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|Course: Intermediate Accounting(2) | |The Islamic University of Gaza |
|Instructor: Salah Shubair | |Faculty of Commerce |
|Time :Two hours | |Department of Accounting |
Final exam. (2014/2015)
Name:…………………………………………… Student No. …………….…
Q.1 Multiple Choice (14 Points)
|1 |2 |3 |4 |5 |6 |7 |
|A |D |A |B |C |B |D |
1. Marle Construction enters into a contract with a customer to build a warehouse for $850,000 on March 30, 20155 with a performance bonus of $50,000 if the building is completed by July 31, 2015. The bonus is reduced by $10,000 each week that completion is delayed. Marle commonly includes these completion bonuses in its contracts and, based on prior experience, estimates the following completion outcomes:
|Completed by |Probability |
|July 31, 2015 |65% |
|August 7, 2015 |25% |
|August 14, 2015 |5% |
|August 21, 2015 |5% |
The transaction price for this transaction is
a. $895,000
b. $850,000
c. $552,500
d. $585,000
2. On June 1, 2015, Johnson & Sons sold equipment to James Landscaping Services. In exchange for a zero-interest bearing note with a face value of $55,000, with payment due in 12 months. The fair value of the equipment on the date of sale was $50,000. The amount of revenue to be recognized on this transaction in 2015 is
a. $55,000.
b. $5,000
c. $50,000
d. $50,000 sales revenue and $2,917 interest revenue.
3. Bella Pool Company sells prefabricated pools that cost $100,000 to customers for $180,000. The sales price includes an installation fee, which is valued at $25,000. The fair value of the pool is $160,000. The installation is considered a separate performance obligation and is expected to take 3 months to complete. The transaction price allocated to the pool and the installation is
a. $155,676 and $24,324 respectively
b. $160,000 and $25,000 respectively
c. $180,000 and $25,000 respectively
d. $138,378 and $21,622 respectively
4. Botanic Choice sell natural supplements to customers with an unconditional right of return if they are not satisfied. The right of returns extends 60 days. On February 10, 2014, a customer purchases $3,000 of products (cost $1,500). Assuming that based on prior experience, estimated returns are 20%. The journal entry to record the sale and cost of goods sold includes a
a. debit to Cash and a credit to Sales Revenue of $3,000.
b. credit to Refund Liability of $600 and a credit to Sales Revenue of $2,400.
c. debt to Cost of Goods Sold and credit to Inventory for $1,500.
d. credit to Estimated Inventory Returns of $300
5. On August 5, 2015, Famous Furniture shipped 20 dining sets on consignment to Furniture Outlet, Inc. The cost of each dining set was $350. The cost of shipping the dining sets amounted to $1,800 and was paid for by Famous Furniture. On December 30, 2014, the consignee reported the sale of 15 dining sets at $850 each. The consignee remitted payment for the amount due after deducting a 6% commission, advertising expense of $300, and installation and setup costs of $390. The amount cash received by Famous Furniture is
a. $12,750
b. $11,985
c. $11,295
d. $11,685
6. Remington Construction Company uses the percentage-of-completion method. During 2015, the company entered into a fixed-price contract to construct a building for Sherman Company for $24,000,000. The following details pertain to the contract:
At Dec. 31, 2015 At Dec. 31, 2016
Percentage of completion 25% 60%
Estimated total cost of contract $18,000,000 $20,000,000
Gross profit recognized to date 1,500,000 2,400,000
The amount of construction costs incurred during 2016 was
a. $12,000,000.
b. $7,500,000.
c. $4,500,000.
d. $2,000,000.
7. Bruner Constructors, Inc. has consistently used the percentage-of-completion method of recognizing income. In 2015, Bruner started work on a €42,000,000 construction contract that was completed in 2016. The following information was taken from Bruner's 2015 accounting records:
Progress billings €13,200,000
Costs incurred 12,600,000
Collections 8,400,000
Estimated costs to complete 25,200,000
What amount of gross profit should Bruner have recognized in 2015 on this contract?
a. €4,200,000
b. €2,800,000
c. €2,100,000
d. €1,400,000
Q. 4 —Preparing a pension work sheet. ( 16 points )
The accountant for Marlin Corporation has developed the following information for the company's defined-benefit pension plan for 2016:
Service cost $500,000
Actual return on plan assets 260,000
Annual contribution to the plan 900,000
Past service cost, effective January 1, 2016 105,000
Benefits paid to retirees 60,000
Discount rate 10%
Accumulated OCI—Gain/Loss, January 1, 2016 0%
Instructions
(a) Using the above information for Marlin Corporation, complete the pension work sheet for 2016. Indicate (credit) entries by parentheses. Calculated amounts should be supported.
(b) Prepare the journal entry to reflect the accounting for the company's pension plan for the year ending December 31, 2016.
Marlin Corporation
Pension Work Sheet—2016
————————————————————————————————————————————————————— General Journal Entries Memo Entries
————————————————————————————————————————————————————
Annual Defined
Pension OCI Pension Asset/ Benefit Plan
Expense Cash Gain/Loss Liability Obligation Assets
—————————————————————————————————————————————————————Bal., Dec. 31, 2015 (1,000,000) (3,750,000) 2,750,000
Past Service Cost
—————————————————————————————————————————————————————Adjusted Bal.
—————————————————————————————————————————————————————Service Cost
————————————————————————————————————————————————————Interest Expense
—————————————————————————————————————————————————————Interest Revenue
—————————————————————————————————————————————————————Asset Gain/Loss
—————————————————————————————————————————————————————Contributions
————————————————————————————————————————————————————Benefits
—————————————————————————————————————————————————————
Journal entry
for 2016
Balance, Dec. 31, 2016
Q.4 Solution Marlin Corporation
Pension Work Sheet—2016
—————————————————————————————————————————————————————————— General Journal Entries Memo Entries
—————————————————————————————————————————————————————————
Annual Defined
Pension OCI Pension Asset/ Benefit Plan
Expense Cash Gain/Loss Liability Obligation Assets
————————————————————————————————————————————————————Bal., Dec. 31, 2015 (1,000,000) (3,750,000) 2,750,000
———————————————————————————————————————————————————
Past Service Cost 105,000 (105,000)
————————————————————————————————————————————————————— Adjusted Bal. (3,855,000)
—————————————————————————————————————————————————————Service Cost 500,000 (500,000)
—————————————————————————————————————————————————————Interest Expense (1) 385,500 (385,000)
—————————————————————————————————————————————————————Interest Revenue (2) (275,000) 275,000
—————————————————————————————————————————————————————Asset Gain/Loss (3) 15,000 (15,000)
—————————————————————————————————————————————————————Contributions (900,000) 900,000
—————————————————————————————————————————————————————Benefits 60,000 (60,000)
—————————————————————————————————————————————————————
Journal entry 715,500 (900,000) 15,000 169,500
for 2016
Accumulated OCI, Jan. 1 0
Balance, Dec. 31, 2016 15,000 (830,500) (4,680,500) 3,850,000
Solution
(1) ($3,750,000 + $105,000) × 10% = $385,500
(2) $2,750,000 × 10% = $275,000
(3) $260,000 – ($2,750,000 × 10%) = $15,000
(b) Pension Expense 715,500
Pension Asset / Liability 169,500
OCI—Gain/Loss 15,000
Cash 900,000
Q. 3 ( 20 points )
Lucas, Inc. enters into a lease agreement as lessor on January 1, 2015, to lease an airplane to National Airlines. The term of the noncancelable lease is eight years and payments are required at the beginning of each year. The following information relates to this agreement:
1. The airplane has a cost of $51,000,000 to Lucas, an estimated useful life of fourteen years, and a salvage value of zero at the end of that time.
2. National Airlines will pay all executory costs related to the leased airplane.
3. Annual beginning of year lease payments of $7,172,753 allow Lucas to earn an 8% return on its investment.
Lease Amortization Schedule
Lessor's Lease Amortization Schedule
Annual Interest on Reduction of Balance of
Date Lease Payment Unpaid Liability Lease Liability Lease Liability
Annual Interest on Lease Receivable Lease
Date Lease Rental Lease Receivable Recovery Receivable
1/1/15 $51,000,000
1/1/15 $7,172,753 -0- $7,172,753 43,827,247
1/1/16 7,172,753 3,506,180 3,666,573 40,160,674
Instructions
(a) Prepare the journal entries on the books of the National Airlines ( lessee —finance lease) during 2015?
(b) Prepare the journal entries on the books of the Lucas, Inc ( lessor —direct-financing lease ) during 2015?
(c) Prepare the journal entries on the books of the National Airlines ( lessee —operating lease) during 2015?
(d) Prepare the journal entries on the books of the Lucas, Inc ( lessor — operating lease ) during 2015?
Q.3 Solution (a)
January 1, 2015
Leased Equipment 51,000,000
Lease Liability 51,000,000
Lease Liability 7,172,753
Cash 7,172,753
December 31, 2015
Interest Expense 3,506, 180
Interest Payable 3,506, 180
Depreciation Expense 6,375,000
Accumulated Depreciation—Leased Equipment 6,375,000
January 1, 2015
(b)
Lease Receivable 51,000,000
Airplanes 51,000,000
Cash 7,172,753
Lease Receivable 7,172,753
December 31, 2015
Interest Receivable 3,506,180
Interest Revenue 3,506,180
(c) January 1, 2015
Rent Expense 7,172,753
Cash 7,172,753
(d) January 1, 2015
Cash 7,172,753
Rent Revenue 7,172,753
December 31, 2015
Depreciation Expense 3,642,857
Accumulated Depreciation—Leased Equipment 3,642,857
Q.2 TRUE-FALSE ( 10 points)
X 1. A change in accounting policy is a change that occurs as the result of new information or additional experience.
T 2. Errors in financial statements result from mathematical mistakes or oversight or misuse of facts that existed when preparing the financial statements.
X 3. Companies report changes in accounting estimates retrospectively.
X 4. Companies account for a change in depreciation methods as a change in
Accounting policy.
X 5. Accounting errors include changes in estimates that occur because a company . acquires more experience, or as it obtains additional information
T 6. The basis recommended by the IASB for the statement of cash flows is actually “cash and cash equivalents.”
X 7. IFRS does not allow flexibility regarding the classification of certain items on the statement of cash flows.
T 8. Most companies using IFRS show dividends paid as a financing activity.
T 9. The first step in preparing a statement of cash flows is to determine the change in cash.
T 10. A company reconciles net income to net cash flow from operating activities when using the direct method or the indirect method.
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