Intermediate Accounting II-(ACCT 311), Fall 2014 Final Exam — Version BF1204A1180:F1217A1180:F1230B1034A1180:E1191A1180:F1243B1034A1180:E1191A1180:F1256B1034A1180:E1191A1180:F1269B1034A1180:E1191A1180:F1282B1034A1180:E1191A1180:F1295B1034A1180:E1191A1180:F1308B1034A1180:E1191A1180:F1321B1034A1180:E1191A1180:F1334B1034A1180A1180:N1503

Please see
instructions on the answer sheet provided before completing the exam.

Question 1 (3 points—30 minutes)

On January 1, 2014, A&O Corp. leases equipment to PVP Company under a
six-year non-cancelable lease agreement. The fair value of the equipment is $700,000
and the cost of equipment to A&O is $600,000. Economic life of the leased equipment is ten years with no residual value and title
to the equipment passes to PVP at the end of the lease. Equal annual payments of 151,421 are due on
December 31 each year. The implicit
interest rate is 8%. Collectibility of
the lease payments is reasonably predictable and there are no additional costs
yet to be incurred by A&O Corp.
Assume that this is a sales type lease.
The present value factor for an ordinary annuity for 6 periods at 8% is
4.62288 and the present value factor for an annuity due for 6 periods at 8% is
4.99271.

For A&O Co. (lessor) answer
the following questions.
a.
Show
calculations for Lease Receivable on 1/1/2014 (round your answer).
b. Prepare the journal entry to
record the lease on 1/1/ 2014.
c.
Prepare a
partial amortization table for the lease through 12/31/2016.
d. Prepare the journal entry to
record the receipt of lease payment on 12/31/2014.

Question 2 (3 points—30 minutes)
The following partial information is available for A&O Company for
2014 and 2015:
2015 2014
Cash $ 292,000 $ 153,000
Accounts receivable 149,000 117,000
Inventory 150,000 180,000
Prepaid expenses 18,000 27,000
Plant assets 1,275,000 1,050,000
Accumulated depreciation (450,000) (375,000)
Patent 153,000
174,000
$1,587,000 $1,326,000
Accounts payable $ 153,000 $ 168,000
Accrued liabilities 60,000 42,000
Mortgage payable — 450,000
Preferred stock 525,000 —
Additional paid-in capital—preferred 120,000 —
Common stock 600,000 600,000
Retained earnings 129,000
66,000
$1,587,000 $1,326,000
·
The increase in Accumulated Depreciation account is due to the
depreciation expense for the period. No plant assets were sold during the year.
Patents were not purchased or sold during the year.
·
The Retained Earnings account has been charged for dividends of $148,000
and credited for the net income for the year.
·
Depreciation expense and patent amortization expense for 2015 are
included in the $680k operating expense shown below.
The income statement (partial
information) for 2015 is as follows:
Sales
revenue $1,980,000
Cost of
sales 1,089,000
Gross
profit 891,000
Operating
expenses 680,000
Net income $ 211,000
Indirect method: show
calculations for cash flow from (a) Operating (b) Investing, and (c) Financing
activities for 2015.

Question 3 (2 points—15 minutes)

During 2014, AM Construction
Company changed from the completed-contract method to the
percentage-of-completion method for accounting purposes but not for tax
purposes. Gross profit figures under both methods for the past three years
appear below:
Completed-Contract Percentage-of-Completion
2012 $
400,000 $ 800,000
2013 600,000 900,000
2014 700,000 1,000,000
$1,700,000 $2,700,000
Assume an income tax rate of 35%
for all years.
a.
Show
computations to determine the adjustment needed in 2014 to the beginning
balance of retained earnings to
account for the effect of this accounting change on prior periods.
b. Prepare a journal entry needed in
2014 to adjust the accounting records for this change in accounting principle.
.
Question 4 (2 points—25 minutes)

The
following information pertains to VAAP Co.’s defined benefit pension plan for
the year 2014.

Projected benefit obligation at 1/1/2014

$700,000

Fair
value of pension plan assets 1/1/2014

600,000

Unrecognized
prior service costs at 1/1/2014

100,000

Service
cost for 2014

80,000

Amortization
of prior service costs

11,000

Actual
return on plan assets in 2014

55,000

Expected
return on plan assets in 2014

50,000

Contributions
to the plan in 2014

90,000

Benefits
paid in 2014

25,000

Unexpected
loss from change in projected benefit obligation due to change in actuarial
predictions in 2014

27,000

Settlement
rate used

9%

a.
Show calculations to determine the pension expense for 2014.
b. Show
calculations to determine the ending balance of the projected benefit
obligation at 12/31/2014.

Question 5 (4 points—20 minutes)

Select the
best answer for each of the following and write the letter corresponding to
your answer in the answer sheet provided.

1.
VAAP Company becomes aware of a lawsuit after the date of the
financial statements, but before they are issued.The cause for action occurred
during the accounting period covered by the financial statements.A
loss and related liability should be reported in the financial statements if
a. VAAP lawyers admit
guilt.
b. The court will decide
the case within one year.
c. The amount can be reasonably
estimated, and an unfavorable outcome is reasonably possible.
d. The
amount can be reasonably estimated, and an unfavorable outcome is highly
probable.
2.
A company is
required to exclude a short term obligation from current liabilities if
a. It intends to
refinance the obligation on a long term basis
b. It enters into a
financing agreement that permits the enterprise to refinance the debt on a short-term
basis.
c. It demonstrates an
ability to consummate the refinancing
d. Both conditions in a
and c are met.
3.
Under the effective-interest method of bond
discount or premium amortization, which of the following statements is correct?
a.
As bond
discount is amortized, the interest expense increases over time.
b.
As bond
discount is amortized, the carrying value of bonds remains the same over time.
c.
As bond
premium is amortized, the carrying value of bonds increases over time.
d.
All of the
above statements are incorrect.
4.
A&O Corporation issued a 10% stock dividend of
its common stock which had a par value of $10 and a fair value of $13 at the
time of the stock dividend. At what amount should retained earnings be
capitalized (debit to retained earnings) for the additional shares issued?
a.
There should
be no capitalization of retained earnings.
b.
Par value
c.
Fair value
on the declaration date
d.
Fair value
on the date of distribution
5.
What effect does the issuance of a stock
dividend have on each of the following?
Par Value per Share Retained Earnings
a. No effect No
effect
b. Increase Increase
c. Decrease Decrease
d. No effect Decrease
6. Which
of the followingwould result
in future deductible amounts?
a.
Fines
resulting from a violation of law.
b.
Warranty
expense reported in financial income before it is paid.
c.
Depreciation
taken on the tax return in excess of the amounts reported in financial income.
d.
Interest
received on a municipal obligation.
7. Under the cost method, when a
company sells its Treasury Stock either above or below its cost, which of the
following statements is correct with respect to accounting for the sale?
a. Sale of Treasury Stock above cost results in a debit to Paid in Capital
from Treasury Stock.
b. Sale of Treasury Stock above cost results in a debit to Retained
earnings.
c. Sale of Treasury Stock above cost results in a credit to Paid in
Capital from Treasury Stock.
d. Sale of Treasury Stock below cost results in a credit to Paid in
Capital from Treasury Stock.
8. A lessor with a sales-type lease
involving unguaranteed residual value available to the lessor at the end of the
lease term will report sales revenue in the period of inception of the lease at
which of the following amounts?
a. Lease receivable plus the present value of the unguaranteed
residual value.
b. The sales price of the asset, less the present value of the unguaranteed
residual value.
c. The sales price of the asset, plus the present value of the unguaranteed
residual value.
d. The sales revenue would be equal to the sales price of the
asset.
9.
A company changes the useful life of a building from 15 years and no
salvage value to 25 years and no salvage value. The company would account for the effect of
this change
a. By recasting previously issued financial statements.
b. In the period of change and future periods if the change affects
both.
c. As a change in estimate effected by a change in accounting
principle.
d. As a change in accounting principle.
10. A&O
Corporation sold equipment for $85,000.
The cost of the equipment was $100,000 and the book value was $82,000. Under the indirect method, to determine net
cash flow from operations, A&O would
a. Subtract from net income a $3,000 gain from
sale of equipment
b. Add back to net income a $15,000 loss from
sale of equipment
c. Add back to net income a $3,000 loss from
sale of equipment
d. Subtract from net income a $15,000 gain
from sale of equipment.

Question 6 (6 points—40 minutes)

Show
computations for each of the following, and clearly show your final answer
using the answer sheet provided.
1.
PVP Company sells products for $500,000 (on credit) that include an
assurance-type warranty for the first 90 days. The cost of the products is $250.000.
PVP also offers a service type warranty
for extended coverage for 2 years beyond the expiration of the assurance-type
warranty for $10,000. The estimated cost of the assurance-warranty is $20,000. Prepare
(a) a journal entry to record sale and related warranties AND (b) a journal
entry to record the cost of goods sold.

2.
During 2013, PVP Co. introduced a new product carrying a two-year
warranty against defects. The estimated warranty costs related to dollar sales
are 2% within 12 months following sale and 3% in the second 12 months following
sale. Sales and actual warranty expenditures for the years ended December 31,
2013 and 2014 are as follows:
Actual
Warranty
Sales Expenditures
2013 $ 500,000 $20,000
2014 1,500,000 50,000
$2,000,000 $70,000
Show
computation for an estimated warranty liability on (a) 12/31/2013 and (b) on 12/31/2014.

3.
VAPCompany’s balance sheet shows:
·
Common stock, $20 par $4,000,000
·
Paid-in capital in excess of par 1,000,000
·
Retained earnings 800,000
Prepare
journal entries to record the following transactionsusing the cost method.
(a) Bought
10,000treasuryshares of itsowncommon stock at $30 a share.
(b) Sold
2,000 treasury shares at $31 a share.
(c) Sold
1,000 shares of treasury stock at $27 a share.

4.
At December 31, 2014, VAAP Corp. had 55,000 shares of common stock. The company has a 7% ten-year bond sold in
2012 for $1,000,000 and convertible into 35,000 shares of common stock. Net
income for 2014 was $302,500 and the tax rate is 35%. Show computations for
VAAP’s (a) basic and (b) diluted earnings per share in 2014.

5.
On January 1, 2013, PVP Co. purchased a
machine for $880,000 and depreciated it by the straight-line method using an
estimated useful life of ten years with a salvage value $80,000. On January 1,
2015, PVP determined that the machine had a useful life of six years from the
date of acquisition and will have a salvage value of $70,000. An accounting
change was made in 2015 to reflect these additional data. Show calculations to
determine the depreciation expense for this machine in 2015.

6. A&E Co. reported $250,000
income in its 2014 income statement before provision for income taxes. To compute the provision for federal income
taxes the following 2014 information is provided.

Estimated product warranty expenses deducted in
financial income before payment

25,000

Income from tax exempt municipal bonds

10,000

Depreciation deducted for income tax purposes in excess of
depreciation reported for financial statement purposes

20,000

Enacted corporate income tax rate

35%

Show computations to determine
the amount of (a) current income tax liability (income taxes payable), and (b)
deferred tax asset and/or deferred tax liability as applicable on 12/31/2014.

7. PVP Corp leased a truck on
1/1/2014. The lease requires PVP Corp to
make 5 annual payments of $20,000 beginning on 1/1/2014. At the end of the lease PVP Corp guarantees
the residual value of the truck will total $6,000. The lease qualifies as a capital lease. The
interest rate implicit in the lease is 10%.
Present value factors at 10% are as follows:
·
For an
annuity due with 5 payments, 4.16986
·
For an ordinary
annuity with 5 payments, 3.79079
·
Present
value of $1 for 5 periods, 0.62092

Show
calculations to determine the amount for PVP Corp’s recorded liability
immediately after the first payment.
8. A&O Inc. leased a machine
from PVP Co. The lease qualifies as a
capital lease and requires 10 annual payments of $25,000 beginning
immediately. The lessor’s implicit rate
is 12% and the lessee is aware of this rate.
The lessee’s incremental borrowing rate is 14%. The lease has a bargain purchase option of $10,000
at the end of the tenth year.
·
The present
value of an annuity due of one at 12% for 10 years is 6.328; and at 14% for 10
years is 5.946.
·
The present
value of an ordinary annuity at 12% for 10 years is 5.650.
·
The present
value of one at 12% for 10 years is 0.322; and at 14% for 10 years is 0.270.
Show
calculations to determine the amount A&O should record as a lease liability
at the beginning of the lease term.