COMPREHENSIVE EXAMINATION F
PART 6
(Chapters 22-24)
Approximate
Problem Topic Time
F-I Multiple Choice Questions. 25 min.
F-II Statement of Cash Flows. 25 min.
F-III Accounting Changes, Error Corrections, and
Prior Period Adjustments. 30 min.
F-IV * Analysis of Financial Statements. 25 min.
F-V Segment Reporting. 15 min.
120 min.
*This topic is dealt with in an Appendix to the chapter.
Test Bank for Intermediate Accounting, Fifteenth Edition
F – 2
Problem F-I — Multiple Choice Questions.
1. Which of the following transactions would be considered a financing activity in preparing a
statement of cash flows?
a. Amortizing a discount on bonds payable
b. Recording net income from operations
c. Selling common stock
d. Purchasing inventory
2. The net income for the year ended December 31, 2015, for Tax Consultants INC. was
$990,000. Additional information is as follows:
Capital expenditures $1,200,000
Depreciation on plant assets 450,000
Cash dividends paid on common stock 180,000
Increase in noncurrent deferred tax liability 45,000
Amortization of patents 21,000
Based on the information given above, what should be the net cash provided by operating
activities in the statement of cash flows for the year ended December 31, 2015?
a. $1,326,000.
b. $1,416,000.
c. $1,461,000.
d. $1,506,000.
3. Information concerning the debt of Cole Company is as follows:
Short-term borrowings:
Balance at December 31, 2014 $525,000
Proceeds from borrowings in 2015 325,000
Payments made in 2015 (450,000)
Balance at December 31, 2015 $400,000
Current portion of long-term debt:
Balance at December 31, 2014 $1,625,000
Transfers from caption “Long-Term Debt” 500,000
Payments made in 2015 (1,225,000)
Balance at December 31, 2015 $ 900,000
Long-term debt:
Balance at December 31, 2014 $9,000,000
Proceeds from borrowings in 2015 2,250,000
Transfers to caption “Current Portion of Long-Term Debt” (500,000)
Payments made in 2015 (1,500,000)
Balance at December 31, 2015 $9,250,000
In preparing a statement of cash flows for the year ended December 31, 2015, for Cole
Company, cash flows from financing activities would reflect
Outflow
a. $2,000,000
b. $2,250,000
c. $2,575,000
d. $3,175,000
Comprehensive Examination F
F – 3
Problem F-I — (cont.)
4. In considering interim financial reporting, how did the Accounting Principles Board
conclude that such reporting should be viewed?
a. As a “special” type of reporting that need not follow generally accepted accounting
principles.
b. As useful only if activity is evenly spread throughout the year so that estimates are
unnecessary.
c. As reporting for a basic accounting period.
d. As reporting for an integral part of an annual period.
5. Which of the following items represents a potential use of cash?
a. Patent amortization
b. Sale of plant assets at a loss
c. Net loss from operations
d. Declaration of a stock dividend
6. Worthington Company purchased a machine on January 1, 2012, for $6,400,000. At the
date of acquisition, the machine had an estimated useful life of six years with no salvage.
The machine is being depreciated on a straight-line basis. On January 1, 2015,
Worthington determined, as a result of additional information, that the machine had an
estimated useful life of eight years from the date of acquisition with no salvage. An
accounting change was made to reflect this additional information. What amount of
depreciation expense should be reported in Worthington’s income statement for the year
ended December 31, 2015?
a. $1,066,667
b. $800,000
c. $640,000
d. $400,000
7. On January 7, 2013, Yoder Corporation acquired machinery at a cost of $2,100,000.
Yoder adopted the sum-of–the–years’-digits method of depreciation for this machine and
had been recording depreciation over an estimated life of five years, with no residual
value. At the beginning of 2015, a decision was made to change to the straight-line
method of depreciation for this machine. Assuming a 30% tax rate, the cumulative effect
of this accounting change, net of tax, is
a. $0
b. $280,000
c. $294,000
d. $420,000
*8. Information from Collins Company’s balance sheet is as follows:
Current assets:
Cash $ 12,000,000
Short-term investments 20,000,000
Accounts receivable 50,000,000
Inventories 66,000,000
Prepaid expenses 2,000,000
Total current assets $150,000,000
Test Bank for Intermediate Accounting, Fifteenth Edition
F – 4
Problem F-I (cont.)
Current liabilities:
Notes payable $ 21,000,000
Accounts payable 18,000,000
Accrued expenses 13,000,000
Income taxes payable 3,000,000
Current portion of long-term debt 5,000,000
Total current liabilities $ 60,000,000
What is the acid-test (quick) ratio?
a. 1.03 to 1
b. 1.37 to 1
c. 1.40 to 1
d. 2.50 to 1
*9. Fargo, Inc. disclosed the following information as of and for the year ended December 31,
2015:
Net cash sales 600,000
Net credit sales 960,000
Inventory at beginning 100,000
Inventory at end 150,000
Net income 30,000
Accounts receivable at beginning of year 110,000
Accounts receivable at end of year 130,000
Fargo’s receivables turnover is
a. 7.4 to 1.
b. 8.0 to 1.
c. 12.0 to 1.
d. 13.0 to 1.
*10. The calculation of the number of times interest is earned involves dividing
a. net income by annual interest expense.
b. net income plus income taxes by annual interest expense.
c. net income plus income taxes and interest expense by annual interest expense.
d. none of these answers are correct.
Comprehensive Examination F
F – 5
Problem F-II — Statement of Cash Flows.
Sharp Company
Comparative Balance Sheet
December 31
2015 2014
Cash $ 54,000 $ 36,000
Accounts receivable, net 53,000 57,000
Inventory 161,000 123,000
Land 180,000 285,000
Building 300,000 300,000
Accumulated depreciation—building (75,000) (60,000)
Equipment 1,565,000 900,000
Accumulated depreciation—equipment (177,000) (141,000)
$2,061,000 $1,500,000
Accounts payable $ 202,000 $ 150,000
Bonds payable 450,000 -0-
Capital stock, $10 par 1,250,000 1,250,000
Retained earnings 159,000 100,000
$2,061,000 $1,500,000
Additional Data:
1. Net income for the year amounted to $109,000.
2. Cash dividends were paid amounting to 4% of par value.
3. Land was sold for $120,000.
4. Sharp sold equipment, which cost $225,000 and had accumulated depreciation of $90,000,
for $115,000.
Instructions
Prepare a statement of cash flows using the indirect method.
Test Bank for Intermediate Accounting, Fifteenth Edition
F – 6
Problem F-III — Accounting Changes, Error Corrections, and Prior Period Adjustments.
Molina Company’s reported net incomes for 2015 and the previous two years are presented
below.
2015 2014 2013
$105,000 $95,000 $70,000
2015’s net income was properly determined after giving effect to the following accounting
changes, error corrections, etc. which took place during the year. The incomes for 2013 and 2014
do not take these items into account and are stated at the amounts determined in those years.
Ignore income taxes.
Instructions
(a) For each of the six accounting changes, errors, or prior period adjustment situations
described below, prepare the journal entry or entries Molina Company should record during
2015. If no entry is required, write “none.”
(b) After recording the situation in part (a) above, prepare the year-end adjusting entry for
December 31, 2015. If no entry, write “none.”
1. Early in 2015, Molina determined that equipment purchased in January, 2013 at a cost of
$1,075,000, with an estimated life of 5 years and salvage value of $75,000 is now estimated
to continue in use until December 31, 2019 and will have a $25,000 salvage value. Molina
recorded its 2015 depreciation at the end of 2015.
(a)
(b)
2. Molina determined that it had understated its depreciation by $20,000 in 2014 owing to the
fact that an adjusting entry did not get recorded.
(a)
(b)
3. Molina bought a truck January 1, 2012 for $60,000 with a $6,000 estimated salvage value
and a six-year life. The company debited an expense account and credited cash on the
purchase date. The truck is expected to be traded at the end of 2017. Molina uses straight–
line depreciation for its trucks.
(a)
(b)
Comprehensive Examination F
F – 7
Problem F-III (cont.).
4. During 2015, Molina changed from the straight-line method of depreciating its cement plant
to the double-declining-balance method. The following calculations present depreciation on
both bases. (Ignore income taxes.) The 2015 amount applies double-declining balance to
the 1/1/15 carrying amount after straight-line was used.
2015 2014 2013
Straight-line $100,000 $100,000 $100,000
Double-declining $200,000 $160,000 $200,000
(a)
(b)
5. Molina, in reviewing its provision for uncollectibles during 2015, has determined that 1/2 of
1% is the appropriate amount of bad debt expense to be charged to operations. The
company had used 1% as its rate in 2014 and 2013 when the expense had been $20,000
and $14,000, respectively. The company would have recorded $60,000 of bad debt expense
on December 31, 2015 under the old rate.
(a)
(b)
6. During 2015, Molina decided to change from the LIFO method of valuing inventories to
average cost. The net incomes involved under each method were as follows:
2015 2014 2013
LIFO $51,000 $59,000 $42,000
Average cost $63,000 $67,000 $48,000
Assume no difference between LIFO and average cost inventory values in years prior to
2013.
(a)
(b)
Test Bank for Intermediate Accounting, Fifteenth Edition
F – 8
Problem F-IV — Analysis of Financial Statements.
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 investments 17,200,000 15,400,000
Accounts receivable (net) 109,000,000 111,000,000
Inventories, lower of cost or market 122,000,000 140,000,000
Prepaid expenses 4,000,000 2,800,000
Total current assets $261,200,000 $274,400,000
Property, plant, and equipment (net) 350,000,000 315,000,000
Investments, at equity 2,800,000 3,500,000
Long-term receivables 15,000,000 20,000,000
Copyrights and patents (net) 6,000,000 7,000,000
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 payable 55,000,000 52,000,000
Accrued expenses 27,500,000 30,000,000
Income taxes payable 1,500,000 2,000,000
Current portion of long-term debt 10,000,000 9,500,000
Total current liabilities 101,000,000 110,500,000
Long-term debt 180,000,000 190,000,000
Deferred income taxes 69,000,000 65,000,000
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 shares 12,000,000 12,000,000
10% cumulative preferred shares, par value $100;
$100 liquidating value; authorized 100,000 shares;
issued and outstanding 60,000 shares 6,000,000 6,000,000
Additional paid-in capital 119,000,000 119,000,000
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
Comprehensive Examination F
F – 9
*Problem F-IV (cont.).
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 sold 390,900,000 400,000,000
Selling, general, and administrative expenses 70,000,000 65,000,000
Other, net 9,100,000 6,000,000
Total costs and expenses 470,000,000 471,000,000
Income before income taxes 70,000,000 29,000,000
Income taxes 21,000,000 11,600,000
Net income 49,000,000 17,400,000
Retained earnings at beginning of period 117,000,000 113,100,000
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.
Test Bank for Intermediate Accounting, Fifteenth Edition
F – 10
Problem F-V — Segment Reporting.
Baden Company is a diversified company which has developed the following information about its
five segments: SEGMENTS
A B C D E
Total sales $ 800,000 $1,700,000 $ 300,000 $ 320,000 $ 580,000
Operating profit (loss) (270,000) 480,000 40,000 (300,000) (10,000)
Identifiable assets 2,600,000 5,800,000 1,200,000 3,900,000 5,600,000
Instructions
Identify which segments are significant enough to warrant disclosure in accordance with FASB
No. 131, “Reporting Disaggregated Information about a Business Enterprise,” by applying the
following quantitative tests:
a. Revenue test
b. Operating profit or loss test
c. Identifiable assets test
Comprehensive Examination F
F – 11
Solutions — Comprehensive Examination F
Problem F-I — Solution.
Problem F-II — Solution.
Sharp Company
Statement of Cash Flows
For the Year Ended December 31, 2015
Test Bank for Intermediate Accounting, Fifteenth Edition
F – 12
Problem F-III — Solution.
*Problem F-IV — Solution.
Comprehensive Examination F
F – 13
*Problem F-IV — Solution (cont.)
Test Bank for Intermediate Accounting, Fifteenth Edition
F – 14
Problem F-V — Solution.