Acct 2102 Midterm 2 Study Guide Spring 2015

Exam Format:

Multiple choice questions (42 @ 6.25 points each). Total possible points are 262.5

Maximum grade is 250! The extra points are to compensate for any weakness in the
main test instrument and misunderstanding in the question wording.
Students need to bring their own scantron. Do not mark your scantron until you have
selected your FINAL answer. Eraser marks confuse the scantron grading machine. All
adverse consequences of eraser marks and mismarks are the students responsibility.
Bring extra scantrons.
You are permitted to use a simple four-function calculator (cell phones are NOT simple
four-function calculators). Instructors/exam proctors will check each students calculator
while distributing the exams.
This is a closed book, closed note, and closed neighbor exam. You are NOT permitted to
have scratch paper. You are NOT to look around during the exam. You are to keep your
scantron sheet covered to the extent possible. You must turn in your exam and scantron
with your name, your instructors name, and the version letter of the exam on both. You
will be asked to show a picture id when you turn in your exam and scantron.
You will have 120 minutes to complete the exam.
The exam covers Chapters 14 17.

Skills needed to succeed:

Chapter 14:
1. Calculate cash proceeds on a non-interest bearing note.
Super Wired Electronics needs to borrow $4,200,000 and decides to
issue a five year, non-interest bearing note when the market rate is
8% compounded semi-annually. What is the face value of the note?
FV Lump Sum of 1, n=10, r=8%, r/c =4%, c=2
Factor = 1.4802
1.4802*4200000=6216840

2. Understand the use of financial leverage.

3. Calculate interest on an installment note.

Camp Enterprises just borrowed $15,000. Camp will pay off the loan
in two years by making monthly payments starting one month from
today at an annual interest rate of 12%.
Question: What is Camps monthly payment?
Payment x PVA factor = $15,000
c=12,n=24, r/c=12%/12=1%
Payment x 21.2434 = $15,000
Payment = $15,000 21.2434
Monthly payment = $706.10
In the beginning, Camps loan balance is $15,000.
Remember our formula for interest expense?
Carrying Value * Market Rate = Interest Expense
$15,000 * 1% = $150

4. Explain the methodology for calculating interest on a non-interest

bearing note.
Noninterest-bearing Notes: Your book refers to this as a lump sum
note.
An amount is borrowed (proceeds) and a note is issued for
a larger, lump-sum amount (face value) to be repaid at a
later date (maturity).

There is no interest rate stated on the note, and no

payments are made until maturity. The difference between
the proceeds and the face value equals the total interest
charged by the lender.

5. Calculate principal and interest portions of installment payments.

Camp Enterprises just borrowed $15,000. Camp will pay off the loan
in two years by making monthly payments starting one month from
today at an annual interest rate of 12%.
Question: What is Camps monthly payment?
Payment x PVA factor = $15,000
c=12,n=24, r/c=12%/12=1%
Payment x 21.2434 = $15,000
Payment = $15,000 21.2434
Monthly payment = $706.10
In the beginning, Camps loan balance is $15,000.
Remember our formula for interest expense?
Carrying Value * Market Rate = Interest Expense
$15,000 * 1% = $150
So, Camp makes a $706.10 payment, of which $150 is interest.
$706.10 $150 =$556.10 (principal)
The same process is repeated each period. Although the amount of
each payment stays the same, the allocation between principal and
interest changes each period.
New carrying value = current carrying value principal reduction
6. Calculate the proceeds for a periodic lump sum note.
Raterink wants to borrow money by issuing a 3-year interest-bearing
note with a 6% face rate and a face value of $400,000. At the time
the loan is made, the market rate of interest is 7%.
Question: If, as a lender, you could earn $28,000 (7%) a year on a
$400,000 investment, would you be willing to loan Raterink
$400,000 in order to earn $24,000 (6%) per year?
What we are interested in knowing is what amount of cash Raterink
should receive in exchange for making 3 annual payments of
$24,000 plus $400,000 three years from today. Keep in mind that
the lender can earn 7% elsewhere on its investments.
Calculating Proceeds:
$24,000 x 2.6243 = $62,983
n=3, r=7%, c =1
$400,000 x .8163 = $326,520
n=3, r=7%, c=1
$62,983 + $326,520 = $389,503
Raterink will receive $389,503.20 (cash inflow) at the beginning
of year 1. At the end of years 1 & 2 it will pay (cash outflow)

$24,000 to the lender. At the end of year 3, Raterink will pay

another $424,000 (cash outflow) to the lender. PVA, where n=3,
r=7%, ann=24,000
7. Recognize installment, lump sum and periodic lump sum notes and
understand the differences,
8. Calculate payments of an installment note.
Camp Enterprises just borrowed $15,000. Camp will pay off the loan
in two years by making monthly payments starting one month from
today at an annual interest rate of 12%.
Question: What is Camps monthly payment?
Payment x PVA factor = $15,000
c=12,n=24, r/c=12%/12=1%
Payment x 21.2434 = $15,000
Payment = $15,000 21.2434
Monthly payment = $706.10
9. Understand the relationship between the market rate of interest
and the stated rate of interest for a periodic lump sum note.
Okay, we have established that when the face rate associated
with the note/bond is less than the market rate of interest, the
proceeds will be less than the face value.
If Face Rate < Market Rate = Discount
In this case we have established that when the face rate
associated with the note/bond is greater than the market rate
of interest, the proceeds will be more than the face value.
If Face Rate > Market Rate = Premium
10. Understand the concepts of premiums and discounts on
borrowing notes.
At a discount
1. The amount of the interest payment stays the same
throughout the loan
2. Interest expense increases each period as CV increases
3. The CV increases each period and reaches face value at
maturity
4. The spread between the payment and interest expense
widens each period, causing an increase in CV adjustment
At a premium
1. The amount of each payment stays the same throughout
the loan
2. The CV decreases each period and reaches face value at
maturity
3. Interest expense decreases each period as CV
decreases

4. The gap between the payment and interest expense widens

each period, causing the CV adjustment to increase
11. Given a partial amortization table, determine the face rate of
interest.
12. Given a partial amortization table, determine the effective
(market) rate of interest.
13. Given a partial amortization table, calculate interest expense and
change in premium or discount and carrying value.
14. Understand the methodology for quoting bond prices.
In the marketplace, bonds are quoted at a percentage of face value.
For example, the cash received from a $1,000,000 bond selling at
97 would equal $975,000 (.9750)
15. Understand how to calculate principle, interest and carrying
value for an installment note.
Chapter 15:
16. Given several equity transactions, calculate total shareholder
equity.
The total amount transferred from retained earnings to contributed
capital accounts is the number of shares x the market price of the
stock. Stock dividend distributable is an owners equity account, not
a liability account.
If PCs to Go issues 250,000 shares of common stock for $14 per share and 12,000 shares of
preferred stock for $125 per share, the total assets and total owners equity of the company
increase by $5,000,000 (250,000 $14 + 12,000 $125) as indicated here:
Assets = Liabilities + Owners equity
+5,000,000

+5,000,000

But we must separate the legal capital from the capital contributed in excess of par value.
Therefore the general journal entry is:

17. Given a series of transactions, calculate retained earnings.

Warrik Corporation currently has 100,000 shares of its $1 par value
common stock issued and outstanding. They declare a 15% stock
dividend on June 1st, distributable on June 23rd, to shareholders of

record on June 18th. The stock is trading at $12 on June 1st. What
are the journal entries associated with the stock dividend?
Retained Earnings (15,000 shares x $12)
180,000
Stock Dividend Distributable
15,000
Paid-in Capital in excess of par
165,000
The total amount transferred from retained earnings to contributed
capital accounts is the number of shares x the market price of the
stock. Stock dividend distributable is an owners equity account, not
a liability account.
18. Record the journal entry for issuing common stock and preferred
stock.
Coca, Inc. is authorized to issue 1,000,000 shares of $1 par
value common stock. Prepare the journal entry to record
the sale of 23,000 shares at $17.50.
Cash (23,000 x $17.50) 402,500
Common stock (23,000 x $1)
23,000
Paid in capitalCS (23,000 x $16.50)
379,500
19. Record the entry for making payments on an installment note.
Facts: Camp Enterprises just borrowed $15,000. Camp will pay off
the loan in two years by making monthly payments starting one
month from today at an annual interest rate of 12%.
Question: How should Camp record the transaction?
Dr Cash
15,000.00
Cr
Notes payable
15,000.00
20.

Understand the components of Shareholders equity.

Chapter 16
21. Calculate gain or loss on the disposition of a long term asset.
Proceeds > carrying value = gain
Proceeds < carrying value = loss
Example A: Deaton owns a delivery van with an original cost of
$48,400 and accumulated depreciation of $23,800. The van is sold
for $15,300. (CV = 48,400-23,800=24,600)
Proceeds < CV = Loss
Proceeds
$15,300
Carrying value
(24,600)
Gain (Loss) ($9,300)
Debit
Credit
Cash
15,300
Accumulated deprec
23,800
Loss
9,300

Delivery van (at orig cost)

48,400

Example B: Deaton owns a delivery van with an original cost of

$48,400 and accumulated depreciation of $23,800. The van is sold
for $25,180. (CV = 48,400-23,800=24,600)
Proceeds > CV = Gain
Proceeds
$25,180
Carrying value
(24,600)
Gain (Loss) $580
Debit
Credit
Cash
25,180
Accumulated deprec
23,800
Gain
580
Delivery van (at orig cost)
48,400

22. Understand individual components used to calculate

depreciation. (salvage, useful life, etc. )
Cost
Useful life
Salvage value
Depreciation method
Journal Entry to record depreciation:
(DR) Depreciation Expense
xx
(CR) Accumulated depreciation
xx
23. Calculate accumulated depreciation using the straight line
method.
Wonder Inc. has equipment with a 9 year useful life it
acquired for $240,000. The estimated salvage is $6,000.
The equipment is expected to produce 30,000 feet of
product over its useful life.
5. Using straight line depreciation, what is the book
value at the end of Year 3?
240,000 6,000 / 9 = 26,000 x 3 = 78,000 (Accumulated
Depreciation).
BV: Cost AD = 240,000 78,000 = 162,000.
24. Record the journal entry to record the disposition of an asset.
Record the cash received and remove the asset and related
accumulated depreciation from the companys books, and
Cash
xx
Accumulated depreciation xx

Asset (at original cost)

xx

Record the gain or loss on disposal

Proceeds > carrying value = gain
Proceeds < carrying value = loss

25. Compute a basket purchase of assets and how to allocate the

purchase price.
Cost Basis of PPE (Basket Purchases)
A company purchases an office building and the accompanying
land for $450,000. Separate real estate appraisals show these
assets to be worth $380,000 and $120,000, respectively.
Office building - $380,000/$500,000 = 76% 76%*$450,000 =
$342,000
Land - $120,000/$500,000 = 24%
24%*$450,000 =
$108,000
Total market value = $500,000
26. Record the journal entry for making a purchase of an asset with
an installment note.
27. Given an asset, calculate depreciation expense, carrying value
and accumulated depreciation using double declining balance.
Depreciation = Carrying Value/Usef ul life * 2

Wonder Inc. has equipment with a 9 year useful life it

acquired for $240,000. The estimated salvage is $6,000.
The equipment is expected to produce 30,000 feet of
product over its useful life.
3. Using the double declining balance method, what is the
depreciation expense for Years 1 and 2?
(B)240,000 x 2/9 = 53,333 year 1. Or 240000/9*2=53,333
240000-53,333= 186,667 new cv
186,667 x 2/9 = 41,482 depreciation year 2
28. Given an asset, calculate depreciation expense, carrying value
and accumulated depreciation using units of production.
Depreciation =

Cost - Salvage Value

x Current Output
Total Estimated Output

Wonder Inc. has equipment with a 9 year useful life it

acquired for $240,000. The estimated salvage is $6,000.
The equipment is expected to produce 30,000 feet of
product over its useful life.

4. Using the units of production method, if they produced

5,100 feet in year 3, what is the depreciation expense for
Year 3?
[240,000 6,000] /30000 = 7.8 depreciation per unit
7.8*5100 = 39,780
29. Given an asset, calculate depreciation expense, carrying value
and accumulated depreciation using straight line depreciation.
Depreciation =

Cost - Salvage Value

Depreciable Cost
=
Useful Life
Useful Life

Carrying Value= Cost-Accumulated Depreciation

30. Understand which costs are capitalized as part of a long-term
asset and which are expensed.
Example: Harpo Foods owns a delivery van that they drive
approximately 20,000 miles per year. They change the oil (at a
cost of $50) every 3,000 miles. Which of the following is the correct
treatment of the $50?
CORRECT
Dr Delivery Van
50
Dr
Expense
50
Cr
Cash
50
Cr
Cash
50
An oil change does not benefit future periods.
Example: Harpo Foods owns a delivery van that they drive
approximately 20,000 miles per year. They spent $10,000 to add a
refrigeration unit to the van which will allow them to deliver a
broader range of foods from their inventory. Which of the following
is the correct treatment of the $10,000?
CORRECT
Dr Delivery Van
10,000
Dr
Expense
10,000
Cr
Cash
10,000
Cr
Cash
10,000
The refrigeration unit should benefit future periods for as long as
the van does.
31. Calculate prospective changes in depreciation given new useful
life/salvage estimates.
Chapter 17
32. Given a set of facts, calculate cost of goods sold.
33. Given accounts from an income statement, calculate operating
income.
Example:
Cost of goods sold
$110,000
Sales
505,000

Selling expenses
Administrative expenses
Depreciation expense
Loss on sale of equipment
Sales returns

45,000
35,000
40,000
8,000
10,000

Sales
$505,000
Less: Sales returns
(10,000)
Net Sales
=$495,000
Less: Cost of goods sold
(110,000)
Gross margin
=$385,000
Less: Operating expenses
Selling expenses
$45,000
Administrative expenses
35,000
Depreciation expense
40,000
(120,000)
=$265,000
Income from operations
Other expenses and losses:
Less: Loss on sale of equipment
(8,000)
Income from continuing operations
before income taxes
=$257,000
34. Given accounts from an income statement, calculate net income.
Given accounts from an income statement, calculate gross margin.
Big Cat Inc. has the below balances (Year Ending: Dec. 31, 2012).
Using the below accounts and amounts, create a multi-step income
statement (Tax Rate = 20%).
Sales
Inventory
Interest Expense
COGS

100,00
0
10,000
4,000
20,000

Selling & Admin. Expense

Cash
Interest Revenue
Answer:
Big Cat Inc
Income Statement
For the Year Ending December 31, 2012

10,000
5,000
5,000

Sales

$100,00
0

Less: Cost of Goods Sold

20,000
80,000

Gross Margin
Selling & Admin. Expense

10,000
70,000
5,000
4,000
71,000

Income from Operations

Other Revenue
Other Expense
Income from Continuing Operations before
Taxes
Income Tax Expense (20%)

14,200
56,800

Net Income

35. Calculate net income and income from continuing operations,

given an extraordinary gain or loss.
Income from continuing operations (before taxes) is $200,000. Loss
from extraordinary items is $50,000. If the companys tax rate is
40%, what amount of the $50,000 should be reported on the
Income Statement?
Extraordinary loss from hurricane
Plus: Taxes saved ($50,000 x 40%)
Net of tax amount reported on the Income Stmt

($50,000)
20,000
($30,000)

Net profits calculated without the loss from extraordinary items:

Income from continuing operations before taxes
$200,000
Less: Tax expense ($200,000 x 40%)
(80,000)
Income from continuing operations after taxes
$120,000
Extraordinary Item
Extraordinary loss from hurricane, net of applicable taxes
($30,000)
Net Income

$ 90,000

36. Calculate earnings per share.

Common-size measure of performance
Required disclosure
Basic EPS: (Net income Preferred dividends) / Weighted average
common shares outstanding
Goldblatt Corporation has 100,000 shares of common stock
outstanding and 5,000 shares of $100 par value, 8% preferred stock
outstanding. Compute EPS if net income is $250,000.
($250,000 - $40,000) / 100,000 = $2.10
5,000 shares outstanding x $100 par value x 8% promised return =
$40,000

37. Determine the number of shares used to calculate earnings per

share.
Robsen Enterprises had 200,000 shares of common stock
outstanding on January 1, 2007, and issued an additional 50,000
shares on March 1, 2007. Compute EPS if net income is $425,000.
200,000 x 2 months/12 months
=
33,333
250,000 x 10 months/12 months =
208,333
Weighted-average # shares outstanding
241,666
$425,000 241,666 = $1.76

38. Calculate asset turnover for a group of business units within a

company.
Asset turnover = net sales / average total assets
39. Calculate return on sales for a group of business units within a
company.
Return on sales = net income / net sales
Womens Mens
Childrens
Sales
$4,000,000 $2,500,000 $8,000,000
COGS
(1,000,000) (1,250,000) (3,200,000)
Operating exp.(200,000) (200,000) (200,000)
Net income
$2,800,000 $1,050,000 $4,600,000
Assets
600,000
500,000
900,000
ROS
.700
.420
.575
Asset turnover
x 6.667 x 5.000
x 8.888

ROI

467%

210%

511%

Womens Return on sale = $2,800,000 / $4,000,000

Asset turnover = $4,000,000 / 600,000
Mens Return on sale = $1,050,000 / $2,500,000
Asset turnover = $2,500,000 / 500,000
Childrens Return on sale = $4,600,000 / $8,000,000
Asset turnover = $8,000,000 / 900,000
Present value and future value tables: You will be given a
separate page of just tables to use on the exam. This will be the last
page of your exam.
Important note about distracter facts: Students are expected to be able to tolerate
distracter facts in the questions. These are facts given but not needed to answer the
question.