THIS EXAM IS 135 MINUTES LONG. (Two hours and 15 minutes.

It consists of five (5) multi-part questions. There are 22 questions in total. You can scroll to any
question using the list on the right-hand side of this page.

Allocate an appropriate amount of time to each question.

The questions are based on the fiscal 2017 financial statements of Tesla, Inc. (Tesla). When an
account title is in quotes (e.g.: “Net Revenues”) it refers to a specific line item from Tesla’s
financial statements or footnotes. All dollar figures in the exam are expressed in thousands of
dollars, which is consistent with the presentation in Tesla's financial statements.

The only materials you are permitted to use for this exam are (1) selected pages from the Tesla
2017 Annual Report (print the pages from the document provided), (2) a calculator, and (3) a pen
or pencil.

Be sure to note the relevant dates referred to in each question.

Be sure to show all of your work so that you can earn partial credit where relevant.

Although the blank journal entry templates contain only one debit and one credit, some
answers may require multiple debits and credits.

I affirm that I belong to the honorable community of The University of Texas at Austin McCombs
School of Business. I will not lie, cheat or steal, nor will I tolerate those who do.
I pledge my full support to the Honor System. I agree to be bound at all times by the Honor
System and understand that any violation may result in my dismissal from the McCombs School
of Business.
By signing this document, I acknowledge my obligations under the UT McCombs Honor Code
and pledge to follow the ethical standards for exam taking it implies. Specifically, I pledge that I
shall use only the allowed resources in taking this exam, (and use only the time permitted) and
shall neither give nor receive any type of forbidden aid.
Furthermore, I will not discuss this exam with any student who has not yet completed it.
I Transactions and Events / 20
II Adjusting Entries / 20
III Statement of Cash Flows / 20
IV Revenue Recognition / 24
V Receivables & Receipts / 16
Total / 100
I. Transactions and Events (20 points)
Using information in the financial statements and notes, provide the journal entry Tesla must
have made in fiscal 2017 for the following transactions and events. Assume that Tesla recorded
these items in a single entry and that the company closes its books annually. You do not need to
consider closing entries. Use Tesla financial statement line items as account titles. If no entry
is required, explain why. Indicate whether each account you use is an asset (A), liability (L),
owners’ (shareholders’) equity (OE), revenue (i.e., positive net income impact) (R), or expense
(i.e., negative net income impact) (E) account. Be sure to state any assumptions you make.
Although the questions show journal entries with a single Debit and a single Credit, your
answers can use multiple Debits and Credits, if needed.
Unless noted, each question is independent of the others. (4 points each)
or Space to move this question.
1-1
Assume that Tesla purchased, on account, $350,000 of paint to be used on Model 3 vehicles in
2017. Provide the journal entry Tesla would have made to record this purchase.

Dr. Inventory $350,000 A, L, OE, R, E

Cr. Accounts Payable A, L, OE, R, E $350,000

Assumptions (if any): Could also use Accrued Liabilities for the credit, although we have
discussed using AP for inventory purchases in class
or Space to move this question.
1-2
Refer to note 10 to Tesla's financial statements. Assume that Tesla fully paid employees for work
they performed in 2016 on January 5, 2017. Provide the journal entry for that transaction.

Dr. Accrued Liabilities* $218,792 A, L, OE, R, E

Cr. Cash A, L, OE, R, E $218,792

Assumptions (if any): note that there is no expense recorded here. They recorded the expense in 2016.
They paid the wages in 2017.
*or Payroll and related costs (see note 10)
or Space to move this question.
1-3
The net purchase of "Property and Equipment" in 2017.

Property, plant and

Dr. $3,414,814 A, L, OE, R, E
equipment

Cr. Cash A, L, OE, R, E $3,414,814

Assumptions (if any): this answer focuses on cash purchases of PPE as listed on the SCF. A
more-complete answer includes the non-cash purchases listed at the bottom of the SCF:
or Space to move this question.

Property, plant and

Dr. $4,328,922 A, L, OE, R, E
equipment

Cr. Cash A, L, OE, R, E $3,414,814

Liabilities (unclear
Cr. whether current or A, L, OE, R, E $914,108
non-current)

1-4
The sale of "Property, plant and equipment" (fixed assets) in 2017. Assume that the equipment
had an original cost of $200,000 and was sold for $75,000. (Do not revisit the prior question
using data from this one. Assume that the two questions are completely independent.)

Dr. Cash (from SCF) $75,000 A, L, OE, R, E

Loss on sale of PPE (from

Dr. $105,770 A, L, OE, R, E
SCF)

Accumulated Depreciation
Dr. $19,230 A, L, OE, R, E
(∆ to make entry balance)

Property, plant, and

Cr. equipment (given in A, L, OE, R, E $200,000
question)

Assumptions (if any): could alternatively credit PPE, net (200,000 – 19,230 = 180,770) in lieu of the gross
PPE and accumulated depreciation accounts
or Space to move this question.
1-5
The issuance of "Common Stock" in March 2017. To simplify your answer, ignore issuance
costs and refer only to the Statements of Redeemable Noncontrolling Interests and Equity.

Dr. Cash $399,647 A, L, OE, R, E

Cr. Common Stock A, L, OE, R, E $2

Additional Paid-in
Cr. A, L, OE, R, E $399,645
Capital

Assumptions (if any): all figures from the Statement of Redeemable Noncontrolling Interests and Equity.
Read across the line for the stock issuance for the amounts and up the relevant columns for the accounts
affected.

move this question.

II. Adjusting Entries (20 points)
Using information in the financial statements and notes, provide the adjusting journal
entry Tesla must have made to prepare its 2017 financial statements. Assume
that Tesla recorded these items in a single entry and that the company closes its books
annually. You do not need to consider closing entries. Use Teslafinancial statement line items
as account titles. If no entry is required, explain why. Indicate whether each account you use is
an asset (A), liability (L), owners’ (shareholders’) equity (OE), revenue (R), or expense (E)
account. Be sure to state any assumptions you make.
Although the questions show journal entries with a single Debit and a single Credit, your
answers can use multiple Debits and Credits, if needed.
Unless noted, each question is independent of the others. (4 points each)

2-1
The unadjusted balance at December 31, 2017 for "Inventory" was $2,300,000 (Dr.).

Dr. Cost of Revenues: Automotive Sales $36,463 A, L, OE, R, E

Cr. Inventory A, L, OE, R, E $36,463

Assumptions (if any) 36,463 = 2,300,000 – 2,263,537 (ending balance in inventory). Assume all
inventory was used in Automotive Sales. Inventory was used up and therefore expensed.

move this question.

2-2
The unadjusted balance at December 31, 2017 for "Intangible assets, net" was $365,000 (Dr.).

Dr. Amortization Expense $3,498 A, L, OE, R, E

Cr. Intangible assets, net A, L, OE, R, E $3,498

Assumptions (if any) 3,498 = 365,000 - 361,502 (ending balance in intangibles). To amortize the
intangibles. Other expense accounts are acceptable.

move this question.

2-3
The unadjusted balance at December 31, 2017 for (total) "Deferred Revenue" was $2,300,000
(Cr.).

Dr. Deferred Revenue (total) $ 106,948 A, L, OE, R, E

Cr. Revenue: Automotive Sales A, L, OE, R, E $106,948

Assumptions (if any) 106,948 = 2,300,000 – (1,015,253 + 1,177,799) (the sum of the current and long-
term deferred revenue on the balance sheet). Tesla must have earned some of the deferred revenue.
move this question.
Question 2-4
The unadjusted balance at December 31, 2017 for "Prepaid expenses and other current assets"
was $265,000 (Dr.).

Dr. Prepaid expenses… $3,365 A, L, OE, R, E

Cr. Selling, general and administrative A, L, OE, R, E $3,365

Assumptions (if any) – 3,365 = 265,000 – 268,365. Tesla must have expensed costs that should have
been treated as prepaid expenses. This entry corrects that by properly measuring the asset. SG&A is the
most likely expense, but others could be used—the point being that an expense is credited.
move this question.
Question 2-5
The unadjusted balance at December 31, 2017 for "Interest expense" was $470,000 (Dr.).

Dr. Interest expense $1,259 A, L, OE, R, E

Cr. Interest payable (accrued liabilities) A, L, OE, R, E $1,259

Assumptions (if any): to accrue additional interest payable and record expense: final expense –
unadjusted balanceà 471,259 – 470,000
move this question.
III Cash Flow Statement (20 points total)
Refer to Tesla's Consolidated Statements of Cash Flows.
or Space to move this question.
3-1
Explain in general terms why Tesla adds depreciation and amortization in the operating section
of its statement of cash flows.

The operating section of the SCF is a reconciliation of NI to CF from Operations. As such, it

begins with the accrual figure, NI (net loss), and backs out non-cash expenses like depreciation
and amortization expense.

Depreciation and amortization don’t use cash, by themselves, but they are associated with cash
flows. When the assets being depreciated or amortized were purchased, cash was used.
Generally, those cash flows are Investing cash outflows.
move this question.
3-2
Why is there no line item for depreciation and amortization on Tesla's income statement?

Depreciation and Amortization are included on the income statement, but they are embedded
into other expenses. For example, depreciation of lab equipment is included in R&D expense.
Depreciation of the office equipment is included in SG&A expense.

move this question.

3-3
Explain, in general terms, why Tesla's cash balance changed in fiscal 2017. That is, read and
interpret, Tesla's 2017 cash flow statement. What were its major sources and uses of cash?

Tesla used $25,302 (i.e., ~$25 million) of cash in 2017 overall. Although the change seems
small, it belies the massive investments and financing that took place during the year.

Tesla’s operating cash flow was negative in 2017. The company used $60,654 of cash in running
its operations. That is less than prior years, which is a good sign (the trend is a positive one). In
the long run, a company needs to generate positive operating cash flow to remain in business.

As Tesla’s manufacturing activities grew, the company spent $4,418,967 (over $4 billion) on
investing activities. This was largely PP&E and solar systems that they are leasing to others.
This investment is massive and needed to get their production to a level where they can be
profitable (and generate positive operating cash flow).

They funded this investment through financing activities. They issued both equity and debt. The
major piece was an issuance of debt for $7 billion. (That refinanced about $4 billion of existing
debt.) Overall, they raised $4,414,864 in funds that they invested in their business. Although they
were able to raise those funds in 2017, investors will be reluctant to provide further funding if
operations do not become profitable and generate positive operating cash flow in the near future
(The company also benefited from a favorable exchange rate environment in 2017.)
move this question.
3-4
An August 17, 2018 Wall Street Journal (WSJ) article, The Game has Changed at Tesla,
indicated, "[The] SEC investigation* means Tesla’s precarious cash situation could become
critical in the coming months." They go on to report, "Moody’s Investors Service warned back in
March [of 2018] that Tesla needs to raise $2 billion of capital in the “near term.”"
Referring to Tesla's Statements of Cash Flows, explain why the WSJ is highlighting Tesla's
"precarious cash situation."
*The SEC investigation covers recent tweets by CEO Elon Musk about taking the company
private and company disclosures about Model 3 sedan production issues.
move this question.
The previous answer provides an explanation.

Although Tesla has a $3 billion cash balance, Tesla has large capital investment needs and is
spending a lot of cash to expand its manufacturing operations. They spent $1.6B, $1.2B, and
$3.4B over the past three years. The company has had trouble getting its facilities operational
and as a result has had trouble meeting demand for its vehicles, resulting in negative operating
cash flow. Unless they can build cars at scale they won’t have the cash to invest in growth.

When a company has negative operating cash flow and large investing needs, there are two ways
to fund that: issue new debt or equity or sell off existing assets. The latter is not an option for
Tesla as they are trying to expand, not contract. But, at some point the cost of additional debt
becomes prohibitive (lenders begin to charge very high interest rates or simply decline to lend)
and shareholders invest in new shares only if the share price is sufficiently low (meaning the
company needs to issue a lot of shares to raise the needed funds—thus diluting the ownership of
existing shareholder).

If Tesla needs to raise an additional $2B, the question is, “where is that going to come from?”

(Although not mentioned in the question, one issue raised recently is whether Tesla has been
delaying payments to its suppliers. Doing so enhances operating cash flow in the short term, but
only delays the payments to the next period. Further, it puts pressure on suppliers who are not
being paid and increases the risk that they will decline to do business with Tesla. One can see
that accounts payable and accrued liabilities have been growing over recent years. Whether this
is simply due to Tesla’s growth or to them actively delaying their payments is not clear, but it is
being discussed in the financial press.)
IV Revenue Recognition (24 points total)
Refer to Tesla's financial statements and to Note 2. Summary of Significant Accounting Policies:
Revenue Recognition--Automotive Revenue, on page 69 of the 2017 Form 10-K. Ignore any
time value of money considerations.
Assume that on January 21, 2015 a customer paid Tesla $5,000 as a deposit on a Tesla Model 3
Sedan, to be delivered when the vehicle was produced. Model 3 production began in July 2017
on a very limited basis. The vehicle has a retail price of $35,000 and Tesla does not negotiate on
that price.
The customer's vehicle was delivered on December 31, 2017. The customer paid the remaining
balance at delivery.
Included in each Tesla Model 3 is free internet connectivity, "free" access to the Tesla
Supercharger network, and free over-the-air software updates for the life of the vehicle.
Internet connectivity sold by other vendors is estimated to be $25 per month.
Access to the Supercharger network is "free" for the first 1,000 miles. Thereafter, a full charge
(providing approximately 250 miles of driving) will cost $10. Tesla estimates that most drivers
will drive between 500 and 1,000 miles per month.
General Motors charges its OnStar customers $100 per year for optional software updates that
are automatically sent to their vehicles. Tesla does not sell over-the-air software updates
separately. Tesla managers maintain that they would sell their updates for only $50 year if they
were sold on a standalone basis.
move this question.
4-1
Provide the journal entry that Tesla recorded when it received the customer deposit on January
21, 2015. If no entry is required, explain why. Show your work to earn full credit.

Dr. Cash $5,000 A, L, OE, R, E

Cr. Deferred Revenue A, L, OE, R, E $5,000

Assumptions (if any): could also Credit Customer Deposits

move this question.

4-2
Provide the journal entry, if any, that Tesla recorded on December 31, 2017 when the customer
took delivery and paid for the vehicle. If no entry is required, explain why. Show your work to
earn full credit.

Dr. Cash $30,000 A, L, OE, R, E

Dr. Deferred Revenue $3,072 A, L, OE, R, E

Cr. Revenue: Automotive Sales A, L, OE, R, E $33,072

Note: if customer deposits was initially credited, it would be debited to bring it to zero and deferred revenue of $1,928
would need to be credited—that is:
Dr. Customer Deposits 5,000
Dr. Cash 30,000
Cr. Revenue 33,072
Cr. Deferred Revenue 1,928

Assumptions (if any)

Element Calculation Amount Type Allocation Revenue
Car $35,000 $35,000 VSOE 35,000* $33,072
(35,000/37,040)
Internet $25 x 48 months $1,200 TPE 35,000* $1,134
(1,200/37,040)
Over the air $100 x 8 years $800 TPE 35,000* $756
updates (96 months) (800/37,040)
Access to 4 charges at $10 $40 VSOE 35,000* $38
Supercharger (~1 month of (40/37,040)
driving)
$37,040 $35,000
move this question.
4-3
Provide the journal entry, if any, that Tesla will record on March 31, 2018 with respect to this
vehicle. If no entry is required, explain why. Show your work to earn full credit.

Dr. Deferred Revenue $133 A, L, OE, R, E

Cr. Revenue: Automotive Sales A, L, OE, R, E $133

Assumptions (if any): All Supercharger revenue is earned ($38) + three months of internet ($1,134 *
3/48 = $71) + three months of over the air updates ($756 * 3/96 = $24) = total $133
move this question
n.
4-4
On July 1, 2018 the owner of the Model 3 sedan in this question was in a car accident and the
vehicle was destroyed. The driver was not harmed. The owner has no recourse from Tesla. That
is, Tesla is not responsible for fixing or replacing the vehicle. What journal entry would Tesla
make as a result of the destruction of this vehicle? If no entry is required, explain why. Show
your work to earn full credit.

Dr. Deferred Revenue $1,701 A, L, OE, R, E

Cr. Revenue: Automotive A, L, OE, R, E $1,701

Assumptions (if any): because the car is destroyed, there is no obligation for Tesla to deliver further over
internet or over the air updates. Tesla would have recorded 3 months of those services in the quarter
ending June 30, 2018. That leaves balances of 42 months of internet and 90 months of updates. Those
are now considered earned on July 1, 2018.
$1,134 * 42/48 = 992.25
$756 * 90/96 = 708.75
Total: $1,701
Alternatively:
The original amount allocated to internet was $1,134 and in the first six months 6/48, or 141.75 was
earned, leaving a balance of 992.25.
The original amount allocated to updates was $756 and in the first six months 6/96, or 47.25 was
earned, leaving a balance of 708.75
V Receivables (16 points total)
Tesla does not disclose balances in its Allowance for Doubtful Accounts for "Accounts
receivable." Assume that the balances were $500 at December 31, 2017 and $435 at December
31, 2016.
move this question.
5-1
Tesla does not disclose balances in its Allowance for Doubtful Accounts for "Accounts
receivable." Assume that the balances were $500 at December 31, 2017 and $435 at December
31, 2016.
If Tesla wrote off $135 of "Accounts receivable" in 2017, what journal entry did the company
make to record Bad Debt Expense for 2017?

Dr. Bad Debt Expense $200 A, L, OE, R, E

Cr. Allowance for Doubtful Accounts A, L, OE, R, E $200

Assumptions (if any)

Allowance for Doubtful Accounts
435 beginning balance
Write offs 135 Therefore:
200 Bad Debt Expense
500 ending balance
move this question.
5-2
Refer only to the Tesla Consolidated Balance Sheets for this question.
Assume that in 2017 Tesla earned all the "Deferred revenue" that it classified as current at the
end of 2016. Further assume that this was the only deferred revenue earned by the company in
2017
How much cash did Tesla collect from customers in 2017 under its various arrangements that
lead to deferred revenues?
Show your work to earn full credit.

Deferred Revenue (current + noncurrent)

763,126 + 851,790 beginning
balance
Earned 763,126 Therefore:
1,341,262 collected
1,015,253 + 1,177,799 ending
balance
move this question.
5-3
Assume that Tesla's "Energy generation and storage" and "Services and other" businesses
provide credit to their customers. Assume that the "Automotive sales" and "Automotive leasing"
businesses do not. How long, on average, did it take Tesla to be paid by its "Energy generation
and storage" and "Services and other" customers in 2017?

Days sales outstanding =

365 days / (Sales / Average Receivables)

365 / [(1,116,266* + 1,001,185**) / {(499,142 +515,381) / 2}] = 87.4 days

*Energy generation and storage revenues

**Service and other revenues