FINANCE

Instructions:

1. For the questions requiring a written explanation, please be as brief as possible. None of the questions require a lengthy answer. Often, one sentence per point to explain is enough.

2. Show all your work for maximum credit.

3. PUT YOUR ANSWERS IN RED WITH THE EXAM QUESTION BUT ENSURE THE GRADER CAN IDENTIFY YOUR QUICKLY IDENTIFY. BUT PLEASE MAKE SURE YOU IDENTIFY EACH ANSWER SO THAT I KNOW THE QUESTION YOU ARE ANSWERING.

PART I (50 points) Journal Entries

Whammy Company begins the month of May with $2,000 in cash and $2,000 in stock sold at par. During the month, the company has eight transactions. Prepare the appropriate journal entries for each transaction. You will also need to prepare the appropriate adjusting journal entries.

1. On May 1, the company receives $3,000 cash. The company has agreed to allow a potential customer to use rent part of the company’s office space from May 1 through July.

2. On May 1 the company buys a one year $100,000 fire insurance policy for the office building. The one year premium paid on May 1 was $2,400.

3. The company purchases inventory for $6,000. $5,000 was purchased on credit and the remainder with cash.

4. The company sells the entire inventory for $19,000 on account.

5. The company collects $3,000 of the accounts receivable.

6. The company pays $2,000 on the account payable.

7. Employees earn $6,000, to be paid next month.

8. During May the company purchases $1,200 of office supplies with cash. On May 31, there are only $700 of office supplies left.

PART II BOND PRICING (40 Points)

1. (10 Points) The University of Alabama sells three year bonds with a $800,000 face value to private investors. The bonds are due in three years, have a 6% coupon rate, and interest is paid annually. The bonds were sold to yield 8%. What proceeds does UA receive from the investors?

2. (5 Points) Did the bond sell for par, a premium or a discount? How much was the premium or discount?

3. (5 Points) If the bond sold for a premium or discount, what is the balance in the premium or discount following the interest payment at the end of year 1?

4. (26 points) Prepare all of the necessary journal entries, beginning with the issuance of the bond, the three annual interest payments and the bond retirement at the end of year 3.

Part III Statement of Cash Flows (32 Points)

Prepare a Statement of Cash Flow for the year ending 2017 from the following information.

2016

2017

Cash

85,000

27,000

Accounts Receivable

95,000

80,000

inventory

130,000

134,000

prepaid expenses

9,500

9,000

land

89,700

130,000

PP&E

295,500

256,700

accumulated depr

-30,000

-13,000

total assets

674,700

623,700

accounts payable

98,000

77,000

accrued liabilities

54,000

70,000

bonds payable

110,000

60,000

common stock

100,000

101,000

retained earnings

312,700

315,700

674,700

623,700

PP&E with a historical cost of $50,000 and a net book value of $28,000 was sold for $22,500

Dividends declared and paid for the year were for the year was $32,000.

Land with a historical cost of $25,000 was sold for $35,000

PART IV Variety (35 points five points each)

1. Ending inventory for fiscal year ending December 31, 2016 was overstated (some of the inventory was counted twice). What would this effect have on year ending 2016 (state over or under stated):

a. Assets

b. Retained Earnings

c. Sales

d. Gross Profit

e. Net Income

2. Ending inventory for fiscal year ending December 31, 2016 was overstated (some of the inventory was counted twice). Ending inventory for December 31, 2017 was correctly counted. What would this effect have on year ending 2017 state over or under stated):

a. Assets

b. Retained Earnings

c. Sales

d. Gross Profit

e. Net Income

3. True or false (circle the correct answer) – The auditor is responsible for the preparation and fair presentation of the audited financial statements.

4. What are the three basic components of pension expense (circle correct answer)?

A) Service cost, benefits paid, and expected return on plan assets

B) Service cost, benefits paid, and actual return on plan assets

C) Service cost, interest cost, and actual return on plan assets

D) Service cost, interest cost, and expected return on plan assets

E) None of the above

5. Contingent Liabilities must have the following criteria – circle all that apply .

A) The obligation is certain to require payment at some point in the future.

B) The obligation will probably require payment at some point in the future.

C) The obligation is estimable.

D) The obligation will possibly require payment at some point in the future.

E) None of the above

Dont Fall Down Incorporated produces skates and offers a one-year warranty on all products. During 2016, the company recorded net sales of $3,887.4 million. Historically, about 2% of all sales are returned under warranty and the cost of repairing and or replacing goods under warranty is about 50% of retail value. Assume that at the start of the year Dont Fall Down’s balance sheet included an accrued warranty liability of $16.9 million and at the end of the year, the accrued warranty liability balance was $13.0 million.

6. Calculate Dont Fall Down’s warranty expense for 2016.

7. How much did Dont Fall Down pay during the year to repair and or replace goods under warranty?

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