrases

A.  Residual interest in assets belonging to owners.
B.  Probable future sacrifices of economic benefits arising from present obligations.
C.  Probable future economic benefits obtained as a result of past transactions or events.
D.  Outflows or consumption of assets or incidence of liabilities from delivering goods or services related to ongoing,       central operations.
E.  Inflows of assets or settlements of liabilities during a period from delivering goods or services related to ongoing,       central operations.
F.  Increases in equity from peripheral or incidental transactions.
G.  Decreases in equity from peripheral or incidental transactions.
H.  All changes in equity during a period except those resulting from investments by owners and distributions to       owners.

Classification

A. Income from continuing operations
B. Income from discontinued operations
C. Extraordinary gains and losses
D. Prior period adjustments

Transaction

C 1. A hurricane destroyed a major warehouse of a multinational company.

D 2. A manufacturer of cake mixes discovered this year that it had made a major error in calculating depreciation         expense three years ago.

A 3. An international manufacturer of shoes discontinued production of its Italian styles and reported a net loss for the         year from Italian operations.

A 4. A toy manufacturer with only one plant moved to another location for the first time and incurred $60,000 in moving         costs.

A 5. The gain on the sale of machinery used in the manufacturing operations of the business, assuming that the machinery         was replaced by a newer model.

 24.  Match the following valuations and balance sheet accounts to reflect, in general, the measurements on a typical balance         sheet. Enter appropriate letters to the left.