Exam 2

Car Facts Inc. reports sales of $15,081,362 thousand and cost of sales of $13,691,824 thousand for the fiscal year ended February 28. The gross profit for the year is:

$1,389,538 thousand Gross profit = Sales - COGS = $15,081,362 thousand - $13,691,824 thousand = $1,389,538 thousand.

EZ Wheels Corporation manufactures kick scooters. The company offers a one-year warranty on all scooters. During the year, the company recorded net sales of $1,520 million. Historically, about 4% of all sales are returned under warranty and the cost of repairing and or replacing goods under warranty is about 30% of retail value. Assume that at the start of the year EZ Wheels' balance sheet included an accrued warranty liability of $13.0 million and at the end of the year, the accrued warranty liability balance was $9.9 million. What was EZ Wheels Corporation's warranty expense for the year?

$1,520 million x 4% x 30% = $18.2 million

Central Supply purchased a new printer for $70,875 . The printer is expected to operate for nine (9) years, after which it will be sold for salvage value (estimated to be $7,088 ). How much is the first year's depreciation expense if the company uses the double-declining-balance method?

$15,750 Depreciation rate: 2 × Straight-line rate (1/Useful life) = 2 × (1/9) Depreciation expense, Year 1: $70,875 x 2 x 1/9 = $15,750

A delivery van costing $37,000 is expected to have a $2,900 salvage value at the end of its useful life of five years. Assume that the truck was purchased on January 1. Compute the depreciation expense for the first two calendar years under the straight‑line depreciation method.

(37000-2900)/5=6820

Canton Company sells a motor that carries a 60-day unconditional warranty against product failure. From prior years' experience, Canton estimates that 3% of units sold each period will require repair at an average cost of $160 per unit. During the current period, Canton sold 100,000 units and repaired 2,400 of those units. (a) How much warranty expense must Canton report in its current period income statement?

.03*100000*160=480000

Lynch Company owns and operates a delivery van that originally cost $46,400. Lynch has recorded straight-line depreciation on the van for four years, calculated assuming a $5,000 expected salvage value at the end of its estimated six-year useful life. Depreciation was last recorded at the end of the fourth year, at which time Lynch disposes of this van. Compute the gain or loss on sale of the van if the disposal proceeds are: Use a negative sign with your answer if the sale results in a loss. 1. A cash amount equal to the van's net book value. 2. $21,000 cash. 3. $17,000 cash.

0 2200 -1800 (price given- NBV)

Canton Company sells a motor that carries a 60-day unconditional warranty against product failure. From prior years' experience, Canton estimates that 3% of units sold each period will require repair at an average cost of $160 per unit. During the current period, Canton sold 100,000 units and repaired 2,400 of those units. (c) What analysis issues must we consider with respect to reported warranty liabilities 1.Warranty liability at any given time should equal the actual dollar cost of repairs already paid for 2.Warranty liability must always be assumed to exist and to be at least 3% of the value of expected sales 3.Warranty liability at any given time should equal the expected dollar cost of repairs not yet paid for. 4.The issues to consider with respect to warranty liability are whether it actually exists and what is its correct magnitude 5.Understating accrual of warranty liability overstates current period income at the expense of future income 6.Understating accrual of warranty liability understates current period income to the benefit of future income.

1,2, 6- no 3,4 ,5- yes

Sykora Corp. sells $630,000 of bonds to private investors. The bonds are due in 5 years, have a 6% coupon rate and interest is paid semiannually. Sykora received $490,222 for the bonds at issuance.

12%

For each of the following situations, indicate the liability amount, if any, that is reported on the balance sheet of Bloomington Inc. at December 31, 2019.Next to each situation, enter the liability amount reported on Bloomington's balance sheet. a. Bloomington owes $220,000 at year-end 2019 for inventory purchase. b. Bloomington agreed to purchase a $28,000 drill press in January 2020. c. During November and December of 2019, Bloomington sold products to a customer and warranted them against product failure for 90 days. Estimated costs of honoring this 90-day warranty during 2020 are $3,100. d. Bloomington provides a profit-sharing bonus for its executives equal to 5% of reported pretax annual income. The estimated pretax income for 2019 is $800,000. Bonuses are not paid until January of the following year.

220000 0 3100 40000

Winnebago Industries recorded an impairment loss of $462,000 on its corporate plane during a recent year. Assume that the plane originally cost the company $2,350,000 and had accumulated depreciation of $1,598,000 at the time of the impairment charge. What was the plane's fair value at the end of the year?

290000 original cost-depreciation= Net book val net book val- impairment=fair val

Reed Corp. sells $400,000 of bonds to private investors. The bonds are due in five years, have a 6% coupon rate, and interest is paid semiannually. The bonds were sold to yield 4%. What proceeds does Reed receive from the investors?

435,930

Fey Enterprises recorded a restructuring charge of $15.4 million during the year related entirely to the closing of its division located in Austin, Texas. The company's financial statement footnotes indicated that expected employee separation payments amounted to $12.0 million and that fixed asset write-downs accounted for the remainder. Fey had never before incurred restructuring charges. At the end of the year, the company's balance sheet included a restructuring accrual of $2,565,000 . The cash flow effect of Fey Enterprises' restructuring during the year is:

9435000 12 mill expected emloyee separation- BS restructure accrual (does not include fixed asset write downs)

Which one of the following would be considered a contingent liability? Select one: A. A company estimates that it will probably have to pay $75,000 to the EPA for a chemical spill. B. A company owes $35,000 on inventories purchased on credit. C. A company has access to a line of credit with a bank in the amount of $120,000. D. A company believes that it is reasonably possible it will lose a lawsuit and damages could be $100,000. E. None of the above

A Rationale: For a liability to be a contingent liability, the amount must be estimable and probable.

Which of the following items creates complications related to revenue recognition? A. Bonuses tied to sales goals B. Long-term construction contracts C. Multiple element sales contracts D. Consignment goods

All

Thomas Company receives information that requires the company to increase its expectations of uncollectible accounts receivable. Which of the following does not occur on the company's financial statements? A. Bad debt expense is increased B. Accounts receivables (gross) is reduced C. Net income is reduced D. The allowance account is increased E. None of the above

B

Which of the following would not require the company to record an accrual on the balance sheet? Select one: A. The company owes $43,000 in wages to its employees for the previous two weeks. B. Interest will be paid when a note payable matures in the following accounting period C. Management believes a lawsuit against the company is meritless because they have never had a single complaint about dangerous side effects of their drug in two years. D. The company knows that they will be fined for pollution as a result of their manufacturing process and can estimate the amount of the obligation. E. None of the above

C Rationale: Based on management's belief, the lawsuit at hand can be deemed less than reasonably possible and therefore does not need to be disclosed in the financial statements.

Which one of the following is not correct? Select one: A. For debt issued at par: interest expense reported on the income statement equals the cash paid for interest. B. For bond repurchases: Gain (loss) on bond repurchase = Net book value of bonds - Cash paid to repurchase bonds. C. For debt issued at a discount: interest expense reported on the income statement equals cash interest payment less amortization of the discount. D. For debt issued at a premium, interest expense reported on the income statement equals cash interest payment less amortization of the premium. E. None of the above

C Rationale: For debt issued at a discount, interest expense reported on the income statement is cash interest paid plus amortization of the discount.

Credit analysis concerns which of the following? A. The price of a company's stock B. The ability of a company to consistently pay dividends C. The probability a company will make timely payments D. An assessment of a company's credit-granting policies E. None of the above

C Rationale: The probability a company will make timely payments, that is, the potential risk of default. Bond investors are primarily concerned with a company's ability to make interest and principal payments per the bond agreement.

Which of the following does not represent a current liability? Select one: A. Accrual of taxes payable B. Short-term loan C. Purchase of inventory on credit D. Bond issue E. None of the above

D Rationale: Bonds are issued to raise capital with repayment of the principal amount on a specified date in the future (more than one year from the point of issue); therefore, bonds are considered long-term liabilities.

In times of falling prices, choosing LIFO over FIFO as an inventory cost method would affect the financial statements as follows: Select one: A. Cost of goods sold will be higher and ending inventory will be lower B. Cost of goods sold will be lower and ending inventory will be lower C. Cost of goods sold will be higher and ending inventory will be higher D. Cost of goods sold will be lower and ending inventory will be higher E. None of the above

D Rationale: When prices are falling, the more recent, lower prices will be transferred to the income statement (last in are the lowest prices). Thus, COGS will be lower. Conversely, the earliest, highest-priced inventory will remain on the balance sheet.

One difference between straight-line and double-declining-balance depreciation methods is that: Select one: A. Straight-line method will fully depreciate the asset more quickly. B. Double-declining-balance method will fully depreciate the asset more quickly. C. Income taxes paid will be lower under the double-declining-balance method. D. Losses on disposal will be lower under the straight-line method. E. None of the above.

E Rationale:Neither method depreciates assets fully more quickly (that is, to the residual value more quickly) than the other. In fact, if the salvage value is $0, the double-declining-balance method will never fully depreciate the asset. The salvage value relative to the original cost and the asset life will determine which method reaches salvage value more quickly. Thus a and b and d are all incorrect. c is incorrect because taxes paid are determined by the tax code and not by GAAP depreciation method choice.

B/S closest to Market values

FIFO takes oldest prices and puts it on COGS first leaving you with most current cost on B/S

The gain or loss on the sale of the asset is computed as:Gain/(Loss) on sale = Market value of asset - Net book value of asset

False proceeds received may differ from asset market val proceeds from sale -Net book val of asset

From these disclosures it appears that Costco has not yet adopted the new leasing standard. How do we know this? Had Costco adopted the new standard, capital lease obligations and finance lease obligations would be reported. Had Costco adopted the new standard, operating leases and finance lease obligations would be reported. Had Cost adopted the new standard, operating leases, capital lease obligations, and finance lease obligations would be reported. Based on the lease types disclosed, it appears Costco has adopted the new standard.

Had Costco adopted the new standard, operating leases and finance lease obligations would be reported.

Target sells gift cards that can be used at any of the company's Target stores or on Target.com. Target encodes information on the card's magnetic strip about the card's value and the store where it was purchased. Target gift cards do not have expiration dates. a. When does Target record revenue from the gift card? i. Two years after the date of the sale, which is when the gift card expires. ii. When the gift card is sold. iii. When the customer uses the gift card, at which point, Target also records an allowance for estimated product returns. iv. 90 days after the date the customer uses the gift card, which is when the product return period expires.

III

Target sells gift cards that can be used at any of the company's Target stores or on Target.com. Target encodes information on the card's magnetic strip about the card's value and the store where it was purchased. Target gift cards do not have expiration dates. b. How will Target's balance sheet reflect the gift card when it is initially sold? i. As an asset: cash and cash equivalents. ii. As an asset: allowance for product sales. iii. As sales revenue iv. As a liability: unearned revenue.

IV

I/S closest to Market Values

LIFO

inflation environment: method w/ least impact of CF

LIFO pays least tax since high COGS nl Sale = lower GM

Winnebago Industries recorded an impairment loss of $462,000 on its corporate plane during a recent year. Assume that the plane originally cost the company $2,350,000 and had accumulated depreciation of $1,598,000 at the time of the impairment charge. Explain how the company determined the amount of the impairment loss. Net book value of corporate plane less fair value of corporate plane. Original cost of corporate plane less fair value of corporate plane. Original cost of corporate plane less net book value of corporate plane. Fair value of corporate plane less accumulated deprecation of corporate plane.

Net book value of corporate plane less fair value of corporate plane.

InterTech Corporation needed financing to build a new manufacturing plant. On June 30 of this year, InterTech issued $2,175,000 of 8-year bonds with a 6% coupon rate (payments due on December 31st and June 30th). The effective interest rate was 8%. What amount in interest expense did InterTech record this year for the December 31 payment?

PV(.04, 16, ((2175000*.06)/2), -2175000) 192562*.04=76863

Winnebago Industries recorded an impairment loss of $462,000 on its corporate plane during a recent year. Assume that the plane originally cost the company $2,350,000 and had accumulated depreciation of $1,598,000 at the time of the impairment charge. Why did the company record an impairment loss on the plane? The corporate plane's net book value was less than it's fair value. The corporate plane's fair value was less than it's net book value. The corporate plane's original cost was less than it's fair value. The corporate plane's fair value was less than it's original cost.

The corporate plane's fair value was less than it's net book value.

How would Costco determine if each of the lease contracts listed under Lease Land and/or Building would be a finance lease or an operating lease? Finance leases meet one or more of five criteria. Which of the following is not one of the criteria? The lease term is for a major part of the remaining economic life of the underlying asset. The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already included in the lease payments equals or exceeds substantially all of the fair value of the underlying asset. The underlying asset is of such that the company expects the asset to have an alternative use to the lessor at the end of the lease term. The lease transfers ownership of the underlying asset to the lessee by the end of the lease term. The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.

The underlying asset is of such that the company expects the asset to have an alternative use to the lessor at the end of the lease term.

True or false: A reduction of the deferred revenue account can be interpreted as a leading indicator of lower future revenues. Explain False. Revenue is recognized when the deferred revenue liability increases. If the deferred revenue account has decreased, more cash came in from customers and more revenue will be recognized in the future. True. Revenue is recognized when the deferred revenue liability decreases. If the deferred revenue account has decreased, less cash came in from customers and less revenue will be recognized in the future. False. Revenue is recognized when the deferred revenue liability decreases. If the deferred revenue account has decreased, less cash came in from customers and more revenue will be recognized in the future. True. Revenue is recognized when the deferred revenue liability decreases. If the deferred revenue account has decreased, more cash came in from customers and less revenue will be recognized in the future.

True. Revenue is recognized when the deferred revenue liability decreases. If the deferred revenue account has decreased, less cash came in from customers and less revenue will be recognized in the future.

Indicate the proper financial statement classification (balance sheet or income statement) for each of the following liability-related accounts. a. Gain on Bond Retirement b. Discount on Bonds Payable c. Mortgage Notes Payable d. Bonds Payable e. Bond Interest Expense f. Bond Interest Payable (due next period) g. Premium on Bonds Payable h. Loss on Bond Retirement

a, e, h =IS b-d, f-g= BS

Operating vs Non-operating Income Statement a) Net Sales b) Cost of Sales Before Special Charges c) Special Inventory obsolescence charge d) selling general and admin expense e) research and development expense f) merger and acquisition costs g) in process research and develop charges h)litigation settlement i) interest exp j) interest income k) gain on disposal of fixed assets l) impairment of marketable securities m) other income expense, net n)income tax expense

a-h) ops i+j) non k) ops l+m) non n) ops

Abbington Inc. issues $700,000 of 9% bonds that pay interest semiannually and mature in 10 years. Compute the bond issue price assuming that the prevailing market rate of interest is: a.8% per year compounded semiannually b. 10% per year compounded semiannually

a.747566 b.656382 for semi annual=PV(1/2 of rate, double year, ((-FV*rate)/2), -FV ex)PV(.05,20,((-700000*.09)/2),-700000)=656382

Lynch Company owns and operates a delivery van that originally cost $46,400. Lynch has recorded straight-line depreciation on the van for four years, calculated assuming a $5,000 expected salvage value at the end of its estimated six-year useful life. Depreciation was last recorded at the end of the fourth year, at which time Lynch disposes of this van. a. Compute the net book value of the van on the disposal date.

depreciation exp= 27600 nbv= $ original - dep exp= 18800

can we find bad debt expense with A/R balance and estimated % uncollectable

no need to have allowance for uncollectible accounts

c. From the disclosures details, do you think the Lease Land and/or Building leases are operating or finance lease?

ops lease

Canton Company sells a motor that carries a 60-day unconditional warranty against product failure. From prior years' experience, Canton estimates that 3% of units sold each period will require repair at an average cost of $160 per unit. During the current period, Canton sold 100,000 units and repaired 2,400 of those units. (b) What warranty liability related to current period sales will Canton report on its current period-end balance sheet? Assume that actual repair costs are as estimated.

part as 480000 - (160*2400)= 96000

Unearned revenue, an operating liability, arises when a company receives cash before any goods are delivered or services are rendered.

true