1. White Lightning Inc.

reported income from continuing operations before income taxes of $626,000

for the year ended December 31, 2004. During October of 2004, WHite Lightning elected to phase out
a segment of its business. That segment reported a net loss prior to the measurement date of
$74,000. White Lightning expects to incur additional losses of $35,000 during the phase out period.
Management estimates a loss on the sale of the assets associated with the segment of $85,000. THe
income tax rate for White Lightning is 30 percent.
Prepare the portion of the income statement beginning with "income from continuing operations
before income tax" for the yr ended December 31, 2004

Income from continuing operation 626000

less: loss from discontinued operation
74000+35000+85000
194000
less taxes
(58200)
losses net of taxes -135800
Income from operation 490200

2. The following differences between financial and taxable income were reported by Dider Corp. for
the current year.
(a) Excess of tax depreciation over book depreciation $60,000
(b) Interest revenue on municipal bonds $9,000
(c) Excess of est. warranty expence over actual expenditures $54,000
(d) Unearned rent received $12,000
(e) Amortization of goodwill 30,000
(f) excess of income reported under percentage-of-completion acct. for financail reporting over
competed-contract acct used for tax reporting $45,000
(g) interest on indebtedness incurred to purchase tax-exempt securiteis $3,000
(h) Unrealized losses on marketable securities recognized for financail reporting $18,000
Assume that Dider corp. had pretax accounting income [ before considering items (a) through (h) of
$900,000 for the current year. Compute the taxable income for the current year.

Financial Income 900000

less excess depreciation -60000
less interest revenue municipal bond -9000
less excess income recorded -45000

add warranty expenses 54000

add unearned rent 12000
add amortization of goodwill 30000
add interest on exempt securities 3000
add unrealized losses 1800
Taxable income 886800

3. On December 31, 2003, Jamfest Travel Inc. had 450,000 shares of no-par common stock issued
and outstanding. All shares were sold for $7.50. On June 30, 2004, the firm issued an additional
135,000 shares for $7 per share. The 2004 income was $319,200. On Sept 1, 2005, a 15 percent
stock dividend was issued to all common shareholders. On Oct 1, 2005, 60,000 shares were
reacquired as treasury shares. Net income in 2005 was $278,063.
(1) Compute the weighted average number of common shares outstanding for 2004 and 2005 that
should be shown on comparative statements at the end of 2005.
(2) Compute the basic earnings per share in 2004 and 2005 to be reported on comparative
statements at the end of 2005.
3
shares on Dec 31 2003 450000
on June 30 2004 135000
Sept 1 2005 87750
Oct 1 2005 -60000

Weighted average outstanding share 2004 225000

292500
Weighted average outstanding share 2004 517500

Basic EPS 2004 319200/517500

0.617

Weighted average outstanding share 2005 390000

56062.5
153187.5
Weighted average outstanding share 2005 599250

Basic Eps 2005 278063/599250

0.464
4. The December 31, 2007, balance sheet of Far Imports includes the following items:
9% bonds payable due 12/31/2016 $800,000 Discount on Bonds Payable 21,000
The bonds were issued on Dec 31, 2006, at 97, with interest payable on June 30 and Dec 31 of each
year. The straight-line method is used for discount amortization.
On March 1, 2008, Far Imports retired $400,000 of these bonds at 98 plus accured interest. Prepare
the journal entries to record retirement of the bonds, including accrual of intrest since the las payment
and amortization of the discount.

4
Dr. Cr
March 1 2008
Interest on bonds 6000
Bonds Payable 400000
Cash 398000
Premium on bond redemption 8000

Interest on bonds 10200

Discount on bonds payable 10200

working of discount bonds payable

The balance of discount should be
for remaining $400000 which is as follows
400000*.03/10*9 = 10800
Now it is 21000-10800 = 10200 to be adjusted

Following entries will be passed from 2008 to 2016 twice a year.

30-Jun Dr. Cr
Interest on bonds 18000
Cash 18000
8000000*.09/2

Interest on bonds 600

Discount on bonds payable 600
10800/18

31-Dec
Interest on bonds 18000
Cash 18000
8000000*.09/2

Interest on bonds 600

Discount on bonds payable 600
800000-776000 = 24000/20

Payment entry on Dec 31 2016

Bonds Payable 400000
Cash 400000

5. In 2007, Silverspur Mining, Inc., purchased land for $5,600,000 that had a natural resource supply
estimated 4,000,000 tons. WHen the natural resources are removed, the land has an ext. value of
$640,000. The required restoration cost for the property is estimated to be $800,000.
Development and road construction cost on hand were $560,000, and a building was constructed at a
cost of $88,000 with an estimatted $8,000 salvage value when all the natural resources have been
extracted.
During 2008, additional development cost of $272,000 were incurred, but additional resources wernt
discovered. Production for 2007 and 2008 was 700,000 tons and 900,000 tons, respectively.
Compute the depletion charge for 2007 and 2008. Include depreciation on the building, if any, as a
depletion charge. Round depletion charge to the nearest cent.

5
Cost of Natural resources 5600000
Restoration cost 800000
development cost
560000+272000 832000
building cost 88000
total cost of the Natural resources 7320000
less salvage value
640000+8000 -648000
total cost to be depleted 6672000

Depletion rate per ton for 2008

6672000-1120000/4000000-700000 1.6824
depletion charges for 2008 1514182
Depletion rate per ton for 2007
6672000-272000/4000000 1.6
depletion charges for 2007 1120000

6. Johnson Builders began construction work under a three-year contract at a price of $7,525,000.
The firm uses the percentage of completion method for financial accounting purposes. The income to
be recognized each year is based on the proportion of cost incurred to the total estimated costs for
completing the contract. The financial statement presentations relating to this contract on Dec.
31,2007 are

balance Sheet
account receivable $150,000
Construction in progress $602,000
Less progress billings $562,000 $40,000

Income statement
Gross profit on construction contracts $301,000
(a) Cash Colleted in 2007
(b) estimated income on the contrustion contract

6
Cash collected should be equal to
progress billing 562000

Income should be gross profit completed

work which is 301000

Part B:
Answer each of the following questions in 3 or 4 sentences or less as necessary.

1. Maryanne was looking to purchase a local business that sold coal jewelry to tourists along the
interstate. The present business owner instructed his accountant, Jane Sane, CPA, to provide
Maryanne with the company's financial statement and answer any questions she might have
regarding the provided data. Sane mailed out the most recent set of financial statements, now
three years old, to Maryanne. A few days later Sane received a phone call from Maryanne.
Maryanne asked her how the ending inventory was calculated. Sane replied that inventory was
calculated using a formula of her own design involving numbers provided by her late father.
Explain how the qualitative characteristics of relevance and reliability have been violated in this
situation.
As IAS2 of inventory valuation has not been followed and the valuation of inventory has been done by self
which may or may not represent the true and fair view of the financial position of the company. Under IAS
2
only FIFO and Weighted Average method are allowed. Thus, it is not reliable.
Moreover the data is 3 years old therefore it is not relevant to current period.

2. On 11/1/05 the Scranton Electric Company issued a check in the amount of $36,000 to the Fly By
Night Insurance Company. The amount represented the total premiums on a liability insurance
policy for the next three years. The entire $36,000 was recorded as an expense by Scranton when
the payment was made. When Scranton's fiscal; year ended on 12/31/05, no additional entries
had been made regarding the insurance payment. Explain why Scranton's books are incorrect as
of 12/31/05 and give the journal entry to correct Scranton's books at that date.

As the amount represents the insurance premiums

for three years it means that for this year the expenses
is only for two months of the payment which is 2000
and the remaining amount is the prepaid expense
for the coming years. This record has understated the profits
by 34000 for this year the entry to correct the record would be

as on 12/31/05 DR. CR.

prepaid insurance 34000
insurance expense 34000
( to record the prepaid insurance )

3. Dunmore Coal and Iron purchased $1,000,000 in corporate bonds and 500,000 shares of common
stock in its competitor, Olyphant Iron. Dunmore plans to hold onto the bonds until the maturity
date six years from present. The stock will be sold directly after Oylphant's annual shareholder
meeting three months from present. If Dunmore's fiscal year were to end today, how would the
bonds and shares of stock appear on the classified balance sheet?

3
Bond should be classified as Long term investment as fixed assets

Stocks should be classified as short term investment as current assets.

4. Cal Culate, CPA, is compiling a cash flow statement for his client, Happy Hal Printing. Over the
course of the year Happy Hal acquired new equipment by putting down half of the purchase price
in cash and issuing Happy Hal Printing stock in exchange for the other half. How should Cal Culate
correctly account for this transaction on the cash flow statement?

4
Total cost of equipment say $100000
to be shown as outflow under the investing
activities -100000

50% of 100000 for issuance of stock to be shown under

inflows from financing activities 50000

OR Alternatively

Only show 50% of equipment cost under

investing activities -50000
and
write a note as supplementary data to show issuance of stock for 50% cost of equipment

5. Your client, Rent From Nancy, Inc., has just signed a new lease agreement. Nancy has agreed to
lease a new emu egg incubator to Fly Right Ranch for a monthly rent payment of $1,000. In your
effort to determine the proper lease classification you discover the following information:
Emu egg incubators tend to last about 15 years.

Under the term of the 10-year lease, Fly Right can purchase the incubator from Nancy for $1 at the
end of the lease term.

Fly Right Ranch has had trouble recently paying its bills and is currently in danger of being forced into
bankruptcy.
What is the proper classification of this lease from the standpoint of Rent from Nancy and the Fly Right
Ranch?

5
As there is a clause for lessee to buy leased assets at bargain purchase price therefore it should be treated
as
finance lease.
Therefore the rental to be separated into 2 elements, one principal amount and other is interest expenses.

6. Your client, Hope, of Hope's Country Corner, is curious about two events will influence both taxable
and financial income. The first event involves the purchase of pottery-making equipment. Under the
present tax laws, the Country Corner can take the entire cost of equipment as an expense on the
current year's tax return, while GAAP dictates the equipment be depreciated over its useful live (seven
years). The second event relates to a fine levied against the Country Coner by the local authorities
when Hope erected an outdoor sign the size of which was in violation of local ordinance. Explain to
Hope both the immediate and long-term effects of the two event in causing differences between
taxable and financial income

6
The net income will be more in case of financial income as compare to taxable income due to difference in treatment
of depreciation from accounting and tax point of view. The difference is of temporary nature therefore it will create
deferred
taxation.

The penalty for violation of local ordinance will not be admitted as expense by the tax authority therefore it should be
excluded from expense list for the purpose of tax calculation. In this case the net income will increase and company will
have to pay more taxes, as the difference in treatment is of permanent nature, therefore there will be no deferred taxation

7
500000/1.05 = 476190 x 5% = 23810 should be the bonus of accountant /

8 Maturity risk. Means the friend will be able to pay back or not.

9
The difference in past years profit should be shows as prior period adjustment in the retained earning statements.

10
Justin was right as both businesses belong to different sector therefore any ratios including inventory turnover ratio are no
comparable to each other. The best way is to compare the ratio of previous year of the same company or the company of
the same industry. If Kim wants to know about the inventory turnover he has to compare with the ratio of same industry.