Practice Exam Chapters 1 - 4 seventh



Intermediate Accounting II – ACCT 2164

Exam 3 Study Guide: Chapters 18, 20 & 21

Exam 3 may be comprised of multiple choice, true/false, matching, short answer and problem questions. The study questions and sample problems below should help you prepare for the exam. Please note that the study format may not directly match the exam format.

Solutions to identification questions and problems can be found at the end of this study guide.

1. Distinguish between authorized, issued, and outstanding stock.

2. Explain what it means to account for an accounting change retrospectively and give some examples of changes that should be accounted for retrospectively.

3. Explain what it means to account for an accounting change prospectively and give some examples of changes that should be accounted for prospectively.

4. Define “change in accounting principle”.

5. Describe how a change in entity is accounted for.

6. Distinguish between common and preferred stock.

7. Describe how to account for retired stock.

8. Describe the data found in the shareholders’ equity section of the balance sheet.

9. Differentiate between a stock dividend and a stock split and describe how each would be accounted for.

10. Describe how to calculate the ending balance for retained earnings.

11. Explain the purpose of the Statement of Cash Flows.

12. Describe each of the following cash flow classifications:

a. operating activity

b. financing activity

c. investing activity

Identification # 1

For each item listed below, identify the category of cash flow by writing Operating, Investing, or Financing under the Type column across from the item. For each item listed below, identify whether the item was a source or use of cash by writing Source or Use under the Source/Use column across from the item. If the item is an Operating Activity, indicate N/A (not applicable) for Source/Use.

Type Source/Use

a. Issued Bonds ____________ ____________

b. Issued Common Stock ____________ ____________

c. Sold long-term Investments ____________ ____________

d. Paid Cash Dividends ____________ ____________

e. Redeemed bonds ____________ ____________

f. Decrease in Prepaid Expenses ____________ ____________

g. Issued preferred stock ____________ ____________

h. Net income ____________ ____________

i. Sold equipment ____________ ____________

j. Purchased treasury stock ____________ ____________

k. Purchased buildings ____________ ____________

l. Purchased patents ____________ ____________

m. Increase in Accounts Payable ____________ ____________

Identification # 2

Identify the account type and normal balance of the accounts listed below.

Account Type Normal Balance

a. Retained Earnings ____________________ ____________________

b. Treasury Stock ____________________ ____________________

c. Dividends Payable ____________________ ____________________

d. Depreciation Expense ____________________ ____________________

e. Cost of Goods Sold ____________________ ____________________

Problem 1

The following transactions relating to stocks occurred during 2015. No balances existed in any equity account prior to July 1, 2015. The cost method is used to account for treasury stock.

Jul 1 Exchanged 2,000 shares of common stock with a par value of $1 for computer equipment. The computer equipment had a market value of $8,000.

Aug 1 Issued 1,000 shares of common stock with a par value of $1 for $5 per share.

Oct 15 Declared and distributed a 5% stock dividend. The market value of the common stock on this date was $12 per share and the par value was $1.

Oct 30 Reaquired 500 shares of common stock for $3.00 per share

Dec 1 Reissued 200 shares of common stock for $2.50 per share.

Required: Journalize the entries necessary to record the stock transactions.

Problem 2

May Inc. changed from LIFO to the Average Cost inventory costing method on January 1, 2015. Cost of Goods Sold for each year since the inception of the company are as follows:

Cost of Goods Sold 2013 2014

LIFO $360,000 $800,000

Avg Cost $400,000 $720,000

Required:

1) Calculate the cumulative change and prepare the journal entry to record the change in accounting method.

2) Explain how this change would be reported in the financial statements.

Problem 3

On June 1, the board of directors of Mania Industries declares a cash dividend of $1.50 per share on its 10 million shares, payable to shareholders of record June 15, to be paid July 1.

Required:

1) Prepare the journal entry required on the date of declaration.

2) Prepare the journal entry required on the date of payment.

Problem 4

Cherokee Company's auditor discovered some errors. No errors were corrected during 2012. The errors are described as follows:

(1.) Beginning inventory on January 1, 2012, was understated by $5,000.

(2.) A two-year insurance policy purchased on April 30, 2012, in the amount of $24,000 was debited to Prepaid Insurance. No adjustment was made on December 31, 2012, or on December 31, 2013.

Required: Prepare appropriate journal entries (assume the 2013 books have not been closed). Ignore income taxes.

Problem 5

April Company purchased a piece of machinery for $50,000 on January 1, 2011, and has been depreciating the machine using the sum-of-the-years'-digits method based on a five-year estimated useful life and no salvage value. On January 1, 2013, April decided to switch to the straight-line method of depreciation. The salvage value is still zero and the estimated useful life is changed to a total of six years from the date of purchase.

Required:

(1) Prepare the appropriate journal entry, if any, to record the accounting change ignoring income tax.

(2) Prepare the journal entry to record depreciation for 2013.

Problem 6

On October 1, the board of directors of Craft Industries declares a property dividend of 2 million shares of Beaman Corporation’s preferred stock that Craft had purchased in March as an investment (book value: $9 million). The investment shares have a fair market value of $5 per share and are payable to shareholders of record Oct 15, to be distributed Nov 1.

Problem 7

Partial balance sheets and additional information are listed below for Monaco Company.

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Additional information for 2013:

Net income was $270,000.

Depreciation expense was $30,000.

Sales totaled $800,000.

Cost of goods sold totaled $305,000.

Required:

(1) Calculate the amount of cash received from customers.

(2) Calculate the amount of cash paid to suppliers.

Problem 8

Gazelle Corporation, a merchandiser, recently completed its calendar-year 2013 operations. For the year, (1) all sales are credit sales, (2) all credits to Accounts Receivable reflect cash receipts from customers, (3) all purchases of inventory are on credit, (4) all debits to Accounts Payable reflect cash payments for inventory, and (5) Other Expenses are paid in advance and are initially debited to Prepaid Expenses. The company's balance sheets and income statement follow.

 

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Additional Information on Year 2013 Transactions

a. The loss on the cash sale of equipment was $2,100 (details in b).

b. Sold equipment costing $51,000, with accumulated depreciation of $22,850, for $26,050 cash.

c. Purchased equipment costing $113,250 by paying $43,250 cash and signing a long-term note payable for the balance.

d. Borrowed $5,000 cash by signing a short-term note payable.

e. Paid $47,500 cash to reduce the long-term notes payable.

f. Issued 3,000 shares of common stock for $15 cash per share.

g. Declared and paid cash dividends of $53,600.

Required

Prepare a complete statement of cash flows; report its operating activities using the indirect method.

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Intermediate Accounting I - ACCT 2164

Exam 3 Study Guide: Chapters 18, 20 & 21

Answer Key

Identification #1

Type Source/Use

a. Issued Bonds Financing Source

b. Issued Common Stock Financing Source

c. Sold long-term Investments Investing Source

d. Paid Cash Dividends Financing Use

e. Redeemed bonds Financing Use

f. Decrease in Prepaid Expenses Operating N/A

g. Issued preferred stock Financing Source

h. Net income Operating N/A

i. Sold equipment Investing Source

j. Purchased treasury stock Financing Use

k. Purchased buildings Investing Use

l. Purchased patents Investing Use

m. Increase in Accounts Payable Operating N/A

Identification #2

Normal

Account Type Balance

a. Retained Earnings Equity Credit

b. Treasury Stock Contra-Equity Debit

c. Dividends Payable Liability Credit

d. Depreciation Expense Expense Debit

e. Cost of Goods Sold Expense Debit

Problem 1

|Date |Account |Debit |Credit |

|Jul 1 |Equipment |8,000 | |

| | Common Stock | |2,000 |

| | Paid-in Capital in Excess of Par Value, Common | |6,000 |

| | | | |

|Aug 1 |Cash |5,000 | |

| | Common Stock | |1,000 |

| | Paid-in Capital in Excess of Par Value, Common | |4,000 |

| | | | |

|Oct 15 |Retained Earnings ([2,000+1,000]*5%*$12) |1,800 | |

| | Common Stock([2,000+1,000]*5%*$1) | |150 |

| | Paid-in Capital in Excess of Par Value, Common | |1,650 |

| | | | |

|Oct 30 |Treasury Stock (500 shares X $3) |1,500 | |

| | Cash | |1,500 |

| | | | |

|Dec 1 |Cash (200 x $2.50) |500 | |

| |Retained Earnings |100 | |

| | Treasury Stock (200 X $3) | |600 |

Problem 2

|Account |Debit |Credit |

|Inventory |40,000 | |

| Retained Earnings | |40,000 |

Cost of Goods Sold 2013 2014

LIFO $360,000 $800,000

Avg Cost $400,000 $720,000

Yearly Difference $80,000

Net Difference $40,000

Ending inventory was understated and cost of goods sold was overstated by $40,000.

Requirement 2: This change in accounting principle would be reported retrospectively. In addition to the journal entry updating retained earnings, any comparative financial statements presented from 2013 & 2014 would be restated. A note to the financial statements would describe the change in accounting principle including a justification for the change and a description of how the financial statements were affected.

Problem 3

|Date |Account |Debit |Credit |

|Jun 1 |Retained Earnings |15,000,000 | |

| | Cash Dividend Payable | |15,000,000 |

| | | | |

|Jul 1 |Cash Dividend Payable |15,000,000 | |

| | Cash | |15,000,000 |

Problem 4

(1.) No journal entry is required for the inventory error. It will have self-corrected by the end of 2012 since the 2012 beginning inventory was the 2011 ending inventory and the error in each individual year balances out in the second year (2012).

(2.)

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Problem 5

(1) No entry is required as this is treated prospectively under GAAP.

(2) Depreciation Expense 5,000

Accumulated Depreciation 5,000

Original Cost $50,000

Less: Accum. Dep*. 30,000

Book Value $20,000/4 = $5,000

* 5/15 X $50,000 = $16,667 (rounded)

4/15 X $50,000 = 13,333

Accum. Dep 30,000

Problem 6

|Date |Account |Debit |Credit |

|Oct 1 |Investment in Beaman Preferred Stock |1,000,000 | |

| | Gain on Appreciation of Investments | |1,000,000 |

| |(Fair Value: $10,000,000 – Book Value: $9,000,000) | | |

| | | | |

|Oct 1 |Retained Earnings (2,000,000 shares X $5) |10,000,000 | |

| | Property Dividend Payable | |10,000,000 |

| | | | |

|Nov 1 |Property Dividend Payable |10,000,000 | |

| | Investment in Beaman Preferred Stock | |10,000,000 |

Problem 7

(1) Cash received from customers:

Sales + Decrease in Accounts Receivable

$800,000 + $30,000 = $830,000

Alternatively:

|Account |Debit |Credit |

|Cash (plug) |830,000 | |

| Accounts Receivable | |30,000 |

| Sales | |800,000 |

(2) Cash paid to suppliers:

Cost of Goods Sold - Decrease in Inventory + Decrease in Accounts Payable

$305,000 - $15,000 + $12,000 = $302,000

Alternatively:

|Account |Debit |Credit |

|Cost of Goods Sold |305,000 | |

|Accounts Payable |12,000 | |

| Inventory | |15,000 |

| Cash (plug) | |302,000 |

Problem 8

|GAZELLE CORPORATION |

|Statement of Cash Flows |

|For Year Ended December 31, 2013 |

|Cash flows from operating activities | | |

| Net income |$158,100 | |

| Adjustments to reconcile net income to net | | |

|cash provided by operating activities | | |

| Decrease in accounts receivable ($80,750 - $77,100) |3,650 | |

| Decrease in inventory ($250,700 - $240,600) |10,100 | |

| Decrease in prepaid expenses ($17,000 - $15,100) |1,900 | |

| Decrease in accounts payable ($102,000 - $17,750) |(84,250) | |

| Depreciation expense |38,600 | |

| Loss on disposal of equipment | 2,100 | |

| Net cash provided by operating activities | |$130,200 |

| | | |

|Cash flows from investing activities | | |

| Cash received from sale of equipment |26,050 | |

| Cash paid for equipment | (43,250) | |

| Net cash used in investing activities | |(17,200) |

| | | |

|Cash flows from financing activities | | |

| Cash borrowed on short-term note |5,000 | |

| Cash paid on long-term note |(47,500) | |

| Cash received from issuing stock (3,000 x $15) |45,000 | |

| Cash paid for dividends | (53,600) | |

| Net cash used in financing activities | | (51,100) ) |

|Net increase in cash | |$ 61,900 |

|Cash balance at December 31, 2012 | | 61,550 |

|Cash balance at December 31, 2013 | |$123,450 |

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