October 24, 2007 Anderson ECON 136A 8AM MIDTERM #1 v. 1 Name _________________________ Complete questions #1-25 on green scantron and the rest in your blue book. WRITE YOUR NAME IN THE SPACE PROVIDED AND TURN THIS EXAM IN AT THE END OF THE CLASS... NOTE THERE IS A PROBLEM WHICH MUST BE COMPLETED IN THE SPACE PROVIDED TO ENSURE THIS!! 1. Which table would you use to determine how much you would need to have deposited three years ago at 10% compounded annually in order to have $1,000 today? a. Present value of an ordinary annuity of 1 b. Future value of 1 or present value of 1 c. Future value of an annuity due of 1 d. Future value of an ordinary annuity of 1 2. If a savings account pays interest at 4% compounded quarterly, then the amount of $1 left on deposit for 5 years would be found in a table using a. 20 periods at 1%. b. 5 periods at 4%. c. 5 periods at 1%. d. 20 periods at 4%. 3. On January 1, 2003, management purchased a fixed asset for $300,000 and estimated that it would have a useful life of 10 years with $30,000 salvage value and straight line depreciation. Before booking any depreciation during 2005, management revises their estimate, now believing that the asset will be used until the end of 2020, at which time it will have no salvage value. The proper amount of restatement to the 2004 financial statements, and 2005 depreciation expense to be reported are: a. $10,333 restatement, and $15,375 depreciation expense. b. $10,333 restatement, and $16,667 2005 depreciation expense. c. No restatement, and $16,667 2005 depreciation expense. d. No restatement, and $15,375 2005 depreciation expense. ------------------------------ At Ivan Company, events and transactions during 2004 included the following. The tax rate for all items is 30%. (1) Depreciation for 2002 was found to be understated by $45,000. (2) A strike by the employees of a supplier resulted in a loss of $30,000. (3) The inventory at December 31, 2002 was overstated by $60,000. (4) A flood destroyed a building that had a book value of $600,000. Floods are very uncommon in that area.

MIDTERM #1 v. 1--Page 2 4. The effect of these events and transactions on 2004 net income net of tax would be a. $514,500. b. $21,000. c. $441,000. d. $472,500. 5. The statement "risk is commensurate with reward" means that the higher the perceived risk, the: a. More likely an investor is to abstain from investment. b. Higher the interest rate c. Lower the interest rate d. No impact on the interest rate 6. Which table would show the largest factor for an interest rate of 8% for five periods? a. Present value of an annuity due of 1 b. Future value of an ordinary annuity of 1 c. Present value of an ordinary annuity of 1 d. Future value of an annuity due of 1 7. The term financial flexibility is impacted by: a. The willingness of management to accept risks; b. The number of divisions an entity has. c. The degree of strecthing exercises performed before work by the finance department; d. The liquidity and solvency of an entity; 8. Over the entire life of a transaction, what is the net difference between accrual and cash basis accounting: a. accrual accounting will reflect more assets. b. cash basis accounting will reflect higher profit. c. accrual accounting will reflect higher profit. d. there is no difference. 9. If a Company obtains a non-controlling 35% ownership and voting interest in another company and it grants them significant influence, they should account for this investment: a. Under the equity method b. As a hypothetical investment in a non consolidated baboon c. As a consolidated entity d. Using the guidance of FAS 115

MIDTERM #1 v. 1--Page 3 10. If a company invests in a bond which matures in 10 years and they intend to hold it for that entire time: a. The investment should be recorded at fair value with unrealized gains and losses charged to other comprehensive income. b. The investment should be recorded at cost and unrealized gains and losses reflected as an adjustment to opening equity. c. The investment should be recorded at fair value with unrealized gains and losses charged to income. d. The investment should be recorded at cost on the balance sheet until maturity. 11. Real estate is sold for $2 million, payable as follows: $1,500,000 paid in cash on the day of sale and $500,000 due in five years, bearing interest at 0%. In year two, the seller would record: a. a credit to interest income b. nothing, the entries would be completed when the real estate was sold. c. a credit to interest expense d. a debit to interest expense 12. A general description of the depreciation methods applicable to major classes of depreciable assets a. is not essential to a fair presentation of financial position. b. should be included in corporate financial statements or notes thereto. c. is needed in financial reporting when company policy differs from income tax policy. d. is not a current practice in financial reporting. 13. Which of the following is a required disclosure in the income statement when reporting the disposal of a component of the business? a. The gain or loss on disposal should not be segregated, but should be reported together with the results of continuing operations. b. Results of operations of a discontinued component should be disclosed immediately below extraordinary items. c. The gain or loss on disposal should be reported as an extraordinary item. d. Earnings per share from both continuing operations and net income should be disclosed on the face of the income statement. 14. The financial statement which summarizes operating, investing, and financing activities of an entity for a period of time is the a. statement of financial position. b. income statement. c. retained earnings statement. d. statement of cash flows.

MIDTERM #1 v. 1--Page 4 15. In preparing a statement of cash flows, which of the following transactions would be considered an investing activity? a. Sale of merchandise on credit b. Issuance of bonds payable at a discount c. Declaration of a cash dividend d. Sale of equipment at book value 16. A Company has sold a portion of their business during the year. This should be presented in the income statement: a. As a discontinued operation, in one line-tem on the income statement, and presented net of tax. b. Should not impact the income statement, and be reported solely in the statement of cash flows. c. The operations during the portion of the year should be included in the operating section of the income statement and any gain or loss from the sale of the discontinued operation should be presented as "discontinued operations" on a net of tax basis. d. As a discontinued operation in two components, (1) the results of operating the operation until it was sold and (2) any gain or loss from the sale of the operation. Both should be presented net of tax. 17. Items which do not appear on the income statement above the tax provision should be presented on a "net of tax" basis. a. false b. true 18. The income statement presents: a. is a pain in the neck to present because of various classification issues. b. activities for a stated period of time, requiring the application of judgment (estimates), and is transaction based. c. the sources and uses of cash over a specified period of time, requiring the application of judgment (estimates) and is not transaction based. d. the financial position as of a specific date, requiring the application of judgment (estimates) and is transaction based. 19. Another term for the balance sheet is: a. I have no idea b. Statement of activity for the period c. Statement of sources and uses of cash d. Statement of financial position

MIDTERM #1 v. 1--Page 5 20. If you pay 24 months of an insurance policy on April 1 for $240,000 and record the following journal entry: Insurance expense $100,000 Prepaid insurance $140,000 Cash $240,000 The journal entry required at the end of the year would: a. Debit insurance expense for 90,000 and credit prepaid insurance for the same amount. b. Credit insurance expense $10,000 and debit prepaid insurance $10,000. c. Have no impact on insurance expense, but increase prepaid insurance by $100,000. d. Debit prepaid insurance for $100,000 and credit insurance expense for the same amount. 21. Payment of rent on the first of the month is a _____ to the renter and _____ to the landlord, respectively: a. prepaid expense, and unearned revenue, respectively. b. prepaid expense, and accrued expense, respectively. c. accrued expense, and prepaid expense, respectively. d. unearned revenue, and prepaid expense, respectively. 22. The figure .94232 is taken from the column marked 2% and the row marked three periods in a certain interest table. From what interest table is this figure taken? a. Future value of annuity of 1 b. Present value of 1 c. Future value of 1 d. Present value of annuity of 1 23. The definition of an asset requires there to be a transaction. Which of the following items have probably future economic value but would not appear as assets on a GAAP balance sheet: a. all of these would be excluded from assets. b. internally generated branding c. human resources d. internally generated goodwill

MIDTERM #1 v. 1--Page 6 24. If you pay 6 months of an insurance policy on April 1 for $240,000 and record the following journal entry: Insurance expense $240,000 Cash $240,000 The journal entry required at the end of the year would: a. No entry is required at December 31. b. Have no impact on insurance expense, but increase prepaid insurance by $20,000. c. Debit prepaid insurance for $20,000 and credit insurance expense for the same amount. d. Debit insurance expense for 180,000 and credit prepaid insurance for the same amount. 25. Which statement below best represents the criteria to classify as a current item in a classified balance sheet: a. The item will convert within one year or the operating cycle, whichever is shorter; b. The item will convert within one year or the operating cycle, whichever is longer; c. The item will convert within one year; d. None of these. 26. List each item which is not already a component of "income from continuing operations" AND which is presented on a "net of tax" basis. For each item, state which financial statement that items is presented in. 27. $500,000 of bonds are sold on January 1, 2007 when the fair value rate of those bonds (aka market rate) is 10%. The stated rate of the bonds is 8%, they pay interest at the end of each year, compound annually and mature in 10 years. For a period of 10 years: PV of a lump sum of $1, at 10% is .38554 PV of a lump sum of $1, at 8% is .46319 PV of ordinary annuity of $1 at 10% is 6.14457 PV of ordinary annuity of $1 at 8% is 6.71008 PV of annuity due of $1 at 10% is 6.75902 PV pf annuity due of $1 at 8% is 7.24689 A. What amount would the bonds sell for? Show your computation! B. Show the accounting entry required by the company selling the bonds: i. the day that the bonds are issued (January 1, 2007) ii. for the end of the first year (December 31, 2007) iii. for the end of the second year (December 31, 2008)

28. On December 1, 2003, your company engages CB Leasing (CB) to find a tenant and execute a minimum 10 year lease to occupy a vacant space in the building you own. On December 31, 2003 CB completes this task and NewTenant, Inc. executes a 10 year lease to occupy the space for $100,000 per year in rent, with the first payment due at the end of their first year of occupancy on December 31, 2004 and each December 31 thereafter until the end of the 10th year. Consequently you pay CB $50,000 on December 31, 2003.

On December 31, 2004 NewTenant pays the first $100,000 rent payment on time after occupying the space for one year. On July 1, 2005, you learn that NewTenant has gone bankrupt and will not be making any future rent payments. Under the terms of the agreement with CB, you have no right of return for any of the previously paid $50,000 leasing commission. COMPLETE IN THE SPACE PROVIDED!!! Assuming the only journal entries are those you create below, write the journal entries required:

1. December 31, 2003 when the $50,000 leasing commission payment is made to CB;

2. December 31, 2004 when the first year rent is received from NewTenant;

3. July 1, 2005 when the bankruptcy of NewTenant is first revealed (and is deemed certain at the same time). Include in this entry any general ledger clean-up entries required.

29.

1

2

3

4

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INSTRUCTIONS:I.

II.

III.

1/1/2006Common Stock 10,000 Additional Paid in Capital 90,000 Retained earnings 450,000 Accumulated other comprehensive income 75,000

Total Stockholders' Equity 625,000

For each item above record the journal entry required. If there is any tax impact you may refer to the account as "TAX EFFECT". Please number your journal entries to correspond with the above.

Assuming the beginnind equity balances noted below and after consideration of all the above activity, prepare a combined statement of stockholders equity and comprehensive income for the year ended December 31, 2006.

Dividends declared and paid for $20,000

XYZ, Inc. has a 30% effective tax rate and has $200,000 of net income before the following activity for the year ended December 31, 2006:

Issue 1,000 shares of $1 par common stock for $10,000 cash

Available for sale securities appreciated by $20,000 during the year.

If net income was $200,000 before the above, what is the revised net income after the above?

A crop of bananas (inventory) in Costa Rica was destroyed in the first freeze ever in recorded history. Experts say that such an occurrence will never again take place. The total cost of the inventory destroyed was $20,000.

An error overstated cost of goods sold by $50,000 two years ago which has not yet been recorded or adjusted.

MIDTERM #1 v. 1--Page 7 October 24, 2007 ANSWER KEY Anderson ECON 136A 8AM +-------+------+--------+------+--------+--------+--------+--------+------+ | Text | Bank | Exam | | | Ques | Diff | Lrng | | |Chapter| Ref |Question|Answer| Type | Cat | Lvl | Obj | Page | +-------+------+--------+------+--------+--------+--------+--------+------+ | 6 3 1 b MChoice C 3 | | 6 27 2 a MChoice P 3 | | 4 59 3 d MChoice | | 4 31 4 c MChoice P 4 | | 6 52 5 b MChoice | | 6 6 6 d MChoice C 3 | | 5 52 7 d MChoice | | 3 73 8 d MChoice | | 5 60 9 a MChoice | | 5 58 10 d MChoice | | 6 53 11 a MChoice | | 5 26 12 b MChoice C 5 | | 4 16 13 d MChoice C 4 | | 5 29 14 d MChoice C 6 | | 5 33 15 d MChoice C 7 | | 4 48 16 d MChoice | | 4 47 17 b MChoice | | 4 45 18 b MChoice | | 3 63 19 d MChoice | | 3 79 20 b MChoice | | 3 76 21 a MChoice | | 6 10 22 b MChoice C 3 | | 3 72 23 a MChoice | | 3 78 24 a MChoice | | 5 53 25 b MChoice | | 4 55 26 Exercise | | 6 60 27 Exercise | +-------------------------------------------------------------------------+ * Multiple Choice Foils are Jumbled * Test Questions are Scrambled

MIDTERM #1 v. 1--Page 8 October 24, 2007 2. 4 x 5 = 20 periods; 4% 4 = 1%. 4. $21,000 + ($600,000 x .7) = $441,000. 26. Discontinued operations: Income statement Extraordinary items: Income statement Restatements/ or corr. of errors: Statement of stockholders equity-or RE stmnt Cum. effect of chg in acctg pr: Statement of stockholders equity- or RE stmnt Other comprehensive income: Statement of stockholders equity 27. The annual interest payment is 8%*500,000=40,000 PV of interest=40,000*6.14457= 245,783 PV of Principle=500,000*.38554= 192,770 TOTAL VALUE 438,553 II (i) Entry on date of issue Cash 438,553 Bond discount 61,447 Bond payable 500,000 (ii) Entry at end of first year: Interest expense= FV of bond * FV rate= 438,553*10%=43,855 Interest expense 43,855 Cash 40,000 Bond discount 3,855 (iii) Entry at end of second year: Interest expense= FV of bond * FV rate= (438,553+3,855)*10%=44,241 Interest expense 44,241 Cash 40,000 Bond discount 4,241

28. SOLUTION: 1. Intangible asset/ or leasing commission 50,000 Cash 50,000 2. Cash 100,000 Rent revenue 100,000 Amortization expense 5,000 Accumulated amortization 5,000 3. Amortization expense* 45,000 Accumulated amortization 45,000 Accumulated amortization 50,000 Intangible asset/ or leasing commission 50,000 OR- IF CONDENSED AS FOLLOWS IS ALSO ACCEPTABLE: Amortization expense* 45,000 Accumulated amortization 5,000 Intangible asset/ or leasing commission 50,000 *will accept “unusual” or related expense but NOT extraordinary expense.

29. SOLUTIONI.

1 Extraorinary loss 14,000 Tax effect 6,000 Inventory 20,000

2 Inventory 50,000 Retained earnings 35,000 Tax effect 15,000

3 Dividends or Retained Earnings 20,000 Cash 20,000

4 Cash 10,000 Common stock 1,000 APIC 9,000

5 Available for sale investments 20,000 O.C.I/ or Unrealized gain 14,000 Tax effect 6,000

II. Net income before adjustments 200,000 Adjustments effecting net income (14,000)

Adjusted net income 186,000

III. 29. EQUITY STATEMENT SOLUTION

Comp. Retained Accum. OtherIncome Com. Stock APIC Earnings Comp. Income Total

Balance at 12/31/03, as previously reported 10,000 90,000 450,000 75,000 625,000 Restatement, net of $15,000 tax effect - - 35,000 35,000 Balance st 12/31/03, as restated 10,000 90,000 485,000 75,000 660,000 Net income 186,000 186,000 186,000 OCI- Unrealized gains, net of $6,000 tax effect 14,000 14,000 14,000 COMPREHENSIVE INCOME 200,000 Sale of stock 1,000 9,000 10,000 Dividends (20,000) (20,000) Balance at 12/31/04 11,000 99,000 651,000 89,000 850,000

XYZ, INC.STATEMENT OF STOCKHOLDERS EQUITY & COMPREHENSIVE INCOME

YEAR ENDED DECEMBER 31, 2006

JOURNAL ENTRIES

October 24, 2007 Anderson ECON 136A 8AM MIDTERM #1 v. 2 Name _________________________ Complete questions #1-25 on green scantron and the rest in your blue book. WRITE YOUR NAME IN THE SPACE PROVIDED AND TURN THIS EXAM IN AT THE END OF THE CLASS... NOTE THERE IS A PROBLEM WHICH MUST BE COMPLETED IN THE SPACE PROVIDED TO ENSURE THIS!! 1. If a savings account pays interest at 4% compounded quarterly, then the amount of $1 left on deposit for 5 years would be found in a table using a. 5 periods at 4%. b. 20 periods at 4%. c. 20 periods at 1%. d. 5 periods at 1%. 2. Real estate is sold for $2 million, payable as follows: $1,500,000 paid in cash on the day of sale and $500,000 due in five years, bearing interest at 0%. In year two, the seller would record: a. a debit to interest expense b. a credit to interest expense c. nothing, the entries would be completed when the real estate was sold. d. a credit to interest income 3. The income statement presents: a. the financial position as of a specific date, requiring the application of judgment (estimates) and is transaction based. b. the sources and uses of cash over a specified period of time, requiring the application of judgment (estimates) and is not transaction based. c. activities for a stated period of time, requiring the application of judgment (estimates), and is transaction based. d. is a pain in the neck to present because of various classification issues. 4. If a company invests in a bond which matures in 10 years and they intend to hold it for that entire time: a. The investment should be recorded at fair value with unrealized gains and losses charged to income. b. The investment should be recorded at cost on the balance sheet until maturity. c. The investment should be recorded at cost and unrealized gains and losses reflected as an adjustment to opening equity. d. The investment should be recorded at fair value with unrealized gains and losses charged to other comprehensive income.

MIDTERM #1 v. 2--Page 2 5. If you pay 6 months of an insurance policy on April 1 for $240,000 and record the following journal entry: Insurance expense $240,000 Cash $240,000 The journal entry required at the end of the year would: a. Debit prepaid insurance for $20,000 and credit insurance expense for the same amount. b. Have no impact on insurance expense, but increase prepaid insurance by $20,000. c. No entry is required at December 31. d. Debit insurance expense for 180,000 and credit prepaid insurance for the same amount. 6. The statement "risk is commensurate with reward" means that the higher the perceived risk, the: a. No impact on the interest rate b. More likely an investor is to abstain from investment. c. Lower the interest rate d. Higher the interest rate 7. Items which do not appear on the income statement above the tax provision should be presented on a "net of tax" basis. a. false b. true 8. The financial statement which summarizes operating, investing, and financing activities of an entity for a period of time is the a. retained earnings statement. b. statement of cash flows. c. statement of financial position. d. income statement. 9. Which of the following is a required disclosure in the income statement when reporting the disposal of a component of the business? a. The gain or loss on disposal should be reported as an extraordinary item. b. Earnings per share from both continuing operations and net income should be disclosed on the face of the income statement. c. The gain or loss on disposal should not be segregated, but should be reported together with the results of continuing operations. d. Results of operations of a discontinued component should be disclosed immediately below extraordinary items.

MIDTERM #1 v. 2--Page 3 10. Which statement below best represents the criteria to classify as a current item in a classified balance sheet: a. The item will convert within one year; b. The item will convert within one year or the operating cycle, whichever is longer; c. None of these. d. The item will convert within one year or the operating cycle, whichever is shorter; 11. The definition of an asset requires there to be a transaction. Which of the following items have probably future economic value but would not appear as assets on a GAAP balance sheet: a. human resources b. internally generated branding c. all of these would be excluded from assets. d. internally generated goodwill 12. The figure .94232 is taken from the column marked 2% and the row marked three periods in a certain interest table. From what interest table is this figure taken? a. Future value of 1 b. Present value of 1 c. Present value of annuity of 1 d. Future value of annuity of 1 13. Which table would show the largest factor for an interest rate of 8% for five periods? a. Future value of an ordinary annuity of 1 b. Future value of an annuity due of 1 c. Present value of an annuity due of 1 d. Present value of an ordinary annuity of 1 14. In preparing a statement of cash flows, which of the following transactions would be considered an investing activity? a. Declaration of a cash dividend b. Issuance of bonds payable at a discount c. Sale of merchandise on credit d. Sale of equipment at book value 15. On January 1, 2003, management purchased a fixed asset for $300,000 and estimated that it would have a useful life of 10 years with $30,000 salvage value and straight line depreciation. Before booking any depreciation during 2005, management revises their estimate, now believing that the asset will be used until the end of 2020, at which time it will have no salvage value. The proper amount of restatement to the 2004 financial statements, and 2005 depreciation expense to be reported are: a. $10,333 restatement, and $16,667 2005 depreciation expense. b. No restatement, and $15,375 2005 depreciation expense. c. $10,333 restatement, and $15,375 depreciation expense. d. No restatement, and $16,667 2005 depreciation expense.

MIDTERM #1 v. 2--Page 4 16. Another term for the balance sheet is: a. Statement of sources and uses of cash b. Statement of financial position c. I have no idea d. Statement of activity for the period 17. Which table would you use to determine how much you would need to have deposited three years ago at 10% compounded annually in order to have $1,000 today? a. Future value of an ordinary annuity of 1 b. Present value of an ordinary annuity of 1 c. Future value of an annuity due of 1 d. Future value of 1 or present value of 1 18. If a Company obtains a non-controlling 35% ownership and voting interest in another company and it grants them significant influence, they should account for this investment: a. Using the guidance of FAS 115 b. As a consolidated entity c. As a hypothetical investment in a non consolidated baboon d. Under the equity method 19. A Company has sold a portion of their business during the year. This should be presented in the income statement: a. The operations during the portion of the year should be included in the operating section of the income statement and any gain or loss from the sale of the discontinued operation should be presented as "discontinued operations" on a net of tax basis. b. Should not impact the income statement, and be reported solely in the statement of cash flows. c. As a discontinued operation, in one line-tem on the income statement, and presented net of tax. d. As a discontinued operation in two components, (1) the results of operating the operation until it was sold and (2) any gain or loss from the sale of the operation. Both should be presented net of tax. 20. The term financial flexibility is impacted by: a. The degree of strecthing exercises performed before work by the finance department; b. The number of divisions an entity has. c. The willingness of management to accept risks; d. The liquidity and solvency of an entity;

MIDTERM #1 v. 2--Page 5 21. If you pay 24 months of an insurance policy on April 1 for $240,000 and record the following journal entry: Insurance expense $100,000 Prepaid insurance $140,000 Cash $240,000 The journal entry required at the end of the year would: a. Debit prepaid insurance for $100,000 and credit insurance expense for the same amount. b. Have no impact on insurance expense, but increase prepaid insurance by $100,000. c. Credit insurance expense $10,000 and debit prepaid insurance $10,000. d. Debit insurance expense for 90,000 and credit prepaid insurance for the same amount. ------------------------------ At Ivan Company, events and transactions during 2004 included the following. The tax rate for all items is 30%. (1) Depreciation for 2002 was found to be understated by $45,000. (2) A strike by the employees of a supplier resulted in a loss of $30,000. (3) The inventory at December 31, 2002 was overstated by $60,000. (4) A flood destroyed a building that had a book value of $600,000. Floods are very uncommon in that area. 22. The effect of these events and transactions on 2004 net income net of tax would be a. $441,000. b. $21,000. c. $514,500. d. $472,500. 23. Over the entire life of a transaction, what is the net difference between accrual and cash basis accounting: a. there is no difference. b. cash basis accounting will reflect higher profit. c. accrual accounting will reflect higher profit. d. accrual accounting will reflect more assets. 24. A general description of the depreciation methods applicable to major classes of depreciable assets a. is not essential to a fair presentation of financial position. b. is not a current practice in financial reporting. c. should be included in corporate financial statements or notes thereto. d. is needed in financial reporting when company policy differs from income tax policy.

MIDTERM #1 v. 2--Page 6 25. Payment of rent on the first of the month is a _____ to the renter and _____ to the landlord, respectively: a. prepaid expense, and unearned revenue, respectively. b. accrued expense, and prepaid expense, respectively. c. unearned revenue, and prepaid expense, respectively. d. prepaid expense, and accrued expense, respectively. 26. List each item which is not already a component of "income from continuing operations" AND which is presented on a "net of tax" basis. For each item, state which financial statement that items is presented in. 27. $500,000 of bonds are sold on January 1, 2007 when the fair value rate of those bonds (aka market rate) is 10%. The stated rate of the bonds is 8%, they pay interest at the end of each year, compound annually and mature in 10 years. For a period of 10 years: PV of a lump sum of $1, at 10% is .38554 PV of a lump sum of $1, at 8% is .46319 PV of ordinary annuity of $1 at 10% is 6.14457 PV of ordinary annuity of $1 at 8% is 6.71008 PV of annuity due of $1 at 10% is 6.75902 PV pf annuity due of $1 at 8% is 7.24689 A. What amount would the bonds sell for? Show your computation! B. Show the accounting entry required by the company selling the bonds: i. the day that the bonds are issued (January 1, 2007) ii. for the end of the first year (December 31, 2007) iii. for the end of the second year (December 31, 2008)

28. On December 1, 2003, your company engages CB Leasing (CB) to find a tenant and execute a minimum 10 year lease to occupy a vacant space in the building you own. On December 31, 2003 CB completes this task and NewTenant, Inc. executes a 10 year lease to occupy the space for $100,000 per year in rent, with the first payment due at the end of their first year of occupancy on December 31, 2004 and each December 31 thereafter until the end of the 10th year. Consequently you pay CB $50,000 on December 31, 2003.

On December 31, 2004 NewTenant pays the first $100,000 rent payment on time after occupying the space for one year. On July 1, 2005, you learn that NewTenant has gone bankrupt and will not be making any future rent payments. Under the terms of the agreement with CB, you have no right of return for any of the previously paid $50,000 leasing commission. COMPLETE IN THE SPACE PROVIDED!!! Assuming the only journal entries are those you create below, write the journal entries required:

1. December 31, 2003 when the $50,000 leasing commission payment is made to CB;

2. December 31, 2004 when the first year rent is received from NewTenant;

3. July 1, 2005 when the bankruptcy of NewTenant is first revealed (and is deemed certain at the same time). Include in this entry any general ledger clean-up entries required.

29.

1

2

3

4

5

INSTRUCTIONS:I.

II.

III.

1/1/2006Common Stock 10,000 Additional Paid in Capital 90,000 Retained earnings 450,000 Accumulated other comprehensive income 75,000

Total Stockholders' Equity 625,000

For each item above record the journal entry required. If there is any tax impact you may refer to the account as "TAX EFFECT". Please number your journal entries to correspond with the above.

Assuming the beginnind equity balances noted below and after consideration of all the above activity, prepare a combined statement of stockholders equity and comprehensive income for the year ended December 31, 2006.

Dividends declared and paid for $20,000

XYZ, Inc. has a 30% effective tax rate and has $200,000 of net income before the following activity for the year ended December 31, 2006:

Issue 1,000 shares of $1 par common stock for $10,000 cash

Available for sale securities appreciated by $20,000 during the year.

If net income was $200,000 before the above, what is the revised net income after the above?

A crop of bananas (inventory) in Costa Rica was destroyed in the first freeze ever in recorded history. Experts say that such an occurrence will never again take place. The total cost of the inventory destroyed was $20,000.

An error overstated cost of goods sold by $50,000 two years ago which has not yet been recorded or adjusted.

MIDTERM #1 v. 2--Page 7 October 24, 2007 ANSWER KEY Anderson ECON 136A 8AM +-------+------+--------+------+--------+--------+--------+--------+------+ | Text | Bank | Exam | | | Ques | Diff | Lrng | | |Chapter| Ref |Question|Answer| Type | Cat | Lvl | Obj | Page | +-------+------+--------+------+--------+--------+--------+--------+------+ | 6 27 1 c MChoice P 3 | | 6 53 2 d MChoice | | 4 45 3 c MChoice | | 5 58 4 b MChoice | | 3 78 5 c MChoice | | 6 52 6 d MChoice | | 4 47 7 b MChoice | | 5 29 8 b MChoice C 6 | | 4 16 9 b MChoice C 4 | | 5 53 10 b MChoice | | 3 72 11 c MChoice | | 6 10 12 b MChoice C 3 | | 6 6 13 b MChoice C 3 | | 5 33 14 d MChoice C 7 | | 4 59 15 b MChoice | | 3 63 16 b MChoice | | 6 3 17 d MChoice C 3 | | 5 60 18 d MChoice | | 4 48 19 d MChoice | | 5 52 20 d MChoice | | 3 79 21 c MChoice | | 4 31 22 a MChoice P 4 | | 3 73 23 a MChoice | | 5 26 24 c MChoice C 5 | | 3 76 25 a MChoice | | 4 55 26 Exercise | | 6 60 27 Exercise | +-------------------------------------------------------------------------+ * Multiple Choice Foils are Jumbled * Test Questions are Scrambled

MIDTERM #1 v. 2--Page 8 October 24, 2007 1. 4 x 5 = 20 periods; 4% 4 = 1%. 22. $21,000 + ($600,000 x .7) = $441,000. 26. Discontinued operations: Income statement Extraordinary items: Income statement Restatements/ or corr. of errors: Statement of stockholders equity or RE stmnt Cum. effect of chg in acctg pr: Statement of stockholders equity or RE stmnt Other comprehensive income: Statement of stockholders equity 27. The annual interest payment is 8%*500,000=40,000 PV of interest=40,000*6.14457= 245,783 PV of Principle=500,000*.38554= 192,770 TOTAL VALUE 438,553 II (i) Entry on date of issue Cash 438,553 Bond discount 61,447 Bond payable 500,000 (ii) Entry at end of first year: Interest expense= FV of bond * FV rate= 438,553*10%=43,855 Interest expense 43,855 Cash 40,000 Bond discount 3,855 (iii) Entry at end of second year: Interest expense= FV of bond * FV rate= (438,553+3,855)*10%=44,241 Interest expense 44,241 Cash 40,000 Bond discount 4,241

28. SOLUTION: 1. Intangible asset/ or leasing commission 50,000 Cash 50,000 2. Cash 100,000 Rent revenue 100,000 Amortization expense 5,000 Accumulated amortization 5,000 3. Amortization expense* 45,000 Accumulated amortization 45,000 Accumulated amortization 50,000 Intangible asset/ or leasing commission 50,000 OR- IF CONDENSED AS FOLLOWS IS ALSO ACCEPTABLE: Amortization expense* 45,000 Accumulated amortization 5,000 Intangible asset/ or leasing commission 50,000 *will accept “unusual” or related expense but NOT extraordinary expense.

29. SOLUTIONI.

1 Extraorinary loss 14,000 Tax effect 6,000 Inventory 20,000

2 Inventory 50,000 Retained earnings 35,000 Tax effect 15,000

3 Dividends or Retained Earnings 20,000 Cash 20,000

4 Cash 10,000 Common stock 1,000 APIC 9,000

5 Available for sale investments 20,000 O.C.I/ or Unrealized gain 14,000 Tax effect 6,000

II. Net income before adjustments 200,000 Adjustments effecting net income (14,000)

Adjusted net income 186,000

III. 29. EQUITY STATEMENT SOLUTION

Comp. Retained Accum. OtherIncome Com. Stock APIC Earnings Comp. Income Total

Balance at 12/31/03, as previously reported 10,000 90,000 450,000 75,000 625,000 Restatement, net of $15,000 tax effect - - 35,000 35,000 Balance st 12/31/03, as restated 10,000 90,000 485,000 75,000 660,000 Net income 186,000 186,000 186,000 OCI- Unrealized gains, net of $6,000 tax effect 14,000 14,000 14,000 COMPREHENSIVE INCOME 200,000 Sale of stock 1,000 9,000 10,000 Dividends (20,000) (20,000) Balance at 12/31/04 11,000 99,000 651,000 89,000 850,000

XYZ, INC.STATEMENT OF STOCKHOLDERS EQUITY & COMPREHENSIVE INCOME

YEAR ENDED DECEMBER 31, 2006

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