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ACCOUNTING 201 Final Exam Problems




Question;ACCOUNTING 201;FINAL EXAM;SECTION I. A. Exchange of assets (12 points);During the current year, Pellegrino Inc. trades a piece of;land used in its operations in Italy that has a book value (carrying value) of;$94,000 for a piece of processing equipment used in the operations of Perrier;Co. The carrying value of the machine on Perrier?s books is $75,000. The;transaction lacks commercial substance.;a) Assume the fair value of the land is $100,000. How much of;a gain or loss can Pellegrino recognize on the exchange? Your answer may be;zero.;b) Assume neither the fair value of the land nor the fair;value of the machine can be reliably measured. How much of a gain or loss can;Pellegrino recognize on the exchange? Your answer may be zero.;c) Assume that Pellegrino paysPerrier $10,000 as part;of the exchange of the land for the machine. Assume the fair value of the land;is $100,000. How much of a gain or loss can Pellegrino recognize on the;exchange? Your answer may be zero.;d) Assume that Pellegrino receives$4,000 from Perrier;as part of the exchange of the land for the machine. Assume the fair value of;the land is $100,000. How much of a gain or loss can Pellegrino recognize on;the exchange? Your answer may be zero.;SECTION I. B. Research and development costs (5 points);Rosalynn Corp. incurred research and development costs in;2014 associated with the development of a new drug as follows;Materials and equipment $140,000;Personnel 190,000;Indirect costs 100,000;$430,000;As of December 31, 2014, Rosalynn estimates that the;development process will result in a patentable drug by December 31, 2017 that;has an estimated fair value of $1,300,000. The materials and equipment;purchased have no alternative uses.;Q1. What amount is Rosalynn permitted to capitalize during;2014?;a) ZERO;b) 140,000;c) 290,000;d) 430,000;e) 1,300,000;Q2. Assume it is now December 31, 2017. The patent was;granted in December 2017 and the estimated fair value of the patent is;$1,800,000. What amount is Rosalynn permitted to capitalize as of December 31;2017?;a) ZERO;b) 140,000;c) 290,000;d) 430,000;e) 1,800,000;SECTION I. C. Revenue recognition (8 points);TVLAND is an experienced home theatre dealer. TVLAND also;offers a number of services such as installation and design/layout of the;seating after delivery of the TV. Assume that TVLAND sells big screen TVs on a;standalone basis. TVLAND also sells installation and seating design/layout;services, however, TVLAND does not offer design or installation to customers;who buy TVs from other vendors. Pricing for TVs is as follows.;TV only $ 800;TV with installation service 850;TV with design services 975;TV with design and installation services 1,000;In each instance in which design services are provided, the;design is separately priced within the arrangement at $175. Additionally, the;incremental amount charged by TVLAND for installation approximates the amount;charged by independent third parties. TVs are sold subject to a general right;of return. If a customer purchases a TV with installation and/or design;services, in the event TVLAND does not complete the service satisfactorily, the;customer is only entitled to a refund of the portion of the fee that exceeds;$800.;Question 1.Assume that a customer;purchases a TV with both design services and installation for $1,000. The;requested installation is completely customary and TVLAND has considerable;experience performing installation. Based on its experience, TVLAND is assured;that the installation will be performed satisfactorily to the customer. As;noted above, recall that the design services are priced separately.;TVLAND is allowed to recognize revenue related to the TV upon;delivery of the TV because;(a) The TV has value to the customer on a standalone basis;(b) The arrangement includes a general right of return;relative to the TV;(c) Performance of the undelivered items (installation) is;considered probable and substantially in control of the seller;(d) All of the above are necessary to justify revenue;recognition;(e) None of the above justifies revenue recognition;SECTION I. C. Revenue recognition, continued;Question 2.Indicate the amount of;revenues that should be allocated to the TV, the installation, and the;design/layout services contract.;SECTION I. D. Revenue recognition on a long-term contract (11;points);Ignore taxes throughout this problem.;On March 1, 2010, Green Construction Company contracted to;construct a factory building for Verde Manufacturing Inc. for a total contract;price of $10,000,000. The building was completed by October 31, 2012. Green;uses the percentage-of-completion method.;The annual contract costs incurred, estimated costs to;complete the contract, and accumulated billings to Verde for the year ended;December 31, 2010 are given below.;Contract costs incurred during the year $3,200,000;Estimated costs to complete the contract at 12/31 4,800,000;Billings to Verde during the year 3,500,000;Question 1.How much revenue should;Green recognize on this contract in 2010?;Question 2.How;much profit/(loss) should Green recognize on this contract in 2010? Be sure to;indicate whether it is a profit or a loss.;Question 3.During 2011, Green;incurs $2,800,000 of contract costs (i.e., cumulative total costs as of;December 31, 2011 = $6,000,000) and estimates that the costs to complete are;$3,000,000 as of 12/31/2011. How much profit/(loss) should Green recognize in;2011? Be sure to indicate whether it is a profit or a loss. You may round;answer to nearest thousand.;SECTION I. E. Investments (22 points);Part 1. Pinks Fabric Co. (15 points);There are four questions in this section related to an;investment by Pinks Fabric Co. (Pinks). Excerpts from Pinks? footnotes in the 2014;annual report follow;The fabric sourcing business is being conducted by Gulabi;Trading Co., an investee that is accounted for by the equity method of;accounting (see Note C).;Effective as of April 19, 2005, Pinks entered into an;agreement (the ?Operating Agreement?) with two individuals (the ?Principals?);for the formation of Gulabi Trading Co. Pursuant to the terms of the Operating;Agreement, Pinks and each of the Principals made an initial capital;contribution of $500,000 in exchange for a 33.33% initial interest in Gulabi.;The Operating Agreement provides that profit be shared 66.66% by the Principals;and 33.33% by Financial.;="#000000">


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