Accounting 2610Mid-term Exam 2 PracticeProfessor Xiumin MartinName ____________________________Section ___________________________Mail file Status: Olin, Non-Olin, No mail FileName: __________________________ Date: _____________General 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 6 pages plus the last 1 page which containsPV/FV tables for your use. Please check that you have all the pages. Do not beginuntil 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 tohave it graded.8. Monitor your time and good luck!Points Available Points ReceivedQuestion I 12Question II 16Question III 24Question IV 24Question V 24Total 1001Question I (12 points)1. A potential future liability arising from, for example, a lawsuit is calledA) 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 byA) 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 canchange over time.D) differences in GAAP and IRS rules pertaining to when revenue and expensesshould 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 usefullife of five years and estimated residual value of $5,000. At the beginning of yearthree, Luke’s managers concluded that the total useful life would be four years, ratherthan five. There was no change in the estimated residual value. What is the amountof 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) $15,000.2Question II (16 points)The Staff corp. began operations in 2005. During the year, The Staff purchased twoassets. Below you will find information about each asset:Machine• The Machine was purchased on January 1, 2005. The original price of themachine 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 ininstallation costs. Finally, the company insured the machine against theft for oneyear. The insurance premium of $360 was paid in advance.• The company estimated the machine’s useful life to be 4 years and its residualvalue to be $3,000. To depreciate the machine, the company used the straight linemethod.• On 1/1/2006, the company performed a major overhaul on the machine whichcost $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 apiece of scarp paper for calculations).3Machine TruckCostDepreciation - 2005Depreciation - 2006Gain/loss- 20064Question III (24 points)GEVA Manufacturing is one of the country’s largest producers of mattresses, selling tocompanies like Sleepy’s, Dial a Mattress and Macy’s. It is a subsidiary of the RieselCorporation. 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 $756,021 Additional analysis revealed that credit sales in 2004 represented 65% of total sales andthat the amount of bad debt expense for 2004 was 0.80% of credit sales, or $21,000 (notethat GEVA applies the income statement approach).Required:a. Compute the amount of total sales for fiscal 2004. (6 points)b. Assume that there were no bad debt recoveries in fiscal 2004. Compute the amounts ofaccounts receivable written off as uncollectible in fiscal 2004, and the total collectionsrelated to credit sales during 2004. (12 points)c. Assume that GEVA had used the aging of accounts receivable approach instead ofpercentage of credit sales (i.e., the income statement approach) to calculate the allowancefor bad debt. Do you have enough information to conclude if, over the life of company,such assumption change would increase or decrease the reported income? Explain. (6points)5Question IV (24 points)On January 1, 2006 Drama Corp. opened a shoe store. Information on its inventorypurchases and sales are provided below.Inventory Purchases Date Quantity cost per TotalUnit1/1/06 10,000 4.00 40,0003/10/06 8,000 4.10 32,8004/12/06 12,000 4.30 51,60011/29/06 6,500 4.15 26,975Inventory Sales Date Quantity Price per Total Unit3/1/06 7,000 8.00 56,0009/1/06 20,000 8.50 170,000Assume Drama Corp. uses a periodic inventory system.a. Calculate cost of goods sold for 2006 and ending inventory at December 31, 2006under each of the following cost flow assumptions (16 points):a. FIFOb. LIFOc. Weighted-Average CostFill in the table provided with your answers. You may use your scrap paper forcalculations.Inventory CostingMethod2006 Cost ofGoods SoldEnding Inventory12/31/2006FIFOLIFOWeighted-AverageCostb. Calculate the LIFO reserve at the end of 2006. (4 points)c. Is gross profit under LIFO higher or lower than gross profit under FIFO? Explainwhy. (4 points)6Question V (24 points)On January 1, 2002, Babu corporation issued new bonds with a face value of $2,000,000.The bonds coupon annual rate was 8%. The coupon payments are paid semi-annuallystarting on June 30, 2002. The bonds are expected to mature on December 31, 2006. Themarket annual interest rate at the time of issuance was 10%.a. Provide the journal entry to record the issuance of the bonds in Babu’s books. (8points)b. Provide the journal entries to record interest expense during 2002 assuming thatBabu uses the
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