Test bank intermediate accounting 14e by kieso comprehensive exam f

The net income for the year ended December 31, 2013, for Tax Consultants INC.. Additional information is as follows: Depreciation on plant assets 450,000 Cash dividends paid on common s

COMPREHENSIVE EXAMINATION F

PART 6

(Chapters 22-24)

F-I Multiple Choice Questions 25 min

F-II Statement of Cash Flows 25 min

F-III Accounting Changes, Error Corrections, and

Prior Period Adjustments 30 min

F-IV * Analysis of Financial Statements 25 min

*This topic is dealt with in an Appendix to the chapter

Problem F-I — Multiple Choice Questions

1 Which of the following transactions would be considered a financing activity in preparing a

statement of cash flows?

a Amortizing a discount on bonds payable

b Recording net income from operations

c Selling common stock

d Purchasing inventory

2 The net income for the year ended December 31, 2013, for Tax Consultants INC was

$920,000 Additional information is as follows:

Depreciation on plant assets 450,000

Cash dividends paid on common stock 180,000

Increase in noncurrent deferred tax liability 45,000

Based on the information given above, what should be the net cash provided by operating activities in the statement of cash flows for the year ended December 31, 2013?

a $1,256,000

b $1,346,000

c $1,391,000

d $1,436,000

3 Information concerning the debt of Cole Company is as follows:

Short-term borrowings:

Balance at December 31, 2012 $525,000

Proceeds from borrowings in 2013 325,000

Balance at December 31, 2013 $400,000

Current portion of long-term debt:

Balance at December 31, 2012 $1,625,000 Transfers from caption "Long-Term Debt" 500,000

Payments made in 2013 (1,225,000) Balance at December 31, 2013 $ 900,000 Long-term debt:

Balance at December 31, 2012 $9,000,000

Proceeds from borrowings in 2013 2,250,000 Transfers to caption "Current Portion of Long-Term Debt" (500,000) Payments made in 2013 (1,500,000) Balance at December 31, 2013 $9,250,000

In preparing a statement of cash flows for the year ended December 31, 2013, for Cole Company, cash flows from financing activities would reflect

Outflow

a $2,000,000

b $2,250,000

c $2,575,000

d $3,175,000

Problem F-I — (cont.)

4 In considering interim financial reporting, how did the Accounting Principles Board

conclude that such reporting should be viewed?

a As a "special" type of reporting that need not follow generally accepted accounting

principles

b As useful only if activity is evenly spread throughout the year so that estimates are unnecessary

c As reporting for a basic accounting period

d As reporting for an integral part of an annual period

5 Which of the following items represents a potential use of cash?

a Patent amortization

b Sale of plant assets at a loss

c Net loss from operations

d Declaration of a stock dividend

6 Worthington Company purchased a machine on January 1, 2010, for $4,800,000 At the

date of acquisition, the machine had an estimated useful life of six years with no salvage The machine is being depreciated on a straight-line basis On January 1, 2013, Worthington determined, as a result of additional information, that the machine had an estimated useful life of eight years from the date of acquisition with no salvage An accounting change was made to reflect this additional information What amount of depreciation expense should be reported in Worthington’s income statement for the year ended December 31, 2013?

a $800,000

b $600,000

c $480,000

d $300,000

7 On January 7, 2011, Yoder Corporation acquired machinery at a cost of $1,500,000

Yoder adopted the sum-of-the-years’-digits method of depreciation for this machine and had been recording depreciation over an estimated life of five years, with no residual value At the beginning of 2013, a decision was made to change to the straight-line method of depreciation for this machine Assuming a 30% tax rate, the cumulative effect

of this accounting change, net of tax, is

a $0

b $200,000

c $210,000

d $300,000

*8 Information from Collins Company’s balance sheet is as follows:

Current assets:

Short-term investments 20,000,000

Prepaid expenses 2,000,000

Total current assets $150,000,000

Problem F-I (cont.)

Current liabilities:

Income taxes payable 3,000,000

Current portion of long-term debt 5,000,000

Total current liabilities $ 50,000,000

What is the acid-test (quick) ratio?

a 1:24 to 1

b 1.64 to 1

c 1.68 to 1

d 3.00 to 1

*9 Fargo, Inc disclosed the following information as of and for the year ended December 31,

2013:

Inventory at beginning 100,000

Accounts receivable at beginning of year 110,000 Accounts receivable at end of year 130,000 Fargo’s receivables turnover is

a 6.9 to 1

b 7.5 to 1

c 12.5 to 1

d 13.6 to 1

*10 The calculation of the number of times interest is earned involves dividing

a net income by annual interest expense

b net income plus income taxes by annual interest expense

c net income plus income taxes and interest expense by annual interest expense

d none of the above

Problem F-II — Statement of Cash Flows

Sharp Company Comparative Balance Sheet

2013 2012

Accounts receivable, net 53,000 57,000

Accumulated depreciation (75,000) (60,000)

Accumulated depreciation (177,000) (141,000)

Accounts payable $ 202,000 $ 150,000

Capital stock, $10 par 1,125,000 1,125,000

Retained earnings 284,000 225,000

Additional Data:

1 Net income for the year amounted to $104,000

2 Cash dividends were paid amounting to 4% of par value

3 Land was sold for $120,000

4 Sharp sold equipment, which cost $225,000 and had accumulated depreciation of $90,000,

for $105,000

Instructions

Prepare a statement of cash flows using the indirect method

Problem F-III — Accounting Changes, Error Corrections, and Prior Period Adjustments

Molina Company’s reported net incomes for 2013 and the previous two years are presented below

2013 2012 2011

2013’s net income was properly determined after giving effect to the following accounting changes, error corrections, etc which took place during the year The incomes for 2011 and 2012

do not take these items into account and are stated at the amounts determined in those years

Ignore income taxes

Instructions

(a) For each of the six accounting changes, errors, or prior period adjustment situations described below, prepare the journal entry or entries Molina Company should record during

2013 If no entry is required, write “none.”

(b) After recording the situation in part (a) above, prepare the year-end adjusting entry for December 31, 2013 If no entry, write “none.”

1 Early in 2013, Molina determined that equipment purchased in January, 2011 at a cost of

$645,000, with an estimated life of 5 years and salvage value of $45,000 is now estimated

to continue in use until December 31, 2017 and will have a $15,000 salvage value Molina recorded its 2013 depreciation at the end of 2013

(a)

(b)

2 Molina determined that it had understated its depreciation by $20,000 in 2012 owing to the fact that an adjusting entry did not get recorded

(a)

(b)

3 Molina bought a truck January 1, 2010 for $50,000 with a $5,000 estimated salvage value and a six-year life The company debited an expense account and credited cash on the purchase date The truck is expected to be traded at the end of 2015 Molina uses straight-line depreciation for its trucks

(a)

(b)

Problem F-III (cont.)

4 During 2013, Molina changed from the straight-line method of depreciating its cement plant

to the double-declining-balance method The following calculations present depreciation on both bases (Ignore income taxes.) The 2013 amount applies double-declining balance to the 1/1/13 carrying amount after straight-line was used

2013 2012 2011 Straight-line $100,000 $100,000 $100,000

Double-declining $200,000 $160,000 $200,000 (a)

(b)

5 Molina, in reviewing its provision for uncollectibles during 2013, has determined that 1/2 of 1% is the appropriate amount of bad debt expense to be charged to operations The company had used 1% as its rate in 2012 and 2011 when the expense had been $20,000 and $14,000, respectively The company would have recorded $50,000 of bad debt expense

on December 31, 2013 under the old rate

(a)

(b)

6 During 2013, Molina decided to change from the LIFO method of valuing inventories to average cost The net incomes involved under each method were as follows:

2013 2012 2011

Average cost $63,000 $67,000 $48,000

Assume no difference between LIFO and average cost inventory values in years prior to

2011

(a)

(b)

Problem F-IV — Analysis of Financial Statements

The market value of Farmington Corp.'s common shares was quoted at $54 per share at December 31, 2013, and 2012 Planetarium 's balance sheet at December 31, 2013, and 2012, and statement of income and retained earnings for the years then ended are presented below:

Farmington Corp

Balance Sheet

December 31

2013 2012 Assets:

Current assets:

Short-term investments 17,200,000 15,400,000 Accounts receivable (net) 109,000,000 111,000,000 Inventories, lower of cost or market 122,000,000 140,000,000 Prepaid expenses 4,000,000 2,800,000 Total current assets $261,200,000 $274,400,000 Property, plant, and equipment (net) 350,000,000 315,000,000 Investments, at equity 2,800,000 3,500,000 Long-term receivables 15,000,000 20,000,000 Copyrights and patents (net) 6,000,000 7,000,000 Other assets 8,000,000 9,100,000 Total assets $643,000,000 $629,000,000 Liabilities and Stockholders' Equity:

Current liabilities:

Notes payable $ 7,000,000 $ 17,000,000

Income taxes payable 1,500,000 2,000,000 Current portion of long-term debt 10,000,000 9,500,000 Total current liabilities 101,000,000 110,500,000

Deferred income taxes 69,000,000 65,000,000 Other liabilities 15,000,000 9,500,000

Total liabilities 365,000,000 375,000,000 Stockholders' equity:

Common stock, par value $1; authorized 20,000,000

shares; issued and outstanding 12,000,000 shares 12,000,000 12,000,000 10% cumulative preferred shares, par value $100;

$100 liquidating value; authorized 100,000 shares;

issued and outstanding 60,000 shares 6,000,000 6,000,000 Additional paid-in capital 119,000,000 119,000,000 Retained earnings 141,000,000 117,000,000 Total stockholders' equity 278,000,000 254,000,000 Total liabilities and stockholders' equity $643,000,000 $629,000,000

*Problem F-IV (cont.)

Farmington Corp

Statement of Income and Retained Earnings

Year ended December 31

2013 2012

Cost and expenses:

Cost of goods sold 390,900,000 400,000,000 Selling, general, and administrative expenses 70,000,000 65,000,000 Other, net 9,100,000 6,000,000 Total costs and expenses 470,000,000 471,000,000 Income before income taxes 70,000,000 29,000,000 Income taxes 21,000,000 11,600,000

Retained earnings at beginning of period 117,000,000 113,100,000 Dividends on common stock (24,400,000) (12,900,000) Dividends on preferred stock (600,000) (600,000) Retained earnings at end of period $141,000,000 $117,000,000 Instructions

Based on the above information, compute the following (for the year 2013 only): (Show supporting computations in good form.)

(a) Current ratio

(b) Acid-test (quick) ratio

(c) Receivables turnover

(d) Inventory turnover

(e) Book value per share of common stock

(f) Earnings per share on common stock

(g) Price-earnings ratio on common stock

(h) Payout ratio on common stock

Problem F-V — Segment Reporting

Baden Company is a diversified company which has developed the following information about its five segments:

SEGMENTS

A B C D E Total sales $ 600,000 $1,700,000 $ 300,000 $ 320,000 $ 580,000 Operating profit (loss) (270,000) 480,000 40,000 (300,000) (10,000) Identifiable assets 1,600,000 5,800,000 1,200,000 3,900,000 5,600,000

Instructions

Identify which segments are significant enough to warrant disclosure in accordance with FASB

No 131, "Reporting Disaggregated Information about a Business Enterprise," by applying the

following quantitative tests:

a Revenue test

b Operating profit or loss test

c Identifiable assets test

Solutions — Comprehensive Examination F

Problem F-I — Solution

1 c 6 c

2 d 7 a

3 d *8 b

4 d *9 b

5 c *10 c

Problem F-II — Solution

Sharp Company Statement of Cash Flows For the Year Ended December 31, 2013

Cash flows from operating activities

Adjustments to reconcile net income to net cash provided

by operating activities:

Decrease in accounts receivable $ 4,000

Increase in accounts payable 52,000

Gain on sale of land (15,000)

Loss on sale of equipment 30,000

Depreciation expense—building 15,000

Depreciation expense—equipment 126,000 174,000 Net cash provided by operating activities 278,000 Cash flows from investing activities

Purchase of equipment (890,000)

Net cash used by investing activities (665,000) Cash flows from financing activities

Payment of cash dividends (45,000)

Net cash provided by financing activities 405,000

Problem F-III — Solution

1 (a) None

(b) Depreciation Expense 78,000

Accumulated Depreciation 78,000

[($645,000 – $240,000 – $15,000) ÷ 5]

2 (a) Retained Earnings 20,000

Accumulated Depreciation 20,000 (b) None

3 (a) Truck 50,000

Accumulated Depreciation 22,500 Retained Earnings 27,500 (b) Depreciation Expense 7,500

Accumulated Depreciation 7,500

4 (a) None

(b) Depreciation Expense 200,000

Accumulated Depreciation 200,000

5 (a) None

(b) Bad Debt Expense 25,000

Allowance for Doubtful Accounts 25,000

6 (a) Inventory (Beginning) 14,000

Retained Earnings 14,000 (b) None

*Problem F-IV — Solution

(a) Current ratio:

Total current assets $261,200,000

—————————— = —————— = 2.59 to 1

Total current liabilities $101,000,000

(b) Acid-test (quick) ratio:

Total quick assets $135,200,000

—————————— = ——————— = 1.34 to 1

Total current liabilities $101,000,000

*Problem F-IV — Solution (cont.)

(c) Receivables turnover:

Net sales $540,000,000

————————————— = ————————————————– = 4.91 times Average accounts receivable [($109,000,000 + $111,000,000) ÷ 2]

(d) Inventory turnover:

Cost of goods sold $390,900,000

————————— = —————— = 2.98 times

Average inventories $131,000,000

(e) Book value per share of common stock:

Total stockholders' equity – liquidating value of preferred stock $272,000,000

———————————————————————————— = —————— = $22.67 Common shares issued and outstanding at December 31, 2013 12,000,000

(f) Earnings per share on common stock:

Net income – dividends on preferred stock $48,400,000

——————————————————————————— = —————— = $4.03 Average common shares issued and outstanding during 2013 12,000,000

(g) Price-earnings ratio on common stock:

Market value of common stock $54.00

————————————————— = ———— = 13.4

Earnings per share on common stock $4.03

(h) Payout ratio on common stock:

Dividends on common stock $24,400,000

——————————————————— = —————— = 50.4%

Net income – dividends on preferred stock $48,400,000