下载文档原格式
Unit 11 Sad movies make me cry.一、词汇根据汉语意思或所给单词或首字母提示填空1.You look (苍白). What’s the matter with you?2.He was afraid of losing his (权力).3.Happiness is more important than (财富).4.The boy (踢) the ball into the river. He asked his father to get the ball forhim.5.The doctor asked me to lie down and started to e my body.6.I’m going to lose my w by taking more exercise.7.Don’t push the door. You should p it.8.We’d r go to the movies than stay at home.9.My parents often (courage) me not to give up my dream.10.She (nod) to me when she passed me in the street.11.We are in (agree) on their idea.12.They felt very (disappoint) because they lost the match again.13.The rock music makes Peter (excite).14.Sad movies made Mike (cry).15.They spend more time (eat) their meals.16.Some people hate ads, (say) that they make their cities look ugly.17.Many ads are (aim) at teenagers.18.The picture in an ad looks a lot (good) than the (real) thing.19.That made me (annoy) with myself.20.You’d better (not, talk) loudly in the reading room.二、单项选择( )21. I would rather poor than money in dishonest ways.A. remain; getB. remaining; getC. remain; gettingD. to remain; to get( )22. I think your idea is so good. I am agreement with you.A. forB. inC. withD. on( )23. You should try to relax. Don’t be hard yourself.A. atB. onC. ofD. with( )24. Many children ask their parents to give money to charities buy them snacks.A. later onB. even thoughC. rather thanD. in order to( )25. I stay at home on weekends, but I don’t feel .A. lonely; lonelyB. alone; lonelyC. lonely; aloneD. alone; alone( )26. We think it’s very fair that some seats to be large.A. designB. are designingC. are designedD. to be designed( )27. The ads in the newspaper lead some people on trips to London.A. to goB. goC. goingD. went( )28. Remember your host’s suggestions and the rules.A. to follow; obeyB. following; obeyingC. to keep; to keepD. obey; follow( )29. The clothes are aimed teenagers.A. toB. inC. aboutD. at( )30. —How does your mother like your presents for Mother’s Day?—Well, this sweater that one is fit for her. They’re too big.A. both; andB. either; orC. neither; norD. not only; but also( )31. —There was thick haze (雾霾) in our city this spring. What do you think of it?—I think cars we drive, pollution our city will have.A. the fewer; the fewerB. the fewer; the lessC. the more; the fewerD. the more; the less( )32. Welcome to our school, ladies and gentlemen. , I’d like to introducemyself.A. To be honestB. To my surpriseC. To start withD. To tell you the truth( )33. The little boy by the big one this morning.A. made cryB. was made cryC. made to cryD. was made to cry三、完成句子，每空一词34.故事如此感人以至于我们都哭了。
Chapter 8Relationships Among Inflation,Interest Rates, and Exchange Rates Lecture OutlinePurchasing Power Parity (PPP)Interpretations of PPPRationale Behind PPP TheoryDerivation of PPPUsing PPP to Estimate Exchange Rate EffectsGraphic Analysis of PPPTesting the PPP TheoryWhy PPP Does Not OccurPPP in the Long RunInternational Fisher Effect (IFE)Implications of the IFE for Foreign InvestorsDerivation of the IFEGraphic Analysis of the IFETests of the IFEWhy the IFE Does Not OccurComparison of IRP, PPP, and IFE TheoriesChapter ThemeThis chapter discusses the relationship between inflation and exchange rates according to the purchasing power parity (PPP) theory. Since this is one of the most popular subjects in inter-national finance, it is covered thoroughly. While PPP is a relevant theory, it should be emphasized that PPP will not always hold in reality. It does however, provide a foundation in understanding how inflation can affect exchange rates. The international Fisher effect (IFE) is also discussed in this chapter. This theory is also very important. Yet, it should again be emphasized that this theory does not always hold. If the PPP and IFE theories held consistently, decision making by MNCs would be much easier. Because these theories do not hold consistently, an MNC’s decision making is very challenging.Topics to Stimulate Class Discussion1. Provide reasoning for why highly inflated countries such as Brazil tend to have weak homecurrencies.2. Identify the inflation rate of your home country and some well-known foreign country. Thenidentify the percentage change of your home currency with respect to that foreign country.Did the currency change in the direction and by the magnitude that you would have expected according to PPP? If not, offer possible reasons for this discrepancy.3. Identify the quoted one-year interest rates in your home country and in a well-known foreigncountry as of one year ago. Also determine how your home currency changed relative to this foreign currency over the last year. Did the currency change according to the IFE theory? If not, does this information disprove IFE? Elaborate.4. Provide a simple explanation of the difference between interest rate parity (from the previouschapter), PPP (from this chapter), and IFE (from this chapter).Critical debateDoes PPP Eliminate Concerns about Long-Term Exchange Rate Risk?Proposition Yes. Studies have shown that exchange rate movements are related to inflation differentials in the long run. Based on PPP, the currency of a high-inflation country will depreciate against the home currency. A subsidiary in that country should generate inflated revenue from the inflation, which will help offset the adverse exchange effects when its earnings are remitted to the parent. If a firm is focused on long-term performance, the deviations from PPP will offset over time. In some years, the exchange rate effects may exceed the inflation effects, and in other years the inflation effects will exceed the exchange rate effects.Opposing view No. Even if the relationship between inflation and exchange rate effects is consistent, this does not guarantee that the effects on the firm will be offsetting. A subsidiary in a high-inflation country will not necessarily be able to adjust its price level to keep up with the increased costs of doing business there. The effects vary with each MNC’s situation. Even if the subsidiary can raise its prices to match the rising costs, there are short-term deviations from PPP. The investors who invest in an MNC’s stock may be concerned about short-term deviations fromPPP, because they will not necessarily hold the stock for the long term. Thus, investors may prefer that firms manage in a manner that reduces the volatility in their performance in short-run and long-run periods.With whom do you agree? State your reasons Examine the exchange rate policies of the major multinationals by referring to their annual reports. The Forbes listing of major multinationals on the web is a good starting point. In particular, consult the reports of Renault (France) and Phillips (Holland).ANSWER: It is possible that inflation and exchange rate effects will offset over the long run. However, many investors will not be satisfied because they may invest in the firm for just a few years or even a shorter term. Thus, they will prefer that MNCs assess their exposure to exchange rate risk and attempt to limit the risk.Answers to End of Chapter Questions1. PPP. Explain the theory of purchasing power parity (PPP). Based on this theory, what is ageneral forecast of the values of currencies in countries with high inflation?ANSWER: PPP suggests that the purchasing power of a consumer will be similar when purchasing goods in a foreign country or in the home country. If inflation in a foreign country differs from inflation in the home country, the exchange rate will adjust to maintain equal purchasing power.Currencies in countries with high inflation will be weak according to PPP, causing the purchasing power of goods in the home country versus these countries to be similar.2. Rationale of PPP. Explain the rationale of the PPP theory.ANSWER: When inflation is high in a particular country, foreign demand for goods in that country will decrease. In addition, that country’s demand for foreign goods should increase.Thus, the home currency of that country will weaken; this tendency should continue until the currency has weakened to the extent that a foreign country’s goods are no more attractive than the home country’s goods. Inflation differentials are offset by exchange rate changes. 3. Testing PPP. Explain how you could determine whether PPP exists. Describe a limitation intesting whether PPP holds.ANSWER: One method is to choose two countries and compare the inflation differential to the exchange rate change for several different periods. Then, determine whether the exchange rate changes were similar to what would have been expected under PPP theory.A second method is to choose a variety of countries and compare the inflation differential ofeach foreign country relative to the home country for a given period. Then, determine whether the exchange rate changes of each foreign currency were what would have been expected based on the inflation differentials under PPP theory.A limitation in testing PPP is that the results will vary with the base period chosen. The baseperiod should reflect an equilibrium position, but it is difficult to determine when such a period exists.4. Testing PPP. Inflation differentials between the U.S. and other industrialized countries havetypically been a few percentage points in any given year. Yet, in many years annual exchange rates between the corresponding currencies have changed by 10 percent or more.What does this information suggest about PPP?ANSWER: The information suggests that there are other factors besides inflation differentials that influence exchange rate movements. Thus, the exchange rate movements will not necessarily conform to inflation differentials, and therefore PPP will not necessarily hold.5. Limitations of PPP. Explain why PPP does not hold.ANSWER: PPP does not consistently hold because there are other factors besides inflation that influences exchange rates. Thus, exchange rates will not move in perfect tandem with inflation differentials. In addition, there may not be substitutes for traded goods. Therefore, even when a country’s inflation increases, the foreign demand for its products will not necessarily decrease (in the manner suggested by PPP) if substitutes are not available.6. Implications of IFE. Explain the international Fisher effect (IFE). What is the rationale forthe existence of the IFE? What are the implications of the IFE for firms with excess cash that consistently invest in foreign Treasury bills? Explain why the IFE may not hold.ANSWER: The IFE suggests that a currency’s value will adjust in accordance with the differential in interest rates between two countries.The rationale is that if a particular currency exhibits a high nominal interest rate, this may reflect a high anticipated inflation. Thus, the inflation will place downward pressure on the currency’s value if it occurs.The implications are that a firm that consistently purchases foreign Treasury bills will on average earn a similar return as on domestic Treasury bills.The IFE may not hold because exchange rate movements react to other factors in addition to interest rate differentials. Therefore, an exchange rate will not necessarily adjust in accordance with the nominal interest rate differentials, so that IFE may not hold.7. Implications of IFE. Assume UK interest rates are generally above foreign interest rates.What does this suggest about the future strength or weakness of the pound based on the IFE?Should UK investors invest in foreign securities if they believe in the IFE? Should foreign investors invest in UK securities if they believe in the IFE?ANSWER: The IFE would suggest that the pound will depreciate over time if UK interest rates are currently higher than foreign interest rates. Consequently, foreign investors who purchased UK securities would on average receive a similar yield as what they receive in their own country, and UK investors who purchased foreign securities would on average receive a yield similar to UK rates.8. Comparing Parity Theories. Compare and contrast interest rate parity (discussed in theprevious chapter), purchasing power parity (PPP), and the international Fisher effect (IFE).ANSWER: Interest rate parity can be evaluated using data at any one point in time to determine the relationship between the interest rate differential of two countries and the forward premium (or discount). PPP suggests a relationship between the inflation differential of two countries and the percentage change in the spot exchange rate over time. IFE suggestsa relationship between the interest rate differential of two countries and the percentagechange in the spot exchange rate over time. IFE is based on nominal interest rate differentials, which are influenced by expected inflation. Thus, the IFE is closely related to PPP.9. Real Interest Rate. One assumption made in developing the IFE is that all investors in allcountries have the same real interest rate. What does this mean?ANSWER: The real return is the nominal return minus the inflation rate. If all investors require the same real return, then the differentials in nominal interest rates should be solely due to differentials in anticipated inflation among countries.10. Interpreting Inflationary Expectations. If investors in the UK and Canada require the samereal interest rate, and the nominal rate of interest is 2 percent higher in Canada, what does this imply about expectations of UK inflation and Canadian inflation? What do these inflationary expectations suggest about future exchange rates?ANSWER: Expected inflation in Canada is 2 percent above expected inflation in the UK. If these inflationary expectations come true, PPP would suggest that the value of the Canadian dollar should depreciate by 2 percent against the pound.11. PPP Applied to the Euro. Assume that several European countries that use the euro as theircurrency experience higher inflation than the United States, while two other European countries that use the euro as their currency experience lower inflation than the United States.According to PPP, how will the euro’s value against the dollar be affected?ANSWER: The high European inflation overall would reduce the U.S. demand for European products, increase the European demand for U.S. products, and cause the euro to depreciate against the dollar.According to the PPP theory, the euro's value would adjust in response to the weighted inflation rates of the European countries that are represented by the euro relative to the inflation in the U.S. If the European inflation rises, while the U.S. inflation remains low, there would be downward pressure on the euro.12. Source of Weak Currencies. Currencies of some Latin American countries, such as Braziland Venezuela, frequently weaken against most other currencies. What concept in this chapter explains this occurrence? Why don’t all U.S.-based MNCs use forward contracts to hedge their future remittances of funds from Latin American countries to the U.S. even if they expect depreciation of the currencies against the dollar?ANSWER: Latin American countries typically have very high inflation, as much as 200 percent or more. PPP theory would suggest that currencies of these countries will depreciateagainst the U.S. dollar (and other major currencies) in order to retain purchasing power across countries. The high inflation discourages demand for Latin American imports and places downward pressure in their Latin American currencies. Depreciation of the currencies offsets the increased prices on Latin American goods from the perspective of importers in other countries.Interest rate parity forces the forward rates to contain a large discount due to the high interest rates in Latin America, which reflects a disadvantage of hedging these currencies. The decision to hedge makes more sense if the expected degree of depreciation exceeds the degree of the forward discount. Also, keep in mind that some remittances cannot be perfectly hedged anyway because the amount of future remittances is uncertain.13. PPP. Japan has typically had lower inflation than the United States. How would one expectthis to affect the Japanese yen’s value? Why does this expected relationship not always occur?ANSWER: Japan’s low inflation should place upward pressure on the yen’s value. Yet, other factors can sometimes offset this pressure. For example, Japan heavily invests in U.S.securities, which places downward pressure on the yen’s value.14. IFE. Assume that the nominal interest rate in Mexico is 48 percent and the interest rate in theUnited States is 8 percent for one-year securities that are free from default risk. What does the IFE suggest about the differential in expected inflation in these two countries? Using this information and the PPP theory, describe the expected nominal return to U.S. investors who invest in Mexico.ANSWER: If investors from the U.S. and Mexico required the same real (inflation-adjusted) return, then any difference in nominal interest rates is due to differences in expected inflation. Thus, the inflation rate in Mexico is expected to be about 40 percent above the U.S.inflation rate.According to PPP, the Mexican peso should depreciate by the amount of the differential between U.S. and Mexican inflation rates. Using a 40 percent differential, the Mexican peso should depreciate by about 40 percent. Given a 48 percent nominal interest rate in Mexico and expected depreciation of the peso of 40 percent, U.S. investors will earn about 8 percent.(This answer used the inexact formula, since the concept is stressed here more than precision.)15. IFE. Shouldn’t the IFE discourage investors from attempting to capitalize on higher foreigninterest rates? Why do some investors continue to invest overseas, even when they have no other transactions overseas?ANSWER: According to the IFE, higher foreign interest rates should not attract investors because these rates imply high expected inflation rates, which in turn imply potential depreciation of these currencies. Yet, some investors still invest in foreign countries where nominal interest rates are high. This may suggest that some investors believe that (1) the anticipated inflation rate embedded in a high nominal interest rate is overestimated, or (2) the potentially high inflation will not cause substantial depreciation of the foreign currency (which could occur if adequate substitute products were not available elsewhere), or (3) thereare other factors that can offset the possible impact of inflation on the foreign currency’s value.16. Changes in Inflation. Assume that the inflation rate in Brazil is expected to increasesubstantially. How will this affect Brazil’s nominal interest rates and the value of its currency (called the real)? If the IFE holds, how will the nominal return to UK investors who invest in Brazil be affected by the higher inflation in Brazil? Explain.ANSWER: Brazil’s nominal interest rate would likely increase to maintain the real return required by Brazilian investors. The Brazilian real would be expected to depreciate according to the IFE. If the IFE holds, the return to UK investors who invest in Brazil would not be affected. Even though they now earn a higher nominal interest rate, the expected decline in the Brazilian real offsets the additional interest to be earned.17. Comparing PPP and IFE. How is it possible for PPP to hold if the IFE does not?ANSWER: For the IFE to hold, the following conditions are necessary:(1) investors across countries require the same real returns,(2) the expected inflation rate embedded in the nominal interest rate occurs,(3) the exchange rate adjusts to the inflation rate differential according to PPP.If conditions (1) or (2) do not hold, PPP may still hold, but investors may achieve consistently higher returns when investing in a foreign country’s securities. Thus, IFE would be refuted.18. Estimating Depreciation Due to PPP. Assume that the spot exchange rate of the Britishpound is $1.73. How will this spot rate adjust according to PPP if the United Kingdom experiences an inflation rate of 7 percent while the United States experiences an inflation rate of 2 percent?ANSWER: According to PPP, the exchange rate of the pound will depreciate by 4.7 percent.Therefore, the spot rate would adjust to $1.73 × [1 + (–.047)] = $1.65.19. Forecasting the Future Spot Rate Based on IFE. Assume that the spot exchange rate of theSingapore dollar is £0.35. The one-year interest rate is 11 percent in the United Kingdom and7 percent in Singapore. What will the spot rate be in one year according to the IFE? (Youmay use the approximate formula to answer this question.)ANSWER: £0.35 × (1 + .04) = £0.36420. Deriving Forecasts of the Future Spot Rate. As of today, assume the following informationis available:UK MexicoReal rate of interest requiredinvestors 2% 2%byNominal interest rate 11% 15%Spot rate — £0.05One-year forward rate — £0.049a. Use the forward rate to forecast the percentage change in the Mexican peso over the nextyear.ANSWER: (£0.049– £0.05)/£0.05 = –.02, or –2%b. Use the differential in expected inflation to forecast the percentage change in theMexican peso over the next year.ANSWER: 11% – 15% = –4%; the negative sign represents depreciation of the peso.c. Use the spot rate to forecast the percentage change in the Mexican peso over the next year.ANSWER: zero percent change21. Inflation and Interest Rate Effects. The opening of Russia's market has resulted in a highlyvolatile Russian currency (the rouble). Russia's inflation has commonly exceeded 20 percent per month. Russian interest rates commonly exceed 150 percent, but this is sometimes less than the annual inflation rate in Russia.a. Explain why the high Russian inflation has put severe pressure on the value of theRussian rouble.ANSWER: As Russian prices were increasing, the purchasing power of Russian consumers was declining. This would encourage them to purchase goods in the UK and elsewhere, which results in a large supply of roubles for sale. Given the high Russian inflation, foreign demand for roubles to purchase Russian goods would be low. Thus, the rouble’s value should depreciate against the dollar, and against other currencies.b. Does the effect of Russian inflation on the decline in the rouble’s value support the PPPtheory? How might the relationship be distorted by political conditions in Russia?ANSWER: The general relationship suggested by PPP is supported, but the rouble’s value will not normally move exactly as specified by PPP. The political conditions that could restrict trade or currency convertibility can prevent Russian consumers from shifting to foreign goods. Thus, the rouble may not decline by the full degree to offset the inflation differential between Russia and the UK Furthermore, the government may not allow the rouble to float freely to its proper equilibrium level.c. Does it appear that the prices of Russian goods will be equal to the prices of UK goodsfrom the perspective of Russian consumers (after considering exchange rates)? Explain.ANSWER: Russian prices might be higher than UK prices, even after considering exchange rates, because the rouble might not depreciate enough to fully offset the Russian inflation. The exchange rate cannot fully adjust if there are barriers on trade or currency convertibility.d. Will the effects of the high Russian inflation and the decline in the rouble offset eachother for UK importers? That is, how will UK importers of Russian goods be affected by the conditions?ANSWER: UK importers will likely experience higher prices, because the Russian inflation may not be completely offset by the decline in the rouble’s value. This may cause a reduction in the UK demand for Russian goods.22. IFE Application to Asian Crisis. Before the Asian crisis, many investors attempted tocapitalize on the high interest rates prevailing in the Southeast Asian countries although the level of interest rates primarily reflected expectations of inflation. Explain why investors behaved in this manner.Why does the IFE suggest that the Southeast Asian countries would not have attracted foreign investment before the Asian crisis despite the high interest rates prevailing in those countries?ANSWER: The investors' behavior suggests that they did not expect the international Fisher effect (IFE) to hold. Since central banks of some Asian countries were maintaining their currencies within narrow bands, they were effectively preventing the exchange rate from depreciating in a manner that would offset the interest rate differential. Consequently, superior profits from investing in the foreign countries were possible.If investors believed in the IFE, the Asian countries would not attract a high level of foreign investment because of exchange rate expectations. Specifically, the high nominal interest rate should reflect a high level of expected inflation. According to purchasing power parity (PPP), the higher interest rate should result in a weaker currency because of the implied market expectations of high inflation.23. IFE Applied to the Euro. Given the recent conversion of several European currencies to theeuro, explain what would cause the euro’s value to change against the dollar according to the IFE.ANSWER: If interest rates change in these European countries whose home currency is the euro, the expected inflation rate in those countries change, so that the inflation differential between those countries and the U.S. changes. Thus, there may be an impact on the value of the euro, because a change in the inflation differential affects trade flows and therefore affects the exchange rate.Advanced Questions24. IFE. Beth Miller does not believe that the international Fisher effect (IFE) holds. Currentone-year interest rates in Europe are 5 percent, while one-year interest rates in the U.S. are 3 percent. Beth converts $100,000 to euros and invests them in Germany. One year later, she converts the euros back to dollars. The current spot rate of the euro is $1.10.a. According to the IFE, what should the spot rate of the euro in one year be?b. If the spot rate of the euro in one year is $1.00, what is Beth’s percentage return from herstrategy?c. If the spot rate of the euro in one year is $1.08, what is Beth’s percentage return from herstrategy?d. What must the spot rate of the euro be in one year for Beth’s strategy to be successful?ANSWER:a.%90.11)05.1()03.1(1)1()1(−=−=−++=f h f i i eIf the IFE holds, the euro should depreciate by 1.90 percent in one year. This translates to a spot rate of $1.10 × (1 – 1.90%) = $1.079.b.1. Convert dollars to euros: $100,000/$1.10 = €90,909.092. Invest euros for one year and receive €90,909.09 × 1.05 = €95,454.553. Convert euros back to dollars and receive €95,454.55 × $1.00 = $95,454.55The percentage return is $95,454.55/$100,000 – 1 = –4.55%.c.1. Convert dollars to euros: $100,000/$1.10 = €90,909.092. Invest euros for one year and receive €90,909.09 × 1.05 = €95,454.553. Convert euros back to dollars and receive €95,454.55 × $1.08 = $103,090.91The percentage return is $103,090.91/$100,000 – 1 = 3.09%.d. Beth’s strategy would be successful if the spot rate of the euro in one year is greater than$1.079.25. Integrating IRP and IFE. Assume the following information is available for the U.S. andEurope:U.S. Europe Nominal interest rate 4% 6%Expected inflation 2% 5%Spot rate ----- $1.13One-year forward rate ----- $1.10a. Does IRP hold?b. According to PPP, what is the expected spot rate of the euro in one year?c. According to the IFE, what is the expected spot rate of the euro in one year?d. Reconcile your answers to parts (a). and (c).ANSWER:a.%89.11)06.1()04.1(1)1()1(−=−=−++=f h i i pTherefore, the forward rate of the euro should be $1.13 × (1 – 1.89%) = $1.109. IRP does not hold in this case.b.%86.21)05.1()02.1(1)1()1(−=−=−++=f h f I I eAccording to PPP, the expected spot rate of the euro in one year is $1.13 × (1 – 2.86%) = $1.098.c.%89.11)06.1()04.1(1)1()1(−=−=−++=f h f i i eAccording to the IFE, the expected spot rate of the euro in one year is $1.13 × (1 – 2.86%) = $1.098.Parts a and c combined say that the forward rate premium or discount is exactly equal to theexpectedpercentage appreciation or depreciation of the euro.26. IRP. The one-year risk-free interest rate in Mexico is 10%. The one-year risk-free rate in theUK is 2%. Assume that interest rate parity exists. The spot rate of the Mexican peso is £0.14.a. What is the forward rate premium?b. What is the one-year forward rate of the peso?c. Based on the international Fisher effect, what is the expected change in the spot rate over thenext year?d.If the spot rate changes as expected according to the IFE, what will be the spot rate in oneyear?pare your answers to (b) and (d) and explain the relationship.ANSWER:a. According to interest rate parity, the forward premium is07273.1)10.1()02.1(−=−++b. The forward rate is £0.14 × (1 – .07273) = £0.1298.c. According to the IFE, the expected change in the peso is:07273.1)10.1()02.1(−=−++or –7.273%d. £.14 × (1 – .07273) = £0.1298e. The answers are the same. When IRP holds, the forward rate premium and the expected percentage change in the spot rate are derived in the same manner. Thus, the forward premium serves as the forecasted percentage change in the spot rate according to IFE.27. Testing the PPP. How could you use regression analysis to determine whether therelationship specified by PPP exists on average? Specify the model, and describe how you would assess the regression results to determine if there is a significant difference from the relationship suggested by PPP.ANSWER: A regression model could be applied to historical data to test PPP. The model isspecified as:()e a a 1+I 1 + I u f 01U.S.f =+−⎡⎣⎢⎤⎦⎥+1where e f is the percentage change in the foreign currency’s exchange rate, I U.S. and I f are U.S.and foreign inflation rates, a 0 is a constant, a 1 is the slope coefficient, and u is an error term. If PPP holds, a 0 should equal zero, and a 1 should equal 1. A t-test on a 0 and a 1 is shown below.t -test for a : t = a 0s.e. of a t -test for a : t = a1s.e. of a 0001 1 1−−。
CHAPTER 5Net Present Value and Other Investment CriteriaAnswers to Problem Sets1. a. A = 3 years, B = 2 years, C = 3 years.b. Bc. A, B, and Cd. B and C (NPV B = $3,378;NPV C = $2,405)e. True. The payback rule ignores all cash flows after the cutoff date,meaning that future years’ cash inflows are not considered. In addition, thepayback rule ignores the timing of cash inflows. For example, for apayback rule set at two years, a project with a payback period of one yearis given equal weight as a project with a payback period of two years.f. It will accept no negative-NPV projects, but will turn down some withpositive NPVs. A project can have positive NPV if all future cash flows areconsidered but still do not meet the stated cutoff period.Est. time: 6 – 102. Given the cash flows C0, C1, . . . , C T, IRR is defined by:It is calculated by trial and error, by financial calculators, or by spreadsheetprograms.Est. time: 1 – 53. a. $15,750; $4,250; $0b. 100%Est. time: 1 – 54. No (you are effectively “borrowing” at a rate of interest highe r than theopportunity cost of capital).Est. time: 1 – 55 a. Two. There are multiple internal rates of return for a project when thereare changes in the sign of the cash flows.b. −50% and +50%. The NPV for the project using both of these IRRs is 0.c. Yes, NPV = +14.6.Est. time: 1 – 56. The incremental flows from investing in Alpha rather than Beta are −200,000;+110,000; and 121,000. The IRR on the incremental cash flow is 10% (i.e., −200 + 110/1.10 + 121/1.102 = 0). The IRR on Beta exceeds the cost of capital and so does the IRR on the incremental investment in Alpha. Choose Alpha.Est. time: 1 – 57. 1, 2, 4, and 6The profitability index for each project is shown below:Start with the project with the highest profitability index and go from there. Project2 has the highest profitability index and has an initial investment of $5,000. Thenext highest profitability index is for Project 1, which has an initial investment of $10,000. The next highest is Project 4, which will cost $60,000 up front. So far we have spent $75,000. Projects 5 and 6 both have profitability indexes of .2, but we only have $15,000 left to spend, so we will add Project 6 to our list. This gives us Projects 1, 2, 4, and 6.Est. time: 1 – 58. a. $90.91.10)(1$10001000NPV A -=+-=$ $4,044.7310)(1.$1000(1.10)$1000(1.10)$4000(1.10)$1000(1.10)$10002000NPV 5432B +=+++++-=$ $39.4710)(1.$1000.10)(1$1000(1.10)$1000(1.10)$10003000NPV 542C +=++++-=$ Projects B and C have positive NPVs.b. Payback A = one yearPayback B = two yearsPayback C = four yearsc. A and Bd.$909.09.10)(1$1000PV 1A == The present value of the cash inflows for Project A never recovers the initialoutlay for the project, which is always the case for a negative NPV project.The present values of the cash inflows for Project B are shown in the thirdrow of the table below, and the cumulative net present values are shownin the fourth row:C 0C 1 C 2 C 3 C 4 C 5 -2,000.00+1,000.00 +1,000.00 +4,000.00 +1,000.00 +1,000.00 -2,000.00909.09 826.45 3,005.26 683.01 620.92 -1,090.91 -264.46 2,740.80 3,423.81 4,044.73Since the cumulative NPV turns positive between year 2 and year 3, the discounted payback period is:years 2.093,005.26264.462=+The present values of the cash inflows for Project C are shown in the third row of the table below, and the cumulative net present values are shown in the fourth row:C 0 C 1 C 2 C 3 C 4 C 5-3,000.00 +1,000.00 +1,000.000.00 +1,000.00 +1,000.00 -3,000.00 909.09 826.450.00 683.01 620.92 -2,090.91 -1,264.46 -1,264.46 -581.45 39.47Since the cumulative NPV turns positive between year 4 and year 5, thediscounted payback period is:years 4.94620.92581.454=+e. Using the discounted payback period rule with a cutoff of three years, thefirm would accept only Project B.Est. time: 11– 159. a. When using the IRR rule, the firm must still compare the IRR with theopportunity cost of capital. Thus, even with the IRR method, one mustspecify the appropriate discount rate.b. Risky cash flows should be discounted at a higher rate than the rate usedto discount less risky cash flows. Using the payback rule is equivalent tousing the NPV rule with a zero discount rate for cash flows before thepayback period and an infinite discount rate for cash flows thereafter.Est. time: 1 – 510.The two IRRs for this project are (approximately): –17.44% and 45.27%. Between these two discount rates, the NPV is positive.Est. time: 06 - 1011. a.The figure on the next page was drawn from the following points:Discount Rate 0% 10% 20%NPV A +20.00 +4.13 -8.33NPV B +40.00 +5.18 -18.98b. From the graph, we can estimate the IRR of each project from the pointwhere its line crosses the horizontal axis:IRR A = 13.1% and IRR B = 11.9%This can be checked by calculating the NPV for each project at theirrespective IRRs, which give an approximate NPV of 0.c.The company should accept Project A if its NPV is positive and higherthan that of Project B; that is, the company should accept Project A if thediscount rate is greater than 10.7% (the intersection of NPV A and NPV B onthe graph below) and less than 13.1% (the internal rate of return).d. The cash flows for (B–A) are:C0 = $ 0C1 = –$60C2 = –$60C3 = +$140Therefore:Discount Rate0% 10% 20%NPV B−A+20.00 +1.05 -10.65IRR B − A = 10.7%The company should accept Project A if the discount rate is greater than10.7% and less than 13.1%. As shown in the graph, for these discountrates, the IRR for the incremental investment is less than the opportunitycost of capital.Est. time: 06 - 1012. a. Because Project A requires a larger capital outlay, it ispossible that Project A has both a lower IRR and a higher NPV thanProject B. (In fact, NPV A is greater than NPV B for all discount rates lessthan 10%.) Because the goal is to maximize shareholder wealth, NPV isthe correct criterion.b. To use the IRR criterion for mutually exclusive projects, calculate theIRR for the incremental cash flows:C 0 C 1 C 2 IRRA -B −200 +110 +121 10%Because the IRR for the incremental cash flows exceeds the cost ofcapital, the additional investment in A is worthwhile. c. 81.86$(1.09)3001.09250400NPV 2A =++-= $79.10(1.09)1791.09140200NPV 2B =++-= Est. time: 06 - 1013. Use incremental analysis:C 1 C 2 C 3Current Arrangement −250,000 −250,000 +650,000Extra Shift −550,000 +650,000 0Incremental Flows −300,000 +900,000 -650,000The IRRs for the incremental flows are (approximately): 21.13% and 78.87%If the cost of capital is between these rates, Titanic should work the extra shift.Est. time: 06 - 1014.a. First calculate the NPV for each project.The NPV for Project D is: $=-+=D 20,000NPV 10,0008,181.821.10The NPV for Project E is:=-+=E 35,000NPV 20,000$11,818.181.10Profitability index = NPV/initial investment.For Project D: Profitability index = 8,181.82/10,000 = .82.For Project E: Profitability index = 11,818.18/20,000 −.59.b. Each project has a profitability index greater than zero, and so both areacceptable projects. In order to choose between these projects, we must use incremental analysis. For the incremental cash flows:0.3610,0003,63610,000)( 1.1015,00010,000PI D E ==--+-=- The increment is thus an acceptable project, and so the larger project should be accepted, i.e., accept Project E. (Note that, in this case, the better project has the lower profitability index.)Est. time: 11 - 1515. Using the fact that profitability index = (net present value / investment), we find:ProjectProfitability Index 10.22 2−0.02 30.17 40.14 50.07 60.18 7 0.12 Thus, given the budget of $1 million, the best the company can do is to acceptProjects 1, 3, 4, and 6.If the company accepted all positive NPV projects, the market value (compared to the market value under the budget limitation) would increase by the NPV ofProject 5 plus the NPV of Project 7: $7,000 + $48,000 = $55,000.Thus, the budget limit costs the company $55,000 in terms of its market value.Est. time: 06 - 1016. The IRR is the discount rate wh ich, when applied to a project’s cash flows, yieldsNPV = 0. Thus, it does not represent an opportunity cost. However, if eachproject’s cash flows could be invested at that project’s IRR, then the NPV of each project would be zero because the IRR would then be the opportunity cost ofcapital for each project. The discount rate used in an NPV calculation is theopportunity cost of capital. Therefore, it is true that the NPV rule does assume that cash flows are reinvested at the opportunity cost of capital.Est. time: 06 - 1017.a.C 0 = –3,000 C 0 = –3,000C 1 = +3,500 C 1 = +3,500C 2 = +4,000 C 2 + PV(C 3) = +4,000 – 3,571.43 = 428.57C 3 = –4,000 MIRR = 27.84%b. 2321 1.12C 1.12xC xC -=+ (1.122)(xC 1) + (1.12)(xC 2) = –C 3(x)[(1.122)(C 1) + (1.12C 2)] = –C 3)()2123 1.12C )(C (1.12C -x += 0.4501.12)(4,00)(3,500(1.124,000x 2=+=)() 0IRR)(1x)C -(1IRR)(1x)C -(1C 2210=++++ 0IRR)(10)0.45)(4,00-(1IRR)(10)0.45)(3,50-(13,0002=++++- Now, find MIRR using either trial and error or the IRR function (on afinancial calculator or Excel). We find that MIRR = 23.53%.It is not clear that either of these modified IRRs is at all meaningful.Rather, these calculations seem to highlight the fact that MIRR really hasno economic meaning. Est. time: 11 - 15 18. Maximize:NPV = 6,700x W + 9,000x X + 0X Y – 1,500x Z subject to: 10,000x W + 0x X + 10,000x Y + 15,000x Z ≤ 20,00010,000x W + 20,000x X – 5,000x Y – 5,000x Z ≤ 20,0000x W - 5,000x X – 5,000x Y – 4,000x Z ≤ 20,0000 ≤ x W ≤ 10 ≤ x X ≤ 10 ≤ x Z ≤ 1Using Excel Spreadsheet Add-in Linear Programming Module:Optimized NPV = $13,450with x W = 1; x X = 0.75; x Y = 1 and x Z = 0If financing available at t = 0 is $21,000:Optimized NPV = $13,500with x W = 1; x X = (23/30); x Y = 1 and x Z = (2/30)Here, the shadow price for the constraint at t = 0 is $50, the increase in NPV for a $1,000 increase in financing available at t = 0.In this case, the program viewed x Z as a viable choice even though the NPV ofProject Z is negative. The reason for this result is that Project Z provides apositive cash flow in periods 1 and 2.If the financing available at t = 1 is $21,000:Optimized NPV = $13,900with x W = 1; x X = 0.8; x Y = 1 and x Z = 0Hence, the shadow price of an additional $1,000 in t =1 financing is $450.Est. time: 11 - 15。
米什金货币金融学英文版习题答案chapter11英文习题Economics of Money, Banking, and Financial Markets, 11e, Global Edition (Mishkin) Chapter 11 Banking Industry: Structure and Competition11.1 Historical Development of the Banking System1) The modern commercial banking system began in America when theA) Bank of United States was chartered in New York in 1801.B) Bank of North America was chartered in Philadelphia in 1782.C) Bank of United States was chartered in Philadelphia in 1801.D) Bank of North America was chartered in New York in 1782.Answer: BAACSB: Application of Knowledge2) A major controversy involving the banking industry in its early years wasA) whether banks should both accept deposits and make loans or whether these functions should be separated into different institutions.B) whether the federal government or the states should charter banks.C) what percent of deposits banks should hold as fractional reserves.D) whether banks should be allowed to issue their own bank notes.Answer: BAACSB: Reflective Thinking3) The government institution that has responsibility for theamount of money and credit supplied in the economy as a whole is theA) central bank.B) commercial bank.C) bank of settlement.D) monetary fund.Answer: AAACSB: Application of Knowledge4) Because of the abuses by state banks and the clear need for a central bank to help the federal government raise funds during the War of 1812, Congress created theA) Bank of United States in 1812.B) Bank of North America in 1814.C) Second Bank of the United States in 1816.D) Second Bank of North America in 1815.Answer: CAACSB: Application of Knowledge5) The Second Bank of the United States was denied a new charter byA) President Andrew Jackson.B) Vice President John Calhoun.C) President Benjamin Harrison.D) President John Q. Adams.Answer: AAACSB: Application of Knowledge6) Currency circulated by banks that could be redeemed for gold was calledA) junk bonds.B) banknotes.C) gold bills.D) state money.Answer: BAACSB: Application of Knowledge7) To eliminate the abuses of the state-chartered banks, the ________ created a new banking system of federally chartered banks, supervised by the ________.A) National Bank Act of 1863; Office of the Comptroller of the CurrencyB) Federal Reserve Act of 1863; Office of the Comptroller of the CurrencyC) National Bank Act of 1863; Office of Thrift SupervisionD) Federal Reserve Act of 1863; Office of Thrift SupervisionAnswer: AAACSB: Application of Knowledge8) The belief that bank failures were regularly caused by fraud or the lack of sufficient bank capital explains, in part, the passage ofA) the National Bank Charter Amendments of 1918.B) the Garn-St. Germain Act of 1982.C) the National Bank Act of 1863.D) Federal Reserve Act of 1913.Answer: CAACSB: Application of Knowledge9) Before 1863A) federally-chartered banks had regulatory advantages not granted to state-chartered banks.B) the number of federally-chartered banks grew at a much faster rate than at any other time since the end of the Civil War.C) banks acquired funds by issuing banknotes.D) banks were required to maintain 100% of their deposits asreserves.Answer: CAACSB: Application of Knowledge10) Prior to 1863, all commercial banks in the United StatesA) were chartered by the U.S. Treasury Department.B) were chartered by the banking commission of the state in which they operated.C) were regulated by the Federal Reserve.D) were regulated by the central bank.Answer: BAACSB: Application of Knowledge11) Although the National Bank Act of 1863 was designed to eliminate state-chartered banks by imposing a prohibitive tax on banknotes, state banks were able to stay in business byA) issuing credit cards.B) ignoring the regulations.C) acquiring funds through deposits.D) branching into other states.Answer: CAACSB: Reflective Thinking12) The National Bank Act of 1863, and subsequent amendments to itA) created a banking system of state-chartered banks.B) established the Office of the Comptroller of the Currency.C) broadened the regulatory powers of the Federal Reserve.D) created insurance on deposit accounts.Answer: BAACSB: Application of Knowledge13) Which regulatory body charters national banks?A) the Federal ReserveB) the FDICC) the Comptroller of the CurrencyD) the U.S. TreasuryAnswer: CAACSB: Application of Knowledge14) The regulatory system that has evolved in the United States whereby banks are regulated at the state level, the national level, or both, is known as aA) bilateral regulatory system.B) tiered regulatory system.C) two-tiered regulatory system.D) dual banking system.Answer: DAACSB: Application of Knowledge15) Today the United States has a dual banking system in which banks supervised by the________ and by the ________ operate side by side.A) federal government; municipalitiesB) state governments; municipalitiesC) federal government; statesD) municipalities; statesAnswer: CAACSB: Application of Knowledge16) The U.S. banking system is considered to be a dual system becauseA) banks offer both checking and savings accounts.B) it actually includes both banks and thrift institutions.C) it is regulated by both state and federal governments.D) it was established before the Civil War, requiring separate regulatory bodies for the North and South.Answer: CAACSB: Reflective Thinking17) The Federal Reserve Act of 1913 required thatA) state banks be subject to the same regulations as national banks.B) national banks establish branches in the cities containing Federal Reserve banks.C) national banks join the Federal Reserve System.D) state banks could not join the Federal Reserve System.Answer: CAACSB: Application of Knowledge18) The Federal Reserve Act of 1913 required all ________ banks to become members of the Federal Reserve System, while ________ banks could choose to become members of the system.A) state; nationalB) state; municipalC) national; stateD) national; municipalAnswer: CAACSB: Application of Knowledge19) Probably the most significant factor explaining the drastic drop in the number of bank failures since the Great Depression has beenA) the creation of the FDIC.B) rapid economic growth since 1941.C) the employment of new procedures by the Federal Reserve.D) better bank management.Answer: AAACSB: Reflective Thinking20) With the creation of the Federal Deposit Insurance Corporation, member banks of the Federal Reserve System ________ to purchase FDIC insurance for their depositors, while non-member commercial banks ________ to buy deposit insurance.A) could choose; were requiredB) could choose; were given the optionC) were required, could chooseD) were required; were requiredAnswer: CAACSB: Application of Knowledge21) With the creation of the Federal Deposit Insurance CorporationA) member banks of the Federal Reserve System were given the option to purchase FDIC insurance for their depositors, while non-member commercial banks were required to buy deposit insurance.B) member banks of the Federal Reserve System were required to purchase FDIC insurance for their depositors, while non-member commercial banks could choose to buy deposit insurance. C) both member and non-member banks of the Federal Reserve System were required to purchase FDIC insurance for their depositors.D) both member and non-member banks of the Federal Reserve System could choose, but were not required, to purchase FDIC insurance for their depositors.Answer: BAACSB: Reflective Thinking22) The Glass-Steagall Act, before its repeal in 1999, prohibited commercial banks fromA) issuing equity to finance bank expansion.B) engaging in underwriting and dealing of corporate securities.C) selling new issues of government securities.D) purchasing any debt securities.Answer: BAACSB: Application of Knowledge23) The legislation that separated investment banking from commercial banking until its repeal in 1999 is known as theA) National Bank Act of 1863.B) Federal Reserve Act of 1913.C) Glass-Steagall Act.D) McFadden Act.Answer: CAACSB: Application of Knowledge24) Which of the following statements concerning bank regulation in the United States is TRUE?A) The Office of the Comptroller of the Currency has the primary responsibility for state banks that are members of the Federal Reserve System.B) The Federal Reserve and the state banking authorities jointly have responsibility for the state banks that are members of the Federal Reserve System.C) The Office of the Comptroller of the Currency has sole regulatory responsibility over bank holding companies.D) The state banking authorities have sole regulatory responsibility for all state banks. Answer: BAACSB: Analytical Thinking25) Which bank regulatory agency has the sole regulatory authority over bank holding companies?A) the FDICB) the Comptroller of the CurrencyC) the FHLBSD) the Federal Reserve SystemAnswer: DAACSB: Application of Knowledge26) State banks that are not members of the Federal Reserve System are most likely to be examined by theA) Federal Reserve System.B) FDIC.C) FHLBS.D) Comptroller of the Currency.Answer: BAACSB: Application of Knowledge27) State banking authorities have sole jurisdiction over state banksA) without FDIC insurance.B) that are not members of the Federal Reserve System.C) operating as bank holding companies.D) chartered in the 21st century.Answer: AAACSB: Application of Knowledge11.2 Financial Innovation and the Growth of the "Shadow Banking System"1) Financial innovations occur because of financial institutions search forA) profits.B) fame.C) stability.D) recognition.Answer: AAACSB: Reflective Thinking2) ________ is the process of researching and developing profitable new products and services by financial institutions.A) Financial engineeringB) Financial manipulationC) Customer manipulationD) Customer engineeringAnswer: AAACSB: Application of Knowledge3) The most significant change in the economic environment that changed the demand for financial products in recent years has beenA) the aging of the baby-boomer generation.B) the dramatic increase in the volatility of interest rates.C) the dramatic increase in competition from foreign banks.D) the deregulation of financial institutions.Answer: BAACSB: Reflective Thinking4) In the 1950s the interest rate on three-month Treasury bills fluctuated between 1 percent and3.5 percent; in the 1980s it fluctuated between ________ percent and ________ percent.A) 5; 15B) 4; 11.5C) 4; 18D) 5; 10Answer: AAACSB: Application of Knowledge5) Uncertainty about interest-rate movements and returns iscalledA) market potential.B) interest-rate irregularities.C) interest-rate risk.D) financial creativity.Answer: CAACSB: Application of Knowledge6) Rising interest-rate riskA) increased the cost of financial innovation.B) increased the demand for financial innovation.C) reduced the cost of financial innovation.D) reduced the demand for financial innovation.Answer: BAACSB: Reflective Thinking7) Adjustable rate mortgagesA) protect households against higher mortgage payments when interest rates rise.B) keep financial institutions' earnings high even when interest rates are falling.C) benefit homeowners when interest rates are falling.D) generally have higher initial interest rates than on conventional fixed-rate mortgages. Answer: CAACSB: Reflective Thinking8) Adjustable rate mortgagesA) reduce the interest-rate risk for financial institutions.B) benefit homeowners when interest rates rise.C) generally have higher initial interest rates than conventional fixed-rate mortgages.D) allow borrowers to avoid paying interest on portions of their mortgage loans.Answer: AAACSB: Reflective Thinking9) The agreement to provide a standardized commodity to a buyer on a specific date at a specific future price isA) a put option.B) a call option.C) a futures contract.D) a mortgage-backed security.Answer: CAACSB: Application of Knowledge10) An instrument developed to help investors and institutions hedge interest-rate risk isA) a debit card.B) a credit card.C) a financial derivative.D) a junk bond.Answer: CAACSB: Application of Knowledge11) Financial instruments whose payoffs are linked to previously issued securities are calledA) grandfathered bonds.B) financial derivatives.C) hedge securities.D) reversible bonds.Answer: BAACSB: Application of Knowledge12) Both ________ and ________ were financial innovations that occurred because of interest rate volatility.A) adjustable-rate mortgages; commercial paperB) adjustable-rate mortgages; financial derivativesC) sweep accounts; financial derivativesD) sweep accounts; commercial paperAnswer: BAACSB: Reflective Thinking13) The most important source of the changes in supply conditions that stimulate financial innovation has been theA) deregulation of financial institutions.B) dramatic increase in the volatility of interest rates.C) improvement in information technology.D) dramatic increase in competition from foreign banks.Answer: CAACSB: Reflective Thinking14) New computer technology hasA) increased the cost of financial innovation.B) increased the demand for financial innovation.C) reduced the cost of financial innovation.D) reduced the demand for financial innovation.Answer: CAACSB: Information Technology15) Credit cards date back toA) prior to the second World War.B) just after the second World War.C) the early 1950s.D) the late 1950s.Answer: AAACSB: Application of Knowledge16) A firm issuing credit cards earns income fromA) loans it makes to credit card holders.B) subsidies from the local governments.C) payments made to it by manufacturers of the productssold in stores on credit card purchases.D) sales of the card in foreign countries.Answer: AAACSB: Reflective Thinking17) The entry of AT&T and GM into the credit card business is an indication ofA) government's efforts to deregulate the provision of financial services.B) the rising profitability of credit card operations.C) the reduction in costs of credit card operations since 1990.D) the sale of unprofitable operations by Bank of America and Citicorp.Answer: BAACSB: Reflective Thinking18) A debit card differs from a credit card in thatA) a debit card is a loan while for a credit card purchase, payment is made immediately.B) a debit card is a long-term loan while a credit card is a short-term loan.C) a credit card is a loan while for a debit card purchase, payment is made immediately.D) a credit card is a long-term loan while a debit card is a short-term loan.Answer: CAACSB: Application of Knowledge19) Automated teller machinesA) are more costly to use than human tellers, so banks discourage their use by charging more for use of ATMs.B) cost about the same to use as human tellers in banks, so banks discourage their use by charging more for use of ATMs.C) cost less than human tellers, so banks may encourage their use by charging less for using ATMs.D) cost nothing to use, so banks provide their services free of charge.Answer: CAACSB: Application of Knowledge20) The declining cost of computer technology has made ________ a reality.A) brick and mortar bankingB) commercial bankingC) virtual bankingD) investment bankingAnswer: CAACSB: Information Technology21) Bank customers perceive Internet-only banks as beingA) more secure than physical bank branches.B) a better method for the purchase of long-term savings products.C) better at keeping customer information private.D) prone to many more technical problems.Answer: DAACSB: Information Technology22) A disadvantage of virtual banks (clicks) is thatA) their hours are more limited than physical banks.B) they are less convenient than physical banks.C) they are more costly to operate than physical banks.D) customers worry about the security of on-line transactions.Answer: DAACSB: Information Technology23) So-called fallen angels differ from junk bonds in thatA) junk bonds refer to newly issued bonds with low credit ratings, whereas fallen angels refer to previously issued bonds that have had their credit ratings fall below Baa.B) junk bonds refer to previously issued bonds that have had their credit ratings fall below Baa, whereas fallen angels refer to newly issued bonds with low credit ratings.C) junk bonds have ratings below Baa, whereas fallen angels have ratings below C.D) fallen angels have ratings below Baa, whereas junk bonds have ratings below C.Answer: AAACSB: Reflective Thinking24) Newly-issued high-yield bonds rated below investment grade by the bond-rating agencies are frequently referred to asA) municipal bonds.B) Yankee bonds.C) "fallen angels."D) junk bonds.Answer: DAACSB: Application of Knowledge25) In 1977, he pioneered the concept of selling new public issues of junk bonds for companies that had not yet achieved investment-grade status.A) Michael MilkenB) Roger MillikenC) Ivan BoeskyD) Carl IcahnAnswer: AAACSB: Application of Knowledge26) One factor contributing to the rapid growth of the commercial paper market since 1970 isA) the fact that commercial paper has no default risk.B) improved information technology making it easier to screen credit risks.C) government regulation.D) FDIC insurance for commercial paper.Answer: BAACSB: Reflective Thinking27) The development of money market mutual funds contributed to the growth of ________ since the money market mutual funds need to hold liquid, high-quality, short-terms assets.A) the commercial paper marketB) the municipal bond marketC) the corporate bond marketD) the junk bond marketAnswer: AAACSB: Reflective Thinking28) The process of transforming otherwise illiquid financial assets into marketable capital market instruments is known asA) securitization.B) internationalization.C) arbitrage.D) program trading.Answer: AAACSB: Application of Knowledge29) ________ is creating a marketable capital market instrument by bundling a portfolio of mortgage or auto loans.A) DiversificationB) ArbitrageC) ComputerizationD) SecuritizationAnswer: DAACSB: Application of Knowledge30) The driving force behind the securitization of mortgages and automobile loans has beenA) the rising regulatory constraints on substitute financial instruments.B) the desire of mortgage and auto lenders to exit this field of lending.C) the improvement in information technology.D) the relaxation of regulatory restrictions on credit card operations.Answer: CAACSB: Information Technology31) Securitization is a process of asset transformation that involves a number of different financial institutions working together. These financial institutions are known collectively as theA) transformers.B) amalgamation.C) movers and shakers.D) shadow banking system.Answer: DAACSB: Application of Knowledge32) Which of the following is NOT part of the shadow banking system?A) the transformerB) the servicerC) the bundlerD) the distributorAnswer: AAACSB: Application of Knowledge33) Because of securitization, a new class of residential mortgages offered to borrowers with less-than-stellar credit records developed. These mortgages are known asA) risk-enhanced mortgages.B) subprime mortgages.C) bundled mortgages.D) adjustable-rate mortgages.Answer: BAACSB: Application of Knowledge34) According to Edward Kane, because the banking industry is one of the most ________ industries in America, it is an industry in which ________ is especially likely to occur.A) competitive; loophole miningB) competitive; innovationC) regulated; loophole miningD) regulated; innovationAnswer: CAACSB: Application of Knowledge35) Loophole mining refers to financial innovation designed toA) hide transactions from the IRS.B) conceal transactions from the SEC.C) get around regulations.D) conceal transactions from the Treasury Department.Answer: CAACSB: Application of Knowledge36) Prior to 2008, bank managers looked on reserverequirementsA) as a tax on deposits.B) as a subsidy on deposits.C) as a subsidy on loans.D) as a tax on loans.Answer: AAACSB: Application of Knowledge37) Prior to 2008, the bank's cost of holding reserves equaledA) the interest paid on deposits times the amount of reserves.B) the interest paid on deposits times the amount of deposits.C) the interest earned on loans times the amount of loans.D) the interest earned on loans times the amount on reserves.Answer: DAACSB: Analytical Thinking38) Prior to 1980, the Fed set an interest rate ________, a maximum limit, on the interest rate that could be paid on time deposits.A) floorB) ceilingC) wallD) windowAnswer: BAACSB: Application of Knowledge39) The process in which people seeking higher yielding securities take their funds out of the banking system thus restricting the amount of funds banks can lend is calledA) capital mobility.B) loophole mining.C) disintermediation.D) deposit jumping.AACSB: Application of Knowledge40) Money market mutual fundsA) function as interest-earning checking accounts.B) are legally deposits.C) are subject to reserve requirements.D) have an interest-rate ceiling.Answer: AAACSB: Application of Knowledge41) In September 2008, the Reserve Primary Fund, a money market mutual fund, found itself in the situation know as "breaking the buck." This means thatA) they could no longer afford to redeem shares at the par value of $1.B) they required shareholders to contribute a dollar more in fees each month.C) shareholders were able to redeem shares for more than a $1.D) shares earned more than a dollar in interest.Answer: AAACSB: Application of Knowledge42) In this type of arrangement, any balances above a certain amount in a corporation's checking account at the end of the business day are "removed" and invested in overnight securities that pay the corporation interest. This innovation is referred to as aA) sweep account.B) share draft account.C) removed-repo account.D) stockman account.AACSB: Application of Knowledge43) Sweep accounts which were created to avoid reserve requirements became possible because of a change inA) deposit ceilings.B) technology.C) government rules.D) bank mergers.Answer: BAACSB: Reflective Thinking44) Sweep accountsA) have made reserve requirements nonbinding for many banks.B) sweep funds out of deposit accounts into long-term securities.C) enable banks to avoid paying interest to corporate customers.D) reduce banks' assets.Answer: AAACSB: Reflective Thinking45) Since 1974, commercial banks importance as a source of funds for nonfinancial borrowersA) has shrunk dramatically, from around 40 percent of total credit advanced to around 25 percent by 2014.B) has shrunk dramatically, from around 70 percent of total credit advanced to below 50 percent by 2014.C) has expanded dramatically, from around 50 percent of total credit advanced to above 70 percent by 2014.D) has expanded dramatically, from around 30 percent of total credit advanced to above 50 percent by 2014.AACSB: Reflective Thinking46) Thrift institutions importance as a source of funds for borrowersA) has shrunk from around 40 percent of total credit advanced in the late 1970s to below 30 percent by 2014.B) has shrunk from over 20 percent of total credit advanced in the late 1970s to around 3 percent by 2014.C) has expanded dramatically, from around 15 percent of total credit advanced in the late 1970s to above 25 percent by 2014.D) has expanded dramatically, from around 15 percent of total credit advanced in the late 1970s to above 30 percent by 2014.Answer: BAACSB: Reflective Thinking47) Since 1980A) banks have decreased risk taking to offset the decline in profits.B) banks have offset the decline in profits from traditional activities with increased income from off-balance-sheet activities.C) banks have offset the decline in profits from off-balance-sheet activities with increased income from traditional activities.D) bank profits have grown rapidly due to deregulation.Answer: BAACSB: Reflective Thinking48) Financial innovation has causedA) banks to suffer declines in their cost advantages in acquiring funds, although it has not caused a decline in income advantages.B) banks to suffer a simultaneous decline of cost and income advantages.C) banks to suffer declines in their income advantages in acquiring funds, although it has not caused a decline in cost advantages.D) banks to achieve competitive advantages in both costs and income.Answer: BAACSB: Reflective Thinking49) Disintermediation resulted fromA) interest rate ceilings combined with inflation-driven increases in interest rates.B) elimination of Regulation Q (the regulation imposing interest rate ceilings on bank deposits).C) increases in federal income taxes.D) reserve requirements.Answer: AAACSB: Reflective Thinking50) The experience of disintermediation in the banking industry illustrates thatA) more regulation of financial markets may avoid such problems in the future.B) banks are unable to remain competitive with other financial intermediaries.C) consumers no longer desire the services that banks provide.D) markets invent alternatives to costly regulations.Answer: DAACSB: Reflective Thinking51) Banks responded to disintermediation byA) supporting the elimination of interest rate regulations, enabling them to better compete for funds.B) opposing the elimination of interest rate regulations, as this would increase their cost of funds.C) demanding that interest rate regulations be imposed on money market mutual funds.D) supporting the elimination of interest rate regulations, as this would reduce their cost of funds.Answer: AAACSB: Reflective Thinking52) One factor contributing to the decline in cost advantages that banks once had is theA) decline in the importance of checkable deposits from over60 percent of banks' liabilities to 2 percent today.B) decline in the importance of savings deposits from over60 percent of banks' liabilities to under 15 percent today.C) decline in the importance of checkable deposits from over40 percent of banks' liabilities to15 percent today.D) decline in the importance of savings deposits from over40 percent of banks' liabilities to under 20 percent today.Answer: AAACSB: Reflective Thinking53) The most important developments that reduced banks cost advantages includeA) the growth of the junk bond market.B) the competition from money market mutual funds.C) the growth of securitization.D) the growth in the commercial paper market.Answer: B。
Suggested SolutionChapter 1 1.3.4.5.(a)(b) net income = 9,260-7,470=1,790(c) net income = 1,790+2,500=4,290Chapter 21.a.To increase Notes Payable -CRb.To decrease Accounts Receivable-CRc.To increase Owner, Capital -CRd.To decrease Unearned Fees -DRe.To decrease Prepaid Insurance -CRf.To decrease Cash - CRg.To increase Utilities Expense -DRh.To increase Fees Earned -CRi.To increase Store Equipment -DRj.To increase Owner, Withdrawal -DR2.a.Cash 1,800Accounts payable ................................................... 1,800 b.Revenue ................................................................. 4,500Accounts receivable ..................................... 4,500c.Owner’s withdrawals............................................... 1,500Salaries Expense ........................................... 1,500 d.Accounts Receivable (750)Revenue (750)3.Prepare adjusting journal entries at December 31, the end of the year.Advertising expense 600Prepaid advertising 600Insurance expense (2160/12*2) 360Prepaid insurance 360Unearned revenue 2,100Service revenue 2,100Consultant expense 900Prepaid consultant 900Unearned revenue 3,000Service revenue 3,000 4.1. $388,4002. $22,5203. $366,6004. $21,8005.1. net loss for the year ended June 30, 2002: $60,0002. DR Jon Nissen, Capital 60,000CR income summary 60,0003. post-closing balance in Jon Nissen, Capital at June 30, 2002: $54,000Chapter 31. Dundee RealtybankreconciliationOctober 31, 2009Reconciled balance $6,220 Reconciled balance $6,2202. April 7 Dr: Notes receivable—A company 5400Cr: Accounts receivable—A company 540012 Dr: Cash 5394.5Interest expense 5.5Cr: Notes receivable 5400June 6 Dr: Accounts receivable—A company 5533Cr: Cash 553318 Dr: Cash 5560.7Cr: Accounts receivable—A company 5533Interest revenue 27.73. (a) As a whole: the ending inventory=685(b) applied separately to each product: the ending inventory=6254. The cost of goods available for sale=ending inventory + the cost of goods=80,000+200,000*500%=80,000+1,000,000=1,080,0005.(1) 24,000+60,000-90,000*0.8=12000(2) (60,000+24,000)/( 85,000+31,000)*( 85,000+31,000-90,000)=18828Chapter 41. (a) second-year depreciation = (114,000 – 5,700) / 5 = 21,660;(b) second-year depreciation = 8,600 * (114,000 – 5,700) / 36,100 = 25,800;(c) first-year depreciation = 114,000 * 40% = 45,600second-year depreciation = (114,000 – 45,600) * 40% = 27,360;(d) second-year depreciation = (114,000 – 5,700) * 4/15 = 28,880.2. (a) weighted-average accumulated expenditures (2008) = 75,000 * 12/12 + 84,000 * 9/12 + 180,000 * 8/12 + 300,000 * 7/12 + 100,000 * 6/12 = 483,000(b) interest capitalized during 2008 = 60,000 * 12% + ( 483,000 –60,000) * 10% =49,5003. (1) depreciation expense = 30,000(2) book value = 600,000 – 30,000 * 2=540,000(3) depreciation expense = ( 600,000 – 30,000 * 8)/16 =22,500(4) book value = 600,000 – 30,000 * 8 – 22,500 = 337,5004. Situation 1:Jan 1st, 2008 Investment in M 260,000Cash 260,000June 30 Cash 6000Dividend revenue 6000Situation 2:January 1, 2008 Investment in S 81,000Cash 81,000June 15 Cash 10,800Investment in S 10,800December 31 Investment in S 25,500Investment Revenue 25,5005. a. December 31, 2008 Investment in K 1,200,000Cash 1,200,000June 30, 2009 Dividend Receivable 42,500Dividend Revenue 42,500 December 31, 2009 Cash 42,500Dividend Receivable 42,500 b. December 31, 2008 Investment in K 1,200,000Cash 1,200,000 December 31, 2009 Cash 42,500Investment in K 42,500Investment in K 146,000Investment revenue 146,000 c. In a, the investment amount is 1,200,000net income reposed is 42,500In b, the investment amount is 1,303,500Net income reposed is 146,000Chapter 51.a. June 1: Dr: Inventory 198,000Cr: Accounts Payable 198,000June 11: Dr: Accounts Payable 198,000Cr: Notes Payable 198,000June 12: Dr: Cash 300,000Cr: Notes Payable 300,000b. Dr: Interest Expenses (for notes on June 11) 12,100Cr: Interest Payable 12,100Dr: Interest Expenses (for notes on June 12) 8,175Cr: Interest Payable 8,175c. Balance sheet presentation:Notes Payable 498,000 Accrued Interest on Notes Payable 20,275d. For Green:Dr: Notes Payable 198,000 Interest Payable 12,100Interest Expense 7,700Cr: Cash 217,800For Western:Dr: Notes Payable 300,000 Interest Payable 8,175Interest Expense 18,825Cr: Cash 327,0002.(1) 20 8 Deferred income tax is a liability 2,400Income tax payable 21,60020 9 Deferred income tax is an asset 600Income tax payable 26,100(2) 20 8: Dr: Tax expense 24,000Cr: Income tax payable 21,600 Deferred income tax 2,40020 9: Dr: Tax expense 25,500Deferred income tax 600Cr: Income tax payable 26,100 (3) 20 8: Income statement: tax expense 24,000Balance sheet: income tax payable 21,60020 9: Income statement: tax expense 25,500Balance sheet: income tax payable 26,1003.a. 1,560,000 (20000000*12 %* (1-35%))b. 7.8% (20000000*12 %* (1-35%)/20000000)5.Notes Payable 14,400Interest Payable 1,296Accounts Payable 60,000+Unearned Rent Revenue 7,200Current Liabilities 82,896Chapter 61. Mar. 1Cash 1,200,000Common Stock 1,000,000Paid-in Capital in Excess of Par Value 200,000Mar. 15Organization Expense 50,000Common Stock 50,000Mar. 23Patent 120,000Common Stock 100,000Paid-in Capital in Excess of Par Value 20,000The value of the patent is not easily determinable, so use the issue price of $12 per share on March 1 which is the issuing price of common stock.2. July.1Treasury Stock 180,000Cash 180,000The cost of treasury purchased is 180,000/30,000=60 per share.Nov. 1Cash 70,000Treasury Stock 60,000Paid-in Capital from Treasury Stock 10,000Sell the treasury at the cost of $60 per share, and selling price is $70 per share. The treasury stock is sold above the cost.Dec. 20Cash 75,000Paid-in Capital from Treasury Stock 15,000Treasury Stock 90,000The cost of treasury is $60 per share while the selling price is $50 which is lower than the cost.3. a. July 1Retained Earnings 24,000Dividends Payable—Preferred Stock 24,000b.Sept.1Dividends Payable—Preferred Stock 24,000Cash 24,000c. Dec.1Retained Earnings 80,000Dividends Payable—Common Stock 80,000d. Dec.31Income Summary 350,000Retained Earnings 350,0004.a. Preferred stock gives its owner certain advantages over common stockholders. These benefits include the right to receive dividends before the common stockholders and the right to receive assets before the common stockholders if the corporation liquidates. Corporation pay a fixed amount of dividends on preferred stock.The 7% cumulative term indicates that the investors earn 7% fix ed dividends.b. 7%*120%*20,000=504,000c. If corporation issued debt, it has obligation to repay principald. The date of declaration decrease the stockholders’ equity; the date of record and the date of payment have no effect on stockholders.5.a. Jan. 15Retained Earnings 35,000Accumulated Depreciation 35,000To correct error in prior year’s depreciation.b. Mar. 20Loss from Earthquake 70,000Building 70,000c. Mar. 31Retained Earnings 12,500Dividends Payable 12,500d. Apirl.15Dividends Payable 12,500Cash 12,500e. June 30Retained Earnings 37,500Common Stock 25,000Additional Paid-in Capital 12,500To record issuance of 10% stock dividend: 10%*25,000=2,500 shares;2500*$15=$37,500f. Dec. 31Depreciation Expense 14,000Accumulated Depreciation 14,000Original depreciation: $40,000/40=$10,000 per year. Book value on Jan.1, 2009 is $350,000(=$400,000-5*$10,000). Deprecation for 2009 is $14,000(=$350,000/25).g. The company does not need to make entry in the accounting records. But the amount of Common Stock ($10 par value) decreases 275,000, while the amount of Common Stock ($5 par value) increases 275,000.Chapter 71.Requirement 1If revenue is recognized at the date of delivery, the following journal entries would be used to record the transactions for the two years:Year 1Inventory .................................................................................... 480,000Cash/Accounts payable ........................................................ 480,000 To record purchase of inventoryInventory .................................................................................... 124,000Cash/Accounts payable ........................................................ 124,000 To record refurbishment of inventoryAccounts receivable ................................................................... 310,000Sales revenue ...................................................................... 310,000 To record sale of goods on accountCost of goods sold...................................................................... 220,000Inventory .............................................................................. 220,000 To record the cost of the goods sold as an expenseSales returns (I/S) ...................................................................... 15,500*Allowance for sales returns (B/S).......................................... 15,500 To record provision for return of goods sold under 30-day return period* 5% of $310,000Warranty expense ...................................................................... 31,000*Provision for warranties (B/S) ............................................... 31,000 To record provision, at time of sale, for warranty expenditures* 10% of $310,000Allowance for sales returns......................................................... 12,400 Accounts receivable ............................................................. 12,400To record return of goods within 30-day return period.It is assumed the returned goods have no value and are disposed of.Provision for warranties (B/S) ..................................................... 18,600Cash/Accounts payable ........................................................ 18,600 To record expenditures in year 1 for warranty workCash .......................................................................................... 297,600*Accounts receivable ............................................................. 297,600 To record collection of Accounts Receivable* $310,000 – $12,400Year 2Provision for warranties (B/S) ..................................................... 8,400Cash/Accounts payable ........................................................ 8,400 To record expenditures in year 2 for warranty workRequirement 2If revenue is recognized only when the warranty period has expired, the following journal entries would be used to record the transactions for the two years:Year 1Inventory .................................................................................... 480,000Cash/Accounts payable ........................................................ 480,000 To record purchase of inventoryInventory .................................................................................... 124,000Cash/Accounts payable ........................................................ 124,000 To record refurbishment of inventoryAccounts receivable ................................................................... 310,000Inventory .............................................................................. 220,000 Deferred gross margin .......................................................... 90,000 To record sale of goods on accountDeferred gross margin ................................................................ 12,400Accounts receivable ............................................................. 12,400 To record return of goods within the 30-day return period. It is assumed the goods haveno value and are disposed of.Deferred warranty costs (B/S)..................................................... 18,600Cash/Accounts payable ........................................................ 18,600 To record expenditures for warranty work in year 1. The warranty costs incurred are deferred because the related revenue has not yet been recognizedCash .......................................................................................... 297,600*Accounts receivable ............................................................. 297,600 To record collection of Accounts receivable* $310,000 – $12,400Year 2Deferred warranty costs ............................................................. 8,400Cash/Accounts payable ........................................................ 8,400 To record warranty costs incurred in year 2 related to year 1 sales. The warranty costs incurred are deferred because the related revenue has not yet been recognized.Deferred gross margin ................................................................ **77,600Cost of goods sold...................................................................... 220,000Sales revenue ...................................................................... 297,600* To record recognition of sales revenue from year 1 sales and related cost of goods sold at expiry of warranty period* $310,000 – $12,400** ($90,000 – $12,400)Warranty expense ...................................................................... 27,000*Deferred warranty costs ....................................................... 27,000 To record recognition of warranty expense at same time as related sales revenue recognition* $18,600 + $8,400Requirement 3Allied Auto Parts Inc. might choose to recognize revenue only after the warranty periodhas expired if they are not able to make a good estimate, at the time of sale, of the amountof warranty work that will be required under the terms of the one-year warranty. If Allied is not able, at the time of sale, to make a good estimate of the warranty work that will be required, then the measurability criterion of revenue recognition is not met at the time of sale. The measurability criterion means that the amount of revenue can be reliably measured. If the seller is not able to estimate the amount of work that will have to be done under the warranty agreement, then it is not able to reasonably measure the profit that itwill eventually earn on the sales. The performance criteria might also be invoked here.The performance criterion means that the seller has transferred the significant risks and rewards of ownership to the buyer. As long as there is warranty work to be performed after the sale that is the responsibility of the seller, you might argue that performance is not substantially complete. However, if the seller was able to reliably estimate the amount of warranty work, then performance would be satisfied on the assumption that we could measure the risk that remains with the seller, and make a provision for it.2.Percentage-of-completion method:The first step in applying revenue recognition using the percentage-of-completion method (using costs incurred to date compared to estimated total costs to determine the percentage of completion) is to estimate the percentage of completion of the project at the end of each year. This is done in the following table (in $000s):End of 2005 End of 2006End of 2007Total costs incurred $ 5,400 $ 12,950 $18,800 Total estimated costs 18,000 18,500 18,800 % completed 30% 70% 100%Once the percentage of completion at the end of each year has been calculated as above, the next step is to allocate the appropriate amount of revenue to each year, based on the percentage completed to date, less what has previously been recorded in revenue. This is done in the following table (in $000s):2005 200620072005 $20,000 × 30% $ 6,0002006 $20,000 × 70% $14,0002007 $20,000 × 100% $20,000 Less: Revenue recognized in prior years (0) (6,000) (14,000) Revenue for year $ 6,000 $ 8,000 $ 6,000Therefore, the profit to be recognized each year on the construction project would be:2005 2006 2007TotalRevenue recognized $ 6,000 $ 8,000 $ 6,000 $20,000 Construction costs incurred (expenses) (5,400) (7,550) (5,850) (18,800) Gross profit for the year $ 600 $ 450 $ 150 $ 1,200The following journal entries are used to record the transactions under thepercentage-of-completion method of revenue recognition:2005 200620071. Costs of construction:Construction in progress................. 5,400 7,550 5,850Cash, payables, etc. ..... 5,400 7,550 5,850 2. Progress billings:Accounts receivable ........... 3,100 4,900 12,000Progress billings ........... 3,100 4,900 12,000 3. Collections on billings:Cash .................................. 2,400 4,000 12,400Accounts receivable ..... 2,400 4,000 12,400 4. Recognition of profit:Construction in progress..... 600 450 150Construction expense ......... 5,400 7,550 5,850Revenue from long-termcontract..................... 6,000 8,000 6,000 5. To close construction in progress:Progress billings ................. 20,000 Construction in progress 20,0002005 20062007Balance sheetCurrent assets:Accounts receivable $ 700 $ 1,600 $ 1,200 Inventory:Construction in process 6,000 14,000Less: Progress billings (3,100) (8,000)Costs in excess of billings 2,900 6,000Income statementRevenue from long-term contracts $ 6,000 $ 8,000 $ 6,000 Construction expense (5,400) (7,550) (5,850) Gross profit $ 600 $ 450 $ 1503.a. The three criteria of revenue recognition are performance, measurability, andcollectibility.Performance means that the seller or service provider has performed the work.Depending on the nature of the product or service, performance may mean quitedifferent points of revenue recognition. For example, for the sale of products, IAS18 defines performance as the point when the seller of the goods has transferred therisks and rewards of ownership to the buyer. Normally, this means that performance is done at the time of sale. Although the seller may have performed much of the work prior to the sale (production, selling efforts, etc.), there is still significant risk to theseller that a buyer may not be found. Therefore, from a reliability point of view,revenue recognition is delayed until the point of sale. Also, there may be significant risks remaining with the seller of the product even after the sale. Warranties given by the seller are a risk that remains with the seller. However, if this risk can be reliably estimated at the time of sale, revenue can be recognized at the point of sale.Performance is quite different under a long-term construction contract. Here,performance really is considered to be a measure of the work done. Revenue isrecognized over the production period as the work is performed. It is intended toreflect the amount of effort expended by the seller (contractor). Although legal titlewon’t transfer to the buyer until the project is completed, revenue can be recognized because there is a known and committed buyer. If the contractor is not able toestimate how much of the work has been done (perhaps because he or she can’treliably estimate how much work must still be done), then profit would not berecognized until the extent of performance is known.Measurability means that the seller or service provider must be able to reliablyestimate the amount of the revenue from the sale or service. For the sale of products this is generally known at the time of sale (the sales price is set). However, if the seller provides a return period, it may be necessary to estimate the volume of returns at the time of sale in order to measure the revenue that will be recognized.Collectibility means that the seller or the service provider has reasonable assurance that the sales price will actually be collected. In most cases for the sales of products, the seller is able to recognize revenue at the time of sale even if the sale is on account.This is because the seller has experience with its customers and is able to estimate reliably the risk of non payment. As long as the seller is able to make this estimate, it is appropriate to recognize the revenue but to offset it with a provision for possible non collection. If the seller is unable to make reliable estimates of future collection ofamounts owing, the recognition of revenue would be delayed until the cash is actually received. This is what is done using the instalment sales method of revenuerecognition.b. Because of the performance criterion of revenue recognition, it would seem to be most appropriate to recognize most revenue as the seller or service provider performs the work. This would be the best measure of performance. This would mean, for example,that sellers of products would recognize their revenue over the whole production, selling, and post sales servicing periods. As we saw above, this is not commonly done because,in many cases, there are still significant risks that are retained by the seller (risk of not being able to sell the product, for example). There are also measurement risks (knowing the selling price) that exist prior to the sale. The percentage-of-completion method of revenue used for some long-term construction contracts would seem to most closely recognize revenue as the work is performed. As mentioned in Part 1, we are able to recognize revenue on this basis since a contract exists which commits the purchaser to buy the project (assuming certain conditions are met) and the sales price is known because of the existence of the contract.4.If all revenue is recognized when a student registers for the course, profit for 2007 would be:Sales Revenue1:Manuals and initial lessons (200 × $100) $20,000 Additional lessons ((200 × 8) × $30) 48,000 Examinations ((200 × 80%) × $130) 20,800 Total sales revenue 88,800Cost of sales:Manuals and initial lessons (200 × ($15 + $3)) 3,600Additional lessons ((200 × 8) × $3)) 4,800 Examinations ((200 × 80%) × $30) 4,800 Total cost of sales 13,200Depreciation of development costs:$180,000 × (200/1,000) 36,000Profit $ 39,6005.FINISH ENTERPRISESIncome Statementfor the year ending December 31, 2005Continuing operations (excluding the chemical division)Sales ($35,000,000 – $5,500,000) $29,500,000Cost of sales ($15,000,000 – $2,800,000) (12,200,000)Gross profit 17,300,000Selling & administration expenses($18,000,000 – $3,200,000) (14,800,000)Profit from operations 2,500,000Income tax expense (40%) 1,000,000Profit after tax $ 1,500,000Discontinuing operations (Chemical division)Sales 5,500,000Cost of sales (2,800,000)Gross profit 2,700,000Selling & administration expenses (3,200,000)Loss from operations (500,000)Income tax expense(40%) 200,000Loss after tax (300,000) Gain on discontinuance of the Chemical division 3,500,000Tax thereon (1,400,000)After-tax gain on discontinuance of the Chemical division2,100,000Enterprise net profit$ 3,300,000Chapter 81.Payment of account payable.operatingIssuance of preferred stock for cash.financingPayment of cash dividend.financingSale of long-term investment.investingAmortization of bond discount.no effectCollection of account receivable.operatingIssuance of long-term note payable to borrow cash.financing Depreciation of equipment.no effectPurchase of treasury stock.financingIssuance of common stock for cash.financingPurchase of long-term investment.investingPayment of wages to employees.operatingCollection of cash interest.investingCash sale of land.InvestingDistribution of stock dividend.no effectAcquisition of equipment by issuance of note payable.no effect Payment of long-term debt. financingAcquisition of building by issuance of common stock.no effect Accrual of salary expense.no effect2.(a) Cash received from customers = 816,000(b) Cash payments for purchases of merchandise. =468,000(c) Cash payments for operating expenses. = 268,200(d) Income taxes paid. =36,9003.Cash sales …………………………………………... $9,000 Payment of accounts payable……………………….-48,000 Payment of income tax ………………………………-13,000 Payment of interest ……………………………..…..-16,000 Collection of accounts receivable ……………………93,000 Payment of salaries and wages ……………………….. -34,000 Cash flows from operating activitiesby the direct method -9,0004.Operating activities:Net loss -200,000Add: loss on sale of land 250,000 Add: depreciation 300,000Add: amortization of patents 20,000Less: increases in current assets other than cash -750,000Add: increases in current liabilities 180,000Net cash flows from operating -200,000Investing activitiesSale of land -50,000Purchase of PPE -1,500,000Net cash flows from investing -1,550,000Financing activitiesIssuance of common shares 400,000Payment of cash dividend -50,000Issuance of non-current liabilities 1,000,000Net cash flows from financing 1,350,000 Net changes in cash -400,000 5.。
（财务会计）西⽅财务会计课后习题答案Chapter 6Merchandise Inventory and Cost of Goods SoldCheck Points(10 min.) CP 6-1Nissan North AmericaBalance SheetDecember 31, 20X6Current assets:Inventory (300 @ $80)…………………..$24,000Nissan North AmericaIncome StatementYear Ended December 31, 20X6Sales revenue [700 ($80 + $40)]……….$84,000Cost of goods sold (700 @ $80)………… 56,000Gross profit………………………………….$28,000Chapter 6 Merchandise Inventory and Cost of Goods Sold 379(10-15 min.) CP 6-2 1. (Journal entries) Inventory…………………………………..100,000Accounts Payable…………………….100,000 Cash ($140,000 ?.20)……………………28,000 Amounts Receivable ($140,000 ? .80).. 112,000Sales Revenue………………………...140,000 Cost of Goods Sold……………………..60,000 Inventory ($100,000 ?.60)…………..60,000 2. (Financial statements)BALANCE SHEETCurrent assets:Inventory ($100,000 –$60,000)……………….$40,000 INCOME STATEMENTSales revenue………………………………………$140,000Cost of goods sold……………………………….. 60,000Gross profit…………………………………………$ 80,000 380Financial Accounting 6/e Solutions Manual(10 min.) CP 6-3Billions Inventory………………………… 6.4Cash…………………………... 6.4 Accounts Receivable………….28.5Sales Revenue……………….28.5Cost of Goods Sold…………… 6.2Inventory……………………... 6.2 Cash………………………………26.3Accounts Receivable……….26.3Chapter 6 Merchandise Inventory and Cost of Goods Sold 381(10 min.) CP 6-41. I nventory costs are increasing from $10 to $14 to $18 per unit.2. FIFO results in the highest cost of ending inventory($360)because under FIFO the ending inventory is costed at the last costs incurred during the period. When costs are increasing, the last costs are the highest costs.FIFO results in the lowest cost of goods sold. This occurs because the oldest costs are assigned to cost of goods sold. When costs are increasing, the oldest costs are the lowest.FIFO results in the highest gross profit because cost of goods sold, the expense, is the lowest. (Sales revenue is unaffected by the inventory costing method.)3. LIFO results in the lowest cost of ending inventory($240)because under LIFO, the ending inventory is costed at the oldest costs. When costs are increasing, the oldest costs are the lowest costs.LIFO results in the highest cost of goods sold. This occurs because the last costs of the period are assigned to cost of goods sold. When costs are increasing, the last costs are the highest.LIFO results in the lowest gross profit because cost of goods sold, the expense, is the highest. (Sales revenue is unaffected by the inventory costing method.)382Financial Accounting 6/e Solutions Manual(10 min.) CP 6-5a b cAverageCost FIFO LIFO Cost of goods sold:Average (50 @ $15*) $750FIFO (10 @ $10) + (25 @ $14) + (15 @ $18) $720LIFO (25 @ $18) + (25 @ $14) $800 Ending inventory:Average (10 @ $15*) $150FIFO (10 @ $18) $180LIFO (10 @ $10) $100 _____*Average cost= ($100 + $350 + $450)= $15per unit (10 + 25 + 25)Chapter 6 Merchandise Inventory and Cost of Goods Sold 383(10-15 min.) CP 6-6Kinko’sIncome StatementYear Ended December 31, 20XXAverage FIFO LIFO Sales revenue (600 ? $20) $12,000 $12,000 $12,000 Cost of goods sold (600 ? $9.90*)5,940(100 ? $9) + (500 ? $10) 5,900(600 ? $10) 6,000 Gross profit 6,060 6,100 6,000 Operating expenses 4,000 4,000 4,000 Net income $ 2,060 $ 2,100 $ 2,000 _____*Beginning inventory (100 @ $9.20)…………..$ 920 Purchases (700 @ $10)………………………… 7,000Goods available…………………….……………$7,920 Average cost per unit $7,920 / 800 units…$ 9.90384Financial Accounting 6/e Solutions Manual(10 min.) CP 6-7Kinko’sIncome StatementYear Ended December 31, 20XXAverage FIFO LIFO Sales revenue (600 ? $20) $12,000 $12,000 $12,000 Cost of goods sold (600 ? $9.90*)5,940(100 ? $9) + (500 ? $10) 5,900(600 ? $10) ______ ______ 6,000 Gross profit 6,060 6,100 6,000 Operating expenses 4,000 4,000 4,000 Income before income tax $ 2,060Income tax expense (40%) $ 824*From CP 6-6(5 min.) CP 6-8 Lands’ End managers can delay purchases of inventory until the next year. Under LIFO, high inventory costs that would have been paid for inventory do not become expense as cost of goods sold in the current year. As a result, the current year’s income statement reports a higher net income than Lands’ End would have reported if the company had replaced inventory before year end.Chapter 6 Merchandise Inventory and Cost of Goods Sold 385(5-10 min.) CP 6-9Millions BALANCE SHEETCurrent assets:Inventories, at market (which is lower than cost).. $ 330 INCOME STATEMENTCost of goods sold [$1,001 + ($333 – $330)]…………$1,004 386Financial Accounting 6/e Solutions Manual(10 min.) CP 6-101. FIFO2. LIFO Gross profitpercentage:Gross profit= $460*= 46%$340**= 34%Net sales revenue $1,000 $1,000 _____* $1,000 – $540 = $460** $1,000 – $660 = $340Inventory turnover:Cost of goods sold= $540 $660Average inventory ($100 + $360) / 2 ($100 + $240) / 2= 2.3 times = 3.9 times3. Gross profit percentage — FIFO looks better.4. Inventory turnover — LIFO looks better.Chapter 6 Merchandise Inventory and Cost of Goods Sold 387(10-15 min.) CP 6-11 1. Beginning inventory……………………………... $ 300,000+ Purchases……………………………………….… 1,600,000 = Goods available…………………………………... 1,900,000 –Cost of goods sol d………………………………. (1,800,000) = Ending inventory……………………………….…2. Beginning inventory……………………………..+ Purchases……………………………………….…= Goods available…………………………………...–Cost of goods sold:Sales revenue……………………….$3,000,000Less estimated gross profit (40%) (1,200,000)Estimated cost of goods sold……………….= Estimated cost of ending inventory…………... $ 100,000 388Financial Accounting 6/e Solutions Manual(5-10 min.) CP 6-12CorrectAmount(Millions)a. Inventory ($333 + $3)…………………………………$ 336b. Net sales (unchanged)……………………………….$1,755c. Cost of goods sold ($1,001 –$3)…………………...$ 998d. Gross profit ($754 + $3)……………………….……..$ 757(10 min.) CP 6-13 1. Last year’s reported g ross profit was understated.Correct gross profit last year was $5.6 million ($4.0 + $1.6). 2. This year’s gross profit is overstated.Correct gross profit for this year is $3.2 million ($4.8 – $1.6).3. Lang’s perspective is better because correcting the errorchanges the trend of correct gross profit from up (good) to down (bad), as follows:MillionsLast Year This Year Trend Reported gross profit……..$4.0 $4.8 Up (Good) Correct gross profit……….$5.6 $3.2 Down (Bad) Chapter 6 Merchandise Inventory and Cost of Goods Sold 389(5-10 min.) CP 6-14 1. Ethical. There is nothing wrong with buying inventorywhenever a company wishes.2. Ethical. Same idea as 1.3. Unethical. The company falsified its reported amounts ofinventory and net income.4. Unethical. The company falsified its reported inventorypurchases, cost of goods sold, and net income in order to cheat the government (and the people) out of income tax.5. Unethical. The company falsified its reported amount ofinventory in order to cheat the government (and the people) out of taxes.390Financial Accounting 6/e Solutions ManualExercises(15-20 min.) E 6-1 Req. 1 (journal entried)Perpetual System1. Purchases: ThousandsInventory…………………….……….… 2,200Accounts Payable………………….2,2002. Sales:Cash ($3,500 ?.20) (700)Accounts Receivable ($3,500 ? .80). 2,800Sales Revenue…………….……….3,500 Cost of Goods Sold………………….. 2,100 Inventory………………….………....2,100Req. 2 (financial statement amounts)BALANCE SHEET Thousands Current assets:Inventory ($370 + $2,200 – $2,100)... $ 470 INCOME STATEMENTSales revenue…………………………….$3,500Cost of goods sold……………………… 2,100Gross profit……………………………….$1,400Chapter 6 Merchandise Inventory and Cost of Goods Sold 391(15-25 min.) E 6-2JournalDATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT1 Inventory ($640 + $1,870 + $900)……….3,410Accounts Payable………………………3,4102 Accounts Receivable (17 @ $500)……...8,500Sales Revenue…………………………..8,500 Cost of Goods Sold……………………….2,800* Inventory…………………………………2,8003 Sales revenue………………………………$8,500Cost of goods sold……………………….. 2,800Gross profit…………………………………$5,700Ending inventory ($800 + $3,410 –$2,800)……...$1,410 _____*(9 @ $160) + (8 @ $170) = $2,800392Financial Accounting 6/e Solutions Manual(10-15 min.) E 6-3 1.Cost of Goods Sold Ending Inventory(a) Specificunit cost (6 @ $160) + (11 @ $170) = $2,830 (3 @ $160) + (5 @ $180) = $1,380 (b) Averagecost 17 ? $168.40* = $2,863 8 ? $168.40* = $1,347 _____*Average cost per unit = ($800 + $640 + $1,870 + $900)= $168.40(5 + 4 + 11 + 5)(c) FIFO (9 @ $160) + (8 @ $170) = $2,800 (5 @ $180) + (3 @ $170) $1,410(d) LIFO (5 @ $180) + (11 @ $170) + (1 @ $160) $2,930 (8 @ $160) $1,2802. LIFO produces the highest cost of goods sold.FIFO produces the lowest cost of goods sold.The increase in inventory cost from $160 to $170 to $180 per unit causes the difference in cost of goods sold. Chapter 6 Merchandise Inventory and Cost of Goods Sold 393(15-20 min.) E 6-4 Cost of goods sold:LIFO ($2,930) –FIFO ($2,800)…………………………$130 Incom e tax rate……………………………………….. .35 LIFO advantage in tax savings…………………………..$ 46(15 min.) E 6-51. a. FIFOCost of goods sold:(5 @ $90) + (5 @ $95)……………...$925Ending inventory:7 @ $95………………………………$665b. LIFOCost of goods sold:10 @ $95……………………………..$950Ending inventory:(5 @ $90) + (2 @ $95)……………...$6402.VPA, Inc.Income StatementMonth Ended May 31, 20XXSales revenue (3 @ $150) + (7 @ $155)................$1,535 Cost of goods sold. (925)Gross profit (610)Operating expenses (310)Income before income tax (300)Income tax expense (40%) (120)Net income………………………………………………$ 180 394Financial Accounting 6/e Solutions Manual(15 min.) E 6-6Millions1. Gross profit: FIFO LIFOSales revenue……………………………………$4.9 $4.9 Cost of goods soldFIFO: 600,000 ?$7…………………………… 4.2LIFO: (400,000 ? $5) + (100,000 ? $6)+ (100,000 ?$7)……………………… 3.3 Gross profit………………………………………$ .7 $1.6 2. Gross profit under FIFO and LIFO differ because inventorycosts decreased during the period.If you base your prediction on the decrease in inventory unit cost, then, yes, you would predict that LIFO gross profit would be higher.But if you assume that FIFO produces higher gross profit, then, no, the actual result does not follow your prediction. Chapter 6 Merchandise Inventory and Cost of Goods Sold 395(15-20 min.) E 6-7 DATE: _____________TO: Rick TaborFROM: Student NameSUBJECT: Proposal for Saving Income TaxWe can save income tax by buying above-normal quantities of inventory before the end of the year. Inventory costs are rising, and the company uses the LIFO inventory method. Under LIFO, the higher cost of year-end purchases of inventory goes straight into cost of goods sold. This increases cost of goods sold and decreases net income and income taxes. Because our inventory levels are lower than normal, we need the inventory anyway. In effect, we can use our cash to buy inventory or to pay income taxes. I think it would be wiser to buy inventory.396Financial Accounting 6/e Solutions Manual(10-15 min.) E 6-8 Specificunit cost 1. Used to account for automobiles, jewelry, and art objects.Average 2. Provides a middle-ground measure of ending inventory and cost of goods sold.FIFO 3. Maximizes reported income.LIFO 4. Matches the most current cost of goods sold against sales revenue.LIFO 5. Results in an old measure of the cost of ending inventory.LIFO 6. Generally associated with saving income taxes. FIFO 7. Results in a cost of ending inventory that is close to the current cost of replacing the inventory.LIFO 8. Enables a company to buy high-cost inventory at year end and thereby to decrease reportedincome.LIFO 9. Enables a company to keep reported income from dropping lower by liquidating older layers ofinventory.LCM 10. Writes inventory down when replacement cost drops below historical cost.Chapter 6 Merchandise Inventory and Cost of Goods Sold 397。
会计英语课后习题参考答案文稿归稿存档编号：[KKUY-KKIO69-OTM243-OLUI129-G00I-FDQS58-S u g g e s t e d S o l u t i o nChapter 11.2.3.Describe each transaction based on the summary above.4.5.(a)(b) net income = 9,260-7,470=1,790(c) net income = 1,790+2,500=4,290Chapter 21.a.To increase Notes Payable -CRb.To decrease Accounts Receivable-CRc.To increase Owner, Capital -CRd.To decrease Unearned Fees -DRe.To decrease Prepaid Insurance -CRf.To decrease Cash - CRg.To increase Utilities Expense -DRh.To increase Fees Earned -CRi.To increase Store Equipment -DRj.To increase Owner, Withdrawal -DR2.Cash1,800Accounts payable ................... 1,800 Revenue ............................. 4,500Accounts receivable ........... 4,500 Owner’s withdrawals ................ 1,500Salaries Expense ............... 1,500 Accounts Receivable .. (750)Revenue (750)3.Prepare adjusting journal entries at December 31, the end of the year.Advertising expense600Prepaid advertising 600Insurance expense (2160/12*2)360Prepaid insurance360Unearned revenue2,100Service revenue2,100Consultant expense900Prepaid consultant900Unearned revenue3,000Service revenue3,0004.1. $388,4002. $22,5203. $366,6004. $21,8005.1. net loss for the year ended June 30, 2002: $60,0002. DR Jon Nissen, Capital 60,000CR income summary 60,0003. post-closing balance in Jon Nissen, Capital at June 30, 2002: $54,000Chapter 31. Dundee Realty bank reconciliationOctober 31, 2009Reconciled balance $6,220 Reconciled balance $6,2202. April 7 Dr: Notes receivable—A company 5400Cr: Accounts receivable—A company 540012 Dr: Cash 5394.5Interest expense 5.5Cr: Notes receivable 5400 June 6 Dr: Accounts receivable—A company 5533Cr: Cash553318 Dr: Cash 5560.7Cr: Accounts receivable—A company5533Interest revenue27.73. (a) As a whole: the ending inventory=685(b) applied separately to each product: the ending inventory=6254. The cost of goods available for sale=ending inventory + the cost of goods=80,000+200,000*500%=80,000+1,000,000=1,080,0005.(1) 24,000+60,000-90,000*0.8=12000(2) (60,000+24,000)/( 85,000+31,000)*( 85,000+31,000-90,000)=18828Chapter 41. (a) second-year depreciation = (114,000 – 5,700) / 5 = 21,660;(b) second-year depreciation = 8,600 * (114,000 – 5,700) / 36,100 = 25,800;(c) first-year depreciation = 114,000 * 40% = 45,600second-year depreciation = (114,000 – 45,600) * 40% = 27,360;(d) second-year depreciation = (114,000 – 5,700) * 4/15 = 28,880.2. (a) weighted-average accumulated expenditures (2008) = 75,000 * 12/12 + 84,000 * 9/12 + 180,000 * 8/12 + 300,000 * 7/12 + 100,000 * 6/12 = 483,000(b) interest capitalized during 2008 = 60,000 * 12% + ( 483,000 –60,000) * 10% =49,5003. (1) depreciation expense = 30,000(2) book value = 600,000 – 30,000 * 2=540,000(3) depreciation expense = ( 600,000 – 30,000 * 8)/16 =22,500(4) book value = 600,000 – 30,000 * 8 – 22,500 = 337,5004. Situation 1:Jan 1st, 2008 Investment in M 260,000Cash 260,000June 30 Cash 6000Dividend revenue 6000Situation 2:January 1, 2008 Investment in S 81,000Cash 81,000June 15 Cash 10,800Investment in S 10,800 December 31 Investment in S 25,500Investment Revenue 25,5005. a. December 31, 2008 Investment in K 1,200,000Cash 1,200,000June 30, 2009 Dividend Receivable 42,500Dividend Revenue 42,500December 31, 2009 Cash 42,500Dividend Receivable 42,500 b. December 31, 2008 Investment in K 1,200,000Cash 1,200,000December 31, 2009 Cash 42,500Investment in K 42,500 Investment in K 146,000 Investment revenue 146,000 c. In a, the investment amount is 1,200,000net income reposed is 42,500In b, the investment amount is 1,303,500Net income reposed is 146,000Chapter 51.a. June 1: Dr: Inventory 198,000Cr: Accounts Payable 198,000 June 11: Dr: Accounts Payable 198,000Cr: Notes Payable 198,000 June 12: Dr: Cash 300,000Cr: Notes Payable 300,000 b. Dr: Interest Expenses (for notes on June 11) 12,100 Cr: Interest Payable 12,100 Dr: Interest Expenses (for notes on June 12) 8,175 Cr: Interest Payable 8,175 c. Balance sheet presentation:Notes Payable 498,000Accrued Interest on Notes Payable 20,275d. For Green:Dr: Notes Payable 198,000 Interest Payable 12,100Interest Expense 7,700Cr: Cash 217,800 For Western:Dr: Notes Payable 300,000 Interest Payable 8,175Interest Expense 18,825Cr: Cash 327,000 2.(1) 208 Deferred income tax is a liability 2,400Income tax payable 21,600 209 Deferred income tax is an asset 600 Income tax payable 26,100 (2) 208: Dr: Tax expense 24,000 Cr: Income tax payable 21,600Deferred income tax 2,400209: Dr: Tax expense 25,500 Deferred income tax 600 Cr: Income tax payable 26,100(3) 208: Income statement: tax expense 24,000 Balance sheet: income tax payable 21,600 209: Income statement: tax expense 25,500Balance sheet: income tax payable 26,1003.a. 1,560,00012 %* (1-35%))12 %4.5.Notes Payable 14,400Interest Payable 1,296Accounts Payable 60,000+Unearned Rent Revenue 7,200Current Liabilities 82,896Chapter 61. Mar. 1Cash 1,200,000Common Stock 1,000,000Paid-in Capital in Excess of Par Value 200,000Mar. 15Organization Expense 50,000Common Stock 50,000 Mar. 23Patent 120,000Common Stock 100,000Paid-in Capital in Excess of Par Value 20,000The value of the patent is not easily determinable, so use the issue price of $12 per share on March 1 which is the issuingprice of common stock.2. July.1Treasury Stock 180,000Cash 180,000 The cost of treasury purchased is 180,000/30,000=60 per share.Nov. 1Cash 70,000Treasury Stock 60,000 Paid-in Capital from Treasury Stock10,000Sell the treasury at the cost of $60 per share, and selling price is $70 per share. The treasury stock is sold above the cost.Dec. 20Cash 75,000Paid-in Capital from Treasury Stock 15,000Treasury Stock 90,000 The cost of treasury is $60 per share while the selling price is $50 which is lower than the cost.3. a. July 1Retained Earnings 24,000Dividends Payable—Preferred Stock 24,000b.Sept.1Dividends Payable—Preferred Stock 24,000Cash 24,000c. Dec.1Retained Earnings 80,000Dividends Payable—Common Stock 80,000d. Dec.31Income Summary 350,000Retained Earnings 350,0004.a. Preferred stock gives its owner certain advantages over common stockholders. These benefits include the right to receive dividends before the common stockholders and the right to receive assetsbefore the common stockholders if the corporation liquidates. Corporation pay a fixed amount of dividends on preferred stock. The 7% cumulative term indicates that the investors earn 7% fixed dividends.b. 7%*120%*20,000=504,000c. If corporation issued debt, it has obligation to repay principald. The date of declaration decrease the stockholders’ equity; the date of record and the date of payment have no effect on stockholders.5.a. Jan. 15Retained Earnings 35,000Accumulated Depreciation 35,000 To correct error in prior year’s depreciation.b. Mar. 20Loss from Earthquake 70,000Building 70,000 c. Mar. 31Retained Earnings 12,500Dividends Payable 12,500 d. Apirl.15Dividends Payable 12,500Cash 12,500e. June 30Retained Earnings 37,500Common Stock 25,000Additional Paid-in Capital12,500To record issuance of 10% stock dividend: 10%*25,000=2,500 shares;2500*$15=$37,500f. Dec. 31Depreciation Expense 14,000 Accumulated Depreciation 14,000Original depreciation: $40,000/40=$10,000 per year. Book value on Jan.1, 2009 is $350,000(=$400,000-5*$10,000). Deprecation for 2009is $14,000(=$350,000/25).g. The company does not need to make entry in the accounting records. But the amount of Common Stock ($10 par value) decreases 275,000, while the amount of Common Stock ($5 par value) increases 275,000.Chapter 71.Requirement 1If revenue is recognized at the date of delivery, the following journal entries would be used to record the transactions for the two years:Year 1Inventory .................................... 480,000 Cash/Accounts payable ..................... 480,000To record purchase of inventoryInventory .................................... 124,000 Cash/Accounts payable ..................... 124,000To record refurbishment of inventoryAccounts receivable .......................... 310,000 Sales revenue ............................. 310,000To record sale of goods on accountCost of goods sold ........................... 220,000 Inventory ................................. 220,000To record the cost of the goods sold as an expenseSales returns (I/S) .......................... 15,500* Allowance for sales returns (B/S) ......... 15,500To record provision for return of goods sold under 30-day return period* 5% of $310,000Warranty expense ............................. 31,000* Provision for warranties (B/S) ............ 31,000 To record provision, at time of sale, for warranty expenditures* 10% of $310,000Allowance for sales returns .................. 12,400 Accounts receivable ....................... 12,400 To record return of goods within 30-day return period.It is assumed the returned goods have no value and are disposed of. Provision for warranties (B/S) ............... 18,600 Cash/Accounts payable ..................... 18,600 To record expenditures in year 1 for warranty workCash ......................................... 297,600* Accounts receivable ....................... 297,600 To record collection of Accounts Receivable* $310,000 – $12,400Year 2Provision for warranties (B/S) ............... 8,400 Cash/Accounts payable ..................... 8,400 To record expenditures in year 2 for warranty workRequirement 2If revenue is recognized only when the warranty period has expired, the following journal entries would be used to record the transactions for the two years:Year 1Inventory .................................... 480,000 Cash/Accounts payable ..................... 480,000To record purchase of inventoryInventory .................................... 124,000 Cash/Accounts payable ..................... 124,000To record refurbishment of inventoryAccounts receivable .......................... 310,000 Inventory ................................. 220,000 Deferred gross margin ..................... 90,000To record sale of goods on accountDeferred gross margin ........................ 12,400 Accounts receivable ....................... 12,400To record return of goods within the 30-day return period. It is assumed the goods have no value and are disposed of.Deferred warranty costs (B/S) ................ 18,600 Cash/Accounts payable ..................... 18,600To record expenditures for warranty work in year 1. The warranty costs incurred are deferred because the related revenue has not yet been recognizedCash ......................................... 297,600* Accounts receivable ....................... 297,600To record collection of Accounts receivable* $310,000 – $12,400Year 2Deferred warranty costs ...................... 8,400 Cash/Accounts payable ..................... 8,400To record warranty costs incurred in year 2 related to year 1 sales. The warranty costs incurred are deferred because the related revenue has not yet been recognized.Deferred gross margin ........................ **77,600Cost of goods sold ........................... 220,000 Sales revenue ............................. 297,600*To record recognition of sales revenue from year 1 sales and related cost of goods sold at expiry of warranty period* $310,000 – $12,400** ($90,000 – $12,400)Warranty expense ............................. 27,000* Deferred warranty costs ................... 27,000To record recognition of warranty expense at same time as related sales revenue recognition* $18,600 + $8,400Requirement 3Allied Auto Parts Inc. might choose to recognize revenue only after the warranty period has expired if they are not able to make a good estimate, at the time of sale, of the amount of warranty work that will be required under the terms of the one-year warranty. If Allied is not able, at the time of sale, to make a good estimate of the warranty work that will be required, then the measurabilitycriterion of revenue recognition is not met at the time of sale. The measurability criterion means that the amount of revenue can be reliably measured. If the seller is not able to estimate the amount of work that will have to be done under the warranty agreement, then it is not able to reasonably measure the profit that it will eventually earn on the sales. The performance criteria might also be invoked here. The performance criterion means that the seller has transferred the significant risks and rewards of ownership to the buyer. As long as there is warranty work to be performed after the sale that is the responsibility of the seller, you might argue thatperformance is not substantially complete. However, if the seller was able to reliably estimate the amount of warranty work, then performance would be satisfied on the assumption that we could measure the risk that remains with the seller, and make a provision for it.2.Percentage-of-completion method:The first step in applying revenue recognition using the percentage-of-completion method (using costs incurred to date compared to estimated total costs to determine the percentage of completion) is to estimate the percentage of completion of the project at the end of each year. This is done in the following table (in $000s):End of 2005 End of 2006 End of 2007 Total costs incurred $ 5,400 $12,950 $18,800 Total estimated costs 18,000 18,500 18,800% completed 30% 70% 100% Once the percentage of completion at the end of each year has been calculated as above, the next step is to allocate the appropriate amount of revenue to each year, based on the percentage completed to date, less what has previously been recorded in revenue. This is done in the following table (in $000s):2005 2006 2007 2005 $20,000 × 30%$6,0002006 $20,000 × 70%$14,0002007 $20,000 × 100%$20,000 Less: Revenue recognized in prior years (0) (6,000)(14,000)Revenue for year $6,000 $ 8,000 $ 6,000 Therefore, the profit to be recognized each year on the construction project would be:2005 2006 2007 Total Revenue recognized $6,000 $8,000 $6,000 $20,000 Construction costs incurred (expenses) (5,400) (7,550) (5,850)(18,800)Gross profit for the year $ 600 $ 450 $ 150 $ 1,200 The following journal entries are used to record the transactions under the percentage-of-completion method of revenue recognition:2005 2006 20071. Costs of construction:Construction in progress . 5,400 7,550 5,850Cash, payables, etc. 5,400 7,5505,8502. Progress billings:Accounts receivable .3,100 4,900 12,000 Progress billings 3,100 4,900 12,000 3. Collections on billings:Cash ................ 2,400 4,000 12,400 Accounts receivable 2,400 4,00012,4004. Recognition of profit:Construction in progress 600 450 150 Construction expense 5,400 7,550 5,850 Revenue from long-termcontract ....... 6,000 8,000 6,000 5. To close construction in progress:Progress billings ... 20,000Construction in progress20,0002005 2006 2007 Balance sheetCurrent assets:Accounts receivable $ 700 $ 1,600 $1,200 Inventory:Construction in process 6,000 14,000Less: Progress billings (3,100) (8,000)Costs in excess of billings 2,900 6,000Income statementRevenue from long-term contracts $6,000 $ 8,000 $6,000 Construction expense (5,400) (7,550) (5,850) Gross profit $ 600 $ 450 $ 1503.a. The three criteria of revenue recognition are performance,measurability, and collectibility.Performance means that the seller or service provider hasperformed the work. Depending on the nature of the product orservice, performance may mean quite different points of revenue recognition. For example, for the sale of products, IAS18 defines performance as the point when the seller of the goods hastransferred the risks and rewards of ownership to the buyer.Normally, this means that performance is done at the time of sale.Although the seller may have performed much of the work prior to the sale (production, selling efforts, etc.), there is still significant risk to the seller that a buyer may not be found. Therefore, from a reliability point of view, revenue recognitionis delayed until the point of sale. Also, there may be significant risks remaining with the seller of the product even after the sale. Warranties given by the seller are a risk that remains with the seller. However, if this risk can be reliably estimated at thetime of sale, revenue can be recognized at the point of sale. Performance is quite different under a long-term construction contract. Here, performance really is considered to be a measureof the work done. Revenue is recognized over the production period as the work is performed. It is intended to reflect the amount of effort expended by the seller (contractor). Although legal title won’t transfer to the buyer until the project is completed, revenue can be recognized because there is a known and committed buyer. If the contractor is not able to estimate how much of the work has been done (perhaps because he or she can’t reliably estimate how much work must still be done), then profit would not be recognized until the extent of performance is known. Measurability means that the seller or service provider must be able to reliably estimate the amount of the revenue from the saleor service. For the sale of products this is generally known at the time of sale (the sales price is set). However, if the seller provides a return period, it may be necessary to estimate thevolume of returns at the time of sale in order to measure therevenue that will be recognized.Collectibility means that the seller or the service provider has reasonable assurance that the sales price will actually becollected. In most cases for the sales of products, the seller is able to recognize revenue at the time of sale even if the sale is on account. This is because the seller has experience with itscustomers and is able to estimate reliably the risk of non payment.As long as the seller is able to make this estimate, it isappropriate to recognize the revenue but to offset it with aprovision for possible non collection. If the seller is unable to make reliable estimates of future collection of amounts owing, the recognition of revenue would be delayed until the cash is actually received. This is what is done using the instalment sales method of revenue recognition.b. Because of the performance criterion of revenue recognition, it would seem to be most appropriate to recognize most revenue as the seller or service provider performs the work. This would be the best measure of performance. This would mean, for example, that sellersof products would recognize their revenue over the whole production, selling, and post sales servicing periods. As we saw above, this is not commonly done because, in many cases, there are stillsignificant risks that are retained by the seller (risk of not being able to sell the product, for example). There are also measurement risks (knowing the selling price) that exist prior to the sale. The percentage-of-completion method of revenue used for some long-term construction contracts would seem to most closely recognize revenueas the work is performed. As mentioned in Part 1, we are able to recognize revenue on this basis since a contract exists whichcommits the purchaser to buy the project (assuming certainconditions are met) and the sales price is known because of the existence of the contract.4.If all revenue is recognized when a student registers for the course, profit for 2007 would be:Sales Revenue1:Manuals and initial lessons (200 × $100)$20,000 Additional lessons ((200 × 8) × $30)48,000 Examinations ((200 × 80%) × $130)20,800 Total sales revenue 88,800Cost of sales:Manuals and initial lessons (200 × ($15 + $3))3,600 Additional lessons ((200 × 8) × $3))4,800 Examinations ((200 × 80%) × $30)4,800 Total cost of sales 13,200 Depreciation of development costs:$180,000 × (200/1,000)36,000 Profit$ 39,6005.FINISH ENTERPRISESIncome Statementfor the year ending December 31, 2005Continuing operations (excluding the chemical division)Sales ($35,000,000 – $5,500,000) $29,500,000Cost of sales ($15,000,000 – $2,800,000) (12,200,000)Gross profit 17,300,000Selling & administration expenses($18,000,000 – $3,200,000) (14,800,000)Profit from operations 2,500,000Income tax expense (40%) 1,000,000Profit after tax $1,500,000 Discontinuing operations (Chemical division)Sales 5,500,000Cost of sales (2,800,000)Gross profit 2,700,000Selling & administration expenses (3,200,000)Loss from operations (500,000)Income tax expense(40%) 200,000Loss after tax (300,000)Gain on discontinuance of the Chemical division 3,500,000Tax thereon (1,400,000)After-tax gain on discontinuance of the Chemical division 2,100,000Enterprise net profit$ 3,300,000Chapter 81.Payment of account payable. operatingIssuance of preferred stock for cash. financingPayment of cash dividend. financingSale of long-term investment. investingAmortization of bond discount. no effectCollection of account receivable. operatingIssuance of long-term note payable to borrow cash. financing Depreciation of equipment. no effectPurchase of treasury stock. financingIssuance of common stock for cash. financingPurchase of long-term investment. investingPayment of wages to employees. operatingCollection of cash interest. investingCash sale of land. InvestingDistribution of stock dividend. no effectAcquisition of equipment by issuance of note payable. no effect Payment of long-term debt. financingAcquisition of building by issuance of common stock. no effect Accrual of salary expense. no effect2.(a) Cash received from customers = 816,000(b) Cash payments for purchases of merchandise. =468,000(c) Cash payments for operating expenses. = 268,200(d) Income taxes paid. =36,9003.Cash sales …………………………………………... $9,000 Payment of accounts payable ……………………….-48,000Payment of income tax ………………………………-13,000Payment of interest ……………………………..…..-16,000Collection of accounts receivable ……………………93,000 Payment of salaries and wages ………………………..-34,000 Cash flows from operating activitiesby the direct method -9,0004.Operating activities:Net loss -200,000Add: loss on sale of land250,000Add: depreciation300,000Add: amortization of patents20,000Less: increases in current assets other than cash -750,000Add: increases in current liabilities180,000Net cash flows from operating-200,000Investing activitiesSale of land-50,000Purchase of PPE-1,500,000Net cash flows from investing-1,550,000Financing activitiesIssuance of common shares400,000Payment of cash dividend-50,000Issuance of non-current liabilities1,000,000Net cash flows from financing1,350,000 Net changes in cash-400,000 5.。
Suggested SolutionChapter 13.4.5.(b) net income = 9,260-7,470=1,790(c) net income = 1,790+2,500=4,290Chapter 21.a.To increase Notes Payable -CRb.To decrease Accounts Receivable-CRc.To increase Owner, Capital -CRd.To decrease Unearned Fees -DRe.To decrease Prepaid Insurance -CRf.To decrease Cash - CRg.To increase Utilities Expense -DRh.To increase Fees Earned -CRi.To increase Store Equipment -DRj.To increase Owner, Withdrawal -DR2.a.Cash 1,800Accounts payable ................................................... 1,800 b.Revenue ................................................................... 4,500Accounts receivable ...................................... 4,500c.Owner’s withdrawals ................................................ 1,500Salaries Expense ............................................ 1,500 d.Accounts Receivable (750)Revenue (750)3.Prepare adjusting journal entries at December 31, the end of the year.Advertising expense 600Prepaid advertising 600Insurance expense (2160/12*2) 360Prepaid insurance 360Unearned revenue 2,100Service revenue 2,100Consultant expense 900Prepaid consultant 900Unearned revenue 3,000Service revenue 3,000 4.1. $388,4002. $22,5203. $366,6004. $21,8005.1. net loss for the year ended June 30, 2002: $60,0002. DR Jon Nissen, Capital 60,000CR income summary 60,0003. post-closing balance in Jon Nissen, Capital at June 30, 2002: $54,000Chapter 31. Dundee Realty bank reconciliationOctober 31, 2009Reconciled balance $6,220 Reconciled balance $6,2202. April 7 Dr: Notes receivable—A company 5400Cr: Accounts receivable—A company 540012 Dr: Cash 5394.5Interest expense 5.5Cr: Notes receivable 5400June 6 Dr: Accounts receivable—A company 5533Cr: Cash 553318 Dr: Cash 5560.7Cr: Accounts receivable—A company 5533Interest revenue 27.73. (a) As a whole: the ending inventory=685(b) applied separately to each product: the ending inventory=6254. The cost of goods available for sale=ending inventory + the cost of goods=80,000+200,000*500%=80,000+1,000,000=1,080,0005.(1) 24,000+60,000-90,000*0.8=12000(2) (60,000+24,000)/( 85,000+31,000)*( 85,000+31,000-90,000)=18828Chapter 41. (a) second-year depreciation = (114,000 – 5,700) / 5 = 21,660;(b) second-year depreciation = 8,600 * (114,000 – 5,700) / 36,100 = 25,800;(c) first-year depreciation = 114,000 * 40% = 45,600second-year depreciation = (114,000 – 45,600) * 40% = 27,360;(d) second-year depreciation = (114,000 – 5,700) * 4/15 = 28,880.2. (a) weighted-average accumulated expenditures (2008) = 75,000 * 12/12 + 84,000 * 9/12 + 180,000 * 8/12 + 300,000 * 7/12 + 100,000 * 6/12 = 483,000(b) interest capitalized during 2008 = 60,000 * 12% + ( 483,000 –60,000) * 10% =49,5003. (1) depreciation expense = 30,000(2) book value = 600,000 – 30,000 * 2=540,000(3) depreciation expense = ( 600,000 – 30,000 * 8)/16 =22,500(4) book value = 600,000 – 30,000 * 8 – 22,500 = 337,5004. Situation 1:Jan 1st, 2008 Investment in M 260,000Cash 260,000June 30 Cash 6000Dividend revenue 6000Situation 2:January 1, 2008 Investment in S 81,000Cash 81,000June 15 Cash 10,800Investment in S 10,800December 31 Investment in S 25,500Investment Revenue 25,5005. a. December 31, 2008 Investment in K 1,200,000Cash 1,200,000June 30, 2009 Dividend Receivable 42,500Dividend Revenue 42,500December 31, 2009 Cash 42,500Dividend Receivable 42,500b. December 31, 2008 Investment in K 1,200,000Cash 1,200,000 December 31, 2009 Cash 42,500Investment in K 42,500Investment in K 146,000Investment revenue 146,000 c. In a, the investment amount is 1,200,000net income reposed is 42,500In b, the investment amount is 1,303,500Net income reposed is 146,000Chapter 51.a. June 1: Dr: Inventory 198,000Cr: Accounts Payable 198,000 June 11: Dr: Accounts Payable 198,000Cr: Notes Payable 198,000 June 12: Dr: Cash 300,000Cr: Notes Payable 300,000b. Dr: Interest Expenses (for notes on June 11) 12,100Cr: Interest Payable 12,100Dr: Interest Expenses (for notes on June 12) 8,175Cr: Interest Payable 8,175c. Balance sheet presentation:Notes Payable 498,000 Accrued Interest on Notes Payable 20,275d. For Green:Dr: Notes Payable 198,000 Interest Payable 12,100Interest Expense 7,700Cr: Cash 217,800For Western:Dr: Notes Payable 300,000Interest Payable 8,175Interest Expense 18,825Cr: Cash 327,0002.(1) 20⨯8 Deferred income tax is a liability 2,400Income tax payable 21,600 20⨯9 Deferred income tax is an asset 600Income tax payable 26,100(2) 20⨯8: Dr: Tax expense 24,000Cr: Income tax payable 21,600 Deferred income tax 2,400 20⨯9: Dr: Tax expense 25,500Deferred income tax 600Cr: Income tax payable 26,100 (3) 20⨯8: Income statement: tax expense 24,000Balance sheet: income tax payable 21,600 20⨯9: Income statement: tax expense 25,500 Balance sheet: income tax payable 26,1003.a. 1,560,000 (20000000*12 %* (1-35%))b. 7.8% (20000000*12 %* (1-35%)/20000000)5.Notes Payable 14,400 Interest Payable 1,296 Accounts Payable 60,000 +Unearned Rent Revenue 7,200 Current Liabilities 82,896Chapter 61. Mar. 1Cash 1,200,000Common Stock 1,000,000Paid-in Capital in Excess of Par Value 200,000Mar. 15Organization Expense 50,000Common Stock 50,000Mar. 23Patent 120,000Common Stock 100,000Paid-in Capital in Excess of Par Value 20,000The value of the patent is not easily determinable, so use the issue price of $12 per share on March 1 which is the issuing price of common stock.2. July.1Treasury Stock 180,000Cash 180,000The cost of treasury purchased is 180,000/30,000=60 per share.Nov. 1Cash 70,000Treasury Stock 60,000Paid-in Capital from Treasury Stock 10,000Sell the treasury at the cost of $60 per share, and selling price is $70 per share. The treasury stock is sold above the cost.Dec. 20Cash 75,000Paid-in Capital from Treasury Stock 15,000Treasury Stock 90,000The cost of treasury is $60 per share while the selling price is $50 which is lower than the cost.3. a. July 1Retained Earnings 24,000Dividends Payable—Preferred Stock 24,000b.Sept.1Dividends Payable—Preferred Stock 24,000Cash 24,000c. Dec.1Retained Earnings 80,000Dividends Payable—Common Stock 80,000d. Dec.31Income Summary 350,000Retained Earnings 350,0004.a. Preferred stock gives its owner certain advantages over common stockholders. These benefits include the right to receive dividends before the common stockholders and the right to receive assets before the common stockholders if the corporation liquidates. Corporation pay a fixed amount of dividends on preferred stock.The 7% cumulative term indicates that the investors earn 7% fixed dividends.b. 7%*120%*20,000=504,000c. If corporation issued debt, it has obligation to repay principald. The date of declaration decrease the stockholders’ equity; the date of record and the date of payment have no effect on stockholders.5.a. Jan. 15Retained Earnings 35,000Accumulated Depreciation 35,000To correct error in prior year’s depreciation.b. Mar. 20Loss from Earthquake 70,000Building 70,000c. Mar. 31Retained Earnings 12,500Dividends Payable 12,500d. Apirl.15Dividends Payable 12,500Cash 12,500e. June 30Retained Earnings 37,500Common Stock 25,000Additional Paid-in Capital 12,500To record issuance of 10% stock dividend: 10%*25,000=2,500 shares;2500*$15=$37,500f. Dec. 31Depreciation Expense 14,000Accumulated Depreciation 14,000Original depreciation: $40,000/40=$10,000 per year. Book value on Jan.1, 2009 is $350,000(=$400,000-5*$10,000). Deprecation for 2009 is $14,000(=$350,000/25).g. The company does not need to make entry in the accounting records. But the amount of Common Stock ($10 par value) decreases 275,000, while the amount of Common Stock ($5 par value) increases 275,000.Chapter 71.Requirement 1If revenue is recognized at the date of delivery, the following journal entries would be used to record the transactions for the two years:Year 1Inventory ....................................................................................... 480,000 Cash/Accounts payable .......................................................... 480,000 To record purchase of inventoryInventory ....................................................................................... 124,000 Cash/Accounts payable .......................................................... 124,000 To record refurbishment of inventoryAccounts receivable ...................................................................... 310,000 Sales revenue ......................................................................... 310,000 To record sale of goods on accountCost of goods sold ........................................................................ 220,000 Inventory ................................................................................. 220,000 To record the cost of the goods sold as an expenseSales returns (I/S) ......................................................................... 15,500* Allowance for sales returns (B/S) ........................................... 15,500 To record provision for return of goods sold under 30-day return period* 5% of $310,000Warranty expense ......................................................................... 31,000* Provision for warranties (B/S) ................................................. 31,000 To record provision, at time of sale, for warranty expenditures* 10% of $310,000Allowance for sales returns .......................................................... 12,400 Accounts receivable ............................................................... 12,400 To record return of goods within 30-day return period.It is assumed the returned goods have no value and are disposed of.Provision for warranties (B/S) ....................................................... 18,600 Cash/Accounts payable .......................................................... 18,600 To record expenditures in year 1 for warranty workCash .............................................................................................. 297,600*Accounts receivable ............................................................... 297,600 To record collection of Accounts Receivable* $310,000 – $12,400Year 2Provision for warranties (B/S) ....................................................... 8,400 Cash/Accounts payable .......................................................... 8,400 To record expenditures in year 2 for warranty workRequirement 2If revenue is recognized only when the warranty period has expired, the following journal entries would be used to record the transactions for the two years:Year 1Inventory ....................................................................................... 480,000 Cash/Accounts payable .......................................................... 480,000 To record purchase of inventoryInventory ....................................................................................... 124,000 Cash/Accounts payable .......................................................... 124,000 To record refurbishment of inventoryAccounts receivable ...................................................................... 310,000 Inventory ................................................................................. 220,000 Deferred gross margin ............................................................ 90,000 To record sale of goods on accountDeferred gross margin .................................................................. 12,400 Accounts receivable ............................................................... 12,400 To record return of goods within the 30-day return period. It is assumed the goods haveno value and are disposed of.Deferred warranty costs (B/S) ...................................................... 18,600 Cash/Accounts payable .......................................................... 18,600 To record expenditures for warranty work in year 1. The warranty costs incurred are deferred because the related revenue has not yet been recognizedCash .............................................................................................. 297,600* Accounts receivable ............................................................... 297,600 To record collection of Accounts receivable* $310,000 – $12,400Year 2Deferred warranty costs ................................................................ 8,400 Cash/Accounts payable .......................................................... 8,400 To record warranty costs incurred in year 2 related to year 1 sales. The warranty costs incurred are deferred because the related revenue has not yet been recognized.Deferred gross margin .................................................................. **77,600Cost of goods sold ........................................................................ 220,000 Sales revenue ......................................................................... 297,600* To record recognition of sales revenue from year 1 sales and related cost of goods sold at expiry of warranty period* $310,000 – $12,400** ($90,000 – $12,400)Warranty expense ......................................................................... 27,000* Deferred warranty costs ......................................................... 27,000 To record recognition of warranty expense at same time as related sales revenue recognition* $18,600 + $8,400Requirement 3Allied Auto Parts Inc. might choose to recognize revenue only after the warranty periodhas expired if they are not able to make a good estimate, at the time of sale, of the amount of warranty work that will be required under the terms of the one-year warranty. If Allied is not able, at the time of sale, to make a good estimate of the warranty work that will be required, then the measurability criterion of revenue recognition is not met at the time of sale. The measurability criterion means that the amount of revenue can be reliably measured. If the seller is not able to estimate the amount of work that will have to be done under the warranty agreement, then it is not able to reasonably measure the profit that itwill eventually earn on the sales. The performance criteria might also be invoked here.The performance criterion means that the seller has transferred the significant risks and rewards of ownership to the buyer. As long as there is warranty work to be performed after the sale that is the responsibility of the seller, you might argue that performance is not substantially complete. However, if the seller was able to reliably estimate the amount of warranty work, then performance would be satisfied on the assumption that we could measure the risk that remains with the seller, and make a provision for it.2.Percentage-of-completion method:The first step in applying revenue recognition using the percentage-of-completion method (using costs incurred to date compared to estimated total costs to determine the percentage of completion) is to estimate the percentage of completion of the project at the end of each year. This is done in the following table (in $000s):End of 2005 End of 2006 End of 2007Total costs incurred $ 5,400 $ 12,950 $ 18,800 Total estimated costs 18,000 18,500 18,800 % completed 30% 70% 100%Once the percentage of completion at the end of each year has been calculated as above, the next step is to allocate the appropriate amount of revenue to each year, based on the percentage completed to date, less what has previously been recorded in revenue. This is done in the following table (in $000s):2005 2006 20072005 $20,000 × 30% $ 6,0002006 $20,000 × 70% $ 14,0002007 $20,000 × 100% $ 20,000 Less: Revenue recognized in prior years (0) (6,000) (14,000) Revenue for year $ 6,000 $ 8,000 $ 6,000Therefore, the profit to be recognized each year on the construction project would be:2005 2006 2007 TotalRevenue recognized $ 6,000 $ 8,000 $ 6,000 $ 20,000 Construction costs incurred (expenses) (5,400) (7,550) (5,850) (18,800) Gross profit for the year $ 600 $ 450 $ 150 $ 1,200The following journal entries are used to record the transactions under thepercentage-of-completion method of revenue recognition:2005 2006 20071. Costs of construction:Construction in progress .................. 5,400 7,550 5,850 Cash, payables, etc. ..... 5,400 7,550 5,850 2. Progress billings:Accounts receivable ............ 3,100 4,900 12,000 Progress billings ............ 3,100 4,900 12,000 3. Collections on billings:Cash .................................... 2,400 4,000 12,400 Accounts receivable ...... 2,400 4,000 12,400 4. Recognition of profit:Construction in progress ..... 600 450 150Construction expense.......... 5,400 7,550 5,850 Revenue from long-termcontract ...................... 6,000 8,000 6,000 5. To close construction in progress:Progress billings .................. 20,000 Construction in progress .20,0002005 2006 2007Balance sheetCurrent assets:Accounts receivable $ 700 $ 1,600 $ 1,200 Inventory:Construction in process 6,000 14,000 Less: Progress billings (3,100) (8,000)Costs in excess of billings 2,900 6,000Income statementRevenue from long-term contracts $ 6,000 $ 8,000 $ 6,000 Construction expense (5,400) (7,550) (5,850) Gross profit $ 600 $ 450 $ 1503.a. The three criteria of revenue recognition are performance, measurability, andcollectibility.Performance means that the seller or service provider has performed the work.Depending on the nature of the product or service, performance may mean quitedifferent points of revenue recognition. For example, for the sale of products, IAS18 defines performance as the point when the seller of the goods has transferred therisks and rewards of ownership to the buyer. Normally, this means that performance is done at the time of sale. Although the seller may have performed much of the work prior to the sale (production, selling efforts, etc.), there is still significant risk to theseller that a buyer may not be found. Therefore, from a reliability point of view,revenue recognition is delayed until the point of sale. Also, there may be significant risks remaining with the seller of the product even after the sale. Warranties given by the seller are a risk that remains with the seller. However, if this risk can be reliably estimated at the time of sale, revenue can be recognized at the point of sale.Performance is quite different under a long-term construction contract. Here,performance really is considered to be a measure of the work done. Revenue isrecognized over the production period as the work is performed. It is intended toreflect the amount of effort expended by the seller (contractor). Although legal titlewon’t transfer to the buyer until the project is completed, revenue can be recognized because there is a known and committed buyer. If the contractor is not able toestimate how much of the work has been done (perhaps because he or she can’treliably estimate how much work must still be done), then profit would not berecognized until the extent of performance is known.Measurability means that the seller or service provider must be able to reliablyestimate the amount of the revenue from the sale or service. For the sale of products this is generally known at the time of sale (the sales price is set). However, if the seller provides a return period, it may be necessary to estimate the volume of returns at the time of sale in order to measure the revenue that will be recognized.Collectibility means that the seller or the service provider has reasonable assurance that the sales price will actually be collected. In most cases for the sales of products, the seller is able to recognize revenue at the time of sale even if the sale is on account.This is because the seller has experience with its customers and is able to estimate reliably the risk of non payment. As long as the seller is able to make this estimate, it is appropriate to recognize the revenue but to offset it with a provision for possible non collection. If the seller is unable to make reliable estimates of future collection ofamounts owing, the recognition of revenue would be delayed until the cash is actually received. This is what is done using the instalment sales method of revenuerecognition.b. Because of the performance criterion of revenue recognition, it would seem to bemost appropriate to recognize most revenue as the seller or service provider performs the work. This would be the best measure of performance. This would mean, for example,that sellers of products would recognize their revenue over the whole production, selling, and post sales servicing periods. As we saw above, this is not commonly done because,in many cases, there are still significant risks that are retained by the seller (risk of not being able to sell the product, for example). There are also measurement risks (knowingthe selling price) that exist prior to the sale. The percentage-of-completion method of revenue used for some long-term construction contracts would seem to most closely recognize revenue as the work is performed. As mentioned in Part 1, we are able to recognize revenue on this basis since a contract exists which commits the purchaser tobuy the project (assuming certain conditions are met) and the sales price is known because of the existence of the contract.4.If all revenue is recognized when a student registers for the course, profit for 2007 would be:Sales Revenue1:Manuals and initial lessons (200 × $100) $ 20,000 Additional lessons ((200 × 8) × $30) 48,000 Examinations ((200 × 80%) × $130) 20,800 Total sales revenue 88,800Cost of sales:Manuals and initial lessons (200 × ($15 + $3)) 3,600 Additional lessons ((200 × 8) × $3)) 4,800Examinations ((200 × 80%) × $30) 4,800 Total cost of sales 13,200Depreciation of development costs:$180,000 × (200/1,000) 36,000Profit $ 39,6005.FINISH ENTERPRISESIncome Statementfor the year ending December 31, 2005Continuing operations (excluding the chemical division)Sales ($35,000,000 – $5,500,000) $ 29,500,000Cost of sales ($15,000,000 – $2,800,000) (12,200,000)Gross profit 17,300,000Selling & administration expenses($18,000,000 – $3,200,000) (14,800,000)Profit from operations 2,500,000Income tax expense (40%) 1,000,000Profit after tax $ 1,500,000Discontinuing operations (Chemical division)Sales 5,500,000Cost of sales (2,800,000)Gross profit 2,700,000Selling & administration expenses (3,200,000)Loss from operations (500,000)Income tax expense(40%) 200,000Loss after tax (300,000) Gain on discontinuance of the Chemical division 3,500,000Tax thereon (1,400,000)After-tax gain on discontinuance of the Chemical division 2,100,000 Enterprise net profit $ 3,300,000Chapter 81.Payment of account payable. operatingIssuance of preferred stock for cash. financingPayment of cash dividend. financingSale of long-term investment. investingAmortization of bond discount. no effectCollection of account receivable. operatingIssuance of long-term note payable to borrow cash. financing Depreciation of equipment. no effectPurchase of treasury stock. financingIssuance of common stock for cash. financingPurchase of long-term investment. investingPayment of wages to employees. operatingCollection of cash interest. investingCash sale of land. InvestingDistribution of stock dividend. no effectAcquisition of equipment by issuance of note payable. no effect Payment of long-term debt. financingAcquisition of building by issuance of common stock. no effect Accrual of salary expense. no effect2.(a) Cash received from customers = 816,000(b) Cash payments for purchases of merchandise. =468,000(c) Cash payments for operating expenses. = 268,200(d) Income taxes paid. =36,9003.Cash sales …………………………………………... $9,000 Payment of accounts payable ……………………….-48,000 Payment of income tax ………………………………-13,000 Payment of interest ……………………………..…..-16,000 Collection of accounts receivable ……………………93,000 Payment of salaries and wages ……………………….. -34,000 Cash flows from operating activitiesby the direct method -9,0004.Operating activities:Net loss -200,000 Add: loss on sale of land 250,000 Add: depreciation 300,000Add: amortization of patents 20,000Less: increases in current assets other than cash -750,000Add: increases in current liabilities 180,000Net cash flows from operating -200,000Investing activitiesSale of land -50,000Purchase of PPE -1,500,000Net cash flows from investing -1,550,000Financing activitiesIssuance of common shares 400,000Payment of cash dividend -50,000Issuance of non-current liabilities 1,000,000Net cash flows from financing 1,350,000 Net changes in cash -400,000 5.。
Vocabulary1.You fold paper or cloth tightly around something to cover it completely.A. wrapB. suddenlyC. specialD. jewelry答案：A解析：用纸或布料把东西包装起来2.It means different from normal.A. specialB. presentC. spiderD. suddenly答案：A解析：与众不同的Grammar3.He will tell you the news as soon as he ______ back.A. comesB. cameC. comeD. will come答案：A解析：as soon as后接一般现在时，主语he是第三人称单数，动词加s，即comes4.______ your father a doctor?A. AmB. IsC. AreD. Does答案：B解析：根据句意“你的爸爸是医生吗？”要是be动词，主语是your father，选B5.I won’t go to bed until I ______ my homework.A. finishB. finishesC. finishedD. is finishing答案：A解析：until后接一般现在时，主语I不是第三人称单数，所有后接动词原形finish6.--- What day ______ it today?--- It’s Saturday.A. doB. doesC. areD. is答案：D解析：主语it，对应的be是is7.There ______ any water in the bottle.A. isB. isn’tC. areD. aren’t答案：B解析：根据any可知，句子为否定句，water不可数，所以选择isn’t8.Linda ______ PE.A. don’t likeB. doesn’t likeC. don’t likesD. doesn’t likes答案：B解析：Linda是三单，变否定时三单要体现在助动词上，后面动词还原9.Mary always ______ a suitcase with her.A. carryB. carrysC. carriedD. carries答案：D解析：always是一现的标志，Mary是三单，动词要变三单形式，carry要把y改i加es，所以选carries10.Peter often ______ dinner at home.A. hasB. haveC. havesD. having答案：A解析：often是一现的标志，Peter是三单，所以助动词选has。
{财务管理财务会计}会计专业英语习题答案Chapter.11-1Asinmanyethicsissues,thereisnoonerightanswer.Thelocalnewsp aperreportedonthisissueintheseterms:"Thepanycoveredupthefi rstreport,andthelocalnewspaperuncoveredthepany'ssecret.The panywasforcedtonotlocatehere(CollierCounty).Itbecamepatent lyclearthatdoingtheleastthatislegallyallowedisnotenough." 1-21.B2.B3.E4.F5.B6.F7.X8.E9.X10.B1-3a.$96,500($25,000+$71,500)b.$67,750($82,750–$15,000)c.$19,500($37,000–$17,500)1-4a.$275,000($475,000–$200,000)b.$310,000($275,000+$75,000–$40,000)c.$233,000($275,000–$15,000–$27,000)d.$465,000($275,000+$125,000+$65,000)ine:$45,000($425,000–$105,000–$275,000)1-5a.owner'sequityb.liabilityc.assetd.assete.owner'sequityf.a sset1-6a.Increasesassetsandincreasesowner’sequity.b.Increasesassetsandincreasesowner’sequity.c.Decreasesassetsanddecreasesowner’sequity.d.Increasesassetsandincreasesliabilities.e.Increasesassetsanddecreasesassets.1-71.increase2.decrease3.increase4.decrease1-8a.(1)Saleofcateringservicesforcash,$25,000.(2)Purchaseoflandforcash,$10,000.(3)Paymentofexpenses,$16,000.(4)Purchaseofsuppliesonaccount,$800.(5)Withdrawalofcashbyowner,$2,000.(6)Paymentofcashtocreditors,$10,600.(7)Recognitionofcostofsuppliesused,$1,400.b.$13,600($18,000–$4,400)c.$5,600($64,100–$58,500)d.$7,600($25,000–$16,000–$1,400)e.$5,600($7,600–$2,000)1-9 Itwouldbeincorrecttosaythatthebusinesshadincurredanetlos sof$21,750.Theexcessofthewithdrawalsoverthenetinefortheper iodisadecreaseintheamountofowner’sequityinthebusiness.1-10Balancesheetitems:1,3,4,8,9,101-11Inestatementitems:2,5,6,71-12MADRASCOMPANYStatementofOwner’sEquityFortheMonthEndedApril30,2006LeoPerkins,capital,April1,2006$297,200 Netineforthemonth$73,000 Lesswithdrawals..................12,000 Increaseinowner’sequity.........61,000LeoPerkins,capital,April30,2006$358,2001-13HERCULESSERVICESIneStatementFortheMonthEndedNovember30,2006Feesearned$232,120Operatingexpenses:Wagesexpense$100,100Rentexpense35,000Suppliesexpense4,550 Miscellaneousexpense..............3,150 Totaloperatingexpenses..........142,800Netine$..........................89,3201-14Balancesheet:b,c,e,f,h,i,j,l,m,n,oInestatement:a,d,g,k1-151.b–investingactivity2.a–operatingactivity3.c–financingactivity4.a–operatingactivity1-16a.2003:$10,209($30,011–$19,802)2002:$8,312($26,394–$18,082)b.2003:0.52($10,209÷$19,802)2002:0.46($8,312÷$18,082)c.Theratioofliabilitiestostockholders’equityincreasedfrom2002to2003,indicatinganincreaseinriskforcreditors.However, theassetsofTheHomeDepotaremorethansufficienttosatisfycredi torclaims.Chapter.22-1AccountAccountNumberAccountsPayable21AccountsReceivable12Cash11CoreyKrum,Capital31CoreyKrum,Drawing32FeesEarned41Land13MiscellaneousExpense53SuppliesExpense52WagesExpense512-2Balance Sheet Accounts Ine Statement Accounts1.Assets 11Cash 12AccountsReceivable 13Supplies14PrepaidInsurance15Equipment2.Liabilities21AccountsPayable22UnearnedRent3.Owner's Equity31MillardFillmore,Capital 32MillardFillmore,Drawing 4.Revenue41FeesEarned5.Expenses51WagesExpense52RentExpense53SuppliesExpense59MiscellaneousExpense2-3a.andb.Account Debited Account Credited TransactionTypeEffectTypeEffect(1)asset+owner'sequity+(2)asset+asset–(3)asset+asset–liability+(4)expense+asset–(5)asset+revenue+(6)liability–asset–(7)asset+asset–(8)drawing+asset–(9)expense+asset–Ex.2–4(1)Cash40,000IraJanke,Capital40,000 (2)Supplies1,800Cash1,800(3)Equipment24,000 AccountsPayable15,000Cash9,000(4)OperatingExpenses3,050 Cash3,050(5)AccountsReceivable12,000 ServiceRevenue12,000(6)AccountsPayable7,500 Cash7,500(7)Cash9,500 AccountsReceivable9,500 (8)IraJanke,Drawing5,000 Cash5,000(9)OperatingExpenses1,050 Supplies1,0502-51.debitandcredit(c)2.debitandcredit(c)3.debitandcredit(c)4.creditonly(b)5.debitonly(a)6.debitonly(a)7.debitonly(a)2-6a.Liability—creditf.Revenue—creditb.Asset—debitg.Asset—debitc.Asset—debith.Expense—debitd.Owner'sequityi.Asset—debit (CindyYost,Capital)—creditj.Expense—debite.Owner'sequity(CindyYost,Drawing)—debit2-7a.creditg.debitb.credith.debitc.debiti.debitd.creditj.credite.debitk.debitf.creditl.credit2-8a.Debit(negative)balanceof$1,500($10,500–$4,000–$8,000).Suchanegativebalancemeansthattheliabilitieso fSeth’sbusinessexceedtheassets.b.Yes.ThebalancesheetpreparedatDecember31willbalanc e,withSethFite,Capital,beingreportedintheowner’seq uitysectionasanegative$1,500.2-9a.Theincreaseof$28,750inthecashaccountdoesnotindicateearningsofthatamount.Earningswillrepresentthenetchangeinallassetsandliabilitiesfromoperatingtransactions.b.$7,550($36,300–$28,750)2-10a.$40,550($7,850+$41,850–$9,150)b.$63,000($61,000+$17,500–$15,500)c.$20,800($40,500–$57,700+$38,000)2-112005Aug.1RentExpense1,500Cash1,5002AdvertisingExpense700Cash7004Supplies1,050Cash1,0506OfficeEquipment7,500 AccountsPayable7,5008Cash3,600 AccountsReceivable3,60012AccountsPayable1,150 Cash1,15020GayleMcCall,Drawing1,000 Cash1,00025MiscellaneousExpense500 Cash50030UtilitiesExpense195 Cash19531AccountsReceivable10,150 FeesEarned10,15031UtilitiesExpense380 Cash3802-12a.JOURNALPage43Post.DateDescriptionRef.DebitCredit2006Oct.27Supplies151,320 AccountsPayable211,320 Purchasedsuppliesonaccount.b.,c.,d.Supplies15Post.Balance DateItemRef.Dr.Cr.Dr.Cr.2006Oct.1Balance✓58527431,3201,905AccountsPayable212006Oct.1Balance✓6,15027431,3207,4702-13 Inequalityoftrialbalancetotalswouldbecausedbyerrors describedin(b)and(d).2-14ESCALADECO.TrialBalanceDecember31,2006Cash13,375AccountsReceivable24,600PrepaidInsurance8,000Equipment75,000AccountsPayable11,180UnearnedRent4,250ErinCapelli,Capital82,420ErinCapelli,Drawing10,000ServiceRevenue83,750WagesExpense42,000AdvertisingExpense7,200 MiscellaneousExpense..............1,425181,600181,6002-15a.GeraldOwen,Drawing15,000WagesExpense15,000b.PrepaidRent4,500Cash4,5002-16题目的资料不全,答案略.2-17a.KMARTCORPORATIONIneStatementFortheYearsEndingJanuary31,2000and1999 (inmillions)Increase (Decrease)20001999AmountPercent1.Sales$37,028$35,925$1,1033.1%2.Costofsales(29,658)(28,111)1,5475.5%3.Selling,general,andadmin. expenses..............(7,415)(6,514)90113.8%4.Operatingine(loss)beforetaxes$............(45)$1,300$(1,345)(103.5%) b.ThehorizontalanalysisofKmartCorporationrevealsdet erioratingoperatingresultsfrom1999to2000.Whilesales increasedby$1,103million,a3.1%increase,costofsalesincreasedby$1,547million,a5.5%increase.Selling,gener al,andadministrativeexpensesalsoincreasedby$901mill ion,a13.8%increase.Theendresultwasthatoperatingined ecreasedby$1,345million,overa100%decrease,andcreate da$45millionlossin2000.Littleoverayearlater,Kmartfi ledforbankruptcyprotection.Ithasnowemergedfrombankr uptcy,hopingtoreturntoprofitability.3-11.Accruedexpense(accruedliability)2.Deferredexpense(prepaidexpense)3.Deferredrevenue(unearnedrevenue)4.Accruedrevenue(accruedasset)5.Accruedexpense(accruedliability)6.Accruedexpense(accruedliability)7.Deferredexpense(prepaidexpense)8.Deferredrevenue(unearnedrevenue)3-2SuppliesExpense801Supplies8013-3$1,067($118+$949)3-4a.Insuranceexpense(orexpenses) inewillbeoverstated.b.Prepaidinsurance(orassets)willbeoverstated.Owner ’sequitywillbeoverstated.3-5a.InsuranceExpense1,215PrepaidInsurance1,215b.InsuranceExpense1,215PrepaidInsurance1,2153-6UnearnedFees9,570FeesEarned9,5703-7a.SalaryExpense9,360SalariesPayable9,360b.SalaryExpense12,480SalariesPayable12,4803-8$59,850($63,000–$3,150)3-9$195,816,000($128,776,000+$67,040,000)3-10Error(a)Error(b)Over-Under-Over-Under-statedstatedstatedstated1.Revenuefortheyearwouldbe$0$6,900$0$02.Expensesfortheyearwouldbe0003,740inefortheyearwouldbe06,9003,74004.AssetsatDecember31wouldbe00005.LiabilitiesatDecember31wouldbe6,900003,7406.Owner’sequityatDecember31wouldbe06,9003,74003-11$175,840($172,680+$6,900–$3,740)3-12a.AccountsReceivable11,500FeesEarned11,500b.No.Ifthecashbasisofaccountingisused,revenuesarere cognizedonlywhenthecashisreceived.Therefore,earnedb utunbilledrevenueswouldnotberecognizedintheaccounts ,andnoadjustingentrywouldbenecessary.3-13a.Feesearned(orrevenues)inewilb.Accounts(fees)receivable(orassets)willbeunderstat ed.Owner’sequitywillbeunderstated.3-14DepreciationExpense5,200 AccumulatedDepreciation5,2003-15a.$204,600($318,500–$113,900)b.No.Depreciationisanallocationofthecostoftheequipm enttotheperiodsbenefitingfromitsuse.Itdoesnotnecess arilyrelatetovalueorlossofvalue.3-16a.$2,268,000,000($5,891,000,000–$3,623,000,000)b.No.Depreciationisanallocationmethod,notavaluation method.Thatis,depreciationallocatesthecostofafixeda ssetoveritsusefullife.Depreciationdoesnotattempttom easuremarketvalues,whichmayvarysignificantlyfromyea rtoyear.3-17a.DepreciationExpense7,500 AccumulatedDepreciation7,500b.(1)inewo(2)Accumulateddepreciationwouldbeunderstated,andtot alassetswouldbeoverstated.Owner’sequitywouldbeover stated.3-181.AccountsReceivable4FeesEarned42.SuppliesExpense3Supplies33.InsuranceExpense8PrepaidInsurance84.DepreciationExpense5 AccumulatedDepreciation—Equipment55.WagesExpense1WagesPayable13-19a.DellComputerCorporationAmount PercentNetsales$35,404,000100.0Costofgoodssold(29,055,000)82.1 Operatingexpenses(3,505,000)9.9 Operatingine(loss)$2,844,0008.0b.GatewayInc.Amount PercentNetsales$4,171,325100.0Costofgoodssold(3,605,120)86.4 Operatingexpenses(1,077,447)25.8 Operatingine(loss)$(511,242)(12.2)c.DellismoreprofitablethanGateway.Specifically,Dell ’scostofgoodssoldof82.1%issignificantlyless(4.3%)t hanGateway’scostofgoodssoldof86.4%.Inaddition,Gate way’soperatingexpensesareoverone-fourthofsales,whi leDell’soperatingexpensesare9.9%ofsales.Theresulti sthatDellgeneratesanoperatingineof8.0%ofsales,while Gatewaygeneratesalossof12.2%ofsales.Obviously,Gatew aymustimproveitsoperationsifitistoremaininbusinessa ndremainpetitivewithDell.4-1e,c,g,b,f,a,d4-2a.Inestatement:3,8,9b.Balancesheet:1,2,4,5,6,7,104-3a.Asset:1,4,5,6,10b.Liability:9,12c.Revenue:2,7d.Expense:3,8,114-41.f2.c3.b4.h5.g6.j7.a8.i9.d10.e4–5ITHACASERVICESCO.WorkSheet FortheYearEndedJanuary31,2006 AdjustedTrial BalanceAdjustmentsTrial Balance AccountTitleDr.Cr.Dr.Cr.Dr.Cr.1Cash8812AccountsReceivable50(a)75723Supplies8(b)5334PrepaidInsurance12(c)6645Land505056Equipment323267Accum.Depr.—Equip.2(d)5778AccountsPayable262689WagesPayable0(e)11910TerryDagley,Capital011TerryDagley,Drawing881112FeesEarned60(a)7671213WagesExpense16(e)1171314RentExpense881415InsuranceExpense0(c)661516UtilitiesExpense661617DepreciationExpense0(d)551718SuppliesExpense0(b)551819MiscellaneousExpense2219 20Totals20021321320 ContinueITHACASERVICESCO.WorkSheet FortheYearEndedJanuary31,2006 AdjustedIneBalanceTrial BalanceStatement Sheet AccountTitleDr.Cr.Dr.Cr.Dr.Cr. 1Cash8812AccountsReceivable575723Supplies3334PrepaidInsurance6645Land505056Equipment323267Accum.Depr.—Equip.7778AccountsPayable262689WagesPayable11910TerryDagley,Capital011TerryDagley,Drawing881112FeesEarned67671213WagesExpense17171314RentExpense881415InsuranceExpense661516UtilitiesExpense661617DepreciationExpense551718SuppliesExpense551819MiscellaneousExpense2219 20Totals21321Netine(loss)181821 226767164164224-6ITHACASERVICESCO.IneStatementFortheYearEndedJanuary31,2006 Feesearned$67Expenses:Wagesexpense$17Rentexpense8Insuranceexpense6Utilitiesexpense6Depreciationexpense5Suppliesexpense5 Miscellaneousexpense (2)Totalexpenses (49)Netine$18ITHACASERVICESCO.StatementofOwner’sEquityFortheYearEndedJanuary31,2006 TerryDagley,capital,February1,2005$112 Netinefortheyear$18 Lesswithdrawals (8)Increaseinowner’sequity (10)TerryDagley,capital,January31,2006$122 ITHACASERVICESCO.BalanceSheetJanuary31,2006AssetsLiabilitiesCurrentassets:Currentliabilities:Cash$8Accountspayable$26 Accountsreceivable57Wagespayable1 Supplies3Totalliabilities$27 Prepaidinsurance6Totalcurrentassets$74Property,plant,andOwner’s Equity equipment:TerryDagley,capital122Land$50Equipment$32Lessaccum.depr (725)Totalproperty,plant,andequipment75Totalliabilitiesand Totalassets$149owner’sequity$149 4-72006Jan.31AccountsReceivable7 FeesEarned731SuppliesExpense5Supplies531InsuranceExpense6 PrepaidInsurance631DepreciationExpense5 AccumulatedDepreciation—Equipment5 31WagesExpense1WagesPayable14-82006Jan.31FeesEarned67IneSummary6731IneSummary49WagesExpense17RentExpense8InsuranceExpense6UtilitiesExpense6 DepreciationExpense5SuppliesExpense5 MiscellaneousExpense231IneSummary18TerryDagley,Capital1831TerryDagley,Capital8TerryDagley,Drawing84-9SIROCCOSERVICESCO.IneStatementFortheYearEndedMarch31,2006 Servicerevenue$103,850 Operatingexpenses:Wagesexpense$56,800Rentexpense21,270Utilitiesexpense11,500 Depreciationexpense8,000 Insuranceexpense4,100 Suppliesexpense3,100 Miscellaneousexpense..............2,250 Totaloperatingexpenses..........107,020Netloss$ (3,170)4-10SYNTHESISSYSTEMSCO.StatementofOwner’sEquity FortheYearEndedOctober31,2006SuzanneJacob,capital,November1,2005$173,750 Netineforyear$44,250 Lesswithdrawals..................12,000 Increaseinowner’sequity.........32,250 SuzanneJacob,capital,October31,2006$206,0004-11a.Currentasset:1,3,5,6b.Property,plant,andequipment:2,44-12 Sincecurrentliabilitiesareusuallyduewithinoneyear,$ 165,000($13,750×12months)wouldbereportedasacurrentl iabilityonthebalancesheet.Theremainderof$335,000($5 00,000–$165,000)wouldbereportedasalong-termliabilityontheb alancesheet.4-13TUDORCO.BalanceSheetApril30,2006AssetsLiabilities CurrentassetsCurrentliabilities:Cash$31,500Accountspayable$9,500 Accountsreceivable21,850Salariespayable1,750 Supplies1,800Unearnedfees1,200 Prepaidinsurance7,200Totalliabilities$12,450 Prepaidrent4,800Totalcurrentassets$67,150Owner’s Equity Property,plant,andequipment:VernonPosey,capital114, 200Equipment$80,600Lessaccumulateddepreciation21,10059,500Totalliabili tiesandTotalassets$126,650owner’sequity$126,6504-14AccountsReceivable4,100FeesEarned4,100SuppliesExpense1,300Supplies1,300InsuranceExpense2,000PrepaidInsurance2,000DepreciationExpense2,800 AccumulatedDepreciation—Equipment2,800 WagesExpense1,000WagesPayable1,000UnearnedRent2,500RentRevenue2,5004-15c.DepreciationExpense—Equipmentg.FeesEarnedi.SalariesExpensel.SuppliesExpense4-16 Theinesummaryaccountisusedtoclosetherevenueandexpen seaccounts,anditaidsindetectingandcorrectingerrors. The$450,750representsexpenseaccountbalances,andthe$ 712,500representsrevenueaccountbalancesthathavebeen closed.4-17a.IneSummary167,550SueAlewine,Capital167,550SueAlewine,Capital25,000SueAlewine,Drawing25,000b.$284,900($142,350+$167,550–$25,000)4-18a.AccountsReceivableb.AccumulatedDepreciationc.Cashe.Equipmentf.EstellaHall,Capitali.Suppliesk.WagesPayable4-19a.1Workingcapital($143,034)($159,453)Currentratio0.810.80b.7ElevenhasnegativeworkingcapitalasofDecember31,20 02and2001.Inaddition,thecurrentratioisbelowoneatthe endofbothyears.Whiletheworkingcapitalandcurrentrati oshaveimprovedfrom2001to2002,creditorswouldlikelybe concernedabouttheabilityof7Eleventomeetitsshort-ter mcreditobligations.Thisconcernwouldwarrantfurtherin vestigationtodeterminewhetherthisisatemporaryissue( forexample,anend-of-the-periodphenomenon)andthepany’splanstoaddressitsworkingcapitalshortings. 4-20a.(1)SalesSalariesExpense6,480 SalariesPayable6,480(2)AccountsReceivable10,250FeesEarned10,250b.(1)SalariesPayable6,480 SalesSalariesExpense6,480(2)FeesEarned10,250AccountsReceivable10,2504-21a.(1)Payment(lastpaydayinyear)(2)Adjusting(accrualofwagesatendofyear)(3)Closing(4)Reversing(5)Payment(firstpaydayinfollowingyear)b.(1)WagesExpense45,000Cash45,000(2)WagesExpense18,000WagesPayable18,000(3)IneSummary1,120,800WagesExpense1,120,800(4)WagesPayable18,000WagesExpense18,000(5)WagesExpense43,000Cash43,000Chapter6（找不到答案，自己处理了哦）Ex.8–1a.Inappropriate.SinceFridleyhasalargenumberofcredit salessupportedbypromissorynotes,anotesreceivableled gershouldbemaintained.Failuretomaintainasubsidiaryl edgerwhenthereareasignificantnumberofnotesreceivabl etransactionsviolatestheinternalcontrolproceduretha tmandatesproofsandsecurity.Maintaininganotesreceiva bleledgerwillallowFridleytooperatemoreefficientlyan dwillincreasethechancethatFridleywilldetectaccounti ngerrorsrelatedtothenotesreceivable.(Thetotalofthea ccountsinthenotesreceivableledgermustmatchthebalanc eofnotesreceivableinthegeneralledger.)b.Inappropriate.Theprocedureofproperseparationofdut iesisviolated.Theaccountsreceivableclerkisresponsib lefortoomanyrelatedoperations.Theclerkalsohasbothcu stodyofassets(cashreceipts)andaccountingresponsibil itiesforthoseassets.c.Appropriate.Thefunctionsofmaintainingtheaccountsr eceivableaccountinthegeneralledgershouldbeperformed bysomeoneotherthantheaccountsreceivableclerk.d.Appropriate.Salespersonsshouldnotberesponsiblefor approvingcredit.e.Appropriate.Apromissorynoteisaformalcreditinstrum entthatisfrequentlyusedforcreditperiodsover45days. Ex.8–2-aa.Customer Due DateNumber of Days Past Due JanzenIndustriesAugust2993days(2+30+31+30) KuehnCompanySeptember388days(27+31+30)MauerInc.October2140days(10+30) PollackCompanyNovember237days SimrillCompanyDecember3NotpastdueEx.8–3Nov.30UncollectibleAccountsExpense53,315* AllowancesforDoubtfulAccounts53,315*$60,495–$7,180=$53,315Ex.8–4Estimated Uncollectible Accounts AgeIntervalBalancePercentAmountNotpastdue$450,0002%$9,0001–30dayspastdue110,00044,40031–60dayspastdue51,00063,06061–90dayspastdue12,500202,50091–180dayspastdue7,500604,500Over180dayspastdue5,500804,400Total$636,500$27,860Ex.8–52006Dec.31UncollectibleAccountsExpense29,435* AllowanceforDoubtfulAccounts29,435*$27,860+$1,575=$29,435Ex.8–6a.$17,875c.$35,750b.$13,600d.$41,450Ex.8–7a.AllowanceforDoubtfulAccounts7,130 AccountsReceivable7,130b.UncollectibleAccountsExpense7,130 AccountsReceivable7,130Ex.8–8Feb.20AccountsReceivable—DarleneBrogan12,100Sales12,10020CostofMerchandiseSold7,260 MerchandiseInventory7,260May30Cash6,000 AccountsReceivable—DarleneBrogan6,00030AllowanceforDoubtfulAccounts6,100 AccountsReceivable—DarleneBrogan6,100Aug.3AccountsReceivable—DarleneBrogan6,100 AllowanceforDoubtfulAccounts6,1003Cash6,100 AccountsReceivable—DarleneBrogan6,100Ex.8–9$223,900[$212,800+$112,350–($4,050,000×21/2%)] Ex.8–10Due DateInteresta.Aug.31$120b.Dec.28480c.Nov.30250d.May5150e.July19100Ex.8–11a.August8b.$24,480c.(1)NotesReceivable24,000 AccountsRec.—MagpieInteriorDecorators24,000(2)Cash24,480NotesReceivable24,000InterestRevenue480Ex.8–121.Saleonaccount.2.Costofmerchandisesoldforthesaleonaccount.3.Asalesreturnorallowance.4.Costofmerchandisereturned.5.Notereceivedfromcustomeronaccount.6.Notedishonoredandchargedmaturityvalueofnotetocust omer’saccountreceivable.7.Paymentreceivedfromcustomerfordishonorednoteplusi nterestearnedafterduedate.Ex.8–132005Dec.13NotesReceivable25,000 AccountsReceivable—VisageCo.25,00031InterestReceivable75*InterestRevenue7531InterestRevenue75IneSummary752006Apr.12Cash25,500NotesReceivable25,000InterestReceivable75InterestRevenue425*$25,000×0.06×18/360=$75Ex.8–14Mar.1NotesReceivable15,000 AccountsReceivable—AbsarokaCo.15,00018NotesReceivable12,000 AccountsReceivable—SturgisCo.12,000Apr.30AccountsReceivable—AbsarokaCo.15,125 NotesReceivable15,000InterestRevenue125June16AccountsReceivable—SturgisCo.12,270 NotesReceivable12,000InterestRevenue270July11Cash15,367 AccountsReceivable—AbsarokaCo.15,125 InterestRevenue242**$15,125×0.08×72/360=$242Oct.12AllowanceforDoubtfulAccounts12,270 AccountsReceivable—SturgisCo.12,270Ex.8–151.Theinterestreceivableshouldbereportedseparatelyas acurrentasset.Itshouldnotbedeductedfromnotesreceiva ble.2.Theallowancefordoubtfulaccountsshouldbedeductedfr omaccountsreceivable. Acorrectedpartialbalancesheetwouldbeasfollows: PEMBROKECOMPANYBalanceSheetJuly31,2006AssetsCurrentassets:Cash$43,750Notesreceivable300,000Accountsreceivable$576,180 Lessallowancefordoubtfulaccounts71,200504,980 Interestreceivable18,000Ex.8–16a.2003:53.0{$9,953,530÷[($216,200+$159,477)÷2]}2002:44.8{$9,518,231÷[($159,477+$265,515)÷2]}b.Theaccountsreceivableturnoverindicatesanincreasei ntheefficiencyofcollectingaccountsreceivablebyincre asingfrom44.8to53.0,afavorabletrend.Beforereachinga moredefinitiveconclusion,theratiosshouldbeparedwith industryaveragesandsimilarfirms.AppendixEx.8–17a.$20,300b.60daysc.$271($20,300×0.08×60/360)d.$20,029($20,300–$271)e.Cash20,029InterestRevenue29NotesReceivable20,000Ex.9–1 SwitchingtoaperpetualinventorysystemwillstrengthenO nsiteHardware’sinternalcontrolsoverinventory,since thestoremanagerswillbeabletokeeptrackofhowmuchofeac hitemisonhand.Thisshouldminimizeshortagesofgood-sel lingitemsandexcessinventoriesofpoor-sellingitems. Ontheotherhand,switchingtoaperpetualinventorysystem willnoteliminatetheneedtotakeaphysicalinventorycount.Aphysicalinventorymustbetakentoverifytheaccuracyo ftheinventoryrecordsinaperpetualinventorysystem.Ina ddition,aphysicalinventorycountisneededtodetectshor tagesofinventoryduetodamageortheft.Ex.9–2Includeininventory:c,e,g,i Excludefrominventory:a,b,d,f,hEx.9–3a.Balance SheetMerchandiseinventory$1,950understated Currentassets$1,950understatedTotalassets$1,950understatedOwner’sequity$1,950understatedb.Ine StatementCostofmerchandisesold$1,950overstatedGrossprofit$1,950understatedNetine$1,950understatedEx.9–4 Whenanerrorisdiscoveredaffectingthepriorperiod,itsh ouldbecorrected.Inthiscase,themerchandiseinventoryaccountshouldbedebitedandtheowner’scapitalaccountcreditedfor$12,800.Failuretocorrecttheerrorfor2005andpurposelymisstatingtheinventoryandthecostofmerchandisesoldin2006wouldcausethebalancesheetsandtheinestatementsforthetwoyearstonotbeparable.Ex.9–5PortableCDPlayersPurchases CostofMerchandiseSoldInventoryDate Quantity UnitCostTotalCostQuantityUnitCostTotalCost QuantityUnitCostTotalCostApril135501,750 526501,300950450111553795915505345079521935053450159125363628453212853424PortableCDPlayersPurchases CostofMerchandiseSoldInventoryDate Quantity UnitCostTotalCostQuantityUnitCostTotalCost QuantityUnitCostTotalCost30754378875354424378Totalcostofmerchandisesold2,121Inventory,April30:$802($424+$378)Ex.9–6CellPhonesPurchases CostofMerchandiseSoldInventoryDate Quantity UnitCostTotalCostQuantityUnitCostTotalCost QuantityUnitCostTotalCostMar.125902,250 520941,8825902,250CellPhonesPurchases CostofMerchandiseSoldInventoryDate Quantity UnitCostTotalCostQuantityUnitCostTotalCost QuantityUnitCostTotalCost 020941,880918941,69225290942,2501881321894901881,6207906302115951,42571590956301,42531895760779095630665Totalcostofmerchandisesold4,260Inventory,March31:$1,295($630+$665)Ex.9–7a.$700($50×14units)b.$663[($45×5units)+($47×4units)+($50×5units)]Ex.9–8a.$360(8unitsat$33plus3unitsat$32)b.$318(6unitsat$28plus5unitsat$30)c.$341(11unitsat$31;$1,240÷40units=$31) Costofmerchandiseavailableforsale:6unitsat$28$16812unitsat$3036014unitsat$324488unitsat$33 (264)40units(ataveragecostof$31)$1,240Ex.9–91.a.LIFOinventory<(lessthan)FIFOinventoryb.LIFOcostofgoodssold>(greaterthan)FIFOcostofgoodss oldc.LIFOnetine<(lessthan)FIFOnetined.LIFOinetax<(lessthan)FIFOinetax2.Underthelifoconformityruleapanyselectinglifoforta xpurposesmustalsouselifoforfinancialreportingpurpos es.Thus,inperiodsofrisingpricesthereportednetinewou ldbelowerthanwouldbethecaseunderfifo.However,thelow erreportedinewouldalsobeshownonthecorporation’stax return;thus,thereisataxadvantagefromusinglifo.Firmselectingtouselifobelievethetaxadvantagefromusinglif ooutweighsanynegativeimpactfromreportingalowerearni ngsnumbertoshareholders.Lifoissupportedbecausetheta ximpactisarealcashflowbenefit,whilealowerlifoearnin gsnumber(paredtofifo)ismerelytheresultofareportinga ssumption.Ex.9–10UnitUnit TotalInventoryCostMarketLower CommodityQuantityPricePriceCostMarketofCorMM768$150$160$1,200$1,280$1,200T01,5001,4001,400A,7502,6002,600JK1052,5252,6252,525Total$8,725$8,505$8,325Ex.9–11 ThemerchandiseinventorywouldappearintheCurrentAsset ssection,asfollows: Merchandiseinventory—atlowerofcost,fifo,ormarket$8 ,325Alternatively,thedetailsofthemethodofdeterminingcostandthemethodofvaluationcouldbepresentedinanote. Ex.9–12Cost Retail Merchandiseinventory,June1$160,000$180,000 PurchasesinJune(net)680,0001,020,000 Merchandiseavailableforsale$840,000$1,200,000 Ratioofcosttoretailprice:SalesforJune(net)875,000 Merchandiseinventory,June30,atretailprice$ 325,000Merchandiseinventory,June30,atestimatedcost($325,000×70%)$227,500Ex.9–13a.Merchandiseinventory,Jan.1$180,000Purchases(net),Jan.1–May17750,000 Merchandiseavailableforsale$930,000Sales(net),Jan.1–May17$1,250,000 Lessestimatedgrossprofit($1,250,000×35%)437,500 Estimatedcostofmerchandisesold812,500 Estimatedmerchandiseinventory,May17$117,500b.Thegrossprofitmethodisusefulforestimatinginventor iesformonthlyorquarterlyfinancialstatements.Itisalsousefulinestimatingthecostofmerchandisedestroyedbyf ireorotherdisasters.Ex.9–14a.Apple:147.8{$4,139,000,000÷[($45,000,000+$11,000, 000)÷2]}AmericanGreetings:3.1{$881,771,000÷[($278,807,000+$ 290,804,000)÷2]}b.Lower.AlthoughAmericanGreetings’businessisseason alinnature,withmostofitsrevenuegeneratedduringthema jorholidays,muchofitsnonholidayinventorymayturnover veryslowly.Apple,ontheotherhand,turnsitsinventoryov erveryfastbecauseitmaintainsalowinventory,whichallo wsittorespondquicklytocustomerneeds.Additionally,Ap ple’sputerproductscanquicklybeeobsolete,soitcannot riskbuildinglargeinventories.Ex.9–15a.Numberofdays’salesininventory=Albertson’s,=43daysKroger,=40daysSafeway,=42daysInventoryturnover=Albertson’s,=8.2。
