METROPOLITANSTATEUNIVERSITY

FINANCIAL ACCOUNTING

QUIZ #4

SUMMER 2001

NAME: ______

There are 50 points on this quiz. SHOW and LABEL your work to receive partial or full credit.

  1. 8 points – Multiple Choice. CIRCLE the number with the BEST answer.
  1. Under the purchase method of accounting for a business combination:
  1. The market value of the subsidiary’s assets are added to the parent company’s assets.
  2. The market value of the subsidiary’s liabilities are added to the parent company’s liabilities.
  3. Goodwill is recognized as an asset if the purchase price of the subsidiary exceeds the fair market value of the subsidiary’s assets less liabilities.
  4. All of the above are correct.
  5. Only 1 and 2 are correct.
  1. Metro Inc. has owned 30% of Acme, Inc. for five years, accounting for the investment under the equity method. During the current year, Acme has net income of $200,000, pays dividends of $20,000, has an increase in stock price of $6/share. Which of the following shows the impact upon Metro’s Income Statement from the ownership of this investment.
  1. Dividends of $6,000 received by Metro from Acme.
  2. Unrealized gain from the increase in value of the shares of $1.80/share.
  3. $60,000, 30% of Acme’s net income.
  4. Both 1 and 2 are correct.
  1. Which of the following transactions will result in an increase in the account “deferred tax liability” at the end of (during the) current year?
  1. In the year of acquisition of some equipment, the company uses accelerated depreciation for tax purposes and straight-line depreciation for book purposes.
  2. The company accrues $50,000 of warranty expenses for book purposes and must wait until next year to deduct them for tax purposes.
  3. In year 5 of depreciating a 6 year life asset, the company uses accelerated depreciation for tax purposes and straight-line for book purposes.
  4. During the current year, the company has bad debt expense of $100,000 for book purposes and $90,000 for tax purposes.
  1. MetroCars borrowed $10,000 from the bank by signing a 4-month note payable. The proper accounting treatment of recording the note will
  1. Decrease assets and increase liabilities.
  2. Increase current assets and current liabilities.
  3. Increase current assets and long-term liabilities.
  4. Increase current assets and owners’ equity.

II.A.3 points

Under generally accepted accounting principles, the valuation base for accounts receivable is net realizable value, one of the valuation bases for marketable securities is fair market value, and one of the valuation vases for inventory is the lower of cost or market.

REQUIRED:

Please identify the valuation base for most long-lived assets and explain why the use of this valuation base makes sense.

  1. 3 points

Please indicate whether the following items should be expensed or capitalized.

ExpensedCapitalized

1.______Property tax paid on the company’s headquarters’

five years after acquiring it.

2.______Freight Charges on inventory shipped to the company

with terms of FOB shipping point.

3.______Annual costs incurred to paint the employee lounge.

III.12 points

FACTS:On August 1, 2001, Acme Co. borrowed $140,000 from MetroState Bank to finance the purchase of machinery and inventory for a new location. The loan contract provides for a 10 percent annual interest rate and states that the principal must be paid in four annual installments of $35,000 per year with the first installment due August 1, 2002. The contract also requires that Acme maintain a current ratio of 1.5:1. Before Acme borrowed the $140,000, the company’s abbreviated balance sheet was as follows:

Acme Co.

Balance Sheet

August 1, 2001

Cash & Accounts Receivable$200,000Accounts Payables$ 180,000

Inventory 280,000Wages Payable 30,000

Machinery (net) 470,000Bonds Payable (1) 890,000

Building (net) 950,000Stockholders’ Equity 800,000

Total $1,900,000$1,900,000

(1)Payable on June 30, 2010

Assume that the borrowed funds were used to purchase $40,000 inventory and $100,000 in machinery.

REQUIRED:

  1. Compute the company’s current ratio prior to borrowing the money and making the purchases.
  1. After purchasing the inventory and the machinery with the loan proceeds, compute the company’s current ratio.
  1. After purchasing the inventory and the machinery with the loan proceeds, compute the company’s debt/equity ratio.

IV.12 points

FACTS: On December 31, 2000, Metro Company owned the following investments in the

common stock of publicly owned companies.

December 31, 2000

CostMarket Value

Webber, Inc. (400 shares; cost, $45 per share;

market value, $42 per share)$18,000$16,800

Lennox Co. (300 shares; cost, $56 per share;

market value, $72 per share)$16,800$21,600

Webber was purchased on October 1, 2000. It is treated by management as trading. Lennoxwas purchased on July 1, 1994. It is treated by management as available for sale. A sale of Lennox is not anticipated in the near future. Neither of the stocks pay dividends. Lennox was worth $70 per share on December 31, 1999.

QUESTION:

  1. What is the amount and direction of the effect, if any, upon the Income Statement of Metro for the year ending December 31, 2000 from its investments?
  1. Based upon the above information, what amount of investments, if any, will appear in the current asset category of the balance sheet?
  1. Based upon the above information, what amount of investments, if any, will appear in the non-current asset category of the balance sheet?
  1. Based upon the above information, what is the amount of change, if any, which will occur during the year 2000 in the Stockholders’ Equity category of the balance sheet?

V.4 points

FACTS: Management has the ability to influence net income through its accounting choices. Management has a choice between a 10 year life or a 12 year life for $60,000 of machinery that it just acquired. Salvage value was zero.

QUESTION:What is the effect upon reported annual earnings for the first two years after the acquisition of the machinery if the 12 year life is chosen rather than the 10 year life? Please support your response using words or calculations.

VI.4 points

FACTS: A company acquires equipment on January 1, 2001, at a cost of $63,000. Management chooses to depreciate the equipment with an 8 year life and $7,000 of salvage value.

QUESTION:What would be the direction of the effect upon the income statement for the year 2001 if management chose to use a salvage value of $13,000 instead of $7,000. Please support your response using words or calculations.

VII.4 points

FACTS:A company acquires equipment on January 1, 1998, at a cost of $66,000. Straight-line depreciation is used with an 8 year life and a $6,000 salvage value. On January 1, 2001, the company sells this equipment for $46,000.

QUESTION:Compute the amount of gain/loss which the company will report in 2001.

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