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Section I True/False – If the statement is FALSE, you must explain why or correct it to get credit. (1 point each) Questions: 1. When a specific account receivable is determined to be uncollectible, the journal entry to write off the account reduces cash. TrueFalse(indicate one) If false, explain below or correct above: The write-off reduces accounts receivable, and the allowance for doubtful accounts, but has no effect on cash. 2.Increases in the market rate of interest after a bond has been issued increase the discount on the bond that the issuing firm would record. TrueFalse(indicate one) If false, explain below or correct above: Changes in the market rate after issuance do not affect the discount on a bond. They only affect the bond’s price on the secondary market. 3.When a company acquires its own shares (i.e., treasury stock), total assets and total shareholders’ equity both decrease. TrueFalse(indicate one) 4. A company’s assets and shareholders’ equity both decrease on the date when a cash dividend is declared by the company’s board of directors. TrueFalse(indicate one) If false, explain below or correct above: Liabilities increase and stockholders’ equity decrease when a cash dividend is declared. 5.Selling a depreciable asset for a gain results in an increase in both net income and total assets. TrueFalse(indicate one) 6.An understatement of ending inventory results in an overstatement of net income. TrueFalse(indicate one) If false, explain below or correct above: An understatement of ending inventory results in an overstatement of COGS and therefore an understatement of net income. 7.Use of the double-declining balance method of depreciation results in increasing amounts of depreciation expense each year over an asset’s life. TrueFalse(indicate one) If false, explain below or correct above: The double-declining balance method records higher depreciation expenses in earlier years, with declining amounts of depreciation recorded over an asset’s life. 8.Amortization of a discount on a bond payable will result in an increase in the net bond liability amount shown on the balance sheet. TrueFalse(indicate one) 9.When inventory costs are decreasing, a company that uses LIFO will have higher Retained Earnings than a company that uses FIFO (assuming all else is equal between the companies). TrueFalse(indicate one) 10.When using the percentage of credit sales method for recording bad debt expense, the ending balance in the allowance for doubtful accounts is equal to net sales multiplied by a historical percentage for credit losses. TrueFalse(indicate one) If false, explain below or correct above: When using the percentage of credit sales method, net sales multiplied by a historical percentage for credit equals the bad debt expense recorded for the year, and not the ending balance in the allowance for doubtful accounts. Section II Multiple Choice – Indicate the correct answer. (3 points each) 11.What is the effect on the 2016 financial statements when a capital expenditure during 2016 was incorrectly recorded as an ordinary repair and maintenance expense? A) The error cancels out and the financial statements are not affected. B) Assets and net income are both overstated. C) Assets are overstated and net income is understated. D) Assets and stockholders’ equity are both understated. 12.Farkle Company estimated the net realizable value of its accounts receivable as of December 31, 2016, to be $165,000, using the aging of accounts receivable method. Farkle also provided the following information: · The gross accounts receivable balance on December 31, 2016 was $175,000 · Uncollectible accounts receivable written off during 2016 totaled $12,000 · The allowance for doubtful accounts balance on January 1, 2016 was $15,000. How much is Farkle’s 2016 bad debt expense? A) $10,000 B) $7,000 C) $13,000 D) $3,000 The December 31, 2016 balance in allowance for doubtful accounts, $10,000 equals the accounts receivable balance on December 31, 2016, $175,000, minus the December 31, 2016 net realizable value of accounts receivable, $165,000. The December 31, 2016 balance in allowance for doubtful accounts, $10,000 equals the balance in allowance for doubtful accounts on January 1, 2016, $15,000 minus accounts receivable write offs during 2016, $12,000, plus the 2016 bad debt expense, $7,000. 13.Smort Company purchased land by paying $20,000 cash on the purchase date and agreeing to pay $40,000 for each of the next 8 years, beginning one year from the purchase date. Smort’s borrowing rate is 9%. The land value reported on the balance sheet is closest to: A) $237,600 B) $221,000 C) $340,000 D) $241,400 N = 8 years, I/Y = 9%, FV = 0, PMT = -40,000, PV = ? = 221,392 PLUS the 20,000 payment on purchase date = 241,392. 14. Grewark Company provided the following information for 2017: · Cash sales were $450,000 · Credit sales were $1,350,000 · Selling and administrative expenses were $330,000 · Sales returns and allowances were $90,000 · Sales discounts were $43,000 · Increase in accounts receivable for the year was $55,000 · Gross profit (net sales less COGS) was $1,360,000 How much was Grewark’s Cost of Goods Sold for 2017? A) $307,000 B) $252,000 C) $440,000 D) $340,000 Net Sales = 450,000 + 1,350,000 – 90,000 – 43,000 = 1,667,000. Net Sales – COGS = 1,360,000 in Gross Profit. COGS therefore was $307,000 15.On January 1, 2016, Broker Corp. issued $3,000,000 par value 12%, 10-year bonds which pay interest each December 31. If the market rate of interest was 14%, which of the following is closest to the issue price of the bonds? A) $3,339,084 B) $2,843,172 C) $3,000,000 D) $2,687,033 N = 10 years, I/Y = 14%, FV = 3,000,000, PMT = (3,000,000 * 12% = 360,000), PV = ? = 2,687,033. 16.Which of the following statements incorrectly describes earnings per share (EPS)? A) Earnings per share is a ratio calculated per common share. B) An increase in the market price per common share does not result in a decrease in earnings per share. C) An increase in dividends per share results in an increase in earnings per share. D) The reissue of treasury stock decreases earnings per share. 17.Skylar Company issued $50,000,000 of its 10% bonds at par on January 1, 2016. On December 31, 2016, the bonds were trading on the bond exchange at 102.5. Since the issue date, what has happened to the market rate of interest? A) The market rate increased. B) The market rate decreased. C) The market rate stayed the same. D) There is too little information to determine what has happened to the market rate. 18. On January 1, 2016, PyleDriver Company purchased an asset for $50,000, and estimated that it had no residual value and a useful life of 8 years. An error was made in 2016 because the total amount of the asset’s cost was recorded as an expense in 2016, and no depreciation was recorded. Pretax income for 2016 was $42,000 (when reported incorrectly based on the information above). Assuming the company uses straight-line depreciation, what is the correct 2016 pretax income? A) $35,750 B) $48,250 C) $85,750 D) $92,000 $42,000 pretax income + $50,000 in expenses incorrectly recorded, less ($50,000/8 =) $6,250 depreciation expense that should have been recorded. 19.QV-TV, Inc. provided the following items in its notes to the financial statements for the year-end 2014: Cost of goods sold was $22 billion under FIFO costing and the inventory value under FIFO costing was $2.1 billion. The LIFO Reserve for year-end 2013 was $0.6 billion and at year-end 2014 it had increased to $0.8 billion. What is the LIFO inventory value at year-end 2014? A) $1.9 billion B) $2.9 billion C) $2.3 billion D) $1.3 billion LIFO Ending Inventory (1.3) + LIFO Reserve (0.8) = FIFO Ending Inventory (2.1) 20.A company reported the following asset and liability balances at the end of 2015 and 2016: 2015 2016 Total Assets $6,800,000 $7,600,000 Total Liabilities 3,200,000 3,600,000 During 2016, cash dividends of $50,000 were declared and paid, and common stock was issued for $100,000. What was the amount of net income in 2016? A) $400,000 B) $480,000 C) $300,000 D) $350,000 Section III Free Response Questions. (Points as indicated) Reminder: For the questions that remain, show your work to be eligible for partial credit. Receivables - Use the information below for questions 21-23. On December 31, 2011, Colonial Corporation had the following ending account balances related to credit sales and receivables prior to recording adjusting entries for bad debt expense: Accounts Receivable, Gross$25,000 Allowance for Doubtful Accounts 200 (credit balance) Sales Revenue (all credit sales)400,000 Prepare the necessary year-end adjusting journal entries related to bad debt expense for each of the following independent assumptions. 21. An aging of accounts receivable is completed. It is estimated that $2,150 of the receivables outstanding at year-end will be uncollectible. (4 points) Bad debt expense 1,950 Allowance for doubtful accounts1,950 *Already at a balance of 200, but the above suggests the “target” (i.e., what we want to be in the ending balance) is $2,150. We need to record another $1,950 to get there. 22. Now instead assume the firm uses the percentage of credit sales method. It is estimated that 1% of credit sales for the year will prove to be uncollectible. (4 points) Bad debt expense 4,000 Allowance for doubtful accounts4,000 Percentage of credit sales method just takes credit sales of 400,000 * 1% estimated to be uncollectible, and that $4,000 is automatically what you record as bad debt expense. 23. Assume the same information presented in Q21, except that prior to adjustment, the allowance for doubtful accounts had been incorrectly accounted for and had a debit balance of $200 rather than a credit balance of $200. (4 points) Bad debt expense2,350 Allowance for doubtful accounts2,350 Similar to 21, only now the existing balance is a debit of 200. So to get to an ending credit balance of $2,150 (which reflects the total amount of outstanding receivables that we think won’t be collectible), we need to record $2,350 in bad debt expense. Time Value of Money Problems FOR QUESTIONS 24 and 25, ROUND YOUR FINAL ANSWERS TO TWO DECIMAL PLACES (e.g., $123.45 or 123.45%) 24. Vincent van Gogh only sold one painting during his lifetime, for the equivalent of about $30 in 1890