Test 201 20wo 20answers by 2rwZZG


									Name: __________________________ Date: _____________

    1. Ariel, Inc., issued $30 million face amount of 9% bonds when market interest rates were
       9.30% for bonds of similar risk and other characteristics.
       (a.) How much interest will be paid annually on these bonds?
       (b.) Will the bonds be issued at a premium or discount? Explain your answer.
       (c.) Will the annual interest expense on these bonds be more than, equal to, or less than,
       the amount of interest paid each year? Explain your answer.

    2. The Defiance College sells season tickets for four home football games at a price of
       $15. For the 2007 season, 5,000 season tickets were sold.
       (a.) Write the journal entry or use the horizontal model to show the effect of the sale of
       the season tickets.
       (b.) Write the journal entry or use the horizontal model to show the effect of hosting a
       home football game.
       (c.) Where on the balance sheet would the account balance representing funds received
       for games not yet played be classified? Assume that The Defiance College follows the
       same accounting and financial reporting procedures that are used in business.

    3. Lone Star Sales & Service acquired a new machine that cost $42,000 in early 2006. The
       machine is expected to have a five-year useful life and is estimated to have a salvage
       value of $7,000 at the end of its life. (Round your final answers to the nearest dollar).

       (a.) Using the straight-line depreciation method, calculate the depreciation expense to be
       recognized in the second year of the machine's life and calculate the accumulated
       depreciation after the third year of the machine's life.
       (b.) Using the double declining balance depreciation method, calculate the depreciation
       expense for the third year of the machine's life and the net book value of the machine at
       this point in time.
       (c.) Using the sum-of-the-years digits depreciation method, calculate the amount of
       accumulated depreciation after the third year of the machine's life.
4. Goodwill results from the purchase of one firm by another for a price that is greater than
   the fair market value of the net assets acquired. On January 1, 2007, Blue Grass Co.
   purchased Red Grass Co for $1,200,000 when the net assets were valued at $1,000,000.
   Goodwill will be tested annually for impairment. Assume that after the first year there
   was an impairment of $15,000.

   (a.) Compute the value of goodwill to be recorded on the books of Blue Grass
   Company upon the purchase of the business.
   (b.) What is impairment and how is the first year's impairment recorded in the books?

5. The following are data available for Richards Co. for the month of May:

   Sales                                    1,120   units
   Beginning inventory                        200   units   @ $1.25
   Purchases, in chronological order          500   units   @ $1.30
                                              400   units   @ $1.40
                                              700   units   @ $1.50

   Calculate cost of goods sold and ending inventory under the following cost flow
   (1.) Weighted average
   (2.) FIFO
   (3.) LIFO
6. Prepare a bank reconciliation for Grace, Inc., as of January 31 from the following
   (a.) The January 31 cash balance in the general ledger is $2,544.
   (b.) The January 31 balance shown on the bank statement is $2,272.
   (c.) Checks issued but not returned with the bank statement were No. 435 for $226 and
   No. 448 for $91.
   (d.) A deposit made on January 31 for $640 was included in the general ledger balance
   but not in the bank statement balance.
   (e.) Interest credited to the account during January but not recorded on the company's
   books amounted to $36.
   (f.) A bank charge of $12 for printing new checks was made to the account during
   January. Although the company was expecting a charge, the amount was not known
   until the bank statement arrived.
   (g.) In the process of reviewing canceled checks, it was determined that a check issued
   to a supplier in payment of an account payable of $125 was recorded as a $152 cash

   (1.) Prepare the bank reconciliation for Grace, Inc., as of January 31.
   (2.) Prepare the appropriate adjusting entry(ies) or show the reconciling items in a
   horizontal model, for Grace, Inc. related to the bank reconciliation.
7. Using the column headings provided below, show the effect, if any, of the transaction
   entry or adjusting entry on the appropriate balance sheet category or on the income
   statement by entering the account name, amount, and indicating whether it is an addition
   (+) or subtraction (-). Column headings reflect the expanded balance sheet equation;
   items that affect net income should not be shown as affecting owners' equity.

   (1.) During the month, the board of directors declared a cash dividend of $1,200,
   payable next month.
   (2.) Employees were paid $1,900 in wages for their work during the first three weeks of
   the month.
   (3.) Employee wages of $600 for the last week of the month have not been recorded.
   (4.) Merchandise that cost $900 was sold for $1,350. Of this amount, $1,000 was
   received in cash and the balance is expected to be received within 30 days.
   (5.) A contract was signed with a local radio station for a $100 advertisement; the ad
   was aired during this month but will not be paid for until next month.
   (6.) Store equipment was purchased at a cash price of $300. The original list price of the
   equipment was $400, but a discount was received.
   (7.) Received $180 of interest income for the current month.
   (8.) Accrued $310 of interest expense at the end of the month.

   Transaction/                                               Owners’
    Situation           Assets            Liabilities          Equity          Net Income
        1              ________           ________           ________           ________
        2              ________           ________           ________           ________
        3              ________           ________           ________           ________
        4              ________           ________           ________           ________
        5              ________           ________           ________           ________
        6              ________           ________           ________           ________
        7              ________           ________           ________           ________
        8              ________           ________           ________           ________

8. At the beginning of the current fiscal year, the balance sheet of Arches Co. showed
   liabilities of $380,000. During the year liabilities increased by $10,000, assets increased
   by $55,000, and paid-in capital increased $20,000 to $165,000. Dividends declared and
   paid during the year were $60,000. At the end of the year, owners' equity totaled
   $402,000. Calculate net income or loss for the year.
9. Presented below are the comparative balance sheets of Big Apple, Inc., at December 31,
   2007, and 2006. Sales for the year ended December 31, 2007, totaled $890,000.

                                    BIG APPLE, INC.
                                     Balance Sheets
                                December 31, 2007 and 2006

                                                               2007          2006
   Cash                                                       $ 45,000     $ 49,000
   Accounts receivable                                         134,000      106,000
   Merchandise inventory                                       201,000      197,000
    Total current assets                                      $380,000     $352,000
   Land                                                         66,000       60,000
   Building and Equipment                                      364,000      325,000
    Less: Accumulate depreciation                             (186,000 )   (157,000 )
   Total assets                                               $624,000     $580,000

   Short-term debt                                            $ 49,000     $ 43,000
   Accounts payable                                             92,000       84,000
   Other accrued liabilities                                    64,000       67,000
    Total current liabilities                                 $205,000     $194,000
   Long-term debt                                               87,000      107,000
   Total liabilities                                          $292,000     $301,000

   Owners’ Equity
   Common stock, no par, 100,000 shares
    authorized, 35,000 and 28,000 shares
    issued respectively                                       $102,000     $ 78,000
   Retained earnings:
    Beginning balance                                          201,000      168,000
    Net income for the year                                     74,000       67,000
    Dividends for the year                                     (45,000 )    (34,000 )
    Ending balance                                            $230,000     $201,000
   Total owners’ equity                                       $332,000     $279,000
   Total liabilities and owners’ equity                       $624,000     $580,000

   (a.) Calculate ROI for 2007.
   (b.) Calculate ROE for 2007.
   (c.) Calculate working capital at December 31, 2007.
   (d.) Calculate the current ratio at December 31, 2007.
   (e.) Calculate the acid-test ratio at December 31, 2007.
10. Presented below is a statement of cash flows for Peach, Inc., for the year ended
    December 31, 2007. Also shown is a partially completed comparative balance sheet as
    of December 31, 2007 and 2006.

                             PEACH, INC.
                        Statement of Cash Flows
                 For the year ended December 31, 2007

    Cash flows from operating activities:
    Net Income                                             $9,000
    Add (deduct) items not affecting cash:
      Depreciation expense                                 45,000
      Decrease in accounts receivable                      23,000
      Increase in inventory                                (7,000 )
      Increase in short-term debt                           5,000
      Increase in notes payable                            12,000
      Decrease in accounts payable                         (6,000 )
      Net cash provided by operating activities           $81,000

    Cash flows from investing activities:
    Purchase of equipment                                $(50,000 )
    Purchase of buildings                                 (48,000 )
    Net cash used by investing activities                $(98,000 )

    Cash flows from financing activities:
    Cash used for retirement of long-term debt           $(25,000 )
    Proceeds from issuance of common stock                 10,000
    Payment of cash dividends on common stock              (3,000 )
    Net cash used by financing activities                 (18,000 )
    Net decrease in cash for the year                    $(35,000 )
                                PEACH, INC.
                                Balance Sheets
                           December 31, 2007 and 2006

                                                         2007          2006
Current assets:
 Cash                                                   $             $ 88,000
 Accounts receivable                                                    73,000
 Inventory                                                   56,000    _______
  Total current assets                                  $             $
Land                                                                    40,000
Building and Equipment                                      260,000
 Less: Accumulate depreciation                                         (123,000 )
  Total land, buildings, and equipment                   _______       _______
Total assets                                            $______       $_______

Current liabilities
 Short-term debt                                            $32,000   $_______
 Notes payable                                                          36,000
 Accounts payable                                        _______        29,000
   Total current liabilities                             $            $
Long-term debt                                             85,000

Owners’ Equity
Common stock                                            $ 40,000
Retained earnings                                       $_______      $_______
   Total owners’ equity                                 $_______      $_______
Total liabilities and owners’ equity                    $__________   $_______

(a.) Complete the December 31, 2007 and 2006 balance sheets.
(b.) Prepare a Statement of Changes in Retained Earnings for the year ended December
31, 2007.

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