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Mizzou ACCTCY 2037 - Test 2 Summer 2012

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HONOR PLEDGEName ____________________________Acct 2037 Exam 2Summer 2012 (100 points; 75 minutes)HONOR PLEDGE“I strive to uphold the University values of respect, responsibility, discovery, and excel-lence. On my honor, I pledge that I have neither given nor received unauthorized as-sistance on this work”Name ____________________________ Complete each sentence or statement.Possible answers:Amortization Average rate of return Capital budgeting Capital Lease Capital rationingCompound interest Conservatism Contract rate DepletionDepreciationDouble declining balance FIFO FOB destination FOB shipping pointFunctional Goodwill Lessee Lessor LeverageLIFOMarket rate Moving Average Mutually exclusive Net present valueOperating LeasePayback Periodic system Perpetual system Physical Software production costs Specific ID method Sum of the years digits Sunk costsUnderestimation1. Under the _FIFO_ cost flow assumption, the company includes the earliest costs in the cost of goods sold as it sells the products, leaving the latest costs in ending inventory.2. The concept of _conservatism_ holds that a company should apply GAAP in such a way that there is little chance that it will overstate its income or its assets.3. _Mutually exclusive_ are proposals that accomplish the same thing, so that when one proposal is selected, the others are not.4. _Depletion_ is the portion of the cost of a natural resource that the company allocates as an expense to each accounting period over the asset's service life.5. A(n) _operating lease_ does not transfer the risks and benefits of ownership from the lessor tothe lessee.True/FalseIndicate whether the sentence or statement is true or false._T__ 6. In the lower of cost or market method, when the selling price of the company’s inventory falls below the cost of inventory, they “write down” the inventory on the balance sheet to the market value._F__ 7. The payback period is a good measure for evaluating one capital expenditure proposal againstanother._T__ 8. The average rate of return on investment is the average return on investment per year per dollar invested._F__ 9. All research and development costs must first be capitalized, then amortized over 7 years._T__ 10. A defined benefit pension plan specifies how much the company must pay employees when the retire under the pension plan.Multiple ChoiceIdentify the letter of the choice that best completes the statement or answers the question.____ 11. Which of the following is not true of the retail method of estimating inventory?a. There is never a need for a physical inventory count.b. The inventory is estimated based on the retail value of the merchandise.c. A cost to retail ratio must be computed.d. There must be records of both cost and retail prices of beginning inventory and net purchases.____ 12. When a company evaluates investment proposals with a method that properly recognizes the time value of money, the percentage rate used as a cutoff to distinguish between acceptable and unacceptable proposals is:a. The interest rate on risk-free government securities.b. The weighted-average rate the company must pay to all sources of investment capital.c. The company's incremental borrowing rate.d. The weighted-average rate of return provided by the company's similar investments.____ 13. Which of the following statements regarding patents is true?a. Patents may not be renewed.b. Legal costs of obtaining a patent are expensed as legal and professional fees.c. The primary portion of amounts capitalized as patents for internally developed processes is the research and development costs.d. None of the above are true.____ 14. The excess of the purchase price a company paid to buy another company and the market value of the identifiable net assets it acquired is:a. A franchise.b. Goodwill.c. Due to a failure to negotiate an appropriate price.d. None of the above.____ 15. A retirement plan in which the corporation pays a set amount to the plan each year that the employee works is a:a. 401-k plan.b. Defined benefit plan.c. Defined contribution plan.d. None of the above.Problem 1 [14 points] On January 1, 2009, LK Corporation issued zero-coupon, 5-year bonds with a face value of $2,000,000. The bonds were sold to yield 6%. Required: a) At what price would the zero-coupon bonds be sold on January 1, 2009?b)2,000,000 (PVIF$ 5, 6%) = 1,500,000What would be the book value of these bonds on December 31, 2010 (after2 years)?c)1,500,000 x .06 = 90,000 (added to BV year 1)1,590,000 x .06 = 95,400 (added to BV year 2)Ans. 1,500,000 + 90,000 + 95,400 = 1,685,400What would be the book value of these bonds on December 31, 2013 (after5 years)?2,000,000Problem 2 [14 points] On January 1, 2011 Tract Company buys a building for $500,000. The building has an estimated life of 40 years and an estimated residual value of $40,000. After using the asset for 2 years, on January 1, 2013 it sells the asset for $350,000.Required: (1) Compute the depreciation expense for each year if Tract uses the straight-line method.(500,000 – 40,000) / 40 = 11,500(2) Compute the depreciation expense for 2011 and 2012 if Tract uses the double-de-clining balance method.500,000 x 1/40 x 2 = 25,000(500,000 – 25,000) x 1/40 x 2 = 23,750(3) Using double-declining depreciation, compute the gain or loss that Tract would record on the sale and state if it a gain or loss. State which accounts are affected at the time of the sale and how.350,000 – (500,000 – 25,000 – 23,750) = -101,250 (loss)Cash +350,000Bldg – 500,000A/D – 48,750Loss on sale +101,250(4) Which depreciation method would Tract choose to use for tax purposes?DDBProblem 3 [14 points] The JP Company is considering a proposal that would require a $50,000 investment in a piece of equipment. Net cash inflows from the project are as follows:Year 1 $20,000 Year 4 $10,000Year 2 0 Year 5 15,000Year 3 20,000 Year 6 20,000In addition to the above cash flows, in Year 4 the company will need to upgrade the equipment at a cost of $20,000 and the residual value of the equipment at the end of Year 6 is expected to be $15,000.Required: a) If JP's cost of capital is 8%, compute the project's net present value and state whether the project should be accepted or not.20,000 (PVIF$ 1, 8%) = 18,60020,000 (PVIF$ 3, 8%) = 15,800(10,000 – 20,000) (PVIF$ 4, 8%) = (7,460)15,000 (PVIF$ 5, 8%) = 10,200 (20,000 + 15,000) (PVIF$ 6, 8%) = 22,050 59,250


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