ACCT 5401 Fall 2008 Exam #2, Form A 1
DIRECTIONS: Place your name, Form Letter, and Row Number in the Upper Right of your paper. Number your
paper from 1 to 16 down the left column.
MULTIPLE CHOICE (1 point each). Select the best response from among those listed.
1. In which of the following intercorporate investment classifications are unrealized gains in marketable securities reflected
in the income statement of the investor company?
a. Equity Method b. Market Method c. Trading d. Available-for-Sale e. Purchase Method
2. Significant influence is often presumed only when the investor owns:
a. greater than 5% of the voting stock of the investee
b. greater than 90% of the voting stock of the investee
c. between 20% and 50% of the voting stock of the investee
d. greater than 80% of the voting stock or of the market value of the investee
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. Which of the following would not require the company to record an accrual on the balance sheet?
a. The company owes $20,000 in wages to its employees for the previous two weeks.
b. Interest will be paid when a note payable matures in the following accounting period
c. Management believes a lawsuit against the company is meritless because they have never had a single complaint
about dangerous side effects of their drug in two years.
d. The company knows that they will be fined for pollution as a result of their manufacturing process and can estimate
the amount of the obligation.
5. Contakos Electric Corp. sells $100,000 of bonds to private investors. The bonds are due in 5 years, have a 10%
coupon rate, which means that $5,000 in interest is paid semi-annually. The bonds were sold to yield 8%. About what
amount of cash should Contakos receive from the investors?
a. about $100,000 b. about $90,000 c. about $108,000 d. about $92,000
6. Which best describes par value for a stock?
a. An arbitrary amount set by the company for each share of stock
b. The value at which stock shares were issued
c. The current market value of the stock
d. A term used to describe the normal distance a golf ball may be hit on an average day.
7. The equity carve out in which the parent company distributes the subsidiary’s shares as a dividend to shareholders
is called the following:
a. Sell Off b. Spin Off c. Spit up d. Stock Split
8. Which one of the following selections is not a component of paid-In capital?
a. Preferred stock b. Retained earnings c. Common Stock d. Additional Paid-In Capital
9. How are operating leases reported in the lessee’s financial statements?
a. As an asset that is depreciated, similar to the company’s other assets.
b. As a footnote disclosure.
c. As either a short-term or long-term liability, depending on the length of the lease
d. Operating leases are never disclosed in the lessee’s annual report or 10-K.
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.
ACCT 5401 Fall 2008 Exam #2, Form A 2
11. Which of the following is reported on the face of the balance sheet for corporate pension plans:
a. Amount of the pension plan assets.
b. Amount of the pension obligation.
c. Funding status of the pension plan.
d. Current loss on pension plan assets held.
12. _______________ are fundamental choices about the size and scope of operations and about technologies
employed in delivering products or services to customers.
b. Management systems
c. Organizational strategies
d. Structural cost drivers
13. Which of the following costs is best classified as fixed costs with respect to volume?
a. Depreciation of a copy machine in the Human Resource Department
b. Electricity used to heat, light, and cool a hospital
c. Parts used in manufacturing digital cameras
d. Salaries of quality inspectors in a production facility
14. Step costs:
a. Are constant within certain ranges of activity but differ outside those ranges of activity
b. Are variable within narrowly defined ranges of activity, but constant over wider ranges of activity
c. Have no relation to number of units produced
d. Increase with each additional unit produced
15. A basic assumption of the cost-volume-profit model is that
a. All costs can be accurately classified as either fixed or variable
b. Cost drivers can be organized into unit-level, batch level, product-level and facility-level factors
c. Higher volumes of product require lower prices
d. The mix of products changes over time
16. The contribution margin per unit is:
a. The difference between sales price and total variable cost
b. The difference between total sales and total cost of goods sold
c. The difference between total revenue and total variable cost
d. Total sales minus total cost of goods sold
EXERCISES: PLEASE SHOW YOUR CALCULATIONS ON YOUR WORKSHEET
EXERCISE A (4 points) On December 1, 2007, Beth purchased 2,000 shares of Weather.com for $14,000.
By December 31, the market price of these shares had dropped by $1,000. On April 1, 2008, Beth sold the
2,000 shares for $17,000.
a. What is the amount of the gain recognized in 2008 if Beth had accounted for the shares as trading
b. What is the amount of the gain recognized in 2008 if Beth had accounted for the shares as
EXERCISE B (4 points) The following independent scenarios describe various potential liabilities. For each
scenario, determine whether a liability should be (a) recorded in the financial statements, (b) disclosed in a
footnote in the financial statements, or (c) neither.
Scenario 1: A manufacturing company is sued for alleged product liability. The company’s attorney does
not expect that this suit will result in liability to the company, but a loss is very possible. If adversely
adjudicated, the liability would be large.
Scenario 2: Rolex has sold products to Chalmers Jewelers, a retailer, that sold the products to customers.
The manufacturer’s warranty offers replacement of the product if it is found to be defective within 90 days
of the sale to the consumer. Historically, 0.05% of the products are returned for replacement.
Scenario 3: A customer has filed a lawsuit for a minor amount against Chalmers Jewelers. Chalmer’s
attorneys have reviewed the case and have found that many similar cases have never been awarded to the
Scenario 4: An employee was hurt on the job and the company expects to pay a significant amount related
to health care and lost wages. Health and other insurance is expected to fully cover the loss, but there is a
very remote possibility that the insurance will not cover everything that the company will have to pay the
ACCT 5401 Fall 2008 Exam #2, Form A 3
EXERCISE C (4 points) On September 3, 2008 Hinton Corp, a manufacturer based in Los Angles, issued
100,000 common shares. The shares have a $2 par value and were sold at $25 cash per share.
a. What amount does Hinton report for the common stock account?
b. What amount does Hinton report as additional paid-in capital?
EXERCISE D (4 points) The Dressed Co. has current assets of $100 (amounts in millions), noncurrent assets of $200,
current liabilities of $50, non-current liabilities of $100, and owners equity of $150. Dressed has operating leases with
the following cash flows and present values:
Years Cash Flows Present Values
2009 $105 $100
2010 $50 $40
2011 $50 $35
2012 $60 $40
2013 $80 $35
Total $345 $250
a. What would be the current ratio before and after the inclusion of the operating leases in the balance sheet?
b. What would be the total liabilities to total equities ratio before and after the inclusion of the operating leases in
the balance sheet?
EXERCISE E (4 points)The Boone Wood Products manufactures small tables. The overhead incurred in manufacturing
the tables has both a fixed component and a variable component. The company’s management wishes to explain
variable overhead as a percentage of direct labor costs. Management has obtained the following cost data pertaining to
the production of the small tables:
Units Labor Overhead
Produced Costs Costs
150 $1,600 $1,100
200 $2,500 $1,200
500 $4,000 $2,400
300 $2,700 $1,300
100 $1,200 $1,000
Compute the fixed and variable components of the overhead costs using the high-low method.
EXERCISE F (4 points) Davidson Corporation’s income statement is presented below. They operated at 60% of
capacity during the time period, and desired an before-tax income of $3,000. The tax rate is 40%.
Sales (1,000 Units) $20,000
Less variable costs - 12,000
Contribution margin $ 8,000
Less fixed costs - 6,000
Operating income before tax $ 2,000
Calculate Davidson’s (a) break-even sales units, (b) units for required earnings.
SHORT ESSAYS (4 Points each.)
A. Why does an affiliation agreement tend to be a less costly form of acquisition than purchasing a business?
B. Describe two risks associated with the partnership form of business.
C. During a cash-short time period, identify and briefly describe two ways of surviving.
D. Give one example for each of value-added, supporting, sustaining, and non-value adding activities.
E. What are each of the following approaches to cost management and what is a major weakness of each? (1)
Technology and (2) Outsourcing.
F. Describe a “Variety” option to improving the efficiency of a business.
ACCT 5401 Fall 2008 Exam #2, Form A 4
Case (36 points)WonderBuss Co. produces a number of cleaning products that are sold for commercial
and wholesale markets. Condensed income statements and balance sheets for the company are presented
below. The company has the capacity to produce and sell about 420 million units per year with its current
plants. While costs and expenses increased during 2008, the senior management of the company feel
enthusiastic that WonderBuss is becoming much more efficient in its operations as demonstrated by the
reduction of expense ratios to revenues in the income statement.
The company must earn 15% before tax on its average owners’ equity. The market value of the equity
has decreased from $4.110 billion to $3.872 billion over the 2008 year and the company has been recently
threatened with a buyout, which management successfully fought off.
During 2006, Wonder Co. acquired all of the assets of Buss Co., a major competitor selling equivalent
products. As a result, they formed the WonderBuss Co. During the acquisition, specific assets valued at $2
billion were acquired for $2.8 billion. All of the employees of Buss Co. were let go and the Buss management
retired. As a side note, the U.S. Department of Justice is reviewing the acquisition after complaints by former
employees and further there are now no other major competitors. There are potential environmental liabilities
related to the closed Buss plants of approximately $450 million. The U.S. Environmental Protection Agency
will require the environmental hazards to be cleaned up over the next 5 years. However, if the Buss plants
were still operating these liabilities could be deferred indefinitely.
WonderBuss raised the prices by about 25% during early 2007 and is considering a further increase.
1. Using the high-low method, determine the fixed costs and variable costs per unit for:
a. Cost of sales
b. Operating, selling and general and administrative expenses
c. Other Expenses
f. Amortization and other, net
2. Calculate the total fixed costs (include interest and amortization in this total) and the variable cost per
3. Calculate the contribution margin per unit.
4. Calculate the total contribution margin.
5. Determine the break-even volume in units and as a percentage of capacity.
6. Determine the required volume in units and as a percentage of capacity.
7. Independent of other requirements, what would have been the impact on earnings before taxes of a
20% increase in price for 2008, assuming a reduction in volume of 10%.
8. Determine the operating leverage and margin of safety ratio for 2008.
9. Calculate and comment on the market-to-book equity ratio for 12/31/2007 and 12/31/2008.
10. All of the goodwill relates to the 2006 acquisition of Buss Co. Management considered, but rejected,
the write-off of the goodwill during 2008. What would have been the impact on owner’s equity of this
write-off (assuming that write-off would have been fully tax deductible with a tax rate of 36%)?
11. The property, plant, and equipment account includes about $1.4 billion in real estate that the company
is holding from the Buss acquisition. The real estate is mostly large tracts of undeveloped land north of
Dallas that is currently generating no income. Also included are several plants, originally valued at
$600 million, that were related to the Buss acquisition. The plants have now been closed. Create two
options for this $600 billion in mothballed production plants. List one strength and one weakness for
ACCT 5401 Fall 2008 Exam #2, Form A 5
(Amounts in thousands)
Fiscal years ended December 31 2008 2007
Revenues: 1,750,000 100.0% 1,450,000 100.0%
Cost of sales 1,175,000 67.1% 1,025,000 70.7%
Gross profit 575,000 32.9% 425,000 29.3%
Operating, selling and general and administrative
expenses 135,000 7.7% 129,000 8.9%
Other Expenses 37,500 2.1% 34,500 2.4%
Depreciation on administrative and sales offices 30,000 1.7% 30,000 2.1%
Operating Profit 372,500 21.3% 231,500 16.0%
Interest 25,000 1.4% 25,000 1.7%
Amortization and other, net 3,000 0.2% 3,000 0.2%
Total Other Expenses 28,000 1.6% 28,000 1.9%
Income Before Income Taxes 344,500 19.7% 203,500 14.0%
Provision for Income Taxes 124,020 7.1% 73,260 5.1%
Net Income 220,480 12.6% 130,240 9.0%
Units Shipped (in thousands):
Commercial products 250,000 71.43% 200,000 68.97%
Wholesale products 80,000 22.86% 70,000 24.14%
Other Products 20,000 5.71% 20,000 6.90%
Total 350,000 290,000
Summarized Balance Sheet:
Liquid current assets $321,000 5.7% $200,520 3.8%
Other current assets 800,000 14.2% 700,000 13.2%
Total current assets 1,121,000 19.9% 900,520 17.0%
Property Plant and Equipment 3,700,000 65.8% 3,600,000 67.9%
Goodwill 800,000 14.2% 800,000 15.1%
Total Assets $5,621,000 100.0% $5,300,520 100.0%
Current liabilities $600,000 10.7% 550,000 10.4%
Non-current liabilities 1,500,000 26.7% 1,450,000 27.4%
Total Liabilities 2,100,000 37.4% 2,000,000 37.7%
Paid in Capital 1,100,000 19.6% 1,100,000 20.8%
Retained Earnings 2,421,000 43.1% 2,200,520 41.5%
Total Owners' Equity 3,521,000 62.6% 3,300,520 62.3%
Total Liabilities and Owners' Equity $5,621,000 100.0% $5,300,520 100.0%