Accounting 303 Name _______________________

Exam 2, Chapters 4 and 5

Spring 2011 Section _______ Row _______

I. Multiple Choice Questions. (2 points each, 28 points in total) Read each question
carefully and indicate your answer by circling the letter preceding the one best answer.

1. Changes in accounting estimates are reported

a. currently and prospectively.
b. retroactively and currently.
c. retroactively, currently, and prospectively.
d. by restating prior years.

2. Pablo purchased a lathe on January 1, 2009, at a cost of $45,000. At the time of purchase,
the lathe was expected to have a five-year economic life and a residual value of $3,000.
Pablo uses straight-line depreciation. At the beginning of 2011, Pablo estimated the lathe to
have a remaining life of four years with no residual value. For the year ended December 31,
2011, Pablo would report depreciation of:
a. $6,750.
b. $7,500.
c. $7,050.
d. $7,000.

Use the following information for questions 3 and 4.

On May 1, Foxtrot Co. agreed to sell the assets of its Footwear Division to Albanese Inc. for $80
million. The sale was completed on December 31, 2011.
The following additional facts pertain to the transaction:
The Footwear Division qualifies as a component of the entity according to GAAP
regarding discontinued operations.
The book value of Footwear's assets totaled $48 million on the date of the sale.
Footwear's operating income was a pre-tax loss of $10 million in 2011.
Foxtrot's income tax rate is 40%.

3. In the 2011 income statement for Foxtrot Co., it would report income from discontinued
operations of:
a. $9.2 million.
b. $13.2 million.
c. $22 million.
d. $26 million.

1
4. Suppose that the Footwear Division's assets had not been sold by December 31, 2011, but
were considered held for sale. Assume that the fair value of these assets at December 31 was
$40 million. In the 2011 income statement for Foxtrot Co., it would report a loss from
discontinued operations of:
a. $3 million loss
b. $10 million loss
c. $10.8 million loss
d. $18 million loss

5. Intraperiod income tax presentation is primarily a matter of:

a. Valuation.
b. Going concern.
c. Periodicity.
d. Allocation.

6. Popson Inc. incurred a material restructuring loss. This loss should be reported as:
a. An extraordinary loss.
b. A separate line item between income from continuing operations and income from
discontinued operations.
c. A separate line item within income from continuing operations.
d. A separate line item in the retained earnings statement.

7. The occurrence that most likely would have no effect on 2007 net income is the
a. correction of an error in the financial statements of a prior period discovered subsequent
to their issuance.
b. sale in 2007 of an office building purchased in 1961.
c. collection in 2007 of a dividend from an investment.
d. stock purchased in 1993 deemed worthless in 2007.

8. When a company intentionally sells products to another company with the intention of
misstating their financial statements and later buys back the same products, they are
committing which type of fraud?
a. buy and hold
b. channel stuffing
c. grossing up revenue
d. round trip

2
9. Sullivan Software sells packages of a software program and one year's worth of technical
support for $500. Their packaging lists the $500 sales price as comprised of a software
program at a price of $450 and technical support with a price of $100, with a $50 discount
for the package deal. All of Sullivan's sales are for cash, and there are no returns. Sullivan
sells the software program separately for $475, and offers a year of technical support
separately for $75. Sullivan should recognize revenue for the two parts of the arrangement
as follows:
a. Recognize the entire $500 when the customer pays cash to buy the package.
b. Recognize the portion of the $500 attributable to the software program when the
customer pays cash to buy the package, defer the portion attributable to technical
support and recognize over the support period.
c. Defer the entire $500 and recognize over the support period.
d. None of the above is correct.

Use the following information for questions 10 and 11.

Lake Power Sports sells jet skis and other powered recreational equipment. Customers pay
1/3 of the sales price of a jet ski when they initially purchase it, and then pay another 1/3
each year for the next two years. Lake uses the cost recovery method to recognize revenue
on these installment sales. In 2010 Lake began operations and sold jet skis with a total price
of $900,000 that cost Lake $450,000. Lake collected $300,000 in 2010, $300,000 in 2011,
and $300,000 in 2012 associated with those sales. In 2011 Lake sold jet skis with a total
price of $1,500,000 that cost Lake $900,000. Lake collected $500,000 in 2011, $400,000 in
2012, and $400,000 in 2013 associated with those sales. In 2013 Lake also repossessed
$200,000 of jet skis that were sold in 2011. Those jet skis had a fair value of $75,000 at the
time they were repossessed .

10. In 2010, Lake would recognize realized gross profit of:

a. $0.
b. $150,000.
c. $300,000.
d. $450,000.

11. In 2012, Lake would recognize realized gross profit of:

a. $0.
b. $700,000.
c. $310,000.
d. $300,000.

12. Which of the following was not a criterion for revenue recognition in SAB 101?
a. Cash has been collected.
b. Collectability is reasonably assured.
c. Persuasive evidence of an arrangement exists.
d. The seller's price to the buyer is fixed or determinable.

3
13. Which of the following is not correct concerning revenue recognition?
a. Revenue from selling products is recognized at the date of sale, usually interpreted to
mean the date of delivery to customers.
b. Revenue from permitting others to use enterprise assets is recognized as time passes or
as the assets are used.
c. Revenue from services rendered is recognized when cash is received or when services
have been performed.
d. Revenue from disposing of assets other than products is recognized at the date of sale.

14. Dot Point, Inc. is a retailer of washers and dryers and offers a three-year service contract on
each appliance sold. Although Dot Point sells the appliances on an installment basis, all
service contracts are cash sales at the time of purchase by the buyer. Collections received for
service contracts should be recorded as
a. service revenue.
b. deferred service revenue.
c. a reduction in installment accounts receivable.
d. a direct addition to retained earnings.

4
II. Problems – (72 points in total) Show all work where appropriate!

1. (9 points) Presented below are changes in all the account balances of Jackson Furniture Co.
during the current year, except for retained earnings.
Required: Compute the net income for the current year assuming that there were no
entries to Retained Earnings except for net income and a dividend paid of
$24,000.
Accounts Increase Accounts Increase
(Decrease) (Decrease)
Cash $ 69,000 Accts Payable $<51,000>
Accts Rec (net) 45,000 Bonds Payable 82,000
Inventory 127,000 Capital Stock 138,000
Investments <47,000>

2. (8 points) Cahill & Sons earned before-tax income of $450,000 for its 2011 fiscal year.
During the year the company experienced a $310,000 loss resulting from the expropriation
of assets in a foreign country. The amount of the loss is material and the event is considered
to be unusual and infrequent. The loss is not included in the $450,000 income figure. The
company's income tax rate is 30%.
Required: Prepare a partial 2011 income statement for Cahill starting with income before
tax and any separately reported items. Omit the statement title and EPS.

5
3. (16 points) Prepare a multi-step income statement for the year 2011 assuming the company
had 40,500 shares of common stock outstanding for the entire year and no shares of
preferred stock outstanding. The company is subject to a 25% tax rate. Omit the statement
title.
Accounts Amount Accounts Amount
Administrative Expenses $ 8,860 Sales Revenue $ 96,570
Cost of Goods Sold 63,160 Selling Expenses 16,150
Rent Expense 17,200 Depreciation Expense 10,300
Interest Expense 1,860

6
4. (14 points) Chicago Construction Company was the low bidder on a construction project to
build an earthen dam for $1,800,000. The project was begun in 2010 and completed in 2011.
Cost and other data are presented below:
2010 2011
Costs incurred during the year $ 450,000 $ 1,100,000
Estimated costs to complete 1,050,000 0
Billings during the year 400,000 1,400,000
Cash collections during the year 300,000 1,500,000

Required: Prepare all the necessary journal entries for this project for 2010 assuming
percentage of completion of accounting is used.

7
5. (15 points) On July 1, 2010, Tourville Construction Co. began construction on a new city
hall building for the City of Calais and used the percentage of completion accounting
method. The contract price was $19,000,000. The following costs and estimates are
provided.

2010 2011 2012

Contract Costs Incurred to Date $ 3,000,000 $ 12,000,000 $ 21,000,000
Estimated Costs to Complete 12,000,000 8,000,000 -
Billings to Calais 3,000,000 11,000,000 5,000,000
Cash Collections 1,750,000 12,100,000 4,800,000

a. What is the amount of revenue recognized in 2010? __________

b. What is the amount of revenue recognized in 2011? __________

c. What is the amount of gross profit recognized in 2011? __________

d. What is the amount of gross profit recognized in 2012? __________

e. As a result of this project, what is reported on the December 31, 2010, balance sheet?

8
6. (10 points) Assume Z-Mart appropriately uses the installment sales method of accounting
for its installment sales. During 2011, Z-Mart made installments sales of $300,000 and
received payments of $135,000 on those sales. Z-Mart's gross profit on sales is 30%.
Required: Prepare the necessary journal entries for 2011.

9
 Solutions

Multiple Choice

Question
Answer
Number
1 a
2 c
3 b
4 c
5 d
6 c
7 a
8 d
9 b
10 a
11 d
12 a
13 c
14 b

Problem 1
Change in Assets = Change in (Liabilities + Common Stock) + Change in Retained Earnings
194000 = 169000 + RE
RE = 25000
NI = RE + Dividends Paid
NI = 25000 + 24000
NI = 49,000

Problem 2

Income Statement
Continuing Operations Before Tax 450,000
Income Tax Expense 135,000
Income Before Extraordinary Items 315,000
Extraordinary Loss (net of 93,000 tax benefit) <217,000>
Net Income 98,600

10
Problem 3

Sales Revenue 96570

Cost of Goods Sold 63160
Gross Profit 33410
Operating Expenses
Admin 8860
Selling 16150
Rent 17200
Depr 10300
Operating Loss <19100>
Other Revenue (Expense)
Interest Expense <1860>
Loss from Continuing <20960>
Operations
Income Tax Benefit 5240 EPS
Net Loss <15720> <.39>

Problem 4

(a) Construction in Progress .............................................................. 450,000

Cash or A/P ..................................................................... 450,000

(b) Accounts Receivable ................................................................... 400,000

Billings on Construction in Process ................................. 400,000

(c) Cash ........................................................................................ 300,000

Accounts Receivable ........................................................ 300,000

(d) Construction Expenses ................................................................ 450,000

Construction in Progress .............................................................. 90,000
Revenue from Long-Term Contracts ................................ 540,000

$450,000
————— = 30% × $1,800,000 = $540,000 30% × $300,000 = $90,000
$1,800,000

11
Problem 5
a. 3,800,000
3/15 = 20% 19 x 20% = 3.8

b. 7,600,000
12/20 = 60% 19 x 60% = 11.4 11.4 – 3.8 = 7.6

c. <1,800,000>
Overall loss on project – recognize full loss
Full loss <1,000,000>
2010 GP 800,000
<1,800,000>

d. <1,000,000>
Project GP <2,000,000>
LessPreviously recognized Loss <1,000,000>
<1,000,000>

e. Current Assets
A/R (3 – 1.75) 1,250,000
Costs in Excess of Billings (3 + .8 – 3) 800,000

Problem 6

A/R 300000
Inventory 210000
Deferred GP 90000

Cash 135000
A/R 135000

Deferred GP 40500
Realized GP 40500

12