QUESTION: 2037

In January 1996, Weber Co. purchased a mineral mine for $2,640,000 with removable ore estimated at 1,200,000 tons. After it has extracted all the ore, Weber will be required by law to restore the land to its original condition at an estimated cost of $180,000. Weber believes it will be able to sell the property afterwards for $300,000. During 1996, Weber incurred $360,000 of development costs preparing the mine for production and removed and sold 60,000 tons of ore. In its 1996 income statement, what amount should Weber report as depletion?

$150,000
$132,000
$135,000
$159,000
$144,000

Answer(s): E

Explanation:

The depletion base is the purchase price of the land ($2,640,000), minus the value of the land after restoration $120,000 ($300,000 -180,000), plus any costs necessary to prepare the property for the extraction of ore ($360,000). The depletion charge is $2.40 per ton ($2,640,000 -120,000 + 360,000) / 1,200,000 tons).
Therefore, the firm should report $144,000 ($2.40 X 60,000 tons) as 1996 depletion expense.

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QUESTION: 2038

If a firm's profit margin increases by 8%, the debt-to-equity ratio increases from 35% to 55% and its asset turnover falls by 20%, the effect on its ROE is ________.

+1.3%
+0.24%
-0.8%
+1.6%

Answer(s): C

Explanation:

ROE = net income/equity = (net income/sales)*(sales/assets)*(assets/equity) = (profit margin)*(asset turnover)* (1+debt/equity) The original assets/equity = 1 + 0.35 = 1.35 and the changed assets/equity = 1.55. Therefore, the change in ROE equals (1+8%)*(1-20%)*1.55/1.35 = 0.992. Thus, ROE falls by 0.8%.

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QUESTION: 2039

Below is an example of an incorrectly prepared statement of cash flows. The descriptions of activities are correct.

Cash from operating activities $60,000
Net Income (4,000)
Depreciation (2,000)
Increase in accounts receivable (1,000)
Increase in deferred tax liability $53,000

Cash from investing activities ($48,000)
Purchase of marketable securities 2,500
Dividends received 1,500
Dividends paid ($44,000)

Cash from financing activities (500)

Increase in Short-term debt (2,500)
Increase in Long-term debt ($3,000)
Increase in cash $6,000

The correct cash flows from operating activities is ________.

$65,500
$63,500
$53,500
None of these answers

Answer(s): A

Explanation:

60,000 + 4000(depreciation) - 2,000 (receivables) + 1,000 (deferred taxes) +2,500 (dividends received)

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QUESTION: 2040

Which of the following would not be reported as an extraordinary item?

gain or loss on sale of fixed assets
gain or loss from passing of a new law
gain or loss from early retirement of debt
uninsured loss from a flood

Answer(s): A

Explanation:

An item must be both unusual and infrequent (and material in amount) to be classified as extraordinary.

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