ACC5310 Exam 2
Chang, Inc. issued a 3-month note in the amount of $288,000 on December 1 of this year with an annual rate of 5%. What amount of interest has accrued as of December 31 of this year?
$1,200 $288,000 x 5% x 1/12 months = $1,200
The January 28 (fiscal year-end) financial statements of Collette Inc. reported the following information (in thousands). Year 2 Year 1 Cost of sales $1,213,918 $1,223,622 Inventories, net 468,611 437,396 LIFO reserve 3,476 3,275 If Collette had used the FIFO method of inventory costing, Year 2 COGS would have been:
$1,213,717 thousand FIFO COGS = LIFO COGS - Increase in LIFO reserve = $1,213,918 - ( $3,476 - $3,275 ) = $1,213,717 thousand
1. 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.
Nevada, Inc. reported the following items in the 2017 pension footnote (in millions). Service cost $937 Benefits paid to retirees 149 Interest cost 744 Actual returns on invested assets 963 Expected returns on invested assets 1,086 Actuarial loss 40 The increase in the company's pension obligation during the year is:
$1,572 million The pension obligation increases during the period as follows: service cost + interest cost + actuarial loss - benefits paid to retirees (in millions):$937 + $744 + $40 - $149 = $1,572
Butler, Inc. paid $150,000 to retire a note with a face value of $166,000 . The note was issued with an 8% coupon rate paid semiannually. The note was three years from maturity and had a net book value of $136,400 . What is the net gain or loss on the redemption of the note?
$13,600 loss $150,000 paid - $136,400 book value = $13,600 net loss on redemption
Central Supply purchased a new printer for $64,125 . The printer is expected to operate for nine (9) years, after which it will be sold for salvage value (estimated to be $6,413 ). How much is the first year's depreciation expense if the company uses the double-declining-balance method?
$14,250 Depreciation rate: 2 × Straight-line rate (1/Useful life) = 2 × (1/9) Depreciation expense, Year 1: $64,125 x 2 x 1/9 = $14,250
Redding Corp. reported the following information in its annual report (in millions). Plans' assets at fair value, January 1, beginning of year $14,715 Actual return on plans assets 1,627 Company contributions 1,115 Benefits paid 1,434 Expected return on plan assets 1,585 What were the pension plan assets at the end of the year?
$16,023 million Plan assets at the end of the year = Beginning balance + Actual return + Contributions - Benefits paid$14,715 + $1,627 + $1,115 - $1,434 = $16,023 million
Acadia, Inc. recorded restructuring charges of $188,434 thousand during the year related entirely to anticipated employee separation payments. Acadia, Inc. had never before incurred restructuring charges. At the end of the year, the company's balance sheet included a restructuring accrual of $23,714 thousand. The cash flow effect of Acadia's restructuring during the year was
$164,720 thousand The total restructuring charge accrued was $188,434 thousand of which $23,714 thousand was still unpaid (a liability) at the end of the year. The difference of $164,720 thousand must have been paid in cash during the year. The cash flow effect is $164,720 thousand
Assume that Fey Company reports the following initial balance and subsequent purchase of inventory. Inventory balance at beginning of year 1,200 units @ $60 each $ 72,000 Inventory purchased during the year 1,800 units @ $90 each 162,000 Cost of goods available for sale during the year 3,000 units $234,000 Assume that 1,900 units are sold during the year. What amount is reported for cost of goods sold using the LIFO method?
$168,000
Mullen Company purchased a new machine costing $55,200 on January 1, 2017. The machine is expected to have a $3,600 salvage value at the end of its useful life of six years. What is the depreciation expense that Mullen Company records for 2017 using the double-declining-balance method?
$17,200
Washington Inc. issued $634,500 of 6%, 20-year bonds at 98 on January 1, 2009. Through January 1, 2017, Washington amortized $7,380 of the bond discount. On January 1, 2017, Washington Inc. retired the bonds at 102 (after making the interest payment on that date). What is the gain or loss that Washington Inc. would report for the retirement of this bond?
$18,000 loss Net book value = ( $634,500 x 0.98) + $7,380 = $629,190 Gain (loss) = $629,190 - ( $634,500 x 1.02) = $(18,000)
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?
$18.2 million $1,520 million x 4% x 30% = $18.2 million
Micro Corp. reported a statutory tax rate of 35% and an effective tax rate of approximately 15%. The current year's income statement reported income tax expense of $2,953 million. What did Micro report as income before income tax expense that year?
$19,687 million Income tax expense / Effective tax rate = $2,953 million / 0.15 = $19,687 million
Snooze Inc. reported a statutory tax rate of 35%, an effective tax rate of 30.5%. Income before income tax for the year was $641.1 million. What did the company report as tax expense (on its income statement) for the year?
$195.5 million The company reported taxes on the income statement of $195.5 million. This is calculated as Income before tax × Effective tax rate = $641.1 x 0.305 = $195.5 million.
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. How much did EZ Wheels pay during the year to repair and/or replace scooters under warranty?
$21.3 million Total cash paid out is $13.0 million + $18.2 million* - $9.9 million = $21.3 million.* $1,520 million x 4% x 30% = $18.2 million (warranty expense)
Big Tech Corporation recorded pretax restructuring charges of $981.8 million during the year. The charges consisted of asset write-downs of $647 million, costs associated with exit or disposal activities of $94 million, and employee severance costs of $240.8 million. The company paid $103 million cash to settle these restructuring charges during the year. At year end, the restructuring accrual associated with these charges was
$231.8 million Of the $981.8 million total restructuring charge, only the exit costs and severance costs must eventually be settled in cash. The asset write downs are not accrued—they reduce the assets on the balance sheet. The company accrued $94 million + $240.8 million = $334.8 million as a liability. Thus, if the company paid $103 million cash, the remaining accrual is $231.8 million at year end.
Heller Company issues $475,000 of 10% bonds that pay interest semiannually and mature in 10 years. What is the bonds' issue price assuming that the bonds' market interest rate is 14% per year?
$374,357 Using a financial calculator or Excel the present value of the bonds = $374,357 Excel Rate =7% Nper =20 PMT =-23750 FV =-475000 Type =0
Howell Corporation purchased a new machine costing $27,600 on January 1, 2017. The machine is expected to have a $1,800 salvage value at the end of its useful life of six years. What is the depreciation expense that Howell Corporation records for 2017 using the straight line method?
$4,300
Pinto Corp. sells $240,000 of bonds to private investors. The bonds have a 4% coupon rate and interest is paid semiannually. The bonds were sold to yield 5%. What periodic interest payment does Pinto make to its investors?
$4,800 Coupon rates are used to compute the dollar amount in interest payments paid to the bondholder semiannually. Pinto pays $240,000 x 4% x 1/2 year = $4,800 .
Aiello, Inc. had the following inventory in its fiscal year. The company uses the FIFO method of accounting for inventory. Beginning Inventory, January 1: 104units @ $15.00 Purchase 160 units @ $18.00 Purchase 40 units @ $13.50 Purchase 88 units @ $15.75 Ending Inventory, December 31: 96units The company's cost of goods sold for its fiscal year is:
$4,872.00 Costs of goods available for sale* $6,366.00 Less Ending Inventory 1,386.00 = 88 x $15.75 Less Ending Inventory 108.00 = 8 x $13.50 Cost of goods sold $4,872.00 *Cost of goods available for sale: ( 104 units x $15) + ( 160 units x $18) + ( 40 units x $13.50) + ( 88 units x $15.75) = $6,366.00
Aiello, Inc. had the following inventory in its fiscal year. The company uses the LIFO method of accounting for inventory. Beginning Inventory, January 1: 104 units @ $15.00 Purchase 160 units @ $18.00 Purchase 40 units @ $13.50 Purchase 88 units @ $15.75 Ending Inventory, December 31: 96units The company's cost of goods sold for its fiscal year is:
$4,926.00 Costs of goods available for sale* $6,366.00 Less Ending Inventory 1,440.00 = 96 x $15 Cost of goods sold $4,926.00 *Cost of goods available for sale: ( 104 units x $15) + ( 160 units x $18) + ( 40 units x $13.50) + ( 88 units x $15.75) = $6,366.00
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 Using a financial calculator or Excel the present value of the bonds = $435,930 Excel Rate =2% Nper =10 PMT =-12000 FV =-400000 Type =0
The January 28 (fiscal year-end) financial statements of Collette Inc. reported the following information (in millions). Year 2 Year 1 Cost of sales $1,213,918 $1,223,622 Inventories, net 468,611 437,396 LIFO reserve 3,476 3,275 If Collette had used the FIFO method of inventory costing, Year 2 inventory would have been
$472,087 million FIFO Inventory = LIFO inventory + LIFO reserve = $468,611 million + $3,476 million = $472,087 million
Reed Corp. sells $560,000 of bonds to private investors. The bonds are due in five years, have a 4% coupon rate and interest is paid semiannually. The bonds were sold to yield 6%. What proceeds does Reed receive from the investors?
$512,231 Using a financial calculator or Excel the present value of the bonds = $512,231. Excel Rate =3% Nper =10 PMT =-11200 FV =-560000 Type =0
Heller Company issues $475,000 of 12% bonds that pay interest semiannually and mature in 10 years. What is the bonds' issue price assuming that the bonds' market interest rate is 10% per year?
$534,195 Using a financial calculator or Excel the present value of the bonds = $534,195 Excel Rate =5% Nper =20 PMT =-28500 FV =-475000 Type =0
Chang, Inc. issued a 120-day note in the amount of $288,000 on December 16 of this year with an annual rate of 5%. What amount of interest has accrued as of December 31 of this year?
$591.78 $288,000 x 5% x 15/365 days = $591.78
On January 1, Bloomingdale, Inc. borrows $73,600 from First Estate Bank. The loan is due in one year along with 4% interest. The company is preparing its quarterly report for March 31. Which of the following best describes the necessary accrual for interest expense?
$736 increase liabilities, increase expenses The quarterly interest charge is calculated by multiplying the loan amount ( $73,600 ) by the interest rate (4%) and then by the portion of the year outstanding (3/12), or $736 accrued interest. The company needs to reflect the outstanding interest owed (accrued interest) by increasing liabilities and increasing interest expense.
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?
$76,863 Using a financial calculator or Excel, the present value of the bond = $1,921,562.57.12/31 Interest expense = $1,921,562.57 x 0.04 = $76,863. Excel Rate =4% Nper =16 PMT =-65250 FV =-2175000 Type =0
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 for the June 30, payment in the next year?
$77,327 Using a financial calculator or Excel, the present value of the bond = $1,921,563.12/31 Interest expense = $1,921,563 x 0.04 = $76,863.06/30 Interest expense = ( $1,921,563 + $11,613 *) x 0.04 = $77,327* Discount amortization = $76,863 - $65,250 = $11,613 Excel Rate =4% Nper =16 PMT =-65250 FV =-2175000 Type =0
Hudson Corp. sells $240,000 of bonds to private investors. The bonds have a 7% coupon rate and interest is paid semiannually. The bonds were sold to yield 10%. What periodic interest payment does Hudson make to its investors?
$8,400 Coupon rates are used to compute the dollar amount in interest payments paid to the bondholder semiannually. Hudson pays $240,000 x 7% x 1/2 year = $8,400 .
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:
$9,435,000 The total restructuring charge accrued was $12.0 million because asset write-downs are not accrued. That is, there is no credit to a liability account for write-downs, the assets are credited (reduced). Thus, the company must have paid $12,000,000 - $2,565,000 = $9,435,000 in cash during the year.
Contingent Liabilities must have the following criteria (select all that apply):
- The obligation will probably require payment at some point in the future. - The obligation is estimable.
The year-end financial statements for North Railway report the following information: Year ended December 31,(In millions) Year 2 Year 1 Revenues $19,829 $21,967 Property and equipment, net 49,000 47,608 Total assets 84,122 81,703 The annual property, plant and equipment turnover is
0.41 Turnover = Revenues / Average PPE, net= $19,829 /[( $49,000 + $47,608) / 2] = 0.41
The year-end financial statement of Wando's Vineyards reported Net revenues of $19,425,412 and Cost of goods sold of $7,204,884 in year 2. Note 3 to the financial statements reported that Inventories consisted of: Year 2 Year 1 Winemaking and packaging materials $654,269 $552,234 Work-in-process 5,307,211 4,846,961 Finished goods 3,615,045 3,106,775 Total inventories $9,576,525 $8,505,970 The inventory turnover for Year 2 was
0.8 Inventory turnover = COGS / Average inventory = $7,204,884 /[( $9,576,525 + $8,505,970 )/2] = 0.8
What is the risk premium for a company that has a yield rate of 6.30% when the risk-free rate is 4.93% ?
1.37% The risk premium can be found by subtracting the risk-free rate from the yield rate: ( 6.30% - 4.93% = 1.37% ).
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. The effective rate on these bonds is:
12% Using Excel, the semi-annual effective interest rate on the bonds equals 6%, resulting in an annual effective rate of 12%. Excel N =10 PMT =-18900 PV =490222 FV =-630000 Type =0
1. The year-end financial statements of Collette Inc. reported the following information (in thousands): Year 2 Year 1 Cost of sales $1,441,527 $1,453,051 Inventories, net 585,764 546,745 LIFO reserve 4,345 4,094 The year 2 average days inventory outstanding is:
143.4 days Average days inventory outstanding = (365 x Avg. Inventory) / COGS =[365 x (( $585,764 + $546,745 )/2)] / $1,441,527 = 143.4 days
The annual financial statements of Valley Vineyards, Inc. include the following footnote: Note 4. Property and Equipment Dec. 31, Year 2 Dec. 31, Year 1 Construction in progress $359,527 $385,827 Land 8,063,716 5,089,472 Winery buildings and hospitality center 14,458,309 13,756,320 Equipment 10,122,593 9,055,987 33,004,145 28,287,606 Less accumulated depreciation (12,897,082) (11,654,901) $20,107,063 $16,632,705 Depreciation expense $1,003,564 $955,353 The average useful life of Valley's depreciable assets at the end of its year is:
23.6 years Average useful life = Avg. depreciable asset cost / Depreciation expense =([( $33,004,145 - $359,527 - $8,063,716 ) + ( $28,287,606 - $385,827 - $5,089,472 )] / 2 ) / $1,003,564 = 23.6 years
The year end financial statements for Pratt Inc., report the following information: Year ended December 31,(In millions) Year 2 Year 1 Depreciation expense $86.8 $83.5 Property and equipment, net 565.5 540.8 Land 37.7 40.0 Accumulated depreciation 932.0 917.2 Which of the following estimates the property and equipment's percent-used-up at December 31, Year 2?
64.8% Percent used up = Accumulated depreciation / Average depreciable asset cost = $932.0 / [( $565.5 + $932.0 - $37.7) + ($540.8 + $917.2 - $40.0) / 2] = 64.8%
1. Hasten Corporation has the following metrics for the year. Amount in days Days sales outstanding 34.7 Days payables outstanding 23.6 Days inventory outstanding 56.1 The cash conversion cycle for the year is:
67.2 days Cash conversion cycle = Days sales outstanding + Days inventory outstanding - Days payable outstanding = 34.7 + 56.1 - 23.6 = 67.2 days
1. The year-end financial statements of City Health Corporation reported the following information (in millions): Year 2 Year 1 Net sales $168,650 $145,626 Cost of sales 141,236 120,424 Inventories, net 14,760 14,001 The inventory turnover ratio for Year 2 is:
9.82 Inventory turnover = COGS / Average inventory = $141,236 /[( $14,760 + $14,001 ) / 2] = 9.82
Which one of the following would be considered a contingent liability?
A company estimates that it will probably have to pay $75,000 to the EPA for a chemical spill.
Computing Depreciation, Net Book Value, and Gain or Loss on Asset Sale Zimmer Company owns an executive plane that originally cost $1,280,000. It has recorded straight‑line depreciation on the plane for seven full years, calculated assuming a $160,000 expected salvage value at the end of its estimated 10‑year useful life. Zimmer disposes of the plane at the end of the seventh year. a. At the disposal date, what is the (1) cumulative depreciation expense and (2) net book value of the plane? (1) Cumulative depreciation expense $ (2) Net book value $ b. How much gain or loss is reported at disposal if the sales price is: Note: Do not use a negative sign with your answers. Sales Price Gain or Loss 1.A cash amount equal to the plane's net book value. $ 2.$285,000 $ 3.$700,000 $
A) Depreciation = (cost - salvage value) / useful life Depreciation = (1,280,000 - 160,000) / 10-year = 112,000 1. Cumulative depreciation expense = 7th year disposal 112,000 * 7 = 784,000 2. Net book value = cost - accumulated depreciation 1,280,000 - 784,000 = 496,000 B) 1. 496,000 - 496,000 = 0 2. 285,000 - 496,000 = 211,000 loss 3. 700,000 - 496,000 = 204,000 gain
Applying and Analyzing Inventory Costing Methods At the beginning of the current period, Chen carried 1,000 units of its product with a unit cost of $32. A summary of purchases during the current period follows. Units Unit Cost Cost Beginning Inventory 1,000 $32 $32,000 Purchase #1 1,800 34 61,200 Purchase #2 800 38 30,400 Purchase #3 1,200 41 49,200 During the current period, Chen sold 2,800 units. (a) Assume that Chen uses the first-in, first-out method. Compute both cost of good sold for the current period and the ending inventory balance. Use the financial statement effects template to record cost of goods sold for the period. Answer for Ending inventory balance $ Answer for Cost of goods sold $ Use negative signs with answers, when appropriate. Balance Sheet Transaction Cash Asset + Noncash Assets = Liabilities + Contributed Capital + Earned Capital Record FIFO cost of goods sold Income Statement Revenue - Expenses = Net Income Record FIFO cost of goods sold (b) Assume that Chen uses the last-in, first-out method.
A) Beginning inventory is 1,000, purchase 1 is 800. He sold 2,800 which is beginning inventory + purchase 1. Therefore, ending inventory = purchase 2 and 3. = 30,400 + 49,200 = $79,600 COGS = beginning inventory of 1,000 + purchase 1 of 800 = 32,000 + 61,200 = 93,200 Balance Sheet = -93,200 in non-cash assets and earned capital Income statement = 93,200 in expenses and -93,200 in net income B) Ending inventory with LIFO = sales come from last inventory purchased first. Therefore, 2,800 sold comes from purchase 3 (1,200) + purchase 2 (800) + 800 from purchase 1. Ending inventory = 1,000 from purchase 1 * 34 + 1,000 from beginning inventory * 32 = 34,000 + 32,000 = $66,000 COGS = sales from purchase 3, 2 and 800 from 1 = (1,200 * 41) + (800 * 38) + (800 * 34) = 49,200 + 30,400 + 27,200 = $106,800 C) Average cost method = COGS is accounted for using the average cost of all purchases Average cost = (1,000 * 32) + (1,800 *34) + (800 *38) + (1,200 * 41) / (1,000 + 1,800 + 800 + 1,200) =36 Ending inventory = units remaining * average cost = 2,000 * 36 = $72,000 COGS = 2,800 (units sold) * 36 (average cost) = 100,800 D) 1. FIFO 2. LIFO 3. FIFO
Analyzing Inventory for Two Retail Grocery Companies Carrefour Group (headquartered in Boulogne‑Billancourt, France) and Tesco PLC (headquartered in Welwyn Garden City, UK) compete head‑to‑head in the grocery space in the UK, Ireland, Central Europe, and North Africa. The following information comes from their 2018 annual reports. Carrefour Group in in€ millions Tesco PLC £ millions 2018 2017 2018 2017 Sales € 76,000 € 78,315 £57,491 £55,917 Cost of sales 60,850 62,311 54,141 53,015 Gross profit 15,150 16,004 3,350 2,902 Inventory 6,135 6,690 2,263 2,301 Total assets 47,378 47,813 44,862 45,853 Required a. Calculate gross profit margin for each year for both companies. Note: Round percentage to one decimal place (for example, enter 6.7% for 6.6555%). Carrefour Group Tesco PLC 2018 2017 2018 2017 Gross
A) Gross profit margin % = (gross profit / sales) * 100 Carrefour Group 2018 (15,150/76,000) * 100 = 19.9% Carrefour Group 2017 (16,004/78,315) * 100 = 20.4% Tesco PLC 2018 (3,350/57,491) * 100 =5.8% Tesco PLC 2017 (2,902/55,917) * 100 = 5.2% B) Common size inventory = (inventory /total assets) * 100 Carrefour Group 2018 (6,135/47,378) * 100 = 12.9% Carrefour Group 2017 (6,690/47,813) * 100 = 14.0% Tesco PLC 2018 (2,263/44,862) * 100 =5.0% Tesco PLC 2017 (2,301/45,853) * 100 = 5.0% C) Inventory turnover = (cost of sales/average inventory) Carrefour Group 2018 (60,850/6,412.5) = 9.5 Tesco PLC 2018 (54,141/2,282) = 23.7 Average inventory = (beginning inventory + ending inventory)/2 Carrefour Group 2018 (6,135 + 6,690) / 2 = 6,412.5 Tesco PLC 2018 (2,263 + 2,301) / 2 = 2,282 Average inventory days = (avg. inventory/COGS) *365 Carrefour Group 2018 (6,412.5/60,850) * 365 = 38.5 Tesco PLC 2018 (2,282/54,141) * 365 = 15.4 D) 1. Tesco PLC 2. Carrefour Group 3. Tesco PLC 4. Tesco PLC
Computing Depreciation 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.
Annual depreciation under the straight line depreciation method is calculated using following equation Annual depreciation = (cost of asset - salvage value) / life of asset = (37,000 - 2,900) / 5 =6,820 Under straight line depreciation method, same amount of depreciation is charged every year during the life of asset. Therefore, depreciation for year 1 and year 2 will be same.
Which of the following does not represent a current liability?
Bond issue
Other than raw materials and manufacturing overhead, what is the third component of inventories for manufacturing companies?
Direct labor
Which of the following corporate debt ratings are ordered in terms of decreasing market interest rate?
C, BB, A, AAA
Which one of the following is not a factor that changes a company's pension obligation during the year (select all that apply).
Contributions to the pension plan
In times of falling prices, choosing LIFO over FIFO as an inventory cost method would affect the financial statements as follows:
Cost of goods sold will be lower and ending inventory will be higher
As a result of using accelerated depreciation for tax purposes, The Mentor Corporation reported $521 million income tax expense in its income statement, while the actual amount of taxes paid by the company was $577 million. How did these tax transactions affect the company's balance sheet?
Decrease retained earnings by $521 million The tax expense of $521 million will reduce net income by that amount and thus, retained earnings on the balance sheet will be $521 million lower. The company pays $577 million tax in cash, which reduces assets (cash). The difference of $56 million is recorded as an increase in deferred tax asset or a decrease in a deferred tax liability.
Computing Cost of Goods Sold and Ending Inventory Under FIFO, LIFO, and Average Cost Assume that Madden Company reports the following initial balance and subsequent purchase of inventory. Inventory balance at beginning of year 1,300 units @ $150 each $195,000 Inventory purchased during the year 1,700 units @ $180 each 306,000 Cost of goods available for sale during the year 3,000 units $501,000 Assume that 2,000 units are sold during the year. Compute the cost of goods sold for the year and the inventory on the year‑end balance sheet under the following inventory costing methods.
Ending inventory (FIFO) = unit * unit cost = 1,000 * $180 = $180,000 COGS (FIFO) = total COGS for sale - ending inventory = $501,000 - $180,000 = $321,000 Ending inventory (LIFO) = unit * unit cost = 1,000 * $150 = $150,000 COGS (LIFO) = total COGS for sale - ending inventory = $501,000 - $150,000 = $351,000 Ending inventory (Average cost) = total cost / total unit * ending inventory unit = $501,000/3,000 * 1,000 = $167,000 COGS (Average cost) = total COGS available for sale - ending inventory (weighted average) = $501,000 - $167,000 = $334,000
Dow Chemical Corporation plans to build a laboratory dedicated to a special project. The company will not use the laboratory after the project is finished. Under GAAP, this laboratory should be
Expensed in the current year
A bond selling for an amount above face value is said to be selling at a discount.
False
Companies using LIFO are required to disclose the amount at which inventory would have been reported had it used FIFO. Similarly, companies using FIFO are required to disclose what their inventory would have been if the company had used LIFO.
False
Higher credit-rated borrowers receive lower interest rates than lower credit-rated borrowers, but the differences are typically not significant.
False
If accrued liabilities are overestimated in the current period, the reported income in a following period will be lower than it should be.
False
Impairment of long-term assets is determined by comparing the sum of the present value of the asset's expected future cash flows to the asset's net book value.
False
In order to estimate depreciation expense using the double-declining-balance method, managers must estimate the asset's useful life and its salvage value.
False
Increasing inventory turnover rate will improve profitability.
False
LIFO inventory costing yields more accurate reporting of the inventory balance on the balance sheet.
False
The cash conversion cycle is defined as: Days sales outstanding - Days inventory outstanding + Days payable outstanding.
False
The coupon rate of a bond typically equals the yield (market) rate.
False
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
The market rate of interest is equal to the risk-free rate plus a credit-rating premium.
False
The principal and interest that will be paid on long-term debt within the next operating cycle are reported on the balance sheet as "current portion of long-term debt."
False
Unlike stock, once sold, bonds can only be traded in private transactions between arms' length parties.
False
Using the capital lease method requires that both the lease asset and lease liability be reported off the balance sheet.
False
When a firm uses an accelerated method of depreciation for tax reporting in order to minimize its tax burden, it will not really save any tax dollars in the end because depreciation method merely changes the timing of the depreciation expenses but not the total.
False
Under the new accounting standard for leases (effective 2019), companies classify all capitalized leases as either:
Finance or operating leases
Which one of the following is not correct?
For debt issued at a discount: interest expense reported on the income statement equals cash interest payment less amortization of the discount.
An asset is impaired when the asset's carrying value is
Greater than the sum of undiscounted expected cash flows
Assume that Barber Co. uses the LIFO inventory costing method for both tax and financial reporting purposes. The balance sheet reports inventories at $297 million. Then, in its footnotes, the company reports that inventories would have been $327 million had the company used the FIFO method. The difference between these two numbers ($30 million) is referred to as:
LIFO reserve
Which of the following would not require the company to record an accrual on the balance sheet?
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.
1. One difference between straight-line and double-declining-balance depreciation methods is that:
None of the above
Under the pre-2019 accounting standards, how are operating leases reported in the lessee's balance sheet?
None of the above
Which of the following business factors does not play a role in determining a company's credit rating?
None of the above
Which of the following does Moody's not consider in deriving the credit rating of a company?
None of the above
Computing Present Values of Single Amounts and Annuities Refer to Tables 1 and 2 in Appendix A near the end of the book to compute the present value for each of the following amounts. Round answers to the nearest dollar. a. $120,000 received 10 years hence if the annual interest rate is: 1. 10% compounded annually. 2. 10% compounded semiannually. b. $2,000 received at the end of each year for the next eight years discounted at 8% compounded annually. $ c. $800 received at the end of each six months for the next 15 years if the interest rate is 10% per year compounded semiannually. $ d. $250,000 received 10 years hence discounted at 10% per year compounded annually. $
PV calculation in excel a. The present value calculated if compounded annually is $46,265 and if compounded semi annually is $45,227. b. Present value of annuities amount is $11,493. c. Present value of annuity amount is $12,298 d. Present value of amount receive is $96,386.
Which of the following does not affect the current liabilities section of the balance sheet?
Sale of goods on credit
Which of the following estimates are not always required when calculating depreciation expense? Select all that apply.
Salvage value
Assume that in January 2017, Vivendi announced a €1.2 billion bond issuance. The bonds have a coupon rate of 6.75% payable semiannually. Assume the bonds have been assigned credit ratings of BBB (stable outlook) by Standard and Poor's, Baa2 (stable outlook) by Moody's, and BBB (stable outlook) by Fitch. Which of the following is not true?
The coupon rate on these bonds would have been higher if Standard and Poor's, Moody's, and Fitch had assigned lower credit ratings.
Abbott Laboratories' has a defined benefit retirement plan. The company's 2016 annual report includes the following excerpt about these plans (in millions): Projected benefit obligations, January 1, 2016 $6,256 Service cost — benefits earned during the year 210 Interest cost on projected benefit obligations 230 Actuarial losses (gains) 516 Benefits paid (194) Other, including foreign currency translation (206) Projected benefit obligations, December 31, 2016 $6,812 Plans' assets at fair value, January 1, 2016 $5,418 Actual return on plan assets 505 Company contributions 466 Benefits paid (194) Other, including foreign currency translation (161) Plan assets at fair value, December 31, 2016 $6,034 What is the funded status of this plan?
The plan is underfunded by $778 million The plan is underfunded by $975 million: (Liabilities $6,812 - Assets $6,034 = $778 )
Credit analysis concerns which of the following?
The probability a company will make timely payments
In general, how do credit analysts determine the risk-free rate?
The yield on U.S. Government borrowings
Accrued liabilities are obligations for which there is no external transaction.
True
Contingent liabilities that are 'probable' and can be reasonably estimated are recorded on the balance sheet as a liability and as an expense in the income statement.
True
Credit ratings are an opinion of a company's relative default risk.
True
Employee severance costs, as part of board-approved restructuring plans, are reported in the income statement even if the actual payment for these costs occurs in subsequent periods.
True
In general, in a period of falling prices, LIFO produces higher gross profits than FIFO.
True
Market prices of bonds fluctuate despite the company's obligation (in the form of principal and interest payments) remains fixed.
True
Next year, Chemical Corporation plans to build a laboratory dedicated to a special project. The company will not use the laboratory after the project is finished. Under GAAP, this laboratory should be expensed.
True
R&D expense is treated as an operating expense, not a capital expenditure, unless the R&D assets acquired have an alternative future use.
True
The defined contribution plan and the defined benefit plan are the two general types of pension plans offered by companies.
True
The gain (or loss) on the repurchase of a bond carries no economic effects, as the gain (or loss) is exactly offset by the present value of the future cash flow implications of the repurchase.
True
The market rate of interest is equal to the risk-free rate plus a risk premium.
True
The percent used up ratio indirectly measures the likelihood of future capital expenditures that the company will have to make.
True
The three components of manufacturing costs are direct materials, direct labor, and manufacturing overhead.
True
Unearned revenue, an operating liability, arises when a company receives cash before any goods are delivered or services are rendered.
True
