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.

of 15 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.

of 15 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.

of 15 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

of 15 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 ______

of 15 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.

of 15 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.

of 15 Problem 7 Partial balance sheets and additional information are listed below for Monaco Company.

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.

of 15 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.

Continued on next page Page 9 of 15 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. Gazelle Corporation Statement of Cash Flows For Year Ended December 2013

of 15 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

of 15 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 <$40,000> $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.

of 15 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).

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

of 15 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

of 15 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