# Practice Problems (Exam 3) – ACC 221

Consider the following - Steez Inc. has a printing press they purchased for \$10,000. At the end of its 4 year life, Steez Inc. estimates it will be worth \$2,000. During the course of its life, Steez Inc. expects it to produce 8,000 shirts. The actual number of shirts it produced are:

• Year 1: 2,500
• Year 2: 1,500
• Year 3: 1,000
• Year 4: 2,000

Question #1 - Calculate the annual depreciation on the printing press over the 4 years with the straight-line depreciation method.

Using the straight-line depreciation method, we need to determine the amount of depreciation incurred with each year of operation.

To find this value, we need to find the difference between the cost of our printing press and the residual value of it at the end of its life, and then divide by the years of operation.

Yearly Depreciation = (Cost - Residual Value) / Life (in years)

The cost of the printing press was \$10,000...

Consider the following - Steez Inc. has a printing press they purchased for \$10,000. At the end of its 4 year life, Steez Inc. estimates it will be worth \$2,000. During the course of its life, Steez Inc. expects it to produce 8,000 shirts. The actual number of shirts it produced are:

Yearly Depreciation = (Cost - Residual Value) / Life (in years)
Yearly Depreciation = (\$10,000 - Residual Value) / Life (in years)

...and at the end of its 4 year life...

Consider the following - Steez Inc. has a printing press they purchased for \$10,000. At the end of its 4 year life, Steez Inc. estimates it will be worth \$2,000. During the course of its life, Steez Inc. expects it to produce 8,000 shirts. The actual number of shirts it produced are:

Yearly Depreciation = (Cost - Residual Value) / Life (in years)
Yearly Depreciation = (\$10,000 - Residual Value) / 4

...it's estimated to have a value of \$2,000...

Consider the following - Steez Inc. has a printing press they purchased for \$10,000. At the end of its 4 year life, Steez Inc. estimates it will be worth \$2,000. During the course of its life, Steez Inc. expects it to produce 8,000 shirts. The actual number of shirts it produced are:

Yearly Depreciation = (Cost - Residual Value) / Life (in years)
Yearly Depreciation = (\$10,000 - \$2,000) / 4

...therefore, our printing press depreciates by \$2,000 per year (via straight-line depreciation method)!

Yearly Depreciation = (Cost - Residual Value) / Life (in years)
Yearly Depreciation = (\$10,000 - \$2,000) / 4
Yearly Depreciation = (\$8,000) / 4
Yearly Depreciation = \$2,000

This serves as our final answer!

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Question #1 - Imagine that Steez Inc. makes repairs on its printing press that are estimated to extend the life of the machine by 2 years. Would we capitalize or expense this action?

We would capitalize this action because the repairs of this printing press is providing future benefits to Steez. Inc for at least another 2 years.

Remember...

• Capitalize if it provides benefits over the long term
• Expense if its performed repetitively over periods of time

In this situation, we're providing future benefits by extending the life of the machine by a couple years...

Question #1 - Imagine that Steez Inc. makes repairs on its printing press that are estimated to extend the life of the machine by 2 years. Would we capitalize or expense this action?

...therefore we'll capitalize!

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Question #1 - Imagine that the demolition of Steez Inc.’s building costs \$10,000 and they’re able to salvage & sell \$1,000 of old-building materials. Would we record this in the land or building account, and how much would we record?

Since we're clearing out the old-building to prepare the land for the new building, that's why demolishing the old-building is recorded into the land account!

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Question #1 - GBD Fits has a book value of \$10,000 in assets and \$2,000 in liabilities. With that considered, fair value for their assets is \$12,000 and the fair value for their liabilities is \$3,000. Steez Inc. paid \$17,000 to acquire GBD Fits. What is the amount of goodwill in this acquisition?

We can utilize the following equation to compute goodwill:

Goodwill = Purchase Price - Assets (Fair Value) + Liabilities (Fair Value)

In essence, we must take the purchase price of GBD Fits, and subtract the fair value of its assets from it, and then add in the fair value of its liabilities!

Something that's important to note here: goodwill uses the fair value, not the book value! Don't get tripped up on this!

Goodwill = Purchase Price - Assets (Fair Value) + Liabilities (Fair Value)

In this question, we're given a Purchase Price of \$17,000...

Question #1 - GBD Fits has a book value of \$10,000 in assets and \$2,000 in liabilities. With that considered, fair value for their assets is \$12,000 and the fair value for their liabilities is \$3,000. Steez Inc. paid \$17,000 to acquire GBD Fits. What is the amount of goodwill in this acquisition?

...which we can plug in like so:

Goodwill = Purchase Price - Assets (Fair Value) + Liabilities (Fair Value)
Goodwill = \$17,000 - Assets (Fair Value) + Liabilities (Fair Value)

Next, the question tells us that GBD Fits had a fair value of assets equal to \$12,000...

Question #1 - GBD Fits has a book value of \$10,000 in assets and \$2,000 in liabilities. With that considered, fair value for their assets is \$12,000 and the fair value for their liabilities is \$3,000. Steez Inc. paid \$17,000 to acquire GBD Fits. What is the amount of goodwill in this acquisition?

...which can be plugged in like so...

Goodwill = Purchase Price - Assets (Fair Value) + Liabilities (Fair Value)
Goodwill = \$17,000 - \$12,000 + Liabilities (Fair Value)

...and a fair value of liabilities equal to \$3,000...

Question #1 - GBD Fits has a book value of \$10,000 in assets and \$2,000 in liabilities. With that considered, fair value for their assets is \$12,000 and the fair value for their liabilities is \$3,000. Steez Inc. paid \$17,000 to acquire GBD Fits. What is the amount of goodwill in this acquisition?

...which can be plugged in like so...

Goodwill = Purchase Price - Assets (Fair Value) + Liabilities (Fair Value)
Goodwill = \$17,000 - \$12,000 + \$3,000

...enabling us to solve for a Goodwill amount of \$2,000!

Goodwill = Purchase Price - Assets (Fair Value) + Liabilities (Fair Value)
Goodwill = \$17,000 - \$12,000 + \$3,000
Goodwill = \$8,000

This serves as our final answer!

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Consider the following scenario: For company operations, Steez Inc. has 5 employees that work 20 hours a week and make \$10 an hour. Below is the relevant tax information:

• Federal Income Tax: 10%
• State Income Tax: 5%
• FICA:  7.65%
• State Unemployment: 3%
• Federal Unemployment: 0.5%

Question #1 - In a given week, what amount should Steez Inc. pay out to employees?

When determining the amount to pay out to employees, we should lean on the following equation:

Employee Payout = Total Payroll - (All Income Taxes + FICA)

First, however, we must determine the Total Payroll...

Employee Payout = Total Payroll - (All Income Taxes + FICA)

...then utilize the tax rates to calculate the taxes amounts.

To calculate payroll, we're going to take the number of hours worked per week...

Total Payroll = Total Hours Worked per Week ...
Total Payroll = 20 ...

...and multiply that by the hourly rate...

Total Payroll = Total Hours Worked per Week x Hourly Rate ...
Total Payroll = 20 x \$10 ...

...and then multiply that by the number of employees working...

Total Payroll = Total Hours Worked per Week x Hourly Rate x Number of Employees
Total Payroll = 20 x \$10 x 5

...resulting in a Total Payroll of \$1,000!

Total Payroll = Total Hours Worked per Week x Hourly Rate x Number of Employees
Total Payroll = 20 x \$10 x 5
Total Payroll = \$1,000

We can plug this value into our Employee Payout equation for Total Payroll like so:

Employee Payout = Total Payroll - (All Income Taxes + FICA)
Employee Payout = \$1,000 - (All Income Taxes + FICA)

Next, we must calculate the value for All Income Taxes. The prompt gives us Federal and State Income tax rates...

• Federal Income Tax: 10%
• State Income Tax: 5%
• FICA:  7.65%
• State Unemployment: 3%
• Federal Unemployment: 0.5%

...and we can find the amounts for these taxes by multiplying the rates by our Total Payroll like so:

• Federal Income Tax: 10% x \$1,000 = \$100
• State Income Tax: 5% x \$1,000 = \$50
• FICA:  7.65%
• State Unemployment: 3%
• Federal Unemployment: 0.5%

Let's go ahead and plug in these values for All Income Taxes!

Employee Payout = Total Payroll - (All Income Taxes + FICA)
Employee Payout = \$1,000 - ((\$100 + \$50) + FICA)

Lastly, for FICA, we're going to do the same thing we did for Federal and State Income Tax...

• Federal Income Tax: 10%
• State Income Tax: 5%
• FICA:  7.65% x \$1,000 = \$76.50
• State Unemployment: 3%
• Federal Unemployment: 0.5%

...and plug in the tax amount for FICA like so!

Employee Payout = Total Payroll - (All Income Taxes + FICA)
Employee Payout = \$1,000 - ((\$100 + \$50) + \$76.50)

Now, we can solve for Employee Payout...

Employee Payout = Total Payroll - (All Income Taxes + FICA)
Employee Payout = \$1,000 - ((\$100 + \$50) + \$76.50)
Employee Payout = \$1,000 - (\$226.50)
Employee Payout = \$773.50

...resulting in a final value of \$773.50!

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Consider the following scenario: Steez Inc, to increase customer purchases, starts offering gift cards. During 2022, they sold a total of \$1,000 in gift cards, \$265 of which were redeemed during 2022 (with \$15 of that balance towards a sales tax of 6%).

Question #1 - What journal entry should Steez Inc. create to record the collection of cash from gift cards during 2022?

For starters, when gift cards are purchased, Steez Inc. immediately gets the cash from the sale!

Therefore, since Steez Inc. is increasing their Cash account, we'll debit it (since it's an asset with a normal debit balance).

Now, what account should we credit?

Well, when we collect the cash for the gift card sale... we haven't really technically earned that revenue yet. It's deferred to when the customer actually utilizes the gift card to make a purchase!

Therefore, we'll use the Deferred Revenue account to track this!

Deferred Revenue is a liability (because the company owes the customer their gift card balance in sales), therefore to increase it, we'll credit it by the gift card balance of \$1,000! (Remember: liabilities have a normal credit balance!)

This serves as our final answer!

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Consider the following - Steez Inc. is experiencing increased demand for their Halloween merch drop. They decide to take out a \$5,000, 12% annual interest, 9-month note from CashForDays Bank on October 1st, 2022 to increase their potential output.

Question #1 - What journal entry should Steez Inc. (the borrower) record on October 1st, 2022 (the date of note’s creation)?

On the date of the note's creation, the borrower (Steez Inc.) is receiving cash. Remember: they're borrowing money with this note!

Therefore, since they're increasing their Cash account balance by creating this note, we'll debit the Cash account (since Cash is an asset and therefore has a normal debit balance) by the amount of the note (\$5,000)!

Now, Steez Inc. is going to owe this \$5,000 back at a later date. We'll store this amount owed in the Notes Payable liability account.

We're increasing the amount we owe back, therefore we'll credit the Notes Payable liability account (since liabilities have a normal credit balance) by the amount of the note (\$5,000)!

This serves as our final answer!

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Consider the following:

Question #1 - What’s the selling price (a.k.a. present value) of this bond?

There's two parts to determining the selling price of a bond: (1) determine the present value of the bond, (2) determine the present value of the annuities (a.k.a. interest payments).

Selling Price = Present Value of Bond + Present Value of Annuities

### Find present value of the bond

To find the present value of the bond, all we need to do is take the Face Amount of the bond...

Present Value of Bond = Face Amount x PV Factor
Present Value of Bond = \$10,000 x PV Factor

...and multiply that be the PV Factor, which we'll refer to the "Present Value of a Single Amount" table and find by determining the intersection point between the term of the bond (in years), which is 5...

...and the effective interest rate, which is 8%...

...resulting in a PV Factor of 0.68058...

...which we can plug in like so!

Present Value of Bond = Face Amount x PV Factor
Present Value of Bond = \$10,000 x 0.68058

This means that the present value of the bond is \$6,805.80...

Present Value of Bond = Face Amount x PV Factor
Present Value of Bond = \$10,000 x 0.68058
Present Value of Bond = \$6,805.80

...which we can plug into our selling price equation like so!

Selling Price = Present Value of Bond + Present Value of Annuities
Selling Price = \$6,805.80 + Present Value of Annuities

### Find present value of the annuities

First, what's the value of our annuities?

To find this, we must multiply the Face Amount of the bond by the stated annual interest rate.

Annuity Payment = Face Amount x Stated Annual Interest Rate

Our Face Amount is \$10,000...

Annuity Payment = Face Amount x Stated Annual Interest Rate
Annuity Payment = \$10,000 x Stated Annual Interest Rate

...and the stated annual interest rate is 10%...

Annuity Payment = Face Amount x Stated Annual Interest Rate
Annuity Payment = \$10,000 x 10%

...therefore, our annuity payment per year (a.k.a. interest payment) is \$1,000!

Annuity Payment = Face Amount x Stated Annual Interest Rate
Annuity Payment = \$10,000 x 10%
Annuity Payment = \$1,000

Now, to determine the present value of the annuity, we'll use the following formula (similar to the present value of the bond).

Present Value of Annuity = Annuity Payment x PV Factor

We just solved for an Annuity Payment of \$1,000...

Present Value of Annuity = Annuity Payment x PV Factor
Present Value of Annuity = \$1,000 x PV Factor

...and to find the PV Factor, we're going to do the exact thing we did in the "Present Value of a Single Amount" table, except in the "Present Value of an Annuity" table (the numbers are slightly different!)!

This results in a PV Factor of 3.99271!

Present Value of Annuity = Annuity Payment x PV Factor
Present Value of Annuity = \$1,000 x 3.99271

This results in a present value of all the annuities payments on this bond of \$3,992.71!

Present Value of Annuity = Annuity Payment x PV Factor
Present Value of Annuity = \$1,000 x 3.99271
Present Value of Annuity = \$3,992.71

We can plug this value into our selling price equation like so:

Selling Price = Present Value of Bond + Present Value of Annuities
Selling Price = \$6,805.80 + \$3,992.71

## Calculating selling price

From here, we can easily calculate the selling price of the bond!

Selling Price = Present Value of Bond + Present Value of Annuities
Selling Price = \$6,805.80 + \$3,992.71
Selling Price = \$10,798.51

This makes sense, as our bond is selling at a premium, since the effective interest rate is less than the stated interest rate!

This serves as our final answer!

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Consider the following - Steez Inc. has two classes of stock: 8%, \$9 par preferred and \$1 par value common.

Question #1 - Steez Inc. issues 100 shares of common stock at \$20 per share. How would they record the journal entry for that issuance of shares?

First, how much cash is Steez Inc. receiving by issuing these stocks?

Well, they're issuing 100 stocks at \$20 per share...

Question #1 - Steez Inc. issues 100 shares of common stock at \$20 per share. How would they record the journal entry for that issuance of shares?

...which equates to 100 x \$20 = \$2,000 total!

Therefore, since Steez Inc. is obtaining \$2,000 in cash, that means we'll debit the Cash account (since assets have a normal debit balance).

From here, it's a game of determine how much we should credit the Common Stock account vs. the Additional Paid-in Capital account.

If you're ever lost here, remember: the par value is what goes towards Common Stock! The rest goes towards Additional Paid-in Capital!

Based on the prompt, the par value of our common stock is \$1...

Consider the following - Steez Inc. has two classes of stock: 8%, \$9 par preferred and \$1 par value common.

...and we're issuing 100 shares, therefore we're adding \$1 x 100 = \$100 worth of Common Stock in this situation!

Considering Common Stock is an equity account (meaning it has a normal credit balance), and we're adding \$100 worth of Common Stock, we'll credit it!

From here, the rest of the price per share (\$20) outside the par value (\$1) goes towards the Additional Paid-in Capital! In other words... (\$20 - \$1) x 100 shares = \$1,900 is going towards Additional Paid-in Capital!

Considering that Additional Paid-in Capital is an equity account (having a normal credit balance), and we're increasing our Additional Paid-in Capital through this issuance of shares, we'll credit the account by \$1,900!

This serves as our final answer!