BUAD 280 Practice Exam MIDTERM 31 Theory and Concepts True and False 1.

T F Interest expense on bonds is not tax deductible. 2. T F Land and Constructing in Progress are depreciable assets with varying useful lives. 3. T F Costs to raze an undesired building, which is built on acquired land, are capitalized into historical acquisition cost of that land 4. T F Internal controls are specific only to cash, cash disbursements and billing. 5. T F The present value of semiannual $5,000 payments over the course of 4 years with an annual market rate of interest of 10% is $32,316. 6. T F Garnishments are payroll expenses of the employer. 7. T F A company issues 10,000 shares of common stock ($1 par value) at a market price of $10. To record this transaction, Additional Paid-In Capital in Excess of Par is credited for $90,000 and cash is debited for $110,000. 8. T F An Oklahoma City business paid $15,000 cash for equipment used in the business. At the time of the purchase, the equipment had a list price of $20,000, but when the balance sheet was prepared, the value of the equipment later rose to $22,000. GAAP states that the equipment should then be recorded at $22,000. 9. T F According to GAAP, Land should be depreciated using the depletion method. 10. T F At the end of an assets useful life, total accumulated depreciation is always the same regardless of the depreciation method used. 11. T F The cost of a tangible asset with a definite life is allocated each period over its useful life in a process called amortization. 12. T F The only way to report goodwill as an asset is to purchase another business.

Problem 1: Fixed Assets

a) On Jan 1, 2011 Company A purchased a vehicle costing $20,000. It is expected to have a value of $5,000 at the end of 4 years. Calculate depreciation expense on the vehicle for the year ended Dec 31, 2011 assuming straight-line method. Solution: We will first find the depreciable amount which is $15,000 ($20,000 cost minus $5,000 residual value). Then we divide the depreciable amount by the 4 which is the useful life: Depreciation expense = ($20,000 $5,000) / 4 = $3,750

Note, this practice exam is a broad example of topics that may or may not be covered on the Midterm Exam 3. Note we may be

covering slightly different materials on the exam this semester

Problem 1: Fixed Assets (continued)

b) ABC Company purchases a machine for $100,000. It has an estimated salvage value of $10,000 and a useful life of five years. Calculate the double declining balance depreciation expense for years 1 through 5. Double-declining balance depreciation Net book value, computed as 2 SL beginning of rate beginning Net book value, Year year NBV end of year 1 $100,000 $60,000 $40,000 2 60,000 36,000 24,000 3 36,000 21,600 14,400 4 21,600 12,960 8,640 5 12,960 10,000 salvage value 2,960 Total $90,000

c) A plant costing $110 million was purchased on April 1, 2010. The salvage value was estimated to be $10 million. The expected production was 150 million units. The plant was used to produce 15 million units till the year ended December 31, 2010. Calculate the depreciation on the plant for the year ended December 31, 2011. Depreciation = (15/150) ($110 million - $10 million) = $10 million d) A coal mine was purchased by X Corporation for $16 million. It was estimated that the mine has capacity to produce 200,000 tons of coal. The company extracted 46,000 tones during its first year of operation. Calculated the depreciation. Depreciation = (46,000/200,000) $16 million - = $3.68 million

Problem 2: Journal Entries

A. Sweeney Company completed the salary and wage payroll for March 2009. The payroll provided the following details: Salaries and wages earned $200,000 Employee income taxes withheld 40,000 Insurance premiums withheld 1,000 FICA payroll taxes* 15,000
*$15,000 each for employer and employees

1. Give the journal entry to record the payroll for March including employee deductions. 2. Give the journal entry to record the employers payroll taxes. 3. Give a combined journal entry to show the payment of amounts owed to governmental agencies. 2

A. 1. March 31 Salary and wage expense (+E, -SE) ....................................... Liability for income taxes withheld-employees (+L) ............. Liability for insurance premiums withheld-employees (+L) .. FICA taxes payable-employees (+L) ................................... Cash (-A) ............................................................................. Payroll for March including employee deductions. 1. March 31 Payroll tax expense (+E, -SE) ................................................. FICA taxes payable-employer (+L)...................................... Employer payroll taxes on March payroll. 2. Liability for income taxes withheld-employees (-L) ................. Liability for insurance premiums withheld-employees (-L) ...... FICA taxes payable-employees (-L) ....................................... FICA taxes payable-employer (-L) .......................................... Cash (-A) ............................................................................ Remittance of payroll taxes and deductions for March payroll. 200,000 40,000 1,000 15,000 144,000

15,000 15,000

40,000 1,000 15,000 15,000 71,000

B. Zivia Company sells a bond (which has a par value of $100,000). Assume the market rate of interest is 8% while Zivia Companys bond states a 10% coupon rate. The bonds pay interest semiannually and mature in two years. The bonds are issued on January 1, 2009. What is the journal entry Zivia Co. prepares to record the issuance of this bond. Bond issue price = present value of bond

January 1, 2009 Cash Premium on bonds payable Bonds payable To record sale of bond.

103,630 3,630 100,000

Problem 2: Journal Entries (continued)

C. Taylor Co. sold 100,000 shares of its $1 par value common stock at a market rate of $10 per share. Record the journal entry for the sale of stock. Cash (100,000x$10) 1,000,000 Common stock (100,000x$1) APIC-common To record the sale of common stock. 100,000 900,000

Problem 3: Ratios
A. A Company has assets of $400,000 and total liabilities of $100,000. Compute its debt-to-equity ratio (round to the nearest hundredth). DtE=Total liabilities / Stockholders Equity A=L+SHE, Total equity = 400,000-100,000=300,000 Total liabilities/Stockholders Equity = 100,000/300,000= .33 B. On December 31, B Company has current assets of $150,000 and current liabilities of $200,000 and inventory amounting to $50,000. Compute its quick ratio (round to the nearest hundredth). Quick ratio= (current assets-inventory)/current liabilities =(150,000-50,000)/200,000= .50

Problem 4: Balance Sheet, Income Statement Creation

A. Trojan Sporting Goods, Inc. reported the following amounts on its balance sheet as of December 31, 2010: Inventory $325,000 Notes Payable-LT 100,000 Cash 150,000 Contributed capital 750,000 Net property, plant and equipment 600,000 Accounts receivable 30,000 Accounts payable 45,000 Retained earnings ?

Prepare a balance sheet for Trojan Sporting Goods, Inc. as of December 31, 2010.

A. A=L+OE Sum up assets (1,105,000), subtract sum of liabilities (145,000)= Total Owners Equity Total OE Contributed Capital = Retained Earnings 960,000-750,000= 210,000=RE

Trojan Sporting Goods, Inc. Balance Sheet December 31, 2010 Assets Current Assets Cash Accounts Receivable Inventory Long Term Assets Net PPE Total Assets Liabilities Current Liabilities Accounts Payable Long Term Liabilities Notes Payable Total Liabilities Owners Equity Contributed Capital Retained Earnings Total Owners Equity Total Liabilities and Owners Equity

150,000 30,000 325,000 600,000 1,105,000

45,000 100,000 145,000

750,000 210,000 960,000 1,105,000

Problem 4: Financial Statement Creation

B. The adjusted trial balance for Coliseum Venues, Inc. is shown below: Coliseum Venues, Inc. Adjusted Trail Balance December 31, 20x2 Debits 6500 8000 1000 2500 42000 Credits

Cash Account receivable Supplies Prepaid Rent (3 months) Equipment, net Accounts payable Salary payable Unearned revenue (2 months adv.) Note payable- long term

4000 2000 2000

Common stock Retained earnings Dividends paid Service revenue Salary expense Rent expense Supplies expense Depreciation expense Utilities expense Total

10000 14700 4000 75000 40000 10000 1500 5000 1200 $121,700 $121,700

1) Prepare Colliseum Venues income statement for the year ended December 31, 2007. 2) Prepare Colliseum Venues Statement of Retained Earnings for the year ended December 31, 2007.

1) Coliseum Venues, Inc. Income Statement December 31, 20x2 Revenues Service revenue Total Revenues Expenses Salary expense Rent expense Supplies expense Depreciation expense Utilities expense Total Expenses Net Income

75000 75000

40000 10000 1500 5000 1200 57,700 17,300

2) Coliseum Venues, Inc. Statement of Retained Earnings December 31, 20x2 Retained Earnings, January 1, 20x2 Plus: Net Income Less: Dividends Retained Earnings, December 31, 20x2 14,700 17,300 32,000 4,000 28,000