(Fuqua School of Business) ACCOUNTING 510 MIDTERM EXAM LATEST DUKE UNIVERSITY, Exams of Accounting

Download (Fuqua School of Business) ACCOUNTING 510 MIDTERM EXAM LATEST DUKE UNIVERSITY and more Exams Accounting in PDF only on Docsity! 1 Fuqua School of Business, Duke University ACCOUNTG 510 –MIDTERM EXAM 2021 Your name ______________________________________ Instructions: You are to work completely independently in completing this examination. Communication with anyone other than Xu Jiang and/or Don Pagach about the exam or the course material during the examination period is prohibited. The exam is open-book, open-notes. Calculations must be shown to receive partial credit. It is your responsibility to upload/submit all pages of the examination for grading. Do not upload the file containing the financial statements that you are asked to use to complete the exam. Please place your answers beneath each question. If you believe a question is unclear or that an assumption is needed, state the assumption that you are making and move on. Points will not be deducted unless your assumption is inconsistent with the data provided or trivializes the problem. You have 2 hours and 30 minutes (elapsed time from download to upload) to complete this examination. Technically speaking, you only have 2 hours and 15 minutes to finish the exam and the extra 15 minutes is the time to upload your exam. A penalty of 10% of the total points on the exam will be imposed on any portion of each hour after the 2 hours and 30 minutes that you consume, i.e. 10% deduction for 1-59 minutes late; 20% deduction for 60-119 minutes late, etc. If you work till the last minute to upload your exam and the total elapsed time exceeds 2 hours and 30 minutes, your submission will be considered late. There are 9 pages in this exam (including this cover page). Space is provided for your answers and calculations. Use the space that is provided for your answers. If you place your answer anywhere but the space provided for the answer, you must clearly direct us (in the space provided) to the location of your answer; otherwise, you will not receive points for your answer. There are six (6) parts on this exam; all questions relate to the 2020 financial statements of Rite Aid. Rite Aid applies U.S. GAAP. Rite Aid’s financial statements and excerpts are provided as a separate document. The term “year” refers to fiscal year unless explicitly stated otherwise. Point allocations are shown below and also next to each question. 2 Question Possible Points Points Awarded I. General 9 II. Revenue Recognition 10 III. Accounts Receivables 14 IV. Inventories 5 V. Property and equipment, Intangibles 21 VI. Statement of Cash Flows 11 Total 70 5 Part III – Rite Aid –Accounts Receivables (14 points) 1. (1 point) a. What is the book value of accounts receivable for Rite Aid at the end of fiscal year 2020? 1,462,441 in thousands of dollars. (no partial except 0.5 pt when answering 1,286,785 ) (2 points) b. What is the gross value of accounts receivable for Rite Aid at the end of fiscal year 2020? 1,462,441+14,722=1,477,163 in thousands of dollars; 1.5 pt for knowing that gross= net + allowance and 0.5 pt for the calculation. (1pt if answering 1,286,785+12,849=1,299,634) (1 point) c. How much does Rite Aid expect that they are not able to collect from their accounts receivable at the end of fiscal year 2020? 14,722 in thousands of dollars. (no partial except 0.5 pt when answering 12,849) (3 points) d. Based solely on the information from balance sheet accounts, has Rite Aid’s credit risk increased or decreased for 2020 relative to 2019? How can you tell? 2020 Allowance/Gross A/R=14,722/1,477,163=0.997%. 2019 Allowance/Gross A/R=12,849/(1,286,765+12,849)=0.989%. Therefore 2020 has a higher allowance as a percentage of gross A/R. Therefore credit risk increased for 2020. (1 pt for 2020 percentage, 1 pt for 2019 percentage, and 1 pt for comparison). Full credit will be given if the ratios for both years are correct and the answer is no significant change because the ratios are very close. 2. (2 points) a. Assume that Rite Aid estimates a 2 million bad debt expense in 2020, what is the amount of net write-offs for Rite Aid in 2020? 127 thousands of dollars. Allowance for uncollectible accounts Beginning Balance 12,849 + Bad Debt Expense 2,000 -Net Write-offs 127 Ending Balance 14,722 6 0.5 pt for BB and 0,5 pt for EB, 0,5 pt for bad debt expense and 0.5 pt for the final result. (5 points) b. What is the total amount of cash that Rite Aid collected from its customers and third-party payors in 2020? 23,667,584 in thousands of dollars. Accounts Receivable, Gross Beginning Balance 1,299,634 (=1,286,785+12,849) + Sales Revenue 24,043,240 -Cash Collected (plug) 23,865,584 - Net Write-offs (from above) 127 Ending Balance 1,477,163 (=1,462,441+14,722) 1 pt for BB and EB, 2 pt for sales, 1 pt for net write-offs and 1 pt for getting the cash number correctly. Note that full credit will be given if students 1) assume a certain percentage of sales is on credit and later add back the rest sales on cash and/or 2) assume a certain recovery amount and later add back the recovery as the solution will be the same. For more explanation see solution to problem 9 of the Nordstrom case. Part IV – Rite Aid – Inventories (5 points) 1. (2 points) What does the “net” of the item “inventories, net” on the balance sheet mean? Net of allowance for inventory obsolescence or net of allowance for inventory write-downs. (no partial credit) 2. (3 points) What inventory flow assumptions does Rite Aid use? Does Rite Aid incur higher purchase costs for early purchases or for late purchases? Why? LIFO (1 pt); late purchases are costlier (1 pt) as ending inventory is higher under FIFO (1 pt). 7 Part V – Rite Aid – Property and Equipment, Intangibles (21 points) 1. (2 points) What is the acquisition cost of Rite Aid’s Property and Equipment that remains on the balance sheet at the end of year 2020? 3,962,537 in thousands of dollars. (1 pt if answering the net value of 1,080,499 or answering 4,057,329) 2. (4 points) Suppose that Rite Aid decides to increase its assumption of the residual value of their Equipment at the beginning of fiscal 2021 (i.e., next fiscal year), how if at all, would this affect Ride Aid’s income statement for fiscal 2021? Cash flows from operations for fiscal 2021? (Circle the answer). In fiscal 2021: Rite Aid’s Net Income would Increase Decrease Not Change Rite Aid’s Cash flows from operations would Increase Decrease Not Change 2 pts each, no partial. 4. (3 points) Did Rite Aid buy any new Property, Plant and Equipment in 2020? If yes, how much is the cash purchase? Yes (1pt), 195,141 in thousands of dollars (2 pts, 1pt if answering 171,705). 5. (5 points) Assume that Rite Aid does not acquire any new Property, Plant and Equipment through capital leases during 2020, what is the net book value of Property, Plant and Equipment that Ride Aid sold in 2020? 46,089 in thousands of dollars. PP&E, Gross Beginning Balance 4,057,329 + Purchases 195,141 -Gross value of PP&E sold (plug) 289,933 Ending Balance 3,962,537