ACG 2021, Introduction to Financial Accounting, Fall 2000, Exam 2 Explanations :: UFL Florida Business Accounting

ACG 2021 Fall 2000 Exam 2 Answer Key Explanation Based on the Order of Version A 1) A defined contribution program is one with â€Å"Regular, defined contributions to the fund. The fund balance changes in value with the accumulation of contributions and earnings and is decreased by benefits paid. Benefits received depend on the fund balance available at retirement.† (9-21 in the notes on page 247) 2) This is an error because ordinary repairs (ones that do not increase the original useful life, efficiency or capacity of the asset) are to be treated as expenses and entirely reported on the income statement in the year they are incurred. This error overstated assets by adding the $3,000 to the asset account incorrectly and understated N.I. by failing to record the $3,000 as an expense. 3) If the bonds are selling at 98 ½ ($24,625,000) then they are selling at a discount. This means that the market rate is higher than the stated rate. When the bonds were issued the market rate was the same as the stated rate so the market rate must have increased. (10-20 in the notes on page 274) 4) Here we need to consider two issues. Interest is not capitalized when an asset is purchased but it is capitalized when the company constructs its own asset (only for the period of construction). These concepts are discussed in chapter 8. Inventory is not a capital asset and therefore does not include financing costs. (8-3 on page 193 and 8-7 on page 197). 5) Financial Leverage is Average Total Assets/ Average Stockholders’ Equity. It measures how many dollars of assets are employed for each dollar of stockholder investment. It can be increased by increased borrowing or repurchasing outstanding stock. In laymen’s terms it is the proper use of debt to bring a higher return to owners. (Page 266 of the book, letter C of the ROE Profit Driver Analysis) 6) – 8) Segments that are used to answer the three questions have boxes around them. Using the effective method (assumed unless stated otherwise): Interest Expense = Beginning Carrying Value x Market Rate (Carrying Value = Face Value – Discount) The Present Value of the note is: P.V. = 400,000 x factor (using single sum table where i=8 and n=3). 317,520 = 400,000 x 7.938 (the attached table has 7.9383 on it but this gives a number close enough to be able to pick 317,520) The following journal entries would be made throughout the life of the note: 1/1/00 Equipment 317,520 Discount 82,480 Notes Payable 400,000 12/31/00 Interest Expense 25,402* (Question (8)) Discount 25,402 *1/1/00 Carrying value of 317,520 (400,000 – 82,480) x .