COMPREHENSIVE EXAMINATION F PART (Chapters 22-24) Problem F-I F-II F-III F-IV F-V Topic Multiple Choice Questions Statement of Cash Flows Accounting Changes, Error Corrections, and Prior Period Adjustments *Analysis of Financial Statements Segment Reporting *This topic is dealt with in an Appendix to the chapter Approximate Time 25 25 30 25 15 120 F-2 Test Bank for Intermediate Accounting, Fourteenth Edition Problem F-I — Multiple Choice Questions Which of the following transactions would be considered a financing activity in preparing a statement of cash flows? a Amortizing a discount on bonds payable b Recording net income from operations c Selling common stock d Purchasing inventory The net income for the year ended December 31, 2013, for Tax Consultants INC was $920,000 Additional information is as follows: Capital expenditures Depreciation on plant assets Cash dividends paid on common stock Increase in noncurrent deferred tax liability Amortization of patents $1,200,000 450,000 180,000 45,000 21,000 Based on the information given above, what should be the net cash provided by operating activities in the statement of cash flows for the year ended December 31, 2013? a $1,256,000 b $1,346,000 c $1,391,000 d $1,436,000 Information concerning the debt of Cole Company is as follows: Short-term borrowings: Balance at December 31, 2012 Proceeds from borrowings in 2013 Payments made in 2013 Balance at December 31, 2013 $525,000 325,000 (450,000) $400,000 Current portion of long-term debt: Balance at December 31, 2012 Transfers from caption "Long-Term Debt" Payments made in 2013 Balance at December 31, 2013 $1,625,000 500,000 (1,225,000) $ 900,000 Long-term debt: Balance at December 31, 2012 Proceeds from borrowings in 2013 Transfers to caption "Current Portion of Long-Term Debt" Payments made in 2013 Balance at December 31, 2013 $9,000,000 2,250,000 (500,000) (1,500,000) $9,250,000 In preparing a statement of cash flows for the year ended December 31, 2013, for Cole Company, cash flows from financing activities would reflect Outflow a $2,000,000 b $2,250,000 c $2,575,000 d $3,175,000 Comprehensive Examination F F-3 Problem F-I — (cont.) In considering interim financial reporting, how did the Accounting Principles Board conclude that such reporting should be viewed? a As a "special" type of reporting that need not follow generally accepted accounting principles b As useful only if activity is evenly spread throughout the year so that estimates are unnecessary c As reporting for a basic accounting period d As reporting for an integral part of an annual period Which of the following items represents a potential use of cash? a Patent amortization b Sale of plant assets at a loss c Net loss from operations d Declaration of a stock dividend Worthington Company purchased a machine on January 1, 2010, for $4,800,000 At the date of acquisition, the machine had an estimated useful life of six years with no salvage The machine is being depreciated on a straight-line basis On January 1, 2013, Worthington determined, as a result of additional information, that the machine had an estimated useful life of eight years from the date of acquisition with no salvage An accounting change was made to reflect this additional information What amount of depreciation expense should be reported in Worthington’s income statement for the year ended December 31, 2013? a $800,000 b $600,000 c $480,000 d $300,000 On January 7, 2011, Yoder Corporation acquired machinery at a cost of $1,500,000 Yoder adopted the sum-of-the-years’-digits method of depreciation for this machine and had been recording depreciation over an estimated life of five years, with no residual value At the beginning of 2013, a decision was made to change to the straight-line method of depreciation for this machine Assuming a 30% tax rate, the cumulative effect of this accounting change, net of tax, is a $0 b $200,000 c $210,000 d $300,000 *8 Information from Collins Company’s balance sheet is as follows: Current assets: Cash Short-term investments Accounts receivable Inventories Prepaid expenses Total current assets $ 12,000,000 20,000,000 50,000,000 66,000,000 2,000,000 $150,000,000 F-4 Test Bank for Intermediate Accounting, Fourteenth Edition Problem F-I (cont.) Current liabilities: Notes payable Accounts payable Accrued expenses Income taxes payable Current portion of long-term debt Total current liabilities $ 11,000,000 18,000,000 13,000,000 3,000,000 5,000,000 $ 50,000,000 What is the acid-test (quick) ratio? a 1:24 to b 1.64 to c 1.68 to d 3.00 to *9 Fargo, Inc disclosed the following information as of and for the year ended December 31, 2013: Net cash sales 600,000 Net credit sales 900,000 Inventory at beginning 100,000 Inventory at end 150,000 Net income 30,000 Accounts receivable at beginning of year 110,000 Accounts receivable at end of year 130,000 Fargo’s receivables turnover is a 6.9 to b 7.5 to c 12.5 to d 13.6 to *10 The calculation of the number of times interest is earned involves dividing a net income by annual interest expense b net income plus income taxes by annual interest expense c net income plus income taxes and interest expense by annual interest expense d none of the above Comprehensive Examination F F-5 Problem F-II — Statement of Cash Flows Sharp Company Comparative Balance Sheet Cash Accounts receivable, net Inventory Land Building Accumulated depreciation Equipment Accumulated depreciation Accounts payable Bonds payable Capital stock, $10 par Retained earnings December 31 2013 2012 $ 54,000 $ 36,000 53,000 57,000 161,000 123,000 180,000 285,000 300,000 300,000 (75,000) (60,000) 1,565,000 900,000 (177,000) (141,000) $2,061,000 $1,500,000 $ 202,000 450,000 1,125,000 284,000 $2,061,000 $ 150,000 -01,125,000 225,000 $1,500,000 Additional Data: Net income for the year amounted to $104,000 Cash dividends were paid amounting to 4% of par value Land was sold for $120,000 Sharp sold equipment, which cost $225,000 and had accumulated depreciation of $90,000, for $105,000 Instructions Prepare a statement of cash flows using the indirect method F-6 Test Bank for Intermediate Accounting, Fourteenth Edition Problem F-III — Accounting Changes, Error Corrections, and Prior Period Adjustments Molina Company’s reported net incomes for 2013 and the previous two years are presented below 2013 2012 2011 $105,000 $95,000 $70,000 2013’s net income was properly determined after giving effect to the following accounting changes, error corrections, etc which took place during the year The incomes for 2011 and 2012 not take these items into account and are stated at the amounts determined in those years Ignore income taxes Instructions (a) For each of the six accounting changes, errors, or prior period adjustment situations described below, prepare the journal entry or entries Molina Company should record during 2013 If no entry is required, write “none.” (b) After recording the situation in part (a) above, prepare the year-end adjusting entry for December 31, 2013 If no entry, write “none.” Early in 2013, Molina determined that equipment purchased in January, 2011 at a cost of $645,000, with an estimated life of years and salvage value of $45,000 is now estimated to continue in use until December 31, 2017 and will have a $15,000 salvage value Molina recorded its 2013 depreciation at the end of 2013 (a) (b) Molina determined that it had understated its depreciation by $20,000 in 2012 owing to the fact that an adjusting entry did not get recorded (a) (b) (a) (b) Molina bought a truck January 1, 2010 for $50,000 with a $5,000 estimated salvage value and a six-year life The company debited an expense account and credited cash on the purchase date The truck is expected to be traded at the end of 2015 Molina uses straightline depreciation for its trucks Comprehensive Examination F F-7 Problem F-III (cont.) During 2013, Molina changed from the straight-line method of depreciating its cement plant to the double-declining-balance method The following calculations present depreciation on both bases (Ignore income taxes.) The 2013 amount applies double-declining balance to the 1/1/13 carrying amount after straight-line was used Straight-line Double-declining 2013 $100,000 $200,000 2012 $100,000 $160,000 2011 $100,000 $200,000 (a) (b) Molina, in reviewing its provision for uncollectibles during 2013, has determined that 1/2 of 1% is the appropriate amount of bad debt expense to be charged to operations The company had used 1% as its rate in 2012 and 2011 when the expense had been $20,000 and $14,000, respectively The company would have recorded $50,000 of bad debt expense on December 31, 2013 under the old rate (a) (b) During 2013, Molina decided to change from the LIFO method of valuing inventories to average cost The net incomes involved under each method were as follows: LIFO Average cost 2013 $51,000 $63,000 2012 $59,000 $67,000 2011 $42,000 $48,000 Assume no difference between LIFO and average cost inventory values in years prior to 2011 (a) (b) F-8 Test Bank for Intermediate Accounting, Fourteenth Edition Problem F-IV — Analysis of Financial Statements The market value of Farmington Corp.'s common shares was quoted at $54 per share at December 31, 2013, and 2012 Planetarium 's balance sheet at December 31, 2013, and 2012, and statement of income and retained earnings for the years then ended are presented below: Farmington Corp Balance Sheet December 31 2013 2012 Assets: Current assets: Cash Short-term investments Accounts receivable (net) Inventories, lower of cost or market Prepaid expenses Total current assets Property, plant, and equipment (net) Investments, at equity Long-term receivables Copyrights and patents (net) Other assets Total assets Liabilities and Stockholders' Equity: Current liabilities: Notes payable Accounts payable Accrued expenses Income taxes payable Current portion of long-term debt Total current liabilities Long-term debt Deferred income taxes Other liabilities Total liabilities $ 9,000,000 17,200,000 109,000,000 122,000,000 4,000,000 $261,200,000 $ 350,000,000 2,800,000 15,000,000 6,000,000 8,000,000 $643,000,000 315,000,000 3,500,000 20,000,000 7,000,000 9,100,000 $629,000,000 $ 7,000,000 55,000,000 27,500,000 1,500,000 10,000,000 101,000,000 $ 17,000,000 52,000,000 30,000,000 2,000,000 9,500,000 110,500,000 180,000,000 69,000,000 15,000,000 365,000,000 190,000,000 65,000,000 9,500,000 375,000,000 Stockholders' equity: Common stock, par value $1; authorized 20,000,000 shares; issued and outstanding 12,000,000 shares 12,000,000 10% cumulative preferred shares, par value $100; $100 liquidating value; authorized 100,000 shares; issued and outstanding 60,000 shares 6,000,000 Additional paid-in capital 119,000,000 Retained earnings 141,000,000 Total stockholders' equity 278,000,000 Total liabilities and stockholders' equity $643,000,000 5,200,000 15,400,000 111,000,000 140,000,000 2,800,000 $274,400,000 12,000,000 6,000,000 119,000,000 117,000,000 254,000,000 $629,000,000 Comprehensive Examination F F-9 *Problem F-IV (cont.) Farmington Corp Statement of Income and Retained Earnings Net sales Cost and expenses: Cost of goods sold Selling, general, and administrative expenses Other, net Total costs and expenses Income before income taxes Income taxes Net income Retained earnings at beginning of period Dividends on common stock Dividends on preferred stock Retained earnings at end of period Year ended December 31 2013 2012 $540,000,000 $500,000,000 390,900,000 70,000,000 9,100,000 470,000,000 400,000,000 65,000,000 6,000,000 471,000,000 70,000,000 21,000,000 49,000,000 29,000,000 11,600,000 17,400,000 117,000,000 (24,400,000) (600,000) $141,000,000 113,100,000 (12,900,000) (600,000) $117,000,000 Instructions Based on the above information, compute the following (for the year 2013 only): (Show supporting computations in good form.) (a) Current ratio (b) Acid-test (quick) ratio (c) Receivables turnover (d) Inventory turnover (e) Book value per share of common stock (f) Earnings per share on common stock (g) Price-earnings ratio on common stock (h) Payout ratio on common stock F - 10 Test Bank for Intermediate Accounting, Fourteenth Edition Problem F-V — Segment Reporting Baden Company is a diversified company which has developed the following information about its five segments: SEGMENTS A B C D E Total sales $ 600,000 $1,700,000 $ 300,000 $ 320,000 $ 580,000 Operating profit (loss) Identifiable assets (270,000) 1,600,000 480,000 40,000 5,800,000 1,200,000 (300,000) 3,900,000 (10,000) 5,600,000 Instructions Identify which segments are significant enough to warrant disclosure in accordance with FASB No 131, "Reporting Disaggregated Information about a Business Enterprise," by applying the following quantitative tests: a b c Revenue test Operating profit or loss test Identifiable assets test Comprehensive Examination F F - 11 Solutions — Comprehensive Examination F Problem F-I — Solution c d d d c *8 *9 *10 c a b b c Problem F-II — Solution Sharp Company Statement of Cash Flows For the Year Ended December 31, 2013 Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Decrease in accounts receivable Increase in inventory Increase in accounts payable Gain on sale of land Loss on sale of equipment Depreciation expense—building Depreciation expense—equipment Net cash provided by operating activities $104,000 $ 4,000 (38,000) 52,000 (15,000) 30,000 15,000 126,000 Cash flows from investing activities Sale of land Sale of equipment Purchase of equipment Net cash used by investing activities 120,000 105,000 (890,000) Cash flows from financing activities Payment of cash dividends Issuance of bonds Net cash provided by financing activities (45,000) 450,000 Net increase in cash Cash, January 1, 2013 Cash, December 31, 2013 174,000 278,000 (665,000) 405,000 18,000 36,000 $ 54,000 F - 12 Test Bank for Intermediate Accounting, Fourteenth Edition Problem F-III — Solution (a) (b) (a) (b) (a) (b) (a) (b) (a) (b) (a) (b) None Depreciation Expense Accumulated Depreciation [($645,000 – $240,000 – $15,000) ÷ 5] 78,000 Retained Earnings Accumulated Depreciation 20,000 Truck Accumulated Depreciation Retained Earnings 50,000 Depreciation Expense Accumulated Depreciation 7,500 22,500 27,500 7,500 None Depreciation Expense Accumulated Depreciation 200,000 200,000 None Bad Debt Expense Allowance for Doubtful Accounts 25,000 Inventory (Beginning) Retained Earnings 14,000 None Current ratio: Total current assets$261,200,000 —————————— = —————— = 2.59 to Total current liabilities $101,000,000 (b) 20,000 None *Problem F-IV — Solution (a) 78,000 Acid-test (quick) ratio: Total quick assets $135,200,000 —————————— = ——————— = 1.34 to Total current liabilities $101,000,000 25,000 14,000 Comprehensive Examination F F - 13 *Problem F-IV — Solution (cont.) (c) Receivables turnover: Net sales $540,000,000 ————————————— = ————————————————– = 4.91 times Average accounts receivable [($109,000,000 + $111,000,000) ÷ 2] (d) Inventory turnover: Cost of goods sold $390,900,000 ————————— = —————— = 2.98 times Average inventories $131,000,000 (e) Book value per share of common stock: Total stockholders' equity – liquidating value of preferred stock $272,000,000 ———————————————————————————— = —————— = $22.67 Common shares issued and outstanding at December 31, 2013 12,000,000 (f) Earnings per share on common stock: Net income – dividends on preferred stock $48,400,000 ——————————————————————————— = —————— = $4.03 Average common shares issued and outstanding during 2013 12,000,000 (g) Price-earnings ratio on common stock: Market value of common stock $54.00 ————————————————— = ———— = 13.4 Earnings per share on common stock $4.03 (h) Payout ratio on common stock: Dividends on common stock $24,400,000 ——————————————————— = —————— = 50.4% Net income – dividends on preferred stock $48,400,000 F - 14 Test Bank for Intermediate Accounting, Fourteenth Edition Problem F-V — Solution a Revenue test — a segment is reportable if its total sales are $350,000 or more (10% × $3,500,000) Segments A, B, and E satisfy the revenue test b Operating profit or loss test — a segment's absolute profit or loss must be $58,000 or more [10% of the absolute greater of $520,000 or ($580,000)] Segments A, B, and D satisfy the operating profit or loss test c Identifiable assets test — a segment's identifiable assets must be $1,810,000 or more (10% × $18,100,000) Segments B, D, and E satisfy the identifiable test Segments A, B, D, and E are identified as significant and therefore reportable because they passed at least one of the significance tests  ... depreciation of $90,000, for $105,000 Instructions Prepare a statement of cash flows using the indirect method F- 6 Test Bank for Intermediate Accounting, Fourteenth Edition Problem F- III — Accounting. . .F- 2 Test Bank for Intermediate Accounting, Fourteenth Edition Problem F- I — Multiple Choice Questions Which of the following transactions would be considered a financing activity... years prior to 2011 (a) (b) F- 8 Test Bank for Intermediate Accounting, Fourteenth Edition Problem F- IV — Analysis of Financial Statements The market value of Farmington Corp.'s common shares