Assignment
1. A company with a June 30 fiscal year entered into a $3,000,000 construction project on April 1, to be completed on September 30. The cumulative construction-in-progress balances at April 30, May 31, and June 30 were $500,000, $800,000, and $1,500,000 respectively. The interest rate on the company's debt used to finance the construction project was 5% from April 1 through June 30, and 6% from July 1 through September 30. Assuming that the asset is placed into service on October 1, what amount of interest should be capitalized to the project on June 30?
a. $11,666
b. $18,750
c. $75,000
d. $90,000
2. A company reports the following information for Year 1:
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Sale of Equipment
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$20,000
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Issuance of the company's bonds
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$10,000
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Dividends paid
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$5,000
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Purchase of stock of another company
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$2,000
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Purchase of U.S. Treasury note
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$2,000
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Income taxes paid
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$2,000
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Interest income received
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$500
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What is the company's net cash flow from financing activities?
a. ($9,000)
b. $5,000
c. $5,500
d. $15,000
3. Long Co. invested in marketable securities. At year-end, fair-value changes in this investment were included in Long's other comprehensive income. How would Long classify this investment?
a. Held-to-maturity securities
b. Trading securities
c. Equity securities
d. Available-for-sale securities
4. Howell Co. had the following first-year amounts for a $7,000,000 construction contract:
Actual costs $2,000,000
Estimated costs to complete: $6,000,000
Progress billings: $1,800,000
Cash collected: $1,500,000
What amount should Howard recognize as gross profit (loss) using the percentage-of-completion method?
a. ($1,000,000)
b. ($200,000)
c. $800,000
d. $1,750,000
5. Angie, Inc. owns 35% of Caifeng Corporation. During the calendar year 2016, Caifeng had net earnings of $300,000 and paid dividends of $30,000. Angie, Inc. mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively?
a. Understate, overstate, overstate
b. Overstate, understate, understate
c. Overstate, overstate, overstate
d. Understate, understate, understate
6. Daley Co. holds a 30% stake in DiMarco Co. which was purchased in 2016 at a cost of $3,000,000. After applying the equity method, the Investment in DiMarco Co. account has a balance of $3,040,000. At December 31, 2016 the fair value of the investment is $3,120,000. Which of the following values is acceptable for Daley to use in its balance sheet at December 31, 2016?
I. $3,000,000
II. $3,040,000
III. $3,120,000
a. I, II, or III.
b. I or II only.
c. II only.
d. II or III only.
7. The percentage-of-completion method must be used when certain conditions exist. Which of the following is not one of those necessary conditions?
a. Estimates of progress toward completion, revenues, and costs are reasonably dependable.
b. The contractor can be expected to perform the contractual obligation.
c. The buyer can be expected to satisfy some of the obligations under the contract.
d. The contract clearly specifies the enforceable rights of the parties, the consideration to be exchanged, and the manner and terms of settlement.
8. How should the balances of progress billings and construction in process be shown at reporting dates prior to the completion of a long-term contract?
a. Progress billings as deferred income, construction in progress as a deferred expense.
b. Progress billings as income, construction in process as inventory.
c. Net, as a current asset if debit balance, and current liability if credit balance.
d. Net, as income from construction if credit balance, and loss from construction if debit balance.
9. In accounting for a long-term construction-type contract using the percentage-of-completion method, the gross profit recognized during the first year would be the estimated total gross profit from the contract, multiplied by the percentage of the costs incurred during the year to the
a. total costs incurred to date.
b. total estimated cost.
c. unbilled portion of the contract price.
d. total contract price.
10. How should earned but unbilled revenues at the balance sheet date on a long-term construction contract be disclosed if the percentage-of-completion method of revenue recognition is used?
a. As construction in process in the current asset section of the balance sheet.
b. As construction in process in the noncurrent asset section of the balance sheet.
c. As a receivable in the noncurrent asset section of the balance sheet.
d. In a note to the financial statements until the customer is formally billed for the portion of work completed.
11. The principal disadvantage of using the percentage-of-completion method of recognizing revenue from long-term contracts is that it
a. is unacceptable for income tax purposes.
b. gives results based upon estimates which may be subject to considerable uncertainty.
c. is likely to assign a small amount of revenue to a period during which much revenue was actually earned.
d. none of these.
12. Scott Corp. and its divisions are engaged solely in manufacturing operations. The following data (consistent with prior years' data) pertain to the industries in which operations were conducted for the year ended December 31, 2016.
Assets
Industry Revenue Profit 12/31/16
A $ 8,000,000 $1,320,000 $16,000,000
B 6,400,000 1,120,000 14,000,000
C 4,800,000 960,000 10,000,000
D 2,400,000 440,000 5,200,000
E 3,400,000 540,000 5,600,000
F 1,200,000 180,000 2,400,000
$26,200,000 $4,560,000 $53,200,000
In its segment information for 2016, how many reportable segments does Scott have?
a. Three
b. Four
c. Five
d. Six
13. The following information pertains to Agnew Corp. and its divisions for the year ended December 31, 2016.
Sales to unaffiliated customers $3,500,000
Intersegment sales of products similar to those sold to unaffiliated customers 1,050,000
Interest earned on loans to other operating segments 70,000
Agnew and all of its divisions are engaged solely in manufacturing operations. Agnew has a reportable segment if that segment's revenue exceeds
a. $462,000.
b. $455,000.
c. $357,000.
d. $350,000.
14. Major Corp. has estimated that total depreciation expense for the year ending December 31, 2016 will amount to $400,000, and that 2016 year-end bonuses to employees will total $800,000. In Minor's interim income statement for the six months ended June 30, 2016, what is the total amount of expense relating to these two items that should be reported?
a. $0.
b. $200,000.
c. $600,000.
d. $1,200,000.
15. The MD&A section of a company's annual report is to cover the following three items:
a. income statement, balance sheet, and statement of owners' equity.
b. income statement, balance sheet, and statement of cash flows.
c. liquidity, capital resources, and results of operations.
d. changes in the stock price, mergers, and acquisitions.
16. How is the amortization of patents reported in a statement of cash flows that is prepared using the direct method?
A. Not reported.
B. An increase in cash flows from operating activities.
C. A decrease in cash flows from operating activities.
D. A decrease in cash flows from investing activities.
17. Cash equivalents have each of the following characteristics except:
A. Little risk of loss.
B. Highly liquid.
C. Maturity of at least three months.
D. Short-term.
18. When a company purchases a security it considers a cash equivalent, the cash outflow is:
A. Reported as an operating activity.
B. Reported as an investing activity.
C. Reported as a financing activity.
D. Not reported on a statement of cash flows.
19. A firm reported salary expense of $239,000 for the current year. The beginning and ending balances in salaries payable were $40,000 and $15,000, respectively. What was the amount of cash paid for salaries?
A. $214,000.
B. $289,000.
C. $264,000.
D. $239,000.
20. In a statement of cash flows in which operating activities are reported by the direct method, which of the following would increase reported cash flows from operating activities?
A. Gain on sale of equipment.
B. Interest revenue.
C. Gain on early extinguishment of bonds.
D. Proceeds from sale of land.
Problems
1. Lewis Inc. purchased several investment securities during 2014, its first year of operations. The following information pertains to these securities. The fluctuations in their fair values are not considered permanent.
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Fair Value
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Fair Value
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Amortized Cost
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Amortized Cost
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Held to Maturity
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12/31/15
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12/31/16
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12/31/15
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12/31/16
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Baxter Co. Bonds
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$375,000
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$400,000
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$367,500
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$360,000
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Trading Securities
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Ready Co. Stock
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$48,000
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$62,500
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$66,000
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SkyInc Stock
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$47,000
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$78,000
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$39,000
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Brandy Inc Stock
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$44,000
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$40,500
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$32,900
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Available for Sale Securities
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OverarmorCo Stock
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$130,500
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$150,600
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$140,000
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What balance sheet amount would Lewis report for its total investment securities at 12/31/2016?
2. Moore Construction specializes in the construction of commercial and industrial buildings. The contractor is experienced in bidding long-term construction projects of this type, with the typical project lasting fifteen to twenty-four months. The contractor uses the percentage-of-completion method of revenue recognition since, given the characteristics of the contractor's business and contracts, it is the most appropriate method. Progress toward completion is measured on a cost to cost basis. Moore began work on a lump-sum contract at the beginning of 2016. As bid, the statistics were as follows:
Lump-sum price (contract price) $12,000,000
Estimated costs
Labor $2,550,000
Materials and subcontractor 5,250,000
Indirect costs 1,200,000 9,000,000
$3,000,000
At the end of the first year, the following was the status of the contract:
Billings to date $6,690,000
Costs incurred to date
Labor $1,392,000
Materials and subcontractor 3,294,000
Indirect costs 579,000 5,265,000
Latest forecast total cost 9,000,000
It should be noted that included in the above costs incurred to date were standard electrical and mechanical materials stored on the job site, but not yet installed, costing $315,000. These costs should not be considered in the costs incurred to date.
Instructions
(a) Compute the percentage of completion on the contract at the end of 2016.
(b) Indicate the amount of gross profit that would be reported on this contract at the end of 2016.
(c) Make the journal entry to record the income (loss) for 2016 on Moore's books.
3. Prepare a cash flow statement for the following information. (Indirect Method)
Balance Sheet ($)
Jan 1 Dec 31
ASSETS:
Current Assets:
Cash 310,000 600,000
Marketable Securities 1,200,000 1,000,000
Accounts Receivable, net 290,000 330,000
Inventory 3,000,000 4,000,000
Prepaid Expenses 200,000 300,000
Total Current Assets 5,000,000 6,230,000
Total Fixed Assets, net 2,500,000 2,000,000
Total Assets 7,500,000 8,230,000
LIABILITIES & EQUITIES
Current Liabilities:
Accounts Payable 1,500,000 1,000,000
Notes Payable 1,000,000 1,000,000
Accrued Expenses 500,000 800,000
Total Current Liabilities 3,000,000 2,800,000
Total Long-term Liabilities 1,000,000 1,500,000
Total Liabilities 4,000,000 4,300,000
Preferred Stock 500,000 500,000
Common Stock 500,000 500,000
Capital in Excess of Par 1,000,000 1,000,000
Retained Earnings 1,500,000 1,930,000
Total Stockholders Equity 3,500,000 3,930,000
Total Liabilities and Equity 7,500,000 8,230,000
Income Statement (for problem 3)
Sales 10,000,000
COGS 6,000,000
Gross Profit 4,000,000
Administrative expenses 1,200,000
Depreciation 500,000
EBIT 2,300,000
Interest Expense 500,000
EBT 1,800,000
Taxes (40%) 720,000
Net Income 1,080,000
4. An analyst compiled the following information for Uver Inc. for the year ended December 31, 2016:
? Net income was $1,700,000.
? Depreciation expense was $400,000.
? Interest paid was $200,000.
? Income taxes paid were $100,000.
? Common stock was sold for $200,000.
? Preferred stock (8% annual dividend) was sold at par value of $250,000.
? Common stock dividends of $50,000 were paid.
? Preferred stock dividends of $20,000 were paid.
? Equipment with a book value of $100,000 was sold for $200,000.
Using the indirect method, what was Uver Inc.'s net cash flow from operating activities for the year ended December 31, 2016?
5. Computation of selected ratios.
The following data is given:
December 31,
2016 2015
Cash $ 68,000 $ 50,000
Accounts receivable (net) 70,000 60,000
Inventories 90,000 130,000
Plant assets (net) 383,000 325,000
Accounts payable 60,000 40,000
Salaries and wages payable 10,000 5,000
Bonds payable 70,000 70,000
10% Preferred stock, $40 par 100,000 100,000
Common stock, $10 par 120,000 90,000
Paid-in capital 80,000 65,000
Retained earnings 170,000 175,000
Net credit sales 800,000
Cost of goods sold 600,000
Net income 80,000
Instructions
Compute the following ratios:
(a) Acid-test ratio at 12/31/16
(b) Receivables turnover in 2016
(c) Inventory turnover in 2016
(d) Profit margin on sales in 2016