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Intermediate Accounting II-(ACCT 311), Fall 2014 Final Exam -- Version B

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Question;Please see;instructions on the answer sheet provided before completing the exam.;Question 1 (3 points?30 minutes);On January 1, 2014, A&O Corp. leases equipment to PVP Company under a;six-year non-cancelable lease agreement. The fair value of the equipment is $700,000;and the cost of equipment to A&O is $600,000. Economic life of the leased equipment is ten years with no residual value and title;to the equipment passes to PVP at the end of the lease. Equal annual payments of 151,421 are due on;December 31 each year. The implicit;interest rate is 8%. Collectibility of;the lease payments is reasonably predictable and there are no additional costs;yet to be incurred by A&O Corp.;Assume that this is a sales type lease.;The present value factor for an ordinary annuity for 6 periods at 8% is;4.62288 and the present value factor for an annuity due for 6 periods at 8% is;4.99271.;For A&O Co. (lessor) answer;the following questions.;a.;Show;calculations for Lease Receivable on 1/1/2014 (round your answer).;b. Prepare the journal entry to;record the lease on 1/1/ 2014.;c.;Prepare a;partial amortization table for the lease through 12/31/2016.;d. Prepare the journal entry to;record the receipt of lease payment on 12/31/2014.;Question 2 (3 points?30 minutes);The following partial information is available for A&O Company for;2014 and 2015;2015 2014;Cash $ 292,000 $ 153,000;Accounts receivable 149,000 117,000;Inventory 150,000 180,000;Prepaid expenses 18,000 27,000;Plant assets 1,275,000 1,050,000;Accumulated depreciation (450,000) (375,000);Patent 153,000;174,000;$1,587,000 $1,326,000;Accounts payable $ 153,000 $ 168,000;Accrued liabilities 60,000 42,000;Mortgage payable ? 450,000;Preferred stock 525,000 ?;Additional paid-in capital?preferred 120,000 ?;Common stock 600,000 600,000;Retained earnings 129,000;66,000;$1,587,000 $1,326,000;?;The increase in Accumulated Depreciation account is due to the;depreciation expense for the period. No plant assets were sold during the year.;Patents were not purchased or sold during the year.;?;The Retained Earnings account has been charged for dividends of $148,000;and credited for the net income for the year.;?;Depreciation expense and patent amortization expense for 2015 are;included in the $680k operating expense shown below.;The income statement (partial;information) for 2015 is as follows;Sales;revenue $1,980,000;Cost of;sales 1,089,000;Gross;profit 891,000;Operating;expenses 680,000;Net income $ 211,000;Indirect method: show;calculations for cash flow from (a) Operating (b) Investing, and (c) Financing;activities for 2015.;Question 3 (2 points?15 minutes);During 2014, AM Construction;Company changed from the completed-contract method to the;percentage-of-completion method for accounting purposes but not for tax;purposes. Gross profit figures under both methods for the past three years;appear below;Completed-Contract Percentage-of-Completion;2012 $;400,000 $ 800,000;2013 600,000 900,000;2014 700,000 1,000,000;$1,700,000 $2,700,000;Assume an income tax rate of 35%;for all years.;a.;Show;computations to determine the adjustment needed in 2014 to the beginning;balance of retained earnings to;account for the effect of this accounting change on prior periods.;b. Prepare a journal entry needed in;2014 to adjust the accounting records for this change in accounting principle..;Question 4 (2 points?25 minutes);The;following information pertains to VAAP Co.?s defined benefit pension plan for;the year 2014.;Projected benefit obligation at 1/1/2014;$700,000;Fair;value of pension plan assets 1/1/2014;600,000;Unrecognized;prior service costs at 1/1/2014;100,000;Service;cost for 2014;80,000;Amortization;of prior service costs;11,000;Actual;return on plan assets in 2014;55,000;Expected;return on plan assets in 2014;50,000;Contributions;to the plan in 2014;90,000;Benefits;paid in 2014;25,000;Unexpected;loss from change in projected benefit obligation due to change in actuarial;predictions in 2014;27,000;Settlement;rate used;9%;a.;Show calculations to determine the pension expense for 2014.;b. Show;calculations to determine the ending balance of the projected benefit;obligation at 12/31/2014.;Question 5 (4 points?20 minutes);Select the;best answer for each of the following and write the letter corresponding to;your answer in the answer sheet provided.;1.;VAAP Company becomes aware of a lawsuit after the date of the;financial statements, but before they are issued.The cause for action occurred;during the accounting period covered by the financial statements.A;loss and related liability should be reported in the financial statements if;a. VAAP lawyers admit;guilt.;b. The court will decide;the case within one year.;c. The amount can be reasonably;estimated, and an unfavorable outcome is reasonably possible.;d. The;amount can be reasonably estimated, and an unfavorable outcome is highly;probable.;2.;A company is;required to exclude a short term obligation from current liabilities if;a. It intends to;refinance the obligation on a long term basis;b. It enters into a;financing agreement that permits the enterprise to refinance the debt on a short-term;basis.;c. It demonstrates an;ability to consummate the refinancing;d. Both conditions in a;and c are met.;3.;Under the effective-interest method of bond;discount or premium amortization, which of the following statements is correct?;a.;As bond;discount is amortized, the interest expense increases over time.;b.;As bond;discount is amortized, the carrying value of bonds remains the same over time.;c.;As bond;premium is amortized, the carrying value of bonds increases over time.;d.;All of the;above statements are incorrect.;4.;A&O Corporation issued a 10% stock dividend of;its common stock which had a par value of $10 and a fair value of $13 at the;time of the stock dividend. At what amount should retained earnings be;capitalized (debit to retained earnings) for the additional shares issued?;a.;There should;be no capitalization of retained earnings.;b.;Par value;c.;Fair value;on the declaration date;d.;Fair value;on the date of distribution;5.;What effect does the issuance of a stock;dividend have on each of the following?;Par Value per Share Retained Earnings;a. No effect No;effect;b. Increase Increase;c. Decrease Decrease;d. No effect Decrease;6. Which;of the followingwould result;in future deductible amounts?;a.;Fines;resulting from a violation of law.;b.;Warranty;expense reported in financial income before it is paid.;c.;Depreciation;taken on the tax return in excess of the amounts reported in financial income.;d.;Interest;received on a municipal obligation.;7. Under the cost method, when a;company sells its Treasury Stock either above or below its cost, which of the;following statements is correct with respect to accounting for the sale?;a. Sale of Treasury Stock above cost results in a debit to Paid in Capital;from Treasury Stock.;b. Sale of Treasury Stock above cost results in a debit to Retained;earnings.;c. Sale of Treasury Stock above cost results in a credit to Paid in;Capital from Treasury Stock.;d. Sale of Treasury Stock below cost results in a credit to Paid in;Capital from Treasury Stock.;8. A lessor with a sales-type lease;involving unguaranteed residual value available to the lessor at the end of the;lease term will report sales revenue in the period of inception of the lease at;which of the following amounts?;a. Lease receivable plus the present value of the unguaranteed;residual value.;b. The sales price of the asset, less the present value of the unguaranteed;residual value.;c. The sales price of the asset, plus the present value of the unguaranteed;residual value.;d. The sales revenue would be equal to the sales price of the;asset.;9.;A company changes the useful life of a building from 15 years and no;salvage value to 25 years and no salvage value. The company would account for the effect of;this change;a. By recasting previously issued financial statements.;b. In the period of change and future periods if the change affects;both.;c. As a change in estimate effected by a change in accounting;principle.;d. As a change in accounting principle.;10. A&O;Corporation sold equipment for $85,000.;The cost of the equipment was $100,000 and the book value was $82,000. Under the indirect method, to determine net;cash flow from operations, A&O would;a. Subtract from net income a $3,000 gain from;sale of equipment;b. Add back to net income a $15,000 loss from;sale of equipment;c. Add back to net income a $3,000 loss from;sale of equipment;d. Subtract from net income a $15,000 gain;from sale of equipment.;Question 6 (6 points?40 minutes);Show;computations for each of the following, and clearly show your final answer;using the answer sheet provided.;1.;PVP Company sells products for $500,000 (on credit) that include an;assurance-type warranty for the first 90 days. The cost of the products is $250.000.;PVP also offers a service type warranty;for extended coverage for 2 years beyond the expiration of the assurance-type;warranty for $10,000. The estimated cost of the assurance-warranty is $20,000. Prepare;(a) a journal entry to record sale and related warranties AND (b) a journal;entry to record the cost of goods sold.;2.;During 2013, PVP Co. introduced a new product carrying a two-year;warranty against defects. The estimated warranty costs related to dollar sales;are 2% within 12 months following sale and 3% in the second 12 months following;sale. Sales and actual warranty expenditures for the years ended December 31;2013 and 2014 are as follows;Actual;Warranty;Sales Expenditures;2013 $ 500,000 $20,000;2014 1,500,000 50,000;$2,000,000 $70,000;Show;computation for an estimated warranty liability on (a) 12/31/2013 and (b) on 12/31/2014.;3.;VAPCompany's balance sheet shows;?;Common stock, $20 par $4,000,000;?;Paid-in capital in excess of par 1,000,000;?;Retained earnings 800,000;Prepare;journal entries to record the following transactionsusing the cost method.;(a) Bought;10,000treasuryshares of itsowncommon stock at $30 a share.;(b) Sold;2,000 treasury shares at $31 a share.;(c) Sold;1,000 shares of treasury stock at $27 a share.;4.;At December 31, 2014, VAAP Corp. had 55,000 shares of common stock. The company has a 7% ten-year bond sold in;2012 for $1,000,000 and convertible into 35,000 shares of common stock. Net;income for 2014 was $302,500 and the tax rate is 35%. Show computations for;VAAP?s (a) basic and (b) diluted earnings per share in 2014.;5.;On January 1, 2013, PVP Co. purchased a;machine for $880,000 and depreciated it by the straight-line method using an;estimated useful life of ten years with a salvage value $80,000. On January 1;2015, PVP determined that the machine had a useful life of six years from the;date of acquisition and will have a salvage value of $70,000. An accounting;change was made in 2015 to reflect these additional data. Show calculations to;determine the depreciation expense for this machine in 2015.;6. A&E Co. reported $250,000;income in its 2014 income statement before provision for income taxes. To compute the provision for federal income;taxes the following 2014 information is provided.;Estimated product warranty expenses deducted in;financial income before payment;25,000;Income from tax exempt municipal bonds;10,000;Depreciation deducted for income tax purposes in excess of;depreciation reported for financial statement purposes;20,000;Enacted corporate income tax rate;35%;Show computations to determine;the amount of (a) current income tax liability (income taxes payable), and (b);deferred tax asset and/or deferred tax liability as applicable on 12/31/2014.;7. PVP Corp leased a truck on;1/1/2014. The lease requires PVP Corp to;make 5 annual payments of $20,000 beginning on 1/1/2014. At the end of the lease PVP Corp guarantees;the residual value of the truck will total $6,000. The lease qualifies as a capital lease. The;interest rate implicit in the lease is 10%.;Present value factors at 10% are as follows;?;For an;annuity due with 5 payments, 4.16986;?;For an ordinary;annuity with 5 payments, 3.79079;?;Present;value of $1 for 5 periods, 0.62092;Show;calculations to determine the amount for PVP Corp?s recorded liability;immediately after the first payment.;8. A&O Inc. leased a machine;from PVP Co. The lease qualifies as a;capital lease and requires 10 annual payments of $25,000 beginning;immediately. The lessor?s implicit rate;is 12% and the lessee is aware of this rate.;The lessee?s incremental borrowing rate is 14%. The lease has a bargain purchase option of $10,000;at the end of the tenth year.;?;The present;value of an annuity due of one at 12% for 10 years is 6.328, and at 14% for 10;years is 5.946.;?;The present;value of an ordinary annuity at 12% for 10 years is 5.650.;?;The present;value of one at 12% for 10 years is 0.322, and at 14% for 10 years is 0.270.;Show;calculations to determine the amount A&O should record as a lease liability;at the beginning of the lease term.

 

Paper#38644 | Written in 18-Jul-2015

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