US and Canada Accounting Midterm Logistics Paper

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Midterm Logistics

Please allow 3.25 hours for the exam; once you begin the exam, you will have to complete it in one sitting. The book is open book, open notes – you are permitted to use material from the course. The exam is hosted within Blackboard and is a mix of (10) calculations, (10) true/false, and (10) multiple choice.

There is a non-graded question for you attach supporting work for partial credit on the calculation problems.

Financial Accounting
2013 SAMPLE MIDTERM EXAM QUESTIONS
PART I – Answer True (T) or False (F) in the space provided.
______1. The income statement reports where cash came from and how it was used. FALSE
______2. The income statement is dated over the period of time covered, such as “For the Year
Ended December 31, 2012. TRUE
______3. Management’s judgment and estimation play a larger role under accrual basis
accounting than under cash basis accounting. TRUE
______4. Closing the books sets the balances of asset and liability accounts back to zero.
FALSE
______5. Garmin is a manufacturer of GPS-enabled devices. At the end of 2009 and 2008,
Garmin’s total owners’ equity was $2,836.4 and $2,225.9, respectively. Garmin
reported sales of $1,111.2 and net income of $704.0 in 2009. NIVS IntelliMedia
Technology Group, another consumer electronic equipment manufacturer, had an
ROA of 16.7% and an ROE of 29.7% in 2009. As a common equity shareholder,
based solely on this information, you prefer NIVS. TRUE
______6. Failure to record the $500 of rent expense incurred during the period will overstate
owners’ equity on the balance sheet at the end of the period by $500. TRUE (if an
expense is understated, retained earnings is overstated at the end of the period)
______7. Aetna spends $750 million repurchasing its stock. This cash outflow is reported in
the operating section of the cash flow statement. FALSE (outflow in financing)
______8. Generally accepted accounting principles are identical world-wide. FALSE
______9. When a corporation buys equipment and pays cash, total assets increase by the cost of
the equipment. FALSE
______10. If research and development costs lead to a feasible new product then these R&D
costs are recorded as an asset under U.S. GAAP because they provide future benefit
to the company. FALSE (must expense immediately because at the time of these
R&D costs the firm does not know if a feasible product exists)
______11. Assume Groupon sells a coupon for a local restaurant. The SEC requires Groupon to
measures revenue on the income statement using the gross selling price of this
coupon and not just the net amount retained after paying the restaurant. FALSE
______12. Earnings management is the process of recording adjusting journal entries at the end
of the period so that earnings are reported in accordance with GAAP. FALSE
______13. If Exxon Mobil uses the LIFO inventory costing method for tax reporting it must use
it for financial reporting as well. TRUE
1
______14. When prices are rising, the FIFO inventory costing method will generally result in
higher taxable income than LIFO. TRUE
______15. No gain or loss can be recorded when a company sells a fully-depreciated fixed asset.
FALSE
PART II – Place your letter answer in the space provided.
_______1. All of the following are primary financial statements except
a. income statement
b. statement of retained earnings.
c. statement of assets.
d. statement of cash flows.
e. all of the above are primary financial statements
_______2. Which of the following is a permanent account?
a. dividends
b. rent expense
c. sales revenue
d. salary payable
e. bad debt expense
f. none of the above are permanent accounts
_______3. A lower Accounts Receivable Turnover ratio relative to prior years may suggest:
a. the company is able to collect its receivables in a more timely manner
b. the company is attracting new customers with better credit
c. the company has become more aggressive with its revenue recognition
policies
d. All of the above
e. None of the above
_______4. Which of the following companies is mostly likely to recognize revenue on a
percentage-of-completion basis:
a. Pet store
b. Coal mining company
c. Amusement park
d. Text book publisher
e. Cruise ship builder
f. Pharmaceutical manufacturer
_______5. Lee King Plumbing, Inc. reported assets of $1,500 and liabilities of $700 at the end of
year 1. At the end of year 2, the company reported assets of $2,300 and liabilities of $1,400.
Assume Lee King did not pay dividends or repurchase stock in year 2 but it did issue
common stock for $250. What was net income in year 2?
a. 100
b. -100
c. 150
d. -150
e. 350
f. -350
2
Frozen Food Express
December 31,
Current Assets
Tires on equipment in use
2011
2010
5,592
5,425
_______6. A portion of Frozen Food Express’s most recent balance is provided above. The
company has an unusual current asset – tires. Per the footnotes, the company capitalizes the
costs of tires purchased and expenses them on a per mile basis using an estimated 75,000
mile tire life. Assume that when the tires have reached 75,000 miles, they have no value and
are scrapped. If ‘Tire Expense’ was $3,802, how much cash did Frozen Food Express pay to
purchase tires in 2011.
a. $167
b. $3,636
c. $3,802
d. $3,969
_______7. Life Technologies Corporation and Affymetrix Inc. are competitors in the life
sciences and clinical healthcare industry. Total revenues and R&D expenses from each
company’s income statement are:
Total revenue
R&D
Life Technologies Corporation (“LTC”)
2012
2011
2010
$1,620,323 $1,281,747 $1,151,175
$142,505
$115,833
$104,343
Affymetrix Inc
2012
2011
2010
$410,249 $371,320 $355,317
$84,482 $72,740 $86,296
Which of the following is true?
a. Affymetrix is less R&D intensive in 2012 than in 2010.
b. LTC is the more R&D intensive company of the two.
c. LTC has become more R&D intensive over the three years.
d. All of the above are true.
e. None of the above are true.
Perry Ellis
Accounts receivable, less allowances of $1,298 and $2,549
in 2007 and 2006, respectively
1/31/2007
1/31/2006
157,420
152,529
_______8. For the year ended January 31, 2007 Perry Ellis International earned credit sales of
$829,842. For that same period, write-offs were $1,609. How much did Perry Ellis record
for bad debt expense for the year ended January 31, 2007?
a. $358
b. $1,251
c. $1,298
d. $1,609
e. $2,860
3
SBA Company had credit sales of $672,000. As of year-end, the balance in the Allowance for
Doubtful Accounts before adjusting for bad debts was a $300 debit and the balance in
Accounts Receivable was $72,000.
SBA Company incurs the following bad debts percentages historically:
Total Credit Sales
1.5%
_______9. Referring to the above information, what journal entry will SBA will make if it
estimates bad debts by using a percentage of credit sales?
a.
Bad Debts Expense
9,780
Allowance for Doubtful Accounts
9,780
b.
Bad Debts Expense
10,080
Allowance for Doubtful Accounts
10,080
c.
Bad Debts Expense
10,380
Allowance for Doubtful Accounts
10,380
d.
Bad Debts Expense
12,300
Allowance for Doubtful Accounts
12,300
e.
Bad Debts Expense
12,600
Allowance for Doubtful Accounts
12,600
_______10. Referring to the above information, what is the balance in the Allowance for
Doubtful Accounts after SBA estimates bad debts using a percentage of credit sales?
a. $9,780
b. $10,080
c. $10,380
d. $12,300
e. $12,600
_______11. Given the following data, by how much would taxable income change if LIFO were
used rather than FIFO
Beginning inventory
1,000 units at $25
Purchases
2,400 units at $30
Units sold
1,500
a. decrease by $5,000
b. decrease by $7,500
c. increase by $7,000
d. increase by $5,000
e. none of the above
4
_______12. Dunder Mifflin has inventory recorded on its book at $50,000. The actual market
value of this inventory is $40,000. Suppose Dunder Mifflin inappropriately applies the LCM
rule and writes the inventory down to $0. What will be the effect on the income statement
next year if the company then sells the written-down inventory?
a. Cost of goods sold will be overstated and net income will be understated.
b. Cost of goods sold will be overstated and net income will be overstated.
c. Cost of goods sold will be understated and net income will be overstated.
d. Cost of goods sold will be understated and net income will be understated.
e. $12,600
_______13. A firm buys a building for $10,000 on January 1, 2011. The building has an
expected life of 20 years and an expected residual value of $100. Using the double-declining
method, what is the depreciation expense for the year ended December 31, 2012?
a. $475
b. $495
c. $891
d. $900
e. $990
f. $1,000
_______14. A plant asset is acquired on July 1, 2010 at a cost of $35,000. Estimated residual
value is $5,000 and the estimated useful life is 5 years. The company uses straight-line
depreciation. The balance in accumulated depreciation on December 31, 2011, is:
a. $6,000 debit
b. $6,000 credit
c. $9,000 debit
d. $9,000 credit
e. $12,000 debit
f. $12,000 credit
_______15. Polk Company sold equipment costing $30,000 with $28,000 of accumulated
depreciation for $5,000 cash. Polk’s journal entry to record this sale includes:
a. credit to equipment $2,000
b. debit to depreciation expense $28,000
c. debit to accumulated depreciation $28,000
d. debit to gain on sale of $5,000
e. all of the above are included
5
_______16. How does management select an inventory valuation method?
a. If a company generally sells its oldest inventory first, it must use the FIFO inventory
valuation method.
b. If a company generally sells its newest inventory first, it must use the FIFO inventory
valuation method.
c. If a company sometimes sells its newest inventory and sometimes sells its oldest
inventory, then it must use the weighted average inventory valuation method.
d. A company does not need to consider the physical flow of inventory when
choosing an inventory valuation method.
6
PART III
The following questions relate to The Walt Disney Company (“Disney”). You will need to
refer to extracts from the 2010 annual report attached to the back of the exam to answer
some of the questions in this section.
1. Accounting Equation
In the space provided below write the accounting equation in words:
_____assets__________=_____liabilities_________+ _equity _____
In the space provided below, using the appropriate financial statement, write the dollar value of
each account in the accounting equation for Disney as of October 2, 2010.
$_____69,206_______ = $____29,684_______ + $____39,342_______
2. Composition of Assets
One way that Disney earns money is to produce and distribute TV shows and movies. Briefly
describe what the asset ‘Film and TV costs’ represents.
This asset represents all of the costs to produce movies and TV shows (e.g., salaries, sets,
location travel, scripts) that have not been expensed yet. It also includes broadcast rights
(e.g., Disney pays the NFL for the right to broadcast games on ESPN)
Briefly describe the transaction and the journal entry that initially places the asset ‘Film and TV
costs’ on the balance sheet.
Tranaction: Disney pays the film and TV costs, which are capitalized as the show is being
produced. These costs are “inventory” to Disney
Journal Entry:
Film and TV costs (asset)
Cash or Accounts Payable
$XXX
$XXX
Briefly describe the transaction and the journal entry that removes the asset ‘Film and TV costs’
from the balance sheet.
Transaction: The movie premieres or the TV show airs. Disney is not “selling” the show
and earning revenue. Disney will match the expense of producing the movie/show with the
revenue earned, over the expected useful life of the production.
Journal entry:
Cash
$YYY
Revenue
$YYY
Amortization Expense – Film Costs (exp) $ZZZ
Film and TV Costs (asset)
$ZZZ
Name at least one famous ‘asset’ or income-generating resource belonging to Disney that is not
listed on its balance sheet. Why is this item not listed on the balance sheet?
Mickey – no reliable way to measure the value of this internally-generated asset.
7
PART IV Short Answers
Blockbuster Video offers gift certificates to its customers. When a customer gives Blockbuster
$5 and receives a gift certificate, what journal entry does Blockbuster record? (Assume that there
is no expiration date on the gift certificate and that eventually customer will redeem the entire
amount of the gift certificate.)
Cash
Unearned revenue
5
5
A customer rents the movie Black Swan at a rental fee of $4.00 and buys one box of Raisinets at
a price of $1.00. For purposes of this question, assume that the cost to Blockbuster of providing
the movie rental is zero. The cost of the box of Rasinets to Blockbuster is 35 cents. The customer
pays for this transaction with a gift certificate. Prepare the complete journal entry that
Blockbuster must record for this transaction.
Unearned Revenue
5
COGS
0.35
Video rental revenue
Concession revenue
Inventory
(revenue could be combined into one line)
4
1
0.35
Assume Blockbuster depreciates DVDs over three years on a straight-line basis. At the end of the
three years the DVDs have no value. Suppose Blockbuster purchased 100 copies of the movie
The King’s Speech for $9 each on January 1, 2010. What adjusting journal entry does
Blockbuster make at the end of the year? How much is in accumulated depreciation on
December 31, 2011?
$900/3 = $300 depreciation per year
Depreciation expense
Accumulated Depreciation
300
300
Accum Dep: $300 (2010) + $300 (2011) = $600 at 12/31/11
At the beginning of the year, accounts payable were $150 and, at the end of the year, accounts
payable were $450. Blockbuster paid $700 cash to its suppliers during the year. How much did
Blockbuster purchase from its suppliers on account during the year?
Acct Payable
150
700
? = 1000
450
8
Suppose Outback Steakhouse uses LIFO inventory valuation while the Cheesecake Factory uses
FIFO. Describe in words the adjustments you would make to the reported financial statements in
order to compare the two companies.
Convert Outback to FIFO as follows:
FIFO Inventory = LIFO inventory + LIFO Reserve
FIFO COGS = LIFO COGS – LIFO Reserve
The following information was taken from the footnotes of three package delivery companies.
United Parcel Service of America, Inc.
Revenue is recognized upon delivery of a package.
Federal Express Corporation
Revenue is generally recognized upon delivery of shipments. For shipments in transit, revenue is
recorded based on the percentage of service completed.
Airborne Express
Domestic revenues are recognized when shipments are picked up from the customer.
Which revenue recognition policy do you think is most consistent with the revenue principle?
Why?
UPS. Companies should not record revenue until they have delivered the goods or services.
Customers are not paying these companies to pick up a package or to partially transfer a
package. Customers pay for the package to be delivered to the intended recipient.
Do you believe the difference between Airborne’s and UPS’s revenue recognition policies
materially affects their earnings? Why or why not?
No, the difference in revenue recognition policies in this case probably does not materially
affect earnings. These companies are picking up and delivering packages every day. With
Airborne, so long as the number of packages picked up approximates the number of
packages delivered, there will not be a material difference in the total amount of revenue
recorded in a given period.
9
PART IV (continued)
For each of the following situations, indicate when the organization should record revenue and a
reason for your answer. Keep your answers BRIEF.
Barnes & Noble: Book retailer
Transaction:
Barnes & Noble offers a Member Program which entitles members to receive
discounts on books and other purchases. Customers pay Barnes and Noble $25
for a one year membership. The annual membership fee is non-refundable
after the first 30 days. Refunds due to cancellations within the first 30 days are
minimal.
Revenue should be recognized ratably over the 12-month membership period because
Barnes & Noble has promised to provide membership benefits for one year and, thus, earns
the revenue as it provides these membership benefits. (OK, if answer that B&N should wait
until the end of 12 month period but waiting until end of membership period probably
doesn’t reflect economic reality of when B&N is providing membership benefits)
Merck:
Transaction:
Pharmaceutical company
In September 2011, Merck receives cash from the federal government as an
incentive to stockpile flu vaccines. In return, the federal government requires
Merck to be able to delivery vaccines at a moment’s notice. If there is a flu
outbreak, Merck will deliver the vaccines. If there is no need for the vaccines
by the end of the flu season (April 2012), Merck still retains the cash.
You can make valid arguments to recognize revenue at various points. Merck should
record revenue when it fulfills its obligation. What is Merck being contracted to do: Deliver
vaccines to its stockpile? Stand ready to provide vaccines each month of flu season? Have
vaccines in its stockpile until flu season over?
Guitar Center:
Transaction:
Musical instruments retailer
A customer puts a keyboard on lay-away; the company sets the instrument
aside while the customer makes periodic, incremental payments. Once the
amount is paid in full, the customer receives the keyboard. Guitar Center has a
policy of refunding all amounts paid if the customer reneges.
Guitar Center should record revenue only after the customer pays the amount in full and
the keyboard is delivered. Guitar Center has not yet provided the instrument to the
customer (e.g., what happens if a fire in the store destroys the guitar on lay-away?) Also,
there is too much uncertainty about ultimate collection until the keyboard is paid in full to
know the amount of revenue earned.
10
Part V
The following list shows all of the account balances taken from Flour Power Bakery’s trial
balance at December 31, 2012:
Cash
Dividends
Unearned revenue
Interest revenue
Advertising expense
Accumulated depreciation
Allowance for doubtful accounts
Cost of goods sold
Wage expense
Inventory
Common Stock
Accounts receivable
Interest receivable
Sales
Depreciation expense
Bad debt expense
Accounts payable
Retained earnings
Building
Income tax expense
Prepaid insurance
Note receivable
Income tax payable
$ 11,800
21,000
4,000
1,000
4,100
21,000
700
94,300
56,000
15,800
9,400
14,300
1,000
257,600
7,000
500
3,300
13,100
63,000
19,540
6,300
15,000
19,540
Prepare the income statement and statement of retained earnings for the year ended December
31, 2012.
Flour Power Bakery
Income Statement
For the year ended December 31, 2012
Sales
COGS
Gross profit
$257,600
94,300
163,300
Operating expenses:
Advertising
4,100
Wages
56,000
Depreciation
7,000
Bad debts
500
Operating income
67,600
95,700
Interest revenue
Income before taxes
1,000
96,700
11
Income taxes
Net income
19,540
77,160
NOTE: PRESENTATION FORMAT CAN VARY SO LONG AS START WITH REVENUE AND END
WITH NET INCOME
Flour Power Bakery
Statement of Retained Earnings
For the year ended December 31, 2012
RE, beg bal
Net income
Dividends
RE, end bal
13,100
77,160
(21,000)
69,260
EXTRA – NOT REQUIRED:
Flour Power Bakery
Balance Sheet
As of December 31, 2012
Assets
Current assets
Cash
A/R, net
Inventory
Prepaid insurance
Liabilities
$11,800
13,600
15,800
6,300
Long-term assets
Note receivable
Interest receivable
Building, net
15,000
1,000
42,000
Total assets
$105,500
A/P
Unearned revenue
Income taxes payable
$ 3,300
4,000
19,540
Stockholders’ equity
Common Stock
Retained earnings
Total SE
9,400
69,260
78,660
Total liabilities and SE
12
$105,500
CONSOLIDATED BALANCE SHEETS
(in millions)
October 2,
2010
October 3,
2009
ASSETS
Current assets
Cash and cash equivalents
Receivables, net
Inventories
Television costs
Other current assets
Total current assets
2,722
5,784
1,442
678
1,599
12,225
3,417
4,854
1,271
631
1,716
11,889
Film and television costs
Parks, resorts and other property, net
Other assets
4,773
17,806
34,402
5,125
17,597
28,506
Total assets
69,206
63,117
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable and other accrued liabilities
Current portion of borrowings
Unearned royalties and other advances
Total current liabilities
6,109
2,350
2,541
11,000
5,616
1,206
2,112
8,934
Notes payable
Deferred income taxes
Other long-term liabilities
10,130
2,630
6,104
11,495
1,819
5,444
Shareholders’ equity
Common stock
Retained earnings
Treasury stock
Total shareholders’ equity
30,559
32,446
(23,663)
39,342
28,729
29,389
(22,693)
35,425
Total liabilities and shareholders’ equity
69,206
63,117
13
Film and television costs include capitalizable production costs, production overhead,
development costs and acquired production costs and are stated at cost less accumulated
amortization. Acquired programming costs for the Company’s television and cable networks are
stated at cost less accumulated amortization.
Film and television production costs are expensed based on the ratio of the current period’s
revenues to estimated remaining total revenues (Ultimate Revenues) for each production. For
film productions, Ultimate Revenues include revenues that will be earned within ten years from
the date of the initial theatrical release. For television network series, Ultimate Revenues include
revenues that will be earned within ten years from delivery of the first episode, or if still in
production, five years from delivery of the most recent episode, if later. For acquired film
libraries, remaining revenues include amounts to be earned for up to twenty years from the date
of acquisition. Costs of film and television productions are subject to regular recoverability
assessments. The amount by which the unamortized costs of film and television productions
exceed their estimated fair values is written off. Film development costs for projects that have
been abandoned or have not been set for production within three years are generally written off.
Based on management’s total gross revenue estimates as of October 2, 2010, approximately 82%
of unamortized film and television costs for released productions is expected to be amortized
during the next three years. The Company expects to amortize, based on current estimates,
approximately $1.4 billion in capitalized film and television production costs during fiscal 2011.
14
Financial Accounting
2013 SAMPLE MIDTERM EXAM QUESTIONS
PART I – Answer True (T) or False (F) in the space provided.
______1. The income statement reports where cash came from and how it was used.
______2. The income statement is dated over the period of time covered, such as “For the Year
Ended December 31, 2012.
______3. Management’s judgment and estimation play a larger role under accrual basis
accounting than under cash basis accounting.
______4. Closing the books sets the balances of asset and liability accounts back to zero.
______5. Garmin is a manufacturer of GPS-enabled devices. At the end of 2009 and 2008,
Garmin’s total owners’ equity was $2,836.4 and $2,225.9, respectively. Garmin
reported sales of $1,111.2 and net income of $704.0 in 2009. NIVS IntelliMedia
Technology Group, another consumer electronic equipment manufacturer, had an
ROA of 16.7% and an ROE of 29.7% in 2009. As a common equity shareholder,
based solely on this information, you prefer NIVS.
______6. Failure to record the $500 of rent expense incurred during the period will overstate
owners’ equity on the balance sheet at the end of the period by $500.
______7. Aetna spends $750 million repurchasing its stock. This cash outflow is reported in
the operating section of the cash flow statement.
______8. Generally accepted accounting principles are identical world-wide.
______9. When a corporation buys equipment and pays cash, total assets increase by the cost of
the equipment.
______10. If research and development costs lead to a feasible new product then these R&D
costs are recorded as an asset under U.S. GAAP because they provide future benefit
to the company.
______11. Assume Groupon sells a coupon for a local restaurant. The SEC requires Groupon to
measures revenue on the income statement using the gross selling price of this
coupon and not just the net amount retained after paying the restaurant.
______12. Earnings management is the process of recording adjusting journal entries at the end
of the period so that earnings are reported in accordance with GAAP.
______13. If Exxon Mobil uses the LIFO inventory costing method for tax reporting it must use
it for financial reporting as well.
______14. When prices are rising, the FIFO inventory costing method will generally result in
higher taxable income than LIFO.
______15. No gain or loss can be recorded when a company sells a fully-depreciated fixed asset.
1
PART II – Place your letter answer in the space provided.
_______1. All of the following are primary financial statements except
a. income statement
b. statement of retained earnings.
c. statement of assets.
d. statement of cash flows.
e. all of the above are primary financial statements
_______2. Which of the following is a permanent account?
a. dividends
b. rent expense
c. sales revenue
d. salary payable
e. bad debt expense
f. none of the above are permanent accounts
_______3. A lower Accounts Receivable Turnover ratio relative to prior years may suggest:
a. the company is able to collect its receivables in a more timely manner
b. the company is attracting new customers with better credit
c. the company has become more aggressive with its revenue recognition policies
d. All of the above
e. None of the above
_______4. Which of the following companies is mostly likely to recognize revenue on a
percentage-of-completion basis:
a. Pet store
b. Coal mining company
c. Amusement park
d. Text book publisher
e. Cruise ship builder
f. Pharmaceutical manufacturer
_______5. Lee King Plumbing, Inc. reported assets of $1,500 and liabilities of $700 at the end of
year 1. At the end of year 2, the company reported assets of $2,300 and liabilities of $1,400.
Assume Lee King did not pay dividends or repurchase stock in year 2 but it did issue
common stock for $250. What was net income in year 2?
a. 100
b. -100
c. 150
d. -150
e. 350
f. -350
2
Frozen Food Express
December 31,
Current Assets
Tires on equipment in use
2011
2010
5,592
5,425
_______6. A portion of Frozen Food Express’s most recent balance is provided above. The
company has an unusual current asset – tires. Per the footnotes, the company capitalizes the
costs of tires purchased and expenses them on a per mile basis using an estimated 75,000
mile tire life. Assume that when the tires have reached 75,000 miles, they have no value and
are scrapped. If ‘Tire Expense’ was $3,802, how much cash did Frozen Food Express pay to
purchase tires in 2011.
a. $167
b. $3,636
c. $3,802
d. $3,969
_______7. Life Technologies Corporation and Affymetrix Inc. are competitors in the life
sciences and clinical healthcare industry. Total revenues and R&D expenses from each
company’s income statement are:
Total revenue
R&D
Life Technologies Corporation (“LTC”)
2012
2011
2010
$1,620,323 $1,281,747 $1,151,175
$142,505
$115,833
$104,343
Affymetrix Inc
2012
2011
2010
$410,249 $371,320 $355,317
$84,482 $72,740 $86,296
Which of the following is true?
a. Affymetrix is less R&D intensive in 2012 than in 2010.
b. LTC is the more R&D intensive company of the two.
c. LTC has become more R&D intensive over the three years.
d. All of the above are true.
e. None of the above are true.
Perry Ellis
Accounts receivable, less allowances of $1,298 and $2,549
in 2007 and 2006, respectively
1/31/2007
1/31/2006
157,420
152,529
_______8. For the year ended January 31, 2007 Perry Ellis International earned credit sales of
$829,842. For that same period, write-offs were $1,609. How much did Perry Ellis record
for bad debt expense for the year ended January 31, 2007?
a. $358
b. $1,251
c. $1,298
d. $1,609
e. $2,860
3
SBA Company had credit sales of $672,000. As of year-end, the balance in the Allowance for
Doubtful Accounts before adjusting for bad debts was a $300 debit and the balance in
Accounts Receivable was $72,000.
SBA Company incurs the following bad debts percentages historically:
Total Credit Sales
1.5%
_______9. Referring to the above information, what journal entry will SBA will make if it
estimates bad debts by using a percentage of credit sales?
a.
Bad Debts Expense
9,780
Allowance for Doubtful Accounts
9,780
b.
Bad Debts Expense
10,080
Allowance for Doubtful Accounts
10,080
c.
Bad Debts Expense
10,380
Allowance for Doubtful Accounts
10,380
d.
Bad Debts Expense
12,300
Allowance for Doubtful Accounts
12,300
e.
Bad Debts Expense
12,600
Allowance for Doubtful Accounts
12,600
_______10. Referring to the above information, what is the balance in the Allowance for
Doubtful Accounts after SBA estimates bad debts using a percentage of credit sales?
a. $9,780
b. $10,080
c. $10,380
d. $12,300
e. $12,600
_______11. Given the following data, by how much would taxable income change if LIFO were
used rather than FIFO
Beginning inventory
1,000 units at $25
Purchases
2,400 units at $30
Units sold
1,500
a. decrease by $5,000
b. decrease by $7,500
c. increase by $7,000
d. increase by $5,000
e. none of the above
4
_______12. Dunder Mifflin has inventory recorded on its book at $50,000. The actual market
value of this inventory is $40,000. Suppose Dunder Mifflin inappropriately applies the LCM
rule and writes the inventory down to $0. What will be the effect on the income statement
next year if the company then sells the written-down inventory?
a. Cost of goods sold will be overstated and net income will be understated.
b. Cost of goods sold will be overstated and net income will be overstated.
c. Cost of goods sold will be understated and net income will be overstated.
d. Cost of goods sold will be understated and net income will be understated.
e. $12,600
_______13. A firm buys a building for $10,000 on January 1, 2011. The building has an
expected life of 20 years and an expected residual value of $100. Using the double-declining
method, what is the depreciation expense for the year ended December 31, 2012?
a. $475
b. $495
c. $891
d. $900
e. $990
f. $1,000
_______14. A plant asset is acquired on July 1, 2010 at a cost of $35,000. Estimated residual
value is $5,000 and the estimated useful life is 5 years. The company uses straight-line
depreciation. The balance in accumulated depreciation on December 31, 2011, is:
a. $6,000 debit
b. $6,000 credit
c. $9,000 debit
d. $9,000 credit
e. $12,000 debit
f. $12,000 credit
_______15. Polk Company sold equipment costing $30,000 with $28,000 of accumulated
depreciation for $5,000 cash. Polk’s journal entry to record this sale includes:
a. credit to equipment $2,000
b. debit to depreciation expense $28,000
c. debit to accumulated depreciation $28,000
d. debit to gain on sale of $5,000
e. all of the above are included
5
_______16. How does management select an inventory valuation method?
a. If a company generally sells its oldest inventory first, it must use the FIFO inventory
valuation method.
b. If a company generally sells its newest inventory first, it must use the FIFO inventory
valuation method.
c. If a company sometimes sells its newest inventory and sometimes sells its oldest
inventory, then it must use the weighted average inventory valuation method.
d. A company does not need to consider the physical flow of inventory when choosing an
inventory valuation method.
6
PART III
The following questions relate to The Walt Disney Company (“Disney”). You will need to
refer to extracts from the 2010 annual report attached to the back of the exam to answer
some of the questions in this section.
1. Accounting Equation
In the space provided below write the accounting equation in words:
_______________=______________+ _ _____
In the space provided below, using the appropriate financial statement, write the dollar value of
each account in the accounting equation for Disney as of October 2, 2010.
$____________ = $___________ + $___________
2. Composition of Assets
One way that Disney earns money is to produce and distribute TV shows and movies. Briefly
describe what the asset ‘Film and TV costs’ represents.
Briefly describe the transaction and the journal entry that initially places the asset ‘Film and TV
costs’ on the balance sheet.
Briefly describe the transaction and the journal entry that removes the asset ‘Film and TV costs’
from the balance sheet.
Name at least one famous ‘asset’ or income-generating resource belonging to Disney that is not
listed on its balance sheet. Why is this item not listed on the balance sheet?
7
PART IV Short Answers
Blockbuster Video offers gift certificates to its customers. When a customer gives Blockbuster
$5 and receives a gift certificate, what journal entry does Blockbuster record? (Assume that there
is no expiration date on the gift certificate and that eventually customer will redeem the entire
amount of the gift certificate.)
A customer rents the movie Black Swan at a rental fee of $4.00 and buys one box of Raisinets at
a price of $1.00. For purposes of this question, assume that the cost to Blockbuster of providing
the movie rental is zero. The cost of the box of Rasinets to Blockbuster is 35 cents. The customer
pays for this transaction with a gift certificate. Prepare the complete journal entry that
Blockbuster must record for this transaction.
Assume Blockbuster depreciates DVDs over three years on a straight-line basis. At the end of the
three years the DVDs have no value. Suppose Blockbuster purchased 100 copies of the movie
The King’s Speech for $9 each on January 1, 2010. What adjusting journal entry does
Blockbuster make at the end of the year? How much is in accumulated depreciation on
December 31, 2011?
At the beginning of the year, accounts payable were $150 and, at the end of the year, accounts
payable were $450. Blockbuster paid $700 cash to its suppliers during the year. How much did
Blockbuster purchase from its suppliers on account during the year?
8
Suppose Outback Steakhouse uses LIFO inventory valuation while the Cheesecake Factory uses
FIFO. Describe in words the adjustments you would make to the reported financial statements in
order to compare the two companies.
The following information was taken from the footnotes of three package delivery companies.
United Parcel Service of America, Inc.
Revenue is recognized upon delivery of a package.
Federal Express Corporation
Revenue is generally recognized upon delivery of shipments. For shipments in transit, revenue is
recorded based on the percentage of service completed.
Airborne Express
Domestic revenues are recognized when shipments are picked up from the customer.
Which revenue recognition policy do you think is most consistent with the revenue principle?
Why?
Do you believe the difference between Airborne’s and UPS’s revenue recognition policies
materially affects their earnings? Why or why not?
9
PART IV (continued)
For each of the following situations, indicate when the organization should record revenue and a
reason for your answer. Keep your answers BRIEF.
Barnes & Noble: Book retailer
Transaction:
Barnes & Noble offers a Member Program which entitles members to receive
discounts on books and other purchases. Customers pay Barnes and Noble $25
for a one year membership. The annual membership fee is non-refundable
after the first 30 days. Refunds due to cancellations within the first 30 days are
minimal.
Merck:
Transaction:
Pharmaceutical company
In September 2011, Merck receives cash from the federal government as an
incentive to stockpile flu vaccines. In return, the federal government requires
Merck to be able to delivery vaccines at a moment’s notice. If there is a flu
outbreak, Merck will deliver the vaccines. If there is no need for the vaccines
by the end of the flu season (April 2012), Merck still retains the cash.
Guitar Center:
Transaction:
Musical instruments retailer
A customer puts a keyboard on lay-away; the company sets the instrument
aside while the customer makes periodic, incremental payments. Once the
amount is paid in full, the customer receives the keyboard. Guitar Center has a
policy of refunding all amounts paid if the customer reneges.
10
Part V
The following list shows all of the account balances taken from Flour Power Bakery’s trial
balance at December 31, 2012:
Cash
Dividends
Unearned revenue
Interest revenue
Advertising expense
Accumulated depreciation
Allowance for doubtful accounts
Cost of goods sold
Wage expense
Inventory
Common Stock
Accounts receivable
Interest receivable
Sales
Depreciation expense
Bad debt expense
Accounts payable
Retained earnings
Building
Income tax expense
Prepaid insurance
Note receivable
Income tax payable
$ 11,800
21,000
4,000
1,000
4,100
21,000
700
94,300
56,000
15,800
9,400
14,300
1,000
257,600
7,000
500
3,300
13,100
63,000
19,540
6,300
15,000
19,540
Prepare the income statement and statement of retained earnings for the year ended December
31, 2012.
11
CONSOLIDATED BALANCE SHEETS
(in millions)
October 2,
2010
October 3,
2009
ASSETS
Current assets
Cash and cash equivalents
Receivables, net
Inventories
Television costs
Other current assets
Total current assets
2,722
5,784
1,442
678
1,599
12,225
3,417
4,854
1,271
631
1,716
11,889
Film and television costs
Parks, resorts and other property, net
Other assets
4,773
17,806
34,402
5,125
17,597
28,506
Total assets
69,206
63,117
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable and other accrued liabilities
Current portion of borrowings
Unearned royalties and other advances
Total current liabilities
6,109
2,350
2,541
11,000
5,616
1,206
2,112
8,934
Notes payable
Deferred income taxes
Other long-term liabilities
10,130
2,630
6,104
11,495
1,819
5,444
Shareholders’ equity
Common stock
Retained earnings
Treasury stock
Total shareholders’ equity
30,559
32,446
(23,663)
39,342
28,729
29,389
(22,693)
35,425
Total liabilities and shareholders’ equity
69,206
63,117
12
Film and television costs include capitalizable production costs, production overhead,
development costs and acquired production costs and are stated at cost less accumulated
amortization. Acquired programming costs for the Company’s television and cable networks are
stated at cost less accumulated amortization.
Film and television production costs are expensed based on the ratio of the current period’s
revenues to estimated remaining total revenues (Ultimate Revenues) for each production. For
film productions, Ultimate Revenues include revenues that will be earned within ten years from
the date of the initial theatrical release. For television network series, Ultimate Revenues include
revenues that will be earned within ten years from delivery of the first episode, or if still in
production, five years from delivery of the most recent episode, if later. For acquired film
libraries, remaining revenues include amounts to be earned for up to twenty years from the date
of acquisition. Costs of film and television productions are subject to regular recoverability
assessments. The amount by which the unamortized costs of film and television productions
exceed their estimated fair values is written off. Film development costs for projects that have
been abandoned or have not been set for production within three years are generally written off.
Based on management’s total gross revenue estimates as of October 2, 2010, approximately 82%
of unamortized film and television costs for released productions is expected to be amortized
during the next three years. The Company expects to amortize, based on current estimates,
approximately $1.4 billion in capitalized film and television production costs during fiscal 2011.
13