Accounting Theory-Final Exam

Al-Azhar University Gaza

Faculty of Economic & Administrative Science

Accounting Department

Second Semester 2012/2013 Final Exam Subject: Accounting Theory Time: 2 Hour Date: 03/06/2013

The Exam include 10 question Dont use red pen or a pencil

Question 1: Put () or () - Make your answer in a table in the answer sheet

1. ( ) According to transactions approach, Changes in values are excluded from income if they arise from changes in market valuations or changes in expectation alone.

2. ( ) All unfavorable changes in enterprise resources are expenses.

3. ( ) Companies that are close to their debt covenant limits will choose accounting methods that decrease net income, and thereby decrease the equity number in the debt-to-equity ratio.

4. ( ) Current prices can be obtained to represent either a current liquidation price or a replacement cost.

5. ( ) Expectations of future incomes used by many investors as a main factor in predicting future dividend distributions.

6. ( ) Gains result from the enterprises ongoing major or central operations.

7. ( ) Realization means the reporting of revenue when it was validated by a sale.

8. ( ) Restatement of accounting numbers represents a new measurement basis.

9. ( ) The main reason for adhering to historical costs is that they are assumed to be verifiable.

10. ( ) Value changes and events that are controllable by management and the result from decisions of the current period should be included in noncurrent income.

Question 2: Circle the right answer Make your answer in a table in the answer sheet

1. Users use earnings to help them: a. Evaluate earning power. b. Predict future earnings. c. Assess the risk of investing in or lending to the enterprise. d. All of the above.

2. Holding positive net monetary assets during the period of inflation gives rise to: a. Holding gains. b. Holding losses. c. Purchasing power losses. d. Purchasing power gains.

3. Extra ordinary items include events that are: a. Frequent and recurring. b. Frequent and nonrecurring. c. Infrequent and nonrecurring. d. Infrequent and recurring.

4. Current cost for Plant, Equipment and property is: a. Price of new similar asset. b. Price of used similar asset. c. Cash flow from disposal of asset. d. Historical cost restated for general purchasing power.





5. Comprehensive income is boarder than net income because it includes other changes in net assets like:

a. Change in cash flow. b. Holding gains and losses. c. Accumulated other comprehensive income. d. Retained Earnings.

6. Change in nonmonetary assets and nonmonetary liabilities give rise to: a. Realized gain or loss. b. Extraordinary gain or loss. c. Purchasing power gain or loss. d. Holding gain or loss.

7. Asset expirations or asset reductions not related to the process of providing goods or services to customers or clients should be classified as:

a. Loss. b. Expense. c. Offsets to revenue. d. Nonperforming assets.

8. According to temporal method inventory reported at market value translated using: a. Current exchange rate. b. Historical exchange rate. c. Average exchange rate. d. Exchange rate at date of purchase.

9. According to Activities approach, income arise when:

a. Change in asset and liability valuations only as these are results of transactions. b. Net Cash flow from operations is higher than net cash flow from investment. c. Certain activities or events take place. d. Total Revenues exceed total expenses.

10 A price change occurs if a price increase or decrease in a. Both input market and output market b. Either input market or output market c. Neither input market nor output market d. None of the above

Question 3: Bryant Co. reports the following information for 2012: sales revenue $750,000; cost of goods sold $500,000; operating expenses $80,000; and an unrealized holding loss on available-for-sale securities for 2012 of $50,000. It declared and paid a cash dividend of $10,000 in 2012. Bryant Co. has January 1, 2012, balances in common stock $350,000; accumulated other comprehensive income $80,000; and retained earnings $90,000. It issued no stock during 2012.

Required: Determine the following amounts for 2012: a. Net income b. Comprehensive income c. Other comprehensive income d. Total of owners equity in December 31, 2012

Question 4: Determine for each of the following when income is recognized:

1. Revenue from long term contract 5. Revenue from installment sales 2. Revenue from sales of foods 6. Rent revenue 3. Revenue from Precious metals 7. Revenue from oil extraction 4. Interest Revenue 8. Revenue from sales of stationary





Question 5: In 2012, Wade Corp. reports income from continuing operations before income tax of $1,210,000. Additional transactions not considered in the $1,210,000 are as follows: 1. In 2012, Wade Corp. sold equipment for $40,000. The machine had originally cost $80,000 and had accumulated

depreciation of $30,000. The gain or loss is considered ordinary. 2. The company discontinued operations of one of its subsidiaries during the current year at a loss of $190,000 before taxes.

Assume that this transaction meets the criteria for discontinued operations. The loss from operations of the discontinued subsidiary was $90,000 before taxes; the loss from disposal of the subsidiary was $100,000 before taxes.

3. The company had a gain of $125,000 on the condemnation of much of its property. The gain is taxed at a total effective rate of 40%. Assume that the transaction meets the requirements of an extraordinary item.

Required: Analyze the above information and prepare an income statement for the year 2012, starting with income from continuing operations before income tax. (Assume a total effective tax rate of 38% on all items, unless otherwise indicated.) Question 6: Bryant Construction Company changed from the completed-contract to the percentage-of-completion method of accounting for long-term construction contracts during 2012. For tax purposes, the company employs the completed-contract method and will continue this approach in the future. The appropriate information related to this change is as follows:

Pretax Income from Percentage of Completion Completed-Contract

2011 $980,000 $730,000 2012 900,000 480,000

Required:

a. Assuming that the tax rate is 40%, what is the amount of net income that would be reported in 2012? b. What entry(ies) are necessary to adjust the accounting records for the change in accounting principle?

Question 7: Thurber Co. purchased equipment for $710,000 which was estimated to have a useful life of 10 years with a salvage value of $10,000 at the end of that time. Depreciation has been entered for 7 years on a straight-line basis. In 2011, it is determined that the total estimated life should be 15 years with a salvage value of $4,000 at the end of that time. Required:

a. Prepare the entry (if any) to correct the prior years depreciation. b. Prepare the entry to record depreciation for 2011.

Question 8: The following income statement items for Morgan Corporation:

Sales 250,000 COGS 100,000 Depreciation expense 30,000 Salaries 50,000 Interest expense 20,000 Rent Expense 10,000

The income tax rate is 30%, and the owners equity section includes: Common stocks, $10 par value, 100,000 shares issued & outstanding Preferred stocks, $100 par value, 10% cumulative, 1000 shares issued & outstanding

The dividend pay-out ratio is 50%.

Required: Calculate: a. Total Value-Added b. Enterprise net income c. Net income to investors d. Net income to stockholders e. Net income to Residual equity holders





Question 9: The following balance sheet for Merna Corporation for 2012:

Merna Corporation Balance Sheet as of December 31,2012

Assets Liabilities Cash $ 55,000 Accounts Payable $ 280,000 Accounts Receivables 345,000 Long-term loan 500,000 Trading Securities 120,000 Unearned revenue (rent) 90,000 Inventory 515,000 Total Liabilities $ 870,000 Equipment, net 250,000 Building, net 750,000 Owners Equity Land 265,000 Common Stocks $ 300,000 Additional Paid-In Capital 700,000 Retained Earnings 430,000 Total Owners Equity $ 1,430,000

Total Assets $ 2,300,000 Total Liabilities & Owners Equity $ 2,300,000

Required: Calculate the amount of:

a. Monetary Assets b. Monetary Liabilities c. Non-Monetary Assets d. Non-Monetary Liabilities

Question 10: Zara company has a single long-term liability 5-year, 10% coupon annually with face value = $1,000, number of outstanding bonds = 5,000. The market interest rate = 8%. The Company also has 200,000 outstanding common stock (par-value = $1) expected dividend to be paid D1 = $2 per share and the annual growth rate for dividend g = 5% and the required rate of return Rs = 11%.

Required: Calculate the Value of Zara Company

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Accounting Theory-Final Exam