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COMPREHENSIVE EXAMINATION F

PART 6

(Chapters 22-24)

Approximate
Problem Topic Time
F-I Multiple Choice Questions. 25 min.
F-II Statement of Cash Flows. 25 min.
F-III Accounting Changes, Error Corrections, and
Prior Period Adjustments. 30 min.
F-IV *Analysis of Financial Statements. 25 min.
F-V Segment Reporting. 15 min.
120 min.

*This topic is dealt with in an Appendix to the chapter.

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F-2 Test Bank for Intermediate Accounting, Fourteenth Edition

Problem F-I — Multiple Choice Questions.

1. Which of the following transactions would be considered a financing activity in preparing a
statement of cash flows?
a. Amortizing a discount on bonds payable
b. Recording net income from operations
c. Selling common stock
d. Purchasing inventory

2. The net income for the year ended December 31, 2013, for Tax Consultants INC. was
$920,000. Additional information is as follows:

Capital expenditures $1,200,000

Depreciation on plant assets 450,000
Cash dividends paid on common stock 180,000
Increase in noncurrent deferred tax liability 45,000
Amortization of patents 21,000

Based on the information given above, what should be the net cash provided by operating
activities in the statement of cash flows for the year ended December 31, 2013?
a. $1,256,000.
b. $1,346,000.
c. $1,391,000.
d. $1,436,000.

3. Information concerning the debt of Cole Company is as follows:

Short-term borrowings:
Balance at December 31, 2012 $525,000
Proceeds from borrowings in 2013 325,000
Payments made in 2013 (450,000)
Balance at December 31, 2013 $400,000
Current portion of long-term debt:
Balance at December 31, 2012 $1,625,000
Transfers from caption "Long-Term Debt" 500,000
Payments made in 2013 (1,225,000)
Balance at December 31, 2013 $ 900,000
Long-term debt:
Balance at December 31, 2012 $9,000,000
Proceeds from borrowings in 2013 2,250,000
Transfers to caption "Current Portion of Long-Term Debt" (500,000)
Payments made in 2013 (1,500,000)
Balance at December 31, 2013 $9,250,000

In preparing a statement of cash flows for the year ended December 31, 2013, for Cole
Company, cash flows from financing activities would reflect
Outflow
a. $2,000,000
b. $2,250,000
c. $2,575,000
d. $3,175,000
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Comprehensive Examination F F-3

Problem F-I — (cont.)

4. In considering interim financial reporting, how did the Accounting Principles Board
conclude that such reporting should be viewed?
a. As a "special" type of reporting that need not follow generally accepted accounting
principles.
b. As useful only if activity is evenly spread throughout the year so that estimates are
unnecessary.
c. As reporting for a basic accounting period.
d. As reporting for an integral part of an annual period.

5. Which of the following items represents a potential use of cash?

a. Patent amortization
b. Sale of plant assets at a loss
c. Net loss from operations
d. Declaration of a stock dividend

6. Worthington Company purchased a machine on January 1, 2010, for $4,800,000. At the

date of acquisition, the machine had an estimated useful life of six years with no salvage.
The machine is being depreciated on a straight-line basis. On January 1, 2013,
Worthington determined, as a result of additional information, that the machine had an
estimated useful life of eight years from the date of acquisition with no salvage. An
accounting change was made to reflect this additional information. What amount of
depreciation expense should be reported in Worthington’s income statement for the year
ended December 31, 2013?
a. $800,000
b. $600,000
c. $480,000
d. $300,000

7. On January 7, 2011, Yoder Corporation acquired machinery at a cost of $1,500,000.

Yoder adopted the sum-of-the-years’-digits method of depreciation for this machine and
had been recording depreciation over an estimated life of five years, with no residual
value. At the beginning of 2013, a decision was made to change to the straight-line
method of depreciation for this machine. Assuming a 30% tax rate, the cumulative effect
of this accounting change, net of tax, is
a. $0
b. $200,000
c. $210,000
d. $300,000

*8. Information from Collins Company’s balance sheet is as follows:

Current assets:
Cash $ 12,000,000
Short-term investments 20,000,000
Accounts receivable 50,000,000
Inventories 66,000,000
Prepaid expenses 2,000,000
Total current assets $150,000,000
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F-4 Test Bank for Intermediate Accounting, Fourteenth Edition

Problem F-I (cont.)

Current liabilities:
Notes payable $ 11,000,000
Accounts payable 18,000,000
Accrued expenses 13,000,000
Income taxes payable 3,000,000
Current portion of long-term debt 5,000,000
Total current liabilities $ 50,000,000

What is the acid-test (quick) ratio?

a. 1:24 to 1
b. 1.64 to 1
c. 1.68 to 1
d. 3.00 to 1

*9. Fargo, Inc. disclosed the following information as of and for the year ended December 31,
2013:
Net cash sales 600,000
Net credit sales 900,000
Inventory at beginning 100,000
Inventory at end 150,000
Net income 30,000
Accounts receivable at beginning of year 110,000
Accounts receivable at end of year 130,000
Fargo’s receivables turnover is
a. 6.9 to 1.
b. 7.5 to 1.
c. 12.5 to 1.
d. 13.6 to 1.

*10. The calculation of the number of times interest is earned involves dividing
a. net income by annual interest expense.
b. net income plus income taxes by annual interest expense.
c. net income plus income taxes and interest expense by annual interest expense.
d. none of the above.
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Comprehensive Examination F F-5

Problem F-II — Statement of Cash Flows.

Sharp Company
Comparative Balance Sheet

December 31
2013 2012
Cash $ 54,000 $ 36,000
Accounts receivable, net 53,000 57,000
Inventory 161,000 123,000
Land 180,000 285,000
Building 300,000 300,000
Accumulated depreciation (75,000) (60,000)
Equipment 1,565,000 900,000
Accumulated depreciation (177,000) (141,000)
$2,061,000 $1,500,000

Accounts payable $ 202,000 $ 150,000

Bonds payable 450,000 -0-
Capital stock, $10 par 1,125,000 1,125,000
Retained earnings 284,000 225,000
$2,061,000 $1,500,000
Additional Data:
1. Net income for the year amounted to $104,000.
2. Cash dividends were paid amounting to 4% of par value.
3. Land was sold for $120,000.
4. Sharp sold equipment, which cost $225,000 and had accumulated depreciation of $90,000,
for $105,000.

Instructions
Prepare a statement of cash flows using the indirect method.
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F-6 Test Bank for Intermediate Accounting, Fourteenth Edition

Problem F-III — Accounting Changes, Error Corrections, and Prior Period Adjustments.
Molina Company’s reported net incomes for 2013 and the previous two years are presented
below.
2013 2012 2011
$105,000 $95,000 $70,000

2013’s net income was properly determined after giving effect to the following accounting
changes, error corrections, etc. which took place during the year. The incomes for 2011 and 2012
do not take these items into account and are stated at the amounts determined in those years.
Ignore income taxes.

Instructions
(a) For each of the six accounting changes, errors, or prior period adjustment situations
described below, prepare the journal entry or entries Molina Company should record during
2013. If no entry is required, write “none.”
(b) After recording the situation in part (a) above, prepare the year-end adjusting entry for
December 31, 2013. If no entry, write “none.”

1. Early in 2013, Molina determined that equipment purchased in January, 2011 at a cost of
$645,000, with an estimated life of 5 years and salvage value of $45,000 is now estimated
to continue in use until December 31, 2017 and will have a $15,000 salvage value. Molina
recorded its 2013 depreciation at the end of 2013.

(a)

(b)

2. Molina determined that it had understated its depreciation by $20,000 in 2012 owing to the
fact that an adjusting entry did not get recorded.

(a)

(b)

3. Molina bought a truck January 1, 2010 for $50,000 with a $5,000 estimated salvage value
and a six-year life. The company debited an expense account and credited cash on the
purchase date. The truck is expected to be traded at the end of 2015. Molina uses straight-
line depreciation for its trucks.

(a)

(b)
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Comprehensive Examination F F-7

Problem F-III (cont.).

4. During 2013, Molina changed from the straight-line method of depreciating its cement plant
to the double-declining-balance method. The following calculations present depreciation on
both bases. (Ignore income taxes.) The 2013 amount applies double-declining balance to
the 1/1/13 carrying amount after straight-line was used.

2013 2012 2011

Straight-line $100,000 $100,000 $100,000
Double-declining $200,000 $160,000 $200,000

(a)

(b)

5. Molina, in reviewing its provision for uncollectibles during 2013, has determined that 1/2 of
1% is the appropriate amount of bad debt expense to be charged to operations. The
company had used 1% as its rate in 2012 and 2011 when the expense had been $20,000
and $14,000, respectively. The company would have recorded $50,000 of bad debt expense
on December 31, 2013 under the old rate.

(a)

(b)

6. During 2013, Molina decided to change from the LIFO method of valuing inventories to
average cost. The net incomes involved under each method were as follows:

2013 2012 2011

LIFO $51,000 $59,000 $42,000
Average cost $63,000 $67,000 $48,000

Assume no difference between LIFO and average cost inventory values in years prior to
2011.

(a)

(b)
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F-8 Test Bank for Intermediate Accounting, Fourteenth Edition

Problem F-IV — Analysis of Financial Statements.

The market value of Farmington Corp.'s common shares was quoted at $54 per share at
December 31, 2013, and 2012. Planetarium 's balance sheet at December 31, 2013, and 2012,
and statement of income and retained earnings for the years then ended are presented below:

Farmington Corp.
Balance Sheet
December 31
2013 2012
Assets:
Current assets:
Cash $ 9,000,000 $ 5,200,000
Short-term investments 17,200,000 15,400,000
Accounts receivable (net) 109,000,000 111,000,000
Inventories, lower of cost or market 122,000,000 140,000,000
Prepaid expenses 4,000,000 2,800,000
Total current assets $261,200,000 $274,400,000

Property, plant, and equipment (net) 350,000,000 315,000,000

Investments, at equity 2,800,000 3,500,000
Long-term receivables 15,000,000 20,000,000
Copyrights and patents (net) 6,000,000 7,000,000
Other assets 8,000,000 9,100,000
Total assets $643,000,000 $629,000,000

Liabilities and Stockholders' Equity:

Current liabilities:
Notes payable $ 7,000,000 $ 17,000,000
Accounts payable 55,000,000 52,000,000
Accrued expenses 27,500,000 30,000,000
Income taxes payable 1,500,000 2,000,000
Current portion of long-term debt 10,000,000 9,500,000
Total current liabilities 101,000,000 110,500,000

Long-term debt 180,000,000 190,000,000

Deferred income taxes 69,000,000 65,000,000
Other liabilities 15,000,000 9,500,000
Total liabilities 365,000,000 375,000,000

Stockholders' equity:
Common stock, par value $1; authorized 20,000,000
shares; issued and outstanding 12,000,000 shares 12,000,000 12,000,000
10% cumulative preferred shares, par value $100;
$100 liquidating value; authorized 100,000 shares;
issued and outstanding 60,000 shares 6,000,000 6,000,000
Additional paid-in capital 119,000,000 119,000,000
Retained earnings 141,000,000 117,000,000
Total stockholders' equity 278,000,000 254,000,000
Total liabilities and stockholders' equity $643,000,000 $629,000,000
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Comprehensive Examination F F-9

*Problem F-IV (cont.).

Farmington Corp.
Statement of Income and Retained Earnings

Year ended December 31

2013 2012
Net sales $540,000,000 $500,000,000
Cost and expenses:
Cost of goods sold 390,900,000 400,000,000
Selling, general, and administrative expenses 70,000,000 65,000,000
Other, net 9,100,000 6,000,000
Total costs and expenses 470,000,000 471,000,000

Income before income taxes 70,000,000 29,000,000

Income taxes 21,000,000 11,600,000
Net income 49,000,000 17,400,000

Retained earnings at beginning of period 117,000,000 113,100,000

Dividends on common stock (24,400,000) (12,900,000)
Dividends on preferred stock (600,000) (600,000)
Retained earnings at end of period $141,000,000 $117,000,000

Instructions

Based on the above information, compute the following (for the year 2013 only): (Show
supporting computations in good form.)

(a) Current ratio.

(b) Acid-test (quick) ratio.

(c) Receivables turnover.

(d) Inventory turnover.

(e) Book value per share of common stock.

(f) Earnings per share on common stock.

(g) Price-earnings ratio on common stock.

(h) Payout ratio on common stock.

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F - 10 Test Bank for Intermediate Accounting, Fourteenth Edition

Problem F-V — Segment Reporting.

Baden Company is a diversified company which has developed the following information about its
five segments:
SEGMENTS
A B C D E
Total sales $ 600,000 $1,700,000 $ 300,000 $ 320,000 $ 580,000

Operating profit (loss) (270,000) 480,000 40,000 (300,000) (10,000)

Identifiable assets 1,600,000 5,800,000 1,200,000 3,900,000 5,600,000

Instructions
Identify which segments are significant enough to warrant disclosure in accordance with FASB
No. 131, "Reporting Disaggregated Information about a Business Enterprise," by applying the
following quantitative tests:

a. Revenue test
b. Operating profit or loss test
c. Identifiable assets test
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Comprehensive Examination F F - 11

Solutions — Comprehensive Examination F

Problem F-I — Solution.

1. c 6. c
2. d 7. a
3. d *8. b
4. d *9. b
5. c *10. c

Problem F-II — Solution.

Sharp Company
Statement of Cash Flows
For the Year Ended December 31, 2013

Cash flows from operating activities

Net income $104,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Decrease in accounts receivable $ 4,000
Increase in inventory (38,000)
Increase in accounts payable 52,000
Gain on sale of land (15,000)
Loss on sale of equipment 30,000
Depreciation expense—building 15,000
Depreciation expense—equipment 126,000 174,000
Net cash provided by operating activities 278,000

Cash flows from investing activities

Sale of land 120,000
Sale of equipment 105,000
Purchase of equipment (890,000)
Net cash used by investing activities (665,000)

Cash flows from financing activities

Payment of cash dividends (45,000)
Issuance of bonds 450,000
Net cash provided by financing activities 405,000

Net increase in cash 18,000

Cash, January 1, 2013 36,000
Cash, December 31, 2013 $ 54,000
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F - 12 Test Bank for Intermediate Accounting, Fourteenth Edition

Problem F-III — Solution.

1. (a) None

(b) Depreciation Expense ............................................................ 78,000

Accumulated Depreciation ............................................. 78,000
[($645,000 – $240,000 – $15,000) ÷ 5]

2. (a) Retained Earnings .................................................................. 20,000

Accumulated Depreciation ............................................. 20,000

(b) None

3. (a) Truck ....................................................................................... 50,000

Accumulated Depreciation ............................................. 22,500
Retained Earnings ......................................................... 27,500

(b) Depreciation Expense ............................................................ 7,500

Accumulated Depreciation ............................................. 7,500

4. (a) None

(b) Depreciation Expense ............................................................ 200,000

Accumulated Depreciation ............................................. 200,000

5. (a) None

(b) Bad Debt Expense .................................................................. 25,000

Allowance for Doubtful Accounts ................................... 25,000

6. (a) Inventory (Beginning) ............................................................. 14,000

Retained Earnings ......................................................... 14,000

(b) None

*Problem F-IV — Solution.

(a) Current ratio:

Total current assets $261,200,000

—————————— = —————— = 2.59 to 1
Total current liabilities $101,000,000

(b) Acid-test (quick) ratio:

Total quick assets $135,200,000

—————————— = ——————— = 1.34 to 1
Total current liabilities $101,000,000
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Comprehensive Examination F F - 13

*Problem F-IV — Solution (cont.)

(c) Receivables turnover:

Net sales $540,000,000

————————————— = ————————————————– = 4.91 times
Average accounts receivable [($109,000,000 + $111,000,000) ÷ 2]

(d) Inventory turnover:

Cost of goods sold $390,900,000

————————— = —————— = 2.98 times
Average inventories $131,000,000

(e) Book value per share of common stock:

Total stockholders' equity – liquidating value of preferred stock $272,000,000

———————————————————————————— = —————— = $22.67
Common shares issued and outstanding at December 31, 2013 12,000,000

(f) Earnings per share on common stock:

Net income – dividends on preferred stock $48,400,000

——————————————————————————— = —————— = $4.03
Average common shares issued and outstanding during 2013 12,000,000

(g) Price-earnings ratio on common stock:

Market value of common stock $54.00

————————————————— = ———— = 13.4
Earnings per share on common stock $4.03

(h) Payout ratio on common stock:

Dividends on common stock $24,400,000

——————————————————— = —————— = 50.4%
Net income – dividends on preferred stock $48,400,000
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F - 14 Test Bank for Intermediate Accounting, Fourteenth Edition

Problem F-V — Solution.

a. Revenue test — a segment is reportable if its total sales are $350,000 or more
(10% × $3,500,000). Segments A, B, and E satisfy the revenue test.
b. Operating profit or loss test — a segment's absolute profit or loss must be $58,000 or more
[10% of the absolute greater of $520,000 or ($580,000)]. Segments A, B, and D satisfy the
operating profit or loss test.
c. Identifiable assets test — a segment's identifiable assets must be $1,810,000 or more (10%
× $18,100,000). Segments B, D, and E satisfy the identifiable test.
Segments A, B, D, and E are identified as significant and therefore reportable because they
passed at least one of the significance tests.