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1) Rowen, Inc. had pre-tax accounting income of $1,800,000 and a tax rate of 40% in
2015, its first year of operations. During 2015 the company had the following
transactions:
At the end of 2015, which of the following deferred tax accounts and balances is
reported on Rowen, Inc.s balance sheet?
Account _Balance
a.Deferred tax asset$25,600
b.Deferred tax liability$25,600
c.Deferred tax asset$41,600
d.Deferred tax liability$41,600
2) Part (a)Compute the amount that a $40,000 investment today would accumulate at
10% (compound interest) by the end of 6 years.
Part (b)Tom wants to retire at the end of this year (2014). His life expectancy is 20
years from his retirement. Tom has come to you, his CPA, to learn how much he should
deposit on December 31, 2014 to be able to withdraw $60,000 at the end of each year
for the next 20 years, assuming the amount on deposit will earn 8% interest annually.
Part (c)Judy Thomas has a $2,100 overdue debt for medical books and supplies at Joe's
Bookstore. She has only $700 in her checking account and doesn't want her parents to
know about this debt. Joe's tells her that she may settle the account in one of two ways
since she can't pay it all now:
1>Pay $700 now and $1,750 when she completes her residency, two years from today.
2>Pay $2,800 one year after completion of residency, three years from today.
Assuming that the cost of money is the only factor in Judy's decision and that the cost
of money to her is 8%, which alternative should she choose? Your answer must be
supported with calculations.
3) Percy Corporation was organized on January 1, 2014, with an authorization of
1,200,000 shares of common stock with a par value of $6 per share. During 2014, the
corporation had the following capital transactions:
January 5issued 450,000 shares @ $10 per share
July 28purchased 60,000 shares @ $11 per share
December 31sold the 60,000 shares held in treasury @ $18 per share
Percy used the cost method to record the purchase and reissuance of the treasury shares.
What is the total amount of additional paid-in capital as of December 31, 2014?
a.$-0-
b.$1,380,000
c.$1,800,000
d.$2,220,000
4) Goods on consignment are
a.included in the consignee's inventory
b.included in the consignors inventory
c.included in the consignees revenue
d.included in both the consignees and the consignors inventory
5) Which of the following is not a debt security?
a.Convertible bonds
b.Commercial paper
c.Loans receivable
d.All of these are debt securities
6) Harlan Mining Co. has recently decided to go public and has hired you as an
independent CPA. One statement that the enterprise is anxious to have prepared is a
statement of cash flows. Financial statements of Harlan Mining Co. for 2015 and 2014
are provided below.
BALANCE SHEETS
12/31/1512/31/14
Cash$306,000$ 144,000
Accounts receivable270,000162,000
Inventory288,000360,000
Property, plant and equipment$456,000$720,000
Less accumulated depreciation (240,000) 216,000 (228,000) 492,000
$1,080,000$1,158,000
Accounts payable$ 132,000 $ 72,000
Income taxes payable264,000294,000
Bonds payable270,000450,000
Common stock162,000162,000
Retained earnings 252,000 180,000
$1,080,000$1,158,000
INCOME STATEMENT
For the Year Ended December 31, 2015
Sales revenue$6,300,000
Cost of sales 5,364,000
Gross profit936,000
Selling expenses$450,000
Administrative expenses 144,000 594,000
Income from operations342,000
Interest expense 54,000
Income before taxes288,000
Income taxes 72,000
Net income$ 216,000
The following additional data were provided:
1>Dividends for the year 2015 were $144,000.
2>During the year, equipment was sold for $180,000. This equipment cost $264,000
originally and had a book value of $216,000 at the time of sale. The loss on sale was
incorrectly charged to cost of sales.
3>All depreciation expense is in the selling expense category.
Questions 51 through 55 relate to a statement of cash flows (direct method) for the year
ended December 31, 2015, for Harlan Mining Company.
Under the direct method, the cash received from customers is
a.$6,408,000
b.$6,192,000
c.$6,300,000
d.$6,330,000
7) Pisa, Inc. leased equipment from Tower Company under a four-year lease requiring
equal annual payments of $172,076, with the first payment due at lease inception. The
lease does not transfer ownership, nor is there a bargain purchase option. The
equipment has a 4 year useful life and no salvage value. Pisa, Inc.s incremental
borrowing rate is 10% and the rate implicit in the lease (which is known by Pisa, Inc.) is
8%. Assuming that this lease is properly classified as a capital lease, what is the amount
of principal reduction recorded when the second lease payment is made in Year 2?
PV Annuity DuePV Ordinary Annuity
8%, 4 periods 3.57710 3.31213
10%, 4 periods 3.48685 3.16986
a.$172,076
b.$122,833
c.$126,480
d.$136,599
8) The following trial balance of Reese Corp. at December 31, 2014 has been properly
adjusted except for the income tax expense adjustment.
Reese Corp.
Trial Balance
December 31, 2014
Dr. Cr.
Cash$ 775,000
Accounts receivable (net)2,695,000
Inventory2,085,000
Property, plant, and equipment (net)7,566,000
Accounts payable and accrued liabilities$ 1,701,000
Income taxes payable654,000
Deferred income tax liability85,000
Common stock2,350,000
Additional paid-in capital3,680,000
Retained earnings, 1/1/143,450,000
Net sales and other revenues13,560,000
Costs and expenses11,180,000
Income tax expenses 1,179,000
$25,480,000$25,480,000
Other financial data for the year ended December 31, 2014:
Included in accounts receivable is $1,200,000 due from a customer and payable in
quarterly installments of $150,000. The last payment is due December 29, 2016 .
The balance in the Deferred Income Tax Liability account pertains to a temporary
difference that arose in a prior year, of which $20,000 is classified as a current liability.
During the year, estimated tax payments of $525,000 were charged to income tax
expense. The current and future tax rate on all types of income is 30%.
In Reese's December 31, 2014 balance sheet, the current liabilities total is
a.$1,850,000
b.$1,915,000
c.$2,375,000
d.$2,440,000
9) The correct order to present current assets is
a.cash, accounts receivable, prepaid items, inventories
b.cash, accounts receivable, inventories, prepaid items
c.cash, inventories, accounts receivable, prepaid items
d.cash, inventories, prepaid items, accounts receivable
10) Winsor Co. records purchases at net amounts. On May 5 Winsor purchased
merchandise on account, $40,000, terms 2/10, n/30. Winsor returned $3,000 of the May
5 purchase and received credit on account. At May 31 the balance had not been paid.
The amount to be recorded as a purchase return is
a.$2,700
b.$3,060
c.$3,000
d.$2,940
11) An objective of the statement of cash flows is to
a.disclose changes during the period in all asset and all equity accounts
b.disclose the change in working capital during the period
c.provide information about the operating, investing, and financing activities of an
entity during a period
d.None of these answers are correct
12) The market value of Farmington Corp.'s common shares was quoted at $54 per
share at December 31, 2015, and 2014 . Planetarium 's balance sheet at December 31,
2015, and 2014, and statement of income and retained earnings for the years then ended
are presented below:
Farmington Corp.
Balance Sheet
December 31
2015 2014
Assets:
Current assets:
Cash$ 9,000,000$ 5,200,000
Short-term investments17,200,00015,400,000
Accounts receivable (net)109,000,000111,000,000
Inventories, lower of cost or market122,000,000140,000,000
Prepaid expenses 4,000,000 2,800,000
Total current assets$261,200,000$274,400,000
Property, plant, and equipment (net)350,000,000315,000,000
Investments, at equity2,800,0003,500,000
Long-term receivables15,000,00020,000,000
Copyrights and patents (net)6,000,0007,000,000
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
Accounts payable55,000,00052,000,000
Accrued expenses27,500,00030,000,000
Income taxes payable1,500,0002,000,000
Current portion of long-term debt 10,000,000 9,500,000
Total current liabilities101,000,000110,500,000
Long-term debt180,000,000190,000,000
Deferred income taxes69,000,00065,000,000
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 shares12,000,00012,000,000
10% cumulative preferred shares, par value $100;
$100 liquidating value; authorized 100,000 shares;
issued and outstanding 60,000 shares6,000,0006,000,000
Additional paid-in capital119,000,000119,000,000
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
Farmington Corp.
Statement of Income and Retained Earnings
Year ended December 31
2015 2014
Net sales$540,000,000$500,000,000
Cost and expenses:
Cost of goods sold390,900,000400,000,000
Selling, general, and administrative expenses70,000,00065,000,000
Other, net 9,100,000 6,000,000
Total costs and expenses 470,000,000 471,000,000
Income before income taxes70,000,00029,000,000
Income taxes 21,000,000 11,600,000
Net income49,000,00017,400,000
Retained earnings at beginning of period117,000,000113,100,000
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 2015 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.
13) When the effective-interest method is used to amortize bond premium or discount,
the periodic amortization will
a.increase only if the bonds were issued at a discount
b.decrease only if the bonds were issued at a premium
c.increase only if the bonds were issued at a premium
d.increase if the bonds were issued at either a discount or a premium
14) One of the more popular input measures used to determine the progress toward
completion in the percentage-of-completion method is the
a.revenue-percentage basis
b.cost-percentage basis
c.progress completion basis
d.cost-to-cost basis
15) On the right are six diagrams representing six different present and future value
concepts stated on the left. Identify the diagrams with the concepts by writing the
identifying letter of the diagram on the blank line at the left. Assume n = 4 and i = 8%.
ConceptDiagram of Concept
1>Future value of 1 . ?$1
a.|||||
2>Present value of 1 .
?
3>Future value of an annuity$1$1$1$1
due of 1 .b.|- - - -||||
4>Future value of an ordinary
annuity of 1 .?
$1$1$1$1
5>Present value of an ordinaryc.||||- - - - |
annuity of 1 .
6>Present value of an annuity?$1$1$1$1
due of 1 .d.|||||
$1?
e.|||||
$1$1$1$1?
f.|||||
16) Which of the following costs should be excluded from research and development
expense?
a.Modification of the design of a product
b.Acquisition of R & D equipment for use on a current project only
c.Cost of marketing research for a new product
d.Engineering activity required to advance the design of a product to the manufacturing
stage
17) Peavy Corp.'s transactions for the year ended December 31, 2015 included the
following:
Acquired 50% of Gant Corp.'s common stock for $200,000 cash which was borrowed
from a bank.
Issued 5,000 shares of its preferred stock for land having a fair value of $320,000.
Issued 500 of its 11% debenture bonds, due 2020, for $392,000 cash.
Purchased a patent for $220,000 cash.
Paid $120,000 toward a bank loan.
Sold available-for-sale securities for $796,000.
Had a net increase in returnable customer deposits (long-term) of $88,000.
Peavys net cash provided by investing activities for 2015 was
a.$276,000
b.$376,000
c.$576,000
d.$596,000
18) Which of the following is correct about the effective-interest method of
amortization?
a.The effective-interest method applied to investments in debt securities is different
from that applied to bonds payable
b.Amortization of a discount decreases from period to period
c.Amortization of a premium decreases from period to period
d.The effective-interest method produces a constant rate of return on the book value of
the investment from period to period
19) Among the short-term obligations of Larsen Company as of December 31, the
balance sheet date, are notes payable totaling $250,000 with the Dennison National
Bank. These are 90-day notes, renewable for another 90-day period. These notes should
be classified on the balance sheet of Larsen Company as
a.current liabilities
b.deferred charges
c.long-term liabilities
d.intermediate debt
20) Typical contractual situations that are disclosed in the notes to the balance sheet
include all of the following except
a.debt covenants
b.lease obligations
c.advertising contracts
d.pension obligations
