Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below.
HHF’s long-term debt to equity ratio equity is:
a. 133.3%.
b. 75%.
c. 180%.
d. 0%.
On February 12, 2016, Mohawk Home and Garden enters into contract with a local
business to provide weekly grass-cutting services between May and September of that
year, and receives $2,000 in advance. As part of a local business promotion, Mohawk
offers a 50% discount on any barbecue grill with a list price in excess of $200. In the
past, Mohawk charged the same amount ($2,000) for the same weekly grass-cutting
service, but without the grill discount coupon. Based on historical experience with other
clients, Mohawk estimates that about 40% of the coupons will be redeemed, purchasing
grills with an average total list price of $400. Required:
(a) How many performance obligations are in this contract? Explain the reasons for
your answer.
(b) Prepare the journal entry to account for the transaction as of February 12, 2016,
clearly identifying the revenue or deferred revenue associated with each performance
obligation.
Nichols Corporation purchased $100,000 of Holly Inc. 6% bonds at par with the intent
and ability to hold the bonds until they matured in 2020, so Nichols classifies its
investment as held to maturity. Unfortunately, a combination of problems at Holly and
in the debt market caused the fair value of the Holly investment to decline to $70,000
during 2016. Nichols calculates that, of the $30,000 decrease in fair value, $10,000 of it
relates to credit losses and $20,000 relates to noncredit losses. Assume that Nichols
concludes that the Holly bonds are other-than-temporarily impaired because Nichols
believes it is more likely than not that it will have to sell the Holly bonds before the
bonds have a chance to recover their fair value. Before-tax net income for 2016 will be
reduced by: a. $0.
b. $10,000.
c. $20,000.
d. $30,000.
Which of the following is not true about derivatives?
a. Large losses on derivative investments have been reported in the press.
b. Derivatives are so named because their value is derived from some underlying
measure.
c. Derivatives are useful instruments for managing risk.
d. Accounting for derivatives is fully resolved and no additional rules or interpretations
are likely.
Net income equals:
a. Assets minus liabilities.
b. Revenues minus cost of goods sold.
c. Revenues minus expenses.
d. Cash receipts minus cash payments.
AgriFoods, Inc. prepares and delivers agricultural products to industrial-scale kitchens
and food service providers. One of its key customers is Home Kitchen & Co., which
provides cafeteria solutions for corporations and universities. On January 1, 2016,
AgriFoods obtained a one-year contract to supply a pre-specified amount of vegetables
to Home Kitchen, and received $600,000 in cash. Then, on March 15, AgriFoods hired
Home to run one of its employee cafeterias for a period of six months, from April to
September, and paid $70,000 in cash. For similar arrangements, Home usually charged
$50,000. Required: (a) Prepare the journal entries AgriFoods would record on January
1, 2016 and January 31, 2016 with respect to the sales contract. Assume revenue is
accrued on a monthly basis. (b) Prepare the journal entry to account for AgriFoods’
purchase of Home’s services.
The following refers to the pension spreadsheet (columns have missing amounts) for
the current year for Pancho Villa Enterprises (PVE).
What was PVE’s pension expense for the year?
a. $250.
b. $50.
c. $68.
d. $62.
Generic Company sponsors an unfunded postretirement plan providing healthcare
benefits. The following information relates to the current year’s activity of Generic’s
postretirement benefit plan:
Postretirement benefit expense $150 million
Service cost 120 million
Amortization of net gain-AOCI 10 million
Prior service cost-AOCI none
Retiree benefits paid (end of year) 30 million
What is Generic’s interest cost for the year?
a. $20 million
b. $40 million
c. $30 million
d. $50 million
Flapper Jack’s Pancake Restaurants Inc. sells franchises for an initial fee of $36,000
plus operating fees of $500 per month. The initial fee covers site selection, training,
computer and accounting software, and on-site consulting and troubleshooting, as
needed, over the first five years. On March 15, 2015, Tim Cruise signed a franchise
contract, paying the standard $6,000 down with the balance due over five years with
interest.
Assuming that the initial services to be performed by Flapper Jack’s subsequent to the
signing are substantial and that collection of the receivable is reasonably assured, the
journal entry required at signing would include a credit to:
a. Unearned franchise fee revenue for $36,000.
b. Unearned franchise fee revenue for $30,000.
c. Franchise fee revenue for $36,000.
d. Franchise fee revenue for $ 6,000.
On November 1, 2016, Tim’s Toys borrows $30,000,000 at 9% to finance the holiday
sales season. The note is for a six-month term and both principal and interest are
payable at maturity. What is the balance of interest payable for the loan as of December
31, 2016?
a. $ 112,500.
b. $ 225,000.
c. $ 450,000.
d. $1,350,000.
Sanjeev enters into a contract offering variable consideration. The contract pays him
$1,000/month for six months of continuous consulting services. In addition, there is a
60% chance the contract will pay an additional $2,000 and a 40% chance the contract
will pay an additional $3,000, depending on the outcome of the consulting contract.
Sanjeev concludes that this contract qualifies for revenue recognition over time.
Assume Sanjeev estimates variable consideration as the expected value. What is the
amount of revenue Sanjeev would recognize for the first month of the contract?
a. $1,000
b. $1,333
c. $1,400
d. $1,200
Retrospective restatement usually is not used for a:
a. Change in accounting estimate.
b. Change in accounting principle.
c. Change in entity.
d. Correction of error.
The following incomplete (columns have missing amounts) pension spreadsheet is for
Old Tucson Corporation (OTC).
What was the prior service cost at the beginning of the year?
a. $48.
b. $54.
c. $56.
d. $60.
On March 31, 2016, M. Belotti purchased the right to remove gravel from an old rock
quarry. The gravel is to be sold as roadbed for highway construction. The cost of the
quarry rights was $164,000, with estimated salable rock of 20,000 tons. During 2016,
Belotti loaded and sold 4,000 tons of rock and estimated that 16,000 tons remained at
December 31, 2016. At January 1, 2017, Belotti estimated that 20,000 tons still
remained. During 2017, Belotti loaded and sold 8,000 tons. Belotti would record
depletion in 2016 of:
a. $41,000.
b. $32,800.
c. $30,750.
d. $24,600.
Clark’s Chemical Company received customer deposits on returnable containers in the
amount of $100,000 during 2016. Twelve percent of the containers were not returned.
The deposits are based on the container cost marked up 20%. What is cost of goods sold
relative to this forfeiture?
a. $0.
b. $2,000.
c. $10,000.
d. $14,400.
Jennings Advertising Inc. reported the following in its December 31, 2016, balance
sheet:
In a disclosure note, Jennings indicates that it uses straight-line depreciation over 10
years and estimates salvage value at 10% of cost. What is the average age of the
equipment owned by Jennings?
a. 2.7 years.
b. 3 years.
c. 7 years.
d. 7.3 years.
Penfold’s Paints uses the average cost retail method to estimate its ending inventories.
The following data has been summarized for the year 2016:
Required:
Compute the cost-to-retail percentage used by Penfold’s Paints.
On January 1 of the current reporting year, Coda Company’s projected benefit
obligation was $30 million. During the year, pension benefits paid by the trustee were
$4 million. Service cost was $10 million. Pension plan assets earned $5 million as
expected. At the end of the year, there was no net gain or loss and no prior service cost.
The actuary’s discount rate was 10%.
Required:
Determine the amount of the projected benefit obligation at December 31.
On March 15, 2016, Ellis Corporation issued 5,000 shares of its no-par common stock
in exchange for a patent. On the date of the transaction, the market price of the common
stock was $22 per share. Ellis also received a tract of land from the City of Montrose as
an enticement to build a new office building on the site. The land had a fair value of
$510,000 and Ellis was required to pay only $200,000 to secure title to the land.
Required:
1> Prepare the journal entries to record the transactions under U.S. GAAP.
2> Prepare the entry to record the government grant assuming Ellis prepares its
financial statements according to International Financial Reporting Standards. Prepare
the entry according to each of the alternatives available under IFRS.
Briefly explain the accounting treatment for estimated sales returns at the end of an
accounting period for which cash has already been collected from customers.
Suppose that Laramie Company’s adjusted trial balance ignored the following
information. For each item of information, indicate what effects, if any, these omissions
would have on the stated components of Laramie Company’s 2016 Income Statement
and 12/31/16 Balance Sheet. Assume no income taxes. Use the following code for your
answers and be sure to include the dollar amounts of the effects next to the letter O or
U: N = No Effect
O = Overstated
U = Understated
Below is a list of accounts in no particular order. Assume that all accounts have normal
balances. Required: In column A, indicate whether a debit will:
1> Increase the account balance, or
2> Decrease the account balance. In column B, classify each account according to the
following scheme. For contra accounts, indicate the classification of the account to
which it relates.
1>A current asset in the balance sheet.
2>A noncurrent asset in the balance sheet.
3>A current liability in the balance sheet.
4>A long-term liability in the balance sheet.
5>A permanent equity account in the balance sheet.
6>A revenue account in the income statement.
7>An expense account shown in the income statement.
8> Account does not appear in either the balance sheet or the income statement.
Buildings and equipment (B&E)
ZIP Company owns 40,000 shares of the common stock of PIK Company. ZIP decided
to divest itself of this investment by distributing the PIK shares in the form of a
property dividend. The dividend ratio is one share of PIK for every four shares of ZIP
common held by shareholders. ZIP has 160,000 common shares outstanding. On April
15, 2016, the date of declaration, PIK stock had a par value of $5 per share, a book
value of $12 per share, and a market value of $17 per share.
Required:
Prepare any necessary journal entries. The shares were distributed on May 15, 2016, to
stockholders of record on May 1, 2016.
Briefly explain the following statement. Depreciation is a process of cost allocation, not
valuation.