Final review- Greenberg PDF

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1. **The grid below is a list of possible effects on the income statement and on the balance sheet. The code is: + = increase; -- = decrease; NE = no effect. Transaction: Paid annual interest incurred of $100,000 on all outstanding debt. The entire $100,000 relates to interest computed on the weighted-average amount of accumulated expenditures (AAE) for a building the company is constructing for its own use. Revenue/Gain

NE

Expense/Loss

NE

Net Income

NE

Assets

NE

Liabilities

NE

Equity

NE

The AAE’s are outstanding until the project is COMPLETED, or they are incurred at the end of the year, if the construction is not complete. They represent an approximation of the average debt a firm would have outstanding if it financed all construction through debt

2. **The grid below is a list of possible effects on the income statement and on the balance sheet. The code is: + = increase; -- = decrease; NE = no effect. Transaction: Spent $80,000 cash to repair a broken water main. Revenue/Gain

NE

Expense/Loss

+

Net Income

-

Assets

-

Liabilities

NE

Equity

-

Ordinary repairs are operating expenses on the income statement in the period of the time the repair was done.

3. The grid below is a list of possible effects on the income statement and on the balance sheet. The code is: + = increase; -- = decrease; NE = no effect. Transaction: Spent $80,000 cash on expenditures designed to maintain and develop goodwill.  

Cash paid to produce company – FMV of net assets = Goodwill Goodwill is ONLY reported when a company is purchased!!

Revenue/Gain

NE

Expense/Loss

NE

Net Income

NE

Assets

NE

Liabilities

NE

Equity

NE

4. **The grid below is a list of possible effects on the income statement and on the balance sheet. The code is: + = increase; -- = decrease; NE = no effect. Transaction: On 1/1/16, signed a capital lease to use equipment for the next four years, effective immediately. NOTE: This question is only asking for the effects on 1/1/16. Revenue/Gain

NE 

Expense/Loss

NE

Net Income

NE

Assets

+

Liabilities

+

Equity

NE

When a Capital Lease is signed, the Income Statement is NOT affected. The effects of signing a capital lease are: Increase to Assets (Leased Asset) and Increase to Liabilities (Lease Liability)

5. **The grid below is a list of possible effects on the income statement and on the balance sheet. The code is: + = increase; -- = decrease; NE = no effect. Transaction: On 12/31/2016, made the first annual $30,000 cash payment on a capital lease that began on 1/1/2016. NOTE: This question is only asking for the effects on 12/31/16. PG 140 Revenue/Gain

NE 

Expense/Loss

+

Net Income

-

Assets

-

Liabilities

-

Equity

-

Expenses increase (Amortization expense and Interest Expense), NI decreases, Assets decrease (cash paid and Leased Asset), Liabilities decrease (Lease Liability), and Equity decreases (net income)

**The grid below is a list of possible effects on the income statement and on the balance sheet. The code is: + = increase; -- = decrease; NE = no effect. Transaction: On 12/31/2016, made the first annual $30,000 cash payment on a operating lease that began on 1/1/2016. NOTE: This question is only asking for the effects on 12/31/16. PG 140 Revenue/Gain

NE  

Expense/Loss

+

Net Income

-

Assets

-

Liabilities

NE

Equity

-

Expenses increase (Rent Expense), NI decreases, Assets decrease (cash), Equity decreases (net income) This looks better on balance sheets ; “off-balance sheet financing”

6. The grid below is a list of possible effects on the income statement and on the balance sheet. The code is: + = increase; -- = decrease; NE = no effect. Transaction: on 1/1/16, signed a non-cancelable operating lease to use equipment for the next four years, effective immediately. NOTE: This question is only asking for the effects on 1/1/16. Revenue/Gain

NE 

Expense/Loss

NE

Net Income

NE

Assets

NE

Liabilities

NE

When an Operating Lease is signed, there is no affect to any statements!

Equity

NE

7. The grid below is a list of possible effects on the income statement and on the balance sheet. The code is: + = increase; -- = decrease; NE = no effect. Transaction: Sold an asset that cost $10,000 and had accumulated depreciation associated with it of $9,000 for $500 cash. Revenue/Gain

NE

Expense/Loss

+

Net Income

-

Assets

-

Liabilities

NE

Equity

-

8. The grid below is a list of possible effects on the income statement and on the balance sheet. The code is: + = increase; -- = decrease; NE = no effect. Transaction: During the period, spent $7 million cash in research and development costs which resulted in a new patent. Ignore any amortization. Revenue/Gain

NE

Expense/Loss

+ 

Net Income

-

Assets

-

Liabilities

NE

Equity

-

When developing a patent INTERNALLY, the costs are recognized. Therefore, Expenses (R+D Expense) goes up by 7 million, NI goes down by 7 million, Assets (cash goes down by 7 million, Equity goes down by NI decrease of 7 million

9. The grid below is a list of possible effects on the income statement and on the balance sheet. The code is: + = increase; -- = decrease; NE = no effect. Transaction: Spent $100,000 cash to install an improved electrical system. Revenue/Gain

NE

Expense/Loss

NE

Net Income

NE

Assets

NE

Liabilities

NE

Equity

NE

10. The grid below is a list of possible effects on the income statement and on the balance sheet. The code is: + = increase; -- = decrease; NE = no effect. Transaction: An asset that was previously recorded as impaired has recovered most of its value. Revenue/Gain

NE 

Expense/Loss

NE

Net Income

NE

Assets

NE

Liabilities

NE

Equity

NE

Once the Asset is impaired, it is “Written-Down” and CANNOT be Written back up, therefore NE!

11. Paid 7 Million cash to acquire patent rights from other firms. Ignore any amortization. Revenue/Gain

NE 

Expense/Loss

NE

Net Income

NE

Assets

NE

Liabilities

NE

Equity

NE

Patents created INTERNALLY are expenses immediately, Patents acquired have NE on the Statements

12. Recoded amortization and depreciation expense for the period Revenue/Gain

NE

Expense/Loss

+

Net Income

-

Assets

-

Liabilities

NE

Equity

-



13. A machine has a current book value of $100,000 and fair market value of $75,000. it has been determined that the machine has suffered an impairment loss. Revenue/Gain

NE

   

Expense/Loss

+

Net Income

-

Assets

-

Liabilities

NE

Equity

-

Measurement of Impairment Loss: Book value of Asset – FMV of Asset = impairment loss In this case, the impairment loss is: $100,000 - $75,000 = $25,000 ; so your journal entry would DEBIT “Loss on Asset Impairment $25,000” and CREDIT “Asset (accumulated depreciation) $25,000) Therefore your impairment is a Operating Expense under “special or unusual charges” Expenses go up, NI goes down, Assets (Equipment) goes down, and Equity goes down

14. A building having a book value of $325,000 was sold for $275,000 cash. Which of the following statements are correct with respect to preparing the cash flow statement if the indirect method is being used? $275,000 - $325,000 = -(50,000) LOSS 

Therefore, Losses on the sale of assets are ADDED back to Net Income when using the indirect method

15. Patel incorporated purchased Taubler company for 950,000 cash. Patel assumed all of the liabilities of Tauber. Book values and fair values of acquired assets and liabilities were: Current assets PP+E Liabilities

Book Value $130,000 600,000 175,000

Fair Value $125,000 750,000 175,000

Patel would record goodwill of: Step 1: Calculate Fair Value of Net Assets: Fair Value of Net Assets = Fair Value of Current Assets + Fair Value of PPE $125,000 + $750,000 = $875,000 130,000 ??? = NO impairment is needed

20. On January 1, 2016, Cathy Company began construction of new warehouse. The building was finished and ready for use on December 31, 2016. Cathy spent $4,650,000 on the building. These expenditures were made evenly throughout the year (the average accumulated expenditures (AAE) are $2,325,000. Cathy’s only outstanding interestbearing debt throughout 2016 was a $5,000,000 note payable. The interest rate on this debt was 6%. What amount of interest should be added (capitalized) to the cost of the warehouse, and be depreciated over time? 2,325,000 X.06=139,500

Costs incurred evenly throughout the year AAE Incremental Borrowing Rate Avoidable Interest

$4,650,000 x 0.50 $2,325,000 x 0.06 $ 139,500

21. Deuce Company purchased a truck for $50,000 on January 1, 2016. The asset has an expected salvage value of $5,000 at the end of its five-year useful life. How much is the depreciation expense in 2017 (the second year of the asset’s life) if double-declining balance depreciation is used? 2016: 2/5 (50k)= 20k 2017: 2/5 (50k-20k)= 12k

DDB: Depreciation in 2016: SL Rate = 1/5 = 0.2 ; so the DDB Rate would be double ; 0.2 x 2 = 0.4 or 40% DDB = (40%) x $50,000 = $20,000 Depreciation Expense for 12/31/2016 Depreciation in 2017: DDB = (40%) x [Total Cost – Accumulated Depreciation] DDB = (40%) x [$50,000 - $20,000] = $12,000 Depreciation Expense at 12/31/2017

22. Daniel Technology, Inc. acquired a machine to use in its computer chip manufacturing operations. Due to the rapid rate of technological change in the industry, at the beginning of Year 5, Daniel tested the machine for an impairment loss. Daniel estimates that the machine is capable of generating (undiscounted) future cash flows of $11 million. Based on the quoted market prices of similar assets, Daniel estimates the machine to have a fair value of $9.5 million. At the beginning of Year 5, the machine has a book value of $15 million. What amount of impairment loss, if any, should be recognized in Year 5? BV= $15,000,000 > $11,000,000 = Impairment needed! BV – Fair Value of Asset = Impairment loss to be recorded $15,000,000 — $9,500,000= $5,500,000 impairment loss to be recorded

23. The difference between the expense charged with a capital lease and an operating lease is: Answer: Operating lease isn’t a liability listed on the balance sheet. When you have an expense from an operating lease, it is considered an operational expense. When you have an expense with a capital lease your assets and liabilities are going down with the expenses included in the asset. 24. The Chickasaw Company entered into a lease agreement on January 1, 2015 to acquire a machine. The machine has a useful life of six years. Chickasaw will make annual lease payments of $13,000 for six years, beginning on December 31, 2015. The lease did not meet the criteria to qualify as an operating lease. The six lease payments have a present value of $53,430 at 1/1/15, based on a 12% compound interest rate. What is the balance of the leased asset and the capital lease liability on Chickasaw’s balance sheet at December 31, 2016 (the end of the second year)? Round all numbers to the nearest dollar. 12/31/15- BB: 53430*.12= 6412 interest expense. $13,000 cash paid- 6412= 6588 principal payment which you subtract from BB- $46842 12/31/16 BB: $46842*.12= 5621 interest expense. $13,000 cash paid- 5621= 7379 principle payment which you subtract from BB: = $39463 remaining on capital lease liability balance LT Asset Balance: $53,430/6 years (useful life) = 8905 yearly depreciation expense $53,430 - (8905*2)= $35620

25. During the year just ended, Fox Company made the following expenditures relating to plant machinery and equipment: Renovation of a group of machines at a cost of $50,000 to secure greater efficiency in production over their remaining 5-year useful lives. The project was completed on December 31. Continuing, frequent, and low-cost repairs at a cost of $35,000. A broken gear on a machine was replaced at a cost of $5,000. What total amount should be charged to repairs and maintenance? ANS: $40,000 ; =($35,000 + $5,000) 

The $50,000 would not be included because it is an operating expense not a repair!

26. The cash flow statement of the United Company is in the process for 2016. The United Company is reporting the following balances: 12/31/2016 Equipment Loss on sale of equipment Accumulated depreciation -equipment

12/31/2015 $170,000 ($10,000) $95,000

$100,000 $75,000

During 2016, United sold equipment costing $30,000 for $12,000 and made several purchases of new equipment for cash. If these were the only investing activities, the cash flow from investing activities is a net cash: Step 1) Calculate changes form 12/31/2016 and 12/31/2015: Equipment: $70,000 Increase Accumulated Depreciation: $20,000 increase Step 2) Calculate how much Cash was used to purchase equipment (use T-Account)

Step 3) Calculate 2016 Cash flows from investing Activities: Cash From Sale of Equipment $12,000 -Cash used to Purchase Equipment (100,000) =Cash used(outflows) from investing Act. $(88,000) 27. Equipment with a ten-year estimated useful life and no salvage value is sold at the end of the third year of its useful life. How would using the straight-line method of depreciation instead of the double-declining balance method of depreciation affect a gain on the sale of the equipment? -DBB: higher depreciation and lower net income in early years. -SL: NI Higher, benefits more

28. During 2016, Lang corp reported cogs of $775,000. During the year Inventory decreased $25,000 and Accounts Payable increased $12,500. Lang would report cash paid to suppliers of how much, in 2016 under the direct method for cash flows? ANS: $737,500 ; $775,000 – $25,000 -$12,500 Option 1: Cost of Goods Sold -Decrease in Inventory -Increase in Account Payable = Cash Paid to Suppliers

Option 2: $775,000 (25,000) (12,500) $737,500

29. Given the data below for a firm in its first year of operation, determine net income under the accrual basis of accounting. Cash received from customers $48,000, Accounts Receivable $12,000, Cash paid for expenses $26,000, Accounts Payable $3,000, and Prepaid Rent for next period of $7,000. So, we are trying to determine the Net Income. We must change these charges from the Cash Basis Net Income to the Accrual Basis Net Income: (prepaid rent has NE on Accrual NI since it is not being used)!! Also, we know that it is the company’s FIRST year of operation, therefore all Beginning Balances are 0 ** Cash Received from Customers Accounts Receivable -Cash Paid for Expenses -Accounts Payable (Related to Expenses) Accrual Basis Revenue/Net Income

$48,000 12,000 (26,000) (3,000) $31,000

OR Revenue – Expenses = Net Income ; Revenue = Cash Received + Accounts Receivable credit sales Expenses = Cash paid for expenses + Accounts Payable =Net Income $31,000

30. Selected balance sheet information for the wolf company at the 12/31/15 and 12/31/16 is presented below:

Wages Payable

12/31/15 $4,900

12/31/16 $5,800

Assume that all wages earned by employees are first recoded in the wages payable account before being paid. If the income statement reports wage expense for the period of $80,000, then the statement of cash flows should report cash payments for wages during the period of: ANS: $79,100

31. The direct method and the indirect method are alternative presentations for presenting cash flows from: Operating Activities 32. Price corporation reported a Cost of Goods Sold of $250,000 for 2016. It also reported an increase in inventory for the year of $30,000, and an increase in accounts payable of $24,000. How much inventory did pipe purchase in 2016? ANS: $280,000 $250,000 + $30,000 = $280,000 Not asking for cash payments so we don’t subtract Accounts Payable $24,000

33. The following information relates to machine #200: Cost of machine #200 is $54,000, estimated salvage value at the end of its expected life is $12,000, expected life is 5.

Assume that machine #200 was purchased on 1/1/16 and was put into service immediately. If the double-declining balance depreciation method is used, depreciation expense for the second year of the assets life (1/31/17) is: 2016: $54,000 x (2/5)= $21,600 2017: [$54,000 - $21,600] x (2/5)= $12,960 Depreciation expense for year 2

34. A purchased utility patent has a remaining legal life of 15 years. The patent should: Answer: Amortized over its useful life if less than 15 years; shorter of legal/useful life. Patent Cost/life = amortization expense

35. What happens to the balance of a capital lease liability as payments are made each period? Answer: liabilities decrease over payment periods until 0 at end of life 36. Orange Bowl Company reported plant assets, net of accumulated depreciation (i.e., book value) for the latest fiscal year of $5 million. From this information, which of the following is an accurate statement about the company? Answer: BV= 5 million 37. A company might prefer to structure a lease as an operating lease in order to obtain “off-balance-sheet financing.” Which of the following describes this concept best? Answer: Operating Leases are a form of off-balance sheet financing. The Lessee is contractually obligated to make lease payments, but is not required by GAAP to record this obligation on the balance sheet. But, they are required to report any commitments from operating leases in a Note to the financial statements. This makes the balance sheet and the company’s ratios look better! Original Journal Entry for Operating Lease: there isn’t one!

38. Which of the following is not properly classified as property, plant, and equipment? Answer: Truck held for resale by an automobile dealership. This is not PPE since its being HELD FOR SALE! 39. A lessee mistakenly treated an operating lease as a capital lease. How does this mistake impact the following at the inception of the lease? Answer: Total Liabilities overstated, Total assets overstated

40.XYZ company purchased a truck on January 1, 2016 for $20,000 and intends to use th...