Friday, June 3, 2016

Accounting - Sample Midterm Questions and Answers

Questions for practice exam
Note: Answers are down
Financial Statement Data

(Excerpts of financial statements and notes to financial statements)


Dexter Corporation: Pages 2-6  (Use for Questions 3-5)



                               DEXTER CORPORATION




Founded in 1767 and incorporated in the state of Connecticut in 1914, Dexter Corporation operates in the specialty materials business. The principal markets served by the Company are the worldwide aerospace, electronics, food packaging and medical markets.






DEXTER CORPORATION
STATEMENT OF FINANCIAL POSITION

                                                                        DECEMBER 31                    
IN THOUSANDS OF DOLLARS                                   1999              1998                    1997

ASSETS
CURRENT ASSETS:
  CASH                                               $     9,043         $     8,566         $    11,273
  SHORT-TERM SECURITIES                                   77,807             102,483              57,033
  ACCOUNTS RECEIVABLE, NET                               181,726             203,872             185,257
  INVENTORIES                                            163,495             176,967             159,901
  CURRENT DEFERRED TAX ASSETS                             23,176              14,874              17,107
  PREPAID AND DEFERRED EXPENSES                            9,307              10,768               9,881
                                                         464,554             517,530             440,452

PROPERTY, PLANT AND EQUIPMENT, net                     328,146             360,456             348,172                                                        
INVESTMENTS OF WHOLLY OWNED CAPTIVE
  INSURANCE COMPANIES                                      5,972               8,248               9,056
INVESTMENT IN UNCONSOLIDATED AFFILIATES                      286               9,861               8,704
PATENTS, TECHNOLOGY, TRADEMARKS AND COVENANTS            113,800             118,152              29,489
EXCESS OF COST OVER NET ASSETS OF
  BUSINESSES ACQUIRED                                    112,191             156,989              97,507
OTHER ASSETS                                              49,179              37,132              28,396
                                                     $ 1,074,128         $ 1,208,368         $   961,776

DEXTER CORPORATION
STATEMENT OF CASH FLOWS (Excerpts)
                                                                             YEARS ENDED DECEMBER 31         
IN THOUSANDS OF DOLLARS                                             1999              1998             1997  
OPERATIONS
NET INCOME                                                       $ 107,499         $  31,704         $  56,427
  NONCASH ITEMS:
   DEPRECIATION ON PROPERTY, PLANT AND EQUIPMENT                    36,212            38,696            37,453
   AMORTIZATION                                                     19,243            11,661             7,988
   GAIN ON DIVESTITURE OF PRODUCT LINES                            (95,011)
   CHARGE FOR RESTRUCTURING BUSINESSES                               2,430
   ACQUIRED IN-PROCESS RESEARCH & DEVELOPMENT COSTS                                   24,508
   INCOME TAXES (PAID) NOT DUE                                      (7,575)            4,926            (5,660)
   MINORITY INTERESTS                                               12,074            14,696            14,667
   EQUITY IN NET INCOME OF AFFILIATES                                 (405)           (3,319)           (4,461)
   OTHER                                                            (5,332)            3,299              (978)
OPERATING WORKING CAPITAL (INCREASE) DECREASE                      (34,252)          (26,781)          (19,778)
                                                                    34,883            97,979            84,621

INVESTMENTS

PROPERTY, PLANT AND EQUIPMENT                                      (56,844)          (54,198)          (62,989)
ACQUISITIONS                                                       (18,767)         (217,963)          (68,517)
DIVESTITURES                                                       257,935                              41,539

FOOTNOTES (All amounts are in thousands, unless otherwise indicated)


INVENTORIES

Inventories are valued at the lower of cost or market. Inventories located in the United States represented 55% of total inventories. The LIFO (last-in, first-out) method was used for determining the cost of 59% of U.S. inventories in 1999 and 1998 and 58% in 1997. The FIFO (first-in, first-out) method was used for determining the cost of the remaining 41% of inventories in the United States and the 45% of total inventories which were located outside the United States. The reduction in levels of LIFO valued inventories (LIFO liquidation) was not significant in 1999, 1998 or 1997.


Inventories at December 31 were as follows:
      
        
IN THOUSANDS OF DOLLARS         1999         1998        1997 
                                                         
MATERIALS AND SUPPLIES       $ 56,451     $ 65,180    $ 61,233
WORK-IN-PROCESS                20,821       19,101      17,664
FINISHED GOODS                101,730      110,074      99,803
   TOTAL FIFO COST            179,002      194,355     178,700
LIFO RESERVE                  (15,507)     (17,388)    (18,799)
                             $163,495     $176,967    $159,901


ACQUISITIONS AND DIVESTITURES

During 1999 Dexter acquired a number of companies.  The value of the Property, Plant and Equipment acquired in those acquisitions was $4,303. 

During 1999 Dexter divested its Packaging Coatings business.  The net book value of the Property, Plant and Equipment divested was $47,582.  


PROPERTY, PLANT AND EQUIPMENT   

Maintenance and repairs are charged to operations as incurred and amounted to $17 million in 1999, $18.9 million in 1998 and $18.3 million in 1997. Betterments and major renewals are capitalized. The cost of assets sold or retired and the related amounts of accumulated depreciation are eliminated from the accounts and the resulting gains or losses are included in net income.
 
The cost and accumulated depreciation of property, plant and equipment at December 31, were as follows:

       
        
IN THOUSANDS OF DOLLARS             1999          1998          1997 
                                                               
LAND                             $  27,594     $  30,879     $  28,501
BUILDINGS AND IMPROVEMENTS         175,551       193,594       184,388
MACHINERY AND EQUIPMENT            457,314       509,406       474,079
CONSTRUCTION IN PROGRESS            25,260        22,302        25,157
   TOTAL COST                      685,719       756,181       712,125
LESS ACCUMULATED DEPRECIATION     (357,573)     (395,725)     (363,953)
PROPERTY, PLANT AND
  EQUIPMENT, NET                 $ 328,146     $ 360,456     $ 348,172




During 1999, Dexter acquired Property, Plant and Equipment – exclusive of business acquisitions – in the amount of $58,962.  During 1999 Dexter wrote-down the original cost of its Property, Plant and Equipment in the amount of $1,189.

ACCOUNTS RECEIVABLE

Net accounts receivable decreased in 1999 primarily due to the divestiture of product lines.





                                  SCHEDULE II

                               DEXTER CORPORATION

                       VALUATION AND QUALIFYING ACCOUNTS
              FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
                                 (IN THOUSANDS)

      
        
                                                                  COLUMN C
                 COLUMN A                    COLUMN B            ADDITIONS             COLUMN D      COLUMN E

                                            BALANCE AT    CHARGED TO    CHARGED TO                  BALANCE AT
                                            BEGINNING     COSTS AND       OTHER                       END OF
               DESCRIPTION                  OF PERIOD      EXPENSES      ACCOUNTS     DEDUCTIONS      PERIOD 
                                                                                                      
1999
Environmental Reserve.....................   $15,316                                    $2,321       $12,995
Restructuring Reserve.....................       471        $2,430                       1,670         1,231
Allowance for Doubtful Accounts...........     7,112         1,526                       3,646(a)      4,992
                                             $22,899        $3,956                      $7,637       $19,218
1998
Environmental Reserve.....................   $15,825                                    $  509       $15,316
Restructuring Reserve.....................        34                                      (437)(b)       471
Allowance for Doubtful Accounts...........     7,663        $  910                       1,461         7,112
                                             $23,522        $  910                      $1,533       $22,899
1997
Environmental Reserve.....................   $16,336                                    $  511       $15,825
Restructuring Reserve.....................        74                                        40            34
Allowance for Doubtful Accounts...........     6,620        $2,240         $123(c)       1,320         7,663
                                             $23,030        $2,240         $123         $1,871       $23,522

       


(a) Includes $2,814 resulting from business divestitures.

(b) Due to recovery of insurance claim.

(c)Due to business acquisition.



Answers for the questions

You have the following INCOMPLETE financial statements for RJ Co.

RJ Co.

Balance Sheet

December 31,
2006


Assets

Cash
$       25,000
Accounts Receivable
(a)
  Total
$       45,000


PP&E
(b)


Total Assets
$             (C)


Accounts Payable
$              (d)


Long-term Liabilities
(e)
Total Liabilities
(f)
Shareholder’s equity
(g)
Total Liabilities and shareholder’s equity
$             (h)

RJ Co.

Income Statement

Year ended, December 31, 2006



Sales
$         (i)
Expenses:

Cost of Goods Sold
35,000
Selling Expense
20,000
General & Admin Expense
6,000
Interest Expense
900
Tax Expense
1,100
Total Expense
(j)


Net Income
$      (k)











Question 1 - continued

Required: Complete the financial statements using what is presented above and the following (put your answers beside the corresponding letter below Definitions provided):

a)      Current ratio: 1.2
b)      Debt-to-equity ratio: 1.25
c)      Gross Profit (as a % of sales): 50%
d)     Return on Sales: 10%
e)      Return on Equity: 23.3333% (You may round off your answer using this ratio)

Current ratio = Current Assets / Current Liabilities
Debt to Equity = Long-Term Liabilities to Shareholder’s equity
Gross Profit % = (Sales-CoGS)/Sales
Return on Sales = NI/Sales
Return on Equity = NI/Shareholder’s Equity (ending balance)

a
Solve First: 45,000-25,000=20,000
b
=c-45,000=60,000
c
=h=105,000
d
Use current ratio: 45,000/d=1.2, d=37,500
e
Solve seventh: Use Debt/Equity: LTD/30,000=1.25; LTD=37,500
f
=e+d=75,000
g
Solve sixth: use ROE=7,000/SHE=.233333 SHE=30,000 (rounded)
h
=f+g=105,000
i
Solve third: use GP ratio, Cogs known (S-63,000)/sales=.5 Solve for S=70,000
j
Solve second: Sum all above=63,000
k
Solve fourth: i-j=7,000 or use ROS ratio:10% of i
Question 2 (10 points): Costing

Audio corporation produces two types of mp3 players, standard and high grade.  The standard is designed for durability rather than quality of sound.  The high grade is a recent product addition.  Since it was introduced, overall profits have declined, despite the fact that sales of the new product have been increasing.

Manufacturing overhead is currently allocated based on direct labor costs.  Last year 32,000 standard mp3s were produced and 10,000 high grade mp3s were produced.  Costs were as follows:


Standard
High Grade
Total
Direct Labor
$174,000
$66,000
$240,000
Direct Materials
$125,000
$114,000
$239,000
Overhead
$159,500
$60,500
$220,000
Total
$458,500
$240,500
$699,000

1.      (4 pts) Calculate the total cost per unit for each product based on the information above.


STD:    458.5/32=$14.33 rounded

HG:     240.5/10=$24.05











2.      (6 pts) Keener Bob is an EMBA student at a local university and is convinced that the above approach is flawed. Anxious to get an A in his accounting class he has undertaken an ABC costing analysis at his employer Audio Corp.  He has determined the following:



Activity Level

Cost Pool & Driver
Costs Assigned
Standard
High Grade
Total
Number of Production Runs
$100,000
40
10
50

Quality tests performed
$90,000
12
18
30
Other OH based on MH
$30,000
0.5MH/unit
1.4MH/unit

Total Overhead
$220,000




Calculate the total cost per unit for each product based on the new information above.

Other OH:             STD .5 per unit, so 32000 x .5=        16,000
                                HG   1.4 per unit so 10000x1.4=      14,000
Total                                                                                      30,000 units

Runs:     $100,000 / 50               = $2,000 per run
Tests:     $90,000 / 30                 =$3,000 per test
Other      $30,000 / 30,000         = $1 per MH

STD:       40 Runs x $2k + 12 Tests x $3k + 16,000 MH x $1     =$132,000 Total OH Costs
HG          10 Runs x $2k + 18 tests x $3k + 14,000 MH x $1      =$88,000
Total                                                                                                      $220,000


Standard
High Grade
Total
Direct Labor
$174,000
$66,000
$240,000
Direct Materials
$125,000
$114,000
$239,000
Overhead
$132,000
$88,000
$220,000
Total
$431,000
$268,000
$699,000

Per Unit                             $431/32=$13.47                268/10=$26.80
Note: STD went down, HG went up
Question 3: (9 points)     ACCOUNTS RECEIVABLE - Dexter Corporation


Please refer to the excerpts from the 1999 Annual Report of Dexter Corporation, included in your Financial Statement Booklet
Additional Information
1.
There were no surprise collections (i.e. recoveries) in 1999.




REQUIRED:

1.
(2 pts)
What was the amount of Gross accounts receivables for Dexter Corp. as at December 31, 1999?


Amount of Gross accounts receivables as at Dec. 31, 1999
$ 186,718







A/R Net     181,726
Allow            4,992  (Ending Balance – Sch II)
Gross A/R  186,718







2.
(2 pts)
What was the amount of the Estimated Provision for Bad Debt (i.e., Bad Debt Expense) which Dexter Corp. recognized in 1999?


Amount of the Estimated Provision for Bad Debt for 1999
$ 1,526



See Schedule II  (Charged to Expense column)











3.
(3 pts)
Record the journal entry for the amount of defaults which Dexter Corp. recognized (wrote-off) in 1999? (Exclude amounts related to business divestitures.)



Dr. Allow for Bad Debts   832
      Cr. A/R                                  832
                                                           
From Schedule II

Total Deductions from Allowance                                   3,646  Sch II –Col D
Less: Deductions due to Business Divestiture                  (2,814) (note a)
                                                                                                832






4.
(2 pts)
As we know, Federal Tax Law does not allow the use of the Accounts Receivable
Allowance method for purposes of corporations calculating their federal taxable income. 
Tax law requires the use of the Direct Write-off method. All else being equal,
how much greater or less would Dexter Corp.’s Federal taxable income be
 than their net income before taxes for 1999
Place an X in the appropriate space below to indicate whether Dexter’s
Federal taxable income would have been greater or less.


Amount of difference in Dexter’s Federal taxable income and pre-tax income for 1999.

$ 694






Greater
X  
Less





Direct Write-off Expense                832   Q3

Allowance Method Expense         (1,526)  Q2
Decrease in Expense                     (   694)       =    Increase in taxable income










Question 4:  (10 points)          INVENTORY - Dexter Corporation

Please refer to the excerpts from the 1999 Annual Report of Dexter Corporation, included in your Financial Statement Booklet.
Additional Information:
1.
Assume that Dexter did not record an adjustment to any of its inventory accounts for FCTAs in 1999.
REQUIRED:

1.
(2 pts)
What would Dexter’s inventory, as of December 31, 1999, be valued at under FIFO?


Inventory Note

IN THOUSANDS OF DOLLARS         1999         1998        1997 
                                                        
MATERIALS AND SUPPLIES       $ 56,451     $ 65,180    $ 61,233
WORK-IN-PROCESS                20,821       19,101      17,664
FINISHED GOODS                101,730      110,074      99,803
   TOTAL FIFO COST            179,002      194,355     178,700






2.
(3 pts)
By what amount would Dexter Corp.’s Cost of Goods Sold for 1999 have changed (from the amount reported) if it had always used the FIFO method, exclusively, to account for all of its inventory rather than the LIFO method to account for some of them?  Place an X in the appropriate space below to indicate whether the change would have resulted in an increase or a decrease in the Cost of Goods Sold.


Amount of change in Cost of Goods Sold for 1999 if FIFO method had been used

$ 1,881





Increase
X
Decrease


Inv. Note


RESERVE                  (15,507)     (17,388)   

LIFO Reserve, end of 1999                            15,507
LIFO Reserve, beginning of 1999                  (17,388)
Total Decrease in LIFO Reserve                   (  1,881) CoGs FIFO = CoGs LIFO – (Chg in Reserve) Note change is negative!!






3.
(1 pts)
What is the cumulative difference in Cost of Goods Sold as of the end of 1999 based on Dexter Corp. having used LIFO rather than using the FIFO method?


Cumulative difference in Cost of Goods Sold as of the end of 1999


$ 15,507




LIFO Reserve, end of 1999                            15,507







4.
(2 pts)
If its income tax rate is 35%, what was the total amount of income taxes deferred or saved (paid) by Dexter as of the end of 1999, as a result of using the LIFO method rather than the FIFO method to account for some of its inventories?  Place an X in the appropriate space below to indicate whether the amount was saved or paid.


Total amount of income taxes saved (paid) by Dexter as of the end of 1999 as a result of using the LIFO method

$5,427.5





Saved(or deferred)
X
Paid





15,507 (ending reserve, cumulative CoGS diff)  x   35%      =          5,427.5






5.
(2 pts)
Did Dexter Corp. liquidate any of its LIFO inventory layers during 1999?  If so, how much? To receive any credit you must explain your answer.


The inventory footnote states that LIFO inventories were liquidated in 1999; however, the effects were immaterial.









Question 5:  (10 points)          PROPERTY, PLANT & EQUIPMENT - Dexter Corporation

Please refer to the excerpts from the 1999 Annual Report of Dexter Corporation, included in your Financial Statement Booklet.
Additional Information
1.
Dexter records all of the depreciation on its Property, Plant and Equipment as an expense – that is, none is capitalized.
2.
Dexter did not record capitalized interest for 1999.
3.
For 1999, Dexter recorded a reduction of $3,505 to the Accumulated Depreciation account as a result of FCTAs.

REQUIRED:

1.
(5 pts)
What was the amount of the accumulated depreciation for the Property, Plant and Equipment which was disposed of (i.e. divested, removed from the accounts) in 1999? (Assume impairments or write-offs are recorded only to the PPE account, so it does not affect accumulated depreciation)  Hint: An account analysis may help: T or otherwise – be sure to incorporate additional information given above.


Amount of the accumulated depreciation for the Property, Plant and Equipment disposed of in 1999?

$70,859


Accumulated Depreciation



395,725                             Begin. Bal.


FCTA adjustment   (given)       3,505
  36,212    Depreciation Exp. for 1999


Disposals                                 70,859




357,573                                End. Bal.


2.
(1 pt)
What was the net book value of the Property, Plant and Equipment which was divested in 1999? (Hint: No analysis necessary.)


Net book value of the Property, Plant and Equipment which was divested in 1999

$47,582

See footnote – Acquisitions and Divestitures




3.
(1 pt)
What was the amount of the Property, Plant and Equipment acquired by Dexter in 1999 – by means other than by business acquisition?  (Hint: No analysis necessary.)


Amount of Property, Plant and Equipment purchased in 1999 – by means other than by business acquisition

$ 58,962



See footnote – Property, Plant and Equipment





4.
(2 pts)
What was the amount of the Property, Plant and Equipment acquired – by other than business acquisition – in 1999 and that was paid for using assets (or liabilities) other than cash?


Amount of the Property, Plant and Equipment purchased – by other than business acquisition – in 1999 and paid for using assets (or liabilities) other than cash


$ 2,118



Total cost of PP&E acquired 58,962          (footnote, see above)
Cash paid  .....                         (56,844)     (Cash flow statement)
Noncash acquisitions                 2,118



5.
(1 pt)
Record the journal entry for Dexter’s 1999 repairs and maintenance.  (Assume they were paid for with cash.)



Dr. Repair Expense  17 Million
     Cr. Cash                       17 Million


Bonus Question:


(2 pts)
List the names and amounts of the two intangible assets (categories or groupings as presented by Dexter) as at December 31, 1999.

Patents etc.                                               113,800            
EXCESS OF COST OVER NET ASSETS OF
  BUSINESSES ACQUIRED                                    112,191     (known as Goodwill)        

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