Problem

F-I
F-II
F-III
F-IV
F-V

COMPREHENSIVE EXAMINATION F
PART 6
(Chapters 22-24)
Approximate
Topic
Time
Multiple Choice Questions.
25 min.
Statement of Cash Flows.
25 min.
Accounting Changes, Error Corrections, and
Prior Period Adjustments.
30 min.
* Analysis of Financial Statements.
25 min.
Segment Reporting.
15 min.
120 min.

*This topic is dealt with in an Appendix to the chapter.

Problem F-I Multiple Choice Questions.
1. Which of the following transactions would be considered a financing
activity in preparing a statement of cash flows?
a. Amortizing a discount on bonds payable
b. Recording net income from operations
c. Selling common stock
d. Purchasing inventory
2. The net income for the year ended December 31, 2013, for Tax
Consultants INC. was $920,000. Additional information is as follows:
Capital expenditures
$1,200,000
Depreciation on plant assets
450,000
Cash dividends paid on common stock
180,000
Increase in noncurrent deferred tax liability 45,000
Amortization of patents
21,000
Based on the information given above, what should be the net cash
provided by operating activities in the statement of cash flows for the year
ended December 31, 2013?
a. $1,256,000.

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Test Bank for Intermediate Accounting, Fourteenth Edition

b. $1,346,000.
c. $1,391,000.
d. $1,436,000.
3. Information concerning the debt of Cole Company is as follows:
Short-term borrowings:
Balance at December 31, 2012
$525,000
Proceeds from borrowings in 2013
325,000
Payments made in 2013
(450,000)
Balance at December 31, 2013
$400,000
Current portion of long-term debt:
Balance at December 31, 2012
$1,625,000
Transfers from caption "Long-Term Debt"
500,000
Payments made in 2013
(1,225,000)
Balance at December 31, 2013
$ 900,000
Long-term debt:
Balance at December 31, 2012
$9,000,000
Proceeds from borrowings in 2013
2,250,000
Transfers to caption "Current Portion of Long-Term Debt"
(500,000)
Payments made in 2013
(1,500,000)
Balance at December 31, 2013
$9,250,000
In preparing a statement of cash flows for the year ended December 31,
2013, for Cole Company, cash flows from financing activities would
reflect
Outflow
a. $2,000,000
b. $2,250,000
c. $2,575,000
d. $3,175,000
Problem F-I (cont.)

F - 3F
Comprehensive Examination

4. In considering interim financial reporting, how did the Accounting

Principles Board conclude that such reporting should be viewed?
a. As a "special" type of reporting that need not follow generally accepted
accounting principles.
b. As useful only if activity is evenly spread throughout the year so that
estimates are unnecessary.
c. As reporting for a basic accounting period.
d. As reporting for an integral part of an annual period.
5. Which of the following items represents a potential use of cash?
a. Patent amortization
b. Sale of plant assets at a loss
c. Net loss from operations
d. Declaration of a stock dividend
6. Worthington Company purchased a machine on January 1, 2010, for
$4,800,000. At the date of acquisition, the machine had an estimated
useful life of six years with no salvage. The machine is being depreciated
on a straight-line basis. On January 1, 2013, Worthington determined, as a
result of additional information, that the machine had an estimated useful
life of eight years from the date of acquisition with no salvage. An
accounting change was made to reflect this additional information. What
amount of depreciation expense should be reported in Worthingtons
income statement for the year ended December 31, 2013?
a. $800,000
b. $600,000
c. $480,000
d. $300,000
7. On January 7, 2011, Yoder Corporation acquired machinery at a cost of
$1,500,000. Yoder adopted the sum-of-the-years-digits method of
depreciation for this machine and had been recording depreciation over an
estimated life of five years, with no residual value. At the beginning of

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Test Bank for Intermediate Accounting, Fourteenth Edition

2013, a decision was made to change to the straight-line method of

depreciation for this machine. Assuming a 30% tax rate, the cumulative
effect of this accounting change, net of tax, is
a. $0
b. $200,000
c. $210,000
d. $300,000
*8. Information from Collins Companys balance sheet is as follows:
Current assets:
Cash
Short-term investments
Accounts receivable
Inventories
Prepaid expenses
Total current assets

$ 12,000,000
20,000,000
50,000,000
66,000,000
2,000,000
$150,000,000

Problem F-I (cont.)

Current liabilities:
Notes payable
$
Accounts payable
Accrued expenses
Income taxes payable
Current portion of long-term debt
Total current liabilities
$
What is the acid-test (quick) ratio?
a. 1:24 to 1
b. 1.64 to 1
c. 1.68 to 1
d. 3.00 to 1

11,000,000
18,000,000
13,000,000
3,000,000
5,000,000
50,000,000

F - 5F
Comprehensive Examination

*9. Fargo, Inc. disclosed the following information as of and for the year
ended December 31, 2013:
Net cash sales
600,000
Net credit sales
900,000
Inventory at beginning
100,000
Inventory at end
150,000
Net income
30,000
Accounts receivable at beginning of year110,000
Accounts receivable at end of year130,000
Fargos receivables turnover is
a. 6.9 to 1.
b. 7.5 to 1.
c. 12.5 to 1.
d. 13.6 to 1.
*10. The calculation of the number of times interest is earned involves dividing
a. net income by annual interest expense.
b. net income plus income taxes by annual interest expense.
c. net income plus income taxes and interest expense by annual interest
expense.
d. none of the above.
Problem F-II Statement of Cash Flows.
Sharp Company
Comparative Balance Sheet

Cash
Accounts receivable, net
Inventory
Land
Building

December 31
2013
2012
$ 54,000 $ 36,000
53,000
57,000
161,000
123,000
180,000
285,000
300,000
300,000

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Test Bank for Intermediate Accounting, Fourteenth Edition

Accumulated depreciation
Equipment
Accumulated depreciation

(75,000)
(60,000)
1,565,000
900,000
(177,000)
(141,000)
$2,061,000 $1,500,000

Accounts payable
Bonds payable
Capital stock, $10 par
Retained earnings

$ 202,000 $ 150,000
450,000
-01,125,000 1,125,000
284,000
225,000
$2,061,000 $1,500,000

Additional Data:
1. Net income for the year amounted to $104,000.
2. Cash dividends were paid amounting to 4% of par value.
3. Land was sold for $120,000.
4. Sharp sold equipment, which cost $225,000 and had accumulated
depreciation of $90,000, for $105,000.
Instructions
Prepare a statement of cash flows using the indirect method.
Problem F-III Accounting Changes, Error Corrections, and Prior Period
Adjustments.
Molina Companys reported net incomes for 2013 and the previous two years
are presented
below.
2013
2012
2011
$105,000
$95,000
$70,000
2013s net income was properly determined after giving effect to the following
accounting changes, error corrections, etc. which took place during the year.

F - 7F
Comprehensive Examination

The incomes for 2011 and 2012 do not take these items into account and are
stated at the amounts determined in those years. Ignore income taxes.
Instructions
(a) For each of the six accounting changes, errors, or prior period adjustment
situations described below, prepare the journal entry or entries Molina
Company should record during 2013. If no entry is required, write none.
(b) After recording the situation in part (a) above, prepare the year-end
adjusting entry for December 31, 2013. If no entry, write none.
1. Early in 2013, Molina determined that equipment purchased in January,
2011 at a cost of $645,000, with an estimated life of 5 years and salvage
value of $45,000 is now estimated to continue in use until December 31,
2017 and will have a $15,000 salvage value. Molina recorded its 2013
depreciation at the end of 2013.
(a)
(b)
2. Molina determined that it had understated its depreciation by $20,000 in
2012 owing to the fact that an adjusting entry did not get recorded.
(a)
(b)
3. Molina bought a truck January 1, 2010 for $50,000 with a $5,000 estimated
salvage value and a six-year life. The company debited an expense account
and credited cash on the purchase date. The truck is expected to be traded at
the end of 2015. Molina uses straight-line depreciation for its trucks
(a)
(b)
Problem F-III (cont.).

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Test Bank for Intermediate Accounting, Fourteenth Edition

4. During 2013, Molina changed from the straight-line method of depreciating

its cement plant to the double-declining-balance method. The following
calculations present depreciation on both bases. (Ignore income taxes.) The
2013 amount applies double-declining balance to the 1/1/13 carrying
amount after straight-line was used.
2013
2012
2011
Straight-line $100,000
$100,000
$100,000
Double-declining
$200,000 $160,000
$200,000
(a)
(b)
5. Molina, in reviewing its provision for uncollectibles during 2013, has
determined that 1/2 of 1% is the appropriate amount of bad debt expense to
be charged to operations. The company had used 1% as its rate in 2012 and
2011 when the expense had been $20,000 and $14,000, respectively. The
company would have recorded $50,000 of bad debt expense on December
31, 2013 under the old rate.
(a)
(b)
6. During 2013, Molina decided to change from the LIFO method of valuing
inventories to average cost. The net incomes involved under each method
were as follows:

LIFO
Average cost

2013
$51,000
$63,000

2012
$59,000
$67,000

2011
$42,000
$48,000

Assume no difference between LIFO and average cost inventory values in

years prior to 2011.
(a)

F - 9F
Comprehensive Examination

(b)
Problem F-IV Analysis of Financial Statements.
The market value of Farmington Corp.'s common shares was quoted at $54 per
share at December 31, 2013, and 2012. Planetarium 's balance sheet at
December 31, 2013, and 2012, and statement of income and retained earnings
for the years then ended are presented below:
Farmington Corp.
Balance Sheet
December 31
2013
2012
Assets:
Current assets:
Cash
$ 9,000,000
$
5,200,000
Short-term investments
17,200,000 15,400,000
Accounts receivable (net)
109,000,000111,000,000
Inventories, lower of cost or market 122,000,000140,000,000
Prepaid expenses
4,000,000
2,800,000
Total current assets
$261,200,000$274,400,000
Property, plant, and equipment (net)
Investments, at equity
Long-term receivables
Copyrights and patents (net)
Other assets
Total assets

350,000,000315,000,000
2,800,000 3,500,000
15,000,000 20,000,000
6,000,000 7,000,000
8,000,000
9,100,000
$643,000,000$629,000,000

Liabilities and Stockholders' Equity:

Current liabilities:
Notes payable
$ 7,000,000$ 17,000,000
Accounts payable
55,000,000 52,000,000

F - 10 Test Bank for Intermediate Accounting, Fourteenth Edition

Accrued expenses
Income taxes payable
Current portion of long-term debt
Total current liabilities
Long-term debt
Deferred income taxes
Other liabilities
Total liabilities

27,500,000 30,000,000
1,500,000 2,000,000
10,000,000
9,500,000
101,000,000110,500,000
180,000,000190,000,000
69,000,000 65,000,000
15,000,000
9,500,000
365,000,000 375,000,000

Stockholders' equity:
Common stock, par value $1; authorized 20,000,000
shares; issued and outstanding 12,000,000 shares12,000,000
12,000,000
10% cumulative preferred shares, par value $100;
$100 liquidating value; authorized 100,000 shares;
issued and outstanding 60,000 shares6,000,000 6,000,000
Additional paid-in capital
119,000,000119,000,000
Retained earnings
141,000,000 117,000,000
Total stockholders' equity
278,000,000 254,000,000
Total liabilities and stockholders' equity$643,000,000$629,000,000
*Problem F-IV (cont.).
Farmington Corp.
Statement of Income and Retained Earnings
Year
ended December 31
2013
2012
$540,000,000$500,000,000

Net sales
Cost and expenses:
Cost of goods sold
390,900,000400,000,000
Selling, general, and administrative expenses70,000,00065,000,000

F - 11F
Comprehensive Examination

Other, net
Total costs and expenses

9,100,000
6,000,000
470,000,000 471,000,000

Income before income taxes

Income taxes
Net income

70,000,000 29,000,000
21,000,000 11,600,000
49,000,000 17,400,000

Retained earnings at beginning of period117,000,000113,100,000

Dividends on common stock
(24,400,000)(12,900,000)
Dividends on preferred stock
(600,000)
(600,000)
Retained earnings at end of period
$141,000,000$117,000,000
Instructions
Based on the above information, compute the following (for the year 2013
only): (Show supporting computations in good form.)
(a) Current ratio.
(b) Acid-test (quick) ratio.
(c) Receivables turnover.
(d) Inventory turnover.
(e) Book value per share of common stock.
(f) Earnings per share on common stock.
(g) Price-earnings ratio on common stock.
(h) Payout ratio on common stock.

F - 12 Test Bank for Intermediate Accounting, Fourteenth Edition

Problem F-V Segment Reporting.

Baden Company is a diversified company which has developed the following
information about its five segments:
SEGMENTS
A
B
C
D
E
Total sales $ 600,000$1,700,000$ 300,000$ 320,000$ 580,000
Operating profit (loss)(270,000)480,00040,000(300,000)(10,000)
Identifiable assets1,600,0005,800,0001,200,0003,900,0005,600,000

Instructions
Identify which segments are significant enough to warrant disclosure in
accordance with FASB No. 131, "Reporting Disaggregated Information about a
Business Enterprise," by applying the following quantitative tests:
a. Revenue test
b. Operating profit or loss test
c. Identifiable assets test

F - 13F
Comprehensive Examination

Solutions Comprehensive Examination F

Problem F-I Solution
1. c
6. c
2. d
7. a
3. d
*8. b
4. d
*9. b
5. c
*10. c
Problem F-II Solution.
Sharp Company
Statement of Cash Flows
For the Year Ended December 31, 2013

Cash flows from operating activities

Net income
$104,000
Adjustments to reconcile net income to net cash provided
by operating activities:
Decrease in accounts receivable
$ 4,000
Increase in inventory
(38,000)
Increase in accounts payable
52,000
Gain on sale of land
(15,000)
Loss on sale of equipment
30,000
Depreciation expensebuilding
15,000
Depreciation expenseequipment
126,000 174,000
Net cash provided by operating activities
278,000
Cash flows from investing activities
Sale of land
Sale of equipment
Purchase of equipment
Net cash used by investing activities
Cash flows from financing activities
Payment of cash dividends
Issuance of bonds
Net cash provided by financing activities

120,000
105,000
(890,000)
(665,000)

(45,000)
450,000
405,000

F - 14 Test Bank for Intermediate Accounting, Fourteenth Edition

Net increase in cash

Cash, January 1, 2013
Cash, December 31, 2013

18,000
36,000
$ 54,000

Problem F-III Solution.

1. (a) None
(b) Depreciation Expense ...................................... 78,000
Accumulated Depreciation .......................
[($645,000 $240,000 $15,000) 5]
2. (a) Retained Earnings ............................................ 20,000
Accumulated Depreciation .......................

78,000

20,000

(b) None
3. (a) Truck ................................................................ 50,000
Accumulated Depreciation .......................
Retained Earnings .....................................
(b) Depreciation Expense ......................................
Accumulated Depreciation .......................

22,500
27,500

7,500
7,500

4. (a) None
(b) Depreciation Expense ...................................... 200,000
Accumulated Depreciation .......................
200,000
5. (a) None
(b) Bad Debt Expense............................................ 25,000
Allowance for Doubtful Accounts ............

25,000

6. (a) Inventory (Beginning) ..................................... 14,000

Retained Earnings .....................................

14,000

F - 15F
Comprehensive Examination

(b) None
*Problem F-IV Solution.
(a) Current ratio:
Total current assets $261,200,000
=
= 2.59 to 1
Total current liabilities
$101,000,000
(b) Acid-test (quick) ratio:
Total quick assets
$135,200,000
= = 1.34 to 1
Total current liabilities $101,000,000
*Problem F-IV Solution (cont.)
(c) Receivables turnover:
Net sales
$540,000,000

=
= 4.91 times
Average accounts receivable [($109,000,000 + $111,000,000) 2]
(d) Inventory turnover:
Cost of goods sold $390,900,000
= = 2.98 times
Average inventories $131,000,000
(e) Book value per share of common stock:
Total stockholders' equity liquidating value of preferred stock
$272,000,000
=
= $22.67
Common shares issued and
outstanding at December 31, 2013
12,000,000

F - 16 Test Bank for Intermediate Accounting, Fourteenth Edition

(f) Earnings per share on common stock:

Net income dividends on preferred stock
$48,400,000
=
= $4.03
Average common shares issued and outstanding during 2013
12,000,000
(g) Price-earnings ratio on common stock:
Market value of common stock
$54.00

= = 13.4
Earnings per share on common stock
$4.03
(h) Payout ratio on common stock:
Dividends on common stock $24,400,000
= = 50.4%
Net income dividends on preferred stock
$48,400,000
Problem F-V Solution.
a. Revenue test a segment is reportable if its total sales are $350,000 or more
(10% $3,500,000). Segments A, B, and E satisfy the revenue test.
b. Operating profit or loss test a segment's absolute profit or loss must be $58,000 or
more [10% of the absolute greater of $520,000 or ($580,000)]. Segments A, B, and D
satisfy the operating profit or loss test.
c. Identifiable assets test a segment's identifiable assets must be $1,810,000 or more
(10% $18,100,000). Segments B, D, and E satisfy the identifiable test.
Segments A, B, D, and E are identified as significant and therefore reportable because
they passed at least one of the significance tests.