Shown below is an income statement for 2016 that was prepared by a poorly trained
bookkeeper of Hutton Corporation (not Hutton’s son).
Hutton Corporation
Income Statement
December 31, 2016
Sales revenue
Investment revenue
Cost of merchandise sold
Selling expenses
Administrative expense
Interest expense
Income before special items
Special items
Loss on disposal of a component of the business
Net federal income tax liability
Net income
$945,000
19,500
(408,500)
(145,000)
(285,000)
(13,000)
113,000
(30,000)
(24,900)
$58,100
Instructions: Prepare a multiple-step income statement, in good form, for 2016 for Hutton
Corporation that is presented in accordance with generally accepted accounting principles
(including format and terminology). Hutton Corporation has 25,000 shares of common stock
outstanding and has a 30% federal income tax rate on all tax related items. Round EPS values
to the nearest cent.
2: 15 points —Balance sheet presentation.
The following balance sheet was prepared by the bookkeeper for Moyano Company as of
December 31, 2016.
Moyano Company
Balance Sheet
as of December 31, 2016
Cash
Accounts receivable (net)
Inventories
Investments
Equipment (net)
Patents
$80,000
52,200
57,000
76,300
96,000
32,000
$393,500
Accounts payable
Long-term liabilities
Stockholders’ equity
$75,000
100,000
218,500
$393,500
The following additional information is provided:
a. Cash includes the cash surrender value of a life insurance policy $9,400, and a bank
overdraft of $2,500 has been deducted.
b. The net accounts receivable balance includes:
(1) accounts receivable—debit balances $60,000;
(2) accounts receivable—credit balances $4,000;
(3) allowance for doubtful accounts $3,800.
c. Inventories do not include goods costing $3,000 shipped out on consignment. Receivables
of $3,000 were recorded on these goods.
d. Investments include investments in common stock, trading $19,000 and available-for-sale
$48,300, and franchises $9,000.
e. Equipment costing $5,000 with accumulated depreciation $4,000 is no longer used and is
held for sale. Accumulated depreciation on the other equipment is $40,000.
Instructions: Prepare a balance sheet in good form (omit stockholders’ equity details.)
3: 6 points —FIFO and LIFO inventory methods.
During June, the following changes in inventory item 27 took place:
June 1 Balance
1,400 units @ $24
14 Purchased
800 units @ $36
24 Purchased
700 units @ $30
8 Sold
400 units @ $55
10 Sold
1,000 units @ $60
29 Sold
500 units @ $55
Instructions: What is the cost of the ending inventory for item 27 under the following
methods? (Show calculations.) Perpetual inventories are maintained.
a. FIFO. $______________
Calculation:
b.LIFO. $_______________
Calculation:
4: 6 points —FIFO and LIFO periodic inventory methods.
The Pine Shop shows the following data related to an item of inventory:
Inventory, January 1
100 units @ $5.00
Purchase, January 9
300 units @ $5.40
Purchase, January 19
70 units @ $6.00
Inventory, January 31
120 units
Instructions
a. What value should be assigned to the ending inventory using FIFO? $__________
Calculation:
b. What value should be assigned to cost of goods sold using LIFO? $____________
Calculation:
5: 8 Points —Gross profit method.
Reese Co. prepares monthly income statements. Inventory is counted only at year end; thus,
month-end inventories must be estimated. All sales are made on account. The rate of mark-up
on cost is 20%. The following information relates to the month of May.
Accounts receivable, May 1
Accounts receivable, May 31
Collections of accounts during May
Inventory, May 1
Purchases during May
$21,000
27,000
90,000
45,000
58,000
Instructions: Calculate the estimated cost of the inventory on May 31.______________
6: 10 points —Calculate depreciation.
A machine cost $500,000 on April 1, 2016. Its estimated salvage value is $50,000 and its
expected life is eight years.
Instructions: Calculate the depreciation expense (to the nearest dollar) by each of the
following methods, showing the figures used.
a. Straight-line for 2016: $_________
Calculation:
b. Double-declining balance for 2017: $_________
Calculation:
c. Sum-of-the-years’-digits for 2017: $_________
Calculation:
Short problems (Ques 7 – 11) (2 points each).
7.
8.
Jim Brown, M.D., keeps his accounting records on the cash basis. During 2016, Dr.
Brown collected $360,000 from his patients. At December 31, 2015, Dr. Brown had
accounts receivable of $50,000. At December 31, 2016, Dr. Brown had accounts
receivable of $70,000 and unearned revenue of $10,000. On the accrual basis, how
much was Dr. Brown’s patient service revenue for 2016? _____________.
Story Corp.’s trial balance reflected the following account balances at December 31, 2016:
Accounts receivable (net)
$24,000
Trading securities
6,000
Accumulated depreciation on equipment and furniture
15,000
Cash
11,000
Inventory
30,000
Equipment
25,000
Patent
4,000
Prepaid expenses
2,000
Land held for future business site
18,000
In Story’s December 31, 2016 balance sheet, the current assets total is _______________.
9. Demich Corp. incurred $420,000 of research and development costs to develop a product
for which a patent was granted on January 2, 2016. Legal fees and other costs associated with
registration of the patent totaled $80,000. On March 31, 2016, Lopez paid $120,000 for legal
fees in a successful defense of the patent. The total amount capitalized for the patent through
March 31, 2016 should be ___________________.
10. DeMarco Corp. is contemplating the purchase of a machine that will produce net after-tax
cash savings of $23,000 per year for five years. At the end of five years, the machine can be sold
to realize after-tax cash flow of $5,300. Interest is 11%. Assume the cash flows occur at the end
of each year.
Required:
Calculate the total present value of the cash savings. ____________________.
11. A note about debt included in the financial statements of the Henry Company for the year
ended December 31, 2015 disclosed the following:
Debt. The following table summarizes the long-term debt of the Company at December 31,
2015. All of the notes were issued at their face (maturity) value.
7.55% notes due 2016
$ 206,400,000
8.05% notes due 2023
$ 350,200,000
8.30% notes due 2030
$ 231,000,000
7.93% notes due 2038
$ 206,000,000
6.85% notes due 2017
$ 25,600,000
Assuming that the notes pay interest annually and mature on December 31 of the respective
years.
Required:
Compute the total cash interest payments in 2016 for these notes. ______________
Essay Questions (Ques 12 – 17) (5 points each)
12. What is the purpose of Emerging Issues Task Force?
13. The FASB’s conceptual framework classifies gains and losses based on whether they are
related to an entity’s major ongoing or central operations. Discuss the GAAP theory behind the
classification, and provide at least one well-described example.
14. Discuss the GAAP theory behind prior period adjustments, and provide a well-articulated
example.
15. Discuss the GAAP theory behind the Statement of Cash Flows; as part of your response,
include a comparison of the differences in computing the operations section using the direct
and indirect methods.
16, A depreciable asset has an estimated 15% salvage value. At the end of its estimated useful
life, the accumulated depreciation would equal the original cost of the asset under which of the
following depreciation methods? Is this statement true or false, and why?
17. A plant asset with a five-year estimated useful life and no residual value is sold at the end
of the second year of its useful life. How would using the sum-of-the-years’-digits method of
depreciation instead of the double-declining balance method of depreciation affect a gain or
loss on the sale of the plant asset?
Extra Credit, but do not guess – incorrect answers lose points
EC: 5 Points —Impairment of copyrights.
Presented below is information related to copyrights owned by Zheng Corporation at
December 31, 2016.
Cost
$2,700,000
Carrying amount
2,400,000
Expected future net cash flows
2,100,000
Fair value
1,200,000
Assume Zheng will continue to use this asset in the future. As of December 31, 2016, the
copyrights have a remaining useful life of 5 years.
Instructions:
a. Prepare the journal entry (if any) to record the impairment of the asset at December 31,
2016.
b. Prepare the journal entry to record amortization expense for 2017.
c. The fair value of the copyright at December 31, 2017 is $1,500,000. Prepare the journal
entry (if any) necessary to record this increase in fair value.
