Multiple choice questions (choose the best answer) 3 points each: 15 points total

1. An asset is impaired when the asset’s carrying value is:

a. greater than the sum of discounted expected cash flows.

b. less than the sum of discounted expected cash flows.
c. less than the sum of undiscounted expected cash flows.
d. greater than the sum of undiscounted expected cash flows.
e. none of the above

2. The January 28, 2017 (fiscal year 2016) financial statements of Caleres, Inc. reported the following information
(in thousands).
2016 2015
Cost of sales $1,517,397 $1,529,527
Inventories, net 585,764 546,745
LIFO reserve 4,345 4,094

If Caleres had used the FIFO method of inventory costing, 2016 inventory would have been:
A) $506,852 million
B) $590,109 million 585,764+4,345=590,109
C) $504,752 million
D) $581,419 million
E) None of the above

3. Berlin Corporation purchases an investment in Best Pictures, Inc. at a purchase price of $3 million cash,
representing 45% of the book value of Best Pictures. During the year, Best Pictures reports net income of
$350,000 and pays a total of $90,000 of cash dividends. At the end of the year, the market value of Berlin’s
investment is $3.7 million. What is the year-end balance of the equity investment in Best Pictures?

a. $3,000,000
b. $3,117,000 3,000,000+157,500-40500 157,500=350,00x45% 40,500= 90,000x45%
c. $3,157,500
d. $3,260,000
e $3,700,000

4. On July 1, 2017, Ashtabula Corp. purchases 100% of Blasdell Company for $3.575 million. At the
time of acquisition, the fair market value of Blasdell’s tangible net assets (excluding goodwill) is $2.99
million. Ashtabula ascribes the excess of $585,000 to goodwill. During the first half of the year, the
fair value of Blasdell declines to $3.185 million and the fair value of Blasdell’s tangible net assets is
estimated at $2.795 million as of December 31, 2017. This decline is deemed permanent.

What impairment charge, if any, should Ashtabula report at December 31, 2017?
A) $195,000 2.99-2.795=0.195
B) $390,000
C) $585,000
D) $-0-
E) None of the above

5. Which of the following would not require the company to record an accrual on the balance sheet?

a. The company owes $20,000 in wages to its employees for the previous two weeks.
b. Interest will be paid when a note payable matures in the following accounting period
c. Management believes a lawsuit against the company is meritless because they have never had a single complaint
about dangerous side effects of their drug in two years.
d. The company knows that they will be fined for pollution as a result of their manufacturing process and can estimate
the amount of the obligation.
e. None of the above.

SIX Short problems: (10 points each): ALL REQUIRED 60 Points Total

1. EZ Wheels Corporation manufactures kick scooters. The company offers a one-year warranty on all
scooters. During 2017, the company recorded net sales of $2,800 million. Historically, about 3% of all
sales are returned under warranty and the cost of repairing and or replacing goods under warranty is
about 30% of retail value. Assume that at the start of the year EZ Wheels’ balance sheet included an
accrued warranty liability of $15.4 million and at the end of the year, the accrued warranty liability
balance was $11.5 million.

a. How should EZ Wheels account for warranty claims?

A.
The warranty expense will be put in year the that the sales were
made.

Warranty Expenses 25.2

Estimated warranty liability account 25.2

actual expense
paid

Estimated
warranty 29.1

Cash account 29.1

b. Calculate EZ Wheels’ warranty expense for 2017.

B.

Net sales 2800

Estimated warranty cost 0.90%

Estimated warranty liability

account 25.2
 c. How much did EZ Wheels pay during the year to repair and or replace scooters under warranty?

C.
Beginning balance 15.4
Warranty liabilities 25.2

total 40.6

less ending balance 11.5

Warranty paid during the year 29.1

2. On June 5, 2017, Lewiston, a tile manufacturer, repurchased 2,000 of its $0.75 par value common
shares for $22.50 cash per share. On October 5, 2017, Lewiston reissues the 2,000 common shares
for $40.50 cash per share. Prepare the journal entries for the transactions above and answer
the following questions.

a. What is the change in the treasury stock account on June 5, 2017?

b. On October 5, does Lewiston recognize a profit from the $18 per share increase in the stock’s
market value?
c. What is the change in the treasury stock account as a result of the October 5, 2017 transaction?
d. What is the change in the additional paid-in capital account as a result of the October 5, 2017
transaction?

June 5 2017 October 5 2017

A. Change in treasury stock
cash 81000
2000 Change in Treasury stock 45000
22.5
cash 45000 additional paid in capital 36000

B. Lewiston would recognize a profit for the $18 share increase

C. Cash direct
45000
Change in treasury stock
45000
0

Change in additional pre paid capital

D.
36000
3. In their 2015 10-K report, eBay reported a stock option grant of 2 million options during the year, the
per share fair-value of which was computed as $6.84. If the options have, on average, a four-year
vesting period. what expense did the company report in 2015 related to this grant?
IGNORE income tax effects.

Stock optopm expense=fair vaslue of options credited/vesting period

2,000,000
6.84
13,680,000
4 years
Stock option expense 3,420,000

Three additional problems on next page (required).

4. The stockholders’ equity of Crater, Inc. at December 31, 2016, appears below:

Common stock, $25 par value, 200,000 shares authorized,135,000

shares issued and outstanding 3,375,000
Paid-in capital in excess of par value 1,750,000
Retained earnings 2,575,000

During 2017, the following transactions occurred:

May 10: Declared a 10% common stock dividend when market value was $50 per share
August 31: Issued the stock dividend declared on June 15.
December 10: Declared a cash dividend of $3.50 per share to be paid in January 2018.
December 31: Recognized net income of $ 1,630,500.

Compute the year-end balance of the retained earnings for 2017.

Compute the year-end balance of the retained earnings for 2017

RE + 2575000
NI + 1630500
subtract -675000
subtract -519750

Year end balance $ 3,010,750

5. Mayberry Gas Corp. sells $200,000 of bonds to private investors. The bonds are due in five years,
have an 8% coupon rate, and interest is paid semi-annually. The bonds were sold to yield 6%. What
proceeds does Mayberry receive from the investors at the time of issuance? (You must show how
you arrived at the answer either on EXCEL or by using the appendices at the end of the book .
You may lose points if you do not show me the details.)

Face Value of Bonds 200,000

Coupon rate 8%
Semi annual interest 8,000

6. Aiello, Inc. had the following inventory in fiscal 2016. Compute the company’s cost of goods sold for
fiscal 2016 assuming the company used a) FIFO and b) LIFO methods of accounting for inventory:

Beginning Inventory, January 1, 2016: 130 units @ $15.00

Purchase 200 units @ $18.00

Purchase 50 units @ $13.50

Purchase 110 units @ $15.75

Ending Inventory, December 31, 2016: 120 units

Compute the company’s cost of goods sold for fiscal 2016

Units price Total

Beg inventory 130 15 1950
Purchase 200 18 3600
Purchase 50 13.5 675
Purchase 110 15.75 1732.5

Total 490 7957.5

Sold 370
Ending Inv 120

Ending inventory 10 13.5 135

110 15.75 1732.5
1867.5

COGS $ 6,090