Exam Content:

Q1 Definitions 6 min 8 pts

Q2 Normal account balances 3 min 10 pts

Q3 T-account activity 3 min 6 pts

Q4 Closing entries 6 min 8 pts

Q5 Adjusting journal entries 9 min 9 pts

Q6 Adjusting journal entries 20 min 21 pts

Q7 Classify various cash flows 5 min 10 pts

Q8 Assemble set of financials 25 min 24 pts

Q9 Home Depot financials 15 min 12 pts

92 min 108 pts

La Sierra UniversityLa Sierra UniversityLa Sierra UniversityLa Sierra University Name _________________Name _________________Name _________________Name _________________

Zapara School of BusinessZapara School of BusinessZapara School of BusinessZapara School of Business

Intermediate Accounting 1ACCT 341/541Intermediate Accounting 1ACCT 341/541Intermediate Accounting 1ACCT 341/541Intermediate Accounting 1ACCT 341/541

First Exam, Fall 2013First Exam, Fall 2013First Exam, Fall 2013First Exam, Fall 2013

Instructions:1. Budget your time wisely.2. Show all work and computations. Incorrect answers on the

problems that are accompanied by computations are eligiblefor partial credit.

3. You may use a calculator and a straight-edge. You may notuse your text, any notes, cell phone, computer, etc.. Thisexam is closed-book, closed-notes, and closed-neighbor.

4. An exam is not important enough to compromise yourhonor. Please do not cheat. Anyone caught cheating will beseverely disciplined. The penalty for cheating on this exam,or facilitating cheating, is a zero for the test.

5. Dr. Albrecht believes that each question has sufficientinformation to be worked. Please let me know about anytypos.

6. If any question calls for words in a solution, use the Englishlanguage

7. Good luck.

Question 1 Define the following terms and provide an example of how each one is used.

Adjusting entry

Closing entry

Question 2 For each account listed below, identify if the normal balance is a debit or credit bycircling the best response.

1 Wages Payable Debit Credit

2 Rent Expense Debit Credit

3 Accounts payable Debit Credit

4 Product Inventory Debit Credit

5 Interest Revenue Debit Credit

6 Notes Payable Debit Credit

7 Depreciation Expense Debit Credit

8 Accumulated Depreciation Debit Credit

9 Equipment Debit Credit

10 Prepaid rent Debit Credit

11 Unearned Rent Revenue Debit Credit

12 Common Stock Debit Credit

13 Treasury Stock Debit Credit

14 Operating Expense Debit Credit

15 Accounts Receivable Debit Credit

Question 3

For the unnamed account at the left, compute the endingbalance and write it in the proper location.

For the unnamed account on theleft, compute the missing value(designated by ?) and write it nextto the “?”

Question 4 A few real and nominal accounts have been selected from the accounts of the Lee company.

Interest revenue 12,000Prepaid rent 7,000Unearned service revenue 18,000Notes payable 31,000Dividends 6,000Accumulated depreciation 28,000Retained earnings 42,000Common stock 19,000Wages payable 25,000Rent expense 2,000

Required:

Prepare the necessary closing journal entries.

Question 5 Prepare the necessary adjusting journal entry for each of the following situations. Do notabbreviate account titles, and remember to clearly indent for credit entries.

1. The Bechara Company received prepayments from customers totaling $24 during 2013. In thejournal entry to record the receipt, Bechara recorded service revenue. At year-end it has $8 of

these services remaining to be performed. What is the year-end adjusting entry at December

31, 2013?

2. Merlos Co. paid $12 on April 1, 2013 for 1 year of insurance in advance. In the entry to record thereceipt, Merlos debited prepaid insurance and credited cash. Merlos is a calendar-year company.

What is the proper adjusting entry to be made at December 31, 2013?

3. Royes Company has performed $3 of services for customers for which it has not been paid nor

recorded. What is the proper adjusting entry to be made at December 31, 2013?

Question 6 The Sorunke Company has prepared the following list of unadjusted account balances (aftertransactions but before adjustments) for the year ended December 31, 2013.

Accounts Payable 12,780Accounts Receivable 24,511Accumulated Depreciation 10,000Capital Stock 31,500Cash 38,659Cost of Goods Sold Expense 0Depreciation Expense 0Dividends Distributed 3,000Equipment 26,000Income Tax Expense 0Income Taxes Payable 0Insurance Expense 6,000Prepaid insurance 0Product Inventory 35,778Retained Earnings 33,609Salaries Expense 11,498Salaries Payable 0Sales Revenue 61,300Service Revenue 0Supplies 0Supplies Expense 8,943Unearned Sales Revenue 5,200

Total debits, total credits 154,389

Required: Prepare adjusting entries for the

following situations.

(1) Accrued service revenue is 3,100.(2) Unearned prepayments by customers at

year end total $1,600.(3) Insurance coverage remaining for next

year totals $1,300.(4) Supplies on hand total $800.(5) Unsold product inventory totals $625.(6) Accrued salaries total $2,600.(7) Depreciation expense totals $2,000.

Problem 7 Which section of statement of cash flows?

Identify if the following transactions are accounted for on the Statement of Cash Flows as anoperating activity (OA), investing activity (IA), financing activity (FA) or not applicable (NA). Designate inflow or outflow by placing a plus (+) or minus (!) sign in from of your OA, IA or FAanswer.

Interest paid

Sale of used equipment

Repaid loan principal

Received from customers for cash sales

Paid taxes to government

Received from customers for payment on accounts receivable

Dividends paid

Purchased equipment

Borrowed money via loan

Invested in certificate of deposit

Paid to suppliers

Credit purchases

Received prepayments from customers

Received from owners for issuing common stock

Question 8 The Lorenzetti Company provides the following accounting information. On the blank sheetof paper provided to you, prepare a complete set of financial statements for Lorenzetti in good form. Noabbreviations are allowed. All balance sheet items are for year end unless stated otherwise. For thestatement of cash flows, use the section totals instead of individual detail provided for other financialstatements. Please make sure you include all necessary totals and sub-totals and these are labeled.

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Accumulated items of other comprehensive income . . . . . . . . 2 Bonds payable (long-term) . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Building (net) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 Cash (beginning) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Cash (ending) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Cash flows from financing activities . . . . . . . . . . . . . . . . . . . 11 Cash flows from investing activities . . . . . . . . . . . . . . . . . . (24)Cash flows from operating activities . . . . . . . . . . . . . . . . . . . . ? Common stock (beginning) . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Common stock (ending) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ? Common stock issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Cost of goods sold expense . . . . . . . . . . . . . . . . . . . . . . . . . 236 Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 Interest revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Long-term investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 Notes payable (long-term) . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Retained earnings (beginning) . . . . . . . . . . . . . . . . . . . . . . . . . ? Retained earnings (ending) . . . . . . . . . . . . . . . . . . . . . . . . . . . . ? Sales revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 310 Unearned revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Wages expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 Wages payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

When finished with the first eight questions, turn in this booklet.Professor Albrecht will then give you question 9

NameNameNameName

Question 9 Answer the following questions by referring to the Home Depot financialstatements.

Referring to data for the most recent fiscal year, what is Home Depot’s general or overall balance sheetequation?

By what percent did Home Depot’s total liabilities change from prior year to most recent year?

By what percent did Home Depot’s gross profit change from the year prior to the current year?

How much was Home Depot’s balance of merchandise inventories at year end for the most recent year?

What is the retained earnings equation for the most recent year?

In general, on what day does Home Depot’s accounting year start and on what day does it end?

What is the largest expense for the most recent year and what is the amount?

How much did Home Depot pay in dividends during the most recent fiscal year?

Who is the audit firm for Home Depot?

Copy the first 10 words of the sentence that gives the auditor’s opinion.

How much was Home Depot’s cash flow from financing activities for the most recent fiscal year? Is thisamount a net inflow or net outflow?

What was the largest item in investing activities for the current year? How much is it?

Intermediate ACCT 1 (341/541)Intermediate ACCT 1 (341/541)Intermediate ACCT 1 (341/541)Intermediate ACCT 1 (341/541)

Fall, 2013Fall, 2013Fall, 2013Fall, 2013

Exam 1 SolutionsExam 1 SolutionsExam 1 SolutionsExam 1 Solutions

Q1 Accounting cycle definitionsQ2 Debit or credit account balancesQ3 T-account computationsQ4 Closing entriesQ5 Adjusting entriesQ6 Adjusting entriesQ7 Classification into section of statement of cash flowsQ8 Sorting items into financial statement and organized presentationsQ9 Identifying items from Home Depot’s financial statements

Question 1 Define the following terms and provide an example of how each one is used.

Adjusting entry–a journal entry made at the end of an accounting period to divide revenues and expensesrelated to the passage of time into the current period and next period. These can be either anaccrual, or an adjustment made to a prepayment.

An example of an adjustment for an accrual expense item is:

Wages expense XWages payable X

Closing entry–when nominal accounts (one period accumulators) have their balances transferred toRetained Earnings. The purposes of closing entries are to (1) update retained earnings, and (2)prepare the nominal accounts with a zero balance to start accumulating during the next period.

Revenues, expenses and dividends get closed.

Revenue XRetained earnings X

Retained earnings XExpense X

Retained earnings XDividends X

For the most part, student definitions were vague and incomplete. Frequently, definitions did notdistinguish adjusting entries from closing entries.

Question 2 For each account listed below, identify if the normal balance is a debit or credit bycircling the best response.

1 Wages Payable Credit

2 Rent Expense Debit

3 Accounts payable Credit

4 Product Inventory Debit

5 Interest Revenue Credit

6 Notes Payable Credit

7 Depreciation Expense Debit

8 Accumulated Depreciation Credit

9 Equipment Debit

10 Prepaid rent Debit

11 Unearned Rent Revenue Credit

12 Common Stock Credit

13 Treasury Stock Debit

14 Operating Expense Debit

15 Accounts Receivable Debit

Question 4

Interest revenue 12,000Prepaid rent 7,000Unearned service revenue 18,000Notes payable 31,000Dividends 6,000Accumulated depreciation 28,000Retained earnings 42,000Common stock 19,000Wages payable 25,000Rent expense 2,000

Prepare the necessary closing journal entries.

Interest revenue 12,000Retained earnings 12,000

Retained earnings 2,000Rent expense 2,000

Retained earnings 6,000Dividends 6,000

Question 5

1. The Bechara Company received prepayments from customers totaling $24 during 2013. In thejournal entry to record the receipt, Bechara recorded service revenue. At year-end it has $8 of these

services remaining to be performed. What is the year-end adjusting entry at December 31,

2013?

Service revenue 8Unearned service revenue 8

2. Merlos Co. paid $12 on April 1, 2013 for 1 year of insurance in advance. In the entry to record thereceipt, Merlos debited prepaid insurance and credited cash. Merlos is a calendar-year company.

What is the proper adjusting entry to be made at December 31, 2013?

Insurance expense 9Prepaid insurance 9

3. Royes Company has performed $3 of services for customers for which it has not been paid nor

recorded. What is the proper adjusting entry to be made at December 31, 2013?

Accounts receivable 3Service revenue 3

Question 6 1. Accounts receivable 3,100

Service revenue 3,100

2. Unearned sales revenue 3,600Sales revenue 3,600

3. Prepaid insurance 1,300Insurance expense 1,300

4. Supplies 800Supplies expense 800

5. Cost of goods sold expense 35,153Product inventory 35,153

6. Salaries expense 2,600Salaries payable 2,600

7. Depreciation expense 2,000Accumulated depreciation 2,000

Problem 7 Which section of statement of cash flows?

Identify if the following transactions are accounted for on the Statement of Cash Flows as anoperating activity (OA), investing activity (IA), financing activity (FA) or not applicable (NA). Designate inflow or outflow by placing a plus (+) or minus (!) sign in from of your OA, IA or FAanswer.

! OA Interest paid

+ IA Sale of used equipment

! FA Repaid loan principal

+ OA Received from customers for cash sales

! OA Paid taxes to government

+ OA Received from customers for payment on accounts receivable

! FA Dividends paid

! IA Purchased equipment

+ FA Borrowed money via loan

! IA Invested in certificate of deposit

! OA Paid to suppliers

NA Credit purchases

+ OA Received prepayments from customers

+ FA Received from owners for issuing common stock

Question 8

Balance sheetAssetsCurrent assetsCash 17 givenAccounts receivable 55 givenInventory 39 givenPrepaid rent 8 given

Total 119

Long-term investments 16 given

Property, plant, equipmentLand 41 givenBuilding 38 givenEquipment 62 given

Total 141

Total assets 276

LiabilitiesCurrent LiabilitiesAccounts payable 19 givenInterest payable 12 givenWages payable 12 givenUnearned revenue 26 given

Total 69

Long-term LiabilitiesNote payable (long term) 41 givenBonds payable (long term) 43 given

Total 84

Total liabilities 153

Stockholders equityCommon stock 63 from CS equation on Changes in SHERetained earnings 58 by subtraction after CS is figured outAccumulated items of OCI 2 given

Total SHE 123

Total liabilities & SHE 276

Income statementInterest revenue 6 givenSales revenue 310 givenTotal 316

Depreciation expense 13 givenRent expense 17 givenWages expense 7 givenCost of Goods sold expense 236 givenInterest expense 5 givenTotal 278

Net income 38

Statement of cash flowsOperating activities 6 by subtractionInvesting activities (24) givenFinancing activities 11 givenNet change in cash (7)+ Beginning cash 24 given

Ending cash 17 given

Statement of changes in stockholders equityBeginning common stock 40 givenIssue common stock 23 given

Ending common stock 63 by subtraction

Beginning retained earnings 33 by subtraction after ERE is figured outNet income 38 from income statementDividends paid (13) given

Ending retained earnings 58 from balance sheet

Question 9Referring to data for the most recent fiscal year, what is Home Depot’s general or overall balance sheetequation?

Assets = Liabilities + SHE$41.084 billion = $23.307 billion + $17.777 billion

or $41,084,000,000 = 23.307,000,000 + $17,777,000,000

By what percent did Home Depot’s total liabilities change from prior year to most recent year?

23.307 / 22.620 = 1.0303 = 3.03% increase

By what percent did Home Depot’s gross profit change from the year prior to the current year?

25.842 / 24.262 = 1.0651 = 6.51% increase

How much was Home Depot’s balance of merchandise inventories at year end for the most recent year?

$10.710 billion or $10,710,000,000

What is the retained earnings equation for the most recent year?

Beginning retained earnings + net income !!!! dividends = ending retained earnings$17.246 billion + $4.535 billion !!!! $1.743 billion = $20.038 billion

In general, on what day does Home Depot’s accounting year start and on what day does it end?

The Company’s fiscal year is a 52- or 53-week period ending on the Sunday nearest to January 31.

What is the largest expense for the most recent year and what is the amount?

Cost of sales = $48.912 billion

How much did Home Depot pay in dividends during the most recent fiscal year?

$1.743 billion

Who is the audit firm for Home Depot?

KPMG, LLP

Copy the first 10 words of the sentence that gives the auditor’s opinion.

In our opinion, the Consolidated Financial Statements referred to above present fairly, in allmaterial respects, the financial position of The Home Depot, Inc. and subsidiaries as of February 3,2013 and January 29, 2012, and the results of their operations and their cash flows for each of thefiscal years in the three-year period ended February 3, 2013, in conformity with U.S. generallyaccepted accounting principles.

How much was Home Depot’s cash flow from financing activities for the most recent fiscal year? Is thisamount a net inflow or net outflow?

$5.034 billion outflow

What was the largest item in investing activities for the current year? How much is it?

Capital expenditures $1.312 billion outflow

Exam Content:

Q1 Definition–relevance 8 min 6 pts

Q2 Definition–asset 8 min 6 pts

Q3 Expense matching/recognition principle 10 min 9 pts

Q4 Income statement puzzle 10 min 10 pts

Q5 Organizing a balance sheet 15 min 18 pts

Q5 Multiple step Inc. Stmt. – common size 30 min 28 pts

81 min 77 pts

La Sierra UniversityLa Sierra UniversityLa Sierra UniversityLa Sierra University Name _________________Name _________________Name _________________Name _________________

Zapara School of BusinessZapara School of BusinessZapara School of BusinessZapara School of Business

Intermediate Accounting 1ACCT 341/541Intermediate Accounting 1ACCT 341/541Intermediate Accounting 1ACCT 341/541Intermediate Accounting 1ACCT 341/541

Second Exam, Fall 2013Second Exam, Fall 2013Second Exam, Fall 2013Second Exam, Fall 2013

Instructions:1. Budget your time wisely.2. Show all work and computations. Incorrect answers on the problems that are accompanied by

computations are eligible for partial credit.3. You may use a calculator and a straight-edge. You may not use your text, any notes, cell phone,

computer, etc.. This exam is closed-book, closed-notes, and closed-neighbor.4. An exam is not important enough to compromise your honor. Please do not cheat. Anyone caught

cheating will be severely disciplined. The penalty for cheating on this exam, or facilitatingcheating, is a zero for the test.

5. Dr. Albrecht believes that each question has sufficient information to be worked. Please let meknow about any typos.

6. If any question calls for words in a solution, use the English language7. Good luck.

Question 1 In the chapter on accounting concepts and theory, relevance was put forth as one of thebasic concepts of accounting. As best you can, define and describe relevance. Why is the termrelevance important in accounting?

Question 2 In the chapter on accounting concepts and theory, asset was put forth as one of the basicelements of accounting. As best you can, define and describe asset. Why is the term asset important inaccounting?

Question 3 List and describe the different aspects of what Professor Albrechtcalls the expense matching principle. It is also called the expense recognition

principle. For each of the parts of the principle, describe it in a sentence or twoand then provide an example.

Question 4 Reconstructing an income statement. The Chen Companyhas released only a few clues about its earnings for the most recent year.

Cost of goods sold expense $300,000Net income as a percentage of sales 36 %Gross margin as a percentage of sales 60 %Gain $75,000Income tax expense as a percentage of pre-tax income 20%Operating expenses as a percentage of gross margin 41.667% (25/60)

Required: Using the above clues, prepare a multiple step income statement in good form. The incomestatement should include a columns for labels, numbers and common size percentages.

Question 5 Organizing a balance sheet. An accountant at the Van PuttenCompany dropped the balance sheet and all the items got horribly mixed up. Your task is to prepare a classified balance sheet complete with subtotalsand totals and all necessary headings.

Loans payable (non-current) 625 Equipment 422 Treasury stock (59)Accounts and other payables 318 Investments in stock of other companies (non-current) 412 Bonds payable (non-current) 10 Accumulated items of other comprehensive income 360 Copyrights 27 Accounts receivable 157 Common stock 905 Inventories 233 Retained earnings 570 Land 311 Cash & equivalents 732 Services or products owed 165 Trading securities (short-term investments) 81 Funds and fixed term investments (non-current 30 Prepaid and other 61 Patents 59 Current maturities of long-term debt 290 Buildings 659

Question 6 The Richardson Company, a manufacturer of metal attachments for furniture, has reportedthe following income statements in single-step format.

2011 2010 2009

Sales revenue 9,000,000 7,000,000 6,000,000

Gains 0 500,000 600,000

Interest revenue 55,000 50,000 40,000

Total revenues and gains 9,055,000 7,550,000 6,640,000

Cost of sales 4,000,000 3,250,000 3,000,000

Selling expenses 1,080,000 980,000 900,000

Losses 3,000,000 200,000 100,000

Administrative expenses 400,000 350,000 300,000

Interest expense 22,000 20,000 18,000

R&D expenses 1,500,000 900,000 600,000

Total expenses and losses 10,002,000 5,700,000 4,918,000

Pre-tax income (947,000) 1,850,000 1,722,000

Income tax expense (142,050) 277,500 258,300

Net income (804,950) 1,572,500 1,463,700

Required:

(1) On a separate sheet of paper, rearrange the income statements into multiple-step format.

(2) Perform a vertical (common size) analysis on your multiple-step income statements. Please showtenths of a percentage (e.g., 23.4%). This may be in a column immediately to the right of thenumber.

(3) Perform an horizontal analysis on sales revenue.

(4) Comment on the trends you discern in your analyses. Be sure to mention the gross marginpercentage in your discussion. Which was the best year, in your opinion?

Intermediate ACCT 1 (341/541)Intermediate ACCT 1 (341/541)Intermediate ACCT 1 (341/541)Intermediate ACCT 1 (341/541)

Fall, 2013Fall, 2013Fall, 2013Fall, 2013

Exam 2 SolutionsExam 2 SolutionsExam 2 SolutionsExam 2 Solutions

Question 1 In the chapter on accounting concepts and theory, relevance was put forth as one of thebasic concepts of accounting. As best you can, define and describe relevance. Why is the termrelevance important in accounting?

Relevance is one of two fundamental characteristics of accounting information. Representationalfaithfulness is the other.

Accounting information is expected to be relevant to user decisions. Relevant information pertainsto decisions being made by financial statement users. If it pertains to a user decision, relevantinformation has at least one of three qualities: (1) it provides new information useful in makingpredictions about some future business operation, (2) it provides meaningful confirmation forsomething known before, and (3) it is material, or large enough to make a difference in thedecision.

All financial accounting disclosures should be relevant to decisions being made by financialstatement users. If so, then the benefit from providing the information exceeds the cost ofproviding it. If accounting information is not relevant, then it should not be included in financialreports.

Question 2 In the chapter on accounting concepts and theory, asset was put forth as one of the basicelements of accounting. As best you can, define and describe asset. Why is the term asset important inaccounting?

An asset is a resource that is going to be used in business operations in order to generate revenues. If resources don’t in any way help in generating revenues, funds should not be spent to acquire theresources.

For an asset to be recorded in the accounts and reported in the financial statements, it shouldpossess all of the following three characteristics. First, it should have expected future benefit. Inother words, it should help in generating a future revenue. Second, it should be controllable by thecompany. The company is able to specify who is to use the asset, and can prevent unauthorizedparties from using it. Third, the asset should be present as a result of an exchange transaction. Inother words, the company either has received the asset, or it has paid for the asset and is awaiting itsarrival.

Asset is important in accounting because it is one of the building block elements, and is essentialfor the balance sheet and generating new revenue.

Question 3 List and describe the different aspects of what Professor Albrecht calls the expense

matching principle. For each of the parts of the principle, describe it in a sentence or two and thenprovide an example.

The expense matching principle is where the costs of conducting business (and therefore the costsof generating revenue) are matched to the revenue that results from spending money. The costs arerecognized as expense in the period in which revenue is recognized. First the revenue is put on theincome statement, then the related costs.

The cause and effect relationship can seldom be conclusively demonstrated, but many costs appearto be related to particular revenues and recognizing them as expenses accompanies recognition ofthe revenue. Examples of expenses that are recognized by associating cause and effect are salescommissions and cost of products sold or services provided.

Systematic and rational allocation means that in the absence of a direct means of associating causeand effect, and where the asset provides benefits for several periods, its cost should be allocated tothe periods in a systematic and rational manner. Examples of expenses that are recognized in asystematic and rational manner are depreciation of plant assets, amortization of intangible assets,and allocation of rent and insurance.

Some costs are immediately expensed because the costs have no discernible future benefits or theallocation among several accounting periods is not considered to serve any useful purpose.Examples include officers’ salaries, most selling costs, amounts paid to settle lawsuits, and costs ofresources used in unsuccessful efforts.

Question 4 Reconstructing an income statement.

Cost of goods sold expense $300,000Net income as a percentage of sales 36 %Gross margin as a percentage of sales 60 %Gain $75,000Income tax expense as a percentage of pre-tax income 20%Operating expenses as a percentage of gross margin 41.667% (25/60)

Sales 750,000 100% = 300,000/.4Cost of goods sold expense 300,000 40% = 100% !60%Gross Margin 450,000 60% = 750,000*.6Selling & Administrative 187,500 25%Operating income 262,500 35%Gain 75,000 10% =Pre-tax income 337,500 45%Income tax expense 67,500 9% = 20% of pretaxNet Income 270,000 36%

Question 5Loans payable (non-current) 625 Equipment 422 Treasury stock (59)Accounts and other payables 318 Investments in stock of other companies (non-current) 412 Bonds payable (non-current) 10 Accumulated items of other comprehensive income 360 Copyrights 27 Accounts receivable 157 Common stock 905 Inventories 233 Retained earnings 570 Land 311 Cash & equivalents 732 Services or products owed 165 Trading securities (short-term investments) 81 Funds and fixed term investments (non-current 30 Prepaid and other 61 Patents 59 Current maturities of long-term debt 290 Buildings 659

Assets LiabilitiesCurrent Assets Current Liabilities

Cash & equivalents 732 Accounts & other payables 318 Trading securities 81 Current maturities of long-term debt 290 Accounts receivable 157 Services or products owed 165 Inventories 233 Total 773 Prepaid & other 61 Noncurrent LiabilitiesTotal 1,264 Notes payable 625

Noncurrent Investments Bonds payable 10 Funds & fixed term investments 30 Total 635 Stock of other companies 412 Total Liabilities 1,408 Total 442

Property, Plant & Equipment Stockholders EquityLand 311 Common stock 905 Building 659 Retained earnings 570 Equipment 422 Accumulated items of OCI 360 Total 1,392 Treasury stock (59)

Intangibles Total Stockholders Equity 1,776 Patents 59 Copy rights 27 Total Liabililties & Stockholders Equity 3,184 Total 86

Total assets 3,184

Question 6

(1) On a separate sheet of paper, rearrange the income statements into multiple-step format.

(2) Perform a vertical (common size) analysis on your multiple-step income statements. Please showtenths of a percentage (e.g., 23.4%). This may be in a column immediately to the right of thenumber.

(3) Perform an horizontal analysis on sales revenue.

2011 2010 2009

Sales revenue 9,000,000 100.0% 7,000,000 100.0% 6,000,000 100.0%

Cost of sales 4,000,000 44.4% 3,250,000 46.4% 3,000,000 50.0%

Gross margin 5,000,000 55.6% 3,750,000 53.6% 3,000,000 50.0%

Selling expenses 1,080,000 12.0% 980,000 14.0% 900,000 15.0%

Administrative expenses 400,000 4.4% 350,000 5.0% 300,000 5.0%

R&D expenses 1,500,000 16.7% 900,000 12.9% 600,000 10.0%

Operating income 2,020,000 22.4% 1,520,000 21.7% 1,200,000 20.0%

Other

Gains 0 0.0% 500,000 7.1% 600,000 10.0%

Interest revenue 55,000 0.6% 50,000 0.7% 40,000 0.7%

Losses (3,000,000) -33.3% (200,000) -2.9% (100,000) -1.7%

Interest expense (22,000) -0.2% (20,000) -0.3% (18,000) -0.3%

Pre-tax income (947,000) -10.5% 1,850,000 26.4% 1,722,000 28.7%

Income tax expense (142,050) -1.6% 277,500 4.0% 258,300 4.3%

Net income (804,950) -8.9% 1,572,500 22.5% 1,463,700 24.4%

Chng revenue 2009-2010 16.7%

Chng revenue 2010-2011 28.6%

(4) Comment on the trends you discern in your analyses. Be sure to mention the gross marginpercentage in your discussion. Which was the best year, in your opinion?

Sales are going up at an increasing rate. Both the gross margin and operating income areincreasing. The operating expense of selling are going down (good sign when sales increase). Also, the operating expense of R&D is going up (a good sign as that reflects an investment in thefuture. The one negative is that 2011 had a large one time loss, in contrast to 2009 & 2010 thatshowed moderate one time gains.

Take away the one time gains and losses, then 2011 is the best year by far. All the key indicatorsare going up.

Exam Content:

Q1 Revenue recognition principle 12 min 12 ptsQ2 Revenue recognition problem 10 min 12 ptsQ3 PV/FV computations 10 min 12 ptsQ4 A more complex PV/FV problem 15 min 20 ptsQ5 Loan with amortization table, entries 12 min 12 ptsQ6 Cash or bank rec 20 min 16 ptsQ7 AR & allowance for uncollectibles 5 min 8 pts

84 min 92 pts

La Sierra UniversityLa Sierra UniversityLa Sierra UniversityLa Sierra University Name _________________Name _________________Name _________________Name _________________

Zapara School of BusinessZapara School of BusinessZapara School of BusinessZapara School of Business

Intermediate Accounting 1ACCT 341/541Intermediate Accounting 1ACCT 341/541Intermediate Accounting 1ACCT 341/541Intermediate Accounting 1ACCT 341/541

Final Exam, Fall 2013Final Exam, Fall 2013Final Exam, Fall 2013Final Exam, Fall 2013

Instructions:1. Budget your time wisely.2. Show all work and computations. Incorrect answers on the problems that are accompanied by

computations are eligible for partial credit.3. You may use a calculator and a straight-edge. You may not use your text, any notes, cell phone,

computer, etc.. This exam is closed-book, closed-notes, and closed-neighbor.4. An exam is not important enough to compromise your honor. Please do not cheat. Anyone caught

cheating will be severely disciplined. The penalty for cheating on this exam, or facilitatingcheating, is a zero for the test.

5. Dr. Albrecht believes that each question has sufficient information to be worked. Please let meknow about any typos.

6. If any question calls for words in a solution, use the English language7. Good luck.

Question 1 Revenue Recognition Principle

Explain the revenue recognition principle.

In addition, explain:1) how and why the revenue recognition principle permits

recognizing revenue at the time of a sale for credit.2) how and why the revenue recognition principle permits

recognizing revenue before the point of sale for preciousminerals or agricultural products

3) how and why the revenue recognition principle permits recognizing revenue after the point ofsale when cash collection is problematic.

Question 2 Revenue recognition under different methods. Lee Company manufactures and sellswidgets. In 2011, Lee manufactured 3,000 units at a cost of $80 each. In 2012, Lee manufactured 5,000units at a cost of $80 each. In 2013, Lee manufactured 1,000 units at a cost of $80 each.

During 2011, Lee sold 2,000 units. During 2012, Lee sold 4,000 units. During 2013, Lee sold theremaining 3,000 units. Each unit has a selling price of $125.

During 2011, Lee collected $50,000 from customers. During 2012, Lee collected $200,000. During 2013, Lee collected $700,000 from customers. During 2014, Lee collected the remaining$175,000 from customers.

Required: Complete income statements for 2011, 2012, 2013, and 2014 under the following revenuerecognition alternatives.

1. Revenue is recognized when cash is collected (installment sales method).

2011 2012 2013 2014 Total

Revenue

Expense

Income

2. Revenue is recognized when production is complete.

2011 2012 2013 2014 Total

Revenue

Expense

Income

3. Revenue is recognized at the point of sale.

2011 2012 2013 2014 Total

Revenue

Expense

Income

4. Revenue is recognized under the cost recovery method.

2011 2012 2013 2014 Total

Revenue

Expense

Income

Question 3 PV/FV computations Compute answers to the following questions. I recommend that youshow all work by creating and filling in a table of input values.

PVFVNIPMTType

(1) Today, December 12, 2013 (12/12/2013 in mm/dd/year format), you deposit $267.32 into anaccount earning 1.4% interest. You intend to make six more deposits of $267.32 into the account,

on 12/12/2014, 12/12/2015, 12/12/2016, 12/12/2017, 12/12/2018 and 12/12/2019. To howmuch will the account grow by 12/12/2020? Interest is compounded annually. [Your

answer should be taken to two decimal places.]

(2) Today, December 12, 2013, you borrow $53,176 for the purchase of production equipment andagree to make semi-annual repayments of the same amount for 6 years at 8% interest. The firstpayment is scheduled on 12/12/2013. If the loan is completely repaid after the final payment, then

how much is each payment? [Your answer should be taken to two decimal places.]

(3) Today, December 12, 2013, you borrow $61,221 for the purchase of production equipment andagree to make annual repayments of the same amount for 7 years at an 8% annual rate of interest. The first payment is scheduled on 12/12/2014. If the loan is completely repaid after the final

payment (12/12/2020), then how much is each payment? [Your answer should be taken to

two decimal places.]

(4) Today December 12, 2013, you borrow $9,312 to purchase a used car and agree to make fiveannual payments of the same amount, $2,371.15, after which the car loan will be completely paid

off. The first payment is to due on 12/12/2014. What interest rate is being charged onthe loan? [Your answer should be taken to two decimal places pp.pp%.]

(5) $6,591.26 is being invested today, December 12, 2013 in an account earning an annual rate of

4.28%, compounded semi-annually. How many six month periods will it take theaccount to grow to $14,278.15? [Your answer should be taken to one decimal place.]

Question 4 Complex PV/FV problem. On December 12, 2013, Bayona makes the first of six (6) equalannual deposits of $13,125 into an investment fund. The last is scheduled for December 12, 2018. On

December 12, 2023, Bayona is to make an additional deposit of unspecified amount (X). Beginning onDecember 12, 2031, Bayona is to make the first eight annual withdrawals of $47,522, after which thefund will be exhausted. The interest rate 5.25% compounded annually for the time up to 12/12/2020. After 12/12/2020, the interest rate is 7.32%.

Required: Calculate the amount of the additional deposit X on December 12, 2023. Clearly designate itas the final answer. Please show all work.

Question 5 Installment Loan. The Zhang Company is borrowing $55,235 from a bank on January 1,2013. The bank is charging 5% interest. The loan is to be paid off in six equal sized annual

installments, starting on December 31, 2013 and ending on December 31, 2018. [This is called aninstallment loan] Round all amounts to the nearest dollar.

(1) Compute the amount of the annual payment.(2) Prepare an amortization table in good form to account for this loan. Round all amounts to the

nearest dollar.(3) Write journal entries needed to account for the loan and payments during 2013 and 2014.

Question 6 Bank reconciliation.

The Wong Company needs help in constructing a bank reconciliation for April 30:

The bank statement for Wong, dated April 30, but not received until May 7, contains the followinginformation:

March 31 balance $84,612April deposits (& other credits) $317,681April withdrawals (& other debits) $298,337April 30 balance $103,956

Wong's ledger account for cash has the following information for the past thirty days:

March 31 balance $47,094April additions & debits $328,660April subtractions & credits $304,005April 30 balance $71,749

The staff of Wong has assembled the following information for a bank reconciliation as of April 30:

* Funds collected by bank: April = $16,132 * Service charges: April $3,877 * NSF checks, informed by bank on: April 30 = $1,895 * Deposits in transit: April 30 = $21,811 * Outstanding checks: April 30 = $43,658 The additional information for a bank reconciliation as of March 31 is:

* Funds collected by bank: March = $22,512 * Service charges: March = $4,301 * Deposits in transit: March 31 = $17,212 * Outstanding checks: March 31 = $36,519 Required:

Prepare a proof of cash (comprehensive bank reconciliation) as of April 30 for the month of April.

Question 6 answer sheetApril April

Balance Receipts/ Disbursements/ Balance Event/action March 31 additions subtractions April 30

From ledger account

True balances

April AprilBalance Receipts/ Disbursements/ Balance

Event/action March 31 additions subtractions April 30

From bank statement

True balances

Question 7 Analyzing Accounts Receivable & Allowance for Uncollectible Accounts. The followinginformation was obtained from the records of Johnson Corporation for the month of May.

Allowance for uncollectible accounts May 1 5,000Allowance for uncollectible accounts May 31 ?Credit sales for month of May ?Cash collections for May 240,000Bad debt expense for May 26,000Accounts receivable May 1 28,000Accounts receivable May 31 43,000Accounts written off during May 19,000

Required:

1. Compute the amount of credit sales during May.

2. Compute the amount of allowance for uncollectible accounts on May 31.

Intermediate ACCT 1 (341/541)Intermediate ACCT 1 (341/541)Intermediate ACCT 1 (341/541)Intermediate ACCT 1 (341/541)

Fall, 2013Fall, 2013Fall, 2013Fall, 2013

Final Exam SolutionsFinal Exam SolutionsFinal Exam SolutionsFinal Exam Solutions

Question 1

Revenue is generally recognized when (1) realized or realizable, and (2) earned. Being earned iswhen an exchange of product or service occurs. Sometimes it is considered to occur when the“key” event necessary for an exchange occurs. Being realized or realizable means that the cash (ifnot already received) is likely or probable to occur in the future.

In a highly developed economy where credit sales are common, a customer’s credit worthiness isevaluated through a credit check. If the company determines that it is likely that the customer willpay in the future, revenue is recognized at the point of product/service exchanged despite there notbeing cash yet. This meets the terms of the revenue recognition principle, because the seller &buyer have closed the deal (contractually agreed to the exchange), and because the revenue isconsidered realizable (or collectible).

In the case of mineral discovery and extraction, and agriculture, revenue is often recognized beforean exchange is made between the seller and a buyer. This is because there are well developedmarkets with sufficient demand that on any given day, any amount of product could be sold if itwas taken to market. In this case, the key event is identified as the appropriate revenue recognitionpoint. In the case of mineral discovery and extraction, the key event is discovery of provenreserves. These reserves are kept in the ground until the mining company decides to take themineral to market and sell it. At this time it is extracted and sold, and revenue is recognized. Buyers in such a market either pay in cash or are sufficiently credit worthy to merit extension ofcredit. In agriculture, crops cannot be kept in fields until the decision is made to sell, asdecomposition will occur. In this case, extraction or harvest must take place when it can. Thenharvested grain (or other agriculture produce) are stored until such time as the farmer decides tosell. But because the key event is harvest, revenue is recognized at this time.

Sometimes sellers sell to buyers who are credit unworthy. This is the case when durable goods(that can be repossessed and sold to someone else) are sold to the consumer fringe. In this case,exchanging the product is trivial, because the seller will sell to anyone with a pulse. There isuncertainty as to whether the buyer will eventually pay. The uncertainty is resolved when cashpayment is eventually made. Revenue is recognized at this time, the point of cash collection.

Question 2 Revenue recognition at different times. Lee Company manufactures and sells widgets. In2011, Lee manufactured 3,000 units at a cost of $80 each. In 2012, Lee manufactured 5,000 units at acost of $80 each. In 2013, Lee manufactured 1,000 units at a cost of $80 each.

During 2011, Lee sold 2,000 units. During 2012, Lee sold 4,000 units. During 2013, Lee sold theremaining 3,000 units. Each unit has a selling price of $125.

During 2011, Lee collected $50,000 from customers. During 2012, Lee collected $200,000. During 2013, Lee collected $700,000 from customers. During 2014, Lee collected the remaining$175,000 from customers.

1. Revenue is recognized when cash is collected (installment sales method).2011 2012 2013 2014 Total

Revenue 50,000 200,000 700,000 175,000 1,125,000

Expense 32,000 128,000 448,000 112,000 720,000

Income 18,000 72,000 252,000 63,000 405,000

2. Revenue is recognized when production is complete.2011 2012 2013 2014 Total

Revenue 375,000 625,000 125,000 0 1,125,000

Expense 240,000 400,000 80,000 0 720,000

Income 135,000 225,000 45,000 0 405,000

3. Revenue is recognized at the point of sale.2011 2012 2013 2014 Total

Revenue 250,000 500,000 375,000 0 1,125,000

Expense 160,000 320,000 240,000 0 720,000

Income 90,000 180,000 135,000 0 405,000

4. Revenue is recognized under the cost recovery method.2011 2012 2013 2014 Total

Revenue 50,000 200,000 700,000 175,000 1,125,000

Expense 50,000 200,000 470,000 0 720,000

Income 0 0 230,000 175,000 405,000

Question 3 PV/FV computations (1) Today, December 12, 2013 (12/12/2013 in mm/dd/year format), you deposit $267.32 into an

account earning 1.4% interest. You intend to make six more deposits of $267.32 into the account,on 12/12/2014, 12/12/2015, 12/12/2016, 12/12/2017, 12/12/2018 and 12/12/2019. To how muchwill the account grow by 12/12/2020? Interest is compounded annually. [Your answer should betaken to two places.]

PV 0 FV ? = 1,979.02N 7I 1.4PMT 267.32Type beg fv one period after final payment

(2) Today, December 12, 2013, you borrow $53,176 for the purchase of production equipment andagree to make semi-annual repayments of the same amount for 6 years at an 8% annual rate ofinterest. The first payment is scheduled on 12/12/2013. If the loan is completely repaid after thefinal payment, then how much is each payment? [Your answer should be taken to two places.]

PV !53,176FV 0N 12 6*2I 4 8/2 PMT ? = 5,448.09Type beg pv at time of first payment

(3) Today, December 12, 2013, you borrow $61,221 for the purchase of production equipment andagree to make annual repayments of the same amount for 7 years at 8% annual interest. The firstpayment is scheduled on 12/12/2014. If the loan is completely repaid after the final payment(12/12/2020), then how much is each payment? [Your answer should be taken to two places.]

PV !61,221FV 0N 7I 8 PMT ? = 11,758.86Type end pv one period before first payment

(4) Today December 12, 2013, you borrow $9,312 to purchase a used car and agree to make fiveannual payments of the same amount, $2,371.15, after which the car loan will be completely paidoff. The first payment is to due on 12/12/2014. What interest rate is being charged on the loan?[Your answer should be taken to two places pp.pp%.]

PV !9,312FV 0N 5 I ? = 8.63%PMT 2,371.15Type end pv one period before first payment

(5) $6,591.26 is being invested today, December 12, 2013 in an account earning an annual rate of4.28%, compounded semi-annually. How many six month periods will it take the account to growto $14,278.15? [Your answer should be taken to one place.]

PV !6,591.26FV +14,278.15 N ? = 36.5I 2.14% 4.28 / 2PMT 0Type N/A no payments

Question 4 On December 12, 2013, Bayona makes the first of six (6) equal annual deposits of $13,125

into an investment fund. The last is scheduled for December 12, 2018. On December 12, 2023, Bayonais to make an additional deposit of unspecified amount (X). Beginning on December 12, 2031, Bayona isto make the first eight annual withdrawals of $47,522, after which the fund will be exhausted. Theinterest rate 5.25% compounded annually for the time up to 12/12/2020. After 12/12/2020, the interestrate is 7.32%.

Required: Calculate the amount of the additional deposit X on December 12, 2023.

value of deposits @2023 + X = value of withdrawals @2023123,013 + X = 170,935

X = 47,922

Value of deposits @ 12/12/2021?

PV 0 PV !89,838.55 @ 2018 PV -99,519.22 @2020FV ? = 89,838.55 @2018 FV ? = 99,519.22 @2020 FV ? = 123,013 @2023N 6 N 2 N 3I 5.25 I 5.25 I 7.32Pmt !13,125 Pmt 0 Pmt 0type end type N/A type N/A

Value of withdrawals @ 12/12/2021?

PV ? = 280,282.45@2030 PV 170,935 @2023FV 0 FV !280,282.45 @2030N 8 N 7I 7.32 I 7.32Pmt !47,522 Pmt 0type end type N/A

Question 5 Installment Loan. The Zhang Company is borrowing $55,235 from a bank on January 1,2013. The bank is charging 5% interest. The loan is to be paid off in six equal sized annual

installments, starting on December 31, 2013 and ending on December 31, 2018(1) Compute the amount of the annual payment.(2) Prepare an amortization table in good form to account for this loan. (3) Write journal entries needed to account for the loan and payments during 2013 and 2014.

PV –55,235FV 0N 6I 5Pmt 10,882type end

Date Cash Interest Amort Balance

Jan 1, 2013 55,235

Dec 31, 2013 10,882 2,762 8,120 47,115

Dec 31, 2014 10,882 2,356 8,526 38,589

Dec 31, 2015 10,882 1,929 8,953 29,636

Dec 31, 2016 10,882 1,482 9,400 20,236

Dec 31, 2017 10,882 1,012 9,870 10,366

Dec 31, 2018 10,882 518 10,364 2

11/1/11 Cash 55,235Note payable 55,235

12/31/11 Interest expense 2,762Note payable 8,120

Cash 10,88212/31/11 Interest expense 2,356

Note payable 8,526Cash 10,882

Question 6 Bank reconciliation.

April AprilBalance Receipts/ Disbursements/ Balance

Event/action March 31 additions subtractions April 30

From ledger account 47,094 328,660 304,005 71,749

collections +22,512 – 22,512+16,132 +16,132

service charges – 4,301 – 4,301+3,877 – 3,877

NSF +1,895 –1,895

True balance 65,305 322,280 305,476 82, 109

April AprilBalance Receipts/ Disbursements/ Balance

Event/action March 31 additions subtractions April 30

From bank statement 84,612 317,681 298,337 103,956

late deposits + 17,212 – 17,212+21,811 +21,811

outstanding checks – 36,519 – 36,519+43,658 – 43,658

True balance 65,305 322,280 305,476 82, 109

Question 7 Analyzing Accounts Receivable & Allowance for Uncollectible Accounts.

Allowance for uncollectible accounts May 1 5,000Allowance for uncollectible accounts May 31 ?Credit sales for month of May ?Cash collections for May 240,000Bad debt expense for May 26,000Accounts receivable May 1 28,000Accounts receivable May 31 43,000Accounts written off during May 19,000

1. Compute the amount of credit sales during May.

Beg AR + credit sales – collections – write-offs = End AR28,000 + credit sales – 240,000 – 19,000 = 43,000

credit sales = 274,000

2. Compute the amount of allowance for uncollectible accounts on May 31.

Beg Allow + bad debt exp – write-offs = End Allow5,000 + 26,000 – 19,000 = End Allow

12,000 = end Allow