Accounting 2610Mid-Term Exam 2Fall 2007TOTALDecember 31, 2004 December 31, 2003Accounting 2610Mid-Term Exam 2Professor Ron ShalevFall 2007November 14, 2007Name ___________________________Section ___________________________Mail file Status: Olin, Non-Olin, No mail FileGeneral Instructions:1. You have 1 hour and 20 minutes to complete the exam. 2. This exam is closed book, closed notes. You may use calculators. 3. This exam packet should have 11 pages plus the last 1 page which contains PV/FV tables for your use. Please check that you have all the pages. Do not begin until instructed to do so.4. Review the complete exam in order to allocate your time appropriately.5. If a question is ambiguous, write your assumptions on the exam along with youranswer. You will receive credit provided your assumptions are necessary andreasonable.6. Write your answers neatly in the space provided. 7. You must turn in your exam packet before you leave, even if you don’t want to have it graded.8. Monitor your time and good luck! Points Available Points ReceivedQuestion I 12Question II 16Question III 24Question IV 24Question V 24TOTAL 100Question I (12 points)Write your answers to each multiple-choice question in the table below (Do notcircle the answers). 1. A potential future liability arising from, for example, a lawsuit is called A) an accrued liability. B) a contingent liability. C) a deferred liability. D) an estimated liability. E) None of the above is correct. 2. Deferred taxes are caused by A) a company's inability to pay income tax due in a particular tax year. B) accounting errors. C) the fact that the value of one country's currency relative to that of another can change over time. D) differences in GAAP and IRS rules pertaining to when revenue and expenses should be recognized. E) None of the above is correct. 3. Luke Corporation purchased a truck at a cost of $60,000. It has an estimated useful life of five years and estimated residual value of $5,000. At the beginning of year three, Luke’s managers concluded that the total useful life would be four years, rather than five. There was no change in the estimated residual value. What is the amount of depreciation that Luke should record for year 3 under the straight-line method? A) $15,500. B) $ 8,250. C) $11,000. D) $16,500. E) $15,000. Question II (16 points)The Staff corp. began operations in 2005. During the year, The Staff purchased two assets. Below you will find information about each asset:Machine1Question Answer1 B2 D3 D- The Machine was purchased on January 1, 2005. The original price of the machine was $165,000. Because The Staff paid in cash, they received a 4% discount on the original price. To use the machine, The Staff incurred $1,500 in installation costs. Finally, the company insured the machine against theft for one year. The insurance premium of $360 was paid in advance. - The company estimated the machine’s useful life to be 4 years and its residual value to be $3,000. To depreciate the machine, the company used the straight line method.- On 1/1/2006, the company performed a major overhaul on the machine which cost $25,000. As a result, the total machine’s life increased to 6 years. Truck- On April 1, 2005, The Staff purchased a truck for $23,000. To operate the truck, the company hired a special driver who was paid $36,000 for the rest of the year. The Staff depreciates the truck using the double-declining balance method with anestimated life of 8 years and a residual value of $3,000.- On March 31, 2006, The Staff sold the truck for $19,000. Required:For each of the assets mentioned in the question, fill out the table below. (You can use a piece of scarp paper for calculations).Machine TruckCost159,900 23,000Depreciation Expense - 2005 39,225 4,312.50Depreciation Expense - 2006 28,535 1,437.50Gain/Loss 20060 1,7502Explanations to Question 2Machine:Cost. The cost of the machine is its original price minus the discount they received, because this is the price they paid for the truck. In addition, the installation costs get added to the machine because it made the machine ready foruse. In the same logic, the insurance costs do not get added to the cost of the machine. 165,000*0.96+1,500=159,900Depreciation 2005: (159,900-3,000)/4 = 39,225Depreciation 2006: (159,900-39,225+25,000-3,000)/5 = 28,535Gain/Loss 2006: There was no gain or loss because they did not sell the machine.Truck:Cost. The cost of the truck does not include the salary of the driver. Depreciation 2005: (23,000)*(2/8)*(9/12)=4312.50Because the truck was purchased in the middle of the year, the annual double-declining depreciation of 5,750 (23,000*2/8) cannot be applied. Therefore, since we only used the truck for 9 months within that first yea of use, we need to multiply the 5,750 by 9/12. Depreciation 2006: 23,000*2/8*3/12=1,437.50This is the second portion of the first year. Gain/Loss 2006: There was no gain or loss because they did not sell the machine.(19,000-(23,000-4,312.5-1,437.5)=1,7503Question III (24 points) GEVA Manufacturing is one of the country’s largest producers of mattresses, selling to companies like Sleepy’s, Dial a Mattress and Macy’s. It is a subsidiary of the Riesel Corporation. The following footnote appeared in GEVA’s 2004 annual report: Accounts Receivable — Customers (in thousands)December 31, 2004 December 31, 2003Gross balance 778,094 $770,132Allowance for doubtful accounts (12,193) (14,111) $765,901 $756,021Additional analysis revealed that credit sales in 2004 represented 65% of total sales and that the amount of bad debt expense for 2004 was 0.80% of credit sales, or $21,000 (note that GEVA applies the income statement approach). Required:a. Compute the amount of total sales for fiscal 2004. (6 points)21,0000.0082,625,000 are credit sales, and 2,625, 0000.65= 4,038,461.1 are total sales.b. Assume that there were no bad debt recoveries in fiscal 2004. Compute the amounts of accounts receivable written off as uncollectible in fiscal 2004, and the total collections related to credit sales during 2004. (12 points)We can find the write-offs, $22,918, from the allowance for bad debt account, and the collections, $2,594,120 from the accounts receivable account.Accounts Receivable Allowance for BDBB 770,132 14,111 BBCredit 2,625,000 2,594,120 Collect 21,000 BadSales DebtExpense22,918 Write- Write- 22,918Offs OffsEB 778,094 12,193 EB4c. Assume that GEVA
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