Exam 2 - Excel Portion ACCT 610 9041 Financial Accounting

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Exam_II_PART_II_2172.xlsx

Instructions

Exam II, Part II Instructions:
Complete the problems on the spreadsheet.
Use formulas to calculate all cells that require a numeric answer.
Repond to the essay questions directly below the questions.
	# Points
Problem 1	10
Problem 2	6
Problem 3	12
Problem 4	12
Problem 5	10
	50	points
CAVEATS:
Posting this exam in part or in total on any Website outside of the UMUC Website is a violation of academic integrity in the MS Accounting degree programs.
Posting your answers to part or all of this exam on any Website outside of UMUC is a violation of academic integrity in the MS Accounting degree programs.
Speaking to any other person or entity about the content of this exam or answers in any way is a violation of UMUC's Policy on Academic Integrity.
All suspected violations of academic integrity in the MS Accounting degree programs and or UMUC Policy 150.25 will be turned into the graduate Dean's office for review.
The minimum penalty for violating Policy 150.25 on this exam is failing the exam. The maximum penalty for violating Policy 150.25 is expulsion from UMUC's graduate school.
Your professor is required to report all suspected cases of academic integrity violations in the MS Accounting degree programs and or UMUC's Policy 150.25.
You are strongly advised to review Policy 150.25 and the Graduate Accounting and Financial Manage Academic Integrity Pledge in advance of taking this exam.

Problem I

Problem I - worth 10 points
On January 1, 2017, XYZ Company, purchased new equipment to produces widgets.
	Cost of equipment		$ 1,260,000
	Estimated useful life in years		5
	Estimated salvage value		60,000
	Estimated widgets to be produced in first year		12,000

	Due to demand, production of widgets will decrease by 1,000 units/year until the equipment is completely depreciated.		1,000

	The following depreciation methods may be used:
		(1) Straight-line
		(2) Double-declining balance
		(3) Sum-of-years'-digits
		(4) Units-of-output
Required:				Points
1)	Compute depreciation using the following methods: a) Straight line b) Double declining balance c) Sum of the Years digits, and d) Units of Production.
	a)	Straight-line		1
	b)	Double-declining balance		2
	c)	Sum-of-years'-digits		2
	d)	Units-of-output		1

2)	Select the depreciation method that would result in the highest net income on an Income Statement dated: For the 3-years ending 12/31/19. Highlight your answer .			1
	a)	Straight line
	b)	Double declining balance
	c)	Sum of the years digits
	d)	Units of production
3)	Using the depreciation method selected in #2 above, prepare T-Accounts for Depreciation Expense, Accumulated Depreciation, and Income Summary. Include the ending balance of all T-Accounts assuming closing entries are made at the end of each year.			2
		Depreciation Expense

		Accumulated Depreciation
		Income Summary
4)	Prepare a written note to a client explaining why you chose the depreciation selected in #2 above.			1
			Total possible points =	10

Problem II

Problem II - worth 6 points
DEF, Inc. sells widgets with a warranty under which customers are covered for the cost of repairs of any manufacturing defects that become apparent within the first six months after purchase. Hint: this problem may require FASB Codification research.
Required:					Points
a)	DEF, Inc. estimates that if defects were detected in all products sold, repair costs would range from:				2
	Low end of range	$2,000,000	Minor repairs
	High end of range	$4,000,000	Major repairs
	Assume no particular outcome within the range of $2 to $4 million is better than another. Prepare the required journal entry.
b)	Using the same facts from part a) above, assume DEF, Inc. performs an analysis on the historical data of returns and estimates (based on historical data) finding that:				4
		Estimated to be:		Total possible points =	6
	Goods sold with no defects	75%	of all goods sold
	Goods sold with minor defects	20%	of all goods sold
	Goods sold with major defects	5%	of all goods sold
	Prepare the required journal entry.

Problem III

Problem III - worth 12 points
To raise money for a capital improvement to its national headquarters, JMP Inc. issued $2,000,000 in bonds on January 1, 2017. Hint: you may use time value of money tables to solve this problem.
Assume the following:
	Amount of Bonds Issued	$2,000,000
	Face of Bond	$1,000
	Maturity date	20 years
	Contract rate of interest	5%
	Interest payments	Semi annual
Required:				Points
a)	How many bonds were issued?			1

b)	Prepare the journal entry to record the issuance of the bonds on January 1, 2017 assuming the bonds were issued at face.			1
c)	Prepare the journal entry to record the issuance of the bonds on January 1, 2017 assuming the bonds:			1
	Were issued at:	98
d)	Prepare the journal entry to record the issuance of the bonds on January 1, 2017 assuming the bonds were issued at:			2
	Were issued at:	104
e)	Explain different approaches to amortizing bond discount and premium.			1
f)	Identify the amortization method preferred by FASB and explain why it's preferred.			1
g)	Assume 5 years have passed since the bonds were originally issued and they are now trading in the secondary market. How much would a seller be willing to sell for and a buyer be willing to pay for the bonds originally issued assuming the following:			4
	Face amount of bonds sold:		$100,000
	Market rate of interest on investments of similar risk:		4%
h)	Describe the relationship between the contract and market rate of interest with respect to how a differential between market and contract rates affects the selling price of bonds.			1
			Total possible points =	12

Problem IV

Problem IV - worth 12 points
EHL, Inc. began operations in 2010 and has the following Capital Stock:
	EHL, Inc. Capital Stock:
	Preferred Stock:	# Shares	Stated Dividend Rate	Par value
	Authorized shares of cumulative, non-participatory preferred stock	80,000	6%	$10
	Issued shares of preferred stock	60,000
	Outstanding shares of preferred stock	30,000
	Common Stock:	# Shares
	Authorized shares of $1 par value common stock	50,000
	Issued shares of common stock	40,000
	Outstanding shares of common stock	10,000

Required:				Points
a)	Compute the amount of Preferred Stock dividends.			1
	Total Preferred Stock Dividends =
b)	On January 1, 2017, the Board of Directors declared dividends of	$ 35,000		1

	Prepare the journal entry for the declaration of the dividends.

c)	On March 31, 2017, the dividends are disbursed to stockholders of record. Determine the allocation of dividends to Preferred and Common Stockholders.			1

d)	The Board of directors did not declare dividends during 2018. Determine the allocation of dividends to Preferred and Common Stockholders.			2

e)	On June 8, 2019 the Board of Directors declared dividends of	$110,000		3
	Determine the allocation of dividends to Preferred and Common Stockholders.

f)	The following year, on November 30, 2020, the board declared dividends of	$100,000		2
	Determine the allocation of dividends to Preferred and Common stockholders.








g)	Explain the advantages and disadvantages of investing in preferred stock.			1







h)	Describe the difference between participating and non-participating preferred stock.			1
		Total possible points =		12

Problem V

Problem V - worth 10 points
PMR, Inc. was incorporated in Delaware on January 1, 2015.
	PMR Inc. Corporate Stock as of December 31, 2017
	Par value	$5	per share
	Authorized	1,000,000	Shares of Common Stock
	Issued & outstanding	500,000	Shares of Common Stock
	Two years later, the Board of Directors created a strategic plan for global expansion of its main product. On January 1, 2017, PMR issued 1,000 convertible bonds to begin implementing the plan. The corporation did quite well its first two years of operations. Hint: ignore income tax effects for this problem.
	Assume:
	Net Income	$ 275,750
	Bonds issued	2,100	convertible bonds
	Bond term	5	years
	Bond face value	$ 1,000
	Bond contract rate of Interest	5%
	Convertible into	200	shares of common stock for each $1,000 bond
	Required:				Points
a)	Calculate basic EPS in 2017.				3
b)	Calculate diluted EPS in 2017.				5


c)	In your own words, explain the difference between simple and diluted earnings per share.				1
d)	In your own words, explain how investors use EPS and Diluted EPS to evaluate alternative investment opportunities.				1
				Total possible points =	10

II.xlsx

Instructions

Exam II, Part II Instructions:
Complete the problems on the spreadsheet.
Use formulas to calculate all cells that require a numeric answer.
Repond to the essay questions directly below the questions.
	# Points
Problem 1	10
Problem 2	6
Problem 3	12
Problem 4	12
Problem 5	10
	50	points
CAVEATS:
Posting this exam in part or in total on any Website outside of the UMUC Website is a violation of academic integrity in the MS Accounting degree programs.
Posting your answers to part or all of this exam on any Website outside of UMUC is a violation of academic integrity in the MS Accounting degree programs.
Speaking to any other person or entity about the content of this exam or answers in any way is a violation of UMUC's Policy on Academic Integrity.
All suspected violations of academic integrity in the MS Accounting degree programs and or UMUC Policy 150.25 will be turned into the graduate Dean's office for review.
The minimum penalty for violating Policy 150.25 on this exam is failing the exam. The maximum penalty for violating Policy 150.25 is expulsion from UMUC's graduate school.
Your professor is required to report all suspected cases of academic integrity violations in the MS Accounting degree programs and or UMUC's Policy 150.25.
You are strongly advised to review Policy 150.25 and the Graduate Accounting and Financial Manage Academic Integrity Pledge in advance of taking this exam.

Problem I

Problem I - worth 10 points
On January 1, 2017, XYZ Company, purchased new equipment to produces widgets.
	Cost of equipment			$ 1,260,000
	Estimated useful life in years			5
	Estimated salvage value			60,000
	Estimated widgets to be produced in first year			12,000

	Due to demand, production of widgets will decrease by 1,000 units/year until the equipment is completely depreciated.			1,000
				7
	The following depreciation methods may be used:
		(1) Straight-line
		(2) Double-declining balance
		(3) Sum-of-years'-digits
		(4) Units-of-output
Required:					Points
1)	Compute depreciation using the following methods: a) Straight line b) Double declining balance c) Sum of the Years digits, and d) Units of Production.
	a)	Straight-line			1
		Cost of equipment		$ 1,260,000
		Estimated useful life in years		5
		Estimated salvage value		60,000
		Straight-line		$240,000.00
	b)	Double-declining balance			2
		Year	Depreciation	Book Value
		Year 1	$ 504,000	$ 756,000
		Year 2	302,400	$ 453,600
		Year 3	181,440	$ 272,160
		Year 4	108,864	$ 163,296
		Year 5	103,296	60,000
	c)	Sum-of-years'-digits			2
		Total of life's digit =	5+4+3+2+1 =	15
	Year	Applicable %	Depreciation	Book Value
	1	0.3333333333	400,000	$ 860,000
	2	0.26666667	320,000	540,000
	3	0.20000000	240,000	300,000
	4	0.13333333	160,000	140,000
	5	0.06666667	80,000	60,000
	d)	Units-of-output			1
		Depreciation Per Unit =		24.00
		Year	Production	Depreciation
		1	12,000	$288,000
		2	$ 11,000	$264,000
		3	10,000	$240,000
		4	9,000	216,000
		5	8,000	192,000
				1,200,000
				- 0
2)	Select the depreciation method that would result in the highest net income on an Income Statement dated: For the 3-years ending 12/31/19. Highlight your answer .				1
	a)	Straight line
	b)	Double declining balance
	c)	Sum of the years digist
	d)	Units of production
3)	Using the depreciartion method selected in #2 above, prepare T-Accounts for Depreciation Expense, Accumulated Depreciaition, and Income Summary. Include the ending balance of all T-Accounts assuming closing entries are made at the end of each year.				2
		Depreciation Expense
	Acc. Dep.	240,000	240,000	Income Summary
		240,000	240,000	Income Summary
		240,000	240,000	Income Summary
		Accumulated Depreciation
			240,000	Depreciation Exp.
			480,000	Depreciation Exp.
			720,000	Depreciation Exp.
		Income Summary
	Dep. Exp.	240,000
	Dep. Exp.	240,000
	Dep. Exp.	240,000
4)	Prepare a written note to a client explaining why you chose the depreciation selected in #2 above.				1
	From the various methods available for chargin depreciation we choose straight line method of depreciation because this method results in equitable distribution of depreciation over the life of the asset and results in higher net income in the initial years of assets operations.			Total possible points =	10

Problem II

Problem II - worth 6 points
DEF, Inc. sells widgets with a warranty under which customers are covered for the cost of repairs of any manufacturing defects that become apparent within the first six months after purchase. Hint: this problem may require FASB Codification research.
Required:					Points
a)	DEF, Inc. estimates that if defects were detected in all products sold, repair costs would range from:				2
	Low end of range	$2,000,000	Minor repairs
	High end of range	$4,000,000	Major repairs
	Assume no particular outcome within the range of $2 to $4 million is better than another. Prepare the required journal entry.
	Account Titles	Debit	Credit
	Warranty Expenses	2,000,000
	Warranty Liability		2,000,000
b)	Using the same facts from part a) above, assume DEF, Inc. performs an analysis on the historical data of returns and estimates (based on historical data) finding that:				4
		Estimated to be:		Total possible points =	6
	Goods sold with no defects	75%	of all goods sold
	Goods sold with minor defects	20%	of all goods sold
	Goods sold with major defects	5%	of all goods sold
	Prepare the required journal entry.
	Calculation of Warranty Liability:
	No Defect	0
	Minor defects	$400,000
	Major Defects	$200,000
	Total Liability	$600,000
	Account Title	Debit	Credit
	Warranty Expenses	$600,000
	Warranty Liability		$600,000

Problem III

Problem III - worth 12 points
To raise money for a capital improvement to its national headquarters, JMP Inc. issued $2,000,000 in bonds on January 1, 2017. Hint: you may use time value of money tables to solve this problem.
Assume the following:
	Amount of Bonds Issued	$2,000,000
	Face of Bond	$1,000
	Maturity date	20 years
	Contract rate of interest	5%
	Interest payments	Semi annual
Required:				Points
a)	How many bonds were issued?			1

	Number of Bonds =	2000
b)	Prepare the journal entry to record the issuance of the bonds on January 1, 2017 assuming the bonds were issued at face.			1
	Account Title	Debit	Credit
	Cash	2,000,000
	Bonds Payable		2,000,000
c)	Prepare the journal entry to record the issuance of the bonds on January 1, 2017 assuming the bonds:			1
	Were issued at:	98
	Account Title	Debit	Credit
	Cash	1,960,000
	Discount on Bonds Payable	40,000
	Bonds Payable		2,000,000
d)	Prepare the journal entry to record the issuance of the bonds on January 1, 2017 assuming the bonds were issued at:			2
	Were issued at:	104
	Account Title	Debit	Credit
	Cash	2,080,000
	Bonds Payable		2,000,000
	Premium on Bonds Payable		80,000
e)	Explain different approaches to amortizing bond discount and premium.			1
	There are two approaches to amortize bond discount and premium. First is straight line approach and second is effective interest rate method. Under straight line amortization an equal amount is amortized over the life of the bond and in effective interest rate amortization amount of amortization is calculated on the basis of market rate of interest.
f)	Identify the amortization method preferred by FASB and explain why it's preferred.			1
	Effective interest rate method is preferred by FASB because this method correlate interest expense with the value of the bond.
g)	Assume 5 years have passed since the bonds were originally issued and they are now trading in the secondary market. How much would a seller be willing to sell for and a buyer be willing to pay for the bonds originally issued assuming the following:			4
	Face amount of bonds sold:		$100,000
	Market rate of interest on investments of similar risk:		4%
	Face Value	$1,000.00
	Contract rate	5%
	Coupon in a Year	2
	Time to maturity	15	Years
	Price that seller be willing to sell and a buyer be willing to pay =	$1,111.98
h)	Describe the relationship between the contract and market rate of interest with respect to how a differential between market and contract rates affects the selling price of bonds.			1
			Total possible points =	12
	There is an inverse relationship between the selling price of the bond and market rate of interest. If the market rate is higher than contract rate then the selling price of the bond will be below its par value and it will be sold at discount. If the market rate is lower than contract rate the bond will be sold at premium and the price will be higher than par value.

Problem IV

Problem IV - worth 12 points
EHL, Inc. began operations in 2010 and has the following Capital Stock:
	EHL, Inc. Capital Stock:
	Preferred Stock:	# Shares	Stated Dividend Rate	Par value
	Authorized shares of cumulative, non-participatory preferred stock	80,000	6%	$10
	Issued shares of prefered stock	60,000
	Outstanding shares of preferred stock	30,000
	Common Stock:	# Shares
	Authorized shares of $1 par value common stock	50,000
	Issued shares of common stock	40,000
	Outstanding shares of common stock	10,000

Required:				Points
a)	Compute the amount of Preferred Stock dividends.			1
	Total Preferred Stock Dividends =	$ 18,000
b)	On January 1, 2017, the Board of Directors declared dividends of	$ 35,000		1

	Prepare the journal entry for the declaration of the dividends.
	Account Title	Debit	Credit
	Retained Earnings	35,000
	Dividend Payable		35,000
c)	On March 31, 2017, the dividends are disbursed to stockholders of record. Determine the allocation of dividends to Preferred and Common Stockholders.			1
	Total Dividend	35,000	Per Share
	Less: Preferred Dividend	18,000	0.60
	Common stock dividend	17,000	1.70
d)	The Board of directors did not declare dividends during 2018. Determine the allocation of dividends to Preferred and Common Stockholders.			2

	Unpaid dividend on Preferred Stock for 2018 =	$ 18,000
	Dividend on Common Stock for 2018 =	$ - 0
e)	On June 8, 2019 the Board of Directors declared dividends of	$110,000		3
	Determine the allocation of dividends to Preferred and Common Stockholders.
	Allocation to Preferred Stockholders:		Per share
	Unpaid dividend of 2018	18,000	0.60
	Add: Dividend of 2019	$ 18,000	0.60
	Total Dividend allocated to Preferred Stockholders	36,000	1.20
	Dividend to Common Stockholders:		per share
	Total dividend declared	110,000
	Less: Preferred Dividend	36,000
	Common stockholders dividend	74,000	7.4
f)	The following year, on November 30, 2020, the board declared dividends of	$100,000		2
	Determine the allocation of dividends to Preferred and Common stockholders.
			per share
	Allocation to Preferred Stockholders:	$ 18,000	0.6

	Dividend to Common Stockholders:
	Total dividend declared	$100,000
	Less: Preferred Dividend	18,000
	Common stockholders dividend	82,000	8.2



g)	Explain the advantages and disadvantages of investing in preferred stock.			1

	Preferred stockholders has advantage of preference in dividend at a fixed rate and at the time of liquidation of the company preferred stockholders get preference for the repayment over common stockholders. But the disadvantage of preferred stock is that they do not get participation in the management of the company and do not have voting right. In case of non participating preferred stock, there share in dividend is limited to the rate of dividend on the stock.





h)	Describe the difference between participating and non-participating preferred stock.			1
		Total possible points =		12
	Participating preference stockholders apart from getting their regular dividend on stock also participate in the profit with the common stockholders. Non participating stockholders do not participate in the dividend with common stockholders and get only fixed dividend.

Problem V

Problem V - worth 10 points
PMR, Inc. was incorporated in Delaware on January 1, 2015.
	PMR Inc. Corporate Stock as of December 31, 2017
	Par value	$5	per share
	Authorized	1,000,000	Shares of Common Stock
	Issued & outstanding	500,000	Shares of Common Stock
	Two years later, the Board of Directors created a strategic plan for global expansion of its main product. On January 1, 2017, PMR issued 1,000 convertible bonds to begin implementing the plan. The corporation did quite well its first two years of operations. Hint: ignore income tax effects for this problem.
	Assume:
	Net Income	$ 275,750
	Bonds issued	2,100	convertible bonds
	Bond term	5	years
	Bond face value	$ 1,000
	Bond contract rate of Interest	5%
	Convertible into	200	shares of common stock for each $1,000 bond
	Required:				Points
a)	Calculate basic EPS in 2017.				3
	Net Income	$275,750.00
	Common stock outstanding	500,000
	Basic EPS in 2017 =	$0.55	per share
b)	Calculate diluted EPS in 2017.				5

	Net Income	$ 275,750
	Interest on Bonds	105000
	Total Earnings for diluted EPS	$ 380,750
	Diluted Common stock	920000
	Diluted EPS	$0.41

c)	In your own words, explain the difference between simple and diluted earnings per share.				1
	Simple earnings per share does not take into account dilutive effects of the securities. It is calculated by dividing net income by outstanding common shares. While diluted earnings per share are calculated by assuming that all convertible securities are converted in common stock. Then earnings per share are calculated by dividing net income to the total of common stock and convertible securities conversion in common stock.
d)	In your own words, explain how investors use EPS and Diluted EPS to evaluate alternative investment opportunities.				1
				Total possible points =	10
	EPS and Diluted EPS are used as a criteria to measure the amount of earnings available for each share of common stock. Diluted earnings per share measure the amount of earnings available per share of common stock if all the convertible securities are converted in common stock. This amount of EPS can be compared with the market price of the share to determine if the share is underpriced or overpriced.