The Islamic University of Gaza Course: Intermediate Accounting (2)

Faculty of Commerce Teacher: Salah Shubair

Department of Accounting Time: One Hour.
Final-term exam (2006/2007)

Name: . Student No. .

Q1. (14 Points)

Choose the Correct answer:
1- The lessee's balance sheet liability for a capital lease would be periodically
reduced by the total:
a. Minimum lease payment plus the amortization of the related asset.
b. Minimum lease payment less the amortization of the related asset.
c. Minimum lease payment less the portion of the minimum lease payment allocable to interest.
d. Minimum lease payment.

2- Rent collected in advance by the lessor for an operating lease a (an)

a. Deferred revenue. b. Deferred asset. c. Accrued revenue. d. Accrued liability.

3- On Jan. 1, 2007, X Inc. purchased a machine for $ 650,000. the machine is

expected to have a lo-year life, no residual value, and will be depreciated
on the straight-line basis. The same day the machine was leased to Z Inc.
for a 4-year period at an annual rental of $ 175,000. X paid $ 50,000 of
commissions associated with negotiating the lease in Jan. 2007. During
2007 X incurred insurance of $ 18,000 related to this lease. For the year
ended Dec.31, 2007, what amount should X report as operating profit on
this leased asset?
a. $ 42,000 b. $ 79,500 c. $ 107,000 d. $ 110,000

4- On Dec. 31, 2006, X Inc. signed an operating lease for a warehouse for 10
years at $ 24,000 per year. Upon execution of the lease, X paid $ 48,000
covering rent for the first two years. How much should be shown in X's
income statement for the year ended Dec. 31, 2006, as rent expense?
a. $ 0 b. $ 24,000 c. $ 48,000 d. $ 72,000

5- Almonte Company sold a computer in 2006 for $ 70,000. The computer's

original cost was $ 250,000, and the accumulated depreciation at the date
of sale was $ 200,000. the sale of the computer should appear on Almont's
2006 cash flow statement as:
a. A subtraction from net income of $ 20,000 and an addition to investing
activities of $ 50,000.
b. An addition to net income of $ 20,000 and an addition to investing activities
of $ 50,000.
c. A subtraction from net income of $ 20,000 and addition to investing activities
of $ 70,000.
d. An addition to investing activities of $ 70,000.

6- Installment Sales $ 900,000

Installment accounts receivable, 12/31/2006 $ 500,000
 Cost of goods sold, as percentage of sales 60%
The realized gross profit for 2006 would be:
a.
Q2. (8 Points)
On January 1, 2001, X Company purchased Equipment, 8-year estimated
useful life, $ 8000 slavage value, $ 232,000 cost.
In 2006, the company decided to change the total useful life of the equipment
to 12 years, with a salvage value of $ 4,500 at the end of that time. The equipment is
depreciated using the straight-line method.
Required:
a) Compute depreciation expense on the equipment for 2006.
b) Show the effect on balance sheet at 12,31,2006.
c) Prepare the journal entry to record depreciation expense on the
equipment for 2006.
Q3. (8 Points)
Lessor and Lessee sign a lease on Jan. 1, 2005. The lease contains the
following terms:
Lease duration 3 years beginning Jan. 1, 2005.
Estimated economic life 4 years.
Guaranted residual value $ 5,200 at the end of year 3.
Annual lease payments $ 19,277 payable at year-end.
Leased equipment cost $ 50,000 same as fair market value.
Lessor incremental borrowing rate 12.5%.
Information of present value factors is as follows:
PV of $ 1 for three periods at 12% 0.7118
PV of $ 1 for three periods at 12.5% 0.7023
PV of an ordinary annuity of $ 1 for three periods at 12% 2.4018
PV of an ordinary annuity of $ 1 for three periods at 12.5% 2.3813
Required: A. Prepare lease amortization schedule.
B. Prepare lessor's entries in 2005. (Direct Financing Lease).
C. Prepare lessee's entries in 2005. (Capital Lease).

Q4. (8 Points)
Year AC Method FIFO Method LIFO Method
2004 33,000 30,000 21,000
2005 27,000 28,000 24,000
2006 30,000 34,000 26,000
Management is contemplating a change in inventory methods for 2007.
Required:
- Prepare the journal entry necessary to record.
A- A change from AC method to the FIFO method.
B- A change from FIFO method to the AC method.
C- A change from LIFO method to the AC method.
D- A change from LIFO method to the FIFO method.

Q5. (15 Points)

 JUAREZ COMPANY
Comparative Balance Sheets December 31
Assets 2005 2004
Cash $ 191,000 $ 159,000
Accounts Receivable 12,000 15,000
Inventory 170,000 160,000
Prepaid expenses 6,000 8,000
Land 140,000 80,000
Equipment 160,000 -0-
Accumulated depreciation – equipment (16,000) -0-
Total $ 663,000 $ 422,000
Liabilities and Stockholder's Equity
Accounts Payable $ 52.000 $ 60,000
Accrued expenses payable 15,000 20,000
Income taxes Payable 12,000 -0-
Bonds Payable 130,000 -0-
Common Stock 360,000 300,000
Retained earnings 94,000 42,000
Total 663,000 422,000

JUAREZ COMPANY
Income Statement for the year ended 31, 2005
Revenues $ 975,000
Cost of goods sold $ 660,000
Operating expenses (excluding
176,000
depreciation)
Depreciation expense 18,000
Loss on sale of store equipment 1,000 855,000
Income before income taxes 120,000
Income tax expense 36,000
Net Income $ 84,000

Additional information
1- In 2005, the company declared and paid $ 32,000 cash dividend.
2- Bonds were issued at face value for $ 130,000 in cash.
3- Equipment costing $ 180,000 was purchased for cash.
4- Equipment costing $ 20,000 was sold for $ 17,000 cash when the book value of
the equipment was $ 18,000.
5- Common stock of $ 60,000 was issued to acquire land.
Required:
Prepare a statement of cash flows using the direct method.
GOOD LUCK