15.501/15.

516
Corporate Financial Accounting
Final Examination
May 19, 2010
1:30 3 PM

Name: ______________________________________ Affiliation:

MIT / NON-MIT

Instructions:
(1)
(2)

(3)
(4)
(5)

The exam length is 90 minutes

This exam is 16 pages long (including the cover page). Pages 13-16 contain future
value and present value tables that you may find useful for answering some of the
questions. Please look through the entire exam before you start and make sure
your copy of the exam is not missing any pages.
A non-programmable calculator may be used during this exam. No other material or
electronic device is allowed during the exam.
Write your answers in the space provided and show any supporting
computations you make. Do not attach additional material.
Do not ask questions during the exam. If you feel assumptions are necessary to
answer a question, state all assumptions clearly.

Manage your time efficiently.

Question

Possible Points

20

16

36

20

Total

100

Actual Points

Question 1 Multiple Choice (20 points)

Required: Circle the letter corresponding to your response
1

10

1. Jackson Company had the following account balances related to inventory:

purchases . $40,000
freight-in ..
500
purchase returns ..
1,200
beginning inventory . 20,000
ending inventory .. 15,000
Jackson Company would report cost of goods sold of:
a. $43,300
b. $43,800
c. $45,000
d. $44,300

2. Baxter Company reported the following information at December 10, 1998:

Accounts Receivable ..
$ 34,600
Allowance for Doubtful Accounts .
3,100
On December 11, 1998, Baxter Company wrote-off an account receivable of $2,000. The net
realizable value of the Accounts Receivable after the write-off is equal to:
a. $29,500
b. $33,500
c. $35,500
d. $31,500

Use the following information for questions 3 4.

Sielert Corporation borrowed $300,000 from National Bank on May 31, 2010. The three-year,
7% note required annual payments of $114,315 beginning May 31, 2011.
3. Interest expense for the year ended December 31, 2010 was
a. $12,250
b. $14,000
c. $21,000
d. $0
4. The total amount of interest to be paid over the life of the loan is
a. $21,000
b. $42,947
c. $83,801
d. $63,000

5. During 2004, ABC Company had cost of goods sold of $720,000 and an inventory turnover
ratio of 2.5. ABC had inventory of $260,000 at January 1, 2004. The inventory at December 31,
2004 was equal to:
a. $288,000
b. $274,000
c. $460,000
d. $316,000

Use the following information for questions 6 8.

Wilmas Vegetable Market had the following transactions during 2010:
1.
Issued $25,000 of common stock for cash.
2.
Recorded and paid wages expense of $10,000.
3.
Acquired land by issuing common stock of par value $50,000.
4.
Declared and paid a cash dividend of $1,000.
5.
Sold a long-term investment (cost $3,000) for cash of $3,000.
(continued over the page)
3

6.
7.
8.
9.
10.

Recorded cash sales of $20,000.

Bought inventory for cash of $2,000.
Acquired an investment in IBM stock for cash of $6,000.
Converted bonds payable to common stock in the amount of $10,000.
Repaid a 6 year note payable in the amount of $11,000.

6. What is the net cash provided by operating activities?

a. $20,000
b. $18,000
c. $10,000
d. $8,000
7. What is the net cash provided by financing activities?
a. $13,000
b. $25,000
c. $14,000
d. $9,000
8. What is the net cash provided by investing activities?
a. $6,000
b. $16,000
c. ($3,000)
d. $3,000

Use the following information for questions 9 10.

Foyle Company purchased a new van for floral deliveries on January 1, 2010. The van cost
$32,000 with an estimated life of 5 years and $8,000 salvage value at the end of its useful life.
The double-declining-balance method of depreciation will be used.
9. What is the depreciation expense for 2010?
a. $6,400
b. $4,800
c. $9,600
d. $12,800

10. What is the balance of the Accumulated Depreciation account at the end of 2011?
a. $5,120
b. $15,360
c. $20,480
d. $7,680

Question 2 LIFO Liquidation (8 points)

Robertson Corporation uses a LIFO cost flow assumption for inventories and cost of goods sold.
Its beginning inventory for the current year totaled $48,900 and its ending inventory totaled
$42,600. Cost of goods sold for the year totaled $286,700. A note to its financial statements
discloses that income before taxes would have been $2,700 lower if it had not dipped into LIFO
layers during the year.
Required:
(a) How much of the LIFO layers has Robertson Corporation dipped into for the year? (4
points)

(b) How much of the additional inventory would Robertson Corporation have had to
purchase during the year to avoid dipping into its LIFO layers? (4 points)

Question 3 Bond Accounting (16 points)

Hannigan Company issued 11%, 5-year, $800,000 face value bonds that pay interest semiannually on October 1 and April 1. The bonds are dated April 1, 2010, and are issued on that
date. The first coupon payment will be on October 1, 2010. The discount rate of interest for such
bonds on April 1, 2010, is 10%.
Required:
(a) How much cash did Hannigan Company raise from the issuance of the bonds? (Round
the answer to whole dollars) (5 points)

(b) Record the journal entry at bond issuance (3 points)

DR

CR

(c) How much cash would Hannigan pay in coupon payments in 2010? (3 points)

(d) How much interest expense would Hannigan recognize in 2010? (Round the answer to
whole dollars) (5 points)

Question 4 Lease Accounting (36 points)

On January 1, Year 1, Ripley Corp, as lessee, leases a machine to be used in its operations. The
annual lease payment of $10,000 is due on December 31 of Year 1, Year 2, and Year 3. The
machine reverts to the lessor at the end of three years and the lessor can either sell the machine
or lease it to another firm. The machine has an expected total useful life of five years. Ripley
Corp uses straight-line depreciation method and could borrow on a three-year collateralized loan
at 12 percent. The market value of the machine at the inception of the lease is $30,000.
Required:
(a) Is this lease an operating lease or a capital lease? Circle your answer and explain. (6
points)
OPERATING
LEASE

CAPITAL
LEASE

(b) Assume that this lease qualifies as an operating lease. Record lease related journal
entries for Ripley Corp over the three-year period of the lease (3 points)
DR

CR

(c) Assume this lease qualifies as a capital lease. Repeat part (b). (Round all the numbers to
the nearest whole dollars) (18 points)
DR

CR

(d) Are the total expenses for the three-year period different between operating leases and
capital leases (circle your answer)? Show calculations / explain. (3 points)
YES, THERE IS
A DIFFERENCE

NO, THERE IS NO
DIFFERENCE

(e) List 2 factors that may cause companies to prefer operating leases to capital leases? (6
points)

1.

2.

10

Question 5 Short Answer (20 points)

The following chart shows the market price for the 30-year bonds sold by General Motors from
July 3, 2003 (the issuance date) to March 5, 2009.

Required:
(a). List 2 factors that could have caused the market price of GMs bonds to change in the
way it did on the above chart. (6 points)

1.

2.

11

(b). If GM repurchased these bonds on March 5, 2009, what balance sheet accounts would
likely be affected? (5 points)

(c). If GM repurchased these bonds on March 5, 2009 would it be more likely to record a
gain or loss on the repurchase (circle your answer)? Why? Does this make sense in light of
your answer to part (a)? (9 points)

RECORD A
GAIN

RECORD A
LOSS

12

TABLE 1 Future Value of 1

Periods
4%
5%
0
1.00000 1.00000
1
1.04000 1.05000
2
1.08160 1.10250
3
1.12486 1.15763
4
1.16986 1.21551
5
1.21665 1.27628
6
1.26532 1.34010
7
1.31593 1.40710
8
1.36857 1.47746
9
1.42331 1.55133
10
1.48024 1.62889
11
1.53945 1.71034
12
1.60103 1.79586
13
1.66507 1.88565
14
1.73168 1.97993
15
1.80094 2.07893
16
1.87298 2.18287
17
1.94790 2.29202
18
2.02582 2.40662
19
2.10685 2.52695
20
2.19112 2.65330

6%
1.00000
1.06000
1.12360
1.19102
1.26248
1.33823
1.41852
1.50363
1.59385
1.68948
1.79085
1.89830
2.01220
2.13293
2.26090
2.39656
2.54035
2.69277
2.85434
3.02560
3.20714

8%
1.00000
1.08000
1.16640
1.25971
1.36049
1.46933
1.58687
1.71382
1.85093
1.99900
2.15892
2.33164
2.51817
2.71962
2.93719
3.17217
3.42594
3.70002
3.99602
4.31570
4.66096

9%
1.00000
1.09000
1.18810
1.29503
1.41158
1.53862
1.67710
1.82804
1.99256
2.17189
2.36736
2.58043
2.81267
3.06581
3.34173
3.64248
3.97031
4.32763
4.71712
5.14166
5.60441

10%
1.00000
1.10000
1.21000
1.33100
1.46410
1.61051
1.77156
1.94872
2.14359
2.35795
2.59374
2.85312
3.13843
3.45227
3.79750
4.17725
4.59497
5.05447
5.55992
6.11591
6.72750

13

11%
1.00000
1.11000
1.23210
1.36763
1.51807
1.68506
1.87041
2.07616
2.30454
2.55803
2.83942
3.15176
3.49845
3.88328
4.31044
4.78459
5.31089
5.89509
6.54355
7.26334
8.06231

12%
1.00000
1.12000
1.25440
1.40493
1.57352
1.76234
1.97382
2.21068
2.47596
2.77308
3.10585
3.47855
3.89598
4.36349
4.88711
5.47357
6.13039
6.86604
7.68997
8.61276
9.64629

15%
1.00000
1.15000
1.32250
1.52088
1.74901
2.01136
2.31306
2.66002
3.05902
3.51788
4.04556
4.65239
5.35025
6.15279
7.07571
8.13706
9.35762
10.76126
12.37545
14.23177
16.36654

TABLE 2 Future Value of an Annuity of 1

Periods
4%
5%
6%
1
1.00000 1.00000 1.00000
2
2.04000 2.05000 2.06000
3
3.12160 3.15250 3.18360
4
4.24646 4.31013 4.37462
5
5.41632 5.52563 5.63709
6
6.63298 6.80191 6.97532
7
7.89829 8.14201 8.39384
8
9.21423 9.54911 9.89747
9
10.58280 11.02656 11.49132
10
12.00611 12.57789 13.18079
11
13.48635 14.20679 14.97164
12
15.02581 15.91713 16.86994
13
16.62684 17.71298 18.88214
14
18.29191 19.59863 21.01507
15
20.02359 21.57856 23.27597
16
21.82453 23.65749 25.67253
17
23.69751 25.84037 28.21288
18
25.64541 28.13238 30.90565
19
27.67123 30.53900 33.75999
20
29.77808 33.06595 36.78559

8%
1.00000
2.08000
3.24640
4.50611
5.86660
7.33592
8.92280
10.63663
12.48756
14.48656
16.64549
18.97713
21.49530
24.21492
27.15211
30.32428
33.75023
37.45024
41.44626
45.76196

9%
1.00000
2.09000
3.27810
4.57313
5.98471
7.52334
9.20044
11.02847
13.02104
15.19293
17.56029
20.14072
22.95339
26.01919
29.36092
33.00340
36.97351
41.30134
46.01846
51.16012

14

10%
1.00000
2.10000
3.31000
4.64100
6.10510
7.71561
9.48717
11.43589
13.57948
15.93743
18.53117
21.38428
24.52271
27.97498
31.77248
35.94973
40.54470
45.59917
51.15909
57.27500

11%
1.00000
2.11000
3.34210
4.70973
6.22780
7.91286
9.78327
11.85943
14.16397
16.72201
19.56143
22.71319
26.21164
30.09492
34.40536
39.18995
44.50084
50.39593
56.93949
64.20283

12%
15%
1.00000
1.00000
2.12000
2.15000
3.37440
3.47250
4.77933
4.99338
6.35285
6.74238
8.11519
8.75374
10.08901 11.06680
12.29969 13.72682
14.77566 16.78584
17.54874 20.30372
20.65458 24.34928
24.13313 29.00167
28.02911 34.35192
32.39260 40.50471
37.27972 47.58041
42.75328 55.71747
48.88367 65.07509
55.74972 75.83636
63.43968 88.21181
72.05244 102.44358

TABLE 3 Present Value of 1

Periods
4%
5%
1
.96154 .95238
2
.92456 .90703
3
.88900 .86384
4
.85480 .82270
5
.82193 .78353
6
.79031 .74622
7
.75992 .71068
8
.73069 .67684
9
.70259 .64461
10
.67556 .61391
11
.64958 .58468
12
.62460 .55684
13
.60057 .53032
14
.57748 .50507
15
.55526 .48102
16
.53391 .45811
17
.51337 .43630
18
.49363 .41552
19
.47464 .39573
20
.45639 .37689

6%
.94340
.89000
.83962
.79209
.74726
.70496
.66506
.62741
.59190
.55839
.52679
.49697
.46884
.44230
.41727
.39365
.37136
.35034
.33051
.31180

8%
.92593
.85734
.79383
.73503
.68058
.63017
.58349
.54027
.50025
.46319
.42888
.39711
.36770
.34046
.31524
.29189
.27027
.25025
.23171
.21455

9%
.91743
.84168
.77218
.70843
.64993
.59627
.54703
.50187
.46043
.42241
.38753
.35554
.32618
.29925
.27454
.25187
.23107
.21199
.19449
.17843

10%
.90909
.82645
.75132
.68301
.62092
.56447
.51316
.46651
.42410
.38554
.35049
.31863
.28966
.26333
.23939
.21763
.19785
.17986
.16351
.14864

15

11%
.90090
.81162
.73119
.65873
.59345
.53464
.48166
.43393
.39092
.35218
.31728
.28584
.25751
.23199
.20900
.18829
.16963
.15282
.13768
.12403

12%
.89286
.79719
.71178
.63552
.56743
.50663
.45235
.40388
.36061
.32197
.28748
.25668
.22917
.20462
.18270
.16312
.14564
.13004
.11611
.10367

15%
.86957
.75614
.65752
.57175
.49718
.43233
.37594
.32690
.28426
.24719
.21494
.18691
.16253
.14133
.12289
.10687
.09293
.08081
.07027
.06110

TABLE 4 Present Value of an Annuity of 1

Periods
4%
5%
6%
1
.96154
.95238
.94340
2
1.88609 1.85941 1.83339
3
2.77509 2.72325 2.67301
4
3.62990 3.54595 3.46511
5
4.45182 4.32948 4.21236
6
5.24214 5.07569 4.91732
7
6.00205 5.78637 5.58238
8
6.73274 6.46321 6.20979
9
7.43533 7.10782 6.80169
10
8.11090 7.72173 7.36009
11
8.76048 8.30641 7.88687
12
9.38507 8.86325 8.38384
13
9.98565 9.39357 8.85268
14
10.56312 9.89864 9.29498
15
11.11839 10.37966 9.71225
16
11.65230 10.83777 10.10590
17
12.16567 11.27407 10.47726
18
12.65930 11.68959 10.82760
19
13.13394 12.08532 11.15812
20
13.59033 12.46221 11.46992

8%
.92593
1.78326
2.57710
3.31213
3.99271
4.62288
5.20637
5.74664
6.24689
6.71008
7.13896
7.53608
7.90378
8.24424
8.55948
8.85137
9.12164
9.37189
9.60360
9.81815

9%
.91743
1.75911
2.53130
3.23972
3.88965
4.48592
5.03295
5.53482
5.99525
6.41766
6.80519
7.16073
7.48690
7.78615
8.06069
8.31256
8.54363
8.75563
8.95012
9.12855

10%
.90909
1.73554
2.48685
3.16986
3.79079
4.35526
4.86842
5.33493
5.75902
6.14457
6.49506
6.81369
7.10336
7.36669
7.60608
7.82371
8.02155
8.20141
8.36492
8.51356

16

11%
.90090
1.71252
2.44371
3.10245
3.69590
4.23054
4.71220
5.14612
5.53705
5.88923
6.20652
6.49236
6.74987
6.98187
7.19087
7.37916
7.54879
7.70162
7.83929
7.96333

12%
.89286
1.69005
2.40183
3.03735
3.60478
4.11141
4.56376
4.96764
5.32825
5.65022
5.93770
6.19437
6.42355
6.62817
6.81086
6.97399
7.11963
7.24967
7.36578
7.46944

15%
.86957
1.62571
2.28323
2.85498
3.35216
3.78448
4.16042
4.48732
4.77158
5.01877
5.23371
5.42062
5.58315
5.72448
5.84737
5.95424
6.04716
6.12797
6.19823
6.25933