ACCT 3432 and ACCT 5134 Exam 3 complete solutions correct answers key
ACCT 3432 and ACCT 5134 Exam 3 complete solutions correct answers key
Part I. Multiple Choices:
1. You have 120 minutes to complete this exam.
2. The exam has 11 pages, including this cover page. Check to make sure you have all 11 pages.
3. There are 20 multiple choices and 3 problem solving questions. Each multiple choice problem is worth 3 points and maximum points for each problem solving question are shown at each question.
4. Closed notes, closed books. Only the exam, writing utensils, and a calculator are permitted on your desk.
5. Please write your answers for multiple choices CAREFULLY on the ANSWER SHEET.
6. Please write answers CLEARLY on the exam for problem solving questions. If I cannot read them, I will NOT GIVE YOU ANY PARTIAL CREDIT.
7. DO NOT START EXAM UNTIL I TELL YOU TO BEGIN.
1. The Thomas Company's net income for the year ended December 31 was $30,000. During the year, Thomas declared and paid $3,000 in cash dividends on preferred stock and $5,250 in cash dividends on common stock. At December 31, 36,000 shares of common stock were outstanding, 30,000 of which had been issued and outstanding throughout the year and 6,000 of which were issued on July 1. There were no other common stock transactions during the year, and there is no potential dilution of earnings per share. What should be the year's basic earnings per common share of Thomas, rounded to the nearest penny?
2. On December 31, 2013, Overachiever, Inc. had 300,000 shares of common stock issued and outstanding. Overachiever issued a 10 percent stock dividend on June 1, 2014. On November 1, 2014, Overachiever reacquired 30,000 shares of its common stock and recorded the purchase using the cost method of accounting for treasury stock. What number of shares should be used in computing basic earnings per share for the year ended December 31, 2014?
3. When computing diluted EPS for a company with a complex capital structure, what is the denominator in the computation?
a. Number of common shares outstanding at year-end
b. Weighted-average number of common shares outstanding
c. Weighted-average number of common shares outstanding plus all other potentially antidilutive securities
d. Weighted-average number of common shares outstanding plus all other potentially dilutive securities
4. On January 2, 2013, Worley Co. issued at par $60,000 of 5 percent bonds convertible, in total into 5,000 shares of Worley’s common stock. No bonds were convertible during 2013. Throughout 2013 Worley had 5,000 of common stock outstanding. Worley’s net income was $6,200. Worley’s income tax rate is 40%. No potentially dilutive securities other than convertible bonds were outstanding during 2013. Worley’s diluted earnings per share for 2013 would be
5. When we compute earnings per share (EPS) data, we assume conversion of convertible securities at the
a. Ending of the earliest period reported (regardless of time of issuance).
b. Middle of the earliest period reported (regardless of time of issuance).
c. Beginning of the earliest period reported (or at time of issuance, if later).
d. Beginning of the earliest period reported (regardless of time of issuance).
6. What is the number of shares that should be used in computing basic earnings per share for 2014?
7. What is the number of shares that should be used in computing diluted earnings per share for 2014?
8. For which type of derivative are changes in the fair value deferred and recognized as an equity adjustment?
a. Fair value hedge
b. Cash flow hedge
c. Operating hedge
d. Notional value hedge
9. On June 18, Edwards Corporation entered into a firm commitment to purchase specialized equipment from the Okazaki Trading Company for ¥80,000,000 on August 20. The exchange rate on June 18 is ¥100 = $1. To reduce the exchange rate risk that could increase the cost of the equipment in U.S. dollars, Edwards pays $15,000 for a call option contract. This contract gives Edwards the option to purchase ¥80,000,000 at an exchange rate of ¥100 = $1 on August 20. On August 20, the exchange rate is ¥96 = $1. How much did Edwards save by purchasing the call option (answers rounded to the nearest dollar)?
d. Edwards would have been better off not to have purchased the call option.
10. A contingent loss should be disclosed in a note to the financial statements but should not be recorded as a liability if
a. the possibility of loss is remote.
b. the contingency involves pending or threatened litigation.
c. the outcome is uncertain.
d. the actual incurrence of a loss is reasonably possible.
11. During 2013, Jackson Company became involved in a tax dispute with the IRS. At December 31, 2013, Jackson's tax adviser believed that an unfavorable outcome was probable and a reasonable estimate of additional taxes was $560,000 but could be as much as $600,000. After the 2013 financial statements were issued, Jackson received and accepted an IRS settlement offer of $570,000. What amount of accrued liability would Jackson have reported in its December 31, 2013, balance sheet?
12. On January 1, 2013, Cougar Company received a two-year $600,000 loan. The loan calls for payments to made at the end of each year based on the prevailing market rate at January 1 of each year. The interest rate at January 1, 2013, was 10 percent. Aggie Company also has a two-year $600,000 loan, but Aggie's loan carries a fixed interest rate of 10 percent. Cougar Company does not want to bear the risk that interest rates may increase in year two of the loan. Aggie Company believes that rates may decrease and they would prefer to have variable debt. So the two companies enter into an interest rate swap agreement whereby Aggie agrees to make Cougar's interest payment in 2014 and Cougar likewise agrees to make Aggie's interest payment in 2014. The two companies agree to make settlement payments, for the difference only, on December 31, 2014. If the interest rate on January 1, 2014 is 8 percent, what will be Cougar's settlement payment to/from Aggie?
a. $12,000 payment
b. $12,000 receipt
c. $60,000 payment
d. $60,000 receipt
13. On November 1, 2013, Cahoon Company sold some limited edition art prints to Sitake Company for ¥47,850,000 to be paid on January 1, 2014. The current exchange rate on November 1, 2013, was ¥110=$1, so the total payment at the current exchange rate would be equal to $435,000. Cahoon entered into a forward contract with a large bank to guarantee the number of dollars to be received. According to the terms of the contract, if ¥47,850,000 is worth less than $435,000, the bank will pay Cahoon the difference in cash. Likewise, if ¥47,850,000 is worth more than $435,000, Cahoon must pay the bank the difference in cash. Assuming the exchange rate on December 31, 2013 is ¥120=$1, what amount will Cahoon disclose as the fair value of the forward contract on December 31, 2013 (answers rounded to the nearest dollar)?
14. A company changes from an accounting principle that is not generally accepted to one that is generally accepted. The effect of the change should be reported as
a. a correction of an error.
b. a change in accounting estimate
c. a change in accounting principle.
d. a change of accounting estimate effected by a change in accounting principle.
15. Koppell Co. made the following errors in counting its year-end physical inventories:
2012……………………………….. $100,000 understatement
2013……………………………….. $105,000 overstatement
2014……………………………….. $85,000 overstatement
As a result of the above undetected errors, 2014 income (ignore income tax effect) was
a. Overstated by $20,000
b. Understated by $20,000
c. Understated by $190,000
d. Overstated by $190,000
16. Which of the following is the proper time period in which to record a change in accounting estimate?
a. Current period only
b. Retroactively only
c. Current period and retroactively
d. Current period and future periods
17. The correction of an error in the financial statements of a prior period should be reflected, net of applicable income taxes, in the current
a. income statement after income from continuing operations and before extraordinary items.
b. income statement after income from continuing operations and after extraordinary items.
c. retained earnings statement after net income but before dividends.
d. retained earnings statement as an adjustment of the opening balance.
18. Wolverine Corporation purchased a machine for $150,000 on January 1, 2010, and depreciated it by the straight-line method using an estimated useful life of 10 years with no salvage value. On January 1, 2014, Wolverine determined that the machine had a useful life of six years from the date of acquisition and will have a salvage value of $10,000. A change in estimate was made in 2014 to reflect these additional data. What amount should Wolverine record as the balance of the accumulated depreciation account for this machine at December 31, 2014?
19. Barker, In. receives subscription payments for annual (one year) subscriptions to its magazine. Payments are recorded as revenue when received. Amounts received but unearned at the end of each of the last three years are shown below:
2012 2013 2014
Unearned revenues 120,000 150,000 160,000
Barker failed to record the unearned revenues in each of the three years. As a result of the omission, 2014 revenue was
a. overstated by $10,000
b. understated by $10,000
c. overstated by $40,000
d. understated by $40,000
20. Coombs, Inc. is a calendar-year corporation whose financial statements for 2013 and 2014 included errors as follows:
$ 8,000 overstated
Assume that purchases were recorded correctly and that no correcting entries were made at December 31, 2013, or December 31, 2014. Ignoring income taxes, by how much should Coombs's retained earnings be retroactively adjusted at January 1, 2015?
Part II. Problem Solving Questions
1. (12 pts) On December 31, 2013, Bugler Travel Inc. had 950,000 shares of common stock issued and outstanding. On June 30, 2014, Bugler issued an additional 300,000 shares for $7 per share. On September 30, 2014, the company issued 10,000, 7 percent convertible bonds at par. The maturity value of each bond is $1,000. Each bond is convertible into 20 shares of common stock. None were converted during 2014.
Bugler Travel Inc. also had 60,000 stock options outstanding for all of 2014. The option price is $10 per share. The average market price of common stock for 2014 was $30.
Bugler Travel Inc. reported a net income of $3,652,000 for 2014. Assume the company had a 40 percent income tax rate.
(4 pts) Compute the basic earnings per share. Round EPS to the nearest hundredth of dollar.
(8 pts) Compute diluted earnings per share. Round EPS to the nearest hundredth of dollar.
2. (18 pts) Pratt Company has 2-year, $150,000 loan from a bank on January 1, 2012 with interest payments occurring at the end of each year. The interest rate for the first year is 10% and the rate in the second year will be equal to the prevailing market interest rate on January 1 of that year. But Pratt does not want to bear the uncertainty of second year interest change and wants to pay fixed interest with 10% for 2013. Thus, Pratt entered into an interest rate swap agreement related to this loan. Under the terms of the swap agreement, Pratt will receive a swap payment based on the principal amount of $150,000. If the January 1 of 2013 interest rate is greater than 10 percent, Pratt will receive a swap payment for the difference; and if the January 1of 2013 interest rate is less than 10 percent, Pratt will make a swap payment for the difference. The swap payments are made on December 31 of 2013. On January 1, 2013, the interest rate is 8 percent. Make all the journal entries necessary on Pratt's books at the dates shown below (Round all entries to the nearest dollar).
(a) January 1, 2012 (2 pt) – to record loan payable
(b) December 31, 2012 (6 pts) – to record interest expense for 2012 and fair value of interest rate swap
(c) December 31, 2013 (10 pts) to record 1) interest expense for 2013 2) interest rate swap payment or receipt 3) recognition of gains or losses from interest rate swap by adjusting interest expense and 4) repayment of loan.
3. (10 pts) Sunshine Company reported net incomes for a three-year period as follows:
2011: $121,000; 2012: $239,000; 2013: $94,000.
In reviewing the accounts in 2014 after the books for the prior year have been closed, you find that the following errors have been made in summarizing activities:
2011……………………………….. $48,000 understatement of ending inventory
2012……………………………….. $36,000 overstatement of ending inventory
2013……………………………….. $54,000 understatement of ending inventory
(a) Determine corrected net incomes for 2011, 2012, and 2013 (6 pts).
(b) Give the correcting entry to bring the books of the company up to date in 2014, assuming that the books have been closed for 2013 (4 pts).