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Al-Azhar University Gaza

Faculty of Economic & Administrative Science


Accounting Department

Second Semester 2012/2013


Final Exam
Subject: Accounting Theory
Time: 2 Hour
Date: 03/06/2013

The Exam include 10 question Dont use red pen or a pencil


Question 1: Put () or () - Make your answer in a table in the answer sheet
1.

According to transactions approach, Changes in values are excluded from income if they arise from changes in
market valuations or changes in expectation alone.

2.

All unfavorable changes in enterprise resources are expenses.

3.

Companies that are close to their debt covenant limits will choose accounting methods that decrease net
income, and thereby decrease the equity number in the debt-to-equity ratio.

4.

Current prices can be obtained to represent either a current liquidation price or a replacement cost.

5.

Expectations of future incomes used by many investors as a main factor in predicting future dividend
distributions.

6.

Gains result from the enterprises ongoing major or central operations.

7.

Realization means the reporting of revenue when it was validated by a sale.

8.

Restatement of accounting numbers represents a new measurement basis.

9.

The main reason for adhering to historical costs is that they are assumed to be verifiable.

10.

Value changes and events that are controllable by management and the result from decisions of the current
period should be included in noncurrent income.

Question 2: Circle the right answer Make your answer in a table in the answer sheet
1.

Users use earnings to help them:


a. Evaluate earning power.
b. Predict future earnings.
c. Assess the risk of investing in or lending to the enterprise.
d. All of the above.

2.

Holding positive net monetary assets during the period of inflation gives rise to:
a. Holding gains.
b. Holding losses.
c. Purchasing power losses.
d. Purchasing power gains.

3.

Extra ordinary items include events that are:


a. Frequent and recurring.
b. Frequent and nonrecurring.
c. Infrequent and nonrecurring.
d. Infrequent and recurring.

4.

Current cost for Plant, Equipment and property is:


a. Price of new similar asset.
b. Price of used similar asset.
c. Cash flow from disposal of asset.
d. Historical cost restated for general purchasing power.

Al-Azhar University Gaza

Second Semester 2012/2013


Final Exam
Subject: Accounting Theory
Time: 2 Hour
Date: 03/06/2013

Faculty of Economic & Administrative Science


Accounting Department

5.

Comprehensive income is boarder than net income because it includes other changes in net assets like:
a. Change in cash flow.
b. Holding gains and losses.
c. Accumulated other comprehensive income.
d. Retained Earnings.

6.

Change in nonmonetary assets and nonmonetary liabilities give rise to:


a. Realized gain or loss.
b. Extraordinary gain or loss.
c. Purchasing power gain or loss.
d. Holding gain or loss.

7.

Asset expirations or asset reductions not related to the process of providing goods or services to customers or clients
should be classified as:
a. Loss.
b. Expense.
c. Offsets to revenue.
d. Nonperforming assets.

8.

According to temporal method inventory reported at market value translated using:


a. Current exchange rate.
b. Historical exchange rate.
c. Average exchange rate.
d. Exchange rate at date of purchase.

9.

According to Activities approach, income arise when:


a. Change in asset and liability valuations only as these are results of transactions.
b. Net Cash flow from operations is higher than net cash flow from investment.
c. Certain activities or events take place.
d. Total Revenues exceed total expenses.

10

A price change occurs if a price increase or decrease in


a. Both input market and output market
b. Either input market or output market
c. Neither input market nor output market
d. None of the above

Question 3:
Bryant Co. reports the following information for 2012: sales revenue $750,000; cost of goods sold $500,000; operating
expenses $80,000; and an unrealized holding loss on available-for-sale securities for 2012 of $50,000. It declared and paid a
cash dividend of $10,000 in 2012. Bryant Co. has January 1, 2012, balances in common stock $350,000; accumulated other
comprehensive income $80,000; and retained earnings $90,000. It issued no stock during 2012.
Required: Determine the following amounts for 2012:
a. Net income
b. Comprehensive income
c. Other comprehensive income
d. Total of owners equity in December 31, 2012
Question 4:
Determine for each of the following when income is recognized:
1.
2.
3.
4.

Revenue from long term contract


Revenue from sales of foods
Revenue from Precious metals
Interest Revenue

5.
6.
7.
8.

Revenue from installment sales


Rent revenue
Revenue from oil extraction
Revenue from sales of stationary

Al-Azhar University Gaza


Faculty of Economic & Administrative Science
Accounting Department

Second Semester 2012/2013


Final Exam
Subject: Accounting Theory
Time: 2 Hour
Date: 03/06/2013

Question 5:
In 2012, Wade Corp. reports income from continuing operations before income tax of $1,210,000. Additional transactions
not considered in the $1,210,000 are as follows:
1. In 2012, Wade Corp. sold equipment for $40,000. The machine had originally cost $80,000 and had accumulated
depreciation of $30,000. The gain or loss is considered ordinary.
2. The company discontinued operations of one of its subsidiaries during the current year at a loss of $190,000 before taxes.
Assume that this transaction meets the criteria for discontinued operations. The loss from operations of the discontinued
subsidiary was $90,000 before taxes; the loss from disposal of the subsidiary was $100,000 before taxes.
3. The company had a gain of $125,000 on the condemnation of much of its property. The gain is taxed at a total effective
rate of 40%. Assume that the transaction meets the requirements of an extraordinary item.
Required:
Analyze the above information and prepare an income statement for the year 2012, starting with income from continuing
operations before income tax. (Assume a total effective tax rate of 38% on all items, unless otherwise indicated.)
Question 6:
Bryant Construction Company changed from the completed-contract to the percentage-of-completion method of accounting
for long-term construction contracts during 2012. For tax purposes, the company employs the completed-contract method
and will continue this approach in the future. The appropriate information related to this change is as follows:
Pretax Income from
Percentage of Completion
Completed-Contract
$980,000
$730,000
900,000
480,000

2011
2012

Required:
a. Assuming that the tax rate is 40%, what is the amount of net income that would be reported in 2012?
b. What entry(ies) are necessary to adjust the accounting records for the change in accounting principle?
Question 7:
Thurber Co. purchased equipment for $710,000 which was estimated to have a useful life of 10 years with a salvage value of
$10,000 at the end of that time. Depreciation has been entered for 7 years on a straight-line basis. In 2011, it is determined
that the total estimated life should be 15 years with a salvage value of $4,000 at the end of that time.
Required:
a. Prepare the entry (if any) to correct the prior years depreciation.
b. Prepare the entry to record depreciation for 2011.
Question 8:
The following income statement items for Morgan Corporation:
Sales
250,000
COGS
100,000
Depreciation expense
30,000
Salaries
50,000
Interest expense
20,000
Rent Expense
10,000
The income tax rate is 30%, and the owners equity section includes:
Common stocks, $10 par value, 100,000 shares issued & outstanding
Preferred stocks, $100 par value, 10% cumulative, 1000 shares issued & outstanding
The dividend pay-out ratio is 50%.
Required: Calculate:
a.
b.
c.
d.
e.

Total Value-Added
Enterprise net income
Net income to investors
Net income to stockholders
Net income to Residual equity holders

Al-Azhar University Gaza

Second Semester 2012/2013


Final Exam
Subject: Accounting Theory
Time: 2 Hour
Date: 03/06/2013

Faculty of Economic & Administrative Science


Accounting Department

Question 9:
The following balance sheet for Merna Corporation for 2012:
Merna Corporation
Balance Sheet as of December 31,2012
Assets
Cash
Accounts Receivables
Trading Securities
Inventory
Equipment, net
Building, net
Land

Total Assets

$ 55,000
345,000
120,000
515,000
250,000
750,000
265,000

Liabilities
Accounts Payable
Long-term loan
Unearned revenue (rent)
Total Liabilities

$ 280,000
500,000
90,000
$ 870,000

Owners Equity
Common Stocks
Additional Paid-In Capital
Retained Earnings
Total Owners Equity

$ 300,000
700,000
430,000
$ 1,430,000

Total Liabilities & Owners Equity

$ 2,300,000

$ 2,300,000

Required:
Calculate the amount of:
a. Monetary Assets
b. Monetary Liabilities
c. Non-Monetary Assets
d. Non-Monetary Liabilities
Question 10:
Zara company has a single long-term liability 5-year, 10% coupon annually with face value = $1,000, number of outstanding
bonds = 5,000. The market interest rate = 8%. The Company also has 200,000 outstanding common stock (par-value = $1)
expected dividend to be paid D1 = $2 per share and the annual growth rate for dividend g = 5% and the required rate of
return Rs = 11%.
Required:
Calculate the Value of Zara Company

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