Intermediate Accounting 2 Proctored Final Examination





Intermediate Accounting 2 Proctored Final Examination





Part A: Using the data given, provide the items requested. Each problem is worth

a total of 20 points.

1. In 2007, Johnson Builders began construction work under a three-year contract at a

price of $7,525,000. The firm uses the percentage-of-completion method for financial accounting purposes. The income to be recognized each year is based on the propor-

tion of cost incurred to the total estimated costs for completing the contract. The

financial statement presentations relating to this contract on December 31, 2007, are

Balance Sheet

Accounts receivable Construction in progress

Less progress billings



Income Statement

Gross profit on construction contracts

Determine the

a. Cash collected in 2007 (5 points)




b. Estimated income on the construction contract (15 points)

(Continued on reverse side)


Proctored Final Examination



2. The December 31, 2007, balance sheet of Far Imports includes the following items:

9% bonds payable due 12/31/2016

Discount on bonds payable



The bonds were issued on December 31, 2006, at 97, with interest payable on June 30

and December 31 of each year. The straight-line method is used for discount amortization.

On March 1, 2008, Far Imports retired $400,000 of these bonds at 98 plus accrued

interest. Prepare the journal entries to record retirement of the bonds, including accrual of

interest since the last payment and amortization of the discount.

3. In 2007, Silverspur Mining, Inc., purchased land for $5,600,000 that had a natural

resource supply estimated at 4,000,000 tons. When the natural resources are

removed, the land has an estimated value of $640,000. The required restoration cost

for the property is estimated to be $800,000.

Development and road construction costs on the land were $560,000, and a building

was constructed at a cost of $88,000 with an estimated $8,000 salvage value when all

the natural resources have been extracted.

During 2008, additional development costs of $272,000 were incurred, but additional

resources weren’t discovered. Production for 2007 and 2008 was 700,000 tons and

900,000 tons, respectively.

Compute the depletion charge for 2007 and 2008. Include depreciation on the

building, if any, as a depletion charge. Round depletion charge to the nearest cent.

Proctored Final Examination



Part B: Answer each of the following questions. Show all calculations where necessary. Each correct answer is worth four points.

1. Your client, Fast Buck, comes into your office bursting with excitement. Fast has a con-

trolling interest in a publicly traded Internet company, Fast is excited

about the huge profits made by Dotcom in the current year. He hands you an income

statement prepared by the staff accountants at Dotcom. Summarized information from

this income statement appears below.


Expenses: Gain on Sale of Treasury Stock:

Gain on Sale of Investments:

Unrealized Loss on Investments:

Net Income:

$ 10,000,000

($ 35,000,000)

$ 50,000,000

$ 3,000,000

($ 1,000,000) $ 27,000,000

Verify’s actual income for the current year. If different from the amount shown, explain your answer.

2. On October 5, Fast Freddie Manufacturing purchased a lot of land for its appraised value of $150,000. The next year, Fast sold the property in exchange for a $200,000 note with no stated interest rate. Assuming the appraised value of the land didn’t

change, please give the journal entry to record the note payable on the books of Fast.

3. The following figures relate to Lackawaxen Industries for fiscal year 2007:

Goods available for sale at retail: Goods available for sale at cost:

Sales (at retail):


$150,000 $225,000

What is Lackawaxen’s estimated ending inventory at cost for 2007?

Proctored Final Examination



4. All Things Emu, a retail store specializing in emu-based products, opened its doors for

business on December 1, 2007. The transactions relating to their product line of emu

oil appears below.

Nov 28 Purchased 50 units @ $20 per unit

Dec 5 Purchased 50 units @ $20 per unit

Dec 10 Purchased 250 units @ $25 per unit

Dec 20 Purchased 250 units @ $30 per unit

Dec 24 Sold 400 units @ $50 per unit

What is the gross profit for All Things Emu assuming they used the following inventory


Average Cost First-In First-Out

Last-In First-Out

5. Your client, Atty. Sue Happy, was notified on October 5, 2007 that her law firm,

Weasel, Skunk, and Happy, P.C. would be the proud recipient of a new building, courtesy of an anonymous donor who was impressed with the years of free legal services provided by Sue’s firm to the underprivileged. The fair market value of

the building and land on 10/5/06 was $150,000. At the donor’s request, title of the land and building would pass to Weasel, Skunk, and Happy, P.C. upon Sue Happy’s

satisfactory completion of charm school. Sue completed charm school on December 1,

2007. On 12/1/07 the fair market value of the building and land was $160,000. Land is estimated to compose 20% of the total value of the donation on both 10/5/07 and

12/1/07. What journal entry would Weasel, Skunk, and Happy, P.C. make to record the donated asset?

Proctored Final Examination



6. You’ve been asked to review the cash control policies of Easy Money Co. In your review you observe the following:

• The cash accounts are reconciled at the end of each month.

• Sal A. Mander is in charge of collecting the cash from the vendors, making a

journal entry on the books to record the cash collected, and depositing the cash at the bank.

• Cash is kept in the top drawer of Mander’s desk until he has time to take the deposit to the bank.

• Joe Honest, who works in the financing department, performs the bank reconciliations.

Please identify two problems with Easy’s cash control policies.

7. In July of 2007, Old Forge, Inc. issued 1,000 shares of preferred stock with a $25 par value for $50 a share. On December 31, 2009 each share of preferred stock was con-

verted into three shares of common stock (par value $5 per share). Please show the journal entry made in Old Forge’s books to account for the conversion.

8. Alpha Company sold merchandise on credit to Beta Company for $2,500 on July 1, with terms of 2/10, net/30. On July 6, Beta returned $500 worth of merchandise claiming the materials were defective. On July 8, Alpha received a payment from Beta

and credited Accounts Receivable for $1,350. On July 24, Beta Company paid the remaining balance on its account. How much was the total Sales Discounts given to Beta during July?

9. Tom Incorporated purchased 10,000 shares in Melissa Industries on January 1, 2007 for $10 a share. In April of 2007, Melissa Industries declared and paid dividends in the amount of $35,000. In October of 2007, Melissa Industries declared and paid divi-

dends in the amount of $50,000. On November 12, 2007, Tom Inc. sold 5,000 shares of Melissa Industries at $15 per share. In December of 2007, Melissa Industries

declared and paid a year-end dividend of $1 per share. If Melissa Industries had

100,000 shares of stock outstanding the entire year of 2007, how will the income

statement of Tom Incorporated be affected by 2007’s activity?

10. You’ve just completed the preparation of a personal net worth statement for your client, Alie Gator, so she can obtain a third mortgage on her personal residence. (Aiie

wants to go on a luxury cruise.) When you receive payment for your services, the

check comes from Debt Be Gone, Inc., a large financial advisory company owned by

Alie. What traditional assumption of the accounting model has been violated here? Support your answer.

Proctored Final Examination

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