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Accounting 201 final exam problems

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ACCOUNTING 201

FINAL EXAM

SECTION I. A. Exchange of assets (12 points)

During the current year, Pellegrino Inc. trades a piece of land used in its operations in Italy that has a book value (carrying value) of $94,000 for a piece of processing equipment used in the operations of Perrier Co. The carrying value of the machine on Perrier’s books is $75,000. The transaction lacks commercial substance.

a) Assume the fair value of the land is $100,000. How much of a gain or loss can Pellegrino recognize on the exchange? Your answer may be zero.

b) Assume neither the fair value of the land nor the fair value of the machine can be reliably measured. How much of a gain or loss can Pellegrino recognize on the exchange? Your answer may be zero.

c) Assume that Pellegrino paysPerrier $10,000 as part of the exchange of the land for the machine. Assume the fair value of the land is $100,000. How much of a gain or loss can Pellegrino recognize on the exchange? Your answer may be zero.

d) Assume that Pellegrino receives$4,000 from Perrier as part of the exchange of the land for the machine. Assume the fair value of the land is $100,000. How much of a gain or loss can Pellegrino recognize on the exchange? Your answer may be zero.

 

SECTION I. B. Research and development costs (5 points)

Rosalynn Corp. incurred research and development costs in 2014 associated with the development of a new drug as follows:

Materials and equipment $140,000

Personnel 190,000

Indirect costs 100,000

$430,000

 

As of December 31, 2014, Rosalynn estimates that the development process will result in a patentable drug by December 31, 2017 that has an estimated fair value of $1,300,000. The materials and equipment purchased have no alternative uses.

Q1. What amount is Rosalynn permitted to capitalize during 2014?

a) ZERO

b) 140,000

c) 290,000

d) 430,000

e) 1,300,000

Q2. Assume it is now December 31, 2017. The patent was granted in December 2017 and the estimated fair value of the patent is $1,800,000. What amount is Rosalynn permitted to capitalize as of December 31, 2017?

a) ZERO

b) 140,000

c) 290,000

d) 430,000

e) 1,800,000

 

SECTION I. C. Revenue recognition (8 points)

TVLAND is an experienced home theatre dealer. TVLAND also offers a number of services such as installation and design/layout of the seating after delivery of the TV. Assume that TVLAND sells big screen TVs on a standalone basis. TVLAND also sells installation and seating design/layout services, however, TVLAND does not offer design or installation to customers who buy TVs from other vendors. Pricing for TVs is as follows.

TV only $ 800

TV with installation service 850

TV with design services 975

TV with design and installation services 1,000

In each instance in which design services are provided, the design is separately priced within the arrangement at $175. Additionally, the incremental amount charged by TVLAND for installation approximates the amount charged by independent third parties. TVs are sold subject to a general right of return. If a customer purchases a TV with installation and/or design services, in the event TVLAND does not complete the service satisfactorily, the customer is only entitled to a refund of the portion of the fee that exceeds $800.

Question 1.Assume that a customer purchases a TV with both design services and installation for $1,000. The requested installation is completely customary and TVLAND has considerable experience performing installation. Based on its experience, TVLAND is assured that the installation will be performed satisfactorily to the customer. As noted above, recall that the design services are priced separately.

TVLAND is allowed to recognize revenue related to the TV upon delivery of the TV because:

(a) The TV has value to the customer on a standalone basis

(b) The arrangement includes a general right of return relative to the TV

(c) Performance of the undelivered items (installation) is considered probable and substantially in control of the seller

(d) All of the above are necessary to justify revenue recognition

(e) None of the above justifies revenue recognition

 

SECTION I. C. Revenue recognition, continued

Question 2.Indicate the amount of revenues that should be allocated to the TV, the installation, and the design/layout services contract.

 

SECTION I. D. Revenue recognition on a long-term contract (11 points)

Ignore taxes throughout this problem.

On March 1, 2010, Green Construction Company contracted to construct a factory building for Verde Manufacturing Inc. for a total contract price of $10,000,000. The building was completed by October 31, 2012. Green uses the percentage-of-completion method.

The annual contract costs incurred, estimated costs to complete the contract, and accumulated billings to Verde for the year ended December 31, 2010 are given below.

Contract costs incurred during the year $3,200,000

Estimated costs to complete the contract at 12/31 4,800,000

Billings to Verde during the year 3,500,000

Question 1.How much revenue should Green recognize on this contract in 2010?

Question 2.How much profit/(loss) should Green recognize on this contract in 2010? Be sure to indicate whether it is a profit or a loss.

Question 3.During 2011, Green incurs $2,800,000 of contract costs (i.e., cumulative total costs as of December 31, 2011 = $6,000,000) and estimates that the costs to complete are $3,000,000 as of 12/31/2011. How much profit/(loss) should Green recognize in 2011? Be sure to indicate whether it is a profit or a loss. You may round answer to nearest thousand.

 

SECTION I. E. Investments (22 points)

Part 1. Pinks Fabric Co. (15 points)

There are four questions in this section related to an investment by Pinks Fabric Co. (Pinks). Excerpts from Pinks’ footnotes in the 2014 annual report follow:

The fabric sourcing business is being conducted by Gulabi Trading Co., an investee that is accounted for by the equity method of accounting (see Note C).

Effective as of April 19, 2005, Pinks entered into an agreement (the “Operating Agreement”) with two individuals (the “Principals”) for the formation of Gulabi Trading Co. Pursuant to the terms of the Operating Agreement, Pinks and each of the Principals made an initial capital contribution of $500,000 in exchange for a 33.33% initial interest in Gulabi. The Operating Agreement provides that profit be shared 66.66% by the Principals and 33.33% by Financial.

 

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