10/25/06 Anderson ECON 136A FALL 2006 MIDTERM #1 v. 1 Name _________________________ Answer questions 1-25 on green scantron and #26-30 in your blue-book. WRITE YOUR EXAM VERSION # ON YOUR SCANTRON!!!! AND MAKE SURE THAT THE COLOR OF THE EXAM OF THE PERSON SITTING NEXT TO YOU IS NOT THE SAME AS YOURS!!! 1. Items which do not appear on the income statement above the tax provision should be presented on a "net of tax" basis. a. true b. false 2. The following is an example of a limitation of a balance sheet prepared under generally accepted accounting principles: a. It relies in part upon estimates made by management and which consequently introduces subjectivity to the presentation; b. It presents assets on an historical-cost basis, which may be very different from their fair value; c. A balance sheet is transaction-based, and consequently, important assets, such as the value of human resources, are not reflected as assets; d. All of the above. 3. Which of the following items is presented on a "net of tax" basis in the income statement? a. cumulative effect of a change in accounting principle b. extraordinary items c. discontinued operations d. both extraordinary items and discontinued operations 4. In order for an item to be counted as an asset on the balance sheet, it must be: a. Probable b. A result of a past transaction c. Have a future econcomic benefit d. All of these items must be present. 5. The definition of an asset requires there to be a transaction. Which of the following items have probably future economic value but would not appear as assets on a GAAP balance sheet: a. human resources b. internally generated goodwill c. internally generated branding d. all of these would be excluded from assets.

FALL 2006 MIDTERM #1 v. 1--Page 2 6. Which statement below best represents the criteria to classify as a current item in a classified balance sheet: a. The item will convert within one year; b. The item will convert within one year or the operating cycle, whichever is shorter; c. The item will convert within one year or the operating cycle, whichever is longer; d. None of these. 7. It was stated in lecture that the big question with respect to GAAP accounting is "when?", which drives the accrual basis of accounting. Consequently, the following is the most prevalent cause for restatements: a. depreciation b. revenue recognition c. accounts payable d. percentage completion accounting 8. A change in accounting principle relating to depreciation occurs which is required to be treated as a cumulative effect of a change in accounting principle. The cumulative impact to prior periods is an increase to accumulated depreciation of $200,000 while the new method produces $75,000 less depreciation expense in the current year. The Company has an effective tax rate of 30%. Which of the following best describes how this should be reported in the current year? a. The income statement should include a caption, after the results of continuing operations and the income tax provision, which displays: Cumulative effect of a change in accounting principle, net of $60,000 tax effect $140,000 b. The statement of stockholders' equity should include a reconciliation of the previously reported retained earnings, which includes: Cumulative effect of a change in accounting principle, net of $60,000 tax effect $140,000 c. The income statement should not include this as a separate caption because it is not an extraordinary item. d. The income statement should not reflect this, and it should be presented exclusively in the Company's statement of reportable transactions in the section titled: other comprehensive assets

FALL 2006 MIDTERM #1 v. 1--Page 3 9. The income statement presents: a. the financial position as of a specific date, requiring the application of judgment (estimates) and is transaction based. b. is a pain in the neck to present because of various classification issues. c. the sources and uses of cash over a specified period of time, requiring the application of judgment (estimates) and is not transaction based. d. activities for a stated period of time, requiring the application of judgment (estimates), and is transaction based. 10. Which of the following is reflected at fair value on the balance sheet: a. Available for sale securities b. Trading securities c. Held to maturity securities d. Both available for sale securities and trading securities 11. Which of the following transactions would require the use of the present value of an annuity due concept in order to calculate the present value of the asset obtained or liability owed at the date of incurrence? a. A capital lease is entered into with the initial lease payment due upon the signing of the lease agreement. b. A capital lease is entered into with the initial lease payment due one month subsequent to the signing of the lease agreement. c. A ten-year, 8% bond is issued on January 2 with interest payable semiannually on July 1 and January 1 yielding 7%. d. A ten-year, 8% bond is issued on January 2 with interest payable semiannually on July 1 and January 1 yielding 9%. 12. On January 1, 2003, management purchased a fixed asset for $275,000 and estimated that it would have a useful life of 10 years with no salvage value and straight line depreciation. During 2005, management revises their estimate, now believing that the asset will only be used until the end of 2006, at which time it will be disposed of for an estimated $80,000. The proper amount of restatement to the 2004 financial statements, and 2005 depreciation expense are: a. $50,000 restatement, and $50,000 2005 depreciation expense. b. $22,500 restatement, and $70,000 2005 depreciation expense. c. $0 restatement, and $70,000 2005 depreciation expense. d. $80,000 restatement, and $50,000 depreciation expense. 13. Another term for the balance sheet is: a. Statement of sources and uses of cash b. Statement of activity for the period c. Statement of financial position d. I have no idea

FALL 2006 MIDTERM #1 v. 1--Page 4 14. Real estate is sold for $1 million, payable as follows: $850,000 paid in cash on the day of sale and $150,000 due in five years, bearing interest at 0%. Would the seller compute their gain on the sale of that real estate using a sales price: a. equal to $1 million b. less than $1 million c. more than $1 million d. none of the above 15. The statement "risk is commensurate with reward" means that the higher the perceived risk, the: a. Higher the interest rate b. Lower the interest rate c. No impact on the interest rate d. More likely an investor is to abstain from investment. 16. A Company has sold a portion of their business during the year. This should be presented in the income statement: a. As a discontinued operation in two components, (1) the results of operating the operation until it was sold and (2) any gain or loss from the sale of the operation. Both should be presented net of tax. b. As a discontinued operation, in one line-tem on the income statement, and presented net of tax. c. The operations during the portion of the year should be included in the operating section of the income statement and any gain or loss from the sale of the discontinued operation should be presented as "discontinued operations" on a net of tax basis. d. Should not impact the income statement, and be reported solely in the statement of cash flows. 17. Which of the following types of entities is most likely able to support use of an un-classified balance sheet: a. A manufacturing company; b. A retail company; c. A real estate company; d. None of the above. 18. Real estate is sold for $2 million, payable as follows: $1,500,000 paid in cash on the day of sale and $500,000 due in five years, bearing interest at 0%. In year two, the seller would record: a. a debit to interest expense b. a credit to interest income c. a credit to interest expense d. nothing, the entries would be completed when the real estate was sold.

FALL 2006 MIDTERM #1 v. 1--Page 5 19. Depreciation of fixed assets is an example of the application of this GAAP accounting convention: a. matching b. conservatism c. consistency d. hypothecation 20. The figure .94232 is taken from the column marked 2% and the row marked three periods in a certain interest table. From what interest table is this figure taken? a. Future value of 1 b. Future value of annuity of 1 c. Present value of 1 d. Present value of annuity of 1 21. Over the entire life of a transaction, what is the net difference between accrual and cash basis accounting: a. accrual accounting will reflect higher profit. b. cash basis accounting will reflect higher profit. c. there is no difference. d. accrual accounting will reflect more assets. 22. Payment of rent on the first of the month is a _____ to the renter and _____ to the landlord, respectively: a. accrued expense, and prepaid expense, respectively. b. prepaid expense, and unearned revenue, respectively. c. prepaid expense, and accrued expense, respectively. d. unearned revenue, and prepaid expense, respectively. 23. If an annuity due and an ordinary annuity have the same number of equal payments and the same interest rates, then a. the present value of the annuity due is less than the present value of the ordinary annuity. b. the present value of the annuity due is greater than the present value of the ordinary annuity. c. the future value of the annuity due is equal to the future value of the ordinary annuity. d. the future value of the annuity due is less than the future value of the ordinary annuity.

FALL 2006 MIDTERM #1 v. 1--Page 6 24. Management discovers that a large account receivable is no longer probable of collection and needs to increase the allowance for doubtful accounts as a result. There was no indication that collection of this balance would be a problem as of the end of the prior year. a. The above facts represent a change in accounting estimate and should be presented on a current and forward basis, net of tax, on the income statement. b. The above facts represent a change in accounting estimate and should be presented as an adjustment to retained earnings, on a net of tax basis. c. The above facts represent a change in accounting estimate and should be presented on a current and forward basis. d. None of the above. 25. Which of the following is likely to result in an unearned revenue: a. Payment of insurance premiums for the year at the beginning of the year. b. Receipt of cash on outstanding accounts receivable. c. Payment of cash on outstanding accounts payable. d. Receipt of customer deposits before providing the product or service. 26. Grant Company (Grant) pays payroll every other Friday. During December 2005, the last payroll payment was made on December 23, 2005. There were five working days between the last payroll and December 31, 2005. Employee payroll is $5,000 per day. The next payroll was for $45,000 and was paid on January 6, 2006. I. Record any adjusting journal entries required as of December 31, 2005. II. Record the January 6, 2006 payroll journal entry. III. Of the four broad categories of adjusting journal entries, state which type your entry in I. above is. 27. Briefly describe the pros and cons of utilizing the historical cost basis of accounting over fair value.

FALL 2006 MIDTERM #1 v. 1--Page 7 28. Seller, Inc. decides to sell land to Buyer, Inc. on January 1, 2006. The land is on the Seller's balance sheet for $2 million. Buyer will pay seller $2,500,000 in cash on the day of the sale (January 1, 2004) and $1,000,000 at the end of three years. No other payments will be made and the appropriate interest rate for the amount that Buyer owes to the seller is 8%,compounding annually. The present value factor for a lump sum of $1 at 8% and 3 periods is .79383; The future value factor for a lump sum of $1 at 8% and 3 periods is 1.25971; The present value factor for an ordinary annuity at 8% and 3 periods is 2.57710; (A) Compute the purchase price; (B) Prepare the journal entry which Seller would record on the date of the sale (January 1, 2006); (C) Prepare the journal entry which the seller would record on December 31, 2006.

29.

Purchased 1/1/1999 2,025,000 Estimated salvage value 25,000 Estimated useful life 15

Old Method New MethodSum Yrs Digits St. Line

1999 363,636 133,333 2000 327,273 133,333 2001 290,909 133,333 2002 254,545 133,333 2003 218,182 133,333 2004 181,818 133,333

1,636,364 800,000

INSTRUCTIONS:(I)

(II)

XYZ, Inc. changed their depreciation method during the year ending on December 31, 2005 from sum of the years digits to straight line depreciation. The following schedule indicates the depreciation under each method for all periods impacted by the change. XYZ's tax rate is 25%.

Compute the cumulative effect of the change in accounting principle, excluding any tax effects.

Assuming that XYZ presents only one year in their financial statements, and that they have not yet recorded any depreciation in 2005, state the journal entry required to properly reflect this change and the current depreciation in 2005 (refer to any tax account simply as "tax effect").

30.

Common Stock 1,000,000 APIC 9,000,000 Retained earnings 2,750,000 Accumulated comprehensive income, net of $35,000 deferred tax 65,000 Total Stockholders' equity 12,815,000

Net income 750,000 Dividends declared and paid 525,000 Other comprehensive loss (Gross) 10,000

Discovery of an error which overstated prior retained earnings (before taxes) by 225,000 Effective income tax rate 35%

The following is from the balance sheet of TRULYSCRUMPTIOUS, Inc. as of December 31, 2004:

DURING THE YEAR ENDED DECEMBER 31, 2005, THE FOLLOWING ACTIVITY TOOK PLACE:

BASED ON THE ABOVE INFORMATION, PREPARE THE STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER 31, 2005

FALL 2006 MIDTERM #1 v. 1--Page 8 10/25/06 ANSWER KEY Anderson ECON 136A +-------+------+--------+------+--------+--------+--------+--------+------+ | Text | Bank | Exam | | | Ques | Diff | Lrng | | |Chapter| Ref |Question|Answer| Type | Cat | Lvl | Obj | Page | +-------+------+--------+------+--------+--------+--------+--------+------+ | 4 47 1 a MChoice | | 5 50 2 d MChoice | | 4 57 3 d MChoice | | 3 69 4 d MChoice | | 3 72 5 d MChoice | | 5 53 6 c MChoice | | 3 71 7 b MChoice | | 4 49 8 b MChoice | | 4 45 9 d MChoice | | 5 49 10 d MChoice | | 6 13 11 a MChoice C 1 | | 4 58 12 c MChoice | | 3 63 13 c MChoice | | 6 51 14 b MChoice | | 6 52 15 a MChoice | | 4 48 16 a MChoice | | 5 54 17 c MChoice | | 6 53 18 b MChoice | | 3 74 19 a MChoice | | 6 10 20 c MChoice C 3 | | 3 73 21 c MChoice | | 3 76 22 b MChoice | | 6 17 23 b MChoice C 7 | | 4 54 24 c MChoice | | 3 75 25 d MChoice | | 3 74 26 Exercise | | 3 73 27 Exercise | | 6 65 28 Problem | +-------------------------------------------------------------------------+ * Test Questions are Scrambled

FALL 2006 MIDTERM #1 v. 1--Page 9 10/25/06 26. I. Payroll/ Wage expense $25,000 Accrued Payroll $25,000 II. Payroll/ Wage expense $20,000 Accrued payroll $25,000 Cash $45,000 III. Accrued expense. 27. PROS: Consistency, comparability and lack of subjectivity CONS: Information is less valuable and fair value may be greatly different than depreciated historical cost. 28. A) PV of down payment 2,500,000 PV of $1m balance due 793,830 * PURCHASE PRICE 3,293,830 * pv OF 1 AT 8% INN 3 PERIODS=.79383 APPLIED TO $1M=793,830 B) Cash 2,500,000 Note receivable 793,830 * Land 2,000,000 Gain on sale 1,293,830 * acceptable to show as a n/r for $1 million and a discount for $206,170- same thing either way. C) At the end of the year, the note would have accrued interest on a balance of $793,830 at 8% for a full year. Accordingly, $63,506 of arrued interest should be recorded: Interest receivable 63,506 Interest income 63,506

SOLUTION:29.

Purchased 1/1/1999 2,025,000 Estimated salvage value 25,000 Estimated useful life 15

Old Method New MethodSum Yrs Digits St. Line

1999 363,636 133,333 2000 327,273 133,333 2001 290,909 133,333 2002 254,545 133,333 2003 218,182 133,333 2004 181,818 133,333

1,636,364 800,000

INSTRUCTIONS:(I)

Old Method 1,636,364 New method 800,000 CUM. EFFECT (836,364)

(II)

Accumulated depreciation 836,364 Beginning Retained earnings 627,273 Tax effect 209,091

Depreciation expense 133,333 Accumulated depreciation 133,333

XYZ, Inc. changed their depreciation method during the year ending on December 31, 2005 from sum of the years digits to straight line depreciation. The following schedule indicates the depreciation under each method for all periods impacted by the change. XYZ's tax rate is 25%.

Compute the cumulative effect of the change in accounting principle, excluding any tax effects.

Assuming that XYZ presents only one year in their financial statements, and that they have not yet recorded any depreciation in 2005, state the journal entry required to properly reflect this change and the current depreciation in 2005 (refer to any tax account simply as "tax effect").

(OVERSTATED DEPRECIATION/ UNDERSTATED NET INCOME)

solution to #30

Comprehensive Common RETAINED ACCUM. COMP.Income Stock APIC EARNINGS INCOME TOTAL

Balance as of December 31, 2004, as previously reported 1,000,000 9,000,000 2,750,000 65,000 12,815,000 Restatement, net of $78,750 deferred tax (146,250) (146,250) Balance as of December 31, 2004, as restated 1,000,000 9,000,000 2,603,750 65,000 12,668,750 Net income 750,000 750,000 750,000 Other comprehensive loss, net of $3,500 deferred tax (6,500) (6,500) (6,500) Comprehensive income 743,500 - - Dividends (525,000) (525,000)

1,000,000 9,000,000 2,828,750 58,500 12,887,250

TRULYSCRUMPTIOUS, INC.STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME

YEAR ENDED DECEMBER 31, 2005

10/25/06 Anderson ECON 136A FALL 2006 MIDTERM #1 v. 2 Name _________________________ Answer questions 1-25 on green scantron and #26-30 in your blue-book. WRITE YOUR EXAM VERSION # ON YOUR SCANTRON!!!! AND MAKE SURE THAT THE COLOR OF THE EXAM OF THE PERSON SITTING NEXT TO YOU IS NOT THE SAME AS YOURS!!! 1. Which statement below best represents the criteria to classify as a current item in a classified balance sheet: a. The item will convert within one year; b. The item will convert within one year or the operating cycle, whichever is shorter; c. The item will convert within one year or the operating cycle, whichever is longer; d. None of these. 2. Payment of rent on the first of the month is a _____ to the renter and _____ to the landlord, respectively: a. accrued expense, and prepaid expense, respectively. b. prepaid expense, and unearned revenue, respectively. c. prepaid expense, and accrued expense, respectively. d. unearned revenue, and prepaid expense, respectively. 3. It was stated in lecture that the big question with respect to GAAP accounting is "when?", which drives the accrual basis of accounting. Consequently, the following is the most prevalent cause for restatements: a. depreciation b. revenue recognition c. accounts payable d. percentage completion accounting 4. Depreciation of fixed assets is an example of the application of this GAAP accounting convention: a. matching b. conservatism c. consistency d. hypothecation 5. Which of the following is likely to result in an unearned revenue: a. Payment of insurance premiums for the year at the beginning of the year. b. Receipt of cash on outstanding accounts receivable. c. Payment of cash on outstanding accounts payable. d. Receipt of customer deposits before providing the product or service.

FALL 2006 MIDTERM #1 v. 2--Page 2 6. A change in accounting principle relating to depreciation occurs which is required to be treated as a cumulative effect of a change in accounting principle. The cumulative impact to prior periods is an increase to accumulated depreciation of $200,000 while the new method produces $75,000 less depreciation expense in the current year. The Company has an effective tax rate of 30%. Which of the following best describes how this should be reported in the current year? a. The income statement should include a caption, after the results of continuing operations and the income tax provision, which displays: Cumulative effect of a change in accounting principle, net of $60,000 tax effect $140,000 b. The statement of stockholders' equity should include a reconciliation of the previously reported retained earnings, which includes: Cumulative effect of a change in accounting principle, net of $60,000 tax effect $140,000 c. The income statement should not include this as a separate caption because it is not an extraordinary item. d. The income statement should not reflect this, and it should be presented exclusively in the Company's statement of reportable transactions in the section titled: other comprehensive assets 7. Over the entire life of a transaction, what is the net difference between accrual and cash basis accounting: a. accrual accounting will reflect higher profit. b. cash basis accounting will reflect higher profit. c. there is no difference. d. accrual accounting will reflect more assets.

FALL 2006 MIDTERM #1 v. 2--Page 3 8. A Company has sold a portion of their business during the year. This should be presented in the income statement: a. As a discontinued operation in two components, (1) the results of operating the operation until it was sold and (2) any gain or loss from the sale of the operation. Both should be presented net of tax. b. As a discontinued operation, in one line-tem on the income statement, and presented net of tax. c. The operations during the portion of the year should be included in the operating section of the income statement and any gain or loss from the sale of the discontinued operation should be presented as "discontinued operations" on a net of tax basis. d. Should not impact the income statement, and be reported solely in the statement of cash flows. 9. Which of the following is reflected at fair value on the balance sheet: a. Available for sale securities b. Trading securities c. Held to maturity securities d. Both available for sale securities and trading securities 10. Items which do not appear on the income statement above the tax provision should be presented on a "net of tax" basis. a. true b. false 11. Which of the following types of entities is most likely able to support use of an un-classified balance sheet: a. A manufacturing company; b. A retail company; c. A real estate company; d. None of the above. 12. The income statement presents: a. the financial position as of a specific date, requiring the application of judgment (estimates) and is transaction based. b. is a pain in the neck to present because of various classification issues. c. the sources and uses of cash over a specified period of time, requiring the application of judgment (estimates) and is not transaction based. d. activities for a stated period of time, requiring the application of judgment (estimates), and is transaction based.

FALL 2006 MIDTERM #1 v. 2--Page 4 13. On January 1, 2003, management purchased a fixed asset for $275,000 and estimated that it would have a useful life of 10 years with no salvage value and straight line depreciation. During 2005, management revises their estimate, now believing that the asset will only be used until the end of 2006, at which time it will be disposed of for an estimated $80,000. The proper amount of restatement to the 2004 financial statements, and 2005 depreciation expense are: a. $50,000 restatement, and $50,000 2005 depreciation expense. b. $22,500 restatement, and $70,000 2005 depreciation expense. c. $0 restatement, and $70,000 2005 depreciation expense. d. $80,000 restatement, and $50,000 depreciation expense. 14. The statement "risk is commensurate with reward" means that the higher the perceived risk, the: a. Higher the interest rate b. Lower the interest rate c. No impact on the interest rate d. More likely an investor is to abstain from investment. 15. The figure .94232 is taken from the column marked 2% and the row marked three periods in a certain interest table. From what interest table is this figure taken? a. Future value of 1 b. Future value of annuity of 1 c. Present value of 1 d. Present value of annuity of 1 16. Which of the following items is presented on a "net of tax" basis in the income statement? a. cumulative effect of a change in accounting principle b. extraordinary items c. discontinued operations d. both extraordinary items and discontinued operations 17. If an annuity due and an ordinary annuity have the same number of equal payments and the same interest rates, then a. the present value of the annuity due is less than the present value of the ordinary annuity. b. the present value of the annuity due is greater than the present value of the ordinary annuity. c. the future value of the annuity due is equal to the future value of the ordinary annuity. d. the future value of the annuity due is less than the future value of the ordinary annuity.

FALL 2006 MIDTERM #1 v. 2--Page 5 18. Which of the following transactions would require the use of the present value of an annuity due concept in order to calculate the present value of the asset obtained or liability owed at the date of incurrence? a. A capital lease is entered into with the initial lease payment due upon the signing of the lease agreement. b. A capital lease is entered into with the initial lease payment due one month subsequent to the signing of the lease agreement. c. A ten-year, 8% bond is issued on January 2 with interest payable semiannually on July 1 and January 1 yielding 7%. d. A ten-year, 8% bond is issued on January 2 with interest payable semiannually on July 1 and January 1 yielding 9%. 19. Real estate is sold for $1 million, payable as follows: $850,000 paid in cash on the day of sale and $150,000 due in five years, bearing interest at 0%. Would the seller compute their gain on the sale of that real estate using a sales price: a. equal to $1 million b. less than $1 million c. more than $1 million d. none of the above 20. In order for an item to be counted as an asset on the balance sheet, it must be: a. Probable b. A result of a past transaction c. Have a future econcomic benefit d. All of these items must be present. 21. The following is an example of a limitation of a balance sheet prepared under generally accepted accounting principles: a. It relies in part upon estimates made by management and which consequently introduces subjectivity to the presentation; b. It presents assets on an historical-cost basis, which may be very different from their fair value; c. A balance sheet is transaction-based, and consequently, important assets, such as the value of human resources, are not reflected as assets; d. All of the above. 22. Another term for the balance sheet is: a. Statement of sources and uses of cash b. Statement of activity for the period c. Statement of financial position d. I have no idea

FALL 2006 MIDTERM #1 v. 2--Page 6 23. Management discovers that a large account receivable is no longer probable of collection and needs to increase the allowance for doubtful accounts as a result. There was no indication that collection of this balance would be a problem as of the end of the prior year. a. The above facts represent a change in accounting estimate and should be presented on a current and forward basis, net of tax, on the income statement. b. The above facts represent a change in accounting estimate and should be presented as an adjustment to retained earnings, on a net of tax basis. c. The above facts represent a change in accounting estimate and should be presented on a current and forward basis. d. None of the above. 24. The definition of an asset requires there to be a transaction. Which of the following items have probably future economic value but would not appear as assets on a GAAP balance sheet: a. human resources b. internally generated goodwill c. internally generated branding d. all of these would be excluded from assets. 25. Real estate is sold for $2 million, payable as follows: $1,500,000 paid in cash on the day of sale and $500,000 due in five years, bearing interest at 0%. In year two, the seller would record: a. a debit to interest expense b. a credit to interest income c. a credit to interest expense d. nothing, the entries would be completed when the real estate was sold. 26. Grant Company (Grant) pays payroll every other Friday. During December 2005, the last payroll payment was made on December 23, 2005. There were five working days between the last payroll and December 31, 2005. Employee payroll is $5,000 per day. The next payroll was for $45,000 and was paid on January 6, 2006. I. Record any adjusting journal entries required as of December 31, 2005. II. Record the January 6, 2006 payroll journal entry. III. Of the four broad categories of adjusting journal entries, state which type your entry in I. above is. 27. Briefly describe the pros and cons of utilizing the historical cost basis of accounting over fair value.

FALL 2006 MIDTERM #1 v. 2--Page 7 28. Seller, Inc. decides to sell land to Buyer, Inc. on January 1, 2006. The land is on the Seller's balance sheet for $2 million. Buyer will pay seller $2,500,000 in cash on the day of the sale (January 1, 2004) and $1,000,000 at the end of three years. No other payments will be made and the appropriate interest rate for the amount that Buyer owes to the seller is 8%,compounding annually. The present value factor for a lump sum of $1 at 8% and 3 periods is .79383; The future value factor for a lump sum of $1 at 8% and 3 periods is 1.25971; The present value factor for an ordinary annuity at 8% and 3 periods is 2.57710; (A) Compute the purchase price; (B) Prepare the journal entry which Seller would record on the date of the sale (January 1, 2006); (C) Prepare the journal entry which the seller would record on December 31, 2006.

29.

Purchased 1/1/1999 2,025,000 Estimated salvage value 25,000 Estimated useful life 15

Old Method New MethodSum Yrs Digits St. Line

1999 363,636 133,333 2000 327,273 133,333 2001 290,909 133,333 2002 254,545 133,333 2003 218,182 133,333 2004 181,818 133,333

1,636,364 800,000

INSTRUCTIONS:(I)

(II)

XYZ, Inc. changed their depreciation method during the year ending on December 31, 2005 from sum of the years digits to straight line depreciation. The following schedule indicates the depreciation under each method for all periods impacted by the change. XYZ's tax rate is 25%.

Compute the cumulative effect of the change in accounting principle, excluding any tax effects.

Assuming that XYZ presents only one year in their financial statements, and that they have not yet recorded any depreciation in 2005, state the journal entry required to properly reflect this change and the current depreciation in 2005 (refer to any tax account simply as "tax effect").

30.

Common Stock 1,000,000 APIC 9,000,000 Retained earnings 2,750,000 Accumulated comprehensive income, net of $35,000 deferred tax 65,000 Total Stockholders' equity 12,815,000

Net income 750,000 Dividends declared and paid 525,000 Other comprehensive loss (Gross) 10,000

Discovery of an error which overstated prior retained earnings (before taxes) by 225,000 Effective income tax rate 35%

The following is from the balance sheet of TRULYSCRUMPTIOUS, Inc. as of December 31, 2004:

DURING THE YEAR ENDED DECEMBER 31, 2005, THE FOLLOWING ACTIVITY TOOK PLACE:

BASED ON THE ABOVE INFORMATION, PREPARE THE STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER 31, 2005

FALL 2006 MIDTERM #1 v. 2--Page 8 10/25/06 ANSWER KEY Anderson ECON 136A +-------+------+--------+------+--------+--------+--------+--------+------+ | Text | Bank | Exam | | | Ques | Diff | Lrng | | |Chapter| Ref |Question|Answer| Type | Cat | Lvl | Obj | Page | +-------+------+--------+------+--------+--------+--------+--------+------+ | 5 53 1 c MChoice | | 3 76 2 b MChoice | | 3 71 3 b MChoice | | 3 74 4 a MChoice | | 3 75 5 d MChoice | | 4 49 6 b MChoice | | 3 73 7 c MChoice | | 4 48 8 a MChoice | | 5 49 9 d MChoice | | 4 47 10 a MChoice | | 5 54 11 c MChoice | | 4 45 12 d MChoice | | 4 58 13 c MChoice | | 6 52 14 a MChoice | | 6 10 15 c MChoice C 3 | | 4 57 16 d MChoice | | 6 17 17 b MChoice C 7 | | 6 13 18 a MChoice C 1 | | 6 51 19 b MChoice | | 3 69 20 d MChoice | | 5 50 21 d MChoice | | 3 63 22 c MChoice | | 4 54 23 c MChoice | | 3 72 24 d MChoice | | 6 53 25 b MChoice | | 3 74 26 Exercise | | 3 73 27 Exercise | | 6 65 28 Problem | +-------------------------------------------------------------------------+ * Test Questions are Scrambled

FALL 2006 MIDTERM #1 v. 2--Page 9 10/25/06 26. I. Payroll/ Wage expense $25,000 Accrued Payroll $25,000 II. Payroll/ Wage expense $20,000 Accrued payroll $25,000 Cash $45,000 III. Accrued expense. 27. PROS: Consistency, comparability and lack of subjectivity CONS: Information is less valuable and fair value may be greatly different than depreciated historical cost. 28. A) PV of down payment 2,500,000 PV of $1m balance due 793,830 * PURCHASE PRICE 3,293,830 * pv OF 1 AT 8% INN 3 PERIODS=.79383 APPLIED TO $1M=793,830 B) Cash 2,500,000 Note receivable 793,830 * Land 2,000,000 Gain on sale 1,293,830 * acceptable to show as a n/r for $1 million and a discount for $206,170- same thing either way. C) At the end of the year, the note would have accrued interest on a balance of $793,830 at 8% for a full year. Accordingly, $63,506 of arrued interest should be recorded: Interest receivable 63,506 Interest income 63,506

SOLUTION:29.

Purchased 1/1/1999 2,025,000 Estimated salvage value 25,000 Estimated useful life 15

Old Method New MethodSum Yrs Digits St. Line

1999 363,636 133,333 2000 327,273 133,333 2001 290,909 133,333 2002 254,545 133,333 2003 218,182 133,333 2004 181,818 133,333

1,636,364 800,000

INSTRUCTIONS:(I)

Old Method 1,636,364 New method 800,000 CUM. EFFECT (836,364)

(II)

Accumulated depreciation 836,364 Beginning Retained earnings 627,273 Tax effect 209,091

Depreciation expense 133,333 Accumulated depreciation 133,333

XYZ, Inc. changed their depreciation method during the year ending on December 31, 2005 from sum of the years digits to straight line depreciation. The following schedule indicates the depreciation under each method for all periods impacted by the change. XYZ's tax rate is 25%.

Compute the cumulative effect of the change in accounting principle, excluding any tax effects.

Assuming that XYZ presents only one year in their financial statements, and that they have not yet recorded any depreciation in 2005, state the journal entry required to properly reflect this change and the current depreciation in 2005 (refer to any tax account simply as "tax effect").

(OVERSTATED DEPRECIATION/ UNDERSTATED NET INCOME)

solution to #30

Comprehensive Common RETAINED ACCUM. COMP.Income Stock APIC EARNINGS INCOME TOTAL

Balance as of December 31, 2004, as previously reported 1,000,000 9,000,000 2,750,000 65,000 12,815,000 Restatement, net of $78,750 deferred tax (146,250) (146,250) Balance as of December 31, 2004, as restated 1,000,000 9,000,000 2,603,750 65,000 12,668,750 Net income 750,000 750,000 750,000 Other comprehensive loss, net of $3,500 deferred tax (6,500) (6,500) (6,500) Comprehensive income 743,500 - - Dividends (525,000) (525,000)

1,000,000 9,000,000 2,828,750 58,500 12,887,250

TRULYSCRUMPTIOUS, INC.STATEMENT OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME

YEAR ENDED DECEMBER 31, 2005